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FDI- A classic example of why policy reforms are difficult to implement in India

Ankit Agrawal

The government wishes to allow FDI in multi-brand retailing to the tune of 51 percent which is being vehemently opposed by opposition/coalition parties and various interest groups. According to the rational actor model, the state is a monolithic unitary actor, capable of making rational decisions based on preference ranking and value maximisation.

In reality, the organisational behaviour model and the government politics model supplement this model and the latter only provides guidance to the ideal scenario. India follows a parliamentary system of governance which has a collective executive in the form of a cabinet so policy-making is joint decision-making. Decision-makers refract every policy through the prism of ideology and interest. A policy emerges only if harmonisation of multiple policy preferences can be achieved. India has had coalition governments for almost two decades now which makes persuasion and bargaining central to all policy-making and often results in no outcomes. Various parties weigh the potential benefits and impact on their electoral base while adopting positions on issues.

The same is being observed in the case of this reform proposal. Parties dependent on farmers, traders or the economically backward for votes are vehemently opposing the proposal. FDI in multi-brand retail may be economically rational on grounds of efficiency. But relative weights assigned to equity and efficiency and the question of what constitutes equity are points of contention between those advocating a neo-liberal approach and those who advise a people-centred approach to economic reforms. Currently, advocates of the latter seem to be enjoying the upper hand, even though it could be a matter of debate whether the supporting narratives they promote are spurious and irrational.

One can’t treat the government, its operating environment and the external environment in which the government is embedded as black boxes. The “window of opportunity” for reform is open only when the three streams of problem, solution and politics come together. Electoral compulsions like upcoming elections in states, threat of withdrawal of support by recalcitrant coalition partners and refusal on their part to negotiate has stalled this reform at various stages.

Given the current dominance of the politics of transparency and stakeholder consultation, public interest groups have acquired considerable influence on decision-making in the government. This is being observed in the FDI case where lobbies of traders, middlemen and farmers have sought to pressurise the government through high-visibility tactics ranging from demonstrations to outright violence. Technically, the proposed reform is an executive decision which by definition doesn’t need ratification by the Parliament and is non-binding on individual states since retail is a state subject. Yet, sustained pressure exerted through media outlets and the potential sweep of the policy has forced the government to suspend the proposal.

Even so, strategic incrementalism in the form of allowing cash-and-carry format stores and upto 100 percent FDI in single-brand retail is being practised, aimed at bringing elements from the realm of context of appreciation to context of influence. In sum, divergent interests and electoral compulsions of coalition partners, public interest groups, the reigning paradigms of governance and a free but hyperactive and sometimes irresponsible media, form a potent mix and make implementing reforms difficult.

Ankit Agrawal is an Equity Research Analyst based in Delhi

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Mexico: Return to the “perfect dictatorship”?

Nivedita Kashyap

Between the French elections in April and the US elections in November, the Mexicans voted for their new president on the first of July. Mexico has a presidential system of government and four parties were in the fray, each with a candidate for the post – the PAN, the PRI, the PRD, and the New Alliance. The official election results showed Enrique Peña Nieto from the PRI (Partido Revolucionario Institucional in Spanish) in the lead with 38.2 percent of votes followed by Andres Manuel López Obrador from the PRD with 31.6 percent of votes and Josefina Vázquez Mota from the incumbent PAN with 25.4 percent of votes.

López Obrador, however, has refused to accept the results accusing Peña Nieto’s campaign of electoral fraud and of paying the major media outlets for a favorable coverage. López Obrador’s allegations of widespread vote buying were accompanied by reports of thousands of people rushing to grocery stores to redeem gift cards that they said were given to them by Peña Nieto’s PRI ahead of the elections. Since the results have been announced, thousands of protestors have taken to the streets to protest what they call the “media legitimisation of the electoral fraud”.  These have been led by Mexico’s very own protest movement marshaled via social media, called the “#YoSoy132” (I am 132). The hash tag emphasizes the movement’s connection to Twitter, where it was a trending worldwide topic for days.

Despite the lead in the election results, Peña Nieto cannot declare himself as the president-elect because according to Mexico’s electoral laws, this can only happen when all allegations against the candidate have been first resolved by the Electoral Tribunal of Mexico. Indeed, Barack Obama has been criticised for congratulating Peña Nieto prematurely.

If Peña Nieto is sworn in as the president of Mexico in December this year, he will bring his party, the PRI, to power after 12 years in the opposition. The PRI ruled Mexico for 71 years between 1929 and 2000 and has often resorted to repression of dissent, vote-rigging and corruption to get its way. The outgoing PRI president handpicked his successor in consultation with the party bosses. This had prompted the Nobel Laureate Mario Vargas Llosa to call the government under the PRI “the perfect dictatorship”.

The presumed president-elect, Peña Nieto, has sought to distance himself from the old PRI, stating in his first op-ed after the results were declared that his win does not mean a return to the old ways of his party and reaffirming his commitment to democracy. However, the deep discontent among Mexicans persists with the mostly young protestors drawing inspiration from the Occupy movement, the Indignados of Spain and the Arab Spring in demanding “real democracy” for Mexico.

With many movements demanding democracy all over the world, a very interesting initiative  called the Globalbarometer Surveys (GBS) needs to be highlighted. This project seeks to “develop a global intellectual community of democracy studies surveying ordinary citizens”. The GBS surveys three continents with the help of five regional networks covering Europe, Africa, East and South Asia, Central and South America, and the Middle East. In an event last year in Bangalore, “The Multiple Meanings of Democracy” some interesting trends from the various country surveys were discussed.

The Latinobarómetro, which is based in Chile, has carried out regular surveys of opinions, attitudes and values in Latin America since 1995. Every year they publish a detailed report in Spanish offering a broad view of popular opinion in the eighteen major countries of Latin America, focusing on Latin American citizens’ political opinions and their satisfaction with their governments. Their 2011 report reveals that Mexicans are the least satisfied with the way democracy works in their country among all eighteen countries surveyed.

Latinobarómetro does offer some hope to the Mexicans’ desire to democratise their country. The graph below (made using data made available online by Latinobarómetro) shows a steady fall in the support for an authoritarian regime among Mexicans. It is now up to the new government to ensure that that the number of Mexicans increasingly indifferent to who governs them change their minds.

 

Nivedita Kashyap works at a research based think tank in Bangalore.

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The Indian story- What went wrong?

Pratham Jahoorkar 

Alright, India’ GDP grew at an applauding rate for few years now. They talk of Bangalore– the Indian Silicon Valley, the telecom revolution, BPOs and Slumdog millionaires. We started acquiring western companies almost boding reverse colonisation. “India Shining” had become a cliché. And then, something started working against it all. We now talk about – nine year low GDP growth (5.3 percent in Q1-2012), corruption scandals, stagflation, rupee touching new all time lows, policy shocks that make foreign companies run for cover and of course blackouts! What can explain this turnaround? I pen down few thoughts in the capacity of an active observer at best.

The tightening of the monetary policy focused on the demand side and failed to curb the inflation that was largely because of the supply side shortcomings. Prolonged interest rate hikes (13 times between 2010 and 2011) targeting inflationary concerns have increased the borrowing rates across the board. Home owners, corporates and infrastructure projects are forced to deal with higher domestic debt costs affecting both the demand and the supply side economics adversely. And yet, inflation today continues to be a concern. From a vote-bank perspective inflation remains a higher priority than growth to the ruling parties. Thus, a monetary policy rescue to boost growth seems questionable in the near future.

It is no coincidence that lower growth rates reflect in lower investor confidence in the country. S&P rates India at BBB-. Any further downgrade means India will be the first of the BRICs to lose investment grade status. This is bad news for Indian foreign currency borrowers. Investor unfriendly policies are not only threatening returns that attracted foreign money but are also throttling the much needed investments to fuel our growth. Retrospective tax and FDI policy failure amongst other things, exacerbate a euro zone triggered bearish sentiment amongst the investment community.

The Twin deficits (current account and fiscal deficit) that were last seen in 1991 are back. Massive populist schemes like NREGA, food security bills and fuel/fertiliser subsidies contribute to a larger than expected fiscal deficit of 5.75 percent (as on March 2012). State Electricity Boards are severely buckling under subsidy burden curbing the power required to catch up with the industrial growth – partly causing the half-country blackout this late July. Oil and gold imports coupled with falling service sector exports widened our trade deficit. These deficits alongside grim foreign investment outlook percolate into the forex markets as severe downward pressure on the rupee. No surprise, it is the worst performing currency in Asia at the moment leaving us to deal with the costly imports.

The demographic political dynamics, coalition compulsions, rent seeking loopholes inherent to our democratic system forbid an expeditious counter to these quagmires. The majority poor vote-bank is bound to electorally prefer the populist schemes. While the power perpetuating efforts from the polity pander to such demand at the expense of long term growth. While the populist schemes fail repeatedly due to the implementation deficit, the announcing parties might get re-elected at the expense of massive splurge of tax payer money. It is this cost of imperfect democracy that squarely falls on the religious tax payer- “the middle class”. Other classes either earn too small to pay or are too wealthy to be bothered.

Coalition governments formed by identity politics and forged with disconnected agendas have become a recent reality. The resultant political instability means procrastinated policy making with myopic vision and regional focus. Lack of a clear national leader is now felt more than ever. Further, the license raj hangover still persists in several areas and most prominently in the allocation of resources. The massive scale corruption scandals unearthed in 2G scam and coal resource allocation bear testimonial for it. This is now being coined as the “Resource Raj” by the economists.

The world outlook does not help either. Economists like Nouriel Roubini have long been warning about an economic ‘storm’ in 2013. The shift in trajectory of Indian growth rate from 5.7 percent in the 1990s to 8.6 percent during 2005-2010 was largely due to the service sector growth shift from 7.5 percent to 10.3 percent in the same time period. Global economic doom puts India’s service led export growth story in jeopardy.

There is a glimmer of hope that reassures there is light at the end of the tunnel. That’s an impending 1991 like ‘Crisis’ (“twin-deficits”?) that will shake the governments out of their stupor to reform. Second generation reforms are long overdue that will set to finish the job we have started in the 1990s. These should eliminate all rent seeking avenues, increase investor confidence, facilitate infrastructure build-up, make resource allocation transparent, make subsidies work, revive labor laws and much more. Further, our middle class awakening witnessed during Anna Hazare’s protests is encouraging as well. Will this convert into active political participation by this class is arguable, albeit, is strongly desired.

Amidst this deafening noise of narratives and rhetoric it takes a deliberate effort to do wishful thinking. Hope is not collective action but it will surely lead to one someday when enough people talk and write about it. I try to do my part.

Pratham Jahoorkar is an entrepreneur in financial services industry and is based out of Mumbai.

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Counterinsurgency lessons

What are the lessons to be drawn from Kashmir to Punjab to the North-Eastern states?

Priya Ravichandran

Two of the most critical elements in almost all the COIN operations in India have been

  • Strengthening the police and security force
  • Creating an environment for free fair elections and rebuilding institutions to instill voter confidence.

The best examples of both these points are the campaigns in Punjab and in Mizoram. In both the cases, the police forces were strengthened, equipment modernised and a coordinated strategy built to enable intelligence to be gathered and dispersed systematically. Routing out of insurgents by use of force or intelligence was done and an environment created for the government to step in and establish itself. As documented counter-insurgency operations should contain three stages “Clear – Hold – Build”. It is a politico-military procedure. A successful campaign ensures the establishment of a government to remove anti-state elements and it also ensures that the legitimacy and accountability of its institutions are in place. The presence of these factors ensured the relative success of COIN operations from Kashmir to Punjab.

The biggest drawback in all the operations has been the make-it-up-as-we-go-along idea. This has resulted in the loss of manpower, resources and the opportunity cost from redrawing a plan from the ground up each time. Lessons were not learnt from any of these campaigns because of the lack of institutionalisation of the ideas in a comprehensive manner. There is also the notion that each situation differed according to its historical, geographical and social differences and campaigns cannot be seen to overlap one another. However, As Walter Ladwig says “analysis of successful counterinsurgency campaigns, in their proper context, can lead to the identification of common patterns that have remained consistent over time.” Another major issue has been the differing political ideologies and ground level politics resulting in the need to demonstrate a difference in policy whether the situation warrants it or not.

Except for the relatively unknown Counterinsurgency and Jungle Warfare School in Mizoram and Assam, there is very little effort at the national level to train forces specifically for counterinsurgency operations. Almost no scholarship exists. There has to be a comprehensive study of counter insurgency campaigns around the world and a detailed national level strategy implemented. The first level of defence against any terrorist activity is the constabulary and the local police stations. They have to be strengthened through requisite reforms.

The Naxalite campaign, unlike other operations involves multiple states. Extensive security campaign in one state only flushes the militants to another. The states should come together to agree on a national campaign and enable the central command to direct the operations and enable them to move in when stronger political action is required. To succeed in counterinsurgency, a state must bring all the elements of its national power—political, military, economic and social—to bear on the problem. Using the lessons as a blueprint and developing on them to build a stronger armed force and political institution is the only way forward and the surest way to counter the rising Maoist threat.

The author is programme officer at the Takshashila Institution.

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Do we need the Lokpal or is economic liberalisation enough?

Karthik Dinne

Any debate about the Lokpal generally ends up being an argument over either the function and structure of the Lokpal or about its need. People, who question the need for the Lokpal, term “economic liberalisation” as the solution for corruption and also more often as a panacea. Some of them truly believe that economic liberalisation is the only solution for the problem of corruption. But most others take up this argument just to damage the credibility of Team Anna which is bearing the brunt of the movement.

Corruption in India is a complex problem and there is no single point magic solution, be it a Lokpal or be it economic liberalisation. Lokpal has its own limitations. And so does economic liberalisation- mainly for two reasons. Firstly, economic liberalisation is essentially reducing the role of the government in the business or economy of the country, withdrawal of the government from certain sectors and removing the barriers for the market forces to operate freely. No matter how hard we try to limit the role of the government, it certainly has its role to play in certain vital sectors and areas where markets don’t offer solutions- law and order, universal primary health care and public infrastructure to name a few. If the presence of the government is the cause of corruption and since the government can’t get out of all sectors, there is always a possibility of corruption in those key sectors where government has a certain role to play.

Secondly, designing public policies in those sectors which ensure zero percent possibility for corruption during its implementation is an impossible task. Keeping in view the vastness and diversity of India, one cannot make a rigid set of implementation procedures or rules at the micro level and paint the whole country with the same brush. Some amount of discretion has to be left at the lower levels to ensure flexibility so that the policy can be adapted to the local conditions. But there is always a danger of this discretion leading to graft and other such problems. Maintaining this balance of discretion vs. the rules is one of the most challenging tasks in designing a public policy.

It is in some sense similar to controlling a crime. Some crimes can be prevented by delving deep into their root cause and for some there is no other way than punishing, thereby creating deterrence. Lokpal is one such deterrence mechanism. The absence of such a strong deterrence mechanism only creates incentives for people to be more corrupt. If people believe that even if they get arrested, they can conveniently get out of it by exerting their political influence or owing to the delays in the court judgements, if they think that can comfortably live on by using this convenient argument of “corrupt not until found guilty by court”- it is even more dangerous. The need of the hour is to have such an investigation agency free from political agency and a speedy delivery of the judgement. Lokpal ensures both of these and hence is very much essential.

There might be other possible solutions for corruption, each effective in its own sphere. Some may be “necessary but not sufficient” but that cannot be the argument to downplay that solution. Each step may only advance us a little, but we have to start somewhere and proceed towards having holistic solutions. This excessive obsession with both Lokpal and economic liberalisation is equally dangerous. As Swami Vivekananda once said “We take the highest point of ours and compare it with the least point of others and then downplay them”. Hope we don’t let this happen, because this nation simply can’t afford it.

The Author is a student at the Indian Institute of Technology, Kharagpur. 

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