Tuesday, April 15, 2014

Sanjaya Baru's revelations

Sanjaya Baru's book, The Accidental Prime Minister, is making waves. I haven't read the book myself but I have read excerpts- and I can see that the book promises to be a racy read.

The media has focused on the bits about the relationship between PM Manmohan Singh and Sonia Gandhi. There are numerous other details that are eye-catching as well. Let me mention two:
  • The post of principal secretary to the PM was first offered to a Tamilian. He declined saying that he had promised his father never to take up a government post after retirement. I would love to know the identity of this ex-bureaucrat. The man is a hero! A large number of bureaucrats do everything they can to get some position after retirement and they stoop to unbelievable levels to appease their political masters. Here is a man who said 'no' to a plum position that came to him on a platter!
  • Baru quotes former NSA M K Narayanan as telling him that Narayanan kept tabs on the credit card spending habits of influential editors. If this is true, it means the intelligence agencies in India have carried snooping to heights not attained even by America's National Security Agency.The agency, one is given to understand, at least respected the privacy of US citizens. Baru's revelation is a serious one, especially given the way the UPA government has pounced on allegations of snooping done on Mr Modi's behalf- the so-called Snoopgate affair. One hopes the new government will look into what the intelligence agencies are up to when it comes on spying on citizens

Sunday, April 13, 2014

Fixing the PPP model

Private public partnerships were to be the answer to our investment problem, especially in the infrastructure  sector. Nearly half the investment in the current five-year Plan is supposed to come through PPPs. Sadly, the model is broken and this explains the slump in investment in the last couple of years. One of the biggest challenges for the next government is fixing the PPP model so that growth can revive. (Where it can't be fixed, we have to find ways for government to fund investment).

EPW has a though-provoking article on the subject, with several interesting proposals for reform. The piece is written by an office in the ministry of finance, so it is not as if the government lacks ideas.

As the author points out, the government has been a on re-negotiating binge in several PPPs. In the power sector, for instance, the regulator has revised tariffs upwards. This sort of re-negotiation makes nonsense of the bidding process- those who lost out can always protest, saying that had the more favourable terms extended later been known, they would have bid differently. Secondly, any private operator who finds a project unviable can go running to the government and ask for re-negotiation, saying he cannot proceed otherwise. Effectively, project risk is transferred to government- this is conceptually no different from government bail-outs of banks.

The author spells out three elements needed in the reform of the PPP model: upholding the sanctity of the PPP contract, creating more regulatory certainty, and increasing the value for money (to government) from PPPs:
The answer to this opportunistic behaviour (of private parties) is not renegotiations, but to cancel bad projects and re-tender them to the private sector in a transparent manner. While this would be time consuming and could also reduce the inflated premia generated for the public sector, it would incentivise more realistic bidding....

One of the frequently cited reasons for seeking renegotiations is traffic overestimation. To ameliorate traffic risk incidence on the private concessionaires in the road sector, the government may consider introducing a new bidding parameter: least present value of revenues (LPVR). Under this bidding parameter, the user fees and discount rate are predetermined and the concession is awarded to the firm that bids the least present value of toll revenue. The concession ends when the present value of actual toll revenue is equal to the winning bid.

Then there should be a requirement of value for money calculation at three stages – at the appraisal stage (to decide whether it is worth going for the PPP option), at the operation stage (because the promised benefits may not materialise as in renegotiated contracts), and finally, at the end of the contract period (to compare the actual value for money with the projected). 

To further improve PPP project performance and VfM as also transparency, the concession agreements should be in public domain. This will enable all interested parties to monitor the project, which should improve performance and VfM. The direct liabilities created by PPP projects (as in annuity projects)4 should also be reported in the budget, which would provide a level playing field to all procurement options for provisioning public services.

Mor committee report on financial inclusion

The Mor committee report on financial inclusion has not received proper attention in the popular press. I dissect the report in an EPW article.

Very briefly, the Mor committee thinks the job can be better done through a new set of specialised players for whom a different regulatory dispensation is created. I have my doubts both about the viability of these players and the potential for systemic risk they can create. The committee also advocates a stiffening of priority sector targets. The scheme it proposes is rather complex and is likely to run into measurement issues. New institutions are welcome. But we need to get more out of the vast structure we have created for inclusion- regional rural banks and cooperative banks. I outline in my article how this can be done.

A retired banker, writing in EPW, has the same reservations about the new institutions proposed but he is rather more sanguine about the committee's priority sector recommendations. 

Was the 2G scam a scam at all?

One reason for the UPA's declining fortunes is the preponderance of 'scams' under UPA-II. One big 'scam' that has proved its undoing is the 2G 'scam'. Right from the time, the CAG report came out, I had argued that not opting for the auction route for spectrum rights and adopting a first-come-first-served policy, based on a low price, did not constitute a scam.

First, the policy had been practised by the NDA as well. Secondly, the low price ushered in competition and helped boost telecom density to great heights. So the policy itself was a success. Where things may have gone wrong- and this has to be established in a court of law- was in the manner in which first-come-first-served was implemented under the then minister, A Raja. PC Chacko, who headed the JPC enquiry into the subject, mounts a vigorous defence of the 2G policy in a recent interview:

The 2G scam is no scam. The media must have celebrated the 2G scam, but it is no scam.
There was some impropriety in giving licenses irrespective of the priority of the application and that mistake was done by (former telecom minister) A Raja. He was in jail for that failure, but the government did not defend him. He is still undergoing trial.
According to the CAG (Comptroller and Auditor General), the government's mistake was selling spectrum at a lower price and not by auction. This is totally unfounded. That is the basis of the allegation.So, I can repeatedly say that 2G is no scam at all.

Unfortunately, this defence and others put up by the UPA is likely to drowned in the general election din. Public perceptions are shaped by the media and the media loves a corruption scandal as much as the general public. Once the damage is done, it is hard to salvage a reputation. 

It doesn't happen only in India...

The nexus between crime and politics, which has been in the open in India in recent years, is by no means confined to India. It is a universal phenomenon. In Italy, a former senator and close business associate of ex-PM Berlusconi faces a seven-year jail term for his connection with the mafia, FT reports. He is now on the run from the law:

Mr Dell’Utri was long considered one of Mr Berlusconi’s closest advisors. Both men have accused the courts of leftwing bias and have consistently denied allegations by prosecutors and  mafia turncoats that Mr Dell’Utri had acted as a go-between for the mafia with Mr Berlusconi.
The Palermo-born businessman was placed under investigation in 1994, the year of the first of Mr Berlusconi’s three election victories, and was credited with mounting a campaign in 2001 when Forza Italia swept all 61 seats in Sicily.

Wherever there is big money, big crime is involved. Politics, business, major sports events all involve big money. So, they draw in criminal elements in a big way. Very often, big crime stays in the background and gets its job done by those in the limelight. However, it also happens that criminal elements decide that they should be running the show in politics themselves. This has happened in many democracies, including India. 

Thursday, April 10, 2014

Top 10 emerging market risks

The prospect of an unexpected electoral outcome in India- that is, Modi not forming a government- is one of the 10 top emerging market risks listed by the FT. The stock market has surged on the back of such an expectation; if it is not met, there could be a steep reversal.

The more interesting part of the list is that three of the 10 risks relate to China- a failure to respond to stimulus, a property bubble burst and a collapse in the shadow banking sector.

On a macro-view, there has been a 180 degree turn in the economic outlook. Post the financial crisis, advanced economies were in trouble; emerging markets looked poised to continue rapid growth. Now, it appears advanced markets will recover while emerging markets face a slew of problems related to deep-seated structural factors. For an insight into this, see the IMF's latest WEO.

What difference can a Modi government make to economy?

People have been analysing the Congress and BJP manifestos to see what the key differences are. Broadly, both are for growth and equity. Writing in BS, economist Arvind Panagariya suggests that a Modi government would put growth first, with greater emphasis on the first:

Mr Modi firmly believes in building highways, railways, cities and universities to modernise India and to create jobs that would empower people to access housing, education and health. In assessing schools for recognition, he emphasises performance outcomes instead of inputs norms. In the provision of health, he gives wellness priority over illness and hence seeks enhanced public health measures.

The difficulty with the above formulation is that the manifesto does not spell out how these ambitious programmes are to be funded. Government does not have the funds and the PPP model is broken and needs serious rectification. In general, the institutional shortcomings are so acute that a recovery in growth, as I have argued earlier, is unlikely to emanate from any domestic initiatives. It's hard to believe that any new government has a magic wand with which it can accelerate growth.

The real difference with a Modi government, as Pangariya suggests, could lie elsewhere- in greater decentralisation of economic decison-making:

In the last decade, one-size-fits-all central schemes have proliferated in the health, education, agriculture, skill development, employment, urban development and rural infrastructure sectors. These schemes require states to contribute significant proportions of expenditures and have progressively shrunk their fiscal space while absorbing the states' scarce human resources.
Having been the victim of this "tyranny" of the central government during the last decade as the chief minister of Gujarat, Mr Modi will likely help the states recover some of this lost fiscal space. He will perhaps redesign the schemes in ways that give states greater flexibility and arrest their future proliferation. In contrast, under a Gandhi administration, the "rights" will expand and so will the central schemes, further shrinking the states' fiscal space.

A Modi administration is also likely to give greater legislative flexibility to states in subject areas included in the concurrent list such as criminal and civil procedure codes, labour, bankruptcy, legal and medical professions, education, acquisition of property, factories and boilers. Under Mr Gandhi, the legal grip of the Centre on the states will continue to tighten unabated.

If Mr Modi can do this, it will indeed be a significant change. What we have had under the UPA government is an attempt at economic centralisation as a means of countering the decentralisation brought about by democratic politics. Even as non-Congress governments have assumed power in many states, the Congress has sought to wield power and influence through centrally-sponsored schemes under the aegis of the Planning Commission.

Will Mr Modi be willing to reverse this trend? It's difficult for anybody holding the reins at the centre to let go. And Mr Modi's style in Gujarat has been concentrate power in his office. At the same time, he has declared time and again his opposition to the Congress way of running the country. It could well be that he will see a decisive shift towards decentralisation as one of the hallmarks of his regime. Let us hope he does.

Friday, April 04, 2014

UPA's economic performance: it's the world economy, stupid

I wrote yesterday that it is hard to argue that the current downturn is on account of serious policy errors committed by UPA-II. I said global factors and non-policy factors are more important.

Today, Ruchir Sharma, writing in TOI, points out that India's performance on growth and inflation has not changed between the NDA and UPA governments. Any change in growth is linked to the fortunes of the world economy. The boom in UPA-I and the downturn in UPA-I are both explained largely by the ups and downs of the world economy. He corroborates my view that the significant failure of UPA-II is in respect of inflation (which, I said, was parlty because correct economic data was not available to the government on time): 
The last BJP-led government took power in 1999 and presided over a five-year period of rather standard Indian performance. India posted average annual GDP growth of 5.8% — ranking 50th in the emerging world — with inflation of 3.9% — ranking 70th in the emerging world. This record represented little change from the previous 20 years, so it is hard to see why it should provoke much criticism, or bragging....
After 2003, with international trade booming and easy money pouring out of central banks in the West, growth started to accelerate sharply across the emerging nations, and India was no exception. Its GDP growth rate accelerated to 8% over the next five years, under the Congress government, but its place in the ranks did not improve much. From 2004 to 2008, India ranked 39th in the emerging world for average GDP growth and 73rd for inflation. ....
  Over the past five years, India's average annual GDP growth rate has slowed to 6.5% on average but its global ranking is still basically unchanged at 45th as growth has faltered in many emerging nations...
India's inflation rate has risen from 6.5% in its first term to 10.5% in the second, while its inflation ranking has fallen from 73 rd in the world to a near bottom decile rank of 130th  

Thursday, April 03, 2014

Has UPA-II messed up the economy?

I address this issue in my post at a newly started current affairs website. I will lay out my main ideas:

  • India's growth slowdown does not look bad compared to China's
  • Domestic factors have contributed but these are not policy-related factors but non-policy related factors: court judgements, the CAG reports, the anti-corruption campaign, delays in environmental and land acquisition clearances etc, all of which have impacted on output and investment
  • The key policy failure is in respect of inflation. Supply-side factors apart, aggregate demand in the form of the fiscal deficit is an important contributor. It appears the UPA government was slow to withdraw the post-fiscal stimulus. But this is strictly hindsight. The strength of the recovery in 2010 and 2011 could not have been foreseen when the budgets were presented. 
  • The key global factor in the last two years has been the Eurozone crisis
  • The UPA government deserves the fullest credit for getting on the top of the currency crisis that was brewing in late 2013. India's CAD position is amongst the best in emerging markets now. Add to that the fiscal deficit coming under control, a debt to GDP ratio of under 70% and a growth rate prospect of 5.5-6% in the coming year- and the Indian economy looks distinctly good in the international setting.
It should be evident that, except in respect of inflation, there was no significant "policy failure" in the sense of managing policy in the short-run. The failure is a larger one and it embraces successive governments, namely, the failure to put in place the necessary institutions for PPPs, land acquisition, environmental clearance etc. This is not something that can be remedied in a short span of time.

It is India's strong fundamentals that explain much of the rally in the stock market in recent weeks. The prospect of a stable government and strong leadership at the centre may be contributing but only at the margin. The notion that the UPA government has messed up the economy through welfarist policies thus has little basis.

An article in today's BS points out how good India looks in relation to other emerging markets. The authors give credit to the UPA government, although it is not necessary to share their fulsome praise.

Thursday, March 27, 2014

Estimating the size of corruption in India

Everybody knows corruption is rife in India. Just how bad is the problem? The Economist attempts to quantify corruption in India using three methods:

The first is to tally the money made from scams, based on estimates from officials and investigators. (Our calculation uses realised profits, or the present value of anticipated profits. We use the low end of some official estimates.) The second approach, which is applied more widely in our new index of cronyism (see article), measures the relative performance of billionaires in industries, such as mining and property, that are prone to rent-seeking relative to those in other lines of business (see chart 1). A final method tracks the relative performance of an index of politically linked listed firms constructed by Saurabh Mukherjea of Ambit Capital, a broker (see chart 2). An average of the approaches suggests the gains from rent-seeking over the past decade peaked at about $80 billion. That is equivalent to 7% of the stockmarket’s value today. It is worth noting, though, that the share of GDP for the rent-seeking billionaires and the premium on politically connected firms are no longer what they were in the boom years.

Assuming bribes paid were 5-15% of money made by businessmen, the Economist estimates that total bribes paid would amount to $4-$12bn.  Presumably, this is over a decade. Translating into rupees, this amounts to Rs2400-7200 crore every year.

Wednesday, March 19, 2014

What ails democracy?

The Economist has an interesting essay on the subject. Democracy was widening until the turn of the last century. For the last eight years, it has declined, going by the number of people living in democracies. The declines have taken place outside the West. In the West itself, the effectiveness of democracy as a creator of prosperity is coming under a cloud. Why so? The Economist identifies what it believes are the two primary causes:
THE two main reasons are the financial crisis of 2007-08 and the rise of China. The damage the crisis did was psychological as well as financial. It revealed fundamental weaknesses in the West’s political systems, undermining the self-confidence that had been one of their great assets. Governments had steadily extended entitlements over decades, allowing dangerous levels of debt to develop, and politicians came to believe that they had abolished boom-bust cycles and tamed risk. Many people became disillusioned with the workings of their political systems—particularly when governments bailed out bankers with taxpayers’ money and then stood by impotently as financiers continued to pay themselves huge bonuses. The crisis turned the Washington consensus into a term of reproach across the emerging world.
Meanwhile, the Chinese Communist Party has broken the democratic world’s monopoly on economic progress. Larry Summers, of Harvard University, observes that when America was growing fastest, it doubled living standards roughly every 30 years. China has been doubling living standards roughly every decade for the past 30 years. The Chinese elite argue that their model—tight control by the Communist Party, coupled with a relentless effort to recruit talented people into its upper ranks—is more efficient than democracy and less susceptible to gridlock.
Setbacks to the cause of democracy include Russia under Putin, the Iraq war (which led many to believe that democracy was a fig-leaf for the spread of American imperialism) and the turn of events in Egypt where we are back to army rule. Political gridlock in the US and the stagnation in the Eurozone have done little good for the democratic ideal. Independent economic policy is becoming difficult to implement in a globalised world and this makes voters angry. In the West, voters are reluctant to stomach austerity in the medium-term as an answer to their current problems.

The Economist's solutions are not particularly inspiring. It wants to curb the growth of the state, which may be the right answer in the West but not necessarily the right one in developing countries. In the latter, the problem is not that the state is too large but that it has not got the mix of activities right. A more efficient state, not a smaller one, is what a country like India needs. Another solution is to insulate policies from short-term populist pressures by handing over decisions to technocrats and independent commissions. This assumes that technocrats will work for the larger good and can be held accountable if they fail to do so. In a country like India with weak institutions, it is better to have incompetent politicians who are accountable that very competent technocrats who are not.

The Economist glosses over the subversion of democracy by money power or crony capitalism, which has done a great deal to discredit democracy. To succeed in politics, you need big money and the providers of big money have to be taken care of by successful politicians. No democracy has been able to tackle this scourge. Another big problem is the lack of accountability of politicians in the interregnum between elections. We can kick out the party in power once in five years but how do voters express their ire towards politicians or policies during that period? These issues, to my mind, are most important than the ones the Economist raises- and so is the need to find answers to them.