NPA valuation is key to bad bank

 

Source: By K Vaidya Nathan: The Financial Express

 

The truth of a proposition is independent of how many people believe it to be correct. Probably most, possibly all but a handful of PSU banks are dead banks walking—zombie banks kept from formal insolvency only because they are government-owned. According to the 2017 Economic Survey, public-sector banks are saddled with 80% of the non-performing assets in the country and their NPA ratio has reached 12%. If Basel norms are strictly applied, most PSU banks should be deemed severely under-capitalised and should become history like Lehman Brothers. They would, but for the fact that they are government-owned. Ironically, it is this very fact that stops these rickety zombies from becoming good banks.

The bad bank proposal put forward by RBI and the Public Sector Asset Rehabilitation Agency (PARA) idea suggested by the Chief Economic Advisor have been non-starters for the simple reason that they require the valuation of NPAs. Putting a value to a non-performing loan is easier said than done because its true value is at best a bad ‘guesstimate’, even on a hold-to-maturity basis. Given the nebulousness in measuring their value, it is possible for an unscrupulous banker to manipulate the valuation to the detriment of the bank. The flip-side to this is that, if a PSU banker grants large debt reduction even if she believes it is the right thing to do, she could attract the attention of the investigative agencies, as PSU bankers come under the purview of PoCA (Prevention of Corruption Act). Paradoxically, government ownership makes the well-intentioned PSU banker an existential worrywart who deliberately chooses to kick the NPA ‘can’ down the road.

This inability to find a lasting solution has its cost on the real economy. A huge overhang of NPAs that PSU banks currently have, acts like a tax on new lending. Banks are required by RBI under the Basel guidelines to have a minimum amount of regulatory capital. Since PSU banks have only so much amount of capital and are already sitting on a ginormous NPA stockpile, they choose to hoard capital and ration lending rather than engage in new lending to the economy. Credit off-take to the industry, as a result, is now among the lowest in the last couple of decades. The government does not have too much fiscal leeway to inject so much capital that it stops being a constraint for banks to do fresh lending. So, the NPA issue needs to be tackled head-on to support new lending activities that are so urgently needed.

Most PSU banks in India follow the standardised approach for capital allocation under Pillar-I of Basel regulations. Under this rudimentary approach, they are not required to calculate the mark-to-model value of a loan at any given point in time, something that most large global banks do under the advanced approach of Basel. As a result, there is no agreed methodology for marking-to-model NPAs either by the regulator or by banks that is tailored for credit risk in the Indian context. And coupled with the fear that a vigilance investigation may pop up like a malignant lump just before the bank official is about to retire, makes the PSU banker pretend not to notice the elephant sitting the room.

Unless there is an objective method, largely agreed upon by the regulators and the banks, this problem is likely to continue. And in procrastinating about coming up with an objective methodology for valuing NPAs, even if it is not perfect, policy-makers, regulators and even academics may be kicking the sticky ‘can’ down the road. Not dealing with the NPA valuation problem but putting a band-aid on it, and hoping that the structural cracks in the PSU balance-sheets would heal with time, is procrastination or at best, wishful thinking. Not addressing the problem today may mean that the PSU banks may have to deal with something even worse in the future.

There are largely two different approaches to tackling the NPA valuation problem. The first may be to appoint a committee or task it to an autonomous body such as the Banks Board Bureau. But who is to say that however esteemed the committee members might be, the members would have the ability to value NPAs or worse, wouldn’t do it without prejudice or favour. The second approach is for the regulator to come up with a methodology that is as objective and fair as possible, acknowledging the fact upfront that it is not going to be perfect. For instance, to mark-to-model loans of publicly traded companies, the KMV model can be used.

The model is used globally but is far from perfect. The best thing about an approach like this is it is difficult to game the method because it uses just three inputs to find the mark-to-model value—the stock price, the volatility of stock price and the leverage of the firm. All three inputs are publicly known and have no element of subjectivity. For privately-held firms, the regulator can come up with a data-driven algorithm that uses historical corporate defaults and their recovery values as training data to produce a data-driven decision rule to value current NPAs.

Such data-driven algorithms have been used to predict lot more random outcomes like an election or a baseball game with reasonable precision. Of course, such approaches are not perfect, but perfectionism is often cited as the mother of procrastination. And there would always be sceptics who would think that all the quant models are hogwash, but the truth of a proposition is independent of how many people believe it to be correct.

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Launch date Awaited

 

 

Source: By Mohan R Lavi: Deccan Herald

 

 

Oscar Wilde once said, "Marriage is the triumph of imagination over intelligence. Second marriage is the triumph of hope over experience." The taxpayer in India can only hope that the proposed GST (Goods and Services Tax) will be better than past experiences as far as indirect taxes are concerned.

 

At the end of every meeting of the GST Council, taxpayers eagerly await the final word on when GST would make its entry, (with July and September being the only possible dates), what the negative list comprises and an idea about the rates of taxes applicable to their commodity or service. Every single time till date, they got disappointed because, apart from anything in their wish list, other administrative matters get announced. The government is unleashing GST on the nation in instalments. While this is understandable in a law that replaces almost all indirect taxes in the country, keeping the important bits of the law till the slog overs could result in a hurried legislation which is not recommended for a law that is supposed to be a game-changer.

 

The model GST law which was circulated last year has undergone many iterations and the law that was passed by the Lok Sabha recently has altered many clauses that were present in the November version of the law. The next meeting of the GST Council has been scheduled for May when the rates would probably be decided along with the negative list. While July appears over-optimistic, the fact that September will be the only other option should comfort the taxpayer.

 

In order to reduce the guessing game, the Council should announce a firm date for transitioning to GST. Entities would need some time for transition as they may have to change their systems and technology. They would also need to brace for the impact of a higher rate of tax. The Council should just announce that GST would be implemented from the September 1, 2017. The Bill adopted by the Lok Sabha has also cleaned up the provisions with regard to input tax credit which was direly needed. Transitional provisions form a very critical part when moving over to GST - the substance of the intention of the government to facilitate an easy transition has been retained in the transitional provisions. The only area of concern as far as the transitional provisions go is that the oft-repeated "appointed day" has not yet been announced.

 

The agricultural sector or any taxation department have never had to debate on any issue pertaining to either direct or indirect taxation as taxation laws have invariably swayed towards ignoring the sector for the purposes of taxation. Sporadic references have been made to agriculture but there was no major impact of taxation on the sector. One of the concerns that the Central GST law has produced is whether agriculturists would be subject to GST. This concern has arisen due to a change in the definition of the agriculturist from the previous version. The latest version of the law defines agriculturist to mean an individual or a Hindu Undivided Family who undertakes cultivation of land by own labour or by the labour of family or by servants on wages payable in cash or kind or by hired labour under personal supervision or the personal supervision of any member of the family.

 

A question that pops up instantly is whether there are any other forms of cultivation possible which the law may have omitted. While agriculturist has been defined, neither agriculture nor cultivation has been defined anywhere in the law. To add to one's interest, the provisions regarding registration clearly state that an agriculturist to the extent of supply of produce out of cultivation of land need not take a registration.

 

Interesting situation

 

A combination of all the above facts leaves the agriculturist in an interesting situation wherein his profession finds a mention in the law ostensibly with the purpose of taxing but he doesn't have to take a registration nor is the activity of agriculture or cultivation defined. So why the definition of an agriculturist only, the only possible answer could be that the lawmakers had a thought to tax some agricultural activity but have kept it in abeyance. Another area of concern in the law as adopted by the Lok Sabha is that as per Schedule I, supply of goods or services or both between related persons or distinct persons when made in the course or furtherance of business would be deemed to be a supply even though there is no consideration in the arrangement.

 

This would impact entities such as banks, financial institutions and companies with a place of business in multiple states who are forced to take multiple registrations under GST but have a number of inter-branch transactions without charging any consideration. For instance, the head office of a bank may obtain services from a common vendor for many branches without invoicing the individual branches as the head office absorbs the cost.

 

There is a pressing need for greater clarity on such issues which the next set of FAQs (frequently asked questions) have to tackle. If the intention of the government is to actually tax such supplies, taxpayers may start debiting nominal values to such transactions to minimise their tax outgo. Salaried employees should be happy that as on date, there is no plan to slap a GST levy on salaries. However, there is a proviso that gifts not exceeding Rs 50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

As a tax mechanism, GST relies a lot on technology. Transitioning taxpayers have had to spend a lot of time during the transition process on providing information online. The website of the Central Board of Excise and Custom is already showing signs of strain due to the traffic hitting it. If the same trend continues, www.gst.gov.in could well become the website on which maximum time is being spent by users.

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Why the ‘right to Internet’ is a bad idea

 

Source: By N. Jayachandran: Mint

 

As the share of states in government expenditure is inching towards 60%, the budgets of different state governments are more important than ever before. Those budget statements also contain some interesting ideas. One such idea came from Kerala this year. Promising to deliver a new optic fibre network, Wi-Fi transmission centres and free Internet facility to two million poor families, Kerala’s finance minister T.M. Thomas Isaac affirmed access to Internet as a right for every citizen. With this, the southern state joined a clutch of countries like Finland, Estonia, France, Spain, Greece and Costa Rica that have declared the Internet a basic human right—the precise legal commitments differ in each of these countries.

Last year, the UN issued a declaration which was widely interpreted as an affirmation of access to Internet as a basic human right. A closer reading, however, suggested that it primarily focused on imploring states to refrain from taking any measure that disrupts citizens’ access to the Internet. However, the UN declaration also went on to affirm “the importance of applying a comprehensive human rights-based approach in providing and in expanding access to Internet…” So far it is clear that there are two distinct issues involved here: 1) the access of Internet services to people who cannot afford it currently, and 2) the disruption of Internet services for current users.

The latter can be covered under both the right to access information and the right to freedom of expression. The state ought to frame guidelines or laws to govern Internet disruptions and shutdowns in accordance with liberal interpretation of the freedoms it bestows upon individuals. Such a policy should curb the powers of the state and Internet service providers to implement Internet blackouts. But can access to Internet in general be defined as a basic human right? Vinton G. Cerf, a “father of the Internet”, doesn’t think so.

In an article for The New York Times, Cerf argued, and correctly so, that the move to declare the Internet as a human right may be well intentioned but misses the point that “technology is an enabler of rights, not a right itself”. A strong rebuttal from Scott Edwards of the Amnesty International USA pointed out that even if “access to the physical town square may not be a human right in isolation, it has always been for most inseparable from the right to association and expression”. “And denial of access to the town square through curfews, martial law, or emergency rules,” Edwards adds, “are tantamount to restriction [sic] on association and expression.” But again Edwards is actually defending the right to access Internet for current users more than the right to services for those who cannot afford it.

But Cerf himself complicates the matter by allowing for the Internet to be defined as a civil right which is “conferred upon us by law” as opposed to a human right which is “intrinsic to us as human beings.” This brings us to another distinction—one between positive rights and negative rights—which is more important to developing countries like India. Negative rights are intrinsic to us as human beings and the Constitution merely guarantees the protection of such rights. The Constitution usually curtails the power of government or other entities in performing certain actions which violate the negative rights of the individual. The right to equality or the right to freedom of expression enshrined in the Constitution of India is examples of such rights.

A positive right, on the other hand, enables the holder of the right to claim a good or a service against the state or someone else. These rights—or simply, entitlements—require fiscal allocations and hence are subject to budgetary constraints. In India, such rights include the right to work (National Rural Employment Guarantee Act, 2005), right to education (Right of Children to Free and Compulsory Education Act, 2009), and right to food (National Food Security Act, 2013). Cerf’s idea of right to the Internet as a civil right also comes under the banner of positive rights.

When legislated, supporters argue, positive rights become justiciable and enable the citizens to demand better services from their governments. But as Parth J. Shah, the founder president of the Centre for Civil Society argues in Liberalism In India: Past, Present And Future, justiciability works only in theory, not in practice. Non-provision of positive rights can be justified on several grounds like budgetary constraints and fiscal prudence and no one in the government can be held accountable. Moreover, declaration as rights enables centralization of power. A right to education, for instance, mandates a kind of standardization for every corner of the country without taking into account the granular differences on the ground. This limits policy experimentation and is deleterious for governance in general. Positive rights also dilute the scope of more critical negative rights by spreading the state capacity—a scarce commodity, especially in a country like India—thin.

The usefulness of the Internet cannot be overstated and the government should do everything possible to bridge the digital divide among its constituents. But declaring access to the Internet as a citizen’s right is not a defensible proposition.

 

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The fraying fabric of liberal democracy

 

 

Source: By Arun Maira: Mint

 

 

Liberal, secular democracies are besieged. Their ideals are being challenged among Hindus in India, among Republicans in America and among political parties in France. They are besieged in Russia, Turkey and other countries. Alarms were heard around the world with the unexpected election of Donald Trump as president of the US—though there were many earlier warnings of dissatisfaction with institutions of liberal democracy, with the rise of authoritarian leaders and populist movements on all continents. Like global warming, which has come into collective human awareness lately, the causes of discontent with liberal democracy have been brewing outside the gatherings in which “people like us” from around the world were celebrating globalization’s benefits. They weren’t listening.

 

A democracy or an econocracy

 

An expanding movement called “Rethinking economics”, of over 40 groups of economics students in 13 countries, is expressing dissatisfaction with the ideas of economics they are being taught. They also point to a root cause of the global discontent with democracies. In their view, the large influence of economists on governments and in multilateral organizations, as well as the dominant ideas of economics that are being translated into public policy, has converted democracies into “econocracies”. They present their arguments in a very readable book, The Econocracy: the Perils of Leaving Economics to the Experts.

 

“The economy”, they say, has become a parallel universe to human society. It has its own models of the world founded on over-simplified premises such as: Human beings are rational, self-interested agents; transactions between them can be modelled as mathematical formulas; and whatever cannot be quantified cannot have a role in their models. In this over-simplified view of human society, politics—the cut and thrust of human aspirations and power—is an interference in the growth of a disembodied “economy”, the maximization of whose growth must be the ultimate goal of good economic policies.

 

The authors give the example of how a famous children’s charity justified a campaign to encourage fathers to read to their children on the basis that improving literacy would increase GDP (gross domestic product) by 1.5% by 2020. With the dominance of economists in public policy, people are being led to think that something is worth doing only if it will contribute to the growth of GDP.

 

Rather than society being manipulated to feed the growth of a disembodied economy, the economy must be changeable to serve society. In his introduction to The Econocracy, J.B.S. Haldane, chief economist at the Bank of England, writes, “Public interest in institutions has been dented. Repairing that dent... will require new and wider means of listening to, and learning from societal stakeholders.” The student authors say, “We believe that at its core, economics should be a public discussion about how to organize society. To be able to do that, economics must be transformed from a technical discipline into a public dialogue”.

 

EVMs and deliberative democracy

 

US Justice Louis Brandeis said: “The greatest menace to freedom is an inert people. Public discussion is a political duty; and that this should be the fundamental principle of the American government.” The popular vision of democracy is a society in which every citizen has a right to vote for her representative in government. In this vision, the core of democracy is free, fair and frequent elections. According to this concept, India is a hugely successful democracy. Using technology, such as electronic voting machines (EVMs), it conducts elections on a scale no other country does. EVMs are transported even to remote mountain hamlets so that every citizen can exercise her right to vote.

 

This vision sees only the vertical threads of democracy’s fabric—the constitutional relationship between the people and those who govern them. It misses the horizontal threads that make the fabric of democracy strong. The horizontal threads are processes for deliberation among citizens, who may have diverse opinions about the qualities of their society and differences about what public policy should be. As Brandeis said, public discussion is the duty of citizens; only to vote in elections is not enough.

 

Technology is making it easier for consumers to exercise their choices in the marketplace. With a touch on their smartphones, they can select from a dazzling array of products and services sellers offer them. They can also electronically select a candidate from those offered to them at elections. Social media and marketing companies are deploying increasingly better algorithms to understand every individual’s preferences and give her what she wants. They know what we like and give us more of what we like. Thus, social media, with its vast reach, is creating large echo chambers of people with the same preferences, within which they can hear more about what they like, from people they want to follow. However, it is deepening divides between people with different views. They do not hear each other.

 

For a healthy democracy, shared public spaces, online or not, are a lot better than echo chambers”, writes Cass Sunstein in his book, #Republic: Divided Democracy in the Age of Social Media. Digital technologies and social media are making life easier for consumers. But they are making life more difficult for citizens. Two centuries before social media, framers of the US Constitution were deeply worried that without the horizontal weft of democratic deliberations, democracy’s fabric would be weak. Social media facilitates populism. It is making people passive consumers and passionate supporters of products—including political leaders.

Democracy’s vertical links between people and their governments have become weak, with experts making policies which they are convinced are good for the economy, without listening to the people. Democracy’s horizontal threads are fraying, with “people like us” listening only to people we like, a tendency that social media strengthens. Deficiencies in listening are root causes for the weakening of democracy’s fabric.

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Urgent next steps in banking sector reforms

 

 

Source: By Montek Singh Ahluwalia: Mint

 

 

Now that the Bills on goods and services tax (GST) have been passed by the Lok Sabha, the top priority must be fixing the problems of public sector banks. This requires action on three fronts. We must (i) accelerate recoveries from non-performing assets (NPAs), (ii) recapitalize public sector banks to strengthen their ability to expand credit, and (iii) introduce reforms that will increase the efficiency of these banks.

 

The traditional strategy for dealing with NPAs has been to reschedule the loans. However, this helps only where projects suffer from a short-term “liquidity problem”. It cannot help when there is a “solvency problem”, i.e. the income stream simply cannot service the debt even over a longer period. Most of the large NPAs reflect solvency problems. Revenue streams were overestimated and costs have increased beyond original projections. Such projects can only be rescued if banks take a haircut and reduce the debt. Understandably, this is something bankers hate to do. There are two ways of handling the problem. The Reserve Bank of India (RBI) has notified schemes for both, but neither of them has worked.

 

The Strategic Debt Restructuring Scheme allows banks to convert the debt into equity, take control of the project, remove the existing management, and induct new management. Ideally the project should be auctioned off to the highest bidder and the existing management, if not suspected of malpractices, should also be allowed to bid. The difference between the amount paid for the equity and the value of the debt converted, is a market-determined debt write-off. The scheme has not worked for a variety of reasons. These include problems of coordination among the different banks involved, regulatory uncertainties (especially for infrastructure projects) which deter new investors, and the unwillingness of bankers to accept a sufficient write-down of the outstanding debt. There is also the practical problem of running the projects taken over until a new management comes in. Banks are ill-equipped to do this.

 

The second option is to work with the existing management and negotiate a suitable debt reduction. This is what the RBI’s most recent Scheme for Sustainable Structuring of Stressed Assets (S4A) was designed to do. It has the advantage of not having to look for a new management, but since the incumbent management remains in place, and the debt write-off is not competitively determined, there is a danger that the concessions given may attract the charge of cronyism and corruption. Bankers worry about this since Section 13.1. d (iii) of the Prevention of Corruption Act (Poca), 1988 makes a public servant liable to the charge of corruption if he/she, “while holding office as a public servant, obtains for any person any valuable thing or pecuniary advantage without any public interest” (italics added). Bank employees are public servants for the purpose of the Act, and the term public interest is not well defined.

 

Some think that the problem can be overcome by setting up an independent “oversight body” to approve the debt reduction terms. But since the oversight body will also consist of public servants, the problem remains. Poca clearly needs to be amended, and a proposal pending in Parliament should be expedited. However, this may not suffice, because proposals for a settlement have to be developed by bank managements, and then submitted to the oversight mechanism. Bankers have no incentive to propose large reductions in debt, especially since it is an implicit acknowledgement of poor lending practices on their part.

 

The best solution is to create a new government institution—the so-called “bad bank”—to which the public sector banks transfer their large problem assets at a realistic price, leaving it to the new entity to handle recovery. Realistic pricing of the assets transferred is absolutely critical, since otherwise the hole in the balance sheets of banks will simply be transferred to the new institution. It should remain in the books of the banks, and can then be recapitalized appropriately. Bankers will be much more willing to transfer their NPAs at a low price to a new public sector agency, than offer the same benefit to a private party. The new entity can then offer realistic levels of debt reduction without making a loss on its books. It will also be much less vulnerable to the charge of corruption if the public interest and urgency involved in cleaning up NPAs is clearly spelt out in the mandate of the entity. Its proposals could also be vetted by a high-level oversight board.

 

The new entity would have to be funded by the government, perhaps by government guaranteed bonds which are exchanged for NPAs offloaded from banks. It could work in partnership with private asset management companies specializing in particular areas to bring in new investors. It could experiment with both approaches—a change in management in some cases, and retaining existing managements in others. These ideas have been discussed in several quarters for some time. It is time to take the plunge and announce the establishment of the new institution, and set a target for taking up 10-20 of the largest NPAs in the near future. Early success will help clear the air.

 

Recapitalization of public sector banks

 

The capital requirements of public sector banks to sustain credit growth at 15% per year were estimated by the finance ministry two years ago. The strategy needs to be completely reworked since the scale of NPAs is much larger than was then expected. Bank profits after provisioning for the NPAs will therefore be much smaller than expected. The scope for raising funds from the market has also reduced given the poor performance of the banks. The burden on the budget is therefore bound to be higher. Three difficult questions arise.

 

(i) will the additional capital now needed be provided by additional budgetary funds? If sufficient budgetary funds cannot be provided, is the old idea of falling back on the RBI’s reserves going to be activated?

 

(ii) Are we willing to lower the government equity below 51% in order to allow public sector banks to raise capital on favourable terms? If so, it may be possible to attract one or more strategic investors into some of the public sector banks. They need not be given any direct role in management, but could be given a seat on the board, as China has done. The reduction in government equity below 51% may be resisted because it jeopardizes reservations in employment. These fears can be addressed by building suitable provisions into the shareholders agreement, and announcing that the government, which will remain the dominant though not the majority shareholder, will ensure that reservations continue.

 

(iii) Should budgetary funds for recapitalization continue to be distributed across public sector banks in the traditional way, with the weaker banks getting proportionally more in order to achieve a reasonable growth in lending, or should we allocate them in a manner which favours the better-performing banks? The latter approach will increase the overall efficiency of the public sector banking system as a whole, and incentivise the weak banks to improve their performance.

 

Reforms in the banking sector

 

Looking ahead, we cannot avoid serious banking sector reforms if we want the public sector banking system to become more efficient. In this context, reducing the government equity below 51%, and attracting some strategic investors, would be a very major step. It will not only reduce the pressure on the budget to provide funds for recapitalization, it will also set the stage for a more commercial orientation for public sector banks. This is critical if public sector banks are to compete more effectively with private sector banks.

 

If reducing government equity below 51% is not feasible at present, we should at least experiment with the halfway house suggested by the P.J. Nayak committee, of vesting the government’s shareholdings in public sector banks in a separate holding company, and limiting the finance ministry to deal only with the holding company on policy issues. The individual public sector banks should be free of finance ministry control and become board-managed entities. The holding company should appoint a non-executive chairman and other representatives on the board. Top appointments in the banks, including those of the chief executive officer, should be made by the board of each bank, and not by the appointments committee of the cabinet.

The Bank Boards Bureau was initially seen as a step towards the establishment of a holding company, but it has not been empowered to play this role. Even in the matter of appointments, it only makes proposals to the appointments committee of the cabinet, which is not very different from the pre-existing position. The steps listed above may appear controversial, but if we can’t move in this direction, we should be realistic and not expect any significant progress in the resolution of the NPA problem, or improvement in the quality of lending by public sector banks, in the future. This is bound to take a toll on our economic prospects for the next several years until private sector banks grow in size and come to dominate the market. But that could take 20 years.

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Giving nod to Indian goods

 

 

Source: By Ashwani Mahajan: The Statesman

 

 

After assuming power in May 2014, the Prime Minister Narendra Modi announced key points of his economic policy, of which Make-in-India was an important component. Significantly, rate of growth of industrial production which was more than 15 per cent in 2007-08 dropped to zero and sometimes to negative in the years after 2011-12. Electronics, computer hardware, durable and non durable consumer goods, furniture etc. all were being imported from China or other countries. No new factory was coming up in India and existing ones were also shifting out. Not only that manufacturing was at a standstill, the share of manufacturing in GDP was hardly around 15 per cent.

 

In May 2014, after the formation of the Modi government, policies like Make in India and Start Up India were announced. In his speech from the Red Fort, Mr Modi said that his policy was to increase industrial production in India. He appealed to companies from around the world to come and start production in India. On the other hand, the government called upon entrepreneurs in India to set up manufacturing in the country and said they would be relieved from various types of red tape. ‘Ease of Doing Business’ would be improved to make the business environment better for new and old entrepreneurs.

 

For ‘start-ups’, the government assured an enabling environment in terms of facilities, tax exemptions and cooperation. For the first time, there was an effort to increase business on such a large scale. New phrases like Start up, stand up, holding hands etc. were added to the official dictionary. Although the fruits of these efforts may take some time to come, it cannot be denied that there has been some improvement in the environment for industrial and business development. The new ‘start-ups’ started coming and the government’s attitude was also to provide a ‘holding hand’.

 

Whereas, the first condition for increasing industrial production is that industries be established, domestic demand for those goods is also a precondition. Unfortunately for the last several years, the import of industrial goods (whether they are consumer goods or producer goods, such as machinery) has been increasing fast. Exports were not increasing at the same pace. However, huge imports also indicate that demand existed in our own country which is an important precondition for industrial output to increase.

 

World Trade Organisation (WTO) came into existence in 1995. According to the agreements reached at WTO, commitment was made by all member countries to keep import tariffs low and eliminate all non-tariff barriers which could curb imports. Due to cheap labour, government subsidies and unethical practices, and resulting low prices, Chinese goods started dominating world markets. The impact was also felt on India, and India’s trade deficit with China reached $ 52.7 billion by 2015-16.

 

The government is also a big source of demand. At present many imported goods enter the government procurement chain due to many reasons. Suppliers of Chinese goods win tenders due to low prices. According to a rough estimate, government purchases at least Rs 2 trillion (Rs 2 lakh crores) every year. It is therefore necessary that in order to increase production in the country, procurement of items made in India should be preferred by the government. Even before the new economic policy came into force, preference used to be given to small scale industries/ Khadi products. But this was given up after the new economic policy came into force. At the first instance the preference in the purchase was changed to a price preference and subsequently the preference was abated gradually. After the WTO agreements, it was argued that since we are obliged to treat foreign companies/ imports on a similar footing as Indian products, we could not give preference to indigenously produced goods, even from small industries.

 

Under the ‘Buy American Act 1933’, US-made products are preferred in government procurement in USA. According to WTO rules, if a government gives preference to products made from that country for its own consumption, then it would not be treated as violation of WTO rules. But if a commercial entity is forced to give preference to indigenously produced goods for commercial use or sale, then it would be considered a violation of WTO rules. In the Jawahar Lal Nehru Solar Mission, when the condition of the use of local solar equipment was imposed by India, the US objected to the same and India lost its case in Dispute Settlement Panel (DSP) and even in the appeal.

 

It is clear that if the government gives preference to products made in India for its own requirements, then WTO Agreements are not violated. Even America gives priority to American goods in government procurement. India can do the same and there cannot be a dispute. Recently a committee of Secretaries of the Ministries has made a recommendation to the government that to make the ‘Make in India’ policy successful, the products made in the country should be given preference in government procurement. It is believed that the government will soon announce such a policy and the rules will be issued by the Finance Ministry in this regard.

Significantly, today a large quantity of products is being imported from China and host of other countries and the same gets included in government procurement. It may be assumed that by giving priority to the purchase of products made in the country, the ‘Make in India’ programme can be made successful in the country. Industry is also pleased with such a policy proposal because it will give industry an assured captive market for its goods.

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Indian democracy can do with a weak state

 

Source: By Kunal Singh: Mint

 

In past days, one could stand when the national anthem played—if one wished to. But that equation has changed of late. Now, one dare not do otherwise. Although the Supreme Court has made the playing of the national anthem mandatory in movie theatres and filmgoers are required to stand up and pay respect, it is not a hidden cop watching them that they fear. Not even a possible secret informer furtively lurking à la the East German Stasi. Once the reports of recalcitrant sitters are roughed up started trickling in, the fear of being at the receiving end of instant “justice” has become real. In a democracy with no limits, it is the majority that decides for the minority. What makes Indian democracy palatable and good for the people of India is Indian republic.

As Shruti Rajagopalan has pointed out, the part of the Constitution which lays out the fundamental rights of citizens is the most “undemocratic” in nature. The fundamental rights of a citizen, or the republican values in our Constitution, curb the powers of the democratically elected government. But the real effect of those rights has been gradually eroded due to various exceptions introduced to the fundamental rights both by the legislature as well as the judiciary, excesses of democracy or majority rule, inadequate state capacity, and lack of demand by the citizenry for upholding fundamental rights.

The judiciary is also part of the scheme to curb the powers of the government. And it has indeed given some very progressive judgements. In Bijoe Emmanuel v. State of Kerala (1986), the Supreme Court in a welcome judgement expanded freedom of expression to include the right to remain silent, thus allowing children belonging to a sect called Jehovah’s Witnesses the right to not sing the national anthem. But the same court has now mandated, from on high, respect for the anthem. The unremitting quest for popular legitimacy, a product of democracy without curbs, has also corroded institutions that are supposed to safeguard the cherished values of the Indian republic.

A contest parallel to that of democracy and republic is one between communities and individuals. The case I wish to make here is that Indian democracy has strengthened the power of communities and the weak state has meant that the Indian republic has not been able to protect the rights of an individual in conflict with a community. While the Constitution gives space for affirmative action for certain castes and allows the right to practise and propagate religion, most of the fundamental rights have been bestowed upon individuals. In principle, the rights of individuals should trump those of communities. But the power of democratic mobilization has been skilfully employed by communities to turn that principle on its head.

The “first past the post” system of electing representatives has permitted political parties to choose a select number of communities to cultivate for elections. Various tools of governance ranging from reservations in jobs to subsidies for power, water, fertilizer, etc., are employed to cultivate groups which can deliver en masse votes. A few minority groups tend to gain a disproportionate share in the governance agenda. This is not always bad but the worst sufferers are the minorities or the weaker sections within the minority groups. The case of triple talaq is an example: Most of the political parties have sided with the Muslim orthodoxy in the name of protecting the traditions and customs of the minority group.

When it comes to the rights of the individual—the freedom to write a book that offends a religious community, the freedom to make a film that offends the supporters of a political party, or the freedom to not sing the national anthem—the weak Indian state surrenders to the mobocracy of groups with votes. Francis Fukuyama has postulated that for a liberal democracy to be successful, it requires the following three institutions in a stable balance: a strong state, rule of law and political accountability. Fukuyama places India firmly in the group of what Joel Migdal calls strong societies and weak states.

The weak state that India is can become very efficient when it chooses to do so. And it makes that choice often to uphold Indian democracy and seldom for the cause of the Indian republic. Take elections, for example. As the world’s largest democracy, India conducts the world’s largest democratic exercise when the members of the Lok Sabha are elected. Even many of India’s state elections are some of the largest in the world. And it is not just elections; take the Hindu religious gathering of Mahakumbh. Given its scale—the festival is attended by tens of millions of pilgrims—the state has to get involved and the event is organized in a near-flawless manner.

But the same state fails in empowering the individual—whether it is in protecting the individual’s freedom of expression or delivering quasi-public goods like quality education, healthcare or drinking water. So perverse is the effect of Indian democracy that there is hardly a solution in sight for the air pollution choking several cities across north India. Since relief delivered on this count will not be a “club good” that can be claimed by any particular community, there is no incentive for the state to take strong decisions.

Indian democracy can do with a weak state that can conduct elections efficiently, but the Indian republic needs a strong state (not to be confused with an authoritarian state) that can protect individuals from the groups that those elections empower.

 

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Alone by the wayside

 

 

Source: By Krishnan Srinivasan: The Telegraph

 

 

The Silk Road, so named by the German geographer, Ferdinand von Richthofen, in the 19th century, was never a single road but a network of trade routes within and across Asia to Europe that developed in fits and starts over the past 2,000 years. Many products apart from silk travelled on this route and were traded, including art objects, manuscripts and ideas, religious and scientific, the most celebrated and long- lasting being the Buddhist faith that originated in India. At one end of this ' road' was China; at the other end were India, Persia, Arabia and Europe, unified in an early manifestation of globalization by the Mongols in the 13th century. The Silk Road enduringly excites the imagination and possesses a unique brand identity.

 

On separate occasions in 2013, China's president, Xi Jinping, announced a new ' Silk Road Economic Belt' and a 'Maritime Silk Road', which together have become known as 'One Belt, One Road'. China invited other countries to be partners in this venture, which would be mainly financed from its considerable resources, amounting to four trillion dollars. The newly- formed China led Asian Infrastructure Investment Bank and the New Development Bank would support the project. Four years later, Xi declared China to be a champion of free trade and globalization; OBOR would represent free- flowing goods and services and exchanges of people and ideas in a spirit of cooperation.

 

China's economy is moving from one based on investment to one resting on internal consumption, resulting in huge overcapacity in infrastructure, machinery, steel, cement, workers and engineers, along with zero or negative return on investments domestically. Its poorer peripheral landlocked provinces, such as Tibet, Yunnan and Xinjiang, would benefit from inclusion in a wider trading network.

 

Every finance minister is looking for easy money to relieve budget constraints. Although not previously consulted, over 50 countries have already endorsed the OBOR, accepting the Chinese assurance that "we are not imperialists and we do not want to colonize the world". But India has not joined that number, though the OBOR's connectivity and integration could be the stimuli needed to improving our manufacturing and competitiveness. India could also take advantage of China's consumer market and easier access to Iran, Afghanistan and Central Asia.

 

The OBOR project was not designed as an anti- India measure or as a way to exclude India, but India's acceptance would necessitate looking at China with an open mind, overriding the paranoia in certain circles, including in the government and armed forces, and shifting the emphasis from confrontation to cooperation. Participating in the OBOR could also help smoothen India- Pakistan relations.

 

Bangladesh, Cambodia, Myanmar, the Philippines, Vietnam and many other countries are vying for Chinese investment, and capital from China would accelerate Indian infrastructure projects. The OBOR project, once linked with Indian information technology, could incentivize the provision of higher education in India for foreign students.

 

Whether or not India joins the project, the OBOR will, in any case, make headway. A train from China to Spain and back has already completed the 16,200 miles round trip. A summit of interested countries is to be held in May in China, and it is to be seen whether India proposes to attend. Where the OBOR transits disputed territory, one of India's leading diplomatic analysts has pointed out that joint development of such areas — on the lines of Russia and Japan in the Kuril Islands — can override the questions of sovereignty, with benefit to both parties concerned.

 

Chinese firms have invested in lease facilities in a variety of ports in relatively small coastal nations from Darwin in Australia to Zeebrugge in Belgium, with the likes of Kuantan, Colombo, Male, Djibouti, Haifa, Ashdod, Port Said, and Piraeus in between. Many of these places have poor infrastructure, weak construction companies and fiscal problems, and welcome China's involvement irrespective of security considerations. India's opposition to the OBOR was first articulated in 2016 and reiterated by Narendra Modi this year.

 

Noting the "compelling logic of regional connectivity for peace, progress and prosperity", he added that connectivity could not "override or undermine the sovereignty of other nations". Seeking "openminded consultation", India has described the OBOR as a unilateral Chinese initiative, with a limited role for participating countries, and has, most importantly, objected to the route of the $ 50- billion China- Pakistan corridor that passes through Gilgit/ Baltistan in Pakistan- occupied Kashmir en route to Gwadar in Balochistan. Modi warned against "rising ambition and festering rivalries", saying that the need was "to guard against any inclination that promotes exclusion". In reality, China is not likely to make any tall demands violating sovereignty, but India apprehends that the OBOR could be a part of China's plan to encircle India and build up the economies of neighbouring countries which will augment their strategic autonomy.

 

However, New Delhi fully understands that no rising power will refrain from seeking geostrategic opportunities. China is rising and there is an air of inevitability about a future Sino- centric Asia. Apart from the argument about disputed territory — since 1960, China has professed that it does not have a border with India in Kashmir — the economic analysis of the OBOR is significant, and presents a negative picture. China's resources enable it to invest in low profit, high risk projects abroad that could meet its need for energy, raw materials and markets for manufactures.

 

Since most of the foreign investment will be done with Chinese labour and material, foreign exchange from China will be a small component of the costs of investment.

 

The countries through which the OBOR — in the form of rail, road, pipelines and cables — will pass will provide the land and incur debt to pay the costs of the projects. It is still uncertain if the benefits will exceed the costs incurred. Permanently transferring real estate to the Chinese and incurring the debt could prove onerous to host countries before long, and favours provided by Beijing may one day be called in. According to Chinese analysts themselves, 80 per cent of the loans to Pakistan might not be repaid, and 30 per cent to 50 per cent of the loans for the OBOR in other host countries. The conclusion has to be that the benefits to China would, therefore, be non- economic, namely diplomatic, strategic, political and intellectual.

 

Furthermore, if the infrastructure is purely economic and not strategic, it should be open to all countries to utilize it, which, in turn, would enhance its viability. If this is the case, third countries like India will have nothing to gain by joining the OBOR participants' club as such. Strategically, through the OBOR, China will strengthen its political bonding and international presence, develop land routes to the Indian Ocean, secure the benefit of oil and gas pipelines, counter American influence, and prevent Central Asia and Pakistan from becoming a base for Islamic extremism. The Maritime Silk Road would develop into logistic bases, the most desirable locations being at the intersections of the land and maritime corridors.

 

A relatively minor OBOR offshoot, the Bangladesh- China- India- Myanmar connectivity project, though mentioned in many Sino- Indian joint statements at the highest level, also incurs Indian suspicions since it would allow China access to and through the sensitive Northeast. Along with security considerations, India fears that cheaper Chinese manufactures and consumer goods will flood the Indian market, adding to the $ 60 billion deficit in balance of trade

Enhancing the Indian disquiet are signs that the early strains between the Trump White House and Beijing may be dissipating, with the potential of the United States of America and China working together to contain North Korean weapons of mass destruction and reviving the four- nation US- Pakistan- China- Afghanistan group to mediate between Kabul and the Taliban. The latter could lead to a renewal of US interest in Pakistan as a central factor and a rapprochement between Islamabad and Kabul, thereby diminishing India's role in the region and its preferential status with Washington — which may have been wishful thinking in New Delhi all along. The Indian case on the China- Pakistan economic corridor may rest on solid grounds, but it is never comfortable in any situation to stand alone as the sole dissenter.

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Toilets to let

 

 

Source: By Bibek Debroy: The Financial Express

 

 

There is a dashboard for Swachh Bharat Mission (SBM) Gramin. This isn’t only about toilets. On toilets, at the time of writing (since it is a dashboard, the figure changes constantly), 36.5 million toilets have been built. The all-India coverage was 42.02% in October 2014 and is 62.22% now. Therefore, cumulatively, 103.3 million households now have toilets. Himachal Pradesh, Kerala, Sikkim and Uttarakhand have 100% coverage and Chandigarh is fast approaching that threshold. Conversely, or perversely, the numbers are low in Dadra and Nagar Haveli, Bihar, Jammu and Kashmir, Odisha and Uttar Pradesh. These are through the individual household latrine scheme, community sanitary complexes are different.

 

Similarly, there is a dashboard for SBM (urban). This shows 3.1 million household toilets have been constructed; 115,785 community and public toilets have also been constructed. Sikkim, West Bengal and Andhra Pradesh are approaching 100% coverage, Gujarat is approaching 95%. But there is also Meghalaya, with coverage of 0.02%. Understandably, the community and public focus is greater in urban than in rural. That’s good news, at least in some states. However, for every silver lining, there is a cloud, and I am not going to harp on so-called laggard states. Nor am I going to focus on rural.

 

Let’s talk about urban, something the average English-language newspaper reader readily identifies with. Observer Research Foundation (Mumbai) has just come out with a book/report authored by Dhaval Desai—Finding Answers to Nature’s Call in Maximum City. (The title is actually in Hindi, this is the sub-title.) This is stock-taking of the state of public toilets in Mumbai and it isn’t only about building public toilets, but also maintaining them, once built. Here is a quote about a case that received some attention two years ago.

 

“Mrs Kalpana Pimpale, a 45-year-old widow and loving mother of two teenage children, died when she fell into the filled-to-capacity septic tank when the entire floor of the toilet occupied by her collapsed, plummeting her into the deadly depth below. Her body was extricated with the help of firefighters four hours later. Incidentally, the toilet block was constructed just five years ago under the MCGM’s (Municipal Corporation of Greater Mumbai) Slum Sanitation Programme, which mandates the contractor to ensure structural solidity of the toilet blocks for 30 years.”

 

This unfortunate incident raises obvious questions about contract enforcement and establishing culpability. This incident occurred in a slum in Mankhurd. Our perception, entirely valid, is that sanitation conditions in slums are atrocious. The base-level is so low that incremental improvements haven’t made much of a dent yet. The ORF book documents this, and in fairness, also documents several best practices. Moving away from slums, what will you do if you need to visit a toilet in the area around Gateway of India? There is a Sulabh Shauchalaya block there and I will not quote from the depressing description given of this complex.

 

Suffice it to say, you can’t really use it, especially if you happen to be a lady. I have personally faced this problem, not just around Gateway of India, but in other places in Mumbai, and other cities. What do you do when you are abroad? You look for a public toilet (sometimes paid) in, or around, a metro station, a tourist spot or a mall. Rarely will you search for a hotel. In India, barring some malls, a hotel is the only answer. From April 1, there will be some change in Delhi, at least for area under South Delhi Municipal Corporation. Every hotel, restaurant and “eatery” has been directed to grant open access to all citizens, irrespective of whether they are customers or not. At best, there is discretion to charge a fee of Rs 5. How can a government arbitrarily inflict this on hotels, restaurants and eateries? At least for part of this, I think legislative backing exists. There is an Indian Sarais Act of 1867.

 

Sarai means any building used for the shelter and accommodation of travellers, and includes, in any case in which only part of a building is used as a sarai, the part so used of such building.” This certainly covers hotels, though perhaps not restaurants and “eateries”. Several states/districts have made it mandatory for hotels to be registered under this statute. Section 7(2) of this old legislation states, “The keeper of a sarai shall be bound at all times when required by any Magistrate or any other person duly authorised by the Magistrate of the District in this behalf, to give him free access to the sarai and allow him to inspect the same or any part thereof”. That “free access” was meant for a different purpose. Nevertheless, rules can probably be formulated under Section 7(2).

I am not sure about legislative backing for restaurants and “eateries”. These are generally covered by Shops and Establishments Acts. But I don’t think present structure of those Acts allows for the kind of toilet rules we now have in mind, though I have come across boards where “to let” is spelt as “toilet”. Once, late in night, near Moolchand Flyover, I saw someone relieving himself on the road. He had got down from a car, and presumably, should have known better. I felt like getting down and censuring him. However, I checked myself. Where could he possibly have gone? Malls had closed and the nearest hotel was a long distance away.

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A new paradigm for privacy

 

 

Source: By Rahul Matthan: Mint

 

 

Last week, the government made it mandatory to link Aadhaar numbers to tax returns and set itself a target of one year within which it would link all mobile numbers to the Aadhaar database. While the Supreme Court agreed to refer these issues to a larger bench, it seemed happy to let the government continue to incorporate Aadhaar into all aspects of our lives. So much has been said about these decisions that I don’t want to add my voice to the chorus—except to say that it brings into sharp focus the lack of a privacy law in the country.

 

Perhaps in anticipation of these events, a number of academic papers have been published recently, agitating the need for privacy legislation. They have broadly suggested the enactment of a law along the lines of the OECD (Organisation for Economic Cooperation and Development) data protection principles articulated in the 1980s—that personal data is the property of the data subject and cannot be used without his consent.

 

Most privacy laws have been built on this model and if we go down this path, our law will be consistent with global practice. However, if we make consent the cornerstone of our privacy jurisprudence, we will have taken a conscious decision to place upon the data subject, the burden of determining whether or not the use of personal data for a particular purpose is in his interest. In our present data-intensive world, this is a question the data subject is ill-equipped to answer.

 

Today data is collected, processed and transferred in more ways than can be comprehensively enumerated. Our online activity is logged; our financial transactions tracked and correlated against location, age and time of day; and our physical activity measured using wearable and other smart devices. All this data is stored in the cloud and is easily accessible through application program interfaces (APIs) for further processing. Databases are designed to interconnect with each other and use deep learning algorithms to find patterns in ways that even the best data scientists will struggle to understand. Providing meaningful informed consent under these circumstances is impossible.

 

The one person in the data processing workflow, who might have visibility into the possible outcomes of data processing is the organization collecting the data—the data controller. It knows what the data will be used for, as well as the algorithms through which the data will be processed. It is best equipped to assess the possible consequences—both intended and unintended—of its use. More importantly, it has the ability to consciously determine the outcome of the data processing. It makes more sense to hold the data controller accountable for ensuring that no harm befalls the data subject than use poorly informed consent provided by the data subject as a licence to process.

 

The trouble with this model is that the data controller’s interests are not always aligned with the data subject’s. There will be instances where safeguarding the privacy of a data subject runs contrary to the commercial interests of the data controller. Thankfully there are legal constructs designed to address exactly this sort of misalignment. Directors have a fiduciary obligation towards their company that must override any allegiance that the director owes to individual shareholders. Company law requires directors to fulfil their fiduciary obligation even if doing so is contrary to the interests of the shareholder who appointed him. Surely we can impose a similar fiduciary responsibility on data controllers.

 

There could be other situations where the commercial interests of the data controller run contrary to those of the data subject. Take, for example, the use of financial information to assess creditworthiness. If the data controller is required to focus solely on promoting the interest of the data subject, it will only consider information that establishes a favourable credit rating. Doing so would run contrary to the commercial interests of the data controller whose business depends on lending only to those borrowers who can repay. In such circumstances the fiduciary responsibility of the data controller should extend to ensuring that the data in its possession is processed in a fair and non-discriminatory manner. And that it does not use other extraneous facts in its possession to unfairly discriminate against the data subject.

In a way, it is a blessing that India took its time to enact a data protection law. Without the baggage of consent-based privacy jurisprudence, we have the freedom to enact a law that is appropriate to our data-intensive world. While the rest of the world is struggling to redesign their laws that are based on a data protection model conceived of in the 1980s when data volumes were a mere trickle compared to today, India has the opportunity to build, from scratch, a forward thinking privacy framework that can address the current reality and can serve as a model for the rest of the world.

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Classical Amartya Sen and a baroque world

 

 

Source: By Akshath Jitendranath: Mint

 

 

Social choice theory is characterized by ornate mathematical results. This, some have suggested, gives it a baroque façade. Just like the baroque style, works in social choice can look wholly unconcerned with the world around us. But if this is true, then a curious puzzle emerges: What is Amartya Sen—the author of some of the most influential ideas in contemporary social thought—doing in a theoretical world that appears unconcerned with the “real” world? To address this puzzle we need to recognize the baroque façade of social choice as just that—a façade! What appears as mathematical wizardry can illuminate some of the most fundamental issues that a society faces.

 

There is no better evidence for this claim than Collective Choice And Social Welfare. This book has been recognized as a classic since it first appeared in 1970. In it, Amartya Sen weaves together logic, economics and philosophy to establish some propositions. These propositions are the foundations from which Sen has proceeded to articulate the influential ideas we associate with him. Further, these propositions transformed the disciplines of welfare economics, development economics, political philosophy, and ethics. Now, almost 50 years since it first appeared, this classic has been reissued in a new edition. This new edition has preserved the original text. But it supplements the 1970 edition with a new introduction and 11 new chapters.

 

The first thing a reader will observe is the unusual structure of the book. Each chapter is partitioned into starred and unstarred parts. In the unstarred part, a discussion proceeds in ordinary language. But in the starred part, the ordinary language discussion transforms beautifully, if I may indulge, in an aesthetic remark, into a line of reasoning using precise definitions, axioms and proofs. This stylistic experiment anticipates a feature that characterizes Amartya Sen’s work: the beautiful and accessible exposition of essentially abstract ideas. But, what is the problem these chapters are addressing?

 

The problem of social choice is owed to a work of genius that came in the form of a devastating exercise in logic—the misleadingly named “General Possibility Theorem” due to Kenneth Arrow. In Arrow’s formulation, the problem of social choice is this: How do we move from many different rankings of a set of options into a single ranking of that set of options? This move is called an aggregation, and is at the heart of social choice theory.

 

An aggregation has the appearance of a quixotic mathematical exercise, but once you recognize it, they are ubiquitous activities in a society. To illustrate their ubiquity: The outcome of an election requires aggregating the votes of different individuals, a judgement of the Supreme Court requires aggregating the verdict of individual judges that constitute a bench, the measurement of poverty or inequality in a society requires aggregating the different welfare levels of individuals in that society, among others. Arrow’s theorem is devastating because it established that an aggregation is “impossible” to get. Impossible, anyway, without violating some very weak conditions of rationality. Another way to formulate this is to say: A rational aggregation is impossible.

 

The 1970 edition of this book took Arrow’s problem as its point of departure and extended it in various directions. Two of these are, for me, the most luminous. First, Sen deepened Arrow’s aggregation problem. Second, he discussed possible ways out of this problem.

 

How does one deepen a problem that has been described as devastating? Arrow established the impossibility of a “rational” aggregation. By rational we mean some normative demands of consistency. Sen established The Impossibility Of A Paretian Liberal. While this was published as an independent paper in 1970, it appears here in chapter six (“The Liberal Paradox”). This result argues: It is impossible to get an aggregation, say an allocation of resources that is both “efficient” (in a weak utilitarian way) and respects individual liberty (in a very minimal form). Discussing this result more fully is beyond the scope of this review. I note, however, what this result achieved. While Arrow’s aggregation was concerned with satisfying normative demands that are in the domain of rationality, the normative demands that Sen wanted an aggregation to satisfy are in the domain of ethics. While the line that divides the two domains is not as distinct as some economists make it out to be, it is useful to highlight the distinction. In particular, it is useful to see a feature that characterizes Amartya Sen’s work—the importance of ethics, non-utilitarian ethics in particular, to the concerns of economics. Even those unfamiliar with social choice will associate this as being characteristically Sen.

 

Is there a way out of Arrow’s devastating exercise in logic? The most luminous chapters of the 1970 edition are addressing this question. In Arrow’s system, the information contained in the different rankings to be aggregated is unjustifiably restrictive. Two assumptions about the ranking contribute to what Sen calls the “informational penury”. First, the ranking is ordinal, or cannot be represented numerically. Second, the different rankings are not comparable, or there is no interpersonal comparability. To illustrate this, assume I rank caviar above fries, and a vegan ranks an apple above an orange.

 

Then, by these two assumptions we cannot say that I prefer caviar more than a vegan prefers an apple. Neither can we say that changing from fries to caviar increases my welfare more than the change from an orange to an apple increases a vegan’s welfare. Sen relaxed both assumptions in a series of logical steps. This allowed more information to be part of the aggregation exercise. I will not go into the details of these steps, but will leave you with the upshot. If we allow numerical representation without interpersonal comparability, then the impossibility does not go away. However, if we allow interpersonal comparability, then there is a way out of impossibility, and we can proceed in this way with or without numerical representation. A remarkable feature about this exercise was that Sen did not treat the concept of interpersonal comparability in a binary way—either we have comparability or we have incomparability. Instead Sen established a series of results that allow a continuum of comparisons between these two ends. Sen called this continuum “partial comparability”.

 

Now, all this, I concede, even without the mathematical detail does have a baroque appearance. But to see how this sheds light on the world around us, consider the following: A rational aggregation rule which is “possible” if we allow interpersonal comparability is a version of John Rawls’ Difference Principle. In the jargon of social choice, this rule is called the maximin; an extension of this is the leximin, which Rawls himself endorsed. Another example is that unsophisticated measure of poverty which is unfortunately popular in Indian policy circles—the headcount measure. Sen’s well-known critique of both Rawls and the headcount measure might be familiar to people. That both critiques use the insight of partial comparability might not be as familiar.

 

As this shows, social choice techniques form the basis of such diverse and important activities as the measurement of poverty, and the specification of principles of distributive justice. However, there is more to the luminosity of social choice, especially when applied by a master like Sen. Let me illustrate with a final example. At an abstract level, exploring what aggregation we can get by allowing interpersonal comparability is a mathematical exercise—how can we characterize meaningful comparisons? But if we change the terrain of this question from epistemology to ethics, then the question becomes, “Comparisons of what information is justified?” The answer to this is the most famous of Sen’s formulations—capabilities! Sen would go on to develop this more fully in Commodities And Capabilities, which remains the best book on the subject.

 

Indeed, the ideas that we associate with the more classical Amartya Sen—the value of freedom and agency, the profound critique of John Rawls, a humane vision of development and progress, the advance of human rights, the importance of public reasoning, and most famously the capability approach, among others—are grounded by an insight from this book. This, alas, is not very well understood. It is this misunderstanding that the new edition is trying to fix. While the new chapters in the expanded edition are responding to critiques, presenting shorter proofs, generalizing some older results, and providing a systematic overview of how the literature has developed since Arrow’s devastating exercise. It is mainly concerned with showing how the supposedly baroque world of social choice has informed the ideas we associate with the more classical Sen.

However, the relevance of this book to the concerns of the world does not mean that it can be read on the beach. The arguments presented here are abstract even when judged by the conventional standards of an academic work. Further, in advancing these arguments, Sen Responds to interlocutors from various academic disciplines, and draws from sources all over the world. All this can make engaging with this book an intimidating prospect. Nevertheless, it is these intimidating features of the book that make reading it one of the most intellectually rewarding experiences you will encounter. It is like attending a master class, where one of the great thinkers of our age orchestrates the instruments of logic, normative reasoning, economic analysis and history, to answer some of the deepest questions that living together in groups or societies throws up. For this reason, I hope this book gets banned, so that everyone reads it.

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The end of globalization

 

 

Source: By Prabhat Patnaik: The Telegraph

 

 

Donald Trump's recipe for reviving employment in the American economy is to impose restrictions on imports from other countries. If at the same time he had taken steps to increase the level of aggregate demand in the United States of America in other ways, such as through increasing State expenditure financed by a fiscal deficit, then restricting imports from other countries would not lead to a reduction in the magnitude of such imports in absolute terms. It would not, in such a case, cause any unemployment in other countries for the sake of boosting employment in the US. Put differently, it would not in such a case mean the export of unemployment from the US to other countries.

 

But even as he is protecting the US economy against imports from other countries, Trump is not increasing aggregate demand in the US in other ways. Increasing State expenditure through a larger fiscal deficit or through enhanced taxation on the rich, who save a larger proportion of their incomes and whose tax payments therefore come substantially out of their savings, is the most obvious way of increasing aggregate demand. Larger State expenditure financed by taxes on the working people who spend much of their income does not result in a net increase in aggregate demand).

 

Trump, however, is not planning to increase taxes on the rich; on the contrary he is planning to reduce the corporate tax rate from 35 to 15 per cent. He has indicated a willingness to increase the fiscal deficit but the reason he is willing to do so is to accommodate this cut in corporate tax rates. In other words, he plans to increase the fiscal deficit to finance not larger State expenditure, but fiscal transfers to the rich.

 

This would not, however, increase aggregate demand. Since the rich consume a small proportion of their incomes at the margin, such transfers would scarcely raise their consumption. And since a rise in pre- tax profits per se does not induce larger investment unless the market is expanding already, and is expected to continue doing so, such transfers through a corporate tax cut would not even cause larger private investment.

 

It follows therefore that Trump's strategy for reviving the US economy and increasing its employment rate envisages protection from imports, but largely precludes other ways of expanding aggregate demand in the US. It relies in short upon a 'beggar- my- neighbour' policy, which entails snatching demand from other countries in a world where the overall market- size is not increasing. It amounts, as already mentioned, to exporting unemployment from the US to the other countries of the world.

 

Such a policy can work only if the other countries that are hurt by US protectionism do not retaliate by imposing their own restrictions on imports from the US. If they do, then such competitive ' beggar- my neighbour' policies would not only not bring about any increase in employment anywhere at all, including in the US, which started this protectionism; but it could even worsen the state of the world economy, and hence of all the countries collectively. This could happen because competitive resort to protectionism across the world would further reduce the inducement to invest on the part of the capitalists, worsening the world economic crisis.

 

Trump's strategy for increasing employment in the US economy, therefore, presupposes that even as the US imposes protectionist measures against other countries, they do not retaliate; that is, they sit tight, even as unemployment is exported from the US to their economies. It presupposes, in short, that the US would be able to impose upon the world a regime of 'one- way free trade' ( where the US protects itself from imports but others accept free trade), the way Britain had been able to do during much of its imperial history.

 

Either way, however, it portends the end of the current period of globalization. If the US does succeed in imposing 'one- way- free- trade', then we are back to the earlier days of colonialism with its palpable manifestation of unequal power, in lieu of the apparent symmetry of globalization. If the US does not succeed in imposing 'one- way- free trade', then we have competitive protectionism, where the main hallmark of the current globalization, namely freer movement across the world of goods, services and capital, including of capital in the form of finance, would have disappeared.

 

If the world economy is to recover from the protracted crisis to which it has sunk after the collapse of the US housing ' bubble' in 2008, then there has to be a revival of global aggregate demand. Since monetary policy has proved to be singularly incapable of bringing about any such revival (even with a zero rate of interest the US is unable to make any noticeable dent upon the unemployment scenario), such a revival of aggregate demand can occur only through fiscal intervention.

 

Finance capital, however, is invariably and implacably opposed to State intervention through fiscal means to directly increase aggregate demand; and in a world where finance capital is globalized while the State remains a nation- state, its opposition acquires decisive force, for any State that dares to go against its will, runs the risk of a financial outflow, precipitating a financial crisis and bankruptcy within its shores. Nation- states caught in the web of globalization; of which globalization of finance is a central feature, must therefore eschew any fiscal intervention for stimulating demand.

 

This in turn implies that the world economy continues to remain trapped within a crisis caused by insufficient aggregate demand. Leaving aside the temporary palliative that an occasional ' bubble' in asset prices can offer, and also leaving aside the possibility of a particular country improving its position through the successful pursuit of a 'beggar- my- neighbour' policy of the sort that Trump is attempting, there are only two possible ways that the world economy can come out of the existing crisis. One is if several nation- states pursue a coordinated fiscal stimulus. Even though a stimulus of this sort would be against the wishes of global finance, it cannot in such a case resort to a flight from one country to another, since all would be engaged in active fiscal intervention.

 

The other way is if individual countries delink themselves from globalization, especially from the vortex of globalized financial flows, by putting in place capital controls, and then pursue active fiscal intervention; they would also need to have trade controls in such a case to ensure that the trade deficit remains manageable.

 

Each of these ways of coming out of the crisis however entails overcoming the opposition of finance capital; and that is not easy. Indeed, the idea of a co-ordinated fiscal stimulus being undertaken by several major countries together had been mooted during the Great Depression of the 1930s itself. John Maynard Keynes had suggested it; and, even before he had done so, a group of German trade unionists had come up with this same proposal.

 

But, as Charles Kindleberger suggests, the stout opposition of finance capital had torpedoed all such proposals. The opposition by finance capital to any such idea in the present context will be no less stout, and even more effective, since it occupies an even more hegemonic position in the current regime of globalization. And there are no global movements, either of workers, or of peasants, or of the two together, to counter politically this opposition of finance to a coordinated fiscal intervention.

 

Such political mobilization, for countering the opposition of finance to fiscal intervention in order to overcome the crisis, is much more feasible within particular countries. The fact that Trump has not taken on the hegemony of finance, and has not proposed larger State expenditure financed by a fiscal deficit, but instead has confined himself to imposing a 'beggar- myneighbour' policy on other countries, reflects only his class bias; it does not indicate that this alternative is foreclosed.

But the political mobilization of workers, peasants, agricultural labourers and petty producers of all descriptions within particular countries — needed for overcoming the hegemony of finance capital, and for putting in place an alternative strategy for revival — though it may accept the overall framework of a capitalist economy to start with, may not remain confined to this framework. It may well start a dynamics that becomes the harbinger of a new order going beyond capitalism. In short new possibilities are opening up today which entail the end of the current globalization. Ironically, this globalization was advertised not long ago as constituting the end of history.

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Talk-time on Ayodhya

 

 

Source: By Rajinder Sachar: The Statesman

 

 

The Chief Justice of India has suggested that he can act as a mediator in the pending Babari Masjid demolition case. The expression of concern is a little odd as it comes at the instance of an “inter-meddler”, and without the parties being present in Court. No wonder the suggestion on negotiations towards a mutual settlement has caused a flutter in the political roost. In my opinion, the Babari Masjid demolition case is not a matter that can be settled through a compromise. This case has constitutional implications. The Constitution states clearly that India is a secular republic.

 

I was in Geneva attending the UN Human Rights Commission meeting when I was informed that the Babari Masjid had been demolished. On television, I watched the gory spectacle of BJP storm troopers climbing up the walls of the Masjid and breaking it down. The party Chief Minister, Kalyan Singh’s assurance to the Supreme Court that he would take steps to prevent the demolition was belied. The Supreme Court by a majority just accepted his apology instead of sending him to jail for contempt of court. But this was a relatively minor issue compared to the ominous conspiracy of the Congress Prime Minister, Narasimha Rao, who suddenly became inaccessible to senior journalists, his Home Secretary and even his colleagues.

 

I feel ashamed to admit the complicity of the judiciary, which despite the injunction since 1949 to bar people from entering the area did not proceed against the public. Even the higher judiciary did not intervene; rather, it seemed to ignore the trespass.

 

The magnitude of the danger should have been grasped by all parties. The battle for secularism should have been reflected in the determination to nip the canker of communalism in the bud. As it turned out, nothing was done.

 

At that point of time, I had made a public statement, saying that the Government should have announced December 6 as a ‘National Repentance Day’ when people will fast and pray for the unity and welfare of all communities”. But the non-BJP parties analysed the situation as merely a law and order problem and thus acquiesced in this dastardly action.

 

Whatever the history of the controversy, all parties let the matter be referred to Allahabad High Court. Both sides were aggrieved with its decision. The BJP is insisting that it will build a temple on the site where the Masjid undoubtedly stood for over 500 years. The Muslims cannot obviously agree to a shameful compromise on the sanctity of the Masjid. The matter is before the Supreme Court; it cannot avoid a decision which may not make everyone happy.  It is its constitutional duty and it has no other option.

 

Going by precedents, the case in favour of Muslims is invincible. I say this on the precedence of the Shahidganj Masjid case in Lahore. It was decided by the Privy Council in 1940. The Supreme Court need not decide on the merits of the argument whether Babari Masjid stood where the Ram Temple once existed. This is of no consequence as it is not relevant to the judiciary’s ultimate decision. It is obvious to the meanest intelligence that it is impossible to prove that the birthplace of Lord Ram was beneath the Masjid . It may be a matter of faith, genuine or contrived, but that is no proof. Nor for that matter can it ever be cited as a legal ground to take away the land from the mosque. If the finding is that the mosque was not built on Ram’s birthplace, then the Muslims can get the land back. They will be free to use it in any way, including the construction of the mosque.

 

Alternatively even if it is assumed that there was a temple on the land of Babari Masjid, the suit filed by the VHP/RSS has to be dismissed. Admittedly, Babari Masjid existed for over 500 years, till it was demolished by the activists of the VHP/RSS on 6 December 1992.  From the legal perspective, the Sangh Parivar would have no right even if a temple had been demolished to build the Babari Masjid. I say this in view of the precedent of the case of Shahidganj Masjid. There was a mosque dating back to 1722. But by 1762, the shrine came under Sikh rule and was used as a gurdwara. It was only in 1935 that a suit was filed claiming the building was a mosque and should be returned to the Muslims.

 

The Privy Council observed that “their Lordships have sympathy with a religious sentiment which would ascribe sanctity and inviolability to a place of worship. However, they cannot under the Limitation Act accept the contention that such a building cannot be possessed adversely. The property now in question, having been possessed by Sikhs, was adversely given to the waqf and to all interests there under for more than 12 years. The right of the mutawali (caretaker) to take possession for the purposes of the waqf came to an end under the Limitation Act”. On a parity of reasoning, even if a temple existed prior to the construction of the Masjid 500 years ago, the suit by the Hindu outfits like Nirmal Akhara VHP / BJP etc lacks basis.

There is another reason why in such a situation, the suit will fail because in common law, even a rightful heir, if he kills his ancestor, forfeits his right of inheritance. In the Masjid case too there was a “murder most foul”, and hence the killer cannot be allowed to take the benefit of his own dastardly deeds, whatever the factual position may be. Of course, it is the privilege of the Chief Justice of India to constitute the Bench.  With respect, I submit that it might be more reassuring if a Bench of seven or nine judges hears the appeal.

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Why care about inequality?

 

 

Source: By Vivek Dehejia: Mint

 

 

Why care about inequality? Unlike our friends on the left, who take it for granted that inequality of outcome, rather than of opportunity, is ipso facto undesirable, for those of us who place ourselves on the classical liberal or libertarian end of the spectrum, this is a serious and important question which does not have obvious and easy answers. It helps to start from first principles.

 

Thus, if unequal outcomes across individuals are the result of individual effort, or the differences in individual endowments, and, crucially, if these differential outcomes arise through competition on a level playing field in which the rules are fair and transparent and the same for everyone, there should be no prima facie case to be concerned about inequality of outcome, assuming equality of opportunity and access have been ensured. Thus, in the classical world of atomistic competition of economics textbooks, the laissez faire outcome is not only efficient (which can be proved mathematically, in the absence of market failures), but, for classical liberals and libertarians, it is also equitable, fair and just.

 

Leave this fictitious textbook world, however, and the tale becomes twisted. Thus, in the real world, accumulated inequalities of outcomes can, and do, become embedded in inequalities of opportunity and access. So, a Sidwell- and Harvard-educated patrician whose family sailed on the Mayflower in 1620 (such people do exist—one went to school with a cousin of mine and is a famous economics professor) automatically starts out at an advantage compared to someone with public school and college credentials from the blighted inner cities.

 

Crucially, this advantage is not reflective purely of differences in effort or natural endowment, but of inequality occluded over centuries. The game is simply not played on a level playing field to start with, and so we cannot blithely assert that differences in outcomes are ethically irrelevant and can safely be ignored. A perceptive former student of mine once said, aptly, that the classical liberal postulate, that only equality of opportunity matters and inequality of outcome may be ignored, really only applies to frontier societies, in which it may safely be assumed that everyone is starting, roughly, on an even playing field. Elsewhere, the assumption, and the ethics which flow from it, is treacherous.

 

Yet a different perspective arises if we change the unit of analysis. Thus, classical political theory focuses on inequality at the level of the individual person (or, perhaps, of the individual household, which is already a fudge), but suppose we shift our attention to units of governance? Thus, if we consider the planet as a whole, we observe staggering inequalities among nations.

 

In the absence of a world government, such inequalities must, perforce, be accepted, although they may not be deemed morally neutral. Thus, for instance, the fact that India today is poorer than Great Britain is not merely an ethically irrelevant accident of history, but reflective of the history of war, colonization, loot, plunder, enforced mass starvation, and so forth.

 

Move down to the level of the nation-state, which, starting with the Treaty of Westphalia (1648), has been the basic political construct of our modern world, and we may observe similar inequalities, not just amongst individuals, but amongst sub-national units of governance, such as states or provinces. Peel away a further layer, and one will discover inequalities at the sub-sub-national level, such as districts in India, counties in the US, and so forth. Indeed, in the case of India, in particular, Praveen Chakravarty and I have documented such pervasive inequalities in a series of writings, including in this newspaper.

 

These inequalities, too, are not merely accidental, but reflect differences of history, geography, even climate. Thus, for instance, a body of research suggests that regions of India ruled by “native princes” have fared better, even into the present, than regions ruled directly by British colonial authorities. Likewise, even earlier in history, peninsular India was spared the impact of land-based invasions, and still today, peninsular India is much more prosperous than the landlocked hinterland of north India, which suffered repeated depredations over the centuries.

 

Whatever the reasons, and they are not fully understood, present-day India, in particular, is characterized by large and skyrocketing inequalities at the state and district levels—in marked contrast to other federal economic and political unions, where such inequalities have become attenuated over time. While we can engage in endless philosophical rambling on whether we ought to care about inter-personal inequality, it is self-evident, in the context of a federal union, that large and rising inter-state inequality is relevant, at a minimum, in a political economy sense, if not necessarily in a wider ethical sense.

That is, the ties that bind an economic and political union together may begin to fray if income and other gaps grow out of control. We need urgently to turn our attention to widening income gaps at the regional level in India, as these will surely begin to colour the political economy of the federation in years to come.

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The future of monetary policy

 

Source: By Meghnad Desai: The Financial Express

 

With a new president in town and only a year left in the first term of the Fed chairman Janet Yellen, speculation is mounting about the future of the Fed. Given that Donald Trump has strong views on everything and many of them are, at the least, unorthodox, and, at the worst, an anathema as far as many critics are concerned, the debate is likely to get bogged down in personalities—who gets what rather than asking whether the whole question of monetary policy needs a rethink.

Consider the idea of central bank autonomy. This is a pillar in the conventional wisdom about monetary policy. Many people think it is a permanent feature of a sound economic policy. Yet, central bank autonomy is of recent origin. I recall no such idea before the monetarists became dominant in economic debates. It was during the 1980s when it was firmly believed that money supply should be and could be controlled to contain inflation that the idea of central bank independence was floated. Governments were suspected as fiscal profligates. A firm, external, supra-democratic control was needed to keep those governments in check. This idea has now become so firmly fixed that many commentators think it is immutable.

It is instructive therefore to read Sebastian Mallaby’s massive book, The Man Who Knew, on Alan Greenspan who served as Fed chairman under four presidents. The book is vast in its ambitions, extended in the width of its coverage, scholarly in its meticulous search of sources and well-deserving all the many honours it has garnered. Mallaby has written the history of monetary theory and policy making of the last 50 years with an enviable eye for contemporary politics. He tells the life of Greenspan as an intellectual history of the last 70 years.

Mallaby’s account of the rise of monetary theory and policy in the US begins at the beginning in the 1950s with a few robust intellectuals, Milton Friedman chief among them, who ignored fashion and stuck to their beliefs. Greenspan began as a good student of Arthur Burns who, along with Wesley Mitchell, had pioneered detailed measurement of the microeconomic industrial and commercial data to monitor macroeconomic movements.

Greenspan was always a conservative, but meeting Ayn Rand gave him a faith. He became a libertarian and took market competition as the basis for a sound economy. There was, then onwards, a tension between the man who looked at data and the faithful libertarian. Often, he let his faith overcome the warnings of data.

Even so, Greenspan did get to the top and made monetary policy for over 20 years. Mallaby covers the stock market bubbles being debated. There is the fallacy here of the true free marketeer that bubbles cannot be spotted or even checked when blowing up. The policy maker cannot and ought not to interfere. But when a bubble bursts, instant help is at hand from the previously unwelcome policy maker. There is a similar refusal to see that control of inflation is not enough. Financial stability is a different problem. Even with low inflation, it is possible for markets to go berserk as they did to Greenspan’s regret. He could not let go of his Ayn Rand fundamentalism till the very end. He knew that markets are not always vigilant against excesses, but he could not admit it to himself nor base his policy on the likelihood of markets being wrong.

For two decades, the developed world stayed with the twin ideas of rational expectations and efficient markets. These in turn dictated fiscal prudence—making the debt-GDP ratio a totem and low deficits a constant feature and an anti-inflationary monetary policy, including central bank independence. The crash of 2008 showed that these principles are not sufficient for economic and financial stability. Yet, no one has really questioned them.

The time has come therefore to get back to first principles. Who are central bankers independent of? If they are zealous about their autonomy from the elected representatives, but not mindful of the redistributive results of their policy, they are merely serving the asset-holders who just happen to be the very rich. Keynesianism, now in disgrace, trusted the elected representatives to look after the many, not the few. A sustained attack on Keynesian policy in the 1960s well covered in Mallaby’s book, shows that it came from politically motivated academics.

But their arguments were couched in economic-theoretic terms. Milton Friedman did win the battle for conservatism. Many of his ideas were radical such as negative income tax. But we found out during the halcyon days of monetarism that money supply could not be defined, much less controlled. Inflation came down due to large scale unemployment, not monetary policy. We are now realising that the days of QE are over. A full recovery has not taken place. GDP growth is low in G7. Fiscal policy needs a new boost. We also need new thinking about monetary policy.

 

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