Indian Council for Research on International Economic Relations

ICRIER Think Ink

  • No.TittleAuthor

    Date

  • 1Urban Finance & Municipal Bonds: The ImpasseSandeep Paul

    Jul 2016



  • The concept of urban local governance has a long history in India. The first municipal corporation in India came up as early as 1687-88, when British established a corporation to govern areas in and around fort St. George in the present day Chennai city. The concept caught on and after much evolution, local governments now occupy an indispensible position in Indian governance system. The real turnaround in this episode was the 74th constitutional amendment act which dispelled all the doubts on status and legitimacy of decentralized forms of governance. The act ushered in a new era in decentralized governance by empowering urban local bodies (ULB) with constitutional status and a definite set of functional items. Most importantly, the 74th amendment act enabled ULBs to function as institutions of self government and attempted to ensure financial independence and stability of them.

     

    While the constitution has tried to ensure financial stability of ULBs through devolution of taxes and establishment of state finance commissions, question remains whether financial inflow has been adequate to cater to the ever increasing demand for public goods. The growth in urbanisation and urban population has severely strained the local governments as demand for urban services and infrastructure development has gone up many folds. The fourteenth finance commission has noted that local bodies are not even able to meet a fraction of their expenditure on provision of basic services and are heavily dependent on the transfer of one fund or another. From the precarious state of finance of most of ULBs it is evident that the present revenue sources are not enough to plug the increasing demand for investment in urban infrastructure. Municipal bonds, a cheaper source of funding can be one way to solve this financial crunch. Municipal bonds in general refer to debt instruments issued by an institution of self government or their agencies. A widely popular debt instrument all over the world, the proceeds from municipal bonds is usually used to fund the infrastructure development or to meet day to day obligations. Countries like USA have a long history in utilizing these debt instruments to effectively fund infrastructure investment. In 2015 alone issues worth $403 billion has been made, accounting for 6.25% of total bond issuance in the country. Even developing countries like South Africa and Vietnam is actively exploring this option to fund their infrastructure development.

     

    The idea of raising funds through municipal bonds is certainly not new to India. Bangalore Municipal Corporation was the first to raise funds through issue of bonds in 1997. These bonds, worth Rs 1.25 billion were state government backed and was privately placed. The first ULB to make a public offering was Ahmadabad Municipal Corporation in 1998 when it issued Rs.1000 million in bonds to finance its water supply project. Since then few cities like Nasik, Indore, Hyderabad, Chennai, Visakhapatnam etc. have followed the suit and have issued bonds to mobilize resources from the capital market. While few were tax free bonds there were also taxable issues. Moreover, most of them were sold not through public offering but to certain selected investors (private placement). However the market has not expanded much and the number of municipal bond issues remained dismally low. In aggregate, only Rs.13.53 billion has been issued under all categories of municipal bonds. The market has been virtually dead for the last few years with no new fresh bond issues. The pooled finance mechanism which showed promising results in early 2000s has also failed to live up to its true potential. The idea was that the state level umbrella entity could bring together smaller municipalities who lack the skill and potential to access capital market on its own. The concept proved to be a success in few states like Karnataka and Tamil Nadu who could come out with successful bond issues while most of the other states failed to do the same.

     

    While much has been written about the potential of debt instruments in financing urban infrastructure, the efforts in this direction is yet to catch up. Though the government has stepped up its efforts with SEBI releasing a new framework for public issue of debt securities by municipalities in July 2015, the market response has been uninspiring with no new issues so far. The fourteenth finance commission also stressed the need to explore this option in its report. The issues are multifold with apprehensions about investor confidence topping the list. The doubts about self sufficiency and prudence in financial management of ULBs are strong in the investor community. ULBs also seem to accept and go by this view as most of the municipal bond issues in the past were privately placed. In contrast to this individuals hold the bulk of the municipal bonds in USA. Another feature that stands in the way of development of a healthy municipal bond market is the ‘lemons’ issue. The credit worthy ULBs plush with internal revenues are in no need of debt financing and tend to stay clear off it while the cash strapped ones are more than eager to avail new sources of funds. This invariably increases the risk of the borrower and dampens the market confidence in municipal bonds. On the supply side, apprehensions about capacity, cost considerations, regulatory conditions and associated obligations furthers the apathy and inaction of local bodies.

     

    Any attempt to raise funds through debt financing has to be done in such a way that financial health of ULBs should neither cloud investor outlook nor jeopardize the repayment process. Project specific financing, linking the repayment to an assured flow of revenue could be strategies to overcome this. Pooled finance mechanism was a right step in this direction and needs to be taken up more seriously. Government can also encourage its agencies like HUDCO who have a long history of association with municipalities and local self government to play an active role in the municipal debt market. They can not only guide the ULBs in the process but also contribute to deepening of municipal debt market through providing guarantees on debt, underwriting bond issues and investing in lower rated tranches of bond issues. While there is no doubt that integration with the capital markets will be a game changer in the local governance, financial stability of institutions is a prerequisite. As access to finance is only a part of the bigger picture, efforts have to be stepped up to ensure sustainability in all realms of urban finance.

     

    –Sandeep Paul

  • 2Traversing the murky waters of the ‘Panama’ canalAnandita Bagchi

    Jun 2016



  • A little over a year ago, an anonymous source contacted the German newspaper Süddeutsche Zeitung and submitted encrypted internal documents from Mossack Fonseca, a Panamanian law firm. This was the inception of what is now famously known the world over as the ‘Panama Papers’. Touted as one of the biggest leaks in investigative journalistic history, the data contains 11.5 million documents and 2.6 terabytes of information from the internal database of the law firm. This makes it larger than the US diplomatic cables released by Wikileaks in 2010, and the secret intelligence documents given to journalists by Edward Snowden in 2013.[i]

       

    The unprecedented exposé allows us a peek inside the underbelly of the offshore world. As the data spans nearly four decades, from 1977 through the end of 2015, it provides a thorough look at how dark money flows through the global economy, breeding crime and depriving national treasuries of tax revenues. The yearlong investigation that was conducted by the International Consortium of Investigative Journalists, Süddeutsche Zeitung, and more than a hundred other news organisations, shows how financial secrecy is sold to politicians, fraudsters, drug traffickers, billionaires, celebrities and sports stars. It exposes a system that enables crime, corruption, and wrongdoing, hidden by secretive offshore companies.[ii]

       

    The law firm at the forefront of this all, Mossack Fonseca, is the world’s fourth biggest provider of offshore services and boasts of a global network with six hundred people working in forty-two countries. It has been operating in tax havens including Switzerland, Cyprus and the British Virgin Islands, and in the British crown dependencies of Guernsey, Jersey, and the Isle of Man. It sold unnamed offshore companies (shell companies) around the world which enabled their owners to cover up their business dealings, no matter how shady[iii]. The firm has also been administering offshore firms for its clients for the payment of a yearly fee. It has been reported that clients could buy an anonymous company from Mossack Fonseca for as little as USD 1,000. This being just an empty shell, for a little extra fee, the firm would also provide a sham director and conceal the company’s true shareholder. The result was an offshore company whose real ownership structure and purpose could not be deciphered from the outside[iv]. Post the leak, the firm has shuttered offices in three prominent tax havens (Jersey, Gibraltar, and the Isle of Man), after enjoying a presence in these locations for over twenty years.

       

    It must be clarified though, that the term ‘offshore’ is not to be associated only with illicit activities of the world’s rich and famous. The most important thing to understand is that offshore entities are not illegal, neither to set up nor to use[v]. Offshore entities can legitimately be used to hold property in another country, minimise probate on death, provide asset protection, provide investment diversification, and operate an active business. What breaks the law, is the activities of the entities and the shareholders.

       

    The leaked Panama files show how associates of Russian President Vladimir Putin secretly shuffled around USD 2 billion through banks and shadow companies; how the erstwhile Prime Minister of Iceland[vi], Sigmundur David Gunnlaugsson and his wife secretly owned an offshore firm that held millions of dollars in Icelandic bank bonds during the country’s financial crisis. They provide details of the hidden financial dealings of about 130 politicians and public officials around the world, apart from celebrities, sports stars and the like. Even world leaders who have publicly declared their stance on anti-corruption, such as the Chinese President Xi Jinping, Ukrainian President Petro Poroshenko, and British Prime Minister David Cameron, find their names directly or indirectly linked to these documents.

       

    The ‘Panama Papers’ provide a compelling explanation to the growing phenomenon of income inequality in our times – pervasive corruption[vii]. The source of the leak has stated that this was done not for any specific political purpose, but because they understood enough about the contents to realise the scale of injustices described therein. If law enforcement agencies are able to access the documents, thousands of prosecutions could emerge.

       

    That being said, an important point to be considered from such leakages of internal documents is whistleblower protection. Whistleblowers are likely to find themselves in extremely challenging circumstances after turning the spotlight on obvious wrongdoing. It is imperative that governments codify protections for whistleblowers into law; else, enforcement agencies will only have their own resources to depend on, which could very well be insufficient to say the least[viii].

       

    — Anandita Bagchi

       

    ———————

    [i] http://www.thecitizen.in/index.php/NewsDetail/index/6/7327/Panama-Papers-Hit-Bachchan-Adani-But-Also-Xi-Putin-Cameron-Football-Star-Messi

    [ii] http://anticorruption-intl.org/criticising-shell-companies/

    [iii]http://www.firstpost.com/business/all-you-need-to-know-about-the-panama-papers-leak-2711328.html

    [iv] http://panamapapers.sueddeutsche.de/articles/56febff0a1bb8d3c3495adf4/

    [v] http://www.huffingtonpost.com/entry/five-legitimate-reasons-t_b_9620364.html?section=india

    [vi] Prime Minister Gunnlaugsson resigned after being implicated in the ‘Panama Papers’ investigation

    [vii] http://panamapapers.sueddeutsche.de/articles/572c897a5632a39742ed34ef/

    [viii] http://panamapapers.sueddeutsche.de/articles/572c897a5632a39742ed34ef/

  • 3India’s Competitiveness in Textiles and Clothing, Then and NowPrateek Kukreja

    May 2016



  • The Indian Textile Industry is the second largest employer after agriculture, which provides direct employment to around 45 million people. The sector also accounts for 14% of India’s total industrial production, which is close to 4% of the country’s total GDP (Ministry of Textiles, Govt. of India Annual Report 2014-15). According to the WITS Comtrade 2014 data, India ranks only second after China in the list of the world’s largest exporters of Textile and Clothing, with an impressive export figure of around USD 38.6 billion.

     

    This was the first organised industry that came up in the country (Kar, 2015). Being one of the oldest industries and holding a significant share in country’s total investment, employment and output, the textile and clothing industry occupies a central place in Indian economy. With an abundant availability of raw materials such as cotton, wool, silk and jute as well as of a relatively cheaper labour force, India enjoys a comparative advantage in terms of cost of production and of a skilled manpower relative to major textile producers.

     

    The textile and clothing sector internationally, has been governed by several agreements which have sought to curb imports from developing countries to developed nations over the past few decades. The history of trade in Textile and Clothing can be dated back to the post World War II period, when there were several bilateral trade agreements taking place largely in response to the pressure posed on the industrial countries by Japan’s export-led industrialisation. Japan’s highly competitive textile exports to these countries made them wary of the international competition as well as the shrinking domestic market. These agreements, however, came to a halt in 1961, when a regulatory framework was signed by the then GATT member countries, which was named as the Short-Term Agreement. In 1962, this was replaced by the Long-Term Agreement, imposing controls on the exports of cotton textiles from the Developing countries to the Developed ones. The Long term arrangement was soon superseded by the Multi-Fibre Agreement (MFA) in 1974. Though the MFA was initially thought of as a temporary safeguard, it was extended several times in 1978, 1982, 1986, 1991 and 1992. Finally, it was at the Uruguay Round in 1994, that the participating countries agreed to abolish the MFA over a ten year transition period through the Agreement on Textile and Clothing (ATC) and eventually, on 1st January 2005, MFA was phased out completely (Article 1.1 of the ATC).

     

    The phasing out of the MFA has had a positive impact on India’s share in world exports, which, according to the WITS Comtrade figures, grew from around 3.37% in 2005 to 4.53% in 2014, at a CAGR of around 3.01%. Comparing this growth with that in the previous decade, the share of India in world exports of Textiles and Clothing declined from 3.02% in 1994 to 2.94% in 2004 at a CAGR of (-)0.25% (WITS Comtrade).

     

    Clearly, the removal of quota restrictions by the developed countries on the exports of textiles and clothing from the developing countries through the course of the MFA-phase out has provided the Indian textile exporters with greater opportunities for increased exports and for reaping benefits of the comparative advantage that India possesses in this sector.

     

    According to the recent WITS Comtrade figures, the leading T&C exporters of the world in 2014 in order of ranking were[1] : China (33.81%), India (4.53%), Italy (4.33%), Germany (4.16%), Turkey (3.41%), Bangladesh (3.17%), Vietnam (2.96%), United States (2.65%), France (1.94%) and Belgium (1.84%).

     

    Interestingly, during the post-MFA regime, of these leading T&C exporters, leaving China, which stood out in terms of its export figures, as discussed earlier, only India, Vietnam and Bangladesh have experienced a positive CAGR in share of exports. All the other countries have witnessed a decline in share of global exports of T & C during the post MFA regime as shown in figure 1.

     

    Figure1 Share of Leading T&C Exporters in 2014 (except China) in World Exports of T&C

     ICRIER

    Source: Author’s Calculation based on UN Comtrade database

     

    However, in recent years, countries like Bangladesh and Vietnam have been posing a threat to India’s competitiveness. During the post-MFA regime, Vietnam and Bangladesh were the top two nations in terms of CAGR in share of exports for T&C (WITS Comtrade). Vietnam’s share in world exports rose sharply from 1.05% in 2005 to 2.96% in 2014 at a CAGR of 10.94%, whereas Bangladesh’s share increased from 1.52% in 2005 to 3.16% in 2014 at a CAGR of 7.61%. Therefore, Vietnam and Bangladesh could be seen as a potential threat to India’s rising dominance in terms of share in T & C exports to the world.

     

    Moreover, following the Trans-Pacific Partnership (TPP) Agreement, which is a trade agreement among twelve Pacific Rim countries and which was reached finally on 5 October 2015, after 7 years of negotiation, it is strongly believed that Vietnam could be a major gainer. TPP, which will slash an estimated 18,000 tariffs among the participating countries, is likely to boost foreign investment into (and thereby exports out of) a low-wage economy like Vietnam. Bangladesh, also being a low wage economy, its textile industry is primarily based on low-cost apparel manufacturing. Therefore, enjoys a greater competitiveness vis-à-vis the competing exporters and thus, may pose a threat to India’s position in world exports of T&C, by inching closer every year.

    –Prateek Kukreja

    ………………………………………….

     

    [1]Figures specified in parenthesis are the respective shares of the exporting countries in total world exports of T&C during 2014 (Source: Author’s computation based on WITS Comtrade Database)

  • 4Origins of Risk PreferencesBhavook Bhardwaj and Suvi Agrawal

    May 2016



  • Uncertainty is inherent in every walk of life and decisions made in the face of such uncertainties reflect the underlying risk preferences of the decision maker. Important economic decisions such as investment and consumption are based on the risk-preferences of individuals. However, often, little thought is given to understand the mechanisms underlying and the factors influencing risk preferences. We contemplate on the role that belief systems play in shaping risk preferences.

     

    We restrict the definition of a belief system to a set of behavior governing norms. These norms may be derivatives of a religion or school of thought. We do not intend to delve into the complexity of belief systems; hence we assume that there exist two belief systems in the world that are mutually exclusive and exhaustive in the universe of belief systems. This is a highly simplifying assumption, but sufficient for expositional purposes. We also assume that people have preferences over the choice of their belief systems expressed by a probability distribution, determined by a well-defined set of factors that include social norms and perception of utility from adhering to a given belief system. This means that interpretation of the same belief system can vary across individuals. These preferences are dynamic, that is they change over time. We postulate that the degree of risk aversion, as reflected in actions observed, are derived from the belief system an individual adheres to. Specifically, a more risk-averse individual will belong to a particular belief system, reasons for which are discussed below.

     

    Suppose there are two belief systems: B1 and B2. The belief space in each system is divided into two subsets consisting of core and non-core beliefs. Let X1 and Y1 be the subsets of core and non-core beliefs in B1 and X2 and Y2 the subsets of core and non-core beliefs in B2. Also, X1 > X2 , and Y1 < Y2 i.e. the number of core beliefs is higher in the B1 and number of non-core beliefs is higher in B2. The core beliefs, we argue, are hard to alter. Non-core beliefs, on the other hand, are likely to change over time and can be seen as Bayesian in nature i.e. the beliefs are updated upon the receipt of more information. A good example of core beliefs is the 17th century Catholic view of the cosmos, which despite the empirically proven heliocentric view put forth by Galileo, remained unaltered for years. Contrarily, consider the case of weather forecasting. Scientific advances made over time provide a farmer with greater reasons to believe his mobile phone over Zeus. This forms a non-core belief.

     

    We propose that the specific elements in the core set can determine the risk preferences to a large extent. If we assume that the number of core elements is positively correlated to higher risk aversion, then people adhering to B1 are likely to be more risk averse than people adhering to B2. These preferences can be reflected in realm of financial decisions, economic decisions as well as personal decisions. Further, the elements in the form of proscriptions can also explain instances of irrational behavior in the sense of economic theory. This includes cooperative behavior, altruism and trust. This has been verified by several existing studies. Anderson and Mellor (2009) find that religion may sustain cooperation. Through a repeated public goods game, they show that decline in public goods contribution by religious participants tends to decline less relative to non-religious participants. They suggest this observation may be due to religious instructions that promote altruism.

     

    Coming to our proposition, it is more of a shot in the dark than an empirically verified one. Nonetheless, we believe it’s one to ponder upon and testable using experimental methods.

    —Bhavook Bhardwaj and Suvi Agrawal

    ………………………………  .

    References

    Anderson, L.R. and Mellor, J.M., 2009. Religion and cooperation in a public goods experiment. Economics Letters, 105(1), pp.58-60.

  • 5Caught in a ‘Padmavyuha’: Travails of Natural Rubber CultivationSandeep Paul

    Apr 2016



  • A crop of high industrial and strategic importance, natural rubber is one the major plantation crops in India. Though the crop has long ago moved away from the conventional plantation economy systems, much of the production is still concentrated in the traditional areas, majorly in the state of Kerala. Often dubbed as the plantation hub of the country, the state accounts for a substantial share of production of the four major plantation crops in India namely tea, coffee, rubber and cardamom. Natural Rubber is undoubtedly the most favoured among these crops in the state and has witnessed significant growth since its introduction. Today it is the most important crop in the state with maximum area under production far exceeding conventional crops like rice and coconut and is a source of livelihood for around a million households in the state.

     

    The rise and the fall

    Though a crop of great commercial importance to the economy, picture is far from rosy for the rubber cultivators in Kerala. With constant decline in prices, rising unprofitability and multitude of other problems the sector is facing its toughest time in the history. As the following graph shows there has been a free fall in prices especially in the last two years. While tribulations associated with price crash is a not a novelty for the rubber cultivator, it is feared that the present crisis questions the very existence of the sector.

    Figure

    A plantation crop with a history of indigenous entrepreneurship, rubber cultivation had a smooth growth trajectory in Kerala. With a constant decline in conventional agriculture, it had acquired the undeniable status as the most remunerative crop in the state by the 1960s. Everything went well until the early 1990s when the Indian prices stayed above the international prices attracting huge investment and showing a steady increase in acreage. The situation has changed henceforth. The synchronisation of domestic and world prices subsequently led to a low price phase between 1997 and 2001. This is often referred to as the ‘Rubber Crisis’ period. During this period, the price of rubber reached its rock bottom but the sector wriggled out of it in mid 2000’s with prices again peaking in 2010-11. Everything was looking promising at this juncture; rising prices, increasing production and consumption. Then one fine morning, the cycle restarted, prices slumped and we have the present crisis. It is at this juncture that the big question arises – how is the present price crash and associated issues different from the former ones? What makes it more serious?

     

    “When ill luck begins, it does not come in sprinkles, but in showers” [i]

    Historically, the growth and sustenance of any plantation crop around the world has been based on the age old theory of ‘comparative advantage’. This is more pertinent in an open economy set up into which we are slowly heading. In the case of rubber, since the time of independence, the sector has been lucky to avoid such a challenge largely due to the support of the state not just from the supply side but also on the demand side. The opening up of markets in 1991 and the demand for natural rubber in the country outstripping the domestic production pushed the rubber cultivators to the hitherto unheard challenge of world prices. It was also at this time that the sector reached the culmination of a ‘structural change’ that started long ago – the predominance of smallholdings. This posed further complications for the sector. Usually the comparative advantage of a plantation crop stems from a ‘cheap land-low wage’ combination. Both land and labour which provided the ‘comparative advantage’ for the tropical or sub-tropical plantation crops are already costly in Kerala. But again this is natural for any capitalist economy where the price of factor inputs like land and labour are bound to increase overtime. The way out for this challenge usually comes in the form of labour augmentation, technological changes, rise in productivity etc. which would again drive down the costs and thereby increase profitability. This is where it gets tricky for Natural Rubber Cultivation. Unlike most other crops in India, the productivity (kg/hectare of tapped area) in India is already much higher than competing countries and the yield in Kerala is above the national average[ii] . This limits the scope to overcome the crisis through yield increase. That leaves us with the option of labour augmenting technology. Sadly rubber does not have much to look forward here also. Tapping (extraction of latex) of rubber is a semi-skilled process where the experience and talent of the tapper matters a lot. Scope to adopt labour augmenting technology or mechanisation is highly limited here. Further, the ability of small farmers to adopt even the existing technological innovations to improve the product quality is also a concern. With almost every available quality enhancement technique showing clear economies of scale, these are often neither accessible nor profitable for the smallholders.

     

    Another major concern that haunts the sector is its declining labour force. The most alarming fact in this regard is that that there has been hardly any growth in the labour force in most of the areas over the last two decades. The gruelling job is no longer attractive to the young generation. Inability to earn a respectable income makes matters worse. The point that is often missed is that the wage in rubber tapping is per tree and hence the daily wage depends on number of trees tapped. With the dispersal of holdings, multiple grower dependency and shrinking of land holdings, adequate sufficiently large tapping assignment is a far cry for almost all the tappers. Efforts to introduce migrant labour have also failed miserably owing to socio-economic reasons.

     

    The trajectory of growth during late 2000’s teaches us an important lesson. Better prices may not always get translated to a sustainable growth. The growth during this period was largely due to the smallest category of holdings- those of 2 ha and below. Growth of area under production for all other size categories either declined or stagnated. The impact of this was two-fold. Firstly, the instability and informality of production in smallholdings negatively affected the supply chain. Secondly, sustained low and volatile prices as we experience today immediately throws the entire sector into a haywire. As the state has failed to establish proper institutional safeguards and social security measures during the growth period, the ability of smallholders to withstand price fluctuations remain highly limited.

     

    In short, the natural rubber sector has got itself into a ‘padmavyuha’. The run has been impressive but not enough. The way out is also not easy. Tested with the tumults of the global economy, its own structural deficiencies are pulling it down. While raising import duty appears to be an attractive option at first glance, it is neither a practical nor a sustainable option. As our production falls short of domestic demands, the threat of imports and the short term price fluctuations caused by it is here to stay. Also it is often pointed out that in the case of rubber the relationship between tariff rates and imports do not follow the expected pattern[iii] . This is majorly because the demand for natural rubber by our industries also depends on a host of other factors ranging from crude-oil prices to industry structure and export promotion policies. The almost monopsonist status of tyre industry further complicates the demand pattern. While price floors and import restrictions can be short term mitigation measures, the need of the hour is larger structural and institutional overhauling both from supply and demand side.

     

    – Sandeep Paul

    —————————————-

    References

    George K T, Joseph J (2005). “Value addition or value acquisition? Travails of the plantation sector in the era of globalisation”, economic and political weekly, 40(26):2681-2687.

    George K.T, Haridasan V and Sreekumar B (1988). ‘‘Role of Government and Structural Changes in Rubber Plantation Industry,’’ Economic and Political Weekly, 23 (48): M 158-M 166.

    Joseph, K. J. (2009). ASEAN-India pact and plantations: Realities of the myths. Economic and Political Weekly, 14-18.

    Strasser Balz (2009). “We are as flexible as Rubber: livelihood startegies, diversity and the local institutional setting of rubber small holders in Kerala, South India.”New Delhi, Manohar.

    Viswanathan, P.K. George, K.T. and Joseph, T. (2003). ‘‘Informal Labour Market and Structural Devolution.’’ Economic and Political Weekly, 38(31): 3277-81.

    —————————————-

    [i] Mark Twain – The Tragedy of Puddn’head Wilson

    [ii] http://rubberboard.org.in/IRS_Vol33.pdf

    [iii] Joseph, K. J. (2009). ASEAN-India pact and plantations: Realities of the myths. Economic and Political Weekly, 14-18.

  • 6Hiccups to StartupsLipakshi Kapoor

    Sep 2015



  • An ‘Idea’ is all it takes. But is it really that simple??

     

    With the current government promoting the ‘Make in India’ campaign to such a large extent, the start-up picture in its totality appears much larger than one would have otherwise imagined. Not only are startups becoming increasingly imperative to improving the country’s economy, they might also be a solution to India’s future development and prosperity. Realising the importance, the present government constituted the Ministry of Skill Development and Entrepreneurship with the view to improve the skill and entrepreneurship ecosystem in the country. Here are some reasons as to why, in the light of the challenges we face, startups are the way forward.

     

    India has an enormous population base, a majority of which is in the age group of 15 –59 years[i] . It is set to become one of the youngest nations in the world by 2020. This is strengthened by the fact that the average working Indian will be only 29 years by 2020 as compared to 37 in China and the US, 45 in Europe and 48 in Japan (Economic Survey 2011–12, Government of India)[ii] . This will give India an upper hand vis-à-vis the rest of the world with respect to its key human resources. This demographic development of India offers both opportunities and challenges.

     

    India’s economy has grown at the compounded rate of 7% a year over the past 10 years. Continued growth at this rate implies a two fold increase in personal consumption by 2020. With the government’s focus on making the youth of India job creators and not job seekers, young graduates from prestigious Indian institutions such as Indian Institute of Technology (IIT) and Indian Institute of Management (IIM) are keen to start their own businesses. Following a growing trend over the past few years, many graduates opt out of possible placements in favour of initiating their own start-ups and putting their own innovative business ideas into practice.

     

    In addition to the social challenge of not being welcomed by society, there have also been ongoing concerns that some regulations, rules, and government policies place a disproportionate burden on small businesses and entrepreneurs. India, in comparison to the other developing countries like Philippines and Thailand, has the least business friendly regulations. As per World Bank statistics, India has a 12-step procedure for startups in comparison with other countries like Korea, Thailand, United Kingdom and United States that have a less than 10-step procedure. The cost of startup procedure in India in 2014 was 12% of Gross National Income (GNI) per capita which is higher than other developing countries like China, Korea, Rep, and Thailand. [iv]Due to the high number of laws, regulations and registration, starting any new business becomes difficult and time consuming, and the World Bank has ranked India an abysmal 142(out of 189 economies) in the ease of doing business.Thus, one is compeeled to ask the question whether or not startups are actually being welcomed and supported by Indian society and the people in power?

     

    The first and most fundamental challenge faced by entrepreneurs in India is that of raising finance. As compared to other countries these are very different in India, especially with reference to online entrepreneurs. Online business models are still new in the country and thus getting initial business funding becomes extremely challenging for them. [v]The loan option gets ruled out as most bankers agree that the organized lenders tend to avoid start-ups. Coming up with a solution for funding startup-related problems, India’s stock market regulator is planning to create a crowd funding platform for small enterprises. However the numbers of investors have been limited and the companies are not allowed to publicize their efforts through ads on other media channels.[vi] The lack of infrastructure is another hindrance faced by the startups. The most obvious signs of lagging infrastructure development are the over-stressed power grids. In this context it must also be kept in mind that that in order to fulfill our objective of generating a self-accelerating process of economic growth, the development of infrastructure plays a vital role.

     

    The Government has numerous ways and means to stimulate economic activity and growth within the country by helping entrepreneurs achieve their dreams and by helping established businesses grow and prosper. The most powerful incentives the government has are at the financial level. The Union Budget of 2015 increased the opportunities for startups,;MUDRA Banks have been set up under a Prime Ministerial Scheme to facilitate funding for small entrepreneurs. 200 billion rupees have been allocated to the plan; the Finance Minister has allotted funds worth Rs. 1000 crore for startups[vii] ; and various other measures like Public Procurement Policy, investment in infrastructure, Goods & Services Tax (GST), introduction of internationally competitive Direct Taxes, sharp slash on few indirect taxes, and simplification of tax regime announced should result in ease of doing business. Focusing on self-employment and skill development of the youth will also lead to a positive impact on our present economic system if adequate measures are taken to ensure their implementation.

     

    The true success of the budget lies in its implementation. Mere allocation of resources is futile if the way forward regarding funding is not specified. At present no significant disbursement has been announced regarding the 1000 crore allocation for startups. Therefore, the country will require adequate measures regarding availability of finance and an infrastructural boost to bring it at par with the world’s manufacturing hubs. In order to meet the countries development goals, the pace of reforms also needs to be maintained or rather improved. Socially, the Indian society is adapting to a more risk-friendly environment. The physical infrastructure needs to be upgraded. There needs to be an increase in the quality and quantity of Venture Capital /Angel Investors in India. Crowd funding must be promoted. Also, the governments need to continue reducing the administrative burden on entrepreneurs, and coordinate among their agencies to ensure that the necessary resources are directed where they are needed[Viii].

     

    With a vast majority of the Indian population set to fall into the youth bracket within the next few years, the scarcity of job opportunities is going to rise tremendously making startups the ideal solution to our problems. However the challenges faced in this area in our country bear the potential of being damaging. When seen in this light it is clear that we might just be facilitating our own downfall unless we act in the right direction and take the necessary steps required. India as a country has always had potential – now it is high time we delivered. But can we? The question remains.

     

    — Lipakshi Kapoor

    ————————————————————

    [i]Census Of Indiahttp://www.censusindia.gov.in/vital_statistics/srs/Chap_2_-_2010.pdf (last access July 7, 2015)

    [ii]India to be a youngest nation by 2020 – March 16, 2012http://www.thehindu.com/news/national/india-to-be-a-youngest-nation-by-2020/article2999479.ece (last access July 9, 2015)

    [iii]Nasscom : Perspective 2020 – Transform Business , Transform India
    http://www.nasscom.in/sites/default/files/upload/Perspective%202020%20Press%20release%20presentation.pdf
    (last access July 7, 2015)

    [iv]World Bank Data- http://www.doingbusiness.org/data/exploreeconomies/india?topic=resolving-insolvency
    http://www.doingbusiness.org/data/exploretopics/starting-a-business (last access July 7, 2015)

    [v] Entrepreneurship Challenges and Opportunities in Indiahttp://www.tmimtjournal.org/Pdf/Poceddings/Track3/Track3_Paper12.pdf(last access July 9, 2015)

    [vi]Crowdfunding may get easier for start-ups in India, Hindustan Times – May 6 ,2015 http://www.livemint.com/Money/VpYCWZSwpZiuaKtpv9HwHI/Crowdfunding-may-get-easier-for-startups.html(last access July 9, 2015)

    [vii]Budget 2015: Fund of Rs 1,000 crore for startups, Times Of India, Feb 28, 2015
    http://timesofindia.indiatimes.com/tech/tech-news/Budget-2015-Fund-of-Rs-1000-crore-for-startups/articleshow/46408359.cms (last access July 7, 2015)
    World Bank -While India’s Economy has Turned the Corner, Wider Reforms are needed to Boost Economic Growth -April 28, 2015 http://www.worldbank.org/en/news/feature/2015/04/28/india-economy-turned-corner-wider-reforms-needed-boost-economic-growth(last access July 9, 2015)

  • 7‘Micro’ financing the solar potentialBhavook Bhardwaj

    Jul 2015



  • About a quarter of the Indian population is bereft of any form of electricity at all. Globally, the figure stands at 1.6 billion (International Energy Association). Tragic as it may seem, not many people are aware of this fact. The role of media in highlighting the importance of such an issue is crucial and it has failed miserably in it. Our obsession with growth figures has belittled the need for achieving basic human freedoms. The growth rhetoric is not as farfetched as it may seem if it fails to provide basic necessities and entails greater inequality. Economic inequality seems to be the buzz word in contemporary development debates (especially after Thomas Piketty’s recent work* ). A less acknowledged but closely related aspect of economic inequality is energy inequality. Growing energy inequality is evident in India. The percentage of rural households relying on kerosene as the primary source of domestic lighting has increased from 55.3 percent in 2001 to 55.6 percent in 2011 whereas the corresponding figure for urban households declined substantially, from 44.3 percent in 2001 to 31.4 percent in 2011 (Census 2011).

       

    Renewable energy is seen as a potential rescue agent to the growing energy needs of India. The Indian government through Ministry of New and Renewable Energy (MNRE) has been actively promoting renewable, energy especially solar energy through subsidies and awareness campaigns. Despite the subsidies, high upfront costs of equipment act as a major bottleneck in the widespread adoption of domestic renewable energy systems. This is where microfinance comes into picture, bridging the financial gap between rural households and renewable energy adoption. It has been acknowledged that household renewable energy systems may not be inherently income generating and returns from such systems accrue from the cost avoidance due to them (Srinivasan 2011). Thus financing such systems may not fall under the conventional microfinance paradigm. There has been some evidence of the impact of microfinance on environment (Anderson et al 2002, Lal and Israel 2006, Rouf 2012). Conventional microfinance influences environmental resources through the indirect route of social and natural capital. Green microfinance, a more targeted and direct form of microfinance is an outcome of the evolving nature and the increasing innovation experienced in the microfinance sector.

       

    A flagship initiative of government of India is the Jawaharlal Nehru National Solar Mission (JNNSM), under which capital subsidies on solar energy are disbursed through regional rural banks (RRBs) on a pan-India level. Prathama bank, an RRB based in Uttar Pradesh is a leader in disbursing capital subsidy among other RRBs. Their micro-credit model ‘Prathama Jyoti Microcredit Scheme’ is a remarkable success story which has enabled discretionary clean lighting for thousands of households. The most popular product offered under this is scheme is a 37Wp two Light Solar home System (SHS). The structure of this microcredit scheme is simple and innovative. The loan amount has to be repaid within 3-5 years depending on the term of loan chosen by the recipient. The minimum term of repayment is 3 years which is the lock-in period as specified by the scheme guidelines. If the recipient wishes to repay before the lock-in period, she can do so by paying almost the entire amount and leaving a token amount like Rs 500, which is subject to loan interest. The interest rate charged on the microloan is 10% per annum and there is no collateral requirement. The recipient is provided with flexibility in the schedule of repayment and they can choose to repay on a monthly basis, bi-annual or annual basis. For the monthly repayment schedule, an instalment of Rs 300 per month has to be paid (lower than their kerosene expenditure). The default rate as reported by the bank officials is less than 10 percent, which makes this scheme a highly successful one. For a given branch of the bank, approximately 8-10 villages based on the proximity to the branch are eligible for availing the microcredit. Similar schemes have been initiated by other Regional Rural Banks.

       

    Market mechanism has to take charge in order for the concept of green microfinance to become a widespread phenomenon. Novel concepts like Crowdfunding are gaining popularity in the mainstream microfinance. Energy in Common (EIC) is one such crowdfunding organisation catering exclusively to rural renewable energy installations. However the presence of private players in this niche segment is still an exception rather than a norm. With equipment costs declining and capital subsidies expected to be phased out gradually, the future of solar micro-financing lies with the private players and socially benevolent organisations. Apart from the off-grid areas, such schemes have a great potential even in grid connected areas due to the erratic electricity supply which ranges not more than 5-7 hours in a day. MFIs can also be used as an alternate transmission route for government to channel subsidies to rural consumers. Since the monthly payment is a reasonable amount of Rs 300, conventional microloans can be clubbed with SHS provision thus creating a new category of renewable energy linked micro-loans. Solar microcredit has shown to have reduced the household dependence on kerosene as a source of lighting. Thus there is huge scope of green microfinance in India both from the supply and demand side perspective. Addressing energy poverty is closely linked with addressing income poverty. Hence the future discourse should be paved along a coherent path keeping in mind this linkage.

    ——Bhavook Bhardwaj

       

    —————————-

       

    References:

    International Energy Agency.IEA Analysis World Energy Outlook. Paris: International Energy Agency; 2009

    Chapter 5, ‘Cooking Fuel and Lighting’ ,Census 2011

    Rouf, KaziAbdur. “Green microfinance promoting green enterprise development.” International Journal of Research Studies in Management, Volume 1 Number 1(2012): 85-96

    Lal, Abhishek, and Elizabeth Israel. “An overview of microfinance and the environmental sustainability of smallholder agriculture.” International journal of agricultural resources, governance and ecology 5, no. 4 (2006): 356-376.

    Anderson, C. Leigh, Laura Locker, and Rachel Nugent. “Microcredit, social capital, and common pool resources.” World development 30, no. 1 (2002): 95-105

    Srinivasan, Sunderan. Rational Exuberance for Renewable Energy: an economic analysis, Springer-Verlag London limited, 2011.

       

    —————————-

    * Piketty, Thomas. “Capital in the twenty-first century.” Cambridge, MA, London(2014).
    1 Watt Peak, a unit of power

  • 8Regulating Disruption (Part II: Of Cats, Bacon, and Free Speech)Sirus Joseph Libeiro and Parnil Urdhwareshe

    Jul 2015



  • The Internet is truly vast. Born among a small group of technicians and academics in the late 1960s, the World Wide Web[i]  today connects 40% of the world’s population. In this short span, the relentless march of technology has reduced the costs of access and connectivity, and the Internet has played an increasingly important role in all aspects of human interactions. It is now central to global networks of inter alia capital, goods, services and communication (Castells, 2005).[ii]  In Part I of our series on Disruption, we looked at the Internet’s role in unleashing a new wave of economic disruption – one where participants leverage the lack of regulatory frameworks to reshape markets and the demands for regulation that result. However, the impact of the Internet goes much beyond economics; in a global society of hyper-connected individuals, we are required to undertake renewed examinations of the meaning of political participation, alternative systems of knowledge and cultural exchange, evolving human relationships, and even the nature of national sovereignty. In this article, we attempt to examine how the Internet as a space enhances the creation and dissemination of knowledge and impacts socio-political interaction.

       

    While knowledge networks have always existed in society, prior to the Internet they were constrained by a lack of resources. However, as it became increasingly easy for devices to connect and contribute to co-ordinated processing, networks were no longer bound by resource constraints and quickly expanded across boundaries of time and space. Access and communication is now possible irrespective of where and when the request originates as each device is capable of participate as a node contributing to the larger whole. The decentralized structure of this “network of networks” has enabled the creation of (and free access to) a huge quantum of content and is one of the hallmarks of the Internet. Until recently it would have been fair to describe online activity as one unified ‘cyberculture’ largely North American in makeup (be it adulation for cats and bacon, the celebration of ‘first world problems’ or the range of pop-culture disseminated). However, the Internet as a ‘space’ has gradually become reflective of the fact that its user base is culturally and geographically diverse. As this happens, the capacity of different cultures to have near-instantaneous exchanges has begun to fundamentally alter social interaction.

       

    The growth of the Internet has been associated with simultaneous growth of both the digital community as well as personal autonomy. Today, websites act as platforms for enabling relationships and allow access to people, groups and virtual spaces across the world – to connect with as well as to share information and ideas. Moreover, these connections are no longer limited to personal relationships but have made inroads in domains such as education, governance and social activism, health, corporate accountability, entertainment etc. For many, the ability to communicate with like-minded people and express freely is changing their lives for the better. While the study of the Internet’s impact is still nascent, research has indicated positive impacts on promoting individual autonomy, feelings of security and personal wellbeing, even reduced isolationism (especially in restrictive patriarchal societies). Such impacts have been found to be greater for individuals with lower incomes in the developing world, as well as for women. The Internet is beginning to provide historically weaker groups a chance to assert themselves.

       

    Not even language has escaped the Internet’s impact. Today smartphones are capable of real-time translation at a conversational level. Back-end support for multi-lingual scripts is empowering non-English speaking users to participate online and democratizing cultural contribution. Even as English remains dominant, a dynamic lingua franca is emerging from the Internet’s cultural cauldron – one that includes mutated English (‘lol’ and ‘brb’ are often understood independent of user’s language[iii]) but is not limited to words. Emoticons enrich online language by compensating for the lack of body language and prosody while “emojis” (which originated in Japan but are now universal) can convey complex emotions to add nuance and depth to online conversations. The rise of Internet linguistics as a sub-domain of language studies is a testament to the Internet’s impact on language and the gradual development of a common base for ideation.

       

    However, not all is well with the Internet’s current form. In spite of increasing diversity online, a lot of content remains hegemony of the English language with roots in the global-north. An acute lack of affordable access and local content in the developing world only deepens an existing digital divide[iv]  and threatens to alienate those offline even further. For those online, there is a worry that technologically mediated relationships and the lack of face-to-face interaction might reduce the empathy that is necessary for healthy communication. Manifestations of this include cyber-bullying and online debates being hijacked by ‘trolls’ attacking users solely to cause hurt. Such abuse inherits some of the worst aspects of real-world bigotry as malice becomes directed at disempowered groups. The wave of threats aimed at feminist blogger Anita Sarkeesian during the infamous “Gamergate” controversy, the ubiquitous harassment of women online, racist discourse on social media and the deplorable spread of revenge-porn[v]  is proof of how truly terrible the internet can get. Anonymity, while empowering, also enables people to exploit it for nefarious and illegal purposes. A truly telling example of this is the “DarkNet” network where in the underbelly of the Internet criminals offer their services for sale[vi] , child pornography is easily accessible and terrorist organizations can engage in encrypted cross-border communication hidden from governments and law enforcement agencies. Further, in a hyper-connected network, content can quickly gather critical mass and spread across nodes like a contagion and – as long as it is sensational – it is attributed legitimacy. This is worrying not just for the sake of informational integrity but because of the potential for instigating social unrest.

       

    Fears of cultural dilution, online transgressions and threats to state security have mobilized governments around the world. While communication (both across and within borders) has empowered individuals to criticize States and bypass conventional censorship, it has also been used as a tool for countries seeking to undermine each other. Governments have responded by upgrading their surveillance apparatus and cyber-warfare capabilities, censoring and blocking content with a heavy hand, and invoking legislations that limit fundamental rights to expression. The Snowden revelations have sparked widespread calls for respecting and replicating national sovereignty on the Internet, and have led to many nations digging their heels on preventing Internet governance frameworks from redistributing power away from the State. Many countries (including India) are attempting to shield themselves from external interference by demanding that data about their citizens be “localized” onto servers within their borders. Although the cause of national security is inarguably essential, data localization is akin to old world trade barriers, capable of undoing the benefits that can arise from the free-trade of ideas. At the same time, they give governments potentially dangerous levels of control over “their country’s Internet”.

       

    In his book on the enduring nature of international conflict, Joseph Nye discusses the rise of non-state actors in the form of transnational corporations that act independent of states. Nowhere is this truer than on the Internet. As users become products, the quantum and, rate with which personal data is collected and used by private companies could cross the line between data analytics and gross breaches of individual privacy with surprising ease. Further, given that such portals are increasingly the gatekeepers of news and social interaction for the current generation, to state that the filtering process is algorithmic cannot be enough to avoid responsibility. Incidents like Facebook’s psychological experiment or Google’s tryst with the ‘right to be forgotten’ highlight a potentially insidious power to shape our thoughts and opinions. That such entities be this powerful even as their goals aren’t necessarily informed by the same noble principles as national constitutions cannot augur well for the Internet’s celebrated impact on enriching and deepening socio-political debates.

       

    For a generation that grew up with it, the Internet embodies the promise of liberty to voice opinion safely and communicate across borders. While these ideas are hardly novel, the scale and speed of the new network promises to alter the landscape of socio-political-corporate power relations altogether. It is this that motivates dissenters to attempt circumventing the ‘Great Chinese Firewall’ even at great risk. It is what inspired a 21-year-old to challenge a law limiting free speech in the Supreme Court and win. The Internet as a space that empowers marginal communities must be protected. This is of great relevance given the increasingly shrinking physical spaces of deliberation and dissent today. The task of balancing the concerns of national security, stability, private interests, with digital rights and free speech is an unenviable but a crucial one.

    ——-Sirus Joseph Libeiro and Parnil Urdhwareshe

       

    —————————————–

    [i] While the internet refers to a system of networks between computers and digital machines, the World Wide Web (or ‘www’ as it is commonly known) is the information sharing medium built on top of the internet.

    [ii] http://www.umass.edu/digitalcenter/research/pdfs/JF_NetworkSociety.pdf

    [iii] At the same time, LOL has equivalents across languages. For example, in French LOL is often used interchangeably with MDR – “mort de rire” i.e. “died of laughter”.

    [iv] Digital Divide is defined as ‘ the gap between individuals, households, businesses and geographic areas at different socioeconomic levels with regard both to their opportunities to access information and communication technologies (ICTs) and to their use of the Internet for a wide variety of activities’ (Understanding The Digital Divide, OECD, 2001).

    [v] Revenge porn is sexually explicit media content that is distributed without consent of the individual involved in it.

    [vi]The Dark net is an exclusive network that is used by individuals for sharing files and sensitive data, protecting identities of political dissidents and whistleblowers. However, there is also an criminal element to the activities which happen on the anonymous internet. E.g. Silk Road: a marketplace on the DarkNet was a marketplace for transactions of banned drugs. It was shut down in 2013 by the Federal Bureau of Investigation.

  • 9Towards a sustainable approach in urban water managementSri Siddhartha Ayyagari

    Jun 2015



  • The state of water supply services in Indian cities is steadily declining with inadequate coverage, intermittent supply and poor quality. Water tariffs in Indian cities are so low that it is hard to even recover the operation and maintenance expenses of the water board. Further, rapid urbanisation is posing a serious challenge with increasing demand. It is estimated that India’s urban population is going to increase by 600 million by 2031(40 % of total population), with the number of metropolitan cities (with population of 1 million and above) will increase from 53 in 2011 to 87 in 2031(HPEC, 2011). With a 5.5 per cent annual growth of the per capita GDP, and with more than half the population living in urban areas by 2050, India’s per capita domestic and industrial water demand per person could be doubled(Amarasinghe et. al. 2008). Further, climate change is also posing a serious challenge by altering weather patterns there by affecting the hydrological cycles.

       

    Currently, surface water sources are being heavily contaminated with sewage being directly dumped into these bodies without any prior treatment. This also seeps into the ground, further contaminating the ground water reserves, making it unsafe for drinking. Majority of the rapidly expanding suburban areas now rely completely on ground water. A study by CSE (2012) on 71 cities found that groundwater constitutes 48 per cent of the share in urban water supply. In order to ensure continuous water and public health, ULBs are pumping water from distant sources (as much as 150 km from the city). This in turn involves heavy costs in pumping, supply infrastructure and its maintenance. Moreover, the transmission and distribution losses due to leakages and other factors constitute as high as 40-50 per cent of the total water supply. Cities spend around 30 -50 per cent of the total revenue on electricity in pumping water.

       

    Most cities do not have a sewerage network (CSE, 2012). Even when one does exist, it does not cover the entire city. Further, parts of the urban agglomerations, which remain under rural administration, do not have adequate sewerage systems either. According to Central Pollution Control Board (2009), more than 70 per cent of the sewage generated in class-I and class-II cities (population above 1 lakh and 50,000 respectively) is not treated. The existing treatment facilities in the cities are operating sub optimally (ibid). The state of water and sewage management in the industrial sector is equally abysmal. In spite of being the second highest consumer of water after agriculture, majority of the industries still depend on surface and ground water sources(Aggarwal and Kumar, 2011).The level of recycle and reuse in industries is extremely low. It is estimated that 70 per cent of the industrial waste is directly dumped into the water bodies without prior treatment (ibid).

       

    Rapid industrialisation coupled with increased urban population has an extremely adverse impact on the traditional water bodies. They have become dumping sites for untreated sewage, municipal solid waste and industrial effluents. In most of the cities, the water from these sources has become non- potable. These bodies are regularly encroached upon for various development activities resulting in widespread floods due to outflow of water from these catchment points during monsoon. Most cities have no legislation for protecting water bodies in urban (and rural) areas. Guwahati is the only city in India, which has enacted a law for conserving its water bodies (Shah, 2015).

       

    As India rapidly urbansies, it is imperative that the gap between supply and demand of water is addressed in a holistic manner. If not, there will be serious consequences for cities in ensuring water supply for its residents. Waste water generated from households and industries should be effectively reutilised with regulating ground water usage and encouraging city level water-shed programmes for a sustainable water management plan.

       

    There is a huge scope for promoting industrial water reuse and recycle with technological intervention where the returns to the capital investment for the technology can be achieved in short span. Evidences of technology interventions in Japan and Singapore have shown significant improvement in waste water management. All these alternative strategies provide a key opportunity for cities to realise environmental, social and economic benefits from instituting a comprehensive water supply and sewerage management strategy. Another key element for the long term sustenance of the project is end users. Therefore all stakeholders should be involved at every level of deliberation to build consensus and make the system work. This would require raising public awareness through political intervention and extensive engagement.

       

    In conclusion, to achieve the goal of sustainability, one of the major drivers of change can be implementing 74th Constitutional amendment Act which emphasizes on devolution of powers to the ULBs, with greater financial and functional autonomy. Currently, ULBs are run by a complex institutional setup with limited financial and executive powers. Cities are still dependent on state and central grants for their daily operations which undermine improving service delivery and asset management. If cities are given more autonomy, it is the ULBs who will be more accountable to the citizens demanding better governance and services. Global experience of successful water bodies primarily focus on institutional reforms, dynamic leadership, technology intervention and community participation.

    —Sri Siddhartha Ayyagari

       

    ……………………………

    References:

    Aggarwal and Kumar. (2011). Industrial Water Demand in India: Challenges and Implications for Water Pricing. In India Infrastructure Report 2011. Oxford University Press, New Delhi.

    Amarasinghe, U., Shah, T., Turral, H., & Anand, B. K. (2007). India’s water future to 2025-2050: Business-as-usual scenario and deviations (Vol. 123). IWMI.

    CSE (2012).”Excreta Matters”. Centre for Science and Environment Publishing. New Delhi

    High Powered Expert Committee (HPEC) Report on Urban Infrastructure and Services, Government of India.

    Chairperson, Isher Judge Ahluwalia, 2011. Report available at
    http://www.niua.org/projects/hpec/FinalReport-hpec.pdf)

    Registrar General of India. Census of India 2011, Government of India.

    Shah, Mihir. (2015). Urban Water Systems in India: A Way Forward. ICRIER publishing. New Delhi.

  • 10Regulating Disruption (Part I: Dial D for Disruption)Sirus Libeiro and Parnil Urdhwareshe

    Jun 2015



  • The disruptive economy is nigh, or so most new start-ups would have us believe. It is gospel among new and fast-moving start-up companies that routinely set their sights on global markets. Many do this with firm belief in the insight offered by Clayton Christensen[i] (and more essentially, Joseph Schumpeter) – that innovators can exploit new technologies[ii] to serve previously ignored markets (often at the bottom), refining their offerings while being ignored by complacent incumbents, until they can begin to steal away customers and potentially reshape entire industries. The list of industries witnessing disruption is rapidly increasing – examples include Uber for transportation, AirBnB for hospitality, Amazon and Alibaba for buying and selling physical goods, iTunes for digital content and WhatsApp and Viber for communication. A lot of us no longer hail taxis because we can “Uber it” and fewer people physically visits stores because they can “1-click” it on Amazon.

     

    While it is certainly true that disruptors’ success can be attributed to betting on early technologies, innovative business models and untapped markets, their focus on these heretofore disregarded spaces often lends them an additional competitive advantage – that of lower regulatory burdens. Laws often lag behind industry – decisions on regulating new markets are complicated by confusion on how to intervene even in the best of times – and disrupting firms ensure that they maximise on that delay[iii]. It is fair to argue that the abilities of Uber, AirBnB and WhatsApp to offer customers prices that are fractions of those charged by taxi services, hotels and telecom operators are buoyed by the latter’s need to adhere to existing regulations. These regulations are (more often than not) designed to protect consumers, promote competition, secure government revenue and (in some cases) protect incumbent firms. It is fitting then that increasingly, there are calls for regulation in disruptive industries from consumers, competitors, governments and those being disrupted.

     

    The demands on regulation from incumbents facing disruption take one of two forms – that the regulatory requirements applicable to them either be extended to such new firms or that incumbents be relieved of the requirements as well[iv]. They argue that governmental intervention (one way or the other) is necessary to ensure fair competition and a “level playing field” – this holds true from traditional licensed taxi services to telecom operators. On the other hand, demands from disruptors for governments to step in and ensure competition is considerably more muted – understandable given their aversion to regulation as well as the fact that such firms often bank on the disrupted market becoming “winner-take-all”, which state intervention would seek to prevent.

     

    While incumbents and competitors form the first wave of demand for regulatory intervention, eventually the greatest potential source of pressure for regulatory intervention however is consumers themselves. As the spaces within which transactions take place continuously evolve, frameworks that are competent to identify and enforce the resultant rights, responsibilities and liabilities as well as resolve occasional disputes become increasingly necessary. While unsupervised disruptors might occasionally seek to respond to consumers’ apprehensions (Uber and Amazon advertise their in-built reporting and reputation systems while AirBnB insures users staying in homes accessed via its system), they are also known to ignore their own minimum standards – user elation over Uber’s low prices and ease-of-use was eventually dampened by incidents of assault by unverified drivers.

     

    As a result, users are increasingly dissatisfied with purely contractual frameworks within which they have little bargaining power and no collective representation[v]. Hence the beginnings of demands on governments to ensure the protection of consumer rights. These demands are intensifying as consumers better understand their relationships with disruptive firms – this is true for example with regards to the analysis and use of customer data – there are reports of e-commerce and travel websites charging consumers differently based on factors including their purchase history, browsing history and even choice of platform (mobile or desktop, and even Apple Mac or Windows)[vi]. At the same time, consumer demand for government intervention goes both ways – including for the protection of benefits they see from disruption (as seen in the vigorous consumer movement to ensure Net Neutrality).

     

    It is important to note that the apprehensions that lead to demand for regulation are not just limited to the transactions themselves. They entail larger debates about the trade-offs between privacy and convenience, and even the rights of labour (the argument that most strengthened the Luddite cause) and inequality (most recently outlined in the work of Thomas Piketty)[vii] . And while we may often believe that larger disruptions to our lives are a long way off, technology has a way of sneaking up on us – Amazon’s usage of drones might be a few years off but a pizza store in Mumbai piloted drone delivery (pun intended) last year.

     

    Regulation has its work cut out for it as it faces the unenviable but essential task of balancing the needs of technological progress against those of present day citizens. When the ever-prescient John Maynard Keynes remarked upon the possibility of widespread unemployment from humans discovering means of “economising the use of labour” faster than “the pace at which we can find new uses for labour”[viii] , he could have been talking about Google’s driverless cars as much as any artefact of the industrial age. His follow-up optimism that “this is only a temporary phase of maladjustment” and that “in the long run […] mankind is solving its economic problem” could well depend on knowing when to regulate, and when to not.

     


    —Sirus Libeiro and Parnil Urdhwareshe

    —————————————————-

    [i] Christensen, Clayton (1997), “The Innovator’s Dilemma”.

    [ii] “Technologies” here also include new business models.

    [iii] In cases where governments do react rapidly, regulation can often suffer from poor quality. The results of this regulation can be ineffective at best and counter-productive at worst. Uber illustrates this – it regularly operates in many countries (arguably successfully and with consumer support) with disregard for laws attempting to rein it in.

    [iv] These arguments are particularly common in telecom, where existing operators argue that disruptive services such as WhatsApp and Viber “free-ride” on the significant infrastructural investments made by incumbents to offer competing services.

    [v] For some innovations based on two-sided markets, this includes producers as well. There are reports of Uber drivers (who are also car owners) unhappy with their lack of bargaining power in the traditional contractual framework, with responses including attempts at unionisation. (http://citypaper.net/uberdriver/; http://observer.com/2015/02/uber-drivers-are-scrambling-to-make-ends-meet-after-latest-fare-cuts/)

    [vi] http://www.washingtonpost.com/posteverything/wp/2014/11/03/if-you-use-a-mac-or-an-android-e-commerce-sites-may-be-charging-you-more/; http://www.livemint.com/Opinion/BfgodGLHFjYT4QfMkbCeWM/I-am-a-hypocrite.html

    [vii] Piketty, Thomas (2014) “Capital in the Twenty-First Century”; Mr. Piketty’s analysis goes to show that the returns on capital (including in the form of disruptive technology) outpace those on growth. An approximation of the argument is advanced by the Economist – “other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it” (http://www.economist.com/blogs/economist-explains/2014/05/economist-explains)

    [viii] Keynes, John Maynard (1930) “Economic Possibilities for our Grandchildren”

  • 11Unleashing the True Potential of Gold- Lessons from TurkeyFlavy Sen Sharma

    May 2015



  • India is the world’s largest consumer of gold and fourth largest consumer of oil but needs to import about 97% and 73% of its annual demand respectively[i]. This excessive reliance on imports has dealt a severe blow to the nation’s current account deficit (CAD) and has severely strained the nation’s foreign exchange reserves. While a 50% drop in oil prices since June 2014 has provided some much needed respite for the Indian economy, the impact of gold imports continues to pinch. To take charge of the situation, the Finance Minister announced in the government’s maiden budget some measures aimed at monetizing gold. While the specifics of the measures still need to be ironed out, the prospects of the new scheme can be assessed by juxtaposing it with the existing schemes and with the efforts of countries which have been pioneers in gold monetization.

           

    The success story of gold monetization in Turkey is of particular significance as its appeal to gold is similar to that of India. According to certain reports, there were close to 3,500 tons of “under the pillow” gold in 2013 which accounted for 12% of their GDP[ii]. Realizing the latent contribution of gold to the economy, policy makers employed innovative measures which reduced the impact of gold imports on the CAD and pumped significant amounts of stagnant gold into the financial system. One such measure was that of the Reserve Option Mechanism (ROM), which allows commercial banks to hold up to 30% of their statuary reserves in gold and foreign currencies. The ROM has induced banks to proactively develop instruments and design schemes to monetize household gold savings much like the course of plan proposed by the Indian government.

           

    The Indian proposal parallels the Turkish model on its three features- the new gold deposit scheme, the sovereign gold bond and the Indian gold coin[iii] . Under the first feature, individuals, temples and other institutions can deposit their gold at specified banks and earn interest income on their idle gold holdings. The deposits of physical gold in one’s Metal Account will be assessed on the basis of purity and value, following which a fixed interest rate within the range of 1%-3% is to be apportioned. Capturing the essence of the existing Gold Deposit (GDS) and Gold Metal Loan (GML) Schemes, the new scheme is unique in how it integrates the two and enables a three-way transaction between customers, jewelers and banks. Thus, the internal recycling of gold is ensured at various levels of the process, making it equally profitable for all stakeholders.

           

    The new scheme was proposed with the aim of revamping the existing schemes of GDS and GML, the limitations of which must be taken into account. The GDS and the GML function in a disconnected manner whereby gold is deposited by the consumer in the bank as per the specifications of GDS and lent onward by the bank to the jeweler through GML. The schemes, offered by some banks like State Bank of India, have failed miserably, with deposits of only 15 tons of gold. The reasons for failure are manifold, the most important of which is the poor interest rates being offered (0.75% – 1%). Additionally, the few banks that offer the scheme have set a minimum deposit amount of 500g, thus catering to temples rather than individuals[iv]. The lack of an efficient means to decipher the cartage and purity of gold makes it difficult to offer interest which is typically paid in grams of gold. Further, banks do not accept jewellery, assuming that customers would be reluctant to part with jewellery in return for plain gold once the investment matures.

           

    The current scheme needs to overcome these limitations, offer lucrative returns and target all individuals irrespective of their level of gold holdings. An effective instrument for the quick assessment of gold quality must be devised and the new product needs to be widely marketed just as in the case of Turkey’s gold products.

           

    A similar measure adopted in Turkey – the Gold Time Deposit Account Scheme- has proven to be particularly successful in incentivizing banks to become part of the gold monetization process. Through the scheme, one can earn interest income ranging from 0.8%- 1.75%[v] on their gold savings. The Term Gold Deposit Account in the Turkiye Is Bankasi AS (Turkey’s largest bank) can be opened with a minimum of 10g of gold following which one may continue investing in increments of 0.01g[vi] . These provisions make the scheme extremely appealing to individuals. Following the introduction of these accounts, Turkiye Is Bankasi AS, has increased its gold deposits tenfold in the last 2 years. Turkey boasts of a very efficient gold assessment system with several accredited assaying units where non-standardized gold can be taken and appropriate certificates are accepted by authorized buyers and sellers of gold throughout the country. In addition to this scheme, banks introduced a number of marketing tools to engage with customers, including special days for them to bring their gold to local branches and receive better prices on old gold compared to jewellery retailers.

           

    The provisions of the Turkish scheme, if prudently emulated in the Indian scenario, has the potential to unlock 20,000 tons of gold worth more than $1 trillion and contribute substantially to the GDP growth and deficit control targets of the central government.

           

    The second feature of India’s proposed gold monetization scheme is the sovereign gold bond which intends to provide an alternate to purchasing physical gold. Functioning like a regular coupon bearing bond issued by the government, the investor lends money to the government and receives periodic fixed coupon/interest payments on it. The price of the bond will be based on the price of a fixed quantity of gold. On maturity or sale of the bond, the holder will receive an amount equal to the value of the underlying amount of gold as on that date. The requirement for gold imports is made redundant through this mechanism as the entire transaction takes place in cash. Here comparison can be drawn between the instruments of sovereign gold bonds and gold ETFs (Exchange Traded Funds). While both are designed to track gold prices, they are different as gold bonds pay interest over the term of investment. Returns on gold ETF’s are around 1% and hence are not attractive to investors. The sovereign gold bond scheme will not only reduce gold consumption but also give people an avenue to invest in gold without holding physical gold[vii].

           

    Lastly, the government plans to introduce an Indian Gold Coin, carrying the symbol of the Ashok Chakra. Indian consumers largely rely upon foreign gold coins to address their needs, driving a significant amount of Indian currency to foreign markets. The purpose of the measure is to reduce the demand for coins minted outside India and ensure the recycle of the gold available in the country. Similar gold bullion coins are issued in other gold consuming countries like Turkey. The Turkish government launched the Turkish Republic Coin, a branded coin which can be bought by retail investors and is the only form of gold coin sold at authorized outlets. Turkey produces both decorative and standard 22k gold coins in abundance, which has in the past decade become popular as a hedge against inflation.

           

    Turkey’s success story of gold monetization is not limited to these features. Its success is linked with other government measures which can in the future lend to India’s ambitions as well. Turkey has several London Bullion Market Association (LBMA) certified refineries which produce gold bars and coins. Gold-based investment products like the Gold Demat Account, the Gold Based Mutual Fund where 50 per cent is invested in gold-based capital market instruments, and the Gold Pension Fund have further supplemented the process of gold monetization. Banks also created other new and innovative gold banking products. For example, gold-dispensing ATMs so consumers can easily buy hallmarked bars; and mobile apps which allow people to gift gold via one of its 300 gold-dispensing ATMs in Turkey[viii].

           

    Although the scheme of the incumbent government has been bold and creative, the implementation process is likely to encounter many hiccups, the most important one being the propensity of traditional Indian households toward physical rather than paper gold. To remove this inertia, the government will need to bring out some specifics related to how capital appreciation will be treated from a taxation point of view and how deposit institution would be able to hedge against movements of this commodity should it become increasingly volatile in the foreseeable future. The way forward for India lies in unleashing the true potential of gold through lessons drawn from Turkey.       

    ———Flavy Sen Sharma

    ———————————–

    1. Hewitt, A., Street, L., Gopaul K., (2015), Turkey: Gold in Action, World Gold Council

    2. Soundararajan, N., Goswami, A., Bhatia, C., Jakhade, J., Bagrawat, S., (2014), Why India Needs a Gold Policy, FICCI- World Gold Council Report

    3. Singh, C., Sinha, A.K., Nandkarni, A., Kumar, A., Sardar, J.K., Jain, S., Das, S., Agrawal, S., Shukla, S., (2015), Gold and India, IIMB-Working Paper No. 482

    ———————————–

    [i]http://www.eia.gov/countries/cab.cfm?fips=in

    [ii]http://www.btvin.com/opinion/read/192/monetising%20gold:%20learning%20from%20turkey

    [iii]http://www.business-standard.com/budget/article/gold-monetisation-may-curb-imports-115022801361_1.html

    [iv]https://www.sbi.co.in/portal/web/personal-banking/gold-deposit-scheme-gds

    [v]http://www.teb.com.tr/for-you/gold-time-deposit-account/

    [vi]http://www.isbank.com.tr/EN/personal/deposit-products/term-deposits/term-gold/Pages/term-gold.aspx

    [vii]http://businesstoday.intoday.in/story/union-budget-govt-announced-slew-of-schemes-to-monetise-gold-holdings/1/217451.html

    [viii] Turkey: Gold in Action, Downloadable at http://www.gold.org/supply-and-demand/turkey-gold-in-action

  • 12Protecting ‘Trade’-itional Knowledge –Towards the Economic Development of Local CommunitiesAnandita Bagchi

    Apr 2015



  • Some of our most important knowledge about the world is not contained in books. It is living knowledge; embedded in local practices and passed on from one generation to the next. No single definition could possibly do complete justice to the diverse forms of knowledge that are held by traditional communities. The wider significance of ‘Traditional Knowledge’ (TK) means that it arises in international discussions on a host of topics including trade and economic development. However, knowledge is not “traditional” only because of its antiquity. Much traditional knowledge today is a vital and dynamic part of the contemporary lives of many communities. It essentially is a form of knowledge which has been developed, sustained and passed on within a traditional community. It is its relationship with the community that makes it traditional.

              

    Human societies have seldom been self-sufficient in all respects. They have not only consumed knowledge-based and other goods which are produced locally, whether by themselves or others but have also given them, shared them, received them, owned them and most importantly exchanged them with others including those from different communities. These were in fact, the nascent beginnings of trade. Even in the present world economy, TK is a means to social and economic development. For example, the Seri people of Mexico use the Arte Seri mark to distinguish their craftworks based on their TK and other genetic resources, and to support a sustainable trade in these products.

              

    Whether TK should be legally protected or not, is a question that has been on the anvil for a considerable amount of time. Perhaps the most important agreement to put TK protection on the international agenda was the Convention on Biological Diversity (CBD) of 1992. Today, commercial exploitation of this knowledge by third parties is only one of the concerns that confront TK holders. This is what primarily raises questions of legal protection, prior informed consent and equitable benefit-sharing by the local communities.

              

    Protection of traditional knowledge through intellectual property law is being sought in the forms of “positive protection” and “defensive protection”. Positive protection refers to the acquisition by the TK holders themselves of an intellectual property right such as a patent or an alternative right provided in a sui generis[i] system. Defensive protection refers to provisions adopted in the law or by the regulatory authorities to prevent intellectual property right claims to knowledge, a cultural expression or a product being granted to unauthorised persons or organisations. In deciding the kind of legal protection that could be accorded to TK, the aspirations and expectations of TK holders must be borne in mind. Critics of the idea of legal protection argue that creating a TK regime would represent the removal from the public domain of a very large body of practical knowledge about solutions relating to health, agriculture and the environment. However, enforceable legal rights are not the only thing on which the benefits derived from trade hinge upon. It also depends on the ability of traditional communities to take advantage of national and international law including property and access rights relating to land, natural resources and intellectual property.

              

    Numerous times though, instead of protecting this knowledge, intellectual property law may have actually assisted in its commercialisation by individuals or entities that are external to the TK generating community. Naturally, the situation that results is an inequitable one in which the knowledge is made marketable and is profited from without attribution or compensation to the knowledge-generating community.

              

    Closer home, in the recent past, India has had to thwart attempts by western usurpers who were attempting to patent the medicinal value of the neem plant and the healing properties of turmeric for their own economic benefit. The creation of the Traditional Knowledge Digital Library (TKDL) is a noteworthy effort on the part of the intellectual property administrators in India, to document in detail a vast pool of traditional medicinal knowledge that we possess. That the TKDL has been hugely successful is evident from the fact that as of June 2011, in Europe alone, India had succeeded in bringing about the cancellation or withdrawal of 36 applications to patent traditionally known medicinal formulations, in under 2 years.

              

    Even with wide-spread cases of attempted or successful TK usurpation, not all hope is lost. There are, albeit a few cases where the benefits of monetisation of knowledge derived from traditional communities flow back to them. One such example is found in the southern part of India – the medicinal knowledge of the Kani tribes led to the development of a sports drug named Jeevani. Two patent applications were filed on the drug and the technology was then licensed to an Indian pharmaceutical manufacturer pursuing the commercialisation of Ayurvedic herbal formulations. In order to share the benefits of the TK-based drug, a trust fund was subsequently established.

              

    For a holistic solution to the problem of protection of TK; given the complexity of the issue, workable measures need to be devised based on consensus achieved on their adoption. Measures may be conceived at both the national and international levels, but they must be consistent, coherent and mutually supporting. The active participation of traditional knowledge holders and traditional communities should be encouraged in the formulation of policies at both levels. Adjustments can also be made to use the current IP regime in a manner that maintains balance between the protection and preservation of TK and the free exchange of knowledge.The protection of TK is an evolving field, one that will continue to pose questions forcing the international community of policy makers to think that it might just be necessary to come up with a common framework for countries to follow, within which they can further develop their national laws.

    – Anandita Bagchi

    …………………

    References:

    1. World Intellectual Property Organisation; Intellectual Property and Traditional Knowledge; Booklet No. 2

    2. National IPR Policy (First Draft): December 19, 2014

    3. WIPO Magazine; Protecting India’s Traditional Knowledge: June 2011

    4. Andanda, Pamela; Striking a balance between Intellectual Property Protection of Traditional Knowledge, Cultural Preservation and Access to Knowledge; Journal of Intellectual Property Rights; Vol. 17: November 2012

    …………………

    [i] Sui generis measures are specialised measures aimed exclusively at addressing the characteristics of specific subject matter, such as TK

  • 13Kick starting India’s 2020 Motorbike: Foreign Trade Policy 2015-2020Devyani Pande

    Apr 2015



  • Traders can finally breathe a sigh of relief, trade policymakers finally have their work charted out and trade analysts can finally start putting their heads together to get a sense of the upcoming trade scenario. After a long wait of about 7 months, the new foreign trade policy (FTP) has finally been unveiled. The word “finally” is pertinent in this case for reasons more than one. Not only the wait has been long, but the efficacy of the policies under the FTP will also decide if this is the much needed big push for foreign trade in India. Amidst much fanfare, the FTP has been released with a bonus “Foreign Trade Policy Statement” highlighting the vision, mission and goals of FTP in the backdrop of India’s engagement in the world trade and scope for improvement. 

      

    Ignition to the engine: Focus on Export Competitiveness:   

      

    A natural reaction is to compare the new FTP with the older FTP to gauge the value addition. It seems this year’s FTP consists of an amalgamation of the schemes introduced in the previous FTPs adding to it greater incentives for traders. The Merchandise Exports from India Scheme (MEIS) and the Services Exports from India Scheme (SEIS) are the focal points of the trade policy under the ambit of the government’s Make in India policy. The MIES is a merger of 5 different schemes (Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, Vishesh Krishi Gram Upaj Yojana (VKGUY)) that has provided for duty scrips with no conditions and a categorization of
    countries with highest rates for traditional partners, next for emerging market economies (including ASEAN) and lower for other countries. Traders can now utilize these duty scrips for payment of custom duty, excise duty and service tax. The SIES has replaced the Served from India Scheme (SFIS) that provides for rewards to all Service providers of notified services, who provide services from India, regardless of the constitution or profile of the service provider. Among services, the highest admissible rate of 5% has been allotted for business services (such as professional services, research and development, educational services and construction etc.). This is a welcome step to incentivize exporters to enhance their exports, particularly in areas of R&D services on natural and social sciences, advertising services, technical testing and analytical services etc., in which India has developed substantial human capital. Apart from these two main policies, the government has not shied away from bringing the defence, aerospace and nuclear energy sectors into the “Make in India” programme. The FTP lays down provisions for facilitating and encouraging defence exports— by extending a 24 month export obligation period, instead of a normal 18 month time period for from the date of issue of authorization.  

      

    The wheels and tires: Trade facilitation and ease of doing business

      

    The FTP 2015-20 is a forward looking policy document which also focuses on specific aspects of trade facilitation and ease of doing business. With forthcoming e-Governance initiatives such as mobile applications for FTP and online issue of certificates, the government has tried to make sure that digitization eases the problems of traders. Traders will easily be able to file applications online (without providing for hard copies), saving time and cost and ensuring transparency at the same time. There is also a provision for online inter-ministerial consultations to reduce time for official approvals.  Such new initiatives will prove to be significant confidence building measures for traders, who have been vying for simplified trade procedures. The FTP has also carried forward the institutional mechanism of setting up a Board of Trade (BOT) with a renewed focus on providing an advisory role and offering a platform for discussion and consultation. Another institutional mechanism which will be set up is the Council for Trade Development and Promotion. This Council will be a community of Central Government and various States and UT Governments. This way, the government will be able to bring together the states also in the implementation of trade policies and procedures.    

      

    Transmission: Looking Towards Regional Integration:

      

    The FTP statement clearly states that enhancing trade relations with its neighbours in the South Asian region with a view to participate in the regional value chains will be a key focus area. In the past, India has indicated its willingness to take on asymmetrical trade responsibilities in the region in order to promote greater regional and economic integration. It already provides zero duty market access to all Least Developed Countries (LDCs) of SAARC, for all tariff lines, except 25 lines of liquor and tobacco. To ease hurdles related to transport and stringent business regulations, it has been decided to prepare a 5-year plan for South Asian integration by identifying specific value chains which will include textiles, leather, tourism, automotive components, chemicals and healthcare. The setting up of a National Trade Facilitation Committee will go a long way in addressing issues related to customs procedures and high transaction costs faced by traders.   

     

      

    On the whole, the policies in the FTP 2015-20 are promising and the FTP Statement is a visionary document. The policies, if implemented prudently will certainly give the desired results of providing a stable and sustainable policy environment for foreign trade in both
    merchandise and services. For this to happen, it is to be seen how the two main stakeholders- the traders and the government will steer the handlebars of this “motorbike” in the coming times, spurring India to assume a position of leadership in the international trade discourse by 2020.

    —-Devyani Pande

    —————————–

    References:

    1)      Foreign Trade Policy 2015-2020, Directorate General of Foreign Trade, Ministry of Commerce and Industry, Government of India

    2)      Foreign Trade Policy Statement, Directorate General of Foreign Trade, Ministry of Commerce and Industry, Government of India

    3)      Highlights of the Foreign Trade Policy 2015-2020, Government of India, Department of
    Commerce, Ministry of Commerce and Industry

  • 14Flexible Inflation Targeting in India: Risks and ChallengesPurva Singh

    Mar 2015



  • In February 2015, the Reserve Bank of India (RBI) and the finance ministry agreed on a monetary policy framework to focus on flexible inflation targeting (FIT). As per the agreement, (a) the RBI will aim to bring down inflation below 6% by January 2016, (b) bring down inflation to 4% (with a band of + 2%) in the 2016-17 and subsequently, (c) in case the RBI fails in meeting the target, it will have to report to the government the reasons for its failure and remedial measures. 

    The recommendations for moving towards a flexible inflation targeting regime were made in the Urjit Patel Committee Report (UPCR) in January, 2014.  As per the UPCR, the flexible inflation targeting aims at anchoring inflation expectations, improves overall macroeconomic stability and enhances growth prospects in the medium run. At the same time, this regime allows the inflation to deviate from the target in the short run to accommodate growth. Strict inflation targeting on the other hand aims at stabilizing the inflation only, disregarding the impact on the real economy Gupta and Sengupta (2014). UPCR’s recommendation to move towards this system has also brought about much debate on the benefits and costs on the same.

    As per the Percy Ministry Report (2007), an institutional obligation to predictable and low inflation would mitigate risks of capital flights as value of the rupee would be maintained in the real terms and expectations about its future values remain stable. Some in favor of the FIT system also opine that it would make monetary policy more transparent and predictable and the agreement will strengthen coordination between the government and RBI. However, Subbarao (2009) and Gupta and Sengupta (2014) have pointed several challenges to the implementation of the FIT system. Some of the challenges that have been highlighted in these studies are:

    (a) Food items have about 39 % weight in the CPI basket. Absence of supply side measures make the food supply vulnerable to shocks which are beyond the vagaries of monetary policy. (b) Inefficient transmission mechanism due large fiscal deficit; presence of administered prices and illiquid bond market. 

    Table: Weights of different categories of CPI

    ————-

    Group description

    CPI- New series

    Food and beverages

    45.86

    Pan, tobacco and  intoxicants

    2.38

    Clothing and Footwear

    6.53

    Housing

    10.07

    Fuel and Light

    6.84

    Miscellaneous

    28.32

    Total

    100.00

    ————-

    Source: CSO

    The adoption of the FIT regime has also brought to fore a major concern of RBI becoming what former Governor of Bank of England, Mervyn King (1997) has described as being  “inflation nutters”.  and thus putting growth on the back-burner. Gupta and Sengupta (2014) in their study (using Taylor rule

    [1])  have shown that in the past the  RBI has not been consistently responsive to output growth putting greater emphasis to inflation rate compared to output gap. This might mean that the Central Bank in its overwhelming desire to manage inflation could put growth on the back burner. The study also points to the challenges in the management of the impossible trinity- which points out that it is impossible to attain monetary policy independence, exchange rate stability and capital market regulation simultaneously all at once and only two of these three can be achieved at a particular point in time. The adoption of FIT mechanism might result in the central bank renouncing exchange rate management in favor of greater monetary dependence.Thus, while the FIT regime is expected to bring about transparency, certainty and accountability in the inflation management process, supply bottlenecks in the agriculture sector and long and uncertain time lags in the monetary policy transmission could impose a challenge. The RBI also needs to consciously exercise caution on the adverse impact of the FIT regime on other macro- financial variables like output, fiscal policy, exchange rate management and financial stability. 

    —Purva Singh

    —————————— 

    Notes: 1. Taylor rule estimates the desired level of interest rates based on two parameters: first, the output gap, or the difference between actual output and potential output, and second, the inflation gap, or the difference between actual and targeted rate of inflation.

    References:

    Gupta, A. S. and Sengupta, R. 2014, Is India Ready for Flexible Inflation-Targeting?

    HPEC (2007) Report of the High Powered Expert Committee on Making Mumbai an International Financial Centre, Ministry of Finance, Government of India

    Subbarao, D. (2009), Global Financial Crisis- Questioning the questions, JRD Tata Memorial Lecture, New Delhi, 2009

  • 15Sharing is Caring –The Collaborative Internet EconomySirus Joseph Libeiro and Parnil Urdhwareshe

    Feb 2015



  • We’ve come a long way since 1969, when a student at UCLA typed “LO” to send the very first Internet message.[i]  The internet is now ubiquitous. It has radically changed how humans produce, share and consume information. By granting the ability to transcend geographical limitations near-instantaneously, the “net” dramatically improved the efficiency with which we share ideas and conduct transactions. Such online activity quickly coalesced into notions of horizontal communities that prioritized decentralized “peer-to-peer” institutions [ii]  over the centralized capitalist apparatus characteristic of the 20th century. It was this reimagining that midwifed what is being called the ‘sharing-economy’, which has disrupted traditional markets and ignited a wide range of debates on “labour rights”, “income inequality”, “resource redistribution” and the very idea of “ownership”. In this piece, we look at sharing economy’s impact on costs of transaction and gains in efficiency, and the concomitant challenges in regulating this phenomenon.

    The sharing economy uses Internet-enabled connectivity to let individuals quickly share resources for collaborative consumption. By stressing on access over ownership[iii] , it eliminates the need for middlemen by allowing those in need to quickly find owners with such resources who are willing to share (often for a fee). An immediate result is reduction in both transaction costs and the amount of time these resources lie idle.

    In the wake of the anti-excess narrative that followed the Financial Crisis of 2007-08, the availability of cheap physical assets dovetailed perfectly with the rise of community-driven enterprises[iv] . The presence of a mature consumer base entrenched within digital networks provided fertile ground for the sharing system to flourish, augmenting family incomes in an economically uncertain environment. As direct interactions between buyers and sellers increased, micro-level preference matching became possible at a scale previously unseen. Platforms began to integrate customer feedback directly into their pairing algorithms, creating steady pressure on service suppliers to ensure consistent quality and timely service.

    Part of the sharing economy’s success has been attributed to the Internet’s ability to enable resource sharing at zero marginal cost – the phenomenon that previously revolutionized the digital music industry [v]. According to Jeremy Rifkin [vi] , the Internet made it far easier for owners of regular assets (cars, apartments etc.) to put their possessions in the market in real-time at near zero additional cost. Most existing fixed-costs for such assets (mortgages, maintenance costs, utility charges etc.) have already been absorbed, giving these products a significant competitive edge over the traditional service sector’s centralized inventories and high operating costs. Enterprises such as Uber and AirBnB couple these advantages with mobile devices to create always-accessible digital interfaces that shape real-world economic interactions and quickly disrupt the sectors within which they operate. A myriad number of services available through app-based interfaces now exist, with Uber-clones providing similar ease in services such as laundry, cleaning and food delivery.

    Also critical to the adoption and sustainability of such a system is interpersonal trust, a factor that is often built into the sharing platform[vii] . Apart from basic safeguards for identity confirmation, the sharing economy relies heavily on feedback from participants on both sides of the exchange in the form of reviews and ratings (successfully implemented for the first time on the e-commerce website eBay). This “crowd sourcing” of quality control directly inform the platform’s matching algorithm, which factors in poor feedback when matching members. The panopticon of constant and publicly accessible assessment creates strong incentives for members to operate fairly and transparently. The digital database acts as a proxy for trust [viii] , creating the promise of high minimum levels of safety and quality for participants. This goes some way in explaining why users are willing to stay with (AirBnB), share rides (Uber) and other physical possessions with complete strangers.

    However, the system is not foolproof. In the absence of regulation, platforms have been known to skirt their own minimum standards, resulting in occasional but deeply worrying harms to participants that trusted the system. The most successful of these platforms (Uber and AirBnB) have also been the ones with the most worrying lapses. The banning of Uber in New Delhi following the rape of a passenger by a driver, who had a noted history of violent behavior, puts into sharp relief the dangers that shoddy implementation can allow. Reports of other worrying instances (including unfair and anti-competitive business practices) have surfaced across many of the markets within which Uber operates. With huge amounts of capital backing Uber (it was valued at $40 billion in 2014), the capacity of local incumbents to offer any real competition is often rendered redundant. While the banning was criticized by some as bureaucratic overreach backed by pressure from incumbents [ix], ensuring the safety of participants and welfare of city residents is a subject with little room for compromise.

    How to approach the disruptive impact of such services is less clear. There exist fears that initiatives such as AirBnB are destabilizing housing markets, and worsening affordability of habitat in cities like New York [x] . It is thus imperative that these new systems and their impact be understood critically. State regulation of such borderless technologies is strongly argued both for and against in contemporary debates. The growth of these technologies certainly caught regulatory institutions off guard, but such disruption is characteristically Schumpeterian – in which case the literature is divided on the desirability of intervention. As policy makers struggle to comprehend the very nature and classification of these enterprises and their services, pertinent issues of taxation, unfair competitive practices, liability, and labour regulations come to the fore.

    Nonetheless, the sharing economy holds real promise for developing countries, which suffer from poor enforcement of property rights and rigid regulatory regimes [xi] . In such economies, collaborative consumption offers an attractive alternative for overcoming information asymmetry and enabling decentralized peer-to-peer provisioning of goods and services. Technology-based matching of consumers and providers requires relatively little capital investment, and the crowd-sourced model of governance can go some way in self-regulation within such sectors. The potential for boosting household incomes and spurring small scale entrepreneurship is promising [xii] . As models of consumption undergo this transformation, its impact is being felt globally. Accommodation shortages during the 2014 Football World Cup in Brazil were quickly addressed by such platforms, with over 1 lakh people staying in shared accommodation. According to a Nielsen Global survey in 2013, 68% of online consumers were willing to share and rent out personal possessions and services in these markets. Of these, respondents from the Asia-Pacific were the most willing with 78% willing to share, followed by Latin America and the Middle East at 70% and 68% respectively [xiii] . This augurs well for India given its telecom boom, and the State’s ambitious plans to ensure universal internet connectivity. With an institutional structure to ensure digital literacy, access and requisite safeguards, these technologies could benefit those previously underserved by traditional markets by providing them entry to the more inclusive online sharing community.

    ————————–Sirus Joseph Libeiro and Parnil Urdhwareshe

    ———————————————————————————————————————-

    [i] The message was meant to be “LOGIN”, but the system crashed.

    [ii] http://ouishare.net/en/about/collaborative_economy

    [iii] http://articles.latimes.com/2014/apr/06/opinion/la-oe-rifkin-airbnb-20140406

    [iv] http://www.economist.com/news/technology-quarterly/21572914-collaborative-consumption-technology-makes-it-easier-people-rent-items

    [v] http://www.latimes.com/opinion/op-ed/la-oe-rifkin-airbnb-20140406-story.html#axzz2yCYKxvIB

    [vi] Rifkin, J. “The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons and the Eclipse of Capitalism”.

    [vii] http://www.wired.com/2014/04/trust-in-the-share-economy/

    [viii] http://www.inc.com/christine-lagorio/sharing-economy-trust-pipe-dream.html

    [ix] http://www.washingtonpost.com/blogs/innovations/wp/2013/05/24/the-sharing-economy-how-do-you-stop-something-you-cant-keep-up-with/

    [x] http://www.theverge.com/2015/1/21/7865959/airbnb-under-fire-new-york-city-city-council

    [xi] http://www.cato.org/blog/how-sharing-economy-can-help-developing-nations

    [xii] http://www.forbes.com/sites/modeledbehavior/2014/08/04/the-sharing-economy-and-developing-countries/

    [xiii] http://www.nielsen.com/lb/en/press-room/2014/global-consumers-embrace-the-share-economy.html

  • 16Indian Industries: Caught in the Schemes ConundrumDebolina Mukherjee

    Feb 2015



  • India has a large number of policies and schemes for promotion of industries initiated by different ministries/departments of the Government of India. While some of these policies concentrate on the development of Indian industries in general, others may focus on specific sector. Some of these schemes also promote development of industrial cluster. Apart from the centrally sponsored schemes, individual states also have their own industrial policies to support the development of industries and clusters. Despite having such a large number of schemes and policies for promoting industries, the performance of India’s industrial sector has remained dismal. The contribution of the sector towards India’s GDP has also remained low and has infact come down in the last two years compared to that of the services sector (For reference see fig 1.1).

    GDP


    Source: Economic Survey (2013-14), http://indiabudget.nic.in/es2013-14/echap-01.pdf

    Given this backdrop, it is important to understand why the Indian industrial sector has lagged behind despite having such favourable policies.

    A quick look at the different centrally sponsored policies and schemes such as the SEZ Policy, National Manufacturing Policy and the Foreign Trade Policy (2009-2014) of the Ministry of Commerce and Industry, the Integrated Textile Parks Scheme of the Ministry of Textiles, the Mega Food Park Policy of the Ministry of Food Processing Industry, etc. show that often there is a lack of both intra-ministerial and inter-ministerial coordination while formulating a scheme. This curtails the scope of dovetailing the benefits of different schemes. For example, the Chapter 3 benefits[i] of the Foreign Trade Policy are extended to Export Oriented Units but not to the SEZs. This acts as a disincentive for units locating inside SEZs.

    Lack of co-ordination is more prominent among central and state governments. Often state governments are not aware of the central government schemes. This creates a serious problem for the industry since state governments are responsible for providing key facilities like water, electricity, pollution clearance, state level tax benefits and can also play a key role in getting land for the industry.

    Also, while all the schemes talk about giving grants or fiscal incentives to the industry, not much importance is given to providing business and trade facilitation. While it is true that the incentives are generally given to cushion the high cost of borrowing in India, it should be kept in mind that high cost of borrowing cannot be cushioned by incentives alone. Moreover, often fiscal incentives are WTO actionable. Hence, the focus needs to be on reducing cost of borrowing rather than giving incentives. Additionally, the schemes should be designed and marketed in such a way such that ease of doing business and not fiscal incentives becomes the key attraction.

    Overall India has almost 300 industrial incentive schemes both at the central and state government levels. Some of these schemes provide complementary benefits. Presence of such a large number of schemes confuses the industry and they are not able to take the right decision. As a result inspite of giving good benefits many of the schemes remain unutilised. Also, absence of strict monitoring authority may increase the scope of misuse of the benefits. Therefore, the central government along with state governments should be more proactive in increasing proper utilisation and monitoring of the schemes.

    Owing to India’s huge domestic market, at present the entire policy focus is to attract market seeking investment. There is a need to change the perception to integrate India with the global value chain. Prime Minister Narendra Modi’s ‘Make in India’ campaign has started to ward changing this perception. In this campaign the PM has already made a pitch to global MNCs to come and manufacture in India to supply to the rest of the world. The campaign promises to improve India’s position in Ease of Doing Business indicator. While these are steps in the right direction it is important to give a serious though to the issues discussed above for development of manufacturing and industries in India.

    ———Debolina Mukherjee

    ———————————————-

    [i] Chapter 3 benefits include schemes such as Served From India Scheme (SFIS), Vishesh Krishi and Gram Udyog Yojana (VKGUY), Focus Market Scheme (FMS), Focus Product Scheme (FPS)

  • 17Revenue Forgone due to SEZs: That big a deal?Purva Singh

    Jan 2015



  • In India, revenue forgone due to Special Economic Zones (SEZs) has been a subject of much criticism since the incentives given to SEZ’s developers and units imposes a burden on the government exchequer. The recently released CAG Report criticizes the SEZs in similar light stating that ‘SEZs in India had availed tax concessions to the tune of Rs. 83,104.76 crore’. (CAG Report on Performance of Special Economic Zones, 2014).

    In India, both SEZ units and developers enjoy direct as well as indirect tax exemptions like:

    Developers:
    Under Section 80IAB of the Income tax Act, SEZ developers are entitled to 100 percent Income Tax exemptions on income derived from the business of developing SEZ for any 10 consecutive years out of 15 years from the beginning from the year SEZ has been notified. 

    Units:
    SEZ units enjoy 100 percent Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for the first five years, 50 percent for the next five years thereafter and 50 percent of the ploughed back export profit for next 5 years. 

    In addition, the SEZ developers and units are exempted from Central Sales Tax and other levies and are also allowed duty free import and domestic procurement of goods for development, operation and maintenance of the SEZ unit.

    While, it is true that these tax exemptions have posed a burden on the government finances due to the revenue forgone, it might be unfair to look solely at the revenue losses without considering the benefits created by these SEZs. There is a need to analyze the benefits along with the revenue forgone instead of viewing the revenue losses in singularity. Although benefits arising from SEZs have been economic as well as social, in this analysis we look at the economic benefits only (since they are easier to measure) vis-à-vis the costs (revenue forgone). Economic benefits of the SEZs include boost to exports, employment generation, investment promotion etc.

    Export from SEZs account for about 25.9% of India’s total SEZs. For the purpose of our analysis, we look at the IT exports from SEZs (which accounts for almost 26% of exports from SEZs and has a very low import content) vis-à-vis the total revenue forgone from the SEZs (see table below).

    Table: IT Exports from SEZs and Revenue forgone due to SEZs

    Year

    IT Exports from SEZs
    (Rs. Crores)**

    Revenue Forgone
    (Rs. Crore)*

    IT Exports from SEZs/
    Total Revenue Forgone Ratio

    2008-09

    4884

    5637.29

    0.9

    2009-10

    29658

    9512.06

    3.1

    2010-11

    26423

    15267.16

    1.7

    2011-12

    72528

    57226.87

    1.3

    Note: *Revenue forgone due to customs and direct taxes only and does not include revenue forgone on account of Central Excise and Service Tax in relation to SEZs.
    ** IT Exports from SEZs have been calculated as Total IT exports (from India’s Balance of Payments data) minus Exports from STPI since IT exports in India come majorly from STPI and IT SEZs.
    Source: Revenue Forgone figures have been taken from Chapter 5 of the CAG Report on Special Economic Zones, 2014.

    As the table clearly shows, in the last four years upto 2011-12, the IT exports alone from the SEZs have outdone the Total Revenue forgone. IT Exports have grown multifold in the last few years. The SEZ scheme has given impetus to the IT exports which form a crucial component of India’s foreign exchange earnings as well since India is a Net exporter of software services.

    Hence, the revenue forgone due to the fiscal benefits availed by the SEZs are lower than the export earning as compared to IT exports and miniscule in proportion to the export earnings generated by total SEZ exports. Additionally, as per the NASSCOM Strategic Review 2013, there are 99 Operational IT SEZs out of which 44% are in Tier II and Tier III cities showing that they are not concentrated in the Tier I cities only. This is an indication that there is a need to look at the data in a different light and things might not be that bad for the SEZs as they are projected to be.


    —-Purva Singh

  • 18Taxing Intellectual Property Rights – Need for a comprehensive policyAnandita Bagchi

    Jan 2015



  • The notion of taxation of goods, services and income has already been established in the global society far back in time. However, the idea of taxing what is known as intellectual property rights is a fairly recent phenomenon. Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. IP is protected in law by, for example, patents, copyrights and trademarks, which enable people to earn recognition or financial benefit from what they invent or create.[i]

    IP falls within the class of assets termed as ‘intangible assets’ which form a prime component of taxation policy development, in the realm of international taxation. Commercialization of IP is done by way of assignment and licensing. In India, IP is taxed in various indirect ways. Provisions for IP taxation are spread over different legislations making it difficult for any of the stakeholders to assess their applicability and implications. This has often resulted in varied approaches being taken by the Central and State governments on taxability of intangible assets. At times, the judiciary has had to step in to interpret the provisions so that liability to tax could be correctly ascertained. One such instance is the dispute between Tata Consultancy Services and the State of Andhra Pradesh[ii] where the Supreme Court clarified the meaning of the term ‘goods’ for the purposes of sales tax. It stated that “the properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored, or possessed, etc., are ‘goods’ for the purposes of sales tax. The test to determine whether a property is ‘goods’, for the purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc…

    …Even intellectual property, once it is put onto a media, whether it be in the form of books or canvas or computer discs or cassettes and marketed, would become ‘goods’.

    Under Indian law, taxation of IP has been covered in a fragmented manner under the following legislations – Income Tax Act, 1961; Sales of Goods Act, 1930; Customs Tariff Act, 1975; Central Excise Act, 1944. It has also been covered within the law relating to Value Added Tax and Service Tax. The only straightforward provision in the Income Tax Act, 1961 is Section 9(1) (vi) which deals with taxation of income by way of royalties under the head ‘income deemed to accrue or arise in India’. Foreign transactions which involve sharing of technical know-how are being taxed since 1969 on wards and Section 92 of the Finance Act, 2002 makes interest arising from international transactions, taxable. Deductions are provided on expenditure on know-how[iii] , expenditure on scientific research[iv] , income from copyrights[v] , etc. There is still scope to expand the segment of deductions with respect to the income earned by one on expending his intellect and the expenditures he makes towards it.

    Service tax was imposed with the enactment of the Finance Act, 1994. Soon after the taxation of services provided by ‘consulting engineers’ was embedded into service tax law. Attracting controversy and therefore being laid bare to judicial interpretation, ‘consulting engineer’ services were held to also include ‘training of personnel, software support, operation/maintenance, emergency support, technical consultancy, etc.’ in addition to advisory/consultative assistance, by the Supreme Court.[vi] It was only in 2004 that ‘IP services’ were expressly brought within the service tax net.

    Further, ever since the scope of service tax was enlarged to include transactions amounting to ‘deemed sales’, double taxation of a transaction has been the subject of much debate. VAT is collected on the retail sale of goods. The 46th Constitutional Amendment defined “tax on the sale or purchase of goods” to include ‘a tax on the transfer of property in goods (whether as good or in some other form) involved in the execution of a works contract’. This amendment brought ‘deemed goods’ and ‘deemed sales’ within the ambit of taxation. On application, it meant that any contract which included technical know-how, assignment or license of IP would be considered as ‘deemed sales’ and taxed accordingly. ‘Temporary transfer or permitting the use or enjoyment of any intellectual property right’ was included as a declared service with the insertion of Section 66E in the Finance Act, 1994. All the activities listed out in Section 66E amount to provision of service and are therefore liable to service tax. When the Negative List was introduced, it was clarified that declared services for service tax purposes that are related to ‘deemed sales’ transactions have been carefully specified to ensure that there is no conflict. However, the conflict appears to have remained unresolved in the area of taxation of intellectual property rights. The same transaction is subject to VAT and service tax on the entire value. One hopes that the legislation on Goods and Services Tax will effectively eliminate this incidence of double taxation.

    It is evident that even though certain provisions taxing intellectual property rights exist, the inherent ambiguity in the law coupled with the lack of a comprehensive policy has led to a bee-line at the courts in order to resolve matters. The same position holds true when we bring intellectual property within the scope of customs duties. The customs law in India is codified in the Customs Act, 1962 and the Customs Tariff Act, 1975.One question that has repeatedly presented itself for determination before the bench is – whether royalty, license fees, value of technical know-how etc. must be added to the total import value for the purpose of being charged to customs duty. One of many decisions on this point was given in Associate Cement Companies Limited [vii]. Commissioner of Customs where the Supreme Court held that valuation for the purpose of customs duties on drawings, designs and technical material and IP when put on a media, is to be regarded as an article, on the total transaction value of which customs duty is payable. It is therefore not permissible to split the architectural designs into intellectual input on one hand and the paper on which it is given shape to, on the other. We see that though the law and the judicial pronouncements on it have eagerly emphasized on taking the total value of the imported item into account for the imposition of duty, the past governments have not shown any signs of developing a scheme to incentivize the acquisition of technical know-how and other IP.

    That companies have begun to place significant value on their intangibles, cannot be emphasized enough. Technological developments and far-reaching communication systems have made IP accessible globally. In order to discourage siphoning of profits and to encourage creation of IP, UK has recently (in June 2013) introduced tax benefits in the form of ‘Patent Box’ such that incomes earned by companies from patents owned in the UK, is taxed at a concessional rate of 10%. India is an IP starved country and it would do well to encourage creation and harboring of the IP within the country, by providing tax incentives. Therefore, it is time that the Government considered deliberating upon an inclusive policy for the taxation of intellectual property – one which would not only ensure revenue but also incentives to the industries and augment the economic growth of the country.

    -Anandita Bagchi

    ————————————————–

    References:

    1. Prasad, Sathish, Singh (Working Paper, 2014): Emerging Global Economic Situation – Opportunities and Policy Issues for Services Sector

    2. Tax Updates (June 2014), Federation of Indian Chambers of Commerce and Industry

    3. Global Intellectual Property Centre (U.S. Chamber of Commerce): India – International outlier on IP (July 2013)

    4. Income Tax Department: Royalty and Fees for Technical Services (Taxpayer Information Series – July 2013)

    ————————————————–

    [i] World Intellectual Property Organisation

    [ii]Tata Consultancy Services v. State of Andhra Pradesh 271 ITR 401 (SC) (BCAJ)

    [iii]Section 35AB of the Income Tax Act, 1961

    [iv] Section 80GGA of the Income Tax Act, 1961

    [v] Section 80QQA of the Income Tax Act, 1961

    [vi] Bharat Sanchar Nigam Limited &Another c. Union of India &Ors. 2001 CTR 346 (SC)

    [vii](2001) 128 ELT 21 (SC)

  • 19Institutional ‘Lock-In’ in India: The case of Slums in MumbaiSahil Gandhi

    Dec 2014



  • It is a well established fact that institutions affect the growth of a country (see Acemoglu et. al. 2001, 2005; Knack and Keefer 1997). In developing countries, it is observed that the requisite formal institutions are inefficient. These inefficiencies, which often arise due to the un-adaptive nature of formal institutions and their incongruence with informal institutions, perpetrate institutional lock-ins, having a detrimental impact on the development of the country. A nuanced understanding of the role played by institutions in affecting outcomes would require one to choose a unit of analysis that is smaller than a country. Hence, the essay focuses on the persistence of slums in India’s premier metropolis – Mumbai.

    Formal institutions mainly refer to rules of interactions among people and organizations that are sanctioned by law. From the works of North (1990), Ostrom (1990) and Grief (1993) we know that there also exist informal institutions, which structure interactions and enable contracting, pointing to the significance of private ordering. The relationships between the formal and informal institutions are often complimentary or substitutable in nature (Williamson 2009). When formal institutions of contract enforcement present a ‘credible threat’ it compliments private contracting between parties. This is because disputes between the parties can be settled privately and efficiently as both parties are aware of the existence of an effective formal system to which they take recourse. In such cases, as articulated by Dixit (2004), private ordering successfully takes place in the ‘Shadow of Law’ leading to efficient economic outcomes[i].

    However, when formal institutions lack credibility, there develop informal mechanisms for contract enforcement, which could be detrimental for the overall outcomes. The ineffectiveness of the legal system in being a threat enables the more powerful party in a bargaining game to extract all the gains for itself. Thus weak formal institutions give rise to the possibility of the emergence of informal institutions that would only benefit the ‘elite’. Such a situation calls for reforms in the formal system. However, the elites would face high potential losses from a change in the situation. Hence, they re-position themselves in a manner that nullifies the effects of the reform, ensuring institutional persistence or ‘lock-in’. They do this by manipulating the weak underlying political institutions in a way that maintains the economic outcomes in their favor. Thus, political institutions – both formal and informal – adapt with the changing economic institutions, thereby playing a crucial role in determining the success of reforms (see Acemoglu and Johnson 2005). These processes of institutional change are investigated for the case of India’s financial hub – Mumbai.

    Mumbai is a city of paradoxes. It is home to some of the richest families in the world and also some of the largest slums. Currently, a large proportion of the city’s population lives in slums. Despite various attempts, slums persist in the city. This incapacity is due to policies or regulations, which are driven by the inefficient political institutions. The following three supposedly pro poor reforms and their failure will lend support to this argument.

    Urban Land (Ceiling and Regulation) Act was passed in 1976 authorizing the government to acquire vacant land in excess of 500 sq. meters for developmental purposes such as providing affordable housing. The government acquired a lot of land in Mumbai from private owners but the owners approached the court claiming that their land was applicable for exemption. This led to vast tracts of land being stuck in litigation making them unavailable for the market and to the state, leading to soaring property prices in the city. This increase was exploited by a few powerful groups of politicians and builders for personal gain. Thus, the Act failed to meet its objectives and was repealed in Maharashtra in 2007. It was expected that the repeal would lead to an increase of land supply in the market, which would ultimately lower property prices and make housing affordable. However, this would have hurt the interests of politicians and builders. So as not to be adversely affected by the new situation, they ensured that land was released gradually in the market in a manner that did not have a major impact on property prices. Thus, they secured their position in the transition period. The resultant outcomes worked in favor of the elite both, when the Act existed and even after it was repealed while adversely affecting the majority of the citizens in Mumbai (see Pethe 2010).

    Development Control Regulation 58 was implemented in 1991 at a time when textile mills were closing down in Mumbai. The policy was meant to enable the government to acquire two-thirds of land from owners of defunct mills to provide low-cost housing and open spaces. However, it was later amended in favor of private developers by the state legislature through consent by all political parties. This amendment led to only 6 percent of the total mill lands being acquired by the government. At present, the mill lands are being used for constructing commercial offices, which would not have been possible without this amendment. Thus, one can clearly infer that all political parties colluded with each other and with the private sector so as to make gains at the cost of the social welfare.

    Slum Rehabilitation Scheme implemented by the Slum Rehabilitation Authority (SRA) was introduced in the late 1990s. The mandate of SRA was to incentivize private developers to rehabilitate the slums and provide them free housing by allowing the developers to build houses for sale on the same land. This scheme seemed to be a win-win for all. However, this scheme has not been able to deliver on its promises and has instead been compromised by the slumlords, politicians and builders at the cost of the vulnerable slum-dwellers. This scheme not only enables the politicians to reap the benefits of ‘vote-bank’ politics but also enables them to collude with various private entities for their own interests.

    The policies discussed above validate the fact that political institutions and economic institutions are inherently intertwined. Whilst promising property rights to the lowest income groups – in various forms – one sees that actors in powerful positions only serve their own interests. In spite of there being a legal system in India, approaching the court has rarely been an option for the vulnerable class owing to prohibitive costs. Thus, with no credible threat of the legal system to the elite, there exists no shadow of law. The private ordering that takes place between the politicians and the builder lobby hampers equitable development of the city. Hence, although reforms are being undertaken, there is no perceptible change in the realities. Slums, which are an institutional arrangement providing shelter to the poor, benefiting politicians via vote-bank politics and builders who reap enormous gains under the pretext of redevelopment, have remained ‘locked-in’ in Mumbai for many decades.

    —-Sahil Gandhi

    ————————————

    [i]Within the shadow of law, net benefits of approaching the courts are always positive.

    ————————————

    References:

    Acemoglu, D., and S. Johnson (2005): Unbundling Institutions, Journal of Political Economy, 113, 949-995.

    Acemoglu, D., S. Johnson, and J. A. Robinson (2001): The Colonial Origins of Comparative Development: An Empirical Investigation, American Economic Review, 91(5): 1369– 1401.

    Acemoglu, D., S. Johnson, and J. A. Robinson (2005): Institutions as the Fundamental Cause of Long-Run Growth, in P. Aghion and S. Durlauf (eds.), Handbook of Economic Growth, Amsterdam: North-Holland, 385–472.

    Dixit, A. (2004): Lawlessness and Economics: Alternative Modes of Governance, Princeton University Press: Princeton.

    Greif, A. (1993): Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition, American Economic Review, 83(3): 525-548.

    North, D. (1990): Institutions, Institutional Change, and Economic Performance, Cambridge University Press: Cambridge.

    Ostrom, E. (1990): Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge University Press: Cambridge.

    Pethe, A. (2010), Contextualizing Land Management Issues within the framework of Urban Governance: Case of Mumbai, Presentation at the International Workshop on Expanding Land Access, World Bank, Washington DC.

    Williamson, C. R. (2009): Informal Institutions Rule: Institutional Arrangements and Economic Performance, Public Choice, 139(3): 371–387.

  • 20Empowering the employed: Skill up gradation of the labour marketArpita Patnaik

    Dec 2014



  • The employment conditions of existing labour market participants are important for two reasons. First, they constitute the largest part of the labour market and skilling them will have the fastest impact on manufacturing productivity. The abysmal growth of manufacturing in the last quarter is testimony to the urgency of this need. Second, there is increased investment in high tech industries. This process is accelerated with the increase in FDI in these sectors. Not only does FDI introduce advanced technologies used in developed countries, but, it also forces local competitors to adopt these technologies to remain competitive. Workers in these industries will require constant up gradation of their skills to keep pace with the demands of new technology. The increased automation in these high tech industries would also require them to be able to program these machines adequately.

    Thus for workers to keep up with the pace of technology, constant and periodic up gradation of skills is needed. While the government may have the schemes in place on paper, a study of the Industrial Training Institutes and firms indicated that they are not implemented in practice. The production managers of several firms were interviewed as a part of a survey in the textile clusters located in Gurgaon and the automobile and electronics clusters in Aurangabad. We also interviewed graduates and teachers of Industrial Training Institutes (ITI s) for the same survey. The interviews indicated that most of the ITI s in these areas have outdated syllabi and poorly implemented courses. In addition to this, the employers that were interviewed complained about the inadequate exposure of workers to new technology. The employers had to intensively train the workers on the job even after they graduated from these institutes. The latter was a frequently cited problem in the electronics industry, a high tech industry. It was also found that training workers was difficult for employers due to poor foundational skills. Analytical skills, communication skills and theoretical knowledge were identified as problem areas by the employers.

    Skill up gradation of the labour force requires active participation of the industry. The fastest way to keep up with the skill demand in the market is to train workers on the job. In fact, several firms have adopted this model of on the job training, with Siemens being a case in point. The infirm training is a two-step process. Firstly, the workers are trained in their machinery in the starting few months of their employment. Secondly, up gradation happens through classes that take place post working hours. These classes introduce workers to both the basic theory and practical application of the new technology that is going to be introduced. In this context, firms could sponsor their workers to enrol in skill development programs and enforce a contract that requires the workers to continue working with them for some period of time after the training.

    While employees of large firms are in a position to receive this training, the small and medium sized firms may not be able to invest in their workers in this manner. Apart from the cost of putting workers under training, the large turnovers in small firms also works as a strong disincentive for employers to sponsor training.

    As a result, there exist gaps that are required to be filled by government sponsored skill enhancing programs. Government programs can introduce short term or part time courses targeted to improve certain skills. These programs have been implemented in the Textiles Industry[1] but need to be expanded to many other sectors. Other than machine specific skills, the foundational skills of the workers can be built only through a strong education system. Good quality basic education needs to be provided to create a good quality workforce that has strong analytical abilities and good communication and comprehension skills. This trainability of the workforce has been cited as the key issue with the Indian labour market rather than the kind of skills gap than employers report [2]. The government needs to recognise this in its efforts to create a labour force resilient to the winds of technological change. The benefits of basic education extend beyond skill up gradation to improving mobility in the labour market too as strong analytical and communication are broad based skills and ease the transition from one industry to another.

    Joint effort on part of the government and the industry is a third alternative for building these programs. The experience of China provides a good model for India to adopt especially since China and India are both developing economies with a large labour force. China has some of the highest FDI in the world as well as one of the most expansive vocational training programs. The Chinese model requires compulsory participation of the industry in these training programs (Mehrotra et al 2014). The firms are mandated to send some of their employees to train workers in these vocational institutes. These employees then bring in knowledge of the newest technologies to rest of the workers and thus aid the government in improving the skills of the labour force. Other than China, Singapore has a skills development framework which works on the collaboration of the industry or the firm. As analysed by Kuruvilla et al (2002), the legislation requires employers to contribute 1% of gross salary of all employees earning less than 1000s$ a month into the skill development fund. The firms can then recoup a percentage of their funds by requesting grants for skill development. In addition to this, incentives have been provided to foreign investors to set up training centres. These firms are guaranteed the right to hire a proportion of the graduates of the institute. This handles any problems of free riding that these investors may have faced.

    Skill up gradation programs to improve long term employment prospects aren’t emphasized enough in the skills agenda of the government. The government needs to learn from the experiences of countries such as Singapore and China to develop these programs so that it can empower the employed.

    –Arpita Patnaik

    —————————————————

    [1] SKILL DEVELOPMENT AND TRAINING PROGRAMMES OF CENTRAL GOVERNMENT, Reported by the Planning Commission

    [2] Mehta et al (Working Paper): Making Sense of India’s Skills Gaps

    —————————————————

    References:

    1. Kuruvilla, Erickson & Hwang (2002) An assessment of the Singapore Skills development System: Does it Constitute a Viable Model for other Developing Countries?

    2. Mehta, Ghosh, Patnaik (Working Paper, 2014): Making Sense of India’s Skills Gaps

    3. Mehrotra, Gandhi and Devi (IAMR Report 2014): Understanding Skill Development and Training in China: Lessons for India

    4. Planning Commission Report: SKILL DEVELOPMENT AND TRAINING PROGRAMMES OF CENTRAL GOVERNMENT

  • 21Health in Early Childhood & its Implications for EmployabilityDivya Chaudhry

    Nov 2014



  • A large body of contemporary literature on “human capital” has by default considered the term to be synonymous with education. It is well established that investments in education translate into higher future earnings and differences in incomes can hence be attributed to differences in education. But a fundamental factor that could more effectively explain variations in educational success of children, and later life outcomes such as income-differentials, susceptibility to disease, etc., is development that happens early in life.

    Early child development refers to the sequential emergence of interdependent skills – sensorimotor, cognitive language, and social-emotional functioning. The phenomenon in itself is complex as it is conditional on biological, genetic, social and physical environment in which children are brought up. A child’s experiences and environments during early childhood are critical for immediate development of the brain and many biological systems.

    Socio-economic status is a proxy for a range of household and community characteristics such as nutrition, housing, parenting, health care and social experiences. Nutrition, however, is a key mediator of the effects of socio-economic status on the child’s well-being. Malnourished children are more vulnerable to infections and are more likely to die from common childhood ailments such as diarrhoea and respiratory infections. Recurrent illnesses weaken the nutritional status in young bodies, binding them into a vicious cycle of frequent sickness and faltered growth. Undernourishment, a shortfall in the amount of food energy consumed on a regular basis, is an underlying cause, often compounded by severe and repeated infections, particularly in disadvantaged sections of the populations [i] . In addition to the efficacy of nutrition in child development, more recent research efforts have examined the effect of household and community level sanitation on childhood cognitive skills and morbidity[ii] . Poor sanitation is linked to adverse nutritional outcomes by leading to frequent incidence of diarrhoea and other gastro-intestinal disorders that preclude nutrient absorption.

    Institutions too are significant contributors to early child survival and development. The Integrated Child Development Services (ICDS) scheme is representative of Indian government’s commitment to provide pre-school education to children age 3-6 years, and reduce the incidence of malnutrition, morbidity and mortality for children under-5 years of age. Even though the ICDS program has followed a holistic approach to cater to the needs of child survival and development, the scheme has had only ‘modest positive effects’[iii] .

    In discussions of trainability, early years of life have so far received little attention. This is particularly because there has been a greater emphasis on measures of overall cognitive development like “IQ”, which is relatively difficult to assess until the commencement of formal primary schooling. Similary, interventions that target at improving schooling outcomes or cognitive abilities are perceived to be more successful than pre-schooling or direct interventions in the family. Early trainability skills, however, are inculcated by families and immediate environments, much before formal academic institutions can intervene. More formally referred to as non-cognitive, these skills are vital for shaping traits like memory, attention, self-discipline, and adaptability, that are equally valued by employers.

    Even though non-cognitive abilities are difficult to measure, they play a significant role in determining schooling and labour market success. Such findings are supported by studies of early childhood interventions that substantially improve non-cognitive skills, but only weakly affect cognitive ability. Much of the effectiveness of such interventions comes in fostering emotional security and motivation in children, traits that trigger child exploration in early years of life.The intuitive premise of these findings is simple: when the foundations of early life are built on disadvantaged circumstances, schools play only an inconsequential role to make up for the damage done. As schools work with what parents give them, educational outcomes/cognitive skills suffer for those whose deficiencies are left untreated.

    Therefore, early child stimulation occurs through highly complex interactions between children and their immediate environments. Interactions between children and pre-primary instituions are hence essential for shaping skills that predict schooling achievement and labour productivity in adulthood. Moreover, capabilities are augmented at subsequent stages if they are effectively produced during preceding stages. If capabilities are garnered successively at early stages of life, greater returns to human capital formation can be reaped at subsequent stages.

    –Divya Chaudhary

    ————————

    i. World Health Organization, Global Database on Child Growth and Malnutrition.

    ii. Poor hygiene poses dangers for own households and households in close proximity. Spears (2012) has discussed the negative externalities associated with the issue of open defecation in India.

    iii. World Bank. India: Challenges of Development. Overview of Sectoral Assistance Evaluations. Washington DC, 2002.

    ————————

    References:

    Hanushek, E. A., & Woesmann, L. (2008). The Role of Cognitive Skills in Economic Development. Journal of Economic Literature, 46(3), 607- 668.

    Heckman, J. J. (2003). The Supply Side Of The Race Between Demand And Supply: Policies To Foster Skill In The Modern Economy. De Economist, 151(3), 1-34.

    Heckman, J. J., & Masterov, D. V. (2007). The Productivity Argument for Investing in Young Children. Review of Agricultural Economics, 466-493.

    Humphrey, J. H. (2009). Child undernutrition, tropical enteropathy, toilets, and handwashing. The Lancet, 374, 1032-1035.

    Rosales, F. J., Reznick, J. S., & Zeisel, S. H. (2009). Understanding the Role of Nutrition in the Brain and Behavioural Development of Toddlers and Preschool Children: Identifying and. Nutr Neurosci, 12(5), 190-202.

    Spears, D., Ghosh, A., & Cumming, O. (2013). Open Defecation and Childhood Stunting in India: An Ecological Analysis of New Data from 112 Districts. PLoS ONE, 8(9), 1-8.

    Spears, D. (2012). Policy Lessons from Implementing India’s Total Sanitation Campaign. NCAER , 1-32.

  • 22Sunk Costs of Exporting and the Effect of Export Promotion Policies: Evidence from the Indian Steel Industry Manpreet Kaur Juneja

    Nov 2014



  • 1. Introduction

    The existing literature has largely established superior performance of exporters when compared to non-exporters (Bernard et al., 1995) . This has led to a reorientation of policy-makers and international organizations towards export-promotion policies in order to increase domestic growth. It is important to disaggregate the correlation between exporting and productivity in order to understand the underlying causal mechanism at the micro-level. Understanding the causation channel of higher productivity of exporters can direct policy formulation to achieve the desired impact. Robert and Tybout (1997) demonstrate that sunk costs, plant characteristics (observed or unobserved) and macroeconomic conditions significantly affect firm’s export decision.

    This paper explains this causation through the role of sunk costs of exporting i.e. learning to export effect. Sunk costs are the fixed and irrecoverable costs that firms must incur in order to enter and produce in the market (Sutton, 1991). Sunk costs of exporting are expected to exist since in order to enter the export markets, firms need to incur information costs to learn about foreign markets (the demand sources, product standards, prices, custom rules), obtain export licenses and establish transportation, shipping and distribution networks (Robert & Tybout, 1997). The sunk costs create a wedge between incumbent and potential entrant’s total costs equal to the sunk cost. Firms with superior productivity self-select into the export markets because they can profitably incur sunk costs of exporting. In order to operate in export markets, entrants must profitably overcome sunk costs while incumbents must not make losses. Thus, the entry and exit threshold differs. A hysteresis band of productivities is created equaling the difference between cutoff productivity for exit and entry. Sunk cost leads to hysteresis effect i.e. a shadow cast of history on future. It acts as a barrier to entry and its reduction can aid entry of firms that can profitably export in the foreign markets. A temporary policy change can permanently alter the market structure by enabling potential entrants to recover sunk costs. However, uncertainty about the policy change can sever the effectiveness of these policies (Baldwin, 1989).

    The following section provides evidence consistent with the existence of sunk costs of exporting and the effectiveness of temporary export promotion policy from a natural experiment created in Indian steel industry between 1998-2007, which has been used in Bown and Porto (2010). A temporary incentive enabled profitable potential entrants to incur sunk costs and enter the market, and they did not exit when the incentives were removed.


    2. Evidence on Sunk Costs of Exporting

    Sunk costs of exporting exist because firms need to incur information costs to know about the foreign market and to establish transportation, shipping and distribution networks. Evidence on existence of sunk costs in exporting can clearly be seen through the role of structural changes like technological advancements in communication and transportation. The technology revolution has drastically reduced the sunk costs of exporting. This has been the driving force for increase in the number of firms involved in exporting as well as the volume of goods being exported.

    Temporary export promotion policy is a useful policy tool to eliminate inefficiencies in an industry due to sunk costs. Bernard et al. (2003) estimates show that 5% reduction in geographical barriers raised aggregate manufacturing labor productivity by 4.7% and killed 3.3% of U.S. plants. Sunk costs to enter export markets is higher than domestic markets, exposure to trade raises the sunk costs in an industry and forces firms with least productivity to exit the market. Such reallocation effects exist even in large economies like U.S. The evidence on existence of sunk costs of exporting can be established through the effect of export promotion policies. The incumbent firms in the industry have an edge over the potential entrants since they have already incurred the sunk costs. This can hold even if potential entrant is more productive than incumbent firms. Evidence of this can be seen through the analysis of Indian steel industry where export promotion incentives were temporarily introduced.

    2.1 Natural Experiment Evidence: Indian Steel Industry

    A natural experiment was created when the Indian Steel Industry was given combined preferential market access by similarly timed and constructed policies by major global steel importers U.S., EU and China in 2002, which were subsequently rescinded in early 2004 (Bown and Porto, 2010).

    2.2 Empirical Evidence

    2.2.1 Aggregate Export Trends

    According to Bown and Porto (2010) estimation when in March 2002 Indian steel industry was exposed to an exogenous and unexpected preferential market access shock, there was a sharp surge in exports .This natural experiment is particularly interesting to seek evidence for sunk costs in exporting because it resulted in India’s steel exports increasing dramatically in a relatively short period of time from 2.98 million tonnes in 2001-02 to 4.96 million tonnes in 2002-03 and further to 5.5 million tonnes in 2004. Moreover, the expansion trend did not reverse after the measures were rescinded . Steel exports from India spurted 36.8% in 2002-03 while the total steel production showed a rise of 7.2% (Ministry of Steel, India). India’s exports to the U.S. increased dramatically- from $50 million in 2002 to $250 million in a single year. Interestingly, even after the measures were rescinded in 2004, Indian exports to the U.S. were on an upward trend i.e. $600 million in 2004 and $750 million by 2006 (Bown and Porto, 2010).

    Figure-1 (Data Source – World Integrated Trade Solution)

    Figure-2 (Data Source – Indiastat.com)

    Figure (2) shows the export quantity trend. Total export quantity did fall in 2004-05 when the measures were rescinded but not to the 2001-02 aggregate export quantity. After the export-promoting incentives were rescinded, the incumbent’s exports fell back to the pre-existing level. However, they facilitated potential entrants to overcome sunk costs in exporting and enter the export market. Thus, the aggregate level did not fall back to the pre-policy level. In order to distinguish between entry and volume decisions of incumbents and entrants, let us look at the disaggregated trends.

    2.2.2 Export trends at a disaggregated level

    2.2.2.1 Incumbents Export Trends

    The Indian steel industry can be divided into two types of producers: Integrated Producers comprising major players – Steel Authority of India Limited (SAIL), Rashtriya Ispat Nigam Limited (RINL), Tata Steel. Secondary Producers – the mini-steel plants with Essar Steel, IspatIndustries, Lloyds Steel, Jindal Steel being the major players. The integrated producers are the major incumbents in the market including JSW Steel. Since JSW Steel was formed from a merger in 2004-05 that coincides with the measures rescindment, I exclude it from the analysis. The three major integrated players were historic exporters and had already incurred the sunk costs of exporting.


    Figure-3 Data Source – Indiastat.com (Compiled from statistics released by SAIL)

    Figure (3) plots the exports of the three major players during 1995-2008. The time frame created by the natural experiment is analogous to the three-stage game: 1) Pre-2002 i.e. before the measures were introduced 2) 2002-2004 i.e. time period in which preferential treatment was granted 3) Post-2004 i.e. after the measures were rescinded. In 2002, following the introduction of preferences, there is a sharp increase in exports of all the three major incumbents i.e. SAIL, RINL, TISCO and the trend of surge in exports continued until 2004 when the measures were rescinded. Following 2004, the exports continued to fall and reached the pre-2002 export level by 2006 but continued to decline thereafter. Time-series export pattern of the three major players mirrors the policy change; there is a transient effect of export incentives on the incumbent firms.

    2.2.2.2 Entrants Export Trends

    The sustained export expansion after the policy rescindment can be explained by the constantly rising trend of secondary producers’ total exports as opposed to the big three exporters. Figure (4) shows that there is a co-movement in the total steel exports and secondary producers’ export trends which suggests that the continual expansion was mainly driven by the exports of secondary producers which is an aggregation of the export trends of mini-steel plants and the new entrants.

    Figure-4(Data Source- Indiastat.com)

    There is a structural break in the time series export pattern of secondary producers concurrent with the policy change in 2002. Structural break in time series regression occurs if the regressor number of firms is omitted (Baldwin, 1989). New entrants and their export trends can perhaps explain the sustained expansion of secondary producer’s exports after the policy rescindment. Figure (5) depicts the export trend of four new entrants that entered the export market in 2002 following the introduction of preferences but did not exit when they were rescinded. Analogous to secondary producers the exports of these new entrants have been continuously increasing since the policy introduction. Since these firms did not exit after policy rescindment, this indicates that they could profitably export without the policy aid but could not recover the sunk costs to export. A temporary incentive can enable potential entrants to recover sunk costs of entering the export market. Sunk costs act as a barrier to entry and temporary preferential advantage can facilitate new firms’ entry and expansion into the export market. The exports of the new entrant have been increasing since the introduction of preferences and have continued to increase even after the preferences were rescinded while the exports of the big three integrated producers have been falling. This suggests that the new entrants are more efficient than incumbents so their export market share has been rising compared to incumbents.

    Figure-5(1. Vardhman, VLS Wires & RL Steel export trends compiled from Prowess, CMIE 2. Bhushan export trend compiled from Bhushan steel website)

    The temporary export-promoting policy alter the market structure permanently by enabling potential entrants attain economies of scale to overcome sunk costs of exporting. Thus, it increases the number of active firms, alters their relative market shares and possibly facilitates efficiency gains if there exist potential entrants that have superior productivity than incumbents and could enter due to this temporary incentive. The key effect of the policy change is that it aids the entry of potential entrants with higher productivity levels which previously could not enter. This leads to efficiency gains, as exports will be made at a lower unit cost in the market. This is in conjecture with Melitz & Bertrand et al (2003) finding that exposure to trade reallocates market shares towards firms with superior productivity and generates aggregate industry productivity growth that contributes to welfare gains and growth and that the effect of trade incentives does not depend on firm heterogeneity in the absence of sunk costs. Similarly, a negative shock can shrink the no-exit range and make incumbent firms exit. “Hysteresis differs from irreversibility since the system could be restored to its period t state by a corrective shock.” (Baldwin, 1989, pp.15)

    –Manpreet Kaur Juneja

    ———————————————————-

    i. The evidence on superior productivity of the exporting firms as opposed to non- exporters has been demonstrated in many studies in the literature (see: Jensen and Wagner (1997), Aw and Hwang (1995), Aw et al. (1997, 2000), , Clerides et al. (1998)) (Delgado, Farinas & Ruano, 2002, pp398).

    ii. Existing exporters, entrants and product switching by historic exporters, drove the export expansion.

    iii.Data source: IndiaStat

    iv. Jindal Iron and Steel Co. Ltd. (JISCO) and Jindal Vijayanagar Steel Ltd. (JVSL) merged and formed JSW Steel.

  • 23Thailand Crisis: The Implications of Connected Lending and a Weak Political StructureNilesh Basu Roy

    Oct 2014



  • The surge of economic growth in Thailand during the late 1980s and through the mid 1990s owed very little to initiatives of elected governments. Rather it was the two brief post-coup caretaker administrations led by the technocrat Anand Panyarachun that provided the policy push for growth. Unelected and not being a career politician, Anand and his team were subject to very few of the customary constraints faced by elected Thai governments . During this time Thailand built a reputation for financial orthodoxy and macroeconomic stability, and it was hailed as a model for robust economic development in the World Bank’s Miracle Report (1993). Things however changed and in July 1997, Thailand stood at the doorstep of a severe crisis due to the appearance of cracks in its internal regime. The political confusion of that period and inherent defects in bank ownership produced an injurious mix that reinforced each other to exacerbate the weaknesses in the system thereby damaging the prospects of sustained growth.

    Much of the literature on East Asia’s financial crisis has exclusively focused on international and region-wide economic weakness. Other important dimensions such as connected lending and a weak political structure were responsible for sustaining, if not triggering the crisis. Thailand’s political institutions prior to 1998 reflected a highly decentralized system which tended to produce policy paralysis more often than not. Investor confidence in Thailand was undermined by the fact that timely policy reform was all but impossible and the resultant delays extracted a heavy price from the system.

    The banking system in Thailand was overwhelmingly based on relationships between firms and banks. This phenomenon of connected lending became one of the main proximate reasons of the financial crisis in 1997. Empirical evidence shows that the majority of shareholders of big firms were powerful Thai families. A number of single family controlled firms existed and wielded enormous and unconditional power. A relatively lower proportion of firms were controlled by multiple shareholders. In the pre-crisis period an oligopolistic structure of ownership and governance prevailed in which powerful families had a disproportionate influence in the system.

    In addition to the problem of tightly controlled banks and its consequences (see Table above), the political structure of Thailand added another layer, increasing vulnerability of the system. The Government was virtually captured by private interests and there was rampant corruption, opportunistic behavior and unstable coalitions. Very little economic reform could be introduced because of the massive and embedded vested interests.

    Thailand’s multimember electoral system strongly encouraged candidates to campaign on the basis of individualized strategies (rather than on the basis of a party label) as they were compelled to differentiate themselves from competitors of the same party. Not only did this create contradictions as far as the party stance and opinion on issues of public interest were concerned, but the emphasis on candidate-based rather than party-based electoral strategies ensured that politicians would strive to deliver selective benefits to voters in their electorate in order to differentiate themselves from rivals from the same party. This encouraged vote buying and placed a premium on politicians being able to generate a flow of cash to cover costs while in office. In short, the logic of the country’s electoral system made it all but impossible for politicians to agree to economic reforms if they threatened rent-taking arrangements they had put in place for themselves or their key supporters .

    An uncanny resemblance in the operation of both the political and financial system was emerging which was extremely detrimental for the economy. The adoption of ‘individualistic’ over a ‘collective’ approach reflected the difficulty of taking action for the greater public good- the malpractices in the banking and political systems combined to create a deadly vicious cycle. Crony capitalism contains a number of contradictions within and is unsustainable and inevitably culminates into crisis. But it leaves behind a damaging legacy that could take many years to correct. This lesson is relevant for many countries including India. We would be prudent to recognize that our real estate and land markets, among others, need serious corrective measures else the India growth story could hit a roadblock sooner than later.

    –Nilesh Basu Roy

    —————–

    References:

    Anuchitworawong, Chaiyasit, Toshiyuki Souma, and Yupana Wiwattanakantang, 2003, Did family controlled banks prevail after the East Asian financial crisis? evidence from Thailand, Working paper 2003-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University, Tokyo, Japan.

    Laurids S. Lauridsen, Roskilde University, Denmark, Financial Crisis in Thailand: Causes. Conduct and Consequences.

    Rajan, Raghuram G., 1992, Insiders and outsiders: The choice between relationship and arms-length debt, Journal of Finance 47, 1367–1400.

    Chutatong Charumilind, Raja Kali and Yupana Wiwattanakantang, Connected Lending: Thailand before the Financial Crisis, Center for Economic Institutions, Institute of Economic Research,

    Hitotsubashi University 2-1 Naka, Kunitachi, Tokyo 186-8603, JAPAN.

    Koji Kubo, The degree of competition in Thai Banking industry before and after the East Asian crisis, ARRIDE, discussion paper no-56.

    —————–

    i. Doner & Laothamatas, (1994).

    ii. Anuchitworawong et al, (2003).

    iii. Bualek, (2000).

    iv. The top four family-owned banks in 1996 were the Bangkok Bank, the Thai Farmers Bank, the Siam Commercial Bank, and the Bank of Ayudhaya. They were controlled by; Sophonpanich, Crown Property Bureau, Lamsam, and Rattanarak, respectively.

    v. Allen Hickey, (1998).

  • 24Capturing Data on Trade in Services – Lessons India can learnTanu M. Goyal

    Oct 2014



  • Global trade in services has registered a phenomenal growth in the recent years and in countries such as India, trade in services contributes substantially to their international trade. India, being one of the largest exporter and importer of services is a proponent of liberalisation of trade in services in the WTO and in its bilateral free trade agreements (FTAs). It is, therefore, crucial for India to have a robust data collection mechanism for trade in services, which includes global and bilateral trade and investment flows across different services sub-sectors. A technical group has been set up by the Department of Commerce under the Chairmanship of the Directorate General of Commercial Intelligence and Statistics (DGCI&S) for this purpose. 

    Globally, different organisations have attempted to capture data on trade in services. The General Agreement on Trade in Services (GATS) of the WTO[i] was the first agreement that tried to define trade in services through four modes.[ii] The GATS established legally enforceable discipline at the multilateral level to capture the international trade in services, which applies to all WTO member countries and all services subsectors. The International Monetary Fund (IMF) collects data for balance of payments and international investment in accordance with the Balance of Payments (BoP) Manual. As of date, the IMF collects data for its member countries in accordance with the Sixth edition of the Balance of Payments and International Investment Position Manual (BPM6).[iii] The Organization for Economic Co-operation and Development (OECD) and the United Nations also collects data on trade in services.  A number of countries such as the United States (US), the United Kingdom (UK), China and Australia have domestic regulations mandating data collection on trade in services. Some countries such as the US have a separate Act namely the International Investment and Trade in Services Survey Act, 1984, mandating collection of trade in services data while there are others such as Canada and Australia that continue to collect trade in services data under their general Statistics Act.

    In India, at present to some extent the services trade data is captured by the Reserve Bank of India (RBI) under the purview of the Foreign Exchange Management Act (FEMA), 1999. Services trade statistics are generated from the Foreign Exchange Transaction Electronic Reporting System (FETERS), which only covers specific sectors and does not give mode-wise data for services delivery. Also, at present the data is captured at the level of authorized dealer in foreign currency (banks) and not the service supplier. Since 2008, the Indian government has promulgated the Collection of Statistics Act, 2008, which also mandates collection of trade in services data. However, it is difficult to measure trade in services compared to trade in goods due to its intangible nature and the lack of a proper framework for data collection and reporting.

    There are several issues faced in capturing data on trade in services.

    1. How to classify services sectors?

    2.How to identify service providers especially when there is large number of non-corporate entities?

    3. How to isolate the different modes of service delivery and quantify them?

    Country experiences and global benchmarks can be used to resolve some of these issues. For instance, as regards classification of services sectors, the GATS classifies different services. During the Uruguay Round of negotiations, WTO members adopted a classification of service sectors entitled “Services Sectoral Classification List”, (W/120) based on the United Nations Provisional Central Product Classification (UNCPC). The IMF’s Balance of Payments Manual also classifies services under different heads. These classifications are recognized globally and some countries are already following them. Internationally, most countries have adopted or are shifting to the IMF’s BPM6 classification of services sectors. India has also adopted the BPM6 classification and there is now a need to create a concordance between the national industrial classification (NIC) and BPM6 to facilitate data collection by sub-sectors and cross-country comparisons.

     

    Data collection requires identification of service provider. A number of countries undertake primary survey for collecting data. In the US for instance, the Bureau of Economic Analysis (BEA) mails the survey questionnaires to the entities and persons who are believed to be eligible from the reports of their international transactions. The BEA uses benchmark or census surveys to reach the entire population every 5 years. The questionnaires are sent to potential respondents and the mailing lists include US persons who have previously filled a report and all US persons who although have not filled the report before but are believed to have transactions in the services. The lists are collated based on information from government sources, industry associations and publications, business directories and various periodicals.

    [iv] In the UK, any trading businesses registered for Value Added Tax (VAT) and/or Pay as You Earn (PAYE) tax are surveyed.

    The services sector in India is not similar to the comparator countries, which make it difficult to collect information. In India around 80 percent of services are in the non-corporate sector. As a result, it is often difficult to identify the service suppliers, particularly in categories such as logistics services, construction services or retail services. Thus, it is difficult to create a database of all service suppliers. Thus, it is important for India to design a data collection framework which is able to identify the services exporters and importers. One way to achieve this is to create a population of companies supplying services using the directories and member list of associations and professional bodies. Post which, there is a need for a primary survey of service suppliers to filter those who trade in service. Once, the service suppliers are identified a population has to be created, which can be surveyed on a regular basis. An online mechanism should be devised so that filing of information is easy and everything is linked to the unique identification number of the service supplier.

     

    Most countries do not have a mechanism for reporting mode-wise services trade data due to the complexity of trade in services and inter-mode linkages. Moreover, sometimes the boundaries between goods and services trade are blurred, especially in case of services like “travel”, “construction” and “government goods and services”. With technological development new modes of services delivery have surfaced and more often than not it becomes difficult for even the service supplier to isolate the different modes of service delivery. It is therefore important to provide clarity even to the service supplier to ensure that over time, transactions are recorded as far as possible by modes of delivery. For this, it is essential to have industry consultations and pilot surveys to understand the trade patterns. This approach is likely to make the framework robust and ensure that institutional mechanism for collecting services trade data is all inclusive.

    -Tanu M. Goyal 

    ————

    [i] General Agreement on Trade in Services, Article 1 accessible at http://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htm (last accessed on July 25, 2014)

    [ii] These include  (a) from the territory of one Member into the territory of any other Member (Mode 1); (b) in the territory of one Member to the service consumer of any other Member (Mode 2); (c) by a service supplier of one Member, through commercial presence in the territory of any other Member (Mode 3) and (d) by a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member (Mode 4).

    [iii] It replicates the earlier Fifth Edition of Balance of Payments Manual (BPM5), released in released in 1993. However, the coverage of services is greater in BPM6.

    [iv] See Page 6 “Survey Coverage” under Survey methodology chapter in “A Guide to BEA’s Services Surveys” (http://www.bea.gov/surveys/pdf/surveysu.pdf )

  • 25India’s potential growth storyPurva Singh

    Sep 2014



  • Macroeconomic theory states that a fall in aggregate demand leads to recession, causing the actual output to drop below the potential (or trend) output. However, this effect is temporary. A recovery follows recession causing the actual output to bounce back to the potential and the potential itself if not affected significantly by recession[i]

    An examination of India’s potential output growth data however puts this macroeconomic theory in question.

    Potential output can be broadly defined as the maximum amount of goods and services that an economy can produce at full capacity. It is often referred to as the production capacity of the economy. In the macroeconomic sense it is the output that is defined as the “maximum production without inflationary pressure”[ii]. It is that level of output at which there is no pressure for inflation to increase or decrease.

    While there are several techniques to estimate potential output, a simple statistical smoothening procedure called the Hodrick Prescott (HP) filter is used in this analysis. The HP filter has become popular because of its flexibility in extracting a trend from macro- economic data. Results from the HP filter technique point that while potential output traced an increasing trajectory since FY72 to FY07, it started reversing since the global financial crisis (FY07) and there has been a huge decline ever since(Figure 1). Potential output growth which peaked at 7.8 percent in FY07 has fallen to 5.7 percent as of FY14. This has put to question the recovery theory that was talked about in the beginning- not only is the actual growth way below the potential, the potential growth itself has seen a perceptible decline since the crisis.  


    Figure 1: India’s potential growth on a declining trajectory since FY07

    figure1

    Source: Central Statistical Office, Note: * Real GDP at Factor cost

     

    In the context of Harrod -Domar Model which views investment and Incremental Capital Output Ratio (ICOR, utilization rate) as the sole determinants of the potential output, much of the decline in potential growth can be explained through the declining investments and increasing ICOR. However, if we look at the growth accounting framework, it explains economic growth by decomposing it into contributions of labour, capital and a residual measure of gains in efficiency called the Total Factor Productivity (TFP)[iii].
    Even though recent studies[iv] (Anand et al. 2014) have shown the rising contribution of TFP in explaining economic growth, we stick to the Harrod  Domar model in explaining the potential growth decline.

    Investments as measured by Net Fixed Capital formation (Gross fixed capital formation adjusted for inventories) have declined both in growth terms as well as a percentage of GDP (Figure 2). NFCF growth which averaged 13.6 percent between FY03 to FY08 fell to an average 7.3 percent in the next five years. As compared to a growth of 16.1 percent and 25.7 percent in FY04 and FY05 respectively, NFCF contracted by 0.2 percent in FY14 after growing by a mere 1.4 percent in FY13. As a percent of GDP too, the share of NFCF has declined significantly. NFCF as a percent of GDP fell to 17.6 percent in FY14 as compared to the peak (highest ever) 29.3 percent in FY06.



    Figure 2: Net Fixed Capital Formation on a decline

    figure2

    Source: Central Statistical Office


    Incremental Capital Output Ratio (ICOR) or capital efficiency is the other factor responsible for the decline in the potential growth.  ICOR measures the fixed investment required to produce an additional unit of output. Lower the ICOR, higher the productivity of capital and vice- versa. ICOR which averaged to 4.1 in the pre- crisis high growth phase (FY04- FY07) rose to an average 5.9 for FY10- FY13. In FY13, ICOR rose sharply to 8.5 reflecting a massive decline in capital efficiency. 


    Thus, the slowdown in India’s trend growth in the last few years was led by the declining investments and capital efficiency. This decline was a result of the heightened regulatory and policy uncertainties and delayed project approvals and implementation and structural weaknesses. In order to boost the potential to sustainable pre- crisis growth there is a need for addressing supply bottlenecks and implementing structural challenges particularly in the agriculture and power sectors and creating an investment- friendly environment with faster approvals and implementation. Only these can help in driving in investments and reducing the capital inefficiency which need to be brought to pre-crisis levels to give potential growth a fillip.

    -Purva Singh

    ——————————-

    [i] Ball M L. Long Term Damages from the Great Recession in the OECD countries, NBER, 2014

    [ii] Okun, Arthur,M. The Political Economy of Prosperity. Washington, DC: Brookings Institution, 1970

    [iii] In the conventional growth accounting framework which uses a Cobb Douglas production function Total Factor productivity is calculated as the Solow Residual (A):

    Y=AL^{\beta}K^{\alpha}

    , where: Y = total output, L = labor input, K = capital input and A = total factor productivity which embodies the efficiency with which factor inputs are used, such as technological progress and other components.

    [iv] Anand R, Cheng K, Rehman S, Zhang L. Potential Growth in Emerging Asia. IMF, 2014

  • 26Consolidation Activity in the Indian Pharmaceutical Sector: A Brief NoteBeena Saraswathy

    Sep 2014



  • The pharmaceutical sector has been the centre of attraction to the policy makers as well as academia due to its strong link with the consumer healthcare and the life of patients, which cannot be substituted with any other product. In recent years, the sector has been undergoing a paradigm shift in regulations and operation, with the re-introduction of product patent system. The introduction of the new patent system raised several important questions like the affordability of drugs to the common man. During the post 1990s, there has been a rush among the firms in the sector to enter into consolidation, to overcome the challenges posed by globalisation.

     

    Globally the pharmaceutical sector has been one of the major consolidation intensive sectors. During the 2004-10 merger wave, around 11 percent of the overall cross-border sales and 9 percent of the cross-border purchases has been undertaken by chemical sector firms, which include the pharmaceutical sector. In the year 2009, the corresponding figures were 13 and 12 percent (Beena, S, 2013). It makes around 43 percent of the total sales and 77 percent of the total purchases made by the manufacturing sector firms.  There has been several attempts to quantify the extent of consolidation activity in the Indian pharmaceutical sector. According to Basanth (2000) pharmaceutical sector in India accounted for 5.2 percent of all mergers and 8.3 per cent of all acquisitions in the manufacturing sector during 1991-1999. Beena, PL (2008) observed that drugs and pharmaceutical industry accounted for a large number of mergers and acquisitions in India. A recent study by Beena, S (2013) also observed that up to the year 2008-09, around 9 percent of the pharmaceutical sector firms disappeared due to mergers alone. This number would have been even higher, if the acquisitions are also taking along with mergers. As per Competition Commission of India (2014), recently, there has been 27 mergers and acquisitions in the sector.

    Obviously, the increased extent of consolidation activity in the sector has been distrusted by many. The basic reason for this has been the likelihood of monopoly creation and the consequent adverse effect on patients’ welfare. The specific feature of the pharmaceutical sector unlike other sectors is that the consumption decisions are taken by the doctor and not directly by the actual consumer (patient). This makes the demand less sensitive to prices. It is well-known that the sector consists of various cheap generic drugs as well as branded drugs, with wide variation in the price level, along with the existence of high information asymmetry. It is also important to mention the unethical practices among doctors, chemists, hospitals with the pharmaceutical companies. All this makes the supply side factors more important in deciding the consumption decisions. Given this scenario, the occurrence of mergers and acquisitions especially among the big firms in the sector, further strengthen the supply side.

     

    Coming to the competition side of the sector, the general perception is that the sector is not concentrated. The best evidence for this is the observation made by the competition regulator of India, i.e., the Competition Commission of India (CCI)[i] while dealing with the proposed consolidation of Ranbaxy and Sun Pharma, that the pharmaceutical sector in India is not concentrated. The reason given is that the top ten firms in the sector such as Abbot, Sun Pharma, Cipla are holding only 6.43, 5.35, 5 percent market share respectively. It is important to mention that, the pharmaceutical sector consists of a wide range of therapeutic categories and sub-groups such as molecules, which are not substitutable to each other. Any assessment of competition in the sector should consider the product market concentration. The final consumption of medicines are not occurring at the broad level, but at the product level.  It has been observed that various therapeutic categories are experiencing acute concentration in the sector. For example, though there are around 100 firms operating in the Contact Laxative segment, the four firm concentration ratio is near 90 percent. Out of this, the first firm itself controls more than 60 percent of the market share. This is observed for many other categories of drugs. Further, the number of firms engaged in producing certain categories of drugs is less than five or ten in many cases.

     

    Hence, the competition concerns in this sector owing to the consolidation activity should address these kinds of issues along with the fact that the policy decisions are going to affect the life of millions who are working hard to sustain their life.

     

    Beena Saraswathy

     

    References:

    Basanth, Rakesh (2000), “Corporate Response to Economic Reforms”, Economic and Political Weekly, Vol.XXXV, No. 10.

    Beena, P. L (2008), “Trends and Perspectives on Corporate Mergers in Contemporary India”, Economic and Political Weekly, September 27, pp. 48-56.

    Beena, S (2013), “Global Trends in Cross-border Mergers and Acquisitions” in Reddy, Krishna (ed), “The Economic and Social Issues of Financial Liberalisation: Evidence from Emerging Countries, Bookwell Publishing, New Delhi, pp. 26-40. ISBN 978-93-80574-41-7.

    [i] Available in http://cci.gov.in/May2011/Home/C-2014-05-170-Form-IV.pdf; Accessed on 5th September, 2014

  • 27Rethinking the Patent-Innovation Linkage through India’s Pharmaceutical IndustryVasudha Wattal

    Aug 2014



  • It can be gathered from the news over the past couple of months that all may not be so well in our once ‘glorious’ indigenous pharmaceutical industry. Concerns have been raised about the quality of drugs manufactured in India, while revocation of patents and grant of compulsory licenses for crucial patented drugs have been condemned. For these reasons, the US Chamber of Commerce’s Global Intellectual Property Centre (GIPC) index, for the second year running, has put India at the bottom of the list of 25 countries evaluated on the basis of their intellectual property (IP) regime. Such a move has raised questions on India’s commitment towards promoting innovation and forces us to rethink the basic patent-innovation linkage.
    Patents encourage innovation by assuring the innovator that there wouldn’t be free riders on his ideas and thus, he doesn’t need to keep them a secret. Going by this line of reasoning, having an effective patent system in place, say in the context of pharmaceuticals, will bring in more treatment options for an array of diseases that are on the rise. This certainly sounds good until we ask ourselves – do patents always foster innovation? There have been an increasing number of studies to indicate that while the R & D costs of US pharmaceutical firms have been on the rise, the number of new chemical entities have not grown proportionately. At the same time, the pharmaceutical patents granted every year are increasing at a tremendously fast rate. It thus appears that not all patents granted are for development of truly novel products, and instead are for minor changes in existing products such as polymorphs, combinations with other drugs, new dosage forms, isomers, etc. However, it should be noted that patent laws with a lower technical requirement do not favour local innovation, especially in developing countries. In fact, such patents, by creating an obstacle for legitimate generic competition and thereby accessibility to affordable medicine, prevent realization of the right to health as is recognized in the International Covenant on Economic, Social and Cultural Rights, as well as, by the national constitutions of several countries. But there isn’t unanimity in how people see this issue. There is also the view that incremental innovations are rather valuable as they expand the variety of drugs within a therapeutic class thereby ensuring uninterrupted supply of vital medications in case of any manufacturing bottlenecks etc., besides providing treatment options to a wide range of patient physiologies.
    Quite recently, India has been criticized for its indiscriminate use of the provision of compulsory licenses and thereby, of stifling investment in innovation. Further, it has been condemned for not providing enough incentives to firms to invest in development of more sophisticated technologies, largely based on its policy to not grant patents for incremental innovations and for upholding its mandate to protect public health by granting a single compulsory license. However, they seem to be focusing on a single point in a much larger picture. In a country such as India where 86% of the private expenditure on health is out of pocket and over 80% of the population has no health insurance coverage, cost effectiveness of treatment is a major concern. Therefore, incentives should definitely be provided to firms not only to promote innovation, but to ensure that such innovations may be cost effective for the masses.
    It may be time for the world to look beyond patents as the means to foster innovation and seek additional ways to balance industry interests with those of public health, while causing the least distortion possible. The idea of non-price linked mechanisms for incentivizing innovation, such as prizes and advance market commitments, is gaining some momentum. Moreover, differential pricing and tax benefits are additional channels being considered in various parts of the world. Between 2004 and 2010, the state governments of Himachal Pradesh and Uttarakhand, offered tax benefits targeted at attracting more investment in these states. This led to more firms setting up plants in these regions for manufacturing generics but did not boost innovation. It is much needed that tax exemptions are given specifically for the process of drug development, alongside ensuring a smooth process for conducting clinical trials in India. These two together will attract FDI as well as encourage domestic firms not only to invest in R & D but also to develop the so called ‘neglected’ drugs. Currently, there is a very meager proportion of the budget allocated to health and even lesser for the development of pharmaceutical firms. This needs to be changed with policies targeted at developing the firms’ capacity to innovate. The chances are that if India adopts such measures then there is little reason for the global industry to doubt its intentions. The question now is whether the new Indian government is ready to start addressing this much contentious issue afresh, and willing to take up these initiatives to prove its commitment towards encouraging innovation. The newly announced budget has, unfortunately, failed to address this issue in much detail. While investment in training of medical professionals, increased FDI in healthcare as well as greater medical tourism have been announced, there is absolutely nothing which might restore the pharmaceutical industry’s faith..

  • 28Rise of E-sportsSirus Libeiro

    Aug 2014



  • On July 21, 2014, the winning team of the fourth international championship (TI4) for Defense of the Ancients 2 (DotA2) – an online multiplayer game – received $5 million as prize money. The tournament’s total prize pool of over $10 million is the highest ever in the history of electronic sports (e-sports) and was raised mainly through contributions from the global player community. Gaming was once considered to be the exclusive domain of computer geeks and a leisurely activity. However, with the rapid professionalization of competitive gaming, entry of big businesses and major brands in the industry, and rising global popularity, e-sports are steadily inching towards becoming a serious ‘sport’.

    The narrative of e-sports needs to take into account its parallel rise in different parts of the world. The emergence of competitive video gaming was informed by differing value systems, gaming cultures (Wagner, 2006), and physical infrastructure in the west and the east. Competitive gaming started gaining traction in the USA during 1990s with spread of the personal computer (PC) and emergence of popular computer games. This was accompanied by emergence of gaming teams/clans or leagues, comprising of professional gamers who competed in these tournaments. While in its early days, e-sports in the west focused on networked First Person Shooter (FPS) tournaments, South Korea (the birth-place of e-sports in the East) experienced tremendous popularity of Massively Multi-user Online Role Playing Games (MMORPG) and Real Time Strategy (RTS) genre of games. South Korea, with one of the most liberalized telecom sectors in Asia (Yun et al, 2002) and extensive broadband penetration, was a natural contender for the emergence of e-sports. Its high-speed broadband network in the ’90s opened up new avenues for providing entertainment content to its citizens. It also presented lucrative business opportunities for tech-entrepreneurs. Riding on the back of this massive infrastructure, S Korea became the world leader in e-sports, with tournaments being telecast both online and on Korean television. The formation of the Korean e-Sports Association (KeSPA) with the active involvement of the government ministries gave impetus to its proliferation within the country and provided it with legitimacy and respectability paralleling that of other professional sports ( DeNicola, 2014).

    The launch of World Cyber Games and Electronic Sports World Cup in 2000 signaled the tremendous potential of competitive gaming events. Numerous gaming leagues also sprung up to provide a platform for aspiring gamers. Major League Gaming (MLG), established in 2002 in the USA is possibly the biggest organization responsible for supporting professional gamers and organizing e-sporting events (Jackson, 2013). The popularity of e-sports (especially Starcraft, an RTS with a huge fan following) in Korea is comparable to the status enjoyed by cricket in the Indian subcontinent, with star players/teams enjoying celebrity status, and lucrative endorsement deals.

    Another unique aspect of e-sports is that of live gameplay streaming. The arrival of Internet Protocol Television (IPTV) technology (Scholz, 2011) allowed the creation and broadcasting of user content, and had a catalytic effect on rapid diffusion of e-sports globally (Edge, 2013). Players, broadcasters, and viewers who constitute the gaming community have been an inextricable part of e-sports’ growth story. Unlike traditional sports, gameplay streaming allows for a two-way communication between the player or the broadcaster, and the spectators. This fosters a feeling of belonging amongst the spectators while also popularizing their favorite broadcasters. The ability to both spectate and contribute (Edge, 2013) leads to building up of ‘social capital’ for the community based on a platform which transcends the limitations of physical space.

    According to a recent report, around 71 million people worldwide (half of them in the USA) are active consumers of e-sports related content (SuperData, 2014). Twitch, a web platform for live streaming games, has proved to be pivotal in the expansion of e-sports. Established in 2011, it reached about 45 million users in 2013 (O’Neill, 2014). This has attracted a lot of attention from tech organizations and major brands wishing to invest in the industry. The finals of DoTA2 TI4 were telecast by ESPN, and the television giant is looking to expand its coverage to other games as well (Chalk, 2014). Big brands like Coke, Nissan, Intel, and Red Bull have already moved into e-sports in order to capitalize on the opportunity. At the time of writing, Google had finalized a deal to buy Twitch for $1 billion and fold it within its YouTube operations (O’Brien, 2014).

    Meanwhile the global community in e-sports continues to grow. League of Legends (LoL), another online multiplayer strategy game, reached a staggering 27 million daily players in 2014, more than double of its 12 million players in 2012 (Sherr, 2014). The revenue generating models used by these games are quite different from the traditional ones. Some games like the popular ‘World of Warcraft’ charge a monthly fee from its subscribers. In case of LoL, players have no initial charge but can choose the pay-to-play option for certain aspects of the game or for improved aesthetics of their gameplay. DoTA2 follows the free-to-play model wherein the entire game and all its characters are free, and the players may pay for cosmetic visual improvements. These improvements do not affect the performance of a character, thereby ensuring a fair gameplay experience for all. This model of micro transactions has proven to be a success; in 2013, DoTA2 and LoL generated $80 million and $624 million respectively through these micro transactions (Grubb, 2014).

    In a groundbreaking decision in 2013, the US government provided e-sports players the same recognition as professional athletes (Tassi, 2013) when applying for visas. Some educational institutions have begun offering scholarships for competitive gamers in both Korea (Du, 2014) and USA (Swartz, 2014). While the industry is yet to mature, given the increasing professionalization of competitive gaming and organizations which foster gaming talent, and the burgeoning presence of the gaming community, it is not implausible that e-sports becomes a viable career choice in the near future.

    The professional gaming ‘scene’ in India, while still nascent, has been steadily gaining momentum. Even though the abysmally low internet speeds in India (average speed of 1.4 Mbps in 2013 as per Akamai, 2013) make seamless live-streaming difficult, the gaming community has been growing over the years. While the current e-sports events are lacking in scale, exposure and finances, it is expected that deeper internet penetration and increase in user base would improve the situation. Electronic Sports League, one of the biggest leagues in the world, would soon be organizing local tournaments in India (Arya, 2014). Given India’s demographic profile, it is only a matter of time before businesses and marketing agencies perceive value in investing in this industry, leading to further mainstreaming of e-sports in the country. Meanwhile, at the global level, the complex marriage of competitive gaming, sports, media businesses, and technology continues to evolve within the context of a hyper-connected world.

    -Sirus Libeiro

  • 29Budget 2014’s fiscal arithmetic: Whiff of Deja- vuPurva Singh

    Jul 2014



  • In the new government’s maiden budget, the Finance Minister announced that the government will stick to the fiscal deficit target for 2014-15 at 4.1 per cent of GDP, as proposed by his predecessor in the Interim Budget. His roadmap for consolidation also entailed achieving a fiscal deficit of 3.6 per cent by 2015-16 and 3 per cent by 2016-17, in line with the FRBM Act. Fiscal deficit is the difference between the revenue receipts plus non-debt capital receipts and the total expenditure including loans, net of repayments. It indicates the total borrowing requirements of Government from all sources.
    While the government’s commitment to fiscal consolidation is applause- worthy, the quality of the fiscal consolidation seem to be an issue. Almost 46 per cent of the fiscal deficit target already been reached in the first two months of the financial year, indicating that the government will find it tough to contain deficit at 4.1 per cent. Considering that there has been no cut on the expenditure to meet the deficit target and revenue growth targets are too optimistic, the current strategy of deficit reduction could be a déjà- vu- curtailing capital expenditure and garnering additional revenue from other sources such as disinvestment and the non-tax segments. This will be a copy paste of what the previous governments have done to cut down the deficit. 
    On the expenditure side, the budgeted expenditure for FY15 has risen marginally to Rs 17,94,900 crore from the estimated Rs 17,64,900 crore in the interim Budget. Failing to come clean on the subsidy bills, the total subsidy outgo on major subsidies (96 per cent of the total subsidies), are in fact seen rising marginally to Rs 2,46,397 crore this year from Rs 2,45,451 crore for last year. The budget expects the expenditure on subsidies to fall to 2.0 per cent of GDP (a seven year low) from the current 2.3 per cent, but there is little detail on how the government proposes to achieve this. Any slippage on subsidy front (unproductive expenditure) could mean that the government would slash the capital expenditure (or the productive expenditure) in order to rein in the deficit. 
    On the revenue front, the budget estimates the revenue receipts to increase by 17 per cent (y-o-y) as compared to the 10.2 per cent last year. Tax revenues are budgeted to go up by 17.7 per cent over the last year. However, the last time such a big increase in tax revenues took place was in 2010-11 but it was a result of the base- effect (flat revenue in the previous, crisis year of 2009-10) aided by a rollback of some tax cuts. The current optimism on the revenue front is based on the assumption of a 13.4 per cent of nominal GDP growth. But, with weak monsoon and lagging manufacturing sector posing as a downside risks to growth, and Rs. 20,000 of revenue foregone due to rise in the income tax exemption slab, it will make it difficult to raise the tax to GDP ratio to the budgeted level of 10.6 from 10.2 currently. 
    However, the government expects to meet its deficit target through higher receipts from disinvestments and larger dividend receipts from Reserve Bank of India. Public-sector disinvestments are expected to fetch the government an estimated Rs 63,425 crore in the current year, up 145 per cent over Rs 25,841 crore collected last year. Dividends from RBI and other financial institutions are expected to be Rs. 62414 crore in 2014-15 against Rs. 45113 crore in the previous year. 
    Even if the government is successful in raising such ambitious disinvestment revenues (given that equity markets remain buoyant) and is successful on meeting the fiscal deficit target, such a kind of fiscal model cannot form the basis of sustainable fiscal consolidation. Instead, a sustainable model of fiscal consolidation has to be based on efficient expenditure management and greater tax revenues. The government has missed out on any concrete steps in the budget targeting these two. 
    Undoubtedly, the task of fiscal consolidation will not be easy for the government. With very little room to cut overall expenditure, the government has to instead focus on switching expenditure from unproductive subsidies to productive sectors and raising tax revenues. The budget has struck a right note by forming Expenditure management Commission which is expected to come up with an overhaul of the subsidy regime and ensure an efficient resource allocation (to more productive expenditure). However, the non- implementation of GST is a big miss. Implementation of GST would not only mean increased tax revenues (through simplified tax regime), it will reduce the cost of doing business and increase profitability by eliminating multiple central and state taxes. 

  • 30Aid for Trade: Examining Aid Effectiveness for Trade FacilitationIsha Dayal

    Jul 2014



  • The Aid for Trade (AfT) initiative was launched in 2005 at the 6th WTO Ministerial Conference in Hong Kong with the aim of helping developing and least developed countries (LDCs) build trade related capacity to overcome trade barriers, and in turn raise their participation in international trade. With the Agreement on Trade Facilitation being finalized at the 9th WTO Ministerial Conference in Bali in December 2013, there has been a renewed interest in the AfT program. The Trade Facilitation agreement calls for all WTO members to strengthen the implementation of GATT Articles V (Freedom of Transit), VIII (Fees and Formalities) and X (Publication) with the aim of streamlining trade procedures and expediting the movement and clearance of goods among all countries. At the same time the agreement accounts for “special and differential treatment for developing and least-developed countries” which includes opting for repeated extensions in implementing commitments through a flexible timeline and acquiring technical assistance and capacity building support wherever required. The provision of this assistance comes under the purview of AfT. 
    Aid is a transfer of resources, voluntarily provided as loans or grants by developed countries or international organizations (such as IMF, OECD, World Bank) to developing countries and LDCs for various developmental activities: which in the case of ‘trade facilitation’ would include a county’s trade related policies, procedures, institutions and infrastructure. 
    The impact of aid on the growth and development of a nation has intrigued researchers for the past many years, but has also raised the issue of whether aid has been ‘effective’, i.e. whether aid has been successful in helping achieve the desired objectives. Direct unconditional funding from the donor’s perspective, and misaligned domestic policies from the recipient’s perspective have been pin-pointed as the major causes of aid ‘ineffectiveness’. Considering that the positive impact of aid has not been ascertained in the literature and many donor organizations have been asked to revise their aid programs in recent times: does the Trade Facilitation agreement include provisions that ensure the effectiveness of AfT in developing countries and LDCs? What must be the aid disbursement agenda in order to prevent fallout of the AfT program?
    The Paris Declaration on Aid Effectiveness (2005) underlines five core pillars to ensure the effectiveness of aid disbursements:
    Ownership: Developing countries set their own strategies, improve their institutions, and tackle corruption.
    Alignment: Donor countries align behind these objectives and use local systems.
    Harmonization: Donor countries coordinate, simplify procedures, and share information to avoid duplication.
    Results: Developing countries and donors shift focus to development results, and results get measured.
    Mutual accountability: Donors and partners are accountable for development results.
    These pillars are further strengthened by the Accra Agenda for Action (2008) which emphasizes on the role of ownership of development targets by the recipient country: building more inclusive partnerships and coordination between different donors, and donors and recipients: and achieving and accounting for results. Capacity development, in terms of building the ability of recipients for future development, is an integral principle of the Accra Agenda.
    In order to notify the WTO nominated Trade Facilitation (TF) committee of phasing the TF implementation schedule, the developing countries and LDCs are required to categorize provisions of the agreement on the basis of their requirement for assistance. This is indicative of a strong ownership component since the target is set by the recipient country. The donor countries too are required to pitch in AfT for the desired objective of the recipient country, making the aid flows aligned between the donor’s and recipient’s objectives. These pillars are further supported by the “targeted assistance and support” on “mutually agreed terms” necessitated by the agreement in order to help recipients “build sustainable capacity to implement their commitments”. Along with prior targeting of AfT, steps to raise the transparency and accountability of assistance have been taken by setting down stringent review procedures of the aid disbursed and making all information publically available. The donors are required to provide information on aid disbursements every twelve months including the intended use of funds, procedures for disbursement, and the beneficiaries. The beneficiary country too is required to provide information on the agencies responsible for coordinating the donor support. In this regard, the WTO designated TF committee shall hold atleast one session every year to discuss problems regarding implementation of commitments, and review progress on provision of assistance and inadequacy of support, if any. 
    However the agreement is not binding on the pillars that stress upon harmonization and coordination of activities between the parties involved, considering that the members are to only “endeavour to apply” and hence only attempt to take into account the overall developmental framework of the recipient country / region, and the ongoing technical assistance programs of the private sector or other donors in case there may be an overlap or duplication of activities. Moreover, the agreement is less stringent towards promoting internal coordination between trade and development officials of the members in the capitals and Geneva regarding the implementation plan: and towards the use of roundtables, consultative group discussions and other coordination structures to coordinate and monitor implementation activities. 
    Overall, even though the Trade Facilitation agreement does account for most of the principles of aid effectiveness, it is imperative to ensure coordination and harmonization of assistance activities for positive results that can be measured in the years to come. In addition, it is important to specify the route through which assistance can be provided, since the agreement invites assistance either bilaterally from donor countries or via “appropriate international organizations”. Considering that bilateral aid can be biased towards certain developing countries and objectives – thereby being less effective – the AfT program can encourage, or rather necessitate, the flow of aid through non-partisan international organizations in order to promote a fair disbursement of funds and assistance towards global trade facilitation. 
     

  • 31Imports vs. Exports: Revisiting Trade PolicyDevyani Pande and Samridhi Bimal

    Jun 2014



  • The phases of development of the world economy have largely been a struggle between the two schools of economic thought-“mercantilism” and “liberalism”. The term “mercantilist system” was coined by Adam Smith to describe the system of political economy that encouraged exports and restrained imports to consolidate regional power centers. Economic liberalism, on the other hand, has components of international division of labour and specialization with focus on free markets and private ownership of capital. The popular opinion today is of the existence of the economic liberalism doctrine. However, it does seem the lines between mercantilism and liberalism are blurring and what might come about in the future is a hybrid form of economic liberalism with traces of the mercantilist system. While trade policy around the world has been increasingly liberalized, there exists an underlying mercantilist characteristic of supporting domestic production and employment with the motive of increasing exports rather than imports. 
    Governments of many countries all over the world today, have fallen prey to a common fallacy that supposes a country’s wealth is augmented by a positive ‘balance of trade,’ i.e. nations become rich by exporting more than they import. Trade policies around the world have focused on promoting exports over imports in the belief that rising imports and trade deficits are bad for economic growth and employment. In recent times, the emphasis on exports has gained popularity and countries have managed exchange rates, doled out tax benefits to exporters and subsidized exports; among other measures to make their economies export oriented. These measures along with the establishment of export promotion councils (even in India); do tend to signal towards the stress laid on exports as opposed to that on imports. Efforts are made to boost exports and diminish imports by usually subsidizing exports by means of grants and lower taxes, and discouraging imports by means of tariffs.
    This is not surprising as the motivation for a country to import goods and services from other countries is perhaps less obvious than its motivation for exporting (making a profit on goods not consumed by the domestic market). A judicious examination of the reasons for and advantages of imports would throw light on the significance of imports in trade. There are broadly two reasons to import:
    Goods or services that are either essential to economic well-being or highly attractive to consumers but are not available in the domestic market
    Goods or services that satisfy domestic needs or wants can be produced more inexpensively or efficiently by other countries, and therefore sold at lower prices.
    The merits of imports and exports have often been hotly debated. Contrary to popular belief, imports are just as beneficial to an economy as exports. On the production side, imports can improve firm productivity and export competitiveness, and the resulting trade growth can contribute to global economic growth. The key to improvements in firm productivity lies in imports of intermediate goods and services. 
    Adam Smith exposed the fallacy of exports making a nation wealthier by pointing out that the wealth of nations consisted in the productive labor of its peoples rather than in bars of gold and other precious metals stored in its treasury. In fact it is imports that make a nation richer. By importing goods that are cheaper than those they can produce themselves, nations have cash to spare as well as the goods. This makes them wealthier than if they were self-dependent (Smith 1776).
    The US humorist, P J O’Rourke put it succinctly: “…Imports are Christmas morning; exports are January’s MasterCard bill.” Imports make us richer, and exports make it possible. The self-sufficiency which is advocated as a virtue is the road to poverty. It denies us the specialized and skilful services of far-flung producers anxious to provide us with goods at lower prices than we can make for ourselves.
    On the consumer side too, imports are actually good for a country and its people in general. Imports deliver lower prices and more variety to consumers. Imports raise the standard of life. As an example, till 1983, India had two brands of cars which were actually outdated. Even for these, India had to wait for several years. In 1983, this changed with the arrival of the Maruti. Then, with liberalization and globalization reforms in 1991, we now have all the top brands of cars in India. Other industries also witnessed the same pattern. Consumers have benefited a lot with increase in imports. All industries in India followed the same pattern before 1992. There are all the top brands of the world operating in India now. 
    In the trade policy circle, there has always been a greater misunderstanding when the discussion turns to the balance of trade question. Policymakers often get anxious when a country’s imports exceed its exports, creating a trade deficit. Anxieties about imports and trade deficit can lead to trade policies that do more harm than good. An expanding trade deficit is not necessarily a sign of weakness, but may signify a more robust domestic demand for goods and services, as well as rising investment and a larger inflow of foreign capital to finance it. The idea that imports reduce employment and slow down the economy undermines public support for trade liberalization. It falsely paints the trade as a zero-sum game, pitting nations against each other in a contest to export the most and import the least, with countries have trade-surplus as winners. Adam Smith eloquently wrote about this in 1776 in his seminal book, The Wealth of Nations:
    “Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.”
    The goal of policymakers should not be to maximize exports and minimize imports in behest of notion of achieving a balanced trade. Instead the goal of policymakers should be to maximize benefits of citizens to buy and sell in global markets for mutual gain, whatever the mix and proportion of goods, services and assets they freely choose to trade.
    A trade deficit may be beneficial if a country is spending more than it is currently earning to build the capacity to service and, ultimately, perhaps, pay off its debts. The bottom-line is that it is not the deficit or surplus that is the key thing, but what it is doing and whether the country is building enough capacity to service that debt. 
    After debating and understanding the merits of international trade, countries need to revisit their trade policy regimes. This holds true even for India. In the current scenario, when the Indian economy is poised for the giant leap, it is imperative that import-export considerations are kept in mind to judiciously leverage the capacity building with its deficit.

  • 32Combating crisis: A comparative analysis of India and KoreaKuntala Bandyopadhyay

    May 2014



  • India and Korea have both emerged as strong Asian economies demonstrating increasing resilience to deal with crises. Both countries have been subject to various economic crises. Beginning the 1950s, India ran trade deficits that increased in magnitude in the 1960s. In 1966, foreign aid slowed, and the response was devaluation accompanied by partial liberalization. By 1985, balance of payments problems reappeared and by 1990 turned into a serious macroeconomic crisis. South Korea also had its share of experiences of economic crises. 
    The approach to combat those economic crises has been different in India and Korea. Comparable to the 1991 crisis in India was the 1997 crisis in Korea that was triggered by the inordinate rise in short-term foreign debt, especially the high leverage of Chaebols. Korea’s government began its policy reaction to the crisis quickly and much ahead of the other affected economies such as Thailand and the Philippines. Several initiatives were undertaken to address problems associated with the Chaebol system and the financial system even as the government began talks with the IMF in November 1997 for a bailout package. The policy response was quick and decisive as illustrated by the fact that while GDP growth rate fell from 7.1 percent in 1996 to -6.8 percent in 1998, it rebounded just as rapidly to 10.7 percent in 1999. 
    In 2008, the Korean economy was better equipped to deal with the economic crisis compared to the 1997 crisis. First, sufficient foreign reserves had been built up in the interim that helped diminish the impact of a sudden reversal in capital flows. Although the large accumulated short-term foreign debt made the Korean economy vulnerable to a foreign liquidity shock, the amount of foreign reserves was still sizeable to cover all short-term foreign debt. The restructuring of chaebols in 1997 meant that the debt-to-equity ratio of the corporate sector had plunged to around 100% in 2008 from over 400% in 1997. This improvement in financial buffers greatly helped Korean firms to withstand the credit constraints and demand contraction posed by the global crisis that was triggered by the now well known Lehman Brothers collapse in 2008. In addition, banks were better placed to absorb shocks in 2008 than in 1997, based on improved prudential regulations. Increase in manufacturing exports, on which the Korean economy was heavily dependent, to China served to cushion the dramatic collapse in global trade. China’s import recovered faster than other regions, which in turn was the result of the global rebalancing. In retrospect it is clear that sound pre-crisis fundamentals coupled with post-crisis macro-policy choices were crucial to Korea’s performance. Thus large amount of foreign reserves, improved financial structures of firms and banks, a prudent government balance sheet and timely and focused interventions meant that Korea successfully recovered from the crisis. The value of pre-crisis fundamentals achieved by the restructuring processes since the 1997 crisis cannot be overemphasized. 
    On the other hand, although India’s response to the two crises in 1991 and 2008 respectively was also measured and swift, the pre-crises fundamentals were much weaker compared to Korea. But India did not follow through the reform process to its logical extreme, notwithstanding its implementation and institutional bottlenecks. The 1991 crisis provided the opportunity to bring about a fundamental change in development strategy, an abandonment of the import substitution model, reducing sharply the role of the public sector by de-licensing many sectors. While growth did revive, it did not pick up to the heady levels of 9% until 2003-04. It was subsequently interrupted by the 2008 global crisis. According to Srinivasan (2002) the relatively modest of success of Indian reforms cannot be attributed to their rapidity. At the same time reform did not help increase the share of manufacturing in GDP-fast growing sectors remained either capital intensive or skilled-labor intensive. Transformation would therefore need a structural shift to labour intensive manufacturing to absorb the huge surplus labour from the farm economy. This requires reform of labour laws and building of infrastructure, especially power. 
    The financial crisis of 2008 thus occurred when much reform was pending, although the political will to implement it naturally weakened after the onset of the crisis. While the crisis lowered the growth rate from 9.7 % in 2007-08 to 6.5 % in 2008-09, the economy recovered quickly to grow at 7.9 % in 2009-10 and 8.3 % in 2010-11 on the back of tax cuts and a fiscal stimulus. But the high rate of growth has not been sustained and declined to 5 percent in 2012-13. It has also become more variable. India’s self-confidence has also been shaken. While other economic indicators – rupee, inflation, current account deficit and fiscal deficit- have all taken a beating along with slowing growth, India’s travails have a conspicuous domestic context. 
    Structural problems – infrastructure deficits, inflexible labour laws among others have resulted in a stagnating manufacturing sector that could absorb the abundant and cheap, unskilled labour. Manufacturing requires transparent rules and reliable infrastructure and India lacks both. Mounting corruption in the allocation of land, spectrum and mines led the Supreme Court to pronounce that all natural resources must be assigned by auction. The verdict must be seen in the context of a deep sense of resentment at the collective failure of India’s institutions. But exclusively picking a market mechanism over an administrative allocation mechanism is an extreme reaction to institutional failure. The high-powered Committee on Allocation of Natural Resources opposes such a ‘one-size-fits-all’ straitjacket while recognising that there can be no substitute for strengthening institutions. 
    The two crises of 1991 and 2008 both brought to the fore structural problems and institutional weaknesses in India that otherwise tend to get hidden in times of good economic performance. While reform has been gradual, it has also suffered from poor implementation. Going forward it is equally if not important to address institutional and implementation bottlenecks as it is to design better policy for improved economic outcomes. To reiterate, the Korean experience is instructive in this respect.

  • 33Fate of microfinance regulation hangs in the balanceSirjjan Preet

    May 2014



  • After over two decades of impressive growth and increased recognition as a developmental tool designed to facilitate financial inclusion, microfinance sector in India was hit by the deepest crisis event ever. In October 2010, major crisis erupted in the state of Andhra Pradesh (AP) which was home to a quarter of the Indian microfinance industry. It triggered the collapse of the entire sector causing the growth rates for both loan portfolios and clients to drop as low as 17 percent from 95 and 57 percent in 2009. State government of AP promulgated the AP Microfinance Institutions (Regulation of Money Lending) Act 2010, effectively shutting down all microfinance operations in the state after a spate of 35 suicides committed in 45 days on account of usurious interest rates and coercive recovery techniques employed by the microfinance institutions (MFIs). The scale and density of microfinance operations in AP and the bursting of the massive debt bubble pointed out the deeper dysfunctions in the microfinance industry and precipitated the need for a comprehensive regulation and supervision of microfinance in India. 
    In general, microfinance regulation and supervision has been at the centre of intense policy debate and extensive research across the globe. In August 2010, the Basel Committee for Banking Supervision issued supervisory guidance for the application of its Core Principles to microfinance activities conducted by depository institutions in their jurisdictions. However, the need for regulation and supervision goes beyond deposit taking institutions, particularly in a country like ours where MFIs are not allowed to collect deposit and therefore, do not fit into the scope of supervisory framework. In response to the challenges facing the microfinance industry in India, the central government proposed The Micro Finance Institutions (Development and Regulation) Bill 2012, hoping to provide a statutory framework to regulate and develop this industry. The bill was introduced in the Lok Sabha in May, 2012 and was later referred to the Parliamentary Standing Committee on Finance that rejected the bill in February this year terming it as “sketchy with inadequate groundwork” and asked the government to bring forth a fresh legislation. 
    It is important to note that the microfinance bill in its present form would have failed to achieve its purpose of regulating and strengthening the microfinance sector in the country. The central government needs to rework the following provisions of the bill for it to be able to fulfill the social and developmental expectations: 
    The very fact that the Reserve Bank of India (RBI) was proposed as the regulator and supervisor of the entire microfinance sector raises questions on the capacity of the central bank to regulate and supervise vis-à-vis that of an independent authority such as a Microfinance Regulatory Authority. Organizational setup of the RBI is not suitable for regulating and supervising MFIs operating on small scale in remote areas. Even financial institutions like the National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India (SIDBI) have expressed their desire to be a facilitator and not a regulator for microfinance stating their lack of wherewithal to undertake and manage this large and dispersed sector.
    Former Minister of Rural Development, Mr Jairam Ramesh had criticized the bill as being “oriented to protect microfinance institutions, not their clients – the poor borrowers”. Ironically, the bill is silent on three critical borrower protection issues. Firstly, it does not address the issue of multiple lending by the MFIs and does not suggest any mechanism for monitoring multiple lending or over-indebtedness. Secondly, the bill fails to indicate effective steps for restraining MFIs from adopting coercive collection methods for recovery of dues. It is also silent on the field monitoring of operations / activities of MFIs. Thirdly, it fails to deal with the issue of multiple memberships restricting the members of self-help groups from gaining membership of multiple groups.
    Standing Committee on Finance in their 84th Report pointed out that the microfinance bill defines the MFIs but omits the definition of “poor households”, “financial inclusion” and “microfinance” indicating a lack of focus on financial inclusion.
    The proposed Ombudsman model of grievance redressal in microfinance sector loses its effectiveness in the light of the fact that most of the clients are poor, illiterate and placed in remote areas making it difficult for them to travel to lodge a complaint with the Ombudsman.
    Proposal allowing MFIs to collect thrift has invited objections from various important committees (such as the Malegam Committee, Raghuram G. Rajan Committee and C. Rangarajan Committee) and the state governments alike. RBI has also opposed it by saying that deposits and thrift are essentially the same; and as a matter of public policy, RBI only permits the banks to accept public deposits.
    Another contentious provision pertains to allowing the MFIs to provide pension and insurance services. Such services fall under the regulatory purview of the Insurance Development and Regulatory Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA). Allowing MFIs to enter this domain could lead to duplicity of regulation unless regulation of these services by the MFIs is left exclusively to the respective regulatory authorities.
    While holding wider consultations with the state governments and the RBI, the Ministry of Finance has ignored the civil society and other stakeholders belonging to the vulnerable section of the society while drafting the bill and has therefore, failed to incorporate their concerns in the bill.
    In view of these omissions and commissions, the bill has to undergo extensive review and revision before it sees the light of day. Since the bill was part of the Congress’s plan for financial sector legislative reform, all eyes are now set on the new government. Till the time new government is able to generate enough political will and consensus needed to design a new and effective regulatory and supervisory framework for Indian microfinance, the fate of microfinance regulation hangs in the balance.

  • 34Re-examining Auction Design for Telecom Spectrum in IndiaAbhilasha Sahay

    Apr 2014



  • The recent telecom spectrum auction, held in February 2014, raised the much needed revenue for the fiscally strapped Government, amounting to INR 61,000 crore. However, it failed to address the long-standing industry demand for more quantum of spectrum. Yet again, this has drawn industry and policy attention towards examining auction-design for assigning telecom spectrum in India. This article aims to deconstruct India’s present auction-design and suggest alternatives, one of them being, adoption of ‘packaged bidding’.

    The need for auctions stems primarily from the excess demand for Telecom’s sine quo non- spectrum. Prior to auctions, the Government of India followed administrative assignment of spectrum. Post liberalization, reliance on market forces was realized by way of auctions to efficiently allocate spectrum. The first auction was held in 1991 wherein a limited number of cellular mobile and basic fixed service licenses were assigned. It was believed that auctions would ensure efficient use of spectrum by assigning it to those who value it the most and generate government revenue too[1] . However the mere usage of this tool did not guarantee complete success; roll-out of services remained slow due to unforeseen problems with the design and rules of the auction. Once the licenses had been granted, the winning bidders reported that they had over-bid and that their businesses were not viable[2]. The government then relieved them of the obligation to pay further instalments of their committed license fees and allowed them to move to a revenue sharing regime. Several alterations to other aspects of license such as calling charges, rentals, duration of the license and choice of technology have been made ever since. Today, a Simultaneous Multi-Round Open Ascending (SMRA) auction design is followed. Table 1 below gives details on recent telecom auctions, all of which followed SMRA:

    Table 1: Telecom Spectrum Auctions

    Year Product Revenue Comments
    2010 3G and 4G USD 18 b Success
    2012 2G (GSM+CDMA) CDMA cancelled; GSM- USD 1.6 b Partial failure: unusually high reserve prices
    2013 2G (GSM+CDMA) USD 340 m Only one bidder (MTS)- unusually high reserve prices; negligible participation
    2014 2G USD 10 b Success: reduced reserve prices; impending expiry of licenses of market-leading telecom operators

    Source: Compiled by author

    The Indian market is divided into 22 telecom circles. Under SMRA, each circle is bid for individually and simultaneously. Simultaneous bidding keeps the procedure fairly flexible, i.e. players can switch to a second-best option, if the first becomes too expensive[3]. Sequential bidding (wherein each circle is bid for one after the other), on the other hand, makes the process more aggressive since players don’t have a ‘look-back’ option. Further, as compared to sealed-bid auction, an open auction as followed under the SMRA format, reduces uncertainties associated with valuation assessments and diminishes chances of winner’s curse (players tend to value the commodity much more than its real valuation and thus over-bid). The use of SMRA design is justified on the above grounds. However in recent times, this format has gained international criticism for its inefficient outcomes and its inability to internalize changes in industry demand.

    Telecom has emerged as a sector having far-reaching impacts. Owing to its pervasive and interconnected nature, synergies among different telecom circles cannot be overlooked. In this regard, individual bidding, as used in SMRA, exposes bidders to aggregation risks especially if synergies among circles are significant. In a scenario where circles A and B are complements and only stand-alone bids are allowed, a bidder may overbid for A in the fear of being outbid for B. In the February 2014 auctions, actual revenue raised was 41 per cent higher than what was estimated by the auctioneer; thus suggesting some degree of over-bidding. Typically, in subsequent rounds of auction, a player’s willingness to participate may get overpowered by his fear of being subjected to a winner’s curse, leading to lower levels of participation and thus inefficient trade[4]. In this context, packaged bidding as used in combinatorial auctions could be an alternative. Combinatorial auctions have gained significant success in countries such as UK, Nigeria, Switzerland and Netherlands.

    Figure 1
    Mathematical equivalent of positive synergies among two circles A and B:
    Valuation (A+B) > Valuation (A) + Valuation (B)

    To implement package bidding, the regulator needs to gather information from bidders on how they value different packages of spectrum and create bundles accordingly. Each player then bids for these packaged circles. Based on true revelation of valuation by bidders, this mechanism mitigates aggregation risks. Additionally, it induces contiguous spectrumoutcomes as aggregated band plans tend to emerge endogenously in the bidding process. Need for contiguous spectrum has most recently been recognized as a pre-requisite for the fast emerging data market. It would also lead to consolidated outcomes, i.e. lesser number of players operating in each circle, which may help overcome the industry challenges due to spectrum fragmentation. Packaged bidding would also facilitate procurement of national licenses and creation of a single pan-India license.

    However adoption of such a design comes with certain caveats. This procedure typically requires highly processed information which lies beyond the scope of modern computation methods. For instance, in an auction comprising of 22 circles and their respective combinations, the valuation set would consist of 222 numbers. Additionally, it is important to define parameters on the basis of which circles should be packaged and have a clearly spelt-out mechanism. 

    A simplistic change in design would not guarantee efficiency alone. Prior information regarding availability of spectrum would be required to develop and plan robust strategies. In the absence of which the industry resorts to knee-jerk reactions, creating inefficiencies. It is vital to have amore dynamic auction mechanism with timely modifications to the auction rule in accordance to changes in technology and market conditions. Most importantly, re-prioritization of objectives with greater focus on efficiency is imperative to bring about the envisioned change.

    • [1] Jain, R. S. (2001). Spectrum auctions in India: Lessons from experience. Telecommunications Policy, 25(10), 671-688
    • [2] Ibid
    • [3] Robert Porter’s presentation at The Neemrana Conference (2011), session on Telecommunication Services
    • [4] Hendricks, K., Porter, R., & Tan, G. (2003). Bidding rings and the winner’s curse: The case of federal offshore oil and gas lease auctions (No. w9836). National Bureau of Economic Research.

  • 35Riding on the App Economy Wave: An Opportunity for Job Creation that India Cannot MissSugandha Srivastav

    Apr 2014



  • The paradigm of usage for mobile phones is shifting. From being devices used for voice and text communication, mobile phones have become pocket personal computers (PCs). This shift began in 2007/2008 when Apple launched the iPhone and the App Store, which heralded the beginning of what is known as the ‘App Economy.’ Apps for phones are akin to what software packages are for PCs. Apps increase the functionality of mobile phones by performing specialist functions that can fall within the ambit of networking, business, navigation, gaming, education, finance etc. While in developed countries, smart phones are generally complementary goods to the PC; in developing countries, they are primarily substitutes, given that the majority of the population cannot afford PCs. In India, the household penetration of the PC is a paltry 11 percent indicating that smart phones and the apps they carry, can have a decisive impact on delivering services to previously excluded groups. 
    In the era of hyper-mobility, ‘pocket PCs’ such as tablets and smart phones, can drive productivity and mitigate informational asymmetries. In India, the last quarter of 2013 saw a 166 percent increase in the shipment of smart phones. This makes India the fastest growing smart phone market in the world. By virtue of this and the fact that each Indian smart phone hosts an average of 17 apps, it is not surprising that the market for apps is being referred to as an ‘economy’ in itself. In the USA and EU28, the app economy has thus far created 519,000 and 520,000 direct jobs respectively. In terms of revenue, EU28 countries get one-fourth of the total global revenue which amounts 13.85 billion USD per annum. This is especially significant given that the app economy is one of the few sectors that is growing despite the recession. The emergence of open-source software tools and platforms also multiplies the potential impact of this sector by allowing anyone from the public domain to take part in app development and distribution. 
    This is an opportunity for India which, if not captured soon, will represent a sunk cost. India is the third largest region in terms of app downloads for Google Play. However, it does not fall into the top ten revenue generating app economies. The monetisation challenge is particularly acute in India’s case because the Indian customer is highly price sensitive, credit/debit card penetration is low and the mobile-payments regulation is not favourable. In addition, the take-off of the app economy may be tempered by weak network infrastructure and spectrum constraints which will impede the deployment of newer generation technologies. The primary challenge for India is therefore two-fold, first, it must find innovative strategies to monetise its large base of downloads and second, it must ensure that its supporting ecosystem is conducive.
    Business model innovation that takes into account India’s unique constraints is occurring. Given the difficulty of mobile-payments, physical retail outlets which permit cash payments for apps have been established (AppsDaily). Furthermore, telecom operators who earlier offered highly unfavourable revenue shares to developers have realised that this strategy is unsustainable in the face of global competition. Therefore, telecom operators such as Vodafone, have launched new app stores in India which adhere to the global norm of giving 70 percent of the total revenue to the app developer. 
    These changes represent steps in the right direction but much more remains to be done, especially on the policy front. While the app economy must certainly be left to operate on its own, the government still has a role to play in terms of ensuring robust network infrastructure. The RBI can also evaluate its mobile-payments regulation to ensure that online payments become easier such that the app economy and India’s digital economy, at large, take-off. 
    According to Microsoft estimates, currently 10 percent of all the apps in the global market are being created in India. Given India’s phenomenal growth rates in terms of 3G SIMS, smart phone shipments and app downloads, there is huge beckoning opportunity for job creation. However, if the network and financial infrastructure do not keep pace, the app market will become yet another missed opportunity for the Indian economy. 

  • 36Addressing the nation’s trust deficit in tax administrationNeetika Kaushal and Mansi Kedia

    Apr 2014



  • As the financial year 2013-14 draws to an end, tax authorities continue to grapple with collection targets. The fear looming ahead points towards, perhaps, another year of failed fiscal revenue estimates. The interim budget statistics reveal that the much-hyped fiscal consolidation in 2013-14 was achieved on account of reduced government expenditure, and not higher revenues. India continues to report a below average tax-GDP ratio, 17.2% in 2012-13, which is much lower than the average 22% in other BRIC countries, and 17.7%[1] in lower middle-income economies.
    While the government’s unsuccessful attempts at raising tax revenues can be partially attributed to the global economic slowdown in the last couple of years, the bigger challenge probably lies in the inefficiency of the overall tax system, including both policy and administration. The government raises revenue through two broad types of taxes – direct and indirect. Though indirect taxes are regressive[2] in nature, they are easy to administer and collect. On the other hand, direct taxes in India are progressive and based on a system of voluntary self-assessment; this however, increases the burden on tax administrators to identify default and/or non-compliance. In such a system, the perception of taxpayers towards the department (government) and the latter’s ability to appropriately utilise tax revenue can play a key role in ensuring compliance and tax collection.
    In a pilot survey conducted for an ongoing study on barriers to compliance and cost of compliance for direct taxes in India, it was found that Indian taxpayers appreciate government initiatives related to digitization and improved communications. According to recent statistics[3] , more than thirty million taxpayers filed online returns in the financial year 2012-13. This is much higher than the number in developed countries such as Australia where taxpayers continue to paper-file their returns despite an established e-filing system. The survey revealed that the challenge lay in responses that did not reflect taxpayers’ confidence in the government to address concerns of economic well-being and overall development. Recent initiatives on tax reforms, some which have been implemented (such as Large Taxpayer Units, Safe Harbour Rules) and others that are still being debated or recasted (such as Direct Tax Code, Goods and Services Tax) have not seen much traction. Indian taxpayers continue to remain unimpressed by its institutions, which they believe, in Acemoglu and Robonson’s vocabulary, are extractive.
    Tax authorities in all countries face scepticism from taxpayers. Governments acknowledge the adverse impact of ‘trust deficit’ on compliance and tax collections. They have, therefore, worked towards changing the taxpayers’ perception and reinstating their faith in public institutions. Countries like Australia and UK have transitioned from confrontational compliance models to co-operative compliance models. Her Majesty’s Revenue and Customs (HMRC), UK, has dedicated customer relationship managers and customer coordinators who shadow a large business for tax purposes. An important part of enforcement and compliance strategy is working on psychological aspects of compliance. In the UK, nudge letters prepared by a behavioural insight teams are customized for different categories of taxpayers to discourage evasion.
    The Australian Tax Office (ATO) follows a Taxpayer Charter with a dedicated annual Compliance Program. Under this program, a model (Fig 1) has been developed to understand economic, psychological, and industry-specific factors that influence compliance behaviour across different taxpayer groups. The structured pyramid represents willing taxpayers at the bottom and the unwilling category at the top. Accordingly, compliance strategies are soft towards people at the bottom but stringent for those at the top. This compliance pyramid is not only useful to adopt the right approach towards compliance and judiciously allocate resources, it also helps establish fairness and instils confidence among taxpayers.
    Figure 1
    Figure 1 
    Regulatory Impact Assessments (RIAs) is another policy tool that reflects the government’s diligence in policy making. Countries such as UK, Australia, and New Zealand have formalised processes and dedicated teams engaged in RIAs that help avoid policy flip-flops – a perennial problem in India.
    Economic and administrative motivations of policymakers in India must not overlook perception management, a subtle yet integral piece of successful policy implementation. The ideas illustrated above are simple and effective solutions for establishing the right perception of government institutions. Adam Smith’s four canons of taxation – equity, economy, certainty, and convenience also beckon the need to establish a trust-based relationship between taxpayers and tax authorities.
    [1] Center for Budget and Governance Accountability
    [2] Regressive with respect to disposable income
    [3] Based on interactions with the Directorate of Income Tax, Ministry of Finance
     

  • 37Abenomics and the Fed ‘QE’ Taper: Does it mark the revival of the Yen Carry Trade?Neha Malik

    Mar 2014



  • Carry trade is a strategy which involves taking a short-position in a low-interest currency (funding currency) and simultaneously a long-position in a high-interest currency (target currency). The interest rate differential, however, is not the only determinant in such a trade. Currency risk or the expected movement in the exchange rate is a weightier consideration for the trade participants. 
    Prior to financial crisis (2008), the yen had been the most favoured funding currency amongst the investors primarily due to the protracted period of low interest rates in the Japanese economy since the mid-1990s. Some of the preferred target currencies were the Australian/New Zealand dollar, Mexican peso etc. The period following the financial crisis (2008) saw the reversal of the Yen carry trade as the US dollar replaced the traditional funding currency owing mainly to historically low levels of interest rates in the US economy. Although interest rates in the US had been low during 2004-07, they were still higher than those prevailing in Japan. It was after April 2009, that the short-term interest rates in the US fell below that of Japan. 
    The flight of hot money from the US to China is one instance of the carry trade flow triggered by the policy measures adopted in the period following the 2008 crisis. Moreover, steady appreciation of the Chinese Yuan against the US dollar since April 2008, ensured sustenance of this trade. The USD/CNY trade, however, may not be sustainable anymore given the recent decision by the Fed to withdraw the monetary stimulus in a phased manner along with an expected devaluation in Yuan. 
    With the US economy showing signs of revival and the decision by the Fed to taper the monetary stimulus in increments of $10 billion before ending them in October 2014, the interest rates in the US are expected to rise in the near future. Meanwhile, Abenomics has been the economic norm in Japan ever since Shinzo Abe assumed the position of the Prime Minister in December 2012. One of the crucial components of this discipline has been a highly explosive monetary stimulus undertaken with the twin purpose of ending deflation and weakening the Yen. The Fed’s decision to trim the asset purchases coupled with the likely extension of Abenomics in Japan may pave the way for the JPY/USD carry trade in the near future. 
    The latest statistics on interest and exchange rates also indicate a likely resumption of the JPY/USD carry trade. Although the short-term interest rates in the US are just above that in Japan, long-term interest rate spread between the two countries has widened to more than two percentage points of late [figure 1a) and 1b)]. There has also been acceleration in interoffice assets of foreign banks in Japan which have increased from 6.7 trillion yen in December 2012 to 8.2 trillion yen in January 2014 (fig.2). Although interoffice lending is not the only representative of ‘carry trade’, it can be considered as one of the suitable proxies. Since, carry trade is not without inherent exchange rate risks, it is important to consider the JPY/USD trend in the past few years. The yen has exhibited a depreciating trend against the US dollar since December 2012. The average rate of yen against the US dollar was 79.8 in 2012 while the corresponding figure for 2013 was 97 and the signs of depreciation continue in 2014 evident from the latest monthly data. USD/JPY rate was 102.02 in February 2014. 
    Figure 1a) Short-term interest rates in the US and Japan (%) Figure 1b) Long-term interest rates in the US and Japan (%)
    Figure 2 Interoffice lending of Foreign Banks in Japan 
    (100 million yen)
    Source: ECB, OECD Financial Statistics and Bank of Japan statistical database
    USD/JPY data is, however, vulnerable to correction as a lot depends on the future US economic data. Though the latest statistics on jobless claims and factory output in the US seems positive, other economic surprises and global uncertainties also need to be controlled for. For instance, the Russia-Ukraine conflict has spurred the flight of capital back to the safe haven due to which there has been appreciation in the Yen. There is also some evidence of repatriation of capital by the Japanese investors who have switched to other assets within the domestic markets. When the data on interest differential and the exchange rate of the JPY vis-a-vis the USD is considered in isolation (with other things remaining constant), there is a high likelihood for the Yen to emerge as the most preferred funding currency in the coming months.

  • 38Repo Rate vs. CRR: Which one is better at infusing liquidity while containing inflation?Kirti Gupta

    Mar 2014



  • RBI Governor Raghuram Rajan made it apparent from his latest speech that inflation would remain a major concern for India’s economy. Headline inflation in December last year eased to 6.2 percent from 7 percent in the previous month. Notwithstanding, in the Third Quarter Review of Monetary Policy 2013-14, RBI surprisingly raised the repo rate by 25 bps to 8 percent when the market was expecting a cut in interest rate to stimulate the credit demand. This act of RBI demonstrates a new trend, suggesting its focus rather shifting towards consumer prices which remained elevated at close to double digits. In the midst of it all, let’s discuss two important tools of monetary policy: cash reserve ratio (CRR) and repo rate. 
    Effective date (for RR & CRR) Repo Rate (RR) Cash Reserve Ratio (CRR) WPI Inflation Rate (Y-on-Y)
    28-01-2014 8 4 6.2
    29-10-2013 7.75 4 7
    07-10-2013 7.5 4 7
    20-09-2013 7.5 4 7
    15-07-2013 7.25 4 5.8
    03-05-2013 7.25 4 4.6
    19-03-2013 7.5 4 5.7
    09-02-2013 7.75 4 7.3
    29-01-2013 7.75 4.25 7.3
    03-11-2012 8 4.25 7.2
    22-09-2012 8 4.5 8.1
    11-08-2012 8 4.75 8.0
    17-04-2012 8 4.75 7.5
    Source: RBI In the Second Quarter Review of Monetary Policy 2013-14, RBI shot the repo rate by 25 bps to 7.75 percent while retaining the CRR at its current level of 4 percent, suggesting that inflation was a concern. Repo rate suggests the interest rate at which commercial banks are allowed to borrow from the central bank for short-term, only when they possess government securities which are used as collateral. While CRR is the proportion of their deposits that commercial banks have to keep with RBI, and no interest is paid on those deposits. The RBI had cut the repo rate by 25 bps in January 2013 when headline inflation eased nearly 7 percent while holding the CRR at then current level of 4.25 percent. Earlier, when the inflation rate was hovering around 8 percent for a couple of months, the RBI resorted to cuts in CRR aiming to provide adequate liquidity in the market amidst high inflation. At the same time, it is noteworthy that repo rate was kept unchanged from April 2012 to November 2012.
    These trends suggest that RBI has been much more cautious with the repo rate when there is a need to enhance liquidity in the market and inflation expectations are on the higher side as well. This is broadly in light of the fact that banks can borrow at the ongoing repo (interest) rate as per their requirements, considering that they have excess of mandated government securities that could be used to borrow funds from repo window. Thus, it may cause an excess flow of money over the desired level of the RBI, therefore, causing rise in prices.
    On the other hand, CRR has been widely used as an instrument to expand liquidity. It has quite a few benefits over the repo rate, especially when reining in inflation is a priority. A cut in CRR directly expands the liquidity of the banking system in a stipulated amount and banks can possibly lend at cheaper rates. Simultaneously RBI can have a control on sudden rise in prices if required. This is possible by selling off government securities in the open market, which helps in absorbing excess liquidity from the banking system. However, the problem with CRR is that it cannot generate liquidity beyond a stipulated amount and when higher liquidity in the banking system is required, it does not help much. Price of credit remains high and, therefore, higher demand cannot be easily fulfilled. In that case, the RBI resorts to lowering the repo rate. In sum, high inflationary expectations necessarily signify hike in repo rate when the objective is to contain inflation, but CRR is used as a tool when both liquidity and soaring inflation are a matter of grave concern.
    1 Banks are mandated to invest 25% of their deposits in government securities, which is known as Statutory Liquidity Ratio (SLR). Only after completing the SLR requirements, the rest of government securities can be used to borrow funds at repo rate.

  • 39The Female Retention Problem in GujaratMichael Dickerson

    Sep 2010



  • The gender gap (i.e. the difference between the percentage of males and females) in enrolment at the primary and secondary levels in rural India has decreased steadily over the last several years. Many states have shown substantial progress in increasing female enrolment levels while also making progress in reducing the gender gap, notably Bihar, Rajasthan, and Uttar Pradesh (it should also be noted that it is possible to have both an increase in female enrolment as well as an increase in the gender gap). A notable exception is Gujarat where little progress has been made in reducing gender disparity despite the state’s impressive economic growth. Analysis of data collected by the ASER Centre over the last five years indicates that the issues of gender disparity and female retention in basic education have not improved. In light of the recent passage of the Right to Education Act, it is imperative to better understand why and how, despite progress in many states, some continue to lag in terms of providing basic education and, more specifically, in reducing the gender gap in enrolment levels.

    The benefits of female education are widely recognised and the desire to achieve gender equality in education has been stated nationally (within India) and internationally by the United Nations, the World Education Forum, etc. Two of the eight widely supported UN Millennium Development Goals (MDGs) specifically address the issues of gender and education, as does the World Education Forum Dakar Framework. The 86th Amendment to the Constitution of India specifies that “free and compulsory” education should be provided to all children between the age of six and fourteen while the recent Right to Education Act is an attempt to further enable the achievement of this goal.

    Sarva Shiksha Abhiyan (SSA), the Government of India’s flagship programme for achieving the universalisation of elementary education, has a “special focus” on female education. SSA is a partnership between the central, state, and local governments and implementation strategies are largely determined at the state level (theoretically within the framework stipulated by the central government). The causal relationship between SSA (and associated programmes) and the reduction in the gender gap has not been adequately analysed, but the association is compelling. Gujarat is an example of a state where economic gains have not translated to social gains (in the case of improving gender parity in basic education).

    Using the data collected for the Annual Status of Education Report (130,000+ observations from Gujarat), it is possible to estimate the gender gap (disaggregated by age group) and regress (using a simple linear regression) the change over time; the results, shown in the figure below, clearly indicate a serious female retention problem in Gujarat.


    Author’s calculations based on data from the
    Annual Status of Education Report (ASER Centre)

    By contrast, it is possible to compare the progress Bihar has made to that of Gujarat by looking at the male/female enrolment levels for a particular age group (in this case, 11-14). Bihar shows an increase and a convergence in enrolment levels while Gujarat levels have not improved. In the 11-14 age group, Bihar has surpassed Gujarat in both gender parity and overall enrolment levels as of 2009.


    Author’s calculations based on data from the
    Annual Status of Education Report (ASER Centre) 

    There has been some effort to increase female enrolment (e.g. the Kanya Kelavani Initiative, the National Programme for the Education of Girls at the Elementary Level, Kasturba Gandhi Balika Vidyalaya, etc.), but it appears that these interventions have had little impact on gender parity in Gujarat. A promising area of research would be to assess why these programmes have failed in Gujarat thus far, while the situation has been steadily improving in other states.

     

  • 40Technology in India: some perspectivesSabyasachi Saha

    Jun 2010



  • In the recent past, we saw two important dates being observed in India; first, World Intellectual Property Day on April 26 and National Technology Day on May 11. The first date had a global significance given that the World Intellectual Property Organisation had instituted this date in 2000 while the second on a modest note is Indian in spirit. Acknowledging the close link between IPR regimes and technological assertiveness of a nation, one needs to find out where India stands in technology at present, particularly after the changes in the Patents Act that was expected to give a fillip to innovation. 
    We know that technological learning and catch-up has played a very significant role in India. Traditionally, shop floor technological learning and process revolutions have helped our industrial growth. More recently, India’s engineering skills have got reflected in routine (though skill intensive) tasks in knowledge driven sectors like IT. In the bargain, did we lose out on creativity and cutting-edge research? One explanation put forward is the resource constraint of a developing economy like ours. Over the years, R&D expenditure has gone up in India, but it is still below one per cent of our GDP. However, given the fact that technology has sizeable externalities, is not static and comes with a price tag in most cases, efforts towards innovation are imperative despite disparate resource endowments across nations. 
    There is little doubt that India has acquired technological sophistication in some sectors. We are, however, far from achieving frontier research capabilities. One needs to think if we can achieve this transition only with a quantum jump in the levels of our R&D expenditures, or whether it can be achieved by maintaining a year-on-year steady growth in our resource allocation towards research. Apparently, there is no clear answer to this. 
    Technology generation as captured by patent statistics suggest that there has been a steady increase in the number of patents originating in India. According to the latest Annual Report (2008-09) of the IPO, the Council for Scientific and Industrial Research topped the list of Indian patentees. The private sector has contributed significantly towards patenting in pharmaceutical and information technology sectors. However, we do not have a significantly diversified portfolio of patents in India.
    Patenting abroad signals demand for technologies and technology intensive products abroad. In terms of share of foreign patents with the USPTO over 2002-06, China with a share of 1.8 per cent stood ahead of India which had only at 0.5 per cent. Both, however lagged far behind South Korea, which had a substantially larger (7.8 per cent) share. This share can improve for India only if it strives for higher technology content in its exports. In turn we need to look at our industrial strategies to encompass innovation incentives and create enough demand for indigenous technologies. It is also crucial that development of high technology sectors centres on growth and diffusion of intellectual human capital. To this end, therefore, India should orient production strategies to ensure not only that skills are exploited, but also that talents are used in a larger measure.

  • 41Is ICT an ‘Engine Of Growth’ For India?Suvojit Bhattacharjee

    May 2010



  • India’s Information and Communication technology (ICT) sector is a perfect example of the positive externalities generated by globalisation in a developing economy. ICT has tremendous potential to generate growth through significant export surpluses and substantial increases in income and employment. It is this, perhaps, that has prompted India to concentrate on the ICT sector as one that offers the greatest potential to boost growth. This is reflected in the sharp rise in investment (as a percentage of GDP) from 3.8 per cent to 5.6 per cent between 2002 and 2007. Will this help boost productivity and growth rates? What challenges does India face in proclaiming ICT as her ‘engine of growth’? It may perhaps be useful to look at the experiences of OECD for an answer.
    ICT investments and its links with sustainable growth have been a major research topic in OECD economies. The OECD manual on ICT and economic growth puts forward three reasons why economists and policymakers have shown a deep interest in the effects of investments in ICT on growth. First, ICT investments contribute to overall capital deepening and hence aids in raising labour productivity. Second, rapid technological progress in the ICT producing sectors and the greater use of ICT by firms would help raise multifactor productivity (MFP) growth. Third, the network effects generated by ICT through lower transaction costs and more rapid innovation will improve the efficiency of the overall economy. It has been widely established that the impact of ICT is channelised through two sectors: ICT-producing and ICT-using sectors. Sectors that produce or distribute ICT products are classified as the ICT-producing sectors while extensive users of ICT, like the banking and financial services sector, constitute the ICT-using sectors. 
    In many OECD countries, the ICT-producing sector has seen very high rates of productivity growth, especially in the 1990s, which translated into better economic performance. ICT manufacturing has made the largest contributions to aggregate productivity growth in Finland, Ireland, Japan, Korea, Sweden and the United States though the ICT-using sectors, i.e. sectors that are intensive users of ICT, constitute a much larger part of the economy. To get an idea of the relative contributions of the ICT producing and using sectors, we have examined data pertaining to the United States. 
    If we disaggregate the total factor productivity growth (TFPG) of 1.05 for the total US economy for the period 1995-2000, we find that the ICT producing sector contributed 0.71 and ICT using services contributed 0.68 to TFPG. The contribution of non-ICT sectors was negative at -0.34 per cent (mainly because the non-ICT sector is dominated by sectors like agriculture where productivity growth has, at best, been sluggish). Data available for the period 1979-1995 also show that ICT producing sectors has the highest share in TFP growth. The much higher contribution of ICT-producing sectors to productivity growth as compared to ICT using sectors can be attributed to more rapid technological advances in ICT producing sectors and to the rapid growth of the sector as a result. Besides, it is possible that the existence of a domestic ICT producing sector spurs the development and adoption of ICT applications for specific purposes within a country. The experience of OECD countries, thus, indicates that though ICT using services take the growth path to a higher level, it is the ICT producing sectors that are the true ‘engines of sustainable growth’.
    What lessons can India learn from the OECD experience? The most important one is that it needs to take a fresh look at the pattern of investment in the ICT sector. According to the limited data available for India on ICT from CMIE, more than 95 per cent of India’s ICT investments have been in the ICT using sector. If the experience of OECD countries is anything to go by, it is apparent that steps have to be taken to correct the skewed investment pattern in the sector to encourage much higher investment levels in the ICT producing sector.
     

  • 42Regulations in the Packaging Industry: Time for change?Divya Satija

    Apr 2010



  • The government intends to notify the provisions of the Food Safety and Standards Act shortly. The Act essentially is an amalgamation of six different acts that today govern food safety standards in the country. Currently, regulations like the Prevention of Food Adulteration Act, 1955, Meat Food Products Order, 1973, Fruit Product Order, 1955, the Standards of Weights and Measures Act, 1976 and the Standards of Weights and Measures (Package Commodities) Rules, 1977 and the Drugs and Cosmetics Act, 1940, among others regulate processed food packaging in India. All these acts focus on quality control rather than quality management. 
    Quality management has three main components: quality control, quality assurance and quality improvement. Its focus is on product quality, along with the means to achieve it. Therefore, the thrust is on both quality assurance and control of processes as well as of products. This enables consistency in quality. The existing laws that have now been unified under the Food Safety and Standards Act contain little more than technical guidelines that specify the quality of the packaging material but ignore the packaging process altogether. 
    One of the fastest growing sectors in the Indian economy is the food processing industry. Since most of the processed food items require packaging, the growth of the food processing industry has triggered the growth of the packaging industry too. With rapid urbanisation, changing life styles, growth in modern format retailing and preference for home delivery, there has been an increase in the demand for more conveniently and safely packaged food items. According to the India Food and Drinks report, 2009 by BMI, the per capita consumption of packaged food products in 2013 is expected to be 55.4 per cent more than the level in 2008. However, existing regulations governing the packaging industry are obsolete, partly because of the narrow focus of these regulations and partly because they fail to take into account technological change and the rapid growth in the variety of foods that are now being packaged. 
    In addition, manufacturers in the food processing industry normally outsource packaging of their products to contract manufacturers. Usually, manufacturers specify technical guidelines on the material to be used; rarely do they specify the process to be adopted for packaging. Consequently, the possibility of adulteration always exists. Besides, it is not mandatory for manufacturers to specify technical guidelines. As a result, there is no uniformity in the packaging standards adopted by different manufacturers. 
    Far more importantly, enforcement of quality standards at different stages of the value chain fall under the jurisdiction of different ministries, making it impossible to enforce accountability. For example, most of the raw material for the food processing industry is procured from the agriculture sector. While the Ministry of Food Processing Industry is entrusted with the responsibility of ensuring quality standards in processing, it has no power to ensure that the raw material procured meets required quality standards. Take, for instance, the case of processing milk. The food processing ministry can ensure quality standards in the processing stage but has no powers to ensure that milk is collected in a hygienic manner. Inter-linkages across different sectors/industries are generally not reflected in the regulations for these sectors/industries. 
    In addition, there are no packaging specifications to ensure that the packaging material used is environment friendly. Nor has any attempt been made to ensure that packaging standards are so set as to take into account different retail formats. For example, a product might be stored in a well ventilated, air conditioned modern retail format as well as in the open in a local neighbourhood store. In this instance, inappropriate packaging can lead to serious consequences, as it did a few years ago for renowned packaged food processors like Cadbury, PepsiCo and Coca Cola. Their products were taken off the shelves after they were found to have been contaminated due to inappropriate packaging. Thus, it is important that the packaging standards for processed foods be suitable to India’s climatic condition and appropriate for storage across all kinds of retail formats. 
    This throws light on two important shortcomings in the regulations governing the packaging industry. First, there are no specific standards for quality management for the food packaging industry and second, there is no uniformity in standards. Therefore, more than simply unifying existing law, it is time the government completely revamped food packaging standards and guidelines with a decided shift in focus from quality control to quality management.

  • 43Cutting the Fiscal FlabRadhika Kapoor

    Mar 2010



  • Martin Feldstein, while addressing the Reserve Bank of India in 2004, remarked, “Fiscal deficits are like obesity. You can see your weight rising on the scale but there is no sense of urgency in dealing with the problem. And, also like obesity, the more severe the problem, the harder it is to correct”. The question that arises is what weight loss strategy should be adopted – the quick-fix easy solution of slimming pills or the more arduous route of exercising regularly? The finance minister, while presenting the budget for 2010-11, has chosen the more arduous path and clearly spelt out the message of fiscal discipline to the nation.
    The budget deficit of the central government stands at 6.8 per cent of GDP in 2009-10 and, this rises to about 10.5-11 per cent of GDP if deficits of subnational governments are included. The combined government debt is 82 per cent of GDP. Given these worrying figures, the decision to act on the fiscal problem was imminent and necessary. And, it is apparent that the finance minister has done so. Importantly, the fiscal consolidation exercise has not been done by cutting spending on social sector schemes and capital expenditure. Government spending on social sector programmes increased by 22 per cent to Rs 1,37,674 crore, or about 37 per cent of the total planned outlay of budget 2010-11. Non-plan expenditure, on the other hand, has been held down. The government expects to spend 66 per cent of total expenditure on non-plan activities during 2010-11 compared to 70 per cent in 2009-10.
    To ensure fiscal discipline, the FM has cut subsidies and hiked duties in a manner that will imply an additional cost for consumers in the short run. There has been an increase in excise duty, which is a part of the exit strategy from the stimulus package that was put in place to combat the global slowdown. Continuing to keep these duties low would have meant a huge burden on public finances through government borrowings. The one measure, which has drawn the most criticism, is the increase in customs and excise duties on petrol and diesel, which in turn has led to a hike of Rs.2.71 and Rs.2.55 per litre respectively. The fuel price hike is being criticised for being inflationary.
    This will lead to a slight increase in inflation in the weeks to come, but if this exercise had not been undertaken now and fiscal deficits were allowed to run high, inflation would have been even higher in the long run. Governments have two ways of meeting deficits. They can either issue bonds and raise money from the market or they can print money. Their ability to issue bonds is limited by their ability to service debt and the market appetite for government bonds. Monetising the deficit has a severe inflationary impact. The question, therefore, is should we tolerate slightly higher inflation today or be prepared to put up with much higher inflation in the future. Of course, there is a trade-off involved here. It could be argued that higher inflation today could well entrench inflationary expectations, but it is also the case that greater fiscal profligacy today signals that government may wipe out debt through higher inflation in the future.
    Another important concern is the impact of fiscal deficits on private investment. In the aftermath of the crisis, it is mainly government and private consumption, boosted by the fiscal stimulus packages, that have driven growth. However, this cannot continue indefinitely and investment is imperative for growth. If the government keeps borrowing to fund its deficit, it will crowd out private investment and the RBI would run a tighter monetary policy, increasing interest rates. This will also widen current account deficits. Though increased interest rates may well attract more capital flows, for emerging economies on the path to recovery, there are challenges emanating from increased capital flows with ramifications for monetary growth, inflation and exchange rate stability. Controlling fiscal deficits in a timely manner will offer more scope for the RBI to run a looser monetary policy and make more credit available for the private sector.
    The oil price hike will raise an additional Rs25,000 crores in revenues, and while some might argue that this may not make a very significant dent in fiscal deficit, this exercise signals that the government is serious about containing the fiscal problem. The success of fiscal consolidation depends, to a large extent, on the credibility of the government and people’s perception of the government’s commitment to fiscal discipline. It is, therefore, imperative that the budget involves some element of ‘fiscal signalling’. This budget does so by laying out a clear path of medium and long-term fiscal correction. It also outlines fiscal consolidation targets such as reducing government debt to 68 per cent of GDP by 2014-15 as recommended by the Thirteenth Finance Commission and promises to introduce the direct tax code and the good and services tax from April 2011.The decision to bring the subsidies through cash “above the line” brings greater transparency in fiscal accounting.
    In conclusion, the finance minister needs to be applauded for moving towards fiscal prudence without jeopardising the country’s growth prospects. While this might lead to a slight increase in inflation in the weeks to come, it will save us from much higher inflation in the future and provide a more conducive environment for investment and growth.
     

  • 44 Union Budget 2010-11: A Balancing Act but not Quite EnoughMathew Joseph

    Mar 2010



  • The Finance Minister laid down three objectives as the focus of the 2010-11 budget: raising the economy’s growth rate quickly to the pre-crisis 9 per cent level, making that growth inclusive, and moving towards fiscal consolidation. However, the measures announced in the budget may not contribute to growth nor make that growth more inclusive and may not even lead to fiscal consolidation. The achievement of these objectives is likely to be thwarted by the inherently inflationary nature of the budget. Finance Minister Pranab Mukherjee in his budget speech, while noting that high inflation in food items had already spread to non-food sectors has, of course, expressed the hope that the steps taken by the government so far will bring the rate of inflation down in the next few months. The question is: will it?
    The firm effort at fiscal correction is the hallmark of this budget. The budget went by the guide map prescribed by the Thirteenth Finance Commission and proposed to bring down the fiscal deficit sharply from the revised estimates of 6.7 per cent of GDP in 2009-10 (6.9 per cent after including the off-budget bonds) to 5.5 per cent in 2010-11 and further to 4.1 per cent in the next two years. A hefty rise of 18 per cent in gross tax receipts (against less than 5 per cent rise in the 2009-10 revised estimates), a 32 per cent rise in non-tax revenue (less than 16 per cent in 2009-10) and large receipts from public sector disinvestment (Rs.40,000 crore against about Rs.26,000 crore in 2009-10) are expected to bring about strong fiscal adjustment in 2010-11. On the expenditure side too, strong adjustment is envisaged with revenue expenditure growth coming down to below six per cent from 14 per cent in 2009-10. Interestingly, capital expenditure is targeted to grow quite strongly at 30 per cent in 2010-11 on top of a similar growth of 28 per cent in 2009-10.
    The budget made substantial changes on the tax front through which the Finance Minister expects to reverse the revenue trends of the current year. Corporation and income tax receipts grew reasonably well in the current year at 18-19 per cent. For 2010-11, corporate tax collection is expected to grow at 18 per cent with a small reduction in surcharge from 10 per cent to 7.5 per cent and an increase in the rate of minimum alternative tax (MAT) from 15 per cent to 18 per cent. Personal income tax rates have been brought down on different income slabs, lowering receipts by Rs.26000 crore. This is estimated to lead to a 3.5 per cent decline in collection. With the restoration of import duties on crude and refinery products, customs receipts are estimated to rise by a large 36 per cent against a 15 per cent decline in 2009-10. A partial rise in general excise duty rate by two per cent and other upward adjustments of specific duties on cement, petroleum products and tobacco products are estimated to raise the excise duty collection by a huge 29 per cent against a six per cent decline in the current year. While retaining the rate of service tax at 10 per cent, the budget proposed extending the service tax to new sectors such as property construction, rail freight and air travel. This is estimated to raise service tax receipts by 17 per cent as opposed to a decline of five per cent in 2009-10. The adjustments in indirect taxes are targeted to bring in additional revenue of Rs.46500 crore.
    There is little doubt that the taxation proposals are inflationary – the indirect tax measures will lead to higher inflation through a cost push effect and direct tax measures through demand pull. Both these imply that the magnitude of inflationary pressure implicit in the budget is Rs.72500 crore or 1.2 per cent of GDP. The possibility of another petroleum price hike, manifested in the very low petroleum subsidy provision of about Rs.3100 crore is likely to stoke inflation further.. High inflation hurts the poor more and makes growth less inclusive.
    High food inflation has been the main factor driving the overall inflation rate. It is apparent that India has hit a food constraint that has not only driven up prices but that also threatens to limit its growth potential. That the finance minister acknowledges this is evident in his budget speech, which outlined a four-pronged strategy to boost agricultural growth. However, most of the measures announced are likely to bear fruit only in the medium and long run. Besides, the measures announced do not make for an agricultural reforms agenda that tackle the problems caused by government control over inputs, production and marketing – an agenda that is critical to ease the food constraint. There is also little in the budget to indicate an effective short-term food inflation management strategy.
    In short, the budget has pushed for fiscal consolidation too hard, hoping that it would help restore the pre-crisis growth trajectory but the tax measures it resorted to for achieving fiscal correction could unleash an inflationary spiral which could harm both growth and the inclusiveness of that growth and also make it difficult to achieve fiscal consolidation.
     

  • 45 The spectre of a new asset bubble looming in China?Morgane Fleur Lapeyre

    Feb 2010



  • Recent price increases in the property market have aroused fears that the ‘old’ subprime bubble may have shifted to emerging Asia, with China being the first in line. Prices of new residential property rising at an annualized rate of more than 20 per cent (Mint, January 22nd) and residential pre-sales (sales of uncompleted houses) have increased by 147 per cent in the first half of 2009 compared to the same period last year.
    Capital flows are heading towards emerging Asian economies where the recovery is strongest, driven by the combination of unprecedentedly low interest rates in advanced countries and renewed investors’ appetite for risk. The resulting abundant liquidity is perceived as a source of threat for it may contribute to the creation of a new asset bubble. As a result, the IMF has recently decided to control capital flows to the region as temporary palliative treatment.
    According to the Economist (January 14th), if a bubble does build up again, it will be in the emerging world where its symptoms are most likely to emerge: rapid credit growth, high asset valuation, and public enthusiasm for particular assets. To date, China seems to be the country where these three conditions are closest to being fulfilled.
    New loan issuance is estimated to have doubled between 2008 and 2009, reaching a record 9.6 trillion yuan last year. The recent acceleration of credit growth, with an estimated 1.1 trillion yuan worth of additional loans in the first two weeks of January, has prompted the People’s Bank of China to raise banks’ deposit reserve requirements by 0.5 per cent last week. The bank has also sought to reassure markets on the pace of credit growth by requiring domestic banks to lend in “a reasonable and balanced manner” in 2010.
    James Hamilton (Econbrowser) explains that domestic inflationary pressures stemming from the country’s artificially undervalued exchange rate, rather than materializing in the goods and services sector, have tended to be channeled into the “hard” commodity and real estate markets with private investors stockpiling copper as store of value or acquiring property in major cities. Besides, with deposit interest rates at only 35 basis points, private investors have greater incentives to look into the equity and real estate markets for higher returns.
    In advanced economies, excessive indebtedness and higher down-payments demanded by real estate lenders make opportunities for leverage in property markets in the region rather slack. In China, on the contrary, the government’s reversal of its past tight housing policies (implemented to deflate an impending bubble in the property market in 2007) in response to the financial crisis, coupled with loose lending conditions have revived such opportunities in the country. The reduction of minimum capital requirements for housing developments from 35 to 20 per cent in September 2008 and the 1.5 trillion yuan (38 per cent) from the fiscal stimulus package allocated to infrastructure have largely encouraged construction activity. Over the past year, buyers and developers, who had delayed purchasing in 2008, have rushed to take advantage of price drops and relaxed policies.
    As for investors’ appetite, the persisting accommodative stance of monetary policy together with high public indebtedness in advanced economies, with deficits exceeding 10 percent of GDP in some countries (such as the United States, Britain and Greece), may likely lead to a saturation in the demand for government debt securities in the region. Besides, the vast differential in the prospective growth rates of advanced and emerging Asian countries (the IMF forecasts 2 per cent growth in 2010 in the former compared to 8.4 per cent in the latter and up to 10 per cent in China) adds weight to the statement that the enthusiasm for (speculative) investment has greater chances of finding a new anchor in the emerging world, China in the lead.
     

  • 46 Is protectionism the only way forward- The case of Indian wine industry?Amrita Gupta

    Feb 2010



  • Almost twenty years after liberalisation, protectionism is still being used to promote the wine industry giving it the advantage of an infant industry. Restrictive policies and imposition of high import duties on foreign products are some of the measures being adopted to protect the domestic industry.
    The wine industry in India grew after states like Maharashtra, Karnataka and Andhra Pradesh (grape growing regions) recognised the potential of viticulture and introduced favourable policies like allocation of land for vineyards, wine parks, excise duty exemptions and sales tax relief for domestic manufacturers to promote the domestic wine industry. Additionally, these wine producing states and states with high wine consumption like Delhi individually imposed high levels of various taxes like excise duties, additional countervailing duties and VAT on imported wines and restricted their distribution. These taxes were over and above the basic customs duty of 150 per cent imposed on imported wine. The states argued that restrictions on imported wines were imposed to proscribe liquor consumption under article 47 of the Constitution of India. However, it also indirectly protected domestic wineries, which enjoyed duty exemptions and lower VAT. Imported wine suffered both in terms of higher excise duties and non-tariff barriers.
    However, there is need to assess whether such restrictive measures are actually required to promote the domestic industry. This question assumes particular importance in the context that the European Union (the largest supplier of wine to India) threatened to challenge India at the WTO for non-compliance of “national treatment” unless Indian states reduced their differential duty structures and restrictive policies. The policy of “national treatment” (Article III: 4 of GATT 1994) states that imported products “shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use”. 
    A recent study by ICRIER for the Italian Trade Commission on wine retailing in India throws up some interesting results that need to be kept in mind in deciding whether the Indian government should continue with the high tariff and non-tariff barriers on imported wine. First, Indian vineyards are doing well with an established domestic presence and growing exports. India is one of the top fifteen wine producing countries around the world, with the domestic wine industry clocking an annual growth rate of between 25 and 30 per cent. Second, the price sensitive Indian consumer prefers low-cost wines priced in the range of Rs.400-800 (around 3-4€). Indian wines offer a wider selection than European wines in that price range. Imported wines have a price insensitive, niche clientele, whose consumption is not affected by high prices. Third, export-import data show that India still has a negative trade balance in the sector, with substantial imports from EU countries like France and Italy. The study also revealed that apart from imported wine, India also imports wine-grade grape seeds, machinery and expertise from EU countries like France, Italy and Spain. Some of the leading wineries have also been set up as joint ventures with European viticulturists.
    The study results showed that Indian wine has a specific customer base and growing export market. Therefore, protectionism is not really necessary for the growth of the industry. In fact, protectionism is actually promoting restrictive taxation between Indian wine producing states. Maharashtra and Karnataka had extended the high duty structure imposed on imported wines to domestic wines produced outside their state. This inter-state competitive taxation affected the wine market in both states.
    Moreover, we are still importing expertise from European countries. So altercation with the European Union at WTO might impact trade in the sector. It also needs to be kept in mind that India has already had to roll back restrictive levies in 2007 on wine and spirits after being challenged by the United States at the WTO for non compliance of “national treatment”. Repetition of the same situation with the European Union would result in a “no win” situation for India.
    A reduction in restrictive duties by state governments would create a conducive environment for state level collaborative ventures with EU countries that could ensure the transfer of expertise at a relatively low cost. With the European Union countries looking to expand their markets in the wake of the recent economic meltdown, India can enter into collaborative ventures, including making domestic vineyards production centres for European wines. Removing restrictions will also increase India’s bargaining potential at the Broad-based Trade and Investment Agreement (BTIA), which India is negotiating with the EU.
    After the recent criticism by EU, the central government had appealed to errant states to comply with WTO norms. However only two states, Goa and Tamil Nadu, agreed to give ‘national treatment’ to imported liquor. Other states like Delhi, Andhra Pradesh and Maharashtra still continue with their restrictive policies. Non-compliance by these few states may affect the future of Indo-EU trade in this sector and India will continue to face criticism at forums like the WTO. This is something that policy makers at the state level need to consider.
     

  • 47To Attend or Not to AttendRitwik Banerjee

    Feb 2010



  • Several reasons have been assigned for the rampant absenteeism among teachers in primary schools – a problem that plagues not just India but most developing countries. These include the complete absence of any monitoring mechanism, the disincentivising effect of poor infrastructural facilities and poor compensation, particularly at the primary level and lack of intrinsic motivation. Policies to tackle absenteeism in schools have, therefore, tended to revolve round improving infrastructure, compensation packages etc.
    However, an empirical analysis based on a theoretical model developed by this researcher showed that the decision to attend or not is in fact a joint decision taken by the teacher and the student, which implies that the decision of one affected the other. Thus there exists a simultaneity between teachers’ decision to attend or not and decision of the students. A teacher would not like to come to an empty class and a student prefers a less truant teacher. This finding has significant  implications for policy making.
    We employ Becker’s marriage market framework and propose that the teachers and students produce a ‘shared good’ when they attend classes. A shared good, in this context, can be thought of as the benefit of a more educated society, which accrues to the society as a whole. This shared good is produced only when both the teacher and her student is present. A utility maximisation exercise is performed by the teacher and student given a set of constraints where the utility functions depend on the shared good, among other things. At equilibrium, we show that teacher’s and student’s attendances move in the same direction. Subsequently, we also establish the same result using a game theoretic approach. Here, the teacher and the student play a guessing game under full information where one tries to guess whether the other is going to attend class or not and subsequently makes one’s own decision. We find a continuum of Nash Equilibria, where attendance of one is equal to the attendance of the other. Each of the teachers and students thus stands to lose if they choose an attendance level different from the other.
    We verified the above results empirically on the basis of a survey of primary schools in the North-West Frontier Province in Pakistan conducted by the World Bank.  We estimated the following two equations simultaneously using seemingly unrelated regression.
        
            0.87**
           (0.05)
            0.39**
          (0.017)
    where 
     is the teacher’s attendance,
     is the child’s attendance 
      is the predicted attendance of the teacher obtained from the exogenous variables of the teacher’s equation only
      is the predicted attendance of the children obtained from the exogenous variables of the child only, 
      and  are the vector of exogenous variables and the disturbance of the teacher’s equation and 
     and  are the vector of exogenous variables and the disturbance term of the child’s equation.
    We find that the coefficients of the predicted attendances are positive and significant at the 5 per cent level for both equations indicating that the attendance of one is directly proportional to that of the other. Thus, the decision to attend or not is a simultaneous one. We also observe that  is significantly influenced when the predicted attendances are included in the respective equations. It increases from 0.0775 to 0.2795 in the teacher’s equation and 0.0583 to 0.2479 in the child’s equation when predicted attendance is included among the repressors, implying that it plays a significant role in determining teachers’ and students’ attendance.
    Our study shows that teacher absenteeism should not be treated in isolation. Policies should target both the groups simultaneously and not each group separately. In this regard, one of the greater focus areas to enhance attendance should be mandatory and active participation of parents in school management. That the active participation of parents in school management markedly improved attendance of the teachers as well as students was borne out in an experiment run by World Bank in Nicaragua. Involving local participation in school management may, therefore, prove an important factor in tackling absenteeism in schools than policies and perhaps needs to be encouraged along with measures such as improving infrastructure and compensation packages. 

  • 48Modernisation of Airports: Will it benefit the Express Industry?Ramneet Goswami

    Jan 2010



  • Civil Aviation is the fastest growing arm of India’s transport infrastructure. Passenger and air cargo traffic have increased manifold in the post-liberalisation phase (Figure 1). The government’s open sky policy and liberal air service agreements have led to the presence of a large number of foreign players, which has resulted in traffic congestion and delays at a majority of the airports.
    Figure 1: Trend of Passenger and Cargo Traffic
     
    Source : Airport Authority of India,
    http://www.airportsindia.org.in/traffic_news/mar2k8_trafficnews.jsp
    The government has taken a number of measures to improve the airport infrastructure for the country. It has drawn up a plan to modernise 37 non-metro airports. Several measures have been taken to lure private investment in airports. The government has invited private participation in the modernisation of major airports such as Delhi, Mumbai, Bangalore, Hyderabad and Cochin. It has also allowed 100 per cent foreign direct investment (FDI) in greenfield airports, maintenance, repair and overhaul (MRO) organisations, pilot training and technical institutes and up to 74 per cent in ground handling services through the automatic route. Private developers are allowed to set up captive airstrips and general airports 150 km away from an existing airport and there is 100 per cent tax exemption for airport projects for a period of 10 years. In addition, the government is developing Nagpur as an air cargo hub. To handle express/courier consignments, a dedicated courier terminal has been established at Chennai Airport.
    As the express delivery industry is largely dependent on air transport, it has benefited a lot from the modernisation programme of airports. The Indian express industry, which provides value-added, integrated time-bound, door-to-door delivery of documents, parcels and merchandise goods, at present valued at Rs.90 billion as compared to Rs.71 billion in 2005-06, has seen an annual growth rate of 25 per cent. According to a study conducted by the ICRIER and IIM (Kolkata) for the Express Industry Council of India (EICI), despite the global slowdown, the industry will manage to grow between 10 and 15 per cent in the next two years. It supports various export-oriented industries like electronics, telecommunication, IT, banking, retail, auto-components, textiles and apparel, gems and jewellery and pharmaceuticals. Due to global competitiveness, all major global players such as FedEx (Federal Express), DHL (Dalsey, Hillblom and Lynn), UPS (United Parcel Service) and TNT (Thomas Nationwide Transport) have established their presence in India in this segment. To facilitate trade, many express companies and their councils have taken up dedicated space in airports for cargo clearance. For example, EICI has a common user facility at Delhi and Mumbai airports while DHL and FedEx have developed gateways in Delhi airport. Deccan 360 has made Nagpur the base for its air cargo operations. To give greater importance to this sector, Indian customs have separate regulations for faster clearance of express cargo.
    Although airport modernisation has facilitated the express industry, there are still some areas of concern. One problem area has been the adequacy and cost of space and allied facilities made available to the express delivery services industry. In the survey, express companies have pointed out that there is no uniformity in the usage charges of equipment in privatised airports. For instance, in Delhi, Mumbai and Chennai, the usage cost of an X-ray machine is around Rs.0.75 per kg, but at Bangalore airport, it costs Rs.1.5 per kg. Besides, since the government is planning to implement ground-handling restrictions that will force express companies to use designated ground handling agents, the cost of equipment usage is likely to increase.
    Second, gateways do not often get prime locations. Private airport developers are keener to provide prime slots to hotel, retail, city side developers, parking lots and other lucrative businesses, which provide them with non-aeronautical revenues and considerable profit. In fact, in Delhi, the gateway is located next to the Haj terminal and during the Haj season, operations are badly affected. Warehousing facilities are small and congested and there are hardly any cold chain facilities though these are clearly needed to reduce wastage. The domestic terminal does not even have covered space for storage of cargo; in the rainy season and extremely hot conditions, consignments get damaged. Unlike most international airports, in India, there are no facilities for transfer of cargo between the domestic and international terminals. 
    These are genuine concerns, which should be taken into account in the airport privatisation master plan. The master plan should estimate the expected growth in cargo traffic volume and allocate space accordingly. Since the high cost of infrastructure will increase the already high logistics costs in India, space should be provided for cargo facilities at concessional rates. The government should also ensure that private developers bring down the charges for using equipment. The express companies pass on such costs to their clients – Indian businesses – and hence, affect the latter’s global competitiveness.

  • 49National Rural Health Mission (NRHM): Is it working?Shikha Juyal

    Jan 2010



  • Four years ago, the National Rural Health Mission (NRHM) was launched with the aim to provide accessible, affordable and accountable quality health services to the poorest households in the remotest rural regions. With barely three years of the mission remaining, it may be worthwhile to take a look at the progress that has so far been made in achieving the objectives that had been set out. A preliminary assessment of the programme, based on health indicators, shows that the government has had very limited success in achieving its objective to establish a fully functional, community-owned, decentralised health delivery system.
    The mission was launched to correct the skewed access to healthcare facilities between the urban and rural areas. While there were a plethora of schemes that catered to the healthcare needs of urban areas, there was little that had been done to set up a functioning rural healthcare system. One of the main reasons for inequalities in access to healthcare facilities between the rural and urban areas was the lack of good medicare infrastructure in rural areas of most states, particularly Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Jammu and Kashmir, Manipur, Mizoram, Meghalaya, Madhya Pradesh, Nagaland, Orissa, Rajasthan, Sikkim, Tripura, Uttarakhand and Uttar Pradesh.
    Because the NRHM was specifically aimed at removing infrastructural (both physical and human) bottlenecks that resulted in unequal access, states with unsatisfactory health indicators and/or with weak infrastructure were classified as special focus states to ensure that efforts were concentrated where it was most needed.
    The mission had set specific targets that were to have been met by 2012. These include a reduction in the infant mortality rate (IMR) to 30 per 1000 live births, a reduction in the maternal mortality rate (MMR) to 100 per 100,000 births, improved access to integrated comprehensive primary health care and, last but not least, upgrading community health centres.
    There is little doubt that the mission has conferred some benefits on rural areas. Major health indicators in the focus states have shown some improvement. For instance, at the national level, there was a decline in the infant mortality rate from 58 per thousand live births in 2005 to 53 in 2008 (all India) after implementation of NRHM. The IMR in focus states like Bihar fell from 61 to 56, in Chhattisgarh from 63 to 57, in Madhya Pradesh from 76 to 70, in Uttar Pradesh from 73 to 67, in Rajasthan from 68 to 63 and in Assam from 68 to 64. These figures are, however, still dismal even when compared to the target IMR rate of 30 under NRHM. The NRHM has had an impact but a rather limited one. (Graph 1).
    Graph 1: IMR figures in various states and all India level (recent figures)
    Source- NRHM website. 
    The state of public health in India and gains under NRHM, as indicated by a few important health indicators, are as follows:-
      Indicators and Action Points Gains under NRHM
    1. IMR IMR down to 53. Down by 4 points in 2008 as compared to a point a year in earlier years (2003-06).
    2. Immunisation Full immunisation increased from 20.7 per cent to 41.4 per cent in Bihar, 25.7 per cent to 54.1 per cent in Jharkhand, 30.1 per cent to 36.1 per cent in MP, 53.5 per cent to 62.4 per cent in Orissa, 23.9 per cent to 48.8 per cent in Rajasthan, 25.8 per cent to 30.3 per cent in UP between District Level Household and Facility Survey (DLHS)-II and DLHS-III.
    3. Accredited Social Health Activist (ASHAs)/ Link Workers In total, 7.31 lakhs ASHAs selected under NRHM till 31st Aug, 2009 as compared to 1.30 lakh in 2005-06, 5.25 lakh trained upto the 4th module (ASHAs induction training may be completed in 23 days spread over a period of 12 months)
    4. Primary Health Centre (PHC) and Community Health Centre (CHC) Total number of PHCs functioning on a 24×7 basis increased from 1263 at start of NRHM (31/3/2005) to 7613 (as on 31/8/2009). Similarly CHCs functioning on a 24 x 7 basis increased from 980 to 3606 ( as on 31/8/2009)
    5. Mobile Medical Units (MMU) 354 districts have MMUs functional so far (Out of that 136 in High focus non northeast (NE), 83 high focus  NE, 131 non-high focus large and 4 in non high focus small and UT)
    Notwithstanding the claims of progress made by the NRHM, nothing perhaps reflects its painfully slow pace as a comparison with Kerala (Table 1).
    Table-1: Comparison of major health indicators 
    (status as on 31st Aug, 09)
     
    States
    Indicators
      IMR (in per 1000 live births) Life expectancy rate ( in years) MMR (in per 100,000 births)
    Kerala 12 73.8 95
    Bihar 56 61.05 312
    Uttar Pradesh(UP) 67 59.7 440
    Madhya Pradesh(MP) 70 57.65 335
    Rajasthan 63 61.7 388
    The poor performance of these states in terms of major health indicators should perhaps come as no surprise. Data provided by the NRHM shows that there has been little progress in creating the required infrastructure. NRHM had assessed the needs of the focus states. Table 2 shows the assessed need for infrastructure and the actual achievement on this count.
    Table-2: Comparison of sub-centre and health specialist under NRHM in few focus states (in no’s)
     
      Bihar UP MP
    Sub-centre required 14,959 26,344 10,402
    Shortfall in target achievement 6,101 5,823 1,568
    Total health specialist required at CHC 280 2,060 1,080
    Shortfall in target achievement at CHC 176 1,442 860
    Apart from the severe shortfall in physical infrastructure, the programme has been plagued by inadequate and irregular drug supply, poor staffing and ambulance facilities, lack of specialised medical professionals etc. Similarly, ASHA, the programme for first contact care, has not been effectively implemented because of lax selection criteria and poor compensation.
    Clearly, the government will have to introduce fresh initiatives if the targets set for the mission are to be achieved. One way is to explore the possibility of public-private partnerships to accelerate the implementation of various programmes under the mission. There is also need to integrate disease control, sanitation and hygiene programmes. Linking budgetary allocations to actual achievement of targets could act as an incentive for timely completion of projects. More importantly, the government needs to persuade rural communities to take ownership of healthcare projects – this would involve community participation right from the stage of assessing its requirements for healthcare facilities that include physical and other infrastructure to involvement in project execution.
     

  • 50It’s not the fact but type of regulation that matters!Francis Xavier Rathinam

    Dec 2009



  • The global crisis has helped us refocus our attention on a number of questions that were put on backburner earlier. How much regulation is too much? Are repressive financial policies the solution for fixing financial crises? Over the years, the intellectual support to banking regulation swung between extremely thin or ‘free’ banking to an outright interventionist approach. Interventions, argued advocates of ‘free’ banking, act as a tax on the intermediary system, depress the real interest rate and incentive to save, thus reducing productive investment and ultimately hindering economic growth. The solution prescribed was to liberalise the financial market to allow for the financial deepening that would lead to efficient channelling of resources. On the other hand, the theoretical justification for stringent financial regulation is based on asymmetric information problems. ‘Free’ banking is argued to be at the heart of the financial crises in recent times as liberalisation leads to risky lending behaviour. There is no theoretical consensus on the impact of deregulation on the financial sector and economic growth. Empirical evidence is mixed. Thus, optimal financial policies are purely an empirical matter in a specific institutional and temporal context.
    In this short note, we attempt to answer these questions. RBI data from January 1990 to July 2009 is used for the analysis. Lending and deposit rate ceilings and floors are combined in a principal component analysis, to arrive at the index of interest rate regulation. SLR, CRR and priority sector lending constitute the index of prudential regulation whereas the index of bank regulation is an all-encompassing index of interest rate and non-interest rate controls. These indices, shown in panel 1, capture the extent of deregulation till 2005, RBI’s effort to use these measures to manage the credit boom till 2008 and the crisis response from then on.
    Panel 1: Time plot of indices of bank regulation, credit to private sector and investment in government securities
    Source: RBI, 2009 
    Autoregressive Distributed Lags (ARDL) regression, which decomposes the short-run and long- run relationship among the variables, shows that banking regulation is a significant determinant of bank credit in the long run. However, the index of industrial production, a measure of economic activity in the economy, does not have much impact on private credit. This is in line with the fact that bank credit to the private sector was mainly driven by consumer credit during most of the sample period. The short-run results exhibit a stronger impact of regulation on credit growth indicating that banks respond quickly to new opportunities. On the contrary, financial deregulation has a dampening effect on bank investment in government securities and helps channel resources to private sector. Overall, the results support the view that deregulation led to efficient resource allocation in the post-reform period in India.
    When the analysis is repeated for the sub-sample January 2005 to July 2009, as a robustness check, we find a negative association between regulation and credit growth, albeit insignificant, indicating RBI’s success in dampening the credit boom. In the upswing of the credit cycle in 2005-2008, RBI has managed to force banks to increase their capital cushion and strengthen their liquidity as asset prices, especially housing and real estate, boomed. Decomposing bank credit shows that the credit growth fuelled by deregulation seems to be completely unlinked to production indicating that credit was channelised towards consumption and refinancing rather than production. Thus, there is need for measures to encourage lending to the non-financial business sector.
    These results show that the problem with banking regulation is not so much the fact of regulation but the type of regulation. Thus, what is required is a regulatory framework that is adaptable to changes in the macroeconomic environment rather than complete deregulation. Indian experience shows that banking regulation could be effectively used in containing macro-financial risks using macro-prudential tools.
     

  • 51Services Sector Growth in IndiaAlamuru Soumya

    Nov 2009



  • India’s accelerated economic growth in recent years has been a focus of significant policy discussion and analysis. The services sector has played a pivotal role in this acceleration. Growth in services picked up in the 1980’s and accelerated in the 1990’s.  Since then, it has become a dominant contributor to economic growth. The prime movers of the growth in services are hotels and restaurants, communication and banking and business services (computer related services, renting of machinery, accounting and research development) with recorded growth rates above 10 per cent on the average from the 1990’s. 
    Two issues are often raised regarding the services sector. One relates to the complementarity between manufacturing output and services sector output on the one hand and the complementarity between public investment in infrastructure and the private investment in services sector. The second issue is the impact of the rapid growth in the services sector on inflation. 
    There is a vast literature in economics supporting complementarity between the industry and services sector. Fast growing services like trade and transport, which are also called producer services, reflect the complementarity between industry and services sectors. Also, the importance of infrastructure in facilitating services is well recognised. We have conducted a regression analysis to test whether such a complementarity exists and the extent of such complementarity between the services and the two sectors of manufacturing and infrastructure. We have also looked at the impact of public investment in infrastructure on private investment in services. The results show that, there is a strong, positive impact of real output in manufacturing sector on services sector output with an elasticity of 0.75 and real output in infrastructure has a positive impact on services output with an elasticity of 0.74. The public investment in infrastructure has a positive impact on private investment in services with elasticity of 0.22. These elasticities seem to suggest a significant complementarity between services, manufacturing and infrastructure sectors. 
    On the service sector growth and inflation, it has been argued that a rapid growth in the services sector tends to push up the rate of inflation since the services is not a commodity producing sector. The rationale is that there will be a demand-supply gap created because of the increase in output without a simultaneous change in consumer goods produced. A faster growth in services may also lead to a divergence between the inflation rates in traded and non-traded goods sectors. We did an empirical analysis by estimating the impact of the share of the services sector output in GDP on the price level (as reflected in the wholesale price index) while adjusting for monetary policy by using a dummy variable.  The regression results clearly showed that an increase in the share of the services sector in total output does not have a positive impact on the wholesale price index provided there was en effective monetary policy in place.  
    Thus, the growing complementarity between the industrial and services sectors augurs well for the medium-term growth performance of the Indian economy. Further, the significant complementarity indicated in the analysis between infrastructure and the services sector suggests that India has to improve her infrastructure substantially to strengthen the services sector as well as the manufacturing sector. The analysis also show that fears about the inflationary effect of services sector growth appear to be unfounded.
     

  • 52Don’t throw the baby out with the bath water!Sirjjan Preet

    Nov 2009



  • The Committee on Investor Awareness and Protection, constituted by Government of India, released a Consultation Paper on Minimum Common Standards for Financial Advisers and Financial Education. The six-member committee headed by D. Swarup, who incidentally is also the Chairman of the Pension Fund Regulatory and Development Authority (PFRDA), has put forward some groundbreaking proposals which have caused turmoil of sorts in the life insurance industry. The committee has proposed the phased elimination of commissions paid to insurance agents by April 2011. The committee’s recommendations are designed to reform the industry but they miss the peculiarities of the life insurance business in India. By doing away with insurance agents’ commission, they will be throwing the baby out with the bath water! 
    The Insurance Act, 1938, currently allows insurance companies to pay a maximum commission of 40 per cent of the first year’s premium, 7.5 per cent of the second year’s premium and 5 per cent from there on. The committee recommends a move from a commission-based system to a fee-based system. The report proposes that the upfront commission embedded in the premium paid (to agents of insurance companies) should come down to 15 per cent immediately. It should fall to 7 per cent in 2010 and there should be a zero-commission structure in place by 2011.  The objective is to remove the bias towards selling policies with higher commissions and to ensure that the entire premium paid by an investor is put to work, increasing returns on investments. 
    The committee’s recommendations have triggered opposition from the industry regulator, the Insurance Regulatory and Development Authority (IRDA). The IRDA has written to the finance ministry opposing the removal of commission from the premium and contesting the observations of the committee regarding the working of the commission system. 
    The committee report draws attention to the huge sum of Rs.14,704 crore paid by the industry as commission in 2007-08,but ignores the fact that the industry earned a premium of over Rs.220,000 crore and that the commission-to-premium ratio actually fell from 12.2 per cent at the time of liberalising the sector to 6.6  per cent. 
    The report also expresses its concern over the possibility of high upfront commissions (40 per cent of premium) leading to mis-selling by insurance agents. It points out that agents hard-sell high commission products that require premium higher than what customers can afford. The IRDA data however reveals that 42 per cent of new premia came from the plans where the upfront commission ranged from 1.75 to 2 per cent (with no trail commission to follow). For a few products, the maximum commission can be 40 per cent whereas there are several products where the maximum commission is 2 per cent. Also, the average earnings of an agent range from Rs.8,000 to Rs.10,000 per month, which contradicts the general perception that agent commissions in India are high. 
    The committee feels that since insurance commissions are the highest in the first two years, agents have a vested interest in letting policies lapse and getting clients to subscribe to new ones instead, so that they continue earning high commissions. The report, therefore, highlights the high lapsation* rate of insurance policies but fails to mention the rise in renewal premium income from Rs.26,250 crore at the time of opening up of the sector to Rs.156,000 crore in 2007-08. However, the report rightly emphasises on the need for investor education which can also address issues in sales processes and spare the investors the burden and cost of multiple regulatory regimes. 
    IRDA’s primary objection to the committee’s report is that its implementation would affect financial inclusion adversely. IRDA fears that millions of rural agents, who rely on commissions from the sale of small-ticket insurance policies, stand to lose if there is a switch to a fee-based regime and would, therefore, be reluctant to sell insurance. Therefore, reach is bound to be affected and financial inclusion would suffer a big blow. 
    Excluding agent commissions from premia and adopting a fee-based model will work only when insurers match the commissions earned by agents with an equally lucrative incentive structure. But such a move will increase the expenses of the insurer and adversely affect their profitability. A well-defined process to affix responsibility for a bad financial outcome and the consequent loss suffered by the consumer; along with punitive action including fines will ensure that incentives alone are not the driving force in marketing. This will also ensure that agents adopt a more professional sales approach.
     

  • 53Is Dollar the new Carry Craze?Neha Malik

    Oct 2009



  • For long, the yen has been the favoured currency in carry trade (a strategy in which the investor borrows in low-interest-rate (funding) currency and invests in a high-interest-rate (target) currency). However, it appears imminent that it will be replaced by the US dollar. The moot point, however, is whether this will be a permanent phenomenon.
    Carry trade is not without inherent exchange rate risks. One of the exchange rate risks is the expectation that the target currency will depreciate against the funding currency to offset the interest rate differential between the two. Available evidence since the 1990s, however, suggests that the target currency has instead appreciated, thereby, yielding higher than expected profits to carry traders. 
    Prior to the 2008 financial crisis, the yen served as the top funding currency given the impossibly low interest rates in Japan i.e. .07 per cent and .365 per cent for 2005 and 2006 (six-month Libor) respectively (WEO database, IMF) Yen borrowers were helped not only by the higher interest rates in New Zealand and Australia, but also by the appreciation of these target currencies. However, with the onset of the sub-prime crisis and the subsequent flight to safety, investors rushed to pay back in yen, thereby, causing an upward movement in its value and a temporary demise of carry trade. 
    With the crisis subsiding and the global economy showing signs of recovery, it remains to be seen which of the two currencies, the US dollar or the Japanese Yen, will emerge as the stronger contender to revive carry trade. With interest rates in the U.S. near zero and a strong possibility of dollar depreciation owing to a huge budget deficit (estimated to be $1.34 trillion for 2009 by the Congressional Budget Office), the US dollar seems to possess the characteristics of an ideal funding currency for carry trade. This is not the first time that it will play the role of a funding currency. It was one of the top funding currencies during the low-interest-rate regime (from 2002 through mid 2004) in the U.S. It could, however, never dethrone the yen in this game. 
    Recent data, however, suggests that the dollar may replace the yen as the funding currencies. According to Bloomberg, on September 14th 2009, the three-month dollar Libor (.29 per cent) fell below that for the yen (.35 per cent) for the first time since 1993. The dollar’s claim to be the carry trade currency is strengthened by the reluctance of the newly formed government in Japan (Democratic Party of Japan) to allow any depreciation of the yen. The yen has appreciated against the dollar to 90 on Sept 24th 2009 compared to 98 per dollar on March 24th 2009 (BOJ Statistics). 
    Figure 1 shows the difference in the short-term interest rates for Japan and the U.S. from September 2008 onwards. It can be seen that the rate for the U.S. which was previously higher than that for Japan has fallen below the latter’s after April 2009.
     
    Figure1:   Short-term Interest Rates (per cent per annum)
    Source: OECD Financial Indicators
     
    Figure 2 reflects the depreciating trend of the dollar from 2002 onwards followed by an appreciation after July 2008. However, there has been resumption of the downward trend in the past six months which is likely to continue until the budget deficit contracts by a substantial amount.
     
    Figure 2:  Nominal Broad Dollar Index
    Source: Federal Reserve Statistical Release
     
    The question is whether the US dollar will continue to serve as the top funding currency in carry trade transaction for any length of time. Given the huge US budget deficit, the short-term interest rates are likely to rise in the future (Congressional Budget Office estimates). Further, the future of the Japanese economy continues to be clouded with uncertainty since the slow global recovery might fail to boost Japanese exports. Consequently, despite the Japanese government’s current stance against depreciation of the yen, it may well be forced to do so. Moreover, according to IMF estimates, Japan would continue to witness deflation till 2011. This indicates that low interest rates will continue for the next two years. Hence, it doesn’t seem likely that the dollar will displace the king of carry trade for too long.
     

  • 54Is it Time to Withdraw Fiscal Stimulus in the USA?Subhanil Chowdhury

    Oct 2009



  • The increase in the US GDP growth in the second quarter of 2009 has generated hope that the worst of the financial crisis is over. Consequently, there is a feeling that the fiscal stimulus package in the USA, should be withdrawn. Is it really time to do so? Many economists have argued that the current increase in the US growth rate is a result of the fiscal stimulus. Hence, any withdrawal of the stimulus now might induce the US economy to relapse into a downturn.
    This is not merely a conjecture. History lends credence to this view. President Roosevelt’s New Deal introduced during the Great Depression led to recovery between 1933 and 1936. Its premature withdrawal in 1936, led the US economy back into a recession. Something similar happened to Japan in the1990s. A slowdown in 1991 prompted the Japanese government to introduce fiscal stimulus. This helped the economy recover at a moderate pace. However, a cut in government expenditure in 1996 saw Japan slip back into a recession.
    The withdrawal of fiscal stimulus this time round may have the same effect. This is because other growth stimuli in the form of higher consumption expenditure or interest cuts have limited scope in the US economy. The main stimulus for growth in the US economy before the crisis was rapid consumption growth, financed by debt.1 With the onset of the financial crisis the credit market froze resulting in a reduction of consumer credit and a consequent cut in consumption demand. The growth rate of personal consumption expenditure in the US was -1 per cent in Q2 2009.2 Moreover, in Q2 2009, consumption credit declined by 6.6 per cent.3 These figures indicate that there has not been a revival in consumer demand as yet in the US.
    Moreover, unemployment in US is still on the rise. The unemployment rate increased from 7.6 per cent in January 2009 to 9.7% in August 2009. Employment in non-agricultural sectors declined by 216000 in August 2009, while the total number of unemployed persons increased by 466000.4 In August, the real weekly earnings of non-agricultural workers declined by 0.2 per cent as compared with the preceding month.5 The continuing job losses and fall in workers’ real earnings are likely to accentuate the demand problem.
    However, falling consumption demand and real wages is not a sufficient condition for continuing with the fiscal stimulus. It can be argued that a boost to private investment expenditure through a reduction in interest rates would do just as well to revive the economy. But the scope for any further reduction in the interest rate is limited. The rate at which the Fed lends to commercial banks, has been reduced from 6.25 per cent in January 2007 to 0.5 per cent at present. The massive reduction did not do much to stimulate the economy. 
    In short, the current situation of the US economy is such that it must continue with a fiscal stimulus to fully recover from the recession. The main argument against continuing such fiscal stimulus is that it raises the real interest rate, which crowds out private investment. However, the inflation-adjusted, 10-year constant maturity treasury rate actually declined from 2.75 per cent in October 2008 (immediately after the crisis) to 1.77 per cent in August 2009. In other words, even with high government expenditure, there has been no increase in real interest rates in the US economy.
    This analysis makes it apparent that Keynesian policies of higher public investment can provide the answer to handling a severe downturn in demand.   

  • 55WFiscal Deficit and Economic Growth in IndiaManjeeta Singh

    Sep 2009



  • This financial year, the budget (2009-10) has a fiscal deficit of 6.8 per cent of the GDP (and this does not include the fiscal deficit of the states). The fiscal deficit will be financed mainly by market borrowings of nearly Rs.400,000 cr. There have been concerns about the high fiscal deficit. The IMF, while praising India’s ability to face the global crisis, has warned that India’s debt as a percentage of GDP was too high and, therefore, a sharp rise in the deficit could raise concerns about fiscal sustainability. The RBI governor too has underlined the need for returning to the path of fiscal consolidation to contain borrowing requirements. And the finance minister came out with the statement that the high fiscal deficit was not sustainable and in the fiscal responsibility and budget management document for 2009-10, the government plans to bring down the fiscal deficit to 5.5 per cent in 2010-11 and further to 4 per cent in 2011-12. Is the concern over the high fiscal deficit justified? 
    Though a large fiscal deficit by itself is not bad, it can affect the country’s economic growth adversely. A large fiscal deficit implies high government borrowing and high debt servicing (the total debt servicing will be 37 per cent of revenue expenditure in 2009-10), which in turn could mean a cut back in spending on critical sectors like health, education and infrastructure. This reduces growth in human and physical capital, both of which have a long-term impact on economic growth. Large public borrowing can also lead to crowding out of private investment, inflation and exchange rate fluctuations (impacting exports). However, if productive public investments increase and if public and private investments are complementary, then the negative impact of high public borrowings on private investments and economic growth may be offset. 
    How has increase in fiscal deficits impacted India’s economic growth over the years? 
    As public debt is normally the accumulation of liabilities created to finance the government’s budget deficit, the fiscal deficit in absolute terms should be approximately equal to the annual increase in public debt. Though this has been the case up until the year 1998-99, there seems to be a widening gap between the two thereafter (Figure 1).
    Figure1: Gross Fiscal Deficit and Increase in Public Debt-Centre 
     
    Taking the annual change in public debt as a better indicator of the size of gross fiscal deficit(GFD), India’s economic growth rate has been plotted against this GFD to GDP ratio for the period 1981-82 to 2007-08. We see that the rate of growth is lower when the GFD-GDP ratio of the Central government is high. (Figure 2)
    Figure 2: Fiscal Deficit-GDP Growth Rate Relationship
    A simple regression shows that growth in public debt too has an adverse impact on India’s economic growth. Gross domestic capital formation is included in the regression as it is one of the most important determinants of economic growth rate. 
    y= 9.542 +0.095gfc -0.277pd                          R2=0.378
          (5.75)   (2.04)       (-3.26)
    where,
    y= growth in real Gross Domestic Product
    gfc= growth in Gross Domestic Capital Formation (proxy for domestic real investment)
    pd= growth in Centre’s Public Debt
    The coefficient for public debt is negative and statistically significant at 1% level of significance. (Figures in brackets are the t-statistics)
    Therefore, it can be said that the present disquiet in India about the rising fiscal deficit is justified. Given that high deficits have an adverse impact on India’s growth, it is imperative that the government draw up a clear roadmap to reduce fiscal deficits if it wants the economy to return to 9 per cent growth path as it says it does. What needs to be done is restructuring of public expenditure. Merely meeting targets stipulated in the FRBM Act through clever accounting practices such as the transfer of massive subsidies to oil marketing and fertiliser companies as off budget items will not do. Neither will measures like divestment to finance the fiscal deficit.

  • 56What ails Public-Funded Research in India? A diagnosisSabyasachi Saha

    Aug 2009



  • Public funded research in India because of its sheer size and proficiency holds key to India’s transformation to a knowledge economy in the near future riding on fundamental research and human resource generation. Subsequently, university system in India could refer to both the traditional university system along with the competently designed apex institutions (IITs). Alongside university research, a model of independent science research through dedicated institutions mainly through the CSIR network was designed to expedite the process of technological learning and catch-up.  However, science research in India reflects enormous heterogeneity in terms of quality. Overall, it is often contended that science research in India has not been quite so successful in generating the required critical mass of knowledge repository and manpower to adequately fuel the growth engine of the economy. We summarise some of the issues and areas of concern.
    (i) Sub-optimum R&D Expenditure by international standards
    Research and Development expenditure as percentage of GNP in 2005-06 stood at 0.89%. A quick international comparison reveals that developed countries on an average spends over 2% of their GDP on R&D, a cut above India’s spending. Even an emerging economy like China spends 1.42% of its GDP on R&D, again ahead of India. Only Brazil is somewhat close to India with 0.82% of GDP being spent on R&D. However, a sector wise break-up into shares of R&D expenditure in India shows that 74.1 % of the total R&D expenditure was incurred by the government and just 25.9% by the private sector during 2005-06.
    (ii) Falling number of good faculty
    It has generally been accepted that the number of quality entrants into the teaching and research profession has been reduced due to better remuneration elsewhere. Thus the real challenge is to attract good and competent candidates to the academic profession and also help them sustain their interest in teaching and research in the long run. It has been pointed out that government’s policy on promotions does not incentivise faculty to undertake quality research.
    (iii) Poor quality of our PhDs
    The quantity versus quality paradox of Indian higher education is relevant for research training also. Out of 18730 doctoral degrees awarded in India in 2005-06, 8420 (accounting for 44 percent) were from the sciences and 103105 (55 percent) from humanities. In sciences, 5625 doctoral degrees (accounting for 66 percent of total science PhDs) were awarded in pure scientific disciplines, 1058 (12.5 percent) in engineering and technology, 1119 (13.3 percent) in agriculture and 438 (5.2 percent) in medicine. While the numbers might appear impressive, there remains a big question mark about the quality of many of these PhD degrees.
    (iv) Sub-optimum patenting and publication activity
    Although patenting is still not very common among academic researchers in India, some of the S&T institutions, particularly the CSIR network, have put in place an institutional framework to encourage patenting of their research outputs. It may be noted that the number of US patents granted to CSIR jumped to 196 in 2005 from just 6 in 1990-91. Although, prima facie we observe a spurt in patenting activity from a handful of laboratories, very few of these patents have actually been licensed to the industry. Overall, India’s contribution in the world publications has increased marginally from 2.1% during the 1995-2000 to 2.3% during 2000-2005.  Although India’s impact factor (average number of citations per paper) is not yet at par with the world average within most scientific fields, it has made significant gains in Physics, with an average of 3.13 cites per paper for the period 2003 to 2007.
    (v) Ambivalence towards IPR issues
    Scientists in India have often been viewed as ‘lethargic’ towards active participation in commercialization of their inventions. Dedicating research outputs to public domain for free use and follow-on research has been a standard practice. The National Knowledge Commission of India (NKC) constituted by the previous government came up with a strong recommendation for a new legal framework, mandating disclosure and patenting of output from public funded research along the lines of the US Bayh-Dole Act. However, in the absence of an appropriate understanding of the Indian context of academic research, this Act might affect the existing balance of incentive structures.
    One might find it useful to concentrate on mitigating more fundamental problems affecting the Indian academia in the first place beyond IPR related concerns. Moreover, there is every need to systematically understand the complex matrix of incentives affecting the various tasks performed by a typical university faculty prior to any institutional and organizational reform. It also remains to be ascertained whether financial incentives alone can influence faculty performance. Justifiably, appropriate alignment of incentives is required to ensure quality in research and training as well as in boosting efforts toward commercialization of public-funded research.

  • 57Indian Higher Education: Yet another ‘Two Box Disease’Pawan Agarwal

    Aug 2009



  • In addition, under the unified systems, an explicit focus on skills would be essential. It is time to dispense with highfalutin notions that the main of higher education is to ennoble citizens. Developing skills and abilities to innovate are the main goals of higher education. Recognizing this, the UK has renamed its education department as the Department for Business, Innovation, and Skills while Australia has renamed its agency the Department of Education, Employment and Workforce Relations. In India, this clear focus on skills in education is missing. Thus, the country needs a new Ministry of Education and Skills for this task. 
    Conclusion
    Immediate remedy for this two-box disease of Indian higher education lies in social transformation, building pathways between the vocational and the higher education sectors and bringing the vocational and higher education sectors under one ministry for policy coherence, thus forming a seamless fabric of education. This would provide Indian higher education capabilities to compete globally.

  • 58Does R&D Intensity Matter for Trade Performance in case of Indian Pharmaceutical Industry?Badri Narayan Rath

    Aug 2009



  • Though the global financial turmoil has dampened the growth momentum of India’s chemical sector, the effect of the crisis on pharmaceutical industry is lesser in comparison to other industries. The consistent demand for existing drugs for disease prevalence, growing ageing population, low R&D costs etc. are the major factors behind the insulation of pharmaceutical industry from the global crisis. Indian pharmaceutical industry, which had little technological capabilities and non-existent market in 1970s, has engraved a niche for itself in the pharmaceutical domain, today. The turnover of pharmaceutical industry in India has grown from Rs.1500 crores in 1980 to over Rs.78000 crores in 2008. The industry ranks fourth in terms of volume and thirteenth in terms of value in the world. The strategic government policies have changed the status of pharma industry from a mere importer to an innovative cost-effective producer with surplus trade balance in the global market. Despite all positive sides, Indian pharmaceutical industry still plays negligible role in terms of global competitiveness. The industry stands very low in terms of R&D intensity and labour productivity as compared to many of the developed countries like the US, Japan, Belgium and France. Although the trade performance of Indian pharmaceutical industry is quite impressive over the years, its export share in the global pharmaceutical export market is less than 1.5%. At the same time, the share of pharmaceutical export as a
    Figure: R&D Intensity and Trade Balance of Pharmaceutical Industry 
    Source: R&D intensity has obtained using CMIE, Prowess Database, Exports and Imports data have been collected from RBI, Handbook of Statistics on Indian Economy, various issues.
    percentage of India’s total manufactured exports is around 7% in 2007-08. Against the above backdrop, the linkage between R&D intensity and trade balance is definitely an important issue for the policy makers to address. Theoretically higher R&D intensity (R&D expenditure as a percentage of gross sales) will have a positive impact on trade balance. The higher the investment in R&D, higher would be the output and thereby exports will increase. Investing more on R&D will also increase the in-house technological capability of Indian pharmaceutical industry, which in turn, will reduce the import of sophisticated technology and raw materials. The figure exhibits a positive relation between R&D intensity and trade balance. The pharmaceutical industry in India demonstrates a surplus in trade balance due to relatively high exports as compared to its imports. As a consequence of rising trade balance, the export to import ratio has increased from 2.2 in 1990-91 to 5.1 in 2000-01.  But after the period 2000-01, the ratio has declined drastically to 2.3 in 2007-08. This implies that though Indian pharmaceutical industry has significantly improved its R&D intensity from 0.2% in 1990-91 to 6% in 2007-08, but it may not sufficient to ensure a rising competitiveness in the global market. Therefore, the industry needs to increase its proportion of gross sales for R&D activities in order to play larger role in the global market. In a nutshell, the investment in R&D by industry is very low in India because of ample number of small size companies and risks related to profitability. Although, India has consistently increased its R&D expenditure and enjoyed a favourable trade balance in pharmaceutical products, its export share in the world market is still less than one and half per cent. In this juncture, it is important for the government to encourage the small and medium firms by providing low cost finance for research with subsidy facilities for indigenous research activities.

  • 59Impact of Nonstop server in IndiaRaj kumar Shahi

    Jul 2009



  • India is today among the major software producers and a hub of IT sector activity. A vital segment of IT is critical data access that needs nonstop server (hardware) activity. Nonstop technology as the name suggests, provides 24/7 applications and superior service levels.  It is therefore not surprising that only three companies IBM, HP and SUN, cover the nonstop server market in India. 
    Nonstop servers use advanced processors like RISC (reduced instruction set computer) and EPIC (Explicitly Parallel Instruction Computing) based architecture.  IBM and SUN use RISC base power processors while HP uses EPIC based Itanium architecture.  RISC architected data flow is based on sequential execution semantics, while EPIC architecture is based on parallel execution semantics. Ceteris Paribus, EPIC is more efficient at executing commands, but RISC combined with higher clock speed can provide equally high level of efficiency.   IBM thus uses RISC technology with higher clock speed to compete with HPs EPIC based technology.  At the same time, other hardware manufacturers are also investing in EPIC architecture for their new generation products.   Nova pc & Airtel pc have also introduced low cost computing forward approach nonstop (High-end) Server. 
    At the high end, availability of 128 processors in such nonstop servers facilitates major mission critical applications. At present the latest technology offerings are coming from IBM mainframe Z10, HP superdome & Sun Sparc. Along with Dell, these companies also provide new enhanced Non-stop Blade System, which combines standards-based modular computing with the trusted 24/7 fault-tolerant availability. Blade System Cloud technology is usually paid incrementally and it helps in reducing cost. It also provides more flexibility, more mobility, incremental storage capability and allows up gradation on demand.  Cloud Computing Services are arguably the most economical technology available for companies today. 
    Users of nonstop servers in India range from Telecom,  Retail, Airline, Railways, Banking, Insurance, Education, Defence to manufacturing  industries like  Cement, Energy & Power, Pharma, and Aerospace. Given India’s growth forecast, the   coming few years will see a surge in demand for nonstop high-end servers. Even the non users today such as Small & Medium Enterprise in finance, healthcares, Manufacturing, Energy & Aerospace sector will migrate to the more efficient   nonstop servers. It is likely to be a necessity for these companies rather than a choice. 
    The following graph shows that in the last 7 years growth of high-end non-stop servers has been higher, on average, than the total server market and projections for 2009 reinforce this pattern.
    Growth of Nonstop (High-end) & Total Server Shipment in India
    Source: Gartner
    A positive externality from higher deployment of nonstop servers would be greater job creation, especially for skilled IT professionals catering to the high end server market. A skill gap analysis of the Indian market has shown the woeful shortage of skilled professionals which will only increase since high growth is likely to accentuate such pressure. To prepare ourselves for the emergent situation, it is crucial to address the shortage of IT professionals skilled in high end server OS software and maintenance services.  Sadly today most of such training is provided by the company itself or if provided by third parties the fees is prohibitive, thus limiting the supply of such skill sets.  There are no easy solutions to this puzzle, but surely one answer could lie in the adoption of more non proprietary open source software that will serve a dual purpose- one increase competition with existing suppliers and two make it easier to create skills required for maintaining and servicing high end nonstop servers.

  • 60Food Security Act: Would it be better as an Act?Deepti Sethi

    Jul 2009



  • A National Food Security Act, modeled along the lines of NREGA, is going to be endorsed as per the Indian National Congress manifesto 2009. As per this Act, the most vulnerable sections of society will have a legally enforceable right to food that guarantees sufficient food for them. Thus, every family living below the poverty line either in rural or urban areas will be entitled, by law, to 25 kgs of rice or wheat per month at Rs 3 per kg. Not only this, government has even promised to set up subsidized community kitchens for the homeless and migrants. This scheme would be a major challenge for the government. Because, several national programmes are already on-going in the country to handle food security , but still according to the recently released Global Hunger Index 2008, India ranked 66 among 88 developing countries–worse than nearly 25 Sub-Saharan African countries and all of South Asia, except Bangladesh. May be this Act can ensure food for all and also help in meeting the MDG target. 
    On similar lines of Food Security Act, the most wide-spread prevalent programme is the Public Distribution System which later became Targeted PDS.  Under this system, central government procures foodgrains to benefit the people living below poverty line (BPL). Procurement of foodgrains is one of the essential aspects of the food security policy of the Government of India in order to protect vulnerable sections of society against price volatility; it also provides price security to the farmers, which induces them to sustain production levels. But the major weakness of the system is poor targeting of the beneficiaries. Number of studies says that there have been large scale errors in the identification of BPL families. These miss-targeting causes actual poor families to get deprived of their entitlement and as a consequence food gets diverted to non-poor (non-target) section. Will this Food security act also end up with the same fate?   
    Another hindrance in fulfilling the objective of the food security act can be lack of food availability. Government is considering removing ban on exporting wheat and rice (non-basmati rice) on the one hand and at the same time ensuring food security to all under the enacted Food Security Act. With the implementation of this act, it is expected that demand for rice and wheat will go up and easing these exports will cause supply crunch and intensify upward pressure on the prices. It has been recommended that in order to meet the needs of the Food Security Act, there has be adequate amount of food grains reserves in government depots and therefore no easing of exports. In the alternative, a larger budgetary provision will have to be made for foodgrains procurement. 
    In 2008-09, FCI godowns had been over-flowing with 22 million tonnes of wheat, almost double what they have procured last year and double the buffer norm of 11 million tonnes. In 2007-08, wheat procurement stood at over 11 million tonnes and 17 million tonnes of rice as against total wheat output of 78.40 million tonnes and 96 millions tonnes that of rice output. Wheat procurement accounts for around 14 per cent of the total wheat output and that of rice registered around 18 per cent of its output (Fig 1). Figure 1 clearly portrays that government procurement for Public Distribution System and other schemes is quite low in comparison with the production level of foodgrains.
          
    Source: Agriculture Statistics at a  Glance, 2008 and Economic Survey, 2007-08
    Note: rice procurement for the period 1997-98 to 2002-03 are from Oct-Sep, for 2003-04 to 2006-07 are annual figures and 2007-08 pertains toApril-Dec period 
    Whether Food Security Act will be a success is a big question mark. On the one hand it seems yes, because of the lower price offer than what Public Distribution System does (35 kg ration at Rs 4.15 per kg for wheat and Rs 5.65 per kg for rice) and the present overflowing wheat stock with FCI, gives a positive signal. But on the other hand, knowing the fact that Food Security Act is more or less based on equally ineffective Public Distribution System, there is a dire need to correct the method of targeting BPL population. The entitlement decisions are generally taken by the local administration (Gram Panchayats or Block Development officers). It is impossible to know whether the actual entitled person has issued card unless proper monitoring of the system is there. To keep a check on this, cross checking of identification should be introduced and should be made mandatory. A stable procurement policy along with effective minimum support price has to be restructured. Therefore, to ensure long-term commitment under the Food Security Act, these problems need to be corrected first. Also, government should keep in mind that if it lifts the ban on exports of non-basmati rice, it might adversely affect the very purpose of food security in the country and the dream of feeding the hungry will remain a dream only.
     

  • 61Falling Access to Trade Finance during the Financial CrisisShravani Prakash

    Jun 2009



  • The financial crisis that has engulfed the world economy since mid-2008 brought about a sharp fall in global trade. After growing at more than 6% since the 1990s, trade growth has been estimated to fall by 9% in 2009. This decline, although instigated by the sharp decline in global demand, has been exaggerated by a disruption in financial intermediation and the consequent fall in trade financing. Trade finance is a vital component of international financial flows, representing 80% of the $15 trillion global trade flows in 2008. However, the ongoing recession has created an estimated $100-300 billion shortfall in trade finance.  The fall in the supply of trade finance contributed 10-15% of the decrease in world trade since the second half of 2008 (World Bank estimates). International financial strains have also created a simultaneous rise in the cost of trade credit. 
    Surveys of banks around the world have found that volumes of bank-financed trade credit are falling more significantly in emerging markets than in advanced economies. There is also evidence that financing both exports to and imports from emerging and developing Asian economies are being hit the hardest, as financing of imports from South- Asia, Korea, and China have decreased significantly. Bank- financed trade credit, being short term and quickly redeemable at par, was the easiest asset class for banks to cut at the time of heightened risk aversion. The strain on trade credit lines was created by the growing liquidity pressures, increased cost of funding, application of stricter credit criteria, capital allocation restrictions, reduced inter-bank lending, reduced country exposure and rise in counterparty risks (fear of default). The contraction was further fueled by the loss of critical market participants like Lehman Brothers and a drying up of the secondary market for short-term exposure. 
    Drying up of trade finance has affected international supply chains as constrained access to finance for global buyers has restricted their ability to provide finance along their value chains, including to exporters. Trade credit short-falls also generate negative externalities that could soon damage the wider economy as a whole. As importers and exporters are unable to borrow previously accessible and relatively low-cost foreign-currency-denominated working capital, they are forced to obtain spot foreign exchange to make necessary payments. This could lead to increase in demand in the foreign exchange market and may also reduce the supply of spot foreign exchange, thereby raising the probability of delayed receipts of foreign exchange earnings from exports. 
    Globally, a number of individual and collective initiatives have been taken to address the issue, aimed at increasing the volume of and improving access to trade finance (Table 1). However, even though markets are beginning to improve, the strain on trade credit persists, with smaller traders finding it particularly hard to obtain credit. A majority of banks anticipate the current pricing trends to continue in 2009, although a few banks note that spread increases may reverse once demand has picked up again and volumes may rise with the imminent consolidation of the banking sector. 
     
    Table 1: Measures to Address Trade Finance Issues 
    Source: WTO – Report of the TPRB, April 2009; IMF; G20 Global Plan for Recovery and Reform
    It is vital to resolve the trade credit problems to prevent lack of capital from stifling trade when demand returns and growth resumes. The challenge is to rebuild trust between banks and persuade them to get back into lending. Targeted initiatives to support short-term pre and post-shipment export financing are needed. These initiatives must be designed to facilitate the resumption of private sector financing However, measures to support credit flows in general and implementation of macroeconomic and structural policies to address the underlying causes of the crisis will play the major role in restoring confidence and rebuilding trade credit lines.
     

  • 62Mobiles can build a more inclusive financial systemMamta

    Jun 2009



  • Today, life is unimaginable without a mobile phone. For most it would come to a standstill without it. Given its functionality, growth has been extraordinary recently in both rural and urban areas: rural tele-density has increased to 12.72 from 0.4 and urban tele-density 72.47 from 5.8 in past 10 years. India is the fastest growing mobile market in the world and almost 15 million subscribers are being added per month, mostly in rural areas. Such massive growth in numbers is commendable by itself, and if accompanied by the predictable positive economic impact, the results could be unprecedented. Several studies have quantified the role of mobile phones in improving productivity, employment, profits and also enabling social change. The reasons mobiles have such major impacts are mainly due to reduction in transaction cost, widening markets and alleviating infrastructure constraints. Each of these positive characteristics of increased connectivity has potential in the financial services sector as well.
     
    source:RBI
    India has a relatively deep financial system and a wide network of banks. The average population served per branch office (an important indicator of banking penetration) is 15 per 1000 persons and has not changed much in past 10 years. The rate of increase in the number of bank branches in India during 1991-2006 in urban and rural areas was 3.5 and 0.6 respectively; that is, the population coverage of banks in rural areas is declining. While urban India seems to be over-banked with more than 100% penetration (many urban Indians have more than one bank account), rural India lags far behind with 19% penetration. Banking infrastructure in rural India is poor and although there are 32,000 commercial bank branches in India, only 7% of villages boast of a branch. Among the reasons for low presence are lack of infrastructure, regulatory constraints, illiteracy, incomplete service offerings by banks, and high transaction costs in the formal banking system, information asymmetry, and high proportion of non-performing loans (NPLs).
    Opening more branches is perhaps not justified on economic grounds in rural areas. Therefore, to improve access in rural areas, banks needs to modify existing channels, introduce new channels and identify innovative ways to integrate the two. The indirect costs (transaction costs, commissions, etc.) and expenses associated with banking transactions are very high. Moreover high levels of illiteracy deter rural customers from actively engaging in formal financial transactions. Given its rapid spread, mobile banking seems to be an obvious method to reach out to the unbanked population. This is not a totally new concept since several successful structures have already been established across countries to tap the unbanked population using mobile technology. M-pesa (Kenya), Obopay (USA), Mcheck, RBAP-MABS (Philippines) are compelling examples.
    In India, where it is expensive and cost ineffective to extend the coverage of the banking channel, branchless payment systems can dramatically reduce the cost of delivering financial services to poor people. Branchless banking can offer basic banking services to customers at a much lower cost than what it would cost to serve people through traditional channels. For the spread of any technology used to increase financial access, it is imperative that the technology is user friendly and in tune with mass customer needs. The early adopters of technology in India (such as followed by various other promising technology providers in India –EKO, FINO, TCS, A Little World (ALW), CMFIL, ATOM Technologies have proven at pilot levels that microfinance channels can also improve inclusion. While the potential of branchless banking is enormous, policy and regulation could still prove to be obstacles in this regard. The regulatory hurdles imposed by government, financial institutions, and the department of telecom are inimical to the success of mobile payments; so they need to addressed.
    To sum up, the knowledge, capital and technology to address the challenges of rural-urban gap however now exist in India, although they are not yet fully aligned due to regulatory constraints. A multi-pronged approach is required to make the Indian banking system more inclusive, which requires a concerted effort by several stakeholders, including the Government of India, the Reserve Bank of India, and Telecom regulatory authority. Thus with a more enabling environment the next few years promise to be exciting for the delivery of financial services to poor people in India.  
     

  • 63Agricultural Extension: Role of Mobile PhonesGaurav Tripathi

    May 2009



  • Today, life is unimaginable without a mobile phone. For most it would come to a standstill without it. Given its functionality, growth has been extraordinary recently in both rural and urban areas: rural tele-density has increased to 12.72 from 0.4 and urban tele-density 72.47 from 5.8 in past 10 years. India is the fastest growing mobile market in the world and almost 15 million subscribers are being added per month, mostly in rural areas. Such massive growth in numbers is commendable by itself, and if accompanied by the predictable positive economic impact, the results could be unprecedented. Several studies have quantified the role of mobile phones in improving productivity, employment, profits and also enabling social change. The reasons mobiles have such major impacts are mainly due to reduction in transaction cost, widening markets and alleviating infrastructure constraints. Each of these positive characteristics of increased connectivity has potential in the financial services sector as well.
     
    source:RBI
    India has a relatively deep financial system and a wide network of banks. The average population served per branch office (an important indicator of banking penetration) is 15 per 1000 persons and has not changed much in past 10 years. The rate of increase in the number of bank branches in India during 1991-2006 in urban and rural areas was 3.5 and 0.6 respectively; that is, the population coverage of banks in rural areas is declining. While urban India seems to be over-banked with more than 100% penetration (many urban Indians have more than one bank account), rural India lags far behind with 19% penetration. Banking infrastructure in rural India is poor and although there are 32,000 commercial bank branches in India, only 7% of villages boast of a branch. Among the reasons for low presence are lack of infrastructure, regulatory constraints, illiteracy, incomplete service offerings by banks, and high transaction costs in the formal banking system, information asymmetry, and high proportion of non-performing loans (NPLs).
    Opening more branches is perhaps not justified on economic grounds in rural areas. Therefore, to improve access in rural areas, banks needs to modify existing channels, introduce new channels and identify innovative ways to integrate the two. The indirect costs (transaction costs, commissions, etc.) and expenses associated with banking transactions are very high. Moreover high levels of illiteracy deter rural customers from actively engaging in formal financial transactions. Given its rapid spread, mobile banking seems to be an obvious method to reach out to the unbanked population. This is not a totally new concept since several successful structures have already been established across countries to tap the unbanked population using mobile technology. M-pesa (Kenya), Obopay (USA), Mcheck, RBAP-MABS (Philippines) are compelling examples.
    In India, where it is expensive and cost ineffective to extend the coverage of the banking channel, branchless payment systems can dramatically reduce the cost of delivering financial services to poor people. Branchless banking can offer basic banking services to customers at a much lower cost than what it would cost to serve people through traditional channels. For the spread of any technology used to increase financial access, it is imperative that the technology is user friendly and in tune with mass customer needs. The early adopters of technology in India (such as followed by various other promising technology providers in India –EKO, FINO, TCS, A Little World (ALW), CMFIL, ATOM Technologies have proven at pilot levels that microfinance channels can also improve inclusion. While the potential of branchless banking is enormous, policy and regulation could still prove to be obstacles in this regard. The regulatory hurdles imposed by government, financial institutions, and the department of telecom are inimical to the success of mobile payments; so they need to addressed.
    To sum up, the knowledge, capital and technology to address the challenges of rural-urban gap however now exist in India, although they are not yet fully aligned due to regulatory constraints. A multi-pronged approach is required to make the Indian banking system more inclusive, which requires a concerted effort by several stakeholders, including the Government of India, the Reserve Bank of India, and Telecom regulatory authority. Thus with a more enabling environment the next few years promise to be exciting for the delivery of financial services to poor people in India.  
     

  • 64Implementation of SPS measures in IndiaRashmi Rastogi

    May 2009



  • Import of agriculture commodities in India has increased dramatically from US$1.4 billion in 2004-05 to US$3.4 billion in 2007-08 (Fig 1) mainly due to adoption of safety standards in India in 2003-04. Implementation of the safety standards should actually have led to a decline in imports but in India this has resulted in an increase in imports of agriculture commodities. This increase in imports has been of lower quality of imported products which are still not compliant with these standards. In order to safeguard the economy from the harmful effects of exotic (foreign) living organisms in the imports, the SPS agreement of WTO allows Member countries to adopt safety standards. However, several developing countries use them as protective measure rather than as safety measures. 
    Figure 1: Imports of Agriculture Commodities in India
    Source: Export and Import Databank, Directorate General of Foreign Trade, GOI In India, the regulations governing the imports of agriculture products are in line with international standards. The Plant Quarantine Order (PQ Order), 2003, lays down regulations for import of plant/plant material into India so as to safeguard plant, animal and human life from exotic insects. To ascertain which agricultural products can be harmful for India, a Pest Risk Analysis (PRA) is conducted on agricultural products likely to be imported. Prior to the PQ Order, PRA was done on less than 100 commodities. After implementation of PQ order in 2004, PRA of commodities increased steadily and by 2007-08 there were 900 commodities on which such analysis had been conducted. Even though the Indian safety standards are at par with international standards the quality of imported agriculture products still remains non compliant due to weak implementation of these standards. 
    In a survey on non-tariff barriers faced by importers of agriculture products into India, it was found that testing required to be done at ports is not carried out by the concerned authorities and consignments are often released on payment of bribes. There are several instances when imports did not meet safety standards. For example, in 2006-07, due to an acute shortage of wheat the government of India banned its exports and allowed free imports. Consequently, in 2006-07 imports of wheat reached the maximum level in the past seven years and touched US$ 1,292 million. Wheat imported in 2006-07 faced severe criticism on grounds of quality. It was widely reported that laboratory tests conducted on the wheat subsequent to its import was found that it was unsafe for human and animal consumption, as it contained harmful chemicals such as organo-phosphorus compounds like Malathion and hydrogen phosphide used as insecticides and pesticides. Also, the imported wheat was found to have weeds, fungus infections and pests. The wheat imported from one of the Cairn group of companies in the Asia Pacific region was found to have two kinds of fungus infections, one insect pest and 14 weeds, of which 11 weeds were exotic to India. This has happened despite the requirements of the PQ Order in India. 
    The SPS rules for imports of agriculture products are in line with international standards, however, these standards fail to meet the stated objective as the government has a weak implementation process. Enforcement of regulations is weak not only for imports but also for domestic products.  This could be a reflection of the general apathy towards health and safety. It is necessary to change this mind-set and have a strong implementation of standards to protect the economy from the pervasive damage that can be caused by exotic pests and insects.

  • 65Why Substitution Account Failed and The Way Forward?Loknath Acharya

    Apr 2009



  • The current call for a global currency is not a new one. In the past and especially when the dollar showed signs of weakness, there have been calls for replacing dollars. This article tries to look at the reasons why the earlier moves didn’t materialize and the future prospects. IMF introduced Special Drawing Rights (SDRs) in order to supplement USD and gold as reserve currencies to solve the liquidity problem. Triffin’s dilemma showed that the US would have to continually run a current account deficit to provide the global liquidity. After floating exchange rates came into being the worry about global liquidity evaporated and hence the SDRs never really served the purpose they were intended to. But there were many attempts to popularize the use of SDRs as it was believed to be a much superior alternative. Later in 1970’s when dollar showed consistent weakness, it was also believed that the SDRs could provide an effective diversification by replacing portions of USD reserves. At that time the USD accounted for roughly around 70 percent of non-gold reserves. The way to go forward was by creation of a substitution account. The most comprehensive proposal on creation of a substitution account was the Polak-de Larsosiere proposal. This proposal may not have worked towards a potential solutions because- First the US was not sure about the interest cost to be paid after its short term liabilities to central banks were converted into long term liabilities to the fund. One of the ways to overcome this was to sell a portion of IMF gold- which could be used to cover the transition cost.   If IMF along with other countries like China who hold huge reserves agreed to compensate some portion of US loss then this problem could have been overcome. Second, many countries were not willing to accept a lower interest rate that the SDR would pay against a much higher rate paid by the US treasury. This really wasn’t a serious problem retrospectively, because for a very long period of time the interest on SDR was higher than the US treasury rates. Thirdly as the SDR is a derivative index of currencies with the dollar having the highest weight age, an expansionary policy on the part of the US would lead to depreciation of dollars and softening of short term interest rates. This created an uncertainty about the viability of future interest rates which could be paid on the SDRs. The way forward to solve this problem would be to diversify the SDR to a much larger basket of currencies. The current weighting system which gives weight as per the trade denominated among the four currencies needs to change. A new formula will have to be found.
    Similar to the situation in 70’s, even in present times most of the global reserves are denominated in the US currency (fig 1). Roughly 65 percent of currency reserves are held in USD (used Brad Setser’s calculation). While in the 1980’s the developing (developing and emerging are used interchangeably) nations didn’t have much reserves and are only interested in getting the funding. The ratio of non-gold reserves held by advanced economies and developing economies is at the lowest. This can be interpreted as the change in the reserve accumulation shifting from advanced economies to emerging economies. The global non-gold reserves index has also picked up after 1998 when the East Asian economies started building huge reserves (fig 2). So, this time the lead is taken by the emerging economies. 
      
    Fig.1: Composition of foreign exchange reserves
    Source: Brad Setser, CFR
     
    Fig 2: Non-Gold Reserves 
     
    Source: IFS, author’s calculation
    The solutions mentioned here are not new as the debate is not new itself. The timing is as good as it will ever get. We have the benefit of hindsight and willingness of many more countries to accept the change. Many believe that the root of the current crisis is the dollar hegemony. It serves the reserves holder as well as the US in the long run. The current step taken by the G20 to empower IMF is a positive one. But much more needs to be done – a strong political will and to move away from the thinking of currency as a source of sovereign identity.
     

  • 66Guaranteed wage employment programme – NREGSShikha Juyal

    Apr 2009



  • National Rural Employment Guarantee Scheme (NREGS) that was operationalised from 2nd February 2006 marks a major paradigm shift from the earlier wage employment schemes as it creates a rights-based framework for wage employment making the government legally accountable for providing employment to those who ask for it. NREG Act provides for the enhancement of livelihood security of households in rural areas of the country, although some experts also commented that “Schemes like NREGS go against the principle of teaching a man how to fish and instead give him the fish?” But is ending all schemes, the right solution? The main objective of the programme is to create employment opportunities and physical and social infrastructure in rural areas, which reduces rural to urban migration. NREGS is a demand-based programme, and hence, the requirement of funds and employment generation will depend on demand for work. People have to submit a written application for employment to the Gram Panchayat, stating the time and duration for which work is sought. Then employment is to be given within 15 days of application for work, and if it is not then daily unemployment allowance is to be given. The budget outlay provided by the GoI under NREGS has increased continuously from Rs.11,300 crores (in 2006-07) to Rs.12,000 crores (in 2007-08) and Rs.30,000 crores (in 2008-09). NREGS has managed to raise rural wages and also the minimum wages have been revised upwards in some states (Fig 1).
     
    Source: – www.nrega.nic.in/wages.pdf
     
    The national overview of the programme shows that the total employment provided under NREGS was 2.10 crore (in 2006-07) , 3.39 crore (in 2007-08) and 3.51 crore (in 2008-09 till Dec 2008). Women’s participation has increased from 41% in 2006-07 to 49% in 2008-09. The number of households provided employment in states has increased since operationalisation and was more for states in which more districts were covered (in phase 1 of NREGS). The graph below validates this finding (Fig 2).
     
    Source: – http://rural.nic.in/budget/Budgetframe.htm and http://nrega.nic.in
     
    Main problem of NREGS is with the implementation of the programme. Focus should be on how the outcomes can be improved. There is need to issue electronic job cards to the workers and provide adequate manpower (administrative and technical) for preparation of plans, scrutiny, approval, monitoring and measurement of works, maintenance of the stipulated records at the block and Gram Panchayat levels. To ensure proper record-keeping, some training is also required. The list of permissible works needs to be broader, for example it could have training and skill development programmes for unskilled workers so that at later stages they could benefit from their enhanced skills–this may require a slight change in budget share. The need for greater transparency to minimize corruption, can be achieved by greater use of Post Office/Banks to ensure full wage payments; and requiring Gram Panchayats to display information daily about work sites and workers employed. Any discrepancies could then be highlighted by the job seekers. A more frequent audit would also help to make this programme implementation more effective.

  • 67INDIA and IFRS: Can we bridge the GAAP?Sirjjan Preet

    Mar 2009



  • Over 100 countries across the globe speak the same accounting language; while we in India, enrolled in this language course, wish to complete it in time and with good grades. Transition from Indian GAAP (Generally Accepted Accounting Standards) to IFRS (International Financial Reporting Standards) has its own set of benefits and challenges for those who prepare and use financial statements. Harmonization of existing standards with IFRS requires changes not only in the accounting procedures but also in the legal regulatory framework and IT systems. Switchover to IFRS will transform the way companies and markets judge performance and value. So, are we ready to handle the new accounting regime that comes in force in India from April 2011? Is India Inc aware of the intricacies and methods that would come along with new standards? And most importantly, in the wake of global financial crisis and our own economic slowdown, could we switch to IFRS in 2 years? The answer to these questions should be clearly given. 
    The transition from Indian GAAP to IFRS is complicated. This is so because of the complex procedures that we have currently in place and the aggressive timelines that require companies to prepare their first IFRS balance sheet by April next year. The convergence with IFRS will facilitate comparability and benchmarking performance across border, provide easier access to cheap capital and debt at reduced risk premium, lower operating costs by eliminating the need for multiple reporting, enhance transparency and finally build the corporate brand value of Indian companies. In addition, the use of IFRS would impact the compensation structures of employees, debt and borrowing covenants of lenders, change the key performance metrics and change the way investors perceive companies. Hence, all companies should swiftly move towards implementation of IFRS to avail the convergence benefits which would get reflected in the economy’s growth. When will they dig themselves out from under the current crisis, and put IFRS back on the priority list, is yet to be seen. 
    The first major step towards transition has been taken by ICAI (Institute of Chartered Accountants of India) which has published a white paper drawing up a roadmap for implementation of IFRS, but a lot needs to be done at the micro level. 
    Changeover to IFRS involves three key issues: First the complexity of accounting framework in India with multiple standard-setters viz., ICAI, SEBI (Securities and Exchange Board of India), NACAS (National Advisory Committee on Accounting Standards), Income Tax Authorities, Companies Act, and industry regulators viz., RBI (Reserve Bank of India), IRDA (Insurance Regulatory and Development Authority) etc. A smooth transition calls for a concerted effort on their part to coordinate their plans and to create an understandable accounting landscape that will prevail in 2011.  Second, the non-availability of a large pool of IFRS literates. In the US (which could possibly move to IFRS in 2014), all educational institutions and professional bodies are revamping their curricula to include IFRS learning. Whereas in India, the only major initiative taken by ICAI in this direction has been the launch of IFRS certificate course and IFRS training program for professionals. Third, India is working towards a moving target as IFRS is expected to undergo change between now and 2011 putting us at a comparative disadvantage as we still don’t know what would be the IFRS requirements to apply in 2011. 
    The following step-by-step transition methodology can be adopted to resolve the above issues in a phased manner 
    Phase I – Diagnostic Review 
    Every company has its own needs and culture and the transition methodology can be tailored to the organization specific requirements. In this phase, all companies carry out a diagnostic review to assess the IFRS impact on financial reporting, long-term contracts, supporting business processes, information systems, tax compliance and employee benefits. This is done to equip businesses with a better sense of what changes would be required and how much time and resources would go into ensuring a smooth transition. This way the companies can also plan their strategy for the road ahead. 
    Phase II – Setting up an IFRS conversion project 
    This phase involves designing of conversion strategy, establishment of IFRS accounting policies, carrying out operational and systems changes, and eventually coming out with the first comprehensive IFRS financial statement.
    Phase III – Incorporating Change 
    In this phase, attempt should be made to integrate IFRS changes into day to day operations, processes, and systems and controls. The idea is to establish a sustainable process which a company can repeat to produce meaningful information not only immediately but also long after the conversion takes place. 
    IFRS is important from investor confidence perspective but can’t be considered as an accounting firewall against all frauds. Satyam was one of the first Indian companies to announce transition to IFRS but the Rs 7,000-crore financial fraud shows that the real problem is in the auditing process and the corporate governance framework, not in the accounting standards. The present financial crisis has thrown up a new set of problems of credit, job losses, decreased consumer spending and shrinking margins, and it comes as no surprise that the companies don’t seem to be in a rush to implement IFRS. Regulators are also too occupied in grappling with new challenges to keep up the momentum. Moreover, the modification of Income-tax Act, Companies Act and other legislations that run counter to IFRS is not easy, and in practice, such legislative activity could take years. Therefore, ICAI and the Government have to play a larger role in addressing these problems to avoid long delays.

  • 68Will it be ‘déjà vu’ for Global Steel Industry?Deepika Wadhwa

    Mar 2009



  • It was only yesterday when everything appeared to be hunky-dory for the steel industry. The industry was boasting of high growth in production and consumption, high prices and equally high profits. Steel producers all over the world were caught in a frenzy to expand capacity through greenfield investments and consolidate through mergers and acquisitions. However, the ongoing global economic crisis has taken its toll. Steel demand, prices and production have all plunged and some layoffs have also been announced by steel firms. The demand for steel in a country is mainly linked to fixed capital investment, which in turn is dependent on availability of capital. Global financial crisis and resulting tighter credit conditions have seen a sharp decline in construction and other related activities especially in developed economies and also in emerging economies. Besides, lower availability of consumer loans, rising unemployment and lower consumer confidence have significantly affected the spending on durables such as automobiles, household appliances and other steel intensive goods. Due to the weakening demand from major steel consuming sectors and the already piled up large inventories by major steel firms worldwide, steel prices have plummeted by almost 40 percent for various categories of steel products in most regions after reaching record highs in early June last year. With every passing day, steel companies across the world have been announcing production cuts. (See chart and table )
     
     
    Source- World Steel Association
    In India, although steel output has grown by 3.7 percent in 2008 as compared to 2007, the increase is much less than what was previously expected, reflecting delayed greenfield projects due to the credit crunch as well as weaker demand conditions.
     
    Region 2008 2007 Growth Country 2008 2007 Growth
      ( in mt) (in %) ( in mt) (in %)
    World 1329.7 1345.4 -1.2 China 502.0 489.2 2.6
    Asia 770.0 756.3 1.8 Japan 118.7 120.2 -1.2
    EU (27) 198.6 209.6 -5.3 US 91.5 98.2 -6.8
    EU (15) 168.3 175.2 -3.9 Russia 68.5 72.4 -5.4
    North America 125.4 132.7 -5.5 India 55.1 53.1 3.7
    C.I.S. 114.0 124.2 -8.2 South Korea 53.5 51.5 3.9
    South America 47.6 48.2 -1.3 Germany 45.8 48.6 -5.7
    Africa 17.0 18.8 -9.5 Ukraine 37.1 42.8 -13.3
    Middle East 16.0 16.5 -2.8 Brazil 33.7 33.8 -0.3
    Oceania 8.4 8.8 -4.5 Italy 30.5 31.5 -3.2
    Source- World Steel Association
    However, steel is a cyclical industry and regularly experiences many ups and downs. Today’s downturn in the steel industry has come after a long period and how bad it would get is difficult to predict. However, as the worst possible scenario, some industry experts believe that steel production would decline by almost 10 percent in 2009 and would take 4-5 years or more for the industry to rebound to the production level achieved in 2007. 
    The revival of global steel demand since 2000 was due to expanding emerging economies particularly China. Most likely investment on infrastructure in these emerging countries especially BRIC countries would continue since these economies have tremendous potential for growth (BRIC accounted for around 50% of global steel demand in 2007). For instance, construction activity in China alone is estimated to contribute slightly less than a fourth of global steel demand and although its growth has slowed down in the fourth quarter of 2008, it is still expanding. Moreover, consumption of steel is expected to remain steady in India, given the already low consumption level of steel in the country (apparent consumption of crude steel per capita was just 42 kg in India compared to China’s 296 kg and world average of 202 kg in 2006) and other emerging economies have also very low steel consumption. In fact, world steel production has increased by 4.5 percent in January 2009 compared to December, 2008 mainly because of 9.9 percent increase in Chinese steel production. Indian steel production has also witnessed an increase of 1.6 percent in January 2009 as demand for steel products in the construction sector rose slightly. This is mainly attributed to economic stimulus packages and increased spending on infrastructure in India. Thus, with countries resorting to macroeconomic measures to stimulate economic growth and expand domestic demand, the global steel industry is already beginning to pick up, and it is quite possible that global steel output could revive in a year so and it may not see any prolonged downturn.

  • 69Interim Budget: Pointer to Big Troubles AheadMathew Joseph

    Feb 2009



  • Yes the cat is now out of the bag. Ever since the introduction of last year’s budget, targeting a further fiscal consolidation for 2008-09, economists have been pointing out the gross underestimation of fiscal deficit in that budget. The Interim Budget has now revealed a huge rise in fiscal deficit of the central government to 6 per cent of GDP from 2.7 per cent in 2007-08. Has the fiscal deterioration been due to fiscal stimulus packages administered by the government to counter the impact of global crisis on the Indian economy? What about the continued high deficit targeted for 2009-10?
    The table below summarizes the budgetary trends as presented in the Interim Budget 2009-10. The worsening of fiscal deficit in 2008-09 (revised estimates) from the budget estimates is due to an increase in expenditure of Rs. 150,069 crore (2.8 per cent of GDP) and decline in revenue receipts of Rs. 40,762 crore (0.75 percent of GDP). The fiscal burden arising from fiscal stimulus packages (including both revenue fall and expenditure increase) amounted to Rs. 40,700 crore constituting just 0.75 per cent of GDP. In short, of the deterioration of fiscal deficit of 3.5 per cent of GDP from the budget estimates, 2.8 per cent of GDP has nothing to do with fiscal stimulus packages
    Table: Central Government Budget 2009-10 (Rs. Crore)
    2007-08
    (Actuals) 2008-09 (BE) 2008-09 (RE) 2009-10 (BE) %Change 4 over 2 %Change 5 over 4
    1 2 3 4 5 6 7
    1. Revenue Receipts (3+4) 541925 602935 562173 609551 3.7 8.4
    2. Gross Tax Revenue 593147 687715 627949 671293 5.9 6.9
    Corporation tax 192910 226361 222000 244200 15.1 10.0
    Income tax 102644 120604 108000 118800 5.2 10.0
    Customs 104119 118930 108000 110187 3.7 2.0
    Excise duties 123611 137874 108359 110604 -12.3 2.1
    Service tax 51300 64460 65000 68900 26.7 6.0
    3. Net Tax Revenue (Net of States’ Share) 439547 507150 465970 497596 6.0 6.8
    4. Non-Tax revenue 102378 95785 96203 111955 -6.0 16.4
    5. Recoveries of Loans 5100 4497 9698 9725 90.2 0.3
    6. Other Receipts* 3264 10165 2567 1120 -21.4 -56.4
    7. Total Expenditure* 677201 750884 900953 953231 33.0 5.8
    8. Revenue Expenditure 594494 658119 803446 848085 35.1 5.6
    Of which: Interest payments 171030 190807 192694 225511 12.7 17.0
    9. Capital Expenditure* 82707 92765 97507 105146 17.9 7.8
    10. Revenue Deficit (8-1) 52569 
    (1.1) 55184
    (1.0) 241273
    (4.4) 238534 (4.0) 359.0 1.1
    11. Fiscal Deficit [7- (1+5+6)] 126912
    (2.7) 133287
    (2.5) 326515
    (6.0) 332835 (5.5) 157.3 1.9
    *Excludes transactions related to RBI transfer of State Bank of India to central government in 2007-08 (Rs. 35531 crore) which is deficit neutral as equivalent amounts are shown on both receipts and expenditure sides.
    Note: Figures in brackets are per cent to GDP.
    The above does not take into account the off-budget items of oil and fertilizer bonds which are estimated at Rs. 95,942 crore, equivalent to 1.8 per cent of GDP. For the previous year 2007-08 this amounted to Rs. 19,453 crore or 0.4 per cent of GDP. Thus including these off-budget items, the centre’s fiscal deficit in 2008-09 would be 7.8 per cent of GDP compared to 3.1 per cent of GDP in 2007-08. Fiscal deficit of the states is expected to be over 3 per cent of GDP in 2008-09 against the budget estimates of 2.1 per cent of GDP taking into account the additional borrowing of Rs. 30,000 crore in the fiscal stimulus package and the likely shortfall in tax revenues. Thus the combined fiscal deficit could be about 11 per cent of GDP in 2008-09 against 5.4 per cent of GDP in 2007-08. 
    A major part of the rise in fiscal deficit in 2008-09 is due to a huge growth in revenue expenditure of about 35 per cent against the average annual growth of about 12 per cent in the previous five years. Furthermore, the deterioration in the growth of revenue receipts is quite marked from an average of about 18.6 per cent per annum in the past five years to just 3.7 per cent in 2008-09. In the case of net tax revenue, the deterioration is particularly steep from an average growth of 22.6 per cent per annum during 2003-08 to just 6 per cent. The tax-GDP ratio which had gone up to 12.6 per cent in 2007-08 from 9.2 per cent in 2003-04 is estimated to decline to 11.6 per cent in 2008-09. This is budgeted to go down further to 11.1 per cent in 2009-10. This clearly is an admission of the fact that the economy has deteriorated in the current year and will deteriorate further next year. 
    The budget has provided for a marginal decline of fiscal deficit to 5.5 per cent of GDP next year. This is predicated on a modest increase in expenditure of less than 6 per cent for the next year and a strong growth in GDP of about 7 per cent in real terms both of which are unrealistic. We are indeed heading towards really difficult times

  • 70Future Prospects for Renewable Energy in IndiaRamneet Goswami

    Feb 2009



  • India ranks as the world’s seventh largest energy producing country and fifth largest energy consuming country. India is also the fifth largest oil and seventh largest gas importer in the world. Due to increasing gaps between domestic energy demand and supply (table 1), India’s incremental energy demand for the next decade is projected to be among the highest in the world. According to the Planning Commission, energy requirements of the country are expected to grow at 5.6-6.4% per annum over the next few years. The share of imports of oil is also expected to increase to 90-93% of demand by 2030 from the current level of 73%. Thus there is a need to look at various options available to reduce the dependency on foreign supplies of crude oil.
    Table 1 : Trends in Demand and Supply of Primary Energy in India
    (Figures in Million tonne of oil equivalent (Mtoe))
     
      1980-81 1990-91 2000-01 2006-07
    Domestic Production of commercial energy (includes coal, lignite, oil, natural gas, hydro power, nuclear power and wind power) 75.19 150.01 207.08 259.56
    Net imports (include coal, oil and LNG imports) 24.63 31.07 89.03 131.97
    Total commercial energy 99.82 181.08 296.11 391.53
    Non-commercial energy (include the traditional fuels – wood, cow dung, crop residue and biogas) 108.48 122.07 136.64 147.56
    Total Primary energy demand 208.30 303.15 432.75 539.09
    Source : Integrated Energy Policy Report, Planning Commission
    Fortunately, India is blessed with a variety of environmental friendly alternatives – renewable energy- sources such as biomass, solar energy, wind energy and small hydro power. The country ranks fourth for installed wind power capacity, second for biogas generation, seventh in solar photovoltaic (PV) cell production and ninth in solar thermal systems in the world. Investment in renewable energy is rising. With an increasingly favorable regulatory and policy environment along with a growing number of entrepreneurs and project developers, as per the Ernst and Young Country Attractiveness Indices 2008, India ranks as the third most attractive country to invest in renewable energy, after the USA and Germany. As the only country in the world with a separate ministry for renewable energy development- India has 13.2 GW of renewable energy – excluding large hydro – representing about 8% of total electricity capacity. However, renewable excluding hydroelectricity will contribute only 5-6% in India’s energy mix by 2031-32 (Planning Commission).
    India has an enormous potential for renewable energy across the various sources and greater reliance on renewable energy sources offers enormous economic, social, and environmental benefits. Since a large number of small hydro projects exists in hilly areas, development of small hydropower for decentralized power generation will lead to rural electrification and local area development. Solar thermal technologies have a very high potential for applications in solar water heating systems for industrial and domestic applications and for solar cooking in the domestic sector. This could be made financially viable with government tax incentives and rebates. Power projects based on biomass plantations have the potential to offer new avenues of employment through collection, storage, handling and utilization of biomass materials especially in rural areas, and in promoting rural industries and generating rural employment.
    Table 2 : Renewable Energy in India at a glance
    (Figures in Megawatt)
     
    Sources
    Estimated Potential Mid-Term (2032)
    Cumulative Installed Capacity (30.9.2008)
    Wind Power
    45,000
    9521.80
    Small Hydro Power (up to 25 MW)
    15,000
    2220.99
    Bagasse Cogeneration
    5,000
    993.83
    Biomass Power
    16,000
    656.60
    Waste-to- Energy
    7,000
    55.75
    Solar Power
    50,000
    2.12
    Total
    1,83,000
    13451.09
    Source : Ministry of New and Renewable Energy, GoI http://mnes.nic.in/
    Energy plantations can become the means for restoring deforested and degraded lands in tropical and subtropical regions. Countries such as Canada, the US and the UK are already focusing on the use of hydrogen as an alternative fuel, therefore, India can collaborate with these countries for technology-transfer and R&D. In the near future, due to expected high growth, this sector will give an opportunity to educational and training institutions to introduce new course curricula and training for students to work in this emerging area.

  • 71Real Sector Resilience: The Case of BangladeshTanu M. Goyal

    Jan 2009



  • South Asia emerged as one of the major garment producing regions with the increase of north-south trade and is also deemed to be affected significantly because of the global financial crisis. Within South Asia, the case of Bangladesh, is important to be looked at-as to what  extent  the financial and the real sectors are impacted. Bangladesh’s financial markets are quite insulated from the rest of the world, but the probable impact of the global crisis on this country is routed through its real sector or the foreign trade sector. Bangladesh’s industrial production growth has averaged more than 6% over the last 5 years. The export sector has been the engine of industrial growth, with ready-made garments (RMG) leading the way–having grown at an average of 30% over the last 5 years and comprised more than 75% of the total exports in 2007-08. EC and USA are the largest markets for RMG from Bangladesh, together accounting for 90% of total exports in FY08. These statistics reflect the highly skewed pattern of exports, thus also reflect the vulnerability of the country. The World Bank has projected a lower economic growth for Bangladesh, from 6.5 percent to 5.4 percent for the current fiscal year (2009) and in the worse case 4.8%. As per their study, the global financial crisis is likely to affect Bangladesh’s exports in the near future. However, the Bangladesh Garments Manufacturers’ and Exporters’ Association (BGMEA) is optimistic about the exports of RMG to the West, particularly, the US. BGMEA asserts that the recession indicates both risks and opportunities for the RMG industry and Bangladesh’s lower-end basic garments have been forecasted to be less affected than the high value items.
    Year on Year Percentage Change in Bangladesh’s Export Receipts of RMG
    Source: Bangladesh Bank
    The G exports of Bangladesh in September 2008 were 45.21% higher than its last financial year, despite the crisis taking its toll in the rest of the world around the third quarter of 2008. India is also an important textile exporter in the South Asian region with the share of textiles in total exports being almost 14% in the FY08. However, the massive slowdown in the west has led India to experience a decline in the export of RMG. As per the Apparel Export Promotion Council (APEC) in India, the apparel exports may be 9.3% down from 2007 and 24% lower than the earlier projections. Apart from this decline, by July 2008, up to five lakh people lost jobs in the garment export industry.
    It is a general assumption that the global financial crisis will affect all economies that are integrated with the West, particularly the USA. But this does not hold true in case of Bangladesh. Bangladesh is highly dependent on the US for the Export of RMG, nevertheless, basic garments have inelastic demand and are less vulnerable to external shocks. This is so because the average unit value realization for Bangladesh (6.07) in RMG is much less than other South Asian countries (India’s value is 13.15), making it highly price competitive. Given the price competitiveness in Bangladesh, it has so far been able to withstand the crisis better and has been seemingly plaint to the global economic meltdown.

  • 72Debt Sustainability in IndiaDony Alex

    Jan 2009



  • For designing an appropriate stimulus package in the Indian scenario, where fiscal deficit is estimated (Macro Team’s estimates) to be more than 8 percent (Combined centre and state with off budget items also included, 2008-09) and the ratio of public debt to GDP around 73, one of the crucial questions is the sustainability of the high level of public debt. In last few years there has been a downward movement in the public debt to GDP ratio in India. The Twelfth Finance Commission had set the optimal ratio of public debt to GDP as 55 percent in 2004-05. It is currently significantly higher.  Internationally, the Maastricht Treaty had set the favorable debt level to around 60 percent of GDP. Other considerations like the level of primary deficit, fiscal deficit, the differential between GDP growth and interest rates and the external debt component in total debt have also to be looked into for ensuring debt sustainability.
    For the Indian economy it has been found (Rangarajan and Shrivastava 2005) that for the period 1955-2000 that primary deficit was the core variable that led to increase in debt to GDP ratio. The public debt to GDP ratio in the beginning of the first plan period (1950-51) was around 29 percent which had risen to the peak of around 83 percent in 2003-04. Even with positive primary deficit for a long period of time, the debt to GDP ratio was contained due to the faster growth of GDP as compared to the real interest rates. Rangarajan (2003) had found that during the 1970’s and 1990’s negligible increase was seen in the debt-GDP ratio because nearly 100 percent of the impact of the primary deficit was absorbed by the growth interest differential.
    If we try to evaluate the soundness of the Indian economy through these parameters the picture is some what mixed. The positive factor is that we have been running a primary surplus  since 2006-07 and recently available data for 2008-09 (budget estimates) indicate a rather low level of primary deficit of around -0.8. But these estimates may have to be seriously revised because there has been huge increases in government expenditure which will raise the level of the primary deficit. As regards the growth interest differential there may be concern as the GDP growth rate would come down sharply in the coming years and interest rates may come down only with a lag. However, India has one other major advantage of having very low external debt as a share of total debt. India has less than 4 percent (2008-09) as their external liabilities of the centre to the total public debt.  Thus, the most volatile component of debt is extremely small. While this is a silver lining, we cannot still allow the total public debt to go far beyond the levels as recommended by the Twelfth Finance Commission or the Maastricht Criteria. This implies that there is not much fiscal headroom for stimulating domestic demand. This is a pity as monetary measures need to be supplemented by fiscal expansion for the counter cyclical measures to become effective. This is especially true in a downturn when the consumption propensity is likely to decline and the monetary multiplier is weak.

  • 73India & Japan: Poised to enter a New Era of Economic RelationshipAmit Singh

    Nov 2008



  • PM Yoshiro Mori’s visit to India in August 2000 was the beginning of a new era of India-Japan relations, which set the precedent for visits to India by his successors Junichiro Koizumi and Shinzo Abe. Since then, the two countries sought to strengthen bilateral ties through new initiatives and programmes ranging from economic and cultural linkages to defence and security. Japan at present gives 30 per cent of its foreign aid to India and is, even in this period of global economic turmoil, committing more than US $4 billion to the Delhi-Mumbai Industrial Corridor (DMIC). The two recent mega deals between Indian and Japanese companies, namely,Daiichi-Ranbaxy merger (US $4.6 billion) and the acquisition of 26 per cent stakes (US $2.7 billion) in TATA Teleservices by Japanese mobile giantNTT DoCoMo, are clear instances of the growing economic ties between the two countries. 
    In April 2005, the two countries agreed to set up a Joint Study Group for a free trade agreement (FTA). The JSG in 2006 recommended to develop a Comprehensive Economic Partnership Agreement (CEPA), which was launched in January 2007 covering issues – trade in goods and services, investment flows, trade promotion and measures for promoting economic cooperation in identified sectors. Even after ten rounds of negotiations, a number of issues in the proposed India-Japan CEPA are yet to be resolved, including items in the negative list of products to be protected from tariff-cuts and quality control norms for import of farm goods. Tariffs (import duties) on most goods in Japan are already low at present. Thus, a critical determinant in greater market access for Indian products in the Japanese market would be the reduction of existing non-tariff barriers (NTBs). Indian concern lies over Japanese technical barriers to trade (TBT) and its stringent sanitary and phytosanitary measures (SPS), which act as NTBs to Indian export items, viz. pharmaceutical, chemicals, biotechnology, and cosmetics sector goods. Indian pharmaceutical companies have not been able to tap the Japanese market to its full potential due to the country’s stringent SPS, TBT and environmental norms. Japan provides the world’s second largest drug market. At the moment it takes an Indian pharmaceutical exporter 5-7 years to start exporting from the date of application. Japan is not agreeing a mutual recognition agreement (MRA) in pharmaceutical sector, which would enable both the countries to identify the testing procedures and standards used in the other country for their goods. India’s demand is to have standards uniform to those set by US Food and Drug Administration (FDA), but Japan contends that these are not enough and is resolutely pushing for its own set of testing measures. 
    Further, Japan’s interest lies in automobile and chemicals, while Indian industry seeks total protection on these items. India, on the other hand, is keen on expeditious implementation of quality control norms in Japan. As stated above export of Indian agricultural goods, chemicals and pharmaceuticals face various NTBs in Japan. Indian industry feels that the implementation process of SPS norms in Japan is so long that in case of mangoes, it took 15 years for India to get clearance. Rules of origin, which lay down how much of an imported input should be allowed in a product being traded under the CEPA, is another contentious area. In services, the major hurdle lies in the area of mutual recognition agreements (MRA) wherein both parties accept foreign professionals with degrees and diplomas offered in their home country. As such a mutually agreed MRA is desirable for clinching the deal in terms of services. Also, a 15 per cent withholding tax — a share of the payment withheld by the paying party on account of taxes — levied by Japanese authorities is also a major hurdle discouraging Indian professionals from working in Japan, and needs to be sorted out. 

    After clinching the FTA with ASEAN and sorting out all outstanding issues with South Korea for a CEPA, India is keen to conclude the CEPA with Japan. It is expected that such an Agreement would help the two countries increase their share of Asia’s economic output in the coming years. The recent surge in Japanese FDI in India to the tune of $5 billion this year so far against less than $500 million last year indicates the increasing interest of Japanese investors in India. Indian industry expects the CEPA to lead to greater flow of technology and investments from Japan into India. However, if the current global financial crisis continued to affect the global economy for long, it would most likely impact the increasing economic relationship between India and Japan. How much the present crisis affects the India-Japan comprehensive economic relations remains an open question? Nonetheless, the CEPA between the two large economies of Asia may evolve an understanding between them for the early conclusion of the WTO’s Doha Round negotiations, which is vital for the maintenance and development of the international trade system!

     
    Amit Singh
     

  • 74Making the Case for Soft PowerRajeev Ranjan Chaturvedy

    Nov 2008



  • Soft power refers to a nation winning influence abroad by persuasion and appeal rather than by threats or military force. Soft power is a charisma that enables a nation to charm people into doing what it wants others to do. Soft sources of power such as culture, political values, and diplomacy are part of what makes a great power. Success depends not only on whose army wins, but also on whose story wins. China has worked hard to enhance this power, with the Beijing Olympic Games as the climax of its efforts. It is said that as much as $43 billion was spent on sports arenas and social infrastructure, revealing the country’s ambition and drive. China is steadily expanding its cultural, educational and diplomatic influence globally, especially in the developing world. The Chinese have historically had a very well-established network for promoting the influence of culture, education and diplomacy. China is employing its soft power through a broad range of activities in Asia, Africa and Latin America viz. Cultural exchange, sending doctors, engineers, teachers to work abroad, welcoming students from other nations to study in China, promoting Chinese language programmes abroad by establishing Confucius Institutes, culture and language centre around the world, conducting Chinese cultural festivals, greater economic cooperation, making major investments in infrastructure, agriculture and energy etc. China is steadily increasing its soft power and Chinese culture, cuisine, calligraphy, cinema, art, acupuncture, herbal medicine, and fashion are already evident in many parts of the world. Kids wearing Chinese clothes and playing with Chinese toys is becoming very common. China plans to build more than 100 Confucius Institutes worldwide by 2010. China has upgraded its public diplomacy over the years, reinforcing its slogan of peaceful rise. In fact, cultural diplomacy has become an “essential part of China’s overall diplomatic strategy”. 

    Despite many stories of India’s emergence as a rising power, it is believed to be behind China by a decade in many respects. To manage its rise and to make it a developed country, India needs to optimise its impressive soft power resource by paying enough attention to it. India’s values and principles attract as well that constitutes India’s greatest asset in the world of 21st century. India possesses a unique civilization that is assimilating along with its free market democracy, and heterogeneous, pragmatic and open society.  Its needs focus in tapping its soft power potentials which lies in its democratic credentials, secular values, pluralistic society, considerable pool of skilled English speaking professionals, holistic healthcare, culture, classical music, handicrafts, etc. Soft power would be vital for translating India’s ambitions into reality.

     
    Rajeev Ranjan Chaturvedy
     

  • 75The systemic importance of the GATS domestic regulation negotiationsSeema Sapra

    Oct 2008



  • Doha round negotiations under GATS Article VI:4 are mandated to develop necessary disciplines to ensure that measures relating to licensing requirements and procedures, technical standards, and qualification requirements and procedures do not constitute unnecessary  barriers to trade in services. The fourth and current version of a draft text was circulated in January 2008. With its offensive interests in services, India has been active in these negotiations and has sought to protect its right to regulate services for legitimate reasons while at the same time seeking disciplines on the domestic regulations of its trading partners that act as disguised trade restrictions to committed market access in services. 
    These negotiations have systemic importance in so far as their outcome could potentially result in a re-balancing of the relationship between market access (Article XVI) and domestic regulation under the GATS. The primary issue under discussion involves the appropriate balance between the right to regulate and the new disciplines that are crafted.  The draft text, though still lacking consensus, contains ambiguous language that might have such systemic impact. Negotiators thus need to proceed with the utmost caution. They must understand the GATS system-wide implications of the negotiations and evaluate the text under discussion from the perspective of how it might be interpreted in future WTO disputes before the Appellate Body.  
    The issue acquires greater significance after the Appellate Body decision in the Gambling dispute. In this dispute, the Appellate Body found that US laws prohibiting supply of gambling and betting services by suppliers located outside the United States to consumers within the United States amounted to a WTO inconsistent “quantitative” restriction in violation of US scheduled market access commitments under GATS Article XVI. While the United States seemed to have made a scheduling error in not expressly excluding gambling services from its commitments under the residual head of “other recreational services”, this dispute raised concerns in the literature that the Appellate Body erred in not recognizing the US measure as a “qualitative” regulation under GATS Article VI. 
    After the Gambling ruling, negotiators must consider whether the new disciplines on domestic regulations might not have the unintended(?) consequence of shifting the present balance in the GATS between domestic regulations and market access. There are provisions in the new draft text which if applicable during the Gambling dispute might well have resulted in a different outcome. Specifically, these include paragraph 3 (in the January 2008 draft) which without qualification recognizes the right of Members to regulate and to introduce new regulations to meet “national policy objectives”. Though the critical right to regulate is already recognized in the GATS preamble, its inclusion in this format in new rules might have far-reaching consequences, if a dispute settlement panel or the Appellate Body were to find in such provision, a need for deference to national policy objectives even when these do not relate to competence to provide the service or to maintaining the quality of the service. The draft text’s unclear treatment of the relationship between the new disciplines and Members GATS schedules is another cause for concern. In the Gambling decision, the Appellate Body left open the question as to where “in the abstract” GATS Article XVI drew the line between qualitative and quantitative measures. Similarly, it did not decide the question of the relationship between the first and second paragraph of Article XVI which is also germane to this issue.  The new disciplines under negotiation would influence the future evolution of GATS jurisprudence on the scope of the right to regulate a service once market access commitments are scheduled. And negotiators must pay attention.
     
    Seema Sapra
     

  • 76Carbon KARMARiddhima Gandhi

    Oct 2008



  • Carbon is said to be the new currency, so can India get paid for being carbon conscious?
     

    The conceptualisation and growth of the ‘carbon economy’ is one of the most significant outcomes of the concern over climate change. The Clean Development Mechanism (CDM), a ‘market-based’ flexible mechanism under the Kyoto Protocol (KP), claims to have the potential to compensate India ‘monetarily’ for taking a greener path, thereby making India part of the exponentially growing global carbon market valued at $64.03 billion. The CDM operates by providing an incentive for developing countries to adopt sustainable practices and green technologies, while enabling countries under KP emission targets, the chance to buy the much vaunted ‘Certified Emission Reductions’ (CERs), or carbon credits from developing countries. These are released on the completion of successful CDM projects. CDMs form 21% of the global carbon market, and India and China are world leaders. Despite the potential CDMs offer, it is not a simple win-win strategy. The outcome of the CDM’s teething problems, such as high transaction, information and delay costs, is that most of the Indian projects are unilateral. CERs are also difficult to sell on the international market.  Most European Union countries (the largest spot carbon market) have a cap on the percentage of CDM CERs they can import. Further, they would demand excess CERs only if they are unable to offset their own targets. As of now carbon credits are not scarce, because emission targets are too lenient or are not being taken seriously by KP signatories. Carbon emissions are increasing annually and the US hasn’t even signed the KP.  There is clearly a demand supply mismatch in the carbon market. This results in many primary producers, like India selling CERs at low prices. The average price of an Indian CER is ?5 while in the EU it is traded at ?20. It is true that Indian CERs will sell at higher prices closer to project maturity, but often the opportunity cost of waiting is too high. Cheap and abundant CERs, may even allow polluters to continue with ‘business as usual’ as they can buy CERs easily. The future of the carbon market is uncertain, given KP obligations will expire in 2012. But CDMs and carbon trading is here to stay. Hopefully, as emission targets become more stringent, CERs will become more valuable and easier to sell. 
    To help this, emerging carbon funds, like the World Bank’s should become more proactive, by buying up CERs and reducing the number available to trade. India should continue to explore untapped sectors such as building construction, reforestation, transport etc. They must also attempt to bundle small-scale CDM projects or use them as pilots. The CDM Executive Board’s Methodology Panel also needs to become more liberal to accommodate such activities. The government must also continue to facilitate the CDM process, for example by forming public private partnerships, especially for converting utilities into CDMs. However for now, given all the uncertainty, a rational conservative position is to view earning CERs or carbon credits not as the ultimate goal; but as bonus revenue for taking on a green project. This perhaps hints that the incentive the CDM alone offers is not yet powerful enough.

     
    Riddhima Gandhi
     

  • 77Deflating the Indian ElephantTanu M. Goyal

    Sep 2008



  • In the first quarter review of the annual monetary policy, RBI increased the CRR by 0.50 percentage points and increased the repo rate by 0.25 percentage points. Both these instruments were used as measures to control inflation through control of money supply and aggregate demand. RBI has used these instruments in past also, but this year the increase has been rather gradual.
     
    Keynes advocated the use of anti-inflationary monetary policy under a full employment framework. But such interventions are not best suited for India due to existence of disguised unemployment and also large part of the economy (agricultural sector) is non monetised. In such a scenario, monetary policy can only play a secondary role and alone may not be able to generate intended results. Past trends indicate that in India inflation is not a temporary phenomenon and  monetary policy tools alone, may not keep inflation down or stabilise it for too long. RBI has defined the comfort zone for inflation to be around 5-5.5%. Looking at the quarterly inflation figures since 1999, this mark has been frequently crossed with major peaks in 2000, 2003, 2004, and 2007 and yet again in 2008.
     

    A tight monetary regime do effect inflation but in phased manner. The first effect is felt instantaneously while the second is felt with a lag of 6 to 8 months. With such a persistent inflationary trend, the correlation coefficient between CRR and the rate of inflation is (-) 0.55, clearly implying a moderate level of interdependence between the two over the past decade. Apart from this, in developing economies, there is an increasing need for credit to feed engine of growth. Thus restricting credit hampers capacity building mostly in the sensitive sectors of the economy. Using the CRR route to curtail excess credit may not have similar impact for all sectors and industry groups. It does however restrain credit only in the more vulnerable sectors while the bigger firms have access to funds via other sources like retained earnings, capital markets and other external sources. Further, a increase in CRR affects domestic consumption and also impacts the aggregate demand component by affecting investment in the economy. This would in turn have an effect on capital formation, productivity and on future supply, aggravating the situation further. Thus it creates a vicious circle for inflation. In the second quarter of 2008, when the CRR was raised to 8.5%, the rate of growth of private sector credit came down from 8.5% (approx.) in the first quarter to 1.8% by the end of May in the second quarter. Also, for the agricultural (and allied activities) sector, the year on year variation in the debt outstanding as on May’08 was 19.3% as compared to 32.3% as on May 07. Thus we see that credit control may not be the single most effective policy instrument; it neess to be supported by other measures, especially measures to smoothen supply of commodities. A study by RBI shows that 74% of the current inflation is supply driven. Restricting credit has an effect on domestic demand, while in the present situation; it is mostly the rise in global demand that is leading to a mismatch in demand and supply. Measures should be undertaken to improve the supply situation rather than to limit the domestic demand.
    Monetary Policy is but one tool to curtail inflation. As an economy experiences inflationary situations, appropriate and timely use of the monetary policy can provide some immediate relief, in the short run. But, there is also an important role for the fiscal policy. In order to stabilise inflation in the medium and long run, resources must be prudently diverted towards building up the supply capacity in the economy, and particularly in the more vulnerable sectors of the economy. For that purpose, monetary policy instruments may be complemented with fiscal policy efforts directed towards strengthening the supply in weaker sectors of the economy, for instance the agriculture sector. Large part of this sector is rain fed and hence efforts to overcome such constraints may be undertaken. A great proportion of the current inflation is triggered by food crises, apart from the rise in petroleum, steel and cement prices. Higher actual public investment needs to be undertaken to overcome the supply bottlenecks in this important sector of the economy. RBI has been doing its bit, rather frequently, but monetary policies work the best when complemented by prudential fiscal policies.
     
    Tanu M. Goyal
     
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  • 78Social Sector in IndiaDebosree Banerje

    Sep 2008



  • India’s new economic policy has been quite successful in creating a favourable environment for rapid economic growth, but it has been argued that attention has not been paid adequately to development of social sector- like basic education; health care etc. It is important to investigate whether insufficient social sector expenditure has hampered India’s human capital formation. Theories of endogenous growth, state that apart from physical capital and labour, human capital (health and education) is another important input for production growth. Therefore, developing countries should invest a significant portion of their resources in the health and education.
    However, in India where a large segment of population depends greatly on public provision of health and education, public investment is not only crucial but also expected to be high in this respect. However, in India, situation is different. According to WHR 2005, per capita health expenditure in India (Rs. 96) is much lower than that of others countries like China, US (Rs. 261 and Rs. 5274 respectively) and others. In fact, share of expenditure on health and education in total social sector expenditure by all states fell from 16% and 52.2% during 1990-91, to 11.7% and 45.8% in 2006-07 respectively. (Reserve Bank’s report of State Finances: A Study of Budgets of 2007-08). Interstate analysis shows that there exists an inequality among the states also in terms of per capita social sector expenditure. Per capita expenditure of Kerala, Tamil Nadu and Maharashtra are much higher than that of Bihar, MP and UP. . 
     

    Source: Own calculation based on Budget Documents of State Governments, CSO
    Note: Social sector expenditure includes expenditure on social services, rural development and food storage and warehousing under revenue expenditure, capital outlay and loans and advances by the State Governments
     
    However, since the latter states depend mostly on public sector for their provision of health and education, variation in per capita expenditure has not only reduced their access to health and education and but also increased interstate inequality. For example Infant mortality rate in Maharashtra, Tamil Nadu is much lower (35) than that of Uttar Pradesh and Madhya Pradesh (>70).  According to census 2001, literacy rate in Maharashtra and Tamil Nadu are 76 and 73 respectively and in Bihar it is 47.
    There is a visible red alert in the social sector of India. If the insufficiency and inequality in expenditure continues to persist, it will not only hamper India’s human capital formation but also its economic growth in long run. However, only increase in social sector expenditure will not serve our purpose. Policy makers should also pay attention towards efficient allocation of resources to target the actual needy section of population, so that benefits of increased expenditure can trickle down to the lower mass of population. In addition, there is also a need for creation of general awareness among people. Civil societies like different NGOs can make people aware of their general health and educational status through mass education programs or awareness generation camps. If people are more aware, their demand for better health and education will increase, creating a pressure on government to invest more for social sector promotion in India.
     
    Debosree Banerjee
     
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  • 79South Asian Agro Value Chain: Foreseeable Reality or MythSanjeet Kumar Rai

    Aug 2008



  • In the recently concluded two-day 15th SAARC Summit in Colombo on 2-3August, 2008, the heads of state of SAARC countries arrived on a general consensus to increase the effort for food security, intra-regional cooperation in trade, and regional initiative to curb the terrorism activities in the region. The issue of food security is of great importance today given the global dimension of this problem. A special Colombo statement on food security declared that the leaders participating in the 15th SAARC summit have affirmed their resolve “to ensure region-wide food security and make South Asia, once again, the granary of the world”. Though, food security issue is a global concern, the lack of progress in multilateral negotiations, especially on agricultural commodities in the Doha Round adds to this global problem. But the lack of progress in Doha Round can be seen as blessing in disguise for South Asian countries, as it gives an opportunity to increase their intra-regional cooperation. This may eventually provide a regional solution to the food security problem. In the Colombo declaration, it was agreed that the SAARC Food Bank be urgently operationalized. While a food bank will help to solve the food availability problem, the issue of capacity building to improve the purchasing power of people would still need attention.
    Developing the regional agro-value chain in South Asia can be seen as a solution to the capacity building dimension of the food security problem. An efficient and sustainable South Asian agro-value chain can be established with the free flow of goods and services in the region. Many studies on intra SAARC trade has concluded that major barrier to the free flow of goods and services in the region is tariff and non-tariff barriers to market access, and poor connectivity in the region i.e. underdevelopment of transport and communication infrastructure. Of the two barriers to market access, non tariff barriers, especially standards barrier is perceived to be a major impediment to intra regional trade. In the Colombo declaration, Heads of state of eight SAARC countries have agreed on the creation of a SAARC Regional Standard Organization that will harmonize quality standard. Successful implementation of this agreement would certainly help in greater market access to the SAARC member countries in the region. Poor transport and communication infrastructure is another major impediment to the free flow of goods and services in South Asia, especially land transport where performances are dismal. This needs to be improved so that seamless transportation is possible in South Asia. Efficient land transportation among South Asian countries will ensure that whenever there is technology or surplus, value chain can be created in any part of the region. Communication infrastructure i.e. availability and use of Information and Communication Technologies (ICTs) is underdeveloped in the region, which is a vital ingredient of any value chain. In the Colombo declaration, an agreement to set up SAARC Development Fund (SDF), of initial corpus of $300 million has been reached upon. This can be used to improve the regional transport and communication infrastructure, especially ICTs.
    South Asian regional integration of agro-value chain can offer a viable solution to the food security problem in the long run. It would eventually lead to inclusion and equitable integration of agro producers with small landholdings in the South Asian region in international agro-value chains and networks in the long run, ensuring the food security for small and marginalized farmers. Colombo declaration, if implemented in letter and spirit would eventually lead to South Asian agro value chain a foreseeable reality.
     
    Sanjeet Kumar Rai
     
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  • 80Nuclear Option for India’s Energy NeedsRajeev Ranjan Chaturvedy

    Aug 2008



  • Different energy forecasting agencies provide different scenarios on the likely increase in energy consumption in the coming decades. But, all of them predict that future economic growth crucially depends on the long-term availability of energy in increasing quantities from sources that are accessible, easily available, and environmental friendly. High oil and natural gas prices and increasing public acceptance of the threat of climate change have spurred a new interest in nuclear energy as an alternative to fossil fuel. India’s conventional resources are far from being adequate to achieve the targeted mission of ‘Power for All’ by 2012. At present, among available energy, apart from coal and hydro, nuclear energy is the only attractive alternative which can fill the increasing gap between demand and supply (for India’s energy resource position see table below). Why nuclear power? First- an alternative to future fossil fuel, second- cost-effective option, third- environmentally sustainable and reliable energy source, fourth- it provides secure fuel supply or a fair amount of stability; and finally- is inevitable for long term energy security with new technological developments and substantial improvement in safety performance.

    India’s Energy Resource Position
     

    Resource Amount Potential (GWe – yr)
    Coal 206 billion tonne (total)   
    5 billion tonne (proven)
    41,000 
    15,000
    Oil  0.75 billion tonne 00
    Natural gas 692 billion m 3 250
    Hydro  84 GW at 60% PLF 84 GW at 60% PLF
    Uranium 78,000 tonne metal  In PHWRs – 420 
     In FBRs – 54,000
    Thorium 518,000 tonne metal In Breeders – 358,000
    Non-conventional  
    Wind 20
    Small hydro 10
    Total solar insolation 600,000
    Ocean thermal, sea wave and tidal 79

    Assumptions for potential calculation in above Table: For coal, oil and gas: Complete source is used for electricity generation with thermal efficiency, h = 30% and calorific value for coal = 5000 kcal/kg, oil = 10,200 kcal/kg and gas = 9150 kcal/m3. For nuclear fuel: Fuel burn up in PHWRs = 6700 MWD per tonne and h = 29%. FBRs can use 60% uranium with c = 42%. Breeders can use 60% thorium with h = 42%.

    Source: R. B. Grover, “Nuclear Energy: Emerging Trends”, Current Science, Vol. 78, No. 10, May 25, 2000, p. 1194)

    There are currently 442 nuclear power reactors operating in 30 countries. They total about 370 gigawatts of generating capacity, and they supply about 16 per cent of world’s electricity. This percentage has been roughly stable since 1986, indicating that nuclear power has grown at about the same rate as total global electricity for the past twenty years.  With an experience of half a decade in the field of nuclear technology, India, is the only developing country that has demonstrated its capability to design, build, operate and maintain nuclear power plants and produce the required nuclear fuel and special materials. At the same time, the country is an emerging leader in the development of reactor and associated fuel cycle technologies for Thorium utilization. A 30 KW(Th) research reactor KAMINI has become operational and is perhaps, one of its only kind in the world currently operation with uranium-233 based nuclear fuel. Looking all these, it is in India’s interest to develop nuclear energy. More importantly, international environment is also favourable and India must avail this opportunity to gain maximum from international community to ensure energy security and enhance its national interest.

     
    Rajeev Ranjan Chaturvedy
     
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  • 81Is India really heading towards MDG-2?Annu

    Jul 2008



  • To meet the Millennium Development Goal with respect to education(MDG-2, India seems to have marched towards this goal on quantitative parameters with gross enrollment, literacy and girls enrollment all improving and drop out rate coming down (see figure). However achievement of this goal numerically masks the deficit on quality front, as revealed by recent surveys on learning achievements of students of class III and V by National Council of Educational Research and Training (NCERT) and on teacher truancy by Kremer et. al (2005). In NCERT surveys, the mean learning achievements of students of class III in language is found to be just 63.1 per cent and in Maths it was even lower at 58.3 per cent. Further the achievement has varied across states from 45.2 per cent in Madhya Pradesh to 81.8 per cent in Mizoram, reflecting the wide interstate variation. At class V level, language achievement is further lower at 58.6 per cent and maths achievement is 46.5 per cent. Similar interstate variations exist at class V level as well.
     
    Indicators of MDG -2: India

     
    One of the important reason for this low achievement level is perhaps the high teacher absenteeism in Government schools {Kremer, et. al and ASER (2007)}. According to Kremer, et. al, India has the second-highest average teacher absence rate among the eight countries for which absence calculations are available; with 25 per cent of teachers, absent from school and another 25-30 per cent in school but not teaching and only about half teaching actively, as observed during unannounced visits to government primary schools. The state-level variation in teachers, those not found engaged in teaching activity ranges from 41 per cent in Maharashtra to 81 per cent in Chhatisgarh. Similarly ASER reveals teacher absenteeism of 9 per cent in primary schools. Despite all this, India is expected to achieve MDG-2 well before 2015. This highlight the loophole in the way the MDG-2 is defined, which only talk of  “ensuring that all boys and girls complete a full course of primary schooling,” but makes no mention of the level of learning to be achieved by students completing primary schooling.

    Looking at the instruments to the problem, higher salaries are usually supposed to be a good incentive or instrument to reduce teacher absenteeism, but this mechanism has not worked and absenteeism is more prevalent among high salaried teachers than those who have lower salaries (Kremer et.al). But other possible instruments to answer the problem could be marginal incentives of facilitating travel (one of the reason for teacher absenteeism is distance to travel from home to school), ensuring good working conditions in schools (teacher toilets, availability of electricity etc.), and devolution of “administrative” and “financial powers” to local bodies over hiring, firing and promotion of teachers which can provide alternative source (in addition to the regular inspection of the schools) of supervision and monitoring of teachers  because of their closeness to the place of action than the State Directors of Education. However, some of the states have devolved elementary educational responsibilities to the Panchayati Raj Institutions (PRIs), but PRIs lacks financial resources to implement their mandates. Assigning more active role to Parent teacher association (PTA) and increasing the frequency of inspections can also be of some help. Clearly, in India the focus has been more on increasing the physical resource base for education and much less attention has been paid to the question of how efficiently the allocated resources are spent. Thus, the government needs to divert attention from ensuring mere “quantity education” to “quality education” and steps are required to curb evil of teacher truancy and ensuring improvement in learning.

     
    Annu
     
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  • 82A New Panchsheel in India’s Policy towards its NeighborsIndrajit Sinha Ray

    Jul 2008



  • From a fringe player with its dominance confined to South Asia during the Cold War and most of the 90s, India is moving steadily to be among the top global players. India therefore requires a pragmatic neighborhood policy which will secure its economic and strategic objectives both at the regional and global level. India has a lot of potential stakes in its neighborhood. India’s neighborhood (China included) offers a huge market for Indian products, services and also for investment. India’s familiarity with the overall culture of these countries can provide India an edge over other competing countries. India needs a steady supply of  power and energy to sustain its growth.  Nepal and Bhutan’s huge hydropower potential, if properly exploited, can  remedy  India’s power crisis to a large extent.  For importing gas, oil and hydropower from Central Asia, India needs transit facilities through Pakistan. On the eastern front, India requires transit facilities through Bangladesh for rapid transportation of goods to India’s isolated and  underdeveloped North –East region.. Myanmar, apart from having vast natural gas reserves, can be of great strategic importance for two reasons. Firstly, Myanmar can provide road or rail access to other ASEAN countries. Secondly, Myanmar can give India’s landlocked North-East region the required access to the Bay of Bengal. In this way, Myanmar can play an instrumental role in bolstering India’s Look East policy. India needs cooperation from Sri Lanka and Maldives to protect India’s interest in the Indian Ocean region. In spite of being a strategic competitor, China offers a huge opportunity to India because of its vibrant economy. India can benefit from better connectivity and trade with China through proposed Kolkata-Gangtok-Lhasa road and Guwahati-Kunming road. Lastly, India has to keep the reality in mind that its neighboring countries are of immense strategic importance to the countries who are inimical to India’s rise as a major power. This factor leaves India having no choice other than nurturing friendly relation with its neighbors even if they offered no economic opportunity to India. 

    India can adopt a Panchsheel or five-fold approach in its  neighborhood policy . Firstly, India has to expand its economic engagement in its neighborhood countries. Most importantly, India has to participate in the growth of its smaller neighborhood countries by increasing investment, trade and aid. Special care has to be taken for countries which suffer from a chronic trade deficit with India such as Bangladesh. Secondly, India has to modernize and streamline its military capability.  Economic might, high level of economic engagement and  military capability will provide India the requisite power to maximize its gains in any bargain with its neighbors. Thirdly, if solutions cannot be reached bilaterally, India has to leverage its relationship with the major powers of the world to solve pending problems with its neighbors. Fourthly, India has to adopt a generous and cooperative  approach towards solving the relatively minor  problems  with its  smaller neighbors. This may allay the smaller neighboring countries’ fear of facing a hegemonic India fueled by its economic resurgence. Fifthly, India has to promote its culture, literature and movies in its neighborhood countries to establish its soft power in the neighborhood. In this way, India can expect a new generation in the neighborhood countries who will have a better understanding of   India and may provide enough popular impetus to build a friendly neighborhood around India.

     
    Indrajit Sinha Ray
     
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  • 83Digital Divide & Corporate Social ResponsibilitySubhasis Bera

    Jun 2008



  • At the World Summit of the Information Society in December 2003, it was declared that the global challenge for the new millennium is to build a society where everyone could access and share information, enabling individuals and communities to achieve their full potential in promoting their development and improving their quality of life. This commitment was acknowledged again in the second phase of the summit in November 2005, putting emphasis on Information and Communication Technology (ICT) implementation. India started implementation of ICT during the decade of 1980s and could witness a rapid development in the software industry contributing significantly to the world ICT. But the rapid development in software industry has not been matched with the development of other ICT sectors such as hardware and telecommunications. There is a divide in the digitalization process among Indian states and such imbalances can cause harm to the development of the ICT sector as a whole. The digital divide is huge in terms of internet users, and it also exists for telephone and mobile users. 
    A recent survey report India online 2008 shows that while Internet penetration has increased to 12% in urban India from 9% last year, rural penetration still stands at 4.5% and over half of all net users (51%) in the country are salaried employees in the corporate world. India is expected to have second largest number of mobile users in the world after China by the first quarter of 2008 and statistics also show that India has the highest total net addition of mobile subscriber in the last quarter of 2007. Although the number of mobile users are increasing and the difference in the degree of use of ICT among people is still increasing. This gap is prominent mostly in between rural urban area, but it is also wide enough among urban areas. 
    To bridge the digital divide, a number of policies (ICT infrastructure developmentEnglish language trainingLocal language support etc) are implemented by central and state government. A large number of pilot projects(such as Hole in the WallTARAHaat, iShakti)  were set up by NGOs, Government, cooperatives, private sector, and individual entrepreneurs to help the farthest potential user to get the appropriate benefit of ICT. Unfortunately only few of these experiments scaled up. Failure of these attempts induced few Indian ICT firms to come up with their Corporate Social Responsibility (CSR) as a commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and the society at large to improve their lives in ways that are good for business and for development. This initiative is restricted in the local areas. Unfortunately CSR activities conducted by ICT firms do not have any national or state level plan and appear to be determined by geographic location of the companies and not by the development indices. This indicates that ICT industry as a whole needs to have a proper CSR strategy based on development indices to decide its course of actions to bridge the digital divide.
     
    Subhasis Bera
     
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  • 84Clean Energy Vs. Food Security: Tackling Dilemma!Amit Singh

    Jun 2008



  • With depleting fossil fuels and soaring oil prices (US $130 a barrel)-  biofuels are seen as the ‘Green Alternative’. Investments in crop-based biofuels production are rising steadily as countries seek substitutes for high-priced petroleum products, GHG-emitting fossil fuels, and energy supplies originating from politically unstable countries. With climate change a big threat,  several countries, like the EU, US, Brazil etc., have set targets to increase biofuel use and adopted various promotive policies for the same. While the European Union (EU) considers biofuel to be a sustainable source of energy, the United States (US) tends to see them as an alternative for reducing oil-dependency and as a technical option to respond to climate change. In addition, several developing countries, such as, Brazil, Mexico, Malaysia etc. have engaged in an export oriented development of biofuel. While on the other hand the increasing use of food and feed crops for fuel is altering the fundamental economic dynamics that have governed global agricultural markets for the past century. African economies are concerned that an increasing diversion of arable land to bio-fuel may threaten food security especially for the vulnerable sections of their population. 
    India is in the process of putting up a comprehensive National Biofuel Policy, which is pending finalization with the government. However, the government has been carrying out experiments and pilot projects to study the viability of biodiesel. 5% ethanol blended gasoline was mandated in 9 major sugar cane growing States and 4 Union Territories (UT), which was extended to 20 States and 4 UTs  from 1st November 2006 subject to commercial viability. The next stage is a mandatory 10% blending by the Oil Companies from October 2008. Oil from Jatropha is an option for India, but it is still in the phase of maturity. Few State Governments in India viz. Uttarakhand, Chhattisgarh, Rajasthan and Orissa have undertaken some concrete measures to promote the cultivation and production of Jatropha. This momentum is expected to accelerate in near future. It is being argued in policy debates that a ‘climate of food insecurity’ is being created as the developed countries are turning ‘food crops’ into ‘biofuels’.  It is expected that 20% of the corn produced in the US goes for making biofuel, while the world’s poor struggle with surging food prices. The question arises as to how to tackle this dilemma, i.e. taking immediate efforts to mitigate the adverse impacts of climate change, at the same time ensuring sufficient amount of food availability for the world’s population, particularly poor at the international level. 
    Growth in biofuels production capacity offers many promises, but also many challenges for the future course of sustainable development. The design and implementation of sustainability audits is critical as the biofuels industry develops, with clear metrics for evaluating the social and environmental consequences of biofuels and feedstock production. The best way forward would be to strengthen the technological capacity of the developing countries by ensuring access to adequate technology at affordable costs for accelerated mitigation efforts to tackle adverse climatic changes, inter alia, through increased use of renewable energy, including biofules, and enhanced energy efficiency.  
    In defense of the world’s poorest populations, it is of utmost importance that the ripple effects of crop-based biofuels on food-security and the environment be understood soon and considered carefully in the design of development policies and investments. Instead of diverting crop land for the production of biofuels, methods should be adopted to utilize the wastelands or dry lands or uncultivable lands into such use. Almost thirty million hectares of wasteland is available in India, which can be efficiently used for the cultivation of Jatropha and similar crops to produce biofuel. In fact, keeping in view of the costs and viability of biofuels, there are suggestions in academic circles that instead of using biofuels as transport fuel, it should be made available to the poor for their household energy needs; and in that case the subsidies given by the government on kerosene could be diluted.
     
    Amit Singh
     
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  • 85Self-employment and DevelopmentSaswata Chaudhury

    May 2008



  • One of the major differences between developed and developing countries is the proportion of the self-employed population. Generally it is observed that higher self-employment is associated with lower level of economic development of the country. Peoples are said to be self-employed, if they run their own enterprises, with or without hiring additional labour. Due to lack of employment opportunities in a developing country, people prefer to go in for self-employment. In general, self-employment is attractive for its flexible working hour and independence. But it also demands more responsibility and more physical and mental involvement in the job. Managerial ability and probability of detection for tax evasion have positive impact on self-employment. On the other hand, degree of risk aversion has inverse relation to the choice of self-employment. Due to absence of economies of scale and lack of trained entrepreneurial skill, most of the self-employed units are characterized by low productivity. But productivity also depends on the characteristics of self-employment job. For example, an individual more dedicated to his self-employment can be more productive than a person who adopts self-employment due to unavailability of wage-employment. Economic development is expected to be lower in an economy with high self-employment. From the figure, it is clear that higher growth of self-employment leads to lower growth in Gross Domestic Product (GDP).

    Figure: Cross Country Comparison of growth of self-employment (GSN) and growth of GDP (GGDP), 2002-06

     Text box: ggdp
         Source: World Economic Outlook 2007 and International Labour Organization.
     
    Since employment and productivity have important influence on growth path of an economy, employment generation demands special attention of the policy makers, especially in developing countries. In a country like India, it is very hard to generate sufficient employment opportunity in formal/organized sector owing to infrastructure and budget constraints. Thus, government has an alternative to promote self-employment, which is in any respect is better than un-employment- a fire-bound problem in India. To promote self-employment, government needs to take measures like providing adequate credit facility, proper training, creation of market, improvement of infrastructure etc. Hence the reality for the developing country is that when first best is not feasible, it has to go for second best option.
     
    Saswata Chaudhury

  • 86Small Hydro Power: The Way ForwardSmita Miglani

    May 2008



  • Global warming and growing dependence on exhaustible oil and gas imports have made it important to  focus attention on alternative energy sources – nuclear energy and renewable energy sources (RES) to meet India’s electricity requirements. The Ministry of Power has set an ambitious goal of ‘Power For All’ by 2012 which entails an additional capacity generation of about 1, 00,000 MW during 2002-2012. India is endowed with abundant renewable energy sources (solar, wind, hydro and biomass) but is not able to arrive at an optimum renewable energy mix due to constraints such as high installation costs of solar PV panels and limited cultivable farm land available for biofuels. 

    Hydropower holds great potential for river-fed areas and areas with streams/canals such as the North-Eastern States, Maharashtra and Kerala. While Large hydropower projects (more than 25 MW) usually involve issues of  environment and rehabilitation of displaced population, the Small Hydro Power (SHP) projects (upto 25 MW) are relatively free of these problems and are well suited for small decentralized off – grid applications in remote rural areas where extension of the grid system is uneconomical. These projects require small investments, have low running costs and contribute to the upliftment of the local economy to self-sufficient levels through generation of greater employment opportunities (directly or indirectly). The success of Karmi Small Hydro Electricity project (district Bageshwar in Uttaranchal), for instance, validates this point. The project, with a capacity of 50 KW built within a small budget of Rs. 53 lakh supplies electricity to 225 families of six villages. It has contributed in improving the social status and living standards of local residents through generation of greater employment opportunities in occupations such as wool spinning and farming. In the international circles too, the importance of SHP projects is increasingly being recognized and India has made collaborative arrangements with countries such as China, Nepal, and Cuba for areas such as training of manpower and identification of feasible sites. 

    An estimated potential of about 15,000 MW of SHP projects exists in India but still 85 per cent of it is unutilized. If an average annual growth rate (of 6.8 per cent) of capacity addition during the 10th Plan Period is assumed to be maintained for the 11th Plan (2007-12), a cumulative installed capacity of about 2741 MW will be achieved by 2012 (Figure). This is clearly short of the planned target of 3376 MW. In the past too, we have missed the targets set for the years 2005-06 and 2006-07. Hence, it is clear that the Government’s target to meet ‘Power for All’ by 2012 is facing a challenge. An important reason for the unmet targets of the 10th Plan Period has been the neglect of associated infrastructure. Some crucial target areas for SHP in  the mountainous regions of North-East India suffer from lack of road connectivity hindering movement of equipments and manpower. Scarcity of trained manpower compounds the problem.

     
     
    Meanwhile, there are some other areas where renewed attention and dissemination of funds and efforts will yield the desired results. Public-private-partnerships can be encouraged for development of infrastructure for successful project implementation and in the process, also train locally available human resources. India has a wide base of equipment manufacturers for d consultancy services are available from a number of government and private consultancy organizations. Further, it would be beneficial if the Government ensures standardization of equipments, procedures and guidelines and facilitates consistency in maintenance of quality data on topographical and physiographical conditions for careful identification of sites. Water resources from perennial rivers must especially be harnessed. Carefully implemented pl
     
    Smita Miglani
     
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  • 87Sustaining the Growth Momentum in the Indian IT-ITES/BPO SectorDurgesh K. Rai

    Apr 2008



  • Services and mainly the export of IT-ITES/BPO services, constitute the most important component of export earnings for the Indian economy. The exports of IT- ITES/BPO services are growing at 28 percent and expected to reach US $ 40.8 billion in 2008. ITES/BPO alone constitute more than one fourth of total IT- ITES/BPO exports. However, India’s share in the world market for IT software and services is only 2.8 percent. One key feature of the industry is its heavy dependence on the US market which accounts for about two-thirds of total IT-ITES/BPO exports. Another important characteristic is its imbalanced mix of services offerings which is skewed towards the banking, financial services and insurance (BFSI) constituting 40 percent of total IT-ITES/BPO exports.
     
     
    Some recent developments, especially the appreciation of Indian rupee against the US dollar and slow down in US financial sector due to sub-prime crisis has caused concerns for the industry- affecting the profit margins of the companies and overall business inflow. In response, many companies have started devising new strategies to cope with the situation. For instance, TCS and Yahoo have recently decided to reduce variable payments and termination of some “non-performing” employees. Some big companies, such as Genpact and EXL, are trying to mix up their service locations by shifting to other low cost locations such as Philippines. Although these strategies can mitigate the problems of big companies to a certain extent but it will be detrimental to employment growth and also options for small and medium sized companies are very limited.

    One possible solution to handle this problem is to diversify client base- Europe can be a potential destination for IT-ITES/BPO exports. Although UK is our main export destination in Europe, other big economies like Germany, France, Italy, Netherlands etc are largely untapped. The ongoing India-EU negotiation on Trade and Investment Agreement should be used as a platform to enhance India’s presence in these countries. CECA with Singapore can also be utilized to facilitate the exports to ASEAN and APAC regions.

    Another solution can be diversification of products/services offerings. Presently, major proportion of revenue comes from a single vertical e.g. BFSI. Industry needs to focus on some other verticals like construction and utilities, legal, healthcare etc. These are the sectors which are growing at a fast pace in most of the world economies and scope of outsourcing and offshoring is high. Due to abundant supply of required manpower India has comparative advantage in these sectors. One hurdle in way of this diversification is shortage of trained human resources in these sectors. For this government and industry have to come together and make some concrete efforts to enhance the supply of skilled manpower. Companies should direct efforts towards offerings differentiation and there by climbing higher up the value chain, efficient use of available resources, retaining their talent pool, shifting to the 2nd and 3rd tier cities, etc. Apart from developing infrastructure, particularly transportation, for small and medium size companies Government should extend STPI scheme beyond 2009 and develop BPO specific SEZs.

     
    Durgesh K. Rai
     
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  • 88Community-PPP for Inclusive Health CareSukumar Vellakkal

    Apr 2008



  • Given the poor performance of public healthcare and the perceived high quality of private healthcare, the private health sector occupies more than 70 percent of the market share and is expanding with a growing preference even among the low income groups.  However, such an expansion will not be costless. Due to the high cost of skilled manpower along with huge capital investment and the thriving profit motive, the price is expected to increase further. Not only there are hardly any pricing criteria for healthcare services but also no benchmark as to how much care is required by patients for each category of illness. Additionally, there is high probability for supplier-induced-demand; for an ideal healthcare manager a vacant bed has to be occupied and CT scan equipments fully utilized. In a country where 72 percent of the health expenditure is Out-of-Pocket spending, people at the bottom of the pyramid will be severely hit by such a cost escalation. In fact, access to healthcare is not only a problem for below poverty line (BPL) but also for above poverty line (APL) categories. 
    Much discussion has been evolving around the Private–Public partnership (PPP) paradigm for an inclusive healthcare system; let’s elaborate the same with Community participation and Health Insurance (HI). The concept is not alien to India and already several community organizations are experimenting with different delivery models. Nobody can deny the importance of HI however, only around 3 percent of Indians, mostly belonging to the formal sector, have some forms of HI coverage. Community can play a vital role here. The added advantage of community involvement is that a group of people acting as a cohesive social unit can relate, better than any outsider, to the needs and priorities of the target population, location-specific conditions, prevalent activities and level of resources. Each community can be organized at the village level in coordination with other stakeholders such as NGOs, SHGs and PRIs; form an independent village healthcare committee with sub-committees to deal with various issues: negotiation with insurance companies and healthcare providers, premium collection and utilization, monitoring and claim settlement. Each community can negotiate with the insurance companies to design ‘tailor-made’ HI schemes reflecting their health risk profiles, prevailing healthcare infrastructure and affordability of premium incorporating seasonal fluctuations in income. Further, to make the partnership sustainable, communities and insurance companies can enter into mutual agreements on sharing the profit or loss arising out of the insurance contract. Nevertheless, a community can negotiate with private healthcare providers to ensure quality care at reasonable price, and also with the stakeholders of public healthcare system to get quality services. From a government perspective, it can implement not only the various government HI programmes for the poor, for e.g., UHI for the BPL, but with a strong decentralized component by integrating initiatives like NRHM & NUHM with community participation. 
    The fundamental issues for the low level of HI penetration in India like low awareness, poor trust on insurance companies over reimbursement, inability to deal with insurance company etc. can be overcome to some extent by the community centered-public-private partnership. Moreover, the inherent problem of asymmetric information on relevant parameters for relations among the stakeholders in HI business resulting in ‘adverse selection’ (tendency of relatively more unhealthy people buying HI) and ‘moral hazards’ (over utilization of healthcare due to HI coverage) can also be controlled. Above all, the practice of considering HI as something on the top of the health pyramid can be revoked and transformed into an integral part of the existing healthcare system through active community involvement.
     
    Sukumar Vellakkal
     
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  • 89Meeting India’s Future Crude Oil RequirementsDeepti Sethi

    Apr 2008



  • India ranks 6th in terms of primary energy consumption accounting for 3.5% of the global commercial energy demand. Between 1971 to 2005, its total final consumption (TFC) has increased by four folds, however, energy supply has not kept pace with its demand. A large portion of the demand is met through imports. Production of crude oil has also stagnated thus there has been rapid increase in crude oil imports also. India’s oil import dependency registered 76 % in 2005-06 out of which, nearly 67 % is of total crude oil was imported from Middle East countries. On the prices front, international crude oil prices have increased by four times between 2002 and 2008. Energy mix of India has shown that importance of petroleum products have gone up significantly, coal consumption quantity has marginally increased, whereas electricity consumption registered more than nine times increase. Another interesting fact is that natural gas consumption has increased by almost 48 times during this 34 years time span, while its consumption was minor compared to other energy sources in 1971.
     
    On the demand side, total final consumption of energy has increased for every sector- industry, transport sector, household sector. Crude oil maintains great importance in energy mix and is expected to remain the most dominant fuel worldwide till 2030 as per International Energy Outlook 2007. In lieu of this, projecting crude oil demand for India using a trend analysis involving simple extrapolation of past trends (The advantage of this method is its simplicity and limitation is that there is no attempt to explain why certain trends were established in the past and assumes that same trend will persist in future too) is expected to be 177.26 million tones of oil equivalent (mtoe) in the terminal year of Eleventh Economic Plan and that of Planning Commission is 185.40 mtoe. Moreover, stronger correlation has been found out between crude oil consumption and GDP. Thus with higher GDP, high-energy needs for the country is expected. 

    With deficit in supply, it becomes crucial to come up with efforts to expedite the process of exploring domestic avenues and avoid excessive reliance on external sources to meet our energy requirement. Other than Middle East countries, IBSA can be a good option (IBSA Africa is a trilateral, developmental initiative between India, Brazil, and South Africa to promote South-South cooperation and exchange) for reducing dependence on Middle East. Other option can be Sasol, a South African- petrochemical group is a leader in the gas-to-liquid (GTL), and coal-to-liquid (CTL) technologies, in collaboration with Tata, have been attracting attention because they provide an alternative to traditional oil extraction and can be useful for reducing imports. To reduce dependence on oil consumption, development of non-conventional sources (which include renewable) as substitute is important to meet the energy needs. Also good management of local energy resources without distorting environment is necessary. The Integrated Energy Policy of India has noted that lowering the energy intensity of GDP growth through higher energy efficiency is critical for India to meet energy challenge and ensure energy security.

    Deepti Sethi
     
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  • 90Budget 2008-09: Understatement of DeficitsMathew Joseph

    Mar 2008



  • For an economy maintaining near 9% annual growth in the past five years (8.7% to be exact) but on the brink of losing its high pace, with inflation raising its head again after a brief spell and its agriculture deteriorating over the years, has the Budget 2008-09 come as its best hope or something different? As the economy strayed beyond its potential growth rate for some time, monetary authorities have been trying to bring the economy back to its potential growth path through monetary tightening. Has the budget queered the pitch or aided the process? 
    The measures announced in the budget appear to have been like the doctor prescribing the exact medicine for the sickness. The general reduction in CENVAT and reduction in excise duties on specific products have been chosen most appropriately to have the maximum impact in the context of a slowdown in manufacturing growth. While retaining the peak customs duty for reasons of rupee appreciation, customs duties on project imports and certain material inputs were reduced to boost domestic production and investment. Fiscal stimulus was quite necessary in the context of fall in external demand arising from global slowdown and appreciation of the rupee. The massive relief on personal income tax through raising the exemption limits and adjusting the income slabs has been a long-pending reform finally accomplished. This will provide additional boost to domestic demand to compensate for the fall in external demand and the monetary-policy driven decline in domestic demand. 
    The most significant announcement in the budget, however, has been the loan waiver scheme for farmers who have defaulted on their bank loans estimated at Rs. 60,000 crores. This, while freeing the debt-stricken farmers, points towards cleaning of the balance sheets of the affected banks. While no provision has been made in the budget for this, this would definitely involve burden on the exchequer at least to the extent of interest on off-budget bonds that may be created for the purpose. The budget also has not included any provision for meeting the 6th Pay Commission pay raises along with arrears from 2006 for the central government employees. 

    Revenue estimates appear to be realistic except for the non-tax revenue, where its growth is put at a low 2.6% in 2008-09 against 12.2% in 2007-08 (Table). ‘Other receipts’ show a big jump to Rs. 10165 crore from just Rs. 500-600 crore in the previous two years showing government’s new resolve to undertake substantial disinvestment of government equity in public enterprises. The expenditure numbers appear to be huge underestimates. Revenue expenditure growth will be much higher than growth of 11.8% indicated in the budget. The assumed growth of capital expenditure of 8.8% is too low in comparison with the growth of 24% in 2007-08. Consequently, revenue deficit and fiscal deficit is bound to be much larger than the 1% and 2.5% respectively of GDP as shown in the budget. In short, while the budget indicates further movement towards fiscal consolidation, in fact, it may not turn out to be so.

     
    Mathew Joseph

  • 91Capitalize on FDI Flows from EUDeepa Bhaskaran

    Feb 2008



  • India and EU formally began negotiations on the “Bilateral Trade and Investment Agreement” (BTIA) in Brussels, Belgium on 28th June 2007. Through this India and EU expect to remove barriers to trade in goods, services and investment across all sectors of the economies. Precisely, EU would want India to reduce tariffs in goods and remove FDI restrictions in key services such as retail and legal. India, on the other hand, would want EU to remove Non-Tariff Barriers (NTBs) in goods and increase market access for professional services.  Over the decade, EU has emerged as India’s largest trading partner in goods, accounting for 20 per cent of India’s goods trade. Services trade between the two has also grown. Reciprocity of flows of FDI has been witnessed between the two sides and EU has interestingly, emerged as the main destination for Indian companies in 2005-06. Approximately 50 per cent of total mergers and acquisition by Indian companies are in EU. Some examples are the Tata Group, which holds 18 companies in the UK alone and Godrej Consumer Products, which acquired Keyline Brands of Britain in 2006. EU is one of largest source of FDI to India, mainly in sectors like power/energy, telecommunications & transportation. Within EU, a large proportion of FDI flows to India are from U.K., Netherlands, Germany, France, Italy and Sweden However, India receives only a miniscule one percent of EU’s outward FDI flows and ranks far behind other Asian countries like Japan, China, Indonesia, South Korea and Taiwan.
     
     
    The FDI flows from EU to India depict a fluctuating trend. There has been a sudden surge in FDI flows into India during 2000-01, as a result of India’s liberalization policy. During 2002-2006, the FDI inflows declined, due to diversion of EU’s investments into the new EU member countries during this period. During this period, intra- EU FDI flows increased, while, EU’s outward FDI flows reduced. Later in 2006, FDI flow from EU picked up in response to the Strategic Partnership Joint Action Plan adopted for economic cooperation, establishment of High Level Trade Group and a positive investment climate in India. This reversal of trend was mainly on account of massive inflow of investment from the UK in 2006, wherein Cairn Energy stood out as single largest investor with Rs 6,663.23 crore of investment. This is heartening for a growing economy like India, where large scale investments are crucial, especially in the infrastructure sectors like power and transport. Hence the importance of EU as provider of capital cannot be ignored, but there exists a large untapped potential. India can gain tremendously by improving the investment conditions in India and that can act as a motivation for negotiating a new bilateral trade and investment agreement between India and EU.
     
    Deepa Bhaskaran
     
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  • 92Medicinal and Aromatic PlantsPankaj Vashisht

    Feb 2008



  • The Himalayas with its varied agro-climatic conditions and diverse soil type are a natural habitat for variety of economically high-value medicinal plants used in alterative medicine systems like Ayurveda, Unani, Tibetan, Sidha and naturopathy. Increasing population pressure and awareness towards alternative medical treatment system are putting pressures on presently naturally growing medicinal plants. Also, lack of skilled manpower in the collection process of these delicate plants, large-scale banned illegal collection and the changes in the climate are adding to the damage, leading to the depletion and ultimately extinction of the medicinal plants. Preservation of these valuable natural resources thus becomes the need of the hour. Use of modern agro-technologies can be an effective solution to meet the increasing demand.  The medicinal and aromatic plants give maximum yields if grown in the right agro- climatic zones. Local farmers can be involved, encouraged; supported and trained with technical know-how for initiating commercial cultivation of medicinal plants according to specific agro-climatic zones. The Public-private partnership model can also work best here. 
    Statistics from Dehradun-based NGO Herbal Research and Development Institute (HRDI), promoting medicinal and aromatic plants cultivation, are testimony of hidden potential of the sector. During 2003-04 to 2006-07, the organization achieved compound annual growth rate of more than 100 per cent in terms of revenue generation, number of persons employed, number of farmers benefited through its training programs, number of farmers involved in medicinal & aromatic farming, area under aromatic plants and quantity of essentials produced.
     
     
    Agricultural diversification towards these plantations can increase farmers’ earnings, giving them the scope for further investment, governments’ revenue can enhance and society can have easy access at affordable prices to the safer yet effective alternative medical treatment system. A smooth transition from allopathic dominated medical system to alternative medicine system may also be on the cards. Fast growing international market for medicinal and aromatic plants presents large-scale export opportunities. The area is productive and the atmosphere is conducive to grow the crop of all round benefits arising from the large-scale commercial cultivation of medicinal and aromatic plants. All that is needed is a well-coordinated and well thought and swiftly taken step with active governmental support.
     
    Gaurav Tripathi
     
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  • 93Automobile Industry in India: Can we learn from China?Pankaj Vashisht

    Jan 2008



  • 94Human Capital Stock in IndiaManjeeta Singh

    Jan 2008



  •  
    Since economic reforms were initiated in 1991, India’s economic growth rate has averaged at 6 per cent, accelerated to over 8 per cent since 2005. There is optimism among most economists and organizations that India will do better in the coming decades. One of the reasons for this is the ‘demographic dividend’. The labour force in the next few decades is expected to grow at a faster rate than its competitors and is expected to generate surplus resources for the purpose of investment. This argument of course, assumes that labour is employable. It is therefore of interest to know what is the quality of workforce in India.
    Average years of schooling have commonly been used as a proxy for educational attainment. While this may not exactly reflect the quality of human capital, it is a better measure than the enrollment ratio which measures growth in the stock of human capital. The average years of education have been estimated for the economically active population (those in the age group 15-64 years), using the data from the 61st Round of all India household survey conducted by NSSO. The survey, which covers over one lakh households from 28 states and 7 Union Territories, provides information mainly on the consumption patterns however it also includes demographic and socio-economic characteristics like age and education level. The average years of schooling for India as a whole is 6.2 years. Sixteen of the twenty seven states have an average that is lower than the national average. As is expected, poorer states have a population with low educational attainment. Among the southern states Andhra Pradesh is doing very poorly. The states in the North Eastern region are the relatively better performers. The graph shows five of the best and worst performers.
     
     
    The estimates presented above tell us that we have been moderately successful in providing only the basic education. However a number of studies have consistently demonstrated that returns on secondary education are much higher than on primary education. Therefore the surplus required for investment purposes may be difficult to generate. It also seems that India has decided to take a path where its economic growth will be dependent upon the services sector, technology and skill levels. Given the quality of existing human capital stock, unless drastic measures are taken to enhance the education levels, economic growth will not be sustained as skill shortage will become a severe constraint. And the demographic dividend we are so happily talking about may become a liability.
     
    Manjeeta Singh
     
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  • 95Does Trade liberalization Impact Industrial Workers?Annu

    Dec 2007



  • The Stolper Samuelson theorem, is the first theoretical formulation to explain the effect of trade liberalization on income distribution among productive factors. This theorem combined with Heckscher-Ohlin model asserts that with increasing protectionism, real return to the countries scarce factor increase. So in case of trade liberalization, it’s the abundant factor that should gain in real terms. Since India is abundant on labor, a positive impact on labour should be expected with trade liberalization. But empirical evidences seems to be contradictory to this prediction. Trend in the growth rate of industrial wages in pre and post liberalization period at two digit level data of Annual Survey of Industries reveal that the trend growth rate of industrial wages is lower in post-liberalization period.
     
     
    The manufacturing sector as a whole, the real industrial wages which were growing at the rate of 3.3 per cent per annum in pre- liberalization period are witnessing a negative growth rate of -1.0 per cent in post liberalization period. Similarly at two digit level, in eight out of fifteen industrial groups, the growth rate of real wages have turned negative in post-liberalization period. Whereas in other five groups though the trend is positive but growth rates have reduced. This is in contrast to standard trade theory and indicates the downsizing effect of trade liberalization which is inevitable consequences of growing international competition. With trade liberalization composition of manufacturing employment has changed drastically. In 1993-94 the share of contract worker in employment was around 12%, which has increased to around 24% in 2003-04. Given the fact that contract workers are paid less than permanent ones this decline is justified. There are just two exceptions to this declining trend “wood and wood products” and “Basic metal and alloys industries”.

    Undoubtedly following the trade liberalization Indian economy has witnessed high growth characterized by increasing exports and foreign investment but this growth has adversely affected our abundant factor labor which is an issue to look at.

     
    Annu
     
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  • 96Does What You Export Matter?Rajeev Anantaram

    Dec 2007



  • The East Asian strategy of rapid economic growth, powered by aggressive export orientation had long been held up as a model for developing countries to emulate.  While the contributions of other determinants such as a high savings rate, investments in human and physical capital, sound macroeconomic policies, political stability were also acknowledged, ‘outward orientation’ was seen as providing a special impetus to growth. Conventional trade theory, in its many variants, posited that countries produced (and exported) goods and services according to their respective comparative advantage. It followed that rich, developed countries exported more sophisticated goods while the exports of poor countries were largely low value-added, if they ever got beyond exporting primary products. There were notable exceptions (Chile’s principal exports, despite being an upper middle income country were nitrates, copper and grapes), but by and large, theory and observation converged.
    Production processes have become increasingly globalized in recent years resulting in complex supply chain links.  Expectedly, the production and export profile of countries has become more idiosyncratic, reflecting this new scenario, often in contravention of classical trade theory.  Countries are producing goods and services well above what their income levels would predict. An attempt has been made by Hausmann, Hwang and Rodrik in their NBER paper (2005) to formalize this change by creating an index that measures productivity levels associated with a country’s specialization pattern. The index provides a country’s export profile which is highly correlated with per capita GDP by construction, and is limited by its near exclusive focus on commodities and manufactured goods. Service exports are given lower weights. The most interesting findings of this paper are about India and China. Both countries have an export profile which would according to conventional trade theory, be associated with countries three to four times richer. Both these countries have diversified their export baskets. China fares better than India (by having a higher index) but there are two caveats that need to be considered.  First, the deck is stacked against India because of the low weight given to service exports. Second, most Chinese high- end exports are by multinational corporations with operations in China, while Indian exports are almost entirely indigenous. The paper does not claim to turn trade theory on its head, but still makes a contribution because of the additional nuance it provides by focusing on the composition of exports.  In doing so, it provides useful policy advice, however preliminary.
     
    Rajeev Anantaram
     
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  • 97Tourism Potential for Regional Development in IndiaRashmi Rastogi

    Nov 2007



  • The service sector in India has consistently gained-in importance, contributing more than 50 per cent in total GDP. GDP from the service sector has been growing at an average annual growth rate of 7.4 per cent from 1996 to 2006. This includes services which either directly or indirectly link with finance, tourism, trade and professions. Tourism is an important component of service sector and foreign exchange earned from foreign tourist arrivals in India has been increasing at an average of 20 per cent per annum since 2003. This has contributed to an average annual growth of the service sector by 12.54 per cent during 2003-2006.
     
     
    As the graph illustrates, for the period 1996 to 2006, growth cycles of service sector GDP and foreign tourist arrivals have been closely related. Cross correlation (0.36) and Granger causality (4.78) results demonstrate that the growth of foreign tourist arrival precedes growth of GDP from service sector by one or two quarters respectively. This reinforces the fact that foreign tourist arrival in India leads service sector growth.
    It is well established that, tourism fosters economic growth in terms of employment and income. It has potential for impacting regional development and can help to remove inequalities between different regions of the country specially lagging regions like the North East.
    The North East, a home to several tribes each with distant geography, culture and social identities, comprises of 8 states. This region has all the features for becoming an attractive tourist destination as it is abundant in natural beauty, wild life, flora and fauna. However, less than 1 per cent of total tourists to India visited this region. The tourist potential in this area has been explored in a limited fashion, notably Assam for its tea (similar to Makaibari in West Bengal) plantations. Many are not even aware that Manipur is described as “the Switzerland of India” while Meghalaya, Mizoram, Nagaland, Tripura and Arunachal Pradesh are not even fully explored as tourist potential destination. Given India’s increasing concerns for the economic upliftment of lagging regions, and the clear linkages between service sector GDP and tourism, tourism policy for the North East needs a boost. The government should contribute towards development of tourism infrastructure and political stability in the region to make it a popular tourist destination.
     
    Rashmi Rastogi
     
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  • 98Is Curative Care the Cure?Ali Mehdi

    Nov 2007



  • The burden of disease on developing countries, most of us would know, is immense. The estimated loss in India’s national income due to heart diseases, stroke and diabetes in 2005 was US$9 billion, and it is projected to exceed US$200 billion over the next decade (WHO). The figure below shows that in a country like India, where more than one-third of the population lives below poverty line, out-of-pocket health expenses are alarmingly high. According to one estimate, 2-3% people are pushed into the poverty trap every year as a result of such expenditure. The situation is worse off in rural areas – the loss of household income per treated person in rural Bihar is Rs.585, while only Rs.5 per treated person is spent at the government level (NSS 60th Round, Report No. 507).
    As a solution, almost invariably, NGO representatives have suggested greater expenditure on health infrastructure, training of medical personnel, R&D, provision of cheaper drugs, etc. – all in a curative breath. What is known but not appreciated is that the government has limited resources, while the pharmaceutical companies are there for profits, primarily.
     

    Source: World Health Statistics 2007 (also for statistics below).
     
    Though preventive health care as an efficient approach in resource-poor settings like that of India is appreciated in principle, there is practically no research or action taken on how it could actually benefit the poor. All that we have in this direction are immunization and sanitation programs, the success of which is suspect. After 60 years of our independence, immunization coverage among 1-year olds with three doses of DTP stands at 59% (that of Pakistan being 72%), while population with access to improved sanitation in urban / rural areas is still at 59% / 22% (of Pakistan being 92% / 41%). We know there is a positive correlation between preventive health and the health of the Indian economy. And there is most probably one between preventive health and poverty reduction, which is one of the crucial determinants of the health of the Indian economy, especially in view of the recent concern that India’s growth needs to be more inclusive and distributive. While we do not know how much is health R&D or where exactly is it spent – whatever it is – there is clearly a need to spend on research focusing on development of the poor through health innovation – and in the preventive direction, not just in the field of bio-medicine.
     
    Ali Mehdi
     
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  • 99China’s In(pig)flation.Loknath Acharya

    Oct 2007



  • China’s In(pig)flation.

     
    China’s inflation grew by 6.5 per cent in August, 2007 from last year, which is eleven year high. On first sight inflation figures may seem alarming but a closer look tells a different story. The rise mainly comes from food prices which increased by 18 per cent in August over last year. During the period January to August the food prices have increased by 9.3 percent over the same period last year. Non Food Prices have only increased at around 2 %. Nonetheless, Chinese authorities are very concerned as this hurt the poor. The Government, remembers that the infamous Tiananmen Square event was preceded by soaring food prices.
     
     
    Why are the food prices soaring? The main reason for this is rise in meat prices, which rose by around 49 per cent in August, 2007 and by 27.3 per cent in the first eight months of this year. The big star is the pork price which is higher by around 77 per cent from last year. China is the world’s largest pork consumer. The rise in pork prices can be attributed to the breakout of the blue ear disease among pigs which resulted in massive killing of pigs. Some estimates say that almost 20 per cent of the pig population has been wiped out. 

    Also, the main feed for pig globally is corn. The current focus on climate change and search for cleaner fuel has led to increased use of ethanol as fuel. Corn demand by ethanol industry has increased tremendously. This has resulted in corn prices increasing by as much as 30 percent in last one year globally. Thus, the cost of raising pigs has also increased. 

    Authorities have taken various steps for increasing pig supplies like free vaccination. A budgetary allocation of 1.5 Billion Yuan has been made to boost pig supplies. Raising pigs takes around two years time. So, the next best solution is obviously- buy .One of the major beneficiaries of this has been the US Meat Producing giant Smithfield Foods which has bagged an order to supply 60 million pound of pork to be delivered by December. Among other measures, it is expected that Chinese authorities might try and move corn supplies away from ethanol industry, which will be difficult as environmentalist’s voice gets stronger. 

    All these efforts have begun to bear fruit (or rather Pigs), pig prices dropped by 11.3 per cent in a single month since August owing to decrease in spread of disease. Chinese authorities have assured that pig prices are unlikely to increase in the long run but short term turbulence is inevitable. 

    Is there a lesson to be learned for India in managing supply side shocks?

     
    Loknath Acharya

  • 100Electronic Banking Seems a LuxuryMamta

    Oct 2007



  • Not long ago, a customer had to wait for hours at the bank counters for withdrawing money. Today, he has so many options. In the last few years, the entire banking structure has undergone drastic change with introduction of value added and customized products- credit cards, ATM’s, internet banking, electronic clearing services, tele-banking, quick collections facilities for outstation cheques etc. Increased competition, customer expectations and emerging technology reflects bank’s operation to be well tuned with global practices.
    But, in reality, a large segment of population, do not have access to such sophisticated products. The Internet banking certainly a major phenomenon in India hasn’t till now explored its full potential. According to recently survey reports from the Internet and Mobile Association of India (IAMAI-IMRB), the Internet population currently stands at 38.5 million of which only 4.6 million are banking online. Though Indians go online for a number of activities only 32 per cent use it for banking transaction (figure).
     
     
    For credit cards, only 22 million Indian’s hold a card and the actual number of users might be even less as many have multiple cards access. The value of credit card transaction doubled between 2003-04 and 2005-06 and still there is lot of potential for its growth further.
    Level of penetration of banking services in urban and rural India, a report by Leeladhar (2006) elucidate that only 59 per cent of adult population have access to a bank account. This implies 41 per cent of adult population is “unbanked”. Also the share of rural “unbanked” is comparatively high (70 per cent). This shows that the use of new financial product is mainly confined to the urban population.
    To summarize, although access to current electronic financial products are increasing at a fast rate, but still they are more or less confined to only a part of the population and mainly in urban area; and even here, these facilities are seen to be a subject of luxury. Electronic banking can be an efficient mode for financial inclusion as e-banking is cost efficient. Therefore we should look towards to e-banking as a means of financial inclusion. Active policy initiatives are needed for financial inclusion as well as for penetration of e-banking.
     
    Mamta
     

  • 101Do we need moneylenders for financial inclusion?Mandira Sarma

    Sep 2007



  • That village India predominantly depends on informal sources of credit, mostly the moneylenders, is well known. The prominence of moneylenders in rural India has been rising over the last three decades.
     
     
    In the backdrop of the recent initiatives for ‘financial inclusion’ in India, the low share of institutional credit agencies in rural India and the consequent rise in the dependence on the moneylenders is worrisome. To add to it, a recently published RBI report has recommended promoting the moneylenders, simply because they “continue to operate despite the century-long efforts to find substitute for them” and also as “banks do not like to deal with marginal farmers”. The report of the technical group (TG) for reviewing legislation on money lending (published on 24-07- 2007) recommends, inter alia, the creation of a new breed of moneylenders, to be known as ‘accredited loan providers’ (ALP), whom the banks will lend to carry out independent money lending business. The TG also recommends that the advances made by the banks to the ALP for this purpose should form a part of their ‘priority sector lending’ obligation. This, the TG opines, would “give an added thrust to the initiatives towards “financial inclusion” through the formal lending institutions”.

    Financial inclusion, according to RBI deputy Governor Mr. V. Leeladhar, “is delivery of banking services at affordable cost to the vast sections of disadvantaged and low income groups.” Going by this definition, creation of ALP will be a blow rather than a boost to the objective of financial inclusion. While the efforts of financial inclusion should bring the ultimate borrower and the banks closer, creation of ALP will create an unnecessary layer of intermediary between the two, thus distancing them even further. Banking services in rural areas have diminished over the years — the rural bank branches have declined by 13.2% while the total number of bank branches in India grew by 14.6% between 1991 and 2006. Thus, rural India’s dependence on the moneylender is not by choice, but due to lack of alternatives. The money lending business is often exploitative involving usurious rates of interest and indulging in harsh and unethical recovery practices. Such practices may become institutionalized if moneylenders are promoted with bank loans.

    There is no short cut to financial inclusion – banks must spread to the villages, albeit with specialized products for the small borrowers – if the objective of financial inclusion has to be achieved. Instead of encouraging banks to spread to the remote villages, RBI seems to be adopting a short cut and flawed route by creating ALP, thus making the objective of financial inclusion distant and remote.

     
    Mandira Sarma
     

  • 102Should RBI follow IT?Sanghamitra Sahu

    Aug 2007



  • The recent surge of inflation in India has forced the researchers to revisit the feasibility of Inflation Targeting (IT) in India as it is advocated as a framework which would provide a transparent monetary policy framework and thus would send clear signals to market participants regarding the stand of central bank vis-à-vis inflation. With this approach, the central bank commits to a numerical target of annual inflation which makes price stability as the primary goal. In addition, the inflation forecast over a time horizon acts as an intermediate target. Thus, inflation targeting becomes forward looking in nature and therefore allows policy makers to respond to economic shocks more flexibly.
    The experience of the 23 countries practicing inflation targeting such as New Zealand, UK, Brazil, Chile, Republic of Korea et cetera suggests that inflation targeting helps not only in lowering inflation but also lowers inflation expectations and inflation volatility. There have also been no visible adverse effects on other macro economic parameters like output, interest rate and exchange rate. But in India the adoption of inflation targeting has hit the road block due to the concern that its adoption and implementation necessitates a number of preconditions such as central bank independence, absence of fiscal dominance, technical capability to forecast inflation and financial market depth. And there is a perception that failure to meet any of these preconditions makes inflation targeting infeasible. However the experience of inflation targeting countries in Figure indicates that none of these countries met all these preconditions at the time of adoption.

    Note : 0 : Poor Condition and 1 : Ideal Condition for adoption of inflation targeting. Source: Batini et al (2006), IMF
    An analysis of policy developments in India would suggest in favour of an inflation targeting framework. For example, in 2000, the ‘Advisory Group on Transparency in Monetary and Financial Policies’ under the chairmanship of Mr. M Narsimhan recommended to pursue a single medium term inflation objective.  This begins either with the finance ministry or with the RBI announcing occasionally a quantitative target for inflation, which can be converted to a regular policy exercise. Also as evidenced by the experience of other countries, the feasibility and success of inflation targeting depends on the commitment of the policy makers and their ability to bring the necessary institutional and technical changes in order to maximize the potential benefits of inflation targeting.

     

     
    Sanghamitra Sahu
     

  • 103Agricultural Subsidies on Biofuel Crops: A Misnomer?Suparna Karmaka

    Aug 2007



  • The concern over global warming and climate change has suddenly become the main topic of discussion at all international fora. A panacea seems to have been found in the biofuels (bioethanol and biodiesel), and US is leading this particular charge. Food crops like corn, sugarcane, sugar beet, soybeans, rapeseed and palm oil are presently being used as feedstock for biofuels. And the support-incentive schemes adopted usually combine generous subsidies for domestic generation (via tax credits) and tariff protection against imports, in particular into the US.
    This has had two effects. Increased demand of food crops for fuel has increased the domestic demand for these crops, which while reducing the net subsidies that these countries are paying their farmers (in 2006, US taxpayers paid farmers around USD 11.9 billion to make up for low market prices as opposed to 14-18 billion in 2004-05), is also increasing prices in those countries dependent on imported food. The ‘tortilla unrest’ in Mexico earlier this year is but a mere preview of things to come. The FAO has recently calculated that despite bumper harvests in 2007, the poorest countries will see their cereal import bill increase by one quarter in the current season alone due the biofuels demand.
    Notwithstanding how the price and supply scenario plays out in years to come, this raises a concern from the perspective of the currently stalled Doha Round of WTO Negotiations. It needs to be recalled that the current impasse is mainly on account of the stalemate in agriculture, in particular the developed country intransigence on reduction targets for agricultural subsidies.
    The issue pertains to the treatment of subsidies on the agricultural products used as feedstock for generation of biofuels. And the concern is that given that new industrial uses of agricultural produce have been found and are being encouraged, ought the developed country subsidies going into these agricultural crops dedicated for biofuel generation continue to be discussed under Agreement on Agriculture (AoA)? If not, what should their treatment ideally be, and is there a need for reviewing the caps of agricultural subsidies under AoA, especially those under green box?

    It is notable that while the US is negotiating for the development of stronger WTO rules that will rein in the use of industrial subsidies, in the light of the ongoing agriculture negotiations, the proposed new subsidy rules are not intended to apply to the agriculture sector. A question that begs to be answered is whether the industrial use of agricultural crops should merit different treatment (from other food crops) insofar as ‘certain particularly trade-distorting subsidies’ on these crops are concerned.

     
    Suparna Karmakar
     

  • 104Substance Use in India and AsiaGarima Malik

    Jun 2007



  • Substance Abuse is the repeated use of a substance like tobacco, alcohol and/or illicit drugs despite having personal distress and problems related to its use. The problem of substance use has to a large extent stabilized in developed countries which have been exposed to substance use for decades, in contrast to many developing countries where the problem is on the rise. Research on the causal factors is pointing towards urbanization, poverty, migration, technological change and educational deficits.
    The situation will become worse as multinational alcohol manufacturers are now aggressively targeting the developing countries particularly in South-East Asia. In India, Sri Lanka, Thailand and Malaysia drinking patterns illustrate how the per capita consumption figures of a country do not necessarily give the true picture of consumption patterns of Asian countries. Parallel with the international and more expensive alcoholic beverages there exist the local, cheap, potent brews, both legal and illicit which are not computed into the national statistics.
    National Sample Survey of India (1993-1994) show the rural-urban divide for males and females respectively for bidis and cigarettes and tobacco consumption in other forms such as snuff, chewing tobacco, burnt tobacco powder, and paste (graph)
     

     

    Approximately 55,500 adolescents start using tobacco every day in India, joining the 7.7 million young people under the age of 15 who already regularly use tobacco. Global Youth Tobacco Survey (GYTS) showed that 10 percent had ever used tobacco in any form. The proportion of students currently using any tobacco products was 4.5% (boys: 5.5%; girls: 3.1%). Alcohol abuse in the rural communities of South East Asia Region member States is a particularly serious problem. The pattern of drinking is usually binge drinking centred around pay day or on special occasions, such as, marriages and festivals. Also given the poor socio- economic status of most rural communities, disproportionate amounts of family income (30% in Asian countries) is spent on alcohol leaving very little money for food, education, housing and health. Thus a vicious cycle of poverty is perpetuated.
     
    Garima Malik
     

  • 105Supporting or Sporting – Common Wealth of the EconomyRuchi Jain

    Jun 2007



  • Recently crowned trillion dollar economy, India, will be the third developing country (after Jamaica in 1966 and Malaysia in 1998) to host the Commonwealth Games in 2010. No doubt, CWG will boost infrastructure of the host city, Delhi where the event is scheduled to be held from 3-14 October covering 17 disciplines. The construction of roads, flyovers, car parks, housing, stadium, drainage, metro system etc. will generate many employment opportunities. Also, this event is expected to spur boom in hotel, airline, tour and travel industry as well as in neighbouring states.
    An economy which is ranked 126 out of 177 countries in Human Development Index and 55 among 102 developing countries in Human Poverty Index will be spending around a billion dollars on a sporting event. Although hosting such mega sporting events is viewed as a prestigious achievement resulting in opportunities for economic profit, urban regeneration and global media exposure, the experience that a developing nation faces differ vastly from that of a developed nation. One of the factors that work against developing nation is the lack of existing infrastructure leading to higher expenditure. In the Indian context, it is clearly depicted by the size of financial approvals. Government has approved Rs.1000 crores (±10%) for upgradation/creation of venue infrastructure for the projects of Sports Authority of India, Rs.767 crores (±15%) for conduct of the games to the organizing committee, Rs. 770 crores to Delhi Government for upgradation of civic infrastructure and EFC has recommended Rs 325 crores (±25%) for DDA. These financial outlays exceed the total central plan outlay allocated to the Ministry of Youth Affairs and Sports in the last ten years (1997/98-2006/07). Moreover, the opportunity cost of capital may be particularly high in developing nations.
     


    Note: * Budget Estimate
     
    The extent to which newly constructed sports facilities represent a good public investment depends not only on the immediate economic impact of the mega event but also on its post event usage. Lack of developed sports culture and bureaucracy in India may not only lead to inefficient use of the world class facilities after the event but also tend to fall into disrepair.

    It is hoped that the decision to host CWG turns out as a step towards propelling India on to the world stage by making short and long term benefits of the games large enough to cover the costs rather than a burden on the existing system.

     
    Ruchi Jain
     

  • 106“Greening” Economic GrowthPurnamita Dasgupta and Anshu Gupta

    May 2007



  • The WTO Doha negotiations have formally resumed. However, it remains doubtful if they will progress towards a resolution by July when the US President’s fast track negotiating authority expires. The reason is lack of forward movement from major negotiators either on agriculture subsidy and tariff reduction or future import quotas, the two most intractable issues in the Round. Countries are loathe to be seen by their domestic constituencies as having given up too much in as sensitive a sector as agriculture.
    Does that mean that the DDA will remain stuck at least until after the next US Presidential election or is there is a way forward? If not, what has to give for a speedy conclusion? In this context the choice between a “Doha-lite” outcome, that is, a shallow low-ambition agreement, or abandoning the Uruguay Round concept of the Single-Undertaking modality perhaps becomes relevant.
    The latter is preferable. A Doha-lite outcome is unlikely to satisfy anyone. It will probably also not serve the objective of strengthening the multilateral negotiating system. In contrast a high-ambition deal on a few select issues like NAMA, trade facilitation, and services including GATS Article VI negotiations, combined with some minimal advance in agriculture (including elimination of export subsidies by 2013) and the already agreed aid for trade package would advance the multilateral cause and help sustain the credibility of WTO to revert back to a more substantive agriculture liberalization at a later date. This would also serve India’s interests because it will have consolidated its newly acquired status as one of the principal negotiators in the WTO. That gain should be grasped and nurtured.
     
    Rajiv Kumar and Suparna Karmakar

  • 107Give Credit to RBI when it is dueAbhijit Sen Gupta

    May 2007



  • In recent days the RBI is being increasingly censured, for the monetary tightening measures in the recent past, and especially its decision to let the Rupee appreciate, in its fight against inflation.

    In a country where 260 million people are below the poverty line, and fighting a daily battle for bare survival, burdening them with an inflation rate of over 6 percent can not be acceptable. High inflation rate is neither good for growth or equity.

    In this situation the RBI is bound to take measures to bring inflation rates down to manageable levels. It has tried to do so by raising the short term rates and reserve ratios as well as letting the nominal exchange rate appreciate. The first two measures have been aimed at reducing the liquidity in the economy with an objective of curbing demand. On the other hand appreciation of the rupee reduces the price of imports, which lowers the overall price level. Moreover, by refraining from intervening in the forex market and allowing the Rupee to move freely, the RBI also keeps liquidity under control, which again helps in fighting inflation.

    It has been argued that the appreciation of the rupee is bound to hurt the Indian exports and consequently put brakes on the high growth rate of the Indian economy. What is being ignored is that a large number of Indian exports like electronic hardware, petroleum and gems and jewellery are import intensive and are benefited from the appreciation of the Rupee in so far as cost of production is lowered. A related point is that export competitiveness of a country depends upon the real exchange rate and not the nominal exchange rate. The real exchange rate between two countries depends on the inflation differential between countries apart from the nominal exchange rate. Thus if other countries are experiencing low inflation than India, their cost of production is going to be low, which in any case is going to make Indian exports uncompetitive. Figure 1 below shows that although REER index has increased somewhat from August 2006, its value in March 2007 is similar to what it was a year ago.

    Abhijit Sen Gupta

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  • 108Rethink the Negotiating Strategy in DohaSurabhi Mittal

    Apr 2007



  • The Doha Round has resumed in February and agriculture is still one of the stumbling blocks. The introduction of a farm bill in the US that will shift amber and blue box subsidies to the green box has complicated matters further. This is because the bill will cause an increase in direct payments to farmers by 10 per cent. As far as India is concerned, it needs to do a rethink on agriculture, which is crucial. Nevertheless India also needs to ask what else it can gain from the successful completion of the Doha round.
    Everyone knows that OECD support programs artificially reduce world prices below the cost of production and inhibit the ability of developing and less developed countries farmers to compete. Even if the trade distorting product specific subsidies are reduced or eliminated, the price transmission mechanism is so poor that it will be difficult to transmit the impact of price change directly to the farmers in an efficient manner. Recent research by the author shows that a 10 per cent rise in world prices leads to only 0.5 per cent, 2.0 per cent, 7.3 per cent and 8.7 percent rise in rice, wheat, cotton and sugar domestic prices in short run. Also, prevailing regulations by the government in form of policies of Minimum Support Prices shield producers from adverse price swings, causing domestic prices to adjust to world market prices in a partial-adjustment manner. High distribution costs add another layer between border prices and producer prices. The credibility of India’s agricultural exports can be judged by our random decisions to ban exports in situations of domestic crisis. Thus OECD liberalization will not have a meaningful effect on Indian farmers.
    The farm and export subsidies of OECD countries are an important supply constraint for Indian farmers but not the most important one. There is need to work out the trade-offs between sectors in the Doha negotiations based on realistic gains rather than just following the tradition of protecting our agriculture sector.
     
    Surabhi Mittal
     

  • 109Doha Logjam: What Must Give?Rajiv Kumar and Suparna Karmakar

    Mar 2007



  • 110Union Budget 2007-08 Expenditure Concerns RemainRajiv Kumar , Amitendu Palit & Karan Singh

    Mar 2007



  • According to the Economic Survey expenditure management remains a major concern, which is not fully addressed in the latest budget.
    Total expenditure is budgeted to increase by 17% over 2006-07 (RE). Net of transfer of RBI’s equity holding in SBI to the Government, capital expenditure will go up only by 10.3% As a result, its share in GDP might decline further, continuing the trend since 2004-05.
    Outlay on social services has increased (Table 1 and Table 2) with combined central expenditure on education and health finally expected to touch 1% of GDP. But while expenditure on education has increased sharply due to a 35% increase in allocation for school education, resource flow to health has been relatively less. Stagnation in health expenditure, as a proportion of GDP at 0.3%, for almost a decade, is a matter of concern (Figure 1).
     

    Source: Union Budget Documents
     
    Despite an almost 10% hike in allocation for agriculture over 2006-07(RE), as a proportion of total central expenditure, share of agriculture and allied activities has dropped from 1.8% in 2006-07(RE) to 1.6% in 2007-08(BE). A similar drop, from 2.7% to 2.5%, is seen in rural development (Table 2).
    At 8.1% of total expenditure, central expenditure on food and fertilizer subsidies in 2006-07 (RE) was more than that on education and health (Table 2). Outgo on subsidies is budgeted to drop to 8% of total expenditure. But will it? Food subsidies won’t reduce unless prices moderate. Same holds for petroleum subsidies. And fertilizer subsidy has only gone up as a proportion of total central expenditure since 2004-05 (Table 2).
    At its budgeted level and as a proportion of GDP, India will continue to spend more on defense than on social services. The gap, however, is narrowing (Table 1). The largest expenditure outgoes – interest payments – are budgeted at 23.4% of total expenditure despite a cut of almost 2 percentage points (Table 2 and Figure 1). These will consume 32.7% of total revenue receipts.
     

    Source: Union Budget Documents
     
    Fiscal management, however, appears to be on track (Figure 2). A lower fiscal deficit should generate a primary surplus in 2007-08. But maintaining FRBM-targets in 2007-08 depends heavily on success in cutting expenditure, particularly on food and fertilizer subsidies.
     
    Rajiv Kumar, Amitendu Palit & Karan Singh
     

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