India Resets its Agenda on Pakistan

The barbaric massacre of 26 innocent Indian tourists at Pahalgam on April 22 by terrorists reminds us of a haunting conversation between Ivan Karamazov and his brother, Alyosha, in Fyodor Dostoevsky’s novel The Brothers Karamazov. Reflecting on the atrocities committed by humans during wartime, specifically the brutal acts carried out by the Turks in Bulgaria, Ivan observes: “People speak sometimes about the ‘animal’ cruelty of man, but that’s terribly unjust and offensive to beasts, no animal could ever be so cruel as a man, so artfully, so artistically cruel”.

Here, Dostoevsky, challenging the notion that human cruelty is merely “bestial”, suggests that ours is indeed a distinct form—nay, humanly-capable of a calculated, almost ritualistic form of wickedness. After all, it is only humans who would enquire about the religion of a man before deciding whether to kill, and even take delight in killing the selected man before his wife’s/kith and kin’s eyes. 

In response to these dastardly acts of terrorists, India imposed economic and trade sanctions against Pakistan, signalling its firm stance against terrorism. Over it, the Indus Waters Treaty was kept in abeyance to further emphasize India’s resolve in addressing cross-border terrorism.    

Prime Minister Narendra Modi underscored the government’s determination, stating in a public meeting, “India will identify, track, and punish every terrorist and their backers. We will pursue them to the ends of the earth …” On the night of May 6-7, India conducted precise air strikes against nine terrorist camps located in Pakistan and Pakistan-occupied Kashmir, including the Jaish-e-Mohammed stronghold of Bahawalpur and Lashkar-e-Taiba’s base in Muridke, which are linked to the orchestration and planning of cross-border terror attacks. The operations, executed within a 23-minute window, were carried out without violating Pakistani airspace and reportedly inflicted significant damage on the targeted camps. 

Not to escalate the conflict further, the Director General of Military Operations, Lt General Rajiv Ghai, made a call to his counterpart in Pakistan and informed that the Indian armed forces carried out ‘focused’, ‘measured’ and ‘non-escalatory’ strikes on nine terror sites in Pakistan and Pakistan-occupied Kashmir and that no Pakistani military establishment had been targeted. Further, any attack on India would invite a befitting response.  

However, Pakistan, as anticipated, retaliated with a barrage of drone and missile strikes. These were, however, successfully intercepted by India’s air defense network, minimizing damage. As the drone and missile strikes continued unabated from Pakistan, on the intervening night of May 9 and 10, India launched precision strikes on Pakistan’s air force infrastructure, including 11 airfields—Nur Khan, Rafiqui, Murid, Sukkur, Sialkot, Pasrur, Chunian, Sargodha, Skardu, Bholari and Jacobabad— air defense units, and control networks. This devastating blow resulted in Pakistan calling for a ceasefire. Having achieved all its goals of Operation Sindoor, India, wisely acceded to the call for a truce. 

A prolonged military campaign with Pakistan is certainly not in the interest of India for reasons galore: It adversely impacts India’s ambition to become a developed economy by 2047. Secondly, assuming a net revenue growth of about 11% and an expenditure growth of about 7%, the budget for 2025-26 projected a fiscal deficit of 4.4% of GDP. But a prolonged border conflict and the resulting rise in defense expenditure is likely to lead to unanticipated growth in budgeted expenditure. This, in turn, would have serious implications for the government’s fiscal consolidation road map. Thirdly, a sustained Indo-Pak conflict could even dent GDP to a significant extent. Indeed, one estimate puts this slide at 1.5 -3% of India’s GDP. So, India has more to lose, while Pakistan, a ‘basket case’, has little to lose. 

Against this backdrop, Prime Minister Modi set a new norm for tackling cross-border terrorism: Any future act of terror would be viewed as an act of war and would invite an appropriate military response against both the terrorist camps and also against their sponsors—the Pakistani military and government. Secondly, India will no longer tolerate Pakistan’s nuclear blackmail. Thirdly, the Indus Waters Treaty would be held in abeyance till India is convinced that Pakistan has stopped sponsoring terrorists. He thus said goodbye to India’s hitherto practiced soft approach. 

Nevertheless, going by the past, there is no guarantee that terrorist attacks from Pakistan will cease to occur in the future. This necessitates enhancing intelligence, surveillance and reconnaissance capabilities to pre-emptively neutralize such terror attempts. Over it, India must develop the ability to routinely dismantle terror infrastructure in Pakistan without relying on large-scale deployment of forces along the border. Lastly, India, as a nation united, must assert its own resolve to fight terrorism, for external support will inevitably wax and wane depending on shifting geopolitical dynamics.

 

Unified Pension Scheme: Isn’t It an Extra Burden on the Exchequer?

 

The existing pension system in India is highly skewed. Retirement schemes such as provident and pension funds predominantly cover workers from the organized sector, which hardly constitute 10% of the workforce. The remaining 90% of the working population engaged in the unorganized sector has no access to any formal system of old-age economic security. Coupled with this, like in most developed countries, we do not have a universal social security system that protects the elderly from economic deprivation. 

Again, within the organized sector, there exists a dichotomy. Employees of the private sector have access only to a provident fund system. It is a defined-contribution program under which, workers and employers contribute each around 10-12% of monthly earnings. At retirement, the fund pays the employee the accumulated amount along with the accrued interest. Against this, government employees’ programs run on a pay-as-you-go defined-benefit basis. And, this scheme is non-contributory. Thus, the entire pension payment becomes a part of the government’s annual revenue expenditure.    

However, as the pay-as-you-go defined-benefit scheme involves transfer of funds to pensioners from the earnings of the current workforce, which as a proportion to the retired people is dwindling, policymakers realized that the scheme is becoming fiscally unhealthy and unsustainable. The increasing lifespan of the retired people has further worsened the scenario. 

Against this backdrop, the then government under the Prime Minister Atal Bihari Vajpayee replaced the Old Pension Scheme (OPS) with a New Pension Scheme (NPS) on January 1, 2004. 

The NPS is a market-linked pension system under which pension payment is based on defined contributions from both employees and the government. Under NPS, employees are required to contribute 10% of their salary with a matching contribution from the government. Later in April 2019, the government’s contribution was increased to 14%. The said collections were deposited in a pension fund scheme selected by the employees for investment in market-linked securities. The Pension Fund Regulatory and Development Authority regulates these funds. There is, however, no certainty about pension incomes. The NPS is implemented for all government employees except Armed Forces who joined the service on or after January 1, 2004.    

Now the present government has launched the Unified Pension Scheme (UPS). It borrowed the defined contribution of NPS and the defined benefit of OPS. Under it, employees contribute 10% of their basic salary plus dearness allowance (DA), while the government contributes 18.5% of the basic salary and DA. More importantly, it guarantees a pension of 50% of the last drawn salary based on the average of the previous 12 months to all those employees with 25-plus years of service. A minimum pension of 10,000 shall be paid for those who worked for a minimum period of 10 years. Similarly, a family pension @60% of an employee’s pension at the time of his/her demise shall be paid to the dependents. Pension payments are also hedged against inflation by raising the pension payments in line with the consumer price index (CPI). A lump sum superannuation payout over and above the gratuity is also promised. The UPS, thus, ensures payment of a defined pension amount.   

Announcing the UPS, the government observed that it “aims to provide stability, dignity, and financial security for government employees post-retirement, ensuring their wellbeing and a secure future”. 

This, however, posits a battery of questions. In making the UPS an assured pension scheme, the government has to bear any gap between the eventual earnings on these contributions and the promises made under the scheme. So, will it not impose an additional burden on the exchequer? Will it not burden future governments? 

Of course, one may argue that future growth in the economy shall absorb the additional burden without threatening fiscal prudence. But there is also an argument that the shift from NPS to UPS will impact future allocations to education and health sectors which are languishing even now with an allocation of hardly 2.6% and 2.1% of GDP, respectively. 

Over it, analysts are also worried about the old-age security of 90% of the workforce that is employed in unorganized sectors. Their question is: Aren’t they to live with dignity in old age? Indeed, they consider them as the contributors of a major chunk of GST, which incidentally funds the ‘certainty’ of the UPS. Their argument is: These issues too merit the attention of policymakers.

Budget 2024: Can it Raise the Rate of Creation of Productive Jobs?

In a recent Op-ed article, Dr Ashima Goyal, Emeritus Professor, IGIDR and member of the Monetary Policy Committee, made an interesting observation: “The first priority for the new government is to raise the rate of creation of productive jobs in the economy”. Further, she also rightly observed that “sustaining high growth with a focus on labor-intensive sectors … is a precondition” for raising the rate of creation of right jobs.

In 2022, educated women had the highest open unemployment rate of 34.5 per cent for graduates vis-à-vis 26.4% of male graduates. Against this backdrop, it is heartening to note that the Union Budget for 2024-25 made it clear that employment is the government’s major priority by proposing five schemes for facilitating employment, skilling and other opportunities with an outlay of Rs 2 lakh cr. 

Of them, three schemes provide “employment-linked incentive(s)” and are based on employees’ enrolment in the Employees’ Provident Fund Organization (EPFO). The first scheme, which is supposed to cover about 210 lakh youth employed in all formal sectors in two years, will provide a wage subsidy of up to Rs 15,000 in three installments as a direct transfer to employees. The eligibility limit will be a salary of Rs 1 lakh per month. 

The second scheme will “incentivize additional employment in the manufacturing sector” by providing an incentive of 24% of a Rs 25,000 monthly wage directly both to employees and employers in the first four years of employment. Here again, the eligibility is limited to a monthly salary of Rs 1 lakh. This scheme is supposed to cover about 30 lakh employees and employers. 

The employer-focused third scheme covers all additional employment within a salary limit of 1 lakh per month. Under it, government reimburses employers up to Rs 3,000 per month for two years towards their EPFO contributions to each additional employee. It is expected to incentivize additional employment of 50 lakh persons. 

The fourth scheme is meant to skill 20 lakh youth over five years in collaboration with state governments and industry by upgrading 1,000 Industrial Training Institutes in hub and spoke arrangements with outcome orientation. It is also proposed to align the course content and design to the skill needs of the industry.   

The fifth scheme aims to provide internship opportunities in 500 companies to one crore youth in the coming five years. These internships shall provide exposure to real-life business environment of varied professions to youth for 12 months. Such exposure is expected to better their employment opportunities. The scheme provides for an internship allowance of Rs 5,000 per month for 12 months along with a one-time assistance of Rs 6,000. The training cost and 10% internship cost shall be borne by the participating companies from their corporate social responsibility (CSR) funds. Participation of companies in the scheme is voluntary and the enrolment of interns shall be through an online portal. 

Now, the big question is: Are these schemes sufficient enough to raise the rate of creation of productive jobs? The first reaction of economists is that the procedures and conditions prescribed under these schemes may create obstacles for their effective implementation. For instance, under scheme one, by the time the second instalment of Rs 3,000 becomes payable, an employee must undergo a compulsory online financial literacy course, or else it will not be released. There is yet another disturbing clause: “Subsidy must be refunded by the employer if the employment of the first-time employee terminates within 12 months of his recruitment. Such conditions are termed by industry experts as impracticable. Similarly, analysts wonder if many firms would participate in the voluntary internship scheme, for participation through a centralized portal of government agency could be a daunting task. 

Nevertheless, these schemes essentially aim at encouraging employment by reducing the cost of new hires. But is that what matters the most to businesses for creating jobs? According to development economists the answer is: ‘No’. For, it is the lack of sufficient demand in the market owing to poor consumption that is holding back private investment, which is mostly leading to unemployment. 

Secondly, it is not the big companies that create more jobs for they are largely capital-intensive. Rather these schemes may work well if nudged through small, medium and large enterprises. 

At the same time, India, under the fear of automation, cannot afford to negate absorption of new technology. So, in the ultimate analysis what matters most for employment growth is the creation of a conducive atmosphere that “sustains high growth” by encouraging private investment in labor-intensive sectors duly backed by a stable financial sector and supportive inflation targeting policies. Indeed, that is what is needed more for even availing subsidy offered by the budget.

 

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Mr CBN Must Take AP “from Talking About AI to Applying AI" …

“People are going to use these [AI] tools to invent the future that we all collectively live in”, said Sam Altman, Open AI CEO to NBC News anchor at the 20^th Aspen Ideas Festival held from June 23 to 29, 2024.

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The first cabinet meeting of the NDA government of AP chaired by Mr Chandrababu Naidu that was held last Monday discussed the state of affairs in AP and took a few critical decisions. Amongst them, there is one interesting decision that is pretty forward-looking: The cabinet approved “a skill census considering a family as a unit for assessment to impart industry-ready skills and enhance the scope of employment”.

AP government’s interest in imparting industry-ready skills to youth is all the more encouraging to hear, for in the rapidly evolving business landscape, companies are hurrying to harness the potential of Artificial Intelligence (AI) to drive innovation, make data-driven decisions, and create a competitive edge over the rest.

This has created a high demand for AI engineers, for it has great potential to improve and simplify tasks commonly done by humans such as speech recognition, image processing, business process management and even the diagnosis of a disease.

Interestingly, seized of the prospects of AI technology, the Central government had already approved spending Rs. 10,000 cr on the IndiaAI Mission that involves bringing AI compute capacity under the public-private partnership mode through GPU-based servers, allocating early-stage funding to deep-tech start-ups, setting up of innovation centers and developing broader AI sovereign infrastructure. According to the Ministry of Electronics and IT, it is likely to go up to Rs. 20,000 cr owing to additions of certain components.

All this throws open a new channel for Mr Naidu—a Chief Minister known to be far ahead of others in harnessing the power of IT—for creating employment potential for the youth of AP.

Analysts opine that by 2027, India is likely to overtake the US as the largest software developer community in the world. Now, with the widespread adoption of generative AI tools, software developer’s productivity is predicted to grow by 55%. One estimate reveals that by 2030, developer AI tools are likely to boost global GDP by $1.5 tn.

In such an emerging scenario, imagine what India is likely to gain if only its burgeoning developer community is trained in time to adopt the newfound AI tools for coding. Another advantage that the experts claim out of such convergence between software engineering and AI is: we get the best of both worlds: likely to not only speed up coding but also impart the advantage of the end product being both precise and flexible.

Now taking a lead from these prospects, AP government may have to launch early training programs to reskill the software developers to use AI tools. Secondly, looking at the ongoing fusion between human and machine languages, IT professionals advise that even our school-going children can be trained to program in Telugu language.

In this context, they even cite the New Education Policy of 2020 which proposed that coding classes may be conducted for school children from class 6 onwards. Now they also say that children can learn coding with the help of AI assistant—all in Telugu.

So, what it all means is: it is not English learning that matters most, but grounding the boys and girls soundly in Maths and Science is what matters to nudge the youngsters to pick up interest in STEM careers right from a very young age. Such a move is certain to keep the flow of software developers from AP ever-growing which ultimately could make the state quite wealthy.

The availability of powerful open-source AI models has made the job of the AP government that much more affordable to undertake not only training programs for youth but also to resolve many societal challenges. For instance, on the lines of e-seva kendras that he conceptualized/established in the past, Mr Naidu may now think of establishing a network of Arogya kendras (Health Care Centers) using AI-developed tools to dispense primary healthcare advice to rural folks. Such an arrangement can enable people to walk-in into these Kendras to spell out their health problems/recite symptoms and get preliminary advice promptly and rightly. These Centers can even be enabled to offer advice by scanning through X-ray and MRI images. In a way, such elimination of the human interface may enhance the scope of the marginalized lot to get the right advice well in time with no hassles.

That being the prospects thrown open by the AI, it is now for Mr Naidu to use his ingenuity to create excellent training facilities across the geography of AP—in short, create such atmospherics that could motivate students to get themselves trained in using AI tools and get ready to launch themselves as well-equipped coders for the world to benefit, besides, of course, benefiting themselves. Of course, in all these endeavors, guardrails are crucial.

Exploiting this convergence between software engineering and AI technology today with a right training package—both for the already employed developers whose jobs are threatened by AI and students—Mr Naidu can build a bright future for his State.

No wonder, if Mr Naidu is already at it!

                  

 

 

 

 

‘Kingmaker Naidu Returns’

 

‘Yes’— that was the headline on page 3 of the Economic Times of 5^th June 2024. Similar comments —“Naidu calls shots in Delhi”, “the CEO of AP is back in power”, etc.— were, of course, aired by every other member of the national media.

People of Andhra are however not enthused by that coverage, for it does not make much material difference to them. Rather, what they are concerned more about is:

• Can Mr Naidu make the abandoned Amaravati a functional city, vibrant with life?
• Can Mr Naidu restore law and order in the State to its rightful place?
• Can Mr Naidu complete the remaining 25% construction work of the Polavaram project and operationalize it?
• Can he create employment in the State?
• Can he generate income for the State which phenomena squarely rests on capital-incentive projects, which in turn calls for infrastructure development?

True, these tasks are not going to be easy, for Mr Naidu and his government are likely to face an acute shortage of financial resources. But his electoral college knows that the 75-year-old Naidu— a politician with a never-say-die attitude—weathered several such storms in the past, including an attack on his life by Naxalites in 2002, and hence, pinning all their hope on him, look forward to a liberal, law-abiding and an economically vibrant Andhra.

Interestingly, in a recent meeting with his party’s newly elected MPs, Mr Naidu said: “You will see a new Chandra Babu from now… there is an accusation that Chandra Babu will not change. It will not continue anymore…”

People of Andhra therefore presume that he “would not repeat the mistakes that he had committed during his previous tenure as the Chief Minister”. This indeed gives new hope to the farmers of Amaravati who willingly enabled him to procure 34000 acres of land for the proposed capital of the newly formed Andhra Pradesh. In this context, they expect Mr Naidu to:

• set aside his passion for building iconic structures such as those designed for housing legislative assembly, high court, etc., for their designing and construction are time-consuming and highly capital-intensive, and instead, build the road network as per his original plan of the city, create supporting urban infrastructure such as sewage system, electric lines, etc. so that it becomes ready for building superstructures by public and private investors…
• be content with the present structures that are housing the assembly and high court, at least for the time being so that the time, energy and financial resources can be used to make the pooled land ready for utilization by various agencies interested in setting up their establishments
• handover the developed and reconstituted plots to farmers who participated in the Land Pooling Scheme as agreed in the development program
• focus time and energy on finishing the construction of buildings such as secretariat towers, Judges' quarters, etc. that were left half-done and make them ready for occupation by the concerned on top priority
• pursue the Central Government Departments/Public Sector Undertakings that have earlier got the land allotted for them to construct their office buildings and also impress upon them to start functioning from Amaravati at the earliest
• pay the promised lease rentals to farmers of Amaravati that have been in pending for payment
• convince private establishments such as HCL Technologies, Amrita University, etc., who had acquired land and indeed started construction of buildings for establishing their institutions but half the way abandoned to start their operations in Amaravati by impressing them about the permanence of Amaravati as the capital city of AP.
• invite afresh tech companies, both global and domestic, to establish their service centres in Amaravati by showcasing the merits of Amaravati such as the availability of a pool of skilled manpower, a newly built planned city with hassle-free mobility, etc.
• squash the cases filed by police against the peacefully agitating Amaravati farmers, including women who relinquished lands under the LPS against the three capital proposals of the previous regime for more than three years

Simply put, citizens of AP are expecting Mr Naidu to make Amaravati fully functional in the coming three to five years so that no one can dare doubt its stature as the capital city of AP in the days to come. They also believe that once Amaravati is made functional with basic urban infrastructure in place, it grows on its own through private investment thereafter—even if someone shifts the Court or Secretariat to another place in the future.

Such a danger of shifting the administrative offices to other places cannot be ruled out since Indian polity is known for its idiosyncrasies: in our country, opposition party’s sole duty is to oppose everything that the ruling party does—whether it is good or bad, and once it comes to power, reverse all the decisions of the previous regime —no matter what it costs to the exchequer. That being the reality, people are looking at Mr Naidu to give a permanent shape to Amaravati in the coming three to four years.

Another important expectation of the youth from Mr Naidu is: Creation of employment. The ‘India Employment Report 2024’ released by ILO states that India’s large young workforce, often considered a demographic advantage, faces challenges due to lack of necessary skills. It states that a “significant portion of youth lacks basic digital literacy skills, with 75% unable to send emails with attachments, … and 90% unable to perform basic spreadsheet tasks like putting a mathematical formula”.

The report suggests “integrating high-quality skills training into education to uplift economically disadvantaged groups and boost employability. It also recommends improving access to IT and bridge the digital gap”. Despite the bitterest experience meted out by the previous regime to Mr Naidu, the youth of the State look at him to facilitate the development of their skills and make them employable, which calls for further strengthening the skill development facilities in the State.

Hope of the State is: Mr Naidu will simply deliver what the State is fondly expecting from him.

Elections 2024: What Next?

Now that the national six-week boisterous election process amidst searing summer—high-pitched rhetoric by the political parties to propagate their programs as the best to serve the marginalized/to usher in socioeconomic transformation, leaders shaming each other with accusations such as narcissism/illiberalism/racism/bigotry, etc., and of course, each of them yet promising to protect the constitution—has come to an end, and a new government is likely to be in place in the coming two weeks, it is time for the nation to debate dispassionately as to what the new regime should aim at to grow economically amidst the ongoing deglobalization. 

First things first: Growing at an annual rate of 6-7%, India has of course, already become the fifth-largest economy and is expected to become the third-largest by 2027. Its clout has undergone a dramatic change in the recent past: American companies have 1.5 million staff in India—the highest number outside the US. India has the world’s fourth most valuable stock market. A research report brought out by Goldman Sachs labeled India as “the emerging services factory of the world”. It projected India’s service exports to rise to $800 billion by 2030, which is, of course, a tad lower than the target of $1 trillon set for both services and merchandise exports by its government. As the global trade in services is still growing, Indian IT companies have successfully sold themselves as global capability centers (GCCs) offering R&D services to multinational companies. This is likely to pave the way for a new wave of services-led growth for India, over and above what has already been accomplished: Wizmatic, a consultancy firm from Pune estimates revenue from such GCCs as high as $120 bn. According to Goldman Sachs report, India enjoys a share of 4.6% of global services exports, while its goods exports hardly account for 1.8% of global merchandise trade. 

Taking forward the agenda of the liberalized economy launched in the 1990s and 2000s, the previous government attempted to create an efficient, transparent and single domestic market by introducing GST and also giving a thrust to revenue collection. As an obvious extension of these happenings, the government also tried to take advantage of the ongoing US-China trade war and its impact on the supply chains in China by working to tilt the balance of India’s growth toward manufacturing activity through modernizing country’s infrastructure with extensive budgetary support and even offering subsidies for foreign companies to base their production centers in India. 

Despite all these developments, India faces a daunting task. Its economy must generate massive employment not only to sustain its growth but also to reduce the prevailing phenomenon of low levels of human development and high levels of inequality. It is worth remembering here that the Human Development Report 2023-24 published by the UNDP, placing India’s Human Index Value at 0.644 as of 2022, ranked it 134 out of 193 countries. This places India behind Bhutan, Bangladesh, Sri Lanka and China. The report also raises concerns about rising inequality and its impact on human development. Indeed, the World Inequality Lab study reports that “the top 1% earn on average of 53 lakh per year, 23 times more than that of the average Indian”. This stark difference in income levels is certain to impact aggregate demand and consumption, which in turn adversely impacts human welfare. 

That aside, the recently released India Employment Report 2024 developed by the Institute for Human Development issued in partnership with the International Labor Organization revealed that “educated youth (in India) have higher rates of unemployment, reflecting a mismatch with their aspirations and available jobs”. It also points out that “technological change and digitalization are rapidly affecting the demand for skills, which will continue to impact young people in the Indian labor market”. It is indeed a subtle pointer to the fact that it is imprudent to take India’s services growth for granted. The new government may have to therefore take cognizance of the suggestions made by the report viz., one, promoting job creation; two, improving employment quality; three, addressing labor market inequalities; four, strengthening skills and active labor market policies; and five, bridging the knowledge deficits on labor market patterns and youth employment.

The path for the new government to tread is thus well laid out: giving primacy to human development and through it accelerating growth. So, political parties, irrespective of their status—be it the party in power or in the opposition—must come together to think beyond their political agenda and draw a new growth strategy, be it for promoting manufacturing or services growth, that simultaneously addresses the twin objectives of economic growth and human development. 

To ensure human development, one of the most important and urgent needs is: Investment in education and skill development. That alone can pave the way for bringing down the inequalities prevailing in society appreciably. Along with it, they must also draw a plan to steer the country out of the folly of freebies by focusing all their energies on improving the productivity of the masses.

 

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Supreme Court Struck Down Electoral Bonds Scheme

A five-judge Constitution Bench headed by Chief Justice of India, DY Chandrachud unanimously struck down the electoral bonds scheme terming it “unconstitutional and manifestly arbitrary”. It also held that the bonds scheme and the preceding amendments made to the Representation of the People Act, the Companies Act, and the Income Tax Act violated the right to information about political funding under Article 19(1) (a) of the Constitution.

Before getting into the details of the judgment, it is in order here to first recapitulate the scheme. On January 2, 2018, the government of India notified the electoral bond scheme. Under it, the State Bank of India is authorized to issue electoral bonds in the denominations of Rs 1000, 10000, 1 lakh, 10 lakh, and I crore and to encash them. It is a kind of promissory note issued by SBI promising to pay the indicated sum to its bearer. They will be sold for 10 days in January, April, July, and October of each year. It being a bearer banking instrument, does not carry the name of the buyer or payee. Any citizen or company can purchase these bonds from SBI and donate them to any political party. Political parties that secured more than one percent votes in the last general election to the House of the People or a Legislative Assembly are only eligible to accept such donations. Once a donee receives the bonds, they have to encash them by lodging with SBI through a bank account within 15 days of receiving it. The scheme thus affords donor anonymity to everyone except SBI, for it must record the Know Your Customer (KYC) details of the buyer of the bond.

It is to provide this unique feature of donor anonymity to the electoral bonds that the government made the following amendments to the existing provisions under different laws:

• According to Section 13A of the Income Tax Act, political parties were earlier required to maintain a record of contributions above Rs 20000 received from whatever source. The Finance Act 2017 amended this provision to the effect that donations received through electoral bonds are exempted from this provision, which means, parties are now not required to maintain any record of what they receive through bonds.
• Under Section 29C of the Representation of the People Act, 1951, parties were earlier required to prepare a report on contributions over Rs 20000 received from any person/company in a financial year. With the amendment made to this provision under the Finance Act 2017, contributions received through electoral bonds need not be included in the report.
• Similarly, under Section 182(3) of the Companies Act, companies are required to disclose details of contributions made to political parties —name of the political party and the amount given—in their Profit and Loss account. It also imposed a cap on companies’ contributions to political parties: they can only donate up to 7.5% of the average net profits of the previous three years. Now, with the amendment under the Finance Act 2017, this cap has been eliminated and companies are simply required to indicate the total amount given to political parties in a financial year.

The government defended the amendments and scheme as a whole by arguing: one, that it enables any person/company to donate to political parties of their choice through banking channels and thereby minimize unregulated contributions in cash; two, that the anonymity offered by the scheme ensures that the donors need not fear retribution or coercion from parties to which they have not contributed; and three, that the use of banking channels will curb the role of black money in election funding. Intriguingly, it has also argued that citizens did not have a general right to know the funding of political parties.

However, the court opined that the scheme promoted “economic inequality” which can “lead to differing levels of political engagement because of the deep association between money and politics”. Observing that it gives donors a “seat at the table” and allows them to influence policy, the court averred that the voter must have access to information to assess whether “a correlation between policy-making and financial contributions” exists.

The Court also dismissed the government’s claim that the scheme was meant to curb the injection of black money into the electoral process stating that “curbing of black money” is not a reasonable restriction to the exercise of the voter’s fundamental right to information about political funding enshrined in Article 19 (1) (a). Further, the court opined that the scheme “is not the only means for curbing black money in Electoral Financing” and “there are other alternatives which substantially fulfill this purpose and impact the right to information minimally when compared to the impact of electoral bonds on the right to information”.

The Court also set aside the government’s submission that the mechanism of confidentiality under the scheme is “foolproof” and “unbreachable” pointing out that anonymity ascribed by law does not mean that anonymity is practiced in reality.

Referring to the way that amendments were made to Sec 29C of the Representation of People Act, Section 13 A of the Income Tax Act, and Section 182 of the Companies Act through the Finance Act 2017 that was introduced as a Money Bill to facilitate anonymity for contributions through electoral bonds, the court observed that they are violative of Article 19 (1) (a) and unconstitutional. The court held that “the deletion of the proviso to Section 182(1) of the Companies Act, permitting unlimited corporate funding to political parties, is arbitrary and violative of Article 14”. For, “the ability of a company to influence the electoral process through political contributions is much higher when compared to that of an individual”. Thus, the Supreme Court has declared the Electoral Bonds Scheme unconstitutional.

The Bench also directed the SBI: i) to stop issuing electoral bonds, ii) to submit details of the Electoral Bonds purchased from 12 April 2019 till date along with the date of purchase of each Bond, the name of the purchaser, and the denomination of the Bond purchased to the Election Commission of India, iii) to submit the details of political parties which have received contributions through Electoral Bonds since 12 April 2019 to date to the ECI along with the details of each Electoral Bond encashed by political parties, the date of encashment and the denomination of the Electoral Bond, iv) to submit the said information to the ECI within three weeks from the date of this judgment.

Further, the Court has also directed the Election Commission to publish the information shared by SBI on its website within one week of its receipt. Simultaneously, political parties are directed to return the bonds that are not yet encashed by them to the purchaser.

Reacting to the pronouncement of the Supreme Court, enthusiasts of transparency hailed it as a landmark judgment. However, this judgment can hardly help in bringing transparency into electoral funding since unaccounted-for cash is now likely to play a greater role.

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India in the Global Bond Index: What Next?

 

At last, India has made its entry into JP Morgan’s global bond market index. This will of course happen over a period of 10 months, starting from June 28, 2024, with a weight that is expected to reach 10% at an incremental of 1% per month by March 2025 in the GBI-Em Global Diversified Index. That aside, India is also likely to be included in other indices under the GBI-EM suite, with total assets of $236 bn under its management. 

With Russia out of the index after being ostracized post-Ukraine invasion, there emerged a free slot for another country to fill it and India with a fully accessible route for investment in the Government Securities (G-Secs) market that offers 23 government bonds with a notional value of Rs. 27 lakh cr equivalent to $330 bn, fit the bill quite well. 

Obviously, when G-Secs are included in a global index, the Indian bond market is certain to get a fillip, for foreign funds are likely to invest in G-Secs in larger quantities than what they are currently doing. The very inclusion in the global index affords a kind of gold standard to our bonds due to which foreign funds will be encouraged to invest. Even through passive investments of fund houses in a bond index, we are likely to get about $20-30 bn by way of our share of 10% in the index. In addition to that we may also get additional inflows by way of direct investment in our bonds as they offer higher interest vis-à-vis global rates. All this cumulatively leads to an increase in foreign portfolio investment (FPIs) in the debt market. 

One may now pose a question: Isn’t this happening today? True, FPIs do invest in G-Secs, but the limits prescribed for FPIs are not being fully utilized. The debt utilization statistics reveal that FPI holdings in G-Secs stood at 23.51% for general foreign investors and for long-term foreign investors it was about 5.59%. 

In such a scenario, the inclusion of our bonds in the index will be a game-changer: it is certain to widen our investor base, besides bringing down the cost of capital. Secondly, at a later stage, lured by the favorable yield on these indices, investors may even show security-specific interest, which means a still wider investor base.  Thirdly, it may even lead to the inclusion of corporate bonds at an opportune time. Finally, all this results in large capital inflows, which means not only a stronger rupee but also a strong surplus balance of payments position despite a widening current account deficit. 

Over and above all this, funding of the government deficit by FPIs, eases pressure on domestic banks for funds. This in turn will pave the way for banks to allocate more resources for lending to the private sector, resulting in economic expansion. 

However, there is a flip-side to this hunky-dory scenario. The inclusion of Indian bonds in the global indices exposes our bond markets to the repercussions due to exogenous forces. For instance, a phenomenon like the 2008 Global Financial Crisis would lead to a sell-off across markets and once our bonds are a part of the indices, it would result in capital flight. Such capital flight can destabilize not only the bond market but also exchange rates. In such situations, the intervention of Reserve Bank of India (RBI) assumes paramount importance in stabilizing both the forex and bond markets.  

At times, FPIs can induce volatility in domestic markets through their responses to exogenous reasons. For instance, when the US Federal Reserve raises interest rates dollar gets strengthened automatically, and this would simply trigger capital flight. This creates volatility in the forex market calling for RBI intervention. Such outflows create a cost for the central bank. Similarly, country rating plays an important role in the trading patterns of fund managers. Any change in rating outlook can also affect the investment patterns of funds, which can cause volatility. 

Today, RBI is in a position to successfully regulate excess volatility in the bond market by affecting liquidity. Thus, it has all the while managed to keep yields from G-Secs range-bound. This has helped the government in keeping its cost of borrowing moderate and stable. But once the FPIs start playing actively in the G-Secs market, the scene will change. Similarly, high foreign holding of debt exposes our markets not only to external macroeconomic shocks but also to geo-political risks. That aside, it subjects our fiscal situation to greater scrutiny. To sum up, on the positive, there will be an influx of foreign funds but the market and the RBI must be ready to manage external shocks and volatility with alacrity.

Right Time for India to Step In!

Foxconn, the Taiwanese major and the largest chipmaker in the world, has walked out of its joint venture with Vedanta group after a year of signing an agreement to set up a Rs 1.54 tn facility to manufacture semiconductors in Gujarat.

This joint venture was a kind of flagship attempt in encouraging domestic research leading to chip manufacturing. It is of course, not yet clear exactly why the joint venture was dissolved. But both companies have reiterated their commitment to the semiconductor sector. Reports also indicate that they are on the lookout for a fresh start independently. 

According to analysts, one probable reason for this fallout could be the revised incentive scheme of the government that offers bigger sops to smaller chips that are considered central to the ecosystem that caters to the needs of automobiles to consumer electronics and the lack of necessary technology with the Vedanta-Foxconn combine to manufacture such nano chips. 

Along with it, two other semiconductor proposals under the government’s subsidy scheme are also said to be in trouble. The ISMC, backed by Abu Dhabi’s Next Orbit and Israel’s Tower Semiconductor, appeared to have asked the government to hold back on considering its proposal till the merger of Tower with Intel is finalized. Similarly, the proposal of Singapore’s IGSS is still to be cleared, perhaps in want of right technology, delay in corporate action, etc.   

The government however does not consider these adverse developments a setback to its ambitious semiconductor program as is vindicated by what Prime Minister Narendra Modi said at the recently concluded ‘Semicon India 2023’, a global meet attended by investors from all over the world: “India will emerge as a global hub of the semiconductor and chip-making industry”. 

The government has thus made a fresh bid to attract global chip manufacturers into the country. And, as a policy, creating a necessary ecosystem for manufacturing chips in the country makes great sense for reasons galore: one, the major supply crunch that the world faced during the pandemic that affected China’s production compelled global players to look for a resilient supply chain; two, the Western players are looking at de-risking themselves from the likely diktat of China owing to its dominance in chip manufacturing supply chain through friend-shoring arrangements; three, the Russia-Ukraine war that resulted in the shortages of Neon, which is a crucial input for chip manufacturing; four, European Union and the United States refusing to let China buy sophisticated manufacturing gear and China in return imposing export controls on Gallium and Germanium which are key inputs in chip making and the resulting concern of producers to speedily look for resilient supply chains, etc., are cumulatively offering a right opportunity for India to set up chip manufacturing facilities in the country. 

Over it, India could also benefit from the newfound comfort that the US is of late exhibiting in sharing technology with it. Indeed, the US appears to be eager to deepen its ties with India in the technology sector, perhaps, in its concern to bolster the resilience of its supply chains. All these global developments cumulatively suggest that it is the right time for India to seize the opportunity to gain a foothold in chip manufacturing.   

That said, we must also bear in mind that chip manufacturing poses an enormous challenge: one, its manufacturing calls for a huge scale involving large investments in the range of $20 bn for it to be cost-effective; two, its manufacturing process requires huge quantities of absolutely pure water which places constraints on the location of such units; three, chips being of dual use, transfer of high-end technology may be a real challenge calling for deft diplomacy, and four, there is a fierce competition in the industry with the US declaring a $52 bn financing support that has already attracted an investment commitment of $200 bn in 2021 itself. Even EU announced similar support owing to which Intel has already committed an investment of $80 bn across the EU. 

In the light of these challenges, we must handhold the proposed Micron investment to manufacture memory chips in Gujarat till its fruition so as to create an alluring ecosystem. That aside, we must assure a stable operating environment through a reliable policy framework, besides comparable tariffs and trade linkages for global investors to log in. Yet, there could be a slip between the ambition and the chip!

FTX Debacle: History Repeats Itself!

FTX International, a Bahamas-based company, is a digital currency exchange—a platform from which people can buy and sell digital assets like Bitcoin, Ethereum, etc. On November 11, it filed for bankruptcy protection throwing the $11 tn digital asset market into a crisis. 

Billions of dollars of customer assets are reported to have evaporated along with the altruistic image of its founder, Sam Bankman-Fried, who built up a huge empire within a short period of time by luring innocent investors with promises of high yields vis-à-vis banks to park their funds, that too, without the hassle of setting up a crypto wallet. Even major venture capital companies are no exception to this greed: they are also reported to have invested around $2 bn in the company.   

It is of course, not yet clear exactly what went wrong at FTX—an exchange that was valued in January at $32 bn and being, neither a trading firm nor a lender, theoretically must always have at its command, funds equivalent to its clients’ deposits—that led it to a humiliating bankruptcy. 

It all started with the publication of the balance sheet of Alameda Research, a crypto-investing firm owned by Bankman-Fried which showed a large chunk of digital currency created by FTX called FTT. These FTTs, which are like Bitcoins but minted by FTX to encourage people to use them like stock in the platform. Though FTX uses blockchain technology, their transactions are less transparent than Bitcoins, and hence it is difficult to track how many tokens had been created. Investors can, of course, buy and sell FTTs, but trading is relatively limited. These tokens are also held by other platforms.  

As the news about Alameda owning FTTs leaked, the CEO of Binance, a rival crypto platform, announced in the first week of November that his company would sell off all its FTT tokens. This resulted in a sharp fall in the price of FTT. As the price dropped, many customers rushed to withdraw their assets from the FTX platform. This rush for withdrawals indeed resembled a classic bank run, though by then the extent of the relationship between Alameda Research Company and FTX was not quite known to the investors. On November 8, FTX stopped allowing customers to withdraw money from the platform. Following this stoppage of withdrawals by FTX, the relationship between Alameda and FTX began to become clearer to everyone. Ultimately, Bankman-Fried admitted in an interview that FTX ‘accidentally’ lost $8 bn of customer deposits but reassured investors that the company hopes to tide over the liquidity crisis. 

But as Bankman-Fried's efforts to sell FTX to Binance fell through, it became clear that FTX lent customers’ funds to Alameda Research, a Bankman-Fried-controlled crypto-investing company that was hit hard earlier by the failures of Three Arrows Capital, a crypto hedge fund and Voyager, a crypto broker. Ironically, the crypto technology was supposed to improve the transparency of financial transactions, but FTX, as stated by John Ray III, the veteran insolvency professional brought in to run the business, stated in the bankruptcy filing, used “software to conceal the misuse of customer funds.” 

Thus, the opacity of FTX and Alameda, their complex corporate structure, the use of tokens minted by FTX to boost the balance sheet of its sister concern, Alameda, the intercorporate transfer of customers’ funds, the resulting liquidity crisis, and the typical rush for withdrawal of funds by the depositors well before the company became insolvent did sound all too familiar for anyone who has studied the financial and banking crises of the past. Indeed, it was not the technology but the governance that supervised its operation, which led to the collapse of FTX. And, importantly, it also shows the lack of effective regulatory supervision. 

Obviously, this calls for making the crypto ecosystem safer for investors. But there is a caveat here. The pain of the current FTX crisis just confined to its customers; it did not spread to the broader economy, for crypto is not integrated with the traditional financial system. There is a fear that any legislation that legitimizes crypto might eliminate this barrier. Secondly, such legitimization of crypto might even tempt the normal financial system to park its assets on the block chain, the open-source software that is maintained by unidentified and unaccountable developers, which is tantamount to placing the financial system on a shaky foundation. So, any legislation to regulate the crypto ecosystem must be attempted with due diligence.

India @75 …

 

In his address to independent India towards midnight on August 15, 1947, from the portals of the constituent assembly of India, Pandit Nehru posed a question: “Whither do we go, and what shall be our endeavour?” And, he himself answered it in the form of a master plan for its future, thus: “To bring freedom and opportunity to the common man, to the peasants and workers of India. To fight and end poverty and ignorance and disease. To build up a prosperous, democratic and progressive nation, and to create social, economic, and political institutions that will ensure justice and fullness of life to every man and woman”.

Looking back over the last 75 years of our independence, it is heartening to realize that we stabilized ourselves as the most stable democracy amongst the countries that emerged out of colonial rule during the forties. Thanks to Pandit Nehru and the institutions that he built in the initial years of our evolving as an independent nation that we could navigate through the hiccups emerged in between that threatened the very core of our democratic setup and quickly return to our chosen path.  On this historic occasion of completing 75 years of independence, we certainly deserve to be proud of our well-established democratic traditions.

That said, we must also be cognizant of the fact that democracy doesn’t mean merely elections and participatory governance. As Nehru envisaged in his address to the constituent assembly, it also means fighting poverty and empowering the common man with the freedom to pursue the kind of life that he/she values so that they could enjoy “the fulness of life”.  

Economic policies and pursuits have thus become equally important. When we think of economic policies, two major events stand out since 1947. The first one is: periodic bouts of food shortage that we suffered till the 1960s due to no rains or excessive rains that played havoc with our agricultural production. Indeed, those were the years of “ship-to-mouth” existence, for it was the vessels carrying wheat from the US under its PL-480 programme that kept us away from hunger. It was the “Green Revolution” that was launched by miracle wheat seeds brought from Mexico and adapted by Indian agricultural scientists to suit our agro-climatic conditions that finally made enough food available for us since the 1970s. It also made India a major exporter of food products, while maintaining enough buffer stocks to tide over any eventuality domestically.

The other major economic breakthrough came in the early 1990s. When the nation was passing through the worst foreign exchange crisis, it was PV Narasimha Rao – a retired politician whom destiny put on the throne of Prime Ministership of India –who mustered the courage to gently push India away from Nehruvian economics to a path of liberalization. The far-reaching neoliberal economic reforms that PV launched not only freed India from the shackles of socialist ideology but also reconfigured its much-mocked “Hindu rate of growth”: to the surprise of everyone, India’s growth rate quickly picked up momentum and reached the 5.1 percent mark in 1992-93. 

Thereafter there was no looking back: India’s current GDP stood at Rs 236.65 lakh crore as against Rs 2.7 lakh crore on the date of our country becoming independent. We could today boost ourselves as the fifth largest economy in the world. Despite the population growth from 340 million to 1.3 billion during the said period, there is a considerable rise in per capita income too: as against a per capita income of Rs 249.6 in 1947, the current per capita income at constant prices stood at Rs 93000.  

It’s indeed a laudable accomplishment, but a deeper look at it reveals that this gain is not evenly spread across the different segments of society. Economic reforms launched in 1991 led to asymmetrical growth: 57% of national income is pocketed by the top 10% of the population while a good half of all Indians languishing at the bottom of the pyramid hardly earn 13% of national income. This has widened the gap between the rich and the poor. The rural and urban divide has also become more conspicuous. Indeed, there is a strong growing resentment about liberalization and globalization of our economy, for growth in GDP is not accompanied by a matching growth in employment.  

This growing inequality in income and wealth coupled with the slide in the public sector to provide adequate and quality services in health, education is causing resentment among the weaker sections of society. The inequality that has almost become all-pervasive is indeed alienating the less-endowed from the mainstream. This is in turn nurturing divisive forces in the nation, challenging our very democratic institutions.

On this historic occasion of our celebrating 75 years of independence, the big question that stares at us is: what are the challenges posed by this economic scenario? Ironically, despite these accomplishments, there are challenges galore for the Indian economy and our leadership. First is the rising inequality. Next is the exploding population, widespread poverty, and growing unemployment. Unless these issues are tackled meaningfully, domestic demand cannot grow. And, without it, there cannot be sustainable and inclusive growth.

People often talk about India’s advantage of a high share of the younger population. But it also poses a great challenge: they need to be healthier and be capable of handling modern technology. It means, there is a need to train youngsters on a massive scale. This in turn calls for higher spending on the social sector, which is again constrained by fiscal concerns. Over them, the all-threatening challenge is ruptures and cleavages based on region, religion, language, and gender threatening the very social fabric of the nation.

All these challenges are simply craving for a governance that is responsive, transparent, and corruption-free.