Tag Archives | sector

Explaining India’s economic troubles

The most lucid insight comes from Raghuram Rajan and TN Ninan

This is perhaps the best way to understand what went wrong with Indian economy in the recent years under the UPA. The insight comes from noted economist Raghuram Rajan:

Rajan said the problem in India was due to low growth in rural productivity, unlike China where rural entrepreneurship was the biggest growth driver for years. According to him, India has simply shifted resources to rural areas through transfer programmes like the guaranteed rural job scheme and minimum support price for crops, without the concomitant rise in farm productivity. That has fuelled demand for goods and services and led to high inflation.

“We don’t have the luxury of high growth (any longer) to indulge in populism,” said Rajan[BS]

TN Ninan builds on the argument in his column.

The professor of finance at Chicago, who is also an adviser to the Prime Minister, argued that productivity growth in Indian agriculture had been poor, so rural incomes were not growing fast enough. In its effort to deal with this, the government was pumping subsidies and income transfers into the countrywide, to put money in people’s pockets — which the recipients were spending. Since this expenditure was not matched by productivity growth, it was causing inflation.

…It is a line of thought that is worth staying with. If you look for the root cause of the power sector’s problems (high losses, disincentive for investors), it boils down to the virtually free electricity provided to farmers. That can’t be corrected because farmers don’t earn enough to be able to pay a higher electricity tariff. And there is a limit beyond which it becomes impossible for other users to cross-subsidise power to farmers; high electricity tariffs are already a burden for exporters who compete against rivals in countries that enjoy lower power tariffs. So you can’t fix the power sector’s problems without fixing agriculture. That argument can be taken a step further: Land revenue has virtually disappeared as a source of money for state governments — farmers can’t be taxed because they don’t earn enough. Irrigation charges cannot be levied at any reasonable level, for the same reason. Fertiliser prices cannot be raised, diesel prices have to be kept down because farmers use it for their pump-sets, and so on.

The bald truth is that half of India’s workforce toils in the fields to generate one-sixth of GDP. Since the other half produces the remaining five-sixths, non-agricultural incomes are typically five times agricultural incomes. The way to even out the imbalance is to get people off the land, and into non-agricultural occupations. But urbanisation and the growth of non-agricultural employment have been slow in India, an important reason being the stifling of industries that can provide entry-level, low-value work.

…The answer to the problems of high inflation and slowing growth, and low farm incomes, would lie in addressing the basic reforms that India is still to attempt – like labour laws. Instead, we have a food security Bill that will create irrational incentives which end up threatening agriculture itself. Talk of committing hara-kiri.[BS]

Who will explain this simple economic truth to the NAC and its chairperson, Mrs Sonia Gandhi?

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PM’s Africa trip

Quick thoughts.

Now that the Indian Prime Minister is at the fag-end of a historic week-long Africa trip, it is time to ask a fundamental question: What is the goal of India’s Africa policy?

  • Furtherance of bilateral trade with Africa, mainly by promoting Indian private sector businesses in Africa
  • A quest to secure Africa’s resources — oil, gas and minerals — to quench a fast-growing India’s thirst
  • Formulate a long-term strategic relationship with Africans by deeply engaging various sections of African society, businesses and government
  • Ensure African support for India’s bid for a permanent seat at the UN Security Council
  • Pure altruism to promote democracy, ensure growth and bring prosperity to Africa

Whatever be the theoretical proclamations by the mandarins at Delhi, Indian policies towards Africa in practice will always remain complex mixtures of benevolent liberalism, transactional calculation and strategic realism, with one or more of these facets dominating the others depending on the geo-political and geo-economic situation, and the focus of the Indian government at that point in time.

By the way, did anyone else also notice that military cooperation agreements between India and African countries are conspicuous by their absence during PM’s Africa trip? Delhi seems to have missed a trick here by perhaps forgetting that “Smart Power = Soft Power + Hard Power”.

The darkest thing about Africa has always been our ignorance of it. ~George Kimble

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Rent, ransom, whatever…

Little hope for Pakistan unless it seeks a decisive break from its history.

From a column by Arvind Subramanian in the Financial Times:

The history of economic development suggests that rent-ridden countries create governments with few incentives to build strong political institutions or listen to their people. In Egypt, for instance, these various rents account for about two-thirds of foreign exchange earnings. Directly or indirectly they generate at least a third of government revenues. This is not as large as other oil exporters in the region, like Libya, but substantial nonetheless. And Egypt’s state, in common with others across the Middle East, has used these rents to appease and suppress dissent, creating circumstances in which they have little need to develop competent political institutions.

Even if the people of Libya and Bahrain join those of Egypt and Tunisia in overcoming their cursed political systems, the economic manifestations of their rent curses will remain. Even if they become more democratic, because these countries benefit from substantial rents they will have less need to tax their peoples. This precludes the need to reform state controlled industries to create private sector wealth. It also will stop the development of genuine democratic systems, the usual basis for the legitimate taxation of citizens.

Weak economic institutions will be the consequences of these nations’ ongoing reliance on rents. These will fail to deliver essential services, such as education and skill creation, in turn limiting the pool of entrepreneurial talent. Such institutions also create bloated bureaucracies, weak legal enforcement of property rights, and obstacles for starting businesses, especially for those outside the regime’s inner circle. Without reforms the private sector will still likely thrive only through connections to a rent-addled state, not because of the raw dynamism found in many Asian countries.

On this reading the long-term economic prospects for these nascent Middle Eastern democracies remain gloomy. The economic challenge they face is much more fundamental than the often-heard prescription of greater globalisation and more markets. A decisive break with their own national histories is needed, and this means ending their reliance on rents as a first step. Only then can economic institutions be developed that create job opportunities in the private sector for their large, young and unemployed populations.[FT]

While Mr Subramanian may have been talking about the Middle-Eastern states, his thesis seems right if one looks at an example closer home: Pakistan. Due to its geo-strategic location, geo-political interplays, and the dangers of a confluence of jehadi terror and nuclear weapons, Pakistan has turned out to be a classical rentier — or perhaps a ransom-demanding state — fitting the Subramanian model.

Since 1947, Pakistan has officially received $27.8bn in civilian and military aid from the US. It also is one of the top five recipients of aid from multilateral agencies like the World Bank, International Monetary Fund (IMF) and the Asian Development Bank (ADB). Pakistan has received $18.5bn from the World Bank, around $16bn from the IMF and $15bn from ADB so far.

Pakistan today faces perhaps its gravest economic crisis since its creation in 1947. The solution lies in what Subramanaiam prescribes for such countries: “A decisive break with their own national histories….”

Going by the voices coming from the Pakistani state, and the commentariat — bar an odd exception — this seems unlikely. It seems as if they have never heard of the classic Japanese dictum that ‘a crisis is too good an opportunity to waste’.

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The Chief said it

On India’s retaliatory triad and offensive capabilities against China.

From an interview by the Army Chief, General Vijay Kumar Singh in The Asian Age:

Q. There are reports that Pakistan is rapidly expanding its nuclear arsenal to negate the Indian Army’s superiority in conventional forces. Is this a worry?

A. No country will use nuclear weapons right away, whatever they say. I’m sure we have enough retaliatory triad available to deal with such an attack. Are they going to start a war with a nuclear strike? I don’t think so. Even if there is a strike in a particular area, we have developed a capability to move a certain force level through that. We can move through contaminated areas. If somebody throws something at you, we are capable of retaliating in equal measure.[AA]

This is in line with what he had stated even earlier — that the Indian Army is capable of “fighting dirty”.

But does India already possess a retaliatory triad, as an assured Second Strike capability, which the good General talks of? After all, the Navy Chief had stated last December that India would have in place a nuclear triad for assured second-strike capability, only after the deployment of India’s first nuclear-powered nuclear-armed submarine, the INS Arihant.

And the second interesting bit is about Indian military preparation vis-a-vis China.

Q. What is the state of military preparedness in the eastern sector in relation to China? Is India contemplating setting up a mountain strike corps in the eastern sector?

A. We are taking cognisance of the fact that there is a very large force level that they have. What steps do we take if tomorrow intentions go wrong? Those contingencies have been worked out. And there is nothing called a mountain strike corps. A strike corps is a normal corps that takes offensive action. Offensive capabilities in the mountains are required. For too long we have only been looking at being reactive.[AA]

Offensive capabilities in the mountains are required. For too long we have only been looking at being reactive.” Whoa! That is some declaration of intent by the army chief.

For those who wonder if it is premature for an army chief to talk in these terms, just consider this. The General may be giving the message not to our Chinese friends but to his own political masters in New Delhi.

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Weekend levity: Why pizza gets to your home before the police

How some of my friends would explain this modern lament

@RMantri: Would laconically say that because pizzas are sold at a profit, while police are provided fixed salaries by the government.

@Swaraj_India: Would quote from Austrian school of economics, give five examples from different US states, and assert that if India’s economy was really a free-market one, each one of us would have the kind of police we individually wanted. Would insist that only if Arun Shourie was given an important position in the BJP, Indian police would reach before the Pizzas.

@Acorn: Would devise a new “pebble in the shoe” theory. Because police have to, by Indian law, buy shoes made in the dysfunctional public sector factories, pebbles get into the low-quality shoes and impede their movement. Pizza delivery boys buy shoes from a vibrant private sector, this allows them more freedom of movement (would add some obscure but authoritative links and a few mathematical calculations to conclusively prove it). Would tweet about removing the “pebble in the shoe” as today’s slogan for fixing mal-governance in India.

@Offstumped: Would start with the Vedas, quote extensively from the Puranas and the Arthashatra (the original one), then move to Al-baruni’s original text and British papers from the Nineteenth century to conclude that it is all due to Dharma. The bottom-line: Pizza delivery boys know their Dharma while the police have forgotten it. Would lament that BJP haven’t yet produced a policy paper on how Narendra Modi has already tasked Gujarat Police to learn the lessons from Pizza delivery boys on timeliness.

@Retributions: Would decry those who raise such questions as illogical and cut-off from the unwashed masses of India. Would create outrage on twitter by asking how many people in semi-urban and rural India actually have access to a Pizza. Decry this comparison as an elitist fad of Delhities, and just because it is repeated ad nauseam by some celebrity TV anchors (will cite a couple of their stupid tweets to support his argument), the question doesn’t deserve an answer. Finally, would cheekily suggest that if Rahul Gandhi were to become the PM, he would be able to answer this conundrum, because he has something in common with the Pizza: Italy.

@filter_c: Would immediately source from Pakistani Urdu dailies like Nawa-i-waqt that it is an Indian conspiracy to show Pakistan police in a poor light. On the Indian question, would ask the Indians to be more proactive and not just depend on the police to arrive at time. Would try and blame Antony for it but would then realise that Antony is not the Union Home Minister.

@varnam_blog: Would pull out an obscure historical text which says that police actually reached before pizzas during the Indus Valley civilisation.

Polaris [Dhruva Jaishankar]: Threaten to write three op-eds/ Pragati pieces and suggest that it is an apt topic for a greater in-depth study which can be a metaphor for wholesome reform in the Indian governance system. Would draw examples from the Japanese system and how some European countries had actually managed to ensure that police reach the site before the Pizzas. Would draw solace from the fact that US think-tanks actually studied the problem but couldn’t resolve the problem satisfactorily.

The Gold Standard [Dr. Anantha Nageshwaran]: Would write a detailed blog-post with 27 references and 39 links to show that US monetary policy is wrong, the jury is still out on China’s statistics and Europe is doomed to fail. When pressed further, will quote from a 7-year old column by Dr. Pratap Bhanu Mehta which tangentially suggests that Pizzas and police are “atrophies of our rhythmicities” (no one will dare ask him further what it means because Pratap Mehta has said so).

@Pragmatic_d: Rant over “Police Reforms”.

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70 lacs in FDI in defence since 2001

But status quo on FDI in defence sector continues, at 26 percent.

From the 5th Report of the Parliamentary Standing Committee on Defence [pdf here]:

Ministry is of the view that as defence is a strategic sector the foreign investment in joint ventures in defence sector should be limited to 26%. Any FDI increase beyond 26% would be considered on a case to case basis. [MOD ID NO. 11013/25/2008/D(PARL) dated 30.10.2009]

It would be interesting to recollect that the above policy of allowing up to 26% FDI in defence sector was put in place in 2001. KPMG-CII report titled Opportunities in the Indian Defence Sector earlier this year provided the invaluable data to put the efficacy of this policy in context. Since 2001, a grand total of Rs 70 lacs has so far come into the Indian defence sector as foreign direct investment in eight years. Rs 70 lacs!

The  Economic Survey for 2008-09 had raised hopes about an increase in FDI limits in defence sector when it had suggested the FDI limit be raised to 49%.  Obama administration in the US  has also requested the Indian government to consider raising the FDI limit in defence sector to 49% earlier this year.

Alas, the status quo continues under St. Antony.

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Halo’s hallucination hurts

The biggest service that Mr. Antony can do to national security is resign as the defence minister.

Congress MP and spokesperson, Manish Tewari’s recent piece suggesting that the defence ministry has not done enough to strengthen national security — though written in his personal capacity — has suddenly put the defence minister, AK Antony in the media spotlight. First off the block was Aditi Phadnis, who penned a column that was part-critical and part-defending of his actions in the Business Standard. That was followed by Suman Sharma ripping Mr. Antony apart [HT: Filter Coffee] in a very scathing appraisal of his performance till date. Now, we have John Elliott joining in [HT: Rajeev Mantri] to suggest that it is time for Mr. Antony and the Prime Minister to wake up and smell the coffee when it comes to defence preparedness.

But the most substantive and hard-hitting criticism of Mr. Antony as the defence minister comes from Ajai Shukla in the Business Standard. The piece is worth reading in full but here is an extract.

Here’s how it adds up. Antony’s obsessive quest for unblemished weapons procurement has delayed the acquisition of artillery and anti-aircraft guns, fighters, submarines, night fighting gear and a host of equipment upgrades. With arms inflation at 15 per cent per annum, a five-year delay means that India pays twice what it should have. And when that equipment is obtained through government-to-government purchases and other single-vendor contracts, the cost is about 25 per cent more than it would have been in competitive bidding. Conservatively estimating that delays afflict just half of the defence ministry’s Rs 50,000 crore procurement budget, India buys Rs 25,000 crore worth of weaponry for 125 per cent more than what it should have paid.

Over and above that figure is the cost to national prestige and the devaluation of India’s military deterrent when — as in the wake of the 26/11 terror strikes in Mumbai — India’s armed forces are unprepared for immediate strikes. That happened on Antony’s watch.

To inconvenient questions about procurement delays, Antony declares that “India is a democracy” and “we have to ensure full transparency”. Point out to him that many democracies manage timely procurement in a transparent manner, and you will get a patronising, “Don’t worry, we are doing all that is necessary to safeguard the security of the country.”[Business Standard]

As if almost on cue, Mr. Antony spoke at the inauguration of the 34th DRDO Directors’ Conference and blurted out the same old banalities.

We want the private sector to play a more prominent role in the defence sector. We are revising the Defence Procurement Policy. Our aim is to motivate private companies to invest more financial and human resources in R&D. However, any increased role for the private sector will not be allowed at the cost of the public sector. We want the public sector and the private sector to prosper mutually and not in isolation of each other. We will also never compromise on transparency and fairness in defence dealings.[PIB]

A friend‘s appropriate, albeit clichéd, reaction summed it up all: It would be funny if it were not tragic.

Just for the record,  when Mr. Antony was reappointed the defence minister in UPA 2.0, this blog had asked him to be be radically different in this tenure. Alas, those hopes have all been dashed now.

Arjun Singh finished the HRD ministry in a blatant manner whereas Antony has done the same to defence ministry in a more discreet manner. Why a mention of AK Antony does not receive the same indignant reaction as Arjun Singh is only because of the opacity of media coverage and a lack of public knowledge on defence issues in India.[Link]

Mr. Antony didn’t even pay heed to the words of his American counterpart, Mr. Robert Gates which it seems were perhaps spoken only for him. The only way left for Mr. Antony now to redeem himself and save this nation is to resign as the defence minister. That would be his greatest contribution to the national security of this country. Harsh, but true. Unfortunately, both for Mr. Antony and the nation.

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PMRP — A short-term solace

Omar Abdullah has to focus on a long-term plan to revive state capacity in J&K, rather than be dependent on the Centre for administering development schemes in his state.

While the outlays of the state of Jammu & Kashmir — most of it as dole by the Centre — receive a lot of publicity, the poor outcomes and high percentages of unutilised expenditure receive scant attention in the national media. The details of proposed outlays and actual usage for last year are liable to catch most readers by surprise.

It is no secret that only twenty percent of the funds received by the State under Prime Ministers Reconstruction Program [PMRP] were utilized till the program expired in March 2009. Out of Rupees 30,000 Cr received under PMRP by the state, it had utilized only Rupees 6,000 Crores. The program that had been initiated with high promises of changing economic landscape some five years back with great fanfare and publicity was defeated. The figures made available to the Assembly had indicated that only Rs 2,789 crores out of Rs 6,052 crores had been spent by the state under the state sector projects to be implemented by JK Government while Rs 734 crores out of Rs 4,751 crores had been spent under the central sector projects to be implemented by the state government. Under central sector projects to be implemented by the central agencies, the expenditure on different projects has been lowest with only Rs 2,814 crores out of Rs 18,455 crores.[GK]

PMRP was announced by PM Manmohan Singh in November 2004 and was supposed to last up till 2008, with a total outlay of  Rs 24,000 crore. The track-record has been very poor so far with only 22 out of 67 projects taken in hand five years ago completed so far. In all likelihood, conceding the request of the J&K CM, Centre will extend the PMRP till the end of Eleventh Plan in 2011-12. However, there have been two significant changes in centre’s approach towards PMRP after the UPA government returned to power last year.

Firstly, the centre has deputed union secretaries to directly monitor the progress of PMRP projects in the state. After one such visit in October last year, the next visit of union secretaries is planned for February this year. Secondly, the Delivery Monitoring Unit[DMU] under the PMO also took stock of the PMRP earlier this month after DMU’s charter was reduced from 101 items in UPA1.0 to only 18 projects in UPA2.0.

It can thus be reasonably expected that the unexpended outlays under the PMRP in J&K will come down significantly this year. But this is a cause for no rejoice as the enhanced central role in executing these projects is itself a vindication of the long-held belief that the J&K state apparatus is defunct with little capacity to govern and administer development projects. Unless Mr Abdullah can work steadfastly towards regenerating that state capacity using these PMRP projects as a launch pad for administrative reform, he will not be able to sustain — let alone, build upon — these achievements. In any case, he already has enough political battles at hand — with the separatists, PDP and even some members of his ruling coalition partner, the Congress party arrayed against him — to go along with these astronomical administrative challenges.

All hope is not lost for the young CM though. A supportive centre, declining violence levels in the state, his own clean and youthful image coupled with no electoral battles in the state for another five years theoretically gives Mr Abdullah enough leeway to undertake some bold and imaginative steps in the state. It would be perfectly acceptable for Mr Abdullah to be consummated in fire-fighting — jumping from one crisis to another — as all his predecessors have done in the last two decades. But it is the more difficult alternative — of focusing on a long-term plan to revive the state — that will help him rewrite history; in a state that has so far remained a prisoner to its own tumultuous history.

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Chinese do not love Africa any longer

Commodity price decline shows the true colour of Chinese intentions in Africa. India should hold steady to its own model of engagement in Africa.

It was a story where most thought that China had beaten India and even United States and Africa’s former colonial masters in Europe. However, it might surprise these wise men to hear that the Chinese have started exiting Africa now.

During the commodity price boom, China invested massively in Africa seeking to lock up as many raw materials as possible. Some spoke confidently of China having a 50- or 100-year strategy toward Africa. But more than 60 Chinese mining companies have left the mineral rich Katanga the last two months, as cobalt and copper prices cratered. Over 100 small Chinese operators are reported to have left Zambian mines for the same reason.

A similar retreat may be occurring at the strategic level.

In 2007, it was announced that China would lend the Congo US$5 billion to modernise its infrastructure and mining sector. Under a draft accord, Beijing earmarked the funds for major road and rail construction projects and for rehabilitation of Congo’s mining sector. The repayment terms proposed included mining concessions and toll revenue deals to be given to Chinese companies. In simple terms it meant 13 million tonnes of copper for $5 billion – or (even at today’s depressed prices) $40 billion for twenty-times less. Yet the China-Congo deal has gone very quiet as the copper price has plummeted. The market, not grand strategy, is the Chinese motivation in Africa.[Commodities, Africa and China pdf]

The obvious explanation, and a rather plausible one, is that there are signs that the economic downturn will reduce Chinese demand for African resources. There will be a concomitant drop in Chinese aid and interest in Africa. While the economic downturn is the obvious reason, this is likely to portray China in a poor light — not dependable and only a fair weather friend — in Africa and perhaps even in South America.

It is not that the US and Europe, which are in recession, or India, battling its own economic slowdown, can rush in to fill the vacuum left by Chinese retreat from Africa. And for good reason. India has to stay away from being bracketed with the old colonialists from Europe or the new imperialists like China. Fortunately, India has had its own model of engagement in Africa, distinct from the Chinese model. It is important that India continues to traverse steadily on the same path and the Indian model is more likely to deliver in the long run.

This blogger has consistently held the view that India needs to dehyphenate itself from China in all portrayals of its economic interests in Africa. When the piffling size of India-Africa summit was being disparagingly compared to the African summit in Beijing early last year, this blogger had even then explained that the Indian model, at variance from the Chinese approach, is likely to succeed in Africa.

It is not limited to containing or matching Chinese economic interests in Africa or answering India’s impending quest for energy security. Unlike China, India has had a historical relationship with the African continent for centuries, based on trade with the eastern and southern coasts of Africa. The presence of a large Indian diaspora in Africa for over two centuries also provides India with a unique advantage over its Asian neighbour. India’s quest for energy in Africa, unlike China, is not a core component of the Indian government’s energy security policy; rather, it is part of its bid to diversify energy sources.[IndAfr Forum Summit]

It is now, in these tough times, that the triumvirate of Indian diplomats, diaspora and private sector should try doubly hard to sustain India’s economic engagement with Africa at the existing levels. That would embody a grand strategy for the future, which will differentiate India from the purely market-driven Chinese interests.

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