NDA – The Acorn

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.

When Bill Clinton had to be scared

Being prepared to press the red button ensures that it doesn’t have to be pressed

So Bill Clinton has revealed that “Indian officials spoke of knowing roughly how many nuclear bombs the Pakistanis possessed, from which they calculated that a doomsday nuclear volley would kill 300 [million] to 500 million Indians while annihilating all 120 million Pakistanis. The Indians would thus claim ‘victory'”. This is from Taylor Branch’s new book, The Clinton Tapes: Wrestling History with the President, and is presumably in the context of the 1999 Kargil war. (linkthanks Pragmatic Euphony)

In her report, DNA‘s Uttara Chowdhury leads readers to thinking that this should anger the Indian government. “New Delhi,” she writes, “is likely to be furious with the observation, which portrays it as a government willing to play fast and loose with its citizens lives to notch up a bizarre win against Pakistan.”

Why should New Delhi be furious when Mr Clinton’s words show that Indian officials ensured that the psychological aspect of nuclear deterrence was maintained during the crisis? For a country with a no-first use policy, it is imperative that there is no ambiguity in the minds of adversaries and observers with regard to its commitment to a retaliatory strike. If Mr Clinton was convinced that the red button would be pressed in retaliation, regardless—and perhaps more importantly, in spite of knowledge of the damage assessments—New Delhi should be pleased. Given his subsequent actions, this might have well been the case.

It is unclear who made these statements to the Clinton administration—whether they were made by government officials or by interlocutors outside the government. Also, the damage assessment of 300 to 500 million Indian casualties appears overstated (given the state of Pakistan’s arsenal in 1999, at least)—it is unclear if this was a case of Indian officials deliberately overstating it to signal how much damage India was willing to accept; or indeed, a case of Mr Clinton exaggerating the numbers to show how abominable the Indian position was. (See an earlier post on MUD or mutually unacceptable destruction).

The paradox of nuclear deterrence requires India to credibly demonstrate the unflinching resolve to cause mindless destruction in order to forestall it. To see this as playing “fast and loose” to notch a “bizarre win” is an uninformed, superficial and incorrect way to look at this issue.

In fact, these revelations highlight an important aspect germane to the current public discussion over the minimum credible deterrent. Much of it revolves around the adequacy of the nuclear arsenal—despite broad consensus that the garden-variety 20kT fission warheads are deployed on multiple platforms. The crucial question is: can Indian officials continue to convince the Clintons of the world, like they did in 1999? The business of convincing cannot be left to serendipity—it must be institutionalised.

The difference between Vajpayee and Manmohan Singh

Statesmanship and not

Much of the public debate over Prime Minister Manmohan Singh’s bad wager at Sharm-el-Sheikh as been framed wrongly. It is not about the need for India to diplomatically engage Pakistan (although presenting a binary choice between war and talks, and advocating talks suits the UPA government just fine).

It is about how. Shekhar Gupta’s op-ed today inadvertently demonstrates what exactly was wrong with Dr Singh’s approach:

“Everybody wants to go to war. The armed forces are so angry. But ek samasya hai (there is a problem). You can decide over when you start a war. But once started, when it will end, how it will end, nobody knows. That is a call leaders have to take,” (Prime Minister Atal Behari Vajpayee) said (in December 2001, after the jihadi attack on the Indian parliament), focusing entirely on his soup. Once again it was a statesman speaking rather than an angry Indian.

After almost 16 months of stand-off on the borders and coercive diplomacy when, as disclosed by Brajesh Mishra in an interview with me on NDTV’s Walk the Talk, an all-out war nearly broke out on two occasions, Vajpayee again made a dramatic “turnaround”. Addressing a crowd in April 2003 in Srinagar, he made yet another unilateral peace offer, to his own Kashmiris as well as Pakistan, and it yielded the Islamabad Declaration after a summit with Musharraf in January 2004. [IE]

In a situation not unlike the present, Mr Vajpayee moved unilaterally. Doing so meant that he could do it on his own terms. Doing so meant that he didn’t have to agree to the ‘price’ his Pakistani counterpart would ask for in order a joint statement. In Dr Singh’s case, the price paid was not only high, it was paid unnecessarily.

Notwithstanding this blog’s criticism (see a representative post) of the content of the ‘peace process’ that followed the Islamabad summit in 2004, it is undeniable that Mr Vajpayee’s move was real statesmanship. For all its faults, the direction and pace of the 2004-2008 ‘peace process’ was in India’s hands. Dr Singh’s move, in comparison, was a poorly conceived, badly managed and dangerously risky gamble. His own fate is in Pakistan’s hands.

My op-ed in Mint : Ten years after Pokhran-II

The payoffs are clear, unambiguous and long-term

In an op-ed to mark the tenth anniversary of India’s second round of nuclear tests, I argue that they made India a far more credible international actor. And that while India is reconciled to the ownership of nuclear weapons but remains unclear what they are for. I also point out that the conventional military balance remains as important despite nuclear deterrence being in place; and that our political leadership needs an altogether different level of skill to translate the nuclear advantage into foreign policy outcomes.

Excerpts:

“Real strength lies in restraint,” Sonia Gandhi said ten days after India conducted its second series of nuclear tests on May 11th and May 13th 1998, “not in the display of shakti.” She could not have been more wrong.

At the time of Mrs Gandhi’s speech, India had spent a decade fighting a proxy war against a Pakistan that China had brazenly armed – with American connivance – with nuclear weapons and ballistic missiles. India’s protestations that it is a victim of both cross-border terrorism and illegal nuclear and missile proliferation got nowhere. The nuclear powers had perverted the entire edifice of nuclear disarmament by legitimising their own nuclear arsenals in perpetuity. They were coercing India to constrain and give up its nuclear weapons programme. It was abundantly clear that India’s display of restraint was being exploited as a sign of weakness.

Pokhran-II changed that. Because it demonstrated to the world that India was ready to incur costs in the defence of its national interests. [Mint]

Thanks to Kedar Wagle, Anand Sampath & V Anantha Nageswaran for providing inputs and comments

BJP and the nuclear deal

Still blind to the political advantage

The BJP’s position on the US-India civilian nuclear agreement can be described in three words: “Oh, come on!”

Having painted itself into the anti-deal corner, the BJP finds itself incapable to climb out of the hole despite the many lifelines it has been thrown. First L K Advani appeared to signal that the party might find a way of supporting the government on the deal. Then came Brajesh Mishra’s remarks and the subtle manner in which Jaswant Singh distanced the party from them. What is unfortunate is that the BJP leadership appears to be content taking the apparently less risky way out, rather than distinguish itself through a bold move in the national interest.

It appears to be blind to the political advantage it can acquire by going to the electorate as the party that first set the stage for and then saved the deal. It appears to have underestimated the political advantage of demonstrating that it is not on the same side as the anti-national Communists.

Arundhati Ghose hopes that “it should not be beyond the abilities of our politicians too to find a political solution out of the present logjam.” The BJP leadership appears blind to the political advantage of proving her right.

Wealth creation: Advani’s take

Modern India’s leaders must stop disparaging wealth creation

L K Advani’s speech at CII was a lot better than Manmohan Singh’s: for he recognised the need for the government to match the ambition of the population. [Yossarin has a fuller analysis]

Rather, the soaring ambitions, aspirations and expectations of the Indian people, especially India’s youth, make it obligatory on any government to work with matching ambition. Anything less would mean letting down our people, letting down our youth.

By ambition, I mean, first of all, expansion of the prosperity net to include all those sections of our society who have so far remained either deprived of the fruits of India’s economic growth or received only some crumbs.

What India has witnessed in recent years is growth with widening inequalities. A very responsible person in our public life, a former governor of the Reserve Bank of India—no less—, recently stated that the earnings of 20 richest Indians exceeds those of 30 crore poor Indians. If this is true, it is shocking. Lopsided growth, however high its rate, can never be sustainable. This is the reason why the exclusive talk of 9 per cent GDP growth rate by some people in government or in the business community does not enthuse the general public.

Forbes magazine, which is famous for tracking the wealth of businessmen around the world, has predicted that India will have more billionaires than any other country in the world by 2017. Frankly, this does not gladden me at all. Rather, I would be delighted if, ten years from now, we are able to eliminate abject poverty from India. [via Offstumped]

Unlike Dr Singh, Mr Advani didn’t spout dangerous nonsense about earning less being a national duty. But his discomfort with wealth creation was unwarranted, and is disturbing if it is genuine. It not only misses the point that wealth creation and poverty elimination are not in opposition. It also contradicts the earlier part of his speech about matching ambitions: eliminating poverty is unambitious. Creating the conditions that allow the people to become wealthy is a far more ambitious goal.

Related Link: Atanu Dey’s commentary on Mr Advani’s economic agenda (in a speech to FICCI) in the March 2008 issue of Pragati.