India has emerged as a major arms purchaser in the past few years, despite the slow pace of acquisition and defence modernisation. India&rsquo;s defence imports, of which there is no accurate figure, are estimated to have been around $15 billion in 2010-11. A heightened threat perception and a determined effort to overcome technological obsolescence in defence equipment are driving this process. However, such a high level of imports tacitly admits to the failure of the domestic defence production establishment, barring a few exceptions, to meet the requirement of the armed forces, both in terms of requisite volume and cutting-edge sophistication.

Manufacturing defence

Business Standard

The death of eight villagers, including two women, in the hands of armed CPI(M) cadre in Maoist-infested Lalgarh in West Bengal will be seen by many in the state as one more nail in the coffin of the Left Front rule, a process that began with the death of 14 villagers in police firing in 2007 in Nandigram. Immediately after the carnage, Trinamool Congress leader Mamata Banerjee rushed to the area to express sorrow and display solidarity with the bereaved. The state is firmly in the grip of &ldquo;body politics&rdquo; whereby after every act of violence leaders rush to the affected areas to claim ownership of the unfortunate dead to further their own cause. The essential dynamic of the state&rsquo;s politics in the countryside is not one of power changing hands simply by changing popularities getting reflected in the votes cast.

West Bengal's violent politics

There is no magic bullet to kill the stubbornly high food price inflation, which jumped to an year&rsquo;s peak of 18.32 per cent in the last week of December 2010. This much was clear at the end of a high-level review of food price inflation chaired by Prime Minister Manmohan Singh on Tuesday. It has now been clear for some time that unlike in the past, when high-value, protein-rich foods like pulses and livestock products drove up food prices, this time round non-protein items and perishables like vegetables are driving up the prices, which have gone up by a whopping 58.8 per cent in recent weeks. Some livestock products have also seen prices rising sharply. Prices of cereals have remained more or less stable and that of pulses, the most-consumed protein source, have dropped by 10 per cent compared to last year&rsquo;s peak. Though analysts tend to blame the recent unseasonal and, at places, heavy rains for the sudden price spurt, this can only be partly true.

Feeding food prices

At a time when energy security has become critical and environmental concerns emanating from the use of conventional fossil fuels are also growing, it is ironical that the bulk of India&rsquo;s huge hydropower production potential, deemed as the world&rsquo;s fifth largest, remains untapped. Hydroelectricity, being clean, renewable, inflation-neutral and cost-effective in the longer run, is considered a preferred form of energy in most countries. But India has come to neglect this source. Consider the facts. Hydroelectricity accounts for as much as 90 per cent of the total power production in over 20 countries and more than 50 per cent in over 65 others. In India, on the other hand, the hydropower&rsquo;s share in total electricity output has plummeted to a meagre 22 per cent from 44 per cent in the 1970s.

The power of water

Recent trends in India&rsquo;s balance of payments appear counter-intuitive, with trends in exports and imports running counter to conventional trade theory. Despite the steady appreciation of the rupee by almost 8 per cent in 2010-11, exports have grown faster than imports. While trade deficit and, by extension, the current account deficit are lower than what conventional wisdom would suggest, the reasons underlying this peculiar behaviour need to be looked at more closely. Indian imports are generally price inelastic, implying that their behaviour does not directly reflect exchange rate movements. This has largely to do with the nature of imports, which are dominated by capital goods, food items and oil. Imports of food, both in terms of quantity and value, have increased over the past year due to lower domestic production and higher prices, reflecting global scarcity.

Puzzling trade trends

The latest round of auctions of the Indian Premier League (IPL) have thrown up what appear to be surprising valuations for both domestic and international players. But individual cases aside, the larger trend is quite apparent. Youth comes at a premium and so does hitting power. All-rounders get a premium and so do those with &ldquo;star&rdquo; power. All in all, the national team selectors could pick some insights into what makes for a successful T-20 team &mdash; youth, the right combination of skills, and all round skill-sets. But beyond this not much else should be read in the way the players have been valued. Quite apparently, some less-than-average performers have gained tremendous valuations, perhaps because of greater &ldquo;star&rdquo; power and as a result of greater advertising revenues for their teams. In some cases, great talents have been ignored, perhaps because the shortest version of the game cannot tolerate individual idiosyncrasies like the longer formats can.

The IPL option

Heavens have not fallen with a sharp fall in the monthly Index of Industrial Production. Relax! As if quarterly data were not difficult enough to generate and interpret, policymakers, investors and analysts have to now grapple with a new slippery customer called monthly data. The widely reported comment that &ldquo;volatility&rdquo; of monthly data has increased does not acknowledge the fact that such monthly data are of recent origin and as yet highly unreliable. This is not to deny that the November 2010 numbers for the Index of Industrial Production, that show the IIP growth slowing down to a low of 2.7 per cent, month on month over November 2009, are a cause for concern. Indeed, the seasonally adjusted month-on-month growth rate has also come down. However, cumulative growth during April to November 2010 over the same period in 2009 shows the IIP growth rate improving from 7.4 per cent to 9.5 per cent.

Realism on growth

It is not surprising that the national committee on forest rights Act, headed by National Advisory Council member N C Saxena, has found the implementation of this landmark tribal welfare legislation &ldquo;terrible&rdquo;. Even three years after the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act came into force, as many as 11 states have not even begun implementing it. In most other states, execution is woefully poor. As a result, the statute&rsquo;s basic objective of undoing the historic injustice done to the adivasis (tribals) and other forest dwellers under the colonial forest laws is not being served. The new legislation recognises the forest dwellers&rsquo; right to homestead, cultivable and grazing land and non-timber forest produce. Significantly, it gives the forest communities the right to manage the forestlands traditionally used by them, thus, ending the forest departments&rsquo; absolute hegemony over forests.

Responsibilities about rights

The referendum for independence in Southern Sudan proves once again the adage that the ballot box trumps the bullet. Coming as it does after a quarter century of savage civil war, this week-long mostly peaceful exercise sends multiple messages to a world that is being increasingly polarised on ethnic and religious lines. Had it not been for successive dictators&rsquo; violent attempts to impose Arab Islamic culture and sharia law on a Christian and animist south, Sudan could have profitably exploited its rich mineral and oil resources (the latter currently accounting for more than three-fourths of Sudan&rsquo;s income). Till the nineties, these ethnic fissures were widened by the Cold War, with Soviet or US intervention being a proxy for competing claims on the country&rsquo;s resources. To be sure, the issue can by no means be considered settled even after the January 7-15 referendum.

The lessons from Sudan

That the government&rsquo;s tax reforms programme has hit a roadblock is evident from the fact that it now has no fresh deadline for the launch of a national goods and services tax (GST). It was in 2008 that Finance Minister Palaniappan Chidambaram first set April 2009 as the date for GST rollout. The government failed to meet that deadline. His successor, Finance Minister Pranab Mukherjee pushed the target date by a year. The government missed that target too.

GST's shifting deadlines

Pakistan&rsquo;s economy and politics are seemingly intertwined in a vicious cycle that has pushed the country into a dangerous downward spiral and left it staring at the abyss. Pakistan today is in a low equilibrium trap, characterised by low growth rates, high inflation, low rates of investment and high levels of foreign debt (relative to the size of foreign exchange reserves). Highly divisive and volatile national politics is making a bad situation worse. Pakistan&rsquo;s recovery from the global economic downturn has been anaemic. Real GDP growth rates since 2007 have averaged slightly over 3 per cent, following four years of relatively solid growth. An investment rate of 17 per cent of GDP is well below what is needed to jumpstart the economy and is not helped by the reluctance of both domestic and foreign players to invest in Pakistan.

Pakistan's priority

It is a shame that even a member of the Union Council of Ministers, Railways Minister Mamata Banerjee, has protested against the recent hike in petrol prices. Ms Banerjee is unfortunately engaged in a &ldquo;race to the bottom&rdquo; kind of political one-upmanship with the populist Left Front government in West Bengal that she hopes to defeat in this year&rsquo;s assembly elections. But, for even the generally more responsible Bharatiya Janata Party to blame the government for the petrol price hike, when, in fact, the responsibility for petrol pricing has been placed firmly in the hands of oil marketing companies, is unpardonable populism. Indeed, it is precisely because petrol prices have been deregulated that the oil companies are able to increase them in response to rising global crude oil prices. Many other countries have also been forced to increase fuel prices at home in response to global trends.

Fuel price distortions

Instead of lifting, the cloud over the subcontinent&rsquo;s micro-finance sector has got bigger with the Bangladesh government initiating an enquiry into the functioning of the Grameen Bank group. This is most unfortunate as micro-finance represents an enormous opportunity for the poor and faith in its foundations will be shaken if its father figure, Muhammad Yunus, comes under attack. The Awami League government of Bangladesh seems to be opportunistically seizing upon a chance to engage in political vendetta when it should be putting the Nobel laureate on a permanent pedestal for leading the world in innovation in a key socially useful area. The immediate provocation is a documentary by a Norwegian public TV channel alleging diversion of aid funds between different entities within the Grameen family to avoid paying taxes. The allegation was investigated by the Norwegian authorities and Dr Yunus and his organisations were exonerated.

Grameen Bank's travails

The need for ensuring food security for the poor is indisputable. However, the means to do so have to be practical and fiscally sustainable. That is what the prime minister&rsquo;s economic advisory council Chairman C Rangarajan and a group headed by him, which looked into the proposed food security law, seem to think. Most of the points raised by this panel about the recommendations of the Sonia Gandhi-led National Advisory Council (NAC) in this regard seem well founded.

The route to food security

It is entirely understandable that a group of 14 distinguished and highly respected senior citizens, including business leaders, eminent economists and legal luminaries, chose to write an &ldquo;open letter to our leaders&rdquo; on the issues of a deficit in governance and the urgent need for a proper response to it. Many concerned citizens have expressed similar views in recent months.

The governance deficit

No one should imagine that in a parliamentary democracy, where ministers are picked from among members of Parliament, talent alone determines allocation of ministerial portfolio. Any prime minister has to balance a variety of political considerations, picking from a given set the best team possible. Hence, it would be wrong to see the reshuffle carried out by Prime Minister Manmohan Singh only in terms of what it does to the quality of his team. There are provincial, caste and other considerations that go into picking and choosing ministers and so one must also be mindful of the political balance imparted by a given team. Elections in Uttar Pradesh and Kerala, the situation in Andhra Pradesh and such like would have played their role. However, even after accounting for all such considerations, the team that Dr Singh started with in May 2009 was not the best team he could have had. Moreover, many of the ministers he picked disappointed him with their sub-optimal performance.

A sub-optimal reshuffle

The question of whether or not RBI should hike policy rates in its quarterly monetary policy review due on January 25 should have been answered rather forcefully by the inflation data for December. After showing tentative signs of moderation in October and November, wholesale price inflation shot up close to 8.5 per cent on the back of a spike in vegetable prices led by onions and tomatoes. Even if these prices were to cool off a tad, the prospect of a hike in diesel prices looms on the horizon. The chances of ending the current fiscal year at anywhere near the 5.5 per cent that RBI officially targets seem bleak indeed. There is also a palpable sense of despair and desperation in government agencies over its inability to tame the price monster. Thus, no agency that is even remotely associated with managing the price-line can afford to remain passive at this juncture. The central bank in its avatar as the principal inflation-fighter in the economy certainly cannot.

Time for baby steps

The reshuffle of portfolios and induction of a few new members into the Union Council of Ministers have been widely viewed as a &ldquo;damp squib&rdquo; or at best &ldquo;sub-optimal&rdquo;. In large part, this negative reaction of the media and of political commentators has been because of the high expectations generated by reports of a major shake-up in the Union Cabinet and the Congress party in the wake of recent scandals and the decline in the government&rsquo;s and the ruling coalition&rsquo;s image. If these expectations had not been allowed to develop, the level of disappointment would have been lower. Having said that, it must, however, be conceded that even this so-called &ldquo;musical chairs&rdquo; has not only sent out some important messages, but has the potential of impacting considerably on economic policy, especially in critical sectors like infrastructure and agriculture.

Reshuffle and the economy

The impact of Chinese President Hu Jintao&rsquo;s state visit to the United States and of his meetings with US political and business leadership has wide-ranging portents, both bilaterally and globally. The visit comes at a time of global economic uncertainty and rising political tension in East Asia. The US is finding its diktat as the sole &ldquo;superpower&rdquo; being challenged by an increasingly assertive China, emboldened by mind-boggling economic growth and political clout. The trajectory of future US-China relations portends more than any comparable bilateral relationship and is expectedly being watched with a mixture of curiosity and fear. President Hu and President Barack Obama sought correctly to calm sentiments that have been increasingly confrontational in recent times. Bilateral tensions, however, continue to simmer and cannot be expected to go away in a hurry.

Mr Hu goes to Washington

Strategic analysts have started worrying about a new &ldquo;Cold War&rdquo; between the United States and China. There is of course a lot that has happened and is happening to suggest that relations between the world&rsquo;s No.1 and No. 2 nations are no longer as good as they used to be. But Indian analysts and policymakers would be foolish to rush to the conclusion that these relations have reached a point of no return. There is no gainsaying the fact that China&rsquo;s recent emergence as both an economic power and a nation capable of exerting political influence has sharply altered global power dynamics for the first time since the end of the Cold War. Particularly in the Asia-Pacific, the ascent of China, following the collapse of the Soviet Union and Japan&rsquo;s relative decline, has altered the Asian balance of power.

America's Asian drama

Micro-finance institutions (MFIs) registered as non-banking financial companies (NBFCs) and self-help groups (SHGs) linked to banks, both answerable to the banking regulator Reserve Bank of India (RBI), between themselves account for 92 per cent of the micro-finance space. So, when the Yezdi Malegam Committee, set up by RBI, recommends that a separate category of NBFC-MFIs (they make up 58 per cent of the sector) be created and RBI regulate them, it is clearly upbraiding RBI for not ensuring better and more comprehensive regulation earlier. If that had been done, the whole crisis of the past several months could possibly have been avoided. Now that a comprehensive set of recommendations is available, there is a need to act on them speedily so that further crisis is avoided and growth is smooth and healthy.

Mr Malegam's rap

Incisive columns and editorial comment by top opinion leaders

Page 424 - Editorial Comment