The HINDU Notes 31st August 2019

Liberalism runs into national populism

No country has found the golden mean between free-range liberalism and statism

•Just before the G-20 meeting in Osaka in June this year, Russian President Vladimir Putin made headlines in the world media with an interview to the Financial Times in which he stated that liberalism had “become obsolete”. He went on to say that liberal ideas about refugees, migration and LGBTQ issues were now opposed by “the overwhelming majority of the population”. Even some western nations, he went on, had privately admitted that multiculturalism was “no longer tenable”. There was a swift and critical response from the President of the European Council, Donald Tusk: “Whoever claims that liberal democracy is obsolete also claims that freedoms are obsolete, that the rule of law is obsolete and that human rights are obsolete.” This was in fact not what Mr. Putin had alleged, but the wider question is why the Russian President is saying this now and whether he had a point.

Defining liberalism?

•To start with, since liberalism means different things to Mr. Putin and Mr. Tusk, what is liberalism? This complex term, much used in India today in various contexts of opposition to the present Union government — and used in a derogatory sense by supporters of the government in respect of its detractors — might broadly encompass three definitions. There is economic liberalism, which ‘emphasises free competition and the self-regulating market, and which is commonly associated with globalisation and minimal state intervention in the economy’. There is political liberalism, which for most commentators is founded on ‘belief in progress, the essential goodness of the human being, the autonomy of the individual, and standing for political and civil liberties’ as laid out in various United Nations Covenants. And then there is social liberalism, ‘linked to the protection of minority groups, and such issues as LGBTQ rights and same-sex marriage’.

•Mr. Putin appeared critical of the ‘approach of some western governments by specifically mentioning immigration, multiculturalism and LGBTQ issues, and therefore seemed to focus on social and political liberalism’. By no means is Mr. Putin the only world leader who dislikes this aspect of liberalism. The leaders of India, China, Turkey, Brazil, the Philippines and several others, even in Europe, believe highly centralised political systems work better for political stability and economic progress than western liberal democracies.

•Nevertheless, liberalism has been the dominant socio-political ideology in the West since the end of the Second World War, where it has been regarded as the norm until recently. However, many even in the West now believe it could be in decline, as evidenced by support for Brexit in the United Kingdom, or support for populist leaders such as President Donald Trump in the U.S., Hungarian President Viktor Orbán or (former) Italian Deputy Prime Minister Matteo Salvini. David Runciman, professor of politics at Cambridge, contends that voters everywhere increasingly dislike and distrust elected representatives because western democracy has ceased to work and failed to deliver, and is headed for a long-drawn-out demise. The financial downturn in 2008 marked a major turning point, with impunity for corrupt bankers and an attempt to return to status quo globalisation that allowed markets to determine everything and led to major questions of identity and culture. Now globalisation is heading for a backlash, leading to protection, local solutions and stronger nation states, and the growing conclusion that liberalism needs urgently to justify itself by addressing issues of inequality and the loss of a sense of community.

Against migrants

•Mr. Putin said Germany made a mistake by admitting more than one million refugees. He said: “This liberal idea presupposes that nothing needs to be done…because their rights as migrants have to be protected… It has come into conflict with the interests of the overwhelming majority of the population.” There is little doubt that Mr. Trump in America uses the immigration and minority issues, with their racial undertones, to bolster his core support. In European countries such as Greece, Germany and Italy that have been entry points for the recent wave of asylum seekers, attitudes towards immigrants have hardened since 2014. Poland and Hungary do not favour the admission of refugees even fleeing from violence and war, and nearly all European Union members are convinced that the EU has badly mismanaged the question of admission of refugees, which in turn has led to questioning the very basis of Europe’s integration project.

•Mr. Putin also deplored liberal governments dictating LGBTQ values that “millions of people making up the core population” opposed. “We have no problem with LGBT persons… but some things do appear excessive to us,” he stated. Gender parity issues are strongly promoted in the British media and entertainment industry, and a storm arose in England recently over the teaching in primary schools of same sex relationships and gender identity. Boycotts of various kinds, including of major sporting events, have been threatened because of alleged anti-gay sentiments or legal restrictions. Nevertheless, same sex marriage is recognised only in some countries, others have the death penalty for homosexuality, and laws regarding LGBTQ rights vary widely across jurisdictions. As a generality, it can be stated that they are disfavoured in the vast majority of the non-western non-secularised world.

Liberty vs. protest

•Why has Mr. Putin expressed his opinions now to a newspaper considered a flag-bearer of liberalism? The Russian President’s position is that ‘his country has a specific and different kind of civilisation, where sovereignty trumps democracy and national unity, and stability trumps human rights’. Western-style liberalism that prioritises individual rights over those of society is regarded as a ‘challenge to his style of government’, which presents an alternative model. The same view is shared by China. The desire for liberty is recognised as universal, but the freedom to protest in unauthorised demonstrations and wilfully shatter the economy and tourism as in Hong Kong, or the freedom to blaspheme and outrage the sentiments of the devout, as in the French Charlie Hebdo case, or the freedom to bear arms as enshrined in the U.S. Constitution, are only random examples that show that liberty has limitations, even if they are self-imposed. Russia and China, with good reason, believe that unauthorised demonstrations open the way to foreign interference and ‘colour revolutions’. No country has found the golden mean between free-range liberalism and statism. When liberal government and liberal models are under pressure even in the flagship West, it is probably ‘as good a time as any for Mr. Putin to make his case’.

On dilution, bifurcation and ‘special status’

J&K’s perceived loss and New Delhi’s real gains over the Centre’s Article 370 decision need to be objectively assessed

•The jubilation in parts of the country following the supposed abrogation of Article 370 was in contrast to the gloom in the Kashmir Valley. It was ignored by both sides that New Delhi did not make any substantial gain in terms of powers; neither did Srinagar suffer any major loss. Later, in what could be construed as a setback to the Centre, the Supreme Court referred all the petitions on Article 370 to a Constitution Bench, which will hear the matter in the first week of October.

•Amidst these developments, some points require deeper scrutiny. First, the apex court could possibly strike down as ‘unconstitutional’ the Centre’s move to amend Article 370 by invoking the very same article. Second, the bifurcation of a State which is under President’s rule into two Union Territories is possibly against federalism. And third, Article 370, as it stood on August 4, was a special power available not to Kashmir, but to the Centre.

•First, Article 370 has not been abrogated. It still very much remains part of the Constitution. Instead, the government, in an innovative and constitutionally suspect manner, invoked the Article to amend Article 367. On August 5, the President inserted a new clause to say that the ‘Constituent Assembly’ of Jammu and Kashmir (J&K) shall mean ‘Legislative Assembly’ of the State, and ‘State government’ shall mean ‘Governor acting on the advice of Council of Ministers’. With this interpretation, Article 370 presented an entirely different picture. Since the erstwhile State was already under President’s rule, the Parliament, by exercising ‘powers’ of the Legislative Assembly, gave its concurrence to the aggressive surgery of Article 370 that has killed the spirit as well as the text of the provision.

Bona-fide exercise of power?

•True, during President’s rule, Parliament can certainly exercise ‘powers’ of the State Assembly; but whether the aforesaid ‘concurrence’ can be termed as a legitimate and bona-fide exercise of power is a moot question for various reasons.

•One, a Legislative Assembly that was in itself a creation of the Constituent Assembly cannot take the place of the latter. Two, the August 5 order defined the ‘State government’ to mean ‘Governor acting on the advice of Council of Ministers’. And since there was no Council of Ministers, the validity of the Governor’s concurrence mentioned in the presidential order was questionable.

•Finally, Article 370(1)(d), which on August 5 was used for the purpose of diluting the Article itself, was meant to be deployed to apply ‘other provisions of Constitution’ to Jammu and Kashmir, not to modify or repeal Article 370 itself. The expression ‘other provisions’ here means provisions other than ‘Article 1’, ‘Article 238’ (now repealed) and ‘Article 370’.

•Four points are to be kept in mind here. First, one constitutional provision cannot be used to nullify another. Second, an interpretation clause is to be used only when there is ambiguity in the Constitution. Here, the ‘Constituent Assembly’ Article 370 talked about was clearly identifiable — it first met on October 31, 1951 and was dissolved on January 26, 1957, and hence there was no ambiguity. Third, even when there are two contradictory provisions, the ‘doctrine of harmonious construction’ is to be invoked so that both the provisions are given effect to. Fourth, like Parliament, President too cannot alter the federal character of the Constitution, which has been held to be part of its basic structure. The Constitution prohibits colourable exercise of power — what you cannot do directly, you cannot do even indirectly.

Blow to federalism

•Next, the constitutional validity of Jammu and Kashmir’s bifurcation into two Union Territories is also doubtful. Article 3, which deals with Parliament’s powers to alter boundaries of a State or bifurcate it, required the President to obtain the ‘concurrence’ of the J&K State Assembly before Parliament took up such a Bill. It has now come to light that while imposing President’s rule in J&K on December 19, 2018, the proviso on the reference to Assembly was suspended. This not only shows that the bifurcation was planned by the Centre in 2018 itself but also gives a clear indication of its mala-fide intention of doing something indirectly.

•A mala-fide presidential action under Article 356 can be struck down. If the apex court upholds the Centre’s suspension of Article 3, it will be an end of Indian federalism as States will become a plaything in the Centre’s hands. It needs to be recalled here that prior to the Reorganisation Act of 1956, States were given the opportunity to express their views. Andhra Pradesh Assembly too was given this opportunity in 2014 prior to the creation of Telangana. Since the J&K Assembly stood dissolved and there had been no election announced, it was denied its right to express its view.

•When a State is under President’s rule, Parliament can act as nothing more than a ‘night watchman’. It certainly cannot pass a resolution to bifurcate the State.

No major departure

•Let us now objectively assess New Delhi’s gains in sounding the death knell for Article 370. Since almost the entire Constitution of India had been already applicable to J&K, constitutionally speaking, heavens have not fallen for Srinagar. Entry 76 of Union List, which deals with audit, was extended to J&K in 1958 . The Election Commission of India was similarly given powers to conduct elections from 1959 by the First Amendment to the J&K Constitution. A total of 94 out of the 97 items in the Union List had already been made applicable to J&K when the Centre made its move and hence Parliament had all the powers.

•Out of the 395 Articles in the Indian Constitution, 260 Articles had already been extended to J&K through successive Presidential Orders. As regards the rest of the Articles, J&K Constitution had identical provisions. Moreover, more than 250 Central laws had already been extended and most of J&K’s State laws were identical to Central laws.

•In reality, the ‘special status’ Article 370 conferred was not to J&K but to the Central government. The Centre could deny certain provisions while extending unilaterally some other amendments. For instance, following the 44th Amendment, unlike in the rest of the country, national emergency in J&K could still be imposed on the grounds of ‘internal emergency’. Similarly, while for the rest of the country, freedom of speech could be curtailed only through ‘reasonable restrictions’, in J&K, it could be controlled through restrictions that “appropriate legislature considered reasonable”.

•Yes, we do live in a post-truth world but we need to objectively assess J&K’s loss and New Delhi’s real gains when it comes to the dilution of Article 370. Further, whether the apex court will allow India to become a ‘unitary state’ remains to be seen.

Spelling out the government’s RBI windfall

The final impact of such infusions on the bank’s independence would depend upon the future course of such transfers

•The transfer of Reserve Bank of India (RBI) surplus to the government is a routine matter. Every year after the finalisation of the accounts of the RBI its surplus is transferred to the Central government sometime in end-August; this augments the non-tax revenue of the Central government. Normally, an estimate of such a transfer is decided informally between the RBI and the Central government by January and finds a place in the Budget estimate, typically announced in early February. But this year is an exception. The announcement of a huge transfer of RBI surplus, earlier this week, of ₹1.76 lakh crore to the Central government, seems to have generated quite a bit of media attention.

The two narratives

•There are perhaps two caricatured folklore narratives about this increased transfer of RBI surplus.

•The first one goes as follows: the government, facing a resource crunch, has arm-twisted the RBI to transfer some of its reserves, which is almost in the nature of family silver. This is not good for the economy. As when and if the economy faces a crisis, the RBI may not have adequate money to protect it. Also it denotes an erosion of the RBI’s independence. This assumes credence in view of the perceived difference of opinion between the RBI and the Central government, that has been highlighted in recent media reports, as well as the resignation of the former RBI Governor, Urjit Patel in 2018. The second one, on the contrary, runs on the following lines: the central bank is a unique institution; it is backed by the faith reposed on it by the the Central government, and therefore, a huge amount of reserves with the central bank is in the nature of idle cash which could have been utilised more productively in the economy. This year, the Central government has done precisely this. The RBI decided to transfer this increased surplus after following due process and after accepting the recommendations of the Jalan Committee (i.e., the expert committee to review the extant economic capital framework of the RBI, headed by the former RBI Governor, Bimal Jalan and with eminent central bankers, bureaucrats, economists and accountants as its members).

•Are these competing narratives reflective of the political priorities of the exponent? Or, are there more differences in substance?

Notes on the RBI

•The narrative that the RBI is an overcapitalised institution has been in currency for some time. The Economic Survey of 2016-17 found that the RBI is one of the most capitalised central banks in the world and noted, “There is no particular reason why this extra capital should be kept with the RBI”. Later, the former Chief Economic Adviser, Arvind Subramanian in his book Of Counsel: The Challenges of the Modi-Jaitley Economy (2018) has caricatured the syndrome of treating the government’s capital at the RBI by RBI officials as “prudence or paranoia”. Folklore estimates of excess capital of the RBI in the range of ₹4.5 lakh crore to ₹7 lakh crore seemed to have been blowing in the wind. The issue became all the more controversial after the resignation of Mr. Patel in December 2018 citing personal reasons.

•Against this backdrop, the RBI, in consultation with the Government of India, constituted the Jalan Committee to assess the quantum of economic capital of the RBI (in end-November 2018). The committee submitted its report on August 14 and the RBI’s Central Board in its meeting held on August 26, 2019 accepted all the recommendations of the committee; accordingly it finalised its accounts for 2018-19 using the revised framework. According to the accounts, the RBI has ended with an overall surplus of ₹1,759.87 billion in 2018-19 as against ₹500 billion in 2017-18, representing an increase of more than 250% (Table).

•But what are the constituents or purposes of the RBI’s excess capital? There are two distinct types of items under it. While “Contingency Fund (CF) and Asset Development Fund (ADF) represent provisions made for unforeseen contingencies and amount set aside for investment in subsidiaries and internal capital expenditure respectively”, components such as, “Currency and Gold Revaluation Account (CGRA), Investment Revaluation Account (IRA) and Foreign Exchange Forward Contracts Valuation Account (FCVA), represent unrealised marked to market gains/losses” (RBI, Annual Report, 2017-18).

•In assessing the economic capital framework (ECF) of the RBI, the Jalan Committee justifiably went by the key premise, “As a central bank is a part of the Sovereign, ensuring the credibility of the RBI is as important, if not more, to the Government as it is to the RBI itself”. Insofar as the methodology is concerned, the committee adopted the Expected Shortfall methodology (instead of the existing Stressed Value-at-Risk) for measuring market risk.

An outlook

•But what are the risks to the RBI? In view of the RBI’s function as a lender of last resort, it needs to maintain some Contingent Risk Buffer (CRB) to insure the economy against any tail risk of financial stability crisis. The Jalan Committee recommended that the CRB needs to be “maintained at a range of 5.5 per cent to 6.5 per cent of the RBI’s balance sheet which is above the available level of 2.4 per cent of balance sheet as on June 30, 2018”. Applying its recommendations to the RBI’s 2017-18 balance sheet would result in RBI’s risk equity levels in a range of 25.4% to 20.8% of balance sheet. In line with the methodology of the Jalan Committee, the amount of transfer of the RBI’s surplus to the government has been placed at ₹1.76 lakh crore this year.

•In the lingo of a caricatured two-handed economist, several pointers can be flagged towards deciphering the folklore narratives. First, the Jalan committee does not seem to have compromised on arriving at the economic capital framework of the RBI and has calculated the extent of excess capital of the RBI under a set of fairly standard and conservative assumptions. Second, at this juncture of the Indian economy — when the spectre of a slowdown is looming large and when channels of credit disbursements are choked because of a lack of capital with the commercial banks — a transfer of such additional money to the government could enable the government to go in for bank recapitalisation in a big way and would be good for the economy. Third, the transfer of the additional surplus from the RBI could enable the government to pursue efforts towards stimulating the economy while maintaining budget discipline. Remember, in pursuing the fiscal stimulus of 2007-08, fiscal deficit went up from 2.5% to 6%. Of course, the final impact of such actions on the independence of the RBI would crucially depend upon the future course of such transfers. After all, we all know the story of the goose that laid the golden eggs.

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