Why ongoing controversy over Kerala CM’s advisor Gita Gopinath is bogus

BOOK REVIEW

23 Things They Don’t Tell You About Capitalism, Author: Ha Joong Chang.

By G Pramod Kumar – Historically, the socio-economic affairs of the state are mostly driven by the planning board, which is now handled by (deputy chairman) a hardcore left-wing economist VK Ramachandran, and the finance ministry headed by another left-wing economist Thomas Issac [2]. It’s hard to imagine a supervisory role for Gita within this space. Neither she nor Chief Minister Pinarayi Vijayan [2] claims one for her.

Moreover, Gita’s domain expertise has nothing to do with Kerala’s requirements. The real crisis in the state is its inability to generate wealth locally, the decline of the welfare state that was built on the early reformist movements, and the successive governments’ failure to stem the privatization of sectors such as education and health. With her training and expertise in international finance and market economics, will she be able to help?

Clearly not.

Probably, Pinarayi’s expectations from Gita, despite the apparently bigger knowledge-based scheme of things, is that she would help him achieve economic growth although it’s not her domain expertise at all. Even if she was equipped, she won’t be able to do much, because in terms of wealth-generation, Kerala is gridlocked.

It can’t have even mid-sized industries, it doesn’t have an entrepreneurial culture and most of its services sector, which accounts for about 70 percent of the state’s gross domestic product, serves the local consumerist appetite. The bulk cash that the state generates are remittances which for the time being plug the production gap.

Can Gita turn this around? Most probably not.

As Chang systematically argues, “good economic policy doesn’t require good economists.”

“The economic bureaucrats that have been most successful are usually not economists. During their ‘miracle’ years, economic policies in Japan and (to a lesser extent) Korea were run by lawyers. In Taiwan and China, economic policies have been run by engineers. This demonstrates that economic success does not need people well trained,” he says.

In the old industrial countries such as Germany and France too, it’s the quality of engineers and designers, not economists. On the contrary, it’s the international economists that created the financial crisis and experts from IMF and the World Bank who wrecked havoc with many developing countries. more> http://goo.gl/pgUGEr

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Gagging media

In Kerala, lawyers join hands with government to deny citizens’ right to know
Times of India – The media literally waits at the gates of courts – as Kerala witnessed on Wednesday (Jul 27) at Kollam [2, 3] where sentencing in a cop’s murder case was delivered – for details of judgments to trickle out. The result is that it is the citizens’ right to know, as envisaged in the Constitution, and the media’s freedom to gather and disseminate news, that are being forcefully denied.

In a move that complicates the issue, the high court has instituted strict curbs preventing media from accessing judgments. Journalists’ entry into judges’ chambers is banned.

A quixotic idea of emailing judgments to media is being mooted. To say that these steps are lopsided would be an understatement.

The ambivalence of the Kerala government, especially of chief minister Pinarayi Vijayan [2, 3], on the issue shows that he and his party are trying to divide and rule by using the legal fraternity to intimidate the press. more> http://goo.gl/S5p8gd

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Wealth-generating economic activities – not finance – is the answer

As a result of financialization, Kerala government is operating under the misconception that finance is the key to economic development, exemplified by the non-stop efforts to get loans from various sources [2, 3, 4].

The Times of India report, “Fiscal repair needs more than cuts” (July 8, 2016), says, “Isaac is expecting a 25% increase in tax collection to mitigate this crisis.” “The basic reason for the present present fiscal crisis is the alarming growth in non-plan expenditures comprising salaries, pension, teaching grants given to private/ aided education institutions,” said B A Prakash [2], chairman, fifth finance commission.

The total salary and pension expenditure during 2015-2016 was Rs 36,569 crore ($5.48B). “This accounts for 82% of the total tax and non-tax revenue of the government. With the implementation of pay and pension revision, the additional financial commitment required is estimated as Rs 54,754 crore ($8.21B),” Prakash said.

In a nutshell, Kerala has an overdeveloped government for an underdeveloped economy.

The report adds, “The CII (Confederation of Indian Industry) also expects the budget to support revival of crisis-ridden public sector undertakings and traditional sectors like cashew.”

There seems to be fundamental flaws in the expectations and role of budget and finance with the Kerala government and various agencies. Proper role for finance in an economy is to be an enabler for wealth-generating activities. However, Kerala economy is in deep financialization. Hence, normal expectations will not work. Much of Kerala economy consists of:

  1. Rent seeking” activities
  2. Social welfare schemes
  3. Operation of non-viable public sector units
  4. Under-performing education industry

Lack of operational capabilities, know-how and skill-deficits in critical government agencies are the main contributors for the malfunctioning state economy. Routinely seeking external loans for development projects while there is a huge amount of bank deposits in the state is a manifestation of this problem.

While the governments takes credit for the welfare schemes, the tax system is extremely regressive. Significant part of state tax revenue is from state lottery and alcohol sales [2], while income tax share is non-existent.

The planned “Kerala Bank” [2, 3, 4], consolidating the district co-operative banks, is a potentially good idea to help with capital formation. But the current profligate ways of the Kerala government will have to change. Currently, borrowings are channeled into consumption or unproductive development projects, If the “Kerala Bank” is used for similar borrowing and spending, the result will be a catastrophe.

Kerala economy is beyond repair, and need to be replaced. The real solution is to develop and implement a wealth-generating industrial development program as anchor for a balanced economic development.

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Education is not for democracy, but excellence

The Times of India feature, “Time of Change” (July 3, 2016) is helpful in understanding the thinking of the new Kerala government.

In your report, the minister for transport, A K Saseendran “unveiled a three-prong thrust for all the three departments (Motor Vehicles Department, Kerala Road Transport Corporation [2], and water transport), identifying the most challenging task to be resurrecting the loss-ridden KSRTC.” (“A roadmap for change”)

The report adds, “Kerala boasts of the largest transport network in the country with more than 4,200 KSRTC buses and over 10,000 private buses plying the streets, servicing lakhs of commuters and connecting even the smallest village and city.”

C Raveendranath, minister for education, says, “The practice of terming schools as ‘uneconomic’ must stop as the value of schools cannot be measured in terms of money.” The minister added, “Government is planning to upgrade all the schools with public participation. Public participation would rekindle the democratization process in education.”

From the reports, what stands out is the mind-set of the Kerala government. It is that of a “Nanny state” [2]. The transport minister is keen on expanding the state owned transportation system. The state will be better served, instead, if the minister focuses on creating conditions that will enable private businesses to effectively operate transportation systems.

The education minister talks about “democratization process” in education. “Democratization” seems to be a code-word for promoting mediocrity and uniformity. In education, Kerala needs to promote excellence to have a viable economy, instead of depending on people migrating for jobs.

The efforts outlined by the ministers are routine — not transformative — and continuation of the status quo. For transformative changes, Kerala government needs to change its “Nanny state” mind-set.

The purpose of a government is to create conditions for a thriving economy for its people. Peter Drucker says, “The purpose of government is to make fundamental decisions, and to make them effectively.. The purpose of government, in other words, is to govern.” And not doing.

If the goal is to have the government do as much as possible, it is limiting. But if the collective energies of the people are unleashed, the possibilities are endless.

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Playing yesterday’s game

By Indrani Bagchi – The South China Sea is several seas away from us. The NSG membership will happen some time after we (the people and the government) have stopped hyperventilating about it.

Instead, look closer home. India’s immediate neighborhood remains on its treadmill: furiously running through myriad crises without actually getting anywhere.

Can India get beyond firefighting as a foreign policy goal in its backyard?

The real neighborhood challenge comes from an ever deepening China-Pakistan relationship. Andrew Small, author of a deep study of the China-Pakistan axis, says he has noticed a much greater political consonance between these two countries in recent years. India should abandon the “Indian rate of progress” as it builds up Chabahar in Iran, which would be the best counter to Gwadar.

It is a fact that two years on, India under the Modi government is still floundering in the same Pak-China swamp. The “neighborhood first” policy promised a new approach. Instead, we continue to play yesterday’s game. more> http://goo.gl/cdjuIX

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Rebuilding a government

The Times of India feature, “Belt-tightening on the anvil” (July 1, 2016), covers details of the white paper by the Kerala finance minister, T M Thomas Isaac.

The report says, “The inefficiency to mobilize taxes and corruption in tax administration department and at check posts contributed to the decline in revenue. It came down to 13.1 during the UDF rule. Now Isac says he will raise the tax collection at the rate of 25 per cent. It is a huge challenge especially because he will have to overhaul the whole system and bring e-governance and more accountability,” said Mary George, chairman of Public review Expenditure review committee.

Based on the problems identified in the white paper, “overhauling the whole system” is too little. What is required is rebuilding the entire Kerala government processes and systems.

Here are some highlights from the “White Paper on State Finances,” some of which are astounding.

  • “The finances of Kerala are in dire straits.”
  • “The entire borrowing ceiling now permitted by the Central Government is just sufficient to meet the day to day expenditure of the State Government. Consequently, my Government is faced with the stark reality that there are no funds left for capital expenditure like construction of roads, bridges and other major infrastructure projects,” said Justice P. Sathasivam [2], Kerala Governor, in his address to the Legislative Assembly on June 24, 2016.
  • “For the last three years, budgets placed before the State Legislature have not had much of reality with either the resources to finance them or with the actual expenditure incurred at the end of the year. Schemes and projects were announced without the funds to back them up.”
  • “Budgets have lost their sanctity and budget speeches have become exercises in conjuring up unachievable visions of schemes and projects. The divergence between the reality and what is professed, has reduced the annual budgets to a ritual of proclaiming a slew of real or imagined dreams and intentions. Thus unfortunately, the State has been living on a financial lie.”
  • “The vital tax collection machinery, be it in commercial taxes, or excise was pawned away for private gains ignoring public interest.”
  • “Imprudent financial management has had an opportunity cost of nearly Rs.3000 cr. ($450m) per annum – money that could have been ploughed into the much needed capital expenditure in the State.”
  • “Unless, special efforts are demonstrably made evident to investors, this negative image may hamper the borrowing program of the State in the future. If the image of the State Exchequer is not restored in public minds, then it will detrimentally affect resource generation to finance the major policy initiatives and capital projects of the State”
  • “The State will have now to wait longer for catching up with advanced States and that the effort will now cost us more.”
  • “The State Own Non Tax Revenue in Kerala arises largely from lotteries and services rendered in Government Departments and account for on an average about nine percent of the total receipts of revenue.”
  • “Commercial Taxes constitute the major share of the revenues of Kerala, yielding approximately 50% of the State’s total Revenue Receipts. For a fiscally constrained State like Kerala, Commercial Taxes is the mainstay for Government. Any slackening of the mobilization efforts on this front immediately plunges the State into a crisis.”
  • “The Government in 2006-2011 had built up a robust, well-oiled and effective tax collection machinery.”
  • “The crisis itself was due to the lack of cohesiveness in Government during 2011-2016, with one arm in Government doing things without the other arms being aware of it.”
  • “The general lackadaisical directions of governance and indiscipline might well have seeped in to the tax administrative machinery in various departments, paving the way for easy subversion of administrative systems in place in these departments.”
  • Corruption and nepotism in the tax administrative apparatus was quietly allowed to grow strangely.”
  • “Sheer indifference to updating technological systems that should have been the foundation of scientific data analysis needed for effective tax collection.”
  • “Even when the finances of the State continued to remain stressed and on the verge of a breaking point, concessions were lavishly handed out on taxes.”
  • “It is also a tragedy that the appeal process often becomes steeped in corruption with the Deputy Commissioners (Appeals) remanding ripe cases overlooking even judicial pronouncements. Those who resisted the pressures found themselves helpless. There is a case where a Deputy Commissioner (Appeal) was changed three times till a pliant officer was found who would oblige the vested interests.”
  • “The report of the Comptroller and Auditor General on KVATIS in 2015 has documented in detail, how addition of simple validation procedures could have avoided significant leakages. The truth of the matter is that there was no attempt to update the systems since its introduction in 2008. Even the computer server capacity was not expanded, so much so that it became very difficult for taxpayers to access the database for even remitting their tax.”
  • “Significant tax concessions were given even through budgetary announcements even at the peril of a collapse of the treasury which was already starved for funds.”
  • “All caution was thrown to the winds in announcing new schemes without matching budget provisions in the hope that tomorrow would take care of itself!”
  • “Concessions offered to benefit certain groups of tax payers which amounted to sacrifice of revenues already being received.”
  • “Unwritten reluctance in certain cases to ensure that legally mandated revenue generation measures are implemented.”
  • “Failure to implement technology support in the major tax collection departments to give advanced data analytics support for tax collection and monitoring.”
  • “The immediate concerns as a State economy is the risk of our foreign NRI (Non-Resident Indian) remittances dwindling.”
  • “The decline in the rubber and price of other commercial crops has had a deleterious impact on the regional economy.”

Analysis of the white paper points to the following causes for the financial crisis in Kerala.

  • Irresponsible government
  • Corruption at different levels of the government
  • Lack of a balanced, sustainable economy
  • Inefficient tax administration systems and support processes
  • Fantasy budget and financial planning processes
  • Lack of inter-department coordination and collaboration
  • Lack of effective planning, coordination, collaboration and data management infrastructure and processes for the government
  • Lack of a coherent vision for the state economy

During the previous LDF (Left Democratic Front) government (2006-2011), responsible financial management resulted in:
     a) High growth rate (24%) of commercial taxes
     b) High year-end treasury cash balances.

During the last UDF (United Democratic Front) government (2011-2016) financial mismanagement, corruption and unfunded project expenses resulted in:
     a) Lower growth (10.13%) of commercial taxes
     b) Negative year-end treasury cash balance.

Tax revenue is highly volatile and point to an unbalanced economy. Major part of the tax revenue is from commercial taxes, resulting from consumption. Therefore, the first level dependence is on economic activity (consumption). The second level dependence is on the bureaucratic tax collection system (“vital tax collection machinery”), which is prone to political interference and manipulations.

A large portion of the tax revenue is derived from state lottery and alcohol sales. And the income tax share is nonexistent. This makes the tax system extremely regressive. A necessary goal for real economic development is shifting a significant share of state taxes to income tax, which will necessarily mean creating good jobs in the state, and will provide many supplementary economic benefits.

Implementation of a state-wide effective IT infrastructure capable of administrative support, financial and project management is a critical need.

The problems highlighted in the white paper also point to many governance deficiencies. Here are the critical ones.

1. Meaning of democracy

A common belief among political parties and leaders in India is that if they win elections, they can run the government as they please. The is a misconception. India is a “constitutional democracy” [2, 3]. That means political parties, political party members and leaders, government ministers, officials and employees have to behave and act within the provisions of the constitution and the laws derived from it. In addition to the constitution and laws consistent with it, there are sensible norms and customs that need to be followed by all for a functioning democracy.

Democracy matters because “it is the best system we’ve invented for distributing wealth, maintaining peace, and preventing one portion of society from falling beneath the yoke of another.”


2. Purpose of government

Kerala government formulation itself is based on outdated concepts, manifested by its tendency to arrogate to itself various activities in the economy. In fact, Kerala government may be a quintessential example of a malfunctioning government Peter Drucker [2, 3, 4, 5] describes: “There is mounting evidence that government is big rather than strong; that it is flat and flabby rather than powerful; that it costs a great deal but does not achieve much.”

Drucker defines the role of government: “The purpose of government is to make fundamental decisions, and to make them effectively.. The purpose of government, in other words, is to govern. This, as we have learned in other institutions, is incompatible with ‘doing’ … If this lesson were applied to government, the other institutions of society would then rightly become the ‘doers’ … It would rather be a systematic policy of using the nongovernmental institutions of the society – the hospital as well as the university, business as well as labor unions – for the actual ‘doing.'”

OECD (Organisation for Economic Co-operation and Development) has expanded on Drucker’s ideas and developed concepts for “public management” using “leveraged government,” More details available in the OECD publication: “Government at a Glance“.

Kerala government should focus on governance and divest itself from all other activities, automatically reducing its financial burden.

3. Tax administration

Kerala government tax administration, also known as “vital tax collection machinery,” is a misguided organization. Currently, based on the inclination of the political party in power, the “machine” whirls into action, collecting taxes. If the inclination of the party in power is lower taxes, the “machine” goes slow, and tax collection decreases. This type of thinking is an outdated vestige of the colonial days.

“The promotion of voluntary compliance should be a primary concern of revenue authorities,” OECD recommends in “Principles of Good Tax Administration.” And OECD adds, “Voluntary compliance is promoted not only by an awareness of rights and expectations of a fair and efficient treatment but also by clear, simple and ‘user-friendly’ administrative systems and procedures. Voluntary compliance is enhanced when it is easier for taxpayers to do so. Voluntary compliance is maximized when revenue authorities are aware of major developments and trends in the business and legislative environment, and are responsive to their implications on tax administration and compliance.”

The measure used for the effectiveness of taxation, rate of growth of commercial taxes collected is unscientific. A better method for estimating potential taxes is to benchmark with Tax revenue to GDP ratios. EU Tax revenue statistics may be a helpful guide for estimating tax potential in Kerala.

The solution to the current financial crisis in Kerala is a comprehensive economic development program — not increasing the rate of commercial tax collection.

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Stay out of politics, Supreme Court tells Governors

The Times of India – The Supreme Court has downsized governors’ discretionary powers and told them: They are to shut their eyes and ears to political imbroglios, even horse-trading, as long as the council of ministers headed by the CM enjoys a majority .

Writing a note highly critical on Arunachal governor JP Rajkhowa’s role in the state’s political instability, a constitution bench of Justices J S Khehar, Dipak Misra, Madan B Lokur, P C Ghose and N V Ramana unanimously said: “Activities within a party, confirming turbulence, or unrest within its ranks, are beyond the governor’s concern. more> http://goo.gl/tUJSRI

Related>

  • Understanding the Uttarakhand crisis, thehindu.com
  • Arunachal Pradesh verdict: SC lays down governor’s limits, dnaindia.com
  • Top 10 observations of Supreme Court on Arunachal Governor JP Rajkhowa, newsx.com
  • Arunachal Pradesh row: What message does the Supreme Court give to the political class? Sanjay Hegde, indiatimes.com
  • How the drama regarding government formation in Arunachal Pradesh unfolded, Shantanu Nandan Sharma, indiatimes.com
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    A development shell game

    The Times of India feature, “KSUDP short of Rs 750cr ($112.5m) to meet targets” (June 30, 2016), shines light on the sorry state of development projects in Kerala.

    The projects were launched in 2007 with deadline set in 2012, were extended twice and the final closing data was fixed on June 30, 2016. According to the report, “an amount of $45 million will remain unutilized by the loan closing date which is June 30, 2016. The packages comprised to improve roads, water supply and sanitation, solid waste management, sewerage network improvement and storm water drainage.”

    It seems most of the effort was focused on getting the loan, but there was little attention paid to completing the projects. Understanding the reasons why there is so much interest in getting the loans, but not enough motivation in completing them would be an useful exercise. Because the failures point to systemic problems.

    Reasons for project failures include “public resistance, non-availability of land and poor performance of contractors.” And, “four sewerage contracts in Kochi worth Rs 168 crore ($25.2m) could not be commenced due to public protest.”

    With stopping of ADB (Asian Development Bank) funds, the only option before KSUDP (Kerala Sustainable Urban Development Project) to seek funds from the state government, which is unlikely to succeed due to the dire condition of the government finances.

    The report also says, “The JICA (Japan International Corporation Agency) stopped the Rs 250cr ($37.5m) payment after the state failed to complete project within the stipulated time frame.” (“Irked by delays JICA had done an ADB before”)

    In addition, “The project management unit of the KSUDP, which is struggling for funds, had paid close to Rs 70 crore ($11.25m) in consultancy fees alone for managing various projects” (“Consultants guzzled close to Rs 70 crore”). The report also adds, “As per the terms of agreement with ADB, projects can be implemented only with a panel of consultancies. Hence, even if it results in economic drain, we have to go by the terms.” an official pointed out.

    The feature also reports about an interesting distracting activity. The report says, “At first, the plastic waste dumped in the various corners of the compound will be moved to one place. Then private firms will be roped in to beautify the remaining plot. The space for upcoming waste treatment plant and waste-to-energy plant will also be marked. A few firms have already come forward offering their corporate social responsibility (CSR) fund for the beautification.” (“Brahmapuram plant to get a green makeover“)

    The proposed “beautification” proposal highlights skills deficit in the Kochi Corporation. The beautification plan is an attention diverting effort to salvage a half-baked plan for waste management. Instead of diversions, what is required is implementing a comprehensive waste management solution and implement it vigorously.

    Putting all the pieces together, this is the picture that emerges:

    KSUDP and other Kerala government agencies hire consultant(s) to prepare proposal documents to obtain loans, with minimal or no project execution preparations. Once the loan is secured, victory is declared. Since there were built-in deficiencies in capabilities for project execution, the project never takes off or flounders. The funding agency gets frustrated, and eventually stops further payments. The expenses incurred for partially implemented projects gets added to the state debt, worsening the budget deficits.

    The reason for ADB requirement to include consultants in the ADB-funded projects need to be understood. Outsourcing project planning and management functions to consultancies inhibits developing mission critical skills within the project-sponsoring agencies. So why is the ADB interesting in requiring use of consultancies? Is it to promote scams like the one outlined? Or, to inhibit real economic development?

    With the current financial crisis facing the state, maybe the Kerala government will be forced to adopt better project planning and financing methods.

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    Kerala model’s mutation over the years

    By K V Joseph – The pattern of development, which ushered in Kerala during the third quarter of the 20th century, attracted worldwide attention.

    It was eulogized as an ideal form of development as Kerala could achieve impressive level of improvement in various social indicators without a corresponding development of the economy.

    The growth of consumerism has paved the way for the emergence of various kinds of undesirable consequences. One of them relates to the attitude of Keralites towards work. A mentality for hard work, essential for economic development sadly, seems to have vanished from the bulk of Keralites. A fall in agricultural production, particularly of paddy, is a clear manifestation of such a mentality.

    Though overall prosperity is discernible, the quality of life has also deteriorated beyond recognition. The state is facing new problems like shortage of clean drinking water and the menace of waste management with no clear solution in sight. Heaps of plastic bags containing household wastes are a regular sight from one end of the state to the other.

    How to retrieve the model poses a major issue calling for serious attention. more> http://goo.gl/PVlghe

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    Discard anachronisms, embrace digital economy

    Digital economy transformation offers developing economies opportunities for “leapfrog” economic development. Instead of automating old practices, jump into digital economy.

    The Times of India report “Amendment scraps periodic conduct of license exams” (June 28, 2016), provides an example of anachronistic practices in the Kerala government that is ripe for moving to digital.

    The report says, “The document writer’s license rules have been amended to put an end to periodic conduct of license examinations.” Instead of doing away with a systems that may have been needed in the 19th century, Kerala government makes a big show and scraps periodic license exams.

    Reacting to the government move, document writers said that it would result only in increase in fraudulent and erroneous documents.”If anyone can execute a document, there are chances for rise in number of fraudulent and court court litigations,” Kerala state document writers and scribes association state president Indukaladharan said.

    In a modern economy, legal titles and ownerships do not depend on documents, but in digitized authoritative registries. Leading edge technologies such as blockchain, digital certificates and signatures are enabling transactions without paper documents, while eliminating fraud. Rather than trying to hang on to outdated, obsolete practices (like document writing), the smarter approach will be to take the initiative to implement market leading systems for digital document and process management. It is such visionary steps that can create a vibrant industrial sector in the state, rather than the trailing edge IT activities currently being promoted. Nor will the numerous incubators established by the Kerala government generate intended results. Creating real innovation in the economy requires strong, streamlined and linked “value-chain of idea generation, idea conversion and idea diffusion.”

    Such progressive efforts will, naturally, make some skills obsolete. Providing social safety net for those displaced by new technologies is the way forward, rather than holding on to obsolete methods. Kerala has a tradition of taking bold, unconventional leaps. Maybe Kerala can claim another first by implementing “Basic Income” for the displaced workers, continuing the tradition of democratically promoting socialist ideals.

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