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Why PPP Model of Infrastructure Development Is Yet to Takeoff in India?


Infrastructure is a key enabler for an economy to function at a competitive and sustainable growth rate. There is no denying to the fact that last quarter century has seen a remarkable expansion of Indian Infrastructure in its scale and reach.

But despite that impressive historical growth, the underdeveloped state of infrastructure still acts as a constraint on the possibility of realization of the full growth potential of India.

The heart of the Indian Infra reforms has been the Public-Private Partnership (PPP) model. Therefore, any attempt to know what went wrong must come to grips with how we, as a country, implemented the PPP model, where we made mistakes and what needs to be fixed?

A PPP project basically involves three major stakeholders- the government, the private developer and the banks, each of these has its fair contribution in carving a failure out of a potentially successful concept.

Though the model was basically developed to leverage the combined strengths of the government and private sector to meet India’s critical infra needs. But multiple flaws with the model have led to numerous projects facing a cash crunch, banks facing the risk of loans turning into NPAs and developers on the brink of bankruptcy.

The Government and the MCA

One of the fundamental mistakes done by the government was narrowing down the lens of constructing a partnership with the private sector under PPP model to financial necessity. The government initially tried to leverage the model just to attract private investment in infrastructure sector. Ironically, governments can often raise funds at lower costs compared to private developers!

The government did not focus on garnering other benefits of the partnership like private sector’s ability to bring in the latest technology, efficient managerial practices and complementary risk mitigation. Further, in seeing PPPs as a channel to attract private sector funds overlooked the critical need to build institutions that would have enabled efficient deployment of the capital.

The government also failed in ensuring that private sector would not be called upon to bear risks for which it was ill-equipped like land acquisition or environmental clearances, which were the critical reasons behind the stalled projects.  The government could not foresee the need to establish an independent regulator to ensure an efficient dispute settlement mechanism.

The Model Concession Agreement (MCA) which was developed to build capacity for project designs was far too inflexible. It applied a ‘one size fits all’ solution to projects in a sector. It failed to recognize the fact that many projects may face unique technological or demand risks that may go beyond standardized templates.

MCA has also put a larger set of bindings on the private developers and hence not only limited the accountability of the government but also failed in ensuring equitable risk allocation. The Kelkar Committee has acknowledged the problem and provided a framework of renegotiation of MCA under various circumstances.


The Private Developer

A report on PPP projects submitted by Kelkar committee pointed out the game of inflating the Total Project Cost (TPC) played by the developer deliberately. By inflating TPC, developers sourced higher debts than the actual requirement. If the project is then jeopardized, there is virtually no “skin in the game” by the developer as the funds are at risk are those of lenders.

A 2016 submission of the parliamentary standing committee found that the National Highway Authority of India allowed concession agreements with cost estimates differ from those used in loan applications. It suggested that banks and other financial institutions must have authority to review MCAs along with ministries.

The Banks: Source of Funds

Unlike the international precedents, infrastructure was funded to a major extent by commercial banks in India. Since infrastructure projects have long gestation periods and banks raise funds from depositors for a tenure ranging from short to medium term, this created a potential for serious asset-liability mismatch.

Ignoring the problem, banks not only went ahead in lending to infra projects but also showed irrational exuberance in terms of lending to the sector. The share of bank loans to infra projects rose from 13% in 2002 to 31% in 2015. The mammoth NPA problem that the commercial banks in India are facing today could have had a lower scale if bankers acted with some foresight then.

Way Ahead

The success of PPP to a large extent depends on optimal risk allocation, an environment of trust among the stakeholders and robust institutional capacity. The government must come forward with the establishment of independent regulatory institutions to have necessary regulatory oversight and an efficient dispute settlement mechanism.

Pricing and accounting reforms are required to improve fiscal sustainability of the projects, to have clearer projections of fund flows and to distinguish between losses due to social obligations and losses caused by inefficiencies.

Apart from sound regulatory and arbitration framework, a robust PPP enabling ecosystem includes diversified and liquid financial institutions. The private fund flow into the infra sector has been rightly streamlined by the establishment of National Infrastructure Investment Funds (NIIF) by the government and Infrastructure Debt Fund by RBI. Further, the green signal to Infrastructure Investment Trusts (InvITs) is a step in right direction as it would scale down the exposure of commercial banks to the Infra sector.

Besides that, the government while learning from its past experiences has rolled out Hybrid Annuity Model (HAM) under PPP which is a welcome step. HAM model successfully balances the risk mitigation needs of the private sector by providing about 40% of the project cost in terms of annual annuities in a five-year time frame and rest on the revenue sharing model.

The government must take swift actions to implement some of the key recommendations of Kelkar committee like setting up of national level PPP institution, a dedicated PPP tribunal and a formal framework of contract renegotiation.

Building institutional capacity, better regulatory oversight, diversified source of funding, efficient dispute settlement mechanism, flexible contract negotiation, and accounting and pricing reforms.  By working on these initiatives, the government can leverage PPP model as a powerhouse to India’s growth and infrastructural needs.

The article was also published at Transfin.

The Spillover Effects of Burning Crude Oil Price on Indian Economy


The Brent Crude oil which was range bound to $30-50 band in the last two and half years has recently shot off to $80 levels after cooling a bit later to $70-75. Successful supply cuts by OPEC, rising geopolitical tension in the Middle Eastern region, the revival of US sanction on Venezuela and Iran and the possibility of a trade war between US and China are the significant factors behind the rise in the prices of crude oil.

India meets about 80% of its crude oil demand via imports and crude oil shares the largest weight of our import bill. Every Dollar increase in crude oil prices increases in the country’s net import bill by $0.51 billion.


Above table shows the historical movement of the price of crude oil in international market. Look at this chart carefully as it bears a great significance on Indian economy! Having that in the mind, let’s try to decode how the burning crude oil prices have been affecting the Indian economy.

An External Shock: Rise in CAD

Since the crude oil is India’s essential commodity item of import, a rise in the price level is not going to result in lower demand as the general demand-supply law works. Therefore, the direct impact of sharp price rise worsens the trade balance and the Current Account Deficit (CAD).

India’s current account deficit has already tripled to 2% of the GDP in FY17 when the crude oil prices averaged about $55. However, with $400Bn plus in the reserve coffers of RBI, CAD doesn’t seem to be causing macroeconomic problems of the likes of 2013.

But, in FY18, if the crude oil sustains at current levels of about $75, the CAD may further worsen to 3% of the GDP which can be a cause to worry.  (Every $10 increase in crude oil prices is estimated to increase CAD by 0.4% of GDP). With global interest rates hardening and Indian macro parameters worsening, the reserve cushion may not be there for long due to possible capital outflow.


Oil is a critical input to India’s energy, transportation, and production activities and therefore, any movement in its prices have a direct bearing on input cost. There is a high degree of positive correlation between Crude oil prices and rate of inflation in India. A rise in oil prices means a rise in inflation rate which has been historically verified.

source: tradingeconomics.com

If we try to compare the WPI inflation chart shown above with the crude oil prices chart, there are certain peaks which coincide like of 1971-73 (Yum Kippur War), 1990-92 (Gulf War), 1998-99 (East Asian Crisis), and 2008-10 (Global Slowdown).

According to a recent note by Nomura, every $10 increase in oil prices increases consumer price inflation by 0.6-0.7% points. Therefore, the current crude oil spike could be a start of another inflation spiral. Now, the RBI lodged with inflation targeting mandate is keeping a close watch on oil prices and inflation data. With hardening domestic inflation and global interest rates, analysts have been betting on the timing of the rate hike of RBI!

Fiscal Deficit

Everything seems interlinked in the economic world! With rising CAD and inflation due to oil prices, the government may lose the tracks of fiscal consolidation path. The government has already failed to meet the 3.2% fiscal target of FY17 and faces greater challenges on fiscal front in FY18 due to higher needs to recapitalize banks, higher CAD, higher borrowing costs (hardening yield curve and depreciation of rupee) and the massive health coverage plan proposed in the union budget.

With a 50% rise in crude oil prices in last 9 months leaves not much of the choice to the government other than to cut the excise duty which would act as a leakage on the up until reliable tax-revenue stream. If the government decides to pass out the price rise to the people, it would be self-destructing in nature as it will fuel the inflation (In a pre-election year!) and a consequent rate hike cycle can harm the struggling private investments.

There looks to be a distant possibility of fiscal consolidation in India when general elections are due next year and suddenly oil prices start moving north!

Exchange Rate

Lower interest rate differentials between developing and developed economies (due to hardening of the yield curve in the US) have caused a general outflow from the emerging markets by the foreign investors. There was a net outflow of portfolio investments of $8.44 billion in the January-May period this year with $7.95 billion dollars in May alone.

The rupee has dropped about 6-8% against the dollar since the beginning of the year. It has become full circle from appreciation to depreciation in a few years time!  Domestic clues like rising CAD, fiscal slippages, inflation worries and the pre-election year volatility have accelerated the depreciating pace. Along with these, the bond yields spike in India made RBI intervene in the exchange rate markets.

This would be interesting to see if RBI could successfully curb the currency volatility while not sacrificing much of the reserves. However, with global growth recovery, this could be a blessing in disguise if Indian exports start picking up taking advantage of depreciating rupee.

Way Ahead

There is no immediate fixit available for this. India should look forward to renewable sector in the long term to meet it’s ever-growing energy needs. It should more focus on the exploration of domestic reserves and also build up its reserve capacity. Had India had enough oil reserve capacity and infrastructure, It could have easily scaled down the problem. India must promote rupee trade and currency swap mechanisms as it would ease down the tensions on CAD. Recent invitation of Venezuela for rupee-oil trade can be a great deal to start with.

Though the rise in current account deficit, spurring inflation, fiscal slippages, and depreciating rupee are not the new byproducts of the rise in crude oil prices, the timing makes it unique and much more challenging! In a pre-election year and amid the possibility of capital outflow, the burning crude oil prices have much more intense spillover effects on Indian economy.

Why Indian Startup Ecosystem Is Starved Of Domestic Capital?


Digital wallet payment giant Paytm is majorly owned by Chinese conglomerate Alibaba.  Domestic e-commerce unicorn Flipkart, as well as local cab hailing leader Ola, have secured a majority of its investments from Japanese investment fund SoftBank or US-based Tiger global. Another inline unicorn, Zomato has recently raised $200Mn from Ant Financials which is again connected with China’s largest e-commerce firm Alibaba.

Do these cold facts ring a bell? Aren’t the homegrown unicorn’s ownership structures are dominated by the foreign capital? But why?

India has successfully gauged a position as a global startup hub that is becoming attractive to investors, startups and corporates and emerged as the 3rd fastest growing market for technology startups globally. The Indian technology landscape has witnessed a tremendous growth towards the creation of innovative startups. But the domestic capital has been conspicuously lagging behind its competitors abroad, if not absent, in making these entrepreneurial stories successful.

Why Not Just Foreign Capital? 

As per some of the statistics, about 9o percent of the funds that flow into Indian VCs are of foreign origin. And, about five years ago that used to be as high as 98%. These numbers are reliable enough to implicate two trends in the investment ecosystem of Indian startups.

First is that there is an apparent domination of foreign capital in fuelling the growth of Indian startups ecosystem and the other is the domestic investment, though at a slow pace, has started picking up.

The problem with foreign capital is two-pronged. One is it comes in the growth stages of the startups leaving the early birds starved of funds and the other is despite it being a helping hand in supporting entrepreneurial activities and creating employment opportunities, the long-term benefits of domestic growth are harnessed abroad.

Domestic Funds: Under Sized But Over Cautious!

However, it would be utterly naïve to hold domestic liquidity crunch responsible for lacklustre interest of local investors as indicated by some analysts due to the ongoing TBS challenge. As the data itself suggests that domestic share of investment has gone on an upward trajectory in a time period when average liquidity headed southwards.

However, the fund sizes of domestic venture capital (VC) funds or private equity (PE) funds have been comparatively too small. For example, local funds face capacity crunch to support individual deals worth more than $100Mn which is almost negligible in comparison to the $100Bn plus aggregate investments made by Japanese or Chinese giants.

However, it would be unrealistic and unfair to expect a domestic VC of comparable size as of its Chinese or American competitor especially when their GDP is five to seven times bigger than the Indian GDP. Put simply, it would be foolish to compare apples and oranges! Naturally, with smaller fund size comes lower risk appetite.

Indian VCs and PEs have remained too cautious in making their investment decisions and it would be no exaggeration if we term Indian funds more of a follower than a trend setter in making appropriate investment calls.

Further, small fund size, lower risk appetite and an ultra-conservative approach make Indian VCs grossly uncomfortable with sky-high valuations of emerging startups. The recent acquisition war between Walmart and Amazon to acquire local e-commerce player Flipkart at a rocket high valuation of $20Bn plus rules out any possibility of any Indian VC getting into the race.

The Foreign Capital Advantage!

It has been also observed that startups prefer to go for foreign VCs as they boost the brand image and come with the technical and managerial expertise of global standards, international network and more importantly much higher valuations! They also provide easier terms to utilize the capital comparatively and have lesser interference in the boardroom busy in making strategic decisions.

The other obvious advantages that a venture capital fund from abroad enjoys in comparison to domestic fund house are the lower cost of capital, higher fund sizes, lower return expectations and higher ability to go for long-term maturity.

The Enabler Government: Needs To Become Risk Sharer!

To the credit of the government, it has played its role near to perfect in creating an enabling environment to foster Indian startup ecosystem by taking initiatives like Startup India, Standup India, improving ease of doing business, simplifying rules for startup registration and regulatory clearances, promoting innovation and technology and creating a digital techno interface to support the budding startups.

Indian entrepreneurial community is much more enthusiast, hopeful and ambitious in the era of current dispensation due to these favourable policies. Even the state governments have been competing to attract investment and facilitate entrepreneurial activities in their regions by framing favourable startup policies which is a classic example of competitive federalism.

However, the government needs to upgrade its role from just an enabler to a risk sharer not just to sustain the ongoing momentum but also to enough confidence in the domestic capital and investors. One needs to recognize that despite reaching impressive milestones on the journey of Indian startup ecosystem, most of them especially the ones which are in a nascent stage are still capital starved.

As per a Tie report, still, a low proportion of startups gets funded in India. Since the market is starved of domestic capital and foreign investments come only in the growth phase of the venture, the budding startups face the fund crunch.

Globally the venture capital money has also come from sovereign wealth funds, pension funds and other such large-sized funds. India has no such source of funds despite public sector enterprises likes of LIC have been sitting on huge cash piles. The government needs to come with necessary regulatory changes to enable the capital inflow from such PSEs to unlock the potential promised by the growing startup ecosystem along with securing the possibility of high capital returns.

In order to attract more private capital in the startup ecosystem, Government of India came with a Rs.10,000Cr, Fund of Fund plan executed by SIDBI which is a very welcome step. This was launched to motivate Alternative Investment Funds (AIFs) to float schemes that will invest exclusively in startups; however, the disbursement of funds has remained sluggish and conservative making the initiative inefficient. This has been a pattern across the state funds created to support startups. There is a dire need to cut down the bureaucratic hurdles.

If one digs deep into this problem, the over-cautious attitude of bureaucrats sitting over state funds is not because of traditional red-tapism but due to the excessive fear of being seen in wrong light if the investment goes south.  The government, therefore, needs to ensure much bigger participation of private professionals in making swift decisions to ensure efficiency of the policy initiative. 

Listing in India has remained another humungous task faced by startup community to access market capital. Most of the startups have preferred to be listed abroad than to go through the complex procedure in India. Government and SEBI must come together to simplify the listing process to have smoother access to capital market.

Ideas such as establishing an Exchange Traded Fund (ETF) if paid due diligence can turnout to be a brilliant possibility and create a win-win situation for startups, VCs as well as retail investors. Further, the government can always amend the tax laws to incentivize venture capital investments especially when the imposition of  taxes such as angel tax has been causing tax terrorism!

There is no doubt that Indian startup ecosystem requires much more domestic capital infusion. If the government is willing to take a step forward to become a risk sharer party, if It can successfully mobilize enough confidence from the private sector, there is nothing that can stop the Indian startup ecosystem to become the brightest star of global entrepreneurial paradigm.

Municipal Bonds Market In India: How To Make Them Work?


(This is the second of a two-part series (Please read the first part here) on the need to recognize how Municipal Bonds in India can be used to drive its’s rapidly growing urbanization requirement. Municipal bonds can potentially serve multiple stakeholders by granting financial autonomy to Urban Local Bodies (ULBs) as well as becoming a highly effective and untapped investment opportunity.)

Municipal bonds are bonds issued by Urban Local Bodies (ULBs) – municipal bodies and municipal corporations to raise funds for financing specific projects in the urban landscape, particularly infrastructural projects.

Even as constitutional legitimacy has been provided to ULBs in terms of autonomy, they remain feeble on the financial side of things. Tapping into the municipal bond market can be a starting point towards rendering the ULBs financially autonomous.

Have Municipal Bonds Worked in India?

As per a report on Urban Infrastructure and Services, 2011, Indian ULB’s are among the world’s weakest in terms of financial autonomy and their capacity to raise external capital.

In India, only 1% of the total urban local bodies’ requirement is funded by municipal bonds, compared to around 10% in the United States. It is observed that no municipal bonds had been issued since 2007 until recently when Pune Municipal Corporation successfully raised INR 200 crore via issuing municipal bonds as the first tranche of INR2260 crore plan to be raised in a 5-year time frame.

According to the government sources, municipal bonds in India were able to garner only $275 mn (INR 1750 cr) in India as opposed to the US $304 billion in 1 year and South Africa’s $1.8 billion raised in a single quarter.

Both demand and supply issues have been the prime factors behind the poor performance shown by municipal bonds in India. On the demand side of things, lack of financial transparency and lower operational efficiency reduces the creditworthiness of municipalities and thereby attract unimpressive interest from the investors.

Nagpur Municipality planned to raise INR128 crore in 2007 but was able to procure only INR21 crore. Similarly, as noted by the Fourteenth Finance Commission, borrowing restrictions placed on the municipalities and incomplete devolution of powers, constraints on the capacity of the municipalities to leverage the municipal bonds market. While bigger municipal bodies can go for bond issues easily as they are backed by state and federal governments assurance, the smaller municipalities often find it difficult to access the market due to lack of capacity and scale.

Therefore, the respective governments should guarantee such bonds issued by smaller yet progressively performing ULB’s and their projects. Further, the provision of tax exemption only for bonds earning interest >8% makes them unattractive, especially for retail investors. Also, as per the regulations, retail investors can only participate in secondary markets.

This has further marginalized the interest of retailers and muted retail investments, the secondary market of the muni bonds virtually don’t exist. The listing of the municipal bonds as exchange-traded bonds would increase the liquidity situation and ensure broader participation. The retail participation can be enhanced by extending appropriate tax concessions on returns and also by providing competitive return rates.

Also, the institutional investments would spike if securitization of these bonds gets the green signal so that these bonds could be used as a collateral asset as per the funding requirements. The inclusion of muni bonds under the priority sector lending obligations or counting them as a part of SLR holdings would boost the credibility but also the demand from large banks and financial institutions.

Further, high transactional costs, lack of operational autonomy for ULBs (only “revenue bonds” allowed to be publicly issued. “General obligation bonds” can only be issued via private placements) and low revenues for ULBs which weaken their financial profile have been some of the significant supply-side factors which restrain the scope of municipal bonds in India which attract immediate attention and resolution.

SEBI Guidelines

The Securities and Exchange Board of India (SEBI) has recently brought out regulations on the issue and listing of debt securities by municipalities. However, some restrictive measures such as Municipalities not being allowed to issue unsecured bonds or a ruling mandating them to contribute at least 20% of the project cost greatly restricts their autonomy.

Though the freshly issued guidelines are welcome to structure the municipal bond market, more concrete steps need to be taken to encourage these instruments for investment. Conclusively, it can be said that Municipal bonds hold a great promise for solving the urban infrastructural problems. While granting constitutionally legitimacy to municipal bonds empowers them to a great extent, such authority without real financial autonomy is futile. Steps must to taken to ensure that the ULBs are both constitutionally and financially independent.

(The article was originally published at Transfin.)

Muni Bonds: The Untapped Potential For Urban Infra Needs


(This is the first of a two-part series on the need to recognize how Municipal Bonds can be used to drive India’s rapidly growing urbanization requirement. Municipal bonds can potentially serve multiple stakeholders by granting financial autonomy to Urban Local Bodies (ULBs) as well as becoming a highly effective and untapped investment opportunity.)

Urban Local Bodies (ULBs) is a broader term used for government entities responsible for setting up, maintenance, and administration of public welfare, health, regulations, and infrastructure in urban areas. Comprising of Municipal Corporations, Municipalities and City Councils – subject to size of urban sprawl – they are constitutionally empowered, at least on paper, to function as self-governing entities.

Inception of Municipal Bonds in India

Under the 12th Schedule of the Constitution, 18 functional items have been placed under the purview of ULBs including urban planning, infrastructure, drinking water, public health, and urban amenities. The resource base of ULBs consists of their own tax and non-tax revenue, grants and subsidies from central and state governments, loans from state governments, banks and also market borrowings.

However, due to the ever-rising demand for basic urban services, ULBs have been facing the issue of lack of requisite funds, resulting in a delay in project implementation.  It was the Rakesh Mohan Committee on “Commercialization of Infrastructure Projects (1996)” which recommended the development of a municipal bond market in India. The Committee pushed for private sector participation and accessing capital markets through the issue of municipal bond.

Following the recommendations, it was the Bangalore Municipal Corporation in 1997 which for the first time issued state guaranteed municipal bonds in India worth INR125 crore. Following this, other municipal corporations like that of Ahmedabad, Mumbai, Nashik and Madurai also issued these bonds. However, due to lower interest rates, non-tradability in the secondary market and virtually no tax benefits, they attracted tepid response and largely mobilized capital through institutional or private placements.

What are Municipal Bonds?

Municipal bonds are debt obligations, which are issued by ULBs to finance local infrastructure and civic projects like construction of schools, local transport, health care centres etc. They are used to mobilize capital from the market in exchange for payment of regular interest and the principal at a pre-determined maturity date.

Municipal bonds in India can be broadly classified into two categories. One is the general obligation bonds which are issued against the financial credibility of the issuing municipality. In such cases, payment to the bondholders is done using the tax revenues generated by the ULB. The other category of municipal bonds are revenue bonds, the proceeds of which are used to finance a particular revenue-generating project. Repayment of principal and the interest, in this case, is done via the revenue generated from the earmarked project.

How Can Municipal Bonds Help?

Given the pace of reforms being witnessed in the country, with the additional objective of creating more smart cities, ULB’s have increasingly been facing the heat of fund crunch.

The need to bridge the existent infrastructure gap, upgrade and maintain the existing ones, and the wide-scale urban migration exerting pressure for the creation of newer and larger facilities considerably strain the balance sheets of corporations.

The primary sources of resource mobilization i.e tax and non-tax revenues and state grants remain grossly inadequate to meet the requirement. The erstwhile Planning Commission had estimated an INR35 lakh crore fund requirement to be able to meet the current urban infrastructural needs. Interestingly, McKinsey, a management consulting firm pegged the required amount at about INR53 lakh crore. The Smart City programme introduced by the Centre, alone has an envisaged infrastructure spending to the tune of INR7 lakh crore over the next 20 years (i.e. INR35,000 crore each year).

With the overleveraged balance sheets of state government and legal bindings placed by Fiscal Responsibility and Budget Management (FRBM) Act, 2002, not much should be expected from the state governments in terms of allocating funds via grants or even loans.

Municipal Bonds, therefore, come to enjoy a critical significance in meeting the immediate challenge of urban infrastructural needs. They also share the burden of excessive dependency on state or federal grants. The 12th Finance Commission Report reveals that over the years, their dependence on “other source of revenue”, which includes grants from central and state governments; transfers from state or central finance commissions, has been increasing. As per the 13th Finance Commission, 47.1% of total municipal revenue consisted of grants from the state and centre in 2007-08. Municipal bonds will offload that share and push for more localized investments and greater public participation. This would result in an efficient assessment of local needs and push for transparent funding and ensure accountability of corporations.

International Precedents

Most developed and developing nations are focused on building local credit markets. North America and Europe have a long history of utilizing household savings for infrastructure development. The former has heavily relied on municipal bonds, while the latter established development banks. Most developing nations have used either one of these methods or their hybrid, directly or via financial intermediaries to raise capital.

Recognizing the potential that municipal bonds hold in contributing towards the development of the urban space can prove to be of great assistance to ULBs. While granting constitutional legitimacy to municipal bonds will empower ULBs to a great extent, such authority without real financial independence is futile. Concrete steps must, therefore, be taken in the right direction to ensure that ULBs possess the requisite institutional and financial autonomy.

(The article was originally published on Transfin)

Indira Gandhi: The Unforgettable Persona Of The Indian Political History


Indira Gandhi is remembered as one of the most powerful Prime Minister of India. She has been controversial in her political tenure since her accession to Prime Minister-ship till her unfortunate murder. She was brave, bright and bold in her approach and decisions.

All in time, she was very much clear about her vision and ideology and never hesitated to take policy decisions which faced opposition even within from her party. It is true that she acceded to the throne with the intent of placing the puppet prime minister remotely controlled by the coterie of then Congress stalwarts but to the surprise and shock of everybody, she not only consolidated and concentrated the power in her hand but also emerged the winner of every political battle.

This piece is the first part of a two-part series which sheds light on her political career which was full of interesting incidents, stories and controversies ranging from bank nationalization to declaration of emergency to her brutal and unfortunate murder.

Road to PM-ship

The mysterious death of then Prime Minister Lal Bahadur Shastri, during Tashkent Declaration (1966) brought the discussion on succession to the fore. Moraraji Desai was a senior and in a way rightful contender to the post. But a section of Congress (Syndicate) under the leadership of K Kamraj disliked him and therefore was in a search for a name who could challenge Desai but work under the Syndicate’s shadow. Indira Gandhi who was new and inexperienced but carried the legacy of Pandit Nehru was their obvious choice.

Desai due to his seniority and position in the party felt confident about his win in the contest. He termed Indira as “ye kal ki Chokri”! However, to everyone’s surprise, Indira Gandhi in a much famous contest defeated Morarji Desai by 355 votes to 169 and became the first and the only women Prime Minister of the country.

The 1967 Election Debacle

In the general elections of 1967, Congress suffered a major setback. Though it succeeded in retaining control of Loksabha by winning 284 out of 520 seats but the majority margin in the Upper House was drastically reduced. Further to the losses incurred, Congress also lost its majority in eight state assemblies which include Bihar, UP, Rajasthan, Punjab, Orissa, WB, Madras and Kerala. The major reasons for the defeat were raising factionalism and weak leadership in Congress after the death of Nehru (1964) and also united opposition which contested the elections. This was the election in which all opposition parties including Lohiya’s socialist party, communal Jan-Sangh, rightist Swatantra, CPM, Muslim League, Akalis all joined hands together and fought anti-congress elections.

Fault Lines in Congress

The outcome of 1967 elections drastically changed the balance of power inside the Congress. The powerful Syndicate got weakened as many of its loyalists including the president, Kamraj lost the Loksabha election or of state assemblies. Though Indira Gandhi had acquired a certain control over the government after the blow suffered by the Syndicate, she hardly had any organizational base in the party.

Moreover, Kamraj got re-elected to parliament by winning by-elections tried to assert his position by stating that it is the party (Syndicate) should form the policies and the government should be accountable to the party for its implementation.

However, Indira was not willing to cede control to the Syndicate. She emphasized the fact that the government acquired its power and legitimacy from the parliament and the people himself, not from any party or organization.

This way two wings, which were ideologically different, developed and later got radicalized in Indira times. One was led by Indira herself propagating socialist agenda (Congress-Left) which included Ten Point Programme and advocating closer relations with communist countries. The other wing (Congress-right) was led by Syndicate under its new president Nijalingappa (after the retirement of Kamraj) which opposed the socialist policies and demanded greater private sector participation and use of foreign capital for economic development.

The Presidential War and Split of Congress:

Though Congress had always been ideologically heterogeneous party accommodating diverse ideological strands with overall nurturing of a left of the centre image, this time the two factions were much more radicalized on both political and economic fronts. The historically subdued Congress-right faction was much more assertive and was willing to openly oppose the left-wing policies.

For example the Ten-Point Programme adopted by the left wing faction led by Indira and which comprised of many socialistic agendas like social control on banks, nationalization of general insurance, ceiling on urban property and income, curb on business monopolies and concentration of economic power etc, was aggressively opposed by the right wing section under the leadership of Desai and Nijalingappa. Moreover, the syndicate even proposed an alternate set of far-right policies which consisted of ideas like liberalization, privatization, warm relations with the West and higher reliance on foreign capital.

This rift got further intensified over the period of time and reached its peak with the death of President Zakir Hussain in May 1969. It is to be noted that while the post of President as per the Indian constitution is of a ceremonial head but at the times of hung parliament, he enjoys certain discretion and therefore could play a politically decisive role. The Syndicate which was determined to have their own man on the top position, despite Indira Gandhi’s opposition, declared Sanjiva Reddy as a Congress candidate for the Presidentship.

This was the declaration of an open war against Indira. However, she accepted the challenge and decided to give it a strong fight with all of her strength. Though She was on back-foot due to a clear majority of the Syndicate on congress parliamentarian board. Within days of the declaration, she sacked Morarji Desai from the Finance Minister portfolio on the grounds of his conservative ideology incapable to implement her radical policies.  There were two other candidates for Presidentship, CD Deshmukh, a senior statesman was fielded by Swantantra and Jan Sangh while VV Giri, then Vice-President decided to stand as an independent candidate backed by communists and several regional parties.

Indira Gandhi wanted to support Giri but did not know how she could go against her party’s candidate whose nomination papers she has filed. At this stage, the syndicate made a major blunder. To ensure Sanjiva Reddy’s election, Nijalinagappa met the leaders of Jan Sangh and Swatantra and persuaded them to cast their second-preference votes, once the CD Deshmukh gets eliminated in the first round. ( Know more about the election of the President of India)

Indira immediately accused the Syndicate of having struck a secret deal with communal and reactionary forces in order to oust her from power. She now, more or less openly, supported Giri by refusing to issue a party whip in favour of Reddy and by asking Congress MPs and MLAs to vote freely as per their own “conscience”.  At the time of the election, nearly one-third of them defied the official nomination of Congress and voted for Giri who was declared elected by a narrow margin.

The countdown had begun with the election of VV Giri as the President of India. The defeated and humiliated Syndicate took disciplinary action against Indira Gandhi and expelled her from the party for having violated the party discipline. Indira responded by setting up a rival organization, which came to be known as Congress (R where R was for Requisitionists. The Syndicate dominated Congress came to be known as Congress (O) where O was for Organization.

Once again at the final showtime, Indira Gandhi emerged as a victor securing the support of 220’s of party’s Lok Sabha MPs while the Syndicate got the support of just 68 MPs. Moreover, she now became the unchallenged leader of both the government and the new party which was soon to become the real Congress.

(To be continued….)


Will Automation Make You Jobless Soon?


Automation, Artificial Intelligence (AI), Robotics and Technology are the buzzwords of the industries especially of manufacturing and IT services. Techno experts have been calling AI and Automation as the future of technology. Whereas the critics have been taking it as a threat of potential job displacement.

As per the research report of PeopleStrong, a Human Resources Solution firm, India will make up around 23% of jobs to be lost to automation globally by 2021. However, one needs to understand the root cause of why India stands to lose a quarter of Jobs due to automation? Is it because of the process itself or due to lack of apt skills?

McKinsey Study

Another study compiled by McKinsey Global Institute says that advances in AI would have drastic consequences on the existing job markets. The Study estimates about 40-70 million job losses alone in the US market due to automation.

However, the study also acknowledges the fact that new jobs would get created in the market which would require a newer set of operational skills. So the constant updating of the skill set as per the technological developments becomes a crucial mandate to stay relevant in the job market.

A historical perspective of the journey of innovation suggests that the fear of job losses looks misplaced. The report exemplifies the effect of the invention of personal computers which were to consume jobs at unprecedented scale but in fact resulted in the creation of 18.5 million jobs after accommodating the possible job losses due to the innovation.

Automation at its face value may appear as a destructive force to the job prospects but a conscious analysis suggests that it would create new possibilities which would require an advanced skill set and changed job roles. In line with the argument, Infosys, India’s leading IT firm, stated that automation allowed it to shift 9,000 workers from low-skill jobs to more advanced projects, like machine learning and artificial intelligence.

Experts’ Views

The Economic experts based on the basic principles of demand and supply have been suggesting the fact that the process of AI and Automation can result in higher income levels as it would enhance not only the competitiveness of the product and offer better quality but also cash in economies of scale as well as higher labour productivity. This would ultimately get reflected in lower prices of the product which would, in turn, create higher demands, higher productions and hence higher income levels.

Further, the establishment of automation industry itself would generate employment opportunities for production of spare parts and services. Therefore, the efficiency argument goes in favour of automation. However, another significant aspect of the AI revolution is the variability in the impact distribution based on region as well as job classes.

The developing countries are expected to be more affected than the developed world. As per the World Bank data, 69% of today’s jobs in India are threatened by automation. And India isn’t alone: China’s figure was 77% and other developing countries also scored highly.

Mohandas Pai, former CFO of Infosys, have stated that very high skilled jobs and very low skilled jobs are going to be least affected due to automation. As high skilled jobs are yet irreplaceable because the technology is still in developing stage while the low skilled jobs would remain cost competitive.

It is only those middle-class jobs which involve repeated and rule-based work could face the heat. As per the world development report,2016, of the world bank, as technology would streamline routine tasks, middle-skill jobs like clerical workers and machine operators may decline while both high-skill and low-skill ones would increase. It is the division of labour which will go to an advanced stage.

Further, automation technology promises huge possibilities from the perspective of art and craft sector. With the replacement of repetitive and loop-based work with automated devices and process, it is the human intelligence and creativity space which will get a strong push.

Misplaced Fear

Also one needs to understand the fact that the process of automation is going to be introduced in a gradual manner and thereby is not expected to produce a knee-jerk reaction in the job market. If India grows at 8% a year, with a labour productivity increase of 1.5% a year, jobs should grow at a rate of 6.5% a year.

With automation, jobs may grow within a band of 4-5% a year for the next 10 years. Also as the cost of initial automation and robotics is high, In a country where wages are much lower than such costs, the impact will be felt at a slower pace.

However, the major challenge to adopt the AI techniques is streamlining the education sector as per the future requirements. If the educational sector is overhauled and proper skilling is imparted, there would no exaggeration in saying that automation would promise immense possibilities to the global market.

Conclusively it can be said that historical experience adjoined with the benefits of automation like lower costs, better quality, mass production, higher income levels, greater competition indicate the positives of adoption of automation technology while the fear of job destruction stands misplaced.

Simultaneous Elections: A Masterstroke or A Futile exercise?


The issue of holding simultaneous elections to the Lok Sabha and all the State Assemblies has become hot again with the recent statement of the Election Commission of India stating that there is a practical possibility of implementing the idea once the necessary political convergence takes place.

In that context, Bureaucracy Today presents a fresh perspective along with a detailed analysis of the hot topic. In an exclusive interview to BT, Election Commissioner Om Prakash Rawat speaks in detail about the opportunities and the challenges associated with the Idea.

In order to provide a comprehensive character to the cover story, we have also tried to incorporate the views of diverse stakeholders, including leaders of various political parties and two former Chief Election Commissioners.

Prime Minister Narendra Modi has suggested that elections to the national and State legislatures, panchayats and local bodies should be held simultaneously. However, the idea is not new as it was first introduced by the Law Commission headed by Justice BP Jeevan Reddy in 1999.

Later on, in 2009, BJP leader LK Advani aired similar views. The Parliamentary Standing Committee on Personnel, Public Grievances and Law and Justice under the Chairmanship of EM Sudarshana Natchiappan (Congress), in its 79th Report in 2015 also concluded that simultaneous elections were required for long-term governance. In fact, the practice was already under effect, though unconsciously, from 1952 to 1967. However, it got disrupted in 1969 due to the premature dissolution of the Lok Sabha.

Election Commissioner O.P. Rawat while speaking at length to Bureaucracy Today provides useful insight on the envisaged benefits and challenges associated with the idea. “Under the current system of elections, India is in a constant phase of polling with this and that State going to the polls.

It hampers governance as political leaders find themselves busy in a consistent mode of political campaigns. For example, we have just witnessed the UP, Punjab, Uttarakhand and Goa Assembly elections and the election dates for Gujarat and Himachal Pradesh Assemblies have now been announced. It creates an unintentional environment of policy paralysis”, Rawat says when BT asks him about the fundamental reason behind the genesis of the idea.

The line of reasoning stands justified as every time a State heads for the polls, the Model Code of Conduct (MCC) gets enforced by the Election Commission. The enforcement of the MCC limits the powers of the Government as new projects, policies and major announcements can’t be made by it.

The MCC has critical importance in ensuring free and fair elections across the country which is a constitutional mandate imposed on the Election Commission of India. It prevents the ruling party from exerting undue influence on voters and thereby provides an unbiased playground to all the contestants and political parties.

THE Hobbling Experience

However, the MCC makes the Central Government walk with a limp for nearly 30 months out of its 60-month tenure. It puts the top line leadership to an endless political campaign mode, brings administrative machinery to the halt, results in utter wastage of human resources and involves huge economic cost to the national exchequer.

Confirming the views of O.P Rawat, former Chief Election Commissioner H.S Brahma states that “the whole exercise results in an unproductive expenditure to the tune of thousands of crores of rupees whose brunt is ultimately bearded by the ordinary taxpayer”.

All goes well with the theoretical disposition of the proposal of holding simultaneous elections but the real challenge is faced on the implementation ground. Synchronization of elections to the Lok Sabha and all the State Assemblies remains the foremost challenge.

For example, if the Modi Government wants to implement the idea from the 2019 general election, how would it ensure the concordance of State Assembly elections? Will the Punjab Assembly which recently secured a full five-year term surrender its remaining period? This remains a big question.

The Indian Constitution has provisions for the early dissolution of national and State legislatures as per the wishes of the Government concerned with the mandate of holding fresh elections within a period of six months. Further, Article 356 of the Constitution empowers the Centre to dissolve any State Government on various grounds as per the recommendation of the Governor of the State.

Observers say the Indian political system has witnessed instability and volatility of tenure with the emergence of coalition Governments at the national level as a single party majority has become the rarest of a rare case.

The scene gets more complicated at the State levels with the emergence of regional parties which mobilize votes on regional issues and aspirations. There are more and more cases of hung legislatures where no party gets a majority, withdrawal of support of coalition partners, large-scale horse trading and no-confidence motions making the completion of tenure unrealistic and unviable.

According to observers, these multiple scenarios which occur regularly in the political corridors of India raise numerous questions on the feasibility of holding simultaneous elections.

When asked about these cases, Rawat tells Bureaucracy Today: “The Election Commission of India has already submitted a detailed proposal explaining the practical modalities of holding simultaneous elections. The Commission has suggested appropriate amendments to the Constitution, including Articles 81, 82, 83, 85 and 356 to make the proposal practically feasible.

The Commission has also given the recommendation of introducing a confidence motion rather than a no-confidence motion or holding both the motions simultaneously in the case of early dissolution of a House.

Suppose a Government faces a no-confidence motion and loses the confidence of the House at a certain stage of its tenure, rather than calling for fresh elections, a confidence motion needs to be presented by the challenging political party. If it wins the confidence motion, it would immediately replace and succeed the present dispensation for the rest of its tenure. If it loses, then the present Government would be continuing to rule the State”.

A senior Government officer on condition of anonymity revealed to Bureaucracy Today that the Centre was exploring the possibility of holding simultaneous elections in a two-phase cycle to tackle the problem of convergence of various elections.

“Basically the idea is to hold two elections in a five-year period. At first, all the elections would be conducted simultaneously in a concordant manner, but then there would also be a provision of holding mid-term elections to re-synchronize the States, if any, which have fallen apart from the cycle for any of the stated reasons,” the officer says.

When BT tried to confirm whether the idea was presented by the Election Commission, Rawat denied. He states that the idea may be under the consideration of the Government but was not originally presented by the Commission.

Apart from large ground level difficulties, the proposal also faces an ideological battle from Opposition political parties with some alleging to the extent that the whole idea was a covert attempt to stall the parliamentary form of Government in the country and replace it with the Presidential order.

Various Takes

Manish Tiwari, former Union Minister and Congress spokesman, while speaking to Bureaucracy Today says that not only is the idea impractical but it is also against the spirit of federalism which is a basic feature of the Constitution. All these fervent propositions proposed by the Prime Minister find their genesis in the 2014 general election successfully fought riding on a single personality by the BJP. The idea of holding simultaneous elections is just another attempt to recreate an election wave and sweep national and State elections. It would ultimately translate into the destruction of democratic values and the spirit of co-operative federalism of India.

Sitaram Yechury, leader of the Communist Party of India (Marxist), while expressing his views to Bureaucracy Today categorically denies any possibility of holding simultaneous elections to the national and State Assemblies. He says, “Unless Article 356 gets deleted from the Indian Constitution, the holding of simultaneous elections will remain a bogus idea.”

The former Chief Election Commissioner, SY Quraishi, in a telephonic conversation with Bureaucracy Today expresses the similar thoughts raising various questions on the practical modalities. He says “The feasibility of the idea remains quite unclear. How you are going to ensure synchronism of the elections when the Constitution itself provides provisions of early dissolution or imposition of Presidents rule.

How are the aspirations of assertive regional parties going to find their legitimate expression? How can you muffle up a single set of election and create a single set of national priorities? How are you going to acknowledge the presence of regional diversity and differences? The Election Commission must first come clear on these questions, only then a meaningful deliberation on the issue is possible.”

Indian Voters’ Wisdom

However, when these questions are put to the Election Commissioner Rawat, he expresses his confidence in the institutional set-up of Indian democracy and the wisdom of Indian voters. “ You see, Indian democracy has matured and so Indian voters. While raising these questions you are undermining the wisdom of the voter. It is not so the case.

The Indian voter is very much informed now and can very well discriminate between different types of elections, political parties, candidates and national or regional aspirations. You must place your trust in the hands of our voters.

After all, this is all about democracy. Also, you should not forget that the ultimate focus should be on a better serving of the people of this country. Everything else should be subsumed to the best interest of the population.” Rawat tells Bureaucracy Today.

Sambit Patra, BJP spokesman in a conversation with Bureaucracy Today, however, says “The BJP welcomes the idea. We believe in a consensus-based approach keeping the spirit of co-operative federalism. I think the Prime Minister has made absolutely clear by stating that there will not be any imposition of the idea on other political parties.”

When asked about the infrastructural preparedness of the Election Commission in case the idea gets flagged off by the Government, Rawat quickly responds that “Infrastructure is not the issue. The commission has an adequate number of voting machines and required manpower.

Though we would need a capacity addition to conduct simultaneous elections,  the new Voter Verified Paper Audit Trail (VVPAT)Simultaneous Elections enabled voting method but that could be arranged easily. I do not see any challenge in it. The main challenge lies in evolving a broad-based political consensus as the implementation of the proposal would require a number of constitutional amendments.”

Way Ahead

The idea of holding simultaneous elections to the national and state legislatures has its own merits, still, it appears to be in a nascent stage. There is no doubt that the country needs to save itself from constant electoral campaigns, huge economic costs and poor political governance involved with the current system of elections but the various challenges associated with its implementation like ensuring constant synchronization, protecting the federal structure and giving space to various regional aspirations must first be acknowledged and then be discussed with all the political parties.

The detailed proposal of the Election Commission discussing practical modalities which include multiple constitutional amendments should come in the public domain so that other stakeholders like political parties, civil societies and experts can express their opinion on it. If all the challenges are handled with a consensus-based approach, there is the least doubt that the idea could turn as a masterstroke by Indian democracy.

(The article was originally published at Bureaucracy Today news magazine)




Recapitalization of Banks: The Unfinished Agenda


Modi government finally recognized the critical health of Public Sector Banks (PSBs) due to rising Non-Performing Assets (NPAs) and announced much-needed recapitalization amounting to INR2.1L cr.

Equity markets as expected showed their support by spiking the market capitalization of 22 listed PSBs by INR1.2 L cr the very next day. The announced package is structured in three tranches. INR18,000 cr will come directly from budgetary allocations. Another INR58,000 cr will be raised by PSBs themselves…presumably via the sale of non-core assets. It is to be noted that Indradhanush (an existing government program) already included these ideas but perhaps not at such a scale.

The new announcement, however, had a third element comprising INR1.35 L cr to be raised through recapitalization (recap) bonds. Implementation for the moment remains unclear. PSBs, flushed with liquidity post demonetization, is likely to buy these recap bonds, the proceeds of which would be re-injected into banks by the government as equity.

Hence PSBs in a way would finance their own bail-out. Cleaner balance sheets make banks more attractive for private investment, also enabling them to focus on fresh lending. The move will boost bank capital ratios, thereby giving them more leeway in expanding credit without worrying about regulatory pressures.

This is important as, under Basel III norms, the minimum level of tier 1 capital has been mandated at 10.5%. In fact, last year when RBI eased the classification norms of tier-1 capital and allowed banks to revalue their assets as per new guidelines, most including the largest lender SBI, could not secure the 10.5% mark.

Recapitalization is a quintessential move to restore the beleaguered sector – plagued by rising NPAs, deteriorating asset quality, and historically low credit growth.

Gross NPA in PSBs rose from 5.43% of advances in March 2015 to 13.69% as of June 2017. In 2015, banks needed recapitalization of INR2 L cr to handle the challenge. Since bad loans have sharply risen since then, the current allocation stands inadequate vis-à-vis the estimated INR3 L cr plus requirement as per Fitch.

It is to be noted that most part of the infused capital will be utilized for higher provisioning or debt write-offs, limiting the possibility of inorganic revival in credit. Also, propensity to lend (supply) need not straightaway translate into a propensity to borrow (demand). Given recap bonds would crowd out private investment and large-scale investors have a sluggish credit demand; targeted lending to MSMEs could revive the credit cycle.

One of the biggest challenges of the recapitalization plan is the possibility of a rise in debt to GDP ratio, which at 69% already indicates higher levels in comparison to other Emerging Market Economies.

Though the Economic Survey suggests bringing debt to GDP ratio to sub-60%, the current proposal makes its achievement difficult. It would be interesting to see how rating agencies respond to this probability.

Coming to the fiscal debate, Chief Economic Adviser Arvind Subramanian says that the true fiscal cost of issuing bonds worth INR1.35 L cr would range between INR8,000-9,000 cr in the form of interest cost.

Unlike the accounting norms of International Monetary Fund (IMF), Indian standards require the inclusion of interest payments on recap bonds in its fiscal expenditure. Restructuring accounting norms as per IMF will be a possible way to save oneself from breaching the budgeted fiscal deficit target of 3.2%.

The fiscal cost could go higher in case the bond market witnesses sustained yield spikes as was seen in 2009 due to oversupply. To illustrate, the 10-year Indian generic bond yield rate which was at 6.75% on October 24 has already touched the peak rate of 6.89%.

The idea of recap bonds has been executed in other economies such as USA, UK, and Indonesia in the past. In the 90s, India itself issued recap bonds to rescue the financially stressed oil marketing companies. Indonesia issued them after the ‘98 East Asian Crisis resulting in the collapse of its banking and financial sector.

Taking a cue from low international interest rates, Indonesia revised its strategy in 2004 by issuing Dollar dominated bonds in International markets. India could have considered this option as besides from facing a lower interest charge, our comfortable external debt position gives more room to increase leverage Internationally.

Also, the problem of crowding out of private investment would reduce. The government has the option to issue “Masala Bonds” (Rupee dominated bonds issued abroad) to hedge any exchange rate risks. Probably the expectation of a rate hike by US Fed in December made the government shy away from this strategy.

The whole exercise brings the problem of moral hazard to play as any write-offs give wrong incentives to defaulters. Case in point is Essar Steel, where promoters bid to buy back the company after receiving write-offs, ironically after filing for bankruptcy. Therefore, the banking management must be vigilant to write off only genuine cases instead of inadvertently assisting willful defaulters.

Way Ahead

The success of recapitalization eventually depends on financial prudence shown by bankers while allocating proceeds for provisioning, write-offs or fresh credit disbursal. Transparent decision making accompanied by lower turnaround time would be key. Further, recapitalization must accompany a stream of other measures such as consolidation, governance changes and the eventual creation of a bad bank.

The market has wholeheartedly welcomed the move, but it would be interesting to see whether the Finance Minister would take the initiative to its logical conclusion i.e. a revived & healthy banking sector in India.

The article was originally published at Transfin.

One Year of Demonetization: The Pain Is NOT Worth the Gain!


The date marks the first anniversary of the great Indian demonetization which was projected as the historic decision by the Modi government. In a single stroke, 86% of the currency in circulation was taken out of the system. The objectives stated by the Prime Minister were to unearth the black money, choke terror funding, seize counterfeit currency and hit hard on corruption. But when the utopia could not be realized, the goalposts were shifted to formalization and digitalization drive. Even that could encase limited success. Amid much fanfare, More than hundred people have lost their lives directly or indirectly caused by the demonetization drive.

One year since the whole exercise begun, available statistical data is confident enough to suggest that demonetization was not only badly planned and poorly executed but also a conceptually flawed decision. Former Prime Minister and the eminent economist Dr Manmohan Singh while terming demonetization a monumental mismanagement predicted a 1-2% hit on GDP due to it.  GDP for Q2 FY 18 aligning on the lines of his prediction has plunged to a three year low at 5.7%.

The attorney general in the affidavit filed before the Supreme Court stated the government estimated Rs 10 lakh crore to come back as deposits expecting 3-4 lakh crore of black money to be flushed out of the system. The expectation of the windfall gains was wiped out with the report of RBI stating that 99% of the demonetized currency got deposited back to the system.

The government making an overnight change of stance amusingly claimed the report to be a victory and stated that the dubious transactions were going to be thoroughly investigated. The truth is that the rich and powerful black money lobby was successful to park their ill-gotten wealth back to the system either through the nexus with banking officials or via rechanneling it through shell companies or Jan Dhan accounts. It was only the “Aam Admi” who supported the move at his best, suffered the worst. The government while unleashing tax terrorism and inspector raj is still churning on the data and yet to find the real black money hoarders.

Though any push to the formalization of the economy should be a welcome step, the applied “shock and awe therapy” has resulted in the total shutdown of selective informal sectors. Amid the fervent talks of unearthing the black money, the government has completely missed the point by assuming that “all cash is black and all black is cash.”

It is to be noted that 92% of the employment comes from the informal sector which constitutes agriculture and Micro, Small and Medium Enterprises. It also contributes about 48% of GDP. The fact that the informal economy operates almost in cash only mode does not implicate it to be a black money hoarder. Streamlining the sector on the formal channels is a desirable goal but the applied method has called for a total shut down.

In a way, the Indian economic structure explains that informality has been the strength of the sector. The forceful formalization would take away that advantage & make them prey for the large corporate houses which enjoy the economies of scale.

As expected the principle of competition among the unequal has wiped out the employment boosters like the leather industry of Kanpur, power looms of Surat and garment hub of Tirupur resulting in a 1.5 million-plus job losses post demonetization. The Real Estate sector has come to a halt and so the construction jobs. The informal sector needed a gradual shift to formalization starting with tax incentives, better credit accessibility, market demand and other policy supports.

On the other hand, the government apparently made a naive assumption that the black money only exists in cash. The demonetization could just hit the stock of black money, particularly in cash. It was incapable to touch upon the black money stored in forms of real estate properties, gold etc. Further, it could also not address the flow of black money in the economy making regeneration a potential possibility.

On the similar lines a digital push to the economy was a welcome step but again the method adopted still remains questionable. After an initial surge in digital payments, largely attributed to a shortage of cash in the banking system, digital transactions have seen a dip, indicating a slow reversal in the usage of digital platforms. The digital transactions which sharply spiked to 149 lakh crore in March 2017, up from Rs 94 lakh crore in November 2016 have come down to Rs 99.28 lakh crore in October (till 29th). However, bankers and analysts said a complete switch back to pre-November 8 trends has not happened, holding out the possibility that there has been some behavioural change in transactions patterns.

Though the government has met some success on better tax compliance and digitalization of the economy, it has totally missed the stated larger goals. Even the limited success has come at the unwarranted cost to the national exchequer, shaken consumer confidence, and existential threat to MSME’s.

The argument of increased tax compliance is morally challenged by the mega recapitalization plan of public sector banks which would ultimately incentivize the willful defaulters of the corporate world at the cost borne by the Indian taxpayer. Conclusively, demonetization can be termed a huge political success for the Modi government but least have been the benefits to the Indian Economy.

The long-term impact of the mammoth exercise is yet to come out as companies are still getting de-registered, the data is still getting mined and the debate is still on. But if we were to believe the great John Maynard Keynes, ” In the Long Run We Are All Dead!”

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