Split Personality: Modi is no Mao, Marx or Mahatma. And demonetisation is no Cultural Revolution

You know it’s silly season when people start muddling up identities, comparing two dissimilar events and equating themselves with great historical figures. And you know this whole thing is straying into nutty zone when the ease of comparison trumps traditional ideological divides.

Uma Bharati, India’s water resources minister, recently claimed that prime minister Narendra Modi’s economic policy actions (especially the demonetisation scheme) were consistent with Karl Marx’s ideology. “The truth is the prime minister is executing what Marx always advocated,” Bharati asserted rather breezily in a recent interview with The Economic Times newspaper.

This suggested convergence of Marxist economics and Modi’s policy does not carry even a trace of irony or hint of sarcasm. It also seems to lobotomise the bitter philosophical and political antagonism between the Hindu nationalist Bharatiya Janata Party and the Indian Left parties, currently playing out through the students of New Delhi’s Jawaharlal Nehru University.

Taken at face value, Bharati’s statement seeks to prise out crucial electoral space from the Left parties that has traditionally eluded the BJP; her equivalence stems from the idea that both Marx and Modi seek equality and want to eradicate disparity. This is not the first time Bharati has tiptoed into enemy territory: “I am in the BJP, but ideologically I am a Leftist,” she reportedly said according to India Today.

This blurring of sharp lines between political opposites has been taking many curious twists.

Demonetisation was part of a grand “cultural revolution” being choreographed by Modi, the BJP’s minister for urban development and information and broadcasting, M Venkaiah Naidu, wrote in an Op-Ed on Nov. 29. There are three ways of vivisecting Naidu’s poker-faced assertion.

One is to assume that the minister is using the historical allusion with full knowledge of the barbarity and societal upheaval that accompanied the Cultural Revolution in China. Two, this is his Shilpa Shetty moment: the article has been ghost-written without him or the scribe really caring to check its authoritarian imprint. Three, Naidu is consciously seeking to divorce the term from its Chinese precedents and has used it bereft of its underlying significance.

Crossover in America

The line between the deep Right and the Left has been blurring for a while, especially in the US. Neo-conservatives, who occupied important positions within the Bush administration, were ironically considered as ideological descendants of Leon Trotsky, the communist theorist and prominent leader of the 1917 Russian Revolution. The neocons sought common cause with Trotskyites through their differentiated understanding of permanent revolution, world revolution or the withering away of the state.

The US has a long history of Left-wing firebrands moving to the Right; David Oppenheimer’s book Exit Right: The People Who Left the Left and Reshaped the American Century provides details of people who undertook the ideology-traversing journey and are still influencing political thought in the USA.

It should, therefore, come as no surprise that Steve Bannon, the alleged white supremacist and handpicked member of Donald Trump’s incoming administration, had supposedly declared himself a “Leninist”a few years ago. While Bannon does not remember the conversation, the possibility that such a declaration might exist has inspired many op-eds and articles.

Assuming the conversation did take place, Bannon presumably makes this leap of faith because he sees his desire to demolish the state congruent with Lenin’s vision, though there is a deep divergence over what comes thereafter. Bannon is executive director of brietbart.com, which gained infamy during the recent US presidential campaign for peddling half-truths and unwittingly helping “post-truth” become the word of the year.

Modi and Indira

Apart from Karl Marx, Modi has often been compared to other historical figures. Occasionally fawning acolytes have even rushed into cringe-land blithely: the new chief of Indian Council for Cultural Relations, Lokesh Chandra, called Modi a reincarnation of god and greater than even Mahatma Gandhi for adopting a practical approach to solving India’s social and economic problems.

The fact that 87-year-old Chandra was a lifelong loyalist of late prime minister Indira Gandhi and reportedly enjoyed close links to former Soviet Union leaders in an earlier life can be viewed either as an absurd incongruity or part of the same affliction that’s warping boundaries between the Right and Left.

Historian Ramchandra Guha recently compared Modi with Indira Gandhi herself. Despite the two leaders inhabiting conflicting political terrains, many overlapping points exist: the personality-driven politics, the authoritarian streaks, the high-decibel rhetoric of punishing the rich and eradicating poverty.

The opening pages of Sukumar Ray’s Bengali book of nonsensical stories, HaJaBaRaLa, describes how a man sleeping under the tree one summer afternoon suddenly finds his handkerchief transmogrified into a cat. Ray, father of renowned filmmaker Satyajit Ray, was influenced by Lewis Carroll’s idea of distorted reality. There is a similar shade of fantasy in Indian politics: What you see may not always be a true depiction of absolute reality.

This article originally appeared in quartz (www.qz.com) on December 1, 2016, and can also be read here

After Shock Within, Comes External Shock Wave

Apart from demonetisation worries, Donald Trump’s victory in the US has added new risk variables for equity, bond and currency markets

The government’s demonetization contretemps has focused attention on the short-term havoc it will inflict on the domestic economy. There’s another worrisome front opening up which could exert additional pressure on the stressed economy: the external sector.

Donald Trump’s unanticipated election victory in the US and his scattergun statements on trade, visa control and general economic policymaking have added new risk variables for equity, bond and currency markets.

In addition, markets sense that the Federal Reserve might be on track to increasing interest rates in December. Consequently, investors are headed for dollar-denominated assets which, in turn, has adversely affected emerging market assets.

In India, foreign portfolio investors sold close to Rs32,000 crore of securities in November (till 25 November) alone. Predictably, the Indian rupee also depreciated by over 2% in November.

It also raises questions about the Reserve Bank of India’s (RBI) surgical strike: There’s speculation that the sudden and inexplicable 100% incremental cash reserve ratio announcement is aimed at stopping the deposits deluge from bringing down bond yields further and staunching outflow of foreign exchange.

But, that’s not the main problem; it only adds to the underlying weakness. The problem lies on the current account front.

The mainstay of India’s export basket— services—is slowing down. According to RBI data, services exports between April-September 2016 increased only 2% over the same period in 2015, while services imports are up 7%. And, though India enjoys a positive trade balance in services exports, slowing export growth has shrunk the surplus trade balance by 50%.

There’s more. The performance of software and IT-related services exports, the largest contributor to services exports, is expected to deteriorate progressively. Leading infotech companies are revising their FY2017 estimates downwards.

For example, Infosys has marked down its top-line growth expectation to 8-9% for FY17; the lowered guidance comes a second time this year.

Nasscom, the industry association for the information technology and business process management companies, expects IT industry’s exports to grow at 8-10% for the financial year ending March 2017, against its earlier estimate of 10-12%: from $119-121 billion estimated earlier to $116-118 billion now.

The drop in the IT sector’s revenue generation is a direct fallout from US-based companies holding back, or deferring, their spending till the political drift becomes clearer. Trump is expected to take over in January; meanwhile he has revealed his business agenda which, if followed through, is likely to spell trouble for India’s IT sector.

For example, he has promised to review the US visa programme and reform “abuses of visa programmes that undercut the American worker”. Read that as targeting the H1B visa programme, a non-immigrant visa that allows US companies to hire foreign workers in specialized roles for short periods. In IT-speak, it’s a special window which allows Indian software coders to work on client sites in the US.

Trump seems to be following through on his promise: his pick for advocate general, Alabama senator Jeff Sessions, is a long-time H1B opponent who has tried to legislate a reduction in H1B annual quotas and sought federal investigations into alleged H1B visa frauds.

So, till the picture gets clearer, most US companies have put their IT spends on hold. This hurts because the US accounts for about 60% of India’s software exports. Add to this Brexit and the uncertainty caused earlier in year, and that’s another negative mark against the rupee. Expect further changes over the next few months as the picture becomes clearer.

There’s additional pressure on the horizon. Goods exports have been in steady decline, affected by a mix of cyclical and structural factors. Merchandise exports between April-October 2016, in dollar terms, were stagnant (actually marginally down by 0.17%) over the same period in 2015.

The trade balance might look redeeming, with the negative spread between imports and exports having narrowed but hides another source of worry: goods imports during April-October contracted 10.85% in dollar terms.

Apart from the impact of lower oil prices, this reflects two trends: waning global demand squeezes items imported for re-export (such as precious stones, or other jewellery inputs), and decline in domestic demand affects imports of raw materials or intermediate goods.

The bad news doesn’t end there. One of the pillars of India’s current account— remittances sent by Indian workers overseas—has also been steadily coming down. Net remittances during April-June 2016 amounted to $8.82 billion, down 3% from $9.1 billion in the same period of 2015.

It can be argued that the external economy has been under stress for a while. What’s changed is the effect of demonetization on the economy.

The sudden liquidity withdrawal will have a shock effect on the economy, disrupting supply chains, dampening an imminent consumer-led economic revival, deterring capex impulses and lowering overall GDP growth.

How long that will last is still uncertain. But what is certain is that the added burden of a shrinking external economy—gripped by a decade-long slowdown and buffeted by systemic shocks like Brexit or unexpected sharp turns in US economic policy—will only aggravate the systemic shock.

This article originally appeared in Mint newspaper on November 30, 2016, and can be also be read here

The Two-Step Trump Dance

It seems India-US ties will primarily be a two-track exercise: with one track chugging along smoothly and the other full of bumps and speed breakers

India has witnessed 16 years of progressively intensifying partnership with the US under the George W. Bush and Barack Obama presidencies. With Donald Trump moving into the White House soon, predictions about future India-US ties swing between hope and trepidation. Indeed, both sides may have to reset many existing markers in ongoing negotiations.

Everybody is trying to figure out Donald Trump the president versus Donald Trump the candidate. On the campaign trail he confused observers with his wildly oscillating undertakings. The scope for speculation is greater in his ramblings about India; he waxed effusive about India’s business opportunities but issued grim warnings about Indian software engineers in the next breath.

The question uppermost then is: Where does India figure in his plans? For one, Trump’s campaign arc has seen many flip-flops and this may well continue till he finds his feet in the Oval Office in January 2017; the post-victory phase has seen policy reversals, such as second thoughts on completely discarding Obamacare and scrapping the nuclear deal with Iran.

The clue to Trump’s India policy may lie in the document ‘Republican Platform 2016’: “India is our geopolitical ally and a strategic trading partner… We encourage the Indian government to permit expanded foreign investment and trade, the key to rising living standards for those left out of their country’s energetic economy. For all of India’s religious communities, we urge protection against violence and discrimination.”

Parsing the paragraph, it seems the India-US relationship will primarily be a two-track exercise, with one track chugging along smoothly and the other full of bumps and speed breakers. For instance, as the first sentence suggests, security and strategic ties will remain cordial. The second sentence points to the craters: unfulfilled trade and investment demands. In short, it’s business as usual.

The first reset button, though, will have to be pressed by Prime Minister Narendra Modi. He assiduously built a close working relationship with Obama: They had three bilateral meetings and numerous one-on-one engagements in the past 30 months. Modi will now have to figure out the unknown quantity called Trump and see if they can share a working relationship.

So, while there are no safe bets, hopefully the institutional architecture of the current bilateral framework—especially ministerial negotiations under the Strategic and Commercial Dialogue (S&CD)—will hold under the new leadership.

For instance, the civil nuclear partnership and defence acquisitions will be pursued as aggressively by the incoming administration as the outgoing one. Security, strategic affairs, defence cooperation are likely to be smooth sailing because both countries have some convergence of interest here.

To be sure, there’s still uncertainty about Trump’s outlook towards Pakistan, Russia and China and their knock-on effects on India, but it is clear that the India-US geo-strategic alliance will persevere in some form.

The problem area, as in the past, will be trade and investment. Both sides have painted themselves into intractable corners with numerous trade barriers. While Trump’s trade-related campaign tirade was largely restricted to the Trans-Pacific Partnership (TPP) and US-China trade relations, the new administration might train the arc lights on India’s $30 billion trade surplus with the US. India-US trade in goods and services touched $108 billion during the 2015 calendar year.

Interestingly, during Modi’s first state visit to the US, the joint statement set a $500 billion trade target without mentioning any end date. And while under the S&CD and its predecessor, the India-US Trade Policy Forum has held 10 ministerials so far, progress has been at a glacial pace.

Large parts of each year’s communiqué read like the one from the previous year. There are many pain points developing. For instance, in agriculture market access, India wants to export grapes, rice and honey while the US wants market access for cherries, alfalfa hay and pork.

The US has issues with subsidies in the Indian textile sector. India and the US have dithered over signing a bilateral investment deal, the main trip-wire being the contentious investor-state dispute settlement mechanism.

The other sensitive area is intellectual property rights; both sides have been gingerly circling each other with communiqué politesse masking the underlying stress. There are serious differences of opinion in services trade.

There is one redeeming feature though. Under the Obama regime, India was left out of the three large trade arrangements being shepherded by the US: the TPP, the Transatlantic Trade and Investment Partnership (TTIP) and Trade in Services Agreement (Tisa). While Trump has publicly expressed his distaste for TPP (with TTIP presumably falling in the same category), Tisa remains the odd one out.

This is one area where India will have to be vigilant, given India’s strategic advantage in services. India should also use this opportunity and leverage its relationship with the US to prise open the Asia-Pacific Economic Cooperation for a membership. This is a grouping that works well for India, given its flexibility, advantages and non-binding commitments.

It is unlikely that the Trump administration will roll over on trade any time soon; neither should India, because strategic autonomy will continue to be an asset. While the love-hate relationship can continue, both sides must endeavour to find some middle ground in the meantime.

This article originally appeared as part of my column, General Disequilibrium, in Mint on November 16, 2016. It can also be read here.

Poll Bound: Narendra Modi’s Currency Play Has More Political Value Than Economic Benefit

The Narendra Modi government’s decision to demonetise the Rs 500 and Rs 1,000 notes in circulation will have three distinct political outcomes, two of which will be advantageous for the ruling Bharatiya Janata Party (BJP).

The first, and instantly visible, impact of the late evening announcement on Nov. 08 by prime minister Modi himself is a reversal of the news cycle. Dire discussions on the polluted Delhi air and its impact on foreign investment? Gone. The unfortunate ripple effects from the army veteran’s suicide? Buried. Doubts over the BJP’s chances in the forthcoming state elections? Dismissed.

Elections to state assemblies in the first half of 2017 are crucial for the ruling party, especially since they have been smarting from the defeats in Delhi and Bihar in 2015 and West Bengal this year. The battleground states this time include Uttar Pradesh (UP) and Punjab. UP, as things stand, will see a four-cornered battle.

Demonetisation immediately changes the narrative. The BJP has been trying to stitch together a patchwork support base among the Dalits, Muslims and other disenfranchised segments of UP; their votes are crucial to winning the state. Demonetisation will, in some limited fashion, help in providing a new talking point, one that takes potshots at the privileged and mendacious classes.

Given the fact that the government and the Reserve Bank of India now plan to re-introduce the Rs 500 and Rs 1,000 notes, albeit with a new design and enhanced security features, along with the creation of a new Rs 2,000 note, the entire objective of the exercise seems to be targeted at blindsiding counterfeiters, not so much hoarders of cash. Whichever way you look at it—“surgical strikes” on either counterfeiters who aid terrorism or black-money merchants—it is a narrative ripe with opportunity for rhetoric and election sloganeering.

State elections also point to advantage no. 2. The element of surprise will probably inconvenience the other three parties. The use of cash in Indian elections is an accepted fact and some of the parties are rumoured to be large users of cash. This surprise element would have surely nixed their ground-level strategies. In short, it will be back to the drawing board for most of these parties.

It can be argued that this is a problem for even the BJP. Modi emphasised in his speech: “Secrecy was essential for this action. It is only now, as I speak to you, that various agencies like banks, our offices, railways, hospitals, and others are being informed.” But, the question remains: would he have taken such a momentous decision without consulting the BJP’s command-and-control centre, the Rashtriya Swayamsevak Sangh (RSS)? In many ways, strands of such a policy action have been appearing in the media for a while, as editorial advice or even harking back to the example of the USA which discontinued high-denomination currency notes in 1945.

The question over the consultative process gains further momentum when viewed from a political survival standpoint. The demonetisation exercise will adversely affect small traders and shopkeepers, a segment of society which has traditionally remained a strong BJP vote bank. Most businessmen in this segment depend on cash transactions and PM Modi’s move is bound to discomfit their operations. Given this bloc’s importance, there must have been some serious back-room calculations about going ahead with such a measure.

And a calculated move it is. One probable clue lies in the fresh issuance of Rs 500, 1,000 and 2,000 denominations after a brief hiatus. So, if you ignore the short term spike in chaos, inconvenience and rhetoric, the cash economy is bound to make a comeback in a couple of months, albeit in the form of newly-designed currency. That should give the traders and small shopkeepers some succour.

But, it will require the party apparatus to reach out to various trade associations and federations to communicate with them, assuage them, and address their concerns in the short term.

This will be doubly necessary given the other three-alphabet headache that’s hurtling towards small businesses at breakneck speed: GST. The new tax system envisages a complete overhaul of tax assessment, calculation and reporting. That chaos is in the not-too-distant future, it will create huge turmoil with the trading class having to register with the tax authorities, re-skilling themselves in figuring out the new tax structure, as well as chasing tax credits from authorities. As an example, shopkeepers and small businesses in Malaysia took to the streets early this year, frustrated at the complexity involved in complying with GST.

This is political issue No. 3 for the BJP and its spiritual bosses at RSS.

In the final analysis, the whole exercise seems designed to replace, rather than demonetise (which is to suck out completely and abolish), high-value notes. Counterfeiters will be hurt, middle-class families will be discommoded, and some currency hoarders will be disrupted, but the cash economy will return to a new normal in a few months. But, only after the UP elections.

This article originally appeared in Quartz on November 10, 2016, and can also be read here

Anatomy of the unspoken word

Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development

Ratan Tata (left) with Cyrus Mistry. File photo courtesy PTI.

This year’s Nobel for economics—on contract theory—continues the Sveriges Riksbank’s quest to reward investigations into information asymmetry, especially its role in contracts, markets and incentives. Theory suggests that asymmetry of information leads to imperfect markets, including adverse selection and moral hazard. While perfect markets are chimeras, restricted to theoretical constructs, communication and information flows play a definite role in reducing imperfections.

Two recent events highlight how lack of communication, or not saying the right word at the right time, can lead to sub-optimal consequences, especially for minority shareholders.

The first is the corporate putsch playing out on prime time. The sudden, unseemly ouster of Cyrus Mistry as Tata Sons chairman, and the subsequent two-way flow of accusations and assertions between him and his predecessor Ratan Tata, highlight how things can go terribly wrong when leaders do not communicate. In fact, the hazy chain of events suggests that breakdown in communications lines led to this abrupt, indecorous turn of events. As a result, the share prices of most listed Tata companies have suffered.

The first thing that strikes any observer is the perception gap between what Ratan Tata wanted from his successor and what Mistry, in turn, understood and delivered. While conversations between the two during the passing of the baton remain private, it is abundantly clear that either Mistry misunderstood his covenant or Ratan Tata was not explicit in describing the role. Ironically, and rather late in the day, both are indulging in excess communication, mostly through the media.

Consequently, there is soiled laundry on display. Leaving the allegations aside, there is sufficient evidence to suggest that Ratan Tata’s and Mistry’s paths to corporate excellence diverged sharply and there were no attempts to make them meet. Mistry also expresses incredulity at the board “replacing” him for non-performance, especially after directors had lauded his performance. He also claims that while he was promised a “free hand”, some directors would leave in the middle of board meetings to seek Ratan Tata’s guidance.

The other side brushes these contentions aside; but it does maintain that Mistry has been on the Tata Sons board for a decade and was, therefore, party to some of the business decisions that he is now questioning.

All these point to a much larger, and grievous, communication gap. Neither Ratan Tata nor Mistry thought it fit to publicly discuss the controversial issues before they blew out of proportion. As a holding company of numerous listed companies, the Tata Sons board should have ensured adequate discussion and disclosure. For example, instead of lavishing Ratan Tata with public commendations, Mistry should have warned shareholders of the impending write-offs that he so direly predicts now.

The second incident of crossed wires is a direct outcome of the government’s multilateral trade strategy. A recent news story, citing unidentified people, said that the Indian negotiating team at the World Trade Organization’s (WTO) recent Oslo mini-ministerial had decided to oppose attempts by rich countries to introduce the promotion of global value chains (GVCs).

Indian negotiators fear that developed nations will sneak in issues like intellectual property rights, investment safeguards, competition laws under the garb of discussing GVCs. India, and a host of other developing countries, want WTO to first settle the pending Doha agenda before taking up new issues. Unfortunately, the Indian government’s ensuing communiqué about the meeting does not reveal whether GVCs came up for discussion at all. And even if they did, how the Indian side reacted.

Conversely, the whole episode might end up muddying the government’s policy stand on GVCs. India has been a proponent of GVCs, especially increasing the share of small- and medium-sized enterprises in GVCs. The government views GVCs as a device to increase domestic and foreign investment in manufacturing. The commerce ministry’s annual report for 2013-14 spells it out: “The business and trade segments of e-commerce and global value chains provide an opportunity to compete at par with other world economies and expanding our technology base.” But in the absence of proper communication, there is a lingering doubt over the government’s stand: Does it want GVCs or is it opposing their entry? Lack of clarity in economic policy hurts everybody because it affects investment decisions and stifles employment generation.

A similar lack of communication besmirched India’s reputation when WTO members met in July 2014 to vote on the trade facilitation agreement. India was the only country to oppose the deal and was subjected to global condemnation, despite having valid reasons for blocking the agreement. What made it doubly intriguing was the fact that India was principally on board with the idea and had already implemented many of the measures listed under the agreement. The problem: India did not communicate adequately with WTO fellow travellers or explain its stand lucidly. Western media, taking the cue from political leaders, labelled India a game-spoiler. Outcome: Global decision makers still look at India askance.

Both examples lead to one indisputable conclusion: Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development.

This article originally appeared in Mint on November 2, 2016. It can also be read here.

The Politics of GST

While GST implementation will revolutionize taxation in India, it will also upend power hierachy in the tax bureaucracy, fiscal federalism and corruption template

The goods and services tax (GST) juggernaut has now begun its journey and there is no looking back. The new tax system promises to revolutionize life for the entire value chain starting from goods and services producers all the way to consumers. But the GST also promises to upend many other established systems—such as the power hierarchy in the tax bureaucracy, the known fiscal federalism model and the prevalent corruption template. These changes, in turn, will dictate the final shape of the new tax regime.

The first signs of impending trouble can be found in the notification regarding the GST council. The press release announcing the creation of a GST council, under the provisions of the Constitution (101st Amendment) Act, 2016, states the council will be chaired by the Union finance minister, with his junior minister and finance ministers from states as members.

The fun and games begin thereafter. The secretary (revenue) in the finance ministry is the council’s ex-officio secretary, and he will be assisted by one additional secretary and four joint secretary level officers. The chairman of the Central Board of Excise and Customs (CBEC)—a body created under Central Boards of Revenue Act, 1963—has been reduced to a permanent invitee.

This has set in motion a power struggle between officers from the Indian Revenue Service (IRS) and the Indian Administrative Service (IAS) for control over the council. This is manifestly a fight to gain oversight over what will inarguably become the country’s richest financial pipeline. Although finance minister Arun Jaitley has assured IRS officers that their grievances will be heard the first round seems to have gone to IAS officers.

Similar signs of the IAS cadre inserting itself into the fiscal framework can be found in the GST Network (GSTN), an information backbone for the new tax system. The network has been set up as a not-for-profit company with shareholding from the Centre, states and financial institutions. The company’s website calls it a “non-Government, private limited company”. Both the chairman and chief executive officer’s posts are occupied by former IAS officers, as are many other board seats. Of the total 13 board members, there is only one CBEC representative.

Smooth GSTN operations will be critical to the GST’s success. A lot will hinge on registering all buyers and suppliers, calculating and crediting input tax to intermediary stage producers on time to induce more producers to register with GSTN.

Excise and customs officers have planned a series of agitations, which stretch all the way to budget day in February 2017. Interestingly, the power struggle spilled overinto the direct taxes domain in July when income-tax officers rebelled against the secretary (revenue)—this required the finance minister’s intervention.

With the oversight of the financial pipeline changing, there are no guarantees that corruption will be completely eliminated. There has been a lot of discussion on the likely corruption model that will replace the legacy structure. The earlier indirect-tax regime had many loopholes, inserted by the industrialist-politician-bureaucrat nexus. Tax experts have pointed to some gaps created at the GST’s birth. One springs from the threshold fixed for exempting goods and services from GST, Rs20 lakh, which could motivate many assessees to break up operations into an informally connected web of small units. Second, allowing states to exercise oversight over units below Rs1.5 crore annual turnover might open up another escape hatch. This is an evolving space; tax officers have already put the new code through the wringer and alerted seniors about possible loopholes.

Finally, GST has altered the fine balance of India’s federal structure by reshuffling taxation powers divided between the Centre and states in the Constitution. It is quite likely that states will attempt to regain some of this equilibrium through the GST council. The amended Act gives the council members enough powers to decide on which goods and services will be subjected to or exempted from GST, to decide the differential GST rates, and much more.

The catch is in the decision-making process. All proposals will be decided through a voting system, with the principle of one-state-one-vote. Under the voting formula, the Centre has one-third weightage of total votes cast, with the states apportioned two-thirds weightage. Any proposal needs a majority of at least three-fourths of the weighted votes cast. Assuming a full house present (quorum requirements are 50%), a Centre-sponsored proposal can succeed with 18-19 state votes.

The current National Democratic Alliance (NDA) combination rules over more than 10 states (either singly or in coalition) and has the support of three regional state governments. The fate of Arunachal Pradesh hangs in the balance. Five states—Goa, Uttarakhand, Uttar Pradesh, Manipur and Punjab—go to the polls in 2017. Another seven states will battle it out in 2018. Of the 12, if NDA manages to win six-seven, they will have enough firepower to push through proposals in the council. This gives a completely new meaning to the concept of fiscal federalism.

Intense politics preceded the birth of GST. But it would be a mistake to think that only good economics will henceforth guide the remaining workload to get GST off the ground. The real politics starts only now.

This article originally appeared as part of my column, General Disequilibrium, in Mint on October 19, 2016. It can also be read here.

India’s Disenchantment with Multilateralism

India’s initial enthusiasm for multilateralism stemmed from the belief that the global economic governance system would take on board emerging economies’ concerns

India’s decision to pull out of the South Asian Association for Regional Cooperation (Saarc) summit in Islamabad marks a new milestone in the country’s growing disaffection with regional and multilateral groupings. This discontent was most visible at the G20 summit, which it used for some unsubtle political messaging. Its near-perfunctory chairmanship of the eighth Brics (Brazil, Russia, India, China, South Africa) summit raises further questions about its interest in multilateralism.

Is there an impending shift in India’s multilateral policy framework, in much the same way that the recent “surgical strikes” pushed the strategic restraint doctrine? Will the current administration give politics greater weightage in its external policies, which till now had an economic focus? Welcome to the post-Uri policy configuration.

The future of Saarc, perennially hostage to the hyphen dividing India and Pakistan, is now further jeopardized, with Bhutan, Bangladesh, Afghanistan and Sri Lanka joining India in boycotting the Islamabad summit in November.

The low-key run-up to the eighth Brics leadership summit, scheduled on 15-16 October in Goa under India’s chairmanship, further reveals the political leadership’s fatigue with such associations. Hopefully, this will be reversed when the Brics leaders get together.

India’s stand at the latest G20 summit in Hangzhou also betrayed frustration, with Prime Minister Narendra Modi highlighting Pakistan’s export of terror. This would have seemed logical at any other global gathering, but the G20’s purpose is fostering global financial stability and economic cooperation, not airing political differences. But then, isn’t economics also about politics?

Modi’s outburst against Pakistan at a China-curated G20 summit was strategic. China has repeatedly blocked India’s attempts to enforce a UN-sponsored ban on Jaish-e-Mohammad chief Masood Azhar. In addition, Beijing is going ahead with the China-Pakistan Economic Corridor, a vital component of the One Belt, One Road initiative, which plans to pass through contested territory in Pakistan-occupied Kashmir despite India’s reservations. The last straw perhaps was China’s public opposition to India’s entry into the Nuclear Suppliers Group. India also denied China some moments of glory in Hangzhou: It refused to ratify the Paris climate accord there.

There’s also growing global disenchantment with the G20, with the weak structural engineering of this alignment now becoming slowly visible. The Hangzhou summit communique reads much like its predecessors’. It included all the well-intentioned, oft-repeated noises about policy coordination, economic growth, governance, development, inequality. Here’s the problem: The communique lacks a credible path to policy action, or any quantifiable targets. Similar communiques in the past have also helped create an atmosphere of scepticism. For example, the 2014 Brisbane summit had announced a policy framework for increasing global gross domestic product by an additional 2% by 2018, predicated on large-scale infrastructure investments. The International Monetary Fund’s staff note for the 2016 summit says the target looks unattainable because of low investment rates in most advanced economies. Consequently, analysts are rushing to publish the G20’s untimely obituary (goo.gl/57hQsn).

The G20’s shaky foundations can be traced to the circumstances of its birth. It was created in 1999—primarily as a reaction to the 1997 Asian financial crisis—as a platform for finance ministers and central bankers to discuss international financial and monetary policies, global economic trends and reform of multilateral financial institutions. In November 2008, then US president George W. Bush invited global leaders to Washington, DC to discuss a coordinated global response to the financial crisis. This became the G20’s first leadership summit, and provided the defining character of its birth: a fire-fighting unit masquerading as a global policy coordination body.

Logically, therefore, once the immediate hump of the crisis was crossed, the G20’s utility seemed diminished. Some good examples are the US’ disregard for policy coordination preceding the taper tantrum, resulting in tough times for emerging economies—and the slow progress in reforming the shareholding of Bretton Woods institutions.

The director of Globality Inc., Rebecca Liao, writes in Foreign Affairs: “Instead of coordinating economic policy among the world’s wealthiest countries, it (G20) broadened its scope to include climate change, investment initiatives, and human rights. Since its members are largely unable to come to a meaningful consensus on this expanded range of issues, the G20 then became a think tank of sorts.”

India’s enthusiasm for multilateralism stemmed from the belief that the global economic governance system would take on board the concerns of emerging economies. That hope now looks dashed, with slow progress on most issues. Add to that India’s concerns on terrorism going unheeded on global multilateral platforms. Consequently, it is quite likely that India’s policy architecture might acquire a slight bias towards bilateralism, given Modi’s predilection for one-on-one engagement with world leaders. There are also some indications of the foreign policy needle shifting slightly towards politics.

This column was originally written as an Op-Ed for Mint newspaper and can be read here 

Book Review: India unleashed

A senior journalist tells a lucid story of how reforms played out in a diverse, democratic country

The past 25 years have witnessed an upheaval in the global political and economic order. The fall of the Berlin Wall and the dissolution of former Soviet socialist republics proved to be a major catalyst. This is an era that also saw the rise of a new category of nations called “emerging markets”, which differentiated them from the earlier, somewhat-pejorative Third World classification. Nothing can be more dramatic in this period than the rise of China and India, two dissimilar Asian neighbours sharing a contested and uneasy border.

After the 2008 trans-Atlantic financial crisis, these two countries contributed to world economic growth in large measure. The subsequent slowdown of China’s frenetic growth, and a re-assessment of its position as the world’s manufacturing shop-floor, has shifted focus to India and its economic growth potential. Indeed, India’s attempts to showcase itself as a global economic and political power — it is the fastest growing economy in the world today, albeit from a lower base — has its fair share of sceptics.

There are many who have been stung by India’s hesitant steps in the past; a disappointed international investor had once commented sardonically how India will perennially remain a “potential”, always looking to fulfil its destiny.

This book comes at a time when India’s hopes have been rekindled once again, even though the country finds itself at strategic cross-roads. Shifting power templates and uncertain economic currents have forced India to rethink its priorities.

Turning Point 

All existing equations have been re-arranged: old friends have turned lukewarm, past indifferent relationships have become super-charged. In the midst of all this, a change in the political leadership also saw old rules rewritten. While economic policy is still work-in-progress, fresh energy has been invested in foreign policy. The world is once again looking at India with new eyes.

The author’s long and successful career as a journalist, first in India and then in Singapore, has afforded him a ring-side view of history as it unfolds; his perch at Straits Times has provided a unique vantage point for the south and south-east Asian theatre. The author has attempted to encapsulate India’s transformation over the past 25 years in 350-odd pages. He crisply outlines the grand aspirations, highlights the transformational moments and unabashedly shows up the warts.

The narrative begins with the notion of India shining, the redemptive features of a diverse and democratic republic that continues to defy disbelievers. The high point of India’s emergence as an emerging power, the author feels, came during the country’s swift and capable response to the December 2004 tsunami. Caught unawares by nature’s brutal and devastating fury, India refused all external help and marshalled its own administrative and defence capacities to provide relief to affected areas. In fact, India went a step further and provided disaster relief – both in terms of material as well as capacity — for many neighbours equally ravaged by the rising sea waves. This event marked a turning point; it heralded the arrival of India as a mature and capable republic that could not only take care of itself but was willing to support its neighbours in times of need. India was no longer dependent on hand-outs or external support for coping with natural disasters.

Change Comes

Beyond this unfortunate but symbolic event, the author writes that India’s reputation was also burnished by its armies of software engineers and the resilience of its populace. This is also a chronicle of India’s increased engagement with the world, emerging from its self-imposed exile and re-establishing its position in trading and strategic negotiations. Beginning with former Prime Minister P V Narasimha Rao’s prescient “Look East” policy, helped in some measure by Singapore, to Prime Minister Narendra Modi’s “Act East” policy, an on-going high-octane engagement with the US or the balancing act with China, India’s strategic imperatives are much more dynamic and challenging. In the midst of all this the usual suspects — corruption, bureaucratic inertia, scams, turf wars, terrorism, internal schisms and faultlines, diplomatic mis-steps, political expediency trumping good governance, among others — keep tripping up India’s chances.

The author leavens his account with numerous anecdotes, some of them experienced first-hand. These makes the reader an almost unwitting observer as events unfold. The author also calibrates expectations by stating that the book is not an academic work. Yet there is a gnawing and empty feeling in some places that could have used some research to highlight India’s on-going battles.

For example, the chapter on the Comprehensive Economic Cooperation Agreement, signed between India and Singapore in 2005 after years of haggling, probably deserved some more details. This is important because some of the issues have gone on to define India’s stand in subsequent global multilateral negotiations, or in on-going plurilateral talks. The readers would have definitely benefited from the author’s simple explanations and lucid style.

This book provides an account of India’s travels and travails over the past 25 years. Readers wishing to figure out the troughs and crests of this journey should pick up the book. It is exceedingly well written; even for those wishing to explore issues in depth, this book provides a good starting point. It is an enjoyable slice of India’s post-reforms history.

India Rising: Fresh Hope, New Fears

Ravi Velloor

Konark Publishers

Rs 530

The review originally appeared in The Hindu BusinessLine. It can also be read here.

The SBI merger: is bigger always better?

The process increasingly looks like a shotgun wedding, with not enough opportunity to pause and ponder

The anticipated merger of the State Bank of India (SBI) with its five associate banks and Bharatiya Mahila Bank (BMB) finally got off the ground with the government sending a letter to all seven banks on 20 June. From thereon, the time taken for obtaining individual board approvals, appointing legal and accounting firms as well as investment banks, getting them to conduct due diligence and arriving at a fair share swap ratio, was under two months.

That should be some kind of a record. Deals involving smaller companies or banks have taken far longer. And this is the country’s largest bank, SBI, merging with six other pretty large banks. There are many imponderables involved in such negotiations: for example, the overlap in the combined physical network, the people question, or integrating disparate back-end systems and processes. Clearly, the government is in a hurry to complete this merger.

The merger is being pursued in the belief that larger automatically means better. Vanity is also a motivating factor—creating an institution that will make it to the list of the world’s largest banks confers bragging rights.

There are perceived gains as well: the government, as shareholder, feels it will have six less capital-hungry banks to worry about. There are also expectations that a larger institution will be better equipped to deal with sticky loans, thereby enabling fresh credit outflows to productive sectors. Productivity and efficiency gains are among other expected benefits. But these could turn out to be illusory given the SBI’s legacy and ownership structure. A former SBI chairman had once remarked that reforming SBI was like trying to make an elephant dance. Even after discounting for exaggeration, there are grounds for circumspection; a large and unmanageable bank is getting even larger.

What’s even more worrying is how the process increasingly looks like a shotgun wedding, with not enough opportunity to pause and ponder. Three issues merit wider debate.

One, the merger patently lacks shareholder democracy. Individual shareholders have been discouraged from objecting. Anybody wishing to oppose must own at least 1% of either bank’s share capital (for example, that amounts to 77.6 million SBI shares) or must marshal 100 shareholders irrespective of their shareholding. According to SBI’s annual report for 2015-16, only five shareholders owned more than 1% in the bank on 31 March 2016: the President of India (60.18%), Life Insurance Corp. of India (11.27%), HDFC Trustee Co. Ltd (on behalf of HDFC Mutual Fund, 2.08%), Bank of New York Mellon (as depository for SBI’s outstanding global depository receipts, 1.86%) and Reliance Capital Trustee (on behalf of Reliance Mutual Fund, 1.09%).

Similarly, chances are that mostly institutions own shareholding of over 1% in the three associate banks with public shareholding—the State Bank of Bikaner and Jaipur, State Bank of Travancore and State Bank of Mysore.

While it is safe to assume that the President won’t be objecting, it is also unlikely that any institutional investor will really challenge the process. The SBI owns 100% in the State Bank of Patiala and State Bank of Hyderabad, while the government owns 100% in BMB. Two other associate banks were merged with the SBI earlier: the State Bank of Saurashtra in 2008 and State Bank of Indore in 2010.

In the face of such power asymmetry, in which one set of shareholders has greater rights than another group, the predictable has happened. Left trade unions in Kerala have taken the deal to court; there it might languish for a time.

Two, the merger seems to overlook a critical, post-crisis concern—the too-big-to-fail (TBTF) question. Tremors of the 2008 trans-Atlantic financial crisis were felt all over the interconnected world. The TBTF theory posits that some institutions are so large and intricately interconnected with different parts of the economy that failure can create a systemic shock. This forced many governments to bail out large financial institutions with taxpayer money. It might also be instructive to note that many countries have been formulating preventive TBTF regulations. Australia, for example, has prohibited any merger between the country’s four largest banks. Switzerland, on the other hand, has the world’s most stringent capital norms.

The Reserve Bank of India (RBI)—in keeping with various multilateral agreements at the Financial Stability Board, G20 and the Bank for International Settlements—has designed a risk mitigation framework for dealing with “domestic systemically important banks” or D-SIBs. The framework recognizes SBI and ICICI Bank as D-SIBs, both of which must maintain higher common equity tier I (CET I) than their peers. It allows national authorities greater discretion in the selection and risk mitigation processes than what’s prescribed for global systemically important banks, G-SIBs.

But here’s the thing. Once the merger is completed, SBI could become part of the G-SIB club, ending RBI’s discretionary approach. What happens then? Will the current capital shield be adequate? If no, what impact will additional CET I have on expected efficiencies? Even if it doesn’t get clubbed with G-SIBs, RBI will perforce have to review its D-SIB framework.

Finally, a speculative thought. Rumours are China now wants in on plurilateral trade in services agreement (TiSA) and India has also expressed a similar desire. Leaked TiSA documents show nil barriers to financial services imports, including total freedom to overseas financial companies for acquiring local outfits. Is the SBI merger a pre-emptive move then?

Some of these conversations need to happen now, not post-merger. Especially whether bigger is always better.

This appeared in Mint newspaper on September 21, 2016, and can also be read here

Lost History: An encounter with the 'king' of Turtuk, a border village near Gilgit-Baltistan

The village is just 10 km away from Pakistan-occupied Kashmir and became a part of India as recently as 1971.

Entrance to the Royal Palace, Turtuk village

A guided tour of the Ladakh's Turtuk village, in the mountainous region of Baltistan that is on the border of Pakistan and India, ended at what is known in these parts as the Royal Palace. After a long walk down narrow and undulating lanes in the crisp afternoon sun, shepherded by a nimble 16-year-old, we had arrived at what was supposed to be the highlight of our excursion. At first glance, it was slightly underwhelming – the house is larger than its neighbours, but little else set it apart.

The palace doors opened into a colonnaded courtyard that supported a verandah with no visible access. A short flight of stone steps, which rose steeply through a hidden corner, brought us to a figure supine on a floor mat. Our guide gently nudged the figure – a man stumbled out of his afternoon siesta, disoriented by the sight of so many strangers. He was feeble and slightly bent.

Smoothing the creases on his shirt and patting his disheveled hair into place, he led us into a room, apologising for not according us a better welcome. He explained, somewhat diffidently, that working the fields in the morning sun had induced the mid-day torpor.

He then sat on a couch, but not before picking up a wooden sceptre, crested with a distinctive metal serpent head, and placing it pointedly on his lap. He then becomes Yabgo Mohammad Khan Kacho, the king of Turtuk and descendant of the Yabgo Dynasty of Chorbat-Khaplu, a region that now falls beyond the Line of Control and in the contested territory of Pakistan occupied Kashmir. Though he no longer enjoys the powers nor the official recognition as a past royalty, he is known in these parts as the king.

Yabgo Mohammad Khan Kacho, King of Baltistan.

Across the border

Turtuk is a quaint village perched barely 10 km from the Pakistan border, under the benign gaze of the K2 peak across the border. The village, located in the Sheyok river valley about 200 km from Leh, is a verdant relief amidst the spare and stark beauty of Ladakh’s landscape.

Turtuk, in Ladakh district, is in the Indian-administered part of the Baltistan region and borders Pakistan’s Gilgit-Baltistan area.

The Gilgit-Baltistan are has for years existed largely away from the glare of Indian and international media, but the spotlight has been on it for the past month, after Prime Minister Narendra Modi publicly promised – twice in quick succession, in his Independence Day speech and before that, in his concluding remarks at the all-party meet on Jammu and Kashmir in Delhi on August 12 – to highlight the plight of residents of Balochistan and Pakistan-occupied Kashmir to the world. While Balochistan is a province in Pakistan, which has been fighting for autonomy, Gilgit-Baltistan is a part of PoK.

The Gilgit-Baltistan territory is special – it is a crucible in which trade, culture, religion, languages and cuisines from Europe, Central Asia, Afghanistan and China have come together for centuries. India has made many claims over the province and many analysts have recounted its recent political history. Interestingly, a thin strip of this province juts into India.

The prime minister’s reference to the three disputed areas has got foreign policy and strategic experts parsing his words, as well as setting off a maelstrom of articles and Op-eds (examples are here, here and here).

Overnight, a new country

This prompted me to wonder: what would the people of Turtuk, just a stone’s throw away form Gilgit-Baltistan, make of Modi’s statement? Would they also be deconstructing his speech?

One thing is certain. Nationality or sovereignty are elusive, if not transient concepts for the king and villagers here. And there's a good reasons for this.

One night in December 1971, village residents went to sleep as Pakistan citizens. They awoke next morning as Indians. Turtuk, along with three other villages in the vicinity – Tyakshi, Chalunka and Thang – were occupied by advancing Indian armed forces during the 1971 war of liberation of Bangladesh.

Turtuk residents have only one grouse – the Indian army should have gone a little further and occupied the rest of Baltistan. The overnight change of sovereignty split many families along the Line of Control – parents on this side with children and grandparents on the other. Political conspiracies abound on why the Indian army did not move further afield when it was there for the taking.

Kacho, Turtuk’s king, also has some family on the other side. He traces his lineage to the Ghaz tribe from West Turkestan, a region today known as Central Asia. His ancestor, Beg Manthal, came to Baltistan in 800 AD from Yarkhand (which is part of modern-day China’s Xinjiang region) via the Saltoro ridge (which is to the west of the Siachen glacier) and conquered Khaplu, in modern-day Gilgit-Baltistan.

The Yabgo dynasty, Manthal onwards, ruled the Chorbat-Khaplu region of Baltistan for a millennium, expanding it over time to Ladakh’s frontiers on one side and to Ghizer district on the western edge of Gilgit-Baltistan. The dynasty ended in the first half of the 19th century when the Dogra empire, which had, in 1846 taken control of Kashmir, forming the princely state of Jammu and Kashmir, expanded its kingdom North and East.

A wall at one end of the room has the family tree painted on it, going back centuries.The king said the Indian army helped him document this. In the face of an elusive administration, the Indian army means many things to most Baltistan residents – employer; buyer of locally-produced vegetables, milk, fruits and meat; provider of healthcare and education as well as occasional source of telecom network and other basic infrastructure.

The king describes himself as a writer and said his father didn’t want him to work but just spread the word about their family. He was not trained in anything but made to read a lot. He read books written by local historians and decided that the best thing to do would be to tell his people what they were all about.

But, the Indian government banned his book based on complaints from a sect that saw blasphemy in his account of how their religious order was established, he said. He contested the ban in Indian courts and eventually won after years of litigation. But he rues the fact that he didn’t retain a single copy of the book – he doesn’t even remember the name of the Delhi-based publisher.

Connected, yet isolated

Turtuk is a microcosm of Baltistan’s inclusive culture: a multi-ethnic village, with around 4,000 residents speaking different languages and praying to different gods. Different denominations – Nurbakshi Shias, Sufis, Sunnis, Buddhists (and perhaps even Ahmadiyas and Ismaili Shias) – live peacefully, farming and trying to make sense of the burgeoning tourism business. Turtuk was opened up to tourists only in 2010. The chairman of the local school and healthcare committee remarked that many old Turtuk residents would long to see cities, but now, the cities were coming to see them.

Turtuk was an important junction on the Silk Route with ancient linkages to Tibet, Afghanistan and the steppes of Central Asia. A part of China’s One Belt, One Road initiative, an attempt to resurrect the Silk Route that connected parts of Asia, Europe and Africa, will now come close to Turtuk as it proposes to pass through Gilgit-Baltistan.

Turtuk residents fervently wish that the LOC opens up so they can meet family on the other side, re-establish social connections and perhaps even resume commerce.

The king is still recounting the region’s old linkages when his narrative is cut short with new arrivals, guests of a senior army officer posted in the vicinity. Yabgo Mohammad Khan Kacho apologises and rushes off to attend to the new rulers of Turtuk.

This article was originally published in www.scroll.in and can also be accessed here

Book Review: Repo And Its Masters

A RBI governor remembers his doughty fights, but cuts down on the math

WHO MOVED MY INTEREST RATE?
BY DUVVURI SUBBARAO
VIKING | PAGES: 323 | RS. 699

Central banks have been labelled exotic beasts: rarely seen in public, much less understood. Realisation of what central bankers do has been seeping in slowly. Over the past few decades, as bond and currency trading acquired gargantuan propor­ti­­ons, the arcane world of dealers kept a close watch on every statement coming out of central banks, parsing each phrase and analysing each nuance. Any action, or the faintest hint of a future one, had the potential to affect currency prices, bond rates and indi­vidual fortunes. This need for analysis and interpretation also produced a large tribe of writers called ‘central bank watchers’.

Over time, as societies overwhelmingly bec­a­me dependent on debt— for housing, education or buying their next television—larger sections of the population got interested in the central bank’s actions. Any increase or dec­­rease in interest rates, or liquidity conditions, had a direct impact on household incomes and lifestyles. And yet, despite this growing interface, cen­­tral banking remains shrouded in a mysterious and inscrutable cloak.

Former Reserve Bank of India governor Duv­vuri Subbarao makes a valiant attempt to lift this veil and demystify a central bank’s workings. This is a first and we hope this will enthuse others to share their views. But there are two ways of viewing the book’s purpose. One, in trying to explain a central bank’s operations, Subbarao creates an opportunity to justify his actions dur­ing 2008-13, a period of stubbornly high inf­l­ation, extraordinary exchange rate volat­ility and an unprecedented (and unbroken) spree of interest rate increases. A converse view is also possible: its primary function is to rationalise his actions and he uses it to dec­ode the RBI’s actions and working styles. Which set of lenses have been used? The narrative str­u­cture and the tenor seems to suggest it’s the latter.

This becomes clear as one ploughs thr­ough an otherwise eminently readable account. The book’s pre-launch publicity focused on the governor’s well-publicised conflicts with former Union finance ministers P. Chidambaram and Pranab Mukherjee. Central bankers have traditionally shared antagonistic relationships with fiscal authorities. The book dwells at length on Subbarao’s differences of opinion with Chida­m­baram and Pranab, and how rising prices and a slowing economy widened the rift between Mumbai’s Mint Street and Delhi’s Raisina Hill.

But, with due apologies to Shakespeare, met­hinks the governor doth complain a bit. This is not to imply he was wrong in his stand on interest rates. Subbarao stood up against the collective might of the government, Parliament, a misinfor­med finance sector and uninformed commentariat by defending his right to raise interest 13 times in quick succession. He explains quite expansively why the situation warranted such drastic action. The fiscal and monetary expansion post the 2008 trans-Atlantic financial crisis, without adequate investment in production and supply capacities, embedded inflationary tendencies in the economy. Given political leaders’ reluctance to tighten fiscal reins, it was left to the monetary authority to attempt demand compression through interest rate increases.

Face-offs between monetary and fiscal auth­orities are built into the design; Subbarao mentions as much in the book. In times of crisis, both work in lockstep, as was evident after the 2008 meltdown. But, the impact of an expansionary fiscal policy on inflation and economic growth was ignored by the political class and India’s cossetted business interests. Much of the book describes this clash of ideals.

But there are gaps in Subbarao’s acc­ounts—both when describing clashes with North Block or when recounting challenges faced during vital post-crisis moments. Here are two examples.

First, there’s no mention of his immediate predecessor’s track record. Subba­rao mentions Y.V. Reddy only in passing while mentioning how crisis forced him to rev­erse his predecessor’s string of interest rate increases. We are not asking for public display of dirty laundry. Reddy too had to contend with a frequently (and publicly) remonstrating finance ministry. Reddy’s interest rate increases, to burst speculative asset market bubbles, earned him unstinted praise from economists and observers worldwide.

But, here’s the thing. Subbarao was fin­ance secretary when Reddy was busy inc­reasing interest rates to stave off risks. Interestingly, even Chidambaram was fin­ance minister during that period and he made public his displeasures with Reddy’s insistence on rate hikes. It would have been interesting, and more honest, if the book also disclosed Subbarao’s role as Chidambaram’s finance secretary in his engagements with Reddy, and the lessons learnt from those interactions before moving to RBI. Subbarao limits his interface with Reddy to discussions on RBI’s balance-sheet; I am sure there must be more. If the governor is going to reveal all about his skirmishes with political authorities, his interaction with RBI as finance secretary should also be fair game.

Two, there’s not enough explanation about how the RBI managed its balance-sheet in the aftermath of the crisis. Or, enough inside dope about the crisis days following the closure of Lehman Brothers. Subbarao describes how the monetary tap was kept open at full tilt to give the financial sector confidence that funds were always available. This was largely a signalling and confidence-building measure to avoid payment imbroglios or defaults which get amplified into panic during crisis times. As part of the strategy, RBI kept repo rates (the interest rate at which RBI lends to banks against government securities) low; but the reverse repo rate (interest rate at which RBI accepts money from banks against securities) was always kept 1.5 per cent higher. This was particularly true of December 2008.

Interestingly, this rate difference converted RBI—usually known as a lender of last resort—into a borrower of last resort. Banks would occasionally use the repo window to smoothen temporary mismatches, but would dump far excess cash with RBI’s reverse repo window. Clearly, credit aversion in the immediate aftermath of the crisis forced banks to seek safe havens for their surplus cash. Given money’s fungible character, we also do not know if banks borrowed from the repo window, turned around and tipped over the same money at the reverse repo window, thereby earning a neat 1.5 per cent without breaking into a sweat. The central bank’s annual report for 2008-09 (June 30 year-ending) highlights this anomaly: outstanding repos shrunk to Rs 895 crore (previous year Rs 22,805 crore) and rev­erse repos swelled to Rs 88,335 crore (previous year Rs 300 crore). This surely had some consequences and it would have been interesting to know Subbarao’s views.

But, beyond this, Subbarao has done a superb task of shedding some light on a central bank’s specialised role, especially by making it accessible to a wider spectrum of readers. He uses simple language and infuses some humour when necessary. It stops short of being a complete masterclass because encounters with the political class keep intruding. But somebody needed to talk about these incidents because the public rarely gets to know how both institutions interact. Yet, it also doesn’t do full justice to the political economy of Indian central banking. So, what is it, a book on central banking or an expose? I see it as setting the record straight.

This book review first appeared in Outlook magazine and can also be read here

Book Review: The Wrong Idea of America

A former White House aide and economist makes a surprisingly sloppy appraisal of US’ problems

The Price of Prosperity: Why Rich Nations Fail And How To Renew Them
Todd G Buchholz
Harper, an imprint of HarperCollins Publishers
367pp; $29.99

Brexit has eloquently demonstrated what a terrible bummer nostalgia can be. Wallowing in a sense of persecution and aching for long-lost days of glory, British leaders ceaselessly campaigned to leave European Union; and, nostalgia made for a good tool to rouse, exhort and even to delude. But with “leave” leaders and campaigners increasingly abandoning ship, it is quite evident that nostalgia has limited currency in good governance.

Author Milan Kundera was rather cutting about it: “In the sunset of dissolution, everything is illuminated by the aura of nostalgia, even the guillotine.” When former empires and superpowers refuse to go gently into the fading light or remain steadfast in denial about reality biting their heels, nostalgia is a helpful analgesic that numbs the pain.

Todd G Buchholz uses this anaesthesia to quite remarkable effect. His latest adds to the growing list of works harking back to an imagined ideal period, keen to revive an illusory greatness. This sense of “greatness” is also quite unidimensional, with some of modernity’s post-War distortions embedded deep.Greatness of another kind

The author’s mission is simple: he sets out to diagnose what’s gone wrong with his great country — and here greatness is primarily a shorthand for prosperity — and how it can be revived. But do not be misled by the words “Rich Nations” in the title; this book is mostly about the US. His prescriptive analysis also betrays his politics, which often dips into partisan territory; ironically, he remains blissfully unaware of just how much this limited political worldview has eroded his “great’ nation.

For example, he laments how the Barack Obama administration has not taken advantage of current low interest rates by issuing long-tenor bonds of, say, 50 or 100 years’ maturity. Locking into long-maturity bonds at rock-bottom rates does indeed make sense. Instead, he sees White House opting for the shorter end of the yield curve because interest rates are usually lower at that end. And, here comes the conspiracy theory: lower interest rates help deflate debt-to-GDP ratios and provides an illusion of a lower budget deficit, “flattering the president’s fiscal profile”.

Strangely, the author ignores how a partisan Congress has dogged President Obama’s executive actions. Is there a possibility that the Obama administration issued short term bonds to avoid a combative and obstructionist Congress, which needed any excuse — including bonds longer in maturity and higher in interest rates — to trip up the president?

It’s also funny that Buchholz should complain about short term holdings: as former managing director of Tiger hedge fund, he should know a thing or two about them.The immigrant’s case

Buchholz’s starting hypothesis posits that as nation-states get prosperous, their birth rate drops. Consequently, there are more elderly than young working people. Who does all the work then? The immigrant, of course. And, then he remits his earnings home. Ergo: the immigrant should be integrated better into the American society, so that he can look up to George Washington as a forefather, even if he surrounds his Thanksgiving turkey with some ethnic dishes.

So there it is, Solution No. 1: a strange nationalistic formula that can cure numerous economic ills. His nationalism is also time-stamped: it must pay obeisance to only cultural icons adopted in the past 240 years; whatever existed before July 4, 1776, is not worth knowing. Nationalism also means regaining GMC — grit, mobility and confidence — which defined American exceptionalism in the past.

This is a strange salmagundi of suggestions, which flirts with patriotism without trying to sound too reactionary, strains to accept immigrants without sounding xenophobic. Anecdotal evidence makes up for actual facts, poor research leads to hypotheses, history is used to suit pre-determined conclusions.

Let’s look at poor research: “Traditional Hindu culture honours boys above girls, since the religion requires that parents be buried by a son.” Will somebody please educate Mr Buchholz on Hindu funeral rites, especially since Hindu Americans make up almost 1 per cent of the country’s population.Missing in action

And that’s exactly the nub of everything that’s wrong with this book. While dwelling upon patriotism and nationalism in good motherhood, apple-pie American style, Buchholz misses the US’ main fault-lines — growing inequality — or the myriad reasons behind stagnating real incomes.

It is glib to point fingers at outsourcing but how do you sort out Corporate America, with its flawed governance structures and undue focus on three-monthly profits (which rewards large-scale retrenchment if it helps nudge up stock prices)? Buchholz is silent. Not a single word about how strong, public institutions made the US a true liberal democracy and how their decay is perhaps an important cause behind the slip from “greatness”.

There is also no mention about the US’ hegemonic role in global negotiations, which has systematically eroded multilateralism. The US was one of the principal founders of the post-WWII global multilateral architecture which was then successfully subverted to suit narrow, partisan, private corporate interests. And, of course, Buchholz refers to the 2008 meltdown as a “global” financial crisis, which in itself is symbolic of how blinkers have narrowed the fabled American vision.

In trying to attempt a broad-brush future manifesto for the US, Buchholz may have bitten off a bit too much. There is a lot of research, but some of it fails to meet strict academic rigour and some of it is pointless. The book is readable, written in fast-paced prose and that is it’s only saving grace.

This book review was originally published in The Hindu BusinessLine. It can also be read here.  

Key GST Lessons From The World

The long march to implement the long-awaited Good and Services Tax in India has just begun. It is instructive to understand how other countries introduced this tax and cherry-pick lessons from their experiences

As India gets ready to celebrate the 70th anniversary of its independence, it is also preparing for another important milestone. Great hopes have been pinned on the Goods and Services Tax (GST), which will liberate Indian citizens from the tyranny of multiple levies and tax rates. This tax will unite almost all state and central indirect taxes into one single category, thereby creating a true single market in the country.

The passage of the Constitution (122nd amendment) Bill on 3rd August in the Rajya Sabha marks the crossing of the first hurdle in implementing the transformational GST regime. However, there is still substantial legislative work to be done – apart from the amendment (which will now travel to the Lok Sabha, the President’s office and state assemblies for ratification), Parliament will have to vote in two further bills to make GST a reality.

Beyond the legislative workload, Indian administrators and businesses will need to do their homework before this reality sets in. There are approximately 140 countries in the world that have introduced GST (also called VAT, or Value Added Tax), and there are manifold lessons to be drawn from their respective implementations.

Malaysia was the most recent country to implement GST in 2015, having announced its intention to do so in 2009. Malaysia’s experience highlights how inadequate preparation can hamstring the tax’s speedy implementation from the outset.[i]Malaysian businesses and tax authorities had a harrowing time adjusting to the new system, which was riddled with uncertainties and teething problems. The Malaysian government had to contend with street protests by small businesses and traders who were confused by the new system—whether in calculating the correct value-added rates, or in seeking tax credit refunds. Unsurprisingly, opposition political parties found it opportune to fish in these troubled waters, adding to the government’s mounting operational woes.[ii]

There was another layer of complexity. Malaysia had a multiple GST rate structure, much like the one proposed in India. A 6% GST (among the lowest in the world) was introduced, with some essential goods exempted and some goods attracting a zero rate i.e they were not exempt and could be taxed later. India too has proposed a multi-tiered structure, which will be finalised by the GST Council whenever it is set up.

Two clear lessons emerge from the Malaysian experience. Under pressure to launch GST as soon as possible, the Indian government must resist temptations to truncate the implementation process, which will include the training of tax officers and business executives. A presentation by revenue secretary Hasmukh Adhia estimates that 60,000 tax officials in both central and state governments will need to be trained.[iii] GST is a tectonic shift in the indirect tax architecture: the point of taxation shifts from producers to consumers, requiring a significant reorientation in philosophy and perspective. This overhaul cannot be completed unless the technology backbone is in place and all the relevant economic agents are registered. That alone is a mammoth task. There should, therefore, be no compulsion to implement GST by April 2017 if either the system is not fully tested or all the pieces are not firmly in place.

A related issue almost tripped up Malaysia’s GST experiment: the timely payment of input tax credit refunds.[iv] Unless the necessary technology infrastructure is installed, it can take months to refund tax credits, thereby creating cash flow problems for all links in a supply chain. This can easily convert GST supporters into detractors. Delaying tax credit refunds leads to protracted litigation and provides perverse incentives for the supply chain to stay outside of the organised system.

A second set of lessons can be drawn from Singapore. The city-state introduced GST in 1994 but witnessed a sharp rise in inflation soon after its introduction, mirroring the experience of many other countries.[v] Although inflation rates tend to moderate after a couple of years, the Indian government must be prepared for an initial surge because of India’s unique supply-side pressures, which tend to firmly embed inflationary expectations in households and businesses. India can consider what many countries did: initiate anti-profiteering measures at the retail level to protect consumers from price gouging.

Subsequently, the Singapore government faced other predicaments, like t the need to increase GST rates without stoking inflationary pressures. Eventually Singapore did increase GST rates (from 3% in 1994 to 7% currently), but simultaneously cut income tax rates (both at the individual and corporate levels) and accelerated the delivery of welfare benefits to lower income sections.[vi] While GST is efficient, it can also be regressive, especially for low income workers or pensioners. The Indian government therefore needs to be cognisant of this, and act cautiously.

The final set of lessons come from Canada, which introduced GST in 1991 amidst great internal conflict and disagreement. In fact, at the tax’s introduction, three provinces–Alberta, Ontario and British Columbia–even sued the federal government for violating constitutional agreements and limits. But over the years, Canada has pioneered a unique system that allows for three different models to co-exist.[vii] [viii]For example, Quebec is permitted to administer its own value-added tax alongside a federal GST. Quebec is responsible for all tax administration in the state, independently determining its tax base, independently fixing the state VAT rate, and even remitting federal GST collected in the state to the central government for a fee.

Compared to Canada, India has been able to forge a broad consensus among most states through a process of negotiation and compromises. The only point of disagreement remains the GST rate, which has been entrusted to the GST Council. This may lead to intense political manoeuvring with demands for special status or special rates. Tamil Nadu has already expressed its dissatisfaction with GST.

These examples clearly illustrate that the GST battle has barely begun: there are many mountains to climb, and multiple fires to extinguish along the way. The process of bipartisan consultation and consensus-building with states and various stakeholders must continue to make GST a cornerstone of successful and sustainable fiscal federalism.

This feature was exclusively written for Gateway House: Indian Council on Global Relations. You can also read it here.

References

[i] Pachisia, Vivek; Lessons from countries that have implemented goods and services tax; Financial Express; July 28, 2016;http://www.financialexpress.com/economy/gst-lessons-from-countries-that-have-implemented-the-goods-and-services-tax/331289/

[ii] Dey, Sudipto; Some Lessons From Malaysia That India Can Use; Business Standard; New Delhi; June 13, 2015; http://www.business-standard.com/article/economy-policy/gst-some-lessons-from-malaysia-that-india-can-use-115061300748_1.html

[iii] Adhia, Hasmukh; Goods and Services Tax: Next Steps; Department of Revenue, Ministry of Finance, Government of India; New Delhi; August 4, 2016;http://finmin.nic.in/press_room/2016/GST_nextstep_04082016.pdf

[iv] Beh, Yvonne & Tan Yi Lin; GST In Malaysia: One Year On; Wong and Partners; April 2016;http://www.wongpartners.com/files/Uploads/Documents/Type%202/WP/al_kulalumpur_gstmalaysia_apr16.pdf

[v] Ilias, Suhaimi with Zamros Dzulkafli, Ramesh Lankanathan and William Poh; Malaysia: GST- Early Impact Assessment; Maybank KimEng; April 2015;http://info.maybank2u.com.sg/pdf/investment-insurance/misc/misc-15-04-15-3.pdf

[vi] Singapore Government; How Is the Government Helping to Mitigate Inflation in Singapore; December 14, 2012; https://www.gov.sg/factually/content/how-is-the-government-helping-to-mitigate-inflation-in-singapore

[vii] Kumar, Sanjay with ML Sukhpal, Sandeep Rawal, Ashok Kr Pandey, Samar Nanda; Policy Paper on Role of Central Board of Excise and Customs in GST; National Academy of Customs, Excise and Narcotics;http://nacen.gov.in/inspire/uploads/downloads/569887ea212d1.pdf

[viii] Sharma, Radheshyam with JK Simte, MK Sarangi, KGVN Surya Teja, Sydney D’Silva and Manish Thapliyal; How to achieve administrative harmony between centre and states in the GST regime; National Academy of Customs, Excise and Narcotics; January 6, 2016;http://nacen.gov.in/inspire/uploads/downloads/56989a961d524.pdf