September 2019


Media coverage in India this month focused on domestic issues, both political and economic in nature.  Chief among the former was the government’s decision to abrogate Article 370 of the Indian Constitution that gave Jammu and Kashmir a special status and to bifurcate the State into two Union Territories (UTs), a move that has sparked considerable reaction.  In terms of economic developments, news coverage focused on the measures announced by Finance Minister Nirmala Sitharaman to revive growth, boost consumption and uplift investor and consumer sentiment as well as on the Reserve Bank of India’s (RBI) approval of a US$25.1bn surplus transfer to the government.

Government Scraps Article 370, Bifurcates Jammu & Kashmir into Two Union Territories

India’s central government scrapped Article 370 of the Constitution that granted special status to Jammu and Kashmir and decided to bifurcate the state into two Union Territories, firstly, Jammu and Kashmir, which will have a legislature, and secondly, Ladakh, which will be without a legislature.  Members of various political parties have expressed their views on the subject through a series of op-eds during the month.

An op-ed by Home Minister Amit Shah in The Times of India, supported the move, stating that Article 370 in its original form was not compatible with India’s development aspirations, as these severely restricted the state’s progress and, also, promoted separatism.  “In many ways, 2014 marks a point of inflection in India’s governance and policy paradigm.  For the first time a non-Congress government won a full majority in the Lok Sabha.  The Narendra Modi-led government has since rewritten the grammar of change.  In the last 63 months, dozens of signature policy initiatives have not only brought about significant qualitative improvement in people’s lives, but also pitchforked India as a global growth engine, cementing its status of eminence among the world’s leading nations… The nullification of Article 370 and abolition of Article 35A, despite the opposition’s inexplicable resistance, as also the lack of majority in the Rajya Sabha, exemplify this determination… The peculiar brand of appeasement politics, coupled with lack of political will, ensured that no leader dared to change the “special status” of J&K perpetuated through Articles 370 and 35A.  The Modi government’s decision on Article 370 and Article 35A, and the passage of the relevant Bills in both houses of Parliament illustrate Modi’s resolve and political statesmanship to actualise the “one nation-one Constitution” principle, and lead Jammu and Kashmir into a new era of development.”

Former Union Minister Mani Shankar Aiyar’s op-ed in The Indian Express, opposed the move, by voicing concerns on how in the name of ‘Fundamental Rights’ through the scrapping of Article 370, the fundamental rights of the people of Kashmir are being extinguished.  “Narendra Modi and Amit Shah have just created a Palestine on our northern border.  To do so, they first floated the deceitful rumour of an imminent massive Pakistani terror attack on the Valley to induct around 35,000 additional armed personnel into a region already bristling with lakhs of jawans… They have detained over 400 local leaders.  They have shut down schools and colleges, shops and hotels, petrol pumps and gas outlets, and rendered the usually bustling streets of Srinagar and other Valley towns an empty wilderness.  All communications have been severed other than those they do not have the technological capacity to cut… Modi-Shah have learned their lessons well from their mentor, Benjamin Netanyahu and the Zionists, including Menachem Begin, who preceded Netanyahu.  They have learned how to trample on the freedom, dignity and self-respect of the Kashmiris even as Israel has tried to get away with seven decades of merciless oppression of the Palestinians… Instead of achhe din, what Parliament has ensured is a long, dark night in the Valley, and perhaps even the rest of the country, with simmering communalism, rising political tensions, unending hit-and-run terrorism, asymmetric armed struggle, and guerrilla insurrection.  This is what happened in East Pakistan in 1971.  We are now bringing a similar disaster upon our heads.  Be warned.”

Finally, Aam Aadmi Party (AAP) leader and Rajya Sabha MP, Sanjay Singh, through an interview in Business Standard, gave a more balanced view on the subject, stating that while the AAP backed the Centre on abrogation of Article 370, it never supported the idea of converting the state into a union territory.  “The government is claiming that the Right to Education Act and Constitutional Amendment 73rd and 74th could not be implemented in Jammu and Kashmir because of Article 370.  The government also said development works were affected there.  Today, the Home Minister said that the government will bring peace and give employment,” Singh told ANI. “Some people are peddling delusions that AAP supported UT (Union Territory) status.  AAP and Arvind Kejriwal ji have not supported UT status.  Article 370 does not mean that you strip full statehood of Jammu and Kashmir and create it into a union territory with a legislative assembly.  AAP does not support any such initiative,”…. ”But I don’t think there was some need for UT status for the state.  Arvind Kejriwal supported the move on Article 370.  He never supported UT status,” he added.

Government Unveils Package to Boost Indian Economy

Finance Minister Nirmala Sitharaman announced various measures, including rollback of enhanced super-rich tax on foreign and domestic equity investors, exemption of start-ups from ‘angel tax’, a package to address distress in the auto sector and upfront infusion of US$10bn to public sector banks, in efforts to boost economic growth.  Various media publications unanimously applauded these measures and weighed in on its implications for the Indian economy.

A column in Livemint stated that the intent of the measures is to revive economic momentum among the growing sense of gloom and doom and outlined why the step-up in reforms signals some structural measures may be on the anvil. “Finance minister Nirmala Sitharaman also announced a slew of measures to stoke demand, including a rejig of its spending programme by front-loading it, addressing supply-side bottlenecks and easing bank credit rules, even as she promised to end “tax terrorism” that has left India Inc. jittery… “Next week we will be coming with one more set of announcements.  You may expect us to talk to you twice more in the near future,” Sitharaman said while concluding her presentation… Coincidentally, the finance minister’s remarks came on a day rating company Moody’s Investors Service pared India’s growth estimate from 6.8% to 6.2% in the current fiscal year.  They were preceded by similar revision in forecasts by the Reserve Bank of India, International Monetary Fund and the World Bank—all of them confirming the growing apprehension that the Indian economy was cooling.  The package of measures, Sitharaman hopes, will arrest if not reverse the slowdown.”

The Hindustan Times was also complimentary of these measures, in particular its focus on boosting the prospects of the auto sector and improving credit flow to ease concerns of the liquidity-starved micro, small and medium enterprises (MSMEs).  “Sitharaman announced a relief package for the distressed automobile sector, which was resorting to layoffs and output cuts.  The package included allowing additional 15% depreciation on vehicles, deferment of one-time registration fee, lifting ban on purchase of vehicles by government departments and the launch of a scrapping policy for old vehicles.  Coupons could be given to those scrapping their vehicles to be redeemed while purchasing a new vehicle, she said… The government departments and central public sector enterprises (CPSEs) have also been instructed to clear all pending payments of vendors, particularly MSMEs, she said.  Delayed payments from them will be monitored by the Department of Expenditure and reviewed by the Cabinet Secretariat, she added.  The finance minister also announced measures to improve credit flow — the lifeblood of an economy.”

Finally, an op-ed in Economic Times complimented the government for resisting frantic lobbying from some of India’s most powerful companies and announcing measures that adopt a more realistic view of India’s economic position, instead of merely handing out a big tax break.  “The Reserve Bank of India, the International Monetary Fund, investment banks and ratings agencies have all recently cut their estimates of 2019 growth sharply… The best news is that Prime Minister Narendra Modi’s government, which has loudly touted its stewardship of the Indian economy, appears to have woken up to the scale of the problem.  Many would argue that the slew of administrative and tax changes that Finance Minister Nirmala Sitharaman announced as stimulus measures last Friday weren’t bold enough. But that misses the key point: Sitharaman and her ministry at last seem to be willing to take criticism on board and to adopt a more realistic view of India’s economic position.  That’s the first step toward fixing the economy.”


Reserve Bank of India (RBI) Approves a US$25.1bn Surplus Transfer to Government

The RBI decided to transfer a record US$17.6bn of its surplus to the central government for the fiscal year 2018-19 and an additional US$7.5bn of excess provisions as recommended by the Bimal Jalan committee on Economic Capital Framework (ECF).  Various media publications focused on how the surplus transfer would be utilized by the government besides analysing the impact of this transfer on the economy.

India Today published an article which captured the opinion of several economists on the transfer, several of whom stated that the transfer of funds is expected to help the government at a time when India is going through a period of economic slowdown, triggered by slower consumption demand and weaker investment.  “Many economists have termed the move as a lifeline for the government, which is exploring options to revive economic growth amid a period of sluggish consumer demand and weak investments.  Before the RBI’s announcement, the government had budgeted Rs 90,000 crore as surplus and dividend transfers from RBI for the current fiscal.  However, it will now get Rs 86,000 crore more than the budgeted amount… Some economists have welcomed the move as it will help the government counter the shortfall in revenue and tax collection.  Since inflationary pressure is low, economists believe that the move will not have a negative impact in the long run… Most of the economists agreed that the move can help the government in providing a stimulus the economy besides aiding recapitalisation of core sectors.  It will also help the government make up for the shortfall in its tax collections to a major extent.  Economists have made it clear that the manner in which the government utilises the excess fund will be crucial in reviving the economy.  In a nutshell, the trick lies in boosting investments in core sectors rather than focusing on uplifting consumption.”

An editorial in The Hindu outlined the importance of the RBI reserves for a monetary/financial stability crisis while stating that the government should ensure it utilized the funds in a prudent manner.  “The outflow from the RBI’s reserves was limited to this amount only because the Bimal Jalan Committee, appointed to recommend the economic capital framework for the RBI, decided to keep a major part of the reserves locked up and out of the reach of the government while opening up the remainder with strict stipulations The Committee has recommended, and rightly so, that the Currency and Gold Revaluation Reserve Account (₹6.91 lakh crore as of June 30, 2018), at least half of which was eyed by the government, represents unrealised gains and hence is not distributable to the government…  In principle, it could be argued that the government as sovereign owns the RBI and hence there is nothing wrong if it decides to tap the central bank’s reserves.  Yet, that it actually chose to do so is unfortunate because these reserves represent inter-generational equity built up over several years by the RBI by squirrelling away a part of its annual surplus… The reserves, as the Jalan Committee has pointed out, represent the country’s savings for a ‘rainy day’, which is a monetary or financial crisis… Only the release of the RBI’s Annual Report in the next few days will help in the understanding of the reasons behind the sharp jump in the surplus.  The big transfer from the RBI will free up the hands of the government at a time when tax revenues are undershooting the target by a long chalk.”

A column in the Livemint took a more conservative stance on the transfer stating that even though concerns over fiscal deterioration may have been allayed to some extent for now given the inadequate goods and services tax (GST) collections, the legroom for major stimulus measures from here on remains limited.  “Since the government has shown a commitment to fiscal consolidation, economists expect excess money to be largely reserved to meet the expected shortfall in tax revenues…  As per estimates by Anubhuti Sahay, senior economist at Standard Chartered Bank, overall, the government is likely to receive additional revenue inflows of around ₹60,000 crore.  “This is likely to assuage worries about fiscal slippage—we estimate that the FY20 fiscal deficit target faced a slippage risk of 0.5% of GDP on ambitious tax targets.  As most of the excess revenue is likely to be used to contain any fiscal slippage in FY20, room for fiscal stimulus remains limited, in our view,”… Although GST collections crossed the ₹1 trillion-mark in July for the third month in a row, economists said the pace of growth is insufficient to match the targeted ₹6.63 trillion for this fiscal year, as far as the government’s share goes.”

Finally, a column published on NDTV.com, Mihir Sharma, Senior Follow at the Observer Research Foundation was critical of the RBI’s decision, stating that it set a dangerous precedent.  “On some level, this could be viewed as a compromise between the RBI and the government, allowing the RBI to retain at least some of the disputed capital.  But the problem is once such raids are viewed as acceptable, it might not stop there.  What happens when this government is next in a similar hole – which, unless it alters its mismanagement and statist orientation, is exactly what will happen.  Why would it not decide to squeeze the RBI some more? The problem is with the Modi government’s approach to long-term strategic thinking.  It may have a vision of the future, but no understanding of how to get there.  To make India a strong and vibrant economy, you need independent institutions like the RBI.  Instead, the government – supposedly in service of its “vision” – seeks to undermine such institutions.  This ends up hurting India’s prospects.  We have nobody to blame but ourselves and the leaders we have chosen.”