Tag Archives | reforms

A welcome twist to demonetization

Image Source: newsexperts.in

Image Source: newsexperts.in

The government’s most recent amendment mandating that wages be paid by cheque or bank transfers is a welcome by-product of the demonetization drive.

President Pranab Mukherjee promulgated with immediate effect an ordinance amending the Payment of Wages Act, 1936 on 28 December 2016 (Ordinance). Amending an 80 year old law that required payments to be made only in cash, the Ordinance allows employers to pay wages by cheque or by electronic transfer. It provides employers with the option to pay their employees in cash, except where the worker is employed in an “industrial or other established sector”. In such cases, wages must be paid only through cheque or bank transfer.

The Payment of Wages Act, 1936 (POW Act) applies to persons earning up to Rs. 18,000 per month. Importantly, it makes specific provisions for persons employed in specified “industrial or other establishment”, that is, sectors where government regulation is required for the protection of workers, (for instance, railways, coal mines, etc.).

Shortcomings of the Ordinance

Although the Ordinance has been viewed as a welcome change, it leaves certain issues unaddressed. For example, it proceeds on the assumption that all workers have functioning bank accounts, and know how to operate them. This not necessarily being the case, workers who lack such facilities may be more inconvenienced. The Ordinance also does not contain any provision aiding the transition for workers without bank accounts to be accommodated into the new regime. Ensuring that employees have functional bank accounts and are aware of how they operate would iron out major creases in implementation.

Aside from such operational hurdles, the Ordinance is expected to increase transparency in wage payments. It could reign more salaried people in under the tax net, and ensure that workers are paid the fair wage due to them.

Manasa Venkataraman is a Research Associate at the Takshashila Institution and tweets from @nasac.

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Snapshot of 2016 military modernisation in India

By Guru Aiyar (@guruaiyar)

 A mixed year of  hits and misses, what is most pertinent for defence policy is military modernization and overdue defence reforms

The year that has gone by has been a mixed one as far as defence forces of India are concerned. It started with an attack on Pathankot airbase . Observers were quick to point out that this was a reply to Christmas 2015 visit of Prime Minister Modi to Pakistan. Little do they realise that planning for an attack of this magnitude could not have taken place in a week. Nevertheless, this exposed a chink in the security of military bases in India. The subsequent attacks in Uri in which 17 Indian soldiers were killed kept the world waiting about India’s response. What India replied on September 29, 2016 with a ‘surgical strike’ has signalled a new normal in India-Pakistan face off. India’s defence spending at about US $ 48 billion as per the 2016-17 budget stood at the sixth position in the world rankings with China at number two.  The successful testing of 5000 plus Km range Agni V missile on December 26 has China genuinely worried.

According to defence economist Laxman Behera, the finance minister made a key change in the nature of allocation of defence budget. However, the capital expenditure component (that effectively indicates the acquisition) of about 10% (army), 30% (Air Force) and 40 % (Navy) is something that must worry the policymakers. There is a renewed thrust on Make in India as far as thrust on technological improvement is concerned. But how much it has impacted on capability is something that is highly suspect. The import bill is still phenomenally high. Prime Minister Modi rightly pointed about using technology to reduce manpower costs and making military leaner.

The Navy hosted an International Fleet Review that saw participation from more than 50 countries. With power projection and the goal being a ‘net security provider’ in the Indian Ocean Region (IOR), the naval display was undoubtedly the centre of attraction. With the nuclear submarine Arihant getting its punch in the form of an operational ballistic missile, the second strike capability has been completed. Of course, the Scorpene documents leak in August has put in a brake in the conventional submarine capability proving that dependence on foreign suppliers will always be with a caveat. In November, the largest ship made in India, INS Chennai guided missile destroyer was inducted. The year ended with Navy exercising with Russia in the Bay in Bay of Bengal. With a goal of 200 ship and 600 aircraft in 2027, the maneouvres of the Indian Navy would be closely watched by the US. For this is the capability that would be most vital if the US looks for a partner in developing its ‘pivot’ in East Asia as a counter to China. Justifiably, India is inching closer to sign defence agreements—the Logistics Support Agreement (LSA), Basic Exchange and Cooperation Agreement (BECA) and Communication and Information Security Memorandum of Agreement (CISMOA).

The Indian government signed the landmark Rafale deal to bolster the strike capability of the Indian Air Force. Although the outgoing Air Chief Marshal Raha stated the numbers are inadequate, he vouched for its exceptional technological superiority.  With Tejas being in the Final Operational Clearance (FOC) stage, the IAF is optimistic about the aircraft to replace its ageing MiG 21 and MiG 27.

While the recent appointment of army chief had its share of controversies, the government has indicated that it will move towards the much needed joint chief of defence staff in 2017. This long standing reform will hopefully propel the military toward greater potency and ‘bang for buck.”

Guru Aiyar is a Research Fellow at Takshashila Institution and tweets @guruaiyar

Featured Image: India Gate by Arian Zwegers from creativecommons.org

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Structural Reforms: What are they and how do you go about it?

BY Anupam Manur (@anupammanur)

No democratically elected government with a limited term of office would want to risk negative popularity in the short term for potential benefit in the future, for which they might not be able to take credit.

The microeconomist’s universal answer to all questions is demand and supply and the macroeconomist’s version is structural reforms. So goes the joke. Kaushik Basu, Chief Economist of the World Bank, in fact tweeted something similar: “Structural reform is safe advice. No one knows what it means. If economy grows: I told you. If it stalls: You didn’t do structural reform.”

So, what exactly constitutes structural reforms? From the political angle, The Economist looks at structural reforms as changes to the way the government works. From an economic viewpoint: it is about making markets work efficiently in the various sectors of the economy. An IMF paper[i] describes structural reforms as: “They typically concern policies geared towards raising productivity by improving the technical efficiency of markets and institutional structures, and by reducing or removing impediments to the efficient allocation of resources”. In fact, changes in the Ease of Doing Business rankings, published anually by the World Bank, signifies the various structural reforms undertaken in any country.

Structural reforms gained popularity from the IMF and World Bank. The two global institutions would attach preconditions to the loans that they provided to countries. These conditions were known as Structural Adjustment Programmes (SAP). Only upon initiating these reforms would a country be eligible to get loans from the IMF or World Bank. These reforms included:

  1. Trade liberalisation: Removing barriers to trade, decreasing tariffs and quotas, exchange rate liberalisation, and minismising the government’s involvement in trade.
  2. Balancing budgets: Governments had to impose strict austerity measures to reduce the fiscal deficit and create a roadmap for repayment of the loan, which involved raising taxes and cutting down expenditure.
  3. Reigning in inflation by imposing tighter monetary policy conditions and removing government’s influence in the central bank’s functioning.
  4. Removing many state controls on production, subsidies, price controls, etc.
  5. Encouraging investment by removing regulatory hurdles. This applied to both domestic and international (FDI) investment. This also involved market deregulation in most sectors of the economy.
  6. Improving overall governance structures, reducing corruption, etc
  7. Privatization and divestment of large public sector units.

Much of the Fund’s current work still revolves around the same issues. In the latest Article IV IMF staff consultation with member countries, their recommendations for most of the countries bordered around the same issues: initiate structural reforms: the United States has to reform its primary education, while France has to balance its budget and urgently carry out labour market reforms; Japan needs structural reforms to inspire more migration to mitigate the demographic crisis, and Brazil need to reduce the fiscal deficit, inflation, corruption in the government, undertake financial market reforms, and so on.

Most empirical analysis does bear out the fact that structural reforms matter to increasing productivity and GDP growth. However, there are a lot of conditions under which structural reforms work. Most countries try to undertake structural reforms when they are in crisis – either out of their own volition in order to fix the broken systems or by command from the IMF and World Bank. The success of the reforms depend upon a number of factors, such as the initial conditions, strength of existing institutions, speed of reforms and the sequencing of the reforms. After the disintegration of the USSR, for example, many countries undertook structural reforms in order to move to a market based economy. Each country followed a different approach and the ensuing results very varied. The Central and Eastern European countries fared far better than the former Soviet Union countries.

There are two important political economy factors at play that determine the success of structural reforms. The first is the time lag between the implementation of the reforms and the eventual positive effects of the same. Most empirical research shows that there is a considerable lag before the positive effects are played out in the economy, be it in terms of increased growth, reduced inflation, increased employment or higher trade. In between, however, it is not uncommon to see short term pain and a dip in growth. This explains why most countries are still reluctant about implementing big reforms. No democratically elected government with a limited term of office would want to risk negative popularity in the short term for potential benefit in the future, which they might not be able to take credit for.

Closely related is the second political economy factor of managing the winners and the losers. Every big reform will create multiple winners and losers. Economists such as Roland suggests that a gradual approach to reforms would allow an opportunity to giving compensating tranfers to losers from reforms to buy their acceptance.

The former Swedish Finance Minister, Anders Borg, has written an insightful article on the ways to tackle this particular problem. One of his biggest advice: front loading. “When structural reforms are implemented close to an election, the short-term impact will dominate the debate, and the more nebulous long-term gains will be written off as uncertain forecasts.” Thus, this should be done early enough after a government is formed to allow for some of the positive effects to come through before the next election.

Anupam Manur is a Policy Analyst at the Takshashila Institution.

[i] “Structural Reforms And Macroeconomic Performance: Initial Considerations For The Fund”, IMF Staff Reports, November 2015.

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The Lampost Framework: Why India Struggles With the Implementation of (some) Reforms

The ecosystem for implementation of reforms in India is structurally setup to solve acute, visible problems, but not chronic issues that require long-term monitoring.

By Akshay Alladi (@akshayalladi)

In much of our public policy discourse, many Indians are dismissive of state capacity. Much of what is run or managed by the state is shoddy- shabby hospitals, poor schools, crumbling roads and only intermittent power.

However, on closer examination, there are some areas where the Indian state’s performance is not just adequate, but indeed quite spectacular. Conducting elections in a free and fair manner, the eradication of polio through one of the largest public health programs in the world etc. are remarkable achievements.

Consider the case of polio eradication: The campaign was started only in 1995, and the total coverage of the target population was 99.7%! The WHO has now declared India to be totally polio free. Just a decade ago, the universal vaccination coverage in a state like Bihar was only 30%

What explains this seeming paradox?

If you look at it, a pattern emerges of the sorts of reforms the Indian state implements well, and what it doesn’t. The state manages to get several children into school, but fares very poorly on learning outcomes. It has been very successful in the eradication of diseases such as polio, but does badly on delivering healthcare in general. With the Mangalyaan mission it managed to reach Mars at an incredibly low cost, but struggles in delivering high quality science education to a broad mass of people. And as noted by Nobel laureate Professor Amartya Sen, the Indian state has prevented any famine from occurring in modern India (unlike in China or much of the developing world), but has a very poor track record on malnutrition.

The acute and the chronic

The pattern to note is that the Indian state does relatively well in handling “acute” conditions- that is those that require a specific intervention, for a limited time period, and with a clear, visible goal- which can measured at relatively low cost. The Indian state however struggles with chronic conditions- those that require painstaking management over a longer period of time, and where success is not as readily visible, so considerable cost and effort is required to measure progress.

The reason in some ways is the nature of Indian democracy. In Amartya Sen’s landmark work ”Democracy as Freedom” he asserted ”No famine has ever taken place in the history of the world in a functioning democracy”, and the reason he adduced was that democratic institutions—regular free and fair elections, independent courts and legislatures, free press and vibrant civil society—are all effective mechanisms of upholding the basic rights of citizens and would prevent a famine by providing effective feedback and pressure on the Government to act.

But why do the same mechanisms then not work in solving problems of a more chronic nature?

The lampost framework

To explain why reforms are difficult to implement in India (as opposed to why they are difficult to formulate and pass) I propose a new model (called the “lampost” framework). This framework  builds off the key concepts of Allison/ Elmore’s models as well as a modified version of Kingdon’s window specific to implementation (see schematic below). To illustrate the framework I use the case of sanitation or open defecation (OD) as an example.

Schematic1

Several initiatives, such as the recent Swachh Bharat, and the earlier Nirmal Bharat and Total Sanitation program (TSP) have sought to eliminate open defecation, but have progressed only on toilet construction, but not on the Information, Education and Communication (IEC) to improve toilet usage. Even now an estimated 600 million Indians defecate in the open, and only 46% of the toilets built in Year 1 of Swachh Bharat are reported to be used.

Explanation based on the framework: Absence of toilets is measurable at low cost, and building toilets is a one time activity addressing an acute issue (shortage of toilets). Hence, both for the media and for the public at large, by bounded rationality there is far greater emphasis on toilet construction and voters are rationally ignorant about toilet usage.

Though the media does highlight non-usage of toilets, such information is anecdotal, just given the high costs of gathering large scale information on toilet usage (a chronic condition). Hence, from a “demand” standpoint  it is easier for agenda setting on toilet construction (which then gets into the window of policy implementation), rather than usage (which is left out of the window).

The “supply” analysis is as follows: As a rational response to the “demand” side, both politicians and the bureaucracy prioritise toilet construction as a visible, measurable win; this is also because the allocation to IEC is lower (in fact it has been reduced to 8% of total funds in Swachh Bharat from an already low 15% earlier).

Given resource constraints the Government also cannot get a new, specialized implementation workforce focused on IEC- e.g., out of 76,108 Swachhata Doots required, only 8890 were recruited, the Communication and Capacity Development Units (CCDUs) that were supposed to implement this did not have dedicated staff, and had multiple objectives (Source: Arghyam Trust).

Hence the ‘bureaucratic actor’ who has multiple objectives, but not the commensurate capacity, rationally deprioritises the part that is less funded, and less measured- i.e., IEC. As an example of this behavior, in Himachal Pradesh IEC was initially prioritised with very good results for toilet usage, but as central allocation (and measurement) became far higher for construction, the bureaucracy prioritised construction, reversing the gains on sanitation.

The top down design of the sanitation program, also gave the line level bureaucracy very little autonomy or say in the policy design (as shown by the Himachal example)- hence from an Organizational Development standpoint the motivation to implement is lowered.

IEC and on-going toilet usage also depends on the last mile of the state- most of whose members are drawn from the same society who share the same prejudices about sanitation and are hence imperfect agents of change in social behaviour.

Finally, the activities of on-going maintenance and monitoring require coordination between multiple agencies. For example to build and maintain running water in the toilets, local officials must cooperate across more than 10 departments to obtain the relevant information, inputs and clearances as well as work with citizens and panchayats. These departments all have different objectives and priorities, and hence implementation for on-going maintenance is much more challenging.

I call this the “lampost” framework after the droll story about the medieval philosopher Nasruddin Hodja; when Hodja lost his keys he famously looked for them only under the lampost even though he likely dropped them elsewhere, because as he reasoned- what is the use of looking for something in the dark where it cannot be seen anyway! Much of the decision making in the Indian policy making is governed by the same principle- which explains the focus on visible wins that will be noted by the media, and hence the people, as opposed to the intervention that is likelier to have impact but is harder to measure.

This framework explains why India is good at solving acute issues/ crises/ one-time goals such as preventing famine (as Amartya Sen showed) or eradicating polio, but bad at implementing policies to address chronic issues that require sustained implementation and monitoring such as sanitation, malnutrition etc.

Akshay works in the e-commerce industry, and was a management consultant serving clients in the financial services and Government spaces. He is also an alumnus of the Takshashila GCPP13 Cohort.

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Potential Areas for Reforms

With most parliamentary sessions in 2015 being washed out due to noncooperation by the opposition, there is a lot left to done by the Modi government. Depending on the success of Modi’s talks with the opposition, here’s a few things that can be achieved in 2016.

The February session promises to be action packed with a few interesting bills lined up:

GST: The goods and services tax, once approved, will simplify India’s tax regime by integrating the central excise tax, service tax, and state value-added tax. India currently has as many as 14 state level taxes, each of which differ from state to state in levels and implementation. The simplification and unification of these taxes is, according to some estimates, poised to add 2% to India’s GDP. The GST, which has been adopted in several other countries with good results, is expected to boost export volumes, create employment opportunities, encourage competition between states, and increase the tax collection for the government.

Pushing the GST through the parliament has not been easy though. Despite a clear majority in the lower house, the BJP has not been able to pass the bill in three consecutive parliamentary sessions, due to opposition from the Congress party. The latest winter session was again washed out without any major reform going through. Since then, however, PM Modi has had several political talks with the opposition leaders with GST as the specific agenda and the Finance Minister Arun Jaitley commented on January 3, 2016 that he was reasonable confident of passing the GST in the February session. Mr. Modi will have to spend a great deal of capital to pass the GST in the upcoming session, and even then, the bill that gets passed might be a slightly diluted form of the ideal bill.

Bankruptcy Reforms: The average time taken for insolvency proceedings in India is a staggering 4.3 years, whereas the comparable figure in the US is 1.5 years and 1 year in the UK. Having a clearly defined bankruptcy law is essential for providing a favourable investment climate in any country. Exit norms are as important as easy of entry. The new bankruptcy law is expected to not only reform domestic bankruptcy law but also set the framework for developing an effective system for addressing cross-border insolvencies in India. The Insolvency and Bankruptcy Code Bill, which was introduced in the 2015 winter parliamentary session, is currently stalled in a joint committee between the two Indian houses of parliament. However, because bankruptcy reform is a priority area for the Modi government, we expect to see movement on this important matter in the next parliamentary session.

Banking Reforms: The Indian banking sector is dominated by the public sector banks, which are starved for capital and have huge Non-Performing Assets. The pace of stressed asset creation has also been high, which had prompted Moody’s to keep a ‘negative’ outlook for Indian banking sector. However, the Modi led government has been talking of reforming the banking sector with the Finance Minister introducing a 7 point programme to revitalize the public sector banks. The revitalization plan includes creation of a Bank Board Bureau, improving governance standards, and additional capital infusions. Though privatization of the banking industry is the need of the hour, which is unlikely to happen any time soon, this is the first step in the right direction. 2016 should see some significant improvements in the banking industry. Moody’s has already changed its outlook to ‘stable’, following the reduced pace of stressed assets addition.

Legal reforms: Opening up the legal sector in India, i.e., allowing foreign firms to practice and set up offices in India will be crucial to improving the ease of doing business. Inflow of FDI is hampered by concerns over legal cover and arbitration. Companies investing in India want the assurance that they can rely on sound legal advice, judges, and courts.  In 2015, the government began discussions surrounding a gradual opening of the legal services sector to foreign attorneys. The Prime Minister strongly supports legal reform in India and though India is adopting a cautious approach, it has taken the first steps by informing the World Trade Organisation in August 2015 that it would open its legal sector to foreign lawyers and law firms, but would do so only after consultations with all stakeholders, including the Bar Council of India (BCI). As the first step, the benefits of an open legal sector would only be provided to those countries that offer similar treatment to Indian lawyers and firms.

The proposal being considered by the CoS recommends that international arbitration and mediation services and only advisory or non-litigious services in home country law of the foreign lawyer, third country law and international law may be allowed. It proposes that foreign lawyers could be permitted to practise in India in conjunction with Indian lawyers, as a joint venture, with a cap on foreign participation.

Increased Ceiling for FDI: The Modi government has increased the ceiling for FDI in India in many sectors since 2014. It has also cleared many sectors to be considered under the automatic route and has allowed up to 100% FDI, without prior approval of the RBI. The long-standing 10 percent limit on single institutional investors still exists and continues to inhibit growth. Furthermore, even in sectors where the investment limit has been increased to 49 percent, barriers still exist. For example, in the insurance sector, even though the government raised the FDI cap to 49 percent, no foreign company has been able to increase its investment due to India’s restrictive interpretation of management control.

There are some exciting times ahead. If the Modi government can push through some of these long pending reforms, India can look forward to the next wave of growth.

Anupam Manur is a Policy Analyst at the Takshashila Institution and blogs @anupammanur

 

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The reform train

The previous post explained the idea of Overton window. This post aims to understand the concept through the example of a push-pull locomotive. A Push-Pull train is one where locomotives at both ends of a train are used at the same time to move the train in one direction — both the locomotives are controlled by one pilot.

Push-pull train[1]

push pull

push-pull locomotive

 

Government reforms operate like the Pull- Pull model ie., locomotives on both sides are pulling the train apart in opposite directions. Both the directions are pulled by separate pilots, and the reform train stands still.  The train can be thought of as the Overton window whose motion is dependent on which side the force is stronger. The force required to pull the train on either side depends on what the societal majority prefers. Needless to say, like social change, reforms are slow and deliberate that take enormous effort and conviction.

pull pull

This analysis might lead us to make fatalistic conclusions. It is here that newspapers, opinion makers, social media et al play an important role in the moulding public opinion and thus help move the Overton Window. Which side the window moves depends on how public opinion is moulded, but it for certain that these elements are unconstrained by electoral calculations and therefore are critical; a politicians motto might be to win the elections, but a common man’s motto is to lead a happy and a prosperous life and this is only possible through an efficient government.

PS – The famous “push-pull” night train between Mysore and Bangalore takes 5.5hours to travel 140km.

PPS- The original Overton window was presented with a vertical alignment to avoid the “right”/”left” connotation. Although horizontally aligned, the author does not assume right/left connotations in the locomotive example.

[1] The image is taken from wikipedia

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The reality of political opposition

A politician’s first goal is to stay in power and staying in power requires winning consecutive elections – Varun Ramachandra (_quale)

Policy analysis through models and frameworks is useful because it holds the potential to distill complex ideas in a simple manner without stripping the essentials. Therefore, it makes sense to analyse why governmental level reforms are hard to achieve through these very models.  Usually, we trivialise the process of reforms at the governmental level, but reforms are complex processes  involving multiple stakeholders (including politicians and policy makers). Political realities, parties’ own political future, and a multiverse of public opinions are considered before taking a decision.

“Overton window” is one such model that helps us achieve the said objective. This concept was first developed by Joe Overton of the Mackinac Center for Public Policy. The Overton Window describes the realm of political acceptability within which politicians and policymakers operate. This realm (window) is determined by what politicians believe will win them their next election. As described by this introductory essay in Mackinac Center, “Policies inside the window are politically acceptable, meaning officeholders believe they can support the policies and survive the next election. Policies outside the window, either higher or lower, are politically unacceptable at the moment”

overton

(Figure shows the Overton Window– more freedom refers to less government intervention, less freedom refers to higher government intervention)

A politician’s first goal is to stay in power and staying in power requires winning consecutive elections. Therefore, policy changes occur only within this window of reality. The window moves if and only if the move has the potential to lead towards another electoral victory. It is often thought that politicians with enough credentials can move the window either side, however that is very rarely the case. History has shown us very few leaders who have expanded this window, but these leaders are exceptions that validate the general rule (of course, the analysis holds true only in case of democracies and not in an authoritarian setup).

The word reform in the modern context refers to improving existing conditions or practices, and therefore it surprises many of us when we see opposition parties opposing reforms that an existing government tries to bring about. It is also true that depending on a person’s political ideology, certain reforms may not be thought of as reforms at all. This conundrum leads us to conclude that opposition to reforms might stem from 2 sources

  • From those who assess that the “proposed” change is outside their own Overton Window, thereby not opposing it might lead to electoral failure.
  • From those who assess that the proposed change is well within the “Overton window” of the ruling party, thereby ensuring the continuity of the existing ruling party.

It is not unusual to hear the term “opposition for the sake opposition sake”, while this is true in the larger context, from a political party’s viewpoint the quote transforms itself into “opposition for the sake of winning the next election”.

Varun Ramachandra is a policy analyst at the Takshashila Institution, he tweets @_quale 

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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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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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