Gist of The Hindu: December 2014

Gist of The Hindu: December 2014

For a new Paradigm of Social Justice

The central policy challenge for the new government is how to sustain social gains while ensuring that Dalits can participate more meaningfully in the economy, by sharing in the fruits of economic growth while contributing as well. In his address to the nation on Independence Day, Prime Minister Narendra Modi expressed his intention to “take a solemn pledge of working for... the welfare of the poor, oppressed, Dalits, the exploited and the backward people of our country.” We don’t know just what precise shape his social justice vision will take in practice, but it is likely to be a mix of traditional approaches, when unavoidable, coupled with a new architecture, when feasible. When independent India’s founding fathers committed themselves to constitutionalism and democracy, they were well aware that democracy was a “top dressing on Indian soil, which is essentially undemocratic,” as B.R. Ambedkar cogently put it. The rigid and deeply maligned social hierarchies of Indian society meant that a commitment to equality and social justice was hardly a “natural” sentiment.

Survey on Dalit entrepreneurs

Since then, the Indian state has sought to put forth dozens of laws and programmes to attenuate these deep social inequalities and two-thirds of a century after independence, social inequalities in Indian society are a far cry from what they were when the country came into being. But there is a long, long way to go before social justice is a reality for the vast majority of Indians from socially marginalised communities. It is equally clear, however, that the country needs new thinking (nayi soch) on social justice, as the Prime Minister has argued.

In recent years, the country has been witnessing social change that is gradually weakening the iron grip of status hierarchies, and India’s Dalits are slowly seeing its benefits. But the gains are more social than economic. The central policy challenge for the new government is how to sustain the social gains, ensuring that Dalits can participate more meaningfully in the economy, by sharing in the fruits of economic growth while contributing as well. Our initial findings indicate that almost all of the respondents are first generation entrepreneurs. Most are not well-educated (in terms of fancy degrees); indeed, many have even limited schooling. The collective turnover of these 1,000 Dalit entrepreneurs is nearly Rs.10,000 crore. Almost none of them has received support or preferential treatment from the government. They did not even consider approaching institutions like the National Scheduled Castes Finance and Development Corporation (NSFDC) which is mandated to promote entrepreneurship among Dalits. The transaction costs are simply too high when compared to the very modest amounts of funds handed out by people who have little knowledge of the issues.

What’s more, the government was unaware of the fact that some Dalits have achieved noteworthy success as entrepreneurs until our survey received widespread media coverage. This is a severe indictment of what surveys like the Economic Census capture and the plethora of schemes and programmes that allegedly strive to promote Dalit welfare. It is a sobering thought, however, that for every successful Dalit who defied the odds to become a trailblazer, there are countless others who have failed and given up, beaten down by life’s impossible odds. It is also pertinent to remember that three-fourths of Dalits (about 150 million) still live in villages. What they don’t need are grandiose government schemes which people ignore with justifiable contempt. Instead three policy challenges raised by the Prime Minister in his Independence Day speech — skills, manufacturing and urbanisation — if addressed well, will do more for Dalit entrepreneurs, for the community and the country at large, than the dozens of stand-alone schemes that exist currently.

Second, manufacturing offers more scope for would-be Dalit entrepreneurs for the simple reason that the children of the elite simply cannot take the heat and dust and the distant locations that are inevitable in setting up a manufacturing unit in India today. They prefer service-related occupations in metros in air-conditioned offices. If manufacturing takes off in India, Dalit entrepreneurs, with a little help and nudge, will enter manufacturing supply chains and some of them will grow into large firms in their own right. Having faced trying circumstances growing up, there are many more willing to roll up their sleeves and do what it takes to get the job done. But for this they — like most small enterprises — face credit constraints because they lack collateral. It is ironic that in India, nationalised banks are on socialist principles; today, public sector banks have lent tens of thousands of crores to big businesses but have little money to lend to aspiring small entrepreneurs.

Third, social hierarchies are much more rigid in rural India, and an urbanising India offers better opportunities for aspiring Dalit entrepreneurs. The metros today are so expensive that entry for new entrepreneurs with few financial resources and limited social networks will be much more difficult. An urbanisation strategy that focusses much more on small and medium towns and that attracts large manufacturing investment (both domestic and foreign direct investment) will create more opportunities for Dalit entrepreneurs in manufacturing supply chains.

The challenge for policymakers is to create what de Tocqueville termed “equality of conditions” wherein anyone can chart his/her own course with initiative, tenacity and an enabling policy regime. We rightly take pride in our political freedoms but these are yet to ensure full citizenship rights to marginalised groups. What is required is a balance between old thinking and nayi soch. For the government, this means developing a coherent interlinked strategy that combines skill development, manufacturing and urbanisation. And for the Dalit community, nayi soch requires it to shed old shibboleths about entrepreneurship and private enterprise and embrace it rather than treat it as a Baniya activity. Only then will the promise of Dalit entrepreneurship be fully realised.

Banking on Inclusion

In launching the most ambitious plan ever to extend basic banking services across the country, the government is fulfilling a promise made by the Prime Minister in his Independence Day speech. The launch of the Pradhan Mantri Jan Dhan Yojana also marks the completion of 100 days in office by the NDA government. Many of the details of the scheme were made available in advance, but the official launch on Thursday was in itself historic. A record 1.5 crore accounts were opened on the day of the launch, and an upwardly revised target of opening 7.5 crore new accounts by January 26, 2015 looks achievable, given the high levels of enthusiasm seen on the opening day. There has been close coordination among the government, the States and the bankers, and it is hoped that this will continue in equal measure to ensure the success of the scheme. For the NDA government, there will be a large number of positive political and economic spin-offs from the successful implementation of the scheme. Apart from making available basic banking facilities to every household, it is designed to provide social security through insurance schemes, and in select cases, pension schemes. This will be no mean achievement, given the absence of even a rudimentary social security cover for a very large number of people. In due course, the government plans to route cash transfers in lieu of subsidies through these accounts. That would pave the way for a comprehensive reform of the subsidy regime for a number of essential commodities.

The sheer size and complexity of the logistics involved in executing the gigantic inclusion plan will continue to amaze long after the initial glitches are ironed out. To be executed in two phases — the first will be for a year, while the second phase will be between 2015 and 2018 — the Jan Dhan Yojana plans to extend financial services in a country where only 58.7 per cent of an estimated 24.67 crore households have access to banking services. The scheme targets households rather than individuals, and uses technology extensively to further inclusion. Since opening physical bank branches on such a large scale is out of the question, the scheme will rely on a large number of business agents or correspondents for the last mile. It is therefore important to provide incentives to this category of intermediaries to ensure their total involvement. Experience with mandated inclusion programmes suggests that the new account-holders need to be kept engaged for sufficiently long periods. The RuPay smart card is probably an answer, as it will keep the account-holders connected with the banks. For the macroeconomy, the big benefit will be fewer physical cash transactions — a development that will aid in the implementation of official policies.

A Big Bang Reform that may be Spot on

The reassuring message in the Pradhan Mantri Jan Dhan Yojana is that in pursuing its economic objectives, the government wants to accord an important role to the public sector even while relying on market mechanisms. The goal is hard to achieve. It is costly and unviable. It will create huge stresses in the banking system. The Narendra Modi government’s Pradhan Mantri Jan Dhan Yojana (JDY), an ambitious scheme for financial inclusion aimed at creating 7.5 crore new bank accounts in the banking sector by January 26, 2015, has its sceptics and critics. There is more than a fair chance that they will be proved wrong. Think back to the last comparable attempt at financial inclusion — Indira Gandhi’s bold move to nationalise 14 banks in 1969 (with another six being nationalised in 1980). We heard pretty much the same arguments then. Bank nationalisation was denounced as populist, a socialist gimmick, politically-motivated and worse. Today, not many would question the beneficial impact nationalisation had on banking and the Indian economy. To put JDY in perspective, it is useful to see what bank nationalisation achieved.

Bank nationalisation saw a huge expansion in branches into the hinterland. The expansion of the branch network, in turn, caused money kept under the mattress to be swept into the banking system. Cash under the mattress may be savings for an individual but these do not translate into “saving” for the economy. “Saving,” in economic terms, is whatever is available for lending or investment, that is, savings that come into the financial system. Bank nationalisation caused the saving rate to go up from 12 per cent of GDP in 1968-69 to 20 per cent in 1979-80. The rise in saving facilitated a commensurate rise in the investment rate from 13 per cent to 21 per cent. The increase in the investment rate set the stage for the growth rate of the economy to shift from the much-derided “Hindu” rate of 3.5 per cent up to the 1970s to 5.5 per cent in the 1980s. It was the first shift in trajectory in India’s economic growth in the post-Independence period.

Financial inclusion benefited not just the economy but also the public sector banks (PSB) despite initial setbacks. Investments in branches and the servicing of millions of small accounts pushed up operational costs in nationalised banks. Combined with bad loans, the investment resulted in the net worth of public sector banks turning negative by the early 1990s. However, the infusion of capital by government was modest by international standards — less than 2 per cent of GDP, compared to anywhere between 5-60 per cent elsewhere. Bank recapitalisation was part of a larger package of banking sector reform. Another key reform was the listing of PSBs which subjected them to market discipline. At the same time, India’s economic growth began to accelerate in the 1990s.

In these new conditions, the long-run benefits of financial inclusion began to kick in. Inclusion not only increases deposits, it brings in low-cost deposits through savings and current accounts. For PSBs, the high proportion of low-cost deposits in total deposits turned out to be a source of competitive advantage. Their financial performance improved through the 1990s and the noughties and even after the financial crisis of 2007 until the problems in the infrastructure sector came to the fore. Judged over some three decades, bank nationalisation proved a winner with financial inclusion being a key driver of success.

Critics of the scheme contend that merely scaling-up will not help the banks or the economy. They say that many of the new accounts created by inclusion initiatives in recent years have low balances or remain inoperative. They overlook a crucial change in the situation: large amounts are poised to flow into bank accounts, thanks to the direct benefit transfer scheme (DBT) rolled out in January 2013. Right now, DBT covers 28 schemes, mostly payment of pensions and scholarships. It will soon cover payment of subsidies as well as wages under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

Payment of subsidies is scheduled for the first phase of financial inclusion, that is August 2014-August 2015. Once this happens, PSBs will have substantial “float” funds (on which they pay zero interest) in the accounts they have opened. These are equivalent to low-cost deposits and should compensate for high operational costs. Over time, banks should have in place the infrastructure and the processes to make loans to the new account holders. Small loans have been freed from interest rate regulation and we know from the experience of micro-finance institutions that they can be hugely lucrative. Then, there is the fee income from selling insurance products. Putting all these together, in the long-run, JDY could replicate the effect that nationalisation had on the financial performance of PSBs.

There are details that need to be worked out. Every account under the scheme comes with a RuPay debit card and Rs.5,000 overdraft facility in the first phase. In the second phase, a Rs.1 lakh accident insurance facility and a Rs.30,000 life insurance facility will be added. How exactly the premia on the insurance facilities will be paid for has not been spelt out. Some reports indicate that the premia will come out of charges levied on RuPay card transactions. Will the volume of RuPay transactions be large enough to pay for the premia? Banks need to have an idea of the fee income they can hope to generate from the accounts. If the insurance premia involve any subsidy, the government must bear the cost.

The Rs.5,000 overdraft facility has given rise to concerns about another loan “mela.” This would amount to Rs.37,500 crore for 7.5 crore account holders. These concerns are overblown. Banks will provide the overdraft facility only after watching the account holder’s record for six months. There is an incentive for repayment, which is that the account holder can avail of the facility as often as he likes. It should be possible to contain losses at an acceptable level.

Two aspects of JDY are worth highlighting. First, it is “big bang” reform alright but not quite what advocates of reforms have been urging. Mr. Modi has sensed the need for a game-changer at a time of flagging economic growth. However, he has chosen to rely on his own instincts in judging what that game-changer might be. Mr. Modi’s preference for an initiative that combines inclusiveness with the potential to boost growth could turn out to be spot on.

Second, the government has decided that financial inclusion is best pursued through PSBs. This is rather different from the view implied by the decision of the Reserve Bank of India (RBI) to use new institutions, such as payment banks and small banks, to push inclusion. The RBI seemed to have concluded that not much could be expected of PSBs. If JDY works out as planned, one wonders whether there will much space left for payment banks. Why would a customer go to a payment bank that only provides deposit and payment services when he has access to a full-scope bank?

The government’s reliance on PSBs makes sense — and not just because there is an enormous infrastructure that can be readily tapped. Where regulation is weak and contracts ill-developed, it is best to use public institutions to attain larger objectives, instead of relying on regulation or public-private partnerships. It is easier for the government to enforce its writ through institutions that it directly controls. The reassuring message in JDY is that in pursuing its economic objectives, the government wants to accord an important role to the public sector even while relying on market mechanisms.

Solid start on Procurement

In a single stroke, the Narendra Modi administration has underscored its seriousness in taking indigenisation of military hardware to the next level, and signalled its intent to end the drought in military procurement, which had begun to affect defence preparedness. At a meeting of the Defence Acquisition Council (DAC) headed by Defence Minister Arun Jaitley last week, several decisions were taken to unclog the flow of equipment and technology to the three services. A thrust to produce domestically advanced weaponry was imparted by the decision to scrap the tendering process for the import of 197 light utility helicopters, eliminating the European Eurocopter and the Russian Kamov from contention. The tainted pitch by AgustaWestland for these choppers had boomeranged. Instead of seeking foreign suppliers, the DAC decided to go for 400 indigenously manufactured helicopters, which would become the lifeline for troops deployed on harsh border terrain. Despite initial hiccups, Hindustan Aeronautics Ltd. is producing the Advanced Light Helicopter, gaining experience that would come in handy in the new undertaking. The DAC directive could boost the Indian military aviation industry, which would do well to develop collaborative frameworks to absorb foreign technology to ensure quality, and reduce production time-frames.

The Defence Minister has also injected fresh energy into the indigenous Arjun project by clearing the way for the induction of 118 of the tanks. Simultaneously, the DAC cleared the production of Self Propelled (SP) guns mounted on the chassis of an Arjun tank. The move reveals a proactive doctrinal preference for swift battles, powered by mechanised forces, which would be especially relevant in the desert border zones in and around Rajasthan. The meeting also paid much-needed attention to India’s ailing submarine arm by clearing a mid-life upgrade of six submarines. The clear message that emerges from the decisions is that India is ready to work with western partners, including the United States, provided a pure buyer-seller relationship is jettisoned in preference to joint production partnerships. Consequently, it is likely that the joint production of Javelin missiles will be on the agenda of Indo-U.S. defence ties. While the government seems to be firmly setting out the ground rules of procurement, it is important that the Modi administration walks the talk. Over the years many reports have emerged about dubious but politically well-connected agents involved in greasing their way through lucrative defence deals. Mr. Jaitley and his team now have a fine chance to clean up and impart much-needed transparency to the system of military procurement.

A new sunrise

India and Japan have enjoyed the best of relations over the decades. Yet, their trade and economic partnership has, strangely, been under-performing, belying the promise and potential. Bilateral trade at $16.29 billion in 2013-14 accounted for just 2.13 per cent of India’s total trade and barely 1 per cent of Japan’s. The low-profile trade relationship is especially disappointing considering how much Japan has to offer in terms of investment and technology, and how much India needs both. India may be one of the largest recipients of Japanese ODA (Official Development Assistance), but when it comes to foreign direct investment (FDI), it ranks low, well behind China. Between April 2000 and February 2014, Japanese companies cumulatively invested $15.97 billion in India, accounting for just 7.46 per cent of total FDI inflows into India, which in a way epitomises the state of the economic relationship between the second and third largest economies of Asia. All this could change for the better, post-Prime Minister Narendra Modi’s visit to Japan, which seems to have breathed new life into economic relations. Japan has said it would invest 3.5 trillion yen ($33.5 billion) in India in the next five years in the sectors of infrastructure, manufacturing, transport and clean energy, and on smart cities, all thrust areas for development for the Modi government.

To be sure, this is not the first time we have seen positive intent in the leadership of the two Asian giants to improve trade and investment. Ever since India liberalised in the early 1990s, there has been steady interest among Japanese companies and investors — but they have often been frustrated by complicated procedures and cumbersome processes. Actually, Japanese companies willingly ceded market space in India to competitors from South Korea and China rather than deal with the red tape. It is in this context that Mr. Modi’s promises of “red carpet, not red tape”, and a special track in the Prime Minister’s Office to facilitate Japanese investments, have to be seen. Mr. Modi harped on all the right themes including the three Ds that India can boast of, namely democracy, demography and demand, while making his pitch to Japanese business. With manufacturing costs increasing in China and given the political issues between the two countries, Japanese businesses are looking to diversify, and India presents a good choice with its huge market. New projects such as those for super-fast trains and smart cities are ideal destinations for Japanese investments. The Modi government has to now move quickly to fulfil its promises of easing procedures and facilitating investment to capitalise on the optimism and goodwill generated from what has clearly been a successful visit in economic terms.

Towards a Skilled Workforce

With his twin focus on jobs and growth, Prime Minister Narendra Modi seems intent on placing renewed emphasis on skill development in the services and manufacturing sectors. In his Independence Day speech, the Prime Minister spoke of his ‘skilled India’ mission to promote holistic development. There is no doubt that India needs to equip its youth with greater work skills. At present, the country churns out a mostly semi-literate workforce without the requisite marketable skills in a globalised world. According to a report by the Adviser to the Prime Minister on the National Council on Skill Development, among those in the 15 to 29 years age group, only 2 per cent have received formal vocational training, and 8 per cent non-formal vocational training. Against 128 lakh new entrants to the workforce, there were only 31 lakh seats for vocational skill training. As Mr. Modi stressed in his speech, with 65 per cent of the population under 35 years of age, India will have to think of reaping the demographic dividend. However, India ought to set its sights higher than what Mr. Modi envisaged when he lamented the shortage of drivers, plumbers and cooks. The real challenge is not to find low-paying jobs for the unemployed, but to equip those entering the workforce with the necessary skills in a competitive environment.

By promising to enhance the skill development of India’s youth at a rapid pace, Mr. Modi spoke of forming a pool of young people who are able to create jobs. More importantly, he also talked of a workforce that will be in a position to “face their counterparts in any corner of the world” by virtue of hard work and dexterity of hands. Capacity-building was spoken of in the global context as the ability of India’s youth to “win the hearts of people around the world” through their skills. The importance of promoting the manufacturing sector was highlighted both in the context of creating employment opportunities and developing a balance between imports and exports. The exhortation to multinationals to sell in any country but manufacture in India, also came in the context of putting to use the education and capability of India’s youth. For employment-led growth, for the “Come, make in India” slogan that Mr. Modi delivered on Independence Day to have any meaning, the government must invest heavily in education and training, in research and development. Otherwise, cheap labour will remain the only attraction for foreign investment in India. Skill and talent are the results of education and training, and India must lay greater stress on its educational infrastructure before it can attain higher levels of growth. The skill set of India’s youth have to necessarily match that of the world’s best.

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