A better way of selecting the top brass – 2

Politicisation will limit politicisation

Two of the more thoughtful critiques of the Modi government’s decision to jettison the principle of seniority in appointing India’s next army chief appear in the Indian Express and Business Standard today. Sushant Singh and Ajai Shukla are among the most astute commentators on the subject so it is important to read their arguments with care.*

Sushant’s main argument is that the principle of seniority in choosing the chief must be replaced by an institutionalised due process, and not arbitrary selection by the political leadership. Ajai, though primarily concerned about the politicisation of the army, also criticises the rationale provided by the Modi government in the specific case of Gen Rawat.

A reasonable person will tend to agree with Sushant and Ajai, for after all, it is a good idea to ensure that the selection process is transparently objective. However, the reasonable view in this case might be both unsatisfactory and impractical. It might be a better to allow the political executive the complete discretion to pick from among the available pool of three star officers. If the Cabinet prefers non-military criteria like partisanship, ideology or ethnicity, so be it, as the Cabinet is accountable for outcomes. The lessons of 1962 are not lost on India’s politicians. As I wrote in my first post on this topic, if we can trust the prime minister with a nuclear button, we shouldn’t worry about a much lesser risk as the selection of army chief.

Won’t this politicise the army? Well, the trajectory is unlikely to be much different from what it is now. Moreover, even as Sushant, Ajai and I are concerned about the politicisation of the armed forces at politician-general level, we are also concerned about the politicisation within the army. As Ajai brings out in his article, factional politics among the branches of the army are intense and have ended up in the Supreme Court. It is naive to believe that this intramural politics has been untouched by the country’s partisan politics. I’ve covered this objection in my earlier post.

(*As the two are both friends and sparring partners, this blog refers to them by their first names, instead of formally by their honorifics and last names.)

A better way of selecting the top brass

Nothing is lost by abandoning the principle of seniority, but the armed forces need restructuring

Yesterday, the Modi government decided to supersede two general officers and appoint Lt Gen Bipin Rawat as the next chief of army staff. In a system where seniority has risen from a criterion to the criterion, and where “lines of succession” are drawn in a manner to mirror royal succession in monarchies, the move has shocked many. After all, the last time such a thing happened was in 1981 when the Indira Gandhi government appointed Gen A S Vaidya over Gen S K Sinha’s head.

Here’s the thing: the Modi government has done well to break a norm that had so become an entitlement that it had begun damaging the incentive structures of the the military leadership. The sordid saga of Gen V K Singh five years ago revealed that the army’s leadership was spending undue energy on manipulating promotions and appointments to ensure desired lines of succession. Any organisation whose leadership is engaged in such machinations is likely to suffer loss of professionalism. By elevating seniority to a sacrosanct principle, we might well have depoliticised appointments at the level of the political leaders picking the military leadership. However, it does not mean we have depoliticised appointments within the military establishment. Because of secrecy and respect that the armed forces enjoy, the ‘politics’ within the armed forces is generally invisible to the public. That doesn’t mean it doesn’t exist. Just go back and look at the reports that emerged five years ago during the Gen V K Singh’s controversy.

If the Indian armed forces had the luxury of being a showpiece, where they did more ceremonial parades than combat, it might have been acceptable to go by seniority. But India’s armed forces have been fighting wars, proxy wars and insurgencies for ever, and the future presents ever greater risks. In such a context, it is downright absurd to argue the the senior-most officer should become the commander. Furthermore, it is downright absurd to accept that the service chiefs should be both excellent commanders and excellent staff officers: a great military leader need not necessarily be the best military manager. To roll the two roles into the same office is to get a little bit of both, and the best of neither. Jettisoning the primacy of seniority is the first step: the Modi government must use the opportunity to implement structural reforms to India’s military structure. (It’s clear what such reform should entail: see this article)

There are two important objections to non-seniority based appointments. First, that it would upset the army’s internal appointments and promotions structure. Second, that it would allow the political leadership to appoint military leaders based on partisan, ideological, religious, caste or other criteria unrelated to military merit. Let’s consider each of them in turn.

Yes, superseding officers will cause genuine heartburn, embarrassment and grievances among those adversely affected by the move. The retirement or resignation of those who have been passed over for promotion count as a loss to India’s military capital. That, however, is the price we must pay for a competitive military establishment. Much of this cost is one off, representing what behavioural economists call the “endowment effect”. Because officers expect to be promoted on the basis of seniority, they feel what is rightfully theirs has been taken away. If, from now on, officers no longer expect the seniority norm to hold, they will feel less cheated. That said, it is incumbent on the Ministry of Defence and the services headquarters to ensure that the superseded officers are treated with respect and decorum; and if they have years of service left, are re-employed in government positions commensurate with their seniority.

The second objection is more serious: what is to stop the political leadership from appointing military chiefs on dubious, non-military criteria? Well, for one, it is not as if lobbying on such grounds has not been taking place. However, the argument that the prime minister cannot be trusted to properly appoint a service chief sounds pretty unserious when the office of the prime minister has everything from the nuclear button to the validity of all legal tender in his hand. If the citizens of India vote in a government in a constitutional manner, and the ruling party constitutionally appoints the prime minister, who selects his cabinet, then that is that.

Now it is not as if the Cabinet can appoint an army chief without being bound by any constraints: they will be limited to a small number of officers to choose from, and any ideological, partisan or communal preference will be constrained by the fact that the armed forces are engaged in active duty. No Cabinet would want to lose battles or wars, or found wanting in the face of external threats. Parliament must do its job and keep the government in tether: so rather than defend the principle of seniority, concerned citizens must demand the amendment of the anti-defection law that has converted MPs into robots under the control of the party leaders.

The Modi government would do well to follow up its departure from orthodoxy with a sincere commitment to restructure the armed forces. Early in his tenure, PM Modi was reluctant to risk this reform. He should not shy away from it now. The K Subrahmanyam report was almost two decades ago; there have been a few subsequent initiatives to study the matter further. It’s well past decision time.

Tailpiece: My comments on an NDTV show on this subject in February 2012.

Update: Read the second post on this topic here.

Cash crisis, reform and pain

Structural reform does not have to be painful.

It is clear by now that the Modi government’s currency reform, involving replacement of old high-denomination notes with new ones, is inconveniencing people across the country to various extents. The expectation that the inconvenience will last only a few days has given way to fears that it will take longer: weeks, a couple of months, or more. Many economists estimate that the cash shock will cause an economic slowdown and hurt economic growth in the short term. [Mint has a very good economic analysis of the currency reform]

So question obviously is: was the move worth the pain? Are the benefits of a one-time cleanup of unaccounted cash worth the disruption of almost everyone’s daily life and the short-term—albeit irreversible to some innocent businesses and individuals—damage to the economy? It’s too early to tell.*

In the meantime some defenders of the move argue that inconvenience and pain is an essential part of structural reform. This is both inaccurate and disingenuous. This month’s currency exchange is not a structural reform. And structural reforms do not have to come with so much pain for so many people.

Those old enough to recall 1992 will hardly recall any pain or inconvenience. Similarly, it is hard to envisage the people of the country undergoing pain if say, schools no longer required licenses, businesses could be set up and closed down without hassle, tax laws became simpler, or even labour reform allowed easier hiring and firing of people.

Those linking structural reform to pain are doing a disservice to the cause of liberalisation. There is no reason why structural reforms must be painful. If anything, by removing red tape, preventing official harassment and lowering friction, structural reforms will make life a lot less painful—both in the short term and in the long term. Baby, bathwater and so on.

* Postscript: Many have asked me whether this currency reform will be successful. The honest answer is that it is too early to tell.

In fact it is hard to even analyse its impact had everything gone smoothly. The Indian economy is very complex, and we know less about the ‘unorganised’, ‘informal’ economy. Like blood that runs through the body’s veins, money supply affects every sector and over a billion people. It would be flippant and arrogant to claim to be able predict how it will pan out. Further, given that the transition is not going smoothly, what was complex has become even more so.

Complexity, the lack of required level of knowledge and inability to predict outcomes is one reason for governments to be tentative and parsimonious in their actions. This forms the basis of the argument for “small government”, or “minimum government”. The Modi government has wagered against this wisdom.

Only time will tell. Take expert predictions with a pinch of salt.

New currency notes for old

A one-off reduction of unaccounted money must be followed by long-pending structural economic reforms.

Some of the most insightful arguments on the demonetising of high-value currency notes have come from Takshashila associates.

Ajit Ranade has long been a proponent of getting rid of the high-denomination bank notes, pointing out that this will make a big dent in holdings of unaccounted money.

Karthik Shashidhar, on the other hand, has calculated that the exercise will be very costly. In other conversations with some colleagues last night, we noted that the real costs will be even higher, given the higher transaction costs, friction and so on.

[Update] Anupam Manur has a thorough analysis of the demonetisation.

Deepak Shenoy, one of India’s shrewdest analysts of capital markets, has more recent analysis that argues that the Modi government’s move will have short-term negatives but long-term positives. You should read the articles I’ve linked to above.

The Modi government’s move (even if it rightfully ought to be the RBI governor’s move) to demonetize Rs 500 and Rs 1000 notes and replace them after some time with new Rs 500 and Rs 2000 notes will act as a move to massively reduce the existing stock of unaccounted money and counterfeit currency. [Update: There will be new Rs 1000 notes too!] This will generally hurt the people who are sitting on large amounts of cash holdings (mostly for evading tax) and also, temporarily, those who are holding on to some cash, but have no bank accounts. This is significant.

A senior colleague argued that this was an extremely courageous move by Prime Minister Modi, not least because it hurts business communities that have long supported him and the BJP. However, given that this is one of the few moves that makes honest citizens feel good, it is likely to strengthen Mr Modi’s personal popularity. Effects on electoral outcomes have probably been calculated by those whose business it is to do so, and are probably as good as the best (or the worst) guess. There are just too many factors at play when it comes to how people will vote.

Now, if the government (or the RBI) had merely demonetized the big notes, the effect would have been to put permanent brakes on tax evasion and a faster move towards ubiquitous electronic banking. However, since the big notes will be back, the effect will be one-time. In fact, as another colleague pointed out last night, the same mattress will hold twice as much cash if filled with Rs 2000 notes. Also, many cash holders will convert their current holdings into gold, foreign currency or some other assets until they can change it back to cash again. There are limits to how much money they can hide this way, but many middlemen will make healthy commissions by providing such “services”.

Bank accounts will see a lot more transactions as latent account holders begin to transact through banks. This effect too will not be complete, as some might just decide to wait until the new notes arrive, and then lapse back to old habits. Behaviour is very hard to change easily. Until mindsets towards banks, taxes and scruples change, people will continue in the old pattern. It’s a good time to refresh the case for structural reforms: deregulation, getting rid of the license raj (no, it didn’t go away in 1992), tax reform and liberalisation. This will require even more courage on the part of this government (or any government, for that matter).

Will the move hurt confidence in the Indian Rupee? A sober Anupam Manur, Takshashila’s macroeconomics analyst, noted that denominations don’t impact the value of the currency. He doesn’t think the rupee will be hurt. On the other hand, another colleague likened this to Mr Modi’s Tughlaq moment — more politically, perhaps than economically.

The war against corruption and unaccounted money can only be won when economic incentives change, and in turn, change behaviour patterns (and ‘culture’). Disclosure schemes and demonetization of high-denomination currency notes have a salutary, but temporary effect. There is, however, no alternative to Reforms 2.0.

A lesson in opposites

Why doesn’t Karan Thapar dare to call anti-Hindutva by its name?

In an op-ed that wishes for Narendra Modi’s ‘sudden removal’, (via Offstumped) Karan Thapar writes:

Where does this leave the regional parties and the Left? They may retain their identity, even their present base, but they will have to line-up behind Modi or Sonia, in the saffron camp or the liberal/secular one. They may even have to submerge themselves within the broad appeal of the camp they belong to. [HT]

Now calling for parties to line-up against Modi is fine. But why the subterfuge? For neither Sonia Gandhi, nor the Left nor any of the regional parties are truly secular. And they are far from being “liberal”.

Secularism and Liberalism are lofty principles. The word that Thapar should use is anti-Hindutva. Will Thapar, Sonia Gandhi or anyone else in that camp dare declare that they are anti-Hindutva?

Narendra Modi’s foreign affairs

The Gujjus of Astrakhan

Newspaper columns this week are mostly about Narendra Modi, and mostly about domestic issues. Those interested in foreign affairs will find K P Nayar’s piece in The Telegraph of interest:

While India’s strategic community and sections of the media have been obsessed with the India-United States of America nuclear deal, it has largely escaped their attention that Modi travelled twice to Moscow to cash in on traditional Indo-Russian links, going against the recent fashion in New Delhi of running down such commercial-cum-cultural ties with Russia in an eagerness to suck up to Washington. No one should be surprised if it is Modi who has the last laugh at the Americans, who denied him a visa in a moment of extreme bad judgment and short-sightedness in Washington. Continue reading “Narendra Modi’s foreign affairs”

The secular demand for security

The right lesson for all political parties—including the BJP but especially for the Congress—is that there is a tangible electoral advantage to be had by being serious about forcefully countering terrorism. These are not merely the words of some opinionated blogger (or, for that matter, a columnist in The Indian Express). After the Gujarat election, they are revealed preferences of the electorate. The demand for security is secular in every sense of the word.

The writing is on the wall: internal security has become an electoral issue

The march of terrorism in Indian cities, along with the government’s inability to prevent attacks, this blog wrote this August, was “on the verge of crossing the chasm and (rightly) becoming a electoral issue. The parties that fail to see it are quite likely to pay a price”.

And in November, The Acorn noted that “if the UPA government’s pussyfooting on counter-terrorism was due to electoral calculations with an eye on the Muslim vote bank, here’s something for Congress Party strategists to think about: terrorist attacks across India are making security an aam aadmi electoral issue. Muslims are not likely to relish a situation where bombs go off every now and then putting them on the defensive. Conspiracy theories too are subject to diminishing returns; and one attack too many—as we have seen in the last couple of years—could cause a secular demand for security.”

That’s exactly what Shishir Gupta concludes from the results of the Gujarat assembly elections. Narendra Modi’s electoral victory owes itself to many factors. Yet the fact that his government delivered on security was not lost on Gujarat’s voters.

The right lesson for all political parties—including the BJP but especially for the Congress—is that there is a tangible electoral advantage to be had by being serious about forcefully countering terrorism. These are not merely the words of some opinionated blogger (or, for that matter, a columnist in The Indian Express). After the Gujarat election, they are revealed preferences of the electorate. The demand for security is secular in every sense of the word.