Dear Prime Minister,
The people have spoken. Now comes the hard part. Expectations of replicating the "Gujarat Model" across the country will determine how the electorate judges your performance and of the Bharatiya Janata Party, particularly with the clear mandate that you have meticulously advanced by an entire round of Lok Sabha elections.
Opinions on what this should involve will vary. Chambers of commerce will send in the first-100-day-agenda statements (if only the problems of the economy can be addressed in 100 days) while data-warrior economists will quote statistics to canvass diametrically-opposite measures. Suggestions you receive would range from the simplistic to the complex; from the motivated to the well-intentioned; and of course, despite the best of intentions, suggestions may range from the preposterous to the counter-productive. Against this backdrop, this column lists five specific things that the new government should or should not do. These are not being proffered as the most important steps to take. These also do not constitute a magic wand that would make India's problems vanish. Yet, these are steps that in this column's belief would be good things to do.
First, the idea of heading a government of resurgent nationalistic economic superpower can be very tempting to set up an Indian sovereign wealth fund ("SWF"), but you should stay away from the idea. SWFs are typically created out of foreign exchange surpluses, but can also be set up as state-owned financial institutions that make investments in businesses across the globe. An Indian SWF can be tempting if presented as an avenue to make commercial investments in businesses and infrastructure of weaker economies and make them beholden to India. Examples of China building ports in Sri Lanka or middle-eastern SWFs bailing out Wall Street would be cited to urge you to create a tool of economic diplomacy. Rebuff them.
As you know, India is not exactly an economic superpower. Sovereign money is not to be risked and squandered lightly. Segments of Indian population as large as entire national populations are still poor and go to bed without basic nutrition. Statistics of poor Indians are highly controversial and disputed numbers range from 421 million to 148 million. The outgoing government would support the lowest number.
But the electorate disagreed and threw it out. Leaving poverty statistics aside, don't forget your promise of running a small government. Recall Arun Shourie's stellar job in divesting government's interests in commercial business.
Second, a number of claims by foreign investors in India under bilateral investment treaties are waiting for your attention. This is where economic diplomacy needs to be brought to bear. Try to project future economic opportunities convincingly to get these counterparties to re-negotiate these treaties. Many of them have been negotiated and executed with no experience or competency on the Indian side, and they enable private arbitrations over sovereign disputes. Yet, the claims pending under them could be based on strong grounds in substance.
This is one area where you may need to provide leadership and take unpopular decisions to settle these disputes to look ahead. Side point: do refrain from setting the Central Bureau of Investigation on public servants who negotiated these treaties - that would certainly make India a bigger laughing stock.
Third, the Financial Sector Legislative Reform Commission (FSLRC) has done really detailed work over two years, and made powerful recommendations independent of the outgoing government. Implementing the FSLRC report would create a financial regulatory system that would truly befit the third largest economy in the world. Use your numbers to resist the historical antipathy of your coalition partner to the FSLRC's chairman Justice B.N.Srikrishna. This is one area where focus on the message rather than the messenger would be apt. Regulators, some subtly and others openly, would come up with various reasons to oppose a range of the FSLRC recommendations. It would be important to sift the grain from the chaff. Whatever be your preferred pace, directionally, the FSLRC route is the way to go to meet the regulatory needs of your projected economic future of India.
Fourth, the politics-neutral P J Nayak Committee report given to the Reserve Bank of India when polling was underway, on corporate governance in the banking sector needs an urgent reading and even more urgent implementation.
The breakdown of governance in nationalised banks poses a serious risk of government having to infuse more good money after bad into these banks' capital. The new company law which the BJP helped pass last year has galloped way ahead of the law dealing with governance of public sector banks. Repel attacks on the report on the ground that it allegedly calls for bank privatization.
Far from it - even if government continues to keep owning these banks, it would be really smart to implement the governance reform and create value for your bank equity holdings.
Finally, it is always tempting to let regulators loose on foreign financial institutions suspected of having played banker to offshore money belonging to opposition parties. Now that the elections have been emphatically won decimating the opposition, it would be useful to adopt an ownership-neutral approach to enforcing against foreign-held-Indian money. Chase violators of exchange controls by all means. But do it uniformly or not at all. Taking action against one foreign bank for vague ostensible reasons without publicly stating the real reason for their being chased creates uncertainty for others who always comply with law.
It is impossible to measure how much capital refrains from coming to India due to regulatory uncertainty. This last bit will be a recurring theme in all the regulatory reform that you would need to oversee.
Sincerely, without any contempt.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.
somasekhar@jsalaw.com
The people have spoken. Now comes the hard part. Expectations of replicating the "Gujarat Model" across the country will determine how the electorate judges your performance and of the Bharatiya Janata Party, particularly with the clear mandate that you have meticulously advanced by an entire round of Lok Sabha elections.
Opinions on what this should involve will vary. Chambers of commerce will send in the first-100-day-agenda statements (if only the problems of the economy can be addressed in 100 days) while data-warrior economists will quote statistics to canvass diametrically-opposite measures. Suggestions you receive would range from the simplistic to the complex; from the motivated to the well-intentioned; and of course, despite the best of intentions, suggestions may range from the preposterous to the counter-productive. Against this backdrop, this column lists five specific things that the new government should or should not do. These are not being proffered as the most important steps to take. These also do not constitute a magic wand that would make India's problems vanish. Yet, these are steps that in this column's belief would be good things to do.
First, the idea of heading a government of resurgent nationalistic economic superpower can be very tempting to set up an Indian sovereign wealth fund ("SWF"), but you should stay away from the idea. SWFs are typically created out of foreign exchange surpluses, but can also be set up as state-owned financial institutions that make investments in businesses across the globe. An Indian SWF can be tempting if presented as an avenue to make commercial investments in businesses and infrastructure of weaker economies and make them beholden to India. Examples of China building ports in Sri Lanka or middle-eastern SWFs bailing out Wall Street would be cited to urge you to create a tool of economic diplomacy. Rebuff them.
As you know, India is not exactly an economic superpower. Sovereign money is not to be risked and squandered lightly. Segments of Indian population as large as entire national populations are still poor and go to bed without basic nutrition. Statistics of poor Indians are highly controversial and disputed numbers range from 421 million to 148 million. The outgoing government would support the lowest number.
But the electorate disagreed and threw it out. Leaving poverty statistics aside, don't forget your promise of running a small government. Recall Arun Shourie's stellar job in divesting government's interests in commercial business.
Second, a number of claims by foreign investors in India under bilateral investment treaties are waiting for your attention. This is where economic diplomacy needs to be brought to bear. Try to project future economic opportunities convincingly to get these counterparties to re-negotiate these treaties. Many of them have been negotiated and executed with no experience or competency on the Indian side, and they enable private arbitrations over sovereign disputes. Yet, the claims pending under them could be based on strong grounds in substance.
This is one area where you may need to provide leadership and take unpopular decisions to settle these disputes to look ahead. Side point: do refrain from setting the Central Bureau of Investigation on public servants who negotiated these treaties - that would certainly make India a bigger laughing stock.
Third, the Financial Sector Legislative Reform Commission (FSLRC) has done really detailed work over two years, and made powerful recommendations independent of the outgoing government. Implementing the FSLRC report would create a financial regulatory system that would truly befit the third largest economy in the world. Use your numbers to resist the historical antipathy of your coalition partner to the FSLRC's chairman Justice B.N.Srikrishna. This is one area where focus on the message rather than the messenger would be apt. Regulators, some subtly and others openly, would come up with various reasons to oppose a range of the FSLRC recommendations. It would be important to sift the grain from the chaff. Whatever be your preferred pace, directionally, the FSLRC route is the way to go to meet the regulatory needs of your projected economic future of India.
Fourth, the politics-neutral P J Nayak Committee report given to the Reserve Bank of India when polling was underway, on corporate governance in the banking sector needs an urgent reading and even more urgent implementation.
The breakdown of governance in nationalised banks poses a serious risk of government having to infuse more good money after bad into these banks' capital. The new company law which the BJP helped pass last year has galloped way ahead of the law dealing with governance of public sector banks. Repel attacks on the report on the ground that it allegedly calls for bank privatization.
Far from it - even if government continues to keep owning these banks, it would be really smart to implement the governance reform and create value for your bank equity holdings.
Finally, it is always tempting to let regulators loose on foreign financial institutions suspected of having played banker to offshore money belonging to opposition parties. Now that the elections have been emphatically won decimating the opposition, it would be useful to adopt an ownership-neutral approach to enforcing against foreign-held-Indian money. Chase violators of exchange controls by all means. But do it uniformly or not at all. Taking action against one foreign bank for vague ostensible reasons without publicly stating the real reason for their being chased creates uncertainty for others who always comply with law.
It is impossible to measure how much capital refrains from coming to India due to regulatory uncertainty. This last bit will be a recurring theme in all the regulatory reform that you would need to oversee.
Sincerely, without any contempt.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.
somasekhar@jsalaw.com