Rough economic analysis of the Jan Lokpal Bill


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Rough economic analysis of the Jan Lokpal Bill

  1. 1. Jan Lokpal Bill Economic Analysis & National Defence Impact Assessment By : Ashish Puntambekar The Nataraja Foundation, MumbaiIn every major democracy around the world, people look at theeconomic impact of any new legislation very seriously and asignificant part of the public debate is about the socio-economiceffects of any proposed law.The surprising thing about the Jan Lokpal Bill and the entiredebate around it, is that no one including people from the AnnaHazare team have said anything about the huge EconomicWindfall that will accrue to India if the bill becomes law …essentially on account of the transparency that it brings intoGovernment and all other transactions.The truth is that if the Jan Lokpal Bill is passed by Parliament, IndianGDP will almost triple from US $ 1.8 Trillion currently, to US $ 4.5Trillion by 2025.The fact that no one has looked at this aspect, or quantified theeconomic benefits of the proposed Jan lokpal legislation , points toa big lacuna in our thinking.There is therefore a clear need to move beyond the emotional issuesthat surround the debate today ( Inclusion of PM, Communal Angleetc ) and look instead at the hard numbers in terms of expectedeconomic and other benefits of a strong lokpal institution.This paper examines the economic and national defence benefits thatthe Jan Lokpal Bill will deliver to the nation. The main argument hereis that a tough lokpal law will bring about a major change in theinvestment climate in India through transparent decision making at alllevels of government . This new transparency will then facilitate thefollowing macro impacts over the next 15 years :A. Strong Lokpal Institution… Economic Windfall …in Brief1. FDI flows into India will triple from 2011 levels to exceed US $ 75 Billion by 2016 as a result of increased investor confidence in the Indian Economy.
  2. 2. 2. Clarity in policy and less corruption will catalyze the forecasted Goldman Sachs investment estimate of US $ 1.7 Trillion in the Infrastructure sector in India … Investment multiplier impact of this investment could be of the order of US $ 5.1 Trillion by 2025. The Lokpal Institution will thus help create approximately 60 Million new jobs in India as the huge Infrastructure rollout happens. ( Please refer Annexure 1, for the employment Impact Calculation )3. India whose investment image has been badly hit as a result of the CWG and 2 G scams will resume an 8.5 % plus growth rate and sustain this over the next 15 years . This will enable India to become a US $ 4.5 Trillion Economy by 2025. The estimate does not include the huge positive impact if existing tax revenues are employed properly. Currently a very significant part of taxpayer money is getting eaten away by corrupt officials. I have not included this huge impact in my analysis.Detailed Analysis of Economic Benefits Due To A Strong Lokpal1. Jan Lokpal Bill as an FDI CatalystA strong Lokpal will catalyze a three fold increase in Foreign Direct Investment( FDI ) as early as 2016...Equity FDI may go from US $ 25.834 Billion (Financialyear 2009 -10) … to US $ 75 Billion .This will be a dramatic acceleration brought about , in the main by greatertransparency in government decisions.For the record the following is the Govt. data on Equity FDI into India in therecent past. Year Equity FDI ( US $ Billion ) 2005 – 2006 5.540 2006 – 2007 12.492 2007 – 2008 24.575 2008 – 2009 27.330 2009 – 2010 25.834 2010 – 2011 Data not available Source : Govt of India, Ministry of Commerce website
  3. 3. Given the above track record in FDI , my personal forecast of the Anna HazareEffect “ Jan Lokpal Bill ”on future Equity FDI inflows into India is as follows : Year Equity FDI ( US $ Billion ) 2012 – 2013 35.00 2013 – 2014 45.00 2014 – 2015 60.00 2015 – 2016 75.00Source : Forecast by , The Nataraja Foundation … The Indian Education Megaproject main problem that I see with these huge FDI flows after the passage of astrong Lokpal Bill is that India’s currency ( The Rupee ) will strengthenconsiderably. There may be a need then for the RBI and the Government tomanage this problem of plenty by allowing some sort of Barter trade when itcomes to FDI. Specifically in Infrastructure , the Govt may allow companies andforeign investors to bring in their equity contribution in Projects by supplyingCement and Steel in lieu of cash equity … thereby reducing upward pressure onthe Rupee.Apart from this upward pressure on the Rupee, the Lokpal Bill will be great forFDI into India.2. Jan Lokpal Bill as a Domestic Investment / GDP CatalystAnna Hazare’s Jan Lokpal Bill will also help catalyze Investment in Infrastructurein India. This is because, with the current and huge corruption, most Indians arealso afraid to Invest in small projects and businesses.Therefore if the Jan Lokpal bill becomes law, Investment, mostly domestic( Please note that I am not counting FDI here ) could reach US $ 1.7 Trillion by2018…This is an estimate by Goldman Sachs and it will materialize only if wehave good governance. This money will never come out of peoples pockets ifScams such as CWG / 2 G continue.To make these large investments materialize, it is extremely important that thelower bureaucracy ( in government departments ) and the lower Judiciary atthe district and state levels come under the investigative umbrella of the Lokpal.This is important as 95 % of the economy is at this lower level. The currentattention on the Prime Minister and the Supreme Court in my view is not the mainissue in the Lokpal debate.
  4. 4. In my view the net Investment multiplier impact of this US $ 1.7 Trillioninvestment in Infrastructure will be of the order of US $ 5.1 Trillion by2020 … as the investment in Infrastructure will have huge catalytic impact on thegrowth of other industries in India.The Anna Hazare movement will thus help create in excess of 60 Million newJobs ( Please refer Annexure 1 ).The Following are Indian GDP & Infrastructure Investment estimates by leadingglobal organizations :GDP Projections ( US $ Trillion ) 2025 2050 1. BRIC Report ( Goldman Sachs ) 3.17 27.80 2. McKinsey & Co. 4.01 - 3. Indian Education Megaproject ( Assumed ) 4.50 -Infrastructure Investment Projections ( US $ Trillion ) 1. Goldman Sachs ( Next 10 years ) 1.7 2. Indian Planning Commission ( XI th 5 year Plan ) 0.5Source : BRIC Report ( Goldman Sachs ), McKinsey & Co. Indian Planning CommissionThe above, in brief summarizes my view on the Indian Economy if AnnaHazare and his team succeed in getting the Govt to table the original JanLokpal Bill in Parliament or amending the one they recently passed. If they failand the Govt Succeeds in steamrolling / passing its own version of the billin the Rajya Sabha ( the toothless lokpal bill , passed by the Lok Sabha ), theabove forecasted growth in GDP will not materialize.In short, if the Govt. version of the bill is passed, it will do immense harm tothe Indian Economy and the 60 Million people who today may get jobs due tonew investments…will remain jobless … creating huge demographic problems by2025, by which time the 300 Million young people forecasted by the census enterthe working age and do not find jobs. No one is currently talking of thisdemographic nightmare that will happen in India by 2018. Already in 2012, thefirst 3 % of this multitude has entered the market and there are no jobs for them.Certain vested interests are saying that the Lokpal Institution will create abureaucracy of 50,000 – 60,000 officials. These same people are not telling thecountry that simultaneously the Lokpal institution will facilitate 60,000,000 Jobs.What is the cost – benefit debate in this ? Its very clear.
  5. 5. Further, any perceived threat from the Lokpal Bill need not materialize if certainSecurity related decisions of the Executive and the functioning of the higherJudiciary are kept out of the perview of the Lokpal . In fact the Timesof India had come out with an excellent comparison of the Govt Bill and theHazare team’s bill and had even put in a third column of its own ( The Times ofIndia version of the Lokpal Bill ... which in my view was very very good asit ensured that the Lokpals power was checked through a proper processof selection and with a proper procedure for appointment and dismissal of lokpalofficials ) ... those interested may please refer to the TOI website.B. National Security Impact Of The Jan Lokpal BillOne of the major arguments against the Jan Lokpal bill is that it willdamage India’s security interests.Actually, just the opposite is true. After the latest Bombshell droppedby the Army Chief Gen VK Singh, regarding the scams in equipmentprocurement ( TATRA Turck Deal ) and the fact that most of theequipment with our Armed Forces is Obsolete ( 97 % Of the IndianAir Forces Aircraft ), it makes sense to have a strong LOKPALInstitution so that scams do not take place in the Procurement ofMilitary Equipment, that is so necessary for the security of ourcountry.Specifically the Lokpal will ensure :1. Greater transparency in defence deals and procurement procedures as a result of a strong Lokpal. This will result in timely acquisition of equipment and spares for the armed forces which have been neglected for the last 15 – 20 years2. Within an economy of US $ 4.5 Trillion that India will be by 2025, the size of the Indian Navy will triple as will the size of the Indian Air force. The Indian army will also be mordernized to be a leaner and more effective organization. This will be following the global standard in advanced nations where the Navy and Air Force are the major arms. In India, currently the opposite is true and our land based forces are the biggest of the three.The key issue here is that the above mordernization of the armedforces will not materialize unless corruption is dealt with first.
  6. 6. The recent experience with the 2G and CWG scams and the loot thathas been going on in India with the active participation ofgovernment functionaries provides little confidence that an 8.5 %GDP growth rate will be achievable and sustained without aneffective anti - corruption organization. The Lokpal bill is therefore“ THE BILL “ which will facilitate development in all spheres.It needs to be understood that the Lokpal is not a cure for 100 % ofthe vast corruption problem that plagues India , but it will be animportant deterrent. Secondly , it is also important to understand thatimmediately after the Lokpal bill is passed into law, there will be aperiod of considerable turmoil as the system tries to clean itself up.There will also be a big need to simplify laws and procedures relatingto commerce.C. Achieving A Quantum Leap in MindsetsA strong lokpal institution will dramatically cut transaction costs forbusinesses in India and the resulting transparency will createimmense opportunities for small businesses and for entrepreneursright from the village level to the cities.The Lokpal institution will facilitate an environment whereMegaprojects in Education, Healthcare and Urban development canactually materialize as the leakage of funds can be reduced withnearly all of the money actually reaching the poor in cities and townsas well as in our remote villages. Improved utilization of existing taxrevenues is another major impact which I have not included in myanalysis.If Anna’s team fails and the Govt succeeds in steamrolling its owntoothless version of the bill in the Rajya Sabha as well, theabove forecasted growth in GDP will not materialize. In fact , if theGovt. version of the bill is passed, it will do immense harm to theIndian Economy and the 60 Million people who today may get jobsdue to new investments…will remain jobless … creating hugedemographic problems by 2025.Anna Hazare’s team will do well to include some of the EconomicRationale presented above to support their argument for a StrongLokpal Institution. The Lokpal Institution will greatly facilitate the
  7. 7. Tripling of Indian GDP to US $ 4.5 Trillion by 2025. This in fact is themost important argument in its favour.Finally, it would be artless for the political class to think that theLokpal issue will go away. In fact , given the response to team Anna’smovement , in the event the Jan Lok Pal Bill is defeated in Parliament( because many MP’s have criminal records ), the people who are thesovereign , may actually demand a national referendum on theLokpal issue. It may be noted here that the Indian constitution doesnot say anything against a National Referendum. A referendum onthe Lokpal bill however , is not a good thing as some of the clausesin the Jan Lokpal Bill undermine our democratic system and thereforeneed to be removed. A referendum on the Lokpal bill will also meanthat Parliament has abdicated responsibility. It is therefore the duty ofthe opposition to act and resolve the stalemate. – Concluded –Ashish PuntambekarProject DesignerThe Nataraja Indian Education Megaproject … High Quality Education to 126 Million Children …Totally Free of Cost& The Mumbai Megaproject … Transforming Mumbai by 2025
  8. 8. Annexure 1 Job Creation Potential of The Jan Lokpal BillAssumption : This analysis assumes that the current decline in Economic GrowthParameters is essentially the result of bad governance and the huge Corruption atevery level of Government in India.The Analysis also assumes that if Corruption in Reduced and Governance /Transparency is improved, the entire forecast of Potential Investments in India will berealized. Lastly it needs to be mentioned that even Indian Citizens are not investingbecause of Corruption and bad Governance. Any Potential FDI is a small part thereforeof the Total Investment that will happen as a result of the Jan Lokpal Bill becoming Law.Calculation Of Employment PotentialSample Project Size : US $ 11 Billion / Rs 50,000 Crores ( Actual Project ) As in a Large Capital Investment Project such as a Refinery / ( Power Plant + Port ) ProjectActual EmploymentGenerated At Site : 80,000 Construction Labour employed … for 3 YearsIndirect Employment : 2,40,000 People … in Supporting Ancillary Industries and Service Businesses in India…excluding Overseas Employment ( Equipment Suppliers etc )… the project Considered has a 40 % imported Equipment Component.Total Employment : 3,20,000 People … For Three Years ( In India )Potential Investment in India … US $ 1.7 Trillion … In Infrastructure Alone( Source : Goldman Sachs )To simplify the calculation, I am assuming that the above investment occurs in US $ 500Billion Clips and we do this 3.5 times … for 10.5 years.Total Employment Generated by a US $ 500 Billion Investment … Once every 3 Yearsand continuing for a full period for 10.5 Years in all.Employment Generated = 500 X 3,20,000 = 14.54 Million 11These Employment Numbers are Valid For a Large Industrial Project and are directly and In-Directly concerned with the project itself. The Investment Multiplier impact of such projects onthe economy will be a Factor of “ 3 ”. Net Employment Generated within the Economy willtherefore be = 14.54 X 3 = 43.63 MillionFor Social Infrastructure Projects ( Education, Hospitals Etc ) … The Potential EmploymentGenerated will be much more and have an investment Multiplier Impact of between “ 4 ” and“ 5 ” … Additional employment generated will therefore be anywhere between 58 Million and72 Million People in India … by 2025 due, directly to the Lokpal Bill Becoming Law.The Healthcare Industry itself is capable of employing 45 Million Additional People. This canbe verified from Independent Sources.