The Orwellian Doublethink Syndrome

Earlier this year, a group of Indian citizens including the likes of prominent industrialists Anu Aga, Azim Premji and Keshub Mahindra and wrote an open letter to government leaders asking them to curb rampant corruption, and contain the “governance deficit” plaguing the country. Problems seem to be scaling much faster than the capacity of policy makers and government leaders to formulate and deliver solutions.

Despite recent media attention, this governance deficit is more grave than is appreciated, and presents serious risks for global investors pouring capital into the world’s second fastest growing economy. In fact, the government’s actions over the last year or so could lead one to speculate that India in 2011 is increasingly becoming like the dystopia envisioned by George Orwell in his classic novel 1984.

In the novel, Orwell defines the concept of doublethink as:

…the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them….to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies.” In 1984, the governing party maintains its rule by employing doublethink to dislocate the sense of reality.

MJ Akbar, widely regarded as one of India’s finest political commentators, wrote last year that, paradoxically, it was Prime Minister Manmohan Singh’s weak and pliant character that allowed him to rise to the nation’s most powerful political post. Manmohan Singh has been able to assume the highest political office because he is very unassuming. Until now, his personal probity has been shielding the UPA government. A sampling of some of the decisions taken recently by the UPA seem to realize, sometimes in horrifying ways, George Orwell’s dystopian state from 1984.

In September 2010, PJ Thomas, a bureaucrat with corruption cases pending against him, was picked by the UPA government as head of India’s constitutional anti-corruption watchdog, the Central Vigilance Commission, despite the Leader of Opposition in the Lok Sabha registering her dissent at the time of the appointment. Eventually, it was only with the intervention of the Supreme Court that PJ Thomas’s appointment was struck down. In February this year, the government proposed amendments to India’s Information Technology Act that would give it sweeping powers to censor content on the Internet.

Notably, in November 2010, the mass media decided to collectively black out the biggest exposé of the internecine and incestuous relationship between the government, prominent media personalities, corporate lobbyists and industrialists, while blogs and social media last year swung into action to help bring the scandal into the mainstream consciousness.

Most recently, in the imbroglio surrounding the Jan Lok Pal Bill to reform and create mechanisms for checking corruption, a group of ministers chaired by Sharad Pawar and including the DMK’s MK Alagiri, both with suspect credentials, was formed to consider the appeals led by veteran social activist Anna Hazare. We’ll return to this issue shortly.

On the economic front, Finance Minister Pranab Mukherjee re-classified social sector spending on schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) as capital expenditure in this year’s Budget, effectively under-stating the likely fiscal deficit. It is also notable that to artificially create employment under MGNREGS, the government bans the use of machinery. On principle, is this policy dramatically different from the Samajwadi Party’s regressive promise to ban the use of computers because computers were “destroying” jobs?

When asked about second-generation economic reforms, Pranab Mukherjee  dismissed the charge of the Budget lacking bold reform steps and insisted it was already a very reformist Budget, calling demand for economic liberalization “adventurism”. Year after year, India’s chief economic policy makers take high growth for granted.

India has a prime minister who holds a powerful office because he is weak, who is renowned for his personal probity but has presided over the most corrupt government in the nation’s history, who has the finest academic credentials as an economist and kick-started India’s liberalization in 1991 as finance minister, yet has failed to implement any economic reforms as head of the government since 2004 and instead foists upon an unsuspecting nation a regressive job creation program that bars the use of machinesdistorts labour markets, causes inflation and destroys productivity, going so far as to classify MGNREGS expenditure in ways that under-state the long-term fiscal damage caused by it.

Prime Minister Manmohan Singh’s record since 2004 is one of irreconcilable contradiction and deliberate divergence between his stated individual attributes and the policies pursued by his government – a case of textbook doublethink come to life, one that even George Orwell could not have scripted better.

Indeed, one is impelled to question whether this a calculated political strategy by the Congress party to dislocate the sense of reality of Indian citizens and voters.

Is this the kind of leadership and policy vision that will be able to do justice to India’s economic potential and drive its rise to economic superpower status? As Bob Dylan might have said, the answer is blowing in the wind.

In the last few days, we have been led to believe by the mass media that Anna Hazare’s movement has been spreading across India. There’s tremendous public anger against the raft of scams and massive corruption that has come to light over the last six months.

As the INI Acorn blog has analyzed expertly, neither the means nor the policies that Hazare and his followers are using and proposing to implement will actually result in eradicating or reducing corruption. All those thinking the Jan Lok Pal Bill will be a silver bullet against graft will be disappointed in the long run.

That the movement should gain so much traction tells us that the public mind too has been entrapped by Orwellian doublethink. The current government has succeed in dislocating reality and confusing Indian citizens into thinking elections are pointless and democracy has no value.

One would have expected the Opposition parties to have consolidated the groundswell of outrage against corruption, but gleefully for the Congress party strategists, the “Sab chor hain” logic seems to be winning and people are rejecting politicians en masse. Orwellian doublethink has succeeded in confounding the Indian masses.

Egyptians and Libyans took to the streets to overthrow dictatorships, Indians are taking to the streets to overthrow our democracy by employing unconstitutional means to pursue unconstitutional ends.

We should keep our Republic.

Where Narendra Modi bests Milton Friedman

Comparing Modi with Friedman is unfair to both – the former is a politician, the latter was an academic. And yes, on most economic policy issues, I would still go with Friedman’s counsel.

Nonetheless on higher education, the scorecard may be opposite. One of the biggest market imperfections, and I do not refer to market imperfections lightly, is the global market for higher skills. Prima facie, there are many immigration restrictions. But high supply of skilled labour might force mindsets to change; it might be the ultimate fait accompli – the recent discussion of the US entrepreneurship visa despite the general overhang of protectionism and nativism is a case in point. In any case, what the embassy will not do, cables of KPOs might accomplish to a large extent. Here, India has a huge advantage – we will be adding more workers in the next couple of decades than China, EU and US combined.

This is what Modi has grasped – and his India Today Conclave speech demonstrates this well. Milton Friedman was against government funding of higher education (In fairness, that was in the American context which did not and does not face the same global demographic scenario as India does today). But I believe limited funding of higher education for all – through the voucher model, similar to the American GI bill – of colleges and/or leading certificate programs like CFA etc would be very beneficial for us. Also, it would be the best pro-woman move by the government as their school-to-college transition is often set against marriage – where the latter unfortunately wins at a much higher frequency than it should.

PS: While I recognize that most of the benefits of this subsidized higher education would still be private (rather than positive public externalities) – and hence some people may reasonably oppose my suggestion, such a subsidy would be infinitely better than spending money on dead end schemes like NREGA. Thankfully, firms like TeamLease have been lobbying for such a transition (Disclosure: No interest in TeamLease or any other educational firm)

Your taxes at work (or not)

The Times of India reports

Nearly 50 lakh central government employees and 38 lakh pensioners can look forward to a 6% increase in their dearness allowance with the Union Cabinet approved the proposal on Tuesday.

If the move is approved, the dearness allowance, which is linked to the consumer price index, will rise from 45% currently to 51%, triggering a further change in the allowance structure. For instance, payments like conveyance allowance and children's education allowance will also increase by 25%.

Further, special compensatory allowance for those posted in remote areas such as the north-east and Jammu & Kashmir as central government employees in these areas are entitled to a Special Compensatory Allowance. Their special allowance goes up by 25% the moment the 50% trigger is breached.

While the move will provide some relief to government employees and pensioners whose salaries and pension are usually revised once a decade, the increase will cost the exchequer Rs 1,500 crore annually.

(emphasis mine)

Now, we must pay higher to get the best talent for key administrative tasks. But across-the-board raises for redundant peons and superflous tea-getters who are already paid a multiple of their private sector counterparts is ridiculous (and not to mention other professions like government school teachers, who are also paid much more than their private sector counterparts who despite not having the required qualifications teach much  much better per rupee spent on them because of the incentives of carrots and sticks)

Being against across the board pay raises may sound like elitist to some, but helping the lower middle government worker class at the expense of either helping the real poor, and/or lowering the tax burden on the most productive who can further boost the economy (and hence in the long run, create higher-paying sustainable private sector jobs) is actually the anti-egalitarian position.

Outlook Implies Mukesh Ambani Can’t Value Businesses

( Cross-posted at http://broadmind.nationalinterest.in/2011/03/vsnl-privatization-2/ )

The central thesis of Outlook’s article on the disinvestment of VSNL hinges on the insinuation that Tatas got something for nothing. In his reply to a critique at INI Broad Mind, Outlook assistant editor Saikat Datta has put forth seven points which he says have not been addressed by either Dr Arun Shourie or this blog. We shall address these points in detail in this post.

Mr Baijal writes in his book:
Market price at the time of disinvestment was Rs 175 and controlling shares were sold to Tatas through a closely contested competitive bidding between the two industrial giants of India, at a price of Rs 202.

Dr Shourie, in his reply to Outlook also notes the following:

A comparison of what the winning bidder paid with what the prevailing market price of VSNL shares was shows how perverse the insinuation behind the question is.

  • The equity value of the company as per the winning bid (Rs 202 per share) was Rs 5757 crores. This valuation did not include the Surplus Land.
  • The market price of VSNL, on Feb 1, 2002, the day of the bids, was about Rs 155 per share, and this share price included the Surplus Land.

Furthermore, I understand that in August, 2006 the DoT informed the Company that the Government was considering all important issues on the subject and that the Government decision shall be communicated to the Company, as and when taken. As far as I can ascertain, no further communication has been issued by DoT to the Company on this subject till date.
As Dr Shourie also notes, all facts relating to the the transaction were known to both parties when the bid was made. All the points raised by Mr Saikat Datta in Outlook – about the land bank of VSNL which was not “demerged”, writing off the already-disputed tax liability of VSNL, and partially applicable, time-bound monopoly privileges of VSNL – were known to all bidders besides the Tatas. The main point is that all information was communicated to all bidders before bidding took place – it doesn’t matter when, whether 10 days or 10 months, the “discovery”, as Mr Datta puts it, of the land bank was made as long as the same was duly documented and communicated to all bidders participating in the bidding.

Therefore, Mukesh Ambani and Reliance Industries knew this too – they made a business decision not to bid above a certain price, and the Tata group won the auction. Once again, it is worth noting the share price of VSNL at the time of strategic sale was Rs 175 and this stock price included the value of the land bank as estimated by the stock market, while the bidding process fetched Rs 202, even though all bidders knew they would have no claim on the land assets.

In a competitive bid, people discount all expected future cash flows with the appropriate risk-adjusted interest rate. In this case, the cash flows excluded the sale of VSNL’s land assets, included the one-time tax write-off granted to the Company, and accounted for the curtailment in VSNL’s monopoly status in national and international long distance calling markets.

Mr Datta would have a case if he could show that only Tatas knew about these developments and others did not – that might have made a strong case for corruption in the procees. He does not come even close to credibly demonstrating the same.

Instead, we are fed insinuations and sensationalized land price comparisons of what VSNL’s land assets were worth in 2002, and what they are worth today. Outlook proclaims that a “reasonable estimation would put the current total value of the 773 acres anywhere between Rs 6,000 crore and Rs 8,000 crore.” This data point is meaningless and irrelevant to the “investigation”, because the Tatas have not sold and cannot monetize the land assets without the express consent of the Government, which obviously has not been granted by the DoT, which is still evaluating the matter as per Dr Shourie’s reply.

It was made clear at the time of bidding that “sale proceeds of such land would go to the government as per pre-sale share structure”, and the same was duly recorded in VSNL’s Shareholder Agreement. It is also worthwhile reiterating once again that Tatas have not yet made even one paisa from VSNL’s land assets – what “gift” does Outlook refer to? As things stand today, the matter has been pending with the DoT for various bottlenecks relating to the mechanics and execution of a de-merger.

It is the government’s responsibility to ensure the completion of the same, in line with what is recorded in the Shareholder Agreement. Perhaps Dr Shourie did not push the matter from 2003-2004, when he exited office – but what has been happening in the 7 years since then under the UPA administration? Outlook says they will take up this topic in coming issues – perhaps we can wait and watch.

Just bearing in mind that VSNL was sold via a competitive bidding process – where all information relating to the transaction was made available to all bidders before bidding – neuters all allegations made by Outlook’s article.

In economics jargon, the acquisition price was set by the market transparently without any information asymmetry.

Let’s look at the points raised by Mr Datta:

1) Mr Datta seems to ask the question why the land assets were not de-merged from VSNL before the disinvestment took place – doing this would never have allowed the current situation to arise, he rightly points out. But it should be appreciated that the land and tax laws in India are inflexible and very complex when it comes to de-mergers and transfer of assets from one entity to the other. Our laws date back at least four-five decades, and in some cases are from the 19th century. There is a dire need to reform these archaic laws and bring them in line with the present day. In fact, this type of reform is part of the second-generation economic reform agenda.

Should the entire disinvestment have been cancelled then, as Outlook suggests? As Disinvestment Minister, Dr Arun Shourie’s priority was to encourage competition in telecommunications by ending VSNL’s monopoly – he expressly notes in his reply to Outlook that specific actions were taken to increase market competition and to benefit Indian customers. Mr Pradip Baijal has penned a 300-page book on how disinvestment put consumers and citizens first. As chief policy-makers, it was their executive decision to proceed with the disinvestment while ensuring ring-fencing of the land assets and its exclusion from the valuation. This decision was not corrupt, illegal or unethical. There is no basis to assert that there has been corruption and Tatas got something for nothing.

2) Mr Datta then asserts that Tatas have been trying to bring closure to the matter by suggesting that they purchase the land from the government – once again, Tata group’s suggestion is not binding on the government to accept, neither is it illegal for the Tatas to make. Merely suggesting solutions and submitting a prayer to to the government to help bring closure to a long-standing matter does not tantamount to corruption, and neither is it bad behaviour.

3) Mr Datta asserts that Dr Shourie could have used the “government’s clout” to get the land back. The very tone of this statement reeks of self-righteousness and assumes that VSNL is the criminal, and the government fair and correct to “police” them. What Mr Datta has not investigated is whether the government had any authority at the Board level to make the kind of interventions he suggests. Privately-owned publicly-listed companies, even those where the government is a minority shareholder, have “fundamental rights” just like citizens of India.

Did the Articles of Association of the Company grant special rights to the Government? Does Mr Datta realize that VSNL was and is a publicly-listed company having an independent Board of Directors and management team and has to operate according to prescribed standards of corporate governance, since it has thousands of shareholder-owners in India and the US?

By using its “clout” in a way not expressly permitted by corporate laws and the Articles of the Company, the government could violate the law of the land and be taken to court, where judges would not entertain as evidence the type of yellow journalism Outlook is peddling.

Points 4), 5) and 6):
Mr Datta then asserts, baldly in the face of fact and common experience, that there has been no competition in the telecommunications market and VSNL enjoyed a monopoly. An analysis of calling rates suggest that there was a “southward plunge”, according to trade magazine Voice & Data: Both national long distance (NLD) and international long distance (ILD) have shown a negative growth to the tune of around 13–14 percent. The main reason for this negative growth was the aggressive competition between service providers in the ILD space.

To quote Mr Datta from his 4th Question: “The monopoly of VSNL in international phone calls was only ended for all incoming international calls. The monopoly of ALL outgoing calls was retained for VSNL. So when Mr Shourie says that the monopoly ended, he is only referring to a minor portion of it, which was the INCOMING traffic and NOT the outgoing calls from BSNL and MTNL. Why?

Mr Datta disregards the points made by Dr Shourie and this blog: that VSNL would receive ILD traffic of BSNL and MTNL,on a most favoured customer basis, at market rates”, and VSNL “had to match any market price that its competitors offered”. Moreover, VSNL was given this time-bound reprieve because its monopoly in the telecommunications industry had been taken away by the government, compromising the rights of minority shareholders of a company listed in the US and India.

Ratan Tata warned shareholders to brace for competition on September 3 2003. “No more ISD bonanza for VSNL”, Mr Tata had said.

He would have been saying the opposite thing at his company’s annual shareholder meeting if Mr Datta’s calumny would have been anywhere close to reality.

7) Finally, Mr Datta raises the canard about the cancellation of tax payable by VSNL. It is notable that VSNL had already won the case in 2000 at the Income Tax Tribunal, and the decision was in appeal. Hence, the liability was “Contingent” meaning that it would be payable if and only if VSNL lost the case at the higher Court after having already won at the Income Tax Tribunal.

Anointing himself Judge, Mr Datta seems to be certain that VSNL would lose the case and hence “We, the people got zilch amount from these taxes,” he claims wildly, legal due process be damned!

Once again, he seems to think that some sinister conspiracy is happening because this information on the tax liability was provided to the two bidders “A DAY BEFORE” the bidding day.

The moot point is both Reliance Industries and Tata group knew about this before they started bidding – hence their bid price captured this information.

Here’s how it works in practice – when a large corporate like Reliance or Tata is planning an acquisition or bidding in an auction, it hires a team of investment bankers and financial advisors who help the company build a financial model on how much it should be willing to pay for the asset it hopes to acquire. Such a model can be quite complex, and depends on all kinds of factors such as the capital structure of the acquirer, financing methods employed for the deal and of course the assets and liabilities of the target. Plug a number in or change a value in the model, and it correspondingly informs the acquirer how much is estimated to be the “right” price. This exercise is both an art and a science.

The reason it makes sense to try to do away with the Contingent tax liability is that it’s a risk that’s hard to model for the acquirer. How does one predict with certainty or estimate which way the higher court’s decision to go, whether that decision may be appealed further, how long the whole judicial process may take and then calculate a price based on all these variables on which to bid in the competitive auction? Given that the tax claimed was substantial, this issue could have derailed the entire disinvestment exercise. Dr Shourie and Mr Baijal may have exercised a certain judgment in doing away with the Contingent tax liability, but they did not err on the side of aggression since the Income Tax Tribunal had already thrown out the Income Tax Department’s argument.

Moreover, given the growth of the telecommunications sector, tax revenues paid by the new private companies have grown and the economic activity facilitated by the availability of cheap telephony have more than offset the “loss” caused to the pocket of Mr Saikat Datta and all other taxpayers of India. Just Reliance Communications Ltd. paid taxes of over Rs 370 crore in the financial year 2009-2010 – and this is guaranteed to be paid, not Contingent on anything.

Reliance Industries lost the auction, Tatas won the auction based on their more optimistic view of and assumptions about VSNL’s business prospects. Mr Datta would have a case that there was corruption if he could conclusively prove that just one of the bidders had access to this crucial input on waiver of tax liability but neither Tata group nor Reliance Industries has cried foul till date.

Moreover, in his hurry to implicate Tatas and Arun Shourie, Mr Datta assumes a Contingent liability is no different from an outstanding debt, and portrays a healthy disregard, almost contempt, for price discovery of VSNL’s assets by a market mechanism. By claiming that VSNL was sold for a song and “gifted” to the Tata group, Mr Datta implies that he knows something about VSNL’s business that even Mr Mukesh Ambani’s battery of analysts and advisors did not – else, why did they not bid the price up higher?

Finally, it should be noted that whatever the current or recent business relationship between the  lobbyist Nira Radia and former Disinvestment Secretary Pradip Baijal, it has not been proved to have any bearing on Mr Baijal’s record in that position. Mr Datta has tried to character-assassinate Pradip Baijal by referring to his links with the now “untouchable” lobbyist.

There is an old saying – To a man with a hammer, everything looks like a nail. Even if one ignores the calumny in the article, the selective reporting by Mr Saikat Datta and Outlook magazine reflects their deep-set bias, intentional or not, against free markets and entrepreneurship. Making the VSNL acquisition work hasn’t been easy for the Tatas.

Coming from a magazine whose Editor Vinod Mehta believes that India is now a “free market capitalist economy”, this should hardly be surprising. There is a rich body of research and scholarship stating how our nation is in dire need of second-generation economic reforms, which have been stalled since 2004. India is very far from being an economically-free country – our nation is 124th worldwide according to an annual ranking, behind countries like Gautemala, Serbia, Pakistan and Romania.

When the Editor’s understanding of economic issues is so shallow and so far behind the curve, what can one expect from the publication?

Perhaps this isn’t conscious or intentional – the team at Outlook may be suffering from what Malcolm Gladwell has termed “creeping determinism”.

Re-naming the blog: Swaraj is Suraj

There is a lot of talk these days about good governance, cleaner administration, faster execution.

This blog believes that these are nebulous terms that obfuscate more than illuminate. If we follow the principles of freedom, choice, competition, decentralization and the rule of law we will have better governance, administration and execution. That is, if we follow the classical liberal principles of devolution of power, respecting individual rights and curtailing the state’s discretion – most of the problems of our country would end.

That is, this blog believes that Swaraj is Suraj.

Hence the slight modification in the blog name. Carry on the good fight for individual liberty, for the Indian union, and for truly inclusive development.

Amartya Sen’s harmful education policy

Amartya Sen has often spoken against private tuitions, especially by government teachers – and the communist government in West Bengal implemented a ban on all tuitions by school teachers based on Sen’s recommendations. Now of course there is a certain conflict of interest here, but outright banning of tuitions where the teachers actually have an incentive to teach (as opposed to in government schools, where there is no performance pay) is counterproductive. Swami Aiyer had earlier taken Sen to the cleaners earlier, but we have some more data from the ASER 2010 report which further shows the stupidity and hypocrisy of Sen’s prescriptions

A clear decrease is seen in the incidence of tuition among children enrolled in private schools across all classes up to Std VIII. This proportion has not changed much among children enrolled in government schools, although in states like Bihar, West Bengal and Orissa, where private school enrolment is low, the proportion of children in Std V enrolled in government schools who take tuition classes is high

So not only is the law being blatantly violated in my state (thank god for law-breakers!), there is a clear correlation between lack of private schools and high incidence of tuitions.

Amartya Sen, like all good socialists, got it reverse. Instead of banning all private provisions to create an illusory level playing field, he and others should support an enhanced role for the private sector in education and other fields. That creates accountability, and then remedies/supplements like tuitions are less required. But if socialists had sense, they would not be socialists – now would they?

Why do we need nineteen brands of toothpaste?

Somebody recently told me how could I ever use mint toothpaste?

That reminded me of Nehru’s question – why do we need nineteen brands of toothpaste. Of course I did not bore my friend with another rant against Nehru. But I thought I would burden you guys instead.

Well we need many brands of toothpaste because there are a billion plus people in this country. Some like mint, some like it old plain simple. Some like herbal, some do not. Some need tartar control, some need whitening. Some do not care about what kind of toothpaste – and instead care about best prices at the quantities they seek, and so on. And yes, some just like better packaging etc too.

We are all free and unique individuals, and we must not sacrifice our freedom and individuality so easily. We work hard to earn our money, and we like to spend it the way we see fit. India may have won the battle of choice in toothpastes, but the war still hangs in the balance when it comes to even more important choices – in education, health-care, and so on.

There will always be some who see freedom as messy, wasteful, uncoordinated. They are wrong. Not only is freedom more moral than centralized control, it is inevitably more efficient too. We must learn to ignore those who ignore this lesson of history and economics.

How Should Companies Be Privatized? The Case of VSNL

Outlook magazine is carrying a cover story this week alleging irregularities in the privatization of VSNL under the NDA administration. The magazine has splashed the picture of Dr Arun Shourie, who was Disinvestment Minister in the NDA administration, with the caption “Arun Shourie’s Gift to the Tatas.”

I was very critical of this piece on Twitter and the writer of the story, Outlook assistant editor Saikat Datta asked me whether I would put together a blog post putting forth my views on the topic.

Mr Datta says at the beginning of the article, taking issue with the way in which the privatization was handled by the administration:

It gave away for Rs 1,439 crore a strategic public sector undertaking (PSU) flush with cash reserves, a monopoly over international and STD calls, infrastructure worth hundreds of crore and over 1,200 acres of land. Of this, 773.13 acres was surplus (a land bank meant for future expansion) and at least 387 acres should have come back to the government and the rest to earlier shareholders.

However, neither Arun Shourie as the disinvestment minister nor Pradip Baijal as secretary in the same ministry were paying much attention to this huge land bank circa 2002. The book value (when VSNL procured the land in the ’80s) of this 773 acres, distributed in Delhi’s prime Greater Kailash area and Chhattarpur, Pune, Calcutta and Chennai, was Rs 17.72 lakh.

Disinvestment, if defined as the strategic sale and transfer of management control of government-owned companies, is always a contentious issue. There are powerful political groups who believe it is important for the government to operate all types of companies in myriad industries, and are fundamentally and ideologically opposed to privatization, while others doubt the motives and intentions of those who would execute such a policy.

Simply put, privatization is a political minefield because those who benefit from it are a highly fragmented group while those who lose because of it are a highly consolidated and unified group.

The Outlook article then goes on to detail its allegations of how the Disinvestment Ministry showed favours to the Tata Group. Dr Shourie has responded to these in detail, pointing out factual inaccuracies (such as the canard that post-privatization VSNL had a monopoly over national and international calling) in Outlook’s claims and emphasizing how VSNL minority Shareholder’s rights were accommodated (given that it was a public company listed in India and the US) by providing it a National Long Distance licence without Entry Fee to offset the annulment of its licence monopoly on International Long Distance calling. Of course, an individual Shareholder’s rights and an entity’s contractual and property rights are a minor detail and don’t seem to interest Outlook.

It is also worthwhile referring to Pradip Baijal’s book on India’s disinvestment experience, Disinvestment In India : I Lose, You Gain. In the book, Mr Baijal calls the VSNL case an “ideal privatization:”

There are many principles of doing a good privatization deal. A public monopoly is much better than a private monopoly, the company being privatized should have a shareholding, so that the market could also evaluate the share price along with the valuers, the best in the market should be encouraged to bid, the deal should be in the favour of neither the seller nor the buyer – it should be in the public interest. All these parameters of a successful privatization were achieved in this case through a very tortuous process. VSNL was a challenging privatization.

Clearly, neither Dr Shourie nor Mr Baijal seem to have taken the matter lightly, as Outlook insinuates. Specifically on the issue of VSNL’s land bank, Mr Baijal writes:

Then came the ticklish issue of 770 acres of surplus land. The solution – separate the surplus land from VSNL. Also the sale proceeds of such land would go to the government as per pre-sale share structure.

Mr Baijal records in his book that the government obtained a per-share price for VSNL at 11 times earnings compared to pre-privatization market placements at a multiple of 6. In plain English, this means the government obtained a hefty premium when divesting VSNL. The Tata Group beat Reliance Industries in a closely contested bid for VSNL, and the land assets owned by VSNL had been ring-fenced from the sale of the VSNL’s core business of telecommunications.

Immediately after privatizing the company, international call rates fell dramatically due the dismantling of the monopoly enjoyed by VSNL, falling by over 90% over the next 4 years. This fact flies in the face of Outlook’s insinuation that the Tatas were given VSNL as a “monopoly”. Monopolies raise prices charged to consumers, they don’t cut them. In fact, it will be accurate to say that Outlook has published a blatant lie.

It should also be noted that the Tatas are yet to earn even one paisa from the surplus land owned by VSNL. Essentially, the issue of how the land assets, which has been ring-fenced and the government’s ownership protected, should be de-merged is yet to be resolved. As Dr Shourie notes in his reply to Outlook, the DoT is still considering how this should be done. Hence, Outlook’s headline proclaiming the “gift” to Tatas is misleading at the very least and malicious and libelous at worst.

Even the Tatas did not anticipate the severe competition in the market that ensued, says Mr Baijal in the book. Given these facts, is it reasonable to state that the Tatas got VSNL for a song because of incompetence on part of Mr Baijal and Dr Shourie?

The problem is Outlook has only consulted the government’s lawyers and accountants as part of its “investigation” and perusal of a “mountain of documents” to publish this latest breaking-news story.

As part of the due diligence for the story, Outlook could have also talked to an equity analyst at a brokerage firm covering the publicly-listed company to ask them how the acquisition has worked for Tatas – maybe that would have thrown some light on how lucrative a deal it was for the acquirer.

Entrepreneurs and business managers know what havoc a 90% drop in product pricing because of stiff competition can cause. It’s safe to say that Tata Group would have faced a serious management challenge to make the VSNL investment work.

Later in the chapter on VSNL, Mr Baijal opines:

VSNL’s balance sheet and share price movement shows that Tatas have been struggling to make this investment profitable, the government has lost taxes and BSNL has lost connectivity charges.  Perhaps an accountant would say that we could have earned more than 10 times the revenue if we had privatized VSNL as a monopoly and the other stakeholders, including the government, also would have continued to make huge profits.

Who is the gainer then and why did we privatize? The answer is not difficult to find and that is why the title of this chapter  highlights this as a perfect privatization. The biggest gainer of this privatization has been the consumer as with the withdrawal of a public company and a monopoly from the network, it was easy to increase the forces of competition. A public sector incumbent would never have allowed this process to go on smoothly.

What used to be the case in the telecommunications sector, is very much the case today in India’s coal and railways industry. Both these key sectors are government-owned monopolies – but they don’t have to be. All of us are paying higher prices for myriad goods and services because Coal India Limited is the only coal company in a nation with the world’s 5th largest coal reserves, and the Indian Railways enjoys a monopoly on railroad transportation in the world’s 2nd fastest growing economy.

Don’t have reliable power supply in your town or fed up keeping up with rising prices of everyday commodities? Chances are this is being caused at least in part by these two government monopolies.

We celebrate when the Indian Railways show a “profit” or Coal India has a record IPO. We shouldn’t because these companies are prospering at our expense, and are an “invisible” but substantial drain on the performance of our economy.

The Outlook article quotes at length from then Attorney-General Milon Banerjee’s Legal Opinion and the CAG report [PDF] on the VSNL transaction. The government’s lawyer or accountant would naturally find fault with what was done in the VSNL case – it is to be expected, because as Mr Baijal notes, it did cause a “loss” of revenue. Those institutions are correct, since their job is to watch out for the government’s interest. They do not speak for consumer interest, for the interest of the Indian citizen who is using those services.

For citizens, the VSNL privatization worked very well. Many Indians have relatives or friends in the US and other countries. Remember when the calling rates were over Rs 100 per minute in the 1990s? Since the monopolist VSNL was privatized and competition introduced, costs have collapsed to Rs 7 per minute – and we haven’t even adjusted for inflation.

The Government of India is not making huge profits and has “lost” revenue, but you and I can talk to our friends and relatives at a much lower rate. Remember in the 1990s when Internet access was sold by the hour and cost tens of thousands of rupees for a few hundred hours? That was a government monopoly making a “profit”.

Imagine what this entails for the coal and railways sector, and the cost each of us is paying for the gross inefficiency entailed by the unnecessarily monopolistic nature of these sectors. It takes very strong political resolve to privatize such monopolies because it involves upsetting entrenched special interest groups who benefit from the monopoly – and Disinvestment Minister Arun Shourie was able to do this work because of the political backing provided by Prime Minister AB Vajpayee, who held back the Swadeshis within his own party and made economic liberalization his mission. In fact, AB Vajpayee made Connectivity via telecommunications a cornerstone of his government’s agenda and the privatization of VSNL was a key component to achieve that target.

In 1991, Finance Minister Manmohan Singh too was able to liberalize the economy because of the political backing provided by Prime Minister Narasimha Rao.

It’s to these politically-difficult policy decisions and implementation that we owe our recent economic success. Since 2004, Prime Minister Manmohan Singh has had no backing from Sonia Gandhi, and the liberalization process has come to a standstill. Prime Minister Manmohan Singh’s government has also succeeded in redefining Disinvestment to mean Monetization.

Finally, we should evaluate whether the CAG report on the issue should be treated as gospel. As noted earlier, the government’s accountant would rather have that VSNL should have continued like Coal India and Indian Railways today – maximize “profit” for the Government, which is basically ripping off Indian citizens and consumers and hijacking the economy’s productivity gains.

Coal India and Indian Railways are government-created monopolies short-changing every single Indian consumer. They “profit” because the government doesn’t allow anybody else to take them on. They are like the student who comes first in a class of one person!

The CAG report on the recent telecom scam has received widespread attention and the political Opposition has used it to put the UPA administration on the back foot – but revenue maximization does not serve the consumer’s interest. Because of the government’s revenue-maximization policies, broadband Internet access and 3G have been priced out of the reach of most Indian consumers. Is this in the national interest?

The positive externality to the nation and the economy of widespread, cheap Internet and telephony connectivity is incalculable, and far exceeds the “loss” caused to the “national exchequer”. That’s what the government’s accountant, the CAG, won’t tell you.

Arun Shourie and Pradip Baijal were votaries of market competition and watched out for consumer interest while being in government. This was their “fault,  is effectively what Outlook’s analysis implies. Unfortunately, entrepreneurs and votaries of the free market are viewed with suspicion in India even today and motives are ascribed to their actions – something which Mr Baijal hinted at in an interview.

Outlook says in conclusion:

Tatas made the money, the nation remains shortchanged.

You decide – has “the nation” been shortchanged? What does ubiquitous, cheap telephone and Internet connectivity mean to Indians? Is making money a crime – all indications are the Tatas have earned the money the made (we’d have to talk to an analyst tracking the VSNL stock to be sure they have actually made any substantial money), given how competitive the industry became after their acquisition of VSNL?

Don’t Outlook and its publishers seek to make money by selling their magazine? Why make it sound like a sin?

The tone and tenor of the article written by Mr Datta is insinuative, sensationalized and provocative when it ascribes sinister motives to Tata Group and the NDA’s Disinvestment Ministry, and as I’ve tried to document, their thesis is quite baseless. Last year, Outlook earned our respect by being the only mainstream media outlet to report extensively on the Radia Tapes episode. It is disappointing to see this standard of journalism from the same team.

Sadly, for all the celebratory notions we have of how great our entrepreneurship spirit is, leading Indian news magazines like Outlook seem to bat for the government’s interest, not for consumers and citizens, and seems to consider legitimately earned profit to be a dirty word, just like India’s first Prime Minister.

We all know where that landed us.

UPDATE: Before writing this post, on a debate that ensued on Twitter, I made certain comments about the quality of India’s higher education system and the quality of liberals arts training offered at universities. These comments were not directed at any individual or institution, I was referring to the state of higher education in India in general.  It should in no way be construed as a personal attack on any individual. I have the deepest respect for India’s journalists (including all those at Outlook, who as I noted above were instrumental in ensuring a wide audience came to know about the Radia Tapes episode), most of whom have rendered yeoman’s service as the Fourth Pillar of our democracy.

UPDATE 2: Saikat Datta has responded to this post here. This blog’s reply to Mr Datta’s response is here.

Classical liberalism 101 – Part 2

Talking about liberalism in India, one falls for the insipid and inane debate between some mythologized Western rugged individualism and ostensible Eastern harmonious social co-operation. But we are talking about the autonomy of individuals and groups as opposed to the ever-increasing authority of the state and its functionaries – bureaucrats and politicians. For example, one can be for generous voluntary charity and various socio-cultural associations while still being against the idea of these aims being enforced by the government – especially beyond a certain necessary minimum and in a one-size-fits-all centralized manner. One can peacefully protest or better still economically boycott artists and writers producing work that one finds offensive – that happens to be a voluntary, social-based activism route – while still defending those very artists from being arrested by the government, or their works being censored. After all, such authoritarian steps by the state reduce the autonomy of those individuals who may not find the paintings, say, to be offensive. Indeed, even if everybody found that painting to be offensive, but so long as it was just a painting, banning it still takes away the autonomy of the artist.

Therefore, when one talks about individual freedom, one does not call for a lonely atomism – whereby any collectivism is looked down upon. Getting together for a cause – or for good old fun – is second nature to man. What is morally worrying to many is a coerced collectivism that is either not prevented by the state, or is worse encourage by it – whether such collectivisms are along social divisions like caste or religious purposes, or along the more Marxist thought of class lines. As the American polemicist Thomas Paine wrote in his revolutionary pamphlet, Common Sense, the biggest mistake that many people make (and quite clearly, continue to make) is to confuse the nation’s state with the nation’s society. Whether something should be done is one normative question,who it should be done by is another normative question (and how it should be done is yet another – although that is less of a normative and more of a positivist question). Indeed, such ideas based on voluntarism and trusteeship formed the underpinnings of Mohandas Gandhi – who was strongly against a centralized, powerful state, and who has been grossly misinterpreted by Indian politicians as we will read about later. Another point to note here about this rather silly accusation of individual freedom resulting in a lonely and listless society is that it is actually coercive collectivism – especially in the form of socialism – that leads to people living lonely and relatively more “atomized” lives with no more need for family and community as a safeguard for individual welfare.

(Cross-posted at http://spontaneousorder.in/?p=1340 )

Economic Freedom of Indian states

The Cato Institute and Indicus Analytics have released the Economic Freedom of the States of India 2011 report along with the support of Friedrich Naumann Foundation. The rankings are based on the latest comprehensive and objective data available (2009), and is modeled on the Fraser Institute’s world rankings. We find that Tamil Nadu is economically the most free state in India, with Gujarat a close second. Andhra Pradesh (AP), at third rank, is also the fastest improver. Swaminathan Aiyar has a chapter explaining the rise of Andhra Pradesh which nicely supplements the great work done by Bibek Debroy and Laveesh Bhandari in the rest of the report. More importantly, and some would say predictably, we find a positive correlation between economic freedom and economic growth.

This report also shows us the importance of decentralization. If states must compete on efficiency to get more businesses and skilled labour, they are more likely to enact reforms than the central government. The mildest competition may push one further than the strongest of convictions – especially in a democracy like ours. Indeed, free states healthily competing against each other to improve their governance and business environment are the laboratories of democracy. Although one must add the caveat here that part of the rise of AP’s ranking was that it was better able to exploit central funds and hence reduce the size of its state government relative to the economy, which was one-third of the ranking value. Of course, better accessing central funds is not a strategy to be recommended across all states because any top-down fund is by definition fungible.

(Cross-posted at http://spontaneousorder.in/?p=1333)