What can IT Industry do for India?

IT industry's contribution to the resurgence of India as a major economic power on the global stage need not be over-emphasised. What can it do for the transformation of Indian society? And, why should we burden the industry with a 'social obligation' ? Why should it be expected to do more than what happens automatically from its normal business operations ?

These are some of the questions which Amartya Sen dwelt upon in his Keynote Address at the NASSCOM 2007 India Leadership Forum in Mumbai earlier this month on "I.T. and India". He talked about the possibility of the IT industry to reach out beyond its traditional domain. While acknowledging the enormous contributions made by the industry, the nobel laureate emphasised that it can do even more, indeed in some ways, much more.

"This is partly because the reach of information is so wide and all-inclusive, but also because the prosperity and commanding stature of the IT leaders and activists give them voice, power and ability to help the direction of Indian economic and social development."

Full text of the address is available at The Hindu website. This is a must read for all Indian IT professionals. I am highlighlighting some important points from the lecture.

Amartya Sen has elaboarted on the connections between the success of IT in India and some particular features of India's past - intellectual traditions of Indian society that have tended to support the pursuit of specialized excellence, a general attitude of openness influences from far and near, etc.

Social obligations of the IT industry go beyond the very obvious charitable activities such as building hospitals, research centres and other social institutions which have traditionally been performed by Indian industry, including many of the major IT leaders. As information is key to societal change, the IT industry can take a central role in this regard and make a big difference.

"As it happens the key to the success of IT, namely accessability, systematization and use of information is also very central to social evaluation and societal change. There is, in fact, a very foundational connection between information and social obligation, since the moral - and of course the political - need to pay attention to others depends greatly on our knowledge and information about them."

........"This foundational connection also gives the information industry a huge opportunity to help India by trying to make its contribution to the systematization, digestion and dissemination of diverse clusters of information in India about the lives of the underdogs of society - those who do not have realistic opportunity of getting basic schooling, essential health care, elementary nutritional entitlements, and rudimentary equality across the barriers of class and gender. This can also be said about problems of underdeveloped physical infrastructure (water, electricity, roads, etc.), as well as social infrastructure, that restrain the broad mass of Indians from moving ahead. There are particular causal connections also here: an enterprise that hugely depends on the excellence of education for its success - as the IT sector clearly does - has good reason to consider its broad responsibility to Indian education in general."

The Surging Inflation - Other Views

India growth story is hot. And, so are the debates on soaring prices and overheating. As the government is trying its best to dowse the inflation and the political heat it has generated (and RBI doing its part on the monetary side), I decided to check out what the blogging community is saying on this. Are rising prices a necessary side-effect of high growth which we must learn to live with or are they symptoms of a deeper malaise? Why has the government not succeeded in containing the prices despite a series of measures over last few months? What should be done immediately? What should be done in the longer run? How to address the supply bottlenecks?

I came across some very good pieces on the subject. The common thread running through most of the discussions on the blogosphere is about supply side constraints especially those relating to agriculture commodities. It's interesting that many of them refer to onions. The ubiquitous onion seems to have become a symbol of price rise affecting common man and having a potential to affect electoral politics.

I am prividing links to two of the blog articles that I found interesting.

The first one is Inflation + Price of Onions. Kamla Bhatt in this post says that infrastructure bottlenecks should be adressed, as lack of food is not an issue as much as lack of an effective distribution channel.

"Inflation is on the rise and you can see it all around you. Price of onions, wheat, oil have all been climbing northwards and have hit the pocket book of many consumers. The economy is overheated and there is no question about that. ...There is no question that infrastructure is one of primary bottlenecks in India. If the infrastructure bottleneck is addressed it will lead to swifter movement of goods and reduce the transportation costs and the overall cost of products."

The second post is from "chutney spears" How to solve inflation in India? The author Shivaji Das talks about the signs of high prices as experienced in an Indian city. In a lighter vein, he offers some suggestions for controlling inflation, including putting curbs on the Bacchan family’s visits to temples to pray for happy marital life for Aishwary-Abhishek and firing the people publishing such high inflation numbers.

Please give your opinion on this.

Inflation defies monetary and fiscal measures, uptick continues

The annual wholesale price index-based inflation continued its upward march, touching 6.73 per cent for the week ended February 3, up from the previous week's 6.58 per cent. The contributory factors remain the same - pulses, cereals, vegetables and non-vegetarian food articles within primary articles, besides Manufactured Products including cement, steel and machinery items. The inflation estimate for the week ended Dec. 9 has also been revised to 5.63 percent from 5.32 percent. The government revises the inflation rate with a lag of two months on additional price data.

The continued 'pincer movement' - the strategy adopted by the government and monetary authorities to fight inflation from both supply side and demand side - has so far not delivered desired results and we may be approaching a stage where all the weapons in the armoury are exhausted.

To tackle the demand side (i.e. inflation arising from rapid growth and credit expansion), the central bank has been tightening the monetary policy. The most recent monetary policy measures include hike in repo rate and cash reserve ratio in quick succession. The Indian economy is expected to expand at a record 9.2 percent in the year ending March 31, following a 9 percent growth last year. Bank loans increased more than 30 percent in each of the past two fiscal years, outpacing the 23 percent growth in deposits.

The central govenrment, on the other hand, has taken a series of steps to address the supply side constraints. These include ban on export of items wheat and milk powder, lifting restrictions on import, reduction in customs duties, invoking restrictive storage laws and delisting a couple of essential commodities from the futures trading exchanges. The latest one is a cut in petrol and diesel prices.

Though all these fiscal and monetary measures will act with a time lag and may help contain the spiralling prices, these may be 'too late, too little' - especially the fiscal measures, monetary tightening measures beyond a point are not desirable as they will hurt the economic growth. On fiscal side, more needs to be done in the immediate term. And, much more on a long-term basis to improve the farm output.

Business Line editorials on the suject

De-fuelling inflation

Weaponless in price war

Related posts on AKT on Markets

War on inflation intensifies - CRR raised again

RBI raises repo rate

THE NEW HINDU RATE OF GROWTH
Indian economy is on a high growth trajectory
CSO has upped the FY07 growth forecast to 9.2%


Indian economy is expected to grow by 9.2% in the current financial year ending March 2007, driven by robust growth in manufacturing and services sectors.

This will be the fastest rate in 18 years and follows a strong 9% growth in the previous year, according to the Central Statistical Organisation (CSO). The highest-ever growth rate of 10.5% was recoded in 1988-89, but it was preceded by two low-growth years on account of drought (3.8% and 4.3%). The current boom marks the best-ever growth phase in recorded history. The growth story is largely being led by industry (more specifically, manufacturing) and services. While industry as a whole is expected to grow by 9.9%, the corresponding rate for manufacturing is 11.3%. The services sector is set to expand by 11.2%,

Agriculture languishing
While industry and services sectors are booming, the agriculture sector remains an area of concern. The sector which employs about 60% of the population is expected to expand by a mere 2.7 % on top of the 6% growth last year. Agriculture's share in the economy has been consistently declining – it would account for about 18.5% of GDP, down from the 23.9% in 2000-01 and 32.2% in 1990-91.

The past four years of sustained high growth have generated a great deal of euphoria and optimism on one hand and fears of overheating on the other hand as the economy moves into unchartered territory. Raising the farm output will be key to sustaining the high level of growth and spreading the benefits of economic boom to different sections of the society.

Impact of rating upgrade by S&P

S&P has raised India's sovereign debt rating to investment grade in view of the country's strong economic outlook, its rising foreign exchange reserves and the depth of financial markets.

The Indian economy has registered an average growth of over 8 percent in the past three years and is expected to grow at a record 9 percent in the current fiscal year ending March 2007. The rating upgrade from BB+ to BBB- is an acknowledgement of the improved fundamentals of the economy. According to S&P, gradual reforms and consistent monetary and fiscal policy stances have sustained macroeconomic stability and India's huge foreign-exchange reserves provide a buffer against changes in investor confidence.

Although the rating upgrade should attract more overseas funds into the economy and enable corporates to raise funds at better terms, it is largely seen as a (long overdue) affirmation of what has already been factored in by global investors. The bullishness on the Indian economy has been attracting large capital inflows in the equity market pushing the market to record highs. Hence it may not have a dramatic effect on the level of capital inflows.

The information on which this is based has been known and factored in, still the rating upgrade lends credibility to the continuance of the India story. Now that all three major rating agencies S&P, Moody’s and Fitch have an investment grade rating on India, more long-term and stable money such as pension funds can invest in Indian markets with greater confidence. Many such funds have the mandate to invest only in investment grade papers. On the other hand, medium-sized companies will benefit from the improved rating and they will be able to borrow abroad at lower rates (bigger companies already enjoy good pricing power in respect of their global bond issuances).

India's Mobile Revolution - the Great Leveler

The story of growth of mobile networks in India is nothing but revolutionary. The booming Indian telecom industry is adding over six million mobile connections every month and it is connecting various sections of society like taxi drivers, paanwallahs, farmers, fisherfolk.

Shashi Tharoor in a recent article published in International Herald Tribune says that the “mobile miracle” has accomplished something India's old Socialist policies talked about but did little to achieve — it has empowered the less fortunate. Hailing the transformation of India in communications as dramatic, he says the cell phone revolution is exciting not only as a sign of India's economic transformation, but as a symptom of something far more important, a change in the attitude of India's governing classes.

“Now to anyone who grew up in pre- liberalization India, that is astonishing. Bureaucratic statism committed a long list of sins against the Indian people, but communications was high up on the list; the woeful state of India's telephones right up to the 1990s, with only eight million connections and a further 20 million on waiting lists, would have been a joke if it wasn't also a tragedy — and a man-made one at that.”

Decrying the government's indifferent attitude to the need to improve communications infrastructure in the pre-liberalisation era, Shashi Tharoor says that perhaps the key contribution of the government has been in getting out of the way — in cutting license fees and streamlining tariffs, easing the overly complex regulations and restrictions that discouraged investors from coming in to the Indian market, and allowing foreign firms to own up to 74 percent of their Indian subsidiary companies.

ABC of SEZ

The controversies surrounding the special economic zones refuse to go, as the land acquisition and rehabilitation issues continue to haunt. Government has now decided to put on hold clearances for new SEZs until new a rehabilitation policy is in place. A Times of India editorial on the subject (Jan 20, 2007).

The Centre has been forced to put on hold clearances for new special economic zones (SEZs). The SEZ policy has attracted controversy since it was first announced in 2005. The government's reason for the present pause is that it would wait for the national rehabilitation policy to be in place before allowing new SEZs. On the face of it, it is a sensible decision since large tracts of land are expected to be acquired by the government for SEZs. This is bound to force thousands of people out of their homes and present livelihoods. In the absence of a proper rehabilitation policy, resettlement of SEZ oustees would become a tardy affair. Already, the government is facing the heat in places where land has been acquired.

The opposition to SEZs is taking the shape of a loose coalition of disparate outfits ranging from grass-roots activists, including Medha Patkar and former prime minister V P Singh, to NGOs and even Left extremists. Sections of the political mainstream, including those within the Congress, are worried about the SEZ policy. The groundswell against land acquisition has been exploited by opposition parties at the local level to target the party in office. It is obvious that the Centre would not like the SEZ policy to become a magnet for opposition parties prior to assembly elections in Punjab and Uttarakhand, which have Congress governments.

That some of the vocal opponents of the SEZ policy have been valuable allies of the UPA during the 2004 elections would add to Congress's discomfort. The trouble over the SEZ policy is another indication of the flawed nature of Indian democracy. Policies are announced by the government without carefully studying their implications. In the case of the SEZ policy, the government should have worked out a consensus with all the political parties and civil society organisations. A top-down approach to development is fraught with the danger of alienating the state from even the intended beneficiaries. It is not too late to change. In the case of projects that are land-intensive, a dialogue with people who reside and live off that land is essential. The government needs to look at them as stakeholders in the project and treat them as venture capitalists, their capital being land. Fears of home and livelihood loss have to be addressed at various levels if the necessary, and inevitable, industrialisation of the Indian economy has to happen. Before setting out to implement the SEZ policy, the government should have followed the ABC of governance; it ought to have gained the trust of the people.

India in 2007 – My Wish List

(1) PC & MS – May god give you the strength to work towards making India a developed economy without succumbing to the pressures from left partners and the temptations of populist politics.

(2) Corporate India – Let the good numbers continue to pour in. Let there be more global takeovers. But don't fall prey to nationalistic feelings; let the business and strategic interests prevail.

(3) Indian IT Companies – Look elsewhere (US slowdown is real, but there are other markets). Aur bhi gham hain zamane mein US mohabbat ke siwa !

(4) RBI – Do whatever it takes to avoid overheating and to balance the economic growth with inflation, notwithstanding the preference of the political establishment for low interest rates.

(5) Real estate prices and speculators – STOP. ENOUGH IS ENOUGH.

(6) Stock market investors –Learn to live with volatility and low return expectations, or stay away. This year will be different from past few years.

(7) Agriculture – The mother of all professions, your younger siblings – manufacturing and services – are booming. The national economy needs you to contribute more. When will you come of age?

(8) UP elections – Let there be a clear verdict. No more horse-trading, back-room maneuverings and strange bed-fellows, please.

(9) Karnataka Government – Need to do a lot more for Bangalore infrastructure, before the IT capital loses its sheen. And, do it fast.

(10) Onion, tomato, sugar, wheat and other things in common man's shopping cart – No runaway movement this year.

THE ABC OF SEZ
What is Special about SEZs, China's experience, the Indian experiment, the politics and the economics ...

A Special Economic Zone (SEZ) is a geographical region where economic laws are more liberal than a country's typical economic laws. SEZs are set up with a view to increasing investments – typically foreign investments - and promoting exports, by offering privileged trading terms. Usually an SEZ is designated as a duty free enclave and treated as foreign territory for the purpose of trade operations, duties and tariffs.

SEZs have been established in many countries like China, India, Philippines, Russia, Iran, Jordan, Poland, Kazakhstan and North Korea at varying scales and with varying degrees of success. In India, the government’s big bang approach to push through a large number of SEZs has generated lot of heat and triggered a nation-wide debate on the costs and benefits of SEZs, including the issues like social displacement caused by large-scale conversion of agricultural hinterland into industrial belts.

International experience with SEZs has shown that by offering various incentives, SEZs can attract investment and foreign exchange on a large-scale, generate employment and boost infrastructure and technological development. However, critics claim that SEZs attract investments only by offering distortionary incentives rather than building underlying competitive conditions. These incentives create a fiscal burden on the taxpayer and hurt environmental and labor standards. In addition, critics argue that the direct and indirect costs of maintaining zone privileges do not benefit the rest of the economy and, instead, lead to “out-of-bound” enclaves of prosperity. It has been widely recognized that promotion of SEZs in the context of an overall strategy to promote economic development, active linkage programs and adequate social and environmental safeguards are necessary to reap the maximum benefits from SEZs at the minimum cost to the society.

China's Experience
The Chinese model of SEZs has been very successful and SEZs there have been considered as remarkable contributors to the miraculous economic growth of the country. The dragon’s success story has inspired many other countries, including the other Asian giant India, in their pursuit of foreign investment and export-led growth. A brief on how China did it.

China started the SEZ experiment as early as 1980s as part of the broader economic reforms and opening-up policy. The first group of SEZs was set up in Shenzhen, Zhuhai & Shantou in Guangdong province and Xiamen in Fujian province - all located in costal areas of Southeast China. This was followed by other 10 costal cities, Hainan Province and Pudong area in Shanghai. To further build on the success of these SEZs, China went on to establish “Economic and Technological Development Zones” (ETDZ) on similar lines. Compared to SEZs which were developed in the whole city (sometimes whole province), ETDZs are developed on relatively small geographical areas earmarked in coastal and other open cities. The overall development of SEZs in China has moved along the following 3 dimensions: extending from SEZs to ETDZs; stretching from east costal region to inland middle and west region; upgrading from fundamental industries to hi-tech industries..

The Indian Experiment
Government of India embarked on the path of economic liberalisation way back in 1991, with foreign investment as one of the foundations of economic policy. However, it was only in 2000 that a policy on SEZs was formulated.

The objective of the policy is to facilitate setting up of SEZs, with a view to providing an internationally competitive and hassle free environment for exports. The policy provides for setting up of SEZs in the public, private or joint sector and envisages a lead role for the state governments, in line with the general trend of decentralization in governance and policy implementation. SEZ units may be for manufacturing, trading or service activities.

The SEZs are designated as a “duty free enclave” and will be treated as foreign territory for trade operations and duties and tariffs. The privileges include no license requirement for imports, exemption from customs duty on import of capital goods, raw materials, consumables, spares, etc., exemption from central excise duty on procurement of capital goods, raw materials, consumables, spares, etc. from the domestic market, reimbursement of central sales tax paid on domestic purchases, 100% income tax exemption for a block of five years, 50% tax exemptions for two years and upto 50% of the profits ploughed back for next 3 years, and 100% foreign direct investment allowed in manufacturing sector through automatic route barring a few sectors.

SEZs currently operating in India are located at Kandla and Surat in Gujarat, Cochin in Kerala, Santa Cruz (Mumbai) in Maharashtra, Falta and Manikanchan - Salt Lake in West Bengal, Chennai in Tamil Nadu, Visakhapatnam in Andhra Pradesh, Noida in Uttar Pradesh, Indore in Madhya Pradesh, and Jaipur in Rajasthan. In addition, numerous SEZs are at various stages on development in various parts of the country.

The current debate on the potential revenue loss, the accusations of “land grab” by real estate operators in connivance with politicians and middlemen and the sharp political divides on the issue (there are differences even within the government) are likely to slow down the development of SEZs in the near term. This may actually be an occasion to look at the issues afresh and tighten the policies so as to harmonise the whole process with the broad goals of economic development.

Who is afraid of SEZs?

It’s not just Sonia Gandhi who is worried about the development of Special Economic Zones (SEZs) in India and its immediate political fallout. The debate on SEZs is getting hotter and hotter with criticism coming in from various quarters, including the Finance Ministry and the Reserve Bank of India. Even Prime Minister Manmohan Singh recently asked the states, without mentioning SEZs, to go slow on offering sops to drive industrial development. “The jury is still out on whether these policies (incentives) really promote industrial growth” said the Prime Minister.

The ever-growing list of powerful people questioning the way SEZs are conceived and being developed in the country has turned the focus on the whole range of issues from the long-term social and economic consequences to revenue implications, uneven development and sacrifice of prime agricultural land to boost industrial growth. Although SEZs are expected to boost investments, industrialization and exports in a big way, the costs and benefits need to be weighed carefully.

Finance Minister has expressed concerns over the loss of tax revenue due to the sops offered to the SEZs. RBI has also cautioned the government on potential revenue loss saying that the incentives may be justified only if the SEZ units ensure forward & backward linkages with domestic economy – and this is a big ‘if’. Acting on its view, RBI has already announced guidelines to banks that will make it difficult for them to lend to the SEZs in a big way. Financing of SEZs will be treated like commercial real estate lending, attracting higher risk weight for the purpose of capital adequacy. This means banks will have to set aside a larger capital for such lendings as compared to other assets.

Another worry is that the mushrooming of SEZs would aggravate the widening inequality in India - both in terms of individual income levels and national infrastructure. The IMF Chief Economist Raghuram Rajan has warned: “Not only will [the SEZs] ... make the government forgo revenue it can ill afford to lose, they also offer firms an incentive to shift existing production to the new zones at substantial cost to society.” Given the way large corporates are rushing to grab the 'sweetheart' deals offered by the state governments, the ‘land grab’ in the name of SEZs is going to badly affect the livelihood of a large number of farmers. Swathes of prime agricultural lands will be converted into ‘islands of prosperity’ and the affected farmers will definitely not be in a position to transition to the jobs created in these ‘islands'.

The issue of “land grab” has turned out to be the most controversial aspect of the SEZs, also politically the most sensitive one and perhaps the last straw on the proverbial camel’s back. This is the issue that has caused sharp political divides and forced a re-look at the entire gamut of the planning and development of SEZs. The international experience with SEZs has shown that only large SEZs are likely to succeed and that for every successful SEZ ('Shenzen’ is the name that comes to mind immediately) there are numerous failures. Clearer guidelines are needed for land acquisition and compensation to farmers. The possibility of using barren and wasteland - of which we have plenty - for setting up of SEZs, rather than fertile agricultural land, should be explored.