Tuesday, July 31, 2007

Indian economy’s reform path

If you were asked to tell something about the Indian economy’s reform path, you would I am sure, start with the 1990’s. But a noted economist like our present Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia would start elsewhere. Where precisely? See it in his own words, extracted from what appeared in today’s ET:

“Actually, during the early years of planning, we achieved a fairly decent rate of GDP growth, but as we entered the 1960s, performance slumped, food production fell, there were forex constraints and don’t forget, we had major wars with our neighbours. It was during this time that people started questioning the continuance of the socialist model of governance.”

“Come to think of it, the reform process actually started in the 1960s, when Mrs. Indira Gandhi supported the Green Revolution, which was carried out with the help of imported high quality seeds and fertilizers. But the winds of change became strong as the last decade started; professionals and business people were ready for a change and welcomed the reform process. In fact, the initial tempo was sustained quite well and the growth rate picked up in early 1990s. But the growth rate decelerated in the mid-90s owing thanks to the East Asian crisis and the economic slowdown. But we haven’t looked back since!”

Sunday, July 29, 2007

Why should movies be insured?

Most of us think that cinema industry is a non-priority sector. Whoever is producing movies is betting his own money on them and if he loses, that’s alright; it is his loss. If he wins, he wins big and has hit a jackpot. But is such a stance reasonable? I don’t think so. The industry also provides lot of employment opportunities for millions of people all across India. Think of not just the producers of films, but the distributors, the cinema halls and the employees they hire to run the shows. Even think of the poster boys – I mean, the wall poster fixing boys. This industry is one which provides employment across a cross section of our society. In addition to employment, we have to give due place for the artistic and literary talents that it nourishes and thus makes a positive contribution to the society at large.

You would have heard about the calls for giving cinema also an ‘industry status’. What could be the import of such a call? One that I came across today is, making them eligible for insurance. Giving industry status means that Banks are allowed to finance projects in the sector. When a bank finances the production of a film, it looks at the physical assets that are either owned or used during the making of the film and accordingly arrives at the quantum of loan to be sanctioned. Normally banking practices mandate that the assets should be insured properly and thoroughly against theft, fire etc. It is only a matter of time, before the risk coverage gets enlarged to include thinks like artists not turning up for work, making losses in distribution segment etc. How would it sound if it were to be insured for its commercial success? Too far fetched; isn’t it? May be, we will see it in course of time. Are we not seeing insurance covers for rocket launches?

It is in this context that it would be interesting to know that only 30% of the movies produced are insured. This figure is almost 100% abroad.

Saturday, July 28, 2007

Indian economy’s reform path

If you were asked to tell something about the Indian economy’s reform path, you would I am sure, start with the 1990’s. But a noted economist like our present Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia would start elsewhere. Where precisely? See it in his own words, extracted from what appeared in today’s ET:

“Actually, during the early years of planning, we achieved a fairly decent rate of GDP growth, but as we entered the 1960s, performance slumped, food production fell, there were forex constraints and don’t forget, we had major wars with our neighbours. It was during this time that people started questioning the continuance of the socialist model of governance.”

“Come to think of it, the reform process actually started in the 1960s, when Mrs. Indira Gandhi supported the Green Revolution, which was carried out with the help of imported high quality seeds and fertilizers. But the winds of change became strong as the last decade started; professionals and business people were ready for a change and welcomed the reform process. In fact, the initial tempo was sustained quite well and the growth rate picked up in early 1990s. But the growth rate decelerated in the mid-90s owing thanks to the East Asian crisis and the economic slowdown. But we haven’t looked back since!”

Friday, July 27, 2007

Mashelkar Report controversy

Though we have noted about this in our Indian Current Affairs blog as it was developing, it is time to consolidate all what we know at one place to have a backgrounder in the issue for reference.

You can’t get a better backgrounder on how or why the Committee came to be constituted, from anywhere other than the report itself. Let’s take a look at the opening paragraphs of the report:

“The Patents (Amendment) Bill, 2005, introduced in the Parliament in March, 2005 with the objective of making the Patents Act compatible with India’s international obligations, particularly under the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement) had the benefit of detailed discussion in both the Houses. During the debate, the issues regarding patentability of micro-organisms and the definition of 'pharmaceutical substance' to mean “a new chemical entity (NCE)” or “new medical entity (NME)” were raised. The Commerce and Industry Minister then assured the Parliament that he would refer these issues to an Expert Committee for detailed examination and report the matter to the Parliament.”

Accordingly, a Technical Expert Group on Patent Law Issues was set up by the Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion in April, 2005.

The terms of reference for the expert group were:

  1. Whether it would be TRIPS compatible to limit the grant of patent for pharmaceutical substance to new chemical entity or to new medical entity involving one or more inventive steps; and
  2. Whether it would be TRIPS compatible to exclude micro-organisms from patenting.

Take a look at the full report here, if you have got the patience to go through the full report.

Why it ran into trouble was that it was accused of plagiarism. The report had lifted three paragraphs in its conclusion from a 2005 paper authored by a research scholar Mr. Shamnad Basheer. His research work was commissioned by the UK based Intellectual Property Institute.

But in the subsequent that was raised about it is very easy to forget the recommendations of the committee on the terms of reference. What are they?

  1. On the first point of reference, it has answered that it would not be TRIPS compliant to limit granting of patents to New Chemical Entities only. Patents are to be granted for incremental innovations.
    1. It is worthwhile to note that at present, under Indian laws there is NO patent protection for incremental innovations. So this recommendation of the committee, is seen by the red brigade as a pro-MNC stance of the committee.
  2. On excluding micro-organisms from patenting, it observed that such exclusion would be violative of TRIPS Agreement.

As of today, the position is that the government says that it cannot act on the report unless the ‘technical inaccuracies’ are corrected. But Mr. Mashelkar says that, as he has resigned from the Committee, there is nothing more that he needs to do.

Wednesday, July 25, 2007

Consequences of WTO talks (Doha round) falling through

This is an article written by a UN Under Secretary General. It is a must read for all of you. Take a look at it here.

The WESS 2007 (World Economic and Social Survey, an annual publication by UNESCAP) underlines two types of costs – direct and indirect – consequent to the failure of WTO talks.

Direct costs refer to the net gains from trade liberalization that would no longer materialize. Estimates put the loss of income at about $100 bn.

Indirect costs are more diverse. They include: a long-term erosion in multilateralism and its non-discriminatory rules which have provided a stable anchor and rising trade-driven prosperity to the world for more than 60 years. It could also spell the beginnings of a reversal of economic reforms back to protectionism and trade favouritism, and the mergence of new political divides which could ultimately threaten peace and security.

Failure of the Doha round would lead to a proliferation of bilateral and regional trade deals. Already in the ESACP region about 38 trade deals have been concluded since 2004. Another 25 are under formal negotiations.

What is wrong with bilateral and regional trade agreements?

The disadvantage of bilateral and regional trade deals is that they result in a trading environment wherein the developing country producers and traders will find that cheapest sources of supply are beyond their reach.

What could be achieved by the Doha round?

Hence completion of the Doha round is in the interest of developing countries. It could provide market access to developing country producers that is stable, irreversible and non-discriminatory. Because it is global, there would be scope to deliver trade concessions across more sectors than any bilateral agreements are able to do. It would help WTO members to maintain their reform momentum, giving countries external incentives to implement difficult but desirable policy changes that they would otherwise be unable politically to achieve. These benefits are all much less evident in bilateral trade agreements.

Tuesday, July 24, 2007

What is PL 480?

It is a food assistance programme of the US government. Food assistance is given to other countries – either on government to government basis or on people to people basis. U.S. support for overseas food aid was formalized in the Agricultural Trade Development and assistance Act of 1954, also known as P.L. 480 Food for Peace. The basic legislation, establishes the U.S. policy of using the country's abundant agricultural resources and food processing capabilities to enhance food security in the developing world. It has its own strategic and humanitarian concerns behind it.

The PL in PL 480 stands for Public Law. This food aid program is comprised of a number of ‘titles’. Each title has different objectives and provides agricultural assistance to countries at different levels of economic development. Title I of the P.L. 480 program is administered by US Department of Agriculture (USDA) and Title II is administered by the US Agency for International Development (USAID). Nothing much is known about other titles.

Title I provides for the sales of U.S. agriculture commodities on concessional credit terms to governments and private entities in developing countries. When allocating assistance under the Title I program, priority is given to agreements that provide for the export of U.S. agricultural commodities to those developing countries which have demonstrated the potential to become commercial markets, are undertaking measures to improve their food security and agriculture development, and demonstrate the greatest need for food.

Title II, is Emergency and Development Food Assistance. Through this program, USAID promotes managed growth in activities that use food for humanitarian feeding and for education.

Monday, July 23, 2007

About ADR, GDR, IDR and also SLR

Today I give you answers to two of the shout-box queries that were asked a couple of days ago. Incidentally what a rhyming in the naming?

19 Jul 07, 15:17

rishi raj: What is ADR,GDR,IDR ?What is the basic role they play in economy ?

ADR: American Depository Receipts

GDR: Global Depository Receipts

IDR: Indian Depository Receipts

Say if an Indian company wants to mobilize capital from abroad, can it do it? Even a novice will instantaneously come up with an answer like ‘NO’. We have too many controls which will not allow raising of capital abroad easily. This is what we ‘perceive.’ As we are liberalizing our economy, raising of capital from outside the country is slowly enabled by the government. ADRs and GDRs are the result of such liberalization.

What happens in these ADRs and GDRs is that an Indian corporate can deposit its stock (shares) with a foreign depository (foreign host country equivalents to our own NSDL and CSDL) and raise money from foreign public by offering these ADR/GDR issues for subscription. Usually the corporate conducts a road-show (advertising and publicity for its issue) and attracts the attention/interest of the foreign public to subscribe to its capital. The foreign governments and / or stock exchanges (where the issue will be listed) will have their own regulations (which are usually very stringent) which have to be complied with by the Indian corporate. The government liberalized the rules in this regard sometime in 2002.

And IDR is an exact reverse of the ADR/GDR issue. A foreign company can raise capital from Indian public, the same way that Indian companies can raise capital through ADR/GDR issues. The government of India framed the IDR rules sometime in 2004.

The basic role they play in the economy now should be very clear to you? Is it? Raising capital from foreigners or allowing foreign companies to raise capital in India.

19 Jul 07, 12:46

aparna: what is slr exactly

SLR stands for Statutory Liquidity Ratio (Banking) / Single Lens Reflex (Photography) and Self Loading Rifle (Policing).

I am not mocking at you; seriously. I am assuming that you are asking me about this in the context of banking. It stands for the percentage of net demand and time liabilities of a bank that has to be maintained by the Bank with the RBI. This can be in the form of cash, gold or approved securities. This percentage currently is at 25%. The Banking Regulation Act, 1949 actually prescribes a floor and ceiling for this percentage. The floor is at 25% and the ceiling is at 40%. That is, the RBI can't impound more than 40% of the net demand and time liabilities of banks nor can it prescribe a percentage which is below 25% for this purpose. It has to operate within this band. But recently the BR Act, 1949 was amended doing away with the floor. This gives RBI flexibility to prescribe a percentage of SLR which is lower than 25%. On the SLR funds, the RBI has to pay the banks interest. It is currently at 7.5%.

Contrast this with CRR -- Cash Reserve Ratio, wherein the Bank has to maintain a certain percentage of its net time and demand liabilities in the form of cash with the RBI. CRR at present is 6.25%. On the CRR funds, RBI will not pay any interest to the banks.

You can take the ‘net demand and time liabilities’ broadly to means the deposits of the bank. Why this term is used is that many a time there will be situations in which the deposits figure will not be reflecting the actual deposits. It is the ‘net’ figure that is to be taken and not the ‘gross’ figure. Demand liabilities are those that have to be paid by the bank on ‘demand.’ And ‘time liabilities’ are those that have a time within which the bank has to pay these liabilities. Time deposits like bank FDs (Fixed Deposits) come under this ‘time liabilities’ category.

Sunday, July 22, 2007

How should India respond to climate change?

With recent reports of climate change from the IPCC and the Stern review, it is important to know as to how India is likely to be impacted and what should it do about it.

It is a very interesting debate that appeared in ET. Take a look at it here.

Some salient points worth our noting from this debate:

India must factor in climate change into medium-term development projections and target at sustainable development using non-conventional energy sources and new technologies.

First of all, we can examine emerging world markets in carbon credits and create appropriate structures to enable our industry to take advantage of similar market opportunities. Perhaps we can think of a country’s CDM fund on the lines of EU emissions trading scheme with state and sector and specific emission allowances over and above which credits need to be purchased. This would develop a domestic market for carbon credits.

Secondly, opportunities for better use of by-products and some productivity increasing win-win situations like the one shown by Shell in Netherlands, wherein it is pumping CO2 from a refinery to green houses producing fruit and vegetables could perhaps be tried vigorously.

Third, alternative sources of energy can be encouraged by planning for integrated supply of power from non-conventional sources along with traditional sources. Regulations for fixed quotas from renewable sources can be put in place. In fact, the Electricity Act, 2003 enables this. This should be vigorously pursued.

Fourth, planning for coastal cities needs to take into account impending possibilities of a rise in sea levels.

Lastly, the dire predictions made by IPCC with regard to declining crop productivity in South and Central Asia need to be taken seriously and further investigated.

Wednesday, July 18, 2007

Answers to shout-box queries – 11

Here go answers to some of the recent shout-box queries.

18 Jul 07, 13:42

vijay: sir, what is hawala, and what is the difference btn Money laundering and hawala?

Hawala may be used while laundering money; but hawla is not money laundering. It is completely different form of crime or doing business. Depends on how one looks at it.

Suppose you have a relative abroad. Let’s say US. You want to send him some dollars. But, for various reasons you find that it is not feasible for you to send him dollars from India. So, if you have another friend here in India who also has a friend or relative in US and if he can establish contact with your relative there you can do a hawala transaction and send him money. You give your local friend the equivalent of dollars (in rupees). Your local friend tells his relative/friend in the US to give that much money to your relative in dollars.

Money laundering is a totally different thing. You earn black money and you convert into white money. This is called money laundering. There are various methods in which this is done. People make use of the stock markets, fictitious transactions, insurance (as I noted earlier), real estate etc. Put simply, if you are bringing on books losses or profits which are not yours, as yours, you are indulging in money laundering.

18 Jul 07, 13:05

rishi raj: What is the meaning og "negative net worth" in connection to RRBs ?

Put simply, net worth means -- all the assets of the bank less its assets. If this figure is in the negative, that is a negative net worth. Suppose a bank has Rs. 100 crores in assets and Rs. 98 crores in liabilities. Its net worth is Rs. 2 crores. If you reverse the figures i.e., its assets being 98 crores and liabilities being Rs. 100 crores, the bank has a negative net worth of Rs. 2 crores.

18 Jul 07, 10:14

Suresh: what is web1.0 and web 2.0, what is the difference between these two

Web 2.0 is a term often applied to a perceived ongoing transition of the World Wide Web from a collection of websites to a full-fledged computing platform serving web applications to end users. Ultimately Web 2.0 services are expected to replace desktop computing applications for many purposes. Take a look at this: http://en.wikipedia.org/wiki/Web_2.0

Web 1.0 is nothing but what preceded this present transition. You can view it basically as an information provider. Web 2.0 is characterized by interactivity, user participation and ownership of content and data. Things like sending an SMS straight from a web site was not thinkable till a few years ago. Today’s web based applications which are able to guide users in traffic with a simple cell phone, guide cars through the traffic maze, monitor the movement of trucks, give information about any individual from anywhere in the world etc., are all manifestations of Web 2.0.

17 Jul 07, 19:44

Mukesh Kumar: what is hedge fund

A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. Generally hedge funds take a lot riskier investment strategies and are guided basically by profit motive rather than security motive. The people who invest in such funds have lot of appetite for risk.

Tuesday, July 17, 2007

Holding companies – why are they the flavour of the season?

What is a holding company? How did this form of a corporate structure come about?

Any company which holds a substantial portion of the equity of another is called the holding company of the latter. This has a bit of history. While reading modern Indian history, some of you would have come across a phrase called ‘Managing Agency’. The managing agency has come about during the first wave of industrialization in British India. Under the arrangement, somebody would own a company and somebody else (the managing agency) would run it for a fee. This arrangement suited many businessmen who were based in Britain but had their operations in India. Sometimes, the managing agency also owned substantial stakes in the operating companies. This system was finessed by Indian entrepreneurs to gain control over their own operating companies. As a result, over time, managing agencies were transformed into proxy holding companies.

Holding companies have again become the flavour of the season, with many corporates floating a number of holding companies. Why this sudden rush? The answer lies in the soaring stock market valuations. Promoters are looking for new ways to unlock valuations hidden in operating companies, as well as improve their overall valuations to facilitate fresh capital raising.

Monday, July 16, 2007

KG basin Gas pricing imbroglio

In a longish article, today’s ET covered the issues very succinctly. Take a look at the full article in page 13. I am not able to find the web link for it.

I will note only some facts which are worthy of note. It is for us to draw conclusions from the facts. I give my conclusions at the end.

Seven years ago India’s oil import bill was $15 bn; but today it is about $57 bn.

How does KG basin gas compare with other options?

  1. Imported fuels are costly: Naphtha costs about $16 per mmbtu; Imported LNG costs about $7.5 per mmbtu; Petronet LNG is selling imported gas at $6.67 per mmbtu.
  2. RIL’s price discovery exercise has resulted in a price of $4.33 per mmbtu.
  3. Panna-Mukta-Tapti (PMT), a joint venture between BG, Reliance and ONGC is sold at $5.77 per mmbtu.

Average costs of power from various alternatives:

  1. Cost per unit from oil-fired plant is almost Rs. 6 per unit including variable cost.
  2. At $4.86 per mmbtu, the per unit cost will be around Rs. 3 to 4.

RIL had bid for supplying natural gas to ONGC for the latter’s Kawas and Gandhar plants at $3.18 per mmbtu in 2003. While RIL says that ONGC ignored a signed contract sent by it to ONGC, the latter says that RIL had reneged on the contract. The matter is in court.

Internationally, gas prices are always linked to crude prices and have soared in recent years as crude kept rising. For instance, imports into Thailand and Myanmar are nearly $6 per mmbtu while prices in the US, UK, Germany are $6 to 8 per mmbtu.

The spot market price of imported LNG is $8 to 9 per mmbtu. For long term contracts (7 to 10 years), LNG is available at $6 per mmbtu.


  1. As we are pinning our hopes on NELP (New Exploration and Licensing Policy) for oil and gas exploration, if we have to attract large and serious international players into our oil and gas exploration sector, we have to show a serious commitment to reform and demonstrate to the world that we don’t renege on contractual commitments made by us.
  2. It is time we accept the reality that fuel prices the world over will keep fluctuating, based on market conditions. Crude, which was available for as low as $8 a barrel in 1998, today is more than $70. There is no guarantee that the prices will not fluctuate again. So, every country has to take these fluctuations in its stride and strike long term contracts to the extent possible. That would give it some insurance against shocks.

Sunday, July 15, 2007

China’s strengths and weaknesses

· An article that is worth a read is “Broken China” by Pete Engardio that appeared in today’s ET.

· All of you know by now my admiration for the communist giant China and the critical attitude towards our own communists for their not being practical the way China had always been. There is an old Telugu saying which when translated into English roughly means “distant hills always appear smooth.” So would the case with many things that we perceive in real life. China’s is no different. It has its own strengths and problems. The challenge lies in trying to adopt the strengths without their attendant problems, to the extent possible.

· Some of the problems in the Chinese model are:

o A glaring administrative failure. A bureaucratic system that seems almost impervious to reform.

o A political structure that gives party officials down to even the smallest villages, huge influence over many facets of economic life.

o An ‘unstable, unbalanced, uncoordinated and unsustainable’ economy, as told by its own Premier Wen Jiabao.

o An over reliance on exports, weak domestic consumption, and a primitive financial system.

· But some of these very problems have some inherent strengths in them:

o It has given China a $1.2 trillion foreign reserves – the most every amassed by any country.

o The political structure ensures that projects which take a typical four years in the presumably efficient West, get completed in less than a year in China.

· To read this article you can use the e-paper of The Economic Times. Follow this link and choose page 5. You need to be registered to read these articles. Registration is free.

Friday, July 13, 2007

The SEBI-NSDL face-off

NSDL – National Securities Depository Limited was awarded the mandate by PFRDA (Pension Fund Regulatory and Development Authority) to act as the CRA (Central Recordkeeping Agency) for the new pension scheme in April this year. The CRA keeps track of the contributions of the subscribers to the scheme and also the government which puts in a matching share besides the earnings of the subscribers and related data.

When NSDL sought SEBI approval for acting as the CRA of the new pension scheme, SEBI rejected it saying that it is a non-core function of the NSDL and is outside the law. To buttress its argument SEBI has given two reasons as to why this non-depositary activity is fraught with risks and liabilities and how it endangers the integrity of the depository system:

  1. Any liability incurred on account of such activity is likely to endanger the net worth and solvency of the depository.
  2. Common information systems may result in breach of security of the depository system.

But NSDL bases its argument backed by strong legal opinion which says that NSDL is not barred from undertaking an activity which is not its core function.

The government is expected to step in and solve the dispute.

Thursday, July 12, 2007

How does ethanol help stabilize sugar prices?

When ethanol blending is allowed, rather encouraged by the government, it would result in demand pick up for ethanol. Ethanol, as you all know, is manufactured from molasses, which is a by-product of the sugar manufacturing process. Right now instead of manufacturing ethanol, the sugar factories are producing RS (Rectified Spirit) which goes into the production of IMFL – Indian Made Foreign Liquor. If producing ethanol gives the sugar factories more money, they would naturally be interested in producing ethanol. As the companies get to see an increase in revenue and possibly thereby profit, they would be in a better position to rejig pricing of other products like sugar being manufactured by them.

Unlike other commodities whose prices are allowed to be determined by the forces of demand and supply, sugar prices in India are the result of a complex system of controls, governing everything from the area within which sugar mills must procure their cane, to how long they must continue to procure, to how much the mills can release in the free market and so on. The result is that price signals to farmers and industry are woefully distorted.

A carefully worked out policy in regard to the by-products of the sugar industry could make substantial difference to the sugar industry. The increased profitability, better production planning for sugar and other products [change in product mix] could benefit the growers, help in stabilizing sugar prices, save in foreign exchange [use of ethanol] by reducing oil import bill and help the sugar industry. (This para is an excerpt from the 2nd report of the National Commission on Farmers. Take a look at it here.)

Incidentally one more important report on sugar industry is given by the Committee on Revitalization of Sugar Industry [Tuteja Committee Report-2004].

It is also worthy of note that there is a sugar institute at Pune which goes by the name -- Vasantdada Sugar Institute. And the Indian Institute of Sugar Research is at Lucknow.

Wednesday, July 11, 2007

Women reservation bill

I was asked to write something about women reservation.

By women’s reservation here, we are talking of the representation of women in legislatures. Whatever I am noting here is from the two links that I have given at the end of our noting. Those of you, who have some patience and time, should go through those links. They are very informative and give you the required ammo to fire on your own.

An ILO study shows that while women represent 50 percent of the world adult population and a third of the official labour force, they perform nearly two-third of all working hours, receive a tenth of world income and own less than one percent of world property. This is the backdrop in which a fair representation for the fairer sex has come to be articulated.

In December, 1999 the government of the day introduced a bill to amend the constitution (85th Amendment). The Bill provides for reservation of one-third of all seats in the Lok Sabha and the Vidhan Sabhas for women. This reservation shall also apply for seats reserved for Scheduled Castes (SCs) and Scheduled Tribes (STs). As the reservation is large, the bill provides for rotation of reservation in every election.

What are the flaws in this bill and why is this not getting passed in the Parliament? Let’s look at them.

The flaws boil down to the two major proposals of the bill viz., the 1/3rd reservation and rotation. Can 1/3rd strength of the Parliament be expected to lose their seats for the sake of women representation? Nobody would be willing for the simple reason that they would not be ready to sacrifice their career for a cause. Secondly, rotation means that every single seat will be rotated. Can any politician build and nurse a constituency with interregnums? Will this serve the cause of leadership development of the society at large? Highly unlikely.

So how to find a way? Let’s look at two of the suggestions:

  1. Compel political parties to mandatorily nominate women candidates for at least one-third of the seats on the pain of losing recognition. The logic behind this suggestion stems from the fact that there is in fact a positive discrimination in favour of women in elections and that the success rates of women contestants are far higher than those of the men candidates. So compelling political parties to ensure that women from 1/3rd of their contesting candidates will serve the purpose. This will be acceptable to political parties also on grounds of merit. They will be free to choose female candidates and constituencies.
    1. This is flawed on two counts. First, it is violative of the constitution. Article 19(1) (c) which guarantees rights to forming associations, is amenable for restrictions only grounds of sovereignty and integrity of India or public order or morality. So a reservation based restriction will not pass muster.
    2. Secondly, there is no guarantee that the women candidates will get elected.
  2. Increase the number of seats in the legislatures. The present strength of legislatures is based on the 1971 census, when the population was about 54 crores. As per the 2001 census, the population is 102 crores, which is almost double that 1971. So if seats are increased, a portion of them can be reserved for women. The strength of the Lok Sabha can be easily increased by one-third to 750. This will take away the fear of any male member to vacate the present seat. These extra seats could be dovetailed into double-member constituencies, which will ensure the reservation of one seat for women and, even permitting two to be elected, if the other woman candidate gets the maximum of the votes polled.
    1. The idea is good and appears practicable. But why have double member constituencies? The number of Lok Sabha seats can be proportionately increased based on the increase in the population. But, all the same such an increase should not be an uncapped increase. There has to be a cap somewhere. Any future increase should ensure that women constitute 1/3rd of the Lok Sabha’s strength at any given point in time.

Do look at the following two links. They are good.



Tuesday, July 10, 2007

Tax on Limited Liability Partnerships

We all know that India is experimenting with LLP (Limited Liability Partnerships). Let’s dig deeper and take a look at it.

Various committees and expert groups have, from time to time, recommended introduction of LLP legislation in India. The Abid Hussain Committee (1997) has recommended this legislation in the context of SSIs. The Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003) and Dr. Irani Committee on New Company Law (2005) have also made recommendations for a separate LLP Legislation.

Therefore, the Ministry of Company Affairs has introduced a Bill, namely Limited Liability Partnership Bill, 2006 in Rajya Sabha on 15th December, 2006. The Bill is under consideration of the Standing Committee on Finance.

The taxation of these entities instead of the individuals which is being considered, may lead to a higher tax burden for the partners and dual taxation of foreign partners. This will lead to a setback for cross-border partnerships on two counts.

Firstly, if the LLP itself is taxed, the foreign partner may not be able to claim the benefit of any double taxation avoidance deal which his home country may have struck with India.

Secondly, if the LLP generates income here as well as abroad, the entity will have to pay tax here even for the income that is generated abroad.

Taxing the individual partners will do away with both these disadvantages. In that case the Indian partner would pay tax only for whatever income he gets from the partnership’s activities here, while the foreign partner will not pay any tax here.

Monday, July 09, 2007

How does deforestation result in soil infertility?

8 Jul 07, 17:37

rizwan: does cutting of trees and deforestation result in soil infertility? How?

This needs a bit of longish answer. If you are having some natural sciences background, it would be easy to understand. But the following stuff that I found on the Net is very easy to comprehend. Take a look:

Rainforest microbes are extremely efficient at breaking down and recycling waste organic matter - the leaf litter and layers of detritus on the ground. When there is deforestation, almost no nutrients reach the forest soil and it is consequently poor. Removal of the trees allows the soil to dry out and the little humus that exists to deteriorate. This causes the rainforest microbes to die and the soil becomes largely inert, biologically. The degraded soil is also prone to erosion by wind and when land floods, it can be washed away.

The root systems of the trees are confined to the topmost layers of the soil. This is not unexpected, since the deeper layers of the soil do not contain appreciable quantities of nutrients. Because of the resulting poor soil conditions, sustained farming after forest clearance is difficult and people regularly move on, looking for more fertile soil. The types of crops grown take the few remaining nutrients that are present from the ground, without putting anything back. Typically farmers move on after just three years and each time they move, they "slash and burn" virgin forest, destroying everything that grows.

If total deforestation of an area of rainforest occurs and the topmost layers of nutrient-deficient soil are removed by erosion, the virgin forest can once again be regenerated by a new primary succession. However, this is not possible if the underlying rock (such as weathered sandstone and alluvial sands) is low in nutrients. In this case only a much simpler ecosystem develops, such as a heath-population or a sparse savannah. Once destroyed, the rainforest is gone for ever.

Typically in an area like the Amazon basin, which is home to the world's largest single rainforest, only around 4% of land is suitable for agriculture of any type. 75% of the land is so poor that cultivators are unlikely to get more than a single crop from the soil, before it is completely exhausted.

Settlers tend to cut the largest trees, thinking that the soil is the most fertile there, but the rainforest natives know that the places where the trees have thin trunks often have the best soil. The soil infertility has caused the large trees to develop a highly efficient system of nutrient extraction. Tree roots can extend up to 100 meters along the ground from the tree trunk and form a root mat 30 centimeters (a foot) or more thick. This mat can capture over 99% of the nutrients that fall on it.

On the one hand rainforest soil is permanently damaged by water erosion. Deforested areas are exposed to rain and flooding, both of which washes away top-soils. Tree roots tend to hold soils together, act to provide physical reservoirs for water by making barriers and slow the rate of flow of moving water, thus reducing its eroding effects. In Nepal and India, for example, deforestation in the foothills of the Himalayas has led to catastrophic flooding of the river Ganges. Bangladesh has been in receipt of the results, with well known effects. Forests act as giant sponges, absorbing enormous quantities of water in the rainy or monsoon seasons. Normally this water is released in a controlled way over the following year, providing those downstream with a steady and sustained flow. Remove the rainforest sponge and the waters simply rush downstream and flood, often taking soils, humus, and the micro-fauna with them.

Conversely, soil can be baked by the sun. One consequence is that the important mycorrhizal fungi are destroyed by dehydration. The fungi live in a symbiotic relationship with trees, and every rainforest tree species may have its own, very specialized, fungal species associated with it. These unique fungi enable the tree to absorb more minerals from the soil than it would otherwise be able to, in exchange for energy. These fungi are similar to those associated with mushrooms that are commonly found in temperate forests. In both instances, most of the fungus is in tiny filaments that surround the tree's roots. When the mycorrhizal fungi are not present, the trees cannot grow. In deforested areas, fungi will not grow in the warmer and drier soil that results when the forest canopy is removed. The degraded soil is taken over by coarse grasses and other hardy species.

Mining activity not only destroys trees with clearings and roads for the mines, it also pollutes rivers and water tables with heavy metal toxins that are almost impossible to remove. Rainforest areas downstream of mines can be affected for hundreds of miles. These toxins - often mercury-based compounds - not only kill animals and plants, they can affect the microorganisms as well.

The microorganisms are at the bottom of the food chain. Their survival is essential for the survival of all the other species. Sad as it may be to lose something as beautiful as one of the jungle cats to extinction, through human abuse of the rainforest, the forest itself and most fauna would survive nevertheless. Loss of rainforest microbes, however, would have a severe effect throughout the entire rainforest ecology. The rainforest is dependent upon the actions of microbes, to sustain the base-level of food supply. Microbes dispose of dead matter by decaying and rotting it. They provide nutrients both from their by-products and from themselves, for other usually larger and more complex life-forms - they are food.

Many species of animal and plant could consequently suffer extinction, if microbial populations were destroyed or degraded. Although microbes are numerous and there are many species, they can be sensitive to the smallest of environmental change - changes in water acidity, levels of sunlight, toxins, etc. They can be quite fragile. However, they and their diversity are key to the survival of the forest.

The microbial world of the rainforest, though lacking the appeal of the more exotic larger creatures, should be regarded as just as important as any other rainforest population. Therefore efforts should be directed towards understanding and preserving their habitat and the way they interact with the forest environment.

Sunday, July 08, 2007

Answers to shout-box queries - 10

On July 5th, Suresh was asking as to what compelled Buddhadeb Bhattacharjee to accept the monumental truth. That socialist alternatives are not practical alternatives.

Here goes my take on that:

I would say it is plain and simple realization of the futility of age-old beliefs. Communist ideology as I see it is one such age-old belief. The Comrades have failed to realize that even in the last remaining bastion of Communism that China is today, what is able to sustain it is -- hard-nosed realism with which that form of communism is laced and practiced. Any ideology could take only the past and the present in articulating a solution for the problems it sees. It cannot predict the problems of the future and come up with solutions NOW. It has to keep changing with times. It has to make amends. China was successful in making such amends. Compare all the fool-hardy behaviour of our communists in raving and ranting against capitalism with the realistic behaviour of the Chinese communits. They have welcomed and in fact pioneered the concept of SEZs. They have welcomed the private sector behemoths to operate in their country. They have realized that even for a country as vast as itself, an export led growth need not be an anathema. Our communists have falsely been chanting the mantra of self-reliance. China bade good-bye to such policies long back in the mid-1970's itself as it has realized that the solution is in changing with the times. It has also carefully articulated such paradigm shifts that it has undertaken and sold them well in its larger body politic. It has seen the Long March and the subsequent land-reforms as solutions relevant for that particular time. It has not prevented it from articulating a One-China Two-systems policy.

Can we expect such realism from our Communists? One only has to look at our Kerala CM to know where we stand. Even the Central leadership of the CPI(M) and CPI is not inspiring much confidence in spite of it having some of the best brains of the country. They are wedded to a failed concept. They are too wedded to it to disown it now. It is realists like Buddhadeb that the communists very badly are need of now. But will they allow such people to thrive? That is the big question.

Saturday, July 07, 2007

Why isn’t there depression?

Bradford Delong, the celebrated economist reeled out some interesting economic history to suggest that the current day global imbalances and misaligned real exchange rates threaten to bring about a mild recession and also possibly a significant and prolonged depression. Yet these are not happening, he says, for three reasons.

Let us first look at the economic shocks that he has listed:

  • 1987: America’s stock markets tanked for technical reasons in the fall of that year.
  • 1991: Saddam Hussein’s adventure in Kuwait shocked the world oil market.
  • 1992: Europe’s fixed exchange rate system collapsed.
  • 1994: Mexican peso crisis
  • 1997-98: East Asian Financial crisis
  • 2000: The dot com bubble
  • 2001: The terrorist attacks on the twin towers in New York, US.

The three possible reasons why recession and depression are not likely to happen:

  1. The world simply has been lucky. Though the streak of luck may not continue.
  2. Central bankers have finally learned how to do their jobs, especially after 1987. The lack of far sighted decision making meant that economic policy lurched from stop to go to accelerate to slow down. Consider this: before 1985, central bankers switched their objectives from year to year. One year, they might seek to control inflation, but the previous year they sought to reduce unemployment, and next year they might try to lower the government’s debt refinancing costs, and the year after they might worry about keeping the exchange rate at whatever value the political masters prefer.
  3. Financial markets have calmed down. Today, the smart money in financial markets takes a long-term view that asset prices are for the most part rational expectations of discounted future fundamental values. Before 1985, in contrast, financial markets were overwhelmingly dominated by the herd behaviour of short-term traders. Thus central bankers were stuck trying to control a world economy shocked by random changes in the animal spirits of investors and traders.

Friday, July 06, 2007

Food subsidy administration through coupons

5 Jul 07, 18:01

Rishi raj: Hi..What would be the effect of giving coupons for PDS system ?

Giving coupons would be dismantling the existing PDS system. Food coupons allow the beneficiaries to directly purchase food grain of choice, as opposed to a predetermined basket available under PDS, from ‘kirana stores’ at PDS prices (the latter can collect the difference from the government). Besides, encouraging more efficient private grain handling, this opens up the possibility of large corporate involvement.

While coupons do have merits, it should be remembered that they will also bring with them some problems which are peculiar to them.

One of them is -- will they be delivered the way they are meant to be delivered? Perhaps it is distinctly possible that they will be garnered by the undeserving and a parallel/black/underground market for them develops. In all probability political affiliations may determine who is 'deserving' and who is not. Perhaps a biometric smart card based system of distributing coupons can overcome some of these problems. But will the political system allow such a system to take root?

Second is corruption. This had haunted the existing PDS system also. Nobody is talking of safeguards against corruption in the ravamped coupon based system. It would be naive to think that this will not be there.

But on the positive side:

  1. Given that a reasonable system of distribution is allowed to be kept in place, it would ensure not just food security, but nutritional security for the vast majority of our needy masses.
  2. The coupon system is more easily amenable to a technology backed fight against corruption and iniquities in the distribution system.
  3. Once the private sector is involved in it, the raison deter of black marketing gets removed.
  4. The supply chain management burden that is now there on the government stands off-loaded to the private sector. Government would be able to do a much better job of ensuring food security as it can concentrate only on procurement for security reasons.

Thursday, July 05, 2007

Are any sops required for the exporters in view of the strengthening rupee?

Look at the strong case made out by an editorial in ET about why there is no case for giving more sops to our exporters even in the light of a strengthening rupee.

  1. Barring sectors such as textiles and clothing, there is substantial import content in most of our exports, which mitigates the impact of the rising rupee in that imported inputs become cheaper.
  2. The case is stronger for making the industry more productive. This can be achieved through:
    1. Quality power at affordable prices so that dependence on high cost captive power is reduced;
    2. Better transport and port infrastructure to reduce shipment costs;
    3. Improved administrative systems to bring transaction costs down.

Wednesday, July 04, 2007

Tax relief on overseas losses

Corporates and banks can now use losses suffered by their ‘overseas branches’ to lower their tax outgo in India. This follows an ITAT (Income Tax Appellate Tribunal) ruling to this effect. It said that the losses incurred by the foreign operations of an Indian company have to be allowed as a deduction from its domestic profit, even though the profit earned abroad continues to remain exclusively taxable in the foreign country under the terms of the double taxation avoidance agreement.

This is a win-win situation for the corporates and results in ‘double dip of losses’ in tax parlance. That is the Indian companies will get a deduction for their overseas profits twice – once in its assessment in India and the next time when it makes profit in the foreign country.

The argument given by the tribunal was that once an income becomes taxable by a foreign government with which New Delhi has a tax treaty, India loses its right to tax the same unless the agreement has a specific provision that income can be taxed in both the countries. Therefore, when an income is taxed abroad, it can not be taxed in India.

Yet, when a company makes a loss abroad, it can be adjusted against profits in India because the provisions of DTAA cannot be thrust upon the Indian company. The tax treaty applies only when it is more beneficial to the taxpayer.

Tuesday, July 03, 2007

For a viable microfinance model

An article with this heading that appeared in today’s ET provides some solid suggestions. I recommend reading the full article here.

The problems being faced by the Microfinance sector include:

  • Limited access to foreign capital
  • Reliance on bank financing

Some suggestions for making this a viable model:

  1. Category call: The multifarious structures that have cropped up in the sector (as NBFCs, NGOs and Trusts) have given rise to disparate funding structures. The RBI should resist the temptation of making it mandatory for all MFIs to adhere to a common legal structure. Instead it should devise a funding pattern based on some rating mechanism, which ignores the MFI’s genetic structure.
  2. Capital flexibility: Providing MFIs with lot of elbowroom in funding options. The existing cap of $5 mn foreign loans per annum should be increased. Access to foreign capital and local finance also should be eased.
  3. Emphasis on finance: The RBI should allow MFIs to act as financial conduits. This means that they should be allowed to access savings and offer other financial services.
  4. Regulatory role: A separate regulatory infrastructure for MFIs should be established by RBI much like what it has for commercial banks, urban cooperative banks and NBFCs.

Monday, July 02, 2007

Answers to some shout-box queries – 9

21 Jun 07, 23:20

Vasudev: Sir, can u throw a light on the GO 610 in Andhra Pradesh regarding Telangana!!!

This is proving to be one of the most contentious issues in Andhra Pradesh today.

It is a pretty simple issue which is complicated by local politics. It is possible that what I write here may raise the hackles of many others. Nevertheless, let me give it a try.

The seeds for this issue were sown during the separate Telangana agitation that was launched way back in 1969. There was an agitation led by Dr. Marri Chenna Reddy agitating for a separate statehood for the Telangana region of AP. Indira Gandhi handled the agitation very well and ensured that the issue did not escalate. Basically, the Centre led by Indira Gandhi was of the view that there was no necessity for a separate state for the Telangana region and that a balanced development would suffice. However, in the process of containing the agitation, the political leaders in AP came to an understanding with the Central leaders in what came to be known as the Six Point formula. This was in 1973. It was intended to remove the misgivings then prevailing about the future of the State. It was intended to indicate the basic approach to promote the accelerated development of backward areas, a balanced development of the State as a whole and to provide equitable opportunities to different areas of the State in the matter of education, employment and career prospects in public services with a view to achieve a fuller emotional integration of the people of Andhra Pradesh. Consequent to this agreement, the Constitution was amended through 32nd Amendment and in 1975 a Presidential Order was brought out with regard to organization of local cadres and regulation of direct recruitment.

With a view to give effect to this Presidential Order, a number of committees were constituted during the course of time and a number of orders were issued by the Government from time to time. One of the basic issues that had always agitated the people of Telangana was that people from other regions of the State viz., Andhra and Rayalaseema have garnered more government job opportunities than the people of Telangana region, in Telangana region. The current public posturing of parties is nothing but giving a vent to such feelings. The Presidential Order had laid down (broadly) that government jobs in the respective regions should be reserved for the local people to a large extent. The order further specified that the non-local persons holding such posts shall have to be allotted to the respective areas where they are ‘local’. But there are so many exceptions to this that it was soon realized that implementing the order is easier said than done. And political parties being what they are, have only articulated the problem when it suited them. So a party like TRS – Telangana Rashtra Samiti, which was formed with the sole objective of attaining statehood to the Telangana region, championed the cause of this implementation. All the brouhaha that we see daily in papers is nothing but the political games being played out by every party. All this will come to nothing and the order will anyway be implemented in course of time. The problems that are being seen and articulated will all be overcome during the course of time – when passions die down and better sense prevails over all the parties.

One of the major difficulties that is worth noting in implementing the order is – non-implementation of the order has also resulted in an integration of the so called non-local people in some other ‘local’ areas. If such people are now repatriated to their original ‘local’ areas, they would face integration problems there. The government seems to be not prepared to see this as a problem. It will have some repercussions. But in course of time these problems will fade away on their own – not because they have been recognized and solved, but because they are shoved under the carpet and are not likely to resurrect. My belief stems from possibilities like retirements. What happens when the people who had to be repatriated retire? And their place is filled up with ‘local’ people? This is a classic case of the problem fading away. This is quite likely because some people are bound to approach the courts seeking relief on one ground or the other. That will cause some delays in implementation and some people will stay back in their ‘non-local’ area and perhaps retire there.

But emotions being what they are and political parties not found wanting on whipping them up, it is quite possible that large scale repatriations do take place. But let us see how the events will roll.