Will bank mergers make a difference?

Source: By Madan Sabnavis: The Financial Express

The decision to merge disparate PSBs into a set of 12 banks is quite a big step, and adds a new chapter and outlook to the concept of public sector banking. We had the Indradhanush Scheme in the earlier episode of banking reforms, in 2015, and after the successful merger of SBI with its associates, and that of Bank of Baroda with Dena Bank and Vijaya Bank, the government is more certain about the future path. From an economist’s point of view, what does this mean?

Merger of PSBs is often seen as a compromise as it does not change the way in which banking is conducted, and is analogous to merging various state departments. Ideologically, it is clear that ownership remains with the government; there would be no let-go on this aspect of banking. The staff count does not go down, which positive is compared with mergers of private banks, where several jobs, especially at the senior level, are dispensed with. There are savings, in case branches are closed, and staff transferred, which is painful, but preserves tenure of staff. Besides, when it comes to PSBs, officers are used to transfers. But, the latest presentation is silent on how various senior positions have been re-allocated in the last two episodes of mergers as there cannot be multiple risk, credit, treasury, operations, IT, etc, heads. Clearly, several staff may have lost their seniority. But, this can be rationalised as being necessary for the larger good. What is the larger good?

It is interesting that PSBs are still talked of as instruments used for meeting larger political goals. For instance, for MUDRA loans to SMEs targets have been set for PSB, but not for private banks. The one time settlement (OTS) scheme for SMEs spoke of holds for PSBs only; it is not obligatory for private banks. Also, when there is an assurance that some PSBs have agreed to link their lending rates to the repo rate, it is implicit that there are orders from above. Therefore, even today, PSBs are not as free as their private counterparts when it comes to taking credit decisions at the macro level. Even the Jan Dhan exercise was driven by PSBs, as are loan waivers.

As the owner of these banks, the government has a right to decide these policies, but, it also means that the high command approach still holds, and will continue to do so for the merged banks. Hence, while the concept of the so-called ‘phone banking’, which can be catastrophic, has been abolished; banks still have to adhere to these guiding orders, and will not be independent like their private counterparts.

A lot of changes will be seen in the governance structures, such as appointments to the Board, remuneration to Board members, review by the Board of all designations above general manager, etc. But, given that Board members would still be driven by the overriding instructions from above, it may not mean much, if the basic pillars of business guidance are fixed.

Also, it has been reiterated that the chief risk officer position would be mandatory, and there would be outside recruitment at market pay. Does this mean that PSBs with a total officer staff of over 400,000 do not have the talent to fix 12 posts in these banks? There is already quite a bit of ill-feeling on lateral recruitment of some tenure-driven posts in PSBs; this announcement can be more demoralising. Ideally, bringing in a performance-linked bonus for high performers would have the sent right signals in the market, and raised morale. This is definitely required to enthuse the staff of the merged banks, especially since there will be substantial disruption on account of the mergers.

Curiously the new mosaic talks of willingness to pay non-official directors a higher sitting fee, but not the existing staff, who have built these banks over the years. This is something which should be addressed in course of time, and would also appeal to the Unions.

Now, coming to the idea of a merger, it must be realised that the overall balance sheet size cannot change with these mergers as there is still a fixed set of assets and liabilities. Statistically, ratios look better for the merged entity as it adds profits of strong banks to losses of weak banks. But, there is no new profit being generated anywhere. In fact, statistically, the ratios of NPA and capital adequacy of merged banks tend to be higher or lower than individual components of the entity.

Based on the dictum of one of the large business consultants in 1999-2000, we are following a model where the banking system has global, national, and more niche specific banks. The approach can be questioned in this modern age, where the focus is more on inclusive banking, with more sophistication in financial markets. Are we really saying that large banks created will be able to be in the USA what, say, Citi Bank is in India? There are regulatory barriers everywhere, and the approach, so far, has been to close down unprofitable foreign branches. In that case, what exactly are we talking of?

It has been argued that large banks with bigger capital can take larger exposures. But, is that what we want? RBI’s large exposure norms clearly want banks to lower their exposures to large borrowers in order to reduce concentration, and are being prodded to borrow from the bond market. In that case, this cannot be a goal for PSBs. Merging for the sake of merging banks, without changing the operational structures, may not necessarily lead to an optimal solution. True, any rationalisation in costs, like closing of branches or ATMs, can help the profit-and-loss account. But, the same could have been worked out between PSBs without such mergers, too, with, say, PNB not retaining a branch where OBC has one.

The fear, probably, with such large PSBs is that crises tend to get magnified. This has been witnessed in some banks at different points of time, but, being a relatively rare occurrence, is less of an issue. Alternatively, there should ideally be no pushing of programmes by the government on lending, or even schemes like Jan Dhan, so that banks take independent decisions, based on commercial logic. At the extreme limit, the push for SME lending, or affordable housing can germinate the seeds of a crisis (which may look unlikely today).

The timing of these mergers is also curious; almost all PSBs are struggling to come to terms with the existing NPA crisis. While NPA ratios have declined, at close to 10%, they are still very high. A large number of cases are pending with the IBC, which, in turn, quite expectedly, appears to have lost steam, with the realisation rates now coming down, after the initial success. Now, all would be working hard on these mergers, which take time to put together.

The contrarian may just argue, quite rightly, too, that there was really no immediate need of such big bang mergers—they could have been planned over a period of time to eschew disruption.

 

 

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The crime of silence around the country’s suicide epidemic

Source: By Tasneem Raja: Mint

Every 40 seconds, someone somewhere in the world takes his or her own life. Imagine if it was not someone somewhere in the world. Instead, it is a family member, a friend, a colleague, a neighbour, or a person we know, who is perhaps thinking of taking their life. The crisis would then look different.

According to the World Health Organization (WHO), for every 100,000 women, about 16 women take their own lives. By the data available, India’s suicide rate for women is the sixth highest in the world. About a decade ago, a bulk of young female deaths in the country was attributed to child-bearing and related causes. Today, suicide is the leading cause of death among young women. We lose about 25 men for every 100,000 men to suicide.Suicide is the second biggest cause of death, especially amongst younger men, exceeded only by death due to traffic accidents. The Lancet series, the last such extensive study on suicides in India, placed the death toll of suicide in 2010 at 187,000.

Behind these numbers lie stories of immense human distress and suffering that cause people to take the ultimate step of taking their own lives. Suicide is a complex phenomenon, and can be precipitated by a range of inter-related factors laced with a sense of hopelessness. The two mental ill health conditions most often associated with suicide are alcoholism and depression. Amongst the young, the commonest causes seem related to academic performance, and a “let down" in romance. Other factors stem from opportunity deficits and disadvantages determined by caste, economic and other forms of social inequity, political ideology, domestic violence, bullying, harassment and chronic diseases, among others.

Global studies also show that a great number of suicides occur in countries with a rapid pace of development, such as India and China. What is evident is that it has taken on epidemic proportions, especially in our country. Each case leaves behind a close network of other human beings whose lives will never be the same again. Yet, there is a deafening silence around suicide, beyond the very few that get discussed in the media.

Until recently, suicide was a criminal offence under the Indian Penal Code. This pushed a bulk of the reporting underground. Beyond the law lie deep-rooted cultural and social beliefs that consider suicide a taboo, and its discussion, a no-go area. Most organized religions do not allow for the same rites and rituals of death for those who has killed themselves. This is because certain religions and cultures consider the taking of one’s life a sin. The feeling of guilt this induces does not help the cause. Not only does it rob an individual’s space to “come out" and talk about it, it also strips the family, loved ones and friends of space to grieve after a loss.

While there are no quick and easy solutions to the deep-rooted societal problems that are linked to suicide, there are things that each one of us can do to prevent a friend, a co-worker, a family member, a neighbour, and an acquaintance from taking the step.

The first of these is to be more responsive to people in our immediate environment. This includes stopping by and checking on that friend who has been a little withdrawn lately, offering an ear to someone who needs to vent. Evidence around suicide indicates that the ultimate act of killing oneself is an impulsive one, and that the impulse tends to pass if the moment is handled well. This is the premise that suicide helplines work on.

Several studies have indicated that there are multiple risk factors associated with suicide, and these may vary with gender, age, physical and mental well-being, and individual experiences. Treatments and therapies, therefore, vary as well. Psychosocial interventions have been found to be beneficial for individuals who have attempted suicide. It has been observed that these interventions have dissuaded several individuals from making another attempt.

Psychotherapy or Talk Therapy is one such type of psychosocial intervention that can effectively reduce suicide risk. This can a) help people learn new ways of dealing with stressful experiences through training; b) help individuals recognize their own thought patterns and consider alternative actions when thoughts of suicide arise; c) reduce the rate of suicide among people with borderline personality disorder, a serious mental illness characterized by unstable moods, relationships, self-image, and behaviour.

Decision makers and policies must ensure reduced access to means that promote thoughts of suicide. In order to address the immense need for viable mental health care services, there is also a need to develop scalable and evidence-based models of care across the country through collaborations and partnerships. These models, once endorsed by the government, can be replicated across India. The Maharashtra government’s partnership with Tata Trusts on mental health initiatives in Nagpur is one such example.

Each and every individual can make a difference, and all it takes is one little step to reach out to someone who is in need. It is important to listen and connect and seek professional help whenever there is a need for it. One little gesture may, perhaps, save a family member, a friend, or someone we know. This one little gesture can help end this crime of silence that lurks in our midst.

 

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Jalan panel’s recommendations represent a possible silver lining

Source: By Jamal Mecklai: The Financial Express

The Jalan Committee’s recommendations on transferring a part of RBI’s “excess” capital to the government represent a possible silver lining in the thunderstorm that has been pummeling India’s economic growth. This is not only because it may assist the government in meeting this year’s fiscal deficit target, but more pertinently because it represents the first public quasi-acknowledgement by the Modi government that having experts, who have significant domain knowledge and experience, determine policy frameworks can be of huge value.

One of the loudest failures of the government, from its first election to today, has been the cavalier attitude it has shown to knowledge and experience. Senior bureaucrats were—and continue to be—transferred to completely unrelated ministries, nullifying their years, perhaps decades, of experience. As a result, we have had some incomprehensible decisions hurriedly implemented—read demonetisation—and even some extremely sound policies implemented in a haphazard and not-thought-through manner—read GST.

Even today, with the economy deep in the danger zone, policies are being put forth without adequate planning. For instance, as argued very clearly that the current proposal to immediately merge several public sector banks into one another, while sound in principle, reflects the worst possible timing, since at this time, banks need to focus primarily on sharpening—and increasing—their lending (particularly given the generous government support), instead of which several bank managements will now need to spend huge amounts of time in managing the mergers.

What the government clearly doesn’t realise is that the economy and markets are not swayed as easily as the electorate. Simply making triumphal pronouncements is not enough—the economy needs sound ideas, careful planning and meticulous implementation. The sum total impact of the government’s economic policies over the past five years is there for all to see—a sharp and continuing decline of our GDP growth rate.

Between 2014 and today, of 14 large economies, only Turkey and the UK have seen GDP growth fall more sharply than India. To be sure, there has been a modest global slowdown, but half of the countries I looked at—Brazil, France, Indonesia, Japan, Poland, Russia and the US — are reporting higher GDP growth rates than in 2014, indicating that sensible, tailored policies can keep growth ticking over even in difficult times.

The comparative story in Asia is even bleaker, with 7 of 11 Asian countries showing increased GDP growth; India’s performance is by far the worst. Even Pakistan, often dismissed as a basket case, is growing faster than we are today. It is clearly disingenuous to claim global circumstances are the main reason for the government’s failure on the economy.

It is significant that the two large countries that are faring worse than India are hobbled by negative sentiment—Turkey as a result of Erdogan’s flailing around as his imperial reign appears to be ending, and the UK, of course, because of Brexit and, now, Boris Johnson. Negative sentiment in India, too, has been spreading rapidly and is, without doubt, a significant force in the slowdown.

It is often said that acknowledging a problem is a necessary step to solving it, but, thus far at least, this government appears unable to admit failure in the smallest of issues, let alone ones as dramatic and apparently as close to its heart as economic development—remember, acche din, the target of a $ 5 trillion economy by 2024, and so on.

Of course, there is no need for loud mea culpa’s; the Jalan panel was constituted quietly in the midst of the finance ministry-RBI maelstrom. It did its work, albeit with some public acrimony, but delivered what I believe are sound results, both in terms of immediate impact as also, critically, in setting a framework for future operations.

It is another matter that the RBI board decided to push the limits of the recommendations, as one of the committee members pointed out; clearly, institutional capture, which is another structural reflection of the insecurity of the government, remains a strong agenda item.

Given that the global growth environment is also turning more difficult, the government needs to wake up and build on its lone expert-driven success. Otherwise, we may have to accept 5-5.5% as the upper bound of India’s growth, which could lead—a la Erdogan and, even, Putin—to an electoral surprise in 2024. This may turn out to be the real silver lining.

 

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In ethanol, government’s sugar solution

Source: By Parthasarathi Biswas: The Indian Express

On 3 September 2019, the government approved an increase in the price of ethanol to be procured by public sector oil marketing companies (OMCs) from sugar mills for blending with petrol for the 2019-20 supply years from December 1. The Cabinet Committee on Economic Affairs (CCEA) also allowed conversion of old sugar into ethanol, which again is expected to help mills deal with the current overproduction in the sweetener and make timely payments to farmers for the cane delivered by them.

What exactly is ethanol and how do mills produce it?

Ethanol is basically alcohol of 99%-plus purity, which can be used for blending with petrol. The normal rectified spirit used for potable purposes has only 95% alcohol content. Both ethanol (also called anhydrous alcohol) and rectified spirit are produced mainly from molasses, a byproduct of sugar manufacture.

Mills typically crush cane with a total fermentable sugars (TFS) content of about 14%. Much of this TFS — sucrose plus so-called reducing sugars (glucose and fructose) — gets crystallised into sugar. The un-crystallised, non-recoverable part goes into what is called ‘C’ molasses. The latter, constituting roughly 4.5% of the cane, has a TFS of 40%. Every 100 kg of TFS, in turn, yields 60 litres of ethanol. Thus, from one tonne of cane, mills can produce 115 kg of sugar (at 11.5% recovery) and 45 kg of molasses (18 kg TFS) that gives 10.8 litres of ethanol.

But rather than produce sugar, mills can also ferment the entire 14% TFS in the cane. In that event, they would end up making 84 litres of ethanol and zero kg of sugar. In between these two extreme cases, there are intermediate options as well, where the cane juice does not have to be crystallised right till the final ‘C’ molasses stage. The molasses can, instead, be diverted after the earlier ‘A’ and ‘B’ stages of sugar crystal formation. Mills, then, would produce some sugar, as opposed to fermenting the whole sugarcane juice into ethanol. If ethanol is manufactured using ‘B’ heavy molasses (7.25% of cane and with TFS of 50%) around 21.75 litres will get produced along with 95 kg of sugar from every 1 tonne of cane.

So what has the government done?

Given the surplus sugar production in the country, it has allowed mills to produce ethanol from ‘B’ heavy molasses and directly from sugarcane juice. On 3 September 2019, the CCEA approved even use of sugar and sugar syrup for production of ethanol; mills can simply add these to the molasses mother liquor for further fermentation. But the real impetus has come from mills getting higher rates for ethanol manufactured from the ‘B’ heavy and sugarcane juice routes.

For the 2018-19 supply years (December-November), the ex-distillery price payable by OMCs for ethanol manufactured from the conventional ‘C’ molasses route was fixed at Rs 43.46 per litre. This was set higher at Rs 52.43/litre for ethanol from ‘B’ heavy molasses and Rs 59.13/litre from sugarcane juice. For the new 2019-20 supply year, the prices have been raised marginally to Rs 43.75/litre (‘C’ molasses), Rs 54.27/litre (‘B’ molasses) and Rs. 59.48/litre (sugarcane juice). Moreover, even ethanol produced from sugar and sugar syrup will enjoy the Rs 59.48/litre rate.

How will all this play out?

Currently, ex-factory prices of sugar are ruling at around Rs 32 per kg. If a mill were to produce 115 kg of sugar and 10.8 litres of ethanol through the conventional route, its gross realisation at Rs 32/kg and Rs 43.46/litre would be roughly Rs 4,149 from every tonne of cane crushed. But if it were to convert the entire cane juice into 84 litres of ethanol, the gross realisation at Rs 59.48/litre works out much higher at Rs 4,996 per tonne of cane.

In other words, there is a huge incentive to produce ethanol today. This has been additionally facilitated by the government mandating 10% blending of petrol with ethanol. Between 2013-14 and 2018-19 (supply years), ethanol procurement by OMCs has increased from 38 crore litres to an estimated 200 crore-plus litres. Out of the latter, 32 crore litres is expected to be made from ‘B’ heavy molasses and sugarcane juice. If mills are able to divert more of cane juice for ethanol, it would mean producing less sugar. Since the country is producing too much sugar and is importing oil, the ethanol-blending programme is beneficial both for mills and for the country’s balance of payments. Ten-per-cent blending requires 330 crore-odd litres of ethanol, which can now be produced through the ‘B’-heavy molasses and sugarcane juice routes as well.

What is the present situation in sugar like?

Mills are expected to close the 2018-19 sugar season (October-September) with all-time-high stocks of 136 lakh tonnes (lt), which is equivalent to to six months of domestic consumption. Even if production falls from 329.5 lt to a projected 270-280 lt in the new season and exports nearly double to 60 lt — the country consumes only 265-270 lt a year — stocks will remain at levels where mills will still struggle to pay farmers. As of now, they have outstanding cane dues of over Rs 10,000 crore, of which Rs 7,000 crore-plus is in UP alone. These will mount further as crushing for the 2019-20 season begins in a month’s time. Ethanol is the only real saviour under the circumstancesboth for mills and cane growers.

 

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Look East, Act East

Source: By Achintya Kumar Dutta: The Statesman

North-east India, consisting of eight states ~ Assam, Manipur, Nagaland, Mizoram, Meghalaya, Tripura, Arunachal Pradesh and Sikkim ~ was a neglected and insignificant area during colonial rule. Unlike the north-west frontier, it was never a gateway of invasions into the heartland of India. However, after Independence the country became vigilant in the north-east not least because of the Chinese threat. The region acquired a military importance in the 1950s and Sixties. During the Cold War era, the Government of India lacked a definite North-East India policy.

This made the region totally isolated in terms of the country’s economic and foreign policy. Rather new barriers were created to the free movement of the region’s people, who historically have interacted with China, South-east Asia and the Indian core, and in turn had influenced their respective cultural traditions. Under such circumstances, their prolonged discontent combined with neglect and under-development resulted in political unrest and a movement for autonomy, resulting in the creation of new Union Territories and states (Nagaland, Mizoram, Arunachal Pradesh and Meghalaya) in the 1970s and 1980s.

However, the Centre was anxious to bring the people of this region within the fold of Indian society and economy. The government thought it was imperative to make this region an integral part of India by creating more economic opportunities and thus buttress economic activities in this region so that the majority could be associated with trade, commerce and related economic activities. The best praxis was to establish links between this region and India’s neighbours.

Thereafter, the Government of India gradually looked towards the north-east as a gateway to strengthen its politico-economic and cultural connectivity with the South-east Asian countries and ASEAN. This region was considered important for pursuing what is known as the Look East Policy (LEP) from the 1990s, i.e., an outward looking India to improve connectivity with South-east Asian nations.

Apart from being rich in natural resources, this region was thought to be an important zone for international trade. More importantly, the region is strategically very important because it shares the international border with China, Myanmar, Bhutan and Bangladesh. At the international level, the disintegration of the Soviet Union was a huge blow for India at the economic, security and political levels. Other factors like the Gulf crisis, the obsolete policy of non-alignment, the growing Chinese influence in South-east Asia, a trend towards regionalisation and the economic success of South-east Asian and East Asian nations compelled India to engage these countries under the rubric of the LEP. At the same time, the Shukla Commission (1996) recommended that the northeast be transformed through infrastructure development and eventually bring this region within the purview of LEP.

The post Cold War period has created a congenial environment for India to consolidate connection with the South-east Asian countries. The ASEAN countries, on the other hand, also started realising India’s potential in shaping the future political and security environment in Asia. Moreover, the economic liberalisation initiated by the then Government of India has paved the way for adopting a new economic diplomacy. This encouraging environment gave birth to the LEP to facilitate India to foster closer economic ties with its South and South-east Asian neighbours with emphasis on renewing political and economic contacts with the Asian nations.

Consequently, India became a Full Dialogue Partner of ASEAN in the fifth summit in Bangkok in December 1995 and in 1996 the country became a Member of ASEAN Regional Forum (ARF) which deals with strategic and political issues in the Asia-Pacific region. However, the government was acutely aware that India could not enter the South-east Asian market without the development of the infrastructure of the north-eastern states. While emphasising regional integration, reform and liberalisation, LEP also emphasised rapid economic growth and development of the north-eastern region.

Therefore, engaging the region in various connectivity projects and regional and subregional cooperative initiatives became one of the important features of India’s LEP. Subregional organisations, such as Bay of Bengal Initiative for MultiSectoral Economic Cooperation (BIMSTEC) and Bangladesh, China, India and Myanmar Economic Corridor (BCIM-EC) Forum emerged. Thus India’s north-east was viewed as a ‘gateway of opportunities of international trade and commerce’. Besides border trade, educational, medical and tourism facilities of the north-east were also planned to meet the needs and expectations of South-east Asia.

Encouraging such ventures will provide ample opportunities for north-east India as a stakeholder in the booming economic and other related activities of South-east and East Asia. Surprisingly, India’s north-east still bears witness to the symptoms of underdevelopment and civil unrest. New attempts are therefore often undertaken to tackle the situation. The proposed Asian Highway is an attempt to develop the region by opening it up to the global order. This transborder road connectivity is expected to play an important role in the economic development of the region through cheaper transportation of goods and people, increased exports, industrial development, development of tourism, and employment generation.

However, there is a growing suspicion that the absence of industrial infrastructure and industrialisation in the region may reduce India’s northeast to a mere transit point of human and commercial traffic. Moreover, unless the insurgency problem in the region is addressed and peace and tranquillity are ensured, mere construction of a trans-national highway will not facilitate the flow of expected benefits. Of the possible negative effects, there are fears of an increase in drug and small arms trafficking due to quick and easy movement of people because of the Asian Highway.

Another factor is that in the absence of local entrepreneurs, people from other parts of the country will reap the benefits that will emerge from the Asian Highway. This project may also lead to haphazard urbanisation of the region, which could pose other problems. The government has to be careful of these possible threats and should plan how to tackle them.

 

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US, Russia rip up arms control deal

Source: By Deccan Herald

The United States and Russia ripped up a Cold War-era missile pact in a move that raised the spectre of an arms race between the global powers. The 1987 Intermediate-Range Nuclear Forces (INF) treaty limited the use of medium-range missiles, both conventional and nuclear.

US Secretary of State Mike Pompeo announced Washington’s formal withdrawal in a prepared statement at a regional forum in Bangkok, minutes after Russia pronounced the treaty void. Both sides had signalled their intention to pull out of the treaty for months, trading accusations of breaking the terms of the deal. “Russia is solely responsible for the treaty’s demise,” Pompeo said in a statement issued at an Association of Southeast Asian Nations (Asean) foreign ministers’ meeting. Shortly before Pompeo’s announcement, Russia’s foreign ministry in Moscow said the deal had been terminated “at the initiative of the US”.

Later the ministry said that Washington had made a “serious mistake” in ditching the treaty, insisting that the US had abandoned the agreement for its own gain rather than because of alleged Russian violations. Deputy Foreign Minister Sergei Ryabkov also urged the US to implement a moratorium on deploying intermediate-range nuclear missiles after leaving the INF.

Washington has for years accused Russia of developing a new type of missile, the 9M729, which it says violates the treaty — claims that Nato has backed up. The missile has a range of about 1,500 kilometres according to Nato, though Moscow says it can only travel 480 kilometres. The INF treaty limits the use of missiles with ranges of 500 to 5,500 kilometres. “Russia failed to return to full and verified compliance through the destruction of its noncompliant missile system,” Pompeo said, referring to the 9M729 ground-launched cruise missile.

The 29-country Nato transatlantic alliance rallied behind Washington, blaming Russia for the treaty’s demise and vowing to respond. “We regret that Russia has shown no willingness and taken no demonstrable steps to return to compliance with its international obligations,” Nato said in a statement. “Nato will respond in a measured and responsible way to the significant risks posed by the Russian 9M729 missile to Allied security.”

The White House launched a six-month withdrawal procedure for leaving the treaty in February. Soon after Moscow began its move to pull out, and last month Russian President Vladimir Putin formally suspended its participation.  Signed in 1987 by then US president Ronald Reagan and Soviet leader Mikhail Gorbachev, the INF treaty was considered a cornerstone of the global arms control architecture. But the United States said the pact had given other countries -- namely China -- free rein to develop their own long-range missiles and has accused Russia of repeated violations.

US-China tensions — mainly over trade and maritime disputes — have been centre stage at the ASEAN meeting in Bangkok, where Pompeo has pedalled Washington’s “Indo-Pacific” strategy to counter Beijing’s economic and military might in Asia.

US wants new deal

Pompeo said that the US was “seeking a new era of arms control that moves beyond the bilateral treaties of the past”, calling on Beijing to join discussions. “The United States calls upon Russia and China to join us in this opportunity to deliver real security results to our nations and the entire world.”

The INF deal was seen as one of two key arms deals between Russia and the US -- the other being the New START treaty, which keeps the nuclear arsenals of both countries well below their Cold War peak. That deal expires in 2021 and there appears to be little political will from Moscow or Washington to renew it, experts say.

China has already rebuffed calls from the US to join the New START treaty in the future. The demise of the INF has sparked fears of a new era of weapons development between the heavyweights. Putin last year announced plans to develop new weapons, including a medium-range land-based missile and a land-based version of the Kalibr missiles that have already successfully been used by the navy and tested in Syria.

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The changing seas: antecedents of the Indo-Pacific

Source: By T.C.A. Raghavan: The Telegraph

With the publication of the ASEAN Outlook on the Indo-Pacific the elucidations of the concept have expanded. The Association of Southeast Asian Nations statement follows that of Australia, the United States of America, Japan, France and Indonesia. For each, the conceptual rebalancing the term implies is directly related to the new factor in this region — Chinese maritime assertion. India’s position, too, on the Indo-Pacific is related to this new factor in its geopolitical environment but it has also older antecedents that are equally significant.

There was more than the usual interest when the prime minister of Japan, Shinzo Abe, rose to address a joint sitting of the Lok Sabha and Rajya Sabha in August 2007. He had then been in office for less than a year but came from a well-known political family. His grandfather, Nobusuke Kishi, was the first Japanese prime minister to have visited India when he did so half a century earlier. Abe in his speech invoked the Mughal prince, Dara Shikoh, and, in particular, the title of a Sufi text he authored in 1655, Majma-ul-Bahrain.

This translates as ‘Mingling of the Two Oceans’. Dara Shikoh’s purpose was finding common ground between the two universes of Islam and Hinduism. For Abe, Dara Shikoh’s title was, however, the perfect metaphor for a “broader Asia”, one in which the “Pacific and the Indian Oceans are now bringing about a dynamic coupling as seas of... prosperity”. India and Japan, Abe’s point was, had the ability and the responsibility to broaden Asia even further and “to nurture and enrich these seas to become seas of clearest transparence”.

This statement, in sketching out a new geopolitical category comprising the Indian and Pacific Oceans, did not use the term “Indo-Pacific” itself but certainly anticipated it. The concept gained traction slowly. To a great extent, the ongoing global war on terror and the global financial crisis acted as dampeners. In any event, its time would come in the next decade as growing Chinese maritime assertion focused minds on this common space. The ‘Indo-Pacific’ has since firmly entered the political and diplomatic lexicon.

In spite of the borrowed metaphor from Dara Shikoh, Abe’s idea was primarily a geopolitical construct. He spoke of India and Japan as Asian democracies, of the strategic global partnership that bound the two governments and how this was going to be a pivot for the “outer rim of the Eurasian continent”.

Perhaps Abe’s reflections that day struck a chord in India for other reasons apart from the compelling geopolitical logic that faces India as its foreign trade expands and this rapidly increases its dependency on the maritime domain. These reasons derive from other constructs of the ‘Indo-Pacific’ which past scholars, activists and intellectuals in India had attempted to formulate as equally important to India’s lived experience and memories of its history.

In modern India, perhaps the first conscious use of the term ‘Indo-Pacific’ was by the noted scholar, Kalidas Nag, and it is found in his 1941 book, India and the Pacific World. For him the term referred to largely a cultural and civilizational entity. The impulse to trace India’s links with this maritime universe had much to do with his association with Rabindranath Tagore. Kalidas Nag wrote, “Sailing in 1924 with Dr. Rabindranath Tagore into the Western Pacific, I was blessed by the Master Poet in my endeavour to trace the cultural and artistic relations of India with the nations of the Far East: China and Japan, Java and Bali, Champa and Cambodge, Malaya and Burma”.

Kalidas Nag thereafter sought to give an institutional form to these “thousand points of historical contact and cultural relations” and this took the form of the establishment of the “The Greater India Society” in 1926 and its journal, The Journal of the Greater India Society, which appeared from 1934 to 1959. Scattered through its issues are the efforts of historians, linguists, anthropologists and other scholars exploring the points of contact between India and its vast maritime neighbourhood through history. Works such as K.N. Nilakanta Sastri’s South Indian Influences in the Far East (1949) or R.C. Majumdar’s Hindu Colonies in the Far East (1944) and earlier similar works were part of this scholarly tradition.

If Rabindranath Tagore has been the impetus for this largely scholarly endeavour, Mahatma Gandhi was responsible for another dimension of India’s Indo-Pacific perspectives — diasporic relations. Charles Freer Andrews thus wrote a book titled India and the Pacific (1937) that detailed his experience of working with Indian workers in faraway places beginning with his visits to Fiji in 1915. The emigration of Indian labour showed to Andrews an even broader canvas than the Pacific. He noted there had been “strangely little realization as yet, even in India itself, how far the emigration of Indian indentured labour had spread”. Thus, apart from Fiji and the Caribbean, there was Mauritius and, as Andrews noted, “Natal owes most of its development as the ‘Garden of South Africa’ to Indian labour”.

It has been estimated that in the century from the 1830s some 30 million Indians travelled overseas from India. Along with this vast movement of labour were entrepreneurs in capital. In the early 1870s, Bartle Frere, a former governor of the Bombay Presidency touring in the East African coast had noted that “all trade passes through Indian hands... and without the intervention of an Indian either as capitalist or as petty trader, very little business is done”. This presence extended beyond East Africa and Frere had also noted, “Along nearly 6000 miles of sea coast, in Africa and its islands, and nearly the same extent in Asia, the Indian trader is, if not the monopolist, the most influential, permanent, and all-pervading element of the commercial community.”

This pervasive spread of Indian labour and capital owed much to the phase of globalization under the aegis of the British empire and the fact that the vast space of the Indian Ocean was a “British Lake”. This imperial system had as its base Indian labour, Indian business and, not to forget, the Indian policeman and the Indian army. All this was dramatically illustrated by the building of the Ugandan railway at the end of the 19th century, described then as the “driving of a wedge of India... across East Africa”. This Indian expansion under the imperial aegis is as much an antecedent of the Indo-Pacific as any other.

From an Indian perspective, then, the term ‘Indo-Pacific’ can be seen as the convergence of a number of constructs — the geopolitical and the strategic is only the most recent. None of these constructs is or should, however, be seen as static.

The Greater India Society approach had evident limitations. The Indian imprint in Southeast Asia was not a direct transference of influence but it was rather a fusion of ideas and cultures. The indigenous societies of Southeast Asia retained far greater agency over the ideas they imported than happens in colonial conditions — a point R.C. Majumdar and other historians may not have conceded in the 1930s and 1940s. Indian labour and capital expanding all across the Indian Ocean littoral was deeply resented by many as part of an exploitative colonial intrusion and the pushback against this in the 1950s and 1960s was inevitable. In spite of this the Indian connection had durability and has endured.

The current interest in the concept obviously is political and directly linked to the expansion of Chinese influence and presence across the littorals of the Indian and Pacific Oceans. Notions of the Indo-Pacific may thus further evolve depending on the quality of China’s future interface with others.

 

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The country’s new DNA law raises privacy concerns

Source: By Mandira Kala: Mint

Parliament is set to pass a law to regulate the use of DNA technology. Since the DNA of a person is unique, it can be used to accurately identify a person’s identity. Globally, DNA technology is used to help enforcement agencies identify both perpetrators and victims in criminal cases. In medicine, DNA is used to identify the susceptibility of a person to diseases such as cancer and Alzheimer’s. In civilian life, DNA can be used to establish parentage of children or sibling relationships.

However, the use of DNA technology also raises major concerns relating to consent (i.e. the right to refuse to provide a bodily substance), privacy and data security. Hence, countries the world over have felt the need to strictly regulate the use of DNA. One hopes that the new law would fill a major gap, as the use of DNA technology in India has been left unregulated. Unfortunately, there are major lacunae in the way the new law addresses core issues such as privacy and fundamental rights.

In criminal cases, the law specifies the requirement of written consent before DNA samples are collected for testing from criminal suspects or under trials, offenders, victims of a crime, and missing or unidentified deceased persons.

Once these samples are analysed by a DNA laboratory, they will be stored in a national DNA data bank under various categories depending on whether the DNA has been collected from a crime scene, suspects or offenders, or unidentified deceased persons. For such criminal cases, safeguards are specified on limiting access to the DNA data bank and conditions under which DNA information can be deleted.

However, the new law goes well beyond criminal matters and regulates civilian and medical use of DNA. This is where major concerns arise and affect issues as diverse as parentage disputes, medical negligence, and any matter related to establishing an individual’s identity. On these issues, the new law does not prescribe any safeguards.

For example, the law does not require the consent of an individual while giving DNA samples in civil matters such as a paternity suit. The ethic behind the need for consent is that a person’s bodily substances include DNA, which not only identifies the person, but also reveals her genetic information such as physical and medical traits. Such information may affect her privacy, and so consent offers a safeguard against DNA misuse.

Or consider the provision related to the national DNA database that is being created under the law. As the name suggests, the database is a central repository of DNA information of individuals covered by the law. While the database will have information related to criminal offences, the law is unclear on whether DNA collected for civil cases will be stored in this database.

This is because the law requires all DNA laboratories to share DNA test results with the data bank. Therefore, were a DNA laboratory to analyse a DNA sample in the course of a private dispute between parties (say, an in vitro fertilization clinic and a pregnant woman), would it share this information with the data bank?

The Bill in question does not state that DNA information related to civil matters will not be stored in it. Note that the Combined DNA Index System (CODIS) in the US and the National Criminal Intelligence DNA Database in the UK are national DNA data banks with information related only to criminal investigations.

Further, if DNA information related to civil matters is stored in the data bank, it may violate the fundamental right to privacy as laid down by the Supreme Court. The Court has stated that the right to privacy may be infringed only through the enactment of a law, and that law must achieve a public purpose that’s proportionate to the infringement of privacy. Since the storage of DNA profiles for civil matters (such as paternity suits and medical diagnoses) may not serve a public purpose, it may violate the right to privacy.

A more fundamental issue is ambiguity on whether the law intends to regulate DNA tests conducted in medical and diagnostic settings. For instance, many laboratories across the country offer such tests to determine a person’s predisposition to cancer, diabetes and other diseases.

Such testing can also be used to identify an individual. For example, breast cancer can be diagnosed by analysing mutations in the BRCA1 gene, which involve analysis of large parts of an individual’s DNA, which could provide enough information to identify an individual. The law does not address how this DNA data will be stored, for how long, whom it will be shared with (such as a person’s health insurer), and when it will be deleted.

In fact, the gaps in the new DNA law dovetail into the larger issue of the lack of a data privacy law, which was raised by several Members of Parliament opposed to the law. While introducing it, Union minister Dr. Harsh Vardhan stated that the law intends to regulate DNA testing for identifying criminals, victims, missing, and deceased persons.

Clearly, the law goes beyond this objective. It needs rigorous scrutiny by a cross-section of experts and wider consultations. This can be achieved if the Bill is referred to a parliamentary committee. Otherwise, it could be a missed opportunity to effectively regulate the use of DNA technology.

 

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A more precarious citizenship

Source: By Sanjib Baruah: The Indian Express

The phrase “India’s internal matter” has featured prominently in the country’s diplomacy in recent days. It cropped up repeatedly in the government’s responses to the international fallout of the moves on Jammu and Kashmir: To scrap Article 370 and downgrade the state to a Union Territory. The country’s diplomats have pointed to the Simla Agreement of 1972 and the Lahore resolution of 1999 to assert India’s jurisdictional competence to take those actions.

Every new agreement overtakes the past,” says India’s ambassador to the UN regarding the international commitments made in an earlier era. But whether the Centre’s unilateral action— and the communication blockade and security crackdown imposed on the people most affected by it — is consistent with the commitment to resolution of differences through peaceful and bilateral means is quite another matter.

The “internal matter” formulation also surfaced in a somewhat novel context. In statements made in Dhaka, External Affairs Minister S Jaishankar described the process of the identification of citizens and non-citizens in Assam as India’s internal matter.

The use of the phrase in the case of Kashmir is quite familiar: To make a jurisdictional assertion of India’s power to act on matters affecting that area. The claim is that Kashmir comes under India’s “domestic jurisdiction” in the sense of Article 2(7) of the UN Charter, which excludes UN intervention in matters that are “essentially within the domestic jurisdiction of any state”. But there are no jurisdictional challenges to the process of citizenship documentation in Assam. The citizenship practices of states and the power to define the rules of entry into a country are widely seen as matters of sovereign discretion.

Jaishankar’s statement in Dhaka was clearly intended for a different purpose: To ease Bangladesh’s fears. It was a promise that the fallout of the citizenship documentation process in Assam will be contained; it will not extend to Bangladesh. Home Minister Amit Shah had previously raised India’s concerns about unauthorised immigration with his Bangladeshi counterpart. The news of the NRC — and that millions of suspected Bangladeshi unauthorised immigrants may be excluded — has received wide media coverage causing significant consternation and confusion in Bangladesh.

Not surprisingly, the media there made a point of putting Jaishankar’s comments in that context. According to the Daily Star, when the minister was “asked about concerns that some four million Bangla-speaking people are at the risk of losing Indian citizenship as they were left out of the National Register of Citizens in Assam,” he said, “This is an internal matter of India”. Bangladesh Foreign Minister Abul Kalam Abdul Momen was quoted as telling reporters that when he pointed out that his country was “already in serious trouble with 1.1 million Rohingyas,” Jaishankar replied, referring specifically to the NRC, “you don’t worry at all about it”.

Of course, Article 370 featured prominently on Jaishankar’s agenda in Bangladesh. His comment that the Kashmir decisions were India’s internal affair was the focus of newspaper headlines in Bangladesh. The country’s Ministry of Foreign Affairs expressed his country’s support for that position: “Bangladesh maintains that the abrogation of Article 370 by the Indian government is an internal issue of India.”

But what does it mean to suggest that the NRC and related efforts to harden the Indo-Bangladesh border and to curb unauthorised immigration will not impact Bangladesh? At least the Indian Supreme Court order that re-energised the NRC process does not support such a reading. The NRC was only one element of that 2014 ruling. The Court, acting on the far-reaching powers given to it by Article 142 of the Constitution, gave a number of directions including one on the “mechanism of deportation of declared illegal migrants”. By no stretch of imagination can this instruction be construed as a matter of domestic policy.

“While taking note of the existing mechanism/procedure for deportation keeping in view the requirements of international protocol,” said the order, “we direct the Union of India to enter into necessary discussions with the Government of Bangladesh to streamline the procedure of deportation”. The issue, however, has taken a backseat during the Court’s monitoring of the implementation of its directions. The updating of the NRC—India’s largest ever judiciary-led bureaucratic operation — has taken most of its energy and attention.

India’s efforts to tighten border enforcement and curb irregular migration parallel similar moves by a few other countries. The impact of these actions on regional neighbours has rarely been benign. In the most extreme case, the Donald Trump Administration’s clampdown on unauthorised immigrants has had profound effects on countries south of the US border. The single most important factor negatively impacting Central American countries like Honduras and El Salvador has been the return of deportees.

Understandably, one message that Jaishankar tried to convey to Dhaka was that no matter what, Indian policies will not include deportation— at least not to any noteworthy extent. This won’t come as a surprise to many. That India does not have large-scale deportations in mind has been quite evident for a while.

India’s diplomatic priorities vis-à-vis Bangladesh are simply much too high to risk alienating that country by deporting its nationals. The Modi government has clearly made a decision that the question of unauthorised immigrants is best left as India’s internal matter. Many would welcome the fact that deportation is now off the agenda. But the full implications of this shift will not be apparent for a while.

Viewed in comparative terms, regularisation or legalisation is one obvious alternative. Irregular migration is to a significant extent a component of labour migration. Faced with a choice between ignoring tax evasion in the underground economy that frequently employs irregular migrants, or exercising control over it, governments have sometimes found regularising the status of unauthorised migrants to be an attractive policy option. Amnesty is its synonym. But lately it has become a controversial word, at least in the US.

There are no signs that a general amnesty will be among the options that India will consider. But defining hundreds and thousands of people living in the country as non-citizens will create a new form of precarious citizenship — people with fewer rights and entitlements. This is an uncharted and potentially dangerous territory for a democracy. The growing talk of detention camps and the rapid normalisation of the idea do not bode well.

However, given the ruling party’s ideological predilections, it is clear that the aborted citizenship amendment bill will be reintroduced in the near future, and it is likely to get Parliament’s approval quite easily. What will then effectively become a faith-based selective amnesty will radically change the meaning of being excluded from the NRC.

Given this outlook, those who once supported the Assam Movement will be hard-pressed to claim that the completion of the NRC will mark the successful achievement of their goals. Whatever one thinks of the movement’s famous demands for the “three Ds, detection, deletion and deportation,” the future of Assam will be very different from what supporters of the movement had imagined. Popular protest movements — like revolutions — it seems, can also end by devouring their own children.

 

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Unreasonable concern

Source: By Kapil Sibal: The Telegraph

The angst about triple talaq is justifiable. The Narendra Modi-Amit Shah duo made it an emotive campaign issue. Without doubt, it is an unjust way of severing a marital relationship even if `nikah' is a matter of contract. That it is a part of 1,400 years of Hanafi tradition does not make it justifiable more so, when the Quran does not sanctify it.

The Supreme Court judgment was split three ways. Two of the judges recognized it as a religious practice, part of personal law that could not be interfered with. Given the stand that the All India Muslim Personal Law Board did not endorse this practice, the judges injuncted triple talaq. The two distinguished judges gave six months' time for Parliament to initiate legislation, in the absence of which the religious practice would be deemed to be legitimate.

Two other judges held the practice to be unconstitutional. The fifth judge went by the principle that what is morally abhorrent cannot be legally justified. Triple talaq, if given, was to be regarded as one-time talaq and the law laid down by the Supreme Court in the Shamim Ara case would hold the field. This meant that pronouncement of triple talaq would not sever the marital status but give time to parties for reconciliation after which talaq would be legitimized. In a sense, there was no majority judgment in the case.

The Muslim Women (Protection of Rights on Marriage) Ordinance, 2019 became law when it was cleared in the Rajya Sabha. It is an ill-conceived legislation and the rhetoric accompanying it seeks to brush the Muslim community as anti-women as if this is a rampant practice prevailing within the community. Of almost 200 million people belonging to the community, the number of cases of triple talaq as indicated by the minister for law and justice in the past two years was just over 300. The politics behind it was the motivation for this legislation, in spite of the crocodile tears shed for Muslim women.

First, there was no reason to issue an ordinance. Ordinances are only issued when there is an emergent situation that needs to be addressed. Had this been referred to a standing committee of Parliament, it would surely have been passed by consensus subject to making the bill a rational piece of legislation. At the moment it is not. Section 3 of the Act declares the pronouncement of talaq to be void and illegal. There was no reason for Parliament to legislate upon it since the Supreme Court had already declared the practice to be void. A Muslim husband cannot divorce his wife even if he pronounces talaq three times in any manner. There is no rationale for punishing a husband when the marriage is intact. How can a marriage which is legitimate in spite of the pronouncement of triple talaq visit the husband with imprisonment? Such legislation defies logic.

Second, when the marriage is intact, where is the question of providing subsistence allowance to the wife? She is, in spite of the pronouncement, entitled to all her rights as a wife. In the event of denial of any rights, she has recourse to the courts just as a married Hindu woman does when denied access by husband to the common habitat. Another provision is even more problematic. Section 6 is a legislative determination in which the married Muslim woman, upon pronouncement of triple talaq, is entitled as a matter of law to the custody of her minor children. Custody of children in all statutes regulating marriage, divorce or separation is a matter which is left for determination by courts: the best interests of children being of paramount importance. Instead of this, by legislative diktat, custody must remain with the wife while the husband suffers incarceration. Such a provision will fail the test of reasonableness.

There are other problematic provisions in the law as well. Pronouncing triple talaq is a cognizable offence. This means the husband can be arrested without a warrant. The complaint can be made by the wife or any person related to her by blood or marriage. We know that dissension within families motivate people to seek revenge. Not all marriages are happy marriages. Complaints can be motivated. Such a provision can actually work great injustice if an unhappy married Muslim woman or unhappy relatives seek to exploit the leeway given by the law to harass the husband. That the offence is compoundable is welcome but that too can only be done with the permission of the magistrate.

In such a situation, the wife being the target of triple talaq may not be willing to compound the offence. The possibility of blackmail inmyriad situations cannot be ruled out. The bail provision, which, too, is part of Section 7, defies logic. While the marriage is intact, the husband is in jail. His application for bail will only be considered after hearing the married Muslim woman upon whom talaq is pronounced and, thereafter, the magistrate will grant bail solely on justifiable grounds.

One cannot imagine the present dispensation bringing legislation to criminalize abandonment of all wives no matter which religion they embrace. According to the last census, more than two million women have been victims of desertion. Why does the present government not bring a law to punish all such husbands instead of targeting the few who practise triple talaq within the Muslim community? There are 2.37 million women who are separated. Of this, 1.9 million are Hindus.

According to the 2011 census, the percentage of women staying in marriage is highest amongst Muslims with 87.8 per cent compared to Hindus with 86.2 per cent and Christians with 83.8 per cent. The percentage of widowed women is least amongst Muslims at 11.1 per cent compared to Hindus at 12.9 per cent and the Christians at 14.6 per cent. The percentage of separated and abandoned women is also least amongst Muslims at 0.67 per cent compared to Hindus at 0.69 per cent and Christians at 1.19 per cent. These data speak for themselves.

 

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Political, not constitutional

Source: By M Gautham Machaiah: Deccan Herald

For the first time in its history, Karnataka will have not one, but three deputy chief ministers. While the post, like that of the deputy prime minister, does not have the sanction of the Constitution, its legal sanctity has nevertheless been upheld by the Supreme Court. The deputy PM and deputy CM are, however, mere ceremonial designations as their powers are on par with other cabinet ministers, no more.

Article 74 (1) lays down, “There shall be a council of ministers, with the prime minister at the head, to aid and advise the President.” The Salaries and Allowances of Ministers Act, 1952, make a mention of the prime minister, cabinet minister, minister of state and deputy minister. At the state level, ‘prime minister’ is substituted with ‘chief minister’. Thus, nowhere in the Constitution or any other Act, do the terms ‘deputy prime minister’ or ‘deputy chief minister’ find mention.

The first deputy PM of India was Sardar Vallabhai Patel, followed by Morarji Desai, Charan Singh, Jagjivan Ram and Yashwantrao Chavan. All of them were administered the oath of office and secrecy as ministers and later designated as deputy PM through a presidential order. However, history was created in 1989 when Devi Lal took oath as deputy PM in the VP Singh government even as the then President R Venkataraman was swearing him in as a minister.

In his book, ‘Commissions and Omissions of Indian Presidents,’ Venkataraman recalled, “I asked my secretary to convey to VP Singh that Devi Lal could be sworn in as minister and later designated as deputy PM. But when I administered the oath as ‘mantri’, he insisted on reading it as ‘upa pradhan mantri’. I corrected him saying ‘mantri’ again, but the second time, too, he read it as ‘upa pradhan mantri’. It was fully displayed in the live telecast of the proceedings, but I did not want to create an ugly scene and therefore allowed Devi Lal to continue to proceed as he wished.”

The appointment of Devi Lal as deputy PM was challenged by K M Sharma (KM Sharma vs Devi Lal and Ors, 1990) on the ground that the oath administered to him was not in accordance with the “prescription of the Constitution.”

Relying on an earlier order of the apex court, the then Attorney General (A-G) Soli Sorabjee, argued that the oath comprised two parts—descriptive and substantial. As long as the substantial part is correctly followed, a mere mistake in the descriptive part does not violate the oath. The person taking oath makes an affirmation that he will bear true allegiance to the Constitution and uphold the sovereignty and integrity of India. Thus, the words that precede this portion are merely descriptive of the person taking the oath, the A-G contended.

Sorabjee also submitted that the Third Schedule of the Constitution, which specifies the format of the oath, does not make a separate mention of the prime minister either, as it only refers to ministers. However, it has been a practice for the designated candidate to take oath as prime minister. Admitting that there is no constitutional provision for deputy PM, the A-G submitted that the post is only descriptive.

Dismissing the writ petition, the court held, “Respondent 1 (Devi Lal) is just a minister like any other member of the council of ministers though he has been described as the deputy prime minister. The description of him as deputy prime minister does not confer on him any power of prime minister. It cannot, therefore, be said that the oath administered to him as deputy prime minister was not in accordance with the prescription of the Constitution.”

In 2018, Sekhar S Iyer, an academic, filed a similar PIL before the Karnataka High Court questioning the constitutional validity of the appointment of G Parameshwara as deputy CM on the ground that the Supreme Court did not lay down any law in the Devi Lal case but had only dismissed the petition by recording the A-G’s submission. Stating that the Supreme Court’s order was binding on the High Court, the bench dismissed the petition as “unnecessary litigation” and imposed costs on the professor.

At present, no set precedent is followed in the appointment of deputy PMs or deputy CMs. In 2002, LK Advani, who was already home minister in the Vajpayee government, was elevated as deputy PM through a presidential notification. Recently, Andhra Pradesh Chief Minister Y S Jaganmohan Reddy drew attention by appointing five deputy CMs, the highest ever in any state in the country. In this case, the legislators were first sworn in as ministers and then designated as deputy CMs.

In Karnataka, the culture of deputy CMs started in 1992, when S M Krishna was appointed as deputy to the then chief minister M Veerappa Moily. Siddaramaiah held the post twice, first under JH Patel and later when Dharam Singh was the chief minister. In 2012, when Jagadish Shettar of BJP was in power, the state had two deputy CMs, R Ashoka and K S Eshwarappa. Now, the party has broken its own record by appointing three. The last deputy CM was Parameshwara in the JD(S)-Congress government.

The new deputy CMs will no doubt exert greater influence compared to their colleagues, but legally, their powers will be no more than that of other cabinet members. Their salary and emoluments will also be on par with ministers, though they may enjoy certain privileges like pilot and escort vehicles, zero traffic facility and a slightly higher slot in the order of precedence. In the end, the post of deputy CM exists only to serve political compulsions and not any constitutional obligations.

 

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Borrow abroad and profit

Source: By Surjit S Bhalla: The Financial Express

Budget speech 2019 contained a new policy statement—GOI was planning to issue 10-year bonds denominated in foreign currency. This proposal has generated a controversy unlike most others. Every budget has good, bad, and ugly components. And critics are free to choose and comment on what they like, or hate. There are very few, if any, analysts who believe that the Budget 2019 income-tax proposals have any merit to them. Likewise, there are very few experts who believe that issuance of foreign currency bonds is a good idea. Indeed, the list of eminent experts who think it is an ugly idea is near endless.

Former RBI governor and distinguished economist Raghuram Rajan states as following “Foreign bankers often meet finance ministry officials, trying to persuade India to issue a foreign bond. In my experience, they usually started by saying that such borrowing would be cheaper because dollar or yen interest rates are lower than rupee interest rates. This argument is bogus—usually the lower dollar interest rate is offset in the longer run by higher principal repayments as the rupee depreciates against the dollar.” He has been joined by my ex-PMEAC colleague and good friend Rathin Roy who went a step further and stated: “Show me one country after world war which has done a foreign currency sovereign bond and not paid dearly for it.

Further, “I would pay very careful attention to what several governors of the Reserve Bank are saying that these are sovereign liabilities in perpetuity. I think there are serious issues regarding loss of sovereignty, which need to be addressed. I do not think that the argument that it is cheaper is a good one, I think it doesn’t even hold if you add hedging costs and I don’t buy the simple argument that if something is cheaper, it is good”. In addition, the Swadeshi Jagran Manch (SJM) is on record as stating that issuance of foreign denominated bonds is anti-patriotic, that it would lead to a loss of sovereignty, and would lead to currency depreciation. To my knowledge, this is the first time esteemed economists and SJM are on the same side of an economic argument—can both be right, or are both wrong?

The above is just a brief taste of the comments and condemnation the foreign bond issue has received. The only eminent person (known for his balanced views) to publicly favour a sovereign foreign bond (SFB) is former RBI governor Bimal Jalan who stated “At the moment, we are in a fortunate position. Our debt-to-GDP ratio is not very high, exchange rate is stable, and foreign exchange reserves are high. So foreign borrowing, if its long term, which it would be, is not a problem.” Former RBI governor YV Reddy had a more nuanced comment, stating that if foreign bond issuance was accompanied by a move towards greater capital account convertibility, then it may be worth pursuing.

The key issue in this debate, as nearly always, is empirical, and has to do with currency depreciation. Show me the money (evidence) and win the argument. Simple accounting math about foreign borrowings is as follows. All examples are with respect to dollar borrowings, but the same set of arguments apply to borrowing in the other three currencies—yen, euro, and the British pound. A country pays a country premium for borrowing in dollars; currently the US 10-year bond is trading at 2% and Indonesia just borrowed in June 2019 at around 3.6%; at the time it borrowed, it paid close to a 1.5% premium. A complex set of factors determine the country premium, but magnitude of reserves and foreign currency debt are important attributes. About 40% of Indonesia’s debt is denominated in foreign currency; in India it is less than 5%. India should be able to borrow at a somewhat lower premium than 150 bp, possibly 130bp.

India can borrow abroad in dollars at 3.3% or borrow foreign money in rupees (a masala bond) at a 3% higher premium, or 6.3% (the current government 10-year bond is trading at 6.35%). The difference between 3.3% and 6.3% is the depreciation premium that emerging countries pay.

This is what the market “demands” and it is unlikely that this premium has shifted too much for emerging markets over the last 20 years. Over a 10 year period, the 3% annual depreciation assumption means an economy pays 35% more with a masala bond than with an FCB. If the cumulative depreciation at the end of 10 years is more than 35%, the borrowing country loses; if less, than the borrowing country gains. The entire argument against foreign bonds (except the patriotic one) is whether this depreciation has been (and is expected to be) more than 35% over a 10 year period.

Data on 10 year currency depreciations are reported for several countries for the period 2009 to 2019. This assumes that each country started borrowing in 1999, one year after the East Asian crisis. Respected scholars (and respected policy makers) hark back to the Asian crisis for clues about what will happen to India’s exchange rates over the next decade. Do these esteemed scholars recognise (let alone appreciate) that the rupee/dollar exchange rate was Rs 42 in 1998 (Asian crisis) and Rs 40 ten years later in 2007? This, despite Indian inflation rates averaging 3% higher, per year, than the USA during this period.

In the sample of countries chosen, I have included three countries from Latin America (Chile, Brazil, and Mexico) to satisfy the critics assumption that if India were to borrow $10 billion, or even $30 billion, or even $50 billion, we would face a Latin American crisis. Serious economists have invoked this “threat” in their arguments, so it is prudent to account for it. Note that the period chosen is a fairly long period (20 years) and involves close to 90 countries. What do the results show? Unambiguously, that it pays for a country to borrow abroad!

Let us take the case of India first. Against the US dollar, the average 10 year depreciation since 2009 for India (or average annual depreciation since 1999) is 26% which means that India would have made a profit of close to 10% for each 10-year bond that it floated. Recall what Rajan said about this possibility. He called it bogus. The two worst-performers are Mexico and South Africa, and even these two economies break even! Even an average emerging economy makes a profit of 5 bp on every FCB bond it has floated over the last 20 years. This puts into question Rathin Roy’s conclusion that every country has paid dearly for FCBs; empirically, the result is the opposite—since the East Asian crisis, most countries have profited handsomely. I don’t know the veracity of his conclusion post WWII; maybe the few who borrowed abroad (particularly in Latin America) paid dearly between 1945 and 1998. But, for each Latin American disaster, there is an Asian success story. So which continent does Roy (and others) believe India is comparable too?

Indian inflation has moved structurally downward over the last three years and, thankfully, the post Patel-Acharya MPC realises this fact. However, in the six months prior to Das’s first rate cut in early February 2019, inflation had averaged 3.7% and the real repo rate had averaged 2.8% (defined the RBI/MPC way of current repo rate minus two month earlier inflation). In the six months since (February 2019 to July 2019), two-month lagged inflation has averaged 110 bp lower at 2.6% i.e., despite 75 bp of repo rate cuts, the average real repo rate has moved higher to an average of 3.4%, an increase of 60 bp.

All the empirical evidence (past and expected future) suggests that the MoF idea of floating FCB’s is a terribly good idea, an idea whose time has definitely come. It will also help to significantly lower the real repo rate to respectable levels. No country has grown at “trend” rates with a real repo rate around 3.4%, not even 2.4% and not even 2%. So please, MoF, borrow abroad; and please, RBI/MPC, smell the real rate before deciding on monetary policy.

 

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A final solution to arbitration in India

Source: By Surabhi Lal: The Financial Express

The Arbitration and Conciliation Amendment Bill 2019 received Presidential assent and was notified in the official gazette on August 9, 2019. The Bill was passed by the Lok Sabha on August 1, 2019, after the Rajya Sabha passed it on July 18, 2019. The Arbitration and Conciliation (Amendment) Act, 2019, is an updated version of a Bill passed by the Lok Sabha in 2018, which lapsed due to the dissolution of the Houses of Parliament. The 2019 amendment Act is intended to fix the loopholes created by the Arbitration and Conciliation Amendment Act, 2015, and is a step towards the government’s objective of making India an arbitration hub. But the implementation of certain provisions of the 2019 amendment Act may create ambiguity in the future.

Pronouncement of arbitral award: Section 29A of the 2015 amendment Act, which provided a 12-month timeline for completing an arbitration starting from the date the tribunal entered reference, was criticised because of its rigidity, which compelled parties to approach courts to seek extension. The 2019 amendment Act allows more flexibility by providing that the 12-month period must start from the date of completion of pleadings.

The amended Section 29A exempts ‘international commercial arbitrations’ from this timeline to provide leeway to arbitral institutions to conduct proceedings in accordance with their own case management mechanisms. But domestic arbitrations governed by institutional rules continue to be governed by the mandatory timeline, and ad hoc international commercial arbitration seated in India will not be covered by fixed timeline. The amendment should have made an exception for all arbitrations administered by arbitral institutions instead of international commercial arbitrations.

Limiting scope of Section 34: The amendment to Section 34 promotes arbitration by clarifying that an application for setting aside an arbitral award will not require anything beyond the record that was before the arbitrator. The requirement to furnish proof under unamended Section 34(2) of the Arbitration and Conciliation Act, 1996, created inconsistencies as several High Courts conducted proceedings under Section 34 by framing issues and permitting leading of evidence beyond the record of the arbitral tribunal, in effect conducting proceedings under Section 34 as a civil suit. The amended Section 34 resolves the issue by substituting ‘furnishes proof’ with ‘establishes on the basis of the record of the arbitral tribunal’.

Confidentiality provision: Insertion of Section 42A is a positive step as it obligates parties, arbitral institutions and the arbitrator to maintain confidentiality of ‘all arbitral proceedings’ except for ‘implementation and enforcement of award’.

Insertion of Part 1A: The Arbitration Council of India has been set up as a regulator of arbitration. The 2019 amendment Act provides for composition, duties and functions of the council and claims that it is an independent body nominated or appointed by the central government, constituted for the purpose of, inter alia, grading of arbitral institutions and accreditation of arbitrators. It provides guidance on which arbitral institutions will be covered and which arbitrators will be accredited. The council has a laudable objective of streamlining arbitration by formulating rules, conducting workshops, holding training and maintaining a depository of arbitral awards made in India. However, the implementation of these objectives seems challenging as the provisions governing the council are vague.

A major criticism of the council is its perceived impartiality or its lack thereof. Its members are nominated or appointed by the Centre or are ex officio members by virtue of their position in ministries. The council is duty bound to review the grading of arbitration institutions and accreditation of arbitrators. The government’s involvement in several arbitrations could make the independence and impartiality of arbitrators, who will be subject to accreditation by the council, questionable. Further, foreign legal professionals’ exclusion from the list of those qualified to be an arbitrator will exclude many distinguished lawyers who otherwise appear as arbitrators for dispute resolution in India. Their non-inclusion could discourage foreign parties wishing for their arbitration to be seated in India, who would want an arbitrator from a neutral country to be on their panel.

Applicability of 2015 Act: Section 26 of this Act that provided for its applicability ended up as a subject of dispute due to conflicting High Court decisions around its interpretation. This was settled by the Supreme Court in BCCI vs Kochi Cricket, where it was held that the 2015 amendment Act was prospective and would apply to: (a) arbitral proceedings commenced on or after October 23, 2015; and (b) arbitration-related court proceedings filed on or after October 23, 2015, even where the arbitral proceedings were commenced before the amendments came into force.

The Court further stated that whether certain provisions of the 2015 amendment Act were clarificatory, declaratory or procedural and therefore retrospective, is a separate and independent enquiry. The Court in this case undertook this enquiry regarding the applicability of amended Section 36 of the Act (execution), holding it to be a merely procedural provision and thus applicable retrospectively to Section 34 petitions (challenge to domestic awards) pending as on October 23, 2015.

This judgment helped the arbitrating community as it clarified the applicability of the 2015 amendment Act. Now, the 2019 amendment Act deletes Section 26 and provides that with effect from October 23, 2015, the 2015 amendment Act would only apply to arbitrations commenced after October 23, 2015, and to court proceedings arising therefrom.

The 2019 amendment Act overrules the BCCI decision and seeks to clarify the applicability of the 2015 amendment Act. This will cause delay as all pending court proceedings in relation to arbitrations that had commenced prior to October 23, 2015, will be relegated to the pre-amendment Act scenario. The legislature has not dealt with the status of thousands of pending petitions where courts have refused to grant a stay under amended Section 36, nor is there clarity regarding what provisions in the 2015 amendment Act would have a retrospective application considering they may be clarificatory, declaratory or procedural as held in the BCCI decision.

While the 2019 amendment Act goes some way towards promoting India as an arbitration hub, by providing for realistic timelines and limited scrutiny of awards, certain ambiguities and concerns are left unaddressed. A detailed set of rules governing the working of the council, which would be promulgated in pursuance of part 1A, could resolve ambiguities associated with the provisions of part 1A. The applicability of the 2015 amendment Act will cause delay due to the relegation of pending court proceedings to pre-amendment Act scenario, lack of clarity on the cases where stay has been refused under amended Section 36, and due to continuing ambiguity regarding what provisions would have a retrospective application.

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Understanding cryptocurrencies

Source: By Udit Misra: The Indian Express

An inter-ministerial committee (IMC) that was set up to assess the viability of virtual currencies has recommended that India should ban private cryptocurrencies such as Bitcoin. The detailed report of the IMC was submitted on February 28 but it was made public only on July 23. It is available on the Department of Economic Affairs’ website.

What are virtual currencies?

A virtual currency is a digital representation of value that can be digitally traded and functions as (a) a medium of exchange, and/ or (b) a unit of account, and/or (c) a store of value, but, unlike fiat currency like the rupee, it is not legal tender and does not have the backing of a government. A cryptocurrency is a subset of virtual currencies, and is decentralised, and protected by cryptography.

What are Distributed Ledger Technologies and Blockchain?

Imagine a small group of school friends maintaining a list of transactions among themselves, but with a twist: Instead of holding this list in one single computer or in the notebook of one of the group members or authorising some outside authority (say, their class teacher) to maintain (and update) the list, all of them decide to maintain a separate copy of the list in their personal computers. Every time they transact, the rest of the members verify the transaction and once it is verified by all, they update their list.

Further, to make sure that none of them changes records of the past transactions in their personal list, they decide to place each transaction as a block, and to stack it one after the other in a sequence. This way, no one can tweak the details of any past transactions because the overall sequence will not match with sequences held by others. Lastly, to make sure that no other child from the school gets to know the details, they devise a code (a cypher) for all their communications related to the list.

Broadly speaking, this is how Distributed Ledger Technologies, and Blockchain, in particular, function. DLT refers to technologies that involve the use of independent computers (also referred to as nodes) to record, share, and synchronise transactions in their respective electronic ledgers. Keeping such distributed ledgers obviates the need for keeping the data centralised, as is done in a traditional ledger. All virtual currencies use DLT.

A transaction under DLT essentially refers to the transfer of “value” from one to another. This “value” could be any record of ownership of assets — money, security, land titles — or the record of specific information such as information about one’s identity or health information, etc. That is why DLT has applications in several fields.

Blockchain is a specific kind of DLT that came to prominence after Bitcoin, a cryptocurrency that used it, became popular. Cryptocurrencies such as Bitcoin use codes to encrypt transactions and stack them up in blocks, creating Blockchains. It is the use of codes that differentiates cryptocurrencies from other virtual currencies.

What is the IMC’s view on DLT and cryptocurrencies?

The first thing to understand is that the IMC recognises the potential of DLT and Blockchain. The IMC accepts that internationally, the application of DLT is being explored in the areas of trade finance, mortgage loan applications, digital identity management or KYC requirements, cross-border fund transfers and clearing and settlement systems. To that extent, it recommends the Department of Economic Affairs (within the Finance Ministry) to take necessary measures to facilitate the use of DLT in the entire financial field after identifying its uses. The IMC also recommends that regulators — RBI, SEBI, IRDA, PFRDA, and IBBI — explore evolving appropriate regulations for development of DLT in their respective areas.

However, the IMC has recommended a ban on “private” cryptocurrencies. In other words, it is open to a cryptocurrency that the RBI may unveil. The IMC’s view is that it “would be advisable to have an open mind regarding the introduction of an official digital currency in India”. It noted that the RBI Act has the enabling provisions to permit the central government to approve a “Central Bank Digital Currency” (CBDC) as legal tender in India.

Why have private cryptocurrencies attracted a ban?

While it is true that the technology used in virtual currencies has immense potential, without a central regulating authority, they can have numerous downsides. The IMC’s first concern is that non-official virtual currencies can be used to defraud consumers, particularly unsophisticated consumers or investors. The IMC gives the example of the Rs 2,000 crore scam involving GainBitcoin in India where investors were duped by a Ponzi scheme. Moreover, such currencies often experience tremendous volatility in their value. For example, Bitcoin was selling at $20,000 per coin in December 2017 but in less than a year, it was trading at $3,800 per coin. In a country where lakhs of traders get involved in such currencies, this could have huge implications.

Second, scaling up such a currency system over a large population would require crippling levels of energy resources. Currencies such as Bitcoin require humongous processing power. According to a report by the Bank of International Settlement, Bitcoin processing already uses as much energy as is used by Switzerland; it called this an environmental disaster.

Third, the IMC is worried that if private cryptocurrencies are allowed to function as legal tender, the RBI would lose control over the monetary policy and financial stability, as it would not be able to keep a tab on the money supply in the economy.

Fourth, the anonymity of private digital currencies make them vulnerable to money laundering and use in terrorist financing activities while making law enforcement difficult. Fifth, there is no grievance redressal mechanism in such a system, as all transactions are irreversible. It is for these broad reasons that the IMC singled out private cryptocurrencies for a ban.

 

 

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A long haul ahead

Source: By Surajit Mitra: The Financial Express

The government recently notified the second phase of the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME-2) scheme (in effect from April 1 for three years). It envisages incentives for purchase of electric buses, PVs and three-wheelers for commercial usage, along with privately-owned electric two-wheelers. Around 85% of the Rs 10,000 crore outlays are earmarked for incentives, while Rs 1,000 crore will be used for creating charging infrastructure.

FAME-2 proposes that the quantum of incentives be linked to the cost of advance batteries (non-lead acid batteries) and the government will be neutral to all types of EV technologies—hybrid electric vehicles (HEV), plug-in hybrids (PHEV) and battery electric vehicles (BEV). The contours of FAME-2 are influenced by the learnings from the pilot FAME-1 (April 1, 2015, to March 31 this year). So, stringent eligibility conditions relating to localisation as well as better vehicle performance specifications such as minimum top speed, range per charge, acceleration, energy efficiency of EVs, etc, have been included.

Many companies have raised concerns about eligibility conditions being too stiff and are demanding for their review, as also for allowing them in time to conform to these criteria. Broadly, however, most scheme conditions are on expected lines. For instance, the precondition of subsidies in case of cars being provided only for commercial applications (taxi/fleet) and the insistence on localisation reflects political and economic realities. While there may be no problem for the government in levying lower GST of 12% and lower road taxes for all EVs, private or commercial, yet it is politically inconceivable to provide subsidies for purchase of cars to well-off citizens irrespective of environmental benefits.

Similarly, as currently most EV parts are imported, a move towards electric mobility threatens to shift manufacturing and value-addition abroad. Hence, it is logical that unless the government takes corrective policy measures, the auto sector, which accounts for half of India’s manufacturing GDP, may go the way of the electronics industry, where huge imports have become a big problem.

At the same time, policymakers cannot ignore the ground realities. While the growth outlook for auto sector is positive, the consumer acceptance of EVs in India remains challenging. Indian consumers demand highest performance levels at lowest prices, and Indian driving conditions are tough due to high temperatures, slow average speeds, etc. Also, local manufacturing of batteries and parts, which constitute the bulk of the cost in an EV, will need time and substantial investment. While FAME-2 is important for supporting EV offtake, this push will only be for a limited time and volumes. Localisation will not take place merely by creating initial demand through FAME-2 or by stipulating stiff localisation timeline targets.

So, in addition to setting up charging infrastructure, we need policies for attracting investors to manufacture EV parts in the country. While supply-side incentives are essential, these alone will not be enough, because the break-even period for auto sector investments is long (8-10 years), and it involves high risk due to a volatile, uncertain, complex and ambiguous future scenario. Perhaps an effective policy intervention is to have a preferential taxation regime, both GST and road tax, for all EV technologies. Currently, only BEVs enjoy a significantly lower taxation as compared to petrol/diesel vehicles. This benefit should be extended to HEVs and PHEVs in proportion to the social benefit provided by way of reduction in fossil fuel consumption and carbon emissions.

The most important gain from such a policy will be to ensure long-term sustained minimum volume demand for EV parts since all these technologies have common parts. This will help meet the prerequisite condition for investment viability and make localisation feasible. For this, the government must carry forward its technology-agnostic intent, as evident in FAME-2, by rationalising GST tax rates for HEVs and PHEVs. As a long-term policy, vehicle taxation must be based on fuel efficiency as measured by carbon emissions. This parameter simultaneously addresses all the priorities, besides being simple, measurable, transparent and outcome-based. Clearly, it’s going to be a long haul for FAME-2, which needs consistent, sustained policy backup to succeed.

 

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