A House Divided: The Script of AP

Andhra looms large in my Weltanschauung. Notably, I lived in Hyderabad back in 2005-07, making many friends for a lifetime (in one case, hopefully longer) during my sojourn. Scores more over the years have hailed from Telugu-land. Rare among this breed, however, were those who believed possible what shall become a reality later this year (having lived through BR turning BR + JH, I was much more sanguine). Erstwhile AP shall split, and Telangana shall be State #29 of the Union, come June 2!

Much ink has been expended on the why. Of these reasons, none is cited with more vehemence or consistency than historicity. Indeed, the idea harks back to the India of sixteen mahajanapadas in the form of Assaka. Yet, through the Satavahana, Vakataka, Chalukya, Rashtrakuta, and Kakatiya periods, the borderlines remain fluid. Come the Nizams and the 1799 alliance (which gifts Rayalaseema and Coastal Andhra to the British while retaining Telangana within Hyderabad) and the map starts to take shape. Then, of course, comes the Telangana rebellion against the Nizam and the Doras, building the groundswell for Hyderabad's merger with India and culminating in Operation Polo on September 17, 1948.

Enter Potti Sreeramulu. Overcoming Prime Minister Jawaharlal Nehru's long-held opposition, a language-based Andhra state comes into being in October 1953—almost directly in consequence of Amarajeevi's sacrifice—comprising seven Coastal region districts along with four from Rayalaseema (and no Telangana!), with Kurnool as capital. Genie out of the bottle, demands to redraw the map of India on a linguistic-regional basis proliferate across the country, forcing Nehru to appoint a States Re-organisation Commission. This is where it turns into a veritable political thriller.

The SRC, headed by the PM's beloved Fazl Ali (and including the venerable KM Panikkar, HN Kunzru et al), recommends in 1955 the formation of separate Andhra and Hyderabad states, considering economic disparity and relative misalignment in public opinion with respect to unification. Note that this is entirely in line with Nehru's concerns around the “tint of expansionist imperialism” in the Telangana-Andhra merger, with the PM going so far as to compare it to a matrimonial alliance needing “provisions for divorce” if the partners cannot get on well. At the very least, the SRC indicates a five-to-six-year cooling period before considering Vishalandhra. In a strange u-turn, a forever-sceptical PM now overrides his own SRC, not to mention earlier JVP and Dar commissions, to deliver a unified Andhra Pradesh in 1956!

Much has been speculated about Nehru's rather uncharacteristic volte-face—whether driven by blackmail by Andhra elites, the spectre of a communist Telangana, threat of royalist-Muslim revival of Azad Hyderabad dream, or a Soviet-influenced vision of mega-states. Or, perhaps more characteristically, the idealist in him was taken in by the 'Gentlemen’s Agreement' (in the main for political power sharing with a CM/Deputy CM split, a 60:40 Cabinet composition, job protections via Mulki rules, no revenue surplus diversion, and oversight via a Regional Committee as a special legislative body). Regardless, Nehru wilted, and in so doing, virtually wrote the exact script of the subsequent movement and eventual division.

Of course, in the typical arc of history, it took a few years for the union to entirely unravel. The Agreement itself was violated almost at once: Deputy CM post frequently left vacant or abolished; job quotas bypassed; Telangana surplus diverted to fund major irrigation projects in coastal Andhra etc. The ground continued to simmer: over 350 students lost their lives in 1969's First Telangana Movement; TPS won 10 of 14 seats in 1971 only to be co-opted into the Congress ranks in true Indira style; the 1973 Jai Andhra counter-movement that led to abolition of Mulki protection; and NTR's 1985 Government Order 610 to repatriate non-local appointments etc. Much was promised, little delivered, and for an illusory period of peace, it appeared that the demand for separate Telangana had petered out.

Cut to 2000. Chandrababu Naidu was at the peak of his political prowess. Having secured a crushing victory to enter his second term in 1999 and deeply allied with the ruling NDA at the center, he was internationally celebrated as a tech-savvy "CEO" Chief Minister. The Congress, led by the feisty Y.S. Rajasekhara Reddy, was entirely unable to breach Naidu’s development-focused narrative. Against this backdrop, a certain K. Chandrashekar Rao, then Deputy Speaker of the Assembly and disgruntled at being denied a cabinet post, sensed a massive blind spot in Naidu's Vision-2020 plan: the severe agrarian distress and deep feelings of neglect in the Telangana region. He walked out of the TDP and formed the Telangana Rashtra Samithi. There has been no looking back since, and in just over a decade, the statehood demand has fructified.

Naturally, as clear catalysts, KCR-TRS are being feted for their contribution toward the realization of the Telangana dream. What is less obvious, and arguably more pivotal, has been the Congress's strategic role. India's GOP may or may not have orchestrated his exit from the TDP, but they intentionally elevated KCR to legitimacy, forming an alliance in 2004, and including a promise for the reorganisation of states in their common manifesto. With this, they fractured TDP’s Telangana vote bank, sending Naidu into political wilderness for the last decade. What's more, when in power, the Congress carefully sustained the Telangana issue on a slow burner to keep the TDP perpetually at loggerheads internally, utilizing this friction to encourage a steady stream of desertions that have severely hollowed out Naidu’s regional leadership. For now, at least in Telangana, it appears bye-bye TDP.

Where does that leave the Congress? The bifurcation has obviously been inspired by massive anti-incumbency both nationally and regionally. Fact is that much of their woes are the outcome of a sense of entitlement and being too smart for their own good. This move appears no different. Thus, in the Congress high command's calculation, the division finishes Naidu off forever, checkmates a rising Jagan Mohan Reddy, and hopefully gains KCR as a long-term ally (for an eventual merger). I would be surprised by either outcome. Naidu will now double down on residual Andhra, and it is likely to be a two-way fight between him and Jagan for the foreseeable future. And KCR is unlikely to share power when he can reign absolutely. Eventually, the plan backfires on the Congress itself.

In summary, yes, one must justifiably expect celebrations galore in Telangana and KCR-mahal come June 2. And yet again, the fortunes of the country and its states have been held hostage to the Congress's partisan machinations and short-termist outlook. Chacha Nehru then, Sonia Gandhi now. Here's to hoping that this script changes nationally soon...

Inflation Bonds: Flatter to Deceive

Months in the making, the Reserve Bank of India has finally launched consumer inflation-linked bonds. Going under the moniker of 'Inflation Indexed National Saving Securities - Cumulative' (a mouthful, if ever), these bonds have been the subject of much anticipation. Alas, the fine print finds them coming up woefully short.

The biggest stumbling block lies in the product design and its consequent tax treatment. In most countries with such bonds, the formulation goes broadly thus: pay the investor a nominal interest rate on Face Value while letting the FV float in line with the linked inflation index. It is a simple structure that pivots on gains from the inflation-driven FV increases, which are treated as capital gains in the eyes of the taxman.

To take a line from the fabled Maggi sauce commercial, the IINSS is different. It has been structured as a bond paying interest, the rate of which is pegged to the Consumer Price Index. By implication, the entire interest earned qualifies as income, to be taxed at the marginal rate. To be fair, if only the inflation-compensating portion had been subject to capital gains, it could have benefited from indexation. Clearly, the powers-that-be at FinMin and RBI thought otherwise.

Several sticky points other than taxation come up too. The typical desi fixed-income investor, mostly given to income, may not line up in droves for the compulsorily cumulative IINSS. To boot, the lock-in period itself is rather long at 10 years. Such an extended tenor may only accentuate inflation and interest rate uncertainties that scare away investors. Early exit is possible, but only after 3 years, and with a penalty. Finally, there is an unfathomable ₹5-lakh investment cap. All told, I don't see investors being inexorably drawn to IINSS (versus, say, infrastructure bonds with a friendlier format and better post-tax returns).

Be that as it may, one could still have rooted for distribution success. We know only too well that, in the Indian context, financial products need to be actively sold (occasionally with little correlation to merit, ULIPs being a case in point). I wouldn't hold my breath for this though — these bonds are to be sold only via banks, and their low commission structure is unlikely to be incentive enough for them.

Perhaps I am being overly cynical. Maybe IINSS is a step forward, but it could have been so much more. Certainly, days into his tenure, our rockstar RBI Governor had himself talked a big game as to its market-making potential. At least on that count, if not more, this is an ahem.

Raja Beta Banega Neta!

No, this is not a rant against dynastic politics. Only an ostrich, or your average Congressi blessed with archetypal thick skin, would have missed its disastrous limitations. The fact is that present-day India pretty much makes the case for the misfortunes that result when power is thrust into the hands of those whose credentials begin and end with parentage. Thankfully, although General Elections are a year away, the writing seems to be on the wall for sundry dynasts and their brazen sense of entitlement.

My pitch today is almost the opposite. For our polity to step up, more of our bright young things ought to be encouraged to don the political mantle. This, however, is a long walk from current reality. Quiz any Indian schoolgoing child about career ambitions, and it is difficult to transcend the familiar doctor-engineer-civil servant territory. Yes, an MBA has gained some coinage as a livelihood option in the last decade or so; and there will be the occasional interest in bijness (often running in the family); but you can bet the barn against finding anything more than the odd aspirant for public life.

Yet, at many levels, politics is at the top of the pyramid. Take a country like ours, and it is easy to argue that professionals of all ilks actually have to defer to the neta class more often than any other. Apart from an undeniable power to do good, it is not as if there is no economic upside either (and that is without perforce descending, UPA style, into my-kursi-is-my-ATM moral degeneracy). Despite this, politics as a career somehow continues to be considered lowly and fit only for 'the scoundrel'.

Of course, this is in stark contrast to democracies housed in the more developed nations of the West. Politics is right up there with medicine and law as career choices for the nation's bright minds. Sure, there are jokes on the neta as much as, say, on a banker, lawyer, movie star, or any other. However, there is no sustained scorn or uniform vilification of the kind we see locally. Thus, talent does enter, and often from the unlikeliest of quarters. In the US, for instance, from a Lincoln to an Obama, politics has accorded means for the proverbial outsider to rise to the very top by dint of merit (and some timing; but such is true in all walks of life). Must we be so very different?

The most commonly profferred hypothesis for this dichotomy seems to be the vintage of those democracies. Somehow, barriers to entry are lowered as the democratic model matures over time; and (eventually) the cesspool of politics becomes less murky. However, in this respect, our record of the last few years has been rather uninspiring. One does not have to look further than the principles that were IAC, to the compromise that is Kejriwal, in order to understand this gap.

To that extent, the AAP's apparent descent from the promise of breathtaking change may have ramifications beyond the obvious. Will similar future efforts be equally torn asunder by the fallibility of a few? Were they felled in trying to do too much too soon; and is that all we must guard against? Or must we be willing to tread the longer path by galvanising from within, centred around the two national parties? With the Congress seemingly intent on self-destruction, at least part of the answer is clear. The time is now.

Karnataka 2013: What Next?

It may not have made a monumental difference to the result, but I did not enjoy being forced to watch the recent state elections in Karnataka entirely from the sidelines. I had little choice though. Our move to India's IT capital was far too recent for us to have a vote, and I got a taste of what it feels like to be among the disenfranchised.

As it turned out, the contest was even more one-sided than expected. The incumbent BJP dispensation, battling misgovernance and corruption charges as much as a widely perceived disconnect with the electorate, was always facing an uphill task. Perhaps it could have weathered the storm better; a three-way split in its vote left it with no chance. A beleaguered Congress, stung nationally by a second summer of scandal (and an intervening winter of discontent), had some reason to cheer with a clear mandate in the state.

I don't know if many in the BJP were truly surprised by the result. Sure, India's principal opposition party would have been happier had it not been pipped to #2 by an HDK-led JD-S. Equally, they rightly worry about the ground ceded, not only to a resurgent Congress but even to the JD-S, in the usually more discerning urban vote. Yet, the saffron dream had gone sour in their fabled 'Gateway to the South' a lot earlier. Naturally, their spokespersons tried their feisty best to minimise airtime on Karnataka results, and focus debate in national media on the scam-battered Centre. (That a bumbling UPA-2 continues to provide grist to these windmills has more to it than meets the eye, perhaps; but that is another story.)

Does the Congress have enough to rejoice in its Vidhan Soudha victory? I would call it a mixed bag. Faced with a possible rout in Andhra and expected reverses in TN, the UPA is desperately looking at states to make up its losses. As things stand, it comes up woefully short. That, incidentally is the reason behind the unashamed wooing of a Nitish in Bihar despite a 'committed' Laloo ji who remains perpetually Barkis-is-willin'. One hears of a personal subtext too in Shri Chidambaram's new-found bonhomie with the Bihar CM; a fact that the Congress High Command may be unwilling to admit publicly. At any rate, gains in Karnataka help, but must be seen in the context of its relatively small 28-MP size in Lok Sabha arithmetic.

How does that leave the BJP (in itself a complicated call; it seems too much to prognosticate on the NDA overall) in the 2014 battle stakes? It is clear that they have their work cut out. For starters, this fixation with prime ministerial ambition is almost reminiscent of the erstwhile Janata Party — counting chickens long before the electoral eggs have hatched.

At one level, the BJP's predicament is understandable. It is difficult to see the party cross the 200 mark minus Narendra Modi at the helm (so the cadre believes). Truly, no figure polarises the debate in India today more than he. That so few folks in our polity tread the middle ground when it comes to NaMo must count as a significant (and hilariously unintended) achievement of post-2002 Congress strategy. Of course, a wide section of the media sympathetic either directly to it or to the 'secular' cause, has willingly played ball. The last word on this remains to be said though; I am sure this will occupy centre-stage over the next few months.

Coming back to Karnataka, it is do-or-die for the new regime to consolidate the vote ahead of LS elections next year. The fact is that 2014 remains a tough call. Can the UPA get its governance mechanism back together enough to perform an unlikely hat-trick? Will the BJP or the NDA get its house in order, politically and electorally, to be third time lucky? Or will an unfortunate nation be subject to a post-poll Third Front-led ragtag coalition as many pundits currently postulate? Let's keep watching.

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.

Shape-shifting Monster

Being a toddler-parent means toys of assorted shapes and sizes are an inescapable part of existence. I have one of either gender, and would like to believe that neither is overly pampered. Yet, there are moments when I am at wit's end as to how so many trinkets make their way into the house — my childhood benchmarks clearly don't apply, outnumbered 1:16 or so. Equally, I cannot help but marvel at the ingenuity and imagination that power many of these. Colour-changing cars and shape-shifting beasts fall into this category.

It was such an object of fantasy that offered the perfect metaphor during a fevered discussion the other day. The conversation went somewhat like this: my friend, part of the domestic insurance industry, was trying to argue for more institutional indulgence — government, courts, banks etc — to support the fledgling sector. At some point in the evening, the conversation turned to ULIPs, one of my pet peeves, thereby prompting the monster reference. I don't know how the tête-à-tête ended (some Dalmore was involved!), but perhaps a few notes from it bear repetition.

In a nutshell, that India is under-insured is beyond doubt, but there is more to the picture. We ought to know that, second only to bank deposits, insurance is the most popular financial product in town. It has a legacy that goes back decades: LIC itself in its present avatar is over half a century old, National started in 1906, and there were companies in this business even in the 1800s. So the industry is no babe in the woods.

Cut to the present, and data shows 20% of household savings going into insurance — while all of equity inflows, including mutual funds, hover around a paltry 5%. Likewise, consider AUM: insurance is 10 times the size of equity MF, with ULIPs alone being more than double at last count. Insurance, therefore, can hardly claim not to have had enough of show-me-the-money.

This brings us back to the point on ULIPs. Just the last decade saw the industry peddle them aggressively to a gullible public, backed by disingenuous advertising and aggressive distributor incentives. The opaque nature of ULIP performance reporting and high exit costs were common knowledge — perhaps even deliberate. Certainly they did not speak to any genuine effort to serve the Great Unwashed.

The IRDA did — belatedly; and perhaps only spurred on by the SEBI turf war — attempt to rein in the monster. Fee structures and rudimentary visibility parameters were mandated. Yet, even after 2010, the messaging was around ‘new, improved’ plans accompanied by significant switching costs. Shape-shifting right there.

In truth, glancing beyond ULIPs at traditional plans too shows up the industry as pretty lazy. Despite lofty goals of serving under-insured India etc, these products (term cover is a particularly glaring need) are sold with terms mired in complicated legalese, unfriendly surrenders and claims, and overly high sales commissions. Once again, the IRDA has attempted a few fixes, but these are arguably half-hearted or too late.

Summarising, it is not difficult to posit that the insurance industry has itself to blame for much of its ills. If only the Indian investor was a tad more discerning (and not perplexingly averse to equity), the heat on insurers could, in fact, have been worse. For now though, the monster lives to see another day.

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.