policywatch - cuts · pdf filehas again voiced concerns over whether these norms would be a...

Merger regulations under the Indian Competition Act, 2002 have alwaysbeen controversial. Now that the government in its wisdom has

announced June 01, 2011 as the date for operationalising them, Indian businesshas again voiced concerns over whether these norms would be a boon or abane. They seem to be leaning towards the latter.

One of the concerns seems to be centered on the lowfinancial thresholds set by the government formandatory notification of merger transactions.Financial thresholds are yardsticks used bycountries such as the US and the UK, amongother countries and our law has been draftedkeeping the good practices followed across theworld. To address the issue of low thresholds,it is important to note that the Draft MergerRegulations recently released for consultationshave proposed an increase in the threshold limitby as much as 50 percent. This threshold, too, is notcast in stone and can be reviewed as our economy grows.

Many opponents of the regulations also argue that market domination inan economy like India might not be a bad thing and may have pro-competitiveeffects by encouraging competitors to enter. It is pertinent to understand thatit is not the evils of market dominance but the abuse of such dominance andsituations that is being targeted through such norms and initiatives. Therefore,such a conclusion might not be entirely true as there were no entry barriers atthe time of such takeover to cause �appreciable adverse effects on competition�� the litmus AAEC test. A critical point of analysis by Competition Commissionof India (CCI) in any merger analysis will be to also scrutinise whether theproposed transaction would create entry barriers for new entrants.

The concerns regarding risk of leakage of sensitive information relatingto merger transactions from the CCI due to low standards of confidentiality-an unfortunate feature of public institutions due to widespread corruption,are well-founded.

Notwithstanding such concerns, however, a well-implemented mergerregime adds to industrial growth and promotes economic democracy. In thebackdrop of the recent trend of foreign companies taking over Indianpharmaceutical companies the relevance of a competition law and the role ofCCI to deal with such transactions through conditional approvals have beenfurther highlighted.

We disagree that the competition law has been poorly designed. Instead,the true test and focus here should be on its effective implementation. And letus not lose sight of the fact that the CCI is an enforcement agency that hasbeen entrusted with the task of competition regulation of which mergerregulation is a part. Interventions by advocacy groups, customers andcompetitors who can guide the CCI to take care at every step during thecourse of its functioning will be valuable.

� Abridged from an article that appeared in the Business Standard, on April 29, 2011.

PolicyWatchPolicyWatchVolume 12, No. 1 January-March 2011

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

Regulatory Turbulence

for Airlines

� A K Bhattacharya ............ 7

Rule-Based Economic Policies

� Yoginder K Alagh .......... 10

Wrong Approach to

Food Security

� Sharad Joshi .................. 15

Learn, Localise,

Lateralise to Grow

� Arun Maira .................... 22

Published by Consumer Unity & Trust Society (CUTS) , D-217, Bhaskar Marg, Bani Park, Jaipur 302016, IndiaPhone: 91.141.2282821, Fax: 91.141.2282485 Email: [email protected], Website: www.cuts-ccier.org

Printed by: Jaipur Printers P. Ltd., M.I. Road, Jaipur 302001, 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

Sibal to Delink Spectrumfrom Licenses ......................2

Indian Economy toTouch US$2tr ........................9

Digitised Ministries ............ 12

Rural Jobs SchemeCuts Spend ........................ 14

GST to BoostTax Revenues .................... 16

Lack of Political WillHampers RTEImplementation ................. 18

Merger Regulations PromoteEconomic Democracy

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

Stricter Mobile Radiation NormsConcerned over high-level of

electromagnetic radiation from mobiletowers and handsets, a high-levelinter-ministerial committee was calledfor imposing strict restrictions oninstallation of mobile towers nearhigh-density residential areas,schools, playgrounds and hospitals.

The hot tropical climate, low BMI,low fat content of an average Indianand high environmentalconcentration of radio frequencyradiation may place Indians underhigh risk of radio frequency radiationeffect. Hence, revision of radiationnorms is important for healthconcern.

The committee report has alsorecommended the use of hands-freetechnologies such as Bluetoothhandsets and ear phone so as tominimise the contact of head withmobile phone. (TH, 02.02.11)

Data Protection Rules SoonThe government is framing rules

for data protection and liabilities ofservice providers under theInformation Technology Act. Afacility for assessing quality ofbiometric devices for UniqueIdentification applications will be setup.

The Department of InformationTechnology will also prepare threemanuals for skills enhancement anddraft consultation paper as part of the100-day agenda. A pilot scheme forproviding digital literacy will beintroduced. The Department of Postswould introduce a prepaid credit cardto rural people, which will facilitatenon-cash transactions. (BS, 02.01.11)

DoT Warns Erratic Cell FirmsThe Department of Telecom

(DoT) has asked all cellphone serviceproviders to comply with the newnorms for the mobile numberportability (MNP) scheme and warnedthem of action if they fail to do so.The DoT warning follows complaintsfrom mobile subscribers that theywere finding it difficult to switchoperators under the MNP scheme.

Many subscribers havecomplained that they were facing a lot

of problems as the existing operatorswere not obliging their requests tochange. These subscribers were toldthat ‘servers were down’ or ‘there weretechnical glitches’ which preventedthem from effecting the switch.

(BS, 26.01.11)

Mobile TV Policy on AnvilThe draft of the mobile TV policy

is in final stages and expected to besent to the Cabinet soon. Beforesending the draft, the Ministry ofInformation and Broadcasting woulddiscuss with the DoT issues relatingto spectrum allocation to mobile TVservice providers.

700 MHz frequency band has beenin great demand for mobile andwireless broadband services as thetechnology required to be deployedin this frequency band will be cheapercompared to high frequency band.

(TH, 20.02.11)

Pay for Chosen ChannelsThe TRAI has asked satellite TV

operators the details of subscriptioncharges for individual channels theyoffer to customers. The regulator, in2010, had asked the firms offeringdigital television services, whichincludes cable and direct-to-homeoperator, to allow consumers to selectand pay subscription for channels

they choose to watch, instead ofoffering only bundled packages.

The deadline for complying withthe directive expired in January 2011and further actions will be taken ifsatisfactory response is not obtainedin 10 days. Reliance BIG TV Ltdresponded to the notice, while SunDirect already offers à la carteservices. Dish TV is still pricing itschannels individually and will respondsoon and Videocon d2h requested foran extension. (Mint, 08.01.11)

Broadband in 5 lakh VillagesThe Telecom Ministry is likely to

provide rural wireless broadbandconnections to over 5 lakh villages inone-and-a-half years and a subsidyto both state-owned and privateservice provider operators from theUniversal Service Obligation (USO)Fund for this purpose.

The USO Fund was set-up in 2002in order to provide mobile services andbroadband connectivity in rural andremote areas of the country. Under the‘Rural Wireline Broadband’ scheme ofUSO Fund, a total of 2,61,413broadband connections and 2,506kiosks have been provided till January31, 2011, in rural and remote areas ofthe country, against a target of8,88,832 connections and 28,762kiosks by 2014. (HT, 28.03.11)

Sibal to DelinkSpectrum from Licenses

Telecom minister Kapil Sibal,

outlined the broad contours

of New Telecom Policy (NTP)

2011 which included delinking

of license from spectrum,

allocating spectrum on a market-

linked price mechanism and a

uniform fee for all licenses.

This would mean that a new

telecom licence would be given

for a nominal entry fee, after

which operators would have to

pay a market-determined price for

getting spectrum. The market-determined spectrum price could be arrived at

through auctions or any other mechanism suggested by the Telecom

Regulatory Authority of India (TRAI).

The move would adversely affect new operators like Uninor, Loop and

the GSM businesses of Tata Teleservices and Reliance Communications, all

of whom have 4.4Mhz of spectrum. They will now have to pay market-

determined rates to get the next 1.8Mhz or any other additional spectrum.(FE, 30.01.11)

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Central Regulator for PortsThe new regulatory structure

proposed for the port sectorenvisages one regulator for the majorports and state regulators for the portsunder the jurisdiction of stategovernments.

The proposed Major PortsRegulatory Authority will replace theexisting Tariff Authority for MajorPorts (TAMP), according to the draftPort Regulatory Bill. The regulator willformulate tariff guidelines which arenow being done by TAMP.

It will also issue guidelines ondeciding various other charges forfacilities and services provided byport terminals including those run byprivate operators. The authority willalso issue norms for transhipment ofcontainers, or goods between vessels,and use of property belonging to theports or the private terminal operators.

(BL, 23.03.11)

Safety of Highway UsersThe Road Transport and

Highways Ministry will set up a panelof independent auditors to look intoproblems faced by users of nationalhighways and evaluate cases wherethe users feel developers are notadhering to terms of the agreementwith the National Highways Authorityof India (NHAI).

NHAI needs to be strengthenedin terms of technical manpower andensure long-term financing issues forthe National Highways developmentprogramme. The NHAI and theHighways Ministry will award projectsto develop about 16,160 km in thecurrent fiscal. The Ministry hadalready awarded under the SpecialAccelerated Road DevelopmentProgramme and in Left WingExtremists affected areas. (BL, 04.01.11)

Refund for an Airline TicketDomestic airlines have agreed to

refund passengers all costs barring thebase fare if a non-refundable ticket iscancelled. However, passengers canavail this facility only if they canceltheir tickets two hours prior to theflight departure.

The decision was taken at ameeting of the Civil Aviation

Economic Advisory Council that isgoing into issues relating to bringingtransparency in fixing of airfares andprotection of consumer interests.

Apart from the base fares, fuelsurcharge, passenger service fee, useror airport development fee and taxeswill also be refunded in case ofcancellation of a ticket. It has also beenproposed that the service tax shouldbe abolished on air tickets as it isagainst the International CivilAviation Organisation norms and notin line with international practice.

(ET, 24.01.11)

NHAI to Speed upThe NHAI plans to fast track

project award to meet its target of7,000 km by 2011. It has alreadyawarded projects totaling 4,600 km in2011 and plans to award projectstotaling 2,400 km more by March2011.

Projects totaling about 1000 km areawaiting clearance of the Public-Private Partnership AppraisalCommittee. The performance of theRoad Transport Ministry was 33percent lower than 1,283 km achievedduring the corresponding period in2010.

Various reasons like absence of apermanent chairman and allegationsof bungling in the award of roadprojects, leading to raids by the CBI,have been given for the performance.The Minister decided to form amonitoring committee withrepresentation from all stakeholders.

(BS, 15.02.11)

Ombudsman for AviationThe Civil Aviation Sector is set to

get an Ombudsman soon. The CivilAviation Ministry has started work oncreating a post for one in the sector.The Ministry is also looking atcreating an Ombudsman’s post anddiscussing whether to create that postnow or incorporate it in the CivilAviation Authority (CAA) Act.

A need for an Ombudsman was feltafter the spot fares in the Delhi-Mumbai route were up to 300 percenthigher. The person will look into theproblems and complaints of airpassengers and be the final appellateauthority for them. CAA is to be fundedby R12 charged on every air ticket andwill not be dependent on thegovernment for funds. (BS, 15.02.11)

Bidding Norms for HighwaysWith the government’s liability on

annuity payment reaching R85,000crore and the Ministry deciding todiscourage awarding projects onannuity, the existing Engineering,Procurement and Contract (EPC) modelbeing upgraded to replace annuitymodel

The new model, being prepared bythe Planning Commission, is expectedto be finalised soon. It would havefixed total project costs andspecifications. In the existing EPCmodel, a contractor builds the road andall the changes in the design and thecost of input cost is paid by thegovernment. The current model alsodoes not mandate the contractor tomaintain the road. (BS, 09.03.11)

TRANSPORT

Safety of Passengers on Top Priority

The Minister of Railways, Mamata Banerjee said that Indian

Railways work round the clock just like an army where every moment

matters and every operation needs to be done in a disciplined

manner. She said that safety of passengers cannot be

compromised. It is always to be given top priority.

There should be periodical review and inspection to

ensure that all safety related activities are done as per

the rules. She said that maintenance of rolling

stock especially coaches, wagons and engines is

quite important and no laxity on this should be

tolerated as it is related to safety.

She said that it is necessary to provide service

with a smile maintaining good public dealings. It is

necessary to listen to public grievances, address them

effectively and create a sound mechanism to ensure best

passenger friendly measures. (www.internationalnewsandviews.com, 22.01.11)

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GAIL Backs Pipeline TariffsIndia’s biggest gas transportation

firm Gas Authority of India Ltd (GAIL)India has endorsed petroleum sectorregulator’s proposal allowing pipelinecompanies to charge tariffs lower thanapproved rates but the move has beenopposed by Reliance GasTransportation Ltd.

The regulator’s move aims topromote competition in gastransportation sector which isexpected to grow fast after RelianceIndustries recently tied up with globalenergy major BP to source and marketnatural gas in India.

GAIL has, however, cautioned thatthe freedom to offer discount couldbe misused by companies havinginterests in both gas production andtransportation. Reliance GasTransportation Ltd asked the regulatorto defer the move till the Indian naturalgas market is matured. (ET, 24.03.11)

Uniform Pricing for Natural GasIn an attempt to rule out a uniform

pricing regime for natural gas, an inter-ministerial panel, headed by a PlanningCommission adviser, has taken a callto raise the price of domestic naturalgas for industrial users. However, agroup of ministers is expected to makesome normalisation to the panel’sdecision, considering the oppositionfrom power sector users who will sufferhigher input cost in case of higherrates.

This move of the ministerial panelto average the rates of all natural gasproduced or imported into India aimsat making LNG imported fromAustralia affordable. In India domestic

gas is sold for US$4.2 and US$5.25per million British thermal unit, takinginto count whether it is meant for apriority sector or not while LNGimported by Petronet from Australiacost about US$16 per unit.

(www.money.oneindia.in, 24.03.11)

Panel Devises Ethanol PriceIn India, the expert panel set up to

devise the government-regulatedpurchase price for ethanol hassuggested making permanent theinterim price of R27 per litre. The finaldecision will now be taken by anexecutive group of ministers or thecabinet.

It had suggested three criteria forconsideration: first, landed price ofethanol from Brazil, which is at presentR31 per litre at port; second, the priceof conversion of rectified spirit toethanol, which works out to R29 perlitre; and third, a rate based on theprice petrol – the refinery gate pricefor petrol is in the range of R30 to R32per litre.

(www.biofuelsdigest.com, 01.02.11)

Discount on Crude SalesBacked by higher crude oil and

natural gas prices as well as a one-time settlement of past dues, Oil andNatural Gas Corporation (ONGC) hasreported a 131.9 percent jump in netprofit for the third quarter of thecurrent fiscal. ONGC has posted aprofit of P7,083 crore in the thirdquarter against P3,054 crore year-on-year.

The company received R1,898crore as one-time settlement of naturalgas dues on the contributions it madeto the gas pool account. The gas poolaccount, to which ONGC contributed

funds, was created in 1990s for sellinggas at subsidised prices to keyindustrial sectors, such as the powerand fertiliser, and regions.(BL, 28.01.11)

Residents Face LPG ShortageDue to the ongoing cold wave,

residents of Ludhiana have beenwitnessing LPG shortage. Accordingto consumers of different LPGcompanies, the gas cylinders are beingrefilled after the backlog of 10-15 days.

Sources point out there is alsoincrease in black marketing of LPGcylinders and a domestic cylinder ofworth R350 is being sold betweenR600 to R800. Naveen Talwar, ownerof Bharat Gas Agency said that whilechecking if they come across aconsumer having two cards, they canmake a request to him/her to get eitherof his cards cancelled. (ENS, 08.01.11)

Reliance Bids for Six O&G BlocksReliance Industries bid for six oil

and gas exploration blocks while CairnIndia submitted offers for two out ofthe 34 on offer in the IXth round ofauction under the New ExplorationLicensing Policy (NELP).

Cairn India, whose success inRajasthan may have propelledReliance to bid for two blocks in thestate, has submitted offers for onlytwo blocks, one onland and oneoffshore. Cairn has not bid for any twoexploration blocks on offer inRajasthan.

Reliance, which had not bid forany block in the previous NELP-VIIIround in 2009, has shown interest inonland blocks in Rajasthan,apparently swayed by the huge oilfinds by Cairn India.

(www.currentnewsindia.com, 28.03.11)

OIL & GAS

IOC Seeks Hike in Fuel Prices

Indian Oil Corp (IOC), the country�s biggest fuel retailer, said

there was a need to raise petrol prices, a day after the federal

budget failed to announce any measures to stem revenue losses

of state oil firms.

Petrol prices in India are market-linked, but diesel, cooking

gas and kerosene rates are set by the federal government, which

partly compensates state oil firms for their losses when global

crude oil prices increase.

Raising fuel prices is politically sensitive in India, with the

government struggling to balance maintaining growth momentum

and reining in inflation, among the highest of major Asian economies. IOC has raised petrol prices at least nine

times since state control on its pricing was lifted June 2010. (Reuters, 01.03.11)

www.timesofindia.indiatimes.com



State, Pvt Cos. Beat CPSUsCentral Power Sector Units (CPSUs)

like National Thermal PowerCorporation (NTPC) and NationalHydroelectric Power Corporation haveperformed poorly on capacity additionin the current five year plan, while Stateand private sector have not onlycommissioned a large number ofprojects but also announced a seriesof new projects aimed at rapidly addingcapacity to make the most of presentdeficit situation in the Indian powermarket for the 11th Plan period.

As of November 15, the centralsector had added just 7,905 MW ofits initial target of 36,874 MW. Whilestate utilities commissioned 12,511MW capacity against the plan targetof 26,783 MW and the private sectoradded 8,945 MW capacity against itsplan target of 15,043 MW set for themby the Planning Commission.

(FE,04.01.11)

Increase in Host State’s PowerThe Union Cabinet approved a

key proposal by the Power Ministryto increase the share of host states to50 from 15 percent, in allocation ofelectricity generated from thermalpower plants. It also approved acrucial amendment to the NationalTariff Policy to boost green energygeneration and help reduce thecountry’s carbon footprint.

While the Central Government’squota is kept same at 15 percent, theshare of beneficiary states in theregion has been decreased from 75 to35 percent. Enhancement of allocationto 50 percent to the home state willhelp in developing power projects andincreasing generation in the state.

(BS, 07.01.11)

Under-recoveries Hit PowerAccording to Montek Singh

Ahluwalia, Deputy Chairman ofPlanning Commission, under-recoveries of the state government-controlled power distribution utilities(discoms) may impact the stability ofthe entire power sector in the country.

Preliminary estimates, by the PlanCommission and the last FinanceCommission, suggest that the discomsare losing annual revenue between

R50000-60000 crore which is notpossible for the system to bear for along time. The Commission hasalready appointed a high-levelcommittee for detailed assessment ofthe scenario and suggest remedialmeasures. (BL, 05.02.11)

New Power TransmissionA new inter-State transmission

charge norm is in the offing, whichcould make it relatively cheaper forupcoming power projects, especiallylarge, inter-State projects, to wheel thegenerated electricity to customersacross regions.

The Central Electricity RegulatoryCommission is paving the way for theimplementation of the new ‘Point ofConnection’ model, which will replacethe current ‘Regional Postage Stamp’method that is followed for calculatinginter-State transmission charges andlosses.

The new regulation on ‘sharing ofinter-State transmission charges andlosses’ mainly aims at developing auniform transmission charge sharingmechanism among grid constituentsand avoiding ‘pancaking’ oftransmission charges for powertransmitted across regions, as is beingexperienced under the current(postage stamp) regime. (BL, 29.03.11)

Power to Get Tax Holiday BoostThe government is likely to give a

breather to the power sector byextending the tax holiday for thesector by 2012. The move will benefitpower projects, including ultra mega

ones (UMPPs) and transmissionprojects, that are slated to be awardedin the remaining period of the 11th Plan(2007-12).

The power sector currently getstax break under Section 80-IA of theIncome Tax Act. The sop ends onMarch 31, 2011 making projects whichare awarded after the cut-off dateineligible for the benefit. Under theprovisions of the section, powerprojects get deduction of up to 100percent profit for any ten consecutiveyears out of first 15 years ofcommissioning of a project.

The biggest beneficiary of theextension will be state-owned NTPC,while projects of companies such asSterlite, Jindal Power, Lanco, GMRand other state utilities could alsoavail of the tax sops. (FE, 20.02.11)

Rates to Spike in MaharashtraElectricity bills could go up as the

government has decided to levy anadditional duty and tax on electricityproduced and sold in Maharashtra.While the levy would be applicable topower generation and distributioncompanies, it could be passed on tothe consumer.

The fund collected through the levywould be used to improveinfrastructural facilities in cities andvillages where power generation plantshave been set up. State finance ministerAjit Pawar made the announcementregarding the new levy in his budgetspeech. The finance minister used theexample of Chandrapur to justify themove. (ToI, 24.03.11)

POWER NTPC to Give Power to Host States

The Centre has approved a

policy for allocation of

electricity from new thermal

power projects being set up by

public sector firms such as

NTPC Ltd. Under this, the

companies will have to

allocate a much higher share

of electricity to States where

future plants are located.

The new policy earmarks 50 percent of the electricity generated from

these stations to the home State for 10 years starting April 2012, up from a

maximum of just over 30 percent currently. The move will come as a big

boost to the coal-bearing States of Orissa, Chhattisgarh, Madhya Pradesh

and Jharkhand, where a number of projects are slated to come up in the near

future. (www.energybusiness.in, 27.01.11)

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SBI to Merge 5 SubsidiariesState Bank of India (SBI) proposes

to merge its five remaining subsidiarieswith itself over the next 12-18 months.SBI said before the ParliamentaryStanding Committee on Finance thatthe consolidation exercise has beensystemically planned as part of alogical step to bring in economies ofscale, reduce administrativeoverheads, redeploy and channelisetrained manpower to businessdevelopment and, in the process, alsoreduce avoidable competition fromdifferent arms of the same group.

While the bank had alreadymerged two subsidiaries, it will needapproval of government for the nextfive. (ToI, 23.02.11)

Public Banks may exit RRBsPublic sector banks can exit if they

are not keen on infusing more capitalin regional rural banks (RRBs) theyhave sponsored. The government isexamining the report in consultationwith the Central Bank, the ReserveBank of India and National Bank forAgriculture and Rural Development(NABARD), the regulators for the 82RRBs in the country to strengthenthem.

The government could allow someother financial institution or the publicat large to pick up the stakes of thepromoting banks. The country’slargest lender, SBI, alone sponsors 17RRBs.

Roping in any other financialinstitution or tapping the capitalmarkets is the only option left forRRBs if they want to stay in the field.There is competition between theRRB and sponsoring bank as bothhave branches in same areas.

(ET, 19.01.11)

‘Study Group’ on Black MoneyTo tackle the issue of black money

in a proactive manner, the FinanceMinistry has set up a ‘study group’to improve voluntary compliance andaddress the issue of revenue leakagesby suggesting appropriate measuresto motivate tax evaders to disclosetheir unaccounted income.

The study group will devise waysto increase direct tax collections andsuggest measures to curb tax evasioneffectively in the changing businessscenario, which includes curbing thegeneration of black money. It willstudy the barriers to compliance asan ongoing programme and thecompliance costs with respect todifferent categories of taxpayers.

(TH, 31.01.11)

RBI’s Focus on Inflation ControlGovernment bonds fell amid fears

of sharper-than-expected monetarytightening by the Reserve Bank ofIndia (RBI). The market has so farfactored in a 25-basis point increasein key policy rates in industrialproduction figures. The index ofindustrial production grew by ameagre 2.7 percent.

RBI Governor D Subbarao saidthat the Central Bank has to calibrate

its policy to manage the price rise whilealso supporting economic recovery.He stated, “We have recovered fromthe crisis sooner than other countries,but inflation also caught up sooner”.Though supply-side pressures haveimpacted food prices more, the CentralBank is concerned this could lead tomore generalised inflation. RBI hasprojected 5.5 percent inflation forMarch 2011. (BS, 18.01.11)

Banking Licence GuidelinesThe RBI will announce draft

guidelines for giving new bankinglicences. In the Budget 2011-12,Finance Minister Pranab Mukherjeehad said the RBI plans to issueguidelines for the grant of new bankinglicences before the close of 2011.

The RBI also sought to know“whether industrial and businesshouses could be allowed to promotebanks.” Furthermore, it soughtstakeholders’ views on whetherNBFCs should be allowed to convertinto or promote banks.

At present, India has 26 publicsector banks, seven new privatesector banks, 15 old private sectorbanks, 31 foreign banks, 86 regionalrural banks, 4 local area banks, 1,721urban cooperative banks, 31 statecooperative banks and 371 districtcentral cooperative banks.

(ET, 28.03.11)

Wealth RegulationNew rules are underway for the

estimated US$1tr wealth managementindustry and banking regulator RBIand capital market watchdog SEBImay be made jointly responsible forimplementing these regulations andkeeping a watch for any violations.

While RBI and SEBI would beprimarily responsible for complianceof the rules, help would be sought fromother regulators, namely ForwardMarkets Commission, InsuranceRegulatory and DevelopmentAuthority and Pension FundRegulatory and DevelopmentAuthority Bill, whenever needed.

The new set of rules is beingframed under the aegis of FinancialStability and Development Council(FSDC), a high-level regulatory bodychaired by the finance minister.

(ET, 07.03.11)

MIXED BAG

ResourceFlows into

Infrastructure

The Centre intends to come up

with a �comprehensive policy� to

improve resource flows to the

infrastructure sector. The Finance

Minister highlighted that a major share

of public resources � about 48.5

percent of gross budgetary support to

the Central Plan � has been allocated

for the development of infrastructure.

The government�s approach has

been to attract and leverage private

investment in infrastructure to meet

the growing requirement of the

economy. All three sectors �

agriculture, industry and services �

are contributing to consolidation of

growth. Tax revenues have grown at

an exceptional rate and there has

been a strong rebound in exports.

(BL, 05.03.11)

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I t was a pleasantsurprise that there

were no loud protestswhen airfares on manydomestic sectors almostdoubled. There wasadded relief, too, as therewas no governmentintervention either todiscipline the airlines. TheDelhi-Mumbai economyclass one-way fare for anevening flight shot up toR 1 4 , 8 0 0 - 1 6 , 4 0 0 ,compared to the normalfare of R5,500-6,000.What happened? Whydidn’t the aam-aadmigovernment of the United Progressive Alliance (UPA) issuea warning or two to the airlines for what it should haveseen as a ploy by them to pocket super-profits?

Remember that the UPA government did just that lastDiwali in November 2010, when the airlines decided toraise fares by almost 300 percent taking advantage of theholiday rush. The Civil Aviation Ministry had issued astern warning to the airlines asking them to limit the fareincrease on such occasions within a pre-determined slab.The airlines’ argument that fares tended to go upautomatically just before major festival holidays,particularly for those purchasing tickets at the last minute,failed to impress the government.

To be sure, the increase in fares during the Holi weekendremained within the government-stipulated cap. Here thenwas a government that seemed to be tying itself in knotsover its own mindless game. Having first tinkered withmarket-determined prices and imposed a fare cap that toofor a service that a tiny percentage of well-heeled Indiansconsume, it had no reason to intervene again since theairlines raised fares within the permissible range, nevermind that the increase was more than 100 percent.

There was another governance failure that stood out instark contrast. The airlines experienced a surge in the Holiweekend booking rush also because the ongoing Jatagitation had paralysed train services in large parts ofnorthern and western India leading to the cancellation ofmany trains. The absence of government intervention indefusing the Jat agitation also contributed to the airlinefare spike.

There is, of course, a larger problem in the way thegovernment has been dealing with airline fares. The belief

* Columnist, Business Standard. Abridged from an article that appeared in The Business Standard, on March 23, 2011.

I N F R A � A V I A T I O N W A T C H

Regulatory Turbulence for Airlines– A K Bhattacharya*

that airline fares should besubject to governmentdirectives has no rationaljustification. Yes, airlinefares too need to beregulated, so that airlinesdo not make super-profitsby taking advantage ofsudden shortages inairline seats availability,but that regulation shouldbe done by a regulator, andnot by the government.

Those who had heaved asigh of relief at theformation of the AirportsEconomic Regulatory

Authority of India (AERA), in the belief that over time thisbody would expand its role and bring under its ambit theregulation of airfares as well are in for a majordisappointment. The government proposes to create aseparate regulatory authority to oversee airfares, whileAERA would continue to deal with only airports regulation.Indeed, the government’s thinking is that there should bea new apex level regulatory body supervising the functionsof the two regulators – one for airports and the other forairlines. Why the government has made such elaborateplans to create multiple regulatory authorities within thesame sector defies all logic and common sense.

Consider the following. The power sector has three distinctoperations with different functions – generation,transmission and distributions. Now imagine a situationwhere instead of the Central Electricity RegulatoryCommission as at present, there would be three differentregulators – each one of them looking after the threesegments of the power sector. What would be theadvantage of such a system? None, except that more jobswould be created and more retiring bureaucrats will feelmore secure about landing themselves with decent jobswith the perquisites and pay that are not lower than thelast pay drawn by them prior to their retirement, thanks tothe Sixth Pay Commission recommendations.

If only the government began seeing beyond the myopicinterests of its bureaucrats, the civil aviation sector wouldbenefit from better governance with a proper regulatoroverseeing the airports and the airlines. There is no needto create more regulatory bodies, which can only createmore confusion and widen the governance deficit.

Creating more regulatory bodies will onlycreate more confusion and widen the

governance deficit

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I N F R A � E N E R G Y F O C U S

Electricity Sector �Impediments to Open Access

– Navneet Sharma*

* Director, CUTS Institute for Regulation and Competition. Abridged from an article that appeared in The Financial Express, onFebruary 09, 2011.

A key objective of EA 2003 was to provide ‘open access’in electricity transmission and distribution. In other

words, the Act mandates competition and choice, whichwere non-existent in the pre-EA 2003 era. Central to theemergence of a market is the provision of open access.Seven years have passed, but for a few instances of limitedsuccess (Mumbai, Karnataka etc), India’selectricity consumer is yet to have thefreedom to choose his electricity supplier.Why could not the open access provisionsbe activated so far?

Section 42, read along with other sectionsof EA 2003, is clear that the states ‘shall’introduce open access to all consumersabove one megawatt load. EA 2003mandated open access in electricitytransmission and distribution. It envisagedthat all consumers above one megawatt willbe free to source electricity from a supplier of their choice.So there remains no ambiguity whether or not to provideopen access. This was discussed in a recent brainstormingmeeting at the Planning Commission, where it emergedthat a concerted effort is needed before all the stakeholdersbuy in and open access is activated. But let me first dealwith what holds it back.

Is open access a ‘win-win’ proposition? In theory, thiswould be a win-win scenario if a distribution company (ordiscom) and the consumer both benefit from open access.But in reality, as in other sectors, there is much difficultyto persuade a monopolist/incumbent to give up itsmonopoly privileges. An oft-repeated concern by discomshas been that if large consumers shift, the discom (orutility) would suffer losses. But experience of othercountries, such as the UK, shows it is not so. Also, in

The ElectricityAct, 2003 (EA

2003) opened thepower sector tomultiple playersby providing fora power market

replete withcompetition

other sectors, for instance telecom, where consumers movefreely to another supplier, competent players withstoodsuch challenges.

That leads to another question relating to the politicaleconomy surrounding the electricity sector. In the sector,the regulatory framework includes the Ministry of Powerand the Central Electricity Regulatory Commission at theCentral level, and government departments and regulatorsat the state level, i.e. multiple bodies dealing with electricityregulation. Amidst multiple agencies and short-term andconflicting interests, the decision makers tend to succumbto local pressures and find ways to avoid open access. Aplain answer is ‘political will’, which is necessary to createa competitive electricity market.

Next comes the nitty-gritty or specific regulation of openaccess i.e. lending regulatory clarity on the terms of openaccess. For open access to be practicable, prices shouldbe broken up in components like production cost and

transmission loss cost, and also specificapplicable charges against wheeling, standby, cross subsidy etc should be determined.

A related aspect on charges is that if acategory (of consumers) is competitive, thenthe discom should not charge it the regulatedtariff but a negotiated tariff. Thus, in the caseof competitive consumers there should betwo separate agreements, one with thegenerator and the other with the distributor.

Though housing societies in urban centres,due to their bulk consumption above one

megawatt, would qualify for open access, discoms arereluctant to give them open access. Discoms claim thatsuch housing societies ‘distribute’ electricity without being‘licensees’ within the meaning of EA 2003.

Finally, the most important issue is the impact of openaccess on poor consumers. Statistics reveal that whileelectricity generation has increased about 60 percent, thehousehold access to power has increased only 10 percentin the last ten years. A question here is whether openaccess will let low-cost electricity go to poor consumers?Here again the answer flows from political economyconsiderations. Unless, regulatory intervention frees upthe low-cost electricity that is tied up with discoms, thebenefit to aam aadmi is still a distant dream.

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New CPI for InflationIndia introduced a national

Consumer Price Index (CPI) that isexpected to eventually replace theWholesale Price Index (WPI) as abenchmark for inflation. A large partof price rise is due to widening gapbetween the wholesale and retailprices.

The new index has the potentialto become the single index ofreference for inflation as it comprisesservice sector data. Central banks,across the world, rely on CPI data tomake monetary policies unlike RBIwhich depends on WPI. Data iscollected from 1,183 villages and 310towns across India for the all-IndiaCPI. (Livemint, 17.01.11)

New Manufacturing PolicyThe new draft manufacturing

policy, aimed to reduce thecompliance burden of the industrythrough self-regulation and help makeIndian industry globally competitive,will soon be placed before the Cabinet.

The Union Commerce andIndustry Minister Anand Sharma saidthat the announcement to imposeMinimum Alternate Tax on specialeconomic zones and its units came asa complete surprise and he would takeup the matter with the FinanceMinister urging him to review theimposition.

The government has proposed toset up integrated greenfield megainvestment zones to attract globalinvestment and latest technologies.

(TH, 02.03.11)

Karnataka-Gujarat Role ModelsGujarat and Karnataka are ‘role

models’ of a competent and transparentgovernment and a progressiveleadership that can attract investors inthe coming years. There are reasonswhy Essar, Torrent, Reliance, Shell,Tata, Adani and some others arethriving in Gujarat like effectivegovernance and administration,business-friendly policies, superiorcore knowledge infrastructure and anentrepreneurial culture.

In 2011, US India Business Councilfeatured such exemplary leadershipand Ron Somers, President, US IndiaBusiness Council, travelled toKarnataka and Gujarat to meet thechief ministers of both the states andthe leaders of top companies likeWipro, Infosys, IBM, Lanco, Bioconand Suzlon. (BS, 08.01.11)

India May Miss Divestment TargetIndia has fallen short of its

divestment target for 2011 and ifcurrent market conditions persist,chances are that even the next fiscalmay not be smooth sailing forgovernment share sales as politicaltensions in the Middle East and NorthAfrica and spiralling crude oil pricescontinue to haunt investors.

The government has adisinvestment target of R40,000 crorefor 2011-12. In 2010-11, the governmentgarnered nearly R22,500 crore throughshare sale of SJVN, EIL, Coal India,MOIL, Power Grid and SCI through itsdivestment programme, reflecting ashortfall of R17,500 crore. (ET, 25.03.11)

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

Hurdles for FDI InflowsOne of the key factors affecting

��investors sentiment� according to

the RBI is environment minister

Jairam Ramesh�s �environment

sensitive policies� which seem to be

driving foreign direct investment

(FDI) away from the country. The

inward FDI during April-September,

2010 stood at only about US$12.6bn

as against US$19.8bn inward flow

witnessed during the same period

last fiscal. Net FDI flows to India

declined by almost 36 percent that

period.

There are the persistent

procedural delays, land acquisition

issues and availability of quality

infrastructure. The government is also

thinking on introducing amendments

to the Land Acquisition Act and the

global forecasts suggest that net FDI

flow for emerging economies will

rise by 11 percent in 2011.(FE, 28.01.11)

Liberalise FDI Policy on JVsThe government is likely to

liberalise the FDI norms for entry of

foreign companies that have existing

joint ventures or technical

collaborations in India. The new

policy, to be implemented from

April 01, 2011 may drop the

requirement of no-objection

certificate (NOC) that foreign firms

need to set up a separate entity.

The revised version of the FDI

policy, which will be released on

March 31, is expected to do away

with Press Note 1, 2005, to bring in

the above-mentioned change. The

main rationale behind the move to

liberalise the policy is to prevent

�monopolistic tendencies of certain

domestic as well as foreign

companies�.

Besides, India is now aggressively

engaged in signing bilateral trade

agreements with several countries,

which may induce the foreign

companies to set up shop in one of

the partner countries and start

exporting the commodity into India

duty-free under a particular free trade

agreement. (BS, 15.03.11)

Indian Economy to Touch US$2tr

With the Union Budget projecting

gross domestic product (GDP)

to be R89,80,860 crore in 2011-12,

the size of India�s economy is now

poised to touch US$2tn in 2011.But

the Budget estimate, which assumes

a 14 percent growth in GDP at market

prices, is likely to be an underestimate.

If one assumes a 9 percent GDP

growth, and assumes an inflation rate

of around 7 percent, GDP at market

prices is more likely to grow at 16 percent, which would ensure that the

size of India�s GDP would be R91,38,419 crore (US$2,031bn) in 2011-12.

The pace at which the size of the economy has doubled from US$1tr-

US$2tr is impressive and when the GDP touches the second trillion in 2011-

12, the per capita GDP would be around R74,780 (US$1,662). (FE, 02.03.11)

FDI WATCH

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* Former Union Minister. Abridged from an article that appeared in The Financial Express, on January 19, 2011.

T R A D E & E C O N O M I C S � I N F E A T U R E

Rule-Based Economic Policies– Yoginder K Alagh*

From my cottage close to a naturepark, far away from Delhi, the

happenings in our Republic in recentweeks appear to reflect the Romancircus. Hapless victims, including oneofficer whose integrity I certified andwill do so again if ever called to, arethrown before the hungry lions as themedia gladiators guard the show.Sometimes the Spartacus gladiatorsare also the victims. Reasonedarguments are casualties. Institutionalresponses to some of the realproblems we face, however, are noton anybody’s agenda.

As the dust settles, it is likely that itwill be accepted that we have enoughpersons of integrity such that the rotcan be contained but that amongstthem there is unease and the ability tostrongly contest wrongdoing isweakening. This, then, is a problemand we must strengthen systems tocounter it. We also need to appreciatethat we are no longer in the era ofstrong central leadership and mustdevelop rules for more effectivecoalition regimes. A zero-corruptiontolerance rule has to be thecentrepiece but a lot can be donearound it to allow those who want tobe honest to continue to be able to doso.

On a narrower plane, rule-basedeconomic policies and frameworks ofaccountability in this context may help.The transition to a market economy,

initially reasonably smooth, was arule-based phenomenon. TheNarasimhan Committee, set up inGandhi’s time, laid down theframework. The rules were first to bringabout domestic reform and prepareIndian industry for the more generalreform expected in the early 1990s.Output, import, investment and pricecontrol was to be abolished andsubstituted by tariff, dual pricing andtax policies.

Machinery industries were placed ontariff protection instead of importcontrols. Efficient Indian industrieswith negative protection, since theirinputs were inefficient, required tariffprotection in a harmonised manner inwhat were called inverted tariffstructures, popular with developedcountries in the stimulus packagesafter meltdowns.

Apart from harmonisation, phasingrules were in place since Indianindustry was expected to face greatercompetition globally in three to fiveyears. In a well known paper, RajaChelliah estimated that around 60percent of Indian industry wasderegulated by 1989. Dual pricing forsome industries like cement waspractised as an interim measure butindustry was ensured a reasonablerate of return on long-run marginal-cost principles, which led to themodernisation or weeding out ofinefficient units.

The reforms now are far more generaland, in principle, should be moreaccepted since they should befollowing market-based rules. Thereare two flies in the ointment. First, inmany non-tradables and controlledindustries, the system of regulators,which replaced the earliermechanisms, consists of retiredbureaucrats, in many cases somewhatinnocent of economic principles andalso not always very competent. Thereis also the anomaly of the earliercontrollers later becoming regulators,who tend to be secretive, and sittingin judgement on what they werethemselves doing.

There is the more damagingphenomenon of reform beingsystematically scuttled, either bybureaucratic inertia, political meddlingor just incompetence. So, the preferredvariants of fertiliser pricing reformsuggestions were jettisoned andalternatives accepted. Again, themarket rules suggested newerproducts; balancing investments andthe expansion of capacity were put onthe back burner for years. Thisprotected inefficient units or inputsuppliers but cost the country dearly.

A degree of transparency,consistency in policy rules and adesign of reform with establishedguide posts would help clear the airand lead to the required level ofconfidence for higher growth.

This will help

clear the air

and provide the

necessary

confidence

required for

higher

investment-led

growth

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

India Most Corrupt NationIndia finds itself bracketed with

countries like Philippines andCambodia, rated as the fourth mostcorrupt nation among 16 countries ofthe Asia Pacific surveyed by leadingHong Kong-based businessconsultancy firm – The Political andEconomic Risk Consultancy Ltd(PERC). In India civil and other local-level political leaders were found morecorrupt than the national-levelpolitical leaders.

The Indian government has beenwracked by a series of scandalsinvolving the sale of telecom licenses,preparations for the CommonwealthGames, a land scam involving highlevel military officers, and improperproperty loans made by state-ownedfinancial institutions.

(www.rediff.com, 29.03.11)

Fiscal Deficit a ChallengeEven as inflation continues to

remain a concern, bringing downdeficit to the projected levels in 2011-12 and 2012-13, is a challenge for India,according to Federation of IndianChambers of Commerce andIndustry’s Economic Outlook Survey.

If the government wants tomaintain fiscal discipline in the comingyears then it must carry forward thetax reforms agenda and complete thereforms initiated in the pricing ofpetroleum products. The survey pegsthe fiscal deficit at around 5.3 percent

Infra Projects LanguishA total of 666 projects with an

investment of P1,74,000 crore werestalled in 2010 against 519 entailingan investment of P1,36,627 crore in2009, according to the 41st survey byProject Today in India.

While in the government sector,project cancellation was limited toelectricity and roadways, the privatesector saw large-scale cancellationsin refineries, steel, aluminum andelectricity. The number of projects fellby 35 percent from 2,328 to 1520 in2010. Automobiles, cement, steel andrefineries were four major sectorswhich saw record project completions.

(BL, 25.01.11)

5th Largest Consumer MarketAccording to a study ‘Consumer

2020: Reading the signs’ conductedby Deloitte Touche Tohmatsu Ltd,India is ready to become the world’sfifth largest consumer market by 2025.The convergence of economic,demographic, and technologicalforces will bring about unprecedentedchanges in consumer behaviourglobally.

With growing purchasing power,India is having a significant impact onthe global consumer market in a widerange of consumer goods. India needsto take measures that stimulateconsumer spending like liberalisingconsumer finance and improving thesocial safety net. (BL, 05.02.11)

Bits & Pieces

How Corruption Hits Growth?� A spate of scams involving politicians and

bureaucrats surface

� Opposition stalls Parliament trying to corner the

government. Decision making in the bureaucracy

slows down

� Lack of parliamentary activity causes delays in

reforms. Key decisions on FDI in insurance and

retail, land acquisition for infrastructure, direct,

indirect tax reforms and food security are held up

� Continuation of political deadlock in the near-

term could lead to investor pessimism over these

much-required reforms

� Flow of both FDIs and foreign institutional

investments could be affected

� The spending approval process for public sector

projects is slow and could be one reason why

government has failed to spend the close to P1tr

cash surplus over the last two months (ToI, 05.02.11)

Rich Gets Richer

A study undertaken by

consultancy firm McKinsey

& Co. found that, rich Indians

are getting richer, faster. In last

three years, India�s top three

income households have grown

two times faster than what was

forecasted in 2007, despite

global slowdown. It is for this

reason that the boom in sales of almost every consumer

product is visible all over. While the households in the

low income bracket, poorest of all, is higher.

Growth has disproportionately improved lives of people

at the top than the bottom and so, as a society we should

build inclusiveness in the economy. Indian households

are getting smaller and they are also getting richer because

there are more earning members per household, women

being an important category, which is boosting the

household income at a faster pace. (ET, 01.02.11)

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of the GDP and the WPI inflation rateto be at 7 percent. (BL, 26.01.11)

FDI’s Free FallFalling FDI in India in both

absolute and relative terms indicatesa lack of investor confidence. It shouldjolt politicians back to governance andbuilding on the 1991 reforms. A UNreport on FDI in 2010 makes this point.

Though global FDI flowsincreased by a percentage point in 2010,developing economies’ share jumped10 percent. For the first time ever, morethan half of global FDI travelled toemerging markets. However, FDI inflowsinto India declined by a whopping 31.5percent. (ToI, 25.01.11)

Foodgrain for Poor PilferedMore than half, 55 percent, of

foodgrains meant for the poor isdiverted and never reaches them, theEconomic Survey, 2010-11 reveals. Alarge amount of the grain is sold off ata higher price in the open market thanthe stipulated ration shop price.

The Survey points out to the extentof pilferage that occurs and why thefood security bill stands to fail ifimplemented in the current marketconditions. The current system ofhanding over cheap food to theapproximately 500,000 ration shops allover India and then requiring them tosell it at below market price to poorhouseholds leads to large leakages.

(BL, 25.02.11)


C A G R E P O R T S

Question D-6 capexThe Comptroller and Auditor

General (CAG) of India is finalising areport that questions thegovernment’s move to allow RelianceIndustries to increase its expenditurein developing the D-6 field in theKrishna-Godavari basin by overUS$6bn, significantly reducing thestate’s share of revenue from thecountry’s biggest gas field.

Despite the high expenditure, theReliance’s gas output from D-6 hasfallen to about 55mn cubic metres aday when the target was 80mn cubicmetres. The finding is likely to includean extensive account of lapses by theOil Ministry, which abandoned itsown procedures, and Reliance did notcomply with some provisions of theproduction sharing contract.

(ET, 01.02.11)

Regulators Pulled UpThe CAG rapped five regulators,

including SEBI, IRDA and PNGRB, forkeeping their surplus funds worthover R2,142 crore collected throughfee and penalty outside thegovernment accounts.

The practices by the regulatorsare in contravention of theinstructions issued by the Finance

Ministry that all ministries anddepartments of the government wouldensure that the funds of regulatorybodies are maintained in the PublicAccount. (BS, 18.03.11)

Bihar’s Fiscal Position WorsensThere was deterioration in Bihar’s

fiscal position in terms of trends in2009-2010 compared to the last twoyears, CAG report said. Although thestate maintained a revenue surplusduring these years and had alreadyachieved the 12th Finance Commissionrecommendation of eliminatingrevenue deficit, there was a decreasein the revenue surplus during theperiod under review, said the CAGreport on the state’s finances for theyear ended March 31, 2010.

The report, however, said thefiscal deficit which was well withinthree percent of the state grossdomestic product increased to 3.4percent during the year, which too waswithin the revised recommendation of3.5 percent. (ET, 30.03.11)

India’s Unused AidIndia is sitting on unused foreign

aid of over R1 lakh crore reflectinginadequate planning by ministries likeurban development, water resources

and energy. The government has paidcommitment charges of R86.11 croreduring 2009-10 in the form of penaltyfor not timely utilising the aidapproved by multilateral and bilaterallending agencies.

The CAG report has outlined 16sectors which sit on unutilised externalassistance to the tune of R1.05 lakhcrore. The sectors include urbandevelopment, roads, agriculture andrural development, water supply andsanitation and power. (BL, 18.03.11)

Gets a Say in Social AuditEntrusted with the task of

improving the social audit process inMahatma Gandhi National RuralEmployment Guarantee Act(MGNREGA) following reports ofmalpractices and corruption, the CAGrecommended to the states to set updirectorates to train auditors from civilsociety.

The audit watchdog hasrecommended this as part of the newaudit regime that is likely to scrutinisethe flow of hundreds of crores ofrupees spent on schemes under theMGNREGA. According to CAG’srecommendations, a nominee of thegovernment auditor would be presentin social audits that gram sabhas wouldconduct twice a year. (ET, 07.03.11)

Online Payment for PowerThe Tamil Nadu Generation and Distribution

Corporation (TANGEDCO) appealed to low-tensionelectricity consumers to take advantage of the onlinepayment facility to pay their electricity bills. The paymentfacility had been extended to all the parts in the State witheffect from December 2010.

Consumers having an internet banking facility throughIndian Bank, Indian Overseas Bank, ICICI Bank, Axis Bankand City Union Bank can also utilise the TANGEDCO’sonline payment facility. Steps have been taken up to includeState Bank of India, Karur Vysya Bank and Bank of Barodain the online payment services of TANGEDCO.

(TH, 19.02.11)

NHAI Opts for Online BiddingWith corruption charges flying high, the government

has decided to move to electronic bidding of highwayprojects. For the first time since its inception, the NHAIwill start e-tendering of projects from April 2011.

NHAI has approached the National Informatics Centreto build the platform for electronic bidding. The industryhas welcomed the initiative and feels this would help weedout corruption in the system. (BS, 25.03.11)

Digitised Ministries

The Centre is contemplating to bring in legislation to

make it mandatory for every Central Government

organisation and department to deliver public services

using information and communication technology (ICT).

The draft of the bill called �electronic service delivery�

is ready.

The benefits of the bill

would include efficient,

transparent and reliable

delivery of web enabled

public services in a definite

and time-bound manner to

citizens, thereby

transforming governance.

The bill would boost

the national e-governance

programme for which the

total expenditure is estimated

between R40,000 and R50,000

crore. As part of the implementation of e-governance

programme, the Central Government would set up

2,50,000 common service centres by 2012, which will

give a fillip to inclusive growth plans. (DNA, 28.03.11)

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C O R P O R A T E G O V E R N A N C E � I N F E A T U R E

Shady land deals, dodgy telecom auctions and political support for illegalmining – who in India does not know of the cosy links between politicians

and businessmen? It’s called crony capitalism. It leads to the enrichment of afew companies that enjoy state patronage, blocks competition, discouragesinnovation and ultimately hurts growth. But, while the state-business nexus inIndia can hardly be denied, the question is: how pervasive is it?

To try and answer that question, Ashoka Mody,Anusha Nath and Michael Walton analyse the profitsof companies listed on the Bombay Stock Exchangeto find out whether there is evidence of market powerand whether the benefits of growth have accrued to afew favoured firms. The period covered is the 1990sand the 2000s, the decades after economicliberalisation that saw a marked change for the betterin the Indian economy.

One way to gauge dynamism is the entry of new firms.The paper finds that while there was substantial newentry across virtually all industries in the early 1990s,this stopped in the late 1990s and did not pick up inthe 2000s despite a recovery in profits. Large businesshouses and publicly owned companies remaineddominant during the period and firms linked to business houses slightlyincreased their share of total sales in the sample from 41 percent in 1989 to 42percent in 2008.

The point the authors make, though, is that the increase in concentration in themarket in the 2000s did not have an impact on profitability. For instance, firmsin less concentrated sectors have higher profit rates. They also find that “firmsin re-concentrating sectors have similar overall profit dynamics as other firms,again supporting the view that the exercise of market power is not a generalphenomenon for this group”.

In fact, the authors say that it is the dynamic firms that do well and thus gainmarket share. The paper does find persistence in profits from year to year, butit also notes that this persistence declines when profits are averaged overlonger periods, thus pointing to “super-normal” profits being whittled awayover time. Also, while they agree that market power may have a hand in thepersistence of profits, they find that a part of the persistence reflects greaterefficiency. The profitability of business houses behaves in a similar fashion tofree-standing firms, with no evidence of greater capacity to use market powerto get more profits.

Not surprisingly, the authors say their findings present “a picture of a corporatesector that, in this period of major change, was characterised to extensivecompetitive pressures, inducing dynamism, as opposed to being typified bymarket power and entrenchment”.

Nevertheless, the authors also point out that their analysis does not take intoaccount state-corporate links that may erect policy barriers to entry, thus havingan impact on profits. But there is little doubt that for the vast majority ofcompanies, including many large ones, cut-throat competition is the norm.That should be good news for the economy.

How Pervasive is Crony Capitalism?– Ashoka Mody, Anusha Nath and Michael Walton

Extracted from the IMF Working Paperentitled, ‘Sources of Corporate Profits inIndia – Business Dynamism orAdvantages of Entrenchment?’

The article appeared in the Livemint, onJanuary 14, 2011.

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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 B R I E F S

EXPERT VOICE

Cut Stamp Duty to Curb Black MoneyPrime Minister Manmohan Singh hinted that the state

governments could reduce stamp duty to check the flow of blackmoney into the real estate sector. Both developers and consumerswill benefit from a reduction in stamp duty, a property tax. Illegalmoney is increasingly finding its way into the sector. Private realtorshave welcomed the proposed move on the ground that it wouldhelp bring transparency in transactions.

Stamp duty is a property tax, to be paid in almost every deal at aprescribed rate on the transaction value or calculations based oncircle rate, whichever is higher. It varies from state to state. Atpresent, stamp duty is charged from both consumers and developers.

(FE, 19.03.11)

‘Polluter-must-pay’ PolicySingh made clear his government’s policy on the environment-

vs-growth debate. He virtually cautioned against over-zealousnessof green lobbies. To deal with residual pollution caused, despiteregulatory efforts, Singh suggested the polluter-must-pay principleto discourage polluters and collect fund for regulating this system.

If India were able to eliminate all its greenhouse gas (GHG)emissions, it won’t make a significant difference to our climate sincethe country’s emissions account for only four percent of the globaltotal and so the countries responsible for the build-up of GHGsshould take action. (FE, 04.02.11)

20-Point Agenda on CorruptionSingh is set to outline a comprehensive agenda to make

transparency and ethics the core focus of governance at all levelsthrough a 20-point agenda. Adoption of Finlands’ model ofprocedures was also under consideration. The PM wants effectivesteps to break the corruption nexus between politicians andbureaucrats and focussed attention on making corruption a zero-tolerance zone.

The measures to curb corruption were: proper scrutiny of officialsbefore appointments, especially to critical posts, posting on websitesthe names of officials involved in corruption cases and permissionto prosecute identified cases, internal security, implementation ofthe Gram Sadak Yojana and drinking water mission, etc. (BS, 02.02.11)

Rural Jobs Scheme Cuts Spend

The Mahatma Gandhi National Rural Employment GuaranteeScheme (MGNREGS), the United Progressive Alliance

government�s flagship programme, has so far spent just 56 percentof its Budget allocation of R40,000 crore. It has recorded a fall inthe average number of workdays per household in 2011.

Government managers are asking for a 60 percentrise in allocation for the scheme in 2012. While

there was a surplus ofR7,000 crore in 2010,the surplus was doublethat amount in 2008-09. The Ministry hasattributed this hugeunspent balance to poordemand for work ratherthan to poor access to

work. (BS, 03.02.11)

No Need to Amend RTI ActUPA chairperson Sonia Gandhi-led

National Advisory Council (NAC) might haveexpressed strong reservations on thegovernment’s draft rules on Right toInformation (RTI) Act, but the CentralInformation Commission (CIC) has endorsedthe rules saying it finds nothing wrong evenwith word limit restrictions for RTIapplications.

The Commission, which is the final andcentral appellate authority for the Act, has sentits comments to the government expressingonly a single reservation on the draft rules.According to sources, the Commission haseven approved of the provision which makesit mandatory for an applicant to sum up hisrequest for information in 250 words, excludingthe address of the public information officerand the applicant. (ET, 13.02.11)

Makeover for Sugar EconomyA government panel, headed by the former

RBI Governor C Rangarajan, recommended aradical overhaul of the sugar market, includingpartial indexing of cane prices to the retail priceof the sweetener and relaxing restrictions onsetting up of sugar factories.

The measures will reduce governmentintervention, usher in competition and makeat least a section of farmers happy with theruling UPA. The government should move toa uniform formula that will be based on aweighted average of the retail price of sugaracross the country.

It would be best for state governments toprocure sugar from mills through an opentender, rather than have fixed quotas. The panelalso suggested that the current controls onexport and import of sugar should remain.

(Livemint, 05.01.11)

Stop Food Wastage!The government is discussing if it should

regulate how much food can be consumed atweddings and other social events. Thethinking comes as the government is trying toreconcile with the varying view points on theproposed legislation on food security, and asthe ruling Congress-led UPA attempts tosupport its food entitlement programme forthe poor.

The Department of Food is of the viewthat if it improves the efficiency of PDS,reduces leakage in the pre-harvest, storageand transportation stages and cuts wastage,the government would be able to providefoodgrain as a legal entitlement to the poor.The government spends R55,578 crore a yearon food subsidies. (Livemint, 22.03.11) T

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* Founder, Shetkari Sangatana and Member, Rajya Sabha.The article appeared in The Hindu Business Line, onFebruary 23, 2011.

The discordance of views between the NationalAdvisory Council and the Prime Minister’s Expert

Committee on Food Security was ironed out by acompromise between contending parties on the quantumand level of subsidies for food security.

But there was no public debate on the larger issuesinvolved in food security, like feasibility of the PDS.

India has often let go such great opportunities, avoidingopen debates on matters of vital public importance. Weavoided an open debate on the Nehruvian socialistmisadventure, for which we suffered some four decades.This is not the first time that the PDS has been a subjectof intense controversy. The first time this happened waswhen Rafi Ahmed Kidwai was Food and AgricultureMinister in Nehru’s Cabinet. Finally, the Food Corporationof India won the day by prevailing upon the Oppositionto maintain the status quo and keep the PDS going, alongwith the paraphernalia of food procurement.

PDS and PilferageThe logic of those who oppose the PDS is irrefutable.PDS necessarily involves a dual pricing mechanism whichis opposed to the idea of a unified market. Properlyimplemented, PDS would take away almost 70 percent ofthe foodgrain market.

The PDS is a white elephant, and the foodgrain marketcan hardly hope to bear such a burden. In today’ssituation, that kind of dual pricing will not be acceptableto the WTO.

Rationing has been in existence for long, long time. Therehas been a continual debate on whether a free marketsystem works better than a controlled PDS with severallayers of inspection.

The recent case of Lt. Col. Sahani has clearly brought outthe impossibility of a well-regulated rationing systemexisting even under military rule.

The PDS, by its nature, offers great opportunities forpilferage.

The PMO will find it impossible to maintain its clean imagein the event of another multi-million scam in the domainof PDS, if it continues to insist on a system of food securityimplemented through a rationing system.

Wrong Approach to Food Security– Sharad Joshi*

Coupons would work better than public distribution system (PDS) as a foodsecurity mechanism. It is not surprising that the largest support for PDS comes

from regions where pilferage is maximum

The PDS has failed beyond redemption and any plans toensure food security through the PDS is doomed todisaster. The largest support for PDS comes from regionswhere the proportion of pilferage is maximum.

Redundant InstitutionsThe present system of agricultural marketing in India isbased on three pillars. The first is the Commission forAgricultural Costs and Prices (CACP) that establishessome kind of estimates of the cost of cultivation that thefarmers must recover. In fact, its estimates come closer toa running average of last three years’ prices, according toan expert committee. The Food Corporation of India (FCI),the second pillar, is only nominally responsible for theprices it pays for the foodgrains.

It is mainly in charge of foodgrain procurement andpumping the foodgrains procured into the rationingsystem. The CACP has become redundant since we nowhave, in futures markets, a much better estimate of pricesthat farmers can expect at harvest time.

The rationing system, the third pillar, has become a targetof criticism because of the large holes that are built into it.Most of the defects of the rationing system can beremedied by the system of food coupons that could belinked with the UID.

This is once again an excellent opportunity to have a publicdebate on all these issues. It appears that we will fritteraway the opportunity.

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


Bill on Forward ContractsCommodity-markets regulator

Forward Markets Commission expectsthe Parliamentary StandingCommittee’s report on ForwardContracts Regulation Amendment Bill2010 to be taken up in the Budgetsession. The Bill has undergonevarious changes since it was firstintroduced in 1998 with three standingcommittees submitting their reports.

The government seems moreconvinced now that the futurestrading in commodities were notstoking up inflation. Competition inthe commodity exchange space willintensify, as there are five nationalexchanges currently in operation. Thenumber of commodity exchanges hadbeen changed to eight by thegovernment and FMC has ruled outfurther margin hike in guargum futurescontract to arrest hike in prices.

(BL, 25.01.11)

Nod for Press RegistrationThe Union Cabinet decided to

replace the old Press and Registrationof Books Act, 1867, with a new lawwhich will give statutory backing toguidelines and executive ordersissued, from time to time, on issuessuch as the FDI limit and facsimileeditions, and scientific, technical andother specialised journals.

It will also have a provision to barthose convicted under the UnlawfulActivities [Prevention] Act from

P A R L I A M E N T A R Y R O U N D U P � N E W S B R I E F S

bringing out publications, andprevent blocking of titles. The titleowners would have to maintain theperiodicity of the publication andsubmit annual statements on matterslike circulation figures. The Bill wouldalso set time frames for approval ofnew titles and cover Internet editionsof newspapers. (TH, 11.02.11)

Govt Okays Banking BillThe Union Cabinet gave its

approval for introduction of a BankingLaws Amendment Bill 2011 in theParliament. This Bill seeks to amongother things lift the 10 percent votingrights cap in private sector banks andpave the way for the RBI to give someadditional banking licences to privatesector players.

The proposed Bill will seek toamend the Banking Regulation Act,1949, so as to remove the votingrights cap for private sector banks.The legislative intent will be to makevoting rights commensurate witheconomic ownership. (BL, 03.03.11)

Second go at PensionsA Bill to regulate the pensions

business introduced in the Parliamentby the UPA government set aprecedent by keeping the policydecision on foreign investment outsidethe purview of the legislation. Themove insulates it from the kind ofpolitical opposition that has checkedforeign investment in insurance.

The Bill said the foreign investmentpolicy for the pension sector wouldbe determined and notified outside thelegislation under the Foreign ExchangeManagement Act. The UPA’s attemptto increase the foreign investment limitin insurance firms from the current 26to 49 percent has been unsuccessfulso far on account of politicalopposition to the legislation.

(Livemint, 25.03.11)

Academic Depository on CardsThe Union Cabinet cleared a Bill

that seeks to create a national databaseof academic qualifications in DMATformat, which will authenticate andreissue certificates. The NationalAcademic Depository Bill 2011 willnow be tabled in Parliament.

The database will be establishedin an electronic format by an identifiedregistered depository, with allinstitutes, including school boards,the Indian Institutes of Technology,the National Institutes of Technologyand polytechnics from different Stateshaving linkages to the depository.

The database will help theadministration effectively deal withforged certificates and fake degreerackets, and enable online verificationand easy retrieval of particulars ofacademic qualifications. (TH, 23.03.11)

Food Security Near ReadyUnion Finance Minister Pranab

Mukherjee announced that theNational Food Security Bill (NFSB) willbe introduced in the Parliament duringthe course of 2011. Presenting theUnion Budget 2011-12 in the LokSabha, Mukherjee said that thegovernment is close to finalisation ofthis bill after detailed consultationswith all stakeholders including stategovernments.

Referring to the government’sschemes of Right to Work for ruralpeople, Right to Information and Rightto Education, Mukherjee said that thegovernment has engineered a majordirectional change in public policy byits focus on inclusive development.

The Finance Minister said that theallocation for the Social Sector in 2011-12 is being proposed to be R1, 60,887crore, which is an increase of 17 percentover current year.

(www.andhranews.net; 28.02.11)

GST to Boost Tax Revenues

State governments will enjoy virtual veto power on matters concerning

the proposed goods and services tax, with the Centre ceding ground to

opposition-ruled states on the Constitutional Amendment Bill in an attempt

to build consensus in Parliament.

The legislation

stipulates that every

decision of the goods and

services council, a joint

decision making body of

states and Centre, must be

supported by all the

members present, giving

every state the power to

block a proposal.

The proposed GST council will have Union finance minister, minister

of state for revenue and finance ministers or anyone designated by the

states as members. The council will decide on all the key issues concerning

GST including the taxes that will be subsumed in GST, goods and services

that will attract this levy, threshold limit, and rates of tax. (ET, 23.03.11)

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(CRI) at Kasauli, the Pasteur Instituteof India (PII) at Coonoor and the BCGVaccine Laboratory at Chennai.

(TH, 05.03.11)

Drugs to Heal Rural HealthcareIn what would come as a shot in

the arm for rural healthcare, thegovernment is planning to form a chainof over 8,000 drug retail outlets spreadacross the length and breadth of thecountry to take affordable medicineto the hinterlands. The plan is to setup or contract one drugstore in everyblock in addition to about four-fivedrug outlets in all districtheadquarters. India has 640 districtsand 6,000 blocks.

The government aims to have atleast one warehouse in each district,centralise the drug procurement at thestate level while decentralising thedrug distribution system. The idea isto create a Drug Supply LogisticsCorporation, under which national andstate level utilities would be set up toensure transparency in provisioningof adequate, low cost, generic drugs.

(FE, 14.03.11)

Taskforce to Support PharmaThe Union Ministry of Health &

Family Welfare constituted a taskforce to evolve a long-term strategyfor addressing the issues faced by theIndian pharmaceutical industry.

The task force would evolve ashort, medium and long-term policy

Healthcare Needs ‘Lifeline’With a bed ratio of 0.77 per 1,000

population and doctor-populationratio of 0.6:1,000, the healthcareindustry in the country wants animmediate lifeline to tide over the everincreasing demand-supply gap. Thelifeline should include a 10-year taxholiday, infrastructure status andwaiver of duties on life-saving drugsand key equipment.

The industry needed a stimuluspackage akin to the one given to theinfrastructure and informationtechnology industry. The governmentneeds to create a policy environmentthat encourages banks and financialinstitutions to lend to hospitalprojects. (BL, 24.02.11)

Closure of Vaccines UnjustifiedTaking a critical view of the manner

in which the manufacturing licencesof three public-sector vaccineproducing units were suspended, aParliamentary panel said it wasabundantly clear that the decision wasbased on a major misconception anddue to the misinterpretation of certainunclear signals in the communicationfrom the World Health Organisation(WHO).

A prudent step that was blatantlymissed by the Ministry of Health andFamily Welfare was determining, at theoutset, the WHO’s exact position inthis regard. The three units in questionare the Central Research Institute

Perhaps the single worst idea in 2011�s budget is to slap a five percent servicetax on healthcare, which will put affordable medical treatment further beyond

the reach of the common man. It is unfortunate that the contribution of thehealthcare sector to the overall growth and development of the economy is grosslyunderestimated in India.

The public healthcare infrastructure in the country hardly inspires confidence.India has just 90 beds per 1,00,000 people as opposed to a world average of 270beds. There are only 60 doctors and 130 nurses per 1,00,000 people againstworld averages of 140 and 280 respectively. Around 80 percent of Indians financetheir health bills from their own pockets. With government hospitals and clinicspoorly resourced, the private healthcare sector is crucial to providing medicalfacilities to the masses.

If the proposed tax is enforced, hospitals will have no other option but topass on the burden to patients. With rural healthcare already in a shambles, thetax may disincentivise poor patients from seeking formal medical care.

The budgetary allocation for various national disease programmes has alsobeen slashed by 14 percent over the last two years. Instead of burdening thesector with extra taxes it needs to declare healthcare an infrastructure industry.This will enable the sector to attract greater investment and bring quality medicalservices to the masses. (ToI, 07.03.11)

to make India the hub of drugdiscovery, research and development.It would come up with strategies tosupport the interests of the Indianpharmaceutical industry in issuesrelated to Intellectual Property Rightsand recommend strategies tocapitalise on the opportunity ofUS$60-US$80bn drugs going off-patent over the next five years.

It would suggest policy measuresto promote indigenous production ofbulk drugs, prevent take-over of theindustry by multinational companies,promote generic drugs andrecommend measures to ensureadequate availability of quality genericdrugs at affordable prices.

(TH, 17.03.11)

SMS-enabled Pill AuthenticationSoon, you will be able to know

whether the drug is genuine or not bysimply sending an SMS from yourmobile, thanks to a new initiative bythe Drug Controller General of India.

A unique identification numberwould be introduced for each drug.This will be printed on the label clearlyto enable a common user to identifyit. If one has a doubt on theauthenticity of the drug either becauseof its different taste/shape or reaction,one can immediately SMS themanufacturer for a confirmation.

The proposed system is expectedto protect a patient from serious risksof consuming spurious drugs.

(BL, 06.03.11)

A Bitter Pill

Proposed service taxon healthcare iscounterproductive

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B-schools v. AICTEAt least five B-schools in Delhi and Mumbai

are in discussion with others to form a consortiumand approach the Bombay or Delhi High Court toeither seek an interim injunction or reversal of theAll India Council for Technical Education(AICTE) guidelines. Over 200 B-schools arescheduled to meet in Delhi to discuss the issueof diktat on admissions.

In December 2010, AICTE issued guidelineson post-graduate diploma in management(PGDM) courses. Among others, the one whichis being strongly opposed by B-schools is thatadmission to all PGDM courses must be donethrough common entrance tests such as theCommon Admission Test, Management AptitudeTest or examinations conducted by stategovernments. (BS, 03.02.11)

Bill to Curb Fraud in EducationThe Prohibition of Unfair Practices in

Technical Educational Institutions, MedicalEducational Institutions and Universities Bill, 2010provides for the prohibition of certain unfairpractices in technical educational institutions anduniversities and protects the interests of studentsadmitted or seeking admission like the refusal toreturn or withhold, degrees, diplomas or refundfees, and charges a hefty penalty for misleadingadvertisements, while making the demanding ofcapitation fee a cognisable offence.

The HRD Ministry has asked the public sectorenterprise, the Educational Consultants India Ltdto give a project report on the maintenance andupdating of a web page that could be dedicatedto students abroad. (TH, 03.02.11)

RBI Norms for MicrofinanceA RBI panel has recommended

stringent regulations for microfinanceinstitutions (MFIs) in order to getthem do what they were originally set-up for-provide easy loans to the poorfor income generation.

The recommendations, if acceptedwill temper the growth of MFIs as itrestricts loan size and end-use. It willalso compress the margins of MFIlenders because of caps on lendingrates and competition from banks.

The report of the RBI board sub-committee also threw a lifeline to theMFI sector by allowing banks to relaxloan repayment schedules of MFIswhich pushed up the share price ofSKS Microfinance by six percent.

(ToI, 20.01.11)

Lack of Political WillHampers RTE

Implementation

A year after the implementation of the Right to Education

(RTE) Act, the dream of universal education still remains

a distant reality for many children due to the lack of political

will in the states. According to the National Commission for

Protection of Child Rights (NCPCR), the chief monitoring

body of the Act�s implementation, only 13 states have notified

their state rules.

A report taking stock of implementation of RTE in India

said that while the NCPCR has been mandated with

monitoring the

implementation of

the Act, the body

lacks the capacity to

do justice. The

school management

committees are the

first line complaint

mechanisms under

the RTE Act which

have not been

formed in most

states. This leaves parents and children without a visible place

to go if their educational rights are violated.

The Right of Children to Free and Compulsory Education

Act came into force from April 01, 2010 under which RTE

will be accorded the same legal status as the right to life as

provided by the Indian Constitution. Every child in the age

group of 6-14 years will be provided eight years of elementary

education in an age appropriate classroom in the vicinity of

his/her neighbourhood. (www.inewsone.com, 31.03.11)

MFI Act stays in AndhraThe Andhra Pradesh

government does not intend towithdraw the AP Micro FinanceInstitutions Act, even if the RBIaccepts the recommendations ofthe Malegam committee on thesubject.

Rural Development PrincipalSecretary R Subrahmanyam saidthat the proposal of RBI supervisionis unlikely to be effective since theydo not have the machinery to dosuch a task and that the interestshould be calculated on adiminishing balance. Thegovernment will not accept anyrecommendations that do noteffectively protect the interests ofSHGs and the poor. (BS, 22.01.11)

Regulator to Deal with MFIsThe government is actively

considering establishing a regulatoryframework to deal with malpractices ofMFIs, accused of charging exorbitantlyhigh interest rates and using unethicalloan recovery practices.

Shashikant Sharma, Secretary,Financial Sector in the Ministry of Financesaid that microfinance is an importantplank in the government’s agenda forfinancial inclusion. However, ‘the suddenand rapid growth of MFIs has given riseto lending malpractices by some MFIs’.

A strong and effective regulation ofthe sector is therefore imperative to putan end to undesirable practices and putthe sector on the path of providinginclusive growth.

(www.smetimes.tradeindia.com, 16.03.11)

MICRO FINANCE

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C O M P E T I T I O N I N S I G H T � N E W S B R I E F S

Car Makers under ScannerInternational car makers, Honda,

Hyundai and Volkswagen, have comeunder the scanner of the CompetitionCommission of India (CCI) forabusing their dominant marketposition by selling auto parts tocustomers at high prices.

The CCI has asked its DirectorGeneral (Investigations) to probe aconsumer’s complaint against the carmakers, who allegedly abuse theirdominant position by makingavailable spare parts only throughtheir authorised dealers, who in turnsell them on high rates.

Normally, auto spare parts fromIndian car makers are available withany retailer, not necessarilyauthorised, but the case is not thesame with international car makers.

(ET, 14.03.11)

IRDA Out of CCI’s PurviewInsurance regulator could seek

immunity from the competitionwatchdog’s authority on mergers inthe sector, taking a cue from the RBI,which ensured that anti-trust laws willnot come in the way of consolidationin the banking industry.

A proposal from the insurancewatchdog is likely to find sympathetichearing in the government. There are23 life insurance companies and 22non-life insurers in India. Industryexperts opine this is far too many andsee consolidation as inevitable.

The government had notified themuch-awaited merger proposalsunder the Competition Act to bebrought into force in June 2011. Butthe government accepted RBI’sposition that all aspects of mergersand acquisitions in the bankingsector should be regulated by it andapproved necessary changes to theBanking Regulation Act. (ET, 08.03.11)

CIL Moves CCI Against CartelState-owned Coal India has

moved the competition watchdog CCIagainst explosive manufacturers,alleging that the players are forminga cartel while quoting bids floated bythe coal PSU, thereby, killing its rightto procure the product at a fair price.

Coal India’s complaint comeswithin months of a similar complaint

filed by the Explosives ManufacturersAssociation of India (EMAI) that CILwas procuring 20-22 percent of itsrequirement from a single explosivesmanufacturer without inviting bids.

CIL, which accounts for around85 percent of the coal produced in thecountry, needs explosives to removethe soil layer covering coal depositsin mines. (BS, 20.02.11)

Onion, Cement Prices HikeThe CCI, constituted to promote

consumer welfare through faircompetition in markets, has receivedvarious complaints pertaining to thesudden rise in the prices of cementand onions.

The CCI cannot control the pricesor inflation and it is not even its duty.But it can check that there is healthycompetition in the market to safeguardthe interests of consumers. The CCIhave an investigation wing that carriesout probe and issued notices to theparty concerned.

After collecting the facts and dataand hearing both parties, theinvestigation officer decides aboutthe guilt. Then a final notice is issuedand penalty is imposed.

(www.sify.com;21.02.11)

Banks Face Heat Over LoansThe RBI expressed its displeasure

with a section of banks levying highprepayment penalty on foreclosure ofhousing loans. The Central Bank isalso weighing options to tell banks toease the burden on borrowers willingto prepay the loan fully, even as theCCI finds such penalty legally valid.

This issue has attracted absorbingdebate after the CCI’s ruling thatimposing penalty for pre-closure ofhome loans is in tune with the existinglaws. The commission has, in fact, setaside its investigation wing’sobservations that such clauses wereanticompetitive in nature and hencecontravention of some sections of theCompetition Act. (ET, 02.02.11)

CCI to Check Malpractices in BizThe CCI plans to take stringent

action against the business outfitsengaged in malpractices thatundermine the interests of theconsumers. Sectors like real estate,

entertainment, cement, petroleum,steel, travel industry, healthcare andeducation are on CCI’s radar.

CCI Chairman Dharender Kumarsaid CCI has settled 40 of the 150cases received since its inception,with far-reaching implications forbusiness, industry and the film world.It is now fully geared to play itsstipulated role as an effectiveinstrument in accelerating economicgrowth through the various spin-offeffects of competition in the economyand ensuring the markets work for thebenefit of the common man.

(BS, 22.02.11)

CCI to ApproveBig M&As

The CCI has been empowered to

scrutinise large merger and

acquisition (M&A) deals and then

either approve or reject them. In a

much-awaited move, the Ministry of

Corporate Affairs has notified the

relevant provisions of competition

law that will give the CCI powers to

examine corporate deals beyond a

certain value.

The Ministry has notified sections

5 and 6 of the Competition Act. The

notification will be put up on the

Ministry�s website soon. The

provisions will be effective from June

2011. According to the Act,

companies involved in M&As should

notify CCI about proposed deals as

long as the combined annual

revenue of the individual companies

is at least R3,000 crore. (ET, 05.03.11)

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In fact, the production of onions didnot fall below last year’s production.

Yet, due to vagaries of weather likeheavy rains, some of the onion cropwas affected. This led to tradersencashing the situation by raisingprices beyond normal increases. Thegovernment got into action bybanning exports and raising imports,including phlegmatic imports fromPakistan. Furthermore, income taxraids were conducted on traders, andthe Competition Commission of Indiaswung into action to investigatealleged cartelising behaviour oftraders. Reportedly, income tax raidsdid not yield any evidence of collusionor any other misdemeanour. Tradershowled, and the raids stopped whilenew arrivals brought down the pricesby and by.

The allegation that onion merchantswere colluding does not hold muchwater. Existing high onion prices maynot necessarily be the result ofcollusion among traders, which isnecessary to prove a violation underour competition law. The simultaneousincrease in the prices of onion acrossIndia is a phenomenon known as ‘priceparallelism’. Price parallelism is amirroring effect where tradersindependently pursue their ‘unilateralnon-cooperative best response’ inview of what other rivals are doing.Therefore, there is neither an explicitagreement nor a tacit understandingamong the traders.

In a case in the US – Interstate Circuit,Inc vs US (1939) – the court acceptedthat collusion may be inferred fromcircumstantial evidence but warnedagainst going too far. In a famousphrase, the US court argued that“conscious parallelism has not yet read

onions by traders. As pergovernment’s own version, price riseis due to hoarding and the countryhad enough stocks of onion. Further,overall impact of unseasonal rains ononion prices does not justify theabnormal prices either, as only about20 percent of the crop was damaged.On the other hand, economic analystshold poor agricultural productivity,transportation and inadequateinvestment in agriculture asresponsible for the crisis.

Looking at the situation from variousangles, one could see that surely therewas some artificial shortage in themarket along with other factorsaffecting onion price. This furtheraggravated the onion crisis. If seenfrom a common man’s point of view, itonly demonstrates a governancefailure because onion is one of themost essential food items. Also, thespillover effect of high onion pricesto other food products cannot bedenied.

The government had very fewavailable remedies to check this crisisimmediately. The most effective toolis the Essential Commodities Act,1955, which can be invoked by variousstates to check hoarding and black-marketing. In the long run, thegovernment needs to invest more ongrowing essential food items such asonion. These included tightening theenforcement mechanism and resortingto imports while regulating exportsmuch before the crisis could havedeepened. The same can happen forother commodities as well, andhopefully the government can startplanning well in advance, by takingproactive measures rather thanindulging in a reactive manner.

CCI Needs to Think Out of the Box– Pradeep S Mehta*

Food price inflation in India is not an isolated conundrum. The same can be witnessed inmany other countries as part of a global phenomenon. Without going deeper into thisphenomenon, let us review the simple case of the recent onion price rise crisis. It is a

sensitive issue as the onion is a staple food item for Indians. In the past, the issue has ledto downfall of governments

* Secretary General, CUTS. Vikas Kathuria of CUTS contributed to this article. Abridged from an article that appeared in TheFinancial Express, on March 21, 2011.

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conspiracy out of the Sherman Actentirely”. In short, parallel businessbehaviour by itself does notconstitute a Sherman Act offence.

Even in India the position on priceparallelism and collusion is the same.In ITC Ltd v MRTP Commission[(1999) 46 Comp Cases 619], it washeld that three essential factors haveto be identified to establish theexistence of a cartel, namelyagreement by way of concertedaction suggesting conspiracy, thefixing of prices, and the intent to gaina monopoly or restrict/eliminatecompetition.

There have been instances where theMRTP Commission (the formercompetition authority) has tried toinvestigate cartels on suspicion of pricerises or submission of collusive tendersin various industries such as tyre,sugar, yarn, plywood, cement, etc.However, they were not successful inproving the existence of a cartelbecause the evidence collected did notgo beyond price parallelism.

While escalating prices of onioncannot be attributed to cartels,probable reasons may range fromdemand-supply gap to hoarding of


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

Corruption, that has been corroding our system overthe decades, now threatens to derail the India growth

story. It has perhaps already become systemic andaccording to the pessimists the rot is so deep andwidespread that it is beyond repair.

While the rot is undoubtedly extensive and seriouslydamaging to brand India, it can still be reversed and thesystem saved from its pernicious impact.

While the industry and middle classes clearly suffer farless now from corrupt practices than in the pre-reformperiod, the poor still continue to suffer as a result ofextensive mal-governance that characterises the deliveryof public goods and services in nearly all parts of ourcountry.

Onus on GovernmentsThe onus for this corruption is clearly on the Central andstate governments. This needs to be tackled urgently asmal-governance, is arguably the most important causefor the worsening internal security situation.

But the main sources of corruption today relate to eitherthe allocation scarce natural resources like land, spectrumand minerals or to large scale government constructionor procurement contracts. In all these cases, thegovernment at various levels and specially the higherechelons of public authorities, and not the petty official,are involved and implicated.

On the other side of these transactions are either a newbreed of fortune seekers or the larger corporations andnot the small and medium sized entrepreneurs who insteadhave to deal with fending off the inspectors who harassthem to enforce the non-enforceable statutory provisions.

The question must be whether there can be a push backagainst such a nexus and crony capitalism in a situationwhere all major constituents of our social fabric seem tobe tainted.

The media, judiciary, including its highest rankingmembers, civil society organistions, the formations towhom we look for fighting against entrenched vestedinterests and corruption are sadly themselves oftenimplicated.

Not a Banana RepublicLet’s hope we are not yet a society or banana republicwhich has come to accept corruption as normal let aloneglorify it.

* Director General, Federation of Indian Chambers of Commerce and Industry. Abridged from an article that appeared in TheHindu Business Line, on January 08, 2011.

Time to Fight Back Corruption– Rajiv Kumar*

It is therefore important that all major constituents orstakeholders in the country pay greater attention to selfregulation and to weeding out the rotten apples from withintheir midst. There is an attempt now to shift the entireblame for corruption on to the Indian industry and there isgrowing talk in the public domain of ethical deficit in theIndian corporate sector.

The Federation of Indian Chambers of Commerce &Industry (FICCI) released a resolution, which among thingsstates that, “Given FICCI’s roots in nationalism, we aredeeply concerned about the potential damage to brandIndia and the India story due to brazen acts of corruptionby a select few. To preserve India’s robust image and keepthe growth story intact, FICCI calls for transparency,accountability and probity in our system ofgovernance…Therefore, FICCI believes that anybodyfound indulging in corrupt practices either as payee orrecipient, must be punished summarily in a fast trackedprocess.”

Let us hope that other industry associations will followthis lead and also establish some self regulatorymechanisms like an ethics committee that will lay downsome norms for their members and ensure their compliance. This will give Indian Inc the high ground from which itcould demand higher standards of probity andaccountability from the political and bureaucraticestablishment and other social formations.

It is important that all majorconstituencies and stakeholders inevery sector pay greater attention toself-regulation and to weeding out therotten apples from within their midst

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Since the economic recession in the West, some observers have dared tosay that the Emperor may be insufficiently clad. Economists have dominated

the advisory councils of policy-makers. Now many people, even economiststhemselves, are questioning the foundations of their theories. We should knowthe whole truth before indicting economists. Milton Friedman is popularlyknown for the statement, ‘The business of business is only business’. Whenhe visited India in 1955, he warned Indian policy-makers about the dangers oftheir approach to development – too mathematically planned, too closed, stiflingbusiness. ‘He told us so’, commentators on India’s economic history point out.And, thank goodness, we made the reforms in 1991.

Friedman had said more than that, though. He began his memorandum to thegovernment of India with a warning that, “There is a tendency not only in Indiabut in most of the literature on economic development to regard the ratio ofinvestment to national income as almost the only key to the rate ofdevelopment…In the opinion of this writer, this seems a serious mistake…Inany economy, the major source of productive power is not machinery,equipment, buildings and other physical capital; it is the productive capacity ofthe human beings who compose the society. Yet, what we call investment refersonly to expenditures on physical capital; expenditures that improve theproductive capacity of human beings are generally left entirely out of account.”

The dominant paradigm of economics (and planning), to which Friedman hadalluded, is growth of the numbers and by numbers. Whereas another paradigmis development of the people and by the people. In this paradigm, developmentis focused primarily on people. Indeed, India’s ‘demographic dividend’ – andconsequent growth in the size of India’s GDP that economists foresee – cannotbe predicated only on the large numbers of Indians. In an ongoing publicdebate among Indian economists, Jagdish Bhagwati and Arvind Panagriya areleading one side, and Amartya Sen is the talisman on the other. Both sidesagree that development requires growth in the size of the economy as well ashuman development. The argument is about means and ends. As Friedmansuggested, acceleration of human development must be the precursor toeconomic growth, rather than a later outcome of it.

India needs innovations in its architecture for implementation designed aroundthree ‘L’s. First, Localisation. Government programmes are too centralised withdetailed designs determined by a controlling body in the Centre or in the states.

Learn, Localise, Lateralise to Grow– Arun Maira*

* Member, Planning Commission.Abridged from an article thatappeared in The Economic Times,on March 14, 2011.

One size cannot fit all. When thedesign does not fit a local need, therewill be wastages and poor outcomes.The government must be for thepeople and of the people. It must beby the people also: becauseparticipation by the people in planningand execution is required to produceuseful benefits.

The second ‘L’ is Lateralisation.Vertical silos that separategovernment departments andschemes must be cut through. Also,organisational boundaries betweenthe public sector, private sector andthe voluntary sector must be bridgedto create working partnerships. Theformation of lateral partnershipsacross many boundaries is requiredto produce results more effectively.

The third ‘L’ is accelerated Learning.Local teams must learn to design goodsolutions and to implement them.States must learn how to enable moredevolution. And the Centre must learnhow to support the states toaccelerate improvement in humandevelopment and economic growth.Local bodies can learn from eachother, and the states from each other.

The pace at which Indian institutionslearn and change will determine howmuch longer India will take to improveits human development indicators.Starting with similar or even lesserendowments, the nations that learnfaster and implement faster, developand grow faster, too. The final cautionis this. Just as the capacity of thephysical infrastructure must increaseto support the pace of economicgrowth, tardy change of institutionsand development of human capacitywill be constraints on sustainabilityof India’s growth.

India needsa newmantra fordevelopment,focusing onimplementationand execution,not just onnumbers

Th

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con

om

ic Tim

es



There are two news items about the current negotiations going onabout the proposed India-Europe free trade agreement that deserve

some reflection on everyone’s part. One is about the possible impact ofthe agreement on luxury, or higher-end car prices in India; the other was acase filed against the European Commission, by the Corporate EuropeObservatory (COEb), a lobby watchdog. Let us consider them one at atime.

It appears that the currently high 40 percent duties on luxury cars may beagreed down. If duties on luxury cars are reduced, and the automakerspass on the tax cuts to consumers fully, then prices of imported luxury carswill come down quite a bit. Many who were thinking about buying thesecars may now decide to buy an imported car even if it costs a little more.

I am immediately reminded of two events that everybody in, and around,my generation has experienced. One was the advent of the Maruti car andthe other was the entry of small car manufacturers such as Daewoo (nowout of production) and Hyundai into the Indian market. For many, manydecades, the Ambassador and Premier Padmini continued with producingthe same model with little or no change in their design or accessories.

People waited for months to get delivery of their cars and the carmanufacturers made no investments in new models or in expandingcapacity. They said they were doing all this to keep prices low. And, theyalso made us believe that they were not making enough profits at theselow prices to make any new investments for technological upgrades totheir car. Then Maruti 800 came on the scene. Suddenly, Hindustan Motors,instead of making losses at the advent of competition, started makingchanges to the more than 40-year-old Ambassador to make it more attractive.

And, let us not forget the Japanese either. All the way till almost the end ofthe 90s they continued selling the Maruti 800, which, in the late nineties,was at least two decades old. Once Daewoo and Hyundai came in, theyimmediately introduced newer models and since then they suddenly foundan attractive and growing market that justified newer models.

Both these experiences are worth recalling now. In the first case, India wasstill a highly controlled economy; in the second India had alreadyundergone major reforms for close to a decade. Opening up to competitionis something that new entrants like; it is also something that incumbentcompanies hate.

In India, we know that industry associations are being consulted. Of course,we are not surprised since, thanks to the Nira Radia tapes, we are nowaware that without the explicit or implicit connivance of Indian corporategroups even ministers cannot be sure of their ministerial berths.

It is important to emphasise that this is not the fault of democracy or thefree market. Instead, it is the fault of the government and the intellectualsin the world’s largest democratic free market. They are giving democracyand free markets a bad name because they have forgotten what eitheractually means. First, we must learn from our own experiences. Second,we, who are so quick to refer to other countries for doing whatever we do,should learn from what COEb has done to the European Commission.

* Research Director, IndiaDevelopment Foundation. Abridgedfrom an article that appeared in TheFinancial Express, on February 26,2011.

Outgrowing Infancy– Shubhashis Gangopadhyay*

Competition in the Indian

automobile sector should

be encouraged for the

widest efficiency gains

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

SOURCES

BL: The Hindu Business Line; BS: The Business Standard; ENS: Express News Service; ET: The Economic Times;FE: Financial Express; HT: Hindustan Times; TH: The Hindu; ToI: Times of India

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.

Complete reproduction without alteration of the content, partial or as a whole, is permitted for non-commercial,personal and academic purposes without a prior permission provided such reproduction includes full citationof the article, an acknowledgement of the copyright and link to the article on the website.

CIRC�s RegTracker

A new publication to

encourage informed debate

in the economic regulation

space

Regulatory Reforms in the Civil Aviation Sector

Challenges to Competition

This briefing paper examines how the regulatory framework and competitive environment has evolved

after the deregulation and whether the existing scenario is conducive to development of the sector,

in particular, and the economy, in general. Few policy recommendations have been articulated to

promote competition in the sector.

www.cuts-ccier.org/icrr09/pdf/Briefing_Paper-Regulatory_Reforms_in_the_Civil_Aviation_Sector.pdf

Competition and Regulation in the Indian Port Sector

The briefing paper tries to explore the regulatory and competition scenario in the Indian port sector

and gives the regulatory scenario on ports, particularly the general regulatory framework governing

port operations. It takes a look at the nature of competition in the sector, where some players are

identified together with some measure of market shares.www.cuts-ccier.org/icrr09/pdf/Briefing_Paper-Competition_and_Regulation_in_the_Indian_Port_Sector.pdf

This is the very first issue of a new bi-monthly publication from CUTS

Institute for Regulation & Competition (CIRC), the CIRC RegTracker.

This newsletter will be tracking the current policy changes and proposals

on economic regulation in India, particularly focusing on the dynamics of

policymaking and its implication for growth and competitiveness. This

publication does not aim to provide an in depth analysis of the happenings,

but hopes to raise some points to ponder, as food for thought and deeper

analysis by policy makers and researchers.

Furthermore, during this period, news report in the Mint on April 06,

2011 says that the government is mulling the creation of a Fertiliser Regulator.

It is a ludicrous proposal as the goods sector needs to be regulated for standards

etc., by dedicated institutions, such as BIS, and market abuses to be dealt

with by the Competition Commission.

Not as ridiculous but equally inane is the proposal to turn the Director

General of Civil Aviation into a Civil Aviation Authority with additional

powers to regulate air fares, which is reported in this newsletter. While this

proposal conforms to the current fashion of creating more regulators and

regulatory institutions to deal with issues which can well be handled by the

existing institutions. Or is it another move to create more parking lots for

retired/retiring bureaucrats.

Fed up with the governance deficit the Public Accounts Committee in its

controversial report on the 2-G scam has suggested that retiring secretaries

should be debarred from joining a tribunal, non-governmental organisation

or a firm by providing a cooling disconnect for three years.

The other policy issues discussed in the newsletter pertain to real estate,

ports, roads, warehousing and telecom sectors.

This issue can be accessed at: http://circ.in/pdf/CIRC_RegTracker_April2011.pdf

B R I E F I N G P A P E R S

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