SEZs on pause mode

The government’s reported decision to put a cap on the number of special economic zones (SEZs) is welcome, given that the recently notified rules for SEZs have met with opposition from within the government. The pause would allow the government to debate the contours of incentives for SEZs, and even the very need of such islands, to encourage exports-oriented investments. Ever since the new SEZ rules came into force early this year there has been a deluge of announcements. Many of these look suspiciously like land-grab attempts seeking to make the most of generous incentives and the ongoing real-estate boom. The various tax concession have only made the appeal irresistible. Economic theory, too, is dismissive of the relative merit of tax incentives in attracting investments. Indeed, our own experience — the 15 functioning SEZs have attracted private investments of only about Rs 2,200 crore and their share in exports is dismal — highlights the failure of SEZs to yield the desired results. Investments located in SEZs are distortionary or sub-optimal as they give undue weightage to fiscal incentives, to the exclusion of other relevant parameters such as location or the availability of labour. All this learning is lost on the latest policy, which showers numerous direct and indirect tax incentives on net forex earners in SEZs. The question is, with Indian exports finding their feet in global markets do they need such props. The justification of SEZs rests primarily on China’s outstanding success with such zones. What is overlooked is that tax benefits in China’s SEZs were available only to foreign investments, not exports.
With tariffs coming down fast, it’s not only the exporters, but even local industry that needs access to good infrastructure, cheap capital, deliverance from red-tape and more friendly labour laws. So, limited tax benefits could be made available, if at all, only to the SEZ developer. The units located therein should not get any tax incentives. For, if the SEZs come anywhere close to delivering what they promise the units located there would in any case get an enormous competitive edge.


-- The Economic Times Editorial

Populist not popular

Manmohan Singh may have asked petroleum minister Murli Deora to stand firm, but the possibility of a rollback in the prices of petrol and diesel still remains. The ill-considered, reactive response of the Left parties, some junior partners in the UPA, and the BJP led Opposition; which have been in the forefront of the rollback demand; is far from surprising. What is, however, unfortunate is that even the Congress Party has lent its voice to the rollback chorus. The reaction of the political class, driven by electoral populism and coalition management, is retrograde in content. Fast-clip growth, coupled with development and equity, cannot be determined purely by markets. Political intervention is imperative. Such intervention would be effective only when it manages to strike the right balance between the interests of consumers and the fiscal health of both public sector enterprises and the state. The under-recoveries of oil marketing companies (OMCs) had been pegged at Rs 73,500 crore, no thanks to the government’s decision not to raise product prices for so long despite soaring international crude prices. Such gargantuan under-recoveries could well wipe out the OMCs.
Both the state and the political class should impress upon people that finally the government would have to spend public resources to bail out the OMCs if the latter go into the red. It is doubtless a political party’s task to articulate the popular will. It’s equally its responsibility to mould that will in a progressive direction. Sadly, our political class has, for some time now, failed miserably on that score. The state, on the other hand, has also been unable to improve delivery. That has surely not helped enhance public trust. The degree of people’s regard for the public sector is always directly proportional to the stake they have in a nation’s political economy. A gross deficit of functional democracy plagues the Indian polity, and its public sector. A more holistic conception of popular politics will change that.


-- The Economic Times Editorial

A retrograde move

Marriages of convenience in Indian politics have often been misconceived experiments in bad blood and poor politics. That Jan Morcha, an umbrella organisation of one left and three ‘democratic’ parties formed at former PM V P Singh’s behest, has decided to ignore that is clear from its decision to align with the People’s Democratic Front (PDF) — a newly floated agglomeration of Muslim outfits, in Uttar Pradesh. We wonder how exactly would pandering to minority communalism help strengthen the cause of democracy and development in the state. The alignment is, indeed, disturbing. There needs to be a challenge to Mulayam Singh Yadav’s government from outfits other than the BSP. UP certainly deserves to be delivered from raging epidemics, periodic gang wars and continual communal conflicts. The current alignment can, however, hope to deliver none of that. The point is not merely to unravel Mulayam’s identity-based electoral arithmetic. The point is to offer the denizens of the state an alternative political agenda of development.
In UP, minority disaffection and marginalisation are certainly not imagined problems. The attempt to economically cleanse the weaker community during the communal riots in the state last year, has underscored the continued existence of vicious Hindu communalism. Moves to form minority parties, in such circumstances, would further legitimise the sangh parivar’s specious ‘action-reaction’ thesis, and strengthen fringe lumpen groups like the Hindu Yuva Vahini. A pan-Muslim party like the PDF would, in any case, not work in UP. The Muslims there are far more socio-economically differentiated than, say, in Assam. One of PDF’s key demands — job reservation for Muslims — is unlikely to find resonance among a significant section of Muslim OBCs. The PDF, clearly, manifests the elite Muslim’s anxiety in UP. The Muslims question in the state is really about making the mainstream less exclusionary, even as the community is internally reformed. The Jan Morcha must foreground this modern core of Muslim aspirations.

-- The Economic Times Editorial

Stand firm against populism

The Centre must stand firm and not give in to the gratuitous talk of rolling back the belated hike in petrol and diesel prices. Given the continuing rally in international crude oil prices, the call for cutbacks is disingenuous and politically irresponsible. Gross, open-ended subsidies on petro-products would wreak havoc on already strained budgetary resources, and ruin the finances of oil marketing companies. Unalloyed consumption subsidies make no sense. They simply distort relative prices and thoroughly misallocate scarce resources. Already, despite the price revision, the government would need to issue oil bonds of the order of Rs 28,300 crore just to make up for the accumulated under-recoveries of oilcos. The latest tranche would be over and above the Rs 11,500 crore issued only a few months ago. All such bonds would need to be redeemed (with interest) from the general budget and would inevitably be at the cost of far worthier, more pressing governmental expenditure.
Note that planned expenditure on the capital account is budgeted at under Rs 29,000 crore for this fiscal as a whole. Yet, questionable consumption subsidies on oil products is almost the same! The cost of subsidy needs to be met through current provisioning without the frequent recourse to oil bonds. It merely compounds the economic and financial costs of run-away populism, and right across the board too. There remains an entirely valid case for moderate, specific levies on oil products. The current practice of ad valorem duties are clearly distorting given the sustained rally in imported prices. That said, the decision not to revise prices of cooking gas and kerosene is both fiscally imprudent and politically retrograde. The subsidies on LPG and SKO would add up to Rs 25,000 crore and more, per annum. In effect, the government wants to drive home the message that it is quite alright, for instance, for LPG consumers to wallow in unrevised prices today so that the entire populace pays for the higher prices tomorrow (or whenever the oil bonds are redeemed) with interest and all!

-- The Economic Times Editorial

Belated and incomplete

The Centre’s move to belatedly revise the retail prices of petrol and diesel comes not a day too soon, given the spiralling international prices of crude oil. The reduction in custom duties makes perfect sense as well. It would slash the high effective tariffs on auto fuel and reduce retail prices in tandem. Also welcome is the decision to change the pricing methodology for petro-products, and dump import-parity prices. The fact is that when domestic refiners are assured import-parity prices, they enjoy unwarranted rents. After all, the differential in ocean freight and other associated costs between products and crude can be substantial. And since refiners basically import crude, import-parity prices on products actually have built-in provision for routine unearned rents. They need to be shelved. But the stubbornness in keeping cooking gas (LPG) and kerosene (SKO) prices unchanged is wholly retrograde. It means huge, open-ended subsidies which are totally unjustified.
The fact remains that the non-poor who use LPG certainly do not need give-aways and everyday handouts. And unrevised prices of SKO simply ups the incentive to adulterate auto fuel and go for untoward usage. Clearly, the move to keep LPG and SKO prices unchanged is reckless populism. The fiscal costs would be massive. It would imply high costs right across the board. Also questionable is the far greater hike in petrol prices. The notion that petrol is used by the car-owning elite and diesel is mostly used for public transport is not particularly valid any longer. As it is, petrol consumption in twowheelers has greatly increased; some of the biggest cars on Indian roads now run on diesel. The continuation of ad valorem levies on oil products is also extremely distorting, given the rally in imported prices. What we need are specific moderate duties on products, to avoid needless buoyancy in end-prices. The bottom line is that efficiency, improvement and competitive pricing should replace administered pricing and much opacity. It’s time to refine politics out of oil pricing.

-- The Economic Times Editorial

Tribal stake in plantations

The move to allow the private sector to invest in plantations to help restore degraded forest area is a pragmatic acceptance of the fact that public land like public money is often seen as not belonging to anyone and blatantly exploited by a nexus of corrupt politicians, pliable bureaucrats and crooked contractors. Which has resulted in a situation where forest produce like bamboo can be accessed by the haves for a fraction of the price a selfemployed basket-weaver has to pay! It is an iniquitous system, which sometimes throws up brigands like Veerappan, who, even while meeting the demands of this corrupt nexus, claim to be acting in the tribals’ interests by providing them alternate employment where they live! That Veerappan thrived for so long speaks volumes of the tribals’ faith in a callous state.
The move to invite the private sector to help restore degraded forest area should be seen in the context of the failure of the existing system and the rapid depletion of India’s forest wealth. The rationale is that the private sector, unlike the cash-strapped state, has the resources and the organisational skills to regenerate degraded forest land. However, adequate safeguards have to be built into the policy framework to ensure that the benefits accrue to all stakeholders. One way of doing this is to speedily introduce the Scheduled Tribes (Recognition of Forest Rights) Bill and implement the Provision of Panchayat (Extension to Scheduled Areas) Act 1996. Flyby-night operators of the kind who floated dubious money-grows-on-trees schemes should be kept out. Above all, there has to be a structured approach which not just identifies land for private participation but also the appropriate usage. For instance, degraded land abutting sanctuaries could be used to promote sustainable eco-tourism. If Bilt can acquire Malaysia’s SFI and access forest land in Sabah, a policy of encouraging corporate India to work with empowered tribals to regenerate India’s forest wealth should be welcomed!

-- The Economic Times Editorial

A grave transmission error!

JUST a year before Berlin replaced Bonn as the German capital, I was there for a conference. My cabbie looked around, glanced at me and asked: Do you know the national bird of Germany? No! I said! Cranes! He replied. Which one? I asked. The Construction cranes, he retorted. I looked around. Sure enough, all I could see around were nothing but construction cranes. So overwhelmingly did they dominate the skyline!
Have you noticed the unmistakable change in the Indian urban skyline of late? Just stand atop a building in any urban part of India to know the difference. Up to seven service providers, all vying with one another to hog the skyline with their towers on which is mounted their transmitters to satiate the nation’s long suppressed need for telecommunications.
But it is one thing to feel great about this changing landscape, completely different if you look at the critical attendant issues. I am referring to the health hazard. Talk about the perils of using mobile phones has been around for years, with no conclusive evidence really. Often a claim is made that using mobile handsets is dangerous, and that it causes brain tumour, to be quickly debunked by a study saying how it is harmless for humans. It’s a different matter that these debunking theories, as claimed by some, are always at the behest of interested mobile companies.
The threat of hazard posed by the towers, or at least its realisation, is of a more recent origin. But a Delhi-based NGO was alarmed adequately enough to move a PIL in the Supreme Court against their mushrooming growth and the attendant health risks. The court too, on its part, thought the matter was serious enough for it to seek responses from a bevy of government ministries.
Whatever might be the truth, the fact is that there is enough data to show that it is better to be cautious. In Australia, for example, as recently as May this year, a spate of brain tumours among staff forced a university to close part of its business school and test for radiation emissions from rooftop phone towers. The university discovered with shock that five of its employees had tested positive for brain tumour in the past month alone, in addition to two others in 1999 and 2001. Two were malignant and five were benign.
While the university’s decision was greeted with shock by the business school employees, electrical workers who worked near the mobile phone towers were barred from working for fears of links between emissions and a “caner cluster”. The mobile industry, as expected, reacted that there was nothing to prove that the tumours were in any way linked to emissions from the mobile towers. Fair enough! There is nothing conclusive yet. But is it still not something that needs to be looked into?
Contrast this with the casual manner with which we are going about it in India. In the upmarket Delhi neighbourhood of Gurgaon, for example, one mobile operator has fixed transmitters on the ground facing the top of a residential building. Since the top floors of these high-rises were not receiving good signal, they decided to blast the signals right into the top of the building.
Most countries where human life is valued would take cognisance of such developments and try to put systems in place. In the US, for example, there is a law that prohibits erection of transmitter towers near schools and residential areas because of potential health risk they pose.
What stops us from taking similar systems? Whether one likes it or not, USA and the developed world always take a lead in such matters. And it could be as simple a thing as foreign investment. While we dither over all proposals and raise issues of competition, or loss of jobs, and if all else fails, security, the US, irrespective of anything else, unambiguously sends any foreign investment proposal to the Committee for Foreign Investment in the US. CFIUS has personnel from security agencies, finance, commerce and other bodies, and only after it is cleared by them does it go any further.
India can, perhaps, take a lead in the issue of mobile phones as a health hazard. What stops us from setting up a body of experts drawn from say the All India Institute of Medical Sciences and IISc to go into the technical-medical issues involved? Not only would a body like this have credibility and respect, but users, subjected to a barrage of conflicting views, can breathe easy too. The body could easily advocate exercising caution if a hint of a hazard existed.
Sure, we are all benefiting from the progress in telecom technology, but nothing can justify making guinea pigs out of humans. Already some good initiatives such as compulsory sharing of towers is taking place, but that is just the beginning. The towers, apart from being probable health hazards, also cause visual pollution. A studied response to such issues in future would perhaps be good for our health and aesthetics too!

-- Guest Column, Economic Times

Mainstreaming biofuels

Reliance's proposed forays into ethanol and subsequently sugar production are welcome. It would help mainstream bio-fuels in India, offer sugarcane growers better remuneration and provide a considerable boost to the country’s quest for alternative energy sources. The company is reportedly planning to manufacture ethanol initially in the three processing units in Pune, Osmanabad and Kolhapur and commence sugar production from the 2007-08 crushing season. Ethanol production is still quite low in India and needs to be expanded. This will not only help in reducing burdensome oil imports but also promote a cleaner environment. The entry of Reliance, with all its financial muscle and commercial expertise would help in augmenting ethanol output substantially. This, along with its plans to venture into sugar production in the near future would provide an additional incentive to sugarcane farmers to further increase planting and derive a higher average return per acre. Moreover, greater profitability will incentivise sugarcane production for the traditional rice and wheat growers. This would, in turn, help in enhancing sugar yield from the already robust 19 million tonnes in 2005-06. With the opening up of foreign markets in Pakistan, Indonesia and Sri Lanka and withdrawal of subsidised European sugar from global markets following a WTO ruling, higher production will allow sugar mills to export more and take advantage of high international prices.
Reliance, of course, isn’t the only company eyeing the sugar sector. Excited by the promise of huge returns, many other companies are also planning entry. This is, indeed, welcome. Increased competition for mill-land among the new entrants and higher provisioning of cane to them will ensure consolidation of the sector in the near future. Government policies must fall in line with the favourable changes underway in the sector.


-- The Economic Times Editorial

Wrong, Mr Gowda!

We urge the Karnataka legislature, the BJP and the Congress, to unanimously reject the Streamlining of Karnataka Infrastructure Development and Land Reforms Bill, 2006. The bill — which has been drafted at chief minister H D Kumaraswamy’s behest, and which the state government reportedly wishes to table at the ongoing special session of both the houses — is meant to enable the state to take over the Bangalore-Mysore Corridor Project (BCMP) from its private developer, the Nandi Infrastructure Corridor Enterprise (NICE). That would undermine all efforts to gather private investment in infrastructure. All political parties must ensure that the JD(S)-BJP government is not allowed to undermine the development of modern economy and good governance in the state. The draft bill is nothing but continuation of H D Deve Gowda’s political shenanigans by other means. Though the Framework Agreement for the BMCP was signed in 1997, it had been clinched by Deve Gowda in 1995. To that extent, the JD(S) accusation that NICE took over excess land for the project by defrauding local farmers rings hollow. Which is confirmed further by the fact that the state government passed 18 pieces of legislation to acquire land for the NICE project before it was signed in 1997, without any objection from Deve Gowda and his party.
Rehabilitation programmes should enable traditional communities, which give up land for more modern and productive uses, to become viable stakeholders in modern economic activity that their land would subsequently foster. To that extent, some villagers might have genuine grouses, and the government should certainly step in to make amends. The latter has, however, only sought to grind its political axe by trying to pander to vested interests. Development of physical infrastructure, especially roads, must be the main focus of all governments if economic liberalisation has to be fruitfully sustained. Private investment in infrastructure projects is, therefore, critical. And Deve Gowdas, who claim to protect the interests of traditional communities while doing everything to prevent them from joining the modern economy as equitable stakeholders, must be junked.

-- The Economic Times Editorial

Unwarranted paranoia

The government seems determined to harass Chinese investors. First, it was the National Security Council (NSC) opposing infrastructure investments by Chinese companies because of security concerns. Now, the FIPB has put on hold Chinese firm ZTE Telecom’s plan to invest in wholesale trading in telecom equipment. The Hutchison’s Group’s plans to invest in container terminals have been put on hold for a while. The government can’t decide if the Hong Kong-based Group, one of the world’s largest operator of container terminals, is a security threat. Earlier, telecom infrastructure firm Huawei’s investments plans were held up for a long time. All this is totally unwarranted. Simply describing India as a favourable investment destination would fail to draw higher foreign investment in presence of bureaucratic impediments. The government must realise that suspicion of anything Chinese is no longer tenable. Globalisation presents unprecedented opportunities to both Indian and Chinese companies to forge mutually beneficial agreements which would fuel growth in both the countries. ONGC and CNPC’s successful joint bid for Syria’s Al Furat oil and gas fields is one such example.
With a larger number of Indian companies expanding operations in other countries to boost profits and increase marketshare, there is now a two-way relationship between Indian and foreign companies. Thus, getting paranoid about security and imposing restrictions on foreign companies eager to invest in telecom, ports and other sectors could trigger retaliatory measures on Indian companies. That would, in turn, be detrimental to their long-term growth prospects. Setting up an autonomous regulatory body, that will supervise the functioning of foreign companies in critical sectors such as telecom and ports and ensure compliance with regulations would be a better way of protecting security and sovereignty. This would also guarantee transparency and accountability in the company’s operations. NSC should be aware that any policy resistance against investment by companies of a specific country sends out wrong signals.

-- The Economic Times Editorial

The need for hard data

It's becoming increasingly clear that the government did virtually no spadework before deciding on quotas in central educational institutions. There is, for instance, no reliable evidence on the proportion of students from among the OBCs currently enrolled in these institutions. An ET-NCAER analysis of data thrown up by the 55th round of the NSS has unearthed a wealth of information on economic and educational status of India’s OBCs. The data is rich in detail and would help in the formulation of rigorous criteria to determine policies for more equitable access to education. OBCs as a whole are, clearly, worse off than the general category, but the top 20% of the former are not very much behind the same segment of the general category in per capita consumption. The gap widens for the middle layers, but narrows again for the bottom 20%. There’s considerable gap in access to education, though. The data shows that only 8.8% of the top 20% of the OBCs have access to higher education as opposed to 18% of the same segment among the general category. The same analysis has shown that the top 20% among OBCs are either ahead of, or virtually on par with the top 20% among upper castes at the elementary, middle and higher-secondary levels.
The data may appear to support the case for OBC quotas in institutions of higher learning. However, as we have argued, quotas are not the right instrumentality for redressing disparities, vis-a-vis access to higher education. Central educational institutions are a source of competitive strength for India in the knowledge economy. Equity as a policy objective must be balanced against the need to maintain this source of excellence. Once the quality of government schooling improves, the diversity of the student population in these institutions will doubtless approximate to the general population. Meanwhile, the government should universalise the JNU model, which awards booster points for various orders of backwardness to admission-seekers. That would have the same intended outcome as quotas without granting caste institutional legitimacy.

-- The Economic Times Editorial

Increase ore royalty rates

It's notable that Jindal Steel has reportedly bagged long-term mining rights in Bolivia’s El Mutun site, said to contain Latin America’s largest iron ore deposits. It would be the biggest contract for ore abroad, by an Indian steel producer since the reserves there could rival proven ferrous deposits in the whole of India. But while Indian companies win mining rights abroad the fact remains that there is a sorry lack of transparency when it comes to mining here at home. The investment regime for the high-growth potential mining sector remains mired in rigidities and glaring policy inflexibility, despite pious intentions of reform. Note that India’s estimated reserves of iron ore are amongst the largest anywhere. And yet, there is much opacity in the grant of licence for reconnaissance, prospecting or actual mining. Or, consider our royalty policy. The royalty rates remain rock solid and pegged at a paltry Rs 27 per tonne, never mind the sustained rally in iron ore prices. And that’s the going royalty rate for the highest quality ore, with Fe content of at least 65%, or more.
For lesser ore, the rate is a niggardly Rs 11/tonne! And this despite international iron ore prices going up from $33/T in 2003, to $61/T in ‘04, and likely to reach $85/T in ‘06. Domestic prices of finished metal are in any case linked to global prices. And yet, we do not have a policy for ad valorem royalty rates. Worse, the ‘specific’ rates remain unrevised for sustained lengths of time. Royalty revenues accruing to the states surely need to reflect international scarcity value of ore, since our annual iron ore output is but a small fraction of world production. Already, cash-strapped, mineral-rich states, in a desperate bid to boost revenue accruals, link mining rights to putting up steel mills which may be locationally quite unviable. Instead, we need reasonable royalty rates and policy clarity. As an avowedly globalising economy we need to scrap the last vestiges of autarky and unabashedly pitch for openness.


-- The Economic Times Editorial dated 3rd June' 06.

Tap CEOs for top jobs

Is it possible for Deepak Parekh or K V Kamath to become India’s FM? The answer is likely to be no, because of perceived conflicts of interest and also because the political system doesn’t trust businessmen. That’s a state of mind, which is a hangover from the socialist era and needs a radical rethink. The US, the world’s oldest democracy, has no hesitation tapping knowledge and expertise wherever it can be found. Earlier this week President Bush nominated Henry “Hank” Paulson, chairman and CEO of Goldman Sachs, as Treasury secretary. Mr Paulson joins a long list of top level US corporate executives who have joined government. Robert Rubin, President Clinton’s Treasury secretary was also a former chairman of Goldman Sachs. In the current administration, Joshua Belten, the White House’s chief of staff, is a Goldman alumnus. Paulson’s two predecessors and vice-president Dick Cheney have all run companies. A two-way flow between industry and government is commonplace in most advanced markets.
There is no doubt that there are potential conflicts of interest. For starters, Paulson will have to ‘ring fence’ his vast personal fortune, which essentially means putting his assets in a blind trust so he has no knowledge as to how they are managed. Every word Paulson speaks, and every action he takes will have an impact on Goldman, one of the largest investment banks. As Treasury secretary, he will have to represent the US’s interests in talks with China, a country whose leaders he had avidly wooed in his Goldman avtar. Remarkably, at least for us Indians, no one in the US thinks that these conflicts disqualify Paulson. No one suspects that he will be secretly on China’s side in negotiations over, say, currency changes. It is simply assumed that his dharma from now on will be to serve the interests of the US government, to the best of his ability. In India, suspicion and ignorance of business, and not completely unjustified fears that conflicts cannot be managed, prevent the polity from using the services of CEOs who may be inclined towards public service. The country is the loser.

-- The Economic Times Editorial dated 3rd June, 2006