Is India Open For Business?

WTO logoThe Sixth Review of the Trade Policies and Practices of India offered an excellent opportunity to learn about the development of the trade, economic, and investment policies of India since its previous WTO Review in 2011, and its overall readiness for business.

WTO members commended India’s accelerating economic growth during the review period, particularly in the services sector, and the milder inflation in recent years.   However, members also recognized India’s need and willingness to overcome its structural bottlenecks, including fiscal deficit, shortfalls in infrastructure such as education, health care, transportation, and power supply, delays in project approval, difficulties in land acquisition, low manufacturing base and agricultural productivity, and cumbersome labor market regulations. In this respect, WTO urged India to pursue further tax reforms, which may increase government revenues, as well as to increase investment in infrastructure.

In terms of trade policy challenges, India’s share of world trade continues to be small, with only a slight increase from 1.3 percent in 2009 to 1.7 percent of global merchandise exports in 2013.  Further, given uncertainties in the international economic environment in general and within India’s major trading partners in particular, the country may experience future challenges in its trade sector. Moreover, domestic factors like weak infrastructure, rising wages and scarcity of skilled labor in the case of services are inhibiting growth of trade and related activities (WTO, 2015)

Finally, the rising incidence of non-tariff barriers, in the form of sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT), remain a major trade concern.  While tariffs have been going down globally (also as a concomitant to rising number of FTAs), the use of technical regulations/mandatory standards as barriers has grown, along with the growth of a variety of conformity assessment procedures.  The resultant increased transaction costs arising from complying with such regulatory requirements adds to the costs of India’s exports and erodes price competitiveness (WTO, 2015).

Women, Poverty and Economics

Macro-economic policies such as trade agreements, national development plans and poverty reduction strategies need to reflect the differences between men and women.  This includes policies that advance land and inheritance rights for women and legal protections for migrant and domestic workers in origin and destination countries to reduce the potential for exploitation and abuse.

I am (wo)man is a digital media campaign calling on women and men from all over the world to share, through a photo and personal story, what women’s economic empowerment means to them.   The purpose of I am (wo)man is to spread awareness of and encourage action for women’s economic empowerment through digital and social media.

economic_empowerment“When the land is in my husband’s name, I’m only a worker.   When it is in my name, I have some position in society and my children and my husband respect me so my responsibility is much greater to my own land and I take care of my fields like my children” – A farming woman in Maharashtra

Why Modi Matters

Time Magazine Cover Why Modi MattersIn his first year as Prime Minister, Narendra Modi has seized the global spotlight with global media coverage.  Two authoritative weekly newspaper articles published in the past week, Time Magazine and The Economist respectively, offer two important reasons why the world needs both India and the prime minister to step up as a confident global power.

Economic Reforms (Fast and Far)  

First, the outlook for the Indian economy has improved over the past year, though that’s not entirely due to Modi’s efforts.  Modi’s “pro-business orientation” is unlike its predecessor.  The government has taken steps to further liberalize India’s economy by, for example, opening up key sectors of the country’s economy and pushing through long standing proposals to increase foreign direct investment.  On whether economic reforms have gone far and fast enough, Modi told TIME editor Nancy Gibbs, “This time last year, nothing seemed to be happening in the government.  There seemed to be a complete policy paralysis. …There was no leadership.  My government’s coming to power should be viewed in the contexts of the developments of the 10 years of the last government vs. 10 months of my government (Time, May 18, 2015).”

Modi’s Pledges 

Modi's Many Tasks The Economist Special Report May 23 2015Second, Modi is a superb taskmaster.  The Economists has compiled a list of 30-odd official pledges announced in the past year to outline the government’s ambitions (see left).   Around half the tasks are means to be completed by the next election, 2019.   The article(s) were published in Time magazine, May 18, 2015; The Economists May 23-29, 2015 (US Edition).

 

 

 

Emerging Markets Need to Prepare in Advance to Deal with Uncertainty

Managing Director of the International Monetary Fund Christine Lagarde speaks as Governor of Reserve Bank of India Raghuram Rajan looks on during an event at the RBI headquarters in Mumbai March 17 2015.Unconventional monetary policies, which include large purchases of government debt, has been used to provide policy accommodation in advanced economies since the 2007 global financial crisis.  However, these policies have had both positive and negative spillovers.

During a recent visit to India, International Monetary Fund (IMF) Chief Christine Lagarde, cautioned that “the unconventional monetary policies have had strong positive spillovers for the global economy, and by implication for India and other emerging markets.”  However, “it is also true that these policies led to a build-up of risks.” 

Between 2009 and the end of 2012, emerging markets received about US$ 4½ trillion of gross capital inflows, representing roughly one half of global capital flows.  Such inflows were concentrated in a group of large countries, including India, which received about US$ 470 billion (IMF, 2015).  As a consequence, bond and equity prices rallied, currencies strengthened, and spillovers to asset prices and capital flows were even greater than from earlier conventional policies (IMF, 2015).  “The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility,” she told Raghuram Rajan, Governor of Reserve Bank of India (RBI) and audience at the headquarters in Mumbai, March 17.

I agree the next move for emerging markets is to prepare in advance to deal with this uncertainty.  The reality is that as economic conditions improve in at least some advanced economies, portfolio rebalancing out of emerging market economies can be expected, and some volatility cannot be ruled out.  Remember the surprise indiscriminate capital outflows from India mid-2013?  With all eyes on US Federal Reserve change in posture, the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets.

Photo source: voanews.com

The Superior Financial Powers of Modi’s Fiscal Roadmap

One of the key features of the Modi administration’s fiscal roadmap is the move to increase disinvestments to include both disinvestments in loss making units, and some broader strategic disinvestments.  The government plans to raise 695 billion rupees ($11.2 billion) in the year starting April 1, an amount crucial to its efforts to narrow the budget deficit.

The sale target includes stakes in central public sector enterprises, holdings in non-government companies, strategic disinvestment and Specified Undertaking of the Unit Trust of India (SUUTI).  In an interview with Bloomberg News (March 3), Disinvestment Secretary Aradhana Johri  reported India’s divestment receipts in the current year ending March 2015 was at 254 billion rupees.  The government is looking to raise 285 billion rupees through sale of its holdings in SUUTI, Bharat Aluminium Co and Hindustan Zinc Ltd.

The scaling up of disinvestments is ambitious, and highlights an important characteristic of Indian federalism: Central government possesses superior financial powers.

Part of the revenue levied at the Central government is of course redistributed among states, on the basis of advice of the organizationally independent Finance Commission or through the National Institution for Transforming India (NITI Aayog), and constitutes a significant source of income for them.  However, the impression that is thus created is one of profligate states, and a more careful and sophisticated Central financial management (Mitra/Pehl, 2012).

Since the liberalization of economic policies and the decentralization of policymaking to states from the early 1990s onwards (and even before then), states have been able to exercise some autonomy in regulating their own development trajectory (Mitra/Pehl, 2012).  However, the picture today is one of differentiation among India’s states in terms of their fiscal capabilities as well as their developmental potential, and a need for reform of inter-state mechanisms of coordination and equalization (an issue NITI Aayog promises to address).

The government is firm on achieving a fiscal deficit target of 3% in 3 years.  The fiscal deficit targets are 3.9%, 3.5%  and 3.0% in FY 2015-16, 2016-17, and 2017-2018  respectively.  But that journey has to take account of the need to increase public investment.

Budget Proposes Game-Changing and Revenue Significant Reforms

There are several specific proposals in the Budget 2015-16 to recalibrate India’s tax effort so that fiscal consolidation may be achieved in the short and medium term.  The game-changing and revenue significant proposals include:  Goods and Service Tax (GST) and Jan Dhan, Aadhar and Mobile (JAM) – to implement direct benefit transfer.   “GST will put in place a state-of-the-art indirect tax system by April 1, 2016.  The JAM Trinity will allow us to transfer benefits in a leakage-proof, well-targeted and cashless manner,” said Finance Minister Arun Jaitley during the budget speech on February 28.

In preparation for the introduction of the GST, the Government has been taking consistent policy steps to expand the scope and reach of service tax.  The shift is monumental in terms of changes in the mode of implementation and will undoubtedly require a transition phase.

Economics for the Common Man

AAP chief and its chief ministerial candidate for Delhi Kejriwal waves to his supporters in New DelhiAam Aadmi (AAP), or Common Man Party ran a  simple but formidable campaign, beating back the Bharatiya Janata Party (BJP) ambitions to gain political capital in a Delhi state election.    The message was simple, “Never underestimate the power of the common man.”

Economics for the Common Man  

Aam Aadmi Party Common Man Political Cartoon published on AAP website 10 February 2015

The rise of the AAP’s Arvind Kejriwal, Delhi’s new Chief Minister and former tax inspector provide important insights into the nature of politics at the grassroots level in India.  On the one hand, ‘pro-poor polices and clean government’ is the narrative for the ‘common man.’  Politicians functioning as intermediaries with the state acquire influence and amass political capital (Krishna, 2012).  On the other hand, a great deal of hard work is required to mobilize non-caste based political entrepreneurs who can deliver economic benefits and provide avenues for greater political participation (Krishna, 2012).  From this vantage point, it is imperative that the ruling party remain focused on redistributing wealth from the more advantaged to the less advantaged.

The Challenge for Economic Reforms 

In October 1929 Sir Basil Blackett characterized political unrest in India as an economic phenomenon of the middle class, the “outcome of discontent and maladjustment” (Foreign Affairs, October 1929).   Today, the challenge for economic reforms in India is inclusive growth.  Social unrest and protests similarly runs deep in resource-rich areas of central and eastern India, where rapid economic growth has been accompanied by rapidly growing inequality (HRW, World Report: 2012).

Prime Minister Narendra Modi swept to power with the biggest national election victory in three decades, promising to revitalize India’s economy, fix governance and push through reform legislation by executive decree.  However, economics for the common man is systematic.  The strategies and processes that create, break down, and recreate social coalitions in the party system require calculated tactical alliances (Swamy, 2012).   Institutions in the economic system must distribute rights and realize solutions.  When these transaction are taken into account, it turns out that the existence of firms, the structure of the financial system and even fundamental features of the legal system can be given a relatively simple explanation (see Coase, 1960).

BRICS to Discuss Creating it’s Own Rating Agency

BRICSBRICS experts will meet in March to discuss the idea of establishing an independent credit rating agency announced Brazilian Ambassador to Russia Jose Vallim Antonio Guerreiro.  The agency would become an alternative to the ‘big three’ firms: Standard and Poor’s (S&P), Moody’s, and Fitch Group.

The BRIC [Brazil, Russia, India and China] idea was first conceived in 2001 by Goldman Sachs as part of an economic modeling exercise to forecast global economic trends over the next half century; the acronym BRIC was first used in 2001 by Goldman Sachs in their Global Economics Paper No. 66, “The World Needs Better Economic BRICs”.

Today, their collective contribution (which includes South Africa) to global economic growth over the last decade has reached 50%, which makes this group of states the leading power in global economic development.   In addition, BRICS accounted for approximately 11% of global annual foreign direct investment (FDI) flows in 2012 (US$465 billion); and 17% of world trade with combined foreign reserves estimated at US$4 trillion.

“We may need to look for alternative indicators and broad approaches to assess the ‘health’ of economies,” said Ambassador Guerreiro. “I do not believe that the new agency will be something to resist the existing institutions.  They do their job, and certainly, there is a demand for their services.  But it is possible that the BRICS countries will elaborate a different approach”  (Office Group, SCO BRICS, Ufa 2015).

The challenge of course, is how the procedures of existing rating agencies can be applied more fairly to all economies.  The credit rating firm Standard & Poor’s will pay $1.5 billion to resolve a collection of lawsuits over its ratings on mortgage securities that soured in the run-up to the 2008 financial crisis, concluding one of the U.S. government’s most ambitious cases tied to the housing collapse.  The settlement comes after more than two years of litigation as S&P tried to beat back allegations that it issued overly positive ratings in order to win more business (Reuters, 2015).

Incentivizing Trade and Investment

The U.S.-India Business Council (USIBC) hosted President Barack Obama and Prime Minister Narendra Modi for a first-ever joint address to the U.S. and Indian business communities on Monday, January 26 in New Delhi along with the Government of India’s Department of Industrial Policy & Promotion (DIPP), the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce & Industry (FICCI).

Is Bioenergy a Bad Idea?

WRI14_WorkingPaper_4c_WRRIX_012815.pdf_A new study published by the World Resource Institute (WRI) has sparked new debates about bioenergy.  The Report titled, “Avoiding Bioenergy Competition for Food Crops and Land,” show that any dedicated use of land or growing bioenergy inherently comes at the cost of not using that land for growing food or animal feed, or for storing carbon.  Particularly concerning, experts say “Bioenergy, energy derived from any fuel that comes from biomass, is an inefficient use of land to generate energy,” (Searchinger and Heimlich, 2015).  Here’s the problem: India’s growth is driving just this type of energy consumption.

India’s Economy is Expected to Grow

According to the World Bank, India’s economy is expected to grow by about 5.6 percent in Indian fiscal year (IFY) 2014/15 (April-March), an increase over the sub-five percent levels in the previous year.  This would be the strongest among major developing economies between 2013 and 2016.  Importantly, India’s growth, which drives energy consumption across all major sectors, would make India the fourth largest energy consumer, following the United States, China, and Russia (GAIN Report, 2014).

India’s Biofuel Policy 

The Government of India (GOI) approved India’s National Biofuel Policy in 2009.   The policy encourages use of renewable fuel as an alternative to petroleum and proposes to supplement India’s fuel supply with a 20 percent biofuel (i.e. bioethanol and biodiesel) mandate by end of 12th Five-Year Plan (2017).

The salient features of the policy, include: strengthening India’s energy security; farming degraded soils or wastelands not otherwise suited to agriculture; providing financial incentives for feed stocks, conversion processes, production units and innovation; advancing biofuels technologies in the marketplace; and, meeting the energy needs of India’s vast rural population by stimulating rural development and creating employment opportunities and addressing global concerns about containment of carbon emissions through use of environment friendly biofuels (GAIN Report, 2014).

Implications for Domestic Energy Base

Man hauling Sugar Cane in Chandigarh Punjab. Photo taken by Sophia N. Johnson 9 October 2008

First, biofuels are an alternative energy option due to the availability of feedstock crops. Since the sugar industry is one of India’s largest industries, sugar cane and its processing byproduct are widely available for bioethanol production (Chand, Kumar et. al., 2008).

Second, while India’s domestic energy base is substantial, India continues to import significant amounts of energy resources.  In IFY 2006/07, imports of fossil fuels grew at a rate of seven percent, which outpaced consumption growth by three percent.  However, in last three fiscal years, higher petroleum prices led to demand contraction (GAIN Report, 2014).  Currently, coal and oil constitute 66 percent of India’s total primary energy consumption basket.  Natural gas maintains a seven-percent share of the basket, and renewables such as wind, geothermal, solar, hydroelectricity, and waste account for 25 percent of India’s total energy.  Nuclear accounts for a one-percent share.

Third, the biofuel industry could have significant impacts on the health, education, and productivity of the rural poor population in India.  Some anticipate that the biofuel industry will create new jobs for the poorest communities in India because biofuel production requires mostly unskilled labor, which is widely available in rural areas (Chand, Kumar et. al., 2008).

Finally, the poor are unlikely to reap any benefits or additional income from the biofuels industry.  Biofuel production has the potential to cause harm to the rural and urban poor.  The Indian government cited that there were over 30 million hectares of wasteland available for jatropha production around the nation.  The question seems to be, whether biofuels widen or narrow the inequality gap?

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