P J Nayak committee on bank governance

The RBI committee on bank governance, headed by PJ Nayak, submitted its report earlier this month. The committee wants government to divest control and eventually its majority stake in public sector banks. PSBs are to be a run initially by Bank Boards Bureau, then by a Bank Investment Company (BIC) manned entirely by bankers and eventually by bank boards whose chairmen, directors and CEOs will be appointed by the BIC. The government's stakes in the BIC will eventually fall below 50%, which would mean privatisation.

The model the committee has in mind is Axis Bank (formerly UTI Bank) in which the government first distanced itself from management, then from control and went on to reap huge returns. Well, the government floated SBI at Rs 100 and its now trading at over Rs 2500.

Handing over the entire lot of PSBs to one set of bankers- unelected and unaccountable to parliament- is an enormous risk. It is also unnecessary. Boards of PSBs can be professionalised by government and the issues of management- succession planning, job rotation, training, recruitment of specialists from the market, etc- can all be done within the ambit of public ownership.

What we don't want is a set of PSBs handed over to private owners and managers who make their money and then take it bankruptcy- for the taxpayer to bail them out. If this happens in India on the scale we saw in the west in the financial crisis, that is a recipe for both political and economic turbulence.

I have a detailed critique of the report in EPW and a shorter commentary in the Hindu.

Pak general on Modi

To the dismay of many in Pakistan, let me suggest that if Modi gets his act together, he will take India places. India will change, perhaps finally realising its dream and potential, as will its polity. India will never be the same again; this remains my considered opinion. He is that kind of fellow. 

....Modi’s aim will not be to seek a war. But come another situation like Mumbai 2008, he would like his military to respond with effect; of that there should be little confusion. Pakistan will then need to evolve its own plan to first deter and then respond to such a reprisal. That will put them both on a slippery slope of escalation dominance.

Shazad Chowdhry, a former air vice marshal, writing in The News, Pakistan.

(Thanks to Sanjiv Sood for the pointer)

How to tackle food inflation?

The new government's big priority is tackling inflation, chiefly food inflation. One option often suggested is simply releasing some of the foodgrain stocks held by the government at a low price or even free. Isn't this better than allowing the grain to rot or be eaten by rats?

Well, the answer is not that simple. Kaushik Basu, former CEA, made the point in 2011 in an article in EPW. If the government unloads grain at below the market price, traders will buy it up and sell at the market price through their shops, making a neat profit! So, this won't work.

How do we reach food to the poor at subsidised priecs. The public distribution system has leakages but some states have managed to plug these effectively (Tamil Nadu and Chattisgarh). The answer that Basu proposes is giving food stamps to the poor. They can use the stamps to buy from any private shop. There could be a problem here. What if the market price spirals out of control? Will the poor get adequate food, then, using food stamps? Working to plug leakages in the PDS using IT might be a better option for now.

Will America abolish the death penalty?

When it comes to the death penalty, the US is in truly dubious company in terms of the number of it people it executes every year: China, Saudi Arabia and Iran. This is in stark contrast to Western Europe which has abolished the death penalty.

The Economist notes that pendulum has slowly swung towards abolition for a number of reasons:

•  Support for the death penalty has dropped from 80% in 1994 to 60% last year.
• The number of executions has fallen from 98 to 39
• The empirical evidence is that the US has a higher murder rate than the EU despite the latter having abolished the death penalty. The murder rate is higher in American states that have the penalty than those that don't
• Executing somebody is three times more expensive than locking him up for life, thanks the long-winding appeals process.  

As somebody who is opposed to the death penalty, I welcome the trend.

Thomas Piketty book flawed by errors?

This could be the story of the year on the book of the decade. FT claims its investigation of the spreadsheets used by Thomas Piketty in his sensational book, Capital in the 21st century, showed there were serious errors:

The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.

.....In his spreadsheets, however, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.For example, once the FT cleaned up and simplified the data, the European numbers do not show any tendency towards rising wealth inequality after 1970. An independent specialist in measuring inequality shared the FT’s concerns.

Chris Giles provides a detailed critique of these errors here. 

It was the politics, stupid

The markets are on fire following the victory of the BJP. Optimism is in the air. People are again talking of a return to a growth rate of 7-8% after the 5% growth rate of the last three years. This has led commentators to conclude that it is the economic downturn plus high inflation spelt doom for the UPA in the recent elections.

As readers of this blog would know, I have argued that the UPA's economic performance was not bad at all and that its record of growth with equity is impressive. A British academic, writing in the Indian Express, corroborates this view with a focus on how real incomes improved in the rural areas:

They (the NCAER and a team from the University of Maryland) surveyed just under 42,000 households across India in 2011-12, a massive sample. Crucially, these were the same households that they had surveyed in 2004-05, so they could track changes that were experienced over the first seven years of UPA rule.

The study found that real average household incomes in rural areas had increased by 5 per cent annually, which was almost twice the increase of 2.6 per cent in towns and cities.
When they adjusted their calculations using the numbers of members of households, the growth of incomes in rural India was even more impressive: an annual average of 7.2 per cent. So the UPA’s policies clearly helped to make growth “inclusive” in terms of the rural/ urban divide.
What about poor people? The researchers separated respondents to their survey into several social groups. They then calculated changes in per capita household incomes for each one. The most prosperous group, “high caste Hindus”, gained less than all of the other groups. The table tells the story.

So, it's hard to ascribe the UPA's failure to economic outcomes in terms of improvement in real incomes of the masses. It could well be that the failure to deliver on other expectations- electricity, roads, water- and popular expectations in respect of these made a difference. However, it is the political factors, the writer suggests, that really mattered. It may not have been corruption, as the writer thinks, as much as the appeal of Modi's leadership and of Hindutva, as I have argued in an earlier post. 

Understanding Modi's victory

Well, yes, it is Modi's victory, not the BJP's, as many have said. Surjit Bhalla makes the point forcefully in his piece today. As he points out, had the BJP been led by anybody else, people would not have been able to tell the difference between the NDA and the UPA.

But what exactly has brought about this victory? The direction of change was clear enough from the opinion polls but none predicted the sheer enormity of it. I have been reflecting on the many explanations:

i. People were fed up with corruption: No. Many of the surveys did not thrown up corruption as a major concern. I doubt that anybody seriously thinks that corruption will disappear with the new government.

ii. The slowdown in growth and mismanagement of the economy: If one looks at the last ten years or even the last five, the UPA government's management of the economy has been pretty good. True, we have had two years of a slowdown and high inflation and some of the urban middle class may have been swayed by the development agenda of Modi. But real wages in the rural sector have gone up in recent years despite inflation and the rural poor have also benefited from the UPA's welfarism.

iii. People don't want welfarism, they want growth and jobs:Trouble is, the BJP has not asked for MNREGA to be scaled down or closed, it was more aggressive on the Food Security Act than the Congress, strongly supported Land Acquisition Bill and opposed what has been labelled a reformist move, letting in FDI into multi-brand retail.

iv. The Congress did not communicate its achievements properly: Does that mean the NDA lost because its India Shining campaign was not effective in 2004, that the Congress somehow had better communications in 2009? Not convincing.

v. People have had enough of dynasty: Is that why they favoured the Shiv Sena in Maharashtra and made sure that Mulayam Singh Yadav's family alone got elected in UP while other party members were routed?

vi. The Congress did not project Rahul as a PM: Did that worsen or improve matters for the Congress?

vii. People were impressed with the Gujarat growth model: Yes, that's part of the explanation but it cannot be the whole explanation because, then, the CMs of Maharashtra and Tamil Nadu, two fast-growing states, should have been candidates for the post of PM in the past.

Personalities do count. Modi is an extraordinary personality by any reckoning, a man of enormous talent, energy, and a capacity to connect with the masses with his spell-binding oratory. Pitted against him was a 43-year old with no comparable record of accomplishment. In the eyes of many, it was a no-contest.

And yet, Indian elections do not centre on personalities alone. In 2004, Vajpayee would have easily scored over Sonia and it's hard to say that in 2009, Manmohan Singh was perceived to be clearly superior to L K Advani.

Adding to Modi's formidable personality and impressive track record was, I believe, another key factor: the potent appeal of Hindutva. Support for the BJP this time cut across caste barriers. That support could have only been the result of the transcending appeal of Hindutva. The BJP rode to power in 1999 on the strength of the Mandir campaign launched earlier by Advani. In 2004, as an article in BS pointed out recently, the difference between the BJP and the Congress was a mere nine seats: it was the Congress' allies that enable the UPA to prevail over the NDA. In 2009, the appeal of Hindutva was muted by five years of extraordinary growth which permitted welfarism on an extraordinary scale: the farm loan waive, MNREGA, the Pay Commission award etc.

In 2014, against a more normal (or sub-normal) economic background, the BJP was able to tap into the latent appeal of Hindutva. In Modi, it could not have had better candidate to do so. It is a phenomenon to which V S Naipual drew attention in the wake of the demolition of the Bajri Masjid. He characterised the event as the manifestation of long-suppressed Hindu pride and rage, a movement from the ground-up.( He was severely criticised for his explanation). With economic advancement, Naipaul noted in his book, A million mutinies now, comes an assertion of one's identity. The go-go years of this decade have provided the fuel for precisely such an assertion.

Development has its appeal but the pull of right-wing parties also involves a rich dose of nationalism. Development plus Hindutva must explain the sheer scale of Modi's victory.

The accidental Prime Minister

I have finished reading Sanjaya Baru's The accidental prime minister.The book is unputdownable. It is an absorbing ring-side account of what went on in the PM's office in 2004-08, the period that Baru served as media advisor. The intrigues at the highest levels, the jostling for positions and the pulls and pressures on the prime minister- one gets an excellent flavour of these.

One anecdote lingers in the mind. M K Narayanan got the job of NSA after Mani Dixit passed away. Other contenders were in the fray. Narayanan seemed to have concluded that it was Sonia Gandhi who swung the job for him. At the beating of the retreat ceremony that year, he rises from his seat in one of the back rows, goes up to Gandhi sitting in the front row and, in full view of the cabinet ministers and foreign dignitaries, does a namaste and returns to his seat.

It is the book's central thesis, however, that is of primary interest. This is that Singh did a great job when he was given a relatively free hand in his first term. In 2009, he made the mistake of thinking the UPA's victory was his. The Gandhi family then went about showing him his place and reminding him that his primary responsibility in his second term was to ensure the succession of the Gandhi scion. This left Singh very little room to operate and that's why his reputation and that of the government went downhill. Baru's contention is that, having appointed Singh as PM, Sonia Gandhi should have let him get on with the job. Instead, she acted in ways that lowered the prestige of the office of PM.

I find it hard to accept Baru's contention. Political authority and power in  a democracy flow from one's standing with the electorate. To put it bluntly, he (or she) who delivers the vote must call the tune. Prime ministers- Nehru, Indira and Rajiv Gandhi, Vajpayaee and V P Singh, to name a few- have exercised authority in the past because they were leaders of the party to which they belonged, were elected to the Lok Sabha and were also responsible for their party's coming to power.

Singh's case was very different. He was not the vote-puller for the Congress. He was appointed PM by the principal vote-puller, Sonia Gandhi. In such a scheme of things, it was only natural that the principal decision-maker should be Gandhi. Singh himself seems to have acknowledged as much when he told Baru that there could be only one power centre. It is Baru who seems to have difficulty accepting this.

Singh necessarily had to operate within a framework created by Gandhi and the party. It was also only to be expected that key political appointments and appointments in the PMO should be decided by Gandhi. If this resulted in the perception that the PM's office was being demeaned, that was implicit in the arrangement that Singh went along, not once but twice. It is naive to argue that Singh should have put his foot down on this or that issue because he happened to be PM. The fact is that he was an appointed PM, not an elected one.

There is a post-script to the book. Singh did not think it necessary to refute Baru's thesis after the book came out, instead choosing to maintain an eloquent silence over it. If he was responsible for the victory of the UPA in 2009, then he is also responsible for the subsequent fall in its standing. Or, if the Gandhis are responsible for the way the Congress' image has nose-dived, then they were also responsible for the victory of 2009. It cannot be that Singh gets the credit and the Gandhi family the blame. (Baru correctly points out that the Gandhis cannot take the credit but not the blame- he should apply the same logic to Singh).

The Congress party would have expected Singh to refute Baru's thesis and say to the world that he would not fault the relationship between himself and the Gandhis. He did not do so. As an article in today's Economic Times correctly points out, that is why Rahul Gandhi chose to stay away from the farewell given to Singh. The Gandhis would be justified in expecting better of somebody that put in the PM's seat for ten years, not to speak of the numerous positions he enjoyed earlier.

The probability of getting murdered

Well, it was one in 16,000 in 2012 according to a UN report quoted in an article in the Economist. How to shorten the odds? The Economist offers useful tips:

First, don’t live in the Americas or Africa, where murder rates (one in 6,100 and one in 8,000 respectively) are more than four times as high as the rest of the world. Western Europe and East Asia are the safest regions....Next, be a woman. Your chance of being murdered will be barely a quarter what it would be were you a man. In fact, steer clear of men altogether: nearly half of all female murder-victims are killed by their partner or another (usually male) family member. Then, sit back and grow older. From the age of 30 onwards, murder rates fall steadily in most places. But not everywhere. Europeans are more at risk in middle age than in youth.

Surprisingly, when it comes to murder, crime pays. Only 43% of murders result in convictions. In the Americas, you can literally get away with murder: the probability that you will escape justice is 0.75.

Was Manmohan Singh the architect of UPA victory in 2009?

In his book, The Accidental Prime Minister, Sanjaya Baru contends that PM Manmohan Singh was responsible for the UPA coming back to power for a second term. He says that the strong performance of the economy, the PM's reputation for integrity (before the scams started erupting the UPA's second term) and, not least, the Indo-US nuclear deal boosted the UPA's standing amongst the middle classes. They voted solidly for him and that's how the Congress did so well in the cities. Singh's big mistake, according to Baru, was to let the party know that that is how he felt.

The party had other ideas. They wanted Singh to prepare the ground for Rahul Gandhi to take over and they wanted him to clearly understand that the vote-puller was the Gandhi family and hence Sonia Gandhi the boss. Since Singh seemed to claim credit for the UPA victory, they set out to 'defang' him. That's how Singh ended up losing stature and indeed becoming an object of ridicule.

It is a beguiling thesis. But how true is the claim that Singh brought about the UPA victory? T N Ninan has an interesting rejoinder in his column in BS. Ninan points out that the Congress victories in the cities were nowhere as impressive as Baru makes out:

It is true that the Congress swept Delhi and Mumbai, but it did poorly in Bangalore and got noticeably fewer votes in Hyderabad-Secunderabad than in 2004, while the two seats were split as before. In Kolkata and Chennai, the party was a non-player. Among the smaller cities, Pune voted the Congress as before, Ahmedabad and Vadodara voted the BJP with most of Gujarat, and Jaipur voted the Congress with the rest of Rajasthan.
Of the two cities that the Congress did sweep, Mumbai had the special circumstance of a split in the Shiv Sena, with Raj Thackeray's newly formed Maharashtra Navnirman Sena cutting into the Shiv Sena vote and pushing it into second place in four out of six constituencies. In fact, the Congress share of the vote fell in four Mumbai seats in 2009, compared to 2004. So the only city where the Congress saw an uptick was Delhi, but then it had won six of the seven seats here in 2004. Juxtapose that against the fact that the Congress in poorly urbanised Uttar Pradesh did better than in any election since 1984, and also swept hilly Uttarakhand, and it becomes hard to argue that the party's better showing in 2009 was because of one man and his urban appeal.

I would think that the Sixth Pay Commission award, MNREGA and the farm loan waiver were all crucial in fetching votes for the Congress and resulting in its bettering its performance over 2004. For the second and the third, credit must go Sonia Gandhi. One respects the instincts of politicians, their shrewd understanding of what would translate into votes. If Sonia Gandhi had not been convinced (on the basis of evidence) that welfarism had paid off, she would not have persisted with those policies in UPA- II. If one accepts this, Singh was wrong in his understanding and there was some justification for the party showing him his place.

Modi's aborted rally in Varanasi: wherein lies the truth?

On TV yesterday, I watched commentators fulminate about Modi's alleged disrespect for a constitutional authority, the Election Commission. Former CEC Krishnamurthy said that, whatever the BJP's complaint, they should not be criticising the EC, they could seek redress. So are Modi and the BJP kicking up a fuss without reason ? Ashok Malik's rendering of the events in ET  sets you thinking about the merits of the EC decision:

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate informed the BJP that Benia Bagh could not be allotted for the Modi meeting as one "Mr Khan" had booked it in the interim on behalf of his NGO. Apparently, he wanted to unfurl the national flag. Subsequently, other district officials confirmed to BJP functionaries that Mr Khan's application had been backdated and that the DM had exempted him from paying the deposit.
When confronted, the DM cancelled Mr Khan's allotment and instead told the BJP he had received a report from the Intelligence Bureau (IB) in Delhi warning of a security threat. Arun Jaitley, senior leader of the BJP, contacted the IB and was categorically told by the top leadership of the Bureau that no such special warning had been issued......

At the Election Commissioners' media conference on the afternoon of May 8, the EC added another twist to the tale. It said the DM had rejected the Benia Bagh option because the ground was too small to accommodate the big crowds Modi would gather. This too didn't make sense. After all, in the set of permissions delivered at close to 2.00 am that morning, the DM had asked the BJP to hold its public meeting at the Chhota Cutting Memorial Maidan. This is smaller than Benia Bagh and takes in only 3,000.

 ....Meeting a senior leader of the Varanasi BJP, the DM smiled in the midst of a disagreement and said, "After all, I have to stay here after the election ..." The implication of obvious. He had a state government - and a ruling party - to serve.

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?curpg=2&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

An opposite viewpoint is here but it doesn't tell us what happened.

At 2.00 pm on May 6, the district magistrate informed the BJP that Benia Bagh could not be allotted for the Modi meeting as one "Mr Khan" had booked it in the interim on behalf of his NGO. Apparently, he wanted to unfurl the national flag. Subsequently, other district officials confirmed to BJP functionaries that Mr Khan's application had been backdated and that the DM had exempted him from paying the deposit.

When confronted, the DM cancelled Mr Khan's allotment and instead told the BJ ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

At 2.00 pm on May 6, the district magistrate informed the BJP that Benia Bagh could not be allotted for the Modi meeting as one "Mr Khan" had booked it in the interim on behalf of his NGO. Apparently, he wanted to unfurl the national flag. Subsequently, other district officials confirmed to BJP functionaries that Mr Khan's application had been backdated and that the DM had exempted him from paying the deposit.

When confronted, the DM cancelled Mr Khan's allotment and instead told the BJ ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

At 2.00 pm on May 6, the district magistrate informed the BJP that Benia Bagh could not be allotted for the Modi meeting as one "Mr Khan" had booked it in the interim on behalf of his NGO. Apparently, he wanted to unfurl the national flag. Subsequently, other district officials confirmed to BJP functionaries that Mr Khan's application had been backdated and that the DM had exempted him from paying the deposit.

When confronted, the DM cancelled Mr Khan's allotment and instead told the BJ ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

At 2.00 pm on May 6, the district magistrate informed the BJP that Benia Bagh could not be allotted for the Modi meeting as one "Mr Khan" had booked it in the interim on behalf of his NGO. Apparently, he wanted to unfurl the national flag. Subsequently, other district officials confirmed to BJP functionaries that Mr Khan's application had been backdated and that the DM had exempted him from paying the deposit.

When confronted, the DM cancelled Mr Khan's allotment and instead told the BJ ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The fact is the DM has changed his story several times, depending on the listener. On the evening of May 5, when the BJP asked for permission for Modi to address a public meeting in Benia Bagh in Varanasi, his only campaign speech in the urban segment of the constituency, the DM verbally agreed. It was decided a formal application and the deposit for the ground would be submitted the following morning. This was duly done at 7.30 am on May 6.

At 2.00 pm on May 6, the district magistrate ..

Read more at:
http://economictimes.indiatimes.com/articleshow/34847642.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Why would the Congress lose the election?

What exactly is likely to cost the Congress the 2014 election? An FT commentator thinks it's not the growth slowdown or even rising inflation. It is the change in the voter profile over the years. The poor are no longer the dominant constituency with the proportion of those below the poverty line falling to 22%. And yet the Congress' policies have been targeted towards the poor, rather than the dominant segment with rising aspirations. The latter need jobs, not doles:

India in 2014, in other words, is not the same country it was in 2004. Congress’s undoing is that it has failed to recognise this. It has instituted socially laudable right-to-work and right-to-food programmes. But such schemes are costly and prone to rampant theft. By putting a strain on the Treasury, they have contributed to persistent inflation. That in turn has forced the central bank to raise interest rates, slowing growth.

..Most Indians are no longer satisfied with the make-work schemes or food handouts in which Congress has increasingly specialised. Many have caught the whiff of a better life. Now they want jobs and opportunity. Even those who have not yet clawed their way on to the bottom rung of the aspirational ladder have seen what it looks like, courtesy of the satellite television channels that beam images of a middle-class life into even the most benighted corners of the country. India’s villages are not what they once were. The bullock cart has given way to the motorbike; the dirt road to tarmac.

This is a rather simplistic explanation, I'm afraid. The UPA's schemes are targeted not just at the poor but at those above the poverty line as well. Schemes such as MNREGA and the right to education are not just for the poor. Subsidies, including those on cooking gas and even food, are intended for the middle class and those above the poverty line. Indeed, it could well be that it is the trend towards targeting of subsidies only for the poor that has alienated the middle class.

The other problem with the explanation is that it fails to tell us why the BJP, in its manifesto, is not arguing for the dismantling of subsidies and welfare schemes. As I have pointed out in my blogs, Mr Modi has been saying something to the contrary of late. He has argued, for instance, that MNREGA should be made more efficient- say, in terms of creating assets. He has not said the scheme should be wound up. He has also said subsidies must stay. If the FT commentator's thesis were correct, the BJP should be singing a different tune.

Whatever the statistics on poverty, it is more than likely that, in the medium-term, no government can afford any economic policy that is not centrist or even slightly to the left of centre. We have to look elsewhere for the disenchantment with the Congress. Mr Modi appeals on the strength of the fact that he is a self-made man, has not amassed wealth for himself and has a solid track record in Gujarat.

The Congress, in contrast, is projecting Rahul Gandhi, who is seen as a privileged scion of a dynasty, the UPA is tainted with corruption charges and Gandhi has yet to prove himself in an administrative capacity. The perceived diminishing of the office of PM under Manmohan Singh could also be a factor. Rightly or wrongly, the perception has gained ground that India needs a strong leader as PM and that Mr Modi could be that leader.

History of RBI: link

Here is my review of the fourth volume of the history of RBI.

Competition in Indian banking will be slow in coming

The RBI's decision to use a fresh set of licenses to banks had raised hopes that a new set of players would enter and invigorate competition in banking. Those hopes have since faded as the RBI granted 'in-principle' licenses to only two players.

For now, corporate houses are out. Newer players may have to come in as specialised players in wholesale banking, payments, infrastructure etc. There may not be many full-scope banks coming in. So, expect competition to be muted.

But does Indian banking lack competition at all? What is the rationale for letting in new players? More in my article in Hindu Business Line.

FT columnist roots for Modi

The Economist cast its vote against Modi about a month ago, saying that the Gujarat riots of 2002 in his time could not be overlooked. Several intellectuals abroad have signed letters saying pretty much the same thing.

FT's foreign affairs editor has a different view- he thinks Modi deserves a chance. Here's why:

His rise would send an invigorating message across a country where too many people’s chances are still blighted by poverty, class or caste. That anti-dynastic message deserves to resonate well beyond India. The upper echelon of China’s government is still dominated by “princelings” – men such as President Xi Jinping who are descended from Mao Zedong’s close comrades. The US could well witness another presidential election contested between the Bush and Clinton clans. South Korea and Japan are led by the daughter and the grandson of former heads of government. Politics is also strongly dynastic in India’s neighbours Pakistan, Sri Lanka, Bangladesh and Myanmar. It would be a welcome change for India to elect a self-made man.

......The ruling Indian National Congress has reason to be proud of the liberal economic reforms that it unleashed in the 1990s. But the party has now lapsed back into the rhetoric of redistribution and big government. By contrast, Mr Modi emphasises economic policies that are focused on encouraging growth, helping business and reducing the size of government. This kind of liberal agenda is no longer so fashionable in the west. But it has been crowned with economic and political success in Gujarat.

As readers of this blog would know, I am a little sceptical about the view that Mr Modi stands for Thatcherite reforms, which means small government and leaving things to the market. He will, of course, be business-friendly. But that does mean rolling back the state. If his record in Gujarat is anything to go by, the Modi approach is to combine pro-growth policies with effective state institutions. Gujarat's leading PSUs have effected a turnaround under Modi. The erstwhile Gujarat Electricity Board is an astonishing story of recovery. Public distribution in Gujarat is reasonably effective. So are public hospitals- Gujarat has a first-rate public kidney hospital in Nadiad and a cardiology hospital in Ahmedabad. 

My own view is that Mr Modi will bring his administrative skills to bear on strengthening public enterprises and institutions. I also reckon that he will not roll back the present welfare schemes, although he may refrain from expanding them. India's polity is such that it  forces people who want to rule at the centre towards the centrist position when it comes to political ideology; likewise, the basic economic ideology will have to be slightly left-of-centre if it is gain acceptance in a still poor country riven with inequalities.

More on this in a TV discussion on CNBC in which I participated recently.  Here are link1 and link2

Gujarat growth model: useful links

EPW has generated a lively debate on the Gujarat model. Here are the links:

1. Ravindra Dholakia: Relative growth performance of Gujarat

2. Ghatak and Roy

3. R Nagaraj

4. Sugata Marjit

5. Response to Marjit

Middle class' phoney angst over corruption

I have long argued that corruption cannot be a central issue in the Indian polity because corruption in one form or another exists everywhere. The best one can do is minimise petty corruption of the sort that the ordinary man faces in his daily life.

And yet from time to time one hears that corruption is a major issue. The people who say this are very often from the middle class- the very class that is part of the corruption that goes on and is a major beneficiary. Shankar Sharma has an interesting take on this theme in BS. dilates on this theme and says that the middle class had no problem with corruption in UPA- I when the benefits were trickling down to them- in the form of higher salaries, appreciation in stocks, etc. It is only when the economic slowdown began that corruption became an issue.

....since the big economic boom began in 2004, the Indian middle class has partied. Salaries increased at a compounded rate of 40 to 50 per cent across most professions. Packages of Rs 50 lakh and higher became commonplace. US salaries paled in comparison.
And which industries saw the biggest salary jumps? Largely, infrastructure, real estate, telecom, finance, mining, power and so on. Now, weren't these the very sectors in which some of the biggest scams (real or concocted) since 2004 have occurred? You bet. These sectors were the ones in which the same ultra-moralistic Indians fought each other to gain employment. Was middle-class India so innocent as to be unaware that bribes are an integral part of doing business to run any regulated business such as infrastructure, power or mining (anywhere in the world, actually)? That contracts in these businesses are almost never won honestly, or that bids won honestly have little if any profits embedded in them?

...Please note that the so-called anger against corruption started to gain momentum only in 2011 - almost precisely when our growth rates started to plummet. Truth be told: Indians were happy to make money off corruption, and happily turned a blind eye to what lay beneath the boom. It is only when our salary increases dwindled that we turned to the Kejriwals and the Modis on the rebound.

 Sharma goes on to argue that Indians are willing to wink at Modi's supposed lack of respect for democratic norms or secularism or even the prospect of crony capitalism under Modi because they expect the goodies to start flowing again. (This is an argument that is made for Singapore very often).

I have difficulty in going along with this proposition. People may believe that Modi will be an effective administrator but I doubt that they will be willing to let anybody trample over democracy or secularism. The very fact that the BJP and Modi have had to change their positions on these matters suggests that Indians will not compromise on basic tenets. Indira Gandhi found out this truth the hard way. So will anybody else who tries to take liberties with basic principles. 

Modinomics: an American view

A former American bureaucrat, writing in the Hindu, compares Narendra Modi with Ronald Reagan. One common element, according to him, is that both have humble backgrounds. Modi is looked down upon by the nation's elites as Reagan was in the US  because he comes across as unsophisticated.

This is certainly true. It astonishes me that the elite in the media and elsewhere are unable to respect something as phenomenal as a chief minister of a state, with no experience at the centre, being able to generate a nationwide following, something that his party itself has never enjoyed!

The writer then suggests that Modi's economic vision is somewhat similar to Reagan's and that he has the capacity to unleash the nation's entrepreneurial energies:

As one who lived through Reaganomics, I believe that Modinomics can be the perfect antidote to the kleptocratic crony socialism that has kept India from realising her vast economic potential. If India’s natural entrepreneurial dynamism is ever fully unleashed, the sky will be the limit. I am persuaded by the evidence (hotly debated in an election season, of course) that shows that economic growth in Gujarat under Mr. Modi has been a boon to all segments of society, especially the poor. I am just sharing my view as an observer, and of course respect that it is for the people of India to decide what is best for them. 

One has to be careful not to overdo the comparison. Giving a boost to entrepreneurship is not the same as embracing Reaganomics. In India, no government can afford to move very away from welfarism. Modi's recent pronouncements seem to reflect this recognition. BS has caught this point well in a recent edit:

In the past, Mr Modi has said in speeches that his definition of reform does not include the changing of poorly framed policy, but merely building infrastructure. In his most recent statements, he has outlined a slightly different agenda. He has said, among other things, that "we will not reduce subsidies". As if to underline this point, he said that his economic agenda should be described as "pro-people", and added that "the poor will continue to control the coffers of India". This seems to suggest that Mr Modi's economic vision will maintain the United Progressive Alliance's (UPA's) welfarist policies .

....Mr Modi's attitude to privatisation of public sector undertakings (PSUs) was also disappointing. He said that the idea that PSUs were inefficient has "done much damage"......Most worrying, perhaps, is the one area where Mr Modi has promised a break with the UPA. He has said that a review of policies governing foreign direct investment was necessary: "We have to protect the manufacturing sector. If we are unable to protect the manufacturing sector and small-scale industries, our youth's future will be destroyed." 

This is a far cry from Reaganomics. Those who think that Mr Modi will make a clean break with past policies ignore the compulsion in the Indian context to walk on two legs: growth and welfarism. What we can expect of Mr Modi is that by improving governance, he will boost growth and he will make welfare schemes more efficient. As part of his effort to improve governance, he may tilt towards greater decentralisation. But it would be naive to suppose that Mr Modi will embrace free market economics a la Reagan. 

Gujarat growth model: is it for real?

There has been an enormous amount of talk about the Gujarat growth model. Modi's admirers say it has worked, meaning it has delivered growth and better living standards. His critics say that it has worked only for corporates. Where does the truth lie?

I have scanned the literature. Let me state my conclusions upfront:

•  Gujarat has been a leader when it comes to growth rate
• It has lagged behind in social indicators (meaning, its indicators are not as good as those another high-growth state such as Tamil Nadu)
• However, Gujarat has been catching up on social indicators too. Once Modi's attention was drawn to Gujarat's adverse indicators, he has been quick to address this issue.

Ok, now on to some key facts. How do we address the growth issue?

• Comparing Gujarat's growth rate in the 2000s with that in the nineties: Not correct, because it is not just Gujarat that has improved its growth rate but the rest of India
• Comparing Gujarat's growth rate with that of other states:Not correct because if Gujarat has always been ahead of other states, then the fact that it has done the same under Modi does not tell us whether Modi has made a difference
• Comparing the difference in growth rate between Gujarat and the rest of India in the 2000s (post-Modi) with that in the 1990s (pre-Modi): Correct. If the differential has changed, we can come to conclusions.

An article in EPW follows the last approach.  There are some important methodological issues. Do we look at growth in state domestic product (SDP) or growth in per capita SDP?  The authors use both methods and come to the following conclusions:

• Gujarat was at par with or ahead of the rest of India in the 1980s
• Gujarat was ahead of the rest of India in the 1990s
• Gujarat maintained its lead over the rest of India in the 2000s but the difference was not significantly greater than in the 1990s.
• Gujarat is not alone in the high-growth league: it must share honours with Maharashtra, Tamil Nadu and Haryana

The authors conclude that Modi not deserve special credit for his performance. It is possible to differ. Growth in the 2000s was on a higher base, so if Modi was still able to maintain the difference with respect to India, that constitutes an achievement.

Surjit Bhalla, writing in IE, follows a slightly different tack.  He looks at the pre-Modi Gujarat (years between 1992 and 2001) and Modi Gujarat (2002 to 2011/12) and compares indicators with seven states whose per capita incomes were at the same level as Gujarat in 2001. His conclusions are resoundingly in favour of Modi:

• Annual agricultural growth accelerated across India and in the similar seven states (SSS), agricultural growth accelerated by 1 per cent per annum (ppa) to 3.8 per cent; in Gujarat, the acceleration was more than three times as much
• Manufacturing in Gujarat accelerated by 5.6 ppa compared to an acceleration of 2.9 ppa for the SSS
• the service sector in Gujarat, from being 0.5 ppa behind the comparator states in the pre-Modi period, accelerated to 2 ppa higher with the arrival of Modi — 10.7 per cent per year versus 7.7 per cent before

What about the criticism that Gujarat's growth was not inclusive and that growth in Gujarat has been jobless? Well, Bhalla points out that when we look at growth in wages of the poor relative to those of the rich, Gujarat does better than other states; also, on unemployment.

What about social indicators? Bhalla has a piece on this aspect as well. He points out that on several indicators- inequality, education, access to sanitation and water, health and the sex ratio- the improvement in Gujarat's indicators is better than in the seven comparable states (except for female infant mortality).

Note, however, that only looks at the change from what you might call a low base for Gujarat. In absolute terms, Gujarat's indicators lag behind the best performers in the country, as Jean Dreze points out in his article in the Hindu:

Whether we look at poverty, nutrition, education, health or related indicators, the dominant pattern is one of indifferent outcomes. Gujarat is doing a little better than the all-India average in many respects, but there is nothing there that justifies it being called a “model.” Anyone who doubts this can download the latest National Family Health Survey report, or the Raghuram Rajan Committee report, and verify the facts.

Dreze makes a more interesting point. He questions the view that Gujarat's achievements are the result of private enterprise as distinct from state intervention (and,by implication, there are lessons for the rest of India). He writes:

When I visited Gujarat in the 1980s, I was quite impressed with many of the State’s social services and public facilities, certainly in comparison with the large north Indian states. For instance, Gujarat already had mid-day meals in primary schools at that time — decades later than Tamil Nadu, but decades earlier than the rest of India. It had a functional Public Distribution System — again not as effective as in Tamil Nadu, but much better than in north India. Gujarat also had the best system of drought relief works in the country, and, with Maharashtra, pioneered many of the provisions that were later included in the National Rural Employment Guarantee Act. Gujarat’s achievements today build as much on its ability to put in place functional public services as on private enterprise and growth.

Dreze asks: if Gujarat's high growth is not matched by a commensurate improvement in social indicators, does it has to do with a slackening in public services or with gender inequality? It is interesting that, in a recent interview, Modi has said that PSUs can do as well as private firms, if given adequate autonomy and has cited Gujarat's own PSUs as cases in point.

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

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. 

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.

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  

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.