Tuesday, March 27, 2012

Defending the indefensible

(First published in The Pioneer dated March 27, 2012)


The latest incident of China conducting a ‘live-fire’ exercise in the Tibet Autonomous Region bordering India to test its multi-role J-10 fighters armed with laser-guided bombs is a reminder that India must always be in a state of ‘quality preparedness’, and not just ‘preparedness’ — which the Union Ministry of Defence points out that our Armed Forces always are. Of course, our Armed Forces are ever prepared and willing to take on any challenge to the country’s security and sovereignty and they can be trusted more than many other wings of the Government to perform their task fearlessly and with sincerity. But they also need to be equipped with the best arms and ammunition that are available in the market and be backed by the requisite logistical support. This requires a committed political push that must transcend platitudinous talk and convert into action on the ground. Unfortunately, that has not been really happening. The Budget allocation for defence for the year 2012-13 tells the story.

While it is true that there has been a ‘substantial’ increase by more than 17 per cent in the allocation for defence in the coming fiscal, this increase is based on the Budget Estimate for the year 2011-12. It is actually close to only 13 per cent when the figure for the Revised Estimate is taken into consideration. Of the Rs 1,93,407 crore that has been allocated, less than half — Rs 79,500 crore — is going to be spent on procuring modern weapons. The rest will largely be used in areas such as salaries, pensions and other maintenance costs. In 2011-12, the pay component represented more than 31 per cent of the total defence budget and comprised some 28 per cent of the defence budget growth. In other words, the hike in defence allocation by a mere 13 per cent is not going to give the Armed Forces the kind of money they need to invest in medium and long-term modernisation projects, but it will just about suffice to take care of the immediate commitments or near-commitments of purchase of equipment that they have made in recent months, such as for 126 Medium Multi-Role Combat Aircraft, 145 Ultra Light Howitzers and 197 Light Utility Helicopters.

Even if we take the relatively healthier figure of a 17 per cent increase over the Budget Estimate as an indicator of the good things to come, if only to put up a feel-good fa├žade, there is another dampener: Our Budget allocation for defence is a piffling 1.90 per cent of the Gross Domestic Product, which is marginally up from an equally pathetic 1.84 per cent in 2011-12. The reason for this near-stagnation is the repeated failure of the Defence Ministry to aggressively push its agenda before the Government and extract respectable allocations. After all, the Government has found the means to allocate higher funds to social sectors and other areas whose Ministers have been pushy enough or have had the clout to take their case right up to UPA chairperson Sonia Gandhi. Although Union Minister for Defence AK Antony too enjoys that rare access to Ms Gandhi, he has not been able to use it to the advantage of the Armed Forces.

In fact, the only time in recent memory when the defence allocation went up significantly was in 2009, a few months after the 26/11 Mumbai terror attacks. The allocation was the hiked by as much as 34 per cent. Do we need terror attacks to make the Government sit up and realise that defence is a priority sector too?

The Defence Ministry should have been more assertive, more so when several Standing Parliamentary Committees on Defence have repeatedly recommended allocations that should be at least three per cent of the GDP. But the lack of aggression on Mr Antony’s part to make this happen became evident after the Budget proposals were announced. He expressed satisfaction over the 17 per cent hike and claimed that the Union Minister for Finance had assured him of more funds in case the Armed Forces needed them in time to come. Mr Antony is a Minister with impeccable personal integrity and has been able to steer a Ministry that has had a notorious reputation for shady deals, away from controversies. Unfortunately, his eagerness to maintain that clean image has also resulted in various decisions being halted in their tracks. If there is one establishment that cannot afford status quoism and paralysis in decision-making, it is the Defence Ministry.

Any move to hike defence allocation and accept the levels of modernisation that our Armed Forces need are guided largely by the external environment — on what is happening across the borders. Strangely, it is a reality that our political establishment shies from acknowledging on the record. This has made the UPA Government almost apologetic over every measure (relatively small and few) that it has taken to upgrade the country’s defence needs. Every time it has taken a step in that direction, particularly along or close to the Line of Actual Control bordering China, the Government has been quick to dismiss the suggestion that it was doing so to counter Beijing’s designs. ‘Our measures are not country-specific’, has been the refrain of the Government. But defence upgrades do not take place in a vacuum. If there is nothing to defend against, why spend money on defence? We have a volatile neighbourhood and countries in the region like China, Pakistan and Nepal have been giving us sleepless nights. It is because they are the way they are that we have to continuously upgrade our defence needs to a larger extent that we presently are doing.

These countries have never been defensive about their designs. A World Bank report in 2011 said China’s military expenditure was reported at 2.01 per cent of its GDP in 2010. Since China’s economy is much larger than India’s, this two per cent of GDP translates into several billions of dollars in excess of what India plans to spend. Take just one figure: India plans to spend over $100 billion on defence acquisitions in the next five to 10 years. It is an impressive figure, but is only 40 per cent of what China spends on its defence. Pakistan too had increased its defence allocation by 12 per cent in 2011-12.

The fact that India has overtaken China as the world’s biggest importer of weapons does give the impression that our defence establishment has at last woken up to the reality of modernising fast. According to the Stockholm International Peace Research Institute, imports from India now account for close to 10 per cent of the total global arms market. But this surge has less to do with any sustained upgradation measure that the country has been engaged in, say over the last decade. It’s the clutch of recent deals that India has entered into with foreign suppliers or is in an advanced stage to close that has given it the ‘distinction’ of emerging as the world’s leading arms importer.

It also has to do with China’s decision to concentrate on indigenous production of defence products such as stealth fighter jets and aircraft carrier-related material, after it had recently been on a buying spree. Still, China’s share of the global import market is at a formidable five per cent. But the most interesting aspect in all this — and India cannot have ignored that — is that China is also an exporter of arms. According to SIPRI, China is now the world’s sixth largest seller of defence equipment, only behind the US, Russia, Germany, France and Britain. Pakistan is one of its valued clients. The significance of this development is too obvious to need further mention.

Tuesday, March 20, 2012

Taxing foreign investors

(First published in The Pioneer on March 20, 2012)


The Union Budget is generally not used as an instrument to target individuals or institutions that have embarrassed the Government. It is normally not used to propose amendments to laws with retrospective effect so that these individuals or institutions are offered no route to escape the fury of the regime. Unfortunately, the Congress-led UPA Government has done just that in the Budget for 2012-13, while it has failed to apply its mind to tackling many other more important problems confronting the country’s economy. But then, little else can be expected from the Congress which has even had the temerity to amend the Constitution with retrospective effect to nullify orders of the court with the sole objective of saving its leader and maintaining its vice-like grip on the people immediately preceding and during the dark days of the Emergency.

The sly manner in which the Government has gone about fixing Vodafone, without naming the firm, by seeking to amend with retrospective effect a slew of provisions in the Income Tax Act, 1961, to make the telecom major cough up Rs 11,000 crore by way of capital gains tax, is eerily similar to what the Congress had done in August 1975 when it amended Article 329 as well as Schedule 9 to negate a judgement of the Allahabad High Court which had invalidated Mrs Indira Gandhi’s election to Parliament. The judgement followed Raj Narain’s petition accusing her of electoral malpractice. The Constitution (39th Amendment) Act was passed, under which a new provision, Article 329A, was added. According to this Article, election to either House of Parliament of a person who holds the office of Prime Minister at the time of such election shall not be called in question. Any pending election petition would abate. This Article was repealed through the Constitution (Forty-fourth Amendment) Act, 1978, after Mrs Gandhi was defeated and the Congress lost power in 1977.

Although the Supreme Court set aside the judgment of the Allahabad High Court in November 1975, the Congress Government decided to take no chances, and a year later brought the Constitution (42nd Amendment) Bill which provided for the amendment of Article 368 dealing with the power of Parliament to amend the Constitution. The new provision removed all restrictions on Parliament’s power to amend, thus subverting the Supreme Court’s landmark verdict in the Kesavananda Bharati case in 1973. The Bill later became law which was subsequently repealed by the Janata Party Government through the 43rd and the 44th Amendments that largely reinstituted the position that prevailed before the 39th Amendment came into being.

The UPA Government’s response through the provisions in the Budget for 2012-13 aimed at cutting Vodafone to size has come after the Government received a setback in the Supreme Court. The court had in January set aside a Bombay High Court order which had directed Vodafone International Holdings to pay the Income Tax Department Rs 11,000 crore as tax after the telecom major had acquired a majority stake in Hutch Essar and entered the Indian telecommunication market. The Supreme Court made two important observations in arriving at the verdict: First, since the acquisition was conducted through an agreement that was finalised offshore, the Indian tax authorities had by law no jurisdiction over the transaction. Second, there was nothing to suggest that Vodafone had entered into the offshore transaction with the purpose to avoid being taxed in India where it launched operations subsequent to the finalisation of the deal.

If the Government believed that the existing laws contained loopholes which allowed companies with assets and business interests in India to escape from paying capital gains tax because the acquisitions had been done offshore, it could have amended those provisions and brought such deals under the tax laws with prospective effect. No eyebrows would have been raised and the Government would have sounded credible in saying that it could not allow the country to become a tax haven. Even the Supreme Court had said that the Vodafone case was an “eye-opener” for the Indian legislature to take measures to meet situations that arise due to “what we lack in our regulatory laws”. The Government did open its eye after the verdict, but only to seek a negation of the verdict.

Of course, even after the Government gets the Finance Bill passed with these provisions, it will not be the end of the story. It could herald the beginning of another battle in the courts, because many experts believe that the proposal to amend the tax laws with retrospective effect (ridiculously with effect from 1962) is bad in law and may be challenged. It is certain that after the Budget is adopted, the Government will re-open the case against Vodafone, triggering perhaps a fresh round of litigation.

The constitutional validity of a retrospective amendment may not be in doubt, but what is equally unambiguous is that the right of the legislature to amend laws with retrospective effect is not unfettered. For instance, the Supreme Court had in the case of Sri Prithvi Cotton Mills versus Broach Borough Municipality, analysed the validity of the retrospective amendment of a statute. It said, “In testing whether a retrospective imposition of a tax operates so harshly as to violate fundamental rights under article 19(1)(g), the factors considered relevant include the context in which retroactivity was contemplated such as whether the law is one of validation of taxing statute struck-down by courts for certain defects; the period of such retroactivity, and the decree and extent of any unforeseen or unforeseenable financial burden imposed for the past period etc.”

The Government’s desire to tax companies with retrospective effect — and that too through a mere ‘clarification’ to the Income Tax Act — is bad politics and worse economics. The issue is not limited to Vodafone any more, since it impacts the image of India among foreign investors as a country worth investing in.

The statement of an official of the Union Ministry of Finance that foreign direct investment is not “primarily dependent upon tax, but is more governed by aspects like huge domestic market, low cost of operation, low labour cost and huge skilled manpower”, ignores the basic fact that, all of the factors which he has listed are irrelevant if there is no transparency and stability in the laws that govern such investment.

Muslim votes did Mayawati in

(First published in The Pioneer dated March 13, 2012)

Now that the Samajwadi Party has trounced the Bahujan Samaj Party in the polls and stormed back to power in Uttar Pradesh with a commanding mandate that the party has never enjoyed in the past, it has become fashionable to say that the people of the State have risen above caste and religious considerations to elect a Government. Some analysts have been tempted to even compare the verdict with that of neighbouring Bihar which broke free from the caste web that Mr Lalu Prasad Yadav had spun and ensnared the voters in for years together. But such a comparison is inaccurate for the simple reason that, in Bihar the political shift has been on a gigantic scale with the JD(U) and the BJP forming a coalition to break Mr Lalu Prasad Yadav’s back. In Uttar Pradesh, there has been no such creative political restructuring. The result, therefore, is reflective more of shifting loyalties than about representing a new social order.

The State’s two prominent castes have voted in nearly exactly the same manner that they did in the 2007 Assembly election. The Dalits have voted for Ms Mayawati and her BSP and the Yadavs have voted for Mr Mulayam Singh Yadav and his SP. What has changed since 2007 is that the Muslim voters this time returned to their old habitat, the SP. A large section of these voters had five years ago backed the BSP on Ms Mayawati’s promise to give them a better deal. The alienation of the minority voters in Uttar Pradesh was complete by the time the Lok Sabha election was held in 2009, and the immediate beneficiary then became the Congress. Since then, the Congress has lost momentum although it continued to shower the Muslim community with all sorts of fantastic assurances. With the anti-incumbency factor working against Ms Mayawati and the SP pledging a far more lucrative deal, the Muslims returned to the SP’s fold.

If there was a socio-political restructuring in recent times, it was in 2007 when Ms Mayawati achieved the seemingly impossible: She brought the caste highest in the social order and the caste lowest on the social ladder on a common platform and forged an alliance that won for her party more than 200 seats in the Uttar Pradesh Assembly. Brahmins and Dalits voting for a common candidate had become a thing of the past; the phenomenon existed during the Congress’s heyday before the Mandal storm and Mayawati hurricane arrived and blew the combination apart. In the election of 2012, we have seen that the Brahmin voters have divided their loyalties among the BJP, the Congress and to some extent the SP. Again, this is not a new development, because the Brahmins and other upper castes in the State have been with the SP, the Congress and the BJP earlier.

Had the SP been successful in winning over sizeable, if not all, sections of the Dalit voters, it would have qualified as a political revolution. Since that has not happened, the SP has an opportunity — now that it is in power — to prepare the ground for such a transition. But there are little indications that the party is even thinking on those lines. Either it has already given up on the venture of winning over the Dalits as being ‘impractical’ or it is so consumed by the traditional OBC dislike for the lower castes that it is unable to break free from the shackles of prejudices of the past.

Whatever may be the reason, the present offers an opportunity for the SP to undo its past and extend its political patronage to the Dalits. It must understand the ground situation to convert its political foes into allies. Ms Mayawati had succeeded in giving the Dalits a sense of ‘dignity’ more than anything else. The Dalits got little in terms of real development: Their economic situation remained as pathetic as it had been before she came to power, their educational standards stagnated at previous levels and they remained as deprived as always of basic amenities like potable water and electricity in the rural areas of the State. Ms Mayawati did nothing to address their economic plight. All that they received from her is that sense of ‘dignity’ from the administration, the police and others who had once treated them with contempt.

Can the Samajwadi Party ensure for the Dalits the ‘dignity’ which they received during Ms Mayawati’s regime? If it can do so and top it up with some concrete welfare measures that the BSP failed to deliver, the SP may yet win them over. After all, if the BSP could attract the upper castes in 2007, why cannot the SP gain the trust of the Dalits, who comprise more than 20 per cent of the State’s population?

But, while it may be true that there has been no social engineering of the kind that was witnessed in 2007, it is also a fact that the voters, including the Dalits, are eager to see real social and economic progress. Since the SP enjoys an industry-friendly image, it should not be difficult for the party’s Government to kick-start infrastructure and other projects that have been languishing for some years now. If the new Government manages to spread the benefits of economic growth across the State and across caste and community lines, it will win over new voters and expand its base.

Ms Mayawati would like to give the impression that the economy has done well during her tenure. Indeed, the State’s Gross Domestic Product grew at a healthy rate of more than seven per cent over the last five years, touching over eight per cent in 2010-2011. But few people in the State have benefited from this, and least of all the Dalits or the other disempowered groups. Close to 25 per cent of the incidents of infant mortality have been reported from Uttar Pradesh. In most other social indices the State continues to score poorly and is placed near the end of the table of the best performing States in social indicators.

According to Human Development Report 2011, just 49 per cent of total households in the State had electricity for domestic use in 2008-09; the figure for rural households was an abysmal 37.6 per cent. These are statistics, but in reality many of the households are only nominally connected to electric poles that do not have power supply. The Human Development Report also points out that projected life expectancy at birth in the State during 2006-10 had been 64.2 years, which is lower than the figures available for most other States.

Many of these poor performing indicators have directly impacted the plight of the Dalits. It is, thus, logical to expect that the situation of the Dalit population would improve if Mr Akhilesh Yadav’s Government paid attention to pulling the State out of the morass it is stuck in. The cost of failure will be enormous. The SP must not forget that the BSP has secured 26 per cent of the votes and can, therefore, regain the advantage at the slightest hint of failure by the new Government.

Assertive judiciary, diffident executive

(First published in The Pioneer dated March 6, 2012)


It will be an exaggeration to say that the UPA Government and the Supreme Court are locked in a major confrontation with each other or that they are on a collision course. But recent developments do indicate that the two have begun to share an uneasy relationship, where one adjudicates and the other seeks a review of the verdict. Such happenings are not uncommon in a vibrant democracy. But what is somewhat rare is that the Supreme Court has delivered half a dozen back to back judgements against the Government and made scathing observations which have left the Congress-led UPA squirming in discomfort and itching for a reversal of those rulings and remarks.

Not too long ago, when KG Balakrishnan was Chief Justice of India, this sort of uneasiness did not prevail. He did nothing that would embarrass the Government, although he had plenty of valid reasons to do so. For one, the 2G Spectrum scam broke out during his tenure, but for him it did not exist. Given the enormity of the expose in the media on the scam, he could have even taken suo motu notice of the spectrum loot and sought a response from the Government much before the scam blew up in the Congress-led UPA’s face. In another instance, he effectively bailed out then Telecom Minister A Raja when he refused to take cognisance — let alone act — over a report forwarded to him by the Chief Justice of the Madras High Court that Raja had tried to influence one of the High Court’s judges to favour the Minister’s friend in a case. These are just two instances.

But the equation changed dramatically after Mr Balakrishnan retired and Justice SH Kapadia took over as Chief Justice of India. Since then, the Supreme Court has become more demanding, putting the UPA on the mat on a number of issues and generally being ruthless in ticking off the Government. Such has been the breadth of the Supreme Court’s recent reach that people have begun to wonder if the UPA has outsourced governance to the Supreme Court. The court has had to step in largely because the Government has been struck by a paralysis in decision-making. The result is that even in matters where the Supreme Court normally has no reason to intervene, it has done so. That the Supreme Court has begun to set the agenda is because an inept Government has allowed it to do so.

If a survey is conducted among the people of the country on whether they believe the Supreme Court is right in deciding on issues that are within the domain of the executive, the result could well be in the court’s favour. This is because the people are so disgusted and distressed by the performance of the UPA that they have begun to believe in the Supreme Court’s powers to ‘govern’ them. It’s a perception that even the Supreme Court will not like or want it to be sustained, because any belief that the court is working at cross-purposes with the Government does neither the Supreme Court nor the executive any credit. Yet, with a bumbling Government and an unrelenting judiciary, that is precisely the impression which is being fortified with each passing day.

Let us begin by considering two recent cases to demonstrate the active intervention of the judiciary and the ridicule it has heaped on the Government. The first is the issue of decriminalisation of homosexual relationships. Hearing an appeal against a Delhi High Court verdict which removed consensual homosexual relationship from the ambit of Section 377 of the Indian Penal Code, the Supreme Court made fun of the Union Government’s ‘neutral stand’ on the issue, wondering how the Government could not decide whether it was for or against a particular law. But before doing that, it pulled up the counsels for the Government for taking diametrically opposite positions on the subject and wasting the court’s time. The court had a good time, therefore, first in assailing the UPA’s conflicting stand and then for its supposed neutrality. The case has amply shown that the Supreme Court is in no mood to be lenient towards the Government and bail it out when the latter is caught in a cleft-stick.

The second instance is to do with the Supreme Court’s directive to the UPA regime to implement the project of linking the country’s rivers. The UPA had shelved the scheme that had been mooted by the NDA Government in 2002. The issue here is not the merit of the project, but the fact that the court is making policy decisions for the Government. It was the NDA’s right to have formulated the project and it was well within the right of the UPA to discard it. The unprovoked decision of the Supreme Court, which has come as a bolt from the blue, demonstrates the (low) esteem in which the court holds this Government — so low, in fact, that it dares to direct the Government to implement a policy which is in the domain of the executive. It would not be incorrect to say that this is not a very comforting development for those who believe in the supremacy of democracy.

This low-key and subtle tussle between the UPA and the Supreme Court is reflected in the two verdicts that the apex court has delivered recently in connection with the 2G Spectrum loot, and on both of which the Government is seeking a review. In one case, the court said that private citizens can approach the Government to seek sanction for the prosecution of a public servant and that the Government was obliged to respond within four months of receiving the request for sanction. Clearly, the UPA is uncomfortable with the imposition of such clarity in accountability and is hoping to raise ‘legal issues’ to somehow scuttle or at least dilute the verdict. The second judgement has to do with the cancellation of the 122 telecom licences. Here again, the Government is not willing to give up without a fight and is doing everything, directly and indirectly, to somehow derail the verdict.

As if these were not causes enough for the Supreme Court and the UPA Government to be at loggerheads, there is another verdict that has raised the Government’s hackles and placed it in a direct disagreement with the judiciary. This pertains to the court’s recent ruling in favour of Vodafone International Holdings, which had been ordered by the Income Tax authorities to cough up Rs 11,000 crore by way of taxes for the deal the telecom major had struck abroad with Hutch Essar to enter the telecom market in the country.

Ruling in favour of Vodafone, the Supreme Court said the deal did not come within the jurisdiction of the Indian tax authorities. Stung at the prospect of losing such a huge sum, the UPA has decided to challenge the verdict. The ruling was a scathing attack on the lack of financial understanding within the Government.

These are only some examples. More such admonitions have taken place. The court’s verdict slamming the Government for the crackdown on Baba Ramdev’s supporters, the court's insistent follow-up on action the UPA has been taking over the issue of black money and its directive to the Government to explain what action it has taken on complaints that former Chief Justice of India KG Balakrishnan had amassed wealth disproportionate to his sources of income are some of the instances where the Government has been put in the dock.

Since more face-offs are expected in the coming months, it remains to be seen as to who emerges worthier in the end — the UPA Government or the judiciary.