‘SIT is diversionary tactic’

‘SIT is diversionary tactic’

INTERVIEW WITH PROF.ARUN KUMAR

Published in the Frontline June 27, 2014.

Professor Arun Kumar is the Sukhamoy Chakravarti Chair Professor in the Centre for Economic Studies and Planning, Jawaharlal Nehru University.  An expert on the black economy in India, he has been a member of the Group producing Alternative Economic Survey for the last 15 years, providing alternative analysis of the official data. He is also associated with movements such as Right to Housing and against corruption.  He is the author of the book, ‘The Black Economy in India’ (Penguin, 1999) and most recently, of ‘Indian Economy Since Independence: Persisting Colonial Disruption’ (Vision Books, 2013).  In this conversation with V.VENKATESAN, he answers questions based on his recent book, and on the SIT, set up by the Government, to bring back unaccounted monies stashed in the foreign bank accounts of Indians.

Q: Your recent book has a whole chapter on the black economy. I found the distinction which you draw between anecdotal and the larger picture of black economy interesting. In a sense, would you describe the SIT, set up by the Modi Government, to investigate the black money stashed in foreign bank accounts by Indians, as dealing with the anecdotal or the larger picture?

A: My first point would be that steps could have been urgently taken by the new Government. This government has taken advantage of the Supreme Court’s direction to set up the SIT in the Ramjethmalani v. Union of India case.  All the agencies which are in it – like ED, IB, RAW etc. – they already have a lot of information. The question is why they were not acting on it.   Because politically it is not convenient to act on the information that is already there.  To give one instance, hawala takes places in certain places in Delhi, Mumbai, Kolkata, every city.  Now, these places are tracked by government agencies.  So, this is not as if they don’t know where hawala takes place from.  Who are the hawala operators working from there?  And who are the people visiting their houses?  This information should have been there with IB, and ED.  So, if the Prime Minister wants to stop hawala, it can be done in five minutes, because that information on where it is operating from is already available to the government agencies.  So, why was this not the first step? Hawala is the main conduit for taking the money out and bringing it back.   In the Jain Hawala case, which was discovered in a hostel in JNU, how was it discovered?  One Kashmir terrorist was caught with a draft of Rs.15 lakhs.  So where did the draft come from?  So, immediately, they raided the residence of S.K.Jain, and got hold of names of politicians.  Out of that, the BJP president, L.K.Advani admitted that he got money for party.  Janata Dal (U) leader, Sharad Yadav admitted that he took Rs.3 lakhs. But nobody was prosecuted at the end of it. So, the point is this information about where hawala operates from is known to the intelligence agencies. So that could have been the first step.

In the HSBC case, where the stolen data was received from the French Government, around 700 Indians had bank accounts in that Zurich branch. There it was revealed that HSBC was working as the hawala operator. The modus operandi was this: if I wanted to transfer money, I would call certain number, and they would send somebody, an account would be opened, and then when I wanted to transfer money, somebody would come, pick up the money and next day, I would be given the receipt that the money had been deposited in that Zurich bank account and when I needed the money, I would call up that number, somebody else would come, and bring the money. This is what the HSBC Bank was doing as a hawala operator.  Now I am told that all the multinational banks do this.  So, the other thing that could be done is to curtail banking secrecy. SIT is set up because Supreme Court has directed the government to do so and so it had to be done. But independent of the SIT, if the Government was serious, it could have taken immediate steps to control the black economy, by curtailing hawala, by moving against the places where hawala takes place, and by immediately moving to curtail the secrecy in the banking system and so on. 

I doubt the sincerity of the Government in setting up the SIT that they are serious about bringing the black money back.

From 1947 onwards, more than 40 commissions and committees of different kinds have been set up which have looked at different aspects of the black economy.  They have analysed the different aspects of black economy very seriously in the last 65 years. These committees and commissions have made thousands of suggestions. Wanchoo committee is rich with suggestions.  And, hundreds of them have been implemented also.  Yet, black economy has continued to grow. 

The black economy is characterised by waste of capital.  I call it `digging holes and filling them’.  You set one man to dig a hole during the day, and at night set another person to fill it. So this is activity without productivity.  Capital is being utilised, but output is zero.  A large part of black economy is like that.   Because of black economy, a large amount of illegality is associated with economic activity.  The point is, there is output in the black economy, but the economic potential is not reached due to waste.  The potential in the Indian economy today is 12 per cent rate of growth. Because of black economy, it is only going it at an average of 7 per cent.  In the 1970s when the potential of the economy was 8.5 per cent, we were going at 3.5 per cent.    South East Asian economies are examples of successful state intervention, while India is not.  But corruption is growing in China despite successful state intervention.  It is not as if black economy doesn’t exist there.  But it doesn’t come in the way of policy being implemented.   They have a sort of vertical strict hierarchical structure in which once the policy is decided, it gets implemented. People make money, but work is done. It is like Pratap Singh Khairon effect in the 1960s.  Pratap Singh Khairon was supposed to be taking money.  But he was doing the work.  In India, we are characterised by subversion of policy.  That is why we have lagged far behind the South East Asian countries.  We have democracy, while these countries don’t have that. China doesn’t have it. There is a big difference in the political structure.  Because we have democracy, everything has to go through the political process, and this process gets subverted by the black economy. And this subversion of the political process results in policy failure.

When I say black economy is today 50 per cent of the GDP, it means almost all activity has some associated illegality.  In my book, I have described many sectors where black incomes are generated, but I could not discuss all since the list is long.   Whether it is education, health, environmental regulation, traffic on the roads, law and order, industrial regulation, mining, whichever sector you take, it has black income generation. So it is widespread. It is `systematic and systemic’.  It is not anecdotal.  It is not that one day I do it, next day I don’t do it.   Under the system followed in production, the excise fellow will be bribed, the sales tax fellow bribed so much, the local politician, the policeman and so on taken care of. It doesn’t matter what the tax rate is, because the system is in place. So whether the rate is 97.5 per cent or 10 per cent, the businessman will evade taxes.  That is why in India, even when the tax rate has come down, the black income generation has gone up. So, over the years, the tax rates have been reduced, controls have been reduced, MRTP, FERA, small scale reservation, licencing and many other controls have gone, and yet the black economy is increasing. Why? Because laws are systematically violated. How are the laws systematically violated? By having the policy-maker and the implementer of the law a party to its subversion.

So, underlying the black economy is a `Triad’.  The triad consists of the corrupt businessman, the corrupt politician and the corrupt executive.  The corrupt executive consists of the corrupt bureaucracy, the corrupt police and the corrupt judiciary.  Judicial corruption is also enormous as many recent exposes point to.

The above analysis suggests that is the problem is political in nature and all parties are involved in it, so, the political will to tackle the menace has not been there.  Private information exists in the entire system. Bureaucrats know, Judges know, policemen know, who are the people to be contacted for hawala, who are the people to be contacted for setting up bank account there (in the tax havens), all these information exist.  It is there with intelligence agencies also.  But it is not being used to tackle the problem, because it is political.  Because all parties are involved in it, they don’t want to deal with them.

Q: Can the SIT provide this political will?

A: No. SIT cannot.  What will come out of this?

Q: Ram Jethmalani, the petitioner in the case before the Supreme Court, says the SIT can file the FIR.

A: But then what after that? Proceed and prosecute one or two? But there are tens of thousands of them. The big fish is very clever. If, say, the Ambanis want to send some illegal funds abroad, they will not do so in the name of Anil Ambani or Mukesh Ambani.  It will be through layering. It will always be through various shell companies.   Big fish have a lot of money there, (in the tax havens) but it is not directly in their names.  How will the SIT find that out?  It has to catch them here in India.

Q:The terms of reference of setting up the SIT entrust it with the responsibility of preparing a comprehensive action plan, including the creation of necessary institutional structures that can enable and strengthen the country’s battle against generation of unaccounted monies, and their stashing away in foreign  banks or in various forms domestically.  Don’t you see this as a broad mandate, which will help fight the black economy?

A: This has been the kind of mandate which was there with the earlier committees also. It was there with Wanchoo and Santhanam committees.  They have made hundreds of suggestions.  It is also discussed in the report of the National Institute of Public Policy which studied the problem in early 1980s.  This is not the first time.

Q: But this time Supreme Court will be monitoring, that is the big difference.

A: But who are the people involved? Who do you catch?   The point is there is no death of knowledge about how black incomes are generated, how black income is taken abroad, and how it is round-tripped. But we don’t have specific names. Who will investigate now? The same Enforcement Directorate. The same IB. The same IT department.  The same Central Board of Direct Taxes. Why were they not doing it till now? This data is kept, but not being used.  There is private information, but it does not become public information which can be acted on.  How will the SIT get hold of all these data?  The SIT can establish general institutions, principles, which are already established. But how will it catch individuals?  Only through raids? That the CBDT can do on its own and has done so selectively?  It doesn’t need to be told by an SIT. But, raids have been political weapons and hence discredited. There is a Member, Investigations in the CBDT who is supposed to get raids conducted.

Q: Why do you think SIT doesn’t inspire confidence?

SIT may do something different and surprise us.  But, what has been the experience of committees and commissions? I am not despondent.  It is one more attempt, where much more serious things could be done even without the SIT – raid hawala houses, close them down, end banking secrecy.  I am not, in principle, opposed to SIT. What I am saying is this (SIT) may be a diversionary move.  Now whenever the questions are asked of the government it ca conveniently say that SIT is looking into the matter.  When under public pressure, three institutes were asked to look into the problem of the black economy, the Government used them to say it would answer questions when their reports come.  Pranab Mukherjee (Finance Minister in 2011) said in his next budget he would present the reports also.  Three years down the line, it has not been done. So, this can also be a convenient excuse for the government to stall answering inconvenient questions.

Q: Is the apprehension that the Court may take over the functions of these executive bodies valid?

A: The Court may make them accountable. That may work positively.  The question is why is the ED, with so much information not acting? They were not acting because of political reasons. So, how will SIT get over that?  Because even now, even though the ED, IB and RAW may be part of the SIT, will they reveal the full information?

Q: Chairman and Vice-Chairman can ask them.

A: They can ask what? If they ask for something specific on Hasan Ali, yes. Beyond that, the agencies under political guidance can also say they don’t have information.  For Hasan Ali case, what have they done? To nullify RTI, very often, the reply is that the information sought for is not available. So the same thing can be done.  If the political bosses want information revealed, it would be done. The Judges (the Chairman and the Vice-Chairman of SIT) won’t know what to ask for.  How would they know what to ask for?  They are outsiders to the system.  Political control is very important.  That is why in Lokpal, it was very important to keep it outside the political control.  As long as the political control is there like in the case of CBI, the CBI plays games.  Where ever it wants, it reveals something.  Where ever it doesn’t want, it doesn’t reveal. And wherever it likes, it spoils the cases.  Very often, the Courts have scolded the CBI for spoiling the cases. So, it is the political will that matters finally. 

Q: What then is the logic of this SIT?

A: Well, the Supreme Court thought that Court monitoring of these two cases (Hasan Ali and LGT case) may help.  But how will it help in general curtailing of black economy?  We have got any number of institutional structures, which are already supposed to be doing all these.  Our agencies track hawala operations. What more can they set up?  Instruments are already there.  Income Tax Department used to have a survey ward, which was supposed to investigate whether people are filing returns or not. But it had become corrupt. Similarly, there has been a valuation department, which is supposed to arrive at correct valuation of properties for purposes of taxation but this has also not served its purpose due to corruption.

Q: Do you think SIT can encroach on the powers of the executive, as the previous Government told the Supreme Court?

A: The SIT can only ensure that the Executive functions as per the law.  In that sense, the SIT can monitor specific cases.  The Court is not saying that SIT will do policy-making. It can only suggest changes and it is for the government of the day to accept or not.

Q: The Modi Government has come to power on the plank of corruption-free governance etc. Should not the Court wait and see whether the agencies, responsible for unearthing black money, fulfil their responsibilities without fear or favour? 

A: The order in the case was delivered earlier, prior to the coming to power of the new Government.

Therefore, it is a continuing process.  Once the Court had given the order in 2011 that the SIT be set

up, it is now being implemented.  All I am saying is, don’t expect too much from the SIT.  SIT may

help in specific cases.  Like the case of 700 people who are caught up in the HSBC disc.  In the LGT

disc, 26 names have come up.  They can try and investigate whether there were more than 26 names,

whether there are other names, which the Government is not revealing. Or suppose if a new case is

discovered, it can also be taken up by them. Beyond that, our expectations may be far-fetched.  It is a

very complex political question since it involves the nexus among politicians, businessmen and the

executive; the ruling elite of the country.  That nexus has to be broken.

Q: The chairman of the SIT, Justice M.B. Shah has said there are complexities in the SIT’s task. 

What are the complexities involved?

A: The SIT’s task is complex because the nexus among the triad itself hides a lot of things.  They are

the ones who are working in secrecy (the politicians, businessmen and the executive).  This nexus can

be politically broken.  When the anti-corruption movement was at its peak with Anna Hazare and

Baba Ramdev leading it, you could see that the Government was almost shivering.  When Baba

Ramdev came to Delhi, four Cabinet Ministers went to receive him. Cabinet Secretary was there.

Suddenly, the Government was willing to act on corruption.   Public opinion is the only thing that can

change the apathy that the government has shown most of the times.  As long as the Government was

fearful that something was going to come out, they promised Lokpal.  As soon as the movements

subsided, they again started going slow on Lokpal. Towards the end, just to show that they are anti

corruption, they allowed the Bill to pass.  Only public pressure will change things for the better. 

Government can put pressure and make SIT ineffective by signalling the government officials who

are members of the committee not to reveal certain information, not to be pro-active. SIT has to

function within the parameters of what the politicians wish or what the executive says.  From SIT, I

expect only limited gains.  Because it won’t be able to generate public information, which would be

actionable. May be, we can expect some results in two or three cases, but these are of 2007 vintage. 

By now, the money will not be there.  In Hasan Ali case, when the disc was captured, it was supposed

to have 8 billion dollars.  In 2011, the Finance Minister, in his press conference, revealed that only

60000 dollars were left.

Q: Ram Jethmalani, in an interview to a television channel, has said footprints can be easily

identified, and the money trail can be followed.

A: Not so easily.  What happens is when you transfer money from one shell company to the other,

you close the previous one.  Then, how do you go back?  India cannot investigate tax havens,

belonging to other countries. The advantage the advanced countries have is the money which they get

from tax havens is giving them additional capital.  Why is it that the advanced countries were happy

with these tax havens and not acting against them earlier? Because, they were finding that the capital

is flowing from the developing world to them.  One of the arguments has been that after colonisation

ended in the late 1940s and early 1950s, these tax havens were deliberately set up by the developed

countries so that the capital which was earlier coming from the developing countries as drain of

wealth, could now come through these tax havens into their economy. And they were benefitting. 

Latin Americans lost hundreds of billions of dollars through these tax havens to the European

countries. India and other countries lost to Britain because money was going through these tax

havens. Of late, after the global economic crisis of 2007, there has been pressure from the OECD

countries that the taxation secrecy should go.  That is why the Swiss banks have opened branches in

Singapore, and Dubai.   Even if Switzerland complies more with whatever pressure they get from

OECD, their branches operating in other countries would continue to act.  That is why Credit Suisse

was caught now in the US and fined $2.5 billion. UBS was caught in 2007.  Therefore, banking

secrecy should end globally. Only then we can catch them.

One important thing I must point out.  In 2008 when the financial crisis took place, that time Fortis

Bank collapsed and the Netherlands Government took it over. They found that Fortis Bank had 700

subsidiaries in tax havens. So the whole purpose of subsidiaries in tax havens is to allow high net

worth individuals to move money.  This is a standard practice of multinational banks especially, the

Swiss, British and the big American banks. So this should be checked.   Now HSBC has been caught

for allowing hawala operations to take place through its official channels.  But no action has been

taken against them as yet. 

arunkumar1000@hotmail.com

Reviving growth: Need to tackle the macroeconomic imbalances

Reviving growth: Need to tackle the macroeconomic imbalances

Arun Kumar

Sukhamoy Chakravarty Chair Professor, CESP, SSS, JNU.

Published The Hindu, June 7, 2014.

BJP’s dramatic victory is partly a result of UPA’s failure to tackle Indian economy’s problems. Persisting high rate of inflation, declining growth, inadequate employment generation, fiscal deficit, current account deficit and corruption contributed to the public’s disenchantment with UPA. Expectations are high that the new government will tackle these problems decisively and bring relief to the public.

The economy’s rate of growth has declined quarter after quarter since the end of 2010-11, i.e., for the last 12 quarters. The industrial sector has been showing negative or near zero rates of growth recently. Services sector, the engine of growth for the economy, has experienced declining rates of growth and so has agriculture. In turn, this has led to sluggish employment generation. The problem has been compounded by the capital intensive nature of current investment which uses less labour and more capital, so that even when output rises, employment hardly grows. Most are forced to work in the informal sector at low wages which coupled with high persisting inflation causes economic distress and political unrest.

This state of affairs is due to the decline in the rate of investment from its peak of 38% in 2007-08 because of the global economic crisis. It went up in 2009-10 but is down to about 32%. It is still high compared to the figure of around 20-23% in the 1990s. It rapidly increased in the 2000s leading to the boom of 2003-2008. The rapid increase in investment was engineered by allowing national income to shift rapidly in favour of the high savers - those who have high property incomes. This was evident from the direct tax data which showed that corporate tax collections boomed after 1999. This trend has led to a rapid increase in inequality in society and a slow rise in mass consumption so that the growth of the economy has depended more and more on rising investment levels.

Hence the crucial determinant of growth in the economy in the period after 2000 has been investment. So, as the investment rate declined after 2010-11, the rate of growth of the economy fell. Investment in the economy depends on private investment, both foreign and domestic and on public investment. There has been a problem with each one of them.

The situation has been aggravated by developments on the external and the fiscal fronts. The green shoots in US did not bloom, Eurozone went into a double dip recession, Japan continued its sluggish growth and the Chinese and the other BRICS economies slowed down. Thus, exports growth rate has been low. But, imports rose sharply due to the high import bill for petro products and increase in gold import bill. The consequence has been a high trade deficit and current account deficit and a decline in demand in the economy. This has also been accompanied by reduced inflow of foreign investments so that the value of the rupee viz-a viz the dollar declined sharply in the last few years. This added to the imbalance on the external front with speculation and flight of capital aggravating it. The threat of a downgrade of the country by the credit rating agencies has been looming which could lead to an increase in cost of borrowing abroad and to a rise in the current account deficit.

Foreign investment has slowed down but it only constitutes around 10% of the total investment in the economy. Bulk of the investment is internal and this has slowed down due to several factors. One of them has been the unravelling of scams since 2009 and the intervention of the courts. This has impacted the confidence of the business community which was used to using crooked means to manage its investments and the markets. After the court interventions there have been question marks on many decisions like, allotment of spectrum and coal blocks and iron ore mining. This has unnerved businessmen who have lost the confidence that they can manage the business environment in the old way.

The confidence has also been shattered by the widespread public protest against large scale acquisition of land needed for major projects. This goes back to days even before Singur. Resistance has continued in Jaitapur, Koodankulam, POSCO, Tata Mundra and so on. Some of the big ticket investment projects have been called off, like, the $12 billion project by the Mittals. The problem remains unresolved because the public perceives a loot of natural resources – land, air, water, spectrum, forests and mines – at its expense. So, execution of big projects has slowed down. The private corporate sector has been flush with funds which they have not invested due to the uncertainty and sluggish demand in the economy. In brief, the slow down in internal investment is a result of the discredited model of investment in the county which has been based on collusion between the businessmen, politicians and the bureaucracy. Thus, for different reasons, both foreign and domestic private investment has slowed down.

The last element, public investment also slowed down because of policy paralysis in the government and even more importantly due to the sharp cut back in Plan size in each of the last 5 years so as to keep the fiscal deficit down; compared to the budget estimates the actual has been less by Rs.5 lakh crores in these five years. This has led to slow down in investment in infrastructure and aggravation of shortages.

Because of the slow down in the economy, tax revenue increase has suffered. That is why the fiscal deficit has tended to increase and to keep it in check, the Plan size has been curtailed. But that sets up a vicious negative cycle. As the economy slows down, threat of downgrade by the credit rating agencies increases, revenues of the government rise less and the deficit tends to rise both of which lead to a loss of confidence and a further slow down.

Can the new government tackle the difficult economic situation? Mr. Modi is reputed to be a `man of action’ but the issue is what action? The corporate sector has backed him in the hope that he would reverse the fortunes of industry. The stock markets have risen sharply in the last few weeks. Can the new government simultaneously fulfil the hopes of business and of the under employed youth hoping for a miracle?

While the rise in the stock markets signals the flow of funds from FII, it does not mean that FDI will suddenly increase. Further, there is the danger of a speculative bubble building up – as in the past - which could collapse and adversely impact the investment climate. This could be triggered by the continuing easing of the Fed intervention in the US – something that is ongoing. Even if foreign investment increases, it is a small part of the total investment so it cannot be the major stimulus needed. Domestic investment – public and private – needs to be revived. Large investment is going to remain hamstrung by environmental and other clearances and difficulties in acquisition of land unless laws are changed but that would take time. Transparency in business decisions is needed to revive investment and that also needs time. So, the only thing that can be done soon is to increase public investment and especially in rural areas where infrastructure is woefully inadequate.

Schools, dispensaries, roads, telecom, water, small irrigation and so on are needed urgently in rural India. This can potentially create lots of jobs unlike the big investments and would be much less expensive than in urban areas because land is less expensive. Thus, it would benefit many more people and slow down the expensive and environmentally damaging urbanization currently taking place. But this requires efficient governance.

In brief, the problems of the economy stem from the macroeconomic imbalances and corruption and unless they are addressed, the economy will not recover. The need today is not only for a decisive leader but for a new holistic macroeconomic approach – a break from UPA’s policies. Unfortunately, the BJP manifesto only presents a hint of its macro economic plan and that too towards the end of the manifesto, as if like an after thought. Hopefully, the Union budget will help clarify matters.

arunkumar1000@hotmail.com

Nehru’s Legacy in the Present Juncture: Assessing Economic Successes and Failures

Nehru’s Legacy in the Present Juncture: Assessing Economic Successes and Failures

Arun Kumar

Sukhamoy Chakravary Chair Professor, CESP, SSS, JNU

Published in Mainstream, May 31, 2014. Vol. LII No. 23. Pp. 19-21.

Nehru, India’s first Prime Minister, passed away fifty years back in 1964. It is time that an objective assessment is made of his contributions to the nation at that critical juncture of its existence. The newly independent nation was grossly underdeveloped due to the colonial rule. Colonization led to India falling considerably behind the advanced nations in every sense due to drain of wealth and lack of investment in the economy.

The gap in infrastructure between Britain and India in 1950 gives an idea of the lack of investment in the economy (Kumar, 2013). Whether in power generation per capita, roads per thousand sq km or in education per thousand of population, India did not catch up with the 1950 level of Britain even by 2000. So, in spite of massive investment in each of these fields after 1947, India remained backward. The lack of investment over two centuries could not be made up in five decades.

What independent India inherited was a backward economy in every sense. Its agriculture was backward with almost no technical change in more than two centuries. Productivity was low and correspondingly incomes in agriculture were low and poverty entrenched in rural areas. Industry was backward by international standards and largely owned by foreign capital, including certain critical areas like, banking and petroleum. India had little R&D and depended on repeated imports of technology. There was a high death rate due to poor social infrastructure and poverty.

The dream of the national movement was that after independence, India would be turned into a modern economy like that of the advanced western nations. The challenge was how to move from being a poor and under developed nation to an advanced nation in the shortest possible time. For this, poverty, illiteracy and ill health had to be eliminated quickly, physical infrastructure built and agriculture and industry modernized.

Nehru and his followers set out to accomplish this task of modernizing India from the word go. However, there were huge social problems that had to be confronted. India is the most diverse nation in the world with linguistic, regional and religious diversity and wealth and income inequalities and other such variations across the nation. Partition and the war in Kashmir were the immediate crisis that confronted the nation after independence. Drafting the constitution for such a diverse nation was a major challenge. The country was not only poor but still feudal in its outlook and that posed serious challenges to the idea of modernization and to the western institutions of a modern state.

India was also confronted by the Cold war and had to steer a path through this minefield with pressure from the Western bloc to join it. However, given the colonial experience, India did not trust the West. Yet, it depended on the West for trade, aid and military hardware. The dispute and the war with China pushed India towards the West but the dispute with Pakistan forced India towards the Soviet camp. The Indian elite did not like socialism or communism but was forced to ally with the Soviet bloc given that the West and China were supporting Pakistan against India. This led to the dilemma and the confusion in the mind of the Indian ruling elite, namely, while depending on the Soviets for strategic support, technology and arms, it wanted to follow the West as its ideal in terms of ideology, development and consumerism (Kumar, 2013).

In the 1950s under Nehru’s leadership, India quickly set up the framework for its modernization. Constitution, elections, Parliament, Planning, elimination of Zamindari, land distribution, setting up institutions of higher education and R&D laboratories, agricultural universities, IITs, heavy industry, production of basic goods like, steel and energy, nationalization of airlines, banks and petroleum and so on.

There was emphasis on simplicity in life so that the nation could plough its resources into development. The rate of investment and savings increased all through to provide the resources for rapid development. There was emphasis on curbing luxury imports and also import substitution so that industry could grow and diversify. The rate of growth of the economy went up sharply in the 1950s compared to the period of first fifty years of the twentieth century under colonial rule.

The experience and the understanding of the national movement was that problems faced by the people were social and not individual. So whether it be poverty or illiteracy or ill health, the cause was systemic, namely, the British colonial rule that did not set up the institutions needed. It was clear that the individual could not set them up on their own. Thus, the role of eliminating the basic problems faced by the people was given to the collective, the government. Nehru and his supporters accepted this logic and government was given the leading role in the economy; not that there would be no private sector. It was to be the driving force of progress in society. The Indian big business also understood this and accepted the fact that they did not have the capital to set up infrastructure and basic industries.

The economy was to become a mixed economy and planning was given the role to help in optimal utilisation of resources to achieve the fastest possible rate of growth. Central Planning was patterned after the Soviets. The public sector received a large measure of support from the Soviets which also gave some technology which set the country along the path of relative independence. The country tried to balance the state and the market.

This economic strategy also helped ward off the pressures from the two Cold War blocs. At the international level, India went in for non-alignment with a tilt in favour of the Soviet bloc given the US tilt towards Pakistan. The existence of the two competing blocs, enabled Nehru to get the space needed to chart a relatively independent path of development. The Western bloc could not exert the pressure it later did, lest India tilted even more towards the Soviet bloc. Thus, Aid came from the West in large doses. This was sorely needed because of the consistent trade and current account deficits that India ran on account of the Western development path it chose for itself.

Theoretical support for a large and interventionist government came from the ruling ideology at that time in the advanced Western nations. After the great depression of 1929-33, these economies followed the Keynesian approach which led to the creation of a welfare state with large public investment in infrastructure and a large public sector (with few exceptions).

This economic strategy resulted in a big step up in growth after 1950. Industry grew rapidly and diversified. Public services increased so that health standards improved and the death rate fell sharply. Literacy spread and science and technology which was ignored by the colonial power received a big boost.

Unfortunately, for the Nehruvians, the strategy of western development was based on trickle down and led to persistence of poverty and growing inequality in society. It also led to pro urban and pro industry policies to the marginalization of rural areas and agriculture. This led to a growing energy intensity of the economy. For a country that is short of petroleum resources, this has meant that every time the world faces an Oil crisis (like in 1967, 1973, 1979, 1989 and 2000s) Indian economy also goes into a crisis.

The feudal attitudes in society could not be changed rapidly since the leadership was largely feudal in nature. This reflected in the functioning of the institutions set up. For instance, among the elite there was resistance to eliminating illiteracy so that they could get cheap labour. Consequently, adequate emphasis was not given to good school education and especially for the poor. This has been an important cause of the persisting poverty in the country and continuing backwardness. It has also meant inadequate emphasis on R& D. It is not that Nehru did not talk about these critical issues but the party over which he presided did not go along with him. The bureaucracy which was to deliver remained in the colonial mould and did not pull its weight for transforming the nation into a modern state.

The top down policies of copying western modernity also led to inadequate employment generation so that very few could get into the lucrative organized sectors and bulk of the population has remained struck in the agriculture sector and the unorganized sector at low wages. The marginalized sections in society, the SC, ST, women, Muslims and so on have not benefited as much as they ought to have. Thus, the policy of reservations has not only continued but has had to be extended to other marginalized sections. All this led to the growing social and political crisis in the country in later years.

The consensus over policies that existed at the time of independence (due to the experience of the national movement) quickly dissipated with the elite sections cornering the gains of development and wanting more to become like the westerners who were their role model. At a very low per capita income they wanted to have the same consumption level that the average person in the advanced countries had. The growing middle class and the elite in society in their impatience to consume more, increasingly resorted to the black economy and corruption to have higher incomes. Business men also captured policy through corruption and manipulation and this fuelled the black economy further. The seeds of these trends were visible before Nehru’s death. He had to write a letter to all the Chief Ministers cautioning them against the growing corruption in the country.

The growing corruption and the black economy led to failure of policies. The large role of the government in the economy started to come unstuck. Development started to falter and with that the faith of the people in government and its policies also declined rapidly in the 1970s and the 1980s and led directly to the New Economic Polices in 1991. The country came full circle to the pre 1950s policies minus the colonization by a foreign power. Nehru was blamed for the failure of policies which led to India lagging behind the other developing countries like, the South East Asian Tiger economies and China.

In conclusion, it can be said that Nehru’s policies in the 1950s and early 1960s set independent India on a path of rapid development in spite of a very difficult political and social situation in the country and the international situation due to the Cold war. It was his policies that set the base for later faster growth in the country by setting up the social and physical infrastructure. His policies enabled the private sector to grow rapidly and become big enough to take the lead in economic development in the period after 1991. The policy framework put in place resulted in reduction in poverty even if at a slow pace.

However, as pointed out above, the big mistake was to follow the top down approach to development in the race to catch up with the West. It compromised on the independence of economic policies which were only relatively independent because they were basically a mix of the market and central planning copied from the West. These policies led to growing inequity in society, to persistence of poverty, inadequate employment generation, rising energy intensity and periodic crisis in the economy when the global Oil economy faced a crisis. There was growing black economy due to political economy reasons that led to widespread policy failure and to the decline in the faith in government intervention in the economy and that became the undoing of the Nehruvian framework in the post 1991 phase. But the consequence of this change in framework has meant a less caring state and society, growing self-centerdness, rising consumerism, rapid environmental decline and growing inequality. Finally, though the seeds of the failure of the Nehruvian framework lay within itself, Nehru’s legacy cannot be seen in stark terms as success or failur.

arunkumar1000@hotmail.com

Vote on Account: Neither Economically nor Politically What was Needed

Vote on Account: Neither Economically nor Politically What was Needed
Arun Kumar, CESP, SSS, JNU

MAINSTREAM, VOL LII NO 9, FEBRUARY 22, 2014

A vote on account is not expected to make any major announcement of policies since it is supposed to be a temporary measure to enable the government to continue its expenditures to maintain itself and the continuing programmes. It is expected that the new government that would take over in a few months from now would present the full Budget. In a way, the government that is on its way out should not tie the hands of the government that is expected to take over by announcing policies. But these are only conventions. Nothing prevents a government from presenting a full Budget. After all, a new government can again go in for a revised Budget if it so desires.

More importantly, in the vote of account for 2014-15 presented now, there are major policy announcements, like changes in excise duties, to boost the profitability of certain industries that are not doing so well and changes in the accounting procedures to show a much larger Central Assistance for State Plans and a reduced Central Plan Outlay. It has also announced ‘one-rank one-pay’ for the retired Army personnel and waiver of interest on loans to students. Thus, where the ruling party felt it could gain electorally by announcing schemes, it has done so. The question then is: why did it not go further on some crucial matters for the economy?

As the Finance Minister has spelt out, the economy has been slowing down for the last nine quarters. Further, the economy has shown a high degree of macro volatility since the Fiscal Deficit, Current Account Deficit in foreign trade and inflation have shown adverse trends in the recent past. In the last five years, the government has repeatedly said that soon the rate of inflation will decline and invariably that has not happened; it has remained persistently high with ups and downs.

The government’s claims for the next year are not anchored on the prospects of the economy. Its budgetary numbers are predicated on a growth in the nominal GDP of 13.4 per cent. Given the government’s claim that inflation is running at five per cent and the economy will grow at about six per cent, the GDP growth will at best be 11 per cent. Even this is unlikely since the principal problems in the economy are not being addressed. Thus, the budgetary calculus is likely to go wrong and the new government will have to bear the burden of correcting a deteriorating situation.

Inflation is measured by the Wholesale Price Index (WPI) which does not represent the true inflation in the economy since it does not give any weight to services. So, for instance, it does not reflect the rise in the cost of education or health. Even public institutions are charging higher prices to come closer to the market prices. This is on the plea that subsidy is undesirable for the Budget and economy. The public is confused and thinks that a fall in the rate of inflation means lower prices. This is not true since a decline in the rate of inflation only means a slowdown in the rate at which prices are rising. So as long as the inflation rate is positive prices continue to rise. With inflation, the public finds its purchasing power declining and its standard of living affected.

The Finance Minster proudly proclaimed that he is on the path of fiscal consolidation since he has kept the Fiscal Deficit for the current year (2013-14) below the target of 4.8 per cent. But how has he achieved it when tax revenues have fallen short by about Rs 77,000 crores (by 6.5 per cent) compared to the Budget estimates? There is a drastic cut in the Plan size (by Rs 80,000 crores). This is a trick the Finance Minister has been playing on the public consistently year after year. The fiscal deficit target is being achieved by compressing essential expenditures. This is like chopping one’s nose to cure one’s cold.

Thus, when the Budget is presented, to show the government’s seriousness about the Plan for public consumption, inflated figures of Central Plan allocations are presented before Parliament. But after a year, when the next Budget is presented, the actual figures show that much less than the budgeted amount is spent so that the Plan targets remain unfulfilled.

The shortfall for 2009-10 was Rs 41,009 crores, for 2010-11 Rs 60,168 crores for 2011-12 Rs 83,861 crores, and for 2012-13 Rs 1,53,033 crores. The shortfall of RE over BE for 2013-14 is already Rs 65,989 crores. Thus the total shortfall of the Central Plan expenditure over the five years amounts to more than Rs 4,04,000 crores. When Plan expenditures are cut, it implies a shortfall in public investment. No wonder there is shortage of infrastructure like power, water and railways. Further, this leads to a slowdown in the economic rate of growth as the demand falls short and bottlenecks appear. Additionally, it leads to unfinished projects since allocations for them are inadequate.
The country has witnessed a slowdown in exports while imports remain high. Energy and gold imports have contributed substantially to the high level of trade and Current Account deficits (CAD). High gold imports are a result of the demand in the economy due to the uncertainty and the desire of the savers under the circumstances to buy more gold as a hedge. Energy imports have been high since coal production has not kept pace given the uncertainties regarding coal mine allocations due to the corruption cases and environment considerations.
The result of a high CAD has been speculation on the value of the rupee and a decline in its value vis-a-vis the foreign currencies. It fell to a record low of Rs 68 to the dollar. The problem was compounded by the signals emanating from the Federal Reserve (the US Central Bank) regarding phasing out of the quantitative easing. This opened the possibility of drying up of easy liquidity available in the international financial markets in the last few years; this was driving foreign investments into the emerging markets. The slowdown in China and tepid recovery in the US and other advanced economies add to the uncertainty for the world economy. Thus, the external picture has been one of great uncertainty not only last year but over the last three years. This is likely to endure and it will continue to impact the CAD and value of the rupee.
The high CAD has also resulted in a rapid rise in the debt of the country and especially of the short run kind that causes greater instability. The foreign debt of the country is about $ 100 billion more than India’s foreign exchange reserves. That is the signal to inter-national speculators that there is a weakness to be exploited here. While the steps taken by the government and the Reserve Bank to check short-run speculation and reduce the inflow of gold have stabilised the rupee somewhat, these are not enough. Reports are that gold is being smuggled in at an increasing pace and this can again add to pressures on the BOP. So, the situation will remain precarious as long as India’s macro economy is not stabilised.
An important reason for the slowdown of the economy is the decline in the investment rate in the economy. It had peaked in 2007-08 and since then it has declined by about five per cent. An important reason for this decline is that investments in India have been based on crony capitalism and in the last four years with the exposes of various scams and cancellation of licences, businessmen face uncertainty. Further, the government’s decision-making has slowed down with the policy-makers (politicians and bureaucrats) delaying decisions. So, the model of crony capitalism has collapsed and no new one has emerged.
Corruption has also meant that the public has viewed the large investment decisions of the private sector with suspicion. People do not want to give up their land since they believe that natural resources are being looted by the businessmen along with the politicians at their expense. Thus, movements against displacement have become strong and projects have stalled both in the public and private sectors. We have had the examples of Singur, POSCO, Nandigram, Raigadh, Jaitapur, Greater NOIDA and so on. The courts have also viewed with suspicion the various land acquisition demands. Thus, investment by the private sector, both foreign and Indian, has slowed down. As already mentioned, the public investment has slowed down due to the cuts in the Central Plan size in the last five years.
At the root of the instability in the economy is the black economy and indiscriminate opening up leading to the BOP problems. The black economy results in higher costs and waste which causes prices to rise. It also leads to speculative activity and episodic price increases as in the case of onion prices last year. This is compounded by the connivance between the businessmen and policy-makers. The black economy results in shortfall in tax revenues and higher expenditures due to corruption so that the fiscal and revenue deficits are larger than they need be. Due to the flight of capital and under- and over-invoicing of trade and transfer pricing, the BOP turns adverse. Thus, the instability in the economy is a direct result of the black economy which results in the BOP problem, high Fiscal Deficit, higher inflation and a slowdown in investment both by the private and public sectors.
The indiscriminate opening up has led to the reduced policy-space for the government. The government has targeted the Fiscal Deficit as the main variable to operate on since the credit rating agencies look for it hawk-eyed. So, it has not minded the expenditure compression even if that has meant a slowing down of the economy and consequent bottlenecks and problems. It has been warned by analysts that private investment is unlikely to pick up much in the near future given the uncertainty of the coming elections and the likely prospects of a hung Parliament.
The FM’s claim that massive investment projects have been sanctioned does not amount to much in a period of the uncertainty since sanction does not mean the decision to invest. The only chance for the economy to come out of the slowdown was an increase in public investment. For this the black economy had to be effectively tackled. One does not have to close the economy to regain the policy-space but only tackle the black economy. However, the government has been reluctant to do so in the last five years and continues to be so.
The government had a chance in the vote on account to take adequate steps to tackle the macroeconomic imbalances. It has not thought it prudent to do so because these may be seen to be policy-decisions. However, since it has taken some policy-decisions as already pointed out, it should have taken the really critical decisions on stabilising the economy. Instead, the Finance Minister spent much energy on showcasing the UPA’s economic performance in the last 10 years and especially when he was the Finance Minister.
To conclude, the Finance Minister has claimed that of late the various deficits have moderated and so the UPA Government’s policies have been on track. But the experience of the last five years is that the government has not been able to deliver on its claims. It has repeatedly claimed in the last three years that the price rise would moderate and the rate of growth would pick up; but this has not happened. Consequently, the credibility of the government has been low and the public has voted against the Congress in the recent Assembly elections. If the government’s performance was indeed good, why would it lose so comprehensively? If one ponders over this, it is clear that the vote on account neither delivers politically what the Congress-I needed nor economically what the country requires at this juncture—a lose-lose situation for all.

arunkumar1000@hotmail.com

Interrogating the Anti-Corruption Platform

Interrogating the Anti-Corruption Platform

Arun Kumar

Sukhamoy Chakrvarty Chair Professor, CESP, JNU

Published The Hindu, February 6, 2014.

AAP has announced its intention to fight against corrupt leaders from all parties in the coming national elections. So, anti corruption seems to be its main plank for the coming elections since it has not yet announced anything else. Its success in the recent Delhi state elections was on a largely anti-corruption plank. Even the promises of cheaper/free water and electricity to the electorate were based on ending corruption in the provision of these services. Beyond these and a few other issues, the vision of AAP regarding India has yet to emerge. Given the pent up anger of the electorate with inflation and corruption, a limited agenda was enough in Delhi. Would a purely anti-corruption plank also work at the national level for the same reason?

Other political parties have been forced to adopt an anti-corruption stance. Clearly, AAP has succeeded in changing the political discourse in the country. The rapid adoption of the Lokpal bill, promise of passing the other pending anti-corruption bills and the buzz about selecting clean candidates points in that direction.  

Corruption has become a key issue since it results in daily hardships for the aam admi – whether regarding employment, prices, education, drinking water, electricity, dealing with police, bureaucracy, judiciary and so on. The nation faces crucial problems both at the macro and the micro economic levels. Tackling these problems requires addressing the wider economic, political, social and institutional context and not just corruption. Another impression being created is that problems can be resolved by bureaucratic or political fiat?

To tackle corruption, its cause needs to be correctly identified. The basis of corruption is the growing black economy propelled by widespread illegality in a variety of economic activities and the disruption of the democratic institutions. It has grown from 4-5% of GDP in 1955-56 to the present more than 50% of GDP and as an offshoot, corruption has become rampant. Given its all pervasive character, the black economy has become `systematic and systemic’ and that is why, it has widespread macroeconomic, social, political and institutional implications. These cannot be tackled only through checking corruption.

The macroeconomic aspects of the black economy result in wider inefficiencies of the system. It leads to poor quality of goods and services and higher costs. It causes wastage so as to create shortages so that higher profits can be generated through speculation. It reduces the rate of growth of the economy much below its potential, leading to missed development. `Expenditures do not lead to outcomes’ and targets are not fulfilled in say, education. It leads to flight of capital so that a poor country faces a shortage of capital.

In India, businesses have formed a nexus with the politicians and the executive to generate black incomes. This triad has turned politics on its head. It manipulates policies to suit the favoured businessmen who makes extra profits and share it with the other two. The gains of this small group are at the expense of all others and this aggravates disparities. Representation has lost much of its meaning since the elections have largely thrown up those who take the vote of the people but after winning work for the vested interests and against the interest of the people they represent. Even the leaders of the most deprived sections have quickly turned corrupt after coming to power. No wonder people lost hope in the system’s capacity to deliver to them and became more and more sectarian and divided along caste, community and regional lines. Today, hope has revived and people are looking for new clean leaders.

Corruption is associated with the public sector while the private sector is portrayed as its victim. So, less of government is suggested for reducing corruption. Businesses support such a policy since it gets them greater freedom in the market which translates into a higher degree of monopoly, capacity to fix prices and boost profits. The flip side of such a policy is that the aam admi has to depend more on the markets. While this may be welcomed by those who gain from the markets, it is detrimental for the poor who are marginal to it, like, the women, the dalits and the muslims.

The markets often cannot cater to the basic needs of the poor (not just those below the poverty line) because of their low incomes relative to the prices. Today, 23 years after the largely market based policies were introduced after 1991, the marginalized face shortage of work, low wages because of massive under employment, reduced subsidies resulting in higher prices and increasing cost of education and health. Further, advertising is resulting in changing tastes and demand for newer products thus causing the poverty line to rise. There is the paradox of increasing poverty in spite of rising incomes.

 In brief, a business led anti-corruption agenda would benefit the aam admi incidentally; to the extent of reduction of waste. But, because of tilt of policies towards businesses, they would lose much more and in the net would be worse off in spite of reduction in corruption. For example, today most government schools provide indifferent education. If an anti-corruption regime privatizes these schools which will charge higher fees, the poor would not be able to afford them and would be worse off. Even the somewhat better off `middle class’ would lose since it also has limited purchasing power and confronts a situation similar to the poor. The issues of the marginals may get marginalized.

Why are businessmen in India who have gained through crony capitalism and pro business policies interested in an anti-corruption plank? They want to safeguard the massive amount of capital they have accumulated in the last two decades. They have rapidly invested their surpluses into land (say, SEZs), other natural resources like, mines, forests and spectrum and so on.

Since 2010, exposes of big scams threatens these investments. Movements have sprung up against large projects from POSCO to Kutch and Koodankulam to Haryana. So, businesses want to legitimize their gains and launder their image by distancing themselves from those who have been caught in the scams. Further, they want efficient capitalism to multiply their capital rapidly. Hence a section of businessmen support the anti-corruption movement. They also see an opportunity in the present anti-corruption mood of the public to legitimise capitalism by diverting attention to corruption in government - they do not want reformed capitalism or a welfare state. But, can there be efficient capitalism without tackling the black economy of which businessmen are the dominant part? So, the fight against corruption alone can only be a limited one.

A pro-business anti-corruption programme can only have a short run perspective. Over time, as it leads to greater inequity, slow down in the economy and social discontent, the rulers would have to turn authoritarian to quell the rising social and political discontent. What is the alternative?

Tackling the black economy through a pro Aam Admi programme would make government functional rather than minimal. It would lead to a positive sum game and be neither pro nor anti business. It would lead to an appropriate mix of state and market led development which would cater to the marginalized sections of society without promoting sectarianism. Tackling the black economy would also help overcome the deep  macroeconomic imbalances - current account deficit, fiscal deficit, inflation, slow growth, stagnating industry and so on.

Flight of capital would decline turning the current account deficit into a surplus. The fiscal deficit would turn into a fiscal surplus generating enough resources in the budget for improving social and physical infrastructure - education, power and so on. It would lead to reduction in costs (as over invoicing declines) and fall in inflation. As more direct taxes are collected, less of indirect taxes would be required and this would lead to lower prices. Also, as the fiscal deficit falls, the government borrowing would fall thereby reducing its interest burden, the largest single item of expenditure. Finally, as policies begin to work, inequity declines and the investment productivity rises, the rate of growth of the economy would rise. Thus tackling the black economy would be a long term and equitable solution. To check the growing black economy requires political will to cut the triad make institutions functional and promote movements for greater democratization.

There are then two paths for checking corruption. A short run limited micro-economic and ahistorical plank which would be a zero sum game that would marginalize the poor. The other would be a democratic path and positive sum game along which the black economy would be tackled and many of India’s macro and micro economic problems would be resolved.

arunkumar1000@hotmail.com

When the burden falls on the poor

When the burden falls on the poor

ARUN KUMAR.

CESP, SSS, JNU.

The Hindu, January 13, 2014.

Policies being pursued in India are based on the growth-at-any-cost model. The poor and the enviroment suffer while the corporates and organised sectors reap the benefits

The Aam Aadmi Party, having won the trust vote, is now in the saddle in Delhi. By announcing several measures to benefit Delhiites, it had already impacted the political discourse in the nation. The established political parties are trying to follow suit. Why did the previous Delhi government not take some of these steps given that the financial implications are not large while the benefits to the citizens are substantial?

The steps initiated by the Aam Aadmi Party in Delhi have come under severe attack on various grounds. First, that subsidies will increase with adverse fiscal implications. Second, that this would set in motion competitive politics of giving freebies adversely affecting the budgets of other State governments and the Centre. Third, that the benefits would mostly accrue to the middle classes as opposed to the really needy and the poor. Fourth, the steps were initiated when the government had not yet won the vote of confidence and, therefore, did not have the mandate to take such important and far-reaching decisions. Lastly, the tax payers will subsidise others and this is like robbing Peter to pay Paul. This last implies that the measures undertaken by the AAP will benefit some at the expense of others — a zero sum game. The question then is who is the aam aadmi and who will benefit from the steps initiated? A deeper analysis of the processes set in motion by the AAP can help clarify that.

Giving free water of up to 667 litres a day to a family will definitely involve increased subsidy. It is also correct that those who do not get piped water from Delhi Jal Board will not benefit from the announcement and steps would have to be taken to supply them water. The AAP’s contention is that both these are feasible given better governance of DJB, which would reduce wastage of water leading to increased availability of water and higher revenues for the board.

Further, given the surplus in the Delhi Budget, more tankers can be purchased soon and additional water pipelines installed in the coming years. Checking of the tanker mafia in Delhi which operated with the connivance of the officialdom and the politicians would help augment water resources of the DJB. Of course, nothing would change unless corruption is checked. This would be feasible if the Mohalla committees begin to function as proposed by the AAP.

Regarding the reduction in electricity tariffs for the consumption of the first 400 units per month, a subsidy will be borne till Delhi Electricity Regulatory Commission (if convinced) lowers the rates. But, the AAP will also check malpractices by the electricity companies which were yielding them undue profits at the expense of the citizens of Delhi. Earlier, some citizens and businesses were found to be stealing power, causing losses to Delhi Electric Supply Board, but after privatisation, it is the electricity companies who have been stealing from the citizens. It is well-known that regulation is hamstrung by the famous Averch-Johnson effect. It implies that the private regulated companies show higher capital and other expenditures to get a higher price from the regulator for the product/service they provide. The regulator does not have an independent source of determining the cost of production and depends on the private companies to supply them with data and this is manipulated to show higher costs. This is achieved by showing higher capital costs, higher overhead costs, and so on. Past examples of such manipulation are Enron and fertilizer subsidy.

Cross-subsidisation

How can profiteering by the private companies be checked? The accounts of the companies need to be checked by independent auditors and that is what the AAP hopes to do with the help of the CAG. But, what if the CAG, under political pressure, does not play ball? Can the private auditors be used? No, because they are usually in cahoots with the companies.

Thus, at the end of the day, lowering power tariffs may only be possible if the government is willing to increase subsidies. The same may be the case for water. Those who are well-off in society often pay for others on the principle of ‘Ability to Pay’ or ‘cross-subsidisation’. The issue is whether this is fair.

Subsidies are typically a result of economic processes that create economic hardships for those being subsidised. The poor who face under employment and low incomes need state support to afford even a minimal existence. Typically, the low incomes of the poor lead to the higher profits of the businesses and the high living standards of the well-off Indians. In this sense, cross-subsidisation of the poor by the well-off is a way of paying back what was due to the poor in terms of the basics of life.

So, who is Peter and who is Paul in India? As the issue is posed, it is implied that there is a zero sum game, that is, Paul gains at the expense of Peter. Can there not be a positive sum game in which both gain together? Policies being pursued in India for more than two decades have been based on the principle of ‘growth at any cost’ with all costs falling on the poor and the environment while the corporates and the organised sectors benefit. This has led to massive environmental degradation, displacement of the poor and increased disparities. Consequently, at a very low level of per capita income, India has one of the highest number of billionaires and the largest number of extremely poor in the world and has some of the most polluted rivers, air in the cities and habitats in the world.

The growth of the black economy has led to a rapid increase in corruption all around. The top three per cent of the income ladder benefit from this since the underground economy is concentrated in their hands. This worsens the disparity beyond what the official data reveals, leads to price rise, waste of resources and loss of production due to inefficiency.

The black economy also leads to expensive and poor quality services. Take the case of water supply in Delhi. The tanker mafia has corrupted the bureaucracy, the police and the politicians (the Triad). Often, the politician and the businessman are the same person. The Triad makes money at the expense of the citizens. They disrupt the water supply and allow wastage to take place. The loss of DJB and the citizens becomes the profit of the water mafia. Thus, checking the black economy will immediately increase water supply, lower the cost of water to the citizens and increase the profits of DJB. The same is the case with electricity or speculation in vegetable prices (traders prefer that vegetables rot so that the prices shoot up).

Thus, the issue is not robbing Peter to pay Paul but the returning of what was robbed by Peter from Paul. In other words, checking the growing black economy and corruption is a positive sum game for every citizen except the corrupt. This is what the AAP’s agenda is. The black economy is now over 50% of GDP and if brought into the white economy or checked, it would lead to a rise in the tax-GDP ratio by about 20 per cent. This would be adequate to finance the proposed subsidies nationally, lead to lowering of prices for all, result in higher profits for the honest due to increased production in the economy because of the efficiency gains and increased demand. As income generation becomes buoyant, most subsidies can be eliminated.

The issue is macro and not micro as the opponents make it out to be. In brief, the honest Paul and Peter would gain together while only the dishonest Peter would lose. It is the latter who is shedding crocodile tears at the actions of AAP.

arunkumar1000@hotmail.com