Big Business Strikes Again, this Time Through Modi Government's Assault on RBI

The unprecedented invocation of Section 7 is not in enlightened public interest – it is a brazen move to force the RBI to open bank funding to desperate corporates.

M K Venu in The Wire.In

Reserve Bank of India Governor Urjit Patel with former governor Raghuram Rajan in the background. Credit: Reuters/Danish Siddiqui 

The business cronies of this government have done it again. And they manage such coups each time with unfailing precision. This time, the Centre has taken the unprecedented action of sending a direction to Reserve Bank of India (RBI) under Section 7 of the RBI Act, the first step in a process of virtually issuing a diktat that the central bank must do whatever is necessary to resolve the potential credit freeze in the non-banking finance sector and relax norms for lending to small business.

The RBI over the past year placed lending restrictions on weaker banks, where non-performing assets (NPAs) and other warning indicators were much higher than normal, consequently eroding much of their capital. You can be sure once these norms are relaxed by an RBI under duress, bank funds will start flowing again to the cronies directly or indirectly because moneys are essentially fungible.

I’m told that one celebrated big business promoter from Gujarat, who is known to travel with Prime Minister Narendra Modi on official trips abroad, is currently borrowing short-term money at over 18% to meet his past loan servicing needs.

But once RBI relaxes the current stringent lending norms for banks and adequate liquidity is provided to trapped NBFCs, select big business cronies – owing nearly Rs 4 lakh crore to banks – will continue to get access to funds. In any case, these powerful promoters have managed to avoid going into bankruptcy proceedings as mandated by the RBI’s circular of February 12, 2018. Some of the power projects of the Adani Group, Essar, the Tatas and so on, who have repayment overdues of over Rs 1 lakh crore, are currently being given a fresh lease of life.
So make no mistake, the unprecedented invocation of Section 7 of the RBI Act, never done since independence, not even during the financial crises of 1991 or 2008, is not guided by enlightened public interest as the finance ministry may claim.

It is a brazen move to force the RBI to open bank funding to desperate corporates who need to save themselves so that they are also in a position to give the necessary funds to political parties via anonymous electoral bonds.

Also read: Modi Government Invokes Never-Used Powers to Direct RBI Governor: Reports

These corporate groups and their promoters remain immortal and untouched through all regimes. They manage to get a share of juicy defence contracts even while they owe over Rs 1 lakh crore of overdue loans to banks. Modi will also have to answer why a select group of promoters are getting special treatment by avoiding the RBI circular of February 12, 2018. Is there pressure on the central bank to dilute its rule which mandates that all borrowers above a certain level have to enter bankruptcy proceedings? Is a special dispensation being created for cronies?

These questions will surely haunt the Modi regime in the run-up to the 2019 elections. The sheer power exercised by these business houses is now becoming more and more apparent and naked.

Earlier these powerful forces ran a campaign against Raghuram Rajan and ensured he didn’t get an extension because Rajan had sent a list to the prime minister’s office (PMO) of politically-connected promoters who may have fraudulently diverted bank loans for purposes others than the financing of their projects.
Rajan had asked for a multi-agency probe against these errant promoters because RBI felt it alone did not have the wherewithal to do it. An RTI application by The Wire confirms that the list was sent in 2015 and the PMO is refusing to part with it even to a parliamentary committee headed by BJP leader Murli Manohar Joshi after several reminders.

Also read: Exclusive: RTI Confirms Raghuram Rajan Sent Modi List of NPA Defaulters, Action Taken a Secret

So, it is clear the government is hiding something and is now feeling impelled to get rid of the RBI chief by initiating action under the never-before-used Section 7 provision.

RBI governor Urjit Patel cannot heed the Centre’s directive as it would lower the dignity of the institution and erode the integrity of some of the tough decisions that the central bank has taken to clean up the banks and bring errant promoters to their heels. If Patel quits, India will become a laughing stock among global investors and the money markets could see unprecedented volatility. Remember, in his speech last Friday, deputy governor Viral Acharya had invoked the 2010 Argentine example where the central bank governor there resigned in protest after the regime tried to force him to part with the institution’s reserves to fill the government’s fiscal gap. The markets went for a toss after that in Argentina.

There is a strong parallel here as the finance ministry is also coercing the RBI into parting with a part of its contingency reserves (over Rs. 2.5 lakh crore) to meet the Centre’s growing fiscal deficit in an election year. All this is happening under the shadows of high oil prices, a growing current account deficit and a weakening rupee.

If the RBI governor resigns in these circumstances there could be huge repercussions. The invocation of Section 7 of the RBI Act is, therefore, an act of desperation that is bound to boomerang on the Modi government.

Pranab Mukherjee's visit to RSS HQ explained

Jawed Naqvi in The Dawn

TWO lobbies were clearly worried by a photograph that was clicked during the swearing-in celebrations of the Karnataka anti-BJP coalition. It showed Congress leader Sonia Gandhi locked in a rare embrace with Dalit leader Mayawati. The picture had other leaders who were opposed to the Modi-led BJP government basking in the glory of the Karnataka victory, but the hugging of the two women was a defining moment. Insidious advisers to the Congress leadership had stalled their coming together in the past.

Among the understated reasons was the stark reality that some of the Gandhi family’s upper-caste advisers also happened to be conduits for the mercantile lobbies based in Mumbai. The photograph threatened both, the tycoons and their caste protégés adorning the upper houses of legislatures, where those who cannot win the Lok Sabha or assembly polls are given a cosy perch, not just in Congress.

There is a brouhaha about former president and former Congress minister Pranab Mukherjee’s visit to the Rashtriya Swayamsevak Sangh headquarters. It’s surprising why no one has linked the visit with the Karnataka photo. Mukherjee is an educated Brahmin, flaunting the requisite links with Mumbai businesses, which could be a temptation for the RSS leadership to sound him out.

It is possible of course that the nudge for the meeting came from the mercantile club in Mumbai. It has acquired the habit of late of playing kingmakers. Remember how hard they had lobbied with the RSS to make Narendra Modi the BJP’s prime ministerial candidate? 

They finance other parties too, not the least the Congress party. But there is a silent caveat here. The Congress that forms the government or heads a coalition should not offer the prime minister’s job to a Gandhi, and we have had two such non-Gandhi Congress prime ministers to press the point.

-----Also Read

The Marwari hegemony of Indian Media

-------

There is a history to this reasoning and the Gandhi family has been pitchforked as the villains, or the heroes, depending on where you are vis-à-vis crony capitalism. Jawaharlal Nehru had no love lost for the mercantile leaders whom Gandhiji otherwise saw as the trustees of a free India. Nehru put their biggest icon in jail for fraud. (R.K. Dalmia’s close friendship with Mohammad Ali Jinnah may have been an added allergen.)

Then came Indira Gandhi. She nationalised the cabal’s ‘usurious’ banks and also locked up several of them under the draconian Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, the law she passed just before the 1975-77 emergency.

Mr Mukherjee recently chronicled his political innings from 1980 onwards. That marked the post-emergency return for Indira Gandhi who was looking vulnerable after her traditional left supporters deserted her over the emergency. Mr Mukherjee’s proximity to the Mumbai tycoons is well documented in books that predictably did not make it to bookshops. He became a darling of the media as her finance minister, the same media that is celebrating his visit to the RSS headquarters although he said perfectly liberal, pro-constitution things there. When Mrs Gandhi was killed, Mr Mukherjee reportedly saw himself as her natural successor, a thought resented by her family friends.

Rajiv Gandhi arrived to throw the ‘moneybags off the backs of the Congress workers’. He sent Mukherjee into political oblivion. The tycoons, however, swung into action. Every inch of media space they owned was harnessed to tarnish the young prime minister with financial scams. His death brought the cabal and Mukherjee back into the heart of Indian politics, both firmly embraced by Narasimha Rao.

One more twist followed. When Rao lost the elections in 1996, he handed over the Congress presidency to Sitaram Kesri, a canny grass-roots Congressman. The change was accepted by the Gandhis who saw in Kesri a better chance of getting to the bottom of Rajiv’s murder mystery than Rao had delivered. Also Kesri shored up two prime ministers with the help of communists.

I remember asking him at a news conference why he had taken the unusual step to ally with Dalit leader Mayawati in 1998. Did he see her as an asset as a woman leader, or was she a potential Dalit ally? Kesri exploded with joy. Both, he yelled. We don’t know which of the Congress rivals locked him up in the bathroom subsequently and handed the leadership to a still reluctant Sonia Gandhi, who had evidently not yet recovered from the shock of her husband’s assassination. Mukherjee was part of the group, or perhaps its leader, that went after Kesri in what can only be described as a palace coup. Kesri saw himself as a Gandhi loyalist and didn’t know what hit him. He died from the shock.

It is said that the Mumbai club has applied a financial squeeze on the Congress party for flirting with state leaders they do not control. This could be a blessing in disguise for the party. It could bring the Gandhis close to crucial leaders like Mayawati, Arvind Kejriwal, Lalu Yadav and Mamata Banerjee who have to fend for themselves financially.

If, like Kejriwal, Rahul Gandhi goes for crowd funding instead of leaning on crony tycoons for support, he might become a richer, cleaner leader. But before that, he must do with the current potential ‘Congress Syndicate’ what Emperor Akbar did with his regent Bairam Khan or Nehru did with his detractors clothed as advisers. They could be sent to work with the masses under a new Kamraj Plan to borrow from the Congress history.

Above all, it was Mayawati’s sacrifice and not ambition that has reaped rewards for a rejuvenated opposition. Rather than aim to become prime minister, Rahul Gandhi would do well to watch out for deserters, no matter how educated they are, while embracing the game-changing picture from Karnataka.

The anomalous rise of Mr Kejriwal

Jawed Naqvi in The Dawn

YOU would have thought that water alone has the anomalous property of expanding when frozen. Delhi Chief Minister Arvind Kejriwal displays a very nearly similar propensity. He ‘expands’ where others would retreat. The more the media mocks and berates him on behalf of its paymasters, and tries to put Kejriwal in the deep freeze, the fierier he comes out. In this regard he is somewhat like Donald Trump, but the similarity ends here.

Unlike the flashy billionaire who loves the good things of life, Kejriwal is a middle-class family man, happy with his vegetarian meal and cough syrup. As the US preside15 degreent seeks to discard the pro-poor healthcare and moves to auction away public spaces of learning and education, Kejriwal veers closer to the old-fashioned economics that harks back to India’s early quest to become a welfare state. Unlike most of his competitors Kejriwal revels in his hostility to crony capitalism, which he believes has stunted India’s growth.

He was likened to Pakistan’s Imran Khan initially. That was unintelligent. If anything, Imran veers closer to the BJP’s politics of riding religious identity. Would he be able to say, for example, “I will never use religion to win an election even if I have to lose a 100 times”? That’s what Kejriwal said publicly when the BJP won Uttar Pradesh in a polarised election.

Some events more readily set him apart from his rivals. When mobs attacked Muslims in BJP-ruled Haryana, Kejriwal dispatched a fact-finding team to the neighbouring state. In 2015, Haryana Chief Minister M.L. Khattar reportedly asked Muslims to leave the country unless they gave up eating beef, a claim he later denied. “Khattar sahib should resign … His statement is not only unfortunate, but shameful,” Kejriwal’s Aam Aadmi Party said. He set up a special investigation team to revisit the Sikh massacre of 1984, which has not attained a satisfactory closure. When Hindutva mobs vandalised churches in Delhi, it was the AAP that led the face-off with the communalists. I’m not sure if any of these events could be associated with the studiously pro-clergy Imran Khan. Recently, Kejriwal was associated with a Jain monk who walks naked, and it’s his business to do that. But the AAP leader has not used religion to canvass support or to attack his opponents. The imam of Jama Masjid, known for meddling in Muslim communalism, offered support to Kejriwal, which he tersely refused. 

The more Kejriwal’s rivals throw muck at him, the cleaner he looks. How many times has the Delhi Police picked up his MLAs for this or that alleged crime only to be rapped on the knuckles by the courts? By a quirk of logic, the Delhi government has no control on the city’s police who fall under federal supervision. Even the chief minister’s offices were not spared from being raided by the agencies. They only got frustration to show for their heavily publicised efforts.

Sample a report in The Hindustan Times last month: “The Delhi Police arrested 13 MLAs of the ruling Aam Aadmi Party in the last two years on charges ranging from rape, extortion, cheating, forgery to rioting. For most of these offences bail is hard to come by, but all the 13 lawmakers are out on bail. In fact, two have been cleared of all charges.”

The anomalous rise of Kejriwal persists with its perverse logic. In 2013, according to The Hindu, the Congress government moved to probe alleged foreign funding to Kejriwal’s party. The following day, the daily donation to the AAP increased six-fold. Kejriwal thanked the BJP and the Congress for the windfall. Like Jerry Mouse thumbing his nose at his quarry, he said: “We are grateful to the BJP and the Congress for raising questions on our funds.”

I have met Kejriwal once for five seconds at a public event where I thought of giving him a book on corporate corruption. He may never have needed it actually, because it turned out that he knew more than the book could reveal. I am told he is allergic to leftists, which is not strange since the left has vainly put up candidates against him. But then, what is a former Maoist doing in his cabinet? There must be some meeting of the minds. It could be much more than that.

Initially, I tended to agree with those who were unsparing in their criticism of Arvind Kejriwal. They were supporters of Congress or the left and believed that he was some kind of an agent for the BJP, if not the Rashtriya Swayamsevak Sangh. He very nearly was. His early mascot was dubious — a former army truck driver who was projected as a Gandhian activist against corruption, a strange Gandhian though who prescribed public flogging for tipplers.

Easily the single-most important factor shoring up Kejriwal’s pronounced secularism is Ashish Khetan. This journalist-turned-politician carried out the most damaging exposés on Hindutva fanaticism in Gujarat during Prime Minister Modi’s tenure as the state’s chief minister. Khetan’s eerie video interview — a sting operation — with a self-confessed hater of Muslims could only be subverted as evidence of crime and complicity if the state’s key pillars looked the other way.

Last week, the Modi government through the lieutenant governor shut down the AAP party office in Delhi claiming it did not have official clearances. The timing was notable. Elections are scheduled next week to the Municipal Corporation of Delhi, currently ruled by the BJP. “A victory in the municipality will fulfil Mr Modi’s dreams for India”, says the radio jingle. Kejriwal was the first to stall the Modi juggernaut in Delhi. In response, the prime minister, that for the first time in Delhi municipality’s history, has staked his reputation to defeat Kejriwal. But in Kejriwal’s case when he loses, he wins.

The State of India

Part 1

Part 2

The Doctor and the Saint

Crony capitalism a big threat to countries like India, RBI chief Raghuram Rajan says

MUMBAI: Reserve Bank of India governor Raghuram Rajan has warned against crony capitalism which he said creates oligarchies and slows down growth. 

"One of the greatest dangers to the growth of developing countries is the middle income trap, where crony capitalism creates oligarchies that slow down growth. If the debate during the elections is any pointer, this is a very real concern of the public in India today," said Rajan while delivering the Lalit Doshi memorial lecture in Mumbai on Monday. 

The last general election was fraught with allegations of the nexus between politicians and business groups.

RBI governor Raghuram Rajan (left) with finance minister Arun Jaitley. 

Rajan extolled the virtues of India's democracy before turning to its darker aspects. "An important issue in the recent election was whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians. By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth. And by substituting special interests for the public interest, it is harmful to democratic expression. If there is some truth to these perceptions of crony capitalism, a natural question is why people tolerate it. Why do they vote for the venal politician who perpetuates it?" 

Rajan continued by saying, "One widely held hypothesis is that our country suffers from want of a 'few good men' in politics. This view is unfair to the many upstanding people in politics. But even assuming it is true, every so often we see the emergence of a group, usually upper middle class professionals, who want to clean up politics. But when these 'good' people stand for election, they tend to lose their deposits. Does the electorate really not want squeaky clean government?


Finance minister Arun Jaitley (left), with RBI governor (second from left in front) during a meeting. 

"Apart from the conceit that high morals lie only with the upper middle class, the error in this hypothesis may be in believing that problems stem from individual ethics rather than the system we have. In a speech I made before the Bombay Chamber of Commerce in 2008, I argued that the tolerance for the venal politician is because he is the crutch that helps the poor and underprivileged navigate a system that gives them so little access. This may be why he survives." 

The governor's warning against crony capitalism and oligarchies is a reiteration of his statements four days before the Lehman Brothers collapse in 2008. In a speech at the Bombay Chamber, Rajan had highlighted that India had the highest number of billionaires per trillion dollars of GDP after Russia. While excluding NR Narayana Murthy, Azim Premji, and Ratan Tata as 'deservedly respected', Rajan had said "three factors — land, natural resources, and government contracts or licenses — are the predominant sources of the wealth of our billionaires. And all of these factors come from the government."

Cronyism British Style - A depressingly British tale of friends in high places

From Ofsted and the BBC to the Lords, there’s a strong whiff of cronyism. When will we have the courage to challenge it?

• 
• • Zoe Williams
  • The Guardian, Monday 4 August 2014

Illustration by Andrzej Krauze

One crony is just a crony; it doesn’t – by my reckoning – become an “ism” until there are three. If the chairmanship of the BBC Trust hadn’t come up at the same time as the chiefdom of Ofsted, and if those two things weren’t playing out in the foreground of the peerage announcements to come this week, it might be OK, and the whole of public life wouldn’t look like it could all be such an embarrassing stitch-up. Unfortunately, the three events have come together. David Hoare is the new chief of Ofsted. Seb Coe is not the new head of the BBC Trust, but not for want of begging by the government, which changed the job requirement to make it more appealing to him. Karren Brady and Stuart Rose are reported to be lined up for ennoblement.

In fairness, appointments to the House of Lords are at least meant to be political, even if they shouldn’t, strictly speaking, be distributed on the basis of wealth. The other two posts, however, are supposed to be appointed impartially, with the emphasis on fitness for the post.

So what is David Hoare’s fitness? He is a trustee of AET academies, which is the largest chain, and also one of the worst – in the bottom quarter for results, both its disadvantaged and non-disadvantaged pupils achieving below-average GCSEs. Five schools in the chain had “unacceptable standards”, according to ministers earlier this year, though Ofsted’s verdict, due to be published last week, has been delayed. Not to worry. The other 72 schools may well have acceptable features. The Department for Education can’t see what all the fuss is about, since Hoare appears to be far less unpopular and less irrelevantly qualified than its other candidate, Carphone Warehouse founder (and Tory donor) David Ross.

For me, the main problem isn’t Ross’s relationship with the Conservative party, or even the alleged tax-avoiding practices of Ross and Hoare’s current or past business interests, though I must admit I’m not thrilled to see the highest ranks of public life wedged with people who don’t appear to understand the point of tax. No, worse than any of that is the assumption of the DfE that almost anybody will be better at running education than someone with experience of teaching.

The entry point for a significant post in the academies system is that you should never have set foot in a state classroom. God forbid that you should ever have stood at the front of one, and taught anything to anyone. In years to come, we will look back in wonder at this period, when government worshipped at the feet of industry so fervently that it thought its titans could do anything. But right now, we’re all trapped in the bowels of government delusion, and won’t see the light until Alan Sugar has been appointed chancellor of Cambridge University and Richard Branson is chief medical officer.

These are two sides of the same coin, whether you’re talking about politicians fawning over business leaders, or business leaders casting cash – or the pearls of their acumen – towards politicians. You’d think we’d be used to it, since New Labour was beset by rows such as these. Whether it looks like corruption or cronyism – is it actively bent, or does it merely stink? – depends a lot on whose side is doing the crony recruitment. But this is surely a rare point of convergence between the Morning Star and the Daily Mail: it doesn’t look very transparent or objective when politicians recruit their allies.

They give us breadheads, to run our institutions of oversight, but they also give us circuses: this is the only plausible explanation for the desperate bid to appoint Seb Coe as chair of the BBC Trust. He is a Tory and a national treasure, a man it is impossible to dislike, a recognisable face and acute businessman whose achievements are uncomplicated and demonstrable. He can run really fast, OK? In these turbulent times for the BBC, as its enemies mass on the borders of its charter (up for renewal in 2016) calling for its disintegration, that’s what we need at the helm, clearly. A man who can run incredibly fast.

In the hubbub around the job description having been rewritten to suit Coe, you may have missed the details of that rewrite: it was to reduce the time commitment that the head of the trust would have to make. This said it all about the process – first, that nobody making the appointment was really taking seriously how significant it was, and second, that Coe didn’t really want to do it. He has now come out and rejected it, as apparently have Patience Wheatcroft, Dame Marjorie Scardino, Sir Howard Stringer and Sarah Hogg.

Why candidates should be snatching their hats so energetically out of the ring is open to question. Former Labour culture secretary Tessa Jowell maintains they are put off by the high level of political meddling, but this seems to be an unlikely deterrent for those who agree with the meddlers. I can well imagine, however, that a candidate of any leaning might be put off by the sheer bungling frivolity, the sight of a government desperately grappling for a household name, a bit of borrowed popularity. Anyway, the shortlist is, for today at least, back to one: Nick Prettejohn, City grandee and former adviser to George Osborne. The circus said no, and we’re back to the breadhead.

The phrase “City grandee” cheered me up, however: remember Royal Mail, and remember that it could be worse. They didn’t have to just give these posts to their associates; they could have sold them.

‘We Only Postponed The Day Of Reckoning’

Economist-cum-technocrat Deepak Nayyar is viewed as an influential observer of the economy and a selective critic of liberalisation. He was the chief economic advisor to the government during the tumultuous period between 1989 and 1991, when India negotiated with the International Monetary Fund. In a rare interview, Nayyar—emeritus professor of economics at the Jawaharlal Nehru University in Delhi—took questions from Sunit Arora published in Outlook India:

Sunit Arora: Professor Nayyar, is India facing a balance of payments crisis?

Professor Deepak Nayyar: We are indeed in a crisis. In the past three months, confidence has been strongly undermined. India’s balance of trade deficit (10 per cent of GDP) and current account deficit (4.8 per cent of GDP) are both at levels that are unsustainable in terms of fundamentals. If you compare this with the past in India, or the present in other emerging economies, you would recognize how serious the situation is. It is as clear as daylight that we cannot continue to live beyond our means year after year.

But why has the mood shifted from abject despair to seeming euphoria?

The panic lifted when US Federal Reserve Chairman Ben Bernanke announced in mid-September that he was going to defer the progressive withdrawal of quantitative easing. It was not the magic wand of Raghuram Rajan at RBI that stabilized the rupee It was this exogenous event in the US! Essentially, the problem lies in our flawed strategy of using foreign (portfolio) investment inflows to finance the current account deficit. Given this approach, we must be prepared to accept the ebbs and flows of global finance. However, we cannot claim we are victims of global finance. Of course, most emerging economies were hurt by Bernanke's decision. But we chose this path. And our fundamentals are distinctly worse 

What do you think is an appropriate value of the rupee?

The rupee was somewhat over-valued at Rs 55/$ . We have had high inflation for three years, much higher than in the outside world. Hence, this needed to be corrected. But the sinking to Rs 70/$ was too much of a correction. Clearly, there is no assurance the rupee will remain at current levels of Rs 62/$. When the Federal Reserve Board meets next, it is almost certain that they will announce a phased withdrawal of quantitative easing. There could then be a repeat performance of capital outflows from India. It is simply a matter of time. We have only postponed the day of reckoning.

The government continues to insist that we don’t need to go to the IMF.

"It would be prudent and wise to explore seeking an arrangement with the IMF—even if this cannot be in the public domain for obvious political reasons.”

The government cites two reasons for their comfort: the exchange rate has stabilized, and foreign exchange reserves at $275 billion are large enough. The exchange rate could slip again. And the comfort implicit in these reserves is illusory. Simply put, short-term debt and liabilities that can be withdrawn on demand are much larger than our reserves. The private corporate sector has to repay $ 170 billion before end-March 2014. And the outstanding stock of portfolio investment is much larger. If there were to be capital flight, just as we had in 1990, the reserves would vanish—and vanish quickly. In the past, many countries in Latin America, East Asia and elsewhere have lost more than $100 billion of foreign exchange reserves in a fortnight during financial crises.

So, do we need to go to the IMF?

It is important to recognize that the IMF simply does not have the resources to finance such large current account deficits let alone combat capital flight. But the IMF is a lender of last resort. Its imprimatur tends to stabilize confidence in international financial markets. The government must recognize that the present situation is at least as serious, if not worse, than what it was in 1990-91. In these circumstances, it would be both prudent and wise to explore the possibilities of an arrangement with the IMF, even if this cannot be in the public domain for obvious political reasons. The government must recognize that terms are always better before a crisis implodes, and always much worse thereafter. Obviously, this would be a back-up plan, tactical rather than strategic, should the need for contingency finance arise. The government must also explore alternative emergency financing possibilities such as swap arrangements with other central banks.

How would you rate the UPA’s management of the economy?

The macro-management of the economy during the tenure of UPA-II leaves much to be desired. The management of the balance of payments situation has been poor. This problem, which has been building up for three years, should have been addressed much earlier—with the same urgency as the government is doing now. The early warning signals were all there but were quietly ignored.

If you were Chief Economic Advisor, what would you have advised the government?

The irony of my life is that, in the late 1980s, I wrote about the macroeconomic crisis to come, but I was at the epicentre trying to manage it when it surfaced (in 1990-91). If I had any association with the government, starting 2009, I would heard these alarm bells. For one, I would have begun to act on accelerating rates of inflation. For another, I would have done something to ensure that the balance of trade deficit, hence the current account deficit, did not climb to these unsustainable levels. These problems did not surface overnight. For more than three years now, inflation has been gathering momentum and the balance of trade deficit has been rapidly ballooning.

Why hasn’t the UPA been able to tackle persistent and high inflation for the past three years?

“I am opposed to Raghuram Rajan’s plan to allow global banks to buy Indian ones. Banking plays a critical role in countries latecomers to industrialisation.”

I think that both the diagnosis and the prescription of the government on inflation has been wrong. The government has simply raised interest rates time and time again. This has ended up stifling domestic investment. But it has done nothing to combat inflation. Hiking interest rates would moderate inflation if rising prices are driven by excess liquidity. But when inflation is driven by supply-demand imbalances, adverse expectations, or segmented markets, monetary policy cannot address the problem. It is no surprise that it has not. Indeed, theory and experience both suggest that, beyond a point, raising interest rates does not combat inflation, just as lowering interest rates cannot stimulate investment. The persistent inflation has hurt people most of whom do not have index linked incomes. Come election time, this resentment will translate into a protest by voters against incumbent governments, wherever they are, because people hold governments accountable for inflation. The real problem now lies in the credibility of the government, now much diminished, because that is what shapes confidence, perceptions, and expectations. It is possible—although as a citizen I sincerely hope it does not happen—that markets might decide, without waiting for the people to decide at election time. If a macro-economic crisis does surface before the election, then markets would have decided on the economic performance of the government even before the people have had an opportunity to do so.

So you feel the crisis could re-appear…?

It is possible. It serves no purpose to be alarmist. Yet, it is important to be a realist. I do not see any evidence of a real turnaround, at least so far, on any of the criteria—trade deficit, current account deficit, inflation, savings, investment or growth—that shape underlying fundamentals. The only silver lining is the good monsoon. The paradox is the skyrocketing prices of food in what seems to be an abundant monsoon. The depreciation of the rupee is going to compound the problem. Imports are 25 per cent of GDP so that a 10 percent depreciation directly pushes up the wholesale price index by 2.5 percentage points, while indirect pass-through effects could add a further 1 plus percentage points.

Shifting tracks, what is your view on Raghuram Rajan’s statement on recasting norms for allowing international banks to buy Indian ones?

My view is clear. I am opposed to it. I would wish to exercise strategic control in the banking sector as it has a critical strategic importance in countries that are latecomers to industrialization. Evidence available for the past ten years, which reveals a significant decline in the share of manufacturing in GDP and in employment, suggests that there is a danger of de-industrialization in India. I would argue that the time has come for India to think of strategic industrial, trade and technology policies. There is no country that has industrialized without strategic forms of intervention. The fetishism about liberalization is overdone. It is a means of increasing the degree of competition in the economy. But its pace and sequence must be calibrated. We cannot lose sight of the ends. Industrialization is an imperative because that is our potential comparative advantage.

What is your view on the corruption scandals around the allocation of scarce natural assets?

As a concerned citizen, I can only express anguish and anger at such a blatant sharing of the spoils between the state and some corporate entities. The metaphor , crony-capitalism, is an apt description. Public Private Partnerships (PPPs) are just rhetoric. For one, there is so little progress. For another, it might simply socialize the costs and privatize the benefits. Where is it going to lead us, say in infrastructure?

Finally, where do you weigh in on the Amartya Sen versus Jagdish Bhagwati debate?

I followed the debate, but it is a red herring that poses false dilemmas. Both are concerned with outcomes—growth or equity—but neither is concerned with processes, which requires thinking about transition paths or journeys to the destination. Most importantly, we need growth with equity. Is it possible for us to promote growth when you have a State that is incapable of regulation? Similarly, is it possible for a state that cannot deliver even basic public services to implement good redistribution programmes? Efficient markets need effective governments.

Reliance Energy Pricing - Selling the dream for a song

SURYA P. SETHI in the hindu

  

The Hindu

 

The government has spared no effort to convince the public that its gas pricing formula, skewed in favour of Reliance, will be the solution to India's energy needs

Politicians worldwide are dream merchants. They sell dreams. Indian politicians are, of course, second to none in this business and have indeed perfected this art form. Their success in selling pipe dreams is perhaps a measure of the depth of our despair as a nation. Can any Indian, my age, forget the euphoria that the dream of “Garibi Hatao” created in the 1970s? Some 40 plus years later, the same Congress party is telling the nation that 70 per cent of people now need food subsidy to survive. Of course, its minions in the Planning Commission are running out of newly sharpened pencils convincing the nation that poverty has reduced significantly. They see no contradiction between the claimed lowering of poverty and the proposed food security bill that has its foundation in the fact that 70 per cent of Indians cannot even buy sufficient food to survive today.

Rangarajan formula

Veerappa Moily, an old Congress satrap, is a highly decorated warrior of many election battles. As an experienced dream merchant, he is selling the Rangarajan formula for pricing gas as the panacea to India’s energy security woes. No one has answered any of the direct questions that I have asked in my four articles in The Hindu since the Rangarajan Committee report surfaced. However, deceptive claims have kept appearing in the press about the wisdom of pricing natural gas as proposed by Dr. Rangarajan. And since no one was buying their arguments, the powers-that-be took out their most lethal weapon — the pen of the Honourable Minister himself to destroy non-believers like myself. Unfortunately, some of the statements in Mr. Moily’s op-ed of August 7, 2013 in the Times of India come straight out of a recent Annual Report of Reliance.

My issue is with our dream merchants and not with Reliance for it, like any private enterprise, responds efficiently and effectively to shape the prevailing environment and maximise profits. So let me cut short the song and dance and pose some straight questions to the Honourable Minister.

1. Can the Honourable Minister list the $100 billion that Indian companies have invested or committed to date for oil and gas assets overseas? The actual investment to date is under $25 billion and I honestly wish it was four times higher as claimed by the Honourable Minister. Although there are huge cans of worms under some of the overseas acquisitions we have made, the truth is that for every dollar invested overseas we have accrued more oil and gas reserves than for the same dollar invested in the Indian sedimentary basin. Large and serious global investors in oil and gas go where the prospects are the best. I am proud that despite a few questionable deals, the Indian public sector (primarily OVL) took the lead in this while the domestic private sector concentrated on India — an environment it could efficiently and effectively manage for much higher monetary gains (not resource accretion).

2. Can the Honourable Minister name any country in the world that offered investors from India or elsewhere a formula such as that proposed by the Rangarajan Committee or, for that matter, a formula such as the one currently in use in India to lure exploration and production investments in conventional natural gas or oil?

3. Despite the price reforms in Brazil and China cited by the Honourable Minister, do either of these countries or for that matter any country in the world provide the kind of guaranteed well head price for conventional natural gas that we have been paying under the current formula or promising to pay under the Rangarajan formula from April 2014? Can the Honourable Minister name a single well head in the world that is currently receiving $8.40/MMBTU or anywhere close to it for conventional natural gas?

Doubtful claims

4. The Honourable Minister gives several numbers about potentially higher domestic productions that could have been realised by end-2013 and by 2014-15 from KG-D6 and the likely savings in LNG imports. The Honourable Minster blames his own government for failure to give timely approvals to Reliance to achieve these outputs. The validity of these claims, especially the basis for estimating avoided LNG imports, remains in doubt but, more importantly, is the Honourable Minister trashing the various findings of the CAG and the Parliamentary Committee on KG-D6? Is the Honourable Minister trashing the findings of his predecessor and the reports of his own Ministry and the DGH?

5. The Honourable Minister promises an additional production of 40 MMSCMD of gas annually “starting” 2016-17 and savings of $65 billion in LNG imports. This outcome, the Honourable Minister informs, is the direct result of the changes he has instituted in the way his Ministry had been operating and the use of the Rangarajan formula for pricing conventional natural gas at the well head. Again, leaving aside the dubiousness of the estimated savings on LNG imports, let me ask the Honourable Minster if he can guarantee the promised additional output. Will this additional output come from the existing fields or new fields with new investments? Will the additional output result from RIL belatedly fulfilling its long unmet commitments under the addendum to the agreed initial development plan as detailed by the CAG? Finally, will this additional production come from acreage that should have been relinquished years ago as pointed out by the CAG?

In closing, the Honourable Minister lets fly a “conservative” pipe dream of 100 tcf of gas unlocking “$1 trillion in value” — never mind the details or the basis. At IIM-Ahmedabad, one of my very famous professors always said that a policymaker must have her/his head in the clouds but the feet must remain firmly on the ground. Since my infancy, my mother always told me that thieves have no feet. Neither that famous professor nor my illiterate mother is alive today for me to ask them if dream merchants with heads in the clouds too have no feet!

Modi's Gujarat - No model state

Christophe Jaffrelot in Indian Express : Fri Sep 06 2013,

In Gujarat, growth relies on indebtedness. And relegates development.

The Gujarat pattern of development has often been arraigned from the left because of its social deficits. Indeed, the state's social indicators do not match its economic performance. With 23 per cent of its citizens living below the poverty line in 2010, Gujarat does better than the Indian average — 29.8 per cent — but it reduced this proportion by less than 10 percentage points in five years. This poverty reduction rate has something to do with the wages of casual workers. According to the 68th round (2011-12) of the National Sample Survey Organisation (NSSO), Gujarat has among the lowest average daily wages for casual labour (other than in public works) in urban areas: Rs 144.52, when the national urban average is Rs 170.10. This kind of poverty goes with malnourishment. One of the social indicators where Gujarat shows the most dramatic lag is the hunger index — only about 43 per cent of children under ICDS in the state are the normal weight, according to an Indian Institute of Public Administration report.

These indicators are aggregates. Their break up is particularly enlightening. The urban/rural divide is pronounced in Gujarat. This is evident from NSSO data, including estimates of the average monthly per capita expenditures (MPCE). The urban MPCE was 49 per cent higher in towns and cities than in villages in 1993-94. Fourteen years later, the urban MPCE was 68 per cent higher. In 2011-12, the difference stabilised at 68.1 per cent. Certainly, the operationalisation of the Narmada dam has improved circumstances for some people living in rural areas, but only in part, because the canals have not reached the fields, especially in Saurashtra. This has happened not only because of bad planning, but also because the supply of water to cities (including industry) was prioritised. Second, cash crop farmers have been affected by the low level of agricultural prices. Cotton is a case in point: prices did not go up, whereas inputs became costly because of inflation. Third, prime agricultural land has been given to industry and the latter's activities have affected the natural environment. In Mahua, where the Nirma group had been given 3,000 hectares for mining activities and a cement factory, BJP MLA Kanubhai Kalsaria objected that the water tank the villagers depended on would be badly damaged. He was sidelined and subsequently, he resigned from the party to fight the government's policy.

Among the rural groups that suffered from the state's policy, Adivasis are a case in point. According to a World Bank report, between 1993-94 and 2004-05, the share of those who lived below the poverty line increased from 30.9 per cent to 33.1 per cent — 10 percentage points below the national average. The Modi government has been criticised for not allocating to Adivasis and Dalits funds in proportion to their population. While the former represent almost 18 per cent of the state population, they were allocated 11.01 per cent of the total outlay in 2007-08, 14.06 per cent in 2008-09, 13.14 per cent in 2010-11 and 16.48 per cent in 2011-12. Moreover, actual expenditures were even lower. The same was true of the Dalits, who represent 7.1 per cent of the state population and who were allotted 1.41 per cent of the total outlay in 2007-08, 3.93 per cent in 2008-09, 4.51 per cent in 2009-10, 3.65 per cent in 2010-11 and 3.20 per cent in 2011-12.

Generally speaking, Gujarat has not spent as much as other states on the social sector. In a report, the Reserve Bank of India showed that Gujarat spends less than several other states in this area. Take education — in 2010-11, Gujarat spent 15.9 per cent of its budget in education, when Bihar, Chhattisgarh, Haryana, Kerala, Maharashtra, Orissa, Rajasthan, Uttar Pradesh and West Bengal spent between 16 and 20.8 per cent. The national average was 16.6 per cent.

While these criticisms from the left are well known, those on the right, especially the liberals, could also have indicted the Modi government for its lack of financial discipline. The Gujarat growth pattern relies on indebtedness. The state's debt increased from Rs 45,301 crore in 2002 to Rs. 1,38,978 crore in 2013, not far behind the usual suspects, Uttar Pradesh (Rs 1,58,400 crore) and West Bengal (Rs 1,92,100). In terms of per capita indebtedness, the situation is even more worrying, given the size of the state: each Gujarati carries a debt of Rs 23,163 if the population is taken to be 60 million. In 2013-14, the government plans to raise fresh loans to the tune of Rs 26,009 crore. Of this amount, Rs 19,877 crore, that is 76 per cent, will be used to pay the principal and the interests of the existing debts. Gujarat would fall into the debt trap the day this figure reaches 100 per cent.

This fiscal crisis has been caused by several factors. First, many Gujaratis who are supposed to pay taxes don't, whether they are at the helm of companies or ordinary citizens. In 2010, the total amount from taxpayers in Ahmedabad, Surat, Baroda and Rajkot alone was Rs 7,555 crore. This was more than the annual tax collection of Bihar at the time.

Second, the exchequer has been directly affected by the business-friendly attitude of the Modi government. To woo investors, it has indulged in tax deductions and low interest rates, and sold land at throwaway prices. Take the example of the Nano factory. If K. Nag's biography of Modi is to be believed, the Gujarat government made unprecedented concessions to Tata Motors, including the sale of 1,100 acres of land at Rs 900 per square metre, when its market rate was around Rs 10,000 per square metre, a Rs 20 crore exemption on stamp duty levied on the sale of land, a 20-year deferral in the payment of value added tax on the sale, and loans amounting to Rs 9,570 crore against an investment of Rs 2,900 crore (330 per cent of the investment) at 0.1 per cent interest rate over 20 years. Most of the big companies investing in Gujarat — Adani, Essar, Reliance, Ford, Maruti, L&T and others — have been offered special conditions, especially under the SEZ framework.

Certainly, to attract investors is a good way to prepare for the future and heavy debts are not a problem if these investments generate tax revenue. But how productive these investments will be remains to be seen. Many of them are at least partly speculative. The SEZ Act allows the owners of large SEZs (above 1,000 hectares) to use 75 per cent of their superficy for non-industrial purposes (for the smaller ones, up to 50 per cent of an SEZ can be devoted to non-processing areas). SEZ owners have been quick to indulge in real estate speculation and to lease at market price land that they've bought at throwaway prices. Interestingly, the corporate sector is not covered by the RTI. We wonder why.

Those on the right, who overlook the fact that the Modi government is more business-friendly than market-friendly (surprisingly, for liberals), claim that the way Gujarat is attracting investors is good for development. But it is only good for growth. For development, investing in education would make much more sense.

The writer is senior research fellow at CERI-Sciences Po/CNRS, Paris, professor of Indian Politics and Sociology at King's India Institute, London, and non-resident scholar at the Carnegie Endowment for International Peace express@expressindia.com

Party Donors nominated to House of Lords

from The Independent

The naming of business chiefs who have donated millions of pounds to the major political parties as new members of the House of Lords has provoked accusations that money is “polluting” Parliament.

The donors are included on a list of 30 new peers who will take the total membership of the Second Chamber to nearly 850 – the biggest number since it was reformed 14 years ago.

The 14 Conservative nominations include Sir Anthony Bamford, the chairman of JCB, whose family and firm has handed £5m to the party in recent years. His elevation comes three years after a previous attempt by David Cameron to award him a peerage was dropped.

JCB has close links with the Conservative Party. It employed the Foreign Secretary William Hague as an adviser after he stepped down as party leader in 2001 and Mr Cameron last year opened a company factory in Brazil.

A Tory source praised Sir Anthony as an “incredibly significantly industrialist” whose business employs thousands of people and pointed out he was invited on a foreign delegation organised by the last Labour government.

The Conservative list also includes Howard Leigh, a Tory treasurer and fundraiser, who has donated more than £200,000 personally and through his company.

Two prominent Liberal Democrat donors are among the 10 party supporters nominated to the Upper House by Nick Clegg. They are the entrepreneur Rumi Verjee, who brought Domino’s Pizza to Britain and has given the Liberal Democrats more than £800,000 and the nightclub developer James Palumbo, whose Ministry of Sound company has donated almost £700,000.

One of Labour’s five new peers is the businessman Sir William Haughey, a former director of Celtic football club, who has given the party more than £1.3m since 2003.

The campaign group Unlock Democracy said the nominees were the “usual list of party donors and cronies” and accused Downing Street of producing the names in Parliament’s summer recess to minimise adverse publicity.

Lord Oakeshott of Seagrove Bay, a Liberal Democrat member of the committee of MPs and peers which drew up a blueprint for Lords reform blocked by Mr Cameron, said: “Cash for peerages pollutes Parliament and political parties. We are all in it. It is now more urgent than ever to elect the Lords and get the big money out of British politics for good.”

The swathe of appointments brings the number of people entitled to sit in the Lords to 838 (although 53 are currently absent), the largest figure since most hereditary peers were removed in 1999.

The new peers could cost the taxpayer about £1.2m, plus travel and other expenses, leaving Mr Cameron with awkward questions over his promise to cut the cost of politics.

New peers

1. Sir Anthony Bamford (Con) Veteran industrialist whose family is a long-standing, generous Tory supporter.

2. Danny Finkelstein (Con) Times columnist, below left, and old friend of George Osborne. A youthful supporter of the SDP.

3. John Horam (Con) Britain’s most travelled politician sat in the Commons for Labour, the SDP and finally the Tories.

4. Howard Leigh (Con) Chairman of the Leaders Group, a network for supporters requiring members to donate at least £50,000 a year.

5. Olly Grender (Lib Dem) First worked for the party in the 1980s and was Paddy Ashdown’s chief spin doctor. Has just stood down from a Downing Street stint.

6. Brian Paddick (Lib Dem) Former senior officer in the Metropolitan Police, above right, has twice been a candidate for London Mayor.

7. James Palumbo (Lib Dem) Friend of Nick Clegg and has lent his nightclub, free of charge, to the Lib Dems.

8. Sir William Haughey (Lab) Glaswegian businessman above right, who built a fortune in the refrigeration business. Has given more than £5m to charity.

9. Jon Mendelsohn (Lab) Chief fund-raiser for Labour who set up his own lobbying company with two party colleagues.

10. Jenny Jones (Green) One of their most prominent figures on the London Assembly for 13 years.

'Buddy' scheme to give more multinationals access to ministers

Controversial scheme which gives corporations privileged government access to be extended to a total of up to 80 firms

• James Ball and Henry Taylor
• The Guardian, Friday 18 January 2013 16.55 GMT

Figures suggest Shell has had the greatest access to ministers under the 'buddy' scheme, with 56 face-to-face meetings since May 2010. Photograph: Robin Utrecht/EPA

 

The government is expanding a controversial scheme which pairs dozens of multinational companies with a ministerial "buddy", giving them privileged access to the heart of government, the Guardian has learned.

The minister for trade Lord Green launched the "strategic relations" initiative in July 2011, giving 38 companies, including oil, telecoms and pharmaceutical giants, a direct line to ministers and officials.
The Guardian has obtained a list of 12 further companies which have now been added to the programme, and understands that UK Trade and Investment is considering up to 30 more for addition over 2013.

Analysis of official registers reveals the 38 companies in the first wave of the initiative – more than two-thirds of which are based overseas – have collectively had 698 face-to-face meetings with ministers under the current government, prompting accusations of an over-cosy relationship between corporations and ministers.

The full degree of contact between the chosen companies and the government is not known as telephone calls, emails, and meetings with officials are not recorded on the registers.

Campaigning groups expressed alarm at the level of access that some of the businesses appeared to have to ministers. The Guardian figures, which looked at the meetings the companies held with No 10 and the three departments involved in the buddy scheme – Business, Culture, and Energy and Climate Change – suggested Shell had the greatest access to ministers. The oil giant has had 56 face-to-face meetings since May 2010.

Greenpeace said this consistent access was showing through in government policy.
"The concern about the government's buddy system was always that policy would end up skewed towards narrow corporate interests rather than the wider public good, and these revelations will do nothing to allay those fears," executive director, John Sauven, said.

Other signs of the scheme bearing fruit for business have arisen in public statements made by the universities minister David Willetts. Last week he urged officials to prescribe more of an Astrazeneca drug, and in November he met Novartis officials about streamlining and accelerating UK research and development and clinical trials – something advocated by many clinicians, as well as businesses.
Among the first wave of "buddied" firms were some which have been targeted by campaigners for paying little or no UK tax, or making "sweetheart" deals with tax authorities, including Google and Vodafone. A spokeswoman for UK Uncut, which campaigns against tax avoidance and spending cuts, said the regularity of government access for big business was drowning out other voices.

"There are hundreds of thousands, if not millions, of people who have marched, written to MPs, gone on strike, protested and occupied over the cuts and privatisation which are devastating our lives," she said.

"These demands by ordinary people have been ignored by a cabinet of millionaires which is choosing to only take the calls, the meetings and the dinners with big business and the banks to introduce policies which benefit them and the wealthy minority in this country."

The new companies to be given ministerial buddies – but not yet publicly disclosed – include the property firms Atkins and Balfour Beatty, which have been paired with climate change minister Greg Barker, who is overseeing work on the government's green deal and zero-carbon homes programmes.
David Heath of the Department of Agriculture is paired with food businesses Nestlé, Unilever, Mondeléz (formerly part of Kraft, and includes Cadbury) and Associated British Foods (owner of Primark and Kingsmill). Statoil is added to the oil companies already in touch with Vince Cable; foreign office minister Hugo Swire has been buddied with Procter and Gamble, and David Willetts with Cisco. The culture minister Ed Vaizey is paired with Telefonica (O2) and Everything Everywhere (Orange and T-Mobile), while Green adds engineering firm GKN to his list.

A spokesman for UK Trade and Investment confirmed the government was considering adding "around 30" more companies to the strategic relations programme over 2013.

"As previously, companies will be selected based on a range of criteria, including the complexity of their relationship with government (and hence the need for strong co-ordination) and their existing or potential contribution to the UK economy," he said.

"Understanding business concerns and being clear about government's own priorities can make a real difference to trade and investment."

A Department for Business, Innovation and Skills spokesperson said Willetts was responsible for the "strategic relationship management" for several pharmaceutical companies, including AstraZeneca. "He regularly meets with companies to discuss issues of importance to them, and has a strong interest in making sure that the environment for the life sciences industry is conducive to innovation and growth."

The Federation of Small Businesses defended the relationship with the government, saying members had good access to ministers through representation by the federation at regular meetings with ministers, but the government could do more.

A spokeswoman said: "We support schemes where multinationals support small businesses in the supply chain and give advice and support through mentoring, for example, such a scheme was announced between UKTI and Diageo in 2012. We would like the government to play an important role in encouraging, promoting such schemes, and engaging small businesses more in the process."
The FSB had 34 meetings with ministers in the four departments analysed by the Guardian between May 2010 and June 2012.