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Dear Reader,

is happy to present its third quarterly edition, delineating upon the basics that drive or should drive India, i.e, infrastructure, foreign trade and FDI. Infrastructure is the very foundation on which a country's industrial economy is built, while foreign trade and FDI are the modern day pillars that support it. It is imperative to improve infrastructure to attract foreign trade and investment.

We have grandiose ambitions about growing 8% annually, every year and becoming an economic giant, making foreign investment the only imperative. Yet we have attained notoriety among foreign investors for the tedious procedures, an apathetic bureaucracy, lacking infrastructure and unwarranted delays. Time has gone for policy makers to have realized

Foreign investments not only act as a catalyst to sustainable growth but has tremendous positive ripple effects. It can also help to generate competencies with Indian manufacturing and thus lead us to become a trading powerhouse. The International Trade section features the highlights of the New Foreign Trade Policy (NFTP), as a separate section, at last, for the convenience of the reader. The same has been dissected from an analytical point of view, incorporating the view points of sectoral experts and researchers. We believe India should unhesitatingly opt for by reducing transaction costs.

More than any investment, good infrastructure investment is a strategic key to bring out inherent strengths of any nation, making it work for growth, global competitiveness and poverty reduction. We believe that adequate attention to Inland Waterways and Rural Infrastructure can make a vital difference to the nation. Let there be no

The present report (the fourth one), like its predecessors, is a combined effort of many practitioners, researchers, policy-makers and professors. We are constantly taking ideas and research support from our students (particularly the Spring Summer Session 2004/06) under the National Economic Planning term paper and making them work on the ground.

I am sure this issue of IER will definitely trigger much debate, among all the progressive groups seeking alternative view point for the policies. The effort will continue till such time that every Indian has access to the governance he/she deserves.

Prasoon S. MajumdarManaging Editor

The IIPM Think Tank

'

Foreign 'purse'pectives.

International Intercourse

Constricted Constructions'

Editor's Page :The India Economy ReviewRethink Delineate Edify

“Economy is a savings bank, into which men

drop pennies and get dollars in return.”

- Josh Bill ings

FOREIGN 'PURSE'PECTIVES"Ever wondered why, despite being the world's

largest democracy and a liberalised economy, we

get less than one-tenth of the FDI that China gets,

although China is amongst the world's largest

dictatorships as well as a totally controlled market?

The very same America and its allies which

keep protesting about the Chinese human rights

violations, send the maximum FDI to China! It is

because the rules of the free market suggest that we

go to countries which have the purchasing power

because that is where the products sell. If we need

to see success in a liberalised world, then we need

to know the basic rules at least!!"

- Dr. M. K. Chaudhuri,The Great Indian Dream, Page No.174

The India Economy Review 20054 5The India Economy Review 2005

Any theory of development must

start with a consideration of forces

that determine investment in

underdeveloped countries, especially

when it is realized that savings are

by no means the only limiting factor,

may be low because, investments are

low rather than vice versa.

F

Annotat ion On FDI

F DI includes investment in physical assets, such as plant and equipment, in a foreign country. Holdings of 10 percent equity, or more, in a foreign enterprise is the

commonly accepted threshold between direct and por tfol io investment as it demonstrates an intent to inf luence management of the foreign entity. The main types of FDI are acquisition of a subsidiary or production facility, participation in a joint venture, l icensing, and establ i shment of a green f ield operation. FDI is a key factor in economic growth and wealth, leading to susta inable development. FDI is important not only to increase the rate of investment in the economy but a lso for inducting new technologies and management practices, and scrapping obsolete and sub -critica l capacities. Anecdotal and statistica l evidence exist across the world that FDI/MNCs have a number of spillovers. Some of these have occurred in f irms of the same industry in the form of improved human capita l, demonstration ef fect or competition ef fect while

others are across industries through vertical inter-f irm l inkages or spread of management practices. This complementary and cata ly tic role of FDI is deemed quite valuable in the present world. Please consider the fol lowing cases :

• The price of passenger cars in China dropped more than a third between 1995 and 2001 af ter Ford, Genera l Motors and Honda entered the market.

• In India, too, prices of consumer durables — from TVs to a ir - conditioners — dropped steadi ly af ter foreign companies entered. As for the automobile industry, today the fact that at least 30 car models are sold in India, up from just eight at the end of the eighties, has seen prices drop steadi ly in a l l segments by 8 to 10 per cent a year.

• If consumers have benefited, so have economies.

Wages in India’s business -process -outsourcing sector are 50 to 100 percent higher than in other white - col lar s e c tor s r equ i r i ng s i m i l a r ski l ls.

• In the Chinese auto industry, “ for e i g n pro du c er s o f fe r unski l led l ine workers more than twice the going rate for unskil led manufacturing jobs.”

(A study from the McK insey Globa l Inst itute t it led ‘The truth about foreign d irect investment in emerging markets and quoted in an ar t icle t it led ‘Truths about FDI’ that appeared in Business Standard ; February 23rd 2004)

two main exceptions), most of the region, especially South-East Asia, has relied heavily on FDI, and the East Asian countries tend to have much simpler rules for FDI approvals than are now in place in India.

T h e PH D C h a m b e r o f C o m m e r c e a n d I n d u s t r i e s (PHDCCI)’s analysis points that the percentage of cumulat ive actua l FDI inf lows compared to cumulative tota l approva ls between 1991 and March 2004 is as low as 51 per cent, particularly because of delays caused at the State levels. Clearly, when it comes to economic decision-making, the gap between reality and rhetoric

“China’s managers and trained employees have accumulated valuable learning exper ience s ince the t ime the Chinese mar ke t was opened to FD I . Ch ina opened t he minds of i t s people to new technologies, indus t r ia l p rocesses and organisat ion, manufac tur ing methods, incent ives and per formance evaluation. China made no dis t inc t ion between toys for kids and computers. They plunged into the business of manufactur ing toys for children below three and computer accessor ies for global companies . They were clear that leader ship, methods, processes, organisa t ion s t ruc tures, incentives and per formance measures were the pr incipal gains from FDI.”

(Mr. G.Ramachandran and Mr. Chandra sekhar Krishnamurt i in ar t icle t i t led

‘How not to measure FDI ’; The Hindu Business L ine; 29th July 2003 )

ProblemsIndia has grandiose ambitions about growing 8 percent annually, ever y year and becoming an economic giant. Yet, it attracts about 10 percent of the FDI that China does every year. The main reason for that is the role of warped and discretionary policy.

While it i s true that not all of East Asia relied heavily on FDI to achieve rapid growth ( Japan and South Korea are the

remains as large as ever, despite all the official and media hype.

While policy barriers have b e en r emove d prog re s s ive ly and the time taken for clearing new proposals by the Foreign Inves tment Promot ion Board (FIPB) has signif icantly come down, most of the delays are s t i l l tak ing place. ( ‘PHDCCI concerned over low rate of FDI inf low’; The Hindu Business Line; August 26th 2004)

“It is not surprising

then that for a lot of

MNCs, India isn’t such

an attractive investment

destination. If the same

project can be cleared

with ease in communist

China, why then would

someone come to

democratic India just to

watch the project file go

through 267 hurdles?”

(Mr. Bimal Jalan, Former RBI Governor)

Quick Learner

Any theory of development must

start with a consideration of forces

that determine investment in

underdeveloped countries, especially

when it is realized that savings are

by no means the only limiting factor,

may be low because, investments are

low rather than vice versa.


Consider this : From 1991 t i l l March 20 03, $76.77 billion worth of proposals were cleared , but the ac tua l i nve s tment t ha t took pl a c e amounted to $33.33 bi l l ion. Clearly, bureaucrat ic ha ss les and a host of other problems l ike getting clearances for land, power, wa t e r, env i ron ment a n d m i s c e l l a n e o u s s u n d r y

procedures ac t a s deterrent . Reliance l ike to l ist the roughly 300 clearances required before one can star t a power project. Others have l isted the 50 or so clearances required before you can star t a hotel. ( ‘Red tape gets redder’; T.N.Ninan; Business Standard).

Please refer the box

Any macroeconomic mode l fo r I nd ia that has empirical credibilit y has the fo l l ow ing ou tpu t (outcome). Each of them will tell you that if the country i s t a r g e t i n g 7-7.5 per cent GDP growth over the next decade, it will face a growing domestic savings-investment gap — which will have to be made g o o d b y F D I . Estimates of the gap in 2010 vary within the range of $25

billion to $35 billion. Today, the best we get is $4 billion. As against the targeted r e q u i r e m e n t o f $15 b i l l i o n e ve r y yea r, on l y $3 - 4 bil l ion is t r ick l ing in India’s relatively m e a g r e i n f l o w s contrast sharply with surveys by consulting f i r m s l i k e A T Kearney suggesting that it is the third m o s t a t t r a c t i v e destination for FDI ( p receded by US and China). But this l ine of reasoning

should not delude us. The gap between us and China i s o f g a r g a n t u a n p ropo r t i on s . Fo r e x a m p l e , C h i n a a lone got $53.8 bil l ion in the f ir s t 10 months of year 2004. (Source: Extracted from

an ar t i c l e t i t l ed ‘On

Sitaram Yechury’s Barks

And Bites’ by Mr. Omkar

Goswami and appeared

in Financial Express; July

20th 2004 and Financial

E x p r e s s e d i t o r i a l

t i t led ‘ Inves tment raj ’;

December 7th 2004).

The I IPM Thin k Tank has collated a lot of relevant information upon the problems faced by the foreign investors. Some representative e x a m p l e s a r e discussed below:

Consider this:Domestic companies and subsidiaries of

foreign companies are a t t rac ted by SEZ schemes, but incorporation of a company in India itself is a Herculean task. The very first hurdle to be crossed is regis ter ing the name.

The Regis t rar o f C o m p a n i e s

calls for needless explanations if the name applied for, even i f i t is not unlawful, is generic in nature and has long been used by the parent company.

F o r e i g n subscribers to the Memorandum and Articles are frowned

upon. To save time, if Indian nominees are appointed at this incorporat ion s tage, transfer of shares to the parent company at a later stage requires FIPB approval even if the concerned industry falls under automatic route.

Consider this A businessman in Singapore wanted to register a wholly owned subsidiar y in India, and went to a lawyer to get the job done. The lawyer advised him that if it was to be the subsidiar y of an in t e r na t iona l c o m p a n y , t h e authorized capital would have to be 10 times the minimum s t ipulated for an Ind ian company. Asked for the reason, n o n e cou l d b e provided. The next

problem cropped up with the name. If it was a wholly-owned subsidiary, the Indian company must have the exact name as the parent overseas, with ‘India’ suffixed in brackets. Well, if that was the rule, so be it. But what if the international company ’s name has already been r e g i s t e r e d b y someone e lse in India, and therefore i s no t ava i l ab le anymore? Would that mean the Singapore Company cannot set up a subsidiary in India, because the prescribed name is already taken and because the rules do not permit any other name? The lawyers advising the businessman had no answer. Kafkaesque, isn’t it?

Our Singapore businessman tr ied

to find out where all these rules could be found, and got no where. In contrast, all that he had to do when he registered h i s comp any i n Singapore was to go to the designated website, do a search on names, pick a name and check if it was available, and fill in the form on the site when he found the free name that he liked. Is he being unreasonable when he asks why the government of India can’t make life as easy for a potential investor?(Sources: Extracted from

t h e Economic Time s

editorial titled ‘The devil

is in the detail’; October

13th, 2004 and a column

written by Mr. T.N.Ninan

t i t l ed ‘ The red tape

gets redder ’; Business

Standard)

Complex facilitation structureAs was mentioned in an ar ticle t i t l e d “ Don’t l e t go of the foreign hand” by Mr. A rvind Mayaram and appeared in The Economic Times on August 6th, 2004, in India, the current FDI faci l itation structure is quite complex. The Indian Investment Centre, which was original ly m a n d a t e d t o p u r s u e t h e s e objectives, is a lmost defunct.

Ti l l 1991, the Depar tment of Economic Affa irs was the noda l depar tment that dea lt with foreign investment policy

and regulated the f low of FDI. But the secretariat of industria l approvals, which accepted and approved foreign inves tment applications, functioned in the min i s tr y of indus tr ie s . Pos t 1991, the subjec t of foreign investment policy has been with the Depar tment of Industria l Policy and Promotion (DIPP) but the Secretariat of Industria l Assistance (SIA), as it’s now k n o w n , i s n o l o n g e r t h e secretariat for the FIPB, the foreign investment promotion and approval body. The f inance secretary chairs the FIPB and

Growing Divide

The Obstacle Race

As per UNCTAD, FDI

levels need to treble ( from

the current level of around

US$ 4-5 billion) if India

wishes to achieve an 8%

GDP growth as envisaged

in the 10th 5 Year plan of

2002-2007

(Source: ‘Revamping FDI Policy’; NEP Paper presentations; Spring

Summer 2004-2006, IIPM New Delhi)

“In the category of FDI

the contribution from

overseas Indians is

only 9.15% of India’s 4

billion dollars. Having

seen the enormous

economic role expatriates

have played in countries

like China and the

Philippines, India wants

more strategic and

lasting contribution from

its diasporas…

(Source: ‘Revamping FDI Policy’; NEP Paper presentations; Spring Summer 2004-2006, IIPM New Delhi)

Annotat ion On FDI


all foreign investment cases are processed in the finance ministry. The process has been further complicated by the establishment of the Foreign Investment Implementation Authority (FIIA) in 1999, to facilitate quick translation of FDI approvals into implementation, provide a proactive one-stop aftercare service to foreign investors. The FIIA has created fast-track committees (FTC) in 30 ministries/departments in the Central government. The constitution of the FIIA is almost the same as the FIPB. Whereas the secretariat for the FIPB is in the finance ministry, that of the FIIA is in DIPP. It’s clear that by creating two distinct bodies, FIPB and FIIA, the system has become more complex and confusing. Then there is also the FIPC for promotion.

Central to the debate whether foreign investment actually leads to development is the role of the actors involved. These actors are typically the multinational enterprises and institutional investors. According to UNCTAD (United Nations Conference on Trade and Development), there are 60,000 of them operating from 800,000 foreign affiliates. But Indian policy makers do not pay adequate attention in an effective manner.

Mr. Janmejaya Sinha of The Boston Consulting Group, opines that, about 400 people form world opinion- - -top 100 CEOs, their board members, a

few key bureaucrats and some key politicians. They form their outlooks on the basis of who they meet and hear (network and socialize). In the year 2003, when Mr. Jack Immelt , CEO of GE, visited India, did not meet any key policy maker and politician, leaving India Inc bereft of showcasing the vibrant and blooming industrial sector.

Ms. Jayshree Sengupta points out in the Hindsutan Times article titled “Clear the road” that, about 60 percent of exports by China are undertaken by MNCs. In India, MNCs have not come in a big way to the Special Economic Zones (SEZs) set up by the government. In 1990, foreign affiliate accounted for less than 9 percent of total Chinese exports. In 2002, they provided nearly half of them (exports). In some high technology industries, the share of foreign affiliates in total exports was as high as 91 percent in electronic circuits and 96 percent in mobile telephones. In India, by contrast, FDI has been much less important in driving export growth, except in information technology. FDI in Indian manufacturing has been, and remains, mostly domestic market-seeking, accounting for only 3 percent of exports in early 1990. Even today, it accounts for only 10 percent (of India’s manufacturing exports). (Source: NEP Presentation, S/S 2004-2006, IIPM New Delhi).

Please refer the box:

• On an average it takes 11 procedures and 89 days to start a business in India; nine procedures and 46 days to start a business in South Asia. In China, the global centre of foreign investment, it takes 12 procedures, but only 41 days to start a business.

• On average, it takes 10 years to resolve bankruptcies in India, almost double of the 5.2 years in South Asia, more than four times that of China and over five times that of the OECD average.

• In India, creditors can hope to recover only 12.5 cents on the dollar if a business goes bankrupt, as compared to 21.4 cents in South Asia, 35.2 cents in China and 72.1 cents in OCED.

• It is three times more dif ficult to hire workers in India as compared to China. Although the regulations on working hours are less rigid in India, it is more than twice as difficult to fire a worker in India as in China. In comparison with South Asia, it is slightly easy to hire workers in India; but much more difficult to fire them.

• The cost of creating collateral in India is 11.3 percent of the country’s per capita income, in comparison with no cost in China, 8percent for South Asia, and 5.2 percent among OECD nations.

• India has been assigned 'zero' with respect to credit information index, which is a measure of the scope, access and quality of credit information available through public registries and private bureaus. The index is 1.7 for South Asia, three for China and 5 for the OECD countries.

• It takes six procedures and 67 days to transfer a property from a seller to a buyer in India, in comparison to five procedures and 55 days in South Asia, three procedures and 32 days in China and four procedures and 34 days in the OECD countries.

• On an average it takes 40 procedures (from the moment the plaintiff files a lawsuit until actual payment) and 425 days to enforce a contract in India, in comparison with 29 procedures and 375 days in South Asia, 25 procedures and 241 days in China and 19 procedures and 229 days in the OECD countries.

• The cost of enforcing a contract (court and attorney fees) is 43percent of the total debt in India, 40 percent in South Asia, 25.5 percent in China and 10.8% in OECD countries.

(Source: World Bank report titled, Doing Business in 2005: Removing Obstacles to

Growth, as appeared in an article titled ‘Those puppets on a chain’; The Economic

Times; 28th September 2004).

A r e c e n t s t u d y b y M r. Ga nesha n Wigna raj and Mr. A sh le y Tay lor benchmar k s i ndus t r i a l comp e t i t i v ene s s i n 8 0 d e v e l o p i n g a n d t r an s i t i on coun t r i e s u s i ng the concept of manufac tured expor t compet i t iveness index (MECI ). The MECI is based on three components — cur rent manu fac tu red e xpo r t s pe r c ap i t a , l o n g - t e r m g row t h i n m a n u f a c t u r e d e x p o r t s f rom 1980 to 1999 and the cur rent share of technology-i n t e n s i v e e x p o r t s . T h e s t udy p lace s I nd ia in t he 37th posi t ion wi th a score of

0.38, which is much below the score ob ta ined by the Ea s t A s i an coun t r i e s an d Mexico, Brazi l, South Afr ica and China with which India is of ten compared. The situation ha s ha rd l y change d f r om the ear lier rankings by two other repor ts — the Global C o m p e t i t i v e n e s s R e p o r t 2001 of the World Economic Forum (WEF) and the World Compe t i t i vene s s Yea r book 20 01 o f t he I n t e r na t iona l I n s t i t u t e f o r M an agemen t Development ( IMD).

T h i s i m p l i e s t h a t

d e s p i t e t h e i n c r e a s e i n F D I , c o m p e t i t i v e n e s s o f I n d i a n i n d u s t r y h a s n o t imp roved much ( ba r r ing a few except ions ) . This poses a s imp l e que s t i on — h a s su f f i c i en t ca re been taken to inc rease t he abso rp t i ve c a p a c i t y o f t h e c o u n t r y an d i t s f i r m s i n t h e p a s t one decade af ter the 1991 l iberalisat ion? (Adapted f rom an ar t ic le t i t led ‘Mixed

benef i t s f rom FDI inf lows’ wr i t ten by

Mr. V inish Kathur ia and appeared in

The Hindu; 12th Oc tober 2004)

Puppets on a chain

The Race to Bot tom!

“Acording to a CII

study, a typical power

project requires 43

Central Government

clearances and 57 State

Government (including

the local administration)

clearances. Similarly, the

number of clearances for

a typical mining project

is 37 at the Central

Government level and 47

at the State Government

level.”

(Source: ‘Revamping the FDI Policy’; NEP Paper presentations; Spring

Summer 2004-2004; IIPM New Delhi)

Annotat ion On FDI


FDI in retailingA c c o r d i n g t o M r. A r v i n d S i n g h a l , C h a i r m a n , K S A Te c h no p a k , pr a c t i c a l l y no country in the world has banned F DI i n r e t a i l i n g . S ome d o impose conditions such as the number of stores (China has a norm of not opening more than 2 stores in one province) locat ion of s tore s ( Ma lays ia and Indonesia) and ownership pattern but by and large, these a r e fe w a nd cont i ngent on spec i f ic cond it iona l fac tor s . I n prac t ica l ly no developed or deve loping countr y have “global” reta i lers wiped out the local retai l industry. According to Mr. Vivek Mehra , Executive Di re c tor, P w C , I nd i a , F DI he lp e d or g a n i z e d r e t a i l to grow substantia l ly in Thailand, Malaysia and Brazi l to around 40 to 50 percent and in Poland and China to around 20 percent. Opening up FDI in retail will not open the f loodgates overnight. In China, for instance, it took 15 years to reach 20percent penetration- - - - -time enough for industry to adapt. That small

cannot coexist with the large is only a myth. Large reta i l formats would come up only in large cities, which constitute not more than 10 to 15 percent of the population. Hence, the majority of reta i lers in small and medium cities and rura l areas remain unaffected with r e spe c t to t he employ ment oppor tunit ie s . Another r ub -of f ef fect of permitting FDI in reta i l includes increase in the “O ut sou rc i ng Ac t iv i t y” carried out by the international reta i lers . It increases 5 to 6 t imes with the internat iona l reta i ler’s presence. A case in point is Wal-Mart. It has bought over $15 bi l l ion worth of goods from China in 20 03 aga ins t loca l sa le s that have hard ly crossed US $2 bi l l ion. Many bel ieve that organised reta i l is a sunrise sector in India. That is good news. Worldwide, the retail sector employs more people than any other. It could be a painless way for millions of India’s young jobless to find employment. If only policy would allow that. Please refer the box.

Solut ionsGloba l ly, F DI h a s b e c ome a c o m p e t i t i v e i n v e s t m e n t instrument. It goes where the returns are best. Global FDI dest inat ions are not decided by the host country’s socia l objectives, but by the potentia l that ex i s t s . Plea se re fer t he box . Sooner, this rea l ization dawns upon the policy makers, the better it wil l be for Indian economy.

FDI in infrastructure A c c o r d i n g t o M r . P. C . Chidambaram, Finance MInister, the 10,000 MW of additional energy that India needs every year for the next 15 years makes India one of the most lucrative countries for investment. It just needs the right policies. (“Savour the Chidambaram Effect”; Mr. Senthil Chengalvarayan,; The Financial Express; Business Bites, 25th May, 2004). To leverage its

“We are more bullish

on India than on China

because the country

has many advantages.

Indians speak fluent

English, have the right

attitude and, more

importantly, have a

regulated banking sector.

We are looking for a

strong strategic partner

for our Indian foray,”

(Mr. Francis McAuley, International Director, Debenhams UK, in an

interview with the Economic Times, August 24th 2004.)

Retail is one of the few sectors closed to FDI, primarily due to opposition from local traders, who have been alleging that a large number of jobs generated by sma l l ou t l e t s would melt away if larger players enter the fray.

L e a d i n g ove r s eas p l a ye r s l ike Car re four of

F r a n c e , T e s c o and Debenhams of the UK, NTUC F a i r P r i c e o f S i n g a p o r e a n d John Keels of Sri Lanka — who were keen to inves t in I n d i a — h a v e shelved their plans as of now and are look ing a t other des t ina t ions l i ke Brazil, Indonesia, Argentina, China, P h i l i p p i n e s an d

the east European coun t r i e s , wh i ch have recently joined t h e E u r o p e a n Union.

The IIPM Think Tank reaf f irms i t s s tance upon th is i s sue. A lack o f coherent policy on the re ta i l sec to r i s keep ing away most of the large retail chains. The a b s o l u t e l a c k

of c lar i t y on the government ’s view on FDI in retail is s tif ling the growth ( I nd ia i s mis s ing out on a promising o p p o r t u n i t y t o

create millions of new jobs) of one of the most impor tant s e c t o r s o f o u r economy. (Source: Adapted from

an ar ticle titled “Global

retail firms back of f on

FD I f l ip - f lop” by M r. Cha i t a l i Cha k rava rhy and Mr. G. Ganapathy, Economic Times, August

24th, 2004)

In attracting FDI, the odds against India look formidable. As the ADB study points out, Asia’s loss of global FDI during 1998 to 2000 meant gains for countries like Brazil, Finland and Ireland. Brazil is a vast economy tha t has pushed through a successful s t a b i l i s a t i o n programme and now ranks among the top five markets in the world for many consumer products. The feeling among investors is that it’s another China in the making.

F i n l a n d , acknowledged as

the wor ld ’s mos t comp e t i t i v e an d least corrupt, has used FDI to emerge from depression into one of Europe’s most rapidly developing economies, and new foreign companies are coming in at the rate of 200 a year. Fore ign inves tor s believe Finland will be the third bes t country in the world, af ter Canada and the Netherlands, to do business over the next five years.

I r e l a n d i s reaping the benefits of policies that have remained singularly c o n s i s t e n t a n d he lped c rea te a

solid market-driven, expor t-based, and FDI-led economic e n v i r o n m e n t . Between 2000 and 2002, i t received 9 per cent of all manufacturing FDI coming to Europe, 8 per cent of research and deve lopment i n v e s t m e n t s , 31 pe r cen t o f pharmaceutical and healthcare projects (overtaking the UK), 42 per cent of new sof tware projec ts, and 12 per cent of information and c o m m u n i c a t i o n s technology projects.

Then there is Russia, which, for the first time, has appeared

Retail Woes

Asia's loss: Europe's gain

“…. Nearly 40 percent of

FDI has come through

the mergers & acquisitions

(M&A) route. This

implies that three fifths

of the FDI may still be

resulting in introduction

of newer technology in the

country. And if this newer

technology is spilling over

to the local industry, it will

be worth inviting foreign

firms.”

(Source: ‘Revamping FDI Policy’; NEP Paper presentations; Spring Summer 2004-2006, IIPM New Delhi)

Annotat ion On FDI


potentia l for FDI, Indian policy makers need to accelerate ef for ts to institutional ize government ef f iciency and carry on implementing promised reforms. Dr. Manmohan Singh, Prime Minister of India, believes that Indian economy has the ability to absorb $150 billion of foreign investment in this sector over the next ten years. In his view, a irports and rai lways require $55 bil l ion over the next ten years while power and telecom need $75 bil l ion, and $25 bil l ion respectively over the next f ive years. Unless the government goes the whole hog with FDI reforms, most of its aspirations on the infrastructure front wil l remain only on paper. ( 'FDI: Benefits wil l f low only with open, consistent policy’; Mr. Krishnan Thiagarajan; The Hindu Business Line ; 24th October 2004). A case in point is the civi l aviation. The IIPM Think Tank ideates that foreign airl ine investment can potentia l ly deliver increased capacity, a greater choice of a irl ines, improved service, lower fares and more eff icient a irports. This wil l benefit Indian consumers and the economy. We need to have a l iberalised market with strong rel iance on competition rather than regulation to achieve our goals. Foreign airl ine capita l wil l provide signif icant benefits.

Mr. Kapil Kaul, senior V.P, CAPA-Centre for Asia Pacif ic Aviation, mentions that, ( ‘It’ l l spur India Inc to invest in civi l aviation’; The Economic Times ; September 20th 2004), foreign investment wil l spur big Indian corporations to invest in the aviation sector and this wil l enable the government to work on a comprehensive restructuring process. We have a vir tual “open skies” condition in respect to India’s international air market and foreign carriers are dominating the Indian skies and destroying the future of Air-India. The policy makers have no problem with foreign carriers ruling Indian skies but wil l not a l low a sensible decision l ike foreign airl ine investment to go through. India needs a well structured and a real istic aviation policy to provide equitable opportunities to all its stake holders including our national carriers. Aviation policy should not be surrender to corporate inf luence.

Accord ing to the ana lys i s done by the

PHDCCI, while inadequate infrastructure, lack of transparent guidelines and Governmental delays are acting as bottlenecks to the entry of foreign investors, factors such as non-workability of BOOT (build-own-operate -transfer) and BOLT (build-own-lease -transfer) schemes are a lso holding up the progress. ( ‘PHDCCI concerned over low rate of FDI inf low’; The Hindu Business Line; August 26th 2004). The risk perception for long gestation projects remains at unacceptably high levels. Mr. Rajiv Kumar, chief economist, CII opines that there are two factors that hold back private investment from moving into the infrastructure sectors. Firstly, the policy inconsistency that arises from political parties being unable to agree on the core elements of a strategy for achieving high rates of ‘inclusive economic growth.’ Secondly, the absence of regulatory structures holds back private investment. This is amply demonstrated in reverse by the inf low of private investment in telecom where a robust regulatory structure today exists. A proper appreciation of these two features will attract the requisite investment.

Export-oriented FDITNCs’ decision to locate to a country is based on the tax structure, special programmes and schemes, the competition regime, entry and establishment requirements, investment protection, technology transfer, natural resources and skill levels, incentives and institutional mechanism. Studies have shown that export-oriented FDI is driven by different factors than domestic market seeking FDI. Mr. Nagesh Kumar argues that, ( ‘Towards A National Foreign Trade Policy’; The Financial Express; 27th August 2004), what is needed is a combination of pro-active promotion, incentives structures, and selective policies to prompt MNCs to make India global or regional production hub. Here, our ability to offer to MNCs access to a large and expanding domestic market besides other resources such as low cost, but high quality human resources needs to be leveraged effectively for getting them to consider India as a base for export-oriented production. RIS studies have shown that export-obligations can be effective tools for promoting manufactured exports by MNCs in countries with large home markets, such as India. Such obligations are consistent with

the WTO rules. The IIPM Think Ta nk ’s research ( ‘Revamping FDI Policy’; NEP Presentation papers, Spring Summer Batch 2004 - -2006, New Delhi) ref lects also the same perspective.

investors, and a similar story is now unfolding in the automobile sector, where Hyundai, Suzuki and Ford took the initiative and now Tata Motors and Toyota have joined the bandwagon. The

among the top 10 most favoured investment destinations in the world in a recent A T Kearney sur vey of global executives.

Russia is reporting a 50 per cent FDI growth for this year and has launched a vigorous investment campaign in the US.

(Source: Extracted from an article titled

" Can India ever be a turtle’; written by

Mr. Barun Roy and appeared in Business

Standard; November 28th 2003)

The research exercise under taken by Mr. Janmejaya Sinha and Mr. Vik ram Bha l la of The Bos ton Consul t ing Group upon t he “ Pe r fo r mance o f M NCs in I nd ia” has some s tar t ling proposit ions and dismantled the my ths surrounding the operat ional results of MNC’s operat ing in the Indian economy.

• The average Return on Capital Employed for MNCs was 19 percent compared to 11 percent for Indian companies.

• The Average Return on Sales for MNC’s was 7 percent compared to jus t 4 percent for Indian companies.

• About half of the MNCs earned higher returns in India than their global average. As an example, in banking the bigger foreign banks Cit ibank, Standard Char tered, ABN Amro and Bank of America (except HSBC) are all more profi table in India than their global average. Another unique of fer is that these players contr ibute signif icantly to their overseas operations through of f shor ing and back of f ice processing.

As pointed out by Mr. V ive k Bha r t i , ( ‘R a i s i ng the bar on exports’; The Financia l Express ; 3rd September 2004), a feature that is common to both automobiles and sof tware exports, two sectors, doing very well on the export front, is the openness of these sec tors to foreign competition and FDI and India is now emerging a sourcing destination in these sectors for global majors. Both in ITES and automobiles, MNCs have made Ind ia a hub for their g loba l production and supply chains and this has inspired Indian companies too to aggressively ent e r t he g loba l f r ay. T he BPO story was led by foreign

IIPM Think Tank ideates that this par ticular strategy can be replicated in all the other sectors, as well.. Other strategic efforts, as harped in an AT Kearney’s FDI Confidence Index report, shou ld inc lude focus ing the market on India’s relatively high rates of return and long term potentia l, addressing the issue of transforming the country into a viable export platform, and encouraging strategic a l l iances with foreign investors.

Inst itut iona l reforms M r . A r v i n d M a y a r a m , Director, Centre for Trade & Development, Rajasthan opines that an Investment Promotion

“………. If export

promotion is the objective

then FDI should be

encouraged in areas which

are presently reserved for

the small scale industries

(SSIs). India’s major

exports are Garments,

Gems and Jewelry and

Agricultural products

which are largely produced

by the SSIs. Given the low

cost of labour, these sectors

are highly employment

intensive.”

(Mr. Manoj Pant in an article tit led ‘Compounding the FDI confusion’, that appeared in The Economic Times)

World class in India

Annotat ion On FDI


Authority ( IPA) works to promote the country as an investment destination, targets investors and provides a f ter - care service in a hol i s t ic manner. Currently these functions are d ispersed in d i f ferent government bodies. He outl ines the under mentioned roles for the Investment Commission ( IC). ( “Don’t let go of the foreign hand” by Arvind Mayaram and appeared in The Economic Times on August 06th 2004.) It could be an ef fective IPA by undertaking primari ly f ive functions :

(a) Policy advocacy, (b) Image -making, (c) Investment promotion, including Investor

targeting, (d) After - care of the investors, and (e) Networking, both global ly and within the

country with state level IPAs.

The new IPA must identify TNCs that are seeking new markets or production bases and target them. Foreign investors go through severa l stages of decision-making before f ina l ly deciding upon a location. At every stage, the new IPA must provide ful l support to the investors. Once the decision to invest in the country is taken, the af ter - care function, requiring ef fective coordination with l ine minis tr ies and the s tate IPAs, becomes important.

I nter nat iona l Coopera t ion , Com monwea lth Deve lopment Cor porat ion ( CDC ), U K a nd Overseas Private Investment Corporation (OPIC), USA, are very act ive in promoting outward investment. Development Finance Institutions, Investment Guarantee Schemes, bi latera l and multi latera l institutions, pr ivate consultancy f irms and private banks and insurance companies a l so a ssi s t in investments of f i rms in other countries. Information about f irms intending to invest in other countries at a very early stage can be sourced from these agencies at an early stage. Organisations l ike the World Association of Investment Promotion Agencies (WAIPA) has over 160 IPAs as members and would enable the new IPA to network with other IPAs and bodies like UNCTAD, UNIDO, MIGA, OECD and FIAS, which are the co -sponsors of WAIPA. Investors know that most of the action and requisite scope for improvement are at the state government level. As happened in the case of China, the investors wil l come in droves, of the newly empowered s tates exhibit proact iveness , than they have done ti l l now. Please refer the box . Against this backdrop, the IPA can play a signif icant role, a lso at the state level.

As has been dicussed earl ier, the Centre may keep on churning out reports to l ibera l ise the environment for FDI, but it is the states that are

haven’t got their act together. The former have indeed succeeded in getting the high amounts of FDI during October 2002 a long with Delhi and Maharashtra. The mindsets of other states must change radica l ly i f actual FDI inf lows have to accelerate from the current levels.

The IIPM Think Tank feels that, actively seeking foreign capita l on the one hand, and l imiting it by placing sectora l caps on the other, are inconsistent moves. The present policy on ownership controls in different sectors and within each the types of businesses, sti l l bristles with contradictions. Nowhere is this more glaring than in the banking industry. Controls on ownership structure co -exist with tota l freedom to foreign interests in the case of incumbent enterprises. As a matter of fact, exclusive foreign entities control nearly 10 per cent of the tota l assets in the banking industry. I f foreign ownership is not in national interest then it defies comprehension that some of them should be a l lowed to not only carry on their business but even grow. But i f they pose no such threat then shutting the door on some merely because they were not in when the door was shut the f irst time, even as incumbent enterprises enjoy tota l freedom from ownership restrictions, is an example of perverse protection for the latter which serves l it t le publ ic purpose. ( ‘Raising the FDI l imits’; The Hindu Business Line ; 17th October 2004). Also, in a global ly integrated economy, a iming to ensure that management control remains with Indian shareholders appears to be a futi le exercise. At least in a dynamic industry such as telecom, ceding management control to foreign investors wil l be imperative. The IIPM Think Tank ’s research ( ‘Revamping FDI Policy’; NEP Presentation papers, Spring Summer Batch 2004 - -2006, New Delhi) a f f irms that, as of now, some of the foreign telecom players have bypassed the sectora l cap through a complex f inancia l engineering exercise. But keeping the FDI window open at a l l t imes is critica l, as over the next year or two, once the ful l potentia l of Indian telecom, including broadband is unleashed, quite a few global telecom players would be wil l ing to do a rethink. (FDI: Benefits wil l f low only with open, consistent policy’; Mr. Krishnan Thiagarajan; The Hindu Business Line ; 24th October 2004)

Ta xat ion reforms Capita l formation is the key to economic and

industria l growth. To atta in this goal and attract investment — both domestic and foreign — there is a need to focus on reforms in tax laws by making it simple and lowering the tax rates. (Source : ‘Law reforms af fecting Indian Business'; NEP Presentation papers, S/S2004--2006, New Delhi)

Quality of FDIMs. Nitya Nanda , Consumer Unity and Trust Society, Ja ipur suggests that, ( ‘Push hard for qual ity FDI’; Business Line ; 7th June 2004), the enthusiasm shown by most developing countries today in at trac t ing FDI i s more because of ideolog ica l fac tors rather than ground - level changes. All the multi latera l bodies l ike World Bank and IMF, among others, advocated that, a country cannot develop without FDI. But the fact is , receiving more FDI is no panacea for developing countr ies . China ha s ma inta ined high GDP growth a long with huge FDI f lows. However, it star ted receiving FDI only af ter it got into a high growth path. Hence, large FDI f low is the ef fect of high growth and not the other way round. Even today, China’s growth is largely driven by domestic capita l formation, and FDI as a proportion of tota l investment is barely 10 per cent. Very of ten there is ta lk about the South-East Asian miracle. Again, these countries have achieved high growth by mainly depending on their domestic capita l accumulation rather than FDI. The experience of Brazi l and Argentina, the two Latin American nations that attracted huge FDI throughout the 1990s, is even more tel l ing. Argentina is in a deep crisis and the Brazi l ian economy has remained stagnant for long. It is , therefore, quite clear that huge FDI f lows have not been of any rea l va lue to these countries. The IIPM Think Tank endorses this view point. The chal lenge before India is not only to attract more FDI but to get qual ity FDI that fosters development.

Prof. Ragbhendra Jha , a professor at the Australian National University, further reinforces this stance. ( ‘FDI: Is more a lways better? ’; The Economic Times ; 28th July 2003). The policy makers should be wary of equating higher FDI inf lows with better economic performance. The qual ity of FDI is equal ly, i f not more, important as its quantity. In a country l ike India, with historically high tariffs and large domestic market, FDI might move in merely to produce behind tariff wal ls for the domestic market. Such FDI becomes

Chongqing is a relatively poor western Chinese province with a population of 31 million located along the upper reaches of the Yangtze. Chongqing is determined to grow fas t and increase employment — and has realised that the best way of doing so is to at trac t FDI. I t has cut adminis trative licenses by half and abolished over 1,000 local s tatutes that came in the way of encouraging FDI. Except for weapons manufacture, foreign investors can invest in any thing in Chongqing. Approvals are secured in a mat ter of weeks. Tax breaks are of fered — zero for the f irs t two years, and 15 per cent (versus the norm of 33 per cent ) for the nex t eight. Manufacturers can impor t capital goods dut y free. And visas are available on arr ival at Chongqing Airpor t. ( Source: Ex trac ted from an ar t icle t i t led ‘On Si taram Yechur y’s Barks And Bi tes’ by Mr. S i taram Yechur y and appeared

in Financial Express; 20th July 2004)

Finally, networking both globally and within the country would be an important function of the IC . Out wa rd i nve s tment promot ion agencies (OIPAs) promote outward investment, of ten in combination with the promotion of inward investment and export. Japan Bank for

the implementing agencies. As has been pointed out in an ar ticle tit led ‘India Invest Blues’ in Financia l Express, 8th February 2003, the states are a d iverse lot, with some l ike Andhra Pradesh and Karnataka aggressively of fering the best conditions for investors while those l ike Bihar

The r ise of a province

Annotat ion On FDI

The India Economy Review 200516

virtually indistinguishable from domestic investment and has, in the Indian context, sometimes lobbied for higher protection a long with domes t ic f i rms . FDI becomes attractive for its own sake when it makes a net contribution to exports and/or has productivity spillover effects. The professor also mentions that another pitfall in the FDI policy. The extant regime is let t ing foreign investment substitute for a genuine domestic privatisation programme. Hence, at the level of policy a successful FDI policy must be integrated with a policy of trade reform and genuine privatisation.

F o r e i g n i n v e s t m e n t , obviously relies on the promise of better returns than domestic y i e ld s . T he c h a n ne l s u s e d a re norma l ly a combinat ion of technolog y fee s , t rans fer pricing, royalties, licence fees, and export of capital equipment and of course, capital market o p e r a t i o n s . Fr om a n o t h e r perspective, foreign investment f lows along opportunities, which also could be the fault lines in the host system, that promise h ig her re t u r n s . M r. Y. R . K . Reddy explains that, ( ‘Foreign Investors And Special Privileges’; The Financial Express; 31st May 2004), these foreign a f f l iates are not the ideal transnational corporation that has no tilt to one nation. These companies are headquartered in countries of their origin with dominant shareholders from that particular country. The actors will obviously act in their self-interest, a la Adam Smith’s baker. But some reform-savvy chief ministers treat the baker as a benefactor and shower speedy approvals, exceptions, exemptions, priority, and subsidy. Reportedly, there is inadequate

due diligence on them and no analysis of potential benefits. The race among states appears to be for gross numbers of projects and investments. This practice needs immediate attention.

Finally, in order to attract FDI (more f rom developing cou nt r i e s ) , i t i s i mpor t a nt to make the relat ive cost of production lower by providing better infrastructure (cheaper electricity, better transport and communication facilities etc) and easing labour laws.

ConclusionThe United Nations Conference on Trade and Development (Unctad) report points that (‘Unctad report optimistic on global FDI inf lows this year’; The Hindu Business Line ; September 22nd 2004). India’s FDI inf lows amounted to $4,269 million in 2003, against $3,449 million in 2002, while FDI outf lows amounted to $913 million, against $1,107 million in 2002. It ranked 114 in an inward FDI performance index and 61 in outward FDI performance. Expectations of what FDI can achieve in the current context need to be more realistic. The inves tment potent ia l of the private sector is inadequate and the public sector is shackled by the Fiscal Responsibil ity and Budget Management Act . In this context, FDI would have a greater role to play in generating more tax revenues through larger investments. Ways must be found to improve the contribution of FDI to technology, productivity and exports. This will require a reconsideration of the policy approa ch to F DI , d r aw i n g lessons from more successful experiences.

Several chief ministers

have been competing for

over a decade to showcase

their states and attract

foreign investment. So

much so that even a

doubtful investor with a

foolish project, a dubious

history and questionable

intentions enjoys the

benefit of an audience with

them. Special attention,

special dispensation,

concessions, waivers, land

allotments and the like are

lined up indiscriminately

and without due diligence

(Mr. Y.R.K. Reddy in an article tit led ‘Foreign Investors And Special

Privileges’ in Financial Express; 31st May 2004)

“No nation was ever ruined by trade.”

- Benjamin Franklin

INTERNATIONAL INTERCOURSE

IER

Annotat ion On FDI


Alexis de Tocqueville, Democracy in America (1840)

O

“Trade is the natural enemy of all

violent passions. Trade makes men

independent of one another and

gives them a high idea of their per-

sonal importance; it leads them to

want to manage their own affairs and

teaches them to succeed therein.

Hence it makes them inclined to lib-

erty but disinclined to revolution.”

O ver the last two decades, few develop-ing nations have grown rapidly without simultaneous increase in both exports and imports. And, vir tual ly, a l l devel-

oping countries that have grown rapidly have done so under open trade policies or decl ining trade protection. An open economy promotes growth in many ways. Domestic producers are forced to become more ef f icient to survive. Openness a lso af fords access to the best technology and a l lows countries to specia l ize in what they do best rather than produce everything. (The Principle of Com-parative Advantage). The fa l l of the Soviet Union was in no small measure due to this fa i lure to access cutting edge technology. In the late 1950s and the 1960s, Mr.Raul Prebisch, the Argentinean economist who was the f irst Secretary-General of UNCTAD (United Nations Conference on Trade

and Development), had seen the role of trade in terms of bridging the foreign exchange gap involved in achieving a par ticular rate of growth. Also, export industries through their forward and backward l inkages in the rest of the economy had a multipl ier ef fect on growth.

Trade helps produce rapid growth, and rapid growth helps the poor through three channels.

First ly, it leads to what the Columbia Uni-vers ity economis t , Prof. Jagad ish Bhag wat i , ca l ls the active “pull-up” rather than the passive “trickle -down” ef fect. Susta ined growth rapidly absorbs the poor into ga inful employment.

Secondly, rapidly growing economies can generate vast f isca l resources that can be used

for targeted anti-pover ty pro -gramme.

And f ina l ly, growth that helps ra i se incomes of poor fami l ies improves their abi l -i t y to acce s s publ ic s er v ice such as education and health. ( ‘International trade and eco -nomic growth’; Mr. S. Venu; The Hindu Business Line ; 10th September 2004)

External sector is increas -ingly becoming important for the g row th of I nd ia n econ -omy. The share of imports and exports accounted for 22.8 per-c ent of GDP in 20 0 0 - 01 a s aga inst only 14.6 percent in 1990 -91. The growth of this sector has def initely a say in the achievement of 8 percent growth rate. Mr. Pasca l Lamy, t he Eu rope a n Un ion Tr a d e

“Trade is the natural enemy of all

violent passions. Trade makes men

independent of one another and

gives them a high idea of their per-

sonal importance; it leads them to

want to manage their own affairs and

teaches them to succeed therein.

Hence it makes them inclined to lib-

erty but disinclined to revolution.”

Annotat ion On Trade

Mr. A rvind Pana-g a r i y a , P r o f e s -sor of Economics a t t h e U n i v e r -si t y of Mar yland, has analyzed the data for a large number of coun-tr ies for 38 years s p a n n i n g o v e r 1961 t o 19 9 9, made available by the Global Devel-opment Network. He div ides these data into two 19-year per iods and identif y, for each pe r iod, wha t he calls growth “mir-acles” and “deba-cles”. The former a r e d e f i n e d a s c o u n t r i e s t h a t grow at 3 percent o r more in pe r-capita terms and t he l a t t e r t ho se e x p e r i e n c i n g a decline in the per-capita income. He found that miracle coun t r i e s invar i -ably exper ience a ver y rapid expan-s i o n o f e x p o r t s

and impor ts while d e b a c l e c o u n -t r i e s r a r e l y d o . Thus, consider the p e r iod 1961- 8 0 . The s e y e a r s a r e commonly ident i -f ied wi th impor t-subs t i t u t ion. Ye t, t h e r e m a r k a b l e fac t is that vir tu-a l l y a l l m i r a c l e coun t r i e s du r i ng t h i s p e r iod r ap -i d l y e x p a n d e d their expor t s and impor ts. The coun-tr ies in this group came f rom v i r tu-ally all continents i n c l u d i n g L a t i n America, which is o f t e n d e s c r i b e d as having led the deve loping wor ld i n t h e a r e a o f imp o r t s ub s t i t u -t ion. Brazil, which grew at 4.6 per-cent dur ing 1961-8 0 , e x p a n d e d i t s e x p o r t s a n d i m p o r t s a t 8 .1 and 7.6 percent, respec t ive ly, over the per iod. Among

countr ies that grew at 3.6 percent or more, t he lowes t r e co r d e d g row t h r a t e o f i m p o r t s wa s 7. 2 p e r c e n t for Tunisia, which g r e w a t 4 p e r -cent in per-capita terms. Even as one goes down the lis t, there are only two countr ies that reg-i s t e r e d r e l a t i v e l y low g row th ra te s of impor ts: Mauri-t ius and Kenya with impor t g row th o f 3.8 and 3.6 per-cent, respec t ively. I f o n e l o o k a t g row th debac le s , the weight of evi-d e n c e i s h u g e l y agains t trade being the culpr i t. Out of the seven debacle c a s e s o n w h i c h da ta on t r ade i s available, only two s h o w s i g n i f i c a n t growth in impor ts. In the other cases, d e c l i n e s i n p e r-cap i t a t e r ms a r e a c c o m p a n i e d b y

‘Open up trade, get r ich’

“……………But we

then choose to forget

that, as with free trade,

protection too has income

distributional consequences

that might leave many

already very poor Indians

poorer. The fact that

the Japanese restrict the

import of rice or that the

Americans restrict the

import of sugar into their

economies is not relevant

to us. The average level of

income in these countries

is approximately 10

times ours, implying that

the impact of restrictive

policy on the poor of these

countries is minimal by

comparison.“

(Mr. Pularpe Balakrishnan in an article tit led ‘Foreign Trade And National Interest’ in The Financial Express; 19th July 2004)

Alexis de Tocqueville, Democracy in America (1840)


had no drop in pover ty levels. The IIPM Think Tank ref lects that, one of the main reasons for this anomaly (export-pes -simism) is the inward looking economic growth strategy that India adopted in the f irst four decades af ter ga ining Indepen-dence. This a imed at achiev-ing self- suf f iciency rather than export growth. Coupled with a p l e t hor a of cont rol s a nd regulations, high tari f f wal ls and severe foreign exchange restrictions, this strategy led to a non- competit ive domes -tic industry and a thin volume

of foreign trade. This point is a lso duly i l lustrated by the con-trasting post-war experiences of Korea and India unti l late 1970s. Increased savings rates of fered both countries growth opportunities but only Korea was able to take advantage of it . With its emphasis on pro -ducing everything domestically including machinery and raw materia ls , India choked off the growth potentia l it had created for itself. ( ‘Open up trade, get r ich’; Mr. Arvind Panagariya; The Economic Times ; Apr i l 23rd, 2003 )

impo r t g row th o f l e s s t han 2 p e r-cent. This pat tern is repeated dur ing 1981-99. The key d i f f e rence i s t ha t the number of mir-ac l e coun t r i e s i n the lat ter per iod is smaller and that of debacle count r ie s larger. But remark-a b l y , t h e t o t a l popula t ion en joy -ing miracle growth rates at the begin-n i ng o f t h e f i r s t p e r i o d a t 356 . 5 million was consid-erably smaller than that at the begin-

ning of the second per iod at 2.1 bil-l ion. The popular be l ie f tha t 1980s an d 199 0 s we r e l o s t d e c a d e s o f development while 1960s represented the golden per iod o f g row th i s too s imp l i s t i c . W h i l e i t is t rue that the populat ion exper i-encing a decline in per-capita incomes d u r i n g 19 8 0 -9 9 was vas t l y l a rge r than in 1961-80 — par t ially due to the imp lo s ion o f t h e Sov ie t Union and

Eas t and Cent ral Eu r o p e a n c o u n -tr ies — the devel-o p i n g c o u n t r y population exper i-encing r ising living s tandards dur ing 1980-99 was also mu ch l a r g e r o n account of China and India growing at 8.3 and 3.8 per-cent, respectively( Source: Ex trac ted from

an ar t icle t i t led ‘Open

up t rade, get r ich’ by

Mr. Ar vind Panagar iya

and appeared in The

Economic Times; Apr i l

23rd, 2003 )

Commissioner makes a point that ( 'EU-India par tnership in g loba l trade'; The Economic Times, March 14, 2003), since the completion of the last round of global trade negotiations, the Uruguay Round, India’s exports have more than doubled and Ind ia’s share in world trade increased by 40 percent. But the star ting base was a low one: from a mere 0.6 percent to 0.8 percent — obviously, there is sti l l a lot of room for improve -ment. (One should remember the fact that India’s GDP is the four th highest in the world, in terms of purchasing power).

Reaching the export trade target visual ized by Mr. Kamal Nath , Commerce Minister is a very, very ta l l order. According to WTO statistics, world mer-chandise exports crossed $7.27 tri l l ion in 2003 while India’s f igure was $55 bi l l ion (roughly 0.75 per cent). According to ca lculations by the Commerce Depar tment, a growth of 4 to 5 per cent per annum in world

merchandise exports over the next f ive years means Indian exports wil l have to reach $175 bi l l ion by 2009 to reach a share of 1.5 per cent. This implies a growth of 21 per cent CAGR in exports over the next f ive years. India has touched 20 per cent export growth levels since 1991 severa l t imes, but not consis -tently for f ive years at a stretch. ( ‘Can trade target be achieved?’; Mr. N. N. Sachita na nd ; The Hindu; 13th September 2004)

Mr. S . Venu , a Chenna i based management consultant points that ( International trade a nd e conom ic g row t h ; T he Hindu Business Line ; 10th Sep -tember 2004) newly industri -a l ised economies, such as Hong Kong, Singapore, South Korea and Taiwan, have all been free of pover ty for more than a decade, according to the dol lar -a-day poverty line. By contrast, during the 1960s and the 1970s, India remained closed to trade, grew approximately 1 per cent annu-a l ly ( in per capita terms), and

The way ou t o f pove r t y i s t rade and grow th. Fur-ther, international mar ke t s p rov i de oppor tuni t ie s for growth. In the case of China, i t has been a case of how a country can use g lobal i za t ion fo r rapid growth. It has been using both FDI and trade as the wheels of growth. Ch ina’s t wo -way t rade is l ike ly to cross the one tril-l ion dollar mark. I n 1978, i t was around $20 billion and it was a defi-cit trade. In 1979, China had officially announced its ‘open door’ policy. Since then, nothing has s topped Ch ina’s global foray. The Chinese leadership had decided to use foreign trade as a

tool to transform its social is t economy into a market econ-omy.

T he Ch ine s e miracle is not the s a m e o l d E a s t A sian one. While the success stories of the eas t Asian e c o n o m i e s h a d been export-led, in China it is a story of trade-led growth, in which imports also played an equally important role. The ‘open door’ policy did serve the dual purpose of attract-ing FDI and push-ing t r ade . A f t e r the initial years of the policy, the two became mutua l l y complementary. In the process, China has emerged not only as an aggres-s ive expor ter but also a rapidly grow-

ing importer. China’s direction of trade is very interesting and can be put in this way: China sells in the West and buys in the Eas t. The countr y runs huge trade surplus vis-a-vis the West, par-ticularly the US, but has def ic i t t rade with i t s neighbor-ing countries in the East (Japan, South Korea, Taiwan and now A SE A N — al l have surplus trade with China.)

There is a message behind China’s tril-lion dollar success. It is a simple mes-sage: open up your economy.(Source: Extracted from

an ar t i c le wr i t ten by

Mr. T.K . Bhaumik and

appeared in The Finan-

cial Express; 8th October

2004.)

Open Up!


“Today China is making

Japanese branded TV

sets, Taiwanese-financed

semiconductors, and

Korean mobile phones,

which are among the most

sophisticated in the world.

I think China has moved

up the learning curve

quickly, and will continue

to so do so………. ”

(Prof. Robert Friedman in an interview with ‘4Ps’, January 2005, IIPM’s Marketing journal)

“….countries that have

achieved significant

poverty reduction are

generally those that have

grown rapidly and have,

in turn, been open to

trade. The most obvious

examples are the Newly

Industrialized Economies

(NIEs) including Hong

Kong, Singapore, Republic

of Korea and Taiwan that

have entirely eliminated

poverty according to the

dollar-a-day poverty line.”

(Prof. Arvind Panagariya, in an article titled ‘Open up trade, get rich’; The

Economic Times; April 23rd 2004)


ProblemsThe IIPM Think Tank , a f ter scanning the internal economic environment and global trade scenario, found that the cur-rent system is plagued by many s tructura l problems l ike the ones mentioned below:

• Low productivity, • Unrel iabi l ity and inconsis -

tency in product develop -ment and manufacture,

• A low level of innovation, • All-pervasive graf t, • Inept agent s and ser v ice

providers, • Faulty exchange rate, • Labour issues, • Energy pricing, • Skewed taxation, • Unrebated state levies, • SSI reser vat ion (nonex i s -

tence of ‘economies of scale’ paradigm ),

• Miscel laneous supply- side problems and

• Other demand-side issues

Consider this :The competitiveness of Indian expor t s i s a l so l ikely to be af fected by wide f luctuations in the exchange rates. It is rather unfor tunate that we think of inter vent ion on ly when the rupee is depreciated, whereas no such move was made despite protes t s f rom the expor t ing community when the rupee was appreciating. The government should introduce a system in which intervention can be made whenever the rupee f luctuates plus or minus 2 per cent from Rs 46.

T h e I I PM T h i n k Ta n k f inds that the current Indian exports have been dominated by undif ferentiated products, where the ma in compet it ive advantage l ies in cheap labour

and simple technologies ( phar -maceutica l s and Information technology being exceptions). India’s competitiveness has a lso been adversely af fected by the inabi l ity to diversi fy the com-position of export basket. The Depar tment of Commerce has not encouraged any k ind of R&D activity that would have helped both in product iv ity improvement and product inno-vation. The 1999 World Com-petitiveness Year Book, by the International Institute for Man-agement Development, applied 287 criteria and ranked India 39 among 47 countries. The World Economic Forum surveyed 59 countries in 1999 and put India in the 53rd slot . The World Bank appraised 46 countries for inter se competitiveness ; India ranked 40th. ( ‘Shoot the shib -boleth trader away’; Mr. Raghu Dayal ; The Economic Times ; 25th August 2004). The World Competitiveness Report 2004 observes that while India has improved its relative position in terms of attributes related to corporate ef f iciency, it has lost ground where they relate to policy regimes and infrastruc-ture.

Mr M. Rafeeque A hmed , President, Federation of Indian Export Organizations, in con-junction with Mr. R.K. Dhawan, Former Add it iona l Direc tor General of Foreign Trade points out that ( ‘Do we need an exim policy’; The Business Standard 19th August 2004), in Malay-sia and Indonesia, 70 per cent of the projects involving FDI have been export-oriented. In contrast, the share of multi -nationals in India’s exports is at best between 5 and 7 per cent. India’s abi l ity to attract export-oriented FDI wil l deter -

mine the magnitude of exports in the long term. But the same is not happening at this front. The State should provide a conducive environment for attracting export-oriented FDI in the country.

s tate governments have been consulted but wi l l need to be involved closely in it s implementa -t ion. Also, at the s tate level , where trade pol icy has to be ac tua l ly implemented , there i s neither

“When the International

Trade (Development and

Regulation) Act came

into being in 1992, it was

felt that matters needed

to be simplified and with

the passage of time there

would be no written policy

as such. What the coun-

try today requires is

the International Trade

Policy. Unfortunately,

we have lost at the

World Trade Organisa-

tion (WTO), although the

minister of commerce feels

that he has achieved the

desired results.”

(Mr. M. Rafeeque Ahmed and Mr. R.K. Dhawan, in an article tit led ‘Do we need an exim policy’; The Busi-

ness Standard 19th August 2004)

The I IPM Thin k Ta n k has co l l a t ed a lo t o f r e l evan t information upon the prob-l ems f aced by t he I nd ian expor ters. Some representa-t ive examples are discussed below:

Consider this :Mr Rajesh Mehta heads Rajesh Expor ts Ltd, a lis ted company t ha t i s t he b igges t I nd ian manufacturer and expor ter of jewelr y. The Bangalore-based f irm repor ted a turnover of Rs 3,050 crore dur ing 2003-04 with the US, UK, UAE, Kuwait and Singapore being its key markets. All this in the face of incredible odds.

A s h i p m e n t f r o m a n expor t-or iented uni t ( EOU ) must be accompanied by two sets of shipping bills - one fo r EOU cus toms and t he o the r fo r a i r por t cus toms . The f irs t set of bills is called the ‘pink ’ bill since i t has a colour-coding s t r ip on top. I t is f i led in quadruplicate. EOU cus toms r e t a in s t wo set s, and re turns two, one of which is for the airpor t. Incidentally, there are similar codes fo r advance l i cense ( ye l low ) , drawback ( green )

and DEPB (blue). But at the airpor t, the of f icial gives the pink bill a cursor y look and demands the whi te b i l l (on the lines of what is submit-ted by non-EOU expor ters ). Mr Mehta claims that this is an unnecessar y demand, only adding to the paperwork.

“The shipment is packed and sealed in front of EOU customs and then taken to the airpor t - where i t is unpacked, inspec ted and sealed again in front of airpor t cus toms,” says Mr Mehta. Af ter that a cus toms of f ic ial escor t s the package to the air line s trong room. The whole process can take hours of precious t ime.

M r M eh ta l amen t s t he government ’s lack of faith in expor ters and says that while the government may claim to have s impl i f ied procedures, i t has not reduced the heavy paperwork involved.

Consider this :According to the Federation of Indian Expor t Organiza-t ions, t ransac t ion cos t s are anywhere bet ween 6.8 -14% in India, compared to 0.5-2% in China.

Consider this :One of the major problems that expor ters face even 15 years af ter the ini t iat ion of economic reforms is bureau-cra t i c red- tape. The enor-mit y of this problem can be gauged f rom the fac t tha t expor ter s require ‘257 sig-natures from a mult i tude of government agencie s as a f irs t s tep toward expor t of a commodit y’.

Consider this :Dwell t ime of air freight of expor t cargo a t De lh i a i r-po r t i s abou t t h r ee day s , as agains t the less than 12 hour s e l sewhe re . The p ic -ture is more pathetic for sea freight.(Sources: Extracted from article titled

"Customary delay‘’ authored by Mr.

Somnath Dasguta and Mr. Jaidev

Majumdar and appeared in The Finan-

cial Express; 19th August 2004; an

another article titled ‘Quo Vadis, Mr.

Kamal Nath’ authored by Mr. B Bhat-

tacharya and appeared in Financial

Express; 19th August 2004; an article

writ ten by Mr .Jayanta Roy,Financial

Express, August 18th, 2004; an article

titled ‘Top agenda for new govern-

ment’ authored by Mr .Jayanta Roy and

appeared in The Financial Express;

13th May, 2004)

It is everybody’s knowledge that most of the export related infra structure i s sues and taxa -t ion related concerns are under the jur i sd ic t ion of s tates who too have been prepar ing their own trade and investment pol icies . None of the

any idea of nor exper t i se in internationa l trade pol icy. (Mr. Ju l ius Sen; ‘Trade Pol icy Making In India : The Real ity Below the Waterl ine,’; CUTS, Ja ipur) . This , in nut shel l expla ins the appa l l ing s tate -of-a f fa irs .


Trade Turmoils


Solut ionsIt is everybody’s knowledge that compared to their competitors in the South-East Asian region a nd ot her emer g i ng e cono -mies, India’s exporters suf fer a number of handicaps in the matter of export-related infra-structure, cost of f inance and the transaction cost. The plan-ning authorit ies in the s tate a lso concede to this. The f irst step to remove the anti- export bia s i s to lower ba rr ier s to imports and expose domestic producers to external competi-

import tarif fs, which are among the highest even in developing Asia and cer ta inly the highest among the industria l izing G -20 countries. Both trade and stra-tegic policy makers have come to rea l ize not only that trade is a “two-way street”, but a lso that imports are even more impor-tant than exports in bui ld ing a s trong externa l prof i le for the country. China, which col-lects only 3 percent of its tota l revenue from customs, of fers a s tr ik ing contrast to India , which col lects 10 percent.

August 2004). Various schemes that were formulated long ago have become redundant. In fact, the DEPB (duty ent it lement passbook benefit) scheme and the advance l icensing scheme needs to be d i spensed with. Nearly 30 to 40 per cent of the expor ter s today a re defau lt-ers under the advance l icence scheme and export promotion capita l goods (EPCG) scheme on account of reasons beyond the i r cont rol . A n endu r i ng strategy of export promotion cannot be bui lt around such transient cost advantages. At this juncture, The IIPM Think Tank’s research (NEP Presenta-tion papers, S/S2004--2006, New Delhi) ref lects that though many of these schemes were intended to be transitional, they are sti l l continuing because of strong lobby pressures rather than their economic merit. A l iving proof is the contentious duty entitle -ment passbook (DEPB) scheme

that i s being widely abused. The various export incentives cost the Government about Rs 40,000 crore per year and the DEPB scheme a lone accounts for about Rs 11,500 crore.

Unfortunately, the ministry of commerce and industry per -sists with the bel ief that subsi-d ies are vita l to export growth. (Please refer the section titled ‘Target Plus’ in the ‘Highlights of New Foreign Trade Policy’, given at the end). The Business Standard mentions that ( ‘Subsi-d ising exports’; 3rd September 2004), col lectively, the new and expanded subsidies announced in the New Foreign Trade policy are estimated to add a fur ther Rs 5,0 0 0 crore to the f i sca l burden. The Target Plus scheme, which provides tax incentives to rapidly growing exporters, emphasises growth in volumes without adequate safeguards for domestic va lue addition.

“If Chile can introduce a

rate of 6 per cent with very

positive results, I don’t

see why we can’t start

with a 15 per cent rate.

This will stop all lobbying,

make the system transpar-

ent, and the revenue gains

from removal of all exemp-

tions and increasing all

the lower rates to 15 per

cent, could easily outweigh

the revenue losses, and

may even leave room for

helping some deserving

losers”

(Mr. Jayanta Roy, in article tit led ‘The Road Ahead For The Indian

Economy’ in Financial Express, 27th May 2004)

More recently, however, the world economy has come to rec-ognize the power of China’s impor t demand. According to Mr. Nicholas Lardy, a China exper t at Washington DC’s Institute for International Economics, China’s impor t ratio, impor ts to national income, has increased from about 15 per cent in 1990 to 25 per cent in 2002. India’s impor t ratio last year was about 13 per cent. Of course, this compares with a ratio of 14 per cent for the US and a mere 8 per cent for Japan. India will have to become more open to non-oil impor ts, even if presently there are concerns about a worsening trade deficit, to be able to create relationships of inter-dependence with other developing countries and the developed world.(Source: ‘Foreign trade is also about impor ts’; Mr. Sanjay Baru; The Economic

Times; 21st November 2003)

tion. A low tarif f and free of l icensing import regime which a l lows Indian players access to the global supply chains and enabling them to be cost- com-petitive is an imperative. This measure wil l ensure access to qual ity inputs at g lobal prices. As pointed out by Mr. Sanjay Baru, ( ‘Foreign trade is a lso about imports’; The Economic Times ; 21st November 2003) today, catching up with ASEAN is an imperative for both eco -nomic and geo -pol it ica l rea -sons. To pursue closer economic and strategic engagement with ASEAN and other Asian econo-mies we wil l require to reduce

Simultaneously, it would be better to withdraw most, or a l l , of the export sops and substi -tute things that would genuinely help producers. (The Economic Times editorial titled ‘Boost com-petitiveness’; August 25th , 2004 points that assorted export pro-motion schemes in 2003-04 came to Rs 39,200 crore, 14 percent of total exports. Alternatively, please look into the box, where in details are given.)

The same ha s been cor -roborated by Mr M. Rafeeque A hmed and Mr. R.K. Dhawan , ( ‘Do we need an exim policy’; The Bus ines s Standard 19 th

“We should expedite

our maturing process to

become an economy with

no sops such as advance

license, duty entitle-

ment passbook (DEPB)

scheme and ad hoc incen-

tives to promote export

oriented units and special

economic zones. Export-

ers need no spare change,

just removal of an anti-

export bias.”

(Mr. Jayanta Roy, in article tit led ‘Exporters Don’t Need Spare Change’ in Financial Express, 8th July 2004)

Export subsidy worth Rs 40,000 crore was given in 2003 - 04. The f igure quoted refers to the duty forgone under various export promotion schemes. The break-up is as fol lows:

DEPB : Rs.11,536 croreAdvance l icense : Rs.10,134 croreEOUs/ EHTP/ STP: Rs. 9,224 croreEPCG : Rs. 3,399 croreDrawback: Rs. 3,058 croreOthers : Rs. 1,753 croreTota l : Rs.39,704 crore

The tota l duty forgone as a percentage of exports is 13.6 per cent, since our tota l exports during 2003 - 04 were Rs. 2 ,91,582 crore. Considering average excise duty is 16 per cent and average customs duty is about 20 per cent (during 2003 - 04), the f igure of 13.6 per cent ref lects a correct picture (of course, under a few schemes, the Cenvat faci l ity is avai lable, which may push the f igure of 13.6 per cent a l it t le higher). The bottom l ine is that, subsidies may have provided a boost to exports, but they impose a signif icant f isca l burden.(Source: ‘Should export incentives continue?’; Business Standard; September 8th 2004)


Two-way Street

For whose benefi t?


Secondly, the system is in d ire need of over -haul to reduce the red-tape that, today, of ten makes exporters miss deadlines and hikes transac-tion costs.

Consider this : An APEC study f inds that clearing red tape at country borders can generate twice as much gain to GDP than mere tari f f l ibera l isation and can signif icantly reduce costs to industries. (Source : Economic Times ar ticle tit led ‘Did we ga in anything signif icant at WTO? ’ on August 10th 2004). All import decisions that the govern-ment wants to take should be notif ied through a simple notif ication rather than published in vol-umes of books. Today, we have a trade policy, a handbook of procedures, an input-output norms book and a harmonised code book. Mr. Jayanta Roy, recommends for ( ‘Exporters Don’t Need

Spare Change’ in Financial Express, 8th July 2004) a modern customs armed with a ful ly operational electronic data interchange (EDI) system with no paper tra i l and minimum face -to -face contacts ; rel iance only on self-declaration by importers with a modern risk management system. The IIPM Think Tank advocates for the creation of a singe window online enquiry point. As of now there is no off icia l ly designated inquiry point for traders. Mr. Jayanta Roy estimates a loss of about $15 bi l l ion a year on account of transaction costs. The policy makers have embarked upon an EDI system but it is far from being ful ly operational. Agencies other than the customs are sti l l relying on manual submission of documents and thus the paper tra i l continues. Please refer the box: The present sce -nario warrants a concer ted ef for t to tackle the problem of high transaction costs.

Thirdly, we should have an integrated va lue -added tax on goods and services, to ensure that taxes are not built into the export price. According to Prof. B. Bhattacharya , Dean, Indian Institute of Foreign Trade ( I IFT), New Delhi, India needs to proceed fast towards a ful l VAT system so that a comprehensive drawback scheme can be developed and other incidenta l schemes can be withdrawn. As pointed out in the Indian Express editoria l, ( ‘Trade winds’; September 2nd 2004), most of the export oriented production a l l over the world takes place using ‘global production chains’. I f a 1 percent octroi is slapped on the va lue of a product which has only a 10 percent va lue addition, then it looms large. The firms can not compete with those that of Chinese. Exporters should be refunded a l l the indirect tax that is embedded in their goods. This needs a simultaneous removal of a l l cascading taxes l ike octroi, sa les tax, and so on, and imple -mentation of VAT.

The money saved on export sops should be used to bui ld qual ity infrastructure — power, roads, por ts, ra i l l inkages. That wil l boost com-petitiveness and exports, not more export sops. The money that the government is spending on advance l icensing by foregoing customs duty should be spent on strengthening the country’s infrastructure. (For more detailed elaboration upon the infrastructural bottlenecks at ports, please refer the ‘Infrastructure’ section of this issue.) In the New Foreign Trade Policy, no less than 34 focus areas (Al igarh, Moradabad, Sivakashi, etc) have been identified, but they lack infrastructure. Even Noida, within the NCR, has no power for hours da i ly, and generator use increases costs and makes production unviable. ( I s the Foreign Trade Policy OK?; The Economic Times, 3rd September 2004). The state a lso needs to hasten deregulation of the interna l market, in addition to the huge invest-ments in infrastructure. The IIPM Think Tank ref lects that unless these aspects/ issues are taken care of, there i s l it t le hope of reta ining India’s hold on the expor t market of goods and services and bui ld ing on trad it iona l s treng ths. The better del iverables of fered by competitors wil l continue to push Indian of fer ing out of the market.

The IIPM Think Tank a lso reasons that, the commerce ministry or the newly proposed Board of Trade can do precious l it t le to ensure high expor t growth rates , on a stand a lone basis . The pol icy makers should not forget the basic fact

that, in an era of global isation, when competitive -ness i s the key to success in bui ld ing resi l ience in the expor t industr ies , the trade strategy has to mesh with f i sca l pol icy, monetary pol icy, physi -ca l pol icies and investment planning especia l ly focused on expor t sectors. Af ter due del iberation and due d i l igence upon the current policy making activit ies , The IIPM Think Tank pleads for the drastic overhaul and change in the mindset of the policy makers. Consider this : A monograph by the CUTS Centre for International Trade, Economics & Environment (CITEE) on trade pol icy-making in India explored the lacunae in the system of relying too much on civi l servants without much consultation with stakeholders who are presented with pol icy as a fa it accompli. Even as this s tudy offers such options as making the Prime Minister’s Off ice, the Planning Commission or the Foreign Ministry take active par ticipation in multi latera l trade ta lks, the t ime has come to stop confining the whole WTO-related issues and other inciden-ta l trade related issues to the Ministry of Com-merce and Industry. ( ‘New Foreign Trade Pol icy — Wil l there be a rea l paradigm shif t? ’ Mr. G. Srinivasan; The Hindu Business Line; 27th August 2004). Please refer the box t it led ‘Reinvent ing MoCI’.

Not only are there ef fective and tangible savings to be had from reform in a l l the above mentioned arenas, but these would a lso confer a susta ined competit ive advantage as , genera l ly, developing countries f ind ushering in reforms in these areas that much harder to achieve, g iven the structura l r ig id it ies in the system of devel -opment administration. The Government should address a l l these i ssues, on a hol ist ic approach. The pol icy makers should appreciate the fact that one can’t focus on making the expor ting par t of the economy hea lthier without treating the rest of the system. Consider this : Bangladesh, which has successful ly implemented the China model for its texti le expor t-processing zones, banned trade union activit ies in these zones. This not only needs col laboration across ministries ; it a lso needs the consensus of pol it ica l par ties across the board. The commerce ministry alone can only play a faci l itating role in creating these enclaves. ( ‘The emperor’s new clothes’; Mr. Abheek Barua; Busi -ness Standard; 10th September 2004)

Mr. G.K. Pi l la i , one of the chief architects of the new foreign trade policy and Director General

The IIPM Think Tank reflects that there are many administrative problems that are easily avoidable.

Consider this:A main contributing factor behind the high cargo dwell time is time taken for payment of duty. At all custom points only the State Bank of India is allowed to operate. There is no concept of granting a line of credit, allowing credit card payment, or adopting a deferred payment system. All these are common features in other countries. This, taken care of immediately, could reduce cargo dwell time by about two days!

Consider this:All the important appendices of the handbook of procedures including those on the issue of importer exporter code, SEZ and EOU procedures are available only on the internet and not in the notified printed book. Similarly, the item-wise export and import policy, covering some 11,000 tariff lines, is also only on the Net. The DEPB book, giving the entitlement against each item, is under various public notices and not in the form of a single consolidated public notice.

Consider this:In India, a typical export transaction requires 25 documents to be made and submitted to various agen-cies. We should seriously think in terms of reducing procedural formalities by replicating the Singapore Customs system where a single document is used for clearing export consignments.

Consider this:It takes 258 signatures and 118 copies of the same information to export from India. Delhi airport takes 2.5 day to clear goods for exports and 15 days for import clearance while the international norm is less than 12 hours for such clearances. The export and import dwell time for sea freight in Mumbai is 3 to 5 days and 7 to 14 days, while the international norm is less than 18 hours and 24 hours correspondingly. This a major irritant new global players. (Sources: ‘Exporters Don’t Need Spare Change’; Mr. Jayanta Roy; Financial Express, 8th July 2004; ‘Nothing long term about

it’; Mr. Arun Goyal; The Economic Times; September 1st, 2004; ‘Promote Regional Trade To Enhance Exports’; Vinod Mehta and

Ravinder Goel; The Financial Express; 18th May 2004; ‘Time to rework port logistics’; Economic Times; 6th July, 2004)


Trade Tangles


approved, what is the relevance of such enclave l ibera l isation when genera l l ibera l isation is the norm? For instance, 100 percent FDI shou ld be wel -come everywhere, not just in SEZs. Second, to justi fy the enclave mental ity, the ministry has used the t ime -tested but pointless route of import duty reductions and exemptions, be it for capita l goods or other inputs l ike seeds and planta-tion material where quantitative restrictions are a lso important. The thrust impar ted to agricul-ture, leather, footwear, texti les and garments should be viewed in this l ight and is pointless because of the genera l import l ibera l isation. Moreover, The Economic Times editorial titled ( ‘Making SEZs specia l ’; The Economic Times ; 13th October 2004’) states that India’s Special Economic Zones (SEZs) have for long fa i led to l ive up to their promise. In comparison with China, where SEZs have been the driving force behind that country’s strong export per for-mance — they account for as much as 22 percent of annual expor t s — the contr ibut ion of our SEZs has been modest. Despite a green signal to 23 greenfield SEZs, there has not been much pick-up in invest-ment here. The IIPM Think Tank ’s own research upon this particular issue strengthens this perspective even.

The issue is no better with the case of agri- exports. (Please refer the section titled ‘Package for agriculture’ in the ‘Highlights of New Foreign Trade Policy’, given at the end of this annota-tion). India might be the larg-est producer of milk and other hor ticultura l produce. Mr. N. N. Sachita na nd br ings home

the point that ( ‘Can trade target be achieved? ’; The Hindu; 13th September 20 04 ) , i t i s one thing to produce these items in scattered quantities a l l over the place to meet the demands of the domestic reta i l trade and quite another to consistently export large volumes of pro -ce s s ed agro -produce accord -ing to str ic t t ime schedules. In fact, statistics speak other wise. ( ‘Should expor t incen-tives continue? ’; Business Stan-dard; September 8th 2004). The share of agricultural products in our exports has dropped from 19.4 per cent in 1990 -91 to 11.7 per cent in 2003 - 04. Organised farming systems such as con-tract farming, big processing units, logistics l ike cold chains, refrigerated warehouses at a ir -por ts, the qual ity inspection and Customs systems needed for a major move into agro -exports are sti l l in their infancy or non-existent. Mrs. Mythil i Bhusnurmath shares the same view point. ( I s It Time For Old Dreams To Fade?; The Financial Express ; 22nd September 2004). The PM’s specia l group on cre -ation of 50 mil l ion jobs in the 10th Plan period estimated that an additional 10 mil l ion jobs could be created in agriculture a lone. But now new food safety regulations that come into force in the EU from January 2005, coinciding with the date for dis -mantl ing texti le quotas (a coin-cidence that’s hard to bel ieve is entirely accidenta l) have put paid to that dream. She points that the new regulations make it mandatory for a l l fruit and vegetable products entering the EU to be traceable at a l l stages of production, processing and distribution. What this means in ef fect is that every potato, ever y onion grown in Ind ia

The Minis tr y of commerce and Industr y (MoCI ) must reinvent i t self. Mr. Julius Sen laments that ( ‘Trade Policy Making In India: The Reali t y Below the Water line, CUTS, Jaipur, ) the prob lem i s an ins t i tu t ional one because the commerce minis tr y doesn’t really know wha t i t i s do ing . “ t he….. minis t r y… is f i rmly embed-ded in the domestic poli t ical culture, which accords l i t t le impor tance to pr inciples of free trade within the domestic contex t.”

T he I I PM T h i n k Ta n k asser ts that the minis tr y must now con f i n e i t s e l f t o t h e role of trade facili tat ion and ex tensive research of wor ld markets. I t must also involve i t s e l f i n r emov ing g l i t che s that expor ters face in access-ing world markets. Over the past so many years, major it y of the announcements by the commerce minis tr y, that had revenue implications got rati-f ied by the f inance minis tr y subsequently. I f that were to be case, T he I I PM T h i n k Ta n k f e e l s change s wh i ch

have revenue implications can be c lubbed w i th the Union Budget exerc i se of M in is t r y of Finance. Mr. Jayanta Roy, Pr incipal advisor, CI I, points that ( ‘Scrap the Annual Ritual of Exim Policy; ’The Financial E xp re s s ; 22nd Ju l y 20 04 ) , MoCI’s main focus should be diver ted to trade policy. With regard to the WTO and free trade agreements ( FTAs), the domes t i c p roces s o f po l i c y formulat ion and preparat ion and submission of documen-ta t ion mus t be s t reaml ined with responsibili t ies entrus ted to a revamped Trade Policy Depar tment (TPD) of the MoCI and its of f ice in Geneva. The TPD mus t be complemented by pr ivate sec tor consultat ive bodies and an independent and transparent Tar i f f Com-mission. The TPD head should hold a Minis ter of State rank, and should be entrus ted with the task of in te r-minis te r ia l coo rd ina t ion o f a l l W TO -, EU- and FTA-related issues, relying on its of f ice in Geneva for es tablishing and maintain-ing relat ions with other WTO members. The revamped TPD

must have a chief economis t with international s tature ( rank of a secretar y ) and a direc t recruitment since the post is vi tal. The present sys tem of quickly ar r iving at decisions on FTAs with no clear nodal minis t r y, or the Minis t r y of Ex ternal Af fair s ser ving that role with no reputed econo-mis t in the minis tr y, must s top. ( ‘Top agenda for new govern-ment ’; The Financial Express; 13th May 2004).

A l s o , M o C I n e e d s t o br ing several other minis tr ies, notably those which deal with i n f r a s t r u c t u r e and l ab ou r, onto a common plat form of expor t facili tat ion. Mr. T. C. A S r i n i v a s a -R a g h av a n sug -ges t tha t ( ‘Dog`s break fas t o r t rade po l ic y? ’; Bus ines s Standard; 6th August 2004), at the bureaucratic level, the real problem is to end the tur f war between the commerce m in i s t r y an d t h e e x t e r n a l af fairs minis tr y. Each regards the o ther as made of HPS ( hand-p icked and se lec ted ) idiots.

Reinventing MoCI

of Foreign Trade recommends that India should bui ld one warehousing zone each in the east coast and west coast. Research suggests that a lot of exporters sourcing their goods from trading hubs l ike Singapore and Dubai. In fact, trade a lso takes goods from Dubai to Singapore in some cases. Construction of warehousing zone each in the east and west coast will make it easier to source inputs. These warehouses can also supply inputs to nearby markets l ike Sri Lanka, Nepal and Bangladesh. It is even possible to supply goods to CIS countries by a ir l i f t ing them from these zones. For the Indian companies, especially exporters, the ware -houses will mean ‘ just-in-time’ supplies which are

favored for their ef f iciency. There wil l be no need to book goods three months in advance. Thank-ful ly, this suggestion has a lready been incorpo-rated in the new foreign trade policy. (Please refer the section titled ‘Free trade and warehous-ing zone’ in the ‘Highlights of New Foreign Trade Policy’, given at the end of this annotation).

The New Foreign Trade Policy only pro -poses few make-up changes. (Please refer the sec-tion titled ‘EOUs’ in the ‘Highlights of New Foreign Trade Policy’, given at the end of this annotation). As was pointed in the Financia l Express editoria l t it led ‘Exim Blues’, even i f 27 SEZs have been


“………there is no

evidence that the Cabinet

Secretary sat down

and said something

to the effect that new

consultative and decision-

making procedures would

be needed to deal with

this new and complex

form of policy making.”

(Mr. Julius Sen comment’s in respect of the Uruguay Round, as described by Mr. T C A Srinivasa Raghavan in an article tit led ‘Dog`s breakfast or trade policy?’; Business Standard; 6th August 2004)


must be traceable back to the seed from which it came and the farm where it was planted. The US has passed a bio -terror-ism Act that poses a l l kinds of obstacles on export of agricul-tural products. Given the almost primitive state of preparedness to cope with these k inds of non-tari f f barriers, it would be premature to pin much hope on agri-related industries. Mr. Biswajit Dhar, head, Centre for WTO Studies, Indian Institute of Foreign Trade, recommends ( ‘Unshackling’ And ‘Unleash-ing’ Must Be For Rea l , Not On Paper’, Financia l Express, 10th September 2004), focused interventions wil l have to be made to see that the desired goals are realized. For instance, d if ferent actors involved in the agricultura l sector need to be aware of the fact that consum-ers in the larger markets are acutely conscious of food safety standards, and these standards would have to be met in order to ga in market access. There is therefore a need to improve the level of awareness of farmers and producers of processed agricul-tura l products about standards being set at an increasing rate by most of the major econom-ics. Mr. Vivek Bhart i , advisor to FICCI, ca l ls for ( ‘Raising the bar on exports’; The Financia l Express ; 3rd September 2004), a root-and-branch reform. The biggest push to farm exports can come from al lowing FDI in food reta i l ing. Investments wil l then f low into bui ld ing a cold chain, grading and sor ting practices acceptable in global markets would come into play, and a l l this a long with contract farming for both domestic and foreign markets would dr ive exports. Also, another princi-pa l issue facing farm exports,

apar t from low productivity, i s that government-mandated loca l prices are genera l ly much higher than export prices. By tackling this farm exports would probably increase much faster. ( Source : ‘Sti l l the old mind-set’; Business Standard; Septem-ber 1st 2004). The agricultura l exports of ten face drastic price f luc tuat ions in internat iona l market, which obta in result in unpredictable losses. Mr. T.K. Bh au m i k opi ne s tha t ( ‘The vision is clear’; The Financia l Express ; 10th September 2004), the commerce minister could have instituted a contingency funding mechanism which could be used to protect agri- export-ers and other small exporters from market vagaries.

Mr. Pradeep Mehta , Sec-retary-Genera l, CUTS, Ja ipur, com ment s tha t , ( ‘Pu zz le of New Trade Policy’; Financia l Express ; 1st September 2004) an eminent person heading the Board of Trade may not have the required power and authority as much as a minister would. But it would make more sense i f emi-nent persons are appointed as chairs of its working groups and the ministry is saddled with pro-fessionals who have the capacity to del iver. (Please refer the sec-tion titled ‘Board of Trade’ in the ‘Highlights of New Foreign Trade Policy’, given at the end of this annotation).

Mr. Vinod Mehta and Mr. R av i nde r G o e l po i nt s t ha t , ( ‘Promote Regional Trade To Enhance Exports’; The Finan-cia l Express ; 18th May 2004) the export promotions coun-ci ls have to be reoriented for actively promoting exports of the designated sectors. In this rega rd the recent launch of

Pharma Export Promotion Counci l is a step in the right d irection. There is need to sharpen the export promotion counci l focus by breaking up big counci ls l ike APEDA to cater to specif ic sec-tors l ike hor ticultura l and f loriculture products. Further the counci ls should not be merely RCMC or MDA granting bodies, but leaders in collecting market information, identifying export barriers and actively promoting exports.

Also, the Indian government should abolish trade restricting barriers both at the bi lateral and multilateral levels. A recent study by the ministry points out that exports from developing countries are increasingly facing sti f fer Non Tarif f Barri-ers (NTBs) in the developed markets, l ike the US legislation against service outsourcing or the Buy American provisions to promote US iron foundry products or testing and certification requirements for electric vehicles in the EU. Our attempts at restra ining NTBs wil l have credibi l ity only i f we observe caution in use of such options. The IIPM Think Tank concurs with the idea of Mr. Jayanta Roy, ( ‘Scrap the Annual Ritual of Exim Policy; ’The Financia l Express ; 22nd July 2004). The Tarif f Commission should be revamped a long the l ines of the US International Trade Commission to function as a transparent, independent, and quasi-judicia l body that provides trade exper tise and determines the impact of imports on Indian industries and direct action against certain unfair trade practices (non-tari f f barriers).

Mr. Shubha si s Ga ngopad hyay, Direc tor, India Development Foundation, recommends that ( ‘NE suffers from poor company’; The Financia l Express ;19th February 2004), for achieving eco -nomic development of the N-E is the integration of its markets with the more vibrant regions of the country. Keeping in mind the fact that, these are small states with dispersed populations and, hence, incapable of achieving ef f icient sca les of economic activity and division of labour unless they have easy access to larger markets outside the region. The planners and policy makers need to consider the entire region (the states of Bihar, Jharkhand, West Bengal, eastern UP and Orissa) in mind when trying to develop the N-E. This larger region has a huge potential in tourism; coal, oi l and natural gas ; organic farming, horticulture and f loriculture ; food processing; bamboo and forest products ; l ivestock and animal husbandry; tea plantation; hydel power generation; and handi-

craf t.

India’s roads, ra i l l inks and border outposts to most of its neighboring countries are embar-rassingly poor. More importantly, they preclude any large sca le trade and people -to -people l inks. Roads leading to the border must be made motor-able to faci l itate trade. A step in this d irection wil l faci l itate the process of sel l ing India as an ‘opportunity’ to the countries next door. Accord-ing to Mr. C. Raja Mohan , ( “A foreign policy for the East”; The Hindu; 16th July 2004), India’s strategy to develop the remote North East has begun to get a whole range of new options from the successful evolution of the Look East policy. Free trade and physical connectivity in the region wil l end the “remoteness” of the North East, accelerate economic growth, and create better conditions to address the problems of insurgency in the region. The IIPM Think Tank endorses the idea mooted by Mr. Amit Baruah ( ‘Northeast as a trade hub’; The Hindu; 20th September 2004). It is t ime to shed the suspicions and discuss a deta i led par tnership among Northeast India , China, Myanmar and, possibly, Bangladesh. The Assam Power and Forest Minister, Mr. Pradyut Bordoloi , makes an impressive case for the re -opening of the World War II -vintage Sti lwell Road — the 1,726 -km l ink from Ledo (Assam) through Arunachal Pradesh into Myanmar and then on to Kunming in south-western China. The Sti lwel l Road, named af ter the American Genera l Joseph Sti lwell, was a demonstration of the l inks possible between India, Myanmar and China. Today, there is a case for its reviva l in a completely dif ferent context. Mr. Bordoloi, MLA from Margherita in upper Assam, favours looking at boundaries not as barriers but as gateways. A strong case for trade l inkages between India, Myanmar, and China through the Sti lwel l Road is technica l ly feasible.

Mr. G. Srinivasan points that ( ‘Enhancing export competitiveness’; Business Line ; January 29th 2004) as the country’s export competitive -ness in merchandise goods is getting honed in the face of challenges and new forms of protectionism abroad including non-tari f f barriers and repeat anti-dumping investigations on cer ta in specif ic texti le products such as cotton bed l inen, the Commerce Ministry should stay in touch with Indian missions abroad to take up these issues in the countries themselves swif tly so that the cost ca lculations of expor ter -manufac turers going


"The package to boost

agricultural exports

could not have come at

a better time. During

the past decade. India's

potential in the export

of agricultural products,

in particular processed

products, has been

highlighted many times

over. However, little has

been done in concrete

terms to ensure that this

potential is reliazed."

(Mr. Biswajit Dhar, in an artcile tit led 'Unshackling and Unleashing must be for real, not on paper'; The Financial

Express; September 1st 2004')


Institute of Foreign Trade, New Delh i , a s s er t s that , ( ‘ Shou ld expor t incent ives cont inue ? ’; Business Standard ; September 8th 2004) there i s , nonetheless , a need for procedural simplif ica-t ion a s a lso a s trong administra -tive machinery for enforcement. W h i l e e x p or t e r s h ave c om -pla ined of delays and dua l ity of control, inadequate enforcement measures and inabil ity to punish quick ly and severely the del in-quents create avoidable doubts about the subsidy reg ime.

T h e I I P M T h i n k Ta n k opines that the f i rms (micro -l e v e l ) s h o u l d a l s o a d o p t a pro -ac t ive s tance, rather than blaming the ‘sys tem’ per se . Despite many hand icaps that industr ies may face in expor t-ing , R IS s tud ies f ind a wide va r i a t ion i n ent er pr i s e - l e ve l

expor t per formance within any industry. Obviously, enterprise dynamism has a role to play in producing expor t successes . ( Source : ‘Towards A Nationa l For e i g n Tr a d e Po l i c y ’; M r. Nagesh Kuma r ; The Financia l Expre s s ; 27th Aug us t 20 04 ) . Leaving a side the conventiona l e x p o r t - o r i e n t e d i n d u s t r i e s , Ind ian enterpr i se s have ver y l it t le presence abroad except in pharma, automotives and com-ponents . The way f i rms access g loba l markets wi l l depend on a host of factors l ike international marketing sk i l l s , procurement of f inance, management philoso -phy and etc. The domestic phar -maceutical industry is a working example for th is pro -ac t ive and se l f -he lp s ta nce . Plea se re fer the box:

RIS (Research and Infor -

Where does Kolkata come in? Imagine the physical area that the BIMSTEC covers — India, Nepal, Bhutan, Bangladesh, Myanmar, Thailand and Sr i Lanka. Kolkata si ts at the hear t of this region. The BIMSTEC is nothing but a re-integration of the markets and hinter lands Kolkata ser ved at the height of i t s glor y. As commercial f lows r ise from the free trade arrange-ments agreed within SA ARC and BIMSTEC, the Lef t Front Government in Kolkata has an unprecedented oppor tunit y to accelerate the development of not jus t West Bengal but the entire eastern par t of the subcontinent. Kolkata’s ambit ions need not be limited to SA ARC and BIMSTEC. I t could even leverage China’s dramatic economic growth to the benefi t of the Subcontinent. Beijing wants to link i ts fas t growing south-western provinces with India, Myanmar and Bangladesh. New Delhi has been somewhat cool to this so-called Kunming init iat ive of China. This approach has to alter on an urgent basis. Policy change should facili tate transit trade between China and India through Sikkim and nor th Bengal. Sikkim has been pressing New Delhi to open up the his tor ic trade routes with Tibet. West Bengal has, however, been relatively quiet. Until now, nor th Bengal and its Chicken’s Neck link-ing India to i ts nor th-east have been seen as a vulnerable choke point. Poli t ical pressure from Kolkata and some creative thinking in New Delhi can transform Siligur i and Kalimpong in nor th Bengal into hubs of trade and travel between India, Bangladesh, Nepal, Bhutan, and China. Kolkata used to be the closes t por t of exit for Tibet. As Beijing br ings a rail l ine to Lhasa by 2007, the prospect of re-emerging as a valuable outlet to the inner regions of China beckons Kolkata. ( Source: Adapted from an ar t icle t i t led “A foreign policy for the Eas t ” by Mr.

C. Raja Mohan in The Hindu; 16th July 2004)

Geography is dest iny

awry and the uncer ta inty about shipment of expor t cargo and receipt of export proceeds could be rea sonably overcome.

M r. S . N a r a y a n , ( ‘ Tr a d e Promises With Implementation’; The Financia l Express ; 1s t Sep -tember 2004) i s in favor of cohe -sion in the regulatory framework for expor ts and impor ts . There a r e a ny nu mb er s o f N T B s , homolog a t ion r e q u i r ement s , phyto-sanitary obstacles, which ma ke the proc e s s ex t remely cumbersome. Dif ferent minis -tr ies prescr ibe norms which the

hapless customs authorities have no exper tise to administer. This only resu lts in corruption.

Accord ing to one govern-ment es t imate, ca ses of expor t fraud or misuse of various incen-t ive schemes detec ted dur ing 20 02- 03 involved a n a mount of only Rs 63 crore, which i s less than 1 per cent of the tota l expor t during that year. The extent of inf irmity cannot be any bet ter in any scheme, how-ever adminis trat ively or eco -nomical ly sound it is. Mr. Prabir Sengupta , Director, The Ind ian

Mr. Ajay Piramal, Chairman, Nicho-las Piramal group, informs that India’s share was only $6.5 billion of the $470 billion global phar-maceutical industry. However, in terms of volume, the country was the fourth larg-est consumer and manufacturer. India was also among the top five manufactur-ers of bulk drugs and growing at 30 per cent. Another inter-esting feature was that of the top ten companies in India in terms of market capitalisation, only

one was a multina-t ional and others were Indian.

The single most important factor that has dr iven Indian drug companies to seek foreign mar-kets is the impend-ing change in the domes t ic intel lec-tual property rights regime, which has unt i l now recog-nised only process patents. From 2005, that is set to change and the local drug laws will start recog-nising both product and process pat-ents. That, in turn,

means that Indian firms can no longer survive on assured margins they earned by reverse engineer-ing ( read this as “creatively copying”, if you are averse to euphemisms) drugs that were patented in the regula ted western markets and selling them locally. The Ind ian drug industr y’s s trategic response to this has been to aggressively exp lore both the US and European markets for generic medicines. Gener-ics are drugs whose patents have expired

Take care of the micros and the macros will take care of themselves


“A virtuous circle that

has worked for every

successful nation can be

put to work for India.

We have the resources,

the demographics and

the hunger. All we

need is confidence and

the appropriate policy

frameworks to exploit the

huge opportunity that the

world is begging us to

grasp.”

(Mr. Manish Chokhani in article tit led ‘Putting US consumers first’ in The Economic Times; November 16th 2004)

“Political pressure from

Kolkotta and some

creative thinking in New

Delhi can transform

Siliguri and Kalimpong in

north Bengal into hubs of

trade and travel between

India, Bangladesh,

Nepal, Bhutan and

China.”

(Mr. C. Raja Mohan in an article titled ‘A foreign policy for the East’; The

Hindu; July 16th 2004)


For MNCs, Ind ia cou ld b e c ome e i t he r a d om i n a nt s ou r c i n g or m a nu fa c t u r i n g base in its own right ( in auto components, custom-based and non- elec tron ic produc t s ) , or an a lternative sourcing hub to China to avoid the risks inher-ent in s ing le - countr y. S ince most of this growth wil l come from incrementa l outsourcing by multinational corporations, Mc K i n s e y ha s a dv i s e d t ha t the government must work to ensure that MNCs proactively choose India as their top three outsourcing destinations.

T h e I I PM T h i n k Ta n k strategizes that this manufac-turing sector, comprising a vari-ety of engineering and other products, which wil l continue to play an important role in exports as wel l as employment generation. The textile, automo-bi le and auto anci l lary sectors can be cited as a good example. Ind ia ha s to pedd le it s cos t advantages (particularly labour cost) and location (that enta i ls access to both South-East Asia and Western Asia) to establ ish itself as a manufacturing base for multinationals. With cost advantage on its side, what India needs in these sectors is qual ity production with adequate test-ing faci l it ie s and an aggres -sive marketing ef for t. The steel industry has just come out of a global recession and India must match up the competitiveness of traditional low cost producers l ike that of Germany, the US, and Korea.

India needs to boost manu-facture exports, on a war foot-ing basis. To do that the entire s t r uc t u re of i nd i re c t t a xe s , which penalises manufacturing, has to be overhauled. Instead

of taxing manufacturers with a host of Centra l and state -level taxes l ike excise, octroi, sa les tax and so on, whose f i sca l impact cascades into high prices and loss of compet it iveness . The earl ier attempts of replac-ing this with a single -rate value -added tax have fa i led. In spite of some resistance from vested interests , it shouldn’t lose its nerve and implement this taxa-tion mode.

Gems and JeweleryNine out of 10 diamonds sold world -wide a re proces sed in India, but in terms of va lue, desi diamonds account for about 60 percent of the world market. (The Economic Times editoria l t it led “Diamonds are forever ”August 01st2003)

T h e I I PM T h i n k Ta n k opines that i f India has to move up the va lue chain, and there’s no reason why it can’t, it has to process the big baubles by break-ing into a market dominated by America and Israel. In January 2003, President Putin signed a decree a l lowing a cer ta in pro-por tion of Russian roughs to be sold in the open market, without going through DeBeers (London-based DeBeers car tel keeps roughs pr ices high by restricting the supply of stones). Indian producers, some of whom go to extreme risks to import out- of- ca r tel d iamonds f rom troubled regions in Africa, can now cut r isks — and costs — by dea l ing directly with Russia. Indian players should leverage this window of opportunity and think big.

Service related exportsServices are a major strength of the Indian economy. Mr. A nil.K.Kanungo, notes that, ( ‘Trade

and are open to m a n u f a c t u r e b y firms other than the patent holder. Thus, Indian companies are leveraging their manufacturing skills to offer aggressively-priced products in t he se deve loped markets. This has translated into a rise in exports. However, this has not been a costless option. Reg-ulator y clearances even for gener ic d r ugs a re com-

plex. Brand aware-ness and credibility do not come easy either, especially for medicines. Indian companies have sur-mounted these prob-lems by acquir ing foreign companies (some with existing regula to r y c lear-ances), set t ing up international opera-tions, or collaborat-ing with distribution networks. This has meant fair ly large investment outlays.

Thus, the r ise in Indian drug exports is a story of an endoge-nous response of the industr y to market chal lenges—trade policy, as such, has had virtually no role to play.(Source: Extracted from

articles titled ‘The emper-

or’s new clothes’; Mr.

Abheek Barua; Business

Standard; 10th Septem-

ber 2004 and ‘The rise

of Indian multinationals’;

The Hindu; 22nd August

2004)

mat ion Sys tem for non - a l in -ged countries) empirical studies have emphasised the critical role of in-house R&D activity for strengthening enterprise com-petitiveness. In India, we have been encouraging R&D activ-ity mainly through weighted tax deductions in certain industries. Mr. Nagesh Kumar argues that, ( ‘Towards A National Foreign Trade Pol icy’; The Financia l Express; 27th August 27th August 2004), a more direct support in the form of R&D subsidies for specific projects for development of products or processes and thus strengthening the competitive -ness may be desirable. In order to spur rivalry through innovation, we might also consider adopting a petty patents regime which pro-vides limited protection to minor incremental innovations made by enterprises and spurs inventive activity. A vibrant government-industry partnership alone can enable India face the challenge of building a export-oriented manu-facturing capacity, as has hap-pened in the case of Japan.

Manufacturing exportsMa nu fac t u r i ng expor t s f rom India are l ikely to grow to $300 bi l l ion in 2015 from $48 bi l l ion in 2003, according to a CII -McK-insey report. (An ar ticle tit led ‘Manufacturing exports seen at $300 bil l ion’; Business Standard; 9th October 2004). The country would then have a 3.5 per cent share of the world manufactur-ing trade. Of the tota l $300 bi l -l ion, $70 - $90 bi l l ion is expected to come f rom ju s t four s ec -tors — apparel, auto component, specia l ity chemicals , electrica ls and electronic products. India’s exports in these sectors were $10 billion in 2002. As pointed out by Mr. Vivek Bhart i , ( ‘Raising the bar on exports’; The Financia l Express ; 3rd September 2004 ), in only four years from 2000 - 01 to 2003 - 04, our exports of cars has gone up more than f ive times from 23,000 to 1,26 ,000, and that of two-wheelers has more than doubled to reach 2,65,000. With auto components a lso on a rol l, this sector wil l soon riva l sof tware and ITES as a leading export sector of the country.


“The spurt in

manufacturing is

expected to create 25-

30 million new jobs in

manufacturing and add

1 per cent to India’s

annual GDP growth

rate. To reach the

$300 billion target, the

industry has to clock a

growth of 17 per cent

every year as against

the 11 per cent rate at

which it is growing at

present. Manufacturing

exports from India

grew 20 per cent in

2003 over the previous

year.”

(CII-McKinsey report, on the potential of Indian manufacturing

exports, being mentioned in Business Standard, 9th 2004)

“The larger question,

thus, is whether you

can focus on making

the exporting part of the

economy healthier without

treating the rest of the

system.”

(A comment upon the 'New Foreign Trade Policy' in Business Standard, September 1st 2004)


in services — It is a question of market access’; The Hindu Business Line, 15th September, 2004), i f the West is to make most of its ga ins on Mode 3, one can expect it to of fer suf f i -cient market access to develop-ing countries on Mode 4. Even the Doha Ministeria l in 2001 had given prominence to this paradigm shif t (give and take may be the order of the day) for the f irst t ime when it ar ticu-lated and put forward strongly the interests of the developing countr ies . As services under Genera l Agreement on Trade and Services (GATS) are del iv-ered in four modes, Mode 1, which refers to `cross border supply’ such as exporting supply of services to another coun-try without entering into the territory of the same country, such as the activities relating to the BPO is a great success in India. It is a lso happening in a big way in the IT sector. India looks even much more promis -ing in Mode 4, which is ̀ `move-ment of natura l persons’’. The advantage of Mode 4 does not l ie only in the core competence of IT but can be expanded to many sectors where knowledge is the key input such as educa-tion, hea lth services, f inance, accountancy, consultancy, and so on. India’s strengths l ie in Modes 1 and 4, that is , ``cross border supply’’ and ̀ `movement of natura l persons’’. Similarly, looking at the West, it is under-stood that its strengths l ie in many areas, but vis -à-vis India def initely in Mode 3.

Already, the share of ser -vices sector in exports was about 31 per cent last year. During f ive year s end ing 20 0 0 , our services’ exports grew by 23.2 percent per annum, nearly six

times that of a l l world exports and our market share by 2001 had reached 1.4 percent, which is double the market share we had in merchandise trade.

The planners must perforce draw up a slew of strategies to make ample use of the demon-strated strength and competi -tive edge the country possesses in frontier areas of technology including bio-technology, audio visual communication, hea lth care and hospita l ity services, accounting and book-keeping, project exports, transport ser -vices, consultancy and manage -ment services , and computer related services. ( ‘New Foreign Trade Policy — Will there be a rea l paradigm shif t? ’ Mr. G. Sr inivasan; The Hindu Busi -ness Line ; 27th August 2004). I f one looks at the composition of exports, about 25 percent may be services, dominated by ITES, thanks to the outsourcing bonanza. Bio -tech exports can repl icate the IT sector success i f there is proper policy under-pinning. Of course, tourism and financial services may constitute a signif icant and growing seg-ment of service exports. ( ‘New Foreign Trade Policy — In step with the times’; Mr. R. Par -thasarathy ; The Hindu Business Line ; 8th September 2004).

T he M id d le E a s t , C en -tra l Asia and South-East Asia, besides the neighboring region of South Asia it se l f , shou ld constitute the natura l market for India’s accountants. They are comfortable working with Indians and with Indian levels of compensation, used to taking cultura l imports and services from India and reasonably con-f ident of Indian capabi l ity. ( “A few gif t ideas for the FM” by

T K Arun; The Economic Times; December 25th, 2003)

Mr. T.K. A run a lso argues that the state can a l locate funds not so much for wr it ing of f past debt ( India has written off a sizeable par t of its loans to highly indebted poor countries, in the year 2003) as for creat-ing regulatory expertise in other developing countries, including for the bui ld ings that house the newly created expertise. Regula-tory services play a key role in developing a market for a host of associated services. India has exper tise not just in account-ing but in a number of other regulatory areas as well. Regula-tory services play a key role in developing a market for a host of associated services. India has exper tise not just in accounting but in a number of other regula-tory areas as wel l. The Finance Minister can think of a l locat-ing money to help developing countries set up regulators in telecom. Given the chequered history of India’s telecom policy and regulation, it might seem strange to cla im export qual ity expertise in regulating the sector. Another prospect for foreign-aid assisted export is capita l market related services. What SEBI, the National Stock Exchange and the National Securities Deposi-tory Ltd have together achieved in India is truly remarkable. All the developing countr ies can ga in a lot by drawing useful les -sons from the working of these institutions.

The New Fore ig n Trade Policy does not r ise to the chal-lenges faced by the country in the services sector. Mr. Muchkund Dubey, former secretary, Minis -try of External affairs asserts the fact that, (The new foreign trade

pol icy; The Hindu ; 8th Sep -tember 2004), the government i s i l l prepared to par t ic ipate effectively in these negotiations. Even basic data relating to these sectors are not available. A study done about a year ago of the educational sector in the context of the Doha Round Negotia -tions was perfunctory and based on fragmentary data. The con-clusions were highly tentative and unconvincing. Hardly any serious work has been done to assess the export potentia l of individual service sectors and their abi l ity to withstand global competition. It is understandable that a comprehensive exercise of this nature is beyond the scope of foreign trade policy and hence the Ministry of Commerce and Industry. However, the Ministry can assume a coordinating role as a par t of the pursuit of its new Foreign Trade Policy.

In view of the increasing share of services in GDP and the new lease of l i fe given to GATS negotiations, the services trade should get more than equal treatment, simply because it is in the growth stage. According to a World Bank survey, India’s devel-opmental aspirations leveraging on it s services sec tors would depend on its abi l ity to secure improved access to foreign mar-kets, create a more competitive l ibera l ised domestic economy, and develop appropriate regula-tory institutions. In order to susta in the dynamism of the services sector, India has been advised to address two critica l chal lenges : to secure access to foreign markets and counter cur-rent and potentia l protection; and to continue the process of trade and investment l ibera l isa-t ion, el iminating the barriers the country sti l l mainta ins in a

Forrester Research Inc

estimates that the number

of workers associated with

off-shoring will go up to 3-

5 million. The cross-border

competition is roiling the

$578-billion tech-services

industry like never before.

Deloitte Research’s four-

tier offshoring supply

countries list has India as

a distant leader in the first

tier. The Economist has

estimated that if half of

India’s 50-million Eng-

lish-speaking population

were to eventually earn

$10,000 per year in IT

and IT-enabled services,

it would more than double

the current GDP of $450

billion.

(Source: ‘Shoot the shibboleth trader away’; Mr. Raghu Dayal; The Economic

Times; 25th August 2004)

“Increased trade in ser-

vices will inevitably drive

demand for integration in

other markets----capital,

foreign exchange and, even

possibly, labour markets.

This will require new

approaches to managing

integration.”

(Mr. N.K Singh in article tit led ‘Leav-ing trade marks’ in Hindustan Times; May 5th 2004)



number of sectors. ( ‘Shoot the shibboleth trader away’; Mr. Raghu Daya l ; The Economic Times ; 25th August 2004). Also, service sector export growth preceded a policy framework and an incen-tive structure. It is not tax incentives and import entitlements that are going to susta in the growth of service sector exports but the avai labi l ity of the required infrastructure. Consider sof tware services or tourism. Export trade in both sectors needs more investment in loca l infrastructure, ranging from the basics l ike roads and power to a irpor ts and human ski l ls. This aspect needs attention was wel l.

Conclusion

As pointed out by Mr. Jayanta Roy, ( ‘Top agenda for new government’; The Financial Express ; 13th May 2004), to susta in a GDP growth of around 10 per cent per annum in the coming decades, both private and public investments must pick up. That wil l be possible i f the market is enlarged beyond the domestic arena. Efficiency has to be increased through a fa l l in the incrementa l capita l-output ratio, which again wil l be a ided by foreign com-petition. This is the growth model fol lowed by the South-east Asian economies, China and Chile.

There is no downside risk to it. It is a lso pro -poor and pro -rura l since agro industries wil l play a major role in future export growth.

Internat iona l trade demands a s trateg ic approach, making trade a centra l element in nat iona l development pol icy and expor t-or i -ented investment. A lot remains to be provided to make export a profitable exercise not only for the exporters but a lso to the exchequer over the long haul. Exports can be made a national priority, by ridding exporters of the voluminous paperwork and thereby enabling the industry to remain focused on adding va lue and seeking new markets. There is an immediate need to address a l l the f lanking issues through a comprehensive national movement, making it an inter -ministe -r ia l exercise.

In the f ina l analysis , an open trading system makes for a better world because as A lexis de Toc-quevi l le observed, “Trade is the natura l enemy of a l l violent passions. Trade loves moderation, del ights in compromise and is most careful to avoid anger. ” Taking advantage of these new opportunities, through f it ting internal ization is the key policy chal lenge.


Strategy:It is for the first time that a comprehensive Foreign Trade Policy is being notified. The Foreign Trade Policy takes an integrated view of the overall development of India’s foreign trade.

The objective of the Foreign Trade Policy is two-fold:

(i) To double India’s percentage share of global merchandise trade by 2009; and (ii) To act as an effective instrument of economic growth by giving a thrust to employment

generation, especially in semi-urban and rural areas.

The key strategies are: (i) Unshackling of controls; (ii) Creating an atmosphere of trust and transparency; (iii) Simplifying procedures and bringing down transaction costs; (iv) Adopting the fundamental principle that duties and levies should not be exported; (v) Identifying and nurturing different special focus areas to facilitate development of India as

a global hub for manufacturing, trading and services.

Special focus initiatives:Sectors with significant export prospects coupled with potential for employment generation in semi-urban and rural areas have been identified as thrust sectors, and specific sectoral strate-gies have been prepared.

Further sectoral initiatives in other sectors will be announced from time to time. For the present, Special Focus Initiatives have been prepared for agriculture, handicrafts, handlooms, gems & jewellery and leather & footwear sectors.

The threshold limit of designated `Towns of Export Excellence’ is reduced from Rs 1,000 crore to Rs 250 crore in these thrust sectors.

Package for agriculture:The Special Focus Initiative for Agriculture includes:

A new scheme called Vishesh Krishi Upaj Yojana has been introduced to boost exports of fruits, vegetables, flowers, minor forest produce and their value added products. Duty free import of capital goods under EPCG scheme. Capital goods imported under EPCG for agriculture permitted to be installed anywhere in the agri export zone. ASIDE funds to be utilized for development for Agri Export Zones also. Import of seeds, bulbs, tubers and planting material has been liberalised. Export of plant portions, derivatives and extracts has been liberalized with a view to promoting export of medicinal plants and herbal products.

Highlights of Foreign Trade Policy

IER



Gems & jewellery:Duty free import of consumables for metals other than gold and platinum allowed up to 2 per-cent of FOB value of exports. Duty free re-import entitlement for rejected jewellery allowed up to 2 percent of FOB value of exports. Duty free import of commercial samples of jewellery increased to Rs 1 lakh. Import of gold of 18 carat and above shall be allowed under the replenishment scheme.

Handlooms & handicrafts:Duty free import of trimmings and embellishments for handlooms & handicrafts sectors increased to 5 percent of FOB value of exports. Import of trimmings and embellishments and samples shall be exempt from CVD. Handicraft Export Promotion Council authorised to import trimmings, embellishments and samples for small manufacturers. A new handicraft special economic zone shall be established.

Leather & footwear:Duty free entitlements of import trimmings, embellishments and footwear components for leather industry increased to 3 percent of FOB value of exports.

Duty free import of specified items for leather sector increased to 5 percent of FOB value of exports. Machinery and equipment for effluent treatment plants for leather industry shall be exempt from customs duty.

Export promotion schemes:Target Plus: A new scheme to accelerate growth of exports called `Target Plus’ has been introduced.

Exporters who have achieved a quantum growth in exports would be entitled to duty free credit based on incremental exports substantially higher than the general actual export target fixed. (Since the target fixed for 2004-05 is 16 percent, the lower limit of performance for qualifying for rewards is pegged at 20 percent for the current year).

Rewards will be granted based on a tiered approach. For incremental growth of over 20 percent, 25 percent and 100 percent, the duty free credits would be 5 percent, 10 percent and 15 percent of FOB value of incremental exports.

Vishesh Krishi Upaj Yojana: Another new scheme called Vishesh Krishi Upaj Yojana (Special agricultural produce scheme) has been introduced to boost exports of fruits, vegetables, flowers, minor forest produce and their value added products. Export of these products shall qualify for duty free credit entitlement equivalent to 5 percent of FOB value of exports. The entitlement is freely transferable and can be used for import of a variety of inputs and goods.

`Served from India’ Scheme':To accelerate growth in export of services so as to create a powerful and unique `Served from India’ brand instantly recognized and respected the world over, the earlier DFEC scheme for services has been revamped and recast into the `Served from India’ scheme.

Individual service providers who earn foreign exchange of at least Rs 5 lakh, and other service providers who earn foreign exchange of at least Rs 10 lakh will be eligible for a duty credit entitlement of 10 percent of total foreign exchange earned by them.

In the case of stand-alone restaurants, the entitlement shall be 20 percent, whereas in the case of hotels, it shall be 5 percent.

Hotels and restaurants can use their duty credit entitlement for import of food items and alcoholic beverages.

EPCG: (i) Additional flexibility for fulfillment of export obligation under EPCG scheme in order to

reduce difficulties of exporters of goods and services. (ii) Technological upgradation under EPCG scheme has been facilitated and incentivised. (iii) Transfer of capital goods to group companies and managed hotels now permitted under

EPCG. (iv) In case of movable capital goods in the service sector, the requirement of installation cer-

tificate from Central Excise has been done away with. (v) Export obligation for specified projects shall be calculated based on concessional duty

permitted to them. This would improve the viability of such projects.

DFRC:Import of fuel under DFRC entitlement shall be allowed to be transferred to marketing agencies authorized by the Ministry of Petroleum and Natural Gas.

DEPB:The DEPB scheme would be continued until replaced by a new scheme to be drawn up in con-sultation with exporters.

New status holder categorisation: A new rationalized scheme of categorization of status holders as Star Export Houses has been introduced as under: Category - Total performance over three years

One Star Export House - Rs 15 crore Two Star Export House - Rs 100 crore Three Star Export House - Rs 500 crore Four Star Export House - Rs 1,500 crore Five Star Export House - Rs 5,000 crore



Star Export Houses shall be eligible for a number of privileges including fast-track clearance procedures, exemption from furnishing of bank guarantee, eligibility for consideration under target plus scheme etc.

EOUs:EOUs shall be exempted from service tax in proportion to their exported goods and services.

EOUs shall be permitted to retain 100 percent of export earnings in EEFC accounts. Income tax benefits on plant and machinery shall be extended to DTA units which convert to EOUs.

Import of capital goods shall be on self-certification basis for EOUs.

For EOUs engaged in Textile & Garments manufacture leftover materials and fabrics up to 2 percent of CIF value or quantity of import shall be allowed to be disposed of on payment of duty on transaction value only.

Minimum investment criteria shall not apply to brass hardware and handmade jewellery EOUs (this facility already exists for handicrafts, agriculture, floriculture, aquaculture, animal husbandry, IT and services).

Free trade and warehousing zone: (i) A new scheme to establish Free Trade and Warehousing Zone has been introduced to create

trade-related infrastructure to facilitate the import and export of goods and services with freedom to carry out trade transactions in free currency. This is aimed at making India into a global trading-hub.

(ii) FDI would be permitted up to 100 percent in the development and establishment of the zones and their infrastructural facilities.

(iii) Each zone would have minimum outlay of Rs.100 crores and five lakh sq. mt. built up area.

(iv) Units in the FTWZs would qualify for all other benefits as applicable for SEZ units.

Import of second- hand capital goods:Import of second-hand capital goods shall be permitted without any age restrictions.

Minimum depreciated value for plant and machinery to be re-located into India has been reduced from Rs 50 crore to Rs 25 crore.

Services export promotion council:An exclusive Services Export Promotion Council shall be set up in order to map opportunities for key services in key markets, and develop strategic market access programmes, including brand building, in co-ordination with sectoral players and recognised nodal bodies of the ser-vices industry.

Common facilities centre: Government shall promote the establishment of common facility centres for use by home-based service providers, particularly in areas like engineering and architectural design, multi-media operations, software developers etc., in State and District-level towns, to draw in a vast mul-titude of home-based professionals into the services export arena.

Procedural simplification & rationalisation measures: All exporters with minimum turnover of Rs.5 crores and good track record shall be exempt from furnishing bank guarantee in any of the schemes, so as to reduce their transactional costs.

All goods and services exported, including those from DTA units, shall be exempt from service tax.

Validity of all licences/entitlements issued under various schemes has been increased to a uniform 24 months.

Number of returns and forms to be filed have been reduced. This process shall be con-tinued in consultation with Customs & Excise.

Enhanced delegation of powers to Zonal and Regional offices of DGFT for speedy and less cumbersome disposal of matters.

Time bound introduction of Electronic Data Interface (EDI) for export transactions. 75 percent of all export transactions to be on EDI within six months.

Pragati Maidan: In order to showcase our industrial and trade prowess to its best advantage and leverage existing facilities, Pragati Maidan will be transformed into a world-class complex. There shall be state-of-the-art, environmentally-controlled, visitor friendly exhibition areas and marts. A huge Convention Centre to accommodate 10,000 delegates with flexible hall spaces, auditoria and meeting rooms with high-tech equipment, as well as multi-level car parking for 9,000 vehicles will be developed within the envelope of Pragati Maidan.

Legal aid: Financial assistance would be provided to deserving exporters, on the recommendation of Export Promotion Councils, for meeting the costs of legal expenses connected with trade-related matters.

Grievance redressal: A new mechanism for grievance redressal has been formulated and put into place by a Govern-ment resolution to facilitate speedy redressal of grievances of trade and industry.

Quality policy:DGFT shall be a business-driven, transparent, corporate oriented organization.


“You and I come by road or rail, but

economists travel on infrastructure.”

- Margaret Thatcher, Former British Prime Minister

Exporters can file digitally signed applications and use Electronic Fund Transfer Mechanism for paying application fees. All DGFT offices shall be connected via a central server making application processing faster. DGFT HQ has obtained ISO 9000 certification by standardising and automating procedures.

Biotechnology parks: Biotechnology parks to be set up which would be granted all facilities of 100 percent EOUs.

Co-acceptance/ Avalisation introduced as equivalent to irrevocable letter of credit to pro-vide wider flexibility in financial instrument for export transaction.

Board of Trade:The Board of Trade shall be revamped and given a clear and dynamic role. An eminent person or expert on trade policy shall be nominated as President of the Board of Trade, which shall have a Secretariat and separate Budget Head, and will be serviced by the Department of Com-merce.

(Source: Extracted from issue of The Hindu Business Line; 10th September 2004)

CONSTRICTED CONSTRUCTIONS



II nfrastructure of a nation can broadly be classi f ied into two categories—socia l and economic. Socia l infrastructure typica l ly includes water supply and sanitation services,

housing and urban development, education, etc. Economic infrastructure on the other hand would include the fol lowing:

• Energy sector, comprising power, coal and oil and gas.

• Transport sector, comprising roads, rai lways, por ts, and civi l aviation.

• Communications sector.

The setting up of an economic infrastructure project has severa l positive spin—offs. Demand i s created for s tee l , c ement , capita l good s , engineering equipment etc. Besides generating employment, the local economy, where the project comes up, a lso gets a leg-up. A case in point is a ir transport. Since a ir transport is extensively used for movement of people and goods, the economy can grow much faster with improved faci l it ies at a irpor ts. Just look at what relatively small states l ike

Singapore, Hong Kong, Macau and the UAE have reaped from setting up world-class a irpor ts. ( ‘The Take -off ’ Stage”; Mr. H. S. Bhatia and Mr. R.C. Rekhi; Times of India ; August 9th 2004). The trickle down ef fect, which would lead to socio -economic emancipation, is another d imension. World Bank studies have estimated that a one percent growth in infrastructure development translates into a one percent growth in the economy. ( ‘Infrastructure Finance : The Core Of Development’ The Financia l Express ; August 9th 2004)

The Central Government was investing 10 per cent of GDP in the 1980s, according to Economic Survey. This has decl ined to 5.9 per cent in 2002. This decl ine in public investment led to a slowdown in the economy. As a result, the demand for infrastructure d id not arise as projected and the foreign investors too ran away. This expla ins the decl ine in the share of foreign investment in developing countries l ike India, as pointed by Mr. Bharat Jhunjhunwala , a freelancer. ( ‘Importance of publ ic investment in infra structure’; The Hindu Business Line ; September 6th 2004). The

Annotat ion On Inf rastructure

Development of infrastructure

is a sine qua non of economic

development. For instance,

development of agriculture

depends, to a considerable

extent, on to the adequate

expansion and development of

irrigation facilities. Industrial

progress depends on the

development of power and

electricity generation, transport

Development of infrastructure

is a sine qua non of economic

development. For instance,

development of agriculture

depends, to a considerable

extent, on to the adequate

expansion and development of

irrigation facilities. Industrial

progress depends on the

development of power and

electricity generation, transport

and comunications. Obviously

if proper attention is not

paid to the developmentof

infrastructure, it is likely to

act as a severe constraint on

the economic development

processes in the country.

and comunications. Obviously

if proper attention is not

paid to the developmentof

infrastructure, it is likely to

act as a severe constraint on

the economic development

processes in the country.


i l l - consequences of these measures and policy misca lculations are self- evident. The tragedy is that poor infrastructure represents not only the current poor qual ity of l i fe of Indians, but a lso promises to hold back the economy in future. Consider the fol lowing clari f ications :

State of India InfrastructureMr. Barun Roy points out in an ar ticle in Business Standard that, over 63 percent of rura l house holds lack electricity. Even those who have, don’t have it a l l the time. Blackouts lasting for 10 to 15 hours, or more, are common throughout the vast of the Indian countryside, where the most of our people l ive and struggle to survive. Against this 97 percent of a l l the 214.5 mill ion household in China have electricity. Mr. Suresh Prabhu , former power minister, cer ti f ies that China is adding 12,000 to 15,000 mw of capacity every year while we boast the lowest per capita consumption of electricity in the world. (For more addit iona l information, please a lso refer page number--42, January 2005 issue of '4Ps', the market ing journa l of IIPM)

India’s road network is 3.2 mil l ion ki lometer long, (one of the world largest), but over 95 percent of this network is two lane or narrower and much of it is in pathetic condition. National highways constitute no more than 57, 700 km of which only 3000 km are four lane . The rest of the network consists of urban road, which break up or d isappear af ter every f lood and monsoon.

About 40 percent of India’s 638, 365 vi l lages have no all weather access to market and social services. China’s current network is no more than 1.7million km long but 80 percent of its consist of highway with smooth sea led surface .And there are 20, 000km of four to six –lane, access controlled super

expressways connecting major urban centre on which even ful ly loaded truck move at speed of 80 to 100 km/hour . In another two years 99.5 percent of China’s town and 93 percent of its village will have highway links. In addition to this, there is a lso the problem of accentuating regional d isparities. Developed states such as Haryana and Punjab are wel l connected, where as Assam, Bihar, Chattisgarh, Himachal Pradesh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal are badly of f.

Consider the case of Indian shipping: The fact is that ( ‘Nay, nay, mate’; Economic Times editoria l dated 9th September 2004) 95 percent of our trade by volume and some two-thirds by value is via sea. But our shipping capacity has been stagnant for a decade now, at barely 6.5 mil l ion gross registered tonne. Worse, some 60 percent of domestic capacity is to be scrapped in the next f ive years, resulting in the share of India bottoms in our tota l cargo haulage, down to a four th. India carries less than one per cent of the tota l freight through waterways, compared to 14 percent in the US, 46 percent in the Netherlands and 9 percent

All f igures in Projec ted Projec ted Projec ted Cumulat ive for Cumulat ive for Rs.’000 crore, requirements requirements requirements 1996-97 to 2000-01 to es t imated at 1996-97 2000-01 2005-06 2000-01 2000-06 1995-96 pr ices

Power 36 50 69 200-210 300 to 310

Telecom 7.6 11.5 21.5 55 84

Roads 3 7.5 10 24 44

Railways 7.4 10.4 14.6 43 64

Por ts 1.4 2.1 3.2 9 41

Urban Infras truc ture 7 16 42 55 150

Total ( incl.others ) 67.5 107.6 182.6 432 755

( Source: Rakesh Mohan Commit tee, appeared in The Financial Express, dated Augus t 9 th 2004.)

‘Strengthening the backbone’

in China. ( ‘Tap waterways for freight movement’; The Hindu Business Line ; September 13th 2004).

Indian a irports are a lready two to three decades behind on the technology front, compared to other world-class a irpor ts. India doesn’t have a single hub a irpor t, which is cata ly tic in achieving high economic growth. Mumbai and New Delhi airports have world rankings of 82nd and 98th respectively. India is the second largest country in the world but our two metro city a irpor ts have a long way to go before they catch up with developed world. India does not even f igure in the f ive biggest a i r por t s in As ia . Exc lud ing Japan, these are Bangkok (18 in world ranking), fol lowed by Hong Kong ( 24 ) , S i ngapore (31), Beijing (32), Seoul (43) and Dubai (54). (Source : ‘Airports can be a high f lying business’; The Hindu Business Line ; 27th September 2004).

Mr. Kiran Karnik point s t h a t ( ‘ T h e b a n d w i d t h o f pro s p er i t y ’; T he E c onom ic Times ; 5th November 2004), despite the vir tual revolution in telecommunications, greatly a id e d by d e - r e g u l a t ion a nd competit ion, connectiv ity in rura l India is yet inadequate. Consider t h i s : The Telecom Regulatory Authority of India (TRAI) consultation paper talks about the increasing gap between the penetration of telephony in rura l and urban areas despite several attempts over the last ten years such as insisting on rol l out obligations as part of l icense conditions. Where it does exist, the bandwidth is very l imited, constraining information f lows. Costs are yet too high, both for

access and for usage, leading to a vicious cycle of high costs -low demand-poor connectivity-l imited usage -high costs.

Energ yAs energy is a key input for development , it s impor tance a s s u me s a d d e d s i g n i f i c a nc e w h e n d e m a n d a n d s u p p l y m a n a g e m e n t — b e i t c o a l , power or petroleum—becomes critica l.

Bio-fuelsThe IIPM Think Tank’s research p o i n t s o u t t h a t t h e b i o -fuels have huge potentia l for automobiles owing to widely cultivated high ethanol yielding crops such as sugarcane, corn and wheat. Dr. Jay K Shetty, Senior Director at the US based Genencor Internat iona l Inc , feels exploit ing the bio -fuels potentia l would not only lower the country’s dependence on imported oi l but a lso enable it to address i s sues of trade balance and supply of electric energy to the public grid. It a lso has the potentia l to create large number of jobs covering nearly 10 percent of population.

ElectricityPower is a critical infrastructure fo r t h e g r ow t h o f I n d i a n economy. Acceleration in the economic growth wil l depend upon a financially commercially viable power sector that is able to at tract fresh investments. P o w e r i s a n i m p o r t a n t ingredient for human existence probably next only to water. It is a lso a big growth multipl ier. C on s i d e r t h i s : a n i nc r e a s e in r ura l e lec tr i f ic at ion wi l l stabilize the birth rate at a lower level, improve l iteracy, create a vast new market for products dependent on electricity l ike


A world population

totalling 6.3 billion in 268

nations together consumed

13.94 trillion k Wh of

electricity in the year 2002,

representing a per capita

consumption of 2,211 k

Wh. The corresponsing

figures for India were

1,050 million people

and 497 billion k Wh

representing a per capita

consumption of 473 k Wh.

(Prospectives : Indian Electricity 2003 : Agenda for Review; Economic and Political Weekly, Vol.: XXXIX No.44)


TVs, electric irons, refrigerators, l ight fittings and have beneficial ef fects on public hea lth ( ‘Let panchayats handle rural power’; Mr. S. L Rao ; The Financia l Express ; 20th October 2004). W hat ma ke s the c a s e more pressing is that electricity is a very signif icant infrastructure resource and weaknesses in this sector put India at a competitive disadvantage, more importantly in sun rise sectors l ike food processing and etc. the future of agriculture l ies not in ever more rice and wheat but in fruits , vegetables, f lowers and other perishables, for which rel iable refrigeration and a cold chain from farm to shop is required.

T he p ower s e c tor i s a classic case of an area where a lot needs to be done, and yet one ha s to wa it for the resu lts for a longer t ime. A minimum of 10,000 mw capacity addition every year is needed. Despite the capacity addition of over 1,00,000 mw in the last 50 years, the country, at present, is facing a peaking power shortage of 11.6 percent and energy shor tage of 6 .8 percent. In places l ike Delhi, according to Mr. Gajendra Haldea , ( ‘Trade Hone s t y ’; T i me s o f I nd i a ; August 25th 2004), an energy expert with NCAER, consumers

pay doublethe tar i f f because half the power is lost in T&D, mostly theft. These losses range between 40 to 50 percent in most of the states. T&D losses, which include pla in thef t, are up from 21.8 percent in 1991-92 to 33.98 percent in 2001- 02. ( ‘Power: India’s Achil les’ heel ’; Mr. Swaminathan S. Anklesaria Aiya r ; Times of Ind ia ; 17th September 2004). Other steps needed are improving quality and rel iabi l ity of supply, bringing down the cost of elec tr icity to the user and elec tr i fy ing 65 percent of un-electr i f ied households. Rs. 9, 00,000 crore has to be ra ised for investment in technology, with the a im of bringing down the cost of del ivered power. Attempts to br ing in independent power producers have largely fa i led, e spe c i a l ly a t Dabhol . Ha l f -a t t e mp t e d S E B r e for m s i n Orissa and New Delhi have not achieved anything substantia l.

ProblemsA s e luc id a t e d by M r. A m it Bha ndha ri ( ‘Adrena l in f lows i n t h e w i r e s ’ ; E c o n o m i c Times ; 13th October 20 04 ) , the investment per unit in the for ma l a nd i n for ma l power s egment s i nd ic a te s that the power sector in India is highly overcapita l ised. Despite this ,

Annual petrol consumption in the countr y currently s tands at 6.5 bill ion li t res at a cost of Rs 4,00,000 crore with an annual growth rate of f ive percent. I t requites 650 million l i t res of fuel grade alcohol at 10 percent blending. The countr y is currently producing only around 300 million li t res of fuel grade alcohol, of a total of 1.5 bill ion li t res of alcohol production. I t requires an addit ional 400 million li t res of fuel grade alcohol and one million tonne of grain.( Source: ‘Plea to set up renewable energy research centre for bio-fuels’;

The Hindu Business L ine; November 5th 2004.)

"India needs $55 billion

over the next 10 years

for upgrading and

expanding its airports

and railways, $22 billion

for roads, $75 billion

for the power sector

,and $25 billion for the

Telecommunications"

(Source: NEP Paper Presentations, S/S2004-2006, IIPM, New Delhi )

Green solutions

the country loses 1-1.5 percent per annum of her GDP due to misa l location of resources. Major problems faced by the sector include low plant load factors, leakages in distribution, non -m a rke t r e l a t e d t a r i f f s , bankr upt e lec tr ic ity board s , energy shortages and low level of electrification (55 percent).

I f t h e p r e s e n t s y s t e m is deformed and incapable of meeting the challenge, it needs to be reformed. Any economic reform will inevitably have an ideologica l angle, but it i s a t e c h nolo g i c a l i s s u e i n t he power sector, opines Mr. Suresh Prabhu, former power minister. ( ‘Turbines Will Not Run On Ideology’; Financia l Express ; August 19th 2004.) The IIPM Think Tank, verily subscribes to this viewpoint.

For many long years, India has neglected investments in t r a n sm i s s ion , l e av i n g hu ge investment backlog, pan India. Figures indicate that (Economic Ti mes ed i tor i a l t i t l ed ‘Too restrictive by half ’ ) currently, i n t e r - r e g ion a l t r a n sm i s s ion capacity is a tiny part of the total generation. A mere 2 percent o f g ener a t e d e l e c t r i c i t y i s transmitted cross-country, owing to paucity of l ine capacity.

The ambiguities in extant power t r ad i ng re g i me have

been well documented by Mr. G a j e n d r a H a l d e a ( ‘ Tr a d e Honesty’; Times of India; August 25th 2004). Some states have been selling their allocated share of NTPC power to other states at higher than regulated prices. A case in point: Orissa Grid Corporation and Uttaranchal Power Corporation charge one pr ice for s a le s with in the i r respective states and a higher price for sale to other states. West Benga l SEB, Sikkim andGoa seem to be in the same league. Such prof iteering is patently unlawful. If a state does wish to sell, it can only charge the regulated price and no more. The Electricity Act 2003 is clear on this issue, where in the relevant sections (Section 61; Section 62; Section 79; Section 86 ; Section 62 (5) and etc) prohibits all these unfair practices. In reality, these provisions are blatantly violated. Action in concert with Power Trading Corporation (PTC) and other traders, many players have secured unlawful gains of several hundred crores of rupees at the expense of consumers in deficit states.

Mr. S.K. Sharma and Mr. V i no d B h a r d w a j , D i r e c tor s of Indusree Power (Pvt) Ltd, laments (‘Lighting up Himalayan states : small can be a powerful fuel ’, appeared in The Financial Express, 29th October 2004.) that the present small hydro-

The per capita power consumption currently is 566 units per annum which is very low when compared even with that in other developing countries. The target is to raise the same to at least 1,000 units by 2012 with a minimum lifeline consumption of one unit per day for each household. A nation-wide power grid with adequate transmission capacity is also required. The targeted capacity addition for the 10th Five Year Plan (‘02-07) is 41,000 MW and is likely to be achieved for the first time.(Source: ‘Adrenalin flows in the wires’; Mr. Amit Bhandari; The Economic Times;

13th October 2004) “The main problem with

the power sector, as was

identified in the mid-‘90s,

has been distribution,

he feels………. Since

distribution is under state

jurisdiction, states have

to be encouraged to act.

Until we reach a level of

at least a consumption of

1,000 units per capita,

a detailed discussion

on capacity planning is

meaningless.”

(Source: Mr.R.V. Shahi, Secretary, Ministry of Power‘Private participation: road map to power sector recovery’; Economic Times 13th October 2004)



power (SHP) plans are not based on any rigorous and analytically meaningful appraisal of resources and capabilities, explaining the sluggish pace, with big gaps between the planned, possible and actual. Consider this : out of 32 projects offered by the Himachal Pradesh government to the private sector for development since 1996, only three projects could be commissioned by the year 2003. (Please also refer the box detail ing the potential of SHP sector.)

Unfortunately, the repeated efforts made over the past decade to improve the finances of the SEBs have failed to bear fruit because of lack of political will and fiscal prudence. For instance, in 1996, a conference of chief ministers had adopted a Common Minimum National Action Plan for power (CMNPP) in which it was agreed that no sector would pay less than 50 percent of the average cost of supply. It was also agreed upon that power tariff for the farm sector should not be less than 50 paise per unit and the same would be raised to 50 percent of the average cost of supply in not more than three years. As mentioned by Mr. S.D. Naik , ( ‘Power sector reforms may derail ’; The Hindu Business Line; August 10th 2004), the States failed to implement the agreement. Though Punjab was the first state to announce power tariff of 50 per unit for agriculture in 1996, in 1997, it decided to do away with metering of electricity to farmers and charge a f lat rate based on the horse power of

accumulated losses of SEBs and their outstanding dues to Central Public Sector Undertakings (CPSUs). The accumulated losses have increased from Rs. 4,500 crore in 1991-92 to Rs. 33,000 crore by 2001-02 and the combined dues of 29 SEBs to CPSUs and other Government departments had crossed a whopping Rs 45,000 crore. (‘Power sector reforms may derail’; The Hindu Business Line; August 10th 2004).

Solutions“Our remedies oft in ourselves do lie”, penned the Poet. The IIPM Think Tank has collated the following effective solutions that may make vital difference to the existing problems at hand.

Proper targeting of subsidiesThe state subsidizes energy to a lot of people and while we accept the need to subsidize some consumers, how do we provide these subsidies so that it reaches the targeted group in a self-adjusting fashion? It is this kind of system that we should work out and give incentives to people for efficient use of resources. The solution proposed by Prof. K.S Parik is effective. Please refer the box. Demand Side Management (DSM)It is now a forgone that energy resources are f inite and given the growing energy requirements of the country, urgent steps need to be initiated to get into energy conservation, or technica l ly put, demand side management. Consider this :

I f energy is measured and the farmer pays for i t----i t is his own money that is going for ever y kilowat t of power he is using; i f that happens, some X money is credited to the farmer account and whatever is lef t af ter use for elec tr ici t y he can retain i t. The X amount is f ixed. I f ever y farmer is given something i.e., energy consumed to energy required to ir r igate one hectare of land, that much of money you give ever y farmer and if he wants any thing more than that he should pay for i t. I f one use less energy one saves i t. Thus a person will have incentive to save energy. One can have more elaborate solutions----one can use automatic bank transfer and through many other ways of implementing this entailing less transaction cost and more ef f icient way of reaching the targeted farmer. ( Source: Ex trac ted from an inter view t i t led ‘Revamp power sec tor policy, to at t rac t pr ivate inves tments’ wi th Prof.

K .S. Par ik and appeared in The Hindu Business L ine, Augus t 26th 2004).

the pump set installed, starting a dangerous trend where state af ter state began first moving to a f lat rate and then, in several cases, to zero power tariff for the farm sector.

Moreover, there is the perennial problem of

According to the WWF-India Climate Change and Energy Programme’s Secondary study draft report tit led “Demand Side Management in Electricity Sector” prepared by Prayas, Delhi has an estimated residentia l l ight saving potentia l of about 35 percent, which could be saved at a fraction of cost

of new power generation. Hundreds of megawatts of power saved in the process could be easi ly made avai lable to def icit areas for the use of other consumers. According to the report, one unit of electricity saved reduces coal consumption by about one Kg—a non-renewable resource used to generate 72 percent of the country’s electricity generation. The secondary study repor t a lso notes that large -sca le ef f iciency improvement of uti l it ies and at the user’s end can reduce the load shedding to a large extent.

Apart from controll ing losses (read ‘thef ts’ ), there is a lso a need to make a more ef f icient use of power. One of the ways to promote a more ef f icient use of electricity can be avai labi l ity-based tari f f, a s was pointed out by Mr. Bhanu Bhusha n , member, CERC. ( ‘Adrena l in f lows in the wires’; Mr. A mit Bhandari ; Economic Times ; 13th October 2004). The IIPM Think Tank strongly endorses this view point. In this method, the tariff will have to take into account a ̀ capacity charge’ to pay for the f ixed costs and an `energy charge’ to pay for the variable costs. A `scarcity charge’ wil l a lso have to be included, depending upon the ava i labi l ity of power at the t ime. In a scenar io l ike Ind ia’s , a s tate having extra power can sel l it a s long a s the sel l ing pr ice i s greater than the var iable cost . Encouraging of f-peak usage of power can a lso increase ef f iciency. For instance, in the ca se of Delhi , the peak power requirement i s 3,500 MW whi le the of f-peak requirement i s 1,800 MW. The neighbouring states, Rajasthan, Haryana and Punjab, postponed their agr icultura l consumption to coincide with Delhi ’s of f-peak hours.

The d ra f t norm s for i nter - s t a t e power transmis s ion a re myopic , h inder ing pr ivate sec tor par t ic ipat ion, not whol ly, or in f u l l measure, but very substantia l ly indeed. The centra l transmission uti l ity has been granted ‘de fac to’ regulatory role ( it has been armed with powers, a l lowing to comment upon justif iabi l ity, technica l v iabi l ity, cer t i f icat ion and etc of each and every pr ivate proposa l.) Facts ind icate that (Economic Times editoria l tit led ‘Too restrictive by ha l f ’ ) such opaqueness in the investment regime would verily short-circuit much warranted investment f lows. The need of the hour is to plant a transparent system of bidding for transmission projec t s and a proac t ive pol icy to coa le sce resources. This ef for t should be supplemented

with set t ing up independent system operators for load d ispatch in transmission, with a clear role for Central Electricity Authority (CEA), the power minis try’s technica l body.

Also, there i s the contrad ic t ion in the fac t that commercia l publ ic s ec tor t ransmis s ion company, Power Gr id Corporat ion being the Centra l Transmission Uti l ity. Being responsible for network planning and development g ives them author ity over other entrant s (ma in ly p r i v a t e ) i n t o t r a n s m i s s i o n . M r. S . L . R a o , Cha i rman, Ins t itute for Socia l and Economic Change , i s of the opin ion that , operat ion of r eg iona l load d i spa tch c ent re s ( R L DC ) by Power Gr id Corporat ion (and SLDCs by SEBs) i s an anoma lous s ituat ion where commercia l operators a re re sponsible for an independent and neutra l f unc t ion.

T h e pr e s e n t s y s t e m o f ove r c h a r g i n g exh ibited in the power trad ing market s shou ld be control led on a ver y urgent ba s i s . Power trad ing i s welcome. It ha s a u sefu l role to play. But it must conform to law, and to the reasonable re s tr ic t ions imposed in the publ ic interes t . A r u l ing by the Centra l Commiss ion shou ld pa s s a r u l ing , end ing the PTC ma lprac t ice of overcharg ing.

The SEB’s mindsets need to be changed immediately, from administrat ion to commerce and enterpr ise. A pol icy has to be created where

Two years ago, the global consult ing f irm Mckinsey and Company had es t imated that India could save $12 bill ion by 2005 merely by improving ef f iciency in power generation and removing transmission and dis tr ibution bot t lenecks, as i t will dras t ically reduce the new capacit y requirement.( Source: ‘Power sec tor reforms may derail ’; The Hindu

Business L ine; Augus t 10 th 2004)

in mult id iscipl inary tra ining centres , manning behaviora l specia l i s ts , accountants , economists , lawyers and eng ineers wi l l tr y to incu lcate enterpr ise pr inciples into those who have been tra ined so far to push paper. It was not enough to invite pr ivate industry. I f the s tate elec tr icity boards continue to lose Rs 2 ,500 crore per annum then it is a route to bankruptcy. ( ‘Why State -level Power Reforms Get Stuck ’; Financia l Express ;


Re-inventing ' Subsidies'


June 26th 2004). For 2004 - 05, the economic Survey est imates that SEB losses wi l l be Rs 21, 698 crore before s tate subsid ies , and Rs 10, 556 crore a f ter subsid ies . Please refer t he t able .

Coordination between ministries, governments, public enterprises and research institutions must be institutional ized.

Need for integrated fuel policyProf. Kirit S Parik, Member, Planning Commission, feels that in India, at the moment, different sectoral

right pricing policy for different uses should be so that people select the right fuel for that particular use. The integrated energy policy will make sure that domestic supply keeps up with demand. The same perspective is shared by Prof. S. L. Rao, Chairman, Institute for Social and Economic Change. A case in point is the electricity policy. It only partially reverts powers of electricity regulatory commissions (ERCs) to government. But it does not speak for government as a whole---such as issues under other ministries like coal, oil and gas, taxation, etc. (‘A policy just for the heck of it’; Prof. S . L Rao; The Financial Express; August 10th 2004).

Hydro PowerMr. Shubhasis Gangopadhyay, Director, India Development Foundation after researching upon the statistics with power ministry, opines that (‘NE suffers from poor company’;The Financial Express;19th February 2004), the hydropower potential in the N-E region is estimated at 48,000 MW. Although this constitutes 30 per cent of total reserves of India, less than 3 per cent of this has so far been harnessed. A pre-feasibility study reckons that 35,000 MW of this potential will be

harnessed in the next 20 years or so. The situation is no different in other parts of India. These renewable sources should be immediately leveraged.

The IIPM Think Tank strongly endorses the effective and simple pricing scheme formulated by M r. A bhe ek B a r ma n of The Economic Times. This pricing scheme is pegged to the model (dynamics) of glamorous media, where in users are charges only a fraction of cost.

Near l y hal f the power generated is wasted and stolen, so half the users pay for every one. That puts us on a treadmill, where paying customers pay more, inducing folks to bribe the l ineman and drop out altogether, which increases the load on paying customers…..one get the whole sorry picture. So, Andhra Pradesh industr y

tariffs are Rs 7 per unit, while farmers supposedly pay 50p for power. Delhi has no farm users, but well-heeled and power ful folk run eight air conditioners and pay for one or two. So domestic rates are nearly Rs 4 per unit and industry pays about Rs 4.50.

One can surmount this quandary by levying an uniform charge upon all users. A flat 50p rate gets rid of most of these hassles and has inherent advantages as are mentioned below:

One, with one rate in place, there is no incentive to steal power from a ‘cheaper’ source.

Two, low rates elec tr i f y poor folks, other wise left out by high tariffs.

Three, state governments, which largely control distribution and pricing, will fall themselves to implement this sort of pricing.

Finally, government owned utilities—central ones like NTPC and financially bankrupt SEBs---resist competition because they fear ‘cherry-picking’ by private electricity retailers. (Source: Extracted from an ar ticle titled

‘How long till we get 50p power’ by Mr.

Abheek Barman and appeared in The

Economic Times.)

Power Pr icing!! !

1991-92 2004-05

Loss before Subsidy 4,117 21,698

Loss af ter Subsidy 4,117 10,556

Ex tra revenue from 3% return 4,959 23,774

Source: Economic Sur vey, 2003-04, as quoted in Times of India ar t icle

t i t led ‘Power: India’s Achi l les’ heel ’ authored by Mr. Swaminathan. S . Anklesar ia Aiyar; dated 17th September 2004

Losses of State Electricity Boards (Rs crore)

policies are not connected so that inter-fuel use is not clearly the most optimal that we should have. The planners need to think in terms of what kind of

India also needs a better energy mix as compared to what we have currently. For instance, Japan, which is a major energy importer, did away with energy-intensive industries like steel after the oil shocks of the ‘70s. As mooted by Dr R.K. Pachauri , Director- General, TERI, the services sector also has to be a conscious part of this long-term strategy as it is less energy-intensive compared to manufacturing,

S m a l l h y d r o - p owe r ( S H P ) i s a n e n g i n e o f g r o w t h t ha t can c r e a t e i n t e n s i ve r u ra l e conomic ac t i v i t y in t he H ima layan s t a t e s and g e n u i n e l y f o c u s o n t h e con ce r n s o f t h e common man. A recent s tudy by the Government o f Ind ia, w i th assis tance from UNDP-GEF, for the 13 Himalayan and sub-Himalayan s tates, ident i f ied 2, 162 SHP potent ial s i tes, w i t h 3, 827 mw po ten t i a l ( each pro jec t up to 3 mw

only ). In addit ion, there are a large number of si tes for low-head schemes, with potential b e t ween 3 mw and 5 mw each, which are ye t to be inves t igated. I t is es t imated that about 4, 120 sites are available for SHP development through local resources. The projec ts on these si tes have a rural employment potential of about 400,000 man years dur ing construc tion and direc t and indirec t employment of about 25,000 per sons and

50,000 persons respectively, in operation and maintenance on a r egu la r bas i s . The incremental and super f ic ial ( t a n g e n t i a l ) e m p l o y m e n t p o t e n t i a l o n a s s o c i a t e d ac t i v i t i e s , l i ke d i s t r ibu t ion of power and decentral ized management of power lines, would be in addit ion. ( Source: Ex t rac ted f rom an ar t icle

t i t led ‘L ight ing up Himalayan s tates:

s m a l l c an b e a p owe r f u l f u e l ’,

appeared in The Financial Express,

29th October 2004.)

Another part of this strategy should be to look at alternative sources of energy such as solar power and other variants of non-renewable energy sources.

TransportationPhysical connectivity, on hand, faci l itates the quick and easy movement of people and goods, is obviously a vital stimulant of economic growth and development. A classic and most often repeated example is the famous Silk Route. On the other hand, the absence of this enabling factor turns into a hindrance. Delays due to bad networks can lead to higher costs as well as wastage. The Planning Commission points that bumpy roads cost us Rs. 10,000 crore a year.

A lthough there ha s been some move to modernise the national highways, the secondary roads are in terrible shape. Inter-State check points have become a major cause of delays which can stretch from hours to even days at each check post. The approaches to ports are narrow and congested, leading to serious clogging of traffic and trucks held up for several hours to even days sometimes. ( ‘Can

trade target be achieved? ’; Mr. N. N. Sachitanand; The Hindu; 13th September 2004)

A bad road network will definitely translate into external diseconomies at the firm and industry level. Consider this: Mr. N. Kumar, Chairman, CII National Council of Logistics, said in India logistics costs accounted for 13 percent of GDP, compared

to 6 percent to 7 percent in developed countries. Even a 1 percent reduction in logistics costs could result savings of at least $5 billion (around Rs 22,500 crore.).

Inland WaterwaysMr. K.N Satheesh, Managing Director, Kerala Shipping and Inland Navigation Corporation is a strong votary of development of inland waterways ( ‘Tap waterways for freight movement’; The Hindu Business Line; September 13th 2004). Even though the Expenditure Reforms Commission had asked the Centre to accord highest priority to inland water transport sector l ike that of NHDP, this sector remained neglected due to inadequate width and depth and lack of infrastructure such as cargo handling terminals, navigational a ids and Inland Water Transport f leet. The movement of cargo through costal shipping would considerably reduce the stress on the ra i l and road network in India. IWT is a mode of transport that is economical in non-renewable energy terms. One horsepower moves 150 kg by road, 500 kg by ra i l and 4,000 kg by waterways. The amount of energy consumed

Small is Beautiful



per tonne ki lometer of freight transported by waterway come to merely 1/6 of the amount consumed by road and half of the amount consumed by ra i l.

T he I I PM T h i n k Ta n k strategize that the potential of inland waterways is tremendously huge in northern states which are fed with perennial rivers. This is a slow, but inexpensive and environmentally safe practice of moving bulk goods.

ShippingMr. Vikas M Khan, President and CEO of Norasia Container Lines Ltd opines that (‘Ensuring pr ob l em - f r e e g a t e way s for exporters’; The Hindu Business Line; 29th November 2004), India is in dire need of port growth, spread around the whole country. The state should encourage organic growth, rather than forcing unrealistically large growth in limited ports.

Consider this: India has a long coastline, with over 100 gazetted ports. Yet, 80 percent of India’s

container exports move out of only three major ports.

The IIPM Think Tank is in favor of further investments in ports to expand capacity to 1,000 million tones by 2009. This is possible as capacity in ports can be built very fast. We have seen in the case of Mundra port how capacity can be expanded very quickly.

RailwaysIndia no doubt has the world’s second largest rail network. But the efficiency of freight operations of the Railways is going downhill. Long wagon turnaround times, primitive facilities for loading and unloading at the stations, poor security and endemic corruption leading to substantial thefts and losses are the order of the day. Another worrisome trend is that the Railways’ share of total freight transported has declined from over 80 per cent to 50 per cent in the last three decades. (‘Can trade target be achieved?’; Mr. N. N. Sachitanand; The Hindu; 13th September 2004)

Indian ports, which hand l e ove r 90 per cent of India’s volume of foreign trade, are notorious f o r l o n g s h i p turnaround t imes o f t h ree to f i ve days (average) and dock conges t ion due to inadequate e qu ipmen t , l a ck of Electronic Data Interchange facility a n d t r u c u l e n t labour. This is true of

even new ports such as the Jawahar lal Nehru Por t Trus t a t New Mumba i which has faced a major crisis due to a conta iner jam. Private major ports like Mundhra on the Gujarat coas t are much more efficient but these are few and far between. In 2003-04, Indian p o r t s h a n d l e d around 460 million

tonnes of cargo.

To understand untapped potential and the inefficiency that has crept into t he s y s t em, one should look in to the state of affairs of cargo handling a t I nd ian po r t s . There are several reasons for these i n c l u d i n g d e p t h limitat ions in por t channels preventing

A national transport

policy committee recently

says that despite being

an eco-friendly, cost

effective and fuel-efficient

mode, IWT today carries

only 0.17% of the total

inland cargo throughput

in the organized sector.

The government’s new

proposed policy aims at

increasing the share of

inland cargo movement

by IWT mode from the

present level of 0.17% to

2% by the year 2015.

(Source: ‘State of India’s Infrastructure’; NEP Paper

presentation; Spring Summer 2004-2006, IIPM New Delhi)

As was brilliantly discussed in an Economic Times ar ticle ( ‘Stop the loose-shunted wagon’; Mr. Raghu Daya l ; Economic Times ; September 27th 2004), the Indian Rai lways ( IR) over the past decade has fa l len into a v icious cycle of low long-term investment, misal location o f r e s o u r c e s , i n c r e a s i n g indebtedness , poor customer service and rapidly deteriorating economics.

M r . V i k a s . M . K h a n , President and CEO of Norasia Container Lines Ltd has pointed out that ( ‘Ensuring problem-free gateways for expor ters’; The Hindu Business Line ; 29th November 2004), a large par t of the problem is insuff icient ra i l connections between ports and the hinterland, particularly to North India. Rai l service needs massive upgrading and this sector must be open itself to private sector par ticipation, as ra i l movement of the entire country can not be lef t to a single organization. A classic example is the case of Mundra, a 126 kilometer railways line has been bui lt by a private player.

The government has already star ted the process of creating competition for Concor. The d e p a r t m e n t o f c o m m e r c e

is in favor of private players entering development of railway t r a ck s , wa gon s a nd r e l a t e d infra s truc ture. The ra i lways shou ld prov id e fa c i l i t i e s to private players on the same lines as Concor. As pointed out by Mr. Raghu Daya l, IR has to induct new technologies, rational ize and modernize processes and equipment, innovate and adapt. There is a lso an urgent need for capacity augmentation on the high density trunk routes, pa r t i c u l a r ly on the G old en Quadrilateral and its diagonals.

The IIPM Think Ta nk , a f ter due research (secondary research) upon this institution recommends some alterations in the freight policy. Appropriate freight and fare structure is a categorica l imperative for IR’s sustenance and surviva l. IR is suited to carrying commodities in bulk over long distances, more so at a time when fuel costs are at an all-time high. Long distance freight rates should, therefore, be made attractive compared to road costs.

A m o n g t h e c o s t r e -eng i neer i ng exerc i s e s to be undertaken, staff cost reduction is crucial. A “diagnostic study” carried out by RITES endorsed a prescription to reduce at least

ber thing of larger ships; insuf f icient mar shal l ing yard space in po r t s ; inadequate t rains ser v ices to clear cargo to hinterland; and finally less than adequate number of container terminals to meet India’s cargo volume needs.

Totally inadequate f l oo r space and mater ial handl ing systems, dwell times o f e x po r t ca rgo in days instead of hours, nex t to no s to rage fac i l i t i e s f o r p e r i s h a b l e cargo such as cut flowers and vaccines and cumber some

clearance procedures are the norm. ( S o u r c e s : ‘ E n s u r i n g

problem-free gateways for

exporters’; Mr. Vikas M

Khan, The Hindu Business

L ine; 29th November

2004; ‘Can trade target

be achieved?’; Mr. N. N.

Sachitanand; The Hindu;

13th September 2004 and

other sources)

“There is no doubt that

railway infrastructure

needs to be beefed up.

As of now, only 35% of

the country’s cargo is

handled by railways. The

remaining 65% is moved

through the road network.

Considering the condition

of the Indian roads in

most regions, the situation

does not augur well for the

Indian economy.”

(Source: A Commerce Department official in an interview with The Economic Times, October 8th 2004)


Hard ' Ship'


about 25 percent of work force. As long as Railways remain in the stranglehold of politicians, this situation will not change.

AviationPrivatization of a irports is a global trend. However, unlike in the case of airlines, where privatization has not always meant ga in for promoters , a i rpor ts remain the most profitable links in the civil aviation chain.

Airpor t projec ts require ma s s ive capita l , mos t of in foreign exchange, for building runways, navigation, landing sys tems, termina l bu i ld ings , conveyor belts, airport check-in counters, cargo warehouses, I T s y s t e m s , c o m p u t e r hardware and air-conditioning

estimated to cost $300 million. Government estimates show the two principal airports need an investment of Rs 5,000 to 10,000 crore each over the next five years if they have are to come any where near internat iona l standards (‘Plane truth: Airports are a mess’; Business Standard; 22nd October 2004)

China created infrastructure such a s a irpor ts wel l before the demand. In the 1990s, it built more than 35 airports all over the country, driving huge growth in tourism. From 1996 to 2000, China invested $7.9 billion in airport construction. In 2000 alone, airport investment tota led $2 .3 bi l l ion, a s key a irpor t development projects were completed in Shangai and

When the Br it ish Airpor ts Authority ( B A A ) w a s privatised, its profit showed an increase o f a lmos t 410 per cent between 1987 and 2002, from $186 million to almos t $750 million. The group’s capital increased from $1.8 billion at the time of floating to $8 .5 b i l l ion today. Dividends i n c r e a s e d f r om 11.25 pence per

share in 1987 to almost 41 pence in 2002. Due to expansion of BAA’s activities both in the UK and abroad, the staf f strength increased to almost 2 . 5 t im e s t h e original strength. Wages increased nearly three-fold. The pr ivatisation experience of other European airports l i k e V i e n n a , C o p e n h a g e n , Aeroport De

R o m a , a n d those in Germany has been similar. The pr iva t i sa t ion of airports in Latin American countries also resulted in a high degree of growth and employment. Dit to for Australia and New Zealand.(Source: ‘The Take-off ’

Stage”; Mr. H S Bhatia

and Mr. R . C Rekhi;

Times of India; August

9th 2004)

equipment. As pointed out by Mr. Pa nk aj Na raya n Pa ndit , S en ior Con s u l t a nt , I n fo s y s Technologies, (‘Airports can be a high f lying business’; The Hindu Business Line; 27th September 2004), an international airport of 5 million annual capacities is

accelerated in Guangzhou and Beijing.

I n d i a h a s a n a t u r a l leadership position in SAARC countries. India is strategically located between the industrially developed Europe, oil rich West

“…..India, along with

China would be the hottest

aviation markets of the

future. We see huge

opportunities here and

would want to be a part

of it. Also, the changes

taking place in the Indian

aviation sector, and the

liberalization currently

under way would be

magnificent for the growth

of the economy because of

its trickle down effects.”

(Source: Mr. Robert Milton, the President and CEO of Air Canada, in an interview with The Economic

Times, October 22nd 2004)

The new golden goose

Asia and the high growth regions of China, and South-East Asia. All this points that investment in Indian airports will be profitable for private sector players.

CommunucationMr. Kiran Karnik opines that ( ‘The bandwidth of prosperity’; The Economic Times ; 5th November 2004) information infrastructure is cer ta inly not a substitute for physical infrastructure, but it can be put in place more quickly and offers “force multiplier” capabil ities for the economy. The IIPM Think Tank subscribes to this perspective. A positive policy on convergence needs to be put in place quickly. Today, even the use of a single user-device (telephone) for VoIP and PSTN is not permitted. Changes in l icensing, cable TV and DTH policies are necessary to faci l itate and encourage delivery of voice, data and video through a common pipeline.

Urban InfrastructureSome body has aptly re,arked that the tools and techniques used for urban governance in India are akin to fighting a modern war with bows and arrows.

Williamson model, the first computable general equilibrium model of the Indian economy, the limits to city growth occur due to the inf lation of urban site rents. Further, rents are also aggravated in India’s cities because of rent control that diminishes the incentives of property owners to maintain their property and artificially restricts the supply of rental housing. So while cities can be managed well at any given point in time, they may not be able to accommodate continual growth (a more dynamic process) or migration. According to Prof. Kala S Sridhar, working with National Institute of Public Finance and Policy, (‘City limits’; Business Standard, 7th October 2004) this has some very strategic implications for policy makers and urban planners. Rather than the expansion of a few big cities, it is l ikely that a large number of rural areas are converted to urban areas. So we are more likely to have a more extensive rather than intensive urbanization phenomenon. That is, more cities rather than more growth of existing cities. Intensive growth is not feasible neither in theory nor practice, nor is it desirable. India can learn a lot of lessons from China. More than 400 of China’s 668 cities are facing a water shortage, and of the 400, more than 100 are seriously threatened

Jus t a simple look at these s t a t i s t i c s w i l l r e v e a l t h e untapped potential.

India has 150 aircraf ts and 15 mil l ion people t ravel l ing by air per year as agains t China which has 750 aircraf ts and 75 million people travelling! China has al ready made a blue pr int for ‘ infras truc ture c rea t ion’ to r e ce i ve 1,90 0 a i r c r a f t s b y 2 0 2 0 . L u t o n

airpor t, one of the f ive airpor ts in London, handles 13 million pas senger s . Ryanai r ( a low cost air line in Europe s tar ted 10 years ago) has only 5% of the European market and handles 25 million passengers a year and India has a middle class population equal to that of Europe. The air fare between Delhi and Bangalore is more t han t ha t o f B anga lo re to Singapore even though f lying

t ime to S ingapore is much more than that to Delhi. India needs more air lines and more connections to ef fec t ively tap the explos ive grow th being witnessed in other sec tors of the economy. ( Source: Ex t rac ted f rom an ar t icle

wr i t ten t i t led “Allow foreign air l ine

inves tment? ”; Capt. G R Gopinath;

T he Economic Time s , S ep t emb e r

20th 2004)

At the time of independence only 15 percent of Indians l ived in urban areas. By the year 2000, 30 percent of Indians l ived in cities and towns. And by 2050, 50 percent of Indians are expected to live in urban centres. ( ‘City lights for Hari potter’; Mr. Nandan Nilekani; The Economic Times; 17th August 2004)

While cities continue to be habitable, there are l imits to their growth. In the Becker-Mills -

by water shortage. Further, with nearly half of China’s rivers and over 90 percent of its urban water resources having been polluted to some extent, only 33 of these cities have met state standards for water quality.

The IIPM Think Tank a lso calls for more effective urban planning. This would dramatically reduce the distance between the residence and the work place, thereby reducing the pressure on

Sky is the limit !



road infrastructure and other amenities.

Majority of the infrastructure related issues are state subjects, but a l l the s t a t e s i n I nd i a a re s t r apped for r e sou rc e s . A d d i t i o n a l l y, m a j o r i t y o f the s t a te government s mus t r e c o g n i z e t h a t g l a m o r o u s projects are not always the best means of achieving an effective infrastructure. If the projects are chosen for their glamour rather than their economic viability, they need state support to get off the ground. As pointed in an Economic Times editoria l ( ‘Lessons from Bangalore’ 5th December 2004), as against the intense pressure upon state’s finances, the state support can not keep down the prices charged for the infrastructure projects. This unsustainable practice needs to stop on an urgent basis. It is the responsibility of the individual cities and states to foster them to grow into better urban areas for l iving and for conducting business. On the other hand, the Centre should appreciate the fact that centralized financial a s s i s t a nc e for c r e a t i ng t he infrastructure has to be combined with decentralized prioritization of investment.

Rural InfrastructureMs. Jyotsna Bapat , Consultant, I n s t i t u t e o f S o c i a l S t u d i e s Trust, New Delhi has worked out a very ef fective solution f o r p r o v i s i o n i n g r u r a l infrastructure and the same was d iscussed in an ar ticle tit led “Bridging the ‘viabi l ity’ gap”; October 4th 2004. I f there is a consensus on the pr ior ity for creat ion of a pa r t icu la r in f ra s t r uc ture , i t shou ld be ref lected in the wil l ingness to contribute by the community.

Such willingness can be taken as an indicator of their priorities. Centra l assistance for capita l investment in infra s truc ture should be treated as a common pool to be d isbursed on the principle of “those who want it the least wil l get it f irst”. For example, each vi l lage in a block can be ca l led upon to submit a proposa l that would l ist the priority of their infrastructure from among the sectors of water, transport and telecom. Then, for each sector, they would be required to submit the amount needed for its creation, their contribution and the amount of money they wil l need from the pool. Thus, vi l lages could be ranked ba sed on amount required from outside for the creation and maintenance of the infrastructure. Those who need the least amount for a particular sector wil l be given the money f irst and so on, ti l l the pool is exhausted.

T h e I I PM T h i n k Ta n k a d v o c a t e s t h a t a l l r u r a l proj e c t s (more i mpor t a nt ly road projects) must be freed from the machinations of the public works depar tment and implemented with more civi l society par ticipation.

T h e I I PM T h i n k Ta n k points to the need for ensuring greater coverage of wirele s s services in rural areas and small towns through deployment of c o s t e f f e c t i ve t e c h nolo g i e s l ike broadband over Wi-Max, Cordect, Power Line and so on. As pointed out in The Telecom Regulatory Authority of India ( T R A I ) c on s u l t a t ion pap er ( ‘Allow niche players in rura l telephony: Trai ’; The Economic Times ; 28th October 2004), the ‘niche operators’ should of fer

“The government should

encourage extensive

growth phenomenon by

stepping up infrastructure

in the rural areas and

persuade industry to

locate there. For this,

more local and state

autonomy is required in

the use of resources.”

(Prof. Kala S Sridhar, in an article tit led ‘City l imits’ in

Business Standard, 7th October 2004)

telecom services in rural areas at an affordable price. The removal of entry barriers and regulatory costs for small players as a lso development of rura l content is necessary for generating more and more rura l employment.

For yea r s , gover n ment s have spent vast sums on rura l electri f ication with cla ims of h igh level s of achievements . Ye t , s t a t i s t i c s w i th r e spe c t to r u r a l e l e c t r i f i c a t ion a r e not very encouraging. Latest census shows that hardly 63 per cent of rura l households have electricity. To solve the problem of rura l electri f ication, one can resor t to using bio -mass for

assured supply of bio-mass from cheap agri-wastes such as rice husk, cashew shells, ground nut shell, mustard seed husk and stem, corn cob, coconut shell and coffee husk, on a sustainable basis. Please refer the box

Prof. S.L Rao consider that ( ‘Let panchayats handle rura l power’; The Financia l Express ; 2 0 t h O c t ob e r 2 0 0 4 ) , t h e principle in rural electrification i s to get v i l lages to pay for power. No one really knows how much is supplied to vi l lages and it is being bi l led on an average basis. Emphasizing grid power has led to the over burdening of low voltage l ines and to black

“Investment in rural

infrastructure needs

top-down financing and

bottom-up planning.”

(Ms. Jyotsna Bapat, in an article tit led “Bridging the ‘viability’ gap”; Business Standard; October 4th 2004.)

O f f i c i a l f i g u r e s suggest that there i s po ten t i a l fo r 12 million biogas plants. A total of 3.65 million family t ype plants have been set up, as of now. But, a great major i t y of them are non-functional and the functioning ones are operating a t s u b - o p t i m a l levels. ( Economic Times editorial titled ‘Alternative energy’; 9 t h D e c e m b e r 2004). In spite of

the government ’s efforts, over the last so many decades, the potent ial has been untapped. The IIPM Think Tank, s trongly advocates f o r r e m e d i a l measures to correct the extant situation. T h e s e i n c l u d e , ensuring adequate availability of water, proper education and training endeavors in maintenance and usage ac t i v i t i e s . Kinetic Group’s Mr. A run Firodia, is a

strong votary of this renewable source of energy, popularizing the fac t tha t, i t can practically end India’s pet roleum impor ts. There is also a strong case for combining all excreta, of humans, animals and poultry, along with all forms of organic waste in proper ly designed b i o d i g e s t e r s t o generate methane a n d l e f t o v e r manure.

electrification, very particularly

in these areas, considering cost and input availability. According to rough estimates, the cost of installing biomass-based power generation units is around Rs 3 crore per megawatt against Rs 4 to 4.5 crore for mini-hydel units. Photovoltaic or solar systems cost even more. In addition to the cost advantages, it has many other dimensions. One can get

outs and low voltage. SEBs do not even meter supply f rom the 11kv sub - s tat ion level in many r ura l a rea s and ins tead charge panchayats f lat rates for s treet l ight s . The I IPM Think Ta n k ’s r e s e a r c h u p o n t h i s par t icu la r i s sue corroborates the fac t that gr id power can on ly be a supplement to power ava i lable for 24 hours a day to a l l r ura l u ser s and that r ura l



Annotat ion On Education

elec tr i f icat ion cannot depend on gr id power.

ConclusionBetter roads, better ports, better telephony, assured supply of power...a l l these have huge externalities and could lead the country to that longed for double -digit growth. Efficiency improvements in the delivery mechanisms would have to be effected to temper capacity requirements in all the arenas of infrastructure sector. However, observing the happenings (trends) in the 1990s in public sector investments, it is unlikely that the government would be able to finance all such capacity increases, without call ing for private sector investments and increase in operational ef f iciencies. I f a l l infrastructure sectors were opened up to competitive private investment, the Indian economy would be in striking distance of 8 percent annual growth. (Source: ‘To Market, To Market’; Times of India; Gajendra Haldea; November 4th 2004).

We have lot s to do reach the level s of

Singapore and Hong Kong in terms of efficiency and productivity of operating our infrastructure assets. Use of technology, IT and legal framework have to be streamlined for creating seamless logistics chain.

If infrastructure is not improved in the next five years, development will slow down drastically. China, for instance, created excess infrastructure in a mind boggling way prior to its growth phase but today all of it is being util ized. Growth and development of an economy will a lways follow if infrastructure is developed. The case is reverse in India. Growth is happening, in spite of lagging infrastructure investments. The industry has been unable to implement “Economies of Scale” due to paucity of infrastructure. A case in point is India’s food processing sector. It could have emerged as a world beater with right storage infrastructure. And if infrastructure is unattended for too long, major corporations will relocate to other countries. A decade of sustained stable policy regime with rigorous implementation can really bring change for better.

The real draw of PPP lies in the ef f iciency gains to be made by deploying profi t-seeking pr ivate funds for the construc tion, operation and maintenance of infras truc ture ser vice. I t does not mat ter whether the pr ivate funds deployed consti tute 20 or 80 percent of the cost of a projec t. I t also does not mat ter whether the projec t is commercially viable or res ts on subsidies or cross subsidies. Pr ivate management will need to run the entire projec t ef f iciently in order for their inves tment to earn a high rate of return. The profi t motive is a great organizer of human energies and creativi t y. ( Source: Ex trac ted from a column t i t led ‘ Infras truc ture: wil l the ‘par tnership’ work? ’ authored by Mr. Pradeep Singh

and appeared in Business Standard; 19th March 2003.)

Par tner ing for Progress

IER

IDEATORS

Mr. Chandrasekhar Krishnamurti, The Hindu Business Line Mr. G. Ramachandran, The Hindu Business Line Mr. Sitaram Yechury Mr. T.N.Ninan, Business Standard Mr. Arvind Mayaram, Centre for Trade & Development, Rajasthan Mr. Janmejaya Sinha, The Boston Consulting Group Ms. Jayshree Sengupta, The Hindustan Times Mr. Ganeshan Wignaraj Dr. Ashley Taylor Mr. Vinish Kathuria Mr. Arvind Singhal, KSA Technopak Mr. Vivek Mehra, PwC, India Mr. Francis McAuley, Debenhams UK Mr. Chaitali Chakravarhy, The Economic Times Mr. G Ganapathy, The Economic Times Mr. P.C Chidambaram, Union Finance Minister Mr. Manmohan Singh, Prime Minister Mr. Kapil Kaul, CAPA-Centre for Asia Pacific Aviation Mr. Rajiv Kumar, CII Mr. Nagesh Kumar, RIS, New Delhi Mr. Vikram Bhalla, The Boston Consulting Group Mr. Vivek Bharti, FICCI, New Delhi Mr. Krishnan Thiagarajan, The Hindu Business Line Ms. Nitya Nanda, CUTS, Jaipur Prof. Ragbhendra Jha, The Australian National University Mr. Y.R.K. Reddy, Management Consultant Mr. Benjamin Franklin Mr. Alexis De Tocqueville, Author of ‘democracy in America’ Mr. Pascal Lamy, the European Union Trade Commissioner Mr. Arvind Panagariya, Professor of Economics, University of Maryland Mr. Raul Prebisch, UNCTAD Prof. Jagdish Bhagwati, Professor, Columbia University Mr. S. Venu, Management Consultant, Chennai Mr. Kamal Nath, Commerce Minister Mr. N. N. Sachitanand, The Hindu Mr. T.K. Bhaumik, Confederation of Indian Industry (CII) Mr. M. Rafeeque Ahmed, Federation of Indian Export Organizations Mr. R.K. Dhawan, Former Additional Director General of Foreign Trade Mr. Julius Sen, CUTS, Jaipur Mr. Somnath Dasgupta Mr. Jaidev Majumdar Mr .Jayanta Roy, Confederation of Indian Industry (CII) Mr. Sanjay Baru, The Financial Express Mr. Arun Goyal, Academy of Business Studies Mr. Vinod Mehta, The Financial Express Mr. Ravinder Goel, The Financial Express Mr. G. Srinivasan, The Hindu Group of publications Mr. Abheek Baruah, The Hindu

Mr. G.K. Pillai, Director General of Foreign Trade Mr. T C A Srinivasa-Raghavan; Business Standard Mrs. Mythili Bhusnurmath; The Financial Express Mr. Biswajit Dhar, Indian Institute of Foreign Trade Mr. Pradeep Mehta, CUTS, Jaipur Mr. Shubhasis Gangopadhyay, India Development Foundation Mr. Amit Baruah Mr. C. Raja Mohan, The Hindu Mr. Pradyut Bordoloi, MLA, Margherita, Upper Assam Mr. S Narayan, Former Finance Secretary and Economic Adviser to FM Mr. Prabir Sengupta, The Indian Institute of Foreign Trade, New Delhi Mr. Ajay Piramal, Nicholas Piramal group Mr. Raghu Dayal Mr. R. Parthasarathy, The Hindu Business Line Mr. Muchkund Dubey, Ministry of External affairs Mr. Anil.K.Kanungo Mr. T K Arun, The Economic Times Mr. N.K Singh, Planning Commission Ms. Margaret Thatcher, Former Prime Minister, United Kingdom Mr. Bharat Jhunjhunwala Mr. H S Bhatia, Former aviation technocrat Mr. RC Rekhi, Former aviation technocrat Mr. RV Shahi, Ministry of Power Mr. Barun Roy, Business Standard Mr. Suresh Prabhu, former power minister Dr. Jay K Shetty, Genencor International Inc Mr. Abheek Barman, The Economic Times Prof. S.L. Rao, Institute for Social and Economic Change Mr. Swaminathan S. Anklesaria Aiyar, The Economic Times Mr. Gajendra Haldea, NCAER Mr. Amit Bhandari, The Economic Times Mr. Bhanu Bhushan, CERC. Mr. Vinod Bhardwaj, Indusree Power (Pvt) Ltd Mr. S.D. Naik, The Hindu Business Lines Prof. Kirit S Parik, Planning Commission Mr. K.N Satheesh, Kerala Shipping and Inland Navigation Corporation Mr. N. Kumar, CII, National Council of Logistics Mr. Bimal Jalan, Former RBI governor Dr RK Pachauri, TERI Mr. Vikas M Khan, Norasia Container Lines Ltd Mr. Rajesh Mehta, Rajesh Exports Ltd Mr. Pankaj Narayan Pandit, Infosys Technologies Prof. Kala S Sridhar, National Institute of Public Finance and Policy Ms. Jyotsna Bapat, Institute of Social Studies Trust Capt.G R Gopinath, Air Deccan Mr. Senthil Chengalvarayan, CNBC TV 18 Mr. Pradeep Singh, National Highways Authority of India Mr. Pularpe Balakr ishnan

IDEATORS SOURCES

• ‘Can India ever be a turtle’; Mr. Barun Roy; Business Standard; November 28th 2003

• ‘A policy just for the heck of it’, Prof. S.L Rao; The Financial Express; August 10th 2004

• ‘Adrenalin flows in the wires’; Mr. Amit Bhandhari, Economic Times; 13th October 2004

• ‘Airports can be a high flying business’; Mr. Pankaj Narayan Pandit, The Hindu Business Line; 27th September 2004

• ‘Allow niche players in rural telephony: TRAI’; The Economic Times; 28th October 2004

• ‘Boost competitiveness’; The Economic Times; August 25th , 2004

• ‘Can trade target be achieved?’; Mr. N. N. Sachitanand; The Hindu; 13th September 2004

• ‘City limits’; Prof. Kala S Sridhar, Business Standard, 7th October 2004

• ‘Customary delay’ ; Mr Somnath Dasgupta and Mr. Jaidev Majumdar; The Financial Express; 19th August 2004

• ‘Did we gain anything significant at WTO? ’; Economic Times; August 10th 2004

• ‘Do we need an exim policy’; Mr M. Rafeeque Ahmed and Mr. R.K. Dhawan, The Business Standard 19th August 2004

• ‘Dog̀ s breakfast or trade policy?’; T C A Srinivasa-Raghavan Business Standard; 6th August 2004

• ‘Enhancing export competitiveness’; Mr. G. Srinivasan; Business Line; January 29th 2004

• ‘Ensuring problem-free gateways for exporters’; Mr. Vikas M Khan, The Hindu Business Line; 29th November 2004

• ‘Exporters Don’t Need Spare Change’; Mr. Jayanta Roy, The Financial Express, 8th July 2004

• ‘FDI: Benefits will flow only with open, consistent policy’; Mr. Krishnan Thiagarajan; The Hindu Business Line; 24th October 2004

• ‘FDI: Is more always better?’; Prof. Ragbhendra Jha, Professor, The Australian National University; The Economic Times; 28th July 2003

• ‘Manufacturing exports seen at $300 billion’; Business Standard; 9th October 2004

• ‘NE suffers from poor company’; Mr. Shubhasis Gangopadhyay, Director, India Development Foundation; The Financial Express;19th February 2004

• ‘New Foreign Trade Policy — Will there be a real paradigm shift?’; Mr. G. Srinivasan; The Hindu Business Line; 27th August 2004

• ‘Northeast as a trade hub’; Mr. Amit Baruah ; The Hindu; 20th September 2004

• ‘Nothing long term about it’; Mr. Arun Goyal; The Economic Times; September 1st, 2004

• ‘On Sitaram Yechury’s Barks And Bites’, Mr. Omkar Goswami, Financial Express; 20th July 2004

• ‘Open up trade, get rich’; Mr. Arvind Panagariya; The Economic Times; April 23rd, 2003

• ‘PHDCCI concerned over low rate of FDI inflow’; The Hindu Business Line; August 26th 2004

• ‘Plea to set up renewable energy research centre for bio-fuels’; The Hindu Business Line; November 5th 2004.

• ‘Power sector reforms may derail’; Mr. S.D. Naik, The Hindu Business Line; August 10th 2004

• ‘Power: India’s Achilles’ heel’, Mr. Swaminathan S. Anklesaria Aiyar; Times of India, 17th September 2004.

• ‘Private participation: road map to power sector recovery’; RV Shahi, Secretary, Ministry of Power, Economic Times 13th October 2004

• ‘Promote Regional Trade To Enhance Exports’; Mr. Vinod Mehta and Mr. Ravinder Goel; The Financial Express; 18th May 2004

• ‘Push hard for quality FDI’; Ms. Nitya Nanda, CUTS, Jaipur; Business Line; 7th June 2004

• ‘Puzzle of New Trade Policy’; Mr. Pradeep Mehta, Secretary-General, CUTS, Jaipur, The Financial Express; 1st September 2004

• ‘Quo Vadis, Mr. Kamal Nath’; Mr. B Bhattacharya; The Financial Express; 19th August 2004;

SOURCES

• ‘Foreign Investors And Special Privileges’; Mr. Y.R.K. Reddy; The Financial Express; 31st May 2004

• ‘Foreign trade is also about imports’; Mr. Sanjay Baru, The Economic Times; 21st November 2003

• ‘How long till we get 50p power’, Mr. Abheek Barman, The Economic Times

• ‘How not to measure FDI’; Mr. G. Ramachandran and Mr. Chandrasekhar Krishnamurti, The Hindu Business Line; 29th July 2003

• ‘Importance of public investment in infrastructure’;,Mr. Bharat Jhunjhunwala, The Hindu Business Line, September 6th 2004

• ‘India Invest Blues’; Financial Express, 8th February 2003,

• ‘Infrastructure Finance: The Core Of Development’, The Financial Express; August 9th 2004

• ‘Infrastructure: will the ‘partnership’ work?’, Mr. Pradeep Singh, Business Standard; 19th March 2003

• ‘International trade and economic growth’; Mr. S. Venu, a Chennai based management consultant; The Hindu Business Line; 10th September 2004

• ‘Investment raj’ ; Financial Express; December 7th 2004

• ‘Is It Time For Old Dreams To Fade?; Mrs. Mythili Bhusnurmath; The Financial Express; 22nd September 2004

• ‘Is the Foreign Trade Policy OK?; The Economic Times, 3rd September 2004

• ‘It’ll spur India Inc to invest in civil aviation’; Mr. Kapil Kaul, senior V-P CAPA-Centre for Asia Pacific Aviation, The Economic Times; September 20th 2004,

• ‘Law reforms affecting Indian Business’ ; NEP Presentation papers, Spring Summer Batch 2004--2006, New Delhi

• ‘Leaving trade marks’; Mr. N.K Singh; Hindustan Times; May 5th 2004

• ‘Let panchayats handle rural power’; Prof. S. L Rao; The Financial Express; 20th October 2004

• ‘Lighting up Himalayan states: small can be a powerful fuel’, Mr. S.K. Sharma and Mr. Vinod Bhardwaj; The Financial Express, 29th October 2004.

• ‘Making SEZs special’; The Economic Times; 13th October 2004

SOURCES

• ‘Raising the bar on exports’; Mr. Vivek Bharti, advisor to FICCI, The Financial Express; 3rd September 2004

• ‘Raising the FDI limits’; The Hindu Business Line; 17th October 2004

• ‘Revamping FDI Policy’; NEP Presentation papers, Spring Summer Batch 2004--2006, New Delhi

• ‘Road to Ruin’, Time of India, October 22nd 2004.

• ‘Scrap the Annual Ritual of Exim Policy; ’ Mr. Jayanta Roy, Principal advisor, CII, The Financial Express; 22nd July 2004

• ‘Shoot the shibboleth trader away’; Mr. Raghu Dayal; The Economic Times; 25th August 2004

• ‘Should export incentives continue?’; Business Standard; September 8th 2004

• ‘Still the old mindset’; Business Standard; September 1st 2004

• ‘Stop the loose-shunted wagon’; Mr. Raghu Dayal; Economic Times; September 27th 2004

• ‘Subsidising exports’; The Business Standard; 3rd September 2004

• ‘Tap waterways for freight movement’; The Hindu Business Line; September 13th 2004

• ‘The bandwidth of prosperity’, Mr. Kiran Karnik, The Economic Times, 5th November 2004

• ‘The devil is in the detail’; Editorial in The Economic Times; 13th October 2004

• ‘The emperor’s new clothes’; Mr. Abheek Barua; Business Standard; 10th September 2004

• ‘The red tape gets redder’; Mr. T.N.Ninan; Business Standard

• ‘The rise of Indian multinationals’; The Hindu; 22nd August 2004

• ‘The Road Ahead For The Indian Economy’; Mr. Jayantha Roy; The Financial Express, 27th May 2004

• ‘The Take-off’ Stage’, Mr. H S Bhatia and Mr. RC Rekhi, Times of India, August 9th 2004

• ‘The vision is clear’; Mr. T.K. Bhaumik; The Financial Express; 10th September 2004

• ‘Those puppets on a chain’; The Economic Times; 28th September 2004

• ‘Time to rework port logistics’; Economic Times; 6th July 2004

• ‘To Market, To Market’; Mr. Gajendra Haldea; Times of India; November 4th 2004

• ‘Top agenda for new government’; Mr .Jayanta Roy; The Financial Express; 13th May 2004

• ‘Towards A National Foreign Trade Policy’; Mr. Nagesh Kumar; The Financial Express; 27th August 2004

• ‘Trade Honesty’; Mr. Gajendra Haldea, Times of India; August 25th 2004

• ‘Trade in services — It is a question of market access’; Mr. Anil.K.Kanungo; The Hindu Business Line, 15th September, 2004

• ‘Trade Policy Making In India: The Reality Below the Waterline,’; Mr. Julius Sen; CUTS, Jaipur

• ‘Trade Promises With Implementation’; Mr. S Narayan, The Financial Express; 1st September 2004

• ‘Trade winds’; Prof. B. Bhattacharya, Dean, Indian Institute of Foreign Trade (IIFT), New Delhi, The Economic Times, September 2nd 2004

• ‘Truths about FDI’, Business Standard; February 23rd 2004

• ‘Turbines Will Not Run on Ideology’; Mr. Suresh Prabhu, former power minister, The Financial Express; August 19th 2004.

• ‘Unctad report optimistic on global FDI inflows this year’; The Hindu Business Line; September 22nd 2004

• ‘Unshackling’ And ‘Unleashing’ Must Be For Real, Not On Paper’, Mr. Biswajit Dhar, head, Centre for WTO Studies, Indian Institute of Foreign Trade, The Financial Express, 10th September 2004

• “A few gift ideas for the FM” ; T K Arun; The Economic Times; December 25th, 2003

• “A foreign policy for the East”; Mr. C. Raja Mohan ; The Hindu; 16th July 2004

• “Bridging the ‘viability’ gap”; Ms. Jyotsna Bapat; Business Standard; October 4th 2004

• “Clear the road”; Ms. Jayshree Sengupta; Hindustan Times

SOURCES SOURCES

• “Diamonds are forever ”; The Economic Times; August 01st 2003.

• “Don’t let go of the foreign hand”; Mr.Arvind Mayaram; The Economic Times ; August 06th 2004.

• “Global retail firms back off on FDI flip-flop”; Mr.Chaitali Chakravarhy and Mr. G Ganapathy, Economic Times, August 24th 2004.

• “Performance of MNCs in India”; Mr. Janmejaya Sinha and Vikram Bhalla of The Boston Consulting Group

• “Savour the Chidambaram Effect “,Mr. Senthil Chengalvarayan, The Financial Express; Business Bites, 25th May 2004

• Economic Times editorial titled ‘Too restrictive by half’

• EU-India partnership in global trade; The Economic Times, March 14th 2003

• Extract from an article written by Mr. T.K. Bhaumik and appeared in The Financial Express; 8th October 2004.

• Highlights of Foreign Trade Policy; The Hindu Business Line; 10th September 2004

• Interview of Mr. Francis McAuley, International Director, Debenhams UK, with the Economic Times; August 24th 2004.

• ‘Revamp power sector policy, to attract private investments’; Interview with Prof. K.S. Parik, The Hindu Business Line, August 26th 2004

• “Allow foreign airline investment?”; Interview with Capt. G R Gopinath; The Economic Times, September 20th 2004

• ‘Mixed benefits from FDI inflows’; Mr. Vinish Kathuria; The Hindu; 12th October 2004

• ‘New Foreign Trade Policy — In step with the times’; Mr. R. Parthasarathy ; The Hindu Business Line; 8th September 2004

• ‘The new foreign trade policy’; The Hindu; 8th September 2004

• ‘Trade Honesty’; Times of India; August 25th 2004

• ‘Doing Business in 2005: Removing Obstacles to Growth’; World Bank

• ‘Foreign Trade And National Interes t ’; Mr. Pularpe Balakr ishnanin; The Financial Express; 19th July 2004

SOURCES

Praise for The IER

“I am happy that the think at the IIPM has been doing excellent work on various strategic sectors and issues of importance to Indian Economy...................... “The IER 2003-2004”, which is a IIPM Think Tank presentation is extremely fascinating and value adding……..”

Dr. P.L. Sanjeev Reddy, Former Secretary to Govt. of India, Director, Indian Institute of

Public Administration, New Delhi

“……I have gone through it and it is really a professional exercise to help everyone. What impressed me the most is its analytical approach used for articulating the figures, which otherwise are lifeless entitities……… ”

Dr. Mruthyunjaya, Director, National Centre for Agricultural Economics and Policy Research

“………….the contents are extremely relevant and thought provoking…….”

Dr. Charan Wadhwa, Centre for Policy Research, New Delh

i

“…..…It highlights the wealth of intellectual synthesis of agrarian economy available to us for reenergizing the thought process endeavored at your end……..I hope that the platform of further synthesis of many such issues provided by IER will be serving great interest of agriculture sector.”

Dr. Rajiv Mehta, Member Secretary, Commission for Agricultural Costs & Prices,

Ministry of Agriculture.

“…………………..In my opinion, it has fulfilled its objective in presenting a comprehensive, up-to-date and clear exposition of the issues and concerns that are essential for understanding, evaluating and suggesting solutions to the important national economic problems.”

Mr. U.K.S. Chauhan, Director, Department of Agriculture and Cooperation,

Ministry of Agriculture.

“I laud your info base and analytical prowess, particularly your solutions vis-a-vis international experience……….You may like to examine further from your side the aspects of futures trading in the perspective of the Indian farming community given your extant knowledge base in agriculture.”

Mr. Suvendu Ganguly, Deputy Director,

Forward Markets Commission.

“…...It is a very informative document ……..”

Mr. V.L. Chopra, Member, Planning Commissio

“………I thoroughly enjoyed going through your recent IER………it is undoubtedly a mammoth task of pulling together divergent perspectives on the critical issues of the nation……..”

Dr. Parth J Shah, Centre for Civil Society, New Delhi

The IIPM Think Tank is inspired by Dr. M.K. Chaudhuri ’s v is ion of India as an economic powerhouse in the 21st centur y ; a modern nat ion s tate where pover ty becomes his tor y and the underpr iv i leged are not consigned to the dustbin of amnesia . At The IIPM Think Tank , we passionately believe that the managers of tomorrow that are being groomed at I IPM today wil l play a decisive role in India’s renewed tr ys t with dest iny.

The India Economy Review is a small manifes tat ion of that vis ion. More than 1,000 s tudents (seven nodes) have—and continue to—spent endless hours conduc t ing pr imar y and secondar y research on contemporar y issues that confront the Indian economy. This research is then analysed threadbare by at leas t 50 members of I IPM facul ty across the seven campuses . Fresh insights and policy recommendations that are provided by this core team are then craf ted, honed and polished by a 20 member editor ial team. This massive ef for t is spearheaded and led by Prof. Arindam Chaudhuri .

We trus t that the untir ing ef for ts of The IIPM Think Tank are a modest , yet signif icant contr ibution to the policy mak ing process that is poised to transform India .

The Paradigm Prism

Annual EditionProvides multi-faceted view

points upon Education, Health, Poverty, Agriculture,

Industry, Services, Infrastructure, External Trade,

Foreign Investment and Environment. Features the expert’s views upon these issues and on the Eco-political pulse of India.

First QuarterlyIt features qualified

optimism about the issues of Education, Health,

Poverty and Unemployment. These social sector

issues are imperative to any nation and more

specifically for a developing one like India.

Second QuarterlyThe marginalization of

Agriculture, Minimilization of Industrial Activity and Magnification of Services

Sectors are the three concerns that form the

fulcrum of this particular issue.

Third QuarterlyIt delineates upon the basics

that drive or should drive India ie. Infrastructure, foreign trade & FDI.

Infrastructure is the very foundation on which a

country's industrial economy is built, while Foreign

Trade & FDI are modern day pillars that supports it.

For enquiries, Please Contact: [email protected]; [email protected]

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