Economic Highlights

New Delhi, 24 June 2008

Sustaining High Growth

FDI Better OPTION Than FII

By Dr.Vinod Mehta

(Former Director, Research, ICSSR)

The high rate of economic growth, which we have been enjoying for the past few years appears to be under strain, given the soaring prices of petroleum products and rate of inflation rising to 11.5 per cent last week. 

Economists have already forecast that the growth rate will come down from nine to eight per cent. Besides, with the Government’s concentrating on controlling inflation, the rate may further go below seven per cent. And, in all likelihood the Reserve Bank may go in for tight monetary policy, which will make borrowing for investment purposes costlier.

The economy was on the upswing not because of computer software sector but the traditional manufacturing sector such as steel, cement etc. However, these sectors are now facing a slowdown in their demand. Therefore, the Government must make all efforts to ensure that the growth rate of the manufacturing sector is not allowed to slip very sharply.

Economic reforms of the past one and a half decade have already created a positive climate for the economy to grow fast and we should build on it. The Indian industry by and large has become competitive in the international market.  With foreign exchange regulations being relaxed in a phased manner, it is acquiring manufacturing units abroad, while others have started acquiring new technologies to stay competitive.  For instance, the Indian motor parts manufacturers were initially opposed to the inclusion of their product in the FTA (free trade area) between India and Thailand. However, they are now scouting for new processes and technologies in South East Asia and other countries.

At the moment, both India and China are enjoying relatively high growth rates.  This has particularly attracted the attention of foreign investors, who wish to set up manufacturing bases in India or invest in the service sector. Thus, it is time that we have a clear-cut foreign direct investment (FDI) policy, which covers all the sectors of the economy except those where States feels that there shouldn’t be foreign investment as in the case of atomic power.

In fact, FDI in manufacturing, infrastructure and other sectors is far better than commercial borrowing or investment in scrips by foreign institutional investors FIIs). The investment by FIIs could be considered as hot money, which can be withdrawn by them at any time depending upon their judgment of the economic scene.  The recent sharp dip in the stock market can be attributed to the FIIs’ perception that India will not be able to handle inflation because of its flawed petroleum pricing policy and its waiver on farm loans.

But as opposed to FII, the FDI in manufacturing, infrastructure etc. leads to the creation of assets, which will remain within the territorial boundaries of the country even if the foreign investor wishes to withdraw from the company.

At the moment, there is no single policy on FDI, instead some sort of ad hocism. The cap on FDI varies from sector to sector: in insurance business it is 26 per cent, in banking sector it’s 74 per cent and in  some cases even 100 per cent foreign equity is allowed., whereas there is an automatic approval in other cases, where foreign equity participation is up to 51 per cent. In certain areas such as real estate no FDI is allowed.

Moreover, foreign companies are not as yet allowed to take over sick companies.  There are a number of these in the textile, bicycle manufacturing sectors or there are individual PSUs like pharmaceuticals and photo films which could be taken over by foreign companies with salutary effect, if allowed. This will not only bring in new technology and management system, but can turn them into profitable units!

Some time ago, the Department of Industrial Policy and Promotion (DIPP) is reported to have made a proposal to allow a maximum of 76 per cent stake in the form of FDI across all sectors, including real estate. This would be as good as 100 per cent FDI, as it will allow full management control to the foreign firm, but it would be obliged to disclose its financial results, which at present the 100 per cent owned foreign companies are not expected to make.

Another aspect of the DIPP proposal is that the balance of 24 per cent equity would have to be sold to the Indian public, which means the Indian investor will share the prosperity of the foreign firm.  Actually it turns out to be much more –the 24 per cent equity to Indian public means that the liquid stock (shares that are regularly bought and sold) will grow, which is not only good for stock exchanges but for widening of the share market too. It is likely to have a positive impact on mutual funds and the proposed pension funds as well.

If we can have such a policy as proposed by the DIPP with suitable modifications, one can expect a large inflow of FDI into India.  The timing is very important; and it is now. The economy has finally come out of the Hindu Growth Rate (about 3 per cent) and FDI can provide the necessary push.

It may be mentioned that not only the developing countries but also the developed countries are looking for opportunities to increase inflow of FDI.  A study by FICCI three years ago stated that countries such as  Germany and France still allow investment allowance or accelerated depreciation to foreign direct investors. China grants 10-year tax incentive to promote firms engaged in infrastructure, energy sector and knowledge industry. South Korea provides special incentives for capital investments. Others like Netherlands, Denmark, Belgium, Spain, Switzerland, Luxembourg provide tax incentives; they follow the concept of group taxation.

If India encourages FDI it won’t be unusual or against its own interest. In the current context, FDI would mean creation of assets, more jobs and a competitive economy; it is also likely to contribute significantly to the exchequer in the form of direct and indirect taxes. Therefore, the Left parties as well as the Opposition must have a realistic approach to FDI and should welcome it in almost all the sectors, including real estate and retail, barring sensitive areas such as atomic power. A good monsoon coupled with realistic FDI policy can sustain the now floundering high growth rate, which we were able to achieve with much difficulty in these past few years. ---INFA

 (Copyright, India News and Feature Alliance)

Open Forum

New Delhi, 21 June 2008

Biofuels & High Food Prices

WEST NEEDS TO RELOOK POLICY

By Prakash Nanda

Is the emerging food crisis all over the world going to have an adverse impact on the production of biofuel, which hitherto, was believed to be an effective alternative to the petroleum products?  There are reasons to believe so.

Addressing the World Food Summit at Rome early this month, Agriculture Minister Sharad Pawar had pointed out that additional demand for maize and rapeseed as feed stock for production of ethanol and bio-diesel and high input costs particularly energy prices have had the strongest impact on prices. 

While the quest of the world community for finding sustainable alternatives to fossil fuels is well appreciated, manufacture of biofuels at the cost of food grains needs to be examined in more depth.  As one study indicates, converting all of the world’s grains into ethanol may yield only about 11 per cent of the total world oil demand.  Simply put, even if we decided to convert all of the world’s grain into motor fuel we will still need to use a lot of fossil fuel and will not be having anything left to eat. 

Given such a scenario, the impact of diversion of land, which grows cereal for human consumption into production for biofuels, is likely to be self-defeating. Therefore, Pawar explained why India’s policy has been for the use of non-cereal biomasses, crop residues and for cultivation of jatropha on degraded and wasteland for biofuel production.  “Conversion of food grains and edible oil seeds for producing biofuel, prima facie is fraught with food security concerns as is evident already,” he said.

Is biofuel, then the real villain for the frightening food crisis in many parts of the world today?  It may be noted that the idea of turning farms into fuel plants seemed for a time, like an answer to the high global oil prices and supply worries.  That strategy appeared to reach a high point last year when the US Congress mandated a five-fold increase in the use of biofuels.

It is true that "Green" subsidies for biofuel crops are diverting agri-output away from food.  American farmers have diverted over 30 per cent of corn as part of a government-sponsored ethanol production scheme - aiming to reduce oil dependency and offset man-made global warming.  A fifth of the US corn crop is now used to brew ethanol for motor fuel, and as farmers have rushed to plant more corn, they have cut acreage of other crops, particularly soybean.  That, in turn, has contributed to a global shortfall of cooking oil.

Another stark fact in this context is that while over 240kg of corn would feed one person for a year, the same amount is required to produce just the 100 liters of ethanol needed to fill a SUV tank.

On 4th April, the BBC reported that no increase in global temperatures has been recorded by the World Meteorological Organisation since 1998, despite growing levels of carbon in the atmosphere. Instead, it has linked the 1998 recorded all-time high with El Nino with the recent cooling with La Nina - two vast Pacific Ocean currents. The advocates for biofuel, who consider dependence on traditional petroleum products to be the most important reason for global warming, certainly don’t like this.

With natural factors seemingly decisive to recent weather, and bitterly-cold winters in China (it’s coldest in a century) and in Central Asia and across North America, the biofuels gambit thus seems doubly-questionable. It fuels food price increases more efficiently than it does environment-friendly automobiles.

No wonder, a reaction is now building against policies in the United States and Europe to promote ethanol and similar fuels, with political leaders from poor countries contending that these fuels are driving up food prices and starving poor people.  Biofuels are fast becoming a new flash point in global diplomacy, putting pressure on Western politicians to reconsider their policies, even as they argue that biofuels are only one factor in food prices' seemingly inexorable rise.

Many specialists in food policy consider government mandates for biofuels to be ill- advised, agreeing that the diversion of crops like corn into fuel production has contributed to higher prices.  Work by the International Food Policy Research Institute in Washington suggests that biofuel production accounts for a quarter to a third of the recent increase in global commodity prices. Assuming that current mandates continue, the Food and Agriculture Organization of the United Nations at Rome predicted late last year that biofuel production would increase food costs by 10 to 15 per cent.

All this, however, does not mean that there is no opposite view. While agreeing that biofuels have been a factor in food price increases, Ethanol supporters maintain that it is relatively small and that energy costs and soaring demand for meat in developing countries have had a greater impact. 

It is further pointed out how the growing numbers of the middle class in developing countries such as China and India, who can now afford to eat better food, are the real reasons behind the food crisis. According to this argument, prices are soaring not because there is less food (in 2007 the world produced more grains than ever before) but because more people can afford to eat more.

Additional factors being raised in this context include the drought in Australia last year and the failure of many governments to increase agricultural productivity by undertaking more irrigation projects and heralding new green revolutions. Former US Under Secretary of agriculture August Schumacher, who is a consultant for the Kellogg Foundation, says the criticism of biofuels may be misdirected since development groups like the World Bank and many foreign governments have done little to support of agricultural development in the last two decades.  He stressed that upheavals over food prices abroad have largely concerned rice and wheat, neither of which is used as a biofuel.  For both those crops, global demand has soared.

Notwithstanding all these pleas, campaigners for biofuel are becoming increasingly defensive. No wonder that nearly two months ago, at a conference in Washington, finance ministers and central bankers of seven leading industrial nations called for urgent action to deal with the price spikes. Several of them demanded a reconsideration of biofuel policies adopted recently in the West.--INFA

(Copyright, India News and Feature Alliance)

POLITICAL DIARY

New Delhi, 14 June 2008

Crime Is Now Politics

LEADERS  OF  GEN  NEXT?

By Poonam I Kaushish

Celluloid khoon a la Amitabh Bachchan in ‘Sarkar Raj’ is naqli. For asli Raj don the khadi cap of a neta which guarantees a life-long “bullet proof jacket.” Welcome to India and its new Gen Next reality of criminals banne neta!

Believe me this is no exaggeration and I certainly don’t subscribe to the view that the polity cannot be tarnished by a few black sheep. Chilling reality and cold Government statistics are on my side that show that politics has nothing to do with morality and accountability. Crime is now politics and criminalisation of politics is the flavour of the season.

Turn to any part of the country politico-criminals are now ruling the roost. There are five ‘criminals’ who adorn India’s Treasury Benches. One, Minister had to resign when arrested for murder. Worse, the UPA Sarkar confessed in the Supreme Court that the nexus among criminals, politicians and bureaucrats has increased leading to a disturbingly high level of corruption and dismissing it as compulsions of coalition politics.  

Only last week two State Ministers, one each in UP and Assam were sacked and arrested. The UP Fisheries Minister Nishad for allegedly killing a police constable from his ‘lal battee’ car while leading a mob protesting police protection for an accused in the rape of a girl belonging the Nishad community in Maharajganj district. In Assam, Education Minister Ripun Bora for trying to bribe the police investigating a leader’s murder from his area.   

Earlier too in UP, another Minister was shown the door after his name cropped up in the murder of a law student in Faizabad, BSP’s Azamgarh MP was arrested in a land grabbing case and a Samajwadi MLA was shot by his BSP political rival. A tip of the iceberg given that 40% of the legislators have criminal records. According to the Election Commission UP along with Bihar, account for at least 40 MPs and 700 MLAs who faced criminal charges that included murder, dacoity, rape, theft and extortion. Leading the pack are MPs Pappu Yadav (convicted of murdering a popular left-wing legislator) and Shahabuddin. Both in jail.

How commonplace is the mixing of crime and politics can be gauged from Union Law Minister H R Bhardwaj’s averments in the Rajya Sabha in the last session that there were over 1,300 cases pending against sitting MPs and MLAs in various courts. Of which the CBI is investigating 65. If there were 40 tainted MPs in the 13th Lok Sabha there are over a 100 MPs (23.2%) at present.

Consider also: criminals have been elected from prison. Some continue to rule their empire from jails, hold durbars, instruct their minions by cellphones and issue diktats that few dare disobey. Some take anticipatory bail to avoid arrest. Others find it easier to abscond while some “surrender", engaging clever lawyers to argue their case!

India’s downslide has been rapid. Most distressing is that it doesn’t strike any cord anywhere. With every passing election the phenomenon of criminals-turned politicos no longer creates a ripple, let alone set the Ganges on fire. It has become an accepted norm. Curse all, but when push comes to shove the majority willingly lumps it. Shrugged of as a price one has to pay for democracy. The polity washes its hands off by calling it a “systemic failure”. Are they kidding? In plain English this translates into a fig leaf to cover their shocking incompetence and scandalous failure.

Sadly, it is one of the main reasons for the deteriorating law and order situation. It is also a given that the inability of the State to arrest and prosecute politicos with criminal antecedents is primarily because the State is part of the problem and not the solution. Criminals protect the illegitimate interests of politicians and in turn obtain protection from them and their parties. This mutually beneficial relationship works against the establishment of the rule of law. As a consequence, the criminal justice system is increasingly corrupted and manipulated. Notwithstanding various Court judgments trying to cry a halt to this blatant and brazen jiski lathi uski bhains dadagiri.

Look what happened to the Vohra Committee Report of 1995 which said it all. But today the power daddies of crime, muscle, money and mafia dismiss it as kid stuff. Running a parallel government with established linkages with the bureaucrats, Government functionaries at local levels, politicians, media persons and strategically located individuals while pushing the State apparatus into irrelevance.  This decrepit state of affairs is essential to the continued criminal hold on legislatures across the country. The tragedy is that the private face of our netas is ugly. It wins hands down over their public mask.

There is no gainsaying that the growing Indian middle class is not averse to electing criminals if they can become their patrons and 'deliver the goods'? As a former Chief Minister argued when quizzed about having 22 Ministers in his Cabinet with criminal antecedents, "I don't bother about the Ministers' past. After joining the Government, they are not indulging in crimes and are ready to help suppress criminal activities. Ask the people why they have elected them.” How do you rebut this logic?

Why are political parties happy to adopt criminals as candidates? Simply, because there is no rule of law. The State has lost its Iqbal --- the authority to govern and arrest those who break the law. Thanks to a weak police and legal system which ensures that mafia-turned netagan get away with murder. They are the law and rule by law: use force with impunity, collect protection money, are as powerful as official tax-collectors, settle disputes unlike the State bogged down in legal wrangles and use loads of money to muscle out honest candidates. Remember, Mayawati who auctioned MP and MLA seats to the highest bidder. A milieu of jo jeeta woh sikander, a vicious circle of you scratch my back, I scratch yours!

Why do mafia dons invest large sums in getting a neta’s tag? It is a ticket to continue extortions using political power, gain influence and ensure that cases against them are dropped. Thanks to legal delays, often abetted by political pressures, make convictions of resourceful crooks rather rare. Besides, the returns on political investments are so high and profitable that criminals are disinclined to invest in anything else. Thus, our system has unwittingly created huge incentives for criminals to enter politics. Immortalised by renowned Mumbai mafia don-turned MLA Arun Gawli: “Ab kis ka dam hai ki mujhe encounter me maare. Now no politician can give supari (contract killing) to any police officer or gangster to kill me. Ab mere paas bullet proof jacket hai --- and MLA tag”. 

What of the future? Will we continue to put a premium on criminality? Allow criminals to become netas? Basically, is it good for our democracy to have scoundrels represent the voters? When those who are supposed to lead become saboteurs, it is time to call a spade a spade. A stop can only be put once our polity picks up courage to end this trend. More voices must be raised against criminalisation of politics and ways found to reverse this growing malaise. Above all, we need politicians who are men of conscience, integrity and credibility. Not comrades in crime. ----- INFA

(Copyright India News and Feature Alliance)

POLITICAL DIARY

New Delhi, 7 June 2008

UPA Skids On Messy Oil

TIME TO DRAW LAKSHMAN REKHA

                                              By Poonam I Kaushish                

Go on failing. Go on. Only next time try to fail better. Samuel Beckett’s saying encapsulates the fallacy of the UPA sarkar. How it continues to flunk in providing good governance. Content only in making appropriate noises, expressing hollow concerns but offering no solutions to end the agony of the aam aadmi over soaring prices, still higher inflation and rocketing oil. Which have trashed all hopes of a better tomorrow. Yet for our netagan, India is Incredible!

So busy rejoicing over Brand India, that they forget the ugly reality of Asli Bharat. Amdaani athanni, kharchaa rupiya…baaki jo bachaa who mahengai maar gayee!. This, my dear readers sums up the tragic reality of the aam aadmi under the UPA. Forget bijli, sarak, paani there is no sight even of the much promised roti, kapada aur maakan for the 800 million poor who satiate their hungry, malnourished bellies feeding on the neon signs of Coke that mock their poverty. Mera Bharat is indeed Mahan!

Don’t worry and lose sleep we have taken stern action to bring down the prices. The inflation rate could already be tapering off, cooed our erudite Finance Minister Chidambaram three months ago. Today, he has helplessly thrown up his hands and sings another tune, “There is yet no sign of a decline in the inflation rate. We do not know if we have peaked yet.”

If this spelt bad news, worse followed. The Prime Minister Manmohan Singh went on national TV and radio to announce a steep hike in petrol, diesel and LPG prices last week. Hoping to play the heartstrings with a plaintive plea, “With a heavy heart I am compelled to say inflation is inevitable due to rising global food and commodity prices and oil prices…we have to tighten our belt. We cannot think only for ourselves, for the present, for the here and now. We must think about what is good for our children, grand children and their children. It is our duty to ensure food and energy security for an India where the aam aadmi feels safe, secure and hopeful about the future.”

Are we expected to applaud? Sing paeans of the Government? Let’s talk real. Has anyone bothered to study the end result of any price hike? Can it be counted upon to keep the total deficit in check? No. On the other hand, the actual impact, working through a multiplier effect, is always far greater than the direct increase estimated by the Government’s go up. An increase will not only make life difficult for the vulnerable citizens but also trigger off a cost-push spiral. Every one knows that any attempt to control deficit financing through increase in prices of essential commodities is at once dangerous and suicidal, both economically and politically.

The price hike would also raise the inflation rate. In real terms, this mans that the purchasing power of the rupee would decrease and the interest rate would have to be increased. This would curb growth rate and lead to a fall in the demand for manufactured goods. All the Government has done is changing the gears of tokenism.

Besides, this is loads of economic gibberish which the 762.9 million people earning less than Rs 20 a day don’t understand and couldn’t care less about. Questionably, which future tabbar (family) is the Prime Minister promising a better future for? The 74 million ‘Nowhere Children” who are neither enrolled in schools nor accounted in the labour force or the 44 million children aged between 5-14 years engaged in economic activities and domestic and non-remunerative work?

Needless to say the economic policies of the UPA Government, far from being able to address the central problems of inflation, agrarian crisis and unemployment are adding new ones for the Indian economy. Disillusionment among the aam aadmi whose aspirations were raised with the UPA’s coming to power, is fast turning into discontent. Borne out by rising farmers suicides, despite doles by the Prime Minister, chakka jams and bandhs. Even the National Rural Employment Guarantee Scheme is mired in corruption wherein the benefits are not accruing to the end user.

The tragedy of India is that it is being ruled by leaders who are stricken by reckless populism and crippled by a crisis of casualness. Who seem to be good enough for only fair weather governance. Even the slightest turbulence causes panic. So comatose are they that they refuse to see the writing on the wall and merrily continue to make mistakes.

So what if sound economics adds up to bad politics and deficit populism. Over the years, our netagan have turned this dictum on its head and converted populist politics into economic nonsense. Prime Minister Manmohan Singh’s Government is no different from that of its predecessors. The issue is not about the price hike of petrol and petroleum products. It is about the manner in which the oil crisis is handled.

Think. Over 70 per cent of India’s oil consumption is by the Central Government and its counterpart in the States. Ministers both at the Centre and States get many cars allotted to them with unlimited petrol. An example: A Central Minister used to drive to his residence every time he wanted to go to the toilet as the washroom in his Ministry was not up to the standard!

The MPS and MLAs are not far behind. They get various Public Sector Undertakings to assign cars to them. Not to forget the babudam. The Joint Secretary and above at the Centre are entitled to an official car round the clock. Used to ferry their wives to her kitty party and shopping and drop-pick up the children from school. Unlike in the past when even ICS Secretaries used to drive to work in their personal cars and used official vehicles only for office work. Before telling the consumer to curb oil consumption, the Government should first strictly ration its own consumption.

To show that his Government means business, the Prime Minister talks austerity and shoots of a letter to all his Ministerial colleagues to desist from wasteful expenditure. ''It is a moral duty to cut down on wasteful expenditure. I'm asking you to severely curtail spending on air travel, particularly foreign travel, unless absolutely necessary,” Only three Ministers heed his advise and forego their annual summer chutti in foreign climes.

Till date the Commerce Minister Kamal Nath has made 72 trips overseas till November last spending a total of 424 days outside the country, the Minister of State for External Affairs, E. Ahmed went abroad 79 times and spent 232 days there, others who follow suit were Renuka Chowdhary, Kapil Sibal, Ramdoss and Ambika Soni. So much for austerity. It is another matter that the Prime Minister conversely confessed that his sarkar indulged in lavish spending. Clearly Government money is nobody’s money!

What next? The time has come to draw a lakshman rekha on populist measures.  The Prime Minister should remember that austerity measures and tightening of the belt flows from the top. Yatha Raja Thatha Praja. The buck stops at our netagans doorstep. ---INFA

(Copyright India News & Feature Alliance)