Imran Khan & Modi: The UNGA Standoff

On 27^th Sept, Indian Prime Minister, Narendra Modi, addressed the 74th session of UNGA (United Nations General Assembly) for about 15 minutes & was followed - a few speakers later - by his bete noire, Pakistani Prime Minister, Imran Khan who consumed about 50 minutes; while the former stuck to a prepared text, the latter, went extempore – at times – leading to a faux pas of calling Modi “President”.

Modi, reminded the audience of the 150^th anniversary of Mahatma Gandhi’s birth, that falls this year, Swami Vivekananda’s Chicago address of “Harmony, Peace & No Dissension”, in 1893, in the World’s Parliament of Religions, Indian contributions & sacrifices to UN Peacekeeping forces & the fact that India gave the world Buddha & not wars to buttress India’s peaceful credentials. Perhaps, this was in anticipation of Khan’s likely diatribe on India destabilizing the region & inching towards war. Invoking a Tamil poet, Kaniyan Pungundranar, was as much for his message as to soothe the domestic constituency of non-Hindi speaking Indian states’ concerns, on Hindi imposition, post Amit Shah’s controversial national language call on Hindi day.

Modi recounted his achievements since 2014, when he was first elected: 110 million toilets; 5 lakh insurance cover under a universal health scheme; 370 million new bank accounts; bio-metric, digital identification system & saving of over $20 billion thereof as reasons for his re-election vide an increased mandate, in 2019, & his intention of providing 150 million households with safe tap drinking water & building 0.15 million kilometer roads, during the next 5 years. This appeared more a nudge to the world to accept him as a representative of the world’s largest democracy, perhaps, expecting a personal attack from Khan vide invocation of the Gujarat riots, of 2002 & an attempt at besmirching his reputation thereof. Had Modi invoked the 17 “Sustainable Development Goals (SDG) passed by the UN, in 2015, to be achieved by 2030, as a prefix to his laundry list of achievements, he could not have invited charges of self aggrandizement.

Modi mentioning India's leadership in launching a “International solar alliance” & “Coalition for International Disaster Resilience Infrastructure” were apt, though - a soft push for gaining membership at the high table. He emphasized on the need to tackle "terror" even while avoiding naming Pakistan.

Khan focused on 4 issues: Climate change; siphoning off of money by Pakistani elite & the need for an international alliance to reduce money laundering; Islamophobia & Kashmir. He traced the genesis, of Islamophobia, to 9/11 & the marginalization of Muslims thereof; suicide attacks was largely practiced by "Hindu" Tamil Tigers in Sri-Lanka & the Japanese Kamikaze pilots during WWII earlier, he reminded & pleaded sensitivity in references to the Prophet ala "holocaust" references in Europe.

Khan claimed victimhood - loss of 70,000 lives, in his country, due to war on terror, post 9/11 & argued that the “West especially US” funded “Freedom fighters” in Afghanistan whom the Soviets called “terrorists” basically underscoring that one country's "terrorists" are another country's "freedom fighters"; he emphasized that terror groups have been dismantled in his country & invited UN observers, to Pakistan, for verification - a step clearly aimed at escaping the FATF (Financial Action Task Force) sanctions; the UN would be better advised holding him to his promise & calling his bluff. Though blaming the "West" for Pakistan's Jihadist policies, would definitely invite some rebuke - from those at the receiving end - it appears strategically aimed to invite smiles in China & perhaps Russia too.

Showcasing himself as a dove, Khan recalled that while Pakistan downed 2 Indian planes during the Pulwama standoff, he had returned the captured Indian pilot for the sake of peace, but was unfortunately, rebuffed. His figures on Kashmir were damning: 9 lakhs troops controlling 8 million Kashmiri Muslims, 13000 boys arrested & deported outside the state & political leaders incarcerated; they would rise in protest once curfew is revoked, he predicted & the consequent further suppression would lead to a “bloodbath” even while Pakistan would be, incorrectly, blamed. 180 million Indian Muslims, watching Kashmir events unfold, would get “radicalized” he opined. India uses the term “Islamic terror” & the world forgets “Human Rights” he summarized & pleaded for an UN intervention to avoid confrontation between two nuclear armed nations whose conflict would have consequences beyond the borders, a more subtle aim at “nuclear blackmail” unlike more overt threats earlier. He chastised the RSS (Rashtriya Swayamsevak Sangh) - the fountainhead of Modi’s BJP (Bharatiya Janata Party) for being inspired by Hitler & Mussolini with an aim of "ethnic cleansing" & for achieving "racial superiority"; they hate Muslims for the Muslim rule & Christians for the British rule he rued - a clever attempt at pitching the Muslim & Christian nations together against a "Hindu" India. Fortunately, for India, Pakistan's record, on protection of minorities, does not inspire global confidence. Not alluding to the Muslim Uighur persecution in concentration camps, in Xinjiang, China, or Saudi inflicted carnage in Yemen, but selective outrage on Kashmiri Muslims alone. smacks of partisanship & liable to be called out.

It is logical to assume that Indian diplomats, at the UN, would invoke their "Right to Reply" & highlight the pettiness of Khan's pronouncements & the absurdity of Pakistan attempting to occupy a "moral high ground", on terror, especially when 130 UN designated terrorists & 25 terrorist entities are ensconced on its soil.  

Despite Indian diplomats playing down Khan’s rhetoric & Indian TV channels depicting him as ‘Im the Dim”, the Kashmir message would find takers in the International community & that perhaps, explains why NSA (National Security Advisor) Ajit Doval is back in the valley & Foreign Minister, Jaishankar could, perhaps, be more busy globetrotting. China is Pakistan’s “Iron brother” while Trump is offering “mediation”, though with the caveat, “only if both the parties agree” while UK & Russia are playing “cats on the wall” with France being our only unflinching supporter among the permanent members of the UN Security Council; perhaps that explains why there is a talk about India buying 2 more squadrons (36 planes) of Rafale over & above the 36 already contracted.

Defense Minister, Rajnath Singh & others have been raising war cries on concluding the unfinished agenda of partition which, undoubtedly, would deliver them outstanding dividends during the impending state elections but could also attract international opprobrium.  It might be prudent to tone down the rhetoric to prevent Pakistan from occupying a high moral ground. Khan's personal attacks on Modi forecloses the possibility of an Indo-Pak detente, during the remaining part of their democratic tenures, implying that not all shall be quiet, on the western front, for quite some time.

The knotty issue of Kashmir, perhaps, has only 2 solutions: give Kashmir greater autonomy – a pre-1953 status – as advocated by people like the former Finance & Home Minister, P Chidambaram, a view which lacks unanimity, even within the Congress Party, with young Turks like Jyotiraditya Scindia, supporting the government’s move, reflecting popular sentiment; or make J&K a union territory, side line soft-separatists among the politicians & bureaucracy & help Indian loyalists in the valley gain voice & ascendancy for better integration with the mainland. The latter stratagem has overwhelming domestic support & hence the need to surge forward on the same even while working consciously on a “healing touch” in the valley & checkmating international attempts at intervention.  

Finance Minister, Nirmala Sitharaman’s Tax Cuts: Implications

On 20th Sept, 2019, Indian Finance Minister (FM), Nirmala Sitharaman, stunned the world with a massive cut in corporate tax rates, sacrificing 1.45 lakh crores, in taxes, for FY20, unsurprisingly, attracting a stock market salute, worth a 1930 point rise in the BSE Sensex Index (6% Rise) or about Rs. 2.1 lakh crores in investor wealth. Morgan Stanley, has upped the earnings forecast, for FY20, from 13% to 25% as this cut “boosts corporate savings”. Obviously, the following additional announcements aided the cheer

(a)Budget 2018-19 introduced, on investors, a 10% income tax on Dividend Income, over Rs. 10 Lakhs, over & above the DDT (Dividend Distribution Tax) of 20.56% (17.65% +12% Surcharge+4% Education Cess) charged on the company providing them an arbitrage opportunity vide corporate share buyback, a loophole foreclosed by the June 5^th 2019 Budget; the FM now revised the same, allowing company buybacks, without taxes, if public announcement was made before 5^th June’19.

(b)Surcharge increased from 15%, on personal income tax of payers, with gross income between 2-5 crores (30% basic rate+25% surcharge+4% Cess = 39%) & in excess of 5 crores (30% Basic rate+37%Surcharge+4% cess = 42.74%) respectively, introduced by the June 5^th 2019 budget, stood withdrawn, in Aug, to entice investors, back to the market; now enhanced surcharge shall also not apply to capital gains of any securities, including derivatives, in the hands of FPIs (Foreign Portfolio Investors)

The synopsis, of her announcements, is as follows:

(1)Option for “Domestic companies” to pay a reduced “corporate tax” of 25.17% (22% basic rate + 10% Surcharge + 4% Cess) from 34.32% (30% basic rate + 10% surcharge + 4% cess) if they stop availing of exemptions or incentives; Minimum Alternate Tax (MAT) is also waived.

(2)For corporates' seeking continuation of tax holiday/exemption period & the consequent incentives/exemptions thereof, tax rate slabs remains unchanged, but MAT has been reduced from 18.5% to 15%. Incidentally, all companies with an annual turnover of less than Rs. 400 crores fall into the 25% basic tax bracket while those above the threshold fall into the 30% basic rate slab.

(3)For domestic companies incorporated on or after 1^st Oct 2019, making fresh investments in manufacturing & starting production, before 31^st Mar 2023, Tax rate Is 17.17% (15% Basic rate + Surcharge +Cess) against 28.6%.(25%+Surcharge+ Cess).

Policy wonks, like Dr Arvind Virmani, have been advocating for some time the need for  India to announce a policy push to attract manufacturing supply chains from US & China, independently, by taking advantage of their trade spat, perhaps, a once in a generation opportunity, to increase the contribution of Manufacturing from 15% of GDP to 25% & creation of jobs thereof. Unfortunately, the delay, from the Indian bureaucracy & perhaps political will too, prompted supply chains to shift from China to neighbouring Vietnam- which boasts of quick decision making under a communist regime apart from a corporate tax rate of 20%. Vietnam’s exports, as a percentage of Indian exports, were 6% in 1960, 34% in 2000 & 75% in 2018 & could outstrip India in a few years. The FMs announcements, is a case of thus repenting at leisure.

Deployment of Higher Earnings

There are 5 possible alternatives available to companies for deployment of higher earnings consequent to the Tax cuts

(a)Reduce debt: which would help in alleviating the “Twin Balance sheet problem”. This would help restore health of the financial sector. But flight of capitalists like Vijay Mallya, Nirav Modi etc. does not inspire confidence.

(b)Fresh investments: is what the FM is banking on.

With capacity utilization rates in Indian Industry at 76.1%, in Q4 FY19 (RBI Report), investment might not pick up immediately especially when domestic corporates are burdened with high debts & Banks are suffering from NPA’s leading to the “Twin Balance sheet problem” – a term coined by the former Chief Economic Advisor, Arvind Subramanian. Expecting, therefore, Industry to start investing immediately is utopia for investments decisions are unlikely to be contemplated unless utilization picks up to about 85% which appears unlikely for the next 2 years since Indian consumption story has been weakening, courtesy the highest unemployment rate of 6.1% (as per NSSO-National Sample Survey Organization) during the last 45 years. Concede that utilization could vary across industry verticals but companies with high utilization levels might prefer scooping cheaper assets available under Insolvency & Bankruptcy code (IBC) to the alternative of green-field investments. Companies with high utilization & with no assets available vide IBC, & enjoying healthy financials would have invested even without the Tax cuts. That leaves only international manufacturing chains, looking for an alternative to China, to be welcomed.

US President Trump, announced a reduction in Federal corporate tax rate in the US to 21% (State corporate Tax is another 4% totaling 25%) from 35%, in Dec 2017, which led to $92 billion drop in corporate taxes (31% drop), in 2018.  An IMF (International Monetary Fund) study, on its effects, has arrived at the following conclusions

(b1)Only 20% of the increased cash, of corporates, flowed into investments & R&D; rest utilized for issuing dividends, share buybacks, asset liability & balance sheet adjustments. Thus it was more of a shareholder windfall.

(b2)Historically, in US, impact of tax cuts on investments peaks during the 1^st year after announcement but in the current case, is muted, due to policy uncertainty (Tariff hikes, Trade & Economic policy) & greater corporate marketing power.

(b3)Reduction in personal income tax & government stimulus boosted aggregate demand & contributed more to increased investments than corporate tax cuts. Indian policy makers should have taken a cue & a demand side policy initiative would have been more prudent.

(b4)Non- residential investments, in equipment, software & IP, were significant while residential investment was below projections.

(b5)Cost of capital drop vide corporate tax cut had insignificant impact on investments.

(c)Increased wages: to employees spurring consumption.

The wage revision for the current year was announced in July, for most companies, & the next revision is due more than 9 months away nullifying any expectation of increased wages in the interim. Would companies issue a “Diwali bonus” is anybody’s guess

(d)Increase discounts: to customers.

This is likely during the impending festival season; UR Bhatt, MD of Dalton Capital advisors, averred that “unless there is demand generation, there might not be new investors, irrespective of the tax cut”.

(e)Pass on earnings to investors: possible, looking at the US experience

Fiscal Maths

An unfortunate, immediate, outcome is an increase in fiscal deficit by 0.7% (0.45% after netting off the states' share) unless the govt. recoups losses vide

(1)Non tax revenues with strategic sales / divestment of PSU (Public Sector Units). The withdrawal of surcharges on personal tax surcharges, announced in the June 2019 budget, is thus meant to attract both FPI (Foreign Portfolio Investors) & domestic HNI (High Net worth Individuals) back to the markets, to gain better valuations.
(2)PSUs transfer the increased earnings as additional dividends to the government
(4)Non Govt companies transferring additional earnings vide dividends & hence a higher DDT inflow to government
(4)Stock market rise & profit booking attracting increased revenue inflow vide LTCG (Long Term Capital Gains)

Despite all of the above, the ‘off balance sheet” financing, resorted to by the government, means that even the current fiscal deficit no. of 3.3% is understated & the ambitious revenue projections for FY20 without incorporating the Rs 1.7 lakh crore revenue dip last year – as alluded to by Rathin Roy of the Prime Minister Economic Advisory Council – means that the fiscal deficit would go for a toss even if there is an expenditure compression. No wonder, while the stock market is celebrating, the bond market has seen yields rise, expecting a rise in government borrowing.Lower transfers to the states would lead to deterioration of the state's finances & increase in the states' deficits too.

Generally, monetary easing - leading to lower interest rates - is complemented by fiscal conservatism - vide control on deficits or vice versa. The government & the RBI have opened up both the taps now as a strategy to revive growth; managing an external shock, therefore, would not be easy.

Investment rush unlikely

India might not be able to replicate the US experience of investments, historically, peaking within 1 year of corporate tax reductions, due to low industry utilization rate of 76.1%; International investors could take 12 - 24 months to get their proposals approved by their boards & the famed Indian bureaucracy known more for “Red Tape” rather than “Red Carpet”. If India signs the Regional Comprehensive economic partnership (RCEP) - a trade agreement that includes ASEAN & China too – there might be a lesser incentive to trudge in.

Modi, as usual, has timed this announcement to coincide with the “Howdy Modi” event in the US & his expected meetings with the captains of American Industry. Prudent that the Govt. stop making fresh “reform” announcements every Fri - a practice seen during the last 1 month – which could unwittingly incentivize even interested investors to adopt a “wait & watch mode”, salivating at more giveaways.

Conclusion

The reduction in corporate tax rates would lead to additional demands on releasing the Direct Tax code for consultation on personal income tax reduction too; all Finance Ministers want to play God on Budget day & a DTC law, if implemented, would reduce their importance just as the GST law & the establishment of the GST council - of which state Finance Ministers are members too - has forced them to share power, hemming in the likelihood of the Centre taking independent initiatives on Indirect taxes. Therefore, they would delay releasing a discussion paper on DTC, unless it becomes absolutely inevitable.

India is the 3^rd largest country in PPP (Purchasing Power Parity) terms & predicted to  overtake the population of China by 2027 – as per a UN (United Nations) report & hence the interest of manufacturing companies to invest in the country with the largest potential consumer market in the world is unexceptionable. While India is about 20% of China’s GDP in absolute terms, it is 42% in PPP terms buttressing the assessment. However, expecting them to rush-in, is foolhardy as India has a reputation for introducing retrospective taxation (Ex.Vodafone case) & cesses over & above the basic rates, impairing carefully set plans. The economic scenario in India for the next 12 months would thus remain grim while the exuberance of the stock market shall persist sucking in unsuspecting retail investors."Acche Din" are perhaps 18-24 months away.

Indian Budget 2019-20: Nirmala Sitharaman’s Maiden touch

Nirmala Sitharaman -India’s first female full time finance minister - presented her maiden budget, on 5^th July – faced with headwinds on the economic growth & job fronts impressed  with some new thoughts despite taking over the Ministry only 5 weeks ago. Some of them follow:

Zero Emission Mobility: The auto sector slowdown courtesy the NBFC (Non-Banking Financial Companies) crisis & trickling of credit to buyers thereof was addressed vide:

(a) a one time, six month, partial credit guarantee for PSU (Public Sector Undertakings) banks of first loss of up to 10% of Rs. 1 lakh crore for buying highly rated pooled assets of financially sound NBFCs, this financial year. The IL&FS crisis has triggered a crisis in the “shadow banking” sector & the RBI did not open any special window to handle the liquidity concerns of NBFCs; the govt. vide this announcement  has  “signalled” its intent to help financially sound NBFCs by nudging the “risk averse” PSU bankers & allowing the rest to be subsumed by market forces. An Asset Quality Review (AQR), of NBFCs, if announced will accelerate the inevitable.

Proposal for strengthening the regulatory authority of the RBI over NBFCs has been introduced in the finance bill.

(b)a Rs. 1.5 lakh tax deduction for buyers of EVs (Electrical vehicles) to spur this sunrise non-polluting segment to achieve economies of scale & perhaps, to make India into the EV factory of the world, by 2030; this is over & above the announcement of no custom duties, on some parts used in EVs, that are imported apart from the proposal before the GST council to reduce Indirect Taxes on EVs from 12% to 5%.

(c)Special Additional Excise duty & Road & Infrastructure cess of Rs. 1/- each per litre on diesel & petrol, perhaps, an attempt at “behavioural nudge” on consumers towards EVs; this also means that the demand for including oil under GST is unlikely to be met, immediately; states too would not complain, gaining as they too are due to the oil tax bonanza. This measure could net the Govt. about Rs. 20,000 crores this year.

Since Indian oil imports were $114 billion, in 2018-19, (~22.5%) of the total merchandise imports of $507 billion & India imports 83.5% of its oil needs there is a need to reduce import dependence by focussing on environmental friendly EVs. However, since the no. of moving parts in an EV are less than an IC (Internal combustion) engine vehicles, a shift to the former would induce stress in the auto component industry in the next decade or two & plans need to be initiated to manage the same. .

Stimulus to Housing: To manage the job crisis, a stimulus to the housing segment – the 2^nd largest absorber of labour after agriculture - vide:

(1)Allowing for an additional deduction of Rs. 1.5 lakhs, over & above the Rs. 2 lakhs already available, for availing of housing loans, upto 45 lakhs, till 31/3/2020

There are a lot of stressed assets in realty & buyers had petitioned the govt. for some intervention in the form of interest holiday & creation of a stressed asset fund to complete the projects; the govt. appears to favour market forces to manage the situation. Considering the power differential between the real estate tycoons & the home buyers - many of whom spent their lifetime savings on the home asset - it might be prudent of the govt. to take over the land banks of the recalcitrant tycoons, arrange for sell off - a la Satyam - & use the proceeds thereof to complete & hand over to the consumers. Since realty is one of the sinks of black money, in India, apart from mining, quarrying & Jewellery sectors managed largely vide political patronage, cleaning up this sector augurs well for electoral politics in India.

The govt. had encouraged rental housing & REITs (Real Estate Investment Trusts) formation in its previous term but flows from pension funds, sovereign wealth funds etc. was lacking since REITs expect at least an 8% return while rental yields in India are a meagre 2%. Since the highest component of the housing cost is land & the govt. is the largest hoarder of this scarce asset, Industry has been demanding social capital of free land from the govt. to promote affordable housing which is still unmet; the other suggestion by industry is “Negative Gearing” - where losses on investment by renting out house property is tax deductible & attracts only 50% (say) of capital gains in eventual sale. Real estate players too, instead of making supernormal profits, by keeping prices high, should cut prices to encourage buyers instead of being a cry baby year after year.

Enhance public Float from 25% to 25%: SEBI has been advised to initiate consultations to explore public shareholding increase from 25% to 35% that would enhance free float, allow for better price discovery & allow minority shareholders to own a greater slice of value stocks - the biggest potential wealth shifting announcement. This also takes away the promoters ability to unilaterally pass special resolutions & hence improve governance.  According to Centrum Broking’s research 1174 listed companies (~25%), of the total listed company universe of about 4700 companies, will be affected. These include companies like TCS (Rs. 59500 cr.), Avenue Supermarts (Rs.14000cr.), Wipro (Rs. 15000cr.) & they might have to divest stake or delist. There is a legitimate argument, however, that there is merit in having promoters of small caps & mid-caps have greater skin in the game.

India’s weight in MSCI (Morgan Stanley Capital Index) or other indices, though, could rise leading to benefits over medium term. FPI (Foreign Portfolio Investors) investment upto sectorial limits announced would ensure more inflow of foreign funds. Introduction of tax on dividends, of 10% plus surcharge, for individuals/HUF (Hindu Undivided Family)/partnerships/private trusts, over Rs10 lakhs, in last budget, over & above the DDT (Dividend Distribution Tax), of 20% (including surcharge & cess), charged on the companies, incentivized many promoters to opt for buyback of shares. The loophole is now closed with buybacks on listed companies too, like unlisted ones, attracting a 20% tax.

While the timeline to fulfil the 35% public holding is not spelt out, this has the potential to net the govt. substantial revenues ~20% on about 4 lakh crores or Rs. 0.8 lakh crores. However, Finance secretary, Subhash Chandra Garg, has clarified that a decision has not been taken yet & hence “unfortunate” that the market has prematurely reacted strongly against the “proposal” before SEBI coming out with a “considered recommendation,” on “whether & to what extent & which kind of companies” shall be subjected to the order.

Addressing the Job crisis: Capital adequacy of banks is being addressed vide a promise to infuse Rs. 70,000 crores; the time line of infusion is however unclear – this year or over a 3-5 year tenure. With capacity utilization under 80%, it is unlikely that fresh greenfield investments will be undertaken by industry especially when cheaper assets are available vide IBC (Insolvency & bankruptcy code). Breather on Angel tax, though, is welcome.

Easing of sourcing norms for single brand retail announced could bring in FDI but not help “Make in India”.

Announcement on a TV channel run by start-ups, for start-ups, to discuss on issues affecting their growth, matchmaking with VCs (Venture Capitalists), funding & tax planning, under DD (Doordarshan) bouquet of channels  & willingness to ensure greater dispersion of foreign languages is a signal to job seekers either to make provisions for self-employment or seek avenues abroad; the govt., though, should push for greater labour mobility in WTO (World Trade Organization), FTA (Free Trade agreements)  or in trade block negotiations.

Raising Foreign debt for Sovereign: Indian debt in foreign currency is a low 5% & India’s primary deficit is nearly zero i.e. entire fiscal deficit is used to fund the interest cost on debt. CAE (Chief Economic Advisor) Krishnamurty Subramanian, has argued that since the global interest rates are low there is a case for raising more of sovereign debt abroad in foreign currency. It must however be remembered that the Latin American crisis was caused due to high levels of foreign currency debt & former Governors’ of the RBI, like YV Reddy, resisted the pressure, of the then Govt., on a similar proposal raising the spectre of additional exchange rate risks & the consequent rating downgrade fears.

Zero Budget Farming: A pithy statement was made on zero budget farming which is another name for organic farming – without the use of fertilizers & pesticides & using cow dung, urine, organic waste etc. instead – & using intercrops as a way to supplement income over the main crop as a solution to the farm crisis; obviously, doubling of farmer incomes promised, by 2022, sounds utopian.

Taxing Rich Indians: A surcharge amounting to 3% extra & 7% extra tax was introduced on personal income tax slabs of 2 - 5 cr. & greater than 5 cr. respectively. Despite the Oxfam report, indicating that 1% of Indians hold 51.5% of wealth, no measures on Estate tax were announced.

Criticism on the Budget

Former Finance Minister, P Chidamabaram, called the budget an “unusually opaque exercise” which did not disclose “the total revenue, total expenditure, Revenue deficit, fiscal deficit, the additional revenue mobilizations or financial concessions”. He called the budget “protectionist” for increasing custom duties, “exploitative” for increasing taxes, on petrol & diesel & lamented no “structural reforms” in Part A of the budget speech. He reminded that FPI (Foreign Portfolio Investment) is not FDI (Foreign Direct Investment) & critiqued the increase in FPI limit from 24% to the sectorial cap, perhaps, because the former is more volatile. He found the idea of a Credit Guarantee Enhancement Corporation, National Gas & Water grids interesting but bereft of details.

TT Ram Mohan, Prof IIM (A), lamented the absence of any reference to the fiscal glide path.

Indian exports are stagnating; exports, in 2013-14, were $312 billion which dropped sequentially till 2016-17 & rose to $303 billion in 2017-18 & $328 in 2018-19. One would have expected the broad contours of a revival plan to be laid out with the Commerce Minister spelling out the details later. Indian exporters face structural issues including delayed refunds & high power & logistics costs; decongestion of ports, roads, railways & waterways are solutions apart from removing roadblocks in customs While 50 Lakh crore investment, till 2030, in Railways, was proposed, Rs. 0.64 lakh crores only, in capital budget was allocated for this year in the budget; the budget for roads & highways too is 0.68 lakh crores only. Monetization of railway land & NHAI (National Highway Authority of India) completed road projects & PPP partnerships might be the way ahead.

While the govt. awarded the regulation of HFC (Housing Finance Companies) to RBI from HDB (Housing Development Board), it would have been prudent to announce the institution of a super regulator combining SEBI, PFRDA, IRDA, RBI etc. to avoid both turf wars & prevent regulators from escaping responsibility, post inaction on issues, by claiming them to be beyond their remit.  

Surprisingly, the budget documents, presented, have not been updated with the actual figs of FY 2018-19 but have retained the Revised Estimates (RE) of 2018-19 - the same as presented by Piyush Goel, in Feb 2019; it is obvious that the revenue growth estimates projected by the govt. are more a sleight of hand - an attempt to project a Fiscal deficit of 3.3%.

Conclusion

Nirmala Sitharaman’s maiden budget was a grand statement of Modi 2.0 intent which covered elements of Indian foreign policy too; fresh thoughts like the one of EVs for “Zero Emission Mobility” are welcome while lack of clarity on issues like “Zero Budget Farming” is a concern. Prudent that going forward, hopefully while presenting her first full year budget, for FY 21, in Feb next year, she speaks numbers, for greater clarity, to differentiate between statements of intent & well-crafted fully baked policy. To borrow Arnab Goswami’s famous words: “India wants to know”.

Budget Expectations: July 2019

The euphoria is palpable as Nirmala Sitharaman - the first female, Finance Minister of independent India, if one discounts Indira Gandhi, who handled the finance portfolio, in 1970-71, while being Prime Minister – rises to present the budget on July 5^th; the question on everyone’s lips: will she make history by announcing a “dream budget”?

Challenges:

Growth & Employment: The NDA govt. is faced with the twin challenges of decreasing growth & rising unemployment. GDP growth figs fell to 5.8%, in Q4 2019, the lowest in the last 20 quarters while unemployment is at a 45 year high-7.9% as per CMIE, in June 2019 & 6.1% for 2018 as per the periodic labour force survey (PLFS),  released by NSSO (National Sample Survey organization).

Lower growth means that the revenue estimates announced in the interim budget - such as GST revenue growth of 21%, which was anyway too ambitious, is likely to fall further short even while demands for a stimulus to pump prime the economy, to counter slowdown, inevitably rise. Prudent to revise the tax nos. downwards & increase the non-tax revenue targets.

The auto sector – generally seen as a proxy of the national manufacturing economy - is sputtering during the last few months; however, that could be attributed to the NBFC crisis & the weakening of disbursal of credit, to buyers, thereof. Bring shadow banking under greater ambit of the RBI & release a liquidity lifeline.

Drop in Investment Rate: Investment rate, in the country, is trending around 28-30% which means that with an incremental capital to output ratio of 4, India can theoretically grow at 7-7.5% unless assisted by productivity gains which can, perhaps, add another 0.5% extra. Prime Minister, Modi’s  target of moving India to a $5 trillion economy, by 2024, against the $2.74 trillion in 2018, demands a growth of 12.8% per annum; alternatively, the economy can grow at a slightly lower rate but the rupee should appreciate against the dollar which would decrease the competitiveness of exports, which are already stagnating & hence a no go. Thus, unless the investment rate does not go up to 51% (12.8 X 4) achieving a $5 trillion target is unlikely. India is more likely to become a $4 trillion economy by 2024 growing at 8%. Household savings have dropped from 23% to 17% & private consumption contributes 59.5% to GDP growth even as exports stagnate; simultaneously, household indebtedness has grown in India  which means that while a higher household savings rate is desirable for higher investment rate, it is unachievable looking at the secular trend line. 

High Logistics & Power Costs: Responding to govt. requests for increasing investments, Industry bodies initially complained about “environmental hurdles”, in 2013, which Modi make an electoral issue under “Jayanti Tax” & later got his Minister, Prakash Javadekar, to accelerate clearances. Industry bodies then shifted goalposts to complain about the high cost of capital, which the current RBI Governor, Shaktikanta Das, has partially addressed vide three rate cuts, totalling 0.75%, this year, although transmission is tardy contingent as it is on systemic liquidity & higher interest rates offered on small savings. It might be prudent for the RBI to fix the repo rate at a real rate of 1.5% which combined with inflation of 4% (say) adds to 5.5%.  Industry's grouse on high logistics cost, in India, (14%  of GDP as per Economic Survey 2017-18) against less than 10%, for China & Western economies & the high cost of power - since industrial power subsidizes domestic power - are, however, legitimate. Removal of power subsidy is a delicate political issue but addressing T&D (Transmission & Distribution) losses, largely on account of “power theft”, should be taken head on. Increase of solar power capacity to 29GW (7.8% of the total installed power capacity of 356GW) & with planned capacity of 100GW, in solar by 2022, should ideally lower prices & the govt. should pass on the benefits to industry first to help in lowering costs & hopefully increasing exports. Reduction of logistics costs, though, is a medium term project since it needs investment in roads, railways, waterways & ports. With capacity utilization at 76%, large corporates might not increase investments in greenfield projects especially when cheaper assets are available vide IBC (Insolvency & Bankruptcy code). The govt. should therefore shift focus from cry baby large corporates to the MSME (Micro Small & Medium enterprises) sector which account for 29% of GDP, 45% of manufacturing, 50% of exports & 11 crore jobs; Minister, Nitin Gadkari has expressed an intention to increase export contribution  to 75% & increase employment to 15 crore people. The disproportionate focus we give to large corporates can be gauged from the fact that, as per the RBI, organized private sector jobs increased from 7.23 million, in 1978-79, to 11.97 million, in 2011-12, or 4.7 million in 33 years (or only 1.4 lakhs per annum) while the heavy lifting, on job creation & exports is being done by the MSME sector who are suffering because of lack of credit at reasonable interest rates.

NPA crisis: The “Twin Balance” sheet problem, as eloquently put by the former Chief Economic advisor – Arvind Subramanian – persists. While the IBC has done a yeoman's job on redressing the steel sector, stress in power, aviation, telecom sectors persist & watering down of the RBI's 12^th Feb circular can only provide cosmetic comfort.

The Bimal Jalan committee, which was entrusted with the task of recommending a formula for the transfer of RBI surplus to the govt., is yet to submit its report. It is possible, however, that this surplus could be used by the govt. to recapitalize banks.

Total Deficit of 9%: Former Finance Minister, Arun Jaitley, reduced fiscal deficit (FD) from 4.5% in 2013-14 to 3.4% in 2018-19. The BJP was handed an unexpected international oil price drop bonanza, in 2014, but kept domestic prices nearly flat, by increasing excise duties, on petroleum products, from an ad valorem rate to a fixed excise duty, thereby increasing the tax revenues from 0.88 Lakh crores, in 2014, to 2.6 lakh crores, in 2018-19, an increase of 1.72 lakh crores which is 0.9% of GDP of 187 lakh crores, in FY 19; thus if oil products are brought under GST the entire reduction in FD achieved would be reversed. Meanwhile, the NDA govt. launched the UDAY scheme, in 2014, as part of power sector reforms, under which NPAs of the state power sector companies were transferred to the books of the state govt. in lieu of which the FRBM limit of 3% of the states FD has been breached. The combined fiscal deficit of the centre & the states would actually be about 7%. Sajjid Chenoy, of JP Morgan, says that if “off balance sheet” financing vide state PSUs is added then FD is around 9%. Critics could argue that countries like South Korea sustained FD of 12% while countries like Egypt failed even at 3% since the former used it for creating capital assets giving returns higher than the cost of capital, a worthwhile sustainable investment, while the latter used it for consumption; however India is no South Korea & having seen the aftereffects of the stimulus between 2009-11, we need to tread carefully; the NK Singh committee has allowed an “escape clause” of 0.5% FD extra under specified circumstances; while sticking to the fiscal glide path is recommended, a  0.2-0.3% deviation might not invite the displeasure of international rating agencies aware as they are of the international headwinds.

It is against these structural challenges that the Finance Minister rises to present the budget on 5^th July.

Options:

Raise resources: The govt. can explore following opportunities to raise revenues

(a)Auction assets like spectrum, coal blocks etc.; however, with the telecom industry under stress & polluting resources like coal facing international approbation, there might not be many takers. Bringing in international mining majors like BHP Billiton & Rio Tinto, though, would help enhance competition & bring in the latest technology & management practices.

(b)Privatization: While Niti Aayog has prepared a report on 42 companies that can be privatized; their offer for sale might attract an interest similar to Air India.  A better proposition would be to sell the land assets of defunct companies, pay VRS to the employees & use the remaining money for infrastructure development. Against a disinvestment target of 0.8lakh crores, the govt. achieved 0.85 lakh crores, some vide the abominable practice of forcing another govt. entity to pick up the slack to bail the govt. out. It is time to target 1.5 lakh crores of genuine divestment as it happened under the Vajpayee regime.

(c)List Insurance companies: Merge General insurance companies-United India Insurance, National Insurance & Oriental Insurance); follow it up by divesting at least 10% each in the merged entity & Life Insurance corporation of India. The General insurance companies have a solvency of 150% against the industry trend of 230% (as per a Money control report) & these companies have taken losses in the recent floods & therefore divestment could be postponed. Listing LIC could easily net the govt. at least 50,000 crores this year.

(d)Sell Infra assets: NHAI can monetize completed assets to interested sovereign wealth funds, pension funds et all & use the proceeds to fund further infra assets. Corporatize all major ports & divest upto 49% & use the proceeds to decongest thereby aiding ease of business & exports. Manage likely trade union protests, at ports, by convincing them that the entire proceeds of divestment in a specific port would be used for expansion of that port only aiding creation of more jobs.

To avoid the accusation that the govt. is selling family silver, make a budgetary announcement that all the proceeds of the sale would flow into an infra fund & shall be used for building infra alone; in other words one asset is being sold to build another with the bonus of additional employment.

(e)Add an income tax slab of 40%:Prudent to tax rich tax payers with incomes over 5 crores at 40%; else keep the 3 tax slabs but add a surcharge to effectively create a 40% slab.

Increase MNREGA Spends: MNREGA spends increased from 30,000 crores in 2014 to about 52,000 crores in 2018. Since rainfall is delayed this year & a drought is likely, increasing MNREGA spends to 80,000 crores would be helpful. Since the BJP has promised to bring piped water to all households in the next 5 years, it might be prudent to use the MNREGA money to dig lakes on govt. wasteland on rural & urban outskirts & feed them with rainwater & storm-water drains & use the water so collected to provide piped water which is a low cost option to vanity announcements of bringing river water vide canals - with its attendant land acquisition challenges, ecological disasters & sub optimal  Relief & Rehabilitation measures due to a leaky machinery.

Geo-tag these assets to ensure that projects do not get completed only on paper.

Transfer Fertilizer & Food subsidy vide DBT: India spends about 75000 crores annually vide fertilizer subsidy. The subsidy is paid to the producers & not farmers directly leading to perverse incentives. Subsidies to producers, has remained unpaid effecting industry health. The govt. can announce removal of the fertilizer subsidy & transfer Rs 5000/- per farmer extra over & above the Rs 6000 promised under the PM KIsan scheme to remove leakages & stimulate the rural economy. This could invite criticism of not benefitting tenant farmers though.

India spends 1.84 Lakh crores as Food subsidy& the Food Legislation passed by parliament promises to benefit 2/3^rd of the population or about 18 crore families; prudent to transfer Rs 10,000/- per family to eliminate leakages vide the Public Distribution System (PDS)

Increase spends on Infrastructure: The interim budget promised a capital expenditure of 3.36 lakh crores predominantly in defence (1.03L crores), Roads& Bridges (0.68L crores) & Railways (0.64L crores). It might be prudent to enhance the spends on the latter two to at least 0.8 lakh crores each.

Others which could be addressed outside the Budget:

(a)Factor Market Reforms: While there is a demand for factor market reforms – land & labour- it is difficult to be implemented because of the impending state elections in 4 states; land is a state subject & we have witnessed the hasty retreat of the NDA govt., in the first year of their previous term, on the land ordinance. Industry would always demand a “hire & fire” policy which is a political hot potato; prudent to continue to manage demand cycles vide off roll accretions as is the current practice; one can add apprentices to strengthen the labour force. Showcasing the Rajasthan labour reform model to be emulated by other states is a better proposition.

(b)Focus on MSME: Jaitley had promised, in 2015, a road map of reducing corporate taxes from 30% to 25% & has struck to the commitment by progressively doing so for corporates up to a turnover of Rs 250 crores which accounts for 99% of the companies. The large companies (Turnover above 250 crores, courtesy, tax incentives, anyway pay an effective tax rate less than 25%.

Focussing on the credit needs, at reasonable interest rates, for the MSME sector, prudent, to create growth, jobs & exports. The recent announcement of increasing non-collateral loans to this sector from 10 lakhs to 50 lakhs is a recipe for disaster as it could buy growth in the short run only to turn into NPA’s in the medium term. With an efficient minister, Gadkari, handling MSME, expect him to make announcements on this sector outside the budget.

(c )Create a super regulator: India has multiple regulators – RBI for banking, SEBI for corporates, IRDA for Insurance, HDB for housing finance companies etc.; the govt. planned to clip the wings of the RBI by creating another regulator, for Fintech companies, which is regressive. Since many regulatory issues are falling in between the stools & leading to regulatory turf wars, prudent to combine all of these agencies & create a super regulator. Light touch regulation on NBFCs & chit funds have led to systemic risks; hence stronger regulation recommended.

(d)Entice supply chains from China to relocate: China became a manufacturing powerhouse, during the last 30 years, because of Western, South Korean, Taiwanese & Japanese investments while India became an IT superpower bypassing the manufacturing revolution.  The US-China trade war is a once in a lifetime opportunity to correct this historical wrong. Entice supply chains to relocate to India under the “China+1” policy instead of countries like Thailand & Vietnam- which otherwise offer the advantages of FTA (Free trade agreements) with attractive Western markets. It might be prudent to enter into a FTA with complementary economies like US & EU; however such announcements shall be made outside the budget.

Conclusion:

Indian GDP figs are under a cloud for some time & former Chief Economic advisor, Arvind Subramanian’s paper has accentuated the same; time to put MCA 21 database into the public domain along with the GDP calculation methodology & invite criticisms for correction & rectification in the next 6 months to avoid embracing the “fudged nos” reputation of China.

India faces structural challenges which can only be addressed in the long haul. India becoming a $5 trillion economy by 2024 is as ambitious as doubling farmer incomes by 2022. Rational estimation of targets supported by institutional strengthening & execution efficiency would be a saner alternative.

Are Indian Electronic Voting Machines (EVMs) Safe?

The 7 phase Indian General Elections, started on April 11^th  2019, to elect the 17^th Lok Sabha -  the House of the People – the Lower house of India’s Bicameral legislature & soon enough the EVM controversy erupted again; opposition leaders alleged that buttons on some of the EVMs were missing, non- functional or wrongly favoured the ruling BJP.  The Election Commission of India (ECI) rejected the claims insisting that the EVMs are “tamper-proof”. There has been a long pending chorus to revert back to a paper ballot system.

While the ruling BJP, now, rubbishes the charges, it had levelled similar allegations post losing the 2009 general elections & the then ruling Congress Party called the charges “astonishing”. Incidentally, the BJP spokesperson GVL Narsimha Rao then wrote a book “Democracy at Risk!! Can we trust our Electronic Voting Machines?” with a foreward by its patriarch LK Advani & messages by  TDP’s (Telugu Desam Party) Chandrababu Naidu & Stanford University’s  Prof David Dill; Dill wrote “Electronic voting machines are especially vulnerable to malicious changes by insiders such as designers, programmers, manufacturers, maintenance technicians, etc. Of course, these problems are magnified enormously when the design of the machines is held secret from independent reviewers.” He thus alludes to all the usual suspects - the classic "insiders" - & the need for "transparency" which are legitimate observations..

Rather than dispense with the EVMs, activists have attempted to refine the process - a mature reaction to a problem. Subramanian Swamy, approached the Courts, in 2009, with a prayer, to issue a directive to the ECI, to incorporate a system of “paper receipt” as convincing proof to the voter - that the EVM has rightly registered his vote to the intended candidate - & secured a positive judgement, from the Supreme Court, in Oct 2013. The honourable court directed the govt. to extend financial assistance to the EC for VVPAT (Voter Verified Paper Audit trail) deployment. While demand for a recount, till then,  meant rerun of the EVMs,  it was to be replaced, going forward, by the recount of the paper receipts instead, creating greater "transparency". The cost as estimated, by the Court, in 2013, was a pittance Rs 1690 crores (13 lakh units X Rs 13000 per unit); since 2017, all Indian elections have been held with VVPAT enabled EVMs.

One nagging doubt still persists: If all loopholes have been successfully plugged, why do ruling parties, then & now, support EVMs, even while the opposition cries foul?

Brief History of EVMs in India

MB Haneefa invented the first Indian EVM, in 1980, & it was first used, in 1981, in 50 polling booths of the North Paravur constituency of southern state of Kerala; they were, finally, commissioned, in 1989; the 2004 general elections were conducted entirely on EVMs. The acknowledged advantages of EVMs include saving on paper, elimination of “invalid” votes & quicker announcement of results. Earlier instances of some cases of “invalid” votes being higher than the difference of votes polled by the winner & the first runner’s up, leading to demands for a recount & court battles, is now history. The key takeaway: 23 year delay from 1981-2004 is yet another instance of the famed boisterous Indian democracy's execution - deployment & course correction - mess that plagues governance. 

Controversies, however, continued to besiege the technological solution. In 2010, a techie, Hari Prasad claimed that the EVMs could be hacked & with a few hardware changes programmed to favour a particular candidate; he was criminally charged - for alleged theft of the EVM - to be dropped later only after sending across a chilling signal to all potential challengers.  As per an India Today Report, on May 12, 2017, by Prabhash K Dutta: In 2014, an EVM, in Jorhat, Assam, during a mandatory mock drill appeared to favour the BJP; the opposition lodged a protest with the ECI who claimed that the EVM was defective & assured that none of the faulty EVMs would be used; later, In 2017, at a mock drill to demonstrate VVPATs, the EVMs left a paper trail more for the BJP than the votes cast for the party; the EC on receiving complaints suspended 19 EC officials & claimed that the EVMs were used for demonstration without  sanitizing; similar complaints were received at Dholpur, Rajasthan, a few months later to which the EC clarified that of the EVMs received for the by-polls, 10 were found to be faulty with technical errors in the control unit - of which 8 were detected prior to voting & 2 during voting & prompt corrective action was initiated. The same year, Shrikant Shirshat, contesting from the Saki Naka ward of BMC (BrihanMumbai Municipal corporation), claimed that while he & his family members voted for him, in ward no 164, they ” disappeared” & he was shown as securing zero votes.

The discourse of EVM misbehaviour listed above does not enlighten us to distinguish between a case of “malfunction” – a technical defect in the machine which is legitimate – & “tampering” – manipulation aimed at fraud; hence the need to understand what is an Indian EVM like.

Indian EVM

EVMs consist of a control unit - that remains with the election official at a voting booth - a balloting unit - on which the voter casts his vote - & the VVPAT. They are run on batteries for ease of deployment even in areas without electricity. The machines are connected by a 5 metre cable & can record a maximum of 2000 votes. M2 EVMs (2006-10) can cater to a max of 64 candidates, while M3 EVMs (post 2013) can cater to a max of 384 candidates including NOTA – 16 per balloting unit connected sequentially.  An additional polling official is needed in booths where M2 EVMs are deployed to watch the VVPAT status Display Unit (VDSU) kept on the presiding officer’s desk while there is no such requirement for M3 EVMs. Cost of M2 EVMs (Balloting unit & Control unit) is Rs 8670/- & they have a lifespan of 15 years. Clearly, this Indian "Frugal Engineering" prowess is obviously a source of pride.

EVMs have other advantages including saving on paper & hence a solution to environmental degradation; instead of issuing a ballot paper, the polling officer enables the ballot button & the voter then can cast his vote in the secrecy of the voting compartment by pressing the blue button against the name & symbol of the candidate & visual & audio confirmations is received by a red light & a beep sound respectively. The VVPAT slip - containing the serial no. name & symbol of the candidate - gets displayed for 7 seconds before dropping into the box as an additional proof.  The voter can give a written complain if his vote preference does not match with the paper trail under rule 49MA, of the Conduct of Election rules, 1961; the polling officer shall warn the voter of the consequences of making a false declaration & on getting the written complaint arrange for a the voter to record a test vote in the presence of candidate or his polling agent present in the polling station & himself & allegation if found true arrange for stoppage of further counting of votes in the voting machine & inform the returning officer accordingly. This "warning", of punishment, if accusation is proved false could  turn away genuine complainants; HareKrishna Deka, former DGP (Director General of Police) of Assam, in April 2019, did not lodge a complaint when told that he could suffer from a 6 months imprisonment if his complaint was proved untrue. If an ECI order can intimidate a former top gun of the police force,  one can easily visualize the impact on lesser mortals; perhaps, ECI should tone down the order to instill confidence & deepen democracy. 

While this process takes care of malfunction during polling, how do we know if the EVM does not have any "hidden votes" already recorded?

Prior to the commencement of poll, the presiding officer presses the “result” button to demonstrates to polling agents present, the absence of hidden votes already recorded; a mock poll with at least 50 votes is then conducted to satisfy poling agents the match between the result stored in the control unit, VVPAT slip released & the choice recorded. Presiding officer then presses the “clear” button & the “total” button to show a “0” result before commencing actual poll. There is a “close” button to be activated -by the electoral officer – at the end of the voting day - to stop further voting.

ECI has instituted further checks & balances:

The arrangement of names of candidates in the ballot unit is in an alphabetical order: first for national & state recognized political parties followed by independents; sequence is contingent on candidate name & party affiliation & thus cannot be ascertained beforehand. The loading of names is done by the engineers of the manufacturers ECIL (Electronics Corporation of India Ltd) & BEL (Bharat Electricals Ltd).

EVMs are allocated to polling stations vide a two stage randomized process through an EVM tracking software developed by the ECI; the first at the district election officer level to allocate assembly constituency wise in the presence of political parties & the second randomization at the returning officer level to allocate them polling station wise in the presence of candidates or their agents.

ECI has always contended that the EVMs used in India are tamper proof since they are made from a “one time programmable chip” – which can neither be read or overwritten -  unlike EVMs used in US & other nations are not personal computer based & hence “cannot be accessed or connected to any external device vide the internet, Wi-Fi, Bluetooth or an USB”.

Is there a possibility of trojan horses being burnt into the chips used in EVMs?

Rajat Moona, Member of the Technical Expert Committee (TEC) an apex advisory on EVMs on VVPATs, to the ECI, in an interview, to the Economic Times, on Sept 13, 2018, states that blank chips are imported by Bharat Electronics Limited & Electronic Corporation of India Ltd & the source code developed & programmed by them is coded on the EVM chip & deployed in the new M3 EVM machines; the source code is also verified by the TEC. For VVPAT too source coding is done in India. He did not mention the details regarding M2 EVMs but had an explanation for VVPAT malfunctions.

“VVPAT, unlike an EVM, is a mechanical , not an electronic device & is always more vulnerable to error” & added that while VVPATs went through the rigor of 50 degree Celsius tests, root cause analysis of malfunctioning of VVPATs, in Bhandara & Gondiya bypolls, showed that exposure to direct intense sunlight caused errors. They were expected to be operated in an enclosed environment & in rooms & inherently come with sensitive sensors; a hood is now added to protect the sensors now.

ECI, to its credit, has been extremely prompt in addressing complaints & has run hackathons with an invitation to hack the hardware. while ECI’s explanations & checks & balances listed above are indeed comforting why have many countries, in the world, reverted back to using paper ballot?

International Experiences on EVMs

In this world of about 200 countries about 120 practice democracy & less than 40 countries experimented with EVMs & less than 20 persist with its use. Since EVMs are environmentally friendly – since they reduce paper usage - & ensure quick announcements of results – enhancing efficiency - why have all the democracies not adopted the process? Cost of the machines cannot be a reason since a tried & tested "frugal engineering" solution from India is readily available. Germany introduced EVM in 2005 but its constitutional court scrapped its usage, in 2009, on charges of lacking “transparency”, forcing the country to revert back to a paper ballot just like Netherlands & Ireland.

As per a BBC report: In 2017, EVMs used during the Venezuelan elections, allegedly inflated the actual turnout by at least a million votes while Argentinian politicians rejected e-voting plans fearing manipulation of results & on concerns of ballot secrecy; partial recount was carried out in the Iraqi elections, in 2018 following reports of technical glitches & EVMs became of source of contention in the presidential elections in Congo amid reports that they had not been thoroughly tested.

This raises the question:

Are the EVMs hackable?

University of Michigan scientists were able to change results by sending text messages from a mobile phone. Likewise, Dhiraj Sinha, of MIT, believes that rigging is possible with the use of a very small receiver circuit with an efficient antenna – perhaps, invisible to the human eye  to avoid detection; however mass scale rigging needs the connivance of the machine manufacturers & the ECI. Wireless hacking is contingent on the availability of a radio receiver containing an electronic circuit & an antenna & ECI claims EVMs contain so such circuit elements. Is it however possible that such bugs be introduced by unscrupulous elements during the periodic maintenance of the machines?

Saurabh Bharadwaj, a computer engineer & an AAP (Aam Aadmi Party) MLA, demonstrated on May 2017, in the Delhi assembly, with an EVM prototype, that it can be hacked. ECI, however, dismisses those claims.

Solutions:

Yogendra Yadav, of the Swaraj Abhiyan, in an article on June 6^th 2018, has argued that “any electronic gadget can be programmed & hence manipulated” & hence the focus should not be on the “design of the machine but the administrative protocols that govern its use”. Since Indian EVMs cannot receive external signals, it has to be individually fiddled. Likewise, the chip does not recognize party names or symbols but records votes by the serial no. of the candidate – which is arranged alphabetically by the candidate’s surname; thus  a machine needs to be fiddled after the candidates are finalized for each constituency & a particular EVM allotted – which is about 72 hours before polls.

He has suggested the following, to the ECI, to instill confidence, instead of “hackathon” challenges

(a)ECI must allow experts nominated by the registered party to examine random samples of new machines stored anywhere in the country

(b)Amend election rules to allow a voter to register an objection if he suspects that the paper slip did not match the party he voted for. If the booth records more than 1% (say) of such objections it should be made mandatory at the time of counting to match the EVM count with the paper trail count of that booth

(c) Publicity campaign to educate voters on VVPATs.

(d)Strict adherence to the rule of replacing a malfunctioning EVM within 30 minutes or ordering a re-poll.

(e)Alter the current counting pattern of simultaneously counting booth nos 1- 14 under  "round 1"; begin with matching EVMs & paper trail in one randomly chosen booth for each counting table; only if there is no mismatch, proceed with counting

(f)Candidates who finish 2^nd or 3^rd to be allowed to call for paper trail matching in any booth of their choice before the result is declared.

Former Chief Election Commissioner, SY Quraishi, echoes Yadav's views; writing in The Hindu on April 4^th he says “The top two runners-up in the constituency can choose any two VVPATs to be counted as they have the highest stake in the results. This would serve to do away with a large sample, as only four machines per Assembly would have to be counted to ensure public faith in the system. This is on the analogy of the highly popular and successful Umpire Decision Review System in cricket”While this might delay declaration of election results by a few hours, it would also help in ending controversies & harmful debates.

Apart from Yadav & Quraishi's sane views, other critics have suggested the following factors to be considered to arrive at a decision on EVMs 

(a)Large Electorate: In the 2014 Indian General elections, the electorate was 810 million & 550 million cast their votes; the figure for 2019 is about 900 million. Obviously, for such large no. of voters, EVMs are a better choice.

(b)Eliminate Ballot Stuffing & Ballot box seizing: Nalini Singh, in the 1990’s, telecast a program visually highlighting rampant booth capture & ballot stuffing & manipulation of the electoral process there-off; some critics have argued that EVMs have put an end to the same.

Others disagree; Chief Election Commissioner, TN Seshan, in the 1990s, cracking the whip, a more aware electorate courtesy the media & increased literacy levels & ECI conducting elections, in phases, under heavy protection of security forces cover, have contributed more to bring sanity. While booths capture by armed ruffians has the potential of being highlighted by the media or paparazzi in this era of CCTV cameras & smartphone ubiquitousness, digital capture of an EVM is inherently silent & hence more deadly. Gauhar Raza, writing in The Citizen, on 30th Mar 2017, raises a probing question: Even if individual candidates do have not have the material resources to launch a digital attack, is there a possibility of a political party or corporate houses with a history of crony capitalism or intelligence agencies of foreign nations attempting the same?

(c)No booth wise secrecy: During the era of paper ballots, votes across booths were mixed & counted so that none would know vote share across booths, helping the marginalized sections vote freely & fairly without the fear of retribution; however, this process has been dispensed with in the EVM era despite the availability of “Totalizer machines”. It is time to introduce these “Totalizer” machines.  

Since EVMs look a better bet because of the above listed reasons, debate has now shifted to:

How Many EVMs & VVPAT slips should be matched to instill confidence?

In March, 2019, 21 political parties approached the Supreme Court (SC) challenging the ECI guideline that VVPAT slips counting would take place only in one polling station in an assemble constituency or each assembly segment in case of a parliamentary constituency; generally a parliamentary constituency has between 5-8 assembly segments. Their plea that ECI be directed to verify 50% of VVPAT slips in each assembly segment of a Parliamentary constituency was rejected by the ECI vide an affidavit filed in the SC, on the ground that it would “enlarge the time required for counting to 6 more days”. This appears an unconvincing argument since the 7 phase general election is spread over 43 days & increasing it to 49 days is a small price to pay for sustaining “trust” in the EVMs & democracy; general elections.started on April 11^th & ends on May 19^th with the results to be declared on May 23^rd.   

ISI (Indian Statistical Institute) was tasked to define the sample size for verification & they reverted with a no. of 479, of the population of 10.35 lakh EVMs -to be used in the General Elections - at a confidence level of 99.9936% level; ECI contended that April-May Lok Sabha polls would cover 4125 EVMs & VVPATs which is 8.6 times the ISI recommendation.  Further, they apprised the Court on the infrastructural & logistical challenges of training & deploying manpower for the 50% exercise.

The SC, in 8th April 2019, ruled on randomly selecting 5 EVMs, for every assembly segment /constituency, instead of 1 proposed by the ECI; this will delay the counting process by 5 hours only, & results will still be declared on May 23^rd. The judgement is, however, silent on the course to be adopted if there is a discrepancy in the EVM & VVPAT count in at least 1 of the 5 EVMs; should 100% of the EVMs & VVPATs for that assembly segment be then counted & matched? The opposition has filed a review petition.

Conclusion:

Democracy gives moral legitimacy to a govt. which is contingent on the electoral process being “transparent” – votes are recorded & counted correctly -  “verifiable” – & in “secrecy”- provided by the anonymity of a secret ballot; VVPATs shall help in “transparency” & “verifiability” & use of “totalizer machines” shall help strengthen “Secrecy”.

It is clear that mass manipulation of EVMs in India is impossible but selective tampering is still a theoretical possibility with the connivance of the interested party, ECI & manufacture’s engineers or maintenance staff. Implementing the administrative protocols suggested by Yogendra Yadav is a solution that needs immediate implementation. Since “eternal vigilance is the price of liberty” polling agents at the booth level should keep their eyes & ears open to detect & prevent manipulation.

It is time for India to unite on an EVM solution, to be exported to other countries later, to increase our soft power further.