COVID Crisis: Could India impose Financial Emergency?

[Authored by: Mandar Garge, Apr 28, 2020]

The Indian Union government can, but in all probability, won't impose a Financial Emergency. Never in the history of India has a Financial Emergency (वित्तीय आपातकाल) been declared. 

What is a Financial Emergency? And what are its effects?

First a look at the different types of emergencies the Indian Constitution allows. There are basically three types of emergencies:

1. National Emergency (Article 352)
    - Imposed at: National level
    - By: The President of India
    - On recommendation of: The Union Government of India
    - Has been Imposed: 3 times (1962 China war | 1971 Pakistan war | 1975 Internal disturbance)

2. State Emergency (Article 354) (a.k.a: President's Rule)
    - Imposed at: State level
    - By: The President of India
    - On recommendation of: The Union Government of India
    - Has been Imposed: More than 120 times so far

3. Financial Emergency (Article 360)
    - Imposed at: National level
    - By: The President of India
    - On recommendation of: The Union Government of India
    - Has been Imposed: Never. But we had come very close to imposing it (1991 when India went bankrupt)

Article #360 of the Indian constitution allows the Central Govt. to recommend a Financial Emergency to the President to in case the country is facing an unprecedented financial crisis. The COVID-19 crisis indeed is a grave financial crisis. 

The Mechanics:

• The Central Govt. provides a recommendation to the President. The President issues an order to impose the emergency. 
• The Lok Sabha (LS) and Rajya Sabha (RS) have to pass this order within two months of its issuance (else it becomes void). 
• Once imposed, only the President can lift it. No approval is needed from LS or RS while lifting it. 
• There is no time limit on when President is supposed to lift it. He does so on the recommendation of the Central govt.

The Implications:

• Financial decisions of the entire country become unitary. This means the central government gets complete hold of the Financial budgeting, spending and approval of State level financial bills and decisions.
• The state financial decision making powers render ineffective for the duration of emergency.
• State governments can keep working on financial bills, but their approval can be done only by the President (upon recommendation from the central govt.)
• The President gets complete control over central and state government employees' salaries and allowances (including the Judiciary) during the period of emergency. The President can also reduce their salaries and allowance if deemed necessary.

Does current situation warrant a Financial Emergency?

Probably yes. The country's financial condition is extremely bad. Revenues have diminished significantly, almost stopped. Government is running out of money. The country needs continuous (monthly) revenue to run itself. 

• States revenues have completely halted because the industry is shut, transportation is shut, farming is ON, but the produce is going waste, consumer spending has come to a grinding halt. 
• E.g. Maharashtra's 2019 revenues were around 3.15 Lakh Crores. It has a deficit of 90,000 Cr already. 2020's estimates are yet to come in, but the impact is going to be severe. The state had allocated a 4% expenditure of its revenue for Health care for 2020. COVID has already consumed that spending.
• Lockdown: A report by HDFC bank stated that the lockdown is likely to shave off INR 10 L Cr in the first half of 2020 (That's a whopping 4% of India's GDP)
• Moreover the slump in economic activity is projected to affect India's "forecasted" GDP by another 3%.
• GST collection for March 2020 has dipped by 11% (Rs 97,597 Cr as against 1.07 L Cr in March 2019). April 2020 GST collection can dip further to Rs 80,000 Cr. May 2020 collections are likely to be Rs. 60,000 Cr.
• The COVID crisis has sucked significant and unexpectedly higher amount of Govt's money on medical treatment. Just the money spent by states on testing the their population is more than Rs 100 Cr. The Central government has released Rs 17,000 Cr to states for spending on PPE, Ventilators, kits etc.
• Additionally the Central government is releasing multiple relief packages (a recent one was Rs. 1.7 L Cr - to benefit the poor directly via Direct Cash Transfer to their Jan-dhan accounts).

In such a scenario, its absolutely necessary that the state governments completely stop unwanted and low-priority expenses immediately. There is a possibility that state governments that are politically misaligned with the central govt may not follow Center's directives and guidelines. 

In such a scenario the Central govt. may see wisdom in taking full charge of country's every single financial expenditure.

Can Current Central govt. impose a financial emergency?

Theoretically yes. In fact rather easily. The current, PM Modi-led NDA government has the numbers in LS. It can manage number in the RS. And it can make the President sign an order for rolling out the emergency. 

Would Central Govt. impose a financial emergency?

Very unlikely. Although current situation favors a financial emergency, the current Modi-led Union government will not impose it for the following reasons:

• It would not want to be seen as predatory and would prefer achieving fiscal prudence collaboratively.
• It seems that there is a good amount of coordination and harmony between the Central and State government's in prioritizing the spend on fighting COVID.
• The Central government's approach seems to be that of issuing formal guidelines, make the states tow the line. If they don't, the Home ministry seems to get into a a mode of persuasion. It has been seen that Union government has brought the most misaligned state of WB in line.
• In the video-conf meeting between the PM and the CMs held on 27th April, PM Modi stated that he would like states to decide how to handle extended lock-downs or its lifting up. Modi has expressed complete solidarity with states with high COVID numbers and extended Center's support. 
• Imposing an emergency would send a very negative signal to the already shaken foreign investors.

All in all, the Central government seems to be getting States to fall in line, and work cohesively to ensure that the spending is wise and only where necessary. It seems to be able to impose the same discipline as expected in a Financial Emergency, without actually imposing it. 

What we see currently is an excellent example of how unitedly and cohesively the Center and State governments are working to fight the virus, keeping politics aside at least for some time. Hopefully we never reach the stage of Financial Emergency.

[Authored by: Mandar Garge, Apr 28, 2020]

7 factors that led to Modi's much expected victory in LS 2019

A majority of economic experts political analysts got the LS 2019 election wrong. They either predicted a hung parliament or just-enough-majority to NDA. Modi-led BJP earned 303 seats alone. 

Contrary to most of the analyses which site factors like Nationalism, action against Pakistan, weak Mahagatbandhan, Rahul Gandhi as a week leader etc., as the key reasons of team Modi's victory, the core reason why Modi win was his government's inclusive growth and socio-economic policies which significantly changed things on the ground for the lower 65% (especially the lowermost 35%) of India's population.

I have tried to analyze this win via 7 key factors described further in this article.

Strategy to impact the lower 65% of economic spectrum:
The Indian Demographic can be split in the following economic classes: 
- 35% Poor (maximum participation in voting. Always hopeful of change)
- 30% Lower-Middle-Class (high participation in voting. very hopeful of change)
- 30% Middle-class (average voting participation)
- 2 to 3% Upper-Middle-class (minimum voting participation)
- 1 to 2% Rich (minimum voting participation) 

Most of the analysis of Indian economics and politics and its impact on the population comes from people form the top 5%, who are often disconnected with ground reality. Half of this population doesn't even vote during elections. Modi made his calculations based on economic situation and steered clear of cast-based politics, and that strategy not only paid off but was also the right one for India ( that has conventionally relied on caste-based politics. Modi was absolutely clear in his mind that if he had to win larger voter-bases, he has to impact the lower two buckets that made 65% of the population. He ensured policies and efficient execution of schemes that impacted these groups. This bracket traditionally has been a voter base of either Congress or regional parties. Modi crafted a strategy to positively impact this bracket, even at the cost of his strong support base which got alienated with Demonetization and GST. But Modi took this chance because he wanted to bring in structural changes that were necessary to bring about broader impact. While those impacted by Demonetization and GST kept on whining and portraying how these policies were damaging economy, Modi focused on bringing significant impact to the lives of this lower 65% spectrum. 

No matter what most of the mainstream media reported, there was a substantial and positive impact of Modi's first term on poor (most media deliberately did not report this. On the contrary it reported policy failures, farmers' distress, economic slow-down etc. Especially farmers' distress had been very wrongly reported).

Seven factors highlighting how Modi's approach of inclusive growth impacted this lower 65% spectrum leading to his unprecedented victory in LS 2019.

1. Carefully crafted and Economically viable Socioeconomic policies:
Modi has always been a staunch critic of wealth-redistribution, but not necessarily social spending. He took systematic efforts to move from the Nehruvian-Socialism-based spending (subsidies, freebies, wealth-redistribution - which almost each time, turned out to be financially nonviable) - to financially viable social-welfare schemes setup. Modi believes in social spending that is economically supported by wealth creation schemes. By fixing the public distribution and delivery systems, he made money available to be spent on social schemes. Contrary to his pre-2014 image of a reformist, he balanced backed social spending by wealth and asset creation. The results were seen clearly by the lower 65% and this is what most analyses ignored. 

An account of impact on poor:
Jana-Dhana Yojana: More than 2L bank accounts are being opened everyday
DBT (Direct Benefit Transfer): 400Cr rupees are being directly deposited in jana-dhana accounts via DBT every day (Linking of Jana-dhana accounts with Aadhar ensured no leakages).
SAUBHAGYA: 50K rural houses being provided electricity daily.
Swachh Bharat Abhiyan: 60K toilets being built daily.
Awas Yojana: more than 1000 houses being built and handed over daily.
MUDRA (Micro Units Development and Refinance Agency): 4.25 Cr first time loans have been availed by small entrepreneurs. 
Ujjwala: 70K gas connections are being opened every day for women of BPL.
Ayushman Bharat Yojana: Offers ₹ 5 Lakh coverage to 10.8 crore poor families (approximately 500 million beneficiaries). 

Soil Health Card: 1.3L farmers have benefited 

eNAM (National Agriculture Market): Created for farmers and traders to trade online cutting the corrupt system of middle-men agencies which were indirectly run by corrupt politicians. 

How many main stream news channels were reporting this impressive social progress? Almost none. News agencies were busy creating a picture of how Modi Govt was a failure.

Going beyond castes and religions: The impact of these schemes touched people of all castes, and all religions, everyone who came in its way. No surprise that the Muslim vote share almost doubled from 2014. The anti Tripple-Talaq move played a significant role and indicated to the women of the community that this govt is keen to cause their social upliftment.

2. Inclusive Development, Infrastructure, Employment Creation:
Modi Government made it a point to ensure that all parts of country are covered by the much-needed infrastructure - toilets, water, roads, electricity, phone connectivity, gas connections. These are fairly basic facilities and people should have had them decades ago. Once people have them, they do not wait for government to create employment for them, but rather create jobs for themselves. Modi made people 'enabled' to make a living for themselves and broke them away from the decades of upbringing where Government was responsible for providing them jobs. Modi concentrated on creating an environment that would facilitate employment creation rather than providing employment directly. Additionally the infrastructure projects (roads, electrification, toilets, railways, houses etc.) themselves created significant employment for the locals despite the picture created by analysts that unemployment in India had risen. MUDRA yojana has seen more than 4 Cr people seeking loans. They have created employment. 
Typical indicators of Job creation concentrate on salaried jobs and that too in urban and semi-urban regions. For poor and rural, 'employment' means wages and continuity of ability to earn wages. 

The infrastructure development impacted the lower 65% significantly (especially the lower 35%). For the first time in there lives hey saw toilets being built, water being available, roads being built, electricity and gas connections in their houses. They obviously realized that the Congress or Regional parties could have done easily in 60 years what Modi Government did in just 60 months, but didn't. "Can we risk losing Modi government in LS 2019 elections and dash our hopes of enhancing our lives and the continuity of the infrastructural changes that should have ideally commenced 60 ago? " - is the questions they asked themselves and the answer was clear: "I must make sure Modi returns".

3. Clean Governance, Fight against corruption and black money:
Modi's government ensured that leakages in the public distribution systems were plugged. Pre-2014 era suggests that around 65% of the money marked for poor were  siphoned off by corrupt elements in the distribution system. Modi cracked down on this broken system and put in place a mechanism of Jana-Dhana yojana, Aadhar and Direct Benefit Transfer to kill the middlemen and inefficiency in delivery. He also brought in tremendous efficiencies and restored lost trust of the poor in government institutions making them feel that this government is "actually" caring for them. They saw subsidies actually reaching them. Even in urban areas the citizens witnessed that Government offices have become more efficient, faster, digitized and the work is actually getting done seamlessly. Common man witnessed drastic drop in corruption at government offices. This created a deep impact on minds of poor and middle-class that "this government was serious about making life easier for us". 

Additionally, in his 5-year term, citizens did not witness a single case of corruption at central level. They made up their minds that "Modi was Mr. Clean and the kind of top-most leader I would want to lead my country". Hence any attempt from opposition (e.g. Rafael allegations by Rahul G) on this clean image failed miserably and moreover hurt the vote share of the opposition.

Modi was also very careful not to react to personal attacks made on him. He kept his composure and came out as a balanced and elegant leader caring only about development. That elevated his image to a point that people were not ready to accept any negative allegations against him.

4. Accountability, Continuous measurement of performance, Continuous Feedback:
Modi brought in tremendous accountability in his government's work, set tough and aggressive performance goals for his ministers and officers, and did not hesitate to fire non-performers. He disbanded the GoM (Group of ministers) concept and restricted decision making for projects to three bodies: 1) Owning Ministry - that owned the project, 2) Finance Ministry which usually allocates budget; and 3) The PMO (Prime Minister's Office). The Environment Ministry was plugged in wherever needed. He made decision-making faster, cut the red tape and reduced the multi-step approvals to just 4-levels. He also made his ministers make their work's progress known to public via mobile apps, sought continuous feedback from people and acknowledged, and wherever possible, acted on the feedback. For the first time in Indian history people witnessed a government that was actually seeking citizens' feedback on its performance. Modi really connected with people.

5. Direct Connect with people. No reliance on mainstream media:
Modi's one noticeably different strategy from all previous government was that he did not depend on the conventional media which has traditionally been pro-Congress or pro-Left. He was aware that the media would not cover his good work. He instead chose to connect with people directly via programs like "Mann ki baat". The media downplayed its impact, but the actual impact on the poor was tremendous. They loved the fact that the PM is directly explaining to them his policies, his approach toward eradicating poverty.
Second he made extensive use of Social media and made all his leaders also do the same. He connected deeply with urban and semi-urban and even rural voter through social media.
Third, he made sure BJP and RSS karyakartas stayed connected with the citizens and explained government's work and benefits to the poor.

6. Capturing the emerging and young voter base:
The new voter of today wants to be heard and is very keen on voting. The young voters, usually tech-savvy, social-media-savvy got impressed by the fact that the PM is connecting with them on Social media. They also saw that his entire team is connecting and listening to them via social media. Modi significantly impacted the voter base between 18 and 30 years of age. They saw that "Modi is very development focused, progressive, can represent India brilliantly to external world, is elevating our global image, can protect India from external as well as internal threats. If there is anyone who can take India ahead, its him. I would vote for him". 

Moreover the young India had developed a dislike for dynasty-based, entitlement-based elitist behavior exhibited by the Congress and most regional parties. They saw Modi successfully driving a merit-based organization.

An interesting statistic indicates that the new voter base from 2014 increased by 8.5 Cr (85 M) and NDA won 5 Cr (50 M) new voters. Significant portion of the 50M came from the new voter group.

7. Strategy, Excellent Planning, Continuous voter pulse:
Strategy & Alliances: Modi and Amit Shah executed a brilliant strategy. They started working for LS 2019 from May of 2014 itself. Amit Shah was not handed any portfolio in 2014, but allocated for strengthening the organization, increasing BJP voter base and especially penetrate those regions where BJP hadn't been. And Amit shah executed this strategy brilliantly.

BJP also worked out alliances much efficiently and generously this time, giving regional parties a larger portion in the seat-sharing calculations. E.g.: Bihar - In 2014 BJP contested 30 seats and won 22 out of 40 seats. In 2019, BJP contested only 17 seats. letting JDU contest 17 and LJP 6. The results were outstanding - a win on 39 seats for NDA out of 40. The same approach worked in Maharashtra too

Planning: BJP executed extensive and minute level of planning covering all poll-booths in all constituencies. They leveraged the enormous workforce of RSS karyakartas to reach out to every household and educate the uneducated. These "invisible hands" worked relentlessly to cause a massive shift in the voter base.

Continuous pulse of the voter: Modi made sure he did not commit the same mistake that Vajpayee govt. committed in 2004 (NDA remained oblivious to ground reality and wrongly assumed a definite comeback). From day one Modi mobilized the grand workforce of BJP and RSS karyakartas to continuously provide him parameters from ground zero, thus watching the pulse of the voter. He and top brass of BJP were absolutely sure of a resounding victory in lS 2019. But they chose to not talk about it.

I believe these 7 factors were the key reasons why Modi swept LS 2019. Factors associated with Nationalism (URI surgical strike in 2016, Air Strike in 2019) did play a role but the impact was marginal. The impact was more because of opposition's questioning of the authenticity of these acts. The other factor that is often indicated by the analysts is the absence of a strong alternative and weak alliance of opposition parties. But I seriously think that the impact of this factor was very limited. I do not think people voted for Modi because there was no other alternative. People voted for Modi, because they wanted him to continue the progress that India is witnessing under his leadership.


Mandar Garge