India-Nepal Ties Back on an Even Keel

Nepal and India are trying to even out recent crimps in their decades-old relationship by focusing on areas of cooperation – such as, energy, trade, investment and infrastructure – with the bilateral cooperation agenda also including a public diplomacy programme

Cultural, historical and religious affinity often masks the ordinary Nepali’s simmering political discontent against India. It erupts and manifests itself sharply during any internal crisis in Nepal. This deep-seated antagonism towards India was further stoked by Nepal government’s insinuations (corroborated by Nepal’s media) that India was blocking supply of essential goods into Nepal during the recent Madhesi agitation. In a break with tradition, Nepal Prime Minister K P Sharma Oli proposed a visit to China for his maiden foreign tour.

There were numerous missteps by India also, including delays in using alternate supply routes to provide essential goods to Nepal. This intensified Nepal’s economic suffering during the Madhesi agitation.

However, it seems pragmatism and better sense has prevailed on both sides. PM Oli visited New Delhi in February 2016 (before visiting China in March) and signed a bunch of MoUs with Prime Minister Modi. Nepal has also commenced a public diplomacy initiative to improve communication, as well as to inform and engage Indian civil society on multiple areas of bilateral cooperation. As part of the exercise, an inaugural discussion on “Nepal’s Reconstruction Agenda – Opportunities and Challenges” was held in New Delhi on April 13, 2016. Stakeholder inputs from the discussion will be used for commissioning further research.

The discussions centred on participation of the international community in reconstruction efforts, the economics of a drawn-out reconstruction exercise, areas of collaboration between India and Nepal, and, how to incorporate efficiencies into India’s monetary and non-monetary support to Nepal. There was a common thread running through the deliberations: the centrality, or importance, of local knowledge and indigenous technologies to the reconstruction efforts. To that extent, there was emphasis that international aid agencies should desist from super-imposing global disaster-management solutions that are divorced from Nepal’s cultural, social and architectural inheritance.

The public diplomacy programme comes at the right time. Nepal’s political and social stability is in India’s interest, given the long and porous border between both countries. Nepal faces enormous challenges in its post-disaster reconstruction and rehabilitation programme, which is estimated to cost around $7 billion. India has pledged $1 billion as reconstruction aid, 40% of which is in the form of grants and the balance as soft loans. Another $1 billion was promised during PM Modi’s visit in April 2015 through Lines of Credit (LOCs, concessional loans for projects identified by Nepal, disbursed by Exim Bank of India and guaranteed by both the governments). Many of these lines will probably get allocated for quake-related infrastructure works.

This is the third LOC sanctioned by India, with two earlier tranches totalling $350 million. Many projects under the earlier tranche have been delayed due to either capacity deficits, or bureaucratic hurdles, on both sides. The discussion focused on how the new $1-billion LOC tranche could be used expeditiously and efficiently – using lessons learnt from earlier LOCs — for re-building both physical and social infrastructure.

Physical infrastructure – especially roads and power generation and distribution — is critical for the reconstruction of the quake-affected areas. While the Madhesi agitation forced the Nepal government to explore alternate supply routes, and Oli signed agreements with China to allow Nepal to export and import through Chinese ports, it will be some time before Nepal can seriously think of using China as a trade corridor. There was unanimity during the talks that transporting petro-products across the China border is uneconomic, given that the challenging terrain of the Himalayan range impedes smooth movement of large oil tankers. India, on the other hand, has deployed Vishakhapatnam as an additional transit port for Nepal’s foreign trade. Currently, Nepal’s imports transit through Kolkata port only.

Participants at the public diplomacy forum were also informed that the Oli government has started addressing domestic misgivings over Nepal-India power trade. A 132-kv line from Muzaffarpur, India, has already started supplying 80MW of power to Nepal; this capacity is expected to be upgraded to allow for transmission of 600MW by 2017. The transmission lines being laid for this project will be used by Nepal for both export and import of power, especially once the hydro-electrical projects are completed.

India and Nepal not only share a 1750-km long, porous border but also a unique people-to-people relationship (many Nepali citizens, for example, own land and property in India). India is also Nepal’s largest trade partner and contributor of foreign direct investment. Political gamesmanship often vitiates this deep association. It is unfortunate that egregious, short-term political objectives have now necessitated a public diplomacy programme on a bilateral relationship that is so intricately inter-twined.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can find it here.

Remembering Water...

In this hot and fractious season of water shortages, cricketing villains and simmering public anger, I was reminded of an Op-Ed I wrote for The Economic Times on August 9, 2006. It was titled "Water of Love, Deep in the Ground". Is it coming true? Here it is:

With the government unwilling to act, except to frame effete policy, and the sharks devouring public assets by tacit political consent, it won’t be long before water becomes the incendiary fuel for public strife, warns Rajrishi Singhal

STOCKS are jejune, gold is passe and land is old-fashioned. So, what’s the next big asset class, which will allow investors to get in on the ground floor before every other punter in the land wisens up to it? I asked this question to a couple of my senior colleagues and pat came the reply: “Water”! Certainly not what I was expecting to hear, but the more one thought about it, the more convincing and compelling the idea seemed. In fact, as a commodity and an asset class, water has already triggered wars between nations in Africa and the Middle East and, closer home, strained relations between Tamil Nadu and Karnataka. It also plays a vital role in determining property rates in almost all the major cities — Mumbai, Chennai, Delhi definitely being the main ones. 

The query came up in connection with the unabashed land grab that’s going on in the name of every conceivable enterprise — SEZs, shopping malls, educational institutes, highway projects. What’s more, every major metro has seen the emergence of land sharks who have been cornering large swathes of land — mostly at rock-bottom prices by threatening owners and using the shield of political clout. The modus operandi usually involves bending a few rules here, paying off a few politicians there. But it’s all kosher as long as there’s a profit at the end of the transaction. So, don’t be surprised if you see the same sharks — or at least sharks with similar intentions — taking to water before you can spell aqualung. 

This raises a basic issue — what is an asset? Can water be called one? An asset can, loosely, be defined as an investment that generates cash flow, whether it is a machine owned by a company or a fixed deposit owned by an individual. There is huge opposition from certain quarters to water being termed either as an asset or a commodity since it is part of the “commons”. The argument certainly does have an element of logic to it but does not entirely do justice to ground reality. In fact, various policy documents from the government — including the last National Water Policy of 2002 — also curiously maintain a studied silence on the issue, leaving it not only open to interpretation but to subsequent bending of rules. 

The reason for considering water as an asset is pretty obvious. It is getting increasingly scarce and its supplies have started carrying a premium. In fact, certain members of the conspiracy theory camp even ascribe the current conflict in Lebanon to Israel’s growing thirst for water resources and yearning to control the Litani river basin. Agreed, this probably sounds a bit outlandish, especially given the Iran-sponsored Hezbollah’s involvement in the conflagration, but water is irrefutably a flashpoint in West Asia and Africa. British journalist and author Adel Darwish said in a conference way back in 1994: "Most borders have been set, oil fields mapped and reserves accurately estimated — unlike the water resources, which are still often unknown. Water is taking over from oil as the likeliest cause of conflict in the Middle East." 

In India, the problem is not over availability of water, though that might soon become the issue. Inadequate and corrupt service delivery standards crimp the pipeline. However, given that water supply is largely in the domain of state governments and urban local bodies (ULBs), their inherent inefficiencies and embedded corrupt practices are bound to create opportunities for private sector investment. In a 1996 survey by the Indian government, in 241 towns with populations between 50,000 to 100,000, more than one-third ULBs could not provide more than 100 litres per capita per day. 

SO, THERE does exist a gap between demand (which is growing, with rising population and urbanisation) and supply, which the government bodies seem incapable of addressing. Given this, there does exist an investment opportunity which will certainly be exploited by the sharks, unless the central and state governments, along with the private sector, jointly pursue rigorous structural reforms in the management and delivery of water resources. In fact, at the risk of being labelled a neo-liberal, it must be said that a large part of the responsibility might have to be shouldered by the private sector. 

Involving the private sector in water has many detractors, but the choices are limited. Given the huge investment outlay required to provide water to every Indian, a World Bank document observed: “On the ‘supply side’ there are ultimately only two sources of financing — tax revenues and user charges — and both are falling.” Also, the government has proved to be entirely incapable of delivering the required services at economic rates. Therefore, if we assume that the private sector will play a larger role, it might as well sharply define which areas work and which do not. For instance, building physical infrastructure might not be feasible for all private sector enterprises, given the long payback period and the system allergy towards paying user charges. Some private companies might find it useful to invest in bottled water, given the phenomenal growth rate in the sector (an annual growth rate of over 50%) and the fragmented nature of the industry structure (200 brands with 80% local brands). 

There could be opportunities in other areas that have already seen the emergence of water sharks — water tankers. A lot has been written about them and their unshakeable grip over water supply in metros as well as smaller towns. These sharks have close links with politicians, or have been indirectly promoted by them, prevent the ULBs from investing in the supply infrastructure and then supply to the deprived neighbourhoods at exorbitant prices. Tanker sharks have today become ubiquitous in both metros as well as smaller towns. 

This signifies only one thing: even though the NWP is silent about water markets and the Maharashtra Water Resource Regulatory Authority Act of 2005 wants a water market in the state, a parallel and unregulated water market has already sprung up and is thriving under the official tutelage of the political class. And with the government unwilling to act, except to frame banal and effete policy documents, and the sharks devouring public assets by tacit political consent, it won’t be long before water becomes the incendiary fuel for public strife.

Going Global? Study Tata Steel First

All Indian companies planning to go global should closely follow the saga of Tata Steel’s UK plants; it’s a masterclass on how intimately business is intertwined with geopolitics and geoeconomics

An epochal event, that should resonate for every globalised Indian business, brought down the curtains on an eventful 2015-16. In the last fortnight of March, Tata Steel declared[1] that it will sell off or mothball its U.K. steel plants. The event contains a lesson for every Indian business aspiring to go global; it also has immense geo-economic and geo-political repercussions.

Tata Steel’s momentous decision is in keeping with the general trend of Indian companies selling off overseas assets to either repay debt or exit low-yielding assets. Tata Steel’s decision seems to be a combination of both. Here are some other examples of Indian companies selling overseas assets:

* Reliance Industries sold its Eagle Ford shale oil field in the U.S.A. for $1.07 billion in June 2015.

* In October 2015, Bharti Airtel sold telecom tower assets – close to 8,300 towers — in seven of the 13 countries from its African operations. The proceeds: $1.7 billion.

* Suzlon sold German subsidiary Senvion (earlier known as Repower) to private equity company Centerbridge Partners for Rs 7,200 crore in January 2015.

* GMR Group sold three overseas operations during 2013: in March it sold a 70% stake in GMR Energy (Singapore) Pte Ltd for $520 million; in December it offloaded its 40% stake in Istanbul airport and another airline services company f0r a combined $305 million.

* Avantha Group’s Crompton Greaves has been selling its overseas power equipment assets.

* Healthcare company Fortis sold five overseas healthcare assets between 2013 and 2015

This is just an indicative list but does underline India Inc’s troubled liaison with globalisation. Economic reforms and competitive pressures forced many Indian companies to expand operations overseas through acquisitions with either (or a combination) of three objectives in mind – to acquire competitive supply chains, to access consumer markets, to buy into developed technology and intellectual property. However, the fault was not in going global but seemingly, in the timing.

But it also begs the question: how did Indian companies end up borrowing so much that it would subsequently force them to jettison their cherished global desires?1And, how come they never saw the approaching storm, because most of the loans were contracted either just before the crisis or during the slowdown?

Tata Steel’s UK outing is an example that provides an answer. It acquired British company Corus in April 2007, subsequently renaming it Tata Steel Europe. Tata paid over $12 billion for the purchase, most of it debt. Around the same time, the sub-prime mortgage crisis had started undermining global markets, leading to the cataclysmic closure of Lehman Brothers in September 2008 and the subsequent global financial crisis.

The economic slowdown and continuing weakness in European markets affected sales. What exacerbated matters were structural factors — global steel oversupply, increase in third-country exports into Europe, high manufacturing and environmental costs, continued weakness in domestic steel demand and a volatile currency.

Many other Indian companies with ambitions of acquiring a global footprint similarly borrowed heavily either in 2007 or, bizarrely, during 2011-12. A bloated appetite for foreign currency loans was fuelled by historically low interest rates in developed markets. There was also an element of hubris – a mistaken feeling that growth would continue unhindered, unaffected and untouched by global turmoil.

Unfortunately, this also reveals India Inc’s lack of strategic intent and a bewildering ignorance of geo-economic currents. The absence of an in-house risk-mitigating treasury process is exposed in numerous speeches by various Reserve Bank of India governors: most companies that borrowed overseas to finance acquisitions, left their foreign currency exposures unhedged. Consequently, the rupee’s depreciation since 2013 increased their loan-servicing burden.

Tata Steel’s woes, though, could have an additional set of triggers, which could include UK’s geo-political snuggling-up to China, or even the country’s vexed relationship with the European Union (EU).

China has been dumping cheaper steel in Europe after other large markets – including U.S.A. and India – increased tariff barriers. This has resulted in demands within Europe to increase import tariffs as well.

In a February 4, 2016 news release to disclose results for the quarter ending December 2015, Karl-Ulrich Köhler, MD & CEO of Tata Steel in Europe, stated: “Chinese steel shipments into Europe leapt more than 50% last year, while imports from Russia and South Korea jumped 25% and 30% respectively. The European steel association has identified that Chinese steel is being exported at prices below the cost of production…”[2]

In a separate statement, Roy Rickhuss, general secretary of the steelworkers’ trade union Community, said: “I would like to see evidence of the Prime Minister’s claims that they have increased procurement of British steel or tackled Chinese dumping of steel in Europe…The UK is one of the member states opposing the end of the lesser duty rule in Europe, which currently prevents higher tariffs being imposed.”[3]

But Europe is wary of jeopardising its relationship with China – it is the EU’s second-largest export market, and fourth-largest FDI destination.

The EU and the UK dithered on imposing higher import duties on steel because of apprehensions that it might render end-user industries uncompetitive. Higher tariffs present another predicament for the current Conservative government: weighing the cost-benefit of saving the 15,000 jobs at the Tata Steel works versus antagonising new-found friend China.

Tata Steel now involuntarily finds itself inserted into the Brexit campaign. Advocates of Britain’s exit (Brexit) from the EU are arguing that exiting the Union will allow the Cameron government to bail out the Tata Steel plants and save those 15,000 jobs. Currently, EU’s state-aid and procurement rules restrict state-sponsored lifelines to industry, which have been bolstered by two recent rulings[4].

A face-saving formula – which keeps Tata Steel and its workers, Britain, EU, and China happy — might still be in the works. EU Trade Commissioner Cecilia Malmstrom[5] ’s speech at a recent trade conference provided some clues to such a compromise.

Whatever the fate of Tata Steel plants and jobs, there is a learning in this for Indian companies which are looking abroad: before investing in any jurisdiction, India Inc must do well its homework about a country’s potential geo-economic tripwires – specifically, its bilateral and multilateral trade and investment agreements – and geo-political risks. This will require corporate India to develop a new strategic temper and a broader perspective, one that thinks more like a multinational leader with global – not just Western – ambitions, rather than rely only on the template advice proffered by international bankers and management consultants.

References

[1] Press Release, BSE Limited, Review of European Portfolio of Tata Steel, 29 March 2016, <http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/EB0CC117_DBF1_47E0_8753_5DEA119FE8B6_082546.pdf>

[2] News Release, TATA Steel, Tata Steel reports Consolidated Financial Results for the third quarter and nine-months ended December 31, 2015, 4 February 2016, <http://www.tatasteel.com/investors/pdf/Q3-FY15-16.pdf>

[3] News & Views, Community, Community responds to Prime Minister’s statement on steel,31 March 2016, <http://www.community-tu.org/community-responds-prime-ministers-statement-steel/>

[4] Other news, European Commission, Vestager announces EU State aid decisions: Belgium and Italy, 20 January 2016, <http://ec.europa.eu/ireland/press_office/news_of_the_day/vestager-announces-eu-state-aid-decisions-belgium-and-italy_en.htm>

[5] Malmstrom, Cecilia, ‘Trade Defence and China: Taking a Careful Decision’, European Commission Trade defence Conference, 17 March 2016, <http://trade.ec.europa.eu/doclib/docs/2016/march/tradoc_154363.pdf>


This feature was exclusively written for Gateway House: Indian Council on Global Relations. You can find the article here.