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.

The basics for a recovery

We can put some things on track so the gains of the last few years are not lost. That’s possible despite coalition politics

The air is thick with information and counter-information about inflation. There’s trench warfare happening. No sooner does the government come out with yet another artillery barrage of actions than the Central Statistical Organisation says oops, and revises past inflation numbers upwards. To a spectator, it would be amusing if it were not so worrying, the sheer helplessness on display. And of course, the media and newspaper columnists (including me) love it all as it adds grist to their mill. In fact, one such column in a business paper argued last week that food price inflation was far worse in the Communist Party of India (Marxist) states than the Bharatiya Janata Party-ruled ones.

To begin with, some of the government’s reactions seem extremely short-sighted—such as the ban on commodity futures. The Abhijit Sen committee clearly said there was little evidence of any connection between trading in futures and inflation. The finance minister had set up the panel and in his 2007 Budget speech, had said he would abide by its recommendations. Evidently, the abundant supply of potatoes was known from the futures market several months before the crop hit the market; also that wheat prices had held in the futures, in the face of global rises. We now know the groundnut crop will be good three months down the line, that the mustard crop will be average, and so on. The futures market in agricultural commodities had emerged as a transparent, independent price discovery and supply availability mechanism—it’s been killed. With the threat of government action, steel producers reduced their prices, but their call to sort out issues of raw material prices and supply of iron ore has been ignored. The government warns of “administrative measures”, fully knowing these had earlier led to black marketing and hoarding with little benefit to either the consumer or the supplier.

External economic and market analysts, too, are increasingly commenting about the inept handling of the situation. I wrote weeks ago that current account inflows would start drying up —this is now happening. And, coupled with the hike in oil prices, the rupee is sliding against the sliding dollar, quite a feat in itself. These analysts are also concerned that this state of inertia may continue for some time, and that India, instead of being “the economy”, will be just one among many.

It is time to put things on track, so that the gains of the last few years are not lost. The good news is that food price inflation will be down, given the excellent wheat crop and adequate supply of rice. It is thus important that the next few months be spent in cleaning up the public distribution system (PDS) in the states. It is worth noting that the Left, which is so vocal about inflation, doesn’t look at the poor delivery of PDS in the states it rules. The one big opportunity afforded by the inflation problem is that of making effective the delivery of subsidized grains to the below-poverty-line group. In an election year, this would surely be popular. I have written earlier of several ways this can be done —now, with adequate food stocks, there is a chance to get it right.

This is also the time to address the manufacturing sector’s problems. Across industries, input costs are rising, either due to a rise in international prices, or due to a lack of capacity. Consider the chemicals industry. Process chemicals, required for a multitude of industries, from tyres to footwear to garments, are in short supply due to global demand. There are supply constraints in plastics and metals. Rather than Indian firms setting up capacities abroad, they can source these inputs at home, provided we ease the plethora of policy constraints on small and medium enterprises—which can then take the opportunity to create world class capacities. The problem is that only a small group of high-end firms are commanding the attention of both policymakers and the media.

Finally, this is an opportunity to get mining policies right. India is very rich in mineral wealth, a whole range from precious stones to base metals and their ores, but we have exploited very little of it. If we were just to concentrate on the steel, cement and aluminium industry, we can make India a major manufacturing hub. We need to learn from the 1980s, when the manufacturing sector sourced the latest technologies from the world: It is time to update technologies again.

Even for a coalition government, these are doable—this year. It is quite evident that next year, the government will have to find the means to pay plenty of unpaid bills for oil, fertilizers and food: Having taken that risk, it is important to get the basics right for a strong economic recovery once global fears subside. The worry is that the government seems to believe too much in the Gita, which says “leave all your actions and believe in me, and I will take care of the consequences of all your past actions”—we may, therefore, see no action at all.

Custom-made concerns

The demand for dollars to buy oil has been weakening the rupee against the dollar, and our trade deficit is increasing, with imports far exceeding exports

My niece Nithya, who is studying law in Mumbai, told me last week that though people had asked her to read my column, she found it difficult to understand. I promised to try to be simpler, for the Nithyas are the future of the country, not the bureaucrats or the economists, and they must be able to assess for themselves the rights and wrongs of events.

find that I look at contemporary economic events with a tinge of anxiety, out of concern that things should turn out right, and do try to make some suggestions for improvement. There are two important recent developments, and both need to be looked at from this point of view.

The first, of course, is the price of oil. We import 75% of our needs and with the price of oil having crossed $130 per barrel, we will be spending nearly Rs200,000 crore on oil imports alone. The demand for dollars to buy oil has been weakening the rupee against the dollar, and our trade deficit is increasing, with imports far exceeding exports. With substantial foreign currency reserves, this is of little concern in the short run, but it’s not sustainable unless there are huge capital inflows in the form of investments from abroad. Further, this price of oil should translate, if we include all the taxes, into a price close to Rs100 per litre of petrol, and we are paying far less.

The difference is being borne by the public sector oil companies and by the government, which is guaranteeing bonds issued by the oil companies in the market. The losses of the public sector oil companies will exceed Rs50,000 crore on account of this and they are finding it difficult to manage their working capital needs. Added to all this is the peculiar fact that there is a shortage in the production of LPG and diesel, for the private sector refineries are exporting products at high prices while the public sector companies have to supply to local markets.

There is need for an increase in prices of petrol, diesel, etc., and we should agree it is long overdue and must happen. There is strong argument for a petrol price increase of Rs10 per litre and we should be ready for it. It is important to keep LPG and kerosene subsidized, though with some upward revision in prices. The use of diesel to generate power to run commercial shops and air conditioners should be strongly discouraged—it should be used only for transportation. Some price increases are warranted here, but more seriously, a close watch on who is using diesel generators and why.

At the same time, there is need to dismantle the complicated tariff structure that petroleum products face. Central excise duties and state sales taxes should be reduced — if done carefully, the loss in revenues would be partially compensated by the rise in prices.

On customs duties, it is time to do away with them altogether. The option that the government is toying with, of reducing customs duties on crude to zero, will benefit all refiners, especially the private sector, and do little to the pricing. It is important to reduce product customs duties to zero. Finally, it is important to conserve energy — to use private vehicles for multitasking, to conserve use of LPG, power, etc. We all need to put our shoulders to the wheel.

The second development is the finance minister’s announcement of the details of the loan-waiver scheme for farmers. Simply put, it attempts to write off all the short-term crop loans of small and marginal agriculturists. The cost of the scheme exceeds Rs70,000 crore. Banks have been asked to write these debts off their books on a stipulated date.

There are two worries. First, for the farmers who have had poor crops, it is a relief, but leaves them no better off in terms of working capital for the next season. For those who have had a good crop and have been able to sell it in the market, it is a boon since it provides them a revenue flow which, if carefully used, can purchase inputs for the next agricultural season. Since there are more of the former than the latter, the benefits are short term.

The second worry is from the point of view of the banks. If they write off the dues from their books, they have lost the principal as well as the interest and are, therefore, poorer. Is the government going to compensate them, and if so, from where? If it is from the budget, that means additional borrowings from the market, and indeed, from banks whose liquidity has already been squeezed. One can thus expect a rise in interest rates of government borrowings, especially state government borrowings and oil bonds, making the costs of the borrowings higher. For states, the future appears to be again one of fiscal stress. For the Centre, there is a huge fiscal bill waiting to be paid by the finance minister in the new government next year.

However, if one looks at it, this is a short-term measure that will yield little long-term benefits. We will look at options next time.