Saturday 11 April 2020

Modi Can Ensure the Post-Covid Era Belongs to India (Sunday Guardian)

The Prime Minister has the opportunity to convert the Covid-19 disaster into the success story of the epoch for India, much bigger than the 1992-93 Narasimha Rao reforms.
Among the Big Four of world leaders (the others being Trump, Xi and Putin), only Prime Minister Narendra Modi correctly divided world history into the Pre-Covid and post-Covid eras. The steps that have needed to be taken by governments to protect their citizens from the Novel Coronavirus pandemic will transform the nature of both society as well as the world economy. The change could work to India’s advantage, once policies are drawn up by the Prime Minister’s Office (PMO) in accordance with the lessons learnt during the ongoing crisis, which in its overall effects is heading towards the scale of a world war, especially if the more dismal predictions of casualties come true. But while the expenditure of Allied powers on the 1939-45 war between them and the Axis powers was less than $5 trillion in present value, as of date, the G-20 member states have committed nearly $10 trillion of additional funding to battle the “invisible enemy”, with more cash on the way. The US accounts for more than $6 trillion of such Covid-linked resources, in contrast to the $800 billion spent under President Barack Obama during 2009 to mitigate the effects of the 2008 financial crash. Bank interest rates have gone down almost to zero in several advanced economies, while India with its high interest rate structure continues to be an outlier. As does the country’s conservative fiscal and monetary response even to the Covid-19 economic shock. Despite efforts by some central banks including the Reserve Bank of India (RBI) to roll back the tide, cryptocurrency is on the rise, prompting leaders such as Xi Jinping to embrace the inevitable and work towards making China a global digital currency hub including with the early use of Blockchain. At present, London, Frankfurt, New York and Zurich are the global hubs of traditional currency trading, with Hong Kong, Dubai and Singapore lagging behind. If Xi has his way, the top centres for such trades will mostly be in China, just as the country already dominates the list of the top ten global banks, having replaced the US.
Church and State began to be separated in some of the countries of Europe seven centuries back. The coming years are likely to witness the separation of money supply from central banks and into the hands of diverse entities, several almost entirely beyond official control. Even now, the traditional instruments of control by central banks, including the Bank of England and the US Federal Reserve Board, are increasingly becoming ineffective despite their resort to desperate measures such as zero interest rates. The 1918 Spanish Flu tipped the world into the global economic depression of 1920-21. Conservative monetary policies by the Federal Reserve Board, added to manipulation of the stock market by insider trader cabals, and were followed by the reversal of the growth curve and the Great Depression of the 1930s. The astonishing (if the generosity of donors to political campaigns is ignored) repeal and replacement of the 1933 Glass-Steagall Act and its replacement by the Wall Street-friendly Gramm-Leach-Bliley Act under President Bill Clinton in 1999 led directly to the 2008 financial meltdown, once incoming President George W. Bush doubled down on its greed-enhancing provisions rather than watering them down as he should have, had his administration (and that of his successor Barack Obama in the 44th US President’s “Clinton Lite” first term) not been dominated by Wall Street apologists. As a consequence of Thatcher-Clinton-Bush policies and their adoption in countries across the globe, the upper crust of society in several countries has been gaining at the expense of the middle class since the 1980s. Since that time, the American Dream has been out of reach of almost all US citizens, unless they are born of millionaire fathers, the exception being those in the technology sector. However, now that a handful tech giants have emerged, these individuals are using their financial muscle to retain their monopolies and their bloated prices rather than permit fair competition. In India, use has long been made by overseas business interests of corrupt elements in the different branches of government to exterminate (or buy off cheaply) the many innovators this country possesses. As a consequence, those who could have left for less inhospitable shores, including the majority of unicorns.

Liquidity is the grease enabling the economic machine to function efficiently and at high speed. The Reserve Bank of India needs to overcome the credibility deficit caused by the manner in which DeMo 2016 was implemented by the institution. The steps taken to operationalise DeMo were carried out in such a manner that farmers, SMEs and MSMEs in particular got drained of liquidity for a considerable period. Several never recovered from that liquidity famine, and rather than the increase in annual growth needed to create jobs for those rendered out of work during that period, the economy has slowed down since then. The fuel that powers growth, consumer demand, has not recovered since many years. What is urgently needed is a remonetisation (ReMo) of the economy, and in such an effort, monetary measures on the necessary scale rather than in dribs and drabs by the RBI are as important as fiscal and regulatory steps. India, which has 1/6th of the global population, needs to spend a total sum amounting to 1/6th of its GDP over three years specifically in order to ensure that the economy recovers and rapidly strengthens after the novel coronavirus outbreak is contained. This could be from deficit financing as well as from sale of government assets including land, purchase by the RBI from the public of gold and realistic rather than punitive (and self-defeating) amnesty schemes from North Block. These need credible guarantees of absence of future harassment. Continuing with conservative measures, the way central banks and governments did in the late 1920s, would be disastrous.

The Covid-19 crisis needs solutions that are innovative, and among them may be included a scheme to persuade bank depositors to give 10% of their deposits to the banks in which they are placed. This would be in exchange for future tax relief amounting to 125% of the amount surrendered. Each year, until the entire value plus a quarter of the 10% of bank deposits surrendered gets reached, tax collections from them (both income) as well as GST will remain zero until the limit of 125% of the bank deposits voluntarily surrendered gets breached. In the event of death before such a limit gets reached, the next of kin should be permitted to avail of the remaining benefit. A substantial part of the purpose of taxes being the funding of bank recapitalisation, this scheme would be an effective manner of doing so. Commercial banks need to be brought back to health, so that yet another Yes Bank meltdown (which itself could have been dealt with by the RBI in 2015 rather than 2020) does not repeat itself with other banks. Persisting NBFC and commercial bank stresses need to be diagnosed and treated in time, rather than (hyper expensively) at the terminal stage, which many of them reached as a consequence of policies put in place during the Sonia-Chidambaram years, the toxicity of which seems to have escaped the attention of North Block till very recently. Once Sonia Gandhi established full dominance over Manmohan Singh (which was after his return from hospital for heart surgery), policies and decisions came one after the other that had the effect of severely stressing several sectors of the economy, including telecom, coal, the national airline and banking. It seems to have taken years for the Finance Ministry to understand what had been going on, but the good news is that Modi 2.0 has seen some of the steps needed to clear the economy of the toxicity injected during Manmohan Singh 2.0 through complicit ministers and officials.

The RBI needs to move away from baby steps, including the recent ridiculously low reductions in interest rates during a period of vastly enhanced risk of an economic free fall. This is especially because the economy is already suffering from the pre-existing conditions created majorly during Manmohan 2.0. Just as pre-existing conditions increase the risk of succumbing to Covid-19, pre-existing stresses in several parts of the economy substantially increase the risk of economic damage. Hence the need for fiscal and monetary steps as bold as Prime Minster Modi’s cutting off India from the rest of the world (hopefully from Nepal as well) in time and his unprecedented action of ordering a 21-day lockdown that may need to be continued at least for 15 days more. The RBI merely deferring payment of interest and principal by three months beginning 1 March 2020 gives scant relief in a context where many business and individual incomes are zero or close to zero because of the present 21-day lockdown. The RBI should use its printing presses to give interest subsidies to core sector lending by the commercial banks. Funds should be provided for special windows that can get opened for SMEs and MSMEs, which need term loans with low interest rates. The sharks who give gold and other loans at exorbitant rates of interest have to be driven out of business rather than continuing with the long-standing official practice of looking the other way while they prey on vulnerable individuals and businesses. A way out is to offer an alternative via lending programs initiated by the RBI. Every minute that the RBI hesitates to do this, jobs are lost, and many will never come back. In particular, it needs to be kept in mind that the population within the 20-40 age band is fissile and should not through neglect of their need for gainful work be allowed to turn febrile. Sharp declines in employment could lead to law and order outcomes difficult to manage. Continuing conservative fiscal and monetary policies raise the risk of outcomes wholly contrary to the objective of Prime Minister Modi to protect every citizen. Besides, as is being seen both by central as well as state authorities over the past month, declines in business translate into lower revenues, while high growth brings in higher revenues despite the low rates that stimulate growth. Another reason why several growth-killing rates in the GST as first rolled out need a relook if revenues curves are to rise in a manner reflecting growth rather than Chidambaramesque “police constable” or PC methods.

The good news for India is that the ongoing 21st century Financial Wave is ideally suited to the rapid growth of the domestic economy, both in absolute terms as well as relatively to the rest of the world. The country’s politicians have long shown a propensity to select either civil servants or “experts” pining for retirement homes and sinecures in the US or the UK to man key posts in both North Block as well as Mint Road. These prisoners of procedure and birds of passage have focused on ways of helping foreign investors to make money at the expense of the domestic sector, including by a sustained—indeed, systematic—reduction in the value of the rupee. Hence the manner in which the impossible was attempted such as the banning of crypto currency, or the missteps during the design and rollout of signature initiatives of Prime Minister Modi, such as the 2016 DeMo and the 2017 GST. The Prime Minister leads the way, but the team must follow him at the same pace for the goal to be reached in time, including the reaching of a GDP of $5 trillion during Modi 2.0. What is needed is for future policies and their implementation to reflect 21st century needs rather than 19th century mindsets, or solutions which at their most modern reflect the needs of the 1980s rather than the present.

Prime Minister Modi has the opportunity to convert the Covid-19 disaster into the success story of the epoch for India, much bigger than the 1992-93 Narasimha Rao reforms and their effect on the economy, effects that UPA rule almost totally wiped out. This is because the inherent advantages of India are greater than that found in any other major economy. These include:

(a) Close to 60% of the population being below 30. Given a proper education, including in social attitudes and in vocations, this human resource could with “smart” policy become a magnet capable of drawing investment from across the globe. Many hundreds of Indians have migrated to other countries for better prospects, but for tens—indeed, hundreds—of millions, that is not an option. They remain, and need to be put to work in a host of industries, including in those relocating from China once India’s 18th century Land and Labour laws get modified to meet contemporary needs rather than continue the way the 1897 Epidemic Diseases Act continues in its pristine form even during the ongoing Covid-19 crisis.

(b) Exact estimates are impossible to come by, but a credible estimate is that more than a third of the world’s total stock (as distinct from deposits) of gold is in the possession of citizens of India. There may be those amongst the country’s policymakers who would favour expropriation of much of this stock, of course in the “national interest”, which term is usually used as shorthand for the interests of a handful of individuals. Such a move would not simply be unethical and destructive of the country’s future, but would be met with resistance from the public on a scale not seen since the days when mass civil disobedience erupted in pre-1947 times. The “Peoples Prime Minister”, Narendra Modi, can be expected to not only reject any plan for confiscation of gold held by citizens, but to ensure that the remainder of the term of the official who suggested it gets spent on doing a census of the bat population of the Andaman islands.

India’s private gold stocks therefore represent a golden opportunity. Willing consent is always preferable to coercion, and the holding of substantial gold stocks by the RBI in the future may be an important factor in the health of the rupee, a currency battered by speculators who trade as though having inside information about the approach of policymakers in North Block and Mint Road. On the outside, there seems to be a complete lack of interest in, as well as steps for, ensuring that such speculators are driven away from repeatedly shorting the rupee. The investigative agencies do not seem to have looked into past personal digital, cellphone and conversations of known and active currency and stock market speculators with key officials directly connected with policies affecting the value of specific stocks and the rupee. Lack of such insider trading investigations except in stray instances needs to be corrected, while SEBI needs to function with the efficiency found in the Securities & Exchange Commission in the US. Favouritism and opacity need to be avoided by regulatory agencies.

(d) While the recently announced reduction in salaries of elected officials is a praiseworthy sacrifice, its impact on public expenditure will be small, given that the overwhelming proportion of spending by the exchequer on elected officials is due to the perquisites availed of by them rather than salaries that are modest by international standards. Instead, using the benchmark of a total of one-sixth of GDP spent over three years as the additional amount to ensure a smooth and not a hard landing for the economy after the Covid-19 crisis abates (or to ensure a rapid takeoff into high growth rather than the economy remaining stalled in the runway), part of that needs to be spent on paying back the moneys owed to private units and state governments by the central government. The Income-Tax Department has begun such payments, but the amount involved is tiny in comparison to what is needed to remonetize an economy that was already suffering from pre-existing distress in several sectors, including banking, telecom and construction. Sectors such as health services and media, both of which are in the list of essential services during the present lockdown, could also be given full reimbursement of dues, such as for Ayushman Bharat patients and advertisements. Full and immediate repayment of central dues needs to be matched by the giving of assistance to the states in the form of long-term loans on concessional interest specifically to enable them to pay debts incurred. Such a move would bring back to health several sectors of the economy. Just as the infusion of funds ( in the form of the transfer of 10% of bank deposits in exchange for future tax write-offs) would protect vulnerable parts of the banking system from the danger of depositors having to take a much bigger collective haircut later on, this time without any compensation apart from the limited amounts guaranteed under law. Congress President Sonia Gandhi appears to believe that the press is not needed in a democracy, given that she has asked for the advertising which keeps it going to be cut off with immediate effect. Presumably, the intention behind such a recommendation is to force citizens to look only at foreign media for their news requirements.

A study of the trajectory of central banking shows that gold stocks have long been an important component in public trust. The RBI needs to print currency and exchange paper for gold at a premium from citizens who hold stocks of the metal, no questions asked. In case an individual wants to retain a lien on the gold, he or she may be offered a cash loan against the gold, repayable at 6% annual interest after 5 years, and get back the gold. In such cases, money paid for the gold will go to the individual’s bank account. There is evidence that several desperate citizens are going to loan sharks to pledge gold, and are getting cheated in the process. The RBI should stop such loot of the people by launching its own gold purchase or loan scheme, which could be implemented through its own branches as also through the banking system. And rather than seeking to stave off the inevitable, such as banning cryptocurrency, the RBI needs to nudge the Ministry of Finance into working out sensible and enabling (rather than stifling) regulations which ensure that India becomes a world leader in cryptocurrency and through a natural process becomes a frontrunner in digital currency. Of course, this will need substantial booster shots to the telecom industry, which UPA-era corruption and subsequent legal activism has reduced to a pathetic level far below what is needed by a country needing its immense population to go online and “smart”.

(d) India is weak in both physical as well as in virtual infrastructure, and this creates an opportunity for the future. Rather than spend more money in handout schemes that merely “dig holes into the ground and fill them up”, what is needed is to go in for a large-scale public works programme that includes infrastructure. Housing, health and education need to be part of such a plan. External investors could be invited to participate in select projects. Investors across the world are looking at India and its advantages, but are nervous about the immense discretionary power of the bureaucracy and the unpredictable timeframes in the settlement of judicial disputes. Besides Land and Labour, these too are matters deserving of a special Joint Session of Parliament. The Lok Sabha and the Rajya Sabha need to come together in this crisis of both lives and livelihoods to get passed legislation that will protect both and place India on a stable path to double digit growth.

Such a Joint Session could also enact a scheme for giving government employees the option of retiring at 55, with the full salary between then and 60 being paid in the form of bank deposits earning 6% interest and subject only to a flat 15% income tax rate, should such income breach the tax threshold. The scheme could also extend to the private sector, making it voluntary in both public and private units. Substituting laws that have been out of date, sometimes for close to a century, with laws relevant to present requirements is essential.

Given such a makeover of the regulatory structure (which would be much more comprehensive than the 1992-93 Narasimha Rao reforms) and ReMo, the era after Covid-19 could well belong to India. Investors would flock to a country that has largely dodged the coronavirus bullet (unlike China, which has been hit repeatedly with it) and which will have a youthful population when the EU, Japan and China will be showing the effects of an ageing population. India has a Prime Minister known for his favouring of “smart” solutions. This is exactly what is needed in the economic sphere as well. Any extension of the current lockdown needs to have both an economic as well as a health component. The economy’s “heart” and “lungs” need to function while the “brain” does its work in South Block. These consist of irreducible elements of sectors such as transport, finance, commerce, telecom, agriculture, industry and services. Ways have to be found to keep such sectors in operation while infusing closed job-creating units with the assistance needed to keep employment in them going in these times of stoppage of much of normal life. Should such a plan be put in place, the post-Covid-19 period will see the beginning of the rise of Superpower India.

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