Thursday, 21 April 2016

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.

Friday, 15 April 2016

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.

Thursday, 7 April 2016

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.

Monday, 7 March 2016

What’s In The Bag?

For all intents and purposes, the Budget is in the right direction. Except, it could use a plan to achieve its ambitious goals


From the moment finance minister Arun Jaitley began reading his career’s third Budget speech, all the way till the very end, the stock market’s bellwether index, the BSE Sensitive Index, oscillated wildly. Social media comments too reflected the mood in the bourses — swinging between complimentary and scathing, to downright snarky and fulsome praise. 

One tweet even claimed (without furnishing any proof) that though the Budget speech was read out by Jaitley, its key architect was Prime Minister Narendra Modi. Another, snidely claimed the Budget seemed to have UPA-III’s imprint, given its emphasis on rural and farm sectors. There were other similar tweets. While you can’t really expect a proper analysis in 140 characters, it’s true that the tenor and content of Budget 2016 has left experts confounded and desperate to find the one thread that ties up the whole package of measures.

Indeed, there are multiple strands to Budget 2016, each striving to provide a specific solution. The question is: do all these cohere to form a meaningful tapestry? Does it make sense? It might be worthwhile to examine some of the overarching themes in Budget 2016.

Let’s consider the first charge: Budget 2016 is a political document. To be fair, Jaitley had little choice. Economic policy-making cannot be conducted in a political vacuum. With key states (Assam, West Bengal and Tamil Nadu) going to polls this year, followed by Uttar Pradesh and Punjab next year, it might be naive to expect that Budget 2016 will be bereft of any political grandstanding. 

That might also explain this Budget’s exaggerated emphasis on playing Robin Hood: imposing a slew of additional taxes on the wealthy, under the heading “Additional resource mobilisation for agriculture, rural economy and clean environment”, without bothering to specify whether these taxes will indeed be sequestered for the specified objective, or even caring to explain what happened to taxes collected under similar heads over the years. Ironically, Jaitley has himself provided the counter-point: pensioners withdrawing life savings from pension funds will now have to pay tax on 60 per cent of the accumulated corpus, if it is not invested in an annuity. As a wag observed drily, Thomas Piketty’s whistle-stop tour through India has left economic administrators with fleeting notions of inequality.

Two other broad themes dominate Budget 2016: a stimulus package to spur rural consumption and enhanced outlay to speed up investment in infrastructure. As argued in these pages a few weeks ago (http://goo.gl/GvFnbP), Jaitley was faced with a binary choice: either ramp up public investment to derive economic growth, or stick to the fiscal straight-and-narrow. A spirited public debate ensued with growth adherents advocating a temporary slippage in fiscal deficit. Fiscal hardliners argued it would be foolhardy to relax vigil during these trying times of global turmoil; a downgrade by credit rating agencies would scupper even incipient growth impulses.

In the end, the minister has chosen both options. How he achieves both ends will have to be seen. While his public investment outlay is up 15.5 per cent over previous year’s estimates, he has also set aside large amounts for the rural and farm sectors. Jaitley stated capital expenditure on railways and roads will alone account for Rs 2,18,000 crore this year. Additional outlays have been announced for investment in power generation, ports and waterways. It is interesting to note that even in infrastructure investment, the emphasis is on the rural sector: investing in expanding the coverage of irrigation (to reduce Indian farmers’ vulnerability to fickle monsoons) and investing in rural roads and rural electrification. Connecting unconnected villages will help farmers get their produce to markets. 

In the midst of this enhanced spending, the FM has also promised to adhere to the fiscal deficit target: 3.5 per cent of gross domestic product. A lot will depend on the revenues he manages to raise — Rs 19,610 crore of additional tax revenue (some of it from soaking the rich) and a 25 per cent increase in non-tax revenues. One large chunk of non-tax revenues (Rs 98,995 crore, compared with last year’s Rs 56,034 crore) is expected to come from telecom spectrum auctions. The other source of non-tax revenue is a leap of faith: the government expects Rs 56,500 crore from disinvestments. In this fiscal year, the government managed only Rs 25,312 crore against a target of Rs 69,500 crore.

Undoubtedly, the agricultural sector needs additional resources: it is not only hobbled by numerous structural deficiencies but poor monsoons over the past two years have caused deep distress in the sector. The Budget wants to double farmer incomes by 2022, by facilitating easier access to markets for inputs and finished products, higher credit allocation and better infrastructure. But, the text lacks details of how this will be achieved; there is no mention of a roadmap.

A massive allotment of Rs 2.87 lakh crore — in the form of grant-in-aid — has been made to village panchayats and municipal bodies. Again, there is lack of clarity about the end-objective of this fund flow. Will it be used for local infrastructure? How will the money be spent — in one year or five years?

The FM’s intentions seem honourable and generally aimed in the right direction. The economy needs higher public investment in the absence of private sector capital expenditure; there are deep structural flaws in the farm and rural sector that need urgent corrective action; fiscal discipline is non-negotiable. What’s lacking is clarity, or the nuts and bolts of how the FM intends to achieve these objectives. There are some other unanswered questions in the Budget:

Monetary Policy and Monetary Policy Committee have now acquired a statutory basis. Details on the committee’s composition are absent. While it has been clarified that there will be equal representation from both the government and the central bank (with RBI governor getting the casting vote), it is not known whether the original plan of appointing a senior bureaucrat on the committee as an ex-officio member still exists. The bureaucrat’s status as an observer is to report to the ministry on the voting pattern of the committee members. I am sure you get the picture.

There is an overall increase in the incidence of cesses and surcharges. One example is the Krishi Kalyan Cess, which will levy an additional 0.5 per cent on all taxable services. When combined with a consumption upsurge, due to Pay Commission arrears and a fillip to rural demand, the after-effects are most likely to be felt on the price line. What happens to inflation targeting then?

PM Narendra Modi’s ambitious Make In India programme suffers from domestic industry’s negative propensity to invest. Industry, in turn, complains that bank credit is not forthcoming. Banks, on the other hand, carp that their ability to lend is seriously impaired by mounting bad loans. In short, banks need fresh capital to start the lending process once again. Against this background, Jaitley’s allocation of only Rs 25,000 crore towards bank recapitalisation is underwhelming. FM Jaitley also mentioned consolidation; is he proposing public sector bank mergers as a way of reducing the drain on the Central exchequer?

The fiscal deficit target for 2016-17 — 3.5 per cent of GDP — is premised on GDP growing at 11 per cent. Given the global headwinds, and exports contracting for 14 months consecutively, slippage in the 11 per cent target will not be very surprising. Hopefully, the government’s resource transfers will keep the growth trajectory along expected lines.

A lot of Jaitley’s wishes are riding on revenue estimates delivering. He collected an additional Rs 54,334 crore of indirect taxes over the budgeted estimate during 2015-16 by increasing taxes on petro products, at a time when oil prices were crashing globally. Gross tax revenues are expected to grow by 11.73 per cent during 2016-17, at the same rate as India’s GDP. He is expecting tax on luxury consumption and a plethora of cesses and surcharges to fill the gap. It might be a bit of a tall ask.

There are too many imponderables in this well-intentioned Budget. Hopefully, some clarity will emerge in the coming weeks.


This article was published as cover story in Businessworld magazine (issue dated 'March 21, 2016) as part of the publication's special Budget package, titled 'Budget 2016 Split Verdict'.

The story can be found here.

Thursday, 21 January 2016

Silver Lining to India’s Trade Blues


India’s merchandise exports have now contracted for 13 months in a row, reflecting the global slowdown and impact of China’s economic recalibration. But, therein lay new opportunities and challenges for India’s economic diplomacy


India’s exports of goods have now shrunk for 13 months in a row. Even as this presents a threat to the government’s “Make in India” programme, it also provides some clues to future focus areas for India’s economic diplomacy.

Data for December 2015[i] shows merchandise exports at $22.29 billion, 14.75% lower than exports booked in December 2014. Cumulative exports for the first nine months of 2015-16 (April-December 2015) amounted to $196.6 billion, down 18% over the comparable period of 2014-15. There is one silver lining though: the trade deficit for the first nine months of 2015-16 ($99.2 billion) is lower than the deficit in 2014-15 ($111.68 billion). This is primarily due to lower oil prices.

There are two ways of slicing this data to understand incipient trends; locating the geographical source of this demand compression and looking at performance of specific commodities.

According to Commerce Ministry’s database on exports by region[ii], in dollar terms, the three destinations showing maximum contraction in Indian exports (or areas that are buying much less from India than in the previous year) are Latin America (down by 36.73%), Commonwealth of Independent States (CIS) & Baltic region (down 32.4%) and Africa (25.59%). Clearly, India’s foreign policy practice and economic diplomacy needs to expend greater energy on these areas.

Granulated regional data provides better insights. In Asia, for instance, the sharpest fall in absolute terms has been in exports to the West Asian countries that are members of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates). The second largest drop in absolute terms has been exports to the ASEAN countries, followed by North East Asia (which includes China). While the GCC phenomenon can be ascribed to shrinking oil revenues, leading to diminution of demand for Indian goods, it is the slowing of the Chinese economy that explains the North East Asian drop and a second round impact leading to dwindling of ASEAN demand.

Examining trade data through the lens of performance of specific commodities highlights stasis in India’s manufacturing industry and the need for providing stimulus. This can be either through “Make In India” initiative or through additional investments. The data clearly shows slowing demand overseas for agricultural (rice, other cereals, oil cakes and oil seeds) and oil-related commodities. However, more importantly, import data shows a huge spike in purchases of pulses, gold and silver–indicating higher consumption–but demand for fuel, mineral ores and metals, machinery and equipment remained in negative zone, reflecting static industrial and manufacturing demand.

Yet, there are some oases of optimism— India’s trade in services for the first eight months of 2015-16 (April-November) showed a positive balance of $48.047 billion. In fact, this is one area in which India not only fares better than China (which has traditionally suffered a negative trade balance in services) but has also been able to stave off the China slowdown factor more effectively that merchandise trade.

This, then, points to another focus area for India’s future economic diplomacy, including its bilateral engagements with China or European Union (EU) and regional arrangements like Association of Southeast Asian Nations (ASEAN) or Regional Comprehensive Economic Partnership (RCEP).

The India and China example are instructive. India and China have multiple grounds for disagreement which occasionally drives a wedge between the two countries in multilateral negotiating forums. China’s overwhelming trade surplus with India and the festering border dispute are some of the legacy issues. Thesehave been joined by new contentions, such as India’s lack of response to China’s generous offer of building critical infrastructure.

But a common grouse should be uniting both countries’ interests at global negotiating platforms: services exports. This is because multilateral trade negotiations — such as those under World Trade Organisation (WTO) — or regional trade arrangements (examples being RCEP) and even bilateral agreements focus overly on goods trade. This is disadvantageous for India, which has competitive advantage in services but is denied level playing field in trade negotiations. China is likely to be in a similar situation when contracting exports of manufactured products forces its hand to provide a greater thrust to service exports.

India’s service sector has been a saviour for both domestic economic growth and for overall balance of payments. China’s trade in services is in negative zone because it’s a net spender on tourism and education: its trade balance was a negative $159.9 billion in 2014. This is ripe for change — a Chinese government policy document released in February 2015 set a target of $1 trillion of services trade by 2020, including accelerating services exports[iii] [iv].

With China expected to refocus economic efforts on strengthening its services sector and increasing its share in exports, both India and China need to coordinate their strategies and act in concert during multilateral trade and investment negotiations.

In fact, the UNCTAD Handbook of Statistics 2015, released recently[v] by the United Nations Conference on Trade and Development (UNCTAD), shows that services bailed out global trade during 2014. Data also shows the criticality of services exports for India, and its negative impact on China’s balance of payments. Given this strategic importance of services for both countries trade, and the continuing slowdown in demand for goods, overall global trade patterns are pointing towards the need for greater India-China cooperation in services trade.

References
[i] Department of Commerce, Ministry of Commerce and Industry, Government of India, India’s Foreign Trade (Merchandise): December, 2015;; <http://commerce.nic.in/tradestats/PressRelease.pdf>

[ii] Department of Commerce, Ministry of Commerce and Industry, Government of India, December, 2015;<http://commerce.nic.in/ftpa/rgn.asp>

[iii] The State Council; The People’s Republic of China, New guideline on boosting trade in services, ; 15 February, 2015; <http://english.gov.cn/policies/latest_releases/2015/02/15/content_281475056101818.htm>

[iv] Gerry Shih; China’s economic planners aim to boost service exports; Reuters, 14 February, 2015<http://www.reuters.com/article/china-exports-idUSL1N0VO09W20150214>

[v] UNCTAD;,International trade in services was main driver of growth in global trade in 2014 ; <http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1149&Sitemap_x0020_Taxonomy=UNCTAD%20Home>

Courtesy: Gateway House (http://goo.gl/cXKJYO)


Tuesday, 19 January 2016

Budget: It’s Now Or Never

The 2016 Budget could be the last chance for the government to redeem itself and find a way back into the common man’s heart.


It is that time of the year again. Newspapers, business channels, Internet sites are all full of ideas, suggestions and even advice for Finance Minister Arun Jaitley. The minister’s appointment diary is brimming with meetings scheduled with representatives from industry, trade unions and agriculturalists. They all come armed with wish-lists, hoping to influence the final design of this year’s Budget exercise. 

Jaitley is on track to present his third budget (for 2016-17) and, while patiently sticking to the routine of meeting various lobbies and representatives, he is aware of the criticism he faced for his first two Budgets and the challenges that lie ahead. It’s now or never; this might be his last opportunity to introduce bold reforms and sow the seeds of future growth. Next year might be too late; assembly elections for Uttar Pradesh and Punjab among other states are scheduled for 2017 and expedient politics traditionally triumphs sensible, hard-nosed economic measures in poll-bound years; the year also marks the beginning of the countdown to 2019 general elections.

To be fair, the FM does seem trapped in a cleft stick. Look at the hand he has been dealt: the global economy is struggling to emerge from a prolonged slowdown, leading to lower demand for Indian goods and services, and shrinking exports; China’s economic recalibration is spooking global capital flows and skewing the pitch for foreign direct investment (FDI) into India; indiscriminate past lending by banks (largely public sector banks) has impaired their ability to finance new projects, especially infrastructure projects; power generation and supply — essential for manufacturing activity — is stuck in a tangle of issues relating to fuel supplies, pricing, past regulatory infractions; agricultural output remains depressed due to sub-par monsoons, in addition to legacy issues of low productivity, inadequate credit and input supplies; this has dampened rural demand, thereby impacting a wide range of industries. 

In addition, the pre-election promises of fortifying the country’s manufacturing base, resulting in additional employment, fanned unrealistic expectations; when these did not materialise (as they were not expected to in such a short period), they spawned widespread disappointment with the regime’s economic managers.

It might be instructive to review the FM’s first two Budgets to decipher the tenor and direction of this government’s economic policy-making. In his debut (Budget 2014-15) innings, presented 45 days after taking office, the focus seemed to be on long-term, structural reforms: FDI up to 49 per cent in defence and insurance, guarantees of a stable and predictable tax regime, real estate and infrastructure investment trusts, incentives for foreign institutional investors (FIIs) and fillip to debt markets. The second outing continued policy thrust in the same direction: greater decentralisation and balanced regional growth through higher devolution to states, commitment to increased public expenditure to kick-start investment in the economy and a host of institutional reforms to attract fresh domestic and foreign investment.

But, expectations built up in the pre-poll season cannot be wished away easily and stakeholders have started voicing their disappointment. In short, Jaitley has to find ways to prod the economy into a higher growth trajectory immediately, without over-playing his hand or pushing the economy down a fiscal slope. On the other hand, the government is committed to certain expenditure — social sector allocations (especially in a year of agricultural distress and depressed rural incomes), a higher outgo because of Seventh Pay Commission recommendations and One Rank One Pension settlement (both are expected to result in combined outflows of about Rs 100,000 crore), interest burden on past government loans, capital infusion for state-owned banks and other PSU companies, plus a host of other obligations.

The Good News

Fortunately, revenue growth has been good. Data from the Controller General of Accounts shows net tax revenue for the first eight months (April-November) at Rs 4,64,864 crore, a growth of 12.5 per cent over the corresponding period last year. Non-tax revenues rose 35 per cent, helped primarily by spectrum auction proceeds and transfer of profits from public sector companies. There are three reasons behind tax revenue growth — higher duties on petroleum goods, the new service tax rates and the enhanced cess.

There are other encouraging signs as well. Bursts of public expenditure during June, July and September have taken the government’s total planned capital expenditure to Rs 97,788 crore during the first eight months of 2015-16, a 57 per cent jump over what was spent during the corresponding period last year. For example, funds allocated during 2015-16 to states and Union Territories for development of national highways, according to a PIB press release, is significantly higher than previous year: Rs 81,006.99 crore against Rs 31,495.20 crore in 2014-15, a jump of over 157 per cent. It remains to be seen how much of that allocation is actually spent. The National Highways Authority of India has so far awarded 43 projects in the current financial year for a total length of 2,624 kms.

The individual ministry-wise data provides greater insight. The ministries of road transport and highways, and rural development are among heavy-hitting ministries, with both having exhausted 74 per cent and 80 per cent of their budgeted plan expenditure for 2015-16 in eight months. Even the ministries of agriculture, health and family welfare and human resource development have spent a higher proportion of their budgeted plan expenditure than last year. More pointedly, among the large spenders seem to be ministries charged with key social sectors — such as, rural development and health. 

Clearly, the government is betting on higher public expenditure to shake the economy out of its torpor. This is classic text-book stuff. It is also in keeping with the FM’s undertaking in last year’s Budget speech to increase public investment outlay: “The total additional public investment over and above the RE (revised estimate) is planned to be Rs 1.25 lakh crore, of which Rs 70,000 crore would be capital expenditure from budgetary outlays.”

Clear & Present Dilemmas

The proverbial monkey-wrench is lack of revenue to finance public projects. While revenue generation has so far held up, largely on back of indirect taxes, there are multiple pressure points building up.

One, industrial activity as represented by the Index of Industrial Production shows 3.9 per cent growth during April-November 2015 over the same period last year, helped in large measure by festival shopping during October. Three among the top five items which contributed to October growth corroborates this — gems and jewellery, telephone instruments (including mobile phones) and passenger cars. On the flip side, what is worrying is stagnation in consumer non-durable items, which shrank by 0.5 per cent during April-November. In fact, consumer non-durable items stayed in negative zone in five of the eight months. In addition, the Nikkei Purchasing Managers’ Index also indicates manufacturing shrinking in December, affected partly by the Chennai floods. 

Two, the continuing fall in exports — close to 20 per cent by November — and its impact on overall manufacturing activity, is likely to dampen revenue generation in the coming fiscal. Worryingly, commerce secretary Rita Teotia was widely reported informing chambers of commerce that 2015-16 will end with $270-billion exports, markedly lower than $311 billion in 2014-15. The government and Reserve Bank of India (RBI) have allowed the rupee to depreciate, probably to keep exports competitive. This becomes especially critical when viewed against the Chinese central bank’s repeated devaluation of the yuan — in August 2015 and again on January 7, 2016.

This then, in short, is the FM’s dilemma. How does he meet the various expenditure demands — commitment to social sector schemes; need to keep investing in public investment to rekindle economic growth; allocations to agricultural sector to forestall distress; increase in salaries, wages and pension of government employees (including the armed forces); and, finally (but most importantly), increased allocation to states from the divisible central tax pool under the Fourteenth Finance Commission award. Worse, Jaitley has to fork out increased sums of money while staring down a diminishing exchequer.

The government seems to have reached the crossroads and needs to select a path that will help it emerge from this impasse. A few ineluctable options present themselves.

Feeling Fiscy

First, will the government be willing to take the fight to fiscal conservatives? In short, will it be willing to let the fiscal deficit slip just that wee bit to fire up animal spirits in the economy? 

This question goes to the heart of the Bharatiya Janata Party’s (BJP’s) economic philosophy, which has been morphing from its avowed “swarajya” policy in the 1970s and 1980s to pro-globalisation and support for foreign investment in the 1990s. Among the many consanguineous economic ideologies that exist within mainstream BJP, its affiliates and allies (such as Shiv Sena, Vishwa Hindu Parishad) and its mother organisation Rashtriya Swayamsevak Sangh, the umbrella right wing also includes economists of variegated hues — right-wing economists trained in Western universities (who find enlarged fiscal deficits and higher government debts anathema to the conservative notion of smaller government, low tax rates, and laissez faire economics) sitting cheek-by-jowl with free-market votaries who do not mind tweaking rules to protect domestic interests from competition (the lopsided FDI policy on foreign retail is a good example) or to suit local conditions. A lot will depend on who gets to monopolise airwaves in coming weeks.

There are other external pressures: credit rating agencies (especially the Big Two) are also wedded to fiscal orthodoxy and any deviation invites a rap on the knuckles or a downgrade, depending on the severity of the slippage. Interestingly, when the US allowed its fiscal deficit to expand to $1-trillion-plus between 2009 and 2012 — as it accelerated spending to stave off after-effects of the 2008 global financial crisis and the consequent economic slowdown — it did elicit censure from a section of Republicans in Congress, but that was pretty much it. It’s only in 2015, as the US economy continues to recover, that the deficit narrowed to $439 billion, the lowest since 2008.

Interestingly, while fiscal conservatism is considered an essential ingredient of the Republican ideological toolkit, even the Bill Clinton presidency adhered to large parts of this credo, attracting the new moniker “Liberal Democrats”. In a recent, cogent essay in The Atlantic Why America Is Moving Left, political scientist Peter Beinart, argues that President Barack Obama has pushed US economic policy dramatically to the left and it is likely to stay that way for some time to come. But, in India, conservative orthodoxy has slowly and insidiously sunk roots across ideological divides, thereby making fiscal deficits a dirty and contemptible term, even when sought to be used as a one-off, emergency measure. 

There are reasons to be wary of rising fiscal deficits; the reckless borrowing and spending of the 1980s brought India close to bankruptcy in 1990. Higher fiscal deficits and swollen debt levels could jeopardise the long battle that’s been waged to achieve fiscal stability, especially when the government’s inability to control wasteful spending or to execute expenditure rationalisation is well known. Relaxing vigil on the fiscal front is like a slippery slope: reining it back requires enormous political courage. 

If Jaitley, therefore, chooses to expand the fiscal gap a bit to finance all manners of expenditure (which increasingly look unavoidable now), he should expect commentators to look askance. To that extent, the FM seems to have already laid the foundation in his FY2016 Budget speech: “…insisting on, a pre-set time-table for fiscal consolidation pro-cyclically would, in my opinion, not be pro-growth…I will complete the journey to a fiscal deficit of 3 per cent in 3 years, rather than the two years envisaged previously…The additional fiscal space will go towards funding infrastructure investment.” But, between a paragraph in the budget speech and facing up to the risk lies a a wide chasm — and lots of criticism to boot.

Show Me The Money

The second tough call is raising revenue. As described above, higher tax revenues in the current economic environment increasingly seems difficult. There is no likelihood of an immediate increase in the number of tax payers which can compensate for the dip in revenues from existing tax payers. It will also be suicidal to increase tax or duty rates.

Part of the solution might lie in focusing on non-tax revenues, specifically non-debt capital receipts. The target for government disinvestment was Rs 69,500 crore and the achievement has been a paltry 18.5 per cent — Rs 12,852.90 crore. Evidently, the government’s policy of second-guessing the market has not paid off. It is also true that selling government assets in a falling market could invite Parliamentary condemnation, and the government may not wish to add this to its current list of woes. But, desperate times call for desperate measures. Jaitley might have to force the issue on this one. He does have some political capital in Delhi and he might have to expend chunks of it to push for disinvestment, regardless of how the Sensex behaves. 

Another partial solution exists in the balance sheet of numerous public sector units. The government is believed to have advised profitable PSUs to pay out higher dividend this year — 30 per cent of post-tax profits or of the government’s equity, whichever is higher. There must be some number-crunching behind this. Budget FY16 estimates Rs 36,174.14 crore inflows from PSU dividends. It is to be seen if the 30 per cent dividend diktat precipitates revenue inflows higher than budgeted. There is also a likelihood that the 30 per cent decree has been necessitated by a shortfall expected in dividends budgeted from RBI, nationalised banks and financial institutions — Rs 64,477 crore. Whatever might be the reason, the government’s revenue projections for the year-end, and the anticipated resource crunch in the next year, might have necessitated the 30 per cent order.

An alternative to leveraging PSU balance sheets also exists. At last count, PSUs were sitting on a cash chest of over Rs 2,00,000 crore. Some of this has already been committed to their expansion projects. But a large part is lying idle, invested in low-yielding assets, like bank fixed deposits. The FM has to marshal these funds for a part of his public investment exercise. 

A distinction might be necessary here. The PSU investible corpus should be used exclusively for creating productive assets closely aligned with the specific company’s business opportunities. Therefore, an engineering company’s cash reserves should be utilised for not only expanding existing manufacturing capacity but also creating new production capacity in the engineering industry. For example, this might be a good time to revisit India’s installed capacity for manufacturing turbines, boilers and generators. This is important because it is linked to another facet of Jaitley’s to-do list: energising Make In India. His boss, Prime Minister Narendra Modi, has been busy collecting air-miles over the past 20 months, soliciting foreign investment from various governments and corporations. The trips seem to have paid off with only a slight uptick in FDI — $16.631 billion during the first half of 2015-16, a 14 per cent increase over $14.691 billion in the same period of 2014-15 — and not the deluge expected.

One reason could be the continuing stress in the developing economies, thereby inhibiting capital flows. But, importantly, the trickle of FDI could also be related to India Inc’s lackadaisical investment propensity. Many large Indian corporations have not been entirely successful in shedding investment inertia acquired during the calamitous 2009-14 UPA-II regime. Domestic industry’s unconcealed lack of confidence invariably has a demonstration effect on potential foreign investors. This needs to be corrected and a beginning could be made by asking PSUs to invest in expansion and fresh capacity, which can crowd-in fresh private sector investment.

When In Doubt, Fly

With FDI continuing to remain important for India, PM Modi is expected to retain, if not increase, his itinerant routine. Apart from crafting a fresh foreign policy doctrine for India, which seeks to project the country as a new power (or, as foreign secretary S. Jaishankar calls it, “a leading power”), PM Modi is also actively trying to drum up investments for India. He sees economic diplomacy as the centre-piece of India’s foreign policy. 

But investments are only a part of economic diplomacy. Truth be told, economic diplomacy, which has a vital role in India’s desire to emerge as a “Leading” power, has twin responsibilities — opening up markets for Indian goods, services and capital (human and financial), as well as attracting foreign inward investments. In this task, he will need the unstinted support of the external affairs ministry. 

The Budget, shorn of inner party rivalry, can provide the necessary strategic impetus. One of the ways in which this can be achieved is through higher allocations to successful tools of development diplomacy (such as, the highly successful Indian Technical and Economic Cooperation Programme, under which 10,000 participants from 161 partner countries visit India to attend various capacity building courses). But, more can be achieved. With economic growth showing green shoots in the US but staying tentative in Japan and Europe, India needs to find new markets for its goods and services. After the 2008 global financial crisis, India was compelled to seek out the Latin American and African markets for increasing exports. But, performance has been desultory at best. The Budget should try to correct that.

At the end of the day, the Budget is a economic policy document and not just a statement of accounts. Or, a list of tax changes. It is expected to spell out a roadmap that indicates the direction of economic policy-making and galvanises the pace of economic growth. Too many opportunities have been lost in the past with policy architects focusing on minutiae; FM Arun Jaitley has the opportunity to make enduring course corrections. 

This article was published as cover story in Businessworld magazine, issue dated January 25, 2016, as part of a pre-Budget cover package titled 'A Make Or Break Budget'.

It can also be read here

Monday, 21 December 2015

A Gender Bender for India Inc

A new book tries to unravel legacy issues in largely conservative, family-run businesses, but falters

In the mid-1980s, the conservative and staid Indian business milieu was shaken up by a “breaking” story, front-paged by the Business Standard : a prominent Birla family member was carving up his business empire into three parts for his three daughters.

This incident was epochal for Indian businesses: one, because Indian family businesses abhorred sharing such details in public and, two, because this gentleman was breaking with tradition by not handing over his business to his nephews or other male members of the family. Also, from the standpoint of management practice, he was indulging in advance succession planning (well before it became a buzz-word in corporate boardrooms), and retiring to a life of active social service and politics.

Many business families since then have seen daughters take on the reins of family business, run it efficiently, add value as a custodian and leave a visibly richer company.

In fact, it is interesting to note that Marwari business families, considered deeply conservative and devoutly patriarchal, were first among all Indian business communities to allow women to run businesses. For example, the family constitution of a southern business family, with scions educated at universities overseas, still prohibit women from joining the family business. The example of Balrampur Chini Mills, an on-off stock market darling, is illustrative.

When Kamal Saraogi decided it was not possible for him to stay and work in remote Balrampur, Uttar Pradesh, his wife Meenakshi Saraogi — an educated housewife dedicated to running the household, rearing children and playing wife and hostess till then — decided to relocate herself to Balrampur and take over the running of the family-owned sugar company.

She had no prior experience but was able to transform the company — she expanded it by acquiring other sugar mills and adding other lines of business (such as cogeneration, production of ethyl alcohol and ethanol). Starting from a single mill sugar company, Balrampur Chini today has 11 factories with about 70,000 tonne per day crushing capacity. Succession planning is an integral part of a family business anywhere in the world.

Complex affair
In India, the family structure, given its overarching patriarchal framework, invests the process with an additional complexity. Negotiating this consumes enormous energy, requiring a combination of tact and politesse. One would have expected a book on Indian family business so late in the day to navigate through these choppy waters and provide some insight with the help of case studies and real-life examples. Instead, the book is an addition to the overcrowded shelf of jejune handbooks, masquerading as serious DIY guides to managing family business issues.

For example, on articulating values, the authors recommend: “Despite India favouring an oral tradition for transmitting family values across the generations, we recommend that family business people write these things down because it provides a focus for agreement and helps avoid confusion.”

Really? Sample some of the other colourless and sententious pieces of advice offered as “mantras”.

On professionalising family businesses: “The decision to professionalise should be clearly explained to everyone in the organisation. It should not be enforced or implemented in a top-down fashion — rather it should gradually become part of the work culture of the organisation.”

On succession planning: “Consideration of succession candidates from within the family can raise difficult issues. Before the process starts, however, it is important for the family to reflect upon its values, vision and goals, using these as a guide for decision-making.” To be fair, there are examples in the book, and some of them are indeed interesting.

But most of these do not illustrate or buttress any hypotheses or help in building up a credible and sustainable theoretical base for the practice of managing family businesses. Some of the examples do not even go any distance. For example, while fatuously expounding on how education “is a key factor in the evolutionary process underway in India’s family business sector…”, the authors argue that Aditya Mittal’s Wharton degree and stint with Credit Suisse helped him earn his stripes as a successful chief financial officer of Mittal Arcelor; such a generalisation doesn’t give him any credit as an individual, nor does it do any justice to father, Laxmi Niwas Mittal, who imparted the business knowledge.

A lot of talk

It is evident from the book’s tenor that the authors have sacrificed research in favour of tedious rhetoric. Nothing else explains why the book lacks relevant illustrations from Corporate India; a good example is “primogeniture”, or the unwritten ancient law under which the oldest sibling inherits the kingdom or the family business.

There are a profusion of contemporary examples where the family has foresaken the time-tested primogeniture formula and selected the younger sibling over the older one to run the family business. And, then there are the famous examples of the younger brother refusing to fade gently into the night.

It is mystifying what exactly the second author brings to the book, apart from some fresh, India-based examples relating to middle-sized companies, especially from southern India. His reputation as a Vedic scholar builds up expectations, but the surfeit of banal homilies soon shatters them.

The typical Indian business family — like many other business families around the world — is not usually like a pot on the boil, or a soap opera confection of intrigue and drama.

But they do have their interesting moments, which are inflection points in the history of that organisation. Mapping those would provide greater value to Indian family business students.

Book Review in The Hindu Businessline

Friday, 11 December 2015

COP21 Battle: from Paris to Nairobi

December 13 will bring curtains down on climate change talks at Paris, but the sharp ideological divides between rich countries and developing nations will continue to play out at World Trade Organisation’s 10th Ministerial Conference in Nairobi, beginning on December 15


Even as the Paris climate talks, or COP21, is likely to yield an agreement, albeit a weak one, governments are readying themselves to continue the battle in Nairobi, where they will converge again from 15-18 December for the World Trade Organisation’s (WTO) 10th Ministerial Conference (MC10). And, though the faces around the table will change, the positions adopted by various countries at Paris will only harden.

Take the stand that Western countries — led by the U.S. and Europe — are trying to force fit into all talks: that India and China deserve to be in a separate category since both have outgrown the “developing country” tag. This is being duly repeated by Western media and their think tanks. This implicitly requires India and China to make larger sacrifices than the rest of the developing countries.

In climate change negotiations, a “High Ambition Coalition” (comprising 100 countries, including the U.S.) has pitched for an “ambitious” deal that would require the world to limit global warming to below 1.5 degrees, against the earlier target of 2 degrees. This strategy achieves four things simultaneously.

One, it takes attention away from the pollution that industrialised countries continue to inflict upon the world. Two, it detracts from the package industrialised countries had promised to deliver but reneged — $100 billion of funding for developing and poor countries to help improve energy technologies. Three, it wins over island nations (which can be used in other negotiating forums), who have been complaining about rising water levels due to global warming. Four, it turns the needle of blame towards India and China, both of whom will obviously oppose the increased commitment expectations.

It is quite likely that the developed world lobby will try to replicate some of these strategies at MC10 talks as well.

For example, well ahead of the meeting, the U.S. has begun making noises (with some support from the U.S.-based think tanks and media) that India and China should not be included in the group of “developing countries”, especially when designing support for poor farmers. This, effectively, takes out the strongest proponents of the Doha Round of the WTO. Without these two, most other developing countries will find it difficult to resist pressure from the developed world lobby.

The conclusions are fairly predictable if the West is able to have its way. The U.S. will manage to achieve its goal of burying the Doha Development Agenda (DDA). In this endeavour, it has some help from WTO Director-General Roberto Azavedo, who has suggested on a deadline to finalise DDA and sees MC10 as the last opportunity to do so. This proposition was rejected by developing countries, including India. One reason for seeking to bury DDA is that the U.S. and other developed countries have already managed to swing Trade Facilitation Agreement (TFA). Uniquely, TFA was not part of original DDA but was shoe-horned into the Bali agreement of the WTO by the rich countries as a trade-off. Today, with TFA out of their way, the developed countries would want to bury the DDA.

It will also help torpedo WTO members’ plans to finalise a permanent solution for public food grains stockholding programme or a special safeguard mechanism (which allows developing countries to protect farmers from cheap imports or sharp price drops).

In fact, the U.S. has concurrently started pushing WTO for a deal on “new issues” — environment, labour, e-commerce, global value chains, investment, competition policy and transparency in government procurement — which will replace the development agenda.

As trade ministers congregate in the Kenyan capital next week, expect to see a reprisal of the Paris viewpoints.

Courtesy: Gateway House

Thursday, 26 November 2015

TPP & ISDS: New Tests For India

The U.S.-driven Trans Pacific Partnership agreement between 12 countries, which is aiming to become the new standard of world trade, impacts domestic systems globally. For India, it will skew investment and intellectual property rights, and especially the debate over the Investor State Dispute System which allows companies to challenge sovereign rights and public policy.


The closely-guarded Trans Pacific Partnership (TPP) agreement, which will up-end existing global trade standards, is now public[1]. The 30 chapters comprising 6,000 pages, will undoubtedly influence all future world trade talks — bilateral, plurilateral and multilateral. TPP aspires to become the “gold standard” for global trade – ‘WTO-plus’ standards. The clock has started ticking for the agreement, as legislators of the 12 signatory countries will be under pressure to ratify the agreement before President Barak Obama demits office a year from now.

This has multiple implications for India. In addition to potentially limiting India’s concessions to public sector units, is the issue of intellectual and property rights (IPR) contained with a controversial chapter on bilateral investment treaties (BITS) and the treatment of “investor-state dispute system” (ISDS) mechanism. Under this, foreign investors can sue sovereign countries in a third country through international arbitration.

ISDS was already a contentious issue, with many governments reviewing their ISDS mechanisms over the years in reaction to a growing trend of MNCs filing arbitration cases against host countries, seeking compensation for loss of potential revenue from changes inpublic policy. One of the most quoted cases is that of cigarette manufacturer Philip Morris Asia Ltd. finding the Australian government’s directive on health warnings prejudicial to its future revenues and seeking redressal in overseas arbitration. The arbitration of 2011 is still pending. India has faced its fair share[2] of arbitration cases on similar grounds, involving foreign companies such as — Cairn India, Vodafone, Bechtel and GE Structured Finance BNP Paribas, Deutsche Telekom.

Governments view such arbitration with skepticism. Many claim the system is being gamed, given the opacity of arbitration processes, its non-appellant provisions, its appointment of mostly private sector lawyers as arbitrators (thereby inducing an inherent bias in the judicial process) and its predilection for granting awards to private companies over governments[3].

Many experts also feel that ISDS mechanism creates economic distortions by reducing policy space for government and for the protection offered to investors. Prominent economists like Nobel laureate Joseph Stiglitz, oppose[4] the concept of ISDS as being unfair[5].

The public backlash probably has had a sobering effect. The preamble[6] to the TPP agreement acknowledges government’s rights: “Recognise their inherent right to regulate and resolve to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals.”

But this self-correcting move seems only partial when viewed against the Investment chapter[7], which lists conditions to be followed by TPP signatory countries when soliciting foreign investment. Breach of these can result in ISDS being invoked. These are: offering foreign investors treatment equivalent to national companies (including state-owned enterprises), treatment equivalent to what’s accorded to companies from most favoured nations, minimum standard of treatment (which includes “fair and equitable treatment” and “full protection and security”), prohibiting expropriation or nationalisation (and, if in an extreme case it becomes necessary, then ‘fair value of compensation’ has to be paid which has been left undefined), free transfer of capital, no performance standards (such as minimum export commitment or minimum local content requirement), no restriction on nationality of senior staff or directors.

Other pernicious additions include a stretched definition of investment to include even IPR. This has opened up a rabbit hole of hidden clauses and tripwires. Contradictions abound between the chapters on Investment and Intellectual Property. For example, Article 9.7.5 exempts issuance of compulsory licenses (under the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, host countries can permit a non-patent holder to produce a patented drug) from eexpropriation provisions. But it comes with an escape hatch: issuance of such license must be consistent with TRIPS or with the TPP’s chapter on Intellectual Property. Another insidious addition is that ISDS can also be initiated in cases of “indirect expropriation”, or if the corporation deems that a specific government action “interferes with distinct, reasonable investment-backed expectations…”[8] But here’s the catch: determining what indirect expropriation is will be decided on a case-by-case basis.

This open-ended definition gives arbitration tribunals a free hand to interpret TPP provisions. For example, any regulatory action that could, hypothetically, diminish the value of property/investment, without the government taking ownership of the property[9], could also be deemed to be “indirect”expropriation and invite action under ISDS.

These clauses will undoubtedly affect India’s quest for increased foreign direct investment as part of Make in India. India’s home-grown BITs version — called Bilateral Investment Promotion and Protection Agreement (BIPPA) — has been revised to allow foreign investors to opt for international arbitration only after exhausting all domestic legal options. The draft model agreement is awaiting finalisation. India’s draft BIT and its ISDS treatment is now being pulled in different directions by varied influences — TPP, the work-in-progress Trans-Atlantic Trade and Investment Partnership (TTIP) agreement being discussed between USA and European Union (EU) and the India-EU bilateral investment trade and investment agreement under negotiation. Contradictions are aplenty: While the EU has rejected[10] inclusion of ISDS in TTIP with the U.S., in its negotiations with India in the past, it has insisted on including ISDS[11]. In addition, India’s draft model text drops any reference to most-favoured nation treatment, while TPP includes it.

Clearly, internal and external pressure will be brought on the Indian government to amend its draft model agreement. Some U.S.-based think tanks[12] and administration-friendly publications[13] have already started the drumroll. As India’s Ministry of Finance prepares to finalise its draft agreement, two issues — moral and transactional — must be kept in mind.

The moral issue first. Allowing foreign investors to bypass local legal processes through ISDS creates a discriminatory structure. A transactional solution exists, one borrowed from the securities markets. Many companies offer different kinds of shares and each category is endowed with differentiated rights. For instance, preference shares are entitled to a fixed dividend every year, irrespective of the company’s performance, but forego the right to vote. Therefore, foreign companies wishing to appropriate special privileges over other investors should be willing to forego some rights.

As a test case, this should form the basis of the next round of BIT talks between India and the U.S.

References

[1] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership, 5 November 2015, <http://tpp.mfat.govt.nz/text#>

[2] United Nations Conference for Trade and Development, Database of Investor-State Dispute Settlement (ISDS) (reduced version); <http://unctad.org/en/Pages/DIAE/ISDS.aspx>

[3] Singhal, Rajrishi, ‘India-U.S. BIT: not a done deal yet’, Gateway House, 23 January, 2015; <http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/>

[4] Stiglitz, Joseph, ‘South Africa Breaks Out’, Project Syndicate, 5 November, 2015 <http://www.project-syndicate.org/commentary/joseph-e–stiglitz-on-the-dangers-of-bilateral-investment-agreements>

[5] Lise Johnson, Lisa Sachs and Jeffrey Sachs, Investor State Dispute Settlement, Public Interest & U.S. Domestic Law, CCSI Policy Paper, May 2015, <http://ccsi.columbia.edu/files/2015/05/Investor-State-Dispute-Settlement-Public-Interest-and-U.S.-Domestic-Law-FINAL-May-19-8.pdf

[6] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Preamble, 5 November 2015,http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/TPP-text/0.%20Preamble.pdf

[7] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Investment, 5 November 2015, <http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/TPP-text/9.%20Investment%20Chapter.pdf>

[8] Trans Pacific Partnership, Annex 9-B, Expropriation

[9] Intellectual Property Watch, ‘How The Leaked TPP ISDS Chapter Threatens Intellectual Property Limitations and Exceptions’, 26 March, 2015 <http://www.ip-watch.org/2015/03/26/how-the-leaked-tpp-isds-chapter-threatens-intellectual-property-limitations-and-exceptions/>

[10] Robert, Aline; translated from French by Samuel White; ‘European Parliament Backs TTIP, Rejects ISDS’, Euractiv, 9 July, 2015, <http://www.euractiv.com/sections/global-europe/european-parliament-backs-ttip-rejects-isds-316142>

[11] Mishra, Asit Ranjan, India Rejects Clause on Litigation, Live Mint, 4 July, 2011, <http://www.livemint.com/Home-Page/T8uMUbH7Psx9sJawlwtzvN/India-rejects-clause-on-litigation.html>

[12] Rossow, Richard M, ‘Going To Bat For The BIT’ U.S.-India Insight, Volume 5, Issue 9, September 2015, <http://csis.org/files/publication/150910_USIndiaInsight_September_Clean.pdf>

[13] Worstall, Tim, ‘Cairn Energy’s Indian Tax Dispute Shows The Value Of ISDS Provisions In Trade Treaties, Forbes, June 28, 2015, <http://www.forbes.com/sites/timworstall/2015/06/28/cairn-energys-indian-tax-dispute-shows-the-value-of-isds-provisions-in-trade-treaties/>

Courtesy: Gateway House

Thursday, 5 November 2015

India Resets Africa Strategy

Changes in how India plans to approach its relationship with Africa were evident at the recent India-Africa Forum Summit, including the wider representation of African countries, and Modi’s push to forge a united front with Africa at multilateral institutions on trade and other issues. But beyond these, gaps in the India-Africa alliance remain to be addressed.


Four changes or incipient trends were noteworthy at the third India-Africa Forum Summit last month. These spell out the contours of the engagement that India will pursue with the African continent, its constituent countries, and regional organisations, as well as the government’s desire for a course correction in the traditional trajectory of the India-Africa relationship.

In the first change, a departure from the approach of previous Indian governments, the October event dispensed with the practice of following the Banjul formula, under which only a few African countries participated in the summit [1]. This time, the government invited all 54 African countries to New Delhi, and among those who came were 40 heads of state. While the shift in policy could be ascribed to this government’s predilection for spectacular optics, it is also true that the multilateral summit gave India an opportunity to engage with each country—Prime Minister Narendra Modi and External Affairs Minister Sushma Swaraj held numerous bilateral discussions with individual leaders and representatives.

This extensive bilateral exercise is tied to a second new policy stance—Modi’s push to forge a united front with African nations for a common, but differentiated, negotiating framework in multilateral institutions. India’s previous desires to build such a platform had remained nebulous; the most long-standing of these relates to reforms in the United Nations Security Council. In his inaugural speech at the summit [2], Modi said: “…our global institutions reflect the circumstances of the century that we left behind, not the one we are in today…That is why India and Africa must speak in one voice for reforms of the United Nations, including its Security Council.”

Beyond this, PM Modi has sought African support on two other critical multilateral fronts — climate change negotiations and trade talks. For the first, Modi wants to create a club: “I also invite you to join an alliance of solar-rich countries that I have proposed to launch in Paris on November 30 at the time of the COP-21 meeting.” A combined front such as this will be necessary when negotiating with rich countries for resources to shift to clean energy technologies because, “the excess of [a] few cannot become the burden of many.”

Modi also wants to align African countries to India’s concerns with the global trading regime. This becomes important given the forthcoming World Trade Organisation (WTO) ministerial in Nairobi in December, where developing countries are likely to make a last-ditch effort to save the Doha Development Round. The threat comes from developed nations, specifically the U.S., which in October has signed the Trans Pacific Partnership with 11 other nations and is lobbying to bury the development round.

Modi said as much in his inaugural speech: “India and Africa seek also a global trading regime that serves our development goals and improves our trade prospects. We must ensure that the Doha Development Agenda of 2001 is not closed without achieving these fundamental objectives. We should also achieve a permanent solution on public stockholding for food security and special safeguard mechanism in agriculture for the developing countries.”

India’s desire to construct a common bargaining platform is probably driven by the embarrassment of July 2014, when it was isolated while blocking the Trade Facilitation Agreement at WTO’s General Council meeting. India’s other attempts to get developing countries on board—to provide Duty Free Tariff Preference (DTFP) to least developed countries on 98% of its tariff lines, including in services— have also produced mixed results, prompting the government to now fast-track the entire scheme.

These points of common and joint multilateral action have been re-emphasised in the India-Africa Framework for Strategic Cooperation, which was released at the end of the October summit [3].

The third outcome is a public acknowledgement of the partial success in implementing India’s marquee development cooperation programmes—concessional lines of credit (LOCs), grants, and capacity building through the Indian Technical and Economic Cooperation Programme as well as the Pan Africa E-Network—and the need to improve the current processes.

Modi announced enhanced allocations for the programme—$10 billion under concessional LOCs (double the $5 billion announced at the 2011 summit), $600 million of grants, and 50,000 scholarships in India—but also admitted, in a departure from convention, that, “There are times when we have not done as well as you have wanted us to. There have been occasions when we have not been as attentive as we should be. There are commitments we have not fulfilled as quickly as we should have.”

The problem with LOCs is well documented [4] including a widening gap between sanctions and disbursements. In a pre-summit media briefing [5] in New Delhi on October 17, Secretary (West) in the Ministry of External Affairs, Navtej Singh Sarna, gave an update on LOCs: of the $7.4 billion on offer so far, $6.8 billion has been approved and $3.5 billion disbursed. In effect, disbursals are only 51.47% of sanctions.

Both India and recipient African countries are responsible for the low disbursal rate. In India, a multi-tiered and multi-agency framework for sanctioning and disbursing these loans creates delays. Additionally, a non-transparent process engenders attendant distortions. Exim Bank, which finally disburses the loans, has complained to the Prime Minister’s Office about malpractices [6]. On the African side, capacity gaps in drawing up detailed project reports, essential for the Indian side to conduct a proper appraisal and assessment, cause enormous delays.

The Framework for Strategic Cooperation has promised to introduce a “regular formal monitoring mechanism” to review the implementation of, and progress in, areas of cooperation and identified projects.

The fourth change was the absence of an announcement of trade targets, a departure from the accepted practice at such forums. This was probably necessitated because India-Africa two-way trade has fallen short of the $90 billion 2015 target [7]. But such ambitious targets tend to overshadow otherwise admirable progress in trade relations. In fact, trade between India and Africa has been remarkable. According to government data [8], two-way trade touched $72 billion during 2014-15, which is a vast improvement over the $4.5 billion of 1996-97.

But beyond these four directional indicators, interlocutors still need to address some persistent gaps in the India-Africa alliance.

One, there is little data in the public domain about the development and progress of projects, especially those under the LOC umbrella or under other initiatives announced from time to time. For instance, there is no report card on the promise to help build 100 institutions that India made during the second India-Africa Forum Summit in Addis Ababa in 2011.

Two, with similar and competing summits being hosted by China, Japan, Turkey, and the U.S., India should work on upgrading the status of its India-Africa Summit by including sub-fora on labour representatives, think tanks, civil society, academia, and women’s rights groups, in addition to the existing India-Africa Business Forum.

References

[1] Chand, Manish, ‘India and Africa: Sharing interlinked dreams’, Ministry of External Affairs, Government of India, 28 January 2015, http://mea.gov.in/in-focus-article.htm?24742/India+and+Africa+Sharing+interlinked+dreams

[2] Modi, Narendra, ‘Inaugural Ceremony Speech’, speech delivered at the Third India-Africa Forum Summit, New Delhi, 29 October 2015, http://iafs.in/speeches-detail.php?speeches_id=276

[3] Third India-Africa Forum Summit, India-Africa Framework For Strategic Cooperation, 29 October 2015, http://pmindia.gov.in/wp-content/uploads/2015/10/p2015102903.pdf

[4] Qadri, Asgar & Rajrishi Singhal, ‘Development and Diplomacy Through Lines of Credit: Achievements and Lessons Learnt’, ORF Occasional Paper 53, August 2014, Observer Research Foundation,http://orfonline.org/cms/export/orfonline/modules/occasionalpaper/attachments/op_53_1411638542827.pdf

[5] Ministry of External Affairs, Government of India, Media Briefings, 17 October 2015,http://www.mea.gov.in/media-briefings.htm?dtl/25945

[6] Iyer, P V, ‘Exim Bank’s red flag: Why most Africa deals go to so few firms?‘, The Indian Express, 20 October 2015, http://indianexpress.com/article/india/india-news-india/exim-banks-red-flag-why-most-africa-deals-go-to-so-few-firms/

[7] Ministry of Commerce and Industry, Government of India, Joint Statement of 2nd India-Africa Trade Ministers Meet (2012),http://commerce.nic.in/trade/Joint_Statement_2nd_India_Africa_Trade_17_03_2012.pdf

[8] Ministry of Commerce and Industry, Government of India, Export Import Data Bank,http://commerce.nic.in/eidb/default.asp


Courtesy: Gateway House