Gist of The Hindu: November 2016

Gist of The Hindu: November 2016


Lessons from cash transfers

Union Food Minister asked States to initiate a pilot programme to replace the Public Distribution System (PDS) food ration with cash, a move already being tested in the Union Territories. Indeed it is fair to say that there is quite a buzz in policy circles about the potential for cash transfer schemes to address multiple outcomes while bringing in administrative efficiency. Yet, the evidence base to support large-scale programme switch-outs from food to cash is quite limited in the Indian context, given the diversity of social, economic and implementation contexts. The Centre's push towards financial inclusion and the use of Direct Benefit Transfer (DBT) means that these pilot programmes provide the perfect opportunity to add to the learning around cash transfer schemes.

In India, cash transfers have become increasingly popular in recent years - from girl child protection schemes, to maternity benefit schemes, to schemes aimed at improving nutritional outcomes. There are also other conditional cash transfers (CCT) undergoing evaluation at the moment. The Indira Gandhi Matritva Sahyog Yojana (IGMSY) and the Mamata scheme in Odisha are relatively recent maternity benefits schemes, with conditions like birth registration, pre- and ante-natal care visits, and exclusive breastfeeding. The Bihar Child Support Grant (BCSP) is a CCT aimed at improving maternal and child nutrition outcomes. However, none of these programmes replaces food with cash transfers.

While the move towards cash transfers as a way to reduce programme leakage in the ICDS and PDS is appealing, there is not a great deal of evidence on the impact of cash transfer schemes on nutrition in India. Work by our colleagues in multiple countries and recent synthesis papers suggest that the following issues are central to the design of cash transfer programmes: First, cash transfer amounts need to be sizeable and regular. Second, financial inclusion is not as easy to achieve as one might hope, with bank regulations and requirements placing considerable barriers on participation. The situation might improve, but ensuring financing inclusion and easy access to cash once bank accounts are opened are absolutely essential preconditions for cash transfers that are intended to support routine spending on nutritious foods. Third, there needs to be a mechanism in place to monitor adherence to conditions, if any. Following on that point, hard conditions (which result in penalties if not fulfilled) need to be easy to monitor - exclusive breastfeeding for the first six months is a good example of a condition that is almost impossible to verify. Fourth, improving the demand for services by using conditions is only one piece of the story; the other side is in making sure the services exist. Fifth, targeting is a serious concern in India, as errors of wrongful inclusion and exclusion continue to plague several programmes.

Programmes either need to be self-targeting, as with the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), or should have a more accurate means of identifying the target population. Last, but perhaps most important, the cash transfer must be accompanied with high-quality information/education campaigns that encourage good nutritional choices.

With the possibility of a new set of pilot cash transfer schemes being initiated in the months to come, we cannot overemphasize the need for first, careful attention to those design elements that will support the intended outcomes, and second, for careful research on the measurable impacts of these schemes.

Limits to autonomy

We learn that the differences between the National Democratic Alliance government and the present RBI Governor are by no means novel. The United Progressive Alliance government behaved in exactly the same fashion. Both the Governors manfully stood up to the government and ended up paying a price for doing so - so we are told. This is a theme that the media loves to play up from time to time: the Evil Politician pitted against the Wise and the Noble. Alas, the reality is rather more nuanced. For politicians to leave matters entirely to technocrats isn't really a sensible solution. We have come round to this realisation in many cases.

The judiciary commands great respect among ordinary people. Yet, many people are uncomfortable with the notion that its independence includes leaving the appointment of judges entirely to the judiciary. In all these cases, we understand that autonomy has its limits. Is there any reason a different logic should apply to the RBI? This is the central issue posed by what promises to be a refreshingly candid account by Mr. Subbarao of his years at the RBI. Mr. Subbarao writes, "There was constant and decidedly unhelpful friction between the ministry of finance, under both Pranab Mukherjee and later Chidambaram, and the Reserve Bank on what the government saw as the Reserve Bank's unduly hawkish stance on interest rates, totally unmindful of growth concerns".

Mr. Subbarao says that Mr. Mukherjee and Mr. Chidambaram did not stop with merely conveying their views. They made their displeasure known in other ways. At a G-20 dinner in Mexico, Mr. Chidambaram pointedly ignored Mr. Subbarao while greeting everybody else. Well, you could call it churlish behaviour but bosses express their displeasure in such ways all the time and in every organisation. Mr. Chidambaram has been gracious enough to write a generous endorsement for Mr. Subbarao's book. This does indicate that Mr. Chidambaram's snub was not personal, it was about making a larger point. Mr. Subbarao says that the RBI paid a price for not toeing the ministers' line in more material ways. Mr. Mukherjee refused to grant another term as Deputy Governor to Usha Thorat. Mr. Chidambaram did likewise with Subir Gokarn.

We will soon have a Monetary Policy Committee on which three out of six members will be government representatives. The other three members will be experts from outside. The government will define the medium-term inflation target. The RBI Governor will have to find ways to meet the target and explain any failure to do so. Thus, in respect of monetary policy, we have a framework for autonomy with accountability.

We need to put in place broader mechanisms for accountability for autonomous institutions in general. One way to do so is to subject them to oversight by Parliament. The Chairman of the U.S. Federal Reserve appears before the U.S. Congress and fields questions on a range of matters related to the Fed. It would be helpful to institute a similar mechanism in India for the RBI. Similarly, the IIM Bill, which seeks to cover the IIMs through an Act of Parliament, is a step in the right direction. Another way is to subject autonomous institutions to independent management audit every few years. These audits may be carried out by committees of eminent persons.
Institutional autonomy cannot mean the freedom to operate independently of the government. Rather, it is the freedom to deliver on mandates defined by the government and with due consultation with the government. When technocrats arrogate to themselves the right to decide on matters that fall within their ambit all by themselves, it is not autonomy, it is usurpation. Former RBI Governor Y.V. Reddy is said to have once quipped, "The Reserve Bank is totally free within the limits set by the government." That could well serve as a motto for all autonomous institutions.

Game of Thrones in Kathmandu

Nepal has once again been plunged into political uncertainty with the Maoist party - the Communist Party of Nepal (Maoist-Centre), or CPN (M-C) - withdrawing support from Prime Minister K.P. Sharma Oli's coalition, reducing to a minority the government led by the Communist Party of Nepal (UML), or CPN (UML). Maoist leader Pushpa Kamal Dahal 'Prachanda' announced last week that Mr. Oli had not fulfilled the commitments made earlier in May leaving him with no option.

These developments have been expected. On May 4, Mr. Prachanda had carried out the same threat, expressing unhappiness with the Oli government's performance on post-earthquake reconstruction and the lack of progress on the constitutional amendments process. Then too, he had announced that he would lead a new government which would be supported by the Nepali Congress (NC) and Madhesi groups and urged the UML to join in so that a national consensus government could be set up. A patch-up between Mr. Oli and Mr. Prachanda was put in place, thanks to the efforts of UML leader Bam Dev Gautam. A nine-point agreement was announced to address Maoist concerns which included clemency to the Maoist cadres, provision of compensation to the injured, facilitation of land allotments, giving Maoists a greater say in government appointments, etc. In addition was an unwritten three-point 'gentlemen's agreement' that Mr. Oli would step down as Prime Minister within two months after presenting the budget (Nepal's financial year begins on July 16) and the UML would support Mr. Prachanda as the next Prime Minister.

As it stands, the numbers are against him. In the 598-member House, the no-confidence motion needs only 300 positive votes. The NC and the Maoists together account for 290 seats; the Madhesis can add another 40 votes, making Mr. Oli's exit a certainty. Mr. Oli has also cited "constitutional complexities" claiming that since he was appointed Prime Minister following the promulgation of the new Constitution on September 20 last year, he will have to continue as Prime Minister (or caretaker PM) till the general election is held by January 2018, to establish the bicameral legislature envisaged in the Constitution. Perhaps he hopes that President Bidya Devi Bhandari, his old comrade in arms from the UML, will back him in this. However, this suggestion has dubious legality and is likely to be thrown out by the Supreme Court if matters go that far.

Mr. Oli's nine-month tenure has been a sorry one. He had enjoyed a good reputation during his tenures as Home Minister and Foreign Minister during the 1990s, but as Prime Minister he was unable to reach out to the agitating groups who had felt short-changed by the new Constitution. Even when he relented and the government carried out constitutional amendments to partially address the demands of the Madhesis, it was never with a sense of generosity. His constant refrain of Nepali nationalism led to a downturn in Nepal's ties with India and like other Left leaders, Mr. Oli too fell prey to overplaying the China card.

Governance took a back seat even as Mr. Oli donned his nationalist mantle. Most tragic was his inept handling of the post-earthquake relief and reconstruction effort, squandering the goodwill and sympathy of the international community which had pledged $4.4 billion at the international conference held in Kathmandu a year ago. To date, not even 10 per cent of the pledged amount has come to the National Reconstruction Authority where key appointments were held up on account of political jockeying.

From all accounts, Mr. Prachanda is wiser today than in 2008-9 when his coalition collapsed on account of his decision to sack the then Army chief, General Rookmangud Katawal. He now publicly acknowledges that it was a political mistake. He too had blamed India for his debacle but now has his task cut out to restore bilateral ties. The NC can be helpful in this too. Mr. Deuba, a wily NC leader, has been prime minister thrice before but will have to be pragmatic in accommodating the Madhesi and Tharu demands on federalism and representation in a more generous manner than Mr. Oli did.

Out of the concessional funds amounting to $1.65 billion pledged by India during the last two years, the utilisation has been a meagre $150 million. From the grant assistance of $250 million pledged last year, $100 million has been allocated for construction of 50,000 dwelling units for the quake affected but the PPP model has yet to be worked out. The balance grant amount remains to be committed. In addition, $750 million was promised for the Kathmandu-Nijgadh highway but the Oli government sought to review the project after the contract was awarded to an Indian consultant! Other development partners have accumulated similar experiences. Getting implementation of long stalled projects back on track should be the priority for the new government.

The Narendra Modi government too needs to introspect as to how its much vaunted 'neighbourhood first' policy went wrong. The problem of too many interlocutors, claiming to act on behalf of the political powers in Delhi and often conveying conflicting messages, always existed with Nepal but has become more acute during the last two years. Hopefully, this can now be curbed.

A positive turn in relations with India will work to Nepal's advantage in reviving the sentiment that was generated when Prime Minister Modi visited Nepal in August 2014, of a friendly and caring India, sensitive to Nepal's concerns and generous in seeking mutually beneficial partnerships.

Turmoil in Turkey

Turkey's is a classic case of a coup-prone political system. The military is a relatively autonomous and popular institution. It has in the past toppled civilian governments four times. There had always been tension between the ruling elite and the military establishment. But the relatively stable rule of the Justice and Development Party since 2002 and the popularity of its leader Recep Tayyip Erdogan had projected a picture of military coups having become a thing of the past. The developments that unfolded on Friday and Saturday bust this myth. Even President Erdogan didn't foresee the attempt. His success in taking back the reins of government is good for both Turkey and the larger West Asian region. Turkey is important for regional security at a time when West Asia is in turmoil. Instability here is in nobody's interest. However, the failed coup exposes the weakness of Mr. Erdogan's regime. The fact that it was not a minor revolt by a few soldiers, but an uprising by thousands of troops, raises serious questions about the coherence of the Turkish state. Mr. Erdogan has contributed to the weakening of the state in many ways: his disastrous foreign policy that has worsened the security situation; forced Islamisation that has sharpened the contradiction between the Islamist and secular sections; and the push to rewrite the Constitution to award more powers to himself.

The coup-plotters may have sensed they would get support from the anti-Erdogan masses and the secular political class. Sections of the population have problems with Mr. Erdogan's politics. At Istanbul's Gezi Park, thousands braved his brutal police force in 2013. Despite the government crackdown on liberal academia, opposition, media and social networks, Turkey still has a thriving public sphere where anti-Erdoganism is a common theme for mobilising people. But they don't want the soldiers to "solve" their problem through force. That is why thousands thronged the streets to defend the government they had elected. That is why even Mr. Erdogan's fiercest critics in the opposition denounced the coup. The question now is how the fissures that have been exposed will impact Turkey. It depends, in large measure, on the choices Mr. Erdogan makes. He could see the people's commitment to democracy and use the crisis as an opportunity to reconsider his dictatorial policies. Or he could use the military revolt as a pretext to purge more of his enemies and get what he always wanted, which is a more powerful executive presidency. His choice will guide the future of Turkey's democracy.

One India, one market

Three major benefits will flow from the GST. First, as the Prime Minister outlined in an interview, the GST will increase the resources available for poverty alleviation and development. This will happen indirectly as the tax base becomes more buoyant and as the overall resources of the Central and State governments increase. But it will also happen directly because the resources of the poorest States - for example, Uttar Pradesh, Bihar, and Madhya Pradesh - who happen to be large consumers will increase substantially.

Second, the GST will facilitate 'Make in India' by making one India. The current tax structure unmakes India, by fragmenting Indian markets along State lines. These distortions are caused by three features of the current system: the Central Sales Tax (CST) on inter-State sales of goods; numerous intra-State taxes; and the extensive nature of countervailing duty exemptions that favours imports over domestic production. In one fell swoop, the GST would rectify all these distortions: the CST would be eliminated; most of the other taxes would be subsumed into the GST; and because the GST would be applied on imports, the negative protection favouring imports and disfavouring domestic manufacturing would be eliminated.

Third, the GST would improve - even substantially - tax governance in two ways. The first relates to the self-policing incentive inherent to a valued-added tax. To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in the value-added/tax chain. Provided the chain is not broken through wide-ranging exemptions, especially on intermediate goods, this self-policing feature can work very powerfully in the GST. The second relates to the dual monitoring structure of the GST - one by the States and one by the Centre. Critics and taxpayers have viewed the dual structure with some anxiety, fearing two sources of interface with the tax department and hence two potential sources of harassment. But dual monitoring should also be viewed as creating desirable tax competition and cooperation between State and Central authorities. Even if one set of tax authorities overlooks and/or fails to detect evasion, there is the possibility that the other overseeing authority may not.

Other benefits such as the boost to investment have been documented in the Report on the Revenue Neutral Rate that was submitted in December last year. Of course, these benefits will only flow through a well-designed GST. The GST should aim at tax rates that protect revenue, simplify administration, encourage compliance, avoid adding to inflationary pressures, and keep India in the range of countries with reasonable levels of indirect taxes.

The report also urged that the GST be comprehensive in its coverage, that exemptions from the GST be limited to a few commodities that catered to clear social benefits, and that most commodities be taxed at the standard rate. There is no free lunch here. There is no escaping the fact that the more the exemptions/exclusions, the higher will be the standard rate which could affect poorer consumers.

That said, we must also be realistic about the time frame for assessing the GST. The GST is fiendishly, mind-bogglingly complex to administer. Such complexity and lags in GST implementation require that any evaluation of the GST - and any consequential decisions - should not be undertaken over short horizons (say months) but over longer periods, say one-two years.

In understanding GST systems around the world, we have been struck by how ambitious and how under-flawed the Indian GST is. GST-type taxes in large federal systems are either overly centralised, depriving the sub-federal levels of fiscal autonomy (Australia, Germany, and Austria); or where there is a dual structure, they are either administered independently - creating too many differences in tax bases and rates that weaken compliance and make inter-State transactions difficult to tax (Brazil, Russia and Argentina) - or administered with a modicum of coordination which minimises these disadvantages (Canada and India today) but does not do away with them.

The Indian GST will be a leap forward in creating a much cleaner dual VAT which would minimise the disadvantages of completely independent and completely centralised systems. A common base and common rates (across goods and services) and very similar rates (across States and between Centre and States) will facilitate administration and improve compliance while also rendering manageable the collection of taxes on inter-State sales. At the same time, the exceptions - in the form of permissible additional excise taxes on special goods (petroleum and tobacco for the Centre, petroleum and alcohol for the States) - will provide the requisite fiscal autonomy to the States. Indeed, even if they are brought within the scope of the GST, the States will retain autonomy in being able to levy top-up taxes on these goods.

To have achieved this, in a large and complex federal system of multiparty democracy, with a Centre, 29 States and 2 Union Territories of widely divergent interests via a constitutional amendment requiring broad political consensus, affecting potentially 7.5 million tax entities, and marshalling the latest technology to use and improve tax implementation capability, is perhaps breathtakingly unprecedented in modern global tax history.
Sometimes, we are insufficiently appreciative of how much the country has achieved in coming to this point with the GST. As the Prime Minister suggested, credit should go to all stakeholders at the Centre and the States for having worked towards the GST. The time is ripe to collectively seize this historic opportunity; not just because the GST will decisively alter the Indian economy for the better but also because the GST symbolises Indian politics and democracy at its cooperative, consensual best.

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Courtesy: The Hindu