Why India is not a great scientific power

V. N. MUKUNDARAJAN

Let us bring up a generation that will not hesitate to ask inconvenient questions. This generation will be the torch-bearer of a scientific revolution

The economic growth of the last one decade has prompted Indians to nurse ambitions of achieving the status of a great and exceptional power. The size of the GDP is important, but it alone cannot guarantee that India will be recognised as a world power. It is the robustness of scientific research and innovation that sets apart great powers from the mediocre ones.

We have good scientists, but why has India not produced outstanding scientists who make path-breaking discoveries that will make the world sit up and take notice? Should we continue to be satisfied with tweaking borrowed technologies? Is reverse engineering an innovative phenomenon?

All debates about scientific research inevitably end up zeroing in on the deficiencies of our educational system as the root cause of the abysmal record in scientific research. This is only part of the story.

A nation’s culture — belief systems, values, attitudes — plays a significant role in determining the quality of scientific research. The Oriental attitudes differ from the Occidental values in many respects. Asian societies are basically collectivist, that is, the collective good of society ranks higher than individual happiness and achievements. People do not ask what they can do for their country; they are always asking what the country will do for them. They look up to the state for guidance, leadership and direction. There is no burning individual ambition to excel and achieve something new.

In the West, individuals try to achieve their potential through their own efforts, aided and facilitated by enabling laws and institutions. Self-reliance is the key objective of life. An independent life requires a free and questioning mindset that takes nothing for granted and constantly challenges conventional wisdom. Children are encouraged to push the frontiers of knowledge by self-examination and open-minded enquiry. It is only a sceptical and dissenting mind that often thinks out of the box to explore new vistas of knowledge.

Collectivism promotes conformism and deference to authority whether it is parents, elders, teachers or the government. It is heresy to question established values and customs.

We pass on our passivity and uncritical attitudes to our children. No wonder, the educational system encourages rote learning and unquestioning acceptance of what is taught in the classrooms and stated in the textbooks. How can we expect our children to suddenly develop an enquiring and inquisitive attitude when they have been brought up in a milieu that discourages ‘disruptive’ thoughts?

India and China were once advanced nations before foreign rule drained their resources and sapped their willpower and scientific traditions. Cultures tend to become conservative and defensive when subjected to long spells of colonial exploitation.

Indians are great believers in destiny. But our tradition does not frown upon free will and individual excellence. We must realise that our ability for free action remains unhampered despite what destiny may hold in store for us.

FEAR OF FAILURE

Another flaw in our culture that prevents individual excellence is the fear of failure. The stigma associated with failure makes our children risk-averse while choosing their courses and careers.

Scientific research is a long-drawn war on received wisdom that requires many battles before it can be won. Science was not built in a day. Some of the battles can end in defeat. In the West, they celebrate failure as a stepping stone to success.

Educational reforms must be preceded by mental deconditioning of parents, teachers, educationists and policymakers — throwing away the cobwebs of uncritical submissiveness to conventional knowledge. Let us bring up a generation that will not hesitate to ask inconvenient questions. This generation will be the torch-bearer of a scientific revolution that will unleash cutting-edge research to make the Nobel Prize committee sit up and take notice.

We have nothing to lose except our passivity and fatalism. Let us not wait for things to happen. Let us make things happen.

(The writer’s email ID is vnmukund@gmail.com)

http://www.thehindu.com/opinion/open-page/article2704625.ece

Intervene in dam issue, Krishna Iyer urges PM

Kerala should harden its stand on the demand for constructing a new dam: Justice Kurup

The former Supreme Court judge, V.R. Krishna Iyer, on Saturday urged Prime Minister Manmohan Singh to take the initiative to resolve the Mullaperiyar issue.

Addressing a press conference here, he said the Mullaperiyar dam had outlived its lifespan. The precautionary principle in the Rio de Janeiro Declaration on Environment and Development of the United Nations Conference on Environment and Development, to which India was a signatory, was applicable to the dam.

As per the principle, if there was a suspicion or a probability of an irreversible damage being caused to the environment, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation. He said the authorities should act immediately to save the people living downstream of the dam.

“MUTE SPECTATOR”

Justice Iyer said Dr. Singh remained a mute spectator. The Prime Minister should take the initiative to resolve the issue. He also urged the Chief Ministers of Kerala and Tamil Nadu to try to settle the issue amicably. Justice Iyer said he had written to the two Chief Ministers on the issue. He took exception to Tamil Nadu reportedly denying entry to Water Resources Minister P.J. Joseph to the dam site. In his letter to the Prime Minster, Justice Iyer said it was an “outrage and defiance” of the right of the Minister to visit that portion of the dam which was lying in Tamil Nadu.

ALARMING SITUATION

The former Acting Chief Justice of the Madras High Court, K. Narayana Kurup, who was present at the press conference, said Kerala should harden its stand on the demand for constructing a new dam in view of the alarming situation caused by recurring tremors and poor condition of the dam. The principle of precaution applied to the Mullaperiyar dam. He said clausula rebus sic stantibus in the international law would apply to the dam. The clause gave one of the contracting parties the right to repudiate the treaty at any time without the risk of any legal consequences if there was a fundamental change of circumstances. Justice Kurup said that as per the clause, the Mullaperiyar agreement would “stand abrogated” or “repudiated” in view of the recent developments on the dam structure.

He said the dam had developed cracks and there was a strong possibility of it getting breached, posing a threat to the lives of 35 lakh people living downstream the dam. So this international clause could be invoked.

Justice Kurup said the State government should bring this clause to the attention of the Supreme Court. He was of the view that precautionary actions needed to be taken.

The century-old dam could not be repaired now. The only precautionary action was to decommission it and construct a new dam. Nobody was against Tamil Nadu or its people or against sharing of water with the State. If the dam was breached, Tamil Nadu would also be affected as its five districts would turn barren.

Justice Kurup said all parties should forget their political differences, bury the hatchet and strike a beneficial deal for the welfare of lakhs of people in both the States.

http://www.thehindu.com/news/states/kerala/article2704674.ece

Towards Af-Pak anarchy

C. Raja Mohan

An international conference in Bonn this week, attended by nearly 100 nations and international organisations, sought to create the conditions for an orderly Western military retreat from Afghanistan and ensuring the international community’s continued support to the government in Kabul after 2014.

That the conference ended in a whimper, thanks to its boycott by Pakistan and the Taliban, is hardly surprising. Both the Bonn conference and the one in Istanbul that took place last month were based on the assumption that diplomacy can ensure a successful political transition in Afghanistan.

Three problems with this approach have begun to destroy the widespread international illusions about a negotiated settlement to the Afghan conflict. The first is about the timing. The current international diplomatic effort is taking place at a time when the weakness of the United States and its allies is manifest and the domestic support in the West for a long-term military involvement in Afghanistan is fast eroding.

It would be naïve to believe that the US can win at the negotiating table what it could not secure on the battlefield after a decade-long intervention in Afghanistan at the cost of much blood and treasure.

That the West turned to diplomacy in Afghanistan was in itself an acknowledgement of the failure of its military plans to consolidate the post-Taliban political arrangements in Kabul that were outlined at the first edition of the Bonn conference a decade ago. Diplomacy can be a useful complement to the successful application of military power. But it cannot be a substitute for military victory.

A second set of problems relates to the expectations that the Taliban can be induced to negotiate a reasonable political compromise on the political future of Afghanistan. Having earlier underestimated the resilience of the Taliban, which enjoys the Pakistan army’s support, Washington and its allies are now negotiating from a position of weakness.

The American military leadership argued that with sufficient time and resources it could whack the Taliban into suing for peace. That does not, however, fit in with President Barack Obama’s political calendar and the growing exhaustion in the US Congress with the Afghan war.

The leaders of the Taliban, meanwhile, had chosen to kill former president Burhanuddin Rabbani, Kabul’s principal interlocutor for negotiating a political reconciliation. That revealed the Taliban’s “commitment” to a “peaceful resolution” of the civil war.

The history of civil wars in our age reminds us that they are not easily amenable to a negotiated compromise. More often than not, civil wars end in the victory of one party over the others. The Sri Lankan conflict is the latest example of that trend-line. In Afghanistan, the Taliban and its supporters think time is on their side and victory will soon be at hand.

Third, diplomacy can succeed only when the divergence of interests between different parties to a conflict is bridgeable, and there is room for finding win-win solutions to all. In Afghanistan, what we have instead is a zero-sum game. Few can deny the fundamental incompatibility of the goals of the international community with those of Pakistan in Afghanistan. The world says it wants a strong and centralised state in Afghanistan. Pakistan, in contrast, wants a weak state in Afghanistan that it can control. The international community is willing to live with a moderate Islamic state in Afghanistan that is tolerant of sectarian diversity within the nation and does not export its ideology to the rest of the world.

The Pakistan army’s instruments for influence in Afghanistan — the Taliban and the Haqqani network — espouse a radical and intolerant variant of Islam and are in alliance with international groups that seek to spread their influence through terror.

On the face of it, these powerful contradictions between the international community and Rawalpindi can only be resolved when one side makes significant concessions. For the US this means either leaving Afghanistan at the mercy of the Pakistan army or turning up military and economic heat on Rawalpindi in order to change its strategic calculus.

Rawalpindi is betting that the US and Europe do not have the stomach to follow the latter course. The Pakistan army chief, General Ashfaq Kayani, appears to have convinced himself that the West will have to quit Afghanistan sooner than later, and will need his support for a safe military passage out of the region. Kayani has ordered the civilian government to review the entire gamut of the bilateral relationship with the US as he enforces a blockade of the international forces in Afghanistan, whose most important logistical line runs through Pakistani territory.

Meanwhile, Washington is in two minds. The Obama administration understands that the Pakistan army is part of the problem in Afghanistan, but is unwilling to follow through with the consequences of such an assessment given its dependence on Rawalpindi for conducting military operations.

As a result, Washington will continue to oscillate between trying to finesse the Pakistan problem and confronting it head on. That the US has a weak hand does not mean Pakistan is about to prevail in Afghanistan.

Rawalpindi’s boldness in confronting the US is indeed impressive. But Kayani’s ability to control the events in Afghanistan might be rather limited. The Pakistan economy is in doldrums, the civil-military relations are in a shambles and Rawalpindi’s attempts to negotiate with the militant groups fighting the Pakistani state are going nowhere.

Meanwhile, the sectarian rivalry between Shia and Sunni extremist groups that has entrenched itself in Pakistan and gained ground in the Middle East amidst the deepening conflict between Saudi Arabia and Iran has begun to envelop Afghanistan.

As Washington dithers and Rawalpindi overreaches, India cannot bet on international conference diplomacy of the kind we have seen in Bonn. Instead, New Delhi should brace itself for anarchy and civil war in the north-western marches of the subcontinent as we approach 2014.

The writer is a senior fellow at the Centre for Policy Research, Delhi, express@expressindia.com

http://www.indianexpress.com/news/towards-afpak-anarchy/885599/0

The ore issue

The Justice M.B. Shah commission that was tasked with looking into the illegal mining of iron and manganese ore, in its first interim report, has suggested a ban on exports of the ores in order to conserve the minerals for posterity. The commission is of the view that the mining mafia is plundering natural resources and making “unimaginable profits” and could use this money to influence state policy. A ban, “till things are streamlined and illegal activities controlled”, would help the growth of steel plants and generate employment for locals.

However, the very idea — as endorsed by various political parties since the Karnataka mining scam — that captive mining licences be given to steel plants for converting the ore into steel and thereby increasing profits and tax revenue, is based on an incomplete understanding of mining best practices. This argument, like the Justice Shah commission’s report, conflates the two issues of illegal and commercial mining. While it’s true that commercial mining, with its eye to profit, prioritises exports, how else would the mining sector get the resources necessary for investment in technological upgrade and good extraction practices? For example, in 1980, India had 11.5 billion tonnes of iron ore reserves as compared to Australia’s 15 bn tonnes. In 2005, India had 13.8 bn tonnes while Australia had shot up to 40 bn tonnes. Without the technology and expedient that professional firms bring, mineral resources cannot increase substantially because capital investment cannot be made in new explorations and existing mines.

A mining firm needs to manage its existing mineral resources so that the mine can work for years and also find new deposits. This entails more intensive mining since new deposits are not easy to come by. It isn’t anybody’s case that minerals are not finite and mines will not get exhausted eventually. But measures like an outright ban on exports miss the heart of the problem and fly in the face of acceptable trade practices. Resources cannot be preserved and harnessed by preventing them from going to end-users abroad. Rather, the effort should be to ensure the mining industry gains in productivity and resource optimisation while law-enforcers take care of illegal mining.

http://www.indianexpress.com/news/the-ore-issue/885604/0

100% FDI in single-brand retail coming, but with new riders

NEW DELHI: The government is likely to allow full foreign ownership in single-brand retail stores, even as it may introduce some riders to avoid a repeat of the furore over its twin proposal to permit the entry of multi-brand global retailers into the country.

An official told ET that while the government had announced suspension of its move to ease foreign direct investment norms in multi-brand retail, it is pressing ahead with its decision to remove the cap on foreign ownership in single-brand stores.

“The statement in Parliament is very clear and there was no mention of linking it to FDI into single-brand sector,” the official said, referring to Finance MinisterPranab Mukherjee’s statement in the Lok Sabha earlier on Wednesday.

“The decision to permit 51% FDI in multi-brand retail will be suspended till a consensus is developed through consultations with various stakeholders,” the minister had said after the all-party meeting that had been called to break the logjam in parliament.

The department of industrial policy and promotion, or DIPP, is already finalising the press note to give effect to the November 25 cabinet decision to remove the cap of 51% foreign direct investment in single-brand retail, the official said.

This will allow foreign retailers such as Marks & Spencer and Zara complete ownership of their Indian stores, besides facilitating the entry of others like Ikea and Gap that have been reluctant to form partnerships with domestic retailers to set up stores in the country.

However, the official added, the government may introduce some riders to avoid repeat of the furore over easing of norms in multi-brand retail. “Some changes may be incorporated to avoid opposition of any kind. We do not want a repeat of the multi-brand fiasco,” the official said.

These riders may be in addition to the stringent conditions already approved by the cabinet. Foreign investors are already required to own the brand they intend to retail, the brand must be present in other countries and the retailer must source 30% of the products to be retailed from small industry.

The final policy may increase the local sourcing requirement from the current 30%, while specifying that the condition will not apply to high-tech goods that small industry cannot manufacture.

The government has defined micro and small enterprises as those which have assets of less than 5 crore.

“There is no study to show how much domestic big retailers source from the Indian market,” said Anil Bhardwaj, secretary-general, Federation of Micro, Small and Medium Enterprises, adding, “It could be as high as 70% for all we know and, if that is true, then the 30% requirement is very low.”

According to government data, many foreign firms had opted to stay out due to the 51% cap on ownership, which probably explains why just 196 crore has come in as FDI in the sector over the past three-and-a-half years.

While multi-brand retailers such as Walmart and Carrefour will have to wait before they get access to India’s $400 billion plus organised retail market, the government hopes the provision of full ownership in single-brand retail will bring in much-needed foreign investment.

http://economictimes.indiatimes.com/news/news-by-industry/services/retailing/100-fdi-in-single-brand-retail-coming-but-with-new-riders/articleshow/11027756.cms

Amend the EPF Act to allow workers to migrate to NPS and earn higher returns

The Employees’ Provident Fund Organisation (EPFO) is likely to offer a return of 8.25% this year against 9.5% for 2010-11. This fits in with its poor track record of managing workers’ savings. It is the right time for the government to start winding up the EPFO by allowing workers to voluntarily migrate to theNational Pension System (NPS) that generates superior returns.

In the last two years, the average return from NPS, which manages pension funds of civil servants who joined service after January 2004 and, later, of voluntary individual subscribers, was 11.88%. Last year, the EPFO paid 9.5% after it discovered an accounting error that left the Fund with ‘hidden’ reserves. Consider two savers, each with a deposit of Rs 5 lakh, one with the NPS and the other with the EPF.

If the two saving systems maintain their last year’s savings rate for the next 15 years, the NPS subscriber would end up with Rs 7,42,466 more in his kitty than his hapless EPF comrade. This does not take into account fresh accruals on which the power of compounding would also work its magic. Nor can the EPFO discover hidden treasure in its accounting wilderness every year, making 9.5% impossible from investing in special deposits that earn a fixed interest of 8%, and PSU and government bonds. EPFO trustees look upon stocks as poison, leaving pension funds from other countries and the NPS to profit from India’s stock market.

Exempt trusts – provident fund trusts run by private firms – are also forced to follow the same investment pattern. Surely, the EPFO’s corpus, at over Rs 3.8 lakh crore, is large enough to be diversified across asset classes and both generate high returns and minimise risk. EPFO as well as exempt-trust subscribers deserve the option to migrate to the NPS, select their fund manager and choose one of the three plans, with varying exposure to equities.

Its secure accounting, sound regulation and seamless portability will encourage workers to save and build a decent retirement nest. The government should amend the income-tax law to bring the tax treatment on NPS at par with other longterm savings instruments.

http://economictimes.indiatimes.com/opinion/opinionshome/897228639.cms

UPA’s multiple dysfunctions created the perfect FDI storm

NEW DELHI: The government’s decision to suspend opening up of India’s retail sector to foreign investors, 12 days after it was announced with much fanfare, marks a new nadir in the fortunes of the second UPAgovernment. Optimists, and there a few, think retail FDI could play out like the nuclear deal, where it was initially put on hold after the Left objected, and later revived.

But the second avatar of the UPA appears to be difficult from the previous one, a number of ministers in the current government said, with key players often working at cross purposes. The ministers, as well as several politicians, both belonging to the Congress and the government’s allies, largely spoke on condition of anonymity.

The fiasco has highlighted what was till recently only whispered about – infighting in the cabinet and a rapid diminution in the authority of the Prime Minister,Manmohan Singh. Barely 24 hours after the cabinet meeting, for instance, senior ministers from the ruling and allied parties were expressing their reservation about the move, some openly. It soon became well known, for instance, that defence minister AK Antony and rural development minister Jairam Ramesh were opposed, though neither have spoken in public.

PROBLEMS AT THE TOP
But the discord, according to the ministers and a number of political leaders, is not restricted to the cabinet. According to a number of people familiar with the matter, equations between Sonia Gandhi, the Congress President, and the man she appointed as Prime Minister more than seven years ago, is no longer what it used to be.

“The Congress is like a three-legged animal, with each being pulled in different directions. So, if there is one section that is toeing Mrs Gandhi’s line, there is another that appears to have Rahul Gandhi’s mandate. And a handful of people supporting the PM,” a cabinet minister said.

Sonia Gandhi’s illness has been a complicating factor.

“Who is in charge here? Sonia Gandhi is distracted with her illness and she is no longer as hands on as she was during UPA 1. Rahul Gandhi is a landlord in absentia – his interventions are few and far between and he keeps himself away from the government mostly. That leaves the Prime Minister whom his own party members don’t take too seriously. His authority is constantly challenged ironically not as much by the allies but by Congress cabinet ministers. And it doesn’t help when the PMO is perceived to be playing games with various ministers,” another senior UPA minister says.

“This term of the UPA has killed the spirit of doing business in India,” a top industrialist told ET. “It’s not just an activist judiciary, an out-of-control law enforcement agencies but also other issues such as inflation. Who can do business with interest rates at 16%? This government has some outstanding, bright individuals but nobody is willing to do anything,” the industrialist says.

The division in the cabinet has not helped.

“The FDI in retail is a classic example of how the PM was let down by his own cabinet. Which of the powerful ministers came out in strong support? Not because in principal they didn’t support it but because they are upset and disillusioned by the PM,” says a minister belonging to a party allied with the Congress.

According to this person, Chidambaram feels let down by the PM as he feels the Prime Minister’s Office has not been particularly helpful at a time when he is under relentless attack from Subramaniam Swamy, the maverick politician who has petitioned the courts seeking resignation of home minister, who was finance minister in 2008 when a set of controversial telecom licences were issued by A Raja, the former telecom minister.

A controversial note from the finance ministry, which appeared to partly blame Chidambaram for failing to prevent the scam, has not helped matters.

“It later emerged, of course, that the finance ministry was forced to write this by the PMO and Pranab was quite upset by how he was made to look in all of this for no fault of his,” the minister says.

One cabinet minister also points out that Kapil Sibal, the telecom and HRD minister, who till a few months ago did a fair amount of fire fighting for the government, kept mostly silent during the FDI debate as he feels he went out on a limb opposing the popular anti-corruption campaigner Anna Hazare, with little backing from the party.

Government officials say an attempt was made by the Congress high command to bring in order by appointing Pulok Chatterji as the PM’s principal secretary. Chatterji comes with the formidable reputation of being a professional, low profile and no- nonsense bureaucrat. He has an onerous task at hand, say people in the know, with the relationships between some of the most powerful cabinet ministers at an all-time low.

WALKING INTO DISASTER
Landmark legislation and reforms initiated by the UPA have had one characteristic. With the important exception of the nuclear deal legislation such as NREGA – which provides 100 days of guaranteed employment – and the proposed Food Security Bill have been personally been driven by Sonia Gandhi. The government’s role has been to implement the party’s wishes.

In case of multi-brand retail it was different, with the Prime Minister driving the initiative. The government had to sell this idea to the party once the core committee took a view.

“In other cases, the decision or a policy is moved by the Congress or Mrs Gandhi like the food bill. In this case, it was led by the PM along with industry minister Anand Sharma initially. Finance minister Pranab Mukherjee lent his weight to it, only after the core committee gave its nod.” The Congress core committee consists of Mrs Gandhi, the PM, and some of the top cabinet ministers.

But the core committee’s support proved to be not much help as the opposition remained relentless and in-house dissenters, including a number of MPs from poll-bound UP, failed to fall in line.

BLAMING SHARMA
Many blame industry minister Anand Sharma for the fiasco.

At the cabinet meeting, Sharma is said to have given the impression that Mamata Banerjee, the West Bengal Chief Minister, was on board. “I have spoken to her,” he informed ministers when faced with opposition from those belonging to her party. “But speaking to her and getting her on board are two different things. The impression that was given was that she was on board,” another senior cabinet minister says.

Says Dinesh Trivedi, the railway minister and TMC’s sole cabinet member: “The cabinet is like King Arthur’s table where everyone is equal with the PM presiding over it.”

The TMC had made it clear that it would not support the move and the government could have avoided embarrassment if the voices of dissent were taken more seriously, he said.

When asked if the TMC had not changed track mid way since commerce minister Anand Sharma claimed to have had consultations with Mamta Banerjee, another TMC leader said that “it is one thing to apprise a party on a decision and another to have it ob board”. He may have gone and spoken to the TMC leader but there was no consent to the move, he said.

Law minister Salman Khurshid told ET that the government was “disappointed that such an outstanding measure was being seen with cynicism”. On being asked whether he concedes that the handling of the situation left a lot to be desired, Khurshid said, rather diplomatically, that “in hindsight it would have been more comfortable for us if our allies had come on board earlier”.

A Congress party member says Sharma was the wrong choice to hard sell the proposal. “First, he didn’t even bother to sell the idea to his party men, forget about allies. The result being that a lot of Congress members were doubtful about the move given that elections in key states are next year. Uttar Pradesh was a big factor – how we could explain the benefits of this policy to the farmer in such a short span of time. Our opposition in the state had already made it into an anti-farmer issue and we weren’t sure how it would have gone down there,” the person says.

“This government is being run by Rajya Sabha people some who haven’t even been municipal commissioners,” says a Congress leader sarcastically. The criticism would apply to the Prime Minister, who is a Rajya Shabha member.

Several Congress ministers say it was a classic case of bad presentation. “The policy should have been pitched as a special power that states were going to be given to avail foreign investment in infrastructure and retail if it so desired.

Instead, we pitched it like some central law,” says a senior cabinet minister. “And what was the point in announcing it late at night to the media without bothering to inform political parties during Parliament session? Mamata should have been taken on board and the opposition should have been spoken to. Instead the government was in such a hurry to show that it was not in a state of paralysis that it ignored ground realities,” the minister says.

FM THE LONE POLITICAL MIND
Political leaders across party lines are surprised and non-pulsed about how the finance minister became a part of this mess. The FM is amongst the few political leaders in the cabinet who is perceived to be in command of the political situation. “It is an embarrassment when he is forced to suspend a decision; He is the only person who could get all the political parties to agree on giving up the adjournment motion saving the government from further setbacks,” a cabinet minister said on conditions of anonymity.

Finance ministry officials say that the ministry has always supported FDI as it would bring in much needed capital and technology that would create jobs. The timing depends on the parent ministry, the ministry says.

http://economictimes.indiatimes.com/news/politics/nation/fdi-in-retail-upas-multiple-dysfunctions-created-the-perfect-fdi-storm/articleshow/11027703.cms

Zones of scepticism

Ila Patnaik

This week the eurozone will attempt to find a solution to the deepening banking and fiscal crisis. Many believe that liquidity provision may provide a short-term solution, but the deeper problem of solvency of many governments will remain. There is often a strong overlap between borrowing by governments and lending by banks. This relationship has a long history in India. In the light of the problems of Europe, it is important to look at this intimate connection with fresh scepticism, and worry about distancing bank assets from government bonds. Holding risk-free government bonds, a practice Basel norms encouraged for banks, has, as it has turned out, encouraged governments to borrow imprudently.

The simplest lending by banks to governments is through “financial repression”. Financial repression is when the government usurps powers of financial regulation. The government, or the regulator, then classifies its own bonds as risk-free and forces banks and other financial firms to buy these bonds. In India, 24 per cent of all bank assets are required to be held statutorily in liquid assets, that is, government bonds under the SLR (statutory liquidity ratio) requirement. In the case of employees provident funds, this can go up to 100 per cent of all assets. The financial system is able to collect household savings from across the country, and deliver them as cheap lending to the government.

This makes it easy for the government to run large deficits and to build up debt, without the disciplining constraint of facing a bond market. In India, we are constantly up against a government that borrows too much. We have tried disciplining the government by enacting the Fiscal Responsibility and Budget Management Act. This did not deliver results. On an international scale, fiscal responsibility legislation is not the main roadmap by which any country has achieved fiscal prudence.

Effective fiscal prudence comes from ending financial repression. It requires modifying financial regulation so that financial firms are not forced to buy government bonds. When a government wants to borrow, it should run an auction, and nobody should be forced to lend to the government.

Once investors are voluntary participants in the market for government bonds, they exert market discipline upon the government. When the government is profligate, investors get nervous about whether the government will be able to repay in the future. A government may cheat in the future in two ways. It might either explicitly default. Alternatively, it can ignite inflation, debase the currency, and thus defraud the bondholders who are repaid Rs 100 in full but the rupee is worth less.

People who lend to the government voluntarily would constantly look at the government, and make a call for what interest rate they require in return for taking the risk of lending to the government. When a government is in a fiscal danger zone — as India has done from the early 1980s onwards — the bond market would witness higher interest rate, and thus exert pressure upon the government.

This first element of the story is well understood. The world over, fiscal/ financial/ monetary reforms have been undertaken focused on two subjects: cutting off monetisation (the purchase of government bonds by printing money) and cutting off financial repression (the forced purchase of government bonds by financial firms). India is a laggard by world standards in continuing to run a system rooted in financial repression. Looking forward, putting an end to financial repression is a major pending item in Indian economic policy reform.

The second element of the story is new: this is the soft version of financial repression that was built by the Basel Committee on Banking Supervision (BCBS) at the Bank from International Settlements (BIS) from 1988 onwards. The BCBS sets international standards for how bank regulation is done. With the benefit of hindsight, we now know that there were major mistakes in what BCBS/BIS did.

The international standards which were established by BCBS/BIS claimed that bank investment in government bonds of OECD countries was risk-free. While some economists strongly criticised these propositions, by and large they were not seen as a big issue. Now, with the benefit of hindsight, we realise that this has been a mistake.

When banks were told that they did not need to hold any equity capital for investing in bonds issued by OECD governments, they piled up such debt. This gave abnormally cheap financing to OECD governments. Most OECD countries responded to this cheap financing by ramping up fiscal imprudence. Governments exuberantly built welfare programmes in the so-called “European-style welfare state”. Deficits and debt steadily crept up. The cost of financing was very low, and the equations seemed to square.

Some European governments are now in deep fiscal trouble. But most European banks are heavily invested in their government bonds. The most toxic asset in the euro-crisis is government bonds issued by weak OECD countries. If a country like Italy or France should default on its government bonds, it would trigger a major crisis in the European banking system.

What lessons can we draw? First, that we should be more sceptical about the BCBS/BIS process. In most areas, international norms and standards work well. However, the BCBS/BIS process has failed badly (in this and in other respects) and should be treated with scepticism.

Equally importantly, we should be cautious about banks holding government bonds. If many Indian banks are deeply invested in Indian government bonds, then at a future date we would potentially face a situation like that in Europe today. India’s public finance is by no means in good hands. If, in the future, a fiscal crisis should occur, we should not exacerbate it by linking it to a banking crisis. It would be better to de-risk banking by distancing Indian banks from the Indian state.

The writer is a professor at the National Institute of Public Finance and Policy, Delhi, express@expressindia.com

http://www.indianexpress.com/news/zones-of-scepticism/885118/0

Dorm for the migrant

The migrant labourer’s journey from villages and small towns to metropolises, a movement marked by despair and hope, has defined our time and our spaces. In urban clusters, old identities of caste and creed give way to new identities of where you work and live and how much you earn and what is obtained of your earnings. One of the greatest challenges of our cities, of urban planning, especially as the affordable periphery has been pushed farther off in the distance as cities expand and real estate prices shoot up, has been integrating those who arrive to find jobs or start small businesses. Their work is vital for the cities — but more importantly, finding ways to accommodate their aspirations is crucial to honour an essential social contract.

Delhi has always been a city of migrants, but today it poses formidable challenges to the new arrival. Now it is evolving a programme for the economically weakest of them all — the migrant labourer. The Delhi government will allot dormitory facilities for about 29,000 labourers — 19,000 at Kanjhawala in northwest Delhi and another 10,000 in Najafgarh. This, of course, takes care of one of the primary needs of this urban workforce — safe and affordable housing. The blueprint incorporates convenient stores, sewage-treatment plants and common kitchens. More importantly, these centres will also provide skill-development programmes and vocational training — this is important. Enabling an individual to access greater opportunities is a surer and more efficient way to give social change momentum, than offering schemes that guarantee only minimum employment.

As India rapidly urbanises, migrants can become part of the city’s energetic economy rather than be defeated by it. For the city to triumph, it needs to be a shared space for its residents.

http://www.indianexpress.com/news/dorm-for-the-migrant/885120/0

Back to work

The issue of FDI in retail remains a cliffhanger: faced with ferocious political disagreement, the government has decided to suspend it for the sake of getting on with legislative business, until it evolves a consensus among stakeholders, parties and states.

 However, that consensus must now be actively sought. FDI in retail is clearly an idea whose time has come, and it is also possible to melt away much of the opposition to it. Given that India is one of the most sought-after markets for global retail, the economic benefits of this decision will be tremendous. Many specific constituencies stand to gain. Big box retailers bring consolidation and efficiency, and all their attendant benefits, so consumers will have lower prices and greater choice. Farmers can stand to profit hugely, as these retailers procure directly, and reduce the layers of costly intermediation. Small and medium businesses, who these retailers will source from, also stand to benefit. Global money and enterprise will also upgrade infrastructure and supply chains. This is not to say that the process will be entirely painless. Some jobs will be lost, others gained. However, the fears around global retail have been greatly exaggerated by small-trader lobbies and their political backers like the BJP. For instance, it is not clear that an organised retail outlet poses an existential threat to independent kirana stores, apart from being a shopping alternative — in that sense, another kirana store in the same area would be a bigger threat. Big retailers and independent neighbourhood stores can both thrive in India, as they have in other places — a big chain-store offers deeper discounts and greater variety, while a kirana store might be located closer, offer more personalised service and possibly deliver home.

 The larger point, though, is that a modern, corporate format for retail is an inevitability, and the sooner we let go of fears about malevolent foreign forces, the better. As the government begins dialogue with various stakeholders, these big-picture benefits must be strongly underlined. They must be rationally persuaded to put away interest group politics, and find areas of overlap and consensus.

http://www.indianexpress.com/news/back-to-work/885122/0