When the Indian republic took shape, the erstwhile maharajas and princes were granted privy purses. These were allowances which varied based on the size of their state and the revenue it generated.

Some 25 years down the line, when India was high on socialism, the Indira Gandhi government abolished these privy purses through a president’s ordinance after failing to get the bill passed through parliament.

The princes challenged it in the Supreme Court, which gave a verdict in their favour*. Appearing against the government was none other than Nani Palkhivala.

There was little sympathy for the princes considering that most had prospered on the side of the British and never struggled for the conspicuously luxurious lives for which they had become infamous.

Palkhivala was also bitterly criticised for being on the side of those who never deserved those allowances in the first place. However, in the eyes of the eminent jurist, famed for his razor-sharp intellect, the issue was never about a purse or those who had been deprived of its money.

He wanted to know if there was a guarantee the government would not usurp the hard-earned savings of the middle classes deposited in banks and public savings schemes.

Palkhivala was greatly concerned for the future of India’s ordinary citizens, a future in the hands of a government that did not honour its commitments.

When the Cyprus deal was announced, I could not help remembering Palkhivala.

Unlike India’s abolition of the privy purses, the Cyprus deal successfully dodged parliament on being creatively disguised as a bank restructuring.

The deal has changed for ever the way I will look at bank deposits and considering how kindly insured depositors in Cyprus were treated, one has to take deposit insurance very seriously.

Ordinary people placed their money with banks only because institutional lenders and central bankers were expected to supervise the quality of the bank’s lending portfolio and ensure it is adequately capitalised. However, going forward, banking can no longer remain our lazy investment option because depositors will have to look out for themselves and not take bank balance sheets for granted. Depositors have to behave like lenders.

The problems in the euro zone have not disappeared with Cyprus; they are likely to remain till the time its single currency is accompanied by a single treasury and they can print their way out of their fiscal crises like the United States.

Till that time, the rush of cash into German banks will continue, eventually resulting in banking crises in other (especially the smaller) countries. The Cyprus deal may possibly add speed to this flight.

Expecting Germany to carry the burden of fiscal profligacy is far-fetched and the euro zone’s fiscal worries are in no way receding, as easily seen by the recent Fitch downgrade of Italy to BBB-plus with a negative outlook. The support for austerity is not really forthcoming and political uncertainty in Italy is only a sign of what can happen in worse economies such as Slovenia, Hungary, Spain and Portugal.

More significantly, Cypriot depositors were given a royal haircut and the country which liked to think of itself as a tax haven just had its largest industry wiped out. But Spain got off lightly. The Cyprus deal has announced that not all in the euro zone are equal and this certainly does not promote the unity necessary while negotiating for a unified treasury and fiscal policy.

The Cyprus deal has greatly heightened the risk of bank runs especially in the smaller euro zone countries where liquidity will take flight at the earliest whiff of a crisis.

As Palkhivala said, the end could never justify the means, however noble and popular they may seem.

(*Privy purses were eventually abolished in 1971)

Rating agencies have left India’s sovereign rating unchanged after the 2013 Budget. A rating downgrade would mean India getting junk status which is certainly not something one would want when the current account deficit is widening.

Of course, despite our proud finance minister not admitting to letting rating agencies dictate his budget, I am relieved that the nearest and sweetest low-hanging fruit fell into his lap.

In the post-liberalisation years, I have often wondered about the diminishing relevance of the budget. India’s macro-economic challenges stem almost entirely from structural imbalances and none of these can be addressed in the budget, which is at best a summary of the fiscal impact of initiatives driven by numerous ministries. The poor finance minister bears the brunt of the limelight.

The budget has remained subtly faithful to the Congress-led government’s electoral plank of welfare-based spending and also adopting an aggressive growth posture. The markets suffered from their habitual over-expectation and corrected.

However, the embarrassment of having to rush a clarification on the Mauritius tax treaty could have been avoided knowing well its sensitivity in the current account deficit context; especially when about 40 percent of our foreign portfolios come through this route.

One cannot deny that welfare schemes are necessary because it would be disastrous to let extreme hunger and poverty to exist while another part of our country is conspicuously prosperous.

In hindsight, we seem to have squandered the fiscal windfall resulting from the 2004-08 global liquidity boom. The government could have calibrated its welfare spending across its term and even pushed its luck with the Mauritian treaty to plug the gaps which are allowing our current account deficit weakness to be so blatantly exploited. This way, they could have served both electoral interests and good economics.

Coming back to Budget 2013, it has provided for bigger allocation to rural consumption oriented expenditure. It has also promoted new investment through a 15 percent allowance. The additional tax break for first home owners is a positive. The allocation of 90 billion rupees for states indicates Chidambaram’s commitment to implementing the Goods and Services Tax.

Overall, the finance minister deserves to be commended on his ability to have communicated stability for FIIs both in terms of transaction norms and tax rates.

Expectedly, urban voters have been left to struggle with inflation and negative real return on investments and income. Of course, all the right noises have been made on children, women, job creation and the need to expedite projects.

The ‘tax on the rich’, while helping promote the government’s pro-poor image, merely serves to highlight the inability to do anything substantial and genuinely expand the tax net, combined with our helplessness in having to penalise only those who cannot hide their income. Chidambaram’s statement that only 42,800 individuals in the country declare an income of 10 million rupees and above cries out for attention.

One cannot help wondering who has been buying all that expensive real estate, automobiles and services. No purpose will be served by taxing yachts, cigars and mobiles unless the Direct Taxes Code is expected to deliver this change.

Chidambaram deserves credit for meeting the 5.2 percent 2012/13 fiscal deficit, albeit in an unplanned manner. Whatever else it proves, it surely indicates his resolve to address this challenge. He may well be correct on the ambitious 4.8 percent target he has accepted for 2003/14; even though by his own admission he may not have revealed his plans.

Budget expenditure has substantially increased, subsidies have not come down and development allocations are also up. This is being largely financed through higher taxes, non-tax revenue and disinvestment.

However, as in every budget, expenditure is almost a certainty while income rises are hope and optimism. It is not usually prudent to spend in anticipation. Therefore, this budget will only be as good as its assumptions and only time will tell us how good they are. It concerns me when I see that nominal GDP growth for 2013/14 has been assumed at 13.4 percent against an estimated 11.7 percent in 2012/13. At assumed inflation of 7 percent, real GDP growth should be 6.4 percent.

Higher government borrowing may limit the RBI’s policy space and crowd private borrowers out. Of course, there will be the usual challenges to inflation forecasts: oil prices, monsoons and exchange impact of current account deficit weakness especially with the euro zone acting up once again.

Moreover, with Q3 2012/13 at about 4.5 percent this seems rather ambitious. This also leads us to question the assumed 19 percent rise in gross tax collections. Hopefully, it will not mean more demands and refunds being held back. I say this because there seems to be nothing in the budget which is as drastic.

Chidambaram deserves praise for balancing the accounts and presenting the proposals in a practical manner. One hopes that the principle of conservatism established in accounting was better adhered to.

The finance minister has admitted that the real action has to be outside the budget. Therefore, I would rather treat it as a document of noble intentions based on the assumption that the government will follow through with actions to tackle structural imbalances. Hopefully, we will see a shift from consumption to investment.

Finally, a word of sympathy for the mutual industry which was royally ignored when the insurance industry was permitted to accept the know-your-customer conducted by banks, which may well be a precursor to being permitted to broker insurance policies.

Investors in debt funds also lost the 12.5 percent DDT benefit making short-term bank deposits look that much better. However, debt fund investments beyond one year will continue to remain vastly more attractive when they earn long-term capital gains.

Finance Minister P. Chidambaram has promised a “responsible” budget this time around. According to Webster’s dictionary, “responsibility” is associated with a legal or moral accountability, reliability, trustworthiness in relation with some burden.

What would this possibly mean for the budget’s key stakeholders — business, the middle class, investors and voters?

The UPA government has made welfare spending its primary electoral plank, which was activated a year before the financial crisis of 2008/09. Considering that election fever will take over by the middle of the year, let’s hope Budget 2013 will demonstrate responsibility when dealing with electoral interests.

Hopefully, the budget will not yield to the populist pro-poor call to revert to levying estate duty and wealth tax which will take us back to the time when capital was shoved underground. One would rather examine alternatives:

Assuming we will not gather the political courage to expand the tax net to include agricultural assets and income, one option could be to aggressively recover tax arrears — estimated at about 2.5 percent of GDP.

Dividends are currently tax free in the hands of the receiver as otherwise it will lead to double taxation since corporate profits are already taxed. They should be treated like any income derived from investments such as banks deposits. Then dividends will be taxed in the hands of the recipient and also allowed as a deductible element of corporate profits.

This would result in net worth and equity prices going up, which can be realised through the sale of shares. This can be offset by subjecting all capital gains, short-term or long-term, to tax at marginal rates applicable to the seller. Needless to say, the dividend distribution tax will be rendered obsolete.

Household savings have slumped from 15.4 percent of GDP in 2007/08, 13.6 percent in 2010-11 and now estimated to be about 12 percent. Returns on financial assets have not kept pace with rampant consumer inflation; pushing investors away from financial to physical assets — mainly gold and real estate.

We could adopt a uniform policy to exempt all income coming from investments from tax as long as the investment is not withdrawn. This will significantly address the need to provide real returns to investors.

This should also partly wean investors away from the yellow metal, which can be further helped by a ban on lending against gold. This should accentuate illiquidity, gold’s inherent drawback.

India’s growth rate of 5 percent is the lowest since 2002/03 and has combined with consumer inflation to attack our economic roots. Along with depletion in household savings, low corporate investment and an adverse current account deficit (CAD) are the main causes of our current economic situation.

While investment in India suffers, outward FDI has surged to $112 billion from $1.7 billion in 2000 — nearly 60 percent of inward FDI. On the other hand, rupee corporate borrowings are down and foreign currency loans are higher. Therefore, while gold imports have indeed risen, they may not be the sole cause for our CAD-related miseries.

Credit is due to the finance minister for swiftly setting about averting a ‘downgrade’ by saying the right things and initiating steps which may have arrested fiscal depletion. Hopefully, the budget will prove its responsibility to the salaried and middle class who even today wake up in a cold sweat when they recollect marginal tax rates of 90 percent of the 1980s. Unfortunately, in our country “taxing the rich” has invariably meant taxing those whose income is not hidden.

Overall, Budget 2013 has to assure investors that:

- India can provide a stable tax regime.

- We can get our act together on critical legislation such as the Goods and Services Tax which is estimated to push growth by up to 1.5 percent.

- We can move away from the plethora of exemptions and deductions and arrive at a single composite tax rate

- We can provide a realistic road map for fiscal consolidation.

Therefore, a responsible budget may have to be different, courageous and not merely tinkering at the periphery.  It has to be one which puts broader national interests ahead of electoral politics.

Having replaced the feudal princes by colonising India, the British Civil Service carried on with the master-subject relationship which, understandably, entitled them to huge discretionary powers.

In fact at the district level, collectors (civil service officers) were both administration and judiciary, virtually masters of their entire jurisdiction.

After getting rid of the British and having renamed the ICS to IAS, we took away the discretionary powers of civil servants but promptly surrendered them to the “people’s representatives” in the government.

Corruption is after all a matter of opportunity and nothing can present more opportunities than being granted unbridled discretion. History is replete with stories of the misdeeds of our princely rulers.

With these vast discretionary powers – which would more often than not get exercised without any appreciation of the underlying technicalities or improprieties – it did not take long before our people’s representatives turned wannabe maharajas.

In the 70′s our government took control of banks, mining, generation and distribution of all sources of energy, infrastructure, all mass transport, sales and logistics of agricultural produce.

Still worse, what they did not own they sought to control through the ‘Licence Raj’ and now our new rajas could control without the associated accountability.

Of course, a maharaja’s job is naturally expected to stay in the family with the incumbent being expected to do everything within his power to pass it down to an heir.

Unfortunately for them, while they remained busy with building their power base, our democracy was slowly but surely striking strong roots, and it is hardly surprising that our maharajas now require lots of money to gain popular votes.

The solution to corruption is therefore to primarily wrest away every discretionary power from political appointees and vest it with a committee of professional and technical experts and a bureaucrat representing the government.

This way our voted representatives will get back to doing what they were supposed to do in the first place – debating issues of public and national interest and making laws.

On the other hand, the apolitical committee members can be subjected to oversight by independent constitutional agencies.

As the ancient Arab saying goes: “A fish always rots from the head downwards”.

In India, the fish represents our political establishment riddled with conflicting interests leading to endemic corruption.

The solution has to emerge from within our constitutional political establishment and very quickly at that, lest our beloved country gets overwhelmed by rabble rousers and politically experimenting novices.

The state of Egypt today is a case in point.

However, my optimism was reinforced by a single new item I read on Tuesday.

India’s defence minister has a discretionary power to approve defence contracts which do not meet the technical parameters detailed in the product proposals.

The news report said Defence Minister A K. Antony (who is known for his clean image) had ceded his discretionary powers to the Defence Acquisition Council.

There could not have been a better gift for the Mahatma on his birthday.

Manmohan Singh’s “if we have to go down, let’s go down fighting” comment is exactly the spirit which needs to be demonstrated by those in power. After all, desperate times call for desperate measures.

It’s time politics rises above the compulsions of populism and displays a measure of political will.

After all, any one in power today will suffer similar limitations and if they cannot manage to deliver economic development, they are setting themselves up for an anti-incumbency vote.

The challenges India faces as a nation on the economic front are too huge to be tackled in a 5-year term. The earlier our leaders get used to this, the better they can concentrate on doing what is best in the long-term interest of the economy, rather than stay on in power and risk being labelled a lame duck.

Politics has been known to make strange bedfellows. Therefore, the only possible way would be for the two largest parties, the Congress and the Bharatiya Janata Party (BJP), to get together on a “national economic agenda”, keeping their political agendas aside for a decade.

It may be unthinkable indeed but that’s the only way we can possibly make up for the lost decade to monetise India’s demographic dividend. Reconciliatory policy positions will simply not help long-term political interests.

Look at how the reputation and untarnished image of one of our most respected prime ministers has been left in tatters. If he lives by “coalition dharma”, then he is labelled weak and gets blamed for policy paralysis. On the other hand, when he acts, he is said to be anti-people.

I wonder if FDI in multi-brand retail is really the problem or is it that states have been forced to make a choice between economic progress and vote bank populism. This is possibly the best way ahead. Delegate more of the economic liberalisation agenda to the states so that they are held accountable.

The coming days will provide the prime minister the opportunity to demonstrate his political will. Irrespective of the Trinamool Congress, it seems unlikely that Singh will be asked to resign.

I wager that no regional party really wants to face elections; especially those currently in the opposition, simply because it’s too early to reverse their losses in the recent state polls.

Having rightly committed to social welfare schemes, it is now critical that measures are taken to revive the economy in order to fund them. It is also important that we prioritise enabling efficient mechanisms to deliver these welfare schemes, especially in rural areas, so that subsidies directly reach the deserving.

Considering that a mere 15 pct of subsidies reach the needy, we should be able to save the rest.

It is likely that Manmohan Singh will survive to carry on his reform agenda and regain his reputation as an economic reformer. If not, he better go down fighting.

The senior Bush’s call for a new world order following the end of the Cold War began unravelling authoritarian regimes which formed its delivery mechanism around the world.

In India, it meant dismantling the command economy influenced by the Soviet model, enforced through the government’s involvement in business and concentration of power at the centre.

It is hardly surprising that Indian polity, most of which leans left-of-centre, is opposed to reforms leading to economic liberalisation. After all, as the main beneficiaries of that set-up, their very political identity is at stake.

On the external front, India’s foreign policy has little political and economic choice but to move westwards.

As expected, the transition also had states gradually weaning away from the centre as regional vote bank politics resulted in coalition governments. It may be some time before we see a single-party government.

This is the second minority government led by the Congress with the support of those wanting to keep the right out of power. Therefore, while the first half of the term is spent staying in power, the second half sees some policy action.

As matters stand today, both coalitions and their constituents need more time to face elections because neither seems confident of facing early polls.

While in the last term it was brinkmanship on the nuclear deal; this time it’s the sudden burst of reform announcements.

Apart from the image crisis resulting from the questions raised in the CAG reports and policy inaction, it is the sudden and open threat of a third front alternative emerging from its own coalition partners which has pushed the government to quickly call their bluff.

The new finance minister, who is not known for being sympathetic to the old school of economic policy, deserves credit for swiftly moving to address the subject of highest priority — the threat to our credit rating because of the devastating impact it could have on our ability to raise external debt and its costs.

Chidambaram has also managed to shake off the negativity in the markets and despondency in business circles.

In reality, the oil deficit of about 2 trillion rupees is hardly dented by the diesel price hike and it’s not good economics to sell assets to reduce fiscal deficit. FDI in multi-brand retail cannot address inflation so long as the agro-marketing law exists.

However, if not anything else, these announcements seem to have flagged off the fiscal deficit crisis for public debate without providing a solution.

Finally, by unilaterally removing the FDI restriction on multi-brand retail and leaving its introduction to the states, the centre has taken another giant leap towards federalisation. Each state will have the freedom to opt for liberalisation or pay the political price for not delivering economic progress to its population. I am confident this will eventually place economics ahead of narrow-minded regional vote bank agendas.

The government deserves credit for making the best of the situation. I would hold back on popping the champagne till we see policy changes being executed on the ground.

I only hope that while managing perceptions, we do not take our eyes off the real issues surrounding inflation and fiscal profligacy.

Having said this, the nation is in the midst of serious change to adjust to the new world order and as with every change, the people and our politicians have to endure some pain if we wish to keep the India long-term growth story alive.

Reforms seem to be the flavour of the season after we relished and put aside the corruption issue.

“What do you mean by reforms, getting more money into stock markets? Where would you place ‘financial inclusion’ for example, in your reforms priority?” retorted someone closer to real issues when questioned if India will now see faster reforms.

Notwithstanding the political dividends scavenged through such speculation, it is difficult to believe that one man was holding back the entire reform process.

However, the couple of billions which may come in from FDI for insurance, banks, single or multi-brand really do not matter. Because headlines and sentiment rarely impact hardnosed business cases.

India now demands a change in its eco-political mindset and not merely a few permits added and a couple of licences relaxed.

One cannot help envy the United States for being able to force through the Foreign Account Tax Compliance Act (FATCA) without even respecting sovereign jurisdictions let alone their own business interests. Even countries such as Japan or Switzerland lapped it up without as much of a whimper.

Better still, the others maintain an embarrassing stony silence by saying that it is a matter for their private sector to deal with.

India, on the other hand, once again took the soft route of yielding to demands for retaining status quo on participatory notes whilst no amount of criticism seems enough when it comes to GAAR and its negative impact on FDI. What is perhaps the foremost reform is to impart a sense of stability to anyone involved in business.

India is not alone to have enacted a GAAR legislation. However, it’s the possibility of being subjected to coercive action and the discretion to reopen assessments, thereby leaving tax contingencies open, which gets everyone nervous. This really is a credibility and not a regulatory reform issue.

Given that we will for a long time remain at the mercy of the oil price cycles and also remain net importers, our current account deficit should be expected to stay challenging too.

Therefore, it should be reasonable to expect that we should ensure a stable tax and interest rate scenario for NRIs; especially when they have consistently repatriated funds at a rate even greater than the Chinese. Instead, no sooner than a respectable currency surplus is built, we can’t wait to get back at them by quickly bringing down interest rates to sub-Libor levels. Of course, FII money continues to be encouraged even when the dubious nature of participatory notes has long been acknowledged.

The bogey of taxing interest in NRE and FCNR accounts keeps coming back every other budget. The rules to determine NROR were changed without concern for old arrangements made by returning NRIs.

Retrospective amendments cannot be justified even if other counties have done so in the past.

Indian industry finds it more convenient to import inputs than buy locally and a lot of economic activity enabling infrastructure is required to change this. Foremost, investors in infrastructure projects have to feel that their money is secure and will make a reasonable profit as envisaged when the investment was made.

Not surprisingly, profit is not a bad word in the developed world.

We cannot have licences revoked or held in abeyance after the money is invested. Sensitivities around land acquisition and environment once addressed cannot be reopened.

Investors need to feel reassured that even successive governments will display the political courage to stand by commitments made by predecessors and that the judicial system will protect their rights without delay.

The abandoned Tata Singur factory should be preserved forever as a monument to remind us of the end result of populism.

FDI in retail, another popular ask, may not yield too much either; if one was to go by our experience in single-brand retail.

After all, is it unreasonable for, say, an IKEA to ask for time to develop local manufacturers who can live up to their quality standards? Also, why should their suppliers stay below $1 mln; don’t we want them to grow into big businesses?

Anyway, FDI in multi-brand retail will do no good unless we free up our supply chains by doing away with restrictive agri-marketing laws and barriers in inter-state goods movement through GST.

While we may be helpless when it comes to oil imports, we can certainly limit gold imports by protecting individual savings through genuine inflation-linked bonds and only taxing real interest using the existing indexation framework.

China today manufactures all conventional arms domestically. What prevents us from doing the same?

Indeed, where would we place “financial inclusion” for example, in the reforms priority? This is key in ensuring that the benefit of subsidies reaches only the deserving.

Reforms may therefore have little to do with opening up our trade borders indiscriminately in return for trickling foreign currency inflows and lots of positive sentiment leading to stock markets frothing up higher.

The solution to India’s challenges may be found more within and in re-engineering our mindsets and policy administering processes.

India is a consumption economy and if we can genuinely liberate ourselves from economic and political bigotry we may have to worry lesser about the euro zone credit shocks and fickle FII portfolio inflows when we regain a 9 pct growth rate.

There’s much to be done and therefore great potential in the India long-term growth story. The glass is certainly half-full.

The Reserve Bank of India’s (RBI) monetary policy states that “..it is relevant to assess as to what extent high interest rates are affecting economic growth. Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.”

One could not have placed this argument with any more clarity.

This can possibly be illustrated better by using representative numbers.  Assuming the prime bank lending rate at 14.75 percent per annum, and we reduce the impact of WPI at 7.6 percent, the ‘real’ lending rate will be 7.15 percent per annum which on a post-tax basis will be 5.58 percent per annum, considering it’s a business paying tax at 22 percent and can expense its interest costs.

On the other hand, the retail deposit rate applicable to domestic household savers at 8.5 percent per annum will correlate to the Consumer Price Index of 10.4 per annum, giving a ‘real’ deposit rate of negative 1.9 percent. Assuming an average 20 percent tax rate, a domestic saver will get a negative real rate of 3.6 percent per annum.

How can we expect to attract household savings back into financial assets and how can we justify a further reduction in lending rates?

The RBI in its words had ‘front loaded’ the reduction by the 50 basis points cut in April and in doing so, had very clearly hit the ball back into the government’s court by not mincing words in expressing the need for fiscal consolidation in driving down inflation.

Inflation is back to its customary monsoon dance and we are back to talking about selling our family silver, i.e. PSU disinvestment, to tackle the fiscal deficit.

The liberalisation of the 1990s can at best be considered a beginning for the real reforms which should have followed. Instead, we were left grappling with the pulls and pushes of irreconcilable vested interests which emerged from carefully crafted minority-based vote bank politics.

Somewhere down we seem to have missed executing the welfare and development agenda for the people whilst having succumbed to economic populism of the worst kind.

The RBI policy rightly points to the need for development of supply side infrastructure. This will mean doing a lot more than making licenses redundant and retrospective tax amendments.

Subsidy and welfare grants have to be administered using technology so that they reach only the deserving which in itself will ensure huge savings without the need for cuts.

The real reforms, I believe, are more internal than external.

India needs to first and foremost make itself a ‘free trade zone’ by getting GST through and dismantling the agriculture marketing laws. Speed up exploitation of energy resources by executing transparent bidding processes. Similarly, execute fair and transparent land acquisition processes.

The multi-brand FDI and insurance reforms can come later.

Having now gone so far to perpetuate vote bank politics, it may not be easy for us to wish away the growing strengths of regional and state-level parties. Coalition governments may be the new norm and India may well accept that the shortest route to execute its development agenda may be at the state level in the best interest of federalisation.

The central government should get back to debating, enacting laws and engage in enablement rather than in controlling except what is most needed for national interest.

RBI Governor Duvvuri Subbarao deserves our admiration for standing up to the din and noise emanating from the more vocal India.

He has rightly put consumer inflation on the top of the policy agenda recognising that in our country, placing food on the table still remains a lot more important than consumer durables and automobiles — even if it means sacrificing a percent of GDP growth in the shorter term.

Our central bankers have once again disproved the naysayers by providing hard evidence that India’s financial policy making is in the able hands of independent institutions. So long as this is true, the India growth story will remain firmly intact.

Irrespective of the RBI monetary policy review and its outcome, the fact that policy rates have assumed such obsessive focus needs closer scrutiny.

The boom from 2003 to 2008 was not peculiar to India, which like other emerging countries benefited from the liquidity surplus in developed economies and capex into capacity building was at its best. The Indian economy was already overheated when it collapsed from the sudden credit shock following the Lehman event.

The massive government spending, which incidentally had commenced even before the 2009 crisis, ensured a rapid recovery peaking the economic cycle on the back of consumption.

A shortfall in supply capacities eventually led to the decline with food, particularly protein, inflation racing off.

The monetary policy rate hikes had no significant impact on food prices. This time the government, unlike in 2009, has little fiscal capacity to boost spending and a reduction in interest rates is more likely to prove a mere symbolic gesture.

The consistently negative real interest rates have only pushed Indian savers into gold, our asset class of cultural preference; pushing the trade deficit to historical highs. The global economic situation fuelled by rupee weakness due to the twin deficits, resulted in its devaluation. India being a net importer by virtue of oil pays for devaluations through inflation.

It is unlikely that oil prices will stay suppressed all along. The combined impact on inflation especially if the U.S. Fed goes in for QE3 can prove hugely challenging.

A reduction in interest rates with an intention to push consumer durables would not help in our battle against inflation.

Our challenge will remain to simultaneously restrain inflation, restore the saver’s confidence in the financial economy and tightly direct investments into infrastructure building.

The presidential election process has brought out the gaps in the ruling coalition. It seems unlikely that there will be significant structural solutions forthcoming till the elections. Further with regional parties gaining prominence at the expense of national parties, core policymaking may remain a challenge even in the next parliament term. Withdrawal of subsidies, reduction in government expenditure and control on welfare schemes may not be easy and fiscal deficits may remain a bother.

The solution possibly lies in making subsidised credit available to infrastructure and production capacity enhancement in a directed manner.

This along with ensuring positive real interest rates for savers will revive their faith in financial assets and promote savings.

Consistent negative real rates paid to savers is almost like getting them to subsidise the borrowings to businesses. A surcharge of sorts, especially when they may not even get the benefits. Senior and retired citizens have already been shut off by the equity markets and now their hard-earned money too will soon be rendered worthless.

Therefore, one would rather accept our political frailties and push at the supply end, as it is more likely to give better results than merely bringing down broad-based policy rates.

We can only depend on growth rates to amortise our fiscal deficit. However, a lower growth rate of say 7 pct may have to be the norm unless we can also simultaneously complete initiatives to ensure the subsidies reach the deserving; whilst we continue struggling for the political consensus required to push through the broad-based reform agenda.

The S&P report mentions “these recent developments are not serious enough to lower the sovereign’s creditworthiness”. It goes on to say that, they will consider a downgrade if the government’s policy response to challenges is too little or too late. It is concerned that the government may further regulate the economy to reduce short-term threats to the economy.

There is no point in getting defensive. Just as we happily lapped up earlier praise from rating agencies; it may be worth closely examining their suggestions for a longer term structural outlook.

At the same time we cannot continue to blame our plight on global factors as there is a lot we can do within.

India’s long term growth story is, of course, intact but has exhausted the benefits of the 1990s dose in liberalisation.

I believe we may well have seen the worst but it’s time for a fresh booster so that 2013 can see our economy back to the 7 pct to 7.5 pct growth range.

The solution may not be in taking to knee-jerk and extortionist fiscal actions but rather recognising the need to protect our creditworthiness so that we can attract enough FDI to replace the FII hot money and impart stability to the rupee.

As Einstein said “doing the same thing again and again expecting different results is insanity”. Even he wouldn’t have imagined this being applicable to interest rates.

Maybe it’s time to think beyond monetary policy rates because the challenges of a globalised economy are more complex than the one in the 1990s waiting to be liberated.

The pension bill, first introduced in 2005, got booted out yet again; only this time in ‘public interest’.

Across the world, employers have been finding it increasingly difficult to live up to tacit guarantees underlying a ‘defined benefits’ pension system — a natural fallout of the elderly outnumbering the working population combined with increasing unpredictability in our economic environment over the past two decades.

The feasible alternative is a ‘defined contribution’ system. Under this an employer makes their contribution and ends his responsibility.

The rate at which people change jobs and businesses get re-engineered, it’s possibly best for everyone to take charge of one’s future. The system usually brings along benefits of transportability and the money is not subjected to the employer’s balance sheet risk.

The investors will have a choice in ‘asset allocation’ and should be able to choose between government securities to an actively managed debt portfolio. Similarly, equity risk can be limited.

Of course, there is the risk of the un-empowered being expected to make choices they don’t understand. This will have to be addressed through education and guidelines for advisory selling.

Considering that, the New Pension Scheme (NPS) is already applicable to those in government service since 2004; the benefits of this Bill should accrue to the unorganised sector, the self employed and professionals who don’t have access to a structured pension vehicle.

This legislation will replace the ‘pay as we go’ arrangements by regulated and transparent ‘funded’ retirement schemes.

Therefore, it may well be worth giving in to the demand for FDI 26 pct limit in return for a free passage of this bill – it may not be all we wish for but at least we would have begun the journey.

With the EPF continuing, the new pension scheme driven by tax benefits should be voluntary.

Being at the stage it is in the demographic and economic cycle, India still has the time, not too much though, to set the foundation for a retirement system.

With the ‘social promise’ giving way, Indians will have to fast get self-reliant in their retirement and hopefully, the government will do its bit in assisting us.

Of course, the next big challenge will be to formulate realistic compensation to manage and sell these pension products.

In the meantime, can someone please articulate for the ‘public’ what ‘public interest’ is being adversely impacted by the pension bill?