The budget season in India, with its unique hoopla and hype, is over. One of the last substantive events on the Budget was a seminar which brought together heads of the five leading Delhi-based think tanks to comment on the Budget’s impact on India’s economic and political prospects. While the quality of this year’s seminar was certainly comparable internationally, unlike previous years, there was a lack of unanimity among the panelists on the quality of the Budget.

The Budget drew acclaim for showing the Indian government’s commitment to fiscal rectitude and for making subsidies more transparent by not treating them as off-budget items in future. Several other features drew favorable comments, including an ambitious target for disinvestment; a special allocation for raising agriculture yields in eastern states and for pulses; and the resolve to cut petroleum subsidies by allocating just Rs3,100 crore for the full year, portending another price rise in the near future. Raising the limits for personal income tax and broadening the slabs drew a mixed response. There was a feeling that the Laffer curve potential may have been exhausted and there could be a decline in revenue from lowering the tax rates. Raising the minimum alternate tax (MAT) is seen as anomalous in light of keeping exemptions in place. It reduces the incentive contained in the exemption, and thus makes the exemption redundant. So why keep it?

As a participant in the Budget seminar, I voiced my disappointment that the Budget can be seen as a lost opportunity for pushing forward an agenda of much-needed structural reforms. In his presentation, the Finance Minister was categorical that the it is not merely a statement of government accounts, and should contain a vision. But he fell short of his own benchmark. There are practically no measures with far-reaching or game-changing qualities in the Budget, unless one accepts the move on reducing petroleum subsidies and changing the basis for fertilizer subsidies as some. Given the absence of any political constraints, external to the governing party, the Budget could have included measures to attract bigger volumes of private investment to make up for the inevitable tapering off of the fiscal expansion. Sadly, this is missing.

Today there is practically a void in terms of strategic planning and long-term policy thinking within the Indian government ministries. The Prime Minister’s Office has also consciously given up this role; the best bet is that it is housed in the Cabinet Secretary’s Office. But undertaking reforms requires bold forward thinking and that is the realm of the political process, with the bureaucracy ensuring its implementation. Perhaps the Planning Commission will perform that role, when it emerges in its proposed avatar of the government’s chief economic policy think tank. For now, it must be played by the Finance Ministry which, because of its official mandate, is privy to and involved in all major decisions in any part of the government.

Moreover, the Finance Ministry’s function as guardian of the country’s financial and economic health is affected by what other ministries or departments do. Therefore, the budget could become the occasion for marshaling reform proposals from all the line ministries, examining their financial and economic implications, and then including at least an outline of the proposed reform in the budget. This ensures that line ministries have a target and timeline to achieve, and the proposals go through the necessary parliamentary review. This was done during the early 1990s, and there is no reason for not adopting this modality, quite suited to Indian political and governance realities.

The current budget seems to have given up on the move towards an outcome- or performance-based model, as initiated by the previous United Progressive Alliance government. Surely that is the way to achieve higher expenditure efficiency. This Budget also seems to have regressed rather than moved towards a relatively more unified structure of taxation to pave the way for a goods and services tax.

The capital market response has been a little surprising, due, it seems, to the Budget moving along  expected lines. Conversely, the rising yields on government securities show that bond markets have not accepted at face value the Indian government’s commitment to bring down the level of borrowing. This will result in losses for banks and other financial players and also exert upward pressure on interest rates. This may dampen the investment demand at a time when firms are looking to expand capacity and build inventories.

Hopefully, the animal spirits of Indian entrepreneurs, buoyed by rising demand from higher disposable incomes thanks to the income-tax concessions, will be strong enough to take the coming interest rate hike in their stride. It would be a pity if higher capital cost and governance glitches nipped the investment boom in the bud. That is the only way to achieve the required growth rate.

This essay is adapted from an opinion piece first published here in the Mint.

Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations.

1. The Indian Budget: Give it the benefit of doubt
2. Key priorities for the Indian budget
3. Doha opportunity lost

Last week I went back to Seoul after 26 years. The city is transformed and so is the economy. In 1984, when I visited the export processing zones, Masan and Iri contributed at least 60 per cent of total exports from South Korea. Posco had been established as a public sector company to take on established global giants and out-competed all of them despite having to import 100 per cent of its raw materials by relying on latest technology, economies of scale and above all, sheer hard work and dedication. And, at the same time, Korea was reaching full employment levels by furiously expanding labour intensive exports.

The question arose in my mind that if Korea could successfully combine the latest technology with large-scale employment generation, could India do it as well?

My most striking memory from 26 years ago is of lunch with the president of the Federation of Korean Industries, the organization of the Korean chaebols. These chaebols, like the Japanese zaibatsus, worked closely with their respective governments to create the two industrial juggernauts. I asked the president what the main lessons were for India from the Korean experience in industrialisation. He gave me three nuggets of information that have remained with me since.

First, countries and/or their firms cannot succeed in a fiercely competitive global economy (this was in 1984) unless industry and government worked closely together to achieve national goals.

Second, developing countries should not be unduly concerned about national pride and national brands as long as they can generate the necessary employment for a young workforce by successfully attracting the necessary technology and foreign direct investment (FDI). But neither should they forget that regaining national pride and building national brands are both worthy goals that can be achieved over time. Pragmatically, at that time the Koreans had handed over Masan largely to firms from Japan, a country which colonised Korea not so long ago, breaking down the gate of their emperor’s palace.

Third, a country is only as good as its human capital. The president cited with approval the efforts of his friend Professor Choi, founder of the Korea Advanced Institute of Science and Technology, to bring Korean researchers back from the US by paying them salaries that compared favourably with salaries paid to senior bureaucrats and corporate managers. And, as we know, Professor Choi succeeded brilliantly. Korea has emerged as a leader in several frontline technologies and now competes through product innovation and not as a low-cost producer.

Have we learnt these simple lessons in India? I am afraid not. Government and industry, though not mutually suspicious any more, are still not working together for a common national purpose. For example, the maximization of employment generation is a common goal of both government and industry. Given this, special economic zones, which have already generated large-scale employment, should not be controversial. The criterion for making land available on a priority basis should become the number of jobs generated per unit of land. All restrictions, except on strategic grounds, should be removed on FDI when it can generate employment.

There is, of course, give and take between government and industry. But it is often non-transparent and so is perceived to be largely for private, not national, purposes. This can change if the industry decides to make the government accountable and ceases to act as a supplicant seeking favours. But, in order for that to happen, industry must achieve greater social legitimacy by paying honest taxes, not cutting regulatory corners, generating employment, and lowering prices when it can. In sum, Indian industry must be seen by the people as working for national goals rather than the maximization of personal consumption and ostentation.

Unlike Korea, India still fails to recognize the importance of attracting back our human capital. Instead, we celebrate whenever a person of Indian origin earns global recognition. This is a loser’s pride. Given that the Indian higher education system hardly produces any researchers with global status, the only way forward is to attract talent back from abroad as seed capital. Indian industry can play a major role by beginning its charity at home rather than donating millions of dollars to foreign universities.

Moreover, India should recognize that its talent will not be attracted back only because of a love for the motherland, or because of the possibility of participation in policy making. Researchers need living and working conditions comparable to those which they give up. Here, we must learn from Pakistan, where, in 2006, the government announced education pay scales that, in purchasing power parity terms, are better than those obtained in most advanced economies.

Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations.

This essay is adapted from an opinion piece first published here in the Mint.

1. Korea inter pares? – South Korea on the global stage
2. South Korea: Disappointed expectations but hopes head north
3. Indian education system: Crying out for speedy reforms

China has been taking an increasingly active interest in South Asian countries over the past few years, seeking to rally friendship and support in order to surpass India’s dominance in the region. When the South Asia Association for Regional Cooperation (SAARC) was formed in 1985, they expected leadership from India, but India has yet to assume this role. Now China, India’s main political rival, is entering its neighbouring markets more aggressively through both trade and investment.

China has been the fastest growing economy in the region for the last decade and has surpassed India in terms of growth, world trade share, price competitiveness in product manufacturing and winning oil deals. SAARC’s demand for China’s ‘Observer’ status reveals China’s increasing clout in the region, as well as the growing economic and political relations intended to dilute India’s dominance in South Asia.

China has been improving its trade and investment relations with South Asian countries through treaties and bilateral cooperation. China and Pakistan signed a Free Trade Agreement (FTA) in 2006, as well as numerous other agreements and Memorandums of Understanding (MOUs), including Bilateral Investment Treaties (BIT) to increase mutual trade and investment. Pakistan provides China with cheap raw materials and the use of Pakistani ports in return for access to Chinese markets through preferential treatment under the FTA. Pakistan could very well become a hub in the region, which may lead to considerable future transit revenues and help Beijing build the ‘trade and energy corridor’ through Pakistan.

Although China does not have an FTA with Bangladesh, the two countries granted each other Most Favoured Nation (MFN) treatment in 1984. China provides duty-free access to a list of Bangladeshi products under the Asia-Pacific Trade Agreement, and Bangladesh has offered oil exploration rights to China at Barakpuria. China has also gained naval access to the Bangladeshi Chittagong port, which will bring China closer to Myanmar oil fields and the seas around India.

China has also been increasing its ties with Sri Lanka. China’s motives include oil, ports and Indian Ocean access. China and Sri Lanka signed a Joint Communiqué in 2005 to further bilateral relations and provide each other MFN treatment. China has offered Sri Lanka funds in the form of Aid and Preferential Credit for various developmental purposes. In turn, Colombo has allocated a block in the Mannar basin for Chinese oil exploration. On the southern coast of Hambantota, China has begun developing port and bunker facilities, as well as an oil tank farm.

The downside of this is that China’s increasing presence in the Indian Ocean could threaten Indo-Lankan relations, especially if there is any military cooperation between the two. The case is similar with Nepal, where China is investing in infrastructure at the China-Nepal border.

China has exercised caution in developing these friendly ties with the coastal countries of South Asia. China’s increasing need of energy sources and access the international markets makes the Indian Ocean and its ports very attractive. The increasingly strong relationship between China and these countries is not surprising given this allure, as well as the ongoing rivalry between India and China.

India was once seen as the guardian who would lead South Asia towards growth and development. But SAARC members today are feeling India’s hegemony more than its role as mentor. Pakistan and Bangladesh in particular have many unresolved issues with India that hamper multilateral trade and economic relations. Some of these are geographical, such as land border sharing or sharing of waters, and some are political. One major reason for the failure of SAARC has been the India-Pakistan impasse.

Economic issues, such as barriers to trade and internal protectionism between India and its neighbours, have also been a problem. Countries like Bangladesh and Sri Lanka have accused India of creating barriers against their exports. Although India has an FTA with Sri Lanka, Sri Lanka has issues with India over easier entry, caps on imports and Rules of Origin. Bangladesh accuses India of non-tariff barriers to trade and protectionist anti-dumping measures against its exports. The clearance points of trade between the two countries are constantly clogged up due to inadequate infrastructure. Bangladesh also complains against restrictions on trade due to allotting different goods to specific ports for Customs clearance, as well as discrimination against Bangladesh at Petrapole.

Improving relations with Bangladesh is very important for India’s political relationship with other South Asian countries, but improving India-Pakistan relations tops the list for better economic relations and stability in the region. Currently, trade between the two countries is minimal and usually routed through Singapore or Dubai (or more recently through Sri Lanka, since they share a FTA). Although India granted MFN status to Pakistan long ago, Pakistan has not reciprocated. Transit and trade permits are other critical issues that need to be resolved, though perhaps the APIBM (Afghanistan-Pakistan-India-Bangladesh-Myanmar) corridor could provide a solution.

The most important need for SAARC is true multilateralism and cooperation, which will help catapult the region to higher growth and development. The smaller nations (Sri Lanka, Nepal and Bhutan) need India’s assistance with development and solving internal problems, but if India does not proactively assume leadership in this area, and continues to protect its industries and businessmen from international trade, this opportunity will slip away and spur Chinese interference in the region. Since India borders all of these countries, it is an important security measure that these issues be resolved.

Traditionally, India has been the major trading partner with its neighbours, but China’s trade with South Asian countries has been growing rapidly. Exports from China have increased significantly over the last two decades, surpassing Indian exports to the region since 2000, except for 2003, although exports from China and India grew at about the same rate between 1992 and 2000. India’s exports to other South Asian countries showed a higher growth rate from 2000 to 2003, but Chinese exports have increased year on year faster than Indian’s since 2004, resulting in more Chinese exports for the last three years. This gap is increasing in China’s favour.

Imports from South Asia into China surpassed those flowing into India in 2000, although imports into India grew faster than China between 2000 to 2006. In recent years, imports from South Asia into India have been greater than into China. But China has been capturing neighbourhood markets once dominated by India, particularly in industries such as textiles, machinery and the chemical industry.

China is also increasing its investments in South Asia and has been providing increasing amounts of developmental assistance, grants and aid. China’s is interested in Pakistan’s trade and energy corridor, from the Gwadar (in Balochistan) port of Pakistan to the Western regions of China, which would connect China with oil routes in Western Pakistan. Pakistan’s Karakoram highway provides the shortest possible route from Gwadar to the western regions of China. This route is short, secure and can serve as an alternative to the sea route through the pirate prone Straits of Malacca, where China currently transports most of its crude oil imports. The Chashma Nuclear Power Plant has been another large Chinese investment in Pakistan, and the private sectors in both countries have made important joint ventures, including the economic zone in Pakistan between the Haier (China) and Ruba (Pakistan) groups.

In Bangladesh, China has constructed six friendship bridges, as well as the Bangladesh-China Friendship Conference Centre located in Dhaka. One of the bridges, completed in January 2008, is very important because it connects the northern and southern parts of Bangladesh. Bangladesh received a roughly 60 million yuan grant and 100 million yuan interest free loan from China for this bridge. In Sri Lanka, China has invested heavily in the infrastructure sector, including the Norochcholai Power Station, planned to be completed by 2010. The Board of Investment of Sri Lanka (BOI) is actively promoting a Special Economic Zone for Chinese enterprises at Mirigama, near Colombo. In 2006, through Project Loans, China transferred US$150 million in the form of Buyer’s Credit Facility for the Puttalam Coal Power Project. China also gave US$306.7 million in 2007 as a project loan for the Hambantota port Development project, and another US$74.8 million for the supply of railway passenger carriages and diesel multiple units.

China’s increasing trade and investment relations with South Asian countries should be a point of irritation for India as, in a globalised world, economic relations play a major role in deciding political relations and multilateral collaborations. A healthy relationship between India and its neighbours remains crucial to India’s security, as well as the stable and peaceful development of the South Asian region.

Pravakar Sahoo is Associate Professor, Institute of Economic Growth, Delhi.

Nisha Taneja is Professor at Indian Council for International Economic Research, Delhi.

1. China’s and India’s growing investment and trade with Africa
2. Sri Lanka’s growing political turmoil and its wider implications
3. China-India ties: Wen Jiabao in India – making nice slowly

I write this from a freezing Beijing where I am ensconced in a well-heated deluxe room of the Lakeview Hotel at Peking University. The campus, which I had first visited in 1996, has been transformed since: It has reportedly received generous capital infusions of at least $100 million on several occasions during the last 15 years. I met a number of senior foreign academics who are attached to Peking and Tsinghua universities, whose infrastructure and quality of faculty are improving continuously. As an academic, I admit to feeling most envious of my Chinese counterparts.

But the real bonus of being here has been to find an answer to the question, how is China able to flood global markets with cheap exports without any evident infringement of WTO norms? The related issue is China’s ability to push up investment levels to historically unprecedented levels. These investment levels have been used to expand the manufacturing base, and China has emerged as the second largest exporter after Germany. It is building up huge modern infrastructure capacities, which some would argue may be relatively overdeveloped, given China’s current income levels.

Professor Michael Pettis, of Peking and Columbia universities, explained that China is able to flood global markets with cheap exports by effecting a massive and sustained cross-subsidization of the productive/corporate sector by Chinese households. Chinese household savings have been transferred to the corporate sector through taxation, pricing and exchange rate mechanisms. These are reflected in consistently high corporate savings that are used for expanding capacities and for churning out low-cost tradable products. Real wages have been kept low and productivity growth has been kept at high levels, aided by a near-complete lack of industrial strife. The dismantling of ‘iron bowl’ practices in private and even state enterprises further encouraged high rates of household savings. Consequently, the share of wages in GDP has not risen. Savings were also encouraged by keeping the exchange rate undervalued, which effectively made non-tradable goods and services, which generally constitute a larger share of personal consumption in emerging economies, more expensive relative to tradable products. This promoted exports while restraining domestic consumption.

The flood of household savings, with recourse only to deposits in public sector banks, has been used to keep lending rates extremely low, thereby reducing the costs of capital for Chinese producers and exporters. For example, nominal interest costs have been kept at 6-7 per cent, when as a rule of thumb, Pettis argues, they should have been closer to the nominal GDP growth rate, which has been around 14-15 per cent. Thus, Chinese exporters not only enjoyed an endless supply of cheap and highly productive labour, whose skills are being constantly upgraded, but they also enjoyed relatively low capital costs. Add to this the subsidy inherent in the availability of government-acquired land, abundant energy supplies, negligible environment and transactions costs, and we have a clearer picture of China’s export competitiveness.

This also implies, however, that Chinese producers perhaps have a negative value-added on the basis of domestic resource cost calculations. Has this been the story in other East Asian economies during their own periods of high growth and export orientation? Perhaps, but not for long, as both Japan and Korea were restrained after a point by strong external pressures. But China took the extra step of accumulating US treasury bills at levels never seen before and bought itself an insurance policy against US intervention.

Can this continue? Not indefinitely, for sure. Ignoring external pressures, which will inevitably emerge domestically as well, China cannot sustain this for too long. As Professor Xu Xinzhong of Peking University argued, the low level of consumption may not be due to the share of wages in GDP remaining low, but it may be due to the growing income and regional inequalities that exclude an increasing number of people from the benefits of rapid growth. This is already generating unsustainable social stress and pressures to put in place a social security system and to protect the environment from deteriorating further. Farmers are also beginning to protest against the government’s acquisition of land which, so far, has been routinely handed over to industrial enterprises. Further, the renminbi had been allowed to appreciate for two years prior to the onset of the current global crisis, reducing to some extent the price distortion between the non-tradable and tradable sectors. However, the renminbi has again been pegged to the dollar since July, when the latter started depreciating against major currencies. A large part of the Chinese fiscal stimulus has also been directed at creating infrastructure capacities instead of pushing up household consumption. Thus China, along with the US, may successfully shift the cost of adjusting the global macroeconomic imbalances to the rest of the world. The US could well go along as it helps its own recovery if China continues to finance its deficits.

This article first appeared here at Mint.

1. The market, state owned enterprises and Chinese reform
2. US-China economic imbalance: Alternatives to appreciating the Chinese yuan
3. Outlook for the global economy: waiting for the Chinese switch

There is currently an air of expectation about India’s future prospects both within the country and even more so abroad. We are surely on the move. The new century, it is said, will see India emerge as a global player because of its structural advantages.

Some of the major ones are, for example, a young population with its promise of an expanding workforce and rising savings; established institutions, which have weathered the vagaries of a boisterous democracy and gathered strength; a dynamic and large entrepreneurial class that simply does not take ‘no’ for an answer; a vibrant and independent media that is beginning to rediscover its social purpose of enforcing accountability; a traditionally strong value for education; an ability to adapt to changing conditions; and a benevolent geography that so far has shown tremendous resilience against gross misuse, but may be giving up now. The danger, however, is that these structural advantages, combined with our predisposition for believing that the future is ‘predestined’, can generate a dangerous level of complacency and inertia. This fatal flaw could not only lead India to perform below its true potential, but to even move towards chaos, conflict and disaster.

These alternative possibilities for India’s future emerge most sharply when we attempt to outline future scenarios as was done by a joint team of the Confederation of Indian Industry and the World Economic Forum in 2006. The team generated three scenarios, and none of us could foresee that outcomes under each of the scenarios for India in 2025 could be so radically different. In the best option called Pehle India, the country fulfilled its promise and raced ahead with rapid, inclusive and globally integrated growth to eliminate poverty and emerge as one of the major global powers. The worst scenario called Atakta Bharat had India stumbling along at low growth rates with worsening equity, persistent poverty and growing isolation. Atakta Bharat expectedly also saw increasing social and political stress, resulting in the fragmentation of the country. Having presented the worst scenario on several occasions, I came to realize how eminently possible—though obviously unacceptable—this outcome could be. The principal aim of this column will be to ask the more difficult and uncomfortable questions to try and provoke us out of our complacency and the easy option of taking our destiny for granted and thereby preventing the worst outcome from being realized.

The scenario-building exercise sharply brought out the critical difference between the best and worst outcomes: the quality of governance and implementation of the next round of reforms. This crucial difference between the two scenarios provides the raison d’etre for this column. Here we will persist in making the case for necessary reforms and their implementation. We will not allow our democracy to become an excuse for political inertia or bureaucratic callousness. This is informed by the belief that reforms in this country—with its thankfully open society, competitive democracy and hyperactive fourth estate— cannot be undertaken by stealth. Reforms have been successfully undertaken only when they were backed by poplar opinion and had captured a hegemonic position in people’s thinking. This is true of the adoption of the Mahalanobis model, or the switch to capitalist farming under the Green Revolution, or giving a greater role to the public sector after 1969, or the liberalization of the late 1980s and early 1990s. The truth cannot be further away from the myth that is unfortunately quite widespread: that the 1991 reforms were thrust upon us by the International Monetary Fund and the World Bank. The period leading up to July 1991 had seen a range of our top economists, journalists and even civil servants, across a range of political and ideological persuasions, arguing in favour of dismantling the plethora of dysfunctional controls and licences. Reforms followed when the battle of ideas had been decisively won.

Today, we again need a similar discussion and debate on the need for and the nature of the next round of reforms. The absence of such public discourse and pressure is responsible for reform Bills continuing to languish in Parliament and the ruling establishment getting away with inaction and even sliding back. This is despite the clear demonstration of the huge benefits that reforms have generated for common people, as in the case of the telecom sector. We need to, therefore, intensify the public discourse on the necessity of such reforms and in the process take on some holy cows and bust some well-worn myths. One of them, for example, often heard in industry conclaves and from leaders of large industrial house, is that India can grow despite its government. We will, perhaps, start by exploding this myth in the following weeks. In short, this column will focus on making the case for reforms that benefit the people and on the need to have these reforms rooted in the Indian reality to be effective.

This article first appeared here in Mint.

1. Incredible India? Complicated India
2. Risk and development: a regulatory lesson for India
3. India: Are we isolated on climate change?

At a recent India-China book launch, where human resource development minister Kapil Sibal was present, I made it a point to highlight the comparative picture between India and China in the education sector. This is a crucial sector for emerging economies attempting to achieve inclusive and rapid growth. Moreover, as several recent studies have brought out, returns on skill formation and higher education, which are already substantial, continue to rise as the world increasingly takes on the attributes of a knowledge economy. By the way, the book by Mohan Guruswamy and Zorawar Daulet Singh titled Chasing the Dragon is well worth a read for all those interested in finding out the distance we have to cover to catch up with China.

India’s adult literacy is 61 per cent compared with China’s 91 per cent. Expenditure on education as a percentage of total public expenditure is 10.7 per cent and 12.8 per cent, respectively. China has 708 researchers per million population compared with 19 in India. In 1990, publications by Indians in journals were 50 per cent higher but in 2008, Chinese publications outnumbered Indian ones by two to one. In 1985, the number of PhDs in science and engineering in India were 4,007 and 125 in China, but by 2004, China had 14,858 PhDs, while we had increased the number to only 6,318. In 2007, Indians filed 35,000 patents compared with 245,161 in China.

China is set to overtake Japan as the second largest research & development (R&D) spender after the US in the next two years. It allocated 1.34 per cent of its GDP in 2005 on R&D (which, incidentally, is well below 3.6 per cent in South Korea) while expenditure on R&D in India was barely 0.61 per cent in the same year. We have only 12,000 vocational training institutes to nearly 500,000 in China. More than 19 per cent of the youngsters in China opt for higher education, while only 11-12 per cent of Indian students end up in colleges and universities.

The comparison with China in educational attainments and performance is meant to once again lament over how China is far ahead of us. The comparison is made simply to drive home the need to understand that the education sector in India today needs the kind of focused and urgent policy attention that trade and industry did in the late eighties, which led to their reforms in 1991.

Education reforms and progress are the most important and critical policy issue in the country today. Otherwise, we may soon discover that our much-touted demographic dividend has remained an illusion and instead morphed into a disaster as large groups of unemployable youth, unable to join the workforce, end up swelling the ranks of extremists and insurgents. India will have to earn its demographic dividend and time is actually running out because the window is a relatively short one.

There is little to be achieved by tinkering at the edges, for example, by raising the bar for taking the IIT entrance examination or making the Xth standard exam voluntary. These are at best distractions. What is needed are bold and large-scale reforms that will shake up the sector and allow for new ideas, initiatives, and dynamic new organisations to take roots. We have to take the academic community along in implementing these reforms rather than have teachers at loggerheads with the government on issues of pay, autonomy or curriculum design.

The Human Resource Development (HRD) minister is well aware of the need to think boldly, as is reflected in his statements prior to and after taking charge. The forthcoming Education Bill provides the opportunity to implement the required reforms. These would include: doing away with dysfunctional organisations such as UGC, AICTE, MCI and the other 13 professional councils at the national, and at the state level, which, as recent events have shown, are riddled with malpractices and vested interests; establishing multiple independent accreditation system; allowing profit generation companies to enter this sector so that there is greater transparency in revenue generation; doing away with the plethora of controls, regulations and licences; expanding teachers training and vocational training capacities manifolds by both increasing public sector allocations and attracting private investment in these areas; creating an accessible and large commercial bank credit pool for education loans and massively expanding the number of scholarships to improve equity and access.

Fifty four per cent of India’s population is below the age of 25. We will add 150 million people to the workforce in the next 15 years and have huge backlog to clear, with graduate unemployment running at nearly 20 per cent. The gross enrolment ratio for higher education, at present at 12 per cent, has to be raised to more than 40 per cent if the young population is to be converted into productive human capital. And Indians spend nearly $5 billion to educate their children abroad!

This big domestic demand base can be used to convert India into a global education hub that attracts students from all over the world. This will contribute not only to our gross domestic product — in the US and the UK foreign students contribute $15 billion and $5 billion annually — but also build an India constituency. To achieve this, we need to look at higher education as a sector in which India has a big potential comparative advantage. But, for this to happen, the centre needs to think boldly, take action urgently and not get caught in a defensive, protectionist and controlling mindset.

This article first appeared here in the Financial Chronicle.

1. Larry Summers on higher education and development
2. The education game
3. Financing the expansion of higher education in East Asia

After a long time, the Indian market has begun to under perform the other emerging markets. On days when emerging and other Asian markets have been gaining sharply, our indices have been witnessing selling pressure.

Are we going to enter a phase of relative underperformance due to our own domestic issues, and secondly, is the market running ahead of valuations? One of the major reasons for the underperformance in the past week was a sharp decline in stocks from the telecom sector that came under attack.

This is despite the fact that in the past few days, the markets have been getting good news. The first good news was in form of the bonus by Reliance Industries (RIL). Although, bonus issues are nothing but a sentimental booster but they are an indication that the company is sure that it will be able to service expanded capital without diluting any sort of financial ratios. This is an indication that over the next few years, RIL is expecting that its expansion, which was taken up in past three years, is going to yield results.

The second major positive surprise was the better-than-expected results from tech major Infosys. Despite the flow of positive news, both these stocks did not witness any sort of strong upward movement after the announcements. This is a clear indication that the market has priced in the positive news flows that is hitting the Street now.

The other factor that could be bothering the market is that the numbers are going to reflect the impact of bad monsoons. The Street could be expecting that some sectors such as auto and consumer durables are going to suffer in sales after the festival season. Some cautious investors are preparing for the coming days and are lightening their positions.

We are clearly witnessing profit booking in the Indian market. Our indices have been the best-performing market in this region. So some kind profit booking is going to take place and that is leading to some corrective movement in the market. This corrective movement is going to continue for some more time but the indicators are still showing that the upward trend, which started in March, is still intact at this point of time.

A strong, bearish phase of the market starts when there are first signs of change in fundamentals and instead of selling due to profit booking, institutional investors start to sell to invest either in other asset classes or emerging countries.

So the market is set to witness a correction and it is the mid-cap segment that is likely to see some more pressure due to higher gains that they had registered in the past six months. So over the next few trading sessions, traders should avoid taking a position in mid-cap stocks.

On the oscillator charts, the moving average convergence-divergence (MACD) on daily charts has given a ‘sell’ signal as the average and triggerline have witnessed a crossover after showing negative divergence. This is a clear ‘sell’ signal after the past few false ‘sell’ alarms that had originated on oscillators during the past few weeks.

On the weekly MACD charts, the average and the triggerline are converging and a ‘sell’ signal might soon emerge on these charts. If a ‘sell’ signal emerges on these charts, then we are likely to see a strong intermediate correction in the Nifty.

The 14-day relative strength index (RSI) has a ‘sell’ signal as it moves southward from overbought territory after showing negative divergence. The other short-term indicators of the Nifty have given a ‘sell’ signal as they move southward from overbought territory and a large number of them are showing a negative divergence, which is an indication that the Nifty is likely to shed some more weight in the extreme short term.

The Nifty has moved below its short-term moving averages that are now going to provide resistance in any attempt by the Nifty to move upward.

The first resistance for Nifty in any attempt to move upward is going to come at 5080, this is the first serious resistance level for Nifty . If Nifty is able to cross this then 5160 is going to be the next important resistance for Nifty. In terms of support, Nifty is at present placed just on its medium term support level. The first short term support for Nifty comes at 4870, after which 4759 is the another strong support level over the next few trading sessions.

1. The Indian Budget: An opportunity lost?
2. FDI and Indian growth: the new paradigm
3. How to manage a float of the Indian rupee

The Pittsburgh Summit has clearly pronounced that ‘Today, we designated the G-20 as the premier forum for our international economic cooperation.’

This should normally imply the demise of G8, which has so far been the premier informal forum for global governance. It seems, however, that G8 will continue to function, albeit economic issues may be formally off its agenda, which could hen­ceforth be more focused on geo-strategic and political issues. This will result in a two-track global governance architecture, which, in my view, does not really work.

With a smaller number of richer and more powerful me mbers, G8 will continue to be seen as the real power centre or the ‘high table of global go­vernance’. One cannot see any hosting country being able to prevent another G8 member from bringing up a burning economic or financial problem during a G8 Summit. Therefore, the ‘Us and Them’ divide between advanced and dynamic emerging economies on the one hand and advan­ced economies on the other, will persist and this will not make for real and effective coordination.

The US seems quite prepared to replace G8 with G20. The real resistance, I am told, comes from relatively smaller powers such as the UK, Canada and Japan, who visualise a dilution of their global stature as a consequence. Perhaps, it will take time before the recognition sets in that a larger forum for global governance is more reflective of the present multi-polar world and will be more effective in preventing any unilateral behaviour in the future.

The second major announcement concerns the role and management of the International Monetary Fund (IMF). The context for this changed role is to be provided by the ‘Framework for Strong, Sustainable and Balanced Gr­owth’, which was launched at Pittsburgh and which visualises putting in place ‘…a process whereby we set out our objectives, put forward policies to achieve these objectives, and together assess our progress.’ This is indeed revolutionary, because it implies that the biggest and most advanced economies will be required to ensure that their macroeconomic policies don’t simply serve their national goals but are designed to take into account the externalities that these generate for the global economy.

The IMF has been asked to undertake a ‘… candid, even-handed, and balanced analysis of our policies,’ and develop a ‘… forward looking ana­lysis of whether policies pursued by individual G20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy.’ The IMF will need to build on the existing surveillance mechanism and be truly neutral, unbiased and, most importantly, sufficiently competent technically to be able to analyse the risks inherent in national policies and assess their overall impact on other economies operating in an increasingly integrated global economy.

The Fund’s past record in this regard has been somewhat weak. It has on various occasions either been unable to see a looming crisis (as in its Article IV consultations quite often presenting an outcome, which has been quite at odds from unfolding realities subsequently) or has pulled its punches to avoid ruffling feathers in national capitals. Partly though, this has been a consequence of hypersensitivity on the part of member countries to any critical evaluation of their policies. This is especially true of both the advanced and larger emerging economies.

The marked bias in the selection of staff in favour of a particular kind of economic and quantitative skills has also tended to sustain dogmas and succumb to ‘one size fits all’ approaches. All G20 members will have to accept some surrender of economic and financial sovereignty to the IMF and the newly broadened and more empowered Financial Stability Board if the Fund is to effectively discharge its additional responsibilities.

One of the decisions from the summit is to shift at least 5 per cent of quota share in the IMF to more dynamic emerging markets and developing countries from over-represented countries ‘using the current quota formula as the basis to work from.’ Given that the present quota formula principally relies on the country’s share in global output and trade, it is not clear how this shift will be brought about except for China and a couple of advanced economies.

One of the suggestions at the pre-Pittsburgh Washington meeting was to also include population as one of the criteria for quota reallocation to facilitate this shift. The summit has also called upon ‘… our Finance Ministers and Central Bank Governors to launch the new Framework by November by initiating a cooperative process of mutual assessments of our policy frameworks and the implications …for the pattern and sustainability of global growth.’

India and other large emerging economies will have to develop the capacity for participating in this mutual assessment of national policies and global trends so as to be able to analyse their impact on their own economic pros­pects. In our case, this may be best achieved by setting up a joint working group of the Ministry of Finance and the Reserve Bank of India that can undertake, with needed inputs from outside experts, an assessment of evolving global economic conditions and their impact on the economy. Cr­eating such a capacity should be seen as the necessary condition for effective future participation in the G20 process and for possibly hosting the summit in 2012 after Canada, Korea and France, which have already been identified as the next three hosts.

Rajiv Kumar is Director and Chief Executive of Indian Council for Research in International Economic Relations (ICRIER).

This article also appeared here in the Financial Chronicle.

1. Four challenges in Pittsburgh for the G20
2. The G20 and International Monetary Fund reform
3. The G20 Seoul Summit: Agenda and implications

Security hawks, the media’s foreign policy experts and the political class had a field day after July’s Indo-Pakistani joint statement. Particularly for the Bharatiya Janata Party (BJP), whose astute leader Atal Bihari Vajpayee once took the boldest of steps to liberate India from its Pakistan obsession, nationalism seems confined to overtly displaying our superiority over a smaller neighbour, one fighting with its back to the wall against destabilising forces. Good foreign policy, however, has to be more nuanced so that our long-term national interests are served.

To better appreciate complex diplomatic endeavours, we must start by taking note of some facts. First, India accounts for about 80 per cent of South Asian GDP. Being so dominant, it has to bear an asymmetric responsibility for achieving stability, peace and prosperity in South Asia. This must be the bedrock of our neighbourhood policy. Second, we cannot choose our neighbours and should work with whoever we can to help Pakistan defeat the jihadis. Otherwise, there will be negative outcomes for our own experiment at building a pluralistic, multi-ethnic and democratic society. Third, the strategic balance between the two countries must surely rule out any ideas of a decisive military victory. That road leads only to mutually assured destruction. We may well have to bite the bullet one day, but it is best avoided.

Fourth, there is not one monolithic Pakistan we can engage with. A choice must be made. There is the Pakistan of the armed forces which treats the country and its people as a fiefdom to be exploited for personal benefit. There is another Pakistan toiling in poverty, deprivation and backwardness for which succour from daily injustices is welcome from any quarter. Fundamentalists, meanwhile, see themselves as guardians of the Pakistani state and true representatives of the Islamic republic. They see victory within their grasp because they have duped the army into believing that it can calibrate the growth of jihadism.

There is also the Pakistan of the rising middle class which wants modernisation but equates it with neither westernisation nor Islamisation. They are as horrified as we are at a video showing Taliban goons caning a woman and yet like us do not want to succumb entirely to the Coca-Cola culture. The sufi and pir traditions to which Prime Minister Yousuf Raza Gilani and brave journalists, judges and lawyers belong are also part of this Pakistan. The small, almost inconsequential section of westernised, ‘liberated’ men and women is yet another Pakistan. There is also the Pakistan of the Mohajirs who see themselves as increasingly marginalised and resent that. Finally, there is the Pakistan whose political leaders represent growing popular aspirations for freedom and rule of law.

India must choose which Pakistan it wants to support, and which it wants to isolate and hopefully defeat over time. Clearly, we must work to erode the credibility and legitimacy of Pakistan’s armed forces establishment whose very reason to be is its festering animosity towards India. Islamic fundamentalists are the second group to be opposed. It is not mere coincidence the two are aligned in vicious opposition to India and subvert by coordinated, violent means any move to improve bilateral relations. Pakistan-bashing, on which some sections of India’s political spectrum and media thrive, strengthens the hands of these two groups. Nothing serves their purpose better than a bellicose India flexing muscles and vocal chords against Pakistan which they claim to represent. The reaction to Sharm el-Sheikh must have been music to their ears.

The Pakistan to be supported is today most effectively represented by Gilani. He comes from a sufi family, is a thorough professional with well-established credentials for integrity. He is seen as distinct from his president who comes from a completely different background and perhaps with his own agenda. Gilani represents the aspirations, weaknesses and strengths of the Pakistani middle class which desires better and open relations with its counterparts across the Wagah border. Sharm el-Sheikh was manifestly designed to support him and prevent him from relying completely on Rawalpindi, the jihadis or Asif Zardari for his political survival.

India must continue to make bold attempts to improve ties and strengthen Pakistan’s elected leadership to give it the wherewithal to begin confronting religious fundamentalists and resisting the armed forces establishment, the two worst enemies of the Pakistani people. At Sharm el-Sheikh, India gave away nothing in real terms. It only provided Gilani an opportunity to claim a breakthrough with his own hawks. If the strategy works, we would have an interlocutor with credibility and some capacity to resist the two groups most inimical to our interests.

What possible end can be served if Indo-Pakistani relations remain stalemated? Those who criticise initiatives to engage Pakistan should then suggest a more effective means of improving ties and collaborating with it to fight jihadi terrorists who, as agreed by the two countries earlier, are a menace for both.

This article originally appeared here in the Times of India.

1. New optimism in India-Pakistan ties
2. Wen Jiabao’s visit to India and Pakistan reinforces stability and neutrality
3. India and Pakistan: what the most-favoured-nation decision means

Despite exhortations from successive G-20 summits, the Doha Development Round (DDR) has been in a state of suspended animation since July 2008. It is fortunate that protectionist measures taken by several governments since November 2008, have not resulted in a rash of competitive protectionism. But we are at the top of a very slippery path. It will not take much for governments to succumb to domestic protectionist pressures if unemployment continues to rise or the recovery falters. Therefore, it is quite important that the multilateral trading regime be strengthened and the credibility of the WTO which serves as its global watchman is enhanced. There can be no better means of achieving this than to ensure a successful conclusion of the DDR.

In this context, it is sad to realize that a successful outcome of the DDR is seen as an increasingly remote possibility. There is talk of ‘multilaterlizing regionalism’ which in all honesty is some what of an oxymoron. And some observers, on grounds of realism have suggested that we accept a failed DDR as a fait accompli and start to look for second best options. India and other emerging economies should not accept such a pessimistic prognosis. Instead they need to ensure that the DDR, is successfully concluded even if with a lower ambition level.

In this context, the Indian initiative whereby a mini-ministerial conference was held in Delhi (on 4-5th of September) is indeed welcome. It is also heartening to note that most major WTO members and less developed countries have agreed to send their trade ministers as this will ensure that participation in this purely informal get together will be seen to be fully representative of the WTO membership. This is important as, in the absence of such a broad based representation, the mini-ministerial could well be criticized as being exclusionary in nature and focusing only on issues of interest to a few advanced and large emerging economies. Henceforth, negotiating modalities in the WTO should be such that all 150 members feel included and the process is seen as transparent and not one in which deals are reached behind closed doors by a handful of members. This will require that members of the so called New Quad have a far more active communications stance with the rest of the membership. Moreover, formation of ‘issue based negotiating groups’ which could reflect fluid negotiating geometries and coalitions should be actively encouraged. The mini-ministerial would do well to focus principally on these ‘process issues to facilitate further progress. With an enlarged membership, likely to expand even further, modalities have to be agreed upon to ensure that outcomes and also the negotiating processes are also inclusionary, equitable and transparent.

The most important change that has happened in the WTO since the ending of the Uruguay Round is the emergence of three or four large emerging economies like Brazil, China, India and South Africa which have had to be included among the small core group of negotiators. The emergence of the New Quad (US, EU India and Brazil with the latter two replacing Japan and Canada. The negotiating group often includes China and South Africa as well) marks a major transition in global trade negotiating architecture and necessitates a building up of trust and confidence amongst the members of the New Quad. The best means to build this trust is to try and achieve some collective success on issues which may require less compromise for all concerned. This would also lend support to accepting a less ambitious outcome if that is what is needed for a successful conclusion of the DDR.

The other transition being tackled in the DDR is to bring Agriculture within the ambit of the multilateral trade regime from which it has so far remained excluded. This is a historical undertaking much more strategic in its implications than was for example the inclusion of textiles and the winding up of the multi-fiber agreement. This also took very long and required tremendous efforts and compromises. Agriculture is seen as a strategic sector in the context of food security. This gives extraordinary and disproportionate clout to domestic agriculture lobbies which have been hitherto successful in thwarting any move towards agriculture under the WTO discipline. A necessary condition for achieving this would be for WTO members to agree to an international convention on food security that would essentially disallow food being used as a strategic weapon against any other member country. This would also include protocols outlawing export restrictions and permitting action against cartels by an empowered WTO. The mini-ministerial could discuss holding such a global convention under the UN aegis.

In the meantime, we may agree to move forward on the basis of the understandings that were reached in July 2008. At that time Indian negotiators were successful, having overcome strong resistance, in securing sufficient safeguards against import surges that could affect the livelihood of small and marginal farmers. A successful DDR which yields bound tariffs in NAMA that are above the applied rates, protects our small and marginal farmers and gives us greater market access for our competitive services exports is entirely in India’s interests. By calling for the mini-ministerial, the commerce minister has already signaled India’s intention to remain actively engaged. Now he only has to mobilize the political support within his party for concluding the DDR. This must be his next priority.

This article also appeared here in the Financial Chronicle.

1. India and decoding Doha
2. Doha Round: what India’s new government needs to do
3. WTO problems with the Doha Round and beyond