Tuesday, August 27, 2013

A bridge to nowhere

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." The central bank, of course has other functions in addition to this, such as the manager of foreign exchange, acting as the banker to the government and a lender of the last resort to the banking system. Maintaining price stability however, has always been seen as the primary objective of any Central Bank in the world. As the incumbent Governor of the Reserve Bank Dr. D. Subbarao prepares to demit office after an eventful tenure, I took a look at his monetary policy actions and the impact they have had on some key indicators in the country.

Subbarao’s tenure at the Reserve Bank has been one of the most challenging of any RBI Governor’s in recent times. Within days of his taking office, financial crises struck the economies of the West. Giant institutions collapsed.  Credit markets froze. World trade came almost to a halt. Stock markets crashed. Commodities plunged. The recession that followed in the U.S. and Europe has been described as the worst since the Great Depression of 1932. Though not a direct party to the tumultuous events unfolding in the developed world, a rub-off effect on India was inevitable.

Subbarao’s tenure has also coincided with a leadership crisis at the centre in New Delhi. In the last few years, a profligate UPA-II sunk itself neck deep in corruption, mega scams hit the headlines, crony capitalism peaked, “policy paralysis” became the buzzword and economic reforms that started in the 1990s reversed, ironically by the same man who was hailed as the architect of those reforms earlier. A welfare state has emerged.

In such an environment, managing the country's monetary policy can be no easy task. The policy under Subbarao followed alternate bouts of easing and tightening liquidity in 'baby steps' of 0.25 to 0.50 percent each at intervals of a few months at a time.

Over a period
Eased liquidity, lowered rates
Oct 08 – Feb 10
Reduced CRR by 4 %
Reduced Repo by 4.25 %, Reverse Repo rate by 2.75 %
Squeezed liquidity, raised rates
Feb 10 – Jan 12
Raised CRR by 1 %
Raised Repo, Reverse Repo rate by 3.50 %
Eased liquidity, lowered rates
Jan 12 – May 13
Reduced CRR by 2%
Reduced Repo, Reverse Repo rate by 1.25 %

What effect, if any, have these steps had on the key indicators stated while embarking on these policy actions? Let us take a look at some of them

Consumer prices have risen more than 50 % in less than five years
Consumer prices have risen continuously, at almost a uniform rate in the last five years. Between October 2008 and June 2013, prices (as indicated by CPI-IW) are up more than 50 % i.e. more than ten percent per annum compounded. Whether Subbarao was tightening credit or easing liquidity, it has clearly had little impact on consumer prices. 

The Rupee has depreciated from Rs. 48 to a $ to Rs. 65 in less than 5 years 
After an initial period of stability, the currency has collapsed. Especially from August 2011 when it was trading at Rs.45, it has been a one way street for the Indian Rupee, trading at around Rs. 65 to a dollar at the time of this writing. It is instructive to note that the Rupee broke its long term trading range (between Rs.45 to 50) in end-2011, when it was clear that the tightening cycle has ended and rates would be lowered going forward. Subbarao reversed the rate cycle with a CRR cut in January 2012.

Industrial production has gone nowhere in the last three years
If the rationale for cutting interest rates starting January 2012 was to promote industrial growth, it has clearly not worked. The Index of Industrial Production has gone nowhere in the last three and a half years - it stood at 163.60 in January 2010 and stands at 164.3 in June 2013. Whether Subbarao was raising rates or lowering them, industry has stagnated. 

In retrospect, vacillating between the demand from industry for lower interest rates and the imperative to tame inflation, monetary policy went nowhere under Subbarao. The cycle of liquidity tightening was abandoned abruptly in January 2012, ostensibly under the pretext of taming inflation. But even the meager mitigation in wholesale inflation rate never reached the end consumers. By lowering interest rates too early, Subbarao clearly jumped the gun, aiding, if not entirely causing the currency collapse. 

A prolonged period of negative interest rates is the primary cause of India’s financial crisis today. Negative interest rates promote investment in hard assets like gold and real estate at the cost of financial assets. Negative interest rates induce excessive borrowing and investment in unviable projects. Negative interest rates cause a flight of capital and depreciate the currency. The high inflation in recent years, and the sharp depreciation of the Rupee is a direct consequence of the RBI’s reluctance to raise rates when the situation demanded. A hawkish RBI is necessary to counter government profligacy.

Ironically, and unfortunately, Subbarao has been blamed for precisely the opposite – for not lowering rates enough. In the media, he is often portrayed as the one taking on the mandarins of the North Block, on issues ranging from interest rates reduction to new bank licences. But the symptoms of the current crisis - high inflation and a depreciating currency - prove that interest rates need to be higher and not lower than what they are. Subbarao probably knew this, but in the wake of the misleading clamor for reducing rates from the industry, politicians, influential economists and the media, could not stand up to his beliefs with conviction. In the end, his policy actions could neither control inflation nor promote growth.

Subbarao took office in the midst of a global crisis. He is now leaving in the midst of a domestic one.

(Also read a related article here)

Thursday, August 1, 2013

The Aadhaar Card and our "Identity" crisis

Archana works for an organization that has recently introduced a new device to track employee attendance. At the time of entry and exit, members of the staff press their fingers against a biometric sensor installed in the office. The sensor matches the fingerprints with those in its database, identifies the employee and marks them present. But there is a problem. Female employees have learnt the hard way that on days when they have mehendi on their fingers – a very common occurrence in India, especially during festivals and family events like weddings – the sensor fails to recognize the employee, marking them absent.

Professor Chari is a retired professor who spends his time doing research and freelance journalism. He is a regular visitor at the local Public Library, which has a large collection of rare books that help him in his research. The University has recently ‘upgraded’ its systems, and introduced a biometric reader that scans the borrower’s fingerprints when membership is granted. However, there is a problem. The biometric reader fails to ‘read’ the Professor’s fingerprints, making it impossible for him to enrol. The Librarian says this is a very common occurrence with senior citizens, for which he has no solution.

These two incidents (names changed, stories true) that I came across recently drove me to attend an event organized by Moneylife Foundation earlier this year, on the recently introduced “Aadhaar” card by the Government of India. The event was addressed by Col (retd.) Mathew Thomas, a former missile scientist cum civic activist, and Mr. Jude D’Souza, a forensic expert. At the event, Mr. D’souza gave a demonstration of how fingerprints can be faked, and claimed even Iris scans can be easily tampered with. Col Thomas, in his speech, came down heavily on the Aadhaar project and explained how the project is being pushed ahead despite its lack of Parliamentary sanction, extraordinary high cost and innumerable flaws in conception, execution and  implementation

Since then, I have tracked the Aadhaar project closely. The critics of Aadhaar are many, and its flaws are there for all to see - the project has no Parliamentary sanction, its cost benefit analysis has not been done, it uses questionable methods to collect its data, the accountability for breach of data secrecy is vague and unidentified, the card itself is unnecessary and adds no value, and it exposes citizens to a grave risk of identity theft. (Read thisthis or this) The card is being mischievously linked to government schemes like subsidy payments, for which simpler solutions such as Electronic Transfers (e.g. RBI's ECS) already exist. It's marketing campaign makes the deceptive claim of being “every citizen’s right”, creating a perception of value and benefit. One can understand a right to vote, a right to free speech, or even a right to subsidies and scholarships (if eligible). But a "right" to an identity card is a laughable statement! And yet, the citizen’s have lapped up the card, as if there was no tomorrow (around 38 crore enrolled at the time of writing!). I am amazed at this craving for another “identity” proof, without giving a second thought to what constitutes an "identity", and why identity cards exist. So let us ponder over it...

Aadhaar - A "right" to get a card that tells you who you are!

My dictionary defines Identity as “the fact of being who or what a person or thing is”. A person’s name and face, appearance and physical features give him his identity. His character, reputation, image give him his identity. His achievements, his work, his thoughts and actions – all give him his identity. "Cogito ergo sum”, Rene Descartes famously said in the 17th Century. I think, therefore I am. That gives me my identity. People would still have their identities even if there were no identity cards.

Identity Cards exist not because people need identities, but because organizations need to identify people they want to deal with. The Election Commission issues an Identity Card, because it needs to identify voters who are authorised to vote. National governments issue passports because they need to identify people who enter and exit their country. A school or college issues an Identity card because it needs to identify students who have been granted admission. Why the UIDAI needs to identify anybody is beyond my understanding. It is probably the only organization in the world whose sole purpose is to issue Identity Cards!

Going far beyond its blatant illegality and reckless implementation, the Aadhaar project raises serious issues of citizen’s freedom, liberty and privacy that are little understood by a majority of Indians. The government exists for the sole purpose of ensuring law & order, defending the country from external aggression and providing a dispute resolution framework. People are unaware that nobody – not even the government – needs to know more about its citizens than what is necessary. For example, the Motor Vehicles Department seeks information about a person’s age, physical fitness & blood group in its ‘normal’ course of business. The Income Tax Authority does not ask for your physical fitness and blood group, but may seek information about income and assets, because that is in its normal course of functions. The Election Commission seeks information about age & residential address, but not income & assets! But the UIDAI wants to know everything about everybody, and for no specific purpose! 

It should be noted that opposition to Aadhaar is not opposition to technology. From Stone Age to this day, mankind has progressed only because of advancements in technology. The benefits of technology in areas such as bank computerization or railway reservation systems have been there for all to see. In recent times, government departments like the Income Tax or Passport Offices have computerized their operations, bringing immense improvement in the quality of their service delivery. However, Aadhaar seeks to create an integrated database that will hold everything from a person’s name and date of birth, to fingerprints and iris scans, and address to bank account numbers. It  would expose citizens to a grave risk of identity theft, and is a blatant encroachment on the citizen’s right to privacy and liberty. It would grant immense power to anybody who lays his hands on this data, and would be open to misuse (see this, esp. the last para). This includes unscrupulous employees from the related offices, data collection agencies, people with political power, and by consequence their relatives, associates, business partners or anyone else who is interested in obtaining this data for a consideration. 

The UIDAI claims the data is encrypted at the point of collection. But we know that adding a layer of encryption does little to deter a determined hacker. Everything from bank websites to email accounts, defence networks to even nuclear establishments have been hacked. No wonder UIDAI doesn’t even reveal whether the country’s top politicians own an Aadhaar Card!

To me, Aadhaar is nothing but part of a grand scheme to create a Surveillance State. Its other elements includes the Central Monitoring System (CMS), the National Population Register (NPR), the National Intelligence Grid (NATGRID), countless CCTVs at every nook and corner of the country, and every other instrument of state oppression that is used to track every step a citizen takes. Much of this is often justified on the grounds of 'national security' – in other words, the government’s own administrative failure of securing our borders and making the country safe. Governments exist to serve its people, not to control them. Unfortunately, schemes such as these do not face popular resistance, because a majority of the people feel they have nothing to hide. But once such an infrastructure is created, it can be misused to intimidate and subjugate people, and create a regime of oppression and injustice.

No wonder the government is desperate to give you an Aadhaar card. Why are you desperate to take it?