About Indian economic reforms

Though we have started on the reform path in 1991, there was some talk of slowing down of the reforms from the late 1990s. Here is a list of measures that are taken that counter this point of view:

• Import duties have been brought to ASEAN levels (around 8%) for most items.
• Bank reforms have liberalized interest rates, slashed non-performing loans and made a gradual move toward Basel II norms.
• Agriculture barriers like APMC have been eroded though not removed, in many states. This paves the way for corporates to buy produce directly from the farmers.
• Telecom reforms have sparked a revolution. Lowest tariffs in the world.
• Though electricity sector has witnessed a slow pace, open access is a reality. The new tariff based bidding process has brought down the price per unit to Rs. 1.19 ps.
• Railways are in surplus. Dedicated freight corridors are coming up.
• Rural infrastructure is being strengthened through Bharat Nirman.
• Sates have moved to VAT regime.
• Number of items reserved fro SSI sector has come down from 880 to 326.

On tackling inflation

• I recommend reading today’s debate in ‘Perspectives’ in ET. Do so here.
• I would also recommend reading the full text of tomorrow’s RBI credit policy review.
• Three experts have propounded their views on this. I will excerpt significant points from each of these views.
• Omkar Goswami, Chairman, CERG Advisory
• The current inflation is structural and driven by the supply side – a milieu in which restrictive monetary policy tends to have relatively little traction. By restrictive monetary policy, he is referring to the expected RBI’s hiking of repo and reverse repo rates and a possible hike in CRR.
• Such measures could trigger a slowdown in corporate growth rates, and with it manufacturing and perhaps even services. Combating this bout of inflation needs other measures: slashing customs duties, eliminating non-tariff barriers (read quota restrictions), and controlling certain items of government consumption expenditure. But that requires close collegial coordination between the RBI and the finance and commerce ministries.
• Bidisha Ganguly, Chief Economist, BRICS Securities
• A combination of demand-side and supply-side phenomena has led to the present spike in inflation.
• Monetary tightening by the RBI is unlikely to have any impact on prices of primary products like foodgrains, fruits and vegetables and oilseeds.
• Given the lags with which monetary policy tends to work, central banks in a tightening mode always face the risk of pushing the economy into a recessionary phase.
• Ajit Ranade, Group Chief Economist, Aditya Birla Group
• Inflation today is a global problem, and most central banks are still not done with hiking interest rates.
• There are basically four well known responses to tackling inflation. These are through monetary, fiscal, trade and exchange rate policy.
• Back in 1965 as the border conflict escalated, and shortages, expenditures and inflation shot up, Prime Minister Lal Bahadur Shastri appealed to his countrymen to give up one meal a wekk in the service of the nation.
• The experts seem to be unanimous in holding that restrictive monetary measures from RBI will probably adversely effect the growth in the economy and also possibly push it into a recessionary phase. Let us await tomorrow’s RBI policy statement and try to learn how the RBI tackles inflation.

Why does US consider India important?

In a very good article written in ET, CP Bhambhri tries to make sense of US tilt towards India. I recommend reading the full article at least once. Do so here.

1. Relationship with India, whose energy needs are humungous, is in US’s business interests. This is recognized and stated as such by the US President, George Bush himself. India is a huge market for the sale of nuclear technology for US firms.
2. The opening up of the defense sector by India for private, public and foreign investors, has added a certain coagulating effect to the decision making process in the US about the deal.
3. In the uni-polar world, the US is looking for new strategic alliances in every region, including Asia. Asia of 21^st century has come out of its inherited under-development under colonialism. The end of cold war made a lot of sense for US to look at India in a much different way than it did in the past. A certain and subtle change in geopolitical outlook of America.
4. Sino-US relations have come to be regarded as being based on ‘cooperation and conflict’. US cannot ignore China, not can it also tolerate the growing strength of a communist China. Hence it needs a counterweight in addition to Japan, South Korea and Taiwan. A democratic and powerful India could fit the bill.
5. There is a realization in US that India is not only a good strategic fit for the US, it is also an emerging economic power of the 21^st century. There is a lot to gain from this emerging economic power than mere strategic advantages. These two actually complement each other.

Supremacy of wireless phones over landline phones

Here are 7 reasons given by a telecom professional as to why wireless rules:

1. Offers a robust prepaid variant as against primarily postpaid plans in fixed lines.
2. Mobiles present a much wider choice of tariff plans to suit everyone’s needs.
3. Unlike the plaid old telephones, mobiles are gadgets equipped with many utilities like distinctive ring tones, organizers, cameras, FM radio, blue-tooth and so on.
4. Wireless allows a host of value-added services such as SMS, MMS and caller tunes, which are rather uncommon in fixed lines.
5. Roaming in wireless lets the user simply carry his phone with him to any service area. There is fixed line equivalent for this.
6. As against the tedious process of shifting of fixed lines, mobile users can shift base just by updating a new address with their service providers.
7. Mobiles that are already good for data applications are slated to become even more power with 3G ringing in new features and services.

Infrastructure: Aviation Special

Over 70% of our population is 35 years or below.

Aviation, as a sunrise sector has the potential to create at least 2 mn jobs directly, and millions more through tourism and hospitality over the next decade.

There are almost 400 airstrips and airports across the country. But not all of them are operational.

Passenger traffic has recorded a growth of 20% over the last three years as against 6 to 7% in the years before. IN 2006, domestic traffic grew by 48% to 30 mn.

Today there are only 4 domestic air journeys per 100 people. With about 31 mn households earning about $5000 per year, the potential for air travel in the country is about 150 mn.

The number of airline trips in India is currently only 0.02 per capita compared with 0.09 in China and 2.2 in the US.

For Indian aviation sector to reach a level of even a third of the European or US penetration level, we will need 50,000 flights a day as against today’s 1200.

AAI (Airports Authority of India) manages 127 airports in the country. It has undertaken the development and modernization of 35 non-metro airports at an approximate cost of Rs. 5,500 crores.

Non-metro cities can be equipped with low cost airports by investing a mere Rs. 16 crore each. Developing bush/gravel strips in each district headquarter can be done for about Rs. 3 to 5 crore.

Air India Express – the low cost carrier (international), was launched in April, 2005.

India is the second largest producer of fresh fruits and vegetables in the world but about 35% of this produce goes waste because of non-availability of appropriate storage and transportation infrastructure. Fresh produce, moreover, gets handled by about 5 to 6 different intermediaries before they reach the consumers. Elimination of these intermediaries, is estimated to wipe out nearly 40% of the costs from the system.

India has only about 5 freighter aircraft compared to just one company’s (UPS) fleet of 600.

Estimated fuel bill for 2006 is $1.7 bn of which sales tax is $330 mn.

It is estimated that for every $100 spent on air transport produces benefits worth $325 to the economy and 100 additional jobs in the air transport result in 610 new other jobs.

Naresh Chandra committee looked into chalking out a road map for the sector in 2003.

Personalities connected with the Aviation sector:

Mr. Praful Patel: Union Minister of Civil Aviation

Mr. Giovanni Bisignani: Director General & CEO, IATA

Mr. Assad Kotaite, President Emeritus, ICAO

Mr. Jean Claude Baumgarten, President, WTTC (World Travel & Tourism Council)

Mr. K. Ramalingam, Chairman, AAI

Mr. V. Thulasidas, Chiarman and MD, Air India

Innovate and win

China and India, in their own different ways, will be global manufacturing hubs in the 21^st century, writes Arun Maira of BCG in a centre page article in today’s ET. I recommend reading the full article at least once. Do so here.

To attain high rates of growth in manufacturing sector two requisites are:

1. Indian policymakers must develop the global competitiveness of Indian manufacturing.
2. They must ensure that the sector creates vastly more jobs than it has so far.

These objectives can be met if the country takes note of the three paradigm shifts of the global economy.

1. Concept of manufacturing:
   Manufacturing has moved through three different paradigms. In the first phase, which started during the industrial revolution, workmen became adjuncts to machines. Then the Japanese have reinserted the intgelligence of people on the shop floor through production processes. And now the hitherto concentrated manufacturing activities are getting deconstructed and dispersed.
2. Concept of innovation:
   The dominant model of innovation was the industrial model, built around laboratories, R&D expenditures and patents. Now this is giving way to open source models that produce innovation through the interaction of thousands of independent agents.
3. Concept of productive enterprise:
   The picture of the enterprise itself is changing – one comprising of monolithic, hierarchical or linear processes to one of a fluid network of interacting parts with many nodes but no singular leader.

China’s strengths lay in mass production at low cost in large factories, with top down control. India’s strengths are likely to be in smaller, nimbler, skilled enterprises, laterally linked within networks.

Issues in land acquisition

Some arguments in favour of and against the state acquisition of land for SEZ projects:

For:

1. Land acquisition can’t be left to the market forces alone, as it is unlike any other commodity and millions subsist on land for livelihood.
2. There are socially important issues like fair remuneration for the land acquired, rehabilitation, providing alternative sources of income generation and employment. These can’t be decided or left alone to the market forces.
3. If state moves way from this, there is no guarantee that the market forces will not use money, muscle or political power in the process to gain undue advantage.
4. In view of the sensitivities attached with it, industry also, many a time will not be able to successfully complete land acquisition on its own.

Against:

1. State governments have, more often than not, used the land acquisition to appropriate lands, only to serve them on a platter for private parties.
2. Land should be acquired only for infrastructure projects whose benefits would directly accrue to a far larger population.
3. Left to market forces, industrialization would surely shift from urban areas to rural areas; and also from fertile to barren lands. Hence it is better left to them.
4. It is strange that industrialists, who want less government interference in their activities, want it to acquire land for them!!!

Some well thought out concerns expressed on land acquisition include:

1. The government has used the acquisition of agricultural land as the first step in promoting industry. It should be the last resort!!!
2. Farmers should be allowed to form into a group and decided whether they want to sell their land or lease it to the private industry. If they want to lease it out, the lease rentals should be indexed to the cost of living.
3. If, part of the land is farmed by tenants or sharecroppers, they too should qualify for compensation and voting power, though at a lesser level than the owners.

SNC Lavalin Controversy

The LDF government of Kerala has reversed the decision to have an enquiry conducted by the CBI into the multi-crore Lavalin scam ordered by the previous UDF regime. Instead the state vigilance department was asked to probe the case. Following this, there was a PIL in the Kerala High Court. The High Court has heard the matter and reserved it for orders.

What was the case about?

The Kerala government had ordered the renovation and augmentation programme at Pallivasa, Sengulam and Panniar hydel power stations (aggregate capacity 115 MW) in 1996. Then the Power Minister was Mr. Pinarayi Vijayan of CPM. The awarding of the project has run into controversy because the CAG’s performance audit of the program found fault with it. Neither the renovated power stations were generating power at least to the same level as that of pre-renovation, nor did the promised aid to the MCC (Malabar Cancer Centre) materialize.

History of the case: The three powers stations in the Periyar river basin with a total of 12 generating machines in the capacity range of 5 to 15 MW and installed during 1940 to 1964, were generating much below the design capacities for a variety of reasons. Therefore, an agreement was signed by the KSEB (Kerala State Electricity Board) with the Canadian project consulting company, SNC Lavalin in February 1996 for the supply of project equipment and related services under Canadian credit. Within a few months, the LDF came to power and the new Power Minister took the initiative in re-negotiating the price and other terms and conditions of the contract and also visited Canada for discussions in this regard before finally awarding the contract. Experts argue that the renovation and augmentation could have been done by local engineers of KSEB, leave alone national and international level players. When the project was finally executed in 2001, generation of power did not reach even the pre-renovation levels.

Political corruption: Experts argue that it was a clear case of political corruption. SNC Lavalin had promised to pay Rs. 98.3 crores to the Malabar Cancer Centre (MCC) as a reward for award of the contract to them at an estimated cost of Rs. 283 crores. The legality and transparency related to the promised payments by SNC Lavalin are being questioned. SNC Lavalin has reportedly. The Canadian company agreed to arrange Canadian aid to the tune of Rs.98 crores from various agencies including the Canadian International Development Agency, but has not arranged the promised amount. The cancer treatment centre will remain as a testimony to the miscarriage of the assurance about Canadian aid for its development, which formed part of the agreement between KSEB and SNC Lavalin.

FDI and FII: Difference

They make the headlines in financial dailies on a regular basis. ‘Market plunges on heavy FII selling’, ‘FII purchases jack up market’ -- these are two themes, variants of which often sum up activity in the stock market on a given trading day. ‘FDI in insurance set to go up’, ‘Left opposes the FDI hike in Aviation’ – these are samples of news headlines that we see about FDI and government’s policy relating to it. What are these two? Are they same or are they different? Many a time I have been asked this question through mail and also on the discussion groups.

FDI (Foreign Direct Investment) is an investment made to acquire a lasting management interest (usually 10 percent of voting stock) in an enterprise operating in a country other than that of the investor, the investor’s purpose being an effective voice in the management of the enterprise. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. Usually countries regulate such investments through their periodic policies. In India such regulation is usually done by the Finance Ministry at the Centre through the Foreign Investment Promotion Board (FIPB).

Who are FIIs? Mutual funds, insurance companies, pension funds, university funds, investment trusts, endowment funds and charitable trusts incorporated outside India but investing in equity and debt securities in the country are known as FIIs. They collect money from individuals and corporates (primarily from countries belonging to the European and American continents), and invest it in financial instruments worldwide, with India being one of the targeted markets.

FIIs wanting to invest in equity and debt securities in India have to register with SEBI (Securities and Exchange Board of India) under the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. They also have to get approval from the RBI (Reserve Bank of India) to operate foreign currency accounts (to bring in and take out funds) and rupee bank accounts (to pay for transactions).

FIIs were first allowed to transact in Indian markets in 1993. SEBI lays down parameters relating to eligibility, investments and taxation. Chief among these relates to investment limits. The collective FII holding in a listed company cannot exceed 40 per cent of its equity capital.

Typically FIIs invest either directly or as sub accounts (through participatory notes) or as domestic entities. Participatory Notes (P Notes) are used by FIIs for foreign funds, not yet registered.

The key benefits of FII investments include reduced cost of capital, imparting stability to India's balance of payments, institutionalizing the market, improving market efficiency and strengthening corporate governance. FIIs have been termed as speculators, arbitrageurs and fair weather friends. FII inflows, globally, are considered hot money.

About ECGC

Recently we heard that ECGC has reclassified the credit-worthiness of 237 countries in December by introducing a country forecasting measure to its existing rating methodology. But what is ECGC?

Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit.

Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community.

ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.800 crores and authorized capital Rs.1000 crores.

What does ECGC do?

• Provides a range of credit risk insurance covers to exporters against loss in export of goods and services
• Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them
• Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan

How does ECGC help exporters?

• Offers insurance protection to exporters against payment risks
• Provides guidance in export-related activities
• Makes available information on different countries with its own credit ratings
• Makes it easy to obtain export finance from banks/financial institutions
• Assists exporters in recovering bad debts
• Provides information on credit-worthiness of overseas buyers

Need for export credit insurance

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.