MARCH 03, 2022

By Naresh Minocha, Consulting Editor

RUSSIAN-UKRAINE WAR (RUW) is sending ripples of shocks to economies across the pandemic-ravaged world. Stock markets and global commodity markets have moved in opposite directions: The former seeing plummeting share prices and the latter seeing alarming spurt in prices of diverse range of commodities. Price volatilities result in exceptional, irrational transfer of wealth from one stakeholder to another, disrupting the global recovery.

A few variables make RUW a special learning platform for the policy makers. The War is unfolding at a time when the global economy is struggling to recover from covid-19 pandemic & the resulting economic restrictions.

The situation is a bit similar to World War I, whose last year coincided with onset of 1918 influenza pandemic (often referred to as Spanish Flu). The second wave of pandemic in 1919 wreaked havoc in many countries with some experiencing recession.

The world is much more integrated economically, socially and logistically than it was at that time. The combined impact of localized war and pandemic on supply chains, capital flows and prices can be devastating.

The wars always trigger security concerns in vulnerable nations, forcing them to rework their budgeted expenditure for armament purchases, etc. How this fear plays out in RUW flux remains to be seen. The abrupt changes in funds allocation impact balanced economic growth and public welfare in any country.

No one can predict at present whether RUW would result in global recession or stagflation, leave aside the degree of their severity in different economies. The chances of RUW spinning into world war-III can't be ruled out. If that happens, the risk of global financial meltdown would be strong.

Loaded with scary debt burden, the world economy can hardly afford to pile up more debt or print more currency notes. According to the World Bank's Global Economic Prospects report released in January 2022, total global debt reached 263 percent of GDP in 2020, its highest level in half a century.

Says the Report, "The rise in debt has led to several countries initiating debt restructuring, while many others are in or at high risk of debt distress and may also eventually need debt relief".

The fiscal & monetary capacity of several other nations is also over-stretched. The impact of economic sanctions by NATO countries on Russia and the latter's counter-sanctions would have a spill-over effect on other economies

Whatever be the emerging scenario, RUW offers profound lessons for India. It is now essential to redefine and refocus AtmaNirbhar Bharat (ANB) vision. It was unveiled by Prime Minister Narendra Modi in his Address to the Nation 12th May 2020.

Mr. Modi stated: "The state of the world today teaches us that a (AtmaNirbhar Bharat) 'Self-reliant India' is the only path. It is said in our scriptures - EshahPanthah That is - self-sufficient India."

It would be gracious on his part to now admit and speak on ANB's deficiencies, contradictions and its trade-offs with ease of doing business and living. Flawed implementation of ANB vision in certain areas require analysis for mid-course correction.

The first deficiency of ANB vision is heavy reliance on external debt for financing welfare expenditure of all sorts from free ration to free vaccines. The Union Government's increased dependence on domestic debt too for consumption expenditure is a cause for concern.

The second deficiency in ANB is over-dependence on fair-weather foreign funds - the foreign portfolio investors (FPIs). They pull from capital markets when the going gets tough. This, in turn, influences foreign exchange reserves and exchange rates, endangering the financial stability of the country.

Over-dependence on foreign money conflicts with ANB vision. It is here apt to quote Mrs. Indira Gandhi, who too pursued self-reliance with missionary zeal as PM.

Mrs. Gandhi told Planning Commission in December 1971: "External assistance has been seen to work as an instrument in the hands of foreign Governments to be used at critical times to the disadvantage of the recipient country. Excessive dependence on foreign aid also develops an attitude of complacency towards inefficiencies in our economic system".

She continued: "In the Fourth Plan, we had already decided to adjust the economy to lower levels of external aid. It has become necessary to carry out further adjustment to still lower levels of foreign aid".

Mrs. Gandhi added: "It has been sometimes assumed that foreign assistance is absolutely necessary to cover what is described as the trade gap. Actually, it is mainly a savings gap. We should call less and less upon foreigners to the savings which we should generate ourselves".

In an interview given in January 1972, Mrs. Gandhi observed: "Aid has often been used by nations as a handmaid of their short-term foreign policy interests. We have always stated that we should take only such aid as does not curb our domestic or international policies in any way. We are in a position today to do without aid. It will be difficult, but then nation-building can never be easy".

This version of self-reliance got erased by economic reforms, crafted and overseen by International Monetary Fund, the World Bank, etc. We have compromised our economic freedom in varied ways since 1991. Certain Sea ports are now foreign owned and controlled. So are airlines, telecom service companies and certain other strategic assets. Foreign companies, once nationalized on the basis of war-time experience, are now being privatized. A case in point is Bharat Petroleum Corporation Limited (BPCL).

All policies and regulations have been framed to woo and win foreign investors and their governments since 1991. An Overbearing presence of foreign aid, foreign equity and management control over strategic assets can constrain India's fighting capability during the war. The God knows how strategic companies controlled by foreigners would respond if a war is thrust on India.

The first ANB lesson from RUW is thus: Reduce reliance on feathers borrowed from abroad for short-term glory. Increase instead the dependence on domestic savings. This should be foremost principle of self-reliance to create wealth and to strengthen national security.

Factor in here the gold kept by almost every household, black money stashed by crores of citizens and mind-blowing wealth (public offerings) lying with religious places. All these assets should be tapped by the Government in innovative ways.

The second ANB lesson from RUW: Launch expenditure reforms, beginning from an individual's level to the national level right up to colonial legacy called Rashtrapati Bhavan. Expenditure efficiency should be the new mantra for new India.

National savings can also be improved massively by cutting down the expenditure on luxuries meant for the ministers and elite civil services cadres. The luxuries include imported SUVs, customized aeroplanes and helicopters, new, palatial bungalows, executive enclaves, etc.

These lifestyle comforts for VIPs don't generate wealth. India certainly does not need new legislature buildings to generate & debate new ideas. They can be crafted even under the shade of a banyan tree if there is a political will to induce national consensus on core issues.

The money saved through cut-down in import of luxuries and foreign jaunts can be used to create work opportunities for the jobless. Reckon the foreign exchange saving, if VIPs walk the talk on Vocal for Local. Visualise India becoming a gold exporter overnight if all Indian women moderate their love for the jewellery and dispose of the surplus.

It is here pertinent to fall back on the wisdom preached by a British civil servant while pitching for upliftment of villages in British India.

In 1929 Book titled 'The Remaking of Village India', F.L. Brayne, Gurgaon Deputy Commissioner wrote: "Eradicate the present ideals of absurd expenditure on 1) Kaj, and other such ceremonies, 2) jewellery 3) weddings and 4) Quarrelling (litigation)".

Describing jewellery as "a wicked waste" he stated: "If you spend Rs 100 on jewellery, you get Rs 75 worth; after ten years it is worn away to nothing. If a thief comes, it is gone in one night".

He noted: "Six thousand lakhs of rupees' worth of gold were imported into India in 1925. The interest on that would be six crore of rupees. Think of the waste!"

Referring to Kaj, Mr. Brayne suggested: "If you want to revere the memory of a dead relative, install a hand Persian wheel on a drinking well, roof in and close the well, pave the ground round about, build a nice washing platform and a proper drain, and make it altogether a pleasant, easy and healthy place for drawing water and washing".

Immensely relevant is Mr. Brayne's advice under the prevailing situation. The relevance can be gauged from our passion to 1) erect tall statues for great persons everywhere; 2) build museum of all sorts and 3) create new or revamp existing places of worship.

Is naming of public places such as airports and railway stations inadequate to perpetuate the memories of our great ancestors? Are statues and memorials the only means to fuel spirit of nationalism, patriotism and religious values among the citizens?

Political parties should scale down wastage of time and money on mega election rallies. Similarly, the authorities should shun avoidable litigation. All such small initiatives can help strengthen self-reliance: Let stakeholders put such savings in building new schools, colleges, hospitals and in financing civil defence training.

Modi Government could have avoided piling up of additional debt for covid-linked healthcare and other welfare schemes. This would have been possible if it had created a special reserve for rainy days. The Reserve Bank of India (RBI) didn't visualize worst-case scenario (pandemic coupled with war) before unveiling monetary policy in February 2022. Similarly, the Finance Ministry didn't factor in this while unveiling the budget for 2022-23.

Recall the fact that the Ministry dipped into surpluses of RBI to sustain normal government expenditure. It drew Rs 2.75 lakh crore from RBI reserves in two instalments - about Rs 1.76 lakh crore in accounting year (AY) 2018-19 and Rs 99,122 crore in AY 2020-21. RBI Governor Shaktikanta Das rationalised surplus transfer substantially higher than the budgeted ones as "purely an accounting issue"!

Usage of RBI's reserves to finance normal Government expenditure is not an isolated instance of fiscal complacency. Take the case of several lakhs of crore of rupees collected as additional revenue through brutal taxation of petrol and excise, sapping economic efficiency.

The Government justified this as resource mobilisation as vital for the country's development. Assuming the additional mop-up of revenue was exclusively used as capital expenditure, it certainly failed to arrest slowdown in growth that started with the demonetisation. The slowdown got entrenched with the frequent changes in GST regime.

The Government hiked total excise duty (TED) on petrol by 258.47% from Rs 9.20/litre on 11th November 2014 to Rs 32.98/litre on 6th May 2020 through 13 hikes. During the same period, TED on diesel was hiked by 819.94% from Rs 3.46/litre to Rs 31.83/litre through 13 hikes. The duty on both these fuels was reduced by small margins twice in 2017-18 and in 2018-19 obviously due to electoral compulsions.

The central taxes on petrol, diesel and natural gas as % of budget estimates of gross revenue shot up to 12.2% in 2020-21 from 4.3% in 2013-14. A part of this yearly tax bonanza should have been parked in Energy Prices Stabilisation Fund (EPSF).

The third ANB lesson from RUW is: Institute a statutory EPSF to manage global volatility in crude, liquefied natural gas (LNG) and coal prices.

Two decades back, the Ministry of Petroleum and Natural Gas (MOPNG) proposed creation of a price stabilization fund (PSF) as cushion for price swings in market-based pricing (MBP) of petroleum products.

MBM was ushered in phases as replacement to administered price mechanism (APM). PSF was recommended by MOPNG-constituted expert group on APM dismantling.

In its report submitted in 2000, the group stated: "any sudden distortions in the viability and the prices are likely to generate not only resistance to such policy initiatives but also social tensions."

The Finance Ministry rejected PSF proposal. It instead contended that it would cushion the impact of global crude oil price volatilities through appropriate adjustment in indirect taxes on petroleum products.

In the APM era, the price volatility was taken care of by Oil Pool Account (OPA), which was disbanded in 2002 as a part of APM dismantling process.

The country's growing dependence on imported crude and LNG would have been reduced had the Finance Ministry transferred all oil cess accruals to Oil Industry Development Board (OIDB). Only a fraction of cess money has been allocated to OIDB for development of oil and gas.

Says the latest available OIDB's annual report for 2019-20, "The cumulative amount of cess collected has increased from Rs.30.82 crore in 1974-75 to Rs.2,23,576.92 crore in 2019-20. Out of which, OIDB has been allocated an amount of Rs.902.40 crore till 1991-92. Thereafter, no amount out of cess collection has been allocated to OIDB".

The Oil Industry (Development) Act, 1974 was enacted after the world witnessed massive and successive rise in prices of petroleum and petro-products beginning 1973.

The Act's objectives as stated in 1974 Bill included speeding up of self-reliance initiatives in the oil sector and assured allocation of funds for this task. It is amazing that successive governments have failed to transfer cess proceeds from Consolidated Fund of India to OIDB for last three decades. Does this require knowledge of rocket science to realize harm done to self-reliance by successive regimes - all of which loved preaching nationalism.

No wonder Modi Government has miserably failed to achieve its own target of reducing oil import bill by 10% in 2022. In March 2015, Mr. Modi had given a call to the industry to reduce import of crude by at least 10% by 2022 through enhanced production of crude. Later, a committee prepared roadmap to reduce dependency on energy imports by 10% by 2021-22 end through 5-pronged strategy.

The imports dependency, on the contrary, has increased to about 90% of total crude requirement at present from 87.1% in 2015-16. This is a big blow to ANB vision. It calls for serious reforms to facilitate increase in production of both oil and gas.

Thus, the Fourth ANB lesson from RUW is : Revisit & reboot self-reliance objectives that the Government failed to honour over the decades. This review should cover the failure to achieve basic objective of 2011 New Manufacturing Policy (NMP) and 2014 'Make In India' (MII) initiative.

NMP envisaged increased in share of manufacturing sector in GDP to 22% in 2018 from 16% in 2009. MII deferred this goal by two years to 2020.

According to Finance Ministry's latest Economic Survey for 2021-22, "In 2020-21, the share of manufacturing fell to 14.4 percent but is expected to improve to15.3 percent in 2021-22".

The end-to-end review of ANB should identify strategic areas that are highly dependent on imports, apart from oil and gas sector. An obvious case in point here is India's 100 percent dependence on imports for potash - one of the three primary nutrients for crops.

We have proven deep-seated reserves of potash in Rajasthan. These can be extracted with a globally proven technology, an idea that was once taken up to the global tendering competition and then dropped. Now it is being studied afresh under a tripartite agreement between two mining sector public enterprises and Rajasthan Government.

The Council for Industrial Policy and Research (CSIR) has demonstrated its two technologies. One of these for extraction of potassium nitrate from molasses-based distillery waste. The second one is for extracting potassium sulphate from the sea water. Similarly, a private technology developer company has offered a process to extract potash from boiler ash of distilleries.

The Government has, however, failed to aggregate such potential opportunities to launch a national potash mission. One can cite more such areas where the Government should launch time-bound missions to reduce, if not substitute, import of strategic materials.

The fifth ANB lesson from RUW: Shake off complacent mindset on strategic imports and launch ANB missions in each strategic area.

Similarly, security experts can chip in many more ideas to hasten and strengthen ANB. To conclude, time is ripe to reinvent ANB. It should be comprehensive, time-bound vision to attain self-reliance without hurting economic growth in the transition phase.