The 'main hun na' school of budgeting

Arun Shourie: Saturday, March 29, 2008

Arun Shourie puts the Budget to the aam aadmi test and argues why the UPA fails miserably

In the Budget for 1990/91, the VP Singh Government announced a loan waiver of Rs. 10,000 crore. The Government was soon out. I am not on the precedent, but on the accounting! The waiver had been included in the Budget.

Soon, a new Government was in office. Delivering the Budget speech on 24 July, 1991, the then Finance Minister was as stern as he was scornful about the loan waiver, and about the way it had been budgeted.

‘There is one large component of non-plan expenditure that is a burden on the exchequer,’ he told Parliament. ‘I refer to the Government’s obligation under the Rural Debt Relief Scheme. Unfortunately, there was a gross under-estimation of the total fiscal liability under this scheme which was introduced last year. In addition to the sum of Rs. 1500 crores provided in the revised estimates for last year, we have to provide Rs. 1500 crores in the current year. But this is not all. We may need a similar provision in the next year.’

Guess, who was so punctilious then. The words constitute paragraph 39, of the Budget Speech delivered that day by the then Finance Minister, Dr. Manmohan Singh.

And now? No provision at all for the Rs. 60,000 crore that the loan waiver is supposed to cost. ‘Main hun na’… ‘Credit me with some intelligence...’ ‘Funds will be found...’ ‘Modalities are being worked out…’

After much bewildered talk, the Prime Minister and Finance Minister did hit upon one source for financing the waiver: we may sell Public Sector equity, they suggested. On behalf of the CPI(M), Brinda Karat shot that down with one sentence. Chidambram then told Parliament – and this is after two weeks of confusion -- that he was confident that he would be able to carve Rs. 40,000 crore out of buoyant revenues this year, and that he was equally confident that it would not be difficult for whichever Government is in office next year to find the remaining Rs. 20,000 crore.

Take him at his word for a minute. If it is possible to be so confident on 14 and 17 March when he said as much to the two Houses of Parliament, why it could not have been said while announcing the waiver a fortnight earlier?

Here is Parliament being asked to approve a scheme of Rs. 60,000 crore with no inkling of where the money will come from, and, hence, with no idea of what its impact will be – on prices, on interest rates… Even of whom the waiver will benefit. Is this ‘accountability’? ‘Transparency’?

And this is just a typical omission.

The Sixth Pay Commission is to report soon. Given that election loom, the Government will certainly implement the pay hikes. The Fifth Pay Commission had increased emoluments by 35 per cent. There will be cascading effect for state governments, for municipalities, indeed for each and every institution even vaguely linked to the State machinery. There is no provision at all for this certain outlay in Chidambram’s Budget. When it is prudent to include Rs. 5,000 crore in the Railway Budget as the likely outflow on account of the Sixth Pay Commission increases, why is prudent not to make a provision for the same contingency in the General Budget?

Similarly, subsidies on petroleum products, on food and fertilizers are mentioned, but not included! The latter two alone are estimated to be over Rs. 63,000 crore. The Fiscal deficit is put at 1,33,287 crore in this Budget. Once you include the four items that have been left out – the loan waiver, the subsidies on petroleum, food and fertilizers -- plus the impact of the 6th Pay Commission, it is liable to be double the figure that has been indicated. Fiscal responsibility?

A reform they were to institute

‘Seven years ago, I placed before Parliament the first paper on subsidies,’ Chidambram said in the Budget for 2004/05. They need to be sharply targeted at the poor and the really needy. So? He has, he said, initiated a new study on them!

By the next Budget, he had taken further action: he had placed the study before Parliament. Subsidies are necessary, ‘However, we must now take up the task of restructuring the subsidy regime in a cautious manner and after a thorough discussion.’

Nothing was done even by the 2007/08 Budget. ‘The issue of subsidies is proving to be a divisive one,’ Chidambram said, ‘but I would urge Honourable Members that it is imperative that we make progress on this front if we are serious about targeting subsidies at the poor and the truly needy.’ It isn’t that he had done nothing: ‘My Ministry has held extensive discussions with stakeholders on three major subsidies, namely, food, fertilizer and petroleum. We have also sought the views of the general public. Working groups/committees have gone into the question of fertilizer and petroleum subsidies, the latest being the Dr. C. Rangarajan Committee. I would urge Members to help the Government evolve a consensus on the issue of subsidies.’ Another consultant to Government.

The Prime Minister, of course, alternates his emphasis: reforms one day; reforms with a human face the next! And yet, at least on occasion, he has spoken clearly. The Gross Budgetary Support for the 11th Plan is going to be double of what it was during the 10th Plan, he told the Planning Commission last November. ‘These are large increases by any reckoning,’ he continued. ‘This will only be possible if we have strong growth, if tax revenues remain buoyant as they have been in recent years and if non-Plan expenditure is checked and checked effectively. We need to address the problem of mounting subsidies in food, fertilizers and now, in petroleum which is a recent phenomenon. Over Rs. 1 lakh crores are going to be spent this year alone on these three items. I would like my cabinet colleagues and the Planning Commission to reflect what these mean for our development options and what development options these subsidies are shutting out. Do they mean fewer schools, fewer hospitals, fewer scholarships, slower public investment in agriculture and poorer infrastructure? It is important that we restructure subsidies so that only the really needy and the poor benefit from them and all leakages are plugged.’

The warnings having been given, the task is done – what more are consultants to do, after all? There is no mention of the subject in Chidambram’s Budget speech this year.

But there is mention of one of these subsidies – that on fertilizers – in the document distributed with the Budget, Implementation of Budget 2007-2008. In the Budget for 2007/08, Chidambram had emphasized the need to distribute fertilizer subsidies by some alternate way – so that they reach the farmer directly rather than being eaten up by fertilizer companies. So, what is going to be done? ‘The fertilizer industry has agreed to work with the Department of Fertilizers,’ he told Parliament, ‘to conduct a study and find a solution.’ And what will happen once the study has been done? By now, you should be able to guess: ‘Based on the report, Government intends to implement a pilot programme in at least one district in each State in 2007-08.’

That was the last Budget. And what are we told now about what has been done on this matter? ‘The modalities for providing an alternative method of delivering the fertilizer subsidy directly to the farmer are being worked out. The proposal was examined by a Group of Ministers (GOM) and the Report is being finalized.’

In the meanwhile, all the ills continue: the industry does not get reimbursed in time; the farmer does not get the full benefit; the application of fertilizers remains distorted and our land is harmed.

Exactly the position in regard to the other subsidy, of Rs. 32,600 crore – that on food: the 61st Round of the NSS reveals that one half of the poorest quintile do not have either a BPL card or one for the Antyodaya Anna Yojana. On the other hand, more than a sixth of the richest quintile have BPL cards!

The Italians have the right expression for it

‘The Eleventh Plan target for additional power generation capacity is 78,577 MW,’ Chidambram told Parliament while speaking on this new Budget, adding, ‘which is more than the total capacity added in the previous three Plans.’ In the 10th Plan the target was 41,000 MW. Additional capacity that got commissioned was just about 21,000 MW. But why be niggardly in setting targets? John Galbriath had a word for Indian Planning: ‘therapeutic targetry’! But the sentence that scores for gall is the next one: ‘By end March 2008, we will achieve Commercial Operation Date (COD) on about 10,000 MW, marking the best first year in any Plan period.’

Just pause for a moment, and read that sentence again: ‘By end March 2008, we will achieve Commercial Operation Date (COD) on about 10,000 MW, marking the best first year in any Plan period.’ The trick in it is the benchmark that has been used, ‘Commercial Operation Date (COD)’ – a plant that has been completed is said to have attained ‘Commercial Operation Date’ once it has been in operation at full load for at least 72 hours. Ten power plants contributing 3020 MW were included when totaling up the achievements of the last year of the 10th Plan on the ground that they had been ‘commissioned’. They have been counted again among the achievements of the first year of the 11th Plan – on the ground that in regard to them ‘Commercial Operation Date’ has been achieved! The plants are the same ten. Nor is it just that: among these ten, is Ratnagiri CCPP (Dabhol) II, a plant that was completed in the Ninth Plan; among them is the atomic power plant at Kaiga – which is virtually shut for want of fuel; among them is Karbilangpi, a plant of the Sixth Plan! Nor indeed do the remaining ten plants – accounting for 3090 MW of the 10,000 MW for which Chidambram takes credit – testify to either reforms or execution in the power sector having improved. Each one of them has been under construction for years – among them is another Dabhol plant, Ratnagiri CCPP III, which too was completed in the Ninth Plan; among them are two plants at Purlia which were sanctioned in the Eighth Plan!

Claims and promises in regard to the Ultra Mega Power Projects in Chidambram’s successive budgets have been even more farcical, even more brazenly misleading. It is our intention to award five projects before December 31, 2006, he told Parliament in the Budget for 2006/07. By the 2007/08 Budget, this became, ‘Seven more UMPPs are under process and we are confident that at least two will be awarded by July, 2007.’ In this Budget, he says that the fourth UMPP ‘will be awarded shortly,’ and that five more can be brought to the bidding stage provided the states extend the requisite support. After listing four Ultra Mega Projects, his document of ‘accountability and transparency’, Implementation of Budget 2007-2008, reports ‘Five other suitable sites have been identified by the Central Electricity Authority’ – it proceeds to list five sites in five states. The fact as of 20 February, 2008 is that not one site has been finalized, not one. In regard to each of them, letters are going to and from central and state governments: I can supply the list at short notice.

And yet you can’t quite say that the Government has lied – notice the words it has used, ‘Five other suitable sites have been identified by the Central Electricity Authority.’ That doesn’t mean they have been settled, and, if you concluded as much, well, that is your problem.

The Italians have the right expression for this kind of reporting: suppressio veri suggestio falsi – to suppress the truth is to suggest the false!

A symptom

And yet the Budget is but a symptom of the ways of the Government:

•Just go on announcing schemes;

•Grab existing schemes, group them, give them a new name, and proclaim them as historic new initiatives;

•Announce huge grants and outlays, forget them;

•Advance false claims: those ‘Action Completed’s;

•Shove problems to the future – as in the loan waiver; shove blame on the past – even when doing so flatly contradicts what you have yourself stated in Parliament, as the Prime Minister’s ‘the unpaid distress bills of the NDA’ is flatly contradicted by what is set out in the Economic Survey 2003/04 that Chidambram himself tabled;

•Mislead – as in the calculation of the deficit;

•Double-count – as in regard to power;

•Proclaim the desirable –‘we must aim at outcomes, not just outlays,’ the necessity for reforms as in the Economic Survey – and make people believe that, because you have proclaimed the desirable, you are straining to attain it.

And do all this with full faith – that no one will actually read the documents you pile on them; that, even of they do, they will soon forget; that the media are the easiest to bamboozle…Mismanagement

The Budget is a symptom also of gross mismanagement of the economy. Apart from the fact that reforms have been at a complete standstill ever since this ‘dream-team’ of ‘reformers’ took office, their management has brought the country back into the vicious cycle of high interest rates, declining growth, and inflation. Till 2004 April, foodgrain stocks had been scrupulously kept 40 to 50 per cent higher than norms set by experts – so that fixers always knew that, were they to raise prices, Government could, and would, counter them by releasing stocks from its godowns. Ever since, stocks have been allowed to fall below the norms – with the result that traders today know that the Government just does not have the wherewithal to stabilize prices.

The result has been worsened by erratic policies. Exports of non-basmati rice were banned; soon the ban was lifted. Government did nothing as wheat output fell short; then it floated a tender to import wheat; then it cancelled the tender, then…

As prices kept rising, it hurtled to swat a fly with an axe – the axe of monetary policy: higher interest rates, tightened money supply… Prices continue to rise, and naturally so. Investment is discouraged, and naturally so. Growth rate of manufactures has already begun falling, predictably so…

The dream-team…

(Concluded)

For all stories visit www.indianexpress.com/arunshourie

Time to deal with the aftermath

Time to deal with the aftermath

Arun Shourie

Then came the point on which the prime minister received much applause. Members like me had drawn attention to the very comprehensive and intrusive inspections that were being accepted. Government spokesmen insisted that we had, in fact, been recognised as a Nuclear Weapon State, and that the IAEA would devise “India-specific safeguards”. These, we were sought to be convinced, would be akin to the ones that apply to the five Nuclear Weapon States. I had drawn attention to four vast differences.

First, the sheer numbers. The total number of nuclear power reactors in the five Nuclear Weapon States is 217. Of these 217, just eleven are open to inspections. Of the 104 nuclear power reactors that the US has, only five are under IAEA safeguards. By agreeing to place two-thirds of our 22 reactors, that is 14, under safeguards, the government was now placing a larger number of Indian reactors under safeguards than the total number placed by all the five Nuclear Weapon States taken together! That is just the beginning: with the government having committed to put all new civilian reactors including breeder reactors under safeguards, President Bush, Condoleezza Rice and others have pointed out, within a few years 90 per cent of India’s reactors will be under safeguards.

Second, there is an even more basic difference: the Nuclear Weapon States can withdraw any reactor, equipment or material from the ambit of safeguards. Under the agreement with the US, India was being made to place its reactors under safeguards in perpetuity.

The third difference relates to the nature of inspections: for the Nuclear Weapon States, these are infrequent and nominal. Under the Information Circular of the IAEA that the US is insisting shall apply to us, inspections are frequent and most intrusive.

But there is an even more consequential factor. Under the US Bill as it had been passed by the House and the version that had been approved by the Senate Foreign Relations Committee, inspections would not be limited to inspections by the IAEA. The US would have a right to send its own inspectors.

The prime minister was emphatic. He stated repeatedly that the safeguards agreement that we would enter into with the IAEA would be “India specific” — of course, neither he nor any other government spokesmen indicated or has since indicated how it would differ in regard to the first three points that I have listed above: the frequency and intrusiveness of inspections; our not being able to remove reactors from under safeguards as the Nuclear Weapon States are allowed to do; the agreement being without conditions. But for the moment, I am on what he said in regard to the fourth point. He said: “There is no question of India signing either a Safeguards Agreement with the IAEA or an Additional Protocol of a type concluded by Non-Nuclear Weapon States who have signed the NPT. We will not accept any verification measures regarding our safeguarded nuclear facilities beyond those contained in an India-Specific Safeguards Agreement with the IAEA. Therefore there is no question of allowing American inspectors to roam around our nuclear facilities.”

That last bit, “Therefore there is no question of allowing American inspectors to roam around our nuclear facilities,” drew the loudest applause. The PM reverted to the point. He said later in the debate: “In the Separation Plan, we have agreed to offer for IAEA safeguards nuclear facilities specified in the Separation Plan for that purpose. The nature of safeguards will be determined by an India specific safeguards agreement with the IAEA. This will be applied to the safeguarded nuclear facilities in India. Therefore, there is no question of accepting other verification measures or third country inspectors to visit our nuclear facilities, outside the framework of the India specific safeguards agreement.”

Well, Section 107 of the Senate Bill provides explicitly for detailed inspections — and not just by the IAEA. In particular, Section 107(3) requires that the US-India Agreement ensure,

“In the event the IAEA is unable to implement safeguards as required by an agreement between the United States and India arranged pursuant to section 123 of the Atomic Energy Act of 1954 (42 U.S.C. 2153), arrangements that conform with IAEA safeguards standards, principles, and practices that provide assurances equivalent to that intended to be secured by the system they replace, including —

“(A) review in a timely fashion of the design of any equipment transferred pursuant to the agreement for cooperation, or of any facility that is to use, fabricate, process, or store any material so transferred or any special nuclear material used in or produced through the use of such material and equipment;

“(B) maintenance and disclosure of records and of relevant reports for the purpose of assisting in ensuring accountability for material transferred pursuant to the agreement and any source or special nuclear material used in or produced through the use of any material and equipment so transferred; and

“(C) access to places and data necessary to account for the material referred to in subparagraph (B) and to inspect any equipment or facility referred to in subparagraph (A).”

In a word, India will have to provide not just records and reports, but also allow access to American inspectors. And neither the US administration nor the senators have been in any doubt on this score. In answer to a pointed question in this regard, secretary of state, Condoleezza Rice told the Senate Foreign Relations Committee, “In addition, in accordance with normal practice, the administration is seeking a provision in the agreement for ‘fall-back’ safeguards (i.e. direct verification by the United States of material, equipment and components subject to the agreement) if for any reason IAEA safeguards are not being applied to those items as provided in the agreement. This is necessary to satisfy the requirement in Section 123(a)(1) of the A(tomic) E(nergy) A(ct) that the safeguards provided for in the agreement will be maintained ‘so long as the material or equipment remains under the jurisdiction or control of the cooperating party, irrespective of the duration of other provisions of the agreement (like that for IAEA safeguards).

“In general, the United States (like other NSG participants) relies upon IAEA inspections and monitoring. However, the United States would in fact be able to conduct ‘special verification visits’ in the form of fall-back safeguards as required by the US-India agreement for peaceful nuclear cooperation in the event that IAEA safeguards were not being applied.”

During the debate, Senator Biden, one of the co-sponsors of the bill, observed, “Indian officials are reportedly upset that American personnel might need to visit India’s nuclear sites. It should come as no surprise, however, that we need to ensure that US nuclear materials, equipment, and technology are not diverted to military uses.” He emphasised that, apart from other factors, the US is bound by its obligations under Article I of the NPT not to allow such diversion when it enters into nuclear cooperation agreements with Non- Nuclear Weapon States, “And India remains a Non-Nuclear Weapon State under both the NPT and US law, despite the fact that now it does have nuclear weapons.”

So, if, as the prime minister put it, American inspectors will not be allowed to “roam around” in our nuclear plants, will they be allowed to loiter in or march through them? Is that the distinction that we will now be fed?

On top of Section 107, there is now Section 115. As Dr Gopalakrishnan, former Chairman of the Atomic Energy Regulatory Board, has pointed out, this new section was suddenly, and without any discussion at all, inserted into the bill on the floor of the Senate. Under it, Indian nuclear establishment is obliged to enter into “cooperative research” about technologies and practices for non-proliferation with a new agency, the National Nuclear Security Administration - an agency that had not figured in the Indo-US discussions at all, and whose principal function has hitherto been the denuclearisation of the erstwhile Soviet satellites.

Dr Anil Kakodkar, the chairman of the Atomic Energy Commission, has now gone on record to say that this section, intrusive as it is, has come as a “surprise” to him, that it is a cause of “additional concern”, that we do not need this kind of “cooperation”.

Tests in the future

The prime minister turned next to the provision in the bills as they stood at the time regarding our testing nuclear devices in the future. In their testimony before Congressional Committee as well as in other public statements, US officials had been explicit: we have made it absolutely clear to the Indian negotiators, they said, that, should India ever carry out a nuclear test, the deal would be off. I remember reading out in the Rajya Sabha the statements as well as the specific provision of the bills. The prime minister was emphatic:

“There is provision in the proposed US law that were India to detonate a nuclear explosive device, the US will have the right to cease further cooperation. Our position on this is unambiguous. The US has been intimated that reference to nuclear detonation in the India-US Bilateral Nuclear Cooperation Agreement as a condition for future cooperation is not acceptable to us. We are not prepared to go beyond a unilateral voluntary moratorium on nuclear testing as indicated in the July Statement. The same is true of other intrusive non-proliferation benchmarks mentioned in the proposed US legislation. India’s possession and development of nuclear weapons is an integral part of our national security. This will remain so.”

Well, what will the government’s stand now be because Section 104(3b) of the bill as finally passed by the Senate states, “A determination under section 105 and any waiver under section 104 shall cease to be effective if the president determines that India has detonated a nuclear explosive device after the date of the enactment of this Act.”

Furthermore, the Section 104 specifies that the deal would be contingent on full observance by India of Section 123(a)(4) of the US Atomic Energy Act — that latter provision lays down that, should any nuclear device be detonated for any reason whatsoever not only shall all nuclear commerce be halted with the country, the United States shall have the right to demand the return of “any nuclear materials and equipment transferred pursuant” to the agreement for cooperation as well as any “special nuclear material produced through the use thereof if the cooperating party detonates a nuclear explosive device.”

In its report, the Senate Foreign Relations Committee is absolutely emphatic on this score. It says, “The committee believes that there should be absolutely no ambiguity regarding the legal and policy implications of any future Indian nuclear detonation. The president must terminate all US-origin exports and re-exports of nuclear materials and equipment or sensitive nuclear technology to India, and the committee expects the president to make full and immediate use of US rights to demand the return of all exports and re-exports to India, if India tests or detonates, or otherwise causes the test or detonation of a nuclear explosive device, for any reason, including such instances in which India describes its actions as being ‘for peaceful purposes.’ The committee believes that termination would include the suspension and revocation of any current or pending export or re-export licenses, and that the return of US-origin items and materials should extend to any special nuclear material produced by India through the use of any nuclear materials and equipment or sensitive nuclear technology exported or re-exported to India by the United States.”

Nor is the termination of all nuclear commerce in such an event likely to be confined to the US. Condoleezza Rice gave a glimpse of discussions that American officials have been having with other members of the Nuclear Suppliers Group when she told the Senate Committee, “Our interlocutors in the NSG have made it clear that their support for accommodating civil nuclear cooperation with India hinges upon India’s successful implementation of its commitments in the July 2005 Joint Statement, including India’s commitment to continue its moratorium on nuclear testing. We do not have the official views of potential nuclear suppliers regarding a termination of transfers of nuclear material, including fuel and technology, to India should India detonate a nuclear explosive device. However, we expect that there would be irresistible political pressure for NSG participants to terminate any transfers of nuclear material and technology to India should India detonate a nuclear explosive device.

“Moreover, there is a provision in the NSG guidelines calling for suppliers to meet and consult if a supplier believes there has been a violation of the supplier/recipient understandings resulting from the guidelines, particularly in the event of, among other things, an explosion of a nuclear device. India’s 1998 nuclear tests prompted the NSG to meet in an extraordinary plenary for such consultations. The guidelines further reference the possibility of a common response, which could include the termination of nuclear transfers.

“We have made it clear to the Government of India that the Civil Nuclear Cooperation Initiative relies on India’s commitment to continue its unilateral nuclear testing moratorium. This gives India clear economic and energy incentives not to test.”

That last point — of creating “clear economic and energy incentives not to test” — has been a cornerstone of this “Energy Cooperation Initiative.” The principal sponsor of the bill, the influential head of the Senate Committee on Foreign Relations, Senator Richard Lugar, while moving the bill, emphasised the same point. He told the Senate that the objective of the bill is to provide “a lasting incentive for India to abstain from further nuclear weapons tests and cooperate closely with the US in stopping proliferation.” Recall the enormous pressure to which successive Indian governments have been subject by fuel supplies being cut-off to just the Tarapur reactor — one that produces a mere 365 MW of power. Imagine the pressure that will descend on them when we are faced with the prospect of 35,000 MW being switched off. That is what Rice and others mean when they talk of creating “clear economic and energy incentives not to test.”

Four conclusions for government, two for us

There are several other features of the bill as it has been passed by the Senate that fly in the face of the assurances that the prime minister has given to Parliament. But the few that I have listed are sufficient to show that not one of the “concerns” that the prime minister said he has conveyed to the US president has been heeded - not one, not in the least. The Senate has stuck to the version about accepting which the prime minister had said India has “grave difficulties”. Yet his spin-doctors are declaring victory. And many in our media are lapping it up.

The US is not to blame for this. Their process is so transparent that no one here can pretend that anything at all in the foregoing has come as a surprise. The administration there as well as their legislators want closer ties with India — both because they see India at last beginning to stretch itself to its potential, and also as a possible counter to the growing power of China. But for them, non-proliferation is also a very important objective. The NPT has been a vital and, in a sense, very effective mechanism for arresting the spread of nuclear weapons. But it has begun to fray: India, Pakistan, Israel, and North Korea have acquired the weapons in spite of the Treaty. Brazil, Argentina, Turkey, Egypt, Taiwan are within reach of them. The treaty has also not been able to prevent clandestine proliferation — for instance, by Pakistan. Americans and others have accordingly been looking for other devices with which to supplement that treaty.

The Indo-US agreement is devised as a possible model to achieve this objective among others. American officials have made no secret of this. Pressed about its rationale, this is how Rice responded during her testimony before the Senate Committee:

“Under this initiative, 65 per cent of India’s thermal reactors will be brought under safeguards, a figure that the Indian government has said could rise as high as 90 percent as India procures more civil reactors in the next 15 years. To put this in perspective, imagine the alternative: Without this initiative, 81 percent of India’s current power reactors — and its future power and breeder reactors — would continue to remain outside of IAEA safeguards. The Indian nuclear power program would remain opaque, a nuclear black box.”

Indeed, one of the most knowledgeable experts on South Asian security matters told me that India itself should look ahead - to a situation in which, as a consequence of North Korea’s weaponisation, Taiwan goes nuclear; in which, as a consequence of Iran’s weaponisation, Turkey, Egypt and Saudi Arabia feel compelled to go nuclear; in which Pakistan continues its clandestine proliferation and Bangladesh acquires a nuclear capability — via Chinese built reactors. And it should assess whether it would not be in India’s own interest if the Indo-US Agreement becomes a model for other countries.

They have also been very candid about their modus operandi. Pressed about the aspects that had not been covered, Burns and Joseph urged the Senate to “resist the temptation to take actions that will prejudice our ability to realise the important and long-standing nonproliferation objectives embodied in the Initiative.” They urged it to see that “the commitments India has made under the Initiative are a significant gain over the status quo.” And said, “We believe the best course is to lock-in the significant gains reached and then seek to achieve further nonproliferation results as our strategic partnership advances.”

The problem has not arisen, therefore, because the Americans have been opaque. But because our government has concealed, prevaricated, and outright misled us. And now it is in a bind.

I would, therefore, urge four things to government:

• Do not make a Micawber of the country — waiting for something to turn up.

• Do not make the mistake that earlier Congress governments made — that because you can plant stories in the media, the facts are going to go away.

• Do not make the mistake that earlier Congress governments made — to think that because it controlled three-quarters of Parliament, it could control the situation outside Parliament.

• Yes, closer relations with the US are in India’s interest, but do not make this deal the test of those relations.

But as I have little hope that the government will heed my advice, I would urge two things to the rest of us — especially to my friends in the media:

• Do not be taken in by lullabies of the government and its agents.

• Find out yourselves what is going on behind the scenes: whether in negotiations with Pakistan — on Siachin, on Kashmir; or in those “Round Table Conferences” with Kashmiri separatists; or in regard to this nuclear deal.

(Concluded)

China’s economic growth is not just ‘economic growth’

Arun Shourie: Wednesday, November 08, 2006

It is a grave error to be mesmerised by China’s economic growth as if it were just ‘economic growth’.

To begin with, much of ‘economic growth’ consists of things that add military muscle. When China produces modern weapons-systems — apart from many other systems, it has made major advances in cruise and ballistic missiles, space technologies including technologies to disable enemy satellites, electronic warfare capabilities; when it lays out ‘infrastructure’ in Tibet — that is all ‘economic growth’. But it has direct military implications for India. The train that traverses heights of 16,000 feet to reach Lhasa can carry tourists, no doubt; but also men and materials of the PLA. When — as satellite imagery shows and ground information confirms — China builds 39 transport routes from its interior to the borders with India, and upgrades 15 of them for heavy vehicular traffic, including a four-lane highway right up to the border of Sikkim, all that too is ‘economic growth’; but that ‘growth’ should awaken us to what it implies for our security.

Second, economic growth translates directly into the ability to bend others to subserve a country’s interests. No country in South East Asia — and that includes Australia — will take a step today without factoring in the likely reaction of China to that step. Nor can even the US Administration be oblivious of the fact that China is today the largest financier of its deficit, that it holds one of the largest chunks of US securities, that US firms have such high exposure in China. When the Chinese president announces during his visit to Latin America that China will invest $ 100 billion in that region, and gives $ 20 billion on the spot to beleaguered Argentina; when he announces another $ 100 billion investments in the five Central Asian Republics; and the country chalks up projects to invest yet another $ 100 billion in Iran, China acquires deep and pervasive influence. Will these countries heed us or China when they have to vote on reorganisation of the Security Council? Similarly, the fact that, in the contention for influence in Central Asia, China can deploy resources of an order that Russia just cannot today set aside, has compelled the latter, anxious as it is to check US advances in these five states, to accept being a sort of junior partner to China in the region. The mining boom in Australia, including its production and export of natural gas, are directly linked to China’s growth. ASEAN, and even Taiwan, have been already sucked into the Chinese sphere — their incomes are directly linked to continued Chinese growth. China does not have to deploy any means — certainly not military ones; of their own accord and in their own interest, these countries keep China’s likely reactions in mind.

Why go that far? Do we not do so? Our silence on Tibet speaks for itself. Similarly, it is well known that six years ago Vietnam offered us access to the strategic Cam Ranh Bay. We declined — so as not to offend China. Even six years after establishing a Tri-Services Command structure in the Andaman and Nicobar islands, we have not positioned any significant assets there — in part out of the apprehension that doing so would bring us into direct contest with the Chinese footprint in Myanmar and Bangladesh.

Third, China is already translating its economic power into military might. The 2006 Report of the US Secretary of Defence on China’s military prowess records that the modernisation of Chinese forces is proceeding at a pace faster than US agencies had earlier thought likely.

Fourth, more directly, the scale of China’s and India’s economic development is already making us compete for natural resources — like oil and gas. And the resources that China has accumulated are enabling it to outbid India in contest after contest. In the contest for PetroKazakhastan, China defeat our bid of $ 3.6 billion by bidding $ 4.2 billion. It already has acquired exploration rights for the overwhelming area of Kazakhstan, and has already built a 1000 km pipeline to carry oil from that country into Xinjiang province of China. We depend on Iran for being a counter to Pakistan; for much of our oil and natural gas. But China has now become Iran’s largest market for oil. It has identified projects for investing $ 100 billion in that country in the next 25 years — and this has contributed in no small measure towards its securing deals to import 100 million tons of Iranian LPG and also 150,000 bbl/day of oil — the latter deal is itself worth $ 100 billion. In far away Ecuador too China’s Sinopec and CNPC beat ONGC and won access to 143 million tons of proven oil reserves. In Angola, we had almost got the deal to take over Shell’s operations for off-shore exploration — China swooped it away by extending a 17 year, $ 2 billion soft loan to the country... This rivalry is bound to intensify in the coming years, and the differences in the resources that each side can deploy for each contest is bound to make all the difference to the outcome.

And the country is China

These factors are by themselves enough to raise concerns about the future. They are compounded by the fact that the country we are talking about is China, and not just any other country.

The dominant orientation of China throughout its history has been to power — the acquisition of power, the use of power, the manipulation of the symbols of power. Second, its singular concern in this regard has been to ‘control the periphery’ — that is, to control the areas from which, and the groups by which its security may be threatened. As the areas from which its security may be threatened now include those that are at great distances from it — say, the US — it is determined to acquire capacities that would enable it to keep those distant areas in check also. In any event, India lies literally on its periphery.

Third, and most consequentially, during the last two decades, China has completely rewritten its military doctrine — from ‘Peoples War fought on Chinese soil’ to ‘Local wars under high technology conditions’ to the current doctrine of ‘Force projection under high technology conditions’.

Fourth, China has been doggedly pursuing the consequential ‘Revolution in Military Affairs’, and the ever-new weapons systems that go with it. In particular, a novel danger stems from its emphasis on building capacities to hurl ‘the assassin’s mace’ at the ‘acupuncture points’ of integrated, modern economies — to disrupt power grids, financial systems, air traffic control networks, railway traffic control networks, communications and broadcasting networks... and to do so suddenly, simultaneously and on a fatal scale.

In no doubt about India

And China has a clear idea about India — that it is a potential nuisance. It views us as one of the ‘claws of the crab’ — the crab is the US whose aim is to contain China; a crab with South Korea, Japan, Taiwan, Vietnam, Australia and India as its claws. The recent moves for closer relationship between the US and India, advantageous though they are for us, have had the incidental effect of reinforcing this perception.

Accordingly, China has pursued a consistent strategy of containing India in return, of keeping it confined to, and busy in South Asia.

With this aim, it has given aid to Pakistan for all sorts of purposes — including the development of atomic weapons and acquisition of missile technology. And it has a long tradition of doing so. Recall the counsel of The Wiles of War, “Murder with a borrowed knife” — that is, instead of doing anything overtly aggressive yourself, find the entity that is naturally predisposed to do your enemy down; arm it. China has entered into a military pact with Bangladesh. There have been reports of its offering to build an atomic reactor for Bangladesh. Myanmar is a dependency of China. In fact, the largest supplies of Chinese arms go to four countries in our region — Pakistan, Myanmar, Bangladesh and Iran.

Tibet has been militarised — to put the Tibetans down, no doubt; but only to put them down? China has redoubled its efforts in Sri Lanka, Maldives, Seychelles and Mauritius. It already has access to the ports of Myanmar — from which it has also taken on lease the Coco Islands just 30 miles from the Andamans. Now it is helping build and it thus acquires access to deep-sea ports round us: Chittagong in Bangladesh and Gwadar in Pakistan — the latter alone at a cost of $ 3 billion. It is also upgrading the naval base in Omara for Pakistan. Along with constructing the port at Gwadar, it is building highways that will link Gwadar to locations within Pakistan but also to Urumchi in China. The most consequential of this string of ‘initiatives’ is the project to dredge Myanmar’s Irrawaddy River — this is to be done by Chinese engineers and much Chinese labour. It isn’t just that a good proportion of this workforce will stay on in or around the new facilities. Once the project is completed, China will acquire a useable waterway giving direct access from its Yunnan province to the Bay of Bengal...

Could all this be out of absent-mindedness? The fact is that China has effectively ‘ringed’ India, and is redoubling its efforts to ring it tighter.

Furthermore, in every international arena, there is a pattern to its actions vis a vis India. It has exerted much effort to keep ASEAN from establishing closer links with India — it has campaigned to have ASEAN+3 (ASEAN, Japan, South Korea and China) and not ASEAN+4 which would have included India. It has summarily rejected the G-4 framework for the expansion of the Security Council. It did not condescend to let India enter the Shanghai Cooperation Organisation — through which it is institutionalising its influence in Central Asia. In the end, it agreed to grant us “observer status” — but only along with Pakistan and Iran; and only when we agreed to it getting the same status in SAARC and BIMSTEC: for the latter, it was vigorously supported not just by Pakistan and Bangladesh but also by our ‘traditional friends’, Sri Lanka and Nepal.

Learn from China

None of this is ground for complaint against China. It is pursuing its interest as it sees them. The question we have to ponder is: ‘What are we doing for our interest?’

The lessons are manifest:

• Do not get swept off again by the ‘bhai-bhai’ business.

• Get out of the ‘see no China, speak no China, hear no China’ policy. See what China is doing with clear eyes.

• In particular, do not leave the formulation of a response to just four/five desk-officers working on the China desk.

• Reflect on the capacities that it is acquiring — as Musharraf once said, once capacities are acquired, intentions can change swiftly.

• The time to start preparing for that sudden change of intentions is the time it would take to develop the counter — that is, decades before the change ‘suddenly’ erupts in view.

• Remember, to fall behind a neighbour is to tempt him to assault us.

• Indeed, if the present distance continues, and all the more certainly if it increases, China would not have to ‘assault’ us. The distance will ensure that other countries heed it rather than us. And that we heed it too.

(Concluded)

To race China, first let’s get our feet off the brakes

Arun Shourie, Tuesday, November 07, 2006

India’s growth story must generate confidence, not complacence. We must learn from China the ability to move on from momentary success or failure, keep the focus on reforms, take a decision and execute it

China’s banking sector has been notorious for its non-recoverable loans — till a few years ago, some estimates had placed these at almost half the total outstandings. By contrast, “non-performing assets” of Indian banks are placed at just about 5 per cent of their outstandings.

That is a difference you would expect us to capitalise on. In practice?

The Industrial and Commercial Bank of China is China’s largest personal bank. It has more than 150 million customers. But its portfolio was so weak that, last year, the Chinese Government had to pump $ 15 billion into the bank to help bring its bad loans to what an expert calls “a controllable level”.

Yet last month, the ICBC raised over twenty two billion dollars through an IPO. This became the largest ever IPO in financial history. Upon listing, the bank’s market capitalisation amounted to $ 143 billion — that is almost twice the market capitalisation of the entire financials universe of India, which is around $ 85 billion. Its market capitalisation makes the ICBC the fifth largest bank in the world.

But there is a more telling index. Guess what the offers for subscription to the IPO amounted to? Over five hundred billion dollars.

And remember, the IPO brings down the government holding in the bank by just 10 per cent. That is, the government retains full and complete control over the bank — even after the IPO, it will have 70 per cent of the bank’s equity.

A typical episode, with so many lessons for us in India:

• The confidence that China has been able to generate in its growth story — even in banking, its weakest sector, it can orchestrate a flood of investment.

• Its ability to take a decision and execute it.

• The funds can now be used for rehabilitation, modernisation, expansion.

By contrast, in India we have been debating whether government holding in our nationalised banks should be reduced for at least ten years. By now, what with everyone having enough power to block every proposal, we have given up even talking about reducing government equity in the nationalised banks. As a result,

• The banks continue to perform well below their potential.

• Resources that could be raised for development remain untapped — in three years of disinvestment, we raised $ 9 billion by selling just 1.6 per cent of government equity.

• Our reputation as a country that will not eventually be able to carry through on its announcements is reinforced.

The current self-congratulation

Two features always strike me as special to us. One, we are too easily swept off our feet by momentary success, and too easily plunged into dejection by momentary defeat. Two, we rush to appropriate that victory — even when we personally have done nothing to contribute to it; and, with equal alacrity, we rush to distance ourselves from a setback — even when we have in some sense contributed to it. Just take a look at how our commentators declaim when our team wins a cricket match and what they say when the same team loses.

There is much self-congratulation about, and much appropriation of, our growth rates these days. Much of this congratulation is warranted. Our economy is today the second fastest growing economy in the world. (Incidentally, remember how our commentators used to deride us with, and distance themselves from, the “Hindu rate of growth”. Who is accounting for the 8 per cent growth today? The same Hindus! You can bet that those who were calling that “the Hindu rate of growth” will never but never call this “the Hindu rate of growth”!) The achievements of the services sector are well known. The lesser noticed story is about the Indian manufacturing sector: it has been reinvented on the shop floor. You go to the manufacturing plant of a company like Bharat Forge — it is what we used to read about Japan: a “lights-out factory”. The entire process is CAD-CAM: Computer-aided Design, Computer-aided Manufacturing.

This reinvention and the consequential confidence are showing up in the results: Indian companies have acquired close to 250 companies abroad — this year, what with the Tata’s spectacular acquisition of Corus, India is liable to be the largest foreign investor in Britain!

But there is a central point to this growth. The trigger for it has been that because of reforms — of the first two and half years of Narasimha Rao’s government and of the six years of Vajpayee’s government — the dead hand of the state has been lifted from large swathes of our economy. This has created the space for the long-suppressed entrepreneurial and middle class professional classes of India to work more to their potential.

But reforms are not an once-over switch that, once turned on, can be forgotten. Governments have to keep at them. New impediments arise — often, the very developments that reforms have triggered foment new impediments. These have to be removed. The process has to be extended to ever new areas. But look around. What has happened in the last two and half years? Apart from two areas — civil aviation and railways — reforms have come to a complete standstill. In several areas — for instance, the reversion to the administered price mechanism in the petroleum sector — there has been regression. The result is predictable: in little time, entrepreneurs and professionals will reach the edges of the space that has been cleared for them, and be blocked by walls again.

Many things account for the progress China has made — the incredible 49 per cent high investment rate, for instance — contrasted with our 28 per cent; the strictly hire-and-fire/no strikes/no unions/freedom to retrench labour laws, for another: no wonder, the World Economic Forum’s Competitiveness Report for last year, ranked India as 111 out of 117 countries, and China as 26th. But the main factor has been that, unlike us, China has transformed the nature of the Chinese state.

As for reforms, the first thing to remember is that China began them in 1978; we waited till the bankruptcy of 1991/92. That single fact has made such a difference: when things are not changing much, if we fall behind by a few years, we can catch up — the other fellow wouldn’t have got far; but when things are changing rapidly, being late by 14 years makes it almost impossible to catch up.

Second, China has kept at reforms relentlessly — in our case, even since 1992, we have pushed reforms only by fits and starts; and even then, there were more feet on the brakes than on the accelerator. The third difference, of course, is execution: China has actually, and mercilessly, implemented what it decided; we have been halted by our processes — land acquisition, court proceedings, changes of government; and just as much by thoughts of brilliant alternatives — “Why not this way?” — and second thoughts. There is a telling index of this: even after the figures are put on comparable basis, China has been receiving seven times the foreign direct investment that we have been getting; and this, even though in the manufacturing sector, for instance, the ceiling for foreign investment has been 100 per cent for several years now.

We are often carried away by figures of inflows these days. We should remember that in the last five years, only 17 per cent of foreign inflows into India has been in the form of FDI, 83 per cent has been FII inflow. That 17 per cent compares with 68 per cent for other emerging economies.

The difference

We should temper our self-congratulation by reflecting on the difference that these factors have made. An excellent study by Steve Roach, Chetan Ahya and their colleagues at Morgan Stanley, points out that, as recently as 25 years ago, the per capita incomes of China and India were about equal. Today, China’s per capita income is two and a half to three times that of India. During this period, China’s average growth rate has been 9.5 per cent. Ours, 5.8 per cent. Its GDP has grown in this period by 7.5 times. Ours by 4.5 times. Its economy is now close to three times ours.

Its exports have grown to 41 times what they were — they are now close to $ 850 billion. Ours to 13 times — they are $ 155 billion. Our foreign exchange reserves are $ 160 billion — a great achievement compared to where they had fallen in early 1992. But China’s are one thousand billion dollars — and we shall soon see the clout that these give it. Compared to our total reserves of $ 160 billion, China added to its reserves last year more than $ 250 billion. Its trade surplus with the US alone exceeds $ 100 billion a year.

China’s achievements in health and education have put an even greater distance between the two countries — in China, one of every 32 children born dies in the first five years; in India, one in every 12. In India, 45 per cent of children under 5 are estimated to be undernourished; in China, 8 per cent. Gross enrollment ratio is estimated to be more or less the same in both countries — but the drop out rate in India is 21 per cent, in China it is 1 per cent.

Last year China is estimated to have spent $ 201 billion on infrastructure. We spent $ 28 billion — that is, one-seventh of China. We spent about $ 6 billion on roads last year; China spent about $ 68 billion. And that is just the difference in expenditure — as for execution, the Indian Express has been reporting how the actual implementation of the programme has been mauled here. The costs of this difference are manifest: we produce around 565 billion kWh of electricity; China produces close to 2.3 trillion kWh. Our industry has to pay double of what Chinese factories pay for power; for ferrying freight by railways, our industry pays three times what Chinese factories pay.

The same pattern mars every sphere. We are the second largest producers of cement — a fine achievement. But against our production of 142 million tons, China produces 1.06 billion tons. We produce 43 million tons of steel, a great leap compared to how things used to be in the socialist era. And in Tisco we have the least-cost producer of steel in the world. But China produces over 450 million tons...

Nor is the difference confined to manufacturing and infrastructure. Arthur Kroeber, who has watched India and China for twenty years, points out that agricultural yields in China have been much higher than those in India, and that the difference in absolute terms between them has been growing. In 1980, China grew 4100 kg of rice per hectare; India, 2000. In 2005, China grew 6300 kg, India 3000 kg. The difference in yields had increased from 2100 kg to 3300 kg per hectare. For wheat the comparable figures were 1900 kg versus 1400 kg in 1980; and 4200 kg versus 2700 kg in 2005. For seed cotton, 1700 kg versus 500 kg in 1980; and 3200 kg versus 800 kg in 2005. For vegetables, 14500 kg versus 8300 kg in 1980; and 19300 kg versus 11300 kg in 2005.

By no means is the race over

Of course, the race is not done. On the one hand, we have just begun to exploit our potential. On the other, China, like other societies, has many problems — what with a displaced, “floating population” of 120 to 140 million; environmental degradation to such an extent that the effects of their coal burning reach far-away California; extreme water shortages — government spokesmen announce that this is afflicting 600 cities and that in 100 of them it is now “acute”; a near-breakdown of the health and educational infrastructure in the rural areas; growing regional disparities; corruption as endemic as it is in India; the lingering inefficient governmental enterprises; the inefficiencies of much of their industry — their steel mills use 15 to 30 per cent more energy and 2.5 times more water than mills in developed countries, their dust emissions are 10 times higher...

But we should remember three things. One, we have several of the same problems, and, the fact that China has problems is not going to solve ours. Two, China has shown that when it directs its attention to a problem it does something about it: so, when the new Plan announces that it will focus on reducing income disparities between rural and urban China, between coastal areas and the inner provinces; on improving efficiencies in the economy; and on instituting more environmentally friendly methods of production — when their Plan announces these goals, the likelihood is that the country will advance towards them. Nor will it be prudent to wait, Micawber-like, in the belief that something will turn up — that China will be drowned by its problems.

Three, the massive growth that China has already secured gives it formidable power. So, instead of drawing comfort from the fact that China too has problems, we should reflect on what the strength that it has acquired through this growth implies for us.

A good example is Gandhiji’s reaction to that scurrilous book, Katherine Mayo’s Mother India. Gandhiji nailed her exaggerations and falsehoods. But his advice was, “No foreigner should read it, but every Indian should.” For, it was liable to mislead the foreigner. As for Indians, we would see through the eyes of a critical foreigner what we are apt to ignore as it is so familiar.

The same goes for China’s growth. China should think about the problems that confront it. We should emulate the reasons for its successes:

• Focus

• Sustained pursuit of goals

• Execution

And reflect on the power which that growth gives China.

(To be concluded)