Covering developments on policy responses, policy implementation and policy distortions on a quarterly basis. PolicyWatch Comments are welcome.

Volume 6, No. 1 2005 Petroleum Subsidies: Is There a Real Burden?

he Government has raised the prices of petrol mid-70s to provide financial assistance to state-owned Tand diesel, while kerosene and liquefied petroleum gas companies. Over the past three decades, the Government (LPG) have been spared. No prizes for guessing the reason: has collected about Rs 50,000 crore as cess, and almost all of pressure from the Left. it has gone into the consolidated fund of India. The domestic prices of petrol and diesel have been The cess was doubled in March 2002, on the grounds frozen since November 2004, despite international crude of providing subsidies on LPG and kerosene (the cess was, oil prices crossing the US$55/barrel mark on several however, never intended to cover subsidies). occasions. The oil companies have been clamouring for Unfortunately, the cess has now become an arrangement an equitable sharing of the burden, citing their shrinking to meet the petroleum subsidy burden. Comparing the bottom lines. The Petroleum Minister, Mani Shankar Aiyar, amount of petroleum subsidy and the cess amount has also suggested that all the stakeholders Standard Business collected, it is found that there – oil companies, consumers and the is no net burden of petroleum Government – would have to share the subsidy on the Government. burden. Hence the hike is to pass on a part In fact, the Government is of the burden to consumers. collecting much more than it The Government’s share of the burden claims to be spending. is estimated at Rs 3,553 crore in 2004-05, Even the oil companies are which comprises subsidies on domestic reaping profits from the LPG and public distribution system (PDS) current pricing system. The import parity pricing kerosene. The oil industry’s share is estimated system allows oil companies to factor in customs duty at Rs 20,310 crore, on account of the under- to arrive at the import parity prices. Since the country recoveries on petrol, diesel, LPG and kerosene. does not import petrol or diesel, the amount collected The total burden shared by these two stakeholders is as notional customs duty from the public, estimated at Rs about Rs 24,000 crore. Considering this figure as the 10,000 crore, goes to bolster the finances of oil companies! benchmark, a part is going to be transferred to the There is absolutely no transparency in the pricing of consumers. But, is this the real extent of the burden? petroleum products. The Government and the public- The method currently employed for calculating sector companies are minting money from distortionary subsides on domestic LPG and PDS kerosene is import practices. Claims of a huge subsidy burden and bleeding parity pricing of petroleum products and not unrecovered oil companies are exaggerated; most of the burden is costs, which is the appropriate method. The subsidy actually borne by the consumers. amount is itself based on flawed methodology. According to a discussion paper of the Oil Ministry, While the burden of the subsidy is itself inflated, the public sector units (PSUs) make high profits due to Government mops up a large amount from the oil sector, in monopolistic practices. A significant step towards the form of indirect taxes, most of which is passed on to introducing competition was the de-canalisation of kerosene the public in the form of higher costs. Compared with other and LPG and allowing private parties to import, as well as Asian economies, India’s levy on oil is very high. The market, these products at market-determined prices. total tax revenues from the oil sector stood at Rs 1,10,000 However, since only state-owned oil companies are crore in 2003-04. permitted to market subsidised petroleum products, the non- Additionally, the Government imposes a ‘cess’ on targeted subsidies offered to PSU oil companies, in terms of indigenously produced crude oil and collects about Rs 6,000 concessional pricing, distorts the market and restricts the crore annually from the public. The cess was introduced in ability of private retailers to compete effectively.

“The reformer has enemies in all those Massive Investment ...... 3 Integrated Food Law ...... 9 Survey Speak ...... 16 who profit by the old order and only Calling Off Sales-calls! ...... 4 Failures Abound ...... 11 Exposing the Sclerosis ...... 19 lukewarm defenders in all those who Board for Road Safety ...... 5 Elevating FDI Inflow ...... 12 Union Budget 2005: ...... 20 would profit by the new.” Biotech Policy ...... 8 Reign of Elephant & Dragon 15 Back to the Basics! ...... 21 Machiavelli, in The Prince HIGHLIGHTS

Published by Consumer Unity & Trust Society (CUTS), D-217, Bhaskar Marg, Bani Park, Jaipur 302 016, India Phone: 91.141.228 2821, Fax: 91.141.228 2485 Email: [email protected], Website: www.cuts-international.org Printed by: Jaipur Printers P. Ltd., M.I. Road, Jaipur 302 001, India. Annual Subscription Rs. 150 p.a./US$30 C O V E R S T O R Y Furthermore, the LPG Control Order has specified that foster competition and ensure transparency in the the cylinders, regulators and valves to be used by the parallel determination of the prices of petroleum products. marketeers have to be distinct from those used by the public These measures will ensure that the prices of sector oil companies. This requirement reduces the freedom petroleum products are determined by market forces of LPG end-users to switch from one supplier to the other, without any distortions. They will also help in thus restricting competition. determining the real extent of the subsidy burden, which One of the most significant threats to sustained economic is expected to be much lower. growth of the country is the global oil scenario. This requires The subsidy on LPG can be removed. Presently, the an effective conservation strategy, which can be made subsidy largely benefits the high-income groups in urban feasible, if the prices of petroleum products are determined areas. Moreover, the above measures will ensure that transparently and allowed to reflect their true economic cost. the additional burden on consumers would be much In view of this, Government’s intervention in the sector needs lower. to be rationalised, to facilitate the market process, with A cautious approach is required in the provision of subsidies targeted sharply at the poor. The petroleum sector kerosene subsidies, since about a half of the rural requires a comprehensive competition framework, rather than households use kerosene primarily to light their homes. stringent regulation. For better targeting, coupons should be issued to the The prevailing tax structure should be overhauled. The truly needy, with entitlement to purchase kerosene from import-parity-pricing regime should be dismantled and the a retailer at a subsidised price. This would discourage oil companies should be allowed to charge market-determined diversion of subsidised kerosene to other sectors. The prices. A price stabilisation fund should be created to check list of beneficiaries could be made public and the local high volatility in international crude prices. The Petroleum level agencies should be involved in the monitoring of and Natural Gas Regulatory Board should be established to the kerosene distribution system.

T H E M E : P E T R O L E U M S U B S I D I E S A N D P R I C E S Taxes Inflating Prices “There is no justification in levying the cess, if the amount s much as 50 percent of the petrol generated from it is not being utilised Aretail price is pocketed by the

The Hindu Business Line Business Hindu The for the development of the oil sector,” Government, as taxes. The story is not the Committee observed while very different for diesel either. The total recommending the creation of the tax component ranges anywhere between fund. (ET, 25.08.04) 11.05 percent in Delhi to a hefty 40.28 percent in Mumbai. TAX Domino Effect? This sector is the golden goose for The Government announced a the exchequer. Compared with other hike in the prices of petroleum Asian economies, India’s levies on oil products, citing high international tend to be high. The total revenues from crude prices as the main reason. But, the oil sector – at Rs 1,10,000 crore in the decision is bound to make energy the fiscal 2003-04 – can meet almost 88 percent of the total debt servicing still scarcer for the national economy. and interest burden of the country. No wonder, the Finance Minister is The hike is bound to lead to a chain reluctant to reduce duty rates. reaction of higher fuel costs, higher The Petroleum Minister has impressed upon the States the need to reduce freight and passenger tariffs and higher sales tax on petroleum products, which is as high as 65 percent in production costs of basic materials and Maharashtra. He wants the States to share the burden of the spiralling crude consumer goods, according to J Mehra, prices in the international market. (ET, 11.08.04) Director, Essar Group. He questions the Skewed Pricing petroleum products. Multiple taxes in mechanisms that the Government has The prices of petrol and diesel in India have ensured that the selling been adopting to raise the prices of India are the highest in the South price of petrol is more than double its petroleum products. Asian Association of Regional original price. (FE, 02.12.04) While the Government has cited Cooperation (SAARC) member high OPEC (Oil Producing and countries. If high petrol and diesel Utilise the Cess Exporting Countries) crude prices to prices are a rip-off on Indian The Parliamentary Standing justify the price hike, it nowhere takes consumers, then the highly Committee on Petroleum and Natural the crude prices into account when subsidised kerosene and cooking Gas has directed the Government to fixing the prices of petroleum products. gas more than make up for it. The create a price stabilisation fund from Instead, self-evolved ‘import parity prices of kerosene and cooking gas the cess levied on crude oil. This formula’ is used, which puts the basic in India are among the lowest. should be utilised to absorb prices of petrol, diesel, LPG, etc., at The SAARC countries, other than fluctuations in the international price par with the existing world spot prices. India, seem to have moved towards a of crude oil. The annual average of such (FE, 03.07.04) market-determined pricing policy for cess comes to about Rs 5,000 crore.

2 u PolicyWatch POWER

I N F R A S T R U C T U R E

Out with Subsidies! The existing scheme of Massive Investment Sought A definite timeline to accelerated electrification of one lakh progressively eliminate cross- villages and one crore households will he Government has projected subsidies in electricity tariffs for be replaced by the new scheme. The Tan investment requirement of domestic consumers living above the minimum needs programme for rural Rs 9,00,000 crore by 2012 to poverty line is likely to be announced electrification will be merged with the finance generation, transmission, soon. The relevant guidelines will be new scheme. This was announced distribution and rural laid down in the upcoming tariff after a meeting of the Cabinet electrification projects. policy, which will be placed before the Committee on Economic Affairs. The Union Cabinet soon, said the Union scheme will provide a 100 percent Power Minister, P M Sayeed. subsidy for single point connection

“The tariff policy will lay down the to BPL households. (FE, 18.02.05) Standard Business macro-level ground rules on electricity tariff fixation which every State Power Sector Bidding Electricity Regulatory Commission In a bid to move away from the (SERC) will have to follow. The move cost-plus approach of determining is aimed at ensuring uniformity and tariffs, the Ministry of Power has constancy of approach in tariff setting issued guidelines for competitive across the SERCs,” added R V Shahi, bidding for tariff determination of The draft National Electricity the Union Power Secretary. power procured by distribution Plan (NEP), prepared by the CEA, (ET, 14.02.05) companies. The guidelines have been has set the target of capacity finalised after consultation with the addition at a record 60,769 MW Less Funds for Reform Central Electricity Authority (CEA), for the 11th plan, which is higher In view of the low off take for the Central Electricity Regulatory than the 10th Plan target of 41,110 Accelerated Power Development and Commission (CERC) and other MW. Reforms Programme (APDRP), the stakeholders. “The 60,769 MW target is set Government has decided to reduce the Competitive procurement of for the 11th Plan in order to allocation for 2005-06 to Rs 2,100 crore. electricity by distribution licensees is accomplish the Central This will be 40 percent less than the expected to reduce the overall cost of Government’s objective of allocations made during the fiscal year procurement of power and, thereby, providing power to all by year 2004-05. lower costs for consumers. 2012. The recently announced “In the period up to January 2005, “The guidelines aim at moving national electricity policy has there has been no allocation under the away from cost-plus approach for already provided clear guidelines investment component of the determining tariff and is expected to and the proposed plan will give programme, while Rs 80 crore have further encourage private sector the manner in which capacity will been allocated under the incentive investments,” said Power Secretary, be added,” said H L Bajaj, the component,” said an official. R V Shahi. (ET, 21.01.05 & BL, 04.02.05) CEA Chairman. (BL & FE, 04.02.05) Under the investment component, additional Central Free Power Fine-tuned Electricity Policy Approved assistance of 50 percent of the The Andhra Pradesh Chief The Union Cabinet has approved project cost is provided for Minister, Y S Rajasekhar Reddy, has the National Electricity Policy. The strengthening and upgrading of the decided to make ‘minimal changes’ in policy aims at facilitating open access, sub-transmission and distribution free power policy. making electricity available to all networks. The release of funds is “We are not flouting our poll households over the next five years linked to measurable targets. The promise. But, to strengthen the and meeting the demand for power by incentive component includes 50 distribution system, marginal changes 2012. “The policy, under the Electricity percent of the actual cash loss have been made to the policy,” said Act 2003 will serve as a guideline for reduction by the state electricity Reddy. From April 1, 2005, about four power regulators at the Centre and board or utilities provided as grant. lakh farmers (mainly big and corporate States,” said the Finance Minister, P (BS, 23.02.05) farmers) have to pay between Rs 0.20 Chidambaram. and Rs 2 per unit, based on their The policy will enable companies Free Single Point Connection status. to obtain a licence in a power The Government has approved “We are still going to offer free distribution zone with an existing the new ‘rural electricity infrastructure power to about 90 percent of the player, i.e., the state electricity and household electrification’ scheme deserving farmers. The exercise will board (SEB). The policy has set out providing free single point connection not have direct benefit for the the minimum licensing area as a to households below poverty line. government or the Andhra Pradesh revenue district, to ensure that the This will provide a decentralised Transmission Company, but new entrant does not walk away with power distribution and supply strengthens the distribution system,” the best consumers alone. system. Reddy pointed out. (FE, 26.01.05) (BS & FE, 03.02.05)

3 u PolicyWatch I N F R A S T R U C T U R E TELECOM TRAI’s Common Charter Calling Off Sales-calls! The Telecom Regulatory Authority of India (TRAI) has he Supreme Court has issued notices to top mobile released a common charter of Tfirms and private banks on a public interest petition alleging that they telecommunication services for were providing phone numbers of citizens to adoption by all the service providers. commercial groups for promotion of sales. The Though not mandatory, this Charter Court observed that this practice not only is an attempt by the TRAI to promote violated the fundamental right to privacy but a code of conduct in the industry. also the Telegraph Rules and international Under the Charter, a basic norms. The Court has asked the Government telephone connection should be as well to curb mobile phone ‘spam’. provided within seven days, while a A petition was moved to the apex CFourt mobile connection should be provided accusing Mahanagar Telephone Nigam Ltd immediately on registration, subject to (MTNL), Reliance, Hutch and HSBC Banks of Standard Business technical feasibility and compliance of invading the privacy of citizens by making all required formalities. It also unsolicited calls offering products and provides the citizens the right to have services. The petitioner wanted the Court a free choice in selecting their service to direct the Government to frame a scheme providers, besides being informed or pass regulations to protect the privacy regarding the broad range of services, of subscribers. (FT, 12.02.05 & BS, 08.02.05) individual plans, tariff rates applicable to each of these plans, their validity and the terms and conditions of April 1, 2002 (when the monopoly was telecom operators across 20 states to payment by the service provider. taken away), till the actual date of bid for the largest project envisaged (FE & BS, 25.02.05) payment/realisation. This is arguably under the USO scheme. one of the biggest compensation “We have worked out a per-line Hike in FDI Cap cases the Government has been taken cost of Rs 17,000 which may be brought The much-awaited Cabinet to court for. (BL, 30.01.05) down if there is competitive bidding. decision to allow up to 74 percent The operator can use any technology foreign direct investment (FDI) in Bandwidth Prices Slashed for offering fixed telephone services the telecom sector is expected to The TRAI has slashed the in these villages,” said Shyamal Ghosh, drive a second round of international bandwidth prices by 35- Administrator, USO Fund, Department consolidation. It is likely to facilitate 70 percent, a move expected to lower of Telecommunications. the entry of multinational tariffs for International Long Distance On the other hand, the Bharat companies and enable domestic (ILD) calls, internet access and Sanchar Nigam Ltd (BSNL) is planning companies to raise funds necessary Broadband services. Besides retail to set up 1,00,000 information kiosks to increase the total telecom customers, IT and IT-enabled service covering 48 percent of the rural subscriber base from 90 million now companies would benefit population by the year 2007, in order to 250 million by 2007. significantly from the move. The to provide broadband and connectivity The Government, however, added operators would be free to offer tariffs in these areas. several riders to address the Left that are lower than the ceiling tariff (BL, 04.01.05 & BS, 16.03.05) parties’ security concerns, such as fixed by the regulator. mandating 50 percent of the board “The ILD tariffs will surely Market Upbeat on Prospects comprising of resident Indians. The drop...It is, however, too early to India’s tele-density is expected to Left parties have, nonetheless, comment on the magnitude of the reach 25 per 100 people by the year strongly opposed the decision. likely price cuts. The market will 2010 and it will be one of the world’s (FE & BS, 03.02.05) decide the extent of ILD rate cuts,” a largest telecom markets by the year senior TRAI official said. 2008. “By 2004, India’s teledensity VSNL Sues Government (FE, 12.03.05) was projected to grow to 7 per 100, The Videsh Sanchar Nigam Limited but it has surpassed the (VSNL) has filed a suit in the High Rs 8,000 Cr for Rural Phones expectations and grown to 8.2 per Court of Mumbai demanding Rs 2,560 The Government has embarked 100,” said Gururaj Despande, the crore from the Government of India as on a Rs 8,000 crore plan to provide Chairman of Sycamore Networks and compensation for its early loss of 6 million new fixed line telephones the Chairman of the Board of Tejas monopoly in international long in rural households by the year Networks. “During the year 2000, distance telephony. 2007, with the support from the teledensity was around 2 percent and The petition also prayed that the Universal Services Obligation it has increased to over 8 percent Government pay the VSNL interest at (USO) Fund. because of the Government’s the rate of 18 percent per annum on The USO fund administrator has initiatives in this sector,” he said. the amount of Rs 2,560 crore from invited expression of interest from (FE, 10.01.05)

4 u PolicyWatch TRANSPORT

I N F R A S T R U C T U R E NHAI to Get Autonomy shipping agents. This is in addition (Concor) to run container trains. The Government has decided to to the amendments to the Multi-modal A beginning in this direction was completely restructure the National Transport Act. made in November 2004, when the Highways Authority of India (NHAI), (ET, 16.01.05 & BS, 20.02.05) Railways Board cleared a long- in a bid to empower it to take pending proposal to allow Pipavav independent investment decisions Reduce Cross-Subsidies Railway Corporation Limited, a 50-50 without forwarding them to the Public The World Bank (WB) has joint venture between the Indian Investment Board for clearance. advised the Indian Railways to review Railways and Gujarat Pipavav Port The decision to restructure the passenger fares so as to reduce cross Limited, to operate container trains NHAI was the result of the personal subsidies and freight rates, which from Pipavav port to various inland initiative of the Prime Minister. The would, in turn, lead to growth in the container depots. (BL, 27.02.05) move will help the NHAI to take freight business. independent investment decisions for A comparative analysis of the Shutters Down for MPSRTC mega expansion of the ongoing highways and railways development The Madhya Pradesh Government highways upgradation programme, in China and India between year 1992 has decided to close down the loss- said Prithviraj Chavan, the Minister and 2002 done by WB shows that making Madhya Pradesh State Road of State in the Prime Minister’s Office. while average passenger tariff in India Transport Corporation (MPSRTC). (ET & FE, 15.02.05) is 55 percent lower, freight tariff is Cumulative losses of the Corporation almost 70 percent higher than China. had reached approximately Rs 800 An AERA in the Air The cost per unit in China is lower by crore. The Transport Department was The Government will soon be 15 percent than in India. The analysis working on a report to compensate the setting up an Airport Economic was presented to the Prime Minister’s employees or accommodate them in Regulatory Authority (AERA). The Office (PMO) and the Planning other departments or organisations, role of the proposed regulator would Commission. said Umashankar Gupta, the State’s be to regulate economic affairs of the Listing out potential lessons for Transport Minister. sector. The Authority would be set India from the Chinese experience, the The Corporation has 11,000 up through a legislation and will WB advised that the conflict between employees. According to the details function on the lines of the TRAI and the Indian Railways’ role as a available, operating costs of the the Insurance Regulatory and commercial organisation and its social Corporation for 850 buses have Development Authority (IRDA), said obligations should be resolved. reached Rs 20.44 per km, while the Praful Patel, Civil Aviation Minister. (FE, 28.01.05) earning is just Rs 13.86 per km. Thus, The move is expected to provide the Corporation was incurring a loss comfort to investors and help in Private Containers In of Rs 6.58 per km as on December 31, attracting large-scale investments, To cater to the growing container 2002. The Corporation is also likely to especially FDI, in major projects like traffic, estimated at 15 percent face litigation from some banks since restructuring of the Delhi and Mumbai annually, the Railways has decided to its liabilities have not been settled so Airports with private sector allow entities other than state-owned far. (BS, 04.01.05) investments, added Patel. Container Corporation of India (ET & FE, 03.02.05) Board for Road Safety Maritime Watchdog ith a view to reducing the number of fatal road accidents in the Indian shippers have demanded a Wcountry, the apex body for automobile manufacturers, the Society of freight regulator for the shipping Indian Automobile Manufacturers (SIAM), has mooted the idea of setting industry. Many associations, up of a National Road Safety Board (NRSB). including the Freight Interest Forum According to the SIAM, over 80,000 Indians are killed in road accidents (FIF), and the Indian Merchant every year and the social cost of road accidents in Chambers (IMC) have asked the India is estimated to be over Rs 55,000 crore. Government to initiate steps to set up While the number of fatalities per a regulator in line with the Federal 10,000 vehicles is 14.54 for India, it Maritime Commission (FMC) of the is between 4.1 and 4.6 in other low- US. Further to that, the Associated income countries like Chambers of Commerce and Industry Express Financial The Brazil and Mexico. High- (ASSOCHAM) has now suggested income countries have the formation of a regulatory body to less than two fatalities per control the ‘frequent rise in shipping 10,000 vehicles. freight rates.’ The proposed NRSB Meanwhile, the Shipping Ministry will have members from a wide range of disciplines, including automobile is proposing a Shipping Trade manufacturers, officials from the transport department, researchers and Practices (STP) Bill aimed at academics. (BS & ET, 07.01.05) regulating freight forwarders and

5 u PolicyWatch I N F R A S T R U C T U R E PSBs to be Market Driven “Competition, convergence and consolidation will be the key drivers BANKING & FINANCEhe Ministry of Finance has of the banking industry in the future,” Tcleared a new autonomy said Chidambaram. “We need strong package for public sector banks banks and I am confident we are on

(PSBs), aimed at creating a level Standard Business the right path. I spoke to the Prime playing field for state-owned Minister and we reflected on the banks with their private sector issue… This is the path we must take,” counterparts. As per the new he added. (BS & ET, 25.03.05) provisions, PSBs will have the freedom to decide on virtually BoI Goes Shopping the entire gamut of human After the State Bank of India, the resource issues. Further, the Bank of India (BoI) has emerged as package permits them to undertake acquisitions of companies/business, close the second Indian bank to look or merge unviable branches, open overseas offices, set up subsidiaries, take overseas for acquisitions. The Bank up a new line of business or exit an existing one, without seeking prior was eyeing a small private bank in approval from the Government. Indonesia and was also looking to “We want public sector banks to be more market-driven. They should funding its overseas operations compete on a level playing field with private and foreign banks,” said through medium term notes issued in Amitabh Verma, Joint Secretary, Ministry of Finance. (BL, 23.02.05) the coming fiscal, said M. Venugopalan, Chairman and Amendment Sought As per the first report of the Managing Director, BoI. With a view to initiating recovery Committee, tabled in Parliament during “We are looking at acquisition in proceedings under the Securitisation the Winter session, eight of the 27 Indonesia, as otherwise, there is high and Reconstruction of Financial public sector banks failed to achieve capital requirement to set up a branch. Assets and Enforcement of Security the target of lending five percent of We would need a US$100mn to open Interests (Sarfaesi) Act, 2002, banks NBC to women, especially to self-help a branch. Hence, the acquisition are seeking changes in the Recovery groups (SHGs), as prescribed by the model is a preferred route,” he added. of Debts Due to Banks and Financial Reserve Bank of India (RBI) on July (BS, 06.01.05) Instrumentation (RDDBFI) Act, 1993. 26, 2001. (BL, 02.01.05) A formal request for enabling IRDA to Review Act such changes has been sent to the Regulators Lock Horns The Insurance Regulatory and Finance Ministry from the Indian The Securities and Exchange Development Authority (IRDA) has Bank’s Association (IBA). As per the Board of India (SEBI) is locked in a set up a committee to review some of recent amendment to Section 19 of the turf war with the Forwards Market the recommendations that the Law RDDBFI Act, banks, which have Commission (FMC) over the Commission made in a report it proceeded against defaulters in the regulations of exchange traded gold- submitted in 2004 suggesting Debt Recovery Tribunal, have to first backed mutual funds announced in amendments to certain provisions of withdraw the case before the tribunal the Union Budget 2005-06. the Insurance Act of 1938. in order to initiate proceedings under Both regulators feel that they should The recommendations are the Sarfaesi Act. be exclusively regulating the product. intended to merge certain provisions “The latest amendment to the SEBI’s contention is that any kind of in the IRDA Act of 1999 and the Sarfaesi Act is proving to be a instrument traded on the exchanges Insurance Act of 1938. The proposed constraint for all banks. Borrowers are automatically falls in its jurisdiction, changes relate to investments, trying their best to ensure that the irrespective of whether it is defined as sufficiency of assets, the Tariff three-year limitation period is behind a security or not under the Securities Advisory Committee and the their backs by adopting delaying Contract Regulation Act (SCRA). shareholders/policyholders’ funds. tactics, so that banks are not able to On the other hand, the FMC holds As the Industry is facing intense make recoveries,” said a senior banker. the view that since the underlying competition, insurers now want an (FE, 11.01.05) asset for such instrument is a enabling provision allowing them to commodity (gold), the regulation of raise capital in the form of Falling Short the product lies with the Commission. subordinated debt instruments. As per the findings of the (BS, 29.03.05) Regarding the review related to Parliamentary Committee on the Tariff Advisory Committee, both Empowerment of Women, as many as FM Identifies Key Drivers the public and private sector insurers eight public sector banks, including the Dismissing the fears of job loss, have sought greater flexibility in fixing State Bank of India, have failed to meet the Finance Minister, P Chidambaram, tariffs to cut underwriting losses and the March 2004 deadline for earmarking urged the bank employees to reflect ushering in a free pricing regime as in five percent of their net bank credit on consolidation to make the sector the case of international markets. (NBC) for lending to women. competitive. (BL, 22.03.05)

6 u PolicyWatch MIXED BAG

I N F R A S T R U C T U R E Common Tribunal Likely Develop Rural Infra The State Government will common appellate authority for The Planning Commission contribute up to 10 percent of the fund Arelated sectors could be a reality stressed the need for infrastructure corpus that will be used to attract soon. However, there is no likelihood development in rural and backward investment. of the Government going in for areas and to attract investment for “The Gujarat Government has common regulators for transport and the socio-economic growth of prepared a list of 300 project proposals energy. The idea of having a common states. in different industrial sectors for the regulator for networks such as “Plan expenditure of a State does investors’ Summit where the telecom, gas pipeline, power not necessarily determine its growth Government has outlined feasibility of transmission lines and railways was rate. It depends on the State’s the projects along with the geographical also not found favourable. capacity to attract investment from and locational advantages. With the within the State, outside and abroad,” Central Government sanctioning the said Montek Singh Ahluwalia, the development of seven Special Deputy Chairman, Planning Economic Zones (SEZs) for Gujarat, Commission. The states need to we are poised to offer sops to industry identify the causes of growth like players in setting up industries in these

Business Standard Business poverty alleviation and education SEZs,” said Narendra Modi, the Chief and improve road connectivity and Minister. (FE, 07.01.05) other infrastructure like power and railways, he added. (ET, 11.03.05) PPP in Water Speaking at a national seminar Time to Merge Oil PSUs organised by the Confederation of Indicating his plan for Indian Industry (CII), the Delhi Chief restructuring the oil and gas sector, Minister, Sheila Dikshit, announced the Prime Minister, Manmohan full privatisation in the water sector. Singh, has set the stage for a mega She said the Government was open to merger among the PSUs in the oil public-private partnership (PPP) in the and gas sector. construction of water treatment plants “The appellant authority can be “We can no longer be and supply of meters. expanded to include members with complacent and must learn to think The Government was also expertise in specific areas. For strategically, to think ahead and to ‘seriously considering’ a proposal to instance, a common authority on act swiftly and decisively,” he said, set up a water regulatory body which energy can have separate persons addressing Petrotech 2005. “I find would look into all aspects of water handling the petroleum and power China ahead of us in planning for the charges in the capital region. “The sectors,” said a Government future in the field of energy security.” proposed regulator will be a quasi- official The Government will shortly set up a judicial authority which will be “The Government should not be high-level Committee under former responsible for determining water allowed to overturn the decisions of Steel Authority of India Ltd. (SAIL) tariffs and other critical issues,” said regulators. If required, the Chairman, V Krishnamurthy to the Chief Minister. (BL, 08.02.05) Government could change the consider options for restructuring relevant policy so that the outcome oil PSUs to make them competitive Regulating Media Content of the policy is in line with what is and take on China in the global The Bill providing for a quasi- thought to be desirable.” added the market. judicial regulatory body to monitor official. (BS, 11.02.05) Even the Planning Commission, content on television channels, has in its mid term appraisal in November been drafted and is likely to be PC Announces SPV 2004, recommended creating a single introduced during the monsoon The Finance Minister, P. national oil company by merging session of the Parliament, said Jaipal Chidambaram, announced the setting Indian Oil, Oil and Natural Gas Reddy, the Minister for Information up of a Rs 10,000-crore Special Corporation (ONGC), Oil India Ltd and Broadcasting. Purpose Vehicle (SPV) for and certain operations of GAIL. The Bill will be covering the infrastructure, to help developers (FE, 17.01.05) ‘content’ and not getting into the import capital of US$2-3bn to leverage ‘carriage’ side of the business. The Gujarat Woos Investors Ministry has already initiated investments of Rs 20,000 crore. The Gujarat Government has discussions with the Communications The SPV, which would be a shell announced the creation of US$100mn Ministry on the issue. “We have tried company, housed in the Finance Gujarat non-resident Indian to explain why content should be Ministry, will raise funds from the Infrastructure Fund for foreign separated from carriage and why there domestic market and offer long-term investors and financial institutions should be a separate content debt for infrastructure projects. keen on investing in infrastructure regulator,” said top Government (BS, 05.03.05) projects in the State. sources. (FE & BL, 18.01.05)

7 u PolicyWatch G O V E R N A N C E & R E F O R M S Smooth Sailing Patents Ensured Development Fund will be constituted outsourcing jobs to the dalits and the Following the introduction of the for this purpose, as per the Ordinance tribals. patent regime in the country, the governing the PFRDA. Highlighting the role of the state Government has ensured that there All sums received by the governments, the IMTG says states would not be inordinate delays in the Authority, as decided by the Centre should formulate cluster-based plans granting of a patent and very strong from time to time, will be credited to indicating viable livelihood opposition procedures would be the fund. In addition, a Subscriber programmes like settled agriculture, adopted, according to Ashok Jha, Education and Protection Fund will dairy and animal husbandry, fisheries, Secretary, Industrial Policy and also be established. The corpus of this afforestation, housing, education, Promotion, Ministry of Commerce & fund will come from the penalties basic primary health facilities, safe Industry. levied by the Authority. Further, drinking water, besides programmes Addressing the session organised grants and donations given by the for skills upgradation and vocational by the Federation of Indian Chambers centre, state governments, companies training. of Commerce and Industry (FICCI), on or any other institution will be used In order to provide sustainability the amendments to the Patent Act, Jha for the fund. to the programme, a strong market said that the pre-grant sessions would As a developer, the Authority is chain has to be evolved, the report be conducted in a time-bound manner, required to establish a mechanism for suggests. (FE, 10.01.05) thereby not delaying any case, and a redressing grievances of subscribers. fair chance would be given to oppose It is required to take steps to educate West Bengal Tops the List any patent grant. subscribers on issues relating to West Bengal tops the list of states Allaying fears over the increase pension, retirement savings and in terms of distribution of surplus land in drug prices because of the patent training of intermediaries. and the number of beneficiaries, regime, he said, “prices of drugs will (BS, 03.01.05) followed by Maharashtra, Andhra be determined by the market forces. Pradesh, Assam and Jammu & However, there is always an alternative Quota for SC/ST Kashmir. for any drug, including a patented The Government is considering While the total area declared drug”. This means alternatives would reserving 7.5 percent share each for surplus was 73.36 lakh acres as on be pushed into the market and there Scheduled Tribes (ST) and Scheduled March 31, 2004, 54.03 lakh acres was would be very few takers for the Castes (SC) when awarding tenders distributed to 57.46 lakh individual patented drugs, he added. from public sector units like the beneficiaries, said the Agriculture (FE, 09.02.05) Railways and other central supply and Minister, Sharad Pawar. Of this, West distribution systems. Bengal distributed about 11 lakh acres Pension Protection This has been recommended by to 27.60 lakh beneficiaries, followed by The Pension Fund Regulatory and the Prime Minister’s Inter-Ministerial Maharashtra with 6.14 lakh acres to Development Authority (PFRDA) will Task Group (IMTG) as a strategy for 13.5 lakh beneficiaries, Andhra administer a fund for subscriber encouraging viable livelihood for SC Pradesh with 58.22 lakh acres to 52.6 protection. It will also fund its and ST. The IMTG report has also lakh beneficiaries and Assam with 5.56 expenses through government grants suggested that industries should be lakh acres to 52.6 lakh beneficiaries. and fees. A Pension Regulatory and persuaded to award a share of their (BL, 22.03.05) Biotech Policy will be Simplified he Government’s biotechnology policy, which is T expected to be released soon, will simplify the regulatory processes for the sector. The Government is looking at reducing the clearance time for products. While products that entail low risk will have a two- step clearance process, those in the high-risk segment will invite more stringent criteria. “It has been proposed to have a single window regulatory authority in the long run, but, as of now, the Government will go in for simplification of the existing mechanism,” M K Bhan, Secretary,

www.pnl.gov/gtsp/ research/biotechnology.stm www.pnl.gov/gtsp/ Department of Biotechnology, said on the sidelines of the 2nd International Conference on Biotechnology. Under the new policy, the Government is also looking at increasing public-private partnership to support innovation. The policy will also look at promoting medical school research and stem cell research. (BS, 09.02.05)

8 u PolicyWatch G O V E R N A N C E & R E F O R M S Food Safety Monitoring Body Integrated Food Law Consumer Education and Research Centre (CERC), Ahmedabad, he CII has called for putting in place an integrated food law that in a representation made to the Union Twould encompass several issues, including standard setting, Ministry of Food Processing enforcement and consumer safety for the entire food chain. The Industries, has underlined the need for Chamber is of the opinion that all current laws Times Economic The an effective regulatory authority to governing food quality and safety, such as the monitor the fulfilment of food safety, Prevention of Food Adulteration (PFA) Act, nutrition, labelling and other such 1954 and PFA rules, 1955, plus other Acts and requirements by producers and Orders must be repealed. distributors. According to the CII, the definition of These provisions are missing in ‘food’ should include functional, dietary and the present Prevention of Food nutritional foods and the regulatory Adulteration (PFA) Act 1954, which structure should ensure consumer safety deals largely with the prevention of in the food industry, by setting adulteration, particularly prosecution standards and uniform enforcement at the state level. for the violation of the Act. It does It has suggested the setting up of an autonomous ‘Food Regulatory not deal with the nutritional aspects Authority (FRA)’ to formulate rules and procedures and supervise the nor does it provide for compensation implementation and enforcement. A `council of food standards’ could to consumers for loss, injury or death assist the FRA to recommend and upgrade food standards based on science- because of non-compliance of the Act. based risk analysis to ensure consumer safety, CII added. (BL, 27.03.05) Also, there is no provision for disgorgement of unjust enrichment or Reddy said. The amendment would passenger transport policies of the class action suits against producers greatly benefit women working in state governments to see if there are or distributors of unsafe, substandard special economic zones and IT sector. any practices that blunt free-market or underweight food products and/or Reddy said flexible work timings competition. false or misleading advertising, or sale for women shall be allowed “provided The Commission, empowered to of spurious or counterfeit food adequate safeguards in the factory as penalise a corporate or government products. (Insight, 30.03.05) regards occupational safety and body for anti-competitive practices, health, equal opportunity for women will, however, restrict its action to No Petro Dealership to MPs workers, adequate protection of their ‘competition advocacy’ till it gets fully The Supreme Court appointed a dignity, honour and safety and their operational. (ET, 11.01.05) high-level committee, which advised transportation from the factory the cancellation of 297 petrol pump premises to the nearest point of their Farm Marketing Reforms allotments and recommended that residence are made.” (ET, 29.03.05) With the objective of implementing MPs should not be allotted dealership legal reforms in the agricultural of petroleum products. If given, they Ordered Closure of Polluters marketing sector, the Andhra Pradesh should resign from their membership The Supreme Court ordered the Government has come out with a Bill of Parliament before taking up the Centre to direct 12 state governments that seeks to amend the Agricultural dealership. to close 218 industrial and mining Produce and Livestock Markets Act, The two-judge committee, units within 10 days for failing to take 1966. appointed by the apex Court by its mandatory clearance under The Bill provides for the December 12, 2002 order, said that an Environment Protection Act. enforcement of contract farming, MP has to attend Parliament and “Industrialisation cannot be allowed establishment of private market yards meetings of Parliamentary Committees at the cost of environment,” said the and special markets, setting up of entailing long absence from his place court. national integrated produce markets of allotment of the retail outlet. “They Of the 218 units, 70 are in the for the National Dairy Development cannot thus run the dealership/ industrial and 148 in the mining sector. Board and a change in the composition distributorship themselves but have Goa tops the list with 31 polluting of the existing Agricultural Market to engage employees to supervise units, while Jharkhand and West Committees (AMCs). work. They, therefore, do not fulfil the Bengal have just one unit each. As per the provisions, the number necessary condition of ‘Full Time (FE & ET, 22.02.05) of members of the AMCs in the State Working Dealer,” the report said. will be raised to 18, including growers, (ET, 18.01.05) State Policies under Scanner traders and ex-officio members. There State governments still will also be five representatives from Flexible Timings for Women harbouring a legacy of the control and scheduled castes, scheduled tribes, Government decided to amend the licence raj will have some tough backward classes, minorities and Factories Act 1948, to allow women to questions to answer now. The women among the 14 nominated work in late night shifts, Information Competition Commission of India is members of the committees. and Broadcasting Minister Jaipal set to scrutinise the liquor and (BL, 28.03.05)

9 u PolicyWatch G O V E R N A N C E & R E F O R M S Redefine Centre-State Relations in them. It also wanted the touch 110 million tonnes by 2020, from The Central Government has Government to control misleading the current level of 36 million tonnes decided to set up a new commission advertisements, particularly those annually. to take a fresh look at the centre-state targeting children, the illiterate and Differences have emerged among relations, especially with regard to the the unaware. the country’s leading steel producers division of powers when it came to The petition alleged that the on the idea of having a steel regulator. the appointment of Governors, Union government, which has a duty to While all others have spoken out Home Minister Shivraj Patil protect the lives of citizens, has not against the proposal, the Steel announced. He said there was an taken any initiative in this regard Authority of India Limited is willing urgent need to define the centre-state despite several researches finding to accept a regulator in case the steel relations in a multi-party democracy. soft drink contents to be harmful, prices become unreasonable. Indicating that much had changed especially for children. (BS, 03.01.05) (BS, 31.01.05) regarding the norms of behaviour between the centre and the state Find the Best Talent Specialised Food & Drug Labs governments, Patil candidly observed India needs to find the best talent Under a programme known as that there had been occasions of to head the Competition Commission ‘Capacity Building Project on Food friction between the centre and states and various economic regulatory and Quality Control of Drugs,’ the on certain issues. (BS, 17.02.05) agencies, according to several MPs Government has put in motion a plan at a seminar organised by CUTS- to set up close to 40 food and drug Cadre of Senior Officials International. testing laboratories and upgrade the The SEBI is to create a cadre of Initiating the discussion with existing ones at a cost of around Rs senior officials. According to reference to the current stalemate 350 crore. preliminary indications, the top SEBI relating to the Competition Act, India has passed strong and management will henceforth be drawn Yashwant Sinha, former Finance stringent legislation regarding food only from the cadre. Minister, said: “It is a pity that such and drugs and now the new hi-tech SEBI will interact more closely with an important legislation has run into laboratories will enable detection of other regulators such as the Reserve difficulties because of the petty issue pesticides and other contents Bank of India, the Insurance of who should head the Commission.” efficiently and accurately. Regulatory and Development Yashwant Sinha also said that the Currently, out of the 19 laboratories Authority and agencies such as the country definitely needs a National only 7 are equipped to test all varieties Enforcement Directorate, the Income Competition Policy to ensure a and types of drugs. Despite there Tax Department and the Central competition assessment of all being an equal number of laboratories Bureau of Investigation (CBI). government policies. In the context for testing edible items, none of them As per SEBI Act 2003, out of nine of competition abuses that exist at the is presently able to detect contents members, three should be whole time local level, Sinha expressed doubts as per international standards. members. The lack of a proper cadre about the ability of the Competition The laboratories will be as modern for staffing SEBI at the top levels Commission of India to deal with such and hi-tech as any lab in Europe and means that its top posts lie vacant for issues. (BL, 14.03.05) would be able to conduct all required most of the time. (BS, 24.02.05) tests to ensure that no banned Draft Steel Policy substance or contamination reaches Centre Gets Notice on Cola The draft National Steel Policy a consumer. The labs will be equipped The Supreme Court (SC) issued a visualises that the sector would to detect all internationally banned notice to the Central Government on generate 10 lakh new jobs by the year residues, which will ensure that not a petition seeking the manufacturers 2002, directly or indirectly. Domestic only Indian but also foreign to disclose soft drinks contents and steel output, according to the target companies will have to follow global give warnings of harmful substances set by the policy draft, is expected to standards across India. (ToI, 24.03.05) The Competitiveness Mantra he Prime Minister, Manmohan Singh, asked the

TNational Manufacturing Competitiveness Council Standard Business (NMCC) to come up with ideas that can help Indian industry in becoming globally competitive and generate employment in the country. Addressing members of the NMCC, Singh said that Indian industry should be prepared for lower tariffs and think in terms of world- scale production facilities. Singh also urged industry to think big and think into the future. According to the NMCC Chairman, V Krishnamurthy, the long-term paper include making the environment more they will come up with a long-term strategy paper on conducive for manufacturing and enhancing the manufacturing. The elements that are likely to go into competitiveness of the sector. (BL, 07.01.05)

10 u PolicyWatch E - G O V E R N A N C E NISG’s e-Gov Plan Failures Abound The National Institute of Smart World Bank (WB) study estimated that about a 35 percent of the Governance (NISG) plans to broad Ae-governance projects in developing countries are base the implementation of various e- total failures, 50 percent are partial failures governance projects across the country. and only 15 percent can be termed It has identified certain key areas of as success stories. citizen services, land records and According to Sameer Kochhar, transportation applications that could Chief Executive Officer (CEO), be replicated for rapid deployment. Skoch Consultancy, India’s spending Line Business Hindu The The United Nations Development on e-governance is up 23 percent Programme (UNDP) Resident per annum to touch Rs 2,200 crore Representative, Maxine Olson, said by 2004 end. As per Skoch that the UNDP would be working Consultancy’s e-governance survey towards a coordinated effort in this for 2004, although over 100 direction. projects have been implemented The Centre, under the National E- across the country, only half of governance Action Plan (NEAP), has them qualify as e-governance earmarked Rs 12,400 crore through projects, with interface with public-private participatory models. citizens or other customers of such services. Infrastructure is a critical issue. 25 mission mode projects have been Adequate network/connectivity is important in the rural areas to experience identified for implementation at the a more accessible and transparent face of the Government. (FE, 24.01.05) central and state levels in the next three to four years, with the principle focusing on improving service crore broadband project of the Andhra The Law Secretary, R L Meena, delivery to citizens and businesses. Pradesh (AP) Government. The High said that there had been some The World Bank (WB) has given Court has ordered a status quo in the improvement in the number of an in-principle nod for a US$500mn project. The TRAI objected on the pending cases before the ITAT, but financial support, for four years grounds that the network laying plans they must aim towards a system that initially, to the national e-governance needed a license first. would enable disposal of appeals plan, giving a fillip to the country’s This project is aimed at providing within six months of filing. As on e-governance initiative. entertainment, literacy, data and March 1, 2005, about 1,38,739 cases (BL, 25.01.05, 13.03.05 & FE, 03.02.05) Internet services by charging Rs 100 were pending before the ITAT. a month from rural households. The (BL, 14.03.05) High-tech PMO state is also looking at introducing a The Prime Minister’s Office device that combines the features of Tata Wins Mega Deal (PMO) officials now use information a personal computer, television and The Indian Government technology solutions to monitor the phone in these areas. The setting up announced that the largest implementation of various of Internet kiosks is being planned. outsourcing deal in India, worth programmes and policies of the The project proposes to connect US$78mn, went to Tata Consultancy government. 23 districts, 1,127 mandals, thousands Services (TCS), India’s largest In addition to the implementation of villages and 40,000 government software company. This is mooted as of the National Common Minimum offices and enable departments to Delhi’s most visible step, so far, in Programme (NCMP), the PMO applies deliver citizen services through e-seva reforming its slow moving similar technology tools to monitor centres. (ET, 30.03.05) bureaucracy. various issues concerning the state TCS is all set to digitise the governments, the MP Local Area Courting Technology corporate filings of 6,50,000 Indian Development Fund and some thrust Dispensation of justice may be companies across 22 national offices. areas identified by the government. quickened with the computerisation All the paper records are expected to The PMO officials are able to of all courts in the country over the be computerised over the next six record the proceedings of internal next four years. Rs 300 to 400 crore years. A potential goldmine of meetings on a laptop, upload them and are proposed to be spent every year corporate information will be made then follow-up with the concerned for this purpose. instantly available. departments on a monthly basis. The Union Law and Justice Vijay Kelkar, a former Finance (ET, 05.03.05) Minister, H R Bharadwaj, said on the Ministry official, said that sidelines of a training programme for outsourcing is the way forward, as it AP Broadband Project Halted the newly appointed members of the saves taxpayers’ money and does not A public interest litigation plea and Income Tax Appellate Tribunal risk public sector jobs. For these the objections raised by the Telecom (ITAT) that every court or tribunal, reasons, such reforms are Regulatory Authority of India (TRAI) even at the Taluka level will be comparatively easy to push through. have come in the way of the Rs 400- computerised in the coming days. (FT, 10.02.05)

11 u PolicyWatch T R A D E & E C O N O M I C S States to Get More Elevating FDI Inflow In a move to restore budgetary he government is in the balance, the Twelfth Finance Tprocess of liberalising the Commission (TFC) plans to reform foreign investment regime in state finances and has recommended order to expand the scope of transfer of 30 percent of revenue from foreign direct investment central taxes to the states. (FDI). A survey by The Adhering to the TFC’s Economist shows that India recommendation for enactment of Line Business Hindu The needs to raise its investment fiscal responsibility legislation, many rate to over 30 percent of the states have tabled the Bill in the gross domestic product budget session. The passage of this (GDP) and attract more FDI Bill would entitle them to a debt write- in order to catch up with the off scheme. Suggestions were also Chinese growth. put forth for setting up an Furthermore, the independent agency to review Economic Advisory Council (EAC) has been entrusted with the responsibility compliance. of critically evaluating the overall FDI scenario and suggests ways and means TFC, besides suggesting ways of of attracting FDI inflow. The EAC seemed to be fully confident of the growth reducing the debt burden of the states, prospects and the India-FDI report lays out the ways of tapping the country’s has set a long-term target of 3 percent potential to attract FDI up to US$90bn in the next five years. fiscal deficit each for the centre and In another move, a group of economists pitched for the easing of FDI the states. The states’ share in the norms. In principle, the Cabinet Committee on Economic Affairs (CCEA) divisible pool of the centre’s taxes and has provided clearance to 100 percent FDI in the construction and real duties has been increased by 74 estate development sector, subject to some conditions. The concerns of the percent, grants portion by 143 percent Left were duly considered. The plans to hike the FDI limit to 74 percent in and the share in taxes by 63 percent, sectors like banking and telecom are also underway. respectively. (BL & ET, 24.02.05 & 04.05.05) (ET, 26.02.05, FE, 06.02.05 & 26.02.05)

London to Lose Jobs for setting up a Services Export on the turnover, from the existing Rs A recent research by Troika, a UK Promotion Council. 3 crore to Rs 4 crore. In addition, the financial services consultancy, The task force has been asked to provision for the ‘Promotion of Small shows that a total of 15,000 high-end give its report within the next two Scale Industry Schemes’ was also jobs in London could be lost to India months, an official said. It being enhanced to Rs 173 crore. over the next five years, as the includes representatives of industry (FE, 29.03.05 & BL, 28.02.05) companies show a rising willingness chambers besides officials from the to outsource complex tasks to low- ministries of finance, health, education Doubling Global Trade Share cost economies. and information technology. The Commerce and Industry Displacement of between 10,000 There are 13 services that have Minister, Kamal Nath, has raised a and 15,000 financial service jobs by been identified by the commerce min- strong voice for liberalising the the end of the decade would add to istry as significant in terms of economic policies to double India’s the flood of low-skill call centres and services exports. These include share in the global trade to 1.5 percent back office administration jobs that medical services, project exports, by 2009. To start with, he have already been shifted abroad. education, financial services, tourism recommended concessions to boost Currently, Indian companies are and computer related services. exports, which would create more providing research services to (BS, 04.01.05) employment. London-based stockbrokers and The thrust areas identified under management consultancies and SSI Items De-reserved the foreign trade policy are background industry analysis for The Ministry of Small Scale pharmaceuticals, textiles and auto consultants. Industry (SSI) has identified 108 items components. However, the Corporation of for de-reservation, including 30 items Indicators are pointing in the London believes that off shoring of from textiles. The government has right direction, with exports jobs would not pose a threat to the thrown open the rubber and the textiles increasing despite the appreciation City. (BL, 28.03.05) sector for large and medium-scale of the rupee against the US dollar manufacturing. However, it has making Indian products more Services Export Body retained auto components and expensive abroad. India needs to The government has set up an in- ancillary items for the small scale. sustain an eight-percent growth to ter-ministerial task force, headed by The government has also reduce poverty and grab a larger Director-General of Foreign Trade, K proposed raising the ceiling for the share of the global market. T Chacko, to recommend modalities small-scale industry exemption, based (ET, 17.02.05 & 04.02.05)

12 u PolicyWatch T R A D E & E C O N O M I C S Waiting for SEZ Legislation Escalating PSUs through Press Note 1 (2005 Series), The government has cleared 36 notified fresh guidelines for the he Cabinet Committee on cases for setting up special economic approval of new proposals for foreign/ T Economic Affairs (CCEA) has zones (SEZs) with private investment, technical collaboration with previous announced the creation of a 16 of which have got formal clearance. ventures in India, under the automatic dedicated National Investment Fund “Investors are waiting for the SEZ route. The Prime Minister, Manmohan (NIF), which will comprise legislation, which promises a stable Singh, said that the rule had become proceeds received from policy environment to be in place an anachronism. New JVs, he said, will disinvestments of public sector before they start the work”, said a be shaped by commercial contractual units. Its main aim is to invest the commerce ministry official. This agreements, based on the free will of returns on social sector and revive legislation seeks to provide fiscal the partners, without government potentially profitable PSUs. Varied incentives to exporters, like a 20-year interference. suggestions and oppositions were tax holiday, and envisages procedural The existing JVs, which will fall received from various industry simplification for attracting FDI by under the ambit of Press Note 18, have chambers. not subjecting investments to to obtain a no objection certificate approval from Foreign Investment from the Indian partner for starting Promotion Board. (FE, 10.02.05) new ventures in India in the ‘same’ field of activity. Several provisions of On the Growth Path… Press Note 18 will apply to the existing India is again on the track for a Line Business Hindu The Indian-foreign JVs, though with robust growth. Economic think tank, substantial changes. the National Council of Applied (ET, 16.03.05 & FT, 13.01.05) Economic Research (NCAER), predicted a comfortable economic Bank to Merge with Parent growth of around 6.7-6.9 percent. The proposed merger of IDBI Ltd. All of this performance is expected and IDBI Bank would form the fifth- to be on the back of the manufacturing largest bank in terms of total assets. and services sectors, which grew at 8.1 The boards have approved the and 8.2 percent respectively during the scheme of amalgamation for the merger Government officials stated that second-quarter of 2004-05 (much higher and fixed the swap ratio at 1:1:42, i.e., the Government hopes to generate than the national average of 6.6 IDBI will issue 100 equity shares for around Rs 50,000 crore over the next percent). Concerns on fiscal deficit 142 equity shares held by the three years and the funds raised from and public debt remain the shareholders in IDBI Bank. The post- the sale of government stakes in impediments to sustained growth. merger scenario shows that the total PSUs will be transferred to the NIF. As per the Central Statistical assets of the new entity would be Rs The fund managers will be appointed Organisation, the country’s GDP at the 94,312 crore. However, the merger is to take care of the disinvestment current market prices would be nearly awaiting a final approval from the RBI. proceeds. US$715bn. (ET, 19.01.05) The setting up of this fund is (FE, 28.01.05 & BL, 07.02.05) supposed to be in line with the Slipping State Finances Holcim on a Buying Spree! National Common Minimum The RBI has expressed concerns Holcim, the US$9.4bn Swiss Programme (NCMP). about deteriorated state finances. (FE, 27.01.05, BS 07.02.05 & 01.02.05) cement producer, is all set to become Efforts to shore up finances of the the world’s largest cement company. state electricity boards (SEBs) and To begin, it entered into an agreement Holcim-GACL has made an open sluggish non-tax revenues are the with Gujarat Ambuja Cement Ltd. offer at Rs 370 a share to acquire up culprits. Apart from these, lower non- (GACL) for US$800mn to acquire 67 to 50.1 percent stake in ACC, which, development spending and allocation percent stake in Ambuja Cement India if successful, will give Holcim an for education, infrastructure and Ltd. (ACIL). This deal accounts for additional 18.3 million tonnes of health also led to weaknesses in the the largest FDI in the Indian cement annual production capacity. states’ finances, according to an RBI sector. Both aim to exchange (BS, 06.02.05 & FE, 20.01.05) bulletin. experiences and strengthen their Highlighting the major reasons for cement trading activities. Press Note 18 Scrapped the states’ poor financial health, the Holcim’s dream would come true, The government has scrapped the RBI said, “The direction of fiscal if it manages to wrest control of the contentious Press Note 18 (1998 correction saw a reversal during 2003- Associated Cement Company (ACC), Series), which requires foreign 04, partly on account of one-off factors India’s second-largest cement companies in joint ventures (JVs) to essentially relating to the settlement of company. This dream deal will seek the governments’ consent dues of the SEBs aimed at overtake the current leader, Lafarge, before setting up a rival business in strengthening the power sector.” the French cement giant. the same industry. It has, instead, (BS, 23.02.05)

13 u PolicyWatch C O R P O R A T E G O V E R N A N C E CG Cost as Investment that the committee advise the ttempts are being made to improve the quality of corporate governance government on the new company law, A(CG) norms among listed companies in India. While doing so, the and revisit the penal provisions to companies should regard cost incurred on compliance with CG norms as evolve a system, which is a real deterrent an investment in protecting the interests of stakeholders, instead of to international wrongdoers. expenditure. Also on the new company law, the Towards this end, the National Investors Foundation (NIF), Securities and Exchange in a presentation before the J J Irani Board of India (SEBI) has Committee, recommended that a price constituted a Committee discovery mechanism coupled with an under the Chairmanship of N exit option be provided to the R Narayana Murthy. This dissenting minority shareholders in committee submitted a report case of mergers.

The Economic Times spelling out its It has been seen that most mergers recommendations in mid- end up leaving a group of dissatisfied 2003. After a couple of shareholders agitating against the rounds of discussions and mergers. Therefore keeping in mind the public comments, the amendments were incorporated in Clause 49 of the minority interests and problems arising Stock Exchange Listing Agreement. The Agreement will come into effect from mergers and acquisitions from April 1, 2005. (BL, 23.03.05 & 31.03.05) (M&As), Naitonal Investors Forum (NIF) has proposed certain Tardy Response to CG corporate members, began on March amendments to the new companies law, The Union Finance Minister, P 8, 2005 with the call to find ways to which is expected to be placed shortly. Chidambaram, expressed concern over recognise good corporate (BL, 14.03.05 & FE, 04.01.05) the lack of seriousness on the part of performance and to build ways to corporates in India in following spread the message. Takeover Rules Tightened corporate governance principles, in Delivering his inaugural speech, SEBI has amended the takeover his valedictory address at a summit the United Nations Global Compact regulations to tighten the creeping on ‘Indian CEOs — Competencies for executive head George Kell said that acquisition norms for promoters. Success.’ Pointing out that many another challenge before the Global Acquirers, according to the companies have not appointed ’truly Compact forum was to find ways to amendment, will have to make an open independent directors’ or have got an connect good corporate performance offer to raise their stake beyond 55 audit or a remuneration committee, the with better government policy- percent in a company. Presently, SEBI’s Minister said that these companies making. takeover regulations permit creeping resisted change. The inaugural session of the acquisition up to 75 percent. Promoters “If I ask CEOs what is the distance conclave was also addressed by B can increase their holding in a company they have travelled in the corporate Muthuraman, Tata Steel Managing by buying up to 5 percent of the governance milestone of 1-10, not Director; Subir Raha, President, company’s equity capital each year. many of them will reply that they have Global Compact Society of India & (ET, 24.01.05) crossed even three,” said CMD, ONGC; and Dr June Henton, Chidambaram. Indian companies Dean, College of Human Sciences, Leaders of Tomorrow should also open up and shun their Auburn University, US. (FE, 09.03.05) “We need to foster competition rigid approach to issues like formation among stock exchanges through of board and audit committees. Committee Set to Move creation of well-managed and well-run “We cannot take corporate The Company Affairs Minister stock exchanges,” said the Finance governance forward unless the very Prem Chand Gupta, on January 3, Minister, P Chidambaram on the fundamental principles and policies asked the J J Irani Committee to launch of IndoNext platform of the are not followed by the Indian distinguish companies with a stock exchange at Mumbai. He corporate sector,” the Finance substantial public interest from indicated that India is too big a Minister added. He also asked Indian purely private firms and prescribe a country to be served by only two companies to take globalisation separate legal regime for the former stock exchanges. seriously as technology had enabled to protect small investors’ interests. IndoNext platform will pay adequate everyone to be familiar with the latest The move assumed significance attention to small entrepreneurs who business models in any part of the as it came in the wake of the Reliance run well-managed companies with very world. (BL, 22.01.05 & HT, 23.01.05) ownership dispute, where more than strong fundamentals. “IndoNext will 30 lakh investors had parked their provide the much-needed liquidity to Recognise Corp Performance money in the country’s largest the stocks of these small and medium The first-ever regional meet of the private sector company. companies so far as trading in regional United Nations Global Compact According to an official stock exchanges in concerned,” he said. Conclave, attended by some 2,000 statement, Gupta also recommended (FE, 08.01.05)

14 u PolicyWatch R E P O R T D E S K Reign of Elephant and Dragon n a Central Intelligence Agency commissioned I report, entitled, “Mapping the Global Future,” upbeat projections are made for India and China, the two Asian giants. In the same way that commentators refer to the 1900s as the ‘American Century,’ the 21st Century may be seen as the time when Asia, led by China and India, comes into its own, the report observed. There is also a warning about the pitfalls that the

path may be strewn with – India-China rivalry, Times of India resentment by other countries and internal political and economic volatility, with pressures on resources intensifying as modernisation progresses. In India, states like Bihar, Uttar Pradesh and Orissa will remain age population, largest English speaking population underdeveloped. The legacy of a stifling bureaucracy in the developing world, a large Indian expatriate will remain, but the gross national product (GNP) will population providing access to key markets around the still have overtaken that of European economies. world, an education system that produces millions of Between India and China, India may have an upper skilled personnel and well-entrenched democratic hand, because of a continued increase in its working institutions. (ToI, 16.01.05 & FE, 23.02.05)

India ‘Mostly Unfree’ nation, ranking 9.25 on a scale of 10. and maternal mortality and improving The Index of Economic Freedom, Philippines, at number two, has a access to sanitation facilities. 2005, published by the Heritage backlog of 2,000 cases in the anti- Sachs’ report concurs that Foundation and The Wall Street graft court. Vietnam was at number reduction of population below Journal has labelled India as ‘mostly three. India was fourth on the list poverty line, school enrolment for unfree,’ though the country has because the country’s ‘suffocating boys and girls and water access are moved up three notches to rank 118 bureaucracy’ created plenty of areas where India is on the track to out of a total of 155 countries that were opportunities for pay-offs to cut meet the MDG. included in the study. through the red tape. But, the report (FE, 10.01.05 & 02.02.05) Hong Kong remains the world’s said, the graft in China poses the freest economy for the 11th year biggest global threat because of its Cluster Up running, beating Singapore to second growing economic influence. An analysis carried out by the place. The US dropped out of the top (ET, 08.03.05) Federation of Indian Chambers of 10 for the first time since the index Commerce and Industry (FICCI) was launched 11 years back, falling A Long Way to Go... states that the high cost of input to the 12th position, from the 10th last A recent study on social progress materials and utilities, coupled with year. China is at the 112th position, six and outlook by the World Bank (WB) high finance and transaction costs, higher than last year. This is a clear shows that health indicators in India has resulted in depressed indicator of the change that has taken are not satisfactory. Though infant productivity in India. Low labour place since China joined the World mortality has declined between the productivity more than offsets any Trade Organisation (WTO) and 1980s and 2000 from 115 to 68 per advantage the manufacturing sector undertook major structural reforms. 1,000 live births, maternal mortality derives out of low labour costs. (FE, 04.01.05) rates have worsened, going up from The FICCI has suggested that the 424 to 540 per 1,00,000 live births cluster approach in 82 identified areas India: Fourth Most Corrupt between the 1990s and 2000. The in 23 industries across the country The Political and number of HIV infected has risen from would provide significant scope for Economic Risk 3.5 million in the 1990s to 4 million in improvement in labour productivity. Consultancy Ltd. 2000. The analysis of costs of raw materials came out with its This is also reflected in the report and utilities across 15 manufacturing annual graft ranking released by the Millennium Project segments points out that, on an for Asia, in which Director, Jeffrey Sachs which average, the share of input materials India stands fourth. indicates India is unlikely to meet the and utilities in total output value was Singapore was Millennium Development Goals as high as 81.3 percent in India, as the least corrupt, followed by Japan, (MDGs) for reduction in number of against 75.5 percent in China, 68.7 Hong Kong, Taiwan and South Korea. undernourished people, lowering percent in Malaysia and only 58.5 Indonesia was Asia’s most corrupt infant mortality, under-five mortality percent in Korea. (BL, 06.03.05)

15 u PolicyWatch R E P O R T D E S K

Cheaper Drugs These are over and above the 73 The key priorities for now are disposal In order to make drugs available segments that have been under the of dead bodies, prevention of at affordable prices, the department tax net since 1994. epidemics, provision of fresh water, of chemicals and petrochemicals has The FICCI suggests that the oral rehydration kits, food, medicines, proposed a nationwide implementa- government evaluate these segments shelter, etc. Tamil Nadu and the tion of the Rajasthan model of ‘medicare for augmenting resources for the Andaman and Nicobar Islands are the societies’ in which essential drugs and national exchequer, while carefully worst hit parts of the country. antibiotics, injectibles and IV fluids are nurturing their growth through (BL, 25.01.05) made available to patients at almost 30- incentives and adequate credit 50 percent of their market prices. This facilities. It also recommends that taxes Fiscal Policy Rules for States model was recommended by the on certain services may have outlived The group on Model Fiscal Sandhu Committee in its interim report their utility. The usage and Responsibility Legislation at the state and has been accepted by the requirement of telegraph, telex and level was constituted at the twelfth department. pagers has witnessed a decline over conference of the State Finance “It is a tried and tested model the years and the government may Secretaries in August 2003, with which has been prevalent in Rajasthan consider their removal from the tax net. technical assistance from the Reserve for the past several years. It has been (BS, 08.02.05) Bank of India (RBI). It reported that able to bring down prices of drugs the states must adopt the fiscal policy successfully,” an official in the Tsunami Effect rules built under the legislation. department of chemicals said. This is The Asian Development Bank The definition of liabilities has done by eliminating trade margins (ADB), in its survey of the effect that been extended to include not only the given to dealers and retailers as the the tsunami has had and is likely to liabilities under the consolidated drugs are acquired through open have on the Indian economy and those fund but also those under the Public tenders directly from manufacturers. of the States, has said that India’s Account of the state. Off-budget (BS, 03.03.05) fiscal deficit will take a major hit borrowings, special purpose through the large spending on vehicles, other equivalent More Services in the Net rehabilitation and reconstruction instruments and developments A survey conducted by the FICCI operations. ADB thinks that the macro arising out of state guarantees notes that liberal economic policies impact will be minimal, as should be included when calculating and a buoyant services sector has manufacturing and services have been state liabilities. The group noted that made 63 new services segments viable left untouched and the impact on the fiscal performance of the states for taxation. These results are based fisheries is highly localised. Even the had been an area of serious concern on the feedback from 25 public and tourism sector, which is currently and that the stress has seriously private sector firms and experts. This seeing a tough phase, will bounce constrained their ability to discharge is the case in spite of the doubling of back soon enough. primary responsibilities of developing the service tax from 5 percent in March The impact on poverty is obvious social and economic infrastructure. 2003 to 10 percent in September 2004. and will be difficult to recover from. (BL, 02.03.05) Survey Speak he Economic Survey 2004-05 was tabled in the A wider tax base is TParliament by the Finance Minister, P. seen as essential to Chidambaram. According to the survey, India needs to shrink the stubbornly cut wasteful spending and large fiscal deficit. widen its tax base, if it wants to This may be done by shrink the fiscal deficit. The bringing more and document gives hope about the more services under “possible ratcheting up of the the tax net.

trend growth of the economy Consolidated deficit India of Times from around six to about seven of the Union percent per year,” though not Government and the under the present investment States stands at about levels. 10 percent of the It prescribes greater gross domestic investment in agriculture and allied activities, simplifying product (GDP). The procedures and relaxing entry-exit barriers, competitive target must be to keep finance for farmers and small enterprises and higher the fiscal deficit at 4.4 foreign investment to bridge the yawning gaps in percent of the total output for this fiscal year. infrastructure and other productive sectors. (BL, 25.02.05 & ToI, 26.02.05)

16 u PolicyWatch E X P E R T C O R N E R Step up GDP is still dependent on natural ‘ ndia needs to double the agriculture growth in order resources and any economic growth Ito achieve the target of eight percent economic growth’, undermining these resources will stated Montek Singh Ahluwalia, Deputy Chairman, have adverse effects. Planning Commission, addressing the annual Frank Moreover, he said that the Morais memorial lecture. According to him, mainstream economists measure the the major reason behind the decline in the country’s wealth by the Gross National Product (GNP), which does gross domestic product (GDP) was the Line Business Hindu The diminished agricultural growth. not take into account the ‘natural He said the government should capital’; no value is given to the forest concentrate on the rural infrastructure, to step until the trees are sold. (FE, 11.01.05) up the agricultural growth. Another cause of concern, in his opinion, is the existing gap in Improve Logistics the demand for and supply of quality health care Sam Pitroda, who was actively and education. involved in kicking off the On the other hand, the legendary agricultural telecommunication revolution in scientist and Nobel Laureate, Norman Borlaug, while delivering the India, said that the country, with a Coromandel Lecture organised by the Murugappa Group, made a strong population of over one billion, has a recommendation for adoption of genetically modified technologies to enhance high potential of becoming a global agricultural growth in developing countries. (FE, 09.01.05 & BL, 16.03.05) power, provided it makes genuine efforts towards improving logistics India Needs to Open Up! improving its efficiency. Further, it also and increases the usage of Although India has achieved reduces incentives for financial broadband to a larger section, certain economic and development institutions to constantly search for especially in the rural areas. He said standards, it still needs to go a long innovative ways to develop private this on the sidelines of the three-day way, opined Raghuram G Rajan, Chief sector access. Although the deficits Pravasi Bharatiya Divas Summit. Economist, International Monetary have been financed with apparent He added that if India needs to Fund (IMF). He pointed out that the ease, they have held back growth. achieve the growth rate of 8-9 percent, country’s policies stand in the way of The WB Country Director, Michael it should strive to make its logistics achieving its true economic potential. Carter, averred that progressive fiscal of international standards. Despite having home-grown adjustment and financial sector reforms (FE, 07.01.05) multinationals like Infosys, Wipro, et should go hand in hand. While al., the Indian economy is still not pitching for policies to increase Abolish MSPs open to foreign goods and services. competition, he added that India needs At a pre-budget meeting held in Reiterating the need to finance to put in place more effective the Finance Ministry, agriculture infrastructure through foreign regulatory and supervisory systems sector experts suggested doing away exchange reserves, Rajan said the and make sure that the authorities take with the system of minimum support Government needs to push for reforms swift and effective action to deal with prices (MSPs) and replacing it with a whereby not only would India attract weak or insolvent institutions, so as participatory price insurance scheme foreign direct investment (FDI) but to minimise potential fiscal costs of to protect the interests of farmers. also be able to utilise its reserves to dealing with weak institutions. They also suggested setting up a pay for the import of capital goods. (FE, 06.01.05 & DH, 24.02.05) Rs 500 crore revolving fund for the He further stressed that improving Food Corporation of India to expedite access to education and finance and Economy and Ecology? the payment for purchase of pulses providing better rural infrastructure Certain experts have pointed out and oilseeds from growers, with a will gain support for global that economic or industrial view to encouraging cultivation of competition from a larger section. development should not be at the cost these crops. “India’s foreign exchange reserves of ecology and voiced the urgent need In a related development, a report are significantly above the requirement to preserve the ecological balance in entitled, ‘Vision, Strategy and Action and need to be managed. India needs coastal areas, with a view to Plan,’ prepared by Rabobank for the to find ways to push capital out,” said preventing tsunami-like disasters in Ministry of Food Processing, has Rajan. (BS, 20.01.05 & ET, 14.01.05) future. According to them, the suggested that the Government destruction of the mangroves was one should replace the MSP system with Fiscally Unsustainable of the main reasons for the failure to direct income support system, routed Various experts have expressed mitigate the tsunami disaster. through a credit card or a bank their concern about India’s 8-10 The Director of Centre for account. The report points out that percent fiscal deficit, which is Environment and Food Security the MSP system created imbalance ‘unsustainable’. The fiscal deficit (CEFS), Parshuram Ray, expressed his in farm output at the cost of other problem will limit investment and even concern over the issue. He stated that agri-produce. prevent the financial sector from more than 65 percent of the population (ET, 12.01.05, FE, 18.01.05 & 11.01.05)

17 u PolicyWatch E X P E R T C O R N E R

Meaningful Reporting addressing a symposium organised by Regulatory Authority, is required for The Government makes a large The Loyola Economics Association monitoring farm loans and reminding number of promises within and outside for Development. the bankers of their responsibilities the budget, but it is a good idea to Assuming that the Indian towards the farmers. This will also prepare action taken reports (ATRs), in economy maintains the current make the agri-credit mechanism more order to pin down the government on growth rate, it would take another 61 effective. promises made, according to Bibek years for the country to catch up with Further, he said that most banks Debroy. For a short span of time, under the current economic level of the even failed to fall within the RBI the National Democratic Alliance United States. “Not in your lifetime,” prescribed 18 percent priority sector- (NDA) government, the budget papers he told an audience, comprising lending norms and because of the lost had ATRs. However, the language largely college students. sanctity of the prime lending rate was quite vague and highlighted Pritchett was, however, bullish on (PLR), saw a fall in net profits. Farmers movement rather than action. Instead, the country’s growth prospects and feel deprived when big industrial the ATR should comprise of added that India was a “rich country groups walk away with interest rates meaningful ‘action’ taken and should waiting to happen”. He said that below the PLR. (FE, 27.01.05) not be mistaken with ‘movement’. steady economic growth was good for Recently, the Business Standard the country and cautioned against an Matter of Clarity had carried excerpts from the PMO’s accelerated pace. (ET, 11.02.05) policy thrust for assorted Ministries he lack of clarity in legislation to monitor their functioning and check TFC Prescription Tand ensuring the independence whether the Ministries are conforming The 12th Finance Commission (TFC) and accountability of the regulators to the National Common Minimum has stated that getting the right size are some of the critical issues facing Programme (NCMP) objectives. and composition of government the regulatory structure in India, However, for meaningful ATRs, precise expenditure, to ensure the highest according to Montek Singh targets and time frames are needed, attainable growth rates and meeting the Ahluwalia, the Deputy Chairman, preferably with improvements in government’s social obligations, Planning Commission. He said this outcomes. (BS, 17.02.05) should be considered integral to any at a seminar on the ‘Regulatory plan for restructuring public finance. Framework for the Infrastructure Sector Ridding of Red Tape It said that the suggested reform in India’, jointly organised by the India is on it ways to growth and strategy has to aim to strengthen Planning Commission and Consumer has made significant advances in the growth by increasing the public sector Unity & Trust Society (CUTS). liberalisation of various key savings and the government’s capital industries such as telecom, electricity, expenditure, relative to the GDP. This insurance, transportation, etc., would entail reducing the share of the according to William T Wilson, revenue deficit in the fiscal deficit, Managing Director and Chief which itself should fall. The Economist, Keystone India. Commission said fiscal correction Over the past few years, there has requires increasing the combined tax- been a significant acceleration in the GDP ratio to 17.5 percent, primary liberalisation of a number of key expenditure to two percent of the GDP industries. The market reforms are and the capital expenditure to nearly showing results in the country’s seven percent of the GDP by 2009-10. He further added that the terms national income. India’s immediate and The TFC pointed out that, since on which public sector incumbents timely action after the tsunami disaster the interest on the loan component of are to be subjected to competition indicates an improvement over red assistance was 300 to 400 basis points needs to be spelled out. The quality tapism. higher than the cost of funds to the of people working as regulators was The government’s current Five- Centre, the grant component couldn’t also important. Year Plan estimates that the Indian be really seen as interest free. Hence, While presenting the international economy needs to grow at about 8 it maintains that grants should be experience, Scott Jacobs, of Jacobs and percent annually. The country needs given as genuine grants and the Associates, outlined the major to put in more efforts so as to realise its states might be encouraged to borrow problems faced by regulators, such as vast economic potential. (FT, 29.03.05) directly from the market. (BL, 28.02.05) weak commitment to market reforms by governments, hostile policy Far Far Away... Agri-monitoring Body Needed environment for good regulation and Despite being a ‘star performer’ in An agri-loan regulator is the need undeveloped institutional capacities terms of economic growth, India will of the hour in banking, according to in the regulatory sector. take at least 34 years to achieve the M.S. Kapur, Chairman and Managing The seminar report is available at: 1950’s GDP level of the United States, Director, Vijaya Bank. A body along http://www.cuts-international.org/ according to a senior World Bank the line of the Telecom Regulatory RptRegFrmwork140105.htm economist, Lant Pritchett, who was Authority of India, or the Insurance (BS, 15.01.05)

18 u PolicyWatch S P E C I A L T O P I C Exposing the Sclerosis

overnance, and the sclerosis that has set in*, is the must exert its credibility and authority with the force of its Gfirst authentic account of how the Government ideas, by the fact that it speaks the truth, often the functions, written from the inside by the keen observer inconvenient truth. that is Arun Shourie. He talks about how the system is so The demographic inundation from Bangladesh is an rotten from within that most people are content to just let issue that no one was willing to look into. There was always things be, because they wouldn’t know where to begin, if an excuse to not do something: “one word has killed the they tried. Too many of us in the middle class are content country and that word is examination,” a senior intelligence to blame politicians. Shourie reveals that the bureaucracy official had to admit. Investigations are conducted, – composed of middle class people like us – is at least as information is shifted and the matter disappears. The much to blame. Government shuts its eyes. “This manifest softness is Having been a Cabinet Minister at various times since doubly fatal: on the one hand, it leads the enemy to 1998 – for privatisation, administrative reforms, information conclude that we will not fight; on the other, it leads us to technology and telecommunications – Shourie’s conclude that we should not fight.” observations, as revealed in his present work, are close to The point that Shourie makes through this range of the bone. examples is that the trend is the same, irrespective of the One ludicrous instance of red tape is when almost a gravity of the matter at hand. “When an ailment seizes the year of the valuable time of India’s most senior officials body, every follicle exhibits the same symptoms…You will was consumed to resolve the issue of whether civil find it in every aspect of India’s governance, big or small… servants should be allowed to use green or red ink, as This way of doing things – a mindless, endless shuffling opposed to the blue or black normally used. in slow motion – is not a device, it is more than a The new order in this matter said, “initial habit, it has become nature,” Shourie writes. drafting will be done in Where there exists a black or blue ink. certain group of people Modifications in the who benefit from the draft at the subsequent present system, it will do levels may be made in anything in its powers to green or red ink by the withhold change. How is officer so as to the system to be distinguish the overhauled when the corrections made.” decision to reform it and Hierarchy was also the wherewithal to specified: “Only an officer carry out that of the level of joint secretary decision lie in the hands of the and above may use green or very ones who benefit from red ink in rare cases (duly set arrangements as they are at present? out, with appropriate caveats).” In a review of the book, Edward Luce writes in the Shourie dryly notes, “a good Financial Times** that senior civil servants seem to inhabit bureaucratic solution: discretion allowed but a parallel universe in which “action” is defined by an internal circumscribed”! code that bears little relation to the society it serves. Too The real condition of public sector units came to light often does the hostile bureaucracy win with the help of only when it was time for them to be privatised. In the obfuscation, missing files and wonderfully baroque case of the hotels that were put on the block for delaying tactics. To be fair, Shourie notes that the Indian privatisation, it was found that not one had a deed or administrative system is capable of functioning with world- lease document (in order), Completion Certificate or class speed and efficiency. Following the outbreak of the mandatory certificates from the fire authorities. Their pneumonic plague in 1994, the city authorities of Surat licences for running restaurants and bars had either cleaned the port within weeks and there was no recurrence. expired or did not exist. The consultants selected to Every 12 years, the Uttar Pradesh Government caters to evaluate the properties were provided with only 10 to 15 almost 30 million pilgrims in the traditional Hindu kumbha percent of the information required. By foot-dragging of mela without a stampede, epidemic or riot. Which other this kind, the entire privatisation process could very easily country is capable of handing an event even a tenth of be killed. this? Unfortunately, it is the day-to-day work of the Shourie reveals that at closed door meetings, senior bureaucracy that matters, and it matters too much to be officials were referring to the Planning Commission as ‘a ignored. Shourie does a depressingly thorough job of parking lot’, ‘a doormat’ and ‘a limb the Government used chronicling it. to use to do and say things it did not want to say and do * Arun Shourie, Governance, and the sclerosis that has set in, directly, but a limb which has, by now, atrophied too much Rupa & Co., Delhi, 2004 to even do that much’. The Commission, Shourie feels, **FT, 10.04.05

19 u PolicyWatch V I E W P O I N T Union Budget 2005: A Fine Balancing Act

Key Budget Proposals • Bharat Nirman – to bring an additional one crore hectares under assured irrigation; to connect all villages that have a population of 1000 with a road; to construct 60 lakh additional houses for the poor; to provide drinking water to the 74,000 habitations that are uncovered; to reach electricity to the remaining 1,25,000 villages and offer electricity connection to 2.3 crore households; to give telephone connectivity to the remaining 66,822 villages • National Urban Renewal Mission – To cover the seven-mega cities with a population of over a million • National Food for Work programme converted into the National Rural Employment Guarantee Scheme • Roadmap for Agricultural Diversification; National Horticulture Mission; new scheme for agricultural marketing infrastructure; National Project for the repair, renovation and restoration of water bodies; coverage of micro- irrigation scheme to increase • Enhanced target for credit-linking under Micro-Finance Development & Equity Fund • To set up a Knowledge Centre in every village by 2007 • Manufacturing Competitiveness Programme to be launched to help small and medium enterprises • Textile package with a Technology Upgradation Fund, a subsidy scheme and enlarged life and health insurance for handloom weavers • Corpus for Research and Development Fund to be increased for pharmaceuticals and biotechnology • Drinking Water and Sanitation: emphasis on providing drinking water to the uncovered rural habitations and on tackling water quality in about 2.16 lakh habitations; Total Sanitation Campaign to be extended to all districts • 108 items under small and medium enterprises identified for de-reservation; enhanced provision for “Promotion of SSI Schemes” • All states to implement the Value Added Tax from April 1, 2005. Central Government to compensate the States, according to an agreed formula, in the event of any revenue loss • Policy of making the customs duty structure closer to that of East Asian neighbours • Excise duties rationalised with only two items – cars and aerated drinks – now attracting 24 percent duty For details, please visit the page, http://www.indiabudget.nic.in/

Money is not the Panacea banks to meet the challenge of sustainable, efficient and The Finance Minister (FM) is well aware that throwing low-cost intermediation. money at problems does not make them go away. This is A landmark move in the budget is the announcement evident in his Budget speech where he says that outlays of measurement of development outcomes. This in effect do not necessarily lead to outcomes. takes the national budgeting process to the level of What has made investors, and most economists, performance budgeting. In a sense, budgeting in India is happier is that he has concentrated on continuing growth truly coming of age. (ET, 01.03.05) as a necessary element of all-round development. Peak K V Kamath custom rates are down. There is still a long way to go but MD, ICICI at least the direction of change is right. One hopes that a rising growth rate will garner enough resources to carry Only Futuristic Projections, No Realism! out at least a few of what the Common Minimum Programme There’s expected to be only a marginal decline in the promises to deliver. fiscal deficit. In 2004, the FM pinned hopes on the collection The FM has done away with the government’s ability of arrears of taxes. This year, he has maintained complete to force people to save in instruments that the government silence on how much he has collected, or hopes to collect. controlled. This had resulted in a cascading set of The Budget is silent on the privatisation of public sector distortions in financial markets, not the least of which is undertakings (PSUs) and gives no disinvestment targets. the interest rate floor on small savings. This one measure This clearly means disinvestment is on hold and even loss- will boost capital markets, make financing of new making PSUs are not going to be disinvested. The FM investment cheaper and, most importantly, encourage more seems to have no public sector policy. players to enter the market. (ET, 01.03.05) The ambitious Bharat Nirman scheme for rural Shubhashis Gangopadhyay development seems to be part of an election manifesto. India Development Foundation The catch in the scheme is that it says targets will be fixed for 2009. Fixing targets four years hence puts one in a very Harness the Financial Acumen comfortable situation. No tangible details have been The Budget places broad-based economic development delineated so far and no annual break-ups made available on top of the national agenda. The FM has outlined a for the four years. It is just an idea. Similarly, the FM has holistic approach towards tapping rural India’s vast made only futuristic projections for employment potential as an engine of growth. generation. (FE, 01.03.05) By encouraging delivery of financial services through Yashwant Sinha agents and banking correspondents, it makes possible for Former Union Finance Minister

20 u PolicyWatch G O O D P R A C T I C E S Back to the Basics! Organic Farming in India

The Green Revolution Myth and Reality The Green Revolution, no doubt, enabled the country A commonly held myth has long led farmers to view to boost the production of staple crops and put us on an organics suspiciously — that they traditionally result enviable food stockpile. Unfortunately, it also deteriorated in lower than conventional yields. For instance, some the soil health due to excessive use of chemical fertilisers tea planters in eastern India are apprehensive about and degraded the environment through the use of making the switch to organic tea, since production falls chemical pesticides. The groundwater table has been drastically during the five or six years required for depleted on account of over-exploitation. The result of making the transition. According to them, a planter who the mono-cropping of high-yielding varieties of wheat and decides to make the switch will have to stop using rice was that traditional nutritious varieties of wheat, rice chemical fertilisers, pesticides and herbicides for at least and coarse cereals, which were earlier five years to clear all traces of grown in arid and semi-arid rain-fed such chemicals from the soil and areas, are now out of cultivation. A commonly held myth has long led the tea bushes. No one has the Farmers have committed suicide farmers to view organics suspiciously — financial muscle to last five on account of being debt-trapped that they traditionally result in lower than years on a reduced crop. But, from the use of spurious pesticides conventional yields others say that this is not true and fertilisers, leading to crop failure. at all. Leaf production may The factor productivity decreases as decline for the first few years. the soil is degraded due to excessive use of chemical But, a plantation can realise enough leaf to sustain itself. fertilisers and pesticides. The crop productivity and After three years, once a thick bed of mulch has been production graphs plateau after a certain level. For instance, built over the topsoil, the tea bushes automatically get when urea is used, the plant absorbs nitrogen, but the rest their nutrition from the soil and leaf realisation of the petrochemical, which is a ‘carrier’ that holds the increases. In fact, organic tea fetches much higher nitrogen together, seeps into the soil, making it hard, prices. leaving no space for the roots to grow. The Opportunity What is Organic Farming? The shelf life of organic fruits and vegetable are found Organic farming is a crop production system that to be more than their non-organic counterparts. Organic generally excludes the use of synthetic fertilisers, farming is less expensive for farmers, who can earn premium pesticides and other chemicals. To the maximum extent prices for their produce. The global market for organic feasible, they rely on crop rotations, crop residues, animal foods is valued at US$37bn. Markets in the EU, Australia manure, legumes, green manure, neem seed, kernel and the US, where consumers have been fed on hormone- extracts, neem and karanj seed cakes, compost, cow treated beef and genetically modified (GM, or transgenic) dung, cow urine, bio-fertilisers, vermicompost, vermi- crops for years, are now known to be willing to pay a wash, off-farm organic wastes, mechanical cultivation, premium of 20-25 percent on organic produce. This must and biological pest control to maintain soil productivity, be seen as a great opportunity to pull Indian agriculture to supply nutrients to plants and control weeds and out of the low performance doldrums it has been in for pests. Organic farming: decades now. • uses no harmful chemicals • does not pose occupational hazard to farmers …And the Scope for Using it • keeps food free from pesticide residues, the long term About 65 percent of India’s cropped area is un- effects of which are not clear (many diseases today are irrigated, where the farming practices are still largely attributed to this) ‘organic by default’, without any effort of the • eliminates chemical effluents from the fields government. One of the main reasons for this is that 60 • produces more nutritious food percent of the cultivated area is rain-fed where the use • precludes the existence of genetically modified of chemical fertilisers is either negligible or absent. organisms Farmers resort to excessive use of fertilisers only where • enables the soil to maintain a balance through multiple there is assured irrigation. The farmers in rain-fed areas, cropping and a wide variety of beneficial insects and by and large, use organic manure and traditional farming other wildlife to act as natural predators for crop pests practices. This provides us, in India, with a natural • is kinder to the planet, in terms of sustainability of its advantage, as far as cultivation of organic crops is resources concerned.

21 u PolicyWatch G O O D P R A C T I C E S

The Experience the destiny of Punjab through the practice of organic Karnataka: farming, water harvesting and use of eco-friendly bio-fuel. So far, all policy statements on organic farming have The organisation has roped in intellectuals in environment been made at the national level. The first state-level policy and conservation technologies and organised 35 village in the country, the one by the Karnataka State Government, level awareness meetings in six districts of Malwa with the is expected to offer greater location-specific priorities. participation of more than 500 farmers. Malwa’s cotton Significantly, the policy is not market-driven — the belt faced one of the most unfortunate situations emerging State claims it is not aiming at premium dollars for from debt, death, destruction and displacement: as many organically grown produce in the export market. In fact, as 3,000 farmers committed suicide. the Karnataka Agricultural Department says it has a practical reason for welcoming this policy: it will help Maharashtra: reduce the use of chemicals, improve soil quality and offer Major vineyards in Maharashtra expect a growth in a practical platform to push organic farming. This, in turn, harvest, riding on the back of cost-effective organic farming will lead to a reduction in input costs for farmers. practices in water management, weed management and Department sources say, with rising costs of chemical diseases and pest management. According to A S Deokate, fertilisers and pesticides, farmers had already started Corporate Manager, Indage Group, “we are into organic cutting down on their use. farming and plan to produce residue-free grapes for making What seems to concern the Government most is organic wine, as everybody is becoming health ecological damage, mainly erosion of soil and pollution of conscious.” groundwater because of constant use of chemicals. Groundwater contamination has been making news as labs Challenges discovered traces of pesticides in everything, from breast There are many challenges that are faced by the milk, to cow’s milk, to bottled water, to soft drinks. It is the practice of organic farming. One was already touched upon excessive use of chemical fertilisers and pesticides that is earlier – about the yield drop in the initial two to three to blame for this. years. According to the The Government is looking at Hybrid seed companies, along with Association for the Promotion of self-help groups (SHGs) to take up fertiliser and pesticide companies, have a Organic Farming, a dramatic shift activities such as production of vested interest in not promoting organic from chemical to organic farming quality compost/vericompost, cultivation can bring the yield down by as organic seeds/planting materials much as 50 percent in the first year and plant protection material. The and in the second by 25 percent. It policy expects to channel this organic produce through is only in the third year that there may be parity between Government marketing arms such as SAFAL (Mother the yields of an organic farm and a chemical farm. Dairy’s Fruits and Vegetable market), APMC (Agriculture The next challenge comes from marketing of the final Producers’ Marketing Committee), HOPCOMS produce. It either gets mixed up with regular crop on its (Horticultural Producers Cooperative Marketing and way to the market or does not get a premium. If the produce Processing Society), NCS (Nursery Certification Scheme), is perishable, sellers will be eager to sell at any price, to KAPPEC (Karnataka Agricultural Product Processing and avoid wastage. Export Corporation Ltd.) and KVIB (Khadi and Village At a higher level, proper certification of organic produce Industries Board), which will have separate markets and is absolutely necessary. The package for organic farming storage areas for organic produce. The Government also technology has to be location-specific and, therefore, there plans to offer credit facility for organic farming at is a need to explain our organic farming practices to concessional rates of interest. international certifying bodies and other quality certifying bodies in importing countries. Punjab: Hybrid seed companies, along with fertiliser and Punjab, which literally means the ‘Land of Five Rivers’ pesticide companies, have a vested interest in not and was once characterised by abundance of water, is promoting organic cultivation. Hybrid seeds are designed turning into a land of either no water or contaminated water. for an environment of chemical fertilisers and pesticides, Due to loss of massive forest cover in the Shivaliks, many and when these inputs are not given, their yields tend to tributaries and streams have dried up; many are be the same as ordinary seeds. In fact, there are many contaminated on account of dumping of industrial wastes. stringent conditions for a product to be certified as organic Groundwater tables have depleted from 15-20 feet to 150- in the global market. 200 feet in several parts of the state due to excessive The state should devote itself to providing cultivators exploitation, without adequate recharge through water with timely information, a sound regulatory mechanism harvesting. and a science-based policy. A local voluntary organisation of farmers and youth (The information in this article has been taken from articles called Kheti Virasat has taken up the mission to reshape in FE over the period March 2004 to June 2005)

22 u PolicyWatch D I S C U S S I O N T O P I C VAT 2005: Proposed Implementation and Challenges arking a momentous tax reform, as many as 21 States and most Union Territories in the country switched to Mthe Value Added Tax (VAT) regime from April 1, 2005, replacing the sales tax and other levies like entry tax. The grandiosity of VAT arrival has, however, been marred by strong resistance from traders and far-from- impeccable preparedness of the legal and administrative machinery. What is New about the VAT? Exemptions Under the old sales tax system, each of the different Dealers having a turnover of up to Rs five lakh will be links in the supply chain was being taxed, just like in the exempt from VAT. No registration is required for them. new VAT regime. This amounts to double taxation, as the These traders are not eligible for any input tax credit. This manufacturer pays a tax on the output directly and has means that small traders do not pay any tax on their value also paid a tax on the input purchased (included in the addition, but do pay a tax on the inputs used (through cost of the input). The distinguishing character of the input cost). VAT is that this double taxation is corrected by allowing Small dealers with annual gross turnover not exceeding for a set-off on the tax payment on output – an input tax Rs 50 lakh, who are otherwise liable to pay VAT, shall have credit. This eliminates the cascading effect, taxing only the option for a composition scheme with payment of tax the value addition to the good at each stage and not the at a small percentage of gross turnover to be decided by entire value. State, again without input tax credit. For instance, if a weaver bought cotton for Rs 100 (this includes Rs 20 as tax @ 20 percent) and sold the Loose Ends cloth for Rs 200 (charging the customer Rs 40 as tax @ 20 The prickliest issue about the VAT is that for the first percent), then his total tax liability becomes: few years, it must coexist with the old sales tax. Over the total tax payable – input tax credit next two to three years, the sales tax will be phased out = 40 – 20 = 20 and a pure VAT will be in place. But, before this stage is The weaver still pays Rs 40 to the authorities, but is reached, there will be more-than-double taxation, prices entitled to a refund of Rs 20 on production of an invoice. will rise, business All other existing state taxes such as turnover tax, will flag and inflation surcharge, additional surcharge and special additional tax will run high. would be abolished over time. This is aimed at making the Traders all over the Express Financial The system neater in implementation and more secure as a country have been revenue source. up in arms against the implementation Objectives of VAT of this system • Lower the cost of production and investment since its very • Replace a plethora of different taxes by a single levy announcement. It • Simplify tax returns and procedures has created • Levy a tax at all points up to the final consumer confusions with • Eliminate tax declaration forms required to identify regard to their future goods that have already borne tax plans on relocation • Adopting the system of self-assessment of taxes by of production/ dealers, with only selective audit and verification of distribution declarations made by them facilities. Leaders • Rationalising tax exemptions and rates have been unable to convince traders and consumers of • Replacing the system of notifications and discretionary the long-term benefits of the VAT and the immediate losses provisions by explicit and transparent rules that may be necessary to get them. Leaving aside the issue of simultaneous existence of VAT Rates the two taxes, even the implementation of the VAT in itself There are four basic rates of VAT: 0, 1, 4 and 12.5 percent. can be a problematic task. Any level of propriety in VAT There will be 46 zero-rated commodities – natural and collection demands a strict and clear system of unprocessed products, goods of local social importance, entrepreneurial accounting. The submission of invoices exports, business under special economic zones and for the collection of input tax credit is central to the idea. In software technology parks. Special VAT rate of one percent the case of a bulk of the Indian entrepreneurs, accounting will be levied only for gold and silver ornaments. The four is absent, at worst and insufficient, at best. This will surely percent category comprises items of basic necessities such create problems that cannot be ignored. as medicines and drugs, all agricultural and industrial The silver streak, if one chooses to look at it, will be inputs and capital goods. The remaining commodities, that the lure of an input tax credit may induce the habit of common for all the States will fall under the general VAT better accounting, where it does not already exist. rate of 12.5 percent. (This article has been compiled from news clippings from ET, BS and FE, Jan-Mar, 05)

23 u PolicyWatch E V E N T S & P U B L I C A T I O N S Forthcoming Publications… Multilateral Competition Framework: ReguLetter In Need of a Fresh Approach ReguLetter is the flagship newsletter of The paper starts with recognising the the Centre for challenges posed by cross-border Competition, competition issues, such as Investment & international cartels, export cartels, Economic Regulation mergers and acquisitions, import (C-CIER), covering cartels, foreign investment related information related competition problems and intellectual to the competition property rights related competition scenario around the problems. It then examines the bilateral world. The cover and regional cooperation arrangements story in this issue to deal with these issues – including (volume 6, issue 1) the existing UNCTAD Set and the talks about “Access proposed competition framework at the to Medicines: Beyond Patents” as a critical issue WTO – and finds them to be grossly inadequate. in the developing world today. The tricky The final suggestion is that a new organisation, dedicated business of Corporate Social Responsibility and solely to competition issues under the auspices of the UN, will the way forward with it, is tackled in the section be the most suitable. The new agency can combine the principles titled ‘Perspective’. Other than the regular and structures of the World Intellectual Property Organisation features like Macro Issues, Micro Issues, (WIPO) and Interpol, and similar multilateral bodies. Restructuring, Corporate Issues, Investment & (Suggested Contribution: Rs 100/US$25) Privatisation and Sectoral Regulation, there are Economiquity special articles on ‘Efficiency Defense in The No. 1-2005 issue highlights the Competition Law: A Small Economy Perspective Sutherland report, which calls for ‘ and ‘Does a Cartel Exist in the Philippine Oil institutional reforms of the World Trade Industry’. Besides, it also talks about the Organisation. It emphasises on the need investment prospects in Vietnam for Indian to resolve the disputes between India business as a means of economic cooperation and Pakistan as a key to better economic between the two countries in ‘News & Views’ cooperation in South Asia. It analyses and discusses the state of competition in some of the apprehensions related to Ethiopia. An ‘Insert’ in this issue informs the India’s Patent Act. reader about the current activities of the Centre. (Subscription: Rs 100/US$20 per (Subscription: Rs 150/US$30 per annum) annum) Forthcoming Event… Retreat on Regulatory Accountability With the view to facilitate better understanding among key stakeholders, CUTS Centre for Competition, and Independence Investment & Economic Regulation (CUTS-CCIER) New Delhi, India, July 23, 2005 envisaged organising rounds of discussions to deliberate Regulators need to be given sufficient autonomy to upon the key aspects of regulatory accountability and ensure that they take judicious decisions in a competent independence and help emergence of a consensus, in manner and made accountable and answerable for their this regard. actions and performance. Against this background, a retreat on ‘Regulatory Lack of functional autonomy is not the only deficiency Accountability and Independence’ (second in the series with which regulatory regimes in India are struggling. of three) will be organised at the India Habitat Centre, Poor accountability mechanism is the other concern that New Delhi, on July 23, 2005. is of equal importance and has a direct bearing on The first, in the series, of such discussions was regulatory efficacy. The system should be able to take care organised successfully at New Delhi, India, on May 7, of possible non or even under-performance. Given that 2005. the science of regulatory regimes in India is still evolving More on: http://www.cuts-international.org/ the issue so far has not been able to attract due attention. forthcoming-events.htm#retreat23july05 SOURCES

BL: The Hindu Business Line, BS: Business Standard, DH: Deccan Herald, ET: The Economic Times, FE: The Financial Express, FT: Financial Times, HT: Hindustan Times, ToI: Times of India

The news/stories in this Newsletter are compressed from several newspapers. The sources given are to be used as a reference for further information and do not indicate the literal transcript of a particular news/story.