Pak JIT to visit Pathankot AFB - Modi's "Jaswant" moment?

For a government that has been generally pilloried for not being "radical" enough in its policy interventions, the Modi government has lately shown a strange penchant for spending an enormous amount of political capital on small impact initiatives.

The latest of them is the visit of the Pak JIT to India to investigate the Pathankot AFB terror attack. to be sure, this isnt unprecedented, there was a Pakistani Judicial Commission that visited India in 2012 to record the testimony of witnesses. But there are key differences between 2012 and 2016. For one, the composition of the Pak team - this time, it consists purely of police/intelligence officials, including a junior officer of the ISI. But more intriguingly, its the access accorded to the team that is curious. The Pak team will visit Pathankot AFB, though it has been said that they would not be allowed inside the "Technical area" (the part of the AFB that houses aircraft and missile/radar systems). Somewhat facetiously this would be the first time an ISI (and a MI) officer would "officially" set foot inside an Indian AFB.

What isnt quite clear is the purpose of the visit. All terrorists involved in the attack have been killed. The terror scene would have been cleaned up two months after the incident to afford any great forensic work. Witnesses, barring the Punjab Police SP Salwinder Singh (and his two associates) whose car was ostensibly hijacked by the terrorists, most others would be basically "victims" of the attack and personnel posted in the AFB. By definition they wont have much value to add about the Pakistan connection of the attack, which is the purported objective of the visit.

Question therefore is, what is it that the Pakistani team will do that could not have been done over electronic means in terms of data sharing? Or is it just optics to keep the pressure on Pakistan?

Whatever it is, odds are that this would have an outcome not much different from what has been seen in 26/11. JeM, while not being as strategic an asset for the Pak establishment as LeT is, is still too valuable to be given up on a platter. Not when the establishment thinks that it has substantial strategic leverage thanks to China (CPEC deal) and the upcoming US withdrawal from Afghanistan. Especially as there is no quid pro quo on the table from India, either on Kashmir or for that matter on Afghanistan.

For the Narendra Modi govt, this could end up uncannily like IC814, Jaswant Singh escorting the JeM chief Masood Azhar (and two others) to Afghanistan. It was an imagery (of a culmination of bad strategic choices, starting from Lahore bus yatra) that BJP has been hard pressed to live down. As the hardline nationalist party, the BJP has a certain amount of political leeway in making concessions on Pakistan. But optics without tangible outcomes come back to bite hard.

JeM/Masood Azhar seems to be a case of deja vu for the BJP!

Small Savings rate cuts - How to lose friends and make daft policy

Dogma plays an important role in both politics and economics. After all both are inexact sciences (latter more than the former), hence value of data is always secondary to the primacy of dogma.

Even granting for that though, the decision by the Modi government yesterday to reduce administered interest rates on small savings defies all logic. One, it alienates a core constituency of the BJP, the urban middle class, that was already chaffing at the margins for the Union Budget gaffe on EPF taxation (hastily rescinded). Two, it doesnt even make sense from a purist, macroeconomic standpoint!

Lets go through the market fundamentalist view of why small savings rates needed to come down. The view is simple - as long as households (in other words middle class folks with some disposable income) have alternative savings instruments in the form of PPF/NSC (and other small savings products) with high tax-free interest rates, banks would not be able reduce interest rates on their deposits. So while RBI could cut policy rates, the ability of banks to pass those rates on to borrowers would be circumscribed by the fact that they face unfair competition for deposits in the form of small savings with high interest rates.

Like most market fundamentalist dogmas, the hypothesis doesnt stand basic empirical scrutiny. Lets look at the data on household financial savings in India. Over the last few years, household financial savings have been hovering around the 10% of GDP mark. And they get deployed in a variety of instruments - Bank deposits, shares, Life Insurance, PF, and Small Savings. Look at the composition below.



The numbers are self explanatory. Bank deposits account for a massive 48% of all savings deployed by households in financial assets. Where is that big "transmission roadblock" culprit, Small Savings? Well, its consolidated in the section Claims on Government. And its marketshare? 5.6%! ALL the other components of household financial savings - deposits, insurance, pensions, shares, UTI - are subject to market determined interest rates.

In other words, a small implicit subsidy in 5% of the flows prevents rate cut transmission in 95% of the flows!

This is a classic example of tilting at windmills and brandishing a reformist sword - unfortunately, the financial Don Quixotes have impact far exceeding the spanish dilettante!

Lets also go further and examine the other point - what about the cost to the government of such largesse (towards small savings scheme). The latest Economic Survey has the data.


As can be seen, interest rate subsidy on PPF (the largest, and ostensibly the "unfairest" component of small savings), is ~12000 crores. The other small savings products (PO savings, KVC etc) are used to fund state government deficits, and hence the interest is serviced  by state governments. Lets say that the subsidy on account of all other small savings product is a similar amount. So the total subsidy on account of administered interest rates is ~24000 crores.

For a country with zero social security, is that a big number for rudimentary safety net? In terms of fiscal impact, the notional loss to the government on account of corporate tax exemptions add up to nearly 6 lac crores.

Its clear therefore that purely from an economics standpoint, the reduction of rates on small savings doesnt stand up to basic scrutiny. It seems to be a case of the government giving in to a "financial market populist" demand. However, the political cost of this far outstrips any benefit on the monetary side. For a government that has been so cautious about anything radical, this is a classical "penny wise pound foolish".