Incredibly Indian, or the Travesty of Taj Tourism

The Taj Mahal is unarguably India's finest monument. It's a lover's dirge for his late beloved, set in timeless metre and rhythm. It's a lament in marble, a paean to love, that leaves visitors awestruck and enchanted.

It's, therefore, equally painful when the custodians of this great monument are callous and corrupt. A visit to the Taj is meant to be a homage to beauty, love, devotion. Instead, many visitors have come back angry and frustrated.

Arundhuti Dasgupta Singhal has written in Business Standard on the shameful appropriation of Taj Tourism by touts and how officials are aiding and abetting this. It's titled Incredibly Indian: How Taj Mahal Tourism Has Turned Into Harassment:

http://goo.gl/kUF7Hf

A snatch of a sentence from the above blog highlights the plight of ordinary tourists: "Feeling harassed, helpless and angry at the manner in which we have been dragged into a chain of unofficial payments and pay-offs..."

     

IMF And RBI — Lost In Transmission

The IMF’s 2014 review has some good GDP news but its reservations on interest rates bears closer attention. It can take 32 months for the effects of a an interest rate cut to be felt. What does this mean for the Indian economy?

Christine Lagarde International Monetary Fund (IMF) Managing Director was in India on 16 March for a two-day trip following the 11 March release of the IMF’s 2014 annual review of the Indian economy. The review has some good GDP news for India. Predictably, everybody focused mostly on the growth forecast for 2014-15 and for 2015-16 and (expectedly) missed out IMF’s reservations on a key ingredient that facilitates growth in any economy — interest rates.

There’s a bit of a story behind the IMF’s salubrious growth forecast. The original set of two IMF documents (in which Indian GDP was initially estimated to grow by 6.3% in 2014-15 and by 6.5% in 2015-16) had to be supplemented by two additional reports — one a transcript of the discussion between IMF officials and media, and, two, a copy of the IMF Survey which updated India’s growth forecast, in line with the government’s new methodology. Consequently, IMF now expects India’s GDP to grow by 7.2% during fiscal 2014-15 and by 7.5% during 2015-16.

Growth junkies celebrated this international endorsement for India’s growth prospects. They have been hankering for a rate cut, arguing that the only thing standing between them and double-digit annual growth rates were intractably high interest rates. The Reserve Bank (RBI) has rewarded them with two rate cuts — one in January and another in early March, soon after announcement of Budget. There are now demands for more, and deeper, rate cuts.

But, if they had read the IMF report a bit more closely, they might have been disappointed. The source of frustration is an accompanying document released with the India country report — called Selected Issues (as background documentation) — which includes a chapter on monetary transmission. On the basis of an internal model, this document reckons that the two-stage transmission between a repo rate cut to bank lending rate cut, via the weighted average call money rate, takes a total of 32 months. The impact on deposit rates is faster at 23 months.

Translated, that means RBI’s repo rate cut in January 2015 is likely to result in lower bank lending rates only by September 2017. The final impact on economic output and price levels, and hence growth impetus, will take even longer to feed through the relevant economic linkages. While that does seem a bit extreme, there is no denying that there is a large, looming problem in the room that nobody wants to acknowledge: transmission problems, or crimps in the financial pipeline.

RBI’s rate actions tend to take ages to travel through the economic system before they translate into lower borrowing rates for firms and households at the other end. In short, the transmission time between RBI’s rate action and banks cutting their lending rates is inordinately long, fraught with uncertainties and resistant to any mapping or measurement. Hence, nobody knows — with any modicum of certainty — how exactly this decision travels through the system, or how long this entire process will take.

The IMF report also refutes RBI’s estimates regarding transmission time, as well as dents the central bank’s confidence of improving lags and lead times under the new monetary arrangement it has signed with the Centre. The Urjit Patel Committee had mentioned that “…monetary policy in India impacts output with a lag of about 2-3 quarters and WPI headline inflation with a lag of about 3-4 quarters and the impact persists for 8-12 quarters.”

RBI has on numerous occasions — through working papers, speeches, media interactions and committee reports — acknowledged the problem of transmission leads and lags in India’s monetary policy. Most reports agree that transmission in India works through a number of channels — interest rate, credit markets, foreign exchange rates, asset prices (such as equity or house prices), expectations (about future shocks and belief in central bank ability to counter adversity) — with the existing fiscal and monetary system acting as final arbiters of the speed of transmission.

In each of the channels mentioned above, there are speed-breakers that slow down the pace of transmission. In the interest rate channel, for example, the existence of a large informal sector with largely inelastic borrowing rates, or high interest rates charged in the microfinance sector, impede transmission of rate cuts to output and inflation. Take government borrowing. Not only does it artificially dampen interest rates, it also forcibly appropriates a fixed amount of the banking system’s lendable funds, providing banks with a disincentive to heed market signals. This is one of the things that make it difficult for an RBI repo cut to materialise as a bank lending rate cut.

The Indian financial sector is dominated by banks, with public sector bank providing the bulk of banking services. The unusually large presence of state-owned banks

Hence, in the face of the conflicting transmission time periods provided by IMF and RBI, as well as the existence of innumerable structural road bumps that hinder smooth diffusion of monetary policy, there are legitimate questions about the efficacy of the monetary policy arrangement between RBI and the government.

Kind courtesy Gateway House (here) and Hindu BusinessLine (here)

A Sharing of Instruments

RBI’s new brief to curb inflation comes with a cut in its independence

Like many other things, the Reserve Bank of India has come late to the party. And it has celebrated with a rate cut. Announced on Wednesday morning, outside its usual, scheduled policy review cycle, the RBI cut the benchmark rate by 25 basis points. This is questionable.

What’s curious is the timing: it seems to indicate that the RBI is returning a favour to the government for having signed the monetary policy framework agreement. Signed between the RBI and the Union finance ministry on February 20, it enjoins the RBI to bring inflation—as measured by consumer price index (CPI)—below 6 per cent by January 2016, and thereafter strive to keep it at 4 per cent (with an error margin of plus/minus 2 per cent). Any deviation will be considered a failing, requiring an explana­tion.

The monetary policy framework with a single nominal anchor was recommended by an RBI-constituted expert committee and chaired by RBI deputy governor Urjit Patel. The choice of CPI (combined) as nominal anchor is also in keeping with similar recommendations made by earlier committees, such as the Raghuram Rajan committee and the Percy Mistry committee. It would thus seem that a chorus of orchestrated voices, seemingly with an aligned ideological perspective, has managed to refashion the RBI’s role and purpose.

What is disquieting is the way it tilts at independent monetary policy. The decision also comes at a time when there is an attempt to steadily erode the RBI’s independence (however limited), either through curtailing its powers or through unilateral transfer to the executive, as evident in this budget.

The first is a move to amend Section 6 of Foreign Exchange Management Act (FEMA), which empowers the RBI to control foreign exchange flows. Arun Jaitley stated in his budget speech: “Capital account controls is a policy, rather than a regulatory, matter. I, therefore, propose to amend, through the Finance Bill, Section-6 of FEMA to clearly provide that control on capital flows as equity will be exercised by the government, in consultation with the RBI.” The immediate provocation for this is believed to be an embittered separation process between a leading Indian conglomerate and a foreign telco; to make matters worse, RBI rules on put options in share agreements delayed a settlement. Eventually, though, the RBI is believed to have made exceptions to its rules for this deal.

The second is the setting up of a public debt management agency “which will bring both India’s external borrowings and domestic debt under one roof”, which are all under the RBI’s watch currently. There is also no clarity on the nature of the agency—will it be independent, will it be under the finance ministry or quasi-autonomous? This clarification is necessary because a debt management agency should be in a position to either influence interest rates or take the punch-bowl away in times of excessive fiscal expansion.

In the aftermath of the RBI’s war-mode attack on inflation and inflationary expectations, influential voices have been demanding that its powers be curtailed or stripped. Many blamed the RBI, wrongly of course, for the current economic slowdown. This is not peculiar to India. With a prolonged global slowdown prompting countries to elect conservative candidates, central banks have felt the heat in Israel, Japan and Hungary.

The decision to forge a new monetary policy agreement, especially when aca­d­emics are questioning inflation targeting, has some unexplained areas. First, the RBI has no control over half the constituents in the rebased CPI index (food or fuel items), so this raises questions about influence monetary policy action can have on price behaviour. Second, the RBI has complained in the past about the quality of data collection and analysis, but is willing to submit itself to be judged by the same touchstone. Three, there is an undeniable, but com­­plicated relationship between employment and inflation. The latest economic survey highlights the dis­tortions in une­mployment data; this compact is then bui­lding a framework using the bedrock of two publicly ackn­owledged noisy databases. Four, the transmission route and the time-lag bet­ween monetary policy action and its impact on the price line is unclear; the RBI’s brave promise the­refore to hold down the price line to a specific number using monetary policy is surprising.

The final picture will emerge when monetary policy committee members are selected. One hopes they will be independent professionals, selected not for their political beliefs but their understanding of monetary economics. Finally, one also hopes that the RBI governor will get to have the last word on that committee.

Reprinted with permission from Outlook Magazine: 

http://www.outlookindia.com/article/A-Sharing-Of-Instruments/293613

and, 
Gateway House: http://www.gatewayhouse.in/a-sharing-of-instruments-2/

Budget 2015: No Heed to Economic Diplomacy

Finance minister Arun Jaitley’s 2015-16 Budget resonates only partially with Prime Minister Narendra Modi’s arc of economic diplomacy; it lacks strategic intent that could invest India with some geo-strategic heft in the years to come

Soon after he was sworn in as Prime Minister, Narendra Modi invested India’s languishing economic diplomacy with a renewed energy. It was therefore widely expected that Budget-2015 would achieve strategic convergence with Modi’s vision of using economics to drive India’s foreign policy. But the Budget seems to have achieved that only partially.

Economic diplomacy has a two-pronged role in the Indian economy. One, to open up markets for Indian goods, services and investments, with special emphasis on widening and deepening India’s footprint in neighbouring countries and newer markets like Africa and Latin America. Two, Modi’s whirlwind foreign engagements in the first eight months of his premiership were also focused on attracting foreign inward investments — from governments as well as the private sector — to further invigorate his “Make In India” programme.

On the first count, the Budget is conspicuously silent. It is on the second that the Budget holds out some hope.

The silence in the first instance is surprising. With the U.S., European and Japanese economies — which have also been India’s traditional export markets — still struggling to break out of a low-growth trap, it is imperative for India to create a beach-head in newer markets for its goods, services and investments. Post 2008, India was forced to look to Africa and Latin America to maintain export buoyancy. But, both continents together account for a paltry 15% of India’s total exports and there is nothing strategic in this Budget that indicates a desire to achieve higher numbers.

Modi’s foreign policy priorities have also included a renewed thrust on India’s immediate neighbourhood — countries in both the South Asia Association for Regional Cooperation (SAARC) and Association of Southeast Asian Nations (ASEAN). Barring the announcement of a project development company to help facilitate Indian private sector investments in Cambodia, Myanmar, Laos and Vietnam (CMLV), the Budget is bereft of any meaningful strategy. For example, there is no mention of, or funding allocated to, linking India’s North East to ASEAN through an all-weather transport corridor, an issue that has been discussed and accepted. Even with CMLV, there is no clarity on the investment-absorbing capacity of the individual countries or the kind of sectors Indian companies can focus on [1].

The Budget’s commitment to economic diplomacy is also reflected in money kept aside for various ministries. Budget allocation for 2015-16 under the head “Technical & Economic Cooperation with Other Countries and Advances to Foreign Governments” in the Ministry of External Affairs (MEA) [2] is up by 25.88%. But when compared with the original budget estimate, the allocation is actually down by about 3.5%. Worse, the budgetary outlay for the Department of Commerce in the Ministry for Commerce and Industry (the bulk of which is earmarked for foreign trade and export promotion) for 2015-16 is lower than both the revised and budget estimates for 2014-15. [3]

Another missed opportunity is the Indian Technical and Economic Cooperation (ITEC) programme, a key instrument of India’s development diplomacy which is administered by MEA. Despite its popularity, it’s allocation at Rs 180 crore for 2015-16 is just 16% higher than the actual expenditure last year. 

An argument can be made that given the shrinking fiscal space for the Centre, and the pressure to kickstart growth impulses through public spending, little is left to spare for economic diplomacy. However, that logic is self-defeating because the gains to economy — both in terms of growth and revenue — from accelerated geo-economic strategies is well known.

What makes these lapses doubly alarming is the grim future scenario for India’s trade regime outlined in the Economic Survey, which was released by Chief Economic Advisor Arvind Subramanian only a day before the Budget announcement. [4]

The survey singles out three main challenges: the phenomenon of unbundled and geographically dispersed global value-added manufacturing chains into which India has integrated slowly, the imminent rise of two large trade blocs (Trans-Pacific Partnership with Asia and Trans-Atlantic Trade and Investment Partnership with Europe) which will cover half the world’s trade and China’s emergence as a major voice in trade negotiations. India, says Subramanian, has only two choices: measured integration (an euphemism for status quo) or ambitious integration, which will require India joining the TTP (currently a remote possibility). The flip sides to both options are that measured integration will leave Indian exports isolated, while joining the TTP will require substantial liberalisation which may be out of alignment with domestic level reforms.

As China did during its entry to the WTO in 2001, India can forcefully dovetail the domestic reforms agenda to an external priority. But the country’s competitive democratic politics and the presence of varied interest groups makes that task exceedingly difficult.

Gateway House has been advocating a greater impetus towards improving India’s relationships with neighbours in SAARC and ASEAN, through a strategy of Corridors of Development and Circles of Influence, as a means of achieving some geo-strategic primacy in the coming years. [5] [6] This Budget could have begun that journey.

But, to be fair, finance minister Arun Jaitley has introduced many measures to attract fresh investment into manufacturing and services. These moves may not be headline-grabbing, but are a nuts-and-bolts policy framework: they seek to improve the ground conditions for attracting investments, facilitate efficient use of financing, eliminate legal obstacles that inevitably lead to disputes and prolonged legal battles, simplify processes and stabilise the tax regime. There seems to be a realisation in the Budget, as well as in the Railway Budget of February 26, that investors — whether domestic or foreign — are unlikely to part with their money unless the ground conditions are improved substantially.

The specific measures introduced by Jaitley – heeding the advice of the Economic Survey – include eliminating distinctions between different categories of foreign investors, one-source clearance for regulatory approvals, easier dispute settlement mechanisms, broadening scope of investment vehicles for foreign capital, providing tax clarity and stability. [7]

Hopefully, the oversight in providing the Budget with a strategic edge through geo-economics will be corrected in the quinquennial Trade Policy 2014-2019, which is already delayed and is likely to be announced soon by Commerce Minister Nirmala Sitharaman.

REFERENCES:

[1] Mathur, Akshay; Policy Catalyst: Seven Sisters’ Corridor; 30 May, 2014; Gateway House; http://www.gatewayhouse.in/policy-catalyst-seven-sisters-corridor/

[2] Notes of Demands for Grants 2015-16; Demand No 33, Ministry of External Affairs; Expenditure Budget, Vol II; http://indiabudget.nic.in/ub2015-16/eb/sbe33.pdf

[3] Notes for Demands for Grants 2015-16; Demand No 12, Department of Commerce, Ministry of Commerce and Industry; Expenditure Budget Vol II; http://indiabudget.nic.in/ub2015-16/eb/sbe12.pdf

[4] Economic Survey 2014-15; Department of Economic Affairs, Ministry of Finance, Government of India; February 27, 2015; http://indiabudget.nic.in/es2014-15/echapvol1-01.pdf (Page 37)

[5] Kripalani, Manjeet; Circles & Corridors of Economic Diplomacy; 18 April 2014; Gateway House; http://www.gatewayhouse.in/circles-corridors-of-economic-diplomacy/

[6] Gateway House Fellows; India’s foreign policy priorities 2015; 1 January 2015; Gateway House; http://www.gatewayhouse.in/indias-foreign-policy-priorities-2015/

[7] Jaitley, Arun; Minister of Finance, Government of india; Speech to Parliament while presenting Budget 2015-16; 28 February 2015;http://indiabudget.nic.in/ub2015-16/bs/bs.pdf

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/budget-2015-no-heed-to-economic-diplomacy/

and

Quartz India: http://qz.com/354516/another-area-where-modis-budget-disappointed-economic-diplomacy/

A Tobin Tax For India

In its recent monetary policy document, the Reserve Bank of India has imposed strict maturity conditions on foreign portfolio investment in debt to get a better handle on risk. But a fiscal solution would be more elegant and effective

The nervousness is back, and so are direct physical controls. In an otherwise staid monetary policy document released on 3 February 2015, Reserve Bank of India governor Raghuram Rajan has inserted one small restriction: henceforth all foreign portfolio investors investing in debt instruments—issued by government or private sector companies—have to hold on to their investments for a minimum of three years.

The policy decision is a discreet admission of the risks confronting the Indian economy, as well as a hint of the Indian central bank’s anxieties.

But imposing administrative controls in this day and age—even if they are meant to mitigate risks—sends wrong signals, especially when alternative fiscal instruments are available to achieve the same results. Even the European Union has agreed to implement such a measure despite stiff opposition from Britain and Sweden: the magic bullet is called a Tobin tax.

India must also consider introducing such a tax With Finance Minister Arun Jaitley searching for newer sources of revenue, Budget 2015-16 (to be announced on February 28) will be the right vehicle for announcing this levy.

Named after American economist and Nobel laureate James Tobin, the tax is levied on financial transactions and is aimed at curbing speculation and volatility. Although the tax was originally proposed by Tobin in the 1970s for a post-Bretton Woods global financial system—to curb short-term currency speculation and its attendant risks to the economy (through high interest rates)—over time it has come to denote taxes on all kinds of financial transactions, with each country re-interpreting the concept in its own unique manner. For example, Italy imposed a variation of the tax on high frequency share trading in September 2013—a 0.02% tax on trades occurring every 0.5 seconds or faster. [1]

After years of discussions and dissent, 11 European countries—Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia—have also decided to introduce a financial transactions tax from 1 January 2016. [2] Under the finalised proposal, the 11 countries will impose a 0.1% levy on exchange of shares and bonds, and a 0.01% impost on derivative transactions.

However, Britain and Sweden have already voiced their dissent to the proposal and are likely to oppose its enactment. It is also not known whether Italy will continue with the tax on high-frequency trading after 2016.

The Tobin tax approach has been tried in other countries as well—such as Thailand, Brazil, Chile, and Malaysia—with mixed results. However, in Brazil and Malaysia (and, to some extent, in Chile) the tax is said to have achieved the desired results of curbing volatile short-term currency flows.

India already has a form of Tobin tax in place—the Securities Transaction Tax (STT). Introduced in 2004, the STT is levied on every transaction of securities listed on the stock exchanges and mutual funds. According to Budget documents, the STT helped net Rs. 5,497 crores revenue for the government during 2013-14. [3] The estimate for 2014-15 is Rs. 5,991 crores.

A Tobin tax could be levied on foreign portfolio investors who decide to cash out their investments in Indian bonds before a certain period. This has dual benefits—the investments stay for a longer and predictable period (thereby insulating the economy from egregious volatility), and earn additional revenue for the government as well.

This might be much more elegant than what the RBI is proposing. The RBI monetary policy document states: “…it is decided in consultation with Government that all future investment by FPIs in the debt market in India will be required to be made with a minimum residual maturity of three years. Accordingly, all future investments within the limit for investment in corporate bonds, including the limits vacated when the current investment by an FPI runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of three years. Furthermore, FPIs will not be allowed to invest incrementally in short maturity liquid/money market mutual fund schemes.” [4]

This is a direct administrative decree that not only transmits confusing signals to market participants but could also incur their displeasure. Rajan even admitted in a recent newspaper interview: “I generally believe we should not micro-manage. But the one place where I do make a strong exception is on financial stability. There are situations when market participants do not fully internalise the consequences of their action because they know they can leave before the consequences hit them.” [5]

One reason for the directive could be swelling short-term loans and the bunching up of repayments in the near future. However, data seems to indicate otherwise: according to external debt data till 30 September 2014, released by the Ministry of Finance, short-term debt is only 18.9% of the total external outstanding debt of about $456 billion. At the end of June, it was slightly higher at 19.6%. [6]

So, why is the RBI imposing this diktat now? Clearly, it is a bit jumpy about the consequences of an interest rate hike by the U.S. Federal Reserve Bank some time this year. When that happens, many global investors are expected to withdraw funds from emerging markets like India and invest in the U.S. instead.

Such an outflow could create pressure on the current account, the rupee exchange rate, and on domestic interest rates. India experienced this in 2013. Rajan wants to bullet-proof the balance-sheet not only before the event, but also prior to the announcement of the Budget at the end of February.

References

[1] Clinch, Matt, Italy launches tax on high-frequency transactions; CNBC, 2 September 2013, <http://www.cnbc.com/id/101002422#>

[2] European Commission, Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax, 14 February 2013, <http://ec.europa.eu/taxation_customs/resources/documents/taxation/com_2013_71_en.pdf>

[3] Ministry of Finance, Government of India; Revenue Budget, Budget Documents, <http://indiabudget.nic.in/ub2014-15/rec/tr.pdf>

[4] Rajan, Raghuram G, Sixth Bi-Monthly Monetary Policy Statement; 5 February 2015, <http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=33144>

[5] Sriram R., Bodhisatva Ganguli and Gayatri Nayak, ‘The War on inflation is still not won: RBI Governor Raghuram Rajan’, The Economic Times, 5 February 2015, <http://articles.economictimes.indiatimes.com/2015-02-05/news/58838165_1_rbi-governor-raghuram-rajan-urjit-patel-committee-inflation>

[6] External Debt Management Unit, Economic Affairs Department, Ministry of Finance, Government of India, India’s External Debt as at End-September 2014, December 2014, <http://finmin.nic.in/the_ministry/dept_eco_affairs/economic_div/ExternalDebt_Sep14_E.pdf>

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/a-tobin-tax-for-india/

and

The Hindu BusinessLine: http://www.thehindubusinessline.com/opinion/tobin-tax-makes-a-lot-of-sense/article6898724.ece?homepage=true

India-U.S. BIT: Not A Done Deal Yet

India is revising the model draft agreement of its existing bilateral investment treaties. Some of the new clauses are unlikely to be accepted by either U.S. negotiators or U.S. corporations without substantial dilution

U.S. President Barack Obama’s second visit to India has resurrected hopes that the two countries will revive talks on the dormant but in-progress Bilateral Investment Treaty (BIT). A BIT is being eagerly sought by both sides—from the U.S., to provide comfort to American companies that they will not be treated unfairly, and from India in the belief that it will help increase foreign investment inflows into India.

But negotiating the many tripwires of the BIT will take time and effort. It may therefore be wise to rein in the optimism that is usually generated by high-profile state visits and the associated optics. More so because every significant India-U.S. bilateral visit in recent times—by Prime Minister Narendra Modi to Washington DC in September 2014, by U.S. Secretary of State John Kerry to India in June 2014 and January 2015, and by U.S. Trade representative Michael Froman in November 2014—has rekindled expectations about the abandoned BIT.

Talks on a BIT between the two countries have been on hold since February 2014. [1] Preparations to restart the conversation resumed in the backrooms soon after Modi’s swearing-in on 26 May 2014. Kerry discussed the pending BIT agreement with Modi on the sidelines of the Vibrant Gujarat Summit earlier in January. Diane Farrell, acting president of the U.S. Indian Business Council, confirmed this in a press statement. [2]

However, many hurdles will have to be cleared before any real progress can be made on the BIT. One of the obstacles is that India’s own BIT regime—the Bilateral Investment Promotion and Protection Agreement (BIPPA)—is in cold storage. India is currently reviewing the draft of the existing model agreement and is yet to produce a blueprint that is acceptable to all stakeholders, including different ministries (such as Finance, Commerce, Law and External Affairs). India has signed 83 BIPPAs since 1994 and enforced 72 of these agreements.

The existing text has been under review since early 2013 because many international companies have initiated overseas arbitration against the Indian government—17 new arbitration proceedings over issues as varied as Supreme Court’s cancellation of 2G licences and retrospective taxation notices were filed in the past two years alone. The companies which have sued the Indian government include Deutsche Telecom, Vodafone, and White Industries, under India’s BIPPAs with Germany, The Netherlands, and Australia, respectively.

Another speed-breaker is conflict within the government. The Department of Industrial Policy and Promotion (DIPP, in the Ministry of Commerce and Industry) is opposed to BIPPAs in general [3, 4]. The DIPP is responsible for framing India’s foreign direct investment (FDI) strategy, as well as promoting, approving, and facilitating FDI. The DIPP believes that a conducive economic and legal environment is sufficient to attract foreign investments. It also believes that the existing BIPPAs are likely to result in increased lawsuits and has suggested that the sunset clause in these agreements be invoked to annul them. On the other hand, India’s finance and external affairs ministries are both in favour of an overhaul of the existing template, which will then have to be applied to all existing 83 agreements.

The conflict also arises from the government’s duality in matters of foreign investment—while the DIPP is responsible for FDI, the Ministry of Finance is responsible for administering the BIPPAs.

Talks could face headwinds due to certain new clauses in the draft model agreement. There is a proposal to dilute the “investor-state dispute settlement” (ISDS) system. Unlike the existing contract, henceforth foreign investors will not be able to take the Indian government to international arbitration unless they have first exhausted all legal and administrative options within India.

Clearly, this is a reaction to the spate of offshore arbitration proceedings. It is likely that this defensive move was inspired by external developments. Brazil has eschewed ISDS and South Africa is likely to follow. Australia is under pressure from its civil society to drop ISDS from all its agreements (especially the one with U.S.) and not from a select few, as is the case currently.[5]

The entire ecosystem of perverse incentives built around the international arbitration system could have also compelled the Indian government to dilute ISDS—armies of highly-paid, ambulance-chasing lawyers who have created an entire business model out of arbitrations and arbitrators who keep dragging cases on because they get paid handsomely by the hour—all operating in a highly secretive system. [6] The reworked BIPPA draft tries to ensure a transparent arbitration system by stipulating certain conditions.

But a BIT bereft of ISDS is bound to be opposed by American negotiators and potential U.S. investors. The popular narrative has portrayed the Indian judicial system as slow and inefficient. Indian authorities, on the other hand, are wary of biases in the overseas arbitration tribunals. Achieving a consensus between India and the U.S. on this count is going to be tricky, but India seems to have global precedent set by Brazil, Australia and South Africa in its favour.

A deal-breaker could be intellectual property rights (IPR), a vexed issue on both sides. The U.S.’s private sector has been persistently lobbying with its government for extracting concessions from India, with the National Association of Manufacturers even pushing the U.S. Trade Representative to label India as a “priority foreign country”, an epithet reserved for the worst IPR offenders.

India’s counter-argument has been that its IPR regime is compliant with the World Trade Organisation’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) multilateral agreement, and it considers the U.S.’s Special 301 report—an annual publication from the United States Trade Representative (USTR) identifying trade barriers to U.S. companies and countries which do not provide “adequate and effective” protection of intellectual property rights—unilateral.

Several other prickly issues could sabotage talks—a proposal to drop the most favoured nation status from the agreement, re-phrased expropriation clauses, and re-worded text that ensures that the BIT/BIPPA does not end up favouring foreign investors while discomfiting domestic ones.

Negotiations are all about give-and-take, ceding some strategic space while appropriating critical concessions. This is, admittedly, a time-consuming process. A lot will, however, depend on American corporations and their attitude to doing business in one of the world’s biggest and fastest growing markets in the world.

REFERENCES

[1] Parashar, Sachin, ‘India, U.S. Agree to Restart Talks on Bilateral Investment Treaty’, Times of India; 12 January 2015, <http://timesofindia.indiatimes.com/india/India-US-agree-to-restart-talks-on-bilateral-investment-treaty/articleshow/45846021.cms>

[2] US India Business Council, USIBC Members Brief John Kerry, Secretary of State, and Catherine Novelli, Under Secretary of State for Economic Growth, Energy, and the Environment at Vibrant Gujarat 2015, 13 January 2015, <http://www.usibc.com/press-release/us-india-business-council%E2%80%99s-delegation-vibrant-gujarat-hosts-us-secretary-state-john>

[3] Sidhartha, ‘Finance ministry to move Cabinet for clearing new BIPA text’, Times of India, 24 June 2014, <http://timesofindia.indiatimes.com/business/india-business/Finance-ministry-to-move-Cabinet-for-clearing-new-BIPA-text/articleshow/37108910.cms>

[4] Press Trust of India, ‘Finance & Commerce Ministry to discuss draft BIPA model tomorrow’, Business Standard, 13 August 2014, <http://www.business-standard.com/article/pti-stories/fin-min-com-ind-min-to-discuss-draft-bipa-model-tomorrow-114081300432_1.html>

[5] Chan, Gabrielle, ‘Bill to ban investor-state dispute settlements garners support’,The Guardian, 14 April 2014, <http://www.theguardian.com/world/2014/apr/14/bill-to-ban-investor-state-dispute-settlements-garners-support>

[6] The Economist, The arbitration game, 11 October 2014, <http://www.economist.com/news/finance-and-economics/21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration>

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/
and
Quartz India: http://qz.com/332427/the-biggest-investment-deal-between-india-and-the-us-is-nowhere-close-to-completion/

Time To Put Substance Before Style

China now views itself as an emerging superpower rather than a ‘developing’ country. India should take this into account

Long after President Xi Jinping has flown back to Beijing, there will remain a host of prickly issues that senior ministers and diplomats on both sides will need to bang heads over. During President Xi’s 48-hour whistle-stop through Ahmedabad and Delhi, the climate-controlled atmospherics, the fastidiously choreographed diplomatic pas de deux on Sabarmati, the thunderous rhetoric and the flurry of MoUs made for good optics. But action is always a poor substitute for achievement.

One of the visible thorns in the blossoming relationship is border uncertainty and both President Xi and Prime Minister Narendra Modi did reiterate a need to settle it. But beyond the omnipresent irritation of a virtual border, it is in India’s interest to resolve numerous pending geo-economic issues with China.

Shifts and moves

Start with World Trade Organisation (WTO) first. India invited universal censure after blocking safe passage of Trade Facilitation Agreement (TFA) at WTO’s General Council meeting in Geneva on July 31, 2014. However, China’s unprincipled floor-crossing on that day was truly shocking, after having supported India’s stand in many multilateral fora (such as G-33, G-20) and in bilateral meetings.

China’s mercurial shift could be understandable if India was found to be acting irrationally. But, on closer analysis, it seems India’s actions were justified. Having agreed at the Bali ministerial to approve TFA, on condition that developing countries not be penalised for food security imperatives till a permanent solution is formalised by 2017, India discovered that all discussions thereafter were focused on only TFA. This was contrary to the post-Bali work programme and gave India (and some other developing countries) grounds to believe that once TFA was out of the way, rich countries didn't care much for the Doha Development Agenda, including food security measures.

But, there are some other valid reasons for India’s principled action. For one, India has a sovereign right to provide food security for its citizens, just as US has the right to buy and stockpile crude oil to provide its citizens with energy security. Two, TFA will cause a spike in infrastructure costs for poor countries; the rich nations were to provide budgetary assistance to help them tide over this unplanned expense, but the amount finalised is too low and the modalities are still vague.

Finally, benefits from TFA are ambiguous, with most gains likely to go to the developed world.

China’s sovereign objectives are somewhat aligned with India on this issue, particularly since it too has to provide food at reasonable prices for large sections of its population. Also, China has been a signatory to all the food security negotiations by G-33, a grouping of developing countries with convergent trade issues.

A change of heart?

While it’s not known if Modi-Xi talks included China’s breach of trust, the joint statement issued by both governments was patently anodyne: “As developing countries, India and China have common interests on several issues of global importance like climate change, Doha Development Round of WTO, energy and food security, reform of the international financial institutions and global governance. This is reflected in close cooperation and coordination between the two sides within the BRICS, G-20 and other fora.”

One reason for China’s change of heart could be India’s lackadaisical communications strategy; also, India’s parleys could have conveyed a message that it’s interested in cherry-picking only food stockpiling from a multitude of other development issues. This might have even influenced some of the other large emerging nations, such as Brazil and South Africa, to isolate India.

But there’s another significant development. There's probably a radical shift in how China views itself: as a world superpower and a trade behemoth, competing with the developed countries. Hence, in keeping with this new-found status, TFA makes more sense rather than hankering for food security. While China is indeed a trade colossus, India needs to keep in mind this change in China’s self-perception when negotiating with President Xi’s men in future.

The border incursion, intriguingly timed to coincide with President Xi’s visit, is a reminder of China’s foreign policy dualism: an extended hand of economic friendship to mask the ugly face of geographic expansionism.

The second issue is climate change and India would do well to keep the new Chinese psyche in mind in future multilateral deliberations.

On the surface, both India and China seem to be on the same page. Apart from a common historical stand, both President Xi and PM Modi have also excused themselves from the UN Climate Summit on September 23.

But that’s where the similarities end. China has already signed a separate climate change agreement with US. While these agreements reduce the climate policy distance between the two superpowers, there are still some sticking points. While China and US agree that that rich countries must provide developing nations with wherewithal to upgrade technology, the divergence is whether the old labels of “developing” or “developed” need to be upgraded.

In essence, the rest of the world’s identity — including India’s — is hostage to progress of talks between two superpowers. The initiative seems to be slipping away from India’s grasp; a climate change strategy is required before the big climate summit in Paris next year. While China’s stand may be driven by thickening smog over its cities, India may have to fashion its own position consistent with its economy and stage of development.

Myriad issues

There are many other unresolved issues on the table — using renminbi as a alternative currency, India’s membership in multilateral institutions (such as Asian Investment Infrastructure Bank) and groupings (Shanghai Cooperation Organisation, for example), discussions on how to take the BRICS Bank ahead, enhanced market access for Indian goods and services, are just some of them.

The lessons for Modi are clear: with China what you see is never what you get. Modi will have to take every opportunity to create an independent policy space for india, even if that requires striking trade and investment deals with Japan, USA, EU, Russia or Australia.

The writer is a journalist and senior fellow with Gateway House

Courtesy: The Hindu BusinessLine, edition dated September 22, 2014 (The original can be read here:goo.gl/Cbm3Ex) 

A River Tells A Story

The first thing that hits you as you reach the end of the road is the sound. It doesn’t just hit, it assails; and as I came to realise, it takes over all your senses. The river Parvati rushes all the way down from the Man Talai glacier where it springs up as a tiny brook, gathering tributaries and waterfalls in its widening swathe, displaying its audible impatience as it rushes to meet its more popular counter-part Beas in the Kullu Valley. And, in one of the many sinuous bends the river takes to plough its way down, lies a small village called Manikaran, now a bustling pilgrimage site for both Hindus and Sikhs. Manikaran’s provenance is uncertain but if you listen carefully, amidst Parvati’s roaring din, you can hear many stories.

When I reached Manikaran for the first time in the mid-1980s, the motorable road ended at Manikaran, on the opposite bank. Today I believe it extends further up the mountain to a hydropower project. You had to cross a small metal bridge to reach the village. My first encounter was with a sadhu — smeared with ashes, wearing his basic habit but carrying a fancy rucksack with a sleeping bag tied to its top. Sadhus play an important role in the continuing allure of Manikaran by providing an unending supply of stories and mind-bending herbs to make the stories sound credible.

So, on Dusshera night in 1986, when all the tourists had departed to witness the Ramlila in Kullu, I sat with a sadhu outside an ancient temple. Among the many stories he recounted about the mountains in the region – including one about an ancient Shiva Temple which is struck down by lightning every year and rebuilt painstakingly by its priest with loving care – he shared an interesting legend about how Manikaran came to be and how it was named.

Legend has it that goddess Parvati came down to the river for a bath one day, wearing a precious stone gifted by her loving husband, Shiva the creator-destroyer. While she was busy with her ablutions, the serpent king of the river started coveting her gem. Caution soon yielded to avarice and the serpent king wrested the ornament away from Parvati. She was obviously distraught and went weeping to Shiva and complained about the bully (with the sadhu providing a side-bar on the couple’s infinite love and their timeless coupling).

Enraged, Shiva switched on his third eye. So powerful was Shiva’s wrath that the serpent king had to cough up the gem. And, to top it all, Shiva’s revenge was so violent that the gem split into millions of small hot and burning pieces when the serpent spit it out. Wherever they fell, hot springs gurgled up.

And so it came to be that the river – with its impetuous, abundant, ferocious and untamed demeanour – was named Parvati. The bend in the river is her ear and the small hamlet perched on a rock in the bend is the ornament in her ear, or Manikaran, a phonetic twist to the purer term Manikarn. That night, sitting on a cold marble platform, Parvati’s roar suddenly seem to grow louder at the end of the story.

Reprinted With Permission from Talking Myths Projects: http://www.talkingmyths.com/a-river-tells-a-story-2/

Working The Budget: Before India Goes Business As Unusual, Fix Patchwork Policies

One of the promises made by the BJP in its election campaign was to change the mode of governance. This pledge found resonance with voters because the dominant mode of governance and service delivery was felt to have been appropriated by the privileged, which included the politician-bureaucrat-businessman nexus. Narendra Modi’s rhetoric of “minimum government, maximum governance” promised to upend the superstructure. This meant giving the short shrift to business as usual.

But it would appear that it’s not so easy to extirpate the old ways of doing business. The decision to impose a punitive capital gains tax on debt mutual funds (MFs) has classic Indian bureaucratic response to market initiatives written all over it. Household and corporate savings have been exiting bank deposits and heading for fixed maturity plans (FMPs) and debt MFs. The government wanted to stop this because there was a tax arbitrage at play here. But what they failed to see is that there is also an issue of real returns here.

The problem is simple: interest income from bank deposits attracts income tax. After deducting tax and the rate of inflation from interest income, the real return received by depositors is negative in most cases. There are two options thereafter for investors: move their funds to physical assets, such as gold or property, or move to more efficient financial instruments. Since investment in FMPs and debt MFs qualifies for lower taxes, many depositors forsake bank deposits in favour of debt MFs.

The tax arbitrage could be eliminated by improving the real returns provided by bank deposits. In the short term, this can be achieved by aligning tax breaks on bank deposits and debt MFs. But this may be unrealistic and could create an undesirable precedent. In the longer run, though, the only way to provide positive real returns is to ensure that inflation doesn’t erode returns.

While the arbitrage opportunity has now been plugged, there is still no guarantee that all the money invested in debt MFs or FMPs will necessarily return to bank deposits. What the government does not realise is that the money moving from bank deposits to debt MFs stays in the system and is still available for productive investments; money that moves away to physical assets is lost to the economy.

In the end, to foster savings in the economy, the government will have to take a call on what kind of tax breaks it wants to provide on which kinds of financial instruments. The additional Rs 50,000 deduction from income allowed for investment in certain specified instruments suffers from the same syndrome: most of the instruments included in the list yield only negative real returns.

On another note, finance minister Arun Jaitley in his Budget exhibited some concern for the health of his fellow citizens by imposing a punitive levy, the so-called “sin tax”, on cigarettes. Excise duty has shot up from 11% to 72%. But the levy is limited to only cigarettes of 65-mm length and below. So, the message from the government: cigarettes over 65mm length, the “king-size” brands, are safer than the smaller ones.

What about competing tobacco products? The tax on gutka and chewing tobacco has been increased from 60% to 70%. But on pan masala, the duty has gone up from 12% to only 16%. What gives? This is policy, wittingly or unwittingly, creating a new arbitrage window. There have been reports over the last couple of years, ever since states started banning gutka sales, that these sachets of oral tobacco have been masquerading as pan masala. There is now a tax incentive for gutka to impersonate pan masala. Anybody doing research on the “law of unintended consequences” is sure to find a wealth of material in Indian government policy pronouncements.

If it was public health that was causing Jaitley anxiety, it is intriguing why he spared beedis. Perhaps political expediency requires courting some large beedi manufacturers, whose support is crucial for the upcoming state assembly elections.

Jaitley’s arithmetic for estimating revenue and expenditure numbers for 2014-15 have also invited some degree of scepticism. Even if we tamp down on the cynicism, it is clear that a meaningful Budget can be presented only in February 2015.

Published in The Economic Times on August 2, 2014: goo.gl/sKzcta

Threats: An Age-Old Tactic To Garner Votes

Nothing works like threats. Didn't somebody say something like that, in some movie? Well, life's imitating art out here in Election-land.

Election season gets the worse out in Indian politicians (actually, it could be any politician but my knowledge is limited to desi chaps). #Elections2014 are no different. There are no issues, campaigns are bereft of ideas and stump speeches are usually full of invectives and expletives. The manifestos are photocopies of each other, the candidates selected by the two central parties feature the usual rogues' gallery. They draw their support from smaller parties that wear mendacity on their sleeves.

It is, therefore, not unusual that most parties have resorted to threatening voters. The message is short, dire and bone-chilling.  Every political party is doing it. Complaints are pouring into the Election Commission. Here are just a few examples.

Sharad Pawar's nephew Ajit Pawar has embarrassed his uncle's Nationalist Congress Party by trying to browbeat voters from a West Maharashtra village into voting for his cousin Supriya Sule. The alternative: we'll cut off water supply to the village. Can he deliver on the threat? He is Maharashtra's deputy chief minister, as well as minister for water resources. He has the habit of putting his foot squarely where he shouldn't: once, when faced with complains of water shortage, he retorted by asking whether he should pee into the dams if there was no water in them. He obviously denies ever having made any of these statements.

Bhartiya Janata Party's far right, feeling somewhat neglected and forlorn, has started asserting itself. One obscure chap from Bihar -- Giriraj Singh -- recently trotted out the old chestnut again: he exhorted all those opposing BJP's PM candidate Narendra Modi to migrate to Pakistan. The BJP leadership seemed a bit red-faced, but Giriraj remained unrepentant. 

And then, as if in a competition to better that, leader of Vishwa Hindu Parishad -- a BJP compatriot party -- Pravin Togadia suddenly roared on Sunday that people belonging to minority denominations should be evicted from residential areas populated by the majority.

Actually, both Giriraj Singh and Pravin Togadia seem to be acting out a common strategy -- shepherding back the potential far-right elements who had probably started drifting during the past few weeks. It is possible that Modi's narrative (as well as BJP's under Rajnath Singh) had shifted from hard-core Hindutva to a slightly more ameliorative tone. Those occupying the centre and the left might not have noticed the change, but for those dreaming of a khaki-coloured future regime this might be palpably disturbing.

Threats -- subliminal or even overt -- are common during elections. The Congress used it to great effect during the 1984 general elections. Advertising agency Rediffusion used a subtle (and not-so-subtle) communications campaign to plant horrific images of violence and terror in the voter subconscious.

So, which threat is more effective? The answer, my friends, will be known on May 16, 2014.