CURRENT TOPICS

source: BSC Chronicle.  - thanks

CURRENT TOPICS

MPC’S FIRST MONETARY POLICY

   The recent decision by the Monetary Policy Committee (MPC) to lower the repo rate by 25 basis points (bps) to 6.25 per cent has been met with criticism and skepticism. Questioning of the MPC decision has proceeded along the following lines: First, and most importantly, that the inflation rate is too high to warrant a rate cut. The last four year-on-year headline inflation numbers have been as follows: 5.5 (Apr 2016), 5.8, 6.1 and 5.1 per cent (Aug 2016). The target of the RBI is five per cent for Mar 2017.

   Theoretically, lower interest rates can encourage borrowing, investment and growth. But is it doing the job? After nine months of softening rates, there is no significant uptick in these indicators. Lending by commercial banks, which grew at 23.5 per cent in the Sep 2011 quarter, has struggled to reach double digits in the last six quarters but one: in Dec 2015, lending grew 10.9 per cent, a blip in an 8.6-9.8 per cent growth range. Metropolitan borrowing is the weakest, with semi-urban borrowers taking up much of the slack.

   Unsurprisingly, gross fixed capital formation is sluggish. The second quarter saw investment actually shrink 3.1 per cent year-on-year. The govt has heroically kept public investment going, despite its straine3d finances. However, private investors are yet to feel the love, and have kept investment on hold, leaving overall investment levels, as a proportion of GDP, 10 percentage points below the peak rate of 39 per cent achieved in 2007-08. Nevertheless, the RBI has done its bit. Now, it is time for the govt to work on boosting infrastructure investment, reviving the bond market and ridding the banks of their bad-loan problem, so that they can start lending again. Monetary policy can do only so much, with an MPC or otherwise.

   The first action of the new MPC and governor reinforces the belief that there is a weakening of the central bank and a movement back towards greater financial repression and credit-fuelled growth. The minutes of the meeting will soon reveal the rationale behind lowering the policy rate despite its relatively pessimistic assessment of inflationary pressures relative to its target, and also why it felt compelled to follow the precedent set by advanced-economy central banks in the matter of neutral interest rates despite apparently different domestic circumstances.

   The appointment of an MPC was recommended by several committees, culminating in the recommendations of the Expert Committee to Revise and Strengthen the Monetary Policy Framework, 2014, chaired by Urjit Patel.

Income Declaration Scheme

   The Income Tax Department’s Income Declaration Scheme 2016 that ended on Sep 30 has generated a whopping  62,500 cr from those with black money, leading to tax windfall of close to  29,000 cr for the govt. However, the general amnesty for hoarders of currency – those with undeclared assets in their names as well as in benami names (activities which form the bulk of the parallel economy in India) – is being criticized for being too lenient a scheme, one that does not contribute to the growth of the economy.

   The number of declarations in 1997 was over four lakh; now, surprisingly, it is a sixth of this number. The number of businesses, professionals, corrupt officials and politicians has risen over time.

   The Govt has announced that it would not reveal any of the data collected through the scheme to any agency; not even to the Comptroller and Auditor-General.

   The Govt had also given an undertaking to the Supreme Court in 1997 that it would not initiate any more amnesty schemes. The reason was that an amnesty scheme is unfair to the honest tax-payer while those evading taxation get a concession. But the Income Declaration Scheme is also an amnesty scheme. The penalty charged is less than what was being charged for tax evasion before the scheme was launched. Before Jun 2016, if a person’s income was found to be black, the penalty was 100 per cent to 300 per cent of the tax evaded.

   The average amount of black income per declaration is about one crore rupees. This is indeed low when  there is daily news about people being caught with hundreds of crores of rupees of black income. It is likely that either the big earners of black income have not come forward or declared a negligible part of their black money.

   Gambling, production of illicit liquor, smuggling, trafficking illegal drugs, lending at exorbitant interest charges, money lending without proper licence etc produce black money. When some individuals wish to undertake such illegal activities, these will apparently go unreported and incomes earned would be totally black. It is reported that the income tax officers pressurized people under their charge to make declarations in the last three weeks.

   The fight against black money is impaired by the fact that its share in the economy remain a matter of conjecture. This is despite numerous reports having been prepared on the subject, including the latest joint effort by three economic think tanks that was presented to the Govt more than two years ago.

   Although the report is yet to be made public, it is believed to have assessed the size of the black economy at 75 per cent of GDP or about 90 lakh cr! Interestingly, estimates range from 10 per cent of GDP to 40 per cent. The Income Declaration Scheme has made but a small dent on this.

Tata-DoCoMo row

   Given how Japanese telco DoCoMo is unable to get back even half the investment it made in Tata DoCoMo over seven years ago, it is natural to sympathise with its predicament, more so since Tata Teleservices had agreed that if certain operational milestones were not achieved, NTT DoCoMo’s shares would be bought back at half the price.

   Getting back the money, even after the London Court of International Arbitration (LCIA) award, however, is not in the Tatas’ hands, so filing for attaching of assets in London as DoCoMo is doing cannot help – Corus and JLR are owned by Tata Steel and Tata Motors, which have shareholders other than Tata Sons, so their assets can’t be touched; Tata Sons itself has few overseas assets. Japan’s DoCoMo has sought the transfer of assets worth $1.17 bn from Tata Group, its estranged joint venture partner, in a bid to reach an out-of-court settlement in an on-going legal tussle. The amount is equivalent to what the London-based arbitration court had asked Tata Sons to pay DoCoMo.

   The Japanese company has asked Tata Sons to transfer the assets in any location outside India. The Tatas have deposited $1.17 bn with the Delhi High Court, saying it is unable to pay the penalty amount to the Japanese company as Indian regulations do not permit it. The dispute dates back to Jan 2015, when DoCoMo filed an arbitration stating that the Tatas failed to find a buyer. The case is currently being heard by the Delhi High Court, and courts in the US and the UK.

   In Apr 2014, DoCoMo announced plans to sell its entire stake in TTSL, exiting India five years after it forayed into the country. The exit came after the Indian company failed to achieve certain performance targets. In 2009, DoCoMo has acquired a 26.5 per cent stake in TTSL for $2.7bn.

   The problem here is manifold. The FIPB (Foreign Investment Promotion Board) approval in Mar 2009 was categorical that ‘issue/valuation/transfer of shares shall be as per SEBI/RBI guidelines’ and, in Oct 2004, RBI had said that share sales for an unlisted firm must be based on a price linked to the EPS or NAV or on the basis of an independent valuation – this gave a price substantially lower than the half-price in the Tata-DoCoMo agreement.

   Instead of fighting the Tatas, DoCoMo would do well to jointly represent to the Indian govt that it is important to understand the spirit of the FEMA restrictions on share sales. These restrictions were put to ensure that debt does not masquerade as equity by way of assured buyback deals; but any transaction that seeks to get back half the value cannot possible be debit. Given how important Japan is to India, the govt would do well to ask the Reserve Bank of India to make an exception.

FALL IN SOLAR PANEL PRICES

   A steep fall in the global prices of solar panels is all set to give a boost to India’s ambitious plans to optimally harness sunlight as an  alternate source of energy. The prevailing low-price scenario could boost the efforts to achieve the target of 1,00,000 MW (100 GW) power-generation capacity by 2022 and turn solar power into a viable option. Plummeting prices at the international level have also impacted India, where the cost has declined sharply from  17/k Wh in 2010 to 5.30 in 2015 and 4.30-4.80 this year. The low-price situation, therefore, appears ripe for the Central and State govts to give a push to rooftop solar installations and achieve the 40,000 MW target from the existing 315 MW levels.

   The battle between cost and efficiency in solar panels has been brewing for years. The falling cost of commodity solar panels has made higher efficiency less attractive in some cases because more efficient panels are usually more expensive. The cost of solar panels has fallen so far that efficiency is now extremely important in the residential solar market.

   Even as solar power developers appear set to benefit from the 15-30 per cent drop in prices of various components due to a glut in supplies, mainly from china and the US, it has left the domestic manufacturers worried and the policy makers in a fix. The Indian Solar Manufacturers’ Association has been seeking antidumping duties to safeguard local industry from the adverse impact of imports and dumping from China and other countries. India currently imports almost 95 per cent of the components required for installation of solar projects. As part of its global commitment, India has raised the target for share of renewable or green power in the overall generation capacity from 13 per cent now to 40 per cent by 2022.

   India’s 100 GW plan is, by far, the most ambitious solar procurement programme globally, and the experience of the last five years has given it a well-drilled tender process; solar parks take out some of the development risk. This has reduced the cost of participation for bidders, and several log-term players with interest to build a portfolio have emerged. UDAY a new govt initiative to improve the performance of discoms and rebuild their creditworthiness, will encourage investors to pare risk margin in their target returns, and should attract global funds that have a lower threshold risk. Local conditions are starting to have a more pronounced effect on tariffs as the hard costs have come down. The quality of the procurers’ balance sheet and payment record is now starkly reflected in the tariffs offered. The global conditions are favourable.

   The emerging solar scenario is encouraging more investments. But what is awaited is a competitive manufacturing policy, besides installation of smart metering to help individuals sell surplus power and buy back cheaper electricity from the grid.

DRAFT NATIONAL WATER POLICY

   Amid several inter-state disputes over river water sharing, the Centre has brought the final draft of the National Water Framework Bill, 2016, that stresses managing water at basin level and “right measurement” of state’s contribution to river system to resolve conflicts. The draft Bill pitches for establishing a River Basin Authority for each inter-state basin to ensure “optimum and sustainable” development of rivers and valleys.

   It suggests states to recognize the principle that the rivers are not owned by the basin-states but are “public trustees”. It says all basin states have “equitable” rights over a river water “provided such use does not violate the right to water for life” of any person in the river basin. It says every person has a “right to sufficient quantity of safe water for life” within easy reach of the household.

   The draft Bill also suggests states to ensure water is conserved. Presently, there are disputes because no state knows its exact contribution to a river’s catchment area. When a state will know its exact contribution to the catchment area, it will known quantum of its rightful share. The bill focuses on right measurement of the water at basin level. The model law also stresses on Centre and States working in partnership for managing water.

   It proposes establishing institutional arrangements at all levels within a state and beyond up to an inter-state river-basin level to “obviate” disputes through negotiations, conciliation or mediation before they become acute. All basin states are equal in rights and status, and there is no hierarchy of rights among them, and in this context, equality of rights means not equal but equitable shares in the river waters.

   Water being a state subject, the draft bill, however, will not be binding on states for adoption. It also suggests upper riparian states to adopt a “cautious and minimalist” approach to interventions in inter-state rivers and provide advance information to lower riparian states about such plans, consult them at all stages on possible impacts “and take care to avoid significant harm or injury to them”.

   The draft bill says states shall share “freely” data of all kinds relating to water and put in the public domain for the information of all without any restrictions on the grounds of confidentiality or secrecy. All inter-state water sharing agreements shall be reviewed periodically, every 25 to 30 years, to properly respond to and engage with the changing circumstances on the ground.

   The draft says the resolution of inter-state river-water disputes is not a one-time settlement but shall be recognized as a continuous process of conformity to the spirit of the settlement. The bill defines “water for life” as that basic requirement that is necessary for the fundamental right of life of each person.

INDIA BUYS S-400 TRIUMF

   India and Russia signed an inter-governmental agreement for the procurement of four regiments of Russian-made S-400 Triumf advanced Air Defence Systems in Goa on Oct 15 at the sidelines of the eight BRICS summit. The deal, along with 17 other cooperation agreements, was signed in the presence of Indian Prime Minister Narendra Modi and Russian President Vladimir Putin.

    India is only the second country after China, which ordered six S-400 units in 2014, to receive one of Russia’s most advanced air defence systems. It comes as no surprise therefore that defence experts are enthused about the deal and the implied boost for India’s defence preparedness. The S-400 Russian systems are widely known to be one of the most modern defence systems in the world, that even render the US F-35 fighter jets ‘useless’! So, what’s special about the S-400 Triumf, that even the US is wary of it? Russian experts proclaim that the S-400 system can shoot down fifth-generation fighter jets, like America’s most advanced F-35s! The system has eight launchers, a control centre, a powerful radar and 16 missiles that are available for reload. The system is capable of firing three types of missiles, hence creating a layered defence for any country that owns it.

   The Ministry of Defence’s Defence Acquisition Council (DAC) cleared the S-400 purchase in Dec 2015. The new weapon system, capable of engaging stand-off jammer aircraft, Airborne Warning and Control System (AWACS) aircraft, and both ballistic and cruise missiles in an electronic countermeasures environment, will be a significant boost to India’s so-called anti-access/area denial (A2/AD) capabilities.

   The military is slated to deploy three S-400 regiments in the West facing Pakistan and two regiments in the country’s East near the Sino-Indian border. The introduction of the S-400 into South Asia will likely force Pakistan to step up its asymmetrical defence capabilities.

   At first thought, one would assume that India has every incentive to station a number of S-400 systems – potentially up to three – in fairly close proximity to Pakistan. If equipped with the 40N6 missile, grounding the S-400 in the heart of Punjab would enable India to Stifle the Pakistan Air Force (PAF) from flying in key areas in its Central Command theatre (which is responsible for protecting Lahore). Similar positioning and results can be had in the south (Karachi) and the north (Kashmir).

   In general, Pakistan’s options to address the S-400 would be to (1) form a strong air defence umbrella over its own airspace, (2) greatly expand its asymmetrical offensive capabilities, and (3) heavily invest in defensively sound electronic warfare (EW) and electronic countermeasures (ECM) capabilities (to protect aerial assets and to pursue the S-400). All three elements will require considerable financial investment.

KIGALI AMENDMENT

   Although it took seven years to come to fruition, the Kigali agreement to amend the Montreal Protocol and substantially limit the emission of hydrofluorocarbons (HFCs) that contribute to global warming represents major progress. The important role played by this group of chemicals, used in refrigeration and air conditioning, is evident from the scientific estimate that without a mitigation plan, HFCs could warm the world by an additional half a degree Celsius by the end of the century. As with other such global compacts on environmental matters, India pressed for a more lenient deadline at the Rwanda negotiations.

   Ultimately, it agreed to start freezing HFC use in 2028, four years later than its peer club countries China, Brazil and those in Africa, and achieving maximum reduction by 2047, two years after they do. In welcome contrast, however, India has ordered the manufacturers of HFC 23 – a by-product of another chemical used in refrigerant gas manufacture and with a staggeringly high contribution to global warming – to now capture and dispose of it at their own cost.

   To be sure, the Kigali goals could seem skewed in favour of the developed nations. Most of them have already started moving away from HFC-based cooling, and thus the 2019 deadline to freeze consumption and begin tapering should seem like child’s play to them. On the other hand, India that had long argued for a 2031 freeze year for the developing world, will now have to freeze consumption by 2028, and reduce usage by 85 per cent over a baseline period of 2024-26 by 2045; China, the largest producer, will have to freeze consumption by 2024 and reduce usage by 80 per cent over a baseline period of 2020-22.

   However, this doesn’t mean India has completely ceded ground – it will be allowed to shift the freeze year to 2030 if, after a technological review in 2023-24, it is found that available HFC substitutes can’t keep pace with the refrigeration needs of the country. The country may have a lower per capita HFC footprint at present but it has a lot at stake from increasing consumption; a 2015 study by the Council on Energy, Environment and Water and the International Institute for Applied Systems Analysis finds that its HFC emissions could stand at above 500 million tones of CO₂ equivalent in 2050, with cumulative emission at 6.5 bn tones of CO₂ equivalent in 2050, with cumulative emissions at 6.5 bn tones of CO₂ equivalent between 2010 and 2050.

   A study points out that nearly 1.6 bn new AC units will be switched on by 2050. India made the wise choice to be flexible; earlier this year, the govt even announced a partnership initiative to develop viable alternatives to HFC. Now, it is the turn of the developed world to support developing nations, in terms of funding transaction to, and development of, safer alternatives.

LODHA PANEL VS BCCI

   The Board of Control for Cricket in India (BCCI), under scrutiny since the Indian Premier League (IPL) spot-fixing scam broke in 2013, has made tardy progress in putting in place more transparent and accountable systems, resisting the Lodha Committee’s recommendations meant to overhaul its working. The Supreme Court of India appointed a three-member panel led by Justice RM Lodha in Jan 2015 to look into the functioning of the BCCI and suggest reforms.

   Building on the findings of the Supreme Court-appointed Justice Mukul Mudgal committee on the unsavoury aspects of cricket administration, the Lodha Committee, in Jan 2016, released its list of reforms which had some major contentious points. The reforms were contested by several BCCI post holders. The recommendations focused mainly on BCCI administrative structures and not on its cricketing functions. The Lodha panel also suggested setting up of a players’ association in the country.

   This has led to an extraordinary stand-off between the Supreme Court and the BCCI, with the former choking off funds from the BCCI to its member cricket associations who have yet to “fall in line”. The apex court also said that contracts above a certain sum would require the Lodha panel’s approval and that an independent auditor will scrutinize the BCCI’s accounts and fix this ceiling.

   The latest ruling comes at a time when media rights for the multi-crore money spinner, IPL, are to be awarded for the decade beginning 2018. Little is known about how the BCCI manages its annual revenue of 2,000 cr rupees, about half of which is earned by way of broadcast fees of 43 cr per match, with the rest accruing from the International Cricket Council’s (ICC) kitty, gate fees and sundry sponsorships.

   The court’s basic contention behind appointing the Loha Committee to revamp the administration cannot be faulted: that the BCCI may be registered under the Tamil Nadu Societies Registration Act, but given the enormous following of the game and the public money it manages, it cannot be run like any other club.

   The BCCI’s opposition to the Lodha panel is not hard to understand. For all posts in the BCCI and its member cricket bodies, the panel calls for one-man-one-post, one-State-one-vote, an age cap of 70 years, fixed tenure terms (with cooling-off periods), and of ministers being excluded from official positions. The first stands roundly violated even today, despite conflict of interest issues coming to the fore in the case of former BCCI president N Srinivasan. The Lodha panel also calls for a lean apex working committee of elected members.

   Yet, there is a feeling that the Lodha panel is going too far. The insistence that ministers should stay out seems anti-political per se, as politicians can get systems moving when it really matters. Finally, cricket remains the best-managed sport in the country.

2016 NOBEL IN ECONOMICS

   Economics can seem a rather bloodless science. In its simplest models, prices elegantly balance supply and demand, magically directing individuals’ pursuit of their own self-interest towards the greater good. In the real world, humans often undermine the greater good by grabbing whatever goodies their position allows them. The best economic theorizing grapples with this reality, and brings us closer to understanding the role of power relationships in human interactions. This year’s Nobel prize for economic sciences – awarded to Oliver Hart and Bengt Holmstrom – celebrates their study of economic power, and the tricky business of harnessing it to useful economic ends.

   Behind the dull-sounding “contract theory” for which the two were recognised lies an important truth: that when people want to work together, individual self-interest must be kept under control. For a chef and a restaurant-owner to work together productively, for example, the owner must promise not to use the power he has to change the locks in order to deny the chef his share of future profit. Hart, a British economist working at Harvard University, tackled power dynamics while seeking to explain the existence of firms – a question which has troubled economists since the work of the late Ronald Coase, another Nobelist, starting in the 1930s. Firms provide some advantage over dealing with others through exchanges of cash for services in the open market, but economists have struggled to pinpoint what that advantage is.

   A common and important thread in work by Hart and Holmstrom is the role of power in planning co-operative ventures. Individuals or firms with the ability to hold up arrangements wield economic power. That power allows them to capture more of the value generated by a co-operative effort, and potentially to sink it entirely, even if the venture would yield big gains for all participants and society as a whole. Contracts exist to shape power relationships. In some cases, they are there to limit the exercise of hold-up power so that a venture can go forward. In others, they are intended to create or protect certain power relationships in order to encourage good behaviour: workers or firms with the right to exit a relationship, for instance, force other parties to that relationship to take their interests into account. The broader lesson – that power matters – is one economics too often neglects.

   Like many deserving laureates, Hart and Holmstrom opened whole new lines of inquiry to later economists. The Nobel committee should be applauded for rewarding economists who place power dynamics front and centre. Economic life is messy, but it is also, occasionally, comprehensible. Both Holmstrom and Hart are known for extensive writings on banking, financial markets and liquidity.

2016 NOBEL IN LETERATURE

   For more than six decades Bob Dylan has remained a mythical force in music, his gravelly voice and poetic lyrics musing over war, heartbreak, betrayal, death and moral faithlessness in songs that brought beauty to life’s greatest tragedies.

   But the place of Bob Dylan, the American singer-songwriter and cultural icon of dissent and protest from the 1960s onwards, as one of the world’s greatest artistic figures was elevated further when he was named the surprise winner of the Nobel prize in literature “for having created new poetic expressions within the great American song tradition”.

   The winner of the prize is chosen by the 18 members of the Swedish Academy, who look for “the person who shall have produced in the field of literature the most outstanding work in an ideal direction”. Dylan is the first American to win the Nobel for literature since Toni Morrison in 1993.

   Dylan, though clearly aware and proud of his monumental legacy – recent years have seen a succession of releases of archive material under the umbrella title of “the Bootleg Series”, in which he has deluged fans with unreleased material and opened up his working methods to scrutiny – has always stepped away from attempts to confine him to being something he does not want to be.

   Born Robert Allen Zimmerman in Duluth, Minnesota, in 1941, Dylan got his first guitar at the age of 14 and performed in rock ‘n’ roll bands in high school. He adopted the name Dylan, after the poet Dylan Thomas, and, drawn to the music of Woody Guthrie, began to perform folk music. He moved to New York in 1961, and began performing in the clubs and cafes of Greenwich Village.

   His first album, Bob Dylan, was released in 1962, and he followed it up with a host of albums now regarded as masterpieces, including Blonde on Blonde in 1966, and Blood on the Tracks in 1975. He is regarded as one of the most influential figures in contemporary popular culture, though his music has always proved divisive.

   His own response to receiving the prize is unknown. He rarely gives interviews, and has a troubled relationship with the fame attached to his decades of popularity. However, he has toured almost non-stop since 1988. Armed with a harmonica and an acoustic guitar, Dylan confronted social injustice, war and racism, quickly becoming a prominent civil rights campaigner and recording 300 songs in his first three years!

   Dylan’s first British tour was captured in the classic documentary Don’t Look Back in 1965 – the same year he outraged his traditionalist folk fans by using an electric guitar at the Newport Folk Festival on Rhode Island. The following albums, Highway 61 Revisited and Blonde on Blonde, won rave reviews, but Dylan’s career was interrupted in 1966 when he was badly injured in a motorcycle accident and his recording output slowed in the 1970s.