pragati - issue12 - march2008 community edition

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No 12 | Mar 2008

AL SO

ISSN 0973-8460


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ContentsPERSPECTIVE

2 Strategic depth vs strategic Vanni Cappelli breadth

America needs to reframe its strategic approach to the region

4 No anomaly in the shortage Nitin Pai &Sushant K Singh

Why India needs to move towards more capital-intensive armedforces

6 Securing space on the table AdityanjeeResponding to a new strategic arms race

FILTER

9 On Kosovo; Four stages of a jihadi; Maoists strike in Bhutan;Indias foreign technical aid and loans

IN PARLIAMENT

10 PRS Legislative Research: Budget Session 2008

IN DEPTH

11 Minimum government, Mukul G Asher maximum governance

The Gujarat model of governance holds lessons for the rest of India

ROUNDUP

15 Pinnacle of cynicism V Anantha NageswaranThis years Union budget takes us back to the bad days of the 70sand 80s

17 Futures for farmers Karthik Shashidhar Good futures markets are essential for farmers welfare

19 Advanis economic agenda Atanu Dey The importance of getting it right

BOOKS

21 Confessions of a retailer Ravikiran RaoA review of Kishore Biyanis book, It happened in India

PragatiThe Indian National Interest Review

No 12 | March 2008

Published by The Indian National Interest - an independentcommunity of individuals committed to increasing public awarenessand education on strategic affairs, economic policy and governance.

Advisory PanelMukul G Asher

V Anantha NageswaranSameer Wagle

Sameer JainAmey V Laud

EditorNitin Pai

Editorial SupportPriya Kadam

Chandrachoodan Gopalakrishnan

AcknowledgementsMint

Meena Kadri (Cover photo)

Contact: [email protected]

Subscription: http://pragati.nationalinterest.in/

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2008 The Indian National Interest. Some rights reserved.

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AFGHANISTAN & PAKISTAN

Strategic depth vs strategic breadth America needs to reframe its strategic approach to the regionVANNI CAPPELLI

IN MID-FEBRUARY, as repeated suicide bombings

punctuated open discussions among governmentsand in the media of the possibility that the interna-tional mission in Afghanistan could end in failure-- with all that would mean for the security of In-dia, the United States, and the worldtwo promi-nent individuals made remarks that were espe-cially revealing. The comments on the crisis by theformer high representative for Bosnia Paddy Ash-down and the American Defence Secretary RobertGates were emblematic, as they demonstrated thatthe international community is failing in South-Central Asia as a whole because it does not under-stand the nature of the conict it is engaged in.

Writing in the Financial Times after his rejectionfor the post of United Nations special envoy inAfghanistan by President Hamid Karzai, Mr Ash-

down lamented that With ghting in Afghanistan

now entering its seventh year defeat is now areal possibility. The consequences of this he fore-saw as global terrorism would have won back itsold haven and created a new one over the borderin a mortally weakened Pakistan. Quoting SunTzu, the ancient Chinese military strategist, MrAshdown afrmed that the problem lies in the factthat the Afghan venture is comprised of a series of tactical moves, with no grand strategy. This hesuggested might come in the form of doing a bet-ter job of integrating military and civilian efforts ina way that involves the Afghans more, in order toenhance their security, governance, and the rule of law.

That Mr Ashdown states that the ghting inAfghanistan is entering its seventh year when it

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will in fact complete its thirtieth year in April istypical of the general lack of comprehension of what exactly transpired in South-Central Asia inthe decades leading down to September 2001. Heessentially views the problem as a current internalaffair of Afghanistan, ignoring the regional, his-torical, and ideological contexts. Had he a bettergrasp of these, he would realize that Pakistan,which put the Taliban in power in the rst place,would hardly view the successful revival of itslong-term strategic depth project as a mortalweakening of itself. He would also realize thatwhat he is suggesting is just more tactics, not astrategy.

If Mr Ashdowns views are myopic, those of MrGates might be characterised as blindwere it notfor the fact that he and the faction of the Americanestablishment he represents have so much to cover

up.For the United States, September 11th was agalvanising event, one that opened the Americanpublics eyes to dangers from distant lands, MrGates told a security conference in Munich. Speak-ing of the world Islamist alliance which perpe-trated the atrocity, he afrmed that it was neces-sary to fracture and destroy this movement in itsinfancy. When challenged as to past U.S. supportfor fundamentalists, he answered, If we bear aparticular responsibility for the role of the muja-hideen and al Qaeda growing up in Afghanistan, ithas more to do with our abandonment of the coun-try in 1989 than our assistance of it in 1979. Ex-pressing what he expected from Americas keyally in its war on terror, Mr Gates said, ThePakistan army is an army that essentially has beentrained and equipped to potentially ght India.They are now going to have to re-orient them-selves and gure out how to do counter-insurgency.

Again, to characterise an historical force whichhad its modern ideological origins in Egypt in the

1920s and has wreaked mass destruction andcaused heavy loss of life in Bangladesh, Afghani-stan, and India for upwards of forty years as beingin its infancy is either a mark of extreme igno-

rance or deliberate obfuscation. ConsideringAmericas role in the rise of radical Islam in theregion through the carte blanche it gave during theSoviet-Afghan War to the Pakistani military-security services complex based in Rawalpindi toheavily support the most extremist elements while

marginalising responsible resistance ghters, onemust conclude that it is the latter. Yet if the sugges-tion is seriously being made that, after sixty yearsof enduring rivalry with India, Pakistan is going tosuddenly re-orient itself to ght its own jihadi as-sets simply for Americas convenience, a basic in-ability to think critically must be said to be at work as well.

Although the Bush administration, which ineffect abandoned the primary, South-Central Asiantheatre of the ght against radical Islam to pursue

its catastrophe in Iraq, is certainly incompetent, itis nevertheless striking to see how much of thepublic discourse on Pakistan in America is alsocharacterised by a failure to grasp even the most basic realities of that country. General Musharrafsostensible switching of sides after 9-11 is largelytaken as a given, with little scrutiny of whether thePakistani military has indeed suddenly abandonedits core aggressive Islamic nationalism, which hassought for so long to use extremists to force Indiaout of Kashmir, seek strategic depth by dominat-ing Afghanistan, and repress secular progressiveforces at home. One hears almost nothing aboutthe Islamic unitarist Pakistan ideology that is themilitarys formal ethos, or its basic function of re-pressing democracy, secularism, ethnic autonomy,and womens rights, while upholding feudalism inthe name of an Islam in danger. Instead Pakistanis said to have a modern professional military its bloody record in Bangladesh, Afghanistan, andKashmir notwithstanding.

Amidst the endless talk of stabilising Af-ghanistan and Pakistanwhich the Bush admini-

stration conceives solely in terms of military forceand aid, respectivelysight is lost of the fact thatwhat both countries need is transformation. Andthere is no greater transformation needed inSouth-Central Asia than turning Pakistan into astate that will no longer be a threat to the stabilityand security of its neighbours and the world.

This, unfortunately, will not come about as aresult of the Pakistani elections of February 18th.The poor showing of the religious parties yet againdemonstrated that the threat of extremism emanat-ing from the country comes not from the mass of the people but from its all-dominating military-security services complex. Yet the electoral exercisein and of itself can do nothing to force Rawalpindito give up its stranglehold on the levers of national

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There is no greater transforma-tion needed than turning Paki-stan into a state that will no

longer be a threat to the stability and security of its neighboursand the world.


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power, which it has all too often employed in statesponsorship of terror, even under civilian rule.The pressure for transformation, at least initially,must come from without.

It was one of the great insights of ChesterBowles, Americas most revered and beloved am-

bassador to India, that military assistance distortedPakistans political and economic development,leading inevitably to dictatorship and conict withIndia and Afghanistan. Half a century later, withthe full pathological nature of this distortion therefor all to see in the legacy of a brutally stuntedcivic life in Pakistan, unending war in Afghanistanand Kashmir, and a spreading global terror threat,we are not only in a position to see how rightBowles was, but that the only solution lies in im-plementing his vision of USIndian co-operation

as the basis for security in Asia as a whole.My essay Containing Pakistan: Engaging the Raja- Mandala in South-Central Asia , published in theWinter 2007 issue of Orbis , argues that the UnitedStates should change course and commit itself toan American-Indian-Afghan alliance aimed atcountering the Islamic ideological and terroristthreat Pakistan poses under military rule. This pol-icy would employ such modern tactics as cuttingoff military and economic aid, placing the countryon the list of state sponsors of terror, and recon-structing Afghanistan, including its military capac-ity. But it would have as its strategic basis thetechniques of encirclement, balance of spheres,

and exploitation of tensions that underlie the geo-political vision of the 4th century BCE Indianpolitical philosopher Kautilya, whose Arthashastrarst gave systematic method to political theory onthe subcontinent. By such a comprehensive policyof containment, the alliance would cause the same

internal collapse of a dictatorial power structurethat occurred when the Soviet Unions weak econ-omy was unable to bear the weight of its militarysuperstructure, and give Pakistans secular demo-cratic forces their rst real chance to transformtheir troubled land into one that is no longer athreat to the security of its neighbours and theworld.

Paddy Ashdown ended his piece in the Finan-cial Times saying, What we need is a strategy, nota disconnected collection of uncoordinated tactics.

What we should not need is a Chinese philosopherfrom 26 centuries ago to tell us that.The foundering international community in

Afghanistan is in need of all the expert advice itcan get, however old it is. And it can do no betterthan to combine the prescient sagacity of anAmerican diplomat from half a century ago withthe enduring sagacity of an Indian philosopherfrom 23 centuries ago, countering a criminally in-tended strategic depth with a regionally trans-forming strategic breadth.

Vanni Cappelli, a freelance journalist, is president of theAfghanistan Foreign Press Association.

DEFENCE ECONOMICS

No anomaly in the shortageWhy India needs to move towards more capital-intensive armed forcesNITIN PAI & SUSHANT K SINGH

WHAT DOES the Indian Army have in commonwith National Association of Software and ServiceCompanies, the Confederation of Indian Industryand the National Manufacturing CompetitivenessCouncil? Well, they are all complaining of a short-age of employable graduates.

The Army is short of over 11,000 ofcers. In2005, a NASSCOM-McKinsey report projected thatthe IT industry would face a potential shortage of 500,000 people by the year 2010.

The Army may be looking for young peoplewith ofcer like qualities while the private sec-tor is looking for people of management calibre, but they are essentially shing in the same pond.India produces three million graduates each year.But as Satyams B Ramalinga Raju noted, most of

these are uncut diamonds that have to go throughpolishing factories, as the trade requires only pol-ished stones.

It is more than a coincidence that the armedforces were unable to ll available seats at the In-

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dian Military Academy since the early 1990sjustafter the P V Narasimha Rao governments re-forms dismantled the license raj. Steady economicgrowth over the last two decades and the emer-gence of globally competitive IT, nancial andmanufacturing industries has increased the oppor-tunity costs of joining the armed forces. Further-more, productivity growth in these sectors is in-creasing wages: a young Indian will have to giveup even more to join the armed forces, which offerrelatively lower take-home salaries.

It is tempting to believe that merely raisingmilitary pay will address the issue of ofcershortages. To do so would be to ignore the fun-damental changes to the relative abundance of capital and labour in Indias growing economy. Aslabourespecially managerial talentbecomesrelatively less abundant, industries, including thearmed forces, must become more capital intensive.

This is already happening in the automobilemanufacturing sector. Indeed, should the longawaited labour reforms come about and massmanufacturing take off, the Army is likely to de-velop a shortage in the lower ranks too.

Manpower shortages are not an anomalytheyare part and parcel of Indias transition into amiddle income country. The armed forces woulddo well to prepare for the changed circumstances by implementing structural reforms.

First, in the near term, the armed forcesandespecially the Armyshould invest more in mod-ern equipment and weapon systems while cuttingdown the headcount. Today the Army spendsmost of its money on salaries and operational ex-penses. About 26 percent of the Armys budget is

capital expenditure. Only 10 percent of it goes intomodernisation. This ratio must improve to enablethe Army to take advantage of 21st century tech-nology.

Now, it is true that India needs a large army tohold territory and to carry out counter-insurgencywarfare. It is also true the vision of a high-techarmy has taken a beating due to the failings of Donald Rumsfelds Pentagon. But India is spend-ing way too little, compared to China (leave alonerich Western countries), on military modernisa-tion. If the Armys capabilities are to match Indiasgrowing economic strength in the coming decades,it is imperative that it adopt a more sophisticatedtechnological posture.

A more capital intensive army does not neces-sarily mean one that imports big ticket items.Rather, it is one that invests in technology to im-prove force projection at all levels: from better

body armour and munitions for the soldier tohighly-networked formations and integratedcommand & control. Beyond merely improvingthe teeth-to-tail ratio: the armed forces mustfundamentally re-examine what it is that consti-tutes teeth.

There have been a slew of defence procurementscandals in the wake of the Bofors controversy. Butthe real scandaland an insidious one at thatisin the defence procurement policy. It has becomeso byzantine that the armed forces routinely spendless than their allocation: sometimes surrenderingas much as 10 percent of defence budget.

Second, Indias own experience in the Kargilwar laid bare the need for the armed forces to op-erate in an integrated manner. Furthermore, In-

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dias nuclear doctrine calls for a force based on atriadwith land, sea and air components thatneed to be part of the composite strategic deter-rent. Yet there has been little progress into moving beyond mere operational jointness to integratedmilitary commands that comprise of land, sea and

air components. Indeed, beyond tradition, there islittle reason to have vertically separate militaryorganisations based on the vehicles they use to getto the battleeld.

Current and future operational imperativessuggest that India can no longer afford the luxuryof sticking to that tradition. Economic realiti-escombining resources to optimise the overallteeth-to-tail ratiosonly reinforce this point. Un-doubtedly, such a radical restructuring will be themost ambitious exercise ever. But if India is to

meet the security challenges of this century, thereis no choice.Will all this succeed in the armed forces attract-

ing sufcient number of young people to a mili-tary career? Not unless the manner in which theforces identify, train and manage human resourcesis overhauled. The armed forces no longer haveaccess to low hanging fruit, as good graduates aresought after globally. That suggests that the armedforces will have to emulate the IT majors and set-up their own training academiestake the rela-tively rougher diamonds and polish them in-house. In other words, instead of trying to look for

people with ofcer like qualities, the armedforces will need to create them.

Among the shocking features of the defencehuman resource management policy is the pres-ence of an exit barrierofcers cannot simply re-sign from services after giving due notice. Their

request for termination has to be approved by thegovernment. While this policy has long been justi-ed on ostensible national security grounds, it ig-nores the fact that an exit barrier also an entry bar-rier. At the margin, potential recruits are likely toshy away from signing up because of the risk of being trapped in an unhappy job. This exit barrierhas to go: a reasonably long notice period shouldsubstitute the pleasure of the president.

The roots of these shortages can ultimately betracked down to Indias dysfunctional education

system. Raghuram Rajan and Arvind Subramanianof the International Monetary Fund have pointedout that the solution to the Bangalore BugIn-dias equivalent of the Dutch disease that emascu-lates skilled labour supply in the wider econo-myis to redress the past neglect of primary andsecondary education. They advise the govern-ment to release education from its clutches.

Nitin Pai is editor of Pragati and blogs at The Acorn(acorn.nationalinterest.in). Sushant K Singh is a residentcommentator.

SPACE

Securing space on the tableResponding to a new strategic arms raceADITYANJEE

RUSSIA AND China circulated a draft proposal fora Prevention of Arms Race in Outer Space (PA-ROS) treaty at the 65-member UN DisarmamentConference in Geneva in January this year. It aimsto ll gaps in existing international law, createconditions for further exploration and use of space, and strengthen general security and armscontrol.

A draft treaty on the prevention of placement of weapons in outer space (PPW) provides for a banon placing any arms in space and a ban on the useof force or a threat of force against space objects.

The United States rejected signing of PAROSclaiming that an arms race in outer space does notyet exist. In reality, we are witnessing a new armsrace in the outer space with China and the UnitedStates ring the initial salvos. It is another matterthat the actors involved in the weaponisation of outer space refuse to acknowledge it.

In 2001, the United States, under PresidentGeorge W Bush, unilaterally pulled out of the 1972Anti-Ballistic Missile (ABM) treaty. This clearedthe way for it to develop and install a missile de-fence shield. The ballistic missile defence (BMD)

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system is capable of destroying both ballistic mis-siles and satellites. The downstream consequencesof that single decision catalysed a new race forweaponisation of the outer space. In January 2007,China tested an anti-satellite (ASAT) weaponagainst one of its own ageing weather satellites

orbiting at 500 miles above the earth. The anti-satellite weapon was a non-explosive "kinetic killvehicle" that destroyed its target by colliding withit. China succeeded in the fourth attempt in theseries of tests. (Following the successful intercep-tion, there was initially a total silence from theChinese political leadership. China alluded to acommunication gap between the central govern-ment and the armed forces. But it is impossible forthe Peoples Liberation Army (PLA) to conduct anASAT test without the Beijings knowledge. The

Chinese Communist Partys doctrine is that theparty controls the gun.) China has also developednavigation satellite jammers that are equipped todisrupt the Global Positioning System (GPS). Andrecently, Chinese secretly red powerful laserweapons to disable US spy satellites by "blinding"their sensitive surveillance devices and preventingspy photography when they pass over China. Inaddition to forcing the United States to enter nego-tiations concerning the weaponisation of space,China also considers the ASAT test as a form of 'deterrence against the US.

The United States responded by knockingdown one of its own satellites. A failed 5,000-pound spy satellite about 150 miles above theearth was destroyed with a single missile defenceinterceptor red from a US Navy warship in the

northern Pacic Ocean. The United States claimsthat the missile strike was meant to prevent thetoxic 1000-pound hydrazine tank from scatteringdebris and putting populated areas at risk. But thetiming curiously followed renewed Chinese andRussian attempts at Geneva to bolster an interna-

tional effort to ban weapons in space.Clearly there are rising tensions between the

United States, Russia and China over the militari-sation and weaponisation of space. It is likely thatcountries like Japan, Iran, North Korea and Paki-stan may build their own anti-satellite kinetic killcapabilities. Although no country has so far shotdown another countrys satellites, the possibility of this cannot be excluded, especially in the contextof asymmetric warfare.

An immediate implication is that Indias satel-

lites and future space assets face the risk of beingdestroyed, incapacitated or jammed. For instance,ASAT capability allows states that possess it tothreaten India's Command, Control, Communica-tions, Computers, Intelligence, Surveillance andReconnaissance (C4ISR) architecture. Also, India isin the process of establishing an independentnavigation satellite network with medium- andlow-earth orbit satellites. Such a network will besusceptible to jamming and ASAT weapons.

The signature lesson for India comes from thehistorical experience of negotiating the nuclearnon-proliferation treaty (NPT) and its subsequentextension in perpetuity. That treaty cast in stonethe legitimacy of the ve nuclear weapons states,and effectively released them from their nucleardisarmament obligation. If India had conducted a

nuclear test in 1968 in-stead of 1974, it wouldwell have been grandfa-thered into the NPT as anuclear weapons state.Because it didnt, India

found itself being eitherforced to give up its nu-clear weapons pro-gramme or sit it out out-side the internationalnuclear mainstream.In order to achieve astrategic parity with theUnited States, China islikely to continue to ad-vance its cyberwar andspace war capabilities.Moreover, Chinesepledges not to prolifer-ate these technologiesare believable to the ex-

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Photo: Phil Champion


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tent they are in its interests. Given the historicalexperiencefrom nuclear weapons, to ballisticmissiles to ghter aircraftit is imprudent to dis-miss the possibility that China will transfer spaceweapons technology to Pakistan. India must tolook at the military uses of space technologies and

be prepared with its own ASAT capabilities in caseof future need.It is in Indias interests to become an active

party to the outer space disarmament agenda andto propose its own draft of PAROS. It is importantfor India to inuence the future treaty negotiationsas an insider rather than become an outsider.

In the run-up to negotiations and the eventualsigning of such a treaty, the United States, Russia

and China will continue to enhance their capabili-ties for the military use in the outer space withoutformally acknowledging the intent. There is stilltime for India to acquire, test, and demonstrateASAT capability. But the window of opportunitywill not last very long in case the United States

decidesnow that it has conducted a test of itsownto agree on signing of internationally veri-able PAROS and PPW treaties. PAROS and PPWcan perhaps preserve the peaceful paradise of theouter space by preventing, or at least postponing,an arms race in space. It is imperative at this stagethat India demonstrate its own ASAT capabilities before multilateral negotiations over PAROS takeoff.

Adityanjee is president of the Council of Strategic Af-fairs, New Delhi.

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India must to look at themilitary uses of space tech-nologies and be prepared

with its own ASAT capabili-ties in case of future need.

Interested in writing for Pragati ? We welcome unsolicited articles and letters

Articles that arrive before the 15th of the month will be considered for publication in the next issueFor more information contact us at [email protected]


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On KosovoIT IS difcult to shake off the feeling that the birth of Kosovo is really the culmi-nation of a series of old andunhealthy trends in globalpolitics. Major powers of Europe seem to relish thefact that for the rst time asmall Muslim majority statehas been carved out inEurope, thus testifying toEuropes progress. But thetruth is that the birth of Kosovo is also a profoundtestament of the failure of the nation state form inEurope to accommodate

ethnic diversity. As MichaelMann, in an important articleon the Dark Side of Democ-racy had noted, modernEuropean history has built inan irrevocable drive towardsethnic homogenisation withinthe nation state.

In the 19th century, therewas a memorable debate between John Stuart Mill andLord Acton. John Stuart Millhad argued, in a text that wasto become the bible for sepa-ratists all over, including Jinnah and Savarkar, thatdemocracy functions best in amono-ethnic societies. LordActon had replied that a con-sequence of this belief would be bloodletting and migrationon an unprecedented scale; itwas more important to secureliberal protections than link ethnicity to democracy. It wasthis link that Woodrow Wil-son elevated to a simple-

minded defence of self-determination. The result, asMann demonstrated withgreat empirical rigour, wasthat European nation states,150 years later, were far moreethnically homogenous thanthey were in the 19th century;most EU countries were morethan 85 per cent mono-ethnic.

Most of this homogeneitywas produced by horrendousviolence, of which Milosevicsmarauding henchmen wereonly the latest incarnation.This homogeneity was com-plicated somewhat by migra-tion from some former colo-nies. But very few nation

states in Europe remainedzones where indigenousmulti-ethnicity could be ac-commodated. It is not anaccident that states in Europethat still face the challenge of accommodating territoriallyconcentrated multi-ethnicityare most worried about theKosovo precedent. The EU isan extraordinary experimentin creating a new form of governance; but Europes`failures with multi-ethnicity

may yet be a harbinger of things to come. Kosovo actsas a profound reminder of thefailure of the nation state inEurope.- Pratap Bhanu Mehta, As easy

as Kosovo , Indian Express, 27Feb 2008

Four stages of a jihadiMR SAGEMAN is a leadingadvocate of what is called thebuddy theory of terrorism.He has spent much time ask-ing why well-educated youngmen, from middle-class back-grounds, often with a seculareducation and wives andchildren, become suicide bombers. He suggests thatradicalisation is a collectiverather than an individualprocess in which friendshipand kinship are key compo-nents.

The process has fourstages. The initial trigger is a

sense of moral outrage, usu-ally over some incident of Muslim suffering in Iraq,Palestine, Chechnya or else-where. This acquires a broader context, becoming

part of what Mr Sagemancalls a morality play inwhich Islam and the West areseen to be at war. In stagethree, the global and the localare fused, as geopoliticalgrievance resonates withpersonal experience of dis-crimination or joblessness.And nally the individual joins a terrorist cell, which becomes a surrogate family,nurturing the jihadist world-view and preparing the initi-

ate for martyrdom. ManyMuslims pass through therst three phases; only a fewtake the nal step.

In his new book MrSageman's sample of mili-tants has grown from 172 to500. He gives more promi-nence to Europe, where, afterthe London and Madrid bombings and other thwartedattempts, a new front-line hasopened up. He devotes achapter to the internet. Cru-cially, he argues that most of today's suicide bombers havelittle or no link with theoriginal al-Qaeda (dubbedal-Qaeda central) but arepart of a broader, more amor-phous phenomenon which hecalls the al-Qaeda socialmovement. Mr Sageman issceptical of the view, whichgathered weight last year,that al-Qaeda central isresurgent. Rather, it is the

mutual attraction of freelance jihadists, outraged by the Iraqwar and increasingly mobi-lised online, which shouldworry us most.

- How jihad went freelance , TheEconomist, 31 Jan 2008

Maoists strike in BhutanTHE ORCHESTRATED bomb blasts that detonated onMonday in the capital of Thimphu and three otherlocations across Bhutan are apowerful reminder of thesimmering refugee problemthat has long plagued theBhutanese government.

[...the explosions] were

suspected to be linked to oneof three militant organiza-tions based in NepaltheBhutan Tiger Force, the Bhu-tan Maoists Party and theCommunist Party of Bhutan.- Mohan Balaji, Bombs in Bhu-tan stir refugee crisis , AsiaTimes Online, 23 Jan 2008

FILTER

9 No 12 | Mar 2008

Essential readings of the month

Do you have some-thing for FILTER ?

If you have a journal articleor paper that you think yourfellow readers might beinterested in, please email itto us [email protected]

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THE BUDGET Session of Parliament is scheduled to begin on February 25th andend on May 9th.

The Lok Sabha and RajyaSabha are scheduled to be insession for 35 sittings with a 3week recess between March21st and April 14th.

The standing committeesmeet during the recess toexamine the demands forgrants (the expenditure budget) of each ministry. Thediscussion on the budgetaryproposals and voting willtake place in the second partof the budget session.

Though the main focus of the session will be on thenancial matters, other Billsare also introduced and con-sidered.

The Cabinet has recom-mended that the MaternityBenet (Amendment) Bill betaken up for considerationand passing. This Bill raisesthe maternity benet from Rs250 to Rs 1000, and permitsthe central government toperiodically revise this up toa maximum of Rs 20,000.

The National Commis-sion for Enterprises in theUnorganised Sector (NCEUS)recommended two Billsoneeach for agricultural and non-agricultural sectorsto pro-vide specic benets toworkers. Following this, thegovernment introduced TheUnorganised Sector Worker

Social Security Bill, 2007 .However, this Bill differssignicantly from thosedrafted by the NCEUS. Un-like the NCEUS recommen-dations, this does not specify benets. Instead, it provides aframework for formulatingwelfare schemes specicallyfor the unorganised sector. Itintroduces a portable smartcard to be issued for targeteddelivery of benets and estab-lishes state and national levelSocial Security AdvisoryBoards.

Currently, the investiga-tion regarding improper judi-

cial conduct by judges of thehigher judiciary is governed by the Judges (Inquiry) Act,1968. The Act is now pro-posed to be replaced by the

Judges (Inquiry) Bill, 2006 .The Bill establishes a National Judicial Council (NJC) toconduct inquiries into allega-tions of misbehaviour orincapacity by judges. TheNJC consists of the Chief Justice of India, two SupremeCourt judges, and two HighCourt Chief Justices. This Billenables any citizen to com-plain against improper con-duct by a judge. The NJC

may recommend removal of the judge or minor punitivemeasures. A judge may ap-peal a decision by the NJC inthe Supreme Court.

Over 25 million cases arepending in the district andthe subordinate courts. Thegovernment introduced theGram Nyayalayas Bill, 2007 with the objective of improv-ing access to justice. The Billestablishes gram nyayalayas atthe level of the intermediatepanchayat (roughly corre-sponding to taluk/block),which will be the lowest judi-cial court and shall be headed by a nyayadhikari with mini-mum qualication of what isrequired for a rst class mag-istrate. These courts shallhave exclusive and original jurisdiction over certain civiland criminal disputes (inwhich the maximum pun-

ishment is imprisonment of one year).

The Micro FinancialSector (Development andRegulation) Bill, 2007 seeksto promote the sector andregulate micro nancial or-ganisations (MFO). An MFOis any organisation that pro-vides micro nance services,and would include societies,trusts, and co-operative socie-ties. The Bill sets the maxi-mum amount of nancialassistance an MFO can pro-vide to clients at Rs 50,000 perperson for consumption/livelihood purposes, and Rs

150,000 for housing. The Na-tional Bank for Agricultureand Rural Development(NABARD) is responsible forregulating the micro nancialsector. The Bill also requiresNABARD to create a MicroFinance Development andEquity Fund and use fundscollected to provide nancialassistance to an MFO,. (SeePragati, No 6 | Sep 2007 fordetailed analysis)

The Information Tech-nology (Amendment) Bill,2006, amends the InformationTechnology Act, 2000. The Act

provides legal recognition toelectronic commerce transac-tions, allows electronic lingof documents, and penalisescomputer related crimes.

In 2005, the governmentconstituted an expert commit-tee to review the IT Act. TheInformation Technology(Amendment) Bill, 2006 in-corporates some of its rec-ommendations. It replaces thephrase digital with elec-tronic in order to make theauthentication of electronicrecord technology neutral. Italso provides for the protec-tion of sensitive personaldata, limits the liability of intermediaries, and estab-lishes an examiner of elec-tronic evidence.

The Bill also speciespenalties for the transmittingoffensive or pornographicmaterial electronically. Inaddition, the Bill includes

identity theft and recordingor transmitting nude imagesof a person without his per-mission as punishable of-fences.

The Forward Contracts(Regulation) AmendmentBill, 2006 amends the For-ward Contracts (Regulation)Act, 1952. Contracts in whichthe delivery of goods andpayment of price takes placeafter more than 11 days arecalled forward contracts.This is now being changed to30 days. The Act establishedthe Forward Markets Com-mission (FMC) to regulate the

forward markets in com-modities and to prohibit trad-ing in options. The Amend-ment Bill changes the role of the Forward Markets Com-mission (FMC) from a gov-ernment department to anindependent regulator.

The Bill also enables trad-ing in commodity derivatives(including options). Citingthe growing market and needto upgrade the legal andregulatory system in thecommodity futures market,the government recentlypromulgated the ForwardContracts (Regulation)

Amendment) Ordinance,2008. (See related article onpage 17 of this issue)

The Limited LiabilityPartnership Bill, 2006 createsa new type of partnership inIndia. Unlike a partnershiprm, the liability of its part-ners will be restricted to theamount they have invested inthe rm (similar to a limitedliability company).

The Foreign Contribu-tion (Regulation) Bill, 2006 regulates the acceptance andutilisation of all foreign fundsthrough donations, gifts, orgrants. The Bill replaces theearlier Foreign Contribution(Regulation) Act, 1976. TheAct prohibits certain organi-sations and individuals fromaccepting foreign contribu-tions. In addition, this Billalso forbids organisations of a

political nature and electronicmedia organisations fromaccepting foreign contribu-tions. The Bill requires everysuch entity to renew its regis-tration every ve years. Italso introduces operationalrequirements, such as a capon administrative expenses.

Among the 71 bills stillpending in Parliament. Someof these may be taken upduring the session for consid-eration and passing.

Compiled by Sarita Vanka, ana-lyst, PRS Legislative Research(prsindia.org)

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PUBLIC POLICY

Minimum government,maximum governanceThe Gujarat model of governance holds lessons for the rest of IndiaMUKUL G ASHER

GUJARATS SOCIO-ECONOMIC developmentover the last several years has been favourablyassessed by nearly all objective researchers, do-mestic and international. The Reserve Bank of In-dia, the Planning Commission, the Rajiv GandhiInstitute for Contemporary Studies and DeutscheBank are among those that have ranked it amongthe top states in socio-economic and infrastructureperformance.

The state achieved an average annual growthrate of 10.7 percent between 2002 and 2007, wellabove the national average. The Planning Com-mission has set a target of 11.2 percent growth perannum during the Eleventh Plan (2007-2012).

There is widespread consensus that India isexperiencing a governance crisisreected in thepoor quality, low accessibility and economic inef-ciencies associated with goods and services pro-vided by the public sector. It is also reected in theinattention to the internal security. It is well knownthat anti-social elements, regardless of the com-munity they come from, primarily victimise mem- bers of their own community. All communitiestherefore appreciate effective provision of internalsecurity. The importance of this factor should not be minimised economically, socially or politically.

In 2005, India Today , ranked Gujarat as the safeststate, even after considering the 2002 riots whichresulted in considerable human suffering and sig-

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nicantly tarnished its reputation. Ahmedabad,the seventh largest city in India, has the lowestcrime rate in tier-one and tier-two cities accordingto the National Crime Records Bureau (NCRB).

There is however still much scope for improvingthe feeling of safety among citizens. Greater pro-fessionalism of lower level ofcials in the govern-ment in general, and in security apparatus in par-ticular, needs to be developed through trainingand stricter enforcement.

A major consequence of the governance crisishas been that the average Indian households budget outlays are not being translated into com-mensurate welfare gains, while adversely impact-ing the States legitimacy.

Gujarat has consciously embarked on being anexception by achieving a better balance betweenprivate goods on one hand and government serv-ices, including internal security, on the other. As aresult, for comparable incomes, welfare levels of households in Gujarat can be expected to be higherthan the all-India average; which has increased thelegitimacy of the State. Yet there is lack of curiosityon part of the media, think-tanks, self-styled ex-perts and policy makers across the country to ana-lyse Gujarats socio-economic policies, its govern-ance characteristics, and to draw possible lessons.

There is much in the Gujarat model of governancethat can be applied across India, albeit to suit theparticular context and conditions.

The essence of the Gujarat modelThe essence of the Gujarat model of governance

comprises of three CsCompetence, Corruption-aversion, and Consistency, and two PsPerformance-orientation and Public-private part-nership management skills.

Competence. The governance challenges facingmodern societies are complex. Competition forallocation of economic activities and for utilisingthe knowledge and talent of individuals is intense.Competence must be a key requirement in select-ing ministers, party candidates, bureaucrats, and

managers of public agencies and enterprises. Mereloyalty to a personality or a party should not be asubstitute for competence.

The Gujarat government appears to have rec-ognised the need for competence. It has madesome progress but this needs to be sustained,

broadened, and institutionalised. For instance,competent governance has led to its public andprivate sector companies contributing to nearly 25percent of Indias Certied Emission Reduction(CER) under the Clean Development Mechanism(CDM). This non-conventional revenue source hasa positive impact on the states business climate asit reduces reliance on conventional taxes and fees.

It is not a coincidence that those who derideGujarats impressive developmental record showlittle enthusiasm for giving high priority to profes-

sional competence in public service. The SecondAdministrative Reform Commission (ARC) shouldsuggest concrete measures to address this issuenationally.

Corruption-Aversion. This characteristic has beenmost effectively summed up by Chief MinisterNarendra Modis apt and highly credible phasekhato nathi, khava deto nathi.

It is difcult to convey the emotional strengthof this Gujarati phrase in English, but it connotesstrong aversion to being involved in corrupt prac-tices, nor being surrounded by those who are cor-rupt. Corruption is usually dened as using posi-tion of public trust for private monetary and othergains.

During its campaign for the December 2007elections, the Congress party promised to with-draw criminal cases against nearly 160,000 farmersin Gujarat for the theft of electric power. A partywith such cavalier attitude to power theft wouldnd it difcult to safeguard the integrity of scalinstitutions, and be effective in translating budget-ary outlays into outcomes.

In contrast, the Modi government has been ef-fective in sharply reducing power theft (200,000illegal power connections have been cut), and pun-ishing those who are guilty. It has also been rela-tively successful in introducing economically sen-sible cost recovery and user charges such as forwater, electricity and healthcare.The state electricity corporation has been turnedaround in three years from a decit of Rs 40 billionto a surplus of Rs 600 million. Its measures, involv-ing reasonable payment, but high degree of reli-ability deserve encouragement from the wider so-ciety as this will bring about greater accountabilityand transparency to the political system as awhole. It also preserves individual dignity, self respect and independence.

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balance between privategoods on one hand and gov-ernment services, on theother


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Public sector goods and services provided atuniform zero (or near-zero) price have proven to be expensive, unreliable for individuals and inef-cient and inequitable for the economy. Such pric-ing results in wastage of scarce resources (for ex-ample, irrigated water, electricity, and fertilisers);prevents quantitative and qualitative expansion of services; and creates distributional coalitions lead-ing to perverse political dynamics.

There are two check-posts on either side of theGujarat-Maharashtra border, with the same number of trucks passing through both check-posts.Gujarats collection of taxes from its side is Rs 2 billion higher than that of Maharashtra. Clearly,corruption aversionand competenceshowspalpable benets.

Consistency. This characteristic requires thatpolicy decisions, administrative actions andpolitical pronouncements be consistent with eachother. Lofty pronouncements, without any effort toimplement them in a result-oriented manner, are

no substitute for credible achievements.At a national level, one of the many examplesof inconsistency (and incompetence) is provided by the Rs 120 billion National Rural EmploymentGuarantee Scheme (NREGS). The Controller andAuditor General of India (CAG) has found that barely 3.2 percent of the registered householdscould avail the promised 100 days of employment, between February 2006 and March 2007; with theaverage employment period being 18 days. It alsocites many instances of misspending and wastage.Yet, the central government has decided to imple-ment the NREGS on a nation-wide basis fromApril 2008.

The social returns of the NREGS are low, but itsopportunity costs are high. This suggests that the

same resources couldprovide more desir-able results if spent inan alternative way oron other schemeswhich create employ-

able human skills andproductive physicalcapital. Failure torecognize opportu-nity costs of theNREGS demonstratesprofound economicilliteracy and inexi- bility among the poli-cymakers. The cost of such behaviour is in

large part borne bythe common man inwhose name this and

other similar schemes are presumably being im-plemented.

In sharp contrast, Gujarats Jyotirgram PowerScheme ensures 24-hour, three-phase domesticpower supply to all 18,000 Gujarat villages, em-powering them to pursue diverse livelihoods. Ithas provided Narmada river water to traditionallywater starved Kutch (though currently only fordrinking); and brought about reduction in backlogof legal cases through devices such as night courts.

Its Beti Bachao Aandolan(save the girl child) hashelped increase the female child to male child sexratio from 802 in 2001 to 870 in 2007. The NirogiBalak (disease free child) scheme to be launched inMarch 2008, will further improve social indicators.

Performance. Gujarats socio-economic, infra-structure, and internal security achievementswould not have come about without insistence onperformance at all levels. But this rst requires anenabling environment, including investments in

technological and organisational capabilities. Gu- jarat has been building such capabilitiesfor in-stance, by installing video conferencing facilitieswith district collectors and retraining three thou-sand ofcials to use Indias rst integrated nan-cial management solutions system.

Accountability for performance is also needed,not just by government organisation, but also bythe corporate sector, the civil society groups andthe general public. There is scope for further pro-gress in Gujarat in this area.

Public-private-partnership management skills.These are important for two reasons. First, bothmarkets and governments are social institutions,and therefore have strengths and limitations. In-stead of endlessly debating the merits of each on

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ideological grounds, there should be awarenessthat both are needed in performing a given task.The key is therefore to nd an appropriate balancein a given situation.

Second, partnership implies that each side brings something of value to the activity of enter-

prise. Modern partnerships may involve a mixtureof domestic and international players. This re-quires that the public sector must bring somethingof real and sustainable economic value and shouldmake efforts to continuously enhance its capabili-ties.

The experience of Gujarat during the last dec-ade suggests recognition of both these aspects. Thegovernment has, for example, been involved insuch partnerships in ports and other infrastruc-ture, and in health care (resulting in reduced ma-

ternal mortality). It is promoting knowledge-oriented agricultural practices, a sustainable wayto long-term food security.

Gujarat is nalising a complex and innovativepublic-private partnership with two rms whichwill involve leveraging of its access to coal forpower. Gujarat Mineral Development Corporation(GMDC), will take an equity stake and providecoal to secure exclusive rights to two-thirds of the1750 megawatts to be generated in Chattisgarh.

Gujarat International Finance Tec-City (GIFT), a500 acre Special Economic Zone near Ahmedabad,will include an international market zone, educa-tional zone, and integrated townships. The visionis for the SEZ to be recognised as an InternationalFinancial Service Centre (ISFC). GIFT is targetingdirect and indirect employment of about 1 million;and exports of US$ 3 billion by 2020. It is a jointventure between the public sector Gujarat UrbanDevelopment Company (GUDC), and private In-frastructure Lease and Financial Services (IL&FS).

It will be in the national interest for the statessuch as Maharashtra to demonstrate greater sense

of urgency in constructively competing with Gu- jarat by taking concrete steps to implement devel-opment of Mumbai as an International FinancialCentre.

Mass access to skills development, as beingpractised in Gujarat is essential to achieve theseresults. The examples include promotion of Eng-lish as language to improve employability; requir-ing agricultural scientists from State universities totransfer knowledge to farmers in the eld; andplans for providing broad band access to all thevillages in Gujarat.

Bimal Jalan has argued that the current modelof governance in India is based on ruling rather

than governing mindset. Such a mindset does notrespect the everyday needs of the ordinary citi-zens, nor does it seek to empower them throughskills and freedom to pursue their livelihoods. It isalso not sufciently forward-looking in its visionof Indias role in the global community.

The Gujarat model is based on minimum gov-ernment, maximum governance, while the pre-vailing model is based on the reverse. Gujarathowever, will also need to continue to becomemore procient in pursuing its own model and broaden the support-base for its model of govern-ance.

In his recent book, Billions of Entrepreneurs:How China and India Are Reshaping Their Futures andYours, Tarun Khanna argues that transition of In-dia and China to developed country status willrequire entrepreneurship, by both private sectorand public enterprises; and state bureaucrats andpoliticians. The Gujarat model is consistent withthis requirement, but existing practices are not.

The Gujarat model has a strong claim to bemore relevant for the twenty-rst century India. Its

focus on development, empowerment of individu-als, and internal security benets all communitiesand income groups, and therefore is inclusive inthe correct meaning of the term.

Mukul G Asher is professor of public policy at the Na-tional University of Singapore

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Gujarats focus on development,empowerment of individuals,

and internal security benefits allcommunities and income groups,and therefore is inclusive in thecorrect meaning of the term


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UNION BUDGET 2008-09

Pinnacle of cynicismBack to the bad old days of the 70s and 80sV ANANTHA NAGESWARAN

FINANCE MINISTER Palaniappan Chidambaramwas proud of the fact that he was able to presenthis fth successive budget, matching Dr Manmo-han Singhs record set in the 1990s. The similarity,however, ends there. As P V Narasimha Raos -nance minister, Dr Singheither out of convictionor out of compulsiontried to take India to a newera. This budget takes India back to the days of Janardhan Poojarynance minister in RajivGandhis cabinet in the 1980s.

Mr Chidambaram declared that his govern-ment had continued with the economic reformsinitiated by the Congress government in the 1990s,conspicuously failing to acknowledge the fact thatthe NDA government pursued some bold reforms,at least since 2002. Indeed, a few days before MrChidambarams budget speech, the Central Bu-

reau of Investigation (CBI) found no wrongdoingon the privatisation of the Centaur Hotels inMumbai. It was against stiff resistance from withinand without that Arun Shourie had pursued priva-tisation (and not disinvestment). The Indian Ex-press ran a series of articles in December 2007 onhow well the privatised companies were doing:almost all had become healthier in many respectsand in varying degrees. But the UPA governmenthas resolutely set its face against privatisationitis barely mentioned in public discourse these days.As ostensible reformers, both the Prime Minister

Singh and Finance Minister Chidambaram havefailed to even keep this issue alive in the publicdomain.

The problem in analysing the 2008-09 budget isthat it lacks any sense of philosophical underpin-ning or cogency. It is just a long list of give-awaysprepared with the elections in mind. There is noparticular method in the madness except that ithas been prepared with the elections in mind. Onehas to go a long way backto the seventies andthe eighties to nd parallels. The budget itself brings back memories of Charan Singhs disas-trous budget of 1979 and the loan waiver is remi-niscent of Mr Poojarys loan melas. This one is averitable waiver mela.

Serious commentators cannot evaluate the budget exercise against that objective because the

objective is awed to begin with. An analogywould expose the folly of this logic. If a family hasentrusted its nances to a manager and the man-ager uses the income skilfully to build a mansionfor himself, should the family praise him becausehe has built a good mansion? Similarly, a countrysincome and expenditure are not meant to be slavesto the ruling partys electoral ambitions. So howdoes one evaluate this budget?

The coming weeks will see several analyses of specic measures such as the Rs 600 billion farmloan waiver. In principle, it is hard for anyone todisagree with the argument that poor, distressedfarmers should be helped. The question is howand by how much, and whether the costs of doingso exceed the putative benets. It is anybodysguess if the loan waiver would pass this test.

The real question is if the underlying incomegenerating capacity of the farmer is not enhanced,what happens to his future loan burden? It maynot be the failure of the nance minister but whathas his government done in that critical area? Hasagriculture even got a whiff of even the incomplete

freedom that large sections of the organised indus-try now enjoy in India? Could this money have been put to use for doing any of that?

Asked how the loan waiver would be nanced,Mr Chidambaram shut out criticism by asking the

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public to trust his intelligence that he would comeup with a suitable nancing mechanism. Withouteven questioning his intelligence or personal in-tegrity, basic accounting tells us that if banks areasked to waive loans by the government and thegovernment is the large shareholder in the bank-ing system, it has to provide the backstop. Further,as a shareholder, it must be concerned at theprecedent it sets not only for farmers but also forother borrowers from the banking system in fu-ture.

What then hits the eye is the setting up of anon-prot corporation for skills development. Theallocation for this is a not insignicant Rs 150 mil-lion. Of course, not all of this would come from thecentral government. Yet, the mind boggles at the

sheer wastefulness and needlessness of this. Allthat India needs is a sound education system andadequate number of institutions to impart variousskills the economy needs. The private sector isready to do that. But the government is not only been unwilling to let go but has set itself on adamaging course. The effects of this will be felt fordecades.

But beyond specic issues, the psychologicaldynamics behind the budget and the precedent itsets for the future governments are more disturb-

ing.A decade ago, the same Mr Chidambaram pub-lished a white paper on subsidies. It divided sub-sidies into merit and non-merit categories. Theinitiative went nowhere. It is doubtful if there wasever a worthwhile discussion by political partieson that white paper.

Soon after that he came up with his dream budget the impact of which was muted, naykilled, by Sitaram Kesari, the then Congress party

president. But Mr Chidambaram has since thenmorphed into a politician sold on the merits of nancial inclusion. Again, nothing wrong with theidea but it is the execution that is important.

In this recent innings, he has made sure thatrevenue gathering was cranked up in many

wayssome good, some extortionist and sometruly bizarre. Bibek Debroy aptly commented thatnot a single budget of the UPA government movedthe reform agenda forward and that there was nolegacy to speak of. Thats not entirely true. MrChidambaram's contribution in this innings has been his revenue gathering zeal. Future nanceministers mightunfortunatelynd it ratheruseful.

The seeds have been laid for some bad scaltidings in the coming years, especially if we get

hodgepodge coalition governments that last one ortwo years. For if Dr Singh and Mr Chidambaramcould abdicate scal responsibility so readily,lesser mortals would nd it even easier to do so.The BJP reaction said it all. It called the packagefor farmers too little too late. The brazenness of ithas shocked the party into totally forgetting re-sponsibility in scal policy. Once it recovers fromthe shock, it too would seek to emulate and outdo.

An unstable coalition would always have aneye on elections. Hence, upcoming budgets in thenear-term could be election year budgets in a row.In a recent note to clients, Goldman Sachs TusharPoddar, referring to Indias scal policy, wrote thatit was all downhill from here. He may well havegotten it dead right.

Intelligent men with good intentions either staythat way or they morph into shameless self-interest seekers, impacted by what others do. Or,they morph into cynics because whatever theytried did not work. In the case of Mr Chidamba-ram it is the latter.

This budget is the pinnacle of that cynicism.

But future nance ministers could make this ap-pear as an exercise in scal prudence.

V Anantha Nageswaran is head, investment research,Bank Julius Baer & Co. Ltd in Singapore.

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The seeds have been laid forsome bad fiscal tidings in thecoming years, especially if

we get hodgepodge coalitiongovernments that last one ortwo years.


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AGRICULTURAL MARKETS

Futures for farmersGood futures markets are essential for farmers welfareKARTHIK SHASHIDHAR

THE STEEP rise in global food prices is worryingpoliticians and policymakers. The absence of sig-nicant improvements in the area under cultiva-

tion and technological breakthroughs has put astrain on the available land. Moreover, skewedincentives and regulations in the United States andEurope have led to the diversion of large tracts of cultivable land to producing bio-fuels.

In this context, it is important that Indias re-sources are used optimally without wastage.However, in recent times, prices of commoditiessuch as vegetables have indicated unplanned cul-tivation. On a number of occasions, high prices fora certain commodity during one growing seasonhas led to a glut in the market in the next season.To counter the consequential fall in prices, therehave been several cases of farmer associationsdumping their produce in an attempt to halt thedecline. This would have been preventable if sow-ing decisions were better planned.

It is a well-known (but also unfortunately muchignored) fact that providing cultivators withtimely information on price trends, longer-termweather forecasts and market conditions is impor-tant. But as a mechanism for decentralised plan-ning of agricultural commodities, the role of fu-

tures trading has received much less attention. Futures trading in India

The modern history of futures trading in India began in the year 1875 with the formation of the

Bombay Trade Association Limited. The rivalBombay Cotton Exchange Limited was formed in1893. In the rst part of the twentieth century, fu-tures trading quickly spread to commodities suchas wheat, jute and sugar and was ourishing at thetime of Independence.

In 1952, the Forward Contracts (Regulation) Act(FCRA) was passed which led to the formation of the Forward Markets Commission (FMC), whichremains the regulator. Options trading wasdeemed to be speculative and banned. Also thecentral government got powers to ban or suspendfutures trading in certain commodities. By the1970s, futures trading in most commodities had become inactiveeither suspended or prohibited.

In 1980, the Khusro Committee recommendedreinstatement of futures trading in a number of

commodities. Then, in the 1990s, following liber-alisation, futures trading was introduced in ninecommoditiesincluding silver and onionsand afew existing markets were upgraded. Following anotication by the government in 2003, futurestrading was permitted in all commodities.

Last year, however, speculative trading in thefutures markets was blamed for ination, and thegovernment banned trading in rice, wheat, tur andurad futures. A committee headed by Abhijit Sen, amember of the Planning Commission, was taskedwith examining whether futures trading causesprices to rise. It found no conclusive evidence of futures markets causing ination.

Meanwhile, the government recently passed anordinance amending the FCRA. This amendment,among other things, gives full regulatory powersto the FMC, enhances provision for penalties andpermits trading in options. It is likely to be ratiedin the current session of Parliament.

During nancial year 2006-07, the total volumeof futures traded in India was Rs 36 trillion, a sig-nicant increase from Rs 1.29 trillion in 2003-04.

This gure is expected to touch Rs 74 trillion in2010. The FMC, the Reserve Bank of India and theSecurities and Exchange Bureau of India are dis-cussing a proposal to allow banks and mutualfunds to participate in commodity exchanges.

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Apart from increasing volumes, these players willadd much-needed liquidity into the system.

Currently, about half of all futures trading inIndia is concentrated on bullion (gold and silver).About 20 percent of the trades are in other metalsand oil, with the rest being in agricultural com-

modities.

Futures as a tool for decentralised planningHow do futures help farmers? There are two

basic concepts which are at playprice as an indi-cator, and futures as instruments to hedge and lock in prices.

What typically happens today is that the farmerlooks at current (spot) prices in order to makesowing decisions. Now, given the vagaries andcycles in the agriculture business, spot prices may

not necessarily be a good indicator of the pricesthat are going to prevail at the time of harvest.Recently, corporate initiatives by companies

like ITC and the DCM group have provided farm-ers with valuable information regarding costs andcurrent market prices. However, the key input thefarmer needs is the expected price of the crop atthe time of harvest. If this information were to beavailable, it would be possible to choose the cropthat would yield the highest prots at that time.Moreover, the mechanism of futures markets can be used to lock in future revenues, and thus pro-tect the individual farmer from price variations.

Suppose a farmer wants to grow tomatoes to beharvested in November. He looks at the Novemberfutures prices for tomatoes, and checks if its goodenough for him to make a reasonable prot. Then,to lock in the revenues for these tomatoes, he goesto the futures markets and sells the expected number of kilograms of future tomatoes.

Apart from xing his selling price, he sends outan implicit signal to the other farmers that he isgoing to produce that many tomatoes. Once a

number of farmers have signalled similarly, theprice of tomato futures for November is likely todecline, and other farmers, sensing that they areunlikely to make much out of tomatoes, couldchoose to grow chillies instead. This way, futurestrading acts as an early signalling mechanism andfarmers end up using their land efciently.

Barriers & restraints

But a number of intersecting government poli-cies prevent the farmer from beneting from fu-tures markets. First, in a large number of states inIndia, there are government-mandated monopoliesin procurement due to the archaic AgriculturalProduce Marketing Commission (APMC) Act. In2003, the central government issued a draft

amendment of this act in order to open up thesupply chain to competition. However, a numberof states are yet to implement this. Due to the mo-nopoly, farmers are prevented from selling theirproduce to anyone other than the designated buyer, and hence cannot participate in futures

markets. Moreover, prices may not reect the ac-tual demand and supply situation.

Second, futures trading for agricultural com-modities is restricted to durable commodities such as cereals, pulses, oils, onion and potatoes.The lack of good cold chain infrastructure has beena major stumbling block to introduction of deriva-tives trading in perishables, as reliable delivery is aproblem. The challenge is in developing a goodsystem of cold storage and cold transportation.

Third, for most commodities, large lot sizes

prevent individual farmers from participating di-rectly. The government has prescribedostensiblyto protect small investorsthat the minimumvalue of a derivative contract in India should be Rs

200,000. In order to get around this barrier, theFMC recommends farmers to form associationsand co-operatives, and participate in the deriva-tives markets through them.

Finally, currently India is not one single market.Various states have octroi and entry taxes, prevent-ing free movement of goods. There is also the dra-conian Essential Commodities Act which allowsthe government to place large-scale curbs on the

movement of goods. Indeed, the unfortunateandlong neglected truthis that there is no free tradewithin India.

Agricultural land is an extremely scarce re-source, and it is critical that it is used most ef-ciently and in a planned manner. Central planningfailed. But its shadow continues to haunt the coun-tryside. It is now time to take planning to the low-est levelsto that of the individual farmerinorder to maximise efciency. All hurdles, infra-structural and otherwise, need to be cleared in or-der to enable this.

Karthik Shashidhar's interests include domestic cricket,urban infrastructure and restaurants. He blogs at Perti-nent Observation (skthewimp.livejournal.com) .

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POLITICS AND POLICY

Advanis economic agenda The importance of getting it right ATANU DEY

LAL KRISHNA Advani, the leader of the opposi-tion in the Lok Sabha, addressed the 80th AnnualGeneral Meeting of the Federation of the Indian

Chambers of Commerce and Industry (FICCI) inNew Delhi on 15 February 2008. His speech can beinterpreted as an important speech laying out thecontours of the Bharatiya Janata Party (BJP) policyagenda.

He argued that the BJP has had a consistentpro-enterprise economic philosophy:

I can, in all humility, claim that ours is oneparty that has consistently followed a policy of supporting private enterprise and voicing ouropposition to the license-quota-control regime

even in those years when there was hardly anydebate on economic reforms....It has always been our belief that the dharma (duty) of therajaor the democratically elected governmentin our timesis to govern, whereas the dharma of the community engaged in business, com-merce, industry and agriculture is to createwealth, generate gainful employment and fulllthe material needs of society. A proverb inHindi says, Raja Bane Vyapari, Praja Bane Bhi-kari (People become paupers when the rulershandle business.)

It is heartening to note that Mr Advani holdsthat the government should not be in business and businesses should not be in the business of gov-ernance. The disregard of this basic principle bypowerful people in the government was wilful andmotivated by the simple lust for power. Theyknew that it would impoverish the nation but thatwas not their primary concern. Perhaps they didnot deliberately seek to impoverish the nation;they just had to accept the resultant poverty as anunintended consequence of their own self-interest.

Mr Advani goes on:

To be sure, the special situation after Indiagained independence, and the preceding centu-ries of de-industrialisation under foreign rule,necessitated the state to establish big industries

and run all the utilities. Even today, it is neces-sary for the state to stay engaged in select stra-tegic industries, and ensure the provision of social and economic infrastructure.

As he correctly points out, it is important toremember that the British systematically de-industrialised India.

But what does the state to stay engaged in se-lect strategic industries mean? Does it mean thatthe state has to regulate them? Yes, because thereare externalities that need to be compensated forand which can only be done through regulation.Does it mean that the state may have to create theconditions that would encourage competition in

those sectors? Yes, because under certain condi-tions, monopolies can grow to the detriment of social welfare. Does it mean that the state shouldlend a helping hand when the industries face con-ditions that are recognised sources of market fail-uressuch as very high xed costs, credit con-straints or incomplete insurance markets? Yes,there is justication for the state to intervene tocorrect for those market failures and then let themarket grind out the solution.

What cannot be supported is for the state to getinto the actual business of providing goods andservices. The state should not be in the business of running utilities, or railways, or airlines, or baker-ies.

But what we saw from the 1960s onwards isthat state control became dogma, red-tapism setin, entrepreneurship was frowned upon, withthis came the culture of political and bureau-cratic corruption, and the Indian economy suf-fered badly.

Our roads remained narrow. Our ports re-mained small. Our airports, even in big cities,

remained archaic. We did not expand or mod-ernise our railway network adequately. We didnot take steps to remove power and water scar-city to meet the needs of our growing popula-tion, as also the growing needs of our agricul-

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ture and industry. Hundreds of our irrigationprojects suffered from cost and time overruns.We did not improve our colleges and universi-ties to widen the access to quality higher educa-tion and to create opportunities for well-educated Indians within India. Our system of primary education and primary healthcare suf-

fered badly, as a result of which India, eventoday, is stuck with a very unfavourable rank-ing in the UN Human Development Index.

The negative effect of all this was not only inthe economic sphere. It was also psychologicalin nature. Tens of thousands of young, ambi-tious and talented Indians started to believethat they could realise their dreams only bygoing abroad. There was also a subconscious belief that anything of quality, anything state-of-the-art, has to be of foreign origin. Hence thecraze for imported goods and a tendency toassociate inferiority with Indian goods.

Well, it is not a psychological afiction to judgeinferior goods as inferior. Most goods produced bythe socialist license quota permit quota control rajwere, in fact, inferior.

We must develop a long-range vision for Indiasdevelopment

...It is the duty of Indias political, economicand intellectual elite to look several decadesahead. In a world that is rapidly changing, weneed to gain a good understanding of Indiasneeds, challenges and opportunities from a fu-

ture, strategic perspective. The tendency, espe-cially in the political and governing class, toonly think of the near-term in ofce or of thenext election, can do no good to India.

I urge the business community also to de-velop a long-term perspective for themselvesand the nation.

It should not be for the government or anyoneelse to tell businesses what they should do. It nor-mally pays businesses to take the long-term view.Those that do, succeed in the marketplace; thosethat dont, get weeded out. Telling them that thefuture matters for them is needless and vacuousmoralising. It is bad enough if this stops at the rhe-torical level, but there is a danger that left unchal-lenged, such moralising can nd its way into gov-ernment policy.

Later Advani goes on about the growing ine-quality:

How can we tolerate this reality? No, wecannot. We must not. The BJP and the NDAcertainly will not. We shall take bold and inno-vative measures to ensure that wealth is dis-tributed across regions and across social classes.Indeed, I urge the business community it-selfand also the mediato ponder over howwe can make the current growth story moreequitable and sustainable. I seek your sugges-tions in this regard.

An attitude that seeks answers to how a prob-lem might be solved instead of declaring the solu-tion must be appreciated. Now, staggering eco-nomic inequality is a moral disgrace. It should not be tolerated. But what are the reasons for the ine-

quality and what does one propose to do about it?One way is redistributionand to do so by takingaway from the rich and giving it to the poor.

But isnt it interesting that people who proposeredistribution of wealth as a means of eradicatinginequality do not generally set the example by re-distributing their own wealth. They are alwaysproposing to redistribute other peoples wealth.Charity, it appears, does not begin at home forthem.

Moving on, Mr Advani denes what a futureNational Democratic Alliance (NDA) governmentwould concentrate on: Good governance, Devel-opment, and Protectionor GDP. It is the usualrhetoric about moving from swaraj (self-governance) to su-raj (good governance). Heclaims that the NDA had followed that principleduring its six-year tenure and Narendra Modisperformance in Gujarat has only strengthened theBJPs conviction that that is the way forward.

Mr Advanis speech is denitely more palatablethan Prime Minister Manmohan Singhs speech tothe Confederation of Indian Industry (CII) on cor-

porate social responsibility was a few months ago.This time around, the NDA may have a morepromising public policy agenda considering thatMr Modi will have a greater inuence in framingit.

As many had predicted, the UPAs fth andnal budget leaves behind an unhappy legacy. Be-cause it will attempt to appeal to the UPA. The budget was short-sighted and damaging to theprospects of long-term development. It failed tonotice that Indians are moving ahead despite the

best efforts of the rulers to keep them dependenton the government and in poverty.The challenge for the next government has

been all the more difcult by the UPAs (hopefully)nal act of cynicism and irresponsibility. There ismuch in Mr Advanis speech that gives reason forhope that the NDA is on the right track. It wouldserve the nation well if Mr Advani can insist uponthese policies whether or not the NDA is elected topower.

Atanu Dey is chief economist at Netcore Solutions. Hisblog on Indias development is at deeshaa.org

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BOOK REVIEW

The confessions of a retailerRAVIKIRAN RAO

ONE READS the autobiog-raphy of one of India's mostintriguing businessmen notfor its literary quality, butfor the insight into the mindof the writer. Kishore Biy-ani's 268 page middle-of-career memoir It happened inIndia (co-written with Di-payan Baishya) makes up inthe insight department what it lacks in the literaryquality department. The rst 180 pages, the bulk of the book, have a raw, "straight from the gut" qual-ity about them. They deal with the rise of his retailchain. The last 120 pages deal with his ongoingproject to turn his company into a conglomer-atethe Future group that encompasses suchdiverse businesses as consumer nance and brand-ing. These seem to have been essentially copiedfrom marketing brochures. This contrast is illumi-

nating.It is important to avoid the clich "rags-to-riches" while writing about Mr Biyani's rise. Whilehe did indeed rise to riches from relatively modestorigins, being born to a conservative textile-trading South Mumbai Marwari family wouldhave given him a better start than all but a minus-cule proportion of India's population. The sectiondealing with Mr Biyani's rise gives the picture of aman impatient with his family's conserva-tismboth in business and in the social sphere.

The reader would be justied in being sur-prised to learn of this impatience with tradition,considering that Mr Biyani has built his entire em-pire on the proposition that he is more in tunewith India's mind than his competitors. One way

to resolve the confusion is torealise that impatience withtradition does not mean re-volting against it. It meansintroducing the Disco-Dandiya , a variant of thetraditional dandiya , as MrBiyani apparently did to hislocality. It also means thatwhile he was impatient

with his family's conservative business practices,they ultimately went along with him. His familymembers are now in key positions in his company.

Mr Biyani's rst successesPantaloon and BigBazaarwere a matter of using his character traitsas strengths, and also of right timing. He saw, be-fore others did, that "India two" was hungry forthe high-quality goods that hitherto only "Indiaone" had access to, at reasonable prices. His impa-tience meant that he did not waste too much time

in striking the real estate business deals that werecrucial in ensuring that his stores were in the rightplace to attract the rapidly expanding ranks of themiddle class in the late 1990s. Mr Biyani describeswith a fair amount of pride how he never haggledwhen closing a deal. He gave one chance to theseller or potential landlord to quote his price. If heliked it, he accepted immediately. If he did not, hewalked away. Presumably, with this reputation,those unwilling to risk losing a business partner asvaluable as Mr Biyani would rush to quote their best price to him.

Mr Biyani also famously achieved success withthe "bazaar model" in Big Bazaar. Most retail play-ers assumed that customers would be looking forthe antiseptic environment that they would nd inWestern malls. Mr Biyani realised that the "Indiatwo" shopper had never been abroad, and that herreferent would be chaotic street bazaars He stroveto replicate this model, with crooked lanes insteadof long aisles, unpacked vegetables which the cus-tomer could touch and feel before buying and aconstant din of announcements of great deals go-

ing on somewhere in the shop. This model workedvery well for himthe book begins to scenes of chaos as customers crowd at various Big Bazaaroutlets all over the country to take advantage of the Republic Day sale.

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21 No 12 | Mar 2008

Review

It happened in India: The Story of Pantaloons, Big Bazaar, Central andthe Great Indian Consumer

by Kishore Biyani and Dipayan BaishyaRupa, 268 pages, 2007

Biyani saw, before othersdid, that "India two" washungry for the high-quality

goods that hitherto only "In-dia one" had access to, atreasonable prices.


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Quite clearly, Mr Biyani understands Indiaorat least "India Two", the one that he grew up with.He also has the business acumen to take advan-tage of the opportunity that the rise of this classhas presented. The challenge is to institutionalisethis knowledge so that it is not conned to hishead, but spread within the company. The chal-lenge is also to put in place the management struc-ture and strategic vision that will enable him torun the conglomerate that he is creating. How is hedoing on those counts?

On the face of it, very well. His retail chain nowencompasses Pantaloon, Big Bazaar, Central (megamalls designed to be the central attraction of a city)Ezone, the electronics shops and Home Town, forhome furnishing. They are all expanding at a breathtaking pace and soon every urban Indianwould have shopped at one of Mr Biyani's storesat least once. He has also set up Future Money toprovide nance to buyers, and his umbrella Future

Group is expected to go public any time soon.Most intriguingly, he has also mentored Idiom, adesign shop that seeks to create a new "Indian id-iom", which he is now using for all his brandingand advertising needs.

But still, there are troubling signs that his impa-tience and his insistence that he is breaking a newpath may cause problems for him. The book de-scribes one bad decision. The store manager hadstocked up on white shirts, assuming that theywould sell briskly. After all, everyone has a whiteshirt. Unfortunately, it turned out that the target buyers used Mumbais crowded local trains, andthey did not wear too many white shirts as theywould get soiled quickly. Ultimately, they had toliquidate the stock at a loss.

Mr Biyani uses this as an example of how im-portant it is to make mistakes and learn fromthem, claiming that "No management book, con-sultant or B-School would have given us thisinsight". Really? Wouldn't standard-issue researchinto the buying habits of his target segment havetold him this? He also tells us that letting the storemanager make the decision to sell at a loss was anextraordinarily empowering action for the latter.But unless one lets lower level managers maketactical decisions, how does one run a company aslarge as Future Group?

Mr Biyani is aware that as his role changes, anew management style is expected of him. But hisimpatience with existing management thinkingleads him on a search for new paradigms, and hedwells for some time on "Design based manage-ment". It is not clear why the existing tried andtested practices are inadequate, or where this newparadigm is superior.

Mr Biyani is a pioneer in applying insights

from Indian buying habits to retail. But othershave understood the mind of the Indian consumer before him. Hindustan Unilever has extraordinaryinsights into Indian buying habits, including ruralcustomers. Pepsi and Coca Cola, after initial hic-cups, have done quite well in that regard. The ten-sion between hands-on management and strategicdirection is not unique to India, but a problemfaced by growing companies everywhere. Mr Biy-ani would stand to benet if he picked up anotherIndian trait, that of learning from others.

Ravikiran Rao earns his living as a wage slave to anAmerican multinational and is an active observer of socio-economic trends in his spare time. He blogs atThe Examined Life (www.ravikiran.com)

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Retail wisdom


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