Reforming higher education

We have covered in detail on earlier occasion about this topic. Read it here.

We will see a couple of more perspectives on this issue again.

It is estimated that a 50% increase in the number of seats in our higher education institutions would entail an expenditure of about Rs. 25,000 cr.

The share of total plan funds has fallen steadily from 1.24% in the 4^th Five Year Plan to about 0.35% in the 8^th Five Year Plan.

Today ET has surprisingly suggested that the foreign universities should be left relatively less regulated!!! I can’t disagree with them more. They cited that Singapore does not even have a system of accreditation of overseas universities. And that it leaves it to the employer to decide whether a degree holder meets the qualification most relevant to his needs.

One cannot always compare a small city state’s systems with that of a huge country like ours. Even if at some later stage something is found to be very wrong; bringing in the required regulations and implementing them in a small country like Singapore, will not be fraught with the kind of tortuous courses that usually obtain in a huge country like ours.

There are usually some concerns like quality that need to be addressed. We cannot allow fly-by-night operators to make hay in the name of liberalization of higher education. The Committee constituted by the HRD ministry has done well in recommending that only institutions with about 3 to 4 decades history be allowed in. Some body like the AICTE should look into the accreditation of the foreign universities willing to set up shop in India.

Besides, we have some other sensitive issues like the exorbitant fees charged by them, the issue of reservations etc., to grapple with. The fees to be charged by them may be ‘market determined’ within the context of the Indian market, rather than some distant foreign market.

Similarly clear guidelines have to be in place to enable them to live with the kind of affirmative action approaches that we have in place here. Perhaps something like the one being followed in JNU (Jawaharlal Nehru University, Delhi) may be made applicable to them uniformly.

Detail about retail

We have seen today’s papers screaming about Walmart-Bharti tie up. According to the MOU entered into between them, Mr. Sunil Mittal will own the company running the front-end retail operations, while both Bharti and Walmart will invest jointly in another company, which will engage in ‘cash-n-carry’, logistics, supply chain and sourcing.

We all understand about front-end retail. It is a shop from where the end consumer can shop around, buy goods and services and pay for them then and there either in cash or through his credit card.

But what is ‘cash-n-carry’? It is interesting to know that there are two broad components to the same business – retail!!!

“Cash and carry” is a form of trade in which goods are sold from a wholesale warehouse operated either on a self-service basis, or on the basis of samples (with the customer selecting from specimen articles using a manual or computerized ordering system but not serving himself) or a combination of the two. Customers (retailers, professional users, caterers, institutional buyers, etc.) settle the invoice on the spot and in cash, and carry the goods away themselves.

Though wholesalers buy primarily from manufacturers and sell mostly to retailers, industrial users and other wholesalers, they also perform many value added functions, including selling and promoting, buying and assortment building, bulk-breaking, warehousing, transporting, financing, risk-bearing, supplying market information, and providing management services.

There are significant differences between "classical" sales at the wholesale stage and the cash and carry wholesaler: These differences are based in particular on the fact that customers of the cash and carry wholesaler arrange the transport of the goods themselves and pay the goods in cash and not on credit.

An interesting snippet: We all know that Walmart is the big daddy of retail worldwide. Who founded this behemoth? Any idea? It is Mr. Sam Walton.

Plea Bargain: What is it?

In an excellent article (read it here) K.T. Thomas, a former Judge of the Supreme Court of India explains all about the concept of plea bargain.

With the amendment to the Code of Criminal Procedure (CrPC) by Act 2 of 2006, a new chapter 21(A) was added bringing about plea bargaining into Indian jurisprudence. Plea bargain means the process whereby accused and the prosecutor, in a criminal case, work out mutually satisfactory disposition of the case, subject to the approval of the court.

However, in India it cannot be entered into for the following cases:

1. Offences punishable with a sentence exceeding 7 years of imprisonment.
2. Offences affecting socio-economic conditions of the country, which the Central Government would notify. GoI has actually notified about 19 statutes under this clause.
3. Offences committed against women.
4. Offences committed against children below the age of 14.

The Process:

1. Accused to file an affidavit in court, expressing his willingness to plead guilty.
2. Court issues notice to all the parties.
3. Then it gives time to all the parties to work out a mutually satisfactory disposition of the case.
4. On their submission to the court that they have come to an understanding, the magistrate prepares a report which shall be signed by all the parties to the dispute.
5. Judgment in the case follows imposing lighter sentences on the accused and providing compensation to the victims.
6. Such a judgment cannot be appealed against.
7. Protection to the accused. His pleas, which are his admissions of crime, cannot be used for another purpose.

Merits:

1. Helps courts manage their workload; reduction of backlog in cases.
2. Relieves the magistrate of the burden of preparing a detailed judgment.
3. Reduces the load for Public Prosecutors.
4. Saves lot of time, energy and court expenses for the accused.

Demerits:

1. Reduces the criminal justice system to a barter system.
2. Possibility of innocent accused to capitulate to wrong compromises and wrong convictions in order to escape the ordeal of prolonged trial.
3. Possibility for accused to develop a scornful attitude to the justice dispensing system.
4. Can be construed as violation of Article 21 – deprivation of liberty except according to the procedure established by law.

RBI vs. FM?

If you are keenly watching the financial and economic space in ET you would surely have noticed that there are some differences between the Finance Minister Chidambaram’s and RBI Governor Dr. Y.V. Reddy’s take on repo rate hike. The FM was even quizzed on this and he had to tell that the differences are being blown out of proportion by the press.

What exactly are these differences?

These differences are on account of tackling inflationary expectations. The RBI feels that the economy is in an over-heated mode. Hence the priorities of the monetary policy should be putting inflation management on top rather than worry about growth. It is this which made the RBI hike the repo rate (rate at which it lends money to banks) by 0.25% to 7.25% while not touching the reverse repo rate (the rate at which it mops up funds from banks) in its recent half yearly review of the credit policy. This signaled a reversal of the cheap money policy.

On the other hand, the FM feels that there is no cause for worry on the growth front; the economy has not entered an over-heated zone and that if banks rebalance their credit portfolio and mobilize more deposits, they need not fall back upon RBI for funds or to increase their lending rates.

The RBI’s action leaves the banks with three options:

1. Pass on the additional cost of funds to the ultimate borrower since the spread between the repo rate and the reverse repo rate is narrowed by 25 basis points (0.25%);
2. Absorb the increased cost and cut into their profits; and
3. Limit their lending to deposit growth without resorting to RBI accommodation.

Critics notice that there are three areas of concern on inflationary expectations front:

1. The uneven and untimely rainfall over the past three months has exacerbated the price expectations.
2. There is a bulge in money supply in the current fiscal when it jumped 7.8% over a strident 19% growth witnessed last year. And that this surely has to be neutralized before it shows its adverse effects.
3. The high shares of retail (47%) and housing (54.3%) in credit cannot be ignored
   

In the ultimate analysis, critics suggest that the repo rate hike may not result in banks hiking their lending rates. They may resort to credit rationing or even denial, thus heralding tight money policy rather than dear money policy as envisaged by the RBI. We will have to wait and see how the story unfolds. We will surely get an opportunity to look at this when the next quarterly review by RBI is likely to happen during the busy season in January 2007.

Indo-US preferential trade tariff

India is watching anxiously whether the US Congress will take up the bill dealing with a review of the preferential tariffs during the lame duck session to be convened in the first week of December.

But what are preferential tariffs? Let’s see what wikipedia says about this:

The Generalized System of Preferences, or GSP, is a formal system of exemption from the more general rules of the World Trade Organization, WTO, (formerly, the General Agreement on Tariffs and Trade or GATT). Specifically, it's a system of exemption from the Most Favored Nation principle, MFN, that obligates WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their "most favored" trading partner. In essence, MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them, etc.

GSP exempts WTO member countries from MFN for the purpose of lowering tariffs for developing countries (without also doing so for rich countries). The idea of tariff preferences for developing countries was the subject of considerable discussion within UNCTAD in the 1960s. Among other concerns, developing countries claimed that MFN was creating a disincentive for richer countries to reduce and eliminate tariffs and other trade restrictions with enough speed to benefit developing countries.

According to the US Trade Representative’s web site: The U.S. Generalized System of Preferences (GSP), a program designed to promote economic growth in the developing world, provides preferential duty-free entry for more than 4,650 products from 144 designated beneficiary countries and territories. The GSP program was instituted on Jan. 1, 1976, and authorized under the Trade Act of 1974 for a 10-year period. It has been renewed periodically since then, most recently in 2002, when President George Bush signed legislation that reauthorized the GSP program through 2006.

Indian Banking Scene

Technological developments:

Globally about 10% of the customers regularly do online banking. In India less than 1% of the millions of customers are using Internet banking and the trend is catching up, albeit slowly.

At present there are more than 15,000 ATMs in the country.

IT penetration is about 77.5% in public sector banks.

They spent about Rs. 1054.45 cr so far on IT.

Number of Kissan Credit Cards issued: a little over 80 lakhs.

Planning to introduce cheque truncation system.

Cheque truncation, very loosely defined, is the process in which the physical movement of cheque within a bank, between banks or between banks and the clearing house is curtailed or eliminated, being replaced in whole or in part, by electronic records of their content (with or without the images) for further processing and transmission.

Size of the Indian banking sector:

Total liabilities	2006 (Rs. Crores)
Capital	25,203
Reserves & Surplus	1,57,909
Total Deposits	21,64,477
Total assets
Investments	8,67,790
Advances & Loans	15,16,557
Term Loans	8,43,942

The NPAs (Non Performing Assets) of the banking sector at gross level are at 3.3% and net NPAs are at 1.2% of the total outstanding loans. NPA includes non-accruing, renegotiated, and 90-days or more past due loans. They also include other real estate owned and other foreclosed loan collateral.

Subsidy administration revamp

The government has embarked on a major revamp of the current subsidy regime in food, oil and fertilizers. It plans to introduce food stamps, smart cards and cash transfer schemes to ensure targeted delivery of the various subsidies.

Food stamps could replace the current PDS (Public Distribution System) regime. Smart cards will be issued to all the citizens. This is expected to reflect the subsidy entitlement for target groups. A direct cash support will be given for enabling the citizens to buy kerosene from the market. Civil society organizations also will be involved in the whole exercise.

Benefits:

1. A revamped subsidy adminsitration mechanism in this fashion is expected to bring in enormous savings in the annual subsidy bill of the government. On oil, grains and fertilizers, this is expected to result in a savings of abour Rs. 44,532 cr in 2006-07 or about 8% of the total annual expenditure of the centre.
2. It can ensure that governmetn hand-outs reach the intended beneficiaries, instead of being usurped by various vested interests.
3. Add to the purchasing power of the poor and integrate them better with the rest of the economy.
4. The involvement of the civil society organizations will ensure establishing a complete audit trail and prevent systemic diversion.

Studies by NIPFP (National Institute of Public Finance and Policy) show that the entire state and central subsidies are current at about Rs. 1,00,000 cr.

Communist lessons from China

In an excellent article which is very incisive in its analysis, T.K. Arun analyses that in Asia, especially in China and Vietnam, communism was the route to capitalism.

He says that communist practice in these two countries laid the foundation for these countries’ dramatic capitalist growth today. To invest in the people and invest them with agency are key prerequisites of sustained capital growth. But once this groundwork has been done, communism turns into a millstone.

What the original communist phase of China’s history left behind was a literate, healthy and large workforce augmented by removal of restraints on women working outside the home. This is the most essential raw material of capitalist prosperity. This so called demographic dividend works in three related but different ways:

1. Thanks to the improvement in health, education and women’s empowerment, the birth rate falls and the working life-span extends. The proportion of the non-working dependent population falls. Thus the total output grows faster than before, even without any increase in the output per worker.
2. When those who work have fewer dependants to take care of, savings go up, enabling greater investment.
3. When women also enter the workforce in large numbers, the number of workers generating output counted as part of a country’s GDP goes up further, pushing up GDP even without any productivity gains.

Read the full article here.

Indian Power Sector Scene

Nuclear Power back in favour:

While nuclear power accounts for only 3% of the total generation in India, it accounts for as much as 75% in France. Though in absolute quantitative terms, it is the US which still holds the number one slot with about 830.1 bln units produced from this source. India produces a mere 16.7 bn units from this source.

Only about 30 countries have nuclear power stations, which can generate electricity.

Nuclear generation does not suffer from the problems of greenhouse gas emissions and fly ash accumulation associated with coal based thermal stations. About 35 tonnes of fly ash gets generated per 100 tons of coal consumed.

Nuclear plants are very costly. For a typical thermal plant the cost works out to Rs. 4 to 4.5 cr per MW while it is about Rs. 6 to 6.5 cr per MW for a nuclear plant.

The life of a nuclear plant is about 35 years in comparison to that of 25 years for a thermal plant.

Cost of fuel for nuclear plants is less than Rs. 0.5 per unit as against about Re. 1 for coal based plants. For gas based thermal plants it is about Rs. 1.5 per unit (based on a gas price of about $4 per mmbtu – million metric british thermal units).

One tonne of nautral uranium can produce more than 40 mln units of electricity. This is equivalent to bruning 16,000 tons of coal, 100 mln cubic meters of gas or 80,000 barrels of oil. A typical 1,000 MW power plant would require about 40 lk tonnes of coal per year.

As per estimates, India’s uranium reserves are enough to support only 10,000 MW of capacity.

Power theft solutions:

Around 30 to 50% of the power generated in India is lost during distribution totalling to 30,000 MW and amounting to about Rs. 30,000 cr.

KLG Systel, an IT company has come out with a solution for power theft. The solution called Vidushi, incorporates a remote controller and communication hardware using GPRS/CDMA, theft prevention hardware, and automated meter reading to prevent distribution losses.

India has about 13 cr (as at March 2004) consumers of distribution electricity, growing at about 9% annually.

Need for an effective Transmission System:

With the commissioning of the Tala transmission system, the Northern and Eastern regional grids have been connected. This brings more than 70% of the total installed capacity to the same frequency level. It is important to note that the ideal frequency at which electricity needs to be supplied is 50 Hz. It is important to maintain this frequency of supply, as drastic deviations in the frequency will cause the grid to collapse. Hence the aim of all the regional grids to maintain their frequencies at 50 Hz. If all the regional grids are interconnected, we can be sure of getting electricity at more or less the same frequency througout the country.

The transmission line in India has expanded from 3,708 ckm (circuit kilometers) to 2,65,000 ckm. It is expected to touch 3,50,000 ckm by 2012.

Inter regional power flows account for only about 2 to 3% of the total power produced in the country. As against this, the global norm is about 10 to 15% transfer. We are expected to reach this scenario by 2012.

Orissa and West Bengal are power rich. They pump about 800 to 1000 MW of extra power into the northern grid.

New Technology in Generation:

Super critical thermal power stations.

The super critical technology is based on the property of water. At a pressure of 225 bar (unit of pressure) in a boiler, water transforms into steam instantaneously. This super heated steam is fed to turbine to generate power. This process differs from the conventional one, in which steam and moisture co-exist as a mixture in the boiler.

While the maximum size of a conventional thermal plant is 500 MW, super critical equipment comes in the range of 660 MW to 800 MW and can go up to 1,000 MW. Further, these plants require much lesser time for start-up or shut-down, unlike conventional plants.

Most plants based on this technology are based in Japan and Europe.

Conventional plants have thermal efficiency (energy produced per unit of energy input) in the range of 30-35% only, with most Indian plants operating in 30-32% range. The efficiency of power plants using super-critical technology can go up to 45%. As per estimates a 1% increase in efficiency reduces emissions by upto 2%.

Obstacles to growth

We have all been hearing about the excellent state of the economy, tremendous progress on reforms front, buoyant growth etc. There was an exclusive event – the ET Awards 2006 – hosted by ET recently wherein every important person having something to do with the reform process right from our beloved Prime Minsiter was there. And each one of them recounted the tremendous progress made by the country post 1991 reforms initiative.

But can you identify a few obstacles to growth in the present euphoric scenario? A very well written article in the ET lists out ten of them. Let us look at them:

1. Fiscal mess: Mounting public debt overhang and state government deficits. With demand picking up in the economy, the fiscal deficit is now pressuring interest rates to go up, inspite of there being an increase in savings rate.

2. Lagging infrastructure: In spite of the scanty progress seen in roads and ports sectors, it is at best marginal when compared with the actual requirements. There is an abject failure on the power front. The envisaged growth is not happening.

3. Downsizing and reform of the public sector stalled.

4. Poor governance: Coupled with poor regulation and corruption, this is leading to high transaction costs (leakages) in public service delivery and in doing business.

5. High tariffs: They have a negative fallout in allocative efficiency, welfare and in harnessing international trade as an engine of growth.

6. Failure in domestic tax reform: In spite of the belated move towards VAT (Value Added Tax), the plethora of taxes being levied by state governments come in the way of creating a common national market. India’s high tax rates are badly in need of aligining with international norms, which emphasize moderate rates and better compliance levels.

7. Lopsided growth: Only the services sector was growing; agriculture and industrial growth rates have lagged behind. The blame on infrastructural and labour market weaknesses cannot be totally ignored.

8. Uneven reform: Agriculture totally remained untouched by reform process. Agriculture crisis is best exemplified by farmers’ suicides in various parts of the country.

9. Financial sector: In spite of the fact that major reform successes have been seen in this sector, government still controls the levers of the financial system through regulated ‘benchmark’ small savings interest rates and majority ownership of banks and insurance companies. A mature market driven financial system, with full capital account convertibility and market-based pension systems, is still some way off.

10. Labour market rigidities: They continue to constrain growth and investment.

Read the full article here.

Demutualization of stock exchanges

We keep hearing about demutualization from time to time in papers. What exactly is demutualization? And is it good or is it bad?

Before we undertand what it means, let us first of all understand that stock exchanges in India are formed as associations of stock brokers. All these associations are supposed to be not-for-profit mutual entities. They are supposed to manage their own affairs with government never interfering with their internal functioning while laying down the broad rules of the game in which the stock market game can be played. This has perpetuated a strong control over the stock markets by the brokers.

But this is not the way stock exchanges operate in developed coutries. Hence the need for demutualization was felt as a reform measure in government circles. This is supposed to end the monopoly of the stock brokers. This was sought to be achieved through the transformation of the constitution of the exchanges into for-profit public limited companies. The demutualization in UK was not as a result of government mandate but of brokers’ own volition.

The demutualization of the stock exchanges in India has these noteworthy features:

1. The representation of the brokers on the governing boards of each of the stock exchanges is restricted to a maximum of a fourth of the board’s strength, the rest being appointed in the manner specified by SEBI (Securities & Exchange Board of India).
2. The aggregate shareholding of broker-shareholders is limited to a maximum of 49% of the stock exchange’s equity capital.
3. A minimum of 51% of the equity capital is to be held at all times by public other than broker-shareholders.
4. No broker-shareholder is allowed to have more than 5% voting rights.

Demutualization is supposed to bring in more efficiency to the management of the markets. With the public holding a major share in the equity capital of the stock exchanges, the brokers are expected to be in a less powerful position to manipulate the stock exchanges.

There is an excellent piece on demutualization covered by ET in the classroom at: http://www.economictimes.com/guide/etclass/etmark5.htm

Polio eradication failure

Slowly it is now being reported and acknowledged as well that polio eradication has been a failure in India. It is a shame that India is the only country other than Nigeria to have polio cases in triple digits while even very least developed countries like Kenya, Angola and Cameroon have only reported one case each this year so far. Countries like Somalia, Pakistan, Afghanistan, Namibia, Bangladesh, Ethiopia, Niger etc., have fared better than India in polio eradication. While the incidence of polio reportedly fell from 24,000 in 1988 to 4,800 in 1994 before the pulse-polio programme was started and it further fell to 66 cases in 2005, it rose to 522 in 2006 so far.

Polio is a virus that causes paralysis. The virus multiplies in the gut and is spread by contaminated water. Improvements in water and sanitation can control the disease.

The polio control programme was working well till 1998 when WHO and other international bodies came up with this grand pulse polio programme.

Pulse Polio is an immunization campaign established by the government of India in 1994 to eradicate polio (poliomyelitis) in India by vaccinating annually all children under age five against poliovirus. Every child receives a dose of Oral Polio Vaccine (OPV), a live, attenuated virus which colonises the gastrointestinal tract. This virus competitively inhibits the wild, disease-causing poliovirus. Not only does this prevent pernicious infection in the host, it precludes transmission of the wild poliovirus to other hosts. Since poliovirus cannot survive outside a host for more than two weeks, theoretically it would be eradicated, resulting in the eradication of poliomyelitis.

The campaign proved to be successful, or so it was thought and the incidence of poliomyelitis in India has decreased dramatically: India recorded 4,791 cases of polio in 1994; 2,489 in 1997; 1,600 in 2002; 225 in 2003; 135 in 2004 and 66 in 2005. Instead of seeing a reduction in 2006, this year till October 2006 it was shocking to know that there are 522 cases reported, mostly in Uttar Pradesh and Bihar.

The oral vaccine being used in India is of the ‘trivalent’ variety that seeks to create immunity against all the three kinds of polio virus. Research has revealed that this vaccine is less effective against ‘Type 1’ virus found in India especially UP. Experts also suggest that the high population density coupled with the poor sanitation prevalent there interfered with the action of the OPV, thereby lowering its efficacy. ‘Type 2’ virus is stated to have been eradicated throughout the world, leaving only ‘Type 1’ and ‘Type 3’ varieties to be tackled. Use of monovalent vaccines for tackling ‘Type 1’ and ‘Type 3’ proved to be efficient. The basic premises on which the GoI introduced the trivalent vaccines in the first place appeared to be wrong going by the increase in the number of vaccine induced polio cases – 1600 – noticed last year. The premises were:

1. That just three doses of the oral vaccine would protect a child from polio;
2. That the live but weakened viral strain used in the oral vaccine would spread to other children who had not been immunized and protect them too; and
3. That the oral vaccine would induce strong immunity in the intestines and protect children from being infected.

The choice of OPV (Oral Polio Vaccine) was questioned well at the beginning itself by experts like Dr. Pushpa Bhargava, the present Vice Chairman of National Knowledge Commission. It is reported that the India Expert Advisory Group, the official body monitoring the polio eradication programme has recommended that two rounds of injectible polio vaccine (IPV) be administered to all children in Moradabad and J.P. Nagar districts of UP, where polio is prevalent.

While the experts can be relied on to identify which of the types of vaccines is most suitable for tackling polio in the present juncture, what is appalling is that we have not been able to improve the sanitation conditions in our most populous regions even after nearly six decades of independence! More so when the conditions are in a position to interfere with vaccination programmes. It is time the Governments both at the Centre and in UP woke up to the stark realities of polio non-eradication and act fast without much ado.

Indo-China relations

On the eve of Chinese President Hu Jintao’s visit starting November 20th.

Border dispute:

McMohan Line separates the Indo-China border. We have inherited this dispute from the British when they left the country without settling the border dispute with China.

In the 1962 war Chinese have taken over 33,000 sq kms of Indian land at Aksai Chin.

1988 Rajiv Gandhi’s visit to Beijing

The first major thaw in Indo-China relations occurred with both countries agreeing to setup the Joint Working Groups mechanism to deal with the border disputes. The real negotiations are being carried out in the Western Sector comprising the 33,000 sq kms Aksai Chin and another 5,000 sq kms China got from Pakistan as part of their tactical pact aimed at providing China strategic access to Tibet.

1993 Agreement on Confidence Building Measures.

1996 Agreement on Maintenance of Peace and Tranquility in the Border Areas.

In 2003 China de jure accepted the Indian integration of Sikkim in 1975 and exchanged maps. But it is still holding on to its claim on Arunachal Pradesh – Tawang swathe.

Trade with China

1978 Trade resumed with China after the 1962 debacle.

1995 – 1998 Trade levels surged dramatically between the two countries.

Presently the trade between the two countries is about $20 bn.

Visas

China gives 2 year multiple entry visas to Indian tourists.

India issues 6 months multiple entry visas to Chinese.

As against 4 lk Indians visiting China, only about 1 lk Chinese visit India. This is largely attributed to our security fixation when it comes to issuing visas to Chinese.

Banking

China’s ICBC (Industrial & Commerce Bank of China) has issued a hugely successful IPO last month worth $19 bn. The bank is valued at $130 bn.

In comparison, the 37 listed Indian banks’ combined market capitalization stands at $63 bn.

But China seems to suffering from a lot of bad bank loans in its portfolio. It is estimated that about $911 bn are in bad debts. But China officially admits to only about $164 bn. The Chinese government infused a capital of $300 bn to mop up non-performing loans into its banking system.

Does India need more reforms?

An excellent article written by Prof. T.T. Ram Mohan of IIM, Ahmedabad pooh-poohed the notion that the country is in need of second generation reforms.

He observes that the growth rate in the first decade after reforms was not significantly different from the growth rate in the eighties.

That the fall in interest rates has helped fiscal consolidation, boosted competitiveness and led to a huge increase in retail credit.

The turnaround in firm performance has embraced the public sector as well.

He argues that the following structural changes are responsible for the kind of growth that we have witnessed recently:

• The rise in savings rate from 23.5% in 2000-01 to 29.1% in 2004-05 has come from the turnaround in public savings. With this the economy has moved on to a higher investment rate.
• Enhanced export competitiveness, reflected in the rising share of exports.
• Financial deepening. That is the bank aassets/GDP ratio rose from 48% in 2000 to 80% in 2005-06 on the back of a surge in bank credit.
  

The factor that is common to all these three structural changes is the interest rate. The decline in interest rates ahs helped fiscal consolidation; boosted firms’ competitiveness and led to huge increase in retail credit.

He opines that an understanding of this is likely to contribute to a nuanced appreciation of what the future course of economic policy might be.

Reforming higher education

Issues relating to entry of foreign universities in India.

See the full article in The Hindu of yesterday.

It is a fact that foreign universities play an important role in the Indian higher education scene. There are both pull and push factors operating on Indian students opting for foreign higher education:

• Less seats in higher education, coupled with a fast growing student population act as the push factors.
• As more and more students are going abroad every year, the me-too phenomenon and the important role played by the foreign returned students in the Indian scene, the social status they command on return etc., act as the pull factors.

Five most important issues facing higher education in India as identified by the Parliamentary Standing Committee on HRD include: access and equity; relevance; quality and excellence; governance and management; and funding. The report identified some concerns regarding the foreign institutions:

• Lack of a database of foreign educational institutions
• Possible threat of foreign institutions adopting double standards
• Prospect of entry of unqualified educational institutions

While many foreign institutions are clearly interested in knowing about India and entering India, ambiguity in the regulatory environment has discouraged their planning and open discussion.

As UGC and AICTE have made some regulations or draft regulations regarding governing foreign educational institutions, the HRD ministry has appointed a committee headed by Prof. C.N.R. Rao. Based on the recommendations made by this committee, a draft bill on private educational institutions is under consideration.

In this context the policy makers will do well to keep in mind that:

1. There is a proliferation of many deemed universities in India. From around 15 in 1999, they now number around 105 in 2006. Are they really meeting all the criteria that are envisaged by the Parliamentary Committee?
2. It is important that clear rules and regulations are drawn up and they are implemented in a transparent and quick manner.
3. Academic autonomy, which made the foreign universities, especially the US based ones so successful, is to be ensured and preserved.
4. Meeting all the five important issues identified is possible through a thorough process of accreditation of both the institutions and the professional programs.
5. Limitation on tuition fees etc. can have an adverse affect on entry of some of the US institutions.

Note: This is contributed by Ms. Sumana of Hyderabad.

Comparison of SEZ policies of China and India

In an excellent article written by Amiti Sen, the comparison between Chinese and Indian SEZ policy is discussed. Read the full article as it appeared in The Economic Times here. I am giving below the salient points in a tabular form.

Issue	China	India
Size	Very big. Typically in hundreds of hectares.	Even 10 hectares will do.
Location	Well thought out and located only on coasts. To facilitate exports and imports easily.	Anywhere. No restriction.
Labour laws	Relaxed in the SEZs.	Flexibility is totally absent.
Policy regime	Experimentation of liberal policies in the specified areas while insulating them from the rest of the country.	Based on fiscal sops.
Investors	Basically foreigners who are wooed with sops and promise of stability in policy.	Basically locals. Not foreign investor driven; which should have been the case.
Commencement	In 1979	In 1969 with the export processing zone concept. But failed to muster courage in giving these regions foreign territory status till the year 2000 when Murasoli Maran announced the SEZ policy.
Number	Only six: Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Pudong	Any where and any number. So far 28 operational. About 200 received approvals.
Tax holidays	Present.	Longer and steeper than in China.

Problems of North East

North East is plagued by insurgency, underdevelopment and resultant poverty that has proved to be the undoing of the region. Even the Armed Forces (Special Powers) Act (which was passed on September 11, 1958 by the Parliament of India) is viewed with lot of suspicion by the people of the region. It was passed to enable certain special powers to be conferred upon the armed forces in disturbed areas in these seven states. It was withdrawn by the Manipur government in some of the constituencies in August 2004 in spite of the Central government not favouring withdrawal of the act. According to the Armed Forces Special Powers Act (AFSPA), in an area that is proclaimed as “disturbed”, an officer of the armed forces has powers to: (a) fire upon or use other kinds of force even if it causes death; (b) to arrest without a warrant and with the use of “necessary” force anyone who has committed certain offences or is suspected of having done so; and (c) to enter and search any premise in order to make such arrests. Army officers have legal immunity for their actions. There can be no prosecution, suit or any other legal proceeding against anyone acting under that law. Nor is the government’s judgment on why an area is found to be disturbed subject to judicial review.

All this makes the people of North East believe that they are an alienated land in their own country. There is also a feeling that the people of the region also exhibit a certain go slow attitude.

In 1950-51, the per capita income of Assam (it then also included most of the other NE states) was 4% above the national average. It became 41% less than the national average at 1980-81 prices.

Shortage of funds is not the root cause of the poverty in the region. The total expenditure of the eight NE states is almost Rs. 30,000 cr a year. This translates to spending almost at the rate of Rs. 10,000 per person per year. About Rs. 20,000 cr of this comes as direct grant from the Centre.

The region faces floods very severely every year. 92.6% of the cultivated land is flood prone. As a result farmers do not apply costly inputs such as high yielding variety seeds, fertilizers etc., for fear of their being washed away by floods.

Insurgency alone cannot be blamed for the lack of flow of investments from outside the region. Improvements in infrastructure and the creation of a business-like environment by ensuring that the people of the region instead of looking only at government jobs take to employment generating or wealth creating economic activities are badly needed. In short infrastructure led industrialization in place of an incentive-driven industrialization is the need of the hour, feel some experts.

Healthy investment flow into the region, instead of mere economic sops by the Centre will surely make a change for the better. The risk-reward ratio should be made very attractive for attracting investments into the region. For eg., the already existing incentives in the North East Industrial Policy of 1997 (which is set to expire by March, 2007) perhaps need to be enhanced. In spite of its existence for a decade, as it has not been able to attract desirable level of investments into the region, it shows that the working of the scheme calls for a thorough review and revision.

The recent SEZ (Special Economic Zone) boom has left the North Eastern states of India untouched.

What is detariffing in insurance?

Insurance premiums are fixed by a body known as the Tariff Advisory Committee which controls and regulates the rates, advantages, terms and conditions that may be offered by insurers in respect of General Insurance Business relating to Fire, Marine (Hull), Motor, Engineering and Workmen Compensation. Detariffing refers to doing away with such fixation of tariffs.

Responding to the demands from the industry, the IRDA has notified in September 2005, that a detariffing regime in respect of non-life insurance viz., liability insurance, indemnity insurance, personal lines like health insurance, and marine hull insurance, will come into place with effect from January 1, 2007.

Detariffing is expected to make the prices of these premiums market driven. It is expected that the premiums will take a southward direction. In a detariffed regime insurance companies are expected to focus on personal lines of business like health and motor insurance in a stronger way than at present.

Deficiencies of the VAT system

The system of VAT (Value Added Tax) that we have today in the country is called the dual VAT system because the Centre levies VAT in Excise and the States levy VAT on Sale of goods.

Although dual VAT removed some of the weaknesses in the former Union excise duties and the sales taxes, the present system is prima facie having some inherent weaknesses. They include:

1. It continues to have the cascading effect on one another. The Central VAT levied at the manufacturing level will cascade when the state VAT is levied on the CenVAT inclusive price.
2. Dual VAT causes vertical tax externality due to taxation of the same base by the two tiers of government. That is the tax policy decision of one level of government affects the tax base of the other.
3. The system is loaded against the manufacturers as they have to deal with two tax authorities.
4. There is a vertical imbalance in the assigned taxation powers under the Constitution. Most buoyant sources of tax revenue have been assigned to the Centre. It is estimated that the Centre collects approximately 65% of the tax revenues in India while all the states put together collect about 35%.

Read the full article which suggests a new form of taxation in the form of a comprehensive GST (Goods and Services Tax) here.

Are FDI and trade substitutes or complements?

An interesting article titled “FDI and trade go hand in hand” by Majoj Pant, Professor of JNU. Read it fully here.

Traditionally FDI and trade have been seen as substitutes for one another. According to this view FDI tends to increase when a country imposes high tariff barriers. The reverse (that is trade increases) when tariff barriers are reduced.

He questions this traditional view and says that in the current international economic scenario, it is not easy to view FDI and trade as mutually exclusive categories. The distinction between inward and outward FDI becomes quite meaningless in terms of preference for one or other. Firms prefer FDI vehicle to internalize technological and marketing superiority.

Priority sector lending by banks

At present the policy guidelines say that banks have to lend 40% of their net bank credit to priority sectors which includes agriculture, small scale sector and weaker sections. The RBI is considering a revision of the guidelines which may result in an increase in the quantum of banks’ priority sector lending. The proposed guidelines expand the base for calculating priority sector lending, to include items like foreign currency deposits by NRIs and certain kinds of non-SLR bonds.

It is estimated that this revision in guidelines will bring about an additional Rs. 50,000 cr for priority sector lending.

According to Narasimhan Committee II, as much as 47% of all NPAs (Non Performing Assets) in the banking sector emanate from the priority sector.

Why do banks tweak their EPS (earnings per share) numbers?

Banking stocks are presently doing very well in the share market. If they go for a public issue now, they are sure to get a premium over their book value. Hence to get such better valuations banks are tempted to convert a portion of their equity into preference shares (restructuring of equity base).

Sensing that banks are resorting to such a practice, the RBI decided to put a cap of 40% for such conversion. That is not more than 40% of a bank’s equity can be converted into preference shares. United Bank of India tried to do such a conversion.

What is scientific method?

It is the procedure involved in moving a hypothesis to theory or fact.

A hypothesis is a suggested explanation of a phenomenon or reasoned proposal suggesting a possible correlation between multiple phenomena. The term derives from the ancient Greek, hypotithenai meaning "to put under" or "to suppose".

The scientific method requires that one can test a scientific hypothesis. Scientists generally base such hypotheses on previous observations or on extensions of scientific theories. An experiment has to be devised which will conclusively prove or disprove the hypothesis. Only after passing such a test can a hypothesis rise to the status of a theory. If the theory remains intact against rival theories for long enough, it will become a scientific law.

What is Pugwash summit?

Pugwash is an international initiative that got its name from the Canadian village where its first meeting was held in 1957. The Pugwash Conferences take their name from the location of the first meeting, in the village of Pugwash, Nova Scotia, Canada, birthplace of the American philanthropist Cyrus Eaton, who hosted the meeting. It has contributed a lot to conflict resolution from the cold war days.

Its first closed-door meeting on Kashmir was held in Nepal last year (2005) and in March last, it invited crowds from Kashmir and Delhi for its two-day exercise.

Read more about it here.

Perpetual bonds: the developing controversy

Perpetual bond is a hybrid instrument that pays interest forever. It belongs to the same category as that of an equity share. This instrument made its entry into the financial markets last year. The issuers of perpetual bonds are primarily Scheduled Commercial Banks. In January, RBI allowed banks to shore up their capital through issuance of perpetual bonds and another instrument called upper tier II bond.

So far about Rs. 2,000 cr worth of perpetual bonds are issued by various banks. Cooperative banks are not allowed to subscribe to these bonds.

But brokers who are associated with issuance of these bonds, are conniving with some of the cooperative banks in Maharashtra and making the latter buy these bonds and hold them for some time – usually a couple of months, i.e., till January. By that time they are expecting the provident funds (to whom they expect to offload these bonds) to be flush with cash flows on account of interest receipts from government’s special deposit scheme. That is when the brokers expect to buy these bonds from the cooperatives and sell them to the PFs making a neat profit.

For these two months, the cooperative banks’ books show these investments wrongly as investments in ordinary corporate bonds, since a perpetual bond has a call option at the end of 10 years, in the banks’ portfolio it will appear like any other corporate bond with a fixed interest coupon, maturing in 2016. So even after they have done a thing which should not have been done in the first place, these banks can still escape the glare of auditors, because the year-end statements will not reveal the true character of these bonds in view of their squaring up of the transactions before the close of the accounting year.

Statistics and info on Diabetes

o The International Diabetes Federation estimates that more than 230 mln people are suffering from diabetes and the number is expected to increase to 350 mln people by 2025.

o India has the largest diabetes population in the world with an estimated 40 mln people in 2006-07, amounting to 8% of the adult population.

o WHO (World Health Organization) says that about 1 bln adults around the world are overweight. 300 mln of them are obese, putting them at risk of diabetes, heart problems, high BP, stroke and some forms of cancer.

o WHO estimates that diabetes, heart disease and stroke together will cost about $336.6 bn in India. These estimates are based on lost productivity, resulting primarily from premature death.

Intelligent Transportation System

It is a broad range of diverse technologies which address transportation problems. The technology includes information processing, communications, control, and electronics. Joining these technologies to transportation systems helps saving lives, time and money. It helps users to know traffic jams and the best route to take. Parking information sends drivers directly to an available space. It encourages multimodal transport and reduces the time spent on the road. Checks traffic congestion and pollution. Mobile ITS services offer mobile booking and payment which is commonly referred to as e-ticketing.

International business in ITS stands at $5 – 10 bn per year. Key players include Seimens, Efkon and IRD.

How do export subsidies hurt? How did they kill the Doha round of trade talks?

Subsidies hurt the developing country farmers because they lead to higher output in developed countries – and lower global prices. When subsidies lead to increase in production with little increase in consumption, as is typical with agricultural commodities, higher output translates directly into higher exports, which translate directly into lower prices for producers, lower income for farmers, and more poverty in the Third World.

Amercia and the developed world are the real losers in the demise of the Doha round:

1. Had the Bush administration fulfilled its commitments, American taxpayers would have benefited from the elimination of huge agricultural subsidies – a real boon in this era of yawning budget deficits.
2. Americans would have been better off as consumers too, with increased access to a variety of low cost goods from poor countries.
3. Migration pressure would have reduced, because it is the huge disparity in incomes more than anything else that leads people to leave their homes and families to migrate to the US.
4. A more prosperous globe is in the interest of the rich developed world – as a less poor world would lead to less despair and thereby less political instability across the world.

Because the US played only a lip service to free market principles, favouring Washington lobbyists and campaign contributors who demand just the opposite, the Bush administration doubled the level of agricultural subsidies in the US. It is this which led to the failure of the Doha round.

What is transfer pricing?

It refers to the price charged by an MNC to an associated enterprise for supply of goods and services. Since transfer prices can be used to shift profits out of India and hence avoid taxes, the tax department has a regulation in place since 2001 to check violations. The law mandates MNCs to price their transactions with associated enterprises according to the arm’s length principle. A fairly detailed scheme to compute the arm’s length price has been set out in the income tax law.

MNCs basically need to apply prices that independent enterprises would charge in identical transactions in the market place.

Policy shift on NBFCs likely

The RBI may be close to putting a ban on foreign and local banks operating through NBFCs (Non banking finance companies). The aim is to plug the opportunity available to banks take advantage of regulatory arbitrage. Such arbitrage chances exist due to the fact that NBFCs unlike banks are not bound by strict norms on raising funds and its end use besides the light supervisory touch on such firms.

The attempt by banks, especially foreign ones, to skirt the branch licensing norms by lending to retail consumers through their NBFCs is worrying. The concern arises from the fact that these NBFC companies have sourced funds from banks to fund capital market transactions, which is feared could have systemic impact.

There are severe restrictions on opening bank branches by foreign banks with the annual cap in India being 20, which is in excess of India’s commitment to the WTO.

On the cards are norms on capital adequacy ratio for non-deposit taking NBFCs. The non-deposit taking NBFCs are not constrained by any rules on capital which are applicable to deposit taking NBFCs. With no fetters on capital raising, they normally leverage themselves by about 6 to 10 times borrowing through commercial paper. In recent times, it has been noted that some of them had raised money through CPs (Commercial Paper) and then lend to their high net worth clients to play the stock markets.

Hence the unease of the RBI and move to regulate them tightly.

Bankers’ Conference 2006

Being held at Hyderabad from 3rd to 4th of November, 2006, the theme of the conference is “Inclusive growth: A new challenge”.

What is financial inclusion? The provision of financial system, of financial products and services at an affordable price, to those who have been financially excluded.

The idea of inclusive growth is that no one should be constrained by the lottery of birth – by the region, country, family, race, caste, or sex into which one is born. Including all citizens in the process of growth is of paramount importance. When certain regions, sectors, or groups of people are bypassed by economic opportunities for long periods, the spread and sustainability of growth itself are threatened. Inclusiveness if therefore critical to help countries reach their full potential in a manner which can be sustained economically, socially and politically.

What should be the role of regulation, especially in infrastructure services?

Regulation should aim at removing barriers to competition and eliminating abuse of market power. In segments of infrastructure services that are amenable to competition, regulation should be light handed and tariff setting could be left to competitive markets. -- Planning Commission

Experts in the Yojana Bhavan, feel that the role of regulators in infrastructure is to ensure a fair play in the sector and to protect consumers. Economic regulation means ensuring effective functioning of competitive markets and where such markets are absent to mimic the outcome of competitive market to the extent possible. It also identifies and addresses subsidies and cross-subsidies in the pricing of infrastructure services.

The need for amending the anti-money laundering Act

India notified the Prevention of Money Laundering Act, 2002. Certain amendments were made with effect from July 1, 2005. Further amendments are about to be made. These amendments will bring terrorism financing and customs offences under the glare of PML Act.

The amendments are significant as the monetary authorities in US, Europe and Singapore are not satisfied with the existing framework to curb money laundering in India and hence are not allowing our banks to freely operate and open branches in their countries.

FATF – Financial Action Task Force, a Paris based inter-governmental organization launched in 1989 by the G-7 countries, has sought for making insider trading in stock-markets also a money laundering offence. India has so far carried out 11 of the 20 categories prescribed by the FATF, it has been slow in bringing about amendments covering terrorism financing, customs offences, smuggling, piracy, insider trading in stock markets and environment. In the absence of these amendments the Indian banks are at a disadvantage to extend their presence in developed countries.

Money laundering shatters the economy through unpredictable changes in money supply, posing risks to the soundness of financial systems leading to loss of investor confidence and destabilization of financial systems.

The Iran Contra scandal revisited

Lt. Col. Oliver North, was the military aide to President Reagan’s National Security Adviser. He engineered in 1986 the surreptitious sale of anti-tank missiles to the US avowed enemy Iran at a mark-up of $15 mln which was used to fund the CIA-aided Contras in Nicaragua. The Contras were trying to forcibly overthrow the Marxist Sandinista (FSLN) government of Daniel Ortega, who had been elected the President of Nicaragua in 1984.

This issue needed a revisit here (on this blog) in connection with the recent statements by the American ambassador to Nicaragua showing support for a particular political party in the elections and North joining the issue saying that America should stop pressurizing private sector leaders with potential reprisals.

Government securities market gets an edge

The RBI has increased the ceiling for FIIs investment in government securities. At present there is a ceiling of $2 bn on gilts (government securities) holding by FIIs. Yet, their actual holding by FIIs are only about $188.5 mln. RBI proposed to increase the upper limit to $3.2 bn in two phases – to $2.6 bn by December 31 and then to $3.2 bn by March, 2007.

Any Central Bank is frightened at the prospect of foreign investors holding a majority of its debt, as any decision by the investors to turn tail and run, would bring the country to its knees.

With approximately about $166 bn in forex reserves, the country is comfortably placed on the external front.

Even the recent relaxation permitted on short sales – players will now be able to cover their short positions within an extended period of 5 trading days as against the intra-day short selling permitted at present – will give more depth to the gilts market.

Mid term review of the monetary policy by RBI

Measures and their impact:

1. Inclusion of export finance in bank’s overall foreign borrowing: will cut down resources for exporters, force many banks to unwind.
2. Fair practice in home loans: Floating rate loans cannot be hiked arbitrarily.
3. Self-certification of address, photograph for small a/cs: Less hassles in opening bank accounts up to Rs. 50,000
4. Conversion of extension counters of coop banks into branches: More business for banks, push states to reform the sector
5. Basel II norms postponed to 2009: Positive for the banking sector, which gets more breathing space.
6. Short-selling in bonds; when issued trading in new gilts: Help banks, bond houses to hedge interest risk, better price discovery
7. Individuals can remit up to $50,000 a year overseas: Will take off only if RBI allows banks to offer special products
8. FIIs can invest more in government securities: FIIs invest if there is arbitrage scope; broaden bond market over time
9. Mutual funds allowed to invest up to $3bn from $2bn currently: No big deal since not many are investing abroad
10. EEFC a/c for all exporters, investment in overseas bonds: More flexibility to small exporters, better use of idle cash by big players
11. Prepayment of ECBs up to $300 mn (from $200 mln currently): Corporates can take advantage of market to retire old loans.
12. Banks can give up to 20% of capital as loans and guarantees to cos.: More resources for Indian firms going on overseas acquisition, expansion
13. One-time loan settlement for distressed farmers: Help debt-ridden farmers, check rural discontent
14. NBFCs can offer co-branded cards with banks: Help brand building by finance cos in personal finance
15. Flexibility in NRO a/c, remit up to $ 1mln a year: NRIs can immediately take out money from property sale, inheritance.