Adapting to a new America

Barack Obama’s acceptance speech was an appealing speech for an audience tired of the news from Iraq and Afghanistan, tired of the struggle to pay costs of education and health care and burdened with high inflation and debt

Policy Track | S. Narayan

On Thursday night in the US, Barack Obama gave his acceptance speech as the Democratic presidential nominee at the Democratic Party convention in Denver, Colorado. The stadium was packed and the speech was beamed live. It was an emotionally charged speech aimed at capturing the hearts of the average American. He spoke of the lost American dream, of the millions who have been affected by foreclosures of home loans, of the burden of credit card debts and of rising unemployment. He spoke about the years lost in a war that was not ending and promised to halt that. It was an appealing speech for an audience tired of the news from Iraq and Afghanistan, tired of the struggle to pay costs of education and health care and burdened with high inflation and debt. I heard it and was impressed.

Just a couple of days ago, the US government had released the results of a survey that showed that the number of people living in poverty had increased by nearly six million in the last year. Median incomes have not risen since 2001, and in the last decade, the increase in incomes of the top decile have averaged 11% a year and those of the lowest decile by less than 1% a year. The gap between the rich and the middle class is growing, and there is anxiety that the livelihood of the average American is not secure.

The speech held the right promise, of ensuring that health care is affordable and available to all, that access to higher education is guaranteed to all aspirants, and that public spending would be more focused and accountable. He has promised to tax all companies that outsource jobs and tax breaks for those that bring jobs from outside. He has promised to plug loopholes while taxing the rich and big companies, and to deal with the bureaucracy firmly to ensure that government funds are utilized effectively. He has promised to invest $150 billion in renewable energy, education and health and to recruit millions of teachers to improve education standards.

Clearly, this is a message that appealed to the entire audience and will have an emotional appeal all over the country. The problem with the message is that it is likely to make American companies wary and cautious, and the bureaucracy worried about losing control. In short, appealing to the people would mean alienating vested interests. Given these worries, his thin track record of administration, and persisting inner-party conflicts, it is little wonder that the race for President is still too close to be called. Yet there is an opportunity. Perhaps for the first time in several decades, a Democratic president would have overwhelming support in the Senate and Congress, which the Democrats are likely to sweep. One is reminded of the 1985 scenario in India.

The other problem with the promises is that they are difficult to realize. We heard a similar message in India in 2004 and there is general agreement that there is a large gap between expectation and achievement. There has been no change in the way things are done and the government today has greater regulatory powers in more areas than it did in 2004. Corporate influence is entrenched and policies appear to deal with issues of industry, and not of the citizens. For all the sincerity, it’s likely that the promises made in Denver are going to be very hard to keep.

At the same time, there are interesting economic changes that are happening in the US. Exports are booming, and an industry quite unused to exporting, given the huge domestic demand, is now gearing up to meet export commitments. There is also a significant influx of investment into the US, in real estate, commercial properties, and in businesses. There are large-scale acquisitions of US companies that are happening. These changes are likely to turn around the prospects for growth by the first quarter of next year, and hence the next president is likely to see success in the economy by the end of 2009.

From the point of view of India, a Democratic president is likely to focus much more on domestic issues, and foreign policy would be subservient to this. Multilateral trade and globalization issues, including climate change, are likely to move to the back burner and there is likely to be greater focus on the middle-class American. Most importantly, there would be a close look at outsourcing. As manufactured goods continue to pour in from China, attention on service sector jobs being outsourced is likely to be greater and India should be aware of this. China is now regarded as a country that needs to be engaged with while India is not yet as high up on their radar. The civil nuclear deal is likely to be less urgent for the new government. India will have to fend for itself much more, in external relations, in the neighbourhood and in economic policy. India needs to make quick strategic changes in dealing with a new America.

S. Narayan is a former finance secretary and economic adviser to the prime minister. Comments are welcome at policytrack@livemint.com

Disclaimer :- The copyright for the articles published here lies with HT Media Ltd. The blogs are owned and maintained by livemint.com.

You may not copy, reproduce, republish, download, post, broadcast, transmit, make available to the public, or otherwise use livemint.com content in any way except for your own personal, non-commercial use. You also agree not to adapt, alter or create a derivative work from this content without prior written permission of HT Media Ltd. You are however, free to link to this page.

Policy sans accountability

There has been no explanation as to why we should be running 12.4% inflation when these numbers are much lower in countries we like to compare ourselves with - Brazil, Russia, China, Europe, Japan or the US

Policy Track | S. Narayan

The dark clouds and the sombre atmosphere reflected in a major part the mood of the nation as the Prime Minister addressed the nation from the Red Fort on Friday. Indeed, there are dark clouds on the horizon, and the buoyant spirit of the last three years is noticeable by its absence.

Just the other day, the Prime Minister’s economic advisory council came out with the Economic Outlook for 2008-09 and said what several of us have been saying for months: Growth will be lower than 8% and inflation will grow before there is any relief. Even the Prime Minister’s speech speaks of higher prices in the long term, and has a somewhat inadvertent admission that price rise is not due to external factors alone. Why else would the easing of oil, commodity and foodgrain prices not be reflected in inflation numbers being put out week after week. There has been no explanation as to why we should be running 12.4% inflation when these numbers are much lower in countries we like to compare ourselves with — Brazil, Russia, China, Europe, Japan or the US.

It is not as though the real solutions are not apparent to the policymakers. It is interesting that this government has had the best advice from the several scores of committees that it has appointed. It is equally interesting that the recommendations of most of these remain untouched. It is perhaps in the nature of the democratic process that every report brings forth its own dissent. The Economist argues, surprisingly, that authoritarian regimes nurture a class of recognized intellectuals whose views are carefully listened to and controlled. In democracies freedom of expression leads to a cacophony, in which each one complains that one’s urgent messages are being drowned in a sea of opinion. The Economist calls it “repressive tolerance”. It gives an opportunity to the policymaker and the implementers to call for a debate, for further opinion, and to dilute the doable into defending the status quo. The result is a paralysis of decision making, of discussion replacing action.

Let us take two recent examples. The committee to recommend solutions for adjustment in petroleum product prices has just submitted its report. Interestingly, two years ago, the Rangarajan committee had addressed the same issues. The comparison of the two merits a full column, but several of the recommendations, such as moving away from import parity pricing to comparison with international prices, are quite similar. Why was the earlier report not implemented? Simply because it was drowned in the cacophony of oil companies’ demands for meeting their “under-recoveries”, an arithmetic that they are loath to disclose. Further, in the effort to find the ultimate solution, the present committee has come up with several recommendations that cannot be implemented. Already, there are comments from the ministry of petroleum that most of the steps recommended cannot be implemented feasibly.

The second example relates to the debate on participatory notes (PNs), a matter that has been revived recently. We are told that the Securities and Exchange Board of India (Sebi) is reconsidering the issue of PNs. These are investments made by overseas entities in Indian financial markets through foreign institutional investors (FIIs). The concern was that there was no transparency about the source and origin of these investments. In September last year, the regulators, after several months of debate, decided that fresh PNs should not be issued, and that PN holders could register themselves directly as FIIs. Everyone lauded it as a wise step. Between January and June this year, FIIs have withdrawn over $10 billion from the financial markets, and the regulator has now reported that this is largely because the PN holders are rolling up their investments as mandated by Sebi. The losses in valuation have severely dampened domestic sentiment and domestic wealth, and now there is clamour for a relook at the PN issue. Experts are asking for a re-examination and there are rumours that Sebi will relax the conditions. Meanwhile, of course, $10 billion has gone from the wealth of local investors.

It is difficult to justify such wild swings in approach to policy, given the same players. If the argument in both the cases is that earlier advice was incorrect or inadequately researched, then there should be accountability. If, on the other hand, it is the recipients and the implementers who are to be blamed, then again there should be accountability. The burden for irresponsibility, whether it is in petrol pricing or equity values, is borne by the citizen, but the bar of accountability is set so low that he gets no relief. The concept of “repressive tolerance” ensures that everyone is heard and nothing is done.

Can we not ask, what has happened to the implementation of the reports of over 80 expert committees set up by the government since 2004 whose reports have already been received? Surely, there must be a place where the buck should stop.

S. Narayan is a former finance secretary and economic adviser to the prime minister. Comments are welcome at policytrack@livemint.com

Sherlock Holmes and RBI

The cut in housing loan rates by a bank has shown that banks have sufficient leeway to reduce rates

Policy Track | S. Narayan

Last week’s policy announcement on interest rates was a bit like the Sherlock Holmes story on the dog that barked. As Holmes told Watson, the interesting part was that the dog did not bark, and therein lies a story.

Two comments of the Reserve Bank of India (RBI) were noteworthy. The first was that inflationary pressures were lurking in the economy, and that this was a matter for concern. The second was that banks had enough leeway to reduce interest rates; that the growth in money supply was already ahead of expectations; and hence there was ample liquidity in the economy.

Only a few weeks back, both RBI and the government were congratulating themselves for containing inflation, having brought it down to less than 5%. The passing through of higher energy prices to consumers has been avoided, and winter wheat sowing has been stated to be more than expected. There are also expectations that commodity price increases may moderate, given the expected slowdown in the US.

Then why the sudden concern over inflation? RBI’s response is that it is looking at a 3-4% inflation rate by next year, and the finance minister (FM) says that between a high-growth high-inflation situation and a somewhat moderate-growth and low-inflation alternative, choosing the former would be ‘disastrous.’ In fact, at Davos, he said that a half a per cent lower rate would still leave us with a healthy 8% rate of growth. A possible explanation is the need to be extra careful in an election year—while growth may not win votes, inflation will surely lose them. The future of oil and food prices beyond mid-2008 is still unclear, and therefore, it may be better to wait than to do something. Further, there is little evidence yet that credit deflation is happening, and hence it’s better to guard against inflationary pressures.

There was a need to put pressure on banks to look at borrowing and lending rates—the FM had already said as much at a recent meeting with bankers. It has been clear for some time that credit supply has been quite skewed. Indian companies have had access to all the credit it needs and several cash surplus firms have credit limits that they use for arbitraging the market. At the same time, interest rates on housing loans have been rising, and retail loans as well as small and medium enterprises have had to bear the brunt of high charges. No wonder, Indian companies (and TV channels) were critical of RBI’s do-nothing policy. They would have been the greatest beneficiaries of a rate cut.

In response, one bank has already cut interest rates on housing loans— others are likely to follow. This has established the credibility of South Block/RBI position that banks have sufficient leeway to reduce rates.

The impacts of the interest rate cuts in the US and efforts to revitalize that economy are not yet clear. If the interest rate arbitrage brings in greater flows to our capital markets, then the costs of sterilization by RBI will go up. The FM has already talked about the impact of the market stabilization scheme (MSS) on the Budget. The higher interest burden and the costs of MSS are likely to squeeze the benefits of buoyancy in tax revenues, leaving the government little room for populist schemes without hurting the fiscal deficit. This being the last full Budget before the general election, there will be great pressure for giveaways, as well as pressure from subsidies for food, fertilizer and oil. If there is dampening of growth as well, sops for exports and tax concessions will be pressed for by interested groups. Not an enviable position to be in.

At the same time, if the effects of the slowing of the US economy do not translate into greater interest in the Indian financial market, equity values would continue to fall, and so would real estate prices, after a lag. As it is, market analysts are predicting a fall of at least another 12-15% in the stock market over the next few weeks.

No wonder RBI did nothing, and indeed, that’s the best thing they could have done. The silver lining everyone is looking for is a domestic upturn later this year. The argument is that investment is robust, particularly in construction and infrastructure, and therefore demand would be robust. Equity offerings and new mutual fund offerings in infrastructure have garnered huge investible resources that are waiting to be deployed in the financial markets soon. A good wheat crop would stabilize rural incomes and energize rural demand. If the opportunities arise, it would then be the right time for RBI to pump prime the economy through a rate cut, later in the year. Then one would have very smooth sailing into election mode.

The only risk would be that of inflationary pressures caused by increases in energy and commodity prices. It is obvious that investors, funds, government will be waiting expectantly for things to right themselves—and until then, markets will keep falling.

(S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at policytrack@livemint.com)

Towards a new energy era

There has been a fundamental change in the ownership of oil reserves. The state has taken control of oil

Policy Track | S. Narayan

The oil companies are already hurting. The crude oil prices of over $75 would mean a burden of around Rs65,000 crore for the public sector oil companies this year, unless petrol and diesel prices are raised. The cabinet is unable to take a decision, for the increases would have to be more than Rs10 per litre. The oil companies are borrowing heavily from banks for working capital, and there is no appetite in the bond markets for oil bonds any more, which are fast nearing the status of junk bonds. ONGC alone is sitting pretty, for it gets more money for the little oil that it produces—truly a reward for inefficiency. There is very little attention to the fact that before Christmas, crude oil prices will be $100 a barrel, roughly translating into a price of Rs100 per litre of petrol. And let us not be surprised, if, before 2010, this doubles once more.

There are several reasons for this. At the top are the growing energy needs of India and China with the GDP growth fuelling this demand growth. The uncertainties of Iraq and Sudan and other disturbed countries are resulting in volatilities in trade. There have also been calculations that total oil availability has peaked, or is about to peak shortly, leading to a flurry of price increases.

A prime reason, little noticed, is that there has been a fundamental change in the ownership of oil reserves and resources. The earlier multinational oil majors, Chevron, BP, Shell and others, own less than 10% of the total oil reserves in the world, and the new owners are all state-owned companies, whether in Saudi Arabia, Russia, Venezuela, China or Malaysia. About 80% of all incremental production, over the current 83 million barrels a day, comes from the production of state-owned enterprises. The state, in more ways than one, has taken control of oil. The immediate fallout of this is that strategies for future oil production have changed. Unlike multinationals that focus on maximizing returns to stakeholders, state entities often subserve a larger, political agenda. These could include, as in the case of Russia, a more aggressive presence, or, as in the case of China, enhancing spheres of influence. Profits from oil revenues can now be treated as state resources, and to be earmarked for different sectors of development, and need not be reinvested in the business of oil exploration alone. There is an excitement within governments with surplus money to buy assorted assets overseas. Qatar’s gas money has helped it buy into Barclay’s Bank, and it is now looking to buy Sainsbury’s, the retail chain. Coupled with the fact that new discoveries are often in difficult, more expensive locations, it is quite clear that incremental production will soon slow down to a trickle. Already, excess of supply over demand is barely one million barrels a day, against 4mbd, only two years ago.

There is little evidence that we have a strategy in place that will help tackle a shortage of oil. We need to start now. At the top would be the concern over consumer prices, and the extent of losses that the oil companies can bear. There has to be a balance and prices must rise. It is better that they rise gradually and regularly rather than in fits and starts. And tariffs must be lowered on oil products—oil should no longer be considered a milch cow for revenue generation. The oil marketing companies need to pull up their socks. Private sector players are making money out of refining margins, which will keep going up, and product exports—strategies that public sector oil companies must quickly follow, after making necessary investments.

At the core is the need for conservation. One has only to think of the inefficient diesel generators and agricultural pump sets and wastages in commercial lighting. Japan was able to achieve 30% savings through efficiency measures after the first oil shock of 1973. There need to be legal mandates that would make the manufacturing industry incorporate modern technology with a strict timeframe and penalties. Last year, when diesel generating sets from India were exhibited at a fair in Europe, they were laughed at for their 1950s technologies. Government could assist modernization through fiscal support and financial incentives.

A strategy that oil products would be used only for transportation—sea, air and surface—and not for industrial or commercial use, would help save over 17% of current consumption. The power sector must be geared up quickly, with focus on coal, hydro-electric and, now, nuclear options.

There needs to be funding for research on alternative energy technologies. It is possible to consider collaborative research with laboratories at the forefront of technology anywhere in the world, and to forget the notion that CSIR labs are good enough. And finally, there has to be more emphasis on wind energy and solar energy.

The suggestions may only partially mitigate the problem, but at the moment, we are not even trying. The problem is urgent.

S. Narayan is a former finance secretary and economic adviser to the Prime Minister. We welcome your comments at policytrack@livemint.com

New class of civil servants

The early acceptance of English education by the Brahmins of Tamil Nadu enabled several of them to compete for, and get selected in, the Indian Civil Service and then in the Indian Administrative Service

Policy Track | S. Narayan

Amid all the gloomy news about inflation and interest rates, it would be a change to look at certain transformations at the micro level that are likely to have far-reaching effects in the future. Among these is a story recently highlighted by a weekly magazine.

Analysing the background of the successful candidates for this year’s All India Civil Services exam, the report mentions that the largest percentage (16.2%) is from Tamil Nadu, followed by candidates from Uttar Pradesh (12.4%). The report also points out that a large number of those who succeeded are from poor or lower middle-class backgrounds and that there is a much greater presence of the tier II and tier III cities than earlier. Actually, this has been the trend at least for the last five years, if not more.

When we entered service in the 1960s, and, in fact, right through the earlier decades, these two states had been faring very well in civil service selections. The early acceptance of English education by the Brahmins of Tamil Nadu enabled several of them to compete for, and get selected in, the Indian Civil Service and then in the Indian Administrative Service (IAS) — those who did not qualify joined the Central Secretariat Service, and the so called “Tambrahm” culture was evident in New Delhi right up to the late 1960s. People who entered the service in the North were often children of high- ranked civil servants and certainly came from elite schools and colleges in Delhi and elsewhere. These people of impeccable manners and Victorian habits are still around, greyed and elderly, but revered nonetheless.

I saw the change happen soon after I entered service. In Tamil Nadu, the self-respect movement that started in the 1930s and gave rise to the Dravidian parties enabled access to education to a much wider section of the population. Positive reservation of seats worked to the advantage of those who had earlier been denied opportunities of becoming doctors and engineers. I could see, through the 1970s, the push for technical education from this newly liberated student class — at the same time, there was also disenchantment with government service. The 1970s and 1980s saw very few from Tamil Nadu enter the IAS every year — a majority of the senior officers in the Tamil Nadu IAS cadre today were allocated to this state during those two decades from the Hindi-speaking states.

This period led to the prolific growth of tertiary technical education institutions in the South — there are over 1,000 in the four southern states. At the same time, it provided a platform for acquiring self-assurance for first-generation students from poor and rural families. I believe that this self-assurance is now expressing itself as a need to stand up and do something different. Post-1991, with economic reforms adding to incomes and opportunities, there is more awareness of the importance of the role of government in transforming rural lives, and also of the opportunities that extend beyond information technology cubicles. With education at hand, it is hardly surprising that youngsters in the smaller towns, especially those that have seen hard times and feel that things can be changed, are opting for the civil services. There are entrants whose parents are day- wagers, others who have been supported by single mothers doing manual work. Most important, they come from all sections of our society — the other backward classes, as a percentage, are the highest.

The character of the All India Services has changed in my lifetime, and in my view, the new entrants are far more representative of the aspirations of the “inclusive growth” view. Bright and hard-working, yet from families that know the meaning of hardship, these are the youngsters most likely to be able to administer from the heart, not just from the book. I have also seen a complete social transformation in the composition of the services, a transformation, though painful, which has brought up people much more representative of the diversities in our society. In the South, especially in Tamil Nadu, it has taken almost 70 years to get here, and I do believe that the rest of India must follow, and it may perhaps take far less time. Though one had to compete all the harder to succeed, I am a strong votary of affirmative action to provide preferential opportunities, especially education, to those who don’t have them.

I can hear sceptical readers wondering: Will the new dispensation be ethical and fair? I cannot say. When I teach these students, I see the core of goodness and fairness—what the real world of politics and bureaucracy will do to their hopes and aspirations is yet to be seen. I like the fact that the collector’s office is not a mysterious, forbidding place for citizens — that they can see their own kind sitting there. Will he be fair? As in economics, the laws of supply and demand will operate. Let’s hope the citizenry wants fair deals — I am sure that the new class will deliver.

S. Narayan is a former finance secretary and economic adviser to the prime minister. Comment at policytrack@livemint.com

The space for success

NGOs are delivering much-needed social services in Bangladesh. We could learn a lot from them

Policy Track | S. Narayan

As the waters drain from the plains of Bihar and Bengal, the rivers in Bangladesh have been rising, and more than half of its 60 districts are under water. Dhaka television shows army top brass distributing 40 tonnes of foodgrain and another 1,000 bags of relief material. But the submerged are in millions; more than 30,000 admitted for intestinal diseases and there’s severe shortage of drinking water and food. Commodity prices have shot through the roof; 1kg of dal is 70 taka, the poorest quality rice 20 taka—up by 35% in the last four months.

The government, with hardly 10 advisers, has neither the reach nor the experience in governance for disaster relief; the army is trying its best, but does not have the support of the political parties, who have not got into flood relief. The politicians are upset at the actions taken by the government to bring the corrupt to justice, including several from the two main coalitions, and don’t wish to cooperate. Businessmen, wary of threats of action for economic offences, have either gone away, or are being discreet. NGOs are active in relief, but do not have adequate relief materials.

Dhaka itself, protected by its embankments, is a rich city. Traffic is chaotic, as expensive cars and SUVs jostle for space among posh apartment complexes where each apartment is worth at least a quarter million dollars. There is so much money in Dhaka that one has to rub one’s eyes and look at the misery and the television set to realize it is the same country. The ordinary urban people one talks to complain about the money made by the privileged few in the last decade. They feel squeezed between the urban rich and the rural poor.

Economic growth has touched this country very selectively. The GDP figures speak of a continued growth of 5% or more for several years now, but income disparities, measured by Gini coefficients, have risen sharply, and per capita incomes of the lowest 20% have barely risen in the last decade.

The above does not necessarily lead to a positive comparison with India. In every social development indicator, Bangladesh is ahead. Access to sanitation as well as drinking water in rural areas is far greater. Life expectancy at birth as well as infant mortality figures are better than in India. Population growth is under greater control. Most importantly, data on underweight children and prenatal and postnatal anaemia show that there has been deterioration in India (NFHS III) and improvements in Bangladesh. By all accounts, there is greater outreach of health, education and nutrition in Bangladesh than in India.

These successes are due to the programmes of the several NGOs that are very active in Bangladesh. The story of the microfinance groups, Grameen Bank and Yunus, is well documented, but there are several others that are equally active. Among the more prominent is the Bangladesh Rural Advancement Committee (Brac). This is different from Grameen in that its banking activities are only one aspect of its interventions. It runs more than 14,000 schools, primarily for girls, where a curriculum of non-formal education re-educates dropouts for a period of up to 30 months, and brings them back into mainstream schools. It has also revived traditional village crafts and markets these products in urban areas. It provides inputs to make these products more suitable for the urban consumer. The revenues go back into its initiatives. There are other major NGOs, such as Proshika, and several more, that work in the areas of health care and education. The important aspect of the interventions is that the state has allowed them a free hand to provide these services. As Yunus admits, the state has created the space for NGOs to provide these services, or perhaps, the state has yielded its duties to these organizations. There is a department of the government that provides coordination, ensures that there are not too many overlaps, and that NGOs with a good track record are able to expand their services.

In India, we continue to look at such interventions with suspicion. There is now a bill to regulate microfinance institutions that would regulate self-help groups. The banking sector would like to mainstream these groups into the organized sector, for they see a successful business model. The attempts are to regulate and to bring the NGOs into accountability to the government, rather than providing them space to operate.

Perhaps there is still an opportunity to look at alternative models. Decentralized governance is not necessarily the only way to deliver public services. And public participation is not through panchayati raj alone. Self-help and microfinance groups, public-private partnerships, as well as NGOs are alternatives. NGOs are delivering much-needed social services in Bangladesh. It seems we could learn a lot from them.

What gains, and for whom?

SEZ concessions and the costs of land acquisition will be borne by the public— through higher subsidies or levies

Policy Track | S. Narayan

Three inter-related policy issues that have been in the news recently have significant implications for citizens and taxpayers. First, a group of ministers has recommended that the government can acquire up to 30% of the land needed for Special Economic Zones (SEZs) on behalf of promoters. The government’s earlier stand, in the wake of the Nandigram incidents, was that it should not acquire more than 10% of the land, and that SEZ approvals would only be granted after the developer had aggregated at least 80% of the land required. Second, it has now reiterated its commitment to legislation for a new relief and rehabilitation policy, a draft for which has been in public domain for nearly a year. Third, a report on the contentious issues of tariff subsidies in SEZs submitted to the finance ministry by the research organization Icrier (Institute for Research in International Economic Relations), seems to refute earlier arguments by the National Institute for Public Finance and Policy (NIPFP) about significant revenue losses.

The entire emotional debate on SEZs over the past year was on the acquisition of agricultural land, and the plight of those dispossessed. West Bengal’s agitations were as much about inadequate compensation, as about denial of livelihoods. Maharashtra and Haryana, too, saw such agitations. As a result, the government backtracked, and withdrew from its acquisition efforts. This, naturally, doesn’t suit the developers, as only awards under the Land Acquisition Act of 1894 (yes 1894!) can grant undisputed title. They have been lobbying hard for a rethink, as several projects are held up. Now that the GoM has been persuaded, there will be compulsory acquisition again. To deal with widespread criticism, the government plans to go ahead with its relief and rehabilitation (R&R) policy.

For all its strong words and rhetoric, it is a curious document. It defines the bad guys (those who want projects) and the sad guys (the landowner, labourer, and his kith and kin) in detail. It spells the need for a commissioner for R&R to take care of the latter and threaten the former. The clauses breathe brimstone and fire on development projects, and the need to take care of those affected. This can’t be done by anyone except the government, which is to decide what is good or bad R&R.

Two serious flaws in the draft are striking. First, those dispossessed of land by private developers, have to be given government land—an indirect subsidy for the developers. If that is not available, private land will be compulsorily acquired to rehabilitate them. For those dispossessed by such acquisition, the same process again. The outcome will be much more compulsory land acquisition, not less. Besides, the draft nowhere defines what measures of ‘relief’ or rehabilitation are adequate and leaves this to a group of officials. This implies incentive for rent seeking, by the officials and on behalf of the developers, to the detriment of the dispossessed.

So much for the aam admi.

The finance minister has criticized tariff concessions under the SEZ Act, while the commerce minister has insisted that indirect gains through jobs, exports and eventual growth would mean net revenue gains, not losses. The finance ministry’s views were supported by a report of NIPFP, which quantified revenue losses at around Rs1 trillion. A recent Icrier report, however, argues that these are overstated, that exports are already eligible for duty drawbacks even on the value additions, and that, on balance, taking direct and indirect taxes together; there would be no significant revenue loss. This is a shot in the arm for those who want more of these tariff-free islands.

The debates on tariff concessions have all been about the goods and services created in the SEZ, their exports and local sales. Export processing zones already exist, and duty drawbacks have been part of policy for several years. But little has been said about the developer’s role. He gets duty-free import of raw material, steel, cement, equipment, power plants, fuel, etc., and then sells or leases the facility to ‘units’ that would engage in the actual creation of goods and services. The pricing of the infrastructure—sheds, power, water, et al., is in the hands of the developer, a clear case of monopoly pricing. And the units must bear the costs—that’s how these concessions distort markets and prices within the zones. Regulations here are weak, with much discretion in the hands of the development commissioners. The real exploiters of the concessions are the developers, not the units.

Such concessions and the costs of acquisition will be borne by us, whether through higher government subsidies or levies. A pity that policymaking is so skewed towards those with access that, in spite of all good intentions, the short end of the stick is with the general public. You and me.