Constitutional challenges are often described as hard cases. This is, however, seldom true. Invariably, disputes possess a simple solution. We can debate over what theories of interpretation to apply and over whether the text of a clause needs to be read literally or in light of its historical background, but in most cases, the Supreme Court’s own precedent and commonly accepted legal theories provide an easy enough guide to finding a principled answer. The challenges made to the 103rd constitutional amendment, though, which a two-judge bench of the Supreme Court is slated to hear this month, present a rather more difficult test.
Here, the issues involved concern questions both over whether the amendment infringes the extant idea of equality, and over whether that idea is so intrinsic to the Constitution, that departing from it will somehow breach the document’s basic structure.
The court’s answers to these questions will operate not merely within the realm of the law but will also likely have a deep political bearing — for at stake here is the very nature of justice that India’s democracy embodies.
The law, which was introduced in January this year, amends Articles 15 and 16 of the Constitution, and grants to government the power to provide for reservation in appointments to posts under the state and in admissions to educational institutions to “economically weaker sections of citizens [EWS]”. At first blush, this reservation, which can extend up to 10% of the total seats available, may not appear to impinge on the existing constitutional arrangement. But what it does mandate is a quota that will apply only to citizens other than the classes that are already eligible for reservation. Consequently, persons belonging to Scheduled Castes and Scheduled Tribes and persons who are not part of the creamy layer of the Other Backward Classes will not be eligible to the seats available under the quota.
According to the petitioners in the Supreme Court, the central hypothesis of the amendment, where reservation is predicated on individual economic status, violates the Constitution’s basic structure. In their belief, the law, by providing for affirmative action unmindful of the structural inequalities inherent in India’s society, overthrows the prevailing rationale for reservations. In doing so, they argue, the amendment destroys the Constitution’s idea of equal opportunity. The Union of India argues that while the Constitution demands equality, it does not confine Parliament to any singular vision. According to it, the power to amend the Constitution must necessarily include a power to decide how to guarantee equal status to all persons.
Meaning and purpose
In some senses, as sociologist Gail Omvedt wrote in these pages (“The purpose of reservation – I”, March 24, 2000), “the whole history of the struggle for reservation has also been a debate about its very meaning and purpose”. When reservations were first introduced by some of the princely states the policy was seen largely as an alleviative measure. For instance, in the princely State of Mysore, where privileged castes had cornered virtually every post available under the government, a system of reservations was introduced denominating communities as “Backward Classes”, and providing for them a larger share in the administration. By the time the Constitution was being drafted as a reading of the Constituent Assembly’s debates shows us, the rationale for reservations had broadened. The Constitution’s framers saw the measure as a promise against prejudice, as a tool to assimilate deprived groups into public life, and as a means of reparation, to compensate persons belonging to those groups for the reprehensible acts of discrimination wrought on them through history. Marc Galanter has called this a compensatory discrimination principle.
Yet, despite the expanded justification, the basic foundational logic for reservations was still predicated on a demand for a fairer and more representative share in political administration. This is demonstrated by R.M. Nalavade’s comment in the Constituent Assembly. “Our experience in the provinces, though there are provisions for reservation in the services, is bitter,” he said. “Even though the depressed classes are educated and qualified, they are not given chances of employment under the Provincial Governments. Now that we have provided for this in the Constitution itself, there is no fear for the Scheduled castes. According to this clause we can be adequately represented in the provincial as well as in the Central services.”
By providing for a more proportionate distribution of the share in administration, the programme of reservations, it was believed, would end at least some of caste-based domination of jobs, particularly of employment in the public sector — a domination that was built over thousands of years, where Dalits and Adivasis were denied access to equal status. As Ms. Omvedt has pointed out, the strategy behind reservations could, therefore, never have involved an attack on pure economic backwardness. The idea was always to disavow caste-monopoly in the public sector.
Theory of justice
Even when the Constitution’s first amendment was introduced in 1951, to allow the state to make special provisions beyond reservations in public employment for “the advancement of any socially and educationally backward classes of citizens, or for the Scheduled Castes and the Scheduled Tribes”, the rationale, as the lawyer Malavika Prasad has argued, remained constant. Attempts made at the time to categorise individuals on the basis of economic status were expressly rejected. Behind this thinking was a distinctive theory of justice: that by according a greater share in public life to historically disadvantaged groups the relative position of those groups would stand enhanced. No doubt such a policy would not, in and of itself, help eliminate the various inequalities produced by the caste system, but it was believed it would represent a resolute effort to eliminate at least some of the caste-based domination prevailing in society.
Indeed, the policy and the idea of justice that undergirds it have been seen as so indispensable to the Constitution’s aims and purposes that the Supreme Court in State of Kerala v. N.M. Thomas (1975) held that reservations based on social and educational backwardness, far from being an exception ought to be seen as an intrinsic facet of the idea of equality.
It is in departing from this logic that the 103rd amendment unseats the Constitution’s code of equality. Pure financial ability is a transient criterion; it doesn’t place people into a definite group requiring special privileges. If anything, allowing for reservation on such a principle only further fortifies the ability of powerful castes to retain their positions of authority, by creating an even greater monopolization of their share in administration. If such an end is indeed the vision, it’s difficult to see how the elementary conception of equality guaranteed by the Constitution can continue to survive.
Now, no doubt the Supreme Court may, on the face of things, consider Parliament as possessing the power to altogether dismantle the Constitution’s existing idea of equality without simultaneously demolishing the document’s basic structure. But, if nothing else, when the court hears the challenges made to the 103rd amendment, it must see the petitioners’ arguments as representing a credibly defensible view. The least the court ought to do, therefore, is to refer the case to a constitution bench, given that Article 145(3) mandates such an enquiry on any issue involving a substantial question of law concerning the Constitution’s interpretation, and, in the meantime, stay the operation of the amendment until such a bench hears the case fully. Should the court fail to do so the government will surely one day present to it a cruel fait accompli.
Finance Minister Nirmala Sitharaman began a new practice in the Union Budget, presented on July 5, when she relegated the numbers, or the budgeting, to the fine print, in a break with tradition; they are usually presented as a part of the speech on the floor of the House in Parliament.
What are the compulsions that could have made her shy away from stating the numbers as her predecessors have done earlier, no matter how uncomfortable the fiscal position?
Falling tax revenues
The Central government’s tax revenues for the financial year ending March-end 2019 — as reported by the Controller General of Accounts (CGA) — fell short of the Interim Budget’s estimates (that the Modi government presented in its first tenure) in February by a whopping 0.9% of GDP.
The CGA’s figures show that direct tax collections for 2018-19 fell short by â‚¹74,774 crore while those of indirect tax collections were by â‚¹93,198 crore.
The Budget Speech saved the Modi government the embarrassment of owning up to this shortfall on the floor of the House, although this is not the first time that a government has overestimated tax collections.
Ms. Sitharaman has now budgeted for lower tax revenue in the ongoing financial year, 2019-20, than her predecessor, Piyush Goyal had in the Interim Budget.
The new Budget estimate for gross tax revenue is â‚¹90,936 crore lower than what was projected in the Interim Budget. This is despite the higher surcharge Ms. Sitharaman has imposed on income-tax for those earning more than â‚¹ 2 crore and a range of hikes she has levied on customs duties.
The new Budget estimates show that the government does not expect to improve its performance on tax collections in the current year: Gross tax revenue-GDP ratio is budgeted to slip from 11.9% in 2018-19 to 11.7% in 2019-20. While the direct tax-to-GDP ratio is expected to go from 6.4 to 6.3, the indirect tax-to-GDP ratio will reduce from 5.5 to 5.3.
To fill the gaping hole on the tax revenue side, significantly higher non-tax revenues have been budgeted than the estimates of the Interim Budget. Dividends and profits from public sector enterprises are budgeted at â‚¹1,63,528 crore compared to â‚¹1,36,072 crore in February. This includes an extraordinarily large increase in dividends from the Reserve Bank of India from the â‚¹68,000 crore it paid last year to â‚¹90,000 crore.
The Budget now estimates â‚¹1,05,000 crore to be raised through disinvestment, higher than the â‚¹90,000 crore that Mr. Goyal had projected in the Interim Budget and the â‚¹80,000 crore raised in 2018-19.
Tapping public enterprises
On the revenue side, therefore, the government proposes to make up for its belowexpectations performance by extracting more from profitable public sector enterprises (PSEs); the economy would have been better off had these enterprises taken the lead in rolling out fresh investments, thereby generating growth impulses for the rest of the economy.
As a percentage of GDP, non-tax revenue is budgeted to grow from 1.3% in 2018-19 to 1.5% in 2019-20.
The expenditure estimates show that the money the government is raising from assets, through disinvestment and extracting from the PSEs through dividends, is not going towards significantly expanding public investments. This is because much of it is getting spent on providing for salaries, pensions, subsidies and interest payments on past borrowings.
This is why the Budget presented by Ms. Sitharaman is a hand-to-mouth Budget.
She did well in resisting demands for a fiscal stimulus to pump prime the economy. That is also what has made it a fiscally prudent budget.
The revenue expenditure is budgeted to grow to â‚¹24,47,780 crore in 2019-20, an increase of 14.3% over the revised estimate for the previous year.
The fiscal gap between expenditures and revenues will be financed by borrowing â‚¹7.10 lakh crore. In 2019-20, the outgo towards interest payments is budgeted at â‚¹6,60,471 crore, or more than a third of the total revenue receipts.
The government’s interest payments for past borrowings, the largest component of the revenue expenditure, are budgeted to grow in nominal terms, from 11.1% in 2018-19 to 12.4% in 2019- 20, or faster than even the estimated GDP growth.
Capital expenditure of the government is budgeted at â‚¹3,38,569 crore for 2019-20 which reflects a growth of 6.9% over the revised estimate of 2018-19. In other words, capital expenditure is projected to grow at a rate slower than the projected rate of GDP growth.
This comes when the Budget speech made much about the need to revive investments to accelerate GDP growth. Ms. Sitharaman emphasized in her speech that investments of â‚¹100 lakh crore would be needed cumulatively over the next five years to boost infrastructure; this works out to be around â‚¹20 lakh crore a year.
She did not say where this money would come from. Current savings and investment rates in the economy cannot provide for such large sums. Perhaps the hope is that foreign investors will deploy in India cheap funds they will be able to raise in advanced economies where the costs of borrowings are expected to reduce as the global economy enters a phase of weak economic growth and trade.
Be that as it may, what is not clear is how the government expects the Budget to be called ‘proinvestments’.
It is inescapable from the Budget arithmetic, though, that revenue expenditures and the tax revenues are in need of serious corrections. If they were in better shape, significant expansions in public investments would have been possible.
Since early last year, WhatsApp has busily piloted its payment system in India. WhatsApp Pay relies on the Indian government’s Unified Payments Interface (UPI) system to facilitate inter-bank transactions. Regulatory approval that would allow its nation-wide introduction is stuck on one point: the Indian government has asked WhatsApp to localize all data processing related to payment transactions in India and not on Facebook’s servers in the U.S. This is well in line with the government’s existing technology vision for the digital economy, which hinges on data localization as the magic bullet to solve multiple problems ranging from prevention of personal data misuse to promotion of local enterprises.
Unfortunately, it misses a number of other issues and hidden costs of this current deal and raises broader issues on big tech’s foray into financial services, especially payments.
The case of WhatsApp Pay
In the case of WhatsApp Pay, its parent company, Facebook, has come under scrutiny for harmful content, lack of privacy, and data misuse in recent years. The large amounts of social media data that Facebook sits on, its habit of using private user data to promote business, and its reluctance to adhere to policy have led to radical suggestions of breaking up big tech. Facebook, in response, has rolled out a new plan to reinvent its business, which is to build a new privacy-focused platform that integrates WhatsApp, Instagram and Messenger. This will provide end-to-end encryption for consumers and business services along with direct payment options. As The Economist recently noted, if this succeeds, it would make it more difficult to argue for big tech to be sliced up.
The only hitch in this new business plan is that Facebook is relatively new to the digital payments market and cannot gain a foothold in the U.S., where PayPal has the largest consumer base. This is where it becomes important to make WhatsApp Pay successful in India. India is WhatsApp’s largest market in the world with over 250 million monthly users. Once WhatsApp Pay catches on in India, Facebook intends to introduce it in other developing countries. Thus, the decision to allow WhatsApp Pay in India can catapult Facebook into the big league in the global digital payments market where companies like Alibaba’s Alipay and Tencent’s WeChat are making waves.
India’s digital vision talks about data sovereignty and giving domestic firms an advantage. The digital payments market, with 800 million mobile users in the country of which more than 430 million have Internet access, is estimated to grow to over $1 trillion by 2025. If India is serious about giving local firms an advantage, it should leverage this immense opportunity. With the right policy incentives, local firms could capture large shares of the digital payments market to become e-commerce players on a global scale, as China’s experience shows. In China, domestic enterprises were strategically enabled to use the local market to emerge as global champions. Today, WeChat combines the functional features of several online platforms including Facebook, WhatsApp, PayPal and Uber Eats. Over 300 million users worldwide use WeChat payments for everything, right from ordering food to paying hospital bills, a model that all firms want to emulate.
But giving WhatsApp Pay a plum role in the digital payments market achieves the opposite because if the deal goes ahead, it will automatically give WhatsApp Pay a large advantage over all other Indian firms that are currently operating without the advantage of relying on a large social media and messaging base as WhatsApp does. This creates a ‘winner-takes-most’ dynamic that competition authorities worldwide are becoming wary of: simply because WhatsApp already has the economies of scale and network externalities, it will manage to integrate it into an entirely new sector, with undue advantages that it should normally not benefit from. To top it all, Facebook will also receive a cut in all WhatsApp Pay transactions conducted in India. Similar concerns with market power can exist with allowing other large firms like Google Pay and Amazon Pay, but these will need to be assessed individually while making decisions for the national digital payments market. What matters most is that without a level playing field, even the most well-meaning policy incentives will not safeguard the expansion of local firms in the digital payments arena, thus severely limiting the capacity of local firms to benefit from the potential of India’s own digital payments market.
Fallouts for privacy
The largest fallouts of granting market approval to a global player will be in the area of privacy. In the particular instance of WhatsApp Pay, the deal will give Facebook access to data on how people across countries are spending their money. Even if WhatsApp agrees to set up data localisation in India, the localisation requirement of the government is limited to payments data only. As a result, Facebook will still have access to metadata on all payment transactions, which can be matched with the data that the company already has access to on Instagram, Messenger and WhatsApp for the same users.
With all of that, Facebook will be able to match user profiles on its social media websites with the user profiles that are authenticated by the UPI system in India.
This would not only make Facebook the second biggest identification issuer in India after the Indian government, it would also make Facebook the best repository of data covering all areas of life — social and financial — on all Indian users. This kind of data pooling would never be allowed in the U.S. where financial privacy laws protect against such an outcome, so why should this be allowed in India? Similar risks exist in the case of Google Pay or Amazon Pay, where payments data can be matched with other existing repositories with outcomes that are not desirable and may/may not be as drastic as in the case of WhatsApp Pay.
These examples of big tech and finance help illustrate some of the complexities of digital markets. To address safe digital transformation, we need a policy that focuses on the nitty-gritty of implementation and coordination. We need to be clear on how digital technologies will transform different sectors, especially finance and payments, with a view to promoting competition, enabling local firms, protecting consumer welfare and promoting data sovereignty. In the specific case of the digital payments market, we need the elaboration of clear guidelines that enable the development of a digital payments market, going beyond requirements for storing and processing payments. Data localisation is costly, and consumers not only need protection that these compliance costs will not be passed on to them by businesses, but they also need clarity on how their data will be stored, for how long, and what uses will be prohibited. Local firms will need much more space and support in the digital payments market to be able to create new jobs, new prospects and digital dividends. These are crucial to guarantee the rights of all Indians as we move from a cash-based to a cashless economy.