General Awareness

2009

Name: __________________________

Centre: ________________________

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Contents
S. No. Article Page

1. Dry sky, moist eyes 01

2. Sparks of a Family Feud 03

3. Powerpuff plan 05

4. Modest Ride Home 07

(i) How much is too much? 09

5. Who pays the cost? 12

(i) Climate: a lost battle 13
(ii) The Copenhagen Summit 15

6. Euthanasia Time 17

7. Deadlock of DOHA Diehards 19

(i) Seriousness Missing in DOHA 21

8. Who is developing? 23

9. Does Obama deserve the Noble peace prize ? 25

10. One India One Gold 26

(i) The Crisis in Indian Hockey 29

11. The fundamentals of Indian economy 31

12. Global Economic Meltdown 37

(i) FM'S Prescription 43
(ii) Recovery Time? 45

13. When Dubai Fell Down 48

14. Spiraling Food Prices and

The Economic Recovery of India 51

15. India, Safe For Your Dollars 53

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Dry sky, moist eyes

The sad old story of drought and government helplessness has hit the country again.
The authorities have to do much more than last minute repairs
AMITAYU SENGUPTA

The drought in India is now official, ie the officials have finally accepted what was common knowledge
for over a month. From an early monsoon prediction in June, the Indian Meteorological Department
throughout the month of July kept assuring us that the monsoon was behaving normally and it was just
a matter of time when all shortfalls in rain would be compensated. Now it seems, the ever optimist IMD
too has lost faith.

The result of this dragging of feet can be catastrophic. In lieu with the IMD, the ministry of agriculture
kept assuring us that food production would not be much of an issue. Even as late as July 31, the
agricultural minister Sharad Pawar stated that he expected ‘some shortfall’ in rice production. This was
a gross understatement. Already it has been reported that there was a 25 per cent fall in acreage and
that only two-third of current area was sown. Continuing shortages in rainfall means that even the
production of the sown areas will suffer, reducing final output by quite a margin. And this will affect not
only paddy but other crops as well.

The Prime Minister finally cleared all confusions on August with a straight forward statement. Yes, there
is a drought condition in 246 districts in India. The country is facing a difficult situation. Agricultural
production and the livelihood of the huge majority of population associated with it are in trouble. All
state governments were urged to start relief operations wherever necessary. Programmes like NREGA,
Rashtriya Krishi Vikas Yojana and national Food Security Mission must be utilised to the full extent for
this purpose. In case their contingency relief funds were not sufficient, the states were requested to
quickly prepare a detailed memorandum for assistance under the National Calamity Contingency Fund.

The consequences of this drought will be manifold. Firstly, food production will be hit which in clear
terms means — less to eat. Direct fallout of that will be rise in food prices. With food prices eating off
much of our income, expenditures in other commodities will decrease, affecting the revenues of FMCG
companies. The manufacturing sector, looking to recover from last years recessionary conditions could
well do without that. A drought not only means less water for agriculture, but also less water for overall
usage, which includes industrial production as well. For example, around four tonnes of water is
required to produce one tonne of steel. Many parts of the country could face conflicts between industrial
and domestic water usages. Low rainfall will affect cotton production which in turn will affect textile
industry, one of our top export earners. Similar fate awaits other agro based industries like tea, soya
etc. To cap it all, we might have to import food, which will further eat into our precious foreign reserves.
The stock market surely is not going to like any part of all this, and investors, especially those
controlling the FDI purses, will express their grouses in their own typical way.

Rising food prices are already affecting our daily lives. The Consumer Price Index (CPI) based inflation
rate, which gives higher weightage to food products, was 9.29 per cent for Industrial workers, 11.52 per
cent for agricultural labourers and 11.26 per cent for rural labourers in June 2009. Things have surely
worsened by August. This can rise further if drought triggers further rises in food prices.

It was perhaps because of all these problems that the officials acted like an ostrich in trouble and
denied the dreaded D word for so long. But now that the PM himself was stepped forward, let us not
bicker about all that and look forward to the possible remedies. As the saying goes, better late than
never.

The solution put forward by the PM, and indeed by all discussing the issue, is state intervention. The
central government along with the respective state governments has to make a co-ordinated effort to
counter this problem.

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This I find to be ironic. Till last year, there were consistent arguments of opening up the market for
private procurement of agricultural products, corporate farming and corporate retailing in agricultural
products, open market selling in international markets for highest price etc. Apparently when things go
fine and sundry, the private sector would love to wet its beaks. When the going gets tough, everyone
suddenly remembers the state, the role it is supposed to play in a country and suddenly we all get
moralistic about the issue.

One of the many points made by the PM in his speech is asking all concerned authorities to be wary of
hoarding. Hoarding or the more colloquial ‘black marketing’ is a phenomenon where stocks of essential
commodities are piled up in store houses to take advantage of the demand and earn a higher profit
through higher pricing. In that sense, hoarding is a perfect example of free market. Hoarding is an
activity which is only engaged in by the private procurers. Now it seems that the very agents who were
till yesterday being touted as the solution for the agricultural sector are today deemed to be a problem.
Food Corporation of India, the oft criticised government body, is our only bet today. Just imagine, if all
the suggested ‘reforms’ were implemented, what scope would the state have today to counter such a
crisis?

India officially had record amount of production and procurement in 2007-08 and 2008-09 for which the
country has sufficient food reserves. The Prime Minister himself has assured that there will be no food
crisis despite the drought. But the question remains, if there are sufficient food stocks, why are the
prices rising? Is it that hoarding has already started? Between the farmer who produces the grains and
some like you and me who eats it, there are numerous intermediary agents involved, many of whom are
private players. Barring the authorities, every one else were convinced about the impending drought
months ago. Is it that the private players have taken preemptive measures in advance considering a
rise in demands?

Answers to these questions are subject to detailed investigations. However, what we can conclude
safely is that food availability is bound to be affected given a drought. And no matter what the official
opinion might be, almost everyone in the street already expects rise in food prices in the days to come.
If it took over a month for the government to admit the problem, just how long will it take for it to
implement the solutions? Official processes are notorious for being long drawn and the whole exercise
by itself is a mammoth task. Moreover, the government is only talking about food supply as of now. A
drought, as explained above, has other consequences. The authorities are yet to address those issues,
let alone formulate solutions.

Lastly, as stated in my previous article, it is a shame that a country which seeks to achieve newer
heights in industrialisation is dependent on the vagaries of nature for the most basic of its need.
Agriculture in India is still predominantly rain fed, which is the most primitive form of irrigation. Even the
Inca’s in historic Latin America had better man made irrigation facilities! We need to have proper
irrigation projects in the country to avoid such calamities in the future. After all, isn’t prevention better
than cure?

— The author is an Economist with Economics Research Foundation, New Delhi

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SPARKS OF A FAMILY FEUD

The Ambani family drama gets the nation worried

IT’S definitely the season for reality shows like Sach Ka Samna but the most gripping show of the time
is the Ambani brothers’ fight over gas. Four years after their family-dividing feud, the brothers are doing
it all over again and all that those who are watching care about is who is going to win this round of the
showdown. The happenings so far remind one of the American game show Family Feud, where two
opposing family members “face off” to see which family will gain control of a particular question. The
question here is who will get the better of whom.

THE COMBUSTIBLES
At the centre of the fight is natural gas. Anil wants elder brother Mukesh-led RIL to supply the
28 mmscmd industrial fuel to his group firm RNRL at US$ 2.34 per mmBtu as committed in an
agreement that split the Reliance business empire in June 2005.

RIL says it can’t fix the price without the government’s consent, much less sell it to whom it wants,
although the Bombay High Court ordered it to tie-up supplies with RNRL after mutually agreeing to the
terms.

The government, on the other hand, wants the Bombay High Court order set aside and the part of the
Ambani family MoU pertaining to gas declared null and void. This because the government feels it is
the owner of gas and it alone can fix the price and decide its utility.

Even as the court was making up its mind on the issue, the stakeholders couldn’t wait to slug it out
outside the legal corridors. Anil Ambani turned the pressure on the government with his allegations that
petroleum ministry (particularly minister Murli Deora) was siding with the Mukesh camp, causing much
embarrassment to the government.

Incidentally, the government has since revised its petition on the gas dispute before the Supreme Court,
restricting its prayer to that part of the MoU pertaining to gas. Earlier, it had asked the court for a
direction to declare the Ambani family agreement null and void.

FUMING RELATIONS
Mukesh kept silent throughout, while Anil kept stepping up the tirade. In a no-holds-barred attack, Anil
Ambani accused his “respected” elder brother of trading their father Dhirubhai’s vision for “corporate
greed”, and said Mukesh no longer saw a role for their mother Kokilaben in resolving the gas dispute.

However, Mukesh refused to be drawn into a public quarrel with his younger brother Anil. “We do not
wish to comment on baseless, malicious and wrong accusations,” was all his spokesperson said.

Although he was maintaining all along that the dispute was “nothing personal, it’s strictly business,” Anil
took the fight to a completely different plane by bringing his mother in.

Asserting that he had made sincere efforts at every stage to amicably resolve all issues, but without
success, Anil said that “unfortunately, in the pursuit of corporate greed, RIL has even forgotten the
vision of the founder chairman (late Dhirubhai Ambani)!”

It was Kokilaben who oversaw the division of the Reliance empire in 2005, two years after the
differences between the two brothers became public. The family split agreement provided for RNRL to
get 28 mmscmd of gas at US$ 2.34 per million metric British thermal units for 17 years. But this plan
was frustrated after the government fixed US$ 4.2 per mmBtu as the benchmark gas price — which Anil
later alleged was done to help Mukesh renege on RIL’s commitment to supply gas to his group firm.

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“There was emotion, sentiment and regret... but thankfully, no anger. And above all, there was great
sadness, and even greater pain,” Anil said, sharing his feelings about the whole episode. “Sadness...
that to enforce the gas supply agreement in the interests of shareholders in my group, I have been left
with no choice but fight a court case against my very own respected elder brother — the person who I
most looked up to, loved and respected, second only to my beloved parents.

“Sadness... reflecting on the proud legacy of trust and fair play on which Reliance Industries was
founded by my visionary father Dhirubhai Ambani, and how far RIL appeared to have moved away from
those original values.

“Sadness... that today, gas produced by RIL was flowing to others, before it could be used within the
group — simply because RIL, for four long years, has denied us a bankable supply agreement on the
terms that my respected elder brother and I shook hands on, with the blessings of my mother Kokilaben
Ambani, who is God for me.... As I prayed before the meeting and sought blessings of Lord Shiva and
my father from heaven, I asked them forgiveness.”

THE SPARKS FLY

At another level, the Samajwadi Party, whose president Mulayam Singh Yadav is considered close to
Anil, brought Lok Sabha to a halt thrice on July 29, demanding the resignation of Deora for his role in
the Ambani brothers’ gas dispute. The drama in Parliament was merely an echo of Anil’s well-
expressed anguish: “It is evident that the apparently biased stance commenced in 2006 coincided with
the changes in the ministry. I’m sure all private companies in India wish that if they make commercial
decisions, they wish to get out of, they too had a saviour to help bail them out as in the case of RIL.”

Anil accused the ministry of doing a volte-face, saying it had stated in Parliament at least 13 times that
it had no role in a commercial dispute or in fixing the sale price of gas, but it has now challenged a
commercial contract between two entities.

“The bogey of sovereign ownership is being raised with the sole purpose of attempting to bail out RIL
and help them renege on their contractual commitments,” he said.

Although Mukesh was silent, he lost no time in meeting with key ministers at the Centre, presumably to
put across his version of the story. Anil too did the same, his refrain being, “It was only after the adverse
verdict of Bombay High Court against RIL that the petroleum ministry suddenly decided to intervene in
the purely corporate dispute, using discretion without even seeking the approval of the Cabinet.”

Anil asked the Supreme Court to take up final hearing of the matter on September one, but the court
has expressed its inability to do so on that date. It, however, offered to give an early hearing date when
it considers all the petitions related to the case on September one.

The battle has only begun!

M KARTHIKEYAN
Key points:
• Anil wants elder brother Mukesh-led RIL to supply the 28 mmscmd industrial fuel to his
group firm RNRL at US$2.34 per mmBtu
• RIL says it can’t fix the price without the government’s consent. Government feels it is the
owner of gas
• Petroleum ministry siding with the Mukesh camp, alleges Anil
• Anil expresses “Sadness... that today, gas produced by RIL was flowing to others, before it
could be used within the group”; “unfortunately, in the pursuit of corporate greed, RIL has
even forgotten the vision of the founder chairman (late Dhirubhai Ambani)!”

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Powerpuff plan
A novel scheme for women that looks beyond health and maternity issues
AMITAYU SENGUPTA

ONE of the most important ‘pro people’ project announced by the new UPA government is the National
Mission for Empowerment of Women. The project is unique in many aspects. The most striking feature
being, it plans to take a holistic view on the issue of gender discrimination.

With the ministry of women and child development (WCD) as the nodal agency, the mission will
coordinate with 14 social sector ministries, including health and family welfare, rural development,
human resource development, urban employment and poverty alleviation, youth and sports affairs,
labour, social justice and empowerment, tribal affairs, drinking water, small-scale industries and agro
and rural industries, science and technology, non-conventional energy sources, textiles and agriculture.

This is a novel approach; previously for development of any specific social sector, the government
usually set up specific ministries, which were compartmentalised by design and hence scope of
operations. The WCD was a prime example of the same, where it was till date reduced to addressing
only health related issues of mothers, new-borns and children. Now, it is to be granted a broader
canvas to address different issues plaguing women in this country.

Gender discrimination has been a bane for human societies, and we have not really overcome it even
in the 21st century. Human civilization has never been fair to the ‘fairer sex’. Health neglect, social and
physical exploitation, regressive social biases, abuses, dowry deaths etc are all proof of the patriarchal
society that we have build, endorse, and live in. female foeticides are perhaps the biggest proof of how
unwanted women are in our society. It is ironic indeed, as the society cannot survive without women
giving birth to the next generation!

The issue of gender empowerment is a big issue for society per se. The issue has been discussed at
length in political science and sociological paradigms, with the much-abused feminism developing as
another potent ‘ism’ in human development. It has more to do with changing the social outlook on the
issue. And there are two ways to go about it; convince those imposing this hierarchy to rethink their
follies, or force them. Women empowerment essentially seeks to do the second. It aims to empower
women, so that they can reclaim their rights.

Empowerment can be of various forms. The ongoing debate of 33 per cent reservation for women in the
Parliament is one such form. Reservation in the decision-making institution of the country is giving
direct political power to a section of the society which can then use it to address its problems.

Political representation by itself is meaningless unless it is used to change socio-economic realities.

Thus, any proposal to give political reservation is incomplete as it is not a solution, just the means to
reach the latter. While the strong and often open opposition to the proposal not only reflects the deep-
rooted bias, but also teaches us a very valuable lesson; the change cannot imposed on the top, in the
expectation that it will trickle down. The change must come at the base which is the core of the society.

THAT is where the national mission comes into play. Increasing the coverage of anganwadi
programme, introducing special incentives for female child education, gender budgeting at the core of
the Union Budget structure to allocate resources for women centric programmes, special focus to
provide more micro credit to women to help self sustenance, the SABLA initiative, aimed at providing
health nutrition and education to adolescent girls, active initiatives to encourage and enable women
participation in mainstream work force, encouraging defence, power, telecom, communications,
transport and industry to adopt practices to determine the gender impact of their expenditure and also
more attention on these issues etc are some of the broad initiatives being discussed under this mission.

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The idea is to ensure that the new generation of women are equipped to step out into the modern world
and truly become part of it through active participation and engagement.

The battle is not only to ‘liberate’ the women from the domain of the household, but to also ensure their
protection in the male-dominated ‘mainstream’. Historically it has been seen that women have been
often welcome into hardcore labour- intensive jobs, which to the simple observation might seem as a
change. But there has been a dark side to the story! For example, it was found that in the South Asian
countries during the boom in the 90s, women participation in the work force rose dramatically. This was
often pointed out as one of the benefits of the South Asian rapid industrialization model which
supposedly brought women emancipation as well! However, it was soon found that with the crisis, it
were the women who were sacked the earliest and the easiest! Women workers were paid less than
there male counterparts for the same amount of job done (and hence the surge in their employment as
they came cheaper), they were more disciplined (read bullied) with lower unionization and easy targets
for layoff. Such problems persist in our country as well. Be it agricultural labourers, women engaged in
construction activities (the one’s you and I see carrying the bricks on their heads in any construction
site) and even in the NREGA it is complained that the problem persists. Moreover, sexual harassment
of women in work places is perhaps the biggest problem across all fields of employment, be it at the
rural hinterlands or the urban elite section of society.

The Mission thus seeks to address these shortcomings as well. Ensuring strong corrective measures
against sexual harassments in workplaces or educational institutions, ensure equality in participation in
the same through monitored sex ratios at different levels of hierarchy in such institutions, extended
maternity benefits in work places, developing greater women participation in erstwhile male dominated
areas by developing special provisions like all women police stations or all women bus or taxi services
etc are some of the possibilities being explored to increase the domain of activities for women.

As an economist we are constantly engaged in how to best utilise our limited resources to maximise our
wellbeing. In the same light, we seek to develop our human capital as it is the biggest asset for a
developing country like India. However, a sizeable section of this capital is handicapped due to social
neglect, bias and ignorance. Empowering them will enable them to realise their full potential, which in
turn will help our national human capital to reach greater heights.

The WCD is in the process of developing, revising and updating the reports of Gender Development
Index and Gender Empowerment Measure for India. We usually focus only on the GDP or the sensex
to judge the performance of our nation, overlooking other measures like unemployment, poverty and
mortality rates, which portray the true picture of the development of a nation. I hope that the gender
development index too is not relegated to the background like them.

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MODEST RIDE HOME

Austerity is the buzzword not only in India; world over, governments are tightening the purse
strings

FORMER President R Venkataraman has many firsts to his credit. He was the first first-citizen to have
worked with four prime ministers in his five-year term. He was also the first president to auction his
stretch limousine, seeking to drive home the message of austerity, in the early 1990s.

That was the time when India was facing a climate of political instability that was further compounded
by a gloomy economic situation resulting from the Gulf war. The war, in addition to inflating India’s oil
import bills, resulted in government spending over Rs 1,000 crore for evacuating its citizens from war-
hit Kuwait.

Its sovereign credit rating fell sharply and the country was on the verge on defaulting on its external
debt obligations. Venkataraman felt the time was right to switch to a more modest presidential ride and
hence, bid out his stretched ‘Mercedes Benz’ limo to a Delhi businessman.

DIFFERENT CAST
Today, we are seeing the same story play out all over again. Only the protagonist is different. Finance
Minister Pranab Mukherjee flew economy class in the first fortnight of September, seeking to teach his
ministerial colleagues a lesson — that high spending is no longer a status symbol.

Just before his budget flight, possibly his first, Mukherjee talked external affairs minister SM Krishna
and his deputy Shashi Tharoor into leaving their five-star abode.

The events have unfolded exactly a year since the global financial meltdown and the collapse of
investment banking giant Lehman Brothers.

Although India has done pretty well in so far as riding out the global financial storm, a return to the days
of high growth of nine plus per cent is still far away. Exports have been falling for 11 straight months
and industrial production has remained modest. Added to these woes is the poor monsoon that
threatens to erase rural demand, and high food inflation.

If these do not illustrate the fragility of India’s economic situation, then look at its borrowing numbers.
India plans to borrow over Rs four lakh crore this year. This is 40 per cent of its total spending plan for
the fiscal 2009-10.

Its fiscal deficit is already way above six per cent and has prompted credit rating agencies to have a
relook at the country. The situation, therefore, definitely calls for a course correction. If not Gandhian
austerity, there is a clear case for ministers and officialdom to choose ‘bhavan’ hospitality over five-star
comforts, and economy class flights over business class luxury.

This is what the finance ministry suggested to other ministers, who were clearly not amused, especially
ministers from UPA’s allies.

NCP supremo and agriculture minister Sharad Pawar is believed to have questioned the austerity drive
at a Cabinet meeting and also ruled out travelling economy class, citing health and privacy issues.

SAME SCRIPT
Austerity is not a new concept and not the least in India. Decades before Venkataraman sold the
presidential limousine, MK Gandhi transformed into the ‘Mahatma’ by strictly observing a life of
austerity, including in his clothing.

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World over economies adopt austerity to tide over a temporary downturn. Israel, created in 1948, was in
a state of austerity for a decade from 1949 when everything from food to footwear were rationed by the
state.

Although Saudi Arabia is the world’s largest oil exporter, accounting for over 10 per cent of the world oil
produce, that nation’s central bank last year advised the government to embrace austerity if it were to
keep up with its peers in the Gulf region.

Saudi Arabia’s oil was trading above US $ 120 a barrel. At that rate, estimates suggest Saudi Arabia’s
oil export revenue could have been US $ 400 billion a year if the price had stayed.

Oil prices are now ruling below US $ 70 a barrel and the Saudi caution is more valid today than anytime
before.

Austerity is especially advised by multilateral funding agencies to countries for restoring their financial
health. One classic case is Iceland, where the new Social Democratic Alliance has said it would stay on
the austerity course, although it fought elections promising changes to the financial sector.

CLIPPED WINGS
While the benefits of austerity are many, yet in India it is measured in terms of whose foreign trip
became casualty to the belt tightening.

Early last year when high international oil prices forced the upward revision of retail fuel prices, the
government kick started an austerity drive.

Mani Shankar Aiyer, who was then the panchayati raj minister, was forced to cancel his 13-day trip to
the US and Norway. More such visits were cancelled and much ado was made about these roll-backs.

This year too, the spending cut formula reads similar and includes no first class air travel, no seminar in
five-star hotels, 10 per cent cut in all domestic and foreign tour expenses and 10 per cent cut in
advertisements.

Like Pawar, after initial reservations, ministers have started flying economy class. Rahul Gandhi
traveling by train and Sonia Gandhi flying economy class hit the headlines. Budget airlines like Indigo
and Spicejet have become their preferred carriers. Civil Aviation Minister Praful Patel flew Indigo.
Elsewhere, external affairs minister SM Krishna, who shifted out of his five-star residence, discontinued
his private jet for travel.

But all this does not mean, they have taken the advise sportingly. Which is probably why Mukherjee
came out with a clarification. He said his ministry had only made a request that ministers, MPs and
officials, who are entitled to travel by the executive class, take the economy class in domestic flights. In
the international flights, however, they could avail of the executive class.

“I have suggested that in domestic services you should try to avoid (executive class travel), because
the distance is not far off. So far as international flights are concerned, they can travel executive class
instead of first class,” Mukherjee said.

“There is some misunderstanding,” he said, adding that “every ministry has financial advisors, who
understand what is practicable and implementable and they would advise you accordingly. So don’t
worry over it”. The clarification should have come as a great relief for ailing Air India. Already in
doldrums over sales and profits and in a spot over acquiring new aircraft, an across-the-board ban on
ministers travelling business or first call would have further eroded the airline’s sales.

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In fact, this time around, the austerity drive actually appears tailored to benefit the airline industry, given
the fact that there was no special advice for ministers to travel by train.

So, in a sense, budget airlines will get VVIP customers on domestic routes and elsewhere, full-service
carriers would get to carry the privileged folk whenever they head out on overseas trips.

No airline has complained so far and that clearly means one thing — ‘So far, so good!’

M KARTHIKEYAN
Key points:
• Austerity, need of the hour. India plans to borrow over Rs four lakh crore this year. This is
40 per cent of its total spending plan for the fiscal 2009-10.
• Mukherjee convinces external affairs minister SM Krishna and his deputy Shashi Tharoor to
leave five-star accommodation
• Initial reluctance on part of ministers
• Rahul, Sonia set example; Rahul travels by train
• Austerity measures in Iceland, Saudi Arabia

In continuation with the previous article, the following article describes the latest developments
that are happening in the same context.

How much is too much?

CEO salary again a subject of debate; minister urges austerity, industry hits back
CORPORATE affairs minister Salman Khurshid has triggered a debate on the salaries of the CEOs by
advising them to observe austerity and asserting that government would not shut its eyes on the
amount of money that company chiefs are taking home.

The minister’s comments, though well intended, evoked sharp reaction from the industry, which
opposed any government check on the salaries of CEOs. Khurshid, however, found support from
Planning Commission deputy chairman, who said that CEOs should not be taking home “indecent
salaries”.

WHO DECIDES?
To pacify the industrial lobby, Prime Minister Manmohan Singh clarified that government was not
intending to impose any restriction on the salaries of the CEOs. The salaries, Singh opined, should be
decided by company boards.

Khurshid too had maintained that onus of fixing salaries should rest with the boards and shareholders
of the companies. He was against government approving the salaries of the CEOs. Under the current
Companies Act, 1956, there are certain restrictions on salaries of directors and salary hikes beyond a
point have to be approved by the corporate affairs ministry.

Under Schedule XIII of the Act, remuneration of a managing and whole-time director of a public
company cannot exceed five per cent of the profit for one such person and 10 per cent if there are more
than one such person. In the new company law, which is awaiting approval of Parliament, companies
will not be required to seek government approval for salaries. Companies Bill, 2009, however, is
currently being scrutinised by the Standing Committee of Parliament.

The Committee is expected to make some recommendations, which may or may not be accepted by
the government while moving the bill for consideration and passage in Parliament sometime later.

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INDUSTRY REASONING
The debate can be narrowed down to a simple question — should government impose restrictions on
the salaries of CEOs and directors of listed companies? There are strong arguments on both the sides.
Votaries of free market want no restriction whatsoever. For them, the salaries should be determined by
market forces, board of companies and shareholders. India Inc for obvious reasons wants complete
freedom. Industry chambers argue that high salaries were necessary to retain talent. Otherwise, the
best minds would move to greener pastures and other locations. It was also pointed out that in a
globalised world, Indian industry has to compete with the international companies and hence they
would have to pay salaries comparable at international level. It has also been pointed out that global
CEOs take much higher salaries than their Indian counterparts and there was nothing “vulgar” about
their remuneration.

“Any new norms on compensation to India CEOs may set in motion a flight of talent and capital away
from the country,” industry chamber FICCI’s president Harshpati Singhania said in a statement.

The Confederation of Indian Industry said it will come up with a governance code for its members that
would deal with remuneration of executives at board level and a level below. A CII task force, under the
chairmanship of former Cabinet secretary Naresh Chandra is studying the key issues of corporate
governance, including the compensation packages of senior management.

“CII has always believed that corporates have a social responsibility and always supported self
regulation...,” its president Venu Srinivasan said. Global consultancy firms like Deloitte Touche
Tohmatsu and Ernst & Young also expressed similar view.

“In the global environment, which keeps changing, market forces will determine the right salaries.
International talent is willing to be employed in India on Indian terms and conditions which would have
been unthinkable a few years ago... any artificial cap would lead to flight of talent”, said P
Thiruvengadam, senior director, Management Consultancy Services, Deolitte. According to SN Rajan,
partner, Ernst and Young, “CEO salary has to be viewed in relative terms, and not just an absolute
value. Aspects that impact include size of organisation, its performance, profits generated, impact of the
CEO on the organisation, market equivalences in terms of compensation, replacement cost,
expectations and resultant risk of being held accountable.”

The thrust of all these arguments is that government should play no role in determining the salaries of
CEOs. Companies should be given complete freedom to determine the salaries of its directors.

CASE FOR CAP

On the other hand, those who advocate some kind of restrictions and checks on salaries of CEOs too
have an arguable case. The government has been advocating austerity, advising ministers and top
functionaries to travel economy class, reduce office expenses and avoid organising conferences in five
stars hotels.

Amidst this background, Khurshid said, “What our leadership is telling us is that please inculcate a
temperament of austerity and simplicity… We can hardly… shut out eyes on what salary the CEOs are
going to take (home).” Replying to a question on the stand of government on some CEOs taking home
very high salary which can be described as “vulgar”, the minister said, “We have reached the level of
liberalism where vulgarity is also a fundamental right.”

Ahluwalia’s remarks that CEOs should not be taking home salaries, which are “indecent” is in the same
spirit. Trade union leaders and left parties also expressed their views on imposing some checks on the
salaries of CEOs. One of the trade union leaders had said that there should be a “maximum wage”, on
the similar lines as we have a “minimum wage.”

“We don’t approve high CEOs’ salaries. The government should bring strict law to deal with this
problem. Self-regulation in this case is no remedy,” said Centre for Indian Trade Union (CITU) general
secretary Mohammad Amin, adding the trade union would build public opinion on high compensation

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for corporate honchos. “There should be some restriction on CEOs’ salary... There should be strict
regulation to deal with this,” opined Hind Mazdoor Sabha (HMS) secretary AD Nagpal.

Going by the arguments of both the sides, it would not be appropriate to give complete freedom to
companies their board and shareholders to determine the salaries of CEOs. Shareholders too should
have some say in the matter.
The onus of finding a mid-way rests with the government and Parliament and its Standing Committee,
which is currently examining the new Companies Bill. The choice is not between freedom and no
freedom, but between some freedom and some control.
CHANDRA SHEKHAR
Key points:
• Government would not shut its eyes on the amount of money that company chiefs are
taking home: Salman Khurshid
• Government not intending to impose any restriction on the salaries of the CEOs: PM
• Under the current CompaniesAct, 1956, there are certain restrictions on salaries of
directors
• Remuneration of a managing and whole-time director of a public company cannot exceed
five per cent of the profit for one such person
• In the new Company Bill, which is awaiting approval of Parliament, companies will not be
required to seek government approval for salaries
• High salaries necessary to retain talent; any new norms on compensation to India CEOs
may set in motion a flight of talent and capital away from the country: industry
• Indian industry has to compete with the international companies and hence they would
have to pay salaries comparable at international level

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Who pays the cost?

When the world stands at the verge of collapse due to climatic changes, the developed world
should start to be less selfish
AMITAYU SENGUPTA

VERY recently, the environment minister, Jairam Ramesh has created a flutter with a correspondence
to the Prime Minister’s Office which supposedly suggests diluting India’s stand
on the Kyoto Protocol on environmental issues. Matters are still murky even as I write this piece, with
allegations and rebuttals flying thick from all sides. This piece is not a judgment on the minister’s
statement, rather an attempt to understand the whole issue.

Human civilisation has been built on our ability to exploit nature. We are the only animal capable to
mould the world according to our needs. Our intellect has enabled us to ‘use’ natural resources in a
manner that can enhance our lives. Thereby we have created an ‘artificial’ world and cocooned
ourselves in it. Thus we lived for ages, as the resources were seemingly endless. However, every
sweet dream has a rude awakening, and we are facing one today!

Despite the much cited ‘lack of awareness’, I believe almost everyone is aware that we are faced with a
situation where our activities are taking a toll on the ecological balance of the planet. These activities
are those required to maintain our lives, not only in terms of our comfort and lifestyle, but also
livelihood. There is a strong economic aspect involved in environmental issues. We may cry about the
wanton deforestation, but for those cutting the trees, it is their only form of earning a living! Same
applies for all those who are fishing whales and turtles or pit mining ores. All these activities are being
engaged in because humankind uses these resources in their daily lives. To stop such activities has
two sides to it. Firstly, we have to change our lifestyles, our demands or develop alternatives to natural
resources. Secondly, bring it to the mainstream such that those activities can trigger off economic
production chain to replace the existing one and address the issue of livelihood as well.

It is not just a lack of awareness, but rather unavailability of alternatives that is the biggest problem. We
are worried about the black fumes spewed out of factories veiling the blue skies. No one is more aware
of the harm it causes than the hapless workers in those factories who breathe in those fumes daily in
their workplaces, and I bet they are not happy about it either. But the question is, if we close down
those factories, what happens to economic production? What happens to their livelihoods?

This is much of the basis of the Kyoto Protocol that was formulated. An attempt to bring humankind on
a common understanding for controlling environmental damages evolved into a standoff between the
developed and the developing countries. The developed countries in Europe and America have
reached a certain level of development and economic wellbeing which most others have not. Much of
their success lies in the higher levels of industrialisation they have achieved. In that sense, historically,
developed nations are more responsible for the damage to the environment than developing nations.
However, the question is not only about paying historical debts or score settling (though much of the
arguments do tread on those lines). The point is today they cannot simply ask developing nations to not
engage in those activities that they did few years ago (and are in fact still doing) citing ecological
concerns and pass off the buck.

Most developing nations are industrially weak, or are in very nascent stages. It is but natural that they
engage more in exploiting their natural resources than their developed counterparts today. The
developed countries had done the same years ago when there were none to point fingers at them.

The problem is further accentuated when we take into consideration some more serious factors.
Developing nations, while being engaged more in primary resource exploitation are net exporters of
such resources to the developed world. In that sense, it is really the developed world which is
consuming much of these resources! Much of it is actually reflected in the measure of emissions or
environmental damages being done even today. It is common knowledge that an average American

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does more damage to the environment given his/her lifestyle than any other. So, even if we do talk of
reducing emissions, there has to be a difference in levels of reduction for different countries.

But more basic is the demand of technology transfer and GDP transfer. 77 countries, along with China
(India included), took a position that it was agreed that greener technologies need to be adopted.
However, much of technological innovations take place in the developed world. It has been historically
so, and thus we are now in a situation where the developed nations have reached such levels of
industrialisation that they are capable of improving on existing technologies (with better R&D and
overall experiences) to evolve ‘green’ or ‘environment friendly’ means of production. If the world is
serious about controlling environmental damages, these technologies must be passed on to the
developing nations.

However, as we all know, technologies are priced very high. Patents, intellectual rights etc are some of
the means by which the developers of technology safeguard their innovations zealously to earn money
out of it. To cite environmental concerns and force greener technologies only to earn handsome profits
by selling them to developing nations is simply arm-twisting. To go back to the example of smoke
spewing factories; if there is a technology which can ensure such black smokes are not emitted, the
workers in these factories do not need to poison themselves daily, then as a developing nation we
would be more than happy to adopt it. But it needs to be given to us as buying it is beyond our means.
Simply passing of technologies is not sufficient to develop an industry. It requires loads of investment in
the form of ‘economic cost’. Bearing such expenses is often impossible for poorer nations.

So the Kyoto Protocol asked the developed nations to give 0.5-1 per cent of their GDP (a nation’s
earning in plain terms) to developing nations to help them adopt such industrialisation. Without free
technological transfer and economic aid to adopt it, asking developing nations to reduce their emissions
essentially means raising their cost of production or simply asking them to reduce their economic
activities. For countries struggling with poverty, unemployment etc, both such propositions would only
raise these problems. The refusal of developed nations to agree on lowering their own emissions
unless developing nations reduce theirs is childish bickering at best, and egoist big brotherly weight
throwing at worst. The world cannot afford such stupidity anymore.

Any proposal to dilute the Kyoto Protocol is belittling the graver issue of environment for mean interests.
It is meaningless to bend backwards to ‘accommodate’ USA which is the biggest polluter; rather
attempts should be made to drag it forward into agreeing to reduce its own emissions.
But what is most disturbing is trying to use the issue of environment as a leverage or bargaining chip to
earn other political sops. It is too serious an issue to be treated thus, and the environment minister
should be aware of it the most.

— The author is an Economist with Economic Research Foundation, New Delhi

In continuation with the previous article, the following article describes the latest
developments that are happening in the same context.

Climate: a lost battle

While all of us wish that Copenhagen had succeeded, the economics of
our times won’t let this happen
AMITAYU SENGUPTA

ONE of the most awaited global event came to a conclusion recently in Copenhagen. This was the first
time I feel that human kind came together to discuss a common problem that affects each and
everyone of us. Unlike issues like wars, poverty or such other manmade problems, the issue in
discussion was not something that was being imposed by a section on the other. The issue of global
warming (or global emission, either way you look at it) is an issue that affects both the imposer and the

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imposed in equal degree. In that sense, there are no inequalities amongst all the stakeholders.
However, as the results of the meet prove, we are yet to achieve such consciousness.

The fact that Copenhagen 2009 (or COP 15 in short) was doomed to fail was almost eminent in
advance from the various pre-meet developments (or rather, the lack of any developments). However,
everyone went through the motions over the period, gathered in Copenhagen and finally emerged with
a perfect dud of an understanding.

Consider this; 119 countries met together and what we have by the end of it is three pages!! Not all 119
members were part of this understanding, most only agreed to the ‘consensus’. It was not really
‘adopted’, only noted. It is only an ‘accord’, not even an ‘agreement’. But above all this, surely you
would agree with me, that even for an accord on such a serious issue, three pages is surely too less.
So what do we have in these three precious pages? Well, the first is almost spent on reiterating our
‘commitments’ to the issue of climate change. We agree that climate change is one of the biggest
challenges we face today. Deep cuts in global emissions are required. Adaptation to the adverse effects
of climate change and the potential impacts of response measures is a challenge faced by all countries.
These three truisms form three paragraphs each that fill up almost one page!

Sarcasm aside, a cursory glance at the accord which the global leaders came up with will make it clear
to anyone and everyone that we (as in humankind) are completely clueless about how to go about
saving ourselves from the future catastrophe. The accord talks about the need to cut emissions, but has
no idea about how to go about it. It talks of the need to take into account the adverse effects, but there
is no understanding about how to do it. All it says is that scientists have proven that something needs to
be done about the issue, but we diplomats and politicians (and policy makers in general) simply don’t
know what to do.

There will be various interpretations about the failure of COP 15. I here attempt to give an economic
interpretation of the failure.

As I had written in a previous article, the problem is that we do not have a credible alternative. Let us
break down the whole issue as thus; global warming and all its associated problems are arising mainly
from polluting emissions, mostly carbon based. These emissions are the result of our over dependence
on carbon based fuels for various economic activities. These activities are the core of our development,
wellbeing, daily lives; or any way you look at it. Reducing emissions thus essentially entails cutting
down on such activities, or developing newer technologies that can replace the existing ones. In Cop
15, the negotiators met without any alternative technological solution in offer. The talks were thus
limited to reducing economic activities, or at most tinkering with them such that they are marginally less
polluting than they are today.

Reducing our economic activities is not something that any of us is willing to concede. This then forms
the basis of the divide between developed and developing nations. The moment you bring in this factor,
the notion of equal stakeholders (as stated in the first paragraph) is lost.

For developing nations, it is not just a matter of higher aspirations. Issues like poverty malnutrition etc
cannot be addressed without raising economic activities, or exploiting natural resources. To top it all,
this has to be achieved at the least cost for maximum benefit. This thus forces them to rely on carbon
fuel based technologies as they are the cheapest till date. They were thus asking the developed world
to cut its emissions, which are the highest as it is. For the developed world, much of the development it
has achieved has to be sacrificed to achieve the emission cuts. Not only does this threaten their
achieved level of development, it also forces them to face the uncomfortable problems that the
developing nations are facing regarding poverty etc, something they have dealt with in the past and are
in no mood to revisit. They were thus asking for emission cuts from all countries, which will not only
help maintain their hierarchy (and one cannot deny this selfishness of the developed nation) but also
ensure that the burden on them is considerably reduced.

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Much talk is spent on the question of greener technologies. It is as if, a greener technology can help us
avoid this catch 22 situation. I frankly do not share this optimism. Whatever little green technology that
we have is not being shared as of now. Technology sharing was one of the prime demands from
developing nations, and that has not been heeded to by their bigger counterparts. It is mentioned in the
accord, but no concrete commitment has been made. All that has been offered is funds to developing
nations, which I fear they will have to ‘spend’ to buy such green technologies from the developed
nations. Much of the committed fund is for adaptation and mitigation. Adaptation refers to facing the ill
effects of climate change like flashfloods, rising sea levels and other direct or indirect effects. The
mitigation part has some reference to technology transfer, but the sense is more of seeking
compensation for curtailing emission activities, to bridge the gap between current practices and
‘sustainable development’. Infact, much of the technology to be given by the developed nations is
aimed at capacity building to implement the adaptation action of developing nations. There are almost
no talks of sharing alternative energy based technologies for economic activities, maybe because the
developed nations themselves do not have such technologies (which they themselves can adopt) or
because they are not really ready to give up the technological advantage they have over developing
nations. Much of the ‘success’ being touted about the accord is the amount of money the developing
nations are committing to these purposes. The ‘collective commitment’ by developed nations is
currently 30 billion dollar by 2012. In the context of ‘meaningful’ mitigation actions and ‘transparency of
implementation’, they commit to jointly mobilising 100 billion dollars by 2020. Not only is this
commitment subject to the above highlighted subjective parameters, there is no parity about how this
fund is to be mobilised. Vague statements like “This funding will come from wide variety of sources,
public and private, bilateral and multilateral, including alternative sources of finance” essentially mean
that though the developed nation is committing to generating fund, no one is really very clear about who
is going to pay, how it is going to be paid, and most importantly, no one is willing to be held accountable
by 2020 for the same.

The avoidance of any accountability in the whole accord is another glaring factor which has been
highlighted by most activists. Any commitment, be it financial an aid or emission cut is legally
mandatory, accountable or binding. Since this accord is yet to be adopted, its mostly wishful thinking at
this stage. The saddest part is that everybody is domestically bragging about not having made a
binding commitment in the global forum, as the others were not ready concede. This is a classic
Mexican stand off, like we see in so many Westerns. Unlike the movies, there are no clear cut heroes in
this story and no possible winner either. We all collectively stand to lose, and probably will in the next
Mexico round as well.

— The author is an Economist with Economic Research Foundation, New Delhi

In continuation with the previous article, the following article describes the latest
developments that are happening in the same context.

The Copenhagen Summit

In 2012, the Kyoto Protocol to prevent climate changes and global warming runs out. To keep the
process on the line there is an urgent need for a new climate protocol. During the conference in
Copenhagen 2009 the parties of the UNFCCC met for the last time on government level before the
climate agreement is renewed. Therefore, the Climate Conference in Copenhagen (2009) is a positive
step to bring consensus among the countries before a final strategy is chalked out to protect the earth’s
environment and it is a very important one indeed.

Many commentators are discussing about the successes and failures of the Copenhagen Summit.
However, it is really very difficult to come up with a clear picture as no legally binding agreement is
made. Some of the vital points that are important for analyzing the Copenhagen summit are as follows:

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• Acknowledgement of the impending crisis: The (so-called) Copenhagen accord “recognises”

the scientific case for keeping temperature rises to no more than 2 degree Celsius.
• A legally Binding Contract by next year: A proposal attached to the accord calls for a legally
binding treaty to be pinned down by the end of next year.
• Financing for the poor nations: The climate agreement says that developed countries shall
provide adequate, predictable and sustainable financial resources, technology and capacity-
building to support the implementation of adaptation action in developing countries. Developed
countries set a goal of mobilizing jointly $100 billion a year by 2020 to address the needs of
developing countries. The funds will come from a wide variety of sources, public and private,
bilateral and multilateral.
• Separate emission reduction norms for developed and developing countries: The mitigation
plans (For climate change) are included in two separate annexes, one for developed country
targets and one for the voluntary pledges of major developing countries.
• Checks and Verifications for developing countries: The Copenhagen accord says that the
emerging economies must monitor their efforts and report the results to the United Nations every
two years, with some international checks to meet Western transparency concerns but “to ensure
that national sovereignty is respected”.
• Protection of the forests: The accord “recognises the importance of reducing emission from
deforestation and forest degradation and the need to enhance removals or greenhouse gas
emission by forests”, and agrees to provide “positive incentives” to fund such action with financial
resources from the developed world.
• Carbon trade: The accord acknowledges the importance of use of the carbon markets in
facilitating the enhancement of cost-effective techniques and to promote mitigation action plans.

The issue that is being addressed by the convention is really very big and all 115 countries that
participated in the Copenhagen Summit have to do more than just lip service to save the world from the
perils of global warming.

The summit is stated to be the one last step to save the Kyoto Protocol and given the attendance of the
summit it can be said that nations have risen to the challenges of the global warming. There is a
consensus that steps must be taken to stop global warming but it remains to be seen how much is
translated to reality. Critics of the Copenhagen Summit have come up with following points to doubt the
outcome of the “Copenhagen Accord”.

• No legally binding agreement: No legally binding agreement was made so the level of success of
the conference is unclear. As a result there are many different opinions about the degree of
progress made on climate change policy.
• No emission cut-off target for the developed countries: The spirit of procrastination has
dominated the deliberation of the Copenhagen Summit. The developed countries have again
avoided any clear-cut cut-off targets for now. This will be a difficult topic to find consensus in the
future as well.
• No real agreement to finance the projects in developing countries: Although it is stated that
the developed countries will pool in some $ 100 Billion for the projects in developing countries but
then again it lacks and backing in terms of words.
• Consensus on sharing the responsibility elusive: The impending issue of environmental crisis
is staring all of us and the Copenhagen Summit didn’t act as an ice-breaker between the
developed and developing countries. Various groups are acting as an independent entity and are
focusing on few issues only.

In a nutshell, a lot is promised but what is promised has to be fulfilled. This precondition is missing from
the Copenhagen Accord. It remains to be seen how the world will reciprocate to this impending
‘Humanitarian Crisis’.

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EUTHANASIA TIME
MRTPC will cease to exist, after 40 years of existence

THE 40-year-old Monopolies and Restrictive Trade Practices Act will be a thing of past, yielding place
to a more flexible competition regime that would be solely guided by watchdog Competition
Commission of India (CCI) and Experts giving mixed vibes.

Even as the two-year countdown for the winding up of the MRTP Commission had begun, an ordinance
passed by the President of India on October 14, 2009, clipped the wings of the body, which regulated
monopolies and restrictive trade practices for four decades, two years in advance.

The ministry of corporate affairs, under whose purview falls antitrust and competition issues, repealed
the Monopolies and Restrictive Trade Practices Act, 1969, and replaced it with the Competition Act,
2002, with effect from September 1, 2009. With the notification of section 66 of the CCI Act, which
caused the repealment of the MRTPC, as well as the ordinance passed by President, now, the CCI,
which in 2003 was set up as an advisory body to the MCA, would handle cases pertaining to
monopolistic or restrictive trade practices that were pending before the antimonopoly body. Cases
pertaining to unfair trade practices would be, however, handled by the National Consumer Disputes
Redressal Commission.

Over 2,000 cases were pending with the MRTPC, including around 600 of unfair trade practices, 360 on
restrictive trade practices and 1,200 applications for compensations.

SIGNS OF NEW TIMES

While some experts see the death of MRTPC as natural since it had lost its significance post-
liberalisation, others say it is just transformation and not the end.

“It was relevant for the period during which it was enacted. It has served its purpose. Today we need
one body of codified laws to deal with competition issues,” said Diljeet Titus, senior partner of law firm
Titus and Co.

The competition law is more flexible— a stark contrast from the rigid MRTP Act, he said.
The MRTPC had been amended to suit the need of the changing times post economic liberalisation in
the 1990s. One of the changes in the MRTP Act included the deletion of the chapter dealing with
mergers and acquisitions, whose jurisdiction was shifted to the High Court in 1991.

“The difference in the two bodies (CCI and MRTP) is that of tone — one (MRTP) says: you will not do
this, while another (CCI) says look this is not the way you should do it,” said Dhanendra Kumar,
chairperson of CCI, which would now stand as the sole competition regulator.

SMARTER WAYS
The CCI draws its powers from an Act of Parliament. The Commission has begun cases on anti-
competitive practices, like abuse of dominance, cartelisation, bid rigging, price-fixing, predatory pricing,
combinations etc empowered by sections 3 and 4 of the CCI Act.

Unlike the MRTPC, which could only warn companies against antimonopolistic practice, the CCI can
impose penalty of up to 10 per cent of turnover of the companies found guilty of spreading unfair
competition. The Commission can charge fee for receiving complaints, a practice that was not prevalent
in the MRTPC. Besides, for admitting complaints from individuals, CCI charges Rs 5,000 as fee, while
for companies with a turnover of Rs one crore, Rs 10,000 and for those companies which earn a
turnover of more than Rs 1 crore, Rs 50,000 is charged.

Until recently, the CCI and the MRTPC were functioning together. Duplication existed in some of the
cases. Kingfisher Airlines has recently moved the Bombay High Court challenging CCI’s power to

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investigate it on the airline’s code-sharing pact with the Jet Airways — a case which was already
pending before the MRTPC.

However, the CCI faces the problem of manpower shortage to handle new cases. CCI officials have
said that they would be hiring over 180 professionals soon. Moreover, the Commission is also looking
for a permanent director-general — the person who would be the key hand to investigate cases. At
present, the Commission is functioning with just about 45 personnel.

According to CCI officials, about 10 cases are at present lying before the Commission. They include the
one against DTH operators for not allowing inter-operable set-top boxes, the Jet- Kingfisher proposed
code-sharing agreement and pre-repayment penalties charged by banks like HDFC and LIC Housing
Finance.

While the CCI will admit cases and carry out investigations, the CAT would be responsible for hearing
and disposing appeals against the orders passed by the CCI and also to adjudicate on claim for
compensation that may arise from the findings of the Commission.

Powers are given in galore to the CCI; the use of the power is still awaited. The biggest demonstration
would be when merger norms are finally notified.
ROSEMARY MARANDI

Key points:
• An ordinance passed by the President of India on October 14, 2009, clips the wings of the
body
• The ministry of corporate affairs repeals the Monopolies and Restrictive Trade Practices
Act, 1969, replaces it with the Competition Act, 2002
• Experts see the death of MRTPC differently . Some see the change as natural since it had
lost its significance post-liberalisation; others say it is just transformation and not the end
• Cases pertaining to unfair trade practices would be handled by the National Consumer
Disputes Redressal Commission
• The difference in the two bodies (CCI and MRTP) is that of tone: Dhanendra Kumar, CCI
chairperson

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DEADLOCK OF DOHA DIEHARDS

There are signs of softening up after rigid stands adopted in 2008

OVER 30 ministers met in Geneva in July 2008 and they continued to talk for nine days in search of a
deal to break the duty and other barriers for the world trade, under the Doha Round of
negotiations.

The talks collapsed on the ninth day and the trade ministers packed up and left the headquarters of the
World Trade Organization in disappointment.

Apparently, India did not budge under the pressure of the US and stuck to its stand that it needs
enough flexibility and room to safeguard its farmers in case agricultural imports surge after the Doha
deal is reached. The US led the tirade against India and other rich nations joined in, asking New Delhi
to take up a “leadership” role. They wanted India to open its markets. But the then commerce and
industry minister Kamal Nath stood ground and India was tagged with the image of a ‘fall guy’.

COZYING UP?
Fourteen months after the July fiasco, ministers agreed again to meet. This time in New Delhi under a
“bold” initiative of India which, somehow, wanted to get rid of the “fall guy” image.

Of course, that was not the only reason why commerce and industry minister Anand Sharma, under
guidance of the Prime Minister’s Office, went into the small details for being a good host to about 30
trade ministers, including the ‘big bosses’ — the US and the EU.

The initiative paid off and Sharma called it a “breakthrough” because the key nations which wield
enough influence on the rest of 153 WTO members, decided to send their negotiators to Geneva from
September 14. Director general of the multilateral body Pascal Lamy commented, “We haven’t had real
engagement (since July 2008). It is time to go back to real engagement”.

The Delhi meeting also put a sense of urgency among the ministers into reaching the multilateral pact
by 2010.

“It is doable,” Lamy said. But whether it will be done? “I don’t know”, Lamy who has been named to
serve as DG of the WTO for the second term, said.

ORIGINS
The formal talks were launched at the Qatari capital (by the ministerial meeting — the highest policy
organ of WTO) within a few weeks of the 9/11 terrorist attacks in the US under the banner of Doha
Development Agenda, known popularly as the Doha Round.

These talks were meant to be concluding in 2005 and the world was supposed to have new rules to
govern the global trade, which has since crossed US $ 32 trillion (as per WTO).

But then, it did not happen so. The trade continues to follow the rules set in different sectoral
agreements under the previous Uruguay Round, which concluded in 1994 with an agreement in
Marrakesh in Morocco.
Incidentally, the Marrakesh treaty also led to the formation of the WTO in 1995 replacing the
institution of the General Agreement on Tariff and Trade (GATT) that was signed in 1947.

THE G-T ROAD

Why could the talks not be completed? The deal can only happen if the countries move away from the
public posturing and get down to business of negotiating ‘give and take’ (G & T).

“Doha is a contract,” remarked US trade representative Ron Kirk, on his first visit to India. What Kirk
was trying to explain was that you need to have ‘Gs’ and ‘Ts’ in any commercial contract. From the

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developing countries’ point of view, what could be ‘Gs’ and ‘Ts’? Well, we in India call ourselves as a
developing country. But ask the US and the European Union. They describe us as “advanced
developing country” (ADCs) along with China, Brazil and South Africa. And they want these ADCs to
open their markets for the recession-hit West, be it for industrialised goods or for the farm products.
So the market access to the West would be the big ‘Gs’, whether we like it or not, required from us.
What is the ‘T’ that we can expect? Well, we need to really work for it. We have to ensure that rich
governments in rich nations do not go on feeding their rich farmers by hundreds of billions of dollars
through what are known as ‘domestic support’ and ‘export subsidies’.

For opening the industrial goods, negotiations are going on under the nomenclature of non agriculture
market access (NAMA).

Here again, it is a question of market access and flexibilities sought by the developing countries that no
agreement could be reached. The industrialised nations are willing to cut their tariff but are seeking
aggressive markets in the emerging economies which are the only places they see opportunity in.

“Sixty per cent of the world economic growth is going to come from the emerging economies and the
ASEAN,” Kirk feels.

The fledging industrial economies like India and China would, on the contrary, like to retain flexibility to
protect their industries. It is the quantum of flexibility that talks have remained stuck. Besides, there are
sectors like automobile, chemicals, textiles (most of which are of interest to the EU and the US) where
the developed nations want zero-for-zero (complete elimination) of duty regime. Developing nations
instead insist that the Z for Z should be voluntary and not mandatory.
The WTO, on its part, has formed negotiating groups on the agriculture and NAMA and the draft
proposals have been circulated since December 2008.

Obviously, these texts are not acceptable and that is what became evident at the Delhi meet.
However, these would mostly become the basis of further negotiations which would start in Geneva,
ahead of the G 20 summit.
Lamy is supposed to go and report before the global leaders as to what has been the progress on Doha
since they met last in Washington and London.
The Delhi meeting, to be fair to the Indian strategists, removed the image of India being the “fall guy”.
How long India can remain a ‘good boy’ would be seen in the coming months!
PRAKASH CHAWLA
Key points:
• Trade ministers meet in New Delhi; India keen to avoid “fall guy” image
• “We haven’t had real engagement (since July 2008). It is time to go back to real
engagement”: Pascal Lamy
• Gives and takes involved
• The West wants market access from India, an advanced developing country (ADC); on takes,
we need to work hard
• Talks stuck on the quantum of flexibility

In continuation with the previous article, the following article describes the latest
developments that are happening in the same context.

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SERIOUSNESS MISSING IN DOHA

Key members of WTO wish to conclude Doha talks by 2010, but many show lack of sincerity

ALL the key members of the World Trade Organisation (WTO), a multilateral trade body, wish to
conclude the much delayed Doha Round of talks to reach a global trade deal by 2010 but the
dichotomy is that many show lack of seriousness to achieving the target.

For starters, the world’s largest economy United States of America (USA) has still not appointed its
negotiating team at the WTO.

Commerce Secretary Rahul Khullar has said that the main hurdle for the trade talks was a non-serious
attitude of the US which is yet to put in place its negotiators. “The other nations are saying ‘look guys
your negotiators are not in place...You cannot take it for ever and ever...,” he said.

The US administration is pre-occupied with its healthcare reform issues and trade is not uppermost in
its agenda.

After the talks collapsed at Geneva, headquarter of WTO, in July last year, in September 2009, India
took the initiative to re-energise the Doha talks. Representatives from over 100 countries participated in
New Delhi and decided to restart the negotiations in to resolve the contentious issues.

From September 14 till now, key negotiators including from India met several times in Geneva and at
other places. Officials also engaged in bilateral meetings. But the result was nil.

“Essentially we just went round and round ...We all pretend (that) we are making great progress. But
nothing was really going on,” Khullar lamented.

Before the seventh ministerial meeting, the highest decision making body of the WTO, all the countries
were unanimous that Doha round talks should move on for a global trade treaty.

However, the Geneva meeting came a cropper as nothing substantive was done to resolve the
differences to free global commerce.

Khullar, who was part of the Indian delegation headed by Commerce and Industry Minister Anand
Sharma said, “we (WTO members) did nothing” and spent time discussing trivia and all those ridiculous
details totally irrelevant... to the substance of the negotiations”.

Every member of the WTO were just raising hands in favour of pushing forward the talks, but during the
time of negotiating a small controversial issue everybody was reluctant to open their cards.

“Nothing was going on in the two-three weeks before the summit and whenever you approached
anything even remotely controversial, everyone would head for the bunkers,” he has said.

The message has gone around that if no serious effort is made to move on with the talks, there could
be serious trouble and credibility of both the ministers and most importantly of the WTO would be
ruined.

The negotiations on the Doha Round have been going on since November 2001 and the world leaders
at different summits, including Pittsburgh and L’Aquila, had underlined the need for concluding the
talks. The major issues over which the developing countries like India and the developed nations like
the US locked horns include giving protection to the farmers of poor countries, agricultural subsidies
and tariff reduction for industrial goods.

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WTO TALKS AHEAD

A stock taking ministerial meeting will take place in March 2010 to “seriously” discuss the possibility of
concluding the Doha Round.

Before that meeting, the government has started its exercise of stakeholder’s consultations with
industry and farmers besides others.

Indian negotiators are in Geneva deliberating on the issues, some more officials would join them.

“Some of the younger colleagues have gone and next week some of the top negotiators are back to the
table all over again and this time it is for deadly serious business… either we get it done or come March
there will be some difficulties for everybody to face,” Khullar said.

The global trade pact, once concluded, would result in lower barriers and greater market access in both
goods and services. As per WTO estimates, the Doha Round could result in increased world trade
worth US$ 150 billion through reduced tariffs on industrial and agricultural goods.

WTO IN PARLIAMENT
The Congress-led government came under scanner as the Opposition felt that India might come under
US pressure on the trade talks in WTO.

“There have been illustrations where we seemed to be getting pressured by developed countries,”
Leader of Opposition Arun Jaitley has said in the Rajya Sabha while participating in a calling attention
discussion on the WTO negotiations.

He asked Sharma to refrain from mixing foreign policy with trade policy. “Please keep the current close
proximity in the foreign policy away from the trading policy,” the senior BJP leader has said.

ABOUT WTO
It is a 153-member body. The WTO began life on January 1, 1995 but its trading system is half a
century older. Essentially, the WTO is a place where member governments go, to try to sort out the
trade problems they face with each other. At its heart are the WTO agreements, negotiated and signed
by the bulk of the world’s trading nations. But the WTO is not just about liberalizing trade, and in some
circumstances its rules support maintaining trade barriers - for example to protect consumers, prevent
the spread of disease or protect the environment.
RAJESH RAI

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Who is developing?
Human Development Report’ 09 poses questions on development of the country when the
growth rate is projected to be one of the highest
AMITAYU SENGUPTA
EVERY now and then, comes by some hard facts that jolts one out of slumber. Unfortunately, more
often than not, we raise some hue and cry to only go back to our slumber and the fact is almost wiped
out of our mind. You might call it the ‘Ghajini Effect’.
One such ‘fact’ is the Human Development report. The HDR, as it is better known, is published by the
United Nations, one of the biggest and most revered global institutions. It is usually launched with
massive media coverage, only to be conveniently forgotten. So let me just add to it, with my views on
this year’s HDR reporting.
India is ranked 134th amongst the 182 countries studied in the HDR. Last year, we were ranked 132nd,
and the year before that we were 128th. This is India’s worst ranking in the last decade. Given the fact
that we were never really bothered about our HDR rankings over the decade in question, this really
does not amount to much, isn’t it?
Let us go into some comparisons. Bhutan is ranked 132nd, yes it does rank above India! So does Sri
Lanka at 102nd position. Our neighbouring rival China is ranked 99th. Laos Republic, one of the
smallest and poorest countries in Asia ranks right above us at 133rd. So do Namibia, Botswana,
Nicaragua, Tunisia, Suriname and other such poor African countries. But we can take heart from the
fact that our arch rival Pakistan ranks below us at 142nd position. And before we start talking about the
great global financial crisis, let it be clarified that these figures are based on 2007 data. It takes time to
compile a global report, even for the UN. So the report of 2009 is actually based on 2007 figures when
the economy was booming. The Sensex ended the calendar year with a huge gain of 47 per cent in
2007. India’s GDP growth figures, the Holy Grail for most analysts was over 9 per cent for 2007. So
what really went wrong? Why is it that in 2007, when our economy was growing robustly, the stock
markets were bullish with investments flowing in faster than we could count, we actually slipped in
human development index?
To put matters into perspective, a ranking is but a comparative figure and is hence relative. When we
were ranked 132nd last year, we had an HDI count of 0.609. This year, we are ranked lower, but have
an HDI count of 0.612. Thus, there has been an improvement in the measure, which means there has
been improvement in overall development. As a matter of fact, ever since the HDR reporting was
started by the UN, India has made steady progresses. Over the last 27 years, life expectancy at birth
rose by approximately 8 years our adult literacy rate rose by 25 percentage points. What the lower
ranking actually says is that some others countries have done a better performance in overall human
development than we have.
Moreover, our development is frugal, grossly insufficient and more than that, lesser than overall
developments achieved globally. That by no means does away with a more basic question; why is it
that with so much growth we consistently keep failing in the most basic measures of human life?
As an economist, let me pose the question as: Why is that despite economic growth, rise in GDP and
overall economic development, we are unable to ensure human development, or rather, improvement in
the life of our population? How come certain small countries with lower growth are doing a better job? Is
there a de-link between economic growth, investment, booming economy and the lives of common
men? Is not economics all about the livelihood, income, expenditure and basic wellbeing of our society?
If the economy grows, does not the growth reach the agents that drive it?

THE de-link perhaps exists because of the myopic vision that we all have developed over the last few
decades. We are too obsessed with the notion of growth. It is well accepted that no development can
sustain without growth. To deal with our problems of poverty, malnutrition and all the other ills that
plague us, we need resources. Only economic development can provide the long. lasting cure to these
problems. One important criterion for economic development is growth. However, growth by itself is but
a part of the overall picture. Mis-notion about the term has reached such levels that we have made
growth synonymous with economic development.

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When we talk about this generic ‘growth’, what exactly do we talk about? Just pause for a moment and
ask yourself, what do you really mean when you say ‘the Indian economy has been growing’?

What it actually refers to is the rise in GDP. Yes, GDP has been growing, profits have been growing,
returns on investments have been growing, FDI as a result has been growing. But for economic
development, this accrued growth needs to be distributed. It is this distribution that has failed miserably,
and this is where the de-link perhaps occurs.

How is this distribution supposed to occur? By the current scheme of thoughts, it is supposed to trickle
down. Trickling-down effect is the most common notion of distribution in the growth focused
development model. The argument states that once you have sustained growth, the benefits will
eventually trickle down to the lower strata of society. Intrinsic in this argument is a disturbing notion that
growth by itself is not going to be uniform for all sections of society, one section will derive it later. More
troubling is the magnitude of the trickled down effect. No one talks whether it is sufficient to meet the
rise in needs, whether by the end of the day enough will trickle down to uplift the poor, and more
importantly, how much of it will trickle down, and how much of it will be retained by the upper sections
of society. Clearly, over the last 27 years of reckoning, it has tricked down or else we would not have
the HDI rise by 0.003. But given the lower levels of trickle down, we as a country have slid down in the
development index.

Much of this distribution is sought to be achieved through the ‘market’, which forms the bulwark of our
model economy. The market is supposed to be perfect, most efficient and certainly the fastest
institutional mechanism to do all this. There are two problems with this notion. One, the market is never
perfect; or rather the market is designed to be perfect according to those who control it, which means
that it suits the requirements of certain sections perfectly, but often at the ‘cost’ of others. The financial
crisis in the US and the subsequent findings about the stock market perhaps best illustrates this point.
You now suddenly have a scurry about controlling the financial market because the agents operating in
it are more interested about corporate bonuses than giving salaries to the employees, and the
thousands others, who have invested can jump off the cliff!

Two, the market is not a distributional mechanism at all. A market is a platform for exchange. Thus,
even in a free market, nothing is actually free! Such a platform is not suited to ensure distribution
between the haves and have-nots, because the latter wouldn’t have been have-nots if they had
anything worthwhile to exchange with the former! The haves would not be willing to concede portions of
their share of the growth as that would adversely affect the growth of their profits, benefits etc. the
myopic notion of growth thus becomes inward looking, where more and more have to be denied to
ensure further growth, and you soon have growth for growth’s sake.

Thus, distribution clearly needs to be done by non-market agencies. Distribution needs to be based on
prioritised needs and not ability to buy. The target should be to empower those who cannot buy their
basic needs to be able to acquire it. It is not talking in terms of charity. There is an old saying, “Give a
man a fish and you feed him for a day. Teach him to fish, and you feed him for life.” Well, all of it is true.
But simply teaching him to fish is not enough! You have to give him a reel as well, a pond or a river
where he can fish, and moreover, access to the right to use his skills to earn his living. Imagine some
one teaches you to fish, and leaves you stranded in the middle of the Sahara desert. What good will
your newly-acquired skill do? Distribution is thus not only in terms of passing on of money, or few
shreds of bread. Distribution is more in terms of establishing opportunities and enabling the destitute to
access those opportunities; in short, empowerment. This in turn will generate further economic
activities, and this the real notion of economic development. This is the broader picture. However, we
can only see it when we can break out of our fixation about growth, and start prioritising people over
profit.

Till then HDR reports will come and go, and we will remain indifferent to each like we have been. It
does not matter if we slip in ranking in the HDR.
— The author is an Economist with Economic Research Foundation, New Delhi

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Does Obama deserve the Noble peace prize ?

According to Nobel’s will, the Peace Prize should be awarded to the person who:
“...shall have done the most or the best work for fraternity between nations, for the
abolition or reduction of standing armies and for the holding and promotion of peace
congresses.”
These ideas of the Alfred Nobel were put to test with the selection of Mr. Barrack Hussain Obama, the
President of USA, as the recipient of Nobel Prize for peace 2009. However, this is not for the first time
that Nobel Committee has attracted the attention of people for its selections. Most famous among them
are: Henry Kissinger and Le Duc Tho controversy. Another blot on Nobel Prize’s history is not awarding
Mahatma Gandhi for the Nobel Prize even though he was nominated five times during 1937 to 1948.

It can be safely said that awarding of Nobel Peace prize to Mr. Obama has attracted more puzzlement
than praise. The Norwegian Nobel Committee has defended its choice sighting the extra-ordinary
efforts to strengthen international diplomacy and cooperation between people. The Committee has
attached special importance to Obama’s vision of and work for a world without nuclear weapons. For
this, dialogues between USA and Iran and between USA and Russia are very important. The committee
further cited followings:

• Obama has sowed seeds of a new climate in international politics. Multilateral diplomacy has
regained a central position, with emphasis on the role that the United Nations and other international
institutions can play.
• Dialogue and negotiations are preferred as instruments for resolving even the most difficult
international conflicts.
• The vision of a world free from nuclear arms has powerfully stimulated disarmament and arms
control negotiations.
• Thanks to Obama’s initiative, the USA is now playing a more constructive role in meeting the great
climatic challenges the world is confronting. Democracy and human rights are to be strengthened.
• U.S.-led efforts to strengthen the Nuclear Non-Proliferation Treaty and ratify the Comprehensive
Test Ban treaty—something that Nobel Prize winner Mohamed ElBaradei noted when he said that
Obama “has done in nine months what many people would take a generation to do.”
• U.S. administration, under the leadership of Mr. Obama, has pledged to close down Guantanamo
and leave Iraq.

Moreover, throughout history the Nobel Peace Prize has not just been used to honor specific
achievement; it’s also been used as a means to give momentum to a set of causes.

But there are many question marks on the claims of the Norwegian Committee. The most relevant
amongst those is that Mr. Obama was nominated for the award only eleven days after he took office in
January. So, the grounds sighted by the committee appear frivolous. Most of the criticisms that are
showered against the choice highlight that the Nobel Peace Prize should be for an achievement, not for
an effort. The veil of “extraordinary efforts to strengthen international diplomacy and cooperation
between peoples,” appears more like a prayer of encouragement by the Norwegian Nobel Committee
and more consensual American leadership rather than a token of appreciation for the work he has
already done.

Criticism of the Nobel committee’s choice of awardees has brought to for the debate that questions the
prudence of the Norwegian Committee in prize selection. The selections are perennially questioned—
someone better was overlooked (many are still upset that Mahatma Gandhi never won Nobel Peace
Prize for his work. Also, Ronald Regan did not get Nobel Peace Prize for his efforts to end the Cold
War).

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One India One Gold

India achieved her first-ever individual gold medal at the 2008 Beijing Olympics, since independence. It
took us more than 60 years to break this barrier. Our rankings shot up to 50 among the 200 countries
participating from the 65th rank we achieved in 2004 in Athens. We had won Zero Gold; one silver;
Zero Bronze in 2004. We secured a whopping (!) haul of One Gold Zero Silver; Two Bronzes this
year.
Nearly a hundred member contingent goes to the host city flying our national flag, after 4 years of
money spent in the worlds’ largest sporting carnival watched by more than a billion people across the
globe each day. Each Olympic has been a disappointment for India, save for an occasional freak case
of brilliance.
Lets get to the point straight way:
Why don’t we ever win quite a few Golds and silvers like other countries?
Let us be more understanding rather than acerbic towards well…ourselves.
First things first. Since the past year or so, we have these shining knights:

1. Vishwanathan Anand
More than a legend now. He is the current world chess champion. He first won the world title in 2000,
followed by a win 2007 and now has won for the third time. Also he has won the world championship in
three different ways it is played with: ‘Knockout’; ‘tournament’ and ‘match’ formats. One cannot get
better than him.

2. Sania Mirza
Placed at a high of top 50 till very recently. Easily one of the best tennis icons at a young age. We can
see her pioneering feats in women’s tennis. She has firmly raised the national benchmark to global
standards. It is however alleged that she appears ‘tentative’ while playing against the very best.
Assessing her from purely physical standards, there is little hope she will be among the top three. Her
regular injuries and their diagnoses indicate weaker Indian physical make up that might never the
enable us to surpass the worlds’ toughest. These are perhaps harsh analyses of India’s very best, but
critics are debating on a crucial point, more fundamental that Mirza or other sporting icons. We shall
talk on this later…
3. Saina Nehwal
Has recently won the world junior championship and the Common Wealth Youth Games gold medal.
Overall she is world rank number 11. Her break in to top 5 suddenly seems possible. A rarest-of-rare
feat considering Padukone was considered one off in Indian badminton. Her coach P Gopichand was
another star performer in his own right in the men’s section. However, with her basics right, she is
advancing surely towards the top. But the basic question, can she ever surpass the energy and the
agility of the Chinese?
4. Abhinav Bindra :
Much more than the Gold he won in the 10m-pistol category, it was his concentration, motivation to win
the medal and his devotion towards the sport that is worthy of mention and indeed adulation. His coach
said that he had to be pulled out of training sessions in order he takes some rest. This is the champion
material we are looking for.
5. Gagan Narang
Won the Gold medal and created a world record (perfect 600 in a world championship) in the 10-m Air
Rifle category in the recently held world championship in Bangkok. Ranked in the top 20, this shooter
gets motivated by his failures by own admission. His recent win after the Beijing no-show in the Air rifle
Category shows grit with talent. This deadly mix will surely make him at par with the top three.

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6. Jeev Milkha Singh

One of the most successful of Indian golfers — the first Indian to play in the world toughest US PGA
tour – won the Singapore Open 2008 of the Asian circuit. He has already won the Austrian open this
year.

Apart from this select list we have several more in the making or probable list who will one day break
into the worlds best club list. Instances like Kuneru Humpy, J Chinappa are numerous.

We see a certain pattern in the above winners:

1. We cannot just attribute their efforts to the success of the Indian sporting culture. They are
more individual efforts, supplemented by the government at various levels. But the system has
not produced them. They are definitely freak cases of individual brilliance.
2. According to some sports observers, Their Indian physiques have come in their way of
becoming Global Number One. There is some genetic bottleneck we can all see. Sufficient to
recall Indo-German hockey match and the loud difference in the body make up.

It is by no means a fact that India’s physical make up comes in way to being the world’s best, as quite a
few Indians are and have been the best in their respective fields. Here we are raising an issue in the
domain of life sciences. Scientific findings are generally objective and acceptable. There is no final word
out yet hence thses allegations remains as such till now.

Generally in India, the family is not supportive initially, as the material position of average Indian family
cannot afford the potential breadwinner to take up this ‘risky’ venture. Though the talented are spotted
and the world comes to see his/her prowess later on, but the point we are making must be pondered.
To create batches of talented people, youngsters must be encouraged to practice and the talented
among those need be picked up for nurturing, and all resources should be provided including financial
comfort. Our current practice is: Show your talent and also show your determination. Pass the test of
poverty and family opposition yourself. Then win several national and at least one international events
against the best. The chances are, we might train you. We might not.

Poverty and performance: A look at the worlds’ top ten countries indicates a clear connection
between the rich and the winner.

Exercise: Try to correlate the countries with their GDP. What conclusions do you draw?

Lastly, it is said that the communist countries win more medals than can be explained. Well, they have
a very serious Olympic and sports policy at work. The policy executing rests with officers who take up
work very professionally. It is this observation, which made Abhinav Bindra comment on our singular
lack of policy initiative in sports management.

What we need a certain degree of professionalism in our sports promotion measures. Elsewhere in the
world, sports are seen as an investment and the approach is business like. Sports are akin to any other
profession and a clinical precision is seen in the implementation of sporting development initiatives.
India must invest more in the sports field, more so in the twin areas of infrastructure and financial
incentives to winners at the village level.

Villages are India’s souls. All our richness and weakness can be traced to the man resting around
India’s village chaupals. What’s he thinking? A career in sports for his son…never.

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India’s Show of Strenght at the last two Olmpics

We have chosen view few representatative tables to highlight the following :

1. India’s medal capablity agianst our strenght of participants at these two games
2. Top ten performers give an idea how far we have to go, assuming they have reached plateau
levels.

India at the 2008 beijing Olympics :

Contingent India in sport
Sport men women events Medals
Archery 1 3 4
Athletics 3 13 9
Badminton 1 1 2
Boxing 5 0 5 1 Bronze
Judo 0 2 2
Rowing 3 0 2
Shooting 7 2 14 1 Gold
Swimming 3 1 4
Table Tennis 1 1 2
Tennis 2 2 3
Wrestling 3 0 3 1 Bronze
Yatching/Sailing 1 0 1
12 sports 28 men 25 women 1 Gold 2 Bronze

And our best ever returns :

Medal Name Sport Event
Gold Abhinav Bindra Shooting Men's 10 m air rifle
Bronze Sushil Kumar Wrestling Men's freestyle 66 kg
Bronze Vijender Kumar Boxing Middleweight 75 kg

India at the 2004 Athens Olympics :

India’s participation in the events at the summer games.

Sport men women events
Archery 3 3 4
Athletics 4 13 9
Badminton 2 1 2
Boxing 4 0 4
Hockey 16 0 1
Judo 1 0 1
Rowing 1 0 1
Sailing 2 0 1
Shooting 5 3 5
Swimming 0 1 2
Table Tennis 1 1 2
Tennis 2 0 1
Weightlifting 0 3 3
Wrestling 7 0 7
14 sports 48 men 25 women 43 events

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• And our returns

• ONE SILVER Lt. Col. Rajyavardhan Singh Rathore — Shooting, Men’s Double Trap.

2008 Summer Games at Beijing. The top ten ranked Countires.

Rank Nation Gold Silver Bronze Total
1 China (CHN) 51 21 28 100
2 United States (USA) 36 38 36 110
3 Russia (RUS) 23 21 28 72
4 Great Britain (GBR) 19 13 15 47
5 Germany (GER) 16 10 15 41
6 Australia (AUS) 14 15 17 46
7 South Korea (KOR) 13 10 8 31
8 Japan (JPN) 9 6 10 25
9 Italy (ITA) 8 10 10 28
10 France (FRA) 7 16 17 40

2004 Summer Games at Athens. The top ten ranked Countires.

Rank Nation Gold Silver Bronze Total
1 United States 36 39 27 102
2 China 32 17 14 63
3 Russia 27 27 38 92
4 Australia 17 16 16 49
5 Japan 16 9 12 37
6 Germany 13 16 20 49
7 France 11 9 13 33
8 Italy 10 11 11 32
9 South Korea 9 12 9 30
10 Great Britain 9 9 12 30

In continuation with the previous article, the following article describes the latest developments
that are happening in the same context.

The Crisis in Indian Hockey

There are no nations that can match India’s performance in the Olympics. India has won eight gold, one
silver and two bronze medals in 18 successive appearances since 1928. But, this unique distinction has
gone for a toss. For the first time in eight decades, India has failed to qualify for the Olympic games.
These are, definitely, the signs of death of National Game of India.

But this is a change did not happen overnight. The main reason for the fate of Indian Hockey is the
‘Ostrich attitude’ of those who are in a position of control. The game went through a revolution with the
introduction of the synthetic pitch but instead of embracing it Indian hockey officials buried their heads
in the sand. They viewed the artificial surface as an enemy — something designed to downgrade the
status of sub-continental teams, masters of natural grass. The effort to project the International Hockey
Federation (FIH) as a villain — out to create problems for India by altering the rules and insisting on
unaffordable synthetic surfaces — was a historic blunder. It was compounded by a mindset of
deflecting criticism by attributing the string of poor performances to the pitch, rules, and umpiring.

Since 1980s, hardly anything worked in the right direction for Indian Hockey. Nothing was done to
restructure the system, or to evolve a plan to re-orient coaching. Frequent and sudden changes of
coaches and constant shuffling of players demoralized the players. The idea of hiring a foreign coach

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was snubbed as degrading. The result of all this was that, in the era of artificial pitches, Indian Hockey
team did not figure in the semi-finals of any major competition (After the 1980 Moscow Games Gold
medal). And when this was more than enough, we hear voices which are simply unbelievable. The
crisis in Indian Hockey reached its nadir when National Hockey Players decided to boycott the World
Cup preparatory camp conducted in Pune for an indefinite period in protest against non-payment of
their dues. This reflects the apathetic attitude of the Hockey Federation against the national level
hockey players. God only knows how they deal with state and regional level players.

Working out the finances for hockey players is no doubt a complex issue. Hockey might have earned
India eight Olympic gold medals but for decades it was an amateur sport. Even today, hockey fails to
appeal to big sponsors. What hurts players most is that even when good sponsorship deals are struck,
their rewards are negligible and payments erratic. ‘Hockey India’, a mechanism created by the Indian
Olympic Association (IOA) that is yet to be formalised in a democratic election, has remained apathetic
to players’ concerns. When the International Hockey Federation (FIH) accorded recognition, it was on
the understanding that the national body would be formed by November 2009. The deadline was
extended in view of the difficulties encountered in merging associations in each State. But the
insistence of ‘Hockey India’s’ affiliation panel on a mandatory endorsement of the State Olympic
Associations led to controversies. The threat of legal action by a few delayed the constitution of the
voters’ list. The FIH and the Sports Ministry saw the necessity of nominating observers for holding fair
and free elections. The FIH named a senior vice-president, Antonio von Ondorza, and Union Sports
Minister and former Chief Election Commissioner M.S. Gill tasked the former legal advisor to the
Election Commission, S.K. Mendiratta, with the responsibility of ensuring that democratic norms were
observed. The delay in granting affiliation to Punjab triggered a heated debate. This obliged the Ministry
to issue fresh guidelines, one of which stipulates that the Returning Officer should be an independent
nominee, preferably a retired High Court or district judge.

The takeover of hockey administration after India failed to qualify for the 2008 Olympiad is yet to
produce tangible benefits. The quality of governance by the IOA-led Ad Hoc Committee and then by
‘Hockey India’ has been appalling. The dismal record of 2009 speaks of this. India has tumbled to the
12th place in world rankings, the lowest ever, and missed, for the first time, a podium finish at the Asia
Cup. Indian hockey needs to be liberated from un-elected power-brokers. A command structure that is
competent, democratic, and transparent in its functioning and gives primacy to the raising of standards
and the welfare of players must be formed in the forthcoming elections. The FIH and the Sports Ministry
hold the key to this.

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The fundamentals of Indian economy

Through this handbook, Career Launcher seeks to explain in simple terms, one of the most complex
networks within the Indian social systems – the Indian economic structure. We shall try to discuss and
understand oft heard terms like ‘fundamentals of Indian economy’, India’s GDP, the ‘growth rate’; and
seemingly complex terms like CRR; SLR; et al.

Let us start off with the sheer ‘size’ of the matter in front of us. Well, Indian economy is worth precisely
$ 1.2 trillion dollars. That is, India indigenously produces goods and services, excluding imported stuff
and things foreign, worth 1.2 trillion dollars annually. She is the 12th largest economy in the world with
the US at the top, worth $ 13 trillion. The world economic output is at $ 65 trillion dollars annually, at
present rates.

Now when we hear the phrase; ‘India grew at a very decent rate of 9% in 2007’ or ‘our economy shall
still attain 8% rate in 2008 even after the meltdown’, what do we actually mean? Well, what we mean is
that India will add $ 80 billion to our kitty this year (8% of $ 1 trillion {1 trillion = 1000 bn}.

Let us go on to the most popular phrase, generally touted by our Prime Minister and more frequently by
our finance administrators while assuring us on the soundness of our future growth and inviting
international investments:

‘India’s economic fundamentals are strong’

Let us understand this phrase and what it means: There are several significant parameters or factors,
which are generally taken into account collectively while ascertaining or assessing the strength of any
economy. Let us examine and understand their impact:

1. The political structure: India’s political structure is ‘liberal’ democratic. {Here liberalism
pertains to individual enterprise and freedom against the Marxist premium on state action and
patronage} All major political parties are committed to honoring the written constitution in letter
and in spirit. All political ‘shift-of- power’ is peaceful. There are no significant and perpetual
political or organized threats to our political structure. Dissent, protestations and disagreements
are constitutional and legal. In sum, our political structure is deemed stable and conducive to
long-term investments.

2. The economic model: Basic principles of India’s economic model are derived from our political
structure. Though constitutionally socialistic, the private sector is increasingly being assured of
full political support and since the 90s, India has adopted an aggressive policy of openness and
globalization. Our country is on a fast track to globalizing and privatizing the economy. Barring
very few commodities of strategic and rural importance and with certain aspects of rural market
closed to global commerce, the entire country is open to world trade.

The most important point is: A quick look at our economic bye laws, provisions, bills and
announcements reveals that the Indian state is committed to liberalization and enabling ‘fair’ and equal
opportunity to citizens of the world. Policies and measures since 1990s (and accelerated in 2004) have
testified to government intentions.
There are some immediate parameters, which are crucial to the soundness of our economy:

3. Nature of our economy: Is our economy import led or do exports form a major part of our
economy? What does India’s balance of payment sheet look like? While India largely imports
oils, it is increasingly becoming ambitious in its export targets. Though our export target of $
160 billion was not met, it talks of the greatness of our economic strength. India exports more
than she imports from the US! This scenario attracts foreign investments seeking to benefit
from export-oriented units in India.

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4. Rupee strength and exchange rate mechanism: the strength of any currency is determined
through three major routes: 1.The market decides as in the US and European countries 2.
Government designates its value, as in China and other communist regimes. 3. While the
actual rate is left to market forces, the government designates a band or width movement. It
shall intervene if the rate approaches an end of the band. India largely follows the third route.
The Government is actively seen to influence the rate only if the fluctuation is high, in order to
restore the stability, BUT will not necessarily determine the rate itself. The rate is affected by a
series of indices like:

1. Forex1 : The absolute amount of the stability factor; growth pattern and source of income
to our FOREX or the foreign exchange reserves. Foreign reserves include Gold, currencies
and depository receipts; and global loans. While India’s foreign exchange reserves reached
a comfortable $ 300 bn this early year, it slipped to around $ 250 on account of the
meltdown.
India — the fourth-largest holder of foreign exchange reserves in Asia after China,
Japan and Taiwan — has seen reserves sliding since the start of this fiscal year. Since
March-end, the forex stockpile has shrunk by $50.2 billion. An important point before we
move on: We must appreciate the nature of the forex reserve. Is it only short term FIIs2
(Foreign Institutional Investors) or stock money; FDIs (Foreign Direct Investment) or long-
term money invested in the durables/ nation building industries or manufacturing
processes? What is the proportion of our debts and external borrowings? These may be
noted to assess our fundamentals. It is also important to know our debt servicing track
record.
2. Inter alia Commodity and manufactured-product led Exports and imports: A high export
oriented economy is growth led, and shall yield a stable currency regime.
3. The position of our manufacturing and infrastructure development in our economy.
Some of our infrastructure projects (Bharat Nirman, Sarv Sikhsha Abhiyaan, Road corridors
like Delhi Mumbai Industrial Corridor) are among the most expensive and largest projects in
the world. India has assigned prime importance to infrastructure in our five-year plans and
annual budgets.
4. Nature and direction of our five-year plans and annual budgets; per capita income or the
total income of our nation divided by the total population; rate of national investments and
national savings.
5. The literacy rate and the quantum of technically skilled labor present in our country.
Incidentally, almost all institutions of technical excellence have an Indian work force at the
highest level. India has the highest contingent of technical personnel in the world.
6. Profile of operating multi nationals in India: A profile, which hardly excludes any major
brands of the world.

Track record of profitability of some leading foreign companies in India:

! Members of American Chambers of Commerce in 1992: Zero 2006: 300.
! Most of the US based companies are making huge profits.
! India is the most profitable market for Coke.
! For, Reebok India is the fastest growing market.
! For Motorola, India is the third largest market.
! GE is taking home three times its investments.
! McDonalds is set to earn a 100% profit every three years. Adding on 50 more outlets this year.
! Nine of the top 20 IT companies are American, amounting to 40% of the profits.
! For Citi Bank and Bank of America, India is the largest market outside the US.
! IBM’s presence with 40,000 employees is the largest outside the US.

Please note that the above data pertains to the situation just before the meltdown. This gives an
indication of the potential of our economy to perform under a normal economic regime.

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The upshot of the argument so far is that we are making a case for a very strong economic base of the
country. This enhances ‘investor confidence’ in the Indian market which brings more Foreign Direct
Investment; Foreign Institutional Investment; venture capital; equity; and making IPOs (initial public
offerings) a success.

Drivers of the Indian economy:

The recent growth of our country is mainly policy led. Structural adjustments in the economy of our
country have made trading easy. There is a network of credit agencies giving capital for start ups,
foreign investors are being welcomed, exports are simplified and made less expensive, regional
development boosted through Special Economic Zones being created in low income regions by giving
incentives to big companies like the Reliance, Tata etc. through less taxes, tax holidays, cheaper
infrastructure, cheaper lands, power etc.

Foreign Direct Investment:

Buoyed by a largely supportive public, policies and lawmakers, vast market, foreign investors are
coming to India in hordes. As per the recent rankings India is second only to China in terms of foreign
direct investment demoting the US to a third position. FDIs increase our Forex, thereby helping the
rupee; they also bring dollars, stay for long, build industries, start manufacturing, increasing both
employer and employment potential and help build the nation.

More than $ 20 bn of FDI have already been invested in the current year. Compare this with less than $
4 bn that came to India in 2005!

Venture Capital and Private Equity:

Venture capital is the money made available to a ‘risky’ project. The financier is convinced of the idea,
its blueprint, execution and viability. The financier is not involved more than merely investing heavily.
Any smart management personnel, entrepreneur, individual or a small company can get funds through
a venture capitalist and start his or her project. Generally, venture capital is given to an entrepreneur,
who is brilliant in his/her field of expertise, though s/he may be new to business. The IT boom has been
powered by Venture Capital.

Private Equity: Private equity is the foreign money, which is invested on our IPO’s, joint ventures, and
industry start-ups and green field projects. These money are all long-term investments, growth linked
and increase our capital base and employment and eventually the per capita income

Private equity is a type of foreign direct investment.

Among all types of Foreign money, the FDIs are most sought after, as the capital is invested in nation
building processes as manufacturing, export promoting ventures, infrastructure and in long term
equities.

IPOs or Initial Public Offerings:

Let’s read a news article published in January 2008: This piece will give us an idea of the significance
of IPOs before the meltdown stunted this market…actually the entire global market…

…India’s Initial Public Offerings (IPOs) market has emerged as the eighth largest in the world. The year
2007 saw 105 public offerings raising Rs 39,387.72 crore (Rs 393.877 billion). According to some
estimates, the total value of public issues in 2008 could be as high as Rs 75,000 Crores (Rs 750
billion)…. (Rediff)

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When a SEBI registered company wants to raise funds or capital for its expansion programs, it floats an
IPO for the first time related to that project. The IPO document will in detail inform the investor of the
project, its growth trajectory, and its profit potential. The risk factors are also outlined. Based on his
personal assessment, the investor may invest as a shareholder, by buying shares at the face value as
announced by the Company. Each investor who buys stocks through the IPO gets dividends or profits
based on the company’s performance, as declared by the company. If the company faces losses, the
equity holder also bears the losses. In uncertain market situation, IPOs incur losses and so does each
investor.

IPOs are generally welcomed as they attract public stakes and long term FDIs, equity. India’s
IPO market fetched Rs. 25,000 Cr in 2006-07. It fetched over 40,000 in 2007. However, it will not
continue to grow this year, for reasons clear to all.

Some of India’s biggest IPOs in the recent past include (in Rs):

1. Reliance 11,000 Cr: Fully subscribed or sold out

2. ONGC 9,500 Cr: Fully subscribed or sold out
3. DLF: 9,100 Cr: Fully subscribed or sold out
4. Cairn Energy: 6000 Cr

When a company floats its second or third public offering, it’s called FPOs of Follow-on Public Offers.
ICICI floated its FPO last year.

Though corporate India had over ambitious plans to launch even bigger IPOs in the latter part of 2008,
all such mega projects have been halted due to the crises. India holds the 10th position in the global
IPO market3 .

Foreign Institutional Investment or FII: FIIs are funds that are active in both primary and secondary
markets, invest in stocks and aim at reaping short-term profits. Though they bring dollars, the flight of
the capital is sudden, at times leading to currency and monetary fluctuations.

FIIs are heavily involved in speculative practices like futures trade and short selling. They indulge in
heavy trading in times of crisis making the situation very volatile. The recent controversy relating to
Participatory Notes, involved active participation of the FIIs.

Still, FIIs push up the stock prices, enhance national reputation, increase the investment profits of stock
players, strengthen the stock exchange and generally increase the ‘brand value’4 of the region.
Presence of over 1000 registered FIIs in India boosts investor confidence in Indian stocks.

Hedge funds: Extremely important in the present times of economic crises. Hedge funds are
investment pools of some of the uber-rich or very high net worth individuals across the wealth. The
Hedge Funds have a certain tendency to aggressively invest and usually their returns are typically
higher than any other form of investment. Hedge funds had initially reaped high returns in the US realty
boom. They have been accused of short selling. Much of their strategies remain secret. They operate in
high-risk markets. Hedge funds have this ability to return profits in both the bear and bull hugs. They
have also been affected by huge losses in the present crisis5 .

HNIs: It is noteworthy that more and more Indians are reporting to the millionaires and billionaires list.
HNI or High Net worth investor/individual is the person who has more than $ 1 million, excluding his
immovable properties.

There are close to 1.3 Lac millionaires in India and more than 40 billionaires with four in world’s top ten
richest including Mukesh Ambani, L N Mittal, Anil Ambani and K P Singh.

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The idea to include a note on the annual increase in HNI and the millionaire/billionaire list was to
indicate the very fast growing corporate sector in India. Do note the per annum increase in the list, and
the profile of the rich list. While increasing numbers indicate wealth formation, their profile indicates
enterprise and entrepreneurship, indicating tapping of economic opportunities. Of course it is said that
LN Mittal has lost over $ 50 billion in assets and will no longer fall in the above list. But who hasn’t?

India and China

Most of the noteworthy world leaders, global financial institutions like the WTO, credit rating institutions,
economists, market observers and analysts have called Indian and the Chinese markets as ‘emerging
growth centers’. A few years back Goldman Sachs, a global credit rating agency developed the ‘BRIC’
theory which stated that countries like Brazil, Russia, India and China would be the new global
‘economic super powers’ by 2050. They would have the maximum percentage in the global financial
output.

Well, the present crises have certainly proved that India and China have at least been little less affected
by the meltdown, though in reality, India is now feeling the pinch.

If we compare the two economies6 in question closely, we will gather that India is actually distant from
this ‘growing machine’ called China. But then later, when we evaluate world GDP, in their own currency
value or7 , we come to some really pleasant conclusions.

# Various financial reports/studies by IMF and World Bank (2007 figures) have placed India
between a high of 3rd and 5th position.
# China is one point ahead of India at 3rd or at 4th positions.
# Wide disparity is witnessed against Food production capabilities.
# Both India and China are behind only the US, the European Union and Japan. This clearly
makes the Indian economy among the worlds’ most growing.

We need to focus on these areas in order to catch-up with this aggressive neighbour of ours!

India and China: Economic comparison

Indicators India China

1. GDP (PPP $ TRILLION) 2.34 5.33
2. GDP per capita (PPP) 2,126 4,091
3. Exports (2006-7 Billion) 126 900
4. EXIM BOT (Bn) - 60 +180
5. Forex ($ billion) 276 1612
6. Population below $1/ day (%) 34.3 9.9
7. Population below $2/ day (%) 80.4 34.9
8. Cultivable land (million) 146 100
9. Foodgrain production 108 400
10. Rice productivity (KG Per Hectare) 3034 6233
11. Wheat productivity (KG Per Hect) 2688 4155
12. Life expectancy (Years) 63.7 72.5
13. Underweight children(%) 47 8
14. IMR per 1000 live births 56 23
15. MMR 100,000 live births 450 45
16. Public health expenditure (% of GD 0.9 1.8
17. Telephones (million) 265 910
18. Internet users (million) 46 185

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19. Population (billion) 1.12 1.32

20. Population Growth Rate 2.0 1.2
21. Urban to total (%) 28.7 40.4
22. HDI Rank 128 81
India and China account for 14% of World GDP
Indian exports to China are mainly iron ore based.
Indo-Chinese trade = $ 25 billion our BOT = $ 8 billion this year, may be $ 14 bn year-end. Chinese industrial goods exports to
India account for our 10% of GDP (1.3 reverse)
(It is $8 bn surplus with US). India imports 75% of tubes from China. Data processing machines (35% transmission apparatus
(50%)

Non-tariff barriers: Chinese pricing mechanism is opaque with massive capital and input subsidies. Registrations for commerce
are difficult and expensive no direct flight to Beijing et al.
Agriculture: China invests enormously more in terms of public investment, land holdings are remunerative, more inputs (water,
fertilizer)

1 Foreign Exchange Reserves

2 All important terms like FII & FDI have been explained as you read on…
3 Positions vary with time.
4 Read detailed discussion on “brands” in the last chapter
5 Hedge funds’ role in the Economic Crises has been dealt with in Chapter on the Meltdown.
6 See chart
7 GDP at PPP has been explained in the Chapter on Economic Terms

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Global Economic Meltdown

Understanding the US-led global economic crises

There is a whopping increase of 116% in the number of enterprises closing shop at

25,000 this year; up from 11,044 in 2006. Another 7000 have gone for bankruptcy, up
from the 3500 two years ago. These figures give ample idea of the financial trauma in
the United States. These are unprecedented in the ‘land of opportunities.’

Perhaps, never before in recent history, has any economic development been so talked about as the
ongoing ‘economic meltdown’. Therefore let us understand this phenomenon gradually and fully. This
will also give us a clear picture of the existing global and national economic administration and
functioning. We will stop by important terms and incidents provided in boxes or in other places as
indicated.

As is clear no one person or institution ever understands the world economic network and functioning
completely. Naturally, the fault could not be detected until the symptoms proved beyond repair.

The sudden collapse of global finance giants like Lehman Brothers, AIG, and battering of numerous
other behemoths like Citi Corp triggered the collapse of the stock capital, affecting all US financial
institutions, the effect spreading to European and Asian markets, leading to a worldwide credit crunch
or lack of capital for daily operations, loans and expansions across all sectors and all markets. This
present situation— of substantial loss of stock money, shares being traded very low across all stock
exchanges, high rates for borrowing money, and low productivity due to low demand— is termed
‘economic meltdown’.

How it started: The sub – prime crises

Actively supported by the government, large banks, led by Citi Corp started encouraging the lower
middle/lower class to seek loans to ‘own a house’ in America. While the banks wanted to cash in on the
booming real estate market, the less affluent were lured by the idea of having their own houses. Since
the boom in real estate appeared real and actually gave high returns, the banks forayed into lending to
those incapable of repayment –the poor and the students. Loans to this category were known as NINJA
loans or No Income No Jobs or Assets Loan. It was assumed, and here lies the ‘core’ of the storm the
house shall always be worth more than the defaulted amount and therefore the banks would always
yield profits—even in the ‘default’ case. As stated above, the US government actively encouraged this
arrangement as suited its welfare agenda of ‘house for all’. Institutions like Fannie Mae and Freddie
Mac, which gave unlimited mortgage based loans to individuals were supported by it. Since this model
appeared to yield high returns in less time, hedge funds started operations. The advent of huge and
easy money for house loans made loan seeking very popular among the NINJA awardees. Till 2006
and early 2007, all gained. The poor had houses; the hedge funds went for a kill. The banks made
sedate profits and the US was more socialist now, comfortable in the idea that in US, all will have a
house of their own.

House owners who had no income had to default one day. This happened in 2007. Then this became a
trend and suddenly hedge funds, which cannot tolerate losses for long, started withdrawing. The banks,
which had given loans many times more than they should, couldn’t do much to stop the flight out of
funds. Since, the realty sector was earlier booming, investors had put in major capital in realty stocks.
Now they started withdrawing. As the realty stocks plummeted, the realty sector no longer commanded
premium. The worst point came when the houses themselves lost premium and were now worth less
than the loans forwarded. This meant all loans ever forwarded were loss making. The banks
themselves had taken loans to forward loans to retailers. As a result, in a free fall, all realty stocks
crashed.

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How and why the crisis spread all over the seas.

PLEASE UNDERSTAND THAT THE CRISIS PRECIPITATED NOT BECAUSE OF CONSTRUCTION

ACTIVITIES BUT DERIVATIVE OR FUTURES TRADE AND SPECULATION OR GAMBLING BASED
ON CONSTRUCTION ACTIVITIES.

Role of investment banks (i-banks), Hedge funds and HNI money.

Generally, a bank has substantial ‘liquid cash base’ on the basis of individual and corporate deposits.
This is safe and continuous supply of cash, which forms the base capital of all banking operations.
Investment banks like Lehman Brothers, Goldman Sachs and JP Morgan are not the usual individual
‘account holder type’ of banks we have explained above. They have no security of assured individual
clients like the State Bank of India! They earn as returns on the investments. They assess and predict
the profitability of a project, invest a huge amount and earn profits as returns. Thus Lehman and others
gambled on house mortgage big time. Hedge funds made capital or money available for investing in
high-risk high-return projects. While the i-banks and hedge funds made the mortgage market huge, the
losses too were vast. And since the same companies also invest in other global projects, the crisis
spread like wild fire. As the markets crashed, all investors who would have funded other equity projects,
infrastructure works, construction activities, export oriented manufacturing across the globe went bust;
all their projects collapsed.

Since investor money was completely wiped out, no other stock found purchasers, leading to all round
loss across US exchanges. Since all major world companies had invested in US exchanges, all these
companies lost hugely. There was heavy selling and no buying across all exchanges leading to
collapse of the system. Short selling further added to the panic. Additionally, no money was now
available to any new activity. In London, inter-bank loan rate was trading at unrealistically high levels.
This was because no bank knew the level of losses of other banks and was reluctant to give loans to
other banks. The distrust was complete. It was clear, just as in stampede, where all near the point of
origin generally die/ get injured, all major money forwarding institutions, were paralyzed.

Immediate Impact: It is said that this crisis has wiped out 30% of bank assets in the US. Lehman
Brothers were trading 30 times more than they should have. Citi Corp losses are in billions of dollars.
Washington Mutual, Wachovia, Merrill Lynch, Goldman Sachs, etc. were big names that orchestrated
the world economy. Some of these companies’ total assets are higher than the GDP of many countries.
Citi Bank’s total assets equal a whopping $ 2tn. Lehman Brothers’ assets are pegged at $ 300 bn plus.
They predicted, financed and rated future beneficial projects and were at the core of all global plans. As
they plunged same-day-same time, the world followed suit. Clear enough?

Long-term impact:

Capital for future projects are based on predicted future profitability of the project. Let’s take an
example for elucidation. If ONGC announces an IPO for an oil project, the investors will assume profit
based on increasing demand of oil due to rise in population and purchasing power, pushing the oil
demand. This is how money will be made available to ONGC today.

In the present situation, investors will take the following considerations into account:

1. There is no guarantee of increase in purchasing power as no new jobs are foreseen.

2. Projects might suffer due to credit crunch, as banks have no excess money. Therefore, the
project might suffer delays and increasing cost overheads.
3. There are little prospects for the share of the company rise in near future.
4. No one knows when the global recession is likely to end.

Therefore, if a company is to launch new major projects now, it may not find easy funding. Many global
majors cannot survive without new projects and almost all companies have to innovate. But again no
funds are possible for R & D, innovation or expansion.

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India and the US Crisis:

At the beginning of this rather depressive chapter, we noted the gloom statistically. Now relate it to the
fact that the US market formed 14% of our exports in the year ending March 2008.

The prime minister while admitting slow down of our economy has clearly stated that there would be no
recession in our economy. WTO chief Pascal Lamy, said India and China has saved off the world
economy from total collapse. He said India along with Brazil, Russia and South Africa are still growing
economies. These statements suggest soundness and resilience of the Indian economy in the face of
global fluctuations. Still, the impact, in the immediate term, is showing heavily…

The ‘meltdown impact’ on India has been moderate to heavy based on the sector/area we are referring
to. There is no uniform assessment across all sectors of our economy. The top Ten Indian Companies
have lost over 3 lac crore rupees through stock capital losses, as of Oct 2008.

Broadly, we must analyze the following activities:

1. Banks operations: Most affected. While we from interest on our saving or current deposits,
banks themselves earn through speculation, futures trading and further investment. In the
absence of these options, as of now, not much capital is available with the banks to grow.
Though individual money is safe under government’s strict regulation, banks are unlikely to
offer easy money to individuals, companies and other banks leading to slack in manufacturing
and trade. It is largely speculated that the ICICI bank has been particularly affected by the crisis
owing to its heavy exposure to world derivative market. As a result of this rumor, no bank was
willing to supply credit to this bank, furthering its woes. In the quarter ending September this
year, ICICI lost Rs 11,000 Cr in deposits contraction, while the ‘safe’ public sector banks (SBI
and PNB) gained Rs 70,000 Cr in the same three months, as fresh deposits. By ‘safe’ we mean
from the ‘public perception’ angle.
2. Sectors affected: Banks and all other financial institutions; real estate; construction; BPO;
Aviation; Hospitality.
3. Job market: projected 20% job cuts. Fresh hiring is negligible. Bonuses affected. Most affected:
IT, Finance; Banking, BPO; Real estate and Construction.

Most of the leading IT companies have recorded low Q31 profits due to meltdown.
Q31 means a Quarter. Q3 = third quarter of a financial year i.e. July-August

Some leading corporations like Tata Motors have temporarily closed down some of its plants to
prevent the piling up of the inventory or previously produced unsold goods and material.

4. Not yet impacted: FMCG; Pharma; Media;

5. Stock Exchange: Plunged from a high of 21K in Jan ’08 to 6 K by Oct 08. This is mainly
because of global cues indicating slack future economic activity and withdrawal of foreign
money (FIIs) by parent companies themselves affected by the losses.
6. Slack in demand of Indian goods leading to decrease in export volumes. This means no
demands and therefore no work for EOU or Export Oriented Units.
7. Lack of tourist footfalls.
8. Read along with point 3, decreasing business trips to India is already leading to slower growth
in high-end luxury hospitality sector.
9. Slack demand for Indian professionals in US or other European countries.
10. NRIs across the globe and particularly in the US may send lesser remittances back to India.
11. Possible job cuts, as there could be a gap/delay in new international projects/ because of less
economic activity in sensitive sectors like aviation.
12. All major BPOs are run on US led projects. They may be impacted.

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13. This would mean fewer dollars added to our FOREX. This may impact our national debt
servicing. It would also impact the Sovereign wealth fund.
14. Owing to fluctuations in the dollar trade, the government leverage in regulating currency
demand supply may be restricted. In other words, there could be more demand on the dollar as
less and less dollars would be available for international trade.
15. Government has admitted to slow down in economic activity. India will not achieve 8% growth
rate in 2008 and our five-year plans shall also suffer with a targeted achievement of 9% annual
growth.

The governments’ reaction:

The US government has meanwhile made available $ 700 bn (Troubled Asset Relief Program) to the
ailing financial behemoths and for the general resurrection of the recessionary US economy. The US
has provided money to the banks to ease pressures on liquidity demands and other such purposes,
subtly encouraging moving away from speculation based trading. Likewise, the two major surviving
investment banks (Goldman Sachs and JP Morgan Chase) have restructured themselves to regular
banks. The government is keeping a close watch on all major economic activities and has banned
short selling in the stocks for now. It bailed out mortgage banks Fannie Mae and Freddie Mac; bought
majority stakes in AIG to make it government aided and helped in all bailouts and mergers.

A brief digression is required here: Was the government right in offering such a bonanza to these
institutions? Yes and No. The government at the end of the day is the final guarantor. If all else fails, the
government has to intervene. Second, this crisis was cancerous and was eating away at all financial
institutions and the entire economic fabric of the US - therefore the bail out. Opposition says there was
no need to fund the greedy professionals who lived off gambling with poor people’s hard earned money.
Actually all derivative trade is a form of gambling and governments do not and should not bail out failed
gamblers ever.

India’s reserve bank and the bankers’ bank, the RBI has made available more than a lakh crore rupees
since the crisis to banks by allowing them to keep less cash with the RBI (CRR). It is also encouraging
banks to lend easy money to other banks by restricting call money market (rate at which one banks
lends money to other banks for short periods). The RBI is also easing off restrictions on stock trading
through Participatory Notes, to infuse more foreign exchange and cash in the bourses.
In the long-term the government may look into banking reforms, liberalize foreign direct investment
norms, further de-control industry and generally boost trade and investment

The Great Depression of 1929

In order to understand the present crisis and its relation with the term ‘ recession’ we need to visit this
often read phrase: the Great Depression!

The Second World War had ended in 1919 and there was optimism and hope in the air. Governments
of the day had become major buyers of consumer durables in the preceding war years (1914 – 1919).
These purchases were war requirements and did not merely tally with present demands. While the war
ended, the production did not. Years preceding 1929 were witnessing successive years of frenzied
production, apparently fueled by expectations of higher and still higher demands by consumers. This
did not happen. When the demand started falling, production should have immediately stopped.

The term (economic) depression means a sustained recession in an economy/ (economies). A

depression is a serious form of recession. The 1929 stock market crash preceded the Great
Depression. The crash was followed by the drought of 1930. In the resulting scenario, the banks failed
completely. Production stopped completely and prices fell. Agricultural products became highly
unprofitable. Due to a general lack of work, there were massive defaults on loan repayment.
Simultaneously, people lost trust in banks and started withdrawing their liquid assets. Banking systems
crashed completely. The lowering of Gold prices, crucial at that time, further created economic void.

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Unemployment reached unsustainable levels, as there was no construction activity. In the 30s, these
effects reached Europe. These depressive circumstances continued up to the start of the Second World
War in 1939. The governments of the day sat together to make sense of the events, prevent recurrence
(of wars too!) The United States announced the “New Deal” for the massive reconstruction of the
damaged economies. The resultant solutions were the International Bank for Reconstruction and
Development or the World Bank (through the Breton Woods Conference, 1945), the IMF and the United
Nations.

Select Institutions Affected and Bail out Actions Taken

• Fannie Mae and Freddie Mac : US Govt. has taken over

• AIG : 80% Government stake
• WaMu : JP Morgan
• Wachovia : bought by Wells Fargo (Warren Buffet backed) for$ 15 bn
• ML : bought by BoA for $ 44 bn
• Lehman Brothers : various – Barclays, Noumora

Economic Financial Meltdown

Role of RBI in the control of Money supply

We shall talk about RBI (The PMO1 for all banking operations in India) in the specific context of its role
as troubleshooter in the recent meltdown.
PMO1 The ‘Prime Ministers’ Office (humor: most important office!)

Basically, the banker’s bank is the supreme monetary institution in India. It is also the watchdog of all
economic transactions in India. In the ultimate interest of our economy, RBI is authorized to initiate
measures to control money supply in the country.

In troubled times, as in the present, RBI virtually becomes the doctor, whose skill shall shape the
destiny of the patients’ health.

We shall see how exactly, the RBI intervenes in the times of crisis, as in late 2008:

1. Repo rate is the rate at which our banks borrow rupees from RBI. When the repo rate
increases, borrowing from RBI becomes more expensive. Naturally, a reduction in the repo rate
will help banks to get money at a cheaper rate. Every half percent cut infuses one lakh twenty
thousand crores into the market (@current price) for lending, growth purposes. A cut in the
repo rate will add pressure on commercial banks like HDFC or ICICI to lower the ‘bank rate’ or
the interest charged on loans they would give individual retail consumers. Now, the loan activity
will increase leading to a greater economic activity or growth due to expansion.

2. Cuts the CRR. Well, CRR is a potent fiscal instrument with the RBI to control (rupee) money
supply in the market. CRR or the Cash Reserve Ratio, is the compulsory requirement on the
part of each bank governed by the RBI or ‘scheduled’ banks to keep a certain amount of money
in the liquid form with the RBI. Every one perce cut would mean Rs. 40,000 cr that banks can
retain to give as loans to people.

These ensure the following:

a. No bank will go bankrupt, as some of its money is always available with the RBI, which
may be utilized for this bank.

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b. More importantly, the RBI can check reckless lending by the bank to the retailers,
flooding the market with excess rupee.
3. Give more window or leverage to banks to borrow from the banks against their deposits to be
used to firm up the Mutual Funds floated by the bank.
4. Special refinance measures by RBI to commercial banks against their deposits. This measure
is done to enable more funds with the banks for short-term investment purposes.

By the end of October the RBI had already pumped in more than 2 lac crore into the system through
RBI interventions.
Are the measures undertaken by the Indian government, enough?
Well, first of all, the question itself is inappropriate. We must first understand that to survive and
progress in the present age of competitive market, we need to streamline our economic patterns and
steadily integrate with the global village.

More isolated (or closed) the market, more insulated it is to international fluctuations {as we were before
the 1990s}.

The nation was swiftly moving towards globalization for the preceding 17 years.

It is only natural that when a 13-trillion dollar economy suddenly gets devastated, affecting the world
economy— to which we were trying our best to align with— we are bound to be affected. So, do not
take a knee jerk stance. Understand the core of the issue.

Still, are these troubleshooting measures by the RBI enough? No, the RBI can only give you an
umbrella during rains; it cannot either prevent rains or attend to pneumonia.

In the long term we must strongly discourage heavy speculative trade; or at least move away from our
over dependence on select financial institutions, which thrive on risky investments.

We must make our banks and institutions more accountable and transparent

Exports need to be encouraged and diversified, both with respect to product and market.

Our contribution to world trade stands at a measly 2%. We need to enhance this portion.

We need to diversify our trade partners and move away from US based export partnership to perhaps
new markets like the ASEAN.

We have seen how an increased purchasing power can lift up sectors like telecom, retail etc. We need
to develop our human capital to perhaps lead world trade through a stronger trading center.
The point is, rather than being panic, we must use the interval to warm up ourselves and emerge
stronger in trade, commerce, science and education. These are the basic requirements to become a
world leader.

In continuation with the previous article, the following article describes the latest developments
that are happening in the same context.

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FM’S PRESCRIPTION
Government announces mores steps to boost economy

FINANCE minister Pranab Mukherjee, while winding up the debate on the Finance Bill, 2009 in the Lok
Sabha, announced more concessions for home loan seekers and also industry to give a further
stimulus to the economy, which is still braving the impact of the global financial meltdown.

The major concessions announced by the minister include one per cent interest subsidy for lower and
middle income housing loans and freeing road repair and maintenance services from the ambit of
service tax, besides providing relief to the disabled persons.

Among other things, the minister also announced that the service tax on new services proposed in his
budget would come into effect from September 1, thus doing away with the uncertainty about the timing
of imposition of the levies on additional services. The Finance Bill, which deals with changes in tax
regulations and rules, was later approved by the Lok Sabha with a voice vote. The passage of the Bill
completes the three-phase budgetary exercise in the Lower House.

FILLIPS
Maintaining that lower and middle income housing deserves to be supported to stimulate the segment
of house owners, Mukherjee in his reply in the Lok Sabha said one per cent interest subsidy would be
available to individuals for loans up to Rs 10 lakhs for houses that do not cost more than Rs 20 lakhs.
The budget will provide Rs 1,000 crore for this purpose. Giving yet another sop, the minister announced
that the eligible deductions for assesses with severe disability will be raised from Rs 75,000 to Rs 1
lakh for purposes of income tax, a decision that will provide some relief to physically challenged
persons.

In order to boost education, the minister extended the benefit of deductions in respect of interest paid
on education loan for higher education to legal guardian of the student under Section 80E of the IT Act.
Similarly, he extended the sunset clause for tax holidays for industrial parks by another two years up to
March 2011, in a bid to provide stimulus to infrastructure sector in the wake of economic slowdown.

Elaborating on his proposals, the minister clarified the interest subsidy on home loans will be routed
through the scheduled commercial banks and housing companies registered with the National Housing
Bank. It will be available for a period of one year.

He said he also proposed to provide further stimulus to the housing sector to allow tax holiday in
respect of profits derived from projects approved between April 1, 2007 and March 31, 2008, if they are
completed on or before March 31, 2012.

The minister expected the developers to pass on the benefit of tax holiday to home buyers by
appropriately reducing their prices. “I am sure that both the expenditure and tax-foregone initiatives
would provide relief to a large segment of prospective home owners and help revive the real estate
sector,” he said.

Yet another concession he extended was to the tax holiday on profits in respect of business processing,
preserving and packaging of meat and meat products and poultry, marine and dairy products.

Similarly, the tax holiday provided for undertakings engaged in commercial production of natural gas in
blocks licensed under a New Exploration Liberalisation Policy (NELP) eighth round will be extended for
commercial production of natural gas in blocks under the fourth round of bidding for exploration of coal
bed methane.

The benefit will be available prospectively from assessment year 2010-11 and subsequent assessment
year. On the Direct Taxes Code, which the budget said would be released by August 20 for discussion,
Mukherjee said suggestions made by members regarding simplification would find reflection in the

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preparation of the code. The Tax Code, which will subsume all direct taxes laws, is likely to be tabled in
Parliament for discussion during the forthcoming winter session.

CAUTIOUS ON ECONOMY

Before appealing the House to pass the Bill, the minister pointed out that the economic recovery has
begun and also expressed the confidence that the economy would be able to reach the high growth
rate of eight to nine per cent by end of 2010.

According to the finance minister, creation of infrastructure both physical and social, tax reforms and
inclusive growth would be the theme of the policies and actions of the government.

“Reforms will be on our agenda, but reforms is a continuous process. It is not a mantra which is to be
chanted”, he added. Noting there was no need to either press panic button or paint a rosy picture of the
economy, the minister said, “We are not out of woods, situation is still difficult.”

Efforts, he added, would have to be made to ensure four per cent agriculture sector growth by making
available water, pesticides, fertilisers and credit at affordable cost to farmers. The stimulus packages
announced by the government were giving dividends, the minister said, adding the output of cement
and crude oil has improved and performance of manufacturing sector is encouraging.

Mukherjee also expressed confidence that it would be possible to implement the Goods and Services
Tax (GST) with effect from April 1, 2010, as the “commonality of interest” between the centre and the
states. “On the board national issues, there are no discordant views”, he added.

The minister further said that it was not possible to accept many of the demands of the industry at this
juncture as the tax-GDP ratio had come down from 12.6 per cent to 11.5 per cent, mainly because of
the steps taken to boost the economy.

On the issue of income tax refund and mounting interest payment on delayed refunds, Mukherjee said
that Central Processing Centre (CPC) being set up at Bengaluru would become operational in August.

Centralised processing of returns which are filed online, he added, would help in facilitating payment of
refunds and reducing outgo on delayed refunds.

On further lowering of interest rates for the agriculture sector, Mukherjee said, it was not possible, as
low rates would have adverse implications for the domestic savings.

“We cannot have a policy to discourage domestic savings. We have to take an integrated view”, the
minister said, pointing out that bulk of the savings are accounted for by the household sectors.

Responding to the suggestions of members of doing away with practice of amending tax laws with
retrospective effect, Mukherjee said, the government has to do is to prevent “administrative chaos”
which can result from judgments of the Supreme Court, the constitutional authority to interpret laws.

The minister also dispelled the criticism that corporates are not paying adequate taxes by pointing out
that effective rate of taxation has increased from 19.26 per cent in 2005-06 to 22.24 per cent in 2007-
08.

As regard the enhancement of the limit on wealth tax, he said, it is levied only on dead assets. The
minister in his budget proposed to raise the threshold limit for payment of wealth tax from Rs 15 lakh to
Rs 30 lakh. The proposals announced by Mukherjee, while concluding the budgetary exercise, broadly
address the problems of the sectors hit hard by the global slowdown. The real estate, which has started
showing signs of improvement, will get a stimulus and will also promote growth of allied industries
connected with it.

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The real aim, as also spelled out by Mukherjee, is to bring back the 8-9 per cent economic growth,
witnessed before the global economic crisis following the collapse of America’s iconic investment
banker Lehman Brothers.

CHANDRA SHEKHAR
Key points:
• FM announces one per cent interest subsidy for lower and middle income housing loans
• Would be available to individuals for loans up to Rs 10 lakh for houses that do not cost more
than Rs 20 lakhs
• Road repair and maintenance services to be freed from the ambit of service tax
• Benefit of deductions in respect of interest paid on education loan for higher education
extended to legal guardian of the student under Section 80E of the IT Act
• Tax holiday on profits in respect of business processing, preserving and packaging of meat
and meat products and poultry, marine and dairy products

In continuation with the previous article, the following article describes the latest developments
that are happening in the same context.

RECOVERY TIME?
Is Indian economy showing signs of revival?

GOVERNMENT fiscal and RBI monetary packages have no doubt made India weather the storm of
global economic slowdown. The packages have started yielding result with Indian economy growing by
6.1 per cent in the first quarter of this fiscal, the fastest pace in any quarter since global finance crisis
deepened in the middle of September last year.

Despite manufacturing and some services like hotels still to come out of the crisis fully, GDP improved
marginally from 5.8 per cent in the previous two quarters, when the financial services icons Lehman
Brothers collapsed, sending shock waves around the world.

However, when compared to the first quarter of last fiscal, the growth this time was lower than 7.8 per
cent, but that would not be the appropriate comparison, since the economy started slowing down
heavily from the third quarter.

THE HIGH ACHIEVERS

Also, 6.1 per cent quarterly growth rate makes India the second fastest growing economy among major
countries after China, which recorded 7.9 per cent growth in April-June quarter.

Among sectors, except for manufacturing, farm, trade and hotels so others particularly mining,
electricity and financing, performed quite well.

The worst-hit sectors were trade, hotels, transport and communication, posting 8.1 per cent growth in
the first quarter this fiscal compared to 13 per cent a year ago. Manufacturing was down to 3.4 per cent
against 5.5 per cent and agriculture to 2.4 per cent versus three per cent.

Electricity generation and mining output were the best performers, as they grew by 6.2 per cent and 7.9
per cent in the first quarter of this fiscal against 2.7 per cent and 4.6 per cent a year ago, respectively.

As a whole, industries are showing signs of early revival, though they are yet to recover fully from the
slowdown. Growth for June quarter jumped to 7.8 per cent from a meagre 1.2 per cent and 2.2 per cent,
in the previous two quarters respectively. According to commerce minister Anand Sharma, industry
grew by seven per cent in July.

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Financing, insurance, real estate and business services also expanded by 8.1 per cent against 6.9 per
cent. Construction was slightly down to 7.1 per cent from 8.4 per cent and community services by 6.8
per cent from 8.2 per cent.

In absolute terms, Indian GDP stood at Rs 8.3 lakh crore in the first quarter of this fiscal, if calculated in
1999-2000 prices, compared to Rs 7.83 lakh crore in the previous Q1 and Rs 7.26 lakh crore in the first
quarter of 2007-08.

However, when calculated at current prices, the size of Indian economy stood at Rs 13.27 lakh crore
compared to Rs 12.35 lakh crore and Rs 10.63 lakh crore in these periods.

The 6.1 per cent growth rate prompted many to conclude that India is on recovery path now. In fact,
Prime Minister Manmohan Singh exuded confidence that the worst of global downturn was behind.

“We have been through a difficult year because of global economic downturn, which is only now coming
to an end with slow return to normalcy in the months ahead,” Singh told a meeting of the full Planning
Commission.

TROUBLE SPOT
However, it would be a bit early to say that the economy is fully on recovery path, since the monsoon is
all set to play a spoilsport. Twenty per cent of sown area has already been affected and a bit short of
half of the country is in the grip of drought (at the time of filing the report).

Farm output growth, which grew by 2.4 per cent in the first quarter of this fiscal against three per cent in
the previous Q1, is all set to turn negative in the next two quarters, analysts said. In the first quarter,
when the Rabi crops were harvested, rice, wheat, coarse cereals and pulses recorded growth rates of
3.8 per cent, 2.6 per cent, 25.6 per cent and 18.2 per cent respectively from last year.

Among commercial crops, production of oilseeds increased by 13.6 per cent during Rabi, while that of
cotton and sugarcane recorded (-) 10.5 per cent and (-) 22.1 per cent, respectively during the
agriculture year 2008-09.

The Prime Minister, however, sought to allay fears on this count, saying the government was equipped
to handle drought. “We should not be over pessimistic as the government has enough food grain to tide
over the difficult time,” he said.

In fact, Planning Commission deputy chairman Montek Singh Ahluwalia also said economic growth
would fall in the second and third quarter, when the weakening monsoon would have its dampening
impact on farm production.

However, he was quick to add that the economy would rebound in the fourth quarter, when the rabi
crops come and it would clock 6.3 per cent growth overall in the entire fiscal.

Finance secretary Ashok Chawla expects the economy to grow at 6.5 per cent this fiscal.

“We expect the GDP growth rate to be 6.5 per cent or above. “Growth in the economy is very
encouraging and it is expected to improve further,” he said. This view was, however, not shared by
many who are not in the government. HDFC Bank’s chief economist Abheek Barua said, “We are
expecting 5.8 per cent for the entire fiscal, which means that growth in second and third quarters should
come down.”

FACE SAVERS
Farm production may be lower in the coming two quarters, he said, adding that industry and services
sector may partly offset the dampening effect. On farm sector growth, Crisil’s principal economist DK
Joshi said that monsoon could impact agriculture from third quarter onwards, but that would impact
inflation more than GDP.

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Joshi said his organisation would take a call on revising current expectations of six to 6.5 per cent
growth for this fiscal later. “It is not likely to be revised upwards. Downward risks are more,” he said.

A report released by private sector lender HDFC Bank said that lower farm production due to weak
monsoon is expected to pull down the country’s economic growth to 5.8 per cent for the entire fiscal.

“Drought in close to half of the districts under agriculture production is likely to take the 2.4 per cent
(posted in the first quarter of 2009-10) agriculture output down by three to five per cent. This should
drive GDP growth for FY’10 to 5.8 per cent,” the bank said in the report.

The first quarter GDP release, though encouraging, is unlikely to sustain into the rest of the year, it said.
However, many others said that fall in farm production could be offset by buoyant industry and services,
which anyway occupy much larger contribution to the overall GDP. However, there may be likely impact
of contraction in rural income on industry and services.

These analysts point out that in 2002-03 drought had hit India, but the economy performed well
because of robustness in industry and services. Will this happen this time as well and was the Prime
Minister correct in saying that we should not be too pessimistic. Only remaining months of this fiscal will
tell.

INDIVJAL DHASMANA

Key points:
• Indian economy grows by 6.1 per cent in the first quarter of this fiscal; fastest growth after
China
• Trade, hotels, transport & communication worst hit, posting 8.1 per cent growth in the first
quarter this fiscal compared to 13 per cent a year ago
• Electricity generation and mining output are the best performers; grew by 6.2 per cent and
7.9 per cent in the first quarter of this fiscal against 2.7 per cent and 4.6 per cent a year
ago, respectively
• Construction slightly down to 7.1 per cent from 8.4 per cent; manufacturing down to 3.4
per cent against 5.5 per cent
• Agriculture down to 2.4 per cent versus three per cent

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WHEN DUBAI FELL DOWN

The global financial markets came tumbling after. Indian market, surprisingly, was quick to
recover

THE saying goes that if Dubai sneezes, South India will catch cold. When the reports of trouble in
Dubai surfaced in November, its tremors were rather felt across India, as also the global financial
markets.

But India’s policy planners, who have matured a lot more when handling the global financial crisis that
surfaced about a year ago, were quite considerate in responding to the news of the financial crisis in
Dubai that was set off by the state-owned Dubai World’s request for a six-month deferment to $59
billion debt repayment.

No sooner was the announcement made by Dubai World for debt restructuring, than the global financial
markets fell like nine-pins, but it was termed as over-reaction by analysts and policymakers across the
world.

After all the entire Dubai has a debt exposure of just about $80 billion and not the trillions that were
involved in the global financial crisis that saw numerous banking giants, including over a century-old
Lehman Brothers, going bust, forcing the governments across the globe to come out with bailout
packages.

INDIAN RESPONSE
Indian bourses echoed the global trends and recorded significant fall for two days, before showing a
recovery in the face of a concerted confidence building announcements by the Reserve Bank of India,
that there was no cause for panic.

“...There is no need to press the panic button... First of all, the amount is small and secondly, the
exposure of our banking system to the Dubai financial system is limited,” Finance Minister Pranab
Mukherjee said.

Other government functionaries, policymakers as also the corporate leaders, came forward to calm the
fears that investors might have had about the impact of Dubai crisis on India and asserted that it should
not be anything to be worried about. This was despite the global financial markets, especially in the
Europe, going into a tailspin on first day of the news coming out about the crisis.

The US market was, in fact, saved due to a holiday there, while the first-day impact for India was not for
long, as about half of the trading session had already passed by the time the European markets started
reacting to the crisis. A considerable impact was seen in Indian markets when they opened on Friday
morning, but recovery was already underway by the mid-day, helped by reassuring voices from across
the corners, including from the policymakers, corporates and regulators. The icing on the cake was
when two days of holidays had helped the message to sink in and the GDP data showed a robust
economic growth figure for the second quarter, allaying all the fears that anyone might have had about
the impact of the Dubai crisis on the economic recovery process, at least in India. But, it was not as if
the RBI and the government were trying to sweep the problem under carpet. The RBI Governor D
Subbarao was very clear about what was needed to be done and accordingly asked his officials to
make an immediate assessment of the impact for any necessary recommendations. Well, the RBI was
more concerned on the financial fallout of the problem and was in touch with the banks to see whether
there were any weaknesses in whatever their exposure to Dubai.

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CONCERN FOR KERALA

The government, however, had another aspect to deal with ie the panic situation that got created in
Kerala, a source for large-scale migrant workforce to Dubai.

Mukherjee said that Indians constituted as high as 42.3 per cent of the population of Dubai, and it
needed to be seen how the crisis would affect Indians working there. He, however, sounded confident,
saying, “I don’t think it will have much effect on Indian workers in that country. I don’t visualise that the
Dubai debt crisis will have earth-shaking impact.”

Yet the Indians living in Dubai were not as rattled as those in the Southern state. India’s Consulate
General Venu Rajamony himself allayed the fears of an exodus of migrant workforce and large scale
job losses and said the Dubai debt crisis had no direct impact on the country and there was no need to
panic. “We are confident the government of Dubai and the UAE are fully capable of handling the short-
term crisis faced by Dubai World,” he said.

Rajamony said the decision on seeking extension of repayment is not going to lead to any sudden job
losses of Indians or an exodus back home. Millions of workers from India are employed in realty and
other sectors in Dubai and other Middle East cities and their families are dependent on remittances.

On its part, the government of Dubai, which is part of United Arab Emirates, also promised to pump in
all the necessary resources to make Dubai World, its global investment holding conglomerate, a
commercial success in the long term.

LESSONS LEARNT
The global ramifications of the financial crunch, which many feel was created by plunge in real estate
prices after the global economic meltdown, are being assessed at different levels and Dubai World-like
problems could surface elsewhere also. This could be seen as a manifestation of the wider global
financial crisis and the world leaders have shown the maturity and wisdom to tackle the bigger issues,
as has been seen in the case of bringing the economic superpower, the US, back from deep inside the
recession.

In India too, though there is no alarm, the sense of realism is prevailing and the authorities and the
sectors affected by Dubai debt crisis are looking deeper into the issue to guard against any
uncertainties.

As of now, India’s total exposure to Dubai appears to be just about Rs 7,000 crore, essentially on
account of loans given by Bank of Baroda, which is among the seven top foreign lenders in UAE. While
Bank of Baroda has an estimated exposure of about Rs 5,000 crore, public sector major State Bank of
India has said its exposure to the Gulf city would be less than Rs 1,500 crore. Besides, these
exposures are not necessarily in the troubled waters as all has not drowned in the Middle-East city
state. For that matter, even Dubai World, which is the flagship global investment holding company for
the government there, has not defaulted on any of its debt and has only sought time till May 2010 to
meet its repayment obligations and that too with the support of the government. The entire process of
debt restructuring is being undertaken under the government guidance and some concrete
developments are already said to have taken place for success of this exercise. India, along with China,
has emerged as the global revival engine for the world economy.

In fact, the resilience and strength of India has been understated by even the policymakers and the
central bank, which had predicted an economic growth of about six per cent for the second quarter.

The latest data shows that the economy surged much faster with a growth rate of 7.9 per cent for the
quarter ending September and it is the strength that might prove that the Dubai crisis was just a minor
irritant and well within the capability of India to tackle comfortably.
RAKESH PATHAK & BARUN JHA

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Key points:
• Global financial markets fall like nine pins following financial crisis in Dubai
• Dubai World, the flagship global investment holding company for the government there, seeks
time till May 2010 to meet its repayment obligations
• Financial crunch created by plunge in real estate prices after the global economic meltdown
• Indian bourses record significant fall for two days on November 26-27; recover in the face of a
concerted confidence building announcements by the Reserve Bank of India
• Europe worst affected; US saved due to a holiday; in India, the trading session had
already passed
• Significant number of Indians work in Dubai; will their employability be affected, wonders FM
Pranab Mukherjee

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Spiraling Food Prices and The Economic Recovery of India

India is in a midst of an economic recovery and there are expectations that the economy will grow by
more than 7 percent in the year 2009-10. But the bad news is that spiraling food prices have far
outstripped the (expected) growth rate of India. All the major food items (potatoes, onions and pulses)
are twice as expensive as they were last year. In a country like India where more than 35 percent
people are living below poverty line, this price rise carries serious political, social and economic
consequences. Today Daal-Roti has become a luxury for a majority of Indian populace.

The wholesale food prices in India touched a 10-year high with food inflation coming at 19.95% for the
week ended December 5, 2009. The table below gives the retail prices for some of the key agricultural
commodities in four Indian metros. This is just to give an idea of how the prices have moved in the last
one year.

Food Price Inflation

Rice Wheat Arhar Dal

9-Jan 9-Dec 9-Jan 9-Dec 9-Jan 9-Dec
Mumbai 13 19 16 17.5 49 85
Chennai 18 20 18 21 50 92
Kolkata 14 14 14 14 45 80
Delhi 20 22 13 12 50 82
Sugar Potatoes Onions
9-Jan 9-Dec 9-Jan 9-Dec 9-Jan 9-Dec
Mumbai 22 35 9 23 19 21
Chennai 21 32 10 26 18 22
Kolkata 21 30 5 19 16 24
Delhi 13 32 8 24 21 24
Source: Economic Times (18th December 2009)

Form the given table, almost all of us can draw that there is an increase in food prices in India and this
price rise is close to 100 percent for pulses. The key reason cited for the spiraling food prices is the bad
Mansoon in India. But, bad Mansoon is just one of the many reasons responsible for prices that go
through the roof for most of the Indians. Some of the lesser-known reasons for the spiraling food prices
are as follows:
• We are one of the worst managers of food crops: In 2008, it was estimated that India loses
INR 58,000 crore worth of agricultural food items due to lack of post harvesting infrastructure
such as cold chains, transportation, and storage facilities. If the Government ensured proper
storage facility, food inventory would have been more then sufficient leading to prices remaining
under control. I am not sure if the Government is still doing enough to have proper food storage
facilities in the country.
• Sixty percent of the total cropped area of India is not irrigated: The Indian farmers are
largely dependent on the four-month monsoon season during which 80% of the year’s total
rainfall takes place. The reason is that 60% of the country’s total cropped area is not irrigated.
The Government has again been talking about inclusive growth and stress on rural India. These
facts don’t point to any meaningful efforts to help farmers in a country where over 10,000 farmers
have committed suicide over the last decade.
• The per hectare agricultural yield in India is half that of China. This again points of
inefficiency and the failure to help the farmers adopt latest technology in order to increase the
crop output.

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The points mentioned have been nemesis of Indian agriculture for ages and things could have
been better if we can provide better infrastructure to the Indian agriculture.

These things have been discussed in the past but even after countless parleys about the state of the
Indian agriculture, the situation has never shown any sign of improvement. Through this article, I hope
steps are taken in the near future to ensure minimal food wastage, high crop productivity and increase
in irrigated land. I would like to add here that if the INR 58,000 crore of food crop is not wasted on an
annual basis, India’s deficits could be wiped out in less then a decade without any other measures
being taken.
However, some ways to ease food prices would be:
• Crackdown on hoarders and black marketers could help prevent prices from rising further. This
step might not significantly reduce prices but will ensure that prices don’t escalate further.
• The Government should allow the private sector to import and store the primary agricultural
commodities at zero import duty. This will help east the prices to a large extent.

The Government also needs to unload the wheat inventory it has in its storage locations. This will have
an immediate impact on the prices.

Impact of Food Inflation in India on Indian Consumers

Indian consumers are paying through the nose for the food items and this has left a big dent on the
consumption pattern of the Indian consumer. The chart below gives the way the Indians spend.

Consumption Pattern In India

3.90%
3.90% Food
8.80% Non-Routine
Others
6.20% Durables
42.80%
Clothing
5.80%
Education
Transport
4.20% Health
Housing
8.20%

16.20%

Source: Economic Times (18 December 2009)

It is clearly visible from the chart given above, nearly 43% of the personal disposable income goes into
food products. Unfortunately, this is the segment which is experiencing highest inflation. A high food
inflation ensures that consumers have to cut back on their spending (on non-necessary items). This in
turn will impact the consumption part of the GDP growth.

They prefer going for fixed deposits which are currently yielding only around 8-10% annually. On the
other hand, inflation for an average household is easily around 12-15% (even education, health and
housing cost are going up). Thus, a large section of the population are losing out on their purchasing
power without realizing about it. For those who realize this, there is only one option - to speculate in the
stock markets and try to get returns which beat the annual inflation rate. In this also, most of us know
how many retail investors actually make money in the markets.

Considering these factors, it is very important for the Government to try and control the inflation or at
least try and ensure that these circumstances do not arise again in the future. As mentioned above,
there are several ways of curbing food inflation. It is only that the Government needs to be more
proactive rather then being reactive.

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INDIA, SAFE FOR YOUR DOLLARS

US$ 100 bln FDI, a milestone for the country

INDIA has crossed the US$ 100 billion milestone in foreign direct investment (FDI) through equity since
2000 up to July this year. The figure says the story that the country is safe and sound investment
destination in the midst of the global financial tsunami.

In the words of economists, “It is a milestone”. And the figure also reflects that the investors want to
diversify their portfolio from China by investing in India. “This is a reflection that India is being taken as
a safe and dynamic destination for investment, as the economy is growing at six per cent. The investors
also want to diversify their portfolio from China by investing here,” Rajiv Kumar, CEO and director of
economic think tank Indian Council of Research in International Economic Relation (ICRIER) has said.

WHERE FROM
The cumulative FDI inflows since 2000 and up to July 2009 amounted to US$ 100.33 billion. The inflow
in the first four months of the current financial year was US$ 10.49 billion, according to the Department
of Industrial Policy and Promotion. As much as 42 per cent of the inflows came through the Mauritius
route, apparently because the investors wanted to take advantage of India’s double taxation avoidance
treaty with the island nation.

During April 2000 to July 2009, the cumulative inflows from Mauritius were US$ 41.41 billion. The other
big investors during the period included Singapore (US$ 8.57 billion), the US (US$ 7.22 billion), UK
(US$ 5.33 billion), the Netherlands (US$ 3.86 billion), Japan (US$ 3.04 billion), Cyprus (US$ 2.86
billion), Germany (US$ 2.46 billion) and France (US$ 1.35 billion).

Services sector turned out to be the most attractive destination for foreign investors, as the sector
attracted maximum FDI during April 2000 — July 2009. The inflows were valued at US$ 21.39 billion.
The other major sectors, which attracted FDI during the period was computer software and hardware
(US$ 9.23 billion), telecommunications (US$ 7.36 billion), housing and real estate (US$ 6.93 billion),
construction activities (US$ 5.96 billion), power (US$ 3.86 billion), automobile (US$ 3.73 billion),
petroleum (US$ 2.58 billion) and chemicals (US$ 2.22 billion).

HOWEVER…
Due to the global credit squeeze, FDI in India has declined. During the six months of 2009, the
country’s FDI declined by 31 per cent to US$ 16.64 billion from US$ 24.2 billion in the corresponding
period last year. In the first four months of this fiscal inflows dipped by 15 per cent to US$ 10.49 billion
from US$ 12.32 billion in the same period last year.

However, FDI has gradually started picking up and experts opined that the inflows will improve with
global economic recovery. Despite the economic downturn, the country managed to attract US$3.47
billion FDI in July, while it was US$ 2.24 billion in the year ago month.

“We did not receive much FDI initially... since 2008 we have started receiving good numbers... there are
signs of economic recovery in a few countries and I think inflows will improve with the economic
recovery,” CRISIL principal economist DK Joshi has said.

UNCTAD REPORT ON FDI

India reached the US$ 100 billion mark at a time when the global financial crisis has had a dampening
impact on FDI flows which are expected to fall this year.

According to the World Investment Report, 2009 of the UN body UNCTAD, global FDI flows will shrink
by 30 per cent in 2009 and recover only marginally during the next year. The report found the pattern of
FDI flows had been varied. The inflows of developed countries plunged in 2008 by 29 per cent, in
contrast the developing and transition economies saw inflows rise of 37 per cent in 2008.

53
 PDP

“Although declining (as compared to previous years) FDI flows to developing countries have proved to
be more resilient than other capital flows such as portfolio investment and bank lending. The main
reasons for this are that FDI is more of a long-term nature than capital flows,” the report said.

However, the strong performance of China and India, even during the current crisis, has reshaped the
landscape of FDI flows to the region as well as to the world at large, the report added. But according to
UNCTAD’s World Investment Prospects Survey 2009-11, India has slipped by one notch to third
position as the most preferred FDI country. “These two largest emerging economies (China and India)
ranked numbers one and three, respectively, as the most preferred FDI locations,” the survey said.
RAJESH RAI
Key points:
• India is being taken as a safe and dynamic destination for investment
• Investors also want to diversify their portfolio from China by investing here
• The inflow in the first four months of the current financial year was US$ 10.49 billion
• The cumulative FDI inflows since 2000 and up to July 2009 amount to US$ 100.33 billion
• Investors want to take advantage of India’s double taxation avoidance treaty with
Mauritius; US$ 41.41 billion came from the island nation
• The other big investors — Singapore (US$ 8.57 billion), the US (US$ 7.22 billion), UK (US$
5.33 billion), the Netherlands (US$ 3.86 billion), Japan (US$ 3.04 billion), Cyprus (US$ 2.86
billion), Germany (US$ 2.46 billion) and France (US$ 1.35 billion)

54
India’s Naxalite Insurgency: Article -I

Not a dinner party

Feb 25th 2010 | PHULWARI
From The Economist print edition

India’s Maoist guerrillas carry out two slaughters, then offer a truce

SHORTLY before midnight on February 17th residents of Phulwari, a village in India’s

northern state of Bihar, were roused by gunfire, explosions and a shrieking mob. It
was led by a few of the Maoist guerrillas encamped on a wooded ridge outside the
village. Wearing camouflage-green uniforms, they carried assault rifles and
explosives. Around 100 rival villagers, of the locals’ own Kora tribe, came with them,
with bows and arrows and a few small children.

Peeping from his mud hut, Kashi, a middle-aged tribal, considered loosing off a few
retaliatory arrows, dipped in poison. “But there were too many,” he recalled this
week, standing beside the heap of fine, grey ashes that was his home. His aunt and
nephew were incinerated inside it. Kashi’s brother—their husband and father—was
shot dead while trying to flee with him. In all, 12 villagers were killed that night and
around 30 houses destroyed.

The destruction was selective. Most of Phulwari’s mud-and-thatch dwellings are

untouched. Scattered patches of ash show where some families were singled out.
Why is unclear. The villagers, most of whom have now left Phulwari, say they had
angered the Maoists by refusing to donate a man or woman per household to them.
But there is a rumour that, maybe after the guerrillas raped a woman, some villagers
killed eight Maoists with their arrows. Kashi says he was among them; then retracts.
“We are very scared,” he says.

That is understandable. The guerrillas are believed to have moved into Jharkhand
state, across the wooded ridge, but may return. The state police, 30 of whom have
been deployed to Phulwari, are little deterrent. A nervous-looking lot, they are no
match for Maoist marauders toting weapons stolen from (or sold by) their peers.
Constable Arvind Kumar, pot-bellied and with an inveterate slouch to show for his 18
years in uniform, says he has practised firing his rifle on only three occasions.

Nor is this force likely to remain in Phulwari long. With 50,000 policemen for a
population of around 100m—or 50 per 100,000—Bihar has one of the most
overstretched forces in India. It is also, despite great recent improvements in its
policing, one of the most criminal states: plagued by kidnappers, as well as an
insurgency that to some degree affects 23 of its 38 districts.

Yet the Maoists are much stronger elsewhere. Boasting an estimated 14,000 full-time
guerrillas, and many more semi-trained sympathisers, they loosely control tracts of
Jharkhand, Orissa and Chhattisgarh. They have also overrun a smaller, but spreading,
area of West Bengal, where the Maoist struggle began in 1967—in the village of
Naxalbari, from which the guerrillas, or Naxalites, take their name. On February 15th
the Maoists stormed a camp, killing 24 Bengali police. The government estimates
that they have influence in over a third of India’s 626 districts, with 90 seeing
“consistent violence”. According to the Institute for Conflict Management, in Delhi,
the insurgency cost 998 lives in eight states last year—compared with 377 lost in the
better-known conflict in Kashmir.
What power grows out of

The government in Delhi is alarmed. Its home minister, Palaniappan Chidambaram,

has promised to deploy an additional 15,000 centrally trained police to the six most
affected states by April—taking their number to around 75,000 in all. He has also
badgered the state governments to make more aggressive use of them. They have
done so, but splutteringly. Operations in the southern part of West Bengal have
mainly underlined that the insurgency is more entrenched there than was previously
thought. The state’s main opposition Trinamul Congress party, a member of the
coalition government in Delhi, has meanwhile criticised the anti-Naxalite operations.
A state election is due next year and it may be looking for electoral support from the
Maoists, of a kind that helped bring Jharkhand’s ruling party to power last year. On
February 21st Jharkhand’s chief minister, Shibu Soren, promised to end operations
against the insurgents and “accept their justified demands”.

This adds up to rather less than the sweeping offensive reported by India’s press.
But it seems to have put the wind up the Naxalites. Responding to an invitation from
Mr Chidambaram for talks, their military chief, Koteswara Rao, known as Kishenji,
was reported this week to have offered the government a 72-day truce, from
February 25th. Mr Chidambaram appeared underwhelmed. He issued a fax number
for the Maoists to send him their promise to abjure violence and enter talks, with “no
ifs, no buts and no conditions.” But if the Maoists show willing, the government will
find it hard to refuse them.

Yet the prospects for a negotiated end to the conflict look poor. The Naxalites claim
to be fighting for better treatment of marginalised tribals; but deny the government
access to areas they control. Nor do their leaders appear to harbour democratic
ambitions. They are scathing of their Maoist cousins in Nepal—to whom they have no
close link—for having quit the jungle and contested elections in 2008.
For the moment, moreover, despite reports of factionalism, the Maoists’ influence is
growing. By “taxing” companies drawn to east India’s rich coal and metal deposits,
they are also getting rich. “You will not find any businessman who has been
attacked,’ says Ajit Doval, a former head of India’s Intelligence Bureau, “only poor
tribals and policemen.” -------SOURCE: THE ECONOMIST

India’s Naxalite Insurgency: Article -II

Ending the red terror

Feb 25th 2010
From The Economist print edition

It is time India got serious about the Maoist insurgency in its eastern states

SINCE 2006, when Manmohan Singh described the Maoist insurgency as the “single
biggest internal-security challenge” India had ever faced, it has spread rapidly.
Maoist guerrillas are now active in over a third of India’s 626 districts, with 90 seeing
“consistent violence”. Last year the conflict claimed 998 lives. This month alone the
Maoists—or Naxalites, as they are known—slaughtered 24 policemen in West Bengal
and 12 villagers in Bihar (see article). Yet neither official concern at the highest level
nor continuing horrific violence have prompted a concerted and coherent strategy for
dealing with the insurgency. It is time for the government to devise one.

Mr Singh may have overstated the security threat to the Indian state; but not the
damage to Indian society. The government has faced bloodier threats, on its
borders: from separatists in Punjab in the 1980s and in Kashmir and the north-east
still. But the Kashmir valley has only 5m people, Manipur, most troubled of the
north-eastern states, only 2.5m; Naxalites are scattered among 450m of India’s
poorest people, feeding on the grievances of tribal inhabitants of eastern and central
India against what is all too often a cruel, neglectful and corrupt administration. This
makes the Naxalites hard to treat in the way that India has treated its other
insurrections: as military threats to be dealt with by force—often brutally so.

Even recognising that, the official response to Mr Singh’s wake-up call from the
governments of the affected Indian states has been dismal. None has much
improved its overstretched, ineffectual police force. Besides bureaucratic
incompetence and inertia, there are three main reasons for this inaction. First, state-
level politics can play a pernicious role. The government in Jharkhand, for example,
owed its election last year partly to Maoist support, and has been loth to fight them.

Second, the central government, a coalition run by the Congress party, must share
the blame. It is not enough for Mr Singh, guru-like, to point the way. The strong
leadership required to mobilise resources, public opinion and state governments for a
long and difficult campaign has been lacking. Little has been done to bolster the
central government’s own paramilitary force, an important back-up to the state
police. Nor has the government done much to badger the states into adopting whole-
heartedly a scheme to devolve power to local councils. Yet where this has been tried
it has weakened the Maoists’ grip.

Encouragingly, Palaniappan Chidambaram, India’s home minister, does seem ready

to get to grip with the issue, giving it a new priority in the central government’s
policies. But he has not enunciated a clear strategy either—perhaps for good reason.
The third big obstacle to dealing with the Naxalites is that no one is really sure how
to. A minority, citing the success of strong-arm tactics in, for example, Punjab,
wants a massive counter-Naxalite onslaught. This would be politically unimaginable
and probably futile. A bigger group argues that development, to salve tribal hurts, is
the only solution. Yet that, in the most undeveloped parts of India, will take years.

Wars without end

The right approach is to focus on improving both policing and general administration.
Better policing would protect poor people from Naxalite bandits and extortionists.
Better local administration, providing roads, water, schools and health care, would
give a stake in the Indian state to people who at present have none. It would be a
huge task anywhere in India, and especially in areas plagued by Naxalites. Yet the
alternative is a potentially endless conflict that causes untold human suffering,
further marginalises millions of India’s poorest citizens and deters investment in
some of its most mineral-rich areas.
India has a remarkable ability to wage long-running low-intensity wars without their
causing a sense of national outrage or panic. Outrage and action—if not panic—are
now overdue. Naxalism is already more than four decades old, and India’s recent
rapid economic growth, concentrated in urban, western and southern areas, is
spawning new grievances to sustain it. If not tackled urgently, the insurgency could
stunt the prospects for millions of people for a generation.

------SOURCE: THE ECONOMIST

CLIMATE CHANGE: ARTICLE-I

Q&A: The Copenhagen climate summit

The Copenhagen climate conference COP15 resulted in a document called the

Copenhagen Accord. It was hammered out by a small group of countries - including
the world's two biggest greenhouse gas polluters, China and the US. The conference
as a whole did not adopt the accord, but voted to "take note" of it.

Was the summit a success?

This depends on your point of view.

On the positive side, the Copenhagen Accord, for the first time, unites the US, China and
other major developing countries in an effort to curb global greenhouse gas emissions.
The Kyoto Protocol did not achieve this - it imposed no obligations on developing
countries to restrain the growth of their emissions, and the US never acceded to it. The
accord also says developed countries will aim to mobilise $100bn per year by 2020, to
address the needs of developing countries.

On the other hand, the summit did not result in a legally binding deal or any commitment
to reach one in future. The accord calls on countries to state what they will do to curb
greenhouse gas emissions, but these will not be legally binding commitments.
Furthermore, there is no global target for emissions reductions by 2050 and the accord is
vague as to how its goals - such as the $100bn of funds annually for developing countries
- will be achieved.

What are the key points of the Copenhagen Accord?

• A commitment "to reduce global emissions so as to hold the increase in global

temperature below 2C" and to achieve "the peaking of global and national emissions as
soon as possible"
• Developed countries must make commitments to reduce greenhouse gas emissions, and
developing countries must report their plans to curb greenhouse gas emissions to the UN
by 31 January 2010

• New and additional resources "approaching $30bn" will be channelled to poorer nations
over the period 2010-12, with an annual sum of $100bn envisaged by 2020

• A Copenhagen Green Climate Fund will be established under the UN convention on

climate change, to direct some of this money to climate-related projects in developing
countries

• Projects to reduce greenhouse gas emissions in developing countries will be subject to

international monitoring if they are internationally funded

• Programmes to provide developing countries with financial incentives to preserve

forests -

- will be established immediately

• Implementation of the accord will be reviewed in 2015 and an assessment will be made
of whether the goal of keeping global temperature rise within 2C needs to be
strengthened to 1.5C

Which countries backed the accord?

The essential points of the deal were brokered by US President Barack Obama with
representatives of China, India, Brazil and South Africa. Mr Obama also consulted with
the leaders of France, Germany and the UK. Most countries at the conference gave it
their support, but some countries were resolutely opposed, including Venezuela, Bolivia,
Ecuador and Cuba.

Why did the Copenhagen summit take place at all?

The majority of the world's governments believe that climate change poses a threat to
human society and to the natural world.

Successive scientific reports, notably those from the IPCC

have come to ever firmer conclusions about humankind's influence on the modern-day
climate, and about the impacts of rising temperatures.

In 2007, at the UN Climate talks held in Bali,

governments agreed to start work on a new global agreement.

The Copenhagen talks marked the end of that two-year period.

Why is a new global agreement needed?

The Copenhagen talks sat within the framework of the UN Framework Convention on
Climate Change (UNFCCC), established at the Rio de Janeiro Earth summit held in 1992.

In 1997, the UNFCCC spawned the Kyoto Protocol.

But neither of these agreements can curb the growth in greenhouse gas emissions
sufficiently to avoid the climate impacts projected by the IPCC.

In particular, the Kyoto Protocol's targets for reducing emissions apply only to a small set
of countries and expire in 2012.

Negotiations therefore began on new treaty that was bigger, bolder, wider-ranging and
more sophisticated than the Kyoto agreement, and the plan was that these would conclude
in Copenhagen.

Why is climate change happening - and is it the same as global warming?

The Earth's climate has always changed naturally over time.

For example, variability in our planet's orbit alters its distance from the Sun, which has
given rise to major Ice Ages and intervening warmer periods.

According to the last IPCC report

it is more than 90% probable that humankind is largely responsible for modern-day
climate change.

The principal cause is burning fossil fuels - coal, oil and gas.

This produces carbon dioxide (CO2), which - added to the CO2 present naturally in the
Earth's atmosphere - acts as a kind of blanket, trapping more of the Sun's energy and
warming the Earth's surface.

Deforestation and processes that release other greenhouse gases such as methane also
contribute.

Although the initial impact is a rise in average temperatures around the world - "global
warming" - this also produces changes in rainfall patterns, rising sea levels, changes to
the difference in temperatures between night and day, and so on.

This more complex set of disturbances has acquired the label "climate change" -
sometimes more accurately called "anthropogenic (human-made) climate change".

Will the Copenhagen deal solve climate change?

The global average temperature has already risen by about 0.7C since pre-industrial times.

In some parts of the world this is already having impacts - and a Copenhagen deal could
not stop those impacts, although it could provide funding to help deal with some of the
consequences.

Greenhouse gases such as CO2 stay in the atmosphere for decades; and concentrations
are already high enough that further warming is almost inevitable.

Many analyses suggest an average rise of 1.5C since pre-industrial times is guaranteed.

Tough action to reduce emissions might keep the temperature rise under 2C; but given
uncertainties in how the atmosphere and oceans respond to rising concentrations of
greenhouse gases, it might not.

This is why developing countries put such an emphasis on adaptation, which they argue
is necessary already.

IPCC figures suggest that to have a reasonable chance of avoiding 2C, global emissions
would need to peak and start to decline within about 15-20 years.

Currently, the cuts pledged by industrialised nations are not enough to halt the overall
global rise in emissions. Furthermore, countries that went in to the Copenhagen
conference prepared to offer bigger cuts in emissions if other countries took tough action,
appear to be sticking with pledges to cut emissions at the lower end of their range.

------SOURCE: BBC NEWS

CLIMATE CHANGE :ARTICLE-2

Battle half-won

R. RAMACHANDRAN
The Copenhagen Accord is only a “political agreement” formalised by the U.S.
and the BASIC Four countries which include China and India.
DON'T NUKE THE CLIMATE /HO/AFP
A RADIATION-PROTECTION MASK placed on Copenhagen's famous Little
Mermaid statue by the international "Don't Nuke the Climate" campaign run
by 10 environmental non-governmental organisations.

THE 15th Conference of the Parties (COP) to the U.N. Framework Convention on
Climate Change (UNFCCC) at Copenhagen has clearly failed to deliver what the
world community expected of it, namely, a legally binding agreement that is
ambitious in the sense of deep cuts in greenhouse gas (GHG) emissions by
developed countries to prevent irreversible climate change, and is yet viable and also
equitable in the sense of providing adequate carbon space for the legitimate
development and economic growth of developing countries that social justice
demands.

The Copenhagen Accord, as the final outcome is called, was arrived at in the late
hours of December 18 in a closed-door meeting of five heads of state – President
Barack Obama of the United States with the heads of government of China, India,
Brazil and South Africa, countries known as the BASIC Four. This “political
agreement” was formalised in the early hours of December 19, the final day of the
negotiations which lasted 13 days. Significantly, and not unexpectedly, the accord
eluded consensus, a necessary condition for being termed even as a COP decision,
with Bolivia, Nicaragua, Venezuela and Cuba firmly opposing the accord. As a
result, the accord was merely “taken note of” under the UNFCCC and would be an
agreement among states that declared their adherence to it.

It was clear in the run-up to Copenhagen that the host, Denmark, was in fact making
all efforts to ensure such a weak outcome at Copenhagen – a political declaration by
the state heads rather than a legally binding outcome as a result of the due
democratic process of negotiations under the UNFCCC. As differences between the
Annex-1 (or developed) and the non-Annex-1 (or developing) countries were
seemingly hard to bridge, and with the refusal by the U.S. to join the Kyoto process,
Denmark invented this tactic of “political declaration” that would build on the
“pledge-and-review” scheme that was being evolved by developed countries since
June 2009. Accordingly, Danish Prime Minister Lars Lokke Rasmussen invited as
many as 115 heads of state to the conference, and the conference was structured in a
manner that ensured the meeting of the political heads would forge such a non-
binding, leader-driven declaration.

The conference comprised two segments. The first was between December 7 and 15,
which involved negotiations at the official level. Given the original Danish intent
and the final outcome, it became largely inconsequential. The second was between
December 16 and 18, which involved a high-level segment at the ministerial level.
In addition, the Danish Chair of COP-15 had invited Ministers from all countries for
informal consultations from December 12 to 17. The heads of state had been invited
to the high-level segment on December 17 and 18. In particular, the Chair held
informal discussions with the “Friends of the Chair” who comprised a group of 27
countries that included China, India and the U.S. to assist the Chair in forging a
consensual outcome, especially when serious differences remained to be resolved.

These informal discussions did not succeed and, indeed, many heads of state were
preparing to leave. It was at this juncture that Obama decided to make a last-ditch
effort through separate bilateral meetings with the BASIC Four. Reports say that
when he appeared for the scheduled meeting with Wen Jiabao, the Chinese Premier,
he found to his surprise that all the leaders of the BASIC Four had assembled in the
room. It is not clear if this was a planned strategy by the BASIC Four, but
negotiating in strength with Obama had its positive effect. It resulted in the final
accord recognising the basic principles governing developing countries that flowed
from the UNFCCC.

Without any deep emission reduction commitments by the developed (or Annex-1)
countries on the table, particularly for the medium term as the Fourth Assessment
Report (AR4) of the Intergovernmental Panel on Climate Change (IPCC) requires, it
is indeed fortuitous that there was opposition from the Latin American countries.
Otherwise, there was the imminent danger of this weak accord acquiring the force of
a binding resolution under the UNFCCC and possibly becoming the template for
future negotiations and action. This would mean a complete scuttling of the
Convention’s core principles, which include Annex-1 countries’ historic
responsibility to mitigate against climate change on the basis of equity and
“common but differentiated responsibilities and respective capabilities”, the Kyoto
Protocol’s burden-sharing mechanism that mandates emission cuts by Annex-1
countries, and the Bali Action Plan that calls upon Parties to build on the Kyoto
process and establish long-term cooperation, particularly through technology and
financial support from Annex-1 countries, to achieve the UNFCCC’s objectives.
KAMAL KISHORE/PTI
Prime Minister Manmohan Singh with his Chinese counterpart Wen Jiabao in
Copenhagen on December 18.

One should hasten to add that this cannot be completely ruled out. Only the next
round of UNFCCC negotiations, in June 2010, will tell us what is in store for the
future.

Some developed countries, in particular European countries, and the associated

media have blamed China for the lack of a binding commitment in the accord and
other major developing countries, including India, for such a weak accord. The
British Secretary for Environment, Ed Miliband, writing in The Guardian on
December 20, accused China of vetoing two specific commitments that had been
included in the draft of the accord – one, that of a 50-per cent reduction from 1990
levels in global emissions by 2050 and, two, an 80-per cent reduction from 1990
levels by Annex-1 countries by 2050. In effect, these commitments are no different
from what was already declared by G8 and the Major Economies Forum (MEF) at
L’Aquila, Italy, last year.

The IPCC has recommended that Annex-1 countries effect a 25-40-per cent cut in
emissions from 1990 levels by 2020. Without such additional mid-term targets it is
far from clear how the 2050 targets are meant to be realised. As has been recently
argued in Economic & Political Weekly by researchers from the Tata Institute of
Social Sciences (TISS), Mumbai, if Annex-1 countries are unwilling to undertake
more drastic cuts in emissions up to 2020 than their current weak pledges, they end
up grabbing more carbon space that would only perpetuate the current inequities of
development and economic growth between developed and developing countries.
China’s rejection of the long-term targets has the salutary effect of the Parties
ensuring that the accord does not form the basis for future negotiations and
developed countries’ concerted attempts at killing the Kyoto Protocol do not
succeed.

Indeed, in his address at the plenary on December 18 at Copenhagen, Prime Minister

Manmohan Singh emphasised the importance of the Rio-Kyoto-Bali process. “[T]he
need for action on our part is more, and not less, than what was envisaged at the
time of the Rio Convention or the Kyoto Protocol. That is why the Bali Action Plan
commits us to enhancing the implementation of the UNFCCC. To settle for
something less than that would be seen as diminished expectations and diminished
implementation would be the wrong message to emerge from the Conference.”
Minister of State for Environment and Forests Jairam Ramesh, in his suo motu
statement in Parliament on December 22, said: “The major outcome of the
conference … is the fact that the negotiations under the UNFCCC will continue to
proceed on two tracks as set out in the Bali Road Map – one relating to the long-
term cooperative action for enhancing implementation of the convention and the
second relating to the second commitment period of Annex-1 Parties under the
Kyoto Protocol … The contents of the accord are not legally binding, nor do they
constitute a mandate for a new negotiating process under the UNFCCC.”

This, indeed, is a major positive outcome of COP-15, which otherwise would have
been a complete disaster. No doubt, the BASIC Four have yielded some ground in
order to arrive at a mutually agreeable accord that does not negate the twin-track
process established at Bali under the UNFCCC and the Kyoto Protocol. In the
complete absence of any agreement, the developing countries, China and India in
particular, would have been called deal-breakers. Perhaps it was a strategically
conceived move by China and India to concede a little so as to ensure that the
sanctity of the UNFCCC and the Kyoto Protocol was preserved; in the process they
brought the U.S. into future negotiations. In this, of course, the collective stand of
the leftist Latin American governments to prevent the accord from becoming a legal
UNFCCC document was particularly important.

The perspective of developed countries on the outcome is, however, quite the
opposite. The accord is no more than a framework for putting in place a “pledge-
and-review” process that is not legally binding. This is what the U.S. has all along
been trying to hustle the Parties into accepting via the Australian Proposal in
Bangkok (see Frontline, November 11, 2009), which included a schedule of actions
pledged voluntarily by nations and a World Trade Organisation-like review-cum-
verification mechanism. A build-up towards such a legally non-binding political
declaration had been in the works for some time in the run-up to Copenhagen
through the efforts of the Danish Chair as well as through informal meetings in
small groups at Copenhagen through the different versions of what has come to be
called the “Danish Text”. The developing countries, however, had serious objections
to the Danish Text. Ultimately, the accord emerged as a compromise formula that
was ironed out by the U.S. and the BASIC Four following some concessions made
by the latter towards “transparency” (read reporting and verification) of their
mitigation actions as the U.S. had desired and the inclusion of elements that the
BASIC Four wanted. Naturally, the U.S. views the accord as a major success.

Indeed, in his remarks on December 18 (and the select press interaction that
followed) at Copenhagen, Obama said: “Today we’ve made meaningful and
unprecedented breakthrough…. We agreed to join an international effort to provide
financing to help developing countries … adapt to climate change. And we
reaffirmed the necessity of listing our national actions and commitments in a
transparent way. These components – transparency, mitigation and finance – form
the basis of the common approach that the U.S. and our partners embraced here in
Copenhagen…. I believe what we have achieved in Copenhagen will not be the end
but rather the beginning… of a new era of international action” (emphasis added,
throughout).

The European Union and Britain, though are not entirely happy that the 2050 targets
were vetoed by China, are not unhappy either for they feel that they have brought
developing countries to agree to commitments, something they have all along been
campaigning for. “Of course it was right to consider whether we should sign,” wrote
Miliband, who accused China and other leftist countries of hijacking the conference.
“But to have vetoed the agreement would have meant walking away from progress
made in the last year and the real outcomes that are part of this accord, including
finance for poor countries …. For the first time developing countries have agreed to
emissions commitments for the next decade …. These commitments will also for the
first time be listed and independently scrutinised … We have also established an
unprecedented commitment among rich countries to finance the response to climate
change…. In the months ahead these concrete achievements must be secured and
extended,” he said.

Salient features
DAVID LOH/REUTERS

A bed of corals off Malaysia’s Tioman island in the South China Sea. The
biologically diverse reefs will disappear by the end of this century, wiping out
coastal economies, if the issue of climate change is not addressed.

In the following, we comment on some of the salient features of the Copenhagen

Accord and their implications.

Clause 1 of the accord is a statement of political will to combat climate change “in
accordance with the principle of common but differentiated responsibilities and
respective capabilities” and the recognition of the need to stabilise atmospheric
GHG concentrations so that the increase in global temperature is below 2°C. The
inclusion of the burden-sharing principle of the UNFCCC in the accord has been
clearly at the insistence of the BASIC Four. It should be pointed out here that
Obama, in his address to the plenary at Copenhagen, had deliberately changed
“responsibilities” into “responses” to be in tune with the stand of developed
countries, which have sought to blur the distinction between Annex-1 and non-
Annex-1 countries and make major developing economies such as India and China
accept binding emission reduction targets.

Clause 2 recognises the need for meeting the objectives of science on the basis of
equity. It also calls for global emissions to peak as soon as possible and,
importantly, recognises that “the time frame for peaking will be longer in
developing countries”. It must be pointed out that developed countries have
consistently resisted giving a commitment for the peaking period. The Danish Text,
in fact, went as far as to claim falsely that the developed countries’ emissions have
already peaked when the UNFCCC’s recent data (for 2008) had clearly shown that
their emissions are on the rise. Significantly, on the insistence again of the BASIC
Four, this clause borrows the UNFCCC statement that “social and economic
development and poverty eradication are the first and overriding priorities of
developing countries” and also that a low-emission strategy is indispensable for
sustainable development.

Both Clauses 1 and 3 emphasise the need for international support for adaptation by
developing countries, particularly the vulnerable ones, an aspect that had been
marginalised in the negotiations all along which have laid more emphasis on
mitigation. Clause 3 says: “We agree that developed countries shall provide
adequate, predictable and sustained financial resources, technology and capacity
building to support the implementation of adaptation action in developing
countries.”

Clause 8 puts a figure on this commitment. “The collective commitment,” it says,

“is to provide new and additional resources … approaching $30 billion for the
period 2010-2012 with balanced allocation between mitigation and adaptation” with
priority for the most vulnerable countries. For “meaningful mitigation actions” with
transparency on implementation, there is a commitment by developed countries to
mobilise $100 billion a year jointly by 2020, which is expected to come from a
combination of public and private sources through bilateral and multilateral routes.
It may be pointed out that this was the figure Hillary Clinton had dangled at
Copenhagen to lure developing countries into mitigation commitments, but it must
be added that it is far from clear how this sum will be raised especially when it is
only a statement in the accord and not a COP decision.

Clause 4 is the operational part that is of immediate relevance, which effectively

blurs the distinction between Annex-1 and non-Annex-1 countries. It calls for
Annex-1 Parties to implement individually or collectively quantified economy-wide
emission targets for 2020, and these should be submitted to the UNFCCC Secretariat
by January 31, 2010. It also states that delivery of reductions and financing will be
measured, reported and verified (MRVed) “in accordance with existing and any
further guidelines adopted by the COP”. Non-Annex-1 Parties too are required to
implement mitigation actions as per this clause, which too should be submitted to
the UNFCCC by January 31, 2010. These mitigation actions, including national
inventory reports, have to be communicated every two years on the basis of
guidelines to be adopted by the COP. Mitigation actions by non-Annex-1 countries
would, however, be subject only to domestic MRV mechanism but “with provisions
for international consultations and analysis under clearly defined guidelines that will
ensure that national sovereignty is respected”.
ANJA NIEDRINGHAUS/AP

U.S. PRESIDENT BARACK Obama speaks at the plenary session on

December 18, 2009.

There are potential problems here. As a negotiator pointed out, the unilateral offer of
“international consultations”, as Jairam Ramesh made, the developed countries
would only be quick to latch on to it and enforce it. These phrases – consultation and
analysis – are completely undefined as yet. These, as an analyst has argued, are
merely euphemisms for international scrutiny, which the Minister had assured
Parliament that India would not accept. It is also not clear how the UNFCCC will be
able to frame guidelines for these as well as for the MRVs, when the Accord is not a
COP decision at all. The U.S. has, however, invoked the UNFCCC’s Article 7.2(c),
to argue that the UNFCCC has a role as a facilitator for bilateral or multilateral
agreements that are designed to meet the objectives of the convention.

Nationally appropriate mitigation actions (NAMAs) seeking international support

will be recorded in a registry, a concept that formed part of the Australian Proposal
and the Danish Text for individual pledges, along with relevant technology, finance
and capacity building support. And these supported NAMAs will be subjected to
international MRV, akin to those for the Annex-1 commitments, in accordance with
the to-be-evolved guidelines. In the implementation of this part, the developed-
developing distinction would get completely obliterated. The accord, via Clause 7,
also emphasises the importance of markets and carbon-trading mechanisms for
mitigation actions by developed countries, which actually amounts to developing
countries taking extra mitigation burden in the already restricted carbon space
available to them; this obviously would limit their development and growth needs.

Even though the accord calls for establishing Green Climate Fund as an operating
entity for the financial mechanism envisaged and created, it is not clear how this can
be established because once again it would require a COP decision to mandate that.
Similarly, the proposal to establish a Technology Mechanism to accelerate
technology development and transfer in support of mitigation and adaptation actions
in developing countries would require a COP decision, which the accord is not.

Given the growing scientific view that the increase in global temperatures should be
restricted to 1.5°C, instead of 2°C, the accord calls for an assessment of its
implementation to be completed by 2015 and, if required, alter the long-term goals
accordingly.

From the above, and given the perspectives of the developed countries, it is clear
that the Annex-1 countries will push for the accord becoming a binding document in
lieu of the UNFCCC and the Kyoto process in the coming months of negotiations. It
is this that the non-Annex-1 countries must guard against and resist. They have to
ensure that the Kyoto discussions mandate developed countries to much deeper cuts
than they have pledged so far, including targets for the mid-term, for the second
commitment period beginning 2013. It is highly unlikely that Annex-1 countries, in
their declarations by January 31, would commit to any deeper and more ambitious
cuts than the weak targets that are on the table so far.

A fortuitously leaked internal document of the UNFCCC during the Copenhagen

conference also served to reveal the flip side of this “pledge-and-review”
mechanism being pushed by developed countries and place the current emissions
situation in the proper perspective. The confidential document had assessed the
pledges, voluntary actions and policy goals made by Annex-1 and non-Annex-1
Parties, based on the most recent emission scenarios presented in the World Energy
Outlook 2009 of the International Energy Agency (IEA). Using the limiting value of
44 gigatonnes (Gt) of emissions required by various studies to achieve stabilisation
of GHG concentration to 450 parts per million (ppm) by 2050 needed to keep the
warming below 2°C, the study found that, after accounting of various pledged
emission reductions and stated policy goals, there was still a gap of around 1.9 - 4.2
Gt to be met to satisfy the 44 Gt limit. Unless this gap is closed and Parties commit
themselves to strong action prior to and after 2020, global emissions would remain
 on an unsustainable pathway that could lead to concentrations equal to or above 550
ppm with the related temperature rise being around 3°C, the study has warned.

Interestingly, the study’s analysis shows that the amounts of emission reduction
through voluntary actions of developing or non-Annex-1 countries were more than
the pledges made by Annex-1 countries. The facts revealed by the document should
only make the resolve of developing countries stronger to fight for a legally binding
agreement that mandates deeper cuts by Annex-1 countries at least by December
2010. -----------Source: The Frontline

Telangana Issue: Article-I

Divided State

S. NAGESH KUMAR
in Hyderabad
The Congress had not bargained for the revolt from within when it
unilaterally decided on granting statehood to Telangana.
C.V. SUBRAHMANYAM

STUDENTS OF THE Andhra University burning an effigy of Telangana

Rashtra Samithi president K. Chandrasekhara Rao in protest against the move
to divide Andhra Pradesh.
AN upheaval of the kind that tore the economic and political fabric of Andhra
Pradesh between 1969 and 1972 has engulfed the State once again and on the same
issue of dividing the State, though under completely different circumstances.

The crisis this time was brought about by cynical and short-sighted manoeuvring by
the Congress leadership when it unilaterally decided, and later announced on
December 9, that the process of forming a separate state of Telangana would be
initiated by introducing a resolution in the Andhra Pradesh Assembly.

Soon after Union Home Minister P. Chidambaram made his midnight announcement
after a meeting of the Congress’ core committee, an exclusive body presided over by
All India Congress Committee president Sonia Gandhi, there was an open revolt by
Congressmen from the coastal Andhra and Rayalaseema regions of the State. Nearly
one half of the 156 Congress Members of the Legislative Assembly resigned.

Telugu Desam Party (TDP) and Praja Rajyam MLAs from these two regions also
submitted their letters of resignation to Assembly Speaker N. Kiran Kumar Reddy,
defying their respective leaderships and giving short shrift to the well-demarcated
lines of their parties. After two days of political turmoil, as many as 130 MLAs – 76
of the Congress, 40 of the TDP and 14 of the Praja Rajyam – had resigned. This
created a constitutional crisis as nearly 44 per cent of the 294-member Assembly
was unwilling to be part of the legislature unless its demand for retaining the
integrity of the State was accepted. The Assembly has 123 MLAs from coastal
Andhra, 119 from Telangana and 52 from Rayalaseema.

India’s fifth largest State, in terms of area as well as population, Andhra Pradesh
comprises 23 districts – 10 in Telangana, a semi-arid region that remained under the
despotic rule of the Nizam of Hyderabad for some time even after Independence;
nine in Andhra along the State’s 1,000-km coastline; and four in the Rayalaseema
region, which were known as Ceded (to the English East India Company) districts.
M. MURALI
TRS SUPPORTERS IN Warangal at a rally to welcome the Centre's assurance
that the process of forming a separate state of Telangana would be initiated in
the Andhra Pradesh Assembly, on December 12.

Farmers in coastal Andhra, a region watered by the Godavari and Krishna rivers and
benefiting from the comprehensive irrigation system developed in their deltas by the
legendary British engineer Sir Arthur Cotton, prospered. Telangana, on the other
hand, suffered under the Nizam’s rule. It is also a region of scanty rainfall, and
accessing water for irrigation from rivers has been difficult. Therefore, it remained
backward. The Rayalaseema region, too, did not progress for almost similar
geographical reasons.

The distinct character of Telangana, setting it apart from the other two regions of
Andhra Pradesh, has been a festering problem since the beginning of Independence.
Successive dispensations at the Centre and in the State tried unsuccessfully to find a
workable solution to it without going to the extent of conceding statehood to
Telangana.

Andhra itself was carved out in 1953 from Madras Presidency after Potti Sreeramulu
fasted to death and forced the hand of Prime Minister Jawaharlal Nehru. It was the
first revoking of the country’s internal boundaries on linguistic lines. Three years
later, in 1956, the State of Andhra Pradesh was formed with the merger of the
Telugu-speaking districts of Hyderabad state (now the Telangana region) with
Andhra.

K. Chandrasekhara Rao, a leading light of the TDP’s think tank, was unhappy with
N. Chandrababu Naidu, then Chief Minister, for being denied a Cabinet berth. He
resigned as Deputy Speaker of the Assembly and floated the Telangana Rashtra
Samithi (TRS), first as a movement in 2000 and later as a full-fledged political party
in 2002. Perhaps he thought history would repeat itself: Marri Channa Reddy
became the Chief Minister of an integrated Andhra Pradesh after leading a violent
agitation for a separate Telangana in 1969 through the Telangana Praja Samithi
(TPS).

Fifty-six-year-old Chandrasekhara Rao is a canny politician who was groomed in

the Congress and learnt his political ropes in the TDP, which he joined later. He
hitched his bandwagon in the 2004 general elections to the Congress, fared
moderately and became part of the United Progressive Alliance government at the
Centre. But his honeymoon with the Congress was short-lived as he made demands
that the Congress could not fulfil. He and other Ministers resigned, and his party
was in a shambles. It nearly broke up as his MLAs mistrusted his leadership.

He did a political volte-face in 2009 by joining hands with the TDP. Never mind that
it was led by his bete noire, Chandrababu Naidu, who himself did a U-turn by
expressing support for a separate Telangana. The vaulting ambitions of both to
defeat the powerful Chief Minister Y.S. Rajasekhara Reddy did not fructify as
people once again gave a mandate to the Congress.

His credibility with the electorate comprehensively eroded, Chandrasekhara Rao had
to do something spectacular to redeem his image. He had twice resigned as party
president in the wake of the TRS’ electoral debacles. It was a do-or-die situation this
time.

An opportunity presented itself after the death of Y.S. Rajasekhara Reddy, who, as
Chief Minister, had frustrated all his attempts to emerge as an unchallenged leader
of Telangana. YSR encouraged defections from the TRS and outwitted the
Telangana leader in his own political games by speaking in favour of Telangana
before the elections and changing his tune later.

The turnarounds by the TDP and the Communist Party of India (CPI) from their
long-standing positions favouring an integrated Andhra Pradesh came in handy for
Chandrasekhara Rao. He was strengthened further by the support that the fledgling
Praja Rajyam, launched by the Telugu matinee idol K. Chiranjeevi, extended to the
Telangana cause. The Congress remained the only hurdle to creating a separate state
though a sizable number of its MLAs from the Telangana region were in its favour,
for their own political survival.
P.V. SIVAKUMAR
TRS LEADER K. Chandrasekhara Rao, who was on a "fast unto death", at the
Nizam's Institute of Medical Sciences in Hyderabad on December 8.

He resolved to launch a “fast unto death” from November 29 and settle for nothing
less than a separate Telangana state this time. There was a political vacuum of sorts
with a none-too-assertive Chief Minister Koinjeti Rosaiah at the helm. It was just
the kind of situation where pressure could be built up. Before long, the Centre would
buckle under it.

The Congress leadership in New Delhi proved him right. As Chandrasekhara Rao’s
health deteriorated, violence threatened to spiral out of control in Hyderabad, a city
that had been carefully showcased to domestic and international investors as an ideal
destination to park their funds, and in other places. The core committee of the
Congress imagined it could solve a half-century-old problem in half a day.

Its poorly thought-out announcement betrayed a shocking lack of understanding of

either the significance or the implications of such a decision for the other regions.
The Congress’ strategy was to appropriate to itself the credit for carving out a
separate Telangana and to be seen as fulfilling the dream of a large section of people
in the region. It could harvest a rich haul of votes in the 2014 general elections, it
thought. The Congress plan even went beyond this – the party wanted to kill two
birds with one stone. The TDP, it thought, would not only lose out in Telangana but
stand exposed before the electorate in the coastal Andhra and Rayalaseema regions,
where Chandrababu Naidu would be seen as having espoused the cause of dividing
the State.

Unfortunately for the Congress, there was a backlash from within when J.C.
Diwakar Reddy, a Minister in YSR’s team, submitted his resignation and set off an
avalanche. Showing scant respect for the high command or commitment to the
resolution that the Congress Legislature Party had passed days earlier authorising
AICC president Sonia Gandhi to take an appropriate decision on Telangana, 76
Congress MLAs and at least four party MPs resigned.
The Congress had not only shot itself in the foot but created instant turmoil in
coastal Andhra and Rayalaseema, where there was outrage over the Centre’s
decision. There were spontaneous bandhs in cities such as Visakhapatnam and
Vijayawada; trains were stopped, bus services were paralysed, and demonstrations
were conducted to demand that Andhra Pradesh remain an integrated State. An
HSBC call centre was vandalised in Visakhapatnam, which was being projected as
one of those Tier-II cities that were ideal for attracting investments in the
information technology sector. Hyderabad’s reputation as an IT hub had already
taken a blow, with agitators terrorising anyone who dared to open shop.

The United States had issued an advisory to its citizens not to visit Hyderabad on
December 10 when pro-Telangana organisations planned a massive march to the
Assembly. There was a touch of irony to the vandalism in the State capital. The
status of Hyderabad is a major bone of contention between those who want a
separate state and those who do not.

“There can be no Telangana without Hyderabad” is the refrain of pro-Telangana

activists. Leaders in Andhra say they cannot start searching for another capital in the
event of the State’s division. The administration had shifted once before, from
Kurnool, the capital of Andhra State during 1953-56. The dispute over Hyderabad is
one among the many critically important issues that need a dispassionate and
democratic discussion between leaders of the three regions.

But, the Congress core committee, reviving memories of the style of functioning
when Indira Gandhi was at the helm, did not somehow believe that consultations
within, leave alone with other political parties or representatives from the three
regions, were necessary before taking a decision that would change the history and
geography of southern India’s largest State. The implications of the announcement
on fuelling the demand for the creation of states such as Harita Pradesh,
Bundelkhand, Gorkhaland and Bodoland did not seem to matter. Nothing had been
learnt from history, either, which showed how Andhra Pradesh’s development was
set back by years when the Telangana agitation in 1969 and the separate Andhra
agitation later gripped the State.

Everyone was expected to fall in line just as Chief Minister K. Rosaiah did. The
servility that the Congress high command demanded and received from Rosaiah was
reminiscent of the shoddy treatment meted out to another Congress Chief Minister,
T. Anjaiah (1980-82), by India’s first family. Its consequences were there for
everyone to see – N.T. Rama Rao threw the Congress out of power on the plank of
Telugu self-respect and pride.

The party has now pitted Telugus against Telugus by inventing a remedy that has
proved to be worse than the disease.

-------SOURCE: THE FRONTLINE

Telangana Issue :Article-II

Talking peace
S. NAGESH KUMAR
Rather belatedly, the Centre resorts to democratic consultations on the
Telangana issue, involving the political parties of the State.
V. SUDERSHAN

P. Chidambaram, Union Home Minister, coming out of his office after the all-
party meeting on Telangana in New Delhi on January 5.

THE United Progressive Alliance (UPA) government at the Centre finally devised a
means, democratic consultations, to pull Andhra Pradesh out of the political,
economic and administrative morass it fell into following the hasty announcement of
statehood for the Telangana region on December 9.

On January 5, it convened a meeting of the leaders of eight recognised political

parties from the State with Union Home Minister P. Chidambaram to deliberate on
the mechanism to devise a road map for the long-overdue consultations. Although
the State will remain on ventilator until the air on Telangana is cleared, the Centre’s
prescription has helped ease the month-long tensions caused by bandhs, agitations
and acts of violence.

The two most important political players, the Congress and the Telugu Desam Party
(TDP), both deeply divided along regional lines, have agreed to hold further
political consultations to try and resolve the contentious issue within a reasonable
time frame.

“We are trying to help the political parties of Andhra Pradesh to find the answer to
the issues of the State. We are here to help,” Chidambaram declared, rather
condescendingly, at the conclusion of his discussions with the representatives.
KAMAL SINGH/PTI

After the meeting, Andhra Pradesh Chief Minister K. Rosaiah.

The political parties faulted the Home Minister on two counts: It was the Centre that
committed a blunder by announcing, without holding any consultations, that it was
initiating the process of forming a new State. Having created the problem, it now
wanted the parties in Andhra Pradesh to resolve it by talking among themselves.
This is a tall order given the maximalist position every single party has taken. Both
the Congress and the TDP are racked by internal contradictions that triggered en
masse resignations of Ministers and Members of the Legislative Assembly from
both Telangana and Andhra regions.

They maintained this position at the January 5 meeting. The Congress and TDP
leaders from coastal Andhra and Rayalaseema remained united in their stand against
the bifurcation of the State while those from Telangana insisted on a separate State.
Understandably, these leaders can alter their positions only at considerable risk to
their political careers.

Incendiary speeches by Telangana Rashtra Samithi president K. Chandrasekhara

Rao has provoked people, particularly students, in his region, while Robin Hood-
style capers by Lagadapati Rajagopal, the Congress Member of Parliament from
Vijayawada, in pulling the wool over the eyes of the police and escaping from their
custody have contributed to vitiating the atmosphere in the coastal Andhra region.

Animosities ran so high in the State that P. Ravi, a member of the Joint Action
Committee of Telangana Students, stated: “Nearly 30 lakh people from
Rayalaseema and Andhra will leave Hyderabad for Sankranthi [festival]. But those
who obstruct the Telangana agitation will not be allowed to come [back].” In other
places walls were built across roads and rail tracks, reminiscent of the Berlin Wall
mindset.

For one month, the State resounded with agitations and counter-agitations. If
activists in Telangana burnt buses, those in Andhra and Rayalaseema retorted with
similar acts of violence. If trains were obstructed, shops forced to shut down or
stoned and unwilling businessman browbeaten into submission in one region, people
in the other regions enacted the same methods of agitation. The State-owned A.P.
State Road Transport Corporation (APSRTC) suffered huge operational losses and
its buses extensive damage. The net result of this wanton destruction was a steep
hike in bus fares. This is only the first in a series of back-breaking taxes and tariffs
that the people will have to bear for the month-long indulgences of the political
parties and their supporters.

N. Chandrababu Naidu, TDP president, views the entire political drama as an

example of cutting one’s nose to spite the face. The script, he told Frontline, was
written by the Congress to prevent him from filling the political vacuum caused by
the death of Chief Minister Y.S. Rajasekhara Reddy on September 2, 2009.
KAMAL SINGH/PTI

Praja Rajyam chief Chiranjeevi and Andhra Pradesh BJP chief Bandaru
Dattatreya (right).

Y.S. Jaganmohan Reddy, Rajasekhara Reddy’s son and Congress MP, shares a
similar perception. His supporters view the December 9 announcement as part of a
game plan of the Congress leadership to render him politically irrelevant by striking
a deal with Chandrasekhara Rao.

During the agitation, Chandrababu Naidu maintained a strategic silence for nearly
one month even though 92 MLAs belonging to the TDP staged hunger strikes and
public demonstrations either in favour of or against a separate Telangana. “When the
Congress party at the Centre does not state its position and Sonia Gandhi refuses to
say a word, why should I jeopardise my party’s future by supporting either
Telangana or a united Andhra Pradesh?” he says.

Chidambaram is not flapped by this argument. At the all-party meeting in New

Delhi, he reminded the TDP representative from the Andhra region, Y.
Ramakrishnudu, that his party had on December 7 forcefully expressed itself in
favour of introducing a resolution on Telangana in the Assembly.
V. SUDERSHAN

Telangana Rashtra Samithi president K. Chandrasekhara Rao.

In a statement on December 23, made expressly to cool the embers of the agitation,
Chidambaram had said that it was the altered situation caused by the volte-face by
political parties such as the Congress, the TDP and actor Chiranjeevi’s Praja Rajyam
that the Centre wanted to hold wide-ranging consultations.

However sound technically Chidambaram appeared and whatever documents he

produced in support of his argument, he betrayed the truth that the Centre had no
knowledge of the ground realities. Chief Minister K. Rosaiah understands these
realities very well. But the Congress leadership in New Delhi gave an impression
that his views mattered little.

Reality number one is that like the Congress Chief Ministers, Chandrababu Naidu
also did not want a partitioning of the State. The modus operandi of the political
bigwigs has been similar: speak in favour of Telangana so long as it fetches votes
and dither when it comes to the crunch. At least two Congress Chief Ministers, M.
Channa Reddy and Rajasekhara Reddy, pursued this policy with a great degree of
success. Reality number two is that Chiranjeevi won 16 out of his party’s 18
Assembly seats from the Andhra region and could never support a separate
Telangana State, and so his change of stance was as much on the cards as
Chandrababu Naidu’s.
V. SUDERSHAN

The AIMIM’s Asaduddin Owaisi(left), CPI State secretary K. Narayana, (front

row) the TDP’s Y. Ramakrishnudu and R. Prakash Reddy, and Congress MLA
N. Uttam Kumar Reddy.

As Home Minister, Chidambaram understandably factors the Maoist influence into

his decision-making on Telangana. He openly stated at the January 5 meeting that
forces that ridiculed the parliamentary form of democracy were waiting on the
wings and they would be happy “if we collectively fail to find answers to issues that
concern us”.

Maoists were already interfering in the matter. A stern statement asking the
Congress and TDP leaders to join the Joint Action Committee on Telangana had an
instant effect. Telangana leaders from both parties fell in line. The prolonged
political unrest and workers’ militancy in the mines of Singareni Collieries that are
spread across four Telangana districts are viewed as providing an ideal platform for
the naxalites to operate.

This formulation was reportedly explained by the new Governor, E.S.L.

Naraismhan, when leaders of various political parties called on him. As a former
Director of the Intelligence Bureau and as the Governor also of Chhattisgarh, a State
where police and paramilitary forces are conducting a sustained campaign to flush
out extremists, he should know. His appointment itself was denounced by the
Maoists.

At the centre of the issue of bifurcation is the tussle over Hyderabad, though sharing
of the waters of the Krishna and the Godavari and the division of other resources are
no less significant. It is inconceivable that Telangana’s leaders or people will agree
to part with Hyderabad. It is also quite impractical to have Hyderabad as a common
 capital like Chandigarh since the nearest Andhra border from the city is at least 150
km away. There are no easy answers to these questions.

Therefore, the Centre must not try to find soft or instant solutions and risk the
economic progress of a State. Three years ago, Andhra Pradesh registered an
economic growth rate of above 11 per cent. The State needs all the resources it can
mobilise to complete the 74 irrigation projects that Rajasekhara Reddy started under
the Jalayagnam programme. Chidambaram must get his act right this time and
respect the views of the stakeholders, the people of Andhra Pradesh.

----SOURCE: THE FRONTLINE

Dubai Crisis

Dubai slips
JOHN CHERIAN
in Abu Dhabi
The loan default diminishes Dubai’s ability to steer an independent course and
enhances Abu Dhabi’s role in the United Arab Emirates.
MARWAN NAAMANI/AFP

Sheikh Mohammed bin Rashid al-Maktoum, ruler of Dubai.

THE ruler of Dubai, Sheikh Mohammed bin Rashid al-Maktoum, was in an

expansive mood at a lunch he hosted for visiting foreign journalists at his opulent
palace in the third week of November. Speaking a few days before the emirate
defaulted on loan, he said he was confident Dubai would keep on growing at an
even faster pace. “The future belongs to China, India and the Gulf,” he said.

Dubai, he claimed, had in fact profited in many ways from the global recession. As
an example, he cited the expansion of the fleet strength of the flagship Emirates
Airlines. He said the airlines acquired new planes at a much lower price because of
the recession in the aviation sector. “What I have achieved for Dubai is only 7 per
cent of my vision,” he said. On an earlier occasion, he had said that he had achieved
10 per cent of his grandiose vision to make Dubai a rival to Hong Kong and
Singapore. Sheikh Mohammed, who is also the Prime Minister of the United Arab
Emirates (UAE), said he had downgraded the percentage because his ambitions for
his city-state had expanded even more.

A few days later, on November 26, the bad news about the real state of affairs
started trickling out. Three out of his four closest financial advisers were sacked
from the Investment Corporation of Dubai, which supervises all government
businesses. Then came the news that Dubai was seeking a six-month moratorium on
the debt of Dubai World, the government-owned holding company. Dubai World
has $59 billion in liabilities, a significant proportion of the emirates’ debt of $80
billion. Some analysts say that the debt is closer to $120 billion.

The announcement shook the global market and threatened to prolong the recession.
A statement issued by Bank of America said: “One cannot rule out – as a tail risk – a
case where this could escalate into a major sovereign default problem, which could
then resonate across global emerging markets in the same way Argentina did early
this decade or Russia in the late 1990s.”

The Dubai financial crisis has affected world share market prices and raised
insurance costs for national borrowings. It is feared that countries such as Greece
and Hungary could follow in Dubai’s footsteps and declare a debt default.

Already there were some signs that all was not well in Dubai. Many of the cranes
and heavy machinery around the construction sites remained conspicuously idle.
While riding in Dubai’s brand new Metro, one saw a huge parking lot full of cars
abandoned by fleeing expatriates who either could not repay their loans or wanted to
cut their losses. There were not too many passengers in the trains, which by the way
has a “Gold Class”.

The formal opening date of the world’s tallest building, the 810-metre-tall Burj
Dubai, has been postponed once again. Real estate prices have crashed in the city by
more than 50 per cent. Many prominent Indians have invested in the real estate
market here. Many of the Indians employed here work in the real estate and
construction sectors. A substantial amount of India’s foreign remittances come from
the Gulf. Indians in the UAE account for 10 to 12 per cent of the annual inward
remittances.

Finance Minister Pranab Mukherjee told the media that the impact of the crisis in
Dubai would be minimal but admitted that Dubai’s problems could result in the
return of many Indians. Forty per cent of the UAE’s population is from India
although Indians do not have citizenship rights.

Many economists and experts on the region believe that Dubai has the potential to
bounce back. During the boom years, Dubai had invested in assets all over the
world, which can be easily converted into cash. Dubai’s location as a strategic
trading hub in the region makes it an important centre of international trade and
commerce. Iran is the UAE’s biggest trading partner. Iran does billions of dollars
worth of trade through Dubai as it tries to negate the adverse effects of Western
trade sanctions. The American pressure on international banks to deny Iran credit
has had an adverse effect on Dubai’s economy. Some experts believe this could be
one of the factors responsible for the financial turmoil in the emirate.

At the same time, the UAE has allowed the United States and France to have
military bases on its territory. Iran and the UAE are also involved in a dispute over
three tiny islands in the Persian Gulf – Abu Musa, Tunb and Lesser Tunb. The
islands were annexed by the Shah of Iran in 1971. The UAE’s Minister of State for
Foreign Affairs, Anwar Gargash, said there were some complications in bilateral
relations but hastened to add that “Iran is a neighbour, not a problem”.

Above all, it is unlikely that the cash- and oil-rich Abu Dhabi will let its cousin sink
in the desert quicksand. Abu Dhabi, the largest of the seven emirates that form the
UAE, has built up a sovereign wealth fund estimated at $900 billion. Besides, Abu
Dhabi has one-tenth of the world’s known oil deposits. The ruling families of Abu
Dhabi and Dubai are closely related. Already, the effects of the economic crisis in
Dubai are being felt in Abu Dhabi. The government there will not want Dubai’s
troubles to spill over and spoil its ambitious plans to become the leading financial
and cultural centre of the Arab world by 2030. Behind-the-scenes negotiations are
going on between the officials of the two emirates.

It is clear, however, that Abu Dhabi’s ruling family, the Nahayans, are not in a mood
to give a blank cheque to the Maktoums. A senior Abu Dhabi official said that his
government would “pick and choose when and where to assist”. Dubai may have to
part with equity stakes in some of its major assets. An increasingly assertive Abu
Dhabi may also demand a greater say in the running of Dubai. Given its size and
wealth, Abu Dhabi should logically be the first among equals in the federation. It
occupies 80 per cent of the UAE’s territory.

A result of the financial crisis could be the diminishing of Dubai’s ability to steer a
totally independent course in financial matters and the strengthening of centralised
decision making. Abu Dhabi’s role in the running of the federation will be further
enhanced. Abu Dhabi had initially given Dubai $15 billion and has promised to help
its neighbour on a case-by-case basis. The President of the UAE and the ruler of
Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahayan, in a statement issued after the
Dubai default, said that the country “is stronger and better, and that our economy
and society are healthy”.

NO LIQUIDITY CRISIS
REUTERS

The 810-metre-tall Burj Dubai, the world's tallest tower.

The Governor of the UAE’s Central Bank, Sultan Nasser al-Suwaidi, told the
visiting mediapersons that there was no liquidity crisis in the country. “We came out
of the crisis a few months ago,” he said. The economy, according to al-Suwaidi, was
looking up. “Ten million tourists visited the country in the last six months, and
trading, which had declined, is picking up,” he said. Al-Suwaidi revealed that real
estate, which is the third largest business sector after oil and trade, would take a
longer time to recover.

According to al-Suwaidi, the recovery rate will differ from region to region.
Construction activity in Abu Dhabi seems to be proceeding in full steam, with many
ambitious projects on the verge of being completed. Unlike in Dubai, real estate and
rental values have not plummeted steeply there. “Within a few years the real estate
problems will be resolved and the economy will start recovering from 2010,” al-
Suwaidi averred.

He said that the UAE had no plan to delink from the U.S. dollar. “The U.S. dollar
will be the instrument for investments,” he emphasised. There is pressure from other
Gulf countries to delink from the sinking dollar. There is also talk of a common
currency being adopted by the members of the Gulf Cooperation Council (GCC).
The UAE had opted out of the GCC’s plan for a single currency, but with the U.S.
dollar plummeting, there seems to be some serious rethinking going on in Abu
Dhabi on the subject.

Abdul Aziz Ghurair, the Speaker of the Federal National Council (the UAE’s
Parliament), stressed the fact that the emirates remained the second largest economy
in the Arab world, after Saudi Arabia. The Federal National Council, he said, had
played a key role from 1971 to put in place the political and economic infrastructure
of the UAE. “We are the only federal country in the Arab world,” he said.

Democracy in the UAE is still at a nascent stage. The emphasis is on maintaining

the identity of the Emirati people, who constitute a minority. Out of a population of
more than five million, only around 900,000 are UAE nationals. The rest are
expatriate white- and blue-collar workers. “With so many expatriates, it is easy for
us to lose our identity,” the Speaker said. All the same, he said that there would be
no restrictions on expatriates coming to work in the UAE.

Anwar Gargash acknowledged that the “glitzy development model” of the UAE had
come in for negative perceptions. He admitted that issues relating to the country’s
treatment of migrant labour continued to persist. The government is trying to ensure
that the expatriate labour force, which is responsible for most of the hard work that
made the UAE what it is today, is protected by stronger laws. “It is still a work in
progress,” he said.

The UAE, which consisted of a few fishing villages 60 years ago, has come a long
way. In 1951, there was only a single hospital. Now the best medical care is
available. The average life expectancy of males is 77 years and for women it is 80
years. Gargash claimed that the most successful single story in the UAE was the
presence of women in all walks of life in a “socially conservative” society.

The UAE is among the handful of countries to have signed a “123 Agreement” with
the U.S. for peaceful use of nuclear energy. The signing of the deal has brought the
country even closer to the U.S. “By 2030 we will solve all our energy problems,”
the Minister said, adding that it was extremely important for other countries to
“emulate the UAE’s transparent and peaceful nuclear programme”. He was no doubt
alluding to Iran. Gargash said his government wanted Iran to accept the latest
proposals of the International Atomic Energy Agency. The UAE wants a diplomatic
resolution to the dispute; it wants to be recognised as a regional power.

Lubna al-Qasami, Minister of Foreign Trade and the first woman to hold such a
senior post, said that Iranian banks and companies were allowed to operate freely in
the UAE. The question of reviewing ties with Iran, she said, would only be taken at
“a multilateral level”. Any military confrontation between Iran and the West will
mean more trouble for the UAE, already reeling from the shock of the Dubai
meltdown. Iran has threatened to close down the Hormuz Straits, the main artery for
sea trade in the bustling Persian Gulf.

Nasser Ahmed Khalifa al-Suwaidi, Chairman of Abu Dhabi’s Department of

Economic Development, said that the country’s goal was to integrate its economy
with the world economy. The government, he said, would ensure an annual growth
rate of 7 per cent until 2015, and thereafter 6 per cent. This will mean that Abu
Dhabi will grow at a fast yet sustainable rate. The Abu Dhabi government’s
ambitious “Vision 2030” focusses on diversifying the economy, which is still
heavily dependent on oil exports. The aim is to ensure that the non-oil sector forms
64 per cent of the economy. The Vision 2030 policy paper states that the goal is to
“build a sustainable and diversified high, value-added economy”.

The government of Abu Dhabi is confident of increasing gross domestic product

(GDP) by five times by 2030. This will mean a healthy growth in investment and an
increase in wealth for all those residing in Abu Dhabi. Khalifa al-Suwaidi said Abu
Dhabi’s oil and gas reserves were expected to last at least for another 100 years. The
centre of gravity in the UAE seems to have already shifted from Dubai to Abu
Dhabi. The much-vaunted “Dubai model” of development has given way to a slow,
steady and understated Abu Dhabi style.

ABU DHABI’S INITIATIVE

Abu Dhabi’s Masdar Initiative, which plans to build a “zero carbon” city, is an
illustration. The city will house around 1,500 clean-tech companies, with 40,000
residents and 50,000 commuters, providing a research and test base for renewable
energy technologies. According to Sultan al-Jaber, the CEO of Masdar, Abu Dhabi
wants to position itself as the “technology hub” of the region. “We will develop
human capital in the sustainable and renewable energy sector,” he said. Masdar
Phase-1 will be completed by 2012. Masdar has already put up three solar plants in
Spain and the largest windmill system in England.

In a few years, Abu Dhabi will have its own Gugenheim Museum. Also on the anvil
are plans to set up a branch of the Louvre, Paris’ famous art gallery. Art exhibits,
including works by Picasso and other famous artists, are already on display. Dubai
and its misfortunes seem far away.

The Abu Dhabi government will pump $200 billion into various development
projects in the next five years. Abu Dhabi already boasts an F1 track on Yas Island.
The 2009 Grand Prix was held there.

The UAE is likely to emerge relatively unscathed from the Dubai fiasco even in the
short term.

----SOURCE: THE FRONTLINE

Australian Violence

Hostile hosts
P.S. SURYANARAYANA
in Singapore
Australia: The attacks on Indian nationals threaten to cast a shadow on
bilateral relations.
REUTERS

THE new wave of suspected targeted attacks against Indian nationals in Australia is
threatening to sweep aside the recent gains in the overall relations between the two
countries. By January 18, at least two Indian citizens were slain in two separate
incidents since the beginning of the year. The details of another reported case,
involving an arsonist attack, were treated with some scepticism in Australia.

Critically important to the two countries is the undeniable reality of these crimes and
not their frequency or the extent of their severity. With the Indian media raising an
alarm, the Australian authorities went into defensive mode, denying the possibility
of an anti-India racist motive behind the attacks.

However, the Indian government sought to place the relevant issues firmly on the
bilateral agenda for yet another time in recent months. In a statement on January 7,
New Delhi voiced serious concern over the occurrence of a “series of attacks on
Indian students, as well as members of the Indian community, in Australia over the
past few years”. It also emphasised India’s concern at “the increasing incidents of
assaults since May 2009”.

The brutal attack on Sravan Kumar Theerthala in a Melbourne suburb in May last
year brought into unprecedented focus an important issue simmering until then – the
safety of the Indian student community in Australia. New Delhi not only raised this
safety issue with the Australian authorities but also raised the stakes in the overall
India-Australia relations, and a period of relative calm set in.

However, this was shattered early this year when Nitin Garg, an Indian youth, was
stabbed to death in Melbourne. He was reportedly stabbed in a park while on his
way to a restaurant where he was a part-time worker. Seriously injured in the
assault, he managed to reach the restaurant, where he pleaded for help before
collapsing. He died later at a hospital.
A few days before that incident, the partially charred body of another Indian
national was discovered at a place in New South Wales. He was reported to have
been engaged in the business of recruiting Indians for work on Australian farmlands.
In yet another incident in Melbourne, an Indian survived an arsonist attack on him.
The facts of this case were not established conclusively, though.

The latest series of such seemingly targeted attacks, whether or not racially
motivated, occurred in early January in spite of Australia’s damage-control exercises
that followed the wave of assaults in the middle of last year. Those exercises were
aimed at reassuring the Indian students in Australia and the Indian government.
NARINDER NANU/AFP

The body of Nitin Garg, the Indian student who was fatally stabbed in
Melbourne, being taken for cremation at Jagraon, about 40 km from
Ludhiana, on January 10.

Besides enhancing policing at some places frequented by Indians, the Australian

authorities sought to ascertain the root causes of the problem. This was attempted
through some form of dialogue with the representatives of Indian students as also
some Indian community leaders in Australia. Other inputs were obviously available
from the investigations and assessments by the law-enforcement authorities.

It is understandable that the early-January recrudescence of violence caused concern

in India. The Australian authorities at different levels and civil society, too, are
equally concerned. However, a new question is now beginning to be asked, even as
an old one remains largely unanswered.
The prime old question is, of course, the one concerning the possible motives behind
the seemingly targeted attacks. By any standard of fairness, it is not easy to crack
such a puzzle, especially in the total absence of any ambience of hostility between
India and Australia at the state-to-state and people-to-people levels. Yet, the Indian
authorities and opinion-makers are puzzled at the ease with which Australian
officials tend to portray the attacks on Indians as opportunistic crimes. The relevant
issue at stake, as seen from the Indian perspective, is the insufficiency of
investigative data, in the public domain itself, for a conclusive evaluation of these
crimes.

Also, memories of the travails of an Indian doctor, Mohamed Haneef, which

preceded the vindication of his innocence in a case of terror-related allegations
against him are still fresh. The silver lining in that case was the fairness of the
Australian judicial system. It is this aspect that might be of help to the Australian
authorities even in these cases of physical violence against Indian nationals. For
that, India expects the Australian side to bring the culprits to justice. As this is
written, progress on this front has been slow, although the Australian authorities
have not spoilt their copybook as such.

Such nuances, discernible in the state of interactions between Australia and India at
the official and other levels, apply to the new question as well, besides the old one
about the real reason(s) for the attacks.

The new question flows from the assertions of Australian Foreign Minister Stephen
Smith and others that Canberra’s overarching relationship with New Delhi “has
never been at a higher level” than at present. Smith’s qualitative assessment is based
on his reading that the Prime Ministers of the two countries signed a strategic
partnership agreement last December.
DAVID CROSLING/AFP
 A CANDLE-LIT VIGIL in Melbourne, where Nitin Garg was stabbed, on
January 4.

It is an argument that cannot be brushed aside. The timing of that accord, just a few
months after the brutal assault on Sravan Kumar and a series of other attacks, does
lend itself to the kind of interpretation that Australia has now made. Smith has also
said that Canberra and New Delhi now “agreed that we did not want difficulties, so
far as Indian students and urban crime in Australia are concerned, to get in the way
of what [India’s External Affairs Minister] S.M. Krishna described as an excellent
relationship”.

The telephonic conversation between Smith and Krishna took place in the context of
the early-January recurrence of violence against Indians in Australia.

India sees “its excellent relations” with Australia in a different nuance. According to
the Indian side, Krishna, in his January 11 conversation with Smith, emphasised that
the “non-redressal of this vital issue [of crimes against Indians in Australia] will cast
a shadow on [an] otherwise-excellent bilateral relations”.

The new question, in the context of these nuances, is: Who or what are the forces
that seek to disrupt an excellent equation between Canberra and New Delhi by
sparking another wave of violence against Indians?

Canberra knows that it is in its interest to find the answer to this new question.
Australian action on the basis of a properly discerned or properly investigated
answer can perhaps help reverse the sudden decline in the number of Indian
applicants for educational courses in Australia. After all, Australia earns a lot of
money by providing education to foreign students, and Indians in this category are
among the top spenders in that country.

Australian Deputy Prime Minister Julia Gillard has taken due note of the declining
Indian interest in academic courses in her country. Noting at the same time that she
“cannot diagnose what may or may not be in the mind of prospective [foreign]
students”, she sought to reassure Indians in mid-January that “Australia is a very
safe place and overwhelmingly is a very accepting community”. To stay this way,
though, Australia may have to find a genuine answer to the new question as also the
old one.

--SOURCE: THE FRONTLINE

Deemed University Issue

Deemed failures

V. VENKATESAN
in New Delhi
The “deemed-to-be universities” case in the Supreme Court gets curiouser and
curiouser.
RAJEEV BHATT

Kapil Sibal, Union Human Resource Development Minister. He has said that it
is a policy decision that all deemed universities will eventually go.

REPORTS about the proceedings on two different petitions before the Supreme
Court have made the future of deemed-to-be-universities in the country appear
increasingly uncertain.

In one case, Viplav Sharma vs Union of India, initiated as a public interest litigation
in 2006, the Supreme Court on January 25 accepted the plea of 44 deemed-to-be-
universities to restrain the Central government from derecognising them on the basis
of the report of the Professor P.M. Tandon Committee, set up to review their
functioning, until the court heard them.

A Bench comprising Justices Dalveer Bhandari and A.K. Patnaik directed the
affected universities to file their responses before March 8, the next date of hearing.
Noting that the issue involved a vital public interest affecting students, the Bench
asked the government to place before it the reports of the Tandon Committee and
the task force. The court’s directions were in response to the Central government’s
affidavit that it accepted these reports.

In another case, the Supreme Court on January 29 issued notice to the Centre and
the University Grants Commission (UGC) on a writ petition requesting the court to
declare illegal Section 3 of the UGC Act, 1956, which enables the executive to grant
deemed university status to an educational institution. In his petition, consumer
activist Jitendra Narayan Singh said Section 3 of the Act conferred wide and
unguided power on the executive to recognise an institution as a deemed university
and such action resulted in the commercialisation of the system of granting degrees.

In recent years, the power had been exercised by the executive authority arbitrarily
to confer university status on institutions that “have no standards to be recognised as
universities”. These institutions in turn indulge in conferring degrees for profit, he
told the Bench comprising Chief Justice K.G. Balakrishnan and Justices V.S.
Sirpurkar and Deepak Verma.

“The innocent student, after having invested time, money and effort, receives a piece
of paper as a degree which has no value or substance. The students ultimately find
themselves being robbed of the value for their money paid for services offered by
such deemed universities,” he alleged in his petition.

As the establishment of universities was held to be a legislative act, institutions

could not be conferred deemed university status by the executive, the petitioner
argued. Section 3 of the UGC Act, which confers the power on the Centre to notify
deemed universities, amounted to delegation of an essential legislative function to
the executive and this rendered Section 3 ultra vires of the Constitution, the petition
claimed.
B. JOTHI RAMALINGAM

Students of Saveetha Institute of Medical and Technical Sciences, a deemed

university, at Thandalam near Chennai, went on the rampage on January 19, a
day after the Centre filed an affidavit in the Supreme Court saying that 44 such
universities, including this one, would be derecognised.

The outcome of the second case will be watched with interest as it involves the
judicial review of a legal provision that stood the test of time until allegations about
its abuse began to surface in recent years. But it is clear to any observer that the
outcome in the first case will have a bearing on the second case, even if the prayers
of the two petitioners are different.

In the first case, the petitioner, Viplav Sharma, an advocate, sought a direction from
the court to the government to confer the deemed-to-be-university status only on
institutions providing quality training and certifications, producing highly rated
research material, and having quality professionals with global acceptability. The
United Progressive Alliance (UPA) government, which initially opposed his
petition, changed its stance after it returned to power following the 2009 general
elections, and the assumption of office by Kapil Sibal as the new Human Resource
Development Minister.

UGC review

On June 4, Sibal directed that all pending proposals for conferring deemed-to-be-
university status on institutions that had applied for the same be held in abeyance
until a thorough review of the functioning of the existing deemed-to-be-universities
was undertaken. He also directed the UGC to review the functioning of all such
universities and report within three months the deficiencies with respect to
maintenance of standards, qualifications of the faculty and the quality of
infrastructure. Sibal pointed out that the deemed-to-be-universities should have
obtained the accreditation of the National Assessment and Accreditation Council
(NAAC) or the National Board of Accreditation, (NBA), as the case may be, within
a prescribed period. Therefore, he asked the UGC to specifically report as to what
the status was about accreditation and also about the rectification of deficiencies as
must have been pointed out by the UGC in its periodic inspections. He wanted the
information on the above to be furnished for each of the 130 deemed-to-be-
universities.

Although those three months were over long ago, it is not known whether the UGC
has submitted its report to Sibal. Even in its affidavit to the Supreme Court in the
Viplav Sharma matter, the Central government is silent on this report.

The NAAC (an autonomous body established by the UGC in 1994) has granted
accreditation to 140 institutions. The State-wise list of these institutions, available
on its website, shows that some of the 44 deemed but failed universities are indeed
among them. They include the Gurukul Kangri Vishwavidyalaya, Haridwar; Tilak
Maharashtra Vidyapeeth, Pune; and the Janardan Rai Nagar Rajasthan Vidyapeeth,
Udaipur. The number of institutions that had earned accreditation from the NBA (set
up by the All India Council for Technical Education in 1994) is not available from
its website.

The Human Resource Development Minister set up the Tandon Committee, in

addition to this review by the UGC, to ascertain whether these universities were
serving the purposes for which they were so declared, and whether they were
complying with the conditions, if any, mentioned in the notification by the Central
government in each case.

Only parts of Tandon Committee report revealed

In its affidavit, the Central government has chosen to reveal only parts of the
Tandon Committee report. The committee comprised Prof. P.N. Tandon, formerly of
the All India Institute of Medical Sciences, New Delhi, and a former President of the
Indian National Science Academy; Prof. Goverdhan Mehta, a former Director of the
Indian Institute of Science, Bangalore; Prof. Anandakrishnan, former Vice-
Chancellor Anna Technical University and at present Chancellor of the Indian
Institute of Technology, Kanpur; and Prof. Mrinal Miri, former Vice-Chancellor of
North Eastern Hill University, Shillong.

The committee invited all deemed-to-be-universities for presentations and face-to-

face discussions in August and September 2009 in four sessions. A total of 126
institutions attended these sessions. The committee had sent questionnaires seeking
all relevant information to these institutions well in advance.

On the basis of their responses, the committee submitted its report on October 20,
2009. Meanwhile, the UGC submitted reports to the government on 47 of these
institutions, and the government made these reports available to the Tandon
Committee.

In its affidavit, the Centre has revealed that the Tandon Committee found several
aberrations in the functioning of these universities. The committee concluded that
only 38 of these universities justified their continuation as “deemed universities”; 44
institutions were deficient in some aspects, which needed to be rectified over a
three-year period; and, finally, 44 institutions neither on past performance nor on
their promise for the future had the attributes to retain their status as deemed-to-be-
universities. Sixteen of these 44 institutions are in Tamil Nadu.

The affidavit only revealed some general adverse comments of the Tandon
Committee against the rogue institutions. Although all the 44 institutions whose
deemed status was to be withdrawn were named in its annexure, the affidavit
refrained from mentioning the specific grounds on which each of these invited
derecognition.

Thus, the committee found “undesirable management architecture” where families

rather than professional academics controlled the functioning of institutions. Several
institutions were engaged in thoughtless introduction of unrelated programmes and
proliferation of degrees beyond the mandate of the original terms of grant of
deemed-to-be-university status. It also found very little evidence of noticeable
efforts by some institutions in regard with emerging areas of knowledge.

With the notable exception of some publicly funded institutions, very few
institutions could produce evidence of “quality” research in terms of publications in
leading high-impact journals in respective fields.

Lack of commitment towards research and irresponsible exercise of power with

regard to admission, intake capacity, programmes and fee structure were found to be
other attributes of such institutions. Many of these, which were once colleges,
increased their intake capacity disproportionately and in some cases exponentially in
relation to the qualified faculty strength and other academic infrastructure.

In several institutions, undergraduate and postgraduate programmes had been

fragmented with concocted nomenclatures. Several institutions have prescribed fee
structures considerably higher than those recommended by the official fee structure
committees.

The Tandon Committee members also became members of the task force constituted
by the Centre on November 16, 2009, to prepare an action plan to safeguard the
interests of students enrolled in institutions whose deemed-to-be-university status
was proposed to be revoked in the public interest. The task force recommended that
all pre-existing colleges not found suitable for the status of deemed-to-be-university
should revert to the status quo ante as an affiliated college of the State university so
that students would be able to complete their ongoing courses and obtain degrees
from the affiliating university.

Where an institution is unable to obtain affiliation, it suggested that every effort

should be made to facilitate migration or re-enrolment of students to equivalent or
similar courses in other institutions.

The affidavit estimated the total number of students enrolled in these 44 institutions
to be 1,19,363 at the undergraduate and postgraduate levels, in addition to 2,124
students pursuing research in M.Phil and PhD programmes, and an estimated 74,808
students pursuing Distance Education programmes. These 44 universities are spread
over 13 States, and they could be affiliated to 28 existing State universities, it said.

The task force made it clear that the entire cost of migration and rehabilitation of
affected students should be at the expense of the managements of the failed
institutions and must come from the corpus fund that was required to be maintained
in respect of each under UGC guidelines.

The Supreme Court’s intervention might have tied the hands of the Centre with
regard to derecognising the 44 deemed-to-be universities that the Tandon
Committee has found to be unworthy of deemed status. But the Centre has to blame
itself for its hasty announcement in its affidavit that it accepted the reports of the
Tandon Committee and the task force. The announcement led to widespread concern
and unrest among the students of these universities. The right course for the Centre
would have been to place these reports in the public domain, invite public response,
and then take a decision.

-----SOURCE: THE FRONTLINE

Union Budget:2010-2011

A delicate balance

Union Finance Minister Pranab Mukherjee's strategy of a partial rollback of the fiscal
stimulus package in his Budget is not without its risks, given particularly the uncertainty
over the external environment. Yet it is a measure of the government's confidence that the
move to a higher growth path of 7.2 per cent this year and to a projected 8.2 per cent next
year is sustainable even in the absence of the stimulus that it has reversed course and
sought to raise Rs.46,500 crore through indirect taxes. Though this is offset partially by
the direct tax concessions totalling Rs.26,000 crore, the net revenue raised, together with
the expected buoyancy in a year of robust growth, has enabled the Finance Minister to
keep the fiscal deficit down to 5.5 per cent next year. The real story of this budget then is
not of any big idea or innovative strategy, but one of fiscal consolidation. There is the
recognition that a sound and prudent fiscal management — with the deficits under control,
and subject to gradual and targeted reduction over the medium term — has provided an
enabling environment for the move on to a high growth trajectory. In a milieu where
fiscal consolidation would be impossible while simultaneously increasing social sector
spending and holding taxes down, the tax area had inevitably to yield. Overall, while an
additional tax burden of Rs.20,500 crore is not too much for the economy to absorb, the
impact of specific increases as, for instance, on diesel and petrol — the main target of
protest by the opposition — is bound to be reflected in the price level.

Structural reform of the income tax system has been delayed with the new income tax
code still in its formative stage. Meanwhile, income tax payers have gained significant
relief from the broadening of the income slabs and from tax deductions for investing in
infrastructure bonds and contributing to the Central Government Health Scheme. The cut
in the surcharge on corporate tax from 10 per cent to 7.5 per cent is balanced with the
raising of the minimum alternate tax to 18 per cent. Among the specific sectors, real
estate that has been hit the most by the slowdown has been provided some concession. So
have the medical equipment and mobile phone manufacturers, and the cinema industry.
The restoration of the general excise duty to its original level of 10 per cent and of the
duty on large cars and multi-utility vehicles from 20 per cent to 22 per cent would not be
much of a burden. More significant from the point of view of impact are the revival of the
customs duty of 5 per cent on crude and of 10 per cent on petroleum products and the
hike in the excise duty on petrol and diesel by Re. one a litre. Even while it is reluctant to
decide on raising the prices of petroleum products as recommended by the Kirit Parikh
Committee, it has collected more in taxes and may well let the oil companies live with
under-recoveries of the product prices.

As in the earlier budgets, much of the focus on the expenditure side is on social sector
spending that now accounts for 37 per cent of the total plan outlay for 2010-11, while
another 25 per cent is to be spent on rural infrastructure. The United Progressive
Alliance's flagship Mahatma Gandhi National Rural Employment Guarantee Scheme has
been allotted Rs.40,100 crore and the Bharat Nirman programme of building rural
infrastructure Rs. 48,000 crore. In addition, the allocations for health and housing —
rural and urban — have been increased. Higher allocations are no doubt needed in all
these sectors, but what is missing is the effort to strengthen the delivery mechanism at the
ground level though the institutional weaknesses in the government structure have been
identified over and over again. The suggestion made in the Economic Survey for moving
away from subsidising the foodgrain prices in the public distribution system and instead
providing coupons directly to the families below the poverty line so that they can buy
food from the open market is no doubt too radical for the budget. Yet, in the case of
fertilizers, the government has adopted the nutrient-based subsidy scheme and it even
talks of moving towards a system of direct payment of subsidies to the farmers. This is an
area in which it has to move with caution lest the inevitable increase in fertilizer prices
should prompt the farmers to use less of the nutrients, thereby affecting farm production.
The right to education bill passed last year is still to make its impact felt and the Finance
Minister has increased the allocation for upgrading the quality of school education, to
which every child in the 6-14 age group would be entitled. The right to food, the big idea
that emerged from the last budget, is still in its formative stage, with the draft bill almost
ready for circulation and debate. The government's dilemma on how inclusive that right
should be — whether to adopt the conventional poverty line with its lower figure of
poverty or the higher estimates that expert committees have come up with more recently
— and the attendant cost seem to be holding back its roll out.

Notable in this budget are the moves on reforming the financial sector. New banking
licences are to be issued by the Reserve Bank and eligible non-bank finance companies
are to be allowed to convert themselves into banks. The global financial crisis has shown
up the systemic weaknesses of financial regulatory institutions the world over. Drawing a
lesson from this experience of the advanced financial markets, the Finance Minister has
proposed a Financial Stability and Development Council to exercise macro prudential
supervision over the economy including over large financial conglomerates, and to
coordinate the functioning of multiple regulatory agencies. Overall, the budget has had a
positive impact on business sentiment and the animal spirits of the market.

-----SOURCE: THE HINDU

drought, output and inflation
Understanding the Nature and
Causes of Food Inflation
Ramesh Chand
The main reason for the current
surge in food prices is the supply
shock due to the drought in 2009
and the carry-over effect of the
low growth of food production in
2008-09. As the frequency of
such shocks is expected to rise,
India needs to have an effective
food management strategy to deal
with these episodes. It also needs
to explore various other options
for price stabilisation like
maintaining buffer stocks and
using trade. The economy has to
invest heavily in expanding
storage capacity for various types
of foods in both the public as well
as private sectors. Due to
fluctuations in growth, the export
of some commodities in one or
two years is followed by their
imports, which invariably
involves a large variation in costs
and prices. As India is a net
exporter of food, a part of what is
now exported needs to instead
become part of domestic
stabilisation stocks.
Ramesh Chand (rc@ncap.res.in) is at the
National Centre for Agricultural Economics
and Policy Research, New Delhi.
10
P
olicymakers and administrators
seem unable to bring food prices
under control. Food inflation, based
on the wholesale price index (WPI) for
food articles and food products, entered
double digits in April 2009 and crossed
the 20% level in December.
The increase in prices is not restricted
to a few commodities, and it is being
experienced across the board; the excep-
tion being edible oils. Inflation at the
retail level, which ultimately is what
matters for consumers, is more serious
than wholesale prices. At this rate of
inflation, Indian consumers are required
to spend about 20% more on food com-
pared to the previous year to maintain
their consumption level. A large percent-
age of households in the country is not in
a position to raise its food expenditure to
neutralise the effect of inflation. This is
surely going to aggravate food and nutri-
tion deficiency which remains at a very
high level (Deaton and Dreze 2009).
The debate on the causes of inflation is
full of confusion and most experts do
not distinguish between long-run and
short-run inflation. While the imbalance
between demand and supply is often
mentioned as an important factor, an
adequate understanding of this imbalance
is missing. The long-run implications of
the emerging trends in food production
have also received little attention. This
article looks at the long- and short-term
changes in food prices in nominal and
relative terms and examines how these
changes are affected by changes in pro-
duction and other factors. It also exam-
ines the effect of trade in food products
on domestic prices and supply.
1 Inflation: Trend and Structure
The average rate of annual inflation, based
on the WPI (1993-94) was close to 6% dur-
ing 1994-95 to 2004-05. Inflation in food
february 27, 2010  vol xlv no 9  EPW   Economic & Political Weekly
items, which includes food articles as well
as food products, was 5.64%, and it was
lower than the inflation in prices of non-
food commodities.1 The average rate of
inflation among various food items varied
between 4% and 7.5% (Table 1, p 11). The
lowest inflation during this period was
experienced in sugar and the highest in
fruits and vegetables.
After 2005, food prices increased at a
much faster rate than non-food prices, ex-
cept in 2008 when the prices of commodi-
ties spiked in India and in the global mar-
ket. Food and non-food prices showed a
disparate movement after January 2009
(Figure 1, p 11). On an annual basis, food
prices in 2009 increased by more than 12%
over 2008, in contrast to the 1.76% decline
in non-food prices.
It is important to point out that food
inflation in wholesale prices since 2005
has been accelerating, and it was close to
20% in January 2010. Annual average
food inflation during the period 2006 to
2009 was more than 80% higher than
inflation in non-food commodities. These
trends show that the real prices of food
(food prices relative to non-food prices)
declined during the period 1993-94 to
2004-05 and increased after 2005. Within
the food group, the highest inflation is
observed in the case of pulses and the
lowest in the case of edible oils. Except
edible oil, the real prices of all major food
items have registered an increase during
the past four years.
Food prices increased in real terms and
food inflation accelerated in 2006-09
despite a more than 5% annual growth in
food output during the period 2005-06 to
2007-08. The reasons for this are dis-
cussed in the following sections.
2 Factors Affecting Food Inflation
The acceleration in food inflation and the
abnormally high level of food prices to-
wards the end of 2009 have been caused
by several factors relating to a shock in
supply, trade, global prices, food manage-
ment, speculative activities and demand.
Some of these factors are of a short-term
nature and some are of a long-term nature,
while some operate both in the short as
well as long period.

Figure 1: Inflation (YoY) during Various Months, January 2006 to January 2010 (in %)
25
20
15
Food
10
5 food production dur-
0
1/2006 7/2006 1/2007 7/2007 1/2008 7/2008 1/2009 7/2009 1/2010 during 2009. This
-5
-10
Source: 1, in Table 1.
2.1 Domestic Production
Food inflation in India started accelerat-
ing in the beginning of 2008 (Figure 1)
though food production during 2006-07
and 2007-08 had reached record levels
and registered more than 5% growth in
each of these three years (Table 2). The
growth rate was more than double the
growth rate of domestic demand for
food.2 However, a major chunk of the
incremental output during these years
did not enter domestic supply. As global
prices had reached a very high level in
2007 and 2008, exports turned out to be
much more lucrative than sales in the
domestic market. The share of exports in
domestic production of food increased
from 6.2% during 2003-04 to 2005-06 to
more than 10% during 2006-07 to 2008-09.
This resulted in a transmission of some
of the increase in global prices to the
domestic market, and domestic prices ex-
perienced an increase despite a substantial
increase in domestic food production.
Thus, the main cause of an increase in
food prices in 2008 was the influence of
exports, led by high global prices.
Global food prices cooled down con­
siderably during 2009. The FAO Food Price
Index in 2009 was 20% lower than in 2008
(FAO 2009). In contrast to the global trend,
domestic food prices followed a rapid
increase throughout 2009. The increase
was much higher in real terms than nomi-
nal terms as non-food prices declined and
experienced negative inflation in most of
2009 (Figure 2, p 12). The main factor
underlying high food inflation during
2009 and beyond is that growth in food
production during 2008-09 fell short of
demand (Table 2). Food output in this year
increased by 1.6%, which was short of the
annual growth in demand. As more than
Economic & Political Weekly  EPW   february 27, 2010  vol xlv no 9
drought, output and inflation
half of food produc- imbalance in demand and supply, the
tion reported in a decline in food production was bound to
financial year is con- raise food prices.
sumed in the next
year, the impact of 2.2 Trade and Global Prices
the low growth in Changes in international prices are exert-
ing a significant direct and indirect influ-
ing 2008-09 was felt ence on domestic food prices through trade
as well as through adjustment in domestic
was followed by defi- policies3 in order to keep some balance
Non-food ciency of the 2009 with global prices. However, this influence
south-west monsoon varies greatly across commodities. Inter-
in large parts of the estingly, the prices of edible oil in the
country resulting in a drought (there were country turned out to be lower during 2009
also floods in other parts), which caused compared to 2008 despite a decline in oilseed
considerable loss to kharif output for output by 5% in 2008-09 and an estimated
the year 2009-10. Thus, 2009-10 turned decline of same order during 2009-10. Im-
out to be a bad year after a year of poor ports, which meet around 40% of domestic
agricultural output performance in 2008-09. demand for edible oil, are the major factor
According to the advance estimates issued holding edible oil prices at a low level.
by the CSO, foodgrain production in 2009-10 Why have imports not taken place or
is estimated to decline by 8% and oilseeds helped in cooling domestic prices of other
and sugar cane production by 5% and 11%. food commodities like wheat, rice, sugar,
Since we do not have mechanisms to pulses, and eggs/meat/fish? There are
adequately and promptly augment the several reasons for this and some reasons
Table 1: Inflation in Food and Non-food Commodities during 1994-95 to January 2010
(Based on WPI with base 1993-94) and Growth Rate in Food Output (%)
Item
1994-95 to
2004-05 2005 2006 2007 2008 2009
2010
January
Average
2006-09
1 All commodities 5.90 4.74 4.82 4.82 9.12 2.01 8.54 5.19
2 Non-food commodities 6.02 5.37 4.72 4.54 9.55 -1.76 4.53 4.27
3 Food articles 5.91 3.94 6.83 7.02 6.64 12.32 17.41 8.20
4 Food products 5.33 1.58 2.55 3.43 9.80 13.79 22.55 7.39
5 Food commodities (3 and 4) 5.64 2.97 5.09 5.60 7.87 12.90 19.42 7.86
Foodgrains 5.54 3.83 9.71 6.27 6.37 14.14 17.89 9.12
Cereals 5.57 3.68 6.63 6.97 7.20 12.96 13.69 8.44
Pulses 5.46 5.04 32.05 2.14 1.30 21.81 45.62 14.33
Rice 5.00 4.01 2.13 6.05 8.97 15.96 12.02 8.28
Wheat 5.93 1.08 12.99 6.77 5.06 6.83 14.86 7.91
Oilseeds 5.89 -6.11 -3.96 26.58 17.46 0.92 10.05 10.25
Fruits and vegetables 7.47 7.51 2.24 6.49 5.94 11.77 8.33 6.61
Dairy products 5.20 0.11 4.20 6.08 8.38 6.12 12.87 6.19
Milk group 5.57 0.73 4.48 8.17 7.87 8.93 13.99 7.36
Egg, fish and meat 6.46 9.46 6.72 6.38 3.75 14.44 30.71 7.82
Edible oils 4.85 -7.19 1.23 13.11 12.52 -6.59 -1.17 5.07
Sugar 4.06 15.09 4.83 -14.69 5.62 36.34 58.94 8.02
Growth in food output (%/a year) 2.39 0.55 5.87 4.10 5.39 1.60 -0.2AE 4.24
(1) AE stands for Advance Estimate provided by CSO. (2) Growth rates in last row refer to financial year ending with, like 2005 stands
for 2004-05.
Sources: (1) Office of Economic Adviser, Ministry of Commerce and Industry, GOI, New Delhi. (2) National Accounts Statistics, CSO.
(3) Department of Agriculture and Cooperation, Ministry of Agriculture, GOI, New Delhi.
Table 2: Growth Rate in Output of Major Food Commodities (in %)
Item 1993-94 to 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AE
Foodgrains 0.69 -6.96 5.16 4.16 6.21 1.34 -8.00
Oilseeds -0.43 -3.33 14.91 -13.19 22.52 -5.38 -5.00
Sugar cane -0.15 1.38 18.60 26.44 -2.06 -22.10 -11.80
Fruits 2.48 7.93 4.26 6.43 6.69 na 2.50
Vegetables 3.03 8.02 21.62 4.16 5.37 na 4.80
Total food # 2.39 0.55 5.87 4.10 5.39 1.60 -0.20
# Refer to value of all food crops and livestock products at 1999-2000 prices.
Sources and notes: Same as in Table 1.
11
drought, output and inflation

are commodity-specific. In the case of is around 10 million tonnes out of which inventories of other food items. Because of
edible oil, India is a regular importer and India imports about 30%. The global market this, the stock to consumption ratio for
many big public and private agencies have does not seem to be having the capacity to most of the commodities in the country
been importing edible oil since a long meet India’s rising demand for pulses. remains low and not large enough to go
time. These agencies plan for imports well beyond the next harvest. There is a strong
in advance. The international market for 2.3 Food Management apprehension that allowing big domestic
edible oil is quite big and it offers lot of It is pertinent to ask whether high food in- players or multinationals in the food
choice in terms of destination and the type flation being experienced in the country market would jeopardise food security
of oil traded. The situation is different for could be checked through better manage- and result in exploitation of producers and
Figure 2: Growth Rate in Food Output during 10-Year Periods from ment of our food eco­ consumers. On the other hand, the func-
1971-72 to 2007-08 (in % at 1999-2000 prices) nomy. This issue is par- tioning of India’s main public parastatal,
4
Food crop + livestock ticularly important be- the FCI, has remained under question on
3.5 cause there is a gap be- grounds of efficiency and for putting a
tween desired and ac- heavy burden on the state exchequer. Bulk
3
tual action taken in the imports and exports by state agencies have
2.5 food sector. For in- often raised controversies and these agen-
stance, the first indica- cies did not act with swiftness and effi-
2
tion of a serious fall un- ciency to impart stability through trade.
Food crop
1.5 der sugarcane acreage With an increasing frequency of supply
was available in the shocks and a growing need to use trade
1
1980-81 1984-85 1988-89 1992-93 1996-97 2000-01 2004-05 first week of July 20084 and stock as instruments of price stabili-
Decade ending with but export of sugar con- sation, the country has to have a clear
Source: National Accounts Statistics, CSO.
tinued despite this sig- policy on the role of public agencies and
other commodities, particularly for those nal. Between April and September 2008, private sector in food trade.
which face sporadic shortages in the India exported sugar worth $960 million
domestic market. There are no private and in the following six months (October 2.4 Long-Term Inflation
import houses specifically importing such 2008 to March 2009) it imported sugar Long-term inflation depends upon the
commodities. Strict regulation on import worth $127 million. The situation turned pace of growth in domestic production in
and delay in announcement of policy precarious during 2009 and India imported relation to the growth in demand. This
changes to facilitate imports further re- sugar worth $306 million during the first involves three aspects: (1) level or magni-
strict the ability of private players to go for half of 2009-10 (CMIE 2009, 2010). In a tude of growth of output, (2) year to year
quick imports. Once the situation starts short span of time, the price paid for im- fluctuations, and (3) composition of
worsening, the onus falls on public agen- ported sugar turned out to be more than growth. The long-term trend in growth of
cies to arrange imports. As we do not have double the price fetched by exports.5 This food output (i e, output of food crops and
any institutional mechanism for an early implies that with a correct assessment of livestock) is presented in Figure 3 (p 13).
warning system to know in advance about situation, sugar exported at a low price The graph presents trend growth rates
the likely scenario of domestic and global could have been kept in stock to meet the based on 10-year periods beginning from
supply and prices, the import option is put deficit in production that emerged in a few 1971-72 to 1980-81 and extending up to
in place quite late when the global market months. Similarly, it is felt that timely re- 2008-09. The annual growth rate of total
has already factored in India’s need for lease of cereals stocks held by the Food food reduction remained above 3% in suc-
import. The most recent evidence of this Corporation of India (FCI) could reduce cessive 10-year periods from 1980-81 to
is in the case of sugar. World sugar prices prices substantially.6 Such instances ne- 2001-02. Similarly, the growth in food
ruled around $290 per tonne during the cessitate that we look at the weaknesses in crops ruled above 2.5% in the same period
first quarter of 2009. When the market our food management strategy and policies. except in a few instances. The growth in
realised that there would be a sugar short- According to various reports on climate crop as well as in the entire food sector
age in India, prices increased to around change, the country is expected to face followed a continuous deceleration after
$470 per tonne in the third quarter of 2009. more frequent floods and droughts in the 1999-2000. By the decade ending 2005-06,
By the end of the year world sugar prices future. This will increase the occurrence annual food crop output growth dropped
had doubled. The lack of cooperation or of supply shocks. There are only two ways to 1.7% and the crop plus livestock sector
coordination between the centre and the to address demand and supply imbalances growth fell to 2% level. There is some re-
states further complicates the likelihood arising out of such shocks, viz, cross border covery in the last two years. After 2002-
of a quick execution of the import option trade and by maintaining an adequate 03, growth in food output remained below
to meet domestic shortage, as was seen in inventory. Except for a buffer stock of rice 2.56%. The most recent decade ending
the case of sugar recently. and wheat by public agencies and sugar with 2007-09 shows trend growth rate of
In commodities like pulses, the global stock by various agencies, there is no 2.4% while food output of the crop sector
market is very thin. The total trade in pulses arrangement in the country to carry large shows annual growth of 1.9%. These
12 february 27, 2010  vol xlv no 9  EPW   Economic & Political Weekly

Figure 3: Trend in Per Person Production of Foodgrains (in Kgs)
210
205
200
195
190
185
1976-80 1986-90 1996-2000 2006-09
Source: 3, in Table 1.
growth rates are not even two-thirds of
the growth experienced in the period
1970-71 to 2000-01.
On the demand side, India’s population
is rising annually by 1.4% and per capita
demand is showing robust growth due to
improvements in per capita income and
also because the present level of nutrition
and food intake are very low compared to
the requirement for a healthy diet. Policies
towards inclusive growth and schemes
like the Mahatma Gandhi Rural Employ-
ment Guarantee Scheme, which aim at
augmenting the income of poor house-
holds are also expected to have a positive
influence on per capita food demand.
These changes suggest that if the deceler-
ation in food production growth is not re-
versed food prices would remain under
strong pressure from the demand side.
For a country like India, stable growth
in output is as important as the level of
growth. Fluctuations in growth cause se-
rious disruption in supply and result in
frequent imbalances and bouts of infla-
tion. Food storage capacity in the country
is very low and the quality of storage in-
frastructure is not suitable for keeping
food beyond a few months. This is parti­
cularly true for semi-perishable and perish-
able foods. Because of this, much of the
growth during a year of bumper produc-
tion cannot be carried over to meet a
shortfall in production in the next season.
Therefore, from an inflation point of view,
smooth growth is essential and indeed
much more important than high and
fluctuating growth.
The growth rate of various food com-
modities show wide variation. While
production of horticultural and livestock
products is rising at a relatively high
and stable rate, production of foodgrains
shows slow and fluctuating growth. Despite
a rising food subsidy, cereals are showing
Economic & Political Weekly  EPW   february 27, 2010  vol xlv no 9
double digit inflation. On
a per capita basis, produc-
tion of foodgrains declined
by about 5% between the
early 1990s and the trien-
nium 2005-06 to 2008-09
(Figure 3). Pulses produc-
tion has been almost stag-
nant for the past two dec-
ades. As a staple food,
cereals and pulses are the
major and also the cheapest source of en-
ergy and protein for common people.
Their growth rate, instability and prices
are a matter of much more serious concern
than other foods.
Another important concern relating to
long-term inflation is that the average cost
of production of major crops is showing an
increase even in regions with low produc-
tivity, which have a large potential for
growth. This kind of growth necessitates
an increase in food prices. Only technology
led growth can help in checking high food
inflation in the long run.
3  Conclusions and Implications
The main reason for a sharp surge in food
prices during 2009 is the supply shock due
to the drought in 2009 and the carryover
effect of low growth of food production in
2008-09. As the frequency of such shocks
is expected to rise, we need to have an
effective food management strategy to deal
with them. India needs to explore various
options for price stabilisation like main-
taining buffer stocks and using trade. We
need to invest heavily in expanding stor-
age capacity for various types of foods in
both the public as well as private sectors.
Due to fluctuations in growth, export of
some commodities in one or two years is
followed by their imports, which invariably
involves a variation in costs and prices. As
India is a net exporter of food, a part of what
is now exported needs to instead become
part of domestic stabilisation stock.
There is a need to change regulation in
food markets to encourage and involve the
private sector in the food market, trade
and stock management for price stabilisa-
tion along with active participation of
public agencies. The risk of such players
resorting to hoarding and speculative
trade can be checked by establishing a
food market regulator. India also needs to
drought, output and inflation
set up a strong institutional mechanism
for an early warning system relating to
food demand, supply and price situation.
The long-run food scenario is causing
greater concern as growth in food output
is decelerating. The dependence on pro-
ductivity for food growth is rising, which,
in turn, involves an increase in the average
cost of production. This implies that growth
in food output is driven by an increase in
food prices. To keep food inflation at a low
level, we, of course, also need to take strong
action to develop and disseminate improved
technologies for raising food production.
Notes
1 Inflation in food and non-food commodities was
estimated by constructing indices of food items
and non-food items from official statistics of WPI
for various groups of commodities. WPI for non-
food items was computed by extracting WPI for
food articles and food products from WPI for all
commodities. WPI for food items was computed
by taking the weighted average of WPI for food
articles and food products. The food articles
group with a weight of 15.40% includes all cere-
als, pulses, milk, meat and fish products, fruits
and vegetables, condiments and spices and other
food articles like tea and coffee. It does not in-
clude processed products, which are included un-
der the head food products. The food products
group has a weight of 11.45% in the WPI for all
commodities, and it includes (a) dairy products like
butter, ghee, baby foods, milk powder, (b) canned
preserved and processed fish, (c) grain mill prod-
ucts like maida, suji, atta, bran and bakery prod-
ucts, (d) sugar, khandsari and gur, (e) salt, (f) ed-
ible oils, and (g) other food products. A complete
idea about food inflation can be had from the
combined index of food article and food products.
2 According to an ongoing study by the author food
demand during 1993-94 to 2004-05 increased by
2.2% per annum.
3 Like the hike in minimum support prices of wheat
and rice.
4 Crop Weather Watch Group in Ministry of Agri-
culture in its report dated 11 July 2008 reported a
17% decrease in area under sugar cane in kharif
2008-09, this was repeated in subsequent weekly
reports in the year.
5 Importing at high price and exporting at low
price was also observed in other commodities
(Chand 2001).
6 According to Gulati and Ganguly (2009) unloading
of wheat stock held by the FCI in its godowns in
Punjab will immediately bring down atta prices
by about 20-25%.
References
Chand, Ramesh (2001): “Wheat Export: Little Gain”,
Economic & Political Weekly, Vol 36 (25): 2226-28,
23 June.
CMIE: Monthly Review of the Indian Economy, Eco-
nomic Intelligence Service, Centre for Monitoring
Indian Economy Pvt Ltd, Mumbai, various issues,
2009 and 2010.
Deaton, Angus and Jean Dreze (2009): “Food and
Nutrition in India: Facts and Interpretations”,
Economic & Political Weekly, Vol 44 (7): 42-64,
14 February.
FAO (2009): Food Outlook, Global Market Analysis,
Food and Agriculture Organisation of United Na-
tions, Rome, December.
Gulati, Ashok and Kavery Ganguly (2009): “Reform
Market to Tame Prices”, Economic Times, 18 De-
cember, New Delhi.
13