Over the last two decades there has been a steady increase

PolicyWatchPolicyWatchVolume 10, No. 1 January-March, 2009

Covering developmentson policy responses,policy implementationand policy distortionson a quarterly basis.Comments are welcome.

Over the last two decades there has been a steady increase in public demandall over the world for legislation stressing on transparency, openness and

accountability in governance. This demand is based on the rationale that officialproceedings be not kept secret from the very people served by these. This demandwas vindicated — by 2006, around 68 nations had responded positively throughlegislative action.

This piece of legislation is variously termedas ‘freedom of information’, ‘right toinformation’, ‘information access’ legislationor even ‘sunshine laws’ and ‘open records’.First introduced in Sweden in 1766 it graduallyspread to other parts of the developed world.Within the developing world Colombiaintroduced it in 1988 and other LatinAmerican and Asian countries followed suit.

In the Indian context, this right is knownas the ‘right to information (RTI)’ and refersto the right of every Indian citizen to accessinformation under the control of publicauthorities. It allows citizens to inspect works,documents and records; take notes andcertified samples of material; and obtain information in the form of printouts,diskettes, floppies, tapes and video cassettes or in any other electronic mode. TheRTI lists out penalties for unresponsive behaviour on the part of public authorities.Another important feature of this Act is the provision for Information Commissions– independent high level bodies at both the central and state levels entrusted withthe task of creating awareness among the unaware public about the importance ofthis Act in their lives as well as enforcing the right.

The RTI Act currently in force, however, suffers from a number ofdisadvantages: First, not only is the definition of ‘public authority’ unclear,specialised bodies or staff for identifying these have also not been listed. Thus,the common man with a valid complaint often does not file it. Second, the mandatorytime limit of 30 days for providing information is a matter of concern as requestsfor information might vary in nature and demand imposed on the respondingauthority. Public Information Officers (PIOs), being dependent upon many otherofficials for gathering information, might not be able to cater to requests withinthese rigid time limits. Fourth, some citizens well versed in the provisions of thisAct tend to file frivolous applications for monetary gains. Fifth, there is a need toimpose differential fees, given that the time and expenditure involved in responsesmight vary widely across requests.

In other words, though this Act does bolster the democratic foundations ofgovernance in India the text as well as implementation needs a lot of fine tuning.The glass looks better though when it is viewed as half full rather than half empty.Such a positive outlook also facilitates appropriate and quick adjustments.

Why Labour Reforms are aMust for Job Creation� Jaideep Mishra ....................... 13

Good Intentions to Go Nowhere� Pratap Bhanu Mehta ............... 16

Needed Better, not More,Regulation� Rajat Kathuria ........................ 21

Editor�s Choice

The Fall of the Holy Trinity� Arvind Panagariya .................. 23

Published by Consumer Unity & Trust Society (CUTS) , D-217, Bhaskar Marg, Bani Park, Jaipur 302 016, IndiaPhone: 91.141.228 2821, Fax: 91.141.228 2485 Email: [email protected], Website: www.cuts-ccier.org

Printed by: Jaipur Printers P. Ltd., M.I. Road, Jaipur 302 001, India.

“The reformer has enemies in all those who

profit by the old order and only lukewarm

defenders in all those who would profit by

the new.” Machiavelli in The Prince

H I G H L I G H TS

I N S I D E T H I S I S S U E

Transparent Air TicketPricing ...................................3

India One Grid by 2012 .........5

No Bailout for Private Cos. ...8

GST Provides Stimulusto Economy ...........................9

Bureaucrats on the Loose 12

Satyam, a Blessing inDisguise ............................ 14

RTI Act Norms Mustfor NGOs ............................ 18

e-governance in AllSpheres ............................. 20

Status of �Right toInformation� in India

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2 / www.cuts-international.org January-March 2009 PolicyWatch

I N F R A S T R U C T U R E � N E W S D I G E S T

COMMUNICATION

A New Spectrum PolicyThe Communication Ministry said

the government was working on anew spectrum allocation policy. Thecurrent policy of allotting spectrumto operators has led to fragmentation.

Indian operators have been givenvery little spectrum, compared totelecom companies in other countries.Spectrum is the radio frequencies onwhich all mobile communicationsignals travel.

Indian operators do not providehigh-end offerings such as high-speed internet, video conferencingand interactive gaming on mobiles asthey have not been allotted thirdgeneration (3G) spectrum.

(ET, 20.01.09)

Tata: Pan-India GSM ServiceTata Teleservices Ltd. (TTSL) is

gearing up to launch its pan-IndiaGSM service. The company made astrategic move by merging its passiveinfrastructure business (mainlytowers) with tower company QuippoTelecom to create a strong telecominfrastructure company.

The merger with Quippo Telecomwill create a Rs 13,000-crore entitywith 18,000 towers, making it thesecond-largest firm, in terms ofnumber of towers, across India.

As per the new arrangement,Quippo Telecom will hold 49 percentin the new entity, while TataTeleservices would hold the balance

in Wireless-TT Info-Services Ltd(WTTIL). However, Quippo Telecomwill control the management.

(ET, 06.01.09)

Call Drops: Telcos SlammedThe Telecom Regulatory

Authority of India (TRAI) hasslammed mobile phone operators fornot taking measures to address theissue of frequent call drops beingexperienced by cellular users acrossthe country.

In a letter to all the mobile phonecompanies, the telecom regulator hasexpressed concern that the call dropswere not just causing inconvenienceto consumers but also leading tomonetary losses to the subscribers.

The regulator has asked theoperators to submit a detailed plan ofaction to improve voice quality.

(BL, 04.02.09)

Mobile Access Facilitates GrowthMaking a strong case for

increasing the mobile penetration,especially in the rural areas, a studyby the Indian Council for Researchon International Economic Relations(ICRIER) has found that mobilepenetration facilitates economicgrowth.

The ICRIER report, which is a partof the series of studies on the socio-economic impact of mobile phones(SIM), demonstrates that mobiles aidthe process by which disadvantagedgroups, including the low-skilledlabour force, enjoy the fruits ofeconomic growth.

The study reveals that Indianstates with 10 percent higher mobilepenetration would enjoy an annualaverage growth rate 1.2 percenthigher than those with lowerteledensity. (FE, 19.01.09)

Consumers to Choose OperatorConsumers will soon get the

freedom to choose their long distancetelephone operator. The Departmentof Telecom (DoT) has decided to allowlong distance players to sell callingcards directly to telephone users.

It has, however, not given itsapproval to a proposal to permitunrestricted Internet telephony andhas referred it back to the telecom

regulator. Once the calling cards areintroduced in the market, subscriberscan buy one from a retail outletjust like they buy a pre-paid mobilecard.

The card will have a 16-digitcoded number, which the subscriber,will have to punch it on his mobile orfixed line telephone. This will take thesubscriber directly to the operator’slong distance network from where theSTD or ISD call can be made.

(BL, 02.02.09)

India Warned to Boost InternetIndia, one of the fastest-growing

mobile telephone markets in the world,is in danger of being left behind byother emerging markets, unless ittakes urgent steps to boost its accessto the internet, research sponsoredby Vodafone, the UK telecomscompany, has shown.

The research on the effect ofmobile phones on the Indianeconomy comes ahead of an auctionfor third-generation (3G) spectrumand broadband wireless airwaves,originally scheduled for January 2009.The auction now faces delays over achange in its reserve price.

(FT, 20.01.09)

Mobile No. Portability by AugustUnion Communications and IT

Minister A Raja said the DoT wasplanning to start mobile numberportability (MNP) in major cities ofthe country by August 2009, and inthe remaining cities by the end of2009. Bids had already been invitedfor providing the MNP switches.

The minister said that the fasterpenetration of 3G would enable peopleto use the services with greateraccessibility. Bharat Sanchar NigamLtd. (BSNL) currently had about 43million mobile 2G connections, evenas it was rolling out 24 million 2G linesand 5 million 3G lines.

He added that the country’steledensity had increased from 12.74percent in 2006 to 34 percent inJanuary 2009, showing a stupendousannual growth of about 50 percent.He said the government was aimingat 700 million telephone connectionsby 2012. (BS, 23.02.09)

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www.cuts-international.org / 3January-March 2009 PolicyWatch


TRANSPORT

SpiceJet, GoAir in TalksDelhi-based low-cost carrier

SpiceJet is in talks with the Wadiagroup-owned GoAir for either a mergeror to acquire a controlling stake.Sources from both companies alsosaid that SpiceJet recently made anoffer to GoAir Chief Financial OfficerG P Gupta to join the Delhi-basedairline as chief administrative officer.

Apart from Delhi and Mumbai,GoAir currently flies to smaller townslike Goa, Jammu, Srinagar, Jaipur,Ahmedabad and Kochi. Industryexperts said another advantage of amerger would be the fact that GoAirwas looking at increasing its fleet to20 aircraft by 2011, from five at present.SpiceJet has a market share of 11.8 andGoAir 2.4 percent. (BS, 08.03.09)

Delay-hit Railway ProjectsDelay in implementation of

infrastructure projects has cost theIndian Railways dearly with originalcost of rail projects almost doublingin the delay period.

According to a report on centralsector projects compiled by theMinistry of Statistics and ProgrammeImplementation, Indian Railways’ totalproject cost over-run shot up 93percent to Rs 72,728.67 crore as inAugust 2008.

The delay in execution andcompletion of several railway projectsrange from a few months to as manyas six years. (ET, 17.01.09)

DIAL to Impose ADFIn a major concession to the

Bangalore-based GMR-ledconsortium Delhi International AirportLtd (DIAL) that is operating andupgrading Delhi airport, thegovernment has allowed it to imposeairport development fees (ADF) onpassengers that will help them raiseup to Rs 1,827 crore over three years.

The move also means that thegovernment has forfeited its share ofrevenue since DIAL has been allowedto levy ADF and not UserDevelopment Fees (UDF). DelhiAirport becomes the only airport inthe country to be allowed ADF.

(BS, 09.02.09)

Transparent Air Ticket PricingIn an effort to bring about greater

transparency in domestic air ticketpricing, the government is to soonmake it mandatory for airlines to showcomponents as airfares and chargesseparately.

The Directorate-General of CivilAviation will soon issue a circular tomake it mandatory for airlines to showall the components separately notonly on their advertisements but alsotheir Websites.

The need for the circular is beingfelt as some airlines advertise ticketsbeing available for free or Re 1. Thepassenger booking these ticketsactually has to pay more as the taxesare not shown as part of the fare.

(BL, 23.03.09)

Caveat EmptorTelecom Dispute Settlement and

Appellate Tribunal (TDSAT)Chairman Justice Arun Kumar, whowas flying back from Pune to Delhi,discovered the hard way that evenbitter competition may not improveattitudes to customers.

His office had booked a businessclass seat on a Jet Airways flight butwhen he presented the ticket, he wastold there were no business class seatson the flight. A long argumentfollowed, but the Jet attendant wasadamant – Justice Kumar would haveto buy another ticket in order to flyeconomy.

Finally, however, he relented andendorsed the business class ticket,sparing Justice Kumar the need to buyan economy ticket. While applying fora refund of the difference between thecost of the two tickets from Jet’s Delhioffice, the TDSAT chief has lodged acomplaint with the civil aviationministry. (BS, 22.01.09)

OIL & GAS

ADB Questions Oil Price CutThe Asian Development Bank

(ADB) has questioned the rationalebehind the recent cut in petroleumprices by India, even as there may beanother round of reduction in fuelrates shortly.

In India, retail gasoline prices werereduced by about 10 percent (Rs 5 alitre) and diesel prices by about 6percent (Rs 2 a litre) on December 05,even though under-recovery by theoil companies in 2008-09 is estimatedat some US$25bn.

(http://in.biz.yahoo.com, 15.01.09)

Rating of Fuel Economy of CarsA new law requiring auto makers

to get green ratings which will measurethe energy efficiency of the cars theyproduce is planned by the 2009-end,But car companies are sceptical of theplanned move, arguing that accuratequantification will not be possiblebecause driving conditions vary fromplace to place.

The move is aimed at encouragingthe production of vehicles with betterfuel economy and allowing greaterchoice to buyers. A a representativeof an auto company observed that thegovernment should first focus onimproving infrastructure so thatcongestion levels come down and trafficconditions get better. (ET, 10.02.09)

NHAI to Fund Road DevelopersIn a bid to prevent work on road

projects from coming to a halt, thegovernment is considering a proposalto allow the National HighwaysAuthority of India (NHAI) to extendworking capital loans to developers.

The roads secretary and NHAIofficials discussed the possibility ofsuch a move with road developers.According to developers, the movemay help them tide over the tightcredit situation they face for projectsundertaken by them under the NationalHighways Development Programme(NHDP).

Under the proposed model, NHAIwill provide credit at a rate equivalentto the prime lending rate (PLR) of theState Bank of India plus one percent.

(IE, 11.03.09)

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POWER

7-yr Tax Holiday for Gas Cos.Petroleum Minister Murli Deora

said that the government is workingon granting tax incentives forcompanies on production of naturalgas from oil blocks awarded to them.

The Petroleum Ministry is tryingto get a seven-year tax holiday on gasproduction from oil blocks that wouldbe awarded to bidding firms underthe soon-to-be-commenced NewExploration Licensing Policy (NELP)-VIII.

Under the NELP Policy, potentialbidders for oil blocks have beenassured of a seven-year tax holidayon crude oil from the beginning ofcommercial production. Income-taxauthorities have not allowed the samerelief on gas production due to thelack of specific inclusion of the termnatural gas in the Income-Tax Act.

(FE, 01.02.09)

Deregulating Retail Fuel PricesWith international crude prices

remaining low, the government mightconsider deregulating the retail fuelprices to boost competition betweenthe public and private sector oilcompanies.

The private sector oil companies,which closed down a majority of theirretail stations in 2008 due toskyrocketing crude prices, had beenasking the government to free the retailfuel prices to provide a level-playingfield vis-à-vis its public sectorcompetitors. (TH, 16.01.09)

ONGC Oppose Discount on CrudeHaving drawn flak in the wake of

the Satyam scam, part-time directorsappear to be taking their jobsseriously, particularly in the publicsector.

Oil and Natural Gas Corporation’s(ONGC) independent directors havequestioned the discount on crude –given to state-run refiners undergovernment orders – saying this isagainst the interest of shareholders,especially those with small holdings.

ONGC has been giving discountto cover one-third of the losses state-run oil marketers were suffering forselling fuels at government-cappedrates even during oil’s high run.

(ToI, 19.02.09)

Fertiliser to Switch to Natural GasNational Fertilisers Ltd (NFL) and

Gujarat Narmada Valley FertilisersCompany (GNFC) will benefit hugelyfrom the Centre’s new policyproviding for a ‘special fixed cost’reimbursement to enable conversionof their existing urea plants runningon furnace oil into gas-based units.

The two listed state-ownedcompanies plan to invest around Rs4,800 crore over the next three yearsto change the feedstock of their fourplants – NFL’s Bhatinda, Nangal andPanipat and GNFC’s Bharuch – fromfurnace oil to natural gas.

Apart from the energy efficiencysavings mop-up, plants will also beentitled to a portion of the feedstockcost savings that was supposed toaccrue solely to the Centre.

(BL, 12.02.09)

Incentives to Power CompaniesThe Central Electricity Regulatory

Commission (CERC) announcedincentives including higher rate ofreturn on equity (15.5 percent) topower generation and transmissioncompanies to invite greaterinvestment in power infrastructure inthe next five years.

CERC Chairman Pramod Deo saidthis would help power generatingand transmission companies gethigher profitability, thus attractingincreased private investment. Togive incentives on timely completionof projects, an additional return onequity of 0.50 percent would be madeavailable to the projects, which arecommissioned within the given time-lines.

CERC has done away withadvance against depreciation, adevelopment that may not go infavour of the power companies.

(TH, 21.01.09)

Power Capacity May FallThe capacity addition in power

during the Eleventh Plan (2007-12)could fall short by about 8,000 MWagainst the targeted 78,700 MW.

The targeted capacity addition of40,000 MW in the Tenth Plan fell shortby 20,000 MW. Capacity shortage, onthe power front, has been there foryears.

In 2003, the Electricity Act enabledthe private sector to set up plants andsell power, but not much progress wasmade as transmission posed a majorhurdle. (BL, 13.02.09)

Cos. Can Sue Power SuppliersThe Supreme Court has ruled that

companies engaged in commercialactivities can drag their electricitysupplier to a consumer forum and seekdamages for deficiency in services.

A bench of Justice MarkandeyKatju and Justice RM Lodha rejected aplea of Karnataka Power TransmissionCorporation in which it had said acompany using electricity forcommercial purpose cannot approacha consumer forum against the utility.

The sale of power to a commercialconsumer for a commercial purposewas outside the scope of theConsumer Protection Act, 1986, thestate utility had argued. (ET, 11.02.09)

Govt. May Limit UMPP NumberThe government may revive a

proposal limiting the number of UltraMega Power Projects (UMPPs)awarded per developer.

“We need to give a thought to thedesirability and the feasibility to limitthe number of UMPPs per bidder”,said Jairam Ramesh, Minister of Statefor Commerce and Power.

UMPPs are the centre-piece of thegovernment’s attempts to add over50,000 MW of power generationcapacity through 13 such ultra megaprojects that will come up throughcompetitive bidding by private powerdevelopers. Much of this is expectedto come up over the XIIth Plan starting2012. (BS, 01.02.09)

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India One Grid by 2012Asserting that intra-regional

transmission of power would resolvethe power woes of power deficitStates, the Central governmentannounced that ‘India One Grid’ willbecome a reality by 2012 with thecompletion of the 765 kV Raichur-Sholapur link.

The government also said it wouldinvest Rs 200 crore for setting upworld’s first online high-powerequipment testing facility in theWestern part of the country.

State Public Sector Undertakings(PSUs) – Damodar ValleyCorporation, National Thermal PowerCorporation (NTPC), National Hydro-electric Power Corporation and PowerGrid Corporation of India – will form aspecial purpose vehicle (SPV) for thisfacility. (TH, 30.01.09)

MIXED BAG

lines of insurance, telecommunicationsand the stock market.

The government is planning to setup a National Geospatial DataAuthority, which would provide a levelplaying field to both government andnon-government players.

In the process, the Centre is alsoconsidering bringing in a NationalGeospatial Data Authority Bill, toenable the creation of an ecosystem,to proliferate the applications ofgeospatial technologies.

(FE, 10.02.08)

Investor Grievances RedressalCapital market investors will heave

a sigh of relief if the Securities andExchange Board of India’s (SEBI)move to appoint ombudsmen foraddressing their grievances comesthrough.

The ombudsman will be like a one-man court that will investigate andsettle investor complaints.Appointing ombudsmen would be asignificant move towards protectinginvestors’ interest as the proposedauthority will have powers to dealwith complaints against all kinds ofintermediaries and even listedcompanies.

Investors can approach theombudsman only after they have triedto sort out their complaints with theintermediaries or listed companiesdirectly but are not satisfied or theircomplaints have been rejected.

(BS, 22.02.09)

One Country, One Bank AccountWhile banking with several banks,

keeping track of all the accounts canprove to be cumbersome. Life wouldbe easy if a single account numbergives you access to all banks.

Well, the Indian Banks’Association, at the behest of theGovernment, is examining thefeasibility of a ‘One Country, OneBank Account’ proposal, whereby asingle bank account is all that anindividual would need to transactbusiness at any bank in the country.

If the ‘One Country, One BankAccount’ proposal, currently on thedrawing board stage, becomes areality, it could revolutionise the waybanking transactions are carried outin India. From ‘Any Branch Banking’

services being currently offered byindividual banks, the Indian bankingsystem would be graduating to ‘AnyBank Branch Banking’. (BL, 06.01.09)

RBI’s Status Quo on RatesThe Reserve Bank of India (RBI)

did not lower any of its key interestrates, but bankers and economists areagreed that some easing soon isinevitable.

Elaborating on the third-quarterreview of the monetary policy for theyear, the Governor, D Subbarao, saidIndia would grow at best by onlyseven percent in 2008-09, ending fiveyears of 8.8 percent growth.

He said inflation, as measured bythe wholesale price index, would fallto three percent by the end of March2009 and that the global downturnwould not be corrected before the endof 2009. (FE, 28.01.09)

ICWAI: Regulator for AuditingThe government should set up a

regulatory body to supervise auditingand accounting practices, accordingto the Institute of Costs and WorksAccountants of India (ICWAI).

An ‘Accounting Oversight Board’should be formed, as a regulator, withpowers to verify and take action onmalpractices, if found, KunalBanerjee, President, ICWAI, said.

A second audit, as proposed bythe SEBI should adopt a differentapproach, by checking theefficiencies, costs and other activities,he said. (BL, 07.02.09)

SC: Address Water CrisisThe Supreme Court has directed

the Centre to explore cheaper methodsto solve the water crisis byundertaking scientific research on awar-footing.

The help and advice of foreignexperts and/or Indian scientistssettled abroad may also be taken,since the solution will help not onlyIndia but also foreign countries whichare facing the same problem, some ofwhich may already have progressedsignificantly in this area.

One of the main reasons for theacute shortage in the country was thatmost of the water conservation bodieswere filled up in recent times by somegreedy persons. (TH, 29.03.09)

Farmers Deprived of Low InterestA large section of small farmers are

not benefiting at all from the downwardinterest rate movement. Agriculturalco-operative banks and regional ruralbanks, which are more active in deeperpockets of the rural economy, areforced to continue with the highinterest rates, while offeringinvestment credit for agriculturedevelopment and allied activities.

These two categories of banks areslated to channel investment credit tothe tune of Rs 12,000 crore betweenthem in 2008-09 and offer agricultureinvestment credit at an interest rateband of 11-13 percent a year.

(ET, 09.02.09)

Watchdog for GeospatialWith the increasing demand for

geospatial data by the private industry,there is a need to have an independentregulator for geospatial affairs on the

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

Lights outYoginder K Alagh*

Power tariff norms for the next quinquenium have been declared, and thisputs a welcome end to the uncertainty surrounding a critical factor in

infrastructure investment. But on closer reading, this declaration does not reflecttoo well on the ability of Indian policy making to signal incentives for efficiency,whether by encouraging sustainable growth in a nonrenewable resource sectoror by giving a fillip to a sector that needs special stimulus in a slow growthperiod. Five years from now, this declaration will probably be as adverselycommented upon as the 90s policy.

A 15.5 percent guaranteed rate of return on equity and a 0.5 percent incentive,this is going back to individual firm level pricing. This is a failed policy, evenaccording to its architect, the then Finance Minister of India. It encouragesinefficiency and corruption, specifically by keeping the link between the fixerand the one being fixed. The solution actually lies in rule-based systems devoidof such links. Fortunately, the availability tariff for grid transmission is still on.Even this was opposed by the parastatals and private power traders, but it hadtoo long a history to be jettisoned.

On the power generation front, India’s only professional power regulator SLRao had released a very good Discussion Paper for power pricing, in his capacityas Chairman, CERC. Rao had argued for long-range marginal cost pricing for thesector. Some argue that this method incentivises expensive power, but they arequite wrong. The method not only takes into account the cost of green fieldprojects based on competitive bidding, but also addresses the possibilities ofexpansion and modernisation.

The greatest advantage that this model offers is that all the benefits ofefficiency accrue to the producer. This, in turn, gives powerful signals to

modernisation, encouraging producers to save on costs by completing projectsearly and efficiently. From the perspective of the broader economy, this leads tolarge savings and replaces individual price fixing with a rule-based system. Thegovernment somehow finds it impossible to push the reform process via rule-based systems.

The performance of the electricity sector has been abysmal. Thermal capacity,which grew by 160.23 percent in the decade 1980-91, only went up by 60.70percent in the next decade of reforms. The situation in the first half of thisdecade was worse. Sure a lot of claims are being made on behalf of recent policyinitiatives, a very general habit since 1991. But most large projects are in serioustrouble as far as financial closure is concerned, with the Tata Mundhra initiativebeing a notable exception.

Actually, the entire regulatory edifice is in tatters. Rao has recently produceda paper for The Energy and Resources Institute (TERI), in which he provides

plenty of evidence to show that almost all the regulators are retired civil servants,defying the original intent of the legislation placed before Parliament in 1996 toavoid this. The legislation required the setting up of a transparent mechanismfor selecting professionally qualified persons, but it was later amended. Theselection processes now are witness to many unseemly wrangles.

As Rao says, “Search, selection and appointment of regulators have so farbeen left largely to government servants and have resulted in filling mostappointments with former government servants. The relative lack of commercialand enterprise expertise is unfortunate since there is no understanding on whatstate electricity enterprises must do to develop such cultures. Membersinvariably are appointed at an age when they are nearing retirement or haveretired”. Who will guard the guards?

* Former Union Minister. The articleappeared in the Financial Express,February 03, 2009.

The power sector has

done poorly in recent

times. The regulatory

apparatus

needs an overhaul

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

The government should takeadvantage of the respite in oil

prices and establish a transparent,predictable and durable mechanismfor setting petroleum product prices.The fact that they have not done soyet may be because of politics butalso perhaps because of afundamental ambivalence towardscompetition in the petroleum sector.Certainly the twists and turns inpricing policy over the past severalyears have suggested that thegovernment is not unequivocallysupportive of the involvement of theprivate sector. Their policies haveeffectively emasculated competition.The purpose of this article is to urgethe government to clear thisambivalence.

The generally accepted wisdom isthat competition is desirable and thatmarket forces foster innovation andefficiency. Competition is vulnerableto being undermined throughcollusion and cartelisation.

The central issue is not thereforewhether there should be competitionor not. Is it the substantive intent ofpolicy? What does the governmentreally want? Does it want privatesector involvement and if so acrossthe entire value chain from explorationand production to refining andmarketing; or only in selectivesegments or does it wish to return tothe command and control dirigsme ofearlier years? Today there is too greata gap between rhetoric and reality.

The government’s policy oncompetition was defined by the

gazette notification of April 2002. Thenotification stated that the petroleumsector should be deregulated; thatthe administered price mechanism

should bereplaced bymarket-basedpricing, and thatprivate sector companies should beencouraged to invest across the entirevalue chain. There were conditionsattached but the underlying messagewas clear. All companies – whetherpublic or private – that met thesecondition would operate on the sameplaying field.

The notification has not beenoverridden by further cabinet

decisions. It continues to define thecurrent de jure policy. The de factoreality is, of course, very different.The government has reintroducedadministered pricing of petrol anddiesel and has not removed thesubsidies on LPG and kerosene. Thisin itself does not skewer competition.All players can still be treated equallyeven under the current circumstancesof re-regulation. Competition getscircumscribed when the rules of thegame favour one group over another.This unfortunately is the case today.

The government has ‘used’ re-regulation to tilt the playing fieldtowards the public sector. Thus forinstance, the government companiesare granted oil bonds to compensatethem for the losses that they incur onaccount of the differential between the‘administered’ selling price ofproducts and the international costof procuring the crude. The privatesector does not receive any suchcompensation. The consequence hasbeen the almost total retreat of theprivate sector from the oil productsmarket.

The price of international oil hascurrently slipped into our comfort

zone. It is not, however, likely toremain there indefinitely. Anyone witha historical bent knows that the oilindustry is cyclical and that prices willslip out again. No one knows whenthis might happen; nor at what pace.But everyone must realise that whenit does happen, the governmentshould not confront the samefinancial conundrum that it faced overthe past several years. The hard truthis that if the government does nothave a well-defined and clear policyfor product pricing the next time oilprices starts to rise but insteadresponds in the ad hoc fashion that ithas so far shown, the damage to theentire industry will be irremediable.

A clear policy mechanism cannotbe derived unless the decision

makers clarify their thoughts on thenature and extent of desirablecompetition. A related but equallyimportant outcome of clarity wouldbe to remove jurisdictionalambiguities surrounding the role ofthe petroleum regulators. Today thereare two regulators—one for theupstream and the other for thedownstream. Their roles andresponsibilities have been explicitlyset out but despite that there is stillconsiderable ‘noise’ and tensionbetween the ministry and theregulators. One gets the impressionthat whilst the government hasappointed these regulators to fostercompetition, it remains reluctant togive them the tools and substantivefreedom to secure that objective.

* Chairman of the Shell Group of Companies in India. Abridged from an article that appeared in the Financial Express,February 03, 2009.

Deregulate OilVikram S Mehta*

Government policy must encouragecompetition in the petroleum sector

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T R A D E & E C O N O M I C S � N E W S D I G E S T

A Special Package for TextilesA special package of Rs 325 crore

for the employment-intensive leatherand textiles export sector, fastsettlement of duty credit scrip’s forduty paid in export production andextension of such scrip’s for import ofeven restricted items after payment ofduty are the key features of the tradefacilitation measures the UPAgovernment unveiled.

The procedural simplificationswould help prune high transactioncosts to trade and industry. Specialpackage for the twin sectors wouldbe given for exports to be undertakenfrom April 01, 2009.

To boost agricultural and ruralexports, a re-credit of four percentspecial additional duty, in case ofpayment of duty by incentive schemescrip’s such as Vishesh Krishi andGram Udyog Yojana, Focus Productand Market Scheme would now beallowed. (BL, 26.02.09)

FDI Policy in Major OverhaulBroad consensus is emerging on

a proposal seeking comprehensivechanges in the foreign directinvestment (FDI) policy. This includesscrapping automatic approval insectors that have FDI limits and inwhich ownership or control is shiftingto a foreign company and a newdefinition for calculating indirectforeign equity.

The contours of the proposal werediscussed after the Department ofIndustrial Policy and Promotion, under

the Commerce Ministry, submitted arevised proposal incorporatingconcerns expressed by the Ministriesof Telecom, Home and Information andBroadcasting. (BS, 05.02.09)

Business Warns on Loss of JobsIndia’s labour-intensive export

industries could see the loss of up to10 million jobs over the next threemonths, as many strugglingcompanies shut shop, amid plungingglobal demand and competition fromother Asian rivals.

Ajay Sahai, Director-General of theFederation of Indian ExportOrganisations (FIEO), said industriessuch as textiles, gems and jewellery,handicrafts and low-end engineeringproducts were reeling from lack oforders.

The FIE is appealing forgovernment help, including a debtmoratorium on repayment of termloans, an increase in the rebate paid toexporters against import tariffs paid onraw materials, and a tax exemption onprofits from exporters. (FT, 06.01.09)

Govt to Deregulate SSI SectorState governments should

deregulate the small scale industries(SSI) as it remain under the grip ofinspector raj, which causes maximumharassment to the entrepreneurs.

The SSI sector, which goesthrough inspections from excise,customs, banks, insurance, PF andrecord inspectors 16 years ago, is nowsubjected to many other inspections

which include one separate inspectorto monitor their register of employees,accounts, balance sheet and ontaxation fronts particularly the servicetax inspector.

Likewise, many more areas wereadded in which the sector is subjectedto tedious inspections. There areabout 13 million small enterprisesproviding employment to over 40million people. (BL, 09.01.09)

India’s GDP to Slowdown in 2009The International Monetary Fund

(IMF) projects India’s economy toslow down to 6.25 percent grossdomestic product (GDP) growth thisfiscal and further to 5.25 percent in2009-10, reflecting the ‘deteriorating’global outlook.

This is lower close to onepercentage point from the civil societyorganisations (CSOs) advancedestimates of real GDP growth at 7.1percent for the current fiscal. Thisslowdown comes after India clockedan average growth of 8.75 percent inthe past five years.

India should use the limitedavailable fiscal space only for high-quality infrastructure and poverty-related spending and for bankrecapitalisation if needed, the Fundsaid, adding that the generalgovernment deficit, covering theState’s and Centre’s deficit, is forecastto rise to nearly 10 percent of GDP.

(BL, 18.03.09)

UP to Privatise Sugar MillsUttar Pradesh, the second largest

sugar producer in the country, isplanning to privatise or completelysell-off 33 state-owned sugar mills inan effort to reduce the burden of theloss-making units.

VP Dube, Managing Director ofUP State Sugar Cooperation Ltd, saidthat the previous attempt to sell-offthe state-owned mills in 2008 wasunsuccessful as the bids receivedwere lower than the reserve price.

The corporation is in the processof appointing an advisory firm, whichwill suggest the route to be taken fordisinvestment of the mills. Once thesale or privatisation process iscompleted the new owners would alsoget the reserve area or the canegrowing area surrounding the mills.

(FE, 14.01.09)

No Bailout for Private Cos.

Post-Satyam, the government has prepared an unwritten rule that it willnot bail out a private company in a competitive market place, with the

sole exception of banks. This means that even if a company collapses due tosheer economic reasons and not for any fraud, the government will notextend a bailout package.

Montek Singh Ahluwalia, DeputyChairman, Planning Commission gavereasons why a private company, other thana bank, would not be qualified to get abailout with taxpayers� money. Bailoutsin the case of banks are not uncommon,but the circumstances are very different.

These are regulated institutions, whichtake deposits from the public. All thesefactors justify government interventions.A private company, competing in acompetitive market cannot be treated on the same plank as banks.

(ET, 25.01.09)

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GST Provides Stimulus to Economy

The Goods and Services Tax (GST), proposed to be introducedfrom April 01, 2010, is likely to provide the requisite stimulus

to the economy.�GST would be the single-biggest measure after the elimination

of licensing in 1991. This could provide the requisite stimulus tothe economy during the present slowdown,� the 13th FinanceCommission Chairman, Vijay Kelkar, said.

It is already clear that a well-designed revenue-neutral GSTwill enhance the revenue buoyancy of the States in coming years.

(FE, 06.02.09)

Tax, Excise Duty ReducedThe government announced a

reduction of two percentage points inthe rates of excise duty and servicetax, bringing relief to industry and aamaadmi in an atmosphere of economicslowdown.

The Central excise duty standsreduced from 10 to 8 percent while theservice tax has been brought downfrom 12 to 10 percent. The rate of exciseduty on goods attracting ad valoremrates of 8 and 4 percent will remainunchanged.

The rate of excise duty on bulkcement has also been reduced from10 percent or Rs 290 per tonne to 8percent or Rs. 230, whichever is higher.

(TH, 26.02.09)

Apply for Global PatentsWith applications for patents from

within the country growing seventimes since 2000, the government isplanning a massive modernisation andupgradation of Indian patent offices.

The number of patent applicationsfiled at the four offices — located inKolkata, Mumbai, Chennai and Delhi— have gone up from 4,824 in 1999-2000 to over 35,000 in 2007-08.

The official said India haswitnessed a huge increase in patentapplications after it signed the trade-related aspects of intellectual propertyrights (TRIPs) agreement andamended the patent law of the countryin 2005. (ET, 24.01.09)

Poor’s Share in Carbon TradingIn an effort, perhaps the first of its

kind, to include rural poor in thecurrent clean developmentmechanism, ratified under the UnitedNations Framework Convention onClimate Change (UNFCCC), the RuralDevelopment Ministry has requestedthe Ministry of Environment and

Forests to develop some “pilotsprojects” to secure valuable carboncredits.

This means that a significantchunk of more than 21 lakh works,mostly related to water conservationand afforestation, taken up under theUPA government’s flag-ship NationalRural Employment Guarantee Act(NREGA), would be eligible for carboncredits. (FE 21.01.09)

India Challenges NTB’s at WTOAs economies around the world

are resorting to trade barriers, Indiahas begun the groundwork forchallenging the curbs in developedcountries at the WTO.

The trade policy division in thecommerce ministry is collecting dataas to what kind of non-tariff barriers(NTBs) are being created in the majorglobal markets like the US and EU, sothat they could be legitimatelycontested at the global traderegulator WTO.

However, a few trade experts feelthat the credibility of challenge fromIndia at the WTO could have beengreater had New Delhi not taken stepslike the ban on Chinese toys.

(FE, 15.02.09)

India Fares BetterIndian equity indices have fared

better than their counterparts indeveloped countries in the pastmonth. However, they have not doneas well as the other Brazil, Russia,India, and China (BRIC) nations,which have logged positive returnsin the past month.

“India’s domestic growth story isstill intact and in that sense India isbetter placed compared to other worldeconomies”, said Dharmesh Mehta,Head of Broking, Enam Securities.

According to analysts, the Indianeconomy has got a boost in the formof the stimulus packages announcedby the government and to some extentoil prices, commodity prices andinflation are under control.

(BL, 27.02.09)

New Industrial Policy on AnvilTo boost private investment and

create a more conducive businessenvironment, the Uttar Pradeshgovernment is preparing a newindustrial policy for the next five years.

A high-level steering committee inthis regard has already been formedunder the UP Industrial andInfrastructure Development (IID)commissioner with representationfrom the industry.

Under the steering committee,different sub working groups havebeen formed for various sectors suchas automobile, medical, and labour. UPis seeking private investment inseveral spheres such as power,education, medical, tourism,agriculture, infrastructure andtransport. (BS, 19.03.09)

Fabindia’s Stake in Retailer EastFabindia, an Indian ethnic wear

chain, has purchased a 25-percentstake in East, a women’s wear retailerin the UK.

The purchase price has not beendisclosed. The deal comes with anoption wherein Fabindia can acquirethe remaining stake in East in threeyears. Sunil Chainani, Fabindia’sFinance Director, will join the boardof East.

William Bissell, ManagingDirector of Fabindia, said, “Thesynergy between the two is apparentnot only in the product but also in theapproach and sourcing”. (ET, 07.01.09)

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* Editor, Economic Times. The article appeared in the Economic Times, January 25, 2009.

Auto sales are down, durablegoods’ sales are down, demand

for housing is down, airline passengerloads are down, there are hardly anysectors that seem immune. In such ascenario, you would expect it to be abuyers’ market. You would thinkcompanies would be willing to go thatextra mile to keep customers happy,because, as any marketing man worthhis salt will tell you, a happy customeris unlikely to talk of his experience.But, an unhappy customer will relatehis woes to anyone who will care tolisten. And in hard times, when newcustomers are tough to come by,repeat customers are worth theirweight in gold.

What does this mean? It means youwould expect companies to pay muchgreater attention to customer service,especially after-sales service, thanever before. Yet, this is something afew corporates have internalised.Perhaps, it has something to do withthe long period of expansion (till therecent slowdown) that saw companiesexpend all their energies in a mad chasefor new customers. Perhaps, it has somethingto do with the Indian market long being a sellersmarket, where buyers had no choice, but to lump it.

In such a scenario, after-sales service was just not apriority. And, with the race for additional business

becoming the name of the game, companies, typically,outsourced customer service. As far as companies wereconcerned, it was simply more convenient to focus onprocuring new business and outsource after-sales service.In theory, this makes eminent sense. In practice, ifcustomers are not treated well by the service centre, it isbound to boomerang on the company.

Let me illustrate with a recent example from the airlineindustry. Indigo Airlines is among the better of the low-cost airlines in the country. It prides itself in its customerservice, on being on time and never fails to tell thoseflying with it that it has been voted the best low-costairline, etc.

Sometime in the middle of November 2008, the airlinescrapped its morning flight from Chennai to New Delhi.

No intimation was sent by the airline to passengers alreadybooked on that flight for subsequent days. The result?

Are You Being Served?Mythili Bhusnurmath*

Two passengers who showed up atChennai airport in time for the flightearlier in January 2009 found, to theirdismay, there was no such flight. Theground staff was clueless and deniedknowledge of the flight altogether.

After persistent questioning, ittranspired the airline’s call centre hadmade a couple of unsuccessfulattempts on the contact’s cell phonenumber provided, after which theairline unilaterally put them on a muchlater flight to Delhi. What wasparticularly galling was the attitudeof the airline staff.

Far from being apologetic, a memberof the staff asserted the airline hadthe right to cancel its flights. Sure!But, did it not also have theresponsibility to ensure that thosebooked on the flight were informed?When asked why no SMS had beensent, the airline staff washed theirhands off the matter saying that wasthe job of the call centre, not theairline!

Indigo is not an exception. Many privatesector banks have lost a great deal of goodwill

because of the actions of their direct sellingagents and recovery agents. Nor are service

industries the only ones guilty of such short-‘termism’.

Take a straw poll and almost everyone will have a taleto tell of how companies were like April when they

went to buy and like December after the purchase wasmade, if, God forbid, there was a problem requiring after-sales service.

Mobiles and computers are a case in point. These are oftensold by franchisees, but the agencies do not want to sullytheir hands with after-sales service. The net result is,customers are often forced to run from pillar-to-post, ifthey have a problem.

If companies are serious about tackling the slowdown indemand, this must change. Like banks that securitisedassets and parcelled them out to different investors andforgot their original borrowers – with dire consequences –corporates that ignore the principal-agent relationshipinherent in outsourcing are making a big mistake. Will theslowdown force them to amend their ways?

Are you being served? No,this is not a reference tothat long-running Britishsitcom of the 1970s and

80s, but about somethingmore basic – customer

service. That might seeman odd subject to bring uptoday, when companies, or

so they tell us, arestruggling with a slowdown

in demand

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* Additional Secretary , Government of India. Abridged from an article that appeared in the Economic Times, January 13, 2009.

I n the recently concludedInfrastructure PPP Days organised

by the World Bank Institute and theAsian Development Bank (ADB)Institute, the main theme of discussionwas how to combat the adverse impactof financial meltdown on PPP projects.

Globally, there is rapid scaling back ofhedge funds, private equity funds arein a wait-and-watch mode and holdingback capital, currency devaluation ismaking foreign debt more expensive,investors are demanding higherreturns and private investors arefocusing on the largest, developedmarkets and good policy frameworks.

This is considered the worst creditcrunch in “working” memory and

has impacted every economic activity.However Infrastructure is still seen aspart of the solution by all players, asit is in India.

The profile of infrastructure projects inIndia is not weak. According to WilliamStreeter – Managing Director, GlobalInfrastructure & Project Finance-AsiaPacific, FitchRatings – who has ratedmany new infrastructure project loansin India , the pricing of project risks hasvaried over time and depends more onthe availability of capital and the natureof sponsor-bank relationships than ona broader and more rigorous evaluationof operations.

This aspect has become more acutein the current financial scenario.Whereas domestic banks are still

PPP in the Time of SlowdownArvind Mayaram*

Though the current creditcrunch is the worst in‘working’ memory, India’spublic-private partnership(PPP) projects still presentthe most attractive channelfor equity investors as wellas lenders

Real estate values are fickle and anydownturn in real estate prices canquickly make a very attractive projectsub-prime in nature. This can lead tocommitted lenders backing out and mayrequire re-jigging of user fees and/orgreater infusion of equity capital. Theeffect this would have on project costwould be a risk that the developer hasto bear in the short term.

Secondly, the concessionagreements in most cases factor

in two contingencies that transfercommercial risk largely to the publicsector: (a) In case of demand downturn,the number of years of concession getsextended; and (b) even in the event ofconcessionaire’s default, thesponsoring authority (government)undertakes to pay 90 percent of the debtdue in the event that the project itselfdoes not take off.

This underpins the project withcontingent government guaranteesand ensures adequate returns oninvestment for the investorirrespective of the fluctuation indemand. It also gives the lender thecomfort that in the event that theproject itself fails — the probabilityof which is extremely low asinfrastructure services that the projectpromises to provide will still be indemand — the lender shall still receivea significant portion of debt due fromthe government. This provision is notseen in most of the concessionagreements around the world.

Thirdly, Viability Gap Fundingscheme subsumes all costs that

make a project unviable. The bidderbids for the grant to the project basedon his calculation of the gap in projectviability. As we have seen, one of theconsequences of the financialmeltdown is the liquidity crunchleading to higher cost of finance. InPPP projects, the higher cost offinance is also subsumed under theviability gap grant.

waiting to start lending, foreign fundsare difficult to find. Whereas theFinance Ministry relaxed ECB normsrecently, even if coupled with allowingIIFCL to raise Rs 30,000 crore throughtax-free bonds, this may not be enoughto get adequate finance flowing intoinfrastructure projects.

In the present scenario in India’s PPPprojects still present the most attractivechannel equally for equity investorsand lenders. What is required is toconvince the investors and the lendersthat PPP projects are a greatopportunity for them. The two obviousimpacts of the meltdown have been (a)liquidity crunch resulting in higher costof finance and lesser leveraging; and(b) fear of demand downturn.

The increase in the cost of finance andlowering of equity to debt ratios isresulting in delays in financial closureand, in some cases, withdrawal of thedevelopers from the project. Despitethis, three factors make PPPs in Indiaa relatively safe investment vehicle.

First, the competitive biddingprocess is fairly well-established

and robust, even though processmanagement by the government canbe frustrating at times. This results inefficient ‘price discovery’, whichindicates that project implementationis expected to be completed in timeand at least cost. The only rider is thatthe project must not be overlydependent on real estate developmentfor its revenue streams.

The Economic Times


R E P O R T D E S K � N E W S D I G E S T

Bribes Move Official MachineryAbout 77 percent of bribes

demanded by the country’s officialmachinery are sought from citizensseeking delivery of services that theyare entitled to. These bribes aredemanded for functions as basic asgetting a telephone line installed,obtaining customs clearances andensuring payments for jobs alreadyrendered.

By contrast, such bribesconstitute only 54 percent of theinveiglements demanded by officialsin India’s chief competitor, China.These are the findings of a studyconducted by the Business Registryfor International Bribery andExtortion (BRIBEline) over 16 monthsfrom July 2007-October 2008.BRIBEline is an anonymous onlinereporting tool that collects data onbribe solicitations. (FE, 25.01.09)

Delay in Infrastructure ProjectsHigh interest rates and credit

crunch have delayed severalinfrastructure projects by up to six

months, said a survey by theConfederation of Indian Industry (CII).

According to the InfrastructureOutlook Survey, around 85 percent ofthe respondents have expressedconcern over the delay in financialclosure of infrastructure projects beingimplemented by them.

Over 50 percent of the chiefexecutives surveyed said that theirprojects were getting delayed by upto six months, while nearly 35 percentsaid the delays were more than sixmonths. They expressed hope that thegovernment would step up itsproposed spending on infrastructureby additional 15 percent or more tostimulate the economy. (BS, 25.01.09)

India Ranked 75 th by ForbesIndia has slipped 11 positions to

be ranked 75th in a list of world’s bestcountries for business as the countrylost ground in areas like trade freedom,technology, corporate tax rate andcorruption.

The list, compiled by the USpublication Forbes, ranks 127 nationson the basis of business climate in acountry for entrepreneurs, investorsand workers. The report said that Indiadeclined on the rankings on fourmetrics – trade freedom, technology,corporate tax rate and corruption.

In terms of trade freedom, India wasranked among the lowest at 125th

position, while it was down to 118th oncorporate tax rate front. In technologyand corruption, the country slipped to64th and 71st positions respectively.

(FE, 20.03.09)

IPO-Cos. Weak on GovernanceAbout 50 percent of the

companies that have floated IPOssince May 2007 have weak corporategovernance practices, rating agencyCredit Rating and InformationServices of India Ltd. (CRISIL) hasfound. The agency, incidentally, rated29 IPOs during the period.

The report said that only about 10percent of the 29 companies wereassessed to have robust corporategovernance structures. Corporategovernance practices were average in25 percent of the companies.

CRISIL’s IPO grading is aimed atproviding guidance to investors onthe fundamentals of companies andare significant in case of lesser-knowncompanies. (FE, 20.02.09)

78,000 Women Die in ChildbirthA woman dies every seven

minutes in India, says the latest UnitedNations Children Fund (UNICEF)report. According to the report, 78,000women die annually in India due tocomplications arising out ofpregnancy and childbirth.

As per the UNICEF’s reportentitled, ‘State of the World’sChildren (2009)’, under-five mortalityrate has gone down from 117 per 1,000live births in 1990 to 72 in 2007.However, maternal mortality is stillclose to the 2001-03 figures of 301 forevery 100,000 live births, which is wayoff the desirable target of 109 by 2015.

(HT, 15.01.09)

World Bank Criticises NREGAThe World Bank has described the

much-acclaimed National RuralEmployment Guarantee (NREGA)scheme of the UPA government as apolicy barrier hurting economicdevelopment and poverty alleviation.

Various schemes of the Indiangovernment like NREGA, watershedprogrammes and schemes fordevelopment of small and mediumtowns are acting as policy barriers tointernal mobility, the bank said in itsWorld Development Report 2009.

The report said economic benefitsof migration are not alwaysrecognised by policy makers and, infact, two forms of policy have beenattempted in India to counter migration.

(ToI, 16.03.09)

Bureaucrats on the Loose

In India, civil servants are dismissed only if they are convicted on acriminal charge or for breach of security. Former Cabinet Secretary BK

Chaturvedi recalls the sacking of only three IAS officers in his 40-year career.In India, a confidential career report by seniors is still the norm, although

the Administrative Reforms Commission (ARC) has recently suggestedperformance appraisals instead. But the absence of punishment for non-performing government officers is at the root of the rot afflicting ourbureaucracy.

The ARC has recommended career reviews and exit processes. �After13 years, there will be a career review, which will generate warning signals.A further review after 20 years will take place, and those found incompetentwill be asked to leave,� said Veerappa Moily, chairperson, ARC.

The irony is that India�s bureaucracy is one of the oldest among modernnation states, set up by its colonial rulers. Yet, ours is the farthest fromreforms. The �iron frame of India�, as the civil service was once called, isdesperately in need of some shine. (HT, 22.01.09)

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The sluggish industrial growthimplies structural rigidities in the

economy, as per a recent, IndianCouncil for Research on InternationalEconomic Relations (ICRIER) workingpaper entitled, ‘The Missing Middle’.For broad based, read inclusiveeconomic growth, what’s suggestedis rapid increase in relatively unskilled,labour-intensive manufacturing.

In tandem, what’s called for isstepped up productivity in agriculture,for raising living standards rightacross the board. The paper reiteratesthe point that India’s apparentcomparative advantage in servicesdoes not preclude the need for abuoyant manufacturing-growthphase.

It then outlines the glaring policyhurdles holding back the sustainedgrowth of labour-intensivemanufactures.

The paper does take note of theaccelerated growth rate of the pastseveral years – especially the last fiveyears or so, higher productivity levelsgenerally and the consequentimproved living standards.

But if the recent growth patternspersist in the medium term and beyond,the paper says that India is at “risk ofbifurcating the economy”, with thosebenefiting from growth and othersquite “left out”.

Specifically, while services outputand employment, including theinformation-technology enabledvariety, have grown at a fast clip, thefailure of manufacturing output andemployment to likewise grow morerapidly has meant “too many bottledup in the rural sector”.

The growth of overall labourproductivity that would have

taken place if the shift of low-productivity marginal farmers tou n s k i l l e d - l a b o u r - i n t e n s i v emanufacturing jobs had been morerapid, has not really happened. Hencethe “missing middle” in the populace.

What’s recommended is sustainedgrowth of unskilled labour-intensive

Why Labour Reforms are a Must for Job CreationJaideep Mishra*

While output and investmenthave grown in the organisedsector of the Indian economy,

employment has not. Thelabour productivity of firms inthe informal sector is known to

be about one-fifth that of theformal sector.

manufacturing, which, together withfast-paced growth of productivity inagriculture (which would in part resultfrom shifts to labour-intensivemanufacturing), would bring about“inclusive growth.”

The world over, economiesposting rapid growth have initially –and for a prolonged length of time –experienced an increased share ofoutput and employment inmanufacturing and other industrialactivities.

The study notes that even in theheady 1990s, the only developing

Asian economies that were“sufficiently advanced” to experiencea drop in the share of employment inmanufacturing were Taiwan andSouth Korea.

In contrast, the increase in theshare of manufacturing employmentin India was a “minuscule 0.3percent”– far below what othercountries experienced during theirrapid growth phases.

As the paper elaborates, estimatedindustrial output in India fell from 28percent of total output of goods andservices or gross domestic product(GDP) in 1990, to 27 percent of GDP in2004. By comparison, Chineseindustrial output went up from 42 to46 percent of GDP over the like period.

This is not to imply, of course, thatthe Indian economy ought to

develop along the same lines, or thatthe Chinese growth pattern is“optimal”. Besides, it is not really morerapid growth of services in India thatexplains the difference.

During the period, the servicessector in India is estimated to havegrown from 41 to 52 percent of GDPwhile Chinese services grew from 31to 41 percent. The difference is clearlydue to the slower growth of industrialoutput and employment in India thanin China.

Also, the relatively lowcontribution of high-income servicesto output here and itsdisproportionate demands oneducation and skills induces furtherdistortions. Meanwhile, unskilledlabour-intensive manufacturingmakes economic sense mostly inmass-production, large-scale settings.

Yet our business and labourregulation remain a major deterrent tomass production, the paper points out.

It is true that the economic reformssince circa 1991 have reduced theburden of red tape, bureaucraticdelays and other rigidities to asignificant extent, but India still rankswell down the list of countries whoseregulatory climate is “businessfriendly”.

The paper adds that India has anunusual distribution of firms by

size. The reason, in the main, it isaverred, is the difficulty of starting anew business, which seems to deterstart-ups.

Given the failure of organisedemployment to sufficiently grow, itwould suggest an alternative growthpath, with a higher labour-capital ratio.

This in turn calls for “a relaxation”of some of the more restrictive labourlaws pan-India, the paper proffers. Amore flexible labour market wouldrequire sound compensation benefits,scope for retraining, and the like.

* Columnist, Economic Times. The article appeared in the Economic Times, March 19, 2009.

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No Change in Tax StructureMontek Singh Ahluwalia, Deputy

Chairman, Planning Commission ruledout the possibility of any furtherchange in tax structure in the currentfiscal. He said that the government hasalready taken enough fiscal measuresto boost the domestic economy.

“We feel whatever has been doneis sufficient and have not proposedanother stimulus package for thisfinancial year. Whatever has beendone so far should be implemented”,Ahluwalia said in a conferenceorganised by the Federation of IndianChambers of Commerce & Industry(FICCI) on January 21, 2009.

(ET, 22.01.09)

Need for Better Learning Model“The three challenges –

excellence, expansion andaccessibility – have to be addressedto improve educational standards inthe country”, said Sam Pitroda,Chairman, National KnowledgeCommission. There is a need for abetter model of learning and changeof content as only a low percentageof graduates meet the requirements ofthe industry. Moreover, they lack softskills.

He said that a large number ofprofessors and teachers do notresearch and many researchers do notteach and it is crucial that thissituation changes. It is essential thatuniversities are connected, and thereis research and development

collaboration and resource sharingand interaction among them.

(BL, 14.02.09)

Infra Growth Neutralises SlumpFinance minister Pranab

Mukherjee has said an increase indomestic demand and supply byspurring the development ofinfrastructure could help the countryto tide over the current economicrecession.

“We all agree that domesticdemand and supply will have to beincreased to tide over the currenteconomic crisis for whichinfrastructure needs to be developedand rural economy strengthened”,Mukherjee said at a function to laythe foundation stone for an East-WestMetro corridor in the Salt LakeStadium.

The Centre has approvedprocurement of 1,200-low floor andmedium-floor buses for Kolkata andanother 100 for Asansol to improvethe public transport system.

(FE, 22.02.09)

Wrong Policies Lead to CrisisFormer Union finance minister

Yashwant Sinha said the currenteconomic slowdown one waswitnessing in the country has beenthe direct fallout of mistaken domesticpolicies, global recession as well asIndia having become an “unsafe”destination as a result of the recentterrorist attack on Mumbai.

“It has been the direct fallout ofdomestic policies which were perhapsmistaken policies and we could notanticipate global developments, as aresult of which we have been hit veryhard”, said Sinha.

The global financial crisis onlycame as a final blow for domesticresource mobilisers who found thatinternational financing opportunityhad been shut too, he added.

(FE, 18.01.09)

China, India Continue to GrowChina and India will continue to

grow though quite a bit slower than itis today. This, according toEconomics Nobel Laureate AmartyaSen, is not only good news for theChinese and the Indians, but also forthe rest of the world too amid globalrecession.

“China and India also have a lotof trade between themselves – it ismore important for India than it is forChina. The Chinese are already thesecond largest trading partner of India,will probably overtake the US withintwo or three years. But, I would notdraw from that a conclusion that Chinaand India will drive the worldeconomy”, Sen said. (TH, 19.02.09)

Contagion Works Both Ways“The world is passing through a

difficult time. More so, the developedworld”, said C Rangarajan, MP, RajyaSabha. The industrially advancedcountries are now officially inrecession, having had twoconsecutive quarters of negativegrowth. It is not known at this stagehow long will this recession last andhow deep will it be.

The impact of the financial crisisis felt by the developing economiesas well. Growth is slowing down in allthese countries. India’s growth ratein the current year will be aroundseven percent as compared to ninepercent in the previous year.

Prospects for 2009-10 do notappear to be better than that for thisyear. While in the current year, the firsthalf escaped the impact of globalrecession, in the next year the impactwill be felt throughout the year.Globalisation spreads both prosperityand distress. The contagion worksboth ways. (ET, 04.01.09)

Satyam, a Blessing in Disguise

With Rs 7,800-crore fraud at Satyam Computer leaving India�s IT sectorgasping for breath, Infosys Chairman Nandan Nilekani sees the fiasco

as a blessing in disguise, as it will make authorities enforce better regulationsand auditing mechanisms for the industry.

Nilekani said he wasappalled at the scam, whichwould have largerramifications on the imageof India�s software sector.�The Satyam-scam not onlyhit hard the company�sstakeholders, but also had alarger impact on people likeme, who have beenpromoting the Indiansoftware brand and the

enterprise in this country�, he said. But he also hoped there is a silver liningto this episode. (ET, 23.01.09)

The Times of India


G O V E R N A N C E & R E F O R M S � S P E C I A L A R T I C L E

Have you ever wondered why and how institutionslike IIMs, IITs and a few other institutions of excellence

have remained 100 percent corruption-free, despite beinggovernment institutions?

In any case, here, when I say these institutions are‘corruption-free’ what I is mean that the probability that astudent gains admission by means other than theadmission criteria laid down is zero — not virtually zero,but zero. It is important to understand how these islandsof integrity survive in this ocean of corruption, becausethat may be our only route to pulling our other institutionsfrom the morass of corruption.

The systems and processes of admissions in theseinstitutions are such that even a corrupt head of theinstitution wanting to oblige a political heavyweight,cannot influence the process of selection of the students.No one individual, or even a clique of powerful individualscan make a dent in the processes that govern the selectionof students in these institutions.

Fortunately, even a pliant head of institution, most keen tooblige the powers that be, cannot do so for the simplereason that he is in fact powerless. So when this head ofinstitution tells the powers that be that, sorry, he cannotdo anything to ensure the admission of the latter’s ward,he is not just taking a moral posture. He is telling the truth.

Of course, the nice thing is, when you belong to suchan institution, the moral posturing comes

automatically. Everybody believes in fairness. Everyoneknows that his statement of inability to influence is alsobacked by the system. And that helps enormously.

The systems in these institutions ensure rigid compliance.What is interesting is that these systems are not rigid inthe sense that they stymie individual initiatives or do notallow for situational exigencies. They do. And yet, thesystems are such that the basic integrity is in no way evercompromised.

We have seen glimpses of what a rigid system can do tocurb corruption — namely, in the Right to InformationAct. The right to information by itself does not take awayanything from the decision makers and yet, it enforces adegree of transparency, which in turn curbs corruption.But unfortunately, its very success seems to be the reasonwhy the government, politicians and judiciary want tofuriously backpedal on it.

For the same reason, we must push for electoral reformsin the form of transparent and tax deductible

contributions to political parties. The ad hoc system ofunderhand collections in the name of the party can helppoliticians line their own nests liberally before their party’s.The parties virtually set ‘targets’ of collections in returnfor party tickets and positions.

The politicos in turn set targets for those serving underthem, they in turn set further targets down the line and thesystem cascades down all the way to a point where thepolice sub-inspector or even the constable may have‘targets’ based on where he is posted. That is the reasonpoliticos stoutly resist electoral reforms.

That is also the reason they resist giving the option“None of the above” to the electorate, so that if

enough number of people vote for that option, all thecandidates stand disqualified. And these are all the morereasons why, as a people, we must fight for such systemicimprovements. We have seen many other instances whereintroduction of proper and transparent systems haveminimised corruption.

As the world’s largest democracy, we owe it to ourselvesto recognise corruption for the rot that it is, eating awayour innards. We need systemic solutions.

* CEO, GMR Varalakshmi Foundation. The article appeared in the Economic Times, February 28, 2009.

How Systems can Minimise CorruptionV Raghunathan*

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We have come to accept with equanimity –and therein lies the danger – that we areamong the most corrupt countries in theworld. If you have had anything to do with

any of our government institutions,whether central, state, regional or

provincial, the one unremitting commondenominator you find is corruption


G O V E R N A N C E & R E F O R M S � S P E C I A L A R T I C L E

The performance of governments should not be judgedonly on the contemporary numbers, but also on the

extent to which they bequeath predictable structuralproblems for the immediate future. On one yardstick, theUnited Progressive Alliance (UPA) has had a greatperformance: the highest rate of growth over a five yearperiod, buoyant government revenue, high agriculturegrowth, massive expansion of outlays on income supportprogrammes and the social sector. But on another measurethe luster of this performance seems considerably diminishedwhen put in a longer perspective. Much of these gains weredue to a fortuitous turn of circumstances rather than policy.

In terms of economic policy the UPA has very few reformsto its credit. The introduction of value added tax (VAT)was certainly a major achievement, one that allowed statesand central revenues to remain buoyant. Part of whateconomic reform means is the reduction of arbitrarydiscretion in the way in which the government intervenesin the economy. There is relatively little rationalisation ofsubsidies. On this front the UPA was shamefully arbitrary.The large boost to special economic zones (SEZs) wasnothing more than an arbitrary intervention in real estatemarkets.

Telecom policy has remained a mess and laboured underinsinuations of corruption. While there was some

movement in the power sector, it was considerably slowerthan needed to be the case. By leaving the door open forrenegotiating the financial terms of the mega powerprojects, the government has raised serious doubts aboutthe financial costs of these projects. PPP’s were thegovernment’s big mantra.

But the way PPP’s have been executed has had two adverseand contradictory consequences. First, in some cases ithas actually slowed down the building of infrastructure.But second, by allowing all kinds of charges to beintroduced after the agreements have been executed, thegovernment has also violated fairness and transparency.

It is not entirely clear for instance, why a tax cut at thispoint would have been good from the point of view ofstimuli. After all in some ways there are implicitly stimulusrelated things that have been taking place: pay commissionhand outs, income support through expansion of NationalRural Employment Guarantee Act (NREGA), restructuringof farmers loans. The very same people who are arguingfor tax cuts are also arguing that people are actually holdingonto plenty of liquidity and can spend or invest it becauseof uncertainty. For this reason the government was wisenot to rush into tax cuts.

Higher education, one area critical to employmentgeneration and future growth, has been throttled even

more by misconceived regulation and publicmismanagement. The rush of new institutions beingannounced, from central universities to IIM’s will, becauseof serious design flaws, exacerbates problems instead ofresolving them. In primary education, it is still somethingof a scandal that a good Right to Education Bill has notbeen passed, and fiscal provisions have not been made forthe costs such a bill would entail.

But the blunt truth is that in five years the government hasnot been able to lay out what the architecture of the healthsystem should look like. The biggest intellectual weaknessof the UPA has been its inability to think through designissues with any degree of seriousness. These five yearswere a golden opportunity to transform the architecture ofservice delivery in India.

We know that effective economic governance in thecoming years will require taking difficult decisions

on a whole range issues. Given the options we have, theUPA may return to power; the elections are going to behard to predict. But there is no better indictment of thisgovernment than the fact that even after five years ofspectacular growth, it has not been able to consolidateand enhance its own power.

Good Intentions to Go NowherePratap Bhanu Mehta*

Fragmentation ofpower is allowing allkinds of small groupsto hold up economicpolicy. It is alsogenerating a greatsense of nervousnesson a whole range ofsecurity andcommunal issues thatwill affect businessclimate

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* President and Chief Executive, Centre for Policy Research, New Delhi.

Abridged from an article that appeared in the Financial Express, February 22, 2009.


G O V E R N A N C E & R E F O R M S � P A R L I A M E N T A R Y R O U N D U P

Separate Act for Public SafetyDemanding justice for the victims of the

Uphaar tragedy and initiating a citizens’ campaignfor public safety, the Association of Victims of theUphaar Tragedy held a public demonstrationopposite Uphaar cinema at Green Park Extension.

The demonstration was aimed at mobilisingpeople from all walks of life to put pressure on theGovernment to bring in a separate Act forprotection of life and safety in public places andset up a National Public Safety Commission.

(TH, 20.01.09)

Move to Curb Courier Cos’ Power ShelvedThe Government has withdrawn the proposed

amendments to the Indian Postal Act. TheDepartment of Posts (DoP) would redraft the Bill onceagain and send it for the Cabinet’s consideration.

The Bill was also facing strong objections from thecourier companies, as it proposed to curtail their power insending and receiving mails and parcels.

The scrapped Bill had a provision which restrictedcourier companies to handle delivery of documents andletters below 300 gm weight. The Bill had also proposed auniversal service obligation fee for courier companies onthe lines of those paid by the telecom service providers.

(ET, 30.01.09)

New Code to Shield SoftwareThe government plans to introduce a legislation

empowering software makers in their fight against the saleof unauthorised copies of their products, as it looks tocrack down on rampant piracy in the country where nearlythree-fourths of the software used is pirated.

An amendment to the Copyright Act to be introducedin the Parliament will make it illegal to break the securitycode of all kinds of software from operating systems andgames to multimedia players.

The proposed law will also make it punishable to accesscomputer networks and websites without authorisation.These provisions will help software makers to takepreventive steps to stop piracy. (ET, 06.01.09)

Money laundering Law PassedA Bill aimed at effectively combating money-

laundering, terror financing and cross-border economicoffences was passed by the Parliament.

The Prevention of Money Laundering (Amendment)Bill, 2009 seeks to ensure a legal framework to check suchcrimes. The Minister of State for Finance PK Bansalassured that the government would not be found wantingin taking action against those indulging in money-laundering. The new law seeks to check use of black moneyfor financing terror activities.

The Bill, after becoming an Act, will address India’sinternational obligation and empower the enforcementdirectorate to search the premises immediately after theoffences are committed and police have filed a report.

(FE, 24.02.09)

Warehousing Act DelayedThe enactment of the Warehousing Development &

Regulation Act (WDRA) scheduled for notification onMarch 01, 2009, is likely to be delayed 2-3 months becauseof uncertainty over appointment of the regulator.

The government has appointed Viswanath Chirravuri,resident commissioner of Andhra Pradesh Bhawan, as jointsecretary of the Warehousing Development andRegulation Authority, the authority constituting the Act,under the Department of Food and Public Distribution(DFPD) to look at the regulatory aspects of the Act.

The notification will make the warehouse receiptsissued by credible agencies negotiable, enabling farmersto trade their commodities without carrying them physically.

(BS, 02.03.09)

Bihar to Introduce Anti-corruption BillThe Bihar government is likely to introduce an anti-

corruption bill in the State Assembly, after Chief MinisterNitish Kumar’s admission that corruption has been a bighurdle in State’s development.

All corrupt officials including serving and retiredgovernment officials will come under its ambit after the billis passed by the State Assembly.

The proposed bill will enable the State to confiscateassets of government officials against whom cases ofpossessing disproportionate assets have been filed andcharge-sheets have been submitted in the court of law.

(TH, 03.03.09)

Drug Cos. Oppose Licensing AgencyThe proposed Central Drug Authority (CDA) Bill, likely

to be passed in the Parliament, is posing a threat to about5,000 small drug-making units, the association of theseplayers said.

The Bill has proposed the Centre would take over fromthe States the authority to clear manufacturing licences ofpharmaceutical companies, to ensure high standards. Thiswould mean additional expenses for the small players, asthey will have to come to the Centre and comply withstringent regulatory norms to get permission formanufacturing. (ET, 07.02.09)

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G O V E R N A N C E & R E F O R M S � N E W S D I G E S T

Govt. Frames Media GuidelinesWith ever increasing number of

players occupying the media space,coupled with the introduction of morenew-age mediums, the government isnow mulling over a proposal to set upa commission to frame comprehensiveguidelines encompassing all forms ofmedia.

The recently concludedConsultative Committee meeting ofparliamentarians, chaired by Ministerof State for Information andBroadcasting, Anand Sharma, whilediscussing the repercussions of mediacoverage after 26/11, called for acomprehensive approach to lay outcodes for the entire media. (BS, 15.02.09)

Laptops to Enhance EducationIndia is planning to produce a

laptop computer for a knockdownprice of about US$20, havingpioneered in 2008 the Tata Nano, theworld’s cheapest car, for Rs 1,00,000(US$2,050) a vehicle.

The project, backed by New Delhi,would considerably undercut the so-called “US$100 laptop” designed bythe Massachusetts Institute ofTechnology of the US.

India’s US$20 laptop would alsoundercut the EeePC, made by Taiwan’sAsustek. The EeePC was the firstultra-cheap, scaled-down laptoplaunched worldwide throughcommercial channels. (FT, 02.02.09)

RTI Act Norms Must for NGOs

The non-governmental organisations (NGOs) that are substantially financedby the state government directly or indirectly would have to compulsorily

follow the Right toInformation (RTI) Act normsfor granting their grants.

The government said thatall the substantially financedNGOs working under thedepartments falling inpreview of RTI shouldappoint public informationofficers (PIOs) and firstappellate authorities andshould make necessary arrangements for their training.

As per the Section 4 of the RTI Act NGOs are bound to declare informationrelated to them and available with them. Also they have to follow all thenorms related to the offices of the PIOs and first appellate authorities.

This latest government order means that all the NGOs would have tocreate their websites and display all information about them, apart fromproviding the information to citizen seeking them. (HT, 14.03.09)

Haryana: Smart Cards for PDSHaryana is ready to join ranks with

the Union Territory of Chandigarh inintroducing smart cards for the PublicDistribution System (PDS).

The Haryana State ElectronicsDevelopment Corporation (Hartron),is ready to launch the pilot project forsmart cards in three districts –Sonepat, Kaithal and Panchkula.

The total cost of the project isestimated at Rs 137 crore and will befunded by the Centre. With this, the53-odd-lakh families staying in variousdistricts of Haryana will no longerhave to stand in long queues to collecttheir ration. (FE, 20.01.09)

‘Solar Cities’ of IndiaGurgaon and Faridabad all set to

become Green Cities. Gurgaon andFaridabad in Haryana have beenselected for development as solar/green cities under a scheme of theUnion Ministry for New andRenewable Energy.

The project aims at a minimum 10percent reduction in projected demandfor conventional energy at the end offive years, which could be achievedthrough a combination of energyefficiency measures and enhancingsupply from renewable energysources.

This ‘Development of Solar Cities’programme was developed during the11th Plan period to enable/empower

urban local governments to addressenergy challenges at the city level.

(www.egovonline.net 10.02.09)

Centre to Empower ConsumersThe government is framing a law

to empower consumers to suemanufacturers and service providers,who dupe them by concealinginformation that could influence theirpurchase decisions.

Under the proposed law, suchcompanies will also be prosecuted fornot issuing receipts of purchases. Thepenalty will be equal to the value ofthe product or the service, along withthe interest. The note proposes toamend the Consumer Protection Act1986.

The proposed move will alsodefine ‘unfair contract’ to protect theweaker party from incurring lossesarising out of such unfair tradepractices. (ET, 03.03.09)

EIA Norms for InfrastructureThe government is all set to relax

the Environment Impact Assessment(EIA) norms for infrastructure,housing and IT projects to expediteflow of funds and speed upimplementation.

According to sources, this isbeing done as it has come to light thatproblems relating to land acquisitionand the difficulties in obtaining anenvironment clearance were the mainreasons that delay projects in thesesectors. (FE, 24.02.09)

Energy Policy Receives NodThe Union Cabinet gave its nod

to the integrated energy policy, whichseeks to chart out a road map forenergy security, to achievesustainable growth over a reasonableperiod.

The policy, prepared by thePlanning Commission, is aimed atoptimal exploitation of domesticenergy resources, while exploring andacquiring assets abroad, to attainenergy security for the country.

The Home Minister, P.Chidambaram, said: “India needs tosustain an economic growth of at leastnine percent over the next 25 years ifit is to eradicate poverty and meet itslarger human development goals”.

(TH, 27.12.08)

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C O M P E T I T I O N I N S I G H T � I N F E A T U R E

The Competition Act, expected to be operationalisedsoon so as to supersede the archaic Monopolies and

Restrictive Trade Practices (MRTP) Act, is seen as anattempt to make the Indian laws more contemporary andbring them in line with the modern anti-trust laws.

But there seem to be a few niggling areas of concern,such as whether deals that not long ago raced at a fierypace may now meet with obstinate speed-breakers.

The new Act deals with the challenges of monopoliesand seeks to ensure the sustenance of competition for thebenefit of industry and consumers, concedes PrasantoSengupta, Director, Corporate Finance, KPMG India.

Excerpts from the interview :

The Competition Act deals with various situations underwhich competition may be adversely impacted, but theone on combinations (M&As) has attracted the maximumattention. Why so?

M&As have been a huge growth engine for India Inc.over the last 3-4 years. M&As have resulted in Indiancompanies acquiring skill, creating better scale andderiving resultant efficiencies. By introducing a ‘size ofperson’ test in the regulation relating to ‘combination’under the Competition Act, the number of M&As whichwill come under the scanner of the Act will be reduced.However there are still certain areas of concern.

Do you fear that the Competition Act, once it becomesoperational, can stifle M&As?

The regulations put a premium on ‘size of person’ vis-a-vis ‘concentration’ for deeming which all combinationsshould be referred to the Commission. The regulations areapplicable to any M&As above a certain size, in terms ofturnover and assets, of the acquirer and the acquire. Thiswill make a large number of M&As fall within the ambit ofthe Act, even if they may hardly have any impact oncompetition. Globally, most competition regulators put agreater emphasis on concentration, while deeming whichall combinations should fall within its ambit.

What about the time period?The time period of 210 days is way too long and is not

necessarily in harmony with other regulations. Under theAct, the acquirer has to inform the Commission of theproposed combination within 30 days of the board of

Should Competition LawFocus on �concentration�?

Globally, most competition regulators put greater emphasison concentration or market share, while deeming which allcombinations should fall within its ambit.

directors’ meeting approving theacquisition or execution of agreement. After this there isa waiting period of up to 210 days, for the combination tobe effective. If the Commission deems that a combinationadversely impacts competition, then it has the powers toorder reversal of the same.

Can there be an alternative?There is a need to introduce a shorter timeframe for

approving combinations, which prima facie do not impactcompetition. The Chairman of the Commission has spokenabout a short and a long form – the short form for suchcombinations, which the combining entities believe areunlikely to impact competition and can be approved within30 days. The same is yet to be incorporated.

Don’t we already have some kind of competitionregulation already in place, in certain industries?

Yes, as for example telecom, where most M&As havebenefited the consumer, with continuously falling tariffs.So, for a telecom combination, with the introduction ofthe Competition Act, the multiplicity of approvals willincrease. Telecom is a shining example of an industry whereregulated competition, avoiding both a free-for-all as wellas monopolies, has resulted in the creation of great valuefor both business enterprises as well as consumers inIndia.

How the Commission will address the talent issue andalso the current crisis?

The Competition Commission will need to attract thebest talent from the market. Judging whether or not acombination impacts competition, quickly andprofessionally, will require a significant investment ofefforts by the Commission. The Commission would needto create a quality database across industries andcompanies and the best talent to interpret the same andrespond to the filings of the entities.

As for the stressful times, such as what we witnesstoday, a combination may be necessary in spite of anynegative impact on competition, in the greater interest ofthe economy. Under the takeover code, there are specialprovisions for stressed situations; the Competition Actis, on the contrary, largely silent on this point.

– Excerpts from an interview with Prasanto Sengupta, Director, Corporate Finance, KPMG, India by D Murali that appeared in theHindu Business Line, November 13, 2008


E - G O V E R N A N C E

post tenders online. Even thedepartment of Information andPublicity has been instructed toensure that all tender advertisementis put online before it is cleared forpublication.

(www.egovonline.net, 06.02.09)

Google to Low-cost HealthcareSoon, a simple online search on

Google or Yahoo will help save onyour medical. The government isplanning to provide comprehensivedetails of all commonly usedmedicines and their cheaper versionson the Internet to enable both doctorsand consumers make an informedchoice.

The idea is to promote awarenessabout low-priced unbranded genericdrugs available in the market, whilekeeping a check on big pharmaceuticalcompanies that push their brandedmedicine with huge promotionalexpenses. 780; (ET, 09.03.09)

E-registry of Mortgaged HomesIn a bid to overcome the menace

of home loan frauds, the Indian Banks’Association (IBA) proposes to set upa committee to work out the modalitiesfor establishing a central electronic

e-mitra Scheme Ineffectivee-mitra scheme was launched to

provide a large number of servicesto the citizens on one stop basis, itsuffered from insufficient andineffective implementation as manyof the participating departmentswere not fully prepared to implementit. They were not providing requisiteservices relating to collection ofapplication and grievances to thecitizen, CAG said. (HT, 13.01.09)

CAG REPORTS

registry that will of Financial Assetsand Enforcement of Security Interests(SARFAESI) Act, 2002.

With banks regularly falling preyto frauds being committed in home/mortgage loan using fake sale/titledeeds, the IBA committee is expectedto fast track the matter relating to theregistry. (BL, 12.03.09)

e-Governance in PanchayatsThe Union government has proposeda Centrally Sponsored Scheme for e-governance in Panchayati RajInstitutions (e-PRIs).

The proposed scheme will bringabout improved service deliverythrough the Panchayats and enablegreater accountability of governmentto the community through use ofInformation and CommunicationTechnology (ICT).

The Department of InformationTechnology has included e-Governance for Panchayats as aMission Mode Project (MMP) underNational e-Governance Programme(NeGP). All village and blockpanchayats will be provided with ICTinfrastructure with broadbandconnectivity.


SEBI, IRDA Flout Norms onSurplus Funds

The Securities and Exchange Board of India(SEBI) and Insurance Regulatory andDevelopment Authority (IRDA) are floutingFinance Ministry instructions by parking theirsurplus funds generated through fee charges,penalties, among other things outside thegovernment accounts. The CAG highlightedthat SEBI and IRDA practice on parking ofsurplus funds were inconsistent withconstitutional provisions. (BL, 22.02.09)

Restructuring ofGovernment’s Accounts

The Controller and AuditorGeneral (CAG) has pointed outsome serious fallouts in theaccounts of some governmentdepartments. It has pointed outmisuse of funds. These fundshave not been spent seriouslyby implementing agenciesleading to some unspent amountin the accounts. (ET, 21.02.09)

First e-Court LaunchedThe first model e-court in the

country has been launched by theGujarat High Court. It has startedfunctioning on a pilot basis providingtamper proof authentic audio-videorecording of proceedings with multi-point video conferencing facilitieslinking the courtroom, central jail, thepolice commissioner’s office and theForensic Science Laboratory.

This project is an initiative of theCentral government and was set upwith technical support from theTechnology, Information, Forecastingand Assessment Council (TIFAC), theCentre for Advanced Computing andNational Informatics Centre.


Govt. to Adopt e-Tenders OnlineDelhi government’s decision to

put all tenders online is facing a majordeadlock, as departments are notwilling to put the tenders online. ThePublic Works Department (PWD), andthe Irrigation and the FloodDepartment have been floating all theirtenders on the e-procurement website.

The Information Technology (IT)department has issued orders makingit compulsory for each department to

e-governance in All Spheres

The Second Administrative Reforms Commission (ARC) hasasked the Centre to prepare a clear road map with a set of

milestones to transform the citizen-government interaction atall levels to the e-governance mode by 2020.

It has also asked all organisations and departments of theUnion and State governments to identify e-governanceinitiatives which could be undertaken within their functionaldomain, keeping the needs of citizens in mind.

ARC Chairman Veerappa Moily said the role of the Centre and state governments would change completelyonce the e-governance project was in place, making governance more transparent and accountable. (TH, 25.01.09)


O P I N I O N

Adam Smith’s famous discussion of the organisationof production in a pin factory articulated the

advantages of division of labour and the economic gainsfrom large-scale production. But Smith expressedconsiderable scepticism about the relative efficiency ofthat particular form of business organisation we now callthe corporation in which management and ownership areseparated.

His observation on the corporation reads thus: “Thedirectors of such companies being managers of otherpeople’s money than their own cannot be expected thatthey watch over it with the same anxious vigilance withwhich the partners in private co-partnerships frequentlywatch over their own”. (The Wealth of Nations.)

Managers as agentsOne way to think of

managers in large corporationsis as ‘agents’ paid by theshareholders. The principals orowners employ the agents toact as stewards on theirbehalf. Agents, however, donot share the same interestsas the principals who employthem. They may, for example,seek to use the company’sassets for their own privatebenefit.

So the corporation hasdeveloped instruments tomitigate these “agencycosts”. Managers agree withowners to submit themselves toauditors, to answer to boards andto take part of their pay in the form ofbonuses. All these things help, but stilldo not eliminate the principal agent problem in thecorporation.

Boards are often the creatures of management.Disclosure is limited to what is required by law andshareholders are a diverse and disjointed group and usuallyfind it difficult to take any action. Free to spend otherpeople’s money, managers and directors squander it.

In early 2008, following an extensive survey, TheEconomist found that instead of returning cash toshareholders, managers typically spend too much moneyon favourite projects, reckless diversification, andextravagant indulgences.

L’ affaire SatyamThe recent Satyam episode in which a family that

controls India’s fourth largest software services company

Needed Better, not More, RegulationRajat Kathuria*

with a 8.6 percent stake, worth US$275mn, decided to spendUS$1.bn of reserves and fresh borrowings to acquire twosister companies in the realty and infrastructure businessesis probably just the tip of the iceberg.

In Satyam’s case, shareholders responded angrily andthe management had to withdraw the deal, but not beforesignificant shareholder value had been destroyed. This isnot the first time that corporate governance has come underattack in India for its laxity.

Another frequently cited manifestation of the failure ofcorporate governance is the huge compensation given totop executives compared to the average pay packet. Andthe disparity has been growing.

Regulating executive pay is perhaps out of the question,since it represents the price of attracting and retaining

talent. Self-regulation also doesnot seem to be working and isunlikely to.

Perverse incentivesConsider what happened

during the recent financial crisisin the US. The system prevalenton Wall Street rewards managersfor “appearance of profits”,rather than on accountingperformance, thereby creatingperverse incentives for thosewho are managing otherpeople’s money. When thedubious investments turnedtoxic, the investors lost, but themanagers kept their bonuses.These ill-gotten gains — money

for nothing — are in small part aresult of lack of proper oversight,

but in large part a result of greed. Onefallout of the financial crisis has been the general acceptanceof increased regulation, even in a laissez faire economysuch as the US.

Regulation is no longer being reckoned as an irrelevantintrusion, but is considered necessary to help achievedevelopment goals. Economy after economy has agreedto bail out struggling corporations and injected muchneeded fiscal stimulus in their economies. This is bailoutseason.

In judging whether corporate India is serious aboutreforming itself, CEO pay and performance of independentdirectors remain the acid tests. India’s notorious past withrespect to regulation does not inspire confidence in howthis will be done. But one thing is clear: we need to regulatebetter and, at the same time, ensure that regulation doesnot degenerate into control.

* Professor, ICRIER, New Delhi. Abridged from an article that appeared in the Hindu Business Line, December 24, 2008

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* Columnist, Business Standard. The article appeared in the Business Standard, March 17, 2009.

One of the reasons why the Sixth Pay Commission (SPC) had substantiallyraised the salary for chairmen of all the regulatory bodies was to make that

job a little more attractive for professionals and experts from the private sector.The time has now come to check out if the government has indeed used thebetter pay package for its regulators to widen the choice and attract privatesector people.

A few weeks ago, the UPA government selected Dhanendra Kumar, a retiredIAS officer, as the chairman of the Competition Commission of India (CCI).There were many candidates in the fray, but most of them belonged to the civilservice.

By next Monday, a new chairman of the Telecom Regulatory Authority of India(TRAI) will be in place. Nripendra Misra will complete his three-year tenure onMarch 21 and the government’s search committee is expected to complete itsjob in a few days and an announcement is likely before the week ends.

Once again, a large number of the candidates in contention for the Trai chairman’sjob are civil servants belonging to the IAS. Only one of the candidates belongsto the private sector. Will the government’s search committee make a departureby recommending a non-IAS officer for the job? This appears unlikely.

Civil servants get upset when questioned on why only serving or retiredIAS officers are selected to head the many regulatory bodies that have

been set up in the wake of economic reforms. At present, there is only oneregulatory body, the Directorate General, Hydrocarbons (DGH), which is notheaded by a serving or a retired IAS officer. V K Sibal worked in a public sectoroil company before taking charge of the DGH.

Nobody can, of course, argue that IAS officers are not competent to lead aregulatory organisation. Given their exposure to the manner in which thegovernment machinery functions and the need for a regulator to understandthe working of the government system, IAS officers have a definite advantageover professionals or experts from the private sector. But that should not ruleout the possibility of private sector professionals with requisite experience in asector from performing equally well in leading a regulatory organisation. Indeed,attempts were made in the past to get private sector professionals to headregulatory bodies. These moves, however, did not bear any fruit because the

Regulatory CaptureA K Bhattacharya*

salary offered to a head of a regulatorybody was not attractive enough for aprivate sector professional.

The SPC took note of this feedbackand made amends. Ironically,however, the enhanced pay packagehas made the job of a chairman of aregulatory body even more attractivefor the IAS officers, particularly forthose who are approaching retirement.And only a few applications havecome from private sectorprofessionals. In sharp contrast,several secretaries to the Uniongovernment were interested inheading the Competition Commissionof India. The list of candidates beingconsidered for the Trai chairman’spost also has several secretaries,including even the finance secretary.

No doubt, the situation under theUPA regime has become a little

better than in the past. During theVajpayee government, bureaucratsapproaching retirement wereshortlisted and expected to headregulatory bodies once theysuperannuated. The post of thechairman of the Central ElectricityRegulatory Commission remainedvacant for several months till A KBasu, an IAS officer, retired and tookcharge. Similarly, Dipak Chaterjee wasidentified to head the CompetitionCommission of India just before he wasdue to retire as commerce secretary.The UPA regime has not seen suchinstances of keeping a job vacant sothat a bureaucrat of its choice couldtake that up after superannuation.

Yet, the concern that the SPC soughtto address remains valid. What shouldthe government do now? It may betime now to create a pool of experts,selected from both the IAS and privatesector professionals, which could beused by the government’s searchcommittees to identify the chairmanof a regulatory body. The searchcommittee, which at present is largelyinfluenced by the ministers concerned,will then be able to act moreindependently and have a larger poolof talent to choose from.

India’s regulatorsstill remain

the preserve ofthe IAS

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S P E C I A L C O L U M N

* Professor at Columbia University. Abridged from an article that appeared in the Economic Times, March 26, 2009.

Future historians will, no doubt, applaud Dr ManmohanSingh for his contributions to building a modern

economy as finance minister and to freeing India of nuclearapartheid as prime minister. But they will also record thesetback to reforms during his tenure as prime minister.

The National Democratic Alliance (NDA) had contestedthe general election in May 2004 on a pro-reform platform.Therefore, many in the Congress interpreted its defeat asthe rejection of reforms by voters. Prospects for reformsunder the incoming Congress-led UPA looked bleak.

Yet, when Sonia Gandhi decided to step aside in favour ofDr Manmohan Singh as prime minister, reform advocatessaw a ray hope. As finance minister under Prime MinisterNarasimha Rao, Dr Singhhad earned the title of thechief architect of India’seconomic reforms. Theappointments of PChidambaram and MontekAhluwalia as financeMinister and deputychairman, PlanningCommission, respectively,completed what manycame to call the “holytrinity” of reformers.

Sadly, however, reformsdid not takeoff. The Common Minimum Programme

(CMP) the UPA negotiated with its allies ruled out keylabour-market reforms at the outset. As for many otherreforms, Sonia Gandhi held back Dr Singh’s hand. Shehad him appoint the National Advisory Council (NAC)under her chairmanship with statutory powers to overseethe implementation of the CMP.

The National Rural Employment Guarantee (NREG)Scheme, UPA’s flagship policy initiative, was craftedentirely in the NAC. The legislation on special economiczones, another important UPA accomplishment, wasstripped of its key labour-market reforms embedded in theoriginal NDA Bill.

For his part, early in the term, former finance ministerChidambaram made the completion of the ongoing pensionreform a high priority. Five years later, the Pension FundRegulatory and Development Authority Bill still awaits

The UPA government arguably had the best economic team, raising thehope that it will go ahead with economic reforms. However, the ‘holy

trinity of reformers’ failed to live up to expectations

The Fall of the Holy TrinityArvind Panagariya*

passage in Parliament. Further opening of the insurancesector, another item on the finance minister’s list of reformsfrom the outset, has suffered the same fate.

The greatest disappointment from the UPA has come inthe area of infrastructure. The need for building thecountry’s roads, ports and airports at an accelerated pacehad been well recognised when the UPA came to power;undertaking this task did not require any controversiallegislation; and the UPA had the unusual opportunity tobuild on the success the NDA had already achieved.

When the UPA came to power in May 2004, it had asolid base on which to build. By all indications, the

UPA was keen to seize this opportunity. It moved swiftlyto appoint the Committeeon Infrastructure onAugust 31, 2004. But sadly,through Committee onInfrastructure, the PlanningCommission became a majorobstacle to progress.

Notwithstanding the factthat the NDA had given outhundreds of successfulcontracts for work onthousands of kilometres ofroad and that even UPAhad issued 33 contracts for

work on 2,000 kilometres of roads in its first few monthsusing the documents it inherited from the NDA, beginningin early 2005, the Planning Commission forbid the NationalHighway Authority of India from issuing new contractsuntil the Committee on Infrastructure came up with its new“Model Concession Agreement” (MCA).

In June 2004, economist Shankar Acharya wrote about“good men” in the UPA Cabinet — Dr Singh, Mr

Chidambaram and Mr Ahluwalia — arguing ‘it would bedifficult, perhaps impossible, to conceive a strongereconomic top team.’ Four years later, in September 2008,when he returned to the theme of “a few good men”assisting god look after India, his list had shrunken: thistime around, it only included Dr Singh from the originallist for securing the nuclear deal against all odds plus thenewcomer Dr Y V Reddy who had served with greatdistinction as the governor of the Reserve Bank of India.

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

P U B L I C A T I O N S

SOURCES

BL: Business Line, BS: Business Standard, ET: The Economic Times, FE: The Financial Express, FT: Financial Times, HT: Hindustan Times,IE: Indian Express, TH: The Hindu, ToI: Times of India

Competition and Regulation in India, 2009� A Curtain Raiser

India Competition and Regulation Report, 2009 tries to examine the evolution ofregulation/regulatory problems from a political economy perspective and assess the

quality of regulation in terms of the suitability of content for tackling market failures, theeffectiveness and independence of the regulator and the extent to which the set of sectorregulations fosters competition. This study is an important contribution towards enrichingthe available literature in the public domain and encouraging a dialogue to promote ahealthy and competitive environment as evolving an appropriate regulatory culture isalways a learning curve.

This Monograph can be viewed at:http://www.cuts-ccier.org/icrr09/pdf/Competition-Regulation-India-CurtainRaiser09.pdf

The Competition Regime as a Determinant ofConsumer Welfare: Focus on Indian Telecom

This Monograph elaborates on the concept of consumer welfare which has been concretised and delineated in the form of consumer rights and examines how such

rights can be furthered through a competition regime. It evaluates the formulation andimplementation of Government policies in India, which have affected the pursuit ofcompetition and consumer welfare enhancement. The Monograph also offers a case studyof the telecom sector in India that examines competition issues that are juxtaposed againstan evaluation of the extent to which the mentioned consumer rights are being satisfied.

This Monograph can be viewed at:http://www.cuts-ccier.org/pdf/Comp_Regime_Determinant_of_Consumer_Welfare.pdf

Consumer Participation in Electricity Regulation:Rajasthan Experience

This briefing paper examines the status of consumer participation in the regulatoryreform process in the electricity sector with special focus on Rajasthan. It concludes

that though necessary steps were taken by the regulator in certain cases, due to lack ofcapacity to understand complex issues, consumer participation did not produce thedesired results. The paper lays emphasis on the need to make consumers aware byorganising training programmes, seminars to ensure that they get the right supportfrom the regulatory bodies.

This Briefing Paper can be viewed at:http://www.cuts-ccier.org/RESA/pdf/Consumer-Participation-Electricity-Regulation.pdf

Political Economy of Regulation in IndiaI am sorry to have missed attending this important roundtable due to unavoidable

reasons. From the summary of the deliberations I can say my congratulations to youfor bringing out detailed analysis of regulation efficiency and independence.

V S AilawadiFormer Chairman

Haryana Electricity Regulatory Commission

Forum

Documents

Over the last two decades there has been a steady increase