Ache Din: What Indian Governments Should Do

Political parties in India have coined aspirational slogans extending from “Roti, Kapda & Makaan”, “Garibi Hatao” & “Bijli, Sadak, Pani” to “Poribortan”. Unfortunately, they have remained mere slogans, for even 68 years after Indian Independence, "Garibi" (poverty) remains widely entrenched, with BPL (Below poverty line) figs as per the Tendulkar committee at 22% (270 million people)  & as per NITI Aayog recommendations at 40%(500 Million people), toll-ways have been erected on "Sadaks" & we “pay to use” them while uninterrupted “Bijli & Pani” remain mere pipe-dreams.  Is it not a travesty of justice that after over 6 decades of independence, we have still not taken care of people's basic necessities – the first level of Maslow’s hierarchy of needs?

Prime Minister Modi was spot on when he noted that intelligentsia & officialdom use the words “incentive” & “subvention” while talking about doles to industry while the term ”subsidy” is used for describing a similar exercise directed at the poor.  Incidentally, “incentives” are about 6 lakh crores per year while “subsidies” are around 2.5 lakh crores per annum; demands for eliminating the latter have reached a crescendo while there are no murmurs of protest against the former except from the Left parties.   It is prudent to remove both & allow direct benefit transfers (DBT) to the poor to ensure efficiency. Companies should be fine with a corporate tax rate of 25%.

But for the economic reforms of 1991 not sure if genuine transformative “Poribortan” has ever happened in India. That raises the fundamental questions: Have governments of the day not identified the real problems or have they failed in execution?  Should govt.s concentrate only on basics necessities like food, education, health, law enforcement & infrastructure & create an enabling environment for the entrepreneurial class to do the rest? Should firewalls be created between the govt. & the public sector undertakings in a bid to breed efficiency & make them compete with the private sector under strong regulatory oversight?

Listed below are suggestions against each of the verticals in deep need of surgical interventions.

Food: Public distribution system & Mid-day mean schemes were launched to ensure better nutritional intake & school attendance respectively; however both the schemes are plagued by leakages & controversies like the denial of eggs to school children in MP. With Aadhar in place & bank account seeding gaining momentum, is it not time to scrap the public distribution system & ensure monetary transfers to citizens so that people below the poverty line can buy goods of their choice at market determined rates?

This move shall eliminate leakages & remove market pricing disruptions inherent in the current subsidized model. Furthermore, it shall relieve the Food corporation of India from making further investments in developing storage spaces, leading to huge financial savings; economic waste due to rot of grains stored in open spaces – currently sold at huge discounts to breweries – is also eliminated. While India has been maneuvering to thwart the current pressures at the WTO to curtail food subsidies, it is prudent to get ready for any eventuality. 

Education: All governments since Nehruvian times have paid excessive attention to higher education at the cost of primary education, despite the acknowledgment that democratization of knowledge, starting at the primary schools is the most liberating affirmative action possible. Creation of more IITs, IIMs, AIIMs etc., garners more eyeballs but the woeful shortage of teachers in primary schools doesn’t.  It doesn’t behove well of the legislature to pass the RTE (Right to Education) bill & not force the executive to evolve a time bound plan to have primary school infra with a purported intention to have 100% literacy in a decade’s time.

While the fibre optic backbone in the country is being laid to touch 2.5 lakh villages the plan for “Digital India” would fail without adequate attention to primary education.

Health: Against the WHO mandate of 100 doctors per lakh of population India has 60. Shortages ensure that PHC (Primary health centres) are either un-manned or plagued by absenteeism, prompting a diversion towards private practice.  This partially explains the increase in “medical debt” in India. Health insurance penetration in India is low & the insurance based healthcare model in the US & the debate on Obama-care is the right time to evaluate our own policies.

India produces about 50,000 doctors annually, the highest in the world, but inadequate still to meet our needs. The output is equally divided between the private sector & the govt. sector which the south accounting for 44% of the output.

Capitation fees in private hospitals range between 0.5 – 1.5 crores & 25000 seats accrue about Rs 25000 crores annually & therefore vested interests abound. Supply side measures to increase output to a lakh per annum would help eliminate capitation fees & push the doctors to establish practice in rural or rurban areas.  This is a better measure than imposing penalties on recalcitrant doctors unwilling to work in rural areas, post passing out – although they sign a bond before taking up their courses. Converting district hospitals into medical colleges is a low cost option to increase supply.

Transport: Another sector plagued by a flawed govt. policy is transport infrastructure. While private sector participation in shipping & airlines is welcome, not sure if inviting participation in roadways with its attendant toll-ways is a viable solution considering the huge public backlash that it is inviting; the Raj Thackeray sponsored attack on toll-ways during the last Maharashtra elections being a case in point. The political class which has formed these rules flouts them with impunity; Vittal Radaddiya, in Gujarat, brandishing a rifle & ransacking a toll-way for demanding payment of toll is a fine example. The govt. should be prudent in taking the onus on itself of providing basic infrastructure like roads & environmentally conducive ones like Metro rail - where the private sector is loath to invest due to the long gestation periods involved.

Law Enforcement: Similarly, against the UN norms for police which is 222 per lakh of population (PLP), India has an approved strength of 181 PLP & an actual strength of 136 PLP; total strength is about 16 lakh, short by about 6 lakhs. It is gender skewed too with only about 1 lakh women.  The figures would look worse if you remove the personnel attached to VIP security. Capacity building, therefore, is needed to lessen the workload of an over worked police force & training intensified to tackle crimes including detection of terror modules. Filling a majority of the 6 lakh positions with women would not only bring a greater gender sensitivity but also perhaps lead to more traumatized women walking into a police stations to register their complains which they are currently loath to doing, due to patriarchal attitudes.

Once boots are established on the ground the next step is timely closure of judicial proceedings. The huge backlog of over 3 crore cases – 2.6 crores in the lower courts,  44.5 lakh cases in the 24 High courts & 65000 cases in the supreme court  is partly courtesy the huge vacant positions in the judiciary which needs to be immediately addressed. While the law commission in its 1987 report recommended 50 judges per million of population, India has 19 & 25% of the positions are vacant. The govt. which is the chief litigant, accounting for about 1/3^rd of the cases, should be more prudent in its appeals. Judicial reforms are an urgent need with a time bound justice dispensation mechanism of under 3 years from the trial court to the supreme court with limits on adjournments - not more than 3 say - & postponements. Speedy justice would attract more citizens to approach the courts, thereby reducing the hold of extra judicial bodies like Khap panchayats; perhaps this is affirmative action that the country desperately needs.

The Chief Justice should proactively announce the reduction of court vacations & holidays; furthermore, if call centres can work 24X7, we expect the police department to work 24X7, why can’t we have the Judiciary too work 24X7 or two shifts - of 8 hours each - to start off?; the no of judges & lawyers can then immediately be doubled, using the existing infrastructure alone - obviating need for additional capital expenditure immediately - thereby leading to an additional employment opportunities.

While "minimum Government, Maximum Governance" is a wonderful well intentioned slogan, "Minimum Government" cannot apply to the law & order machinery since it can neither be outsourced nor privatized.

Conclusion

Attacking the basic problems in India is not only a sound strategy but a sure way to create better employment opportunities.  Only that can create an equitable society & a prosperous nation.

Movie Review: Jai Gangaajal

Prakash Jha finally falls for the lure of making a sequel, following in the footsteps of other illustrious film banners; “Jai Gangaajal” is a sequel to “Gangaajal”, an immensely popular & successful film released in 2003. The chief protagonist in both the cases is a SP; while Ajay Devgan was the lead actor in the earlier movie, it is Priyanka Chopra’s turn, this time, to don the police uniform. While the prequel was inspired by the acid blinding incident, at Bhalagpur, in the 1980’s the sequel appears to be inspired by the land right agitations across the country & the hangings of Badaun. Both the movies strongly advocate redemption through police reform, inspiring leadership & the reestablishment of the rule of law.

Manav Kaul (Babloo Pandey) is the don of Bankipur & the local MLA too & Murli Sharma his chief effeminate henchman. Manav’s brother, Ninad Kamath (Dabloo bhaiyaa), who fancies himself as “Choota Vidhayak” is a busy land shark trying to usurp lands of poor farmers only to hand them over to industrialists & make a killing - a common “bahubali” practice these days. Without the concurrence of the local administration this is impossible & here they are helped by the local Machiavellian cop, Prakash Jha (B N Singh aka Circle babu). The world is not without idealists though; it is epitomized by Rahul Bhat - an IIT & MIT Phd graduate  who has decided to relinquish his luxuries & fight for the downtrodden poor peasants - & the local SP - keen to establish rule of law.

The local SP who dries to discipline B N Singh is transferred & in his place is airdropped Priyanka ( Abha Mathur) by the Minister (Kiran Karmakar)  who intends to support the industrial group, Samanta, to set up a thermal power plant in Bankipur in lieu of political funding to achieve his Chief Ministerial ambitions. He has for long been the benefactor of Priyanka & her family since her father’s death & therefore believes that Priyanka would do his bidding. Alas, he is proved wrong for she is shrewd & duty bound & makes a nice case of separating personal indebtedness from discharging of official duties. The movie is the journey of the Quantico star in disciplining the police force, taking the battle into the don’s den & finally getting him convicted.

The movie weaves together all the contemporary burning issues: usurpation of land rights by the land mafia, farmer suicides & non receipt of compensation from the government, corrupt politicians & crony capitalists, lascivious cops trying to make a killing, some idealists trying to create awareness on citizen rights & the plebeians wary of challenging authority until they reach a tipping point when they start imparting vigilante justice. Making the farmers partners in progress rather than divesting them of their lands with a one-time compensation is what the movie signals strongly.  It argues as much against corruption & cronyism as against the issue of vigilante justice personalized through the slogan "Jo janta ko lootega, uska suicide!". Restoration of rule of law is strongly urged.

The movie is also an ode to the role of leadership in transformation. While a lady is being molested the police are silent spectators till Priyanka bashes the baddies nudging the cops to announce their transformation. “Aaj aap humey mard bana diye hai, hum toh soche thhey ki hum napunsak hi mar jaayenge” says one of the cops. Perhaps, individual corruption & cronyism is out of systemic compulsion & not personal choice.

Prakash Jha excels as the quintessential evil, corrupt police officer who later reveals his latent love for the uniform; his calm demeanour, evil smirk & swagger would put many of the mainstream actors to shame. His voice modulated to remind one of Nana Patekar in his hey days, is a delight.  Priyanka, though, is a let-down for her fails to add variety to her performance; as an example in all the scenes on getting out of her police van, she removes her shades in the same kneejerk fashion & throws them in. Style & panache makes an actor & a bit of variety is always welcome & hyperbole is acceptable; ask Rajnikanth. A kick ass role it was meant to me but she is unimpressive in the action sequences. She is a good dancer though & it is a pity that this talent of hers is left unutilized. Perhaps, a romantic track between Priyanka & Rahul would have helped showcase her better & add masala to the movie to cater to the mass audience. Manav Kaul too is a let-down while Rahul excels in his brief cameo. 

The storyline is decent & the editing is taut & the 158 minutes movie is definitely racy. But the lack of good music is a dampener. The lingo used in the movie is earthy with dialogues like “aap to koi galat misguide kiya hai” or “madam sir” while referring to a superior, eliciting some sniggles. Sadly, it lacks the moral & emotional depth of its prequel Gangaaajal & that is its undoing. Watch the movie after tempering your expectations.

Union Budget 2016-17

Arun Jaitley presented his 3^rd budget – a “purposeful” one - today &, perhaps, his best till date; “big bang” it was not & hence comparison with Manmohan Singh’s budget of 1991 or Chidambaram’s “dream budget” of 1997 would be odious. A “Thomas Piketty” budget it was widely assumed to be but finally turned not. Sekhar Gupta in an article in the Business standard calls Modi a reformer who believes in improving efficiency of the govt. & not necessarily a true liberalizer; perhaps, that description is apt & his imprint on the budget is obvious.

The street, though, was delighted that Fiscal deficit was pegged at 3.5% next year, as committed in the roadmap unveiled last year. The bond market is relieved & there are now rising expectations of a rate cut from the RBI. While 4 rate cuts, cumulating 125 basis points were announced, in 2015, only 50 basis points are transmitted till date. Deposit rates which were 50 basis points higher before the first rate cut are 75 basis points higher now & lending rate spread has increased from 200 basis points to 275 basis points.  Spread between the 91 day T bills & the repo rate dropped after the first 3 rate cuts but has reversed after the Oct cut; call rate which was below the repo rate after the first 3 rate cuts too & this too is now threatened. Easing of liquidity, therefore, is a better strategy & the RBI governor should be allowed to have his way.

The Monetary policy committee which is being pushed, through, envisages clipping of the RBI governor’s wings & providing a greater leeway to the govt. to push through its agenda. It would be interesting to see how this transition plays out. The FRBM review however is in order. 

FRBM mandates state debts to be restricted to 3% of GSDP. Since electricity reform under “UDAY” involves states taking over bad debts of discoms on their books, FRBM targets shall be breached. With states like AP asking for either the “special status” promised in the reorganization act to be implemented or be allowed greater FRBM leeway, a review was necessary. This also means that the central govt. is preparing grounds for loosening the fiscal deficit target for FY 2017-18 -  ordained at 3% - in the financial sector road-map unveiled some years ago. One only hopes that it will not lead to greater fiscal profligacy though.

India is growing at 7.6% with a Consumer Price Inflation (CPI) rate of 5.4%. Exports have dropped by 18% this year & a 14 month sequential fall is unprecedented. The external situation is expected to remain tense with the world economy poised to grow by 3.1% only.  While remittances to India have not dropped last year despite the turbulence in the Middle East one cannot expect that to continue; an oil price drop bonanza similar to the last 2 years is again unlikely. Against this background priming the economy to generate internal demand is an urgent need which the FM has attempted to do within the fiscal constraints imposed by largely concentrating on the two largest employers – agriculture & Construction.

The lack of aggression from the FM on driving revenues though is surprising. The budget figs target a nominal growth in taxes of 11.8% & assuming an inflation of 5% - which the RBI is mandated to achieve by Jan 2017 - translates into a real growth rate of 6.8% only. A more aggressive disinvestment target with the proceeds flowing into an SPV to be used entirely for capital investments would have been a more nuanced political & economic strategy.

Revenues

Annual Budget for the year 2016-17 is pegged at 19.87 lakh crores with 16.31 lakh crores in taxes - of which only 10.6 lakh crore accrues to the centre. Total receipts are 16.32 lakh crores of which 5.71 lakh crores are non - tax revenues.  Revenue deficit is therefore3.54 lakh crore.  The non-tax revenue surge is proposed largely through spectrum auctions which have been budgeted at 0.99 lakh crores – 0.40 lakh crores over last year.

Planned expenditure is 5.5 lakh crore & non planned 14.28 lakh crores. The demise of the planning commission was announced in 2014 & the death of the planned / non planned expenditure this year – 2016-17 being the last year of the 12th five year plan.

Against a BE 2015-16 on tax revenues of  14.49 lakh crore, 14.59 lakh crore is the RE, driven largely by a 50.5% surge in excise due to increase in taxes on oil & introduction of swatch bharat cess; such a bonanza is unlikely this year.  Direct taxes - both corporate taxes & Income tax  - targets for the current year were not achieved & it is unlikely that the targets for next year would be achieved either.  While service tax has surged 25.7% this year a more modest 10% growth has been targeted next year; perhaps this will be breached. Service tax & additional taxes vide the tax dispute resolution mechanism would provide some cushion to the FM to generate further revenues.

Tax disputes amounting to 5.5 lakh crores are pending; perhaps the FM is counting on at least 20% of those disputed amounts to flow in this year. The retrospective tax issues that beguiled companies like Vodafone, Crain etc. has now been addressed by proposing a waiver of interest & penalty in lieu of payment of the disputed tax amounts & closure of arbitration proceedings – a proposal initially made by Chidambaram some years ago. While these announcements now are welcome, Jaitley could have announced these proposals in his first budget itself; reversing the “retrospective’ tax to a “prospective” one would have sent the right signals.

Expenditure

The FM has proposed pump priming the economy through an investment of 2.18 lakh crores – 0.97 lakh crores in roads & 1.21 lakh crores in railways. However fine print reveals that of the 1.21 lakh crores, gross budgetary support is 0.45 lakh crores only – higher by 0.13 lakh crores over RE. Of the 0.97 lakh crores, 0.55 lakh crores is the central contribution – 0.30 lakh crores over RE - & 0.19 lakh crores flows through the Pradhan Mantri Gram sadak Yogana. Since 0.15 lakh crores is proposed to be raised through NHAI bonds & the rest is the state govt. contribution, central contribution is 1.2 lakh crores only.

Since urban demand is decent while rural distress is palpable, NREGA has been revived with a proposed spend of 0.38 lakh crores. Perhaps, the PM who announced on the floor of the house that he shall keep NREGA alive as a living monument of the UPA’s failures is retracing his objections.

Expenditure shall be higher than the projected figs. Against a fig of 1.18 lakh crores in food storage for the year 2014-15 & 1.4 lakh crores for 2015-16, only 1.38 lakh crores is budgeted for 2016-17. Unless backed by a fool proof scheme on subsidy reduction through DBT transfers, this target shall be breached.  Likewise, the 7^th Pay Commission recommendations do not seem to have been factored into the budget although 0.65 -0.68 lakh crores is reported by TV channels as unofficially claimed by the govt. sources to have been included; OROP through has been included to avoid any controversy.

Individual & Corporate expectations belied

Since last year’s budget proposed an incremental reduction of the corporate taxes to 25% with a concurrent reduction in exemptions, a 1% drop from 30% to 29% was expected this year which was belied since it would lead to a 0.15 lakh crore dip in corporate taxes. The benefit was restricted to companies with a turnover not exceeding Rs 5 crore in FY 2014-15. New manufacturing companies incorporated on or after 1.3.2016 were given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

It would be prudent for FMs to think through consequences before making promises & if made to stick through the roadmaps for the sake of maintaining credibility. Likewise, when the talk is about removing exemptions, extending the Benefit of section 10AA to new SEZ units which commence activity before Mar 31^st 2020 is abhorrent; it would be interpreted as a measure to boost exports though.

100% FDI in food processing sector though is welcome as much is the 10% rate of tax on income from worldwide exploitation of patents developed and registered in India by a resident. Determination of residency of foreign company on the basis of Place of Effective Management (POEM) is proposed to be deferred by one year while the commitment to implement General Anti Avoidance Rules (GAAR) from 1.4.2017 is on, which marks some consistency.

Infrastructure cess, of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles & SUVs is an environmentally conscious choice as is doubling the coal cess to Rs 400/- per tonne which would involve a 0.12 paise per unit increase in electricity costs as per Piyush Goel.

Individual tax payers were harried since they were not rewarded with an increase in tax slabs perhaps with an intention to increase the direct tax payer count which today is abnormally low; a minor benefit of a tax rebate of Rs 5000/- against Rs 2000/- earlier, for income upto 5 lakhs was announced this year.  Similarly, a deduction of Rs 60000 against Rs 24000 earlier for people living in rented houses was also announced. Together they account for a benefit of Rs 6600/- in the lowest tax bracket & hence is unlikely to enthuse the middle class.

In case of superannuation funds and recognized provident funds, including EPF, the norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made on or from 1.4.2016 – like NPS – through logical could cause employee angst.

DDT (dividend distribution tax) at the rate of 10% of gross dividends in excess of Rs 10 lakh per annum  is equitable as is the surcharge of 15% - increased from 12% earlier - on persons, having income above Rs 1 crore. This segment will also be hit by the TDS of 1 % on purchase of luxury cars exceeding value of Rs 10 lakh and purchase of goods and services in cash exceeding Rs 2 lakh.

Stock Markets

The stock market was spooked by rumours – before the budget - of an increase in the LTCG (Long term capital gains) on listed securities from 12 months to 36 months in line with the same change incorporated for unlisted securities last year. Non announcement of the same provided relief to the market but the long term definition for unlisted securities was reduced to 24 months, perhaps, as intimation that a similar treatment awaits listed securities next year.

The increase in STT on future options from 0.017% to 0.05% was however a surprise.

Disinvestment

Renaming the department is a precursor to some proposals on divestment translating into investments elsewhere. However divestment proceeds have trended between 0.14 – 0.25 lakh crore during the last few years – against much higher targets - & the general feeling is that it could be no different this year. However, with RFP for IDTC hotels, supposedly, raised & the FM sneaking through a proposal of reducing the stake on IDBI to less than 50% one has reasons to be optimistic.

There are 235 CPSE of which only 44 are listed and account for 12% of market cap. Value unlocking can be achieved through listing & a start is being proposed for listing the general insurance firms. Perhaps, more would follow in due course including LIC – making disinvestment targets a cakewalk.

Banking

While the street was disappointed with the capital infusion of 0.25 lakh crores only, it was consistent with what the govt. promise under project” Indradanush” & sticking to a promise needs appreciation. Either the FM could have infused more funds into the banking sector & expected them to lead the charge on economic revival or do it himself through infra spends; he has wisely decided on the latter since the private sector – plagued by excess capacity in many sectors – is unlikely to have taken advantage of more liquidity in the banking sector; likewise infra companies reeling under huge debts & stresses assets would be loath to take advantage of a more liquid banking sector.

With a Bank board under Vinod Rai appointed, a more comprehensive strategy of revamp would be underway.  Passage of the insolvency & bankruptcy act would aid recovery. While amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non institutional investors to invest in Securitization Receipts has been announced it might not help for none in the PSU banks would sell assets at a discount to an ARC & risk incurring charges of corruption later. While there are plans afoot to redraft the prevention of corruption act (PCA), the “twin balance sheet” problem can only be addressed in the medium term.

Conclusion

Freeing the passenger transport sector from constraints, incentivising gas discovery and exploration & providing a legal framework for dispute resolution and re-negotiations in PPP projects and public utility contracts are welcome measures. Likewise, GoI's proposed contribution of 8.33% for of all new employees enrolling in EPFO for the first three years of their employment is a better directed incentive to boost employment as compared to  offering geography or industry based exemptions. Model shops & establishments bill advocating shops remaining open, 7 days a week, through advisory in nature, is transformatory. The task force constituted on rationalisation of human resources in various Ministries if successful would lead to “minimum government, maximum governance”. Likewise, the launch of a pilot on DBT on fertilizers announced could be a medium term solution to harness the fertilizer subsidy of 0.70 lakh crores & automation facilities to be provided in 3 lakh fair price shops by March 2017 could end pilferage & the menace of bogus customers

Therefore though the overall budget seems lacklustre at first glance it could still be retrieved though better execution of the proposals listed. The key to economic revival is the new policy for management of Government investment in Public Sector Enterprises, including disinvestment and strategic sale. Hope that fructifies.

Railway Budget 2016 -17

Post presenting an impressive medium term “Strategy budget” last year, Suresh Prabhu’s 2^nd railway budget, was “workman like” without any “fare increases” to the delight of the common man. Do not however be surprised if tariff increases become a non - budget feature; premium pricing for select services is a strategy already adopted.

The announced plan to set up a Railway Planning & Investment Organisation (RPIO) for drafting medium (5 years) and long (10 years) term corporate plans & a National Rail Plan’ (NRP-2030) was surprising; wasn’t a “medium term plan” launched last year? Will RPIO plan operationalization of those plans?

“It is an infrastructure-led and employment-generating budget.” said PM Modi while Dinesh Trivedi felt that “It doesn’t have any vision,” Reality, as usual, lies between these two extreme views.

Budget speeches should focus on the macro picture rather than dwell on operational issues on how many bio toilets shall be installed, what food items shall be provided in the menu et al. However, Intention to improve “customer experience” is always welcome.

The Minister avers that Rs1 invested in national railways leads to Rs. 5/- increase in national output; transformation of railways & making it the driver of national growth is therefore a natural corollary.  He will however be constrained by the 7^th pay commission pay-outs & the headwinds of a tepid industrial demand effecting freight receipts. Railway Model share dropping from 46.6% in 1980 to 36% in 2012 is therefore a cause for concern especially when it accounts for about 2/3^rd of revenues.

Railway Revenues.

Against the Budget Estimates (BE) of revenues for the year 2015-16 of Rs. 1.83 Lakh crores, IR has achieved 1.67 lakh crores with BE of freight receipts being Rs. 1.21 Lakh crores & Revised Estimates (RE) 1.11 Lakh Crores.  Freight & passenger revenues were 50% each in the mid 70% & it is prudent to revert to such levels, although analysts would interpret it as political hara-kiri.

However, Prabhu has pegged the revenue target, for 2016-17, at a modest 1.84 lakh crores, freight at 1.17 Lakh crores, Passenger revenue 0.51 lakh crores, coaching Rs. 0.06 lakh crores & sundry receipts Rs. 0.09 lakh crores.

IR though has done well on expense reduction. Against a BE of 1.19 lakh crores on expenses the RE  are Rs 1.10 lakh crores achieved through inventory management & austerity measure which include controlling variable costs &  contingent expenses. Expenses though have been conservatively projected at 1.23 lakh crores with pensions for the 13.79 lakh retirees increasing from 34500 crores to 45500 crores. While Ordinary Working Expenses (OWE) grew by 32.5% in 2008-09 due to the impact of the 6th Pay Commission pay-outs, restricting it to 11.6% for 2016-17 is ambitious; expenses in all likelihood shall be higher leading to a worse operating ratio.

Against a targeted operating ratio of 88%, RE are 90% for the year 2015-16 & are budgeted to deteriorate further to 92% for the year 2016-17, worse than the 2014-15 fig of 91.3%.  Clearly IR is in distress & in deep need to raise the top line. Non - tariff strategies is the long term solution to address railway woes.

Non - tariff strategies

Prabhu plans to increase Non - Tariff revenues from the current 5% of revenues to 10-20% in the medium term by monetizing the traffic on the IRCTC website, exploiting advertising potential of trains, stations & land tracks & also partaking in e-commerce. Catering business of IRCTC is also being strengthened by extending e-catering services from existing 45 large stations to all 408 ‘A-1’ and ‘A’ class stations & segregating food production & distribution. With digitalization of railway land done, monetization through horticulture and tree plantation & solar energy generation is planned which shall also address the problem of encroachment.

Current parcel policies would be revised to open the sector to container train operators to effect a quantum jump in IR’s share of the national CEP (Courier, Express and Parcel) market. IR also plans last mile logistics, perhaps, with an intention to re-deploy some of its excess manpower into a high rise sector especially when retrenchment is a hot potato that no political party can attempt.

IR also plans monetization of data pertaining to passenger preferences, ticketing patterns, commodity flows, train running and information on various services and operations without compromising on customer privacy. However all these are medium term strategies & tariff shall continue to be the short term revenue driver.

Tariff Strategies

Dinesh Trivedi – the Railway Minister during the UPA regime - had critiqued last years’ freight price rise & had advocated a tariff drop to increase model share which the Minister seems to concede now when he says “current tariff structure of IR has led to out-pricing of our services in the freight market.” He has announced rationalization of tariffs, appointment of Key customer managers to liaise with major accounts & “evolve a competitive rate structure vis a vis other modes, permit multi-point loading/unloading and apply differentiated tariffs to increase utilization of alternate routes. The possibility of signing long term tariff contracts with our key freight customers using pre-determined price escalation principles will be explored which would provide predictability of revenues to IR and of costs to our customers.”

For the reserved passenger three select train services – Humsafar, Tejas and UDAY have been announced to ensure cost recovery by way of tariff and non-tariff measures. While Humsafar would be fully air-conditioned third AC service with an optional service for meals, Tejas, will showcase the future of train travel in India. Operating at speeds of 130 kmph and above, it will offer onboard services such as entertainment, local cuisine, Wi-Fi, etc. Overnight trains, Utkrisht DoubleDecker Air-conditioned Yatri (UDAY) Express - with the potential to increase carrying capacity by almost 40% -shall be introduced. Clearly, premium pricing is the route Prabhu is exploring to shore up passenger revenues apart from tightening Tatkal ticketing to remove disintermediation.

Additional revenue streams

88% of the current freight receipts are from 10 bulk commodities only & IR, therefore, has decided to expand the freight basket. Rationalising the tariff structure and building terminal capacity apart from creating a rail auto hub in Chennai to capture automobile traffic is planned.

Action plan is to capture traffic through either containerization or new delivery models e.g., Roll-on Roll-off & to run time-tabled freight trains; a time-tabled freight container, parcel and special commodity trains on a pilot basis. Container sector would be opened to all traffic barring coal and specified mineral ores and part-loads would be permitted during the non-peak season & all existing terminals/sheds would be granted access to container traffic, where considered feasible.

10 goods sheds shall be developed by Transport Logistics Company of India, to create a paradigm shift in IRs role as a national logistics provider. This shall have a cascading effect for rail side warehousing would also encourage development of cold storage facilities on vacant land near freight terminals.

Plan size

Against a plan size of 1 lakh crores last year Prabhu has projected a fig of 1.21 lakh crores this year. Unlike a GBS (gross budgetary support) of 0.40 Lakh crore & an actual of 0.32 lakh crores for the year 2015-16, budgetary support for the current year is 0.45 lakh crores. With 1.5 lakh crores promised by the LIC for the next 5 years, we can reasonably expect about 0.30 lakh crores to flow in this year. Expecting actual GBS to be 0.40 lakh crores & combining that with the LIC’s largesse still leaves a gap of 0.5 lakh crores to be filled,  which the Minister has planned through formation of joint ventures with states, development of new frameworks for PPP, scouting international markets for Rupee bonds by multilateral and bilateral agency engagement or co building of assets with the help of Ministry of coal, NTPC SAIL etc.

Partnerships have received in principle approvals from 17 states, out of which 6 MOUs have already been signed & this year 44 new partnership works are indicated covering about 5,300 kms and valuing about Rs. 92,714 crore in the Budget documents.  Assumption that these projects shall be completed in 3 years, adds 0.30 lakhs crore as capital expenditure per annum. With 124 MPs already contributing MPLAD funds & some CSR contributions, it is reasonable to assume that Prabhu shall achieve his target.

Increased Rail speeds & Capacity

Building on the plan announced last year of raising speeds of freight trains to 75 Kmph & empty freight trains to 100 Kmph & passenger trains to 160-200 Kmph, the current budget announces modest target of 50 Kmph & 80 Kmph respectively for the current year; the plan is to eventually double freight speeds & increase passenger train speeds by 25 Kmph in the next 5 years. Surely, Prabhu is realizing what he is up against & advocating a more nuanced strategy of incrementalism.

Increased speeds calls for decongestion of existing high traffic tracks which dedicated freight corridors can address. Prabhu has announced Dedicated Freight Corridor project contracts worth Rs. 24,000 crore on the Delhi - Mumbai & Delhi - Kolkata routes apart from a plan to have additional corridors: North-South connecting Delhi to Chennai, East-West connecting Kharagpur to Mumbai & East Coast connecting Kharagpur to Vijayawada. This is indeed a welcome step although the timelines for closures are humongous when compared to neighbouring China.

Track up-gradation – a costly exercise - & employing a tech innovation of better engines or train sets is the other solution to enhance speeds.  Two locomotive factories are being built in Madhepura and Marhowra in Bihar with GE and Alstom with an order book of Rs 40,000 crore. Locomotives with auxiliary load  now being manufactured by IR will enable elimination of power cars, thereby replacing them with passenger coaches which will enhance the carrying capacity of trains and significantly reduce travel time, noise level, fuel consumption and carbon footprint.

While the last year plan was to have axle load capacity of 22.8T, this has been increased to 25T this year which is welcome with an intention to target 10-20% of traffic this year on such vehicles & increase it to 70% by 2019-20

Corporatization of railways

While the Minister did not specify quite as much, corporatization seems likely with plans to shift to an accrual based accounting from the current cash based one & a transition from single entry to double entry system to make IR accounts transparent. Plans to strengthen the Railway board & to make the Railway board Chairman the virtual head of the company by creating firewalls between the Ministry & IR would enhance efficiency. Consolidating 14 railway companies under one holding company has long term implications especially in making raising of finances easier contingent on a strong balance sheet. Introduction of a KRA system for personnel & signing of MOUs with zones is an attempt to inbreed efficiency.

If all goes as per plan, IR, perhaps, could be listed on the NSE, which will force quarterly results to be announced that shall help the company transform.

Conclusion

Prabhu is known to be an efficient technocrat minister & seems earnestly at work. While the Bibek Debroy committee’s vision was alluded to in the speech, some of the measures suggested like hiving off IR schools to Kendriya Vidyalayas, Hospitals to state hospitals, Railway protection force to CISF etc. to make IR leaner have not been implemented. That would have been truly transformational.

The Budget speech pushed further the govt. pet initiatives like “Swatch Bharat” &“Make in India” Introduction of Antyodaya Express, a long-distance, fully unreserved, superfast train service,  addition of two to four Deen Dayalu coaches in some long distance trains for unreserved travel to enhance carrying capacity for the masses, 33%  reservation benefits for women passengers & additional facilities for the elderly were perhaps an attempt to dry clean the smear of a “suit boot ki sarkar” – a legitimate political act.

Railway budgets have outlived their utility & it is time the ritual of a colonial past is put to rest. Corporatization of Railways & listing on the stock exchanges shall make announcements of quarterly results mandatory that shall help end this antediluvian exercise. Raising the 8.56 lakh crores needed for capital expenditure shall also be easier then, provided the balance sheet is transparent & healthy. Hopefully, the Minister is working on this objective.

Indo Pak Relations: The Sartaz Aziz Interview

Karan Thapar’s interview with Sartaz Aziz, the foreign affairs adviser to the Pak PM, Nawaz Sharief aired on India Today TV this week was insightful. It is reasonable to deduce the following takeaways from the interview

(1)Aziz revealed that Mazood Azhar – the Jaish e- Mohammed Chief & the Pathankot attack accused – was under detention.  When probed further he gave an evasive answer that it was as stated to him by the concerned agencies. 

Aziz was the NSA (National security adviser & Foreign affairs adviser until Oct 2015, when his wings were clipped at the Army Chief Raheel Sharief’s insistence & General Janjua was appointed in his place. Perhaps this was a way of punishing him for the Ufa Statement bungling where the K word went missing. The Pak Army clearly wants to have control over foreign affairs & would protect strategic non state assets like JeM - created & nurtured by the ISI. Therefore it is reasonable to assume that Aziz is not sure about Azhars status; his statement is a mere parroting of an official doctored line.

(2)The Indian Defence Minister, Manohar Parrikar, during his interview with Thapar about a week ago stated emphatically that the Pak team constituted to investigate the Pathankot  attacks would not be allowed entry into the same military premises come what may. Aziz however avers that the Indian side is open to a visit to the location. Clearly one of them is clueless.  If it is the Indian Defence Minister, it is definitely a cause for worry.

(3)Aziz insists that Pak has asked for additional evidence, in Sept 2015, for expediting the 26/11 Mumbai attack case against Lakhvi but there has been no response – despite reminders - from the Indian side till date. Is that the reason the Indian state has shown enormous alacrity in pardoning Headley in lieu of turning approver in the case?

(4)Even if the above were true, Headley’s disclosures to Indian Courts are not new - known as they were to US & Indian authorities long ago - & has no evidentiary value in a Pak court especially when Aziz is convinced that the statements of a “double agent” cannot be believed. He categorically asserts that Headley would not be called in by a Pak court to record his statements either.  He is equally evasive on trying Lakhvi under the Military courts of Pak - created under the 21^st constitutional amendment in Jan 2015 - which means that Lakhvi shall never get convicted.  The rants on national TV that Pak is not doing enough shall be our only consolation.

(5)From Aziz’s statements it is clear that Pak is keen to steer the discourse away from terrorism – which India is interested in solely - to a solution on Sir Creek, Siachen & to enhance Trade. With 10 Indian soldiers dying in Siachen in Jan 2016 & 124 Pak soldiers dying in 2012 & roughly 20000 soldiers from either side perishing in the lofty snowy heights in the last 3 decades, a solution on Siachen seems achievable, provided there is willingness on both sides. However Pak insistence on the 1984 status & not the current one – since India holds a location advantage - would torpedo talks.

(6)Aziz’s exasperation on the slow velocity of talks with India is discernable & he speaks passionately about the changing world order – especially on trade & the Middle East crisis.  He is particularly concerned about the launch of the TPP (Trans Pacific Partnership) which would have an enormous effect on world trade & which could affect both India & Pak negatively & therefore calls for strengthening of SAARC as a counter which is logical.

The interview gives a fair idea on the likely issues that Pak is interested in in its dealings with India & the negotiating position on that Pak is likely to adopt in the foreign Secretary level talks. Either way any dramatic end to the current logjam in Indo-Pak relations is unlikely especially when there is a trust deficit on both sides.

The Revival Plan of The Congress Party

Not many political commentators have spoken about the “jut” or a pony tail - a Brahmanical symbol - that Rahul Gandhi has suddenly started sporting for the last few months. Is he alluding to his own Kashmiri Brahmin roots & thereby trying to dent the BJP base dominated by the Brahmin – Bania combine but is now led by OBC leaders like Narendra Modi much to the chagrin, perhaps, of the forward castes?

Juxtapose this with the Congress’ decision to have 3 forward caste members & 1 Muslim as its nominees for the 4 Ministerial positions allocated to them, in Bihar & the strategy becomes clearer. Rahul’s push for reserving 50% of the positions in the party to Dalits when combined with the above decisions indicates that the Congress think tank wants to arrive at a coalition of the subaltern Dalits with the forward castes to regain power. Rahul Gandhi’s dash to Hyderabad University post the suicide of Rohith Vemula & the protests in Delhi soon thereafter should be seen against this background.

The BSP is dominated by the Balmikis – the largest of the Dalit communities to which Mayawati belongs - while the BJP is trying to entice Pasis – the 2^nd largest of the Dalit communities; the Paswans have been the dominant Dalit force in Bihar. None of the Dalit leaders outside UP & Bihar have attempted to form a regional party & when attempted they were not succeessful; this offers a remarkable opening which the Congress seems to be trying to exploit especially when the BSP’s own influence outside UP is waning.

Rahul Gandhi’s penchant for reviving the party in UP & Bihar through a “lone furrow” - going alone strategy - has misfired while the coalition with anti-BJP forces in the Bihar assembly elections, in 2015, has been remarkably successful, giving an unprecedented electoral dividends of 27 seats of the 41 it contested; its previous best performance being 29 seats in 1995. Clearly, going forward, expect an electoral tie up with the DMK in TN & electoral understanding with the Left in Bengal for the 2016 assembly elections. While political commentators have been arguing that it shall be tricky for the Congress to ally with the Left in Bengal while being in a direct fight with them in Tripura & Kerala what is forgotten is that state level confrontations did not deter the Left from supporting the Congress during UPA 1 (2004-09). If keeping a "communal" BJP out of power was the logic then, then removing a "corrupt" TMC - plagued by the Sharada scam - & preventing the same "communal" BJP's revival in Bengal - nearly dead & dormant after Shyama Prasad Mukherjee's death in the 1950's -  can be the logic now which, incidentally, shall be palatable to the electorate too.

Congress shall also attempt to tie up with the BSP in UP for the 2017 assembly elections but do not be surprised if Mayawati rebukes them fearful as she is of her own Bahujan base getting eroded in the bargain. Electoral arithmetic indicates that a Congress-BSP tie up is a sure shot winner against the SP & the BJP whose revival post the 2014 Parliamentary elections in the largest state of the union is now part of the Amit Shah folk lore.

The BJP for long was considered to be a party restricted to the North & West with a significant presence in Karnataka in the south & attempting to grow in the NE - especially in Assam. The Congress was a Pan India party but has been losing presence gradually; it is decimated in the East & its support in TN has dwindled post the late 60’s with the growth of Dravidian parties & support for formation of the Telengana state killed the Party in AP. It is therefore only a matter of time before the areas of dominance for both the BJP & the Congress coincide. That makes coalitions mandatory for either entity to ride to power.

With the BJP’s coalition partners Shiv Sena, Telugu Desam & Akali Dal smarting under a dominant partner, the perception of a more nuanced & accommodative treatment of the allies by the Congress would offer them an opening with like-minded parties. Paradoxically, this was the strategy adopted by the BJP during the Vajpayee-Advani era when anti-Congressism was the dominant discourse.

What separates the Congress from the BJP today is the ideological cadre muscle provided by the RSS to the latter; organizational elections, decision making based on consensus & more democratic functioning have helped the emergence of state level leaders with strong political roots in the BJP which the high command culture of the Congress lacks. Working on these aspects is also critical to create a long term competitive advantage. Other strategies for revival are listed in my earlier article whose link is attached.

http://meetrk.blogspot.in/2014/12/congress-decimated-suggested-revival.html

Building a coalition of Dalit-Forward castes & agreements with like-minded allies is the sure shot route for Congress revival if coupled with organizational elections; however organizational elections are unlikely since the hegemony of the dynasty could then be challenged. That truly is disappointing.

Kashmir: Why is Mehbooba Mufti not taking over as CM?

Mufti Mohammed Sayeed – the 79 year old PDP patriarch – died on Jan 7^th 2016 & the PDP leadership quickly anointed his 58 year old daughter & party President, Mehbooba Mufti, as his successor, a transition the Mufti would have loved to witness during his lifetime. Incidentally, he attempted such a change over during Sept- Nov last year till dissent from both within the PDP & from the BJP - who view Mehbooba as less conciliatory than her father - did him in.  Against this background, Mehbooba’s reluctance to take over the CM position immediately, claiming that she was in the mourning period was perplexing. Incidentally,  the religious mourning period is for 4 days which ended on Sun, the 10th & the officially ordained state mourning period is for 7 days, ending on 13^th.

The grist of the rumour mills were kept running for the last few days on some intriguing questions: In a patriarchal society was Mehbooba planning to do a Sonia – retain the Presidentship of the Party & have her confidant as the CM? ; was the delay intended to send a signal that she is not obsessed with power; does she want to break off with the BJP & form a coalition with the Congress? ; or is she trying to extract concessions from the BJP or repulsing their demands?

The first 3 questions are easy to answer. Unlike the NC where the Abdullahs’ are masters of all they survey, there are many chieftains in the PDP like Muzaffar Hussain Beig & Tariq Karra who are influential. Against this background it is unlikely that Mehbooba would allow anyone else to be the CM, thereby creating a rival power centre; she might want to become the CM, strengthen her control both over the party & govt. & initiate some moves to regain some of the support lost by the party, in the valley, during the last 9 months. The low turnout at the Mufti's funeral buttresses the assessment of loss of support.

The last assembly elections in J&K gave rise to a fractured verdict with the Hindu majority in Jammu voting massively for the BJP, giving them an unprecedented 25 seats, while the Muslim majority in the Kashmir valley unequivocally siding with the PDP & gifting them an unprecedented 28 seats, the Congress secured 12 seats while the NC got 15 seats in the 87 member assembly.  The BJP block consisted of 28 seats: BJP 25, PC 2; & an independent 1 seat.  The consummate politician in Mufti Sayeed must have realized that the BJP in opposition would have pursued an unbridled Hindu agenda & hence needed to be tamed through a coalition on many issues including article 370; a BJP-PDP tie up was also essential to bridge the religious polarization that had emerged between Kashmir & Jammu, he must have reasoned. A revenue deficit state like J&K, always needs the support of the ruling dispensation at the centre & that must have been the final clincher in cementing the thought of a partnership despite the bitter ideological differences between the two parties.

Tariq Karra, now, is however a proponent of an alternative PDP-Congress tie up. “PDP has lost its support by tying up with a communal party. All the secular forces should unite and rise above their political positions to form an alliance with PDP” he avers. This is unlikely despite Gulam Nabi Azad spending time in the valley after Mufti Sayeed’s death & Sonia Gandhi visiting Mehbooda purportedly to offer her condolences.  If the PDP & Congress come together, they would still need the support of the 4 independents to have a simple majority in the assembly; needless to say such a govt. would be prone to blackmail & hence unstable unless supported by the NC.  The Mufti’s political journey has been marked by an anti-Abdullah family rant; therefore, while the NC offered support to the PDP earlier – an unprecedented gesture which many believe was to ensure the continuance of the power base in the valley & not beyond – Mufti Sayeed, shrewdly, had opted otherwise. Since this line of thought has not changed between March 2015 & Jan 2016 a BJP-PDP coalition is bound to continue.  A PDP-Congress tie up now would also invite the criticism that Mufti Sayeed was perhaps wrong in his political calculations earlier which Mehbooba would be keen to avoid to protect her father’s legacy. Mehbooba is however incensed that none from the BJP top brass visited the ailing Mufti in Delhi unlike Sonia who had paid a visit & waited for about 30 min for Mehbooba's arrival; such personal gestures go a long way in politics.

While there are naysayers on the PDP side proposing a rethink on the tie up with the BJP there are many in the BJP who would like a renegotiation on the “Agenda of Alliance” (AOA) & the Cabinet portfolios. In the long drawn out post-election negotiations between Jan to Mar 2015, the Mufti weared the BJP & its interlocutor Ram Madhav down, to agree for an unequal tie up:  no rotational CM’s unlike during the Congress-PDP govt. during the period 2002-08; 10 Cabinet berths for the PDP & only 6 for the BJP despite both having the support of 28 MLAs. The BJP realized its folly soon after & seems to using the current pause to correct the anomaly which the PDP is loath to concede.  If done, Mehbooba would unwittingly be perceived as “weak” squandering the gains made by her illustrious father, inviting public angst which many of her party chieftains would be keen to exploit.  The assessment that the BJP is seeking a renegotiation on the “AOA” is borne out by the statement made by the PDP ideologue Muzaffar Hussain Beigh on Friday: "the rules of the game cannot be changed midway into the game and BJP needed to stick to whatever it had agreed upon regarding the chief minister's post and cabinet portfolios"

There are others who believe that that post the Pathankot incident & the successive defeats in the Delhi & Bihar elections, the PDP perceives a weakened BJP & is keen to wrest more concessions – more development funds from the centre, climb down from the current position on the dual flag issue, uninterrupted & uninterruptable dialogue with Pakistan,  more liberty in handling the internal situation in the valley including repeal of the AFSPA, release of people like Masarat Alam, scraping the position of a Dy.CM  et al. 

The BJP got jittery post the Sonia-Mehbooba bonhomie & dispatched Nitin Gadkari to meet Mehbooba in the valley & reconciled to continue the current power sharing arrangement with its State President saying so. The PDP said on 12th  that its coalition with BJP will continue on the basis of 'Agenda of Alliance' framed by the two parties last year. The rumours are now laid to rest & the path is now set for Mehbooba to take over as the CM of J&K before the end of Jan. The reins of power slowly but surely now shift to a new dynasty in the valley.