Supreme Court to the rescue

A Mature democracy should work through political consensus, not judicial fiat. The fact that it took a Supreme Court directive for resident doctors to call off their 19-day strike is, therefore, disturbing. Conciliatory overtures by senior government functionaries had, clearly, failed to convince the doctors. That indicates a serious crisis of political legitimacy. The judiciary accomplished what was, by all accounts, a political task. Its emphasis that the patients’ right to be treated is paramount, and that it cannot be subservient to other concerns has, however, rightly delegitimised medical and paramedical workers’ right to strike. The doctors would have surely seen public support for their agitation wane if they had decided to persist in the face of such severe judicial injunction. It would, however, be ingenuous to attribute that solely to the high level of trust the higher judiciary enjoys. The threat of contempt of court certainly made the apex court’s directive more authoritative. Any which way, the sequence of events does not bode well for democracy. The political class should realise that suo motu judicial interventions to rectify such distortions is the consequence of political failure.
Continual disruption of existing social consensus, which has clearly happened in case of reservation, is integral to democratic evolution. But it’s for the political process to maintain dialogue between various constituents of society. It’s the job of the political class to mediate between various sections of society, and between society and the state. Lawmaking is meant to flow out of such engagement. The government failed to persuade the doctors to return because the latter could not trust the various promises made to them. There was clearly a gap between these promises and its subsequent moves. The subtly casteist terms of the current anti-reservation stir, which has sought to articulate genuine concerns, underscores a serious political failure. The political class has failed to evolve a politics that would make primitive social identities redundant. It’s time that changed.

--The Economic Times Editorial

Clouded Crystal ball

It's the season of mixed signals. Analysts in the US are unable to discern any definite direction from the minutes of the last Fed meeting, and, Indian investors are being confronted by falling markets and record gross domestic product (GDP) growth. This is not the only dilemma. Commodity prices too are the topic of intense debate. There is agreement that commodity prices have spiralled this year (even with the recent retracements), but no one knows for sure whether it is a bubble or just slightly-out-of-hand speculation on strong fundamentals. The US Fed too has left analysts unsure; the Fed thinks there is a possibility of inflationary pressures easing on account of cooling economic growth. To investors around the world, this means uncertainty about how long Fed rate hikes will last. The prospect of a seventeenth rate hike in June has already spooked global and American markets. An employment data report set for release on Friday is expected to give the Fed more food for thought.
What does all this mean for India? The answer is not too clear. The economy has recorded its strongest ever growth rate. Corporate earnings growth has been sound and along expected lines, price-to-earnings ratios too are not seen very much out of whack. But, the FIIs have pulled out almost $2 billion in May 2006. The shift of global liquidity to safer options like US bonds, redemption of emerging market funds, the expected change in the stance of the Bank of Japan and its impact on the liquidity fuelling the yen-carry trade, and India’s relative unattractiveness compared to other emerging markets have been touted as the prime reasons. Leveraged local positions have added pace to the decline. In the midst of all this is a report that Franklin Templeton Investments is launching a BRIC fund in the US; India is one of the ‘Bric’ countries. The fund is already available in Europe and the sobering thought is that the weightage to India is the lowest of the four countries. Amongst all these imponderables, volatility seems to be the only certainty.

-- The Economic Times Editorial

Amend Office of Profit bill

The objections that underpin President A P J Abdul Kalam’s decision to return the Office of Profit bill to Parliament indicate that the legislature has, in its attempt to amend the Parliament (Prevention of Disqualification) Act, 1959, failed to take certain crucial questions into account. That is unfortunate. It should have ensured a more foolproof piece of legislation. The fact that the bill was meant to be implemented with retrospective effect has not helped matters. It gives the impression that the sole aim of the MPs was to hastily open the escape hatch for some among them who suddenly found themselves in the middle of an entirely unprecedented and unnecessary row over offices of profit.The need to amend the 1959 law cannot, per se, be disputed, though. The Constitution clearly indicates that what constitutes an office of profit is amenable to change through lawmaking. The 1959 legislation is itself an example of how governments can make new laws to exempt as many offices as they deem fit.
The office-of-profit principle is meant to obviate an institutional conflict between the legislature and the executive, not to stop them from functioning efficiently. Various important executive offices should, in an evolving nation, be legitimately opened up to accommodate bearers of specialised knowledge among MPs, without, of course, diluting the principle that the legislature is supreme. That is precisely why legislative flexibility has been ordained by the Constitution on that score. It would, therefore, be unwarranted, to put in place, what President Kalam calls, “comprehensive criteria” to negatively identify offices of profit for an unspecified period of time since the criteria would keep changing. Such adaptability is, however, not an alibi for Parliament to respond to political contingencies in a partial and opaque fashion. But that is a political problem, which cannot be settled through legislation alone. It will dog lawmaking as long as there is no consensus in polity to play by the basic tenets of modern democracy.

-- The Economic Times Editorial

India Shining

The robust GDP growth figures announced on Wednesday indicates that the India story is still intact, though it might not feel that way on Dalal Street. GDP grew 9.3% in the fourth quarter of ’05-06 and by 8.4% in fiscal ’05-06 as a whole. A 3.9% growth in agriculture during the fiscal, rising to 5.5% in the last quarter, along with continuing strength in manufacturing and rapid growth in the services sector has resulted in the third consecutive year of 7% plus growth. In case of agriculture the low base effect (0.7% in ’04-05) has helped raise growth rates. Agricultural production has shown dramatic fluctuations in the last four years, ranging from -6.9% in ’02-03 to 10% in ’04-05. Indian agriculture remains afflicted by low productivity, with yields in paddy, for instance, lower than Myanmar. Raising the growth rate in agriculture to 4% is essential if a sustained GDP growth of 10% is to be achieved. That would mean increased public and private investment in irrigation and cold storages, introduction of new high-yield technologies and contract farming. The other problem area among the real sectors is mining, which grew only 0.9%. Here the governments needs to evolve a consensus to open up coal mining to private investors and make it easier for the latter to get leases for other minerals.
The government’s macro challenges are the current account deficit and rising interest rates. FIIs have been selling Indian equities over the past few weeks. This is alarming. Net equity inflows from FIIs were $10.7 bn in 2005, and helped finance the current account deficit (CAD). An outflow would widen the CAD. By some estimates it could reach 3.5% of GDP as imports rise and crude prices stay around $70. Not surprisingly, the rupee has been one of the worst performing currencies in 2006. The solution is to encourage more FDI by opening up sectors such as retail, insurance and banking. Rising interest rates, on their part, will dampen both consumption and investment, though imports will also slow down. On the fiscal front the impact of the seemingly unending series of spending commitments remains to be seen. With the current set of policies, GDP growth of 7% is eminently possible; 10% needs structural reforms.

-- The Economic Times Editorial

A Committee a day

Perhaps in his formative years at Gah, or later in college, Dr Manmohan Singh studied a subject called moral science and was taught that a sin of omission is worse than one of commission, and that not acting is on par with sinning! Which could be why the prime minister is determined that every problem should be addressed by as many commissions or committees as possible. The latest instance was the all-party talks on Kashmir where as many as five committees were set up to study everything from A for autonomy to G for governance! On the thorny issue of extending reservation without decreasing the number of seats available for open competition in institutes of higher learning, an Oversight Committee has been set up to take cognisance of what technical committees report on the feasibility of implementation. It need not take too long for Dr Singh to set up another panel to consider the agitating students’ demand for a judicial commission to evaluate the effectiveness of reservation.
Time was when President Harry Truman of the US had a sign on his desk in the White House saying, “The buck stops here.” Dr Singh would probably amend that to “A committee will decide where the buck should stop, assuming that another committee has decided that the buck should stop!” Dr Singh is not the first to realise the advantage of using committees to mothball a problem. Bureaucrats unwilling to take a decision, which could affect their career have played it safe by setting up committees to study the problem until it hopefully disappears on its own! In a 1960 edition of the New York Herald Tribune, columnist Richard Harkness defined a committee as “a group of the unwilling, picked from the unfit, to do the unnecessary”. And so what if, as the US diplomat Dean Acheson once quipped, the final committee report “is written not to inform the reader but to protect the writer”!

-- The Economic Times Editorial dated 31st May 06.

Perils of Abstraction

In MARCH 2005 private equity firm Warburg Pincus, sold $560 million worth of Bharti Televentures’ stock in 28 minutes on the BSE. This attracted world-wide attention, both for the money Warburg made and the maturity and depth of India’s capital markets. Indeed, in a series of further transactions Warburg made around six times its original investment in Bharti. Paradoxically, the fact that Warburg was able to exit so smoothly, with loads of cash, made India more attractive for private equity and other sorts of foreign investors to come in. What’s the connection between this, and the Left’s demand that capital gains tax should be reintroduced and the DTAA with Mauritius scrapped in order to regulate flows of what it considers to be hot money? Simply this; the distinction between what the Left calls speculative inflows of capital and FDI, is partly artificial. Conceptually, the distinction between FII and FDI is crystal clear. The former goes into secondary markets and flies out at the slightest hint of trouble. The latter goes into factories and buildings, and is thus considered stickier.
In practice, things are far less clear. The activities of FIIs and hedge funds have made Indian markets enormously liquid. This liquidity makes FDI easier. FDI does not only mean building new factories. Many foreign investors prefer buying into existing companies — Holcim taking over Gujarat Ambuja, or Oracle buying into i-flex. Wellfunctioning secondary markets also make it easier for foreign investors to exit with their profits thus, paradoxically, encouraging others to enter. The phenomenon of pre-IPO placements by institutional investors also blurs the distinction. In the case of Reliance Petroleum’s recent IPO, the company attracted Rs 2,700 crore of investment through such a quasi-FDI placement. Similarly, FIIs heavily dominate the 50% of public issues reserved for institutional investors. This doesn’t count as FDI as ownership keeps changing with shares being traded every minute. But the original money going into public issues is for project finance. A deep primary market is dependent on a vibrant secondary market, a phenomenon for which FIIs are largely responsible.

-- The Economic Times Editorial dated 31st March 2006

A question of service

THE government has, in the recent past, levied service tax on a number of financial services and intermediaries. Industry participants have mostly resisted such levies. However, not all such resistance is based on selfinterest. There indeed is a need to seriously evaluate the economic rationale and the purpose served by imposing service tax on financial services. This has to be done from the perspective of the investor, borrower and saver, as also from the viewpoint of maximising access to cheap, organised and regulated financial services. There is also the need to figure out the impact such levies have on existing regulations. The situation, especially in the mutual fund sector, underscores the need for such an exercise. Service tax has, over a period of time, been levied on various services used by funds. The tax is, therefore, paid for asset management, services rendered by the registrar and by the custodian. The imposition of service tax on fund distributor commissions had kicked up a storm. While that particular tax was compensated through an increase in the load, funds have been requesting the government to keep sovereign levies such as service tax out of the limits on expenses imposed on them by regulation. Reports, in the case of insurance, indicate that there still are some issues to be resolved vis-a-vis service tax on the risk component of premium and on insurance agent commissions. The imposition of service tax on interest, too, has reportedly been explored.
The impact of service tax on organisations and intermediaries is only one aspect. The increased cost of financial services is another. There is a need to evaluate the extent to which such taxation raises the cost of financial intermediation. Considering the low yields and spreads in the case of various financial instruments, such an evaluation becomes even more pertinent. This will also help bring further clarity on implementation of the integrated goods and services tax.

--The Economic Times Editorial dated 31st May 06.

Wholesale Recast

Group on Recasting of the wholesale price index (WPI) to include 1,200 items in the revised WPI series is welcome. It would assist in improving the measurement of inflation. Presently the WPI series, which consists of just 435 items, fails to capture the massive structural changes that have occurred in the economy over the last few years. Thus, inflation figures released every week do not reflect price movements in some crucial sectors of the economy. Inclusion of important items such as computers and television sets in the WPI series which have experienced enormous sales and falling prices in the last few years would not only make the series more representative but also keep inflation in check. Services account for 52% of gross domestic product (GDP) but the WPI series, which does not cover services, does not reflect this fact. The endeavour to develop a separate Services Price Index (SPI) covering a broad range of services is timely. With a progressive decline in the share of the primary sector in GDP and robust growth in the manufacturing sector, the proposal to assign a lower weight to primary articles and a higher weight to manufacturing seems logical. But the plan to increase the weightage to fuel and oil holds no ground.
Presently, fuel, power, light and lubricants (FPLL) makes up 14.22% of the index. This sector has experienced relatively higher inflation than manufactures and primary articles on account of spiralling international crude prices. But the overall inflation rate remains low. This clearly means that any attempt to increase the weight of FPLL would have minimal effect on overall inflation figures in the absence of concomitant hike in petroleum refinery product prices. The express need, therefore, is to expedite oil sector reforms rather then tinker with weightages. Currently, substantial underreporting of data by various trade bodies makes regular updating of prices difficult. This, in turn, depresses inflation figures artificially. Incorporation of better methods to collect information including greater use of IT would facilitate improved estimation of inflation.

-- The Economic Times Editorial dated May 30th, 2006

Let 34 IITs bloom!!

It's time India built more, many more, IITs. Seven IITs for an economy that intends to sustain its current annual growth rate of 8%, and even improve on it, is dismally meagre. The government should immediately draw up a comprehensive national project to build at least one IIT in each of India’s 28 states and six union territories. It could, for one, give the indomitable E Sreedharan of the Konkan Railways and now Delhi Metro fame, overall charge of the project. That would put it in mission mode. There’s, of course, the little matter of financial resources. Setting up an IIT would require upwards of Rs 2,000 crore. The government should evolve ingenious programmes of public-private partnership, and the required political consensus, to accomplish such an ambitious project. India produces 200 technology specialists for every one million of its population each year as opposed to the US, which produces 750. India has already cornered a large slice of the services pie outsourced by the developed world. It must repeat that feat in manufacturing. More IITs and quality engineering colleges would help the nation accomplish that.
Speed cannot be a euphemism for haste, though. The HRD ministry has reportedly been trying to push through the first batch of students for the two premier Indian Institutes of Science Education and Research (IISER) in Kolkata and Pune by July 2006. The two IISERs will, for the time being, be run out of makeshift campuses, and on borrowed faculty. Such alacrity is counterproductive. Rapid expansion of higher and technical education must be accompanied with pedagogic and curricular reform. IITs, today, are factories churning out engineering graduates. Their distinguished masters and research programmes are in a shambles. That is unfortunate. Engineers deliver more efficient and humane solutions when they can account for an ensemble of technical, economic and social concerns. Post-graduate, and doctoral programmes in basic and human sciences were instituted in IITs to foster precisely such an interdisciplinary approach. Consolidation of that paradigm must be integral to setting up new IITs.

-- The Economic Times Editorial dated 30th May 2006