Miscellanea

3. Fed rate hike restricts India’s policy space

Indian policymakers should prepare for higher inflation,
following the decision of America’s Federal Open Market Committee (FOMC) to
raise policy rates by 25 basis points (or 0.25%). This is the first such move
since December 2015 and the second in a decade. It reflects its assessment that
growth is entrenched, employment strong and prices buoyant in the US.
President-elect Donald Trump is expected to try and pump up growth through
various measures, including fiscal stimuli. So, all 12 members of the FOMC
voted for the hike and prepared markets for at least three more rate increases
in 2017.

Indian markets saw foreign institutional investors (FIIs)
take out nearly Rs 20,000 crore in November, after the government’s
demonetisation announcement. The outflow has continued: FIIs have sold more
than Rs 2,500 crore in December. Capital flight can accelerate after the FOMC
announcement as money flows to safe havens like US Treasury bonds. The rupee
has weakened against the dollar, our main trading currency.

This will boost import costs, bad news for India, a net
importer. Worryingly, crude oil prices have doubled over the year, from around
$27 per barrel in February to $54 now. Part of this is because of signs of
economic recovery in the US, Europe and East Asia, but the real reason lies in
the 13-nation cartel OPEC’s decision to cut production. OPEC sells 42% of the
world’s oil and holds 70% of proven reserves. On December 11, another 11 oil
producers, outside OPEC, including Russia, made a similar pact. This bodes ill
for India, which imports 80% of its oil requirements. Higher crude and a weaker
rupee could widen our trade deficit, kept artificially low when crude prices
crashed.

Given these trends, policymakers must take measures to
counter capital flight and a further, rapid depreciation. Foreign exchange
reserves are adequate, but there is no room for complacency. Interest rates have
little room to move down, if capital flight is to be avoided. And there is no
scope for lax fiscal discipline, as that could trigger macroeconomic
instability.

(Source : The Economic Times dated 16.12.2016)

4.  Winter session
wasted by petty politics, parties must debate and conduct business in
Parliament

Senior BJP leader LK Advani’s anguish over disruption
politics taking centre stage is justified as the winter session of Parliament
ends today without much business being transacted. Both government and
opposition are equally to blame, especially in the backdrop of the NDA
government having conducted a major exercise like demonetisation that affects
every aspect of society. Earlier, opposition parties had closed ranks to force
the government into a debate on demonetisation that would entail voting. By the
time they came around to debate the issue without any rule this week, the
government seemingly didn’t oblige.

This is reminiscent of 2010 when the entire winter session
was washed out over the 2G spectrum allocation scam during UPA-II. Now the
opposition, led by Congress, claims this is the first time in history that
treasury benches have disrupted Parliament proceedings, while government has
blamed opposition for running away from debates. Both sides need to heed elder
statesman Advani’s advice, especially when he invoked Atal Bihari Vajpayee.
Prime Minister Narendra Modi too should take inspiration from Vajpayee who
thrived on engaging debate in Parliament. If Modi had spoken in Parliament on
demonetisation, that would have given opposition one less reason to disrupt it.
His predecessor Manmohan Singh sat through debates on 2G spectrum and coal
allocation scams and sometimes even participated in them.

There was a glimmer of hope when the Rights of Persons with
Disabilities Bill, 2014 was passed in Rajya Sabha, but subsequently more than
80% of time has been lost to partisan bickering this winter session. Both
government and opposition parties agree that GST will be beneficial for the
economy. Centre and states now need to finalise three GST legislations – CGST,
IGST and compensation law – so that they can be introduced and passed in
Parliament early in the next session if GST is to become a reality by the next
financial year.

The government cannot afford disruptions of such magnitude
which have dealt a severe blow to the institution of Parliament. Government’s
crisis managers need to reach out to the opposition and have better floor
management in the House. Both sides must realise that debate is the only
democratic way of making the government accountable for its actions. If
opposition wants to create a favourable public opinion on their view of
demonetisation, the best way would be to get the better of the government in a
parliamentary debate.

(Source: The Times of India dated 16.12.2016)

5. Tax and other enforcement authorities must not abuse big
data to bring back inspector raj

The year’s second voluntary income disclosure scheme was
approved by Lok Sabha and operationalised. Along with it were reports of
bankers being sacked or suspended for complicity in attempts to launder
unaccounted money, and an invitation to citizens to lodge anonymous complaints
if they notice suspicious activity. The weeks following demonetisation have
been accompanied by growing intrusiveness of the state. Big government seems to
be back with a vengeance. But India’s earlier experiment in this area led to an
inspector raj and created opportunities for corruption to flourish. It must not be repeated.

A legitimate expectation of demonetisation was that it would
leave trails which could be used to bring tax evaders to book. This was in line
with a series of steps taken over the last decade to create an audit trail in
myriad areas to allow tax authorities to mine data. This is a sound way of
widening the tax net. In addition to tax authorities, agencies such as the
Financial Intelligence Unit processed information related to suspicious
financial transactions. India was switching to a more sophisticated way of
enforcing tax rules.

It is important that government now build upon a decade’s
work. Threats of tax raids and allowing bureaucrats to exercise excessive power
will be counterproductive. The return of an inspector raj will have a chilling
effect on economic activity. It will only prolong the ongoing economic
disruption. Government must send the right message to all economic agents.
Legitimate economic activity ought to be encouraged and needless impediments
removed. Exhorting people to use digital modes of payment is not enough.
Different arms of the government should make better use of technology to do
their work.

(Source: Times of India dated 19.12.2016)

6. Lead by example: To curb black money at its root, make all
political funding cashless and digital

As citizens are subjected to the unrelenting grind of
demonetisation, they are told this is in the interest of digitising India and
ridding it of black money. To make this argument more convincing than it is
currently, the Modi government must address the very fount of corruption and
black money in our society: political funding. As an Election Commission
background paper points out, money used to fund political parties or candidates
in a non-transparent manner undermines the core principles of democracy. The
rot begins here. It follows, therefore, that digital sanitisation must begin
here too. 

For stemming the flow of black money into politics, a most
recent EC recommendation is to lower the cap for anonymous donations from Rs
20,000 to Rs 2,000. This will help only at the margins, because the current
practice is to subdivide unaccounted funds into units below Rs 20,000 and claim
anonymity for them. The same sharp practice can be followed if a window of
anonymity is allowed below Rs 2,000: it’s just that one will have to claim ten
times more anonymous donations. To give an example of how preposterous current
claims are, in the election year 2013-14 BJP reported donations in excess of Rs
20,000 at just Rs 167 crore, Congress Rs 66 crore and BSP zero.

To end this charade and walk the talk of building a cashless
society, the laws must be amended to mandate that all donations to political
parties can only be in digital format. Prime Minister Narendra Modi has
appealed to 125 crore Indians, small traders and businessmen, farmers,
washermen, vegetable vendors, milk suppliers, newspaper vendors, tea stall
owners and chanaa sellers to bear with the hardships of transitioning to
cashless transactions because that will take India to new economic heights. In
that case, why should only political parties be exempt and continue to wallow
in cash? 

With 80% of the 1,800 parties registered in India not having
contested any election in the last few years, many of them look like setups to
launder money. Mandating a digital trail will put paid to this rot. More
broadly the political class cannot be shielded from the tribulations and trends
of the rest of society. If it claims to want to rid society of black money, it
should lead by example.