OROP: No Silver Bullet

Emotions have run amok on One Rank One Pension since the governmental baton passed to the NDA last year. In a fashion, this is actually a compliment to the PM's leadership. After all, expectations are sky-high in light of the ruling party's widely perceived fauji-friendly tilt, made even more striking by the UPA's characteristic somnolence (that election-eve accpetance of OROP was disingenuous, if not downright dishonest).

Imagination need not be stretched to understand why OROP demands find widespread support. Naturally, the nation's heart-strings tug easily for those that guard her borders. Our Forces' stellar record of aid in times of calamity or strife comes in handy too, no doubt. To top it all, the institution enjoys a moral high ground, thanks to a reputation unsullied barring occasional blemish, standing tall amidst a general decline in standards of public life (that plumbed new depths in UPA years).

So why the delay? The ask itself is clear: to index pensions to benefits for currently serving personnel. In other words, the Government implement a system of 'defined benefits' (percentage of last salary; with math around years worked), paying uniform pension to retirees in the same rank. Yet, be simple as it may, the commitment is not sans ramification. It is a multi-dimensional issue, wherein the crux is money.

For starters, a bitter pill must be swallowed immediately. In other words, funds are needed to bring pensions of old retired on par with new. Unfortunately, this hit isn't merely one-time, but inflates GOI's pension bill considerably in each pay revision cycle (roughly every decade) going forward. With our economic planning often a precarious balanacing act, this has been a deal-breaker hitherto.

Additonally, there is clear-and-present danger that OROP for the fauj opens a Pandora's Box and demands of a similar nature could emerge from other service groups. This includes Police and para-military, but could cross over to non-uniformed personnel too. Railwaymen appear to be first off the mark here (we hear noises around 'essential lifeline of the country' etc) but others may well follow suit. It is this deluge of politico-legal and economic tangles that worries the government.

Fact is that defined benefit pension programmes always run the risk of unsustainability. Many countries have junked such plans on account of the rising burden on declining (productive) populations to support a growing number of retirees. Granted we aren't there today, but what is to suggest that we never will?

As conundrums go, this is hardly unsolvable. One need look no further than our Central Government employees who have been on a defined contribution (versus defined benefit) programme for over a decade. In fact, the National Pension System is class-leading, with multiple low-cost, managed-risk product options (especially those that enable qualified equity exposure) and offers an excellent alternative. Switch to NPS, however, shall be no cakewalk and would entail a mindset shift than mere policy change.

Parsing through all these requires time: a commodity the Modi Govt may not have. It remains true that the UPA's wanton profligacy in the name of social inclusion has pushed India close to the edge of a fiscal precipice. An ill-conceived or reckless OROP implementation must not become another nail in this coffin-in-the-making. That is a prospect our fauji brethern would certainly wish to avoid.

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 culture thousdands of years young.

In addition to patriotic fervour, R-Day is also just occasion for solenn contemplation. In thus ruminating over the state of the nation, one can't help but rue as to what ails its fortunes. Today, the most prominent such malaise is corruption. The affliction is hardly new, but has become so endmeic at the top, so brazen in its extent, that it has become 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 corrpution. 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 Confoederatio Helvetica (or Bahamas, the Caymans, BVI, or other similar global money-laundering havens). Enough exists around us, in form of the 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 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 spoke of legalizing 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 are protected since it was only civic duty, trying to unearth the corrupt. Rinse, repeat, till a pliable babu is found. Voila.

My other bone with such legalization 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, but there 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 likely to be made soon. It may take a regime change for the requisite political will to surface, and perhaps thats what one must pin hopes on, this 26-Jan.

NCTC - Intel Inside

By all accounts, Shri P Chidambaram, our Home Minister, does not take kindly to fools. Nor, can stakes be higher than on Terror, with multiple strikes over the few years highlighting our extraordinarily vulnerable national security status. Yet, when GoI shared a "50 Most Wanted" dossier with Pakistan a few months ago, it was a disgrace (two on the list were in India). That very fortnight, CBI's pursuit of Kim Davy (Purulia arms drop notoriety) in Denmark ended with egg on the face owing to an "expired" extradition notice.

Those 'bureaucratic gaffes' were, of course, only the latest in long history of ignominy (Kargil, 26/11, David Headley, Red Corridor being but a few of its more sordid chapters). Questions were asked of Indian intelligence, or the lack of it. In response we were told to think beyond the CBI, NIA, IB and RAW, all under our venerable Home Minister's charge, to NATGRID, his pet project. NATGRID would allow 11 security agencies access to 21 linked databases covering financial, travel, immigration, asset ownership, telephone and internet usage information for individuals and entities in the country.

Arguments had been made against a NATGRID style response. There were concerns around diffusing focus away from building good ol' Hum-Int with a grandiose but potentially ineffective programme. For instance, it may not raise any alert for an American citizen with Caucasian looks, no cellphone or financial records in his name (save, perhaps, every itinerary with return via Pakistan; an obvious need to brief ISI-LeT) thereby missing Headley. Equally, the potential for assault on personal liberty and data privacy with Government's power to obtain sensitive information without warrant or consent, bred its own share of D Thomases.

Resolution to these, naturally, lay in a well-considered approach. Last week's order notifying the creation of NCTC, alas, displays none of this sure-footedness. In typical PC fashion, it managed to raise hackles all over instead. Opposition-ruled states are up in arms, for one, when Center-State cooperation would be ideal for seamless execution. Likewise, we have conflicts within GoI's own framework with RAW (external intel); NTRO (collection and analysis); and NIA (investigation and prosecution), all of whom have mandates broader than counterterrorism. Nesting the NCTC under the IB, a body sans parliamentary sanction or oversight, too reeks of shoddy legal formulation, if not downright empire-building on part of the Home Min.

PC apologists may point out that feedback has gone into the current notification vis-a-vis his original plan (IB centenary endowment lecture; Dec 2009). This had the NIA, NTRO, NCRB and NSG under the NCTC; as also the counter-terror work of RAW and CBI. Yet, even if watered-down, NCTC remains deeply flawed, most notably in its lack of separation of analytical and operative powers. Add lack of governaceto that, and we can put the US miliatry-industrial complex to shame in its reach. I hope sense prevails soon, with a better design that helps our counterterrorism effort acquire effective teeth. No terrorism-frontline State (for we are unmistakably one) worth its salt should settle for any less.

Asleep at the Wheel

One of the most telling descriptions of the bureaucracy in the 70s 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 key apparatichik in the estwhile growth-sapping regime (something Congress propogandists wantonly gloss over) he 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 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 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 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. Point is will he act; bell the cat?

Who's Afraid of Welfare Wolf

I have been off the air a few weeks. Assorted reasons drove my idle state: I can safely say that paucity of time and not lack of noteworthy content would rank high in them. In fact, our national mood has stretched the arc of the pendulum in this hiatus. A cricket World Cup victory transported India to euphoric seventh heaven. The other extremity was equally tested by a sustained corruption soap opera on national news.

Amidst these topsy-turvy madness, a widely anticipated Union Budget went by without unduly worrying history. Two months on, I found it uncommonly difficult to recall its details last Tuesday (with more than relief in the fact that my conversation partner, usually a highly aware specimen of our species, struggled similarly!). The catalyst for our discussion was a BS blog that argued for a tax-stimulated Welfare State in India. To my mind, the post was most instructive: apart from obvious merit in its core logic (an established part of neoclassical economics), the vitriolic reactions (including some regrettably personal ones) it drew was quite telling.

It is not difficult to understand the clamour for lower taxes. Individuals always want to maximize take-home from gross income (economics = limited-means-unlimited-needs etc). India's historical stress on thrift imparts this global truth an additional flavour. This intensity is likely rooted in political subjugation or consequent economic travails of the last few centuries. It may even be related to facts yet older: the relentless onslaught on our land by variously hued invaders; hence subconscious downplay of 'worldly' pursuit and productivity focus instead. In any case, our sociocultural abhorrence of resource waste is singular (consider a humble beverage PET bottle's multi-stage recycling in an average Hindustani household to sample our resource consciousness). Parting with hard-earned income to an ill-performing State is, thus, a tough sell.

On the other hand, if the governance deficit (Government's 'trust factor' must be at all-time low currently, explaining the cynicism that greeted the post) be bridged, then taxes may well not be branded undesirable waste. Therefore the idea of taxes-for-welfare merits exploration beyond academic interest. In specific, State-run European healthcare framework (different from the private sector US model) is worthy of deeper analysis and potential emulation. Also, to one theme in the post's responses, it is over-simplistic to tom-tom tiny city-state successes against practical realities of India's size and complexity. Likewise, we put at risk lessons of GFC 2008 if we continue to pretend that free markets and private initiative are panacea to all the world's problems (in fact the anti-government intervention refrain too may be in reaction to the corruption-inflation-misrule that the current Raisina Hill dispensation has sadly come to symbolize).

Logically, the other question is if resources to pay for welfare can be mobilized without tax rate raises. An obvious opportunity is coverage: using the metric of filed returns, an abysmal 3% Indians pay taxes (vs US's 45%, say). Sadly, fixing this has not been easy historically. Technology (particularly UID and bolt-on's) however may provide a way out in the not-so-distant future. It is worthwhile to build stronger sponsorship for these efforts, including better appreciation of benefits and timelines. Saddling the taxpaying salaried minority with more levies ought to be the last resort in this sense. (You could say that my stance is partially inspired by a monthend routine of agonizing over the payslip!)

In summary, the post provoked some interesting (even if open-ended) chains of thought. At the very least, its advocacy of a Welfare State underscored a key policy shibboleth - inclusive growth. Question is whether those at the helm think economics beyond competitive populism (sample: commitments in the ongoing state elections); and how they win back that precious commodity called public confidence, key to driving larger participation in nation-building. Woh subah kabhi to aayegi...

Microcredit Miscarriage

Last week, following a rather spirited discussion on the economics and politics of interest rate ceilings (albeit in a Malegam context) I was sent a recent NYT article by Prof Muhammad Yunus (Sacrificing Microcredit for Megaprofits). In it, the Nobel laureate and visionary-founder of Grameen Bank lamented recent trends in Microfinance, calling special attention to developments in India to highlight the sector’s wrong turns.

The good Prof's premise is summarized thus: the model evolved in the 70s' in poverty-stricken Bangladesh as an alternative to the usurious stranglehold of moneylenders. Over the years, its success spawned emulators beyond its birthplace. However, last decade’s structural shift in many parts of the world from nonprofit to commercial lenders (he notably mentioned IPO-famous SKS Microfinance) has resulted in 'a new breed of loan sharks', striking at the sector's very raison d’être.

As arguments go, there is clear merit in what Prof Yunus postulates. It is not merely Mother India buffs who would be familiar with shenanigans of the Friendly Neighbourhood Lala – he was the ogre-of-choice till Hindi Cinema discovered the hate potential of the political class. Replace it with a faceless corporation and supposed implications are shareholder avarice, dubious fund sources and rising operating expenses. All told, this image doesn’t sit well with poverty alleviation shibboleths.

Equally, the issue of lender profitability, the ostensible driver for the 'mission drift', is hardly resolved. An impersonal intermediary like a corporate may be worse suited to understand the borrower’s lifecycle. As such, wrong placement of credit increases risk of default. Worse, absence of community relationships may reduce ability to manage delinquency, further skewing the risk equation. The cascading impact on interest rates is a vicious cycle, potentially leading to lender collapse.

It is a grim picture. At the very least, this model shift requires all stakeholders to tread with utmost care, given impact on the entire ecosystem (certainly the last needed is sundry politicos fishing in troubled waters - a la AP). Prof Yunus recommends an interest rate cap; plus a microcredit regulatory authority to manage administration, accreditation of specialized microfin banks and ensure transparency in lending and collection practices. These make sense in my limited view, with one major caveat: that overzealous governments not go overboard as is their wont, or misuse increased oversight to dole out favours to chosen few.

Subject to these key conditions, there is the not-entirely-theoretical question of whether the intermediary being necessarily nonprofit. Here lies the rub. The Indian experience has been most unfortunate: one where simple, straightforward products (or agencies) get twisted into something completely antithetical, hopelessly losing their original purpose in a web of intrigue and shortcuts (for instance, the Money Matters fiasco where Housing loans metamorphosed into a tool for highly-leveraged speculation; or entire industries hijacked – Insurance digressing into ridiculously-priced ULIP's instead of addressing the opportunity in inadequate cover for the average Indian etc).

At the heart of these BFSI snafus is information asymmetry between the buyer and seller. This is mostly a deliberate design to ensure low buyer appreciation of what he or she is buying. Microcredit has merely followed this trend. January is too early to be cynical though. Instead, hope shines bright with other examples: the Mutual Fund industry, forced to focus back on channelizing retail investment into stocks instead of short-term corporate business or skewed load based easy pickings. Needed, it seems, are a few gentle regulatory nudges – keep the chin up, folks :)

Dal is Meat (rhyme Small is Big)

My idea of a delectable meal often subsumes 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 shy of conspicuous consumption of the non-vegetarian kind. It is equally easy to remember my preaching from the pulpit to those missing out on similar indulgences.

Alas what use is a tale without a twist, and mine came up against one via marriage when my six-seventh dedicated 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 to think my last post (Dal, Not Boring was my first on food; built around an eminently vegetarian delicacy) to be an ‘inspired’ choice! Yet, apart extenuating domestic circumstances (an outvoted minority status), 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 mentioned earlier. 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 officialspeak 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 burgeoning population and changing consumption patterns (economic progress whets 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) display any urgency to increase areas under pulses 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. Else declared national goals like chasing Security Council seats are entirely meaningless.

Dal, Not Boring

Vir Sanghvi's Rude Food is part of my reading staple most weekends. To get to it is not always a cakewalk though: one has to negotiate 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 traveler. Yet, when confining himself to playing patron vs patronizing, 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 Singhvi points out, though content to play second fiddle to other offerings, the Dal does not suffer from lack in variety. All forms of Indian cuisine profess a version and each civilization coming into contact with it has added to options. At one level it is in fact quite interesting how hard put you would be to find Dal oriented eateries when you think how every household carries its individual specimen; and even the occasional cook's experiments have enriched its pantheon. (My mother for instance, not much given to adventurism in the kitchen, still cooks a memorable Dal, and so one would suspect for assorted mothers, spouses and chefs of varying culinary expertise across the Nation!)

However, there is one facet that Shri Singhvi barely scratches the surface on - 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 from personal experience of course). In fact, this has worried no less 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 Sat khichdi lunch :)

The Cycle Diaries: Bihar 2010

My apology to Che-lovers for the title, but the pull of the wheel has been strong in this space these last few days, and it sounded like a good time to talk 'cycle politics' in my beloved home state! For the politically disinclined or oracularly averse (you would be hard put to find self-respecting Biharis willing to go by either description) the crucial eastern state is mid-way through polls to elect a new Vidhan Sabha. Truth to tell, in the fractious cauldron of Bihar's polity where caste often looms larger than life, the election appears a close call. (At the very least, it may not be the cakewalk for the ruling NDA that the Media would have us believe). The battle is, equally, critical to fortunes of at least two regional satraps with thinly-veiled national ambitions. For the country's largest party too, a toehold in Bihar is crucial to its longer term consolidation plans.

Naturally, with such high stakes, it is a no-holds barred fight, with participants of all ilks looking for and playing up the minutest of issues. One idea that has thus taken centrestage is the Mukhyamantri Balika Cycle Yojana. The scheme is simple enough: it entitles girls who pass Class VIII in government schools to state support in form of a free bicycle, or INR 2000 to buy one. (It should come as no surprise that though the Nitish Kumar government has extended the scheme to boys, it is only the promise of female empowerment implicit in its original version that has caught everyone's fancy in one of India's most backward states.)

On his part, Nitish has not shirked from riding the bicycle into the grime of electoral debate. He has extolled its virtues, from obvious aspects like education enabling gender equality to deft positioning as a lesson in striking balance. The latter in particular is a veritable coup d'maitre: in a single turn of the pedal, it transforms the potentially conflict-creating shades of any force of female assertion arising from the scheme, and adds character of blend and acceptability. The logic is pithy, indeed vital in the extant male dominated quasi-feudal milieu, but clearly there is bigger game afoot.

In the larger picture, Nitish knows that the issue of governance played more than its part in pitchforking the NDA to power in 2005 (and reinforced in 2009) when his predecessor's much-vaunted contempt for vikas as a demotic issue came up electoral turtle. (Go back in history and one could make an equally good case via Rajiv's freshman promise and appeal to change in the massive post-Indira assassination mandate.) In short, development may not be an absolutist winning ticket but it can be a great consolidator in electoral sweepstakes. The wily politician in the Bihar CM reckons he needs every card on the table to retain the edge in its complex electoral arithmetic. (The same come-all desperation also motivates his covert appeasement of neo JD-U converts and the occasional bahubali, moves that are termed capitulation by pro-vikas votaries in the intelligentsia.)

At the same time, the pragmatic Nitish recognizes he is no Narendra Modi, missing the BJP strongman's masterly leveraging of the governance plank, and indeed his enviable track record. Even Modi's biggest detractors (and Bihar's CM does occasionally assume that garb) cannot turn from the single-minded determination that Chhote Sardar brings to Gujarat's development agenda, or his patience-is-not-a-virtue attitude to execution. Unfortunately Bihar under NDA rule has mostly struggled to shrug off the negative growth RJD legacy and actually partially benefitted from its shrunk-denominator effect. In a nutshell, it is no one's case to argue that no good has come about in Bihar post 2005, but its pace has been painfully slow and corruption has continued to sadly fester. The incumbent CM therefore has little choice but to root for the symbolism in the bicycle scheme.

The compulsions for Nitish's main challenger are of course entirely different. Shri Laloo Yadav is looking for a way out of political Recycle Bin, hoping that the cycle of change makes people vote RJD's lantern back to power. The path is hardly rosy and the 70+ one-time kingmaker has struggled to brew a concoction to renew his spell, apart from hope in Rambilas Paswan's vote-transfer ability. After initial flirtations with the development plank by pointing to his record as Railway Minister (a claim made hollow thanks to Didi's revelations) he reportedly tried one-upmanship too - promising Class IX students motorcycles if victorious (so much simpler to match 1-kg rice with 2, alas!) but thankfully did not persist. It is, after all, one thing to turn animal fodder into millions, and quite another to conjure up finances for a mere-paas-motorcycle scheme (petrol bhi hai?). And then there is the minor happenstance of students not being of driving age, a fact that Nitish was quick to drive home, calling his bete noire's schemes as "always meant to land you jail"!

We have had some RJD leaders attempt murder-by-whispers too, with talk of how bicycles were being used to finance eloping couples, inter-caste marriages and what-not. Such slander campaigns sit light though, and most Biharis are too politically adept to miss the attempt to wash over Lalooji's misgovernance credentials (he once publicly castigated his trusted lieutenant, Raghuvansh P Singh, for mentioning development during an election rally, calling it an avoidable digression from the fight against communal forces!). Hence, his core support base more or less intact (though there is some talk of post-Babri Muslim angst changing this at a local seat level), Lalooji has been left to ponder where the additional numbers will come from. One can never write him off too soon, but it has till now sounded like a far cry from the days of samose-mein-aloo.

In a few days from now, we will get to know how it stacks up. Yet, irrespective of party inclination, a political lesson cannot be missed and is a harbinger of hope for the Bihari in me. Holding its own amidst the high stakes and tightly strung social equations, the humble bicycle, campaign rally exhibit extraordinaire, epitomizes the inevitable drive of economic progress and inclusive agenda. Or as a much wiser man once put it, one cannot fool all the people all of the time!

For Bettor or Worse

One more scandal. In Cricket. And with origins in our north-westerly neighbor. Before you yawn and throw the newspaper away, cursing them for rehashing old copy, pause a moment. Media baiting apart, recycling strategy does not sell newspapers, at least on a sustainable basis - and mine certainly wears its readership high on its sleeve. If this be the truth, there must be more to it, including a reason why Cricket has kept company with controversy with striking regularity of late.

My brush with the purported gentlemanliness of cricket came from pages of the same newspaper, years ago. The mid-80's, newly launched HT Patna edition headlined "It's Not Cricket" for some fiasco on the ground - the kind that’s hardly likely to cause you to blink in our more cynically evolved times! A question to the Pater elicited an etymological explanation in the game's history and tradition-rich lore. Not sure if it significantly altered my on-field behaviour (or lack of notable achievement), but much before Atticus Finch, it was an excellent introduction to that intangible called sportsman spirit.

Those wistful memories, though, are not the only reason to grieve the morass of modern Cricket. Mind you, the actual charges the tainted trio from Pakistan (and Akmal D’Artagnan) stand in the dock for, are neither unique nor original. More than a few of India's own, including our Hon'ble MP from Moradabd (though his erstwhile tarnished reputation has lately been alight with some other flame!) have shamed cricket and left even its diehard fans wondering whether on-field exploits are driven by sporting acumen or Mammonic influence. One can go so far as to argue that this skepticism; and an exposure overdose have led to Cricket's (relatively) flagging following - and gradual rise of other sports.

In any event, no nation has made such inseparable acquaintance with controversy as Pakistan. Go back but a few years and Pak cricket has been newsworthy more for unsavoury dealings and repeated individual misconduct than genuine cricketing reasons. If unconvinced, try and picture generation's-best-bat Inzamam (thus spake Imran; move over Lara, Sachin!), Peter Pan cowboy Afridi, sex-n-speed (pun intended) posterchild Shoaib Akhtar, twice-named Yousuf (more pun intended) and check if images of occasional glory are not tainted interminably with talent-wasting notoriety. Indeed Pakistani cricketers come and go (often for multiple voluntary and forced retirements!) but despite several efforts to clean their Augean stables, the muck refuses to wash off.

Perhaps all the internecine bickering and dubious (on- and off-field) debacles in Pak cricket could be brushed off as symptomatic of the rot in that country. The world has, after all, been comfortably numbed to bad news from Pakistan. Mourning the absence of sporting events in its geography is not easy given what transpired when Lankan Tigers last dared to venture there. Yet, history teaches us that existence of exclusion begets politics of hate. An economically challenged, educationally backward and socially fragmented state is fertile ground for the unleashing the worst within us. If no other, then this is good reason to shed a tear for Muhammad Amir. Not from the country's oligopolistic elite against whose doorstep lies the blame for most of the mess that is Pakistan, and whose fiefdom the nation's cricket has traditionally been; Amir would not have had it easy. His was a long, heroic journey from the Swat valley, now not famous for panoramic beauty but notorious for the war against Taliban; to matchwinning brilliance at Lord's. For a nation short on inspiration, at least of the right variety, such fairytale stuff was pertinent, to say the least. With those no-balls, alas, the spell is broken!

At another level, we must ponder if too much is invested in the game in the sub-continent: the ridiculous shenanigans before, during and after IPL ought to have triggered such thoughts anyhow. As case in point, consider the pointless brouhaha over another no-ball and symphony of sympathy for Sehwag (he too woke up to it overnight!). For sure lament the decline in the spirit of the game in such incidents but let us equally appreciate the larger context of its commercialization where, indeed, we have played a leading role. And certainly give those ill-founded, frenzied waves of jingoism a miss - it is, after all, just a game :)

PS: My vote too, for legalizing betting. Like the War against Tobacco teaches us, one plays them best when allowed out of the closet. Viva Transparency!

Damp Squib

Months ago, the draft of a new Direct Taxes Code for India had drawn much public acclaim, including in these pages. This was not without reason. For starters, the existing system was visibly knocking the doors of obsolescence. Hence, any review intended to simplify its archaic tenets (thereby reducing repeated recourse to judicial interpretation) was hugely welcome. Next, a forward-looking document shorn of its predecessor's dotage could enable the taxman to better engage and deploy tools of New Age technologies. This promised a sea change in efficiency and effectiveness of Direct Taxes administration (on counts like evasion detection, internal security etc) making it a progressive legislation worthy of our budding economic superpower billing. Last and not least, the very idea of promoting larger debate prior to finalization bespoke intellectual honesty and inclusiveness rare in our policymaking experience. A thumbs-up for this wiki approach was much in line.

However, implicit in all these arguments (in fact providing them overall credence) was the gamechanging nature of actual changes proposed to the tax framework. If it were to fall prey to back-room intrigue and lobbying, as the more cynical amongst us foretold, it would be a real pity in face of path-breaking promise. Even as these fears lurked, the Revised Discussion paper one heard of a few months back, too sounded headed in a compromise-riddled direction. And sadly that is exactly what has finally come home to roost in the proposal formally introduced in the Parliament this week.

So how has the cheer of the finest's toast for Pranab da slipped to old wine-new bottle despair? Not merely for selfish reasons, my first disappointment remains the largely superficial personal taxation changes. In fact, the reams of newsprint dedicated to laud the 'extra income' (INR 24K at the upper end) through marginally tweaked tax slabs makes one wonder when our mainstream media will mature beyond homilies and cliché. (To avoid sounding like a stuck record, one must steer clear of media-bashing: though richly deserved, there is zero surprise in our Fourth Estate's centrist and arguably pro-Congress slant.) In any event, basic math of inflation on the ostensibly cast-in-stone slab values itself beats hollow the DTC's pithy positioning as windfall for the taxpayer!

Going beyond this, one must rue the potential in a truly simplified tax framework. With 6.5% of tax incidence sacrificed at the politically expedient altar of Exemptions, the Government had a clear shot at reducing cost and complexity. Moreover, removal of potentially distortionary criteria would have improved investment decision-making for aam aadmi and HNI alike. Equally, a move to EET could have meant a boost for long term Savings (PF withdrawal is an example) but has been belied. Perhaps most importantly though, the survival of Exemption regime has reduced the leeway to lower rates and punt on increased adherence, ultimately limiting the ability to fund the Government's ambitious developmental agenda.

The saving grace has been the refusal to tinker with Capital Gains Tax that would have created an artificial portfolio churn opportunity (en masse profitbooking in March, followed by resumed long in April, a cost minus any economic value add) that has been avoided. (In lighter vein, the DTC is also the government's first assertion of having achieved its gender equality goals. So the deduction differential allowed for woman taxpayers stands withdrawn, unless if merely saved for a subsequent budget to reinstate)!

Of the pieces of fine print, the other notable revision in the Bill vs its draft is the compromise on corporate taxation. A strong argument exists as to how the Government thus frittered a chance to overhaul capital allocation in our economy. The erstwhile proposal to predicate MAT on gross assets vs book profits represented a fundamental change in the much-misused play around lowering tax liability via investment led depreciation benefits. From usage as tool to 'manage' tax, investments could have come into their own and be evaluated for true CBA. Big Business lobby however (including relatively genuine voices from its capital intensive variety) has ensured we are left with Photoshop type interventions in form of lowered tax rates via elimination of cess, surcharge etc. If, as successive FMs had given us to understand, these were temporary inclusions in our tax regime, it hardly needed a large-scale DTC exercise to get rid of them. Again, there is no surety that some other flavour that suits the incumbent political mood will not 'force' the government of the day to resurrect these ostensibly stopgap devices.

All told, this residual pot of half measures still sets the Taxman back 1% of their INR 5.8 lakh Cr annual kitty, without any redeeming expectation of increased adherence. A solitary hope remains - with the suspense and end Feb Budget jitters gone, we could leverage the long term Tax structure come 2012. If only the redoubtable Mr Mukherjee had been inspired by the spectacular doomsday caper of the same name, the changes would be a bit more appreciable...

Animal Farm

One of India's more watched news channels and its leading English daily recently ran an expose 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 to the outrage a tinge of rare immediacy. A call to action, so to speak, seemed incipient in the wave of national indignation.

Yet, it remains a moot question as to whether this will lead to tangible change. While the media may have chanced upon its grandstand newsworthiness now, the issue has been hanging fire for ages. My personal recall itself is from two decades ago - copious if not compelling lamentations on 'distribution losses', penned in the pursuit of an Economics degree - and the problem was not of recent vintage even then! Indeed similar protestations brought academic glory to many (not me!) over the years, with pithy math of mouths fed if gaps plugged etc. Yet to not much avail, as the sordid visuals from TV testify. For one, the agricultural supply chain has been hostage to political ambivalence for too long. Such has been the potency of notoriously enmeshed vested interests in its every leg, that all other actors need to be content with status-quoist survival play, mostly far too cynical to challenge it. A quick sample is illustrative of 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-marginal brethren are too fractured to wield any real political influence, clear from the typically lackadaisical, stopgap response to farmer suicide. Lack of organized credit in any case confines their choices - a fledgling microfinance revolution is still some time away. (This is not to undermine the fact that better contextual appreciation and economic timing helps sustain local moneylender-cum-intermediary strangleholds.) In this extant reality of stagnant productivity, the otherwise laudable NREGA and mostly reprehensible Maoist violence – both 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 storage and distribution of agricultural produce. Public sector agencies hold the key, but gunnies full of foodgrain don’t have a vote, and tackling post harvest waste remains low in their priorities. Other logistics players, only occasionally different from middlemen, have little motivation to drive efficiency, with infrastructure (and corruption) squeeze on margins, unless to profit from (artificially induced) supply imbalances. Lastly, wholesale through last-mile retail suffer from scale, subject to high rent, rising operating expenses and limited organized investment, disadvantaging honest trade.

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

In short, we must lean on science again. Be it input optimization, 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.

It would, of course, 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 anyways planning to focus on his new ICC Chair, when not engaged in periodic one-upmanship exercises with his professed ally). This is merely to request for not wilfully muddying the waters. We cannot afford to continue ludicrous supply-pricing games; with ill-advised and badly-executed (if not dubiously intended) market interventions missing economic sense.

Hypercritical of politics after a fashion? No. We should recognize the math by which 58 million tonnes of stock accumulates, double of actual need, Or how over a million tonnes were lost to storage and transit in the last 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 recent state elections. Good - they can now watch the tragicomedy play out live.) So if our political master 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 visionary - and allow full mobility and free markets in the sector. Food Security would then move from policy shibboleth to proud reality.

Numb and Number

Well into the 21st century, the first impression for anyone walking into a government office in India is likely an image of a deluge of paper, embodiment of its creaking infrastructure. A proliferation of overflowing cupboards, dusty files stacked wall to wall, cobweb-tarred piles kissing the roof and reigning over every spit-stained corner; it is an ugly and telling sight. The obvious: a grim tale of bureaucratic sloth suggestive of indifference, busy adding to the karguzari paper mountain day by day. Equally, a sense of wonder: how, in its midst and despite it, the business of governance carries on in our vast, parched lands.

Times are a-changing though. Via some central initiative but mostly local effort, the Government is waking up to technology and convergence. While paperless is a far cry, Indian officialdom is taking gradual, diffident steps to improve information management and productivity. This is only natural. Services, and specifically IT, offered a way out in a country beset by inadequate physical infrastructure. In tandem with corruption and lopsided left-leaning policy, these bottlenecks had leashed us to a 'Hindu' rate of growth and an economic has-been status. New Age technology enabled the emergence of a confident, vibrant India that we see generous glimpses of, today. Thus, it is only fitting that it provide the vehicle for our governance transformation, light in a pen-pushing paper-serving Black Hole where citizenry feared to tread.

Obviously, this goes much beyond paper. Of vital significance is technology's gamechanging capabilities in delivery of governance benefits. Indeed, no less than 27 mission critical projects have been put by the Government to this task. UID, or Aadhar as it now named, is arguably the most important of these: the core of our national e-enablement effort. The idea is simple - a unique identifier to serve as primary key driving the massive information repository that governance for a billion plus populace entails. Naturally, the superstructure can only be as good as its edifice. And the UID ask is humongous: plan and execute a 12-digit numerical tag for a mindboggling 600 million records, including associated biometric and personal data. All this over the next 4 years, while staying true to the goals of building a robust and efficient system. If successful, this identifier and pathbreaking database of biometric permanent account numbers and personal statistics would enable policy analytics and monitoring at an unprecedented scale. Frankly, it is near impossible to envision the full governance impact of the result. Yet, broadly speaking, its incisive segmentation and targeting ability would be a dream in terms of faster rollout, easier tracking and better audit.

Of course, the picture is not all hunky dory. The enormity of the exercise is perhaps equalled only by its complexity. For instance, potential private use is a double edged sword. While it does wonders for, say, a financial services company for verification, marketing analytics purposes etc, the risk in unfrittered online access to personal information can be immense, especially for a terrorism frontline state. To this extent, UID is much more than a technological challenge of system design. Imagine, its potential multilevel security solution and consider that this also address ease of accessibility, given a citizenry with varying levels of computer proficiency, safely assumed low in average. Then there are connectivity concerns (Mukeshbhai's opportunity can be Nilekani's bugbear!). Revert to traditional paper census methods or a paper-hub-digital-spoke model and you open up data compromise risks in L1 implementation itself. Power can play spoilsport too - though solar panels were used to fill gaps in proof-of-concept stage, one must bear in mind that a Karnataka does not an India make. We cannot be blind to the bureaucracy's internal change resistance either - some of the flock do love a good drought, as we unfortunately know only too well! And so on.

Yet, the RTI experience teaches us that political will at the top goes a long way in overcoming what seems prima facie insurmountable. Similar commitment must be mobilized to tackle the issue of Data Privacy protection for our citizens. Not only is this a clear checks-and-balances need in post-UID India, it is high time time the Government realizes that misuse potential in a nation with lax, ill-defined laws is not restricted to its Internal Security agencies. Take this train of thought forward, and one would love to see proactive public debate around Aadhar's design and other postulates and concerns - different from the self congratulatory world-hunger-solution posturing that has come by till date. Short of this, it will be another gamechanger that flattered to deceive!

A Follow On Inning

For a prolonged period in the Nineties the powder train 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 fairly consistent 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. Some hangover of those glory days still seems to pull the retail investor (sample the now-thankfully-dear-departed 'MF IPO' mela) to this day though.

As it turned out, in this happy period, my college pocket money was hardly enough to afford any investible surplus. The result naturally was that my initial flirtations with stock-picking missed any skew from the confident swagger of tenderfoot success, nor adventure from lure of lucre. Learning the hard way (and armed with pearls from two notable masters: Messrs Buffet and Lynch) my confidence gradually crept up at least enough to venture my opinion on the table. And when for a few years in a row my portfolio reflected better returns on direct equity investments vs the Sensex (or those via the Fund route) the tendency to play to gallery won me to freely dispense stock advice!

Unfortunately, of late, my acquaintance grew with that familiar spoilsport: Time (or the lack of it). Consequently, most of my theories were tested vicariously - and though the results were not discouraging, the discipline to tend better to my portfolio was found wanting. It is in this backdrop (and to the 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, here's how the issue stacked 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 of a healthy topline growth with plans to ramp up capacity by ~10K MW (over a third), assuming execution on track and equipment delays/ risks in control (Also important given its somewhat sub-optimal debt-equity ratio, affording 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 was steady - a new 20 yr coal supply agreement with Coal India for 12 of its existing 15 units would get supplemented with captive coal mines and KG basic gas expected to kick in over next 2 years. Possible overseas mines acquisitions (hydro projects remain a concern) would provide increased flexibility. There was also strong partnership potential in 2000 MW nuclear power JV and ventures with BHEL and Bharat Forge to manage engineering and equipment needs
• Potential upside existed from sectoral deregulation, specifically unallocated power sale boosting returns or short term power trading (#2 player) and 3P modernization/ life extension practice

Yet, for the retail investor, the icing on the cake could only come from a price play. Indeed, it was key to whether the issue would draw more than institutional interest. The latter, some argued, would get committed any ways, 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 at the very least) it was critical for the floor to be suitably defined so as to set the right tone for the aam aadmi investor.

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 prurient interest) were in itself well served by a simplified version of this script (rob Peter to pay Paul etc) but the back-room shenanigans transcended the staid approach the Govt and its hired guns usually adopt in such situations. In fact, far from commonly held misgivings on price, PSU entities actually bid at the high end, much higher than the floor price or the market - and that when FII interest was almost nonexistent! Extending the line, we had 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 that had been 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 an unprecedented manner. At the same time, it must be pointed out that such insidious conveyances could be but a short term tactic. Over the course of what promises to be a long summer, Fin Min mandarins would do well to imbibe better appreciation of their much professed principles of policymaking like public sector ownership by the public! Not only is the capital requirement in the current Grand Sale of PSU family silver way too high to afford being limited to incestuous bargains, but there is real fiduciary merit in spreading the spoils over a larger investor base. To boot, there may well be electoral arithmetic benefit in promoting an aam aadmi (or middle class, at the very least) lilt in any future auctions (even if at the cost of a marginal discount).

For now though the NTPC FPO kissa does leave more questions than it does answers, such has been 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 pallete 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 can not merely withstand future shock but proactively alert us to impending danger going forward. In fact the latter, curiously and completely missing in the run-up to the Lehman collapse or the events that followed, is the critical test for any proposed structural change. Unfortunately, at least for now, our response appears to me as 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 also 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 eventually turned a Banking crisis and finally led to broader Economic consequences. Obviously such a debacle puts into the dock governments, central banks, regulators, banks/ 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 than 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 tougher ask despite broad unanimity on its goals - 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 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 mortage, 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. He was incensed my conciliatory gesture of a post – and at the suggestion of using a credit/ debit card driven payment system as an 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 made as an appetizer any ways. Some of the thoughts that came to me at various times this week:

• Speedy adoption of VAT and GST system, something that has been argued for 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 computerized across asset classes as well as company registration, customs and excise, tax, passport, licences etc – and cross-tabbed (if needed) with HNI indicators like asset ownership and lifestyle spends
• Better enforcement of annual personal tax returns – and perhaps early bird incentives than merely penalty for delay or default. (No doubt my friend would be happier to hear words like greater powers to enforcement 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 license 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

And 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.

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 had 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 around 25%; saving bank deposits of INR 10 Lakh plus it was one-third etc (Folks with dark humour will savour the fact of ~10% of 3100 RBI bond sales of over INR 5 Lakh gettinh away without a PAN!)
• Moreover, cases of fake/ multiple cards abound, limiting the department’s ability to trace any transaction back to the beneficiary. It is any ways over its head in water on the high-value AIRs for investigation/ matching with I-T 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 – even people with flashy lifestyle not commensurate with known income sources) using AIR data for over three years

But perhaps we write the epitaph of this effort too soon. We can equally note that high-value transactions capture was up 2X between 2007-08 and its preceding year – clearly denoting detection successes 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, this is not the super-bright precocious pre-teens of the current day, the trend is equally 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 merely a ‘Friend’ on my social networking account, but was actually 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 Fin Min 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 will be where my oracular protestations be put to test. As more and more of India takes to using 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), the inclusion revolution shall fly bottom upwards. Empowered handhelds will then achieve what its voice cousins have already done – bridge divides that most thought an impossibility in the Indian context. Not will this spread make the ‘card’ all pervasive, it will put pressure on high value transactions to conform, given an enormously shrunk cash economy in the future.

Hence, card, we dream… Goodbye elitism, farewell effete :D

Waxing Tax Too

In response to Friday evening post, one of my left-leaning intellectual (tautology, really!) friends called me for a not-so-quick tete-a-tete. 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 got a further boost with post 1947 nation-building economic action. Again, the Nehruvian model was resource hungry – revenue had to fund substantial public sector investments. 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 license 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 these as it may, the most potent constituent of the parallel economy was the hawala-hundi system that allowed its ill-gotten gains to find their way to safe havens as much as to become a tool to finance new trades – 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 humiliatingly point out, the endemic corruption bred by such an all-pervasive Black Economy can sap individual will away. One does not need to conduct a Buddha’s Three Questions type of experiment to know that 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!

Whither the disconnect with my more learned friend, 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 to solve world hunger is, frankly, far-fetched.

So whence the solution? There must be many (only followers of Marx have the liberty to merely preach symptoms without offering a meaningful cure!) and for 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 multitude of transactions (over a ceiling value, potentially) for individuals. Being electronic, on transaction speed and high-velocity rotations, credit/ debit cards can easily counter the ‘good’ in the Black Economy value-proposition. With increasing computerization, e-banking can work well 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-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 still out as to the merits of the actual proposal. It certainly deserves minute scrutiny and my current inability to appreciate its fine print is far too real to hazard any early judgement. Yet, it must be recorded that it heralds the resurrection of one 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 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). 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 any way derive sustenance from chatter, especially of the idle kind) or entail expertise in macroeconomic theory more than is my métier, it is likely that Come April we may be raising ours for two and a half cheers to Mr Mukherjee!