FDI in India - An Ethical Dilemma?.

On saturday night, i was watching the santosh sivan directed malayalam movie - "urumi".  Along with the breathtakingly beautiful cinematography(as one would expect of Santosh Sivan), the story of Kelu nayanar who challenged Vasco Da Gama and the Portuguese supremacy unfolded.Well, this post is not about writing a review of the movie - though i liked the movie. It had been refreshingly different. But what i want to write about is the message that the director has tried to bring out through this well crafted film.  Till saturday evening, i had been a vehement supporter of FDI in India. But this film had succeeeded in planting a doubt or two about it!.

The movie speaks about how portuguese, who came to trade with us slowly became our masters.So was the case with British. The movie ends with a modern day analogy where in we allot land to foreigners to come and set up their factories here. This is exactly what has been  the centre of debate ever since the Korean giant POSCO tried to open its steel plant in Paradeep,Orissa. It is the single most largest FDI ($12 billion) in India till date. So the pro-development people have argued that such a step is important to increase our forex reserves as well as to induce growth for our economy. But questions have been raised about its environmental impact (the plant requires deforestation of huge amout of forest land) and also about the concerns of villagers who will be forced to move out of this area.

Obviously Santosh Sivan views the FDI as a necessary evil, where we pave way for foriegners to establish their supremacy once again. So now i have 2 doubts - is FDI an evil in itself?. Or is it the way we implement it(not providing rehabilitation programs for the poor people displaced) that is evil?.

I tend to agree with the second , where as the director's stand is the first. Ofcourse, the story has cunning politicians and multi national companies, who are only interested in maximising their own profits. But that should not be a reason for us to shoe them away. We should have good government policies in place so that the people who come here for business do just that!. In the way , if they make profit well and good. But it helps our own economy, our own people.  This should not be at the cost of poor people losing their livelihood.

In the end, i think FDI is not an evil as such. The problem is with the intermediates trying to make mileage out of it. A good way to go about it will be to provide annuities to the poor people ( as a percentage of the profit that the company makes) and not just one-time compensation. A way should be there to factor in the value of land appreciation over the years. All these if properly implemented will be a win-win situation for both the foreign company and the poor villager displaced.

raghuram rajan and financial crisis....

I am a fan of  Raghuram Rajan , who predicted the Financial crisis before it happened. This he did while at a dinner party hosted to celebrate the retirement of alan greenspan, the then chairman of US Federal reserve, whom many hold responsible for his loose monetary policies which ultimately led to the financial meltdown.
He was the chief economist at IMF and now a professor of finance at booth school of business,chicago. He is also the economic advisor to the PM of India.

I purchased his book - Fault Lines from flipkart.com. They offered 40% discount!. To hell with bookshops in Bangalore!(who dont offer any discount > 10%). Thanks to excellent customer support from flipkart, i received the book the very next day and started devouring with great apetite from then next day..I am yet to complete the book , but from what i have read it promises to be provide a very good insight into the root causes - not just the superficial reasons as we know them - of the sub-prime crisis.

Ever after, when I hear his name mentioned in the newspapers or articles, i follow them keenly. Today I read another well analyzed aritcle at project syndicate - where he finds reasons on why the government stimulus packages have failed to lower the unemployment rates. As in his original book, he points out that the government policy makers fail to see beyond the surface.He advocates imparting "new-skills" to the construction workers who lost their job following the crisis as key to improving the employment rate. The unemployment rates cannot be lowered by increasing demand as thought of by the policy makers.

In another article , he ponders over why the economists missed predicting the crisis at all. His reasons are both intuitive and insightful.


Note - An excellent article by Paul krugman on the reasons for the financial crisis - explains very lucidly the keynesian and the new-classical school of thoughts...

consequences of arab revolts...

Was reading an interesting article on government handouts in Arab countries (to appease the people revolting) .
Came across this interesting quote -

"If a job is indeed productive, its output would be rewarded by other members of society who benefit from it, without the need for government subsidies and guarantees.The fact that government guarantees a job implies that its output is not wanted. Such jobs are a liability for society, not an asset." 


Should some of the politicians in Kerala ponder over this?.


I am referring to - this article at Project Syndicate.

How economic freedom can be used for development...

I liked reading about late YSR in this Economic times editorial by swaminathan aiyer.

If these facts are true, then YSR was close to what a 'practical' Chief minister can do in India.

There is no denying that there will be corruption & nepotism. But to ensure social growth with emphasis on economic freedom is commendable and YSR should be lauded for that.

This article made me look up wikipedia for the term "crony capitalism".

 and i found this.

 The link has special mention for India (reference to its "licence raj" before 1991) . Interesting.. :-)

The Hindu and its Anti-american ways..

I feel the Hindu is often shortsighted in its approach  towards India's foreign policy.
Why does nt it see the bigger picture?.
The article that i am refering to is yesterday's Hindu editorial on accusing Obama of going bush way. ( Hindu Editorial , 22nd march ,2011).

Let me dissect this editorial. The editorial starts with the stands taken by different governments which have condemned  the attack on Libya. - Russia,China, Turkey etc. . This saws the seeds of Anti-America in the mind of reader.Very clever indeed!. The editorial then compares these attacks with the attacks against kosovo and claims how sarkozy is using this war to project himself as a leader.

Ok, i am not being myopic to these facts. But the Hindu "pretends" that it does not see the big picture. What about the thousands of civilians whom Gadhafi has killed?. Does Hindu have a solution towards the Libyan problem?. Else it should keep quiet. (sorry for sounding exteme here).  As written in my previous post, only practical way of dealing with a bloody ruler like Gadhafi seems to be throwing him out of the power. Peaceful talks may not work. countries are wary about the attacks killing civilians. But, what about the civilians being massacred by Gadhafi's forces?. Any day, it is better to throw him out of power.

By missing these facts and not presenting the correct picture to the reader , Hindu is just re-inforcing its anti-American stand.  When talking about an issue, it should present both sides of the story, which is not the case here. I do not agree with the editorial which misleads the public.

PS- I am not pro-US but just found the strong anti-american bias in the editorial uncalled for.

Update - Read this article in the economist - the comments are also interesting.

India's foreign policy and Libya

The allied forces led by France,the UK and the US started their defensive on gadhafi on saturday following the refuttal of ceasefire promised by him. I read yesterday that India strongly condemned the attacks on gadhafi's forces. Mind you, all the BRIC countries are on consensus on this issue. Russia too came forward and condemned the whole thing. This issue and how this has been dealt by India has raised some questions in my mind.

Firstly, India and four other abstained from voting in favor of the proposal of no-fly zone in libya last week at the UN. This was understandable. India argues that any attack will lead to loss of civilian's lives and a solution to the libyan problem should be achieved through talks and not through missiles.

Now the question is - is this the right way to handle a bloody dictator like Gadhafi?. The way he has projected himself on the TV, the way he has gone about the whole thing makes me feel that this guy is not going to oblige to any talks. He has acclaimed that he will pull each rebel out of their homes and kill each of them. So will India's approach help in his case?.

There is a saying in malayalam that  - "kuthan varunna pothinte aduth vedam othiiyitt karyam undo" . meaning is there any use reciting Vedas to a bull that is running towards to you to attack you.
I feel India's approach towards gadhafi is somewhat similar to the idea in this saying.

Agreed, the allied forces should keep in mind they don't harm the civilians.(more easily said than done).They have not done any good for themselves , when US defense secratary proclaimed yesterday that their aim is not Gadhafi! .This approach is confusing.

If they want to keep peace in libya and act in favor of people, what better approach than throw Gaghafi from power?. This should be the way forward and India will do well if it takes a strong stand in this case and not just sit at home and condemn the strikes against gadhafi.

An analysis of the union budget 2011-12.

The perception among  the economists and the industrialists has that the budget is a reasonably good one. The main challenge before the FM was to push for inclusive growth , while bringing down the current acccount deficit and the inflation..I am not sure how far the budget will help in achieving this, for there are lot of assumptions that the FM makes. But it definitely is a step in the right direction - laying out an excellent plan with long term benefits in mind.  The main challenges may on the implementation side and may be the assumptions that the FM makes.


Positives-

1) Increased allocation for education - 52000 crore . 23% higher than before. This is a key area - because investing in education is important because we need skilled labour and only through these steps can we capitalize on India's demographic capital. This is a step with long term benefits in mind and is very good for the economy.

2) Direct Subsidies for the poor, thereby eliminating the incentives for a middle men. This is a big steps towards increasing the efficiency of subsidies. But a flipside that i hear is that  - this will not be effective from April 1,2012 until we have the UID implemented.

3) MNREGA  - allocation same at 40,000 crore. (same as previous year). This is good as the government is focusing on the effective implementation rather than increasing the allocation and the resulting money landing up in the pockets of corrupt beurocrats and middle-men.

4) Steps towards moving to  GST and GTC.- which will simply and reform the tax system.

 Negatives -

1)A Key issue that many economists point out is that there is nothing new in the budget . what he has put in the budget are things which are already being talked about.
2) No concrete steps to bring back the black money .
3) Tackling corruption - just forming a counsil of ministers. sufficient?.
4)  No concrete plan on how the deficit will be brought down to 4.6%.

Neither positive nor negative(gray areas) -

1) Oil subsidies to be brought down - positive or negative?. I am confused on whether this is good or not?.
On one side it reduces the burden on the govermnent thereby helping to reduce the current account deficit.
But on the other side, this reduction implicitly implies that there will be a policy change on the government's part - either deregulate the diesel price and pass on the burden to the consumer. This may spiral inflation.

2) MAT tax going to harm the small software firms - There is a MAT tax ( though i am not sure what this means) being thrust upon on the SEZ. This will be passed on to the software companies. Though biggies such as Infosys will not be affected by this , this is going to affect the small companies.  Nasscom Chief Som Mittal has come out in open against this.

3) Allowing FIIs to invest in Mutual Funds - Most economist see this a positive step. But FIIs are generally not considered as a stable investment. They can withdraw any time. FDIs are anyday better. But ofcourse, something is better than nothing!.

But the government had to something to reduce the current account deficit and this time it is the software services industry that has fallen on its radar.

A big issue is that there are no concreate plans on how the current account deficit is going to be brought down to 4.6% of the GDP.  The tax exemption limits has been increased. The FM is assuming that more people will come forward and pay tax because of the growth. This looks a bit far fetched to me.

An analysis of the Economic Survey 2010-11

The economic survey report came out on friday. There were special articles on this report in all the leading business newspapers. So what is special about this survey?.
It is important because it analyses the macro economic situation in the country and suggests the areas that we need to work on.

While the economic survey predicts that the indian economy will grow at a healthy 9% in 2011-12 as compared to the 8.6% growth in the current fiscal. While the conditions look good, there are some areas of concern - most of important of which are  inflation, current account deficit and steady declines in the FDIs.

Let us look at each of these - First inflation. Although the government rolls out a lot of subsidies (food,kerosene) etc, the problem lies with the public distribution system. The survey says that 40-55% of the total amount set aside for subsidies is diverted by the ration shops. This means the subsidies dont actually reach the targeted audience. Please see my previous post on how the survey argues to do away with the assumption that all people are morally flawless. Another solution to improve the agricultural marketing is to allow FDIs in multi brand retails. Most economists also seem to be on concurrence on this - most notable of them being Mr.Kausik basu, the economic advisor to FM. This will help in improving the supply chain logistics in procuring the food grains from farmers, improving the agricultural returns for the farmers  thereby boosting further production. The need for a second green revolution would not be more relevant than at any other point of time.

The government should focus on direct subsidies thereby eliminating the incentives for middle-men(ration shop keeper etc) by introducing smart cards. The UID will also help this in a big way.

Secondly to bring down the fiscal deficit, the goverment must improve industrial production. The steep fall in the IIP figures are alarming,although some may argue that this is due to high base effect.


What is also required is financial consolidation - rolling back the export duty is expected in the union budget.
Another significant reform to improve the economy will be GST(Goods and Service Tax).Mr Adi Godrej has opined that this is the single most important reform for the government. The popular perception is that the GST will streamline the whole taxation process. The basic concept is that the tax is added at each stage of the manufacturing process based on the value addition. This helps in reducing tax evation. At some stage or other the product or service will get taxed. This GST system also removes redundant taxes thereyby removing the burden on the consumer. The prices of consumer goods are expected to come down by 5-7%. This means higher consumption leading to higher production from a business point of view. Mr.Godrej argues that the GST has the potential to increase the GDP by 1.5 - 2%. Astronishing , is nt it?.

These are some suggestions laid out by the Economic survey, let us hope that the finance ministers heeds to some of these suggestions during the union budget being presented in the parliament right now!.

morally flawless, Are we?!!..

I was reading a report on the economic survey - came across an interesting observation made in the survey.

It says - Many noble plans (read government policies such as MREGA,subsidies on kerosene, food grains) fail because it assumes people are morally flawless. It argues to do away with this assumption. On the contrary, people(police men,shop keeper,citizens) must be be viewed as "rational selfseeking agents". Wow, Is nt this openly admitting that we are all flawed( which I feel is true by the way) . Very happy to see truth being spoken out in such plain words. Some food for thought?. :-)

Let us hope that some government action follows thisobservation in the economic survey.

The food security bill - Whether we have a consensus?.

Although the ruling party politicians and the economists seem to agree that we should implement the food security bill, they seem to disagree on who should be the beneficiaries of this bill. In very simple terms, food security bill promises 35 kg of grains per month to each family, which comes under its perview, at Rs 2 per kg for wheat and Rs 3 per kg for rice.From the news reports it seems like we have difference of opinion on who these families should be.


On one side, we have the NAC - headed by none other Mrs Sonia Gandhi, who says that we should include both normal families & priority families(BPL famlies) under this scheme. This will amount to 75% of the indian population. On the other side, we have the Economic Advisory Council headed by Mr.Rangarajan,who says that we do not have sufficient grains to feed these many families. They opine that only the priority familes should be the beneficaries. This still amounts to 65% of the population. But NAC members such Mr.M.S Swaminathan(father of green revolution) vehemently disgrees with this point. He says that once government starts buying from the farmer, the agricultural output is bound to go up.

Another argument that the Economic advisory counsil makes is that  goverment buying of grains at a higher price from farmers will distort the market price thereby leading to chaos. There also seems to be disgreement on how much this whole exercise is going to cost government. The NAC pegs the subsidy figure at 70,000 crore,where as the Economic advisory counsil puts the figure at around 92,000 crores.

In the end it would be fair to conclude that there is no disagreement over the fact that we should go ahead and implement the bill. Only disagreement seems to be on the implementation front.  The government must start implementing the bill in stages. As the scene unfolds, it will get a clearer picture. But no time should be wasted as the food security bill is an important step towards inclusive growth.

what to expect of the budget?.

Come Feb 28th,all eyes will be on Pranab da(or so he is called.. :-)) and his union budget. It is the most significant event for India and its economy for it states out the directions for our country for the next 1 year.

So what do we expect from it?. Ofcourse different people have different expectations. Upper middle class people like me would want the tax slabs to be raised. Industrialists like Ambani would want some export relaxations. But what about the common man?. His most important worry will be inflation and this is going to be single most important aspect for the finance minister.

We have achieved 8.6 percent GDP growth(whether this is really an end in itself or whether this should be viewed as merely a means for improving the quality of life of poor ..is well, another hot topic) and our economic advisory counsil headed by ex-RBI governer C.Rangarajan predicts 9% growth(pre-recession growth) for the next fiscal. So we are doing well in the growth front.

But there are two major worries for the government - inflation and fiscal deficit. First let us look at the steps which the government can do to control the deficit. To control the latter, the government is expected to do some fiscal tightening. rolling back some of the export cuts  (now that the economy is bouncing back) can be one step. Government can achieve huge savings in expenditure if it focuses on the  subsidies(kerosene,food) reaching the right person. This will mean the government can afford to cut down on some of the amount which it sets aside for subsidies.Implementation of UID will help in a big way.

To control inflation, it should look at improving agricultural productivity, have better marketing infrastructure for the farmers, eliminate the middle men involved( easier said than done), improve storage capacities etc. Our Prime minister has himself  recently said that we cannot under estimate the importance of adopting good marketing techniques in agriculture.This is echoed by many economists. We might be wondering what is wrong with high inflation. what is the big deal about it, monetary tightening is bad for us?. But the problem with india's inflation has high degree of inertia and it will be difficult for government to step in later, if it is not controlled now. This is also the view echoed by the economists at IMF. So let us be prepared for some tighter measures now.

Ofcourse, everyone expects Pranab da to present a populists budgets , or that is what we want. But i feel it will be more on a boring side this time. One one side he has to control inflation and deficit , on the other side he cannot compromise on the economy's growth. Now ,it all depends on how he wields his magic wand  - let us wait till 28th to see how!. :-)

Corporate Social Responsibility

There is an ongoing debate on whether CSR (Corporate Social Responsibility) be made compulsory for companies, considering the fact that  the government is planning to introduce it in Companies bill,2009 which will be presented in the parliament during the budget session coming up. The government, the ministry of corporate affairs, the companies are all part of this discussion.

First let us look at what is CSR?. CSR act mandates that companies having net worth of more than Rs 500 crores or having turn over more than Rs 1000 per year or those have net profit above Rs 5 crore per year should invest 2% of their net profit for social activities.

There was a possibility that this act would get diluted because the companies want the "mandatory" part of the bill to be removed.

Few companies such as ITC, Dabur etc have already taken up this responsibility and embraced. The ITC's echaupal scheme is an excellent example.

There are several ambiguities in the bill, - one of them being that it does not state where exactly the companies should spend this amount.  It will be best for the companies if they spend on social activities related  to their day-to-day activities. For e.g Dabur is spending on sustainable cultivation for herbal products.

While the companies become aware of this, and take up more of such activities volunterily, they should not be coerced to do so, even though Minister for corporate affairs, Murali Deora, spoke about make it compulsory recently. It may have to do with the typical indian mentality of not doing something good unless it is being compulsory.

Whom to blame for fall in FDI Investments?.

Read a hugely relevant article on how conditions in India are becoming increasingly unfavourable for FDIs.Thanks to Abheek Barman for his editorial in Economic times today.

Of late, there has been a lot of hue and cry over why the FDI investments in India are decreasing. FDIs are considered safest when it comes to financing of India's current account deficit. Because of this importance, RBI is planning to setup a pannel to study why the FDI flows are decreasing. The interesting thing is - They will not have to look far to find the reasons. - just need to look at Shastri bhavan in New delhi where most of the oil ministry offices are located!!.

To provide some background info, the FDI in india has been steadily decreasing. It was $40 billion in 2008, $35 billion in 2009, and a paltry $14 billion so far in the first 8 months of 2010 fiscal. There is certainly something going wrong?. The truth is that the confidence of foreign investors in India is decreasing.

You dont have to look beyond the deadlock in Cairn - Vedanta deal  to see why this confidence has been on downside. The issue is that ONGC is blocking the deal because it says it has been paying full royalities to the government although it owns only 30% of the oil blocks in Rajastan(which forms 95% of the valuation of the Cairn India). Cairn India owns the remaining 70%.

Even i thought there is some merit in this argument. But not any more,after reading the editorial. The truth is that Cairn came to india and explored the Rajastan fields in 1990s after India promised they will not have to pay certain taxes. So cairn took all the risk initially. Later on , ONGC stepped in and acquired 30%. If you consider this fact, is Cairn India obliged to pay the royalty?.

By making life difficult for Cairn india to sell its stake to Vedanta, India is not doing any good to its reputation as a good FDI destination. The government should step in and make it happen. Its really saddening to see Bill Gammel, the CEO of a foreign company, running around the doors of the ministers seeking their approval for the sale of their own stake.

Its going to get interesting

Just read the eco times article which quotes Nokia CEO Stephen Elop saying that they will rush to get the first "windokia" phone to market. Remember "time-to-market" is a very important factor in the mobile phone industry. Experts say that it is going to take atleast 6 months before the first phone from this "joint-venture" comes out. This may turn out to be a crucial period. Will they be in a position to challenge the android & iphone supremacy?.


Meanwhile a very interesting chart -
(check Apple's market share in the 1st chart & its profit margin in the 2nd :-)) .

http://www.economist.com/blogs/newsbook/2011/02/mobile_handset-makers

Causes for inflation

Yesterday i read an informative article in businessworld, which was exploring the reasons behind the soaring inflation rates.

On the demand side, it states the inability of the government to foresee the increase in spending power of rural population because of programmes such as MNREGA as one of the reasons. People have more money so the consumption went up.
More prosperity also meant that farmers who were earlier selling milk now use it for their own consumption.

But It is on the supply side, that we have a lot of problems.

1) First and foremost our agricultural production is not efficient. This is evident from the fact that about 60% of population work in agriculture sector, but this sector only provides about 16% of the GDP.The govt has done little to increase productivity in this sector.
 2) PDS - (public distribution system) in India is probably the worst in east asia.The distribution network is not so strong and we do not have good storage facilities also. The middle man steals food grains which are supposed to be sold on subsidy.
To solve this problem, a committe headed by Montek singh aluvalia has suggested introduction of smart cards for people, who can then use to buy food grains at a subsidy.The goods will be transported at market prices(and not on subsidized prices) ,so this will take away the incentive for middle men to steal.

3) Unseasonal rains.
 - But how unseasonal rains in one area affected the whole country?.-

4) AFMC - some rule which states that farmers can only sell through mandis and not to retailers.(retailers can only get 1 year licences , which are to be renewed every year). Nitish kumar of bihar has abolished this and more chief ministers should follow.

To follow up , i read another article by paul krugman today morning on Hindu which mentioned global warming was one of the reason for unseasonal climactic changes which is one of the reasons for rising food costs. The future does not look very glossy!..

inflation and corruption.

I read in economic times today that the finance minister is planning to increase the tax slab in his union budget to compensate for the inflation or rather to compensate for the steps taken by the government to contain inflation.

Isnt this a contradiction?. What effect will RBI's rate hike have if tax slabs are raised?.
RBI again raises the repo rates and this vicious cycle goes on and on?.

I also read today that (and also in the DAMAS economic forum review) that inflation and corruption are the biggest problems that the indian economy is facing today.

To tame the problem of corruption, why does nt the government agree to the Lokpal bill ,which gives powers to an independent body to prosecute and punish the corrupt, without interferences from government? . I feel this is one of those policy that does not have a flip side to it. (except to the politicians ofcourse..:-)  ).