Daily News Compilation (HINDU) for 10th June - Editorials

Putting the spring back into the economy

The economy is in a state of paralysis. The events which led it to this state are as follows:

The reforms era

In the first slew of economic reforms and liberalisation in 1993, the traditional industrial and services sectors within the economy gained a lot of freedom that they had never enjoyed earlier. Before 1993, the major constraints these sectors faced were legal and policy constraints like the industrial licensing policy, tariff and quota restriction on import of raw materials and intermediate goods, etc. The 1993 reforms removed most of these constraints. This led to the first growth boom in India, with the average per capita growth rate of the economy going up from less than two per cent to more than four per cent per year.

Then came the second growth boom in 2004 with per capita growth rates increasing to more than six per cent per year. This boom happened partly due to some of the traditional sectors continuing to do well and also because of a new kind of growth momentum from some specific sectors — minerals, construction, real estate and telecom. The momentum in the minerals sector came from exports, as global demand and the price of minerals were very high during this period. In the real estate and the telecom sectors, growth resulted directly from increased middle class incomes due to the first growth boom. The impetus in construction was the result of conscious policy decisions of the government that wanted to push for big infrastructure projects.

Interestingly, the growth momentum in all these sectors was based on a close relationship between the political class and big private investors. The mineral sector, which was earlier completely under the public sector and catering largely to domestic demand, was consciously opened up to big private investment and exports. The real estate sector, previously made up almost entirely of small players, saw a number of large private investments during this period. In the telecom sector, the nature of the market ensured that only big players could participate. Even in the construction sector, some of the big projects like airports needed huge investment and big businesses.

Paralysis and backlash

Undoubtedly, these sectors needed to be developed for sustained and continuing growth in India. The problem was that policymakers thought that the set of reforms made in and after 1993 would be sufficient to regulate this new kind of growth. On hindsight, we now know that there were very significant regulatory failures in these sectors during the second growth boom. We also understand that the reforms of the 1990s, which focussed on removing constraints on activity, were insufficient to provide broad-based, corruption-free growth in these sectors. Each of these sectors needed a different governance structure and set of regulations, which were not put in place before the sectors started growing at a very rapid rate. 

We also know that the regulatory failures during the second growth boom led to a very strong institutional and political backlash since 2010. This backlash manifested itself in several ways. Since 2010, the media began raising issues of corruption and crony capitalism in these sectors. Next, civil society got involved and voiced its opinion on the need for alternative regulatory and anti-corruption institutions like the Lokpal. Finally, the courts passed orders and rulings that criticised the decisions made by the government in these sectors. All this led to what is now being called the paralysis.

In fact, the paralysis manifested itself in the activity of two important agents of the economic growth — bureaucrats and private investors. 

• Once the courts gave adverse rulings on the decisions taken by some bureaucrats, the bureaucracy as a whole became jittery about taking decisions, sometimes deferring to them to the extent that projects simply ground to a halt. 
• Private investors, on the other hand, found out that formal and informal understandings that they had entered into with the political class were not as secure as they had thought them to be, especially in the face of court cases and popular political uprisings like the one in Singur. 

This uncertainty that crippled both the bureaucracy and private investors led to the collapse of investment and growth rates.

Bureaucracy and business

So, what should the new government do to bring back growth? The first thing that it needs to do is to move the economy out of this paralytic state. Clearly, the approach has to attempt to rejuvenate both the bureaucracy and the private investor. 

Bureaucracy: The government needs to ensure that the bureaucracy does not become a part of any deal-making with the business class which can lead to decisions that are not in the best interests of the country. This means that there needs to be strong penalties for any malpractice by bureaucrats. However, if the government adopts an approach that strongly penalises the bureaucracy for any outcome that is less than satisfactory, then this may lead to a very risk-averse bureaucracy, which also hampers vibrant decision-making. In effect, the government needs to put in place a system which can differentiate between the deliberate malpractice of the bureaucracy and poor decisions that it may occasionally take even with the best of intentions.

The crony-capitalism associated with the second growth boom resulted in all sorts of informal deals between the political and the business class, which initially raised investor confidence in this period, but later led to a breakdown in confidence when the deals were challenged by ‘accountability institutions’ like the Comptroller and Auditor General of India (CAG), the Central Bureau of Investigation (CBI) and the courts. Any future relationship between the political class and the business elite has to be based on formal rather than informal deals. This will not only help investments become less costly due to a fall in transaction costs but also assure investors that these deals will not be reneged in future. 

Tackling inflation

The other crucial thing that the government needs to do in order to sustain growth is to control inflation. Inflation has always been partly demand-driven and partly structural, due to elements like supply bottlenecks. In India, in the last few years, it’s the structural part which is almost always driving inflation, particularly food inflation. 

In order to solve this problem, the government has to think out of the box. First, it has to have a clear idea about which part of the food chain is really responsible for inflation. It is widely discussed that while farmers are not getting adequate returns from the prices they get, consumers pay a high price in the retail market. The government needs to put in place a system which collects data on a real-time basis about various stages of the agricultural pricing process, right from the farm up to the retail market, so that we can identify where the problem lies. Once there is an adequate understanding of this phenomenon, the government can take appropriate measures to minimise it. These measures will have to involve the enabling of more competition at some level of the wholesale business, after the produce leaves the farm, but before it reaches the retail market.

Obama’s climate plan: rhetoric vs. reality

• Obama’s 30 per cent target by 2030 is misleading. It overstates the size of the proposed cut, because the reduction is compared to 2005 emissions . Since 2005, there has already been a big shift away from coal; this shrinks the need for added cuts by about half.
• None of the cuts will matter much without technological breakthroughs. Emission increases from China and other developing countries will swamp cuts the United States might make. Poor countries will not abstain from using more fossil fuels that are needed to produce electricity and reduce poverty. Unless technologies can reconcile more energy with fewer (or no) greenhouse emissions, the crusade against climate change will continue to fail.
• The best approach is to tax carbon emissions. If you want less of something, tax it. Stimulate competition to find ways to conserve energy or produce it without greenhouse gases. An energy tax would also help close U.S. budget deficits. 

In a hole, and still digging

European Reassurance Initiative: United States President Barack Obama’s announcement of $1 billion in military aid to selected European NATO countries  The money will 

• cover the dispatch of more equipment to Poland, and an increased frequency of U.S. troop-rotation there.
• It will also involve more air patrols over the Baltic Sea and more intensive naval operations in the northern Black Sea. 

It is meant particularly to allay Polish, Estonian, Latvian, and Lithuanian fears about what those countries perceive as Russian expansionism following Moscow’s annexation of Ukraine’s Crimea province in March 2014. Mr. Obama has described the security of Poland and the three Baltic states as “sacrosanct”, but has said nothing about permanent U.S. bases in the countries concerned. The plan is contemporaneous with the European Union’s intention to expedite association agreements with other former Soviet republics, such as Moldova and Georgia, for finalisation later in June rather than at the end of this year.

Inevitably, Mr. Obama’s move intensifies tensions throughout Europe. 

Russia: On June 2, Russia’s ambassador to NATO, Alexander Grushko, reportedly told the alliance’s foreign ministers at a meeting in Brussels that their plans could revive the Cold War and the arms race. 

Secondly, European NATO members are divided

• Polish Foreign Minister Radek Sikorski complained that Washington’s plans amount only to “virtual deployments” — but countries such as Germany, France, and the United Kingdom have strong commercial and energy-related links with Russia and may resist more confrontational measures. EU agreements might well be no more than a way for the bloc to import cheap labour and get easy access for EU businesses. 
• Furthermore, NATO has its own agenda; with its Afghan operations winding down, its commanders may well be desperate for a new role, as they were when the Soviet Union collapsed in 1991. 

Victims of political manipulation

Of the nearly two lakh people — a fifth of the Northern Province’s population — who depend on fisheries for their income, fishermen are severely affected by the Indian trawlers. Mannar alone has nearly 40,000 people whose lives are tied to fishing activity along its 163 km long-coastline. Compounding the issue are a few local fishermen engaging in banned fishing methods, including bottom-trawling, citing the Indian trawlers as the reason.

The frustration of fishermen has only grown after the second round of talks between fishermen of the two countries, held in Colombo on May 12, proved futile. 

The problem has to be seen at two levels, says K. Rajachandran, president of a Jaffna-based cooperative. 1. Trawlers pose a serious threat to marine resources and in the long run, it would affect not just fishermen of northern Sri Lanka, but all fishermen in the region. 

2. It is unreasonable on the part of Tamil Nadu fishermen to expect them to negotiate without bringing in the International Maritime Boundary Line (IMBL) into the discussion.

Indian fishermen unfailingly returned to the Sri Lankan waters just as the 45-day ban on trawling observed by them ended on May 31. Following the arrest of the 33 Indian fishermen caught by the Sri Lankan Navy on Sunday, Tamil Nadu Chief Minister Jayalalithaa was quick to write to Prime Minister Narendra Modi, as has been her practice, seeking a “strong and robust diplomatic response”. What transpired through diplomatic channels remains unknown but the following day, President Rajapaksa ordered their release in a “goodwill gesture.”

In less than a week, on June 7 and 8, nearly 80 Indian fishermen — all from Tamil Nadu — were arrested by the Sri Lankan Navy on charges of poaching. As many as 18 trawlers they used were also seized. Within a day of their detention the Sri Lankan President on Monday ordered their release on the occasion of the first joint sitting of Indian Parliament.

Seeing the repeated arrests of fishermen who trespass, Tamil Nadu’s demand for their immediate release and the diplomatic trade-offs that follow, northern Sri Lankan fishermen say they have been made victims of political manipulation.

Need for long-term solution

The Palk Bay conflict was one of the key issues that Ms. Jayalalithaa discussed with Mr. Modi. In the memorandum to him, she has sought assistance for deep sea fishing for Tamil Nadu fishermen.

Considering that Tamil Nadu has to necessarily think of deep sea fishing in its pursuit of a long-term solution to the Palk Bay Crisis, this is a welcome move. The Tamil Nadu Chief Minister has also made out a case for what she terms “traditional fishing rights” of Tamil Nadu fishermen, and for the retrieval of Katchatheevu, both heavily politicised matters.

However, what Ms. Jayalalithaa has been reluctant to admit is that Tamil Nadu fishermen go well past Katchatheevu into what is legally Sri Lanka’s fishing territory across the IMBL. After a brutal war spanning nearly three decades the fishermen are desperately trying to put their lives back on track. Unless the Tamil Nadu Chief Minister recognises this and acknowledges that fishermen from her State are trespassing into Sri Lankan waters — as has been repeatedly proved by satellite images — the fisher folk of Sri Lanka’s Tamil-majority Northern Province will have no reason to cling on to hope. They have already been pushed to the very edge.