UKPCS-2016 Prelims on : 29th January 2017

UKPCS-2016 Prelims on : 29th January 2017
http://www.ukpsc.gov.in/files/scan0004_9.pdf

Scientists discover hot hydrogen atoms in Earth’s atmosphere

Scientists say hydrogen atoms are very light and can easily escape a planet’s gravitational force and because of this,Mars lost majority of its water

Hydrogen atoms play a critical role in the physics governing the Earth’s upper atmosphere and also serve as an important shield for societies’ technological assets, such as the numerous satellites in low earth orbit, against the harsh space environment

Researchers have discovered the existence of hot hydrogen atoms in an upper layer of Earth’s atmosphere known as the thermosphere. This finding significantly changes current understanding of the hydrogen distribution and its interaction with other atmospheric constituents, researchers said.

Since hydrogen atoms are very light, they can easily overcome a planet’s gravitational force and permanently escape into interplanetary space. The ongoing atmospheric escape of hydrogen atoms is one reason why Earth’s sister planet, Mars, has lost the majority of its water, researchers said.
Hydrogen atoms play a critical role in the physics governing the Earth’s upper atmosphere and also serve as an important shield for societies’ technological assets, such as the numerous satellites in low earth orbit, against the harsh space environment.
“Hot hydrogen atoms had been theorised to exist at very high altitudes, above several thousand kilometres, but our discovery that they exist as low as 250 kilometres was truly surprising,” said Lara Waldrop, assistant professor from University of Illinois’ Coordinated Science Laboratory in the US.
“This result suggests that current atmospheric models are missing some key physics that impacts many different studies, ranging from atmospheric escape to the thermal structure of the upper atmosphere,” said Waldrop.
The discovery was enabled by the development of new numerical techniques and their application to years’ worth of remote sensing measurements acquired by Nasa’s Thermosphere Ionosphere Mesosphere Energetics and Dynamics (TIMED) satellite.
“Classical assumptions about upper atmospheric physics did not allow for the presence of hot hydrogen atoms at these heights,” said Dr Jianqi Qin, research scientist at Coordinated Science Laboratory. “Once we changed our approach to avoid this unphysical assumption, we were able to correctly interpret the data for the first time,” Qin said.
Atomic hydrogen efficiently scatters ultraviolet radiation emitted by the Sun, and the amount of scattered light sensitively depends on the amount of hydrogen atoms that are present in the atmosphere. As a result, remote observations of the scattered hydrogen emission, such as those made by Nasa’s TIMED satellite, can be used to probe the abundance and spatial distribution of this key atmospheric constituent.
In order to extract information about the upper atmosphere from such measurements, one needs to calculate exactly how the solar photons are scattered, which falls into Qin’s unique expertise.
The researchers developed a model of the radiative transfer of the scattered emission along with a new analysis technique that incorporated a transition region between the lower and upper extents of the hydrogen distribution.

 

Revamping the Income Tax Appellate Tribunal

The solution to delays could very well lie in prioritizing and scheduling the workload properly

The recent demonetisation is aimed at reducing the extent of black money—money on which tax should be paid, but is not. The government seems keen to bring in other stringent measures to address this menace. Such stringent measures would either result in more people voluntarily paying taxes and assessment volumes rising, or the income-tax department may improve its enforcement capacity to check tax evasion. Either ways, the tax administration and adjudication infrastructure will face increased workload. Unless they are well resourced, the government’s noble initiatives will hit an implementation bottleneck.

Indian tax administration and adjudication needs urgent reforms. The latest World Bank Doing Business Index ranks India 172 out of 190 countries on the “Paying Taxes” parameter. Even this metric is based on only the first-level appeals—from assessing officers to commissioner of income tax (appeals) [CIT(A)]. And, as the Parthasarathi Shome Committee has pointed out, in about 75% of the cases, CIT(A) rules in favour of the tax department. The mechanism through which citizens have re-course against excesses of the Indian tax administration is the Income Tax Appellate Tribunal (ITAT), which is not considered in the World Bank rankings.

ITAT is an independent tribunal dedicated to direct tax litigation. Stringent actions by the income-tax department would translate into more appeals to ITAT. If ITAT is not adequately resourced, this potential deluge of cases may affect its performance. This is troublesome as an independent appeals mechanism is necessary to ensure impartial decisions. To adequately resource ITAT, it is important to first know what is its current performance. Unfortunately, like most other Indian courts and tribunals, ITAT’s performance has not been studied in detail.
Our recent study seeks to provide deeper insights on ITAT’s current performance. We analyse the caseload and disposal rate of ITAT. We use publicly available data from cause-lists published by ITAT, and rulings available on Indiankanoon.org. This gave us details of around 500,000 hearings over 39 months (January 2013 to March 2016) of 126,000 cases and around 28,000 rulings. Analysing its workload and functioning gives us novel insights into ITAT’s performance.
ITAT operates across 21 cities with 105 members. Each city has one or more benches. As of July, ITAT had on an average about 880 cases pending per member (September issue of the journal of the All India Federation Of Tax Practitioners). In the busier benches (Mumbai and Delhi), we find that the probability that a case will not be solved within one year of filing in Mumbai is 80%, while in Delhi it is almost 95%. Focusing only on solved cases, we find that the ITAT takes on an average 36-48 months to resolve a case. This compares favourably with the five-six years taken on an average across the subordinate courts in the country.
Most of the cases (47% of all hearings and 49% of rulings) pertain to appeals filed against regular assessment orders under Section 143(3) of Income Tax Act, 1961. Amongst records where other relevant details are also available (such as international tax matter, search and seizure), it appears that cases pertaining to assessments for undisclosed income (search and seizure, block assessment, etc.) are common (12% of all hearings and 9% of rulings). These are the cases where the tax department claims to have unearthed income which was not voluntarily disclosed for taxation. The volume of cases is likely to increase if the government is serious about reducing tax evasion. Unless ITATs are resourced to handle this sudden increase in workload, the average time taken for disposal of cases may see a sudden increase from the current 36 to 48 months.

So how can ITAT’s performance be enhanced? Commonly suggested remedies include increasing the number of judges or the number of benches to deal with increased caseload. However, our analysis suggests that while a minimum level of infrastructure is important, merely increasing the number of benches or judges is unlikely to deliver better results, as cities with similar numbers of benches and members exhibit very different performance levels.
We also find that cases pertaining to same sections filed within one or two days of each other end up having very different time trajectories. We find no noticeable difference in the time taken for disposal between various subject matters. An interesting aspect is the fluctuation in ITAT’s activities across benches across the year. For instance, the highest number of pronouncements in Mumbai (24% of its yearly pronouncements) happens in May, while for Delhi it is March (14%). January to March have 30% of the yearly listings. In Kolkata, about a third of all cases listed in a year are in March. Clearly, ITAT does not function uniformly throughout the year (much like many other courts in the country).
This suggests that solutions to delays in ITAT could very well lie in prioritizing and scheduling the workload properly. Although ITAT is a specialized court, there are variations in the complexity and urgency of the cases that come before it. Therefore, it may be useful to frame rules on how different types of cases would be prioritized.
This analysis is just a beginning. Various other parameters need to be considered. For instance, qualitative aspects of rulings, factors influencing them and most frequently litigated subject-matters would all be useful in deciding the policy strategy for improving India’s tax environment. More studies like these will help identify the exact institutional weaknesses in tax administration, improving which could help improve India’s abysmally low ranking on the “Paying Taxes” parameter in the Ease of Doing Business Index, and ensuring that citizens have access to an independent and impartial appeals mechanism.

Why the CSR law is not a success

The Companies Act 2013 requires large (above a specified threshold level) firms to spend 2% of their net profits on corporate social responsibility (CSR) projects. This law came into effect in April 2014. The results on CSR expenditures by firms in the fiscal year 2015-16 were released recently. It is certainly true that Indian firms collectively are more than complying with the CSR law. According to Prime Database, Indian companies spent Rs9,309 crore on CSR projects in 2015-16, which was Rs163 crore more than the amount required by law, and Rs703 crore more than the previous year.

The general reaction in the Indian press has been positive and suggests that the CSR law has been a success. However, the CSR law is only apparently successful, and in reality is harmful.
The problem is that reported expenditure on CSR projects is not a good metric of societal welfare. These numbers overstate the effect of the law. It is not clear whether firms have really increased their CSR spending after the law compared to what they were spending voluntarily before the law, because CSR spending was not well reported historically. There is some evidence that while firms that were initially spending less than 2% increased their CSR activity, but those that were initially spending more than 2% reduced their CSR expenditure. Another possibility is that firms spent money on CSR activities that also lead to increasing firm profits, such as inculcating goodwill and good public relations. There is evidence indicating CSR spending leads to brand building and employee engagement. In that case, firms would have carried out these activities with or without the law.
Even if we take the CSR expenditure at face value and assume these are valid numbers, there are still major problems with the CSR law. A required expenditure that does not lead to higher profits is essentially a tax. The CSR law can be viewed as a 2% tax, albeit spent by the firms rather than given to the government. This is a back-door way to increase corporate taxes without a transparent political debate. The corporate tax rate in India is 34.61%—already one of the highest, compared to a global average of 24.09%, according to KPMG, an audit and consulting company. Given the emphasis on liberalization and economic growth, it is unlikely that the Indian polity desires an increase in the corporate tax rate. This certainly will not help to make Indian firms more globally competitive nor attract more foreign investment into India.
Even to the extent that there has been a real increase in socially beneficial activities, the spending has not gone to democratically determined priorities, but rather to whatever the companies prefer to emphasize. Of the nine different schedules prescribed by The Companies Act, two schedules: combating various diseases and promotion of education accounted for 44% of the total CSR expenditure, while reducing child mortality received no funding and eradicating extreme hunger and poverty received only 6% of the total CSR expenditure. Given that about 50% of children in India are malnourished due to pervasive poverty, it is unlikely that the above allocation of resources reflects the democratic will of the Indian people. It is the government’s responsibility to determine high-priority needs of society and target public expenditure in these areas. With the CSR law, the government has abdicated one of its primary functions.
There is also an issue of geographic equity. Five states: Maharashtra, Gujarat, Andhra Pradesh, Rajasthan and Tamil Nadu account for well over one-quarter of all CSR spending. Towards the bottom of the list are Nagaland, Mizoram, Tripura, Sikkim and Meghalaya—all from the NorthEast. This, of course, reflects the inclinations, interests, and priorities of the business sector. But, it is the responsibility of the government to help achieve a more egalitarian society.
CSR is a controversial idea with many executives, academics and officials on both sides of the issue. Thus, it is not surprising that the Indian law does not clearly define CSR for the purposes of expenditures. The law lists only a few genres of CSR activities: “eradicating extreme hunger and poverty”, “promotion of education”, and “social business projects”. This is much too vague to work as a legal definition. It is not surprising that the law does not even discuss, let alone define, an enforcement mechanism or penalties for non-compliance.
The CSR law is inherently contradictory. CSR is fundamentally an inspirational exercise, and it is very difficult to legislate aspirations. Laws only set minimum standards, but do not create an impetus for positive action. For example, it would be difficult to require that companies build “excellent” schools; the legal requirement can be met merely by spending money on education.
Inequality in India, which was already high, has increased even more. The CSR law does not go far enough in reducing inequality and helping the disadvantaged. Without a coercive enforcement mechanism, it is unlikely that the law will result in widespread compliance and real effectiveness. In other words, “required” CSR will remain largely voluntary, but give the illusion of progress. This is “greenwashing” on a national scale!
India is the first country to require companies to expend resources on CSR. There is sound logic behind why other countries have not done this, and India should not either. THE BILLION PRESS

Without a coercive enforcement mechanism, it is unlikely that the law will yield effective results

The Companies Act 2013 requires large (above a specified threshold level) firms to spend 2% of their net profits on corporate social responsibility (CSR) projects. This law came into effect in April 2014. The results on CSR expenditures by firms in the fiscal year 2015-16 were released recently. It is certainly true that Indian firms collectively are more than complying with the CSR law. According to Prime Database, Indian companies spent Rs9,309 crore on CSR projects in 2015-16, which was Rs163 crore more than the amount required by law, and Rs703 crore more than the previous year.

The general reaction in the Indian press has been positive and suggests that the CSR law has been a success. However, the CSR law is only apparently successful, and in reality is harmful.
The problem is that reported expenditure on CSR projects is not a good metric of societal welfare. These numbers overstate the effect of the law. It is not clear whether firms have really increased their CSR spending after the law compared to what they were spending voluntarily before the law, because CSR spending was not well reported historically. There is some evidence that while firms that were initially spending less than 2% increased their CSR activity, but those that were initially spending more than 2% reduced their CSR expenditure. Another possibility is that firms spent money on CSR activities that also lead to increasing firm profits, such as inculcating goodwill and good public relations. There is evidence indicating CSR spending leads to brand building and employee engagement. In that case, firms would have carried out these activities with or without the law.
Even if we take the CSR expenditure at face value and assume these are valid numbers, there are still major problems with the CSR law. A required expenditure that does not lead to higher profits is essentially a tax. The CSR law can be viewed as a 2% tax, albeit spent by the firms rather than given to the government. This is a back-door way to increase corporate taxes without a transparent political debate. The corporate tax rate in India is 34.61%—already one of the highest, compared to a global average of 24.09%, according to KPMG, an audit and consulting company. Given the emphasis on liberalization and economic growth, it is unlikely that the Indian polity desires an increase in the corporate tax rate. This certainly will not help to make Indian firms more globally competitive nor attract more foreign investment into India.
Even to the extent that there has been a real increase in socially beneficial activities, the spending has not gone to democratically determined priorities, but rather to whatever the companies prefer to emphasize. Of the nine different schedules prescribed by The Companies Act, two schedules: combating various diseases and promotion of education accounted for 44% of the total CSR expenditure, while reducing child mortality received no funding and eradicating extreme hunger and poverty received only 6% of the total CSR expenditure. Given that about 50% of children in India are malnourished due to pervasive poverty, it is unlikely that the above allocation of resources reflects the democratic will of the Indian people. It is the government’s responsibility to determine high-priority needs of society and target public expenditure in these areas. With the CSR law, the government has abdicated one of its primary functions.
There is also an issue of geographic equity. Five states: Maharashtra, Gujarat, Andhra Pradesh, Rajasthan and Tamil Nadu account for well over one-quarter of all CSR spending. Towards the bottom of the list are Nagaland, Mizoram, Tripura, Sikkim and Meghalaya—all from the NorthEast. This, of course, reflects the inclinations, interests, and priorities of the business sector. But, it is the responsibility of the government to help achieve a more egalitarian society.
CSR is a controversial idea with many executives, academics and officials on both sides of the issue. Thus, it is not surprising that the Indian law does not clearly define CSR for the purposes of expenditures. The law lists only a few genres of CSR activities: “eradicating extreme hunger and poverty”, “promotion of education”, and “social business projects”. This is much too vague to work as a legal definition. It is not surprising that the law does not even discuss, let alone define, an enforcement mechanism or penalties for non-compliance.
The CSR law is inherently contradictory. CSR is fundamentally an inspirational exercise, and it is very difficult to legislate aspirations. Laws only set minimum standards, but do not create an impetus for positive action. For example, it would be difficult to require that companies build “excellent” schools; the legal requirement can be met merely by spending money on education.
Inequality in India, which was already high, has increased even more. The CSR law does not go far enough in reducing inequality and helping the disadvantaged. Without a coercive enforcement mechanism, it is unlikely that the law will result in widespread compliance and real effectiveness. In other words, “required” CSR will remain largely voluntary, but give the illusion of progress. This is “greenwashing” on a national scale!
India is the first country to require companies to expend resources on CSR. There is sound logic behind why other countries have not done this, and India should not either. 

Koushal judgement and three years later

Koushal judgement and three years later
The most insidious effect of Section 377 is to warp the relationship between the State and the citizen
The framers of the Constitution gave us an Indian Supreme Court with greater powers than any other court of its time. It was a court that the poorest person in the land could approach. For most of its existence, the court has lived up to that promise. Often it has not.
Roughly three years ago the chief justice’s court in the Supreme Court was packed with people. The court was to pronounce on the correctness of the Delhi high court judgement, which had held that Section 377 of the Indian Penal Code did not criminalize adult same-sex consensual sexual relations. There was an air of expectation because in recent years the Supreme Court was often seen as a protector of individual rights. All those expectations were dashed when the court read out its verdict in what has come to be known as the Koushal judgement. The Delhi high court judgement was overruled and homosexuals had once again become criminals in their own country.
The reasons behind the judgement were made available the same day. If there was any solace to be had for cogent constitutional reasoning, that hope too was dashed. The judgement was premised on a misplaced deference to Parliament. The court held that if Parliament had made a law, the courts were required to have a hands-off approach. They were to presume that any law was constitutional.
It seems that the court forgot that Section 377 was never enacted by the Indian Parliament. It had been enacted in 1860 by the British Parliament and thrust upon the Indian people without any public discussion or debate.
Equally, the idea of judicial deference to Parliament seems puzzling. Any reader of a newspaper today would be aware of judicial activism. Judges do, as indeed they should, take the government to task on a daily basis. The entire premise of judicial review embodied in our Constitution requires that independent judges protect the constitutional rights of the minority against the possible tyranny of the majority. If any law violates any constitutional provision, let alone a constitutional right, it must be struck down. Indeed, Justice G.S. Singhvi, the author of the Koushal judgement, had himself struck down provisions of the Delhi Rent Control Act, 1958 which gave protection to tenants occupying commercial premises. Perhaps property rights were seen to be more precious than personal liberty.
Three years on, the Koushal judgement continues to be “good” law. It is true that the Supreme Court has given other, more progressive, judgements such as the one recognizing the rights of transgenders. There are also curative petitions and other writ petitions pending that seek a reconsideration of the Koushal judgement. Yet, the judgement has not been stayed or modified and hence holds the field even today.
It is often said that Section 377 has little relevance as it is rarely enforced. Such a view is deeply mistaken. A provision need not be formally enforced when the mere threat of its enforcement can have a chilling effect. There are multiple instances of police and other authorities threatening the invocation of the provision for the purposes of extortion. Affidavits were filed by many persons in the Supreme Court at the time of the hearing of the Koushal case detailing the custodial horrors they had undergone when they had been jailed for suspected violation of Section 377.
Yet the most insidious effect of Section 377 is to warp the relationship between the State and the citizen. In criminalizing the sexual act felt most natural by a class of people, the Section seems to disallow a citizen the freedom to live life to the fullest extent guaranteed by the Constitution. The State has today told us whom we may not love. Tomorrow it may tell whom we have to. The Section also violates basic norms of private sexual conduct. Today the State has been permitted to enter into one bedroom. Tomorrow it may enter all of ours.
Three years have passed since the Koushal judgement was pronounced. Countless Indians found courage in the Delhi high court judgement decriminalizing sodomy to come out and be proud of themselves. The LGBT (lesbian, gay, bisexuals and transgender) community is made up of people some of whom have grappled deeply with themselves, their identities and their families to have the courage to come out of the closet. The Supreme Court judgement has knocked the belief that at least one pillar of the Constitution would always fight for their corner.
The Supreme Court today enjoys a formidable reputation amongst the public. It would do well to remember that this reputation does not stem from how the court rules today. The court today is basking in the reflected glory of its illustrious former judges. The past judgements of the court guaranteeing Constitutional protection to the neediest has given the court the sheen it has today. Regressive judgements only threaten that reputation. The Koushal judgement may yet be overturned, but its presence on the law reports does no service to the court.
It can only be hoped that the court would find time in its busy docket to take up and overrule the Koushal judgement. The hundreds of thousands of people in the closet are waiting for the court to unlock them and guide them to freedom.

Leveraging the sun to power India’s future

Leveraging the sun to power India’s future
This solar power sector has enormous potential but many challenges lie ahead as well
In 2014, when Prime Minister Narendra Modi first placed solar energy at the core of the energy mix that would fuel India’s economic growth, scepticism abounded: how will the government deliver? Isn’t the target of 100 gigawatts (GW) of solar energy, later revised to 175GW of renewable energy, by 2022, too ambitious? Also, isn’t solar energy expensive? How will India’s poor afford it? Just about two years later, the answers are emerging—slowly but steadily.
This past Friday, the Solar Energy Corporation of India (SECI) called for bids to install 1GW of rooftop solar power projects on central government buildings—its largest tender yet in this segment. India is already home to the world’s largest single-location solar power plant which has been set up by the Adani Group at Kamuthi in Tamil Nadu. The 648 megawatts (MW) project, built in a record time of eight months, dislodged California’s 550MW Topaz Solar Farm in September to secure the top spot and propel India past the 10GW total capacity threshold.
Indeed, huge advances have been made in the past few years—in terms of solar energy specifically and renewable energy in general. According to a Bloomberg New Energy Finance report, the solar sector has had an impressive compound annual growth rate of 59% in the last four fiscal years and its installed capacity at the end of the FY2016 was pegged at 6.8GW. Similarly, the share of renewable energy in India’s total energy mix has also increased from 12.5% in FY2013 to 14.1% in FY2016. Yes, this also shows how fossil fuels still make up the majority of India’s energy basket but let’s not ignore how quickly renewables are catching up. With a cumulative CAGR of 15%, renewables are growing at a faster rate than coal power plants, which are increasing at 12.5%.
Now, place this against the backdrop of India’s large untapped renewable energy potential—according to the government-developed India Energy Security Scenarios, India can achieve 479GW of solar power and 410GW of wind power by 2047—and it is possible to see how, if India plays its cards correctly, solar and other forms of renewable energy may eventually drive economic growth. Specifically, India seems to be on track to achieve its Intended Nationally Determined Contribution, promised as part of the Paris pact to fight climate change, to get at least 40% of its total installed power from non-fossil fuel sources by 2030.
In terms of pricing, SECI breached new frontiers yet again in November with a record low tariff offering of Rs3 per unit. The winning firm at the reverse auction—Gurgaon-based Amplus Energy Solutions Pvt. Ltd, which will be installing a total of 14.5MW of solar rooftop plants across the country—has promised these rates specifically for Uttarakhand, Himachal Pradesh and Puducherry. At one level, low tariff offering doesn’t come as a surprise—this figure has been consistently falling since 2010 when it was pegged at Rs17.91 per unit; over the past few years, it had somewhat stabilized at about Rs5 per unit when the US-based SunEdison, one of the world’s largest renewable energy firms and which has now filed for bankruptcy protection, shook up the market in late 2015, offering to sell power at Rs4.63 per unit to win NTPC Ltd’s contract for a 500MW solar park in Andhra Pradesh. Months later, in January, Finnish company Fortum FinnSurya Energy Pvt. Ltd went a step ahead and quoted Rs4.34 per unit to secure the contract for 70MW solar plant at NTPC’s Bhadla Solar Park in Rajasthan.
What these low rates now mean for consumers is that solar energy, which until recently was too expensive for large-scale use in a developing country, is now on track to compete with cheap fossil fuels. Today, India’s cheapest electricity tariff is at around Rs1-2 per unit. This rate is for the farm sector which is followed by the residential sector and then the commercial sector. But while these are of course promising figures, there is still a long way to go. The low tariffs, for example, are a double-edged sword. Driven by aggressive bids from firms desperate for a toe-hold in this sunrise sector, they have fuelled concerns about viability and project financing, especially for those below the Rs5 per unit threshold. SunEdison, in fact, has put its India assets on the block (some of which were incidentally picked up by Amplus).
Moreover, India still has to make available the necessary capital for developing renewable energy infrastructure—the former Planning Commission had estimated under the 12th Five Year Plan that more than a trillion dollars will be required—and it will have to work every option on the table (from domestic industry to international donors) to fund this turnaround. Similarly, several structural issues in the distribution of power need to be addressed. India’s installed capacity of 275GW is already in excess of its demand of 140GW. Yet, there are still parts of the country where there is no electricity while in many others, power cuts are the norm. This is due to a variety of factors such as coal supply shortage, transmission losses and the poor health of power utilities.
As renewables enter this mix, they will have to be integrated into the existing system and structure. As a NITI Aayog expert group report notes, “A probable re-engineering of institutions, the redefinition of policies, the re-tuning of power systems, and the replacement of old habits with new ones” will be required. This fundamental re-structuring of the country’s power and energy infrastructure will be its biggest challenge.
Can India achieve its solar power targets?

Costs and benefits of the currency swap

Costs and benefits of the currency swap
Has the govt prepared for the costs of its decision and done its homework on logical next steps to help India leapfrog to the next stage of development?
It is little over a month since the Prime Minister made his announcement on the withdrawal of specified banknotes (SBN). This is the terminology that the Reserve Bank of India adopts on the exercise that has been underway since 9 November. The costs appear disruptively high and are almost impossible to estimate given the size and scale of the cash-dependent (but legal) economy and geographical breadth of the country. So, experts who thought that the disruption would be transient and scant and that the government decision had a significant upside to the economy with little downside are changing their minds. Now, they feel that the wealth effect (loss to the hoarders) could be transient and scant while the costs of disruption are significant and enduring.
As much as the government, the critics too are also struggling to evaluate it intelligently. For example, there is a suggestion that nothing would have been lost if the government had given enough time for people to change their SBNs. The phase-out could have been set for 31 December and simultaneously a voluntary income disclosure scheme announced. Hoarders would have paid the government the discount on the wealth that they offer in unofficial exchange of SBN for other forms of wealth. This overlooks some basic human behavioural traits.
| How demonetisation has impacted key sectors
Once a date is set, the SBNs become hot potatoes. Holders would want to drop it immediately. In practical terms, the date would be effectively the next day or the next week. Further, a friend pointed out that it would have come as huge inflationary shock for the economy as every commodity and asset would have suddenly skyrocketed in value against money that would still have been available to chase them. The urban middle class could be unhappier than it is now and the move would end up being a political disaster too.
There is another problem with that suggestion. To give more time for people to adjust might be putting pragmatism ahead of principle—the principle that the immorally acquired wealth should not be given an official free pass. Further, given all the changes happening—such as information technology advances, Aadhaar, goods and services tax and benami transaction Bills—the government would have felt confident that they would stem the future generation of black money and hence decided not to give a free pass to the current stock of black money.
Regardless of whether one is comfortable viewing this exercise through the morality prism, the withdrawal of SBNs is about creating a disincentive for future black money creation in any form (“if they can come after my cash like this, they might come after my other forms of black wealth”). It intends to send a signal to many middle-income earners and self-employed professionals, used to transacting in cash, to get out of that habit.
Of course, the criticism is not confined to chaos and currency shortage but extends to potentially serious economic disruption. Jahangir Aziz of JP Morgan made this point in a recent event in Singapore on the withdrawal of SBNs. Some businesses cannot be competitive unless they operate in a cash environment. If they went formal, costs of compliance—official and unofficial—would rise so much that their businesses would no longer be viable.
The share of the informal sector employment in India at 83.6% is the highest in the world. Quite possibly, almost all of the enterprises in the informal sector operate on a cash basis. The disruption to their business model could be both severe and permanent. Their livelihoods threatened, they could fall below the poverty line. Conceptually, it sounds like a serious issue but orders of magnitude would be needed to assess the severity of the situation. Apart from that, a bigger question remains. No other country of India’s size has such a huge informal sector.
Alex Tabarrok, cited by Niranjan Rajadhyaksha in his thoughtful column (The persistent poverty of the Indian state), makes an important point that many other Indian critics have missed out: India taxes its high-productivity sectors while its low-productivity sectors aren’t. India has no micro, small and medium enterprises (MSME) in manufacturing. Only micro. They constituted nearly 95% of registered MSME manufacturing enterprises. There is a near one-to-one mapping between micro and proprietary enterprises. No surprises, therefore, that employment per unit had come down from 12 (first census) to 6.2 in 2006-07 (fourth census). Units that operate without electricity constituted 40% in the third census and 71.2% in the fourth census.
There is considerable comingling of informal enterprises with black money and cash. Manas Chakravarty has underscored this (Narendra Modi’s great leap forward). Can India really contemplate meaningful and sustainable economic progress with such a large proportion of informal enterprises dominating production? India’s economy is stagflation-prone because of the extreme fragmentation of production in factories and farms.
Crises and the law of unintended consequences combine to produce changes that cause societies to leap ahead to a different era. Otherwise, we would not be living much differently from the hunter-gatherer generations. The question is whether the government was prepared for the costs of its decision and has done its homework on logical next steps such as the above, to help India leapfrog to the next stage of development. That is the subject of the next column.