Fiscal Deficit & The Quality Of Government Expenditure

INTRODUCTION
With the Fiscal Responsibility Bill stalled, the pre-budget time is apposite for taking another look at this issue. Fiscal sustainability has three aspects. One is the trend in the debt GDP ratio as determined by the primary surplus/deficit and the growth rate relative to the real interest rate, second the quality of government expenditure and third the efficiency of the tax system. In this article we focus on the quality of government expenditure. One of the most important implications of the fiscal problem in India is that the government has no money to spend on essentials. The basic problem is therefore of identifying and eliminating wasteful and unproductive expenditures so that the fiscal deficit can be eliminated and more money spent on essential government functions.
INTEREST EXPENDITURE
Interest payments are a major item of expenditure, with about half of total Central government revenue spent on interest payments. They thus “crowd out” other potentially more productive items of government expenditure.
In drawing implications for the present and future it is important to look back into the past. Interest on accumulated debt is the embodiment, as it were, of past sins. That is borrowing to finance past government expenditure. In the past few decades such expenditures consisted of both government consumption (or revenue expenditure) and unproductive investment (or capital expenditure). Thus concern about interest payments is implicitly a concern about the volume and/or quality of expenditures in the past. Some of these past government consumption and unproductive government investments are rightly viewed as crowding out present government expenditures.
One implication of this line of reasoning is that to the extent that this debt was incurred in financing investment or capital it should be allocated and assigned to these investments and the concerned organizations (e.g. PSUs, PSBs, DPEs or administrative departments). A substantial part of the indirect subsidies are the cost to the government of servicing the debt assigned to each of these organizations (organized by sub-sectors & budget heads instead of by organisations). The rest is the depreciation of these assets and their quality because of lack of replacement investment. The net value of these organizations to the government (family silver or copper as it may turn out to be) is therefore the gross value of assets or equity owned by the government in each organization minus the debt incurred by government in setting them up.
The major policy implication is that, if we are concerned about government debt and interest payments, we should sell all units producing “private goods & services” and use the proceeds to repay the debt. Operationally this could be done by creating an independent dis-investment organization and assigning to it both the ownership of the equity and an equivalent amount of debt obligation and giving it the mandate to eliminate both in an efficient way over a fixed period of time. This would reduce government interest payments over time, eliminate the crowding out of current expenditures by interest payment and allow government to focus on essential expenditures.
PUBLIC GOODS
The next question that arises is what are these “essential” government expenditures that have a higher claim on government revenues? One important category consists of Public Goods & Services. Public goods are characterized by an element of non-excludability (e.g. defence, police) or very high transaction costs for pricing (e.g. local roads) so that they cannot be charged for on an individual basis. They (public goods & services) are almost by definition items that must be paid for out of tax revenues.
They include,
i) Roads [excluding major, high density highways] & Water ways [river navigability, drainage systems, flood control]
ii) Legal System [laws, courts, judges]
iii) Public security system [police, prosecutors, jails]
iv) Public Health systems [Communicable diseases, epidemic monitoring & control, Public drinking water, sewerage & sanitation systems]
v) R&D on socially beneficial areas, including tropical diseases, agriculture (e.g. appropriate crops & rotation patterns for different agro-climatic regions), pollution.
vi) Public Education [rights, responsibilities, civic & democratic virtues, public morality, productive knowledge (e.g. agricultural extension), preventive health & population restraint, pollution abatement, water conservation]
vii) Environment & Pollution, forests, parks.

Central and state governments have spread their limited resources too thinly over too many areas and items of expenditure. As a result many of these essentials have suffered from a lack of resources and attention, and the availability and quality of these public goods has deteriorated dramatically. The time taken in court cases is legendary. Those of us who believe that Bihar and Eastern UP is hundreds of miles away may be surprised to know how badly the local/ground level police systems have deteriorated in the heart of the capital of Delhi. In this era of severe fiscal problems it is in my view essential for government to go, “Back to Basics” and refocus its attention on public goods & services.
As most of these public goods will continue to be produced or supplied by government to large extent for quite some time it is essential to improve the efficiency of production in terms of cost & quality. This is considered below
EXTERNALITIES & SUBSIDIES
Degree of Externality
The second essential area of government expenditure is on subsidies for those goods and services that have large externalities. In principle all private (non-public) goods & services can be assigned to three categories: Those with high, medium and low or no externalities. Elementary education, rural water supply, adult literacy, rural secondary education and development of markets in remote, hilly & backward areas have high externalities.
Policy Implications
Two policy implications follow:
a) Phase out subsidies on goods & services with low or no externality such as Industry, power, shipping, road transport, other transport, coal & lignite.
The phase-out schedule must however give sufficient time for,
(i) Developing a clear, transparent and positive framework for private production & supply,
(ii) An independent regulatory framework for natural monopoly segments and
(iii) Consumers to adjust to higher cost-based prices (excluding X-inefficiency costs of monopoly & corruption).
b) Align the actual subsidy ordering with the ordering of degree of externality.
This is implicit in the calculation of financial gains of phasing out subsidy.
PRODUCTION EFFICIENCY
Relative Inefficiency of Public Production & Supply
Even if there is a need for government subsidy, it does not follow that the good or service must be produced and/or supplied by the government. Government should only produce and supply such a good or service if its efficiency is higher than that of the private (individual, co-operative or corporate) sector and non-profit organisations (NPOs).
There are inherent problems in government production and supply of private goods & services. The CAG & other government auditing procedures are not conducive to commercial production and supply, particularly in a highly complex economy subject to myriad risks and shocks. The principle agent problem means that public employees and their overlords have a strong incentive to first create rents & then appropriate these rents for themselves. As a result corruption has gradually become endemic and there is much evidence that government production is less efficient than private. The only profitable government entities are either ones in which resource rents (the difference between world price and the full cost of extraction) can be disguised as profits, or government created monopolies (created by banning private production or investment for decades) with no private benchmarks for comparison.
The production, supply & maintenance of most of the subsidized goods produced by the public sector can and should be progressively opened to the non-profit organisations, co-operatives and private providers. The first step would be to develop a supportive policy framework for private entry. A modern regulatory framework must also be created for social sectors where quality is difficult to judge before purchase but is critical to the future of individuals.
Solution
There are many detailed issues involved in improving the efficiency of government programs. From a broad (macro) perspective, this requires improvement in two areas through dramatic changes:
Public Accountability
The key to public accountability of government agencies supplying goods & services and government servants and political masters overseeing them is the citizens’ right to information. A “Right to Information Act” must be enacted to return this right to the public. The poor in whose name all expenditures are justified must have the right to know all the facts relating to expenditures made/justified in their name. The information needed to be made publicly available includes the names of those who have authorized or spent the money, the purpose for which the money was spent, the names of the companies or individuals who received this money and what they have produced/done for receiving this money.
Issue specific user groups must be empowered to share with Panchayti raj & other government institutions the responsibility for monitoring public activity at the village and local level. For instance, all parents of school age children in the village (or set of villages) must be part of a user group for monitoring the activities of the village primary school, its teacher and the government supplies allocated to it. Similar user groups should be set up for all local public goods and services provided by the government.
Modern Management Practices
A complete and thorough modernization of the systems and procedures for production, supply and procurement of goods & services is needed. Perhaps not more than 25% of government projects use PERT/CPM a technique of project management, a technique that was developed in World War II and taught in US engineering colleges since the sixties. According to an informal survey only a few progressive organisations like NTPC use these techniques. Modern inventory control is a subject I recall discussing with the Navy chief over a decade ago, only to read in the newspaper recently that the armed forces still do not have modern inventory management systems.
INCOME TRANSFERS
Many government expenditure programs are hypothetically directed at the transfer of income to the poor, while several subsidies are justified by such reasons even if the externality is low. An additional consideration enters the picture in this case: The (transaction) cost of direct vs. indirect transfers. Indirect transfers have some self–selecting features but higher transaction costs. We must start experimenting with the use of new smart card technology for providing income transfers to the poor, in place of the plethora of poverty alleviation programs with enormous administrative cost and notorious leakages.

Capital Account Convertibility: Looking Back and Ahead- Lessons from the Asian Crises

IntroductionThe Asian crises has come and gone. The period in which forecasts of its negative effects were continuously revised upwards was followed by constant downward revision of these effects. The current consensus is that, even though the initial severity of the crisis was surprising (given that it occurred in economies thought to be “miracles”) the recovery was as quick as in other previous crisis. As in the case of our own BOP crisis of 1991 the “Asian crisis” was due to a mix of underlying Structural Problems, increasing Macro-economic Imbalances and Triggering Factors or Events. In a few countries like S. Korea recovery has been as fast as (or faster than) in India, while in others like Indonesia it is likely to be much slower. The speed of recovery has depended on the vigor with which some of the critical structural and macro problems have been tackled. Both the problems and the solutions are by now reasonably well understood.
It is therefore time to put aside some of the irrational fears unleashed by the “Asian Crisis” and resume the process of moving towards capital account convertibility. As has been our practice so far, this should be done with “all deliberate speed,” that is at a speed which is reasonably fast but does not involve excessive risks.
Lessons from Crises: Old & New
Though the Asian crisis has come and gone, the processes of separating the right lessons from the wrong ones, is not complete. More important, the lessons for the crisis countries may differ in important respects from those for India. It is necessary to be clear about the lessons for India, before we start applying them to the issue of Capital Account Convertibility for India.
We had already learned several lessons from our own crisis of 1991 and the Latin American crisis of the previous decade. The Eighth Plan working group on Balance of Payments (1989) had analysed India’s debt profile and suggested two fundamental changes:
a) A decrease in the ratio of short term to total debt as the former was dangerously high.
b) A strong effort to attract Direct Foreign Investment so as to decrease the external debt-equity ratio of the country.
A Planning Commission paper [1989] showed that the Fiscal Deficit had risen in tandem with the current account deficit. It subsequently became clear that the former was a major cause of the latter and several government economists were internally warning about the dangerously rising Fiscal Deficit (before the crisis).
The fixed overvalued exchange rate was also recognised as a major cause of the sharp rise in the current account deficit and the 1991 crisis. Opening of the current account over the next two years was therefore accompanied by a flexible exchange rate policy. Post-crisis it was also recognised that the regulatory system for banks as well as stock markets had to be modernised and strengthened. Efforts in this direction started in 1992 and have continued steadily (though not very fast in some sub-sectors) since then [PC working paper 2001/4].
The Asian crisis did reinforce (and make widely known) the importance of flexible exchange rates and Banking de-control & regulatory reform. It is now more widely recognised that the banking regulations have to be brought up to international standards.
There were, also, a few more specific lessons, which are of relevance to our move toward capital account convertibility. In each of the affected Asian countries the crisis lasted about a year and recovery has taken place in two to three years after onset. Even in Indonesia the basic crisis lasted for about the same time and continuing uncertainty is largely due to political violence and constitutional upheavals. This pattern of crisis and recovery is very similar to the Mexican crisis of 1994. Fixed exchange rates and excessive external short-term borrowing (defined as less than one year) were the two most common macroeconomic culprits. The obverse of this proposition is that external loans with residual maturity of over one year did not add at all to the crisis, as the crisis was over within a year. Portfolio flows proved to be somewhat more volatile than expected, partly because of the fixed exchange rate; nominal exchange rate had not been allowed to appreciate in the preceding period of large inflows. As expected, however, stock market declines from panic sale of foreign portfolio equity proved to be self-correcting. The problem of declining stock prices and capital flight was limited to less than a year, as net inflows re-started as soon as the bottom had been reached. Further there is a strong suspicion that as in the Tequila crisis, capital flight originated from domestic investors and not foreign ones. Conversely FDI again proved to be much more stable with reductions in net inflows but no net outflow even during the crisis year. Overall lessons, namely the need for flexible exchange rates, flexible interest rates, competitive stock markets and open forward markets are both helpful in avoiding crisis and in ending them rapidly.
On the structural side, the greatest underlying problem was the control mentality and subversion of markets by the government, alone or in tacit or open collusion with business and financial institutions. More specifically, excessive lending for real estate, which may have been part of the problem in some countries, represented bad lending practices and poor regulatory systems. The problem was not equity investment (domestic, FDI or portfolio) in real estate firms per se, but excessively risky lending to firms (high debt-equity ratios). This was part of a more general problem of highly leveraged firms obtaining further loans from banks, which modern prudential regulations could perhaps have identified as excessively risky for the financial system as whole.
Capital Account Convertibility Reform
Formally we became convertible on the current account in 1994. There is a need to eliminate the gap between the theoretical position and the reality. All import controls (QRs) imposed on protection grounds were eliminated by April 1st 2001. The lifting or easing of exchange controls has however been very limited. Use & purchase of foreign exchange by individuals to import goods and services into India should be made virtually free by April 1 2003. This can be effectively achieved by allowing individuals to use international credit cards or bank cheques (FE denominated accounts) for purchasing goods & services up to a value of $100,000 per annum. This limit could be phased in over the next year, in two steps, starting with an immediate announcement of a $50,000 per annum (per resident) limit (R1). The credit card records would be available to RBI (as well as to the Income Tax department) and any violation of the provision would attract penalties under FEMA. The limit could be raised to $100,000 within the next 13 months (R1b).
Asset Purchase: Residents
A significant step towards capital account convertibility could be made, by simultaneously allowing individuals, businesses and Corporations to make capital transfers abroad, including for opening current accounts (R2). This would be up to a limit of US $100,000 per annum per resident, to be phased in the same manner as the limit for purchases. Within this limit employees of Indian companies could also invest in the ESOPs of foreign companies. The resident entity would however be required to keep a record of all such transactions and the assets so purchased, for showing to RBI or other designated authority when required to do so. In fact there could be a single overall limit of $100,000 that includes both current and capital account transfers.
These two recommendations can be combined together into the following single one:
Recommendation 1: Every resident individual should be allowed to use up to $50,000 per annum to purchase goods or services abroad, to open a bank account abroad or to purchase assets abroad.

This policy would at one stroke introduce virtually complete convertibility for 99% of our population, without giving rise to a significant increase in either capital outflows or import of goods and services. That is for those operating with tax paid income and assets. Capital account convertibility has already effectively exists and has existed for decades for those operating with so called ‘black money.’
Recommendation 2: Corporations and Businesses be allowed to make financial capital transfers abroad (including opening bank accounts with check facility) up to a limit of $50,000 per annum.
They would be subject to certain transparency requirements such as credit card payment, cheque payment from FE account and record keeping.
GDR/ADR: Resident Companies
Issue of GDRs or ADRs is the least risky form of equity issue from the issuing country’s perspective. It is dollar denominated and trading occurs between non-resident. There is therefore no direct effect on the country’s foreign exchange or equity market at the time of a crisis.

Recommendation 3: Issue of ADRs or GDRs by resident companies (Public or Private limited) should be completely de-controlled.
No prior approval would be required from government (or RBI), but the issue would have to be reported to RBI within a reasonable period after it has been made.
FDI & ESOPs
Foreign Employees should be allowed to participate in the Employee Stock Option Plan (ESOP) of an Indian Company with full repatriation benefits, subject to the FDI rules on aggregate foreign equity holding. Such ESOPs are going to be very important in the development of Knowledge based Industries & Services such as IT and Drugs & Pharmaceuticals. The automatic route would also apply to such ESOPs. For instance a company, in a sector in which automatic 100% foreign equity is allowed as per FDI policy, can issue any amount of ESOPs to foreigners by going through the automatic route to RBI.

Recommendation 4: Indian companies should be allowed to issue ESOPs to foreign employees on the same basis as the FDI policy applicable to the sector in which they are operating.
External Commercial Borrowing
As our analysis of the Asian crisis showed there is little risk to the country in external borrowing of maturity above one year. The only thing to be watched carefully is the amount of loans with residual maturity of less than one year. The two together should be kept well within the foreign exchange reserves. It therefore follows that ECB policy can be drastically liberalised without excessive risk. At present ECB of maturity greater than 10 years is outside the ECB limits (i.e. de-controlled). We should plan for complete de-control of ECB and FCCB of maturity greater than one year by 2003-4. These should be phased in starting with immediate de-control of ECB of average maturity greater than 5 years and above, followed by,

Recommendation 5: De-control of ECB (and FCCB) of average maturity of three years or more by resident companies.
Indian Direct Investment Abroad
True Globalisation requires that Indian companies should go out into the world and compete across the globe. This is the most effective way of learning and developing competitive skills. It is difficult enough for companies that have been protected for long to do so without us creating restrictions and hurdles for them.

Recommendation 6: De-control the flow of Indian Direct Investment Abroad by Indian Companies up to a limit of $50 million per annum. Remove the conditions on repatriation of earning by way of dividends etc.

Recommendation 7: As a corollary to the above policies, a coupling of FDI and Indian Direct Investment Abroad in the form of Swap of Equity between an Indian and a Foreign Company would also be permitted (freed) within the allowed FDI ceilings.
Portfolio Investment
One of the lessons of the Asian crisis is that foreign equity investors can display a herd instinct, when they are confronted with extreme uncertainty and lack of information. This creates volatility in portfolio flows. It is a standard principle of financial markets that the more diverse the set of owners of financial assets the less likely it is that they will have the same expectations and act in the same way. Any decrease in controls on portfolio investment in India by foreign residents, that results in a more diverse set of foreign equity holders, is therefore highly desirable. Thus within the prescribed aggregate equity limits for FIIs , we should encourage all non-residents to invest in the Indian equity market.

Recommendation 8: All non-residents (venture capital funds, insurance companies, pension funds, endowments, wealthy individuals etc.) should be encouraged to make portfolio investment in India through a SEBI registered intermediary (portfolio manager, mutual fund etc.). The direct holding of any non-resident should not exceed 5% of the total shares of any given company.

Recommendation 9: NRI’s, FII’s and other non-residents should be allowed to hold equity up to 100% in listed companies, venture fund companies and in the IPOs of venture fund assisted companies. In the case of listed companies, this will be subject to a board resolution.

Universal Primary Education and the Spurious issue of “Privatisation”

The bold move of the Delhi government to hand over about 30 of the worst MCD run schools to “private parties” has raised a storm of opposition. These schools are in slums and peripheral areas, where the need for education is the greatest and the quality of education provided is the worst. Sadly even well-meaning comments reveal a lack of knowledge of basic facts. This article tries to clear the fog of confusion, and goes on to addresses the broader issue of how to ensure universal education in the current environment of fiscal stringency.
The Indian constitution enjoins upon the government to ensure education for all its citizens. The courts have interpreted this provision to say that private commercial schools are not allowed. So how can the Delhi government handover its schools to the “private” sector? What about all those “private” and “government aided private schools” that we read about. The confusion arises from the definition of “private.”
Strictly there are only two types of schools “government schools” and “non-government schools.” In common parlance most of us refer to the latter as “private” schools. The flaw lies in equating “private” with “profit making.” Non-governmental schools can only be set up by non-profit organisations (NPOs) such as societies or trusts under the societies act or relevant trust act. The law as it stands today does not allow the setting up of commercial for-profit organisations to provide schooling, so the question of any school being driven by the “profit motive” does not arise.
The Delhi govt proposes to hand over some schools to non-profit organisations who can run them much better than the governments of the last fifty years have been able to do. It is extremely hypocritical of those who can afford to send their children to good quality “private” schools to rail against this effort to improve the quality of education to poor children on the specious and totally mis-leading charge of “privatisation.”
6.4.1 Universal Primary Education
The union government recently decided to make elementary/primary education a fundamental right, with the operational goal of making it universal and compulsory. Is this merely “pie in the sky” rhetoric or is it a realistic goal. The objective cannot be met by a business as usual approach that pumps more funds into existing systems of government education - namely more funds for more government run school buildings and for hiring more government teachers (who don’t show up to teach). What can a new approach consist of?
Rashmi Sharma has shown that teachers are absent from their work for 14 days a month for officially recognised reasons. Unofficial absence, when added to this, would mean, particularly in rural areas, that teachers are seldom available to do any teaching. Add to this the poor quality of teachers and you may begin to comprehend how uninteresting school is for students in government schools. In fact the teachers themselves are aware of this low quality as demonstrated by the experience of my 17- year old son in a slum in the heart of Delhi last summer. The government teacher there requested him to give her own son lessons.
And all this costs the government upwards of Rs 1000/child /year. Compare this with the cost to NPOs/NGOs of Rs 50 to 65 per child/month. There are now NPOs who have offered to take on the task of teaching at 1/10th the cost incurred by government, with a guaranteed and measurable quality of output (i.e. testable levels of reading, writing and arithmetic ability). One can now begin to get an idea of what can be achieved by a radical new approach.
6.4.2 Rural Schools
In modern economies schooling constitutes one of the most important functions of local government. Primary schooling should be completely de-centralised to Panchayats over the next five years. Each Panchayat should however be required to set up a user group consisting of mothers of young children along with Panchayat officials, the local teacher and a representative of the State education department to monitor and supervise the functioning of the school so as to ensure quality. The funds currently being spent on the primary school system should be devolved to the Panchayats along with the authority to hire and fire teachers. In the transition period the pool of teachers could consist of the currently employed teachers.
Govt should provide a capital grant to any NPO/NGO that wants to set up and run a secondary school in any rural area not currently serviced by a secondary school. Special focus should be on schools for girls so that they do not have to walk unreasonable distance from home (larger grant could be provided in such cases). I understand that the UP education authorities have successfully used this approach to provide a secondary school for girls in every single district of the State. Such an approach is even more important in the poor, badly governed States.
All existing urban primary school facilities should be handed over to Non-Profit Organisations/NGOs on an as is basis. This should be done over a five-year period (say) starting with the worst run schools. The government could provide a one-time grant to those NPOs wanting to set up schools in underserved/slum areas. This would be done on the clear understanding that they would not be entitled to any further subsidies. It would also be made clear that they have to follow some simple basic norms like free education for all those living in the neighbourhood who cannot afford to pay.
The government would focus on training of local teachers (using innovative techniques and communication facilities), and in providing regulatory oversight The laws, rules and regulations relating to setting up and running of non-profit schools must be simplified. This requires a change in attitude from control to modern regulation. Govt. should focus on ensuring transparency to parents of enrolled students and ensure that there is no financial fraud or misleading advertisement of quality of the schooling provided. These changes can transform the educational picture of the country within the next 5 to 10 years.

Telecom Policy For High Growth

Indian Telecom is an example of one of the interesting paradoxes of the nineties. Despite Telecom policy & Telecom regulation being roundly criticised, GDP from communications has been one of the fastest growing sector of the Indian economy. There is still an opportunity to reform and simplify the regulatory framework further and maintain or even increase during the next decade the growth rates seen in the last. This article focuses on selected aspects of policy that need to be reformed, namely licensing, spectrum permits, revenue share and Universal service obligations (USO).
Over the last few decades there has been enormous technological change in telecommunications. This has reduced costs, made possible the complete unbundling of different segments of the industry, led to a convergence of Computers (digital) communication (analogue) and Media (video) and is close to eliminating the “natural monopoly” traditionally held by the local wire line network or ‘Basic service.’ Our policy framework does not fully reflect the revolution that has taken place and will be completed over the next decade or so.
A series of papers since 1998 has outlined the principles on which an efficient Telecom policy should be based (see for instance “A Communication Policy for the 21st century, Economic and Political Weekly, June 3-9, 1999). These principles are, (a) A Market based approach to investment and production (i.e. supply), which is the hall mark of economic reforms, (b) A forward looking approach which anticipates, rather than follows, rapid technological changes in Telecom and communication, and (c) The unbundling of licensing (spectrum permit, service provision and regulatory/technical/prudential).
Two decades ago industry required a license to invest and produce. The amount of investment and the types & quantities of goods that could be produced were specified on the license. The time has come to abandon this practice in the telecom sector, by de-licensing investment in telecom and decontrolling the provision of all telecom services. In other words the spectrum (bandwidth) permit would be unbundled from the (infrastructure) investment and service provisioning/production license and the last two must be freed from control. Telecom companies will then be free to invest in telecom infrastructure, buy sell or lease it to each other and provide any combination of services that they find efficient & economical to provide. The latter could include Internet telephony, NLD or ILD service.
Even when there is no investment licensing or control on production or provision of services, registration may be required for prudential & regulatory purpose. TRAI should have the power to issue such regulatory/prudential/technical licenses to Telecom service providers and to adjudicate on connected matters. Such a prudential license is needed only for the ‘last mile’ (retail) fixed line network, what was historically defined as a “natural monopoly.” A registration procedure will suffice for all other Telecom service providers and various types of service provision.
The government exercises ownership rights over the electro-magnetic radio frequency spectrum or ‘bandwidth’ (Cellular, WLL etc.). An agency such as the spectrum advisor is designated to issue spectrum permits or spectrum use licenses. A spectrum permit should specify the geographical area and bandwidth that can be used and the period for which the user-permit applies. It must not specify or limit the types of telecom services that can be produced or provided (e.g. mobile/basic) on this spectrum. These permits must be fully tradable. The successful bidders must have the right (defined before the auction) to sub-lease part or whole of the spectrum or to sell the spectrum permit to any company that fulfils the eligibility criteria for bidding for the spectrum permit. The eligibility clause would include anti-monopoly provisions. The TRAI should have the authority to enforce the eligibility clause.
The only purpose of the spectrum fee is to effectively ration a scarce resource (not to raise revenues). There should, therefore, be no spectrum fee or charge in geographical areas in which the demand for spectrum is less than the available bandwidth. Revenue shares, which have replaced license fees, can be viewed as a form of spectrum fee. This implies that revenue sharing should be eliminated from all geographical areas (e.g. rural areas & towns) in which there are less than four cellular operators. Bandwidth availability also probably exceeds demand for it in all but the (6-12) largest cities.
These two policy suggestions also imply that there should be no revenue share on any other Telecom service. The infrastructure character of Telecom services cannot on the one hand be used to justify excise, customs and income tax concessions and then be totally contradicted by additional taxation in the form of revenue share (e.g. on basic services, NLD etc.). Both the extra taxation (through revenue share) and the special exemptions should be eliminated.
The USO & the need to connect remote areas like the North East have been used to hide a number of inefficiencies & distortions. The regulator (TRAI) must ensure that the system moves to cost based pricing coupled with an explicit cross tax-subsidy scheme to implement the USO obligation. This should be based on an explicit USO charge in the form of revenue share of variable (call) charges coupled with an explicit subsidy on fixed (connectivity) charge. As the cost of connectivity is much higher in the rural & remote areas the explicit subsidy would be higher for these areas.
The policy should allow the emergence of specialist providers of telecom services to the high cost rural & remote areas, instead of forcing every license holder to set up a rural network. This can be ensured through an appropriate cross-subsidy, determined through a “subsidy auction.’

Christian Terrorists, Islamic Terrorists or Just Plain Terrorists?

Since September 11, many of us have taken a close interest in various debates and discussions on terrorism taking place in the media. One of the issues that have repeatedly come up is the unfairness involved in calling terrorist organisations such as “Al Qaeda” as “Islamic terrorists.” There is an un-stated implication that those who use this appellation are anti-Islam and are using this unfortunate episode to tar all Muslims and Islam with the same brush. Such an emotional response is understandable given that some crazy people in the West (terrorists?) have responded by killing people wearing turbans just because the currently most prominent terrorist wears one and by attacking anyone who has the same general features (“brown” as against “white,” “yellow” & “black,” who have different facial characteristics) as the terrorists involved in the September 11 attacks. Responsible people of whatever religious affiliation who have used the term “Islamic terrorists” have, however, been at pains to state and reiterate that the war against terrorism is not a war against Islam. Sufficient time has now passed for us to examine this issue dispassionately so that future debate is based on logic and not on emotions.
The question is whether the IRA are “Christian terrorists,” the “LTTE” “Hindu terrorists” and AQ, JEM, HUM, LET et al “Islamic terrorists” as described by some. The answer to this question lies in their objectives and ideology. The professed objective of the IRA is to get rid of British rule in Northern Ireland and to expel the British from Ireland. To my knowledge they have neither claimed that their objective is to establish a Christian or Catholic rule in Northern Ireland nor have they used Christian or Catholic theology to justify or support their terrorist actions. If this information is correct the IRA are better termed “Irish terrorists” and not “Christian terrorists”. The objective of the Liberation Tigers of Tamil Elam is merely to establish a homeland for the Tamils in Sri Lanka. Again their ideology may have elements of Tamil superiority, but to my knowledge they have neither professed that there objective is a Hindu state in Sri Lanka, nor have they used Hinduism in any form to justify their actions to the outside world. They are therefore referred to either as “Sri Lankan Tamil Terrorists” or just “Tamil terrorists,” even though the Tamil citizens of India, who do not agree with their ideology or approach, may not like the second appellation. It also does not imply that Sri Lankan Tamils or all Irish are terrorists.
The professed ideology of all the terrorist groups that have been referred to as “Islamic terrorists” or “Jehadis” is Islam. This by no stretch of imagination means that all Muslims are terrorists. Though “Jehad” in Islam means “struggle” these terrorist groups have defined “Jehad” as an armed “struggle” between their version of Islam and non-Muslim people and countries, sometimes by name (Americans) at other times in a generic sense. Their rhetoric and justification is all based on Islamic religious texts, even though the meaning and intent of these texts may be quite different from what they profess it to be and which many Muslims have clarified is a gross distortion of Islam.
In recent history the only other groups that can arguably be classed as religion based were the “Sikh terrorists” trained in or based in Pakistan. Sikhism and its greater glory was the professed ideology of many groups, which terrorised the population of Punjab even though they indiscriminately killed both Sikh and Hindu civilians. Their primary objective was the establishment of a Khalistan within India. Thus they are referred to as either “Sikh terrorists” or “Khalistani terrorists.” By analogy the use of the term “Islamic terrorists,” or in the case of Pakistan based anti-India terrorist groups “Pakistani Jehadis” does not appear to be inappropriate.
Islam has some unique features for which it is rightly appreciated. All Muslims are equal before Islam. The religion does not sanction or continence any distinction or discrimination based on wealth, caste, creed or nationality. This positive feature also means that terrorism based on a fundamentalist & blinkered interpretation of Islam is by its very nature one of the most international forms of terrorism since the demise of communism. Though individual terrorist groups may consist of one nationality (e.g. Philippines’ Abu Sayef, Indonesian ALF) their belief unites them as brothers in a common cause with Saudi Arabians, Egyptians, Iraqis and Pakistanis with the same beliefs. Thus individuals indoctrinated with an ideology that glorifies (their version of) “Islam” and promotes hatred against the rest (Americans & their Arab “stooges”, Jews/Israelis, Hindus/Indians, godless communists/Central Asians/ Chinese) are as international as Al Qaeda even if their primary objectives is the “liberation” of a specific geographical area or country from its rulers.

Terrorists or Freedom Fighters?

Since September 11, 2001 the news media have been full of news about terrorism. There is however a debate waiting to take place, which both the protagonists in the war that struck USA on September 11 as well as bystanders such as India have so far avoided. This is the debate inherent in the statement that, “One man’s terrorist is another man’s Freedom Fighter.” One response to this issue is that “I know a terrorist when I see one.” This response may be adequate while the memories of September 11 are still fresh in everyone’s mind, but will be quite inadequate when fresh horrors overlay some memories but not others. Another response is to sweep the issue under the carpet because it may affect the view of the so-called “Coalition against terrorism” in a direction that is unfavourable to India on Kashmir. As I try to show below, it is in our interest to start laying down the terms of the debate by trying to define what such terms mean in the 21st century.
Who or what is a terrorist? Though the exercise may appear at first like peeling an onion it is an exercise worth carrying out. Let us start with the simplest and most obvious definition: A terrorist organisation (or individual) is one that targets civilians (with the purpose of maiming or killing) for the purported purpose of achieving any professed goal or ideology. The purpose of killing civilians may be to proclaim the terrorists existence or to “terrorise” the population. In any case the pre-meditated killing of civilians clearly and unambiguously defines an organisation as terrorist. Even if the primary objective is to terrorise civilians by blowing up a civilian facility in which a few civilian workers are known to be present, counts in my view as a premeditated killing of civilians.
A murderer also targets civilians, but his/her motives are very personal (revenge against a well specified individual or group, money etc.). A broader goal, objective or ideology than the purely personal is a fundamental element of any terrorist organisation. Even an individual terrorist such as the Unabomber had an ideology – anti-technology (modern version of Luddism) even though he did not publicise it. Anti-abortion extremists that blow up abortion facilities in the USA and environmental fundamentalists who blow up polluting factories and kill people present in them or passers by have a well-defined objective & professed ideology.
Can a State be a “terrorist” State? If we think of examples such as such as Chile, Argentina & other Latin American States under their right wing generals, Cultural Revolution China under Mao, Russia under Stalin, the answer seems obvious. We must move from emotionally charged examples to rigorous definition that is logical & consistent, so that difficult grey areas can also be addressed. Applying our earlier definition, a dictatorship (or oligarchy) that as a matter of sanctioned policy kills its own civilians to terrorise its population into docility and acceptance of its dictatorial rule can logically be classified as a terrorist state. A State that sponsors, supports or shelters terrorist groups, whether domestic or foreign, can by the same logic be called a terrorist state if it helps in the killing of civilians abroad.
Can groups of citizens who are trying to liberate their own country from such a “terrorist dictatorship” use terrorism without loosing their right to be called “freedom fighters?” The logical answer has to be an unambiguous no; the premeditated killing of innocent civilians must logically remain a terrorist act no matter who the perpetrator. The tag of “freedom fighter” does not save one from being labelled a “terrorist.” There are, however, grey areas in practice; The precise definition of “innocent civilian” becomes a little ambiguous. All those in the full knowledge of and participating in the administration of the policy of state sponsored killing of civilians are no longer innocent civilians and can in principle be targeted by genuine “freedom fighters.”
The distinction between dictatorship (oligarchy) and democracy is critical. In a true 21st century democracy it is impossible to imagine a democratically sanctioned policy of killing of innocent civilians so as to terrorise even a part of the population. The most fundamental right of every citizen is the right to life. A true democracy must have laws & institutions that protect this right against occasional abuses by organs of the State. Besides intellectual & media freedom, the right to criticise the leaders and the system, and elections that can change government, minority rights are an important component of true democracy. The majority does not have the right to deny to a minority the same rights that it enjoys (e.g. basic education, religious freedom). By the same token a minority has no inherent right to things that the majority does not enjoy (like special subsidies). Every one has the right to convince others of their own viewpoint and thus change a policy that they do not like. A minority (e.g. the “Black Panthers” in the USA) does not have the right to impose its own views on the majority by force and killing just as the majority does not have the right to use the organs of state to terrorise the minority.
Foreigners entering a democratic country for the purpose of killing anyone (civilian, policy or army) can unambiguously be classified either as terrorists or as invaders. A State cannot be classified as terrorist if it hunts down and kills such hostile foreigners. Citizens do not have the right to shelter such foreigners and are criminally liable if they do so. Thus most of the grey areas found in a dictatorship disappear in a true democracy where the minority enjoys full democratic rights. Killing of not only civilians but also the police and armed forces is a terrorist act in a true democracy.
The only grey area is a situation in which domestic terrorists have managed to operate in an area for some time and managed to terrorise the population. Can democratic rights be abridged to fight this terrorism? In my view a true democracy can and should pass laws that can temporarily and in a well specified area or ambit abridge democratic rights for a limited period of time. Given the general problem of deteriorating governance in developing countries there is strong danger of lazy administrators using such laws well beyond their intended orbit. Adequate safeguards must be built in to any such act. In such a fight against terrorists, some innocent civilian lives are inevitably lost. Such actions by the state and its organs cannot be classified as “State terrorism.” If there is individual malafide action (such as settling personal scores) outside the ambit of the special anti-terrorism law such malafide must be punished by the democratic state.
To conclude, any one who engages in, supports or protects the killers of innocent civilians is a terrorist no matter how elevated the professed objective. In a democratic country with adequate safeguards against aberrant behaviour by the organs of state, even those who kill policemen and soldiers who have not violated the law and are engaged in their normal peacetime activities classify as terrorists.

Indo-US Relations and Afghan Policy

The Art of Foreign Policy lies in making other countries (in the current case the USA) believe that certain policies and actions that are in our (India’s) interest are also in its own (USA’s) interest (and vice-a’-versa). This involves two basic steps: Understanding and appreciating (yes!) the underlying, sometimes unprofessed & hidden, interests of the USA and secondly formulating our policy in such a way that it has a visible overlap with the USA’s own interests. Please note that this does not preclude India (or the USA) from pursuing any other interests and policies that do not have such a real or apparent overlap. I am assuming that we know what our own interests are, even though there have been times in the past when we seemed to act as if the interests of humanity in general had the same priority as that of Indians.
Many commentators have rightly noted that the events of September 11 have had a traumatic impact on the American public and that it will change the way the American people and their government view the rest of the World and America’s role in it. To draw useful conclusions for Indian foreign policy one must first appreciate the shocking lack of knowledge and interest that the American Public and even the US congress had in the rest of the World till September 10th. Any Indian living in the USA would have told you that even on US national television news (as against State or local TV) international news coverage is completely insular and focussed extremely narrowly on USA’s parochial interests or actions abroad. As a result general knowledge about other countries even among US Congress-persons, academics and intellectuals has steadily declined since the end of the cold war.
September 11 has changed all this and there will be a much greater interest in learning about Islam, Islamic countries and countries with minority Muslim populations. This will inevitably include an interest in and openness to learning about Islamic fundamentalist groups and Madrasas teaching hatred against non-Muslims. India is well positioned to be the source of information, knowledge and expertise on Islam in South Asia. India has been asserting for several decades that the Pakistan government since the time of Gen. Zia-Ul-Haq has fostered an Islam-based hatred of India in its schools and religious institutions; That Kashmir is just a symptom of the desire for revenge against “Hindu” India; That the objective of the Pakistan government has been to bleed if not dismember India by not just supporting but starting terrorist insurgencies throughout India. The facts as they have emerged since September 11, support most of the statements made by India. As the facts (once fully known) speak so loudly for themselves an over-emphasis on the anti-India bent of this phenomenon is likely to be counter-productive.
One important focus of our foreign policy in the next 5 years must therefore be to exploit the opportunity provided by the renewal of US interest in our part of the world. We must supply information to and help Americans understand the source and nature of Islamic fundamentalism in Pakistan and other countries of S. Asia and also contrast this with Indian philosophy & religious culture, the determinedly non-violent religions (Buddhism & Jainism) that it has spawned and the syncretic Indo-Islamic culture of India. One concrete new initiative that should be launched immediately is to initiate joint study and/or research programs between Indian and US universities & research institutes on any and all topics of interest to the USA in the backdrop of its “War against Terrorism”.
The operational objective and effectiveness of the post-sept. 11 anti-terrorist strategy of the USA in Afghanistan is now becoming clearer. With every passing day it looks increasingly like India’s traditional approach to economic policy-making and implementation: In other words it is based on very little data or solid information (intelligence), given systematic downgrading of internal expertise (on Islamic fundamentalism, Afghanistan) it is unable to plan ahead and makes ad hoc changes usually in response to representations & petitions by private parties and interest groups (Pakistan & other frontline States), it has multiple and often conflicting objectives (over throw the Taliban, get the top leadership of Al Qaida, please Musharaf) because all manner of interest groups have to be satisfied before it can be approved (State & defence departments, Arab dictatorships) and it fails to achieve most of its objectives as it is based on the assumption of a selfless and honest bureaucracy ( Pakistan Army, govt. institutions & ISI loyalty to US set goals).
Because of all these reasons the US campaign in Afghanistan has been far from successful, with the two primary objectives of elimination of the Al Qaida terrorist network and the elimination of the terrorist Taliban regime unfulfilled and slow progress in cobbling together a “broad-based multi-ethinic” government. Fulfilment of both these objectives is in the interest of India. Can we then formulate a more concrete action plan that more effectively serves the interest of the USA than the current floundering campaign that has vacillated between over-dependence on a less than fully trust worthy Pakistan establishment and excessive belief in its own technological prowess and between the “moderate Taliban option” and the anti-Taliban Northern alliance.
The most feasible and achievable objective in Afghanistan appears to me to be the setting up of a government in North and West Afghanistan consisting of the groups that are a part of the Northern Alliance. This is best done in the context of UN blessed Afghan Federation conceptually consisting of two sub-units, Northern and Southern Afghanistan. The latter would consist of the Pushtoon inhabited areas of South and East Afghanistan and contain about 40% of the Afghan population. The former would contain the areas inhabited by all other ethnic groups, which constitute about 60% of the Afghan population. At least in the medium term, each of the two constituent units would have complete internal autonomy, which for the time being would include their armed police/army. The Federal government could be headed by the former King and would eventually be responsible for external relations, external defence and currency. This division of powers would be reconsidered once complete peace is restored and stable & effective (non-terrorist) governments are functioning in both sub-units.
Once the broad outline of this interim solution is accepted, the “anti-terror coalition” must accelerate the defeat of the Taliban by the Northern alliance in all areas constituting “Northern Afghanistan.” This must be followed by aid, assistance and training in setting up an efficient administrative structure and social security net for the oppressed & starving Afghans in North Afghanistan. Such aid will also ensure that the coalition has a fair chance of winning the campaign for “hearts and minds” of Muslims all over the world. The fourth step would be to help this government track and eliminate the Taliban, Al Qaida terrorists and Pakistani ISI agents still living or operating within the territory of “Northern Afghanistan,” and to block oil & arms supply routes from Pakistan to Taliban controlled Southern Afghanistan that pass through (or close to) Northern Afghanistan. The formation of a functioning govt in Northern Afghanistan will ensure that both US and Indian objectives (as well as those of Russia, Iran, Uzbekistan & Tajikstan) are met speedily in at least 60% of Afghanistan. With secure supply lines to Iran and Central Asia, Northern Afghanistan will not be dependent on Pakistan and any contradictions arising from the USA’s geographical dependence on Pakistan can be confined to Southern Afghanistan.
By this time a Federal Government structure should be defined and agreed upon. A Federal govt can then be set up in Kabul under the aegis of the former King as soon as the Northern Afghan govt is securely in place. The US war effort can then be refocused on tracking and eliminating the Al Qaeda leadership in “Southern Afghanistan.” The first task of this federal government would be to facilitate the setting up of a non-Taliban government in Southern Afghanistan. The Pakistan government will inevitably play a role in the search for a non-terrorist government in Southern Afghanistan given that Pushtoons constitute 10% of its population. India may as well play a magnanimous role in the coalition by accepting and perhaps even proposing such a role for Pakistan and thus completely align Indian and US policy in Afghanistan. Once such a govt. is formed, the Coalition against terror can help it set up an effective administration and help it track down the terrorists and their Taliban supporters. The next step would be to set up a democratic decision making structure at the Federal level that gives due weight in decision making to the population of the two Afghan sub-units.
US Secretary of State Colin Powell has reportedly adopted the words of Prime Minister Vajpayee that the US and India are “Natural allies.” He also stated that Pakistan is also an “ally” and US relations with the two countries are not a zero sum game. Given the greater identity of views between the new leadership of the Pentagon and India than has ever occurred in the past (when the Pentagon often lobbied for Pakistan), we should take Secretary Powell at his word. Senator Biden, Chairman of the Senate Foreign relations committee reportedly admitted that the greatest worry of the US govt. is that Pakistani nuclear weapons may fall into terrorist hands if Gen Musharraf is overthrown by Pakistani fundamentalists. I would suggest that India propose the setting up of a joint Indo-US planning group to deal with such an eventuality. This will help in aligning US and Indian interests in Pakistan and reassure India that Pakistan will not again pull the wool over US eyes by extracting major concessions while continuing to breed hate filled fundamentalists & Jehadis. We must on our part recognise that at the current time peaceful rhetoric coupled with hard-headed anti-terrorist action in Kashmir serves India’s interests much better than the opposite. This will reassure the US that we do not intend to do anything to make their task more difficult.