Corruption: Obelix and the Magic Potion

There is much in R-Day celebrations to tug at the heartstrings. Its crowning moment is the parade: rich in nationalistic appeal, celebration of valour, and pride in the achievements of a republic but a few score years old, and a culture thousands of years young.

In addition to patriotic fervour, R-Day is also fitting occasion for solemn contemplation. In thus ruminating over the state of the nation, one can't help but rue what ails its fortunes. Today, the most prominent such malaise is corruption. The affliction is hardly new, but has become so endemic at the top, so brazen in its extent, that it is morale-sapping and threatens the very fabric of our motherland.

This is not scare-mongering. Take black money, which has a deeply symbiotic relationship with corruption. A few years ago, the Swiss Banking Association reported that banks in Switzerland had around $1.5 trillion in deposits from Indian nationals. Compare this illicit stash to the size of our formal economy, especially one that is strapped for investment to spur growth, and you wonder at the possibilities.

Of course corruption is hardly the preserve of those with access to the Confoederatio Helvetica (or the Bahamas, Caymans, BVI, or other similar global money-laundering havens). Enough exists around us, in the form of you friendly neighbourhood policeman, sarkari babu, driving licence agent, and so on. However, when the Central Govt gets as mired in it as UPA-2 has, then the nation starts to lose its moral compass. After all, what deterrence is to be expected when not a day goes by without headlines screaming obscene amounts and prominent names neck deep in graft. It appears that almost no part of Dilli sarkar is left untouched.

With the stench in Raisina Hill reaching unimaginable proportions, one looks for answers. The mind goes back to a UPA-2 corruption headline of a different kind. A year or so ago, then CEA Kaushik Basu, had offered a striking formulation (endorsed amongst others, interestingly, by INFY co-founder Narayana Murthy). Shri Basu advocated legalising bribe-giving so as to encourage reporting, thereby improving incidence capture.

As solutions go, perhaps we need something similarly drastic to shake us off our slumber. This idea though, however innovative, is a slippery slope. It can easily degenerate from honest reporting, to wilful entrapment (lessons from news channel 'sting operations' that have bred their own format of corruption). Stretch the point and one could start offering bribes by default. If caught, you claim immunity as a public-spirited citizen merely unearthing the corrupt. Rinse, repeat, till a pliable babu is found. Voilà.

My other bone with such legalisation is how it shifts the onus of catching the corrupt to whistleblowers, thereby diluting the ownership of the relevant authorities. Like it or not, it is the government's job to identify and nab the dishonest. Outsourcing it to sundry 'citizen journalists' of potentially dubious intent and zero oversight, sounds ominous to say the least.

Much as the heart would wish otherwise, here is no magical solution. Very little in the proclivities of the current government thus far suggest that a different, deep-rooted attempt to counter corruoption is imminent. It may take a regime change for the requisite political will to surface, and perhaps thats what one must pin hopes on, this 26 January.

The Son of Cash

Cash is King. Or, in the context of our Government's benefits structure, "cash is leaking". This has long been understood: I vividly recall dissecting the ills of India's subsidy framework as part of the Economics curriculum in college in the 1990s; it was a well-worn fact even then. Commentary focused on flaws in the mechanism and the mushrooming of vested interests that were bleeding the system dry. Indeed, the latter had grown so well entrenched, and critical voices so muted, that the infirmities had become part of the accepted, expected ways of working of mai-baap sarkar.

Little wonder then that, far from being shown the door, the subsidy framework has continued to flourish to this day. Consider the math: the GOI spends an estimated ₹3.65 for every rupee of benefit to reach its intended recipient. The resultant fiscal burden across the 3Fs — food, fuel and fertilizer — is clearly already unsustainable. Yet, there is every indication that the Government, reeling under the influence of NAC-chhaap Welfare State model, will escalate these economic costs further.

Before turning our attention to the future, it may be instructive to examine the design and delivery challenges that plague our distribution architecture today. First, the design itself is inherently faulty. For instance, food subsidies are funneled through the PDS, pivoted on the identification of the Below-Poverty-Line population. This tagging has been a corruption magnet. An inability to pay bribes for BPL ration cards means large swathes of genuine beneficiaries remain denied benefits, even as the state's subsidy bill continues to burgeon.

Next, lets talk about the delivery architecture. Staying with the food example, there is little control over the diversion of subsidised grain meant for BPL households to the open market by avaricious ration shop owners profiting off the price differential. Likewise, practices like adulteration, ghost BPL cards, and deliberate stockpiling lead to rampant leakages. Upstream too, we have distribution losses in acquisition, storage, and transport due to inadequate infrastructure and systemic corruption. Finally, the state is drained by an ever-increasing administrative overhead merely to keep this unwieldy apparatus afloat.

Now, the mammaries of our welfare state are expected to grow further (the GOI seems serious about the Food Security Bill). This makes the case to overhaul the entire benefit distribution process even more compelling. Simply put, the need of the hour is to replace the corrupt and convoluted PDS with direct cash transfers to the target population. Life changes dramatically at the consumption end, with a promise to empower the needy, bid goodbye to the ration-wallah's corruption and coercive power, and incentivise quality supply. Likewise, the state's unproductive subsidy burden shrinks by dismantling the PDS and leveraging technology to plan, monitor and reduce sourcing and storage expenses.

One cannot, of course, expect it to be a walk in the park. The most critical element is target identification. UID is trying to solve this tagging problem multi-dimensionally across technology, process, controls, and change management. Helmed by Nandan Nilekani since last year, one can expect a good outcome here. Next, the farmer lobby must be managed: anything seen as encroaching on the MSP and GOI's grain offtake is a political hot potato. It remains to be seen how much political will UPA-2 possesses to tackle this. At another level, the availability of cash in a lump sum has been flagged as a potential hazard. Fears are that menfolk would drink the 'windfall' away. Not for this reason alone, but as a broader social empowerment and financial inclusion measure, the GOI would do well to channel Lakshmi directly to the Lakshmi instead.

Cash, in any event, is likely to make a return, if only in a new avatar. Even if not perfect — and we do not yet know all the questions, let alone the answers — it cannot fail to be an improvement on the mess we have today. Much of this will play out at the level of policy, even more in execution; we have seen the UPA botch both on numerous occasions. Yet, given the high stakes here, let us remain hopeful.

Asleep at the Wheel

One of the most telling descriptions of the bureaucracy in the 1970s went thus: "if you can, don't move; if you must, move slowly; if pushed, move in circles; if cornered, appoint a committee!" One can say this most certainly of our economic policy. Despite years of evidence, governments in India hung on to an anachronistic Nehruvian model, mouthing hollow garibi-hatao type slogans, till being forced off our backs two decades ago. Few know this better than our venerable PM. As a key apparatchik in the erstwhile growth-sapping regime — something Congress propagandists wantonly gloss over — Dr Manmohan Singh wilfully fashioned policies that eventually had us staring down the barrel of a gun in 1991.

Should it, therefore, surprise us that, when the bottom falls off the Rupee, or GDP growth plummets to its lowest in almost a decade as it has today, the GOI is a deer caught in the headlights? Dr Singh would have us believe this is all thanks to the global economic slowdown or Eurozone woes (external locus of control; not leadership). Notably he calls out the RBI's tight-fisted monetary stance even though structural problems need a fiscal and not monetary response. Indeed, the central bank has little elbow room in the face of oil price risks or the current account gap (widest since 1980). I would argue, on the other hand, that the RBI is doing its damnedest to keep inflation in check.

In context, it is important to peel the onion (!) on our inflation problem. Food is a structural shortage story. Agricultural growth at 4-5% is simply inadequate to meet the demands of a burgeoning 1.2B population with real incomes rising 5%. Next, MNREGA pushes up rural wages (10% YOY in Jan 2010, accelerated to 14% now) to unprecedented levels as GOI continues to dole out money with low to no link to productive use. Then the government raises MSP adding further fuel to the fire. Consequent rise in rural wages soon translates to urban wage inflation — via construction and informal workers.

This cycle of food and wage inflation combining to increase input costs for goods has turned our inflation into a structural one. It can, of course, be tackled. The path lies through supply chain efficiency and productivity. These, however, need a strong policy response, not today's status-quoist bias that is happier with incremental versus exponential change. Likewise, the GOI cannot print its way out of the quagmire, continuing to push populist policies in the run up to elections in 2014. With fiscal deficit spiralling out of control, there is only so much the RBI can do. If he is half the economic genius he is touted to be, then Dr Manmohan Singh knows this. The real question is will he act — will he bell the cat?

Carry On 2011

It is never easy to connect the dots in various socio-political and economic trends in the world around us; least of all as it limps back post after the massive upheavals a couple of seasons ago. On balance, at the dawn of 2011, the mood in India is sombre — the scars from a rash of high-profile scams last year have barely begun to heal. At the same time, we are much better off globally than where we ended 2009 (and most certainly 2008) — the world economy appears to have allayed double-dip recession concerns, with recovery on track even if not fully out of the woods.

What would this year be like? I can stick my neck out to venture that it may be more difficult than the one gone by, with initial momentum from a rebound mostly dissipated. Global deleveraging remains a long haul — as we speak, we have merely shifted private debt onto public balance sheets. Recovery, too, is multi-speed, with stars in Emerging Markets but concerns in parts of the West. In the QE2 context, this implies that fiscal stimulus will stay a while, notably in the US and EU. Equally (though this may not impinge on the Indian story much), the highly correlated rates of change in economic growth trends (even if actual values vary) demonstrate the intertwined nature of modern markets. Given the massive relative size of the First World economies, this means national fortunes remain inextricably tied together.

There are other concerns too. The most critical is commodities — oil should already be giving sleepless nights to all energy-deficit governments. It is the tip of the iceberg — most essential items, notably foodstuffs, have high-strung demand-supply equations that can poop the 2011 party. Equally worrisome are rising inflation and asset bubbles threatening to derail the Emerging Markets narrative. Last but not least, the EU has to manage a mismatched fiscal belt-tightening (austerity measures in Greece and others that actually need monetary elbow room; and the absence of any in Germany, France — economies that can afford tighter policy!) and the Euro’s Draupadi-like nature. Obviously — an outside chance, nevertheless — a sovereign debt default will set the cat among the pigeons.

Not unlike 2010, the key remains a coherent, calibrated, and effective policy response. This is also my biggest concern. In a multi-speed recovery world, domestic political pressures can easily upset the current global consensus. Such a breakdown is not unimaginable. It could manifest as First World protectionism born of persistent structural unemployment, or as rampant Chinese assertiveness. In fact, how the world manages an unavoidable rebalancing of global power would be this decade’s most significant megatrend, apart from the transnational commodity supply crisis and the ogre of terrorism or localised discontent.

No doubt we will watch much of these trends unfurl this year and going forward. In my first post in 2011, however, I sign off on a happy note — a tribute to Mankind's achievement on two fundamental metrics — average income and life expectancy, over the last two centuries. Go watch!

Dal is Meat (rhyme Small is Big)

My idea of a delectable meal often presupposes a meat-rich diet. This has worked well for the foodie in me, providing latitude for wide — some would say wild — experimentation in cuisine and ingredients over the years. Indeed, it would be difficult to think of occasions in the past that would have found me averse to conspicuous consumption of the non-vegetarian kind. It is equally easy to remember my preaching from the pulpit to those deprived of similar indulgences.

Alas, what use is a tale without a twist, and mine came up against one via marriage when my dedicated six-seventh carnivorous pursuit met its match. (Incidentally the existing Tuesday exception was likely on account of historical habit more than purely religious reasons.) To cut a long story short, one could be pardoned for thinking my last post — Dal, Not Boring was my first on food; built around an eminently vegetarian delicacy — to be an ‘inspired’ choice! Yet, extenuating domestic circumstances (an outvoted minority status) apart, my alibi is a mehengayi-dayan discussion pending from that post. Indeed, not only is the virus of inflation agnostic to dietary preference, but its acute focus on foods hurts dal as much as chicken, making a complete mockery of the Great (Veg/Non-Veg) Divide.

With this backdrop, let me hark back to the RBI Q2 Monetary Policy document that was mentioned in my last post. The central bank's pointed concerns about food inflation expressed therein are a good starting point to appreciate the worrisome situation (in case you missed your grocery bills these last few months). Terming it 'structural', the Review referred specifically to prices of protein-based foods (despite policy tweaks and good monsoons, inflation in this segment "remained persistently elevated" mid-20s; six months ago it was a whopping 34%). What officialese did not make explicit was the fact that the uptrend is over a year old — meaning this inflation is working off an already high denominator. The resultant compounding effect on end-consumer wallets is, naturally, stark.

It is not difficult to discern the roots of 'structural demand-supply mismatches' the RBI laments, or to build a case for future worsening. Demand is up, driven by a burgeoning population and changing consumption patterns (economic progress whets the appetite for more nutritious food). Neither of these is likely to recede — in fact one can well expect significant upside in each. At the same time, we are faced with what the RBI calls 'inadequate supply response', meaning there is little relief on the other side of the economic equation. Specific to dal, none of the three global producers (US, Oz, Burma) displays any urgency to increase areas under pulse cultivation. (We could, of course, collectively root for a dietary switch towards meat — but that puts at stake much more than my personal domestic discord!)

As a conundrum, it is a desperate one — what else could be more compelling for a nation languishing at #67 in 85 countries on the Global Hunger Index? Unfortunately, the much-required sense of urgency seems thus far missing from all stakeholders — policymakers, producers, consumers, et al (and certainly in our TRP-happy mainstream media, preening with self-proclaimed righteousness, but content to sell the day's news). The logical solution would be for Indian agriculture to step up, even if its immediate ability to do so remains fairly suspect. Otherwise, declared national goals like a Security Council seats are rather meaningless.

Dal, Not Boring

Vir Sanghvi's Rude Food is an occasional staple of my weekend reading. To get to it is not always a cakewalk, though — one must navigate past other HT Brunch features that are often hopelessly inane. Of course, Shri Sanghvi himself, his broad repertoire on his sleeve, is capable of giving any self-respecting foodie more than enough cud to chew. Frequently, his fare is extravagantly esoteric in choice of subject and idiom, more daunting than delectable for the average seasoned traveller. Yet, when confining himself to playing patron versus patronising, his entrée does justice to his vaunted gourmand credentials — even the pungency of his strong opinions tickles the buds and makes for mild intellectual exercise appropriate for Sunday mornings. In either case, the studiedly exclusivist stance is unmistakable.

This week, though, Rude Food was positively brilliant. It swung the spotlight on humble, ubiquitous dal, justly extolling its virtues as the quintessential Indian dish. As Sanghvi points out, though content to play second fiddle to other offerings, the dal does not suffer from a lack of variety. All forms of Indian cuisine profess a version and each civilisation coming into contact with it has enriched its canon. At one level, it is in fact quite interesting how hard-pressed one would be to find dal-oriented eateries when one considers how every household carries its individual specimen — and even the occasional cook's experiments have elevated its pantheon. (My mother for instance, not exactly given to much adventurism in the kitchen, still cooks a memorable dal, and so one would suspect for many mothers, spouses, and chefs of varying culinary expertise across the nation.)

However, there is one facet that Shri Sanghvi barely scratches the surface of — owing, perhaps, to his proclivity for intellectual snobbery, or simply his relative munificence. This is the continued spiral of rising dal prices and its clearly deleterious consequences on household budgets (one speaks equally from personal experience, of course). In fact, this has worried no less a body than the RBI, going by the commentary in its Q2 FY11 Monetary Policy Review. Well merited as it may be, it is too early in the weekend to attempt this fuller discussion tonight. Let me, therefore, leave that for later — perhaps tomorrow, after being fortified with my ritual Saturday khichdi lunch!

Animal Farm

One of India's more watched news channels and its leading English daily recently ran an exposé on the pitiful state of our food distribution system. Given the sheer emotive value of rotting grain in a nation home to the world's largest concentration of the hungry, yet with superpower ambitions, public interest was bound to get fired up. Again, the backdrop of runaway food inflation (that has under its spell more than a trifling percentage of our Great Unwashed) provided the outrage with a tinge of rare immediacy. A call to action, so to speak, seemed immanent in the wave of national indignation.

Yet, it remains a moot question whether this will lead to tangible change. While a grandstanding media may have chanced upon its newsworthiness now, the issue has been hanging fire for ages. My personal recall is of (copious, if not compelling) lamentations on 'distribution losses' two decades ago, in the pursuit of an Economics degree — and the problem was not of recent vintage even then. Indeed, pithy 'mouths fed if gaps plugged' protestations brought academic glory to many (not me!) over the years — clearly, to little avail, as the sordid TV visuals testify. The agricultural supply chain was held hostage to political ambivalence for far too long. Such was the potency of notoriously enmeshed vested interests in every leg that one had to be content with a status-quoist survival play, with cynicism and not challenge being the dominant trope.

A quick dekko illustrates the extent of the rot in the entire ecosystem. Starting at the farm gate, the so-called farmer lobby (read: large agriculturists) cannot think beyond input subsidy retention and diesel price control. Interest in output is limited to pushing periodic MSP increases, with populist governments only too willing to oblige. Their small and marginal brethren are too fractured to wield any real political influence, clear from the typically lackadaisical, stopgap response to farmer suicides. A lack of organised credit confines their choices in any case — a fledgling microfinance revolution is still some time away. (This is not to undermine the fact that better contextual appreciation and economic timing help sustain local moneylender-cum-intermediary strangleholds.) In this extant reality of stagnant productivity, the otherwise laudable NREGA and mostly reprehensible Maoist violence add fresh undercurrents. It remains to be seen how these play out, but (at least for now) they have bred more questions than solutions.

Moving ahead in the chain, the picture alters only slightly. Higher investment continues to be a crying need in the storage and distribution of agricultural produce. Public sector agencies hold the key, but gunny sacks full of foodgrain don’t have a vote, and tackling post-harvest waste remains low on their list of priorities. Other logistics players, only occasionally different from middlemen, have little motivation to drive efficiency, given the infrastructure (and corruption) squeeze on margins, unless to profit from (artificially induced) supply imbalances. Lastly, wholesale through last-mile retail suffers from a lack of scale, subject to high rents, rising operating expenses, and limited organised investment, disadvantaging honest trade.

Fact remains that our nation also drove a Green Revolution. The erstwhile stage was one of stronger political will, with public memory fresh from ignominious PL 480 capitulations. In consequently sympathetic ears, AIR propagated research science prescriptions, and rural India took to HYV seeds, fertilizers, and irrigation in little time. (Incidentally, the most common critique of the Revolution centres around land degradation, showing little appreciation of R&D’s evolutionary nature — science is a process of constant churn, not a one-time infusion. Critics likewise gloss over the lopsided nature of fertilizer subsidies and the like.)

In short, we must lean on science again. Be it input optimisation, cultivation and processing practices, storage, or transit efficiency — each can benefit from the strides the scientific-industrial world has taken over the years. (Robust risk modelling too can help drive deeper microcredit penetration, but that science, alas, draws much derision in a post-Lehman world!) And our IT prowess can be brought to bear on information gaps that mess up cycle time, cost, and pricing across the value chain.

Of course, it would be naive to think one can solve it without social science. And no, this is not a call to the political class to miraculously conjure the will to lead the charge. Shorn of direct electoral gain, political commitment levels seldom multiply manifold — if it has not happened in years, a blog post or television theatrics won’t. (Our beloved Agriculture Minister is anyway planning to focus on his new ICC chair when not engaged in periodic one-upmanship exercises with his professed allies.) This is merely a plea not to wilfully muddy the waters. We cannot afford to continue ludicrous supply-pricing games, with ill-advised and badly executed (if not dubiously intended) market interventions lacking economic sense.

Hypercritical of politics after a fashion? No. We must recognise the math by which 58 million tonnes of stock accumulates, double the actual need. Or how over a million tonnes are lost to storage and transit in just four years while at least as many parts of the country reported starvation deaths. (Yes, we did give folks with BPL cards TV sets in some state elections. Good — they can watch the tragicomedy live now.) So, if our political masters can just about manage to keep their gaming instincts under control, this can get off the ground well enough. And if we are really, truly lucky, perhaps they can think visionarily — and allow full mobility and free markets in the sector. Food Security would then move from policy shibboleth to proud reality.

A Follow On Inning

For a prolonged period in the Nineties the powder keg of India's growth story provided a discernible fillip to equity values, including a booming primary market. To boot, some aggressive issue pricing meant even neophyte investors made a fair killing through a buy-IPO-sell-listing strategy. It was too good to last, and the market eventually turned a great leveler as it must. Despite this, some hangover of those glory days seems to pull the retail investor (sample the now-thankfully-dear-departed 'MF IPO' mela) even to this day.

As it turned out, my college wallet was hardly corpulent enough to afford any investible surplus in this happy period. The result was that my initial flirtations with stock-picking missed any skew or confident swagger from tenderfoot success. Yet, learning the hard way (and armed with pearls from two notable masters in Messrs Buffett and Lynch), my confidence gradually crept up enough to venture opinion on the table. And when for a few years my portfolio reflected better returns on direct equity investments vis-a-vis the Sensex (or via the Fund route), a tendency to play to the gallery won me to freely dispense stock advice!

Unfortunately, lately my acquaintance with that familiar spoilsport: Time (or more accurately, its paucity), grew by leaps and bounds. Consequently, most of my theories were tested vicariously — and though the results were not entirely discouraging, the discipline to tend consistently to my portfolio was found wanting. It is in this backdrop (and to accompanying bugle calls from a generally bullish market) that NTPC announced its mega FPO. Persisting with the axiom of my stock-picking being based on more mature considerations, this is how the issue appeared to stack up:

• NTPC easily stood out as the largest Indian power utility, with reasonable historical revenue/profit track record and operating efficiency in load/ availability factor terms
• The firm boasted a healthy topline growth with plans to ramp up capacity by ~10K MW (over a third), assuming timely execution and minimal equipment delays or risk (important also given a somewhat sub-optimal debt-equity ratio, with scope for putting more equity to use)
• Significantly it was an infrastructure major with very low liquidity pressure atypical of the long gestation in the sector; and a comfortable funding position (~INR 17.5K Cr in cash alone) that weighed on its ROE as much as providing opportunity for backward integration
• Raw material pipeline looked robust — a new 20 yr coal supply agreement with Coal India for 12 of existing 15 units, supplemented by captive coal mines and KG basin gas (in next 2 years). Possible overseas mining acquisitions would provide additional flexibility
  
• From a product mix perspective, hydro projects could be a concern but strong partnership potential in 2000 MW nuclear power JV and ventures with BHEL and Bharat Forge to manage engineering and equipment needs provided a cushion
• Potential upside also existed from sectoral deregulation, specifically unallocated power sale, short term trading (#2 player), and the 3P modernization/ life extension practice.

Yet, for the retail investor, the icing on the cake could only come from price. Indeed, it was key to whether the issue would draw more than institutional interest. The latter, some argued, would commit anyhow, a volume player being inelastic to entry point in view of the overall mood and potential. Given the value-unlocking protestations in UPA 2.0 policy (disinvestment being no more a dirty word), it was critical and expected for the floor to be suitably defined to set the right tone for the aam aadmi.

Unfortunately, by any reasonable yardstick, the pricing and the issue came up short, saved the blushes only through 'motivated' subscription from SBI, LIC and other PSU players. The drama in the FPO (and my own morbid interest) were served well by a simplified version of this script (rob Peter to pay Paul etc) but the back-room shenanigans transcended the discreet approach that the Govt and its hired guns usually adopt in such situations. In fact, despite commonly held misgivings on price, PSU entities actually bid at the high end, much in excess of the market or floor price (and that when FII interest was almost nonexistent)! Extending the line was a series of seemingly unorchestrated sound-bytes (Goebbelsian devices that would have done any crafty market manipulator proud — case in point: Reliance Power) hinting at bear cartels at work to drive price below its 'natural' 230 levels! And if any argument were left to be had, one merely had to look at the complete absence of commitment from NTPC employees. They knew!

In short, the promoter, the Govt of India, obviously needed the money — and as appears in retrospect, badly enough to brazenly flirt with the grey in a manner unprecedented. Be that as it may, it is obvious that such insidious conveyances could be a short term tactic at best. Over the course of what promises to be a long summer, FinMin mandarins would do well to truly imbibe their much-professed principles of policymaking (public sector = public ownership). Not only is the capital requirement in the current Grand PSU Sale way too high to afford being limited to incestuous bargains, but there is real fiduciary merit in spreading the family silver over a larger investor base. To boot, there may be electoral arithmetic benefit in promoting an aam aadmi (or middle class, at the very least) lilt in any future auctions (at the cost of a marginal discount).

For now though the NTPC FPO kissa does leave more questions than it did answers, such was the Government's conduct. And one thought the ignominy in a follow on was restricted to cricket.

Ode in Time of Crisis

Looking back the last few months, it is impossible to miss a humbling feeling of being amidst epochal events. Personally, last September was a heady high, a celebration of creation that rendered me well nigh unequal to the task of putting it to words! Time has flown since, each day a nouvelle discovery of wondrous joys, yet occasionally tinged with an undefinable sense of vulnerability. In my thirty-some years on the planet, this palette of emotions is sans parallel: cheer and blessing, joie de vivre, if ever!

The world, on the other hand, has been seized with circumstances of a lot less happy nature, best epitomized by episodes a year older. With the global financial system at its epicenter, an unprecedented and unrelenting series of economic upheavals have challenged life as we know it. Without getting into inordinate details of these trying times, suffice it to say that no walk of life nor section of society has been left untouched. Moreover, at least in some cases, things will never be the same again. Equally, though the worst is likely behind us, we are not fully out of the doghouse yet. It is clear that the speed, quality and sustainability of recovery depend on our generation's ability to rebuild the economic edifice. This effort must incorporate lessons from the current turmoil. Likewise, it is incumbent on us to have a sense of urgency lest the events and their aftermath fade from proverbially short public memory post recovery.

So what should constitute the bulwark of the Reset Economy? At the heart of reform must be a robust financial system that does not merely withstand future shock but proactively alerts us to impending danger. In fact, the latter, curiously and completely missing in the run-up to the Lehman collapse or the events that followed, is a critical test for any proposed structural change. Unfortunately, at least for now, our response appears to be coming up short. As a first step therefore, let me try and outline today a broad agenda, hoping to see the rest fleshed out in the New Year. (That which springs eternal in the human breast only magnifies early in a new year that also happens to be a new decade, and when penning one's return blog after an interregnum!)

Firstly, we must recognize the character of the current downturn. Like someone put it, the crisis was a lethal combination of market turmoil that turned a banking crisis and eventually led to broader economic consequences. Obviously such a debacle puts into the dock governments, central banks, regulators, banks, and lending institutions as well as corporates. It points directly to lack of coordination between these players, and piecemeal or inadequate appreciation of crisis drivers. Thus, a harmonized non-fragmented response and review is critical to future success.

Next we have the extent of the crisis and the pace of its transmission. For the malaise to spread like it did, the key ingredient was the interconnectedness of financial systems worldwide. This network is directly linked to ever-increasing Globalization of world economy; and aided by rapid advances in Information and Communications Technology. In tandem, these ensure an all-time high factor mobility, making the butterfly-in-China-shapes-NYC-weather connectedness an extant reality rather than a mere Chaos Theory shibboleth.

Does this mean we turn contrarian to the forces of Globalization? One would think not. Not only is this fungibility not easily reversible, there are clear benefits the world has derived from them. This holds true for Technology too. In fact even contemplating any (even if theoretical) reversal effort suggests a need for a lot more calibration than the opposite — a coordinated global effort at crisis-corrective actions. Hence the near-consensus currently seen in implementation of near term solutions must stay the course for the longer term root cause fixes. With the plethora of stakeholders involved (and assuming you agree with me on the low feasibility for an outside observer to grasp its nuances), governments the world over have the primary onus to navigate through the intricacies of (micro and macro) prudential and accounting policies.

The logical extension to this argument is that we cannot let our focus waver even on exit strategies for the short-medium term policy and market interventions. Harmonizing these globally may be a tough ask despite broad unanimity on its goals, namely sustaining the nascent recovery, maintaining financial stability, and protecting a global level playing field. Policymakers would do well to use risk of unintended consequences as the touchstone for their formulations rather than unidimensional desired results. For instance, instead of getting swept off the feet by the obvious, namely increasing capital standards, consequences like drop in capital availability and inefficiency in the banking system, must be factored. (Interestingly, subprime mortgage, now such a dirty word, was the output of one such political agenda, namely incentivization of housing ownership, where side-effects were not considered!)

Looking into 2010, the ball, as it does for most largescale change initiatives, is in the court of the Political kind (bureaucracy included by definition, for simplicity). The stakes are enormous, probably never bigger. Is the species up to it?

No More (Hopefully) Tax!

Some people are difficult to please. And when they belong to the tribe of left-leaning issue-hunting chatterati of our country, woe betide those that seek to propitiate them. So ran my thoughts on getting a buzz from the same Economics Einstein friend of mine who had played catalyst to my last post. He was incensed by my conciliatory gesture of a post — and the suggestion of using a credit-debit card driven payment system as antidote to the cash impelled parallel economy. He called it many names — but the tags principal to his argument were three: it was effete, elitist (Long Live Comrade Dasgupta!) and uni-dimensional.

To the last of these, let me plead guilty immediately — the idea of a carded economy was admittedly an appetizer to deeper policy action. As such, other thoughts that came to me at various times this week:

• Speedy adoption of VAT and GST, something that has been argued in these pages earlier, underscored here since they track the production process through the value chain and hence enable significant MIS
• Comprehensive implementation of UID (linked with PAN) — with all registrars computerised across asset classes as well as company registration, customs and excise, tax, passport, licences etc — and cross-tabbed as needed with HNI indicators like asset ownership and lifestyle spends
• Better enforcement of annual personal tax returns and perhaps early bird incentives, not merely penalty for delay or default. (No doubt my friend would be happier to hear words around greater powers to agencies but very rarely have our national issues been about legislation instead of execution, and we perennially run the risk of bad intention.) My only exception would be for relatively high visibility downstream impact like on personal rights of holding elected office, driving licence etc
• Clarity and continuity in wording rules and regulations, limiting the need for judicial interpretation that may be time-taking and (occasionally) contradictory. One can extend this to talk of faster determination of tax disputes but the need for specialized courts and higher judge-population ratio is a more widely-felt and urgently-needed action

Now, the other two charges. At the core of my premise of effectiveness in advocating an electronic payment system was its ability to capture information in a digital form, coincident with the actual transaction. Equally, the effort in its transmission, storage or retrieval would be marginal save for the investment in scaling up transaction infrastructure in a country as vast as ours (but which, in my defence, shibboleths of Financial Inclusion and Productivity would any ways force on the banking system). The data thus recorded could be mined to model smarter risk-based pricing solutions to help customers and banks, while sharpening the I-T department’s claws (with less false-positive).

Almost in anticipation of this, my friend had pointed me to the PAN/ AIR project and its relative failure in achieving similar results — at least at the government end. He sent me an article from HT on 24 Aug too, with analogous lamentations. The sum and substance of this report went thus:

• Compulsory PAN citation for all high-value transactions has not worked. Of the INR 55.7 Lakh Cr total value reported in 2007-08, 30% were missing PAN. For instance, in realty deals (a known home of Black Economy) of declared value over INR 30 Lakh, capture was ~25%; saving bank deposits of INR 10 Lakh plus, it was one-third etc (Folks with dark humour will savour the fact that ~10% of 3100 RBI bond sales over INR 5 Lakh got away without a PAN); and
• Cases of fake/ multiple cards abound, limiting the department’s ability to trace any transaction back to beneficiary. It is any ways over its head in water on the high-value AIRs for investigation/ matching with IT returns (rumour has it that the department has been trying to build 360 degree profiles of HNI’s — politicians, bureaucrats, corporate honchos, high-growth businessmen AKA people with flashy lifestyle not commensurate with known income sources etc) using AIR data for over three years).

But perhaps we write the epitaph of this effort too soon. One can equally note that high-value transaction capture was up 2X between 2007-08 and its preceding year — indicating detection success more than economic boom. Equally, the march of technology in the banking industry is relentless, making the switch to electronic financial administration easier by the day. Or, for that matter, let us not ignore the large-scale adoption of computers by Indians at large. Mind you, we speak not merely of super-bright precocious pre-teens of the current day; this trend is discernible across age and economic strata. (My father, loath to the PC most of his life — or perhaps never having needed to take to one, courtesy a sarkari lifestyle — is now not only a ‘Friend’ on my social networking account, but preaching the virtues of Skype to me the other day!)

The fun times, however, are yet to roll. To my mind, far more than banking industry paradigms or designs of FinMin mandarins — or even technology’s constant down-spiral of prices and advances in user-friendliness — the real clincher is, literally, in our hands. The convergence of mobile-phone and computing is where my oracular protestations will be put to test. As more and more of India takes to the ubiquitous phone for functionalities beyond voice, they will buy in to its convenience for financial transactions too. If this adoption gets sweetened by promises of greater speed, increased transparency, and lower transaction cost (why ever not, one would think), then the inclusion revolution shall fly bottom upwards.

Empowered handhelds will thus achieve what its voice cousins have already done — bridge divides that most thought an impossibility in our context just years ago. Not only will this spread make the ‘card’ all pervasive, it will put pressure on high value transactions to conform and drive an enormously shrunk cash economy in the future. Hence, card, we dream… Goodbye elitism, farewell effete :D

Waxing Tax Too

In response to last Friday evening's post, one of my left-leaning intellectual (tautology, really!) friends called me for a not-so-quick tête-à-tête. Though certainly short of acrimony, the censorious tone of this conversation was hard to miss. The upshot of the lesson in economic history — or indeed its trigger — lay in how my blog piece in question had seemingly glossed over the Black Economy of India (emphasis as supplied), the continued advance of this Public Enemy Number One, and the calamitous consequences thereof. In other words, direct taxation reform was a condemnable (the word bourgeois was carefully avoided) distraction.

Frankly, this set me thinking. It does not require Keynesian genius to deduce skews in any economic structure hampered by the presence of an illegal economy. The news gets worse if this parallel economy breasts the tape at one-fifth the total, as ours arguably does. So how does this work? In simple terms, high preponderance and resultant cultural acceptance make such an economy difficult to unravel. Again, unfettered access to markets minus the burden of tax makes its cash transactions cheaper. The consequently uncompetitive legal economy thence loses marketshare, profit, and investible surplus. Clogging growth implies less employment and more pressure on government – more so in a regime of floundering tax collections. Need to shore up revenues to fund government spending pushes tax rates north, potentially incentivizing further tax evasion and hence growth of the illegal economy.

So far so good (or bad), in theory. In our case, one could well retrace the path to the days we made our ‘tryst with destiny’. Illegal economic activity had mushroomed in the run-up to independence, typical of wartime economics across centuries, and ramped up further in post-1947 nation-building economic action. The Nehruvian model was resource hungry – revenue had to feed substantial public sector investments, but equally prone to lip-service. The result was aggressive taxation coupled with a maze of incentives ostensibly put in place to foster savings. The fledgling Indian state just did not have the wherewithal to overcome the resultant tax administration challenges.

As it turned out, the next few decades saw a pronounced socialistic tilt in our policy. The consequent licence raj added further question-marks around intent, to a tax regime with already suspect capabilities. While profiteering via artificial supply imbalances had been around for years, under the quota-permit system, policy formulation as well as enforcement became tools for malfeasance. (This in fact stays the biggest reason for celebrating the open-door approach in Direct Tax Code reform in my last post.)

Be that as it may, the most potent constituent of the parallel economy was the hawala-hundi system that enabled any ill-gotten gains to find their way to safe havens, as well as to become a tool to finance economic activity (leading to further proliferation) – and eventually, politics. Hence, even as the formal economy was constrained with pricing, taxation, forex and current/ capital account convertibility restrictions, enormous money transfers via the illegal market became a fact of life. If cash was in play as input or output (and what nefarious purpose doesn’t do both!) the answer in form of this high velocity-instant speed-currency agnostic money system became the oil greasing the Black Economy.

As various studies point out, these Augean stables have a far and deep impact. The endemic corruption bred by such a humiliatingly pervasive Black Economy saps individual will away. Hence, one does not need to conduct a Buddha’s Three Questions type of experiment to understand why it is well-nigh impossible to go without cash ("...is king") in life if registering a property, selling your car, or even making sundry household expenses. When the PM-in-waiting laments distribution losses, one sits up and takes notice!

Which brings us to now and whither the disconnect with my more learned friend, as one may ask. It lies in the essentially populist, two-dimensional corrective action he and his ilk typically advocate. Increasing taxes and duties changes the risk-reward equation making evasion more lucrative; adding legislative muscle to our inefficient executive breeds more corruption; and expecting a proletariat revolution that solves world hunger is, frankly, far-fetched.

So whence the solution (only followers of Marx have the liberty to merely preach symptoms without offering a meaningful cure!), pray? There must be many, but today let me merely place the Korea model (if one plug be allowed) for consideration. This involves a large-scale and comprehensive adoption of cards as the sole payment mechanism for a multitude of transactions (over a ceiling value, potentially) for individuals, with multifold, multi-layered benefits.

In short, being electronic, credit-debit cards can easily counter the ‘good’ of transaction speed and high-velocity rotations in the Black Economy value-proposition. With increasing computerisation, e-banking can work in tandem with such a payment system, also addressing the Government’s benefit end-user discovery issue. The data explosion thus generated would do wonders for risk mitigation for any self-respecting funding institution – also helping buyer and seller price credit right. The government could use this information to plug tax evasion at lower cost, greater accuracy, and faster speed. And if a clincher was needed, for a terrorism frontline state as ours, one can well imagine the internal security benefits from better enforcement.

But, better not to stretch my ‘one plug’ luck too much, even for the hand that feeds etc!

Waxing Tax

Earlier this month, the Government of India placed a paper on a new Direct Taxation Code in the public domain for discussion. Such progressive procedure is as uncommon as it is laudable in a nation where administrative opaqueness has often been used to create latitude for backroom manoeuvering. In fact, the play in influence-peddling is believed to be so potent and widespread (so difficult to miss in Dilli's flaunt-it-if-ye-have-it culture) that subterfuge of this kind is not merely accepted but expected. Drawing inspiration from the fortunes of sundry such power-broking carpetbaggers, if no other reason, it is incumbent on us to celebrate this wiki approach to policy formulation.

The jury, of course, is out as to the merits of the actual proposal. It certainly deserves minute scrutiny and my current inability to fathom its fine print is far too real to hazard judgement. Yet, it must be recorded that it heralds the resurrection of an eminently logical economic shibboleth, hitherto consigned to the dustbin. The premise of lower incidence promoting higher compliance had been anathema to North Block mandarins for years and finally seems to be coming of age. A second toast to the Finance Minister!

Unfortunately, not much of the succeeding discourse on the tax code may be available for ready view in the medium term. The promise in this citizen-friendly reform, however, gives one the confidence to ponder the fate of another far-reaching change — the GST. Similar streamlining of tax administration has already been accomplished by almost every self-respecting economy of benchmark size and scale. The Indian effort has, lamentably, fallen into a quasi-political quagmire. Given the federal nature of the country's revenue system, GST can only come by via legislation, including constitutional amendments, to junk existing laws as also the creation of a common dual (State and Central) framework it perforce requires.

Building universal consensus on the GST, though, has led to endless debate over its management mechanism, including creation of appropriate infrastructure, and on sharing of its spoils. Equally, it may be simplistic to expect that the fact of different political formations being in power in key States and the Centre, and the much-voiced 'loss' to the former (plus concomitant demands for compensation) is merely a coincidence. It is, more likely, a refined filibustering tactic.

It does appear therefore that the question of whether a nationwide GST is actually needed, is a moot one. Much like Direct Taxes, India's Indirect revenue regime is an elephantine and often conflict-prone labyrinth of state and federal levies that we berated when studying Economics in college fifteen years ago (it was not new then; it is not new now). The fact is that the framework carries the baggage of its roots in our colonial past, and is arguably anachronistic. Applying whatever little one remembers (not that it was ever entirely put to rote!) of economic theory, there are two clear wins in its reform. First, elimination of multiplicity simplifies tax structure and fosters compliance (similar to what Pranab da has already been commended on above). Second, creation of a common market and lower tax burden boosts production, directly and via increased investible surplus: the logic on which EU was born, or ASEAN thrives today.

While actual gains from the implementation of a reformed Direct or Indirect Taxes regime are either the subject of impassioned debate (my Commie friends anyway derive sustenance from chatter, especially of the idle kind) or entail expertise in macroeconomic theory more than is my métier, it is likely that xome April we may be raising ours for two and a half cheers to Mr Mukherjee!

Welcome to the After-Budget Party

Our Republic's General Budget for 2009-10 is now in the public realm. Debate around it has been far from secular, pitting commentators along predictable political lines. That said, while repetitive, this periodic posturing is not sans moments of insight. As a sample, tune in to the laborious constructs of presumably neutral mainstream media (certainly chunks of its English-speaking contingent) to discern an overly friendly disposition to the Congress-led coalition (Padma awards do drive some value after all)!

Talking Budget, calls for a New Dawn were almost universal in the backdrop of an unexpectedly euphoric win and Opposition in utter disarray. Early noises via 100-day vision documents from sundry ministers were fairly path-breaking too. Measured against such epochal demands, Pranab Mukherjee's eventual business-as-usual pronouncements seem destined for footnotes, not glorious acclaim. The flip argument could be that nation-building is less about a spectacular agenda than solid action, hence closer to the FM's low-risk 2009 design. Let time tell if this workmanlike Budget was a winner.

Need of the hour, therefore, is to fix touchstones for our economic policy, leading me to my biggest peeve: the Aam Aadmi vs Big Business nonsense that circulates as truism (my last post). In the prevalent operating context, two axioms come to mind as pivots for Reform. First, increased goal-focus which implies turning the spotlight away from tasks to outcomes. For instance, Telecom is a poster child of how policy interventions can positively impact the economy at large (despite absence of China-like monolithic continuity in decision-making, a few highly visible recent coalition politics compromises, and some of independent India's biggest corruption scandals). Let me illustrate a few of the multiple levels where this can be seen in action:

• Implicit in the mobilephone's transition from an aspirational lifestyle product to a ubiquitous one is a story of enabled livelihoods. Today your plumber is a call away, cutting out sundry middlemen-contractors, with obvious impact on the value chain;
• Connectivity bridged distances that investments in conventional infrastructure (alternative) would place prohibitively out of bounds. That distant aunt is a single-attempt call versus literally shouting over 1000 km, Delhi-Patna 'trunk call' or, worse, forced physical travel;
• What information availability (push or pull) has achieved is too complex to fully fathom. Central India's soyabean cultivator has the market at his fingertips now, with consequences on input/ output prices, in a fashion unimaginable in the Humble Farmer's reign;
• Supply is perhaps the highest in impact (after all, benefits remain theoretical minus access). From chasing the friendly neighbourhood DoT-man for an elusive connection, or rectifying perennially 'dead' telephones, to being wooed by tariff wars, freebies and retention packages, we have come a long way.

In short, we need an active marketing of outcomes. Dwell on our global leadership in airtime prices; or how one of India's most backward states is today the most spoilt for choice in telephony operators (almost all mobile). Similar stories from Banking, IT etc must establish that some nudges from the government (and occasionally despite them!) can create true win-wins. Celebrating these, 'selling' the Reform story as it were, is the key to consigning the People vs Business divide to the dustbin it so richly deserves.

This brings us to the second (somewhat trickier) postulate: growth is incomplete without redistribution. We are no strangers to sectoral imbalances or geographic inequity, but limited percolation of the spoils of Reform could bring the entire edifice down. This is not to disregard the need for a laggard manufacturing sector to pick up pace, agriculture to step beyond the Monsoon's shadow, the Hindi heartland to achieve Gujarat-velocity growth, or better infrastructure in general. However, these pale into insignificance compared to the damage potential of broader discontent. Doubting Thomases here could start by noting that a third of rural India (by GOI's own admission) already lies in the Red Corridor, under Naxalite writ.

General disaffection of a chunk of its population from the Reform process, thus, is one of New India's stark realities. A simplistic hypothesis for this deepening unrest is built around heightened awareness (a la Maslow's Hierarchy of Needs). For instance, growing up in mofussil India of the 70s, one encountered few visible objects of wealth to pursue. Model refreshes of the ubiquitous Amby, as a case in point, were too disingenuous for laymen to discern and covet: it remained an immanent part of the milieu. Thanks to a misplaced Socialist slant in policy, choice was limited. In effect, products were inelegantly sarkari or retrogressively shoddy, and often both. Not so today when the flashiest in the world is out competing for your wallet, lifestyles that TV broadcasts direct to your home.

This has clear implications for Reform. As the desire for the good life (alluring decadence even) is stoked to an all-time high, then means must be abundant for the game to be above board. For a nation with a relatively weak tradition in entrepreneurial wealth creation, it is not easy to ensure opportunities are adequate, despite intent. This is the principal argument for Redistribution as stated goal.

By definition, both axioms above are long term. However, Capital is a bugbear (typical of Emerging Markets) immediately. Our policy mandarins, busy congratulating themselves for managing the global meltdown's impact (an unintended by-product of delayed liberalization) need to be cognizant of this. With 9% gone, at least in the foreseeable future, and Divestment war-chest stuck in a morass of political confusion, funding equitable growth remains an open question (an anchor scheme like NREGA by itself will need INR 100K Cr to sustain). Far more than improved experiences with Market vs the State, it is this prospect of mounting government debt that may yet force Mr Mukherjee to push for a more effulgent dawn.