Making sense of the Mauritius tax treaty

Since the Mauritius treaty is back on the front burner, do see some sophisticated thinking on how the tax system can be made compatible with globalisation:

• Page 29 (`Residence based taxation of finance') in Indian social democracy: The resource perspective by Vijay Kelkar and Ajay Shah, February 2011.
• Chapter 9 of the Ministry of Finance Working Group on Foreign Investment, 30 July 2010.
• The Mauritius Code by Ila Patnaik, in the Indian Express on 12 July 2010.
• An entry titled India's financial globalisation, in Encyclopedia of Financial Globalization, edited by Gerard Caprio, Elsevier, 2012; in this the problem of residence-based taxation is located in the larger setting of India's integration into the world economy.

Inflation targeting: What have we learned

Inflation targeting: What have we learned, a seminar by Spencer Dale, Chief Economist of the Bank of England, at NIPFP, 16 June.

Interesting readings

Sanjaya Baru in the Business Standard on India's relationship with Taiwan.

I added Monsoon: The Indian Ocean and the Future of American Power by Robert D. Kaplan to my suggested India bookshelf. It is a truly fabulous book.

Sanjay Banerji in Business World on how socialism went wrong in Bengal.

Minxin Pei has an excellent note on the CASI website titled Dangerous misperceptions: Chinese views of India's rise.

On 16 May, I had written a collection of links titled A new low for Indian economic policy. This story has evolved badly. Today, the Economic Times has reported a set of accusations by K. M. Abraham. SEBI's autonomy is under attack by Mobis Philipose in Mint. Mahua Venkatesh in the Hindustan Times. Editorial, titled India's wobbly regulators in the Mint. Govt influencing selection of UTI AMC head, alleges T Rowe by Shaji Vikraman and Sangita Mehta in the Economic Times and Why North Block can't do without Omita Paul by Sruthijith KK, in the Economic Times.

A troubling upheaval in SEBI is in the works. After the departure of C. B. Bhave, we are now facing the departure of K. M. Abraham, M. Sahoo, J. N. Gupta, K. N. Vaidyanathan, J. Ranganayakulu and Pradnya Saravade. These individuals were of essence to SEBI's remarkable performance in recent years, and will be very hard to replace.

The Economic Times, the Hindustan Times and the Mint are clearly winning on this story.

Striking the right keys by Vikram Doctor and Kalyan Parbat, in the Economic Times.

`Coke Studio' is an impressive concept in innovative music that's run by the American corporation, Coca Cola, in Pakistan. A precis on Wikipedia, and here's their web page. This is an interesting future for music: All the music is freely downloadable. And now, they are bringing this to India.

Google street view will now come to India.

The uncommon experience of reading high quality thinking on Indian macro in the press: Keerthik Sasidharan.

For all of us interested in Satyam, here's a fascinating story about the fraud at Longtop Financial Technologies, a Chinese firm, which was similar to Satyam in many ways.

I did an interview for IFMR Blog on India's financial architecture. Here is the interview in text and the audio.

Siddhartha Deb has a fascinating profile of IIPM and Arindam Chaudhuri in Caravan magazine.

Mahesh Vyas analyses the CMIE Capex database for insights about emerging trends in investment (in the Financial Express).

Martin Feldstein evaluates the scary things that Greece has to now pull off.

Tina Rosenberg, in New York magazine, tells the story of the world's first person who had AIDS and was cured.

OECD-NIPFP Symposium

An interesting event, linked to the release of OECD's Economic Survey of India, 2011.

Can we get back to track on corruption now?

India's corruption crisis

Somewhere in 2010 or so, I started getting much more gloomy about India's problem of corruption. For a snapshot of the zeitgeist, see this group of articles from August 2010. A large swathe of the economy operates in close contact with government. If government will not sensibly make rules, and then fail to impartially enforce rules, then the entire enterprise of the market economy is under threat.

In the months that followed, the topic of corruption exploded in the Indian public policy discourse. The two main events were the Commonwealth Games scandal and the 2G Spectrum scandal. But alongside these, many smaller events also played a role, such as the Adarsh Housing Society scandal.

The two spoilers

I was, at first, hoping that this energy would be channeled into making progress on core issues of governance. But sadly, the first flush of interest in the field was wasted thanks to the Anna Hazare spoiler followed by the Baba Ramdev spoiler. These have provided comic relief, but more importantly they have taken the focus away from the genuine problem of corruption. They have helped increase an entrenched sense of pessimism that nothing can be done about corruption (given that these prominent efforts were irrelevant).

However, the lesson is not that nothing can be done about corruption. The lesson is that such spoilers are not the answer. Genuine institutional reform is. The problem of corruption will resist quick fixes proposed by people who only dimly understand it. Careful thinking in incentives and public administration is required, in diagnosing where corruption comes from and how it can be addressed. Now that the two spoilers seem to be getting out of the way, can we get back to this main quest?

The main quest

Under the topic of `sensibly making rules', we have had two kinds of problems. The first is the problem of old Indian thinking, where socialism and autarky have impeded good sense. But alongside the process of this obsolete economics being weaned out of the system, the new problem is that of hard-driving entrepreneurs rigging the system to make rules that favour themselves.

Under the topic of `impartially enforcing rules', the puzzle is: How do we get humble civil servants in enforcement agencies (CBI / Police / SEBI / RBI / TRAI) to go about doing their job? This task is under fire from three points of view. On one hand, humble civil servants are often outgunned by the sophistication of hard-driving entrepreneurs. When the civil servant is presented with a sufficiently complex scheme, he might just not have the energy to unravel it and pinpoint the skullduggery. It requires an exceptional capability in government, by Indian standards, to hammer down the details of the arrangements that firms might undertake [example]. The second problem is that politically powerful people might try to block investigations. The third problem is simple outright corruption, where the humble civil servant is bribed to not do an investigation properly. In the real world, all three elements are at work.

The Indian development project critically requires institution-building in order to address this. High quality rule making procedures are required, so that the rule-making process cannot be rigged. The hardest job is that of creating an organisational culture for enforcement, so that agencies like SEBI can write the top quality orders of the kind which came out in recent years.

And then, we need the surrounding infrastructure of courts such as SAT and the Supreme Court. These are required to play two kinds of roles. First, when a government agency tramples upon an innocent, the courts have to protect the innocent. Second, when these agencies smell an agency that is about to fold and not actually go through with an investigation or the following court process, they have to be tough about it, as the Supreme Court has been doing in recent months.

To make a difference to corruption, we have to go after these questions. This requires a slow careful process on three fronts:

1. Recruiting top quality individuals, who combine high competence with the highest ethical standards,
2. Modifying rules and procedures so as to make them more robust to corruption, and
3. Strengthening the courts.

There will be no quick results, but over time, this hard work will yield results. 

India's privatisation problem

When the UPA came to power, the word privatisation was buried, partly out of deference for the communist parties which were supporting the UPA. The sale of shares did revive after the UPA-2 commenced [history].

On a global scale, the experience with firms like British Airways and AlItalia has done a lot to persuade people that government is a terrible owner of firms. As a consequence, even though governments worldwide took up ownership of many financial firms during the global crisis of 2008 and 2009, there was never any question that this `nationalisation' would be more than temporary. In OECD countries, there is full clarity that even if government gets into a firm when the firm is in trouble (for certain public policy reasons), this ownership must only be temporary and government must get out of this unpleasant state as soon as possible.

Given the lack of commitment to economic reform in the UPA, expectations in India on the question of privatisation have been low. But the problems of public sector firms are glaringly large and the issue does not go away.

We are all used to Air India being a phenomenally bad use of public money. But as T. N. Ninan points out in the Business Standard today, there are quite a few other such breathtakingly large sinks for public resources. As he says:

...it takes a special kind of government company to lose Rs 8 crore a day, while earning just Rs 10 crore as revenue -- and that in the booming field of telecommunications. That's Mahanagar Telephone Nigam Ltd (MTNL) for you. Its big sister, the Bharat Sanchar Nigam Ltd (BSNL), also loses Rs 8 crore a day, though it earns much more revenue -- about Rs 90 crore daily. BSNL blames the jailed former minister A Raja for its troubles, but there must be more to the story. Now the two companies propose to merge; expect an Air India kind of situation, with staff from the two companies battling over pay and seniority many years into the future.

Air India, meanwhile, provides more proof that the government is a lousy shareholder. One minister destroyed the airline. Another now watches while the airline cuts flights because it has exhausted its credit and credibility, and therefore has to pay for fuel in cash. The staff, meanwhile, is not paid incentives that are equal to something like half their monthly salary in most cases -- and the government expects this de-motivated staff to fight and regain lost marketshare, to offer service with a smile to passengers.

And what about Prasar Bharati, the once supposedly autonomous broadcaster which is now once again little more than a government department? It employs 38,000 people, and loses Rs 2.5 crore a day, to earn about as much revenue. Someone should ask the obvious question: Why is the government in the business of running phone companies, airlines and news broadcasting when it is losing large dollops of money, when private providers are doing a reasonable job, and when there is no shortage of competition? For that matter, does the government need to make watches (at HMT), cement (at Cement Corporation of India), tyres (at Tyre Corporation of India), or shoes (at Bharat Leather)?

The UPA-2 made a big break with the pessimism by moving forward on selling off Scooters India. The long spell of zero privatisation may come to an end, with the UPA-2 selling off Scooters India.

But how might one view the prospect of government selling off some of the other public sector firms? I think a sound approach to this question involves three elements.

1. Removing entry barriers

The first piece of the story is that it is essential to remove entry barriers in various fields, which were once dominated by the public sector. Our poster child in this regard is telecom. Private and foreign firms came into Indian telecom; Indian users of telecom services were huge beneficiaries. Whether MTNL / BSNL were privatised, as VSNL was, was of second order importance. The most important thing that is required for India to make progress is for government to not get in the way of the private sector.

As an example, Indian banking is a place where there are steep anti-competitive restrictions against private and foreign banks. While I believe we should have strong rules about ownership and governance for banks (just as we should in critical financial infrastructure), we should not be blocking the rise of suitable private and foreign banks. We should not be blocking the long-term decline in importance of PSU banks. Getting out of the way of private and foreign banks is as important, if not more important, as the task of selling PSU banks.

2. Dispersed shareholding corporations rather than strategic sales

If all PSUs were sold off, the top 500 families of India would likely endup controlling all of them. This prospect makes one worry, about the increased concentration of economic and thus political power. It would be far better if India move towards privatisation by creating dispersed shareholding (e.g. ICICI or HDFC) instead of privatisation through strategic sales (e.g. VSNL).

This issue also links nicely to the problem of corruption. A country where spectrum auctions can take place while requiring bids to be placed in 45 minutes is a country where auctions that sell off PSUs could be rigged. It is, hence, far better to setup a steady drip whereby 0.1% of the shares of a PSU are sold every day into the pre-opening call auction at NSE and BSE, so that 25% is sold every year. Such a procedure comprehensively eliminates the problems of government process in the sale of shares. The government would merely put out an advertisement, before the story began, saying that over the next 250 days, it will sell 0.1% of this firm on every single day into the NSE and BSE call auctions.

Alongside this sale of shares, government would need to take interest in establishing good quality corporate governance structures for these companies, which are transiting out of government control into becoming dispersed shareholding corporations.

Even in the case of Scooters India, suppose government decided to sell off its ownership of 95.38% within 100 days. It is better to do this without bringing any investment banker into the picture, by selling 0.9538% into the call auction for every day in the coming 100 days, after making a public announcement to this effect. Alongside this, government would need to setup a good quality board and then allow ordinary corporate governance procedures to work.

3. GDP growth, not proceeds

Every now and then, these discussions get stuck on the issue of how government can maximise the proceeds from selling off (say) Scooters India. This is the wrong end of the puzzle. The really important story is about how the labour and capital that's blocked inside Scooters India can turn into greater output. Once that's done, government collects the NPV of future taxation that this productive enterprise will generate.

The focus should be on getting assets out of public control, while avoiding the corruption or political complexity of strategic sales. As long as these are achieved, the magnitude of the proceeds is not of great importance.

Freedom of speech in Pakistan and India

One of Pakistan's more remarkable journalists, Syed Saleem Shahzad, was tortured and murdered, probably by Pakistan's ISI.

• Part one of the article, in Asia Times Online that got him killed.
• Saleem in the shadow of Massoud by Chan Akya, also in Asia Times Online, tries to ask why this would make sense. And once you start thinking about this, was it coincidence that Ilyas Kashmiri was killed shortly thereafter?
• I haven't yet read the book Inside Al-Qaeda and the Taliban, which was released only a few weeks ago.

In one view of the world, freedom of speech is something that you are gifted by your founding fathers. As an example, if you have the good fortune of having a well drafted Constitution, it would say Congress shall make no law ... abridging the freedom of speech, or of the press;. This would block the ability of politicians to enact legislation that is inimical to freedom of speech. Then, as long as rule of law prevails, we get freedom of speech. This seems like a palace coup, it seems rather easy, as long as you have the right intellectual capabilities in the hands of those who draft the Constitution of a country.

We in India or Pakistan are not blessed thusly. The Indian Constitution is not clear-headed about freedom of speech, and anti-defamation law of colonial vintage continues to be on the books. This is an important tool for harassment and intimidation. And then, there is the question of rule of law. What is going on in Pakistan is way beyond questions of how the Constitution should be drafted.

It is, instead, more useful to think that democracy and freedom are made of a million battles, small and large. Freedom of speech is won, piece by piece, through a million mutinies. It is important to constantly think, and speak, and write. Each little act of writing about troublesome issues pushes the envelope of freedom of speech, and creates a culture of honest discussion and discourse.

I feel the media in India has become quite complacent about the tawdry condition of free speech in India. All too often journalists can be warned off a seamy story by a tiny exercise of power or influence. All too often, the crooks are able to buy the loyalty of a journalist quite easily. There isn't enough intellectualism going around, among the men and women in the media. Eshwar Sundaresan, writing in Dawn, says that India badly needs more journalists of the character of Pakistan's Najam Sethi. This is one of many areas where India's success in the last 20 years is leading to an erosion of the very foundations of that success.