India and Pakistan are slowly reintegrating their economies, through trade and investment. Will we stop at sterile commercial transactions, or can there be more to the engagement of the two countries? Most of us in India think of Pakistan as a country with serious governance problems; we think that India has little to learn from Pakistan. A careful reading of history will surprise most of us.
One of the most important developments in the history of the Indian Constitution was the rise of the `basic structure’ doctrine, which
limits the extent to which a powerful political configuration can amend the Constitution. What is not widely known is the intellectual
links that led up to this. A judge of the Supreme Court of India created what was possibly the first constructive jurisprudential
connection between India and Pakistan: he imported the concept of basic structure into Indian jurisprudence from a decision of the
Supreme Court of Pakistan. This is not to say that the basic structure doctrine was not discussed before by myriad scholars and applied in other countries, but merely to celebrate an old acquaintance that not too many of us recall today.
The authors of the Constitution of India saw the necessity of having a mechanism for amending the Constitution: Art. 368 of the
Indian Constitution. However, one question that has time and again caught the attention of the Indian Supreme Court is the extent of this amending power. For example, can Parliament amend the Constitution and make India an autocracy? If not, then is there any implied restrictions to the power of amendment? And if such restictions do exist, what is the scope of judicial review of an amendment passed by a super majority of the elected representatives of the country?
There appear to be three critical milestones in India’s path to the basic structure doctrine.
Justice Mudholkar in the case of Sajjan Singh (AIR 1965 SC 845), for the first time (para 63) used the phrase `basic feature’ of the Constitution to argue that there are certain features of the Constitution that cannot be amended by the Parliament through its amending powers under Art. 368 of the Constitution. This judgment was a seperate concurrent opinion and not the majority view of the Court. Justice Mudholkar drew upon the Pakistan Supreme Court’s decision in Fazlul Quader Chowdhry v. Mohd Abdul Haque, 1963 PLC 486, which had used the basic structure doctrine already.
The phrase `basic structure’ or `basic feature’ of the Indian Constitution has arisen in some decisions before Mudholkar, J. pointed it out in 1964. For example, in re: Beruberi Union case (AIR 1960 SC 845) and State of West Bengal v. Union Of India (AIR 1963 SC 1241) used the phrase but in a much looser sense and not squarely in the context of implied limitations to the amending power under Art. 368. It is, then, fair to say that Justice Mudholkar was the first important introduction of this concept into Indian jurisprudence.
The decision of Sajjan Singh came up for reconsideration by the Supreme Court in IC Golak Nath’s case (AIR 1967 SC 1643). Justice Wanchoo after opining in para 113 that `the power to amend includes the power to add any provision to the Constitution, to alter any provision and substitute any other provision in its place and to delete any provision’, went on to discuss in para 115 if there are any implied limitations on the power of amendment under Art. 368. In this context he referred to the doctrine of basic structure as was highlighted for the first time in India in the separate opinion of Justice Mudholkar. However, Justice Wanchoo ultimately opined that no limitations can be and should be implied upon the power of amendment under Art. 368 but did not go into the question as to whether Art. 368 can be used to repeal the present constitution and come up with a completely new one. Justice Wanchoo was however speaking only for himself and two other judges amongst the 11 who were on the bench. Finally, 6 judges held that Fundamental Rights cannot be taken away by an amendment while 5 judges held that Fundamental Rights can be taken away by an amendment. However, the line of argument taken up by Mudholkar and Wanchoo, that there are implied restrictions to the power to amendment under Art. 368, was still a fringe argument.
This implied restriction or basic structure argument gained prominence for the first time in Kesavananda’s judgment (AIR 1973 SC 1461) where a 13 judge bench of the Supreme Court deliberated on this issue. In spite of the length and complexity of the judgment, the one ratio that emerges out of it is that the amending power under the constitution cannot be used in a manner so as to interfere with the basic structure of the Indian constitution. Reference to Mudholkar’s views in Sajjan Singh (which in turn was the view of the Supreme Court of Pakistan) was made in para 681.
It is in this context, we should recognise the immense contribution of the Supreme Court of Pakistan to the constitutional jurisprudence of India. And Justice Mudholkar needs to be credited for at least trying to make possibly the first jurisprudential connection between the two neighbours back in 1964.
A key intuition of modern thinking in international trade and international finance is that distance matters much more than we think.
We may like to believe that the world is becoming more flat. We may like to believe that for weightless things like services and financial flows, distance is irrelevant. But the research evidence is unambiguous: there is a `gravity model’ in the affairs of men. The interactions between two countries tend to go up in proportion to the product of their GDP, and vary inversely with the squared distance between then.
Traditional trade theory would encourage us to think that India and Sri Lanka (say) have similar factor endowments, so the gains from trade might not be so great. But this is not borne out by the evidence: some of the most intense trade relationships are found between countries in Europe and between the US and Canada: between countries with very similar endowments.
In this region, we need to be much more mindful of the importance of intra-regional finance and trade activities. For India, this means a strong emphasis upon East Africa, the Middle East, Pakistan, Central Asia (by plane today, but someday we should get to road connectivity from the Indian ocean), the land route to China through Tibet, Nepal, Bangladesh, Burma, Singapore and Sri Lanka. India stands out, in international comparisons, for having unusually low economic engagement with its neighbours. This implies that there are opportunities for very large gains. In recent years, some Indian firms have emphasised these countries in their internationalisation strategy (both trade & investment), reflecting a greater role for natural conditions dictated by geography.
Some of these places are hobbled by political problems and abysmally low GDP. The product of the two GDPs matters, and bad political systems like to interfere with globalisation. The wise thing for us to do is to have a consistent and welcoming engagement strategy, waiting for the time that the country finds its feet in terms of establishing a healthy political system, waiting for the country to engage. A good example of India doing something right is the positive approach towards MFN status for Pakistan. We have to wait for Pakistan to understand that this is in their self-interest – and I do believe that in time, they will – but there is no reason for us to get stuck on reciprocity.
Of particular interest in recent months is Burma. Hamish McDonald has a beautiful piece titled Tractors may have replaced horses, but country is still decades behind. If Burma comes out of its deep freeze, then the opportunities for trade and financial links with India are huge. We would go closer to the arrangements which were prevalent in the early 20th century, which reflect the natural opportunities.
With increased trade & financial linkages will come greater macroeconomic correlations a.k.a. shared interests. I saw a fascinating new IMF working paper by Ding Ding and Iyabo Masha titled India’s growth spillovers to South Asia. This finds that after 1995, Indian growth has a significant impact in the region. If this is a robust finding, it is new; the idea that Indian business cycle fluctuations reach out and influence the region is not part of our intuition, particularly given the onerous trade barriers in place. Perhaps there is a lot more trade going on than meets the eye.
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For once, I am pleased at how India played it: India gave Pakistan MFN status way back, in 1996, without getting into the silliness of reciprocity. A hallmark of professional competence in international trade is the idea of unilateral liberalisation: Even if another country is silly enough to have barriers against us, we should not have trade barriers against them. Removing barriers against India’s globalisation is a favour to us
, regardless of what it does to anyone else. India often gets into cul de sac
s by obsessing on reciprocity – e.g. we won’t open up to imports of agricultural products because the Europeans won’t. We won’t allow foreign banks to operate in India because some other countries have barriers against the operations of Indian banks. And so on. But for once, in this case, our guys seem to have played it right (and way back in 1996, too!).
And now, we have a nice next step: Pakistan will give India MFN status. What might happen next? Here are some conjectures:
- At present, there is significant Indo-Pak trade; it merely gets routed through Dubai. Once Pakistan gives India MFN status, the entrepot trade that was going Bombay -> Dubai -> Karachi will go Bombay -> Karachi. This is bad news for Dubai and for individuals and firms which are invested in the future of Dubai as an entrepot centre. Trade data should show a fairly sharp decline in India’s exports to UAE and a fairly sharp rise in India’s exports to Pakistan.
- There will be a boom in shipping, communication and trade serving the direct Bombay -> Karachi route. Similarly, the ports of Gujarat will do a lot of business directly to Karachi.
- At first blush, little changes: the goods that used to go via Dubai would now go directly to Karachi. But a recurring theme in economics is the extent to which apparently small frictions loom large. The removal of fairly modest frictions matters a lot for business activity. So when the cost of shipping goes down by roughly 3x, even though the cost of shipping may be small in absolute terms, this would have a big impact on trade. Another dimension of cost is the cost of the middleman in Dubai. The establishment cost of this middleman in Dubai would be eliminated.
- Important dynamics will now set in amidst firms in Pakistan. Firms that compete with exports from India will suffer. Firms that consume imported inputs from India will thrive. Creative destruction will take place; resources will shift from one group of firms to another. Exporters will be better able to export to India, both because of access to cheaper labour and capital that’s freed up by firms that die owing to import competition, and because of improved competitiveness that comes from cheaper raw materials. Exports from Pakistan to India will go up significantly.
- Large Indian and Pakistani corporations will look much more seriously at the opportunities that lie just beyond the national border. Over time, human capacities and human networks will build up on both sides, supporting cross-border operations. This will take time to ripen, but when it does, the effects will be large. A huge fraction of global trade is intra-firm trade, so it’s very important to have large firms of both countries having operations in both countries, in order to get growth of trade.
- The biggest gains in India will be in Gujarat, given the myriad ports in Gujarat which are a short distance away from Pakistan. But in the future, if road and rail links open up, then there are big opportunities in Punjab also. Wouldn’t it be nice to have a NHAI style road running from Ahmedabad to Karachi, and from Amritsar to Lahore?
To the extent that we’re merely rerouting trade, bypassing Dubai, this will impose no new stress on ports and airports in Pakistan. But to the extent that new trade is created – as I expect it will (and as argued above) – then new work will be required in Pakistan on enhancing the capacity of ports and airports. I would personally be surprised if the effects are not large.
In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India’s connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.
Consider a product like cement, which is ordinarily considered a non-tradeable. Transportation of cement is so hard, there isn’t a unified national market in India. There are a series of regional markets. But even in this, modifications of transportation have mattered greatly. E.g. when Gujarat Ambuja
came up with the innovation (back in the mid 1990s) of sending cement from Saurashtra to Bombay, by sea, this was a very big deal. By that same logic, cement from the coast of Saurashtra can go to Pakistan (or vice versa, depending on who produces at a lower price).
We should not see trade in goods in isolation. All dimensions of globalisation are intimately connected to each other. To do more trade in goods and services, we need more movement of people. Ergo, the silly visa restrictions that both countries impose on each other need to be eased. Finance follows trade: So where trade in goods and services leads the way, bigger financial integration will inevitably follow with trade financing, cross-border banking, payments, purchases of information, operations of multinationals and FDI, INR/PKR currency risk management, and investment flows. More will need to be done on investment guarantees, export/import trade financing, etc.
Thomas E. Ricks (in Foreign Policy) and Lawrence Wright (in New Yorker) on Pakistan.
C. Rangarajan on the debate about the debt management office and about inflation targeting (the latter is an interview with Tamal Bandyopadhyay).
Saurabh Mishra, Susanna Lundstrom and Rahul Anand have a fascinating piece on the sophistication of India’s service exports. Many people suffer from what I call `the widget illusion’, where somehow it is good to make tangible things, and making intangible things is considered wrong. It is high time we get away from such notions.
Kenya’s experience with mobile phones and payments is important for us in India. Read William Jack and Tavneet Suri on this, on voxEU.
I found there are interesting links between this article in The Economist, and the ideas on system-driven credit in a UID world in
this committee report.
Do you use up the power of monetary policy to stabilise inflation, or do you use up this power to manipulate the exchange rate? Some
people think that manipulating exchange rates, and thus fueling export growth, is a shortcut to high GDP growth. Nicolas Magud and
Sebastian Sosa (on voxEU) say that the potential payoff from exchange rate misalignment is small.
A working paper: Liquidity considerations in estimating implied volatility by Rohini Grover and Susan Thomas.
A working paper: Improving the legal process in enforcement at SEBI by Dharmishta Raval.
A working paper: Has India emerged? Business cycle facts from a transitioning economy by Chetan Ghate, Radhika Pandey, and Ila Patnaik.
Mobile trucks that sell food, and link up to customers using twitter: is India is ready for this? See Caroline McCarthy on CNet News.
A first response on the killing of UBL by Steve Coll.
Robert S. Boynton has an article in the Atlantic about how modern communication technology is actually making a small difference to breaking down the North Korean government.
Henry Shukman has a great story in Outside magazine about the 3000 square kilometres of `Chernobyl Exclusion Zone’ which has turned into a miracle for biodiversity. I often wonder what would happen if 3000 square kilometres of prime Gangetic land became true forest.
Perhaps 10% of blind men can teach themselves how to see.
Michael Lewis has a persuasive sounding article, about how a Richter 7.9 earthquake that hits Tokyo will devastate the world
economy. This was written in 1989. By and large, these things did not happen in the recent Richter 9.0 earthquake. Yes, the
recent quake did not frontally hit Tokyo, but then Richter 9.0 is way bigger than 7.9 (this is log scale). It is a useful exercise,
for everyone interested in finance, to read this article and understand how such journalistic thinking goes wrong.
Is research funding going into randomised trials yielding a good bang for the buck? My personal view is that a better use of money is to build datasets like this which are then placed into the public domain, and used by hundreds of researchers.
Tom Wright and Siobhan Gorman in the Wall Street Journal on new thinking by Pakistan’s ISI about who is enemy #1.
Tamal Bandyopadhyay in the Mint on the campaign against C. B. Bhave. Also see Ashok Desai and Mahesh Vyas on these issues.
A. K. Bhattacharya in the Business Standard on the crisis of project management in government. This is what animates Nandan Nilekani’s TAGUP group and I hope this induces fundamental change in Indian public administration. Also see.
Fascinating new research by Devesh Kapur, Chandra Bhan Prasad, Lant Pritchett and Shyam Babu, written by Ila Patnaik in the Financial Express.
Jayanth Varma is dismayed at RBI’s lack of modern finance knowledge in thinking about CDS.
India on the FATF high table by K. P. Krishnan, in the Economic Times.
Neelasri Barman and Parnika Sokhi in DNA about the most important question in RBI reforms: that of HR practices. Roughly 30
years ago, RBI used to do direct recruitment at middle management levels. When the union became powerful and recruitment became restricted to the entry level, it had greatly damaging consequences on the organisation’s capability. If the HR falls
into place with really top quality people, then all the needed RBI reforms will rapidly get done.
William Dalrymple in the New York Times on Sufis.
Jeffrey Goldberg in the Atlantic magazine about the task of stopping Iran’s nuclear capability.
Jeff Frankel says that we have a lot to learn from small countries.
Damon Darlin in the New York Times tells the story about how Netflix worked on video over the net even though this directly
competed with its profitable DVD-by-post business.
Javier Blas and Greg Farrell in the Financial Times on the interesting role of agricultural commodity futures in the recent
flareup of prices.
C. Raja Mohan in The American Interest on India’s strategic directions.
A Reuters report on how Pakistanis are responding to the global backlash against Pakistan.
Writing in the Wall Street Journal, Matt Ridley has some great insights into economic development.
M. K. Venu on corruption in Indian telecom.
Sanjeev Sanyal in the Business Standard on how to think about the role of the university in the city.
When Israel graduated into OECD, it got dropped from the MSCI Emerging Markets index, which helped India gain a bit of weight there.
Economic Opportunities and Gender Differences in Human Capital: Experimental Evidence for India by Robert T. Jensen finds that when the BPO industry brings economic opportunities to women in India, this positively impacts investments in girls – who are more likely to gain body mass and go to school.
The global university and the future of human capital by Andrew Kelly in The American.
Thailand’s grief: Thomas Fuller in the New York Times, a set of pictures at boston.com, and another one.
How to save the news by James Fallows in the Atlantic magazine: an important article that everyone interested in the future of newspapers should read.
5 Ways Steve Ballmer Can Save Microsoft’s Mobile Bacon by Galen Gruman: A careful and thorough guide to Microsoft about how to come back into the mobile phone game.
Robert Samuelson says the story of Greece tells us something about the sustainability of the European-style welfare state. Martin Feldstein has a suggestion for how to achieve fiscal prudence in Europe (and by analogy, in India). Also see Feldstein on the Euro crisis.
Taiwan got their corporate income tax rate down to 17%.