gfiles Magazine November Issue 2011

COVER STORY

government misfeasance stashing money abroad

 

Designing Loopholes

The state is partially responsible for the thriving black economy

 

by ALAM SRINIVAS

 

JULIAN Assange, the brain behind Wikileaks, has claimed that the bulk of the account owners in Swiss banks are Indian. His whistle-blower, the Swiss banker who gave him the details of 2,000 such accounts, said that the Indians included politicians, cricketers and film stars. Under pressure, the Swiss authorities then disclosed that Indians had a mere $2.5 billion, and not $1.4 trillion as claimed by BJP leader LK Advani, in individual, corporate and numbered accounts in their country.

 

One can debate the extent of black money that has been stashed away by Indians in tax havens, especially Switzerland. But, shockingly, in the past two decades of economic reforms, critical government agencies and Ministries like the Reserve Bank of India, the Income Tax (IT) Department and the Finance Ministry may have either deliberately or otherwise encouraged the outflow of illegal income. In effect, it is the state which is partially responsible for the thriving black economy.

 

Diluted Acts related to foreign exchange, case-by-case interpretations by IT officials, corporate pressure to leave gaping holes in laws, and weak monitoring systems have ensured that, despite reforms, the extent of the black economy has increased enormously. The Global Financial Integrity Report last year gave two reasons for this trend: lack of regulation that provided “an added incentive for those seeking to transfer illicit capital abroad”, and increasing income inequality that ensures more money in the hands of the rich, who are the “primary drivers of the illicit flows….”

 

FERA versus FEMA

The old Foreign Exchange Regulation Act, introduced in 1973 by Indira Gandhi, was draconian, unfair, and a relic from a socialist past. But its substitute, the Foreign Exchange Management Act (FEMA) of 1999, was positioned at the other extreme. If the RBI is to be believed, the new Act did not impose any responsibility on it to monitor foreign exchange flows. The onus for this was placed on the recipient/payer, and the banks, from whose accounts the money was paid or received.

 

Under pressure, the Swiss authorities disclosed that Indians had $2.5 billion, and not $1.4 trillion as claimed by BJP leader LK Advani, in individual, corporate and numbered accounts.

 

For instance, in a recent letter the RBI wrote to the Finance Ministry, it admitted that in cases of foreign direct investment (FDI), it is not interested in either the source or the end-use of the money. So, the central bank has no idea how the foreign investor has earned it (it could be from dubious sources) and it is unconcerned at how the Indian firm has deployed it (it could be siphoned off into personal coffers). This might be especially true of unlisted companies, where owners, being the majority shareholders, call the shots and which have received huge sums from global private equity (PE) players.

 

Consider two real-life cases, although we are withholding the names of the companies. In one case, an unlisted arm of a leading business group re-routed its own black money stashed abroad, and showed it as the purchase of a minority stake by an international PE firm. More important, this firm was able to hike its valuation, since it was its own money, to give a false sense to potential institutional and retail investors that it was worth more. It finally went in for an IPO at an even higher valuation.

 

In the other case, an owner asked a renowned PE firm to buy a minority stake in his unlisted firm at a valuation that was twice those of its competitors in the same sector. The PE firm obliged for a simple reason: it was assured a fixed return on its investment if the IPO of the unlisted firm did not happen within a fixed period (four years), and it was logical that the IPO price would be much higher than the valuation at which it had invested in the company. A win-win for PE and the Indian owner!

 

Clearly, in such cases there is immense potential to either convert black money into white, or generate more black money. For example, in the second case, the Indian owner could easily siphon off the PE money into his pockets, or for his personal use. What is even more disgusting is that the RBI is totally blasé about these trends. Look at how it justified its hands-off policies regarding FDI in the same letter written to the Finance Ministry.

 

Both the PE and exports routes offer Indian companies an easy and legalized opportunity to launder their black money, ie convert it into almost tax-free white money.

 

One, it stated that the onus of ensuring that a particular FDI deal has complied with the existing FEMA and other rules was “on the Indian company (which received the money) and the banks routing the FDI transaction”. Two, it contended that the process of reporting these FDI inflows by the banks to the RBI was “essentially a post-investment

reporting for Balance of Payment statistics”. Therefore, the FDI irregularities could only be investigated by official investigation agencies like the Enforcement Directorate if they received complaints or tracked them on their own.

 

Merchandise exports versus receipts

In the 1970s and 1980s, when India placed restrictions on several importers to finance their purchases through export earnings and exporters to ensure that they brought back the entire earnings to the country, the deals were closely monitored by the RBI, Finance Ministry and nodal Ministries. Surprisingly, this is no longer the case. Yes, there is a mechanism whereby the RBI does receive details which can be reconciled in the case of exporters. Unfortunately, the central bank has neither the time, manpower nor other resources to do this job efficiently and effectively.

 

Under the existing rules, when Customs clears the merchandise exports – physical goods as opposed to services (software) – copies of the invoices are sent to the RBI. Similarly, when the bank where the exporter has his account receives the proceeds, it duly informs the central bank. By comparing the two, one can easily find out if the entire export income has come into the country. Sadly, the RBI is unable to do it because it does not have an internal system to go through the thousands of documents.

 

Here is an example of what happens in practice. In its recent report on illegal iron ore mining involving the Bellary brothers, among others, the Karnataka Lokayukta said that the RBI has to “collate and compare the two databases (Customs and banks), and monitor whether the realization of export proceeds is as per law. This is not happening effectively”. The RBI had bank records for only a fifth of the 5,000 iron ore export transactions in the State between 2006 and 2010.

 

Julian Assange (above) of Wikileaks, claimed that the bulk of the account owners in Swiss banks are Indian politicians, cricketers and film stars.

 

Now, look at the catch. India’s merchandise exports are over $250 billion. So, even if there is a mismatch of 1% between Customs and banks records, i.e. 1% of the export income has been stashed abroad, the annual black money generation on this count is $2.5 billion.

 

Legalized money laundering and tax avoidance

What is important to note is that both the PE and exports routes offer Indian companies an easy and legalized opportunity to launder their black money, i.e. convert it into almost tax free white money. I have mentioned that this is possible with PE inflows, which is tax-free. In case of other FDI inflows, from tax havens like Mauritius, the IT department has consistently accused Indian promoters of round-tripping or bringing back their black money as legal and tax-free FDI.

 

In the case of exports, given the RBI laxity and Customs’ collusion, the Indian seller can over-invoice, or over-inflate, his prices; on the invoice, he can say that the goods or services are worth five times the real price. To complete the cycle, the goods and services are sold to fictitious firms abroad – in some cases the goods are dumped in the sea –but the entire proceeds are brought in. Since there has been no real transaction, the money that comes in is actually the exporter’s black money stashed abroad.

 

So, why is the government encouraging these trends, or turning a blind eye towards them? The first reason is related to what a former Finance Minister told me in private a few years ago. “How does it matter if black money is coming back as export, FDI, and FII (foreign institutional investment)? As long as money is flowing into the legal system in a legal manner, we should be happy as it boosts economic growth. Moreover, it reduces the quantum of black money.”

 

The counter to this is that if enough safe opportunities exist to legalize black money, there are also enough incentives for the businessmen to create it. If they realize that they can convert it into white through several methods, without getting caught or being asked questions, they will be encouraged to do so. This also explains why so many politicians and businessmen have recently been caught openly transferring abroad the black money they generated in India.

 

Efforts by the IT Department to force the Finance Ministry to change the treaty clauses to stop round-tripping have fallen on deaf ears over the past decade or so.

 

Second, there is too much pressure on the government from Indian business houses and foreign investors. The latter don’t want the state to plug these holes. Since Mauritius is a tax haven, and India has signed a double-taxation treaty with it, there are tax implications on money coming or going through Mauritius. For foreign investors, it is the best way to save on taxes. So, all efforts by the IT Department to force the Finance Ministry to change the treaty clauses to stop round tripping have fallen on deaf ears over the past decade or so.

 

IT was with great difficulty that IT sleuths were able to file cases to stall another possible fraud – tax evasion through cross-border deals. In such cases, as in the Vodafone-Essar telecom deal which is being fought in the courts, a Mauritius based entity, owned by an Indian promoter, sells the stake it has in a legitimately Indian company with assets in India, to a Mauritius-based foreign investor. Since the deal is between two foreign entities in Mauritius, there is no tax implication. No TDS is cut by the buyer and paid to India’s IT Department because of the double taxation agreement.

 

In the Vodafone case, the IT Department has stated that since the deal involves assets based in India, TDS has to be deducted. Now the Supreme Court will deliver this landmark judgment, which will impact FDI deals. At the same time, the IT Department is pushing the government to amend the double taxation agreement with Mauritius to stop or curtail round-tripping. Finally, the IT officials are complicit in decisions that enable tax evasion or avoidance due to political pressure or individual corruption.

 

Clearly, the blame for an increase in the size of the black economy rests with the government. The “black” buck, as they say, stops with it. If the government is really interested in curbing black money, it needs to drastically improve its regulatory and monitoring mechanism as well as introduce systemic changes in key sectors such as real estate, construction, mining, and financial services which generate, propagate, and help legalize black money. g

gfiles Magazine November Issue 2011

COVER STORY

government misfeasance fertilizer subvention

The subsidy mess

Instead of reforming the existing mechanism, the government is washing its hands of the botched reforms in which Manmohan Singh once took pride

by NARESH MINOCHA

“It is also indicative of the speed at which the new Finance Minister is capable of learning about the hard grassroot political realities. I am sure that the speed at which I am learning will no doubt please my esteemed friend, Shri Jaswant Singh, who out of his genuine concern for, my welfare, was deeply worried that because of my alleged political inexperience, I could well end up as the proverbial sacrificial lamb. He will be pleased to know that we are once again going to disappoint the prophets of doom and gloom. Three cheers for democracy.”

That was how Dr. Manmohan Singh rationalized the start of fertilizer subsidy reforms in Parliament on 6 August 1991, ending a virtual decade-old freeze on statutory fertilizer prices.

With a section of the Opposition threatening to topple the Government on fertilizer price hikes, Dr. Singh moderated the hike to 30% from 40% announced a fortnight earlier. He also exempted small & marginal farmers from the price hike, a dual pricing scheme that miserably failed.

The significance of Dr. Singh’s self-advertised political dexterity lies in the fact his reforms laid the foundation for bad governance of subsidy regime. This fact has been brought home well by the Comptroller and Auditor General’s (CAG’s) performance audit report on fertilizer subsidy presented in August 2011.

The CAG’s report discovered that a staggering Rs 50,587 crore of subsidy paid on sale of decontrolled fertilizers (excluding single super phosphate) for 2007-10 remains unverified!

CAG discovered that a staggering Rs 50,587crore subsidy paid on sale of decontrolled fertilizers (excluding single super phosphate (SSP) for period 2007-10 remains unverified!

The subsidy accounts are a blend of estimates and dubious conjectures. It can be ascertained from the financial results of major fertilizer companies as well as their annual accounts.

As the accounts of companies are always tentative with subsidy estimates constituting a big chunk of sales income, the real state of fertilizer industry is hard to gauge. One can expect CAG to also study this issue in future.

The Conundrum

“Politically, once in place, subsidies are difficult to remove,” says Organization for Economic Cooperation and Development (OECD), 34-member rich countries club. This observation in an OECD paper released in November 2010 aptly applies to Indian fertilizer subsidy scenario.  

Introduced to cushion the impact of first oil shock in the seventies, the fertilizer subsidy has ballooned from Rs 24.88 crore in 1977-78 to Rs 4389.06 crore in 1990-91, i.e., a few months before Dr. Singh embarked on savage reforms.

The subsidy, however, increased during the reforms to 4799.60 crore in 1991-92 and to Rs 5836.14 crore in 1992-93. It peaked to Rs 99,494.71 crore in 2008-09 but to Rs 54,976.68 crore in 2010-11.

The subsidy bill is bound to rise substantially in current financial year due to steep rise in global prices of both potassic and phosphatic fertilizers and prices of fertilizer raw materials.

The Government subsidizes both domestic and imported fertilizers. The subsidy is doled out through two schemes – new pricing scheme for urea and nutrient-based subsidy (NBS) scheme for decontrolled fertilizers. NBS currently covers 25 grades of phosphatic, potassic and complex fertilizers. The Government says that the farmers are currently paying only 27% to 58% of the delivered cost of phosphatic and potassic fertilizers covered NBS.

The country is completely dependent on imports for meeting its potash requirements. It is also relies heavily on imported phosphatic fertilizers and their raw materials. Indigenous inputs barely meet 10% of the raw materials requirements of domestic phosphates industry. As for nitrogenous fertilizers, the country’s self-reliance in urea production proved short-lived due to the Government’s reluctance to facilitate expansion of the industry. Urea imports, which were resumed in 2002, have been rising year after year.

The country today meets 40% of its total fertilizer requirement through imports. Fertiliser subsidy is interplay of several factors. These include collective aversion of the political parties to increase retail prices of urea, subsidy leakages and wastages and failure to control the prices of indigenous inputs such as gas and naphtha

A few other factors contributing to subsidy balloon are the runaway increase in prices of imported fertilizers and raw materials, slow pace in forming overseas joint ventures to secure long-term supply of fertilizers and raw materials with price discounts and the Government’s reluctance to initiate integrated fertilizer-cum-food subsidy reforms.

CAG noticed several instances of diversion of subsidized fertilizers for non-agricultural purposes, avoidable expenditure on subsidy and favours to foreign suppliers in certain cases resulting in excess expenditure on subsidies. It also came across instances of smuggling of fertilizers to neighbouring countries where prices are higher.

The Finance Ministry constituted the Task Force on Direct Transfer of Subsidies (TFDTS) has also raised alarm at illegal diversion of subsidized fertilizers.

Direct fertilizer subsidy has come under close scrutiny under two successive Finance Ministers — first under Chidambaram (above, left) in 2007-08 and now under Mukherjee.

In its interim report submitted in July 2011, TFDTS stated: “Urea is used for the production of urea formaldehyde which is used in garment manufacturing, melamine production, fish farming, milk production and soap manufacturing among other industries. MOP (muriate of potash) is used for manufacturing potassium chlorate which finds applicability for explosives, match and fire-cracker industries. SSP is used for the production of di-calcium phosphate, an animal feed. There is anecdotal evidence indicating that fertilizers are also smuggled out of the country to neighboring ones where prices for equivalent products are higher.”

A case of subsidy misuse akin to the proverbial fence eating the grass is that of fertilizer mixing units consumed subsidized fertilizers. They sell the resulting product, called fertilizer mixtures, at higher/free market rates. CAG contends that such consumption breaks the subsidy chain as these units consumer subsidized fertilizers at the expense of farmers.

CAG has observed “numerous instances of non - availability/shortages of fertilizers” After surveying 5498 farmers across the country, CAG concluded 45% of them bought fertilizers at prices higher than maximum retail prices (MRPs) and 56% of them didn’t know that Government fixed MRPs.

The subsidy mess appears more alarming, if one factors in the inverse correlation between the increase in subsidy and the decrease in crops’ response to fertilizer application!

The imbalanced use of three primary plant nutrients, nitrogen, phosphorous and potash (NPK) and inadequate or non-application of secondary nutrients such as sulphur and micro-nutrients such as zinc  has become a big hurdle in increasing crop yields.

Farmers are getting less benefit from increased but imbalanced use of fertilizers. They have suffered monetary loss due to damage to their soil from imbalanced usage of nutrients.

Farm experts measure fertilizers use efficiency as crop response ratio. This is expressed as ‘X’ kilograms of foodgrain facilitated by the application of one Kg of NPK. This ratio has declined over the years due to excessive use of certain nutrients such as nitrogen and deficient use of others such as potash and sulphur.

As put by Dr. Ramesh Kumar, an Agriculture Ministry official at a conference in September last, crop response ratio has plummeted from 15 kg of grain per one kg of NPK in the fifth plan (1974-79) to 6 kg of grain per one Kg of NPK in the 11^th five year plan (2007-12).

Ambivalence and ambulation

The Government has blown hot and cold while grappling with subsidy since the start of fertilizer reforms on 25 July 1991. It then decontrolled the prices of four fertilizers, calcium ammonium nitrate (CAN), ammonium sulphate (AS), sulphate of potash (SOP) and ammonium chloride (ACL).

This deregulation was done ostensibly on the ground that the nutrient content of these products was lower than that of other fertilizers. Such low-analysis fertilizers required more freight subsidy for transport of same amount of nutrient as compared to products having higher nutrient content.

The Government, however, did somersault on 25 August 1992 by bringing back CAN, AS and ACL under price control as recommended by Joint Parliamentary Committee (JPC) on fertilizer pricing. The justification for the U-turn was that these products are indigenous and need to be subsidized along with urea.

On the same day, the Government decontrolled the prices of all phosphatic and potassic and complex fertilizers on the recommendations of JPC to achieve annual subsidy saving of Rs 3300 crore.

The Government did this within five days after receipt of JPC report, brushing aside its dissent notes. JPC’s majority view was that fertilizers for whose supply the country was dependent on imports might be decontrolled.

The Government also reduced urea price by 10% as recommended by JPC.

The JPC report thus laid the foundation for imbalanced use of nutrients and its deleterious impact on crop response ratio and soil fertility.

The prices of decontrolled fertilizers skyrocketed immediately after the deregulation. The price of muriate of potash (MOP), for instance, shot up to Rs 5600-5900/tonne from the pre-decontrol price of Rs 1700/tonne. The sale of decontrolled fertilizers tapered off immediately after de-control.

This, in turn, led the Agriculture Ministry into offering one-time price concession on decontrolled fertilizers to help growers adjust to free market prices. It provided an ad hoc subsidy of Rs. 1000 per tonne of diammonium phosphate (DAP) & MOP and proportionate P&K nutrient-based subsidy on NPK complex fertilizers with total outlay of Rs 340 crore for Rabi 2002.

Later, this one-time relief transformed into ad hoc subsidy scheme (ADS) that neither JPC nor Dr. Manmohan Singh ever dreamt of. The ADS’ validity was extended on half-yearly basis.  The Government substituted ADS with nutrient-based subsidy scheme (NBS) in February 2010.

When ADS was launched in Rabi 1992, the Government excluded imported DAP and provided Rs 1000/tonne concession only on indigenous DAP. It later brought back imported DAP under ADS.

The arbitrary exclusion or re-inclusion under subsidy regime again showed its ugly face in June 1994 when CAN, ACL and AS were again decontrolled.

The arbitrariness re-surfaced in March 2010 when imported AS and domestic AS produced by steel plants were excluded from NBS. The Government thus now gives subsidy on only domestic AS produced by two fertilizer companies GSFC and FACT.

NBS is discriminatory as it has kept several micronutrients and complex fertilizers such as water-soluble fertilizers from its purview.

The farmers are thus getting lesser benefit from increased but imbalanced use of fertilizers. They have also suffered incalculable monetary loss due to damage to their soils on account of imbalanced usage of nutrients.

It is here pertinent to recall what late US President Franklin D. Roosevelt’s penned letter to all State Governors on a Uniform Soil Conservation Law in 1937.  He wrote: “The Nation that destroys its soil destroys itself.”

India is belatedly learning such bitter truths the very hard way. Since April 2008, the Government has been introducing patchwork corrections in subsidy schemes to undo the damage caused by the goofed-up reforms.

The first corrective initiative was the end of the step-motherly treatment towards single super phosphate (SSP) fertilizer in the wake of steep hike in global DAP prices and shortages.

The Government approved a new policy on pricing and subsidy of SSP, which contains 16% phosphate, 11% sulphur and 16% calcium. As SSP provides more nutrients than DAP, it is lately being identified as a ‘generic customized fertilizer’.

The favourable SSP policy has lured several companies into setting up new SSP plants.

Another corrective taken in 2008 include the maiden policy for coating/fortifying popular fertilizers with micro-nutrients to produce products such as zincated urea.

The Government also introduced nutrient-based subsidy (NBS) for complex fertilizers on a limited scale in June 2008. This was followed up with the unveiling of enlarged NBS in February 2010.

NBS, however, cannot yield all benefits as long as urea remains out of its ambit. Urea accounts for more than half of the country’s total fertilizers consumption. Urea, the only fertilizer whose price is statutorily controlled, is more subsidized than all other fertilizers covered under NBS.

The Government has turned blind to recommendations from different committees for ending the political bias for urea. The 2004 official study on Central Government Subsidies stated that a hike in urea price would have a “significant salutary impact” on balanced application of N, P & K.

The Government can increase the efficacy of fertilizer subsidy dramatically by restructuring the existing total allocation on the pattern of NPK ratio of 4:2:1.  This is considered ideal average NPK ratio for the country, though the specific blend of nutrients would vary from soil to soil especially in intensive farming area where the use of secondary and micro nutrients such as sulphur and zinc is essential.  

Though the Government is reconciled to bringing urea under NBS as recommended by two expert committees, it has not yet indicated when it would translate intent into action. A group of ministers has been grappling with this issue for several months.

As put by Cabinet Secretariat-appointed Committee on ‘Optimumization of Fertilizer Usage’, “urea has to be brought under the free pricing regime sooner than later. In any case, there is a strong case for reducing the subsidy on urea and allowing a higher price to discourage unproductive use. Farmers can be assisted by providing appropriate subsidies on other critical nutrients.

In its report submitted in September 2010, the Committee also stated: “the underlying concept of NBS is equal subsidy for the same nutrient in any form; either as a straight fertilizer or as a complex/mixture. This needs to be operationalised for all FCO (Fertilizer Control Order) approved fertilizers at the earliest.”

Experts suggest that the Government should dereserve manufacture of all micro-nutrients to enable large fertilizer companies to produce them. It must encourage production of customized fertilizers with an eye on site specific nutrient management.

Instead of comprehensive reforming the existing subsidy mechanism, the Government is keen to wash its hands off from the botched reforms in which Dr. Singh once took pride. 

It intends to change-over from the present mechanism of subsidy delivery through the industry to a system under which subsidy is transferred directly to farmers. The options for directly include bank accounts/smart cards/ tradable coupons.

The idea of direct fertilizers subsidy (DFS) has been circulating in different forms within the Government for almost 12 years. It has, however, come under close scrutiny under two successive finance ministers – first under P. Chidambaram in 2007-08 and now under the incumbent Finance Minister Pranab Mukherjee. The Finance Ministry thus constituted TFDTS in February 2011.

In its interim report submitted under the chairmanship of Nandan Nilekani, Chairman, Unique Identification Authority of India (UIDAI), TFDTS said: “the fertilser subsidy is given by the Government to the Manufacturers/Importers directly. In the Interim proposed framework, the subsidy is planned to be provided to the retailers and ultimately to the intended beneficiaries (farmers).”

It has formulated a three-phase approach for DFS. Under the first phase, the Department of Fertilizers (DOF) would facilitate generation of information visibility of the flow of fertilizers along the supply chain from the manufacturer/impoters till the retailer. The implementation of this phase is planned in November-December 2011. Under phase II, the subsidy would be released directly to the retailer’s bank account on receipt of fertilizers from the wholesaler.  The start of this phase is planned in June 2012. Under phase III, the subsidy would be directly transferred to the bank accounts of farmers. 

One has to wait for TFDTS’ final report expected in December 2011 to authoritatively weigh the prospects of DFS.   There is, however, no guarantee that DFS would not misfire due to certain  intractable issues. One such factor would be the failure to create a mechanism to ensure that fertilizers reach every nook and corner and is available in adequate quantities and at the right time. Without freight subsidy, why should any company haul fertilizers to remote or low-demand areas?

Another imponderable would be the lack of mechanism to ensure that farmers put the cash to the intended use. Yet another factor would be the Government’s unwillingness to increase the cash dole-out in tandem with the increase in market prices of fertilizers.

One also has to work out compare the cost of administering indirect fertilizer subsidy (implemented through a few hundred companies) with that of DFS scheme that would target subsidies to over 115 million farm land holdings and 2, 85,000 fertilizer traders.

A basic requirement for DFS is computerization and updating of all land records. The Government has not yet disclosed when these pre-requisites would be put in place. It is not clear whether the Government has the political will to deal with the issue of delivering subsidy to absentee farmers.

It has also not indicated how it would ensure that DFS promotes the balanced use of all nutrients.  Fertilizer subsidy, whatever the delivery mode, has to be managed diligently. If used judiciously, the nutrients can do wonders to food security. If mismanaged, subsidy can harm soils. It can result in precipitous drop in crops response to nutrients in terms of yields. Badly governed subsidy can also reduce the quality of farm produce and stunt the growth of fertilizer industry. Dr. Singh should revisit the grassroot political and economic realties. g

gfiles Magazine November Issue 2011

BOOK REVIEW

darkness of emergency

 

Great book and some food for thought

 

JP Movement Emergency

and India’s Second Freedom

by M G Devasahayam

published by Vitasta

Publishing

Rs 495

 

by DIPTENDRA RAYCHAUDHURI

 

IT is not every day that a book comes out with the rare gift of throwing new light on certain very important developments that took place three and- a-half decades ago. MG Devasahayam’s book contains that rare gift (though one gets no clue of it from the title of the book). The book is essentially about how Jayaprakash Narayan was released from Chandigarh during the middle of the dreaded Emergency and what role Devasahayam, as the custodian of JP in his capacity as District Magistrate of Chandigarh, played in it.

 

This particular aspect is very important on two counts: First, and Devasahayam has mentioned it too, the dark days of the Emergency and the terror associated with it is something not known to the younger generation. Second, it shows what a great role an upright officer can play even as a junior officer.

 

A lot of people blame the “system” for every malaise the country suffers from. But the system consists of individuals, and if only individuals played positive roles the system would not deteriorate to the level it has. When Devasahayam realized that JP’s life was under threat, he silently planned a build-up of pressure on Indira Gandhi, and it worked.

 

Had there been someone else as DM, a conduit of Sanjay Gandhi or Bansi Lal, he would not have played this role and JP’s kidneys could have been damaged much more. That could have prevented him from playing his historic role of uniting the Opposition, and Indian history could have taken a different course altogether.

 

The book reads like a thriller, and no point will be served by quoting from the book. It is a must-read. Through the pages, one gets a feel of the diabolical minds of the Sanjay coterie, and one shudders to think what would have befallen us if that man had become Prime Minister some day. The book also tells the saga of meek surrender of the elite before such dark forces. Of course, even then there was a Chandra Shekhar, an HR Khanna, and, of course, a Devasahayam. And, surely, many others like him. The silver lining was there at the edge of the darkest cloud, and that put pressure on the cloud itself. And there is no question of forgetting the common man, like the people of Chandigarh who, in the election after the Emergency was lifted, accepted money from Congress candidates to donate it to the “poor” Janata Party candidate who ultimately won (p 240).

 

Whether JP’s kidneys were deliberately damaged can never be proven but, as the author has described the chronology of events, it allows a sneaking suspicion into the mind of the reader.

 

Apart from “defying” the Delhi durbar, Devasahayam played an important unofficial role in keeping JP’s spirits high, and thereby rendered a great service to the nation. Such unsung heroes provide oxygen to democracy which in its essence not only means “rule of the majority”, but also “accommodation of the interest and opinion of the minority” to a very large extent. The way Indira tried to clamp down upon JP’s movement showed a blatant disregard for that second aspect of democracy.

 

The book reads like a thriller. Through the pages, one gets a feel of the

diabolical minds of the Sanjay (below) coterie, and one shudders to think

what would have befallen us if that man had become PM some day.

 

In the book, the author has time and again mentioned how this tormented JP. He was a simple man, as evident from the description of his departure from Chandigarh (p 224). Hence the torment. In reality, the movement was well within the parameters of democratic practice.

 

THE author, however, has tried to evoke a parallel between those days and the present time. Here, a thinking mind begs to differ on certain aspects. First, now there seems to be a concerted effort to put the blame on the Congress and replace its government with another one. However, it is known that at the given moment the only alternative to the Congress is the BJP. Even in his days, JP was aware that the Jan Sangh was a communal party and had to be checked. Now that it leads the opposition force, there is no one to put a check on it. Even an internal check is out of the question in Atal Bihari Vajpayee’s absence. So, under the circumstances, making way for the BJP to come to power (which on its own the party would not be able to do) is fraught with dangerous consequences for democracy. The BJP, as we have seen in the past, stands for intolerance and disregard for human rights. But this is not highlighted.

 

Second, the gravest threat to our democracy is emerging from the continuation of poverty, insecurity of earning a living, and the insensitivity of the rulers to this. When the author talks of an organization called Youth 4 Democracy and enumerates “we stand for”, there is no mention of this point. Third, corruption is a threat, but who in this country is not corrupt? Who pays and receives bribes? Who takes and gives dowry? Who has made arrangements for a short and special queue for darshan in the temples in exchange for money? The list can be endless.

 

Corruption is a social evil and has to be fought at the social level. Legislation and institutions are important, but ultimately it all depends upon the character of the people who will implement the laws and defend the institutions. It calls for a social change that will make corruption taboo. Otherwise, can we really expect much from an initiative which is political in nature?

 

Ultimately, it all depends on individuals. The threat was always there. If Lal Bahadur Shastri really said that had he known of Nehru’s wishes, he would not have become Prime Minister, it shows he too was a sycophant. So the seed of deification was there in the Congress from the very beginning. And it did not end with worshipping the Mahatma. Unfortunately, there is no secret mantra that can produce upright men like Devasahayam. Under the circumstances, drawing a quick parallel with the past may often be misleading. g

gfiles Magazine November Issue 2011

CORRUPTION

agenda for democracy

 

Return to the roots

Our political institutions should be based on the ancient Indian polity, rather than drawing from the West

 

by MG DEVASAHAYAM

 

AMID the cacophony over the Lokpal and anti-corruption issues, we have been consistently missing the wood for the trees – a fact that has been succinctly brought home by a group of eminent citizens in an open letter to India’s political leadership.

 

The letter says: “We support the need for the urgent passage of a well-crafted Lokpal Bill by Parliament. We, however, believe that the Bill is only one small but critical step in the national task of weeding out the plague of corruption. This draft Lokpal Bill is intended to address episodic corruption, but is unlikely to have any significant impact on day-to-day corruption which is insidious and demeaning.”

 

The question we need to ask is: Why have things come to such a pathetic pass? Why has corruption become insidious, demeaning and a plague? The answer lies beyond the ongoing “corruption debate”, it concerns the democracy and the democratic governance we practice and their precipitous fall in the past few decades. We need to face the reality that, commencing with democracy at Independence, India descended to autocracy (during the Emergency) and then oligarchy (post-Emergency) and is now more of a kleptocracy.

 

In Gandhian thought, India’s democratic structure was to rise storey by storey from a foundation comprising self-governing, self-sufficient, agro industrial and urbo-rural local communities. These self-governing entities would control and regulate the use of natural resources for the good of the community and the nation. The highest political institution of the local community would be the gram sabha of which all the adults are considered members. The next storey would be the panchayat samiti and then the district council which would be formed by integration of the panchayat samitis of the district.

 

In Gandhian thought, India’s democratic structure was to rise from a foundation comprising self-governing, self-sufficient, agro-industrial and urbo-rural local communities.

 

All the district councils of a State would come together to create the Assembly. The Assemblies, in like manner, would bring into being the Lok Sabha. Thus, the political institution at each level would be an integration of all the institutions at the lower level. Mahatma Gandhi stated his concept of India’s democracy simply:

 

“... There are seven hundred thousand villages in India, each of which would be organised according to the will of the citizens, all of them voting. Then there would be seven hundred thousand votes. Each village, in other words, would have one vote. The villagers would elect the district administration; the district administrations would elect the provincial administration and these in turn would elect the President who is the head of the executive....”

 

To facilitate this vision, the Objectives Resolution called for a Constitution “wherein all power and authority of the Sovereign Independent India, its constituent parts and organs of government, are derived from the people”, that is to say, the true swarajya.

 

Instead, what we got through the Constitution was just the opposite – an upside-down structure: an all-powerful Parliament and Central government; a State government and legislature with limited power, and panchayats and urban local bodies with no power. There was no trace of swarajya. The structure of democracy, built into the original Constitution, had a solid concrete roof (Central government and centralized institutions) with weak brick walls (State governments and institutions), and no foundation (grass-roots institutions in the villages and districts). No wonder, when Indira Gandhi took a kick at this edifice on the midnight of June 25, 1975, it collapsed like the house of cards it was.

 

It is unsurprising that in subsequent years a politician-businessman-bureaucrat oligarchy was formed and led to governance and policy decisions following an alien agenda that facilitated massive loot of natural and man-made resources, and the resultant corruption.

 

The Constitution has centralized all power in the government and made it a tool for the powers-that-be to rule rather than an instrument for the people of India to govern themselves. All legislative powers are vested with the Parliament and State Legislatures. The administrative apparatus and financial control is also co-terminus with the jurisdiction of Parliament and these legislatures. The higher judiciary is far removed from the people in terms of distance, cost and procedures and is accessible only for the rich. In the event, the concentration and centralization of power and authority have become near absolute.

 

The Constitution did not provide for democracy or governance at the grassroots level, thereby depriving the people of any say in the day-to-day management of their affairs. All natural resources stood centralized and subject to arbitrary allocation. Only in 1993 was the establishment and election, respectively, of panchayats and municipalities facilitated through the 73rd and 74th Constitutional amendments. But, till date, these entities are unable to exercise most of the powers and functions so benevolently given to them by the government.

 

The need of the hour is to democratize India’s polity and management of natural resources. Jayaprakash Narayan, the man who defeated autocracy in 1977, had an agenda for democracy in line with Gandhian thought as early as 1959. It was clearly laid down in his seminal essay, “A Plea for the Reconstruction of the Indian Polity”. Even after five decades, every word of it rings true and relevant.

 

According to JP, our political institutions should be based on the principles enunciated and practised in the ancient Indian polity because that would be in line with the natural course of social evolution. Those principles are more valid from the point of view of social science than any other.

 

What we practise, instead, is drawn from the Western polity, which is based upon an atomized society, the State being made up of an inorganic sum of individuals. This is both against the social nature of man and the scientific organization of society. The ancient Indian polity was much more consistent with these. This raises the question: What should be the principles and form of Indian polity today?

 

IF India’s present political structure and institutions of governance are to be soundly based, if they are to draw sustenance from Indian soil and, in turn, are to sustain, revive and strengthen the whole fabric of Indian society, they must be related to the social genius of India and their texture must be woven with an organically self-determining, self-developing communal life in which occupations, professions, functions and decisions are integrated with the community and not dictated by rulers cocooned comfortably in the State and national capitals.

 

This is not only an issue of Constitutional forms or political systems. It is a creative issue in the widest sense of the term. It is a question of an ancient country regaining its lost soul. g

gfiles Magazine November Issue 2011

POLITICS

regime change

 

After Manmohan, who?

With so much in his favour, why is the corridor of power suddenly full of speculation that Manmohan Singh may be on the way out?

 

by RENUMITTAL

 

IT’S the story of two non-politicians who came together to run the government of the world’s largest democracy. The government came to power in 2004, and the people once again voted for it in 2009. But then the fairytale began cracking up. The government failed to curb and handle the crisis which hit it. The leader of the party which headed the government also failed to take the right action at the right time, in the process compounding an already complicated issue.

 

Yes, this is the story of Manmohan Singh, who became a Prime Minister from a bureaucrat. He had never won an election in his life, and was nominated by Congress party president Sonia Gandhi to the post of Prime Minister. She herself was a novice in politics, but had at least won elections.

 

She had also acted as a glue to keep a divided Congress together and kept at bay the overwhelming ambitions of powerful men and women in the party.

 

But the second innings of the UPA has been a saga of corruption, scams, and inept handling of crises by the Prime Minister. By 2011, there has been free talk of an impending mid-term election, or of Manmohan being replaced by another leader. But so far it is nothing but speculation. Congress leaders, however, feel the Prime Minister seems to be destined to go.

 

They say he is doing some hard bargaining and sending out signals that, in the event he has to step down, it can only be if he is made President of India in 2012 when Pratibha Patil’s term ends. It is not known whether this demand will be acceded. But in case Sonia decides to replace him, the Congress Parliamentary Party will elect a new leader, and that will bring an end to Manmohan’s regime.

 

When chosen, Manmohan had certain advantages. He was the best man to act according to US suggestions and prescriptions. As a votary of the free market economy, he was also the man whom big business houses looked to for protection. The icing on the cake was that he was seen as an honest man with no political agenda of his own except to keep the Prime Ministerial gaddi safe and warm for a member of the Gandhi family. He nurtured no ambitions of contesting and winning elections.

 

With so much in his favour, why is the corridor of power suddenly full of speculation that Manmohan may be on the way out?

 

Primarily because there has been a severe cooling off between Sonia and him. Her sudden, undisclosed illness halted this process for some time, despite the fact that the ever so popular Manmohan, the darling of the English and the pink press, has been subjected to negative publicity and questioned on key issues such as the 2G scam.

 

There has been a severe cooling off between Sonia Gandhi and Manmohan Singh. Her sudden illness halted this process for some time.

 

The exit of Manmohan’s national security adviser, MK Narayanan, reportedly at the behest of 10, Janpath, followed by the decision to remove the powerful TKA “Kutty” Nair from the post of Principal Secretary and replace him with a supposed 10, Janpath loyalist, Pulok Chatterji, were clear signs that 10, Janpath was displeased with the PMO’s running, the decisions being taken and the power vested in bureaucrats like Nair, known to be close to Manmohan since the 1960s.

 

A PART from 10, Janpath, senior Congress leaders have been eeply critical of the Prime Minister for quite some time now with an AICC functionary admitting that a negative view of the Prime Minister was gaining currency in the party. It was being felt that his inept handling of the 2G spectrum as well as Anna Hazare’s movement showed that he could not handle the nuances of hardcore politics but was only interested in keeping his chair secure and out of harm’s way.

 

The deterioration has come fast and quick. A key ally like Agriculture Minister Sharad Pawar has called the government and the Prime Minister weak and said that the 2G scandal should have been handled more effectively and competently. He is upset at his name being dragged in and the arrest of Shahid Balwa (a man known to have close links with Pawar). He is also upset at the defeat in Khadakwasala, near his home base.

 

But the fact that a senior Cabinet Minister like Pawar has chosen to speak out only reinforces the fact that all is far from well in the kingdom of 7, Race Course Road.

 

Leaders say no detailed discussions on critical and sensitive issues take place in the Cabinet, with much of it being business as usual. Key allies are neither consulted nor taken into confidence nor sought after for advice on important issues. They have been pushed to the sidelines and told to be happy that they are Ministers in the Union government.

 

THE same situation prevails in the Congress party. No meeting of the Congress Working Committee has been called on any serious or sensitive issue like Telangana, the 2G spectrum scam, the Anna Hazare attack on the Congress party or any other issue.

 

Senior and grassroots-level leaders have been pushed into oblivion and a handful of trusted faces discuss and debate everything in what has come to be called the core committee. They work on limited inputs and have little touch with the grassroots leaders or workers.

 

With the cautious and status quoits Sonia not keeping good health, the question is who can be nominated as Prime Minister in place of Manmohan.

 

The exit of Manmohan Singh’s national security adviser, MK Narayanan (above, left) followed by the moving of Nair (above, right) was a powerful signal of the rift and drift.

 

 

While the most obvious choice is Rahul Gandhi, the impression that comes across is that he is not ready to take over the Prime Ministerial responsibilities.

 

He has declined to be a Minister in Manmohan’s government and is focusing on Uttar Pradesh and the Youth Congress. Sonia wants to instal him as the Prime Minister but since politics comes with no guarantees, the issue being debated at 10,  Janpath is whether she can wait till 2014 to instal him as by then it may be too late and the Congress may not be within striking distance of forming the government.

 

Should he be pushed into taking over his responsibilities with one MP describing it as his inheritance and legacy? The other contenders are from the core committee, which was set up by Sonia herself. Her personal choice, say party men, is AK Antony, another honest leader from Kerala who prides himself on his clean image. But Antony is neither articulate nor administration savvy, he does not believe in taking decisions as they may cast a shadow on his clean profile, and is not considered to be either competent or effective by even his own friends and supporters.

 

A senior leader said these are certainly not the qualities which can bring a tottering UPA II back from the brink of being an outstanding disaster as he will neither be able to manage the bureaucracy nor his fellow colleagues and Ministers. The Defence Ministry is replete with tales of Antony’s non-performance and indecisive ways, say Ministry watchers.

 

Ally Pawar has called the PM weak. Sonia’s choice may be Antony but

the man heading the race is party troubleshooter Mukherjee

 

Home Minister P Chidambaram also sees himself as the next Prime Minister. But his recent problems, both in Madras High Court with relation to his election petition and the Supreme Court where he is close to being named in the 2G spectrum row, along with the inept handling of the Anna Hazare episode, appear to have effectively ruled him out of the Prime Ministerial race.

 

RECENTLY, the Dalit factor has also come into play with both Meera Kumar and Sushil Kumar Shinde being named as being in the race, but in the Congress scheme of things neither has the right qualification for making it.

 

Amid this confusion and lack of direction, the UPA’s main troubleshooter and man for all seasons, Pranab Mukherjee, is today heading the race for the Prime Ministership. Sources say that his earlier trust deficit with Sonia has been bridged, his exceptional powers of handling critical issues and clear-cut view of problems has earmarked him as the man who can be considered to lead the government and handle the myriad problems which have come to plague the UPA. So much so that it was Sonia who, from her hospital bed in New York, directed the party and the government to nominate Mukherjee to handle the Hazare agitation when it was getting out of hand.

 

 

The Prime Minister has been trying to target Mukherjee through the 2G note prepared by the Cabinet Secretary in consultation with Nair and show him up as an involved party. But the tough stand taken by Mukherjee and his self-righteous defence of his own

position soon put him in the clear.

 

For an ailing Sonia, decision-making has become even more difficult as she is happiest not rocking the boat or creating any new problems for herself. It is now clear that Manmohan will not go easily. He wants to complete his term or at the very least bargain for the Presidentship of India.

 

The winter session of Parliament will be crucial for resolving the internal politics of the Congress party with the power lines being more sharply drawn with each passing day. Particularly apparent is the discomfort of the Lok Sabha MPs who have to face elections

and answer the tough questions being lobbed by their voters. They want Sonia to act, and to act fast in resolving key areas of disturbances in both the Central and State governments where they think the party is pushing itself on to the back foot. g