Prem Shankar Jha

Middle-class youth who supported Modi and gave him legitimacy are now seriously doubting his economic policies. That doubt will soon turn into rag

“The economy is in a tailspin. Yes, it can crash. We need to do a lot of good things to revive the economy”. These words are not mine, but Subramanian Swamy’s. Swamy is not a “pseudo-secular” critic of the BJP. He is a disappointed devotee of Prime Minister Narendra Modi who was, only last year, the BJP’s weapon of choice in its assault on Sonia and Rahul Gandhi in the National Herald case.

He is not the only one. Arun Shourie has been warning the country that Modi does not have a clue on how to revive the economy and has therefore turned to the most dangerous form of populism – communal polarisation – in a desperate bid to ensure victory in 2019. Still more scathing criticism has come from former finance minister Yashwant Sinha, whose critique of the government’s unbroken string of economic failures has brought forth no credible refutation, because none is possible.

Swamy is a reputed economist, and the other two are former ministers who have experience and inside knowledge to back their critiques. But what about the Aam Modi Bhakt – urban, educated, middle class and young? Does he still believe that Modi and Amit Shah are crafting a new economy in a New India, that can still bring ‘acche din‘?

The answer has been given recently by Ninad Vengurlekar, a Mumbai-based mechanical engineer and co-founder of a mobile-based education company, who spent a year doing a masters in education technology at Harvard University:

“Why did I support Demonetization?” I was taken over by our PM’s audacity, his resolve, his emotional appeal, and then tears. He said give me 50 days or else persecute me. I thought, if the head of the country is so confident about what he is doing, obviously he knows something that his critics don’t. My support to demonetization came from this trust in the PM. A billion people thought like me. I was not alone.

10 months later, a friend told me, “Bewaqoof banaya Modi ne.” I said,”Shayad”. And we both laughed at ourselves. But did Modi make a fool of the country? Maybe he did. But he never intended to. He was genuine when he believed that there is black money that would be unearthed out of demonetization. It will break the backs of terror organisations. Corruption will be dealt a severe blow by killing the cash economy and digital transactions will be up. Yes, UP elections would also be on his mind.

But I was sure no sane person would put the entire country through discomfort, cause deaths, wipe out incomes of the poor, just to win UP. This was my hunch. My personal reason for support to demonetization was because I genuinely believed that digital transactions would finish the cash economy.

But I was wrong and how. The economic cost of demonetization was never thought through, especially on the poor. Millions lost their jobs, industries closed down, NPAs went up and banks came under undue pressure to recover SME loans. The spiral effect was probably never imagined to be so devastating.

Digital transactions are down. Corruption looks unconquered. Worst, all the so called “black money” has come back to the system. GDP is down to a historic low. And now RBI has stopped short of saying that demonetization was a dare gone horribly wrong.”

Vegurlekar’s is not an uninformed outburst. All the recent signals from the economy are sharply negative: the onset of deflation in agriculture, which confirms the sharp drop in rural buying power caused by the premature return of migrant labour to villages after demonetisation; the CMIE’s recent estimate that 1.5 million jobs were lost between December and April; the shrinkage of commercial bank credit to industry this year for the first time in 63 years; FICCI’s finding that 73% of the 300-plus respondents to its latest survey of industry would do no hiring for at least the next three months; and McKinsey’s finding that more than 35% of the 466-million labour force of India in now severely underemployed, with no secure jobs and no social security.

Add to this the fact that the investments abandoned by their promoters has risen from Rs 8,60,000 crore in March 2013 to the mind-boggling sum of Rs 11,40,000 crore in 2016, that 40 of India’s most courageous (and possibly foolhardy) entrepreneurs are entering bankruptcy court, and that almost half of the $20 billion of foreign direct investment that has come in during the last year has gone into the purchase of distressed assets by international speculators, and the picture of an unravelling economy is complete.

The harsh truth is that India’s once-envied entrepreneurial class has been all but destroyed, and India is being sold piecemeal to foreigners. It is not the only country that has faced such a tragic denouement by ill-conceived economic policies. In December 1998, a year into the Asian financial crisis, the chief of research at the Siam Commercial Bank, Thailand’s oldest bank, greeted this writer with the remark, “Welcome to the basement sale of Thailand “. We are now witnessing the basement sale of India.

Vengurlekar belongs to the part of the new middle class that was the mainstay of the BJP’s victory in 2014 – not because of its numbers, but because of the acceptability it gave to the party. But he now feels betrayed. What he has voiced is what millions of young people are also feeling.

Modi’s highly-personalised propaganda blitz had kept them quiet so far: “The government cannot be lying to us,” they probably said to themselves. “Maybe it is only me, and a few others like me, who have been unable to find jobs”. That doubt has begun to dissolve, and when it does, Modi and his government will face its inevitable corollary: rage. That was the sentiment that drove the Congress out of power in 2014. It is now rising against the BJP.

Is it too late for Modi to reverse the trend? This question begs an even more important one: does the government even know how to do so? And if it does, then what prevented it from taking the right decisions when it first came to power? Modi may claim, as Jayant Sinha has done, that his reforms will benefit India in the long run by simplifying procedures and making the income-generating classes more accountable to the government. But even if this were to prove the magic bullet the economy has been waiting for, its effects will not be felt in time to save the BJP in 2019.

What can and may well save the BJP is continued bickering within the opposition, combined with a total absence of understanding within it of what caused two decades of growth to fail so suddenly in 2012. Till it works that out, it will not be able to offer a credible plan for restarting growth. It will therefore be unable to provide hope to the people who are hurting most – the youth of India. So far not a single opposition party has shown that it has the slightest inkling of how this is to be done. Till one or more of them shows that it does, and offers a policy that the now-sceptical public can believe in, Modi may well continue to reign and the economy to sink.

No ‘Achhe Din’ Here: The Modi Bubble Has Now Burst

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The Indian government seems to have fallen for the Big Business’ agenda of using electric cars even as climate change is accelerating.

Everyone’s suddenly going electric, so India is doing it too. In the past six months, Norway, Germany, Britain, France and China have announced their intention to end the use of fossil fuels in cars by 2040 at the latest. Germany aims to do it as early as 2025.

Although several of these governments have hedged their statements saying that they will switch to electric cars or alternate fuels, everyone knows that, with the possible exception of China, which already has a large coal-based methanol programme running, they are talking about electric cars. So to no one’s surprise, the Indian government has also hastened to fall in line.

In May this year, NITI Aayog, India’s revamped Planning Commission, electrified the Indian elite by announcing that India would aim at replacing its entire passenger vehicle fleet with electric cars by 2040. “India can save 64% of anticipated passenger road-based mobility-related energy demand and 37% of carbon emissions in 2030 by pursuing a shared, electric, and connected mobility future,” it announced. “This would result in a reduction of 156 Mtoe (million tonnes of oil equivalent) in diesel and petrol consumption for that year.” In the same month, Piyush Goyal, the-then minister of power, said that not a single petrol or diesel passenger vehicle should be sold in India from that year onwards.

On September 7, Amitabh Kant, chief executive of NITI Aayog, told the annual meeting of the Society of Indian Automobile Manufacturers (SIAM), an industry lobby, that India would have 30.81 million electric cars on the road by 2030. None of those present could tell how he had been able to arrive at the second place decimal, to within 10,000 cars of what would happen 13 years hence.

The very next day, the newly appointed minister for transport somewhat incautiously told the assembled automakers that they would be “bulldozed” into switching to electric and alternate fuel vehicles if they did not do so voluntarily.

Automobile manufacturers are predictably incensed – and the Modi government’s electric car dream is only the latest development in a long-series of general industry policy flip-flops.

Not well thought out

Was it well thought out? Did any analysis of costs and returns precede this sudden announcement? A look at the draft energy policy for 2040, which was released in June, shows that there was none. For the plan, which estimates that India’s total energy consumption will treble by 2040, predicts that in an “ambitious energy-saving scenario,” the share of fossil fuels will only come down from 81% in 2012 to 78% in 2040. Transport will account for 25% of this.

Only 16% of the oil and 5% of the gas that the “business as usual” scenario would have required will have been saved, mainly through increases in fuel efficiency. Quite obviously, at the time when the policy was being finalised, electric cars had not yet entered the government’s dreams.

What none of the governments that have made this commitment have thought about is its feasibility. The first question any transport minister should have raised was, “Is it feasible?”. One small question would have shown that it is not. The batteries that supply power to electric cars use nickel, cobalt, aluminium, graphite and lithium. All these are rare earths, whose availability in the earth’s crust is far smaller than that of coal and oil.

This poses two problems. First, will there be enough to power the more than two billion cars that will be on the road in 2040, not to mention the billions upon billions of electric bicycles and scooters? Second, will enough new reserves of these be found to offset the amount being mined every year? If the discovery of new reserves falls short of the annual increase in consumption, it will immediately trigger speculation on their future prices in commodity markets, which will push their prices into the stratosphere.

How sensitive these prices are can be judged from the fact that the fall in price of lithium reversed itself sharply at the end of 2015, when the major automakers committed themselves to making electric cars. By mid-2017, they had risen by 50% over the 2015 price.

Wishful thinking

The propagandists for the electric car argue that since lithium accounts for no more than 2% by weight of the most advanced of today’s car batteries, production will be able to keep up with demand and iron out short term price fluctuations. But this is wishful thinking.

The lithium-ion battery that powers the latest Tesla weighs 540 kg and contains close to ten kg of lithium. If the world’s governments wish to wean the world off fossil fuels, they will have to wean two billion conventional passenger cars off fossil fuels. This will require close to 20 million tonnes of lithium. If the number of passenger cars grows by 2% a year and batteries last an average of eight years (the current warranty period on the Tesla), the annual demand for lithium will be in the neighbourhood of 580,000 tonnes.

Even that will reduce the consumption of fossil fuels by somewhere around half, for it does not take into account the consumption of the road haulage industry or the billions of two-wheelers that also consume gasoline today. Against this the entire global production of lithium was 160,000 tonnes in 2015. Since it is rising at 8.8%, it is expected to reach 239,000 tonnes by 2021, according to Macquarie Research. At that rate, it will cross a million tonnes a year before 2040. Can the increase be sustained? The short answer: No. The total amount of lithium in the earth’s crust is an estimated 13.1 million tonnes, according to the US Geological Survey.

Led by the nose

Why then are governments tumbling over each other to announce plans to stop the production of cars that run on petrol or diesel within the next two decades? The answer is that they are being led by the nose by the global automobile industry. As of now, Volvo, Toyota, BMW, Daimler-Benz, General Motors, Chrysler-Fiat, Renault, Honda, Kia, Mitsubishi, Nissan, Volkswagen and Tata have announced plans to make electric cars. They have done this because they know even if their governments do not, there simply isn’t enough rare earths and metals in the earth’s crust to permit a complete shift out of petrol and diesel. So their massive investments in the auto industry will remain safe while they exploit the consumers’ growing fear of climate change to make a fast buck.

Electric cars are therefore a blind alley up which the giant oligopolies that dominate the market economy are taking the world. It is not the first one, for wind and solar photovoltaic power are also in no position to replace even a small part of the electricity that the world consumes. Had there genuinely been no alternative to oil-based petrol and diesel, the mad dash to electric cars would have been excusable. But the technology for converting carbon monoxide and hydrogen, obtained from biomass, into any olefin or transport fuel via the Fischer-Tropsch synthesis has been known for a hundred years and was first used to convert urban solid waste into methanol commercially in the US in 1922.

Today, it can do this with any kind of biomass in the world. Thus the determination of big businesses to lead the world up the blind alley of electric cars at a time when climate change is very obviously accelerating is utterly inexcusable. For the Indian government to fall for it is just plain dumb.

Why India’s Electric Car Vision May Be Leading Up a Blind Alley

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Three almost simultaneous developments, each of which would normally have dented the government’s image in only minor ways, show how Modi’s image is beginning to lose its shine.

Why has Prime Minister Narendra Modi gone in for such a sweeping cabinet reshuffle now? The short answer is a growing anxiety within the Sangh parivar, voiced recently in the context of agriculture by the RSS, that the BJP’s honeymoon with the electorate, the longest that any government has ever enjoyed, may be coming to an end.

For three years, Modi’s political star has been ascending. India’s new middle class has been singing his praises, NRIs have put up altars dedicated to him in their homes abroad, even leaders in the opposition have begun to wonder whether their interests will not be better served if they join the bandwagon, rather than risk being run over by it. Bihar chief minister Nitish Kumar, once the tallest among his opponents, has already chosen the safer course.

Modi has achieved his larger-than-life stature by making a succession of promises to the people and a media blitz that has no precedent in Indian politics. Whenever you look and wherever you go, televisions screens flash his image every few minutes, announcing a new programme or welfare scheme, or admonishing Indians to take part in schemes already announced. The central government’s advertisement budget for “welfare schemes” this year is a mammoth Rs 1,153 crores, Rs 200 crore more than last year. And there is hardly a single advertisement that does not centre around Modi.

This TV blitz is supplemented by a saturation of cyberspace with praise and propaganda for Modi and the BJP, and denigration of all those who find fault with his policies. The combined onslaught has stupefied the ordinary Indian and discouraged the opposition to the point where every effort by it to build a common platform against the BJP has foundered on the unspoken belief that the effort is pointless because Modi is bound to win the 2019 elections.

Modi’s Achilles’ heel

But larger-than-life images also have larger-than-life Achilles’ heels. Three almost-simultaneous developments, each of which would normally have dented the government’s image in only minor ways, show how Modi’s image is beginning to lose its shine. The first is the unconditional Indian withdrawal from the Doklam plateau; the second is the news that 99% of the bank notes demonetised on November 8 have been exchanged for new notes; the third is the decline in GDP growth to a three-year low of 5.7% in the April-June quarter of 2017-18.

Coming on top of two train accidents in four days that have killed more than 20 and injured close to 200 passengers, and the death of 67 children in a single hospital in Gorakhpur, home of Adityanath, reportedly for want of something as basic as oxygen, these setbacks have stripped the Sangh parivar’s “New India” of much of its gloss. The frenzy of denials and rebuttals that has followed each of the three events reveals the government’s awareness of the softening of the ground beneath its feet.

Stripped to its essence, India’s vacation of the Doklam plateau is an unconditional acceptance of China’s precondition for the avoidance of conflict and the resumption of normal diplomatic relations. Modi’s propagandists could easily have portrayed this as a display of good sense and moderation by both sides. But they have described it as a ‘big win’ for India and a diplomatic setback for China.

Since our TV channels have lapped it up without a word of skepticism, Beijing has been forced to disclose that, contrary to the impression it is creating, China has made no real reciprocal concession to India. Hua Chunying, the Chinese Foreign Office spokesperson made this crystal clear by stating, “Chinese border troops continue to be stationed (in) and patrol (the area)”. About the road she said that China “will take into consideration all factors, including weather, to make relevant construction plans according to situations on ground (emphasis added).”

Her reference to the weather is the only hint China will not restart the road building this year. And by ‘all factors’ she may have implied that the resumption of construction could depend upon the state of Sino-Indian relations eight months from now. The Indian public is not well versed in deciphering diplomatic language. But the perception that Doklam was at best a losing draw is bound to sink in over time.

In a similar vein, had the Modi government been less nervous, it could have claimed that the return of 99% of the demonetised currency notes is an indication of the success and not failure of demonetisation. For it shows that large numbers of tax evaders have preferred to deposit their money in banks and pay the penalty, rather than lose their money altogether. The true measure of success, it could have asserted, is not the currency that did not return but the sudden increase of money in peoples’ bank accounts that has taken place since then.

As finance minister Arun Jaitley pointed out last week, this has been substantial. But the problem with putting this forward now is that it would be not the first, but the eleventh justification for demonetisation that the government would be presenting. It would therefore strengthen the suspicion that when Modi announced demonetisation personally last November, he did not really know what he was doing and that his advisers have been cobbling justifications together ever since.

An economy in crisis

The news that the GDP only grew by 5.7% in the first quarter, against 7.9% in the same quarter of the previous year, could not therefore have come at a worse time. The government has ascribed this to the sharp drop in manufacturing growth from 10.7% last year to a measly 1.2% in the first quarter of this year. But the real explanation is that the growth last year, and in fact the whole of the economic revival that the government claims is now beginning, is a statistical illusion created by the measurement of manufacturing growth by value added and not physical output.

Value added is physical output minus the value of consumed inputs other than labour. So it can change without any change in actual production or employment. This is what boosted estimates of growth in manufacturing in 2016-17. As the RBI’s annual report this year has pointed out, in April-June 2016, there was a windfall gain in value added because of a sharp fall in input costs. This year, by contrast, there has been a slight rise in these costs. Since sale prices of manufactured products have remained fairly steady, the whole of this change has been reflected in the fall of value added in manufacturing, and therefore the GDP.

Proof of this can be had by comparing the estimate of changes in value added and physical output during this period. In April to June 2016, manufacturing output grew by only 6.7%, against the 10.7% rise in value added. In sharp contrast, this year physical production rose by 1.8% in the same quarter, but value added rose only by 1.2%. This was because there had been a marginal rise in input costs of 0.6%.

The BJP, however, cannot use this argument because, in stark contrast to the GDP data, the index of industrial production shows growth in manufacturing actually declining from 4.8% in 2012-13, the last full year of UPA rule, to 2.8% in 2015-16 and 3.8% in 2016-17. Doing so would therefore put a very large question mark over the government’s claim to have revived economic growth in the previous three years.

Precise comparisons over a longer period of time are not possible because the Central Statistical Office changed the base for calculating the index of industrial production in 2011-12 and did not link the new estimates with the old, but at the very least, manufacturing growth has fallen  from an average of 8.6% a year between 2003-4 and 2011-12 to 3.5% between 2013-14 and 2016-17.

Coming on top of this, the drop in manufacturing growth to 1.8% in the first quarter of the current year is alarming, for it not only confirms what the government’s critics have been saying, that the hardships caused by demonetisation were not just temporary, as Modi kept reassuring the people, but likely to persist for a long time.

This has since been confirmed by a host of supplementary data, such as the onset of deflation in agriculture, which signals a sharp drop in buying power in the rural areas; the CMIE’s estimate that 1.5 million jobs were lost between December and April; the fact that for the first time in over 60 years commercial bank credit has actually contracted this year, when it rose by more than 20% a year in the Atal Bihari Vajpayee and UPA-I years; that 73% of the 300 plus respondents in FICCI’s latest survey of industry indicated that they had no intention of creating any jobs for at least the next three months, and McKinsey’s finding that more than 35% of the entire 466-million labour force of India in now underemployed, with no secure jobs and no social security.

The conclusion is inescapable: Modi has utterly failed to live up to his commitment to bring back the “ache din ( good days)” and his bubble is about to burst. Only a dramatic change in policies can prevent this, and for that he may have run out of time.

Is the Narendra Modi Bubble About to Burst?

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A statesman is one who admits when he has made a mistake and has the grace to correct it before it does any more harm. The prime minister, unfortunately, has shown no signs of having either of these virtues.

New Delhi: Prime Minister Narendra Modi addressing the nation from the ramparts of the historic Red Fort on the occasion of the 71st Independence Day, in New Delhi on Tuesday. PTI Photo / PIB (PTI8_15_2017_000059B) *** Local Caption ***

There was a discernible note of self congratulation in Prime Minister Narendra Modi’s Independence Day speech this year. As usual, it was replete with claims – “In our country everyone is equal”, “Those who have looted the nation and looted the poor are not able to sleep peacefully today” – and exhortations – “Bharat jodo“, “Let us create a new India” – that are entirely devoid of content. But these are not the sources of his satisfaction. That arises from his confidence that he has ensured a continuation of the BJP in power for the foreseeable future. He has done this by ensuring that the opposition is unable to unite to face the BJP in 2019; and by relentlessly undermining the constitutional safeguards upon which India’s secular democracy has rested, should it become necessary to retain power through constitutional sleight of hand.

The path India is being taken on

In the last three years, Modi and Amit Shah have removed virtually every institutional hurdle to the creation of the ‘new nation’ he talked about. The BJP now has a president and vice-president of its choice, thus ensuring that any conceivable future head of state will follow Modi’s instructions.

After its successes in Uttar Pradesh, Uttaranchal and Assam, the party will soon have the majority in the Rajya Sabha that it needs to enact transformative legislation.

By overturning the seniority-cum-merit system of promotion in the army, Modi has sent the message out loud and clear to the army that henceforth, it does not serve the constitution but the prime minister. The spate of statements from all and sundry in the armed forces that have begun to equate dissenting with the BJP with treason shows that the army has got the message.

The obstacle of the Supreme Court remains. But Chief Justice J.S. Khehar, who had overturned the judicial accountability Bill and saved the collegium system for the appointment of Supreme Court and high court judges, will retire in a few months and it is a safe bet that Modi will renew his struggle to destroy the higher courts’ capacity for judicial review after he is gone.

Modi’s ideal state

Only the electoral system, the beating heart of our democracy, will remain standing in the way. Despite all their bluster, Modi and Shah are acutely aware of the fragility of the BJP’s hold on power. In 1967, the Congress had required 40.7% of the vote to win 282 seats. In 2014, the BJP did it with under 31% of the vote. They will never, therefore, feel truly secure till they have captured that additional 10%.

Since that extra vote is not yet in sight, they have been following a two-pronged strategy to regain power in 2019. The first is to woo away the crucial 10% of the electorate by creating paranoia among caste Hindus in order to create a ‘Hindu’ identity as distinct from caste. The second is to ensure, by hook or by crook, that the opposition remains fragmented. To do this, the Modi-Shah duo launched a no-holds-barred campaign to destroy state-level parties like the Aam Aadmi Party in Delhi, the Janata Dal (United) in Bihar and the Trinamool Congress in Bengal, that enjoy a measure of constitutional autonomy and therefore the capacity to form an alliance capable of defeating the BJP in 2019.

But what is the goal that Modi believes is now in sight? Behind the camouflage of his grandiose and so far unfulfilled promises lies a single unswerving aim. That is to build a Hindu rashtra. There are hints of this in his speech, but three years into the BJP’s reign one does not need these pointers to understand the kind of India that Modi, and the RSS, intend to build.

This state will confront, not accommodate, its neighbours; this state will not tolerate cultural heterogeneity, but seek to replace it with a single homogenised culture that Modi mistakenly believes to be Hindutva. Muslims, and other minorities, will be tolerated in this entity so long as they know their place. Religious pluralism will be tolerated (but not accepted), as former vice president Hamid Ansari pointed out in Bengaluru, but cultural pluralism will not. For the minorities, the path to success will be through cultural assimilation. In sum, Modi is intent upon changing the very idea of nationhood upon which India’s political identity has been based not just for the past 70, but the past 2,000 years.

Is such a profound change even possible? If not, where will its pursuit lead us? Three years on from his swearing in, the answer can no longer be ignored. In every single sphere of governance, Modi is leading India into deadly peril. If he continues down this road, India’s failure as a state is guaranteed.

 

New Delhi: Prime Minister Narendra Modi inspect a guard of honour before
addressing the nation from the ramparts of Red Fort during the 71st
Independence Day function, in New Delhi on Tuesday.
PTI Photo by Shirish Shete (PTI8_15_2017_000139B)

Zero tolerance in Kashmir

Let us look at where he has taken India in the past three years. In Kashmir, he has let loose a regime of absolute terror based on the idea of zero tolerance for political dissent. Today there are no militants in Kashmir, only terrorists who are being hunted down and killed without even being given a chance to surrender. Modi says the Kashmiris are itching to be freed from them. That of course is why hundreds of thousands of youth poured out into the streets and were able to close down the whole of Kashmir for five months last year.

What mainstream and separatist leaders have made clear, repeatedly, is that while they want ‘azadi’ from India, they do not want to become a part of Pakistan. Nor do they want to sever their links with India. All they want is not to be ruled by Delhi, especially on matters concerning their politics, culture and religion. Today, mainstream and separatist leaders are frantic in their pleas for the resumption of a political dialogue with Delhi because the absence of dialogue and Modi’s sole reliance on the gun is driving the youth steadily towards Pakistan, and more recently al-Qaeda and ISIS. Modi has only to live up to the promises he made a year ago to opposition leaders from Kashmir, to discuss any solution within the Indian constitutional framework, for Kashmir to start calming down. But he is dead set against this because a willingness to negotiate with a local government or movement goes agains the very grain of the hard nation state that Modi wants to turn India into and makes him, personally, look weak.

A dangerous foreign policy

Not only is Modi’s hardline policy pushing Kashmir into the arms of Pakistan and jihadi Islam, but it has given the Pakistan army the excuse it had been looking for since 2007 to steadily weaken Pakistan’s democratic establishment and concentrate power in its own hands. This has reversed the trend that India’s helpful and accommodating attitude to civilian governments there, since its foreign exchange crisis in 2012, had created. Indian firing across the LoC has killed 39 persons and injured 133 in 2016, and killed 24 and injured 170 so far this year.

Close to 500 poor and utterly innocent families have therefore suffered grievous losses in Pakistan-occupied Kashmir and possibly a similar number in Jammu and Kashmir, over something that Modi and the Pakistani generals know perfectly will yield them not a stitch of territory or military advantage.

A more immediate peril into which Modi has gratuitously pushed India is the mounting confrontation with China on the Doklam plateau in Bhutan, adjoining Tibet’s Chumbi Valley. Only those willing to gamble recklessly on India’s future have not recognised that the Chinese official position paper released on August 2 is in effect an ultimatum to India to leave the Doklam plateau, or be forcibly ejected from it. It concludes by stating baldly that “No country should ever underestimate the resolve of the Chinese government and people to defend China’s territorial sovereignty. China will take all necessary measures to safeguard its legitimate and lawful rights and interests. The incident took place on the Chinese side of the delimited boundary. India should immediately and unconditionally withdraw its trespassing border troops back to the Indian side of the boundary. This is a prerequisite and basis for resolving the incident” (emphasis mine).

The Chinese ambassador in Delhi underlined this the next day by stating that the presence of even one Indian soldier in Doklam will be considered an act of aggression. But another fortnight has passed and Modi has refused to budge.

Instead, as the South China Morning Post has reported, India is reinforcing its military presence at the India-Bhutan-Tibet tri-junction, and analysts are warning China of the possibility of  a blockade of the Malacca straits by the Indian Navy if China wages war in the Himalayas. Thus, after deriding Jawaharlal Nehru day in and day out for irresponsibly pushing India into the 1962 war, Modi is doing exactly the same thing – pursuing a reckless policy with China and gambling everything upon its not daring to strike back.

I have written extensively in my columns, as have many others, on the Sangh parivar’s relentless assault on Indian Muslims, on secular and Left intellectuals, and on the BJP’s political opponents, using and abusing every instrument of law the government could lay its hands upon, so I will not dwell on it any further.

Nor, for the same reason, will I dwell on the catastrophic decline of the Indian economy in the last four years and the many stratagems the Modi government has used to hide it. Suffice it to say that after taking into account those who have lost their jobs, the net employment growth in these years has been close to zero.

But Modi is as unable to step back from his gigantic blunders with Pakistan, with China, with Nepal and in the handling of the economy, as he was in admitting his bungling of the demonetisation. An essential requirement in a statesman is the self-confidence to admit when he has made a mistake and the grace to correct it before it does any more harm. India’s greatest peril arises from the fact that Modi has not shown any signs of having either of these virtues.

Prem Shankar Jha is a senior journalist and the author of several books including Crouching Dragon, Hidden Tiger: Can China and India Dominate the West?

Modi Is Taking India to a Dangerous Place

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Demonetisation has hit every sector of the economy from construction to automobile at the same time and its ripple effects are likely to be felt for months to come.

Remember the old adage, ‘You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time?’ Narendra Modi’s government is reluctantly learning its truth now. Exactly a month after the sudden announcement of the demonetisation of Rs 500 and Rs 1000 notes, even the tame audio-visual media has, almost unanimously, turned against his government on this issue. Their consensus echoes an epitaph favoured by Bismarck, “ it was not a crime; it was a mistake”.

The mistake is so elementary that it leaves no room for doubt that Modi announced the demonetisation without consulting either the Reserve Bank of India or the economists in the finance ministry and NITI Aayog. One of the most basic equations in economic theory – MV=PT – seems to have been forgotten. It is the base of the quantity theory of money upon which the whole neoliberal macroeconomics of today rests.

In layman terms, the equation states that the money supply in an economy (M) multiplied by the number of times it changes hands in a year (V) equals the average price level (P) multiplied by the number of transactions (T) that take place during the year. PT is the gross revenue generated in the economy during the year. Take away double counting – the resale of intermediate goods from one producer to the next – and you arrive at the GDP of the country.

Neo-classical economists use it to show that if you double the money supply, prices will simply have to double in the long term. But implicit in this is the belief that the velocity of circulation of money is very stable as it reflects the culturally determined habits of saving and consumption, and will therefore remain unchanged. The volume of transactions in any given period is, therefore, constant.

This assumption does not, in fact, hold true all the time. In his book General Theory of Employment, Interest and Money, J.M. Keynes showed that in actual fact, V rises or falls depending on the optimism or pessimism about the future course of the economy. Thus prices can, in fact, increase ­– and output can respond – without an increase in money supply, and fall without a reduction in it. This is the basis of Keynes’ theory of the trade cycle, one of the two that together fully explain this endemic seesaw in a market economy.

But Keynes never envisaged the possibility that a government would, of its own volition, bring the circulation of money to a near halt and force V down close to zero. For, since anything multiplied by zero is zero, it would, therefore kill the market economy and drive it back to barter. That is precisely what the demonetisation is doing. For an already tottering economy, this is a disaster. For the political future of the BJP, it is a self-inflicted goal that may well cost it the match.

I got some idea of how much V had fallen after demonetisation when a sweet shop owner told me that on the day after demonetization, his sale had fallen from Rs 30,000-40,000 per day to a mere Rs 700. A bookshop owner in Connaught Place told a friend that his sales had fallen from Rs 20,000-30,000 a day to Rs 12,000 in the past month. A high-end optician in Khan Market, New Delhi told me that his sales had fallen by 25% in the past month. Automobile sales, which had been rising at 11% a year in the first half of the year, fell by 38% for Mahindra & Mahindra, 28% for Tata Motors, 20% for Hyundai and 22% for Renault in November. There is not a single retailer who does not have a similar story to tell.

If this is the condition of demand in the urban areas, where more people have bank accounts and use credit cards, it is not hard to imagine what the situation is in rural areas where where moneylenders still meet four-fifths of the demand for credit, and nearly all the transactions are done in cash. Two-wheeler sales have fallen by 35-40% because 65% of all the sales are done in cash and tractor purchases have fallen by a whopping 63% because only farmers and a few construction companies buy them.

The worst affected sector is construction. After being starved for funds for nine years, the construction industry has been pushed further down by demonetisation. The immediate impact has been on employment, for not only is it India’s second largest employer – providing jobs to 45 million people – but since employment in agriculture stopped growing a decade and a half ago, it has also been the principal creator of new jobs.

But the bulk of its workers are migrants from other states who are paid by the day, or at best by the week, and they ask for their wages in cash. Therefore, in order to pay them, their employers need to maintain large daily stocks of cash. Those were the cash reserves that Modi made worthless overnight. What is worse, even their current overdraft facilities, and their bank deposits, are not available to them because the government has put a Rs 24,000 a day limit on all withdrawals.

Unsurprisingly, anecdotal evidence suggests that the industry has virtually ground to a halt. The employers’ shortage of cash has translated into a shortage of jobs and stalled construction. Earnings by have fallen by 80-90%. Until November 8, for instance, the mazdoor naka near the Madhuban garden in Bhandup in Mumbai was among the largest in the city, with nearly 500 construction workers thronging it every morning. On November 30, there was just a trickle of 30 workers waiting hopefully for jobs there.

In desperation, more and more workers are accepting payment in the old currency notes, and sending a member of their family to queue in front of banks all day to exchange it for legal tender. But as the employment opportunities have continued to dwindle, an increased number have joined a return flow of migrants to their villages in order wait until the times get better. Bus companies that brought migrant workers from Orissa to Gujarat are now plying in the opposite direction. There is a similar return of migrant workers to Andhra and Telangana from Mumbai and other cities in Maharashtra, and now, increasingly, from Delhi, Uttar Pradesh, Bihar and Rajasthan.

Construction is not the only sector in which jobs have disappeared. A fortnight after demonetisation, the Engineering and Export Promotion Council estimated that more than 400,000 workers had been laid off in the textiles and garments industries and as many as 60,000 in the leather industry. These are only a few lightning flashes illuminating the storm that is enveloping India’s poor.

Demonetisation is also laying waste to small and medium-sized producers and artisans in the country. It has not even spared the service industries, for except in software and domestic service, income and employment in every other service industry is directly related to production in the primary and secondary sectors of the economy.

The story of a utensils manufacturer in Noida that has lost more than half of its employees is the story of hundreds of thousands, perhaps millions of SMEs all over the country. In the month after demonetisation his sales have dropped by 90% for only one dealer has placed orders with his company during this period. More than half of his 40 workers, nearly all of whom are migrants, have been forced to go home, a journey that the government is considerately facilitating by asking the railways to accept old currency notes.

He has so far been able to retain the remaining employees only because a grocery store has been willing to provide basic food on credit. But the latter’s finances are not endless either. What is more, the remaining workers still need some money to send home. So the company’s finance manager has been standing in bank queues until 1:30 p.m. every day to withdraw money. However, after ten days of doing so, he was unable to withdraw any cash.

Demonetisation has not even spared the service industries, for except in software and domestic service, income and employment in every other service industry is directly related to production in the primary and secondary sectors of the economy. An idea of the hardship and loss of employment that it is causing, even if it is temporary, may be had from the fact that 90% of the country’s 300 million workers are in the unorganised sector and, with few exceptions, are paid entirely in cash.

What Modi has inflicted on India, therefore, is far worse than a natural calamity or a recession. For the first hits only parts of a country, while the second often spares agriculture and exports. But demonetisation has hit every part of a country and every sector of an economy at the same time.

Today, as the data for November pours in, a few of the government’s spokespersons and apologists are still trying to minimise the damage demonetisation has done by quoting the data for the whole of November, not just slurring over the fact that the first eight days saw the small surge of demand that had begun in April, but also on last-minute festival season rush.

But the retail sales data for December confirm that the post-November 8 data cited above, that the decline in sales is continuing. Even the automobile sector, where cash is least used is still experiencing a shortfall of over 20%, and two wheeler sales remain down by half.

The government spokesperson is reassuring customers that that demand will bounce back as soon as the cash crisis is over, but while this happens in sales, production will have to wait for three months’ accumulation of inventories to be liquidated in order to revive.

So the impact of demonetisation will not end when the currency replacement is complete because of the ripple effects that the sudden, two-month long contraction of demand has set off in the economy.

These effects that J.R. Hicks – another great 20th-century economist – dubbed the “accelerator,” are well known to any student who has studied his theory of trade Cycles. But if anyone in his government pointed them out to him, he chose not to listen.

As many experts have pointed out, not only was demonetisation unnecessary but also badly bungled. It was unnecessary because the government knew from its income tax raids that people hold merely 5-6% of their undeclared income in cash, and the balance is in gold, precious gems, real estate and benami shareholdings.

It was inept because not only had the government not printed the more than 20 billion new currency notes needed to replace the old, but it also changed their size to ensure that they could not be dispensed from the 150,000 ATMs in the country without extensive modifications. In the end, therefore, demonetisation has created no gainers, only losers. They now have two and a half more years to remember that they owe their hardships to a government and a prime minister who had promised them acche din, but has so far failed to deliver.

Prem Shankar Jha is a senior journalist and author of Twilight of the Nation State: Globalisation, Chaos and War, and Crouching Dragon, Hidden Tiger: Can China and India Dominate the West?

 https://thewire.in/86086/modis-note-ban-may-spell-catastrophe-bjp/
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Security forces in Kashmir during the violence in Srinagar following the killing of Burhan Wani. Credit: PTI

 

When I read that Burhan Wani, the iconic leader of the new militancy in South Kashmir, had been killed, I should have felt at least a twinge of relief. Instead all I felt was overwhelming pity for his family and despair for my country. For his death has not brought peace nearer in Kashmir, any more than the killing of Osama bin Laden has ended the threat from Al Qaeda, or brought peace to the Middle East.

Instead, as the eruption of rage after Wani’s death shows, it has only deepened the estrangement between Kashmir and the rest of India, and brought the moment closer when, if this killing goes on, insane rage will grip the youth of that benighted paradise once more and plunge it towards its own, and perhaps India’s, destruction.

Every titbit of information that has surfaced suggests that the encounter, if not the actual killing, was choreographed. Despite the extraordinary precautions that Wani had taken to make his group in South Kashmir difficult to infiltrate, the Kashmir police had succeeded in doing so. It knew that news of his death would set Kashmir on fire, so it chose a day of the week, a time of the year and, if reports are to be believed, a time of day that would minimise the impact of his death on the people.

But these tactics did not work and Kashmir is now perceptibly closer to the tipping point than ever before. So why is the government persisting with a counter terrorism strategy that, it must know, will only make things worse?

It was not as if it had no other options. Wani was only 22 when his life ended. Although he had joined the Hizbul Mujahideen seven years ago, he had not committed any truly heinous crimes. The Kashmir police had registered four serious cases against him, two of firing upon and injuring sarpanches, and two others of firing upon the police and the Rashtriya Rifles.

None of these had resulted in a death. So why was it so necessary to kill him? Why was no attempt ever made to persuade him to give up violence and pursue his goals peacefully? That is what governor Girish Chandra Saxena’s administration had succeeded in doing with Yasin Malik, Shabbir Shah and the militants of the 1990s. Why did no one even try?

The answer is that in the early ‘90s it was the militants who were on the offensive. The Indian state had resorted to violence with reluctance. Apart from defending themselves, the security forces used force mainly to protect civilians involved in the administration of the state, political cadres of mainstream parties and government buildings and facilities. Force was also used to underline the futility of challenging the writ of the state, but the goal was always to use a mixture of force and persuasion to make the separatists eschew violence in favour of negotiation and accommodation.

Vajpayee’s strategy

This strategy came close to success in 2002 when Atal Bihari Vajpayee rammed through a free and fair election over the strenuous objections of then Kashmir chief minister, Farooq Abdullah, facilitated the formation of a government that the Kashmiris did not consider a tool of New Delhi and launched a visionary initiative to settle the Kashmir dispute with President Musharraf of Pakistan.

The process continued with Manmohan Singh and a high point was April 5, 2005 when the first buses between Srinagar and Muzaffarabad crossed the Jhelum at Kaman post on the cease-fire line after a lapse of 40 years. Men, women and children lined the road to Srinagar dressed in their best clothes and greeted the bus form Muzaffarabad with flowers and song. It was a spontaneous outpouring of joy, such as Kashmir had not witnessed in a quarter of a century.

But the healing process that began then ended abruptly with the UPA government’s crackdown and return to police raj after the Amarnath land scam, and the BJP’s blockade of the Srinagar-Jammu highway in 2008.

That ‘crackdown’ began the return to the nightmare days of the early ‘90s. When, inspite of it, there was an unexpectedly high turnout in the valley in the December 2008 elections, Delhi seized this to claim that militancy had ended; all that was left to do was mop up its remnants and seal the border to keep infiltrators out of the valley.

That unfortunate boast ended Delhi’s dialogue with the Hurriyat. Throughout his second term in office, Manmohan Singh did not meet its leaders even once. This left capturing or killing ‘terrorists’ the only way to mop up the disaffection that remained. The task was delegated to the Kashmir police.

The resurgence of militancy today can be traced back directly to this self-serving deceit. To obtain information the police use the only methods it is familiar with: round up all known suspects and apply third degree methods to sweat information out of them. In the last six years this has turned the Kashmir police into a terror machine.

Loss of civic rights

Credit: Sunandita Mehrotra

Credit: Sunandita Mehrotra

All those who get onto its charge sheets, be it as a militant, a stone pelter or an agitator, immediately lose their civic rights. From then on they are liable to be  summoned to the police station at any time of the day or night and insulted, humiliated, tortured or beaten up, at the will of the station house officer. This has turned life into an uncertain hell not only for them but also their families, who face suspicion and ostracism once they begin to receive visits from the police.

One way out is to become an informer. The other is to become a militant. Wani chose the latter. There was nothing in his family background that had predisposed him to rebellion. His father was the principal of a secondary school, his elder brother had been studying for his PhD in economics when he was killed by the police last year. Burhan was 15 when he and his brother were stopped, abused and humiliated by the police while on a joyride with a friend who was testing out a new motorcycle. Whatever happened then was sufficiently humiliating to turn him into a militant and bring him onto the police’s history sheets.

By the time he was killed, Wani had become the single most potent threat to the Indian state in Kashmir. But the threat he posed was ideological. By the yardsticks of the ’90s, his movement was still tiny and the wounds it had inflicted on the Indian state were no more than pinpricks. What made him a threat was his capacity to inspire. For there was a ‘purity’ in his revolt that the movements of the ‘90s had lost long ago. He had never crossed the border into Pakistan; he was not motivated by religious ideology, he did not want to join Pakistan and he was not in anyone’s pay. His was an apolitical revolt born out of pure rejection: he represented a Kashmiri nationalism that simply wanted to cut its links with India and become free to be itself.

But it was precisely these qualities that made it worth the government’s while to open a channel of communication with him with a view to restarting the search for a political settlement. Killing him was therefore the most self defeating thing the Indian state could have done.

If the government does not want Kashmir to spin out of control once more, it must stop the killing now. The first step would be to declare a unilateral cease-fire, wipe the police’s history sheets clean and give all those on it a respite from fear. The second would be to give full support to chief minister Mehbooba Mufti in her efforts to heal the wounds inflicted on the Kashmiri psyche. The third would be to equip the police to deal with stone pelters and others without using lethal force, inspite of every provocation to do so.

Only if these steps bring back peace will the government be able to look for ways to bring Kashmiri nationalists back to the negotiating table once more. The door to this room has been shut for so long that there is no way of knowing whether it can be opened again. But that does not exempt the government from the need to try.

Prem Shankar Jha is a senior journalist and author of Twilight of the Nation State: Globalisation, Chaos and War and Crouching Dragon, Hidden Tiger, Can China and India dominate the west?
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The media is rife with speculation about why the government refused to extend Raghuram Rajan’s tenure as Reserve Bank of India (RBI) governor. The ideas are endless: the Rashtriya Swayamsevak Sangh was unhappy with his remarks on intolerance; his policies were, to quote Subramanian Swamy, “anti-national in intent”; he orchestrated a huge campaign in the media to make the government keep him on; P. Chidambaram, and therefore, one presumes, the Congress, was still backing him. Therefore, Rajan deserved the same fate, of summary ejection, that 360 consultants to the United Progressive Alliance government suffered when the Modi government came to power.

Alongside these ideas are predictions of the harm that the Indian economy is likely to suffer from Rajan’s expulsion: foreign investment will stream out of the country because his removal will signal a return to autarchy, and therefore unpredictability, in policy-making; the rupee will depreciate dramatically and inflation will re-surface. The timing of the government’s move, only days before Britain’s Brexit referendum, has also faced criticism, because it will magnify all these effects, should Britain decide to leave the EU.

Buried in all the speculation is the possibility that the government sacked Rajan because of his stubborn refusal to lower the interest rates. But even that is being seen as a political move designed to assuage the wrath of powerful industrial and construction lobbies in the country, and not as a hugely belated response to a decade-long dear-money policy that has each year destroyed industrial growth, bankrupted the entrepreneurial class and blighted the future of six to seven million youth who would otherwise have found jobs.

The pressing priority

The truth is that Rajan should have gone earlier. He had to go because he had continued to oppose rate cuts for two years even after his own, invented justification for keeping them up – namely, the persistence of inflation – was no longer relevant. Today, the only thing that responsible media should be discussing is how to minimise the immediate fallout his departure will cause. But that, unfortunately, is the last thing on everyone’s lists.

There is no doubt that the timing of Rajan’s departure is unfortunate, but whatever turbulence follows Brexit (if it happens) will be short-lived. The main threat to the economy will stem from the uncertainty that the change of so key an official will create, especially among foreign portfolio investors. The longer the government keeps the position vacant, the worse the situation will become. Should some of the investors pull their money out, the resulting fall in share prices will trigger the herd mentality and cause further, much larger, withdrawals.

So, no matter who did what, the government’s absolute first duty is to announce a successor without any further delay. That successor has to meet several requirements:

Firstly, their professional qualifications must be stellar and beyond question. Only then will the international financial community be convinced that the government is only changing the governor and not undermining the autonomy of the RBI.

Then, they must be a first-class economist who can explain and justify his or her decision to lower interest rates with sound economic logic. This must not be seen as another victory of crony capitalism.

Finally, the transition from the regime of Rajan to that of his successor – the time they take to become familiar with subordinates at the RBI and the members of its advisory committees, as well as learn the technicalities of the bank’s working – should be as short as possible.

The best candidate

There are any number of excellent Indian economists who meet the first two qualifications. And any one of the RBI’s present deputy governors meets the third. But finding a successor who meets both the first two and the third requirements will not be easy.

There is, however, one person already associated with the Modi government who meets all three needs to the fullest extent. That person is Bimal Jalan.

Jalan is an economist by profession and has numerous books to his credit. He is perhaps the only ‘outsider’ (to the Indian Administrative Service) who has risen to become the finance secretary, an achievement that speaks volumes for his ability and tact. He was the governor of the RBI for six years, from 1997 to 2003, and is therefore well-known among, and held in high regard by, the international financial community. Most of all, it was he who, while working closely with the then finance minister Yashwant Sinha, steered the Indian state through the aid cut-off that followed the May 1998 nuclear weapons tests, and then out of the recession of 1997-2002, onto the 8 to 9% growth path, by halving bank lending rates between 2000 and 2003.

To do the former, Jalan had to attract Foreign Direct Investment from Indians living abroad, and he did so by raising interest rates at the beginning of 1999. This killed an incipient industrial recovery that had begun under the spur of huge harvests in 1997 and the sudden jump in disposable income caused by the Fifth Pay Commission awards a year later. But Jalan began to lower interest rates less than two years later as NRI money poured into the Millennium and India Resurgent Bonds that the government floated in international markets to offset the sudden cut-off of foreign aid.

By the beginning of 2003, lending rates had halved, but the share markets were reviving as promoters turned to them to raise risk-free capital for investment. It took only one spark to ignite the sharpest stock market boom India has experienced to date, and this was provided in May, 2003, by Maruti Udyog’s decision to sell 20% of its shares to the public. This sale was oversubscribed 13 times, and the gold rush began. It did not peter out till eight years later, in 2011, and then, as in 1995, it was the morbid fear of inflation in a Congress government that brought it to its end.

Rajan was a stranger to those events, as he was in the US as they unfolded. Jalan, however, was completely a part of the whole experience.

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Jaitley’s effort included many significant policy plans but had little to offer on reviving economic growth. Unless interest rates are lowered sharply, there is no possibility of recovery.

Only a drastic cut in interest rates can get the economy moving again. Credit: Shome Basu

Only a drastic cut in interest rates can get the economy moving again. Credit: Shome Basu

The Budget presented by Finance Minister Arun Jaitley on Monday contains a number of new departures that merit unstinting praise. Chief of these are a national crop insurance scheme for farmers, a health insurance scheme to protect families from the impact of illnesses that incapacitate the breadwinner and a three-year programme to provide 50 million families in villages with cooking gas facilities.

But on the revival of economic growth, the central challenge facing the country today, the Budget has little to offer. Instead, Jaitley implicitly absolved the government of responsibility for it’s failure to revive growth, by laying the blame on the “serious crisis” in the global economy but said the Indian economy held its ground despite the global headwinds.

The bad debt problem

The self praise, however, is muted. Both the Budget and the Economic Survey have admitted that all is far from well in the economy. The 2014-15 Survey had estimated that 880,000 crore rupees of investment was locked up in stalled projects, concentrated mostly in the heavy industry, construction and infrastructure sectors, and this year’s Survey dealt at length on the mountain of bad debt that this has created in the banking system. On December 31, 2015 the non performing assets (NPAs) – debt on which banks are not able to recover their interest and amortisation – of 24 listed public sector banks, including the State Bank of India and its associates, stood at a whopping 3,93,035 crore rupees, or about 11% of their loans. Private banks had not done much better; although they accounted for less than 20% of outstanding loans, their NPAs added up to 45,000 crore rupees.

This mounting bad debt has reduced banks’ willingness and capacity to lend, slowed the growth of credit to less than half of what it was during its heyday a decade ago and locked the entire secondary economy in the jaws of stagnation. Not surprisingly, industrial growth has been stuck at just over 3% for the last five years. This is close to 2% lower than the growth it recorded in the 1960s and 1970s, during the worst period of the closed economy. Judging from the quarterly data collected by the labour ministry, the slowdown in the growth of employment has been equally sharp.

It is in suggesting a remedy for the crisis that North Block is strangely reticent. Both the Economic Survey and the Budget reflect the conviction that the remedy lies in drastically simplifying and speeding up the procedure for declaring firms bankrupt and liquidating their assets. The Survey has likened the Indian economy to the Chakravyuhain the Mahabharata – easy to get into but very hard to get out of. Enabling companies to exit easily will release what Joseph Schumpeter called “the gales of creative destruction,” for it will free land, buildings and other assets for sale, and bring the capital locked in them back into useful circulation. Citing academic studies, the Survey has claimed that this will improve the productivity of capital by 30-40% and trigger an economic revival.

Jaitley has taken his cue from the Economic Survey. In paras 90-94 of his Budget speech he unveiled a spate of measures that will make it easier to set up asset reconstruction companies, to speed up the working of debt recovery tribunals by digitising the collection of information and recapitalise  public sector banks in order to free up the flow of credit.

Persistence of widespread insolvency

It was these announcements that sent the Sensex up by 800 points, the biggest one-day increase in seven years. But as a panacea for economic stagnation they will not suffice, for implicit in them is the belief that investment is going bad mainly because of the greed of investors who borrow too much and therefore run up very high interest costs, and because of cronyism and unprofessionalism in the management of public sector banks.

These are not the only, or even the main, causes of the malaise in the economy. One key indicator is the large number of companies with restructured loans that have once again become insolvent. In 2014-15, 57,000 crore rupees of restructured loans had gone bad, double the amount from the previous year.

The persistence of widespread insolvency despite the restructuring of debt shows that its cause is not episodic but systemic. Every single one of the economy’s problems can be traced back to the very high interest rate regime that has existed, with one short interlude, since 2007. This has drastically reduced demand by discouraging purchases made on instalment plans, including the purchases of housing and office space, automobiles, electronic and digital equipment, and home and office furnishings. These make up almost half of industrial production. It has also caused a collapse of the share market in all but a few sectors and a virtual disappearance of initial public offerings of shares since 2007. Finally, it has forced promoters to rely almost exclusively on bank loans to finance investment just when the cost of borrowing has gone up. This has greatly increased the risk of investment and is responsible for the large scale abandonment of infrastructure and heavy industrial projects that were highlighted in the 2014-15 Economic Survey.

The interest rate quagmire

Jaitley has urged the Reserve Bank of India (RBI) to lower interest rates on several occasions, and in July his chief economic adviser, Arvind Subramaniam, wrote an article in The Indian Express arguing that the cost of living index is no longer a satisfactory measure of inflation and urged the use of the GDP deflator instead. It is thus surprising that Jaitley did not say anything in his Budget speech about lowering interest rates, a point left out in the Economic Survey too.

This may be out of respect for the RBI’s autonomy in determining monetary policy. But central bank chief Raghuram Rajan has shown no inclination to lower the interest rate so far as he believes, with the cost of living index still averaging 5%, the RBI’s current policy rates – ranging 7.75-5.75% – are already low enough in real terms not to merit much further reduction. Additionally, he firmly believes that most of the problems of industry can be traced back to the mistakes of the promoters, who “do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor … have the right to use the banking system to recapitalize their failed ventures”.

But the RBI’s policy rates do not reflect the actual cost of borrowing. Today the average borrowing rate, including various bank charges, is over 11%. With inflation, measured by the GDP deflator, close to zero the real rate of interest for borrowers is prohibitive. Till it is brought down, and that too very sharply, there is no possibility of a revival of investment and an economic recovery.

The real test for the government will therefore come when the RBI announces its next policy review at the end of this month. If Rajan does not bring down interest rates substantially, Jaitley and Prime Minister Narendra Modi will have to choose between foregoing economic recovery or foregoing the services of Rajan. The choice, either way, will not be easy.

Prem Shankar Jha is the Managing Editor of Financial World and a senior journalist.

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Last month the RBI  governor Raghuram Rajan  defended his decision not to cut interest rates by saying “ It is not the RBI’s business to deliver booster shots to the stock market so that stock markets can soar for a short while, only to collapse when reality hits….What is important for us is sustained low inflation…the RBI will have no hesitation in delivering once we are assured of the low inflation”.  At the time when he said this wholesale price inflation was minus 4.1 percent; primary product inflation was minus 3.7 percent, fuel and power was minus  12.8 percent and manufactures minus  1.5 percent.   So what inflation measure was Rajan talking about?  The answer is the cost of living index.

But  chief economic adviser Arvind Subramanian pointed out in an article in the Indian Express as long ago as  June 12, that  this is the only index he should avoid  using, because its stickiness, and the widening gap between it and all other measures of inflation,  makes it suspect.   Subramanian had written  that pegging policy interest rates  to the cost of living made sense in “normal times”, but not in ‘unusual times’. ‘From the context it was clear that by normal times he meant those that had  existed till 2007, when the CPI., although much more volatile than the WPI, had traced the same long term path.

Times became ‘unusual’ after  2007.  Except for a few months  at the bottom of the global recession in 2010-11, the gap between CPI and WPI has widened steadily from 3 percent in 2010 to an  unprecedented 8 percent in August.  What is more this has happened inspite of the RBI using every monetary instrument to squeeze demand  and force prices down. The only conclusion one can draw  is that whatever is keeping the CPI inflation up, it is not an excess of demand.

If not demand then what is it measuring? There is only one remaining candidate: shortages of supply. The association of inflation with excess demand is so hard-wired into our thinking that it is often hard to remember that inflation can also be caused by  shortages in  supply. The idea of politically inspired, artificially engineered, shortages that last for long periods, is alien to economists’ thinking because it comes from the dangerous realm of political economy.  But once we open ourselves to this possibility it does not take long to see that it is, indeed, the reason why the behaviour of the CPI has changed so radically.

Foodgrain and cash crop prices ( hich account for more than 40 percent of the CPI) have become progressively less sensitive to  demand because   state governments  are setting minimum support prices for  more and more commodities. Today there are procurement , or minimum support, prices for more than 20 groups of food and cash crops, and the central and state governments have been raising these by  five  to seven  percent every year for more than a decade.

The rise in price of urban housing, which  accounts for 9.77 percent of the index,  is  almost entirely accounted for by the  growing shortage of urban land.  Tariffs on  transport, fuel and lighting, which   account for  another  17.1 percent, rose sharply  because of a  revival  of international oil prices till mid-2014,  a 40 percent fall in the value of the rupee after 2011;  a simultaneous removal of subsidies on diesel, gasoline and LPG, and a growing reliance on coal, imported  at four times the domestic price, for power generation.  All these are cost push factors that get  translated into an increase in the cost of living  through  administered changes in price.

Health and education make up another  9.04 percent. The cost of the former has risen because of drug price decontrol – another administered price change  — and because of a growing reliance on private health  services. The rise in the latter reflects the final collapse of the public schooling system.

In sum , whatever the  cost of living index may signify  in  countries where more than half of the population lives on pensions,   in  India it is an index not of excess demand but of the  failures of past governments. To use these  as a yardstick of inflation and curb industry  is to destroy India’s future and administer the kiss of death to its poor.

The right policy is not to leave   interest rates solely to politicians but link them to a measure that has been purged of all pressures caused by administered prices and  shortages of supply. The only one in India  that fully does this is   CRISIL’s Core  rate of Inflation Index (the CCII) .

The CCII is derived from the RBI’s Non-Food Manufactures Index (NFME) but excludes oil and metals because their prices are heavily influenced by global price trends. But it also  includes manufactured foods and beverages, which the NFME excludes. This measure of inflation has stayed close to the wholesale prices index, but is far more stable. In September 2014 when the fall in oil prices had just begun to bring down all indices of inflation, the RBI’s NFME fell to 2.8 percent and the wholesale price index to 2.38 percent, CCII index will not have fallen as much as the WPI but is almost certainly also showing deflation. Today, India desperately needs investment in infrastructure, and therefore the lowest possible long term interest rates. With the CCII at a long term rate of at most two percent thus there is not an iota of economic logic for keeping bank lending rates at 12 percent.

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WITCH DOCTORS AT THE HELM
Prem Shankar Jha
Coming on the heels of July’s 0.5 percent, the 0.4 percent growth of industrial production in August shows that the Indian economy is not on the road to recovery. The reason is the sustained high interest rate regime of the past four years. Industry has been begging for cuts in the cost of borrowing since March 2011. When Modi came to power it thought that its troubles were about to end. But on August 5, RBI governor Raghuram Rajan surprised the country by announcing that he would not lower interest rates, because at 8 percent consumer price inflation was still too high. He also announced that he would not lower rates till inflation, measured by the cost of living, had come down to six percent. So his September 30 refusal to bring down interest rates came as no surprise.
But Rajan went a step further and unveiled an inflation forecasting model which estimated that under the very best of conditions CPI inflation would not fall to 6 percent till January 2016. To Indian industry, which ceased to grow three years ago, this was the kiss of death.
Today there is not a spark of demand anywhere in the entire economy. Inspite of every inducement the growth of credit in the festive season till the 3rd week of September was Rs 17,800 crores against 108,000 crores in the comparable period of last year. Two of the RBI’s own reports have shown that capacity utilization in industry has been falling since the early months of 2012. But Raghuram Rajan remains fixated only on bringing down inflation.
What is worse he is using only one of four measures of inflation—the consumer price index, and ignoring the other three. These are the wholesale price index (WPI), the Reserve Bank of India’s non-food manufacturing index, and the ‘core rate’ of inflation. The WPI is an approximate measure of the rise in production cost. It is therefore crucially important for manufacturers and builders. The RBI’s non-food manufacturing index is a rough measure of the pressure of excess demand on prices because it filters out the impact of weather and export policies on agriculture. But CRISIL’s core rate of inflation is the most precise measure as it includes manufactured food items but excludes globally traded fuels and metals to filter out the impact of world commodity price changes.
Today WPI inflation has fallen from 9.6 percent in 2010-11 to a record low of 2.38 percent. The RBI’s NFMI has also fallen from 8.4 percent in June 2009 to 2.8 percent, mainly on the back of declining world commodity prices. CRISIL’s core rate of inflation is therefore higher, but only by 0.2 percent.
So why has the Consumer price inflation rate remained so stubbornly high? The answer is that the new method of calculation introduced in January 2011 has, in an unforeseen way, become a measure of the effect on prices not of excess demand but of bottlenecks in supply and the failure of the State to provide the infrastructure for growth. .
Primary foods, whose prices are determined almost entirely by supply constraints such as rainfall, area sown, and in the case of vegetables , the amount exported, account for 42.2 percent of the index. Housing accounts for 9.77 percent, but the index includes only urban housing whose supply is severely constrained by the shortage of urban land and the severe curbs the government has imposed on loans to builders.
Health and education make up another 9.04 percent. The cost of both has risen because of drug price decontrol and a growing reliance on private doctors and schools that reflects the failure of the state The only manufactured products included in the CPI are clothing , bedding and footwear (4.6 percent) and manufactured foods ( 8.2 percent). If housing is taken as a proxy for basic industries the total weight of manufacturing in the index comes to just 21 percent. The rest of this index reflects constraints in supply that high interest rates cannot remedy.
This is why four years of ‘inflation targeting’ using the CPI as the yardstick, has failed to make any dent in the CPI inflation. Today people are expecting the RBI to lower rates , but only because CPI inflation has fallen to 6.38 percent and, with diesel prices falling, will go lower.. But the cause — a sharp fall in world commodity, and particularly oil, prices—has nothing to do with India. And we have no idea how long it fall will last. Should domestic interest rates go up again if ISIS captures Basra, or China goes on another investment spree?
The Government has belatedly realized that interest rates determine not only money supply but also economic growth. So it is setting up a joint finance ministry and RBI panel to decide what it should be. But even this is not a sufficient safeguard. The Congress learned to its cost that inflation indices misinterpreted, and interest rates misapplied, can not only sink the economy, but the government as well. If interest rates are to be indexed to inflation it must be to the core rate of inflation, and be subject to whether the government wants growth or price stability. That is a decision that only the cabinet and the prime minister are qualified to make.

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