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8 ISSUES AND INSIGHTS
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MUMBAI | THURSDAY, 10 MAY 2018
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Making a mountain out of a molehill Why I consider the Adopt a Heritage scheme an improvement over what we have done so far
ANJULI BHARGAVA
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n my over four decades as an Indian, never have I felt more ashamed of what we were doing with the rich cultural heritage of this nation as I did around four or five years ago when I took my children to see the sound and light show at Delhi’s Red Fort (the second time was more recent
when I dragged them to Mumbai’s Elephanta caves last December). The sound and light show at the Red Fort used to be a delight for us as kids. The sounds of the horses neighing and the clattering of their hooves, the booming voice of the Mughal emperors, the battle cries, the sound of bugles and bangles, the dramatic play of lights to highlight the drama of the story.. this show along with Ram Leela created by Delhi’s Shriram Bharatiya Kala Kendra were etched in our minds as children. I could recall what would come next. Thanks to this show, from an age of around four or five, I remember loving every inch of the Red Fort. In fact, in the late 1970s and early 1980s, the show at the Purana Qila lacked the punch and thrill of the one at the Red fort, despite the fact that Humayun fell to his unexpected death at the steep steps of the fort, a story the
guides managed to thrill everyone with in their morbid retelling back then. That’s why I was horrified when I went to the Red Fort show a few years ago. In the same week, I watched the new show at the Purana Qila, redone by former Delhi Chief Minister Sheila Dixit for the Commonwealth Games. While the Old Fort show was not what I would have liked — the show focuses more on Delhi as a city, than the history of the fort, it was a few hundred times better than the Red Fort one. Vivid in colour and music, it holds your attention regardless of what it is focused on. In contrast, the audio at the Red Fort was inaudible, you couldn’t make head or tail of what was happening and even the lights failed to bring the drama alive in any way. The bewildered audience — with a large smattering of foreign tourists — was looking at each
other for some kind of explanation. The show was a complete national embarrassment. As usual, I was closely questioned about what I had loved so deeply by those accompanying me. As usual, I had no answers. That’s why for me this news of the Dalmia Bharat adopting the Red Fort and running it is the best news I have heard since India got independence. Nothing is more upsetting than witnessing what we are doing to our monuments — starting from the Taj Mahal to the Salar Jung Museum — a gem in Hyderbad — across the country. I don’t need to elaborate as anyone who has visited any of these in the recent past can testify. The Salar Jung Museum — I have been four times – still has a lovely collection of objects, slowly falling apart. Horror stories of the Taj Mahal appear every other week and I would love to know what Shah Jahan thinks of what we have made of his great
monument of love. I can go on and on. What we have done or failed to do with our monuments and cultural heritage is more the subject of a book. My column can do no justice. Any reader who has visited museums and historical buildings in Europe will vouch for what I am saying — a visit to Stonehenge is a lesson in how to make a mountain out of a molehill. To my mind, it’s a set of nice rocks in a nice setting but a British cultural icon? Please. And here we have mountains staring us in the face in every corner and we refuse to acknowledge or take care of them. I really don’t know what the objections — except that we seem to be doing little else these days — are to this Adopt a Heritage scheme but as I see it, anything is an improvement over what we have managed so far. Do those who are objecting have any better ideas or are we supposed to wait for some kind of turnabout from the authorities who have failed us so far? Let’s for once keep our political leanings and predilections aside and see what is the best way to highlight, preserve and protect what we have.
> CHINESE
Fugitive law can victimise the victim
WITHOUT CONTEMPT SOMASEKHAR SUNDARESAN
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he Presidential Ordinance on fugitive economic offenders is highly likely to be celebrated by the masses. Yet, its constitutional validity is suspect. It is yet another law that have the best intentions as its premise but can end up wreaking havoc on the innocent, who may well be victims of fugitives, but would pay the price for unintended consequences. Here is how this law can cause grievous injury to the innocent. The most serious inroad into the rights of a person who may not be the fugitive but could well be the victim of the fugitive, is contained in the provisions on “disentitlement”. Under this provision, once an individual is declared to be a “fugitive economic offender”, any court in India may, at its discretion, disentitle any company from putting forward or defending any civil claim, if the individual authorised by the company to sue in its behalf, or any promoter of the company, or even any key managerial personnel or the company, or indeed any majority shareholder of the company has been declared a fugitive economic offender. In other words, the company which would be injured because its promoter ran away, or indeed because its key managerial person ran away, could be the one facing the disentitlement from being able to pursue any civil claims.
An example would make it good. Let’s say the managing director, or indeed, a promoter of a company is alleged to have committed a “scheduled offence” — these are offences listed in a schedule to this law — for which the person is issued a warrant and refuses to come back to India, civil courts could rule that no litigation for recovery of even legitimate dues owed to such a company cannot be pursued. The principle underlying the concept of disentitlement is that one who does not subscribe to the rule of law in India may be denied the protections afforded by Indian law. However, this provision goes beyond the person rejecting the rule of law in India. It has the potential to cause serious injury to persons who may themselves be injured by the rejection of Indian law by the fugitive who has left the country. This would translate into a perverse incentive for law enforcers — grab the headlines and show stringency of action by hurting a company that is operating in India. This approach loses sight of the fact that those within reach are those who subscribe to Indian law and are seeking protection of the rule of law by filing legitimate claims. Likewise, it has no regard to the fact that the ransom of ill-treating those who are in India could have no coercive impact on the fugitive — her decision to turn fugitive would have already factored in the possibility of atrocities being heaped on the company she left behind. The other perverse incentive endorsed by this law is that commercial counter-parties who have scant regard for the rule of law could start defaulting on their dues to a company whose promoter or key managerial personnel is declared a fugitive. Despite being a solvent company, the company the fugitive leaves behind would face a potential prohibition on the sovereign assurance that validly contracted promises given to the company must be enforced. Open doors, it is said, tempt
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Listing violations of takeover regulations could mean the state gave itself a tool to come after businesses with a heavy hand
even saints — once a company’s promoter or key managerial personnel is declared a fugitive, every person who has a contract with the company would be entitled to move applications before courts trying claims for enforcement by the company, asking for the discretion in the new law to be used to debar claims by the company. To have any individual declared as a fugitive economic offender, an application has to be moved by the authorities asking the competent court to make the declaration that the person named in it is a fugitive. However, even while moving the application, the authority has the power to attach any property listed in the application, for 180 days. In other words, way before successfully getting a declaration that the person named is a fugitive, properties that may not even belong to the individual named, can be attached
Many people want to short bitcoin but don't The mechanics are there, and so is some volatility
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ave I apologised yet for how wrong I was about Bitcoin futures? In the weeks before Bitcoin futures started trading at Cboe Global Markets Inc. and CME Group Inc., a lot of people argued that Bitcoin futures would finally provide a convenient way to short Bitcoin, and that the shorts would rush in and deflate the price. Meanwhile I was galaxybraining around being like “no no no you see this is a convenient way to buy Bitcoin, which was previously just as hard for careful conservative financial institutions as shorting it was, and so the introduction of Bitcoin futures will make the price go up.” And then the futures started trading and I took a victory lap, like, five minutes into the trading session, when Bitcoin hit a new record high. And then it fell and has never recovered; Bitcoin is worth about half what it was when futures were introduced. If you read my posts about how futures would be good for Bitcoin prices and put all your money in Bitcoin … sorry about that? I don’t know, if you took anything here as investing advice then I think that is more your fault than mine, but nonetheless I confess that my call was pretty bad. Here’s a Federal Reserve Bank of San Francisco Economic Letter about “How Futures Trading Changed Bitcoin Prices.” I suppose it is easier to be right about that question six months after the futures were introduced than it was a week before they were introduced, but still, the San Francisco Fed’s analysis is a little too textbook for my tastes: Before December 2017, there was no market for bitcoin derivatives. This
meant that it was extremely difficult, if not impossible, to bet on the decline in bitcoin price. Such bets usually take the form of short selling, that is selling an asset before buying it, forward or future contracts, swaps, or a combination. Betting on the increase in bitcoin price was easy — one just had to buy it. Speculative demand for bitcoin came only from optimists, investors who were willing to bet money that the price was going to go up. And until December 17, those investors were right: As with a selffulfilling prophecy, optimists’ demand pushed the price of bitcoin up, energising more people to join in and keep pushing up the price. The pessimists, however, had no mechanism available to put money behind their belief that the bitcoin price would collapse. So they were left to wait for their “I told you so” moment. This one-sided speculative demand came to an end when the futures for bitcoin started trading on the CME on December 17. Umm look I guess. On the other hand let’s say you had found a con-
The author is an advocate and independent counsel. Tweets @SomasekharS
Pichai keeps his promise
Sundar Pichai, CEO, Google, opened the annual I/O developer conference by announcing that the cheeseburger emoji had been fixed. Wrong placement of cheese in the burger emoji unveiled last year had kicked up a storm. The Indian-born Google chief had expressed surprise over so many people expressing concern over placement of the cheese below the patty. He had even sarcastically tweeted in October last year that Google would drop everything else and address that issue. On Tuesday, Pichai, in his opening remarks, said, “Towards the end of last year it came to my attention that we had a major bug in one of our core products. It turns out, we got the cheese wrong in our burger emoji,” he said adding that he was a vegetarian.
PM’s counter-attack As Opposition parties continue to sledgehammer the government over the Punjab National Bank fraud perpetrated by a group of companies belonging to merchants Nirav Modi and Mehul Choksi, the buzz in the bureaucratic circles is that the government will soon present a counter-narrative of the whole episode to put pressure on the Congress that led the previous government at the Centre. The NDA government is waiting for the Karnataka Assembly polls to get over to present a “factual” account of the Modi-Choksi scam showing how the loans were issued by PNB to these firms since 2011, a senior government official said. PNB issued over 1,200 fraudulent letters of undertaking to Nirav Modi firms since 2011, of which around 400 were issued during the previous government's regime. The PM has not spoken on the issue himself till date.
Missing in action May 11 is recognised in India as National Technology Day to commemorate the first of the five nuclear tests carried out on that day in 1998. Prime Minister Narendra Modi will not be in India on that day to celebrate the occasion. He will be in Nepal, and is scheduled to fly to Janakpur to announce a direct bus service between Janakpur and Ayodhya (Uttar Pradesh). Janakpur is revered as the birthplace of Sita, and Ayodhya is recognised as the birthplace of Ram. There is some consternation in Nepal that the Indian PM is using his visit for political gains back home. There is, however, some uncertainty over the Centre's plans to celebrate 20 years of the Pokhran nuclear test.
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without any need for the attachment to be blessed by a court of law, so long as the property is identified in the application and the authorities have “reason to believe” that the property represents “proceeds of crime”. Interestingly, the attachment would automatically run for 180 days without even a warrant. The non-fugitive person who owns the property would get just one week to file his say in the matter, which too would start after the attachment. Another provision in the law explicitly provides that the person other than the fugitive, whose property is so attached, would have to shoulder the burden of proving that the property was acquired without knowledge of it being proceeds of crime. The term “proceeds of crime” is not just the fruits of criminal activity listed in the schedule to the law. It also includes “the value of such property”
(meaning despite it being evident that the proceeds of crime were deployed elsewhere, anything equivalent in value may be chased and attached). Besides, “where such property is outside the country”, any other property “equivalent in value held within the country” would constitute “proceeds of crime”. Therefore, all one has to show is that the value of the benefits from “crime” is represented as part of the value of the property being attached regardless of whose hands the property resides in — it would be attached for 180 days, and it is for the owner of that property to show within a week that she did not have knowledge of such property being proceeds of crime. Finally, what are the crimes listed in the schedule? Apart from the economic offences found in the Indian Penal Code, the provisions that would lead to a “scheduled offence” are generic provisions from company law where fraud is alleged, and inexplicably (following the footsteps of ill-advised amendments to the anti-money laundering law) even violations of takeover regulations. While offences such as insider trading and market manipulation are understandable members of the list of scheduled offences, listing violations of takeover regulations could simply mean that the state just gave itself a tool to come after businesses with a heavy hand if it so chooses. This is not at all a comment about the colour of any political party in power. The listing of the takeover regulations as a scheduled offence in the law on money-laundering was done by the UPA government. The NDA government has now made it a scheduled offence under this law. In short, regardless of the party in power, you would do well to be careful and beware the long arm of the state.
WHISPERS
venient and inexpensive way to short Bitcoin in, say, December 2016. No borrow costs, no creepy exchanges, just a perfect seamless way to sell Bitcoins now and buy them back in the future. If you did that on December 17, 2016 — a year before futures were actually introduced — you’d have had a 100percent loss by May. If you did it in May, you’d have had a 100-percent loss by August. If you did it in August, you’d have had a 100-percent loss by October. If you did it in October, you’d have had a 100-percent loss by November. If you shorted Bitcoins in November 2017, hoo boy. I don’t entirely believe that the Bitcoin futures market is full of people taking naked short Bitcoin bets, is I guess my point here? The difficulty of shorting Bitcoin is not primarily about the mechanics of finding a way to short. It’s primarily about Bitcoin’s huge volatility and rapid rise and general ability to blow shorts up in like a day. You can find a lot of people pontificating that they’d love to short Bitcoin (here’s Bill Gates!), but they all … can … and … don’t? (Here’s Tyler Winklevoss telling Gates, go ahead, short Bitcoin, be my guest.) Even with the introduction of Bitcoin futures, there is no convenient way to express the view that “Bitcoin will eventually go to zero but I have no idea what these crazy kids will get up to for the next few years.” And that seems to be the actual short-Bitcoin thesis. If your thesis is “Bitcoin will go to zero in a month” then, sure, go ahead, short the futures, but I have trouble believing that there’s much money staked on that thesis. It seems a little nervewracking, you know? © 2018 Bloomberg
Act now Apropos your front page report, “Videocon loan case: Govt nominee to stay away from ICICI Bank board meet” by Somesh Jha (May 9), the waiting game being played out by the ministry is not helping either the cause of justice or that of governance. By abstaining from three successive board meetings, the government nominee has — perhaps unwittingly — sent a wrong message to stakeholders, particularly to the millions of small depositors, who are shaken by what is going to happen to their life's savings parked in the venerable institution. The significant gain in the share price of the company — perhaps brought about after provisioning of some non-performing assets (NPAs) — is certainly some relief but only just that. People are still worried about the fate of the bank’s CEO and the bank itself. It is the duty of the government and the regulators to speedily resolve the issue and either clear the CEO unconditionally or punish her suitably. The government might be a minority shareholder in the bank but it still has the responsibility to ensure that all the approaches to deal with the issue are pursued speedily and a logical solution arrived at. It is surprising that the government hasn't even written to the RBI. Then we have the Securities and Exchange Board of India (Sebi), another powerful regulator that can examine books of all companies and order corrective actions required. Why is Sebi silent on the matter? Prima-facie, it is difficult to believe that (a) there was no unholy nexus between the Dhoot group and Deepak Kochhar and (b) CEO Chanda Kochhar was not aware of the huge loans sanctioned to Dhoots on one hand and their proximity to her husband on the other. Only the very
gullible will buy that fairy tale. For heaven’s sake enough is enough, several months have passed when the news first broke out. By remaining immobile — “silence will mean validating the board’s view” and the fear of being overruled — nothing will get solved. If the good lady is innocent, say so boldly. If she is guilty, send out a clear message to other bank chiefs. Krishan Kalra Gurugram
A gullible audience Apropos Vanita Kohli-Khandekar's column “Can Hindi GECs re-invent themselves?” (May 9), it is good news that the viewership of Hindi general entertainment channels (GECs) has declined from 28.5 per cent in 2015 to 22.6 per cent now. One, Hindi TV
> HAMBONE
serials have become progressively regressive in raising social themes. In almost every serial it is a woman character who wants to destroy the family; family life continues to be driven by age-old practices and little attempt is made to highlight how it should adapt to new demands of the society. I feel many women watch such serials to learn about new jewellery styles and sarees. Two, Hindi movie channels exhibit repeatedly a limited set of movies as if by rotation and rarely one sees classics like Do Bigha Zameen or trending movies like Hindi Medium. Three, in most Hindi channels, you read news at the bottom of the monitor as you watch astrological issues or clippings of Hindi serials. Thoughtful analysis of issues is non-existent —experts shout at one another with the anchor watching the fun nonchalantly. It is time the information and broadcasting minister pays more attention to reforming GECs than curbing media freedom. Y G Chouksey Pune Letters can be mailed, faxed or e-mailed to: The Editor, Business Standard Nehru House, 4 Bahadur Shah Zafar Marg New Delhi 110 002 Fax: (011) 23720201 · E-mail:
[email protected] All letters must have a postal address and telephone number
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OPINION 9
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Volume XXII Number 192
MUMBAI | THURSDAY, 10 MAY 2018
Retail therapy Walmart’s Flipkart buy could be a high-risk strategy
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fter over a decade of trying, the world’s largest retailer has finally gained a toe-hold in the Indian retail market for $16 billion. Viewed from Walmart’s global revenues of $500 billion, this appears to be a small price to pay for a 55 per cent market share in a fast-growing online retail market — more so when rival Amazon has had a six-year head start, and now accounts for the remaining market share. True, this purchase gives Walmart a running start, and it has the deep pockets to compete against an equally cash-rich rival where Flipkart was running out of cash. The questions centre on Walmart’s real gains from the deal, both in terms of Flipkart’s valuation and the nature of the market the Bentonville, Arkansas-headquartered company is entering. The deal has met with scepticism on Wall Street. Walmart’s investors reacted negatively, wiping away $10 billion worth of the company’s market capitalisation in early morning trade on the New York Stock Exchange, and S&P revised its rating from “stable” to “negative”. An investment of $16 billion for a 77 per cent stake values Flipkart at $21 billion against $10.5 billion a year ago. This sharp valuation jump within a year is the opportunity cost to enter the Indian retail market and challenge Amazon’s global monopoly. This entry strategy needs to be set against the realities of Indian retail, however. The domestic online retail market is valued at about $19 billion, a tiny fraction of the total Indian retail market. Drilled down to Flipkart’s market share, Walmart would be paying, in effect, a significant premium to acquire a share of about 3 per cent in Indian retail, which is not yet within the top 10 in global rankings. Walmart’s challenges may also flow from a legacy issue: Despite its fiveyear first-mover advantage over Amazon, Flipkart has not been able to make profits in its 11 years under the Bansals. Walmart, which is itself making sizeable losses, is yet to specify the deadline it has set to make money in India or what additional investment it will put in to do so. It is possible that the bottom line will not be a major concern as it seeks to establish its dominance. But the fact is that the dynamics of retailing are changing, with growing convergence between online and brick-and-mortar structures (Amazon’s backward integration in the US is a good example of the new dynamics). Achieving this seamless structure by acquiring a brick and mortar B2C chain in India has long eluded it (it has only B2B cash and carry outlets in the country and exited a joint venture with the Bharti group). In this, Walmart and others were a victim of strange government policy that distinguishes between single- and multi-brand retail, allowing only a 51 per cent joint venture route for foreign investors in the latter and restricting it with challenging conditions. Indeed, the fact that this deal will extinguish significant domestic players from online B2C retail is a pointer to some challenges of doing business in India. E-commerce has been the focus of much capricious policy in recent years; when combined with the myriad practical difficulties of setting up and running a business in India, it is fair to say that domestic e-commerce entrepreneurs have been ill-served. Indian online consumers will certainly enjoy the fruits of a global duopoly in terms of fierce discounting wars for a while and the deal demonstrates that Indian startups can start from scratch, take billions of dollars in investments, and give massive exits. But the exit of the Bansals also exemplifies like nothing else that the larger cause of emerging Indian entrepreneurship remains a losing proposition.
Dispelling growth delusions
Trends in the ingredients of the ‘noughties' growth surge do not augur well for sustained 8 per cent plus growth in the near future
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henever official estimates of GDP growth tional trade, capital flows and technology transfers. creep up over 7 per cent, as they did for The cumulative, productivity-enhancing effects of 2017-18 Q3, voices (including of senior gov- wide-ranging economic reforms carried out under ernment spokespersons) proliferate claiming that 8- the Narasimha Rao and Vajpayee governments 10 per cent hyper growth is around the corner. It’s between 1991 and 2004. time for a reality check. Before getting into the main A remarkably successful fiscal consolidation that issues, it is also important to reiterate that the new reduced the combined fiscal deficit from 9.6 per (since 2015) estimates of GDP growth (with base cent of GDP in 2002-03 to 4.1 per cent in 2007-08, 2011-12) are non-comparable to the ensuring higher public savings, earlier (2004-05 base) estimates. For much greater loanable funds for prithe only three common years, vate investment and lower real 2012-13, 2013-14 and 2014-15, the interest rates. An unprecedented surge in the new series gives a GDP growth rate of gross domestic investment estimate that averages nearly 1.5 from around 25 per cent of GDP in percentage points higher than the 2002-03 to 35 per cent by 2005-06 old series. Many analysts believe and even higher in later years. that the old series provided a truer Nearly all this increase was reflection of underlying reality. I domestically financed by an sympathise (see my “How fast is equivalent surge in domestic savIndia growing?”, Business ings, especially public savings and Standard, April 9, 2015). private corporate savings. From a broader perspective, SHANKAR ACHARYA Sustained rapid growth in merwe have to recognise that in our 70-year post-Independence history there has been chandise exports from about $50 billion in 2002only one 8 year-long sub-period (2003-04 to 2010- 03 to $250 billion in 2010-11. 11) when GDP growth averaged over 8 per cent. This was buttressed by a 25 per cent annual During the first five years, up to 2007-08, all macro- increase in India’s service exports (especially IT indicators were very healthy (a “golden age”); then and IT-enabled) between 2001 and 2008. Coupled came the global financial crisis, which rationalised with the concurrent boom in domestic telephony a massive pre-election fiscal blowout in 2008-09, and financial services, the modern service sector which, in turn, kept growth unsustainably high for became a significant contributor to GDP growth another couple of years, though accompanied by an during these years. Are these kinds of factors at play today which unprecedented bout of a double-digit inflation and might underpin realistic expectations of another weakening external balances. What were the factors which propelled India’s bout of hyper growth? Some recovery from the high growth in the “golden age”? Are they being shocks of demonetisation and GST implementareplicated now? Here are my explanatory candi- tion is clearly under way, but that is not enough to propel sustained 8 per cent plus growth. Let us condates for the “noughties” growth surge: The exceptionally strong global economic expansider each of the earlier growth ingredients in turn: sion of 2002-07, which boosted growth across the After anaemic global economic performance for world (including in India) through greater interna- a decade, 2017 saw surprisingly good, synchronised
A PIECE OF MY MIND
Slipping on oil US withdrawal from Iran nuclear deal is bad news
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il prices rose to three-and-a-half year highs on Wednesday, after US President Donald Trump abandoned a nuclear deal with Iran and announced the “highest level” of sanctions against the Opec member. In taking this stand, which is in line with his campaign promise, Mr Trump has reversed his own cabinet’s assessment — just last month Mike Pompeo, the US secretary of State, asserted that there was no evidence that Iran was cheating on its commitments. He has also disappointed a lot of US allies in Europe. The 2015 accord, signed by Barack Obama, was not a bilateral one; five other countries — the UK, France, China, Russia and Germany — were involved. Mr Trump did not mince words, saying the “decaying and rotten structure” of the deal could not prevent Iran from building a nuclear bomb and initiating a nuclear arms race in West Asia. The fallout of this decision will be a further disruption in supply, leading to more uncertainty on the crude oil price front. After the sanctions were lifted in 2015, Iran became the third-biggest exporter of crude within the Organization of the Petroleum Exporting Countries, behind Saudi Arabia and Iraq. The problem is that the news from Iran is not the only factor at play. As the global economy has rebounded over the past 18 months, the supply glut of 2014-16 has eased with inventories running down over time. On the supply side, the story has been far more complicated. For one, the 14-member strong Opec and Russia have cut back supply by at least 1.8 million barrels per day since the start of 2017. It is an open question whether these cuts will be reversed. Saudi Arabia, which is the unofficial leader of the Opec, will not mind higher oil prices at least in the short term, with Aramco, the national oil producing company, slated for a public offering in 2019. There are other geopolitical risks to the supply of oil as well. Venezuela, which has already seen the biggest cut in supply — at the rate of 500,000 barrels a day — thanks to a massive political crisis, is also likely to attract US sanctions if President Nicolas Maduro does not quit power. Supplies from Libya, too, are disrupted due to the civil war. Add the Yemen conflict where Saudi Arabia is fighting Iran-backed Houthi rebels. A good pointer to the massive imbalance in the oil market is the large speculative positions that hedge funds and others have built up recently. Typically, the viability of shale oil in the US was supposed to work as a counter to higher oil prices, but reports suggest while shale supply is improving, massive infrastructural bottlenecks in the form of jammed pipelines will hamper exports at least till December. From India’s perspective, higher oil prices will mean further bad news. The earlier low crude oil prices kept the trade deficit under control as well as moderated inflation and the fiscal deficit. With that cushion gone, there is already considerable pressure on the external current account deficit front and macroeconomic vulnerabilities could be exposed further. The other challenge would be calibration of taxes on petroleum products in such a manner that consumers are protected without impairing the government's revenue target. But that is a tall order.
BOOK REVIEW DEVANGSHU DATTA Most people suffer from a form of cognitive dissonance that behavioural scientists call the “Optimism Gap”. Individuals are usually optimistic about their own future, while being pessimistic about the future of their country, and the world. The optimism gap is pan-global, and it’s been validated in survey after survey across decades. This optimism gap is one of the quirks in our thought processes that leads a solid majority of people to assume that the world is going from bad to worse. Other biases, such as the “Availability Bias” (basing opinions on easily available information like news
The writer is honorary professor at ICRIER and former Chief Economic Advisor to the Government of India. Views are personal
Tax sword over donation of shares I
s India Inc doing enough on philanthropy? The is large scale charitable giving, or philanthropy. In answer to that question would vary widely. The the US, for example, charitable giving is around 2 government has said the inflow has improved con- per cent of its gross domestic product. In India, siderably after it mandated companies to spend 2 per it’s much smaller. One way of scaling this up is tax-exempt donation cent of their profits in corporate social responsibility. But the actual amount collected isn’t much really: of equity. As elsewhere, India’s entrepreneurs hold The CSR expenditure of about 5,000 companies, an overwhelming share of their wealth in the equity of according to the ministry of corporate affairs data, their companies. But donations through this route are a big problem. That’s because till 1973, India was just ~98.22 billion in 2015-16. allowed donation of equity for In its India Philanthropy Report 2017, Bain and Company charitable purposes, without the gave some interesting figures. In receiving foundations losing their income tax exemption status. The relative terms, the share of corpoprovision was withdrawn suddenrate philanthropy in funds raised ly, possibly because of the mistrust for the development sector has actually declined. In 2016, comof business in general. That, of course, was not a surprise as it was panies accounted for 15 per cent of the period when the government the total share of private philanthropy, down from 30 per cent in introduced the MRTP Act, follow2011. There is some good news, ing it up with the Foreign however. Overall, total funds for Exchange Regulation Act. the development sector have It’s perhaps time for the government to once again introduce grown at 9 per cent over the past SHYAMAL MAJUMDAR five years, increasing from ~1,500 norms for donation of equity for charitable purposes, without the billion to ~2,200 billion. While the government remains the largest contributor (~1,500 receiving foundations losing IT exemption status. billion in 2016), its share in total funding has been Charitable trusts/companies lose their IT exemption declining steadily. status under Section 11 and 12 of the Income Tax Act, Private contributions primarily accounted for the 1961, if they hold shares in companies (other than ~700 billion five-year growth. Private donations made those in prescribed categories), acquired by them on up a third of total contributions to the development or after June 1, 1973, and not disposed of till March 31 sector in 2016, up from a mere 15 per cent in 2011. of that year subsequent to the year of acquisition. The What is encouraging is that philanthropic funding position is the same irrespective of the mode of acquifrom private individuals recorded a six-fold increase sition, that is, whether the shares are donated for the in recent years. institution or purchased by the institution. But the actual numbers are obviously still very This needs to change. As Telugu Desam Member small compared to the potential. What India needs of Parliament Kesineni Srinivas says, globally, it is an
POWERPOINT
Bridging the optimism gap flow, which is often negatively-weighted) and the “Negativity Bias” (it’s easier to imagine disasters in concrete details) also tend to confirm this feeling that things are always getting worse. Mr Pinker has spent many years pointing out that this is not actually the case. In book after book, he has used a combination of data and carefully crafted logic to argue with great eloquence that the human condition is actually better now than it has ever been. In his magnum opus The Better Angels of Our Nature, he focussed on violence and pointed out that violence has decreased considerably within our lifetimes and, indeed, that violence has been decreasing for centuries. This book extends a similar thesis to many different parameters that define the human condition and our quality of life. Mr Pinker accesses and interprets data that shows quantifiable improvement in many spheres. He has chapters titled life, health, sustenance, wealth, inequality,
growth in major economies (US, European Union, China and Japan). The IMF expects this to continue in 2018 and 2019. But in recent weeks at least two major shadows have darkened that optimism. First, the international price of oil has rebounded from multi-year lows with surprising vigour and the outlook is not promising. Second, the prospects of a serious trade war between the US and major trading partners (notably China and Europe) have increased significantly. On the domestic front, the decade of UPA government did not yield much economic reform. The last four years have shown a mixed record. Demonetisation was an avoidable economic shock. The GST was unquestionably a major reform effort, but with a lot of transitional problems, and it still suffers from significant weaknesses. The government has been working manfully to deal with the legacy twin balance sheet problems of banks and indebted companies through various initiatives, including the Insolvency and Bankruptcy Code and bank recapitalisation. But it’s all work in progress with a long way to go. The medium-term growth dividend of these reforms remains uncertain. And there has been no significant reform in the crucial factor markets of land and labour. Modest fiscal consolidation has occurred at the central government level (now weakening pre-elections) but much of it has been offset by a deterioration in state finances, leaving the combined fiscal deficit hovering near 7 per cent of GDP. There has certainly been nothing comparable to the dramatic fiscal reduction achieved in the golden quinquennium, 2003-04 to 2007-08. The rate of gross fixed investment has been in steady decline since 2011-12, with a minor uptick discernible in the past year. Again, the contrast with the “golden age” is stark. Export performance has been particularly weak, with the dollar value of merchandise exports at $303 billion in 2017-18, below the level attained in 2011-12. As a share of GDP, merchandise exports have plummeted to 11.7 per cent, the lowest in 14 years. Software export growth has also been lacklustre in the face of new technological and market challenges. Nor does the modern services sector look particularly dynamic, with the exception of civil aviation. Banks (especially, but not only, the public sector banks) are still beset by massive levels of stressed assets. The once dynamic mobile telephony sector has been buffeted by scams, court-ordered licence cancellations, regulatory uncertainty, and a form of predatory pricing by a new deep-pocketed competitor. Many firms have folded and the few that remain struggle to show profits. To sum up, if the ingredients of the “noughties” growth surge were correctly identified above, the trends in those ingredients do not augur well for sustained 8 percent plus growth in the near future. Indeed, some of the indicators point to emerging macro imbalance problems, which might render even India’s current growth performance vulnerable in an uncertain world.
environment, peace, safety, terrorism, democracy, equal rights. He also speaks of less quantifiable things like knowledge, quality of life and existential threats. He charts measures of progress showing progress in terms of education, healthcare, reduction of poverty, reduction of violence, freedom for individuals, LGBT rights, the spread of democracy, more representation for women, fewer injuries in the workplace, etc. The scale and scope of the narrative is vast, ranging across centuries and covering hundreds of millions across many regions. However, the book is anchored in the present. Hence the discussion of terrorism and existential threats (including a possible takeover by Artificial Intelligence). He dismisses these as overblown and possibly inconsequential in the long view. One way to encapsulate this Panglossian approach, is to quote his favourite sentence, “Smallpox was an infectious disease caused by either of two
virus variants...”. That’s from Wikipedia and it’s the past tense that he likes. It’s important to note that Mr Pinker does not necessarily believe the world is doing well; his point is, things were much, much worse in the past, and in the recent past at that. As he says, even 2017 is measurably better than 2016. The broader assertion is that progress came about largely due to the “Enlightenment” — that fuzzily-defined period starting in the 17th century (or perhaps the 18th) when the scientific, rational approach and humanism gradually trumped blind obedience to the tenets of religion(s). This was when humanists realised that a coherent value system could be derived from rational thought without recourse to religious shibboleths. That humanist code could be applied to make the world a better place. Mr Pinker believes that further progress can only come about if we, as a species, continue to pay heed to that dream of the Enlightenment. There are many significant counterexamples that call the thesis of progress into question. For example, there are many regions of increasing rights-
accepted practice of high net worth individuals to donate a part of their shareholding in companies to charitable institutions. But not many entrepreneurs or HNIs in India take this route because of the tax tangle. This is a pity as the potential is huge. According to the Forbes 2017 list of 100 Indian billionaires, the total net worth of these billionaires is around $250 billion. Most of this wealth is held in the form of shares in companies, and even if 1 per cent of this wealth is donated towards charitable purposes, it is a relatively high amount. In any case, the original purpose behind the restriction imposed in 1973 — to prevent avoidance of estate duty, wealth tax, high tax on dividend income etc — is no longer valid. Many countries do allow charities to retain donated shares. The point to note is that if trusts invest only in interest-earning securities like bonds, the real value of these will erode over time with inflation, making it difficult to sustain or expand charitable activities. After all, it has been proved beyond doubt that in the long run, equities give far better returns than bonds or fixed deposits. Of course, proper safeguards must be taken to prevent misuse of this provision. For example, charitable institutions must be prevented from investing their own funds in capital markets or entering into speculative transactions. Besides, a trust should be considered charitable only if the object of the trust is directed to the benefit of the community and not for an individual or group of individuals. There is another compelling reason to turn the clock back. The government had prohibited taxexempt charitable trusts from holding equity stakes in companies for new trusts, but allowed exemption to older ones, including the Tata and Birla trusts, which were permitted to continue holding shares. This is anyway discriminatory and must be corrected.
inequality where minority religion, gender and LGBT rights have been sledgehammered by fundamentalist bigots; there is the erosion of liberal, democratic values even in the US and Europe; there’s the destructive impact of climate change and environmental pollution; there’s growing economic inequality. Although Mr Pinker discusses these things, he believes progress is never linear. It’s up to the reader to judge whether those counter-examples outweigh the multitude of positive examples he does cite. The book also includes an entertaining critique of religion, which Mr Pinker defines as intellectually bankrupt. He cites the usual contradictions, illogic and hypocrisies embedded in all organised faiths. Apart from that, Pinker indulges in the bashing of sundry categories of “progressophobes” (a word he coined and discussed in an entire chapter). That includes journalists, humanities professors (he’s one himself!), public intellectuals (ditto!) on right and left. He even says some scathing things about ecologists. His trenchantly stated opinions will upset a lot of people and entertaining as
it may be, his demagogic methods will also cause discomfort to some of those, who may broadly agree with him. He often uses the “straw man” approach, by stating counter-arguments and demolishing them. That has some inherent problems, as any student of logic could explain. Any book that attempts such a sweeping thesis must, of necessity, cherry-pick data and examples. But that cherry-picking elides information that seriously challenges the assertions. The rigour is shaky on economics, ecology and environmental sciences. The book is well worth reading nonetheless (Bill Gates and Warren Buffett both say they loved it) and the broad theses seems like an excellent antidote to the global pandemic of pessimism. But the granular details will need to be seasoned with a lot of salt.
ENLIGHTENMENT NOW The case for Reason, Science, Humanism and Progress Steven Pinker Allen Lane 556 pages; ~699
