Book Review: Thin Dividing Line by Paranjoy Guha Thakurta & Shinzani Jain : Jan 21, 2018

Money laundering is quite a hot topic of discussion after a series of news breaks on the issue. But it is difficult to nail the culprits when loopholes of the tax rules of the country have been used effectively to reduce tax payments, or to avoid paying taxes. These are perfectly legitimate routes used to avoid paying taxes, where prima facie people have done nothing wrong. But it’s not fair play either. The book, Thin Dividing Line by Paranjoy Guha Thakurta and Shinzani Jain, takes readers through the labyrinth of deceit that is used subtly by some of the big corporate players to escape tax. Mauritius is the main route chosen by individuals and corporates to lower their tax liability. Other centres of tax avoidance are Singapore, Luxembourg, Cayman Islands, etc, which have double taxation avoidance agreements with India. The modus operandi is fairly simple. Set up dummy companies in these countries. Depending on the kind of laws anyone wants to escape, there could be a chain of interconnected dummy companies that are owned by persons or companies indirectly. Tax authorities normally stop at enquiring about, say, three or four links that can’t be traced to the culprit directly. This front is used to invest in, say, the Indian stock market, where the gains are not taxed since there is a double taxation avoidance treaty already in place. The proceeds are, however, taxable in the other country. Now, Mauritius does not have such a tax and, hence, there is no need to pay tax on the entire gains made. Such loopholes exist and are fully exploited by companies in a definite manner.

This is what is, broadly speaking, the thin dividing line between managing and avoiding paying taxes. Can we consider this to be a wrongdoing, or is it a legitimate action permitted by law that may not be in the true spirit? Here, the authors go into detail and quote extensively from what the courts, lawyers, corporates, critics, etc, have said about such activity. When the government brought in GAAR (general anti-avoidance rules), the idea was to distinguish between genuine business carried out in, say, Mauritius and the case of fronts maintained to dodge Indian laws. The challenge has always been how one distinguishes between the two. A major issue for the government is to ensure that the government of Mauritius does not take offence, which has happened in the past when such investments were questioned. Countries give incentives to create a financial hub, which, in turn, gets support from other countries, as it helps to channel investment. In such cases, the Indian government had to retract and redraw the agreements to ensure that no umbrage was taken by Mauritius.

Another problem that afflicts such agreements is that the stock market reacts adversely whenever such loopholes are sought to be plugged. In our country, the stock market is taken to be sacrosanct and nothing that destabilises it is tolerated. The usual argument given is that if there are such checks put in, genuine FPI investment would be deterred. Hence, no government is prepared for such a backlash. Part of the reason is that it can upset the entire system and as considerable political funds are stashed away in these markets, self-interest is also a consideration. Further, several top entrepreneurs who go right through the IPL franchise have also used these connections to reduce tax payments. This is what the authors highlight by detailing how these transactions have panned out and created controversy.

Probably one of the most controversial instruments used for round tripping are PNs, or participatory notes, where the investor is financed by unknown or undisclosed names of persons who would normally be citizens of India. Such PNs are registered with the Securities and Exchange Board of India (Sebi) and are, hence, regulated entities. However, the final owners could be sitting in India and channelling domestic funds through this route to make non-taxable gains. The amount involved is quite large and, by March 2017, was as high as Rs 1.78 lakh crore.

At a different level, the authors also speak of the retrospective nature of action for the government and tax authorities. Here, the Vodafone case has been examined in great detail, where the reader can take a call on which side she would like to be on. The case was unique because there was a claim made by the tax authority on a sale transaction done overseas that involved the Indian company. The case has gone right up to the International Court of Justice given the wider ramifications.

Towards the end, Thakurta and Jain also cover the issue of political funding, which is another source of channelling of illegal funds, thus completing their discourse on the subject. Coming after the rather remarkable book titled Sue the Messenger, Thin Dividing Line is another investigative treatise on this subject. It has been researched in great detail and while the authors provide their view, all the facts and points made are from widely quoted sources, which ensures that objectivity is maintained in presenting facts.

It is essential that the government, as well as law makers, read this book and take the issue seriously. There is a need to reconsider whether all these tax arrangements with different countries do deliver value to the nation or only help those who are quick-footed in escaping tax. While having channels like the silk route for drug trade is illegal, use of tax havens is not. This is a problem across the world, with several large reputed companies using these havens to avoid paying tax. Presently, there is nothing wrong as it is permitted. The question is, why does no one bite the bullet and pull the plug? This will probably be the question the reader will ask after reading this book.

Budget 2018: Proposals would definitely be compelling given that they come just before elections year: 19th Jan, Financial Express

Every Budget brings along with it different hopes and expectations, which get expressed in the form of demands from various sections. At another level, the critics pontificate on the wisdom of having fiscal targets that always move downwards, which helps to discipline the government. Those with a socialist proclivity forcefully argue for higher allocations for social schemes, but everyone agrees that the government should be aggressive on capital expenditure. This time, however, more than the budgetary proposals, the outcome on various themes focused in Budget 2017-18 would evoke considerable interest. An early Budget, as we are having since 2017, has the advantage of cutting the tape and allowing for the government to start spending money from April onwards, which gives enough room to implement cogent policies. But, conversely, having the Budget 2018 on February 1 makes the revised numbers presented by the government for the previous year more nebulous as we are literally conjecturing a lot for two months of the future (more reasonably speaking, three months, as often detailed information for January would not be available when these numbers are tabled). Therefore, the final numbers are more likely to deviate from the revised estimates. Yet certain numbers would be of interest.

First, the income tax revenue would indicate whether or not collections are increasing on account of an enhanced number of assesses (which was stated to be around 25% higher than earlier). This is so because it has been stated that the number of taxpayers has increased after demonetisation, which was to improve future collections. Therefore, if the tax payable by them was significant, then the numbers should get reflected in income tax collections, as the immediate impact of such a reform should be the maximum in the t+1 year. The Budget had assumed a slightly higher growth of 25% in income tax collections as against 22% in FY17. As GDP growth is to be lower this Second, the indirect tax collections would also elicit scrutiny considering that this is the first year of GST. The Budget had not put down the numbers for this reform on February 1, 2017, though there was acknowledgement that GST would be brought in from July 1, 2017. In fact, in terms of growth in collections, both excise and service tax collections were to grow at lower rates compared with FY17. The numbers so far on indirect tax collections have been volatile, given the readjustments made in production cycles of producers as well as GST rates. Since states have to be compensated as per statute, the net flows to the central government would be known as well as the final surplus or shortfall on this score.

Third, some revenue slippages, which appear to be, prima facie, possible on account of developments in the first nine months, would also be clear. These refer to the non-tax receipts which include both dividend/surplus from PSUs including RBI and telecom spectrum sale. The government was supposedly exploring the possibility of getting RBI to transfer some cash balances of the central bank as well as getting PSUs to pay higher dividends. If the budgeted numbers are retained, then it could be assumed that there would be announcements on both soon, which is useful for the markets.year, any increase in this rate could be attributed to a higher base of taxpayers.

Fourth, there has been an announcement made already on recapitalisation of banks in FY18. A sum of Rs 1.35 lakh crore is to be issued as recap bonds, though the mechanics have not been clearly spelt out. While it is not clear whether or not the entire sum would be issued in this fiscal, the point of interest would be the accounting of the same. The questions raised are: Who would be subscribing to these bonds? Will the proceeds be put in as equity or debt (AT1 bonds) in the banks? Will this amount be included in the fiscal deficit definition or will it be considered to be above the line and excluded?

Fifth, there has been some speculation on whether or not the government would be adhering to the capex targets put in the Budget 2018.Interestingly, so far this year, investment in the country has been driven largely by the central government, which had been on target so far. Of the Rs 3.1 lakh crore budgeted for the year, around 60% was incurred up to November. Therefore, the revised figures would answer the question on whether or not any compromise is being made on this account.

Sixth, the final disinvestment target for the year would be known. This year has been good for the government, with around Rs 54,000 crore of the Rs 72,500 crore target being achieved. This has been possible due to a combination of a determined drive of the government to push forward this programme, assisted considerably by an ebullient stock market, which has spread happiness all year long. Under these conditions, the government could also extend the frontier to beyond this mark, which will help to balance the Budget 2018.

Seventh, the overall fiscal deficit number will be the major takeaway as it would close the debate which is there today on what the number will be like. When the announcement was made that the government would be borrowing another Rs 50,000 crore, it did mean that there would be a shortfall of this amount which was to be fixed through this route. Hence, the deficit under ceteris paribus conditions would be approximately 9% of the budgeted number, which would translate to 3.5% of GDP. Also, with the GDP advance estimates speaking of a lower growth number, the 3.2% target looks unlikely to be met. This, in turn, will also tell us what the approach to the FRBM is likely to be, as the earlier stated goal of strictly moving to the 3% mark in FY19 may not be easy. While the proposals for the coming year would definitely be compelling given that they come just before the elections year, the revised estimates would tell us more on the state of the economy and the impact of reforms on the state of finances of the government. In a way, it will be a judgment on fiscal management and the impact or repercussions of reforms introduced in the last 15 months or so.

Do interest rate cuts work? What the dta tells us: January 10, 2018

 There are at least four views on interest rates and their impact. The RBI maintains that the transmission of rate movements in the past has been sluggish. Therefore, banks should introspect before asking for rate cuts. Second, banks posit that they face a conundrum because when they lower their lending rates, all loans get repriced while deposits costs change only when they have to be renewed. Therefore, one cannot expect a oneto-one-correspondence and there would be lags. Third, borrowers always ask for cuts because that is the way to growth as investment increases with low interest rates. Last, obsessive critics argue that the RBI is too conservative and obsessed with inflation which has driven the economy downhill. Does data tell us what exactly is going on? The data shows several aspects of the story. First, the RBI has lowered rates by 200 bps in the last 3.5 years or so and, hence, the direction is clear and in conformity with the CPI number, which has been coming down gradually. Second, banks have been responsive, albeit at a varied pace, and the relation has not been perfect. In 2016-17, banks had lowered the rates by just 7.5 bps when the repo came down by 50 bps. Clearly, commercial considerations, including NPAs, would have influenced such a decision. Third, interestingly the MCLR (overnight) came down sharply in 2016-17 from 9.05% to 7.97%, which is by 107.5 bps. Hence, while base rates did not change much, the MCLR came down more than   Service Fourth, headline growth in credit does not seem to be linked with the changes in lending rate. The highest growth rate was witnessed in 2013-14 (including that to industry) when repo rate was increased. Ever since rates came down, growth has been low indicating that credit does not grow just because of interest rates. Next, the internals of growth in credit are important. While critics are crying hoarse over investment stagnating, growth to this segment has come down sharply. Low capacity utilisation, stagnant demand, overhang of debt, NPA issues in several sectors, etc., are factors which need to change before growth in credit to industry picks up. Contrary to this picture, the growth in retail credit has been generally buoyant. Lower rates have kept the growth rate ticking (even though they have vacillated, they are the highest). This has been driven by home loans in particular, followed by auto loans. This is a positive sign for the credit scenario, which can in the medium term build linkages with higher demand for other sectors leading to better capacity utilisation and demand from industry. The services sector that is dominated by NBFCs and trade has shown varying trends which are still positive. NBFCs have tended to swing to debt where interest rate transmission has been faster, while trade has been one of the more buoyant sectors for GDP growth. Farm loans on the other side would tend to be driven more by circumstances as there are unavoidable priority sector preemptions. The picture emerging is that the RBI has been proactive in lowering rates. The introduction of MCLR has improved transmission while base rate changes have been sticky. Growth in credit will be driven by demand conditions and while lower rates help individuals to borrow, there is limited traction when it comes to credit for industry. Demand is low, while supply will be hesitant until the NPA issue sees some rays of s

Why PMI and IIP can’t be compared: Business Line 8th Jan 2018

The former assesses industry confidence levels while the latter focuses on output. IIP is a more reliable, representative index

The PMI for December has come in at an all-time high of 54.7 which has brought significant cheer to the economy. This comes on the back of smart growth witnessed in the core sector, of 6.8 per cent in November, which augurs well for a higher IIP growth rate. In these rather less than bright times, there is a tendency to pick up any such signal and extrapolate the same to the macro level to indicate that a turnaround, albeit a sharp one, has taken place. But what exactly does this PMI connote?

ELEMENTS IN PMI

Purchasing Managers’ Index is calculated on the basis of information received from companies on various factors that represent demand conditions. It is very different from industrial production which is indicative of actual production.

The PMI takes in responses from a company on a monthly basis on whether there has been improvement, deterioration or no change for a set of parameters relative to the previous month. Five questions have to be scored in this manner: new orders (weight of 30 per cent), output (25 per cent), employment (20 per cent), supplier’s delivery (15 per cent) and stock of purchases (10 per cent). This questionnaire is administered to 500 private sector companies and the comprehensive score is arrived at. The public sector is left out.

Intuitively, it can be seen that the purpose of the PMI is to indicate some degree of confidence level in manufacturing based on this representative sample of companies. While the reference is to the previous month, the methodology involves adjusting for seasonal influences. The answers are tabulated in terms of the proportion of respondents who say yes, no and no-change with weights of 1, 0 and 0.5 being attached to the three responses.

This is done for all the five parameters and a weighted average is taken to arrive at the score. Hence if all say no change then the score would be 50; and if all said yes, the score 100. If everybody says there is deterioration, then the score would be zero. Typically a score of above 50 is looked at positively while anything less than 50 would be a marked deterioration.

The IIP is measured as comprehensive production across the industrial sector and is a comparison over the previous year; hence in a way it takes care of seasonal factors. While the December PMI number of 54.7 can be interpreted as a case of the sample companies feeling they were better off than in November, the IIP growth rate for December would be reckoned over the same month in 2016.

Therefore, a comparison between the two is really not appropriate as the basis for comparison is different. However, as the PMI is released on the first of every month and the IIP is known on the 12th, the PMI score is assumed to be a precursor to the IIP. But, is there a strong relation between the two variables?

POOR CORRELATION WITH IIP

The coefficient of correlation between changes in PMI (month-on-month) and industrial growth rate (y-o-y) for the last five years was 0.25. The coefficient for the same when reckoned on m-o-m basis with growth in IIP was 0.15. (The coefficient of correlation states whether or not there is a strong association between two variables i.e. if PMI changes by a certain amount will IIP also move commensurately in the same direction).

Hence the relationship between the two variables is quite low and insignificant. If the same is calculated for the absolute value of PMI and IIP growth on either ‘y-o-y’ or ‘m-o-m’ basis, the results are less satisfactory at 0.18 and 0.06 respectively. Hence, statistically a high or low PMI number does not tell us anything about the IIP growth number, however compelling it may seem.

The reasons for this are the following. First, a sample of 500 companies is too small to be representative of what is happening at the aggregate level. Also as these companies would tend to be the bigger ones, the SMEs would be left out. The IIP is more comprehensive in coverage. Second, the responses are of an ‘either or’ variety and hence is not graded to any number. If the increase is of say 20 per cent, it would be given the same weightage as 2 per cent growth as the answer is only in the affirmative of the parameter being better. Therefore, there would be an inherent bias in the final numbers that are tabulated.

PMI NOT RELIABLE

Third, even if one were to force a comparison between the two indices, the PMI has only one component, output, which can be related with IIP and has a weight of just 25 per cent. Therefore, at the aggregate level the PMI could be scoring well on orders, stocks, employment or suppliers’ delivery but scoring low on output.

Fourth, even with the PMI new orders increasing, it would not necessarily mean that output would increase in a subsequent period. Fifth, the exclusion of the public sector is significant as there is a very high contribution by this segment, especially in capital goods and infra areas.

Last, since July when GST has been introduced, there have been significant disruptions in the production cycles of companies. As there was some ambiguity in the input tax treatment, companies had gone in for de-stocking prior to the introduction of GST. Subsequently there was the emergence of festival demand which pushed up production. Presently companies are getting back to their normal stock levels and are hence increasing their output. This has causes some degree of volatility in the production cycles.

To conclude it may be said that the PMI is not a leading indicator of the state of industry which is better represented by IIP growth. While the IIP growth calculation has its challenges, the fact is that this number is also used for calculating GDP when reckoning the contribution from the unorganised sector. The sample used by the PMI is not known, but a guess would be that it includes the larger companies, which are also the ones likely to report their conjectures on a monthly basis and could be biased. But nonetheless, th

7 reasons why FY18 GDP growth forecast should be viewed with caution: Business Standard: 5th Jan 2018

The first advance estimates for FY18 GDP growth should be viewed with caution. This is because the estimates have been compiled by extrapolating numbers available for 6-8 months on different variables against the full year. Hence, it is more of a statistical exercise and does not take into account any new information.

This said, the fact that growth will be 6.5% is significant as it is even lower than the Economic Survey assumption of 6.75-7.5% for the year. Hence, it is not expected to be higher than the base mark which means that it would be lowest in the past three years. The effects of demonetisation and GST have played some role here.

Second, capital formation continues to fall to a new low of 26.4% from 29.3% in FY16 and 27.1% in FY17. This means that the private sector investment is not expected to pick up this year and will be showing a declining trend, as there is evidence to show the government spending is on track, given the fiscal numbers.

Third, the difference between gross value added (GVA) growth and gross domestic growth (GDP) growth is 40 basis points, which is again significant as it means that there is an assumption that net indirect taxes would be increasing. That means that GST impact would be positive for revenue collections and could signal reversal of the present trend witnessed in the market.

Fourth, the government sector is again the leader in terms of growth at 9.4% on top of 11.3% last year. Clearly the overdependence on the government cannot be missed and this also means that until private sector investment picks up or household consumption increases, fiscal deficits have to be made flexible to keep growth ticking. This could mean the government is not targeting 3% mark for FY19 but taking on a number between 3% and 3.5% depending on the final outcome for this year.

Fifth, the manufacturing sector is the major disappointment with 4.6% growth, which should ideally be in the 8-9% range. This also reflects that the Central Statistics Office (CSO) does not expect corporate profit-and-loss accounts to look any better in the last two quarters, as the value-added numbers are based on their statements. Also, the Index of Industrial Production (IIP) growth for the entire year would not really pick up steam.

Sixth, despite a normal monsoon, the overall growth of the primary sector covering agriculture and allied activities would be lower than last year. Implicit is that the lower rabi sowing would not give a robust harvest this time.

Seventh, the reforms in real estate could have been a deterrent for this sector, which has kept construction growth at a lower level.

Assuming this growth number holds, two things can be said. First, the fiscal deficit number for the year, other things being constant, would go up as it was based on higher nominal GDP growth number. Second, we will have to wait for one more year to cross the 7% mark, which should be possible in the absence of any disruptive reform – that is definitely not expected.

Recalling 2017: GST was a victory for Modi government: Financial Express 26th Dec 2017

The highlights of the year, in terms of impact on the economy, would have to be GST, the IBC process and inflation

Every year has its economic stories to recollect, and 2017 has been no different. When one looks back on the year, one is remind of that phrase from Macbeth: “full of sound and fury, signifying nothing”. That was the sense that one would get when one tries to make out something from the clutter. We are great in ‘doing business’, ‘fastest growing economy’, ‘introducing plethora of reforms’, ‘Bharatmala, UDAY, UDAN, INDRADHANUSH, UJALA’, etc. But at the end of the day there are few jobs being created and investment is not taking place. Just what is happening? Stock markets across the world went crazy and berserk, and all the greedy and gullible investors have switched over to stocks. Or is it Bitcoin now? The world economy is still wobbly, but who cares as long as the indices are singing a different song. Just look at the stock analysts talking about highest-ever level of indices, and everyone is doing great notwithstanding stagnant investment, mess in the banking sector, low consumption and precarious fiscal balances at home. This will be is number 9 in the countdown. The bard would have said, Lord, what fools these mortals be! (A Midsummer Night’s Dream).
The rupee is eighth in the countdown. It has beaten logic, and remains strong. Looking at the fundamentals, the rupee should be down with the trade-deficit widening and FPI flows just about being there. But the rupee continues to be one of the best-performing currencies, though we are losing our export advantage. This melody continues to play as the dollar remains fragile even though it is the only economy which continues to do better which has prompted the Fed to increase rates thrice this year. There is nothing either good or bad, but thinking makes it so (Hamlet). Next, in the reverse pecking order, is the wonderful interpretation of statistics. The CSO continues to startle everyone to the extent that one ceases to be affected when nice numbers are churned out. Interpretations change as, for the first time, we had economists and politicians saying that GDP growth in Q2 was better than Q1. From when has one does such a comparison? Normally, logic dictates that we compare Q2 over Q2, but then when it comes to statistics, nothing is wrong because we are dealing with numbers. The number-7 spot in the countdown clearly belongs to the way we look at numbers—it can always be made convenient. Talking isn’t doing. It is a kind of good deed to say well; and yet words are not deeds (King Henry VIII).
Demonetisation would be number 6 in the countdown. The fascinating thing about demonetisation is that everyone claims to be a winner. More tax-payers have come into the tax-net, but why, then, are collections not increasing? People are using more digital currency, but why are cash levels back to 90-92%? The moral fabric has improved, but why are we still paying bribes along the way or demanding cash payment? The economy was resilient to the act, but why did GDP growth come down in FY17 when all seemed right? The truth is we will never know. The wheel is come full circle: I am here (King Lear). GST, which came on the back of demonetisation, was again a victory for the government, though the small enterprises took a second hit. Multiple rates and chaos brought about by compliance requirements—so typical of the Indian spirit of jugaad—typify this new scheme. Remember the number of notifications on demonetisation being issued almost every day for two months? One advantage of this new regime is we have all forgotten demonetisation and are focused on dealing with the new tax system. Creating a new challenge is a sure way to ensure we forget the past travails. The SMEs continue to wail, but then this is all good for the larger cause—GST takes the 5th slot. The miserable have no other medicine, but only hope (Measure for Measure).
At number 4, is inflation. Everyone is obsessed with the CPI inflation number, which means that tomatoes and onions are not humble vegetables but main drivers of the economy. Add to this the joker in the pack called the HRA allowance, which scales up inflation. The enigma here is that no one can explain why the same number and direction of movements can mean different things in different months for the central bank. Our doubts are traitors (Measure for Measure). At number three is the fiscal deficit of the government. A simple number like fiscal deficit as a ratio of GDP can involve a lot of diabolic thinking and action, as it is now held as being sacred, to the point of being an obsession. Several debates have been held on whether one should be flexible or not. Seriously, there is much ado about nothing considering that we can get PSUs to pay more dividends or simply cut back on capex to balance the budget. This above all: to thine own self be true (Hamlet).
At the number 2 spot is the Great War against defaulters. The IBC has taken shape and RBI has taken the onus of identifying the bad guys, referring them to NCLT. Not surprisingly, when the assets are to be put on sale, the critics of the defaulters have become sympathetic and want them to be allowed to buy back their assets. This is the irony of the situation. Borrower A and Bank B cannot reach a settlement, and RBI now refers it to the NCLT. But A now wants to buy back its asset a lower price which it was not willing to settle earlier. Come what come may, time and the hour runs through the roughest day (Macbeth).
The top slot goes to the new class of experts who could also be economists who have formed what is called the Shouting Brigade. Their job is to lambast anyone who says that growth is not taking place, and ridicule those who are critical of any reform. The crescendo was attained in haranguing RBI to lower the interest rates one month before the policy, and one month after the policy—which makes it an round-the-year phenomenon! At times, the brigade missed the point that RBI does not decide on rates, but the MPC does. But that was not important as the MPC could have been bluffing! You cannot argue on this and more. All the world’s a stage, And all the men and women merely players. They have their exits and their entrances; And one man in his time plays many parts (As you like it).
Happy New Year!

Book review: Economics of India – How to Fool all people for all times by Madan Sabnavis: Review of book in FE Dec 24, 2017

Is ‘Make in India’ faulty? Could bank NPAs be better managed? Are voters being misled? A book that answers questions like these and more.

Running a government involves tough decisions. More importantly, it involves difficult choices. For example, lower interest rates are good because they bring down the cost of capital and trigger investment. However, we all know how a period of easy money didn’t help the US economy. Nor did it help India in 2012-13 when the RBI lowered rates by one percentage point. Also, what happens to savers? And retired people, who often have no source of income other than deposits? The decision, it may be hard to believe, mostly depends on the central bank, even if it may or may not be convinced about how the government is looking at the economy and what constituents it is looking to please. There is no universal truth in economics, nor a perfectly right thing to do. More so in a democracy like India, argues economist Madan Sabnavis in his latest book, Economics of India, written around a collection of his media articles on various contentious socio-economic issues. The book makes for interesting reading because Sabnavis promises to offer an ‘alt’ view to the prevailing wisdom. Though not always a contrarian, he is more of a careful assessor of both sides of the debate. He doesn’t believe in laying all problems at the government’s door and maintains that turning over the economy to the private sector also won’t work. The truth, in his case, often falls between two stools. Sabnavis sets the tone in the very first chapter by asserting that the Indian government, with its various competing interests to look after and a very small role in the economy (government expenditure has only 12% share in GDP at current prices), is hardly an engine of growth, but a necessary condition at best.

However, the opposite isn’t necessarily true. Indeed, governments in India have been the biggest generators of bureaucratic red tape and policies that “have nothing to do with common sense”, to quote Sir Humphrey Appleby. Yet, when one looks at the risks and rewards, one sees the stark gap between the private and public sectors—just compare the salaries of the heads of public-sector banks/mutual funds and private ones, and their performances. The gap in the former is much larger than the gap in the latter!

The truth is similarly hidden in the case of subsidies, which everyone wants the government to do away with. Subsidies actually are not a waste of money at all; even developed countries have them. It’s their delivery that’s a problem, so there’s an argument in favour of plugging leaks and targeting them. Sabnavis also counters the argument against fuel subsidy by saying that the middle class, which is a major contributor to tax revenues, deserves it. Indeed, subsidies are everywhere; “special lounges and elevators for CEOs of private enterprises is also a subsidy provided for by public money, though it is called shareholder money”. Perhaps his strongest argument is in favour of the MGNREGA and he proves through data that it is effective in providing employment to the poorest. He dismisses the controversy over inflated wages, and asserts that if anything, the programme should be enhanced and perhaps government departments could coordinate to get all relevant schemes covered under the MGNREGA. Indeed, his proclivity for expansionary theories is evident in the chapter on fiscal policy, where he argues that in the years of the downturn, especially 2012-14, adherence to the FRBM limits (for deficits) made global agencies happy, but hurt our own economic growth. His research also doesn’t find any strong links between fiscal deficits and inflation over the years, so he contends that the argument that the budget is crowding out private investment or putting pressure on prices should be taken with a large pinch of salt. In fact, high interest rates, too, can’t bring down inflation, which is more reflective of supply-side dynamics. However, when inflation is high, it does become necessary for the RBI to keep interest rates high.

Not all that the government does is good though. Indeed, the accumulation of negative assets in the banking system has been a direct effect of protection of inefficiencies in the corporate sector, be it private or public, and the priority sector, including agriculture. Of course, the real world outcomes in these two cases are very different; while farmers kill themselves, corporate debt—crores of it—is restructured. Whatever be the political exigency, Sabnavis rightly argues that all rescue efforts or debt waivers should be from the budget, and sourced in a transparent manner, so that banks don’t have to carry the bad debt and put their own balance sheets under pressure. This is also applicable to newer schemes such as Jan Dhan Yojana floated by the current government. However, it is also true that in India, banking is good business and bank stocks enjoy a premium in the market. The proposed Financial Resolution and Deposit Insurance Bill, which intends to set up a corporation to replace the DICGC, is aimed at more effectively addressing bankruptcy of banks and insurance companies. Will it be another regulatory body to work as a stable door when the horse could have bolted due to poor government decisions? It is the same conundrum in manufacturing—can we have ‘Make in India’ without economies of scale and cost-effectiveness, factors essential to turning things around in manufacturing? Sabnavis contends that the government is not serious about manufacturing, and he is right. What we probably need is a government hands-off policy in manufacturing.

Interestingly, governments seldom have to answer to their shareholders, that is, voters. They are rarely pulled up for their performances. It used to be so at election time earlier. Today, elections are fought on social media, by whipping up emotions at rallies, misleading on economic issues such as demonetisation, and even vote capture. Books such as this one would help in revealing the real stories behind the cacophony of political sloganeering, and must be read for improving our voting decisions. A few minor quibbles. Two consecutive “concluding remarks” sections at the end of some chapters might confuse the average reader. Also, tighter editing and proof-reading would have really lifted reader experience. Notwithstanding these small issues, this book is a welcome addition to our economic literature, especially for its clarity in understanding and, in turn, explaining the controversial economic issues simply and elegantly.

Paromita Shastri is a freelance writer