India Leadership Conclave 2018 - Introspection White Paper

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INDIA LEADERSHIP CONCLAVE
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India’s only Pink Magazine on Indian current Affairs
9th Annual India Leadership Conclave & Indian Affairs Business Leadership Awards 2018
India Leadership Conclave
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W H I T E P A P E R
INTROSPECTION
Lessions From The Past &
Prescriptions For The Future
Introspection
Agenda 2018 - New India’s Challenges
T
here are disruptions everywhere in the world minus introspection. India has delicately become a
destination for experimenting innovations laboratories where we are marching ahead in 21st
century with great speed & perfections.Sometimes in the quest of our pursuit to explore
innovations, we must not forget what the future will hold for us if can’t read the writing of the walls. We
can’t merely be a silent spectator to ruin our treasured & hard earned innovations. India today is a force
to reckon with in the global leadership. There are complex areas back home that challenge us. I strongly
feel that we need a strong & robust economic engine that is creating jobs, exploring innovation,
healthier nation and expanding opportunities for Indians in every community across the Nation.When
Power insists, "you're either with us or against us," the space for a diversity of voices and ideas
shrinks.When hate and anger are weaponized, it creates a spiral of silence.
India as a nation has emerged as a strong & dominant player in the global map, despite critics lebelling
India as a failed nation is not true & logical, we will continue to be a great democracy, economic super
power despite odds & challenges.
Yet there are red lines as well.....
Independent India is seventy one years old and may be the fastest-growing economy in the world. Yet,
poverty, inequalities, and digital divides continue to be devil the Indian economy. This combined
paradox of economic success and deprivation for many makes the study of Indian political economy
complex, interesting, and consequential.
I believe that when critical questions are simplistically equated with an anti-government agenda, it
requires courage to hold decision-makers accountable. We don't want to just give you the news; we aim
to promote critical thinking, self-reﬂection, and empathy to encourage informed decision-making. We
are at a crucial moment for both independent media and fearless reporting.We are committed & will
continue to bring you the honest, independent truth on all the important social, political, cultural, and
economic and liberty topics that really matter. We are fearless. We are independent. We cannot be,
silenced or intimidated. We believe in absolute food freedom, individual liberty & highest standards of
Journalistic practice.
 India is estimated to be $ 2.5 trillion economy, while China is $ 11.85 trillion
 An ambitious agenda of change can push growth rates upwards
 India can become a 5Trillion economy in 2024 with 10 per cent annual growth rate
 14.2 per cent growth will get us there in 2022.
Satya Brahma*

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But achieving such high growth will require exceptional structural changes in all sectors of the economy.
The Indian growth story is not just about the rosy predictions
I feel india’s dream growth engine require effective implementation of structural reform measures
The Biggest hindrances to achieve the objective continue to be POLITICALWILLof the Government
in Power
TRANSFORMATION is possible when we do INTROSPECTION
While the Brand india has been hugely successful abroad, back home, we are facing complex social, cultural &
Economic Challenges. Today we are in a very complex economic environment globally. India needs to get to a
stronger growth rate of 10 percent
There are 12 million people joining India's workforce every year and the country needs to produce enough jobs for
them &To get there, the country needs "significant reforms" in its land acquisition processes
If private enterprise is the primary engine of economic growth, India stands out as a rare country that is hostile to
business, as seen by our low ranking in the global "ease of doing business" rankings. This systemic hostility ends
up hurting our best performing businesses or even industries over a period of time. We believes that it’s hard to
disagree with the fact that India is not growing fast enough; despite having the world's largest young and
productive population and a culture that innately values entrepreneurship. It's equally hard to digest how little this
importance is given to the issue in our public discourse given how closely it affects all of us. It impacts the rich and
poor, people with jobs and those without.
Network 7 Media Group is an independent media house that connects its relationship to its audience & our
message is strong & clear. If we want to ensure a viable, beautiful future for our children, and their children, on a
safe and stable planet, we need to act now.And we need to act, first and foremost, within the realm of information:
because right now, it is the absolute dysfunction of the global information architecture — represented in the
intersection of mainstream media outlets, social technology platforms and giant digital aggregators — that is
sowing confusion, and paralyzing us from taking the action required to take on global and local challenges.
Network 7 Media Group chase and break the stories that no one wants to cover, and shine a light on the cracks
between the headlines. And yes, we do not blindly follow the treadmill of the news cycle: we are transforming the
news cycle. We understand that we are dealing with complex issues but not shying away from pointing fingers at
those in power remain disconnected with reality & truth. We aim to put people at the heart of our operations
through our fearless & unbiased reporting. Our journalism is holistic in its scope, fearless in its integrity, rigorous in
its research, and driven by the values of compassion, truth, and justice.
India Leadership Conclave believes that we really need growth for the jobs that our young people need. If we are
really to create those jobs we need massive investments and investment in job-creating activities like
infrastructure, construction & in big projects that could create jobs. During the last four years, the 1% rich doing
nefarious activities escaped and were able to corner 73% of the Nation’s wealth. Before BJP got into power it was
only 49% of the resources. So , IndianAffairs believe that Prime Minister Narendra Modi has to correct his policies
and strategies to ensure that the the poor and middle class who constitute 90% of the lower strata get the real
benefits of economic reforms. Network 7 Media group is of the opinion that the voice of the people is seldom heard
in the corridors of unbridled power of a despotic demagogue. India is practicing crony capitalism where 73% of
wealth is with 1% of population. Despite Namo''s disruptive Demo which proved a death knell for informal sector,
killing millions of jobs in unorganized sector( 17 lacs in Formal sector alone as per CMIE survey) which employs
majority of unskilled labour, contributing to 45 per cent of GDP. Religious intolerance is increasing, rabid
nationalism is spreading its wings to defeat liberal, inclusive pluralized polity of secular India.We are proud to be
called as Hindustan, but lets not politicize it.
India Leadership Conclave is of the opinion that Governments come and go, parties win and lose power but the

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India's hostility to business never wanes. It survives because it is political. Despite pretending to be otherwise,
India remains a "rule of will" society, rather than a "rule of law" country. Our politicians and bureaucrats regulating
industry and the society draw inordinate amount of power from ambiguous rules, badly drafted laws and
procedures that are either selectively enforced or changed at will.
India Leadership Conclave believes that a system with opaque or badly drafted rules, combined with arbitrary or
discretionary enforcement inherently favours the rule of will. It only serves those in power - politicians and
bureaucrats - and hurts everyone else, you and I included. From the poorest people in the remotest corners of
country to middle class citizens, and even big and well-heeled industrialists living in our largest cities, nobody is
spared from currying favours with and seeking benevolence from the state. This hostile business environment
makes it difficult for companies to grow and create new jobs. People's incomes do not grow as fast as they should;
the market size remains stagnant and companies aiming to grow in India remain stuck inside this vicious cycle.
Indian Affairs have observed that Indian start-ups quickly discover that they are unable to compete with foreign
players, who grow quickly in more benign states. Indian industrialists get stuck with debts that cannot be repaid
and turn into non-performing assets (NPAs), and a majority of foreign firms find that despite all the hype over
India's growing middle-class, the country ends up contributing low single digits in percentage terms to global
revenues.While India has admirably pulled a lot of people from poverty, it has lagged behind other countries in
growing their incomes. The well-off are 10 times richer in 2018 than in 1980, those at the median have not even
doubled their income. The Indian middle-class exists only in analysts' projections and PowerPoint slides.
Codifying clear and unambiguous rules and ensuring their proper enforcement is absolutely critical if we are to let
the Indian economy grow to its full potential. This is a fundamental flaw we need to fix, otherwise we run the risk of
languishing as a third world country for decades to come, unable to provide jobs to our young and feed our poor.
With this above background, Network 7 Media Group is hosting the high profile 9th Annual India Leadership
Conclave & Indian Affairs Business Leadership Awards in Mumbai & the theme of this year’s annual edition is
Introspection –Agenda 2018.
Asia, and more specifically India, has emerged as a critical theater in a new era of great power competition. The
contest between a U.S.-led alliance on one side and Russia and China on the other is reshaping India's grand
strategy to becoming a world power. The world's second most populous country, which sees itself as one of
humankind's great civilization-states, hopes to be secure and prosperous and one day spread its influence into all
corners of the world. The rise of india & its most influential leader of the recent times in contemporary history,
Prime Minister Narendra Modi, is taking india by storm & the vision to transform from a 'positive India to a
progressive India’.
India has only one decade to change its status into a developed country and will need to focus on education, failing
which the much-hailed ‘demographic dividend’ will turn into a disadvantage. If India is not able to get its act
together, it will never be able to go into the developed group of nations.the government and policymakers will have
to focus on the young people to ensure they become good citizens and invest in education in order to achieve the
objective and realise the demographic dividend. “India’s strength of demographic dividend could actually turn into
India’s disadvantage by 2030.The need of the hour is thus to improve the overall situation of government schools
across states.India’s full FY18 growth estimate was revised upward to 6.7 per cent from 6.6 per cent in the second
advance estimate released in February. This is in line with the 6.75 per cent growth forecast by the Economic
Survey and down from 7.1 per cent in FY17 with the slowdown being attributed to the lingering effect of
demonetisation and the roll-out of the goods and services tax (GST) in July last year.Goldman Sachs had said in
2010, four out of the top five economies in the world were part of the West. In 2050, according to Goldman Sachs,
the United States will be the only Western power to make it into the top five.Although the United States will be
number two in 2050, its economy will be much smaller than China’s. Goldman Sachs projects that China’s GDP
should match America’s by 2027, and then steadily pull ahead. The collective GDP of the four leading developing
countries (the BRICs — Brazil, Russia, India, and China) is likely to match that of today’s leading Western nations
by 2032.

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The rupee, which has been sliding in value for some time now, depreciated sharply in recent weeks,
giving some cause for concern. The depreciation is largely against the rising dollar, relative to which its
value has fallen by more than 7.5 per cent since the beginning of the year. The Reserve Bank of India’s
reference rate, which stood at Rs.63.4 to the dollar on January 5, 2018, reached Rs.68.4 by May 24 2018
(see chart). Depreciation relative to other major currencies such as the British pound, the euro and the
yen has been much less. Yet, the fall vis-a-vis the dollar is of significance, especially since much of
India’s trade and its foreign debt is denominated in dollars.
Discussions on the rupee’s decline, which is projected to continue, focus on its proximate determinants.
Prominent among these is the rise in the current account deficit on India’s balance of payments,
intensified by the recent sharp rise in the international price of oil.
The current account deficit rose from $41.6 billion in 2016 to $73.3 billion in 2017. Further, the $23.2
billion deficit recorded in the last quarter of 2017 was significantly higher than that recorded in the
previous July-September quarter ($14.4 billion) and in the last quarter of the previous year ($15.5
billion). The effects of this net outflow of foreign currency were enhanced by the retreat of investors
because of rising interest rates in advanced countries and the still-hesitant recovery from the global
recession.
There was a net outflow of portfolio investments of $8.44 billion in the January 1-May 25 period this year,
with $7.95 billion flowing out in May alone. Since some of these trends are not triggered by
developments internal to India, the problem is seen as not being India-specific, especially since the
trends correspond to those in emerging markets across the world, with matters being far worse in
countries such as Turkey and Argentina. While these proximate explanations are indeed valid, the
emphasis on them implicitly underplays what the tendency really reflects. Periodic bouts of rupee
depreciation that sometimes even trigger panic are a symptom of India being a bubble economy. There
are many features that warrant it being characterised as one.
The first, and most obvious, is the fact that the purported success of liberalising “reform” lies not in the
fact that India has been transformed, as intended, into an internationally competitive manufactured-
exports-driven economy, but in its emergence as a favoured destination for international financial
investors. The resulting large capital inflows have had a number of effects, all of which together define
the bubble on which economic growth rides.
The inflows resulted in a medium-term spike in stock market values accompanied by significant volatility,
with stock market valuations of many companies now at levels not warranted by potential earnings.
Moreover, flows into debt markets have meant that India’s bond market—which was earlier restricted
largely to government bonds—is now seeing much activity in the corporate segment, adding to the
exposure to foreign debt of firms looking to benefit from low interest rates abroad.
Since money borrowed at low interest rates in the advanced economies finances a large part of the
foreign financial investment, and since borrowing by Indian corporates is at low interest rates, the level of
capital inflows is extremely sensitive to the interest rate in the developed countries. If interest rates in the
source countries were to rise because of changed circumstances, new flows would dry up and investors
may choose to book profits and exit. This could not only unwind equity and debt markets but also weaken
the currency, making depreciation a reflection of the speculative investments that preceded the
tendency.

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Large inflows of foreign capital, by enhancing liquidity in the system, also trigger a credit boom with
increased lending to the private sector (both households and firms). It is such lending that spurs demand
and drives domestic market growth. Since debt-financed consumption and investment in this scenario is
driven by the pressure exerted by excess liquidity on banks to increase lending, the chances are high
that agents unable to service their debts will be drawn into the universe of borrowers. This increases the
probability of default which, given the credit boom, can lead to systemic fragility. And such fragility can
intensify the capital flight that generates exchange rate volatility.
Occurring in the context of import liberalisation, the demand fuelled by debt is likely to be more import-
intensive than would otherwise have been the case. Since liberalisation in the case of countries like India
does not substantially enhance exports, the import-intensive consumption and investment that
accompany capital inflows generates a third source of potential pressure on the rupee in the form of a
widening current account deficit. If the foreign exchange outflow on account of imports of goods and
services and other payments to non-residents exceeds the inflows from exports of goods and services
and remittances, the deficit, even if financed by capital inflows, sends out signals that the currency is
vulnerable.
Acountry that cannot earn the foreign exchange needed to finance its current needs and must borrow to
meet them is vulnerable to balance of payments difficulties and cannot sustain the value of its currency.
However, until recently this problem was not visible because low oil prices had depressed and kept low
the outflows on account of imports of goods. And when that was not true, capital inflows helped finance
large deficits. That is changing now as oil prices have risen to $80 a barrel, breaching a number of
“psychological barriers”. The reality that India is a country that is vulnerable on the balance of payments
front is asserting itself.
In sum, liberalised trade and liberalised capital flows have substantially enhanced India’s vulnerability, of
which periodic episodes of currency depreciation are a symptom. Ironically, this tendency has been
concealed by the large capital inflows spurred by liberalisation and by the benefits that India derived from
low oil prices. Both those advantages are now under threat as is the unsustainable growth that capital
flows and liquidity infusion stimulated.
Inflation
Moreover, currency depreciation has effects that enhance pre-existing vulnerability. One form that takes
is inflation. If trade liberalisation has increased dependence on imports for consumption and investment,
depreciation by raising the rupee cost of imports would aggravate inflation. Since one of the factors
underlying depreciation is an increase in the price of a universal intermediate like oil, the potential for
inflation is much higher. Inasmuch as the proximate factors underlying the depreciation of the rupee also
create an environment where the growth generated becomes unsustainable, the joint effect of those
factors and depreciation is a tendency to stagflation, or slow growth combined with inflation.
Inflation also forces the central bank to withdraw from the cheap money policies of the high liquidity years
and raise interest rates. Since low interest rates are the only macroeconomic instrument, howsoever
effective, acceptable to neoliberal policymakers committed to fiscal austerity, the situation is one where
there are no means to pull the economy out of the stagflation that envelopes it.

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There is one other development flowing from currency depreciation that can compound these
difficulties. As noted earlier, an aspect of the surge in capital flows to markets like India is an increase in
private foreign debt, as corporations seek to exploit the low interest rates prevailing in developed
countries and the greater freedom to borrow abroad that liberalisation provides. Since large capital
inflows make the domestic currency appear strong, much of this borrowing in foreign currency is not
hedged for possible losses stemming from any currency depreciation.
When depreciation actually occurs, however, the rupee costs of servicing foreign debt rise sharply. This
is also the time when the stagflation afflicting the economy hurts corporate profits, making the burden of
servicing foreign debt too much to bear. The distress sale of assets that follows bankruptcies results in
asset price deflation, which worsens the problem. Depending on the intensity of these effects, the bubble
can burst and the game of speculation can unravel. It is for this reason that this round of currency
depreciation is likely to be scrutinised carefully. It could be the round in which the bubble economy
becomes unsustainable.
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The Constitution Drafting Committee dropped at the very last minute the Instruments of Instructions for
the President and the Governors because it was “felt that the matter should be left entirely to
convention”.
EVERY time a political row erupts raising constitutional issues, our politician “jurists”, and even judges,
go forth on a mission to devise a solution anew as if it had arisen for the first time. One would think that the
simplest course is to consult the text of the Constitution, the intention of its framers and appropriate
precedents.
At the very outset, the Constituent Assembly set up a Union Constitution Committee, headed by
Jawaharlal Nehru, and a Provincial Constitution Committee headed by Vallabhbhai Patel. Submitting
the committees’ report to the Constituent Assembly on July 15, 1947, Patel said both committees had
come to “the conclusion that it would suit the conditions of this country better to adopt the parliamentary
system of the Constitution, the British type of Constitution with which we are familiar.”
The Assembly adopted the report. In October 1947, Sir B.N. Rau prepared a Draft Constitution
embodying the Assembly’s decisions. The Draft was then considered and thoroughly revised by the
Drafting Committee, which submitted a Draft Constitution to the President of the Assembly on February
21, 1948. The Draft was published to elicit public reactions. (For the texts of the two drafts, see Shiva
Rao; Select Documents, Vol. III, pages 1 and 509, respectively.)
B.R.Ambedkar. - P.V. Sivakumar
Introducing the Draft Constitution in the Constituent Assembly on November 4, 1948. the Chairman of
the Drafting Committee, Dr. B.R. Ambedkar, said: “Under the Draft Constitution the President occupies
the same position as the King under the English Constitution.... [He] will be generally bound by the
advice of his Ministers. He can do nothing contrary to their advice nor can he do anything without their
advice” ( ConstituentAssembly Debates; Vol. 7; page 32).

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On December 30, 1948, he told the Assembly: “Under a parliamentary system of government, there are
only two prerogatives which the King or the Head of the State may exercise. One is the appointment of
the Prime Minister, and the other is the dissolution of Parliament. With regard to the Prime Minister, it is
not possible to avoid vesting the discretion in the President. The only other way by which we could
provide for the appointment of the Prime Minister without vesting the authority or the discretion in the
President is to require that it is the House which shall in the first instance choose its leader, and then on
the choice being made by a motion or a resolution, the President should proceed to appoint the Prime
Minister.”
Mohammed Tahir asked: “On a point of order, how will it explain the position of the Governors and the
Ministers of the State where discretionary powers have been allowed to be used by the Governors?”
Ambedkar replied: “ The position of the Governor is exactly the same as the position of the President”
[emphasis added throughout] ( ConstituentAssembly Debates; Vol. VII, page 1158).
Little do those who devise fanciful “guidelines” for Governors realise that they would apply to the
President as well. To guide them, even Instruments of Instructions were drafted and approved by the
Drafting Committee.
None has referred to these crucial deliberations of great relevance as did Justice M.M. Ismail, Chief
Justice of the Madras High Court and an erudite Sanskrit scholar, in his excellent book The President
and the Governors in the Indian Constitution (Orient Longman, 1972).
The Drafting Committee observed: “The Drafting Committee considered that it would be desirable to
append ‘to the Constitution an Instrument of Instructions for the President just as there is one for the
Governors’. The new Schedule III-Afor the President was much wider than the original Schedule meant
as an Instrument of Instructions for the Governors (Schedule IV), which also was enlarged.
“The first Instrument said:
“2. In making appointment to his Council of Ministers, the President shall use his best endeavours to
select his Ministers in the following manner, that is to say—to appoint a person who has been found by
him to be most likely to command a stable majority in Parliament as the Prime Minister, and then to
appoint on the advice of the Prime Minister those persons (including so far as practicable members of
important minority communities) who will best be in a position collectively to command the confidence of
Parliament.
“3. In all matters within the scope of the executive power of the Union, the President shall in the exercise
of the powers conferred upon him be guided by the advice of his Ministers.”. Unfortunately both the
Instruments, for the President and the Governors, were dropped at the very last minute before the Draft
Constitution was adopted on November 26, 1949.
On October 11, 1949, T.T. Krishnamachari, said on behalf of the Drafting Committee, that he was not
moving Schedule III-A for adoption, and at the same time he was moving for deletion of Schedule IV,
which constituted the Instrument of Instructions to the Governors. When this motion for deletion of
Schedule IV was made, some members of the ConstituentAssembly objected.

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“The Fourth Schedule was necessary because certain provisions were put in the Constitution in order to
describe the relations of the President and Governors vis-a-vis the Ministers. It has now been felt that the
matter should be left entirely to convention rather than be put into the body of the Constitution as a
schedule, in the shape of Instrument of Instructions, and there is a fairly large volume of opinion which
favours that idea. Therefore, we have decided to drop Schedule III-B (sic) which we proposed as an
amendment and also Schedule IV which finds a place in the Draft Constitution, because it is felt to be
entirely unnecessary and superfluous to give such directions in the Constitution which really should
arise out of conventions that grow up from time to time, and the President and the Governors in their
respective spheres will be guided by those conventions.As these Schedules were felt to be superfluous I
had moved that the second [ sic .] Schedule should be deleted.”
Clearly the Drafting Committee had approved of the Instruments, and so had members of theAssembly.
They were not dropped only because the Drafting Committee later disapproved of them. They were
dropped because it was “felt that the matter should be left entirely to convention”.
However, the rule was set out in explicit terms: appoint a person who is “most likely to command a stable
majority” in the House. Governor Vajubhai Vala could not possibly have said that honestly of B.S.
Yeddyurappa with his 104 MLAs when he invited him to form a government on May 16, 2018. Note the
use of the word “likely”. This rules out parades as well as letters of support. The Governor makes an
honest assessment. TheAssembly’s decision is final. The Supreme Court has held more than once that
in construing the Constitution British Conventions must be kept in mind.
THE VICE OF DEFECTIONS
The issue came to the fore in 1967 when the Congress lost the elections in several States and opposition
conglomerates won power. That was also the time when the vice of defections began to afflict India’s
politics. The question was raised in the Lok Sabha on April 5, 1967, a propos the Rajasthan Ministry.
Union Home Minister Y.B. Chavan promised to seek legal opinion. In a letter dated May 17, 1967, to
three former Chief Justices of India, Justices M.C. Mahajan, A.K. Sarkar and P.B. Gajendragadkar,
former Attorney General M.C. Setalvad, and the then Advocate General of Maharashtra, H.M. Seervai,
he posed these queries:
M.C. Setalvad, formerAttorney General. - THE HINDUARCHIVES
“Three distinct views have been expressed on this matter. One view has been that the leader of the
largest party in the legislature should be invited to form the government irrespective of the consideration
whether or not such a party commands a stable majority. Supporters of this view have also suggested
that the Governor should use his influence to secure advice to summon the newly elected legislature as
early as may be possible so that the extent of the support to the Ministry may be tested in an open
constitutional forum.
“The second view has been that if the party in power had failed to secure an absolute majority in the
newly elected legislature, the leader of that party should not be invited to form the government even if it
were the largest single party in the legislature and that, instead, the leader of the opposition or the leader
of the next largest party should be invited to form the government. The reasoning behind this view is that

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the electoral verdict should be regarded as, in effect, disqualifying the party in power for holding office for
a further term.
“The third view is that the Governor should make the endeavour to appoint a person who has been found
by him, as a result of his soundings, to be most likely to command a stable majority in the legislature.”
Only Setalvad and Seervai cited authorities. The others gave ipse dixit of little value. Setalvad, Seervai,
and Mahajan plumped for the second course. There was no endorsement of the first course and
complete agreement on the third. On June 18, 1967, Mahajan gave the opinion that “the powers of the
Governor... in the appointment of the Chief Minister are the same as the President has in the
appointment of the Prime Minister”.
H.M. Seervai, eminent jurist. - THE HINDUARCHIVES
The Governor is “not bound to invite the leader of the largest party or the leader of the opposition”. Also,
“if a political party in power has failed to obtain an absolute majority, the Governor should respect the
mandate of the people and call upon the Leader of the opposition to form the government, provided the
opposition or a coalition of the opposition parties are in such numbers as to be able to form a stable
government”.
Sarkar, then busy in the Committee of Inquiry on steel “transactions”, gave a scrappy opinion against
both the first and the second courses mentioned by Chavan and ended with the counsel of the third. P.B.
Gajendragadkar said that the third view was correct, rejecting the first two.
By far the best opinion was penned by Setalvad on June 15, 1967 (obviously, the stay at St. Patricks in
Ooty, where the opinion was written, helped). It quoted copiously from recognised authorities. One in
particular, from Ivor Jennings, is very relevant.
“It is expected that when a government is defeated either in Parliament or at the polls, the Queen should
send for the leader of the opposition. There may be two or more parties of opposition. But the practice of
the present century has created an ‘official’ opposition whose leader is ‘the official opposition’.... The
largest party in opposition is the ‘official’ opposition. The rule is that on the defeat and resignation of the
government, the Queen should first send for the leader of the opposition. This rule is the result of long
practice, though it has hardened into a rule comparatively recently. Its basis is the assumption of the
impartiality of the crown. Democratic government involves competing policies and thus the rivalry of
parties....
“The Queen’s task is only to secure a government, not to try to form a government which is likely to
forward the policy of which she approves. To do so would be to engage in party politics. It is, moreover,
essential to the belief in the monarch’s impartiality not only that she should act impartially, but she should
appear to act impartially. The only method by which this can be demonstrated normally is to send at once
for the leader of the Opposition” ...
Jennings proceeded to add that “this rule has for its corollary the rule that before sending for the leader of
the opposition the monarch should consult no one. If he takes advice first, it can only be for the purpose
of keeping out the opposition or its recognised leader.”

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Setalvad endorsed the rule completely as one “based on the principle that the wishes of the electorate
must be respected”. The rule should be followed “even when the largest party in the newly elected House
is still the party which was the governing party before the election though it has failed to obtain an
absolute majority”.
There is an obvious proviso to the rule. If the former opposition party is simply not in a position to form a
government, the head of state must turn to the erstwhile party in power. Setalvad said a coalition of
parties may be formed after or even before the elections.
Seervai also accepted Jennings’ view. If independents hold the balance, they must be consulted
individually. He was unrealistic in dismissing the advantage that accrues to the party which is ﬁrst called
upon to form a government. Setalvad’s opinion was by far more erudite and weighty than that of any of
the others.
SARKARIACOMMISSION'S RULES
The Sarkaria Commission’s report ignored the jurists’ opinions and propounded its own rules. The
Governor should sound the parties “in the order of preference indicated below:
1. An alliance of parties that was formed prior to the elections; 2. The largest single party staking a claim
to form the government with the support of others, including ‘independents’; 3. A post-electoral coalition
of parties, with all the partners in the coalition joining the government; 4. A post-electoral alliance of
parties, with some of the parties in the alliance forming a government and the remaining parties,
including ‘independents’, supporting the government from outside.”
The subject was also discussed in the Report of the Committee of Governors (1971) appointed by the
President “to study and formulate norms and conventions governing the role of Governors”. It decisively
rejected the rigid arithmetical test of the leader of the largest single party. “He has, however, no absolute
right as leader of the largest single party or group to claim that he should be entrusted with the task of
forming a government to the exclusion of all others... a numerically smaller party may command the
support of a majority in the legislature.”
The Sarkaria Report has been cited by many, including this writer. However, I began questioning it in
1996. It was a Commission on Centre-State Relations. For four good reasons, its report deserves to be
studiously ignored on this subject. It went beyond its terms of reference; cited no authority but stated its
ipse dix i t; its members had neither the intellectual equipment nor the background to lend weight to their
words; and it was appointed without consultation with opposition parties.
ACommission on Centre-State Relations was appointed on June 9, 1983, when opposition-ruled States
were restive over the Centre’s encroachments—Jyoti Basu in West Bengal, Ramakrishna Hegde in
Karnataka, N.T. Rama Rao inAndhra Pradesh, FarooqAbdullah in Kashmir and E.K. Nayanar in Kerala.
None of them was consulted either on its terms of reference or its composition. Justice R.S. Sarkaria of
the Supreme Court, who had delivered a desired report on Tamil Nadu’s Chief Minister M. Karunanidhi
after his ouster during the Emergency was a safe pair of hands. On retirement, he was accommodated
as Chairman of the Press Council. In 1990 at a seminar on the Right to Information in New Delhi, he loftily

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reminded the participants that it took the United States two centuries to produce such a law. He was
speechless when he was asked whether he wanted India also to wait for the same term. The movement
began after the Second World War and swept the U.S. and Europe.
The outlook of another member, S.R. Sen was as illiberal and ignorant. A witness who said that the
Constitution was lopsided in favour of the Centre since it was drafted in the wake of Partition and violent
unrest was loudly told, “We are now in the same situation”.Aperson with such an outlook could hardly be
fair to the States.The other member was B. Sivaraman.
To this hand-picked trio was assigned precise and severely limited terms of reference.
“2. The Commission will examine and review the working of the existing arrangements between the
Union and States in regard to powers, functions and responsibilities in all spheres and recommend such
changes or other measures as may be appropriate. 3. In examining and reviewing the working of the
existing arrangements between the Union and the States and making recommendations as to the
changes and measures needed, the Commission will keep in view the social and economic
developments that have taken place over the years and have due regard to the scheme and framework
of the Constitution which the founding fathers have so sedulously designed to protect the independence
and ensure the unity and integrity of the country which is of paramount importance for promoting the
welfare of the people.”
Mark the words “arrangement”. Yet the Three Musketeers went on a frolic of their own authoritatively to
lay down guidelines on the appointment of Chief Ministers and the like. They did worse. Read this: “A
Chief Minister, unless he is the leader of a party which has absolute majority in the Assembly, should
seek a vote of confidence in the Assembly within 30 days of taking over. This practice should be strictly
adhered to with the sanctity of a rule of law.”
They added: “The question of majority can be easily tested on the floor of the House when theAssembly
is in session. However, during the period the Assembly remains prorogued, a Governor may receive
reliable evidence (e.g. one or more letters signed by or a no-confidence motion proposed by, a majority
of members with their signatures authenticated by the Secretary of the Assembly) that the Ministry has
lost its majority.” Letter boxes on the gates of Raj Bhavans would encourage defectors. But whoever
asked them to propend such rules?
Contrast all this with the report of the Centre-State Relations Inquiry Committee (1971) appointed by the
Government of Tamil Nadu. It stuck to its remit: “the relationship that should subsist between the Centre
and the States in a federal set-up.”
Chapter VIII on The Governors dealt with them in that context. No attempt was made to provide them
with guidelines on the working of the parliamentary system. But, then, its members were of a far superior
breed. The Chairman was Dr P.V. Rajamannar, one of the finest Chief Justices of the Madras High Court;
his colleagues were DrA. Lakshmanaswamy Mudaliar and P. Chandra Reddy.
The Supreme Court’s own record has been an uneven one. S. R. Bommai vs Union of India (1993)
(1994)3 SCC1 would test the ingenuity of a Brahmin priest, or a maulvi, or any other priest addicted to
exegesis, to draw a firm and agreed conclusion on a host of issues from the judgments of the nine-

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member bench which decided the case. The main issue was the validity of the proclamations imposing
President’s Rule in six States. The judges travelled beyond it to deliver obiter of varying weight and
quality. The Sarkaria Report was also cited. Justice K. Ramaswamy opined: “A floor test may provide
impetus for corruption and rank force and violence by musclemen or wrongful confinement or volitional
captivity of legislators occurs till the date of the floor test in the House, to gain majority on the floor of the
House” (para 224, page 192). (See also Justice B.P. Jeevan Reddy, para 263, page 219). The criticism is
valid. It suggests curbs on the abuses. Rejection of the floor test implies rejection of democracy itself.
The judgments do yield a consensus on more than one important issue; but none on those germane to
the subject of this essay which, with respect, fell beyond the scope of the issues the court really faced.
Rameshwar Prasad & Ors. vs Union of India & Ors. (2006)2 SCC1 also concerned the validity of the
President’s Proclamation under Article 356 of the Constitution imposing President’s Rule in Bihar. (Will
not “on Bihar” be more appropriate?) It was rightly struck down. In issue was the justiciability of the
Governor’s Report and, relatedly, the President’s satisfaction in deciding whether the facts fell within the
ambit of Article 356. Also in issue were the scope of Schedule X on defections and dissolution of the
StateAssembly.The Sarkaria Report was of course quoted profusely.
Y.K. Sabharwal, former Chief Justice of India. - V.V. Krishnan
Chief Justice Y.K. Sabharwal said in the majority judgment to which B.N.Agrawal andAshok Bhan were
party: “If a political party with the support of other political party or other MLAs stakes claim to form a
government and satisfies the Governor about its majority to form a stable government, the Governor
cannot refuse formation of the government and override the majority claim because of his subjective
assessment that the majority was cobbled [together] by illegal and unethical means. No such power has
been vested with the Governor. Such a power would be against the democratic principles of majority
rule” (para 165, page 129).
It would, therefore, be safe to conclude that there is no ruling of the Supreme Court laying down the law
on the main issue in the recent Karnataka case that could be said to be binding underArticle 141. It says
that “the law declared by the Supreme Court shall be binding on all courts within the territory of India.”Ad
hoc orders are made by the court to resolve an immediate crisis.They do not “declare” the law.
THE COMPOSITETESTIN U.P.
The law report on Jagdambika Pal vs Union of India & Ors. (1999)3 SCC 95 is rightly described as
(Records of Proceedings). Only two short orders by a three-member bench are set out. The first, made
on February 24, 1998, reads: “The order which commends to us is as follows: (i)Aspecial session of the
Uttar PradeshAssembly be summoned/convened for 26.2.1998, the session commencing forenoon. (ii)
The only agenda in the Assembly would be to have a composite floor test between the contending
parties in order to see which out of the two contesting claimants of chief ministership has a majority in the
House. (iii) It is pertinently emphasised that the proceedings in the Assembly shall be totally peaceful
and disturbance, if any, caused therein would be viewed seriously. (iv) The result of the composite floor
test would be announced by the Speaker faithfully and truthfully.”
The order of February 27 says: “We stand [ sic.] informed through the statements made at the Bar as also

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through the fax communication from the Speaker, U.P. Assembly, that the composite floor test, in strict
compliance of our order dated 24.2.1998 did take place orderly and peacefully and as a result thereof
225 votes were secured by Shri Kalyan Singh and 196 votes by Shri Jagdambika Pal, claimants in rivalry
to the chief ministership of the State.This position concededly has emerged as of late. ...
“The impugned interim order of the High Court in putting Shri Kalyan Singh in position as Chief Minister
should be and is, hereby, made absolute subject of course to the democratic process. Shri Kalyan Singh
had at a point of time offered to the Governor facing floor test, which was declined. On his dismissal, his
rival on being sworn in as the Chief Minister was required to undergo the floor test in a time frame. We
have facilitated both in one go.”
There was absolutely no warrant for this innovation of a hybrid—a composite test. It was devoid of
precedent. The law was not discussed. Pragmatism of a sort prevailed. The proper course was to direct
vote on a motion of no-confidence against the sitting Chief Minister.
GOACASE
The oft-quoted order in the Goa case does not help, either. Chandrakant Kavlekar vs Union of India &
Anr. (2017)3 SCC 758.
“The result of the electoral process in the State of Goa was declared on 11.3.2017. The said Assembly
comprises of 40 elected members. The party having support of at least 21 elected members would
obviously have majority. Annexure B reveals that besides the 13 elected members from the BJP
Legislature Party, three members from the Maharashtrawadi Gomantak Party, Goa, and another three
members from the Goa Forward Party have expressed their support to the BJP Legislature Party.
Besides the above, two elected independent members have also been mentioned in the letter of the
Governor—Annexure B, as having expressed their allegiance to the BJP Legislature Party. It is therefore
that the BJPLegislature Party is shown to have the support of 21 MLAs. ...
“We were satisfied that the instant sensitive and contentious issue raised on behalf of the petitioner can
be resolved by a simple direction, requiring the holding of a floor test at the earliest. The holding of the
floor test would remove all possible ambiguities, and would result in giving the democratic process, the
required credibility.
Goa Governor Mridula Sinha in March 2017 with newly sworn in Chief Minister Manohar Parrikar, BJP
president Amit Shah, Union Minister Nitin Gadkari, and Venkaiah Naidu, then a Union Minister. - Atish
Pomburfekar
“We, therefore, hereby direct that all prerequisite formalities for holding a floor test, including the
formalities required to be completed by the Election Commission, be completely by 15.3.2017. We
request the Governor of the State of Goa to ensure that a floor test is held on 16.3.2017, and the only
agenda for the day would be the holding of a floor test to determine whether the Chief Minister
administered the oath of office has support of the majority. The floor test shall be held on 16.3.2017, as

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early as possible, but surely during the course of the day.” The composite test was buried,
unceremoniously.KARNATAKA,AUNIQUE CASE
The net result? 1. There is no binding ruling by the Supreme Court on the issue raised in the Karnataka
case. 2. The Sarkaria Report is irrelevant and is, in any case, unsupported by authority. 3. Y.B. Chavan’s
“jurists” were of little help, except for Setalvad and Seervai. 4. The rule set out in the Instrument of
Instructions stands validated by authorities on constitutional law like Ivor Jennings’ Cabinet government
(page 32). The head of state must send for the leader of the opposition if the government loses the
election. But his march to power can be interrupted if the defeated party forges a coalition which
commands a majority in the House. As S.A. de Smith held, the test is “a reasonable prospect of
maintaining itself in office” (Constitutional andAdministrative Law, 1985, page 176).
David Butler’s Governing Without A Majority: Dilemmas for Hung Parliaments in Britain (Macmillan,
1983) mentions two stages in government formation. In one the prospective Prime Minister or Chief
Minister is simply asked to explore possibilities of forming a government. N. Sanjiva Reddy gave this
mandate to Y.B. Chavan on the fall of the Morarji Desai government in 1979. He declined. The second
stage is reached when the candidate says he can form the government and is sworn in.
Both Brazier and Butler are agreed that the head of state must ask the coalition leader to produce: (a) an
agreed programme; (b) accord on the leader; and (c) accord on distribution of portfolios. The Governor
of Karnataka was sorely remiss in not demanding such a pact. Also of assistance is a Sharthclyde
Analysis Paper (1941) entitled The Back of the Envelope: Hung Parliament , the Queen and the
Constitution.
To sum up: 1. An incumbent Prime Minister should not be invited to form a government once his party
loses its majority in an election even if it emerges as the single largest party. 2. The President should, in
such a case, invite the next single largest party to form a government. 3. Both rules are, however, subject
to the overriding proviso that any coalition that commands a majority in the house is entitled to be invited
to form a government. 4. The President ought to insist on a clear agreement on the coalition’s leader,
besides a common minimum programme plus an accord to work in coalition, both of which should be in
writing and made public. There must be a written undertaking not to seek dissolution for a specified,
reasonable period of time in order to avert the kind of situation that the Rajiv Gandhi-R. Venkataraman
deal created in 1991. 5. No party is entitled to demand any assurances from the President that he grant a
dissolution in the event of its government’s collapse. Such a demand would be improper. The
established rules as to grant of dissolution should prevail in all cases. In extreme cases the President
can ask the parties to hold discussions among themselves under his auspices but without his
participation. 7. At all times a government must be in place to tender advice to the President, if need be,
as a caretaker government.The government must go on. Indian democracy brooks no interruption.
SRI LANKAN CASE
All this does invest significant discretion in the head of state, but its exercise is very much open to judicial
review. It is time we consulted the rulings of the Supreme Court of Sri Lanka.Alandmark judgment of the
Supreme Court of Sri Lanka, delivered on August 16, 1993, is particularly relevant. Elections to the
Provincial Council were held on May 17, 1993. The court quashed the orders of appointment of Chief

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Ministers by the Governors of the North-Western and Southern councils. Three recognised political
parties were in the fray: the United National Party (UNP), the Democratic United National Front (DUNF),
and its ally, People’s Alliance (P.A.) led by Sirimavo Bandaranaike’s Sri Lanka Freedom Party (SLFP).
None of the parties gained an absolute majority. In the North-Western Provincial Council, the UNP won
25 seats, the P.A. 18 and the DUNF nine. In the Southern Provincial Council, the UNPwon 27, the P.A. 22
and the DUNF six. Though the P.A.-DUNF alliance was in a majority in both provinces, in both the UNP
was asked to form the government. The UNP, then in power at the Centre, followed the Indian example
and got its own party installed in power no matter how improperly.
Article 140 F(4) of the Constitution of Sri Lanka reads: “The Governor shall appoint as Chief Minister the
member of the Provincial Council constituted for that province, who, in his opinion, is best able to
command the support of majority of the members of that Council. Provided that where more than one
half of the members elected to a Provincial Council are members of one political party, the Governors
shall appoint the leader of that political party in the council as Chief Minister.” Since none of the three
political parties had won more than half of the seats, the proviso was inapplicable.
G.M. Premachandra (DUNF) and Amarasiri Dodangoda (P.A.) filed petitions in the Court of Appeal on
May 24 against the Governor of North-Western Province, Montague Jayawickrema, and the Governor of
Southern Province, M.A. Bakeer Markar, challenging the appointment of the Chief Ministers. The Court
ofAppeal referred the issue of the law to the Supreme Court for its rulings.
The facts were clear. In both provinces, secretaries of the allied parties had submitted to the Governors,
on May 19, declarations of agreement to work together backed by affidavits by all their councillors. As
against this, both the UNP appointees submitted letters claiming majority support but did not explain how
that was achieved. Nor did they identify the councillors whose additional support gave them a majority.
The Supreme Court heard and decided the two cases together.
Its judgment sets a precedent of high persuasive value in our courts since the constitutional scheme is
almost identical. The court said: “We have no doubt whatsoever as to the purpose for which Article 154
F(4) gave the Governor a discretion. By the exercise of the franchise the people of each province elect
their representatives for the purpose of administering their affairs. The Governor is given a discretion in
order to enable him to select as Chief Minister the representative best able to command the confidence
of the council, and thereby to give effect to the wishes of the people of the province. The discretion is not
given for any other purpose, personal or political.”
The court ruled that this was not a “political question”. The Governor’s decision cannot be based on
policy but on an objective verifiable criterion for “assessment of support in the council”. It quoted
extensively from the rulings of our Supreme Court. Its observation that “the IndianArticle 163 [ sic.] does
not specify any guidelines” is true only in the literal sense. It presumably had in mind Article 164, which
simply empowers the Governor to appoint ministers. This is, however, based on and regulated by
conventions of parliamentary democracy, debates in the Constituent Assembly and Supreme Court
rulings. The Supreme Court of Sri Lanka rightly applied the principles of administrative law to the
Governor’s exercise of his discretion.
The court further ruled: “The exercise of the powers vested in the Governor of a province under Article

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154 F(4), excluding the proviso, is not solely a matter for his subjective assessment and judgment. It is
subject to judicial review by the Court of Appeal. In applications for quo warranto, certiorari and
mandamus, the Court of Appeal has power to review the appointment, inter alia, for unreasonableness,
or if made in bad faith, or in disregard of the relevant evidence, or on irrelevant considerations, or without
evidence.... The Governor’s decision involves a constitutional power and duty of the Governor, and a
constitutional right of the Petitioners (in common with the other councillors) to the proper exercise of
such power and duty; judicial review is not excluded.”
The petitions were remitted back to the Court ofAppeal for trial in the light of the Supreme Court’s rulings.
Its judgment on October 8, 1993, underlines the implications of the apex court’s judgment.
“It is thus plain to see that where the petitioners have adduced the best possible evidence in support of
their claims the persons appointed as Chief Ministers have adduced no credible information of their
claim of support by a majority of the members. The bald statements of support referred in the documents
of the respondents cannot stand scrutiny in the light of solemn declarations made by the members of the
two parties who constitute a majority that they support the respective petitioners for appointment as
Chief Ministers. Any person would be acting grossly unreasonably if he decided to base his decision
without taking into consideration the uncontradicted evidence adduced by the petitioners and upon the
hearsay and unverifiable claims made by the persons appointed as Chief Ministers.”
The scope of judicial review was to test the “reasonableness” of the Governor’s decisions. “The
Governors have not considered the best evidence in regard to the matters which they are bound to
consider. It also shows that Governors have chosen to act on hearsay claims that are unverifiable. It has
to be borne in mind that the power of appointing a Chief Minister is vested in the Governor by the
Constitution being the supreme law of the land. [The] Constitution lays down the criteria on which such
an appointment should be made. The discharge of its power is a matter of grave public concern. It cannot
be shrouded in a veil of secrecy. We have to observe that the claim of each Governor that he made the
appointment on the basis of undisclosed confidential inquiries, tends to cast the basis of the respective
decisions into secrecy.”
The Governors’ orders were quashed as being “unreasonable and illegal”. Writs of mandamus were
issued to them “to appoint a Chief Minister of the province according to law”. The result is a caution to all
concerned. First, the power of appointment of the chief executive, whether at the Centre or in the
provinces, is strictly regulated by conventions established over the years. Secondly, those conventions,
ascertainable from recognised authorities, have the force of law. Lastly, the power of appointment is not
exempt from judicial review. The Supreme Court of Sri Lanka ruled, as has our Supreme Court, that
conventions are judicially enforceable ( S.C. Advocates on Record Association vs Union of India (1993)
4 SCC 441 at page 656).
Horse-trading is a poor description of the games our politicians play and cite constitutional dicta in
support. Harold Wilson described the game more accurately. It is “the practised performance of latter-
day politicians in the game of musical daggers; never be left behind holding the dagger when the music
stops”.
…………………………………………..
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marks a continuum with demonetisation and threatens the viability of millions of small and medium
enterprises.
THE Goods and Services Tax (GST), heralded by a media blitzkrieg that touted it as a “game changer”,
was launched on the midnight of June 30. The Narendra Modi government, in keeping with its penchant
for drama, decided on a midnight launch at a special session of Parliament, an obvious attempt to draw
parallels with the “tryst with destiny” speech of India’s ﬁrst Prime Minister Jawaharlal Nehru on the eve of
Independence in 1947. At the launch, Modi described the GST as a “good and simple tax”, but there is
widespread scepticism that the new tax regime would be anything but simple; as for whether it would turn
out to be good, there is plenty of doubt about that too.
Missing from the event was the main opposition party, the Congress; M.P.s of the Communist Party of
India (Marxist) also chose to stay away, although its former Finance Minister from West Bengal was in
attendance. For the Congress, which had only last year allowed the passage of the enabling legislation in
Parliament, this was a turnabout of sorts. What explains this? It is quickly becoming clear that there is a
continuum in the policies of the Modi government and its overall approach to policy-making that is
targeting large sections of the people engaged in small- and medium-scale occupations. Seen from this
perspective, the dramatic announcement of demonetisation and its ravaging impact on those engaged in
small-scale and informal occupations, including the calamitous impact on agricultural product prices,
has a connection to what is likely to happen in the name of the GST.
The GST was always positioned as a tax reform, one which would ease the tax burden, make
compliance simpler, reduce the multitude of taxes levied by the Centre and the States by unifying them,
and streamline and modernise tax administration. Moreover, the GST system provides for business
entities to take “credit” for taxes paid along the supply chain to prevent the “cascading effect” of paying
taxes on top of taxes already paid.And, all this was to be achieved without either the Centre or the States
taking a hit on their resources. Moreover, this latter objective was to be achieved without impinging on the
States’ powers of taxation that are enshrined in the Seventh Schedule of the Constitution and which
constitutes what is regarded to be a part of the “basic structure” of the Constitution. This tough balancing
act explains the long and arduous road to GST, which began in 2000 (“Akiller tax”, Frontline, September
2, 2016).
It was always clear that a major reform such as this required a fair amount of sagacity on the part of the
Centre, which, after all, enjoyed lopsided powers of taxation in the Indian constitutional framework;
indeed, this explains why the introduction of the ValueAdded Tax (VAT) was preceded by a long struggle
in which the States bargained hard before they ceded the ground that was rightfully theirs under the
Constitution.Akey problem of the new GSTregime is the complication because of the multitude of rates.
Indeed, the government’s slogan, “One Nation, One Market, One Tax”, is misleading because it still does
not bring about a uniﬁed single tax rate that is applicable on all goods and services across the country.
Instead, there are basically rates of 5, 12, 18 and 28 per cent, apart from a zero rate on articles of mass
consumption, a 3 per cent rate on bullion and a “sin” cess on articles such as tobacco products.
Moreover, a critical universal input, crude petroleum and its products, which contribute to over one-third
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Asenior officer in the indirect tax administration, who has been involved in discussions on the modalities
of the GST over the last several years, told Frontline: “The current version of the GST will create serious
problems. It is going to result in not only tax evasion but also considerable hardship for small
businesses.” Specifically, the multiple rates would increase litigation and lobbying by business entities to
shift goods or services into another bracket, he said.
Referring to the tax rate of 28 per cent on tractors (which was reduced to 18 per cent just before the
launch at midnight), he said, “There is already large-scale evasion in this business, the high rate would
only spur it further.”
Complicated structure
He pointed out that in all internal discussions within the tax administration prior to the Modi government,
the proposal was to only have, at the most, two rates of GST—one for raw materials and inputs and the
other applicable to goods and services meant for final consumption. “The GST that is now launched
suffers from a fatal flaw in design that would become difficult to remedy later,” he said on the eve of the
launch.
The design of the GST and its hasty rollout without adequate preparation and capacity building would
spur tax evasion of a totally new dimension, this officer said. “Earlier, tax evasion was said to occur
because of high tax rates, but now this will happen not because the tax payer does not want to pay but
because of his/her inability to incur the cost of compliance,” he said. Already, a cottage industry of sorts
has developed, with intermediaries masquerading as “service providers” or “tax enablers” offering
solutions to beleaguered tax payers who dread the onset of GST.
Speaking to Frontline on the night of June 30, before the GST launch, a tax official in the Tamil Nadu
government, said key elements of the GST Network “are woefully behind schedule”. “The rollout has
been very late,” he said and claimed that “we have not yet tested the platform”. More critically, key
elements of the software, such as the Application Program Interface (APIs) for the different modules in
the platform were made available to the Department “only days before the launch”. The APIs are a key
element because they act as a bridge between the different pieces of software that use the platform; in
fact, they are essential for GST service providers (GST Suvidha Providers) to access the GSTN (GST
Network) platform.
The official’s revelation that the APIs are just starting to be despatched implies an utter lack of
preparedness. A software developer familiar with APIs told Frontline that the newer versions of APIs
“cannot simply be stitched onto the existing ones”.Any updates would require Suvidha Providers to also
suitably modify their software. Otherwise, there is the risk of even a small change causing a major impact
on the platform. Referring to the APIs that have just been received in Tamil Nadu, the official said: “We
have not even started testing these (APIs). We do not even know what they look like!”
The officer quoted above also pointed out that personnel in the department have been “trained only on
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User Acceptance Testing (UAT) in order to evaluate the system’s compliance with business
requirements and to assess whether the system is acceptable for delivery. “In fact, there does not even
seem to be a road map to do this,” he said.
Seen in this context of gross underpreparedness, Finance Minister Arun Jaitley’s announcement, made
just before the launch, that industry and trade have time until September to file returns for July is but an
admission of failure, not the magnanimous gesture that he appeared to portray it to be. But even if the
platform is rolled out smoothly, there are fundamental problems with the design, which impose a heavy
burden on the weakest link in the Indian business environment—small- and medium-sized units.
The GST system that has been launched requires each and every transaction made by a business unit to
be “matched” with every single purchase or sale, what is termed as a “match” of invoices. For this, a
business entity has to “know” the GSTIN (GST Identification Number) of the counterparty before it does
the transaction; and, even more onerously, the business unit is responsible for the counterparty’s action
insofar as it must ensure that this is reflected in the counterparty’s entries in the system.
The owner of a small hardware shop in Bengaluru told Frontline : “Normally a transaction happens once
the buyer and the seller agree on the product and its price, but now I have to not only sell my product but
also ensure that the purchasing party conforms to the new regulations.”
The apprehension that the GST’s flawed structure would result in increased tax evasion is echoed by this
dealer. “The new rules impose not only costs in terms of systems (computerisation and personnel
familiar with accounting systems to operate them) but also the sheer risk they expose traders to which
are completely outside their control,” he said. “It is for these reasons many would simply avoid the system
altogether,” he remarked.
The tax officer quoted earlier said the system of matching invoices is “completely unique to India”.
“Nowhere in the world do they have a system like this, which requires parties to match invoices; they are
usually self-declared for the purpose of settling tax credits,” he said. Most countries simply require
business units to file a consolidated statement of invoices with their counterparties.
Matching of invoices
“Invoice-based matching would lead to great hardships for businesses, especially small ones.” It would
require a trader to be familiar with the specific HSN (Harmonised System of Nomenclature) code for each
commodity. “How does the administration expect small traders to know the HSN code for every single
commodity they are dealing in?” asked the tax officer.
Wider consultations and the study of best practices the world over would have ensured a better design.
Greater attention to detail would have been possible, said an officer, referring to the fact that the tax rate
and the method of its imposition need to take into account the nature of the supply chain. “The bullion
trade, for instance, is characterised by a short supply chain, in which the link between the manufacturer
and the final consumer does not normally happen through a distributor.” In trades such as this, the supply
chain is short, implying limited physical movement of goods that can be inspected, leaving greater scope

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for tax evasion. “We had suggested that in trades with short supply chains a compounded tax based on
turnover ought to be levied, but obviously bullion traders carry more clout,” he quipped.
Small units’burden
While these may be the daily hazards small units will face, they do not end here. There is also the burden
of filing multiple returns, which, according to tax experts, may be at a minimum of 49 over the course of a
financial year. Contrast this to the two returns that needed to be filed earlier by those filing returns for
service tax during a year.
To make matters worse, the higher costs of compliance—not just financial but in terms of increased
capacity that is necessary to cope with the demands of the new system—have a bias against smaller
units.
The sheer economic cost is one aspect of the problem, as demonetisation has demonstrated so
dramatically since November 2016. Just as “going digital” was not a costless and painless option for
small and informal enterprises, coping with GST is likely to impose similar pain in the immediate short
term. Many units may turn unviable in the short term, unable to cope with the demands of the new regime.
But things could turn out worse for even those who manage to survive the first wave of the onslaught
under the new regime. This pertains to the logical structure of the GST in which transactions are in a
chain. Since tax credits can be claimed for taxes paid down the line, many small business units would
need to be GST-compliant simply in order to survive. This is because larger units that source from small
businesses would demand that the small ones be GST-compliant so that they are able to adjust tax
credits against their tax liabilities. The small units that are unable to do this will be simply cast aside. This
perhaps explains why captains of industry have been unabashed admirers of GST. This is because big
business sees GSTas a means of uprooting competition from the smaller units or at the very least putting
pressure on them. These are still early days, but it would not be surprising if the GST regime paves the
way for greater consolidation through takeovers and mergers and acquisitions following bankruptcies of
small and medium enterprises.
The nationwide agitation of small-scale traders and businesses in cities and smaller towns across the
country—in Delhi’s Chandni Chowk, in Surat, in Ghaziabad and elsewhere—points to simmering unrest.
The fact that the government decided, only hours before the Parliament session, to reduce the GST rate
on fertilizer even as the country is reeling under extreme agrarian distress is likely to be interpreted not as
an act of magnanimity but as utter lack of sensitivity for the weak. If demonetisation was widely seen as a
gross example of the Modi government’s obsession with the optics of a spectacle, the GST has
reinforced that impression.
The imposition of GST, portrayed as a revolutionary reform, ought to have been preceded by a respect
for the democratic character of the polity. This would have meant wide-ranging consultations with
economists, especially experts in public finance, besides chartered accountants, lawyers and a genuine
cross section of business interests, instead of just its creamy layer. In short, a dialogue with all
“stakeholders”, that much-abused term that is fashionable in cbusiness and government circles, would
have perhaps resulted in a better structure. Even if it had not sorted out all problems, the dialogue would

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have ensured at least the goodwill of all those involved. Such an approach would also have sanctified the
notion of reform as a continuous process, not merely an event to be showcased.
The senior tax official quoted earlier told Frontline that the entire structure “has been crafted by the
bureaucracy without building into the tax regime valuable inputs that would have been made available by
expertise outside government”. This, and a more sagacious approach, in which the Centre’s tax-take
was not the only motive, may have resulted in a simpler structure.
“If States’ apprehensions of lower revenues post-GST had been assuaged through legal guarantees,
they may have been willing to agree to fewer slabs,” he pointed out. Moreover, the flaw in the design
arises from the fact that the GST rates have been arrived at merely by subsuming existing State and
Central taxes and levies. “A proper GST would have been arrived at if the government, in partnership
with the States, had gone to the drawing board with the intention of working out a fresh design,” he
argued. “Instead,” he said, “we have a slapdash approach.” “How can this be termed revolutionary?” he
asked.
…………………………………………………………………………………..........................................
The euphoria over the Goods and Services Tax masks the deadly assault on tax policy as a means of
promoting equity.
The unabashed and unprecedented enthusiasm with which the impending imposition of the Goods and
Services Tax (GST) is being welcomed borders on the surreal. Never before has so much hope and hype
been placed on a tax. The media’s acceptance, without the slightest critical scrutiny or scepticism, of the
promise that the tax would set India free has been truly remarkable. The rare sight of broad unanimity
among parties across the political spectrum in and outside Parliament was also extraordinary, even if it
revealed the manner in which grave and weighty issues of economic equity and constitutional propriety
had been pushed far into the background. In short, never has so much good been promised to all Indians
in the name of a tax.
Addressing the Lok Sabha on August 8, Prime Minister Narendra Modi invoked the name of Mahatma
Gandhi and his clarion call to the British to “Quit India” on the same day in 1942 to term the GST as an
instrument that would “liberate Indians from tax terrorism”.
Finance Minister Arun Jaitley repeatedly echoed the slogan “One Nation, One Tax” to suggest that the
imposition of the GST was in keeping with the new-found zeal with which nationalism has been
espoused, especially by the right wing of the political spectrum. His claim, amplified by others in the
media, that the GST would result in a unified national market, appeared to go uncontested. Perhaps it
would have appeared anti-national to ask what else the Indian market was all these years.
If politics played second fiddle to the grave, weighty and jargon-filled techno-economic logic that
advocates of the GST offered on a daily basis in the run-up to the Constitutional Amendment Bill in the
two Houses of Parliament, economists had already vacated the field quite some time ago, paving the
way for a no-contest on this vital issue of tax policy.

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Economists, especially those specialising in macroeconomics, which provides a broader context in
which tax policy functions, have generally, until very recently, stayed away from the issue. The country
has undoubtedly been poorer as a result. Euphoria, fed by reckless assertions such as claiming the GST
would result in an almost 2 per cent increase in the gross domestic product (GDP), replaced economic
logic, without which it would amount to nothing short of voodoo economics.
The long-cherished ideals in the realm of taxation, especially those pertaining to the promotion of social
and economic equity and justice, have been thrown out of the window in the single-minded pursuit of a
new ideal, that of improving the ease of doing business, which is mainly relevant to a narrow sliver of the
population.
Logic of the GST
Truth be told, the GST is nothing but a hybrid version of the value added tax (VAT) that replaced the sales
tax that was constitutionally guaranteed to remain in the hands of the States so that it offered a modicum
of financial autonomy vis-a-vis the Centre. In fact, the “reforms” in the sales tax regime go as far back as
1986, when the Indian government introduced the modified VAT or Modvat. The argument advanced in
the move towards these reforms was based on the notion that a tax on the value added, rather than the
value of the transacted output, would prevent a “cascading effect”.
The provision for taxing only the value added during each stage of the production cycle would eliminate
the scourge of “double taxation”, it was argued. Thus, VAT enabled companies to claim “credits” for taxes
paid by input suppliers in the earlier stages of the production cycle. It, therefore, means that at any stage
an economic agent only pays taxes on the quantum of contribution it has made to the value of the good it
has processed. Moreover, the elimination of repeatedly taxing the same good makes it possible for the
tax authorities to reduce the number of tax rates, implying a simpler and more compact tax system. Thus,
it becomes possible for the system to align rates according to the policymakers’ social and economic
objectives. For instance, essential commodities that are of importance to the poor could be assigned a
“zero rate”, while tobacco, considered a “sin good”, could be taxed at a penal rate.
While the logic of VAT was pretty straightforward, there was nothing logical about the move to get the
States to move into a straitjacketed system where they had very limited room to manoeuvre with rates
depending on their individual needs and developmental priorities. At the time VAT was introduced (in
2005), the sales tax was the primary source of revenue for the States—on average about 80 per cent of
overall revenues. But what VAT brought was more than just a mere improvement in the efficiency of tax
administration; it curtailed the scope for the States to adjust the rate. What GST does is to take matters
completely out of the hands of the States by tying all of them to a uniform rate, irrespective of their specific
needs or priorities.
The 122nd Constitutional Amendment that enables the rollout of the GST regime in April 2017 provides
for a compact list of categories of goods and services that would be concurrently taxed by the States and
the Centre. There will be a “negative list” of goods, basically essentials, on which no tax would be liable.
While industrial inputs and packaging material would be grouped together and subjected to a tax rate of
about 5 per cent, bullion, gold, and silver would be taxed at the rate of about 2 per cent. Luxury goods
such as high-end cars and “sin” goods like tobacco would attract a rate of 30 per cent or more.

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Under persistent and vehement opposition from the States, petroleum and liquor, which account for
almost 30 per cent of their revenues on average, have been kept out of the GST net for now.All remaining
goods will be subject to the standard rate, which has been a subject of some controversy. While much
attention has been focussed on what the so-called revenue neutral rate (RNR) ought to be, there has
been little conceptual clarity from those championing the GST.
Business, especially big business, saw the GST as the most important tax/regulatory reform since
Independence, said A. Sarvar Allam, Additional Commissioner of Commercial Taxes, Tamil Nadu.
“Today, businessmen constitute the most influential and powerful section of society and hence, whatever
matters to business is blown out of proportion,” said Allam, who has been a tax administrator for almost
30 years. Hinting at the misplaced priorities and the leeway given to businesses in general, he pointed to
the fact that amendments to legal provisions on child labour now allow child labour in family-run
businesses. “The imposition of the GST is not going to make any difference to the common man or
woman, unless it results in inflation,”Allam told Frontline.
States’apprehension
The Congress made an egregious error of judgment by demanding that the standard GST rate (inclusive
of the State GST and the Central GST) be capped at 18 per cent in the Constitution Amendment Bill.
Naturally, it found no support from any State, which feared that the cap would set a rigid limit that may
affect their revenue streams in the future. In any case, the Congress was already on board, given that
former Finance Minister P. Chidambaram was the first to initiate the move towards the GST during the
course of his Budget speech in 2006.
Buoyed by the euphoria over the passage of a major hurdle in his reforms push, Modi made the candid
admission that the “many doubts” he had had about the GST when he was Chief Minister of Gujarat
helped him understand the worries of State governments. This was an obvious reference to the concerns
raised by many States such as Tamil Nadu, Gujarat, Maharashtra and Goa. In fact, Members of
Parliament from theAll IndiaAnna Dravida Munnetra Kazhagam (AIADMK) walked out of both Houses of
Parliament when the Constitution Amendment Bill was moved, citing infringements of the constitutional
guarantees of States’rights in the matter of taxation.
The fact that the GST is essentially a tax on consumption implies that the States in which final
consumption occurs get the privilege of collecting the tax. The serious implication this has for States that
have an edge in manufacturing explains the opposition to the GST from States such as Tamil Nadu,
Gujarat, Maharashtra and Haryana.
Typically, when a large industrial house establishes a base in a particular State, aiming to serve the
national market, it is obvious that only a fraction of its output would be sold within its home base. It, thus,
“exports” goods and services to not only other States but overseas too and these are the sites of final
consumption of its products. The GST’s design as a destination-based consumption tax has important
implications for States that are the home base of these manufacturing companies. They are worried that
after having wooed these companies with fiscal incentives over the years, they now stand to lose
revenues because of the GST’s design.

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Allam cites the example of the Korean car major Hyundai, whose main base in India is near Chennai, to
explain why States that are major sites of manufacturing activity are worried. Hyundai sells only about 10
per cent of its cars within Tamil Nadu; 40 per cent of its cars are sold in other parts of India and the rest
exported.
During the manufacturing process the company would have procured goods and services from within the
State, for which it would have paid a tax component. Now the providers of these components, capital
goods, other inputs and services will take credit for the taxes they have paid. But if the final sales are
mostly happening in other States, such tax credit would be apportioned to those destinations from the tax
revenue gathered in the State where the manufacturing occurred.
So, even if the production has happened in one State, a portion of the GST revenue gathered in the
manufacturing base has to be transferred to the State where the final consumption happens. In the case
of exports, the State would have to refund to the manufacturer on a proportionate basis the portion of the
GST revenue paid by the company. So, in the case of a company such as Hyundai, the State may end up
losing a significant portion of the overall revenue that it “earns”. This also highlights the fact that the GST
could actually be a fiscal disincentive to States aspiring to becoming manufacturing centres by climbing
on to Modi’s “Make in India” bandwagon.
Hazards of ‘neutral’rate
It is important to recognise that the RNR would still leave some States as losers without materially
affecting the collections of the Centre. The shifting of the point of levy from one State to another is not
going to materially affect the Centre’s overall take from the tax. But an individual State’s take would
depend on a complex array of factors. A State’s trend in revenue collections over time, its relative tax
buoyancy, the mix of its productive capacity—for example, how much of the State’s output is from
manufacturing and its level of consumption of goods and services— and other factors would determine
what its individual RNR ought to be.
Since these factors change over time, often on an annual basis (depending, for instance, on whether the
State is affected by a drought or a flood in a particular year), they are even more difficult to calculate.
There is, thus, a very real possibility that a straitjacketed RNR, which is fine from the Centre’s point of
view, leaves the States to bear the burden of revenue shortfalls. No compensation, irrespective of how
long it continues, can address this fatal flaw in its conceptual design. Fundamentally, this arises from its
failure to incorporate a dynamic model that remains rooted in reality. The cynical motive behind this faulty
design is the fact that the Centre would remain unaffected because it would get its share of the kitty in any
case.
Allam says the lack of a “cross credit mechanism between service tax and VAT” means that the States do
not have information on consumption of services by industries. “This is another difficulty experienced by
the manufacturing States in determining not only what their standard rate ought to be but also to project
the revenue losses they may incur because of the introduction of GST.”
Unless the list of goods and services exempted and those falling under different rates are finalised by the

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GST Council, which is to be chaired by the Finance Minister, it would be difficult for the manufacturing
States to determine the RNR and the expected revenue loss,Allam said. “As the quantum of production,
consumption and export of goods and services varies from State to State, logically there cannot be a
single RNR for all the States.The RNR will not be based on any logic, it will simply be a rate,” he added.
It is being claimed that States that are mainly consuming centres of goods and services would benefit
from the GST as they stand to gain from the resulting buoyancy in revenues. There is speculation that
this is the reason why even Left-led States such as Kerala have welcomed the reform. For instance, it is
said that the Kerala economy, which is heavily biased towards services, would benefit. But there are
several problems with this simplistic assessment.
First, since consumption can only happen out of incomes, there are serious limits to how long this can go
on in the absence of meaningful economic activity. Secondly, the levels of consumption in States such as
Bihar, Jharkhand and Odisha are already much lower than in the rest of the country. What meaningful
benefit would these States draw from a GSTregime that is supposed to favour “consuming” States?
The design of the GST Council, which is to decide the rates, especially the RNR, and act as a body to
settle disputes between States and the Centre is another issue raised by critics. It is also being burdened
with the task of determining the nuts and bolts of the GST structure to become operational. Although all
States are to carry a vote in the Council, the Centre is to have a one-third share of the votes. But any
decision by the Council would require a three-fourths majority.
Jaitley has made much of this, pointing out that this has been done in the spirit of “cooperative
federalism”. But the point is that by virtue of its share of votes in the Council, the Centre has an effective
right to veto any move not to its liking. It is indeed laughable that a poor (or a weak or small) State with
limited resources at its command would be able to get a favourable verdict in the Council without the
blessings of the Centre, no matter how logical or fair its case may be, even if it has the support of other
States. Moreover, given the nature of Centre-State financial relations, it is inconceivable that such States
would wish to antagonise the Centre and jeopardise the discretionary transfer of resources to them from
the Union government.
If the Council works like a katta panchayat (or khaps as they are called in the northern badlands)
attempting to settle disputes among States and the Centre, there is the danger that the long history of tax
jurisprudence may be jettisoned, raising the possibility of prolonged and messy litigation. A senior tax
official told Frontline that the Council would require the support of “a strong secretariat manned by
experts in taxation and public finance to be effective”.
The enthusiasm with which reforms in indirect taxation have been welcomed stands out in sharp contrast
to the question of reforms in direct taxes, which are far more critical for an unequal society such as India.
It is well known that indirect taxes are regressive in nature for two reasons. First, a consumption tax such
as the GST falls equally on everybody irrespective of the disparities in income levels. Moreover, there is
no escape from the tax because it is built into the price; this is not the case with income tax or other direct
taxes because there are ways in which they can be avoided or evaded.
India’s tax-GDP ratio is about 16.6 per cent, much lower than in other emerging markets (21 per cent)
and the average in the OECD countries (34 per cent). The contribution of direct taxes to the total tax of
the Central government has declined from 61 per cent in 2009-10 to just over half in 2015-16. The direct

India Leadership Conclave 2018 - Introspection White Paper

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