As with most other places in the world, India is facing a significant economic slowdown that is aggravating an already serious liquidity crisis. The government is finding it increasingly difficult to implement additional fiscal or monetary measures, and as a result, has tried to bring liquidity by lifting FDI restrictions and attempting to lure back foreign investment. But politics is getting in the way. The government cannot allow political expediency to derail the progressive lifting of FDI restrictions, even during tough times like these. Many international companies are still looking to enter the country, despite facing enormous uncertainties about their financial health in their existing markets. With a more open India, they will enter and bring with them a significant amount of capital investment and managerial expertise. This will help India pull out of the recession in the short to medium term and also help establish the conditions to sustain economic growth over the long term. Indian companies will use the additional funds from their foreign partners to keep their staff employed and continue with capital expansion plans. Indian companies with global ambitions will have greater access to world-class infrastructure and managerial knowledge that will enable them to better compete around the globe. With increased competition, Indian consumers will be able enjoy the highest-quality products at the lowest cost.

Take the retail sector, for example. Large international retailers such as Wal-Mart and Tesco want to enter India, but have been mostly reluctant so far since they cannot have majority ownership. The government in early February tried to ease this restriction by allowing foreign companies to make indirect investments through Indian companies. However, merely two weeks later, amidst pressure from certain political circles, the government backed off and stated that these indirect investments will also be subject to sectoral ownership limits.

These limits are hindering India’s economic progress, both in the short- and long-term. Many Indian retailers have recently run out of cash to pay their employees, keep existing stores in operation, and open new ones. Foreign investment can help meet these short-term needs. In fact, some Indian retailers are now seeking foreign partners to obtain additional liquidity and attract consumers with the strength of the partner’s global brands. For example, Tata-owned Trent recently teamed up with Spain’s Inditex to open Zara outlets in India.

Besides fulfilling short-term needs, lifting regulations will help build the foundation for India’s continued development. It will allow global retailers to make large investments in cold-storage, distribution centers, and transportation in India. The Indian farmer, consumer, and retail employee will all benefit. For example, an estimated 35% of produce currently spoils on its way from the farm to the market, due to slow transportation and lack of cold storage capabilities. Investment by foreign multinationals will help rectify this situation. In the process, the Indian farmer will have more to sell. The consumer will have more product choices and greater value for money. Many retail jobs will be created.

The automotive sector is a great example of where India gradually lifted regulations, foreign companies entered, and domestic companies, workers, and consumers tremendously benefited. Until 1983, the government protected domestic auto manufacturers with high import tariffs and a ban on foreign investment. As a result, consumers had only two models from which to choose, both of which were high-priced and based on outdated technology. Then the government permitted a Japanese automaker, Suzuki, to partner with state-owned automaker, Maruti Udyog. The Japanese brought with them technology and efficient manufacturing processes, significantly improving productivity and quality. Industry output grew at 13% per year from 1983-1993, compared to 1% per year in the decade before. In 1992, the government further eased restrictions on foreign entrants. Many more global manufacturers subsequently entered the market. Today, more than 20 major automotive manufacturers operate in India, selling hundreds of models and variants. The sector is employing an estimated 10 million people directly and indirectly, which is on par with the number employed in the IT sector. In addition, over the last few years, auto prices have been decreasing by 8 percent to 10 percent annually. India is now positioned to become a major manufacturing hub for global players such as Toyota, General Motors, and Ford.

In this time of cash-poor consumers, continued intense global competition, and beleaguered shareholders seeking better returns, multinationals are eagerly searching the globe for sales and profit. As India further opens, more multinationals will certainly enter. What will be good for the consumer will also be good for Indian businesses and workers.

Full disclosure: Suresh is an independent management consultant based in New York city, with a focus on the retail and FMCG sectors. Prior to this, he worked with Unilever’s Home and Personal Care Division.

Here’s an earlier IEB post on Wadhwa’s research — Don’t Try Kicking Sand In America’s Face.

On another note, Sunita Narain’s at it again — after colas, now it’s edible oils. (HT: Amit Varma, via email)

The entire China vs India debate is so overdone and (mostly) futile. Unfortunately, it seems to elicit the most number of comments on IEB – largely bakwaas, unfortunately – which we have to perforce edit or delete.

Here’s Gurcharan Das, one of my favorite essayists with a rather strange op-ed in the New York Times that begins with the Mumbai terror attacks and the public’s reaction thereof, and then flits from meme to meme — India vs China, the role of Vaishyas in India’s growth, the Argumentative Indian, the 21st century rise of India (and China) and the role (or lack, thereof) of government, and the need for India to get its infrastructure right. Talk about a khichdi of ideas. For all I know, there may be a couple of other memes that I’ve missed. My head was spinning at the end.

Anyone else with similar reactions?

Mira Kamdar’s recent piece in the World Policy Journal illustrates this well. By Ms. Kamdar’s account Indians are heading down an inevitable path to doomsday. Malthusian population pressures, resource scarcity, global warming, environmental degradation, industrial capitalism, and political corruption have combined with an inherently fractured society that is likely to erupt in caste, religious, and class warfare, terrorism, and self-destruction. Mix in the recent US-India civilian-Nuclear deal and the presence of unstable neighbors – Pakistan, Bangladesh – along with an aggressive China, and Ms. Kamdar offers up all the ingredients for a nuclear holocaust. The only uncertainty we are left with is: which doomsday will India break into first — internal implosion or external explosion?

And if this is not enough, Kamdar has one more concern: Indians are taking to cars rather than following the example of bicycle aficionados in Amsterdam, Paris, and New York.

All this, because Ms. Kamdar wishes to disabuse her readers of taking too seriously the rosy-scenarios painted for India in the 5 year old Goldman Sachs BRICS (Brazil-Russia-India- China) report. Perhaps the BRICS authors expected a less fundamental critique of their growth-accounting models? Instead, Ms. Kamdar offers her own BRICS dream in the very last para of her piece: India’s under-class and lower castes having finally usurped political power will magically transform Indian democracy, to root out corruption, poor governance, and “…will have delivered quality education and healthcare, housing, clean water and sanitation…. Its policies will reflect the active civic engagement of an informed electorate, becoming a model for the world of the advantages of truly democratic governance. Now that is what I call dreaming with a BRIC.”

An ongoing doomsday scenario in India that ends in a future utopian vision for India: Ms. Kamdar offers no intellectual bridge from here to there. So how can one trust the reality of either worldview?

Perhaps if she had considered the half-century lost under the unproductive haze of the License Raj; or the pernicious harm done to Indian polity by a caste based reservation system that actually reversed upward caste mobility and institutionalized caste divisiveness in Indian society — an outcome that ironically is the one real ingredient in Ms. Kamdar’s utopia; or, if Ms. Kamdar had considered the woeful neglect of land markets in India instead of choosing to paint the Nano plant site controversy in West Bengal in class-warfare terms; or, that even assuming the worst case global-warming outcome and its impact on agricultural productivity in India, opening up the rural economy to trade and investment offers the individual farmer more, rather than less, options – of goods, technology, and mobility – when dealing with a changing environment.

All of the problems Ms. Kamdar touches on are real and require incremental but genuine responses – to be provided by markets, entrepreneurship, leadership, and good governance. And these responses will by necessity emerge from what India is and not from some radicalized new society that Ms. Kamdar dreams.

Too bad Ms. Kamdar has chosen to neglect the reality and promise of progress in India, while conjuring up wild lurches between doomsday and utopia. One can only hope that the readers of WPJ are more grounded than the author.

Guest post by Nimai Mehta, Assistant Professor of International Trade and Business at American University, Washington DC.

The decade and a half following India’s economic reforms of 1990-91 has been an exciting and transformational one for India and its people, and has also had a significant impact on the entire world. Much good has happened, with increasing growth and prosperity benefiting millions. The world has observed the rise of a large and vibrant middle-class, an aggressive and innovative private sector, and the growth of a soft culture. It is true that severe challenges still remain, caused mainly by massive disparities in income and access to resources, which mean that over 300 million people remain desperately poor, and large parts of the country not benefiting from growth.

A lot of India’s growth and stability today has been credited to its overall political structure and institutions. This is what has kept the nation united through the numerous challenges it has faced, and continues to face. The federal nature of the government, coupled with the presence of an independent judiciary and a powerful media have all combined to create the unique phenomenon that is Indian democracy. There are notable flaws, such as weak law enforcement, and an excessive bureaucracy, but, for better or for worse, Indian democracy has worked.

However, over the past few years, a major development has occurred in India, almost silently, which illustrates the uglier side of this system. While the growth rates clocked by the economy over the years have been impressive, most of the major policy changes benefited big established business houses. This has resulted in the India of today being a highly oligarchic economy, with a relatively small population enjoying disproportionate power, wealth and influence (four of the world’s ten wealthiest individuals are from India). Actual market friendly policies, which would help the middle-class and poor by boosting entrepreneurship would often be to the detriment of this group, and are often inhibited. In the 1950′s, Eisenhower warned the Americans of a “military-industrial” complex which could skew American priorities. His fears might have been unfounded, or at the very least, quite exaggerated. However, India today does the face the danger of a political ? big business complex distorting its priorities.

This phenomenon was partly displayed during the debate over the Indo-US nuclear deal. A seemingly innocuous bilateral treaty, it created frenzied debate, polarized the polity and the nation, and forced the government through a no-confidence motion. To a complete outsider, it all seemed a lot of action for something which appeared quite routine. To Indians though, it all seemed wearingly familiar.

The nuclear deal holds many ramifications for India, and the general consensus amongst the scientific, business and intellectual community is that it would be beneficial, if negotiated properly. Power generation is one area where the deal is said to have probable benefits. India remains critically deficient in power generation, with large parts of the country, including metros, suffering from severe power shortages. This has had a major impact on the growth of small business units, especially in manufacturing.

Since nuclear energy can be used to generate power, it appears that the deal could help meet the shortage, and thus, presents a huge opportunity for big business houses. Each major political alliance in India has its support base comprised of various business houses, and each alliance feels the pressure to make sure the deal goes through when it is in power, to ensure the maximum benefit for its support base. Simultaneously, policy changes such as decentralizing power production, removing subsidies or limiting power theft are often prevented, as those would enable the entry of other players into the sectors. It is like a double whammy effect.

Two other areas where the impact of the political-business nexus can be seen are agriculture and retail. Organized retail presents a massive opportunity for India to broad base its growth, and help kick start the agriculture sector, with estimates ranging from $ 500 billion to over $ 1 trillion. A large amount of agricultural produce in India is wasted each year due to the lack of cold storage, to the tune of $ 7 billion. Investments, both foreign and domestic, should be welcomed in this sector, as well as initiatives to promote local small businesses. Yet, the whole sector has been dominated by big players, who would rather establish consolidated supply chain which would squeeze prices all along the retail chain.

On a broader governance level, the negative impact of the political business nexus can be observed. Running for public office in India is an incredibly expensive proposition and campaign financing remains murky, with virtually no accountability. This works perfectly to the advantage of the business lobbies, in exercising control over political parties. The labor market also remains highly informal and unorganized, as this keeps labor prices cheap. Another good example is the real estate sector, where acquisition of land for commercial or private purposes remains incredibly difficult, for businesses which want to establish themselves. It needs to be pointed out that these phenomena were not the creation of the big players today, but it works to their benefit today to ensure that the status quo remains.

It is entirely likely that the influence of this group would diminish with the passage of time, and that fears about it would prove unfounded (as some of Eisenhower’s were, in the case of the US). Yet, in the Indian context, there needs to be a greater awareness of the dangers posed by such developments, and how they could impact the overall growth story.

Since then, the government has collected Rs.74972.36 crore as cess, but only Rs.902 crore has been allocated to the Oil Industry Development Board (OIDB) that is supposed to disburse the money to the industry.  In fact, the last allotment of Rs. 95 crore to the OIDB was done in 1991-92. The balance money has gone to the Consolidated Fund of India and added to other revenue accruals.

The cess was doubled in 2002 from Rs. 900 per tonne to Rs.1800 per tonne, and further increased to Rs. 2500 per tonne in 2006, on the ground of providing subsidies to LPG and kerosene. As per the Oil Industry (Development) Act, the amount collected by levying cess on indigenous crude is to be utilised for the development of petroleum sector; the cess was never intended to cover subsidies – either directly or through oil bonds.

Cess is only applicable to pre-NELP [New Exploration Licensing Policy] blocks or acreage given to national oil companies (NOCs- ONGC and OIL) on a nomination basis in which the licensee may be one of the NOCs. The blocks that pay cess on oil are: nomination blocks held 100 per cent by NOCs (for example, Mumbai High), joint venture blocks that were awarded as field development contracts (such as Mukta, Panna, Ravva), and exploration blocks that went on to production (such as PY-3, CB-OS/2).

Now that the petroleum sector has been deregulated and opened for private sector, there is no justification of continuing this cess at all. The private companies still pay about half the cess not paid to the government as increased profit oil [amount of production paid to the government under the production sharing contract] and corporate taxes. Recent newsreports indicate that-

The government is obtaining legal opinion for imposing a special oil tax on the domestic crude oil production under the New Exploration Licensing Policy (NELP). The proposed tax is supposed to kick-in after price of domestically-produced crude oil crosses the $75/barrel mark. While public sector oil producers like ONGC and Oil India would have to fork out to the government 100% of additional realisation beyond the cut-off price, private companies like Reliance Industries (RIL), Essar Oil and Cairn India would be required to pay 40% of their windfall gains.[ET]

Cess, customs duty, excise duty, sales tax, education cess, pollution cess and now a special oil tax. Considering the amount of revenue collected by the government[central and state], the net subsidy provided  to the public on petroleum products is only a political statement, with insignificant net financial entailment.

Coupled with the charade of Oil Bonds, the cess imposed on the indigenous crude oil produced by NOCs is an implicit arrangement of meeting the subsidy burden and artificially containing government’s budgetary deficits. All these measures are but an indicator of the byzantine and befuddled nature of the government budgetary process. It is time someone took up cudgels to streamline and simplify the convoluted government fiscal setup, both of revenue collection and of expenditure.

Long-time reader and IEB friend, Joydeep Mukherji sent us this article with a comment:

The West Bengal government has decided to import one lakh tonne of coal at higher rates to fuel the thermal power plants which have not been able to meet the power demand recently for wet and substandard coal.

The resulting rise in the cost of power would have to be borne by the consumers, State Power Minister Mrinal Banerjee said when replying to a motion moved by the Leader of the Opposition Partha Chatterjee in the Assembly today. (ET link)

This article highlights the lunacy behind the intersection of economics and politics in India. India has the third largest deposits of coal in the world, and much of that is in Bengal. However, India imports coal since it is easier to procure and cheaper to buy abroad. Even Bengal is now importing coal since its own coal industry is hopeless.

The problem lies with the monopolies granted to Coal India and other public sector companies, leading to government restrictions and pricing policies that breed black markets and shortages. The coal sector has barely been liberalized despite nearly two decades of reform.

Politically, any ambitious politician from Bengal, Jharkhand or Bihar imemdiately seeks the Coal Ministry (or the Railways as a back up). The goal is not to develop the coal sector to make Bengal and Eastern India a prosperous region based on ample energy. On the contrary, the goal is squeeze as much bribery out of that industry and employ as many party workers in it as possible.

With such an outlook, is it a surprise that Bengal is importing coal? The fact that few people in India even see the irony of this situation shows how deeply the rot has set in.

Strategic fools occasionally write about Indian energy companies buying or investing abroad, often in competition with Chinese firms, describing such actions as if they were epsiodes of combat in a ‘Great Game’. Note that no one points to the reasons at home that lead firms to look for supplies abroad.

Though I have never invested in the shares of Reliance Industries, my recently gleaned understanding of the world petroleum scenario has made me respect the company’s vision in its refining projects. As I mentioned once earlier, RIL’s existing refinery, and the one nearing construction, reportedly have unparalleled flexibility to process heavy, high-sulphur (so-called sour) crude, especially that emanating from Iran. This crude sells at a huge discount to other crudes; once it is refined into diesel, though, RIL is able to sell the resultant distillates, especially diesel, into a world market which is thirsty for such products.

Most mature consumers, the US especially, have made no investment in refining capacity over the last 2 decades, and strategic thinkers in the petroleum industry go so far as to say that RIL’s investments are changing the pattern of world flows in petroleum and petroleum products.

For this reason, I have recently turned from a bear on RIL to a mildly positive neutral. Until last week, that is. With Mulayam Singh and Amar Singh all but in the ruling coalition, suddenly life has become difficult for Mukesh Ambani. The first salvo across his bows was a minor irritant, namely the questioning of concessional import duty paid on two private jets.

More significantly, there are now calls for a ‘windfall tax’ on profits RIL is making on its refining operations. Nothing could more arbitrary than such a tax; windfall taxes have been discussed in the US, on the extra profits oil companies make when commodity prices suddenly ramp up – the implicit logic being that the companies have done nothing to earn this extra profit. I disagree with such taxes, in any case, since anyone who invests in an industry, resource-based or otherwise, runs the risk of prices being lower than he anticipated – in which case he is not compensated by the exchequer.

But in the proposal that RIL be taxed, all one sees is the vindictiveness of those opposed to him. If RIL is making higher profits than other refineries, this is due to its far-sightedness in investing in a more complex and sophisticated refinery. The profits accruing from such an operation are far from a ‘windfall’, a term normally used to describe a lottery win, for example.
If this nonsensical suggestion is accepted by the government, it will send out a signal that Indian governance is of the banana republic variety.

Mohit Satyanand is consulting editor at Outlook Money

Dr Manmohan Singh the prime minister has routinely relied on platitudes (instead of on incentives) to motivate the UPA government’s policies. But he is getting even the platitudes wrong. In a country where the average annual per capita income hovers around an unacceptably low US$1000, he wants people to earn less. Why? Because, according to him, earning less, and expecting to earn less, is a national duty.

By equating a degree of self-sacrifice with national duty, the PM has tried to make a moral argument. He has said that this is what corporates and highly paid executives owed in the endeavour to contain prices and keep the overall growth momentum on track. While this has a populist touch and will appeal to an opinion that is ready to view corporates as “fat cats”, private employment is increasingly the preferred option for most educated persons.

Sectors characterised by “significant market power” in the hands of a few producers have a societal obligation to assist the government in moderating inflationary expectations, the PM rounded off. [TOI]

He has gotten it exactly wrong. The national duty of every citizen is to make as much money as legally possible. Anyone who suggests otherwise cannot have the best interests of the Indian people at heart. Oh, he’s only referring to the top executives, you say? Well, first, depressing wages at the top will cascade down and result in lower earnings for everyone in the pyramid (just as increasing wages at the top will increase wages for everyone). And as a matter of principle, just how does making the rich earn less help the nation? In fact, it does just the opposite. It would have been one thing for Dr Singh to call upon the rich to deepen the culture of philanthropy. But to equate “self-sacrifice” with “national duty” is dangerous nonsense.

Dr Singh shamelessly masks his government’s failure to ensure free, competitive markets—and prevent the build up of significant market power—by claiming that monopolists have societal obligations. That’s dangerous nonsense too. The solution to the build-up of market power is further liberalisation and effective regulatory oversight. Dr Singh’s admission that there are sectors where companies have significant market power calls for moving forward with the economic reform process. Just what happened to the privatisation (okay, disinvestment) agenda?

We have said this before, and we say again: Dr Manmohan Singh has done immense harm to India’s future. The evil that he has done will live long after him. The good was interr’d with P V Narasimha Rao’s bones. Corporate India would do well to ignore the shameless moral poseur. Yes, it’s late in the day for this government. But Dr Singh should go. [See previous calls.]