Gurumurthy Kalyanaram on Liberalization of Foreign Direct Investment in Retail Business in India

Gurumurthy Kalyanaram - Liberalization of foreign direct investment in retail business in India (to 100 percent in single-brand and to 51 percent in multi-brand retail business) has met with monumental political resistance. The government is expected to announce that it is suspending all decisions and notifications regarding this decision till a greater consensus is achieved.

Intellectuals including many economists have urged the government to stay the course, and not give in to political pressures. The singular argument of the proponents is that the benefts of liberalized policy in retail (e.g., increased infusion of foreign capital, technology and managerial expertise in retail sector; development of modern and sophisticated logistical technologies and attendant infrastructure including food warehousing and transportation approaches; reduction in transit and other costs and hence lower price to consumers; and reduction in the power of intermediaries between farmers and the market) are well documented in many countries including Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, Singapore, and Thailand.

Gurumurthy Kalyanaram on Foreign Direct Investment (FDI) in Retail Business in India: Long-term benefit and Short-term dislocation

Gurumurthy Kalyanaram - Government of India's decision to permit 100 percent foreign direct investment in single-brand retail and a maximum of 51 percent such investment in multi-brand retail business has been received with ferocious opposition from various traders' associations and then entire gamut of political parties.

The proceedings of the Indian Parliament (Lok Sabha and Rajya Sabha) have been stalled, and there is a general strike that has been called by the traders' association. Gurumurthy Kalyanaram Lawsuit

Unfortunately, an important policy decision is lost in lot of noise -- both the proponents and the opponents of the proposal have merit in their arguments but all that is lost in the din.

The American Clean Energy Act, Global Warming and the Position of China and India

The American Clean Energy and Security Act (Waxman-Markey) was recently approved (narrowly) by the U.S. House of Representatives. The bill now goes to the U.S. Senate for consideration.

There are several provisions of the bill -- some are bold and others modest, some progressive and others status quoist. With respect to Global Warming and Carbon emission reduction, the Act mandates, "Starting in 2012, ACES establishes annual tonnage limits on emissions of carbon and other global warming pollutants from large U.S. sources like electric utilities and oil refiners. Under these limits, carbon pollution from large sources must be reduced by 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. To achieve these limits, ACES establishes a system of tradable permits called “emission allowances” modeled after the successful Clean Air Act program to prevent acid rain. This market-based approach provides economic incentives for industry to reduce carbon emissions at the lowest cost to the economy."

So, per ACES Act, the United States is using 2005 as the benchmark, and hoping to reduce the carbon emissions by about 17 percent in 2020. 

On China and India: Governance and Economic Institutions

In addition to the democratization of its polity, and liberalization of its economy, the autonomy and democracy of India’s financial institutions and corporations make India a more alluring investment destination. The norms and regulations of the financial markets, and the enforcement and supervision by Securities Exchange Board of India of these regulations are credible, if not perfect. They have made the Indian stock and bond markets transparent and investor-friendly (Swamy 2005). India’s stronger infrastructure in terms of far more efficient and transparent capital markets is enabling the growth of entrepreneurship and free enterprise (Huang 2006).

Empirical research (Khanna, Kogan and Palepu, 2006) now shows that each successful society develops its own set of governance institutions, standards and practices. While there may some de jure similarity in standards, there is no de facto convergence. India has evolved fairly robust and indigenous governance institutions and standards (e.g., dispute resolution bodies such as courts, recognition and protection of private and intellectual property rights, a well-developed private sector, and a modestly better score on corruption and rule of law in World Bank’s governance indicators) over the last 50-60 years (Swamy 2005, Wolf 2006). It may take China the next 30-40 years to develop its own institutions and standards (North and Thomas 1971, Swamy 2005).

Three important policy elements of the India-US Nuclear and 123 agreements

As India debates and will vote for the India-US Nuclear agreement through its members of parliament (it is a proxy vote in that the members of parliament will be voting whether the parliament trusts the current government or not), and as individual members of parliament are being tugged in different directions including their own conscience, there are three policy questions they should consider.

Based on their assessment on these three policy elements, the members of parliament should cast their votes.

(1) Will the safeguards agreement between India and the International Atomic Energy Agency (IAEA), and the exemption obtained from the Nuclear Suppliers' Group assure India uninterrupted supply of nuclear fuel and technology in perpetuity if India abides by the IAEA agreement even if the United States exercises the Hyde Amendment prerogative? (The Hyde Act in the India-US Nuclear agreement prohibits the U.S. administration from directly or indirectly assisting India with lifetime fuel supplies after suspension of the deal).

Simply put, is there separability between the agreement with IAEA and the Nuclear Suppliers' Group (bilateral 123 agreement), and the India-US Nuclear agreement?

The Indian government including Prime Minister ManMohan Singh and Congress party president Mrs. Sonia Gandhi appears to think that the answer to this question is "Yes". Several others -- policy leaders and scientists including P. K. Iyengar (former chairman, Atomic Energy Commission), A. Gopalakrishnan (former Atomic Energy Regulatory Board chief) and A.N. Prasad (former Bhabha Atomic Research Centre Director) assert that the answer is "No". (The three scientists, "Therefore, the government owes a clarification to the Parliament and the public about how they intend to avoid the consequential huge economic loss from the non-operation of these extremely costly imported reactors, as a result of fuel denial.”)

(2) Will the Nuclear agreement with the IAEA and the Nuclear Suppliers' Group (NSG), and/or the agreement with the United States weaken, in any manner, India’s nuclear deterrent and an ability to protect & promote indigenous R&D efforts in nuclear technology?

Simply put, will India's national security and/or sovereignty be compromised? The government says, "No". Others assert that the agreements would compromise the security interests at least some.

(3) Will the Nuclear agreement with the IAEA and the Nuclear Suppliers' Group (NSG), and/or the agreement with the United States have negative collateral effects on other areas of national interest such agriculture, defense and space?

Simply put, will India's national interests be protected? The government says, "Yes". Other including Placid Rodriguez assert that India's national interests may be compromised. (Rodgriguez, "My greatest reservation (about the deal) is that the strategic alliance between India and the US is going into agriculture because in the other three sectors (defence, space and nuclear) we are strong and we can go independently and we will go.)

The proposed agreement between India and International Atomic Energy Agency: Is it a prudent compromise or an unworkable compromise?

The draft text of the safeguards agreement between India's Department of Atomic Energy and International Atomic Energy Agency (IAEA) secretariat appears to be splitting the differences. That's good news. Sometime splitting the differences is prudent compromise, and at other times it kills the baby.

One of the key phrases in the agreement is “corrective measures”. Put simply, the agreement stipulates New Delhi’s right to act in the event of a breakdown of the agreement for international cooperation.

There are two sets of issues/concerns being raised about this phrase. First concern is about the palce ment of this phrase -- the reference to “corrective measures” appears only in the preambular section of the agreement, not in the body of the text. This should not be a major issue.

The second concern is about the meaning of “corrective measures”, which would become operational if the permanent safeguards and assured supplies breaks down. On permanent safeguards India offers the assurance “against withdrawal of safeguarded material from civilian use at any time”. At the same time, India wants to make sure that, after accepting safeguards, it should not be left high and dry on fuel supplies. Hence the compromise language in the IAEA draft affirms about “creating the necessary conditions for India to obtain access to the international fuel market, including reliable, uninterrupted and continuous access to fuel supplies from companies in several nations, as well as support for an Indian effort to develop a strategic reserve of nuclear fuel to guard against any disruption of supply over the lifetime of India’s reactors”.

This -- the focus on diversifying suppliers and the creation of a strategic reserve -- appears to ensure a lifetime supply covers many of the contingencies.

However, the stipulation is so vague and compromised that it has left all the constituents dissatisfied and anxious.

No one understands or knows for certain what this provision means, and/or when it would become operational. Being vague about the details of the provision has suited both the Government of India and IAEA but not the well-meaning interpreters of the agreement within and without the country.

The Indian citizens are worried that India may be caught in a nuclear bind (of interrupted supplied), and the Non-proliferation critics in the U.S. and other parts of the globe are worried that India may exploit the provision for furtherance of its nuclear goals. So there you have it -- splitting the differences may prove to be suboptimal.

The draft text as provided by The Times of India can be accessed at the following link --

draft-text_iaeaindia_toi-july-10

Indian policy leaders and citizens have to carefully consider the geopolitics in assessing the India-US Nuclear agreement

As India debates the merits of the India-US Nuclear agreement (123 agreement), public policy leaders and citizens one must consider three the current and potential geopolitics in determining the acceptability of the India-US Nuclear agreement. There are at least three different elements to be considered --

(1) The Larry Pressler Amendment which was in effect in the U.S. with regard to the export/sale of military technology to Pakistan mandated that the President of the United States had to certify to the U.S. Congress that Pakistan was not misusing the military technology. In 1990 the unthinkable happened. Pakistan had paid billion of dollars for the purchase of more than F-16 fighter aircrafts. But the then President George H.W. Bush refused to provide the certification, and Pakistan was denied the F-16 fighter aircrafts though it had paid for them. Pakistan had got those aircrafts in 2005-2006 when President Bush decided to grant India exemption from the sale of nuclear technology and fuel.

(2) We should remember that first nuclear power station -- Tarapur Atomic Power Station -- built in India ran into serious difficulties in the 1960s. The nuclear power station was built with the help of the US and Europe, and with the assurance of continuous nuclear fuel supply. However, because of many domestic and global pressures including the pressure of the Non-proliferation advocates, the United States and France pulled out of the agreement abruptly. India was stranded but thanks to the leadership of the Indian scientists and the political leadership including Mrs. Indira Gandhi, India developed the nuclear and space technology indigenously.

Congratulations to India that in spite of the attempts to impute a variety of motives to India, India never pulled the Tarapur Atomic Power Station out of the IAEA safeguards.

(3) Assuming that the Nuclear agreement is consummated, what will India do if any party -- be it India or the U.S. (because of Hyde Amendment) -- reneges from the agreement in the future? Where will India go for the nuclear fuel and technology? Imagine the scenario twenty-years from now. Assume India has 30 nuclear power plants in different parts of the country and abruptly India loses supply of most of the fuel. That would be disastrous.

The world certainly has changed the 1960s and even from 1990 but it is also likely to change again in 20 years. India should, therefore, consider the geopolitics of the nuclear agreement. dispassionately.

Tough economic times in India in the midst of ferocious Nuclear debate

As the Indian government's energies are absorbed in the debate over India-US Nuclear agreement (123 agreement), the country's economy is showing serious strains. India's economy is now faced with trio challenges -- rising oil prices, worrisome inflation, and depreciation of Indian rupee.

This is not good news for the country, and not for the ruling coalition of parties who have to face the electorate in the next 8-10 months.

Just look at some of the data. Inflation is at an alarming 10-11 percent annual rate corroding the purchasing power of all the citizens. Food and energy prices are skyrocketing. India is seeking a consensus for a regulated bandwidth of price for oil.

The Indian currency -- Rupee -- is depreciating because of the inflationary pressures. The trade deficit is growing.

For example, on Monday, June 30th, the market capitalization of the Indian financial markets was about one trillion dollars. So was the size of the Indian economy. But on Tuesday, July 1st that was not the case.

Bombay Stock Exchange closed on June 30th with a market capitalization of about $1.02 trillion. On Tuesday, a fall of 500 points in the Sensex and a gain of 32 Indian paise (100 paise = 1 Indian rupee) for the dollar against the rupee saw that figure drop to $970 billion.

Similarly, India's Gross Domestic Product for 2007-08, valued at Indian rupees (Rs) 43,02,654 crore, translated into just over $1 trillion as valued at exchange rate on June 30th. With the dollar appreciating against the Indian rupees and crossing the Rs 43 bench mark on July 1st, the India economy was down to $995billion.

High oil prices have seen India’s oil import bill rise to $16.5billion for April-May this year, up 49 percent from the figure for the same months of 2007. As a result, the overall import bill has risen by 32% to $48.8b. Despite the fact that exports have grown at 22%, the trade deficit has risen to $20.6 billion -- up about 48 percent.

The widening trade deficit has added to the demand for dollars as against Indian rupees. So while the U.S. dollar has been generally depreciating against most currencies, it has been appreciating against the Indian rupee. The exchange rate is over 43 Indian rupees.

The winners and losers in the Indian debate of the India-US Nuclear agreement

The India-US Nuclear agreement (123) debate is furious in India. The coaltion government led by Congress party, and the Prime Minister Manmohan Singh are finally determined to have a go at the nuclear agreement. The communist parties with about 60 parliamentary (Lok Sabha) members are about to withdraw their support to the coalition government but the Samajwadi Party led by Mulayam Singh with about 39 parliament members are all set to support the government.

There is ferocious finger-pointing and heated rhetoric in the Indian debate. Without considering the substance or merit of the agreement, I rate as follows the winners and losers of this debate. I rate on a 1-10 scale, 1 being a perfect loser, 10 being a perfect winner and 5 being no-loss and no-gain.

(1) Congress Party: I give a 5. By pushing aggressively for the consummation of the 123 agreement, the Congress party reinforces its standing as a national party which protects and furthers the country's interests above its own party interests. But the near-collapse of the political alignments for (governance) now and for the forthcoming elections, and the great uncertainty about the final approval of the agreement by the U.S. Congress in good time, and the eventuality that even if the agreement is consummated the United States invokes the Hyde Amendment are too many potential negatives that it make it a 5 for the Congress party.

(2) Mrs. Sonia Gandhi: I give a 5 for the same reasons. The political downsides are too many. But I do laud her ability to put the national interest above the partisan interest.

(3) Prime Minister Manmohan Singh: I give him an 8. Even if the Congress party and its allies were to form the next government after the parliamentary elections, it is most likely that Manmohan Singh will be nominated/elected to be the Prime Minister again. Manmohan Singh is, most likely, concluding his serendipitous political life -- first as much hailed reformist Finance Minister and now as the Prime Minister. Given these facts, how can there be a more lasting and memorable legacy than the consummation of this extra-ordinary nuclear agreement?

(4) The political allies of the Congress party: I give them a 5. What are their choices -- be with the Congress party or with the other political party -- BJP.

(5) Bharatiya Janata Party: I give an 8. The Congress party and its political allies won the 2004 parliamentary elections simply because their collection of parties was larger than that of the Bharatiya Janata Party and its allies. Take, for example, the state of Maharashtra. The coalition Congress party, the National Congress party led by Sharad Pawar and the Communist parties clearly outdid the combine of Bharatiya Janata Party and Shiv Sena. And so went the story in state after state.

But now the opposition to BJP and its political friends is now fragmented -- most states are likely to witness a triangular contest with Congress and its friends as one contestant, the BJP and its friends as the other contestant, and the Communist parties and other small regional groupings as the third contestant. In such a fragmented contest, BJP is likely to benefit very substantially.

Add to this, the opportunity to woo the Muslim voters who are deeply suspicious of the United States -- not unlike the Muslims all over the world after 9/11.

(6) Lal Krishna Advani: I give him a 9. For a man who is 80 years old and who is not seen as a statesman, and who was almost cast away by his own party after his favorable remarks about Jinnah in 2005, there is a remarkable turn-around in fortunes.

India's modulated approach to economy

Economic-development choices and experiments in the last fifty years (e.g., China, India, Soviet Union) have now fairly conclusively demonstrated that mass economic prosperity is better achieved through a focus on the growth of wealth rather than its distribution.

However, there are many influential Indian intellectuals, policy-makers and elected officials who do not agree with this assessment. In some quarters, these policy-makers may be seen -- and they may be right -- as impediments to even faster economic growth in India. But the caution and wariness expressed by these officials have led to a more stable and predictable economy in India. And, here, are two prime examples.

(1) Caution on foreign capital investment: India has been more careful and sometimes even rigid in approving foreign capital investment -- particularly in some areas such as insurance, media, industries with implications for national security. These regulations -- though quite often a bit too restrictive -- have generally provided stability to India's economic growth. For example, there has never been run-away inflation (e.g., Latin American countries) or serious collapse of confidence in the currency (e.g. Asian crisis.) And now look at the serious challenges that the U.S. economy in regulating the hedge funds and sovereign wealth funds -- India's policy appear prudent in the context of this.

(2) Focus on the poor, and poverty: The unprivileged and those struggling in deep poverty constitute about 800 million, about two-thirds of India's population. Simple computations would establish that India's macro economic growth rate, and GDP would increase more dramatically even if a fraction of the 800 million Indians become part of the economic engine. That requires that they participate in the economy -- consumer investment is the engine -- which, of course, translates into policies that are likely to favor some level of redistribution even if it forsakes some growth. At the margin, the benefits of such policies are monumentally greater than any losses.

Overall, these Indian policy-makers who have not adopted the market-economic philosophy without substantial skepticism have contributed to a modulated approach to economic development and growth.