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PSUs – Crown Jewels Or Bleeding Ulcers

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Here is a comment from early September 2002: “Of the 240 central public sector undertakings (PSUs), half were operating at a loss. Out of 1,040 state-government run PSUs, 90 per cent were in the red. Taxpayer’s money was invested in loss-making commercial enterprises where the private sector had invested in a big way.” This was Arun Jaitley, then general secretary of the Bharatiya Janata Party. Around the same time, Arun Shourie, disinvestment minister, said this about PSUs: “These are not crown jewels, these are bleeding ulcers.”

13 years later, with Mr Jaitley as finance minister, came the news that the Prime Minister’s Office (PMO) is “concerned” over the overall health of Air India. Air India has a debt of Rs 40,000 crore, while the losses stand at a huge Rs 38,000 crore. It is surviving on a bailout package, under which the government is committed to inject Rs 30,000 crore of our money into it in a staggered manner till 2021-22.

Narendra Modi came to power on the promise of a “development agenda”, which would mean “minimum government, maximum governance”. Nobody is still clear what this slogan means. In fact, it seems that this government is committed to the same path of maximum government that all previous governments had taken. What illustrates this well is the strongman approach to “fixing” the loss-making PSUs like Air India.

PSUs came to dominate India’s industrial economy since the fateful Industrial Policy Resolution of April 6, 1948, that conferred monopoly on the state for six basic industries. Jawaharlal Nehru called them “temples of modern India”. The Left calls them family silver. They were expanded further through the Industrial Policy Resolution of 1956 and Industrial Policy Statement of 1973. Many politicians, the media, some businessmen and managers tended to believe that government-owned companies were gems that needed to be polished and they would dazzle us.

Most PSUs were hardly gems whether dead or alive. In May 2000, a youthful and enthusiastic Mr Jaitley announced that more than Rs. 2 lakh crore was stuck in government units, asserting that the actual value of these assets was “several times more” and, if realised, could pay off the government’s debt. Mr Jaitley is the finance minister now. Can he walk his own talk?

PSUs are overstaffed, capital-guzzlers, tied to the apron strings of ministers and secretaries, who have their own commercial/political agenda of exploiting them. The boards are stuffed with people who are there for the loaves and fish of office, social status or influencepeddling, not to contribute to efficiency. Some people say that the magic wand of autonomy will turn them from frogs into princes, but autonomy without accountability will be even worse, as the government banks have shown.

Meanwhile, tens of thousands of crores have been wasted in keeping loss-making PSUs alive.

It has been clear since the mid-1970s that PSUs were a drain on the exchequer and so the Industrial Policy Statement in July 1980 talked of “revival” of PSUs through a “time-bound programme” in a country where people, events and programmes were always late. Since then, PSU reform has had many well-meaning heroes.

From a fresh-faced and naive Rajiv Gandhi to a shrewd, dyed-in-the-wool politician like Mr Modi, every leader big and small talked of revival (the only exception was Mr Shourie). Surprisingly, the bleeding hearts hand-picked by Sonia Gandhi as members of the National Advisory Council under Manmohan Singh’s government wanted to direct more money towards the poor, but took no interest in the loot and waste in PSUs.

If Mr Modi truly wants to redeem his pledge of minimum government, his best bet is to start with PSUs. PSUs run businesses. Businesses have only one objective — earn a return on capital that is a few points higher than risk-free return on capital. This is impossible to achieve through a minister-secretary-chairman-cum-managing director combine with lots of interference from the sides. The options are clear: to sell off controlling stakes through competitive bidding for the profit-making ones; and to close down the non-functioning units and sell off their assets, including the enormous land value that many are sitting on. And while doing this, to shrink the ministries that have been overseeing them.

If Mr Modi tries to fix PSUs, he may prove a point, but he will keep a false economic thinking alive that has contributed to our economic backwardness.

(Source: Extracts from an Article by Mr Debashis Basu, editor of www.moneylife.in, in Business Standard dated 23-03-2015.)

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Serve from India – Growth in IT may be faltering, India must diversify its basket of services exports

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India’s information technology revolution happened on its own and we can’t expect it to go on forever. Infosys last week unveiled lacklustre financial results for the March quarter, in line with the trend seen among top-tier IT companies. While it may be too early to reach a definitive conclusion on the scale of challenges confronting the IT sector and its capacity to overcome them, the financial results should serve as a wake-up call to India’s economic policy makers. It’s time to diversify our basket of services exports instead of just firing on one or two cylinders. India should look to match its greatest wealth, its human potential, with the latent global demand that exists across a range of services beyond IT.

A vigorous emphasis on services will dovetail nicely with the thrust on manufacturing through ‘Make in India’. In the wake of technological changes, boundaries between manufacturing and services have begun to blur. Consequently, ‘Make in India’ can be complemented by ‘Do in India’. Two building blocks are needed to harness the potential of services exports. The protectionist thrust of trade policy must be discarded. Unless India opens up its services sector, opportunities to be part of a global network can never be exploited in full measure. If there is a lesson to be learnt from the success of IT, it is that openness leads to job creation.

The lowering of barriers must also encompass the education sector, which needs to welcome rather than run scared from participation of foreign universities. Raising India’s abysmal standard of education is critical to tapping opportunities in services. Under present HRD minister Smriti Irani, counterproductive micromanagement of institutions seems to be the preferred approach to education policy. This must end and a new era of competition, diversity, growth facilitation and quality enhancement begin.

Prime Minister Narendra Modi is a votary of expanding services. His government has shown willingness to act on this conviction. Gujarat International Finance Tec-City (GIFT) was launched this month with the aim of becoming an international financial centre. In a similar manner, India can piggyback on homegrown talent to be a part of the global network in areas such as entertainment, tourism, legal and accounting services. It is time to junk existing shibboleths and show some ambition.

(Source: Editorial in The Times Of India dated 28-04-2015.)

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Modern Arthashashtra—Waging a War on the Economy.

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Russia’s market capitalization is currently about $495 billion. It’s down about 68% from the peak in January 2008. But in local currency, it is down about only 13% in the same period (about 10% of the fall has been in the last quarter). This means that the entire country is valued at less than three quarters of Apple Inc. Russia has a gross domestic product (GDP) in excess of $2 trillion; foreign exchange reserves in excess of $355 billion; and 12.5% of world’s land mass along with abundant natural resources, especially related to energy. And yet it is valued lower than a company that makes iPhones and iPads.

This is surprising because the Russian economy has, in fact, done well over the years. It is the 10th largest economy in the world by nominal GDP and the seventh largest by purchasing power parity (PPP). It has enjoyed fiscal surplus for most of the past decade, except marginal deficits in past five years. Its fiscal deficit in 2014 was just 0.5% of GDP. Government debt to GDP ratio was one of the lowest in the world, at under 14%. Current account was in surplus at 1.5% of GDP. With a GDP per capita at $6,923 (in 2013), Russians are better off than many of their emerging market peers.

From the time when its economy had hit rock bottom in 1998, after the collapse of the USSR, unemployment and poverty have been reduced significantly. While oil and gas remain a substantial part of the country’s exports and its economy, the talent pool it has in the field of space and engineering remains enviable.

But still many aspects show weakness. From the third largest forex reserves globally in 2008, in excess of $590 billion then, there has been a decline of more than 40%. The Russian equity index saw a correction of about 53% between June and December of 2014. The Russian ruble went down from about 34 to a dollar in June 2014 to 67 per dollar in December 2014, before recovering to around 52 to a dollar currently. Russian credit spread expanded from 173 basis points (bps) to 590 bps in the same period, before recovering to 360 bps currently. (One basis point is one-hundredth of a percentage point.) Russian overnight implied forwards moved from 8.5% in June 2014 to 31% in December 2014 before recovering to 15% currently. The Russian overnight repo rate went from 8.5% to 18% during the same period before recovering to 15% at present.

The impact of the turmoil witnessed by the Russian economy can be seen when its equity markets are down by about 5% in local currency terms but 53% in dollar terms, forex reserves are down by 18% and overnight repo rate up by 211%.

This devastation has been caused by a combination of many factors—drop in crude prices, sanctions on Russia due to Ukraine engagement, raw material-heavy export basket in a period of falling commodity prices, and more. But the volatility witnessed in the markets was much more than what the fundamentals suggest. It was not as if Russian equities came from a bubble valuation to warrant such a large correction. The damage witnessed by Russia was nothing short of what a physical war could have caused.

Is this evidence of the world having moved from physical warfare to financial warfare? Do analysts and fund managers now do what soldiers used to do earlier? While in the long term fundamentals will prevail, can the markets be influenced in the short term with such devastating effect on fundamentals? Can the short-term trends be accentuated to cripple markets, and consequently, economies?

One doesn’t know the answers convincingly but it is possible that a short- to medium-term trend of falling crude oil and gas prices was accentuated to create a turmoil in Russian markets.

Integrated debt, currency and equity markets, and the presence of offshore markets allow fund managers to make the effect the cause for further adverse effects. Presence of offshore markets, which are beyond the regulatory oversight and reach of the target country, availability of leverage at near zero interest rates, ability to use the media to push one set of views, ability to influence independent opinion makers such as rating agencies, economists, columnists, policy advisers, and global watchdogs in terms of data interpretation and forecasting can magnify the effects of a small shift in fundamentals. In addition, the adverse effect can be increased manifold if the opposite side does not have financially savvy decision makers; open and liberal markets that allow free flow of capital across debt, equity, commodity and currency markets; deep local markets; and large and nimble domestic institutions that can face the battle. If the perpetrators are able to get financial as well as nonfinancial support from sovereign organizations, then the target country becomes even more vulnerable. Malaysian leader Mahathir Mohamad hinted at such a scenario during the Asian crisis of 1997-98.

It is important for India to safeguard against a black swan event like this where the presence of offshore markets and open access to equity, fixed income and currency markets is used to destabilize Indian markets, and consequently, the Indian economy. Superior macros along with low inflation, balanced budget, manageable current account, adequate forex reserves and higher growth is the best way to keep a global investor’s interest. Development of large domestic institutional investors and increasing the depth of the domestic market is critical to maintain equilibrium. Most importantly, regulators and policymakers will have to be prepared with a deeper understanding of the market, quicker decision-making and having the ability to take unconventional steps such as the Hong Kong monetary authority’s intervention in equity during the Asian crisis. While the probability of such an event taking place is low, it is better to be safe than sorry.

(Source: Article in Mint by Nilesh Shah, chief executive officer, Kotak Mahindra Asset Management Co. Ltd, dated 23-04-2015.)

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Reservation for small enterprises has ended.

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The National Democratic Alliance (NDA) government deserves to be congratulated wholeheartedly for at long last bringing to an end one of the most pernicious vestiges of the licence-permit Raj. Early this week, a notification was issued taking the last 20 products off the “reservation list” – the list of products that can legally be made only by small and medium enterprises, or SMEs. While this last step is welcome, it is worth noting exactly how long it has taken to end this counter-productive restriction. After all, industrial policy was freed up in 1991; only now, 24 years on, has this forced stunting of certain sectors come to an end. The dangers of “gradualism” in reform are revealed here for all to see. Indeed, while the government deserves full credit for taking the last bold step, it is worth noting that the notification took almost six months to be issued, since the committee that decides such matters under the Industries Act of 1951 had recommended the delisting of the final 20 items as long ago as last October. This is more than a symbolic step. These are not marginal, unimportant items that were still on the SME list. In all these sectors, new large-scale enterprises were forbidden. Is it any surprise that almost every lock in Indian markets is made in big, efficient Chinese factories? Once, in the mid-1980s, there were as many as 873 items on this list. From 2002 to 2009, under the first NDA and the first United Progressive Alliance governments, about 790 of these items were removed – including such things as garments. Is it surprising that, with garments on this list, India failed to reach its potential as a garment exporter in spite of ample human resources? The average size of a garment factory in India is about a tenth of their competitors in Bangladesh.

Typically for such economic restrictions, this reservation for SMEs was counter-productive in more than one way. Not only did it stunt the sector, but it ensured the perpetuation of monopolies. After all, when the restrictions were first introduced, existing companies were granted what were called “carry-on business” licences. Thus Bata could continue to make footwear in-house if it chose, but no large Indian competitors could come up to challenge it. One other aspect of this gradualism is worth noting: that, even if there is no will to reform domestically, openness to the world economy can force the government’s hand. After all, if Indian SMEs are competing with large-scale enterprises from China under free trade, why not with large-scale enterprises from India?

Finally, it is worth noting that the biggest beneficiary of this reservation will likely be SMEs themselves. For ‘Make in India’ to thrive and for India to become a genuine manufacturing hub, growth must be driven by SMEs that become big companies. By ending the reservation policy, the government has helped make that possible.

(Source: Article in Business Standard dated 16-04-2015.)

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Make it easy for experts to come to India to teach: Narayana Murthy

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India should make it easy for foreign intellectuals and experts to come here says the Infosys founder N.R. Narayana Murthy.Speaking at the launch of N R Narayana Murthy Distinguished Chair in Computational Brain Research, set up by Infosys co-founder Kris Gopalakrishnan and the Indian Institute of Technology, Madras in the campus, Murthy said: “The aspiration for us has to be how can our Institutes of higher learning emulate those great institutes. I am positive that the students and faculty of these institutes have the competence and inclination for that.Therefore, it is the task of our society, government, political leaders, bureaucrats, and the alumni of the institutes to make life easy for these people to achieve what they want.

That is where I believe enhanced interaction with leading researchers, ability of our students to go to those places, and the ability of those people to travel easily to India at short notices, the ability of our students to attend conferences, perhaps exchange students. . . these things become extremely important.I only hope that this nation, outside this ecosystem of the institutes, will cooperate with all these people to make our dream worthwhile and to ensure that India too receives its rightful place in the threshold of research in these areas,” he added.

According to Murthy, there should be more scholarships to Indian students to go abroad and study there. While it’s easy for Indians to get Visas from any developed countries, Murthy said, many of his friends outside India had told him that getting Visa to visit India is not that easy. He said the country should change that perception.“It should not take more than 24 hours to get the Visas,” he said.

Murthy noted that the brain research activities initiated in IIT Madras, along with other overseas institute, would put India on the map of leading edge ideas in brain research. (Source: Business Standard dated 20-04-2015.)

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A Clarion Call for Cohesive Growth, Amity – PM Narendra Modi outlines coherent vision, ambition at ET Global Business Summit

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Narendra Modi has always been good at making speeches to which his audience swoons, but his performance at the Airtel Economic Times Global Business Summit last Friday was a class apart. Eloquence was not the main thing. He dreamed big, envisioning an Indian economy 10 times as large as today’s. He presented a cogent economic philosophy, radiated the confidence that he would be able to execute the strategy flowing from this vision and called upon everyone, particularly businessmen and entrepreneurs, to join a mass movement of development that would embrace everyone and enrich everyone, while the government provides succour to empower the poor and the vulnerable. Most notably, he called for social peace and cohesion, calling them prerequisites of growth, almost as if responding to his critics on this score.

Vaulting Reasonableness on Growth
Modi’s invocation of a $20-trillion Indian economy might sound like ambition gone berserk: the figure is 25 per cent bigger than the world’s biggest economy today, while the Indian economy is less than $2 trillion. But consider: a real growth of 9 per cent, which India had reached comfortably before the crisis, along with inflation of 5 per cent, means a 14 per cent rate of nominal growth. At that pace, the economy would double in five years, quadruple in 10, be eight times as large in 15, and be more than 10 times as large in less than 18 years. At high income levels, economies tend to slow down, but India’s demographic dividend would sustain for two decades more and productivity gains would more than offset inflation differentials with the US. A $20-trillion economy is, thus, quite a reasonable target. But no leader has till now shown the gumption to articulate such vaulting reasonableness, to fire the ambition of the country’s youth.

Modi elaborated, for the first time, what precisely he means by minimum government, maximum governance. The government has no business to be in business, he said, but should do five things: provide public goods, manage externalities — whether negative ones like pollution or positive ones such as the productivity gains from mass education and skilling — control market power of companies, fill information gaps and provide welfare to those on the margins. Technology would enable the government to be competent, non-corrupt and efficient. Digital India would also advance education, healthcare and financial inclusion.

Growth for Jobs, Welfare

The objective of reform is welfare. Some reform would be driven from the top, others from below, through popular adoption of innovation. Both are important. The state can incentivise an additional 20,000 MW of generation capacity, but an equal impact can be made by people willingly saving power. Cleaning the Ganga, Swachh Bharat and a vibrant tourism industry are campaigns that feed into one another, and can succeed only with mass participation that lives out the principle that Small is Beautiful. The state has to abandon its mindset of command and control and empower the people.

Talk is cheap, and walking the talk is the tough part. It is indeed welcome that PM Modi has committed himself to nurturing education and healthcare, uplift of the downtrodden and social cohesion. This would address concerns that his big business orientation would hurt social development and welfare. Most vitally, identifying social peace as a precondition for prosperity offers a foil to the spirit of schism embodied in the words and deeds of the larger Sangh Parivar on whose shoulders Modi rode to Raisina Hill. They have to heed the PM’s call for social cohesion, if India is to attain its potential as an economy and civilisation. The point is to uphold, not vitiate, India’s tradition of unity in diversity.

(Source: The Economic Times, dated 19-01-2015)

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Indian literary classics made accessible

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At a time when there is raucous debate on India’s real and imagined past, a library of rare ancient Indian classics – one going as far back as 3 BCE – has been launched. A philanthropic initiative of Rohan Murty, the literary project is spearheaded by noted Sanskrit scholar Sheldon Pollock and published by the Harvard University Press.

The first set of books ranging from Bulle Shah’s works in Gurmukhi and the Akbarnama in Persian to Surdas’ poetry and Manucharitramu in Telugu was released by eminent economist Amartya Sen. Over the next seven years, the series, named the Murty Classical Library of India, will publish 48 volumes of these classic works, translated from around 14 Indian languages, including Sanskrit and near extinct vernacular forms.

“India has the single most complex and continuous tradition of multi-lingual literature in the world and a lot of it is inaccessible. MCLI will make this literature available in the best possible way for the general reader as well as students and scholars,” said Pollock. These books have the original script as well as an English translation on the facing page.

The library was meant to reiterate the fact that Indians have been storytellers to the world for centuries, and to redefine the idea of a “classic”.

Murty said he represented the general Indian reader who was curious about ancient India but had access to very few literary sources. “What was life like in ancient India? How did people live, die? What was its astronomy, maths, science like? There is so little discussion on any of these in our schools and colleges,” he said. “This literature will hopefully offer an exposure.”

The next set of translations will include Kamba Ramayanam, Ramcharitmanas, Ghalib’s poetry and 6 AD Sanskrit scholar’s work Kiratarjuniya and Bharatchandra’s Annada Mangal. The big plan is to have 500 books on the MCLI shelves.

Among the most riveting is Therigatha, Poems of the First Buddhist Women which is in Pali and composed by theris, the elder Buddhist nuns. They speak in touchingly honest verse of their spiritual struggles.

Murty promises a digital version of the library sometime soon, low cost or even free to access. “As a tech dreamer, I envision an MCLI with a button you can press and read Bulle Shah in Gurmukhi, Devnagari…a day will come when the communal politics of script will be resolved with the click of a button,” said Pollock.

(Source: Times of India – dated 16-01-2015)

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To Make in India, give a break to our tech & talent

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Prime Minister Modi boldly called for ‘Make in India’. The question is: How to Make in India? What will be the roadmap for Make in India? And, how do we go beyond Make in India — to research, design, develop, produce and thus truly ‘Create in India’?

In our opinion, the answer rests on five pillars.
Human Resource: India’s key advantage is its 500 million youth. By 2016, every fourth skilled worker added globally will be an Indian. But it is imperative to ensure employability of this human resource. As many as 82% of our fresh engineers are deemed to be “unemployable”. Unless the quality issue is addressed, Make in India will yield only low-cost, low-return employment for India. Research needs to be promoted to create new skill sets. This would require significantly higher spending on research from the current $36 billion (in terms of purchasing-power parity), less than 1% of GDP. In 2012, China spent $296 billion on R&D (2%) and the US $405 billion (2.7%).

Capital & Incubation: India incubates around 500 startups a year, China over 8,000. With little investor support and the banking system ill-equipped to assess these businesses, startups are like stepchildren in India. This runs against the global trend of funding innovative startups that rely on a few core competencies to invent products, a phenomenon called innovation capitalism.

We have to be ready to let go of old shackles before we realise new dreams. The Make in India campaign needs to plant and nurture homegrown enterprises than merely become an exclusive fishing zone for large MNCs. People should be encouraged to fund the campaign. Indian households hold gold worth $1,160 billion, more than half our GDP. Gold bonds linked to Make in India enterprises could be an option to explore.

Tech Infusion: Technology provides developing economies the ability to leapfrog certain stages of development. Our mobile phone revolution, for instance, leapfrogged the landline stage, growing from a million mobile connections in 1999 to over 700 million by 2013.

We need to build collaborations across nations based on technological abilities. A shining example is the BrahMos (Brahmaputra-Moscow) Cruise Missile co-developed by India and Russia. While India brought its knowledge in developing the targeting mechanism, Russia contributed with the propulsion system. It gave both nations the capability to develop and produce perhaps the best cruise missile system in the world, with a business volume of about $7 billion.

Today, India has world-class ability in IT, communication, pharmaceuticals and space — let us find collaborations for them. What do we need to leapfrog here? The stage of environmental degradation associated with manufacturing. Make in India, Make it Green.

Building the Ecosystem: Large telecom penetration is not good enough. Manufacturing requires infrastructure: it needs roads on which large trucks can run, it needs ports, and it needs a system that operates all this without hassles — and without corruption. As a democracy India is most conducive to breeding new innovations, but is hindered by the lack of proper intellectual property rights. Indians’ contribution to patents filed globally is less than 1%; Chinese account for 32%.

Domestic Consumer Leverage: Our vast consumer base has to be used as an incentive, to create collaborations with foreign companies. The untapped market is in the villages, with 70% of India’s population. Can it be the opportunity to propel Make in India?

Many people question, how can India — with its dreaded red tape and corruption — truly be a manufacturing powerhouse. The answer is perhaps still evolving. However, necessity is the mother of invention. Remember the beryllium diaphragm.

(Source: Extract from an article in the Times of India dated 18-01-2015 by Shri A.P.J. Abdul Kalam, former President of India & Srijan Pal Singh who heads 3-Billion Initiative, an NGO for sustainable development)

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Oil at $60 isn’t all positive

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The global implications of falling oil prices are largely positive – but that doesn’t mean that there aren’t some risks, too

Everyone
is busy celebrating collapsing oil prices, and the huge positives this
will bring to the global economy. From mid-June, prices are down by more
than 40 per cent, with Brent now falling to below $65 a barrel. There
are many highly credible commentators calling for a continued price
spiral, with price forecasts of $50-55 a barrel by mid-2015 not
uncommon. Where prices ultimately settle and for how long is obviously
anyone’s guess, but this is a huge move with global implications both
politically and economically. Is such a large move in so short a time
unambiguously positive for the global economy, as almost everyone seems
to believe? Is it a massive tax cut and more or less a free lunch as
most want to believe?

The decline in oil prices is simply a
transfer of purchasing power from the producer of oil to its consumer.
From the global economy perspective, there is no additional wealth
created

The obvious positive is that this transfer of wealth
from the oil producers to the consumers/importers should lead to a boost
in consumption. A $40-a-barrel decline in prices will lead to a
transfer of $1.3 trillion a year. It is widely accepted that this will
lead to a boost in global gross domestic product (GDP), as the
propensity of the oil importer to consume is greater than the propensity
of the oil producer to spend.

Markets also cheer as the
importers are the European Union, Japan, China, India and even the
United States, all far more relevant for global financial markets than
Russia, Venezuela, Iran or Nigeria (the worst hit by the decline in
prices). While this is a short-term positive for global growth, as
consumers spend and consumption accelerates it will imply a decline in
global savings, which may have longer-term consequences on financial
markets and interest rates. Ultimately, the oil producers were not just
sitting on their oil revenues, they were invested in some financial
asset, somewhere in the world. This investment will stop as consumption
picks up. There are other implications on global financial markets, not
all of which are positive. As the folks at Gavekal point out, nobody
seems to be thinking of the inventory and liquidity effects of such a
steep decline in oil prices. Assume the world consumes about 92 million
barrels of oil daily and carries about 100 days of inventory. When oil
was trading at $100, $920 billion was stuck in inventories, held by
someone in the system and financed by someone else. If the price of oil
settles at $60, the financing needs will drop to $552 billion. Almost
$400 billion of liquidity will get released into the global system. This
is a positive and will only add to the excess liquidity sloshing around
global financial markets. Such a capital release can fundamentally
alter the economics of many players in the value chain.

However,
somebody will also have to take the near $400-billion loss on existing
inventories as prices for all end products adjust immediately. Some of
the inventories will be held in sovereign strategic reserves, and these
losses will be absorbed or camouflaged in national accounts. However,
there will be collateral damage to the whole petroleum value chain, and
somebody will be on the hook for these inventory losses. It is not clear
where the losses will surface, and the absorptive capacity of the
losers. One cannot rule out some nasty surprises. During the last big
decline in oil prices, starting in 1985, large parts of the Texas
banking system went under, and it was also arguably a catalyst for the
eventual demise of the Soviet Union. Losses of $400 billion can stress
any financial system or counterparty.

Over the past few years,
we have seen a massive buildout of non-Organization of the Petroleum
Exporting Countries oil production capacity, largely in shale and tar
sands in North America. Many of these assets are unviable below $60-65 a
barrel, and the question then becomes: how was this rapid production
build-out financed? Clearly, the producers were not generating
sufficient cash flow to self- finance the production/drilling surge. It
was debt – either high-yield bonds or bank lending – that has financed
the majority of the infrastructure needed to sustain the production
surge we have seen in North America over the past five years. But at $60
oil, much of this debt can no longer be serviced.

This has
already thrown the high-yield market into a bit of a tizzy, as energy
was the highest share of the market and spreads for energy issuers have
surged. Most players in the sector have no ability to access new
high-yield issuance. If losses are significant, it may impact access to
high-yield debt for all sectors of the economy. At a minimum high-yield
spreads will rise. Either way, either access or cost of debt will be
negatively impacted for many sectors of the global economy that need
capital the most.

If banks are left holding the can, the
problems may be even bigger. The losses incurred by the banks on this
lending could erode their capital base and earnings power, further
weakening their ability and willingness to lend. If banks do not want to
lend, that has obvious implications for the pace and sustainability of
any economic upturn.

The other obvious negative of declining oil
prices is the impact it has on the relative attractiveness of
alternative energy and renewables. It will make the world economy more
carbon-intensive and less energy-efficient. Just when solar was nearly
at grid parity, the bar has moved downwards.

In a world fighting
deflation, lower oil prices do not really help the central banks. By
putting downward pressure on headline inflation, already low inflation
expectations may get further entrenched or blindside the central banks
to any pick-up in underlying inflationary pressures.

The simple
point is that there is no free lunch, and one should not ignore the
negative repercussions of such a sharp and quick move in a critical
global commodity. There will be both losers and gainers, and it is
important to think this through and not be caught with the losers.

(Source: Business Standard dated 12-12-2014)

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Sanskrit, taught well, can be as rewarding as economics

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Discovering one’s past helps to nourish those roots, instilling a quiet self-confidence as one travels through life. Losing that memory risks losing a sense of the self.

With this conviction I decided to read Sanskrit a few years ago I wanted to read the Mahabharata. Mine was not a religious or political project but a literary one. I wanted to approach the text with full consciousness of the present, making it relevant to my life. I searched for a pundit or a shastri but none shared my desire to ‘interrogate’ the text so that it would speak to me. Thus, I ended up at the University of Chicago.

I had to go abroad to study Sanskrit because it is too often a soul-killing experience in India. Although we have dozens of Sanskrit university departments, our better students do not become Sanskrit teachers. Partly it is middle-class insecurities over jobs, but Sanskrit is not taught with an open, enquiring, analytical mind. According to the renowned Sanskritist, Sheldon Pollock, India had at Independence a wealth of world-class scholars such as Hiriyanna, Kane, Radhakrishnan, Sukthankar, and more. Today we have none.

The current controversy about teaching Sanskrit in our schools is not the debate we should be having. The primary purpose of education is not to teach a language or pump facts into us but to foster our ability to think — to question, interpret and develop our cognitive capabilities. A second reason is to inspire and instill passion. Only a passionate person achieves anything in life and realizes the full human potential. And this needs passionate teachers, which is at the heart of the problem.

Too many believe that education is only about ‘making a living’ when, in fact, it is also about ‘making a life.’ Yes, later education should prepare one for a career, but early education should instill the self-confidence to think for ourselves, to imagine and dream about something we absolutely must do in life. A proper teaching of Sanskrit can help in fostering a sense of self-assuredness and humanity, much in the way that reading Latin and Greek did for generations of Europeans when they searched for their roots in classical Rome and Greece.

This is the answer to the bright young person who asks, ‘Why should I invest in learning a difficult language like Sanskrit when I could enhance my life chances by studying economics or commerce?’ Sanskrit can, in fact, boost one’s life chances. A rigorous training in Panini’s grammar rules can reward us with the ability to formulate and express ideas that are uncommon in our languages of everyday life. Its literature opens up ‘another human consciousness and another way to be human’, according to Pollock.

Teaching Sanskrit under the ‘three-language formula’ has failed because of poor teachers and curriculum. But the debate is also about choice. Those who would make teaching Sanskrit compulsory in school are wrong. We should foster excellence in Sanskrit teaching rather than shove it down children’s throats.

The lack of civility in the present debate is only matched by ignorance and zealotry on both sides. The Hindu right makes grandiose claims about airplanes and stem cell research in ancient India and this undermines the real achievements of Sanskrit. The anti-brahmin, Marxist, post-colonial attack reduces the genuine achievements of Orientalist scholars to ‘false consciousness’. Those who defend Sanskrit lack the open-mindedness that led, ironically, to the great burst of creative works by their ancestors. In the end, the present controversy might be a good thing if it helps to foster excellence in teaching Sanskrit in India.

(Source: Extracts from an Article by Shri Gurucharan Das in Times of India, dated 14-12-2014)

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Technological Unemployment – Job prospects are grim today, as humans and organisations aren’t keeping up with the pace of technology

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At an informal meeting of some wise men of Mumbai’s financial world, the conversation focused on the rapid automation of more and more work once done by humans and whether it will lead to “technological unemployment” – a phrase coined by John Maynard Keynes, who in 1930 had talked about a “new disease”, which is the inability of the economy to create new jobs faster than jobs are lost to automation.

One of the participants in the informal meeting gave some food for thought for the new government – after jobless growth and jobless mini-recession, will it be a case of jobless recovery? Going by the drift of the conversation, it was apparent no one knew the answer to that question. Technological change over the last generation has wiped out many low- and middle-skill jobs. Just think about the big army of secretaries, typists, telephone and computer operators and payroll clerks who occupied vast office space in earlier years? There are examples galore.

If this was the past, consider the future, and here the news isn’t too good for even some of the most skilled jobs. Though spoken in a different context, McKinsey Inc CEO Dominic Barton told The Economic Times last week, “If you are a heart surgeon in the US today, you better be worried about driverless cars because most of the heart transplants come from car accidents and car accidents are going to drop dramatically with driverless cars”.

If heart surgeons have reasons to feel worried about driverless cars, imagine the plight of truck and taxi drivers when computers start driving more safely than humans. And it’s not a remote possibility. In April 2014, the Google team working on the project announced that their driverless vehicles have now logged nearly 1.1 million km.

If you find all this talk about machines taking away jobs a little outdated, you could do what one of the participants in the informal meeting suggested – read a 75-page e-book, Race Against the Machine, by Massachusetts Institute of Technology’s Erik Brynjolfsson and Andrew McAfee. The authors have brought together a range of statistics and examples to show how technological progress has deep consequences for skills, wages and jobs. Faster, cheaper computers and increasingly clever software are giving machines capabilities that were once thought to be distinctively human – like understanding speech, translating from one language to another and recognising patterns. So automation is rapidly moving beyond factories to areas that provide most jobs in the economy. The e-book makes the case that employment prospects are grim for many today, as humans and our organisations aren’t keeping up with the pace of technology. Is it time to re-imagine the Skill India mission?

(Source: Article by Shyamal Majumdar in Business Standard dated 5th December, 2014)

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Throwaway culture

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Unlike earlier days when things were made to last, today everything is disposable

We’ve
had to get rid of our TV set, which was eight years old, and was acting
up. Can’t you repair it? i asked the technician. He looked at me as
though i’d morphed into a Martian. You don’t repair eight-year-old TVs;
you throw them away, he said.

So we got rid of it at a literally
throwaway price, a small fraction of what we’d paid for it. Now, as i
sit and look at the new TV we’ve bought to replace the old one, i can’t
help but think of its impending demise a few short years from now.

It’s
not just TV sets that belong to what could be called the throwaway
culture. Cars, computers, mobile phones, anything you care to name seems
to be made so as to ensure that it will self-destruct, or be rendered
useless, within a relatively short span of time. And that short span of
time seems to be getting shorter and shorter.

No sooner have you
got the very latest smartphone/ music system/ iPad/ electric nostril
hair clipper when a NEW! IMPROVED! UPDATED version of the darn thing is
launched and you find yourself saddled with the old model which your
raddiwala might have to be cajoled into carting away.

It’s
called ‘built-in obsolescence’, designing devices in such a way as to
make them disposable almost as soon as you’ve bought them. What are
known as ‘consumer durables’ should more appropriately be called
‘consumer disposables’ in today’s transient technology where yesterday’s
new is today’s old.

In earlier times, people didn’t merely buy
durable goods like cars, or refrigerators; they developed a relationship
with them. They weren’t just mechanical devices; they were part of the
family, and like other family members they often developed all manner of
idiosyncratic behaviour – rattles, wheezing, sudden stops and starts –
as they grew older, endearing traits that humanised them.

Instead
of being ashamed of their age, people were proud of how old their car
was, or their fridge, or their music system. It showed how well they’d
been looked after, like aging relatives whom one cherished.

Those
days are dim memories in today’s disposable culture of inbuilt
obsolescence. To which India boasts one notable exception: the
never-say-die neta who successfully defers all attempts to be put out to
pasture and comes with a genuinely lifetime guarantee.

(Source: Times of India, dated 03-12-2014)

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Rajan sings a different tune, pitches for ‘Make for India

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As the Narendra Modi government goes on an overdrive in its ‘Make in India’ campaign, there is a word of advice from Reserve Bank of India (RBI) Governor Raghuram Rajan.

Amid the slowing of the world economy, Rajan on Friday cautioned the government against too much focus on merchandise export-led growth through this campaign and advised to supplement it with ‘Make for India’.

However, since domestic demand tends to get overstimulated, the government will have to frame suitable fiscal policies and RBI itself will have to ensure inflation remains low, Rajan said in his Bharat Ram Memorial Lecture here.

He said the path of disinflation may not be as steep in India as in industrialised nations and disclosed that RBI will talk to the government on the timeline beyond 2016 to keep inflation at four per cent, plus-minus two per cent.

To finance domestic demand responsibly, he advised that it be financed primarily through internal sources and suggested some more budgetary benefits for savings in this regard.

“The world is unlikely to be able to accommodate another export-led China,” Rajan said in his address, organised by industry body Ficci, in New Delhi on Friday.

Clarifying he was not suggesting pessimism for exports, he said, “I am counselling against an export-led strategy that involves subsidising exporters with cheap inputs, as well as an undervalued exchange rate, simply because it is unlikely to be very effective at this juncture.”

Rajan, formerl chief economic advisor in the finance ministry, said India would have to compete with China, which still has some surplus agricultural labour to draw on, when it decided to push manufacturing exports. “Export-led growth will not be as easy as it was for the Asian economies that took that path before us.”

Besides, industrial countries had themselves been improving capital-intensive flexible manufacturing, so much so that some manufacturing activity was being “reshored”, he said. “Any emerging market wanting to export manufacturing goods will have to contend with this new phenomenon.”

If external demand growth is likely to be muted, India has to produce for the internal market. “This means we have to work on creating the strongest sustainable unified market we can which requires a reduction in transaction costs of buying and selling across the country,” the governor said. Improvements in the physical transportation network would help but so would fewer, but more efficient and competitive intermediaries in the supply chain from the producer to consumer, he said.

At a time when the Centre is struggling to evolve a consensus with states on the issue of a national goods & services tax (GST), Rajan said: “A well designed GST Bill, by reducing state border taxes, will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come.”

He also said the government would have to frame suitable fiscal policies and RBI itself would have to ensure inflation remained low, since domestic demand tends to get overstimulated.

He further pointed out that the path of disinflation might not be as steep in India as in developed nations and the glide path as advocated by the Urjit Patel committee suited the country.

“Our banking system is undergoing some stress. Our banks have to learn from past mistakes in project evaluation and structuring, as they finance the immense needs of the economy,” he advised. They (banks) would also have to improve their efficiency as they compete with new players like the recently licensed universal banks, as well as the soon-to-be licensed payment and small finance banks.

“At the same time, we should not make their task harder by creating impediments in the process of turning around, or recovering, stressed assets. RBI, the government, as well as courts have considerable work to do here,” Rajan said, pitching for financial inclusion and some Budget sops to boost savings.

“The income tax benefits for an individual to save were largely fixed in nominal terms until the recent Budget; this means the real value of the benefits has eroded. Some budgetary incentives for household savings could help ensure the country’s investment is largely financed from domestic savings,” he said.

Rajan said it was worth debating whether India needed more institutions to ensure deficits stayed within control and the quality of Budgets remained high.

“A number of countries have independent Budget offices and committees that opine on Budgets. These offices are especially important in scoring budgetary estimates, including unfunded long-term liabilities that industrial countries have shown are so easy to contract in times of growth, and hard to actually deliver.”

In addition to inflation, he said, a central bank had to pay attention to financial stability. This was a secondary objective but might become central if the economy entered a low-inflation credit and asset-price boom. “Financial stability sometimes means regulators, including the central bank, have to go against popular sentiment.”

The role of regulators was not to boost the Sensex but to ensure the underlying fundamentals of the economy and its financial system were sound enough for sustainable growth, he said. “Any positive consequences to the Sensex are welcome but are only a collateral benefit, not the objective.”

While emphasising on policies to attract foreign direct investment to fund the country’s current account deficit, Rajan said policies should not compromise India’s interests.

In this regard, Rajan said, the requirements to patent a medicine in India were perfectly reasonable, no matter what international drug companies said. He also said policies should not focus only on FDI but promote young entrepreneurs, arguing “if we make it easier for young Indian companies to do business, we will also make it easier for foreign companies to invest, for both are outsiders to the system”.

This meant a transparent and quick legal process to deal with contractual disputes, and a proper system of bankruptcy to deal with distress — both issues the government had taken on, he said.

Noting that India did not belong to any power bloc, Rajan advised it, besides other emerging countries, to not only ensure quota reforms in the International Monetary Fund and the World Bank but inject new agenda, new ideas and new thinking into the global arena. “No longer will it suffice for India to simply object to industrial countries’ proposals; it will have to put some of its own on the table.”

(Source: The Economic Times dated 13-12-2014)

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On Crony Capitalism

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In his 2012 book, Breakout Nations, Ruchir Sharma said that any country that produces too many billionaires, relative to its size, is in all likelihood off balance. “If the average billionaire of a country has amassed too much wealth, not just billions but tens of billions, the lack of balance can lead to stagnation,” said he. At that time, he had said that “many of India’s super rich still inspire national pride, not resentment, and they can travel the country with no fear for their safety”, but this “genial state of affairs could change quickly.”

That point may well have been reached. Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday came down heavily on crony capitalism – the nexus between “corrupt businessmen” and “venal” and “corrupt politicians” – which, he said, is “killing transparency and competition” and is “harmful to free enterprise, opportunity and economic growth.” The issue of cronyism had played out in full during the recent general elections. “If the debate during the elections is any pointer, this is a very real concern of the public in India today,” Mr Rajan added. Some argue that the charges of cronyism hurled at Narendra Modi during the election campaign, especially his closeness to Mukesh Ambani and Gautam Adani, did not stick; otherwise, how would his party, the Bharatiya Janata Party, have gained a majority in the Lok Sabha? In this narrative, the fear of cronyism is exaggerated.

One school of thought says that Japan and South Korea progressed rapidly because a handful of their companies were singled out for special treatment by the government, and they delivered the results. Most of them have become global conglomerates. That may be true but the Indian experience inspires no confidence. What did telecom companies do when the government gave them inexpensive spectrum? Some of them sold stakes to foreigners at a huge premium. It was only after the Comptroller and Auditor General quantified the loss – it could be up to Rs 1.76 lakh crore, it said – that the people got to know of the extent of the scam. Similarly, the special economic zones became an opportunity for land grabbing. And coal blocks were bagged to lay hands on an undervalued natural resource.
These instances shouldn’t surprise anybody because cronyism has been an integral part of Indian business. In the pre-liberalisation age, many business houses got industrial licences and just sat on them in order to create a scarcity that would keep prices high. Most worked behind the scenes to ensure that rivals were denied licences. “An important issue in the recent election was whether we had substituted crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for pay-offs to venal politicians,” RBI Governor Rajan said.

Cronyism acts as a significant entry barrier into regulated businesses. It is not easy to take on entrenched players who have decision makers in their pockets. If they can cause ministers to be shunted out, imagine the damage they can inflict on newcomers. That’s why most young entrepreneurs these days are happy to confine themselves to unregulated sectors such as information technology. One way to end cronyism in the allocation of natural resources is to move to transparent auctions, like it has happened in spectrum. So far, it seems to have worked well. There is no reason why it can’t be replicated in other sectors. The government needs to put in place safeguards that will ensure that there is no collusion between bidders.

So strong is popular resentment at cronyism and privatesector corruption that nobody has dared to name a businessman for the Bharat Ratna this year.

(Source: Extracts from an article by Mr. Bhupesh Bhandari in Business Standard dated 15-08-2014)

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NJAC: Govt. in a hurry has missed two important checks

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The Constitution (121st Amendment) Bill, 2014, passed by the Parliament has proposed the establishment of a National Judicial Appointments Commission (NJAC). The NJAC will replace the collegium of judges, which is currently responsible for appointments to the Supreme Court of India and the High Courts.

The idea of such a constitutional commission is a sensible one, especially given the increasing dissatisfaction with the opaque functioning of the judicial collegium.

But the Parliament ought to have been careful not to throw the baby out with the bathwater. Despite its many faults, the collegium has been widely credited with protecting judicial independence, its raison d’etre and a fundamental prerequisite of the rule of law. In the two decades since, while other deficiencies have plagued the collegium, unbridled executive interference has not been one of them. In its collective anxiety to replace the collegium, the Parliament has failed to incorporate the collegium’s key safeguard against an erosion of judicial independence, i.e., a predominant voice for the judiciary in appointments. Experience demonstrates that a failure to give the judiciary preponderance in judicial appointments, especially in India’s constitutional democracy where the judiciary is the only real check on the legislature and executive, is prejudicial to judicial independence. As Nani Palkhivala powerfully described it, executive dominance immediately prior to and during the Emergency left our Constitution, specifically the judiciary, ‘defaced and defiled.’ For the nation to be once bitten and not twice shy is to take a blinkered view of this history.

However, in incorporating judicial preponderance, the cabal-like functioning that the collegium has often been accused of must not be replicated. Two checks are necessary: first, the NJAC must have a seventh member who is a retired Supreme Court judge for Supreme Court appointments and transfers between High Courts. For appointments to a high court, this seventh member should be a retired judge of the concerned high court. The former must be appointed by the Prime Minister, leader of the opposition in the Lok Sabha and the Chief Justice of India whereas the latter must analogously be appointed by the Chief Minister of the state, leader of the opposition in that state and the chief justice of the high court. This proposal will ensure that appointments to high courts are not entirely dictated by the Centre. It deserves the consideration of state governments to whom the constitutional amendment will now be sent for ratification. Secondly, a key modification is necessary to the appointment procedure. The exercise of a veto by any NJAC member must be accompanied by reasons, which must be publicly disclosed. Currently , this is not provided for. A failure to disclose reasons will allow pernicious prejudices that have often prevented fine judicial minds from being elevated to the Supreme Court to persist. Transparency, a key leitmotif of the reform of the appointments process, demands such disclosure. It is also imperative that the criteria for selecting judges, and other key regulations, are carefully formulated by the NJAC itself and not left to the executive.

Judges have been appointed to the Supreme Court who have not delivered any significant judgments during their high court tenures. This is not peculiar to collegium appointments but happened during the period of executive dominance too. For elevation of judges, the NJAC must ascertain the number of judgments delivered, undertake an assessment of their quality and the judges’ adherence to values of judicial life. For assessing lawyers and jurists, the extent and quality of their practice or academic work and probity of conduct must be gauged. The NJAC would do well to study the workings of Judicial Performance Evaluation programmes in several states in the US and establish well-defined criteria to assess potential adjudicative ability.

Without such criteria being incorporated and publicly known, the establishment of the NJAC is meaningless. Worse still, without judicial preponderance, its very existence has the ominous potential of setting the clock back on the nation’s long quest of rescuing the judiciary from the clutches of executive caprice. No matter how noble the professed intention of the government in proposing this amendment, and Parliament in passing it, the undue haste with which the bills were piloted through, the lack of meaning full public debate and the complete absence of genuine parliamentary scrutiny, suggest otherwise. They demonstrate a powerful government in an inexplicable hurry, and a lame-duck Parliament seemingly failing to grasp the magnitude of its actions, the effects of which will far outlive its members’ tenures. If the NJAC is to be a genuine third way for judicial appointments, let it be a way that is underpinned by respect for the judiciary, pervaded by transparency and alive to the lessons from India’s chequered history of judicial independence.

(Source: An article by Ms. Ruma Pal and Mr. Arghya Sengupta in Times of India dated 17-08-2014).

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India’s antiquated law on contempt of court restricts personal liberty and must be overhauled

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After having raised the issue of whether the clubby and secretive collegium system actually preserves the independence of the judiciary former Supreme Court judge, Justice Markandey Katju, has now trained his guns on India’s antiquated contempt of court law. He has made the valid point, that judicial supremacy cannot be based on the law of kings in a democracy. Is interference or disruption of the due course of judicial proceedings or the administration of justice contempt of court? Or, does criticism of a judgment or a judge constitute sufficient ground for invocation of the dreaded law? While it ought to be the former in India it’s often understood as the latter, as the contempt law has been employed when judges were made targets of personal attacks or to silence criticism of judgments. But criticising a judge or a judgment perceived to be flawed cannot be seen to be an illegitimate act that scandalises the court or seriously undermines public confidence in the administration of justice. In the UK and US, where both civil and criminal contempt laws are in operation, substantial amendments have constrained the powers of judges who might otherwise have acted to vindicate their authority, pomp and majesty which are anathema to a democratic institution.

The Indian contempt Act of 1971 has evolved over time to incorporate amendments that delineated what does not constitute contempt and framed rules to regulate contempt proceedings, yet inconsistencies remain. In 2006, an important amendment to the 1971 Act provided for truth as a valid defence in contempt proceedings, especially because the law was considered a threat to the fundamental rights to personal liberty and freedom of expression. Not just the doctrine of truth but public interest must be the cornerstones on which the law must be based. The judiciary, executive and legislature must ensure there are enough safeguards against arbitrary exercise of the power for contempt of court

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Labour law overhaul must happen at the centre

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Reform of India’s archaic and restrictive labour laws are central to any reform programme. This is a wellunderstood fact now; that the unfortunate stunting of India’s manufacturing sector, particularly in labourintensive industries, can largely be laid at the feet of these statist laws is undeniable. Not only do they provide bureaucrats with a reason to harass entrepreneurs, and place an excessive and unfair burden on small and medium enterprises, but they have signally failed to protect India’s workers. The fact that every employer wishes to avoid the incidence of these laws has led to widespread casualisation of the workforce. As a consequence, over 90 per cent of Indians work in the unorganised sector. Any comprehensive approach to restarting the economy from the new government will need to include a complete overhaul of labour law.

It is unfortunate, therefore, that the new government has shown little interest in pushing the envelope as far as this essential reform is concerned. Instead, the Bharatiya Janata Party (BJP), which leads the National Democratic Alliance government, has stressed that the Rajasthan government – which it also runs – is conducting labour law reform. The Rajasthan government will alter the application of related central laws: for example, raising the threshold of the number of employees who can be laid off without government permission from 100 to 300, and applying the Contract Labour (Regulation and Abolition) Act only to companies with more than 50 workers, compared with 20 now. Similar labour law changes are being contemplated in Madhya Pradesh, also ruled by the BJP, and even Haryana, which is ruled by the Congress. These are certainly welcome developments, indicating that labour law changes as necessary reforms to revive the manufacturing sector have begun to gain wider acceptance in many states.

(Source: Business Standard, dated 23-07-2014)

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Supreme Court feels slighted snaps at Centre on National tax tribunal

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The Supreme Court reacted sharply to the Centre’s stand that the purpose behind creation of National Tax Tribunal (NTT) was to associate domain experts in deciding taxation disputes as it was often felt that judges lacked expertise in specialized fields.

A five-judge constitution bench comprising Chief Justice R M Lodha and Justices J S Khehar, J Chelameswar, A K Sikri and R F Nariman wondered why the government rushed to the judges whenever they faced a problem.

“Judges may not be experts. But whenever there is a problem, they come to the judges by way of courts or commissions,” the bench said before reserving its order on a petition filed by Madras Bar Association challenging the National Tax Tribunal Act.

The petitioner had alleged that these tribunals could not have been empowered to decide questions of law, which exclusively fell within the courts’ domain. It said the government, by constituting NTTs and providing appeal against their orders directly to the Supreme Court, had denuded the jurisdiction of high courts.

The inclusion of chartered accountants and company secretaries on NTTs and allowing them to decide questions of law did not go down well with the apex court. “How can a CA or CS help determine the question of law involved in a taxation dispute,” the bench asked.

Appearing for an association of chartered accountants and company secretaries, senior advocate K V Vishwanathan said the CA and CS courses involved study of taxation laws.

The bench said, “These days, Class VIII and IX students also study about Constitution. That does not mean they have knowledge of law. The taxation experts may be able to help a judicial member understand the complexities involved in a dispute but how will they determine a question of law?”

In a lighter vein it said, “Many clerks and stenographers after long association with lawyers know the provisions of law quite well. Can they be said to have knowledge enough to decide questions of law. A CA or a CS would be studying taxation law from the angle of tax purposes only and not for understanding the questions of law that would arise in a dispute.”

Appearing for the petitioner, senior advocate Arvind Datar said NTT experimentation was dangerous for the judiciary as slowly, the government would take away expert subjects – disputes relating to company law, trademark and intellectual property – from the high court’s jurisdiction by creating separate tribunals in the name of infusing experts into the dispute redressal mechanism.

NTT, instead of supplementing the judiciary, was supplanting the court’s jurisdiction, Datar said.

The bench asked solicitor general Ranjit Kumar whether NTTs enjoyed any autonomy at all. “The NTT chairman does not even have power to set up benches. This power is vested with the central government. What is the autonomy we are talking about,” it asked.

(Source: Times of India, dated 24-07-2014)

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Judicial appointments need transparency

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Amid growing concerns about political pressure on the appointment or extension of judges, the government has indicated that it intends to move quicker on creating a judicial appointments commission. This immediately follows the revelation of a series of events from 2005 which, although the facts continue to be disputed, nevertheless raise serious concerns. Former Supreme Court judge, and current chairman of the Press Council of India, Markandey Katju recently said that a judge of the Madras High Court was granted an extension although a report by the Intelligence Bureau had said that he was corrupt. Mr. Katju said that the collegium that appoints judges, then headed by the erstwhile chief justice of India, R C Lahoti, had given in to pressure from the government. Mr. Katju said that the ex-prime minister, Manmohan Singh, was put under pressure from a coalition partner – who could only be the Dravida Munnetra Kazagham(DMK) from Tamil Nadu – to protect the judge, and a senior minister pressured the collegium on behalf of the government. Then law minister, H R Bhardwaj, subsequently claimed that extensions to the judge were solely the collegium’s decision. It has now emerged, in a report by The Times of India, that the Prime Minister’s Office had, in fact, lobbied in favour of making the judge in question a permanent member of the Madras High Court bench.

On one level, this is a reminder of the bad old days of coalition politics under the United Progressive Alliance (UPA). The DMK proved itself to be a difficult and bullying ally, and often used its pivotal numbers in the parliamentary coalition to dubious ends. Whether it is in the reported arm-twisting of Ratan Tata by the telecom ministry it controlled; or its insistence that A Raja be retained as a minister in 2009; or in the doubtful Maxis- Aircel deal, the DMK bears a great deal of responsibility for the downfall of the UPA . If these latest allegations are true, however, then it becomes clear that Dr Singh himself had no intention, right from the start, of standing up to this ally. It is no surprise, then, that the UPA failed to manage its coalition.

However, the larger point that must be made is on the nature of judges’ appointments. The incumbent government has already been accused of intervening unduly in judicial appointments, by refraining from returning the nomination of eminent lawyer Gopal Subramanium to the collegium. With each such report, there are more holes in the existing justification for the collegium, that it is immune to political pressure. However, the answer is not to simply replace it with another opaque system. The appointment of judges must be made in the open, and transparently. The executive must be given a greater, but circumscribed, say in the choice of judges, certainly. However, if accusations of corruption or bias are going to be thrown around in this manner, then it is clear that the process requires clarity and light in order to preserve the aura of the judicial system. The proposed judicial appointments commission should, thus, not be a closed and opaque body.

(Source: Business Standard, dated 24-07-2014)

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Another market crash in the offing?

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Reserve Bank of India governor Raghuram Rajan has added his voice to a steadily rising chorus warning of the heightened risks of a global market crash. Specifically, he says there’s a disconnect between the state of the economy and asset prices; that excessively accommodative monetary policy in the developed economies has led to asset bubbles; that competitive monetary easing is leading to beggar-thy-neighbour policies reminiscent of the Great Depression in the 1930s; that the recent low volatility masks many of the risks; and that not enough is being done in terms of improved regulation.

Rajan should know. He was one of those who predicted the financial crisis. At that time, he had said that among the reasons for the crisis were the skewed incentives for fund managers that led to excessive risk-taking. That hasn’t changed. Nor has the pervasive inequality in the US. Several economists have argued that the lack of growth in real wages was the underlying reason for the explosion of private sector debt that led to the financial crisis, as debt was substituted for income. The International Monetary Fund has warned that housing markets are once again getting overheated in several countries.

There have been half-hearted attempts at regulation, but it’s far from enough. The attempt has been to get back to business as usual, by papering over the cracks with money. As the Bank for International Settlements pointed out in its annual report last year, the role of accommodative monetary policy was to buy time to put reforms in place. Instead, it warned, “The time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.”

The worry is the bubbles seem to be getting larger and larger and we are still to recover from the bursting of the last one. And after using up all available ammunition on tackling the current crisis, how will the world deal with another bust?

Will the central banks be able to engineer a soft landing? The history of serial booms and busts casts serious doubts about that. Indeed, if history is any guide, the Chinese Communist Party’s record of steering its economy to a soft landing is much better than that of Western governments and central banks, although whether they will be able to handle their current crisis remains to be seen. The silver lining, if one may call it that, is that there is often a gap between the first warnings and the final bursting of a bubble. For instance, some had cautioned as early as 2004 that a bubble was in the making. And Raghuram Rajan’s famous warning at Jackson Hole was made in August 2005, two years before the crisis hit.

(Source: Extracts from an Article by Mr. Manas Chakravarty in the Mint Newspaper dated 11-08-2014)

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Labour Reforms – Hold the Celebrations

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There has been some minor celebration over the fact that the president has given assent to changes in three central laws relating to industrial labour, proposed by the Rajasthan government and, therefore, applicable to that state. It would seem that we are prepared to celebrate even the smallest change in labour legislation in one corner of the country, when what the country needs is wholesale change across all states. The most significant of the changes in Rajasthan is one that does away with the need for government permission to retrench staff or shut down a unit, so long as the unit employs fewer than 300 workers (against 100 earlier). This is to be welcomed, but do remember that a more ambitious change along the same lines was proposed on a national scale by Yashwant Sinha, in a Budget speech, more than a decade ago. So this is reform by inches over decades. In any case, the real changes needed in labour laws are not those that facilitate units shutting down, rather those that help units to function more easily – though it is also true that you are more likely to hire workers if you know that you can retrench them should they become surplus.

What one would like to hear more of are the changes to labour laws on an all-India scale that the Cabinet was widely reported to have cleared more than three months ago. These were more wide-ranging, though perhaps not comprehensive, and with all-India application. As reported at the time, the changes related to limits on hours of overtime (important for seasonal businesses that have peaking cycles at specific times of the year), women working night shifts (many industries have traditionally had more women employees), reducing the scope for harassing factory owners because of minor infractions, and simplifying form-filling for the owners of small factories. Some of these changes were clearly designed to reduce the scope for blackmail by labour inspectors – harking back once again to Yashwant Sinha’s unfulfilled promise to get rid of the “inspector raj”.

The accompanying message to the country has to be that the government wants to create real jobs that create real value, and pay much better wages than the rural employment guarantee programme does. China, which has been factory to the world, is now less than competitive in quite a few labour-intensive industries because of its much higher level of per capita income and a stronger currency. So far the slack has been taken up by countries like Bangladesh, Vietnam and the Philippines. There is no reason why some of those industries should not find a welcoming home in India. If the government can bring about a more congenial environment for employers, the jobs should materialise – and that would be more important than all the other Modi initiatives so far.

(Source: Article in Weekend Ruminations by T. N. Ninan in Business Standard dated 15.11.2014)

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Gold imports: Reform Taxes, don’t create new smugglers

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Gold imports have skyrocketed despite the global price of the yellow metal weakening. That signals that gold has not lost its sheen as an investment choice. The government is worried that the surge in gold imports could undermine the country’s balance of payments position. The worry is not misplaced. India’s current account deficit is within limits of prudence, due to the sharp drop in global crude prices, but splurging foreign exchange on imported gold will negate these gains. Anecdotal evidence suggests that people are using their unaccounted money to buy jewellery and bullion, shunning financial instruments that create audit trails. So, the need is to establish audit trails of these transactions. One way would be for the Centre to impose a nominal 1% excise duty on jewellery, to create audit trails and curb the use of black money to fund gold purchases.

Jewellery purchases in cash of over Rs. 5 lakh is captured under the annual information returns (AIR) that identify potential taxpayers by examining their expenditure patterns. AIR creates an audit trail too, but there are no trails for cash purchases below Rs. 5 lakh. The import surge is being attributed to a relaxation of the 80:20 scheme — at least onefifth of every lot of imported gold is exclusively made available for exports, and the balance for domestic use — for star and premier trading houses. However, the government should desist from any attempt to restrict the demand for gold through quantitative restrictions or impose higher import duties, as it would only encourage smuggling.

(Source: The Economic Times dated 17-11-2014)

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Judiciary on tight purse strings

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The chief justices and jurists have consistently pointed out that the share the judicial system gets from the budgets, the Union or the states, is meagre. Two months ago, Chief Justice Lodha said that it is getting only between 0.4 and 0.11 per cent of budgetary allocations. The percentage has remained static for years. The other Cinderellas such as health and education have started getting a better share and attention due to social concerns and public awareness. However, courts are still neglected, as vouched for by the current chief justice.

In contrast, the allocation for the justice system is 1.2 per cent in Singapore, 1.4 per cent in the US and 4.3 per cent in the UK. The miserly allotment the Indian judiciary gets includes what it generates from court fees, stamp duty and other miscellaneous heads, which also go to the general pool.

This creates a grim picture in terms of human suffering. More than 30 million cases are pending before the courts. Some judges have said that it would take decades to clear the matters already pending before them. Against the Law Commission recommendation of 50 judges for one million people, the current ratio is 10.5 for one million. Nearly half the judges’ posts are vacant. Tribunals, nearly 40 at last count, are in a worse condition. The consequences are dismal to millions of people awaiting justice. Jails are overflowing with persons awaiting trial. Substantial numbers have already undergone imprisonment for periods they would have been sentenced if they were convicted.

Unappealing service conditions and hidden pressures keep away the best talents at the bar from accepting judicial posts. Good lawyers have to sacrifice sizeable income if they are elevated to the bench. Judges must also be made of “sterner stuff” to resist political and corporate arm-twisting, as seen in recent episodes of mysterious recusals. As a result, the legal eagles have invited a situation in which they have to argue intricate points of law before a less-endowed brethren. It could be called poetic justice, but for the fact that the clients are the sufferers.

It is well-known that the government is the largest single litigant and 60 per cent of the cases involve central laws. Therefore, the Union should contribute adequately to the expenditure on better administration of the courts. New laws are manufactured at every turn without estimating the expenditure involved. In the US, bills are said to annex a financial allocation after a “judicial impact assessment”.

(Source: The Economic Times, dated 02-07-2014)

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Times to reform our judicial appoinment

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The sordid manner in which senior lawyer Gopal Subramanium’s appointment as a judge of the Supreme Court (SC) has been thwarted points to the urgency of reforming judicial appointments. Subramanium’s name was delinked from the other three forwarded by the judges’ collegium to the government for elevation to the bench, based, reportedly, on certain reports of the CBI and the Intelligence Bureau. These agencies have regularly made use of Mr. Subramanium’s legal services. So, this sudden discovery of character flaws can only be attributed to the preferences of the new political dispensation.
(Source: The Economic Times, dated 27-06-2014)

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Agenda for un-legislation

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One of the long overdue steps promised by the new government is to repeal old and irrelevant laws that clutter the statute books. This country is known for having the largest number of legislation, the central Acts alone numbering about 3,000 and state laws which might total at least three times more. The situation recalls the truism of Cicero: more laws, less justice.

Whenever a socio-legal crisis arises, the government promises more laws to get over the embarrassment. If there is a rape epidemic, the concerned minister will undertake to pass a law to end it for all times; if a SUV driven by drunken youth runs over pavement sleepers, let there be another law. The possibilities are endless. In the end, all these theatrics fade from public memory.

Before passing more Acts in the 16th Parliament, the lawmakers could think of un-legislating a long list of outdated laws that have defied the ravages of time. Even scrubbing them with amendments will not make them relevant. The Law Commission had made a study of such statutes in 1998 and presented a lengthy list of legislation which could be jettisoned, benefitting the public and the courts. It had named 166 central Acts, one of which goes to the days of the East India Company, namely, the Coastal Vessels Act, 1838. The country could do away with the Bikrama Singh’s Estates Act, 1883 and the Mirzapur Stone Mahal Act, 1886.

The Livestock Importation Act, 1898, was originally meant to regulate the import of livestock liable to be affected by infectious disorders. It was recommended for repeal, but it was dusted and kept alive with an amendment in 2001 adding “livestock products” to the definition of “livestock”. The Glanders and Farcy Act, 1899, appoints inspectors to search and destroy diseased horses, asses and mules. The Dourine Act, 1910, deals with the castration of diseased horses and compensation to be paid to the owner.

There are statutes that still refer to His/Her Majesty. Acts such as the Prisoners’ Removal Act, 1884, hark back to the days when convicts were shipped to Mauritius or Singapore. There are at least 11 such colonial era statutes still in force, which might interest only students of legal history.

Lugging outworn laws over centuries is not peculiar to this country. There are ridiculous rules everywhere that made Bumble say that law is an ass. It is reported that in 29 states in the US, it is legal to fire someone for being gay. In Thailand, it is illegal to step on money. Divorce is illegal in the Vatican. A Chinese law makes it compulsory for children to visit their parents and attend to their spiritual needs. The long list would make us preen with the pride of rationality. But wait, it is a humbling thought that in this country any sale of property above Rs. 100 should be registered.

One way to make the lawmakers look periodically at the stack of rule books is to implant a terminator clause in each legislation. It should lapse after, say a quarter century, unless they are amended and updated. The courts should also ignore such laws. Some countries have such a clause in their laws, but India has not incorporated that principle, and thus allowed forensic weeds to grow.
(Source: Extracts from an article in Business Standard, dated 18-06-2014)

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Energy Pricing

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The energy sector badly needs reform. India has notoriously poor electricity supply, which has hampered the growth of the manufacturing sector. Meanwhile, energy costs for consumers are not noticeably low, in spite of huge government subsidies on fuel and on electricity – which are largely responsible for high deficits. Policy mismanagement and pricing distortions across the energy space are responsible in large measure for this situation. At the retail end of the chain, prices of diesel, compressed natural gas, liquefied petroleum gas and kerosene are controlled, and so are power tariffs. However, India imports 80 per cent of its crude and 30 per cent of its natural gas. It is also among the world’s largest coal importers. The high international prices of these commodities are not passed on to end-users. Hence, companies supplying electricity and retailing petroleum products suffer losses. Not coincidentally, these companies are owned by the government, since private players are unwilling to enter this space.

A complex subsidy mechanism is applied to oil refining and marketing. The oil and gas subsidy came to about Rs. 1.45 lakh crore in the last fiscal year. It was shared between oil-producing public sector undertakings and the central government. Meanwhile, power sector losses run at about Rs. 60,000 crore per annum. Cash-strapped state-owned power distribution companies cannot repay loans, or even settle with suppliers such as Coal India and National Thermal Power Corporation, the country’s largest power producer. Despite power shortages, there has been controversy over tariff hikes in the Mundra projects of the Adani and Tata groups. Both projects run on imported coal, which became more expensive. Large gas-based power capacities are also sitting idle. Power sector losses have led to a banking crisis. The latest bailout involved restructuring almost Rs. 2 lakh crore in unpaid loans by state power distribution companies. The states issued bonds as part of a debt restructuring package.

The fiscal burden on the energy account is, therefore, huge. The situation cannot be rectified without charging the end-user rational prices.

(Source: Business Standard, dated-18-06-2014)

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Wolves of Wall Street

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Bonus payments by Wall Street firm are at their highest levels since before the financial crisis of 2008, according to a report by the New York State Comptroller. The news came on the same day that a trader at Goldman Sachs was fined $825,000 for his role in a bad mortgage deal.

The record bonuses, accompanied by a rising trend of big fines for financial market crimes, should lead to a new round of debate on the role of the finance industry. Every country needs a robust financial sector, but also has to take care that its economy is not eventually sucked into what J.M. Keynes called a whirlpool of speculation.

The key to reform is not just macroprudential regulations but also a hard look at incentives for excess risk-taking by traders. JP Morgan Chase and Co. boss Jamie Dimon has got a $20 million bonus a few months after the firm paid a record $13 billion in a settlement with regulators.

(Source: The Mint Newspaper dated 14-03-2014)

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Why WhatsApp

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For some time, the behemoth social networking website Facebook has been plagued by reports that it is losing its edge with younger users. Given that explosive future growth is the source of its hefty valuation of $173 billion (Facebook trades at 50 times its 2014 earnings) as well as the fact that domination of user networks is how such websites can hope to make money, this has been a matter of concern for investors. Even US President Barack Obama, who relied heavily on Facebook for his insurgent campaign in 2008, has noticed, saying late last year in a chat with children that “it seems they don’t use Facebook any more”. The numbers back up President Obama’s assessment.

The slack has been picked up by other networks. Tumblr, for example, with its small, easy-to-link posts with high graphics content; Snapchat, which deletes posts and photos after a few seconds; Instagram, which allows users to manipulate and share photos; and, of course, Twitter. But Mark Zuckerberg of Facebook has something most of these others don’t: a war chest. And thus the purchase, for $1 billion last year, of Instagram. And now the mammoth $19-billion purchase of the instant messaging service WhatsApp. It’s obvious, really, that Facebook is not paying for extra-special technology in buying WhatsApp. Other such SMS replacement services exist. Viber dominates West Asia, and was recently bought for $900 million by a Japanese online retailer. China uses WeChat. Japan uses Line. Eastern Europe uses Telegram. WhatsApp, however, has the largest user base, and is big in Western Europe, Africa and South and Southeast Asia. And it’s the only one that charges user fees; the others get money from advertising or value-added services. But Facebook probably isn’t interested in the money that WhatsApp makes from its downloads. It is interested in WhatsApp’s users: 450 million mobile users, about half of the number that uses Facebook’s apps. And it’s adding a million users daily.

Facebook wants those users. And so it paid for them – $19 billion, which comes to $42 (about Rs 2,600) a user. This is quite a lot; it’s difficult to see how each WhatsApp user could eventually be worth that much to Facebook or its advertisers. When Viber was sold, its users were valued at $8.50 (about Rs 530) a user. Even if just the $4-billion cash portion of the Facebook-WhatsApp deal is examined, then Facebook paid more than that. And it’s clear why: Facebook is desperate. It can’t afford to fall behind in terms of dominating the market – and demographics are against it. Rather than organically growing its network with younger users, it needs to capture them outright – hence the purchase of WhatsApp. It’s betting that smart integration of the two networks will follow and help it reverse its usage decline in the 13-21 age group. Facebook itself is 10 years old now; and it is spending money like water to stay young.

(Source: Business Standard dated 24-02-2014)

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Lesson We Must Learn From Global Indian CEOS

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The rise of global CEOs who spent their formative years in India is acknowledgement that the country is doing at least some things right. Many would agree some of the qualities these leaders possess — humility, modesty and a strong work ethic — were acquired well before they left the territorial frontiers of India.

The stability of family upbringing is among the most underappreciated advantages Indians have. According to the US Census Bureau, only 61 per cent of children in the US are raised from birth to age 18 in a home where both of their birth parents reside. Contrast this with India, where parents stay together and put the happiness of their children above everything else. Some children may feel their parents aren’t perfect, but most children learn what’s best about their parents and discard the rest.

This advantage can only accrue if families stay under the same roof: the biggest lessons learnt from one’s parents are often unspoken. Scott Haltzman, a renowned US sociologist, has shown that happier families understand who they are, what they value and why. This keeps families balanced in both good and bad times as they understand that only deep contentment can transcend momentary periods of pleasure and pain.

The understated reaction of Satya Nadella’s parents to their son’s success is an embodiment of this approach. What is also noteworthy is how the Hyderabad Public School (HPS) produced four global CEOs from India: Satya Nadella (Microsoft), Shantanu Narayen (Adobe), Prem Watsa (Fairfax) and Ajay Banga (MasterCard).Of course, a first-rate educational system and a plethora of sporting activities were a definitive advantage. But it appears that two things differentiated HPS from other schools. First, there was the sterling leadership of the principal of HPS, MC Watsa. And, second, the NCC training — which involved military exercises — may have helped students develop some of the qualities they possess today.

As we share the pride of global CEOs from India, we should reflect on the gratitude we owe parents and teachers. What the lives of Satya Nadella, Shantanu Narayen, Prem Watsa and Ajay Banga teach us is that most people do not get to where they are all on their own. It’s also a reminder that most people won’t get there in isolation either.

(Source: The Economic Times of India, dated 17-02-2014)

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Managing Bosses

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To many people, the phrase “managing your boss” may sound unusual or suspicious. Because of the traditional top down emphasis in most organisations, it is not obvious why you need to manage relationships upward — unless, of course, you would do so for personal or political reasons.

But we are not referring to political manoeuvring or to apple polishing. We are using the term to mean the process of consciously working with your superior to obtain the best possible results for you, your boss and the company.

Recent studies suggest that effective managers take time and effort to manage not only relationships with their subordinates but also those with their bosses. These studies also show that this essential aspect of management is sometimes ignored by otherwise talented and aggressive managers…

The fact is, bosses need cooperation, reliability and honesty from their direct reports. Managers, for their part, rely on bosses for making connections with the rest of the company, for setting priorities and for obtaining critical resources.

If the relationship between you and your boss is rocky, then it is you who must begin to manage it. When you take the time to cultivate a productive working relationship — by understanding your boss’ strengths and weaknesses, priorities and work style — everyone wins.

(Source: The Economic Times dated 23.11.2013)
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The ‘Modinomics’ euphoria: questions

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The markets are perhaps getting a little too sanguine at this stage about a Bharatiya Janata Partyled alliance coming to power in 2014 and its likely impact on the economy and governance. Some recent poll forecasts for the current state elections do suggest a swing in favour of the BJP; but to extrapolate from that, the configuration of the coalition that comes to power in 2014 is a long stretch.

Equally importantly, there remains a big question about the nature and effectiveness of “Modinomics” (which some heavyweight brokerages seem to be drooling over) at the national level.

I think investors need to ask some basic questions before putting their shirt on the Gujarat model. First, to what extent is the Gujarat model replicable for the rest of the country, given the diverse problems in different regions? Can his almost Nehruvian commitment to big industry be used to bootstrap growth for the rest of the country? Will he, for instance, ride roughshod over the new land acquisition norms and provide cheap land for industry? Or will he ultimately have to settle for the middle ground of compromise and consensus?

Second, assuming he does become prime minister, who will be his allies? Given his style of functioning – which even his staunchest admirers will concede is somewhat autocratic (and hence perhaps so effective in his own state) – how well will he lead a coalition of regional satraps who can be equally autocratic and stubborn in pushing their own narrow demands and agenda?

Third, let’s face the fact that even if Finance Minister P Chidamabaram were to produce a 4.8 per cent fiscal deficit-to-GDP ratio in 2013-14, it would not mark the end of India’s fiscal woes. The only way to compress the fisc this year is on the back of a hefty deferment of big-ticket expenditures such as subsidy payments for oil and fertilisers. These will become a drag on Mr Modi’s first budget. Besides, there would be the additional load of the full implementation of social programmes like food security. How will a new government handle this? Will it have the courage to prune or jettison some of these revenue-guzzling welfare programmes, and risk eternal damnation by voters? Can it afford to finally do away with oil and other subsidies at one shot? Or will the credit rating agencies start snapping at our heels again a couple of months after a new government takes office?

Fourth, there is a risk that Mr Modi’s appointment as prime minister will polarise Indian politics to an unprecedented degree. There could be various levels at which this plays out. For one thing, I suspect the growth (Mr Modi’s credo)-versusredistribution/ development debate will intensify. The pro-environment, pro-welfare “soft left” that has swelled in numbers over the last few years will take a harder line and the face-off could get nasty. Big industrial projects could continue to suffer. I also have no doubt that the aisle that separates the Opposition and the treasury benches in Parliament will be wider than ever. Thus, Mr Modi could face Barack Obama’s predicament, where consensus on any issue, however critical from a national perspective, is impossible to reach. Again, I would not put it past a Congress-led Opposition to take a leaf out of the BJP’s book and use the same tactics to obstruct lawmaking and the functioning of Parliament.

I am not apologetic or embarrassed about saying that I believe that Mr Modi has the “positive decisiveness” that former Goldman Sachs chief economist Jim O’ Neill so eloquently attributed to him. If a Mr Modi-led alliance does come to power, it will be a critical experiment in whether a single individual can yank an economy out of a low-growth trap created by its own diversity and the pulls and pressures of coalition politics. I am afraid that my a priori hypothesis is that the experiment will fail.

(Source: Extracts from an Article by Mr. Abheek Barua in the Business Standard dated 04.12.2013)

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China’s reform road map has lessons for India

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The detailed document on reform decisions made at Third Plenum of the Central Committee of the Chinese Communist Party has been released. This document contains the details on reform. Since the government decided to release a more detailed “decisions taken” document, many investors have taken this to be a clear indication that China’s top leadership is serious about reform. There once again seems to be a bit of a buzz around China and its long-term growth prospects after post the release of this reform road map.

The complete “Decision on Deepening Reform” document lays out a host of major initiatives, including a decisive shift towards free markets, relaxation of the one-child policy, elimination of re-education labour camps and reforms in land tenure, state owned enterprises, taxation and migrant worker rights. This reform road map show Xi Jinping as being a far more assertive and visionary leader than his predecessor Hu Jintao. He has shown that he has a good grasp of China’s structural economic and social ailments, and is putting in place a plan to address the country’s deep rooted governance issues. He also seems to be putting in place the administrative machinery that will help him overcome deep seated resistance to change from SOEs, local government bodies, tycoons and other local officials.

These steps and announcements show that Xi Jinping has a strong vision for China and the political muscle to attempt change and to stand up to vested interests. He seems to want to move China in a more market – oriented direction than the growth trajectory of the past decade.

Three major points emerge from the document.

Xi Jinping is targeting broad reform of Chinese governance and not just tinkering with economic policies. Mr Xi’s reforms seem to be targeting not just economic development and an improvement in economic efficiency, but a more basic re-write of the function and role of government. This means pushing government agencies to stop direct intervention in markets and forcing them to focus on market regulation, public service delivery, “social management” and environmental protection. Improving governance, at both the central and local level, seems to be his main aim. This is important as most of China’s economic problems – be they excess investment spending or local government debt and the shadow financial system – can be linked to poor governance (especially local governance). Mr Xi seems determined to focus more on social services and amend the local fiscal structures to enable greater focus on these issues.

The most important signal from the party was strong support for the private sector and markets, referring to it as “non-public”. They did pledge to “unwaveringly encourage, support and guide the development of the non-public economy”. They also declared that property rights in the non-public economy may (equally with the state sector) not be violated. The document also says the party will “reduce central government management over micro-level matters to the broadest extent” and calls for an end to excessive central government intervention. The first section of the document is all about giving the markets a decisive role in resource allocation. The clear goal seems to be to reduce the ability of the government at all levels to manipulate either the prices or allocation of natural resources. While China has mostly deregulated its product markets, government bodies still can interfere in markets in many ways: subsidised capital, energy or land for favoured companies, a maze of rules and regulations that make it hard to set up new business and formal or informal restrictions on private enterprises entering certain sectors. The clear intent of the document is to chip away at all these anti-market distortions. The document also mentions “property rights as being at the core of ownership systems” and calls for fair competition and free consumer choice. The party also promised to reduce the administrative hassles and bureaucratic hurdles to doing business. The document also talks of better protection of intellectual property rights and “the lawful rights and interests of investors”, as well as a smoother bankruptcy process.

The main disappointment of the document has been the lack of aggressive state sector reform or a privatisation programme. China’s declining productivity growth and rising debt levels are both linked to the bloated SOE sector which has been guzzling a disproportionate share of bank credit but delivers declining returns on investment. It is clear that while SOEs will not be privatized, they will face much greater competition and tighter regulation. This approach seems to be in sync with the party’s view that competition, more than private ownership is the key to economic dynamism and strong productivity.

China seems to be on the march once again. It has found a strong and decisive leader, who seems to be committed to markets and improving governance. They have identified their constraints to growth and weaknesses in their prior economic model, and seem to have a game plan to address these short comings. Many investors feel comfortable underwriting 7 per cent economic growth for the country for the coming years.

The contrast between what China has just announced and demonstrated and the current situation in India cannot be more stark. Neither do we have decisive leadership, nor do we seem to have clarity on how to get back to 7-8 per cent economic growth.

India really need to get its act together and unveil a coherent road map to address our systemic weaknesses and show concrete action on the ground, more than just sound-bites. Investors will not remain patient forever.

(Source: Extracts from an Article by Mr. Akash Prakash in The Business Standard dated 22.11.2013)

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Corporate practices

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There are two reasons “why” high performance and high integrity are foundational corporate goals. First, their fusion allows organisations to avoid catastrophic risk that injures the company and its stakeholders. But it also confers affirmative benefits inside the company, in the marketplace and in the broader global society. Ultimately, performance with integrity creates the fundamental trust among shareholders, creditors, employees, recruits, customers, suppliers, regulators, communities, the media and the general public…But the hard question is “how” companies can achieve this all-important combination in a complex, fast-moving global enterprise. The fundamental task of the CEO is to create a strong, uniform and global performancewith- integrity culture, which entails shared principles (values, policies and attitudes) and shared practices (norms, systems and processes). Although this culture must include some elements of deterrence against ethical and legal wrongdoing, at the end of the day, it must be affirmative. An underlying tenet of this culture should be that people want to do the right thing because leaders make this a real company imperative. Clear lines must be set for all employees that this culture applies in every nation and cannot be bent by corrupt local practices, regardless of short-term business costs.

(Source: Extracts from “High Performance with High Integrity” by Ben Heineman – The Economic Times dated 19.11.2013)
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Foreign fund flows may get all-clear to take Cyprus route

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The shadow over Cyprus is about to be lifted. Indications are that foreign investors routing their funds through the Mediterranean island will not run into hurdles in claiming tax benefits from investments in India.

Foreign funds and private equity investors, putting money in debt as well as equity in India, were taken aback when India last month notified Cyprus as a “notified jurisdictional area” under the Indian income-tax law. This meant higher walls of compliance that made Cyprus come across as a less attractive tax haven. It’s unclear what provoked India’s stand on Cyprus. Industry circles perceive that this was a fallout of the offshore jurisdiction’s response to certain enquiries by the Indian tax department. But within a few weeks of the notification by India, the Cyprus Government initiated discussions with Indian authorities in India to sort out the matter. A Cyprus finance ministry press release hinted that the two countries could be close to finding a solution.

According to the treaty, investors from Cyprus are spared of short-term capital gains tax – a benefit that puts Cyprus at par with Mauritius – and are charged a lower withholding tax on interest earned on debt investments. Consultations were held between officials of the two governments .

According to communique to clients by PwC, “Both delegations agreed that the circumstances that had caused India to notify Cyprus as a”notified jurisdictional area” under section 94A of the Act on 1 November 2013, can be immediately addressed by: (a) agreeing to adopt the provisions of the new Article 26 of the OECD Model Tax Convention (approved by the OECD Council on 17 July 2012) relating to Exchange of Information in a new tax treaty between the two countries; (b) improving the channels of communication and exerting every effort in facilitating each other in processing requests and responses in a swift and effective manner.”

The Cyprus government release also states that once the notification of Cyprus being notified as a “notified jurisdictional area” under section 94A of the Act is rescinded, it would be done with retrospective effect from 1 November 2013 which was the date of issue of the original notification. Further, the press release also indicates that the revised tax treaty (post renegotiation) between the two countries is expected to be finalised soon.

The future of Cyprus as a tax haven had come under question earlier this year after it ran into a financial crisis with several banks looking for a lifeline.

A combination of low withholding tax and zero tax on capital gains has over the years made Cyprus more attractive as compared to tax heavens like the Netherlands and Luxembourg, to overseas investors and foreign funds buying Indian fixed income assets.

(Source: The Economic times dated 05.12.2013)

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India – State Of Four Estates – A few highprofile cases reveal how much democracy’s ‘software’ lags behind its ‘hardware’

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Administrative and legal processes are now underway to get to the bottom of four high-profile cases involving, directly or otherwise, an assault on the dignity of women. They include a Supreme Court judge, the editor and managing editor of an influential weekly magazine, a former home minister of a major state in the Union (and, possibly, its current chief minister as well) and a spiritual guru with a vast following. What is at stake in each case is abuse of power that is in flagrant violation of the laws by those who are dutybound – because of the positions they occupy – to uphold them.

The larger picture they reveal hasn’t attracted the requisite attention: the growing disconnect between the “hardware” and the “software” of Indian democracy. The “hardware” of democracy include legislative and executive institutions (Parliament, state assemblies, panchayats etc), the judiciary, official statutory and non-statutory bodies, political parties and the media. And the “software” relates to the observance of rules and regulations, conventions and precedents to enable the institutions to function in a transparent, accountable and effective manner. What is the record?

Judged according to these standards, our Parliament and state assemblies are little more than a hotbed of interminable intrigue, confrontation, mudslinging, filibustering and sometimes also outbursts of violence. This numbs the nerves of the executive and paralyses the legislature. The one cannot govern while the other cannot enact laws, adopt policies or, so far as the opposition is concerned, even act as a watch-dog of the government of the day. What stands out, therefore, is a mockery of their constitutional responsibilities.

The political parties are no better. Their public spats are less about policies and programmes and more about the acquisition of power and pelf. Many of them are akin to privately-controlled family businesses. Inner-party democracy is a rumour to them. The Congress, which has had the longest innings in power since independence, leads the pack. But others are not far behind: Thackerays and Badals, Karunanidhis and Pawars, Reddys and Yadavs. And then you have individuals without kith or kin who rule the roost in their parties: Mamata, Mayawati, Jayalalithaa, Patnaik et al. None dares cross their path. What “software” of democracy can they possibly bring to the table? Precious little.

But these permanently feuding parties from one end of the political spectrum to another can and do make common cause when their interests as a corporate class are in jeopardy. Consider their opposition to any serious effort to keep politicians with criminal backgrounds at bay. Consider, too, the alacrity with which they refused to come within the purview of the Right to Information Act. Such “software” contains far too many bugs to serve any worthwhile purpose.

The ailments of the judiciary, including, in the first place, that of the Supreme Court, are of another order. The alleged moral turpitude of some of the judges is only one of them. Even on this count, however, the judiciary is loath to allow an impartial and transparent probe by anyone other than the members of its own fraternity. The most recent instance concerns allegations of sexual misconduct against a recently retired judge of the apex court by an intern.

Add to this the growing interference of the apex court in legislative and executive areas that are, strictly speaking, beyond its remit. It is argued, doubtless with good reason, that such interference is inevitable when the government and the legislature are unable or unwilling or both to shoulder their constitutionally-mandated tasks. Governance, like nature, abhors a vacuum. But the danger in this argument is that it upsets the delicate balance of power between the three estates of the republic that the Constitution decrees. On this count, too, a lethal virus could render the “software” of democracy obsolete.

That danger is no less acute when governments, both at the Centre and in the states, deploy official agencies to get even with rivals. More often than not, such deployment is initiated outside the framework of laws, rules and regulations. Fake encounters and fabricated cases are evidence of this conceited insouciance.

But so is the intrusive surveillance of citizens suspected of making life difficult for the rulers of the day: rival politicians, nosey media persons, uncooperative civilian and police officials, NGOs. We recently witnessed such conduct in, among other states, Uttar Pradesh, Haryana and Gujarat. Surveillance of this nature, especially if it is pervasive, also contaminates the “software” of democracy.

The cases of Tarun Tejpal and Shoma Chaudhary of Tehelka and of Asaram Bapu fall in a different category. They relate to an unforgiveable betrayal of trust reposed in them by their readers, friends, colleagues and followers. What makes the betrayal odious is that these individuals professed to promote highfalutin principles of moral and spiritual rectitude. All three of them emasculated the substance of their calling and, in the process, polluted the “software” that is expected to keep state and society in India in fine fettle.

(Source: Extracts from Mr. Dileep Padgaonkar’s Article in The Times of India dated 28.11.2013)
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Quantitative Easing- An Exit In Three Acts

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The first act in the exit from extraordinary monetary stimulus in the US began in January. The Fed has been trimming its bond purchases by $10 billion a month since then. Quantitative easing will end by December at the current strike rate.

The second act could start around July 2015. Fed chairperson Janet Yellen has hinted that she may begin to push up the benchmark federal funds rate around that time if the US economic recovery stays on track.

There is a possible third act that nobody in the financial markets seems to be considering. The US central bank has quadrupled its balance sheet since September 2008—from $1 trillion then to $4 trillion now. The explosive growth in the monetary base has not been inflationary, but the return to normal monetary policy should eventually lead the Fed to monetary contraction. Such an endgame will be far more painful than what financial markets are anticipating.

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CBI Follies: This Is No Way To Check Crony Capitalism

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The Supreme Court seeks to ensure a strong, independent Central Bureau of Investigation (CBI) to check corruption. Sadly, the CBI is using this enhanced power to pursue frivolous charges against honourable officials. This simply demoralizes and paralyses the bureaucracy, without catching the big fish.

If the CBI is going to chase officials long after they retire, why will they risk taking quick decisions?

The CBI has now registered ten FIRs against six companies for defaulting on loans from public sector banks. How is loan default a crime? Maybe many loans were given because of political connections, but while that’s undesirable, it isn’t criminal. Even willful default is not criminal – the answer is to seize the assets of the defaulters through court action. If the companies in question gave bribes to obtain loans or debt relief, or if they cooked their books, that is certainly criminal. But it is not clear that the CBI understands these distinctions.

Few analysts think the CBI has enough specialized domain knowledge to tackle financial crime. In the West, financial companies are constantly probed and prosecuted, but this requires high financial expertise that can match the best on Wall Street. By contrast, the CBI’s recent efforts suggest a sad lack of expertise, and even of basic financial understanding.

It must be able to distinguish between bad and criminal decisions, and between mere mistakes and crookery. Fast decision-making requires the use of discretion, short-cutting wooden procedures. To treat every use of discretion as criminal is plain wrong, and a recipe for paralyzing decision-making.

Part of the problem lies in a silly legal provision which says that if a decision benefits any private party, the bureaucrat concerned can be charged with corruption even if there is no evidence that he gained personally. A more stupid provision would be difficult to imagine. Can there be any decision that does not benefit somebody? And if indeed there are some decisions that benefit absolutely nobody, would such decisions be worth taking? The UPA government once drafted legislation to remove this provision but did not follow through.

As long as this clause remains law, the CBI can claim it is legally bound to prosecute virtually any decision-taker. Narendra Modi talks of improving governance if he comes to power. That approach must include an immediate ordinance to delete this stupid clause. Other political parties will surely support the conversion of such an ordinance into law.

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Value Every Raindrop

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There is no doubt that water will determine whether India becomes wealthy or remains poor. But the management of water is not simply about building more dams or pipelines to take the water to our cities and then more pipelines to flush the waste from our homes. The management of water is about building a relationship between society and its water, so that we can understand the value of each raindrop and understand that unless we are prudent – indeed frugal – with our use of this precious resource, there will never be enough water for all.

Water management is, then, about society and its ability to build technologies to maximise the use of water and, more importantly, technologies to share water with all. It is for this reason that we must re-learn the water wisdom of the past. In the late 1990s, the Centre for Science and Environment published its book Dying Wisdom: Rise, Fall and Potential of India’s Traditional Water Harvesting Systems, which documented the extraordinary wealth and ingenuity of the country’s people living across different ecological systems to manage water. The systems ranged from ways of harvesting glacier water in the cold deserts to delivering water with precision over long distances through bamboo drip irrigation systems in the north-eastern hills.

The kundi of the hot desert of India incorporates the simplest of technologies for powerful impact. Rain is harvested on an artificially created piece of land, which is sloped towards a well to store precious water. The water maths is equally simple; as little as 100 millimetres of rainwater harvested over one hectare of land will collect one million litres of water in this structure.

On the other hand, in the other regions of the country, people harvested floodwater. In other words, people had learnt to live with an excess of water and with its scarcity. And all the coping used the principle of rainwater harvesting in a country that gets rain for only 100 hours of the 8,760 hours in a year. They knew that all the rain of the year could come in just one cloudburst. The solution was to capture that rain and to use it to recharge groundwater reserves for the remaining year. The answer, ultimately, was to use the land for storing and channelling the rain – over or under the ground, catching water where it falls and when it falls.

This tradition of yesterday has crucial relevance in todays and tomorrows urban India. Today, our cities get their water supply from further 261 (2014) 46-A BCAJ and further away – Delhi gets Ganga water from the Tehridam; Bangalore is building the Cauvery IV project, pumping water 100 kilometres to the city; Chennai’s water will travel 200 km from the Krishna river; Hyderabad from the Manjira, and so on. The point is that the urban-industrial sector’s demand for water is growing by leaps and bounds. But this sector does little to augment its water resources – and does even less to conserve and minimise its use. Worse, because of the abysmal lack of sewage and waste treatment facilities, it degrades scarce water even further. Even so, its water greed is not met. Groundwater levels are declining precipitously in urban areas, since people bore deeper in search of the water that municipalities cannot supply.

In new India, the water imperative is that cities must begin to value their rainfall endowment. This means implementing rainwater harvesting in each house and colony. But it also means learning again about the hundreds of tanks and ponds that built, indeed nourished, the city. Almost every city had a treasure of tanks, which provided it the important flood cushion and allowed it to recharge its groundwater reserves. But urban planners cannot see beyond land. So land for water has never been valued or protected. Today, these water bodies are a shame – encroached, full of sewage, garbage or just filled up and built over. The city forgot it needed water. It forgot its own lifeline.

But the real tragedy is that we have lost knowledge of how to value the raindrop.

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Criminalisation of Politics – Netas not serious about Electoral Reforms.

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Law Commission chairman and former Delhi High Court chief justice A P Shah has said the “political class doesn’t seem to be serious about electoral reforms”. This was one of the reasons why criminal elements entered politics and tainted money came into the economy, he said.

Justice Shah told that when the law panel called a meeting of major parties for consultation — just before responding to the Supreme Court on the issue of disqualification of charge-sheeted politicians from contesting elections — Aam Aadmi Party, BJP and Congress stayed away.

“When we held a national level seminar (on February 1) on this subject, all the major parties, including AAP, BJP and Congress did not attend the meet, and neither did they send any representation,” Justice Shah said. “Institutional integrity is important to preserve. Criminals should not be allowed to get elected to assemblies and Parliament as that will weaken these institutions,” he added.

The Law Commission has been entrusted with suggesting electoral reforms by the government. The apex court too, relies on the commission for its suggestion on important issues such as electoral and judicial reforms. The SC had earlier asked the commission to give its opinion on whether politicians against whom charges have been framed by a court for serious offences should be disqualified from contesting elections. The panel had in its opinion strongly backed disqualification of candidates against whom a court has framed charges for serious offences like rape, murder etc. However, the apex court has kept the case sub-judice with an interim order saying trials against lawmakers facing serious charges should be completed in a time-bound period of one year.

“All earlier suggestions made by the Law Commis- sion on electoral reforms remain unimplemented,” Justice Shah said, elaborating how in 1999, the commission had made extensive suggestions, one of which pertained to disqualification of chargesheeted politicians from participating in elections.

 “Particularly on decriminalization of politics, the 1999 report had made several suggestions but no government took any action. This is one of the reasons why criminal elements enter politics and tainted money comes into the economy,” Justice Shah said. He also emphasized how these criminal elements have the potential to subvert the judicial process. “These criminal elements have the potential to subvert the judicial process and as a result you can see trials are delayed for several years and that is the reason why the rate of conviction is less,” Shah observed.

 “Even after the Lily Thomas judgment of the Supreme Court (which struck down Sec 8(4) of the RP Act disqualifying a convicted MP/MLA from membership of the House) there has been only three disqualifications so far,” he explained, saying how the number of lawmakers facing serious criminal charges are frighteningly high. More than 160 MPs in the last Lok Sabha were those who had serious criminal charges against them.

“Earlier there was unhealthy connection between politicians and underworld. Now these criminals are seeking elections themselves,” the law panel chairman said. Law breakers should not be allowed to become lawmakers, he emphasized.

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Economic Governance Needs A Lighter Touch

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There is much lamentation in India about the lack of governance in general, and about poor economic governancein particular. It is important to place things in context as we try to evaluate how we have fared in this regard.

Economic governance cannot be disassociated from political governance. In his 1989 essay, Francis Fukuyama argued that while there might be many competing forms of social and political organisation, none could claim to be superior or more durable than the idea of a liberal democracy. He went further to make the case that liberal democracy works better with, and is bolstered by, free markets. Since then the global economy has suffered the Asian financial crises of 1997 and the so-called global financial crisis of 2008. This has reignited the debate about the role of markets, their efficacy, and their contribution to growing inequality. In parallel, the world has seen the spectacular economic success of the Chinese model of state capitalism. Was Fukuyama not premature in declaring the “End of History”?

Turning to India, let us first ask the question: are we a successful democracy? Whether it is life expectancy, health, nutrition, poverty or any other metric, India has not delivered as effectively as China. Does this mean that Indian democracy has failed? If China, without a free political system, can deliver substantially greater economic prosperity than India, does this mean that democracy has not been good for India? This line of reasoning may be logical, but it is troublesome. Our notion of what is good for our society must surely be anchored in some moral and philosophical value system, one in which we as Indians attach value to freedom of choice. In fact, the importance of being able to choose who governs us cannot be measured. The success or failure of governance in India cannot and must not be gauged only in terms of our economic performance. Such an evaluation must also take into account what else we have achieved.

Now let us come to the question of economic governance. Although we started our post- Independence political journey wholeheartedly embracing liberal democracy, we did not start our economic journey with the same enthusiasm for markets. On the economic front, we started with the so-called “mixed economy” model. During the first 45 years after Independence, we created a most elaborate system for managing and administering the economy, one that relied very much on state intervention. Over the years, our bureaucracy and judiciary became conditioned to that way of functioning. As a result since we started the economic reform process in 1991, we have not been very successful in changing the paradigm of state engagement with the private sector from how it was in the era of “command and control” to what it should be in the era of deregulated markets.

Twenty years after “liberalisation” the extent of state participation in the economy remains stubbornly large. In infrastructure, the entire electricity supply chain, with the exception of generation, remains dominated by government companies. In agriculture, the pricing of sugar, the procurement and exports of food grains, the marketing of agricultural commodities, are all still subject to pervasive state controls. The state continues to play an invasive role in land markets and PSU institutions still account for more than three-quarters financial sector assets. This widespread government participation in economic activity has been used to pursue the state’s political agenda in a manner that has distorted markets and undermined economic governance. Directed lending to agriculture from PSU banks, free electricity through state electricity boards, subsidised petroleum products through the oil distribution companies are but some examples.

As elsewhere, economic policy in India is hugely influenced by special interest groups. But in part, because of the widespread footprint of government in economic activity, lobbying has deteriorated into “crony capitalism”. While our politics has become more fiercely contested over time, increasing fragmentation of political power has made the Centre-state dynamic harder to harness in service of economic reforms of national importance, and pressures of coalition politics have contributed to greater populism in economic policy-making.

That economic decision-making in our country is heavily politicised may not be good from an economist’s perspective of delivering optimum economic outcomes. But this is in a sense the price we pay for democracy, the value of which cannot be measured in economic terms. The bottom line is that we cannot improve our economic governance by wishing away its underlying political drivers. To improve the quality of our economic management our bureaucracy particularly, but also our judiciary and other institutions, must evolve to higher levels of sophistication, competence and autonomy such that they facilitate, regulate and adjudicate economic activity, rather than supervise it or participate in it.

(Source: Extract from an article by Rajiv Lall in Business Standard, dated 14-02-2014 – The Writer is Executive chairman in IDFC)

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The Sorry State PSU Banks

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The recent qualified institutional placement issue by State Bank of India (SBI) was unfortunately a flop. The bank raised $1.2 billion as against the target of $1.5 billion. Less than $250 million was taken up by foreign institutional investors (FIIs). The post-issue price action was also dismal, with the stock tanking immediately.

This lack of foreign interest was a surprise, since SBI is undoubtedly the best of the public sector banks. It accounts for about 20 per cent of the banking system and has dominant market shares in government business and foreign exchange as well as strong corporate relationships. Historically, it has had the best management team among state-controlled banks; its chairman was normally appointed from within the bank itself. There was a time when SBI stock always traded at an FII premium, given foreign ownership limits, and was seen as the single best proxy for the Indian economy.

The recent lack of interest has nothing to do with SBI in particular; it reflects a general disenchantment with public sector banks. First of all, investors have by now figured that the public sector banks are seriously under capitalised. Most credible market analysts estimate that the public sector banks will need at least $35 billion to $40 billion of new capital just to fund risk asset growth of 15 to 18 per cent and meet the new tougher capital norms being put in place by the Reserve Bank of India, or RBI (Basel-III, counter-cyclical buffers and systematically important institutions). This capital requirement would rise to almost $80 billion, according to Credit Suisse, if you wanted to repair the balance sheets of these banks and take impaired asset coverage up to 70 per cent. All this capital has to be raised in the coming three or four years.

There is no way the government can fund this; there is simply no fiscal capacity. Nor do investors want to stand in front of this freight train, since the capital needs for most banks are greater than their current market capitalisation. Since these banks are mostly trading below their book value, any capital raise will dilute book value and earnings. The more the capital that is raised, the more book value will get diluted and decline in per share terms – and thus the more expensive these banks will look. Why would an investor want to own these stocks today when they are almost guaranteed to be diluted in the coming years?

However, if this capital is not found, who will fund the Indian economy? The internal capital generation of these banks will not support credit growth of more than 10 per cent – and we are talking about 70 per cent of the Indian banking system. The large Indian companies may access international capital markets and disintermediate the banks, but the small and mid-sized companies will see their credit supply choked. It is precisely these smaller companies that underpin our exports, employment generation and economic growth. Even if animal spirits revive after the elections, we do not seem to have the capacity to fund a revival.

In the last cycle of weak asset quality and capital shortage (1998-2003), a sharp decline in bond yields helped repair balance sheets. Government bond yields fell from 11.7 per cent in 2001 to five per cent in 2004. Sitting on a statutory liquidity ratio book of over 35 per cent of assets, these public sector banks booked bond gains of more than Rs 35,000 crore (70 per cent of the year 2000 system book value, according to Morgan Stanley). This windfall allowed the public sector banks to recapitalise. Such bond gains are very unlikely this time around since yields are lower, bond portfolios are smaller and the duration is truncated. Thus, we will have to raise capital from the market.

Moreover, the public sector banks have serious profitability issues. Their return on assets for this year is unlikely to cross 0.7 per cent, which means return on equity of less than 10 per cent. Given the headwinds on wages, pensions and provisioning requirements, there is no visibility on either return on assets crossing one per cent or return on equity reaching 15 per cent anytime soon. Even the poor numbers being reported today are probably overstated. For instance, about 35 per cent of SBI’s profit before taxes comes from accrued interest on both power loans and restructured loans, according to Morgan Stanley. The numbers for other public sector banks are even higher. This is non-cash earnings and something that may have to be reversed if these loans slip.

Public sector banks in India account for more than 70 per cent of the country’s banking system. We cannot fund our growth without them. They are capital-deficient and do not have the ability to earn their way out of their capital hole. Someone will have to provide them upwards of $30 billion of capital, RBI Governor Raghuram Rajan’s biggest challenge will be to put in place the systemic changes needed to attract this amount of capital.

The purpose of this piece is not to bash India’s public sector banks. They have some very good people, but are being choked by the government in terms of both capital and operational freedom. We have seen across sectors that public sector undertakings ultimately succumb to private sector competition if they are not allowed to compete on a level playing field. This cannot be allowed to happen to public sector banks. They are too important to the economy.

(Source: The Economic Times, dated 14-02-2014)

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Ending the Implementation Paralysis

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Politicians make policy, bureaucrats implement them. Trust and harmony between the two can produce amazing results. If trust and harmony decline, so do decision-making and economic performance.

Bureaucrats can function brilliantly if they get clear signals from their political bosses, and assurance that being decisive (which typically includes shortcuts through a jungle of rules) will further their careers. This explains success in states as varied as Bihar, Gujarat, Madhya Pradesh, and Chhattisgarh. Strong chief ministers with clear policies empower bureaucrats to implement those approaches.

But the same bureaucrats freeze into inaction when they receive mixed signals, as has been the case in New Delhi. The law today makes bureaucrats liable for corrupt outcomes even if there is no evidence of their benefiting personally. If political protection is not guaranteed, they stop moving files. Finance minister Chidambaram says, rightly, that India’s problem is implementation paralysis more than policy paralysis.

The bureaucracy has gone through four phases since 1991. In 1991-2004, bureaucrats got the signal “what do we liberalize next?” In 2004-08, this changed to “don’t liberalize more.” After 2009, the signal was “what do we regulate next?” After the anti-corruption anger in 2012, this changed to “run for cover; nobody can guarantee you safety”. This explains the rise and fall of the economy. A fifth phase is needed to lift the economy again.

When economic reforms began in 1991, bureaucrats questioned its sustainability. Many suspected that the reforms were ploys to satisfy the IMF, and might be reversed soon. Opposition parties swore to reverse the reforms if they came to power. But soon GDP growth took off, averaging a record 7.5% in 1994-97. This made the reforms irreversible. Narasimha Rao was followed by Gowda, Gujral and Vajpayee, but the direction of reform continued. Every civil servant was encouraged to ask, “What do we liberalize next?”

This phase ended in 2004. Sonia Gandhi came to power. Far from viewing liberalization as a major success, she portrayed India as tarnished, not shining, under Vajpayee. Her focus shifted from liberalization to welfarism. Bureaucrats got the signal, “Don’t liberalize more”. Thanks to earlier reforms and global buoyancy, GDP growth soared to a record 8.5%/year, but Sonia de-emphasized this.

Next came the financial crash of 2008-09 widely blamed on excessive deregulation and corporate greed. The world over, an outcry began for stiffer regulation and more controls. This had strong echoes in India too. Liberalization was seen as having gone too far, even though it was half-baked in India compared with the Asian tigers.

Bureaucrats struggling to cope with a plethora of old regulations faced an avalanche of new ones. The most onerous related to the environment, forests, tribal areas, and land acquisition. These were well intentioned, but created a new licence-permit raj. Honest business became impossible in several areas, notably natural resources and land. Dishonest business was still possible through kickbacks. However, this eventually caused popular outrage, led by the CAG, courts and Anna Hazare. The courts went after not only corrupt politicians but also bureaucrats, including those that had retired.

This guaranteed bureaucratic paralysis. The system imposes no penalty on those sitting on files, but penalizes those involved in decisions later denounced by the courts or CAG. Earlier, ministers guaranteed political protection to bureaucrats following their orders. But after the new anti-corruption mood, and activist courts, political guarantees become impossible. The new signal to bureaucrats was, “Run for cover.”

Chidambaram and Manmohan Singh endeavoured mightily to revitalize decision-making since late 2012. They devised the Cabinet Committee on Investment to spread the responsibility for decisions among relevant ministries, reducing risks for any one minister or bureaucrat. But though they cleared a mammoth Rs 6 lakh crore worth of projects, there is still no boom in capital goods or construction. Implementation paralysis continues because bureaucrats still find political signals mixed and political protection inadequate.

(Source: Extract from an article by Swaminathan Anklesaria Aiyar in The Economic Times of India, dated 09-03-2014)

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UPA hurts India as it exits

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The only plausible interpretation of the actions by Congress in the last several months is that it has adopted this scorched earth strategy as it retreats from government. Its recent actions seem to serve one principal purpose: make the restoration of growth and the task of rebuilding the nation as difficult as possible for the successor government.

The greater the failure of the successor government, the better would the outgoing government look by comparison. Ironically, the most pernicious act of the Congress-led United Progressive Alliance (UPA) government is related directly to land: the new land acquisition act.

The latter administers an all-round preemptive blow to efforts of a future government to put India back on its feet. For most public projects, the act makes land acquisition such a long-drawn-out affair and land prices so high that only a handful of projects will remain economically viable and capable of being implemented.

A recent report in this newspaper has this to say about the act: “The new land acquisition law that came into force this January, touted as one of the signal achievements of the UPA government, is turning into a major obstacle in the way of a key infrastructure project being pushed keenly by the Prime Minister’s Office.

The government is now back to the drawing board to figure how the project can be made viable. Even building rural roads under Pradhan Mantri’s Gram Sadak Yojana (PMGSY), a programme expressly meant to aid India’s rural poor, will turn into a nightmare.

And this will be in the name of protecting ‘poor’ landowners, notwithstanding the fact that land reform has had little success in India. Except in a handful of states, much of the land is actually owned by large and wealthy farmers.

The new land acquisition act will also make already hard to implement large-scale private projects yet harder to implement. All the provisions of the new act on compensation apply to all private acquisitions of 50 acres of land in urban and 100 acres in rural areas.

According to some calculations, this would render land an order of magnitude more expensive in almost all locations in India than in any other country on the face of the earth. This is why entrepreneurs looking for land will first look on Mars before doing so in India. Rarely has a democratic government consciously inflicted such damage on the nation at its exit.

(Source: Extract from an article by Arvind Panagariya in the Times of India, Dated 11-03-2014 –The Writer is professor of Indian political economy at Columbia University)

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Competition panel to probe ICAI’s continuing education policy

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The CA Institute’s continuing professional education (CPE) policy is under the scanner of the Competition Commission of India (CCI).The CCI has directed its investigative arm to probe an allegation that the Institute of Chartered Accountants of India (ICAI) was abusing its dominant position by imposing discriminatory conditions on CPE.

The Institute declined to comment on this development even as the CCI probe may affect its revenues from organising seminars and conferences. It is probably for the first time that a nonregulatory function carried out by a regulator (ICAI is the accountancy profession regulator) is under the scanner of another regulator (CCI-competition regulator).

The complainant – Arun Anandagiri – has alleged that the CPE policy was discriminatory as it does not allow any other organisation to provide the service of organising CPE seminars. The CPE policy allowed only the institute’s recognised programme organising unit (POU) to conduct the seminars that carry CPE credits.

There seems to be force in the allegations that the restriction put by the CA institute in not allowing any other organisation to conduct the CPE seminars for CPE credits, the CCI has said in a recent order.

The allegation is that such an approach has created an entry barrier for the other players in the relevant market – “organising recognised CPE seminars/workshops/conferences in India”.

The concept of CPE was introduced by the CA institute for its members to maintain high standards of excellence in the professional activities. According to the CPE policy, chartered accountants (CAs) in practice have to annually attain 20 hours of structured CPE credits and 10 hours of unstructured CPE credits. CAs not holding certificate of practice have to attain 15 hours of unstructured CPE credits annually.

The present case focuses upon the structured CPE credits and organisation of the seminars/conferences/ workshops for obtaining these credits.

(Source: The Hindu dated 12-03-2014)

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CA P. D. Kunte – A Tribute

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On the early morning of 21st December when I got the sad news of the demise of Mr. P. D. Kunte, I thought that it was truly the end of an era. Mr. Kunte or “Kuntesaheb” as we all respectfully addressed him, was a Guru for many of us who worked as his juniors.

Mr. Kunte came from a small town of Alibag in Raigad district. He came from a very humble background and stayed with his elder sister while doing his articleship in Mumbai. He started his firm around 1956 in Mumbai. During the first decade of his practice, he did not have too much work. He spent these years reading and gathering knowledge. He would tell us that this helped him a great deal when work started pouring in.

Around 1966-67, he started acquiring bigger clients like Aptes in Mumbai and Chowgules in Goa. These were followed by many more in the next few years – from Hero Group in Ludhiana, Kirloskar and Kalyani in Pune, Ghatge Patil in Kolhapur, Alfa Laval, WIMCO in Mumbai and so on. By mid-seventies, he had set up offices in as many as seven – eight cities across India and one at Dubai. At a time when most of the prominent firms were operating only out of Mumbai, he set up offices in smaller cities to cater to the local clients. Till mid-eighties, he would travel for more than 20 days in a month and work for 12 to 14 hours a day.

Mr. Kunte had many exceptional aptitudes. He had a deep knowledge of almost all the relevant Civil laws of the land. His speciality was to interconnect the provisions of different laws. He was brilliant in tax planning and used novel ideas which were his own. For example, in the early seventies, he created capital structure of two types of equity shares with different rights for private companies of his clients which helped to reduce wealth tax liability. For a few clients, he set up trusts in which creditors of the settlor were the primary beneficiaries and receipt by these creditors from the trusts were repayment of their dues and hence not an income. One important rule followed by Mr. Kunte was to read the relevant provisions of applicable laws before giving answer to any query. He would say that when you read the section from the angle of the problem, it gives you a new perspective. He would urge us to first read the sections, form our opinion and only then read the commentary and case laws. He never believed in giving off-the-cuff replies.

Mr. Kunte followed a strict regime of a very ethical practice. As a strict rule, neither he nor any of the partners or employees were allowed to acquire shares of companies that were clients of the firm. In 1985, he was a director in an MNC and was offered 50,000 shares at par whose market price on listing was expected to be much higher. He, however, refused the offer. His view was that a consultant should have absolutely no conflict of interest which would affect the fairness of his advice. This was at a time when there were no Insider Trading Regulations.

Mr. Kunte was a humble and simple man. Though he was advisor to many big industrialists, his personal ideology was of a socialist. He was philanthropic and would urge all of us to spend a portion of the income on charity. He himself set up a number of charitable trusts. One of the trusts ran a blind girls’ institution at Goregaon. He also helped many charitable organisations but strictly on anonymous basis. In the late seventies, he even donated his office at Hamam Street to Bombay Chartered Accountants’ Society. Through trusts on which he was a trustee, he helped BCA to set up a research fund and a library fund.

Finally, the biggest and lasting contribution of Mr. Kunte to the profession is the army of juniors that he trained. The training he imparted to all of us was exceptional. He would throw the problems at us and urge us to form our opinion and then discuss with him. During his professional career, he may have trained more than 20 highly successful juniors all of whom owe their success to him. He was the Guru to them in a truly “Gurukul” tradition where the juniors would stay at his house for many days and get trained. Although, his body has ceased to exist in this world, his soul would continue to live through all of us juniors whom he had trained.

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A Step Forward For Judicial Appointment

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One of the extraordinary features of the Indian system is the number of things, both big and small, that it eventually manages to get right. A recent example of the former was the decision by the Cabinet to install a Judicial Appointments Commission (JAC). Questions then arose about its status and the government has now decided to make it a constitutional body. Whenever this is done – and one must hope that it is done very soon – it will mark a fundamental change in the way India’s judiciary is run.

Article 124 of the Constitution says that the President of India, in consultation with the Chief Justice of the Supreme Court, would appoint the judges. The Supreme Court took this to mean that neither the executive nor the legislature could have a say in the appointment and transfers of judges. The convention in respect of this is laid down very firmly indeed in the S. P. Gupta case in 1981, when memories of what the government had done to the judiciary during the Emergency were still very fresh and strong. The government has been grumbling since then. In 1993, the Supreme Court instituted a collegium system, which apparently diluted the power of the Chief Justice but did not abridge the judiciary’s right to appoint its own. In 1998, then President K. R. Narayanan made a Presidential reference questioning the collegium system. While this resulted in more guidelines for appointments and transfers, the core power remained with the judiciary. Since then, the executive has tried hard to put a different appointment system in place. The JAC is the final result.

The JAC will be headed by the Chief Justice of India. The other members are the law minister, two of the senior-most judges of the Supreme Court, the law secretary and – in an idea that has been borrowed from the United Kingdom – two “eminent” persons, to be chosen by the prime minister, the Chief Justice of India and leaders of the Opposition in the Lok Sabha and the Rajya Sabha. It would seem that in the ordinary course of things, there are now enough checks and balances. The criteria for becoming a member of the JAC should now be spelt out clearly. One niggling question remains, however: will this system abridge the independence of the judiciary in some unforeseen way? By its very nature, the unforeseen cannot be anticipated. However, it is possible that – just as it happens in any selection done by committees – there will still be some room for bargaining, which leads to the best judges not being appointed. Such outcomes could be minimized by ensuring open hearings, which limit the scope of such backroom deals. In any case, a simple application of a brute majority decision rule does not always lead to the best results; at the very least, such voting should also be embedded in an open and transparent exchange of reasons.

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India’s Gridlock

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Given the fluid nature of circumstances, both globally and domestically, it would be almost foolhardy to crystal-gaze into what awaits India in 2014. At the same time, though, there may be a less speculative way to gain insights into next year: how India deals with its inheritance.

More worrying, from the point of view of an incoming regime, is the logjam that the country has witnessed between the haves and the have-nots—breaking this gridlock is a necessary condition for the Indian economy to regain its momentum. While the haves define policy change, the politically empowered have-nots can stall its implementation.

Both anecdotally and empirically—captured so well in the jobless growth phenomenon of the first decade of the new millennium and growing inequality—it is a fact that few have gained from India’s remarkable economic turnaround over the last three decades.

No matter where we look—whether it be about targeting of subsidies, mining for precious resources, people-centric urbanization, developing new infrastructure like roads/highways (more recently the Navi Mumbai airport project, or setting up of the Kudankulam nuclear power plant in Tamil Nadu)—there is an unresolved face-off. And this gulf is only widening. More often than not, these disputes are now ending up in courts and the judiciary is forced to be the referee.

This is a less than optimal situation because differences of such nature mirror the political pulls and pressures in society and hence, should ideally be resolved by elected politicians. So far, politicians have struggled to come up with a template to resolve such vexing face-offs where there can never be a winner. Whether it is environment versus development, paying subsidies in cash or in kind, tariffs for electricity or water, there is no black and white answer. This is because there are far more stakeholders in the economy today than ever before, with varying degrees of economic capacity (or the lack of it).

This is what makes the 2014 general election so significant.

The country is on a cusp. Not since it gained independence has the country needed a visionary— who will have the political courage to attempt out-of-the-box solutions to end this deadlock— at the helm more than it does now. It will not be about strong or weak leadership, secular or communal leaders. Instead, it will be the ability to throw up a person who has the vision to redefine the “grammar of governance” in sync with contemporary India. So think hard before you vote this summer.

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AAP Breaks Mainstream Politics’ Entry Barriers

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The Arvind Kejriwal-led Aam Aadmi Party’s (AAP) spectacular debut in the Delhi elections has buoyed the confidence of corporate leaders, who are lining up to join the party. Former chief financial officer and board member of Infosys, V Balakrishnan (Bala) has announced his decision to join the party. He could even contest an election on an APP ticket from Karnataka, if the party decides so. Bala joins the likes of Adarsh Shastri, the grandson of former prime minister Lal Bahadur Shashtri, who resigned from his cushy job in Apple to join AAP.

According to experts, the newest party is providing an attractive platform for professionals to realise their ambition of entering mainstream politics. There is a general perception that people with non-political lineage find it very difficult to join a traditional political party, let alone contest elections. With faces such as Bala on-board along with AAP’s success in Delhi is expected to prompt more professionals to join the party. Moreover, the trend is also expected to influence the national parties to become more open while choosing their candidates.

N. C. Saxena, member of the National Advisory Council, said it is believed the route to political power is only “via caste, criminal record or through money”, but AAP has put forward a different kind of values and idealism. The question is not just of whether it is easy or difficult to join the party, it is about the values it projects which people can relate to, Saxena added.

AAP, which has made anti-corruption as its prime agenda, has attracted people from multiple fields. While some have quit their day jobs to join the party, others have supported the movement by lending their expertise and through donations.

Raman Roy, one of the pioneers of the Indian business process outsourcing (BPO) industry, said AAP has demonstrated there can be a professional way to do politics in the country. “The perception is that entering politics is very messy and even if somebody wanted to enter it actively, it will be impossible to get a ticket from a leading political party.” However, AAP has given professionals an opportunity to get their hands dirty. “Professionalizing of politics will be a game-changer for India.”

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A Time To Introspect

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Every day, 50% of Copenhageners commute to work or school by cycles. There is no law forcing them to do so, nor any real incentive. Most cycle because they want to. To support their interest, the local administration has built nearly 400km of bike lanes across the city.

As societies evolve, individuals take over the responsibility of social progress. Monarchs, governments and other authority figures are required only till such time as citizens take over the running of their lives. Sadly, Indian society hasn’t yet reached that point. The Indian tendency to rail against authority is evident in the Devyani Khobragade incident as much as in blaming the police alone for the rise in crimes against women.

It is time to look inwards, where there is a lot that is wrong. Our sense of entitlement, as well as the wretched, fatalistic attitude we have inherited, blinds us to personal shortcomings—our biases and prejudices, our inability to follow reasonable civic rules, or do something about our abysmal creativity and productivity levels. We pride ourselves on being tolerant but are blatantly racist, with each other and with people from other nations who have a different color of skin or a different way of speaking English. We believe the Taj Mahal is the greatest architectural marvel ever created, not because we have compared it with others, but merely because we don’t, and don’t want to, understand or appreciate the architecture of other nations. That xenophobia blinds us. So the only alternative to Hindi movies is Hollywood pulp, to the utter disregard of masterpieces from Kerala or Iran. We wallow in the mediocrity of our film music, insulting not just a glorious tradition but also the universality that it should bring. So no wedding in the vast Hindi heartland, encompassing some eight states, ever resonates to the soothing notes of Carnatic music.

The insularity is compounded by our preference for jugaad over original invention and discovery. For the former, we credit our ability to cut corners, get the job done, no matter what the ecological or social cost. For the latter, we blame the government.

Nor is this lack of creativity in India stemming from an overt focus on hard work. No one will accuse us of high levels of productivity though the sheer number of hours we spend at our workplace should raise hopes of it. According to the Asian Productivity Organization’s Databook 2013, India’s per capita gross domestic product (GDP), an index of its labour productivity, was 7.5% of that in the US in 2011, lower even than that of countries like Fiji, Mongolia and the Philippines. The fate of nations like Italy and Greece shows the ill effects of chronically low productivity levels. Indeed, there is empirical evidence to suggest that productivity growth is a major factor in pushing economic growth as well as the standard of living of a nation, as seen in the case of both Germany and Singapore. Higher productivity leads to increased profitability as costs fall. The sharp recovery in the US despite the financial meltdown shows how higher productivity can lead a nation out of economic gloom.

Nations that are driven by the vim and the vigor of their people exude a soft power that far exceeds mere economic or military might. Germany, Monocle magazine’s leader of the year in its annual ranking of countries by soft power, receives 30.4 million tourists a year. India by contrast gets 6.5 million though its 28 UNESCO World Heritage Sites compares well with Germany’s 38.

The world lauds individual initiative and talent, which is why Scandinavian countries are routinely at the top of any ranking of most respected countries. Creativity and productivity are virtues that need little support from the state. It is about time we turned our attention to our poor performance on both counts.

This is the fourth in a series of essays in which Mint’s editors take stock of 2013 and look at what the new year holds for India.

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On Abolition Of Income Tax – Need the facts on taxation in India.

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Tax /GDP ratio is partly a function of the year. In a good year, interpreted as a year in which growth is good, it touched 12% of GDP, almost 6% direct and the rest indirect. The direct part is divided into a shade over 2% for personal income tax and a shade below 4% for corporation tax. The indirect part consists of customs, excise and service tax. There are bits of the direct part connected with expenditure, wealth, gift and estate duty, but those aren’t quantitatively significant.

Two figures are often bandied around . First, only 35 million people pay income tax. Second, only 42,800 people have annual income more than Rs. 1 crore. Both involve minor misstatements : 35 million is the number of people who submit income-tax returns. In a pedantic sense, they may or may not pay income tax. Even if they do, tax paid could be marginal.

And that 1-crore figure for 42,800 is taxable income. There are 78.9 million urban households in India. Half of them can be expected to be below the threshold. Indeed, there is some multiplicity: in a single urban household, there can be more than one individual who submits income-tax returns.

But the illustrative point remains . Since rural households are outside the ambit of income taxes, 35-40 million is the maximum income tax base we can get. Why are we so shocked that just 3% of the population pays personal income tax?

Since 2006-07,Budgets have had a tax revenue foregone statement. For direct taxes, this is divided into corporates, non-corporate firms and individual taxpayers. Notice that all tax exemptions are implicit subsidies to preferred categories of taxpayers. In individual taxpayer category, around half are salaried. Salaried taxpayers are entitled to limited deductions. That’s not true of non-salaried taxpayers. They are entitled to several profit-linked deductions too. And there are many deductions for non-corporate firms too.

Depending on what GDP figure you take, all those exemptions, direct as well as indirect, amount to anything between 5% and 5.5% of GDP. That 12% figure doesn’t include all state level or local-body taxes. If you include those too, the tax/GDP ratio would be around 17%. However, if all exemptions were to go, tax/GDP ratio would be in excess of 22%.

Also, if all subsidies, Centre as well as state, explicit as well as implicit , are included, subsidies amount to 14% of GDP. Before considering abolition of a tax, we, therefore, need to ask questions. Where will the revenue come from? Which expenditure item will be slashed on a continuing basis, not as a one-shot revenue realization from asset sales (such as privatization)?

When figures like 35 million are cited, there is an impression there’s tax evasion. There certainly is evasion . But there’s an important difference between evasion and tax avoidance . When arguments are made about middle class — not all middle class people are salaried or urban — suffering from income tax, it’s really an argument about limited tax avoidance options being available to salaried people.

Second, as long as there are exemptions , compliance costs cannot be reduced significantly. One needs to pin down the expression compliance costs. Does it mean administrative costs of collection? Does it mean costs to taxpayers, including harassment and bribes? And does it include other social costs?

For income tax, administrative costs aren’t actually that high. For every Rs. 100 collected, it’s around 60 paise . Through the large taxpayer unit, it’s around 4.50 paise. That’s today. Studies done 10 years ago suggest if all compliance costs are included, compliance costs are 49% of personal income-tax collections and the system is regressive. Of course, there’s an argument for simplification . DTC was meant to do that, but has deviated from original intent. And, yes, one should simplify the appellate and refund process.

If income tax is scrapped, what will replace it? Every economist should argue direct taxes are superior. If income tax is scrapped, it can’t be scrapped only for personal income, retaining it for corporate taxation. So, there will be a transition from direct to indirect taxation.

While actual revenue numbers depend on elasticities, we need a rough doubling of indirect tax rates, which are inherently regressive. The only argument in favour of indirect taxation is that it’s easier to enforce . Since we can’t or won’t tax rural income, let’s do it via the indirect route. This isn’t a new idea either.

For those who are advocating an abolition of income tax, there also seems a presumption that compliance costs will be zero under the new framework, whatever that new framework is. The argument that there are countries with no personal income taxation won’t wash either. Those are either tax havens or those with large natural resource bases. Besides, precedence is no argument . Just because Peter the Great taxed beards, should we?

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The Digital Classroom

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The credential — the degree or certificate — has long been the quintessential value proposition of higher education… Higher education, however, is in the midst of dramatic, disruptive change. It is, to use the language of innovation theorists and practitioners, being unbundled.

And with that unbundling, the traditional credential is rapidly losing relevance. The value of paper degrees lies in a common agreement to accept them as a proxy for competence and status, and that agreement to accept them as a proxy for competence and status, and that agreement is less rock solid than the higher education establishment would like to believe.

The value of paper degrees will inevitably decline when employers or other evaluators avail themselves of more efficient and holistic ways for applicants to demonstrate aptitude and skill. Evaluative information like work samples, personal representations, peer and manager reviews, shared content, and scores and badges are creating new signals of aptitude and different types of credentials.

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Working with the Large Taxpayer Unit System

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Globally, large corporates including MNCs find themselves in the harsh spotlight of the tax administration. While India is no exception, recent interactions between many large corporate tax- payers and tax departments have largely been confrontational. Often, ever-burgeoning tax collection targets are said to be the primary culprit behind large tax demands, which often don’t stand the test of tribunals and courts.

Lack of understanding of cross-border business operations is another root cause of agony for MNCs, as has been witnessed in the spate of transfer pricing litigation relating to marketing intangibles. In this backdrop, there is an urgent need for the Tax Administration Reform Commission, headed by Parthasarathi Shome, to look into the tax administration of large corporate taxpayers.

One may have thought the Large Taxpayer Unit (LTU) system, a single-window tax facilitation centre, would have been welcomed by India Inc. Under the LTU system, each large taxpayer who has opted to be covered is assigned a senior tax official as a single-point contact. Taxpayers engaged in the manufacture or service sector that have paid excise or service tax dues of more than Rs 5 crore or advance corporate tax of Rs 10 crore or more can opt to be covered by an LTU. In addition, the option to transfer any excess Cenvat credit – of central excise duty or service tax – accumulated in one unit to any other eligible unit is a big advantage for taxpayers having pan- India manufacturing units.

On paper, the LTU system is designed to reduce tax compliance costs and delays for large taxpayers. In turn, it also facilitates tax administration to ensure tax compliance: data mining, for instance is easier. Large corporate taxpayers anywhere in the world place a premium on the ability to finalize their tax positions in real time, which helps them minimize unpredictability in business operations.

LTUs are used by governments to create mutual trust, usher transparency and resolve issues in a time-bound manner, resulting in effective tax administration and collection. It is important for officials manning LTUs to understand business perspectives – an improved economic and com- mercial understanding is vital. Unfortunately, in India, LTUs are perceived as hunting grounds for tax administrators.

The Large Business Service (LBS) system in the UK currently covers 770 companies. It is structured on sectoral lines that aids in understanding the dynamic commercial environment in which different businesses operate. The sector leader also supports client relationship managers (CRMs) who are allocated to each taxpayer.

Following discussions with each taxpayer and consultation with tax and sector specialists, CRMs compile a report of perceived tax risks and tax positions and share this with the large corporate taxpayer. Any differences in view are identified and resolved, and the way forward is agreed. To deal with the complexities of transfer pricing, an internal board has been set up, which results in speedy resolutions in a time-bound manner.

Most importantly, LBS officials also recommend changes to legislation when it finds there are gaps or defects in law. Recently, the large corporate forum, comprising of nominated members of large corporate taxpayers and LBS officials, was relaunched. Periodic meetings help in better understanding of business needs and compliance burdens.

LTUs in India first need to adopt such tax-friendly measures, only later can mandatory coverage be contemplated.

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Taxing Environment Of Ministerial Laxity

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Jayanthi Natarajan, it would appear, has done immense damage to the economy and to her own party’s electoral prospects. She had, it has been reported, been sitting on hundreds of files for no plausible reason, delaying their clearance for months on end, some of them for years. This amounted to criminal negligence, aborting new projects at a time of waning economic sentiment and slowing investment. It is amazing that she was given such a long rope and not relieved of her ministerial responsibility earlier. The long rope, instead of tripping her up, has choked off the economy’s oxygen supply. The fall in real capital formation as a share of GDP by about six percentage points is at the root of the slowdown in economic growth over the last several quarters.

Now, these files accumulated with Natarajan – 180 of them unsigned, 169 signed but still withheld – for reasons that the former minister has not chosen to share with the public. It is tempting to accept the charge, made by Narendra Modi, that the files piled up because of non-payment of a “Jayanthi tax”, unless Natarajan comes up with a credible explanation for this strange hoarding of vital clearances. Regardless of the explanation, the conduct has been inexcusable. The development further strengthens the case for transferring the job of according environmental clearances to an independent authority with expertise and the requisite staff strength. The environment ministry’s job should be to formulate policy and the norms that the regulator would use to accord or deny clearance, or suggest compensatory measures.

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Tax Terrorism: India Births a New Kind of Terrorism

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A recent move by the tax department has flummoxed corporates and businessmen who are calling it ‘tax terrorism’ — a phrase that has gained currency after it found its way into BJP’s manifesto. Hundreds of closely held firms, many owned by the country’s top business houses, have been questioned on the premium collected against the sale of shares. In notices served a day before the close of the last financial year, the Incometax (I-T) office, after collecting data from the registrar of companies (RoC), has told them to justify the premium, failing which the amount would be treated as income and therefore taxed. A senior tax official said the department was simply following a new rule that came into force from 2012-13. Its intention is to curb money laundering and bogus transactions where the premium an investor pays per share cannot be explained. But tax practitioners ET spoke to feared the department’s sweeping and hurriedly taken decision to beat the March 31 deadline could mean endless hassles for companies. “First, any such transaction prior to 2012-13 (when the new rule came) should not be taxed, but the department has, nonetheless, gone ahead with a fresh circular. This would be legally challenged. Second, one cannot question transactions simply on the basis of RoC data. There has been no evaluation and there is no evidence that income has escaped assessment.

According to tax circles, close to 200 companies have received notices from the tax office in connection with share premium charged by them. The unstated fear among companies is the possible outcome of reopening of assessment. “There is no guarantee that the I-T department would stop with the share premium issue. It’s very much possible that it may rake up other matters. At present, 2008-09 assessments have been reopened which would become time barred post March 31, 2014. But the department, we believe, is collecting data for subsequent years as well. So, it’s a matter of time more notices would be served. Companies issue shares to financial investors, JV partners, co-promoters and parent companies, and often these are influenced by shareholder agreements. The pricing is on the basis of either book value of the unlisted company or its discounted cash flow which estimates future earnings. All cases where the value of share premium is more than Rs.1 crore have come under the department’s scrutiny. The move to tax unexplained premium is aimed at plugging sham deals priced at bloated valuation to carry out shady transfer of funds. However, the department’s March 28 circular puts a question mark on genuine transactions as well.

(Source: The Economic Times of India, dated 25-04- 2014)

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Well-intentioned laws, courts cripple growth

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A key reason why India’s economic growth has halved from 9% to 4.5% per year is that, in search of inclusive growth, the courts and legislatures have increasingly made legitimate business difficult. It now takes 12 years to open a new coalmine. This is not inclusive growth but paralysis and stagnation.

The new land acquisition law aims at quick, fair acquisition. But the secretary of the department of industrial policy and production says the Act has made it “virtually impossible” to acquire land for roads, ports or other infrastructure. Higher compensation provided in the new law is welcome, but it also mandates a social impact assessment for each project, followed by expert group clearance, followed by an 80% vote of affected persons. Legal challenges are possible at each stage. Instead of quick, fair acquisition, we have dither and delay.

India has become a major global player in clinical trials for new drugs. But complaints have arisen against malpractices by some companies — not informing patients of the risks, not giving insurance cover or compensation, negligence leading to deaths. The obvious answer is to prosecute and jail the guilty, deterring further misdeeds.

But in India the courts take forever to conclude cases, so misdeeds are not deterred. Instead of focusing on quick justice, the Supreme Court has decreed lengthy new procedures for clinical trials, causing huge delays and costs for legitimate activity.

Our courts are under the illusion that good practices are created by a jungle of rules. Sorry, they are actually created by swift punishment that deters the guilty. That’s why clinical trials suffer from fewer malpractices in Europe or Japan.

The Supreme Court should focus on speedy convictions, not ever more regulations.

Despite having the world’s third biggest reserves of iron ore and coal, India has begun importing both. The courts have banned iron mining in some states, and court inquiries into corrupt coal block allocations have frozen fresh mining. Now, illegal mining surely should be stopped. But the right way is to nail the guilty, not stop all legitimate activity. No illegal miners have been convicted beyond appeals, but many legitimate miners have suffered huge losses.

Illegal sand mining is rampant. Sand is essential for making concrete for construction. But the courts have passed increasingly stringent rules, curbing mining from river beds on environmental grounds. This has created a huge shortage of sand, which in some states sells at Rs. 1,800/tonne, more than the price of coal some years ago. Cowed by court strictures and threats of prosecution, many Collectors are playing safe by simply not issuing new sand licenses or renewing old ones that expire.

Faced with public outrage over illegal mining, the Green Tribunal has mandated environmental clearance (and hence delays) for even the smallest patches of sand. Will this check illegal activity? No, but it will reduce legal mining, making India even more dependent on the sand mafia for supplies.

These examples are just the tip of the iceberg. Our courts are not designed for making policy: they are designed to judge whether actions are in accordance with the law. They are not experts in the essentially political function of balancing the needs of production and social protection.

Mis-Governance in India is not just the result of crooked politicians and businessmen. It is also the result of well intentioned but badly designed laws. Above all, it is the result of a dysfunctional police-judicial system. Unending legal delays encourage law-breakers in every walk of life. The solution is not policy takeover by the courts, but quick justice.

(Source: Extracts from an Article by Swaminathan S. Anklesaria Aiyar in the Times of India dated 27-04-2014)
(Comment: Court activism is due to gross Mis- Governance, Dysfunctional Administration and Criminals in Politics & Power, who have acquired effective control of the State!)

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Make anyone who indulges in endless litigation pay: SC After hearing arguments for countless hours for more than two years in the Sahara case, the Supreme Court sent a request to Parliament: please enact a ‘Code of Compulsory Compensation’ (CCC).

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“The suggestion to the legislature is to formulate a mechanism that anyone who initiates and continues litigation senselessly, pays for the same. It is suggested that the legislature should consider introduction of a ‘Code of Compulsory Cost’,” said a bench of Justices K. S. Radhakrishnan and J. S. Khehar.

Citing the Sahara case, the bench said Indian judiciary was grossly afflicted with frivolous litigation and the need was to find ways and means to deter litigants from their compulsive obsession towards senseless and illconsidered claims.

“What is sought to be redressed (through CCC) is a habituation to press illegitimate claims. This practice and pattern is so rampant that in most cases, disputes which ought to have been settled in no time at all before the first court of incidence, are prolonged endlessly, for years and years, from court to court, up to the highest court,” it said.

(Source: The Times of India, dated 07-05-2014)

(Comment: The functionaries of the State, particularly senior officials of the various Revenue Departments should be personally made to pay for frivolous litigation initiated and sanctioned by them)

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The New India We Want by Shri N. R. Narayana Murthy

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Whoever becomes the Prime Minister will be the Prime Minister for every citizen, every resident and every visitor of India. The new PM will have to heal the secular rupture that has taken place. No country can make stellar economic progress unless there is peace at its borders and harmony within. Therefore, the first duty of the new PM will be to create an environment where every dialogue, including those with our neighbours, is on a platform of civility, courtesy, harmony and facts. This is the only way to enthuse and energise Indians of all religious beliefs, political ideologies and social status.

The economy has suffered during the last four to five years. The reputation of India has taken a beating abroad during the last six to eight years. During 1999-2009, when China was mentioned three times in boardrooms abroad, India was mentioned at least once. Today, India is not mentioned even once when China is mentioned 30 times. Good governance rests on seven important attributes: equity, fairness, transparency, accountability, honesty, secularism and a robust, consistent and responsive legal system. Most public governance experts tell me that we have seen the steepest fall in these attributes during the last five years. Therefore, the first task for the new PM is to restore these attributes at least to the level they were during the 1990s.

If we want to raise the hope and confidence of the Indian youth, we have to create jobs for them — jobs with good disposable income. We have to create 150-200 million jobs during the coming decade. The only way we can spend more on social welfare programmes is by collecting more taxes that come from growth in corporate activities. The new PM has to articulate India’s commitment to the seven attributes. Our embassies, immigration and customs officials must be empowered to make the visit of every foreigner a pleasant experience. Our state governments must become active partners in this task.

A trusted and well-informed Cabinet group should visit the global capitals every three months and reiterate these messages and make sure that enough investments come in. We have excellent people to lead such groups on both sides of the aisles. These are modern, well-informed individuals who can raise the confidence of senior corporate leaders.

The new PM must accept that, at this stage of our development, jobs can be created only in urban and semi-urban areas. The need of the day is to make our cities more attractive not just for Indians but for foreigners too. We must keep our ego down and realise that the foreigners have umpteen global options for investment. The PM must make the visit and stay of foreigners hasslefree. It is amusing that the visa-on-arrival facility is not available for even one country that is among our top five trading partners in software. The PM must create a ministry of urban governance. An apolitical expert with a proven track record has to lead this ministry since this is essentially a Centre-state issue.

It is time that we made life better for our poor people. We have to focus on education, healthcare, nutrition and shelter. All programmes that provide such facilities must use Aadhaar identity to deliver services efficiently and without corruption through a voucher scheme. You cannot run any such directed schemes without strengthening Aadhaar. Therefore, the new PM must appoint a smart, modern and a results-oriented technocrat to run UIDAI. While continuing with the right to education ideology, the new government must provide full subsidy to the private sector players in these fields through vouchers without making these institutions debilitated.

Taking about education brings me to initiatives in higher education. The new PM must give top priority to pass Bills on welcoming foreign universities and starting innovation universities. Without adequate focus on research and higher education, India’s future is shaky.

Ever since the mid-1970s, population control has been given up. I have hardly seen any PM speak about it since then. It is time we resurrected this important initiative.

Peace at our borders is extremely important and the new PM must give priority to that task. We have not seen any major move with Pakistan since A B Vajpayee’s time. It is time we acted as the elder brother to Pakistan and helped that country overcome the trauma they are facing. A happy India requires a happy Pakistan.

(Source: Extracts from an article by Shri N. R. Narayana Murthy, Executive Chairman Infosys, in The Economic Times dated 29-04-2014)

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Poor Quality of Our Democracy

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This election season, in the midst of our self-congratulation over the vitality of Indian democracy, we should ask ourselves: What is the quality of our democracy? Democracy cannot simply be a plurality of parties, free elections, peaceful handovers of power, an independent judiciary, constitutional governance, and personal and group freedoms. A healthy democracy must also have and promote substantively rich debate on policy alternatives and choices.

It is striking that through the campaign there has been no debate, of any depth, on everyday policy issues. Indian politicians seemingly have neither the stomach nor the intellectual bandwidth for those kinds of debates. The media too cannot sustain any kind of sensible commentary on key policy choices facing us. You would look in vain for an analysis of hard policy tradeoffs as we confront economic and social challenges.

Nowhere is this more evident than in respect of election manifestos which promise all manner of things. Are the policies they enunciate desirable? And if desirable, are they feasible financially, socially, politically, and culturally? Our media should be trying to answer these questions. Instead, they are preoccupied with who will win the election, who did what during campaigning and what is the last thing Narendra Modi said.

The manifestos of the two major parties suggest both are agreed on a Goods and Services Tax (GST) and encouraging foreign investment. That is worth bringing to the attention of voters. Yet few in the media have bothered to do so. BJP’s opposition to allowing multibrand retailing and its espousal of simpler tax structures has had some mention. Can India repudiate its decision on multibrand retailing? How would foreign investors react to constant policy changes? And how should we simplify our tax structures?

Both parties want to do something for health. Congress wants to pass a right to health bill, increase health expenditures to 3% of GDP and create millions of jobs in that sector. How to define the right to health? How many rights-based bills can we work with (right to education, right to information, right to food)? Is 3% too much or too little, and what would we spend less on? What kinds of jobs does Congress want to create in health?

BJP wants to raise education expenditures to 6% of GDP, encourage online courses and boost vocational training. Is 6% affordable, what are the limitations of online learning and do we have the connectivity for it, and how to energies the moribund vocational sector?

Millions are migrating to towns and cities. Urban policy is therefore a huge challenge. Congress wants to build 100 urban clusters around older or emerging cities to take the pressure off existing conurbations. BJP wants to go further and create 100 completely new cities. Which way is better? Is either feasible given struggles around land rights, a new land acquisition bill and lack of supporting infrastructure?

Speaking of infrastructure, both parties want high-speed trains. Given the horrendous record of Indian railways in managing low-speed trains, how would we move to a different, more exacting system? High-speed trains require new tracks. That means dedicating a lot of land to the project. How will that be achieved when land is at such a premium? BJP thinks that we desperately need freight corridors, industrial corridors and a port-led development strategy. Has anyone weighed up what this would mean, how we would pay for it and where we would locate these installations?

We in India are obsessed with the most superficial, transitory and procedural elements of policy making and with quite a thin conception of democracy and good governance. We pat ourselves on the back for holding elections and over deep, elemental battles in our politics — the secularism debate, or human development versus growth-led development and a host of other relatively abstract, philosophical arguments. On the other hand, we shy away from hard-headed, rigorous engagement with everyday policy challenges. If we continue to neglect these everyday challenges in social and political life, we will see our bubbling democracy subside and then eventually be consigned to the dustbin of history.

(Source: An Article by Mr. Kanti Bajpai in the Times of India, dated 26-04-2014)

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Govt. Launches Portal To Better Biz Climate.

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The government flagged off the second phase of its ambitious eBiz project, an integrated eBiz portal which would make doing business in India a lot easier.

The portal allows potential entrepreneurs to do most of the formalities online — submitting forms, making payments, among others. They can also track the status of their requests through the portal.

However, the ministries crucial for clearance of projects like the Ministry of Environment & Forests (MoEF) are yet to become part of the project, raising questions on how the hassles in doing businesses would be addressed.

Launching the project, commerce and industry minister, Anand Sharma, said his ministry would soon approach the Cabinet Committee on Infrastructure (CCI) to bring resisting ministries such as the Ministry of Environment & Forests (MoEF), on board.

The project, which was supposed to have been launched in August 2013, is facing stiff opposition from the Central Board of Excise and Customs and the Central Board of Direct Taxes, apart from MoEF.

The eBiz project, first announced in 2009, looks to improve the country’s ease of doing business quotient. According to a recent World Bank ranking, India stood at 134th among 189 countries in terms of ease of doing business.

A commerce ministry statement said the eBiz platform enables a transformational shift in the government’s service delivery approach from being department-centric to customer-centric.

The first phase of the project, which provided information on forms and procedures, was launched on 28th January, 2013. The second phase, launched on Monday, has added two services from the Department of Industrial policy and Promotion – industrial licences and industrial entrepreneur’s memorandum – along with operationalising the payment gateway by the Central Bank of India.

The government has inked a 10-year contract with Infosys Ltd., where a total of 50 services (26 central + 24 states) are being implemented across five states – Andhra Pradesh, Delhi, Haryana, Maharashtra and Tamil Nadu – in the pilot phase. Five more states – Odisha, Punjab, Rajasthan, Uttar Pradesh and West Bengal – are expected to be added over the second and third years.

According to Raghupathi C. N., head of India business at Infosys, the project is slightly delayed due to several departments’ resistance to change. “The project is slowly nibbling away at the resistance; some stability in the political environment is also expected to improve the situation.”

Raghupathi said the departments are used to running their services in the offline and manual way for several decades now. He said the implementation is “slower than expected” because it is tough to expect departments to completely change their modus operandi overnight. “While there are some easy adopters, there are others who clearly do not see the benefit of it.”

The portal will not only create a single-window for all registrations and permits, but will also provide investors with a checklist.

“So far, there was never a checklist, and people were forced to go from department to department filling forms, never knowing what was remaining,” said Raghupathi. “Only 50-60 % of the services were digital, everything else was manual,” he added.

The government hopes to bring online over 200 services related to investors and businesses over the next 10 years on the portal.

(Source: Business Standard, dated 21-01-2014)

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Judiciary – When Laws Can Be Used To Deny Others Justice

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Can justice be denied to a person, just because she had earlier held a judicial office? The concept of ideal justice ought to transcend all caste, creed, sex, religious and national considerations. It would, therefore, not be fair to argue that justice should elude a former judge if any allegation is levelled against him. Such fundamentalism can strike a blow on the independence of the judiciary, the basic feature of India’s Constitution.

Such arguments aim at browbeating all sitting judges. All sitting judges will be retired judges one day. Any possibility of fear instilled in the mind of a sitting judge would be dangerous for the system. All sitting judges have an obligation to maintain the independence of the judiciary at all costs.

It can be nobody’s case that an errant judge — sitting or retired — ought not to be dealt with appropriately. But can a belated one-sided allegation, howsoever grave the allegations, made before a forum not competent to deal with the same, seek a mob-lynch verdict? In Justice Ganguly’s case, the Supreme Court recorded what it did, based only on the allegations levelled by the complainant.

I do not think the Supreme Court committee gave any finding. If the full Supreme Court has decided not to entertain any such complaint in the future, that must be respected. Perhaps the full court’s decision is an admission that such a complaint ought not to have been entertained in the first instance. Indeed, the apex court cannot be converted into an investigating machinery or a prosecuting agency of the state.

Nothing definite can be stated on the allegations without a trial. And a trial has to be in a competent court of law, arising out of an FIR. Let me not be too legalistic about the scope, purport and ambit of amended Sections 354A, 354B, 354C, 354D of IPC, hurriedly enacted without debate in the aftermath of the Nirbhaya crime.

Today, questions are being raised as to the wisdom of enacting such lethal provisions. I don’t know whether this would have the desired effect. What I apprehend, however, is that some innocent persons may possibly be made victims of the law, either deliberately or otherwise.

Law, as Samuel Johnson said, is the ultimate result of human wisdom, acting upon human experience, for the benefit of the public. I am not convinced that the amended IPC 354 satisfies the test of law laid down by the British statesman. What we need is justice, and not addition to a plethora of extant laws. We also need honesty of purpose on the part of those administering the law. In India we have too many laws but very little justice.

And about justice delivered by the administrators, less said the better. Curiously, both the accused judges have always enjoyed great reputation of judicial independence. It is too much of a coincidence that such judges, with a tremendous reputation of judicial impartiality, should have been accused of wrongdoings in discharge of non-judicial function. The Supreme Court of India has been an inconvenient institution to the powers that be. There can possibly be a larger conspiracy to belittle and downgrade the Supreme Court, which is by far the best functional institution of India today.

The faith of the common man in the Supreme Court has remained undiminished despite motivated attacks made from various quarters. The Bar has an overriding responsibility to protect the majesty and dignity of the judiciary.

Let the law take its own course for any allegations levelled against judges. There are proper fora for ventilating grievances for every aggrieved person. Anyone can file an FIR against any person and the police has no choice but to investigate impartially and take the matter to its logical end. But to attempt to burden our Supreme Court to deal with individual complaints would be against the very basic tenets of the rule of law.

Despite allegations levelled against judges, the Supreme Court remains a shining example of rectitude, independence and impartiality. Let us not attempt to destroy the last bastion of hope for the common man. Let us not destroy our democracy!

(Source: Extract from an article by Advocate, Biswajit Bhattacharya in The Economic Times, dated 15 -01-2014)

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IITs and IIMs – Quality, Not Quantity

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Gujarat Chief Minister’s idea to set up an Indian Institute of Technology (IIT), an Indian Institute of Management (IIT) and an All India Institute of Medical Sciences (AIIMS) in every state of the country may earn him some political brownie points when he tours states that still do not house any of these institutes. Superficially, the idea appears great, since people in every state would have access to a world-class institute nearer home. But Mr. Modi’s advisors would do well to look at the state of the eight new IITs already set up by the United Progressive Alliance government between 2008 and 2009, and the six new IIMs set up during 2010-11. After over five years of existence, these IITs still await a permanent campus. And most have failed to fill up even half of the sanctioned posts for permanent faculty.

The story is no better on the placements front. All the new IITs put together achieved a relatively low placement figure of 79%-92%. At many IITs, students were given job offers for a salary as low as Rs. 3.5 lakh per annum, which is below the minimum annual pay package of Rs. 4 lakh even at some National Institutes of Technology (NITs). And in spite of all their chest-thumping, even their older peers have lost a lot of sheen. For example, they have failed to make the grade among top institutions in both the Times Higher Education and the QS World Asian University rankings. The lacklustre rankings reveal, yet again, that Indian universities fail, for most part, to offer world-class education, training and research-based knowledge creation. There are financial issues as well. Setting up a new institute of national importance would cost the government upwards of Rs. 250 crore without the land cost. If this money is pumped instead into improving the quality of existing institutions or is provided to them to hand out more attractive salaries to faculty members, much more can be achieved. The last one is the key, since even at the old IITs, 41% of teaching posts are vacant. One way to raise the bar on quality education at the new IITs is to bring in top-notch faculty, but that is easier preached than done. A typical IIT assistant professor starts at about Rs. 75,000 a month – less than what many engineers from Tier II colleges get as their first pay cheques. The irony is that even trainers in some coaching centers for joint entrance examination for admission to IITs make six times as much, if not more.

A push towards research is another way to counter the faculty shortage. The Anil Kakodkar Committee of 2010, in its strategic recommendations for the IITs, set a target of 10,000 doctoral fellows being produced annually by 2020-2025, up from the current 1,000. The hope was that some of these PhDs would stay to teach at the IITs. But at present, half  of the PhDs leave academics to join industry for better pay. The IIMs, which account for only 3% of India’s output of management students, are facing similar challenges. Autonomy, availability of more resources and enabling better-quality faculty are the key needs of the country’s showpiece institutes. That, rather than mere geographical expansion, would be a better option.

(Source: Business Standard, dated 21-01-2014)

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Independent Directors’ Appointment Norms Need an Overhaul.

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News that eminent people earn in eight digits from independent directorships raises afresh the question of the role of these board members in corporate India. No one should grudge independent directors their fees, and it is healthy that the Companies Act, 2013 has raised the minimum sitting fee from a laughable Rs. 20,000 to Rs. 1 lakh per meeting. The bigger issue, and one that should concern companies and independent directors themselves, is the true value the latter can deliver. The concern arises because independent directors have more substantive responsibilities than ever before. For the first time, their role and responsibilities have been outlined in the Companies Act (the 1956 version of the law did not contain any reference to independent directors; they were mentioned only in Clause 49 of the listing agreement). Under the 2013 law, independent directors are required to sit on audit committees, nomination and remuneration committees, corporate social responsibility committees and also have pretty stringent whistle-blowing responsibilities.

But if all of this sounds like a full-time job for one person in one company, consider also that independent directors are permitted to join a maximum of 10 boards. At this maximum, and given that an independent director is required to attend at least four meetings a year, he or she could end up attending at least 40 meetings a year. If that sounds doable over 12 months, consider that board meetings typically converge around the quarterly results announcements, which means meetings are crowded around four months of the year.

This problem is compounded by the fact that there is a chronic shortage of quality people to staff corporate boards in India – especially since the Act requires independent directors to comprise a third of the board in listed companies. As a result, a few good men and women end up serving on eight to 10 boards. Given that there are 850,000 companies in India, according to Corporate Affairs Minister Sachin Pilot, many of them family-managed, it would probably be helpful to the cause of corporate governance if the maximum limit were, say, halved. In the US, for instance, where governance may not be perfect but the norms for it are more stringent than those in India, most board members do not serve on more than three boards (Rajat Gupta being a notable exception that provided a salutary lesson on the dangers of multiplicity). This may exacerbate the shortage, but it will force companies to widen the pool from which to draw.

One way of attracting more talent (and surely there is no shortage of that in India) could be to liberalise the fee structure, linking it to profit or turnover, in the same manner as CEO fees, and reintroducing stock options, a move that would go a long way towards helping start-ups. Either way, a more realistic approach is urgently needed so that independent directors become genuine custodians of corporate governance.

(Source – Business Standard, dated 07-02-2014)

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The Endorsement dilemma-marketers must seek watertight celebrity contracts.

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Film actor Amitabh Bachchan’s recent comment on his brand endorsements has sparked a fresh debate on the role of celebrities in advertising. During a discussion earlier this week at the Indian Institute of Management, Ahmedabad, Bachchan said that he stopped endorsing Pepsi after a schoolgirl from Jaipur asked him why he pitched a product her school teacher said was “poison”. But the actor had stood by the brand during its darkest period – the pesticides-in-cola controversy of the early 2000s. Naturally, therefore, questions are being asked whether it was too late for him to discover his conscience after peddling the brand for eight long years, till 2006, and becoming richer by over Rs. 24 crore.

According to a study by London-based Brand Finance, these intangibles account for almost twothirds of the value of the top 5,000 listed companies across markets. So obviously, anything that impacts the value of such intangibles has a huge bearing on business strategy, and therefore cannot be swept under the carpet. Firms challenge claims and damages to their intangibles, whether it is a breach of intellectual property or misuse of brand names by business rivals and outsiders. Why should brand sabotage from within be any different?

Two, celebrities have a huge following, and willynilly consumers see them as the personification and custodian of the brand they endorse. Elsewhere, if a celebrity breaches his or her public persona, invariably the brand suffers and marketers are quick to dissociate the brand from the endorser. And they are able to do it because the contracts explicitly spell out such separation conditions. In contrast, marketers in India are often seen to be drawing soft contracts with celebrities that enable them to be less responsible towards the brand and its ethos. The dangers are obvious. Experience from developed markets like the US or European countries points to more robust celebrity contracts that bind them to ‘good brand practices’ long after the cheques stop coming. Needless to say, everyone is entitled to her views. But if you’re an important cog in an enterprise’s value chain, there cannot but be costs and consequences of any viewpoint that has a bearing on the enterprises’ value. For transnationals like Pepsi, with headquarters in one continent, manufacturing in another, and customers in yet another, the glue that binds them comes from intangibles like intellectual property and brands. Any assault on them, by design or default, has to be dealt with firmly.

(Source: Business Standard, dated 07-02-2014)

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Regulatory regime forcing cos’ externalisation’ – Doing Business away from Indian tax oversight and ease of fund-raising among reasons for India Inc’s for India Inc’s tryst with foreign shores.

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With Indian companies rapidly expanding their presence internationally, there has been an increased keenness in companies operating in high growth sectors to migrate their holding company structures from India to reputed offshore jurisdictions. For lack of a better word, let’s refer this process of structuring/ restructuring as ‘externalisation’ as that term may fit the reference better than ‘globalisation’ or ‘internationalisation’, both of which have much wider imports.

There are several drivers for externalisation. First, it moves the businesses away from Indian tax and regulatory challenges into jurisdictions that may be more conducive from an operational standpoint and also substantially mitigates tax leakage and regulatory uncertainty. Unwritten prohibition on ‘put options’, retroactive taxation of indirect transfers, introduction of general anti-avoidance rules fraught with ambiguities, etc., are a few examples why Indian companies may want to avoid direct India exposure.

Second, from a fund raising perspective, it offers Indian companies to connect with an investor base that understands their business potential and, thus values them higher than what they would have otherwise been valued at in domestic markets. Infosys, Wipro, Rediff, Satyam are classic examples of companies which preferred to tap the global capital markets (NYSE and Nasdaq) without going public in India.

Third, with the Indian currency oscillating to extremes, one of the biggest concerns for foreign investors is currency risk. By investing in dollars in the offshore holding company (OHC), foreign investors can be immune from the currency risk and benefit from the value appreciation of the Indian companies. Many foreign investors that invested in 2007 when the Rupee was at around 42 to a dollar have suffered substantially with the Rupee now being at 62 to a dollar.

Fourth, and this is more of a recent issue, with the coming of the new Companies Act, 2013, which provides for class-action suits, enhanced director liability, statutory minimum pricing norms (beyond exchange control restrictions), there will be keenness to flip the structure to an OHC and ring-fence potential liabilities under the Companies Act, 2013.

Lastly, such offshore jurisdictions also provide for great infrastructure and governmental policies that are discussed with businesses and are more closely aligned to growth of the businesses as against meeting revenue targets. With most clients offshore, there may be certain amount of snob value that may be associated with establishment in such offshore jurisdictions.

Indian tax and regulatory considerations play a very important role in externalisation. From a tax standpoint, flipping the ownership offshore may entail substantial tax leakage, and to that extent it is advisable if the flip is undertaken at early stages before the value is built up in the Indian asset. Another challenge from a tax perspective is the choice of jurisdiction for the holding company in light of the impending general anti -avoidance rules that may disregard the holding company structure if it is found lacking commercial substance. To protect the tax base from eroding, some of the developed countries like the US have anti-inversion tax rules which deter US companies from externalising outside the US.

From a regulatory standpoint, one of the challenges is to replicate the Indian ownership in the OHC, especially since swap of shares or transfer of shares for consideration other than cash requires regulatory approval, which may not be forthcoming if the regulator believes that the primary purpose of the OHC is to hold shares in the Indian company. Indian companies may be restricted from acquiring shares of the OHC on account of the OHC likely qualifying as a financial services company and Indian individuals may be restricted to acquire shares of the OHC under the new exchange control norms since OHC will not be an operating company. The extent of operations to be evidenced remains ambiguous. OHCs acquisition of Indian shares will also need to be carefully structured as the OHC will not be permitted to acquire Indian shares at below fair market value from an Indian tax and exchange control perspective.

India has recently allowed Indian companies to directly list on offshore markets, but the conditions that such listing can only be for 51% shares of the Indian company and that the proceeds of such issuance must be used overseas within 15 days may not allow the true potential of offshore listings to be unleashed. The utilisation of the direct listing regime remains to be seen as the SEBI is yet to come out with a circular setting out disclosures required for such listing.

However, considering the challenges faced by India Inc., the need to move away from India for growth seems inevitable in current times.

(Source: Article by Mr. Ruchir Sinha and Mr. Nishchal Joshipura of M/s Nishith Desai Associates, in The Economic Times, dated 15-01- 2014)

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Paulraj Second Indian to Get Marconi Prize.

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Tamil Nadu-born scientist Arogyaswami Joseph Paulraj has become the second Indian to be awarded the Marconi Society Prize, 2014, considered an equivalent to the Nobel Prize for the technology sector. The award recognises his work on developing wireless technology to transmit and receive data at high speeds. Paulraj is credited with the invention and advancement of Multiple Input Multiple Output (MIMO), a key enabler of WiFi and 4G mobile systems.

The 69-year-old is an emeritus professor at the Stanford University and has served 25 years in the navy. He got the Padma Bhushan in 2010. His idea for using multiple antennas at both the transmitting and receiving stations has revolutionised wireless delivery of multimedia services for billions, said the Marconi Society.

By winning the award, Paulraj joins a select group of information technology (IT) pioneers such as Tim Berners-Lee (world wide web), Vint Cerf (internet), Larry Page (Google Search), Marty Hellman (public key cryptography) and Martin Cooper (cellphone).

N. R. Narayana Murthy, executive chairman of Infosys, said, in a release by Marconi Society, “Paulraj’s brilliance and perseverance have revolutionised wireless technology bringing a lasting benefit to mankind.”

Before Paulraj migrated to the US in the early 1990s, he was well known for pioneering the development of sonars for the navy. Paulraj is the founding director of laboratories Centre for Artificial Intelligence and Robotics, Centre for Development of Advanced Computing, Bangalore, and the Central Research Labs of Bharat Electronics.

After moving to Stanford University, he built the world’s leading research group in MIMO, and founded two companies in the Silicon Valley to develop MIMO.

While global chip maker Intel acquired a company in 2003, Broadcom Corporation bought another later.

Named after Nobel laureate Guglielmo Marconi, who invented radio, and set up in 1974 by his daughter Gioia Marconi Braga through an endowment, the Marconi Society annually awards an outstanding individual whose scope of work and influence emulate the principle of “creativity in service to humanity” that inspired Marconi.

After Sir J. C. Bose’s demonstration of the millimetre wave radio in 1895, Paulraj’s invention of MIMO in 1992 is the next major innovation in IT from an Indian-born scientist, notes IndiaTechOnline.com editor, Anand Parthasarathy. The prestigious prize includes $100,000 honourarium and a sculpture. Its honourees become Marconi Fellows.

(Source –Business Standard, dated 24-01-2014)

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“Look For Raw Talent, Not For English Skills” – Management Guru Ram Charan

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“One lousy leader can change everything.” Coming from one of the world’s most influential consultants (named by Fortune magazine), this comment summed up the point Ram Charan was trying to make to a hall packed with Indian CEOs.

Speaking on the topic ‘Leadership in turbulent times’ at an event organised by Great Lakes Institute of Management, he said that China would emerge as the place where a lot of different industries would be anchored from. When someone from the audience asked how long he expected the China influence to last, he replied, “You can have a lousy leader (and everything can change). We are having such a situation here in India, aren’t we?”

Charan said putting a leadership pipeline in place was critical and firms should start identifying talent early. Talent must be spotted along two lines – those who are great individual contributors and those who can be future leaders. “Both are completely different skills. Potential leaders naturally link with people to get work done for them, have a nose for making money, are highly tuned to succeed in their next-in-line jobs and can work with highly diverse sets of data. Firms can use these as indicators to identify such talent,” said Charan.

(Source: Times of India, dated 24-01-2014)

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Indian Economy – Less Fragile, Not Bullet- Proof.

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Let’s give credit where it is due. Over the last six months, the managers of the economy have converted a system in near-crisis into one of the safer places in a battered ’emerging markets’ grouping. Remember that India was seen last summer as one of the worst performing stock and currency markets, with nervousness underlined by a record current accounts deficit and the highest fiscal deficit among the major economies. So, it is a pretty dramatic change when India now presents a reassuring contrast to the traumas engulfing almost all the second-rung economies represented at the G20 high table. The Sensex is about 14% higher than its 2013 trough. The quarterly trade deficit has dropped from $45-50 billion to $30 billion, and the current account deficit from $20-25 billion per quarter to just $5 billion. Capital inflows have held up, so foreign exchange reserves have stopped falling and indeed have gone up by $18 billion in the last four months. When many ‘G20 Junior’ currencies teeter on the edge of crisis – and the roll call is pretty comprehensive – the Rupee is reassuringly stable at a sensible exchange rate. It helps that the Reserve Bank of India is laser-focused on tackling inflation.

But we should hold the celebrations. First, there is a message in the failure of State Bank of India’s share issue this week. Though the asking price was modest, less than $250 million came from abroad, for an issue size that was intended to be over $1.5 billion. If the whole thing was not a fiasco, it was only because domestic public sector entities (banks and insurance) bailed in – and you can guess whether they were following orders. Bear in mind that bad and restructured loans could eventually wipe out the existing share capital of India’s government-owned banks, and they will need many billions of dollars of fresh capital. But if the largest and best of the pack can’t generate foreign investor interest, what are the others going to do? Fall back on taxpayer money at a time of fiscal stress? A financial sector that is short of capital cannot meet the economy’s credit needs, and will constrict growth. The reform of government-run banks has become essential and urgent.

Second, there is the business of government expenditure. At over 7% of gross domestic product (GDP), the fiscal deficit (for Centre plus states) is by far the largest among emerging markets. The outlook is that things may get worse, as state after state rolls back power tariffs, the cooking gas subsidy is increased, and road tolls are attacked. There seems to be an all-party consensus on more government giveaways, and implicitly therefore against fiscal correction. That this translates into higher inflation and macroeconomic instability seems beyond the ken of everyone from Arvind Kejriwal and Rahul Gandhi to Raj Thackeray. Mr. Chidambaram may do everything possible to keep this year’s deficit down to the target of 4.8% of GDP, but something that is artificially compressed by a determined minister is likely to balloon next year.

Finally, there is the business of improving governance. Aadhaar was to have been a game-changer but has been sacrificed at the altar of expediency. If unique identity numbers are not to be used for enabling cash transfers, as a superior alternative to product subsidies that are poorly targeted and prone to large leakages (and cooking gas is a prime example), what is the justification for spending many thousands of crores on Aadhaar? Talk of lack of conviction in reform! India has escaped contagion for now, but the world’s economic troubles are far from over. The antireform consensus could yet undo our future.

(Source: Business Standard, dated 01-02-2014)

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What Satya Nadella’s Appointment As Microsoft CEO Teaches Us?

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The appointment of Satya Nadella as the CEO of the iconic Microsoft has given us a reason to take pride in the success of a fellow Indian.

Not only is Satya Indian by birth, he went to ordinary schools and colleges, got to the top on his own merit and, most of all, remained a nice, normal and humble guy. We can relate to Satya and his journey in a way that we can’t relate to, say, Steve Jobs or Bill Gates, and that’s what is so inspiring. In his success, we see the possibility of our own success. At a time where young people are looking for role models to emulate, Satya is certainly a wonderful one.

Could Satya have become the CEO of a major Indian company? Or did he have to leave India to succeed? Corporate India is dominated by family businesses. The right genes are still an important requisite for ultimate success. But this is changing slowly.

Finally, there are multinationals like HUL, Suzuki and Samsung. In these firms, most important decisions are made outside India and so, a promising leader has to leave India and get back to headquarters to rise. So, it is indeed true that India is still a small pond for an ambitious and talented professional manager. Hopefully, as Indian firms globalise and professionalise and more entrepreneurial firms achieve scale, this will change. But in the short term, the best opportunities for the very best talent are still outside India. For all our complaints about the US’s restrictions on immigration of skilled workers, we ourselves remain quite closed. If we could make India a less challenging place to do business and if we could become more welcoming of high-end talent regardless of nationality, we would reverse the brain drain and become a magnet for innovators and entrepreneurs who would revitalise our economy in unimaginable ways.

Finally, does India have a competitive advantage to grow top talent? We do. First, we have the numbers. When you have so many young people, a numerically large number of us are exceptionally gifted. Second, there is a Darwinian process that results in survival of the fittest. In middle class and even poor homes, educational achievement is the passport to success, and there is pressure on kids to work hard and succeed. Our education system, with all its inadequacies, results in a hypercompetitive environment that has a way of toughening up people.

CEOs may well be India’s most valuable export. Now, what we need to do is make India more of a meritocracy – in business, education, politics and government – so that more talented people don’t just build great businesses in India but apply themselves to solving some of our toughest social, economic and political challenges. It won’t be long before we become a developed nation.

(Source: Extract from an article by Ravi Venkatesan, dated 11-02-2014)

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Legislative Paralysis – Disruptions Of Parliament Have Harmed Indian Democracy.

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Disruptions of Parliament have become such a common occurrence that they hardly give rise to outrage any more. The last session of the 15th Lok Sabha is no exception. Both Houses have already been adjourned daily, amid slogan-shouting, scuffles and placard-waving by various members of Parliament. The worst offenders have been parliamentarians from Andhra Pradesh, protesting the government’s action – or inaction – on the formation of the new state of Telangana. But other issues have also been raised, through slogans and placards: the fate of Tamil fishermen; special status for Bihar; rapes in Kerala; the anti-Sikh riots of 1984. Each of these is, of course, an important issue and deserving of debate. Equally, each is an important issue and therefore not a reason for disrupting Parliament.

The tenure of the 15th Lok Sabha, thus, has been a disappointment. According to data released by the think tank PRS Legislative Research, the average number of Bills passed by Parliament when a Lok Sabha has completed its full five-year term is 317. The current Parliament has passed only 165, thereby torpedoing any chance of meaningful reform under the second term of the United Progressive Alliance (UPA). This is the worst performance of any Lok Sabha since the first one, which had somewhat weightier discussions to undertake. Worst of all, even those Bills that are passed are frequently passed with insufficient debate, demonstrating the degree to which political parties today have debased India’s public sphere. Only 23 % of laws passed by this Lok Sabha have been discussed for more than three hours. Ten Bills were passed in less than half an hour; as many as 20 in just five minutes. Clearly, not enough attention was paid by parliamentarians to the laws that they approved. Meanwhile, the unfinished agenda – including major anti-corruption Bills, the reform of regulatory structures, and so on – just builds up. As many as 126 Bills remain to be passed; more than half – 72 – in the Lok Sabha. Many of these Bills, which were introduced during the current tenure of the Lok Sabha, will lapse after this session, a waste of time and energy.

(Source: Business Standard dated 12-02-2014)

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Risk-taking businesses shun governments paralysed by extreme risk aversion

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After the Tatas, Mahindras and TVS, it is the turn of Reliance Industries (RIL), India’s largest listed company, to start thinking of diversifying overseas. Part of the reason, understandably, is to spread the risk of operating in any one place across several countries. Many companies around the world take this route after reaching a certain scale. Aditya Vikram Birla and Lakshmi Mittal were early adopters of this ‘go-forth’ philosophy, driven in part by the oppressive economic climate of India in the 1970s and 1980s. The 1990s and 2000s saw dramatic growth at home and almost all companies profited handsomely from that. But over the last year or so, the policy climate has changed dramatically for the worse. It’s not that bad things are being written into policy; policy-making is frozen stiff and nobody wants to implement existing stuff. The main reason behind this policy paralysis is the paranoia that’s gripped mantris and babus ever since the Commonwealth and Adarsh scams blew up last year. The 2G probe, arrests and continued detention of ex-ministers, politicians, bureaucrats and company executives have fuelled this fear and Anna Hazare’s anti-graft movement has only exacerbated it. Why sign off on any file, however incongruous, when there’s the slightest chance that one might be held to task for it sometime in future? At the level of an individual, an aversion to risk can be an excellent survival strategy, prodding people towards prudent decision-making. But when an entire system is afflicted with extreme risk aversion, the outcome is the sort of debilitating paralysis that we see today. Governments gripped by this sort of affliction can stumble along for a while, but businesses need to invest and take risks if they are to grow. Unless the administration gets back to work smartly, capital will start looking outside India.
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CBDT’s business intelligence data warehousing to boost tax mop-up

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To enhance revenue realisation and catch tax evaders quickly, the Central Board of Direct Taxes is working on a comprehensive data warehousing system, which will transform the functioning of the Income-tax Department.

The external data base would complement the internal database of the Department which includes information on permanent account number (PAN), e-filing data, tax deducted at source, share transaction tax payments, annual information returns on high-value transactions and specific information gathered by the Central Information Branch.

According to an internal estimate of the Department, the size to be handled by the I-T warehouse could be around four billion data pieces. The Integrated Taxpayer Database Management System alone has over 600 million pieces of information, mobile numbers would throw up around 1.2 billion data pieces and PAN database had 120 million entries. Besides, there would be local data and also information gathered from different sources.

A senior Income-tax Department official told Business Standard the idea behind RFBIDW was to shift attention from individual assessee to groups such as families, business groups, trades, dealers in particular items and intermediaries for curbing tax evasion.

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After education, a health surcharge ?

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You may soon have to pay more tax since the government is considering a proposal to levy a surcharge to fund its ambitious plan of providing free healthcare to every citizen in the country.

The Planning Commission’s expert panel that has recommended a levy on universal health coverage has turned down the proposal for a securities transaction tax, and has instead voted for a health surcharge on taxable income to fund the scheme.

The move, it said, would complement the government’s budgetary allocation and also ‘obviate the need for user charges on the rich’.

Cess Pool
(1) Govt. collects Rs.27,500 cr via education cess.
(2) Another Rs.17,700 cr collected by cess goes for construction and maintenance of high ways.
(3) Over Rs.15,000 cr collected as surcharge on corporation, income tax.
(4) Other cesses and surcharges levied by the Centre include those on tobacco, pan masala, salt, among others.
(5) All cesses and surcharges add up to Rs.79,000 cr or 8.5% of total revenues.
(6) They are used for various purposes — from funding calamity relief and contingencies to clean energy.
(7) Govt. had levied cess to fund Kargil war, meet spending needs post Gujarat quake. Both cesses have lapsed. (Source : The Times of India, dated 16-8-2011)

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Non-advocates can appear in consumer cases

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The Supreme Court has ruled that non-lawyers can represent, appear and argue cases filed under the Consumer Protection Act before consumer district forums and commissions.

The Supreme Court passed the directive while dismissing an eight year-old appeal filed by the Bar Council of India against a 2002 Bombay High Court judgment that permitted agents to represent consumers. The Supreme Court Bench of Justice Dalveer Bhandari, Justice R. Mukundakam Sharma and Justice Anil Dave on Monday, however, said special guidelines were needed and accordingly, it directed the National Consumer Commission to ‘frame rules within three months’ to regulate the eligibility, ethics and conduct of non-legal representatives. Agents can be friends or relatives but they cannot accept any remuneration and must display competence.

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UK inks deal to tax cash stashed in secret Swiss bank accounts

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The Swiss government has agreed to tax black money held by UK citizens in Swiss bank accounts, for the first time, while still hiding their identity.

The deal could seen between £ 3 billion and £ 6 billion a year being handed to HMRC (Her Majesty’s Revenue and Customs) by Swiss authorities.

The agreement is a part of the HMRC’s latest efforts to track down and tax money hidden in offshore accounts. It follows a similar deal agreed earlier this month between Germany and the Swiss authorities.

The UK citizens’ accounts in Swiss banks will be taxed at between 19% and 34% on the principal sum hidden, depending on how long the account has been running.

The Swiss agreed to make an initial down payment of 500 million Swiss francs (£ 387m) toward the tax liabilities of UK citizens with Swiss accounts.

From 2013, the account holders will also face an annual levy of between 27% and 48% on the income from their accounts, based on whether it has arisen as capital gains, dividends or interest. The UK authorities will also have the right to request the banking details of 500 UK individuals a year for further investigation.

UK citizens will only be able to avoid the new tax measures in Switzerland if they come forward and make a full disclosure of their finances there to HMRC.

(Source: The Times of India, dated 26-8-2011)

(Comment: Will India be able to prevail upon Switzerland to sign a similar deal ? Do we have the necessary political will?)

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25 companies in United States paid more to chief executives than taxman

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At least 25 top United States companies paid more to their chief executives in 2010 than they did to the federal government in taxes, according to a study released.

The companies which include household names like eBay, Boeing, General Electric and Verizon —averaged $ 1.9 billion each in profits, according to the study by the Institute for Policy Studies.

But a variety of shelters, loopholes and tax reduction strategies allowed the companies to average more than $ 400 million each in tax benefits —which can be taken as a refund or used as write-off against earnings in future years.

The authors of the study, which examined the regulatory filings of the 100 companies with the best-paid chief executives, said that their findings suggested that current United States policy was rewarding tax avoidance rather than innovation.

“We have no evidence that CEO’s are fashioning, with their executive leadership, more effective and efficient enterprises,” the study concluded. “On the other hand, ample evidence suggests that CEO’s and their corporations are expending considerably more energy on avoiding taxes than perhaps ever before at a time when the federal government desperately needs more revenue to maintain basic services for the American people.”

The study comes at a time when business leaders have been lobbying for a cut in corporate taxes and Congress and the Obama administration are considering an overhaul of the tax code to reduce the federal budget deficit.

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Foreign banks complain of ‘Imperialist’ US Tax Rule

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A U.S. law meant to snuff out billions of dollars in offshore tax evasion has drawn the criticism of the world’s banks and business people, who dismiss it as imperialist and “the neutron bomb of the global financial system”.

The unusually broad regulation, known as FATCA, or the Foreign Account Tax Compliance Act, makes the world’s financial institutions something of an extension of the tax-collecting Internal Revenue Service — something no other country does for its tax regime.

Conceived as a way to enlist the world in a crackdown on wealthy Americans evading tax, it gives global financial institutions and investment entities a choice: either collect and turn over data on U.S. clients with accounts of at least $ 50,000, or withhold 30% of the interest, dividend and investment payments due those clients and send the money to the IRS.

Foreign institutions and entities that refuse, or fail, to do so face bills for the taxes due, a draconian penalty of 40% of the amount in question and heightened scrutiny by the IRS.

The legislation that created FATCA was introduced in 2009 by four congressmen during a crackdown on: UBS, the Swiss bank giant that sold tax evasion services. Signed into law by U.S. President Barack Obama in March 2010, FATCA goes into effect on January 1, 2014, for most types of transactions and a year later for other payments.

(Source: www.cnbc.com 19-8-2011)
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Cry for Justices

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Attend to the shortage of judges at all levels on a war-footing.

The impending shortage of judges in the Supreme Court might grab headlines. But it is only the most visible aspect of a problem that ails our entire judicial system, right from the lowest to the highest level: the acute shortage of judges. So, come October, when seven of the judges of the Apex Court are due to retire, the Supreme Court will find itself functioning with less than 75% of its sanctioned strength. The position in High Courts all over the country is no better. According to news reports, with the exception of Himachal Pradesh, there is not a single High Court in the country that is functioning at full strength.

(Source: The Economic Times, dated 7-9-2011)
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Indian varsities missing in top 200 global list

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The world’s second-fastest growing economy does not have an educational institute in the top 200 global list this year. The Indian Institute of Technology (IIT), Bombay — the only Indian varsity that found itself in the Top 200 Quacquarelli Symonds (QS) World University Rankings in 2010 at the number 187 spot — dropped 38 places to 225. Similarly, IIT Delhi fell to number 218 from 202 in 2010 and IIT Madras dropped to 281 from last year’s 262.

The remaining Indian universities featuring in the rankings, including IIT Kanpur, IIT Kharagpur, IIT Roorkee, IIT Guwahati, University of Delhi, University of Calcutta, University of Pune and University of Mumbai, did not find a place in the Top 300 World University Rankings.

Globally, while Massachusetts Institute of Technology (MIT) and University of Oxford bettered their last year’s rankings from five and six to three and five, respectively, Yale University dropped one place from third to fourth rank.

In the Asia list, Japan was the best-represented nation, with five of the top 10 and 57 of the top 200 universities, ahead of China (40) and South Korea (35), Taiwan (16), India (11), Thailand (9), Indonesia (8), Malaysia (7) and Hong Kong (7). Despite its troubled economy, Japan’s universities continued to perform better, with Tokyo and Kyoto each moving up one place to fourth and seventh, respectively. In Singapore, National University of Singapore retained its place in the top three.

(Source: Business Standard, dated 7-9-2011)

(Comment: This is an eloquent testimony of falling standards of higher education in India and therefore the quality of output too. Mumbai University does not find any place at all !)

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Amnesty to tax evaders worries Transparency International

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Amnesty to tax evaders worries Transparency International with the government considering a plan to offer an amnesty scheme for voluntary disclosure of undisclosed bank accounts and assets held abroad, corruption watchdog Transparency International (TI) has expressed concerns about the amnesty to tax evaders. “Implicit in the proposal is acceptance that business corporate houses and individual businessmen have maintained secret bank accounts in foreign countries both by evading taxes and concealing the source of money, which could involve criminal and terrorist activities,” said P. S. Bawa, chair of Transparency International India. The watchdog said the earlier amnesty schemes were premised on the ground that business houses and individuals would learn a lesson, declare income, and pay taxes in future. But, it added, that this has apparently not happened and the hopes of the government have been belied. TI also believed that the present move confirmed the inappropriateness of such schemes that pardoned not only illegal activities and concealment of sources of income, but also evasion of taxes, all of which are punishable under the common and taxation laws. The body said the scheme encouraged tax evaders to continue such practice in the future. “Condoning such opaque activities that are against all norms of transparency, projects the image of the India as a reluctant, soft, and pliable State,” said the press release. TI reiterated that this would be a violation of the basic tenets of the Constitution that provides for rule of law and not executive orders that appear to be arbitrary and in violation of the fundamental right of equality before law.

(Source : www.business-standard.com)
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Twenty years after liberalisation, the list of India’s economic problems is fairly long

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The 20th anniversary of India’s economic liberalisation was celebrated in remarkably studied silence. The odd newspaper article apart, there was no official hubris over the epochal changes undertaken in 1991 by a clutch of reformers, many of whom occupy key positions in the current government. A report by C. Rangarajan, the Prime Minister’s Economic Adviser, throws some light on this extraordinary display of reticence. The message from the former central banker who, alongside Manmohan Singh, untied many of the knots that led to the balance of payments crisis in July 1991: it’s not business as usual in India in July 2011. Graft has paralysed the government and the economy is hurting. Prime Minister Singh cannot ignore this cautionary advice from a fellow reformer and a friend.

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Over 31% SC, HC Judges’ posts vacant

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More than 31% of posts of Judges in various High Courts and the Supreme Court are lying vacant, Law Minister Salman Khurshid said in the Lok Sabha. Of the 895 sanctioned posts of Judges in the Apex Court and 21 High Courts of the country, 284 were vacant as on 1st August, 2011, Khurshid said. The largest number of vacancies is in Allahabad High Court where 98 of 160 posts — more than 61% — have not been filled. Himachal Pradesh High Court is the only one which has no vacancies. The Sikkim High Court is functioning with just one Judge against its sanctioned strength of three.

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Is it time to invoke Cicero?

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“The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, assistance to foreign lands should be curtailed lest Rome become bankrupt. . . . .,” Marcus Cicero, 55 BC. Down the ages, Cicero’s words have fallen on deaf years of sovereigns. Athens is bankrupt.

Washington, the modern-day Rome, is on the brink of bankruptcy. Stocks are falling, leading currencies are losing their worth, and investors across markets are cutting their positions before August 2 when the world will come to know whether the US can borrow more. If it can’t, a default stares in the face of the largest economy that suddenly looks like a ponzi scheme — something dollar-sceptics have been predicting for a decade. But since a lot is at stake the big hope is that US lawmakers will somehow find a away to avert a default by the US.

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Gold is at an all-time high, but not for any rational reason

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What do you say to an asset that has few commercial or practical uses, earns no rents, produces nothing, employs nobody and yields no dividends — but manages to rise nearly 40% in one year? On top of that, this asset has been on a tear away run, its longest surge in the last 31 years, and shows no signs of slowing down. At around INRNaN per ounce, gold is on a roll, though many savvy investors will be stumped if you asked them to explain exactly why. Some might say, after scratching their heads, that gold is a defensive position — the thing to hold when everything around you is turning into dust. Thus, the trendy explanation of gold’s meteoric rise is that it’s a mirror image of what’s happening in developed markets — as the European and US economy looks increasingly shaky, money is fleeing conventional assets and turning, literally, into gold. Which investor, even a sophisticated one, would bet on European currencies now?

Who’d stick their necks out on bonds issued by treasuries that increasingly look like they might go under? When sovereign status begins to sound hollow, people head for the yellow stuff. But why do people buy gold and not tin? Well, some folk are diversifying into silver, palladium and platinum, all of which have become dearer. But why is gold the benchmark of value across cultures and centuries? The Egyptians buried their pharaohs with it, the conquistadors went mad looking for El Dorado in the Amazon forests and Indians have always squirrelled the stuff away in lockers and the bowels of temples. Ultimately, the answer to why we value gold might not lie in rationality, but in its exact opposite: faith. Gold has value simply because so many people collectively share the belief that it does. Without that belief, gold would be about as valuable as, say, tin.

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Five tips top CEOs for young leaders

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1. Ambition is a must have, but don’t let it hurt those around you
— Adil Zainulbhai, MD McKinsey India

2. There is no need to hide your Failure, but you do need to flaunt what you have learnt from it — Harsh Mariwala, Chairman & MD Marico

3. Intellect is good, but combine it with Humility and you have an unbeatable combination. — Nitin Paranjpe, CEO, Hindustan Unilever

4. Generalists are OK, but leaders do need to have a clearly defined area of extraordinary competence — Pramod Bhasin, Non-executive VC, Genpact.

5. Think society, not just business. — Kalpana Morparia, CEO, JPMorgan India

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Greek tragedy

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Homer has stood on his head; it is now the Greeks who have been gifted a ‘Trojan’ horse. The gift is a financial bailout package, so that the country does not default on its international debt obligations. But the Greeks have looked to see what is inside the horse, and they don’t like what they see.

And why is Greece being put through the wringer ? Because the French and Germans don’t want their banks (which own much of Greek debt) to take a bigger ‘hair-cut’. Greece’s first bailout package asked debt-holders to write off 21% of the debt; the market now says the hair-cut should be 60%. If Europe’s banks took that hit, Greece could escape the torture to which its citizens think it is being subjected. Moral of the story: if you don’t manage your economy well, expect to get raped when the ‘rescuers’ come charging in.

It is a lesson to which India should pay heed. India is not in Greek shoes, but some lights are flashing red. Inflation is higher than in most countries; the trade deficit is high and the Reserve Bank of India says it is unsustainable; the budget deficit is both high and probably climbing; and the country’s debt-to-GDP ratio is about twice the average for emerging markets. All these point to poor macro-economic management, not in one or two years but over a longer period. And the world is beginning to take notice. India’s stock market is about the worst performer this year, foreign direct investment has crashed, and the rupee has lost more ground than almost all other currencies.

The government may be about to add to the risks, if the bleeding hearts at the National Advisory Council have their way on the universal provision of foodgrain at a price no more than 15% of that grain’s cost to the government—which means that Mukesh Ambani can get his wheat at the same price as a poor Jharkhand tribal. Both will also get their cooking gas at about half its cost. Other proposed entitlement programmes and subsidies will add to the government’s financial burden. Meanwhile, politicians’ thoughts are turning to the next elections, which means the tap could be opened wider. India’s macro-economic risk levels will then go up.

We are nowhere near Greece’s level of impecuniousness, but if we are not careful we could end up needing some help. Anyone here who likes Trojan horses?

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80% IITians lack quality: Narayan Murthy

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Lamenting the quality of engineers who pass out of IITs, Infosys Chairman emeritus N. R. Narayana Murthy has said there is a need to overhaul the selection criteria to the prestigious technical institutions.

Addressing a gathering of former IITians at a ‘Pan IIT’ summit in New York, Murthy said the quality of students entering IITs had deteriorated due to coaching classes that prepare engineering aspirants. He said save the top 20% who crack the tough IIT entrance exam and can “stand among the best anywhere in the world”, the quality of the remaining 80% of students leaves much to be desired. “They somehow get through the JEE. But their performance in IITs, at jobs or when they come for higher education in institutes in the US is not as good as it used to be. This has to be corrected. A new method of selection of students to IITs has to be arrived at,” Murthy said.

According to Murthy, for IITs to be counted among the best in the world, they must “transcend from being just teaching institutions to reasonably good research institutes”, at par with Harvard and the MIT, in 10-20 years. “Few IITs have done well in producing PhDs, but when we compare ourselves to institutions in the US, we have a long way to go,” he said, adding that the emphasis must be on research at the undergraduate level. He also said exams should test the independent thinking of students rather than their ability to solve problems.

Besides, Murthy lamented the poor English-speaking and social skills of IIT students, saying with politicians “rooting against English”, the task of getting good students was getting difficult. “An IITian has to be a global citizen and must understand where the globe is going,” he observed.

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Senior I-T authorities ignored computer system failure

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The apathy of income-tax (I-T) authorities caused a loss of around Rs.35,000 crore in tax collection in the city. The loss occurred, as information collected by the Department’s Central Information Branch (CIB), was not disseminated to concerned field officials from 2005-06 to 2009-10.

The information gathered by CIB is segregated automatically by the computer system and disseminated to concerned Income-tax Officers (ITOs), who do assessment work or to the investigation wing of the Department, which conducts searches. The Directorate of Systems of the Income-tax (I-T) Department in New Delhi handles the overall computer network system.

A letter, dated May 10, 2010 written by A. C. Tejpal, who was then Director of Income-tax (CIB), Mumbai, to the Indian Audit and Accounts Department, had said that the CIB had since 2005-06 to 2009-10 collected over 11.4 crore pieces of information (on unaccounted income) of which 2,247 were disseminated to concerned officials. It further mentioned that not a single piece of information was disseminated through computer system. In 2,247 pieces of information, the CIB found unaccounted income of Rs.14,758 crore on which total tax payable was Rs.5,000 crore. The CIB Mumbai was trying to get the system rectified since 2005.

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Any amendments must strengthen, not dilute, the RTI Act

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Union Law Minister Salman Khurshid’s remarks on the need to revisit the Right to Information (RTI) Act, on the ground that its purported ‘misuse’ was hampering ‘institutional efficiency’, displays the discomfort amongst the political and bureaucratic classes over an Act that has unprecedentedly empowered ordinary citizens.

The power of the RTI is manifest in the number of scams that have been unearthed by deploying it — be it a citizen seeking details about that perpetually unrepaired neighbourhood road or a multi-crore scam of national proportions.

In her address to the joint session of Parliament in 2009, President Pratibha Patil laid down the government’s agenda to put in place a public data policy that would “place all information covering non-strategic areas in the public domain”. This is fine. If at all there are amendments, then according to the author, it should be those that buttress and consolidate the RTI Act — providing protection for RTI activists and whistleblowers in general rather than seek to dilute it. But, the power of RTI is making our politicians rather uneasy everyday.

The author observes that an opaque state is essentially a colonial vestige, one that is impervious, mysterious in its workings, if not actually hostile towards ordinary citizens. On the other hand we require a state which envisages that disclosure of information is not just a citizens’ right, but also a fundamental duty where citizens can feel part of governance and its workings.

It seems our netas and babus, among others, would prefer the former. This must be resisted. The point is to strengthen democracy, not starve it of information.

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India’s higher education system needs better leadership

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The author has brought out the maladies in higher education system in India. The author comments that the assessment of ‘quality of research,’ the citations index used and the definition of ‘international outlook’ of staff, students and research has a pro-western bias. It is not therefore surprising that an analysis undertaken by UK’s Times Higher Education would list 75 universities from the US and 32 from Britain in the top 200! The perplexing question is therefore raised as to how BRIC countries are doing much better in spite of not having any world-class universities at the top. The question can also be asked if these lists are made to promote western, especially US and UK, institutions as destinations for bright young Asian students who are increasingly able to pay their way into high-cost western institutions. In spite of this, it is a very sad state of affairs that not a single Indian university finds a place in top 200 universities worldwide.

The quantitative growth of higher education in India, witnessed over the past decade — with more institutions, more seats, more posts and, above all, more funding, has not translated into equal qualitative development.

This despite the fact that India’s equally poorly-run schooling system produces hundreds of thousands of world-class pupils every year and many of them go to the best institutions worldwide and do shine. Clearly, India’s higher education needs a fix. It faces a huge leadership deficit with institutions unable to translate higher outlays into better outcomes. The deficit in leadership begins at the very top. For a prime minister who spent a part of his career as a university teacher and also Chairman of the University Grants Commission (UGC), Manmohan Singh has not paid enough attention to improving the quality of leadership in higher education in India. According to the author, the legislation appears to be in place, there appears to be no dearth of funding either public or private, but there is total lack of administrative and political leadership in education. India has been damned by a succession of ideologically oriented or plain bureaucratic leadership in higher education consisting of persons like Dr. Murli Manohar Joshi or Arjun Singh and the present incumbent Kapil Sibal is not steady in the ministry to make any mark. The author therefore states that India desperately needs better academic, administrative and political leadership in higher education.

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A positive appeal — Vote for the best candidate, regardless of religion

In a welcome, even path-breaking move, former RSS supremo K. S. Sudarshan and eminent Muslim cleric Maulana Kalbe Sadiq have issued a joint appeal to the electorate not to vote on religious lines. Instead they want voters to send honest representatives to assemblies and Parliament, regardless of their community of origin. That such a call should come from a prominent Hindutva leader and the vice-president of the All India Muslim Personal Law Board in unison is significant. By making a clear distinction between the politics of good governance and the over-leveraged rhetoric of identity-based mobilisations, the two important community leaders have set the tenor for a new political discourse.

The appeal also gains significance in the light of the forthcoming UP elections. It is in stark contrast to the divisive, vote-garnering strategies launched by political parties. Given UP’s caste-based electoral politics, major and minor political players — the BSP, the Samajwadi Party, the BJP and the Congress — are busy leveraging caste-and religion-based electoral strategies. It’s hardly surprising therefore that Sadiq’s statement has not gone down well with Samajwadi Party leader Mohammad Azam Khan. Apprehensive of losing his party’s share of the Muslim vote bank, Azam has asked Sudarshan and Sadiq to ‘make their agenda public’. With an eye on Muslim support, the Congress and BSP too have already ramped up their demand for Muslim quotas in jobs and education.

(Source : The Times of India, dated 2-11-2011)

Tax Treaties — Revision can’t ensure slush funds’ return

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India’s feat in revising tax treaties with 81 countries, including Switzerland, may not significantly help the government in bringing back the money stashed abroad. It may, though, prove a little helpful in nailing tax evaders who have already shifted their bank accounts from tax havens. Experts agree that the much-hyped treaty with Switzerland, which came into effect recently, could allow for better sharing of information for tax collection purposes. But the larger issue of unearthing black money and checking corruption and money laundering may remain unaddressed for multiple reasons, they add.

Firstly, the provisions of the treaty do not include past banking details — only information after January 2011 will be provided. Secondly, India will have to give specific details of tax evaders to get information about their secret accounts in Switzerland. Seeking information under the treaty would hugely depend upon strengthening revenue intelligence in India where tax evaders have made money. In a treaty, you can’t ask for fishing and roving enquiries. You have to specifically give the details of people about whom information is needed. The Indian government can ask Swiss authorities to collect taxes on its behalf in cases of tax evasion, but can’t insist on repatriation of the money. That has to be done at a diplomatic level. India will have to use its revenue intelligence and tell tax havens about the amount which is due and required to be remitted.

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BMC to make digital records of properties

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To help it calculate property tax better, the civic body is planning to create geolocation-mapped digital records of constructions in the city. The project envisages using high-speed digital single-lens reflex (DSLR) cameras to develop a 360-degree map, which can also be used to detect illegal constructions.

The Brihanmumbai Municipal Corporation (BMC) has chosen N ward, comprising Ghatkopar and parts of Vikhroli, for the pilot project. It will be implemented by a private agency. (Source : Hindustan Times, dated 3-11-2011)

(Comment: One has to wait and watch the progress of the Project as BMC is deeply mired in corruption at all levels. The vested interests shall attempt to scuttle, delay and sabotage the Project.)

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Increase cost on frivolous litigation 3,000% to 1 lakh : SC

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The Supreme Court has suggested a 3,000% hike in the cost imposed on a person indulging in frivolous and vexatious litigation, saying unless it is raised from the current Rs.3,000 to Rs.1 lakh, the system will fail to control false cases being foisted to victimise innocent citizens. A Bench of Justices R. V. Raveendran and A. K. Patnaik, said, “At present, Courts have virtually given up awarding any compensatory costs as such a small sum of Rs.3,000 will not make much difference. We are of the view that the ceiling in regard to compensatory costs should be at least Rs.1 lakh.”

It referred to section 35A of the Civil Procedure Code, which provides for compensatory cost in respect of false or vexatious claims or defence. The maximum amount to be levied on a person indulging in false litigation was amended in 1977 from Rs.1,000 to Rs.3,000.

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Ram Charan seeks greater Chindia role on world stage

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He is often referred to as the CEO coach and has been a strategy consultant to top corporate honchos across the world. He feels that India and Indians are poised to play a big role in the global economic order in the 21st century. After noticing Indian companies getting more aggressive in globalising operations, Charan advocated a more aggressive role by governments of India and China. Charan says the leadership at Indian business houses, and the global exposure of the top Indian management, is the strength behind the country’s rising status in the world. He said it is the right time for Indian businesses to go global and cited acquisitions like Jaguar and Land Rover (by Tata group), Novelis (by Aditya Birla group) and Zain by Bharti Airtel. However, he cautioned that the cross-border push should be accompanied only when there are adequate strategic synergies and “not simply for the sake of going global”. “Before expanding overseas, Indian companies should ask these questions as to why are they going there. Is it to get access to the market, or to gain in distribution, or to get know-how or simply to change the game?”

Charan said it was the global exposure of the top Indian management that was proving to be the country’s strength. On the global financial front, he said the governments of India and China should now prepare themselves to play a more active role as the IMF and the World Bank had not been very effective in tackling economic crisis. “We put in a lot of hard work in creating brands and new products, but when the global financial system goes out of control, it hurts us all.” Charan broadly divides the globe into two distinct zones — north and south. The northern part comprises US and Canada and Europe (on the West) and Russia, Korea and Japan (on the East). Countries like India, China, Turkey and the West Asian comprised the southern part. “The markets of the future are all in the sourthern part,” Charan said. He also spoke extensively on digitisation that he said was leading to faster commoditisation. “Digitisation is shortening the shelf life of companies, it shortens the lifecycle of a business model.”

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Dinosaur Laws — Laws must evolve with the times if societies are to progress

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It is hard to think of a more damaging commentary on our legal system. The Supreme Court has described our laws on land as ‘a testament to the absurdity of law and a black mark upon the legitimacy of the justice system’. The Court was rebuking a government department that had first trespassed on a piece of land and then sought to justify its claim on the grounds of ‘adverse possession’, a form of theft sanctified by archaic colonial laws. Unfortunately, the Apex Court’s observation attracted little attention. Anachronistic laws are all too common. The Land Acquisition Act, that has repeatedly been at the centre of controversy over acquisition of land for large projects, dates back to 1894. Our Civil Procedure Code goes back to 1908, our Evidence Act to 1872 and our Telegraph Act to 1885. There are many more such. Yet, it is a no-brainer that laws must evolve in tandem with society if they are not to become an obstacle in society’s progress.

Unfortunately, this seemingly obvious statement has failed to goad successive governments into action. The net result is we have a host of antiquated laws on our statute books that have no business to be there. They should have been repealed long ago but for government tardiness. What is far more dangerous is that there is always the possibility of some elements using outdated rules for harassment, bribery and rentseeking; and courts often have no option but to hand out rulings based on these laws. The Indian Telegraph Act of 1885, for instance, has been invoked many times by the state-owned Doordarshan to claim telecast rights for cricket matches. Many laws that belonged to the British era have clearly become redundant. But there are others, like the Industrial Disputes Act and the Industrial Development and Regulation Act, that are no less relics of the past. If the recent labour trouble in the Maruti Suzuki factory in Gurgaon was a pointer to the need to rewrite our labour laws and the troubles in Singur to revamp our land acquisition laws, the Supreme Court’s reprimand is a call to recast our laws on an ongoing basis. A vibrant society must have vibrant laws.

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DIPP amends Foreign Investment Policy to allow smooth PE exits

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Bringing relief to the country’s private equity investors, the government has amended the foreign direct investment policy by removing a new clause that did not consider any investment with in-built options such as put options or call options as FDI transaction. Put and call options are the most common route for any PE investor to exit from his portfolio companies. According to the new paragraph (no. 3.3.2.1) that the Department of Industrial Policy and Promotion (DIPP) added in the FDI policy and released on September 30, only equity shares, fully, compulsorily and mandatorily convertible debentures and preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI.

According to PE investors, the new clause was detrimental to the future PE investments in India. The PE investors had met officials of DIPP last week and received a positive nod regarding the removal of the clause. Indian Private Equity & Venture Capital Association (IVCA) said it would continue to follow up the matter with the Department of Economic Affairs (DEA), Finance Ministry and the RBI. “After all, the insertion has been made primarily at the behest of the RBI,” said IVCA president Mahendra Swarup. Following IVCA’s meeting, officials of DEA also agreed that while a decision on this matter was under consideration, any insertion in the policy must only be prospective and not made in retrospective effect applicable to already valid transactions, according to PE investors who are involved in the discussion. (Source : Business Standard, dated 1-11-2011)

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EuroZone debt crisis and impact on India

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What can Europe do to win global confidence in its ability to turn itself around? First, it must accept that its policies of subsidising a high-cost economy must end. For far too long have European governments used public money to benefit private constituencies, ranging from business to farmers to organised labour, and thrusting all manner of non-tariff barriers on the more competitive Asian economies. Second, Europe must either move closer to a political and fiscal union, to enable intra-European transfer of funds, or give up the illusion of a Union and let the nations seek their individual destinies. Both options come with a political price that Europeans must be willing to pay and be seen to be doing so, for the G20 to step in and help. Europeans who seek help from emerging markets do not see the irony: nations with per capita income of less than INR308,784 bailing out economies with per capita income of close to INR1,852,706.
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Team Anna — Even flawed crusaders can win

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The image of Team Anna has taken a beating. Some very un-Gandhian behaviour has been unmasked on the part of Kiran Bedi, Arvind Kejriwal and the Bhushans. But while politicians in the Congress and other parties may laugh their heads off, they must not imagine for a minute that public anger over corruption has diminished one whit. This anger was catalysed and channelled brilliantly by Anna Hazare, but has a force that greatly transcends his Jan Lokpal demand. It will not end with allegations of sleaze. Whether or not Team Hazare makes amends to the public remains to be seen. They will be subject to jeers and sniggers for a long time. Yet, this should not be mistaken for a scam that will end their anti-corruption campaign. Whatever they have done pales into insignificance compared with the thousands of crores being made by politicians.

 It would be nice to have squeaky-clean crusaders. But even flawed ones will do. If Jayalalithaa, with her dreadful record, can be viewed by voters as a means to oust the corrupt DMK, then clearly, India is fertile territory even for flawed crusaders. The key issue is not the purity of Team Hazare, but the impurity of politicians. We need institutional change to penalise law-breakers. The Lokpal Bill is no more than a start. We must overhaul the whole police-judicial system to make India a land with justice.

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India’s economic growth — llusion & disillusion

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Minister of Information and Broadcasting Ambika Soni may vehemently disagree with Azim Premji’s statement that the current government is guilty of a ‘complete absence of decision-making’. But she will be hard put to find any takers for her view that Mr. Premji’s forthright criticism was a matter of ‘perception’ that needed to be ‘rectified’. Certainly her boss Prime Minister Manmohan Singh does not appear to think like her; he has taken on board a letter, sent to him by 14 industrialists on October 10, that broadly echoes his own recent statement that economic progress should not be hijacked by internal dissension.

Mr. Premji’s comment at Wipro’s results press conference on October 31 was essentially a précis of the October 10 letter, to which he was a signatory. Nothing in his comments or the letter — the second in ten months — can be considered ‘perception’, especially when it comes to the second stint of the United Progressive Alliance (UPA). It is a fact, not perception, that no major project has got off the ground in this UPA term, on either environmental grounds or opposition to land acquisition. The infamous ‘no-go’ diktat on coal mining put on hold investments in critical infrastructure investment projects worth Rs.40,000 crore, and a recent decision for caseby- case relaxation can hardly be called policy. True, neither issue should be wished away, but as the letter astutely points out, there is a need to distinguish between ‘dissent’ and ‘disruption’. As for land acquisition and rehabilitation, the issues have become so contentious that no industrialist worth his profits wants to venture into new projects for fear of encountering frenzied farmer agitations. Yet, the government has done little to produce workable solutions, with the long-awaited draft land acquisition and rehabilitation legislation suffering a surfeit of socialism that is unlikely to enthuse industrialists or the land-loser. The industrialists’ letter has expended several paragraphs on corruption, the issue that has exercised middle-class civil society. But unlike the many activists, the letter highlights the burdens corruption imposes on the poor and addresses the issue realistically. Pointing to the need for a well-crafted Lok Pal Bill, it suggests such a law will only address episodic rather than systemic corruption. For that, the letter points out, judicial, land, electoral and police reforms are needed. No one can accuse Mr. Premji and his peers of suffering from perception problems on these issues either. There is a backlog of 31 million cases in the courts, a quarter of the members of Parliament have criminal charges pending against them and the police force is scarcely a model of civic uprightness. These are facts. (Source : Business Standard, dated 3-11-2011)

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Greek dangers

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If there were to be any reason for the government to arrest the policy drift of recent months, it should be the darkening international horizon. Late last week, the International Monetary Fund warned that risks to the global economy have increased.

The possibility of Greece debt crisis morphing into something more contagious cannot be ruled out. Japan is still struggling with spending cuts after the nuclear accident there. Look anywhere — US spending, China’s housing boom going awry and elsewhere — chances are that the global economy is on the edge again.

It makes much sense to set one’s own house in order. India needs to set many things right — from fuel pricing to inflation to deficit spending. It is, of course, in no way comparable with the Greek situation. And that is not the point. The issue is to be prepared to face uncertainty in the world economy and also any unforeseen external shocks.

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