An exercise in caution



Source: By Alok Ray: Deccan Herald



The Union Budget 2017-18 is the first post-demonetisation budget designed to mitigate the adverse (economic and political) fallouts of the unprecedented experiment as well as falling private investment, which is the biggest problem facing the economy. Otherwise, the economy is in fairly good shape as inflation is under control, both fiscal and current account deficits are down and more FDI is coming in despite the global slowdown in FDI flows.


However, the 'twin balance sheet' issues - rising bad debts of banks and the corporate sector - continue to haunt the economy while the bonanza arising out of falling oil prices is coming to an end and the rise in Federal interest rate is pulling out more FII (foreign institutional investor) money from other emerging economies, including India.


Finance Minister Arun Jaitley has reduced income taxes for the lowest tax bracket from 10% to 5%, provided a tax rebate of Rs 12,500 for people earning more than Rs 5 lakh while imposing a new 10% surcharge on income from Rs 50 lakh to 1 crore per year. He has also reduced taxes for 96% of business firms - the so-called MSMEs having a turnover of less than Rs 50 crore.


The FM has also proposed to bring in a legislation to confiscate the assets of people who flee abroad to avoid taxes. Jaitley has announced that the income tax department would pursue cases of lakhs of accounts (thrown up by big data analytics) where the big cash deposited does not match with income tax returns. The basic purpose behind these moves is to placate the aam aadmi and the small firms which had to bear the brunt of demonetisation and the resulting cash shortage.


At the same time, the government wants to project the impression that it is pro-poor and is keen to tackle the problem of black wealth. This is all the more necessary since most of the demonetised currency, contrary to initial expectations, has come back into the banking system. Another much-touted step to curb black money is that the anonymous cash contribution from a single source to a political party would be limited to only Rs 2,000 (as against Rs 20,000 at present). Any contribution above this limit would have to come in the form of cheques or purchase of electoral bonds which would not bear the names of contributors (though, the banks selling those bonds would apparently have names of the contributors in their books and the government and the tax authorities would be able to pursue them, if they wish).


So, it remains doubtful whether big contributors would be interested in buying those bonds as they would like to remain anonymous for both economic and political reasons. The escape route of Rs 2,000 in cash would probably be used by political parties to hide their source of funds by simply declaring most contributions as coming through small cash donations of Rs 2,000 each. Bundles of the new Rs 2,000 notes would come pretty handy here.


The basic reason behind falling private investment is the existence of excess capacity in many sectors and, therefore, there is no need to add to capacity by new investment. Creating demand is the need of the hour. The government wants to give a boost to expenditure by spending more on NREGA (25% more allocation), infrastructure projects in roads, rails, irrigation, affordable housing and providing tax breaks to SMEs (considered the biggest job creators all over the world) which would keep more funds in their hands to reinvest, (But, are funds the real constraint or is it the lack of demand?).


Higher budget allocation, tax reliefs (such as reducing the holding period for long-term capital gains on immovable property from 3 to 2 years) and incentives to affordable housing is also expected to boost construction activities which, again, are a big job creator in many sectors through various linkages. Consecutive good monsoons and higher rural income would be another source of additional expenditure.


The government seeks to improve the 'ease of doing business' by abolishing the Foreign Investment Promotion Board (FIPB) which is a duplicate source of red tape for FDI when more than 90% of FDI comes through automatic route and the protection of sensitive sectors (like defence, media etc) is ensured by clearance from respective ministries in any case.


Fiscal consolidation


There is an ongoing debate on whether the government should stick to its fiscal deficit targets or relax it to stimulate public investment when private investment is at an all-time low. The FM has chosen the path of fiscal consolidation by sticking to 3.2% of GDP (a slight departure from 3% target which the international credit agencies would hopefully condone) in the 2017-18 and then 3% in the next year.


More importantly, the earlier laid-down revenue deficit reduction path (revenue deficit - the excess of a government's consumption expenditure over current income - is a better measure of fiscal irresponsibility than fiscal deficit) is being followed. The pushing of cases against large cash depositors would hopefully bring in significant additional tax revenue as many of them may choose the path of paying extra taxes to avoid hassles from the tax authorities. This is another windfall from demonetisation which would come in handy for the FM to balance his books. In addition, the introduction of GST sometime in the coming fiscal may further boost revenue collection,

Overall, though there are no dramatic announcements (for that reason the stock markets are happy), Jaitley has done what he could possibly do, given the prevailing economic and political reality.

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The problem with household debt


Source: By Tulsi Jayakumar: Mint


What should be the monetary policy stance in an economy which has suffered the demonetisation exercise? The Reserve Bank of India, in its sixth bi-monthly monetary policy, three months after demonetisation, kept the policy repo rate unchanged while announcing a change in its policy stance from accommodative to neutral. Traditional debate and analysis has centred around the efficacy of rate cuts in stimulating investment and growth. A deeper question, which has drawn scant attention however, is the issue of growing household debts and the consumption-led growth which such interest-rate cuts have the potential to facilitate.

A recent paper analyses the macroeconomic implications of household debt in the short and long run by analysing quarterly household data for 54 economies for the period 1990-2015. The authors find that debt boosts consumption and GDP (gross domestic product) growth in the short run, i.e. a one-year period. But in the long run, household debts have a negative effect on growth, with a 1% increase in the household debt-to-GDP ratio lowering output growth in the long run by 0.1%. The authors suggest that policymakers face “non-trivial, real costs” in stimulating the economy through credit expansion.

The authors further find that as the household debt-to-GDP ratio exceeds a threshold of 60%, the negative long-run impact of household debt on consumption intensifies. The estimated threshold effect for GDP growth is larger, with the negative debt effect intensifying as the household debt-to-GDP ratio exceeds 80%.

Country-specific institutional factors, particularly the degree of legal protection to creditors, affect the sustainability of such household debt. Further, while financial development in emerging market economies (EMEs) has a positive impact on the relationship between higher household indebtedness and growth in the short run, the degree of financial development plays little role in reducing the negative impact of higher household debt on growth in the long run.

The National Sample Survey Office (NSSO) Survey 70th round, the results of which were published in November 2016, studies household indebtedness for the period January-December 2013 in India. A perusal of the data shows that about 31.4% of Indian rural households and 22.4% of urban households are in debt. The incidence of indebtedness grew much faster in rural India than in urban India, with 35% of cultivator households being indebted in rural areas in 2012, as against 25.9% in 1991. Again, one in about five households in urban areas at the national level was indebted households. Regionally, the indebtedness was far greater in the southern states of Andhra Pradesh, Kerala, Telangana and Karnataka, with the incidence being above 40-50%.

More important is the declining role of cheaper institutional credit in the total cash debt in rural segments, vis-à-vis the exploitative traditional sources of non-institutional credit such as agricultural moneylenders, landlords, traders, etc. The share of institutional credit in the outstanding cash dues of rural households decreased steadily from 61% in 1981 to 56% in 2012. In contrast, the institutional share in urban indebtedness increased and was about 85% in 2012.

More than 40% of rural loans were on compound interest terms. However, even the “simple interest loans” were not really low-interest/interest-free. Non-institutional loans to rural households were at rates as high as 20%. Further, 69% of the total rural household loans and 58% of urban household loans comprised such high-interest loans from non-institutional agencies. Moreover, both rural and urban households seemed to be borrowing less for productive purposes, with the percentage of productive loans coming down from 69% to 40% for rural, and from 42% to 18% for urban, households over the period 1981-2012.

It is clear that institutional credit availability to facilitate rural consumption and growth has been on the wane, with larger household debts being incurred through non-institutional sources, borrowed at very high rates of interest for unproductive purposes. While international studies point to the negative long-run impact of household debt on consumption and growth, such debt-driven consumption as prevalent in India is likely to be even more unsustainable, and non-growth-inducing.

Monetary policy will need to pay attention to this link between consumption and growth. The success of monetary policy and the transmission mechanism would be predicated on the successful reach of institutional credit agencies in rural areas and their growing share in rural household debt.

A perusal of the Global Competitiveness Report further reflects the challenges posed by institutional factors such as “efficiency of the legal framework in resolving disputes”. India will need to strengthen its dispute-resolution mechanism, as also its legal-rights index. The presence of the right institutional environment will have a bearing on the sustainability of household debt.

While the Economic Survey and the budget document have raised concerns about corporate debt and government debt, growing household debt may be the blind spot. Economic analysts, as also the monetary authorities, may need to go beyond their traditional obsession with the growth-inflation outcomes of monetary policy to the underlying conundrums of such growth itself.


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Defence of the realm



Source: By Gurmeet Kanwal: The Statesman



In the budget for the Financial Year (FY) 2017-18, presented in Parliament on February 1, the Ministry of Defence has been allotted Rs 2,74,114 crore, excluding the provision for pensions. The nominal increase of 5.7 per cent over the revised estimates (RE) for FY 2016-17 is barely adequate to provide for domestic inflation. The increase is insufficient to cater for the increase in the pay and allowances of the armed forces and the civilian employees of MoD consequent to the implementation of the recommendations of the Seventh Pay Commission.


The additional expenditure that needs to be incurred on account of the upward revision in pay and allowances has resulted in an increase in the share of expenditure planned on the revenue account in the defence budget and a corresponding decrease in the share of the expenditure on the capital account. While revenue expenditure has gone up from 65.3 per cent of the total budget in FY 2016-17 to 67.0 per cent, expenditure planned on the capital account has gone down from 34.7 to 33.0 per cent.


The total capital outlay for the next financial year ~ meant mainly for the acquisition of new weapons systems and defence equipment ~ is pegged at Rs 86,488.01 crore. Though the government has been making efforts to encourage the acquisition of weapons systems and defence equipment through the “make in India” route, about 70 per cent of the requirements are still imported.


The increase of 10.05 per cent in the capital budget over the budgetary estimates (BE) for FY 2016-17 (Rs 78,586.68 crore) is barely adequate to compensate for the 10 to 15 per cent inflation per annum in the prices of weapons and defence equipment procured through imports. The amount actually spent on the capital account in FY 2016-17 is Rs 71,700.00 crore (RE). A sum of Rs 6,886 crore was transferred to the revenue account. The Customs duty now being imposed on defence imports and the drop in the value of the Indian rupee against the US dollar also make the import of weapons and equipment comparatively costlier. The rupee had dropped to 68.71 to one dollar on November 24, 2016 ~ its lowest level during the year.


Despite low levels of funding on the capital account, allocations continue to be surrendered almost every year or transferred to the revenue budget. All of these systemic weaknesses work in tandem and, consequently, the modernisation plans of the armed forces are adversely affected. As a ratio of the country's GDP, the defence expenditure planned for FY 2017-18 stands reduced to 1.62 per cent. This is the lowest level since the disastrous 1962 war with China when it was 1.59 per cent of the GDP and is grossly inadequate to meet India's growing threats and challenges and the need for military modernisation.


The allocation for defence must go up to at least 2.0 per cent of the GDP in the supplementary demands for FY 2017-18. It should be raised gradually to 3.0 per cent of the GDP as recommended repeatedly by the Standing Committee on Defence in Parliament, if another military debacle is to be avoided.


According to a press release issued by the MoD, the Defence Acquisition Council chaired by Defence Minister Manohar Parrikar had accorded initial approval ~ referred to as acceptance of necessity (AON) ~ to defence procurement projects worth Rs 2,39,000 crore till July 2016. Of this, contracts worth Rs 1,13,995 crore had been signed. At a meeting of the DAC held in November 2016, AON was given for new procurement projects worth Rs 82,117 crore.


The new projects include the purchase of 83 Tejas Mark 1A Light Combat Aircraft (LCA) for the Indian Air Force at a cost of Rs 50,025 crore, 15 helicopters for the IAF and the Indian Army at a cost of Rs 2,911 crore, 598 mini-UAVs for the army at a cost of Rs 1,100 crore, and 464 T-90 Russian tanks at a cost of Rs 13,448 crore.


Given the low availability of funds on the capital account and the ‘committed liabilities’ of previous years ~ previously negotiated contracts with a fixed annual outgo ~ it will be difficult for the MoD to find the funds that will be required to sign contracts to acquire even half the weapons and equipment for which AON has been accorded in November 2016. In FY 2017-18, funds amounting to only about Rs 5,000 crore are likely to be available for new weapons and equipment acquisitions. Assuming the first year’s payment to be 10 per cent of the total, contracts worth about Rs 50,000 crore may be concluded.


A workable method needs to be found to overcome the inability of the MoD bureaucracy and the armed forces to spend the funds allotted on the capital account fully and to curb the tendency of the Ministry of Finance to allow part of the allotted funds to lapse as a tool to manage the burgeoning fiscal deficit. In the interim budget that he presented for FY 2004-05, the then Finance Minister Jaswant Singh had made an excellent recommendation. He had proposed to introduce a non-lapsable, rolling defence modernisation fund worth Rs 25,000.00 crore. It was an innovative measure that did not find favour with the Congress-led UPA government that presented the full budget after it came to power.


The reason given then was that the ‘rules of business’ do not permit a non-lapsable fund as all unspent funds compulsorily lapse at midnight on March 31 at the end of the financial year. Such a roll-on fund is known to have been in vogue during British rule. Since then, the rules of business have not changed substantially. And, even if the rules of business need to be amended now, surely a Constitutional amendment is not necessary to do so.

It is an inescapable national security imperative that a roll-on, non-lapsable defence modernisation fund be instituted with a corpus of Rs 1,00,000 crore. It should be linked with the Consolidated Fund of India. Besides being a statement of account, the defence budget is a tool for demonstrating the country’s resolve and for enhancing deterrence through signalling. Infirmity in the approach to the formulation of the defence budget creates the impression that the management of national security does not rate a very high priority. That is not a worthy message to send out from the premises of Parliament. Overall, with the present defence budget, operational preparedness will deteriorate further even as the threats and challenges continue to increase. And, military modernisation, which had just about begun to pick up steam, will stagnate once again.

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Charting the near-term policy road map



Source: By Jayachandra: Mint



The monetary policy committee of the Reserve Bank of India (RBI) surprised the market by holding rates and changing the policy stance from accommodative to neutral to give itself more flexibility. The market was expecting a 25 basis point cut in policy rates. However, since the banks have reduced lending rates significantly in the wake of the currency swap initiative and influx of liquidity, a rate cut at this stage would not have made much of a difference.


At a broader level, now that the two big events—monetary policy and Union budget—are out of the way and there is a fair amount of clarity in terms of policy direction, it’s time to shift the focus back on implementation and some of the impending policy challenges. In this context, there are five broad areas that will be worth tracking in the near term or in the coming quarters.


First, in the budget, finance minister Arun Jaitley announced that the government’s capital expenditure would go up by over 25% in the next fiscal. This is a welcome move. As private investment continues to remain weak, the government’s capital expenditure will help in maintaining the growth momentum. However, government’s capital expenditure may not be sufficient to push growth in the medium to long run. One of the reasons for weak private-sector investment is the stressed banking sector balance sheet and the reluctance of the banking system to lend to the corporate sector.


The budget has provided Rs10, 000 crore for recapitalization of public-sector banks, which will not be sufficient. Apart from finding resources to adequately capitalize public-sector banks, the government will need to work with the RBI to resolve the bad loan problem at an accelerated pace, as this is perhaps the biggest impediment to investment and growth revival.


Second, one of the biggest challenges in the next financial year will be the implementation of the goods and services tax (GST). The government will need to complete the necessary legislative requirements in the current session of Parliament and ensure that the GST is implemented smoothly. To be sure, there will be fiscal implications if the GST is not implemented properly as the Central government is bound to compensate the states for revenue losses. The need for a large compensation can affect fiscal calculation and end up disturbing the capital expenditure plans of the Central government, thus becoming a drag on growth.


Third, it is now becoming clear that the impact of the currency swap on economic activity is likely to be temporary and the government will now have to focus on gains. Since the government has gathered an enormous amount of data on deposits, it would do well to quickly gauge the possible fiscal benefit. There are suggestions that the gains should be distributed among Jan Dhan account holders. The government should avoid such ideas. Distributing money might result in short-term political gain for the ruling party, but it will set a bad precedent. The gains should be used to push capital expenditure—including in rural areas—which will help augment growth in the medium to long run.


Fourth, one of the biggest disappointments in the budget was that even though the government decided to cut the tax rate for smaller companies, it did not reduce corporate tax across the board. The government would do well to work on a timeline as to how and when the exemptions will be removed and the corporate tax rate will be brought down to 25%. This will provide clarity and will help boost investment. This will also lift sentiment in the financial market and help companies mobilize resources at more favourable terms.


Fifth, now that India’s macro fundamentals are a lot more stable than they were a few years ago, the government can now concentrate on structural reforms. Jaitley in his budget speech said that legislative reforms will be undertaken to simplify rules in the labour market. Simplification of labour laws will help reduce the compliance burden and will be a big positive, especially for the manufacturing sector.

Simultaneously, the government should also work on reforms in other parts of the factor market. For instance, India needs a vibrant corporate debt market. Despite numerous studies and committee reports, progress on this front has not been as desired. It is time the government takes the lead and works with financial sector regulators to give this project a decisive push. Policy movement in these areas will be critical in maintaining growth momentum and building a foundation for higher sustainable growth in the medium to long run.

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Federalism redefined ~ II



Source: By Gyan Ranjan Saha: The Statesman



In the wake of demonetisation, a suggestion was floated by several state governments on the formation of a national government at the Centre. This would have signalled the death of the federal structure of governance which, ironically, has been advocated as part of their agenda for a long time.


Their brand of federalism has been advocated on numerous occasions. Most of the measures, adopted by the Union Government, are invariably regarded as anti-federal by their ministers. One may not find fault with such shenanigans if one grasps the political compulsions of the parties ruling these states. But an intermittent blitzkrieg of such out-of-the-box views is certainly not conducive to a stable and mature polity like India. There is a clear distinction between a federal and a national government as was pointed out by Alexander Hamilton in his essay.


A national government is essentially responsible to the people of the country irrespective of the political leanings of the constituent parties. A federal government, on the other hand, is accountable to the party which enjoys the majority in the legislature. The problem arises when one party has the majority in the Union legislature while different parties do so in the legislatures of the constituent states, as is the case at the present juncture. More often than not, irreconcilable conflicts emerge where governance becomes the victim. The framers of the Constitution possibly could not foresee such a political logjam.


The US Constitution took care of such an eventuality by adopting the Presidential system where the President is elected by the people of the country directly with built-in constitutional checks and balances to prevent untrammelled exercise of authority by the President.


Unfortunately, the Indian experience is throwing up indefensible roadblocks in the way of a smooth working of the government. Added to the problem is the provision of a bicameral legislature at the Centre. Recent history suggests that except the money bills, it has become practically impossible for the executive to achieve its legislative agenda. A bicameral legislature under the Government of India Act 1935 could function as an effective system because of the overriding powers enjoyed by the Viceroy-in-Council. In the existing system, no such safeguard is available and so, despite having a majority mandate, the government is handicapped in getting its agenda passed through the respective Houses.


It is also necessary to examine the issues which unexpectedly arise in the process of governing Union-State relations as would be apparent if one traces the recent history of the country. For example, with the changes in the Union legislature brought about by the installation of a new government, the status of the Governors of the states who were appointed by the previous government becomes precarious when the new government starts the process of replacing them with their own nominees.


This phenomenon has assumed importance over the past seven decades, to the extent that the matter had to be referred to the Supreme Court for resolution. The controversy seems to resurface with every change in the ruling disposition at the Centre. The sensitive issue erupts at regular intervals when the need to choose and appoint officials for strategically vital slots arises. Despite an apparently workable mechanism in place, parties are often seen to be bickering over the selections. One keeps wondering if this is a healthy sign of a democratic set-up in the federal system of governance. A recent instance is the abolition of the Planning Commission.


It is nobody’s case that the erstwhile entity was able to achieve the mission for which it was established. It gradually transformed itself into a gargantuan institution whose main raison de etre was to act as an alter ego of the Union Government and provide a waiting-room for superannuated bureaucrats and unelectable politicians. Yet, when abolished, it created an opportunity for some state governments to attack the decision on the ground of violating the federal system of governance. Also, consider the criticism of many decisions of the Defence Ministry taken in course of its normal line of duty.


For an efficient functioning of the various organs of the services, it is absolutely imperative for them to undertake manoeuvres and surveys from time to time in specific territories of the country. If such programmes are thought to be subject to prior permission of the state governments then the armed forces cannot be expected to perform at all. There may be occasions when a particular geographical area requires immediate movement of the forces as perceived by the Union Government.


Before undertaking such a task on an urgent basis, can the Central Government be hamstrung by the prior concurrence theory? Two expressions have gained almost universal currency in the political discourse ~ cooperative federalism and competitive federalism. Even President Pranab Mukherjee referred to them while inaugurating the third edition of the Bengal Global Summit in Kolkata. The first concept would essentially mean a smooth relationship between the Union and the States. In reality, however, we have seen just the opposite. Most of the States are victims of a fortress mentality.


They leave no stone unturned to put a spanner in the facile working of the system. There have been personal attacks against the Head of the Union Government with a view to reap political dividends. Similarly, there have been efforts to project one state against another and the Union Government, to show one’s achievements. This does not advance either cooperative or competitive federalism. They simply appear fanciful and untrue.

It is time for a relook at the federal system envisaged by the Constitution. Jawaharlal Nehru’s famous expression ~ Unity in Diversity ~ has been devalued by the ominous trends in governance. The country is suffering under the personal ego of political leaders, bordering on narcissism, intense sectarianism, and chauvinism of language, caste, community, religion and provincialism. There is a strong urge towards and hope for a radical change. One wonders if the Founding Fathers had bargained for this metamorphosis of the nascent Republic.

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Federalism redefined ~ I


Source: By Gyan Ranjan Saha: The Statesman


Amartya Sen has remarked that before demonetising the high-value currency notes of Rs.500 and Rs.1000, the Union Government should have discussed the matter with the States (29 in all), and preferably obtained their concurrence. A similar sentiment has been echoed, rather vehemently, by one of the crusaders against the decision. Participatory governance may be a statutory requirement or else, a conventional imperative based on ethical considerations in certain circumstances. But for the former, there has to be a legal provision. He has not pointed out any such procedure laid down in law. As for the latter, it is, always and entirely, a normative issue and would be contingent on the political inclinations of the ruling party.

Further, if the Centre wanted the matter to be discussed and agreed to by the State Governments, it would have been impossible to achieve the objective. Consider the history of the enactment of the goods and services law. The Centre has been struggling to sew up the frayed ends of the proposed law for almost a decade and yet, there is no silver lining in the immediate future, despite the constitutional imprimatur of 1 September having been fixed as the time-limit. It is apparently proving to be a huge task; no one knows when it will be completed.

If the Centre had decided to embark on such an adventure, the demonetisation would never have materialised. There is another aspect which was highlighted by the Prime Minister on 8 November in course of his address to the nation. This relates to confidentiality. In the process of consultation with the state governments, confidentiality would have been the immediate and first casualty and the purpose of the entire exercise would have been defeated. As it is, there have been allegations that despite the cloak of secrecy maintained and the fact that just four civil servants were taken on board, certain vested sections of the political spectrum, allegedly, got wind of the imminent action to enable them to take precaution.

Of course, nothing concrete by way of credible evidence has surfaced till date and the allegations of prior leakage, as is customary in such matters, remain in the realm of speculation. It is also interesting to note that the word “federal” is not mentioned in the Constitution. This word has been interpreted in a subjective manner. It reminds us of the childhood story of six blind men trying to define the appearance of an elephant. Equally interesting is the fact that federalism continues to be the buzzword of those who are disgruntled because of the policies of the Union Government.

In terms of Schedule VII of the Constitution, item No. 36, currency, coinage and legal tender are in the exclusive domain of the Union Government. There is, thus, no legal requirement for consultation and approbation of the state governments in matters connected with these items. Further, instead of issuing the currency or bank notes, the government has entrusted such tasks to the Reserve Bank of India.

This again is subject to the conditions laid down in Chapter III, Schedule 22 of the same Act. It also needs to be mentioned that the law that established the Reserve Bank of India is a pre-independence legislation. Of course, there have been several amendments to the RBI Act since independence, but the delegation of the power to issue and manage the bank notes have not been materially changed. The decision to make changes in the bank notes as per this provision rests with the Union Government, which asks RBI to call the meeting of its Central Board, deliberate on the advice of the government, and send its recommendation to the Centre which in turn announces the decision to the people of the country. The person who can make the announcement is not mentioned in the law. The manner of announcement is entirely at the discretion of the government and cannot be questioned or be subject to judicial review.

We also need to consider if India meets the classical definition of a federal state. The state, as mentioned in the Preamble to the Constitution, did not volunteer to join the Union as happened in the historical federal polity of the United States of America. It has been the case of one sovereign transferring the reins of the country to another sovereign under a law passed in the legislature of the former. The states did not federate into a Union. It was to a lesser extent, the subsequent merger of the Princely States by separate legislative instruments.

The economic and political relations between the Union and the States are well-defined in the Constitution. The specious argument that the subject of law and order comes within the domain of the states as per list II of Schedule VII has been used, almost indiscriminately, to criticise the decisions taken by the Union Ministries as being against the federal spirit of the Constitution.

However, there can be any number of situations when such consultations may not be feasible or possible. The spirit of federalism cannot impede the Centre to move in the best interests of the country. In the case of a natural calamity or for security reasons, it is necessary to take immediate steps by the Union. If the Centre has to obtain prior permission of the affected State and the state government does not give the permission, then should the Union Government remain paralysed?

It seems odd that Prof Sen should advocate that the Union Government should have consulted with the states or at least obtained their concurrence. This leads us to the main issue sought to be discussed, namely, the redefinition of the concept of Federalism in the Indian context. Those who framed the Constitution did not invent the philosophy out of the blue. They were definitely inspired by the development of the theory to a large extent from the American experience. If one goes through the historical background of federalism in the United States of America, it will be noticed that it is not a strategy among the diverse contending political forces of the newly-set up states seeking ways to put in place a binding and permanent establishment of a strong, unified and progresive polity.

It acknowledged the competing and often, conflicting interests of the federating states and looked for an amicable and acceptable resolution of such claims and counter-claims. One needs to examine the Federalist Papers (85 in number) which three eminent constitutional experts and political leaders of the day, namely, Alexander Hamilton, John Jay and James Madison wrote and published in three newspapers, addressed, apparently, to the people of New York state under the common pseudonym ~ Publius.

Charting the whole gamut of the constitutional structure and the philosophical underpinning of the new nation, they laid extra emphasis on the most controversial issues. These included Centre-state relations, inter-state relations and government formation. Surely, it would not be incorrect to assume that our Constitution framers were heavily indebted to them.


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The building blocks of economic policy


Source: By Mint


Economic policy choices are not easy in a country like India. At present, the complication has increased because of the currency swap and deceleration in economic growth. Union finance minister Arun Jaitley will have a difficult task at hand when he rises to present his fourth budget. While every budget is presented in a somewhat different set of circumstances, the broader theme and the context of economic policy remain by and large the same. The budget should be a part of the longer-term policy objective of increasing economic activity, prosperity and well-being in the country.

In this context, economist and veteran policymaker Vijay Kelkar’s remarks at the CD Deshmukh Memorial Lecture can be extremely useful. They are not only relevant for the budget, but for economic policymaking in general. As former finance minister P. Chidambaram said in his 2013 budget speech: “…the last day of February (the budget day) is another day in the life of a nation”. Here are five themes that should guide economic policy.

First, the policy should focus on market failures. Free markets work in enhancing prosperity but there are areas where state intervention is needed. However, in India, the state is dominant in sectors where it is not required and lacks capacity in areas where the intervention is actually desired. It often intervenes with no evidence of market failure, which affects resource allocation. This needs to change. In a column published in these pages, former Reserve Bank of India governor Y.V. Reddy, for instance, noted: “The manner in which the state functions, the behaviour of market participants and the framework of the relationship between state and market in India need to change.”

Second, policy intervention should be seen from the perspective of general equilibrium. Often, policy changes are made with narrow objectives, focusing on one sector or area. For example, in the context of the budget, India has a history of random tinkering with tax rates to promote one sector or the other, which has resulted in distortions. The most recent example is the suggestions made by the committee of chief ministers on digital payments—a host of fiscal measures that will further distort the tax system. The government should avoid such ideas.

Third, the government should spend more efficiently. There are demands for increasing spending in various sectors of the economy and they are often legitimate as India needs improvement in a number of areas. However, public spending has a cost. Kelkar and others have calculated that the marginal cost of one rupee of public spending to society is around Rs3. Therefore, the government should spend carefully as the cost to society is much higher than what gets recorded in the books. Kelkar noted in his lecture: “On the expenditure side, this is a call for reforms of expenditure programmes, so as to ensure that public money is only used for applications where the gains to society of Re1 of expenditure exceed Rs3.”

Fourth, individuals, including politicians, are driven by incentives. Policy changes should factor in the possibility that people can change their behaviour. Insights from public choice theory show that politicians and bureaucrats also work in self-interest. One of the reasons why India has had a high fiscal deficit bias is because higher government spending can lead to higher growth in the short run and could electorally benefit the ruling party. Therefore, it’s important to build checks in the system. As India has moved to a rule-based monetary policy framework, it also needs a better fiscal architecture.

Even though India has the Fiscal Responsibility and Budget Management Act in place, experience shows that it is not sacrosanct. What is needed is an agency like the US Congressional Budget Office which independently reviews government finances so that the public in general is better informed. This will help reduce fiscal profligacy. Fifth, policy should promote competition. A high level of competition is desirable in a market economy as it leads to efficient allocation of capital.

The government has done well by getting the bankruptcy code passed as it will facilitate the closing of firms and the shifting of capital to more productive sectors of the economy. Also, as Kelkar argued, competition is the biggest reason to promote privatization of public sector companies as they distort the market because of access to government funding. Movement on privatization has been slow for a number of years due to a variety of reasons. Following these broad principles in policymaking will help build credibility and lead to better economic outcomes in the medium to long run.


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Dark days for children


Source: By Anthony Lake: Mint


The year 2016 will probably be remembered for military and political events, but it should also go down in history as one of the worst years for children since World War II. Images of dead, injured, and distraught young children filled the media on an almost daily basis: a small boy sitting stunned and bleeding after his home was bombed; small bodies being lifted out of rubble; and small graves on the Mediterranean shoreline that mark the deaths of unknown children.

These images are powerful and uncomfortable. And yet they cannot capture the magnitude of children’s suffering. More than 240 million children are living in conflict zones—from the killing fields of Syria, Yemen, Iraq and northern Nigeria, to less well-documented but horror-stricken areas of Somalia, South Sudan and Afghanistan. And of the 50 million children who live outside their own countries or have been internally displaced, more than half have been forcibly uprooted, and are facing new threats to their lives and well-being.

Millions of children are undernourished and out of school; millions have witnessed unspeakable brutality; and millions are threatened with exploitation, abuse, and worse. This is not rhetoric; it is reality. The UN—with support from countries such as Sweden, and by working through a coordinated humanitarian-response system that includes Unicef is alleviating suffering whenever and wherever it can. But the quantity and complexity of cascading crises are testing that system as never before. New challenges, such as extremism, are increasing the risks to children, and making it more difficult and dangerous to reach them. Meanwhile, armed groups are increasingly targeting schools, hospitals and homes, and compounding innocent people’s suffering. Political solutions to these conflicts are the surest way to stop the suffering and bring an end to such savage violations of human rights. But, barring that ideal outcome, we need to strengthen the current humanitarian system’s capacity to reach the children at greatest risk. More than 70 years ago, world leaders addressed the unprecedented humanitarian crisis following World War II by creating new institutions to bring immediate assistance to those in need. These new global entities laid the foundation for a future based on cooperation, dialogue and results, rather than conflict, disaster and ruin.

That was a turning point in world history; we have now arrived at another one. We need to summon the same spirit of solidarity and creativity today that inspired previous generations, not by founding new institutions, but by finding new ways of responding to the hard realities of our own time. For starters, we urgently need to harness innovation to expand our capacity to reach children who are cut off from assistance in besieged areas or communities controlled by extremists. We should be exploring every option, such as using drones to airdrop food and medical supplies, and developing mobile apps to monitor needs and track supplies on the ground, and to keep aid workers safer. While there will never be a substitute for safe, unimpeded humanitarian access, we need to explore every avenue to reach children in danger.

More broadly, we must do a better job of coordinating among governments and organizations to provide short-term and long-term relief more efficiently, and to make every dollar count. With chronic crises proliferating, we should be maximizing synergies between humanitarian and development initiatives, because the two go hand in hand. How we respond in emergencies lays a foundation for future growth and stability, and how we invest in development can help build resilience against future emergencies.

Lastly, we need to change how governments calibrate the critical aid that they provide to meet fluctuating needs. In recent years, as appeals for aid have escalated, countries undergoing domestic austerity have increasingly had to justify their foreign-aid outlays. Many donors have earmarked their aid funds for specific purposes. To be sure, such funds will always be an indispensable tool in both humanitarian and development efforts; but in today’s unpredictable environment, more flexible, long-term funding is critical.

“Core” funding, as it is known, enables the UN and non-governmental organizations both to react more quickly in emergencies and to plan more strategically. Such funding allows us to provide life-saving help when people need it most, rather than having to wait for countries to respond to specific humanitarian appeals. This is especially important for addressing the “forgotten” crises that the media may have missed.

Sweden has long been a proponent of such flexible support for UN organizations, because it improves results. For this reason, Sweden’s government recently decided to double its 2016 contribution to Unicef’s core funds. Now that the world is working together on a new global development agenda, we hope this practice will spread and inspire other governments to move more towards high-quality funding for humanitarian relief and sustainable development. We must protect the rights, lives and futures of the world’s most vulnerable children. To the extent that we do that, we will help to determine our common future as well.

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Davos' unrealistic dream


Source: By S G Vombatkere: Deccan Herald


The World Economic Forum's (WEF) annual meeting in Davos from January 17 committed itself to "improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional, and industry agendas." It is essentially a jamboree bringing together many hundreds of extremely rich and powerful business magnates, international political leaders, selected intellectuals and journalists from around 100 countries, "to discuss the most pressing issues facing the world."

The WEF has set out 17 sustainable development goals (SDGs) to "transform our world" through economic growth, social development and environmental protection, to "end poverty, protect the planet, and ensure prosperity for all." All countries, independent of political ideology, single-mindedly pursue economic development based on GDP growth, which in turn is based upon increasing consumption and trade of all kinds, including armaments.

It pre-supposes endless material growth based upon extraction-manufacture-transport-consumption (EMTC) within the ecological resource base, the finiteness of which most economists are unable to take into account. Every stage of the EMTC mantra is entirely based upon the continuing extraction-refinement-transport-consumption of oil as a fuel. The finiteness of the resource-base is both in terms of being the source of materials and a sink for the polluting outputs of the EMTC processes.

This model of development is pursued worldwide notwithstanding that in the 1974 United Nations Cocoyoc Conference, the combined wisdom of all nations held that, "Our first concern is to redefine the purpose of development. This should not be to develop things but develop man. Human beings have basic needs: food, shelter, clothing, health, education. Any process of growth that does not lead to their fulfilment - or even worse, disrupts them - is a travesty of the idea of development."

However, all nations have quietly jettisoned the jointly agreed purpose of development and adopted a model in which social, economic, political and cultural development of the people is at best secondary. This has caused enormous and growing socio-economic inequality within and between nations, and in India, the richest 1% now own 58% of the wealth.

In the context of sustainable economic growth, aim of one of the SDGs to eradicate poverty is to "build on existing initiatives to develop measurements of progress on sustainable development that complement GDP". Reliance on the GDP-based model of economic development that is responsible for current and growing inequality is paradoxical, since problems cannot be solved by the same level of thinking that created them.

It does not need rocket science to appreciate that economic inequality increasing within a finite and shrinking resource base leads to increase in poverty both in numbers and degree. Thus, the SDG of poverty eradication is impossible with the present economic growth model which is the cause of huge and growing economic inequality. The SDG to "protect the planet" betrays the unrealistic mindset that humans, using technology, can control nature, whereas it is precisely the technology-driven industrialisation by enormous consumption of energy (fossil fuels) that is the threat to humanity, not to the planet.

However, humanity needs protection from the effects of global warming and climate change caused by many decades of huge carbon emissions emanating from fossil-fuel-based, industrialised economic growth. The understanding that humans are a part of the planet's eco-systems that are at the root of all life itself, is absent from WEF thinking which seeks to protect the planet by SDGs.

Prosperity for all would mean that seven billion human inhabitants of our planet would have access to adequate nutritious food, clean water and clean air, and housing, clothing, health care, education and an occupation or job to support a family. In today's unequal world where the top 1% own over 50% of material wealth, this obviously calls for drastic reduction of economic inequality. But the economic development model generates more money unendingly (since GDP growth percentage every year is based on the GDP generated in the previous year), while production of actual material wealth is limited by the material resource base which gets progressively depleted and degenerated.

Environmental crisis

Ongoing global environmental and social crises are due to the sharp divergence between the dream of unlimited GDP growth and the reality of finite natural and ecological resources and their industrial outputs. Thus, the bulk of limited resources are accessible to the 1% minority who own more money, while basic needs of the "99%" cannot be met, and this only increases inequality.

The 99% will always get short shrift in the current development model, which essentially denies universal access to social, economic and political justice; liberty of thought, belief, expression, faith and worship; and equality of status and opportunity. Earth's resources are natural capital which industrialised societies are plundering "for free". Fossil fuels, which are the life-blood of every economy, have been formed from vegetative growth over millennia by solar radiation and earth's geological processes of perhaps 150 million years. Extraction of fossil fuels has depleted these reserves by about half in the past 150 years as growth-based economies consume fossil fuels at rates commensurate with or exceeding the rate of growth of GDP. It is this consumption which is the cause of global warming and climate change which are humanity's existential threat.

World leaders need to understand that the current model of economic growth in the context of finite resources is unsustainable. They should understand that this is the cause of the existential problem facing humanity and that WEF's unachievable SDGs actually propagate dangerous complacency. The world is surely transforming but not quite in the manner of WEF’s dream to end poverty, protects the planet and ensures prosperity for all humanity.


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Universal basic income’s policy design dilemmas



Source: By Saksham Khosla: Mint



These are heady times for the Indian welfare state. Comments by government officials have renewed hope that a universal basic income, or a variant thereof, is under serious consideration. Presenting the state’s budget earlier this month, Jammu and Kashmir finance minister Haseeb Drabu proposed a targeted basic income in the form of cash transfers. Articulating a more critical view, Niti Aayog vice-chairman Arvind Panagariya, in a recent interview, stated that India simply lacked the fiscal room to deliver a universal basic income benchmarked to the poverty line. Chief economic adviser Arvind Subramanian had indicated that the Economic Survey will likely examine the mechanics of implementing a universal basic income in detail. What practical and analytical criteria might the Survey’s evaluation?


Several distinguished economists have examined the question of affordability in great detail. To avoid repetition, I focus on three pressing questions that deserve equal attention: As a tool of poverty alleviation, what specific benefits does a universal basic income unlock? What delivery mechanism will the Indian state employ for this transfer? Must existing welfare schemes be cut to make space for a universal basic income? A reading of the evidence on the subject throws both the knowns and unknowns of a universal basic income into sharp relief.


First, there is little question that unconditional cash transfers are a progressive policy instrument. Headline results from randomized control trials (RCTs) conducted in Madhya Pradesh and Delhi show that monthly unconditional cash transfers do not harm food security and do not encourage unemployment or wasteful expenses. In 2010, Shubhashis Gangopadhyay and others gave households the choice of receiving Rs1,000 in lieu of subsidized food through the public distribution system (PDS).


The study found that the fear that households would shift their spending away from nutritious foods was unfounded, and no concomitant increase in the consumption of alcohol was observed. In India’s only experiment with basic income, Guy Standing and others launched two pilots in Madhya Pradesh in 2011 where over 6,000 individuals received monthly payments (Rs300 per adult and Rs150 per child) for 12 to 18 months. This modest sum enabled a multitude of positive impacts on nutrition, health, indebtedness and investment, with women, scheduled castes and the differently abled benefiting the most. The number of hours worked increased in villages receiving the basic income, with no impact on spending on alcohol. While the limited sample size does not allow one to extrapolate the results across the country, they do inspire confidence in the virtues of making small transfers to easily targeted communities in need.


Echoes can be found in the research on cash transfers in comparative contexts. A review of 165 studies across 30 countries found that they reduce poverty, encourage school attendance and use of medical services, improve savings, and benefit women’s decision-making power. Data on conditional and unconditional transfers from Asia, Africa and Latin America finds either no or negative impact on alcohol and tobacco expenditure, while other studies show no evidence that such programmes discourage work.


But must such transfers be provided over many years to everyone in a community, rich and poor, to reap such benefits? We simply do not know yet. GiveDirectly, a non-profit specializing in cash transfers to Uganda and Kenya’s poor, announced the launch of a novel RCT last year which intends to give at least 6,000 Kenyan individuals approximately a dollar a day for 10-15 years. It will take approximately a year or two for data on consumer behaviour to become public.


The second question concerns India’s state capacity constraints. How will the state distribute basic income grants and verify delivery? The limits of India are banking and digital payment networks are well known. Recent reports indicate the government’s interest in shifting beneficiary identification from indicators based on the poverty line to individual-level data from the 2011 Socio-Economic Caste Census linked to the Aadhaar database.


While the combination of a unique Aadhaar number linked to biometric data was expected to improve targeting for the PDS, news reports from Jharkhand, Rajasthan, Chhattisgarh and Gujarat paint a dismal picture. Large numbers of beneficiaries have had to go without their entitlements as unreliable fingerprints, connectivity infrastructure and false rejection rates led to system failures. When the mechanism works, however, it can deliver outsize benefits—biometric smart cards reduced corruption and improved payment delivery in two expansive employment and pension transfer programmes in Andhra Pradesh. Variations in sub-national state capacity will clearly continue to plague welfare schemes, even those based on universal coverage.


The final question concerns a universal basic income’s place in India’s complex welfare architecture. Should it replace the government’s flagship poverty programmes? A survey of rural households conducted in nine Indian states in 2011 found that nearly two-thirds of all respondents preferred in-kind food transfers over cash. Another survey held in 2012 to study the performance of the Mukhyamantri Balak and Balika Cycle Yojana in Bihar found that more than half of all beneficiaries surveyed favoured receiving the in-kind transfer (a bicycle) over cash.


On the other hand, a nationally representative household survey conducted last year found that about 53% of households preferred cash transfers in comparison to 29% in favour of in-kind foodgrain transfers. To explain this variation, the literature points to background factors like sociocultural norms, demographic idiosyncrasies, the efficiency and presence of local markets, and access to banking facilities. India’s size and diversity warns against adopting a one-size-fits-all cash policy that risks leaving India’s poor with cash in hand but nowhere to spend it.

As the universal basic income discussion evolves, it is imperative that policymakers deliberate upon the research on cash transfers, the administrative muscle required to disburse benefits across the land, and the contextual factors driving the revealed preferences of the poor. The Economic Survey has a great opportunity to expand the contours of the public debate on a universal basic income and address key knowledge and implementation gaps. One hopes that the Survey will grapple with some of these fundamental questions of policy design.

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Oceanic destiny II


Source: By Govind Bhattacharjee: The Statesman


In his book, Monsoon: The Indian Ocean and Future of American Power, the American author, Robert Kaplan, had argued that the geopolitics of the 21st century will be decided by events in the Indian Ocean rim which is emerging as the new geopolitical centre of the world. Kaplan’s narrative rests on the premise that the Indian Ocean’s regular monsoon winds, which carried traders across the ocean since antiquity, had established cultural and economic patterns which are still very much in action.

There has been little research so far on issues relating to security, stability and sustainability of the Indian Ocean Region and its future potential from the geopolitical and strategic perspectives of the 21st century. The concept of proactively promoting and engaging in a broader Indian Ocean grouping still lies at the periphery of our national objectives and geopolitical goals, ignoring the advantages conferred upon us by history. We are still unmindful of what Nelson Mandela had prophetically said in 1995, “The natural urge of the facts of history and geography should broaden itself to include the concept of an Indian Ocean Rim for socio-economic cooperation and other peaceful endeavours.”

One of the earliest works on the subject, Histoire ancienne des états hindouisés d'Extrême Orient published in 1944 (translated as “The Indianised States of South-east Asia”) by the French archeologist George Cœdès explores the  dharma-dhamma continuum that is evident even today in the thousands of Hindu-Buddha temples practically all over South-east Asia ~ Malaysia, Indonesia, Thailand, Cambodia, Vietnam, Laos, Myanmar. India’s relations with these countries date back at least to 1st millennium AD or even earlier; even countries on the eastern and southern coast of Africa and in the Middle East share thousands of years of close socio-cultural interaction through maritime trade links with India.

In 1947, K M Panikkar had observed, “Millenniums before Columbus sailed the Atlantic and Magellan crossed the Pacific, the Indian Ocean had become a thoroughfare of commercial and cultural traffic.” That was one of the earliest globalisations on record. Sanjeev Sanyal, in his book   Ocean of Churn, had mentioned that the Middle East and Iran had trade links with the Indus Valley people since the Harappan era, that the merchant ships from Guajrat used to sail along the Makran coast trading along the way, past Gwadar and Sutkajen-dor (now near the Iran-Pakistan border).

Discovery of Harappan artifacts and seals as far as Southern Iran suggests a continuum of economic and cultural trails all along. The trail survived  till the 1960s, The Indian rupee was legal tender in most Middle East countries including Bahrain, Qatar, Oman and UAE; they resorted to their own currencies only after the sharp devaluation of the rupee by the RBI in 1966. The supreme living trail is of course the hundreds of thousands of Indians who live and work in the Gulf countries.

Sanyal narrated how seafarers from Odisha and Bengal had started visiting Sri Lanka from the sixth century BC. The first Indianized kingdom emerged in Vietnam’s Mekong delta around 1st Century BC, established, according to legend, by a Brahmin named Kaundinya, to whom both the Chams of Vietnam as well as Khmers of Cambodia trace their ancestry. By then, Indian mariners had learnt enough about monsoon winds and ocean currents to follow the north-eastern monsoon to sail to Sri Lanka in mid-November, an event that is still commemorated in Odisha on the day of Kartik Purnima.

After replenishing the fresh water and provisions in Sri Lanka, mariners would set sail again in January, following ocean currents to Sumatra, then known as Swarnadwipa, and from there, to continue their voyage past the Malacca Strait on to Malay Peninsula, Borneo and Vietnam, or southward along the western coast of Java, and then known as Jabadwipa, on to Bali. After trading for two months, by mid-March, they would start their return journey to reach Sri Lanka in time to catch the south-west monsoon that would take them back home.

With more knowledge about ocean currents and monsoon winds, Indian seafarers became more adventurous. They sailed not only from Odisha and Bengal, but also from Andhra and Tami Nadu. Cotton was the most important export, and Indian cotton carried the seeds of Indian culture, language and religion to the countries of South-east Asia. Hinduism and Buddhism spread within a few centuries, and Mahabharata and Ramayana struck deep roots along with Sanskrit in South-east Asia.

This has survived the onslaught of Islam and colonial rule by the Portugese, the Dutch and the British till today. Hinduism is still dominant in Bali and Buddhism in Myanmar. The ninth century Buddhist temple of Borobudur and the 10th century Hindu temples of Prambanan in Indonesia and the 12th century Hindu temple of Angkor in Cambodia still attract millions of tourists. The Indian links are remembered with considerable warmth.

The Hindu Srivijaya dynasty in Sumatra and Malay Peninsula (7th-13th centuries), Angkor (Khmer) in Cambodia (9th-15th centuries), Majapahit in Java (13th-16th centuries) and Kingdom of Champa in Central and Southern Vietnam (2nd-17th centuries) remained enduring powers in the region, before the gradual spread of Islam from 14th Century onwards and then colonisation by Europeans would eclipse their glory.

Along the west coast of India also, merchant fleets from Arabia negotiated the waters of the Arabian Sea, sailing south hugging the western coast of India, past Saurashtra and the Gulf of Khambhat, through the estuary of Narmada to the modern port of Bharuch, then Barygaza. The Arab merchants would reach the shores of Kerala within a few centuries. It was through this route that groups of Christians and Parsis fleeing persecution in Iran would reach India, making it their home forever.

It is indeed paradoxical how the adventurous, seafaring people of India gradually turned insular and lost their strength before succumbing easily to foreign invasions, and how even crossing the sea (Kalapani) became stigmatized in society. In his seminal work, “Project ‘Mausam’: Maritime Routes and Cultural Landscapes” was launched as a transnational project by the Ministry of Culture, Government of India in 2014, to rekindle the long-lost ties across nations of the Indian Ocean and to forge new avenues of cooperation and exchange.

The project, launched by India in partnership with member states, will mark a significant step in recording and celebrating this important phase of world history from the African, Arab and Asian perspectives. But to regenerate the economic links is even more important, and a sustainable way to achieve this is through the “Blue Economy”.

Gunter Pauli’s 2010 book, The Blue Economy: 10 years, 100 innovations, 100 million jobs promises to “shift society from scarcity to abundance ‘with what is locally available’, by tackling issues that cause environmental and related problems in new ways”. It relies on the design of sustainable systems to fuel “blue growth” which addresses the problems of resource scarcity and waste disposal, while focusing on sustainable development in a holistic manner.

Blue Economy holds immense promise for the Indian Ocean region which has a treasure of vast untapped natural resources. It has the potential to offer many benefits, from utilising the untapped marine and mineral resources of the Indian Ocean to interconnecting, boosting and synergising the coastal national economies of the region. It can also revive the IORARC as an Ocean-based, close-knit and vibrant community. In fact, IORARC has already adopted the Blue Economy as a top priority, and identified eight priority areas for cooperation between the member states including fisheries and aquaculture, renewable ocean energy, seaports and shipping, seabed exploration for minerals etc. One only hopes that the ideas are translated into   action, because like in the past, what happens in the Indian Ocean now will determine the course of human history once again.


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Oceanic destiny -- I



Source: By Govind Bhattacharjee: The Statesman



India is a member of several prominent regional associations and supra-regional groupings like SAARC, ASEAN Regional Forum, Asia-Europe Meeting (ASEM), Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), East Asia Summit (EAS), South Asian Free Trade Area (SAFTA), Mekong-Ganga Cooperation and Indian Ocean Rim Association for Regional Cooperation (IORARC). This is in addition to the country’s membership of several global and transcontinental organisations, such as the United Nations, Commonwealth, G-20, G-77, BRICS, etc. and an observer in Shanghai Cooperation Organisation. Some entities like ASEM, EAS or IORARC have not seen much activity in recent times, and some, like SAARC, have practically achieved nothing in so many decades of their existence, except indulging in occasional exercises in symbolism and tokenism.


After isolating Pakistan last year, the forum itself has now become practically defunct. SAARC has never been a great integrating force within South Asia; in fact, the kind of integration that has transformed the socio-economic and political landscapes in Europe and other continents still remains a distant dream in South Asia, despite an almost infinite potential for cooperation in infrastructure, creation of energy grids and transport networks, for erecting common architectures for handling intra-regional security and harnessing river potential to improve the lives of people.


The time has come to explore and harness the strengths of other supra-regional groupings, by tapping the synergies that flow from historical and cultural bonds. For India, one such group that is vital to our geo-strategic and economic goals is the group of Indian Ocean countries. However, caught in the stranglehold of stagnation in thinking, political leaders and opinion-makers have so far neglected the socio-cultural and economic bonds of these countries with India -- bonds which were forged by history through centuries of maritime trade, as well as religious and political affiliations. These bonds still remain strong and vibrant, and cherished in many of these countries. As the former external affairs minister Mr SM Krishna had stated in 2011, the Indian Ocean remains “an integral part of our collective destiny, and we need a holistic vision for a cooperative response to the challenges in the region”.


There are 59 countries in the rim of the Indian Ocean spanning a total length of 63000 km, of which 21 countries now constitute the Indian Ocean Rim Association for Regional Cooperation (IORARC) -- with seven more countries (including USA, China, UK, France, Japan and Germany) being the dialogue partners. These 21 countries, which include India, Australia, Indonesia, Iran, Thailand, South Africa, Malaysia, Bangladesh, Sri Lanka, UAE, Myanmar and Tanzania together, form an economic powerhouse generating among themselves an annual income of more than $7 trillion. As the former UN Secretary General Ban Ki Moon had articulated in propagating the compelling vision of a “United States of Asia” in 2007, the Indian Ocean Region has the potential to transform itself into a free trade zone, and may even work towards adopting a common currency.


The region has immense geostrategic and geopolitical significance. It is home to 2 billion people spanning three continents -- Africa, Asia and Oceania -- with three strategic naval chokepoints at the Strait of Hormuz, Bal-el-Mandeb and the Strait of Malacca, connecting the Indian Ocean region with the Persian Gulf, the Red Sea and the South China Sea respectively.


The Indian Ocean accounts for the transportation of the highest tonnage of goods in the world, with almost 120,000 ships transiting its expanse annually, carrying two-thirds of the world’s oil shipments, one-third of bulk cargo traffic and half the world’s container shipments. It accounts for more than 20 per cent of the global trade. An estimated 40 per cent of the world’s offshore oil production comes from the Indian Ocean.


The IORARC, which is the only pan-Indian ocean grouping that brings together diverse countries from three continents, had its origin in the 1990s, thanks to the initiatives taken by India and South Africa. It was set up in 1997 with the stated objectives of economic cooperation for sustainable growth and balanced development, and liberalisation and removal of impediments towards freer trade with free flow of goods, services, investment, and technology within the Indian Ocean rim. The apex body of the IORARC is the Council of Foreign Ministers of the member countries. Its Secretariat is located at Port Louis, Mauritius, which is probably not the best place to exploit its full potential.


As Jivanta Schöttli from the South Asia Institute of Heidelberg University had pointed out, the forum had suffered from a lack of visionary leadership and various other drawbacks since inception. The sheer diversity in geography, culture and economic development of the members made it a somewhat unwieldy entity. The track record indeed has very little to show in terms of tangible gains achieved. Projects taken up had either faded away or collapsed, in the process leaving a number of parallel organisations, like the Indian Ocean Rim Academic Group, the Indian Ocean Rim Business Forum and the Working Group on Trade and Investment whose only job purportedly is to provide inputs to the apex body of the fledging organisation.


The three players who could have made a difference are India, South Africa and Australia. As Schöttli pointed out, Australia’s enthusiasm dwindled after the second ministerial conference in Maputo in 1999 had ruled out voluntary trade liberalisation. South Africa’s priority shifted towards African organisations after the election of Thabo Mbeki as president. India’s interest waned as the forum failed to open up new regional space to stimulate investment and trade.


The irrelevance of the forum was highlighted when the tsunami of 2004 had failed to elicit any large-scale cooperation for relief and rehabilitation of the thousands of hapless victims. Other groups and events have since taken over -- BRICS, Asian Infrastructure Investment Bank, developments in the South China Sea areas. The forum is now practically dysfunctional and nothing is known of its activities except occasional meetings.


In recent years there has been a reorientation of our strategic focus in foreign relations in which the essential elements are maritime security, modernisation of the Indian Navy and cooperation with major naval powers such as the United States, Japan and Australia, while asserting our presence in the Indian Ocean only as a ‘catalyst for peace, tranquility and stability’. But the rules of the game are changing slowly, in a marked departure from the past when benign rhetoric used to define and determine our policy on the Indian Ocean.


The 26/11 Mumbai carnage in 2008 rattled us into reckoning and revising the Maritime Doctrine first formulated in 2004. The doctrine revised in 2009 highlighted threats arising from maritime terrorism, piracy, coastal security and the heavy presence of extra-regional forces including the world’s most powerful fleets in the Indian Ocean to safeguard their strategic interests. It identified, among the primary elements of our maritime doctrine, the oil wealth of the Persian Gulf region which is home to seven million expatriate Indians, the importance of key chokepoints in the Indian Ocean. The Southern Indian Ocean Region, including Antarctica, South and East China Seas, Western Pacific Ocean and the Mediterranean were identified among the secondary areas of our maritime interest.

Prime Minister Modi has repeatedly underlined the fact that the Indian Ocean Region is one of India’s ‘foremost policy priorities’, while projecting a vision for ‘SAGAR’ which means Ocean and stands for “Security And Growth for All in the Region”. India is now ready to mark its presence in the wider Indo-Pacific region and may even consider building military bases outside. The country’s interest in developing the Chabahar port in Iran is a reflection of this new-found determination to break from the passivity and hesitation of the past. But we need a vibrant organisation to back up and stimulate these efforts, so as to optimise the outcome. This is why IORARC needs to actively and energetically engaged with.

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A time of reckoning



Source: By Anilla Cherian: Deccan Herald



The potential for imminent and seismic change at the UN was widely anticipated, but the so-called pundits did not predict the scope and alacrity of the change. Introduced without much public and media attention on January 3, in the US Congress, the bill "American Sovereignty Restoration Act of 2017" was one of the New Year's harbingers of change for the relationship between the US and the UN.


There is little room for confusion here. "The bill requires: (1) the president to terminate US membership in the UN, including any organ, specialised agency, commission, or other formally affiliated body; and (2) closure of the US Mission to the UN." A time of reckoning has arrived for the UN. Governor Nikki Haley - a daughter of Indian immigrants sworn in as the new US Ambassador to the UN - was explicit in her confirmation hearing statement: "We contribute 22% of the UN's budget, far more than any other country. We are a generous nation.


But we must ask ourselves what good is being accomplished by this disproportionate contribution. Are we getting what we pay for? In short, Mr Chairman, my goal for the UN will be to create an international body that better serves the interests of the American people."


Imminent change was signalled by Ambassador Haley in her forcefully succinct opening remarks at the UN on January 27: "Our goal with the administration is to show value at the UN... For those that don't have our back, we're taking names. We will make points to respond to that accordingly. But this a time of strength, this is time of action, this is a time of getting things done." She went on to add: Everything that's not working, we're going to try and fix. And anything that seems to be obsolete and not necessary, we're going to do away with."


So a pragmatic question is what the immediate future for UN agencies mandated to focus on sustainable development including environment, human rights, population, and gender issues going to look like?


Sustainable development is a massive umbrella concern at the UN. The UN and its member states universally adopted two landmark global agreements in 2015: the Paris Climate Agreement which entered into force on November 4, 2016 literally days before a new US administration was voted in, and the 2030 Sustainable Development Agenda anchored by no less than 17 new Sustainable Development Goals (SDGs) and a massive associated list of 169 targets.


The future implementation of these agreements is a relevant concern for many developing countries including India - the world's third largest aggregate greenhouse gas (GHG) emitter but also the world's lowest per capita emitter among the top 10 aggregate GHG emitters.


India has long argued that poverty eradication and equity considerations need to be factored in its climate change response. India's 2015 submission to the UN - its "Intended Nationally Determined Contribution"- does not include aggregate emissions reduction targets; instead it pledges to reduce "emissions intensity"- its emissions per unit of economic output. India's push towards renewable energy showcased by the National Solar Mission (NSM) was the identified strategy to reduce emissions intensity and provide clean, sustainable energy for millions.


It is worth recalling that the previous US administration actively negotiated and ratified the Paris Climate Agreement, but also simultaneously pursued a ruling against India's National Solar Mission with the WTO. A US environmental group - the Sierra Club - had argued that: "By dropping the solar trade case, solar panels produced domestically in India will improve energy access and move the world's third largest carbon emitter away from dirty fossil fuels." The WTO ruling against India's NSM revealed an essential fault line about the existence of global governance "silos" on climate and clean energy action.


Decades of UN-led negotiations have resulted in ineffective policy "silos" that separate out "sustainable energy for all" goals from "climate change" goals even though energy is common denominator. Having two separate SDGs on sustainable energy and climate change within the UN's new agenda makes little practical sense in terms of financing and implementation.


The need for integrated action on climate and clean energy is urgent for the "840 million people in India by far the largest national population of any country in the world" (International Energy Agency 2015 estimates) whose heavy reliance on polluting and highly toxic solid fuel energy sources results in grave health impacts and short-term climate pollutants.


Sustainable energy


Integrating access to sustainable energy for the poor with climate change objectives has also been embraced as essential by new and innovative global public-private initiatives that do not fall within the purview of the UN. These global partnerships include:


Breakthrough Energy Coalition (BEC): Philanthropic billionaires agreed to pool their assets to launch the BEC. An opening sentence of the BEC's guiding principle is worth highlighting: "The urgency of climate change and the energy needs in the poorest parts of the world require an aggressive global programme for zero-emission energy innovation."


Mission Innovation: An initiative launched by 20 countries (including the world's most populous and the largest oil, gas and renewable energy producers such as Brazil, China, India, France, Germany, Saudi Arabia and the US), this initiative is the government-driven analog to the business-driven BEC and aims at dramatically accelerating global clean energy innovation.


International Solar Alliance: Jointly announced by India and France, the alliance comprises 120 countries and focuses on the idea that developing countries need scaled up technology, capacity building and initial public financing in order to maximise the potential of solar energy.

Countries seeking urgent, integrated action on energy and climate now need to ask whether the immediate future for effective climate and clean energy action will occur under the aegis of the UN, or within a diverse range of bilateral and public-private partnerships that lie outside of the overall aegis of the UN.

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Govt should safeguard apex court’s supremacy


Source: By Amit Kushari: The Statesman


The Supreme Court of India is a fundamental and one of the strongest pillars of freedom enshrined in the Constitution of India. Without the Supreme Court and its protective umbrella, we would be reduced to being slaves of the executive. We must, therefore, be very vigilant and resist vigorously all attempts made by the executive to reduce its halo of glory and supreme power.

We are pained to note that quite often attempts are made by the executive/government to bypass the glory and finality of a Supreme Court order to satisfy the whims and fancies of groups of people. Since we have a democracy it is quite natural that our government, which is elected by the people, would be forced to bow before groups of people raising unreasonable demands and would pass laws/ordinances to nullify an order passed by the Supreme Court after carefully hearing arguments from both sides.

We came across such an attempt by the government for the first time when Rajiv Gandhi passed a law undoing the rights given to divorced Muslim women to get maintenance from their oppressor husbands who had driven them out of their homes by triple talaq. The Supreme Court had wanted to ensure that there should be no discrimination between women of different religions and since Hindu, Sikh and Christian women got maintenance, Muslim women should also get the same. There was so much pressure on Prime Minister Rajiv Gandhi from fundamentalist Muslim male groups that he succumbed to these pressures and passed a law in Parliament undoing the Supreme Court verdict.

Because of unreasonable popular pressures from big groups, the Government of India so far has not been able to bring about a uniform civil code - or on a smaller scale, make Muslim polygamy and triple talaq illegal. The government apprehends that if it interferes with these unfair and anti-women practices there could be major upheavals in many parts of India which may go beyond control.

Muslims make up 14 per cent of the Indian population and in a number of important big states their population density is much higher. In UP they are 20 per cent, in Bihar 18 per cent, in Bengal 28 per cent, in Assam 35 per cent, in Jammu and Kashmir 68 per cent, in Lakshadeep Islands 95 per cent and in Kerala 25 per cent.

Since there was no democracy in British India, the rulers could take bold decisions fearlessly without bothering about repercussions. Democratic India is so helpless that it cannot even prevent the inhuman custom of bull fighting because large groups of people, who are voters, feel that it is their traditional right, even though the Supreme Court has given a judgement to the contrary.

Before leaving India the British had helped Indians by abolishing the custom of Sati - burning Hindu widows on the pyres of their husbands. There was a huge outcry from traditional Hindus who felt that the government was encroaching on their culture and customs. Raja Ram Mohan Roy and Ishwar Chandra Vidyasagar were in the forefront demanding reforms and there were huge demonstrations against these two reformers. They were termed anti-Hindu and accused of colluding with the British rulers to destroy the Hindu society.

With great difficulty they could get the Hindu Widow Remarriage bill passed. The Sati Abolition Bill was also passed. Violent protesters threw stones at the houses of the reformers, but the British could control the crowds with the police since they did not expect votes from the rioting mobs. Today mobs are demanding cruel games to continue in the name of tradition and culture and our helpless government is trying to save the situation by passing laws compromising with cruelty to animals. I shudder to think what would have happened to Indian women if the British had left without banning inhuman practices in the name of tradition.

We were also very lucky that our first Prime Minister was English educated, liberal person and that his party (Congress) could get a sweeping majority in the Lok Sabha elections of 1952. He could make many bold decisions regarding Hindu society in his Hindu Act of 1956. Hindu women could divorce their husbands and remarry after divorce or widowhood. They could also marry Hindu men of other castes under the Hindu Marriage Act. Before 1956, if a Hindu wanted to go in for an inter caste marriage he would have to compulsorily marry under the Special Marriage Act.

Since no Muslim leader came forward for abolition of Sharia laws, either before the British or during the tenure of Pandit Nehru, their community was left high and dry and they continue to be so today as well as no Ram Mohan Roy or Vidya Sagar was born in their community.

Democracy is undoubtedly a big boon for us because we get the government that we ourselves elect, but there could be huge aberrations also for which the Constitution gave us a Supreme Court to guard our interests in those exceptional situations. The government should protect the Supreme Court umbrella with its full might. It should never give in to groups of people and mobs and bypass the verdicts of the Supreme Court. If they do so one day they will find themselves at the receiving end.

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Economy at cusp of recession


Source: By Renu Kohli: The Financial Express


The first quarter of 2016-17 was marked by stories of green shoots firming up and further uplifting growth. We had discounted such views in these pages in May 2016, convincingly making the case that most lead indicators were not sustaining beyond a few months; pro-growth acceleration arguments were therefore, on a weak footing. Optimism nevertheless held high upon expectations of good monsoons and implementation of the 7th Pay Commission award to boost consumption. Both materialised. Plus bountiful revenues from fuel taxes ensured there wasn’t any fiscal stress in financing higher salaries.

And yet, the economy slowed even before demonetisation. The advance GDP estimates, which do not incorporate demonetisation effects, project a deceleration to 7.1% in 2016-17 from 7.6% last year. But the more striking feature is a sharper slowdown of both industry and services (excluding public administration); the former is anticipated growing only 6.1% from 8.8% a year ago, while the latter is seen chugging along at 6.8% instead of 8.6% in 2015-16. From the demand side, gross fixed capital formation (GFCF) is projected to contract; private consumption will slow down to 6.5% against 7.4% last year.

This slowdown is a bit of an anti-climax for the government and RBI and raises policy concerns: How come private consumption slowed in a year when inflation fell, agriculture growth rebounded and the government disbursed a hefty pay hike? Why does private investment remain withdrawn and is retreating at a confluence of falling loan rates and FDI at historic peak in a backdrop of rock-solid macroeconomic stability?

These questions can neither be brushed aside as temporary aberrations, nor buried under near-term concerns about post-demonetisation developments. Because this trend reversal could be worryingly related to the government’s strategy of incremental reforms!


Optimism misplaced

The timing for demonetisation couldn’t have been worse. It was an unanticipated blow to a faltering economy. Most forecasts however expect a V-shaped rebound in about two quarters in 2017-18. These completely downplay the slowdown that evidently set in much before demonetisation happened; if anything, it could have knocked it down further. The self-explanatory charts accompanying this piece cast a shadow over this optimism.

A health-check shows most lead indicators still weak, some more fragile than before. Exports and IIP gained some traction over a negative base, but it is uncertain if these will hold up beyond a few months. Capacity utilisation remains where it was in last several quarters. Real bank credit growth has fallen further to zero; credit to industry saw deep contraction. Non-performing assets rose sharply; with demonetisation, these could deteriorate further.

Corporate top line, volumes’ growth is mostly subdued; margin pressures re-appeared with trend reversal in input prices. The infallible proxy for business health could be real corporate tax revenues-trend growth fell sharply to 1.5% in April-December 2016 from 8.1% in 2015-16 when deflated with WPI and turned negative when adjusted with CPI. Likewise, real excise duty collections (corrected for additional revenue measures, ARMs) that track manufacturing activity dropped to 2.3% in April-October, 2016 from 7.5% in 2015-16 when deflated with WPI for manufacturing. Post-demonetisation, these trends have worsened further. Puzzling where the optimism comes from!

Work not done

Reforms are aimed at pushing growth, a strikingly similar concept to that of ‘force’ in physics. Force is applied to move an object, which is defined as ‘work done’. If applied force fails to displace the object, ‘work is not done’. Interpreted differently, applied force either did not have sufficient mass or acceleration to outweigh the opposing forces. If growth begins to falter mid-way through a recovery, how should reform efforts be judged?

The optimism of most analysts is underpinned by several baby-step reforms undertaken by the government, the assumption being “the whole would be bigger than its parts”—not big bang, but “persistent, creative and encompassing incrementalism” under the overarching ‘sweet spot’ of ‘a strong political mandate and favourable external environment’ (Economic Survey, FY15). It was argued these wouldn’t just guide prospective action but also be the benchmark for retrospective assessment.

Juxtapose this assertion with the moribund private investment, the contracting stock of capital, and you wonder where have things gone wrong? Let us return to the simile of ‘mass” and ‘acceleration’—it becomes apparent that all parts haven’t formed the critical mass or gained acceleration to push growth higher. Reasons could be several: i) reforms like inflation targeting combined with fiscal consolidation could have severely constrained demand in the short-to medium term; ii) retrospective taxation-related uncertainties could have persisted far too long; iii) the pace of clearing stalled projects might have lost momentum; iv) savings from subsidy reforms could’ve been sub-optimal, slowing public capex; v) initiatives like Indradhanush might still be at an early implementation stage; vi) factor market reforms relegated to states might have fizzled out as attraction for investors; and/or vii) GST, bankruptcy laws’ implementation may have been delayed.

What stands out is the failure to meaningfully address the balance-sheet distress of big corporations and banks, a key element in reviving investment and growth. Initiatives from RBI like CDR, SDR, S4A, etc, hardly managed to reduce the stock of stressed assets. Rising NPA levels suggest the fortuitous window of three years of above-7% growth, driven by terms-of-trade gains might fast be closing; if demonetisation worsens this any further remains to be seen.


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