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Policy Research Publications (2011-12)



Demystifying India-China Trade Possibilities
V Anantha Nageswaran (Fellow for Geoeconomics) & Ritwick Ghosh (Research Associate)

An Indian proverb rings true of the economic ties between India and China – ‘for the friendship of two, the patience of one is required’. The time is not yet ripe for an India-China free-trade agreement though this discourse is vital in understanding where the two countries stand and how each of their futures could shape up.

At this stage, a free-trade agreement with China would largely confer one-sided benefits to China as has already been happening in the bilateral trade relations without the FTA.

By realising its manufacturing potential and developing mature and competitive industries, India will be prepared to face competitive pressures from China and other prospective FTA partners. Without such reforms and more, an FTA with a manufacturing behemoth like China may lead to a destruction of its domestic industrial architecture and probably have a detrimental effect on poverty through loss of worker-oriented industries.

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Discussion Draft on National Cyber Security Policy
Rohan Joshi & Srijith K Nair, Fellows in the Cyber Strategy Studies Programme

The Department of Information Technology, Government of India issued a discussion draft on National Cyber Security Policy on 26th March 2011 and invited comments on it. In our opinion this draft of the national policy is a considerable initial step and the government should be commended for being attuned to the threats and challenges facing the management of cyberspace and taking steps to address them. We feel that the document substantially addresses several areas and processes related to cyber security, particularly incident response, vulnerability management and infrastructure security.
However, we have identified some areas of improvement, including scope, ownership, resource allocation and management, technical and non-technical controls, which we present for the government’s consideration. This document provides comments and feedback on the draft.

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For an Indian Touch in Timor-Leste – Making human capital the focus of India’s international development strategy
Nitin Pai, Fellow for Geopolitics

Timor-Leste, Asia’s newest democracy, presents India with an excellent opportunity to put into place a coherent international development strategy. As this policy brief argues, India should not only upgrade its diplomatic presence in the East Asian republic, but also give a focus to its development initiatives by investing in human capital. It proposes that New Delhi set-up a business park outside Dili, Timor-Leste’s main city to allow private enterprise to flourish.

It also calls upon the Indian government to set up an Indian International Development Agency (InDA) under the Ministry of External Affairs, to achieve better outcomes for its foreign assistance outlays.

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Academic papers, analytical essays and long form articles

The Paradox of Proximity – India’s approach to fragility in the neighbourhood
Nitin Pai, Fellow for Geopolitics
The Paradox of Proximity - Nitin Pai (NYU-CIC)
This paper examines motivations, constraints and processes that shape India’s policy towards fragile states. It aims to show that addressing state fragility in the vicinity is a vastly more challenging project than managing risks emanating from distant ones.

It begins with an overview of India’s contemporary motivations for engagement and intervention in the turbulent geopolitics of southern Asia. It identifies the various types of interventions India has engaged and attempts to derive the underlying features of India’s approach. The policy process is discussed next, analysing how drivers, constraints and players affect decision-making.

It concludes with a brief assessment of how India’s policy towards fragile states, both proximate and distant, might change as India becomes a middle-income country with global interests.

(600 KB) Download PDF | Alternate link (NYU)

Discussion documents are prepared for the purpose of discussion & debate, and do not necessarily constitute Takshashila’s policy recommendations.

Restoring order in Jammu & Kashmir
Sushant K Singh, Fellow for Defence Policy, National Security Programme
The immediate goal for New Delhi and Srinagar should be to restore peace and security in the violence-affected districts of Jammu & Kashmir so that normal activity can resume. This has to be done by suppressing violence, arresting ring-leaders of protesters and actively countering separatists’ plans to direct the pace and scope of social, economic, political and religious life by issuing protest calendars.

The political process in the Valley can only be reactivated fully once the security situation has been brought under control. However certain steps can be initiated to restart the political process immediately. These will have to be undertaken at many levels simultaneously within the state.

This paper presents a thirteen point plan to restore order in Jammu & Kashmir state.
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The case for an India-US partnership in cyber security

Srijith K Nair, Fellow for Cyber Strategy Studies

The rapid development and the increasing reliance on information and communication technology (ICT) and cyberspace in the last couple of decades have changed the way every aspect of the society works. Countries like India that hope to exploit the power and reach of ICT for their development should at the same time be wary of the vulnerabilities in their systems.

These ICT systems and cyberspace are highly complex, some of whose properties we are just beginning to understand and appreciate. In order to successfully defend against attacks on these infrastructure and systems, India should actively invest in researching and developing cyber security solutions and collaborating with other countries that share similar objectives.

This paper recommends that Indian institutions, both in the private and public sector, should engage with those from the United States in a partnership role to tackle issues related to cyber security and information infrastructure protection.

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Foreign Direct Investment in India’s Defence Sector – Go beyond 51%

Sushant K Singh, Fellow for Defence Policy and editor of Pragati – The Indian National Interest Review.

Recent media reports suggest that a note circulated within the Commerce Ministry and sent on to the Cabinet Secretariat for discussion proposes to raise the cap for Foreign Direct Investment [FDI] in defence sector from 26 percent to 100 percent.

This paper recommends that the Government of India raise the cap in FDI in defence sector beyond 51 percent. The cap can be raised by an executive order of the government, and does not require an amendment by Parliament.

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Climate change and national security – Preparing India for new conflict scenarios

Nitin Pai, Fellow for Geopolitics
This policy brief analyses how climate change will affect regional security in the Indian subcontinent and implications for India’s national security. It argues that glacial melt, rising sea levels and extreme weather will exacerbate ongoing conflicts and will require India to develop military capabilities to address a range of new strategic scenarios: from supporting international co-operation, to managing a ‘hot peace’, to outright military conflict.

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Policy Advisory – The need for an Indian Crime Survey


The following is Takshashila’s submission to the Justice J S Verma Committee on amendments to criminal law relating to safety and security of women:

Information underpins all planning. At present, the only source of information about crimes in the country are the statistics collated by the National Crime Records Bureau (NCRB). However, it is well known that all crimes are not reported to the police and as often alleged, if reported, many are not registered by the police. The under-reporting and poor registration is far worse in case of crime against women.

In many Western democracies, an annual Crime Victimisation Survey is conducted to give a more realistic and actionable picture of crime — estimate the number and types of crimes not reported to the police, identify people most at risk and map public attitude towards crime and towards the Criminal Justice System. There is a need for reliable and comprehensive data on crime in India that will sustain an empirical approach towards reducing crime against women. Such information will both supplement and validate the NCRB data.

It is proposed that the laws be suitably amended to mandate the Union Government to conduct annual Indian Crime Surveys (ICS).

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Making publicly funded research accessible


A preliminary policy brief

A vast number of students, teachers, researchers and members of the public are unable to access research papers and data due to prohibitive terms imposed by publishers of international journals.

We are in an unconscionable situation today where Indian taxpayer-funded research is unavailable to the Indian public because it is published in private foreign journals with restrictive copyright and subscription terms.

To make knowledge more inclusive, to make education more open and to promote globally competitive innovation, this policy brief calls for the Government of India institute a National Public Research Database and a family of Open Journals of India.

This is consistent with developments in the United States and elsewhere where the prohibitive nature of prices and conditions imposed by a small number of international publishing firms has been recognised as an inhibitor of innovation and knowledge diffusion.

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Reforming the financial sector


A discussion document

Comments on
 the Financial Sector Legislative Reforms Commission’s Recommendations

V Anantha Nageswaran, Co-founder and Fellow for Geoeconomics

Appointed by the Government of India in 2011, the Financial Sector Legislative Reforms Commission (FSLRC) submitted its report in March.

Had this Commission completed its work before 2008, it might have stood a better chance of being taken seriously for its assumptions were valid in a world dominated by finance, before the crisis seriously undermined them. The pro-cyclical nature of financial markets and credit creation necessitates tight regulation of the sector.

The Commission’s failure to understand that has led it to recommend trimming the powers of Indian financial sector regulators, especially the Reserve Bank of India. That is as dangerous as it is flawed. Furthermore, the Commission has reversed the trend towards greater regulatory autonomy and competence by vesting the government with more powers over the sector. Given the government’s record of wanton disregard for fiscal probity, financial repression and its lack of talent, these recommendations are regressive and bode ill for India.

Therefore, the government that takes office in 2014 after the general elections must appoint another Commission to propose a more reasonable set of proposals for legislative reforms and the strengthening of regulations and regulators in the financial sector.

Download the discussion document in PDF format (130 KB).

Case – A beheading along the Line of Control


On Sunday, January 6th, 2013, Pakistani troops attacked an Indian patrol near Churunda along the Line of Control in Jammu & Kashmir, killing two soldiers and mutilating their bodies. In this case study, Nitin Gokhale, security & strategic affairs editor of NDTV, presents the events as they unfolded in the first two weeks of January 2013.

This case involves international relations, national security, defence and foreign policies and the role of media during crises and controversies.

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Takshashila Cases in Public Policy may be used free of charge without prior permission for academic and non-commercial use.

Issue Brief – Chinese incursions in the Ladakh region


The Chinese People’s Liberation Army’s incursions into the Depsang plains in eastern Ladakh in April have brought the boundary issue back into focus in India’s relations with China. This brief summarises what is happening, analyse why and suggest what India could do about it.

In all likelihood, there will be an eventual peaceful resolution of the crisis, even if it takes some time. As the winters set in across Ladakh later this year, China’s tented outpost will have to withdraw. If the PLA replaces tents with permanent shelters before the onset of winter, it will signal a permanent deployment in an all-weather post. That consolidation will change the nature of the crisis and push India’s hand militarily. 

That India doesn’t officially know the Chinese version of the LAC lies at the heart of this incursion. India must devote more energies to formalise the LAC at the earliest. India must ensure that China and India exchange maps duly marked with their respective versions of the LAC.

With a new Chinese political leadership in place, India’s reaction to the Depsang incursion will set course for the next decade. New Delhi cannot turn a blind eye towards PLA’s moves to keep it off-balance tactically; and the long-term signals about national resolve, political will and military capability that Indian moves will send. This will set a precedent for the future which India has to guard against. 

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Issue Brief – Pakistan’s elections – An Indian perspective


Executive Summary
This issue brief discusses the implications of elections to 272 directly elected seats of Pakistan’s National Assembly earlier this month. The elections resulted in a huge vote of confidence in Nawaz Sharif’s leadership. Leading a single-party government, he will not be hostage to pressures of coalition partners, but his political strength will make the Pakistan army wary of his moves. With deep ethnic, linguistic and economic diversity among the provinces and with the challenge of terrorism confronting Pakistan, Sharif will need to appeal beyond his urban Punjabi base.

Serious doubts remain that Sharif can readily resolve Pakistan’s massive and destabilising problems. His agenda is already challenging, with a plunging economy and critical internal security situation. There will also be clear limits to his powers, especially on Kashmir, jehadi groups, Afghanistan and the nuclear weapons which will remain with the army.

Sharif’s statements about pursuing peace with India have been received enthusiastically in India but it should neither seek a thorough makeover of bilateral relations through dramatic gestures nor disarm its ability to target developments from Pakistan that threaten India’s vital interests. India should nevertheless be a willing partner on any forward movement on bilateral trade and humanitarian issues.  Indian security agencies must also guard against a cross-border terrorist attack by Pakistani jihadi groups, at the behest of the establishment that feels threatened by any notion of peace between India and Pakistan. A careful mix of patience and caution, with an eye on unfolding events, should be the basis of India’s immediate Pakistan strategy.

Download the issue brief in PDF format (440 KB).

Issue Brief – Maoist ambush in Chhattisgarh


Executive Summary
The ambush of a convoy of Congress party leaders in Chhattisgarh on May 25th, 2013, was one of the most ambitious attacks by the Maoists. It was a well-planned attack and shows a complete security and intelligence failure. The Maoists have attained their tactical aim of projecting their power while creating political and moral uncertainty in the state.

The most pressing challenge for the state government is to ensure the sanctity of the electoral process for the forthcoming assembly elections. The political process will have to be shielded from the effects of this Maoist action and consequent reaction of the security forces. While the Indian state cannot shirk from doing everything it needs to do to defeat the Maoists, it must also do everything it can to politically engage and win over the tribals.


The ambush should be analysed in the light of the strategic and political landscape where the Maoists were under duress and parties increasing their reach in the tribal areas. This does not mean that this ambush is a sign of weakness from the Maoists. It could also be a signal of Maoist revival and resurgence for the next stage of conflict in the state.

The immediate response of the government will be to send in additional central paramilitary forces into Bastar region. The other prong of the strategy will be to raise more special forces in the state, modeled on the lines of the Greyhounds in Andhra Pradesh. Both are erroneous propositions. The key to success against the Maoists lies in intelligence-led operations and better policing, and not in reactive combing operations or ‘area domination’ exercises which further alienate the locals and the tribals.

Download the entire issue brief in PDF format (900 KB).

Discussion Document – India’s Central Monitoring System


By Rohan Joshi, Fellow at the Takshashila Insitution

Executive Summary

As part of the 2011-­2012 annual report of the Department of Telecommunications, the Government of India formally announced its decision to implement a Centralised Monitoring System (CMS) for the “lawful interception and monitoring” of electronic communication channels in the country.

The rapid acceptance of mobile telephony and internet in India has had a profound social and economic impact on the country. However, this growth and acceptance of cyberspace in India has coincided with threats to national security and critical national infrastructure being manifested through cyberspace. A framework for legal surveillance, therefore, can be a powerful asset to the government in monitoring and countering such threats.

However, such an inherently pervasive and intrusive program cannot be deployed in a liberal democracy without an adequate level of trust between the government and its citizens and an appropriate framework of checks-­and-­balances to ensure that entrusted agencies do not overstep their jurisdiction. Thus, it is imperative that the Indian government take its citizens into confidence on the necessity for such a program, evolve an appropriate framework of laws, including those pertaining to privacy and data retention, and establish a system of checks-­and-balances to ensure against systemic overreach prior to the implementation of the CMS.

Download the discussion document in PDF format (201 KB)

Research Report – On Labour Law Reforms in India


Towards greater labour market flexibility: Issues and Options

Hemal Shah, Scholar at the Takshashila Institution

This report proposes how we could think about a workable approach to labour market reform, different from the polarised debates we have seen so far. It recommends that such an approach could be started by making small tweaks to social security administration, increasing federal freedom and competition, and engaging meaningfully with trade unions. One of the primary messages is to move the reform narrative to the informal sector.

Analysts and policymakers have long been pushing the cause of flexible labour markets in India. On the other hand, such proposals have been met with staunch resistance from those whose interests are vested in an inflexible labour market, including employees, trade unions, and the labour ministry. After almost six decades of impasse on this issue, it is time to find a workable approach that could be acceptable to both parties – as marginal progress is better than a stalemate. This report shows how this is within the realm of the possible.

Download the research report in PDF format (1.2 MB)

This report can be cited as: Hemal Shah, “Progressing towards greater labour market flexibility: Issues and Options”, Takshashila Research Report, 2013-S01. (2013) www.takshashila.org.in.

Policy Brief – Making India's Labour Market More Flexible


Making India’s Labour Market More Flexible

Hemal Shah, Scholar at the Takshashila Institution

This policy brief presents a workable approach to labour reforms, to break six decades of deadlock. These are reforms that can result in marginal progress that can ease the transition to bigger reforms in the future. Small tweaks to social security coverage and administration for employee welfare, increasing state freedom for business friendly regulation, and engaging meaningfully with trade unions can build momentum on reforming India’s informal sector.

Since the 1991 economic reforms, growth rate in India quadrupled but the rate of good quality jobs remained stagnant. For India to realise its true growth potential and create good quality jobs faster, it has to reform its heavily regulated labour market. Roughly 400 million informal employees make up 93 percent of the total workforce, and they stand to benefit from incremental changes in labour market regulation and improve productivity. However, resistance from those with a vested interest in an inflexible labour market has made reforms impossible. Therefore this policy brief focuses on realistic ideas that could be acceptable to all parties – employees, trade unions, businesses and ministries.

Download the policy brief in PDF format (216 KB)

This policy brief can be cited as: Hemal Shah, "Making India’s Labour Market More Flexible", Takshashila Policy Brief, 2014-S01. (2014) www.takshashila.org.in.

Discussion Document – Resolving the Indo-Bangladesh Maritime Dispute


Resolving the Indo-Bangladesh Maritime Dispute
Piyush Singh and Pranay Kotasthane, the Takshashila Institution

This discussion document investigates the Indo-Bangladesh maritime dispute and presents policy options for the Indian government. Indo-Bangladesh relations have been consistently hit by several contentious issues. One of these challenges is the longstanding maritime dispute over territorial waters and exclusive economic zones (EEZs) in the Bay of Bengal. This dispute was eventually taken to an international tribunal by Bangladesh in 2009 and the verdict is expected to be delivered in a few weeks.

While many states go to international tribunes and courts to resolve bilateral disputes, they ultimately conclude in bilateral negotiations. The Indian government can incentivise its neighbours to resolve outstanding issues bilaterally than through costly international adjudication.

India should concede no part whatsoever of the territorial waters because this area is essential for the livelihoods of its 300 million citizens living in States dependent on the Bay of Bengal. The international tribunal could adjudicate on the EEZ dispute by recommending either the equidistant or equitable principle to demarcate the EEZs. While the equidistant principle is in favour of India, the Indian government has a legitimate case for a favourable position even under the equitable principle. India can also propose joint development and exploration in the EEZ with Bangladesh.

Download the Discussion Document in PDF format (1.2MB)

This discussion document can be cited as: Piyush Singh and Pranay Kotasthane, "Resolving the Indo-Bangladesh Maritime Dispute", Takshashila Discussion Document, 2014-01. (2014) www.takshashila.org.in.

Policy Advisory – Bringing IT Act 2000 in Alignment with the Constitution


Bringing IT Act 2000 in Alignment with the Constitution
In response to input sought by the Law Commission of India on media and privacy

Rohan Joshi and Ranjeet Rane, The Takshashila Institution
Takshashila Policy Advisory 2014-01

This document is the authors’ formal submission to the Law Commission of India. The commission floated a Consultation Paper on Media Law in May 2014 to elicit views from stakeholders and the general public.

Download the Policy Advisory in PDF format (176 KB) 


Section 66A of the Information Technology Act, 2010, when enforced, places unreasonable restrictions on the freedoms of speech and expression of Indian citizens, thereby contravening guaranteed constitutional rights. It is recommended that Section 66A in its entirety be repealed in order to prevent the misuse of indefinite and ambiguous terms for political or personal gain. However, if this is infeasible, it is recommended that clear and narrow definitions of what constitutes grossly offensive, insulting, annoying or inconveniencing content be defined.

Further, beyond the concerns pertaining to the rights to free speech and expression, the verbiage in Section 66A imposes technical limitations that perhaps were not intended. Technical challenges involving anonymity on the Internet and allowing for the repudiation of the origin of digital content, limitations in jurisdiction and inconsistencies between the IT Act and the Indian Penal Code (IPC) may render Section 66A ineffective. In addition, it is also recommended that India not constitute a regulatory authority to regulate "ʺobjectionable"ʺ content on the Internet at this time. Bringing in yet another statutory body to regulate content in India would only add to the list of institutions with overlapping mandate.

Ultimately, India needs common-sense legislation that embraces the spirit of the constitutional rights guaranteed to citizens as well as taking cognisance of the technical challenges that new and emerging media of mass communication present.

Download the Policy Advisory in PDF format (176 KB) 

This policy advisory can be cited as: Rohan Joshi and Ranjeet Rane, "Bringing IT Act 2000 in Alignment with the Constitution", Takshashila Policy Advisory 2014-01. (2014) www.takshashila.org.in.

Discussion Document - Fiscal Consolidation is the Key to Economic Growth


Grasping the Nettle: Fiscal Consolidation is the key to Economic Growth

Budgetary Priorities for the Union Government
Mukul Asher, V Anantha Nageswaran & Narayan Ramachandran, The Takshashila Institution

The budget is the first and the most important policy announcement that the new NDA government will be making. It has come to office riding the wave of aspiration and impatience of a youthful population. The personal credibility of the Prime Minister is high. This is an ideal setting for the government to place long-term interests of the nation ahead of short-term costs, even if they mean hurting special interest groups. The government has nothing to fear. Status-quoist incremental tinkering at the margin will leave both its supporters and the nation at large disillusioned and discouraged.

In a recent newspaper essay, Shinzo Abe, Japan’s prime minister noted that economic growth was important for Japan to achieve fiscal consolidation. In India’s case, with government dominance of the banking sector, government claim on national savings through the banking system and the consequent financial repression, fiscal consolidation is the key to achieving sustainable economic growth.

This Discussion Document provides directions for the 2014 and future budgets focussing on the budget-making processes, subsidies, fiscal dominance of monetary policy, inflation expectations, bank ownership and fiscal consolidation.

Download the Discussion Document in PDF Format (221 KB)

For families, a budget is a statement of income and expenditure. Even though many do not draw up a budget, when they do it, it is just about tallying up income and expenditure items. There are not too many sources of the former and there are too many claims on the latter side. Hence, for families, it is mostly about prioritisation, postponement and discipline.

Most of these considerations apply to institutions, corporations and to sovereigns. The first two, in most cases, have the ability to borrow more than individuals have. A sovereign states has the ability to levy taxes and hence, has more leeway on expenditure than households, corporations or institutions have.

All this might sound elementary but with a new government in office in India—and upon which there are high expectations—, it is important that the government gets these basics right. For the most part, since Independence, governments in India have adopted a feudalistic approach towards its subjects. They have not treated the public with respect for their intelligence and responsibilities. They have taxed a few and showered many—not just the poor—with benefits. The result is a government debt ratio—one that includes debts owed by state governments—that is nearly 60% of GDP.

Given this penchant for grandstanding and its adverse consequences for the government’s finances and for the economy, some would like the budget to focus on its income and spending priorities rather than be used as a platform for making grand announcements. That will keep things in focus. However, a government’s spending priorities reflect its policy priorities, and hence, the budget receives more critical scrutiny than most other government policies.

In particular, the budget expected to be presented on July 10th, 2014 by the new Finance Minister has generated enormous anticipation for several reasons. This is a government that has come with an absolute majority gained by a single political party in a long time. The budget is being presented in the backdrop of persistently high inflation and with a serious monsoon failure in prospect. That the Prime Minister has rescheduled his visit to Japan to enable full attention to be focused on the Parliament’s Budget Session suggests the importance being given to it.

Moreover, this budget presentation follows ten years of the United Progressive Alliance government whose budget record is far from satisfactory. In the first four years, the UPA government appeared to follow prudent budgetary policies simply and only because India’s high economic growth rate yielded ample tax revenues for the government, obscuring its irresponsible taxation and spending proposals. When economic growth dried up, the unsustainability of its budget numbers showed up rather starkly. In its last year in office, the government attempted belatedly to rein in the budget deficit. Seemingly, it has succeeded. The budget deficit ratio (to GDP) has come down to around 4.5%. However, the reduction in deficit ratio has come about both due to the deployment of dubious accounting methods, due to postponement of spending to the next financial year and due to certain decisions that have potential to cause considerable long-term damage.

These decisions include, but not limited to, forcing public sector enterprises to declare dividends and to bearing the government’s subsidy burden. Hence, bringing the deficit under control in a credible manner is an unfinished priority. Otherwise, India’s credit rating will be downgraded, undermining the government’s ambition to upgrade India’s infrastructure to world-class status, as financing costs will rise significantly after a downgrade and inward investments will become available only on costly terms.

We are aware of two limitations of our exercise. First, this briefing note comes too close to the presentation of the budget for the suggestions made here to be considered for the budget. Second, several experts and lobby groups have already made their suggestions for what the government should do in the areas of fiscal consolidation, revenue augmentation and expenditure control. We see little point in echoing them. Nonetheless, where necessary, we reinforce suggestions that might have been made by others elsewhere and by us too, in the past.

Keeping these in mind, we begin this Discussion Document with specific proposals that focus on the process of India’s budget-making, in Section 1. The advantage of this approach is that the suggestions made here will remain relevant even for future budgets. Further, process improvement has multiple benefits. For example, if the Union government improves the budgetary process, it will inspire many State governments to fall in line. The rest of the document is structured as follows:
Section 2 deals with subsidies with particular focus on energy, agriculture and corporate subsidies. Section 3 examines the recent fiscal dominance of monetary policy and its effect on inflation expectations. The related issues of bank ownership and recapitalisation and inflation expectations are considered in Section 4. Section 5 urges fiscal consolidation and before some concluding remarks that wrap up this discussion document.

Download the Discussion Document in PDF Format (221 KB)


First, the Ministry of Finance should constitute a Fiscal Risk Assessment Office with a medium-term focus. Its report should be published and debated annually. It should have professional staff, similar to the Congressional Budget Office in the United States, or similar organisations in the United Kingdom, Canada, and Australia. A longer term fiscal analysis is essential.

Second, the government should prioritise the passing of the Public Procurement Bill 2012. India’s total government expenditure on goods and services, and on assets, is around 15% of GDP (out of total combined expenditure of all levels of government of around 28% of GDP). A 5-10% saving on procurement could provide savings equivalent to 0.75% to 1.5% of GDP every year for the country. The Union government should give priority to its own Public Procurement Bill, and require states and others to do so when the financing comes from the Union government. It should also provide expertise for states to pass their own Procurement Bills.

Third, the government should announce a short and precise time-table to switch in accounting methods from cash to accrual (suitably modified to suit government sector). Such a shift could first be required for public enterprises, including departmental commercial enterprises, such as Railways and India Post; statutory boards such as Employees’ Provident Fund Organisation and Employees State Insurance Corporation; and central universities and other such organisations.

The current cash accounting does not reveal the full cost of an activity. For instance, the costs of adding a full time employee to Indian Railways are not fully recognised as pensions and other future liabilities are not taken into account. Further and perhaps more importantly, the cash accounting method does not permit balance sheet to be constructed, constraining more productive use of assets. (For more details see “Reforming public enterprises” by Mukul Asher in the June 2014 issue of Pragati - The Indian National Interest Review)
Fourth, multi-year budgeting for capital expenditure is another initiative which could be signalled but gradually introduced. The debate on restructuring the Planning Commission has advanced an idea that it should become a professional body whose functions include an independent evaluation of the proposals for new programmes, as well as of existing schemes. Currently its staff lacks requisite skill sets to do such a task.

Fifth, the government should budget for results and outcomes and not for spending. Specific programs in specific ministries (road building, power generation, Food Corporation of India’s mandate) could be a starting point. Selected Ministries could also be asked to prepare substantive performance reports for the parliament and for public debate. This may happen over time but it will be good and important to signal intentions in this budget.

Sixth, the government should consolidate Central schemes according to the objectives to be achieved, with specification of indicators to be monitored, and the time-frame. In general, supply side issues and logistical supply chain aspects need to be given greater prominence.

A number of Central schemes could be modified or merged. For example, The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and Indira Awas Yojana are reportedly being used in a joint manner to encourage rural housing construction. This is a positive step. There is however a strong case for more explicitly linking MGNREGA with skills development particularly in industries such as textiles, agro-processing, food processing and manufacturing where there is potential to learn skills on the job, expand exports, and reduce logistics-supply chain costs in agriculture.

There are two national health schemes under the Ministry of Labour. These are Employees State Insurance Corporation (ESIC) and Rashtriya Swasthya Beema Yojana (RSBY). This has resulted in lack of policy coordination and coherence in the health sector. The government must urgently consider restructuring them to better align with India’s health policies, and place them under the Ministry of Health.

Seventh, the role of the Finance Commission needs to be re-examined to better rationalise India’s public finances at all levels, including urban and local bodies.

Finally, the assumptions that go behind the budget numbers: nominal and real GDP growth, the deflator, the elasticities of tax revenues (direct and indirect) have to be stated explicitly. For comparison, historical ranges can also be given. Since this transparency will enable commentators to judge the realism of the budget numbers more easily, there will be a greater sense of accountability in preparing these estimates. Most countries aiming to achieve fiscal credibility have used conservative estimates and have done better with final outcomes. India, on the other hand, has over-promised and under-delivered, or delivered with sleight of hand on budget deficit projections.

First, the decision reportedly taken directly by the Prime Minister to not merge Aadhaar with the National Population Register, and to restore the direct benefits transfer for cooking gas and other subsidies is encouraging. Second, the previous government had done a commendable job in one aspect—it had quietly brought the subsidy on diesel to insignificant levels by allowing a steady monthly increase in the price of diesel. This government should follow that path for the other subsidised petroleum products such as cooking gas and kerosene.

Elimination of subsidies on energy products and setting them free is an important priority since India is not rich in hydrocarbons. The price should reflect its scarcity for Indians. The government has the right to protect the poor from the vagaries of market prices for energy products. However, that can be done without tampering with the price mechanism. Cash transfers in lieu of subsidised cooking gas, diesel and kerosene may even enable some families to economise on the use of these items and spend the money on more useful items like family health and education.

Specifically on agricultural subsidies, there are many things that the government can do to boost agricultural productivity and employment without wasting scarce government resources.

To start with, several Ministries that deal with agriculture and allied subjects can be merged into one. Second, the government might think that it is taboo to tax agricultural income, but the abuse of non-taxation of agricultural income should be plugged. The weighted average increase in Minimum Support Prices (MSP) for food-grains announced by the NDA government is only around 2%. That is commendable. At the same time, more needs to be done to wean farmers away—especially in states like Punjab and Chhattisgarh—from the production of water-guzzling crops. For example, the current policy on fertiliser subsidies neither provides relief to farmers nor does it help boost soil fertility and productivity.

On the distribution side, we will confine ourselves with the recommendation that the government should consider rechristening Aadhar and use it to reduce inefficiencies and friction costs in the Public Distribution System.

As an aside, there is a case for including in the government a number of credible experts with current knowledge and experience in the field. For instance, the government should consider bringing in Ashok Gulati, former Chairman of the Commission for Agricultural Costs and Prices (CACP). His work on various aspects of Indian agricultural sector, while at CACP, enabled informed debate on various issues such as the Food Security Bill, water usage and management in Indian agriculture, on agricultural exports, on the role of the Food Corporation of India and so on.

Some sections of the public discourse are comfortable criticising government subsidies for farmers and for the poor. The criticisms are legitimate and relevant since they are targeted not at the objectives behind subsidies but at the outcomes they achieve.

Nonetheless, there is a lingering sentiment that urban commentators give a relatively freer pass to corporate tax subsidies. More sunlight on them is needed. In 1997, the then United Front government brought out a white paper on non-merit subsidies. It is time for another white paper on all subsidies, including tax breaks given to specific industries, and even to specific firms in some cases.

Indian capitalists have gotten away more easily than the poor at the hands of the so-called objective and unbiased commentators. As a result, India has neither a command economy nor a market economy but a selective pro-business economy which serves the interests of few at the expense of many.

One of the most damaging consequences of the previous government’s irresponsible attitude towards public resources is the impact it had on the Indian banking system and on inflation expectations. What it sought to give on the one hand through rights, it took away with the other hand through the relentless rise in cost of living, caused by its reckless borrowing. The Reserve Bank of India’s report on Currency and Finance, 2009-12 states:“The size of the government’s net market borrowing programme (dated securities) increased nearly 9.7 times in eight years to INR4.9 trillion in 2012-13. In addition, the government resorted to an additional funding of INE1.16 trillion through 364-day treasury bills)”

Not content with garnering private savings through its market borrowings, the UPA government burdened the RBI with its borrowings. Due to the sheer size of the government market borrowing, much of it ended up in the balance-sheet of the central bank. They simply could not be placed in the market at the coupon rates paid by the Government of India, without seriously impairing the availability and flow of credit to the private sector. So, the UPA government imposed its own version of ‘quantitative easing’ on the RBI since 2008. The table below shows that RBI held just under 5% of all the government securities in 2008. It had more than trebled to 17.0% in 2013.

Caption goes here

Source: Table 2.7, page 12, Status Paper on Government Debt, Ministry of Finance, Government of India, July 2013.

The RBI ended up holding government debt to ensure that the borrowing cost for the government did not rise. Had there been a genuine free market for the debt of the Government of India, its borrowing cost would have exploded. Had it exploded, the interest payment/budget receipt ratio would not have come down but gone up substantially. Instead, RBI balance-sheet exploded with government debt. This is what is known as fiscal dominance of monetary policy.

Consequently, inflation in India skyrocketed. The Consumer Price Index for Industrial Workers went up cumulatively by 63% from end-2008 until end-2013 (based on the index levels of 147.0 in December 2007 and 239.0 in December 2013).

The foregoing analysis makes it abundantly clear that the onus of reducing India’s inflation expectations and breaking the spiral of rising inflation, rising wages and falling productivity rests solely on the shoulders of the government. Prudent, measured and responsible spending and government borrowing programme will not only release more resources for the private sector to borrow and invest, but also bring down inflation expectations. This is both urgent and important given the spectre of a serious drought facing the nation.

Put differently, the government must target reduced market borrowing and should announce a programme to bring down central bank holding of government securities. If it means facing the discipline of the market and higher borrowing costs, that is the short-term cost to be paid for the long-term financial and fiscal health of the nation. This government should be prepared to make that trade-off and credible signals towards that end must be included in the budget.

Nearly fifty years after the first wave of nationalisation of private sector banks, it has to be said that the goal of financial inclusion remains largely elusive and public sector banks have only ended up entrenching cronyism in India. Most non-performing loans of public sector banks stem from loans to politically connected businessmen. Their businesses have failed leaving banks with a big hole and employees with uncertain future. The businessmen continue to prosper and remain pampered.

The previous government brought back the pernicious culture of loan waivers with its announcement of a farm loan waiver before the 2009 general election. The current RBI governor, then in his capacity as the Chairman of the Committee on Financial Sector Reforms had said that, “after fifteen years of getting away from the problem, the Government had vitiated it again”. Just as it was the Congress government in Andhra Pradesh that announced free electricity to farmers in the 1970s to counter the popularity of N T Rama Rao, setting in motion a practice that remains hard to eradicate to date, it brought back loan waivers. The practice has been eagerly picked up by an ally of the NDA government in Andhra now. The damage is not just to the balance sheets of the government or the banks but, more importantly, to the culture of accountability and ethics in the nation.

In addition to these pressures on their commercial lending decisions leading to the problem of non-performing loans, the government has also imposed a rather high statutory liquidity ratio on banks, effectively forcing them to lend to the government. Lending to the government for creation of assets is one thing but lending for its non-productive expenditure is another thing. Had it been the case of the former, India’s potential growth rate will not be languishing at 6% - 7% range.

A harsh but largely accurate commentary on Indian public sector banking has been that it has served the politicians’ vote-bank politics and furthered the business interests of their cronies more than it has served the goal of financial inclusion.
Therefore, for a government wanting to establish a Congress culture-free India, it is time to free the banking sector from government domination, interference and claim on banking resources. Before that, it should address the problem of non-performing loans (NPA) in public sector banks by making it easier to sell collateralised assets. Setting up a bad bank to deal with NPA is one possibility. Then, public sector banks need to be recapitalised. The government should turn to private sources for recapitalisation, thus loosening its hold on the banking system.

Of course, one danger of private sector banking is that India follows the West in over-financialising the economy. When considerations of financial sector and its interests trump considerations of systemic stability and economic welfare, then the economy is said to be financialised. There is no imminent risk of that happening in India especially after the RBI governor has come out clearly against some of the most pernicious recommendations of the Financial Sector Legislative Reforms Commission. That said, the Finance Minister should avoid announcing proposals that would give financialisation a boost. All that he needs to do is to enable the old-fashioned credit mechanism to function efficiently and effectively.

For that to happen, the Budget must take financial consolidation very seriously. That is the subject of the next and final section of this discussion document.

If the July 2014 Budget is to give positive signals on growth, governance and public financial management, then it must demonstrate a credible fiscal consolidation roadmap, which enhances policy credibility and trust. The government should declare goal of eliminating the primary and revenue deficits one year before the end of its first term.

Fiscal consolidation should include additional revenue generation measures, both conventional (tax and non-tax, including cost-recovery policies of government commercial enterprises such as Railways) and unconventional revenue sources such as using land, air-space and other assets more productively, more equitable natural resource rent-sharing with other stakeholders, including state governments, better treasury management and revenues from emission trading.

Further, credible steps to institute and better manage the regulatory structure for the pricing and availability of key inputs such as coal and electricity would need to form part of the road map.

The budget is the first and the most important policy announcement that the new NDA government will be making. It has come to office riding the wave of aspiration and impatience of a youthful population. The personal credibility of the Prime Minister is high. This is an ideal setting for the government to place long-term interests of the nation ahead of short-term costs, even if they mean hurting special interest groups. The government has nothing to fear. Status-quoist incremental tinkering at the margin will leave both its supporters and the nation at large disillusioned and discouraged.

In a recent newspaper essay, Shinzo Abe, Japan’s prime minister noted that economic growth was important for Japan to achieve fiscal consolidation. In India’s case, with government dominance of the banking sector, government claim on national savings through the banking system and the consequent financial repression, fiscal consolidation is the key to achieving sustainable economic growth.

We hope that the new government will grasp the nettle in the budget.

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Book Chapter: India and UN Peacekeeping


Shaping-the-emerging-WorldBook Chapter: India and International Norms: R2P, Genocide Prevention, Human Rights, and Democracy
Richard Gowan and Sushant K. Singh. Sushant is a fellow for national security at the Takshashila Institution.


Shaping the Emerging World: India and the Multilateral Order
W.P.S. Sidhu, Pratap Bhanu Mehta and Bruce Jones
Brookings Institution Press, 358 pages. (2013)

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India’s involvement in United Nations (UN) peacekeeping operations is one of its most visible contributions to the multilateral system. More than 100,000 Indian military and police personnel have served in forty of the UN’s sixty- five peacekeeping missions, dating back to their inception in the 1950s. As of April 2013, India had 6,851 troops and 1,038 police officers under UN com- mand, representing just less than 10 percent of all uniformed personnel in blue-helmet operations. These overall figures arguably underrepresent the importance of India in peacekeeping, as it offers the UN a range of specialized military assets—such as combat helicopters and field hospitals—that peacekeeping missions urgently need. Yet despite these contributions, there is a curious ambivalence around India’s participation in UN peace operations.

Book Chapter: India and International Norms


Shaping-the-emerging-WorldBook Chapter: India and International Norms: R2P, Genocide Prevention, Human Rights, and Democracy
Nitin Pai, Co-Founder and Director of the Takshashila Institution


Shaping the Emerging World: India and the Multilateral Order
W.P.S. Sidhu, Pratap Bhanu Mehta and Bruce Jones
Brookings Institution Press, 358 pages. (2013)

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The doctrine of responsibility to protect (R2P), India’s permanent representative to the United Nations declared in a speech in October 2012, “is the most important challenge that the international community, anchored in the United Nations, is going to face.”1 Arguing that the initial suspicion of many developing countries toward the newest norm in international relations was misplaced, he supported the need for a “collective response by the international community to ensure that mass atrocities like genocide, ethnic cleansing, crimes against humanity do not take place.” Explaining why India had abstained on a United Nations Security Council (UNSC) resolution authorizing military intervention in the Libyan civil war of 2011, he judged that implementation of the doctrine “gives R2P a bad name.”

The Indian diplomat’s arguments are a good example of India’s attitude toward international norms infringing on state sovereignty in furtherance of human security, human rights, or liberal democratic goals. This chapter argues that India takes a middle path, supporting the evolution of human rights and democratic norms, but exercising caution in the manner of their implementation. It delves into the foundations of India’s policy approach toward two sets of norms: those concerning human security and those pertaining to liberal democracy. It interrogates these norms as they have evolved and examines them from an Indian perspective. It concludes by exploring how Indian foreign policy in the context of these norms might change as India emerges to become a more powerful player in international politics.

Read a preview of the chapter online (100KB).

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Invited Paper – Indian Journal of Industrial Relations


Transition to Labor Law Reform: State-Level Initiatives &Informal Sector Labor Relations
Hemal Shah, Scholar at the Takshashila Institution
The Indian Journal of Industrial Relations, Vol. 50, No. 1, July 2014

The 1991 economic reforms in India quadrupled growth, but kept good quality jobs stagnant. About 93 percent of the workforce is employed in the in- formal sector, holding back India’s growth potential. If India is to realize its full growth po- tential, reforming the heavily regulated labor market is indis- pensable. However, resistance from vested interests in an inflex- ible market and lack of political capital in New Delhi has con- tributed to more than six decades of impasse. This paper accounts for interests of all stakeholders in addressing this issue. The pa- per identifies best practices that individual states have under- taken to simplify labor laws to ease doing business and address the lack of skilled labor. It also identifies smaller reforms to ex- tend security coverage to infor- mal workers.

Download the fulltext PDF (549KB)

The paper can be cited as Hemal Shah, "Transition to Labor Law Reform: State-Level Initiatives &Informal Sector Labor Relations," The Indian Journal of Industrial Relations, Vol. 50, No. 1, July 2014.

Discussion Document – China's Economic Outlook in 2015


China's Economic Outlook in 2015: The Trump Card of a Yuan Devaluation
V Anantha Nageswaran, Co-Founder and Fellow for Geoeconomics, the Takshashila Institution.

China’s real economy grew at an average rate of 9.8% annually for the last thirty-four years, up to 2013. In October 2014, the International Monetary Fund declared China to be the world’s largest economy measured in Purchasing Power Parity exchange rates. China has also the dubious distinction of the emerging world’s second most indebted country with total non-­financial debt at 217% of GDP. China’s growth rate has slowed. As it sets out to tackle the debt burden, it will slow even further, complicating its stated goal of rebalancing growth away from investment to household consumption. The one potential safety valve is a huge currency devaluation – something that it resorted to in 1993, with chilling effects on the rest of Asia in the years that followed.

Download the Discussion Document in PDF format (1.4MB)

This discussion document can be cited as: V Anantha Nageswaran, "China's Economic Outlook in 2015: The Trump Card of a Yuan Devaluation", Takshashila Discussion Document, 2014-03. (2014) www.takshashila.org.in.

Policy Brief – Reforming ONGC Videsh for India's Energy Security


Reforming ONGC Videsh for India's Energy Security
Ameya Naik, Scholar at the Takshashila Institution

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Executive Summary

ONGC Videsh Limited (OVL) is the overseas arm of ONGC, India’s primary nationalised oil company. OVL can and must play a critical role in ensuring India’s energy security, which must involve actually securing increased oil and natural gas supplies for the country. Energy security is a bottleneck for India to get back to high economic growth, and OVL needs comprehensive reforms in order to truly contribute to this goal.

In a global oil market that is increasingly captured by nationalised oil companies (NOCs), the role of OVL only increases in prominence. Consequently, OVL must move beyond focusing on acquisition of acreage and drilling rights alone, to examining the entire supply chain of getting oil and natural gas to India. This requires a more strategic approach to acquisitions, which are currently driven by the imperative to rapidly reinvest profits and cash surpluses, so as to prevent their being appropriated by the government to subsidise loss-making domestic public sector undertakings (PSUs).

This policy brief proposes six strategies for OVL to secure deposits, extraction, supply routes and technology. OVL can build technological competencies by entering into joint ventures with market leaders and use it to unlock greater reserves at home. OVL can also enter swap deals and reciprocal arrangements to bring major oil companies (both nationalised and international) to India. To secure more reliable and inexpensive supplies and reliable supply routes, OVL should concentrate on countries where it enjoys unique leverage or soft power advantages. OVL can collaborate with other NOC competitors and avoid being lured into bidding wars with them. It should also cultivate alliances and bidding consortia with private sector players, both domestically and internationally. Finally, OVL should ensure that political risk is comprehensively accounted for, and develop contingency plans for disruptions in supply or supply routes.

This brief also raises certain aspects of domestic policy as necessary counterparts to these reforms. Investment, taxation and pricing of oil and natural gas in particular must be consistent and transparent to help to restore investor confidence in India, and critical sea lines of communication (SLOCs) must be secured.

Download the Policy Brief in PDF format (1.0MB)

This policy brief can be cited as: Ameya Naik, "Reforming ONGC Videsh for India's Energy Security", Takshashila Policy Brief, 2014-S02. (2014) www.takshashila.org.in.

Takshashila Strategic Assessment – Risks to India’s national security from tensions along the Iran-Pakistan border


Risks to India’s national security from tensions along the Iran-Pakistan border
Sumitha Narayanan Kutty and Pranay Kotasthane, The Takshashila Institution

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Key Judgements
Border confrontations between Iran and Pakistan have risen sharply since February 2014, when five Iranian border guards were abducted by the Jaish ul-Adl Sunni militant group and taken into Pakistani Balochistan. More recently, four other attacks have been recorded on the Iranian side since September 2014 following which both countries exchanged mortar fire along the border.

We assess that these border tensions are poised to exacerbate as Iran’s eastern front remains vulnerable to further strikes by Sunni Baluch militants. The Islamic Revolution Guard Corps (IRGC) observes that the quality and training of recruits have greatly improved. Emboldened by the rise of the Islamic State (IS) in Iraq and Syria, the Jaish ul-Adl is keen to make some gains of its own. Certain tactics such as employing a car bomb mirror those used by the IS in Iraq.

Our assessment in the short term:

  • Jaish ul-Adl is poised to scale up attacks, possibly target bigger towns like Zabol, Zahedan
  • The Pakistani ISI will have to evaluate the relative importance of its Baloch assets and decide if it is too expensive to continue supporting Jaish-ul-Adl
  • The Iranian security forces will consider unilateral action to crush Jaish ul-Adl if Islamabad and the Pakistani army fail to rein in the group

After India and Afghanistan, Islamabad has now strained its relations with Iran. Continued incursions by terrorists from the Pakistani side into Iran and the subsequent military posturing by both countries have major implications for both Pakistan’s stability and that of the region as a whole.

In the near term, we believe that these confrontations pose a threat to Indian strategic assets in Iran -  the Chabahar port and the upcoming railway network connecting it to Afghanistan.

Download the Takshashila Strategic Assessment in PDF format (0.3MB)

This assessment can be cited as: Sumitha Narayanan Kutty and Pranay Kotasthane, "Risks to India's national security from tensions along the Iran-Pakistan border", Takshashila Strategic Assessment, 01 -13 November 2014, www.takshashila.org.in.

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