On 29 July 2019, the government amended and added to the terms of reference (TOR) of the 15th Finance Commission (15th FC), asking it to “… examine whether a separate mechanism for funding of defence and internal security ought to be set up…”
The amendment has been interpreted as an attempt by the Centre to encroach on the fiscal autonomy of states and pre-empt a part of states’ resources to fund defence and internal security. There is a wider political and economic context that accounts for this interpretation.
Opposition parties and others claim that amendment of the 15th FC TOR is part of a larger campaign to undermine the federal character of the Constitution. Central revenue is projected to grow 25.6% in 2019-20, compared to the 8.9% rise in 2018-19. The Central government is well aware that another major expenditure shortfall in 2019-20 will further reduce growth, which had decelerated to 5% by the first quarter of 2019-20. The Central government is therefore scrambling for resources.
Is there an anomaly in share of resources?
It must be noted that nearly two-thirds of the shareable pool of tax revenue is usually transferred to the states. In the 14th FC award period, this was set at 63%, with the balance 37% being the Centre’s share. In addition, the Centre also receives cesses and surcharges and the dividends and profits of central public enterprises and public sector financial institutions like banks and the Reserve Bank of India.
In setting the Centre’s share at 37% of the shareable pool, the 14th FC had also factored in the Centre’s access to these non-shareable revenues as well as its expenditure needs, including the provision for defence and internal security. This is standard practice for all finance commissions.
If the 15th FC recommends that a certain portion of the shareable pool should be separately carved out for defence and internal security, then the requirements of the Centre, net of defence and internal security, will have to be adjusted downwards.
Should there be a separate space for defence and internal security?
While defence is a Central subject, internal security is the joint responsibility of the Centre and states. This would imply that the provision for internal security would be carved out in advance from what would otherwise have been states’ resources, but without their approval. So what would be eroded is not so much the fiscal space of states but their fiscal autonomy.
What can be done?
One option is to only allow transfers through untied tax devolution. This option is unrealistic for several reasons. First there may be externalities, effects that spillover beyond state boundaries, or issues of national importance such as food security, which cannot be left entirely to states. Further, strong states may have the resources and capacity to design, finance and manage schemes on their own, but the weaker ones may not. Finally, given the long legacy of CSS, it is difficult to imagine that any central government would completely walk away from CSS, especially those that are popular and have considerable political mileage.
A second option is to make the FC a permanent body and expand its mandate to undertake the resource allocator role of the erstwhile Planning Commission. However, this option would not preserve the fiscal autonomy of states since the FC would decide what programs or projects should be allocated to which states.
A third option, is to revive the Inter-States Council as an effective federal decision making body. It already exists as a constitutional body, but has been left dormant. It can be restructured as a federal institution outside the home ministry, a Council with state chief ministers as members and chaired by the prime minister. The Council should be supported by a secretariat of experts to design programmes and lay put the principles for their allocation among the states.
General Khalifa Haftar, head of the Libyan National Army, is advancing on the capital Tripoli, having taken control of the east of the country including most of the oilfields.
Gen. Haftar had helped Muammar Qaddafi seize power in 1969 before going into exile in the U.S. in the 1980s, but returned to Libya in 2011 to join in Qaddafi’s overthrow.
The revolt against Qaddafi began in Benghazi, and western intervention was legitimised by the fig leaf of a UN Security Council resolution calling for a ceasefire, a no-fly zone and protection of civilians, on which there were five abstentions which included India, Russia and China.
Qaddafi accepted the resolution. Shortly thereafter, France, the U.K. and the U.S. attacked Qaddafi’s forces and NATO assumed responsibility for regime change at the same moment that an African Union mediation mission was en route to Libya.
He now casts himself as a conservative Salafist opposing Islamists and the Muslim Brothers, and has the backing — for their individual reasons — of Egypt, Saudi Arabia and some West Asian states, apart from Russia (openly) and France (covertly).
Libya’s descent –
The United Nations recognised Tripoli’s administration is called the Government of National Accord, but is anything but that, being dependent on a motley of warlords, militant or moderate Islamists, secessionists and monarchists, all split on regional and ethnic lines.
Even before Gen. Haftar launched his offensive, West Libya was replete with inter-militia battles and kidnappings. The Tripoli government commands no security forces, public administration scarcely exists, water, petrol and power shortages abound, and few banks operate. Thousands are fleeing towards Tunisia, and 180 people have been killed so far in the recent fighting.
Post Cold-War phenomenon –
In 1965 and 1981, the UN adopted declarations on the inadmissibility of intervention in the domestic affairs of states, and until the 1990s the UN was the custodian of state sovereignty.
The Iraqi-Libyan species of intervention, professedly with UN approval but actually under western control, is a post Cold-War phenomenon, the motivation being to implant liberal democratic institutions and human rights, along with security concerns, usually thinly justified by 9/11 and lately the Islamic State.
Exogenous state-building and a peripheral role for local leaders characterise this innovation in international relations. The spectre of failed states became a major concern, leading to the imposition of a neo-liberal agenda in the guise of human rights protection.
The ambiguous legal justification for interventions not specifically authorised by the UN showed that attempting nation-building in societies divided by ethnic, factional, ideological and religious lines is beyond the capacity of any minority group of UN members.
Justifying the wars –
Two factors paved the way for these neo-protectorates;
activists with rights-based agendas joined the political mainstream, and
western outrage to televised suffering.
Activists united with foreign policy establishments, and third world disorder presented opportunities for sly expansion of mandates into new operating areas. Added to these was post-1990 revisionism towards state sovereignty and permissiveness to humanitarian interventions.
Relativism towards sovereignty was anathema to post-colonial independent states, especially when western interventions were selective and political in nature, and the victims of intervention lacked the power to oppose.
There could be no institution building in such countries because the interveners were more concerned with checking the power of institutions rather than building them, and to appease domestic opinion back home, concentrated on exit strategies and political markers such as holding elections.
Whether in Libya or elsewhere, expeditionary interventions to implant human rights and democracy have a certain heuristic value in understanding the illusions of western hegemony which rose to prominence in our times and sought to mould the third world in its image.
In the run-up to the 2019 general elections national security has emerged as a major issue. To strengthen only external security and ignore internal security proves inadequate for effective national security management.
On the internal security front, the lack of the our government’s political will to implement long-pending police and intelligence reforms amounts to a failure of good governance.
Need of reforms –
The intelligence agencies continue to be helmed and staffed predominantly by police personnel and others on deputation from various government services.
The rank and file of policemen across the country have their grievances with no effective redressal mechanism in place. For instance, in June 2016 the Karnataka Police planned a protest but was reined in by systemic checks and balances. The Haryana Police were unable to control law and order when godman Baba Ram Rahim was arrested in August 2017; besides, the February 2016 Jat agitation. Clearly that amounts to failure of the police machinery in the State.
Today, the country is vulnerable to externally-fostered internal security threats wherein jihadi terrorists from Pakistan strike targets not only in the border States of Jammu & Kashmir, Punjab, Rajasthan and Gujarat — but also operate in the hinterland States like Karnataka or Tamil Nadu. Only the police and intelligence services can ensure strong internal security management.
The police are hobbled by political interference and the police chain of command does not really function because the subordinate police officers cultivate MLAs and Ministers to intervene on their behalf particularly their postings to different appointments. This hampers professional policing and investigations which is to the disadvantage of the common man.
Another aspect of police reform is linked to Intelligence reforms. Both the internal and external intelligence agencies are predominantly staffed with police officers and there have been several acts of omission and commission.
A shallow progress –
The Supreme Court directed the States to review the progress on police reforms in 2006 and cracked the whip on States which were reluctant to initiate reforms.
In July 2018, the Supreme Court once again reviewed the progress of States and UTs on this front.
Almost 23 States have ignored guidelines on appointment of DGPs. As of today, 12 States have not implemented the separation of investigation and law and order wings.
Way forward –
Police reforms include fixed tenures for Director Generals of Police (DGPs) and Superintendents of Police. Also, the DGPs should have a minimum residual service to ensure continuity and stability and avoid frequent leadership changes.
As much as the police as an institution requires reform to insulate it from political interference, the intelligence agencies too merit a review in terms of accountability, staffing and operations.
Unlike the police whose performance is tangible, the intelligence agencies work remains invisible and away from public gaze.
Reforms will help the state police forces and intelligence agencies to evolve into professional organisations and avoid future failures of law and order and more importantly, provide security oriented to the common man.
Why state financing is the only way to ensure fair and transparent poll funding?
In just 28 days since the announcement of the general election, the Election Commission (EC) has seized cash, drugs, alcohol, precious metals and other items worth Rs 1,800 crore. Compare this to the legal upper limit of expenditure per candidate — Rs 70 lakh. Simple arithmetic would show that the seized amount can fully finance up to five candidates from each of the 543 constituencies.
What is the solution?
State funding of the recognised political parties and outlawing of corporate funding could be instrumental in making the electoral process fairer and more participatory.
In 1962, the late Atal Bihari Vajpayee moved a Private Member’s Bill to prevent electoral donations by corporates. It was argued that since all shareholders need not subscribe to the political endorsement by a corporate, it was immoral to allow donations against their consent.
Vajpayee had propositioned that such funding would only serve corporate interests. While all political parties welcomed the bill, the then ruling party did not vote in its favour. Never again was such a bill introduced.
Electoral funding provisions –
Under Section 29B of the Representation of the People Act 1951, political parties are free to accept donations from any person, except from a foreign source.
Two inferences can be drawn from this — first, money wields the ability to disrupt political agenda; second, foreign money dilutes electoral integrity.
Both reasons would equally be valid for any person who is alien to the election process — a non-voter.
The concerns that arise from foreign-funding are equally applicable to funding from corporates, with the distinction that while the former is a jurisdictional alien; the latter, on account of being a non-participant, is an alien. However, party interests deter further expansion in the law.
Limitation of Electoral Bonds –
Of the Rs 2,722 crore donated through the scheme in the last 15 months, almost 95 per cent has gone to the ruling party, which enjoys a 31.34 per cent vote share.
The remaining contestants with a 68.66 per cent vote share could only garner 5 per cent funding. The anonymity provision under the scheme is antagonistic to transparency — the bonds merely enable an “on-the-books” secretive transfer.
The State Bank as the facilitator would be privy to the details of the depositor and the political party funded, therefore allowing the ruling party to monitor its rivals. What would be unknown to others will be known by the ruling party.
Role of corporates –
Corporates have long defended their political donations on the grounds of freedom of speech. Like citizens, they seek to endorse their economic and political views through contributions to campaign finance.
Corporates are associations that further economic interests of their members who enjoy a freedom of trade. Therefore, their freedom of speech is based on their exercise of the freedom of trade, which is essentially for a commercial purpose.
Citizens, on the other hand, enjoy an unfettered freedom of speech which extends onto the political domain. Since corporates are not participants as voters, they have no claim to freedom of “political” speech and expression. Therefore, while citizen-voters can donate to a political party pursuant to free speech, corporates must refrain from donating to a political party.
Way forward –
In realpolitik terms, there is no incentive for any ruling political party to reform the law as it stands. Thus, necessity would dictate that the task of electoral funding be given to the EC under Article 324.
A fair and transparent manner to finance the political parties would require a censure of unaccounted money and direct donations by corporates and non-voters to political parties.
State funding of recognised political parties is a viable alternative. A state funding scheme would be viable through the levy of an election cess on the direct taxes.
A National Election Fund could be maintained by the EC, into which the proceeds from this cess may be deposited. At the current GDP-Direct Tax ratio and voter numbers, a 1 per cent election cess can fund Rs 500 for each vote cast in elections to the Lok Sabha and the state assemblies.
The cess being progressive would spare the poorer candidates from the costs of funding elections. Direct donations to political parties may be permitted only from persons who are entitled to vote. Those not entitled to vote may contribute to the neutral National Election Fund.
Donations from corporates into this fund will not distort the election process, but would instead improve the integrity of the peoples’ electoral choice.
Parties would be inclined to adopt a more inclusive agenda when in government since more votes will translate into more state funding.
Parties will also vie for votes in absolute numbers than merely be the first past the post. Democracy will then truly be of the people, for the people and by the people.
It is by now close to 50 years since Indira Gandhi brought the idea of eradicating poverty into the electoral arena in India. ‘Garibi Hatao’ had been her slogan. The role that income generation actually played in lowering poverty in India may be gauged from the facts that economic growth had surged in the 1980s, and the late 1960s was when agricultural production quickened as the Green Revolution progressed.
Why we failed till now?
This is because the approach of public policy to the problem has been to initiate schemes which could serve as no more than a sedative.
These schemes failed to go to the root of poverty, which is capability deprivation that leaves an individual unable to earn sufficient income through work or entrepreneurship.
Income poverty is a manifestation of the deprivation, and focussing exclusively on the income shortfall can address only the symptom.
Politics over poverty –
Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) is paying farm households below a threshold ₹6,000 a year. An income-support scheme for any one section of the population is grossly inequitable. We can think of agricultural labourers and urban pavement dwellers as equally deserving of support as poor farmers.
The PM-Kisan has, however, been dwarfed by the promise of the Nyuntam Aay Yojana (NYAY), which envisages an annual transfer 12 times greater to the poorest 20% households. While this scheme is not discriminatory, it is severely challenged by the issue of beneficiary identification in real time.
Both the schemes on display, but NYAY in particular, have been criticised as running into the absence of fiscal space. This is really neither the case nor of the essence, the latter being the role of income transfers in eradicating as opposed to alleviating poverty in India.
Dissecting the fiscal costs –
NYAY is estimated to cost ₹3.6 lakh crore per annum at current prices. This comes to approximately 13% of the central budgetary outlay for 2019-20. This expenditure can be incurred without any consequence for the fiscal deficit if all Centrally Sponsored Schemes are taken off and subsidies trimmed just a bit.
But the point is that at 13% of outlay, NYAY would amount to more than twice the combined expenditure on health and education and more than capital expenditure in the same budget, they being the items of public expenditure that most impact poverty in the long run.
There is an opportunity cost to be acknowledged of an income-support scheme of this magnitude being implemented while there exists a severe deficit of social and physical infrastructure in the country.
What should be done?
In light of a pitch that has been made for the implementation in India of a publicly-funded universal basic income (UBI) scheme, we can say that from the perspective of eliminating poverty, universal basic services (UBS) from public sources are needed, though not necessarily financed through the budget.
There is indirect evidence that the provision of health, education and public services matters more for poverty than the Central government’s poverty alleviation schemes in place for almost half a century.
Per capita income levels and poverty vary across India’s States. A discernible pattern is that the southern and western regions of India have lower poverty than the northern, central and eastern ones. This, very likely, is related to higher human development attainment in the former.
A UBI would imply that a nationwide income support scheme that channels funds from a common pool to households in the poorer States would be tantamount to rewarding lower effort by their governments.
There is a crucial role for a few services in eliminating the capability deprivation that is poverty. At a minimum these services would involve the supply of water, sanitation and housing apart from health and education. It has been estimated that if the absence of such services is accounted for, poverty in India would be found to be far higher than recorded at present.
There are no short cuts to ending poverty, but ending it soon is not insurmountable either.
The World Bank conducts an annual examination to gauge the ‘Ease of Doing Business’ in nearly 200 economies and ranks them on ten sets of parameters, which include ‘Resolving Insolvency’. India ranked 142nd in ‘Ease of Doing Business’ for 2015.
In terms of resolving insolvency, the country ranked 137th. The government set an ambitious target of breaking into the top 50 on this index, and initiated a plethora of institutional reforms, including an overhaul of the insolvency framework. After four years, India ranks 77th, up by 65 places, in the aggregate rankings, and 108th on ‘Resolving insolvency’.
Features of IBC –
Its primary focus is revival of an ailing firm, while recovery by creditors is an incidental outcome. Secured creditors have absolute priority over other claims in insolvency (liquidation) proceedings.
The recovery rate is a function of time, cost and outcome of insolvency proceedings. In addition to reviving ailing firms, the insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (Code) have returned 210 per cent of liquidation value for creditors. They are realising on an average 48 per cent of their claims through reorganisation, as compared to the erstwhile regime which recovered 26 per cent.
The Code provides a timeline of 180 days to conclude a corporate insolvency resolution process (CIRP), extendable by a one-time extension up to 90 days. Probably, no other regime in the world mandates a time-bound resolution. This push has meant that proceedings under the Code take on average about 300 days, including time spent on litigation, in contrast with the previous regime where processes took about 4.3 years.
The insolvency resolution process cost, which includes fee of insolvency practitioner and other professionals, and expenses related to meetings of committee of creditors (CoC), public announcements, filings and litigations, etc., have been 0.5 per cent of the realisation by the creditors in contrast with a cost of 9 per cent under the previous insolvency framework.
With realisation of 48 per cent of claims through reorganisations coupled with pre-admission and post-admission settlements, the Code has proved to be an efficacious remedy even for loan recovery.
The strength of an insolvency framework is a function of four indices relating to commencement of proceedings, management of a firm’s assets, reorganisation proceedings, and creditor participation. The Code does not envisage separate applications or processes for reorganisation and liquidation.
Transparency in proceedings –
The Code envisages a resolution plan for reorganisation of a defaulting firm. Irrespective of the composition of the CoC, other stakeholders have a right to receive the agenda and participate in the meetings of the CoC.
The CoC takes major decisions on behalf of the firm under CIRP. It appoints the insolvency practitioner to run the operations of the firm as a going concern and run the process as well.
Any creditor may seek any information about the firm’s business and financial affairs from the insolvency practitioner. Any creditor may contest the decision of the insolvency practitioner accepting or rejecting its own claims or claims of other creditors.
It is a matter of satisfaction that within two years of the enactment of the Code, the Indian insolvency regime has all the essential elements and practices that any mature insolvency regime ought to have. Not surprisingly, it bagged the award for the ‘Most Improved Jurisdiction’ for 2018 from the Global Restructuring Review. Hopefully, it will also pass with flying colours in the ongoing examination of the World Bank.
North Korea has considerably upgraded its nuclear weapons arsenal and capability which is increasing tensions in the Korean peninsula. It has conducted the intercontinental ballistic missiles (ICBM) tests. President Trump has strongly reverted back by pointing that the American Government can reply using the analogy of fire and fury. This situation is compared to the Cuban missile crisis of 1962. Analysis –
North Korea-USA relations are antagonistic in nature since the Korean War. Since the Korean War of 1950s, the US has regularly maintained a strong military presence in South Korea and Japan.
North Korea maintains a huge military force as per its ‘military-first’ policy. It ranks third after the US and Russia in the possession of nuclear weapons.
North Korea has been testing nuclear weapons since 2006. The latest tests have launched missiles that flew over Japan and ultimately it threatened the US territory of Guam.
President Trump has warned of signalled his intention to send the US Carl Winson super carrier and its carrier strike group to the Korean peninsula.
Impact of a future war –
Causalities and financial losses will be immense including the losses to world economy.
Rise in debt levels of US and ripple down effects to the whole world impacting the global supply chains.
In case of entering of war in South Korea, it being one of the largest hubs of electronics manufacturing, would create shortages across the world.
There would be a large scale migration of refugees from North Korea to China, Japan, South Korea and other Asian countries.
Conclusion – It would be better if some diplomatic resolution is adopted to freeze the war. China holds the key to this diplomatic resolution as it is the largest trade partners of North Korea (DPRK). US should put more pressure on China and Russia who possess some leverage on the rogue state of North Korea.
Recently (on 18 July 2017) India and China jointly submitted a proposal to the World Trade Organisation (WTO) calling for the elimination – by developed countries – of the most trade-distorting form of farm subsidies, known in WTO parlance as Aggregate Measurement of Support (AMS) or ‘Amber Box’ support as a prerequisite for consideration of other reforms in domestic support negotiations. Significance –
This is an important proposal by India and China in view of the ongoing negotiations for the upcoming 11th Ministerial Conference of the WTO to be held in Buenos Aires in December 2017.
It counters the efforts by some countries to target the subsidies of the developing countries while letting the developed countries retain their huge farm subsidies.
The joint paper reveals that developed countries, including the US, the EU and Canada, have been consistently providing trade-distorting subsidies to their farmers at levels much higher than the ceiling applicable to developing countries.
Developed countries have more than 90% of global AMS entitlements amounting to nearly US$ 160 bn. Most of the developing countries, including India and China, do not have AMS entitlements.
Listing the most heavily and frequently subsidised products by the US, the EU and Canada since 1995, the paper calls for elimination of such subsidies. The numbers reveal that subsidies for many items provided by the developed world are over 50% and some even more that 100% of the value of production of the product concerned, while developing countries are forced to contain it within 10% of the value of production.
In other words, while developed Members have access to huge amount of AMS beyond their de minimis (these are the minimal amounts of domestic support that are allowed even though they distort trade — up to 5% of the value of production for developed countries, 10% for developing.) in contrast most developing Members have access only to de minimis resulting in a major asymmetry in the rules on agricultural trade.
Elimination of AMS, India and China believe, should be the starting point of reforms rather than seeking reduction of subsidies by developing countries, some of which like India provide a subsistence amount of about US $ 260 per farmer per annum compared to over 100 times more in some developed countries.
Prime Minister Modi in his televised address to the nation his Government’s decision to demonetise the higher denomination currency notes. There is now ample proof that the grand demonetisation gamble has failed to meet its primary objective. Signals of failure –
The Reserve Bank of India (RBI) has finally released numbers that show how most of the currency notes that were cancelled were deposited in banks.
The airy hopes that the Indian central bank would be able to extinguish a substantial chunk of its liabilities—and some mistakenly also argued that this would provide a fiscal bonanza that the government could use to recapitalize the banking system—have been belied.
Finance minister Arun Jaitley said that the money is now in the system, where the use of Big Data analytics could help the government identify who deposited black money.
The challenge now is to ensure that the creation of new black money is minimized. GST, which creates incentives for producers to seek bills from their input providers—will be part of the solution.
Positive consequences– Every policy has a stated goal as well as secondary consequences, some of which are unintended. It is still quite possible that demonetisation will have positive consequences over a longer period—
the growth in the direct tax base,
the switch in the financial holdings of households from cash to bank deposits,
the increased use of digital payments.
The question to be asked is whether the potential long-term benefits will be greater than the short-term costs that the Indian economy had to bear. Negative consequences – The main negative economic consequence of demonetisation has been the disruption of unorganized supply chains that are dependent on cash transactions. However, it is also true that the Indian economy did not collapse because of the disruption of the monetary base, as some economists had predicted. Lessons to be learnt from demonetisation –
The main lesson is that the Modi government did not seek the advice of experts before going ahead. The strategic decision to surprise holders of illegal wealth would anyway have restricted the circle of those who could be informed, but it seems that the idea came from outsiders with a penchant for impractical ideas rather than experienced policy advisers.
A good policy design should take into account how people will respond to any change in the rules of the game. In other words, incentives matter. Most rational human beings will adjust their behaviour to further their self-interest. Those who had illegal wealth held in cash obviously gamed the cash exchange process. Good incentive-compatible policy design is thus as important as good policy intent.
Conclusion – The implementation of such a behemoth decision requires capacity building of those who would implement it on ground. A surprise invasion to the comforts of bureaucracy may seem desirable to check their readiness but it cannot be performed at the cost of common people and the economy as a whole. Government has derived the lessons and it is possible that the database of doubtful transactions, people and entities (formed post-demonetisation) would be fruitful for the Government to take the necessary legal action against such illicit wealth.
NITI Aayog will launch the Mentor India Campaign, a strategic nation building initiative to engage leaders who can guide and mentor students at more than 900 Atal Tinkering Labs, established across the country as a part of the Atal Innovation Mission.
Mentor India is aimed at maximizing the impact of Atal Tinkering Labs, possibly the biggest disruption in formal education globally.
The idea is to engage leaders who will nurture and guide students in the Atal Tinkering Labs. These labs are non-prescriptive by nature, and mentors are expected to be enablers rather than instructors.
NITI Aayog is looking for leaders who can spend anywhere between one to two hours every week in one or more such labs to enable students experience, learn and practice future skills such as design and computational thinking.
Atal Tinkering Labs –
Atal Tinkering Labs are dedicated works spaces where students from Class 6th to Class 12th learn innovation skills and develop ideas that will go on to transform India. The labs are powered to acquaint students with state-of-the-art equipment such as 3D printers, robotics & electronics development tools, Internet of things & sensors etc.
Atal Innovation Mission –
NITI Aayog’s Atal Innovation Mission is among one of the flagship programs of the Government of India to promote innovation and entrepreneurship in the country to set up the Atal Tinkering Labs across the country. The Mission has / is in the process of setting up 900+ such labs across India and aims to have 2,000 such labs by end of 2017.