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w w w. f i n a n c i a l e x p re s s . c o m

l THURSDAY l MARCH 14 l 2013

Banks need directors on discoms, and must be tough

Powering ahead

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ith 5 of the 7 major states that account for the bulk of power sector losses in various stages of getting on board the government’s ambitious financial restructuring plan, the chances of success look better than at any time in the past—Punjab, sadly , has opted outandtheOrientalBankof CommercechairmanisonrecordsayingRajasthan and Uttar Pradesh are yet to confirm their final participation. What makes the chances of success better than, say, at the time of the Montek Singh Ahluwalia panel’s one-time settlement of dues a decade ago, is that this time around, the banks are going to do the monitoring. If banks show more resolve than they have shown in the past, as in the case of Kingfisher for example, they will nominate directors on the boards of the state electricity boards, and they will drive change. The government alsohasotherchecksandbalancessuchastheneedtoputprepaidmeters foralllargeconsumersaswellasdefaultersanddeadlinesfortariff hikes, but driving meaningful change in a sector where losses have risen from R26,400 crore in FY09 to R70,000 crore in FY11 and a projected R1,16,000 crore in FY13 (13th Finance Commission) is going to take some doing. It is true most state electricity boards (SEBs) have made large tariff hikes in the last 18-24 months—56% in the case of Delhi, 37% for Tamil NaduandWestBengal,30%forKeralaandsomelikeAndhraPradeshhave proposed a 42% hike in FY14 while Tamil Nadu which has large losses has proposedamuchsmallerhike.Butthishastobeseeninthecontextof several of these states doing nothing for a long time. In the case of Rajasthan, for instance, the 23% hike followed a period of 6 years in which no hikes weremade.Indeed,atanall-Indialevel,tariffsarearound R1.1perunitlowerthancost—sothat’sahikeof 30%that’srequiredatanall-Indialeveland much higher at the level of various states. And, the way power costs have beenrising,thefuturehikeswillbemuchsteepergiventhehighercostsof capital of new plants as well as the higher costs of imported coal. Apartfromtheburdenthathikingtariffssignificantlywillplaceonthe political system, especially in an election year, there are the other costs of the restructuring package. As the Shunglu committee pointed out after looking at SEB accounts for between 2005 and 2010, a sum of R77,000 crore hadbeenshownas“othercurrentassets”—thisistheamountof subsidies that the state governments had promised to pay the SEBs, but didn’t have the money to pay . As part of the restructuring programme, SEBs/state governments have to pay all outstanding energy bills of up to March 2012 within a few months. Since state governments will have to, after 2-3 years, take on half the SEB debt by way of bonds—the other half will have to be restructured by banks with a moratorium—this will put a big burden on them.Undertheplan,thisextrafiscalspacewillbeprovidedtothembythe next Finance Commission. A lot will, however, depend on how the economy fares—while central tax devolution to states rose 17.7% in FY09, this fell to just 14.1% in FY13 as the economy tanked. Whether the restructuring works has to be seen, but while the political class has less at stake in an election year—most states have preferred to go in for load shedding instead of tariff hikes—the banks are in serious trouble if it doesn’t.

Government is a growth multiplier
Fiscal policy in India is now far more multi-dimensional than the troika of tax, subsidies and fiscal deficit
oody’s Analytics has recently taken on the RBI Governor for apparently suggesting that India could come closer to double-digit growth. The arm of the rating agency is concerned that without advocating structural reforms, pushing the pace of growth will overheat the economy . While this is an obvious point, one even RBI has made on several occasions, the mistake Moody’s makes is in evaluating the role of the government in the Indian economy. Most foreign commentators have looked at the troika of fiscal deficit, the subsidy bill and the projections of aggregate receipts to sum up their observations. While these are significant numbers, the impact of the federal budget in India cannot be made out through these numbers. It is sort of equating the exercise to the RBI monetary policy action. Since the monetary regulator has only one instrument, which is the interest rates, the impact has to be measured with reference to it. But fiscal policy in India is even now far more multi-dimensional than the troika of tax, subsidies and fiscal deficit. The Indian government action on the economy is far better captured by measuring its impact on the consumption story. This was wonderfully demonstrated by the impact of the Sixth Pay Commission for central and state government employees. In 2008-09, when the G20 economies decided to give a joint boost to their economies by fuelling expenditure, India was hamstrung. The government had already gone in for a 24% rise in aggregate expenditure and so its room for further manoeuvre was extremely limited. It was, however, saved the trouble by the award of the Pay Commission thatcamein2008,whichalmostdoubled

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salariesinmanygrades.In The fund managers from July2010,theCentredecidabroad are under the ased to make it better by alsumption that a governlowing the employees to ment serves the economy choose the date from better when it restricts its which they would want to footprint. A lower deficit, revise their pay as per lower receipts and lower Sixth Pay Commission subsidies are part of the scales. By the Commissame argument. This is an sion’s own estimate, this SUBHOMOY assumption that the Indicreated an additional payan economy is still far BHATTACHARJEE from out of R20,000 crore on the fulfilling. But followCentre, plus the impact on ing this line of thought Till now, the the state government. leads to an expectation This was fiscal profli- government has about the final impact of gacy all right, but it the Budget that is often worked. The cascading worked best as quite different from what impact on the rest of the analysts come to expect. A a consumption economy was significant. government as a conmultiplier but This was captured by the sumption multiplier for FMCG sector and even in rarely as an the economy obviously the demand for consumer investment has its limits, but there is durables, all of which still some headroom left rose handsomely. Since, multiplier. It has for now. The expenditure in the same year, the in- consequently on government staff flow into the small savhelped spur demand in worked out the ings, including the most the economy, and the borpopular one, the Public non-Plan rowing to meet this expenProvident Fund, galloped diture shored up the balelements more to R24,489 crore (2009-10 ance sheets of public impressively and 2010-11) compared to sector banks till recently, a negative balance of in the form of their treaR1,302 the year before, sury income. there was little to crib about savings For instance, in 2011-12, of the total and thereby investment. The savings government expenditure, 20% was on rate of the economy rose to 34% in the consumption, while that on gross capiprocess in the same year. tal formation was only 5.4%. Not only So, what are the comparable meais the capital component of the governsures to analyse the impact of the Budment budget puny, it is spread across get on the rest of the economy . I would too many departments to be a force submit these are the measures of total multiplier in any appreciable way. expenditure and, within that, the segBudget 2013-14 lists 57 departments ment of non-Plan expenditure along where the estimated R1,74,656 crore alwith the extent of public debt. lotted will end up. The Indian government is far better Compare this with another indicaat pushing the rupee into the hands of tor—the level of transfer payments the citizens instead of working as an from the government to the rest of the investment manager on their behalf. economy. In 2012-13, it is projected at

67% of total government expenditure, almost four-fifths of which is consumption expenditure. Are these high levels of transfers creating long-term damage to the economy? If one analyses the level of public debt the government has built up to finance this level of expenditure, it does not seem so. As on March 31, 2012, the total public debt of the Centre was about 54% of GDP and in 2014 it is expected to be 56.7%. As a sampler with the IMF figures for the corresponding emerging economies shows, these are impressively low numbers. As I said earlier, the concerns about the deficits are real. There are already drags surfacing on the way government operations like additional entitlements would impact the economy. Yet, till now, the Indian government has worked best as a consumption multiplier but rarely as an investment multiplier. It has consequently worked out the non-Plan elements more impressively. These are the elements that deserve far more attention than the facile arguments about growth with or without structural reforms. For instance, a possible reform is the impact of changes in the public distribution system. It will, however, lead to the closure of many ration shops that play on the price arbitrage between issue price of grains and the market price. This would be more visible in the low per capita income states and could have a short-term negative impact on the rural economy. So, all reforms are not immediately growth-inducing. Without analysing such myriad factors, getting a grip on the process of fiscal arithmetic in India would lead to a cul-de-sac. subhomoy.bhattacharjee@ expressindia.com

NHAI can no longer blame MoEF for any delays

Removing roadblocks

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iven how the Supreme Court has ruled in favour of NHAI by delinking environment clearances from forest clearances, the road has been cleared for a rapid execution of stalled highway projects.Accordingtoofficials,around20suchprojectscannowbestarted immediately, with a project cost of an impressive R27,000 crore. These projects got stalled when, a few years ago, the environment ministry started insisting that no environment clearances would be given till there was a forest clearance. This seemed the logical thing to do given that the two are closely linked; but it didn’t really apply as much to road projects where the encroachment on the forest was quite minimal. Indeed,formostprojects,thebulkof theroadliesoutsideforests.Butinany projectwheretherewasevenabitof foresttobegonethrough,theforests clearances never came through; in the event, neither did the environment clearances, nor therefore, the bank loans. With the SC’s nod to delink the two, this knot has been untied and the projects can go ahead and NHAI, which was only able to award 1,100 km of contracts in the first 9 months of the year, can now hope to make better progress next year— this year’s target was to award 9,000 km of roads. Itwould,however,befoolhardytothinkthatallisnowwell.Indeed,the SCclearancenowmeansNHAIwillhavetoworkthatmuchharderif projectsaretotakeoff.AftertheSCnod,aprojectdevelopercannowbuildthe road till the beginning of the forest and then after the end of the forest— later, when the forest nod comes, the part in the middle can be completed. But what if the forest clearances still don’t come, or get delayed? This is where NHAI needs to be ready with alternative alignments and be ready to help buy the land required. Equally important, in the case of one big project, NHAI failed to notify the new toll rates—new rules allow developers to collect tolls based on a 6-road basis even while the road is still being expanded, to allow developers to get more funds—for over a year after which the developer walked out. The SC has cleared a major roadblock, it is up to NHAI to ensure it makes the most of this.

Transatlantic trade’s transformative potential
A Transatlantic Trade and Investment Partnership between the US and Europe has the potential to transform global trade
After instant and seemingly coordinated fanfare in Europe and the United States, the proposal for a European Union-US free-trade area has been generating little media attention. There are three reasons for this, and all three highlight broader constraints on good national economic policymaking and productive cross-border coordination. In his “State of the Union” address in February, US President Barack Obama proposed a “comprehensive Transatlantic Trade and Investment Partnership” with Europe based on trade that is “fair and free”. His administration regards this as part of a comprehensive approach to generating “good-paying American jobs”. Obama’s bold proposal received an immediate and enthusiastic reception in Europe. Taking to the airwaves within hours, European Commission President José Manuel Barroso and European Council President Herman Van Rompuy called the proposal “groundbreaking”. Arguing that it could increase Europe’s annual economic growth rate by half a percentage point, they declared that formal negotiations would start quickly . At first, there was quite a bit of general interest, and understandably so. The proposal involves the world’s two largest economic areas, with national, regional, and global implications. Yet, despite the realisation that an agreement could fundamentally alter the nature of global trade and production networks, it only took a few weeks for interest to drop off. One reason is rooted in initial conditions that limit direct gains from increased trade while widening the scope for tension and conflict. Free-trade agreements that promise the greatest benefits are those that link economies longer-term policy objectives, which characterised by high tariffs, low levels merely adds further uncertainty of trade, and little overlap in consump- about the precise path of European tion and production patterns. This is economic and financial integration. not the case for the EU and the US. AvIn the US, the disruption took the erage tariff levels are only 3%. The EU form of yet another fiscal mini-draalready accounts for almost 20% of US ma. With a dysfunctional Congress imports, and the US for 11% of EU im- again letting down the American peoports. And, given similar per capita in- ple, the country is now on the receivcome levels and cultural orientations, ing end of a budgetary sequester—anoverlaps in production and consump- other self-manufactured headwind to tion are considerable. economic growth, job Having said this, there creation, and progress on would be immediate upreducing income and side potential, owing to wealth inequalities. better resource allocaPut the two together tion, more harmonised inand you get a barrier to vestment regimes, EU-US trade negotiastronger standards, and tions—one that renders the elimination of outdatambitious (though not ened non-tariff and regulatirely unrealistic) the twotory barriers. Aerospace, MOHAMED A year timeline that has auto manufacturing, set for completing EL-ERIAN been biotechnology, cosmetics, the deal. and pharmaceuticals are The third reason conamong the sectors that stand to gain. cerns the poor state of global policy diThere is also the potential for reform- alogue, notwithstanding all the happy ing inefficient approaches to food and talk about global challenges and shared agriculture, particularly in Europe. responsibilities. Last month’s G-20 The second reason for waning at- meeting ended up as yet another expentention to the proposed partnership sive summit lacking sufficient content speaks to a broader issue: A seeming- and follow through. Rather than ly endless stream of short-term polit- catalysing constructive policy coordiical dramas has made it extremely dif- nation, it has inadvertently encourficult for both Europe and the US to aged complacency . focus for long on any secular and All three reasons are highly regretstructural initiative. table. They underscore the West’s In Europe, broad-based discussion seeming inability to break out of a was undermined by the outcome of short-term mindset in order to rethe Italian election—just the latest spond to the risks and opportunities sign of how frustrated citizens in a related to historic national and global growing number of countries are re- re-alignments. jecting conventional political parties The real promise of freer transatand the political status quo. With that, lantic trade consists in its potential to it becomes more difficult to pursue transform global trade, production networks, and multilateral organisations to the benefit of all. At the most general level, it would act to rationalise the current system of four poorly functioning blocs—centred on China, Europe, the US, and the rest—to three, and eventually (and perhaps quite quickly) to two better-functioning blocs that would have little choice but to work well together: one dominated by China, and the other by the EU/US. Such a global structure has the potential to encourage better mediumterm alignments to reduce trade barriers, set proper standards, and enhance mutually beneficial cooperation. It would facilitate coordination on stronger global rules and principles, including those pertaining to intellectual-property rights and trade in services. And it would force multilateral organisations to reform if they wish to retain even the limited relevance that they have now. The proposal for freer transatlantic trade is potentially transformational. It comes at a time when the West is increasingly being dragged down by short-term disruptions and continued policy inertia. Yet the implementation prospects are far from promising. The proposal has the capacity to act as a catalyst for adapting policy approaches to current realities; but it is subject to the dulling forces of twentieth-century mindsets and institutions that are too slow to adapt to twenty-first-century challenges and opportunities. Mohamed A El-Erian is CEO and coCIO of PIMCO, and the author of ‘When Markets Collide’ Copyright: Project Syndicate, 2013 www.project-syndicate.org

RADICAL RECOVERY
Soon, dropping your phone in water won’t be that big a deal—the chips inside will simply repair themselves
THE strongest reason why even the most intelligent and sophisticated robot doesn’t qualify as a living being is because it lacks that singular hallmark of life—the ability to heal itself. If your computer breaks down, it can do nothing but wait for a human technician to fix it. But all that could change in the foreseeable future. A team of researchers at the California Institute of Technology (Caltech) have created a computer chip that can heal its own information pathways. The researchers fired highpoweredlasersatthechip,burningawayentireportionsof itsbody .There are thousands of pathways through which a chip can convey information.TheCaltechchipharnessedthisadvantagebyquicklyre-routingall informationawayfromthedamagedportionof thechiptofunctionalsections. Basically, even though the chip took physical damage, its performance remained unhindered. Now,apartfromthesciencefiction-likeapplicationof thistechnology to create self-healing robots, such a chip has enormous applications in present day life. At the moment, even a single transistor being burning out on a chip—they contain hundreds of thousands of transistors—can render the chip useless, vastly reducing the functionality of the device it is in, be it a computer or even a phone. If it is a critical chip, the whole device can stop working, not to mention the loss of the data stored on it. Implementing self-healing chips of the Caltech variety in consumer technology , then, could save countless hours and dollars in tech support.

EAVESDROPPER
The melody in Sibal
Those interested in calling Kapil Sibal will be surprised to be greeted first by a message asking whether they wanted to copy his caller tune, followed by strains of a heartfelt Hindi love song. On being asked about this, Sibal said that the song was his own creation, written for the Bollywood film Bandook!
ROHNIT PHORE

LETTERS TO THE EDITOR
Service tax
Apropos of the news story “Service tax amnesty target modest despite vast scope” (FE, March 11), it was stated in the Budget that of nearly 17 lakh registered assesses under service tax, only 7 lakh file returns regularly. And that there is a need to motivate them to file returns and pay tax dues. A one-time scheme called Voluntary Compliance Encouragement Scheme is proposed to be introduced. A defaulter may avail of the scheme on the condition that he files truthful declaration of service tax dues since October 1, 2007. But why is there a non-compliance at all? Perhaps because basic provisions have not changed with time. Think about it?

Talk about singing one’s own praise!

M Kumar New Delhi

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