Budget 2015: No Heed to Economic Diplomacy

Finance minister Arun Jaitley’s 2015-16 Budget resonates only partially with Prime Minister Narendra Modi’s arc of economic diplomacy; it lacks strategic intent that could invest India with some geo-strategic heft in the years to come

Soon after he was sworn in as Prime Minister, Narendra Modi invested India’s languishing economic diplomacy with a renewed energy. It was therefore widely expected that Budget-2015 would achieve strategic convergence with Modi’s vision of using economics to drive India’s foreign policy. But the Budget seems to have achieved that only partially.

Economic diplomacy has a two-pronged role in the Indian economy. One, to open up markets for Indian goods, services and investments, with special emphasis on widening and deepening India’s footprint in neighbouring countries and newer markets like Africa and Latin America. Two, Modi’s whirlwind foreign engagements in the first eight months of his premiership were also focused on attracting foreign inward investments — from governments as well as the private sector — to further invigorate his “Make In India” programme.

On the first count, the Budget is conspicuously silent. It is on the second that the Budget holds out some hope.

The silence in the first instance is surprising. With the U.S., European and Japanese economies — which have also been India’s traditional export markets — still struggling to break out of a low-growth trap, it is imperative for India to create a beach-head in newer markets for its goods, services and investments. Post 2008, India was forced to look to Africa and Latin America to maintain export buoyancy. But, both continents together account for a paltry 15% of India’s total exports and there is nothing strategic in this Budget that indicates a desire to achieve higher numbers.

Modi’s foreign policy priorities have also included a renewed thrust on India’s immediate neighbourhood — countries in both the South Asia Association for Regional Cooperation (SAARC) and Association of Southeast Asian Nations (ASEAN). Barring the announcement of a project development company to help facilitate Indian private sector investments in Cambodia, Myanmar, Laos and Vietnam (CMLV), the Budget is bereft of any meaningful strategy. For example, there is no mention of, or funding allocated to, linking India’s North East to ASEAN through an all-weather transport corridor, an issue that has been discussed and accepted. Even with CMLV, there is no clarity on the investment-absorbing capacity of the individual countries or the kind of sectors Indian companies can focus on [1].

The Budget’s commitment to economic diplomacy is also reflected in money kept aside for various ministries. Budget allocation for 2015-16 under the head “Technical & Economic Cooperation with Other Countries and Advances to Foreign Governments” in the Ministry of External Affairs (MEA) [2] is up by 25.88%. But when compared with the original budget estimate, the allocation is actually down by about 3.5%. Worse, the budgetary outlay for the Department of Commerce in the Ministry for Commerce and Industry (the bulk of which is earmarked for foreign trade and export promotion) for 2015-16 is lower than both the revised and budget estimates for 2014-15. [3]

Another missed opportunity is the Indian Technical and Economic Cooperation (ITEC) programme, a key instrument of India’s development diplomacy which is administered by MEA. Despite its popularity, it’s allocation at Rs 180 crore for 2015-16 is just 16% higher than the actual expenditure last year. 

An argument can be made that given the shrinking fiscal space for the Centre, and the pressure to kickstart growth impulses through public spending, little is left to spare for economic diplomacy. However, that logic is self-defeating because the gains to economy — both in terms of growth and revenue — from accelerated geo-economic strategies is well known.

What makes these lapses doubly alarming is the grim future scenario for India’s trade regime outlined in the Economic Survey, which was released by Chief Economic Advisor Arvind Subramanian only a day before the Budget announcement. [4]

The survey singles out three main challenges: the phenomenon of unbundled and geographically dispersed global value-added manufacturing chains into which India has integrated slowly, the imminent rise of two large trade blocs (Trans-Pacific Partnership with Asia and Trans-Atlantic Trade and Investment Partnership with Europe) which will cover half the world’s trade and China’s emergence as a major voice in trade negotiations. India, says Subramanian, has only two choices: measured integration (an euphemism for status quo) or ambitious integration, which will require India joining the TTP (currently a remote possibility). The flip sides to both options are that measured integration will leave Indian exports isolated, while joining the TTP will require substantial liberalisation which may be out of alignment with domestic level reforms.

As China did during its entry to the WTO in 2001, India can forcefully dovetail the domestic reforms agenda to an external priority. But the country’s competitive democratic politics and the presence of varied interest groups makes that task exceedingly difficult.

Gateway House has been advocating a greater impetus towards improving India’s relationships with neighbours in SAARC and ASEAN, through a strategy of Corridors of Development and Circles of Influence, as a means of achieving some geo-strategic primacy in the coming years. [5] [6] This Budget could have begun that journey.

But, to be fair, finance minister Arun Jaitley has introduced many measures to attract fresh investment into manufacturing and services. These moves may not be headline-grabbing, but are a nuts-and-bolts policy framework: they seek to improve the ground conditions for attracting investments, facilitate efficient use of financing, eliminate legal obstacles that inevitably lead to disputes and prolonged legal battles, simplify processes and stabilise the tax regime. There seems to be a realisation in the Budget, as well as in the Railway Budget of February 26, that investors — whether domestic or foreign — are unlikely to part with their money unless the ground conditions are improved substantially.

The specific measures introduced by Jaitley – heeding the advice of the Economic Survey – include eliminating distinctions between different categories of foreign investors, one-source clearance for regulatory approvals, easier dispute settlement mechanisms, broadening scope of investment vehicles for foreign capital, providing tax clarity and stability. [7]

Hopefully, the oversight in providing the Budget with a strategic edge through geo-economics will be corrected in the quinquennial Trade Policy 2014-2019, which is already delayed and is likely to be announced soon by Commerce Minister Nirmala Sitharaman.

REFERENCES:

[1] Mathur, Akshay; Policy Catalyst: Seven Sisters’ Corridor; 30 May, 2014; Gateway House; http://www.gatewayhouse.in/policy-catalyst-seven-sisters-corridor/

[2] Notes of Demands for Grants 2015-16; Demand No 33, Ministry of External Affairs; Expenditure Budget, Vol II; http://indiabudget.nic.in/ub2015-16/eb/sbe33.pdf

[3] Notes for Demands for Grants 2015-16; Demand No 12, Department of Commerce, Ministry of Commerce and Industry; Expenditure Budget Vol II; http://indiabudget.nic.in/ub2015-16/eb/sbe12.pdf

[4] Economic Survey 2014-15; Department of Economic Affairs, Ministry of Finance, Government of India; February 27, 2015; http://indiabudget.nic.in/es2014-15/echapvol1-01.pdf (Page 37)

[5] Kripalani, Manjeet; Circles & Corridors of Economic Diplomacy; 18 April 2014; Gateway House; http://www.gatewayhouse.in/circles-corridors-of-economic-diplomacy/

[6] Gateway House Fellows; India’s foreign policy priorities 2015; 1 January 2015; Gateway House; http://www.gatewayhouse.in/indias-foreign-policy-priorities-2015/

[7] Jaitley, Arun; Minister of Finance, Government of india; Speech to Parliament while presenting Budget 2015-16; 28 February 2015;http://indiabudget.nic.in/ub2015-16/bs/bs.pdf

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/budget-2015-no-heed-to-economic-diplomacy/

and

Quartz India: http://qz.com/354516/another-area-where-modis-budget-disappointed-economic-diplomacy/

A Tobin Tax For India

In its recent monetary policy document, the Reserve Bank of India has imposed strict maturity conditions on foreign portfolio investment in debt to get a better handle on risk. But a fiscal solution would be more elegant and effective

The nervousness is back, and so are direct physical controls. In an otherwise staid monetary policy document released on 3 February 2015, Reserve Bank of India governor Raghuram Rajan has inserted one small restriction: henceforth all foreign portfolio investors investing in debt instruments—issued by government or private sector companies—have to hold on to their investments for a minimum of three years.

The policy decision is a discreet admission of the risks confronting the Indian economy, as well as a hint of the Indian central bank’s anxieties.

But imposing administrative controls in this day and age—even if they are meant to mitigate risks—sends wrong signals, especially when alternative fiscal instruments are available to achieve the same results. Even the European Union has agreed to implement such a measure despite stiff opposition from Britain and Sweden: the magic bullet is called a Tobin tax.

India must also consider introducing such a tax With Finance Minister Arun Jaitley searching for newer sources of revenue, Budget 2015-16 (to be announced on February 28) will be the right vehicle for announcing this levy.

Named after American economist and Nobel laureate James Tobin, the tax is levied on financial transactions and is aimed at curbing speculation and volatility. Although the tax was originally proposed by Tobin in the 1970s for a post-Bretton Woods global financial system—to curb short-term currency speculation and its attendant risks to the economy (through high interest rates)—over time it has come to denote taxes on all kinds of financial transactions, with each country re-interpreting the concept in its own unique manner. For example, Italy imposed a variation of the tax on high frequency share trading in September 2013—a 0.02% tax on trades occurring every 0.5 seconds or faster. [1]

After years of discussions and dissent, 11 European countries—Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia—have also decided to introduce a financial transactions tax from 1 January 2016. [2] Under the finalised proposal, the 11 countries will impose a 0.1% levy on exchange of shares and bonds, and a 0.01% impost on derivative transactions.

However, Britain and Sweden have already voiced their dissent to the proposal and are likely to oppose its enactment. It is also not known whether Italy will continue with the tax on high-frequency trading after 2016.

The Tobin tax approach has been tried in other countries as well—such as Thailand, Brazil, Chile, and Malaysia—with mixed results. However, in Brazil and Malaysia (and, to some extent, in Chile) the tax is said to have achieved the desired results of curbing volatile short-term currency flows.

India already has a form of Tobin tax in place—the Securities Transaction Tax (STT). Introduced in 2004, the STT is levied on every transaction of securities listed on the stock exchanges and mutual funds. According to Budget documents, the STT helped net Rs. 5,497 crores revenue for the government during 2013-14. [3] The estimate for 2014-15 is Rs. 5,991 crores.

A Tobin tax could be levied on foreign portfolio investors who decide to cash out their investments in Indian bonds before a certain period. This has dual benefits—the investments stay for a longer and predictable period (thereby insulating the economy from egregious volatility), and earn additional revenue for the government as well.

This might be much more elegant than what the RBI is proposing. The RBI monetary policy document states: “…it is decided in consultation with Government that all future investment by FPIs in the debt market in India will be required to be made with a minimum residual maturity of three years. Accordingly, all future investments within the limit for investment in corporate bonds, including the limits vacated when the current investment by an FPI runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of three years. Furthermore, FPIs will not be allowed to invest incrementally in short maturity liquid/money market mutual fund schemes.” [4]

This is a direct administrative decree that not only transmits confusing signals to market participants but could also incur their displeasure. Rajan even admitted in a recent newspaper interview: “I generally believe we should not micro-manage. But the one place where I do make a strong exception is on financial stability. There are situations when market participants do not fully internalise the consequences of their action because they know they can leave before the consequences hit them.” [5]

One reason for the directive could be swelling short-term loans and the bunching up of repayments in the near future. However, data seems to indicate otherwise: according to external debt data till 30 September 2014, released by the Ministry of Finance, short-term debt is only 18.9% of the total external outstanding debt of about $456 billion. At the end of June, it was slightly higher at 19.6%. [6]

So, why is the RBI imposing this diktat now? Clearly, it is a bit jumpy about the consequences of an interest rate hike by the U.S. Federal Reserve Bank some time this year. When that happens, many global investors are expected to withdraw funds from emerging markets like India and invest in the U.S. instead.

Such an outflow could create pressure on the current account, the rupee exchange rate, and on domestic interest rates. India experienced this in 2013. Rajan wants to bullet-proof the balance-sheet not only before the event, but also prior to the announcement of the Budget at the end of February.

References

[1] Clinch, Matt, Italy launches tax on high-frequency transactions; CNBC, 2 September 2013, <http://www.cnbc.com/id/101002422#>

[2] European Commission, Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax, 14 February 2013, <http://ec.europa.eu/taxation_customs/resources/documents/taxation/com_2013_71_en.pdf>

[3] Ministry of Finance, Government of India; Revenue Budget, Budget Documents, <http://indiabudget.nic.in/ub2014-15/rec/tr.pdf>

[4] Rajan, Raghuram G, Sixth Bi-Monthly Monetary Policy Statement; 5 February 2015, <http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=33144>

[5] Sriram R., Bodhisatva Ganguli and Gayatri Nayak, ‘The War on inflation is still not won: RBI Governor Raghuram Rajan’, The Economic Times, 5 February 2015, <http://articles.economictimes.indiatimes.com/2015-02-05/news/58838165_1_rbi-governor-raghuram-rajan-urjit-patel-committee-inflation>

[6] External Debt Management Unit, Economic Affairs Department, Ministry of Finance, Government of India, India’s External Debt as at End-September 2014, December 2014, <http://finmin.nic.in/the_ministry/dept_eco_affairs/economic_div/ExternalDebt_Sep14_E.pdf>

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/a-tobin-tax-for-india/

and

The Hindu BusinessLine: http://www.thehindubusinessline.com/opinion/tobin-tax-makes-a-lot-of-sense/article6898724.ece?homepage=true

India-U.S. BIT: Not A Done Deal Yet

India is revising the model draft agreement of its existing bilateral investment treaties. Some of the new clauses are unlikely to be accepted by either U.S. negotiators or U.S. corporations without substantial dilution

U.S. President Barack Obama’s second visit to India has resurrected hopes that the two countries will revive talks on the dormant but in-progress Bilateral Investment Treaty (BIT). A BIT is being eagerly sought by both sides—from the U.S., to provide comfort to American companies that they will not be treated unfairly, and from India in the belief that it will help increase foreign investment inflows into India.

But negotiating the many tripwires of the BIT will take time and effort. It may therefore be wise to rein in the optimism that is usually generated by high-profile state visits and the associated optics. More so because every significant India-U.S. bilateral visit in recent times—by Prime Minister Narendra Modi to Washington DC in September 2014, by U.S. Secretary of State John Kerry to India in June 2014 and January 2015, and by U.S. Trade representative Michael Froman in November 2014—has rekindled expectations about the abandoned BIT.

Talks on a BIT between the two countries have been on hold since February 2014. [1] Preparations to restart the conversation resumed in the backrooms soon after Modi’s swearing-in on 26 May 2014. Kerry discussed the pending BIT agreement with Modi on the sidelines of the Vibrant Gujarat Summit earlier in January. Diane Farrell, acting president of the U.S. Indian Business Council, confirmed this in a press statement. [2]

However, many hurdles will have to be cleared before any real progress can be made on the BIT. One of the obstacles is that India’s own BIT regime—the Bilateral Investment Promotion and Protection Agreement (BIPPA)—is in cold storage. India is currently reviewing the draft of the existing model agreement and is yet to produce a blueprint that is acceptable to all stakeholders, including different ministries (such as Finance, Commerce, Law and External Affairs). India has signed 83 BIPPAs since 1994 and enforced 72 of these agreements.

The existing text has been under review since early 2013 because many international companies have initiated overseas arbitration against the Indian government—17 new arbitration proceedings over issues as varied as Supreme Court’s cancellation of 2G licences and retrospective taxation notices were filed in the past two years alone. The companies which have sued the Indian government include Deutsche Telecom, Vodafone, and White Industries, under India’s BIPPAs with Germany, The Netherlands, and Australia, respectively.

Another speed-breaker is conflict within the government. The Department of Industrial Policy and Promotion (DIPP, in the Ministry of Commerce and Industry) is opposed to BIPPAs in general [3, 4]. The DIPP is responsible for framing India’s foreign direct investment (FDI) strategy, as well as promoting, approving, and facilitating FDI. The DIPP believes that a conducive economic and legal environment is sufficient to attract foreign investments. It also believes that the existing BIPPAs are likely to result in increased lawsuits and has suggested that the sunset clause in these agreements be invoked to annul them. On the other hand, India’s finance and external affairs ministries are both in favour of an overhaul of the existing template, which will then have to be applied to all existing 83 agreements.

The conflict also arises from the government’s duality in matters of foreign investment—while the DIPP is responsible for FDI, the Ministry of Finance is responsible for administering the BIPPAs.

Talks could face headwinds due to certain new clauses in the draft model agreement. There is a proposal to dilute the “investor-state dispute settlement” (ISDS) system. Unlike the existing contract, henceforth foreign investors will not be able to take the Indian government to international arbitration unless they have first exhausted all legal and administrative options within India.

Clearly, this is a reaction to the spate of offshore arbitration proceedings. It is likely that this defensive move was inspired by external developments. Brazil has eschewed ISDS and South Africa is likely to follow. Australia is under pressure from its civil society to drop ISDS from all its agreements (especially the one with U.S.) and not from a select few, as is the case currently.[5]

The entire ecosystem of perverse incentives built around the international arbitration system could have also compelled the Indian government to dilute ISDS—armies of highly-paid, ambulance-chasing lawyers who have created an entire business model out of arbitrations and arbitrators who keep dragging cases on because they get paid handsomely by the hour—all operating in a highly secretive system. [6] The reworked BIPPA draft tries to ensure a transparent arbitration system by stipulating certain conditions.

But a BIT bereft of ISDS is bound to be opposed by American negotiators and potential U.S. investors. The popular narrative has portrayed the Indian judicial system as slow and inefficient. Indian authorities, on the other hand, are wary of biases in the overseas arbitration tribunals. Achieving a consensus between India and the U.S. on this count is going to be tricky, but India seems to have global precedent set by Brazil, Australia and South Africa in its favour.

A deal-breaker could be intellectual property rights (IPR), a vexed issue on both sides. The U.S.’s private sector has been persistently lobbying with its government for extracting concessions from India, with the National Association of Manufacturers even pushing the U.S. Trade Representative to label India as a “priority foreign country”, an epithet reserved for the worst IPR offenders.

India’s counter-argument has been that its IPR regime is compliant with the World Trade Organisation’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) multilateral agreement, and it considers the U.S.’s Special 301 report—an annual publication from the United States Trade Representative (USTR) identifying trade barriers to U.S. companies and countries which do not provide “adequate and effective” protection of intellectual property rights—unilateral.

Several other prickly issues could sabotage talks—a proposal to drop the most favoured nation status from the agreement, re-phrased expropriation clauses, and re-worded text that ensures that the BIT/BIPPA does not end up favouring foreign investors while discomfiting domestic ones.

Negotiations are all about give-and-take, ceding some strategic space while appropriating critical concessions. This is, admittedly, a time-consuming process. A lot will, however, depend on American corporations and their attitude to doing business in one of the world’s biggest and fastest growing markets in the world.

REFERENCES

[1] Parashar, Sachin, ‘India, U.S. Agree to Restart Talks on Bilateral Investment Treaty’, Times of India; 12 January 2015, <http://timesofindia.indiatimes.com/india/India-US-agree-to-restart-talks-on-bilateral-investment-treaty/articleshow/45846021.cms>

[2] US India Business Council, USIBC Members Brief John Kerry, Secretary of State, and Catherine Novelli, Under Secretary of State for Economic Growth, Energy, and the Environment at Vibrant Gujarat 2015, 13 January 2015, <http://www.usibc.com/press-release/us-india-business-council%E2%80%99s-delegation-vibrant-gujarat-hosts-us-secretary-state-john>

[3] Sidhartha, ‘Finance ministry to move Cabinet for clearing new BIPA text’, Times of India, 24 June 2014, <http://timesofindia.indiatimes.com/business/india-business/Finance-ministry-to-move-Cabinet-for-clearing-new-BIPA-text/articleshow/37108910.cms>

[4] Press Trust of India, ‘Finance & Commerce Ministry to discuss draft BIPA model tomorrow’, Business Standard, 13 August 2014, <http://www.business-standard.com/article/pti-stories/fin-min-com-ind-min-to-discuss-draft-bipa-model-tomorrow-114081300432_1.html>

[5] Chan, Gabrielle, ‘Bill to ban investor-state dispute settlements garners support’,The Guardian, 14 April 2014, <http://www.theguardian.com/world/2014/apr/14/bill-to-ban-investor-state-dispute-settlements-garners-support>

[6] The Economist, The arbitration game, 11 October 2014, <http://www.economist.com/news/finance-and-economics/21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration>

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/
and
Quartz India: http://qz.com/332427/the-biggest-investment-deal-between-india-and-the-us-is-nowhere-close-to-completion/

Time To Put Substance Before Style

China now views itself as an emerging superpower rather than a ‘developing’ country. India should take this into account

Long after President Xi Jinping has flown back to Beijing, there will remain a host of prickly issues that senior ministers and diplomats on both sides will need to bang heads over. During President Xi’s 48-hour whistle-stop through Ahmedabad and Delhi, the climate-controlled atmospherics, the fastidiously choreographed diplomatic pas de deux on Sabarmati, the thunderous rhetoric and the flurry of MoUs made for good optics. But action is always a poor substitute for achievement.

One of the visible thorns in the blossoming relationship is border uncertainty and both President Xi and Prime Minister Narendra Modi did reiterate a need to settle it. But beyond the omnipresent irritation of a virtual border, it is in India’s interest to resolve numerous pending geo-economic issues with China.

Shifts and moves

Start with World Trade Organisation (WTO) first. India invited universal censure after blocking safe passage of Trade Facilitation Agreement (TFA) at WTO’s General Council meeting in Geneva on July 31, 2014. However, China’s unprincipled floor-crossing on that day was truly shocking, after having supported India’s stand in many multilateral fora (such as G-33, G-20) and in bilateral meetings.

China’s mercurial shift could be understandable if India was found to be acting irrationally. But, on closer analysis, it seems India’s actions were justified. Having agreed at the Bali ministerial to approve TFA, on condition that developing countries not be penalised for food security imperatives till a permanent solution is formalised by 2017, India discovered that all discussions thereafter were focused on only TFA. This was contrary to the post-Bali work programme and gave India (and some other developing countries) grounds to believe that once TFA was out of the way, rich countries didn't care much for the Doha Development Agenda, including food security measures.

But, there are some other valid reasons for India’s principled action. For one, India has a sovereign right to provide food security for its citizens, just as US has the right to buy and stockpile crude oil to provide its citizens with energy security. Two, TFA will cause a spike in infrastructure costs for poor countries; the rich nations were to provide budgetary assistance to help them tide over this unplanned expense, but the amount finalised is too low and the modalities are still vague.

Finally, benefits from TFA are ambiguous, with most gains likely to go to the developed world.

China’s sovereign objectives are somewhat aligned with India on this issue, particularly since it too has to provide food at reasonable prices for large sections of its population. Also, China has been a signatory to all the food security negotiations by G-33, a grouping of developing countries with convergent trade issues.

A change of heart?

While it’s not known if Modi-Xi talks included China’s breach of trust, the joint statement issued by both governments was patently anodyne: “As developing countries, India and China have common interests on several issues of global importance like climate change, Doha Development Round of WTO, energy and food security, reform of the international financial institutions and global governance. This is reflected in close cooperation and coordination between the two sides within the BRICS, G-20 and other fora.”

One reason for China’s change of heart could be India’s lackadaisical communications strategy; also, India’s parleys could have conveyed a message that it’s interested in cherry-picking only food stockpiling from a multitude of other development issues. This might have even influenced some of the other large emerging nations, such as Brazil and South Africa, to isolate India.

But there’s another significant development. There's probably a radical shift in how China views itself: as a world superpower and a trade behemoth, competing with the developed countries. Hence, in keeping with this new-found status, TFA makes more sense rather than hankering for food security. While China is indeed a trade colossus, India needs to keep in mind this change in China’s self-perception when negotiating with President Xi’s men in future.

The border incursion, intriguingly timed to coincide with President Xi’s visit, is a reminder of China’s foreign policy dualism: an extended hand of economic friendship to mask the ugly face of geographic expansionism.

The second issue is climate change and India would do well to keep the new Chinese psyche in mind in future multilateral deliberations.

On the surface, both India and China seem to be on the same page. Apart from a common historical stand, both President Xi and PM Modi have also excused themselves from the UN Climate Summit on September 23.

But that’s where the similarities end. China has already signed a separate climate change agreement with US. While these agreements reduce the climate policy distance between the two superpowers, there are still some sticking points. While China and US agree that that rich countries must provide developing nations with wherewithal to upgrade technology, the divergence is whether the old labels of “developing” or “developed” need to be upgraded.

In essence, the rest of the world’s identity — including India’s — is hostage to progress of talks between two superpowers. The initiative seems to be slipping away from India’s grasp; a climate change strategy is required before the big climate summit in Paris next year. While China’s stand may be driven by thickening smog over its cities, India may have to fashion its own position consistent with its economy and stage of development.

Myriad issues

There are many other unresolved issues on the table — using renminbi as a alternative currency, India’s membership in multilateral institutions (such as Asian Investment Infrastructure Bank) and groupings (Shanghai Cooperation Organisation, for example), discussions on how to take the BRICS Bank ahead, enhanced market access for Indian goods and services, are just some of them.

The lessons for Modi are clear: with China what you see is never what you get. Modi will have to take every opportunity to create an independent policy space for india, even if that requires striking trade and investment deals with Japan, USA, EU, Russia or Australia.

The writer is a journalist and senior fellow with Gateway House

Courtesy: The Hindu BusinessLine, edition dated September 22, 2014 (The original can be read here:goo.gl/Cbm3Ex) 

A River Tells A Story

The first thing that hits you as you reach the end of the road is the sound. It doesn’t just hit, it assails; and as I came to realise, it takes over all your senses. The river Parvati rushes all the way down from the Man Talai glacier where it springs up as a tiny brook, gathering tributaries and waterfalls in its widening swathe, displaying its audible impatience as it rushes to meet its more popular counter-part Beas in the Kullu Valley. And, in one of the many sinuous bends the river takes to plough its way down, lies a small village called Manikaran, now a bustling pilgrimage site for both Hindus and Sikhs. Manikaran’s provenance is uncertain but if you listen carefully, amidst Parvati’s roaring din, you can hear many stories.

When I reached Manikaran for the first time in the mid-1980s, the motorable road ended at Manikaran, on the opposite bank. Today I believe it extends further up the mountain to a hydropower project. You had to cross a small metal bridge to reach the village. My first encounter was with a sadhu — smeared with ashes, wearing his basic habit but carrying a fancy rucksack with a sleeping bag tied to its top. Sadhus play an important role in the continuing allure of Manikaran by providing an unending supply of stories and mind-bending herbs to make the stories sound credible.

So, on Dusshera night in 1986, when all the tourists had departed to witness the Ramlila in Kullu, I sat with a sadhu outside an ancient temple. Among the many stories he recounted about the mountains in the region – including one about an ancient Shiva Temple which is struck down by lightning every year and rebuilt painstakingly by its priest with loving care – he shared an interesting legend about how Manikaran came to be and how it was named.

Legend has it that goddess Parvati came down to the river for a bath one day, wearing a precious stone gifted by her loving husband, Shiva the creator-destroyer. While she was busy with her ablutions, the serpent king of the river started coveting her gem. Caution soon yielded to avarice and the serpent king wrested the ornament away from Parvati. She was obviously distraught and went weeping to Shiva and complained about the bully (with the sadhu providing a side-bar on the couple’s infinite love and their timeless coupling).

Enraged, Shiva switched on his third eye. So powerful was Shiva’s wrath that the serpent king had to cough up the gem. And, to top it all, Shiva’s revenge was so violent that the gem split into millions of small hot and burning pieces when the serpent spit it out. Wherever they fell, hot springs gurgled up.

And so it came to be that the river – with its impetuous, abundant, ferocious and untamed demeanour – was named Parvati. The bend in the river is her ear and the small hamlet perched on a rock in the bend is the ornament in her ear, or Manikaran, a phonetic twist to the purer term Manikarn. That night, sitting on a cold marble platform, Parvati’s roar suddenly seem to grow louder at the end of the story.

Reprinted With Permission from Talking Myths Projects: http://www.talkingmyths.com/a-river-tells-a-story-2/

Working The Budget: Before India Goes Business As Unusual, Fix Patchwork Policies

One of the promises made by the BJP in its election campaign was to change the mode of governance. This pledge found resonance with voters because the dominant mode of governance and service delivery was felt to have been appropriated by the privileged, which included the politician-bureaucrat-businessman nexus. Narendra Modi’s rhetoric of “minimum government, maximum governance” promised to upend the superstructure. This meant giving the short shrift to business as usual.

But it would appear that it’s not so easy to extirpate the old ways of doing business. The decision to impose a punitive capital gains tax on debt mutual funds (MFs) has classic Indian bureaucratic response to market initiatives written all over it. Household and corporate savings have been exiting bank deposits and heading for fixed maturity plans (FMPs) and debt MFs. The government wanted to stop this because there was a tax arbitrage at play here. But what they failed to see is that there is also an issue of real returns here.

The problem is simple: interest income from bank deposits attracts income tax. After deducting tax and the rate of inflation from interest income, the real return received by depositors is negative in most cases. There are two options thereafter for investors: move their funds to physical assets, such as gold or property, or move to more efficient financial instruments. Since investment in FMPs and debt MFs qualifies for lower taxes, many depositors forsake bank deposits in favour of debt MFs.

The tax arbitrage could be eliminated by improving the real returns provided by bank deposits. In the short term, this can be achieved by aligning tax breaks on bank deposits and debt MFs. But this may be unrealistic and could create an undesirable precedent. In the longer run, though, the only way to provide positive real returns is to ensure that inflation doesn’t erode returns.

While the arbitrage opportunity has now been plugged, there is still no guarantee that all the money invested in debt MFs or FMPs will necessarily return to bank deposits. What the government does not realise is that the money moving from bank deposits to debt MFs stays in the system and is still available for productive investments; money that moves away to physical assets is lost to the economy.

In the end, to foster savings in the economy, the government will have to take a call on what kind of tax breaks it wants to provide on which kinds of financial instruments. The additional Rs 50,000 deduction from income allowed for investment in certain specified instruments suffers from the same syndrome: most of the instruments included in the list yield only negative real returns.

On another note, finance minister Arun Jaitley in his Budget exhibited some concern for the health of his fellow citizens by imposing a punitive levy, the so-called “sin tax”, on cigarettes. Excise duty has shot up from 11% to 72%. But the levy is limited to only cigarettes of 65-mm length and below. So, the message from the government: cigarettes over 65mm length, the “king-size” brands, are safer than the smaller ones.

What about competing tobacco products? The tax on gutka and chewing tobacco has been increased from 60% to 70%. But on pan masala, the duty has gone up from 12% to only 16%. What gives? This is policy, wittingly or unwittingly, creating a new arbitrage window. There have been reports over the last couple of years, ever since states started banning gutka sales, that these sachets of oral tobacco have been masquerading as pan masala. There is now a tax incentive for gutka to impersonate pan masala. Anybody doing research on the “law of unintended consequences” is sure to find a wealth of material in Indian government policy pronouncements.

If it was public health that was causing Jaitley anxiety, it is intriguing why he spared beedis. Perhaps political expediency requires courting some large beedi manufacturers, whose support is crucial for the upcoming state assembly elections.

Jaitley’s arithmetic for estimating revenue and expenditure numbers for 2014-15 have also invited some degree of scepticism. Even if we tamp down on the cynicism, it is clear that a meaningful Budget can be presented only in February 2015.

Published in The Economic Times on August 2, 2014: goo.gl/sKzcta

Threats: An Age-Old Tactic To Garner Votes

Nothing works like threats. Didn't somebody say something like that, in some movie? Well, life's imitating art out here in Election-land.

Election season gets the worse out in Indian politicians (actually, it could be any politician but my knowledge is limited to desi chaps). #Elections2014 are no different. There are no issues, campaigns are bereft of ideas and stump speeches are usually full of invectives and expletives. The manifestos are photocopies of each other, the candidates selected by the two central parties feature the usual rogues' gallery. They draw their support from smaller parties that wear mendacity on their sleeves.

It is, therefore, not unusual that most parties have resorted to threatening voters. The message is short, dire and bone-chilling.  Every political party is doing it. Complaints are pouring into the Election Commission. Here are just a few examples.

Sharad Pawar's nephew Ajit Pawar has embarrassed his uncle's Nationalist Congress Party by trying to browbeat voters from a West Maharashtra village into voting for his cousin Supriya Sule. The alternative: we'll cut off water supply to the village. Can he deliver on the threat? He is Maharashtra's deputy chief minister, as well as minister for water resources. He has the habit of putting his foot squarely where he shouldn't: once, when faced with complains of water shortage, he retorted by asking whether he should pee into the dams if there was no water in them. He obviously denies ever having made any of these statements.

Bhartiya Janata Party's far right, feeling somewhat neglected and forlorn, has started asserting itself. One obscure chap from Bihar -- Giriraj Singh -- recently trotted out the old chestnut again: he exhorted all those opposing BJP's PM candidate Narendra Modi to migrate to Pakistan. The BJP leadership seemed a bit red-faced, but Giriraj remained unrepentant. 

And then, as if in a competition to better that, leader of Vishwa Hindu Parishad -- a BJP compatriot party -- Pravin Togadia suddenly roared on Sunday that people belonging to minority denominations should be evicted from residential areas populated by the majority.

Actually, both Giriraj Singh and Pravin Togadia seem to be acting out a common strategy -- shepherding back the potential far-right elements who had probably started drifting during the past few weeks. It is possible that Modi's narrative (as well as BJP's under Rajnath Singh) had shifted from hard-core Hindutva to a slightly more ameliorative tone. Those occupying the centre and the left might not have noticed the change, but for those dreaming of a khaki-coloured future regime this might be palpably disturbing.

Threats -- subliminal or even overt -- are common during elections. The Congress used it to great effect during the 1984 general elections. Advertising agency Rediffusion used a subtle (and not-so-subtle) communications campaign to plant horrific images of violence and terror in the voter subconscious.

So, which threat is more effective? The answer, my friends, will be known on May 16, 2014.

Finals Are In 2016; Next Year Is Just The Semi-Final

Last time I said it, it sounded like a terrible cliche. But, the six months that lie between now and the general elections scheduled for March-April 2014 do indeed seem like a lifetime. And, despite the fact that a major indicator -- results of the elections to four state assemblies in November and December, 2013 -- is still in the works, some indications of the April 2014 hustings are already acquiring a distinctive shape.

So here is the prognosis (and I reserve the right to update it as the months roll out): 2014 will be more like a semi-final and the final will be played out only in 2016. Which means the new government -- whichever combo it is -- will not survive for too long. It will be done in by its own inherent contradictions, much like some of the previous short-lived formulations.

There is a piece in FirstPost already hinting at it (read it here) also, though the overall thrust of the piece is about the souring relations between the Gandhi family members and prime minister Manmohan Singh. But, we've already covered it in an earlier posting about how and why the ordinance was canned by Rahul Gandhi.

So, why am I expecting an anti-climax in 2014?

Look at it this way. Narendra Modi and his followers are desperately trying to convert the elections into a presidential format -- an exclusive battle of wits between him and Rahul Gandhi, or NaMo versus Raga, somewhat like the next highly-billed heavyweight bout at Las Vegas. BJP hopes this format will help it iron out some of the wrinkles presented by a fractured Indian polity, notably the rise of regional parties and coalition politics of the past 20 years. From all available accounts, the Modi camp wants at least 200 seats and the only way to go about it is to pitch him mano a mano with the leader of the ruling party.

Narendra Modi (left) and Rahul Gandhi (Photographs courtesy PTI Photos)

Yet, too many regional issues might still take precedence. For instance, the Telangana-Seemandhra fissures will surely be priority Number One for the Andhra voters, Delhi be damned. So, despite Chandrababu Naidu hitching his wagon to the NaMo star early in the race, Jagan Reddy might be holding most of the aces. In Bihar, while Lalu has been put away, the usual concerns of poverty, lawlessness, entitlements, etc will still dominate the campaign rhetoric. Uttar Pradesh will be battling the after-effects of the Muzzafarnagar riots. Post Phailin, voters in Orissa are still picking up the pieces. Mamata will bring a number of MPs from West Bengal to the negotiating table, even if they're a diminished lot. In Maharashtra, Raj Thackeray's MNS and Sharad Pawar's National Congress Party are both gearing up to corner as may negotiating chips as possible.

These factors have already been put into play and the BJP's attempts to turn this election into a NaMo-versus-RaGa spectacle might not yield any dividends. At least, not yet.

Congress, on the other hand, leaves behind a terrible record of governance. Their feeble attempt to win votes through the cash entitlement route can be a winner but not if some other narrative overwhelms it. And, BJP is trying to do just that with its unwavering focus on corruption during the UPA years. Congress has also conveniently found its straw-man in Manmohan Singh, and is fervently hoping that RaGa's family connections (hence his continuing references to his father's and grandmother's assassinations), his faux earnestness and his boyish charm will win the day.

However, both NaMo or RaGa will have to contend with a number of regional satraps with increased negotiating power. Expect a flurry of post-poll arrangements, tie-ups, understandings. And, this is likely to erode the decision-making powers of whichever government occupies the corner office. This is not an altogether welcome development, given that the country is looking forward to some decisive actions, some measures that will help nudge the economy back into growth mode.

Alongside, expect prolonged and public bickering over who gets which ministry. Most political parties still view governance as an entitlement to loot. This is evident from the fact that most leaders have inducted their sons and daughters as their successors. This rather unseemly squabbling over fish-and-loaves of office will also be another reason for the dissolution of the government in power.

On to 2016 then. In the meantime, enjoy the show. And keep an eye on that chap called Arvind Kejriwal. He seems to be just warmin' up.

When The Postman Knocks...

Finance minister P Chidambaram recently stated that Reserve Bank of India is likely to issue licences to seven new banks (read here). A total of 26 applicants had applied to be awarded banking licences. The FM's comments have immediately sparked off a guessing game about the identity of the lucky seven. 

We are loath to give up an opportunity to speculate; we will therefore definitely hypothesize about the lucky seven. But that is for a later posting. For the moment, let us focus on another important aspect. Mr Chidambaram also said that these new institutions should strive to create new banking templates and not follow the business model adopted by the existing, new-generation, private sector banks. One tends to agree with him, though the scope for innovation in the Indian financial sector does seem quite limited, what with the numerous regulatory and political obstacles erected for banking operations.

Whatever be the message, one only hopes that the FM's imprimatur of avoiding clones doesn't force the central bank to grant a banking licence to the postal department. The postal department is claiming that its massive network gives it access to almost all corners of the country, including large areas which go either unserved or under-served by formal banking practices. While the postal department is undoubtedly the only organisation with the largest physical presence in the country, is that a necessary and sufficient condition for granting a banking licence?

This is not to say that the postal department hasn't done a great job. The postal department has played a stellar role in stitching disparate parts of the country into a cohesive whole, managed to reach the earnings of migrant workers from one corner of the country to their families in another corner, tended to the fires of communications across languages and regions, and much much more.

But does all this still qualify for a banking licence? I don't think so. I had earlier written about it in a guest column for magazine Outlook (read here). 

Political pressure forces the postal department to sell most of their products below cost of production, thereby painting the bottom-line luxuriantly red and requiring infusion of fresh funds from the government every year. This is the main reason why the postal department should not be given a banking licence. The postal deficit for the past two years and this year's budgeted deficit are given below (in rupees crore):

2011-12            2012-13               2013-14 (Budgeted)

5716                  5838                       6717

The government, as things stand, needs to infuse large doses of capital into public sector banks every year (Rs 16,000 crore has been earmarked for government owned banks and financial institutions during 2013-14). Therefore, adding another colossal institution which is likely to absorb large amounts of cash every year is diverting additional amounts of the government's limited resources, which could be better used for development purposes.

Postal departments in many other countries launched banking services at various times in the past -- such as, Deutsche Postbank in Germany (which is now owned to the extent of 94% by Deutsche Bank), Japan Post, Postbank N.V. in The Netherlands which has since been acquired by ING Bank, POSBank in Singapore which has been bought over by DBS Bank. The lesson from the above examples is clear -- all the postal banks had to be acquired by private banks. The two exceptions might be China -- The Postal Savings Bank of China -- and Brazil's postal services, which had to tie-up with a private bank (Bank of Brazil) to gain access to financial products and  services.

With such a wealth of experience available globally, a rethink might be necessary before allowing India Post to diversify into banking services. An alternative strategy would be leverage the same network to allow marketing of third party products.

The Ordinance Gambit: Strategy Or Tactic?

All in all, Congress must be licking its chops for seemingly executing a neat political strategy. But there could be some deleterious collateral damage lurking in the shadows. It now turns out Manmohan Singh will have to become the fall guy for having persisted with an ordinance that allowed elected legislators with criminal convictions to continue in Parliament.

For those who tuned in late, the Cabinet passed an ordinance on September 24, 2013, called Representation of the People (Amendment and Validation) Bill, 2013. The ordinance sought to negate a Supreme Court ruling of July 10, which said that legislators would be disqualified immediately if convicted by a court for a sentence of two years or more. The immediate concern for rushing ahead with an ordinance – instead of waiting for Parliament to reconvene – was apparently the imminent sentencing of RJD chief Lalu Prasad Yadav (an important ally for Congress ) and Congress politician Rasheed Masood. The BJP – which was ambivalent initially –  weighed its assets against its criminal liabilities and figured opposing the ordinance made more sense.

Then as suddenly as the ordinance was sprung on an unsuspecting public, Congress vice-president Rahul Gandhi parachuted into a press conference being addressed by Ajay Maken and announced his displeasure with the ordinance. He called the ordinance “a complete nonsense” and suggested that it be “torn and thrown away!” There was a collective gasp from across the country because this comment was made when the prime Minister was in USA. As soon as he returned, in a show of amazing alacrity, the same Cabinet withdrew the ordinance on October 2. (for a complete chronology of events, read here)

Manmohan Singh & Rahul Gandhi in happier times. Pix courtesy of AFP

What does all this indicate? Here are a few stray thoughts and my take on the entire episode:

* This was a deliberate ploy. It was planned and executed to make Rahul Gandhi come out smelling like roses. The casualty will be the Cabinet members, who are all older than the young party vice-prez. The upshot, as Congress poll managers would want it to appear: the geriatric Cabinet wanted to protect status quo but the vigilant youth forced the change.  This hypothesis seems credible because one suddenly noticed Congress party lightweights, considered to be members of RG’s charmed circle, openly tweeting against the ordinance even before the dramatic press conference (read it here). It seems unlikely that, under normal circumstances, they would have had the gumption to openly criticise an ordinance cleared by the Cabinet. Unless of course they had instructions from somebody senior in the party.

* The party went ahead with the ordinance in the belief that all parties would support it. But, with elections so near, BJP stole some of the television thunder by publicly venting their ire against the ordinance. They even met the President to express their disappointment with the proposed legislation. Public mood seemed to be turning against the ordinance; there were rumblings within other political parties too. Civil society was agitated. Sensing that the mood was turning, Congress must have decided to turn the liability into a show of virtue.

The collateral damage could be Manmohan Singh who comes out of this episode looking rather sheepish and servile. He also emerges as a political relic, charging down the road with a legislation that favoured a venal brand of politics. He is also likely to be branded – subtly of course – as the man who was responsible for wrecking the economy and somebody who now must make way for the impatient and ambitious youth.  This is unfortunate and undeserved for MMS – it's like a bum ride into the sunset for somebody who went through public life with his probity and value system intact.

But there could be one proverbial fly in the ointment – the deliberate slight to Manmohan Singh still raises issues about dynastic politics. This may not go down well with young voters and, as sure as the sun rises from the east, the Opposition isn’t likely to let this opportunity slip away. In the end, it will be interesting to see who and what influences the young finger on the button.