The HINDU Notes – 07th February 2020 - VISION

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Friday, February 07, 2020

The HINDU Notes – 07th February 2020

πŸ“° Rates to fall despite RBI’s status quo

Repo rate kept unchanged at 5.15%

•The six-member Monetary Policy Committee of Reserve Bank of India (RBI) at a meeting on Thursday decided to keep the interest rates unchanged in the wake of a rise in inflation but emphasised that there would be space for rate reduction.

•This is the second straight policy review meeting when the rates had been kept unchanged. RBI reduced the rates by 135 bps between February and October 2019 before pressing the pause button in the December policy review.

Unanimous decision

•Thursday’s decision was unanimous among all the six members of the MPC.

•RBI Governor Shaktikanta Das acknowledged that the market had factored in status quo.

•“While this decision may be on expected lines, and perhaps widely discounted, it’s important not to discount RBI”, he said.

•“It has to be kept in mind that the central bank has several instruments at its command that can be deployed to address the challenges that the economy currently faces in terms of the sluggishness in the growth momentum,” he said.

•Two specific measures were taken by the central bank that could ease lending rates further. One, it opened a window to extend Rs 1 lakh crore to the commercial banks at the repo rate, which is 5.15%. Second, banks have been exempted from maintaining the cash reserve ratio - which is 4% of the net demand and time liabilities now - for home, auto and MSME loans that are extended from January 31 to July 31.

•“... it is an effort to ensure better monetary policy transmission,” Mr. Das said, explaining the objective behind the move.

•The GDP growth for the next financial year is projected at 6%, in the range of 5.5-6% in the first half of the FY21 and and 6.2% in Q3. The growth projection for the current financial year was 5%.

πŸ“° India to study air corridors with Central Asian countries

Jaishankar says it’s required to expedite transport of goods

•Apart from developing trade via the Chabahar port in Iran, India would like to explore setting up “air corridors” between India and five Central Asian nations, External Affairs Minister S. Jaishankar said on Thursday. The air corridors — similar to what India established in 2018 with Afghanistan — would include regular cargo flights with special clearing and customs facilities to expedite the movement of goods, especially fresh fruit and other agricultural produce, and were currently being discussed by the External Affairs Ministry.

•“While flying time from Delhi for most of the Central Asian destinations is two hours, it may take two months for containers sent overland from India to reach these places,” Mr. Jaishankar said at the inaugural of the “India Central Asia Business council” which brought together Indian businessmen and diplomats from Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

•“Availability of air corridors can boost trade in perishable goods, agricultural and food products,” he said. The Minister observed that it was a “matter of concern” that a lack of “overland connectivity” — a veiled reference to barriers to transit trade through Pakistan — had kept the total trade between India and Central Asia quite low at approximately $2 billion a year. India, Mr. Jaishankar said, remains committed to the Chabahar port project in Iran.

Chabahar route

•“India proposes to overcome this challenge through the Chabahar route. India, Iran and Afghanistan believe that Chabahar will become the fulcrum of connectivity for Indian goods to reach Afghanistan and further north to Central Asian states, and for the landlocked Central Asia to find access to ocean through this port,” he said, referring to the Rs. 100-crore investment the recent Budget has proposed to develop the Iranian port.

•Businessmen and diplomats present however remained sceptical of the viability of Chabahar without considerable progress on infrastructure. At present, most of the trade between Central Asia goes via Bandar Abbas in Iran, northern Europe or China. In recent years, the government has been seeking to develop more direct routes from Chabahar, a trilateral arrangement with Iran and Afghanistan, the International North South Transport Corridor (INSTC) and becoming a part the Ashgabat Agreement. However, the rail-link between Chabahar and the crossover into Afghanistan is yet to be developed. At present, $1.5 billion of the $2 billion trade with Central Asia is with Kazakhstan, and more than $1 billion of that comes from crude oil exports to India.

πŸ“° India, African countries resolve to fight terror

Lucknow Declaration urges need for stronger international partnership

•India and several African countries on Thursday pledged to deepen cooperation to combat the growing threat of terrorism and preserve maritime security by sharing information, intelligence and surveillance, in a joint deceleration adopted at the first India-Africa Defence Ministers conclave at the ongoing Defexpo.

•Defence Minister Rajnath Singh said India was geared to provide a range of military hardware to Africa.

•“We condemn, in the strongest terms, the growing threat of terrorism and acknowledge that it constitutes a major threat to peace and security in the region. We urge all countries to take resolute action in rooting out terrorism in all forms and manifestations, terrorist safe havens and infrastructure, disrupting terrorist networks and eliminating financing channels and halting cross-border movement of terrorists. We understand the need for all countries to ensure that all territory under their control is not used to launch terrorist attacks on other countries in any manner,” the Lucknow Declaration said, emphasising the need for stronger international partnership in countering terrorism, including through sharing of intelligence.

•The Declaration also called for strengthening the UN Counter-Terrorism mechanisms and to ensure strict compliance with the UN Security Council sanctions regime on terrorism.

πŸ“° Reducing custodial deaths

The Indian police continue to torture suspects in custody as they are rarely punished

•On October 13, 2019, Pradeep Tomar, a security guard, rushed with his 10-year-old son to Pilkhua police station in Hapur district in Uttar Pradesh. He had been summoned for interrogation in connection with a murder case. The son later said that his father was brutally tortured by the policemen in front of him for hours. When Tomar’s condition deteriorated he was rushed to hospital, where he died. An FIR was registered against four policemen after the National Human Rights Commission took note of the case.

•Earlier last year, a Delhi court sentenced five U.P. policemen to 10 years of rigorous imprisonment for torturing a man to death in custody in 2006. The five policeman had abducted the victim on suspicion of his involvement in a car robbery and tortured him in custody. Later, after he died, they manipulated records to obliterate all evidence of custodial death and closed it as a case of suicide. The case was transferred from a court in Gautam Buddh Nagar to Delhi by the Supreme Court on the grounds that a fair trial would not be possible within the State.

•Pronouncing the verdict, the additional sessions judge Sanjeev Kumar Malhotra said, “The police play a major role in the administration of criminal justice. One of the reasons for custodial death is that the police feel that they have a power to manipulate evidence as the investigation is their prerogative and with such manipulated evidence, they can bury the truth.” He added, “They are confident that they will not be held accountable even if the victim dies in custody and even if the truth is revealed.”

Acting with impunity

•These incidents have brought into sharp focus the way Indian policemen torture and interrogate suspects in their custody leading to death in several cases. As a result, policemen all over the country have been severely criticised and condemned. Strictures passed against policemen from time to time by learned judges of various courts notwithstanding, the police continue to brazenly torture suspects in their custody.

•The Central Bureau of Investigation too uses torture as a method of investigation. In September 2016, B.K. Bansal, Director General of Corporate Affairs, and his son Yogesh committed suicide. In their suicide note, the two men listed the names of officers who had tortured their family in connection with a case of disproportionate assets. Bansal’s wife and daughter too had committed suicide two months earlier. On the directions of the National Human Rights Commission, an inquiry was held by the CBI. Expectedly, the agency exonerated all the accused. Taking cognisance of the matter, the Central Vigilance Commission published a standard operating procedure laying down guidelines for interrogation of accused officials.

•Custodial deaths have been on the increase in recent years. They increased by 9% from 92 in 2016 to 100 in 2017, according to the National Crime Records Bureau. Since policemen responsible for custodial deaths rarely get punished, they feel emboldened to continue using torture as the tool to get to the truth. In 2015, for instance, the police registered cases against fellow police officers in only 33 of the 97 custodial deaths.

A historic order

•The Supreme Court delivered a historic order in 2006 on police reforms. It stated, among other things, that every State should have a Police Complaints Authority where any citizen can lodge a complaint against policemen for any act of misdemeanour. However, only a few States such as Kerala, Jharkhand, Haryana, Punjab and Maharashtra have implemented the order. Others have not taken the matter seriously.

•Until exemplary punishment is meted out to policemen who are responsible for custodial deaths after proper judicial inquiry, not much can be expected to ameliorate the situation. Proper interrogation techniques coupled with use of scientific methods to extract the truth from suspects can go a long way in reducing custodial deaths.

πŸ“° Listening to the call of the informal

The voices of India’s tiny entrepreneurs, living in rural areas and the urban fringes, should not be ignored

•A week after the Budget, it is clear that successive policies of the government over the years have left the informal sector stigmatised. The government and its policy advisers want to dress the sector up to their preferred versions of formality. However, in the process, they could dampen its growth potential, as two recent papers reveal.

•In the first paper, published by the National Bureau of Economic Research, economist Seema Jayachandran argues that there is no strong evidence from studies conducted in many developing countries that formalisation improves business outcomes. In the second article, a background paper for the International Labour Organisation (ILO), economist Santosh Mehrotra calls formalisation an evolutionary process during which small, informal enterprises learn the capabilities required to operate in a more formal, global economy. He says they cannot be forced to formalise.

The formalisation trap

•The key question here is: Who benefits from formalisation of informal firms? Formalisation does reduce the last-mile costs for banks. The state finds it easier to monitor and to tax the firms that adopt its version of formality. However, the process can also produce adverse outcomes for the informal sector firms themselves, as anthropologist James C. Scott explains in Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed .

•In India, which currently faces an unemployment problem, the informal sector provides the vast majority of opportunities both for its youth and for people coming off the farm to earn incomes. Hence, India’s policymakers need to look at the demerits of formalisation from the perspective of informal sector enterprises.

•Ms. Jayachandran’s study reveals that most of the formalities imposed from above, while making it easier for the state and the formal sector to do business with the informal sector, add to the costs of the firms that outweigh the benefits of formalisation.

•She also finds that informal firms are able to improve their ability to do business in various ways. For example, small entrepreneurs gain from forming effective associations with their peers. They benefit greatly from ‘mentoring’. Skills of small entrepreneurs and their employees are best developed on-the-job. This is because they cannot afford the loss of income by taking time off for training. ‘Soft’ skills, to form associations, manage enterprises, matter as much for the success of the enterprises as ‘hard’ resources of finance and facilities. In fact, the productivity of enterprises depends on their soft skills.

•There is a desire to connect small firms in India more firmly with global supply chains. Mr. Mehrotra points out that the primary motivation of multinational companies for expanding their global supply chains is to tap into lower cost sources of supply. Supply chains compete with each other. When wages and costs increase in their source countries, they look for other lower cost sources. The lowest cost firms at the end of supply chains are generally informal. Thus, the push by the state to formalise firms is countered by the supply chain’s drive to lower its costs.

•The thrust of the Indian government’s policies should not be to reduce the size of the informal sector. Rather, it must be to improve working conditions for the citizens who earn incomes in the sector. Their safety at work, their dignity, and their fair treatment by employers must be the thrust of any reform. Indeed, even in developed industrial countries, the informal sector is growing with advances in technologies, emergence of new business models, and growth of the gig economy. There too, policymakers are struggling to invent new systems to project the rights of workers while maintaining the dynamism of an entrepreneurial economy.

Reorienting policies

•Hence, India’s jobs, incomes, and growth challenge necessitates a reorientation of policies towards the informal sector.

•First, the government and its policy advisers must stop denigrating the informal sector and trying to reduce its size. Second, the development of an economy, from agriculture to the production of more complex products in industry, is a process of learning. Informal enterprises provide the transition space for people who have insufficient skills and assets to join the formal sector. Large schemes to provide enterprises with hard resources such as money and buildings, which the government finds easier to organise, are not sufficient for the growth of small enterprises.

•Policymakers must learn how to speed up the process of learning within informal enterprises.

•Third, policymakers must learn to support informal enterprises on their own terms. And they should not impose their own versions of formality on them for their own convenience. Making it easy for MNCs and large companies to invest will not increase growth of the economy if enterprises and incomes at the bottom of the pyramid do not grow. The voices of tiny entrepreneurs in the rural heartlands and on the fringes of Indian cities must be listened to while developing policies for ‘ease of doing business’.

•Fourth, networks and clusters of small enterprises must be strengthened. They improve the efficiency of small firms by enabling sharing of resources; they give them more clout to improve the terms of trade in their favour within supply chains; and they reduce the ‘last mile costs’ for agencies and providers of finance and other inputs to reach scattered and tiny enterprises.

•Fifth, the drumbeat for labour reforms must be changed. A vocal crowd has been harping on the need for bold reforms to make it easier for employers to hire and fire workers. They advocate the raising of the size of enterprises (in terms of numbers of employees) to which laws should apply. These hire and fire laws are already not applicable to the small sector, where the vast majority of enterprises employ less than 10 persons. Hence, there is an urgent need for labour reforms in other ways. The laws should be simplified, and their administration improved. And, their thrust should be to improve the conditions of workers.

•Finally, the social security framework for all citizens must be strengthened, especially for those who have to scramble for work in the informal sector. Health insurance and availability of health services must be improved, and disability benefits and old-age pensions must be enhanced. The purpose of ‘labour reforms’ must be changed to provide safety nets, rather than make the workers’ lives even more precarious with misdirected attempts to increase flexibility.

•Small enterprises need other forms of support to play their vital role in increasing employment and incomes at the bottom of the pyramid.

πŸ“° Does the Budget do enough in providing a stimulus to growth?

By not cutting spending despite constraints, the Budget ensures momentum doesn’t backslide

•Presenting the Union Budget for 2020-21 to Parliament, Finance Minister Nirmala Sitharaman spoke of this being the Budget to boost common people’s incomes and enhance their purchasing power. In a discussion moderated by Suresh Seshadri , Ananth Narayan and V. Srinivasan look at whether the proposed changes in direct taxes and other measures are likely to help spur consumption and investment in the economy. Edited excerpts:

The Economic Survey stressed wealth creation as a central theme. Do the Budget proposals address this? If so, to what extent?

•Ananth Narayan:What you have to look at from this particular Budget is what does it do by way of stimulus, which is, does it actually spur consumption or investment or get some money going through into the system? And second, does it lay a road map for any kind of deeper structural reforms? If both of them come together in the right ingredients, then wealth creation, which is indicated in the Economic Survey, should follow through.

•The Budget gave a lot of good background. The three themes — aspirational India, economic development, caring society — nobody can have an argument with that. But there were severe constraints when it came to actually giving any kind of a stimulus. Frankly, Finance Minister Sitharaman had very, very little space to announce any further stimulus. Really, what you have to be thankful for is that she didn’t cut down on spending. She continued with the stimulus, which has been ongoing for the last three, four Budgets now. In fact, government spending is what is holding up GDP growth.

•I think what has been disappointing is the second part, on structural reforms. There are a lot of good things which have been spoken about on agriculture, irrigation, start-ups and so on. But some of the real elephants in the room [are]: the health of the financial services ecosystems — banks and NBFCs; and structural issues in sectors such as power, telecom, airline and shipping, real estate, construction. And third, most importantly, getting in foreign direct investment into manufacturing or grabbing some of the top supply chains coming out of China. On all these three structural fronts, personally, I was disappointed by the lack of direction in the Budget.

•So, to answer your question, wealth creation: it’s not constricted, the government has not cut down on spending because of fiscal constraints, and there are deep fiscal constraints. On structural reforms, the Budget document itself was disappointing. The good news, of course, is that reforms don’t have to happen only in the Budget, they can happen separately as well. But as things stand, I don’t see enough being done for wealth creation or for the reigniting of the investment cycle.

Would the various direct tax changes give a boost to incomes and thereby lift consumption spending?

•V. Srinivasan:India first needs to have a capex investment cycle going, create more jobs and thereby increase consumption. I think relying on consumption alone and putting money in the hands of people to consume and therefore stimulate the economy is something which can help in the short term, but in the long term can lead to some disastrous results. And clearly, the measures in the Budget have attempted to spur consumption. But I think if you look at the direct tax changes on the personal income tax side, I think it is [at] best status quo. I think more likely than not people would be in the same place where they are, not opting for the exemptions and staying with it at least as of now, till they get more clarity on how exactly these things work and for how long you’ll have the option rather than try to sort of give up on the investments and not take exemptions and live with a lower tax. That’s the thing that you really need to wait and watch. But as of now, if you look anecdotally since that’s the only social security and kitty which people build for their later years, I think it’s more likely that people will continue the exemptions. We need to wait and watch in terms of how the capex cycle comes through, which I think would possibly trigger a much more sustainable consumption cycle than trying to just put money in the hands of people and trying to stimulate the economy.

Could the new opt-in tax regime end up impacting savings? Household savings have after all been a significant contributor to another pillar of GDP, gross fixed capital formation.

•AN:Not directly by the measures which have been announced. Sure, at the margins for certain tax slabs, it is possible that financial investments and savings, which were otherwise encouraged, might no longer make sense. But that’s a very small number in my opinion. I don’t think the changes incorporate a big change in the behaviour of savings per se. But the broader point you make is quite valid. The savings rate, the financial savings rate for households has been dropping quite sharply over the years. And this is a 10, 15 years kind of a trend, which is a sign of worry.

•Frankly, when we worry about things like savings rate and growth and consumption, the starting point paradoxically has to be investment. India tends to earn more and save more when there is investment going through. We saw that, for instance, when the golden quadrilateral was being built 20 years ago; 30 years ago, when the markets were opened up and money came in, poured into various kinds of infrastructure investments.

•We saw what happened 10 years ago, when we saw a lot of banking money go into infrastructure investments, which unfortunately didn’t end well, we saw again growth and consumption that time. So, savings and investments or savings and overall income is structurally I think linked to investments, which is why the structural reforms required for spurring back an investment cycle is what we were all, at least I was, looking for very eagerly. There are lots of small things happening. And I have to acknowledge that, for instance, labour laws are being changed quietly. Likewise, you know, the corporate tax rate cut is very welcome for investments. But it seems a little too little at this point in time. To get back savings, to get back healthy macroeconomic variables, I think we need the investment climate coming back again, and a lot, lot needs to be done on the structural side before that happens.

The Finance Minister has said the government is keen not to splurge to end the slowdown and will instead focus on creating public assets. As an approach, how relevant is it to the current economic logjam?

•VS:It comes back to what we’ve been grappling with and what in the media’s and regulators’ talk is ‘transmission’. And clearly, resources are limited. Understand that both the RBI and the government are trying to sort of do all that they can to spur investment, increase the flow of money. And ‘transmission’, meaning irrespective of how much liquidity you put in, rates are not going lower, banks are not lending; the system is, to some extent, broken. So, whatever the Budget does or any sort of policy measure which is taken is hitting a wall till we sort out some of the systemic issues and try and clean the deck and then start from there. And I think that’s something which was a hope, at least in terms of, whether in the Budget or outside it, trying to make sure that if someone has to take a hit, we need to take the hit.

•If the government has to step in to provide some support, at least clean the deck and then confidence will be back and people can sort of look ahead with reasonable comfort that they are not going to be blindsided by something which they didn’t expect. That phase continues and that irrespective of whether you splurge, don’t splurge, if you do whatever you’re doing, I think it’s not helping.

•So, I think the biggest thing is whether it’s real estate, whether it’s NBFCs, we need to clean the deck and make sure people are comfortable with the future. When you’re not comfortable with the future outlook, and it’s sort of filled with uncertainty, I think you hold back on anything you want to do, and that’s the phase we are going through. The Budget, I was hoping, would trigger some animal spirits by bringing some certainty in terms of putting some of these things behind us. [That has] not happened. So, I think we will have to muddle along till we sort out some of the problems ourselves, or something happens which forces us to do that.

Does the Budget help keep the economy on track to reach the government’s $5 trillion goal?

•AN:At the moment, I don’t think we are on track to reaching this $5 trillion mark by 2024. The good news, though, is that there is no reason why we can’t start to improve our growth dramatically. I think our potential remains pretty high. If we start to address some of the structural issues, I do think given our demographics, given the resources that we have, it’s quite within our reach to bring in foreign direct investment, as well as to have our own investment cycle restarted, so as to get us to higher rates of growth. But for that, we have to make a fundamental departure.

•One quick point on NBFCs etc., I think where the government is stalled right now is twofold. One is they see a moral hazard and I sympathise with that. ‘Why should the government bail out private entities?’, and that’s a good point. Second, the Insolvency and Bankruptcy Code is a lovely piece of legislation. It’s starting to hopefully settle down, it will work for the future. So, therefore, their bet is things will solve themselves and ‘we should not get involved trying to bail out individuals’. I sympathise with the thinking, but I think the size of the problem is just too large. And, therefore, a one-time solution is required alongside making sure there’s accountability. And there are structural reforms so that the cycle does not repeat. Unless we take steps like this, and not just in the banks and NBFCs, but the other sectors, and the ease of doing business on manufacturing, I think the realisation of that $5 trillion potential will remain a bridge too far.

What do you think are the biggest positives of the Budget?

•VS:Clearly, we have not moved back thanks to the Budget. Whatever investment needs to happen, whatever risk capital needs to come into the country, primarily it is coming from offshore through foreign investors because domestic investors and institutions as of now, whether banks, mutual funds and to a large extent insurance companies, lack the risk appetite in terms of putting money, risk capital to work in the current context. And the only people who are willing to do that seem to be offshore investors. So, the Budget recognises that and to some extent offers a much cleaner, easier environment, from a tax perspective, and from an incentive perspective, for foreign investors to access local markets and provide risk capital. And I think that’s one of the big positives in the Budget.