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10 ISSUES AND INSIGHTS

MUMBAI | WEDNESDAY, 16 NOVEMBER 2016

>

Who wants a coal power plant?

81 companies commit to 100% renewable electricity

VANDANA GOMBAR
he announcement of Donald
Trump as the next President of
the US earlier this month saw an
immediate spike in the share price of
coal companies such as Peabody, as
investors braced for a sharp swift in policy towards coal. Different headlines
have been emerging from the rest of the
world, however, as worries about emissions took centre-stage.
The emergency plan to tackle alarming pollution levels in the capital city of

Delhi included a temporary shutdown tunate loss of life of 33 people working

of the Badarpur coal power plant. It was in an underground coal mine earlier
also singled out for closure last year, this month.
when it became difficult to breathe.
France meanwhile decided to exit
This scenario could be repeated in oth- all coal power generation by 2023,
er cities in the country
according to a statement
where popular pressure India is already
by the countrys Energy
forces the temporary, or scaling back plans for and Environment Minieven permanent, closure new coal projects, as ster Segolene Royal on
of a coal plant. This is a risk demand for power
November 3, a move that
that needs to be priced in wanes. Just about
may have been dictated
by lenders to new coal proj- half of the
more by economics than
80-gigawatts
ects.
anything else, according
India is already scaling pipeline of projects is to Bloomberg New Energy
back plans for new coal likely to be actually
Finance. Low European
projects, as demand for built, Coal Secretary
gas prices and renewables
power wanes. Just about Anil Swarup said
are impacting the profhalf of the 80-gigawatts earlier this year
itability of coal power
pipeline of projects is likeplants on the continent.
ly to be actually built, Coal Secretary
In the rest of Asia, there are
Anil Swarup told Bloomberg News ear- protests against coal plants even in
lier this year.
countries that sorely need power.
China the worlds largest produc- Take the 1,320-megawatts Maitree
er and consumer of coal was strug- power plant in Bangladesh, on the
gling to come to terms with the unfor- edge of the Sunderbans mangrove for-

CLEAN POWER
Number of companies committed to 100%
renewable energy

Jan 2015
Jan 2016
Sep 2016

15
50
81

(including Walmart, Unilever, UBS, Swiss Re,

Starbucks, Nestle, Nike, Microsoft, Infosys, Ikea,
Tata Motors, Google, Goldman Sachs, Apple,
bank of America and Coca Cola)
Source: RE100

est, which is being built with in partnership with India. UNESCO is the latest body to join the movement against

the plant, citing a serious threat to

the heritage site.
In Myanmar, the local population is
campaigning against the restart of the
120-megawatts Tigyit coal plant. Sri
Lanka has decided not to go ahead with
the coal power plant planned with
Indias NTPC in the Trincomalee district, giving in to protests against it.
A gas-powered plant is being
planned instead.
A 500-megawatts coal-fired plant
proposed by POSCO at its Pohang
Steel Industrial complex in Korea is
unlikely to go ahead due to protests
from local residents and environmental groups. There are other coal
plants in the country that have been
suspended, or delayed due to local
protests.
Until clean-coal ceases to be an oxymoron, there will be countries that
would pitch for the coal-free tag, if they
could afford it. There are certainly many
companies committed to getting all their
power from renewables, and that list is
growing fast.

> CHINESE

WHISPERS

An unusual trip
A leading Korean small car maker looking to
enter India took a few journalists on a
sponsored trip to South Korea recently.
However, it was an unusual trip for the
journalists in more ways than one. While
the company remained tight-lipped about
its India plans, a big team from the
company grilled the journalists about the
Indian car market for two consecutive days.
Indeed, some journalists had to give in
writing that if they filed a report on the
companys India plans, it would have to be
treated as a purely speculative piece.

Singing a different tune

The writer is editor (global policy) for

Bloomberg New Energy Finance.
vgombar@bloomberg.net

Gridlock leaders get trapped into

Ratan Tata is trapped in a gridlock of his own making in the imbroglio against Cyrus Mistry. Did the passion of the business leader get
in the way of institutional objectivity and decision-making at the Tata group, asks the author in the first of a two-part series
this category.
The nature and extent of opposition
to the moves of the Tata Trusts to get
Mistry removed somehow from group
companies is reflective of the bottled up
frustrations of some of the key stake
holders to hit back. Outgoing leaders do
not always expect such forces to gather
momentum quickly and hit back.

KAVIL RAMACHANDRAN
he knot is getting tighter with
every new step adding to the existing complications. The unanimous decision of the independent directors of the Tata-controlled Indian Hotels
to reaffirm confidence in Chairman
Cyrus Mistry has further weakened
Ratan Tatas position in the current
imbroglio. Reports on the possibility of
the scene replayed at the forthcoming
board meetings of other major Tata
group companies are a sign of the worsening situation.
Ratan Tata has got trapped in a gridlock of his own making. There have
been implicit signs of the creation of
such a situation for some time. Tata had
redefined, twice his retirement age to
ensure his continuity as the chairman
of Tata Sons. The retiring chairman
found it difficult to keep himself away
from the scene after handing over full
executive powers to Mistry. Reports of
allegations and clarifications coming
from various sources raise several questions. Did the passion of the leader
come in the way of objectivity and institutional decision-making in the Tatas?
Was he worried about the decisions and
style of functioning of the successor he
had endorsed earlier? The series of
events pre and post the board meeting of
the Tata Sons mark the makings of the

Former Tata Sons chairman Cyrus Mistry (left) with current Interim Chairman Ratan Tata. Insecurity is yet another challenge
faced by such gridlock makers. They are not sure of the capabilities of their successor they themselves had chosen

creation of a deadly gridlock that Ratan

Tata created for himself.
Fundamentally, gridlocks are manifestations of typical traffic jams Indian
cities are familiar with. Disregard for
accepted and tradition driven principles of governance and practice of professionalism will encourage self-centred
drivers to cut corners and move ahead.
Growing frustration and the tendency to
break rules result in every driver trying
to push forward with ones own agenda.
Sooner than later, the traffic comes to a
complete halt. There are no winners in
such gridlocks as at the end of day every
individual, the economy and the society suffers.
Why do leaders create gridlocks?
There are several reasons for outgoing
leaders to involuntarily create and get

trapped in a gridlock. Basically, they are

leaders who have built their empires over
a period of time through a number of
intelligent and political moves. Over the
years, they start believing that they are
indispensable for the empire they have
been ruling. Surrounded by loyal people,
they continue to be the centre of attention.
They want their successors to be their
own alter ego and drive on the same road,
the same way. Leaders of some of Indias
diversified, large organisations dig their
own grave yard in the process.
Such leaders have so much of confidence in themselves that they believe in
their might to drive through any traffic
jam. For them, the principle is my way,
the highway! Their larger than life size
image and ego, camouflaged by their
rededication to the traditions and values
of the institution they are managing, do

CEOs ponder a new game, with Trumps rules

Businesses are struggling to map how Trump's election will reshape policy
ANDREW ROSS SORKIN

The stock market has jumped taking many prognosticators by surprise in

anticipation of the seismic changes Trump has promised
companies have made large investments and changes in their business
practices to comply with the law. So it's
hard to see how even the law's die-hard
opponents in the industry would press
for the full repeal that Trump said he
would pursue.
Backpedaling on some of his campaign pledges has already begun,
including the promised repeal of the
Affordable Care Act. That omelet has
been made; that toothpaste is out of the
tube, Lloyd C Blankfein, the chief executive of Goldman Sachs, said at the conference.
I wouldnt want regulation to be
repealed in toto, he added. If you want
to be good for bankers, you have to have
policies that would be good for economic growth.
More likely than a repeal, Trumps
administration will try to eliminate the
components he has criticised most. A
Trump administration could try to
weaken the Consumer Financial
Protection Bureau, the watchdog
agency created by Dodd-Frank, which

(The concluding part will be published

tomorrow.)
The writer is professor and executive director
of the Thomas Schmidheiny Centre for Family
Enterprise at the Indian School of Business

The show must go on

While the demonetisation of some high

value notes continues to plague people,
some have found ingenious ways to
manage their lives. Several mom-and-pop
retail stores are accepting old ~500 and
~1,000 notes as long as the entire amount
or almost the whole amount is spent. A few
grocery stores are accepting ~5,000-10,000
in old notes under pay-now-buy-later
schemes for their preferred customers.
Neighbours are seen exchanging grocery
and food items under their own barter
system.

> LETTERS

BUSINESS LIFE

If you were to look at our game board of

all the possible outcomes of the election, this one wasn't even on the sheet.
That was how Mark T Bertolini,
chief executive of the large health insurer Aetna, described the election of
Donald J Trump as the next president.
He was speaking with me last Thursday
on stage at The New York Timess annual conference, DealBook: Playing for the
Long Term.
We started with a fresh piece of
paper yesterday. We had no idea how to
approach it, Mr Bertolini said.
Business executives across the
nation and the world have been whipping out fresh pieces of paper to map
how Trumps election and Republican
control of the White House, Senate and
House which may make Washingtons
notorious gridlock a memory will
reshape economic policy.
The stock market has jumped, taking many prognosticators by surprise,
in anticipation of the seismic changes
Trump has promised: A repeal or
refashioning of the Affordable Care
Act, a dismantling of the Dodd-Frank
regulations for Wall Street, a substantial haircut for corporate and personal
income tax rates, and a major infrastructure spending program, among
other things.
While the new conventional wisdom
may be that the nation is about to see
comprehensive change, the truth is that
it is likely to be more incremental than
across the board.
Take, for instance, the Dodd-Frank
Wall Street Reform and Consumer
Protection Act. While you would think
much of the finance industry would
salivate at the chance to rid itself of the
law, its view is more nuanced. Most

not allow them to see any resistance or

admit mistakes.
Insecurity is yet another challenge
faced by such gridlock makers. They are
not sure of the capabilities of their successor they themselves had chosen. They
are also not sure of their own ability to
take a new path. They fail to redefine
their portfolio of activities and move on.
They are like a hesitant trapeze artist
who holds on to the ladder he has been
standing for fear of not able to jump on to
a new one. In some other cases, outgoing
leaders who are aware of some of the
mess of their own making would be worried about the successor telling the whole
world outside what an incompetent
leader he succeeded. Question marks on
the judgement of group chairman Ratan
Tata and the way he drove his passion
through the group companies fall into

Where do the basic strategy lessons

disappear?
Any student of business strategy knows
about scenario planning wherein one
creates multiple emerging scenarios and
evaluate them for their possible outcome
based on clear assumptions. The Tata
loyalists seem to have miserably failed to
anticipate opposition to their moves
from the group companies where they
dont even hold majority control. The
misplaced assumption that Ratan Tata
continue to wield the power he used to
have might have led them to finalise their
recent moves. Lessons in strategy also
warn against ad hoc and haphazard
moves driven by passion.
One should always draw lessons from
the tragic story of Abhimanyu, Arjuns
son in the Mahabharatha. It is rather
easy to get trapped because of your over
confidence to avenge the enemies.
Getting out of a chakra vyuham is not
always easy.
The gridlock that Ratan Tata has
made is one such. It should be a lesson
for the other successful and long standing leaders to draw lessons from, lest they
might get themselves trapped in another gridlock.

At the launch of the India TB Research and

Development Corporation a flagship
initiative by Indian Council of Medical
Research that aims to bring together all
major national and international
stakeholders to develop new tools (drug,
diagnostics, vaccines) for TB the discussion
was threatening to turn really serious when
a doctor decided to take things in her
hands. She broke into a song I wanna
stop TB, stop TB, stop TB and laid down
some of our habits that could lead to TB,
how one could get rid of these habits and
what sort of treatment is available in case
one gets the disease.

Republicans loathe, for example.

The CFPB probably won't be eliminated, Ian Katz, a research analyst at
Capital Alpha Partners in Washington,
wrote in a note to clients. It would be
horrible politics and optics to get rid of
an agency that was established to protect the little guy.
Katz predicted that the Trump
administration would be able to push
through a switch that critics of
the agency have long lobbied for: a
shift in control of the consumer bureau
from a single director to a bipartisan
commission.
Trump might also focus on changing
a rule for small banks that grow to more
than $10 billion in assets.
Currently, such growth catapults a
bank into a new regulatory category, one
that comes with much stricter scrutiny
and more elaborate reporting requirements. This rule has been criticised by
the banking industry as an impediment
to growth and competition.
2016 New York Times News Service

PM was sincere
With your editorials Remonetise Fast and
Be prime ministerial (November 15), you
have hit the nail on the head and have taken a candid view, albeit somewhat flawed,
about how the Prime Minister has reacted.
There is absolutely no debate on the issue
that the decision to demonetise is in
national interest and would definitely help
big time in significantly cleaning up the
black economy. Statements of the State
Bank of India chairperson about deposits of
~83,702 crore in five days are proof enough.
I am sure other banks, too, would also see
a big spike in their deposits. The government is doing all that is feasible to ameliorate the hardship of the people. Setting up
a task force under the RBI deputy governor
to oversee recalibration of 200,000 ATMs is
yet another step in the right direction. It is
indeed a big crisis but one cant really fault
the government in its sincerity. Your suggestion to import new currency is perfectly valid and indeed a practical solution.
The PM has made this announcement
at a great risk to his partys chances in the
upcoming state elections and the big battle
in 2019. He is aware that if public perception swings the other way, BJP might really be hit hard. So, it is a calculated gamble
to that extent. But taken in the larger interest of the country. The Opposition parties
inane and mindless shouting against the
move is just dirty politics. Even if one was
to believe the insinuations that some politicians had prior information and may have
stashed their and their partys ill gotten
wealth abroad, it would still result in huge
sums coming into the banking system and
also huge sums reducing the RBIs liability.
Cleaning up will certainly not be 100 per
cent but even if 50-75 per cent of the astronomical amounts in the parallel economy
becomes legitimate, the gains would be
unbelievable! One also cant find faults
with Amit Shahs suggestion to the finance
minister for some sops in the next Budget
as a healing touch.
I beg to differ that the PM's speeches in
Goa and Ghazipur gave any hint that the

government was not exactly in control of

the situation. He was candid in his characteristic manner and made an emotional
pitch again in his characteristic style
and hopefully it will have a positive effect.
Krishan Kalra Gurgaon

On a fast track
With reference to the editorial
Remonetise, fast (November 15), it goes
without saying the government has committed a self-goal by not properly doing its
home work prior to embarking upon its
most ambitious plan to demonetise in
its determined bid to serve a severe blow to
the menace of black money in the economy. I fully endorse the editorial views that
the long queues for obtaining cash before
the countrywide bank branches as also at
ATMs does not augur well for the financial
image of the government and it urgently
requires the "remonetisation" of the econ-

> HAMBONE

omy with surgical precision. But, reasonably speaking, this grim situation may also
be somewhat attributed to some immediate panicky and knee-jerk reaction of the
common man, as if heaven is going to fall
even in a day or so. Two key challenges
namely, having enough new currency to
supply to the banking system and the rapid distribution of thereof to the common
man, though justifiably perceived by the
editorial are being actively taken care of
by the government in active coordination
with the Reserve Bank of India.
I also beg to differ with the editorial suggestion that if notes of ~500 and ~100 are
not available in the RBI's kitty, the government needs to immediately order the printing of currency in foreign printing presses
which are so easily available globally. Its
not that easy at such short intervals. But
where is the need to implement such an
out-of-the-box idea in the prevailing circumstances which could have some temporary overtones only. All this indicate that
the government has finally risen to the
occasion to quickly remonetise the old
currency. But it's better late than never and
it also takes two to clap. So both the govt
and the people must act in close coordination to deal with the extant situation.
Kumar Gupt Panchkula (Haryana)
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201 E-mail: letters@bsmail.in
All letters must have a postal address and telephone
number
BY MIKE FLANAGAN

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OPINION 11

>

STAY INFORMED THROUGH THE DAY @ WWW.BUSINESS-STANDARD.COM.

Volume XXI Number 65

ILLUSTRATION BY BINAY SINHA

MUMBAI | WEDNESDAY, 16 NOVEMBER 2016

Standard deviations
Misalignment of currency note sizes is part of a bigger problem

ndias long-suffering cash-strapped aam aadmi will have to wait two more
weeks, according to Finance Minister Arun Jaitley, to gain easier access to the
new ~2,000 and ~500 notes that symbolise the governments campaign
against black money. Apart from evidence of poor planning, this disconnect
between policy intent and implementation efficiency highlights a chronic problem
with which almost every Indian citizen will identify: The lack of standards in the
manufacture of products of everyday use. In this instance, it is the fact that the new
notes that are to replace the old are significantly smaller and, therefore, do not fit
into the dispensing trays of ATM machines. This misalignment of currency note
sizes, apart from the shortage of new notes, has been a significant contributor to the
queues snaking out of banks and ATM kiosks and the visible public unrest that
prompted ultra-emotional speeches from Prime Minister Narendra Modi. If adequate attention had been paid to this small but vital detail, Mr Modi may have spared
the public considerable angst and possibly robbed his opponents of an issue to disrupt Parliament with. Instead, nearly 200,000 ATM now have to be reconfigured at
express speed to deal with a backlog that is approaching crisis proportions.
The chance of a flawless changeover is an open question, given the speed that is
required from suppliers of the new machines. This inattention to standards is not confinedtocurrencynotesandtheirsuitabilityforATMmachines;itissymptomaticofawhole
range of materials and components, including currency notes that have always been in
different sizes, unlike the uniform dollar note of all denominations. Standard specificationsforbuildingcomponentsencouragepre-constructionofdifferentelementslikedoors
and windows, which can then be bought ready-made. This reduces on-site construction
time and encourages do-it-yourself. Today marble slabs come in all sizes, so do wooden
planks,andawholerangeofengineeringitemsofcommonuselikescissorsandknives.
Standardisation facilitates volume manufacture, which cuts costs and also encourages
quality benchmarks to be set. On a broader scale, this lack of uniformity an issue that
goes well beyond certification standards mandated by the Bureau of Indian Standards
conflates with larger industry problems. One, for instance, is Indias continuing adherencetodifferentgaugesintherailways,thecountryslargesttransportnetwork.Indiacurrentlyhasfourdifferentgauges,noneofwhichconformstotheinternationalnormofstandard gauge. This makes it difficult to add much-needed rolling stock outside of whatever
is domestically manufactured. Admittedly, this is an inherited problem and a full-scale
network conversion would be prohibitively expensive.
It is worth noting, in fact, that urban transit systems like the Delhi Metro, however, did adopt standard gauge, but not without some initial opposition within the
political establishment some years ago. Issues such as these go to the heart of the prime
ministers Make in India programme as well. The ambit of this programme, which
is closely related to the prime ministers job creation agenda, should cover not just
large-scale manufacturing but also small and medium industry. The automobile
industry has been a major beneficiary of aligning component manufacture. Perhaps
the lesson from this is to mandate the Institution of Engineers to follow the model
of German engineering best practices and focus on creating uniform specifications
for a range of small and medium products that raise the standard of Made in India
to something approaching global standards.

Muddying the waters

World Banks stand on Indus Water Treaty defies logic

y launching two parallel procedures to adjudicate on Pakistans objections

to a couple of hydropower projects being implemented by India on the rivers
allocated to it under the Indus Water Treaty, the World Bank has only
exposed its naivety. The move is legally untenable as it goes beyond the dispute settlement norms mooted in the treaty brokered by the World Bank in 1960.
Responding to Pakistans allegations regarding Indias hydro-electric projects
Kishanganga on the Jhelum and Ratle on the Chenab in Jammu and Kashmir, the
World Bank has chosen to set up a court of arbitration (as demanded by Islamabad)
as well as a neutral expert (as suggested by New Delhi) to operate concurrently. What
defies logic is that the World Bank has done so despite realising that simultaneous adjudication by two set-ups might result in incongruous outcomes and, thereby, exacerbate the problem rather than resolving it.
According to the dispute settlement rules laid down in the Indus treaty, questions
of a technical nature have to be first addressed by the bilateral Permanent Indus
Commission. If this body is unable to settle it, the matter can go to a neutral expert
appointed by the World Bank on the request of either party. If the neutral expert so
decides, the matter can be referred to a court of arbitration for final resolution. By not
following this procedure, the World Bank has, obviously, defied the Indus Water
Treaty norms, for no sound reasons or foreseeable gains.
Pakistans real motive for concocting fresh accusations regarding Kishanganga,
which was cleared by the Hague-based International Court of Arbitration in 2013, and
dragging the Ratle hydropower project into the dispute as well appears to go beyond
water-related concerns. It seems an upshot of the noises made by New Delhi about
weighing its water-sharing options under the treaty after the terrorist attack on an army
camp in Uri in Jammu and Kashmir. However, the probability of India actually
reopening the Indus Water Treaty is slim as the move might boomerang. In any case,
the treaty is one of the most successful international water-sharing pacts that has survived several full-fledged wars and warlike situations between the two countries
though the agreement is inherently flawed and tilted in favour of Pakistan. Apparently,
Islamabad does not seem to have learnt any lessons from its past misfired attempts
to raise similar issues. Almost all the disputes, including the one about the Baglihar project, put up for international arbitration have been settled in favour of India. Even in
the case of the technical objections filed against the Kishenganga project in the past,
the neutral experts upheld the Indian position, suggesting only minor amendments
in the project design, which India agreed to carry out.
The noteworthy point that is often disregarded is that the Indus Water Treaty allows
India to not only put up run-of-the-river projects on the three west-flowing rivers Indus,
Jhelum and Chenab allotted to Pakistan but also permits creation of water storage on
these rivers of 3.6 million acre feet for drinking, irrigation and flood control purposes.
However, much of the permitted water holding as well as power generation capacity
remains unharnessed. It would, therefore, be unwise for Pakistan to keep raking up old
water rows and cooking up new ones. The World Bank, too, should take only well-advised
steps to facilitate dispute resolution rather than needlessly complicating the issues.

Demonetisation : An
(un)necessary evil?
No adverse impact on GDP, but on the vulnerable
ears of a gross domestic product (GDP) setback en, black money could have been unearthed in a more
from the governments demonetisation action unobtrusive, imperceptible and consistent manner.
are unfounded. At the macro-economic level,
Second, the governments Income Declaration
whatever is the amount of black money coming into Scheme (IDS) initially reported a base of ~5,000 crore
banks by December 31 and into the Reserve Bank of from undisclosed foreign accounts, followed by
India (RBI) by March 31, would be estimated by RBI ~65,250 crore of undeclared income in cash and othon March 31 what has come in and
er assets in India that was likely to
what has not in comparison with
be further revised upwards. While
the cash earlier issued by it. RBI will
the ~5,000 crore base was believthus arrive at a calculation of
able, the ~65,250 crore number
change in its liabilities, and quantirequires deconstruction. It is likely
fy mismatched assets and liabilities
to reflect to no small extent the
in its balance sheet. It will then
expected outcomes of already ongoreturn some government bonds it
ing actions of the tax or intelligence
holds thus enabling government to
departments. After all, income tax
increase spending and, in turn,
officers are regularly carrying out
restoring GDP to normal. Also, the
investigation and search and seizure
view that black money holders will
so that they continually gather
find refuge in gold is based on mer- PARTHASARATHI SHOME
information and possess expected
chants assuming tax evaders risk
collection estimates from such
by accepting old ~500 and ~1,000 notes since, until activities. Only if and when the government releasDecember 31, that is legal. Unlikely again, since cur- es a break-up of the sources of the ~65,250 crore
rently risk aversion is pervasive.
could one assess the nature and reality behind it. Also,
The problems lie elsewhere. First, consider why how much tax can be procedurally recovered from this
demonetisation was rendered essential. The lacklustre tax base remains unclear.
success of the income tax department (ITD) during
It would be superfluous to repeat the inequity that
previous and current governments to contain black emanates between good and bad taxpayers from
money is one explanation. A white paper on black repetitive tax amnesties irrespective of the governmoney listed measures they had taken to curb it. It was ment, a habitual quick fix of Indian policymakers that
unconvincing since black money persisted despite could only have exacerbated tax evasion behaviour
those measures. Admittedly, Budget allocation to ITDs over decades as is well known from international
investigation function is too small compared to needs, experience. Lamentably, India continues to eschew
in contrast to the Budget for fruitless routine assess- benchmarking itself with other tax administrations or
ment of all taxpayers, an uncorrected imbalance even prevalent good practice elsewhere.
after the Tax Administration Reform Commission
Third, tax avoidance and evasion occurs even
(TARC) made its recommendations. If the recom- in the organised sector through tax base depletion
mended reallocation of staff resources were undertak- reflecting misapplication, misuse or illegal use of

Crusade or political strategy?

lack money has been as perennial a subject of
public discourse in independent India as has
been its ability to survive. The received wisdom was: High tax rates, controls and shortages generate corruption and black money.
So, get rid of these and you will cut
off oxygen to black money. But
black money continues to survive
despite reforms removing so many
of its causes.
Amnesty and demonetisation
have happened in the past (a tax
amnesty was declared in 1997 and
there was a demonetisation in 1978)
but this time things appear to be
different. It is rational to use a carrot-and-stick approach first offer
a window of amnesty and then go
on the offensive by initiating SUBIR ROY
demonetisation. But things have
not stopped there. Prime Minister Narendra Modi has
identified benami property, a key store of wealth created by black money, as the next target and asked
people for 50 days before passing judgement.
But 50 days is neither here nor there. It is too long
for administering a shock treatment and too short to
win a decisive battle. So, the question emerges: What
is the wider political strategy behind Mr Modis concerted attack on black money? One theory initially
was that by demonetising (immobilising ~500 and
~1,000 currency notes) the ruling Bharatiya Janata
Party, having taken care of its own resources, will in
one stroke rid the major Opposition parties of a considerable part of their resources and thus severely
handicap them in fighting coming Assembly elections. But this purpose was served by demonetisation.
To go further indicates a more fundamental game
plan. Is Mr Modi trying to make corruption a key
issue in future elections and thus seeking to steal the
political clothes of the Aam Admi Party (AAP) and
Delhi Chief Minister Arvind Kejriwal?

BOOK REVIEW
NIDHI GUPTA
A man who has no experience in government and who is described by most pundits as a bigot, narcissist and misogynist
is the next president of the USA. Many
have been left perplexed about how this
came about. Does a majority of the people in the USA really support his
extremely anti-liberal policies? Did the
voters not weigh the competing policy
stands of both presidential candidates
carefully? If the arguments presented by
Christopher Achen and Larry Bartels in
their book Democracy for Realists are to
be believed, then it would be a mistake to
think that the voters paid (or ever will

If this is so, then two theories follow. One, Punjab

is sending the signal that cleaning up public life, both
in a specific (drug abuse) and general sense (corruption), will emerge as a dominant issue. And on
Punjab, the talk is that AAP has a
good chance of doing well. The second theory is more significant. Mr
Modi fought and won in 2014 by
promising vikas (progress) to aspiring middle-class India, located
between peasants and the urban
middle class. But in over two years
the new jobs have not come and
instead mobilisation has taken
place through first flogging the
Hindutva agenda (from love jihad
to goraksha) and thereafter raising the security pitch over Pakistan.
But there is a limit to rising tension
over Pakistan as it can end up in
war. So is launching a jihad against black money the
BJPs next instrument of political mobilisation as
Uttar Pradesh goes for elections?
There are major fallouts, political and economic,
to this agenda. It will adversely affect the trading
community (not known for its love for paying taxes),
a key constituency of the BJP, and can be rationalised
only if we see the exercise as losing a numerically
smaller support base for a larger one (the aam aadmi
who wants to stop paying bribes at every step).
Additionally, economic life is being shaken at all levels except the corporate. Smaller businesses, right
up to retail, have been disorientated and are witnessing a fall in sales.
What is more, even microfinance institutions
(MFIs), which lend small amounts of money to the
poor have been hit. The lack of banking facilities in
rural areas, where borrowers can change demonetised notes they had set aside for repaying instalments, has hit MFI recoveries. If the banking system
and overall economic activity take weeks to recover

VALUE FOR MONEY

How democracy really works

pay) any attention to the candidates policy choices. With respect to their stands
on different policies, Hillary Clinton and
Donald Trump were like Tweedledum
and Tweedledee to the voters.
Democracy for Realists is a culmination of nearly two decades of work by the
authors on studying voter behaviour and
its impact on elections in the USA.
Written in an academic style, this book is
a must for anyone who would like to be
surprised at the degree to which voter
behaviour is misunderstood. The
authors take on a challenging task of
stripping bare the romanticism associated with democratic theory that of citizens steering the ship of the state. They
study the gaps between popularly conceived ideas of democracy and the reality
substantiated by compelling scientific
evidence. Messrs Achen and Bartels
argue that voters are agnostic to policy
preferences or ideologies, and that, in
fact, voters behaviours are shaped by

incentives and deductions, thus adding to the tax

gap. The governments annual revenue loss calculation presented to Parliament in every Union
Budget we introduced this international practice in
2006 is testimony to tax base depletion. Yet this
government too has done little to cut back incentives
and has indeed given more of them for ever-new
so-called leading sectors, benefitting primarily the
already rich and wealthy. The Union finance ministers promise to bring down headline corporate tax
rate to 25 per cent remains unfulfilled though he
mentions its need occasionally.
Fourth is impact on the poor. To hear leaders opine
that farmers can also put their money into banks is
reminiscent of a policymaker of the previous government asserting to me that there must be a ration shop
every 50 yards. The current authorities may take a few
trips to Indias deep interiors to view if all farmers do,
or can, access banks and how far is their nearest bank;
a mere statistic regarding new bank accounts is insufficient. Policymakers would realise that not just tax
evaders, smugglers or terrorists use cash, but also the
poor. Neither have the leaders of democracy been
observed to queue at banks like the urban commoner.
Thus it is ironic for political representatives to proclaim that the entire country is with them. It reveals little reality check of the vast ocean of ordinary Indians.
Sadly, the suffering of the poor and the sick could
have been averted. For such deeply cross-cutting
action, the government should have had ready counter-measures to ensure the poor did not go unfed and
the sick received treatment. Reports indicate that daily sellers in Kolkatas vegetable and fish markets were
unable to sell since bangali babus do their shopping
with ~500 notes understandably, given fish prices
per kilo. Fish rotted. The sufferer was not the buyer but
the seller whose daily earning feeds the family. Such
examples abound.
Understood that the governments action had to
be kept secret for effective outcome. But news flashes, for example, that ~3 crore were deposited in old
500s and 1000s by governments political party, or its
use of new 2000s, just before the demonetisation
announcement, are disturbing. The governments
full explanation is warranted. Indeed, the prime ministers advisers should have counselled him to leave
behind a national address before being flashed on a
Japanese bullet train ostensibly pursuing the luxury
Mumbai-Ahmedabad bullet train project. A prior
address would have been reassuring and effective
rather than exhorting punishment post-event from
Goas shores. Is the team that assured him that it
would be just a two-day pain being asked to resign or
is absence of accountability being ignored as always?
Finally, further draconian policy could be expected to square the circle. Complementary would be
reinstatement of the Bank Cash Transactions Tax that
was introduced, and removed, by the previous government despite BCTTs success in diminishing fictitious long-term therefore untaxable capital gains
by limiting the high velocity of bank transactions that
illegally converted black money into white. Whatever
occurs ahead, a monitoring cell should be established
to minimise adversity, reflecting its gravity, for honest
taxpayers and the vulnerable.

social identities and partisan loyalties

that people often inherit.
The authors present evidence to
show that barring a few elites, an individual voter is neither consistently liberal nor conservative in terms of identification with issues or policies. It is an
illusion to believe that people engage in
issue-voting. People first decide whom
to vote for and then adopt the stands of
their chosen party (or candidate) as their
own, not the other way around. The
authors write that, Even the most
attentive citizens are mirrors of the parties and not its masters.
Messrs Achen and Bartels also show
the inadequacy of referendum and initiative processes measures that supposedly deepen democracy in a society and
give ultimate sovereignty to people. The
most notable example is that of citizens of
Oakland voting in 1978 in favour of reducing budgets and staffing of firefighting
companies, only to suffer huge fire-relat-

from the disruption, then that will be one cost. The

longer term one will be the deflationary impact on the
economy as demand suffers from a partial demobilisation of income and loss of wealth.
The crowning irony is that the critical aspect about
eradicating black money is not destroying its stock
(hoarded currency and benami property) but nipping its creation in the bud attacking the flow of
black money so that its fresh generation stops. That
will take not 50 days but years as a new culture of
business and politics must emerge. I G Patel, Reserve
Bank of India governor when demonetisation took
place in 1978, recalled in his memoirs that he tried to
dissuade the Janata Party government from demonetisation, pushed for by politicians who wanted to
punish their corrupt predecessors as such an exercise seldom produces striking results. The idea that
black money is tucked away in suitcases or pillow
cases is nave.
To get rid of black money, it will be critical to
change the way elections are funded so that black
money ceases to play a role in them. It is axiomatic
that politicians who get elected through a process that
is steeped in unaccounted cash (witness the pre-election seizures), cannot be expected to pass laws and set
rules that will stifle the role of black money. Only
donations and contributions above ~20,000 to a political party have to be accounted for and there is no limit to how much a party can spend. Candidates have
spending limits which are a bit of a joke.
A campaign against black money will have to be
in the nature of a satyagraha and going by look and
body language, a homespun person like Anna Hazare
seems to fit the bill. Mr Modi, on the other hand,
seems to be personally far too well groomed and
media savvy to carry conviction. So when he gets
emotional about black money, only time can tell
whether he is on a moral crusade or pursuing a political strategy.
subirkroy@gmail.com

ed losses in 1991. Direct democracy, they

reasons unrelated to their competencies.
argue, is often very costly and the benefits
It is interesting to note that a
(if any) dont measure up to these high
growing body of work in behavioural ecocosts. Indeed, with Brexit and the rejecnomics corroborates these findings by
tion of the peace deal in Colombia with
the authors. Indeed, Nobel Prize laureate
the FARC guerrilla group, there has been
Daniel Kahneman has written extensively
a deluge of commentary on
about the peak-end rule and
Messrs Achen and
how plebiscites subvert
the human tendency for
Bartels also show
democracy.
duration-neglect.
The most interesting aspect the inadequacy of
It is not as if this sceptiof the book is the authors crireferendum and
cism of idealised citizens is
tique of the so-called theory of initiative processes
new. As the authors themretrospective voting, which
selves point out, political
measures that
ascribes to citizens the impor- supposedly deepen
scientists and philosotant role of appraising govern- democracy in a
phers since the framing of
ments past performance and
the American Constitution
society and give
actions. While examining the
ultimate sovereignty have questioned the capacconsistency in electoral
ity of the voters. However,
to people
responses to economic perMessrs Achen and Bartels
formance of the incumbents, it
have rejected not just the
is found that voters have an extremely
popular notions of democracy but also
myopic outlook. An incumbents perpreviously held scholarly conceptions.
formance only in the election year is
All this is not to say that they are proparewarded or punished regardless of how
gating dictatorship over democracy.
the policies fare throughout the term. The They only implore us to objectively
authors also show that voters routinely
understand elections in terms of social
engage in blind retrospection, and reward identities, group ties, and ethnic soliand punish incumbents randomly for
darities that run across generations.

We painfully witnessed this phenomenon in the run up to the presidential

vote in the US this year. It was the outsider Donald Trump, who dropped
political correctness, was vague about
policy details but high on rhetoric, which
he understood would resonate with the
so-called disgruntled, blue-collared,
white male voters.
Indeed, analysing the outcome of
these US elections, Pratap Bhanu Mehta
says, The fantasy of a post-racial politics, of a politics not premised on ethnicity, was just that: A fantasy. Perhaps,
Trump knew this all along.
The reviewer is a researcher at the Takshashila
Institution, a Bangalore based think tank and
school of public policy. A longer review appears
on the website

DEMOCRACY FOR REALISTS

Why Elections Do Not Produce Responsive
Government
Christopher Achen and Larry Bartels
Princeton University Press
408 pages (hardcover); ~1,730