Getting India’s Money Back from Tax Havens: Congress caught in its own Web

by Arun Shourie

Stupefied by the strong endorsement all across the country of the demand that the money looted from India must be brought back, the Congress has tied itself in knots.

Its spokesmen - led, as will be clear from the arguments they have advanced, by four lawyers - have given five reactions:

• Why is Mr. Advani taking up this matter now, on the eve of elections?
• The GE-20 meeting was not the proper forum for taking up the issue.
• There is doubt about the figures.
• Why did the BJP government to replace FERA by FEMA, and thereby make the offences compoundable?
• Is Mr. Advani not unwittingly alerting those with illegal money abroad to spirit it away from Switzerland to other tax havens?
• What was the NDA doing when it was in office? In any case there is doubt about the figures.

The reactions betray panic as even the littlest reflection would have shown the “arguments” to be indefensible. Let us consider them one by one.

Why is Mr. Advani taking up this matter now, on the eve of elections?

The fact, of course, is that Mr. Advani took up the matter with the Prime Minister in April last year. He wrote to Dr. Manmohan Singh soon after it became known that the Government of Germany had succeeded in obtaining names of persons who had stashed money in the LGT Bank in Lichtenstein. The reply that P. Chidambram, the then Finance Minister, sent him showed that the Government intended to do little except keep going through the pretence of taking some steps.  Soon thereafter, we were alarmed to learn that a senior official of the Finance Ministry had written to the then Indian Ambassador in Germany not to press the Germans for release of the names of Indians in the list that they had obtained from Lichtenstein — lest the Germans take offence and conclude that they were being pressurized and their bona fides were being questioned! [This information was later confirmed by report filed by Amitabh Ranjan in The Indian Express of 31 March 2009.] Subsequently, we took up the matter in Parliament also. And yet the evasion, “Why now?”

The GE-20 meeting was not the proper forum for taking up the issue.

This customarily self-serving rationalization was put out by one of the Congress party’s lawyers and spokesmen. At this very time the party was trying to insinuate that, actually speaking, the Prime Minister had taken up the matter at the G-20 Summit. As its spokesmen could not point to any statement he made either at the Summit itself or even at the press meet the PM had held after the Summit, they drew solace from a passing reference to the matter in the speech he had made at the dinner hosted by Gordon Brown.

In any case, if the G-20 Summit was not the right forum for taking up this matter, how is it that in the communiqué that the G-20 leaders issued on 2 April 2009, in paragraph 15, entitled, “Strengthening the Financial System,” they pledged themselves “to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information”?

Were they also, in the view of the Congress party, acting inappropriately when they made such a strong commitment in their communiqué at the Summit?

And recall that no sooner had they issued the threat of imposing sanctions that countries which had been black-listed by the OECD that very day began declaring that they would indeed sign up on the agreement to exchange tax information, and that includes evasion.

In any case, there is doubt about the figures.

As is its custom, the Congress is trying to cover up the basic question of the money which has been looted from India and is lying in tax havens, by raising questions about the precision of figures and estimates. This is exactly the kind of legalisms with which persons like Mr P. Chidambaram and other legitimizers were fielded to cover up the loot from Bofors. In its paper, “Overview of the OECD’s Work on International Tax Evasion,” the OECD itself lists studies that state that there are $1.7 trillion to $11.5 trillion which are today parked in tax havens. This paper of the OECD has been widely reported in the Indian press. The basic point is: even if the amounts are just a few scores of billion dollars and not one and a half trillion dollars, why should they not be brought back to India? And the fact is that other countries, much smaller countries with none of the pretensions of being a “super power, have succeeded in getting their money back. Even as of October last year, when the OECD released its paper, little Ireland had succeeded in recovering almost a billion Euros through an investigation into offshore banks.

Given that even small countries like Ireland have got money back, is it not a shame, is it not an outrage that, as of yesterday, 18 April, 2009, The Times of India, should be quoting the Swiss Ambassador to India as stating on record that till now, the Swiss Government has received no request - not even a request - from the Indian Government?

The real question is different: can the money looted from India be brought back to the country when the attitude of the government continues to be as determinedly inactive as that of the present Government?

Can the Government which allowed Ottavio Quattrochi to take his money out of banks - where it was lying frozen on court orders - be trusted to bring back the loot that is lying in Swiss banks and other tax havens? Can the Government which prostituted the CBI so that he may get away from Argentina be trusted to bring the loot back?

Why did the BJP government to replace FERA by FEMA, and thereby make the offences compoundable?

Again, the Congress is relying on the short memory of its audience. The fact of the matter is that no one had been pressing more for the replacement of the harsh provisions of FERA than the Congress itself. The changes were being contemplated since 1996. The demand for doing away with the harsh provisions came to a crescendo during the Government of Mr. VP Singh when FERA came to be used for interrogating captains of industry - like Mr. S.L. Kirloskar - under harsh circumstances. As news reports of that period themselves indicate, FEMA which was approved by the Government in July 1998, was on the lines of a draft which had been prepared under the leadership of the preceding finance minister, Mr P. Chidambaram. Even today, you can go to the website of Rediff-on-the-net, go to their dispatch of 25 July, 1998, on “FEMA, Money Bills: Cabinet nods, Parliament’s turn next,” and you will read, “The Bills were broadly on the lines of a draft prepared under the leadership of then Finance Minister Palaniappan Chidambram.”

In any event, there is no mystery about the reasons on account of which the law was changed. They are well set out in the following passage:

“Until recently, we had a law known as the Foreign Exchange (Regulation) Act. Its object was to conserve and augment the forex reserves of the country. The way to hell, it is said, is paved with good intentions. Like many well-intentioned laws, FERA paved the way to disaster. FERA created a flourishing black market in foreign exchange. It brought into the economic lexicon the word ‘Hawala’. Illegal forex transactions became the fuel for the growth of crime syndicates with trans-border connections.

“FERA also became a tool of oppression. Successive governments persisted with FERA and added COFFEPOSA and SAFEMA. International markets do not respect draconian laws that run counter to common sense. India’s reserves, far from being augmented, dwindled at an alarming rate… Mercifully, FERA was buried finally on May 31, 2000.”

When and where was this written? In an article that appeared The Indian Express on 25 August 2002. Who wrote the article? None other than P. Chidambaram!

Is Mr Advani not unwittingly alerting those with illegal money abroad to spirit it away from Switzerland to other tax havens?

Another clever little statement by yet another clever lawyer of the Congress party! Would the looters who have stashed away money in tax havens from India still need to be alerted after Germany got the names from Lichtenstein as long ago as last year? Would they still need to be alerted after Germany offered to furnish the names to governments that asked for the names? Would they still need to be alerted after the United States got the names from the leading bank of Switzerland, UBS in February this year, and got it to submit to paying a fine of $ 800 million to boot? Would they still need to be alerted after the G-20 leaders, including Dr. Man Mohan Singh as the Congress would like to remind us, declared their determination to get the tax havens to disgorge the names? But such is the confusion in the Congress party and such the brilliance of its lawyers that all it can do is to seek to deflect the nation-wide demand for getting the loot back from tax havens by such witticisms!

What was the NDA doing when it was in office? In any case there is doubt about the figures.

Leaders of the Congress party would be better advised to ask, “During that very period, what was the Congress party doing, what were its lawyers and leaders doing, to thwart the efforts of the NDA Government to uncover the names of persons who had looted the country even on defence deals like Bofors?” But even if the NDA had done nothing - whether on terrorism or money abroad - is that any reason for not hurrying to avail of the unique opportunity that has arisen now?

Even while replacing FERA by FEMA, the NDA Government made sure that it would have an additional two years to file prosecutions under FERA. And it filed as many as 2000 cases against those who were under investigation before FERA lapsed. The reason for doing so, a reason that is well known to lawyers in the Congress party, was that, when a prosecution is filed it is adjudicated according to the law which prevailed at the time at which the case was filed. These are the very cases which the Congress later on did not pursue.

The fact of the matter is that it is now that the unique opportunity has arisen to get the loot back: Germany has succeeded in getting the names; the US has succeeded in getting the names; the G-20 leaders have pledged themselves to ensure the end of bank secrecy; countries that had hitherto refused to share the requisite information are pledging to do so - within a week of their names being published by OECD in the list of countries that were dragging their feet on the question, Costa Rica, Malaysia, Philippines and Uruguay pledged to enter into the relevant agreements.

Conclusion

There is a real fight ahead: a fight in the national interest, a fight that will have to be waged doggedly to get the names from the tax havens and to get the amounts back to India - as tax havens will not easily part with their route to lucre. And not all countries will be eager to wage the fight - so many rulers in Africa, in Latin America, to say nothing of the princelings of China - will be loath to see the fight succeed. So, determination and leadership will be required of India, and persistence, and forging alliances with civil society in Europe and elsewhere.

Nor are bilateral agreements any substitute to multilateral pressure. With close to seventy tax havens, decades will pass before agreements are concluded with each haven, even as money is spirited from the haven that has signed up to the one that is holding out.

As has been correctly emphasized, a consensus is already emerging across the country. Leaders outside the political realm, parties such as the CPI(M), SP, BSP, JD(U), AIADMK have all demanded that the Government act energetically to get the names from the tax havens and to get back the amounts. Instead of quibbling, the Congress would be well-advised to endorse the consensus, and act on it. Not joining secular forces on even so secular an issue?!

Responding to the Economic Meltdown

Some lessons for South Asia

by Arun Shourie

(The Asian Development Bank recently organised a meeting in Manila of central bank governors, ministers and senior finance officials from South Asia to consider the impact of the economic meltdown, and possible responses. Michel Camdesus, former managing director of the IMF delivered the opening address, former Union minister Arun Shourie the closing address. This is the text.)

Several features about the current economic crisis stand out. The first, of course, is the sheer scale of what preceded it, and the magnitude of what has happened in its wake: to recall a typical fact, in a recent lecture, Andrew Sheng mentions that, on the eve of the breakdown, the nominal value of financial derivatives and exchange traded derivatives had soared to fourteen times the world’s GDP.

The second feature is the pace of wealth destruction in this round: as has been observed, there has scarcely been another period of four to five months in which almost fifty trillion dollars worth of wealth has been wiped out.

Third, as several observers have pointed out, the breakdown differs from the Southeast Asian crisis in other respects also: that crisis was on the periphery of the world economic system; this one has originated in, and has thus far most severely struck the very heart of the system. The result makes demands of its own: as the Southeast Asian economies went into a tailspin, the OECD economies held up; this helped the recovery of the former as they were able to resume exports to the latter. This buoy is not available this time round: while some of our economies may be able to resume growth only when the US, European and Japanese economies come out of the recession, we will have to depend on our own efforts. This is all the more so as governments, pressed by job losses at home, will, overtly or covertly, adopt protectionist measures. As a lemma, the same proposition holds for China: it is idle to expect, as commentators kept saying in the last quarter of 2008, that China would shore up other economies. China is focusing its efforts on reorienting its economy towards domestic demand, domestic requirements, domestic employment: the “stimulus” this effort may provide for other economies will only be a residual.Fourth, the world has turned out to have become much more intertwined than experts had pronounced it to be. Economies are much more inter-linked, sectors within an economy like India are much more interdependent than had been presumed. How contrived the declarations of October/November last year look just four/five months later – that our economies will not be affected as the “fundamentals” of our economies are strong, as our economies are, in effect, “decoupled” from western economies. Our economies are linked to others through exports of goods as well as services, through remittances, through foreign inflows – through monies that have come in for arbitrage even more so than as direct investment. But more than any of these, our economies are linked with those of US, Japan and Europe through that all-pervasive intangible – confidence. Yes, particular banks and firms have been thrown into difficulties. Yes, there is shortage of liquidity. But the real blow has been to confidence – that is the tsunami that has traveled all the way to our shores. Till confidence is restored, things will not begin to turn around. And notice that as yet, the 4 trillion dollars notwithstanding, nothing that the governments of the US, Europe or Japan have done has shored up confidence.

That is one reason why the periodic declarations, “We expect recovery from the third quarter of 2009/ from the first quarter of 2010…,” are just that much whistling in the dark.

In spite of the scale of the breakdown; in spite of the pace at which wealth has been destroyed; in spite of the fact that nothing that has been done thus far – and what has been done this time round is far greater in magnitude than in any other crisis in decades – has shored confidence, in spite of these features, Government after government has underestimated the impact that the crisis is certain to have on its economy. Indeed, several governments – and the Government of India is a prime example – have been in denial. The tsunami has hit countries successively. But, till the penultimate moment, each has convinced itself that the tsunami has passed at a safe distance.

The first lesson is not to remain in denial. Governments must anticipate. They must react at lightning speed. They must overwhelm. The old adage is indeed apt: hope for the best but prepare for the worst. A lemma is: do not be lulled into relaxing your effort by blips: that in Pakistan’s case remittances have, in fact, increased a bit in the last two months may well be due to the fact that workers who are being laid off in the Middle East are repatriating their savings in one go; that automobile sales in India have gone up in January may well be due to some transient factors… Hence, instead of clutching at these straws, prudence dictates that we assume that developed countries will take five to seven years to return to the status quo ante, and devise our responses accordingly.

Nature of the stimulus
The view has been urged, “Our deficit is our stimulus.” Such claims are a symptom: the current crisis is being used by many governments, the Government of India is again a prime example, to cover up the results of mismanagement during the period preceding the crisis. Financial profligacy is what caused the deficits in India, for instance, not some prescience about the impending breakdown. Unchecked, poorly targeted subsidies on food and fertilizers; on petroleum products; a massive waiver of agricultural debts; pay rises for government staff – these three items are what pushed the combined deficit of central and state governments in India to over 11 per cent of the country’s GDP. Not only were these outlays way beyond what prudence would have allowed, they were grossly under-budgeted: the provision for food and fertilizer subsidies was at least a third less than what would manifestly be required; the POL subsidies were kept out of the Budget calculations all together; as were the outlays on the massive increases in governmental salaries.

The assertion, “The deficit is our stimulus,” presumes that our economies are today suffering from the classic Keynesian deficiency of demand. That is far from being the case. Not a generalized deficiency of demand but a breakdown of confidence – this is what is causing industry to hold back on investment, it is what is causing even consumers to hold back on purchases. And that is precisely why cuts in rates of interest, cuts even in taxes are not triggering the surge in investments and purchases that policy makers have assumed would follow: how can the fact that a person will have to pay 2 per cent less as interest lead him to go in for a house when he is not sure whether he will have his job two months from now?

Prior profligacy limits a country’s ability to deal with the crisis. And profligacy today limits its ability to deal with the crisis as it continues into next year. Today the countries that have reserves, that have fiscal headroom, that have the ability to execute massive infrastructure projects – these are the countries that are in a better position to navigate the crisis. When investors and others see that their government is unable to bring its expenditures to heel, their confidence in the future is further damaged. And there is the real effect too: in India, with governmental borrowing of Rs. 3600 billion having become inescapable in 2009/2010, the State will be pre-empting the private sector from the market, it will be pre-empting the very sector on which it is coming to rely not just for executing infrastructure projects but even for financing them. A return to fiscal discipline, therefore, is necessary precisely for meeting the crisis.

There is another reason for this. The crisis is no longer a generalized one. By now it is sector-specific. It is location-specific. It is firm-specific. Units in Tirupur in Tamil Nadu producing garments for exports have been hit hard. By the time the stimulating effects of a general deficit will reach Tirupur, an age would have passed.

Moreover, jobs are not malleable. Establishments in the gems and jewelry business have had to cut down operations drastically in Gujarat. Assume that, through deficits, the Government finances public works in Bihar or even in Surat. How many diamond cutters will be inclined to or even be able to avail of them?

To be of help the relief must be in the locality and in the industry that has been hit. Faced with a sudden fall in purchases of trucks, the commercial vehicles sector will be helped not when the Government goes in for an even larger general-purpose deficit but when it decides to expedite procurement of trucks for the country’s defence forces.

The same goes for individual firms. To pluck an example from India, the very firms that were the pride of the country yesterday as they acquired firms abroad are in danger today: several of them acquired the foreign firms with substantial borrowings. Today, with the collapse of markets, the fall in commodity prices, the evaporation even of working capital, they are finding it difficult to service their obligations. That constitutes a twofold problem for the country. First, at the very time that foreign funds have been withdrawn – close to 70 billion dollars in the last six months – about $ 53 billion short term debt has to be serviced – either through repayment or through renewal – in the coming year. Second, a failure of even one of these firms will not just be a problem for that firm, it will be yet another blow to confidence in general. In a word, governments should be planning not just general packages but location-specific, industry-specific and firm-specific relief.

While doing so, governments must keep the inarticulate in mind also. With sources of external commercial borrowing having dried up, Indian corporates, for instance, will be turning to Indian banks and the Indian market. The small and medium establishments, already hit by the sudden and extreme risk-aversion that has seized our banks like banks elsewhere, will now be squeezed out completely. Yet, as a recent McKinsey study reminds us, this is a massive sector. It accounts for 40 per cent of manufacturing output, that is about 17 per cent of the country’s GDP. It accounts for close to 44 per cent of exports. Most important, it employs close to 30 million people. Closures and lay-offs in this sector will be diffused. But they will be of an order that, if unattended, can trigger social unrest.

For the same set of reasons, governments should be alert to early signs of stress even in sectors that are conventionally regarded as strong. In India, for instance, it is generally assumed, and quite rightly so, that our banking sector is safe as it has been conservative. It has made substantial progress in bringing down non-performing loans to just about 2 per cent of its outstandings. But recent studies – by Chetan Ahya and Ridham Desai of Morgan Stanley, by Joydeep Sengupta and Anu Madgavkar of McKinsey – remind us other that there are facets also: about 40 per cent of corporate India’s asset base has a return on incremental capital that is lower than the cost of capital; and Indian banks have lent $ 100 billion to these vulnerable firms – loans that account for a fifth of total bank loans. In a word, take no sector for granted. Identify the vulnerable units in each sector, and prepare contingency plans for them – remembering always that a collapse of any constituent of any sector will impair the most important variable that is needed for revival, the very variable that is most fragile today – namely, confidence in general.

In such environment general deficits will be as much of a stimulus as throwing money out of the window. The stimuli which will really help are ones that strengthen the viability, sustainability, and competitiveness of the economy for the long run — that is, for the time when this particular crisis would have passed and the economy would be back to its normal course. A good example of this kind, for instance, is the announcement in the US that it will be deploying a good bit of its stimulus plan towards creating a green infrastructure. Outlays to create alternate energy which liberate economies like those of South Asia from their current dependence on imported Oil supplies; expenditures to multiply and enlarge manifold the current facilities available for higher and technical education, facilities which would overcome the extreme shortage of technical personnel in these countries would be examples of the same kind. An excellent initiative, one that we should emulate, is available from Singapore. The Government has launched a plan under which a person losing his job can enroll in an institution for acquiring higher skills than the ones that are required for his existing job. He is paid a stipend for every day that he attends a class for five hours of class. When the current downturn is behind us, the person will be able to seek a job which is better paying and which demands more of him than the job that he has just lost.

The crucial variable here is the ability of the country to execute these projects expeditiously. This is why China is way ahead of, say, the typical South Asian country. To begin with, it has $ 2 trillion of reserves. With these it can finance massive infrastructure projects – an option that is not available to a country like India which, through the Government’s profligacy of the past three years, has robbed itself of fiscal headroom. Equally important, China has large supplies of engineers and skilled personnel – because of the extensive programmes which it had implemented earlier for both, training engineers as well as for upgrading vocational skills. With those two trillion dollars it can also, as it is doing, acquire mineral and other resources in other parts of the world, the resources that it will need for its long-term growth. Most important, China has a shelf of projects which it can start implementing forthwith: many of these projects had been prepared to the last detail as long ago as 2005. Several of them were kept in abeyance, in a sense, as it was felt that the economy was overheating. Now they can be implemented without any delay. And that is possible because China has overcome the customary obstacles which hold up the execution of projects in countries such as ours. It has acquired an unmatched capacity to implement projects expeditiously. In our case, apart from implementing such projects as can be implemented now, the current crisis is yet another occasion to make every effort to acquire the ability and resources to improve the capacity to implement projects more expeditiously in the future.

Why not start straightaway? Institute massive rewards for firms and local and provincial governments that expedite the implementation of projects? Institute tax rebates for companies which, instead of laying off workers, retain them and have them acquire better skills?

A role for the ADB
And this points to a vital role which an institution like the Asian Development Bank can discharge at this moment. Andrew Sheng and others justifiably remind us of the curious charge that has been put out – namely, that countries of Asia have exacerbated the current crisis by their excessive savings, that the current crisis has been made possible, indeed that it has been intensified by what have been called “global imbalances”. This is one of those predictable surprises. Our countries were being hectored incessantly that we should increase our savings rate. And now we are being told that, because we have done so, we have contributed to intensifying the existing crisis! But, for a moment, take this charge at face value. The cure is obvious. The cure to “global imbalances,” it has been rightly said, is to develop the capacity within Asia to use our savings here.

In addition to improving our capacity to implement projects within our countries, we should enhance our capacity to implement cross-country, regional projects. There are a large number of such projects which can be implemented, but which have been languishing for reasons that are as remediable as they are well-known. Setting up power projects in Nepal from which power is sold mostly to India; setting up projects to exploit the natural gas resources of Bangladesh from which a large proportion of gas would be sold to India – these projects have not got off the ground for decades because undertaking them has become a political issue within Nepal and Bangladesh. This is where the Asian Development Bank, with the trust which countries in the region repose in its fairness, and in its objectivity and expertise, can play a vital role. It should, for instance, draw up the terms and conditions which would be best for Nepal and would be fair to India for implementing power projects in that country.

This is the role which would be more appropriate than to expend time and effort in setting up yet another institution. As is customary in the wake of every crisis, today also proposals are being advanced for setting up new institutions. Shouldn’t we set up an institution for regional monitoring? Shouldn’t we set up an arrangement, a regional fund for helping our countries tide over such crises? Our experience with new institutions in response to crises has been, that, ten years after they have been set up to deal with the problem, the problem remains as it was, and the institution has become a new problem. Therefore, instead of going in for more institutions, an organisation like the ADB should use its influence and expertise and acceptability to persuade governments to at last start implementing cross-country projects.

Reforms
The current crisis has triggered a sort of triumphalism among those who have traditionally opposed reforms in our countries. “See,” they say, “capitalism has failed; liberalization and opening up of the economy, integration with the world has brought all these problems upon us.” Therefore, they are pressing, not just a halt to further reforms, but for a reversal of many of them. With this logic in hand, we should just have remained at the hunting and gathering stage. Had we only done so, none of the crises that afflict countries periodically would have touched us at all! The lesson is the opposite one. Every circumstance, every arrangement, every new setup opens up new opportunities just as it also occasions new problems. We should not, for that reason, shy away from reforms and progress. The lesson is to institute such correctives and reforms as the new circumstances demand. One of President Obama’s advisers has a good maxim: “No crisis should be allowed to go waste”. In the current circumstances also, the people, as well as governments will be prepared to take measures today which they would not have taken in normal times. The new circumstance should, therefore, be used to affect improvements that are necessary in the light of the crisis as it has unfolded, and at the same time to institute those reforms which will enable our countries to adopt policies and implement projects more expeditiously – policies and projects which, as we noted above, will strengthen the viability, competitiveness and sustainability of our societies for the future.

But all this is contingent on our having clear-headed, competent, purposeful, strong governments. This is the real deficit, the real crisis in our societies – apart from the advance that has been registered in Sri Lanka of overcoming the terrorist threat, and apart from the steady hands that guide Bhutan, governments in South Asia are losing grip as well as legitimacy. No stimulus package, no slew of economic reforms can survive the wreckage of governance.

Considerations that go beyond countries
One of the important features about the current crisis is that the breakdown has not come about because of one rogue, not even because of a handful of rogues. This is not the work of a Harshad Mehta or a Madoff. Entire industries have been involved in bringing about this collapse. Mortgage salesmen, banks, financial analysts, chartered accountants, auditors, rating agencies, regulators, central bankers and the governments – what has happened is the joint product of one and all of them. I’m reminded of a phrase which Joseph Berliner had used to describe the inability over decades of Soviet planners to get at the facts about individual enterprises. The reason, he said, was that from the bottom – the shop-floor of the factory – to the top – the provincial and central planning bodies – everyone had a vested interest in exaggerating the production figures and minimizing the quantities of raw material that had been used to produce the particular item. The reason, he wrote, was that functionaries all along the line were knit in “interlocking webs of mutual complicity.” These “interlocking webs” of the complicit are precisely what account for the current breakdown. For that reason, merely adding one more twist to a regulation or even to the law; merely setting up another institution which in the end comes to work in the same way as the existing institutions – such steps will not do.

For we must examine how this mountain of sand swelled to such proportions and “no one noticed.” We must reflect on the ease with which what was good for a few got dressed up as being good for all. We must reflect how warnings, even protests, some of them from leading statesmen of Asia itself, were disregarded. In fact, they were drowned in the general applause and acclamation of “financial innovation” which was said to be taking place. We must reflect how, in fact, regulations were enacted in countries like the U.S. but were not enforced. We must recall how, at crucial turns, regulations were, in fact, relaxed.

There were several reasons why all this happened. For the present purpose recalling just two of them will suffice. First, the beneficiaries, for instance the investment bankers, had acquired the position and “the intellectual stature” of referees. They were interlinked with advisers, analysts, rating agencies, and ultimately with the regulators. That is how what was good for them came to be dressed up as being good for all. Similarly, several governments and central bankers, as is now acknowledged even by some of the prime actors themselves, blew into the bubble and made it swell even more. The reason was that they took the resulting rise in asset values as certificates for their performance, they took them to be evidence of the correctness of their policies and as proof of the confidence which markets all over the world reposed in them personally.

After all, it is not that warnings were lacking. It is not the case that everyone was convinced that the innovations were all for the good. All of us today recall the statement of Warren Buffet – about an entire category of these innovative instruments being “Weapons of Mass Destruction”. We recall the warnings of Naseem Talib, of Roubini, of Jeremy Grantham. The point to reflect is, “How is it that these warnings went unheeded? How did they get drowned?”

The second point to reflect upon is more fundamental: are there features that are inherent in this kind of a financial universe and which make such breakdowns inevitable? Take, for instance, the simple matter of Asset-based Lending. Marry it to the perverse incentive system which became the characteristic of the financial world in the West. Loans would be given on the basis of the value of a category of assets, say houses. As the volume of loans against that category of assets for further investment in that category of assets increased, the value of those assets went up. Accordingly, in the second round, those who could offer those assets as collateral were able to borrow even more against those assets. That in turn raised the value of those assets even higher… And the larger the volume of loans that got made against those assets, the higher the rewards that accrued to those stoking the fire. And notice, the extent to which “innovation” was taken to further this fire: so much so that today the banks themselves, and the companies that ostensibly insured the transactions of those banks do not know the extent, even by a broad order of magnitude, to which they have become exposed to those toxic instruments.

To continue with the current example, so as to safeguard ourselves against future collapses of this kind, we must devise and hone gauges of our own to identify bubbles. And it should be the duty of our governments and central banks to alert our citizens, in particular small, uninformed, retail investors about bubbles that are emerging. Even this recent episode shows that when asset prices rise at the astronomical rate at which they did in the last five years, a bubble is getting formed. Similarly, when transactions come to have little to do with reality, that too is an indication that we should heed. In this last round, for instance, far-fetched and unimaginably esoteric formulae became the basis for millions of dollars to move into and out of “packages”, and countries. The ratio of one currency to another; the ratio of those two currencies to that of another pair of currencies; correlations of absolutely distant variables over whatever stretch of time fit that string of observations… Such determinants became the automatic triggers for transactions. They had nothing to do with what was happening in the underlying sectors, in the firms. When things are reach such a pass, we should know that transactions and instruments have departed so far from reality that they are bound to come down in a crash.

Thus, the spiral and the eventual collapse were inherent in the design itself. But there is an even more basic question that we must ponder. Are the spiral and the subsequent collapse inherent only in a particular sector? Or is it that the economies themselves have got addicted to bubbles? The real estate bubble in one round. The dotcom bubble in the next. The sub-prime and yen-trade bubble in the third…

Therefore, while much has been made of the fact that this breakdown was triggered by a policy failure, the failure to save Lehman Brothers, the fact is that the failure to save Lehman Brothers was just the occasion for what happened subsequently. That failure, to recall an expression used in a very different context, was just “the spark that lit the prairie fire.” The fact that entire sectors collapsed, that entire economies went into a tailspin so swiftly upon the decision not to save a single institution shows that the whole structure had become just a wall of sand. That is what we should reflect on for our future.

Several operational conclusions follow.

A few things to do
First, there is much talk of a new international economic architecture. Unfortunately, once again almost all work on what shape that architecture should take is being done in the very countries, sometimes by the very institutions and personnel whose excesses and misjudgments, to put it no higher, have led to the present pass. But they are, and quite naturally, loath to part with power. They may well let time pass. They may once again busy us in futile debates. And ensure that processes and institutions remain in their control. That would only ensure that the next bubble, and with it the next jolt will not be long in coming. That is all the more likely because, in those societies, the ones whose excesses and greed have led the world into this pit have got away scot-free. Others – tax payers who must pick up the bill for the bailouts, workers who must suffer joblessness – are the ones who are defraying the cost.

Second, we must keep our ears open to the Cassandras. We must not get swept away by intellectual fashions. Certainly, we should not succumb to the urgings of financial wizards and advisers who chastise our countries and governments for not keeping up with innovations that have been adopted “all over the world.”

Third, these events remind us once again that we must think for ourselves. We must be centres of countervailing intellectual, institutional and real economic power. Unless we build up these capacities, we will remain vulnerable to being misled by persons and institutions that have ideas that suit them rather than us, to say nothing of agendas they might have.

It is equally important to nail the culpable. First, we must document and nail the double standards of the West and of international institutions and international advisers. Policymakers in Southeast Asia recall vividly the advice which was thrust down their throats in the late 1990s. “No, no,” they were told, “you must let those who had made mistakes collapse. That is the way the market ensures that the mistakes will not be repeated in the future.” Governments in Southeast Asia, the government even of Japan, the country with the second largest economy of the world, let banks and other firms fail. These were then bought up at throw-away prices by western companies and consortia. And what is the position today? We are told that all rulebooks have to be thrown overboard. We are told that governments must intervene to save the companies and institutions which have done such gross wrongs, which have made such enormous mistakes, which have been propelled by little else than personal greed – we are told that governments just have to intervene and save these institutions at the cost of the taxpayer because, otherwise, the system as a whole will come down. When that was to be the consequence for our countries, no one was prepared to listen. Not just advisers, but institutions on which countries across the world, including our countries are represented insisted that failure was the only instrument for improvement. These double standards continue to this day. How many have spoken out against the protectionist measures which have already been announced by President Obama? Has he not announced that tax reliefs will not be available to firms that outsource their work? Has he not announced that foreign nurses will not be an employed or welcomed? What if the leaders of one of our countries had announced such measures?

For the same reason it is very necessary to document and nail the red-cards and yellow-cards which rating agencies and other monitors keep handing out. How come they were giving triple ‘A’ ratings to institutions and to instruments and to packages which we now see were entirely hollow? Are these not the very rating agencies and monitors that hand out ratings of one kind or another to our firms, indeed even to our countries, ratings that then influence the decisions of investors and thereby move billions of dollars into or out of our countries? We must document their record so that, in future, they command only as much authority as the intrinsic worth of their work deserves.

Conclusions
In a word,

We must grab the crisis by the forelocks, as we would grab time.

Second, by now the remedies have to be sector-specific, location-specific, firm-specific. General-purpose deficits are no answer to the downturn into which we have been pushed.

Third, we must think for ourselves. In particular, we must document the advice that was thrust down our throats over the years.

Fourth, we must focus on working and reforming existing institutions and processes rather than on setting up yet another slew of institutions. For this purpose institutions like the Asian Development Bank, countries like India and others in South Asia should coordinate and sustain intellectual effort.

[1] Andrew Sheng, “From Asian to global financial crisis,” Third K.B. Lall Memorial Lecture, Indian Council for Research on International Economic Relations, New Delhi, 7 February 2009.

(This article was first published on the Indian Express website on March 19, 2009.)

Bubble, Bubble, Toil and Trouble

by Arun Shourie

Several points about this government’s deficit figures are to be borne in mind.First, notice how far the Government has departed from the limits that had been prescribed in the FRBM act, limits that were acknowledged all round to be necessary both as prudence and to maintain our credibility for investors and creditors abroad. That the gross fiscal deficit had climbed to an average of 7.7 per cent of the GDP in the late 1980s had raised alarm all round. Accordingly, under the FRBM legislation it was decided that this ratio must be brought down from 6.2 per cent in 2001-02 to 3 per cent in 2007-08; and that the revenue deficit must be eliminated by March 2008 and a healthy surplus must be built up in the following years. The GDF/GDP ratio will be more than double the target; the revenue account, instead of being a surplus will be in deficit — a deficit close to 5 per cent of GDP. Economists apart, the CAG has been compelled to make severe strictures on the gross irresponsibility that has resulted in these deficits, and charge the government with heaping burdens on future generations. Do you think that will make any difference to these know-it-alls?

Second, the government certainly cannot claim any surprise at deficits having climbed so high. Several commentators outside Parliament; persons like Jaswant Singh, Yashwant Sinha and me, inside Parliament repeatedly showed how the Budgets — in particular the last Budget — were grossly underfunded, and that the country would be saddled with the costs of such subterfuge. To no avail.Third, the deficits have absolutely nothing to do with any planned Keynesian stimulus to the economy. They have arisen wholly from the profligate mismanagement of the preceding three years — in particular, of the last year, 2008-09. In turn, there were two aspects to this dereliction. To begin with, the items on which governmental funds were expended have left next to no capital assets in their wake — they were just populist heads. Furthermore, the resources that were needed to fulfill these populist commitments were grossly understated. They were understated deliberately and for a purpose: so that the government could claim that it was adhering to its obligations under the FRBM Act. The subsidies on fertilisers and petroleum, the amounts that would be required for the debt waiver, the incidence of the pay commission — items that figured in the Budget itself, items that were well known — were just left out of account. It is on the basis of such concealments that the government claimed, as Chidambaram did in his Budget speech of February 2008, “Honourable members will note that not only will I achieve the target for fiscal deficit under the FRBM Act, I have also left for myself some headroom. In the case of revenue deficit, I will meet the target of annual reduction of 0.5 per cent.”

Far indeed from being a stimulus, the deficits have by now foreclosed options: they have left little room for the stimuli that are needed. The prime minister’s own economic advisory council says as much. “The pre-existing high levels of debt and fiscal stress also limit the available headroom for a counter-cyclical thrust of fiscal policy,” it states in its Review of the Economy, 2008-09. “In the prevailing situation re-prioritisation of government expenditure and speedy implementation of already funded projects at the Central and state levels are critical for the fast revival of the economy.” Any evidence of “re-prioritisation of government expenditure”? Any evidence of steps to ensure “speedy implementation of already funded projects”? In fact, the enormous quantum of borrowing that the fiscal profligacy of the last three years has made unavoidable for the coming year — estimated to be well over Rs. 3,60,000 crore — squeeze the options further. Not only will the government have little money to fund ambitious infrastructure projects, this level of borrowing will leave little for borrowing by the private sector on whom the government is depending more and more for financing as well as executing these projects. With overseas sources having dried up, large Corporates are turning to our banks. And so the only consequence will not just be that there will be less for infrastructure projects, the small and medium enterprises will find it that much more difficult to finance their operations. They would have been pre-empted at the banks by the large corporates.

Indeed, precious time was wasted all along: recall the endless discussions on whether some part of mounting foreign exchange reserves should be used for leveraging an infrastructure fund; recall the tardy, not to say stately pace at which schemes such as that to fund “viability gaps” of projects were handled; recall how nothing but nothing was done either to build up the much-talked about shelf of projects, nor to institute incentives for rapid execution of projects that had been approved.

Fourth, alarming as these deficit figures are, they are almost certainly underestimates even now, and doubly so. As has been pointed out, on the one hand the growth of nominal GDP is liable to be less than the Budget assumes, and, on the other, so are the revenue proceeds. Even that is not the end of the story. The deliberate understatement for 2008-09 and the deliberate underestimation for the coming year continue. To cite just one instance, the Business Standard ( February 20, 2009) has nailed how the fertiliser subsidy has been understated. The subsidy payable for 2008-09 is Rs. 102,000 crore. It has been shown to be Rs. 75,847crore. Wonder of wonders, for the coming year, it has been shown to fall to Rs. 50,000 crore! As the paper has pointed out, not only is some of the subsidy due this year liable to spill over into next year, even if prices of fertilisers fall, the fall is liable to be offset by the depreciation of the rupee.

Fifth, such gross departures from what Parliament has mandated raise the question, “What exactly is Parliament approving when it approves the Budget?” For 2008/09, the revised estimate for the gross fiscal deficit is two and a half times the Budget estimate; that for the revenue deficit is nearly four and a half times the Budget estimate. Net borrowing by the government is liable to be two and a half times the budgeted figure. Indeed, as has been pointed out by observers, it is Rs. 40,000 crore more than the borrowing figure that was announced just a week before the Budget. At 182 per cent, 132 per cent, 125 per cent, 85 per cent, the figures for subsidies, pensions, total revenue non-plan expenditure, defence expenditure respectively — to take just a few examples from among the bulkier heads — bear no relation to what the Parliament approved.

TRANSPARENCY: The CAG’s report which was tabled in Parliament on February 20 2009 documents at length what it calls “opaqueness in government accounts.” There are “significant deficiencies” in the accuracy, completeness and transparency of the accounts, it states. Eight “important statements” which four years ago the twelfth finance commission had said must be included in the Union finance accounts, are still not included. The inclusion has been “accepted in principle,” the government tells the CAG. “The process of consultation is on,” it tells him. The actual inclusion “would be a time consuming exercise.”

We get a glimpse of what is happening in the meanwhile. In 2007-08, the Centre transferred Rs. 51,260 crore directly to “autonomous bodies, societies and non-governmental organisations” ostensibly for implementing centrally sponsored schemes. What happened to these fifty one thousand two hundred and sixty crore rupees? “The aggregate amount of the unspent balances in the accounts of the implementing agencies kept outside government accounts is not readily ascertainable,” the CAG records.

Furthermore, CAG finds that fifty per cent of the total expenditure listed under 28 major heads of the government accounts, an amount of Rs. 20,273 crore has been lumped under a minor head, “other expenditure”. “This indicates a high degree of opaqueness in the accounts,” the CAG observes in characteristic understatement. Giving further examples, the CAG concludes, “This shows that the existing structure of the government accounts does not truly reflect the current activities of the government in these ministries/departments.”

The CAG contrasts the original provisions that were approved by Parliament when Chidambaram presented the Budget for 2007-08 with the supplementary provisions that government had to present within a few months. The supplementary provisions were 143 per cent of the original provisions in the case of the civil aviation Ministry; 1378 per cent (yes, 1378) in the case of the department of economic affairs; 10,761 per cent (yes, 10,761) for the ministry of labour and employment; 718 per cent for the ministry of petroleum and natural gas. Such large discrepancies are due to “unrealistic Budget assumptions,” the CAG points out.

Is this accountability? Is it responsible budgeting? Look at the myth we live by: on the one hand, we follow the obsolete British convention that a cut of just a rupee in any item in the Budget must cause the government to resign, and, on the other, governments so casually disregard what Parliament bound them to do. And yet, the budget is but a symptom of the way economic policies have been managed in the last five years. Reforms were left to rot. The “dream team” insinuated that the Communists were not letting them do anything. The responsibility actually rests with that team itself. The “team” exemplifies a type: persons who believe in nothing. For commitment to a cause — say, reforms — does not mean that one makes the occasional speech on it. Commitment is measured by what you are prepared to stake for that objective.

The stoppage of reforms prepared the ground for the slowdown. And the exact repetition of what had been done in the mid-1980s sealed it. Prices started rising, in part because of shortages of specific commodities, in part because of erratic announcements and policies — recall how food stocks were allowed to run down to dangerous levels; recall the announcements and reversals of announcements on imports of wheat and other commodities. Prices rose. Instead of attending to the specific problems and shortages that were triggering the rise, the government, exactly as had been done in the mid-1980s, wielded the axe of monetary policy: interest rates were raised, CRR was raised. These measures choked growth without reining prices in swiftly enough.

By early 2008, anyone who traveled to factories and industrial estates could see that the momentum was petering out. By March, a minister of the government itself had acknowledged in answer to a question in Parliament that 25 lakh jobs had been lost in three sectors alone. As the tsunami of the financial crisis rose, Chidambaram and Manmohan Singh, and sundry chota-motas of the government stood firm — on denial. “Our fundamentals are strong,” they declared. Had the fundamentals of the Southeast Asian economies collapsed? Had the fundamentals of Argentina, Brazil, Mexico collapsed when their economies went into a tailspin? Indeed, has anything happened to the fundamentals of the US, Japan, European countries today? But “our fundamentals are strong” it was.

Next, the country was fed — and, I am so sorry to say, leading economic papers broadcast this nonsense — “We are effectively decoupled.” Decoupled? Twenty per cent of the GDP, which is what our exports are by now, is no inconsiderable figure. Remittances are over $ 45 billion. Even a fool could see that the slowdown in the Middle East, in the West would lower this figure. Similarly, IT earnings are close to $ 50 billion: how could they remain unaffected when some of the largest clients of our companies were literally collapsing? Even more than these interconnections, we are intertwined with developments elsewhere because of the overriding determinant: confidence. That knows no boundaries. The way our markets would every day mimic what had begun to happen to Nikkei in the morning, and what had happened to the Dow overnight was a daily reminder of this. But so were eruptions in the “real” economy: the fact that importers abroad were not honouring their letters of credit; the fact that they were not lifting goods that had reached their ports; the cancellation of orders… But “decoupled” it was. And then, superciliousness, not to say piety, was made policy. “Just casino capitalism,” Manmohan Singh said as he returned from Japan. Vital months were lost.

PUFFING UP THE BUBBLE: Such dereliction is in itself a crime against the country. But there has been more than dereliction: the government actively fed the bubble as it swelled, and then decreed measures that accelerated the downswing. To take just one instance, in Parliament and outside, my good friend Bimal Jalan warned more than once that the soaring ascent for which the government was taking credit was a bubble, that it just could not, and would not be sustained. With dividends having been exempted from taxes; with interest rate differentials having become what they had; with higher and higher institutional inflows chasing a small range of equities and the resulting sharp increases in stock values; with the appreciation of the rupee, a person abroad could shift money to India, earn a 100 per cent return, and take his money out. It doesn’t take rocket science to see that this just cannot be sustained, Bimal warned repeatedly.

Others gave similar warnings. Chetan Ahya and Ridham Desai wrote a series of analytical reports in which they pointed out how the entire bubble had come to swell merely because of foreign inflows, and, in these, on inflows from the most fickle segment among foreign investors, the institutional investors. In emerging economies other than India, foreign direct investment is around 75 to 85 per cent of foreign inflows, they pointed out, and institutional portfolio inflows are around 25 to 15 per cent. In India’s case though, the proportions were running at just the opposite levels. These inflows reached unprecedented levels: whereas in 2001-03, India received around $ 10 billion a year as foreign inflows; in 2007-08 it received $ 107 billion. Sarkari propagandists claimed this testified to the excellence of the government’s policies. In fact, as Bimal and others were pointing out, it was just arbitrage money. These inflows were what fueled the easy credit cycle: in the last five years, credit creation grew at a rate double that of nominal GDP. The swing was bound to reverse.

But who would listen? Certainly not “internationally famous economists”, certainly not “dream teamers”.

By October 2008 it seemed that those in authority were active participants in the market: it really will be instructive to juxtapose their announcements with the gyrations of the market in the latter half of 2008. Absolutely inexplicable steps were decreed. As everyone was pulling his money out, as there wasn’t even a remote chance that amounts would be brought into India, P-notes were suddenly sanctioned again: this in the wake of the national security advisor having warned that terrorist money was coming into the stock market, that the strictest inquiries must be made about who is bringing in money lest our financial system is destabilised, lest funds brought in anonymously are utilised for financing anti-India operations. Not just that, even as other countries moved to stop short-selling, the government allowed it to continue. Indeed, it went one better: even “naked short-selling” — a nefarious practice which cannot but sharply amplify the amplitude of market swings — was allowed to continue.

I remember our meetings with leading figures from the market as well as leading industrialists. We studied first-hand reports of what was happening all round the country, and tabulated a set of recommendations. The government had no time for any dialogue. We released them in public. During one discussion in the Rajya Sabha, Yashwant Sinha drew attention to these recommendations. Chidambaram’s response was typical: FICCI has given its 10 points, he said; CII has given its 8 points; BJP has its 12-point recommendations. All of them will be examined by government as and when necessary. What loftiness!

That is the attitude that has brought us here. Growth slowed down. Reforms that would ensure future growth, arrested. Infrastructure that future growth requires, at a crawl. Government finances out of synch. Too little being done, too late, to stimulate the economy. The worst of it: the word of India’s government devalued. Not an Interim Budget. An Interment Budget.

(Concluded)

(This article was first published in the Indian Express on March 4, 2009.)

Paper Promises and Alibis

by Arun Shourie

Public Distribution System: From its very first Budget, this Government has repeatedly stressed the urgent need to overhaul the public distribution system — the poor and the lower middle class depend on it; leakages are phenomenal. At first Chidambaram declared that government would fly one sort of pilot — distributing food stamps rather than food. His way of dealing with the fact that nothing had been done was to declare in a subsequent Budget that government would fly another sort of pilot — distributing food with the aid of smart cards. In this, the final and sixth Budget of this government, we are told that an allocation has been made for this pilot — Rs. 1.1 crore to Chandigarh, Rs. 25 crore to Haryana, and Rs. 1 crore to the NIC to see how the pilot will fare. And this allocation, the Budget documents tell us, was made only on 26 December 2008! In the meanwhile, the leakages continue unabated and unchecked. That pattern holds for the black hole of subsidies as a whole.Subsidies: In his first Budget for this government, that for 2004-05, Chidambaram reminded Parliament, “Seven years ago, I placed before Parliament the first paper on subsidies.” They need to be sharply targeted, he said — a euphemism for saying that they were not reaching the intended beneficiaries. Hence, he took a decisive step: he announced another study of them!

Next year, in the Budget for 2005-06, Chidambaram reported the great progress he had made — the study had been placed in Parliament, he said. Subsidies are necessary, he said, “However, we must now take up the task of restructuring the subsidy regime,” he told Parliament, adding immediately the caveat that would constitute the anticipatory alibi for nothing being done — “we must now take up the task of restructuring the subsidy regime in a cautious manner and after thorough discussion.”

Sure enough, the alibi came in handy. In the Budget for 2007-08, Chidambram was able to acknowledge, “The issue of subsidies is proving to be a divisive one, but,” and this showed to those who had been expecting decisive steps from this “dream team” of reformers that he hadn’t given up, “I would urge the honourable members that it is imperative that we make progress on this front if we are serious about targeting subsidies at the poor and the truly needy.” But it wasn’t that he, his ministry and the government had been doing nothing. “My ministry has held extensive discussions with stakeholders on three major subsidies, namely, food, fertiliser and petroleum. We have also sought the views of the general public. Working groups/committees have gone into the question of fertiliser and petroleum subsidies. I would urge members to help government evolve a consensus on the issue of subsidies.”Manmohan Singh himself intoned platitudes to the same effect at meeting after meeting. Last year, Bibek Debroy recorded his having made declarations on the subject twenty two times. [IE, June 12 2008.]

The 2008-09 Budget did not mention the subject at all! During the year, the near-fatal consequence of not having done anything on the matter became evident as Oil and fertiliser prices shot up and the government, having moved back to the administered price mechanism, dithered and failed to pass the risen prices on to consumers. By the beginning of October 2008, the chairman of the government’s own oil company was compelled to say in public that, if urgent steps were not taken within three weeks, the company would have no resources to import oil.

But in an oblique way one subsidy was, in fact, mentioned in one of the documents that accompanied the 2008-09 Budget. This is the subsidy on fertilisers. The government had emphasised the need to distribute the fertiliser subsidy in some alternative way. In the 2007-08 Budget, the government had expressed its firm resolve to take the decisive step as follows: “The fertiliser industry has agreed to work with the department of fertilisers to conduct a study and find a solution.” And what would happen once the study was completed? “Based on the report, government intends to implement a pilot programme in at least one district in each state in 2007-08.”

So, what happened? Reporting the progress that the government had made in executing that decisive step, the document that Chidambaram submitted with his Budget for 2008/09, namely, Implementation of Budget 2007-2008, let it be known: “The modalities for providing an alternative method of delivering the fertiliser subsidy directly to the farmer are being worked out. The proposal was examined by a Group of Ministers and the report is being finalised.”

All that had happened was that under a new name and basis, the subsidy was increased by a fifth. This was called the nutrient-based subsidy regime. What now? The document that accompanies this year’s Budget proposes another study! Implementation of Budget 2008-2009, declares, “As regards nutrient-based subsidy regime, in the light of unsustainable levels of subsidy, it is proposed to have a relook on various delivery mechanisms taking on board the experience of government subventions to the targeted population which would have been successfully introduced. Since this entails a wide review of various delivery mechanisms, it may be difficult to indicate firm time for implementation. Department of Fertilisers proposes to have alternative strategies firmed up within the current financial year so that decisions for implementation could be taken at least in the next financial year.”

“A relook..”; “it may be difficult to indicate firm time for implementation…”; “so that decisions for implementation could be taken at least in the next financial year.” As pathetic as it is typical.

Compare this sequence with what the UPA government had pledged in its Common Minimum Programme: “All subsidies will be targeted sharply at the poor and the truly needy like small and marginal farmers, farm labour and the urban poor. A detailed roadmap for accomplishing this will be unveiled in Parliament within 90 days.”

Some way to manage finances.

Actually, the sentence preceding that pledge about subsidies and the roadmap had made another important commitment: “The UPA government commits itself to eliminating the revenue deficit of the Centre by 2009, so as to release more resources for investments in social and physical infrastructure.” And five years later, in the Budget for 2009-10, what are we being told? That the government is not adhering to that pledge so as to make available more resources for investments in social and physical infrastructure!

The alarming levels to which deficits reached in the late 1980s contributed to the breakdown in 1991. As Mridul Sagar and Amit Kumar of Kotak Equities’ research arm have recalled recently, between 1986 and 1991 the gross fiscal deficit was on the average 7.7 per cent of GDP. For 2008/09, the gross fiscal deficit of the Centre alone is 6.4 per cent of the GDP; once the off-budget items are included, it becomes 8.1 per cent; and when that of the states is included, it becomes over 10.7 per cent of the GDP. Even the revenue deficit of the Centre alone is liable to exceed 5 per cent of the GDP. By now the Centre’s primary balance was to have been a surplus — amounting to 1.1 per cent of the GDP. In fact, the primary deficit is liable to exceed 3 per cent of the GDP.

(To be continued)

(This article was first published in the Indian Express on March 3, 2009.)

Half-Truths and Whole Lies

by Arun Shourie

Power: A week does not pass without us being reminded by some governmental declaration or the other — as if “load-shedding” were not enough of a reminder — of how we are lagging behind in power generation. The government’s answer has been what Professor John Kenneth Galbraith had long ago identified as the forte of Indian planning: therapeutic targetry! There is a big gap? Announce an even bigger target! Accordingly, the 11th plan posits a target of adding 90,700 megawatts — to keep the target from looking too obviously unrealistic, the figure that is usually mentioned is 78,700 megawatts; this is done by excluding the 12,000 megawatts that are supposed to be generated as captive capacity by users. Seven quarters of the 11th plan have already gone. We have added 10,887 megawatts: again, you see the hand of the subterfugists: this figure is inflated to 13,687 megawatts by including 2,800 megawatts that were in fact completed in the last year of the 10th plan and were included in accounts of that year’s achievements! At this rate, experts forecast that we shall add only 40,000 megawatts by the end of the 11th plan: a study prepared for the planning commission itself has forecast that, the way things are going, the gap between demand and supply of power will be larger at the end of the 11th plan than it was at its commencement. On top of all this, the T&D losses — the theft and dacoity losses rather than the transmission and distribution losses they are called — continue at 40 per cent.

Yet half-truths continue to be used to claim achievements. In its Common Minimum Programme, the UPA Government had pledged that it would provide electricity to all by 2009. And, if you read the glowing accounts of achievement under the Rajiv Gandhi Gramin Vidyutikaran Yojana, you would think that the country is well on its way to providing electricity to every household. The facts are to the contrary, indeed they remind us how little we should believe governmental statements.When this government assumed office, the planning commission had estimated that at least 7.8 crore households had no electricity at all. It had put the figure of “unelectrified or de-electrified” villages at 2,35,000.

And now see how targets are achieved! By a sleight of words, the Rajiv Gandhi Gramin Vidyutikaran Yojana rewrote the target down: the objective was not to be to provide “electricity to all” by 2009; it was to be to provide “access to electricity to all”. Second, 7.8 crore households that were without electricity and were to be provided electricity were replaced in documents by 2.43 crore BPL households — in both electrified and unelectrified villages! Next, the number of villages that were unelectrified or which had lapsed to a “de-electrified” state — someone should really give our planners some recognition for their linguistic contributions — was now estimated to be only 1,17,000.

Even so, as against the rewritten targets of providing electricity to 1,25,000 unelectrified and de-electrified villages and 2.43 crore BPL households, the Implementation of Budget Announcements, 2008-2009 document indicates that only 54,000 of those villages and only 43 lakh BPL households have been provided electricity connections. The panchayats have not certified these claims in full. And about what kind of power is actually being supplied, little need be said.

Drinking water: Another scheme named after Rajiv Gandhi, the Rajiv Gandhi Water Mission, presents the same sort of picture. The CAG has put out a performance audit report on it, in particular on the ARWSP, the Accelerated Rural Water Supply Programme. It talks of the “alarming level of slippage” — between April 2000 and April 2007, the CAG records, about 1.54 lakh “fully covered” habitations have slipped back into a “partially covered” or a “not covered” status. Even this data is unreliable. Projects have been commenced and even “completed” at places and in a manner that makes them “unsustainable”. While the programme requires that laboratories must be set up to test the quality of the water which is being supplied, the labs have not been set up. In instance after instance, where they have been set up, qualified persons have not been appointed. Where the persons have been appointed, the mandatory tests are not being carried out. Water being supplied is of such quality that, the CAG records, it “may pose a threat to public health.”

All this in the name of Rajiv Gandhi. I can’t understand why these sycophants are so determined to tarnish the names of their kul devtas.

Employment: The CAG’s performance audit report on NREGA, the programme to implement the National Rural Employment Guarantee Act illustrates another feature. One aspect, of course, is that of the 3.81 crore rural households that registered under the scheme and requested work, only 22 lakh households — that is, a mere six per cent — got the 100 days of legally guaranteed employment. But I am talking about another feature — the CAG drew the ministry’s attention to the flagrant violations of its own guidelines, the flagrant discrepancies in the data, the flagrant malpractices that came into view, the blatant shortfalls in fulfilling targets. The ministry’s response has been typical, and is, therefore, most instructive. Implementation is the responsibility of the states, the ministry told the CAG! We have nothing to say in regard to these deviations!

In a word, when credit is to be claimed, as in the Budget and annual reports of the rural development ministry, the rural employment programme is one of the great achievements of this government, one of its “flagship programmes”. When black holes come into view, why, that is the responsibility of the states!

“The NREGA is a central legislation,” the CAG is compelled to remind the government, “and the ministry, as the nodal agency for NREGA, bears ultimate overall responsibility for coordinating and monitoring the implementation and administration of NREGA and ensuring that funds provided by GoI are economically, efficiently and effectively utilised by the implementing agencies.”

And the guidelines that have been so casually disregarded are the guidelines that you have prescribed, the CAG told the ministry. Suddenly, the ministry had a new view about its guidelines, the very guidelines for formulating which the ministry has been claiming so much credit — “We have tightened them so much that misuse is just impossible,” I was told by a high-up in the ministry: the ministry told the CAG that its guidelines have been “merely suggestive”. The CAG pricks this evasion. The guidelines had been drawn up and prescribed, the CAG reminds the ministry, because the ministry itself had come to the conclusion that adhering to them was necessary to ensure effective and efficient implementation of and ensuring the fulfillment of NREGA. If the ministry has come to the opposite conclusion, namely that they are being disregarded for good reason, “It is the ministry’s responsibility to ensure that adequate and effective alternative controls have been put in place for the same purpose.”

Not a hair of the ministry has turned as a result of any of this. Each time the question comes up, the government points to the money it has spent, and flaunts the allocations as achievement. Contrast this with what Manmohan Singh and Chidambram had declared, “Outcomes not allocations… Accountability… A mechanism to measure the outcome of all major programmes.”

Telecom: Reform after reform that had been instituted both to ensure rapid growth as well as to clean up the sector has been reversed — from inviting and processing tenders of BSNL and MTNL, to the introduction of a universal license, to allocation of spectrum, to methods of auctioning. Steps that were solemnly promised have been buried out of sight.

There had been grave misgivings over the total incidence of taxes and levies on the sector. There were also problems of the opposite sort — the persistent reports about manipulations in booking revenue liabilities on activities. Accordingly, in the 2007/08, Chidambaram announced that a committee would be constituted to review the levies and related matters. Two Budgets have gone by. There is now not even the reference to that promised review and rationalisation.

The Universal Service Obligation fund was constituted in April 2002 to partially finance extension of Telecom services to rural areas. Each operator was to pay 5 per cent of its adjusted gross revenue to this fund. The fund is non-lapsable — unused balances remain in the fund. Even by March 2008, Rs. 20,404 crore had accumulated in the fund — since then the fund has grown even larger. Out of it, mere Rs. 6,370 crore have been spent for bridging the “rural-urban divide” about which everyone is so voluble. The actual, physical progress is much worse than this expenditure figure indicates. In one instance, while the obligation was to set up 7,800 towers, less than 20 per cent have been installed. And not even a question is asked.

There has been severe criticism of this in Parliament. The government has adopted a creative remedy! It has just cooked the accounts and, in accounts presented to Parliament, no less, just shown the balance in the fund as “nil”!! The CAG points out that it asked the government to correct this mis-statement. As it records, in the new report, the government has done nothing.

The scandalous things that happened when licenses were being given and spectrum allocated for 2G services — the way cut-off dates were changed, and that too with retrospective effect; the scuffles that took place at Sanchar Bhavan — have made headlines in the media. The CVC has been compelled to seek explanations. TRAI has been compelled to record that its recommendations were not just disregarded, they were misrepresented in a sworn affidavit by government in court.

Almost the only concerns of government have been 3G and broadband wireless access services. TRAI was asked for recommendations in April 2006. It furnished them in September 2006. The government issued guidelines in November 2007. Since then, the government has been lurching from one foot to the other, issuing amendments to the guidelines, amendments to the 3G policy — its tilt coinciding with heavy persuasion by one side or its rival.

The same goes for a step that would intensify competition and trigger improvements in the quality of service — number portability. TRAI gave its recommendations on this in 2005. The government took two years to announce its acceptance. But that was that. Nothing has been done on the matter. Existing operators have an easy time, as the user remains locked-in to each of them.

Similarly, to unchain internet telephony, TRAI submitted its recommendations in August 2008. The technology is in use the world over. It will spur competition — existing operators will be pushed to improve service and match lower rates. The recommendations were widely hailed in India. The matter remains “under examination” by the government! And two sections continue to reap a windfall — those who operate the “grey market” as the black market in telecom services is known, and Internet companies that operate from abroad.

Is all this just innocent laziness?

(To be continued)

(Arun Shourie is a BJP Rajya Sabha MP. This article was first published in the Indian Express on February 28, 2009.)

• Recent Posts

  • Join Friends of BJP Network
  • Friends of BJP: Who Are We
  • Friends of BJP to be revived
  • Maharashtra Elections
  • Haryana Elections
  • Sudheendra Kulkarni
  • Effective Government Spending
  • We are all Hindus now: Newsweek column
  • Of Jinnah, Jaswant and Hanuman…
  • What is the Nation we want to be? (Part 2)
  • What is the Nation we want to be? – Food for Thought
  • Didigiri
  • Shame at Sharm Al Sheikh
  • Is Idiotbox the Solution?
  • Concept Note: New India Policy Foundation (Part 4)

• Recent Comments

  • SANJAY SINGH on Friends of BJP: Who Are We
  • Anish Tripathi on Friends of BJP: Who Are We
  • Unmesh on Friends of BJP: Who Are We
  • Vikram Arora on Friends of BJP: Who Are We
  • shivkumargupta on Friends of BJP: Who Are We
  • Pradeep on Friends of BJP: Who Are We
  • Pradeep on Friends of BJP: Who Are We
  • Mahendra Mehta on Friends of BJP: Who Are We
  • Friends of BJP : Vijay Vikram on Friends of BJP: Who Are We
  • Raj on Friends of BJP: Who Are We

• Districts Data

  Delhi Mumbai Mumbai Suburban Kolkata Chennai Bangalore ALL DISTRICTS

• Categories

  • Activities
  • Columnists
    • Amit Malviya
    • Anshuman Goenka
    • Arun Shourie
    • Contributions
    • Gaurang Damani
    • GVL Narasimha Rao
    • Maneck Davar
    • Nalin Kohli
    • Neelima Choahan
    • Rajesh Jain
    • RK Misra
    • Sudheendra Kulkarni
    • Sudipto Das
    • Sushil Harlalka
    • Swapan Dasgupta
  • Events
  • Manifesto
  • Uncategorized
    • Memoirs - L K Advani

• Archives

  • July 2010
  • May 2010
  • February 2010
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009
  • January 2009

• 
  

• More about Friends of BJP

  Why We Support the BJP

  The Charter and Founding Team

  Join us

  Friends of BJP Presentation

  Middle India Needs to Come Together

  An Urban Voter's Manifesto

  CONTACT: You can email us at info@friendsofbjp.org

• Staying Updated

  Mobile: sms 4BJP to 575758 (for Indian mobile users only)

  Facebook: Join our Group

  Orkut: Join our Community

  Twitter: Follow Us

  Email: send a blank email to sub@friendsofbjp.org or enter your email address below:

  Feed: add the Feed link at the top of the page in your feed reader

• Links

  • BJP website

• Meta

  • Log in
  • Entries RSS
  • Comments RSS
  • WordPress.org