Today's Editorial 31 August 2014

                 A step back

Source: By Salman Haidar: The Statesman
After what looked like a promising new start, India-Pakistan relations have seesawed back into familiar discord. Prime Minister Modi had opened new possibilities when he invited Mr Nawaz Sharif among other leaders of the closest neighbours to his inauguration. Mr Sharif came to the event, which was an important gesture from him, and all accounts suggest that the meeting between Mr Modi and him outside the formalities of the investiture went well.

There were follow-up signs to raise expectations, the most important being the revival of official dialogue, after a break of a couple of years. Following this, the foreign secretaries of the two countries were all set to meet in Islamabad when Mr Modi abruptly called it off, thus putting into cold storage something that his own initiative had done much to bring about. What caused this to happen and what could be its longer-term consequences are issues that have been under discussion ever since.

The provocation for calling off the talks was the Pakistan High Commissioner’s invitation to Hurriyat separatists from J&K to meet him just as the official talks were about to be convened. New Delhi regarded this as unwarranted interference in India’s internal affairs, and found it significant enough to warrant calling off the meeting. Many in India applauded, as they tend to applaud any similar show of strong-mindedness directed against the neighbour, while others felt that though the invitation to Hurriyat was ill judged, it was of little practical consequence and should not have provoked so strong a reaction. This division of opinion in dealings with Pakistan is familiar, with some intent on showing adamancy towards the neighbour in the belief that this is the way to solve problems, while others take the view that there is no escape from engagement and dialogue. In the short time since he assumed office Mr Modi has shown inclinations in both directions, initially giving the green light for talks and later putting on the brakes. Such veering from one tendency to the other is not unusual in Indo-Pak affairs, where the unexpected comes up all too often and unsettles well-laid plans for dialogue.

In view of the inherent changeability in the situation, it would be premature to conclude that the door to dialogue is now firmly locked for the duration. There will be more than one opportunity later this year itself for the leaders of the two countries to meet should they so desire; they are both expected to attend the forthcoming session of the UN General Assembly so they will be in New York at the same time and some believe that would be a good time for them to repair the damage, though right now that looks like nothing more than wishful thinking. But even if high-level contact is not feasible and exchanges remain at low ebb, there is a good deal of cross-border activity which needs regular consultation. And the whole agenda of  ‘composite dialogue’ remains on the books, something that was first put together as long ago as 1996, has been discussed on many occasions, and remains a mutual commitment. Thus the structure of dialogue remains in place and can be revived whenever the two sides so desire. The present setback need not be decisive.

While it was Mr Modi’s decision that the talks should be called off, one must also consider why the Pakistan HC found it necessary to invite separatist figures from J&K to come to see him. He would no doubt have been acting on instructions and would have been well aware that his invitation would create misgivings in New Delhi, though he may not have anticipated how strong the reaction would be. It cannot be gauged how and why it was decided to invite Hurriyat at a time when Mr Modi was barely into his stride and had shown openness towards developing relations with Pakistan: to push J&K affairs on him in this fashion at this stage was to invite disagreement and failure; and it only expanded the disagreement to argue as the HC did that there was need to go beyond governments and bring  ‘all stakeholders’ into the frame.

Beyond bilateral matters alone, one needs to note the emphasis on regional affairs associated with Mr Modi from the time of his assumption of office. He is almost unique among India’s Prime Ministers in directing attention to the neighbourhood before reaching out to the wider world, and it has seemed that this may well become the hallmark of his foreign policy. Among his predecessors perhaps only Mr I.K.  Gujral gave comparable prominence to regional and neighbourhood affairs with his ‘Gujral Doctrine’.  In pursuit of this goal of stronger regional emphasis, India would need to work together with all the near neighbours, especially Pakistan, so that the region becomes the launching-pad for the kind of active foreign policy to which Mr Modi seems to aspire. There is thus a significant strategic dimension to regional affairs.

As expected, Pakistan has been disappointed and also angered by the brusque cancellation of the official talks. But it is presently engulfed in a political crisis that has left little room for anything to do with external relations.  Opposition leader Imran Khan, supported by prominent cleric Tahir ul Qadri, has brought activity within the government to a standstill and the centre of Islamabad has for days been at the mercy of large numbers of demonstrators demanding the removal of the Prime Minister. The prolonged confrontation has had the effect of weakening the structure of the state itself, or so one would judge from the unceasing commentary in the Pakistani media on the features and the significance of these events.

While it is difficult to judge where all this might be leading, one of the important results of the widespread confusion and disorder is that the army has once more become a visible factor in the affairs of state. For some time now, the army has kept a low profile in Pakistan, deferring to Parliament and the law courts. But now it has become more visible, drawn in perhaps by what looks like the inability of the civilian leadership to bring matters under control.

With these developments, bilateral as in the cancellation of official talks, and internal to Pakistan, where turmoil has left little space for initiatives abroad, what looked for a while like a bright dawn in India-Pakistan affairs has faded rather rapidly. No early improvement seems likely but a little further down the line, if matters settle down as many people hope they will, a fresh effort to address the age-old issues may become possible.

Today's Editorial 30 August 2014

     Mitigating FTA challenges

Source: By Biswajit Dhar: The Financial Express
This year, India completes a decade of intensive engagement with its economic partners through the bilateral Free Trade Agreements (FTAs). The commencement of the negotiations with the 10-member Association of South East Asian Nations (ASEAN) in 2004 for an FTA covering the goods sector was a significant step for the country’s engagement with the global economy. The Agreement marked a departure from India’s erstwhile position regarding bilateral/regional agreements. Until its engagement with the ASEAN in 2003, India was almost unequivocally wedded to the multilateral trading system. The only aberrations came in the form of the bilateral deals with immediate neighbours in the South Asian region. India’s preference for the multilateral trading system was aptly reflected in a discussion paper on regional trading arrangements (RTAs) that it had tabled in the early days of the Doha negotiations. In this paper, India argued that “the multilateral framework for international trade under the WTO-rule-based system needs to be strengthened by addressing issues of concern emerging on account of formation of such a large number of RTAs, including their impact on development”. These views regarding RTAs, clearly those of an outlier, changed quite dramatically with India’s engagement with the ASEAN.

The India-ASEAN FTA is also significant because it has emerged as the corner-stone of India’s “look east” policy. The FTA was conceived as a part of the 2003 Framework Agreement on Comprehensive Economic Cooperation between India and the ASEAN. This Framework Agreement set out the roadmap for deepening economic cooperation between the two sides through the establishment of an India-ASEAN Regional Trade and Investment Area (RTIA). The RTIA was to be realised through progressive elimination of tariff- and non-tariff barriers in almost all trade in goods and by progressive liberalisation of trade in services with substantial sectoral coverage. At the same time, the partners agreed to establish a liberal and competitive investment regime that facilitates and promotes investment within the India-ASEAN RTIA. The negotiations were initiated with rather ambitious targets: the deal on trade in goods was scheduled to conclude by June 2005, while the negotiations on services and investment, which were to be initiated immediately after the conclusion of the agreement on goods, were to be concluded by 2007. The negotiations went well beyond these timelines: the goods agreement became operational only in 2010 and although the negotiations on services and investment agreements were concluded at the end of 2012, they are yet to be implemented.

India’s bilateral/regional economic engagement has undergone a complete transformation since then. It is now one of the most active countries in terms of the engagement with partner countries for comprehensive economic partnership agreements (CEPAs), which have replaced the FTAs. Thus far, CEPAs have been concluded with Singapore, Malaysia, Japan and Korea. Several significant ones —including ones with the European Union (EU), Australia, New Zealand, Canada and Indonesia—are in the pipeline.

Perhaps the most significant agreement that India is currently negotiating is the Regional Comprehensive Partnership Agreement (RCEP). The RCEP will be a mega regional agreement that includes the ASEAN members, India, Australia, New Zealand and the three North Asian countries (China, Japan and Korea). In 2013, RCEP members accounted for nearly a third of the global merchandise trade and a fourth of the global trade in commercial services.

These bilateral/regional initiatives seem to support the view that they would complement the global trade liberalisation agenda of the WTO. The growing number of countries formalising bilateral trade deals and the nature of such agreements support this view. Gone are the days when bilateral deals used to be free trade agreements aimed at reducing and/or eliminating import duties on goods. Recent agreements are more “comprehensive” in their coverage. Not only do they include a number of areas that are monitored by WTO; they include issues that do not figure in the Doha Round. For instance, the CEPAs that India is negotiating include investment, an area that was excluded from the Doha Round; and in the agreement being negotiated with the EU, government procurement is included.

What is India’s experience with implementing these FTAs/CEPAs? A preliminary assessment of these agreements indicates that India has not been able to sufficiently leverage these agreements to increase its presence in the markets of its partners. In most cases, the shares of India’s merchandise exports to its FTA/CEPA partners have either stagnated or have declined since the middle of the previous decade, which roughly coincides with the period when the government entered into the agreements. Overall, the share of Indian exports to FTA/CEPA partners declined from nearly 38% in 2004 to 33% in 2012.

Disconcertingly, the share of India-manufactured goods in the total exports to all the FTA/CEPA partner countries has declined. In the case of ASEAN, the share of manufactured products in the export basket has declined from over 58% in 2005 to less than 44% in 2013, while in the cases of Japan and Singapore, the decline has been from over-50% to around 36% in the same period.

India’s inability to penetrate into the markets of its partners implies that it continues to remain a marginal player in most of these markets. With the exception of Singapore, India’s share in the partner countries’ imports show either little improvement or actual decline. In three of these cases, India’s share is yet to reach 1% of the trade partner’s total imports. These figures are clear indications that India has been unable to benefit from its economic integration with one of the more dynamic regions of the world.

Data show that while India was unable to find market access in partner countries, imports from them remained relatively high. For instance, the trade deficit with its partners as a percentage of India’s exports was nearly four-times, while in case of Korea, the corresponding figure was more than two-times. The terms of India’s engagement with its trading partners has worsened over the past few years.

In light of the above, questions have arisen about India’s preparedness to either take advantage of the opportunities offered by the FTAs/CEPAs or to meet the challenges they have posed.

India’s indifferent performance has evoked strong reactions from the government; the more dominant view is that these agreements must be reviewed. It is yet not clear, however, as to when and how the reviews will be undertaken. But at this juncture, the need is to adopt a more prudent two-pronged approach. First, to identify the weaknesses in the domestic economy causing inefficiencies in the productive sectors, and to find ways of removing them expeditiously; secondly, effective engagement with the partner countries to ensure removal of the market-access barriers that they have employed, especially the non-tariff barriers in goods and the regulatory barriers in services, which have adversely impacted Indian exports. The contours of India’s negotiating strategy must emerge from this exercise.

This is the most opportune time to carry out such an exercise. Some of the CEPA negotiations, especially the RCEP, are entering a critical phase, and India must effectively articulate its interests (offensive as well as defensive), on all the critical issues, at the negotiating table.

Today's Editorial 29 August 2014

                      Untangling a knot

Source: By S N Chary: Deccan Herald
When the newly anointed prime minister Narendra Modi invited the Saarc leaders, significantly including the Pakistani prime minister Nawaz Sharif, for his oath-taking ceremony in New Delhi about three months ago, most Indian people and particularly much of the Indian media went gaga over this invitation calling it a ‘master stroke’ of diplomacy. Anticipation grew that this would follow an upswing in Indo-Pak relations. Us Indians, of the land of Mahatma Gandhi, believe in the power of ‘Gandhigiri’ (Gandhism in action) and ‘Jadoo ki Jhappi’ (magical embrace); at least we seem to take pride in the ‘elevated’ thought process behind it.

However, nothing of that sort of magic seems to have happened, in this case. Instead, recently Pakistani high commissioner in Delhi met with the Kashmiri separatist leaders from both the Gilani and Mirwaiz factions of the Hurriyat despite our government’s loud advice (warning) to Pakistan to ‘either choose dialogue with India or the Hurriyat’. In a huff, our ministry of external affairs cancelled the impending Indo-Pak secretary level meeting. From a ‘Jhappi’ and/ or a warm handshake our government has now done a volte face. So, did we really believe in Gandhigiri? One wonders.

Pakistanis on their part are now making the matters worse by violating the ceasefire on the line of control in Kashmir. There have been scores of firings from across the LOC in the RS Pura and Akhnoor sectors in Jammu &Kashmir at this time of writing. In our country, people keep wondering as to why Pakistan should keep adopting such a belligerent stance despite our friendly overtures. If a warm embrace or handshake does not work, we think that surely economic incentive will work. We have been thinking that giving easier market access to goods from either country – Pakistani goods in India and vice versa – would be a great economic move which would lure the Pakistanis into becoming less confrontational. It is said that the IndoPak bilateral trade currently at around US$ 3 billion, can scale up to $10-12 billion in the years to come provided India and Pakistan behave with each other keeping this economic rationality. However, Pakistan does not seem to buy this line of thinking. Of course, we Indians forget that this bilateral trade is loaded heavily in our country’s favour; most of the trade involves Indian goods finding Pakistani markets.

As far as Pakistan is concerned, the problem of Kashmir is central to its existence. The very rationale of partition was based on religion and there have been no pretensions regarding the status of the non-Islamic population in that country. By this token, they believe that Kashmir that has a majority Muslim population should have joined Pakistan. It is the Maharaja of Kashmir and then the Indian union that have been responsible for the current state of affairs of Kashmir.

Futile attempts

If they acquiesce on Kashmir, the very basis of Pakistan as a nation may be in jeopardy. Therefore, neither friendly words, hundreds of bilateral talks at various inter-governmental levels, nor economic and trade incentives are going to radically change Pakistan’s attitude towards India.

The part of Kashmir that is with us has been a source of worry and constant bickering for us mainly because we have not truly integrated that part with the rest of the country. Today a few Manipuris may feel that India is ill-treating them; a few Nagas may feel like having a separate Nagaland. Some Assamese may still feel disgruntled. However, despite all problems, these states are ‘integrated’ economically and politically with all of us in India. Such is not the case with Jammu & Kashmir mainly due to Article 370 of the Indian Constitution that grants J&K a special status whereby it has its own ‘permanent residents’ unlike in any of the other states of the Indian union.

It is some kind of a state within a state – a kind of ‘autonomy’ already granted to it at its birth. Only the permanent residents of J&K have a right over the land in that state – a restrictive property ownership law that has done much economic harm to that state than any good.

Although the historic conditions under which Article 370 was promulgated have ceased to exist decades ago, India has continued to retain this artificial and temporary constitutional provision in the portion of J&K that is with us. After the accession of J&K to the Indian union, Pakistan occupied a considerable portion of that state. Article 370 cannot be held valid for our J&K state that is only a truncated part of the original kingdom that joined the Indian union. Add to this the control of the Aksai Chin area, a considerable portion of land, by China. Thus, the parties in Kashmir have also changed.

The idea behind the removal of Article 370 shall be to hasten the process of full integration of the J&K state and its people with India. We can very well imagine the economic progress that J&K can make when it receives investments from all over India. Today economically speaking, the state of J&K is tied hand and foot.

Once the people of Kashmir experience economic growth, separatist movements may slow down and eventually vanish. It is possible that seeing the growth on Indian side, the Kashmiris on the Pakistan-occupied portion too may reconsider their status. Former Chief Minister of J&K Farook Abdullah’s statement made sometime earlier that “No right minded person in J&K would like to join either the failed state of Pakistan and/or separate from the economically thriving India” is very pertinent even in this regard.

If Indian government shows statesmanlike courage and integrates J&K ‘heart and soul’ with India, the antiquated basis of Pakistan would be jolted. Perhaps that will propel it into political modernity and into a truly joint program of action on the economic and social progress of the two nations together.

Today's Editorial 28 August 2014

     Environmental studies

Source: By Rudrashis Datta: The Statesman
Our tryst with environmental education is as old as our scriptures. The first major step to weave such a system of learning into the fabric of our educational curriculum was undertaken by Mahatma Gandhi through his seminal scheme of nai talim or ‘new education’ in 1937. Though his radical approach lost steam in independent India largely due to the demand for a more westernized curricula, his emphasis on the role of environmental awareness in basic education is relevant to this day.

India was the first country to formally integrate the concept of education with the environment of the learner. The Education Commission recommended as early as 1966 that ‘the aim of teaching science in the primary school should be to develop proper understanding of the main facts, concepts, principles and processes in the physical and biological environment.’ However, when it comes to maintaining the  initiative, we lack the wherewithal to convert pioneering vision into reality. The fact that the realization of the Education Commission achieved little on the ground can be attested by the fact that two decades later, the National Policy on Education, 1986, stated that   “there is a paramount need to create a consciousness of the environment. It must permeate all ages and all sections of society, beginning with the child. Environmental consciousness should inform teaching in schools and colleges. This aspect will be integrated in the entire educational process”.

However, the observation remained largely confined to the backyard of our education curriculum until the Supreme Court directed on 22 November 1991 that “through the medium of education, awareness of the environment and its problem related to pollution should be taught as a compulsory subject”.  On 18 December 2003, the court further directed that NCERT prepare “a module syllabus to be taught at different grades”. The National Focus Group on Habitat and Learning (2004) set up by NCERT further fine-tuned the theoretical and practical elements of the curriculum related to environmental education. All national and state-level examination boards have adopted environmental studies as a compulsory course in school and first-degree level education.

In contrast, most countries had a viable environment education policy in place in the 1990s. The United States, for example, passed the  National Environmental Education Act in 1990, which stated that  “threats to human health and environmental quality are increasingly complex, involving a wide range of conventional and toxic contaminants in the air and water and on the land” and that “there is growing evidence of international environmental problems, such as global warming, ocean pollution, and decline in species diversity, and that these problems pose serious threats to human health and the environment on a global scale”. The Act paved the way for the setting up of Green Ribbon schools under the Department of Education which focuses on reducing carbon footprint in learning environments while encouraging and financing alternate energy initiatives in schools. In the United Kingdom, the National Association for Environmental Education, an organization of teachers and lecturers, has been working for the last 50 years to provide academic and material support to learning initiatives in schools in an environment-friendly manner. Even in Bangladesh, environment education has been linked to community development through the Comprehensive Village Development Programme, thereby diversifying the scope of environment education from the curriculum to real-life conditions.

Interestingly enough, the Seventh World Environment Education Congress held in Morocco in 2013, which had the theme ‘Environment Education in Cities and Rural Areas: Seeking Greater Harmony’, has called for the diversification of conventional environment education initiatives into sustainability issues such as “relationships among diverse cultures, ways of knowing and being in the world, literacy and oral tradition, education, storytelling and learning that is informed and linked to cultural heritage.” In other words, the conventional approach to environment education, which has involved mindless formulation of theories, is beginning to experience a transition to the practical aspect ~ a transition that is meant to touch and transform more lives on a universal scale.

In contrast, the National Curriculum Framework, devised in 2005 by NCERT as an attempt to give a general national direction to school education in India and followed by most state boards of education is still stuck in the environment education scenario where theorizing about the environmental precepts and rote learning of phenomena defines a child’s awareness.  A cursory glance at the syllabi and evaluation questions of environmental education across the nation will underscore the fact that students memorize selected theories and re-produce them in the answer papers. Clearly, this defeats the very spirit of the introduction of the subject in school. In contrast, almost a decade back, United Nations Environmental Programme’s   “Strategy for Environmental Education and Training” warned against such environmental pedagogy by asserting that “environmental awareness raising initiatives are often unstructured and do not follow the basic principles of environmental education. Often such initiatives target people with specific messages aimed at changing their attitudes and behaviours without an understanding of the context of their daily lives. Such approaches to environmental awareness-raising fail to achieve their goals and often hinder other environmental education processes.”

Equally disconcerting is our general neglect of training teachers of environmental education. Apart from a few discussion papers, dense with vague generalizations and abstract theorizing, there is little at the policy level to devise appropriate training mechanism for teachers in environmental education. This, despite the fact that UNESCO had published an exhaustive teacher-training manual titled “Strategies for the Training of Teachers in Environmental Education” way back in 1987. In contrast, the general practice, regrettably, in our educational institutions is to depute a teacher with a background in biological science to ‘manage’ environmental education classes in most schools across the country.  These teachers lack specialized training to handle environmental education holistically.

The United Nations had declared 2005-2014 as the decade of sustainable development. The decade witnessed landmark progress in the areas of environment and sustainability across the world. Theorizing had given way to concrete environmental initiatives in the classroom.  Environmental education is an area that has evolved continuously over the past decade. However, our environmental education classrooms have lagged behind both in theory and in its practical aspects. Theoretically, the syllabi is outdated and has failed to keep pace with the times. On the practical front, our students have hardly any operative knowhow of the mechanisms of environment and sustainability. Framing an effective environmental education curriculum in an era of rapid evolution of the discipline requires agility, vision and the will to transcend red tape. Abstract theorizing and devising of instructional strategies without considering local sustainability factors can undo the efforts towards universalization of environmental awareness. Environmental education begins in the classroom but is sustained, fine-tuned and perfected outside its walls. The earlier we adopt this precept in terms of strategy, the better it will be for the quality of our existence and the onus lies on all stakeholders to move collectively towards this objective.

Today's Editorial 27 August 2014

            Partisan Commission

Source: By Prasanna Tantri: The Financial Express
In his maiden Independence Day speech, Prime Minister Narendra Modi clearly indicated that the Planning Commission will cease to exist. It is likely to be replaced by a new institution with adequate representation to the states. Careful academic research has clearly shown that resource allocations made through the commission tend to have political overtones and favour states which are politically important to the ruling dispensation. Therefore, this is one measure about which even the opposition parties have little to complain about.

Stuti Khemani, who works with the development research group of the World Bank, in her scholarly article published in the Journal of Development Economics, investigates if the fiscal transfers made by the Centre via planning commission are politically motivated. She studies such transfers for a period spanning 23 years, between 1972 and 1995. Such transfers are extremely critical to the states because in the period under study, central government transfers constituted nearly a third of state revenue. Transfers made through the Plan panel constitute 6% of the total revenues of the states and 51% of the state borrowings. The paper shows that “affiliated states”, i.e., states ruled by the same party that rules at the central level, receive a higher proportion of the resources that are directed through the Planning Commission. Interestingly, states where the ruling party at the Centre enjoys a thin margin get an even higher proportion of resources. The difference pointed out by the author is approximately 30%, which is both economically and statistically significant. Some politically-important states, where the ruling party at the Centre faces stiff fight, receive upto 50% higher grants and loans.

To attribute any political motive and claim any kind of causality, one must clearly understand the institutional set up in India and also the econometric framework used. In India, the central government collects the bulk of the taxes. A large part of the state government expenditure is funded by general purpose transfers made by the Union government. Two institutions play a crucial role in determining the amount to be transferred to each state—Finance commission, a Constitutional body, and the Planning Commission, which is populated by political appointees. It is important to note that transfers done through the Planning Commission pertain to central government schemes such as universal education schemes, employment schemes, etc, which are well-advertised by the central government. People associate these schemes with the central government. In short, the central government has political axe to grind in these schemes.

One may still argue that the above finding could just be a co-incidence and resource allocation might have been actually efficient. To counter this argument, the paper looks at the transfers made by the Finance Commission. The Finance Commission is a Constitutional body entrusted with the responsibility of determining the basis for transfer of general revenues from the Centre to the States. The author does not find any bias in the transfers made using Finance Commission formulae. In fact, such allocations counter the effect of partisanship described above. Politically-affiliated states receive 30% lower grants from the Finance Commission. It is important to note that this finding, apart from confirming the robustness of the findings above, also points at the fact that Constitutional bodies in India have, in general, been impartial. It is also important to note that the study covers 23 long years which saw different parties at the Centre as well as states and almost all states swung from being affiliated states to non-affiliated status and vice-versa. The rich econometric specifications employed by the author exploit these variations and establish the main findings in a robust manner.

These findings are very believable given the findings of a number of earlier independent studies. Shawan Cole, of the Harvard University, has shown that lending by public-sector banks in India tends to be politically-motivated. He shows that agricultural lending goes up during election years and the increase is higher in “swing” constituencies. He also shows that such politically-motivated lending fails to improve productivity. My colleagues, Shashwat Alok and Meghana Ayyagiri, from the George Washington University, have shown that even capital expenditure decisions of the public sector enterprises tend to be politically-motivated. Several other studies have found similar results for other countries.

However, it is prudent to be cautious before assuming that political intervention is going to end. The Prime Minister has not yet spelled out the details of the new super-advisory to be set up to replace the Planning Commission. It is understandable that the Independence Day speech is hardly the occasion to spell out the details, but it is important to unearth the devil hidden in the details. Suppose, if a new set up, with practically similar functions as the Planning Commission, replaces the latter, then the results will not be any different. It could become the proverbial old wine in a new bottle, a refuge to the political refugees, who are likely to sing to the tune of the government in power. In contrast, if the new set up turns out be an independent advisory group, then there is real hope of change.
Constitutional authorities in India such as the Election Commission, the Comptroller and Auditor General of India and the Supreme Court have established their credibility as neutral arbitrators in their respective domains, stray allegations notwithstanding. I recommend that the Finance Commission be given a larger role in determining the resource-allocation formula and the new body replacing the Planning Commission play a purely advisory role. If the government’s intentions are clear, then this a great move towards strengthening federal structure of our country.

Today's Editorial 26 August 2014

        Populism or prudence?

Source: By Jaydev Jana: The Statesman
We are offering subsidies to a wide range of users without proper analysis of their economic and social rationale.  ~ Manmohan Singh, former Prime Minister

India’s national and regional parties are engaged in competitive populism, which is gradually driving the country towards a financial and political abyss. Mindless populism has led to mass madness of greed and entitlement. Subsidies are always tempting; they guarantee instant pay-offs for political parties, and this has been especially true since the 1980s when Indian politics became more turbulent. Elections are virtually defined by promises of subsidy. A significant percentage of federal and state revenues are allocated as subsidies whose objectives have not been met on account of poor governance and rampant corruption. The handling of subsidies has come to be marked by theft and leakages. Given the alarming fiscal deficit, rising inflation and the dire fiscal condition of several states, questions are being raised as to whether India is fast approaching a tipping point and whether subsidies, if unchecked, will irreversibly damage the country’s rise as a rapidly emerging economic power. As the Finance Minister has pointed out: “India has to make a choice between mindless populism and fiscal prudence.”

While certain subsidies are explicit in the budget, others are hidden. The second category includes subsidies on interest rates, in the provisions made for social and economic services, notably health care and education. Subsidies on food, fertiliser and fuel (kerosene and LPG) are prominent and constitute the largest chunk ~ totalling around Rs 2.5 lakh crore or around 2.5 per cent of the GDP. The amount of food subsidy has increased significantly in the post-reforms period and has reached a record level of Rs 1,30,000 crore in 2013-14 to cover expenditure on food security. India has one of the largest food subsidy programmes in the world; it has created a relatively effective social safety net but has also been criticised for the budget deficits, economic inefficiency, poor targeting and huge leakages.

The increase in the food subsidy bill has been attributed to the rise in procurement prices and other incidental charges that have to be borne to build up a buffer stock of foodgrain for the sake of food security. As it turns out, the government is the biggest hoarder of foodgrain because of the sharp annual ratcheting up of the Minimum Support Price (MSP) since the mid-Nineties. The waste in government runs parallel to widespread hunger. One estimate suggests that a one per cent increase in MSP leads to a 0.3 per cent rise in the consumer price index. The MSP was originally meant to be a safety mechanism to insulate farmers from the vagaries of the open market. The support price is one way to placate the vote-banks.

The Targeted Public Distribution System (TPDS) has been far from effective. A large quantity of subsidised foodgrain gets diverted and resold to procuring agencies of the government. In 2013, the Planning Commission reported that almost 40 per cent of the foodgrain, allocated under the TPDS, did not reach the intended beneficiaries.

Agriculture is the main prop of the Indian economy; it provides sustenance and livelihood to more than 70 per cent of the rural populace. Free electricity has been used by medium and large landowners to extract groundwater (GW) throughout the year to such an extent that aquifer levels have dropped sharply in several states. In certain regions, the depletion is alarmingly close to 90 per cent. The presence of arsenic in GW has been reported in West Bengal, Bihar, Jharkhand, Chhattisgarh, UP and Assam.

The subsidy on chemical and synthetic fertilisers has increased exponentially from a mere Rs. 60 crore during 1976-77 to an astronomical amount ~ Rs. 67,971 crore in 2013-14. According to the Economic Survey of 2013-14, indiscriminate use of chemical fertilisers has led to the imbalanced use of soil nutrients in Punjab and Haryana ~ the granary of India. As a result, the quality of the soil has declined.

The biggest challenge is the burden of subsidies on petroleum products. Kerosene for the PDS, domestic LPG and diesel are sold at rates that are far less than international market prices. The argument for providing subsidies on LPG is totally irrational as cooking gas is used by the rich and the middle class. Studies show that 40 to  50 per cent of kerosene, supposedly meant for the poor, is diverted for other purposes, mostly for adulterating diesel. Two bright young officers of a public sector oil company were killed for spilling the beans. Adulterated diesel can damage vehicles and aggravate pollution. Use of kerosene can lead to respiratory diseases. It is almost as if the government is subsidising pollution, fuel adulteration, congestion and chest ailments.

Another expression of populism is the ‘loan mela’ or the practice of writing off of debts of the poor. Subsidies are directed at various sections of society to assist the poor economically. But the benefits are hijacked by those who are powerful. The poor have to make do with the minimum share of both visible and hidden subsidies. “We are basically a subsidy-driven economy and that has to change,” Amartya Sen had once remarked. This is not to suggest that subsidies are wholly undesirable. To subsidise the vulnerable segments of the population is the core of any economic policy, not only in India but all over the world. The transfer of subsidies to the poor and without leakage can lessen their constraints and induce them to improve their capabilities and attain their own potentialities. The objectives of subsidies can be achieved if they are judiciously devised, properly targeted, transparent and accompanied by official data that can enable the intended beneficiaries to claim the welfare handouts as a matter of right.

Today's Editorial 25 August 2014

                         West back in Iraq

Source: By Harsh V Pant: Deccan Herald
Iraq was supposed to be George Bush and Tony Blair’s war.  Much to their chagrin, it is now becoming Barack Obama and David Cameron’s war. The spectre of Iraq is haunting the West once again. After days of deliberation, the United Kingdom too has now decided to chip in. Insisting that his government’s position on Iraq is “clear” and that the UK would not deploy “boots on the ground,” British 

Prime

 Minister David Cameron is suggesting that Britain would "use all the assets that we have”, including “military prowess” and aid to defeat the “monstrous” Islamic State militant group.

The Royal Air Force surveillance aircraft have already been operating in Iraq for the past few days in support of the US missions and the UK government is underlining that its military involvement in the country could last for “months.” Although at the moment the UK military is primarily involved in humanitarian missions and there is no demand for them to deliver air strikes, there are signs that the British government is preparing for that role as well. As a result, critics are calling for greater clarity on the role that the UK is likely to play in the rapidly evolving strategic environment in Iraq. It is hardly likely that the UK would be able to provide clarity any time soon, however.

Most western nations are unsure as to what they can do in the Iraq. Austria, France and Germany are sending military supplies to the Kurds, a mission of which the UK too has been a part of since last week. The US decision to go back to war mode in Iraq has changed the calculus for most powers. As the US scrambles to recover from its flat-footed recognition of the fact that the advance of the Islamic State of Iraq and Syria (ISIS) could no longer be ignored, the Obama Administration has been at pains to underline its recognition of the dangers posed by the extremist ideology sweeping the region. The United States has been carrying out airstrikes in recent days against Islamic State fighters, helping fend back their advance on Kurdish regions. There are close to 1,000 US military advisors in Iraq, including Special Operations forces, divided between Baghdad and Kurdistan and the CIA is believed to be running an operation to supply Kurdish forces, the Peshmerga, with arms and ammunition.

Humanitarian catastrophe

Meanwhile, a humanitarian catastrophe has engulfed the country. The United Nations announced its highest level of emergency for the humanitarian crisis in Iraq last week, where hundreds of thousands of Yazidis and Christians have been driven from their homes and tens of thousands had been trapped on a desert mountain by the advance of Islamic militants across the north of the country.

Formed in 2013 and led by Abu Bakr al-Baghdadi, the ISIS has as its proclaimed aim the establishment of an Islamic emirate that straddles Syria and Iraq. The ISIS is a highly organised, motivated, resourceful and powerful group that uses violence without any compunction. It had been gaining ground steadily over the last two months culminating in the declaration of a caliphate — an Islamic State ruled by a single political and religious leader — with the Syrian city of Raqqa as its seat of power.

Ungoverned territories are dangerous and if the ISIS succeeds in controlling territory from Syria to Iraq, it will draw Islamist extremists who will threaten Western interests much like what happened before September 11, 2001. If Iraq collapses, there could be a knock-on effect on the rest of the Middle East as well, given the artificiality of the entire region. There are now fears that the Islamic State could now use the dam as leverage against the new Iraqi Prime Minister by holding on to the territory around it in return for continued water and power supply. Writing to Congress, President Obama cited the potentially massive loss of civilian life and the possible threat to the US embassy in Baghdad.

Those dangers, he wrote, were sufficient reasons for deploying air power to support Kurdish forces trying to recapture the dam. For the West, the dangers of growing Islamist radicalisation as conflicts drag on in the Middle East are overwhelming. Around 500 UK nationals are estimated to have gone to Syria to become jihadists with most joining the ISIS. At least half are believed to have returned to Britain and this exodus is likely to increase posing significant dangers to the social fabric.

The rise of ISIS owes a lot to the political vacuum in Iraq and the Nouri al-Maliki’s Shia first approach in politics. Haider al-Abadi was picked to form a new government that can unite the country in the face of the Sunni militant onslaught, which many blame al-Maliki for fuelling by pro-Shiite policies that alienated the Sunni minority. Al-Maliki grew increasingly isolated as the dangers from ISIS gained momentum, with Iraqi politicians and much of the international community lining up behind al-Abadi. Once Iran withdrew its support for al-Maliki, he had no option but to go.

The West is hoping that political transition in Iraq towards a more inclusive government with some military assistance to stem the tide of the ISIS would be enough to salvage the situation in Iraq. But there are always dangers of mission creep inherent in any such endeavour.

Much as Washington and London would like to leave Baghdad behind after their previous experience, it is Baghdad that it is not ready to give up that easily. Iraq was supposed to be George W Bush and Tony Blair’s war.  Now much to their chagrin, it is becoming Barack Obama and David Cameron’s war.

Today's Editorial 24 August 2014

 The importance of being moderate

Source: By Andrew Sheng: The Statesman
The 19th century playwright and wit, Oscar Wilde, who wrote the successful play, The Importance of Being Earnest, made his name by playing with words in contradiction and double meaning. Earnest was not just the name of a principal character in the play, but also meant being determined. Wilde, a man of notable success and excesses, said “Moderation is a fatal thing. Nothing succeeds like excess.” So are we living in a world of success or excess?

For the silent majority who go about earning our living and leaving politics to the politicians and religion to God, it seems that the world is becoming more and more polarised ~ fundamentalism is on the rise and extremism is winning.

I have a collection of books on Western philosophy that divided history into different ages. The Renaissance period (14th to 17th century) was the Age of Adventure. The 17th century was the Age of Reason, when logic and mathematics flourished. The Age of Enlightenment described the 18th century, but the 19th century became the Age of Ideology with the rise of Capitalism, Socialism and the like.  The 20th century was the Age of Analysis, when computers and data enabled us to become very empirical and rational.

Unfortunately, the 21st century is an Age of Uncertainty, when even science is no longer sure of anything. With our spacecraft and super-telescopes, we looked out further and further and realised that there were not only more and more universes out there, but also black holes that we cannot understand. With our microscopes, we see smaller and smaller things and then realised that even the smallest particles disappear into energy and concepts we are only just beginning to appreciate, let alone measure.

If we believed in 

Hollywood

, an American way of life would be nirvana. There are many in these worlds that are no longer so sure. Such a life of materialist consumerism is possible for the few, but certainly not for the majority. It is this Age of Uncertainty that has created polarisation and extremism in views and excesses. We are not sure where to go and he who shouts loudest appears to have the most attention. A lot of this has to do with democracy. No one disagrees that democracy has become the accepted ideology of our age. Even Robert Mugabe of Zimbabwe accepts the principle of democracy ~ after all, he has won every election he has participated in, but not everyone would agree with his methods of governance.

The arithmetic of democracy is very simple. If everyone has a vote, then the majority gets to decide who governs for a fixed term. However, if the voting is very close, meaning that the votes are very evenly split, then the smallest of minority with extreme views becomes the deciding vote. And both sides which need the deciding vote may be willing to accede to such extreme views in order to win their support.

The radical Tea Party in the USA was able to be very influential because of their ability to swing votes. They almost caused a default in US bonds, because of their extreme position on fiscal discipline. A time of uncertainty breeds extremist views and action. When society as a whole is insecure, all kinds of views get into play.  The risk is that extremism breeds more extremism.

Take a situation where society is very stable and the ruling party is a strong majority, secure in its position. The political scientist Mancur Olson (1932-1998) examined different forms of governance. He identified the situation where an “incumbent bandit”, even a tyrant, is likely to provide stability in property rights and protect the majority’s rights, because he identifies the majority views with his own.

Saddam Hussein was such an incumbent bandit, but is the present state of deteriorating democracy and civil war any better outcome for those who have to live under bombs and destroyed homes? The commentator Fareed Zakaria has argued that one should distinguish between democracy and constitutional liberalism. The common definition of the former is periodic free and fair elections with one person one vote. The other is the practice of law and order according to the constitution, but the constitution need not be established by the rules of the former. After all, people tend to forget that when the American Constitution was written, those who had the vote excluded women, Afro-Americans and indigenous Americans.

In recent years, fractious politics in America and elsewhere has raised the spectre that the form of democracy practiced there may lead to an unsustainable situation of increasing fiscal deficits through welfarism, because the government must always increase welfare in order to win votes. Fareed argued that Hong Kong was the most revealing example of the above distinction: “it had one of the highest levels of constitutional liberalism in the world but was in no way a democracy.” Thailand is a case where democratic politics have created a situation when the army decided that its presence is needed to restore order.

The reality therefore is that democracy as practiced would require everyone to realise that one must take into consideration the views of others.  Politics is after all the art of the compromise. Each nation must find its own path to national unity and integrity. Former Malaysian 

Prime

 Minister Abdullah Ahmad Badawi said it best, “We have followed a path of moderation, development is our priority, national unity, good community relations, Muslims and non-Muslims, this is what has given us the advantage”.



To compromise is to take a moderate position. Hence, those who take extreme views must always remember that the moderates are in the majority. They may be silent, but they also know that if they allow extremists to hold sway, their future and their children’s future are at stake. If extremist views take hold, then even the silent majority may decide that moderation is worth fighting for. Oscar Wilde always had the last word: “Everything in moderation, including moderation.”

Today's Editorial 23 August 2014

 Crony capitalism threatens growth

Source: By N Chandra Mohan: The Free Press Journal
The Reserve Bank of India Governor Raghuram Rajan has forcefully underscored the danger that crony capitalism poses to India’s growth story. While delivering the Lalit Doshi memorial lecture, he argued that it creates oligarchies that slow down growth. This is not the first time that he has held forth on this topic. India has the ‘dubious distinction’ of the largest number of billionaires per trillion dollars of GDP; that many of them have amassed wealth from land, real estate and natural resources due to proximity to government. This eliminates competition, widens disparities and slows growth.

The dark side of crony capitalism is reflected in the sharp rise in big- ticket corruptions after reforms were implemented since 1991, a fact that upsets even the ardent advocates of liberalisation. The late economist I G Patel admitted that one of his greatest disappointments was that reforms have not “made much impression on corruption.” This was par for the course in the earlier license- permit raj -- in which vast discretionary powers encouraged rent- seeking or garnering of huge benefits by manipulating the environment in which economic activities take place by those in authority.

The concern is that crony capitalism has replaced crony socialism of the licence- raj. Reforms were meant to be an answer to corruption as economic activity was decontrolled, delicensed and deregulated. Many of the old forms of corruption associated with the regime of controls, thus, were greatly reduced, especially in manufacturing. But the license- permit raj is still alive and kicking in mining and services. The discretionary award of coal blocks and 2G telecom spectrums at throwaway prices, resulting in huge losses to the exchequer, exemplify what a crony capitalist regime entails.

India’s growth may be in a tailspin, but the number of Indian billionaires keeps increasing! Five of the leading ones alone account for less than half of total billionaire wealth. Billionaire incomes amounts to a substantial fraction of the goods and services produced in the country or GDP. There are no prizes for guessing that disparities have widened in this milieu, thanks to the growing share of the benefits of growth being cornered by highly affluent segments of society. Sooner or later, this is bound to trigger a backlash as many of them have become wealthy due to proximity to government.

Professor Abhijit Banerjee of MIT and Thomas Piketty of the Paris School of Economics – who has written the bestseller ‘ Capital in the Twenty First Century’ -- have used income tax returns to assess trends in income disparities in India. What they find is that there is growing concentration of income among the top one per cent of the population, especially in the reform era. During the 20th century, the share of top incomes followed a U- shape by being high and then falling and rising again. Unfortunately, such detailed income tax information has stopped since the early 2000s to establish more recent trends.

From 1910 to 1950 -- a highly unegalitarian phase, in which India was a colony of the British – the share of the top one per cent of the taxpaying population accounted for 15 to 18 per cent of total income.

By contrast, 1950- 1980 saw a more egalitarian phase, in which the government followed socialist policies by heavily taxing incomes at the higher end. The share of the top one per cent came down to barely 5- 6 per cent. But thereafter till 2000, with more pro- business policies and beginnings of reform, the share of the top one per cent started climbing up to 12- 13 per cent of total income, clearly following a U- shape.

Although the increase in top incomes is a fact, most of the gains have gone to the ultra- rich segment in this group (0.1 per cent). In the 1990s, it was the ultrarich that enjoyed income growth that was much faster than the overall GDP growth, in contrast to the 1980s, when there was faster growth for the top one per cent group as a whole. The liberalisation of the economy clearly is the backdrop against which this amassing of wealth has taken place, much of it due to closeness to political power. It is precisely this group of ultra- rich that contributes to the growing ranks of billionaires and dollar millionaires in the country.

The growing concentration of income among the billionaires sheds light on the growth paradox of the 1990s observed by researchers. The growth of expenditures (consumption) was very limited while there was substantial growth measured by the national accounts. A significant part of this paradox – between one- quarter to one- thirds -- is explained by a large part of growth being cornered by the very rich.

The trend of growing inequalities in India clearly follows the US pattern, where CEO pay has widened substantially vis- a- vis the American worker’s income. This, in turn, has triggered a backlash like the Occupy Wall Street movement, whose slogan is that we are the 99 per cent, in contrast to the top one per cent, who control 23.5 per cent of income. Such a trend has been observed in other developed and emerging economies as well, including China. Rising inequality indeed is a global concern which, as Piketty argues, will worsen in the future unless it is checked.

A crony capitalist regime shuts down competition and thus is inimical to free enterprise, opportunity and economic growth, argues Rajan. The massive concentration of incomes has also considerably eroded the tax base of the exchequer; as such incomes escape the gaze of the taxman.



For a sense of perspective, the number of those who report a taxable income of Rs 1 crore is only 43,000, while the number of dollar millionaires resident in the country is five times higher and is growing rapidly. The upshot is that crony capitalism constrains any effort to kickstart growth through budgetary surpluses.

Today's Editorial 22 August 2014

 Making financial inclusion work

Source: By Gautam Bharwaj: The Financial Express
The branding of 

Prime

 Minister Narendra Modi’s new financial inclusion vision—Pradhan Mantri Jan Dhan Yojana (JDY)—is direct and simple and should resonate positively with the masses. Another highly encouraging aspect, although it did not form an explicit part of his Independence Day address, is the intent to follow through with delivering a well-rounded set of essential financial tools to excluded low-income households. Over the first 12 months, the focus will be on issuing bank accounts and an accidental death insurance cover to 75 million unbanked households. A year later, these individuals could be provided an emergency credit facility through an overdraft on their bank accounts, a retirement savings plan (presumably using the NPS) and a life insurance cover. As ecosystem partners including banks, telcos, BCs, payment solution providers, distributors, regulators, UIDAI and government departments come together at the starting line, it may be pertinent to pause briefly and reflect on some questions. What have we learnt from past successes and failures in financial inclusion design and/or implementation? How can we avoid repeating past mistakes? And how can we minimise new mistakes during this new policy push?

Although a clear vision flowing from the top is invaluable, there are some inherent problems with setting and chasing numerical targets as the lines between policy intent and meaningful outcomes often tend to blur. Seventy-five million bank accounts could easily dissolve into mere statistics if stakeholders focus entirely on a particular number but lose sight of the underlying policy intention. After all, opening bank accounts for the poor is presumably not the end goal. Nor is it a new idea. Previous efforts at financial inclusion were similarly focussed on issuing no-frill bank accounts. But the majority of such accounts ended up with zero balances and zero transactions simply because households did not have any tangible reason to use banking services. As a result, previous financial inclusion efforts did not really benefit target beneficiaries. Neither did they benefit banks nor the thousands of BC outlets whose core business model depended heavily on revenues from banking transactions.

Real success of supply-side solutions, however well-intended or designed, will inevitably depend on demand-side understanding, adoption and utilisation. Therefore, before we run out and start opening 75 million bank accounts, it may be useful to understand the change that we are aiming to bring about at the level of one household. If everything that we intend today can work for that one household, we can be more confident that it can work for 75 million.

A good starting point may be to reflect on what happens when we ourselves buy a saving, pension or insurance product. First, we need someone to clearly explain the product and the underlying concepts, processes, features, benefits and risks. Once we are sure about the product and the amount that we are committing to periodically save, we need a simple and easy way to complete our enrollment formalities —filling up application forms and providing valid KYC documents. Thereafter, we need a secure and convenient mechanism to put money into our financial instrument—preferably through an ECS on our bank account along with a reminder ahead of the ECS due date. We need an equally simple, convenient and secure method to get back our savings and receive benefits when due. And finally, we need easy access to periodic statements and information regarding our savings, and an equally sound mechanism to file a complaint and get prompt redressal.

This is precisely what each of the 75 million JDY target beneficiaries will require. With perhaps three differences: (1) the number of zeros in the amounts that they will probably save, (2) the marked absence of enthusiastic agents eagerly knocking on their doors to sell them a financial solution, and (3) the high probability of frequent interruptions in committed savings flow due to health shocks, ongoing conflicts between current and future consumption, and/or spells of unemployment.

The JDY must see itself as a mission to deliver mainstream financial and risk management solutions, albeit in sachets instead of full bottles, to low income excluded households. The quality of the content of each sachet should be identical to the contents of the bottle. And the pricing should be proportional.

To start with, someone will need to meet the household to explain the importance of old age savings, emergency credit, life and health insurance, saving for known future expenses, etc. And also why, if the person wants these benefits, she will require a bank account. That way, banking will not be the end of the road. Simply the beginning of a genuinely useful journey towards financial empowerment and independence. In this way, a person would clearly see and therefore use her bank account not only for banking services, but more importantly as a channel to save for her old age or for her children’s education.

In all this, a target beneficiary should not interact with an army of institutions, each armed with its own unique supply-side piece of the financial inclusion ecosystem. Instead, her interface should be a simple and convenient single window through which she would get everything—product information, a bank account, multiple financial services, account statements, periodic information and reminders, and effective complaints resolution. There is a critical role, therefore, for front-end integration of the financial inclusion ecosystem from an individual’s perspective. And an equally critical role for someone to interface with the ecosystem providers at the back-end, periodically gather both supply- and demand-side data, and monitor implementation, adoption and utilisation from a policy goals perspective.

The UIDAI can play a pivotal role in this process as the glue that binds both demand and supply. Presumably, individual applications for a bank account, insurance, pension, savings or credit products would be linked to a person’s e-KYC at the front-end using her Aadhaar number. Thereafter, she could use her own prepaid card or mobile wallet to deposit cash into her bank account from any convenient BC location as per her unique cashflow—regardless of where she works or lives over time. At the back-end, her bank would periodically sweep her committed contributions from her account using a standing instruction mandate, and transmit her savings to each product provider selected by her.



When she needs her savings back or when her pension or insurance benefits are due, she would not need to go through a cumbersome process or wait endlessly. Her money would be swiftly and directly delivered into her own UID-linked bank account. She would simply use her debit card at an ATM to withdraw her money. She should have a toll-free helpline number to call if she has an insurance claim or a complaint or wants to know the balance in her pension account.

Today's Editorial 21 August 2014

                            Strict action needed

Source: By P M Mathew: Deccan Herald
The progressive personal, corporate and indirect tax rates in the country compel people to evade tax and accumulate black money. In reply to an RTI query, the Union finance ministry   said the UPA II government had commissioned a study in 2011 to ascertain the quantum of illegal money in the Indian economy. It said the study was being carried out by Delhi-based National Institute of Public Finance and Policy (NIPFP), National Council of Applied Economic Research (NCAER), and National Institute of Financial Management (NIFM) in Faridabad, Haryana. Though the report was submitted to the ministry in December 2013, neither former Finance Minister Chidambaram nor his successor Arun Jaitley   placed it in parliament.

According to the terms of reference, the study  was expected to bring out the nature of activities that encourage money laundering, examine causes and conditions that result in generation of unaccounted money and suggest ways and means for detection and prevention of unaccounted money .The study was also mandated to suggest methods to be employed for bringing to tax unaccounted money kept outside India and to estimate the quantum of non-payment of tax due to evasion by registered corporate bodies.

Now, the Special Investigation Team (SIT) on black money, constituted by the Narendra Modi government on May 27 in compliance with a Supreme Court directive, is studying the report. According to the report, the quantum of black money in India now amounts to 75 per cent of the country’s GDP (Gross Domestic Product). It is also reported that the annual growth rate of black money is higher than the annual growth rate of GDP. The generation of black money in India is driven mainly by the higher education sector, real estate deals and mining income. As per the report, real estate deals top the list followed by the black income generated by those mixing PDS kerosene with diesel and capitation fees collected by professional colleges.

An integral part of most third-world and many first-world economies, black money refers to the money generated from underground economic activities like drug trafficking, illegal weapons trading, terrorism, prostitution and selling counterfeit and stolen goods. The genesis of black money is from untraceable, and hence untaxable, business dealings that are not reflected in a country's GDP computations. It is the result of cash based system in which transaction records are kept in secret account books. The Wanchoo Committee, in its report in 1971, described black money as a "cancerous growth in the country's economy, which if not checked in time, will surely lead to its ruination".

The capital gains on real estate is the most important source followed by large scale manufacturing, film industry, smuggling and under/over invoicing of foreign trade. Black money surfaces in the parallel economy and is mainly used in land deals, gold purchases and corruption. Earlier estimates on quantum of black money range between $ 500 billion to $ 1,400 billion. A study by Global Financial Integrity has estimated the illicit money outflow to be $ 462 billion. In February 2012, the CBI director had said that Indians have $1,500 billion of illegal funds, in secret bank accounts located in foreign tax havens. According to latest reports, India has received 24,085 data on tax evasion and dubious funds stashed abroad in financial year 2013-14.

Evading tax

The progressive personal, corporate and indirect tax rates in the country compel people to evade tax and accumulate black money. Many professionals like doctors, advocates and chartered accountants hide their real income and escape from taxes ranging from 50 to 70 per cent. According to the report, just 1.8 per cent of registered legal professionals file tax returns, including just 6.7 per cent of registered chartered accountants, 42.8 per cent of registered medical professionals and 35.2 per cent of nursing homes. As Benjamin Franklin said, “Nobody is a gentleman in the matter of payment of tax.” The FDI route is being used for taking black money out and bringing it back into India. In 2011, unrecorded foreign assets worth $89,190 million were accumulated in India.

The country needs to go after corrupt officials as well as business monopolies and initiate genuine campaigns against corruption. Last year’s trial and punishment of high profile Chinese politician Bo Xilai and several other corrupt officials in China are examples of genuine initiatives to fight corruption and black money.

The one time option of Voluntary Disclosure of Income Stream(VDIS) to encourage Indians to bring back black money stashed abroad has had limited success. We have several legislative and regulatory measures to control black money. The public servants in India can be penalised for corruption under the Indian Penal Code, 1860. Prosecution section of the Income Tax Act 1961, Foreign Exchange Management Act, Prevention of Money Laundering Act, 2002, Prevention of Corruption Act, 1988, the Benami Transactions (Prohibitions) Act 1988 and the Corrupt Public Servants (Forfeiture of Property) Bill, 1999, are all powerful legislation existing to curb black money. What is required is the necessary political will for the effective implementation of these legislation and regulations.



Unconventional measures such as compulsory bank account deposits of cash sales by even petty shop owners, co-ordinated functioning between sub-registrar offices, sales tax and service tax departments with the Income Tax Department to ensure that there is no mismatch between transactions, conducting audit for sub-registrar offices for differences in the value registered for the properties in the same locality, fixing limits for cash sales, receipts and payments in cash, demonetising higher denomination currencies, and inserting new, higher denomination  currencies with chips to  track through GPS the bulk transport and exchange of such currencies, etc could help reduce the genesis and circulation of black money  in the economy.  Besides setting up the SIT, the new government at the Centre seems to be serious about checking cross border tax evasion and tax frauds. What is immediately required is strict actions under the already existing direct tax laws.

Today's Editorial 20 August 2014

 Embrace English, grasp the world

Source: By Sunanda K Datta- Ray: The Free Press Journal
The promise of Independence Day is a good time to consider the inequality that underlies the unrest against Union Public Service Commission examinations. Objections to English would disappear if all Indians had the opportunity to master the language on a level playing field. Now, ordinary folk who have not been educated at English medium schools feel discriminated against. The 58 per cent who don’t speak Hindi also fear that the controversy will be exploited to strengthen what is called “Hindi imperialism.” Narendra Modi has displayed tact in not pressing ahead with a threatened campaign to spread the use of Hindi. But neither South India nor the northeastern states can be sure this is not only a strategic pause. Significantly, Modi’s first public speech in the south after assuming office was in English. The only way he can reassure people that his promise of “development, good governance and stability” will, in fact, recast Indian society in a more equal mould is by ensuring that English is no longer the language of privilege as it has been all these 67 years of Independence because it was so under the British.

It was taught in only a handful of elite institutions whose products alone succeeded in UPSC exams and bagged the best corporate positions. That meant exclusion and discrimination. Those charges would disappear only if all state schools taught English well or, better still, if they taught all subjects only in English. It will take time, money and effort. Above all, it calls for a demonstration of will. But that is the revolution Modi cannot afford to shirk if he truly wants a better India.

UPSC candidates now have the option of taking the screening tests in English or Hindi, but even the Hindi version has passages in English to test comprehension of that language. Hundreds of candidates who took the tests and failed, or aspire to take the tests, hit the streets of Delhi protesting against the English passages. They complain that these tests put those who are not proficient in English at a disadvantage. But the very fact that their protest signs are in English show we cannot dispense with the language.

Although almost every state government has tried to discourage the growth of English, its power has only grown because of its promise of material and social benefits. Most of our swadeshi politicians send their own children to English- language schools. The medium of instruction for higher education is almost entirely English. It is, therefore, loaded against students who did not attend English- language schools mainly because they were too poor to do so. Successive central and state governments have done precious little to take English to the poor.

Few free or cheap schools use English as the medium of instruction. Few even teach it properly. English is indisputably an Indian language now, and the most useful language in India. It may not be the first language of spontaneous expression but it is the most powerful unifying force we have. English is the only means of communication between Kerala and Kashmir. It is our only outlet to the world, and the only means of ensuring that Indian school and college education doesn’t fall even further short of global norms.

Now is the time, therefore, to meet grievances by announcing the introduction of a new schooling system in which English won’t be confined to the children of rich parents. Now is the time to destroy once and for all the conspiracy to ensure that 300 million people who are blest with a knowledge of English lord it over 1.2 billion Indians. That can be done by enabling, nay obliging, everyone to acquire equal mastery over English so that India has just one class, albeit with wealth providing inevitable gradations.

One hopes that the promise of an all- party meeting to discuss the UPSC exams will lead to some such positive development and is not a smokescreen for ruinous fanaticism. Ultra- nationalistic strategists in the Bharatiya Janata Party may hope to use the furore to promote the government’s commitment to Hindi and Sanskrit and a majoritarian agenda. Nothing could be more detrimental to India’s long- term interests than a bigoted plan to elevate Hindi and further reduce the importance of English in public life.

As it is, the level of English in India is atrociously low. There’s no comparison with Japan or China which didn’t have the heritage (call it curse or blessing) of English. They were forced to develop their own languages not only for national unification but as the instrument of modern education. For historical and demographic reasons, this was not possible in India.

Modi must know there can be no effective administration except through English. Dispensing justice in a court, governing a district or running a department are very different from making patriotic speeches in legislatures. Political speeches can be in Bengali, Gujarati or any other Indian language, but not administrative memorandums. Much is made of the fact that the careers of lakhs of young Indians is at stake, and that 900,000 candidates will appear for the UPSC’s preliminary test on August 24. But this is nothing compared to what is really at stake – stability, administrative efficiency, the rule of law and everything that makes for caring and responsible government.

Politicians alone can’t provide that, not even if they are honest, efficient and blest with the best intentions in the world. They need a supporting infrastructure, which means streamlined, competent and incorruptible civil services. The infrastructure will be further weakened if Hindi is a recruit’s main asset. This is not only because far from being the majority language, Hindi is used only by some 420 million Indians. It is because Hindi is not sufficiently developed for judicial, administrative or scientific purposes.

National integration will suffer if a language that is associated with cowbelt imperialism is foisted on the entire country. The Left’s demand for “ question papers in all Indian languages" would mean multilingual chaos and administrative breakdown. The government’s craven decision to ignore marks for English language comprehension skills make Civil Services Aptitude Tests meaningless. The objective should not be to ensure that exams are " language neutral" – quoting Jitendra Singh -- but to insist on the highest possible standard of English while making sure every child can attain it.



Abolishing the CSAT may buy immediate peace. But all- round social and economic growth can be ensured only by committing far more resources to using English as the medium of instruction ( or, at least, teaching it as a compulsory subject from the lowest class) in all state schools throughout the country. That alone will end discrimination and elitism by giving all Indian children, whether at Doon School or in the humblest village pathshala, the equal opportunity that underlies a meritocracy.

Today's Editorial 19 August 2014

 Changing Middle East alignments

Source: By S Nihal Singh: The Tribune
Recent developments in the Middle East show with startling reality how quickly geopolitical verities and alignments can change. The most dramatic change has, of course, been brought about by the phenomenon of Isis, the Islamic State of Iraq and Syria, later christening itself the Levant, before becoming simply the IS, Islamic State.

As the IS has set about capturing more and more territory in Syria and Iraq, it has finally brought the United States military into the picture after its departure from Iraq in 2011 in the form of air strikes on IS forces now challenging the relatively peaceful Kurdish semi-autonomous region of Iraq. For one thing, the anti-President Bashar al-Assad crusade by the US and its Sunni allies and monarchies is on the back burner. The more important task of preventing the IS from capturing more of Iraq and Syria is taking precedence. Second, the task of preventing a successful onslaught on the Kurdish region assumes great importance.

As a backdrop, the continuing tragedy of the Palestinians in Gaza, with the obscene number of Palestinian deaths by Israeli military in answer to rockets fired by the Hamas movement is an illustration of the mismatch of forces - one fighting against great odds amidst suspicions of such Arab states as Egypt and Saudi Arabia, among others, and the other supported by US might.

There are no easy answers to any of the crises facing the volatile region. The Gulf monarchies are usually ranged on one side, but they are forced to shift their policies from an indiscriminate funding of Sunni factions opposing the Assad regime to a more cautious policy, given the birth of first the Al Nusra, then the Isis leading inexorably to the IS. Indeed, regionally Turkey and Qatar are now classed as being closest to the Palestinians of the Hamas variety.

How these changing alignments will play out is too early to tell. But the chaos that reigns in Iraq and Syria and is increasingly impinging on Lebanon, perennially a fragile entity, are crystal clear. At the heart of the evolving new order is the nature of the change in Egypt having been transformed from first the fall of Hosni Mubarak to the one-year rule of the first genuinely elected President in the country's history, Mohamed Morsi of Muslim Brotherhood, to the coup of the present ruler, General Abdel Fatah el-Sisi, on the cusp of a popular revolt, to his inevitable election as President.

Egypt today, already the recipient of generous assistance from the Gulf monarchies, is now their ally, and although as the most important Arab nation still leads in mediation efforts between Israelis and Palestinians, seems more allied to Tel Aviv than the Gazans and the Palestine Authority.

How then are the Arab world and outside powers led by the United States to begin to resolve problems as one crisis trumps another? As far as the Gaza crisis is concerned, the US bias in favour of Israel, which it funds and arms to the hilt, is no secret. Therefore, Washington will have to lean on Egypt's shoulder to try to mediate. But in the larger regional context, the dramatic rise of the IS represents a new scale of conflict and danger. Not only is the IS a terrorist movement but it is also disciplined and brutal in spreading its creed and beliefs which are contrary to civilized conduct and living.

In purely geopolitical terms, the United States cannot afford to let IS or its Isis variant swallow up most of Syria and Iraq in the name of a divine mission. For the present, Washington has chosen to shore up the Iraqi Kurds, the most stable and harmonious part of Iraq, from being overrun by the IS onslaught. It has also been unsuccessfully pleading for an inclusive government in place of the overtly Shia dispensation of 

Prime

 Minister Nouri al-Maliki.

For one thing, the Saudis are shoring up the Lebanese army with an additional $1 billion assistance. Mercifully, most Lebanese factions agree on maintaining the status quo. The one fly in the ointment is the Hebzullah movement, a powerful player who has been helping the Assad side in Syria.

The key question is whether the IS, in its triumphant onslaught on Iraq and Syria, has bitten more than it can chew. It has, in the ultimate analysis, brought the US military into the picture despite President Barack Obama's reluctance to re-engage his military in a country much the worse for Washington's original invasion. Judging by the increasing number of air strikes at IS military installations to blunt its attack on the Kurdish region, its leaders might be ruing their overreach.

However, even a beginning to resolve the set of enmeshing problems in the region is for the long haul. The US will retain its partiality for Israel for domestic reasons, if not for other factors. Defeating the IS and its allies will require the building up of a viable coalition to separate the hostile Iraqi Sunnis from their opportunistic alliance with the Isis and the dethronement of Mr Maliki., who is resisting attempts to replace him.

Another major problem is how to bridge the Sunni-Shia divide represented at the two poles led by Saudi Arabia and Iran. An ultimate nuclear agreement between the West and Iran is still possible despite the difficulties. But the Gulf monarchies are not reconciled to getting Iran into the tent, rather than sitting outside. The best that can be hoped for is a ceasefire in Gaza based on some Israeli concessions in lifting the inhumane blockade of the Gaza Strip abetted by Egypt's new rulers. Second, the US and many other regional and world powers are hoping that both the Kurds, the Sunnis and the new Iraqi Prime Minister will get their acts together to defeat the IS in stages.

The obvious conflicting interests and pursuits of the regional players aided by outside actors will take long to resolve. The world's attention is focused on the short term.

Today's Editorial 17 August 2014

  New Parliament off to a good start

Source: By MR Madhavan: The Financial Express
The first full session of the new Parliament ended on Thursday, with Rajya Sabha passing the Constitution Amendment Bill and the National Judicial Appointments Bill on the last day. This session was a welcome change from parliamentary sessions over the last few years: Both Lok Sabha and Rajya Sabha put in about 5% more time than the planned schedule. Compare this with the last Lok Sabha, which worked for 30% less time than scheduled, as disruptions over a variety of issues prevented productive work. However, a word of caution is due here: the first session of the last Lok Sabha was also fairly smooth and it worked for the scheduled time; only in later sessions, a series of allegations related to Commonwealth 

Games

 and allocation of 2G spectrum and coal blocks led to blockage of proceedings.

The two Bills passed on the last day have far-reaching implications. They recast the process by which judges will be selected and appointed to the Supreme Court and high courts, and also regulate the transfer of judges across high courts. The Constitutional Amendment Bill will now be sent to states and can be sent to the President for his assent only after 15 state legislatures have ratified it.

Four other Bills were also passed. The Trai Act was amended to enable the appointment of the Chairperson or members to a position under the government. The Andhra Pradesh Reorganisation Act, which created the state of Telangana, was amended to transfer a few mandals affected by the Polavaram Dam. The National Institute of Design in Ahmedabad was declared an institute of national importance. The Sebi Act was amended to allow consent settlements, widen the definition of collective investment schemes, and set up special courts. The government also tried to take up the Insurance Amendment Bill (which increases the cap on foreign investments in insurance company to 49% of equity share capital), but on the insistence of several opposition parties, agreed to refer the Bill to a Select Committee of Rajya Sabha for detailed examination.

A few important Bills have been introduced. One of these seeks to amend the Factories Act. It enables state governments to change the definition of factories to include only those with 20 or more workers (now 10) if it uses energy or 40 or more workers (now 20) if it does not use energy. It also removes the restriction on women to work on certain machines in motion, and allows state governments to permit them to work in the night shift if there are some safeguards. The Apprentices Act is being amended to permit employers to come together to provide apprenticeships, increase the minimum age to 18 years in case of hazardous industries, and remove imprisonment as a penalty for some offences. This Bill was passed by Lok Sabha and will now have to be considered by Rajya Sabha. The Juvenile Justice Act is being replaced by a new one. One of the contentious provisions is that this Bill lowers the age from 18 years to 16 years for a person who has committed certain heinous crimes to be treated as a juvenile.

This Parliamentary session had a few noteworthy points. Unlike recent sessions, Question Hour was rarely disrupted in the Lok Sabha; as a result, almost a quarter of the Starred Questions were answered orally. On the other hand, in Rajya Sabha, only 15% of the Starred Questions could be answered orally. Among the 304 non-minister first timers, 246 took part in at least one debate. Women MPs were also more active, speaking in 4.6 debates per MP on average compared to 4.4 by their male colleagues.

That said, there were some disappointing developments. The Union Budget exercise includes the process of approval of demand for grants of all central ministries and departments as Parliament has to give prior sanction for all expenditure. In recent years, the demands of only a few (typically, four or five) departments are discussed, and the remaining are clubbed together for a vote (called guillotining of demands). This process continued this year too, with only four departments amounting to 5% of the total budget being discussed. Given that Standing Committees (which also examine these demands) have not been formed after the general elections, 95% of demands have been sanctioned without any examination or discussion. The delay in the formation of the Standing Committee also means that Bills have not been referred to them; indeed, the Apprentices Bill was passed by Lok Sabha without being examined by a Committee. The two major Bills on judicial appointments were also introduced and passed by both Houses within a week. Though these Bills are a variation of those introduced last year, it is debatable whether the new members had sufficient time to examine and digest the implications before voting on them.

The new Parliament has started on a good note. Given the legislative logjam in the last few years, a number of important Bills are pending in Parliament, or lapsed when Lok Sabha was dissolved. These include Bills across sectors: reforming higher education regulation, anti-corruption and service delivery, financial markets, direct and indirect tax reform, agriculture etc. Much work has gone into many of these Bills, including examination by Standing Committees. If the new government can form its views on these Bills and decide which one it wishes to back (if necessary, with modifications), then it can bring these up for discussion in the next couple of sessions.

As the government has a majority in the Lok Sabha but not in the Rajya Sabha, it will need to build a consensus (or at least gather support from some opposition parties) on these Bills. The Standing Committee has given recommendations with all-party consensus on most Bills, and some reports have just a couple of dissent notes. The government may choose to use the broad support indicated in these reports to convince other parties. If it succeeds, we could see a busy legislative schedule in the year ahead.