12
NEW DELHI I WEDNESDAY I MARCH 2 I 2011
The IndianEXPRESS
BECAUSE THE TRUTH INVOLVES US ALL
Failing to take off
Baldauf’s exit shows, once again, how the
government continues to ruin Air India
T
HERE is, regrettably, no
surprise that Gustav Baldauf
chose to resign as Air India’s
chief operating officer. A zealous-
ness to micro-manage the “national
carrier” is too much a part of the
Central government. Indeed, by
issuing a show-cause notice to
Baldauf for stating just that — that
the government played “too promi-
nent a role in the airline” — Air
India’s management proved just
that. When Baldauf, an Austrian
national, was inducted into the air-
line, it was seen as a faint signal by
some that perhaps this time the
government was thinking out of the
box and was committed to reviving
the airline’s fortunes. The reason
for his exit should extinguish any
lingering optimism. The develop-
ment, however, does frame the issue
as it is: is it worth this country’s
finances to keep pouring good
money for the uncertain benefits of
having a “national carrier”? After
the frivolousness of this latest crisis,
can we finally acknowledge that
incremental steps of new hires and
periodic bailouts will not restore the
leaking flagship to any semblance
of financial health?
Those questions are validated by
the allocation, in the Union
budget announced this week, of
Rs 1,200 crore to Air India. That’s
Rs 800 crore short of demand
made to the Central government.
Indeed, in Civil Aviation Minister
Vayalar Ravi’s estimate, it needs
Rs 10,000 crore more. But for a
Reporting back
As violence returns to the Telangana stir, it is
crucial the Centre engage different parties
T
HE political play over Telan-
gana displays certain odd,
disturbing tendencies. The
situation that compelled the setting
up of the Srikrishna Committee —
tactical as well as violent aggression
on the streets of Andhra to put pres-
sure on the Centre — is now slowly
returning to the state, almost two
months after the panel had made its
recommendations on the feasibility
of a separate state of Telangana. It
should now be clear that the Centre
cannot allow the situation to drift.
Having given the appearance of
caving in to the TRS’s passive-
aggressive tactics in December 2009,
and thereby provoking anxiety in
other parts of the state, it has to now
reclaim the middle ground by using
the committee’s very useful blue-
print for negotiations with different
strands of opinion.
The committee has laid out six
available options, including the
status quo, a united Andhra with an
empowered Telangana council and a
separate state of Telangana. It does
not presume to decisively privilege
one option over the others, and
provides a wealth of detail in investi-
gating different scenarios. Moving
forward — towards a new adminis-
trative set-up, a new state, or simply
restoring normalcy within the sta-
FREEZE FRAME
country that is now looking to
adopt different mechanisms to en-
sure adequate outcomes and effi-
ciently targeted subsidies, such al-
location and such future estimates
should strike anyone as unduly
wasteful. That there is doubtful
benefit to the public by these regu-
lar infusions of cash was brought
out recently when the Directorate
General of Civil Aviation released
data for domestic air traffic in
January. Air India’s domestic wing
had slipped to fourth place. Jet,
Kingfisher and IndiGo each flew
more passengers than Air India,
that too by a large margin. The
DGCA’s figures also showed that
Air India reported low occupancy
and the lowest on-time figures. If
this were any other company, its
shareholders would have seriously
reconsidered their investment.
But, of course, Air India is not
any other airline. An anachronistic
pride in a “national carrier” — a
notion exploited by unions and the
ministry — has meant that any
movement on a sensible disinvest-
ment plan has been averted. The
notion has also, all too wastefully,
nourished political support for
reviving the airline without
demanding of the management a
rational case for more funds. The
market clearly is not in awe of a
“national carrier”. It is time we polit-
ically junked the idea too, and
thereby created the conditions for a
realistic appraisal of what to do with
a problem called Air India.
tus quo — is a political project. The
Telangana movement has a long
history, and its political nature has
changed over time. The Congress,
which has a majority in the Andhra
Pradesh assembly and which also
has a majority of the MPs in Lok
Sabha from the state, is obviously
wary of doing anything that could
precipitate a divide within its legisla-
ture party. But given the adjourn-
ments forced by its MPs in Lok
Sabha last week on the subject,
which seemed to take party leaders
by surprise, inaction too cannot be
an option.
It is crucial to establish order and
stability and not let parts of the state
descend into yet another cycle of
violence. The Centre had said that
it would look into the issue after the
Union budget was presented. Home
Minister P. Chidambaram has also
stated that the government is study-
ing the Srikrishna panel’s report
and will convene a meeting of
parties from Andhra Pradesh on the
Telangana issue only when all of
them are ready to give their views.
The process should begin at the
earliest. All the stakeholders should
show a maturity to resolve the issue
and in the meantime refrain from
holding the state hostage to
political blackmail.
A new opening act
I
NCREASING corporate
debt caps for foreign institu-
tional investment and allow-
ing retail foreign investors to
invest in Indian mutual funds are
two significant initiatives in Budget
2011. These steps towards greater
capital account liberalisation will not
only attract foreign capital for
India’s enormous infrastructure
needs, but they will also make
Indian financial markets more sta-
ble and the economy more resilient.
Since 1991, when India witnessed
a balance of payment crisis due to
short-term foreign liabilities, Indian
capital controls have involved
restrictions on foreign debt. There
are no explicit caps on the total
foreign borrowing, the two main
components of which are external
commercial borrowings (ECBs) —
that is, dollar borrowings by compa-
nies — and FII investment in rupee-
denominated bonds. The policy
framework attempts to control this
magnitude. However, there is a
ceiling on FII investment in total
rupee-denominated bonds, and
within that, on government bonds
and corporate bonds.
By 2009, the stock of corporate
borrowing under the ECB window
(dollar-denominated) stood at
above $62 billion, while foreign
lending to firms in rupee-denomi-
nated debt was capped at one-tenth
of that value, at $6 billion. The bias of
controls on rupee-denominated
versus dollar-denominated debt had
resulted in higher dollar-denomi-
nated borrowings by firms.
The ministry of finance working
group on foreign investment,
headed by the present Sebi Chair-
man U.K. Sinha, argued that the
government needs to move away
from restrictions on total foreign
debt, to a restriction on dollar-
denominated foreign debt where
movements of the rupee dollar rate
can pose unforeseen liabilities on
the borrower. If an Indian company
has borrowed in dollars and the
rupee weakens, the company has to
pay more. The policy framework has
been guided by the old belief that
foreign debt, as such, was danger-
ous. The policy lesson that emerged
from the Asian crisis, however, was
YUBARAJ GHIMIRE
T
HE fate of Nepal’s ongoing
peace process and the
promised new constitution
depends on how sincerely
Prachanda and his party, the Uni-
fied Communist Party of Nepal-
Maoists (UCPN-M), cooperate in
the process. He is focused more on
retaining the party leadership and
all the clout associated with it;
supporting the peace process and
the drafting of the constitution
appears secondary, even tactical.
A clear division at the party’s
top level as well as in its various
wings has resulted in a visible
erosion in Prachanda’s loyalty
base. His main concern is to not
allow a party convention to take
place in the near future, al-
though his rivals — party vice
presidents Mohan Baidhya
Kiran and Baburam Bhattarai —
are lobbying hard for it. If that
happens, Prachanda will face a
challenge to his leadership for
the first time in the quarter
century since he began his
underground politics.
The trade union wing of the
party suffered a split recently and
Prachanda acolyte Shaligram
Jammarkatel had to face a
parallel body led by Badri Maj-
gain, a Baidhya loyalist. Jam-
markatel’s sole control over the
union so far and its sway over all
kinds of trade and industries
added to Prachanda’s might. But
the birth of the parallel faction
forced the party standing commit-
tee to dissolve the trade union
itself and convert it into a prepara-
The conditions on our planet may not have been sufficient for life
O
NCE upon a time there was the Big Bang theory of the origins of
the universe. Now, you could say, we have another, more local,
“big bang” — for the origin of life on Earth. According to scientists
in Arizona, the crucial components necessary for life to start may
not have been generated by our own planet in the first instance,
but come from somewhere deep in outer space, carried by the
barrage of meteorites that crashed into the earth four billion
years ago. The key is the discovery that a meteorite was capable
of providing nitrogen-containing ammonia.
In one way it might seem disappointing that the Earth
was not self-sufficient and may not have produced its own life. But
perhaps we should not be so surprised. Our planet, at that time, was an
Budget 2011 shows India’s
refusal to draw the wrong
lessons on capital controls
that foreign debt denominated in
foreign currency could be a much
bigger potential source of risk. Local
currency debt did not pose the same
risks. The Sinha report recom-
mended that restrictions on FII
investment in rupee-denominated
debt — that is, corporate bonds —
be removed.
The primary reason for maintain-
ing restrictions on foreign invest-
ment in rupee corporate bonds was
to control dollar inflows to prevent
the appreciation of the rupee. Over
the last two years, RBI intervention
in foreign exchange market has
been largely absent, and the rupee
has witnessed two-way movements
India has an elaborate system of capital controls.
When juxtaposed with the fact that the Indian economy
recovered quickly after witnessing a setback to GDP
growth after the global financial crisis, many people
are tempted to draw the conclusion that it was the
capital controls that made India resilient. The
importance of the Indian experience in the capital
controls debate is, thus, huge.
with high volatility. Once the
exchange rate regime changed and
the rupee became flexible, there was
little reason to hang on to the restric-
tion on rupee-denominated debt.
In his budget proposals this week,
the finance minister raised the ceiling
on FII investment in corporate
bonds in infrastructure from $5 bil-
lion to $25 billion. This doubled the
cap on total FII investment in
corporate bonds to $40 billion. This is
a step forward in rationalising the
capital controls framework.
The other important move in the
budget towards greater capital
account liberalisation is to allow
retail foreign investors to buy Indian
mutual funds. At present, if a foreign
Back to the old ways?
Prachanda’s dilemma is not a good sign for stability in Nepal
tory committee to hold its national
convention as well as elections.
The control over the trade union
— supposed to be the richest unit
of the richest party in the country
— is crucial to Prachanda.
The erosion in his clout has
come at a time when he stands dis-
credited in India, his home for
eight out of 10 of his insurgency
years as per his own admission,
and the country that mediated his
entry into the democratic fold,
paving the way for his elevation to
the PM’s chair through an elec-
toral process in August 2008.
By 2005, India had recognised
Maoists as the true representa-
Prachanda is focused more on retaining party
leadership and all the clout associated with it.
Supporting the peace process and the drafting of the
constitution appears secondary, even tactical.
tives of the people and given up its
twin-pillar theory, on assessment
that aspiration for change in
Nepal no longer favoured the
continuation of the monarchy,
even in a constitutional form.
Near-nil chances of the consti-
tution being delivered now show
that India’s declared intent and
outcome do not match. Increas-
ingly, the Indian architects of
Nepal’s policy from 2005 are seen
here as actors without account-
ability. That image comes in
handy for Prachanda.
He knows his political future
depends on his retaining the
leadership of the party. For that,
When it all began
PRINTLINE
ILA PATNAIK
investor wishes to invest in the listed
equities market, he has to be in one
of the categories of institutional
investors recognised under the
SEBI Foreign Institutional Investor
Regulations. This framework was
set up in 1992-93 when India first
opened up to foreign investors. The
list of investors has been widened
over the years but still involves a
check on the structure of the
investor, which allows only collective
investment schemes. If the investor is
an individual, he has to register as a
sub-account with an existing foreign
institutional investor.
The biggest weakness of the insti-
tutional investor framework is herd-
ing behaviour by institutional
investors. Due to similarity of
objectives, time horizons, profit-
booking dates, interconnectedness
amongst the big institutions, etc, in-
stitutional investors respond to
various situations in a similar
manner. On the other hand, retail
investors do not exhibit the same be-
haviour. They can bring a diversity
of views and actions to financial
markets. Further, the present crisis
showed that large investment banks
with leveraged investment were
prone to disruptions and shocks.
Yet, as a policy, India has allowed
only such investment companies to
enter the markets from abroad.
Further, the Sinha report
he has to speak like a “revolu-
tionary” and champion the
party’s worldview that Maoists
are against “US hegemony and
Indian expansionism”, and that
the party must launch a revolt to
assert Nepali nationalism and
control state power. Assuring the
Indian Maoists that “we have not
at all compromised on our princi-
ples and values of our revolution”
is a tactical necessity for him
under the circumstances.
That Prime Minister Jhalanath
Khanal, who is also the chairman
of the Communist Party of
Nepal-Unified Marxist Leninist
(CPN-UML), could not imple-
ment the secret deal he had
recently signed with Prachanda
to run a coalition government,
following opposition from all
sides, has given a fresh excuse to
the Maoist supremo to discard
democratic forces as “untrust-
worthy” and go his own way.
Although the PM’s refusal to
give the home portfolio to the
Maoists as promised has been
officially projected as the reason
for the Maoists not joining the
cabinet, it is not so simple. Those
who would have been left out of a
total of 11 berths promised —
especially from the guerrilla wing,
dominant ethnic groups and the
extremely inhospitable place, hot and devoid of oxygen. That the vital
conditions may have come together by chance, in part, literally as bolts
from the blue, brings a satisfactorily quixotic aspect to scientific study —
and, happily, hammers some more nails into the coffin of
Intelligent Design.
But it is not entirely consoling. If the humans of today
are the consequence of a protracted and haphazard
bombardment from outer space, will capricious extra-
terrestrial intervention also determine the end? And will
it be another bang, or a whimper?
From an editorial in ‘The Independent’, London
indicated that while Sebi registers
foreign investors, this is not to
enforce Know-Your-Client (KYC)
norms that India is now required to
do as a signatory to various inter-
national anti-terror treaties.
The Budget 2011 proposal
should be seen in the light of the
above recommendation. The
finance minister proposed to allow
foreign retail investors to invest in
Indian mutual funds. This will mean
that Indian mutual funds do not
have to go register in Mauritius or
Singapore to get foreign investors,
and it is thus a step forward as it
removes the protection the FII
framework was implicitly giving to
foreigners. However, the proposal
does not yet address the objective of
bringing greater diversity of behav-
iour into the market. Since mutual
funds are institutional investors,
though domestic, their behaviour is,
to some extent, still similar to that
of foreign institutional investors.
Still, it is a step in the right direction
towards rationalising capital
controls and moving ahead on capi-
tal account liberalisation.
India has an elaborate system of
capital controls. When juxtaposed
with the fact that the Indian
economy recovered quickly after
witnessing a setback to GDP
growth after the global financial
crisis, many people are tempted to
draw the conclusion that it was the
capital controls that made India
resilient, and thus capital controls
are good and should be retained.
The importance of the Indian
experience in the capital controls
debate is, thus, huge. India is almost
the only “evidence” of a large
country whose historical experience
of capital controls and high growth
make the case for capital controls.
The ministry of finance working
group report and the budget
proposals to move towards greater
liberalisation of the capital account,
rather than hanging on to capital
controls, should have important
lessons for other countries.
The writer is a professor at the
National Institute of Public
Finance and Policy, Delhi
express@expressindia.com
party trade union — would have
deserted Prachanda. He would
also have been a target of much
vilification within his party since
families of the cadres who had lost
their lives during 10 years of insur-
gency had warned Prachanda and
other top leaders of “action for
their disrespect to the blood that
martyrs shed”.
Having burnt all his boats,
beginning with India that created
the ground for his safe landing in
democratic polity, Prachanda
perhaps faces his toughest journey
in politics. His call for a return to
radical politics is more for tactical
reasons, but whether it will have
the kind of impact it had in the
past is doubtful.
Prachanda’s dilemma is not a
good sign for peace and stability
in the country that does not have
an effective government nor state
institutions based on constitu-
tional principles which became
the first casualty of the success of
the mass movement of April
2006. Retrospectively, the
demolition of the old order from
within was perhaps the biggest
success of Maoists, something
their allies and other political
parties are shy to admit.
Maoists can revolt, show
indifference or sabotage the
system from within — hoping it
will help them in the long run —
but other pro-democratic forces
seem incapable of responding to
the situation that emerges.
yubaraj.ghimire@expressindia.com
TheIndian EXPRESS
www.indianexpress.com
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Letters to the
EDITOR
Good job, Mr FM
■ THIS refers to ‘FM delivers,
over to the House’ (IE, March
1). This budget was more a
political statement than an
economic assessment. On the
20th anniversary of reforms,
the FM promised implementa-
tion of pending reforms and
fiscal consolidation. In the
accompanying editorial
‘Building anew’, it is precisely
stated the budget reflects
long-term trends which show
India is changing and devel-
oping as a country and as a
polity. The talk of DTC and GST
with a timetable shows the
maturity of the Indian demo-
cratic system. This budget has
some unforeseen features. To
achieve more accountability
and transparency, the status of
the implementation of
previous budgets is also
mentioned. The concept of
effective revenue deficit is
new. The high levels of non-
tax revenue and disinvest-
ment provide great room to
reduce deficits. Surjit S. Bhalla
is right (‘Sweet smell of
radicalism’) that this budget is
radical and smells of good
economics. To achieve
inclusive and balanced
growth, the wish list is end-
less, but at least the path has
been shown by the FM.
— Shishir Sindekar
Nashik
Different strokes
■ WHEN an economy is doing
well, budgets tend to be non-
events and so it has been with
Budget 2011. The proposal to
contain fiscal deficit at 4.6 per
cent would have carried
greater weight if the govern-
ment had boldly continued
with base exemption limits of
direct taxes on personal
income. That would have
conveyed its firm commitment
to bringing down inflation by
March. The proposed
marginal rise in exemption
only underscores that it has no
clue as to how inflation would
pan out. The price of current
growth is that politics,
economics and commitment
to people are increasingly
going in different ways.
— R. Narayanan
Ghaziabad
Spin doctors
■ THE Bangalore ODI between
India and England has given
Team India valuable tips for
their next matches. Scoring a
big century, Andrew Strauss
was not at all bothered by
spinners like Piyush Chawla
and Harbhajan Singh. He
created a visible scare among
Indian fielders. Strauss’s
innings caused the match to
end in a tie. All good batsmen
have now understood how
to remain on the crease
by scoring singles against
spinners.
— K.L. Khandekar
Vadodara
Chinese checkers
■ THE political uprising in the
Arab world should make
China think. People today are
averse to suppression and
oppression. China has for long
stifled people’s freedoms. By
interacting with people of
democratic countries, the
Chinese have cultivated a
taste for freedom. Their
leaders should see the writing
on the wall. It would be
prudent to avoid needless
bloodshed and usher in
democracy in China. Other-
wise, the firewall may become
a massive fireball.
— Harischandra Parshuram
Mumbai