Monday, October 29, 2012

The lessons of 1962

The 1962 war with China — 50 years ago this month — was a watershed in many ways for India. While the loss of the war was such a humiliating defeat that the scars on the national psyche still persist in some ways, there were other consequences for India at many levels as well.

The first was a rethink about its own foreign policy strategy that had been based until then on a sense of anti-colonial and Asian solidarity against the West. Indian and Chinese intellectuals involved with the freedom movement in both countries had supported each other during the course of their historical struggle against Eng-lish and Japanese imperialism.

During the 1950s, India was one of China's greatest champions, arguing constantly for a seat in the UN for China. India also refused to align with the West in any anti-communist alliance, something that Pakistan did by joining the US-led SEATO. It also supported and encouraged Chinese participation in international events, and during the Bandung conference of 1955, signed the Panchsheel declaration with it.

But 1962 was to change any sense of solidarity into one of great mistrust and force India to rethink its own strategic security. It moved immediately to secure its alliance with the Soviet Union while still maintaining non-alignment as its key foreign policy goal. China moved closer to Pakistan and still calls Pakistan its "all weather friend", supporting its anti-Indian positions in every international forum.

Today, as bilateral ties bet-ween the two countries have rapidly normalised and trade between them stands at more than $60 billion annually, they need to revisit the 1962 war to ensure that any repeat is avoided. For this to happen, they need to re-examine the circumstances that led to war in the first place.

Here, Indian researchers are handicapped in their analysis because the expert committee report — the Brooks Henderson Report — has been kept secret. We have heard that the report castigates the political and military leadership of that period rather than merely citing the lack of equipment and overall unpreparedness on the part of India. In public discourse, India continues to see China as the aggressor and an ally that stabbed India in the back, while the Chinese blame Jawaharlal Nehru's Forward Policy for the debacle.

Two factors speak of Chinese pre-emption where 1962 is concerned. First, their prepared-ness for the war shown by their capacity to move in major battalions on both the western and eastern front. The Chinese withdrew from the eastern sector even though they still continue to claim Tawang but did not withdraw from Aksai Chin, an area that they originally needed to ensure a link between their two provinces of Xinjiang and Tibet.

However, another reason can be attributed to this muscle flexing by China. This was an inevitable rivalry for status as leaders in the region. These were two countries that gained independent nationhood status at the same time, were both champions of the anti-colonial struggle and yet both advocated entirely different political systems. China was a communist party-led single-party system while India was a fledgling but strong parliamentary democracy.

While both professed solidarity, both also saw their own system and ideas of social development as superior. Mao wanted to lead a third world revolution and Nehru had assumed the mantle of an international statesman in support of democratic politics. Both countries were proud and nationalist.

It is these two tendencies that may once again force a confrontation. China has already made aggressive territorial claims against Japan and other East Asian countries and continues to use every occasion to remind India of its territorial claims by denying visas to people from Arunachal Pradesh. In many ways, the Communist Party in China today uses nationalism as its main discourse for the aim of turning the country into a great power. It can no longer fall back on Maoist egalitarianism since it is now the second-largest capitalist economy in the world. China's blogosphere is replete with constant exhortations to defend Chinese national interest by regaining all its territories, including and especially Taiwan.

India too has its own nationalists who see China as the main threat to India and want to see India as a rising power. While discourses of nationalism are understandable, they are also dangerous and can lead to unwarranted xenophobia, forcing governments to take positions that are not necessarily pragmatic.

Both countries have changed enormously since 1962. They are both rising economies — and here again it is assumed that an inevitable rivalry will rise, especially for resources and markets. But both have a lot to gain from changing mutual perceptions of each other. While each remains prepared militarily — and here India is well behind China in its military modernisation and border area infrastructure development — investing in a sound mutually beneficial economic relationship and increased people-to-people contact is the best way forward.

Recent confidence-building measures amongst the two, inclu-ding more than 15 rounds of border talks and increased multilateral cooperation, have helped curtail the post-1962 trust deficit. Both countries now need to concentrate on their internal deve-lopment issues and ensure that they keep all channels of communication open between them.

We may not become best friends again but we can certainly ensure that we become cooperative neighbours and neither harms the other directly or indirectly. As Prime Minister Manmohan Singh has said, "There is enough space for India and China both to grow."


Monday, October 22, 2012

The Economics of Nature

The strongest message to emerge from the global conference of the Convention on Biological Diversity in Hyderabad is that countries allowing their natural capital to be rapidly depleted and destroyed in pursuit of short-term goals are dangerously risking their future. Many examples from around the world underscore the importance of diverse plant and animal species to agriculture, human health, climate and the complex web of interactions that make up an ecosystem.

It is important to note, for example, that the latest update of the IUCN Red List of Threatened Species classifies 20,219 of the 65,518 species listed, as facing extinction. Given the rising threat, the Conference of the Parties to the CBD have done well to commit themselves to a doubling of biodiversity funding for developing countries, although from a modest baseline. India, which has assumed the presidency of the conference and is itself biodiversity-rich, must show leadership by mainstreaming ecosystem concerns in development policy. It has won plaudits by allocating $50 million towards building technical and human capacity to attain biodiversity conservation goals in the country. But the real test lies in its commitment towards strengthening and implementing national laws on environment protection, forests, wetlands, marine areas, wildlife, tribal welfare, air quality and urban development. Some key laws, notably the Environment (Protection) Act, are weakly enforced at present, if at all. State governments share a considerable part of the blame for rendering the law sterile.

Arguably, some of the most important takeaways for participants of the Hyderabad meet come from the findings of The Economics of Ecosystems and Biodiversity studies. They show that nature is critically important to the livelihood of millions, and in India, 47 per cent of the ‘GDP of the Poor’ comes from ecosystem services. It is heartening that Prime Minister Manmohan Singh acknowledged this contribution of natural capital to the economy of the less affluent — in comparison with conventional GDP measurements.

There are valuable insights also for urban areas in the ‘Cities and Biodiversity Outlook’ study. A preliminary assessment of Bangalore, for instance, has demonstrated the value of biodiversity to slum livelihoods, in the form of food and herbal medicines. Local body governments, however, were found to have insufficient knowledge on sustainable development. These are pointers to the work that lies ahead. The CBD’s Strategic Plan for Biodiversity and its Aichi Targets for 2020 call for speedy action to stem losses. India must lead by example over the next two years.

Source: The HINDU

Wednesday, October 17, 2012


India agriculture is on a long-term growth path. Not only is it growing steadily, it has become more diverse and resilient as compared to the past. This despite many challenges such as high dependence on monsoon rains, pressure on cultivable land water resources, and climate change.

As per the latest crop production data available, India produced a record 252.56 million tones of food grains in 2011-12. Many major food crops such as rice, wheat and urad have seen records levels of production. Among non-food crops, cotton production too has crossed the earlier record. The production of fruits and vegetables also has seen significant rise in production.

While this rise in production of various crops has been helped by a favorable monsoon, it would not have been possible without the many new initiatives taken by the Central Governments to agriculture, and positive response from the farming community.

Focused Approach Pays

During the last five years, the Central Government has initiated a number of new schemes with focus on crops and areas with potential for high productivity. The approach has been to harness the unutilized potential by encouraging best practices, distributing quality inputs, bridging gaps and-no less important – constantly monitoring implementation.

One of the major focused interventions for increasing the production of rice, wheat and pulses in a time-bound manner is the National Food Security Mission (NFSM). This mega scheme is in operation in 480 districts in 18 states. The targets for enhanced production of rice by 10million tones, wheat by 8 million tones and pulses by 2 million tones by 2012 with NFSM interventions have already been achieved.

An area focused scheme, Bringing Green revolution to Eastern India, was started two years back to give a boost to food grains production in the eastern parts of the country, which remained untouched by the Green Revolution of ‘60s and ‘70s. This scheme is in operation is Assam, Bihar, Chhattisgarh, Odisha, Eastern Uttar Pradesh and west Bengal. The Production figures of the last two seasons from this area show that the scheme is helping in fast rise in production of crops, especially rice.

Since pulses are a very important source of protein and India has to import a large part of its pulses requirement, a series of steps have been taken in the recent years to promote production of these crops. While pulses have been integral to the NFSM scheme, a new programme of Integrates Development of 60,000 Pulses Village in Rain fed Areas is being implemented in 11 major pulses growing States, specifically to promote pulses production in rained area. So as to intensify the effort, villages have been selected and locally suitable practices are promoted in these villages.

New crop specific initiatives include setting up of a National Mission to promote saffron cultivation in Jammu & Kashmir and a National Bamboo Mission in 27 states. Specific programmes are in operation to promote vegetable cultivation near cities, oil palm, other oilseeds, maize, millets and fodder crops.


A Rs. 25,000 crore scheme, Rashtriya Krishi Vikas Yojana (RKVY), was launched five years ago to incentivizing states to invest more in agriculture. The Structure of the scheme is such that states have complete flexibility in use of funds for any activity that supports farming and allied activities. States are also given awards for their achievements planning for RKVY projects starts at districts level to cater to local needs. This single scheme has resulted in significant rise in investment coming from States towards agriculture and it will have a long term impact towards invigorating the entire agriculture sector. In the last five years, States have used RKVY funds and supplemented these with their own funds for project in areas ranging from land reclamation, micro-irrigation, organic farming mechanization, creation of storage facilities and seed farms to dairy development and fisheries.

Rising Investment in Agriculture

The growth Indian agriculture remained stagnant after the green revolution mainly due to low level of investment. The trends, however, has reversed in the last few years, especially after launch of RKVY and government’s high focus on food security. The Gross Capital Formation (GCF) – a measure of investment – in agriculture sector has risen from about Rs. 76,000 crore in 2004-05 to over Rs. 142,000 crore in 2010-11. While GCF was 13.5% of the Gross Domestic product (GDP) in agriculture in 2004-05, it is over 20% now. State plan expenditure on agriculture has grown substantially since the launch of RKVY. States were allocating about 4.9% of their plan funds to agriculture five years back; in 2010 – 11 they allocated 6.04% to agriculture .

Farmers Must Get their Due

So that farmers get remunerative prices for their produce, the Government announces Minimum support Prices (MSP) of major crops and makes provisions for procurement of the produce at MSP through various agencies. The MSP of major food grains, especially pulses, have been raised substantially in the last few years. The rise has been more pronounced in the case of pulses and millets – the protein crops.

Ensuring remunerative prices for major food grains is also one of the strategies for growing enough food grains to meet India’s demand and generating surplus. This is perhaps one factor that has contributed in a major way to the records production of a large number of crops in the recent years.

Credit: A key input

Farming operations require funds starting from preparing the field for cultivation until the harvest is sold in the market. The Farmer also needs money for other operations, purchase of machinery, dairying, animal husbandry and many more activities. Availability of credit, and in right quantity, therefore, is a very critical requirement for various farming operations.

The Government is striving to reach credit in adequate quality and at low interest to farmers when they need it. There is special emphasis on bringing all farmers, especially small farmers, under institutional credit so that they are not fleeced by moneylenders. The thrust given to institutional credit has resulted in the growth of farm credit from about Rs. 85,000 crore seven years back to above Rs. 5 lakh crore this year. The Government has been paying subsidy (interest subvention) on farm loans to make them affordable. Because of this, farm loans are available at 7% per year and crop loans up to Rs. 3 lakh at 4% per year.

Horticulture and Food Processing:

The Sunrise Sectors

For fast growth in horticulture, a National Horticulture Mission has been established. Another similar Mission in operation to look into the special needs of hilly states with regard to horticulture related activities starting from providing quality planting material to storage, marketing and processing

The Government is giving incentive to entrepreneurs, farmers and state agencies to create storage and marketing facilities for grains as well as the highly perishable horticulture produce.

For encouraging the food processing sector, Mega food parks are being set up throughout the country so that industries get all services at one place.

These and many other initiatives taken in the recent years are bolstering the intrinsic strength of Indian agriculture and marking it more productive. These will help it not only face the challenges of deficient monsoon, climate change etc but also keep it on the path of sustainable growth.


Monday, October 15, 2012

New code of conduct in marketing

Over the past few decades, we’ve focussed our energies on migrating information from the physical world on pen-and-paper into digital formats. In the process, we’ve created large information troves on the Internet using computers to be able to organise and store all the data we have. And computers have merely been helping us process this information.

But the future is in the converse: where computers begin to observe, assimilate and report the physical world.

Of course, computers don’t interact with the physical world like us; so we create tools that allow computers to do so. Take, for instance, barcodes. Here, vertical lines are scanned using a thin beam of light (usually laser), and this allows a computer to identify a book or a product without having to feed this information into the computing system. We see this at counters at grocery stores, supermarkets and libraries. The future of the Web will be somewhat similar but far more sophisticated, wherein computers will identify our physical world by looking at it, much like we do: with ‘digital eyes’ using semiconductor-based cameras.


Original barcodes comprise patterns made of parallel lines varying in width, conveying a sequence of ones and zeroes, which the computer can scan to decode into a matching number or interpret as any other relevant information. Using a dedicated scanning tool has been an inherent problem of the barcode system. Today, with digital cameras becoming ubiquitous — webcams on desktops, laptops, phones and mobile computing devices — we can simply write software that can convert the images of barcodes into the relevant information without having to scan the code using laser beam.

Quick Response codes, or QR codes, take the concept of barcodes to the next level.

QR codes are two dimensional patterns, usually of black modules on white background, which can hold a lot more information than conventional barcodes. Not just numbers, but names, Web URLs, or text material too can be encoded into these codes. Once encoded and a QR code is generated, it can be printed on an advertising hoarding or a product, and the cues are ready for computers to make sense of. Decoding QR codes to retrieve this information requires the computer to observe the QR code via its digital camera, software to decode this information and connectivity to fetch relevant information from the Internet.


QR codes are square images, with smaller black spots holding the binary information, in a manner vertical lines convey characters in barcode. Three squares on three corners of the QR code and a smaller square off the fourth corner help a computer identify the orientation of QR code. Keeping these corners as reference, the rest of the information is processed using simple image processing techniques to decode the binary pattern into a mobile number, name or URL. After decoding this information, a phone call if it is a number, or a search result from the Internet if it is a URL are instigated using software programmes.


QR codes are all set to become the next big thing in marketing. For, if the link to purchase a product is shown on an advertisement hoarding as QR code, the chances of converting the advertisement into a sale is higher.

However, being an all-new technology, there is a learning curve involved. Hence, building awareness on QR codes is important before this can really catch on.

Another concern is security. There is a good chance that QR codes of legitimate sites can be tampered to lead users into dangerous websites, or other security risks. These security risks have acquired a portmanteau term “attagging” (derived from attack and tagging). Creating secure and unique QR codes will be another challenge.


Most smartphone operating systems (iOS, Android, Symbian) support QR code reading. Light and simple software packages from their respective application stores can be used to integrate with the on-board cameras to provide an extra bit of intelligence to the smartphones, making them smarter!

The most popular of such packages is Google Goggles. This app by Google is more than a QR code reader: it is Google’s debut in using images for search. When installed on smartphones, the phone operating system attempts to identify the pictures that are being clicked by looking up for the tags in pictures.

Identifying website logos, famous monuments are the features Google Goggles is capable of. By embedding a QR code in a poster, or a commodity, when the user scans the code using a smartphone camera, the information is immediately suggested.

QR codes with help of tools like Google Goggles are helping us inch closer to bridging the divide between computers understanding the physical world.

Source:The HINDU

Inequality and The World Economy

BY THE end of the 19th century, the first age of globalisation and a spate of new inventions had transformed the world economy. But the “Gilded Age” was also a famously unequal one, with America’s robber barons and Europe’s “Downton Abbey” classes amassing huge wealth: the concept of “conspicuous consumption” dates back to 1899. The rising gap between rich and poor (and the fear of socialist revolution) spawned a wave of reforms, from Theodore Roosevelt’s trust-busting to Lloyd George’s People’s Budget. Governments promoted competition, introduced progressive taxation and wove the first threads of a social safety net. The aim of this new “Progressive era”, as it was known in America, was to make society fairer without reducing its entrepreneurial vim.

Modern politics needs to undergo a similar reinvention—to come up with ways of mitigating inequality without hurting economic growth. That dilemma is already at the centre of political debate, but it mostly produces heat, not light. Thus, on America’s campaign trail, the left attacks Mitt Romney as a robber baron and the right derides Barack Obama as a class warrior. In some European countries politicians have simply given in to the mob: witness Fran├žois Hollande’s proposed 75% income-tax rate. In much of the emerging world leaders would rather sweep the issue of inequality under the carpet: witness China’s nervous embarrassment about the excesses of Ferrari-driving princelings, or India’s refusal to tackle corruption.

At the core, there is a failure of ideas. The right is still not convinced that inequality matters. The left’s default position is to raise income-tax rates for the wealthy and to increase spending still further—unwise when sluggish economies need to attract entrepreneurs and when governments, already far bigger than Roosevelt or Lloyd George could have imagined, are overburdened with promises of future largesse. A far more dramatic rethink is needed: call it True Progressivism.

To have or to have not

Does inequality really need to be tackled? The twin forces of globalisation and technical innovation have actually narrowed inequality globally, as poorer countries catch up with richer ones. But within many countries income gaps have widened. More than two-thirds of the world’s people live in countries where income disparities have risen since 1980, often to a startling degree. In America the share of national income going to the top 0.01% (some 16,000 families) has risen from just over 1% in 1980 to almost 5% now—an even bigger slice than the top 0.01% got in the Gilded Age.

It is also true that some measure of inequality is good for an economy. It sharpens incentives to work hard and take risks; it rewards the talented innovators who drive economic progress. Free-traders have always accepted that the more global a market, the greater the rewards will be for the winners. But as our special report this week argues, inequality has reached a stage where it can be inefficient and bad for growth.

That is most obvious in the emerging world. In China credit is siphoned to state-owned enterprises and well-connected insiders; the elite also gain from a string of monopolies. In Russia the oligarchs’ wealth has even less to do with entrepreneurialism. In India, too often, the same is true.

In the rich world the cronyism is better-hidden. One reason why Wall Street accounts for a disproportionate share of the wealthy is the implicit subsidy given to too-big-to-fail banks. From doctors to lawyers, many high-paying professions are full of unnecessary restrictive practices. And then there is the most unfair transfer of all—misdirected welfare spending. Social spending is often less about helping the poor than giving goodies to the relatively wealthy. In America the housing subsidy to the richest fifth (through mortgage-interest relief) is four times the amount spent on public housing for the poorest fifth.

Even the sort of inequality produced by meritocracy can hurt growth. If income gaps get wide enough, they can lead to less equality of opportunity, especially in education. Social mobility in America, contrary to conventional wisdom, is lower than in most European countries. The gap in test scores between rich and poor American children is roughly 30-40% wider than it was 25 years ago. And by some measures class mobility is even stickier in China than in America.

Some of those at the top of the pile will remain sceptical that inequality is a problem in itself. But even they have an interest in mitigating it, for if it continues to rise, momentum for change will build and may lead to a political outcome that serves nobody’s interests. Communism may be past reviving, but there are plenty of other bad ideas out there.

Hence the need for a True Progressive agenda. Here is our suggestion, which steals ideas from both left and right to tackle inequality in three ways that do not harm growth.

Compete, target and reform

The priority should be a Rooseveltian attack on monopolies and vested interests, be they state-owned enterprises in China or big banks on Wall Street. The emerging world, in particular, needs to introduce greater transparency in government contracts and effective anti-trust law. It is no coincidence that the world’s richest man, Carlos Slim, made his money in Mexican telecoms, an industry where competitive pressures were low and prices were sky-high. In the rich world there is also plenty of opening up to do. Only a fraction of the European Union’s economy is a genuine single market. School reform and introducing choice is crucial: no Wall Street financier has done as much damage to American social mobility as the teachers’ unions have. Getting rid of distortions, such as labour laws in Europe or the remnants of China’s hukou system of household registration, would also make a huge difference.

Next, target government spending on the poor and the young. In the emerging world too much cash goes to universal fuel subsidies that disproportionately favour the wealthy (in Asia) and unaffordable pensions that favour the relatively affluent (in Latin America). But the biggest target for reform is the welfare states of the rich world. Given their ageing societies, governments cannot hope to spend less on the elderly, but they can reduce the pace of increase—for instance, by raising retirement ages more dramatically and means-testing the goodies on offer. Some of the cash could go into education. The first Progressive era led to the introduction of publicly financed secondary schools; this time round the target should be pre-school education, as well as more retraining for the jobless.

Last, reform taxes: not to punish the rich but to raise money more efficiently and progressively. In poorer economies, where tax avoidance is rife, the focus should be on lower rates and better enforcement. In rich ones the main gains should come from eliminating deductions that particularly benefit the wealthy (such as America’s mortgage-interest deduction); narrowing the gap between tax rates on wages and capital income; and relying more on efficient taxes that are paid disproportionately by the rich, such as some property taxes.

Different parts of this agenda are already being embraced in different countries. Latin America has invested in schools and pioneered conditional cash transfers for the very poor; it is the only region where inequality in most countries has been falling. India and Indonesia are considering scaling back fuel subsidies. More generally, as they build their welfare states, Asian countries are determined to avoid the West’s extravagance. In the rich world Scandinavia is the most inventive region. Sweden has overhauled its admittedly huge welfare state and has a universal school-voucher system. Britain too is reforming schools and simplifying welfare. In America Mr Romney says he wants to means-test Medicare and cut tax deductions, though he is short on details. Meanwhile, Mr Obama, a Democrat, has invoked Theodore Roosevelt, and Ed Miliband, leader of Britain’s Labour Party, is now trying to wrap himself in Benjamin Disraeli’s “One Nation” Tory cloak.

Such cross-dressing is a sign of change, but politicians have a long way to go. The right’s instinct is too often to make government smaller, rather than better. The supposedly egalitarian left’s failure is more fundamental. Across the rich world, welfare states are running out of money, growth is slowing and inequality is rising—and yet the left’s only answer is higher tax rates on wealth-creators. Messrs Obama, Miliband and Hollande need to come up with something that promises both fairness and progress. Otherwise, everyone will pay.


Keeping the Peace in Europe

The Nobel peace prize awarded to the European Union is recognition of the historic triumph of democratic solidarity over ideologies based on narrow nationalism, jingoism and militarism. Small wonder that Friday’s announcement has been received with derision and scorn by Eurosceptic and far-right forces that have stoked popular fears over the bloc’s enlargement into Eastern Europe. In the face of record unemployment and crippling austerity, the honour must be read no less as an appeal to the EU’s current leadership to live up to the original promise of promoting peace and prosperity among its people. The EU deserves credit for helping keep the peace in a continent that has been responsible for more death and bloodshed than any other in the world. But its current policies are responsible for an austerity drive so intense that it threatens the disintegration of the European project. Europe’s statesmen of the post-war generation endeavoured to institutionalise the principles of democratic reconciliation, respect for human rights and the rule of law within and between nations. These values form the bedrock of the Council of Europe, the European Court of Human Rights and the EU. Few would dispute that a response to today’s resurgent nationalist extremism and religious fundamentalism globally must ultimately draw upon and build on these principles.

Europe’s visionaries were also shrewd enough to recognise that solidarity among countries could not be sustained without material prosperity for their people. This understanding led to the pooling of Franco-German coal and steel resources and the steady removal of trade and customs tariffs between France, Germany, Italy and the Benelux countries. These visionary steps were precursors to the single market, the Schengen borderless area and the single currency. Whether they say so or not, most regional trading blocs around the world are attempts to replicate more or less the European model. To be sure, the EU’s record in the defence and promotion of human rights and democracy has been less than creditable since 9/11. Key EU states refused to endorse the illegal American invasion of Iraq but the willingness of many European countries to assist in the kidnapping and ‘rendition’ of terror suspects by the United States has exposed them to the charge of double standards and hypocrisy. A more scrupulous adherence to norms would be no less in the bloc’s own interest considering its enlargement into the Balkans where democratic institution-building remains a challenge. The EU has much work to do still to be truly worthy of the Nobel prize for peace. It should not sit on its laurels. For a globalised world has much at stake in the success of European integration.

A Liability For Our Nuclear Plans

In the context of the ongoing debate on Kudankulam, the question of nuclear liability has come to the fore again.

General Electric and Westinghouse, who were the serious bidders, explained to us the practice in the United States whereby the owner-operator of the plant assumed the nuclear liability risk. The operator indemnified suppliers of equipment because the financial risk of a nuclear accident, though very remote, could not be reasonably factored in by the chain of suppliers involved in a nuclear project, in their contracts. The owner-operators of nuclear power plant, who were mostly investor-owned utilities, were asked to take insurance up to a limit available in the market. The U.S government assumed liability beyond the insurable limit up to another limit set under the Price-Anderson Act, passed by the U.S Congress. The limit set under the Price-Anderson Act has been increased progressively from time to time.

Protection in the Contract

General Electric, chosen to build Tarapur, wanted an indemnity protection similar to what it was extended in the U.S. Initially, it insisted that there should be legislative protection. On the other side, India felt it was premature to pass a law as we were then thinking of building only a small number of nuclear power units to demonstrate the economic feasibility of nuclear power under Indian conditions. India persuaded G.E. that a protection in the contract, which was in any case approved by the Government of India, would be adequate. When an agreement with the Atomic Energy of Canada Ltd. (AECL) was drawn up for building the first two reactors at Rajasthan, a similar indemnity protection was extended to AECL and its suppliers. Since India took up building nuclear power units of its own design, indemnity protection has been a part of nearly all supply contracts.

One may ask, in hindsight, if India did the right thing in extending such nuclear liability protection in the past. If we had not done so, we would not have been able to import our first two reactors from the U.S., nor the second pair from Canada. There is no doubt whatever that India gained a great deal by building the Tarapur reactors with U.S. collaboration. India learnt early the problems of operating nuclear power units in our grid systems and also in managing a complex nuclear installation with our own engineers and technicians. In the case of cooperation with Canada, India was able to get the basic knowhow of the pressurized heavy water reactors (PHWR). Thereafter, India progressed on its own to design and build 16 PHWRs in seven locations. Now we are building four 700 megawatt PHWRs of our own design. Four more will follow soon and possibly another four will also be built, thus making a total of 12 PHWRs of 700MW each. Therefore, early cooperation with Canada helped us to become a designer and builder of nuclear power plants.

Owner-Operator Management

Let us look at the way an owner-operator manages a nuclear power plant. Even where a plant has been supplied by a single entity under a turnkey contract, many vendors, often running into thousands, would have supplied many components. During operation, the operator incorporates many changes and modifications to improve the reliability, ease of operation and efficiency. They may or may not have been done in full consultation with the original suppliers of equipment. Chances that sub-suppliers would be consulted on changes are very small. Moreover, nuclear power plants operate for 50 years or longer; our first two Tarapur reactors have in fact completed 43 years. So on objective grounds, the operating entity being solely responsible for nuclear liability is grounded in sound reason. There are about 430 reactors operating in 30 countries the world over. All of them, without exception, have been built under arrangements where nuclear liability flows to the operator. The operator, depending on the political system prevailing in the country, covers the risk to the extent possible by insurance. The government of the country takes up the liability beyond the insurance limit; it may also define an upper limit to its own liability, through legislation. Under the Convention on Supplementary Compensation, a multilateral convention, participating states can also share the liability risk to a defined extent.

India took up the task of drafting a nuclear liability Act whose primary purpose was to ensure prompt compensation to any member of the public who might have suffered injury, death or damage to property due to a nuclear accident. Much of the debate in India took place in the context of the Bhopal tragedy, which was also being considered by Parliament at the same time. In this atmosphere, the legislation that was passed included a right of recourse for the operator against the supplier in case of latent or patent defects or wilful misconduct. We must remember that for our own projects based on our own technology, we depend on a large number of Indian suppliers. The value of these contracts may run into several hundred crores or maybe as low as a crore or less. These suppliers cannot be expected to cover themselves for large value risks of long duration. Therefore, under the rules to be drafted, the Department of Atomic Energy has tried to inject realism by defining the duration of the risk to be the product liability period or five years, whichever is less, and a cap on the risk being the value of the contract. We find that long-standing suppliers of DAE and NPCIL are unhappy to go along even with these caps, as they feel that carrying large contingent liabilities on their books hurts their credit ratings. They, therefore, prefer to move to non-nuclear activities, even though they have acquired valuable nuclear expertise on work done earlier.

In much of the debate in the media and in our courts, it is often suggested that the nuclear liability legislation has been written to suit foreign MNCs.

The fact is that after 2008, when India signed nuclear cooperation agreements with the U.S, France and Russia (and some other countries), not even one contract for the import of reactors has been signed to date. With France, discussions have covered technical and safety issues, and commercial discussions are in progress now. In the case of the U.S., the discussions are still on technical and safety issues. Only in the case of Russia was an agreement signed in 2008 for Units 3 and 4 at Kudankulam, essentially as an extension of the agreement covering Units 1 and 2. Prices have been derived for Units 3 and 4 using the earlier price as a basis. The loan agreement also is based on the earlier pattern.

The 2008 Agreement

The 2008 agreement provides that India would extend indemnity protection for Units 3 and 4, on the same lines as Units 1 and 2. I had in fact negotiated the earlier agreement in 1988, in keeping with the prevailing international practice. If India wants the Units 3 and 4 agreement to comply with its 2010 liability legislation, there is a danger that the entire 2008 agreement may be reopened.

Some of our legal experts point out that the law of the land is “Polluter Pays”. This may be so on paper. In practice, all our thermal power stations are putting out carbon dioxide, which is a pollutant. Are they paying for that? Similarly, all our cities are putting out sewage and solid waste to the environment. Again, sadly, they are not paying for that. In fact nuclear energy poses the least pollution hazard; there is no fly ash, acid rain, or carbon dioxide released into the environment. Units 1 and 2 of Kudankulam were built under a contract entered into in 1988 (and renewed in 1998), before our liability legislation of 2010. We are finding great difficulty in moving ahead with Indian designed and built projects due to some of the provisions of the 2010 legislation. We must arrive at a solution whereby electric power generation growth is assisted to the maximum extent possible, while ensuring that the safety of the people is in no way adversely impacted. With regards to Kudankulam 1 and 2, the delay of one year has already pushed up the tariff from Rs. 3 per KWH to Rs 3.25 per KWH. Any further delay will similarly increase the cost of power to the consumers.

Source: The HINDU

Friday, October 12, 2012

Ensure The Rights Of Persons With Disabilities

The draft bill on the rights of persons with disabilities — intended to replace the 1995 law — is a daring attempt to combat historically-rooted discrimination based on a person’s disability through legal guarantees of equality of opportunity. The wide-ranging commitments in the area of employment are but one instance of an attempt at inclusion and empowerment. Foremost is the increase, up to five per cent, in the proportion of reservation in recruitment to all government employment. The two percentage point increase is perhaps appropriate, considering the greater number of disabilities that are to be accorded protection under the new law.

There is also a private sector corollary to quotas in the form of incentives and disincentives for firms that hire disabled employees and those that do not. Establishments that comprise more than five per cent of the workforce from this category would be allowed to deduct the salaries of every additional employee from their taxable earnings. Conversely, those that fall below the prescribed minimum would be required to add to their taxable income an amount equivalent to the shortfall.

The draft bill makes provision for the identification of posts suitable for disabled candidates and also for periodic review. While the identification of positions may raise awareness among employers on suitable avenues to create openings, this could also prove potentially restrictive, say, when applicants have the prerequisites for positions that are not listed. The new law should instead reflect current policy, wherein government departments are free to make additions, but not deletions, from a pre-determined catalogue of jobs appropriate for disabled aspirants. Such freedom and flexibility would be necessary to overcome procedural shortcomings that may hamper the disabled from taking advantage of new openings. Similarly, the current rotation system should be modified in a manner that vacancies do not lapse just because a candidate with a particular disability was not available. All such self-defeating procedures should give way to more proactive policy adjustments.

The underlying objective of the proposed change is to harmonise current law with the letter and spirit of the 2007 United Nations Convention on the Rights of Persons with Disabilities — one which India was among the earliest to ratify. While initiatives in the arena of employment can critically alter the lives of the disabled, the extent of their realisation would depend on the provision of quality education and universal access. It is time the Centre moved towards expeditious enactment of the new legislation.

Source: The HINDU

Wednesday, October 10, 2012

Rising Yuan in the Land of Setting Yen

The directors of the International Monetary Fund and the World Bank return to Tokyo this week for their annual meetings after a gap of 48 years. It’s a different Japan. The ageing of the host nation, the rise of China, the “shift” of the epicentre of global growth to mainland Asia, in more ways than one, have subdued what was in 1964 —when the Fund and Bank last met here — the “land of the rising Yen”. The “shocks” administered to the global economy by the recent trans-Atlantic financial crisis have further accelerated these “shifts”, and the Yuan now rises where the Yen once shined.


While the Bank arrives in Tokyo with a South Korea-born American as its first ‘Asian-origin’ president, the Fund arrives with its first Chinese deputy managing director, who got the job as part of a deal with the European Union. This would rub even more salt into the wounded pride of a Japan that tried hard for long to get one of the top jobs and repeatedly failed because the West would not accommodate Asia till China stared it in its face.

Not surprisingly, therefore, while much of Asia celebrates the eastward power shift, Tokyo remains more cautious and concerned. This came through explicitly in a paper that Japan’s former Defence Minister and now chairperson of the national executive of the opposition Liberal Democratic Party, Yuriko Koike, wrote for a conference last week on the theme “The Currencies of Power and the Power of Currencies”, organised by the Geo-economics and Strategy Programme of the International Institute for Strategic Studies.

“China is currently deepening its commitment to the global financial system” observed Ms Koike, “By gaining experience as a responsible stakeholder, China should be expected to play an important role in working for global financial stability. But that is a test that has yet to be held.”

Many at the conference agreed with Ms Koike that the jury is out on China’s credibility as a manager of the global financial system, but few shared the recent concern expressed by Brazil’s Finance Minister Guido Mantega that the global economy was being destabilised by “currency wars” between China and the United States. Two years ago, the former managing director of the IMF Dominique Straus-Kahn gave public expression to Mr. Mantega’s worries at the Fund-Bank meetings in Washington DC. These worries have been revived by the third round of liberal monetary policy, dubbed quantitative easing (QE3), launched by the U.S.

Participants at last week’s IISS-GES conference seemed less worried than Mr. Mantega or the man who has since articulated this view in an international bestseller (Currency Wars: The making of the next global crisis, 2011), James Rickards (USA) who was challenged at the IISS conference by John Williamson (U.K.), Surjit Bhalla (India) and Zha Xiaogang (China), who in turn argued that ‘currency wars’ may be a thing of the past, with China entering a new phase of domestic demand led growth that would ensure sustained appreciation of the renminbi (RMB).

Mr. Williamson, former chief economist of the World Bank to whom we owe the phrase “Washington Consensus,” questioned the Brazilian view that QE3 was a ‘beggar-my-neighbour’ initiative aimed at devaluing the U.S. dollar. Rather, he saw it as an effort to boost domestic consumption and global growth. Mr. Bhalla, who has just published a persuasive account of how currency under-valuation provides an impetus to growth, Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences (2012) asserted that China had in fact “won the currency war of the past two decades and has now declared currency peace” with a focus on domestic economic growth.

Seeming to go along with these views, Mr. Zha, from the Shanghai Institutes for International Studies, underscored China’s role as an “importing” power and a source of foreign direct investment. Mr. Zha was most direct in linking the RMB’s future role to Asian geo-politics, curiously echoing Ms Koike’s concerns. “The internationalisation of the renminbi, especially in East Asia, will strengthen China’s economic links with its neighbours” Mr. Zha believes, “and its influence on regional economic and financial cooperation (intra-regional trade, Asian regional capital markets, crisis prevention and management), which is critical for stability in China’s backyard.” (sic)

Therefore, while the Fund’s directors are unlikely to worry about ‘currency wars’ at their meetings in Tokyo, and Christine Lagarde can be expected to be more ‘diplomatique’ in dealing with the issue than her boisterous predecessor, the growing weight of China in the global economy, and certainly in its ‘backyard’, as well as in the management of the Bretton Woods sisters will be on top of the mind of this year’s hosts of the annual meetings, and many other Asian economies.

The IMF is duty bound by the provisions of its Articles of Agreement to insist that each member “undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates” and that they all “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members”.


In the past, the Fund has failed to avert ‘currency wars’ and it remains to be seen whether it will succeed in the months ahead. Ensuring exchange rate stability and discouraging beggar-my-neighbour policies is vital to the stability of global markets as well as to the revival of global growth. It is the Fund that must grapple with this challenge rather than allow some recent attempts to take this matter to the World Trade Organisation to succeed. Stable exchange rates are no doubt a trade facilitator but they are not a matter for trade negotiations. They are the pillars of a stable global economy.

For China to seek a larger role in the management of the global economy it must win the confidence of all, especially Asia, in its policies being transparent and fair. Equally, the U.S. and Europe have to regain their lost credibility for their management of macro-economic policies.

Source: The HINDU

Saturday, October 6, 2012

Nepal’s Political Transition and China , India's Intervention

After decades of dealing with the Indian hand in their country’s domestic affairs, Nepali politicians are now confronted with another assertive neighbour — China. Moving from a relatively detached approach to high-profile engagement, Beijing has now started making its views known about Nepal’s political transition.

In the past, efforts by sections of Nepali politicians to play the “China card” — by projecting China as a stakeholder to counter Indian influence and pressure New Delhi — usually failed. Both the former King, Gyanendra, and the Maoist chairman, Pushpa Kamal Dahal “Prachanda,” tried it — the former when he imposed an autocracy against Indian advice, and the latter while stoking an “ultra-nationalist” campaign.

China made it clear to both that it could not be a substitute for New Delhi. It did not show interest in getting enmeshed in the messy Kathmandu political theatre, was happy to work with any government in power, and stayed away from contentious political issues.

Accumulating influence

But over the last five years, Beijing has also worked to deepen contacts with the Nepali state apparatus, political class, and non-state actors.

High-level Chinese delegations of the Communist Party, government departments, the People’s Liberation Army (PLA), business chambers and academics have visited Nepal. Not a fortnight passes without a set of Nepali politicians, bureaucrats, security officials, businessmen or journalists, travelling to the northern neighbour. Chinese development assistance has increased. A Chinese company has signed a memorandum of understanding to develop a major hydro-power project, West Seti, with the Nepal government. Beijing is keen to develop an international airport in Pokhara, and a Chinese non governmental organisation has expressed interest in investing $3-billion to develop the greater Lumbini area — both projects have however hit roadblocks. Chinese tourists to Nepal have increased, while more Nepali students are going to China for higher studies.

Beijing has used its increasing influence for a clear purpose — to ensure zero “anti-China,” read pro-Tibet, activities in Nepal. In March 2008, “free Tibet” protests had erupted in Kathmandu. The Chinese government was unhappy with what it thought was Nepal’s unwillingness, or inability, to come down on the protests ruthlessly.

Since then, China has extracted repeated commitments from all Nepali leaders to the “one-China policy.” It has also developed links directly with Nepali security agencies and bureaucracy. As a result, long-term Tibetan residents have found it difficult to exercise refugee rights; Nepal has been firm in not allowing any Tibetan political activity; Chinese pressure, among other reasons, led to the exit of the United Nations Human Rights Office, which it saw as being sympathetic to Tibetan protesters. China also kept vigil in the northern Nepal districts that border Tibet, where communities share linguistic-cultural links with Tibetans.

Now, domestic politics

In recent months however, China’s diplomacy in Nepal appears to have entered a new phase — of seeking to influence the domestic political issue of federalism. Several high-level political sources, all of whom spoke to The Hindu on the condition of anonymity, revealed the image of a more interventionist Beijing. Despite repeated attempts, the Chinese embassy in Kathmandu did not respond to requests for an interview.

At the end of June, a month after Nepal’s Constituent Assembly failed due to differences on the issue of federalism, Ai Ping, a senior Chinese party official, visited Nepal. Political leaders who met him say that China clearly communicated it had “security concerns” if Nepal adopted federalism. A very senior Maoist leader told The Hindu: “Their message was China prefers a unitary Nepal, but if federalism has to happen, it should not be based on ethnicity. This is the first time that China has intervened so directly in our domestic affairs.”

After his meeting with the visiting official, Maoist chairman Prachanda, who supports identity-based federalism, is understood to have been taken aback. He had spent some days with Mr. Ai in Shanghai a few years ago, and both the nature of the message and its curt delivery surprised him. Subsequently he called in the Chinese Ambassador to Nepal, and told him federalism was necessary given Nepal’s diversity, and expressed displeasure at the Chinese advocacy against it.

A Nepali Congress (NC) leader, who is close to the influential Koirala family, added: “China has told us not to go for federalism. If at all we do so, there must be as few states in the north as possible. They don’t want to deal with multiple power centres across their border, in the same manner as India too would prefer as few states in the south [of Nepal].” A similar message was passed to the Communist Party of Nepal (Unified Marxist Leninist), with which Beijing has shared close traditional links. This was music to the ears of NC and UML leaders, who are — at best — “reluctant federalists.” Chairman of the radical Maoist splinter outfit, Mohan Vaidya “Kiran,” also visited Beijing soon after splitting from the parent party. On his return, he told reporters, “China is not against federalism but it is opposed to foreign interference on the issue of federalism.” Beijing has been engaging closely with Mr. Kiran’s outfit, which has kept open the possibility of reverting to violence and has adopted a stridently “nationalist” — read “anti-India” — political posture. Incidentally, the NC, the UML and Mr. Kiran’s party have recently joined hands to organise a movement against the Baburam Bhattarai-led government.

Two reasons

Observers point to two reasons for China’s concerns. First, Beijing fears “ethnic” states in the mid-hills and north could become a base for Tibetan unrest. They also see ethnic politics as funded by “western powers,” and conclude that politicians from indigenous groups would do their bidding.

And two, China calculates that federalism will result in an increase in the political power of the Madhesis. A senior Madhesi leader, who has dealt with foreign affairs and visited China, says, “China is influenced by the old Nepali nationalist mindset which sees Madhesis as Indians. So they think a Madhes state means that Indian influence will expand. China will support royalists, hill chauvinists of mainstream parties, and so-called nationalist leftists.”

Political scientist and State Restructuring Commission member, Krishna Hachhethu, responded to China’s concerns in an article in the English daily, Republica. He noted that Chinese diplomats were getting “influenced” by “those defaming identity-based federalism, by calling it ethnic federalism.” Provinces in Nepal would not be created on a solely ethnic basis and no group will have preferential rights. Instead, he argued, what is being proposed in Nepal is aimed at ending inequality between social groups.

He warned that the failure to address Janjati aspirations that could breed an ethnic conflict in the hills.

Geo-political balance

China’s entry into the tricky territory of domestic politics could divide the Nepali political class and society right down the middle. Sources say that Beijing is providing political support to groups which are pro-unitary system or territorial federalism, and encouraging an alliance among such forces. But their move is sure to be resisted by another section, particularly the Prachanda-led Maoists, and marginalised social groups like the Madhesis and Janjatis backing identity-based federalism.

The new Chinese assertiveness has implications for Delhi, which has refrained from getting involved in constitutional debates despite lobbying by contending Nepali factions. In a rare role reversal, as the “China card” becomes a potent political reality in Nepal, India is watching quietly. But there is a likelihood that the two powers will end up backing rival political groupings.

A highly placed Indian diplomatic source says, “We have stayed away from the federalism debate, and have not pushed a line either in public or private. It is for the Nepali people to decide what form this will take. But we recognise the inevitability of federalism, and feel it should happen quickly if Nepal is to be stable. If there are forces pushing an anti-federal agenda, the risk of a conflict increases.”

China’s attempt to back Nepal’s conservative forces threatens to complicate the country’s political transition, as well as jeopardise the fragile geo-political balance in the new republic.

Friday, October 5, 2012


At first blush, the wave of financial sector reforms unveiled by the government appears to have pulled off the impossible. The rapturous surge witnessed on the stock market tells us the investing classes are happy, while the somewhat muted reaction of Opposition parties suggests the insurance and pension sector initiatives cannot easily be painted as “anti-people.”

If the entry of multinational retail behemoths raises fears about the potential loss of jobs and livelihoods, insurance and pension reforms hold out the prospect of better social security for the middle class without the immediate danger of a “employment displacement” effect. In insurance, at least, the reform being contemplated is also quite modest: foreign insurance companies will be allowed to hold 49 per cent equity in their Indian operations but this still does not make for majority control. The private insurance sector is starved for capital and the increase in foreign equity cap will enable foreign partners to pump in money. Whether they will actually do so is another matter, given their own financial problems and their inability to crack the Indian market. For those squeamish about opening the pension sector to foreign investment, the reform has a silver lining: the regulator for the sector will finally acquire teeth. Banks and some mutual funds have already evinced interest in offering pension fund products and passage of the pension Bill will facilitate this process.

As junior partners restricted to a 49 per cent equity share, foreign pension fund companies may not be the threat some believe them to be. But the pension reforms being introduced are hardly a remedy to the absence of a viable and well-funded system of social security in India.

On the positive side, millions of private sector employees and the self-employed — most of whom have no viable pension plans to subscribe to today — may get new options as a result. Remember, the government is in no mood or position to offer its services here; some of its own employees are now governed by the National Pension Scheme.

On the negative side, the Western, especially American, private pension model has not exactly been an unqualified success on its home turf. Millions of Americans are unprotected or their retirement benefits have been compromised because of insufficient regulation and the lack of official oversight. As for insurance, many of the companies looking to enhance their positions in India were key players in the 2008 global financial meltdown. That is why Parliament needs to focus sharply on the quality of the regulator and regulations that will govern the pension and insurance business from now on, especially since it will increasingly be in private hands.

Source: The HINDU

Wednesday, October 3, 2012


Over the last six months there has been an increasing sense of pessimism regarding India’s economic future. Is the growth story over? Was the eight-nine per cent growth a temporary aberration of a few years when the global economy itself was doing so well? Perhaps, there was no real takeoff and hopes for sustained double digit growth rates were the result of unwarranted euphoria. There has been for quite some time now persistent high inflation, high interest rates, rising fiscal and current account deficits and declining growth rates.


To add to the negativity of the domestic perspective, the international environment could not have been bleaker. The advanced economies of the U.S., Europe and Japan are still struggling with the consequences of the 2008 financial crisis. Europe is in a crisis regarding the future of the euro itself. A political consensus on a clear road map for the way forward is still a work in progress with deep differences in both diagnosis and policy prescriptions.

If the pessimists are right then the best case scenario may be to assume that perhaps by 2015, Europe and the global economy would have recovered, India may by then have been able to undertake necessary but difficult ‘reforms’ and then, perhaps, higher growth rates could be hoped for.

But are some underlying trends being missed? When the 2008 global financial crisis hit India, the economy suddenly went into a free fall. The general consensus then was that India would be in for a prolonged period of difficulty, and recovery would occur along with that of the rest of the global economy. India surprised itself and the rest of the world by its extraordinary, swift and robust recovery and that too with a stimulus package that was crafted and implemented as the country went in for a general election. The actual fiscal stimulus was quite modest; less than one per cent of GDP and considerably less than that of most others. What made rapid recovery possible was that it was domestic demand driven.

Domestic demand rose substantially on the back of some earlier political decisions (seen with unease and apprehension by most mainstream economic analysts); the positive wealth effect of the write off of farmers’ loans, the improvement in the terms of trade for farmers through higher support prices, and higher salaries for state employees on the implementation of the Pay Commission’s recommendations. In contrast, in the U.S., the negative wealth effect due to a sharp fall in housing prices as well as stock market was so steep that consumer demand fell sharply. Recovery is still a work in progress.

A combined and well coordinated fiscal and monetary stimulus was feasible as there was policy space. The Reserve Bank of India had been raising interest rates to prevent overheating of the economy and inflation, which had shown upward movement, had come down and so the RBI could lower interest rates significantly. Tax revenues had been growing rapidly with both manufacturing and services growth rates being in double digits in the preceding years and so there was fiscal space. The fiscal stimulus was not grandiose but aimed at creating demand immediately in the coming months across a wide spectrum, ranging from increased expenditure for Bharat Nirman projects to grants for purchase of buses for public transport in cities.

The world suddenly took note of what appeared to be India’s unusual strength, the ability to achieve high growth rates on the basis of domestic demand. Historical experience suggests that inclusiveness has been conducive for growth if growth is not to be export led. This was the essence of the American experience for over 50 years in the 20th century till the 1970s, from the time Ford successfully made and sold its cars to ordinary people who also became industrial workers with growing real wages. Larry Summers, the eminent American economist, in an unusual speech in 2010 referred to the possibility of the World in 2030 acclaiming the success of the Mumbai consensus rather than the Shanghai or the Washington consensus; the strength of the Mumbai consensus being domestic demand driven inclusive growth in a robust democratic framework. This was in contrast to the state driven export led growth paradigm of East Asia, the allusion to the Shanghai consensus, which was no longer feasible due to the emerging difficulties in the West which had no option but to make serious structural adjustments. The Washington consensus of liberalisation, privatisation and deregulation with the faith in the market to deliver the best possible outcomes had crossed its useful shelf life with the global financial crisis in 2008.

Business cycles and recessions have been normal to open free market economies since the advent of industrialisation. Since our transition has been somewhat recent, the reality of “recessions” has yet to sink into our understanding and discourse. If we look at IIP numbers, we were in negative growth territory for some months. The reasonable questions would then be: when to expect recovery, what would be its nature, feeble or robust, and how to try and strengthen it? With tight monetary policy in response to high inflation, excess demand should have been squeezed out of the system by now and this seems to be indicated by core inflation numbers. If this indeed is the case, then recovery should, indeed, be around the corner. Credibly signalling fiscal responsibility would hasten lowering of interest rates by the RBI. Becoming more investor friendly would naturally help in turning market sentiment around.

The sharp depreciation of the Rupee is a real blessing at this juncture. It has, in the course of a few weeks, undone the appreciation of the real exchange rate that had taken place due to the difference between our higher inflation rates and those of our major trading partners. This should address the current account deficit as devaluation is a time tested remedy. What is more important, depreciation of this order should be of great advantage to domestic value addition in manufacturing both for the domestic market as well as for exports; with the open domestic market being more important in the current state of the global economy. India’s reluctance to see the advantages of a competitive exchange rate and to pursue it could be a reflection of the weakness of the political constituency for manufacturing in comparison to that for trade and consumption. Brazil, for instance, has been vocal about the appreciation of its currency due to capital flows. It even attempted measures to moderate this to preserve competitiveness in manufacturing.


The real discussion needs to focus on how to make the recovery robust enough. Given the international situation, it would depend entirely on the success in promoting domestic demand. Without raising the fiscal deficit, the state needs to find innovative ways to drive much larger investment flows into infrastructure to reduce the competitive disadvantage that exists. Mitigating policy and regulatory uncertainty and hence risk is what investors seek rather than big ticket reforms, which would benefit over the medium term rather than in the coming quarters. Going by recent experience, inclusiveness would be critical for higher growth. Inclusiveness is not something unproductive that can be afforded with growth but is essential for it. Bharat Nirman needs to be carried further in terms of 24x7 electricity, an essential requisite of the last century, and broad band, the essential requirement of this century. Bridging the divide between India and Bharat could make the difference between a modest recovery and a surge to plus-nine per cent.