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The Hindu Notes for 25th March 2019

Topic Discussed: The Hindu Notes of 25th March 2019

Another look at fiscal transfers

The time has come to amend the Constitution to fix the proportion of shareable taxes for the States

  • Federalism is an old concept. Its origin is mainly political. It is well known that the efficiency of a government depends on, among other factors, its structure. In large countries, it has been felt that only a federal structure can efficiently meet the requirements of people from different regions. Underlying this proposition is the premise that preferences vary across regions.
  • In our country during the independence struggle, provincial autonomy was regarded as an integral part of the freedom movement. However, after Independence, several compulsions, which included defence and internal security, led to a scheme of federalism in which the Centre assumed greater importance. Also in the immediate period following Independence, when the Centre and all States were ruled by the same party and when many of the powerful provincial leaders migrated to the Centre, the process of centralisation gathered further momentum. Economic planning at a nation-wide level helped this centralising process.
  • Fiscal federalism

  • Fiscal federalism is the economic counterpart to political federalism. Fiscal federalism is concerned with the assignment on the one hand of functions to different levels of government, and with appropriate fiscal instruments for carrying out these functions on the other. It is generally believed that the Central government must provide national public goods that render services to the entire population. A typical example cited is defence. Sub-national governments are expected to provide goods and services whose consumption is limited to their own jurisdictions. An equally important question in fiscal federalism is the determination of the specific fiscal instruments that would enable the different levels of government to carry out their functions. This is the ‘tax-assignment problem’ which is much discussed in the literature on the subject. In determining the taxes that are best suited for use at different levels of government, one basic consideration is in relation to the mobility of economic agents, goods and resources. It is generally argued that the de-centralised levels of government should avoid non-benefit taxes and taxes on mobile units.
  • This implies that the Central government should have the responsibility to levy non-benefit taxes and taxes on mobile units or resources. Building these principles into an actual scheme of assignment of taxes to different levels of government in a Constitution is indeed very difficult. Different Constitutions interpret differently what is mobile and what is purely a benefit tax. For example, in the United States and Canada, both Federal and State governments have concurrent powers to levy income tax. On the contrary, in India, income tax is levied only by the Central government though shared with the States. Recognising the possibility of imbalance between resources and responsibilities, many countries have a system of inter-governmental transfers.
  • The Indian Constitution lays down the functions as well as taxing powers of the Centre and States. It is against this background that the issues relating to the correction of vertical and horizontal imbalances have been addressed by every Finance Commission, taking into account the prevailing set of circumstances. However, Central transfers to States are not confined to the recommendations of the Finance Commissions. There are other channels such as those through the Planning Commission until recently as well the discretionary grants of the Central government.
  • In 2010-11, in the combined revenue receipts of the Centre and States, the share of the Centre was 64.68%. After transfer, the share came down to 40.20%. In the case of the States, their share before transfers was 35.32%. After the receipts of transfers the share of States went up to 59.80%. Thus the shares got reversed. In 2016-17, the share of the Centre after transfers was 33.37% and that of the States was 66.63%. In the case of total expenditures, the share of the Centre in 2014-15 was 41.14% and that of the States was 58.86%. The ultimate position appears reasonable. The question may be on the mode of transfers.
  • New developments

  • The Fourteenth Finance Commission has broken new ground in terms of allocation of resources. One of its major recommendations has been to increase the share of tax devolution to 42% of the divisible pool. This is a substantial increase by almost 10 percentage points. The commission has argued that this does not necessarily affect the overall transfers but only enhances the share of unconditional transfers. It is true that Centrally sponsored schemes, which have ballooned in recent years, may have ‘encroached’ on the territory of States. Over years, the performance of the Central government is judged not only on the basis of actions taken which fall strictly in its jurisdiction but also on initiatives undertaken in the areas which fall in the Concurrent and even State lists. Centralised planning has something to do with it. Today, the Central government is held responsible for everything that happens, including, for example, agrarian distress. In viewing the responsibilities of the Centre and States we must take a broader view than what is stipulated in the Constitution.
  • On the allocation of unconditional transfers, two questions arise. The first is to determine the total transfers that need to be made, while the second is whether all transfers must be done by the Finance Commission alone. Finance Commissions prior to the Fourteenth recognised that some transfers were being made by the Planning Commission; this was kept in mind while deciding on tax devolution. By the time the Fourteenth Finance Commission was required to submit its report, a fundamental change in the institutional framework had occurred.
  • The Planning Commission was replaced by the NITI Aayog, which was simply a think-tank with no powers of resource allocation. In this context perhaps what the Fourteenth Finance Commission did was justifiable. Of course, the Fourteenth Finance Commission did what it did because the terms of reference had not made any distinction between Plan and non-Plan revenue expenditures. The moot question is about what happens if any future government revives the Planning Commission with financial powers. This will put the Central government in a fix.
  • Some suggestions

  • Perhaps the time has come for the Constitution to be amended and the proportion of shareable taxes that should go to the States fixed at the desired level. The shareable tax pool must also include cesses and surcharges as these have sharply increased in recent years. Fixing the ratio at 42% of shareable taxes, including cesses and surcharges, seems appropriate. Another possible route is to follow the practice in the U.S. and Canada: of allowing the States to levy tax on personal income, with some limitations. Since one of the concerns is that resources do not match functions, this may be a way out. But, as in the U.S., the scheme should be simple and ride on federal income tax, that is, just a levy on the income assessed by federal authorities. The freedom given to the States must be limited. It is important to note that the levy by the Centre and States together should be reasonable.
  • Also once this power is given to the States, the transfers from the Centre need adjustment. As far as India is concerned, this is an area which needs a fuller study. Adoption of any one of these alternatives will avoid friction between the Centre and the States. Perhaps the first alternative of constitutionally fixing the ratio is the easiest.
  • There are issues relating to horizontal distribution. Equity considerations have dominated the allocations. This is as it should be. However, the ability of bringing about equalisation across States in India has limitations. Even the relatively richer States have their own problems and they feel ‘cheated’ because of the overuse of the equity criterion. An appropriate balancing of criteria is needed particularly in the context of the rise in unconditional transfers. Of course, appropriate balancing is what all Finance Commissions are concerned about.
  • C. Rangarajan is former Chairman of the Economic Advisory Council to the Prime Minister and former Governor, Reserve Bank of India
  • Parallel tracks on trade ties

    Economic diplomacy can still prevent the removal of the U.S.’s trade benefits to Indian exports

  • Could it be that the strained trade relations between India and the U.S. are an outcome not of the U.S.’s domestic politics but of India’s? The timeline of U.S. President Donald Trump’s decision to rescind the benefits Indian exports enjoy under the Generalised System of Preferences (GSP) programme is revealing.
  • E-commerce rules

  • It begins with the change in foreign direct investment (FDI) rules in India. The tightened norms that came into effect on February 1 place several restrictions on e-commerce companies, including Walmart-owned Flipkart and Amazon.
  • The unexpected changes came after Walmart, the world’s largest retailer, paid over $16 billion to acquire Flipkart last May. To raise the resources needed, Walmart put one of its biggest international operations, Asda, on the block for $10 billion.
  • The calculations behind the $500 billion retail giant’s investment in India have gone awry after the change in the FDI rules. The Walmart family are close friends of Mr. Trump. On February 20, Walmart CEO Doug McMillon said the company was disappointed that New Delhi had changed the FDI rules without consultation and hoped for a more collaborative process going forward. Days later, on March 4, Mr. Trump notified Congress of his intention to slap punitive action on India by ending preferential treatment for the country’s exports.
  • Walmart has a reputation for killing small retail businesses with ultra-low prices, a concern that influenced New Delhi’s decision to tighten the FDI rules. While the FDI policy might be irreversible, economic diplomacy can still defuse the situation and prevent the removal of the GSP benefits that will not take effect for until at least 60 days after the notifications to Congress and the Indian government.
  • The simmering tensions go back to April 2018 when the United States Trade Representative (USTR) launched a review of New Delhi’s eligibility for the GSP programme. Tensions escalated in June, as New Delhi, in response to Washington’s 25% tariff hikes on steel and 10% levies on aluminium, immediately accused it of unfair trade practices, and, seeking to signal a muscular approach, threatened retaliatory tariffs on $235 million of U.S. imports.
  • Bilateral talks since then have failed to ease tensions and India now stares at losing the GSP benefits. Foreign Secretary V.K. Gokhale returned empty-handed from Washington recently.
  • India’s GSP status came under review after the U.S. medical and dairy industries complained that New Delhi is not providing them “equitable and reasonable access to its market”. India’s data localisation policies deepened the rift.
  • New Delhi’s use of price control measures against imported drugs and medical devices has grown noticeably. Cardiac stents were put under price controls in February 2016 and knee implants attracted similar action in August 2017, after which trade margins for many medical devices are sought to be capped.
  • U.S. manufacturers complain that in doing so, New Delhi has meted out differential treatment to them vis-à-vis domestic players.
  • For domestic companies, the price to distributors is considered while in the case of global manufacturers the base proposed is the landed costs of imports. The U.S. medical device industry wants price controls on cardiac stents and knee implants withdrawn and would like products to be treated on parity with domestic medical devices through a trade margin rationalisation regime.
  • New Delhi has preferred to act against unreasonable price mark-ups through price controls when exactly the same outcomes can be achieved through other types of policy alternatives. The USTR is right in pointing out that price capping counts as a trade barrier. New Delhi can easily address the concerns by replacing price controls with trade margin rationalisation measures, applying them equally to domestic and foreign manufacturers.
  • India is the largest beneficiary of the GSP, the largest and oldest U.S. trade preference programme. The GSP is aimed at promoting economic development by allowing duty-free entry of products from designated beneficiary countries. Nearly 4,800 different goods from 129 designated countries enjoy duty-free access under the programme.

  • The immediate loss for India is preferential access at zero or minimal tariffs to the U.S. in case of about 1,900 products, or about half of all Indian products.
  • New Delhi has downplayed the impact of the proposed withdrawal of benefits, saying exports worth $190 million only are likely to be affected and that the tariff advantage was 4% or more on only 2,165 of a total of 18,770 tariff lines.
  • Estimating losses

  • This is an underestimation. The loss to the economy would be much larger than what the Department of Commerce is projecting. While it is true that the actual tariff advantage from the programme works out to a meagre $190 million, which is just 0.4% of the total Indian exports to the U.S., the actual loss will not be limited to the immediate tariff advantage.
  • Indian exporters are competing for market share in the U.S. with other low-income countries in industries where margins are wafer thin. Even minor price hikes can drive significant drops in export volumes. In which case, losing GSP access will be costlier than the projections.
  • Among price-sensitive products eligible for higher GSP benefits that risk losing out to competition from other countries are processed food, leather products, plastic products, building materials, tiles, hand tools, engineering goods, cycles and made-ups such as pillow/cushion sleeves and woven women’s apparel.
  • Many of these are the very industries the new e-commerce FDI rules seek to protect.
  • Puja Mehra is a Delhi-based journalist
  • Twelve years later

    The Madras High Court has prevented a miscarriage of justice in the ‘Dinakaran’ case

  • It is not often that political hooliganism is punished in a court of law. In cases that result in loss of life, investigation and prosecution tend to become inescapable — but the trials are often derailed because of the nexus between party heavyweights and police officers who lean on witnesses to turn hostile. It is therefore gratifying that the Madras High Court has broken the mould to set aside the perverse acquittal of all those involved in the attack on the Madurai office of Dinakaran, a Tamil daily, in 2007 and sentenced nine of them to life. Three persons were killed due to suffocation after parts of the office were set on fire by a mob owing allegiance to M.K. Alagiri, elder son of M. Karunanidhi and then a powerful Dravida Munnetra Kazhagam leader in the temple city. They were angry over an opinion poll carried in the daily, which is part of the Sun Group of Kalanithi Maran, grandnephew of M. Karunanidhi and brother of former Union Minister Dayanidhi Maran. The poll had claimed that Mr. Alagiri was less popular than his brother M.K. Stalin, who now leads the DMK after Karunanidhi’s death in 2018. While the initial reaction from the media group and the press fraternity was one of anger and outrage, the cause for justice substantially failed after a patch-up between the feuding sections of the family. Even while the investigation was transferred to the CBI, the political system was working to save the party’s hirelings. Most witnesses turned hostile, the trial judge rejected even photographic and videographic evidence on technical grounds, and the CBI failed to bring home the guilt of the assailants.
  • The High Court has noted that among the eye-witnesses who shied away from deposing in favour of the prosecution were Dinakaran’s own reporters and photographers, other journalists who covered the event and many police officers who were at the spot while the protest was turning violent and dozens of party cadre were gathering there with lethal intent. It has made a dark but possibly apposite comparison with the Best Bakery case, in which a key witness turned hostile and it was later revealed she had lied out of fear for her life. The Bench has pulled up the trial judge for “manifest perversity” in his treatment of evidence, especially in rejecting on flimsy grounds the testimony of forensic experts that there was no sign of manipulation or tampering in the photographs and footage presented in court. It was well known to the public that Mr. Alagiri wielded enormous clout at that time and that his supporters were involved in the incident. It is indicative of the atmosphere of intimidation that prevailed that even journalists who covered the incident denied their presence. While the court has prevented a miscarriage of justice in this case, it is a sordid truth that the state of affairs may continue in future too, unless amoral political leaders and pliant police officers mend themselves.
  • A different league

    In its 12th iteration, the IPL fields concerns about its place in the cricket calendar

  • The Indian Premier League, since its launch in 2008, has become a sporting indulgence every summer. Cricketing purists may sneer at Twenty20s and their lack of historical resonance, but there is no denying the IPL’s popularity and resilience. The 12th edition, which started in Chennai on Saturday with an easy victory for the holders Chennai Super Kings, will span diverse venues for the 60 matches. Despite the elections being held through seven phases during April-May, the Board of Control for Cricket in India has ensured that every franchise gets its rightful share of home and away matches. But besides the immediacy of sixes, dot-balls and ecstatic fans, the current IPL has to deal with the elephant in the room. It is expected to conclude on May 12, and immediately the biggest tournament in the International Cricket Council calendar awaits the players. The World Cup starts on May 30, with host England taking on South Africa at the Oval. India will open its campaign with the game against South Africa at Southampton on June 5. But there isn’t enough time for the Indian team to recuperate.
  • Virat Kohli’s men have been playing without a break over the last few months, with tours of Australia and New Zealand followed by the limited overs series against visiting Australians. They then plunged into the IPL, and now with the World Cup looming large, that old debate of club vs country has bubbled up again, and rightly so. There are fears about Indian and overseas cricketers picking up injuries in the league, which might scupper their World Cup plans. The national selectors, who are keeping an eye out for some surprise talent emerging in the league, are hoping that the core group of established stars will remain fit for cricket’s showpiece event. There is speculation about the BCCI and the Indian team management having had a word with team-owners over workload management so that key players don’t suffer a burnout. Yet, there is no clarity about this plan, and the fear of fatigue derailing the cricketers is a genuine one. Amidst this confusion, the IPL still presents an opportunity for a few Indian players to press their claims to be on the flight to London. The Australian duo of Steve Smith and David Warner, who are coming back after a one-year ban following the ball-tampering crisis at Cape Town in South Africa last March, are also keen to excel for Rajasthan Royals and Sunrisers Hyderabad, respectively, and claim their Baggy Green caps. Strangely, the domestic tournament with an international flavour, as Rahul Dravid described the IPL, continues to have no space for Pakistan cricketers, raising questions about its organising principles. Politics and commerce have reinforced each other to make an even deeper impact on the IPL.
  • Disinformation is everywhere in India

    It is not only social media that is responsible for it, but also news media and some politicians

  • With the Lok Sabha elections coming up, it is critically important that Indians have access to credible and trustworthy information before they vote. The problem is that many do not feel they do. In a brand new survey of English-language Internet users in India conducted by the University of Oxford, we have found that a majority of the respondents are concerned with whether the news they come across online is real or fake.
  • Who can blame them? After the Pulwama attack, social media and messaging apps were flooded with false and misleading content as people tried to make sense of the horrible violence. As Trushar Barot, a former BBC journalist who leads Facebook’s integrity initiatives in India, tweeted, “I’ve never seen anything like this before — the scale of fake content circulating on one story.”
  • Some of this was ordinary people sharing misinformation in good faith, but much of it was not. As the Central Reserve Police Force noted a few days after losing 40 men in the attack, “It has been noticed that on social media some miscreants are trying to circulate fake pictures of body parts of our Martyrs to invoke hatred while we stand united. Please DO NOT circulate/share/like such photographs or posts.” Even as some news media made the occasional misstep and amplified some of this disinformation, other journalists and fact-checkers were working overtime to identify and debunk some of the worst examples shared online, including fake or manipulated material trying to link Congress president Rahul Gandhi and Congress general secretary in-charge of eastern Uttar Pradesh, Priyanka Gandhi Vadra, to the attack.
  • The heart of the problem

  • Social media and messaging apps are thus at the heart of the disinformation problems that India faces. Of our survey respondents, 52% say they get news via Facebook, and the same percentage say they get news via WhatsApp, which is owned by Facebook. With an estimated quarter billion Indians having come online since the last general election, companies like Facebook, Google and Twitter have become central parts of the Indian media environment, including the disinformation problems that it faces.
  • But disinformation is not only a problem of social media and digital platforms. In our survey, strikingly, those who use Facebook and/or WhatsApp for news do not report higher levels of concern over whether the news they come across is real or fake than those who do not rely on them. It seems people are as concerned about information from news media as they are about information from social media. More detailed questions in our survey reveal a far more complex set of wider problems. At the heart of disinformation problems are stories that are completely made up for political or commercial reasons, to try to discredit rivals or make money from clickbait. Of our respondents, 51% say they are concerned about this problem. But strikingly, a similar number say they are concerned about what they consider to be poor journalism (stories that respondents consider marred by factual mistakes, inaccuracies, etc.). And 50% say they are concerned by hyperpartisan political content, where facts are spun or twisted to push a particular agenda, whether from politicians, pundits or publishers.
  • So, when many Indians in the run-up to the elections say they are concerned about what is real and what is fake on the Internet, this is clearly in part about social media and digital platforms. But unfortunately, it is also about some news media and some politicians who people see as part of the disinformation problems that India faces. It is only a few years ago that the Press Council of India said that “the phenomenon of ‘paid news’ has acquired serious dimensions”, “goes beyond the corruption of individual journalists and media companies and has become pervasive, structured and highly organised.” The Press Council concluded: “It is undermining democracy in India.” Cobrapost’s sting operation last summer, which exposed large media houses willing to peddle propaganda as news, demonstrates that some of these problems persist.
  • Low trust in institutions

  • Beyond the rise of digital media, the backdrop of disinformation problems in India is thus low trust in established institutions. Though there are some admirable exceptions, established institutions often seem to fail the people who rely on them. Other studies have found low trust in politicians and political parties. Our own survey shows that just 36% of respondents feel they can trust most news most of the time, statistically indistinguishable from the 34% who say they trust news found via social media.
  • Addressing the issues

  • What can be done do address these issues? It is clear that platform companies have much to do to improve their content moderation and contain disinformation. Facebook has announced that it currently has over 500 full-time employees and at least 3,500 external contractors who focus on election work, on top of the 30,000 people across the company focused on safety and security issues. (Given the fact that India accounts for more than 10% of the global user base of both Facebook and WhatsApp, and is growing rapidly, it would be good to know how many of these people are focused specifically on India.)
  • Similarly, it is troubling that some coordinated attempts to amplify and spread misleading and false information sometimes seem to emanate from major political parties and activists who support them. This ought to stop, and if it does not, has to be continuously and critically covered by independent journalists to ensure that people are aware of what is going on. Finally, it is clear that Indian news media has a lot of work to do if it wants to gain the trust of the Indian public. Many express high levels of trust in some individual brands, most notably major newspapers and some broadcasters. But many news media are not trusted.
  • In a situation where disinformation seems to be everywhere, and digital platforms, some politicians and some news media are intertwined in these problems, we can only hope that those news media which genuinely do stand out as providers of credible information are able to convince people that they provide exactly that — news that is worthy not only of people’s attention, but also their trust.
  • Rasmus Kleis Nielsen is Director of the Reuters Institute for the Study of Journalism and Professor of Political Communication at the University of Oxford. Twitter: @rasmus_kleis
  • Deconstructing addiction

    The simple home truth is that love and work are all we need for a better life

  • Acclaimed musician Sarah McLachlan sings in her addiction anthem Angel: “You are pulled from the wreckage of your silent reverie.” She wrote the song inspired by the tragic death of the Smashing Pumpkins keyboardist, Jonathan Melvoin, in the 1990s. In recent years, the stories and statistics on addiction have only escalated in intensity and number. This can be attributed to several reasons, one of them being an increasingly socially disconnected world — and no, the number of friends you have on Facebook doesn’t really count.
  • In the late 1970s, a series of controversial experiments, the Rat Park experiments, were conducted by Canadian psychologist Bruce Alexander. Their results, while widely debated, aimed to prove a seminal hypothesis: that substance abuse is an outcome of environmental isolation, and therefore can be overcome with reintegration of the afflicted individual into society in a meaningful way. While that was not proven as an absolute, there has been further research into this area of psychology that suggests that there indeed exists a positive correlation between environmental enrichment and positive recovery from substance abuse.
  • There is copious literature about the best approach to treating addiction, ranging from judgment (“what a weak and selfish person”) to mollycoddling (“it’s a disease; you’re not responsible”). There are many psychotherapeutic and chemical-based treatment options as a result, which have, no doubt, been game changers in the field. But I have come to believe the simple home truth: that love and work are all we need for a better life.
  • First, we must dispense with nouns dealing with addiction. This means not calling a hooked individual an ‘addict’. There is a permanency to that label that is discomfiting to anyone who wishes to clear the slate. And isn’t that what life’s journey is about — salvation? Evolving into a higher being? No pill is needed for that.
  • Which begs the question, what if there is unemployment and zero love? That’s where self-love comes into play. That everything we need to become a complete, compassionate individual lies within us. This is a realisation that occurs with time, experience, age and having a few dark nights of the soul. But when that dark night passes, the world view that the individual has acquired is infinitely larger — and one that accommodates the humanity required to forgive ourselves and forget.
  • There is too much adventure and wonderment in this world to sit by the sidelines, no matter how branded a soul you may possess. Having the fortitude to try again is what redeems us.
  • The writer is based in Chennai