why indian dairy farmers oppose rcep · sanjeeb mukherjee a s india moves closer towards finalising...

SANJEEB MUKHERJEE

As India moves closer towardsfinalising its negotiating posi-tion under the RegionalComprehensive Economic Partnership(RCEP), the Indian dairy industry hasupped its opposition to the pact ongrounds that any lowering of tariffwould severely harm its interests.

RCEP is India’s most ambitioustrade pact to date. Based on India’sexisting free-trade agreements (FTA)with the 10-nation Asean bloc, theRCEP will include all the nations withwhich Asean has trade deals — China,India, Japan, South Korea, Australiaand — most importantly from thepoint of view of the Indian dairy indus-try — New Zealand.

The negotiations onthis issue centre on grant-ing New Zealand access tothe fast-growing dairyproducts market in India—together with wine,apples and kiwis — inreturn for easier norms forcross-border migration ofIndian professionals (nurs-es, chartered accountantsand IT experts).

But this quid pro quo isa little more complicated because ofthe asymmetry in the two countries'dairy sectors. New Zealand is theworld’s largest global milk and dairyproduct exporter, accounting for near-ly 20 per cent, or $5.4 billion, of allglobal exports in 2018, according tothe International Trade Centre. India,by contrast, is a negligible exporter.Currently, most milk and dairy prod-ucts imports to India attract a peakcustoms duty of 64 per cent (60 per

cent basic customs duty and 4 percent countervailing duties).

The Indian dairy industry’s argu-ment against lowering these dutieshinges on the fact that, given thefragmented nature of the sector,cheap imports would impact thelivelihood of almost 100 million ruralhouseholds that are directly or indi-rectly dependent on dairying. Anoverwhelming 77 per cent of thesehouseholds comprise small andmarginal farmers.

Moreover, in India, more than 70per cent of the price that customerspay for milk is passed on to dairyfarmers mainly on account of theunique cooperative structure that wasput in place under Operation Flood I

and II, programmes thattransformed a dairy-poorcountry into the world’slargest milk producer. InNew Zealand, the farmers’share in consumer price is30 per cent, and there arejust about 20,000 farmersinvolved in the dairy sec-tor, most of them withlandholdings that are sev-eral orders or magnitudelarger than Indian farmers’(see chart).

New Zealand exports almost 93 percent of its annual milk production —estimated at 20.5 million tonnes — invarious forms. Indian dairy playerssay that if New Zealand were to shipjust 5 per cent of its annual milk andmilk product exports to India, thesheer volume would be enough todepress Indian product prices.

Rough estimates show that just 5per cent of New Zealand’s annualexports of high-value milk products

would be enough to capture 28 percent of the Indian market for all milkand milk-based products — and thatinclude skimmed milk powder (SMP),cheese and butter.

Clearly, the odds are stacked heav-ily against lowering tariffs. Local dairycompanies may have to slash theirmilk procurement prices if cheapimports are allowed because globalSMP prices are far lower than Indianrates — ~160-170 a kg against ~280-290 respectively. Assuming that 10litres of liquid milk goes into produc-ing one kg of SMP, procurement pricesin India have to drop ~10-11 per litreto make purchases competitive vis-à-vis imports. This would be disastrousfor small Indian dairy farmers, whowere beginning to see a slight increasein procurement rates in the past fewweeks after years of low prices.

Back-of-the-envelope calcula-tions show that Indian farmers couldcollectively lose almost ~3.5 trillion

if procurement prices are slashed.The impact on the rural sector as aresult of lower procurement pricescould be huge, given that latestNSSO data showed that between2003 and 2013 the income from live-stock recorded the fastest compoundannual growth rate (CAGR) at 14.3per cent.

Dairy accounts for 25 per cent (~7trillion) of the country’s total farmproduce and has been a global successstory. Since 1997, world milk produc-tion grew at a CAGR of 2 per cent, halfIndia’s CAGR of 4.5 per cent.

Commerce ministry officials whoare spearheading the RCEP negotia-tions appear to think the dairy sector’sfears are unfounded. "India is the

largest producer of milk globally.Imports of high-value foreign producemay rise in certain categories, butthere's nothing to suggest the entiresector will be affected," a trade nego-tiator at RCEP said.

A senior dairy sector official findsthis reasoning specious. “If the argu-ment is that import of high-value milkproducts, which is consumed by aselect class of people, might rise, whatis the need for lowering tariff onthem?” he points out.

As it stands, the trade-off — Indianprofessionals versus small andmarginal farmers — is a tricky one.Much depends on which lobby isheard the loudest in the corridors ofRaisina Hill.

10 ISSUES AND INSIGHTS>

MUMBAI | TUESDAY, 1 OCTOBER 2019

> CHINESE WHISPERS

> LETTERS

If the judge, jury and execu-tioner in a case are one andthe same, how likely is itthat justice will be delivered?That, in a nutshell, is where the

Directorate General of CivilAviation (DGCA) in India findsitself with regard to air safety.

Let me explain. In almostevery country, the body thatinvestigates aircraft accidents isa highly specialised one withtrained investigators. As andwhen an accident occurs, inves-tigators arrive at a hypothesis onthe possible reasons based onclues gathered at the site or fromrecovered parts.

All possible hypotheses areexamined in detail and rejectedtill the most likely one that tiesin with all other evidenceremains. The most probablecause is established and recom-mendations are made based onthis to reduce recurrence. The

recommendations have to beimplemented by the regulatorand it is held responsible for thefailure to do so. In the US, forinstance, the regulator is theFederal Aviation Administration(FAA) and the body that inves-tigates accidents is the NationalTransportation Safety Board(NTSB). In the UK, the CivilAviation Authority is the regu-lator and investigations are con-ducted by the Air AccidentsInvestigation Branch. In mostdeveloped countries, recom-mendations made post an acci-dent are taken with utmost seri-ousness and are usually bindingon the regulator.

India however has beendoing its own thing in this

regard. Till 2010, safety rules andregulations were prescribed bythe DGCA — both for airlinesand industry personnel. It wasthe DGCA that tried to ensure —without probably having thewherewithal to do so — regula-tions were complied with. Asand when, such regulations werenot followed and a mishapoccurred, the DGCA would aska panel of experts to investigate.Recommendations submittedwould be examined and thoseaccepted would be implementedand the rest ignored. As a formerdirector general of civil aviationtold me once recommendationsthat could be implemented withrelative ease would be imple-mented and the rest overlooked.

In 2011 — in the aftermath ofAir India plane crash inMangalore in May 2010 — thegovernment realised it neededa dedicated set-up to investigateaccidents and set up an AircraftAccident Investigation Bureaubut this effort has remained

largely on paper. While working on an article

on safety for this newspaper, Idiscovered to my horror thatIndia’s annual budget for theDGCA is a mere ~200 crore.Contrast this with the $17.5 bil-lion allotted to the FAA for theyear 2019 by the US government.This despite the fact that air traf-fic growth in India has beenamong the highest and is cross-ing double digits almost everyyear. India is expected to crossthe UK and be the third largestin the volume of traffic by 2024.This single statistic to my mindhighlights why the DGCA isunable to perform as it ought to.

India does not have manytrained investigators but it is notas if some of the required tech-nical expertise doesn’t exist.India’s aviation sector has overthe years nurtured highly com-petent aircraft engineers but theDGCA doesn’t always have themoney to hire such talent. Assuch, circulars and civil aviation

requirements (CARs) issued byit are often not heeded by theairlines and the industry in theirentirety. Many investigationreports have been gatheringdust for years together.

So here’s my suggestion: Letthe money saved from sellingIndia’s national carrier (annuallyaround ~4,500 crore) go into set-ting up and financing two credi-ble safety organisations in India— a new DGCA and an accidentinvestigation body with trainedinvestigators — that work in tan-dem. This is the single biggestfavour the government can do tothe sector in general and the airpassengers in particular.

Last, while we are at it, let’srename the DGCA. The monikerhas been used and abused somuch that we could do with anew epithet altogether (as far asnames go America’s FederalAviation Authority is no slick-er!). How about calling India’snew DGCA Safety First ? If youhave a better idea, do write in.

A penny in time Use the money saved post Air India’s sale to set up twocredible safety organisations in India

Going paperlessTo make the functioning of the centralgovernment paperless, the CabinetSecretariat has directed all ministriesand departments to discontinue the“practice of sending offline progressreports or updates” and “action takenreports (ATRs)” for the eSamikSha portal.Last year, the Cabinet Secretariat hadasked all ministries and departments tosend regular updates of ATRs toimplement the decisions of the cabinetand cabinet committee on economicaffairs (CCEA). It has now said that someof the ministries and departmentseither do not upload ATRs regularly, orsend these in offline/paper form. “Sincethe implementation of Cabinet/CCEAdecisions is now tracked on eSamikSha,this is hampering effective monitoring,”an office memorandum stated. “Inparticular, the status of several Billsapproved by the cabinet has not beenupdated on eSamikSha, even thoughthey already stand enacted as law, afterbeing passed by Parliament,” theCabinet Secretariat said.

Attention ParliamentariansA new solution developed during theSingapore-India Hackathon 2019 in IITMadras may end up keeping an eye onour Members of Parliament if PrimeMinister Narendra Modi sticks to hiswords. The solution in question is adevice that detects who is payingattention during an event/meeting andwho isn’t. “I specially like the solutionabout the cameras that detect who ispaying attention. I will talk to mySpeaker in the Parliament as I am sure itwill be very useful for ourParliamentarians,” said Modi after the event.

Gaming the system

The fiasco involving Punjab andMaharashtra Co-operative Bank (PMC)has stirred up a hornet’s nest. One badaccount, Housing Development &Infrastructure Ltd (HDIL), is said to bethe cause of the downfall of the bank.According to reports, the HDIL expo-sure was not reported for six to sevenyears. HDIL did not service the loansfor three years and yet, it was not report-ed as non-performing. One-third of theloan portfolio of the bank was beingenjoyed by one group. The rule bookhas laid down norms for maximumexposure to a single entity or group. Thebank successfully evaded these checksand balances. How the auditors couldbe hoodwinked for such a long time isa case ripe for investigation.

Compared to other banks, the loanbook of PMC was not too large. Theauditors and RBI inspectors shouldhave been looking at the large loanaccounts with a fine-tooth comb. Ifthis was done, at some point in time,the gaming of the system could havebeen detected. A point to note here isthat the exposure was not caught byinspecting authorities but came tolight because the bank divulged it.Had the bank not come clean, howlong this duplicity would have con-tinued is anybody’s guess.

PMC was said to be amongst thebetter managed co-operative banks.One shudders to think how manysuch surprises are hidden in other

co-operative banks. This will shakethe confidence of the general public.It is the small depositors who are get-ting badly impacted. They do nothave too many choices. New genera-tion private sector banks, with theirhigh threshold of minimum balance,are out of reach. The customer ser-vice levels of public sector banks isnot very inspiring. Co-operativebanks are patronised as they have thelocal flavour, have good customersservice. After the PMC bust, thisbanking avenue will also be lookedat with apprehension.

Will any accountability be fixed onthe officials of the regulatory author-ities? Over the last so many years,there would have been multipleinspections by different personnel.How could they not notice this sleightof hand by bank officials? This issomething that needs to be investi-gated to make the inspection teamwork more diligently in the future.

KV Premraj Mumbai

Need some answers This refers to your editorial “Failuresof supervision” (September 30)regarding the deficient role of theReserve Bank of India (RBI) in the cri-sis plaguing the Punjab andMaharashtra Co-Operative Bank(PMC). The co-operative movementin India was started with an act ofParliament in 1914, primarily for deal-ing with the problem of rural creditand to encourage “thrift, self-help andcooperation among agriculturists,artisans and persons of limitedmeans”. Being so, how PMC could

have had an exposure of ~6,500 crore(which is 73 per cent of the bank’stotal assets) vis-a-vis the bankruptHousing Development & Infrastru-cture Ltd (HDIL) and continue toreport the same as “standard asset”for long, without so much as causingan eyebrow to be raised in the RBI,are all questions that baffle the com-mon man.

If, as is being alleged, the RBI hastaken strong action against PMC onlyafter the bank, on its own, reportedits misclassification of bad loans, itis, indeed, a poor reflection of the for-mer’s supervisory role. Dual controlover co-operative banks by the RBIand the Registrar of Cooperatives(RoC) is only a lame excuse.

“People don’t make mistakes,processes do,” swear quality gurus.It is high time the RBI tightened itsaudit and information gatheringprocesses to ensure that its officersdo a thorough job of supervisingbanks, NBFCs and housing financecompanies that it is entrusted with.Else, we would continue to witnessthe sad spectacle of innocent depos-itors and other bank customersbeing put to hardship due to suchlate regulatory interventions that areakin to closing the stable doors afterthe horses have bolted.

V Jayaraman Chennai

Letters can be mailed, faxed or e-mailed to: The Editor, Business StandardNehru House, 4 Bahadur Shah Zafar Marg New Delhi 110 002 Fax: (011) 23720201 · E-mail: [email protected] letters must have a postal address and telephonenumber

> HAMBONE

During the eleventh comprehen-sive household survey of labourmarkets conducted by CMIEduring May-August 2019, an estimated405 million were found to be employedin India.

The total sample size was 174,405households. Of this, 110,975 householdswere from 7,920 enumeration blocks in322 towns. The rural sample consistingof 63,430 households were spread over3,965 villages.

The sample households yielded567,070 members who were of 15 yearsof age or more. Estimates presented hereare based on the appropriately weightedaverages of the employment/unemploy-ment status of these individuals. Therewere 358,194 members from the 322towns and 208,876 were from the 3,965villages surveyed.

Of the 405 million employed duringthe May-August 2019 months, 129 mil-lion were residents of urban India. Theremaining 276 million were rural folks.

This was the eleventh such surveyand we therefore have a time-series ofthe trends in employment in Indiasince 2016.

The time-series suggests a recoveryin employment. The 405 million esti-mated to be employed during May-August 2019 were 0.6 million higher thanthe employed during January-April 2019which in turn were 3.9 million higherthan the preceding survey conductedduring September-December 2018.

Cumulatively, the count of theemployed has risen by over 4 millionover the past three surveys. This marksan apparent turnaround in employmentfrom a steep falling trend to a graduallyrising trend.

It may be recalled that 10 million jobswere lost in 2018. The September-December 2017 survey had estimated thetotal employed to be 411 million. Thisfell in each of the three subsequent sur-veys to 401 million in September-December 2018. This decline in employ-ment has stopped.

It makes sense to compare the May-August 2019 survey to earlier surveysconducted in similar months. Doing soremoves the effects of seasonality inemployment, if any. Such a comparisonshows that employment in May-August2019 was 2.5 million higher than it was ayear ago.

This is a big relief given the sharp fallin employment recorded in 2018 andalso the lack of growth in employmenteven earlier in 2017. Employment hadfallen by 5.5 million between May-August 2017 and May-August 2018.Earlier, it had fallen by 0.6 millionbetween May-August 2016 and May-August 2017.

Given this past record of declines, thesurge of 2.5 million jobs in the past oneyear is a welcome reversal.

But this expansion is far from suf-ficient. The 2.5 million accretion ofjobs could absorb only 22 per cent ofthe increase in people looking for oneduring this period. While the labourforce expanded by 11.3 million, jobsgrew by only 2.5 million. The remain-ing 8.8 million merely inflated thestock of unemployed.

The count of unemployed has risento 32.6 million. Besides, there is another12 million that is also willing to work if ajob becomes available although theywere not actively looking for a job.

Counter-intuitive as it may sound,there is reason to celebrate the increasein the unemployed. Their increase is anindication of an increase in the hopes forfinding jobs. Earlier, post demonetisa-

tion, this hope had dried up. As a result,in 2017, while the working age populationincreased by nearly 23 million, employ-ment declined by half a million; thecount of the unemployed declined by 9million and those willing to work but notactively looking for jobs decreased by 13million. Effectively, the increase in theworking-age population made no contri-bution to labour supplies in 2017.

In 2018, labour did return to look forjobs. As a result, the count of the unem-ployed rose by 8 million. But the jobsmarket was bad as 10 million jobs werelost during the year.

The results for 2019 so far show thatthe count of the unemployed continuesto grow, but employment has also start-ed rising.

A recovery from the deep disrup-tions of demonetisation (effects seen in2017) and the introduction of the goodsand services tax (effect seen in 2018)seems to be underway. But this recov-ery, particularly in jobs, is extremelyfragile and tentative.

Note that the estimated count of theemployed increased from 402.4 millionin May-August 2018 to 404.9 million inMay-August 2019. But employmentduring May-August 2017 and May-August 2016 was of the order of 408million. The Indian economy is unableto provide employment at the samescale again. In the meanwhile, theworking-age population has been risingand the numbers of the unemployedare rising correspondingly.

The working-age population seemsto be growing at the rate of a little lessthan 2 million per month. Of these, lessthan a million join the labour force look-ing for jobs. For two years, in 2017 and2018, the labour force did not increase.But now, it is increasing. It is importantthat this surge in the labour force findsadequate good jobs. Else, the unem-ployment rate will keep rising or labourwill shift back to agriculture to under-take extremely low quality jobs, largelyin distress.

The author is the MD & CEO of CMIE

Welcome but inadequate increase in jobs

MAHESH VYAS

ON THE JOB

Why Indian dairy farmers oppose RCEP

OUT OF THE BLUEANJULI BHARGAVA

TAKETWOANALYSIS BEHIND THE HEADLINES

Pak invitation for ManmohanCongress leaderson Monday saidthey wereintrigued byPakistan ForeignMinister ShahMahmoodQureshi’s

statement that Islamabad would inviteformer prime minister Manmohan Singh(pictured) for the inaugural ceremony ofthe Kartarpur Corridor in November.Pakistan is scheduled to open thecorridor for Indian Sikh pilgrims onNovember 9. “The Kartarpur corridorinauguration is a big programme andPakistan is preparing for it in a big way.We have decided to invite India’s formerprime minister Manmohan Singh tograce the event... We will send a formalletter to him soon,” Qureshi told CapitalTV. He said Singh represented the Sikhcommunity. Singh was born in a villagein Punjab province in undivided Indiabut did not visit Pakistan during his 10years as prime minister. Sources in theCongress said it was strange that thePakistan foreign minister made astatement on this when such an inviteshould be routed through the ministryof external affairs.

Providing market access to New Zealand inparticular could wipe out their livelihoods

COWED DOWNNew Zealand and India's dairyindustries in numbers

New Zealand India

Milk production 22 180 (million tonnes)

No. of dairy farmers 10,000 100 million

Average farm size NA 1.08(hectares)

Number of milch 5 131 animals (million)

Milk yield (lts per day) 13 3.5

Share of dairy products 93 Negligibleexported (in %)

Farmers’ share in 30 71milk consumer price (in % )Source: Dairy industry and government data

In India, more than 70 per cent of the price that customers pay for milk is passedon to dairy farmers mainly on account of the unique cooperative structure thatwas put in place under Operation Flood I and II

This newspaper has reported that the gov-ernment will create a “NationalInfrastructure Pipeline” that will “includegreenfield and brownfield projects costing above~100 crore each”, in order to “tell investors at whatstage of execution each of these projects is in andoffer a realistic assessment of whether to put mon-ey into them or not”.

We don’t know enough about this pipeline, butthe principle should be unequivocally welcomed.It shows the government is seriousabout the prime minister’s ~100trillion target for infrastructureinvestment – and, further, that itunderstands what the private sec-tor needs for this target to be madea reality.

It is important to judge thismove in context, in order to under-stand why something apparentlysmall might be more momentousthan is immediately visible. There isa reason why “a project pipeline”comes up frequently in conversa-tions with foreign investors, partic-ularly those who represent patient pools of capitallike insurance and pension funds. India is still seen,for various reasons, as a “black box” in terms ofrisk. Investors do not just fear sub-par returns or cur-rency depreciation. They fear outright capital lossthrough investing in projects that fail to take off, arebelatedly subject to regulatory or legal interven-tion, or in which their Indian partners do not upholdtheir side of the deal. We have to face the fact thatIndian dispute settlement mechanisms and theadministrative and regulatory structure do notinspire confidence in the face of such fears.

This is why global private capital would like to

turn to the Indian state — as a partner or a guar-antor — in its forays into project finance. Theassumption that many make is that the best way toavoid catastrophic capital loss is to ensure thestate in some way shares your exposure. This is, inits way, not a bad assumption. The problem, how-ever, is that it puts intolerable demands upon theIndian exchequer.

The need, therefore, is to figure out ways inwhich the Indian state can serve as a partner, de-

mystify political and regulatoryuncertainty about India, and getinside the “black box” of risk with-out straining the exchequer exces-sively. What a project pipeline thatis monitored by the governmentcan do is effectively serve as a state-run rating agency at the project lev-el. Finance then can get on with itsjob of matching pools of capitalwith the appropriate risk-returnlevel of the projects in the pipeline.

It is important to note that sucha pipeline will not by itself reducerisk. But it will clarify risk, and

thereby reduce uncertainty. If properly designed, itwill help the market develop by increasing theamount of information available.

The point to be noted here is that it is not nec-essary to argue that new information is itself beingdiscovered by the state in order to construct thispipeline. One does not have to imagine flocks ofgovernment auditors descending on each projectthat is a candidate for such a list. Such an effort –while in many ways helpful – would face constraintsin the medium term because of state capacity andmonitoring weaknesses. Instead of such a vision,what is required as a first step is simply the collation

in an easily digestible format of information that isalready with various state organs about projects,private and public, and sharing this informationwith possible investors.

Of course, one could ask whether there is animplicit mismatch of expectations here. Manyinvestors might look at a project pipeline andassume the government is indirectly guaranteeingthese projects, even the private ones. The govern-ment is unlikely to make any such claims. In fact,the truth is that the government probably isn’t evenable to guarantee, in the short term, accuracy ofthe raw information that it will collate in order topopulate the project pipeline. This may lead to prob-lems in the future unless expectations are properlyset in advance.

In addition, as with any actions by the statewhich could benefit private players – in this case,by making certain private sector projects moreattractive to investors by demystifying their riskprofile – collusion or corruption is always a threat.The government will have to structure constructionof the pipeline carefully in order to avoid actual orapparent improprieties.

Nevertheless, this idea has extraordinary poten-tial. One major additional facet would improve iteven further: An examination of the impact of anysuch project on India’s transition to a more cli-mate-sensitive economy. Infrastructure projectsthat increase rural resilience or factor in adaptationand mitigation targets, therefore, should be high-lighted as such. In the end, finance will of coursemake decisions on the basis of risks and returns;but the risk of stranded assets, thanks to climatechange, is one major possible risk, going forward,and the impact of warming (or of regulatorychanges as part of India’s nationally determinedcontributions under the Paris Agreement) shouldalso be part of the information set being madeavailable to investors.

Finally, no idea has ever existed that is so goodthat the Indian bureaucracy could not ruin it. Andthe most likely source of such spoiling is the inher-ent unwillingness to work with and for the privatesector. It should be made clear to those designingand administering the pipeline that this is a mar-keting and analysis tool not for the government, orproject implementers, or voters, but strictly forinvestors. It should be set up in a manner thathelps that group and that group alone, or it will fail.There is an implicit acceptance through this meas-ure that India is not itself so attractive that foreigninvestors are enthused. In other words, the statecannot approach such investors with its customaryarrogance. Nor need it think of them simply aslooking for handouts or concessions. What it needsis to listen with humility to their requirements,and put its vast reserves of information at theirdisposal. The Indian state is many things, but hum-ble is not one of them. But a project pipeline is, atits root, an advertisement. Not the bragging sortthat one might see at investor roadshows, but agenuine one that creates trust between govern-ment and capital. Such trust is surely lacking, andthe government has identified one pathway to cre-ating it. It must not lose this opportunity.

[email protected] Twitter: @mihirsharma

Breaking from convention, the monetary policy committee (MPC)of the Reserve Bank of India (RBI) decided to reduce the policy reporate by 35 basis points (bps) in its August meeting. It was then rea-soned that a 25 bps cut would have been insufficient and a 50 bps

reduction excessive. The macroeconomic outlook has changed significantlysince then and policy making has become more challenging. Growth in theIndian economy collapsed to a six-year low of 5 per cent in the first quarterof the current fiscal year. Had the MPC anticipated the extent of the slow-down, a cut of 50 bps would not have looked excessive in August. The cen-tral bank lowered its growth forecast for the fiscal year by 10 bps in August.However, as things stand today, economic growth is unlikely to recover ina hurry and the RBI will need to revise its growth projection significantly.Despite the recent volatility in food and fuel prices, in the near term, infla-tion is likely to remain below the midpoint of the target range. Therefore,lower growth and inflation would warrant more monetary accommoda-tion. The decision will obviously not be as straightforward.

The government has announced several measures to boost economicactivity — most notably, a sharp cut in corporate tax rates. The revenue for-gone on this account, according to the official estimate, would be ~1.45 tril-lion. Since the government has not revised its fiscal targets, it would be inter-esting to see how the MPC accounts for the impact. While some analystsbelieve the tax cuts will push the fiscal deficit to about 4 per cent of grossdomestic product, others are of the view that the impact will be muted.Further, despite the RBI's excess capital transfer, lower growth in tax col-lection would put significant pressure on government finances. If the cen-tral bank believes that the deficit would be significantly higher than expect-ed, it will be a risk to the inflation outlook and become an important factorinfluencing the MPC's decision.

Therefore, in the given economic backdrop, the MPC would do well to delib-erate on the following issues. First, fiscal expansion will affect transmission anda policy rate cut may not have the desired effect. Bond yields have gone up afterthe corporate tax cut. Excessive intervention through open market operations— to keep bond yields low — can become incompatible with the central bank'sinflation-targeting mandate. Further, the MPC will have to see how inflationwould behave over the next one year and beyond. Possible fiscal slippage andvolatility in food and fuel prices can make things tricky. Second, the commit-tee should review the utility of its decision of breaking from convention to low-er rates by 35 bps in the last meeting. Evidently, it was an unnecessary changeand should have been avoided. The market saw it as a consequence of limitedpolicy space and pushed up the bond yields. Third, the global economic envi-ronment is becoming increasingly uncertain on account of trade tensions andgeopolitical risks. Thus, the central bank would need to preserve policy fire-power to deal with the consequences of emerging global risks.

To sum up, there is space for monetary easing, but decisions from hereon will need to be carefully thought through and supported by clear com-munication. A decline in growth should not be used for any kind of policyadventurism.

The monetary conundrumDecisions from here on will need to be more considered

From the point of view of optics, and of underlining India's status as ageopolitical swing state, Prime Minister Narendra Modi's visit to theUS must be seen as a success. The importance of India, and of Indian-Americans, to the political establishment in the US cannot be disputed

following Mr Modi's joint appearances with President Donald Trump at a ral-ly in Houston, attended by more than 50,000 enthusiastic participants — andbroadcast to 3 million more Indian Americans. The PM's pitch to investors andbusiness leaders in the US was also aided by the announcement of cuts in thecorporation tax rate just before his trip.

However, measured by the yardstick of the expectations raised in NewDelhi prior to the visit, the results were somewhat underwhelming in theirscope. Most importantly, there was no visible progress on the ongoing trade ten-sion between India and the US — a wholly avoidable series of disputes, giventhe far larger threat that China poses to the trading system, affecting both Indiaand the US similarly. There were some hopes that a "mini trade deal" might beagreed on by the US president and the Indian prime minister, putting an endto a period of sniping between the two countries' trading establishments.Recent causes of this tension include the US' decision to end Indian exporters'eligibility for a zero-tariff programme, and Indian moves towards protection-ism in sectors like electronics and medical devices. There is certainly scope forcompromise, which would benefit both countries. However, it is unfortunatethat there appears to have been no movement forward. Even the landmark dealthat was supposed to set the tone for Mr Modi's visit, between LNG majorPetronet and US-based Tellurian, has suffered from second-day jitters, with theIndian stock market asking hard questions about the deal — which, it turns out,was less a deal and more another memorandum of understanding. As a mech-anism for reviving bonhomie in US-India trade, this cooperation on energy maynot seem to be as effective as hoped.

It is unfortunate that, instead of resetting economic relations, much of theoxygen was consumed by the fallout internationally of the changed political sta-tus of the erstwhile Jammu and Kashmir state. In spite of domestic interests inthe matter, it is futile to expect the US under Mr Trump to either ignore the issuealtogether or to openly isolate Pakistan — in spite of the aggressive rhetoric ofthe latter. Mr Trump's presence at the Houston rally was followed by pressavailabilities on the following days when he repeatedly deflected questionsabout Pakistan being the epicentre of regional terrorism. This can only be seenas problematic or deflating for India if it was seen as the centrepiece of MrModi's visit. It is clear from his speech to the United Nations General Assembly,however, that he had larger concerns, including India's ongoing commitmentto the fight against the climate crisis. From the point of view of optics, therefore,the visit cannot be faulted — and it will no doubt have further burnished theprime minister's image domestically as a global statesman. But the plain fact isthat he has won few concrete advantages for India over the course of the visit.

A visit for opticsPM's visit to US was expected to achieve more

ILLUSTRATION BY AJAY MOHANTY

The children's adage, “Sticks andstones may break my bones, butwords will never harm me” was per-haps not a part of the lexicon in the nurserywhere Sir James Fitzjames Stephen grewup. A cousin of the famous jurist Dicey,and a legal scholar himself, Sir James wasappointed the legal member of the ImperialLegislative Council in 1869. The creator ofthe Indian Evidence Act of 1872, he wasalso responsible for introduction of the

crime of sedition by inserting Section 124Ainto the Indian Penal Code in 1870.

The reasons for this insertion are nothard to understand. The sticks and stonesof the events of 1857 were still of recentmemory. A new threat to the empire wasemerging in the form of the “words” of aneducated Indian middle class imbued withradical ideas from Europe such as the rightto self-determination, setting up newspa-pers and magazines. This threat, moreinsidious than open revolt, needed strictand specific measures.

Chitranshul Sinha's eminently readablebook traces, with deftness and well-craftedprose, the history of the law of sedition inIndia. Starting with the historical origins ofthe crime of sedition and then tracing itsapplication through the freedom struggle topost independent India and on to recenttimes, the book is well researched and use-ful for both the layman and lawyer alike.

The recent conviction of Vaiko on thecharge of sedition, after the book was writ-ten, will no doubt re-open the debate onwhether sedition should remain on thestatute book or not. However, as the authorshows us, this is not a new debate, and wasa problem with which the ConstituentAssembly members had grappled. Ofcourse, many members of that body werevictims of this law themselves and theirantipathy to this restriction on free speechwas quite understandable. The authorshows how the original text of Article 19,dealing with freedom of speech containedsedition as a restriction on this fundamen-tal right. After a debate that lasted overseveral days, seditious speech was droppedas a restriction on the freedom of speech.As the author notes, at this stage Section124A should have been declared void byParliament, which, however, never hap-pened.

While almost half the book deals withthe origins of the law of sedition, and thefamous trials under that law in the pre-independence period such as the Jugantarcase, and the trials of Lokmanya Tilak, it isthe second half of the book that is of greaterinterest. After all, how could a repressivecolonial law, designed to restrict free speechand the demands for equality and self-determination, be justified in independ-ent India, where the right of freedom ofspeech was guaranteed under theConstitution? And that too when thefounding fathers of the Constitution hadspecifically deleted seditious speech as arestriction on that freedom?

In exploring this aspect of the law, theauthor takes us through the judgments ofvarious high courts and the Supreme Courtand the constitutional amendment thatled to the insertion of the words “reason-able” in conjunction with the restrictionsplaced on the freedom of speech, thus giv-ing the crime of sedition a second life.

The problem with laws in India is morein implementation, than the law itself.

Section 124A is no different. Although thelaw is very clear that prior sanction of theCentral or the State government is a mustwhen charging a person with sedition, theauthor shows how the section is used arbi-trarily, without any reference to the law oreven the parameters laid down by theSupreme Court.

In the chapter titled “Stories of Sedition”,the author tells us how the law has beenused to arrest Kashmiri students in Meerutfor cheering Pakistan's victory over Indiain the Asia Cup in 2014; how Aseem Trivedi,a cartoonist was arrested for publishing car-toons on a website titled “India againstCorruption”; the case of the JNU students;the case of a young lad from Kerala who didnot stand up when the national anthemwas played, and similar stories of excessiveand mindless use of the section. It is hard toimagine how some silly students cheeringfor Pakistan are a threat to the unity andintegrity of India in the manner thatLokmanya Tilak, Veer Savarkar, PanditNehru and Mahatma Gandhi were to Britishrule in India. In a bizarre application of the

law, Arun Jaitley, while he was the UnionFinance Minister wassuo moto charged withsedition for having written an article criti-cising the National Judicial AppointmentsCommission judgment of the SupremeCourt. Mr Bumble, in Oliver Twist, was per-haps quite justified in saying that “If the lawsupposes that then the law is an ass”.

As the author points out, with the abo-lition of sedition and seditious speech as acrime in 2009 in UK, on the reasoning thatit had a chilling effect on free speech, it ishigh time that the same course was adopt-ed in India as well.

The front page of the book carries aquote of Justice D Y Chandrachud —“TheConstitution fails when a cartoonist is jailedfor sedition.” Apt words indeed

The reviewer is a lawyer practising in Delhi

Projecting a pipeline

Union Finance Minister Nirmala Sitharaman'srecent announcement of a ~100 trillion toinfrastructure development heads down awell-worn path. Like past attempts to address India'sinfrastructure deficit and provide a fiscal push to aslowing economy, it will have to reckon with a crucialquestion: where and how is the money best spent?

At the height of India's central planning excesses inthe 1960s, Milton Friedman, as the apocryphal storygoes, visited a canal construction site. On being toldthat the workers were using shovels instead of modernmachinery because the canal was a jobs programme,Friedman pointed out that in that case, the governmentshould have given the workersspoons instead of shovels. Muchhas changed since then.

A convincing body of work haschallenged the Chicago School'sstern views on government invest-ment. Economist DavidAschauer's work highlights the roleof infrastructure investment in acountry's economic growth anddevelopment, for instance. Andover the past two decades or so,the Centre and state governmentshave directed their infrastructureinvestment more effectively. Arecent report by IDFC InstituteInfrastructure Priorities for Job Creation in India pro-vides the tools to further refine investment strategy.

Factoring in economic geographies is key to cap-turing the far-reaching effects of infrastructurespending. Infrastructure needs differ depending onthe dominant economic base in a region - industry,services or agro-allied. Additionally, focusing on areasthat are poised for economic growth will give thegreatest bang for the buck when it comes to helpingfirms scale up via infrastructure investment.

Using night lights data, we narrowed down ourinvestigation for infrastructure priorities to 18 peri-urban districts across the country, that is, those thatborder a rural and an urban district. There was a spe-cific reason for this: Such areas benefit from theirproximity to the agglomeration economies of a largeurban centre but are far away enough to not be affect-

ed by the urban core's congestion effects. The report surveyed 2,500 firms in these districts

to understand how the government should prioritiseinfrastructure. Firms with varied types of economicactivity were asked to rank major infrastructure bot-tlenecks they face in their operations. Unsurprisingly,in all three regions, a number of issues related to roadswere the biggest impediments. Starting with AtalBihari Vajpayee's Golden Quadrilateral to PradhanMantri Gram Sadak Yojana projects, successive gov-ernments have recognised the economic importanceof connectivity. However, connectivity by itself is notenough. We identified specific problems with roads.

In services districts, 66 per cent offirms reported traffic jams as amajor hindrance. Poor quality ofroads stood out in industrial dis-tricts, with 70 per cent of firms rat-ing it highest. Such findings areinstrumental in having problem-specific solutions. For instance, inagro-allied districts, only 32 percent of the firms said narrow roadswere a problem but 77.5 per centidentified traffic jams as being anissue. Thus, the government couldfocus on building flyovers ratherthan widening roads in such dis-tricts to boost growth

and hence jobs. But we have identified more granular, region-

specific constraints too: For industrial clusters,wastewater and effluent treatment facilities; for serv-ices, a lack of electricity; and for agro-allied, inade-quate water supply. Electricity is particularly impor-tant as an infrastructure impediment — the mostimportant overall after roads, in fact. And just likeroads, the specific issues to do with electricity varyacross regions. Contrary to popular perception, pow-er cuts are secondary constraints for agro-allied andservices firms. They suffer more due to high prices.This insight is crucial for directing electricity infra-structure provisioning and price reforms.

The direct effects of providing such infrastruc-ture would be quite visible — better connectivity,more efficient firms and increased direct employ-

ment for people building it, among others. The indi-rect and induced effects on the economy — such asincreased productivity, changes in gross valueadded and induced employment creation - are moredifficult to quantify as the causal effects are difficultto isolate from each other.

That said, we have devised a model for the datacollected from the survey and found a substantialchange in induced employment when the same infra-structure is built in different economic regions. Firmswere asked to estimate the cost savings that arosefrom solving the infrastructure constraints. Thesefigures were then compared to the current labourinvestment of the firms (captured in the survey) todetermine the increased investments in employ-ment. For every 10 per cent increase in savings due toimprovement of roads, there is a varied impact onemployment in different regions — 1.9 per centincrease in agro-allied regions, 3.7 per cent in indus-trial and 5.6 per cent — in services regions.

Within the regions, too, infrastructure has a var-ied impact. In industrial clusters, for instance, a 10per cent increase in the costs saved by firms due tobetter roads would lead to a 3.7 per cent increase inemployment. However, the same 10 per centincrease in costs saved due to upgraded wastewatertreatment infrastructure would lead to a 2.9 percent change in employment. Thus, it is important toestimate the diverse impact of infrastructure beforeprovisioning for it.

India's jobs scenario seems to perpetually teeter onthe edge of a crisis, with one million people enteringthe job market every month and not enough employ-ment opportunities to absorb them. At such a time, adirected approach for prioritising infrastructureinvestments that will induce wide-ranging employ-ment growth is essential. And on the growth front, thecurrent slowdown makes it all the more important thatthe planned fiscal push is well directed.

The right infrastructure, after all, can drasticallychange the way businesses function and labour movesfor the better. In the coming months and years, theCentre and states would do well to keep this need forstrategic infrastructure provisioning in mind.

Writers are associates at IDFC Institute, Mumbai.

THE GREAT REPRESSION: The Storyof Sedition in IndiaChitranshul Sinha280 pages; ~499

BOOK REVIEWJAYANT TRIPATHI

OPINION 11> STAY INFORMED THROUGH THE DAY @ WWW.BUSINESS-STANDARD.COM.

Volume XXIV Number 34

MUMBAI | TUESDAY, 1 OCTOBER 2019

Creating jobs with infrastructure investment

One way of helping project finance revive in India is bydemystifying risk — and the government has just taken a useful step in that direction

HARSHITA AGRAWAL AND PRAKHAR MISRA

POLICY RULESMIHIR SHARMA

Sticks, stones and seditious words

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