The Russians are coming!

Mohan Guruswamy is Chairman and founder of Centre for Policy Alternatives, New Delhi, India. He has over three decades of experience in government, industry and academia. He can be contacted at mohanguru[at]gmail.com.

Mohan Guruswamy

The Russians are coming.

The Russians are coming!

The economic decline of the Soviet Union began in the Brezhnev era of the 1970’s and early 1980’s when the economy stagnated for the first time. These “years of stagnation” marked the end of almost half a century of unprecedented growth and change, and have come to be known in Russia as the gody zastoya, meaning just that. More interestingly for us Indians, the Russians also refer to this period as the period of senility – marazm. One is not sure if the seeds of the demise of the Soviet Union were sown during this period or if it was much earlier during the Stalinist era or even under great Lenin. But one thing is certain; it was during the gody zastoya that the moral degeneracy of the state reflected in the rampant corruption, cronyism, nepotism and rank inefficiency reached new levels. In a system where the state controlled all means of production and services it inevitably led to shortages. The leading Russian poet of that period, Andrei Voznesensky says all there is to say about life in the Brezhnev era in a poem about queues:

I am 41st for Plisetskaya,

33rd for the theatre at Taganka,

45th for the graveyard at Vagankovo,

I am 14th for the eye specialist,

21st for Glazunov, the artist,

45th for an abortion

(When my turn comes, I’ll be in shape),

I am 103rd for auto parts

(They signed me up when I was born),

I am 10,007th for a new car

(They signed me up before I was born).

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Very clearly the train of Communism had stalled. The Russians even had a joke about how three generations of Soviet leaders would have resolved the situation. “Stalin would have shot the engineers, exiled the crew and got someone new to drive it. Khrushchev would have pardoned the crew and put them back to work. Brezhnev would pull down the shades and pretend we’re moving!” Yuri Andropov, the urbane and reflective KGB spymaster, who took over after Brezhnev finally died, seemed fully aware of the malaise and more importantly about how far behind the West the Soviet Union actually was. In 1960 after Col. Yuri Gagarin’s historic space flight, Nikita Khrushchev had promised the world that the Soviet Union would overtake the West in twenty years.  As the long time head of the omniscient KGB, Andropov was more aware than anyone else in Russia that the shades will one day have to go up and if not done carefully would lead to an uncontrollable explosion that would take down everything that was actually achieved under Communism. Yes there were many great achievements, but this is not the time to discuss that, and I’d rather let Comrade Sitaram Yechury expound on them. But Andropov didn’t live long after that but not before elevating the relatively young Mikhail Gorbachev into the Politburo. By doing so he was striking the first deathblow to Communism and one must still wonder if he did it with malice aforethought? 

It was during the late Gorbachev period that I first visited Russia, to see the future. Forty years earlier George Orwell visited the Soviet Union and returned to Britain to exult “I have seen the future and it works!” The Russia I visited in March 1991 wasn’t working at all. One afternoon the little corner store near the Indian Embassy in Moscow at Ulitza Obukha, had just one measly loaf of coarse brown bread. The GUM store abutting the Kremlin where the Soviet nomenclatura (equivalent to our “VIP’s”) shopped had a little more, mostly babushka dolls from which a line of recent Russian despots disgorged each from the belly of the later one. Thus Gorbachev begat Chernyenko, who begat Andropov, who begat Brezhnev, who begat Khrushchev, who begat Stalin, who begat Lenin, who ultimately begat Nicholas!

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Gorbachev’s half-hearted attempts at reform, the much-vaunted Perestroika, and the rising tide of a new political consciousness in Eastern Europe only accelerated the slide. Increasingly bereft of the empire and the salutary lesson administered in Afghanistan contributed as much as the venality and monumental corruption that gripped the system had left Gorbachev with little room to restore order to the command economy. Instead of producing quantities of goods at prices determined by Gosplan, producers circumvented ‘the plan” and produced and sold at will in a parallel system working on barter, exchange and misappropriation. They reported what the authorities wanted to hear and did what they were forced to do to exist in the parallel market system that came into being without official sanction. Thus in effect a large but primitive and increasingly criminal market did exist when a botched coup in August 1991 saw Boris Yeltsin clamber atop a T-72 tank of the elite Taman tank division and clench his fist to create an image of defiance that captured the imagination of the Russian people and the world.

That defiance promised a new beginning and a revival of a nation whose genius was crushed by a mindless ideology and a kleptocratic bureaucratic elite. In a series of stunning moves Yeltsin dismembered the Soviet Union by engendering a surge of self-serving nationalism and following it up with de-colonization. The Soviet Union disappeared for good on December 25, 1991. The Yeltsin promise soon disappeared in a haze of vodka behind which new crony capitalism thrived. In “The New Russians” Hedrick Smith tells us what the old Russia of Brezhnev and Gorbachev was like. Hedrick Smith in fact has another book, which is just “The Russians” which is about the old Russia of The Readers Digest heydays. In “The Oligarchs” which is about “wealth and power in the new Russia”, David Hoffman tells us about what happened in the Yeltsin years when great power and wealth was cornered by a few, very few indeed. What also happened in the waning Yeltsin years was the dramatic emergence of a former KGB agent of the First Directorate and later a minor functionary in the city government of St.Petersburg in the halls of the Kremlin. First as head of the FSB, the successor of his first employer, and then as Prime Minister and to finally become President when Yeltsin retired, finally. Now another new Russia under Vladimir Putin has begun to emerge, but one cannot understand the gains being made without understanding all the preceding Russia’s.

The demise of Communism meant the destruction of the economic system and the introduction of a market economy based on democratic principles. This meant that instead of even the most mundane decisions being made by the State such as what the citizen will consume, what the factories will produce, and what the stores will sell, millions of new decision-makers were making these choices. Prices were freed, but instead of goods re-appearing, prices immediately shot up causing huge hardships to the common people. It would be years before a semblance of stability was restored.  But more stunningly the vast public sector, all of Russia’s great but inefficient production system, factories, stores, banks, farms, oil and coalfields, power plants, defence and ordnance works, airline, railways, in short everything of economic value other than private property was sold. In theory to the general public, workers and financial institutions. But in reality they were grabbed by a new class of crony capitalists, well-connected political hangers on and former bureaucrats, people who will thrive under any system. These were the Oligarchs.

Switzerland Chomsky

The Oligarchs wanted order, but the kind of order that was good only for them. What’s new about that? Among the most powerful Oligarchs were Boris Berezovsky, a former researcher with the prestigious Institute of Control Sciences, and Vladimir Gusinsky who trained to be a stage director and who once drove a Moscow taxi. Both were adventurers who came to great wealth and power during the Yeltsin years. Both came to own and control media- mostly TV- empires. While Gusinsky restricted himself to his media business, Berezovsky’s interests were more varied. Along with a clutch of industrial enterprises he combined a political career also. He was elected to the Duma in the elections that swept Putin to power. Berezovsky was an early supporter of Putin. Gusinsky on the other hand took on Putin and paid for his folly when the banks pulled the plug from under him. He now lives in London, a fugitive from Russian justice. Berezovsky soon after began to feel the prickly sweep of Putin’s broom on his back. He too is now a fugitive from Russian justice and is holed up in Paris. It didn’t take much more to show the other Oligarchs their place.

With the power of the Oligarchs broken, Putin set about in earnest to set right the liberalization that went awry in the Yeltsin years. A strong government not only was able to control inflation and industrial unrest, it also curbed the open lawlessness of the Russian mafia and the rampant corruption of the new elite. During a recent visit to Russia one saw evidence of renewed and vigorous economic activity everywhere. The diffidence and hopelessness of the Gorbachev and Yeltsin years have gone. A new and confident Russia is emerging. There will never be another Soviet Union where Comrade Surjit could go to get his cataract removed or that would straddle the world as one of its two super-powers. In its place we now have a Russia increasingly seeking its true destiny as a modern European nation and an actively dominant role in the world. Make no mistake; Russia is still a military super-power. It has the natural and human resources, and the technological base to make it a great player in world affairs.

The Russian resurgence of the early 2000’s was related to the rise in oil prices. These began to go southwards a decade after that. But till then with a savings rate in excess of 33% of GDP and FDI growing, Russia was on an investment spree. There was evidence of this all over. Everywhere you turned you could see frenetic construction activity. The shops were full and brimming with goods. If Moscow was spruced up and more orderly, St.Petersburg positively gleamed. The fashionable Nevsky Prospekt still  compares favorably with any great European high street. Putin has shown the world what an energetic and determined leadership can achieve. If oil prices begin to upwards, as there are now indications, the Russian economic resurgence will pick up from where it gave up. The western sanctions will soon go with it as their businessmen will once again flock to Russia to seek custom for their products.

In July 1991 I had a conversation with the then Indian Ambassador in Moscow. He vehemently disagreed with me that the Soviet Union seemed on the verge of imminent collapse. On my return I learnt that our MEA considered such thoughts as heresy. Now with the MEA under new management, equally focused in another direction, we seem to be missing the Russian story once again. Like it or not, the Russians are coming!

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Modi’s trump card

Mohan Guruswamy is Chairman and founder of Centre for Policy Alternatives, New Delhi, India. He has over three decades of experience in government, industry and academia. He can be contacted at mohanguru[at]gmail.com.

Mohan Guruswamy

I was asked by a business acquaintance two days before whether demonetization was on the cards? I asked him what makes him think so? To which I was told that was the bazaar buzz. My considered opinion to him was that it was very unlikely and he could go on his planned pilgrimage for I felt that the immediate costs would by far outweigh the long-term benefits.

When I heard the Prime Minister make the announcement last night I recalled an anecdote narrated by Dr.Paul Samuelson, the great economist and Nobel laureate. At the end of a talk on economic forecasting when he was asked if he had forecasted the Great Depression he said: “not a single economist in the star-studded Harvard economics faculty predicted it. Only the janitor of the building did!” Samuelson elaborated that the janitor used to perform a small service to the faculty by collecting salary cheques from them on Fridays for encashment for weekend spending, asked them to withdraw more or all as he felt that the banks will not open on the following Monday.” His advice went unheeded and the following week the faculty had to borrow money from the janitor!

BSE’s mid-cap and small-cap indices have fallen by over 6% each at the time of writing. Photo: Mint
photo: mint

The moral here is that street buzz is often closer to the truth. For several days now I have been hearing on new Rs.2000 notes and an incipient demonetization. But I take pride in being rational and hence have to wonder on why the event overtook us? For a start as much as 86.4% of the value of notes in circulation is in Rs.1000 and Rs.500 denominations. The Rs.1000 and Rs.500 notes account for 7% and 17.4% respectively of the currency in circulation. These are significant numbers and a sudden withdrawal will obviously make an economy offering little cheer even more anemic.

Most middle and upper income households are a little strung out due to this. My wife and I too stock this morning and together we have Rs.600 in usable money. But we are mostly out of the cash economy managing our economy on credit and debit cards. But the vast majority of common folk still function with cash. My driver just told me that he has a few thousand rupees in 500’s and wanted some smaller notes.

It is true the PM has assured us that the old notes can now be exchanged for brand new notes by presenting them in the banks where the Aadhar and PAN numbers will noted to give the authorities a fix on the admitted owners of the cash. This is fair enough and most of us have little to get bothered about, though the queues at the banks will be a bit tedious.

The most competent extra-governmental authorities on these matters such as Baba Ramdev and Amit Shah have with predictable hyperbole compared this to the “surgical strikes” last month. The comparison might even be apt. For like the “surgical strikes” which were in reality a series of cross border raids to depths of 0.5 and 1.5 kms into Pakistan territory, this too is not without much depth. Like the LeT leadership, the black money enemy lies deeper inland and making a thrust here and there does not amount to a surgical strike. The leaders of our nation and the ruling elites understand the gravity and depth of the problem, but the baying hounds of public opinions too have to be addressed. We are being fobbed off with a few bones.

The term black money is all encompassing for income on which no taxes have been paid to the state. This income may be from legitimate sources or patently illegal activities such as smuggling, counterfeiting, corruption and narcotics. The estimates of how much black money is generated each year vary widely. But a widely cited, but still supposedly confidential study by the National Institute for Public Finance and Policy (NIPFP), commissioned by the government estimates the black economy in 2013 to be equal to about 75% of the GDP.

The previous NIPFP official study commissioned by the government in 1985 estimated it be equal to about 21% of the GDP in 1984 or Rs. 36418 crores out of a then GDP of Rs. 173,420 crores. In 2014 India’s GDP is estimated to be over $ 2.047 trillion corresponding to $7.277 trillion PPP ($1=INR60). In 2014 the Government of India was expecting to collect taxes and duties amounting to Rs. 13.64 lakh crores. This only means it is not collecting additional taxes and duties amounting to about 75% of this, other words about Rs. 10.4 lakh crores. This is huge sum and any government will drown in salivation thinking about all the good it can do with that money.

We can then contemplate investment to GDP ratios higher than China’s. What this will do for GDP growth and the expansion of prosperity can well be imagined. India has only 35 million taxpayers of which 89% declare incomes in the 0-5 lakh slab. That means only 11% declare incomes above Rs.5 lakhs a year, an absurd figure considering Indians now purchased over 2.2 million new passenger vehicles and SUV’s last year, by all accounts a slow year.

Clearly most people who should be paying taxes are not. Because the UPA government failed to address this, the people booted them out, with the expectation that a Modi government will restore what rightfully belongs to the public. The NDA has used up almost thirty months frittering away good time. The public restiveness now evident and the protracted sluggishness of the economy have apparently persuaded them that a “surgical strike” was needed. So we are being thrown a few bones.

Last year Indians living in India illicitly exported $83 billion making us the second largest stashers of money abroad after the Chinese. This money is out of the purview of this demonetization. The government has so far demonstrated its inability to coerce or cajole the return of the estimated $500 billion stashed away in the last decade, as the economy expanded exponentially. Most of the other tax-evaded incomes are locked in property, jewellery and other fungible assets. The value of money stashed away as cash is trivial by comparison. Its mostly the likes of small businessmen, traders, artisans and peasant proprietors who keep stashes of hard earned cash at home or buried under. These will be the people you will meet tomorrow morning when you and I queue up at the banks to get our money back.

The rooting out of black money cannot be done by such pinpricks. That calls for the revamp of our system and undertake real and deep reforms. Look at what Arun Jaitely and company did to the GST law. We now have seven slabs and plenty of exemptions for the merry making band to sell discretion. We need a new start and for a good beginning we must make tax evasion a criminal offence attracting a mandatory jail sentence. We need a layer of courts trying and expeditiously disposing off economic offences. The government needs to put its money where its mouth is. Not the other way around, as is increasingly the case.

The Coup in Bombay House

Mohan Guruswamy is Chairman and founder of Centre for Policy Alternatives, New Delhi, India. He has over three decades of experience in government, industry and academia. He can be contacted at mohanguru[at]gmail.com.

Mohan Guruswamy

It seems quite ironical that India’s biggest and possibly most mismanaged state and biggest professionally managed  corporate group are both being convulsed simultaneously with internecine struggles. The media seems unable to make up its mind choosing between them for main story space. If the political dynasty’s drama has all the exaggeration and theatre of a village nautanki, the corporate drama, no less vicious and vicarious, is like a Shakespearean play staged by a Bombay amateur English  theatre group. The themes are almost the same, concerning the small ambitions of the principal players, with the only difference being language.

Like the UP drama, the Bombay House drama, is essentially about an aging patriarch unwilling to fully let go the reins to a chosen successor. Mulayam Singh Yadav who anointed his son Akhilesh as the Chief Minister of India’s largest state and putative inheritor of the clan’s pelf and thralldom, now finds in him a young man seeking to find his wings and get away from the restrictive influence and ways of the patriarch.

Similarly Cyrus Mistry, anointed by Ratan Tata, came a cropper when he tried to set right the weak financial services and corporate ills that he inherited. In this case undoing the inherited mess meant shining a new and revealing light on the inheritance. The dilemma that confronted Mistry was that if did nothing to reverse the trend he stood being damned by his predecessor, and if he didn’t, he risked being damned by the vast body of Tata shareholders, lenders, customers and employees. He chose the later and a carefully assembled cabal divested him of his seat.

The simple facts about the current  state of the Tata Group is that it consists of 57 companies, of which 20 make an annual loss with regularity, with a handful making decent profits, and the rest just chugging along on the slow lane. While the Tata conglomerate is by far the biggest private corporate enterprise in India, it essentially survived as the No.1 because it was too big to fail, not in India where we are more cavalier with public funds and lax with standards of performance. Just two of its businesses made enough money. Enough to keep the rest afloat. Only TCS, India’s biggest IT services company, and the JLR business of Tata Motors could be considered true business successes.

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Cyrus Mistry & Ratan Tata (photo: Wire-SIMC)

But both face uncertain times. New advancements in robotic technologies now challenge the cost effectiveness of Indian IT workers, and the slowing Chinese economy casts a shadow on the futures of Jaguar and Land Rover motorcars. If the rest of the Tata group keeps hemorrhaging and TCS and JLR went the way of the other Tata companies we could very well see the death of a star that shone over the Indian corporate firmament for the last 147 years. This seemed the challenge Cyrus Mistry seemed to be addressing till he threatened Ratan Tata’s legacy?

The question then is how could anyone have a personal legacy in a business that has been professionally managed since 1938? The founder Jamsetji Tata was followed by his son, Dorab Tata in 1904. His first cousin, Nawroji Saklatwala in 1932, succeeded Dorab Tata. After his death in 1938, another Tata, but no relative of the founder, JRD Tata took the helm. He remained Chairman till 1991, when he handed over to another non-Tata Tata, Ratan Tata.

But names have strong associations, even if they are erroneous, as we know in the case of a famous political dynasty now in the evening of its history. Yet it is quite amazing to see every major national newspaper repeating that Cyrus Mistry is the second non-family head of the Tata Group. The first, to them, being Nawroji Saklatwala. Saklatwala was the last Jamsetji Tata blood relative to head the Tata Group. He was Jamsetji’s nephew, being his sister’s son. The Tata’s who followed do not belong to the original line.

Interestingly enough Jamsetji had another nephew, another Saklatwala, who was another sisters son, who began life prospecting for iron ore for Jamsetji. He later on went off to England and to seek his fortunes as a barrister. But other fields beckoned and the strong genes emerged. In the early 1920’s when his cousin Dorab Tata was still the Tata chairman, Shapurji Saklatwala became a member of the British House of Commons from Battersea North as a Communist Party of Great Britain candidate. He went full circle from capitalism to hammer and sickle. Quite an irony. The last Tata scion was committed to expropriation of the expropriator and other such things.

This group, India’s largest with a turnover of over $105 billion, exists in the black mostly on the earnings of TCS, which in turn exists on body shopping. Things in the IT business can change overnight. Look at the erstwhile bellwether Infosys now languishing. Then what happens to the house of Tatas?

Tata’s too need radical resection and restructuring. To save it would inevitably tarnish Ratan Tata’s carefully cultivated legacy. Mind you the Tata trusts only have a majority in Tata Sons. Public institutions and individual shareholders still largely own the big Tata companies like Tata Steel, Tata Motors, Tata Chemicals and Tata Beverages. The trusts are mostly in a minority position in the group. Tata Sons exists by charging for use of the TATA brand name. To that extent it leads a parvenu existence living just within the folds of legality.

Ratan Tata is now calling for things to be done within the Tata Group which should have been done decades ago when he was still new on the job, and after he ousted the group of satraps who had entrenched themselves during JRD Tata’s long reign. Power within the group was consolidated with him. The most famous political dynast too used the argument of a strong center  to concentrate power. With so many diverse businesses and with such challenging external environment with the state as the main facilitator of business success, Ratan Tata thought escape out of this death trap was by flight abroad.

By the time he retired over three fifths of the Tata business is abroad. But that didn’t work out as intended. The steel investment bombed. Only JLR hit pay dirt. But the Indian side of the business, with the exception of TCS, languished. This was in short Ratan Tata’s legacy. This is the legacy he would like to be kept away from the analysts and business historians. But to get the Tata train back on tracks Cyrus Mistry had to undo just that. He paid the price in a boardroom coup. Interestingly enough, going by media reports, the two Tata Sons directors who abstained were Tata insiders and professionals. The ones who voted for removal were more recent additions to the board, handpicked by Ratan Tata.

Finally, there can be no return for Cyrus Mistry and no comeback for 78 year old Ratan Tata. One used up his time and lost, and the other doesn’t have much time. So who will they find in the next four months, which is the outer limit set within which Tata Sons must find itself a new Chairperson? The topmost of the two names being most bandied about is Noel Tata, Ratan’s half-brother and Cyrus’s brother-in-law. Many take his candidature seriously because he is the rich and powerful Shapoorji Pallonji Mistry’s son-in-law and hope that will placate him. I don’t think so. To get an idea of what Noel is all you have to do is visit any  Westside store of the retail chain he manages. They are dull, boring and a business not apparently going anywhere. Besides being well born and well married he has little else to show.

Indira Nooyi who is the PepsiCo CEO is another one in the reckoning. Not having worked in India, I don’t think Nooyi would have the skillset needed to manage a hugely diversified and financially troubled conglomerate that is run by chieftains in an old world quasi feudal managerial style. Besides there is the complexity of the political economy. Managing a pizza and soda pop behemoth would be child’s play compared to heading Tata Sons. Ditto for Arun Sarin who once headed Vodafone.

To my mind it has to be an insider who is acclimatised to the hushed and byzantine culture that permeates Bombay House. And who will defer to Ratan Tata as long as he is there and wait till events force hard choices.

The Supreme Court throws down the gauntlet.

Mohan Guruswamy is Chairman and founder of Centre for Policy Alternatives, New Delhi, India. He has over three decades of experience in government, industry and academia. He can be contacted at mohanguru[at]gmail.com.

Mohan Guruswamy

How the Supreme Court perpetuates itself reminds me of how the India International Center’s (IIC) Board of Life Trustees perpetuate themselves. All decision-making at the IIC is vested with the Board of Trustees. Each trustee is expected to be “an eminent authority in his/her field, bringing years of experience to the governing of the Centre.” A life trustee’s term is till the end of life. When the rare vacancy arises, the surviving life trustees meet to decide on who the next life trustee should be. There are two elected trustees too, but the real clout in the IIC is with the very clubby group of life trustees.

The only difference between the IIC life trustees and the Supreme Court is that judges retire. But like the IIC’s life trustees, new Supreme Court judges are chosen by those already in it and are in its “collegium of judges.” The collegium also selects judges to the High Courts. The collegium comprises the Chief Justice of India, four senior most judges of the Supreme Court and the chief justice of a particular high court and its two senior most judges.

supreme_court_of_india_-_central_wingThe collegium system was not envisaged in the Constitution. Article 124 vests the power of appointment of the Chief Justice of India (CJI) and the Judges of the Supreme Court in the President. It explicitly states that the President shall by warrant, make the appointment after consultation with such of the judges of the Supreme Court and the High Courts of the States, as he may deem necessary.

The important point to be noted here is that the provision expressly states ‘after’ consultation and not ‘in’ consultation. This very simply means that the government will choose and seek the CJI’s opinion on the selection. A plain reading of the provision tells us that the power of appointment vests in the President. The President, of course, means the Executive. The President can act only on the advice of Council of Ministers.

The CJI stands as part of the Trimurti consisting of the President, Prime Minister and himself, representing the Executive, Legislature and Judiciary. While they are supposed to function independently of each other, in they cannot remain hermetically sealed from each other either. The branches are required to work with each other and influence each other in giving this country a stable, respected and trusted system of government that will serve the people and protect their interests too.

Having said that, democracy is the rule of the people. The only institution in the Trimurti that directly derives its legitimacy and power from the people is the Legislature, with the Parliament at the apex. The emphasis on separation of powers is only to protect the other two pillars of democracy from the overweening and overriding of a rampant Parliament. But separation of powers does not mean an entirely independent existence either.

It is possible to visualize a situation where the government disregards the CJI’s opinion, and one can hence see a well-founded apprehension of the executive riding rough shod on the judiciary. That is why the system of government envisaged in a democracy is a system of checks and balances. This is a system that allows each branch of a government to amend or veto acts of another branch so as to prevent any one branch from exerting too much power.

Democracy is also a system of government by accommodation. The spirit of accommodation calls for a certain political temperament and commitment to make the system work and not be focused on overreaching one and another.

The selection of judges from the first days of the Republic onwards was vested with the Executive. But in 1993, in something akin to a coup, the Supreme Court created the collegium system, which has been in use since the judgment in the Second Judges Case was issued in 1993.

There is no mention of the collegium either in the original Constitution of India or in successive amendments. The collegium was the creation of the Court to arrogate to itself the right to choose brother judges. The creation of the collegium was a reaction to the indiscriminate transfer of judges, which was perceived as an attack on judicial independence. The reaction of the Supreme Court was to completely oust the executive from the selection of judges for the Supreme Court and the high courts.

Since 1993 the judges have been perpetuating themselves without any reference to the Executive. To be fair, the Executive hasn’t exactly been reduced to a rubber stamp as we have seen in the matter of Gopal Subramaniam. But the power to initiate a judicial appointment is clearly with the Judiciary.

This power is without precedent. In the USA, the President initiates the appointment to the Supreme Court and recommends a candidate for Congress to approve. In the UK, the Judicial Appointments Commission (JAC) set up in April 2006 selects selects candidates for judicial office in courts and tribunals in England and Wales, and for some tribunals whose jurisdiction extends to Scotland or Northern Ireland.

The JAC was set up to maintain and strengthen judicial independence by taking responsibility for selecting candidates for judicial office out of the hands of the Lord Chancellor and making the appointments process clearer and more accountable. Its creation was one of the major changes brought about by the Constitutional Reform Act (CRA) 2005, which also reformed the office of Lord Chancellor and established the Lord Chief Justice as head of the judiciary of England and Wales.

But the JAC is very clearly not a creature of the Judiciary either. In accordance with the CRA there are fifteen Commissioners, including the Chairman. All are recruited and appointed through open competition with the exception of three judicial members who are selected either by the Judges’ Council or the Tribunals’ Council. Membership of the Commission is drawn from the judiciary, the legal profession, non-legally qualified judicial officer holders and the public.

While stripping the Lord Chancellor of the power to make judicial appointments, the CRA ensured that the Chief Justice did not seize it either. Instead a system was created to ensure that merit that is independently arrived at is the only criterion for selection.

Nepotism, corruption and favoritism are not exclusive to the Executive. The Judiciary too has shown that it has not remained untouched by this. The National Judicial Appointments Commission, which was unceremoniously dumped by the Supreme Court, was an attempt to find a via media to restore merit as a criterion, and yet ensure the independence of the Judiciary.

The NJAC contemplated the participation of both the executive and the judiciary in making recommendations. The Attorney General captures the mood and need exactly when he said: “The executive appointed judges for 40 years. Then, the judges appointed judges through the collegium system for more than two decades. Let the new NJAC mechanism be given a chance to work.”

The Court has overreacted by holding the 99th Constitutional Amendment Act and the NJAC Act 2014 “unconstitutional and void”; and by doing so the Court has ignored the unanimous will of the Parliament, most of the state legislatures and the desire of the people for transparency in judicial appointments. It has perpetuated a system that has not proven to be in anyway superior to what it superseded. On the other hand it has flung down a gauntlet at that most fundamental notion of a democracy that the people speak through their Parliament. It is now for the people to pick up the gauntlet.

J&K: Time to break-up the fiction.

Mohan Guruswamy is Chairman and founder of Centre for Policy Alternatives, New Delhi, India. He has over three decades of experience in government, industry and academia. He can be contacted at mohanguru[at]gmail.com.

Mohan Guruswamy

Kashmir is the northernmost geographical region of South Asia. Until the mid-19th century, the term “Kashmir” denoted only the valley between the Great Himalayas and the Pir Panjal mountain range. The name Kashmir derives from the Sanskrit Kashyapmeru. The Greeks knew it as Kaspeiria. Herodotus called it Kaspatyros. Emperor Ashoka, who called it Shrinagari, founded the capital near present day Srinagar. The ruins of this Ashokan city still stand. Kashmir evolved with a strong Buddhist tradition, but Buddhism here like in the rest of India drowned in the wave of Hindu revivalism initiated by Adi Shankaracharya in the 9th century AD.

Muslim rule was ushered in by Shamsuddin Shah Mir (1339-42), a courtier in the court of King Udayanadeva who seized the throne after his death. The Mughals took control in 1586 during the rule of Jalaluddin Akbar. The region came under the control of the Durrani Empire in Kabul from 1753 to 1819 when the Sikhs took over. In 1846 the treachery of Gulab Singh, a Dogra general and governor of Jammu, was repaid when the British gave him Jammu for it and further turned over the Kashmir Valley to him for Rs.75 lakhs. These treaties formed the so-called princely state of Jammu and Kashmir and Gulab Singh became its first Maharajah. This was also the first time Jammu and Kashmir became one administrative entity.

jk-mapAs governor of Jammu, Gulab Singh had also captured Ladakh and Baltistan.  His son Ranbir Singh added Hunza, Gilgit and Nagar to the kingdom. Thus, a composite state of disparate regions, religions and ethnicities was formed. This is reflected in the present day demographics. The Kashmir Valley of about 6.9 million people is 96.4% Muslim with Hindus and Buddhists accounting for just 3.6%. Jammu which has a population of 5.4 million is 62.6% Hindu and 33.5% Muslims, mostly concentrated in Poonch. Ladakh has a population of just 30 lakhs with its 46.4% of Shia Muslims concentrated in Kargil, 40% Buddhist concentrated around Leh and 12.1% Hindus. Pakistan Occupied Kashmir areas including Gilgit-Baltistan are almost 100% Muslim. The total population now of J&K is 12,541,30, POK is 2,580,000 and Gilgit-Baltistan is 870,347.

The purpose of elaborating on this is two fold. Historically, all the regions of Jammu and Kashmir are part of the present narrative of India’s composite history. Despite its preponderant Muslim population the history of people of the Kashmir Valley is intertwined with all the different local histories of the many nationalities of present day India, which is also home to the world’s second largest Muslim population. There is no separate Kashmir story as there is for Afghanistan or Nepal. It was always a part of the Indian main and except for a brief rule from Kabul. There is no cause or case for a separate Kashmir, like the Tibetans may have or the Palestinians have. The second point here is that the Kashmiri’s are a distinct ethnic group with little of no historical or social affinities, except Islam, with those of the other regions of the erstwhile princely state of Jammu and Kashmir. This J&K, with or without POK, is an artificial entity of recent origin.

J&K is not the only princely state that acceded to India without some early hesitations and a bit of acrimony. The Maharaja of Jodhpur was an early ditherer who even contemplated acceding to Pakistan till sanity prevailed. The story of Junagadh is well known. Hyderabad, India’s biggest princely state and an inheritor of varied traditions including the Sathavahanas, Kakatiyas, Bahmanis and Mughals was, like J&K, stitched together with three large and distinct regions. If J&K had to be rescued by the Indian Army from tribal raiders from present day Pakistan and encouraged and provisioned by the new state of Pakistan, Hyderabad, surrounded on all sides by former British Indian Presidencies, had to be taken by the Indian Army from the dithering Asaf Jah ruler and his coterie of Muslim nobles and proselytizing rabble.

But look at how differently these one time princely states were dealt with. Jodhpur is now part of Rajasthan and the princely line are now hoteliers. Junagadh went to Gujarat via Saurashtra and is now better known for its growing population of Asiatic lions, which are now deemed to be symbols of Gujarati pride (asmita). Hyderabad was dismembered into three parts and parceled off to Maharashtra, Karnataka and Andhra Pradesh in 1956. The present Nizam lives in a two-bedroom apartment in Istanbul. The only group who feels nostalgic about the Nizam era are some ex-Hyderabad Pakistanis living in Los Angeles.

In the new India, old states got subsumed and new states were created. All the many regions of the erstwhile princely state of J&K, whether in India or under the control of Pakistan have by and large settled down under their new national identities, except the Kashmir Valley. It is now India’s seemingly intractable problem. It has festered for over 67 years. Did we miss something?

Like Malda, Kishenganj, Hyderabad and Malapuram parliamentary constituencies, Anantnag, Srinagar and Baramula are the only Muslim majority constituencies in India. There are no  nationality issues in any of the former. Independent India is a nation of many nationalities and for the first time with power vested with the people by a lively democracy. More than being a nation bound together by shared history, shared culture and shared ethnicity, it is bound together by shared aspirations assured by a Constitution, written by our founding fathers that shared an idealism and nationalism forged by shared experience.

It is amply clear that many if not most people in the Kashmir Valley do not share the aspirations, which bind the rest of us together. But history does not offer them any basis for a distinct and independent identity either.  On the other hand the narrative of Kashmir’s recent history has taken a distinct course different from the rest of the country. This India must recognize. In these past 68 years, India has made a hash of managing Kashmir either by placation or by iron hand.
 

800px-karakoram-west_tibetan_plateau_alpine_steppe
Karakoram-West Tibetan Plateau alpine steppe near Ladakh, India (image: wiki)

Pakistan controlled territory has also been a springboard for terrorists and separatists who think of Kashmir as the unfinished business of partition. They don’t seem to realize that the business of Pakistan too is near finishing. Its majority seceded in 1971. Baluchistan that accounts for three fifths of the land mass too wants out. Sind also wants out. The Mohajirs from India centered in Karachi are now not so sure as their fathers were about being in Pakistan. Khyber Pakthunkwa is barely governed. The Kashmiris are too intelligent, educated and self-centered not to know that Pakistan is not a future in their interests. Nor is it in their future.

The Indian state has now to offer something tangible to satisfy most aspirations in Kashmir, and we are talking only about Kashmir. J&K is an artificial and recent construct. Its  long past its use by date. We must also accept that reunification with the POK part of it is neither desirable nor feasible. Historically, culturally, ethnically and linguistically Jammu, Ladakh and Kashmir have as much in common as Tamil Nadu has with Punjab or Assam with Gujarat. The destinies of the people of Jammu and Ladakh have to be delinked from Kashmir. Nor are they exactly happy to be dominated by Kashmir.
 
India must then seek to accommodate Kashmir with an autonomy that will satisfy the aspirations nurtured by this long period of revolt. With accession to Pakistan or a complete independence not options, an acceptable via media must be and can be found. The breakthrough for that must happen in the minds of the rest of India. Heavens are not going to fall, if Kashmir becomes an autonomous region within India. The extent of autonomy then becomes the only matter for discussion. We can afford to be generous. But is India ready for it?

The crisis in the global economy

Mohan Guruswamy is Chairman and founder of Centre for Policy Alternatives, New Delhi, India. He has over three decades of experience in government, industry and academia. He can be contacted at mohanguru[at]gmail.com.

Mohan Guruswamy

Book Review:

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King/ Little Brown, UK/2016.

The crisis in the global economy is a subject that engages many and affects most of mankind. Like all such issues we find little clarity but a lot of fire and brimstone. Few have tried to seek feasible solutions. Even fewer are qualified, experienced and with a usefully cosmic view of the world we live in to write about it. Fortunately we still have people like Mervyn King. King was the Governor of the Bank of England from 2003 to 2013, a tumultuous period that saw the world economy expand at a record pace and then arrive at the precipice in 2008. We are still seeking to find new pathways to get over it. And clearly we are struggling.

We are now increasingly a world where trust is in deficit. Countries don’t trust each other. People don’t trust their governments. Government’s don’t trust their regulators. Regulators don’t trust the banks and the financial community. But above all governments don’t trust the people will support them to do the right things. But as King writes: “Trust is the ingredient that makes a market economy work. It is central to the role of money and banks, and the institutions that manage our economy.” How do we find trust again often seems to be the main issue of our time.

Raghuram Rajan recently wrote: “Politicians know that structural reforms – to increase competition, foster innovation, and drive institutional change – are the way to tackle structural impediments to growth. But they know that, while the pain from reform is immediate, gains are typically delayed and their beneficiaries uncertain. As Jean Claude Juncker then Luxembourg’s prime minister, said at the height of the euro crisis, “We all know what to do; we just don’t know how to get re-elected after we’ve done it!”

End-of-AlchemyBut let us step back a bit and try to understand why and how we are in this situation?

Imagine living on an island as a part of a small group, each of whom is assigned a specific vocation and task. In this system one-person makes clothes, another shoes, some one pots and pans, some one grows food and someone else prints money to facilitate exchange of goods and services. So the shoemaker exchanges his goods with another for money and in turn pays with that money for food or whatever. Since everybody in this system can produce as much as possible, the person who prints the money will be best off among all because he can buy whatever he wants and pay for it with his own money. Take this one step further then. Producers who come to hold more paper than they need then start leaving it with the person who prints them to hold and lend. Expand this to the global scale and we pretty much have something similar to the world system.

In 2016 the World GDP totaled about $77.83 trillion. In 1960 the WGDP was $6.85 trillion (1990). The WGDP was just $1.1 trillion in 1900 and took half a century to grow fourfold to $4.01 trillion and grew ten fold in the next fifty to $41 trillion (1990). The big leaps began after 1971 when US President Richard Nixon unilaterally delinked the US dollar from the international gold standard.

Now lets turn to see how the system actually works. The emerging countries produce goods and services at the lowest costs for consumption in the USA, which in turn pays them in dollars, which they in turn deposit in US banks. Give or take a little. Since money cannot sit still, this money in US banks is then lent to Americans, who today have the highest per capita indebtedness in the world, to splurge on houses, cars, HD TV’s, computers and play stations, which they can often ill-afford. The cumulative debt of US households is now $11.4 trillion. Credit card debt alone of each US household is about $15000. There are 160 million credit cards in the US. The USA accounts for a quarter of the WGDP and the world keeps two thirds of its in US dollars. Quite clearly the USA’s finances, public and personal, are out of control.

The irony is that this is well understood, but like the people who kept investing with Bernard Madoff, countries like China, Russia, Japan, Kuwait, India and others keep investing in US securities at interest rates mostly between 1-2%.  Thus, in effect the rest of the world was plying the USA with cheap credit, encouraging it to splurge even more. Unfortunately there was and is no global regulator to caution the US on its profligacy or force it to mend its ways. There is also no global regulator who can ensure that countries like China balance their trade. Thus, it is US profligacy and Chinese surpluses parked in US banks that are the biggest cause of this dysfunction. Many have described this relationship as akin to that of a drug addict and a drug peddler. The drug addict is now in rehab and it’s the peddler who is suffering from withdrawal!

At the Breton Woods Conference of July 1944 that took place under the fast receding shadow of WWII, Lord Keynes had in mind an elaborate scheme that called for the establishment of an international reserve currency. But this had to be shelved in the face of American obduracy. Keynes’ proposals would have established a world reserve currency called “Bancor” to be administered by a international Central Bank. This Central Bank would have been vested with theresponsibility of creating money and with the authority to take actions on a much larger scale. In case of balance of payments imbalances, Keynes recommended that countries with payment surpluses should increase their imports from the deficit countries and thereby create foreign trade equilibrium.

But the United States, as a likely creditor nation, and eager to take on the role of the world’s economic powerhouse, baulked at Keynes’ plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw imbalance trade as a problem of only the deficit country. But the fact that the US has been the world’s biggest deficit country for several decades and with increasing deficits with most countries seems to have eluded the IMF. This and the fact that the US dollar has become the world’s preferred reserve currency is now the core of the world’s greatest financial problem.

This international system was unilaterally abrogated when in 1971 US President Richard Nixon US delinked the dollar from the gold standard. In the absence of a standard and a useful regulatory function for the IMF the great private banks on Wall Street were given a license to run amok. We are now reaping the bitter harvest.  With the US dollar as the world’s preferred reserve currency, the US and its even more profligate citizens have an apparently endless access to easy credit to satiate their sundry appetites. In this way the ever growing annual US trade deficit becomes the de facto engine of growth for many export dependent economies, such as China, Germany and the ASEAN countries.

Key Speakers At The LSE Financial Crisis Debate
Mervyn King/File Photo: Jason Alden

In Chapter 7 King poses the query “how can we regain the innocence and trust in banking that, as described in Chapter 3, was lost over a long period in which crises became accepted as an inevitable feature of the financial landscape?” Yet he offers little by way of solutions.

Earlier this year, Raghuram Rajan, the Governor of the Reserve Bank of India, wrote: Arguably, what I have in mind will eventually require a new international agreement along the lines of Bretton Woods, and some reinterpretation of the mandates of internationally influential central banks. Setting the rules will take time. But the international community has a choice. We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. Or we can start building a system fit for the integrated world of the twenty-first century.”

The Audacity of Pessimism is the title of the final chapter, and with good reason. Democracy, national sovereignty and economic integration find themselves incompatible.  People choose according to their immediate needs and lights, and mostly swayed by manufactured perceptions. The people’s faith in the market to generate prosperity is severely corroded. King just leaves us wondering if it’s a failure of individuals, institutions or ideas? Or all three? He plaintively asks for “an intellectual revolution”. But such revolutions only follow a cataclysmic crisis. Then there are other new realities.

 The post Cold War era has seen the economic and political rise of a host of nations, Brazil, China and India being foremost among them. Each one of these nations is now a major economic player with bigger GDP’s than many in the G-7. The economic balance of power is shifting towards Asia. Jim O’Neill, the Goldman Sachs economist who was first to coin the acronym BRICS, how predicts: “It’s likely that the combined GDP of the four big BRIC nations will exceed that of the G-7 by 2020.” Since the USA and Europe do not see it as being in their interest to reform the system, it devolves upon these world growth engines to bring more order into the world system. Like Communism the ideology of the Washington Consensus has also been proved to be a failure.

Given his stature and the reputation he enjoys, Mervyn King could have used the masterly analysis of the ills to make bold and innovative proposals to get us out of this situation. He ventures: “another crisis is inevitable, and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner than later.” Mervyn King’s book is masterly about how we came to this pass. But curiously for a man with his experience and stature, he offers no solutions.  But that may be because he knows better.  Or does just lack the audacity?  

GDP: Growth or Fudge?

Mohan Guruswamy

Mohan Guruswamy is Chairman and founder of Centre for Policy Alternatives, New Delhi, India. He has over three decades of experience in government, industry and academia. He can be contacted at mohanguru[at]gmail.com.

The government has now made it known that the GDP has grown from 7.2% in the December 2015 quarter to 7.9% in the March 2016 quarter. This should be a reason for much celebration, but the popular mood seems unmoved. For the statistical picture presented doesn’t seem to dovetail with the ground truth.

Lets take a few important ground truths. Gross fixed capital formation (GFCF), which is the net increase in physical assets within a period, or very simply investment, is actually decreasing. It has been declining steadily since Q2 when it was 32.9% of GDP, to 29.9% in Q2 and 29.4% in Q4. In the data released recently GFCF in Q4 is down by Rs.17,197 crores or contracted by 1.9%. Moreover government expenditure, while having increased by Rs.6482 crores, has actually declined in comparison with Q4 in 2015 by about Rs. 4400 crores. So what is driving growth?  During the UPA period we seemed to have had  jobless growth. Are we now seeing investment less growth?

Another worrying ground truth is the widening discrepancies between sectoral growths and GDP growth. Industry growth fell from 8.6% in Q3 to 7.9% in Q4, while the Services sector slowed from 9.1% in Q3 to 8.7% in Q4. Only Agriculture has reversed to trend from minus 1% in Q3 to 2.3% in Q4, after having tumbled down from 2% in Q2.

Vizag Port/file photo: wiki
Vizag Port/file photo: wiki

During the past two years vast parts of India has been gripped by a severe drought. Food grains production has remained largely dormant. It fell from 265.57 million tons in 2013-14 to 257.07 million tons in 2014-15. It is expected to be 253.17 million tons in 2015-16. There are visible signs of widespread distress in rural areas; the most visible manifestation is the rural migration to the cities in search of jobs.

Yet the agriculture data suggests an optimism that flies against the reality. Clearly the quality of this data seems questionable, particularly since it is the one that eminently suits a practice that Chinese economists quaintly term as “adding water to the milk”, as it is largely dependent on subjective projections and assessments.

Two things standout in the latest set of Q4 data released. Private final consumption expenditure (PFCE) has shown a smart spurt from Rs.71.93 lakh crores in 2014-15  to Rs.80.76 lakh crores in 2015-16. A good part of this increase must be attributed to the huge jump in government wages and pensions (including OROP) by over Rs.110,000 crores last year alone. No wonder sales of bellwether industries like private and commercial vehicles and household appliances have shown an uptick.

Then there is another indicator that is worrisome. Credit growth has declined from 9.1%  to 8.4% in the last year due to a slump in industrial credit demand. This suggests that while some sectors are clearly back on the growth path, it also suggests that this growth is being driven by segments of the population whose incomes have grown sharply in recent times. Must we thank the Seventh Pay Commission and OROP for this?

There is something else that is very worrisome. This is the sharp increase in a budgetary item called “discrepancies” These were Rs.143,000 crores in Q4 2016. While they were Rs.29,933 crores in Q4 2015 or a difference of over Rs.113,000 crores. This means the growth in “discrepancies” was very slightly less than the Q4 growth of Rs.127,000 crores in PFCE or consumption. In other words “discrepancies” contributed almost 50% of GDP growth. This is like the “miscellaneous” item in business accounting. Every year there is a provision for it, but when “miscellaneous” rises to many times over the usually expected, auditors have to take notice. On an annualized basis this shaves off almost 1%  off GDP growth, making the expected annual GDP growth 6.9% instead of the 7.9%, which Arun Jaitely is prattling about.

Now a little explanation seems to be in order. Gross domestic product (GDP) measures output as the sum of final expenditures—consumer spending, private investment, net exports, and government consumption and investment. Gross domestic income (GDI) measures output as the sum of the costs incurred and the incomes earned in the production of GDP.

In theory, GDP should equal GDI; in reality, they are different because their components are estimated using mostly different and less-than-perfect data sources. In national income accounting, the difference between GDP and GDI is called the “statistical discrepancy”; and it is the factor ‘x’ which balances the GDP=GDI equation. Economists also know this item as the official fudge factor. Since it’s a contrivance to balance GDP and GDI, the temptation to inflate it is real, particularly when you are desperate to show performance?

Now consider this too. In February 2015, the government gave itself a little bonus by tweaking the methodology of computing GDP to put economic growth at a higher trajectory by 2.2%. Too bad it was not announced by the Manmohan Singh government one year earlier because then the growth in its last year would have been a good-looking 6.9% instead of the dismal 4.7% which Narendra Modi pilloried. Take out this bonus and take out “discrepancies”, we take out a huge 3.2% from the 7.9% GDP growth being tom-tomed.  This suggests that GDP growth is actually around 4.7%.

But there are encouraging signs too. Latest corporate results show that profits are rising. The FE’s study of about 1200 companies shows that Q4 profits rose by almost 42%, while sales rose only by 4.20%. A CRISIL study for FY16  tracking results of 642 companies representing almost 72% of the NSE’s market capitalization, shows profits rose by 16.7% to Rs.178,833 crores, while revenues rose only 2.5% to Rs.22,98,030 crores. Clearly, the prospects for investment are now brighter as Q4 results are heartening. But we must wait a bit for those results to be seen.

With Q4 corporate profits showing a smart upturn and the Indian Meteorological Department (IMD) categorically pronouncing “zero chance of deficient rains”, we have good reason to be optimistic about. Hopefully this will be the season of inflection for the Indian economy? In usual times the IMD’s predictions have as much credibility as the neighborhood astrologer. But we know from the past that after two bad years the probability of a good monsoon becomes very high. Governments come and go, but it is the monsoons that still determine economic outcomes.

Economies don’t shift trajectories easily and quickly. India has shown the ability to be on a high trajectory before. The entire UPA 1&2 period was a period of unprecedented growth, averaging 7.8%. But UPA 1&2 also sowed the seeds for our present slowdown by spending increasingly more on subsidies, mostly unmerited, rather than on capital expenditure. The Modi government needs to urgently reverse this. But it has studiously shirked from this, as philosophically the RSS too shares much of the misguided populism that emphasizes indulging sundry citizen appetites rather than on investing in growth and the future. If subsidies (merited) were mostly for education and health, that too would have left better placed us for a  faster growth.

Higher growth rates will happen, but for that the government must do the right things first. That will come by making investments in human capital and in productive job creation. Since capital is always the constraint, it must be judiciously used. Fudging data will only create an interim illusion of well-being. Since reality catches up sooner or later, it is better to grapple with it now and rely on the illusion in 2019.