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

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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.

Securing our farms’ future

Not only are our nutrition, public health standards falling, we are also moving into a food deficit territory

Policy Track | S. Narayan

Weeks ago, I wrote about the rising prices of crude oil, slowing down of exports and the likely increases in the price of wheat. It is little satisfaction to see these events happening. The worry I had expressed then, that the proponents of capital account convertibility, free exchange rates and an open financial architecture were missing the heavy dependence on manufactured consumption goods, energy and food imports that this economy is hurtling towards, is now even more relevant.
On food security, a recent paper of the International Food Policy Research Institute raises concerns. It looks at two dimensions of food insecurity: the inability to access both sufficient food and nutritious food. The food energy deficiency prevalence is 51% in South Asia and 57% in sub-Saharan Africa. But, with the numbers far bigger, the problem is greater in South Asia.
As the paper points out, the number of underweight children under five, low birth weight children as well as underweight women are far greater in South Asia as a percentage than even in sub-Saharan Africa. The recent National Family Health Survey (NFHS 3) confirmed an increase in the percentage of underweight women and children in India over the last decade. The study also points to interfamily deficiencies and says that girl children and women suffer greater insecurity.

Some of this is known (perhaps not that we are comparable with sub-Saharan Africa). The added worry, as shown in a recent Economic and Political Weekly article, is that cereal production per capita is declining, and that the period of agricultural growth seems to be over. Those who argue that the share of agriculture declining to below 20% means we are more “developed”), should be worried that India has emerged as a large importer of wheat and that this can disrupt the future markets in wheat, as our demand accounts for more than 26% of all wheat traded in the current year. We are also a major importer of pulses and of oil seeds.

Finally, the commissioners appointed by the Supreme Court have reported that the Public Distribution System is just not working.

In short, not only have we worsened our nutritional and public health standards over the last decade, we have also moved into a food deficit territory over the last five years. We are unable to deliver food to BPL (below poverty line) families. Media photographers, printing pictures of the houses and SUVs of the newly rich farmers who have just sold off their fertile land for real estate, should remember this means less food for them in the future.

There is a similar story in energy, but that is for another column.

Sadly, there is little evidence of any policy intervention. The agriculture ministry is busy defending the price it paid for wheat imports, even when the issue is not about the tender process, but about what other countries were paying at the time. There is still time to correct matters.

The finance minister has rightly been talking about supply-side constraints driving food price inflation. In order to deal with this, three steps are necessary. First, raising production and supply of cereals requires a relook at the support prices for farmers, ensuring supply of fertilizer and seed inputs at reasonable prices, and technology and other support for increasing farm productivity. Sounds familiar? Then why is it that these very basics are not happening? A recent advertisement by the ministry of fertilizers made the shortages and distribution bottlenecks apparent. The past decade has introduced no new seed for paddy or rice that can be called a breakthrough. Clearly, we have the institutions and the infrastructure, but these have gone to sleep. Can one see any agricultural extension worker fromthe government in any village? Surely a little determination can make them work again.

Second, pushing rural credit mindlessly is only aggravating indebtedness. If we can pay horrendously high prices for imported wheat, we should pay our farmers comparable rates. Inter-state barriers to movement of farm goods need to be removed, and markets for these made free. Again, much talked about, but little done.

Finally, can we ensure industrialization does not take away fertile agricultural land? Take the marginal lands in Tamil Nadu, Gujarat, Maharashtra, not the fertile lands of Haryana. Instead, it is possible to bring the farmers of Haryana into the mainstream and add to their earning capacity by integrating them with food processing and value addition activities that produce goods for the urban table.

None of this is rocket science, or newly discovered solutions. The longer we don’t do the needful, the closer the danger of food insecurity. Let us focus the next five years on agriculture, not the stock markets or mergers and acquisitions.

So this State won’t wither

It is the appropriation of state resources by a few that subnational movements are fighting against

Policy Track | S. Narayan

An article by Selig Harrison in the International Herald Tribune, reprinted in other papers, has captured attention here in Singapore. It foresees a gloomy future for Pakistan, suggesting that the country could eventually break up along ethnic lines. There is also much discussion about the unilateral declaration of independence by Kosovo and Putin’s strong reaction to it. And then, there is Spielberg’s protest against the purported involvement of China in the Darfur conflict. Across the world, subnational entities are claiming their right for nationhood and statehood, facing repression resulting in violent upheavals. The last quarter of a century has seen a lot of this—Russia and the Central Asian Republics; Czechs and Slovaks, Macedonia, Croatia, Serbia and Bosnia. The European menace now seems ready to spread elsewhere, to South-East Asia, East Timor and other countries.

The interesting, and perhaps worrying, part is that after creating a separate nation based on their cultural identity, these new, quite small, nation states seem to have done quite well for themselves. Most of the Central Asian republics are prospering, so are the Czechs and Slovaks, as well as several of the other countries mentioned above. Their GDP per capita has grown substantially, and human development index improvements have been more rapid than in India. There seems to be some strength to the argument that small states are better governed and able to take better advantage of their resources.

Could such trends emerge in India? What would be the consequences?

Recent and continuing events in Maharashtra indicate that though a political ploy, there is some support for the anti-north Indian sentiment. It is also now clear that there is sympathy for the Sri Lankan Tamils, even the most violent fractions of it, in Tamil Nadu. We saw the anti-Bihari sentiment in Assam. There is the Telengana movement in Andhra Pradesh. Of these, perhaps the Assam and Maharashtra sentiments are driven more by competition for economic development; the Tamil Nadu one is truly an ethnic sentiment.

Apart from these, there are also sub-national movements based on deep-rooted caste differences. There is an attempt to enlarge the footprint of the BSP across India; there have been earlier attempts to unite Yadavs of the country, and so on. A number of caste-based political parties are springing up and jockeying for position in coalitions that can be formed to rule, both in the states and at the Centre. Finally, there is the divide between the secular and the non-secular parties—itself an attempt to divide the citizens.

Running through all these fissures is the gap between the poor and the non-poor, expressing itself in violence and extremism in states with Naxalite activity.

Some broad observations are possible. First, this country has lived with differences for several thousand years, and its cultural identity, habits and regional influences, have coalesced into a national identity that is not easy to dissolve. Most movements mentioned here have been put together by groups seeking political power within the democratic framework. They recognize that this is an era of coalition politics, and that even small groups would have leverage in the coalition beyond their actual voting percentages. It is understandable that with the largest political parties unable to grow the democracy into a two-party system, other participants, based on different ideology or caste groupings, would emerge. Still, it has to be recognized that the political process is the path to economic influence, and the reservations, patronage and rent-seeking are likely to be the motivation for these small parties to survive and prosper.

Perhaps this should be the cause for worry. The so-called subnational entities, unlike in other parts of the world, do not have (except a very few) a clearly defined region or geography to claim nationhood or statehood. But there is certainly a claim on public offices, public finance, public patronage, and indeed the spoils of office that these groups are strongly fighting for. It is this approach to appropriation of state resources by a few that the extremists are fighting against, and they are gaining ground.

It is important to recognize fissiparous tendencies and find solutions. At the individual level, there are opportunities for all. One has only to look at the growing middle class, the young and the affluent. It is important to provide the same access to everyone, so that there is no need to seek niches to grow in. So one goes back to the importance of inclusive growth, of higher educational attainments, better access to skills and technology and the host of economic actions that are necessary to bring prosperity to the entire nation. If there are opportunities for growth and affluence for all, across the entire country, there would be pride in nationhood. One has only to look at the multicultural US to recognize this. The urgency for removing regional disparities, for improving the lot of agriculture, for providing opportunities for the poor and the backward, is thus no longer just an economic agenda —it is necessary if we are to keep the nation together after a decade.

S. Narayan is a former finance secretary and economic adviser to the prime minister.

Under the election shadow

The Budget meets important concerns halfway, while making tantalizing promises for the future

Policy Track | S. Narayan

Some announcements in the Budget are in line with media and analysts’ expectations. At the macro level, it is heartening that the fiscal as well as the revenue deficit targets for 2007-08 are being met. The 2.5% fiscal deficit target for 2008-09 as well as the reduction of revenue deficit to 1% continue the path towards fiscal consolidation. For the first time, however, there is recognition that the off-budget subsidies, such as oil, food and fertilizer bonds, constitute “real liabilities” and need to reflect in government accounting. Finance minister P. Chidambaram’s statement that he would request the 13th Finance Commission to revise the road map for fiscal consolidation is a bit worrying, signifying that the growth flexibilities he has had in the past are eroding and that he needs to be careful about his expenditure.

Actually, he has. The growth in the gross budgetary support is only 16.4%—a low figure if one considers the 19% increase granted between 2002 and 2004, the even higher growth in budgets before that period and the even higher increases after 2004. Allocation of only Rs10,000 crore under plan ‘B’ for plan capital also indicates there won’t be much more money for the 11th Plan available during the year. This must be disappointing to the Planning Commission. Still, focus on controlling inflation and on growth speaks of prudent management.

There are several positives. Most important are the indirect tax initiatives. Keeping the peak rates of customs duties in an era of an appreciating rupee is sound judgement. Excise duty reductions as well as targeted decreases in two-wheelers, paper, pharmaceuticals, etc., are intended to strengthen the growth sectors in Indian manufacturing. There seems to be a message here. Corporate tax rate changes affect companies, owners and shareholders—indirect tax cuts help industry to grow, and the choice of the latter is an attempt to spur growth.

At the same time, the personal income-tax concessions are measured, welcome and not overboard.

The big news is in agriculture. The waiver of loans for small and marginal farmers, at an announced cost of Rs60,000 crore, is an important relief and makes the sector viable again. The investments in irrigation, food security, agricultural production and productivity as well as fresh infusion of capital are likely to give fresh growth impetus in this sector. The worry is that there is no clarity about where this money is to come from. If the government is to reimburse the banks over three years, as has been clarified, then there would be a budgetary burden as well as a burden on the banking sector.

The focus on education and health was also anticipated. However, the investments proposed in secondary education are fairly modest, and the major increase is happening in midday meal schemes—a consumption expenditure rather than investment. It is interesting that there is repeated mention about schemes for SC/ST and for minorities—indicating a real concern for these vote banks. That perhaps accounts for the announcement about a large number of fairly small schemes, carefully distributed over the geography of those states that are definitely going for elections this year, and those that are important allies of the United Progressive Alliance.

Such minutiae are hallmarks of state budgets, not the government of India’s budget, and the shadow of the election is obviously looming large.

There is, however, a sense of disappointment. There is no mention of infrastructure. The Budget does not address any of the issues raised in the Economic Survey tabled only the previous day. The survey points out the crying need for reforms—there is little in the Budget speech, not even lip service to the recommendations made therein. There is little comment on the unfinished agenda in banking, financial markets and insurance. There is no information on how the pressure of capital inflows would be managed, though there is a threatening mention of “short-term measures”. It had been expected that there would be a sovereign wealth fund created, which would help Indian investments overseas—but this hasn’t been announced.

Important concerns have been met halfway, tentatively. There is crying need for upgrading skills—the suggestion is to form a new entity whose role and task is uncertain. Irrigation is a great initiative—but with inadequate funds provided. Climate change concerns are voiced—and left to a permanent body to be constituted in the future. Corporate bond markets are important, but there is no finality about how this is to be achieved. Short-term capital gains are to be taxed more and the securities transaction tax is to be treated as an expenditure, not as a part of tax paid—an additional burden.

It’s fairly clear that elections are not far away, and it is now possible to speculate that they could be sooner, rather than later. The Budget leaves the opportunity to carry forward the promises in the new government, while making tantalizing promises for the future.

S. Narayan is a former finance secretary and economic adviser to the prime minister.

Beyond today’s politics

If public policy is for the few and by the few, it would only alienate the citizenry, sooner rather than later

Policy Track | S. Narayan

I can well imagine how excitement and expectations today would overshadow concerns about economic issues, but the real world of goods and services, of markets and trade, will go on independent of the blips of politics. The last couple of weeks have been particularly interesting, and a lesson on how differently similar problems are being handled in the US, UK and here.

The concerns over the likely implosion of the two massive mortgage security institutions in the US—Fannie Mae and Freddie Mac—are an example. These are government-supported institutions (GSEs), which buy mortgages from banks using debt raised in the market at lower interest rates. Once the underlying mortgages get distressed, so does the business model. These two institutions account for a significant proportion of the mortgage debt outstanding in the US, and a collapse would ripple through the entire financial market. In the wake of the likely implosion of a California-based bank, the Fed and the treasury have moved swiftly to find a solution. Fannie Mae and Freddie Mac will have access to federal funds in the form of debt, equity and guarantees, but existing shareholders would have to take the brunt of lower values. There have been academic debates on two counts—first, concern over state intervention in a country where markets are traditionally left to determine winners and losers; and second, the moral hazard of choosing new equity over the older shareholders, arguing that this would reduce future risk taking by investors. But markets and the public have broadly welcomed the moves.

Note that in an unusual situation, the treasury and the Fed have not been averse to finding new solutions, in fact pragmatic ones over theoretical, and the treasury secretary is winning applause as a problem solver. At the same time, the Fed chairman is open about his concerns and has presented a grim picture of inflation and economic slowdown.

So, pragmatism and transparency, and an attempt to ensure swift action to protect the masses of investors and customers. In short, less economists, more doers.

Similarly, in the UK, there is transparency over the Bank of England’s letters to the chancellor saying that they would have to live with the inflationary pressures, as any monetary tightening would slow growth further. There is also the promise that banks and institutions in distress would be supported.

Let’s compare this with events here. First, there is an assertion in the media, and in public, by policymakers, ministers, etc., that there is nothing to worry about. It has been said that inflation will decline by itself; the economy would continue to grow; food prices would be higher; and people would have difficulties making ends meet, but everything is fine. And in any case, the problems are due to causes beyond our control and, hence, there is nothing much to do. One has only to watch the TV to see this message repeatedly coming across from the government.

It is possible to argue that in the face of declining growth in industrial production, lower capex investments, and slowing infrastructure development, pragmatic answers are possible. For example, and there could be other ideas as well, focused support to investment and industry as well as emphasis on rapid infrastructure development could ensure that we do not get into a downturn. It is better to react early than too late. Further, if it is clear that higher oil prices are here to stay, is it not important to know the strategies for dealing with the future? In terms of problem solving, the Reserve Bank of India (RBI) has also been a hesitant conservative. Depreciation of the rupee has certainly added to inflationary pressures, but RBI has not sought to deploy its reserves to stem this, and reduce the burden of the market stabilization scheme bonds.

The other, more significant departure is the concern over individuals, over shareholders, rather than public at large. The windfall tax controversy is a case in point. Windfall gains are associated with lotteries, where a risky investment is made with a low chance of success. How would unexpected increases in oil prices constitute windfall gains? If there have been aberrations in policy, these need to be addressed, and a wakeful media needs to question how these aberrations happened, but to raise this to the level of a national debate is surely a waste of resources in itself.

This brings me to the final thought. Everywhere I have gone, I can actually see the benefits of government activity for citizens. In Cambodia, I recently saw a large public lake being upgraded into a leisure spot, where the buzz among citizens was about the benefit from tourist inflows. Why are there very few public projects in India that people relate to, where they can see direct benefits? The Delhi Metro, of course, is an exception. If public policy is for the few and by the few, it would only alienate the citizenry, sooner rather than later.

S. Narayan is a former finance secretary and economic adviser to the prime minister.

A smart card so she exists

Once these cards are in place, it is only necessary to ensure availability of services, and the deserving will get their due.

Medical attention was available to all those who applied,” said General Dwyer after Jallianwala Bagh. “How would those whom you have shot, apply?” said the judge: from the arraignment of General Dwyer.
My last column had discussed concerns about implementation: I had said it was not appropriate that those in government argue they are responsible only for allocations and have little control on implementation. Two years ago, the concept of outcome budgeting was introduced—it was supposed to convey the extent to which allocations have been utilized. This year’s outcome budget—available on the finance ministry website—makes interesting reading. There is little mention of the actual performance against allocations, only that processes controlling the utilization of allocations have been completed.

Consider just two examples. First, new power generation capacity in 2007-08, as a percentage of plan targets, would be perhaps the lowest ever. Shortage of electricity, as a percentage of demand, has increased by two percentage points in the last four years, and is more than 9% now. So, this summer will see more power cuts across more regions in the country. Second, three years ago, the Union budget promised a massive programme for rejuvenating water bodies, to increase surface water storage for irrigation— this year’s budget speech told us the programme has just been discussed with international funding agencies that have agreed to support the scheme. Quite a gap here.

Since my last column, I received several comments asking me to point out non-performance in various sectors, and the list is quite endless. I would rather carry on to suggest how to make things work.

had dealt with urban service delivery last time. One commentator pointed to a significant gap in my argument—that my scheme would work when the individual could get a smart card made. A maid working in a household is eligible for kerosene, and public distribution system amenities, and to facilities such as means scholarships for her children, etc. But she needs proof of residence, indeed proof of existence. Without this, she would probably pay six times the cost for rations, kerosene, or cooking gas. This is a horrendous problem. The simplest way to handle this is to put the responsibility on the employer. As long as the employer certifies the genuineness of the person, she should get the required card. To have some checks and controls, these could be valid for a short term—say, six months or a year—at the end of which the card would no longer work until renewed. This can help verify whether the person is still employed or not. This does not take care of the unorganized, migrant population entirely, and I don’t think it should, if we are to have some order in the rural urban migration.

Let’s turn now to the rural sector. The government has to deliver a mix of services. The public distribution system provides rice, wheat, sugar and kerosene. The farmer needs credit. It is also possible to deliver fertilizer subsidy to the farmer instead of to the fertilizer company. A single smart card could do all this. Most of the rural farmers are already part of some institutional arrangement—kisan credit cards, NREGP (National Rural Employment Guarantee Programme), et al. In fact, they are better organized than the urban poor.

he core of the problem is the landless rural people—the agricultural wage labourers. Surprisingly, over the past 60 years, sufficient information has been gathered at the village level about them. Ration cards have been made; there are certificates at the school level, at the DRDAs (District Rural Development Agencies), and a number of other locations—but none of these speaks to each other. A simple private sector-led survey to put the data together to create the hologram of the person and his residence, income and family, is a possible, not an impossible, task. This is the most deserving set and is also difficult to reach—it requires greater attention from governments and greater effort by implementors. If we can do a responsible census in a two-year time frame, we can certainly do this.

Once smart cards are in place, it is only necessary to ensure availability of services. To reiterate, I am certain corruption and leakages will remain. But this system will ensure that the deserving will get the services, and that the corruption would be in the number of bogus entitlements that would continue to circulate, and be skimmed off. It will be up to individual administrations to deal with this: My concern is for those living and deserving, not for the bogus cards.

In a war-ravaged country such as Cambodia, with 80% subsisting on primary agriculture, levels of poverty in excess of 40%, and literacy levels lower than India, I am now witnessing the delivery of entitlements: I am not willing to believe or accept that we can’t do this in India, however venal or corrupt the public services may be.

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

A balloon of benefits

The government has paid little attention to job opportunities in the real economy

Even after a week of considerable discussion about the Sixth Pay Commission report, the media is still not very sure whether to laud or castigate it. There have been comments about the additional fiscal burden, comparisons with the private sector, the relevance of performance incentives, et al, but the media has been careful not to take on the bureaucracy by asking what the public will get in return. It has even accepted the costs to the Centre of about Rs30,000 crore in 2008-09 as inevitable.

Concern with retention at middle management levels is visible in the report. There has been evidence of flight of officers to the private sector after putting in 10-15 years in government, leveraging their knowledge of processes and people tocommand a huge multiple of earnings in their new assignments. There have also been reports that the defence forces are finding it difficult to recruit officers, with managerial skills in demand in the real economy. The recommendations of the pay panel provide for a bulge in the benefits at these levels, in the hope of improving parity between the private and government sectors. Building on this platform, my ex-colleagues at senior levels have ensured there is enough gravy for them, as well (I do hope to get a good raise in my pension).

Thus, the balloon of benefits is larger at the middle and top end.

It’s more subdued at the lower end. The class of stenographers, the backbone of the notes and minutes that remain unchanged from the days of Curzon, is being done away with. The minimum–maximum ratio is being stretched from the present level of 1:9 to about 1:12, with lower benefits at the clerical and lower levels. There is little for the entrants, and indeed, at entry levels, several tasks are being removed. There is a strong recommendation for outsourcing lower-level service tasks. In this sense, the report is certainly elitist for, like the government and the important policymakers, it pays lip service to inclusive growth, but is tilted towards the upper end of skills and knowledge.

The government has paid little attention to job opportunities in the real economy. It’s recognized that mere literacy is not enough for skills creation, that there is a severe shortage of even ordinary skills needed in services, construction and manufacturing—but there’s been no coherent strategy to attempt to bridge the gap. There are many committees in this government, but none to tackle the problems of employment and livelihoods.

This pay commission report, to my mind, is yet another example of this bias towards the knowledge economy, the middle class and senior managers, the demand for FMCG and urban allowances. The small town aspirant, the first- generation school graduate, has little to look forward to. This is worrying at a time when we urgently need to take people off farms into service jobs, reduce pressure on land, and to move youngsters to service jobs.

There are other recommendations that may get distorted during implementation — such as the proposal to allow a higher (3.5%) rate of increment to 20% of the employees, categorized as “high performers”. It is tough to evolve measurable criteria at clerical levels. There will always be complaints of favouritism, of lack of transparency and recourse to RTI against these decisions. The running pay scales are unlikely to satisfy the demands for promotions, for elevations in government service bring substantial power and additional responsibility. The increases in education allowance and house rent allowance are marginal when compared with the rise in the costs of these services. It is not clear whether the medical insurance scheme aims to reduce the ambit of the Union government health scheme — if so, there would be substantial cuts in benefits for employees.

The position of the commission on the new pension schemes is not clear — it uses the words “new pensioners”, but since 1 January 2004, new entrants are on a contributory pension programme. Reductions in gazetted holidays may be seen as erosion of benefits. Lateral entry at higher levels, even in professional services, may not be welcomed. There are several such recommendations that may become subject to further negotiations between the government and employees before they are implemented.

At a conceptual level, the report fails to address the issues of service delivery. The incentive mechanisms are small: There is little to improve efficiencies or to punish inefficiencies. The running pay scales could be viewed by the public as yet another incentive for non–performance. Surprisingly, the Administrative Reforms Commission and the pay commission don’t seem to share views about improving processes and output measurement.

The report is, at best, a human relations exercise to keep the employees appeased in an election year.

One could consider it an opportunity missed to address fundamental issues in how the public services function, and to reward performance and castigate nonperformance.

Finally, it is not clear whether even at middle-management levels, the report will ensure loyalty and retention when compared with the incentives in the private sector.

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

The anti-designer

I like Margiela for many reasons. He is equal parts philosopher and designer.


My kids occasionally play this game called Where’s Waldo? I think of this in the context of my favourite menswear designer, Martin Margiela. Let me go out on a limb here: I think Margiela is the coolest menswear designer (he designs for women too) on this planet. If any of your friends are travelling to Europe, I would urge you to beg, bribe or threaten them into procuring — in order of preference — a pair of Margiela blue jeans, any of his cotton tank tops, his wool sweater made entirely of ski gloves and, finally, if you can afford it, the pants and jackets he designed when he was at Hermes. His clothes aren’t cheap. The blue jeans I salivate over retail for about $1,450 (around Rs59,000) in New York’s Meatpacking District. That’s a lot of money for casual wear.

I like Margiela for many reasons. He is equal parts philosopher and designer. His clothes are full of artful little metaphors about life, love and rock ‘n’ roll that are a challenge to uncover but keep your grey cells ticking all the same. He uses found and discarded items such as plastic caps, acrylic scarves and resins in his designs. Best of all, he purveys in discreet luxury. He is not a brand bombast. In other words, don’t bother buying a Margiela if you want the world to know. His logo — four little white pick stitches — is barely discernable, except by the cognoscenti. When he designed for Hermes, his menswear line was frequently lauded in what I considered excessive language. The most “perfectly cut pants on the planet”, said one fashion editor. Yet, he twiddled his nose at the fashion brigade by holding his shows at decrepit parking lots in the middle of nowhere. Imagine all those stilettoed magazine editors clambering over debris to see a fashion show.

The reason I admire Margiela is not only for his creative clothes, his thoughtful sentiments or his obvious distaste for the fashion bourgeoisie. My reason has little to do with clothes or designing. Throughout his career, which began in 1988, this Belgian has refused to be photographed or interviewed.

In the media-loving fashion world, Margiela is somewhat of an anomaly. No one knows what he looks or sounds like. Contrast this with Karl Lagerfeld’s antics with a camera, Dolce and Gabbana’s flamboyant excesses and Valentino’s dallying with Naomi, Cindy and Linda. Contrast this with the yachts, the drugs, and the drunk driving convictions. The best thing that the paparazzi can come up with about Margiela is his penchant for anonymity.

Not that journalists haven’t tried. Lots of people have tried to find and interview Margiela. He sends faxed responses to media inquiries signed “Maison Martin Margiela” as if it were some sort of socialist collective rather than a single individual.

Oddly, or perhaps fittingly, Margiela was inspired by Japanese designer Rei Kawakubo, whose layered clothes for Commes des Garcons range from avant garde to just plain weird. To me, Kawakubo is the queen of wackiness and I mean that as a compliment. Her clothes are so far out of the ordinary that they speak another language. Margiela, in a way, is a more wearable Kawakubo.

Unlike fellow Belgian Ann Demeulemeester, Martin Margiela is a deconstructivist, which is simply another way of saying that he worships all those construction details that the average tailor tries to hide. Seams are on the inside, right? Wrong. Margiela’s seams are visible; his armholes sometimes appear in front; he frayed his jeans long before they were the flavour of the decade.

Not all his clothes are so...what’s the word?...far out. As he has grown in cult status and gained in confidence that comes from being worshipped by fashion editors, he concentrates on cut. His latest clothes are all about cut and assemblage. He will take two vintage T-shirts and assemble them so that they appear made for each other. In terms of structure, his clothes look like what Einstein said about Mozart’s music: They look like they were always there. In other words, although they are startlingly original, they reek of the obvious, as in, “Hell, why didn’t I think of putting my clothes together in this fashion?”

Perfect cut is both a cliché and a myth in fashion. Everyone wants a “perfectly cut” suit, whatever that is; and most designers claim they are the masters of cut and silhouette. The bald truth, however, is that there is no one perfect cut that will fit all body types. A suit that looks fantastic on Kevin Kline, for instance, is going to look effeminate when Sly Stallone wears it. That said, there are some designers who change the paradigm; who make a chunky wool coat look like a light and flowing dress such as, say, Jean Dessès or Madame Grès. Kawakubo, even though I don’t understand or appreciate her clothes, did the opposite. She made flowing clothes appear like roughly hewn sculpture. Margiela seems like a happy medium. His pieces have the refinement of clothes but the spontaneity of art. Plus, you can wear them.

Can Inflation be tackled?

The tariff cuts will help edible oil prices, not pulses, cereals and vegetables

I think bewilderment, anger, frustration are all legitimate responses to the news that the provisional wholesale price index (WPI) jumped 0.5% week-on-week to 7.41% for the week ended 29 March. Meanwhile, the figure for the the week ended 2 February was revised to 4.74%, from the earlier 4.07%. The major rise has been in food, vegetables, cement and steel.

Bewilderment, because the Prime Minister (PM) recently said at a farmers’ forum that we cannot return to an era of “blind control” and depress the terms of trade in agriculture. It is said that farmers seek markets and employment, not subsidies, and that we must make farming more economically viable. I thought the huge farm loan waiver, the increase in fertilizer subsidies, the promise of rice at Rs2 per kg in Karnataka, the National Rural Employment Guarantee Programme, all indicated the opposite — more subsidies, more credit for the same unviable farms, income from “ditch digging”, keeping procurement prices low to the disadvantage of the farmer, etc. And all those who can “make farming viable” are with the PM, not among the audience which he was addressing — what are they going to do about it?

Anger, because this was foreseen several months ago. The Reserve Bank of India has been warning us at least for the last six months; global wheat price increases were known to the agriculture ministry for the last eight months, and the biofuel diversion even longer. Yet, we have no programme to increase supply. In Bangladesh, for example, after the devastation from floods last October, faced with galloping food price inflation, the government (an interim one, at that), swung into action. Seeds and fertilizers were provided for the boro rice crop that covers 70% of the annual production. Pesticide application was monitored. Even now, the websites show close monitoring of the crop, district by district, by the authorities. The crop is likely to be a record one, and rice price increases have already started to slow. But we still do not have clear information about the winter wheat crop. Will we import wheat or not? There simply have been no responses to tackle supply.

Finally, frustration, that the fiscal responses being announced do not touch the core of the problem. The tariff cuts will help edible oil prices, not pulses, cereals and vegetables. The export ban will help only if there is adequate supply. There is little evidence that corn has replaced wheat substantially as a result of demand for biodiesel, and certainly not the area under vegetables. The secondary price effects of increases in commodities, steel and cement are yet to kick in.

The problem is larger than made out to be. And it is tough to accept the government’s resignation that little can be done

Note that there is an eight-week lag before the initial estimates of WPI are firmed up—which has been ever upwards. So, even the current numbers are understated. The problem is larger than it has been made out to be. Perhaps we are expected to accept the government’s resignation that it is so ordained, and that interest rate hikes and tightening of liquidity are in the offing, and the slowdown of growth inevitable. But it is difficult to accept that very little can be done.

If food security is emerging as a major issue, surely this can be an opportunity to increase production, productivity and efficiency in agriculture. We can focus on seeds, fertilizer and pesticides even at high subsidies in the tradition wheat and rice belts. If in those areas, private sugar mills can provide inputs to farmers for better cane varieties, why can’t we do that for cereals? It is a decade since our scientists produced a new high-yielding variety suitable for our agro-climatic zones. Can we incentivize that? Can we focus on achieving cereal self-sufficiency in three years and implement all that is necessary? Remember, the same machinery performed during the 1970s and early 1980s. Agriculture has taken a back seat since the great reforms of 1991, and needs to be brought upfront.

The area under oilseeds is already growing very fast, and if we encourage organized retail, area under pulses and vegetables will, as well. These are crops best left to the private sector to encourage with any policy or tax concessions that they need. Another neglected area is fisheries and meat production. Farms to grow meat can be established where agriculture is not possible. The 1978 reforms in China started in agriculture, by making the farmer market-oriented and letting him sell his surplus in the open market. We have gone the other way, and are about to pay for the consequences.

At the other end, there is need to increase production of steel, cement and of all the minerals the country has reserves of. But our mining policy is caught up in knots. There is sufficient evidence, though inadequate exploration, of the riches that the subcontinent possesses, including diamonds and gold. It is up to us to exploit them.

India has been very good at crisis management. This is yet another crisis of supply and strategies need to be thought through and implemented. Instead of blaming the world and quoting international data, let us look at what we can achieve by ourselves.

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

Are you a rock worshipper?

Most people think that rock climbing is a very physical sport


I don’t climb much these days. But of all the outdoor sports I care about, rock climbing is the most accessible. And thrilling, which is a bonus. Watch any child clamber up rocks, and you will see how natural it is—this connection we have with rocks. Take it further: I would say it is an evolutionary link that harks back to the time when we sat in caves and pounded rocks into sharp spears.

I love rocks. Historians wax eloquent about the fact that they are three billion years old and have stood the test of time. But, for me, rocks are a supremely sensual exercise. Their craggy yet smooth texture reminds me of a man’s face before a shave. The undulating curves remind me of a woman’s hips. And no, I don’t swing both ways, contrary to what the previous sentence might indicate. Not that, as Jerry Seinfeld would say, there is anything wrong with that.

Most people think that rock climbing is a very physical sport. That it is. But it is equally a mental sport, although not in the ways you think. Superior climbers such as Lynn Hill or Harish Kapadia talk about strength, concentration and courage, to be sure. But they also talk about controlling the mind in a way that is more Eastern than anything else.

World-class climbers are intensely spiritual people. They talk about “listening to the rock” and using it as a guide in the climb. They use mantras, and believe that you have to “earn” a summit after investing in a climb and failing, sometimes many times. Above all, they talk about letting go and trusting the rock.

As any skier will know, in most adventure sports, proficiency increases when you relax and “go with the flow”. Sure, going with the flow is a cliché, but it is incredibly hard to achieve for most rational people who are used to thinking that improvement comes through more hard work, effort, thought and planning. For strategizers such as these, the prospect that you can get better at something by thinking less and letting go is a contradiction that doesn’t come naturally. The reason it works is because when you loosen up, your body’s deep-rooted instincts take over and show you the right way.

When I climbed rocks, my greatest advances came when I followed my instructor’s seemingly nonsensical advice. I remember scaling a modest 15ft rock as a beginner. I reached a point when I froze. Every climber has gone through this experience. I was a dozen feet above the ground and could see the sharp craggy plateau below me. I was panic stricken and breathless, or rather, I was holding my breath in panic. I couldn’t move. I couldn’t reach the next ledge with my hands and couldn’t do what Robert was saying from way below, “Push yourself up with your legs. Jump a little and grab the ledge above you”. Hell, no. I wasn’t jumping anywhere. It would involve a moment in time when I would be suspended in thin air without foothold or handhold.

“Bring me down,” I called. “I can’t do this.”

Yes, you can, came the voice from below. Loosen up a little. Breathe. Breathe, girl. Relax, and push away from the rock with your foot. You won’t fall. Trust the rock. Push away from the rock and jump towards the ledge above.

I rolled my eyes. What did Robert mean, trust the rock? All I could see were the sharp points below that would bash my skull if I fell.

You know what? It worked. After several deep breaths, I emptied my head of all the logical “no way this can work” thoughts and engaged in simple blind trust. This is what kids do. They don’t care about the future; they don’t see consequences with blinding clarity like adults do. I choose my words carefully.

Clarity is blinding sometimes because it tells you that certain things are not logically possible. Jumping away from a rock, for instance, is a sure way for gravity to work. Or so you think. What actually happens when you push away from a rock is that you fly upwards around the bulge to the next ledge. You grab it, and you are home free. You laugh with delight at conquering what you thought was impossible. And you are hooked for life.

Bangalore is blessed with fantastic rock climbing sites a mere 2 hours away in Ramanagaram, where Sholay (1975) was shot. Outdoor enthusiasts abound in this city, too. Thankfully, I have recently found an outdoor enthusiast who can factor in a key element in my current existence: kids. Most outdoor types are bachelors. They don’t have to deal with kids and their erratic schedules. To find a guy who can take not just me but also my kids rock climbing is like manna from heaven. Ramesh is just such a guy and his kids, it turns out, are around my kids’ age.

Even better. He will not hold it against me if I back out of a climb because of a child’s illness. He will not think me a wimp if I ask for a basic climb because I want to take my six-year-old along.

We went climbing at Savanadurga a few weeks ago: four families with lots of kids. Ramesh and Anand led the trek. Manish climbed with his baby on his shoulder, while the rest of us hobbled up a seemingly vertical cliff face. It was enervating and energizing. I can’t wait to do it again. The kids were the best climbers. They had a low centre of gravity and simply ran up the cliff while the rest of us pondered imponderables such as, “What if we fall?”

Shoba Narayan hopes to climb Duke’s Nose near Khandala next year. Write to her at thegoodlife@livemint.com

Ground reality is different

The difficulty with the ability to explain events after they have occurred is that it moves the problem from the real world to the conceptual one

Martin Wolf wrote on 28 May about the growth report of the World Bank, a product of eminent policymakers and economists headed by Nobel laureate Michael Spence, which has, after 100 seminars, two years and $4 million, concluded that very little is known about how to turn low-income countries into high-income developed countries.

The more economic reports and interpretations we have, the less will be seen on the ground

I have generally been of the view that economic theories and arguments do not get us anywhere in terms of delivery of development, and am more than happy with these conclusions. I am also happy with the corollary that the more economic reports and interpretations we have, the less will be seen on the ground and am, therefore, very glad to get back to my 40 years of administrative and real world field experience, to perhaps give me a sense and feel of what is happening.

Let us look at a few examples. We were told that the National Rural Employment Guarantee Scheme would solve the problem of unemployment and provide minimum entitlements. In many districts that I visited, the scheme is functioning efficiently — individuals have only to register at the appropriate government office and then turn up every month to sign the acquittance and collect half their entitlement in cash, the balance going to the pocket of the government functionary, who then takes care of the necessary record-keeping that public works have been done. In two places, I found factory workers (!) absent on a working day because they had gone to the tehsildar (revenue official) to collect their unemployment (!) benefits. There is definitely more money with the rural poor after this scheme, but it could have been achieved at much less cost. Administrators have been pleading for direct cash payments and subsidies to targeted beneficiaries for more than two years and it’s only now that some economists are turning to this point of view.

We were told that for infrastructure projects, a balanced concession agreement that would match benefits to government with private initiative would do. Several of us had commented that a revenue-sharing concession is good for the revenue sharers, but what’s there for the consumer? Who would guarantee quality of services to him? Three years into airport privatization, we experience the results whenever we take a flight (and not just from Delhi). In the search for the best agreements, the National Highways Authority of India has recorded the lowest performance in the last year in terms of completed mileage of national highways.

Finally, we were told last year that capital inflows were a very good thing and that a strong rupee reflected the inherent strengths of the economy and that we could manage the inflows. We are now told that a weak rupee is good for exports, for revitalizing manufacturing and adds value to inward remittances. We are also told that there is need to match the earlier government’s figures of inflation and since they had 8% some eight years ago, this government should also have the same, even improve upon it. These arguments are a bit confusing.

The difficulty with the ability to explain events after they have occurred is that it moves the problem from the real world to the conceptual one. The consumer and citizen, however, live in the real world and look for solutions that can be implemented. And it is in the real world that there are solutions which can very easily be implemented. Let us look at just three possibilities, in different sectors.

The first is efficiency of energy use. The consumption of diesel is climbing, substantially because the distorted pricing has made diesel prices lower than that of a poorer fuel, furnace oil, and industry with generators has switched massively to diesel. Then there is substantial diversion of LPG to automotive use. These are two areas of wasteful use that can easily be controlled to effect consumption savings in these fuels of, perhaps, almost 10%. Also, it is important that there should be some regimen of discipline in energy use — Japan improved energy efficiencies more than 30% after the 1973 oil shock. Can we think of cash or tax incentives to industries and commerce which reduce consumption and improve efficiency of use?

The second is food distribution. Wheat procured at Rs1,000 per quintal is being sold back to the same people at Rs2 per kg. Surely this is not good economics. At least one could move to smart cards and remove leakage. I have written this last time, but it remains the single most important delivery that is possible in a short time.

The third is some pause and clarity in the policies in financial markets. There is a bewildering array of interventions for and against external commercial borrowing, participatory notes, hedge funds, interest rates, etc. One gets the impression that policymakers have decided to give up on inflation and hope for growth. If so, why not give some pause to policy interventions and allow the markets and expectations to stabilize?

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

No need to raise rates

The attention, therefore, has now shifted to the Reserve Bank of India and the measures it will announce as part of its monetary policy statement on Tuesday

Almost one year back, I had written in this column that a future with oil at $100-plus a barrel, food shortages, and capital flows that we did not know what to do with would represent a failure of all our policies and our strategies. We are there now, with little evidence that circumstances are going to improve. We should see oil nudging $150 by end-year — I had suggested $200 by 2010, and that is still likely. The current wheat crop and the availability of rice may be a breather against food price inflation, but the balance is fragile, and with just one poor monsoon, there would be serious problems in foodgrain availability. As a consequence, the inflation issue will not go away.

As a country, we have not been very good at thinking long-term or even medium-term. At the same time, we have excelled in managing crisis, whether economic, natural disaster or external aggression. The crisis now is in management of inflation, since it is first a political issue and, of course, it affects the ordinary citizen, who is (surprise!) the voter. So, I am confident that inflation will be managed through fiscal and monetary interventions.

Some fiscal and policy measures have already been taken. The easing of tariffs for edible oils and pulses, coupled with reports of a good mustard crop, and of better than expected sowing of oilseeds. Other measures, such as the dehoarding exercise, the negotiations with the steel producers to bring down prices and the like, are the traditional weapons of the government, rusted, and of little value except in the media.

The attention, therefore, has now shifted to the Reserve Bank of India (RBI) and the measures it will announce as part of its monetary policy statement on Tuesday. It is likely that RBI may look at inflation data in three boxes: food, oil and other commodities. While food products, most importantly wheat and rice, are a function of domestic supply, and given that expectations of government stockpiling are likely to be met, it could be concluded that until the monsoon, there is no likelihood of any sudden spurt in food prices. At the same time, there is likely to be a concern over prices of imported commodities, and oil. These prices would be rising, given the robust growth of the emerging economies and the pressure on the dollar. RBI would probably report that inflation expectations are more serious than originally thought, and that the 7% WPI-level inflation is unlikely to go away for some more months, with decent successive harvests being crucial for tackling food price inflation.

There has also been the argument that the interest rate cuts by the US Federal Reserve have created large arbitrage opportunities waiting to be exploited in the Indian financial markets as soon as volatility goes down a little here and, therefore, interest rates need to be adjusted downwards. In the face of current WPI figures, this argument is unlikely to be pressed further for the moment.

RBI has already intervened by raising the CRR by 50 basis points to 8% to dampen inflation expectations. The CRR hike would help contain the second round pass-through effects of higher import prices, even though it can do little to affect supply-side influences from global commodity markets. The monetary tightening caused by the CRR hike will complement the fiscal measures already taken, in the form of reduction in customs duties.

Therefore, there is a good case for RBI not to increase interest rates further on 29 April — it has not raised interest rates since the repo rate increase of March 2007. At the same time, the policy statements on inflation are likely to be strong, so that subsequent monetary action cannot be ruled out. The focus of the policy could well be on liquidity management, rather than a hike in rates or currency appreciation.

Exchange rate management is likely to be less under pressure in the next few months, as the worsening of the current account deficit has been far slower than the growth in the merchandise trade deficit. There has been a significant growth in “invisible” flows that are accounted for by software and business services, as well as remittances by Indians abroad. The invisible surpluses are around 6.5% of GDP in 2007-08 ($78 billion) against 2.3% of GDP in 2000-01. This is likely to cross 7% of GDP in 2008-09, and will help check the worsening current account deficit due to higher oil prices. The RBI monetary policy review is likely to focus somewhat less on currency flows and appreciation this time.

Finally, RBI is quite likely to comment on the growing subsidies. In an election year, it is not possible for the government to pass on the increased costs of oil and commodities to consumers, and more outlays for food and fertilizer subsidies as well as off-budget oil bonds are likely. There is little possibility that the fiscal deficit of 2.5% of GDP promised in the last budget will be achieved, and it is certain that RBI would comment on the worsening fiscal situation.