Category: News And Views

India does have serious problems. Every commentator today highlights India’s poor infrastructure, excessive regulation, small manufacturing sector, and a workforce that lacks adequate education and skills.

These are indeed deficiencies, and they must be addressed if India is to grow strongly and stably. But the same deficiencies existed when India was growing rapidly. To appreciate what needs to be done in the short run, we must understand what dampened the Indian success story.

In part, India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus that its policymakers injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared. So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.

Moreover, India’s institutions for allocating natural resources, granting clearances and acquiring land were overwhelmed during the period of strong growth. India’s investigative agencies, judiciary and press began examining allegations of largescale corruption. As bureaucratic decision-making became more risk-averse, many large projects ground to a halt.

Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed. Once restarted, it will take time for these projects to be completed, at which point output will increase significantly.

Finally, export growth slowed, not primarily because Indian goods suddenly became uncompetitive, but because growth in the country’s traditional export markets decelerated.

The consequences have been high internal and external deficits. The post-crisis fiscal stimulus packages sent the government budget deficit soaring from what had been a very responsible level in 2007-08. Similarly, as large mining projects stalled, India had to resort to higher imports of coal and scrap iron, while its exports of iron ore dwindled.

An increase in gold imports placed further pressure on the current-account balance.

For the most part, India’s current growth slowdown and its fiscal and current account deficits are not structural problems. They can all be fixed by means of modest reforms. This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade. But India does not need to become a manufacturing giant overnight to fix its current problems.

The immediate tasks are more mundane, but they are also more feasible: clearing projects, reducing poorly targeted subsidies and finding more ways to narrow the current account deficit and ease its financing.

Every small step helps, and the combination of small steps adds up to large strides. But, while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement.

Indeed, despite its shortcomings, India’s GDP will probably grow by 5-5.5% this year—not great, but certainly not bad for what is likely to be a low point in economic performance. The monsoon has been good and will spur consumption, especially in rural areas. The banking sector has undoubtedly experienced an increase in bad loans; but this has often resulted from delays in investment projects that are otherwise viable. As these projects come onstream, they will generate the revenue needed to repay loans. In the meantime, India’s banks have enough capital to absorb losses.

Likewise, India’s public finances are stronger than they are in most emerging-market countries, let alone emerging-market countries in crisis. India’s external debt burden is even more favourable, at only 21.2% of GDP (much of it owed by the private sector), while short-term external debt is only 5.2% of GDP. India’s foreign-exchange reserves stand at $278 billion (about 15% of GDP), enough to finance the entire current account deficit for several years.

That said, India can do better—much better. The path to a more open, competitive, efficient, and humane economy will surely be bumpy in the years to come. But, in the short term, there is much low-hanging fruit to be plucked. Stripping out both the euphoria and the despair from what is said about India—and from what we Indians say about ourselves—will probably bring us closer to the truth.

By their very nomenclature regulators regulate, which many mock to mean strangulate industries. In many cases, regulators focus on keeping private players in check, thinking of them as rapacious booty hunters who need to be tamed, confirming the suspicion that the government never really accepted the private sector as a dynamo of growth. What India needs in the form of regulators are bodies that focus on promoting and developing industry. For if industries develop, there are more tax revenues for the government, more jobs for the people, and more social and economic goals.

This would in turn propel industrial growth and start a virtuous cycle of prosperity. Regulation cannot become shorthand for controlling power tariffs. Equally, the proposed coal regulator should overhaul the defunct and destructive policy of reserving coal production for the inefficient public sector and not become an excuse to “regulate” prices, production capacities, import quotas and the like.

The primary role of regulators must be to ensure that the country’s resources are exploited efficiently and transparently for the benefit of industry and thereby people. Transparency demands that resources are allocated using ascending or single-step auctions, or tenders, not via opaque “administered methods” or “First Come First Served” which lead to corruption and hence must be banned.

Pricing must be remunerative, for only a profitable company can continue investing and exploring. Keeping prices and margins low, and crippling industry doesn’t serve anyone’s purpose, least of all the government’s. Domestic production of gas will increase, lowering the need for imports and easing the balance of payments position.

Regulators must of course always protect consumers. For if consumers suffer, industry suffers. Indeed, the whole reason for setting up SEBI came from the securities fraud of the early 1990s.

A fine balance between protecting consumer and corporate interests is required. The regulator often has to shield industry from the government’s faulty policies, just like the Supreme Court has to shield people from laws that violate the Constitution. A development oriented regulator must have the authority to question government policy, forcing it to make amends as and when required.

Unlike China, Hong Kong, Taiwan, Singapore, Korea, Malaysia, South Africa and Brazil. (Source: The Economic Times dated 13-09-2012) 120 (2012) 44-B BCAJ (Comment: We do not promote meritocracy in India. Politics of reservation in all walks is a big hindrance to promotion of meritocracy.)

Remember, GAAR was always proposed to be part of the new direct taxes code, which was supposed to be in force by now. What additional preparation time will three years gain? It merely kicks the responsibility for introducing GAAR and calming market participants over to the next government. It strains belief to assume that, by that time, distrust of the income tax authorities will have ended. GAAR needs to be redrafted to ensure that excessive discretion is minimised — but six months is long enough to do that. The new tax policy should be in place by the next Budget. To try any less hard would be to betray the core purpose of GAAR: to serve as part of a co-ordinated, international crackdown on the sources and destinations of unaccounted-for and tax-avoiding money. This was a compact between the countries of the G20 post the financial crisis, when government resources were crucial to staving off the worst that could happen; and it is clearly something that voters desire. The government should do it properly, and do it now.

Some other aspects of the recommendations are equally questionable. For one, there is insufficient recognition that the incentivisation of “foreign” investment from Mauritius must end. The tax treaty that India currently has with Mauritius must be renegotiated, and the grandfathering of investment made under more lax rules must not also perpetuate the “evergreening” of tax-free pipelines even after laws change. Entities investing in India must be properly regulated, even if in low-tax environments like Singapore, and should meet more stringent know-your-customer requirements than has hitherto been expected of those from Mauritius. The “Mauritius route” is unsustainable, and must be closed. A clear timeline and method to do so must be laid out.

Finally, there is the question of tax on short-term capital gains from listed securities, which the panel suggests be ended. This – yet another attempt to boost listed securities as destinations for India’s savings – is problematic in isolation. However, the Shome committee suggests that securities transaction taxes receive a compensating hike, in order to ensure no loss of revenue to the government. That has some points in its favour: a securities transactions tax does have the advantage of ensuring that more people come into compliance with the law. It serves as an incentive against speculation. It is simple. These are all positive qualities. In the end, it must be remembered that India’s tax system is starkly regressive, and taxation is too easy to avoid. The concerns of equity must be borne in mind when designing taxation. GAAR is an essential tool towards equalizing the tax burden, and must not be watered down beyond recognition.

Certainly, the main opposition party should seek answers from the government on important issues, including corruption. However, the place for such interrogation is Parliament. The BJP is also within its rights to disagree with government initiatives, be it subsidy reduction or retail reform. But to come across as neither interested in debate nor offering alternatives to the policies it bashes, doesn’t bolster the party’s image. The BJP seems more concerned with destabilising the government than with resolving issues.

Why does the BJP limit its critique of the diesel price hike or retail reform to making noise? Surely, it should also prescribe how it thinks India should promote much-needed fiscal consolidation. Petrol prices rose several times under the tenure of the NDA, which endorsed price decontrol in 2002. Nor was the NDA hostile to retail reform, as pointed out by commerce minister Anand Sharma. Opposing multi-brand retail FDI today, the BJP must explain how else investors can be made to help boost the agri-value chain. Or how direct contact between farmers and buyers could be facilitated to raise farm incomes and lower prices for consumers.

When ruling at the Centre, the NDA brandished pro-growth policies to claim India was shining. Today, the BJP comes across as wilfully disowning a modern economic vision in tune with fastglobalising India. Tomorrow, if it comes back to power, can it afford to blink at reforms and let the economy go further down the tube? It’ll also serve the nation better by providing constructive opposition rather than fuelling political uncertainty.

Researchers at Rensselaer Polytechnic Institute showed that exposure to light from computer tablets significantly lowered levels of the hormone melatonin, which regulates our internal clocks and plays a role in the sleep cycle. In the study, published in the journal Applied Ergonomics, the researchers had volunteers read, play games and watch movies on an iPad, iPad 2 or PC tablet for various amounts of time while measuring the amount of light their eyes received.

They found that two hours of exposure to a bright tablet screen at night reduced melatonin levels by about 22%.

Once this comes into force, the employee concerned and also the company’s management could face imprisonment of upto seven years. It is likely that the proposed IPC amendment would be broad based and, in addition to bribes given to public officials, will also cover bribes within the private sector (such as company A, a supplier, bribing an official in company B to bag huge orders).

 All engineering colleges and stand-alone business schools are regulated by the All India Council for Technical Education (AICTE). Business schools under universities are regulated by the University Grants Commission (UGC). The AICTE has thus far focused exclusively on fattening the supply pipe of engineers and MBAs. The logic is that India’s higher-education enrolment ratio is very low compared to other emerging countries; to improve that, the AICTE has been liberal with approvals. This strategy is turning counterproductive. The AICTE should now focus on the quality of education imparted.

Employers complain that the output of engineers and MBAs is poor because the teaching faculty is weak. Engineering colleges and business schools, in turn, say that’s because the salaries are regulated by the AICTE, which keeps them from hiring good teachers. While the norms for engineering colleges are fairly stringent (not less than 2.5 acres of land, at least one acre of land for every 300 students, working capital of at least Rs 1 crore and a studentteacher ratio of not more than 15), those for business schools are lax: 20,000 square feet of built-up area, seven faculty members, 20 computers, 2,000 books in the library and subscription to 30 journals. The lack of entry barriers has caused the glut and the consequent fall in quality. These are issues that the AICTE needs to address urgently.

The crucial reform this sector needs is more effective legislation. Legislative initiatives like the Higher Education and Research Bill, 2011, which seeks to replace the AICTE and the UGC with a commission responsible for ensuring quality, and the National Accreditation Regulatory Authority for Higher Educational Institutions Bill, 2010, which will make it mandatory for all institutes of higher education to be accredited by an independent agency, have not made much headway. Unfortunately, in another craven surrender to its allies, the government reportedly withdrew the latter Bill – two years after its introduction – on Tuesday, because the Trinamool Congress had objections. Surely these objections were not new? If so, why has the human resource development ministry waited for so long to review the Bill? Such lack of seriousness in reform will only worsen the sector’s crisis.

Health minister Ghulam Nabi Azad informed the Rajya Sabha about the steps taken to counter this situation. Among other things, the government has relaxed norms for establishing new medical colleges in terms of faculty, land and other infrastructure. It has also relaxed the student/teacher ratio in postgraduate classes and raised the intake capacity at the undergraduate level from 150 to 250. The result will be more doctors, but given the dilution on various counts, it could very well mean poor-quality ones. This is inadequate medicine for an already sick healthcare system.

The Supreme Court stated that 37 years of prosecution is not sufficient in itself to conclude that the accused people have been deprived of their fundamental right to speedy trial.

If this is so in criminal cases, the record of civil courts is worse. Property and partition suits take a lifetime of visiting the courts. In a judgment delivered by the Delhi High Court last week, delays in arbitration was the main argument for quashing the award (Oil India Ltd vs Essar Oil Ltd).

The Supreme Court has dealt with this problem in one of the leading cases, ONGC vs Saw Pipes Ltd (2003). It stated that “it is for the parties to take appropriate action of selecting proper arbitrator(s) who could dispose of the matter within reasonable time fixed by them. It is for them to indicate the time-limit for disposal of the arbitral proceedings. It is for them to decide whether they should continue with the arbitrator (s) who cannot dispose of the matter within reasonable time.”

Long delays keep important issues out of sight and out of mind. For instance, some urgent questions in arbitration law have been referred to a Constitution Bench of the Supreme Court in the 2002 Bhatia International case, but the court has shown no haste to resolve them. Instead, it gave precedence to the problem of incorrect legal reporting mooted by an offended foreign telecom major, and spent two months over it.

There are several economic issues crying for early court decision for decades. These gross cases render the rubric of speedy trial mere rhetoric. Who remembers the appeal lying in the Delhi High Court about the attempted murder of a former Chief Justice of India? It was there for nearly four decades. The trial in the 1993 Bombay blast cases is trundling along in the special court, with no end in sight. All these will climb up the judicial ladder in due time. But remember, no grumbling, and inordinate delay will not be heard as a ground to close the dog-eared files.