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.