04 June 2014

Energy trade with Pakistan

Source: By Davinder Kumar Madaan: The Tribune
RECENTLY, a draft of the Memorandum of Understanding (MoU) was handed over by Pakistan to India for a deal to buy 500 MW electricity
from India for which an inter-grid connection will be built between Amritsar and Lahore via the Wagah border. Earlier, on January 20, 2014, the
Pakistani Cabinet had approved the signing of the MOU. Both countries have constituted a joint working committee to resolve matters related to
the technical, commercial, construction and regulatory issues of this deal. If all goes well, electricity trade between the two countries can start by
the end of 2014 at a tariff of around Rs 8 per unit. Cross-border trading will be through high voltage direct current, which will ensure that both
the grids operate independently. It will be economical to transfer power through Amritsar as Lahore has complete transmission lines and grids,
and is near the grid in the Indian Punjab. The project requires 45 km of 220 KV transmission lines on both sides of the border -- 25 km in India
and 20 km in Pakistan -- within six months following the signing of a formal agreement. Earlier, the World Bank funded the feasibility study and
worked out the imported cost at 10-11 US cents per unit. It offered to provide $300-400 million for installing 220 KV transmission lines to import
a total 1200 MW of power from India.
Currently, electricity production in Pakistan is about 15430 MW against an installed capacity of 22797 MW because of poor infrastructure, old
plants and theft of electricity. The inefficient transmission and distribution system is costing the taxpayers Rs 1.7 per unit over and above the cost
of generation - averaging around Rs 7.3 per unit. Power theft alone amounts to Rs 8,500 crore per annum. Pakistan is producing 36% of
electricity from oil, 30% from hydel, 29% each from gas and 5% from nuclear plants. A sharp decline in the share of gas in energy production
from 52% in 2005 to 29% in 2014 has increased the cost of power in Pakistan. The country faces 7,000 MW power deficits. This turns out to be
31 per cent of the total annual demand. The decision of the International Court of Arbitration (ICA) at The Hague in February 2013 is likely to
hurt its 980 MW Neelum-Jhelum Hydro-Power Project being set up in occupied Kashmir, as the ICA allowed India to divert water from the
Kishanganga river (called Neelum in Pakistan) to its 330 MW Kishanganga Hydro-Electric Project on the Jhelum river basin in Kashmir. Given
Pakistan's internal energy situation, the total 1200 MW power imports from India will be acute and cannot simply be replaced by other sources. In
this way, Pakistan will be more dependent on India for its electricity needs. The country imports 35 MW of power from Iran, and is considering
to import another 1000 MW from Tajikistan by 2016. In recent times, China has agreed to invest US$20 billion in Pakistan's energy
infrastructure, and in return, it will take ownership of coal plants.
Pakistan has also been negotiating the import of 200 million cubic feet (MCF) Liquefied Natural Gas (LNG) per day from India. The latter
proposed to lay 110-km pipeline from Jalandhar to the Wagah border via Amritsar. LNG will be imported through ports in Gujarat and moved
through the Gas Authority of India Limited (GAIL)'s existing pipeline network up to Jalandhar. The cost of LNG imports to India is US$ 13.5 per
million british thermal units (mbtu). After including the customs duty, transportation charges and local taxes, the delivery price works out close to
US$ 21 per mbtu. Pakistan wants India to exempt LNG from taxes so that the delivery price does not exceed US$16 mbtu. India is likely to waive
the duty on the proposed export. However, in case of sudden termination of the contract, GAIL has sought letters of credit from Pakistan for US$
415 million to cover the estimated value of LNG supply for three months and a bank guarantee for $100 million. It will be a win-win situation for
both countries to do gas trade, as India will earn a significant profit and Pakistan will get the commodity at lower prices as compared to the
international import price of US$ 19 per mbtu. Moreover, the existing gas reserves in Pakistan are expected to last only 18 years.
This gas deal will be a test case for the feasibility of the Turkmenistan-Afghanistan- Pakistan-India (TAPI) natural gas pipeline, which is being
developed under the guidance of the Asian Development Bank and expected to be completed by 2017. The inter-governmental agreement on this
pipeline was signed on December 11, 2010, in Ashgabat (Turkmenistan). This pipeline will transport Caspian Sea natural gas from Turkmenistan
through Afghanistan into Pakistan and then to India, covering a distance of 1680 km. It is being constructed via Herat-Kandahar (Afghanistan)Quetta-Multan (Pakistan) to Fazilka, Punjab (India). The estimated cost of this project is US$ 7.6 billion. Its capacity will be 90 million standard
cubic meters per day (mcmd) of natural gas, of which 14 mcmd will be provided to Afghanistan and 38 mcmd to each Pakistan and India. India
will pay a transit fee of US$ 0.5 per mbtu each to Afghanistan and Pakistan, and the delivery price will be around US$ 13 per mbtu. Unlike the
Iran-Pakistan-India pipeline project signed in 1995, from which India backed out in 2007 under US pressure, the TAPI is supported by the US.
Pakistan also signed an MOU with the Indian firm Universal Biomass Energy on December 27, 2013, to set up a 15 MW biomass power plant
within two years in Pakistani Punjab. The energy generated by it would be linked with a 132-KVA supply line.
Cross-border energy trade can lead to effective utilisation of natural resources. It will act as the single most effective confidence-building

measure between India and Pakistan. During the post-SAFTA period (2006 onwards), the two countries have accelerated the process of mutual
trade and gained due to their geographical proximity and contiguity of territories, which helped them in saving the transportation and
transshipment costs. Their bilateral trade in goods increased from US$ 0.8 billion in 2005 to US$ 2.6 billion in 2013. The Wagah border is very
important for exploiting the mutual trade potential, and accounts for more than one-third of the total trade.

1. A Godzilla among planets

A Godzilla planet that is 17 times the size of our earth has been
discovered, leaving the scientific fraternity in shock as anything so hefty
would grab hydrogen gas as it grew and become a Jupiter-like gas
giant.This planet, though, is all solid and much bigger than previously
discovered super-earths making it a mega-earth.We were very
surprised when we realised what we had found, said astronomer Xavier
Dumusque of the Harvard-Smithsonian Center for Astrophysics, who made
the discovery using NASAs Kepler spacecraft.This is the Godzilla of
earths. But unlike the movie monster, it has positive implications for life,
added Dimitar Sasselov, director of the Harvard Origins of Life
Initiative.The newly-found Kepler-10c circles a sun-like star once every 45
days. It is located about 560 light years from earth in the constellation
Draco and has a remarkably fast, 20-hour day.Kepler-10c has a diameter
of about 28,900 km 2.3 times as large as the earth. Using the HARPSNorth instrument on the Telescopio Nazionale Galileo (TNG) in the Canary
Islands the team found that Kepler-10c weighed 17 times as much as the
earth, meaning it must have a dense composition of rocks and other
solids.Kepler-10c did not lose its atmosphere over time. It is massive
enough to have held onto one if it ever had it, Dumusque explained.The
discovery also has profound implications for the history of the universe and
the possibility of life. The Kepler-10 system is about 11 billion years old,
which means it formed less than three billion years after the Big
Bang.Finding Kepler-10c tells us that rocky planets could form much
earlier than we thought. And if you can make rocks, you can make life,
Sasselov noted.
2. Wait-and-watch policy
There are two significant takeaways from the Reserve Bank of Indias bimonthly monetary policy statement of Tuesday, that has held rates steady.
First, it signals continuity in policy, dispelling apprehensions that the RBI
might come under pressure from the new government to change course in
the matter of setting rates. Despite prodding from industry bodies, the
central bank has chosen to hold on to rates for the time being until
inflationary expectations, especially on the food front, calm down. In fact, it
could be argued that the RBI has been kind by not raising rates given that
retail inflation has rebounded in the last couple of months, but then such a
move would have been too hawkish in the face of continuing sluggishness

in the economy. The central bank has balanced its standstill policy on rates
with a neutral tone in its stance, which is the second important takeaway
from the statement. The risks to achieving the target of 8 per cent
consumer price inflation (CPI) by January 2015 are balanced, says the
central bank. And then comes the promise: If the economy stays on this
course, further policy tightening will not be warranted.
In line with the recommendations of the Dr. Urjit Patel Committee to move
away from sector-specific refinance to a more generalised system for
providing liquidity, the policy has reduced export credit refinancing for
banks from 50 per cent of outstanding export credit to 32 per cent. This has
been balanced with a special term repo facility of 0.25 per cent which will
compensate for the reduction in liquidity due to the former step. This is an
important reform measure that will improve access to liquidity for banks
without having to go through formalities such as providing documentary
evidence of export credit and so on. The reduction in the statutory liquidity
ratio (SLR) by 0.50 percentage points is an interesting move and in line
with what the Governor, Raghuram Rajan, had hinted in a speech a couple
of weeks ago. The attempt seems to be to increase credit availability,
especially for infrastructure lending, but the question to ask is: how much
impact will it have in the absence of a rate cut? This could well be a first
step, though, to further loosening of SLR as the government turns its focus
to giving a boost to infrastructure investment. Dr. Rajan clearly seems to
have adopted a cautious wait-and-watch attitude for now, expecting the
government to take measures to control food prices and rein in inflation.
Also on watch will be the governments commitment to fiscal consolidation
and its plans to promote growth, both of which will be evident in the
upcoming Budget. These factors, along with the performance of the
monsoon, may well set the trend for the next policy move of the central
bank.
3. A huge health burden
That over 27 per cent of tobacco consumers in India fall in the 15-24 year
age bracket amply demonstrates how successful the tobacco companies
have been in continually enticing the vulnerable sections of the population
into the suicidal practice. The addition of new customers every year even
as thousands of patrons die annually ensures that the tobacco companies
customer base remains wide and tall. If the global tobacco-related mortality
is about 5.5 million people annually, Indias burden alone is nearly one
million. With nearly 35 per cent of the adult population in the country
addicted to the dangerous substance rolled in paper or leaf or packed in
plastic sachets, India is the second largest consumer of tobacco products

in the world. Besides the high levels of mortality and morbidity, there is a
huge economic cost involved in treating people with diseases caused
directly or indirectly by tobacco use. As a result, the out-of-pocket
expenditure on medical treatment results in higher poverty rates. A
recently released Health Ministry report estimates that 9.3 lakh people in
India are affected by the health costs of tobacco. According to the report,
the total health expenditure burden of tobacco in the year 2011 was a little
over Rs.100,000 crore. To put it in perspective, the amount was 12 per
cent more than the combined State and central government expenditure on
health in 2011-12. The revenue earned through excise duty in the same
year was a paltry 17 per cent of the health burden of tobacco. The benefit
argument of revenue generation through sales therefore stands completely
negated.
It is for these reasons that the Central government, which considers health
to be one of the priority areas, should simultaneously implement multiple
strategies to prevent people, particularly children as young as 15 years,
from getting addicted to nicotine and help the existing users to quit smoking
and/or chewing tobacco. If the government is indeed serious about
reducing the prevalence by 15 per cent by 2020 and 30 per cent by 2025,
the most effective way of achieving it is by raising taxes. It is indeed
heartening that the new Union Health Minister supports higher taxes on
cigarettes and tobacco products; raising tax on tobacco is the WHOs
theme this year. But for any tax increase to become effective, the price
difference between various brands and different tobacco products must be
minimal. But India follows a bizarre, producer-friendly excise duty structure
for cigarettes, beedis and chewing tobacco that makes a mockery of
taxation. Hence, a complete overhaul of the taxation system is warranted to
achieve the desired benefits. It is time the tobacco issue was addressed
with greater seriousness.
4. Au revoir, Afghanistan
Leaving aside the political ramifications of the deal within the U.S., the prisoner
swap blows dark clouds over the Afghanistan-Pakistan-India region
It had all the trappings of a soon-to-be-iconic photograph a tall American
Commander-in-Chief dressed in a smart black suit, his arms reassuringly
around the shoulders of the mother on his left and the father on his right, all
three walking away from the camera down a flowery White House
pathway.However the announcement that Barack Obama made a few
minutes before that photograph was taken on May 31, flanked by the
parents of U.S. soldier Bowe Bergdahl, has since sent ripples of
consternation across both a bitterly partisan Washington and a South Asia

that is jittery from watching Washingtons rush for the exit in

Afghanistan.The unprecedented decision by the White House to hand over
five senior Taliban commanders held in Guantanamo Bay to the Amir of
Qatar in exchange for the release from captivity of Sergeant Bergdahl, is
being seen by many, including Republican lawmakers on Capitol Hill, as
one of the strongest plays by the American President to consolidate his
second-term legacy.
According to the deal, the five men have been banned from leaving Qatar
for at least a year and Mr. Obama said that he had received security
guarantees from Qatar that it will put in place measures to protect our
national security.
Controversial move
However, with Afghan Taliban leader Mullah Mohammad Omar saying the
exchange was a big victory, there is real reason to fear the consequences
of the release of the men described as the Taliban Dream Team, and
comprising the outfits intelligence chiefs, chief of army staff, interior
minister, provincial governor, and one prisoner linked to a joint Taliban-al
Qaida cell.Unsurprisingly, within days of the prisoner swap being
announced, the move was condemned by Mr. Obamas political opposition
as a case of negotiating with terrorists.House Armed Services Committee
Chairman Howard McKeon and the ranking Republican on the Senate
committee, James Inhofe, said in a joint statement that in executing this
transfer, Mr. Obama had violated laws which require him to notify
Congress 30 days before any transfer of terrorists from Guantanamo Bay
and to explain how the threat posed by such terrorists has been
substantially mitigated.Although the White House said in response to such
criticism that it had to act despite the legal requirement for the transfer due
to the unique and exigent circumstances of the case, Mr. Obamas
position has been further weakened by the fact that at least six U.S.
soldiers, some from Sgt. Bergdahls 1st Battalion, 501st Parachute Infantry
Regiment were said to have been killed while looking for the missing man.
Further undermining the administrations justification for this high-stakes
exchange is the uncanny resemblance of Sgt. Bergdahls Afghan
adventures to the plot of the TV series Homeland in which a U.S. soldier
captured by a terror group gradually becomes a double agent and turns on
his motherland with terrifying effect.Although no such drama has yet
unfolded in Sgt. Bergdahls case, after Mr. Obamas plan was announced,
evidence has surfaced suggesting that the soldier may have been an Army
deserter, that the U.S. intelligence community had compiled a major

classified file after investigating him, and Pentagon sources have noted
that he may have been an active collaborator with the enemy.Some of
Sgt. Bergdahls fellow soldiers also mentioned his stated desire to walk
from Afghanistan to India.The White Houses embarrassment deepened
into a borderline PR crisis when it was then revealed that the soldiers
father, Robert Bergdahl, had apparently been tweeting supportive
messages to a Taliban spokesman.
Via his account @bobbergdahl, he said in a tweet that has since been
deleted but was captured in numerous screen grabs I am still
working to free all Guantanamo prisoners God will repay for the death of
every Afghan child, ameen.When asked about this conversation, White
House Press Secretary Jay Carney declined to comment on those reports
but defended the administrations handling of the release.Leaving aside the
political ramifications of the deal within the U.S., the prisoner swap blows
dark clouds over the Afghanistan-Pakistan-India region in the form of
heightened uncertainty regarding Americas designs for a troop-free
Afghanistan in 2016.
New transactions
One precedent that has been set with this prisoner swap is that all manner
of new transactions may emerge in the space for reconciliation with the
Taliban after Western forces scale down.For New Delhi this may mean that
its diplomats may have to get accustomed to engaging with the Taliban as
a neighbourhood political force to reckon with and drop any former notions
of abhorrence.In the light of Mr. Obamas demonstrated mono-vision in his
approach to the Bergdahl affair, Indias new government led by Narendra
Modi may be best served by a new paradigm that goes beyond the trilateral
mentality with Washington, perhaps bringing in Pakistan instead.
5. RBI moves away from sector-specific refinance
Enhances the eligible limit for foreign exchange remittances under the
liberalised remittance scheme to $125,000
The Reserve Bank of India (RBI), on Tuesday, decided to limit access to
export credit refinance while compensating fully with a commensurate
expansion of the markets access to liquidity through a special term repo
facility from the central bank (equivalent to 0.25 per cent).It reduced the
liquidity provided under the export credit refinance (ECR) facility from 50
per cent of eligible export credit outstanding to 32 per cent with immediate
effect, while introducing a special term repo facility of 0.25 per cent to
compensate fully for the reduction in access to liquidity under the ECR with
immediate effect.The RBI said that this was in pursuance of the Dr. Urjit

R. Patel Committees recommendation to move away from sector-specific

refinance towards a more generalised provision of system liquidity without
preferential access to any particular sector or entity.This should improve
access to liquidity from the Reserve Bank for the system as a whole without
the procedural formalities relating to documentary evidence, authorisation
and verification associated with the ECR.
This should also improve the transmission of policy impulses across the
interest rate spectrum and engender efficiency in cash/treasury
management, it added. The RBI also decided to continue to provide
liquidity under 7-day and 14-day term repos of up to 0.75 per cent of the
banking system.This measure will continue to provide liquidity in the
banking system.With a view to improving the depth and liquidity in the
domestic foreign exchange market, the RBI will now allow foreign portfolio
investors to participate in the domestic exchange traded currency
derivatives market to the extent of their underlying exposures plus an
additional $10 million. Furthermore, it also decided to allow domestic
entities similar access to the exchange traded currency derivatives
market.Also, in view of the recent stability in the foreign exchange market, it
was decided to enhance the eligible limit for foreign exchange remittances
under the liberalised remittance scheme (LRS) to $125,000 without end
use restrictions except for prohibited foreign exchange transactions such as
margin trading, lottery and the like. Earlier, as a prudential measure, the
RBI had reduced it to $75,000 last year.
In order to facilitate travel requirements of non-residents visiting India, the
RBI decided to allow all residents and non-residents except citizens of
Pakistan and Bangladesh to take out Indian currency notes up to
Rs.25,000 while leaving the country.At present, only Indian residents are
allowed to take Indian currency notes up to Rs.10,000 out of the country
and non-residents visiting India are not permitted to carry any Indian
currency notes while leaving the country.
6. RBI cuts SLR by 50 bps to release 40,000 cr
Rather than cut key interest rates, the Reserve Bank has released liquidity
into the system.Though price pressures persist, the RBI maintained status
quo on key interest rates but slashed the Statutory Liquidity Ratio to spur
bank lending and get the sluggish economy moving.Showing his
commitment to boosting the economy, Governor Raghuram Rajan, in the
second bi-monthly monetary policy of 2014-15, invoked Abenomics of
Japanese Prime Minister Shinzo Abe saying growth in the coming
quarters will depend on three arrows monetary, fiscal and economic
strategies.

Expand bank resources

The 50-basis-point cut in the SLR to 22.5 per cent (from 23 per cent) of
bank deposits, starting mid-June, will expand banks resource base by
about40,000 crore. This amount, currently invested in government
securities, could get released for lending purposes.The SLR cut is also
seen as a device to restrain the Government from borrowing from the
market. The central bank had last cut the SLR from 24 per cent to 23 per
cent on July 31, 2012.But the contrarian view is that banks may not pare
SLR investments as there is hardly any appetite for credit in the system.
Thus, banks, barring foreign lenders, have been maintaining high SLR
holdings of about 28 per cent of total deposits. According to bankers,
anyway the SLR cut will provide relief only in the case of incremental
deposits that banks raise.Predictably, India Inc hailed the central banks
move to cut SLR, saying it will give banks more room to lend to the
corporate sector but said a cut in key rates would have been more
propitious for growth.
As much as the SLR cut, this policy is crucial for its dovish stance on
inflation. In its policy statement, the RBI said: If the economy stays on this
course (taking retail inflation to 8 per cent by January 2015 and 6 per cent
by January 2016), further policy tightening will not be warranted.On the
other hand, if disinflation, adjusting for base effects, is faster than currently
anticipated, it will provide headroom for an easing of the policy stance.With
the central bank holding key rates, the interest rate at which banks borrow
short-term funds from the RBI (known as the repo rate) stays at 8 per cent.
Further, the slice of deposits that they necessarily have to park with the RBI
the cash reserve ratio remains at 4 per cent of their total deposits.
Calibrated approach: Jaitley
The RBI moves struck a chord with the new Government, with Finance
Minister Arun Jaitley describing the status quo as a calibrated approach to
strike a balance between growth and inflation. Jaitley said the government
on its part will address the problem of price rise by improving supplies. In a
statement, he said: It is a priority for the government to maintain a balance
between growth and inflation ... It (RBI) has followed a calibrated approach
aimed in the direction of balancing between growth and inflation.
ECR reduced
Elsewhere, as part of the monetary policy review, the RBI reduced the
liquidity provided under the export credit refinance (ECR) facility from 50
per cent of eligible export credit outstanding to 32 per cent with immediate
effect. With this, the quantum of cheap funds available for arbitrage when
liquidity is tight has been reduced. The refinance is aimed at encouraging

banks to provide finance to exporters.The ECR is repayable on demand or

on the expiry of fixed periods not exceeding 180 days. It is available at the
repo rate. The draining of liquidity under the ECR has been compensated
by the introduction of a special term repo facility amounting to 0.25 per cent
of the banking systems total deposits.This move is the apex banks bid to
develop a term structure of interest rates, reflecting the expectations of
market participants about future changes in interest rates and their
assessment of monetary policy conditions.
7. Wait and watch
Reserve Bank of India Governor Raghuram Rajan has sprung no surprises
by leaving benchmark interest rates and cash reserve requirements for
banks unchanged in his monetary policy review. The increase in the annual
consumer price index (CPI) inflation from 8.3 per cent in March to 8.6 per
cent in the following month had virtually ruled out any scope for policy rate
cuts. On top of this, there were uncertainties on two fronts the prospect
of below-normal rains courtesy El Nino and the degree of the new
Governments commitment to fiscal consolidation. There will be clarity
about both before the governors next bi-monthly policy review on August 5.
By then, a reasonably clear picture of the progress of the south-west
monsoon along with kharif crop plantings will emerge. Similarly, Finance
Minister Arun Jaitleys Budget would have sent the necessary signals
relating to fiscal policy.
Significantly, Rajans policy statement has emphasised the RBIs
commitment to keeping the economy on a disinflationary course. In effect,
this means achieving a CPI inflation target of 8 per cent by January next
year and not more than 6 per cent by January 2016 as recommended by
a panel under Deputy Governor Urjit Patel. The absence of a change in the
RBIs anti-inflationary stance, even with a change in government, sends out
an important message of continuity. The RBI governor has clearly linked
any easing of the monetary policy to stronger Government action on food
supply and better fiscal consolidation. Jaitleys statement in his weekend
blog that we must move towards an era of fiscal discipline raises hopes
that the Centre will respond appropriately and thereby make the RBIs job
easier. After all, better policy coordination between North Block and Mint
Street is always welcome.
While keeping interest rates on hold, Rajan has lowered the statutory
investment requirement in government securities (G-Secs) for banks from
23 to 22.5 per cent of their deposits. This will free up around 42,000 crore
that banks could lend to industry. But the lowering is unlikely to have any
immediate impact, given that banks today hold over 27 per cent of their

deposits in G-Secs. This excess investment over the mandatory

requirement reflects inadequate lending opportunities in a sluggish
economic environment. Reduced pre-emption of bank deposits will,
however, matter when credit demand revives alongside an overall
economic recovery. Here again, fiscal rectitude on the Centres part is of
paramount importance. Without this, there is little legroom for the RBI to
either slash interest rates or phase out forced subscription of G-Secs by
banks. A lot, therefore, hinges on the direction that Jaitleys Budget
provides.
8. Time to mend fences with the US
The astounding mandate secured by Narendra Modi has led scholars and
commentators to focus on what more the US can do to win Indias favour. While
some argue that the Obama administration ought to modi-fy its advance, others
recommend developing a new relationship with India.In most instances,
punditry appears focused on the immediate future, perhaps for good reason.
Commentators seem sold on Modis campaign slogan that the good days are
coming. Getting on the right side of the new Prime Ministers expected economic
and fiscal turn is considered chief priority for most governments, especially the
US, which had banned Modi from its shores.The current state of political
transition in India offers an opportunity to ask questions that look past immediate
concerns. This is, of course, not to suggest that efforts designed to overcome the
touchy issue of a visa ban on Modi are not important.Personal anguish can make
all the difference in state-to-state relations. Conviction on the part of incumbents
is sometimes the key to unforeseeable advancements, a point clearly illustrated
by the determination shown by President George W Bush and Prime Minister
Manmohan Singh in negotiating a landmark civil-nuclear agreement between
2005 and 2008.Yet, the exaggerated focus on how best an Obama White House
may reach out to a Modi-led PMO risks losing sight of what this crucial
relationship means for world politics in a more general sense.Indeed, there is little
doubt that India-US relations will strengthen. It maybe joyless, as Ashley Tellis,
senior associate at the Carnegie Endowment for International Peace, persuasively
argues, but it will be productive nonetheless.
Immediate concerns

There is an urgent need to address differences pertaining to intellectual property

standards. India is one of 10 countries listed on the priority watch list of the
United States Trade Representatives (USTR) annual report. The key issue,
according to it, has to do with Indias weak IPR legal framework and enforcement
system which hamper Indias innovation climate. This is most acute, according
to the report, in areas such as pharmaceuticals and agro-chemicals, where it is
difficult to secure and enforce patents.In turn, the BJPs retort is unrelenting.
During the campaign, Hardeep Puri, the former Indian ambassador to the UN and
now a party member, made it clear that the report is extra-constitutional.Even
special provisions such as settling matters prior to an out-of-cycle review were
put down by Puri as nonsense. The answer, according to him, lay in taking the
matter to the World Trade Organisations dispute settlement body. Rather than
resort to brinkmanship, simply because this is a determined US-led initiative, it
would be prudent to engage the US bilaterally to arrest such divergence.Further,
much has been written about the so-called freeze in US-India relations following
the Congress-led governments decision to award a $10.4 billion contract to
purchase 126 Rafale fighter jets.
The American offer of F-class jets did not make the final shortlist. The US military,
analysts argue, appears to have understood its mistake in taking the deal for
granted. Indeed, the defence relationship is far healthier than many argue. India
has spent around $10 billion on American airlift capabilities and other equipment.
In 2015, both sides will re-negotiate what is called the New Framework for IndiaUS Defence Relationship.It will be important to manage American expectations,
especially given the new Indian Finance Ministers desire to allow 100 per cent
foreign direct investment in defence.Much is likely to be spent on Israeli and
European platforms. Limiting the scale of potential dissatisfaction on the part of
American firms and government will introduce a transactional, professional
quality to a relationship.
Arguing for responsibility

The BJP government has a great opportunity to debate matters of global interest.
Courtesy Manmohan Singh questions around Indias nuclear status no longer dog
its advance. The days of nuclear apartheid are over. India now has a freer hand
to look at global issues beyond proliferation such as humanitarian intervention.
Since 2005, when the UN adopted what came to be called the doctrine of the
Responsibility to Protect (R2P), Indian representatives have been ill at ease. After
all, the idea behind the doctrine (adopted at the UN 2005 World Summit
Outcome) is to empower the international community to assist, place pressure,
and even intervene in cases where a state no longer offers protection to its
population.India has staunchly opposed intervention, seeing it as nothing more
than a Trojan horse for refurbished imperialism, according to one former Indian
representative to the UN. The invocation of R2P, in the case of Libya, only
reaffirmed the view of Indian diplomats. Nonetheless, R2P is hardly a finished
product; it is a doctrine in need of development.Rather than remain permanently
disenchanted, there is an immense opportunity for India to demonstrate
leadership and argue the merits and demerits of R2P with American counterparts.
To be sure, a major foreign policy speech by President Obama on May 28 made
clear that one of Americas key priorities will be to strengthen and enforce
international order. Such enforcement has done little in Libya. Whether or not
arming rebel groups in Syria will prove effective is highly questionable. Clearly,
the question of intervention is not going away. Rather than remain on the
sidelines, there is an opportunity for India to engage the US to find a balance
between two very different sets of approaches to intervention.India and the US
share a relationship like none other, a relationship that can use matters of
immediacy to energise and build the necessary confidence to disagree; issues of
international concern can be discussed as well. This will require ambition and a
sense for vision, but has the potential to draw India and the US into a dialogue
that will help shape a more constructive and balanced 21st century.
9. The ball is in the Governments court
One of the better aspects of policymaking in India is the fixed periodicity of
monetary policy announcements. No other policymaking unit functions with this
assured regularity, barring the finance ministry.So, the RBIs bi-monthly policy

statement yesterday was along expected lines. But it was heartening to note that
the Central bank stuck to its knitting with unswerving punctuality, despite the
change in government. Monetary policy, however, has to wait for cues from
public policy; the Budget may point to major policy changes if the Modi
government and Arun Jaitley are eager to show their paces and their commitment
to the kind of change their victory presages.
Playing safe

The RBI has played safe. It has reduced the statutory liquidity ratio (SLR) 50 basis
points; not a very significant cut, certainly not the slash some media called it,
more of a modest statement of intentions. As of now, it has to plough the lonely
furrow of inflation control.This is all the more necessary in a country like India
where for some strange reason inflation control seems to have shifted to a
remote corner on the policy radar. It has almost vanished from the list of
concerns of the organised middle-class elites who do not seem to think the
current rates of inflation are anything to feel worried about. Indias middle-class
seems to have become anaesthetised to rising prices.The old debate between
growth and price control has shifted in favour of growth and nowhere was this
more evident than in the latter part of the UPA-IIs term.The RBI under the former
governor D Subbarao had stuck to its guns of a tight money policy in the face of
increasing irritability from North Block about its resistance to growth.Among the
industrial elites, the attitude towards the Central banks insistence on not
lowering rates had ranged from weary resignation to constant complaints about
high interest costs.
Nuanced balance

For Raghuram Rajan, the balance between inflation and growth is more nuanced
than for his predecessors who placed their bets on price stability.In a speech at
the Bancon conference in Mumbai in November 2013, Rajan erected five pillars of
RBI policy. The first was of a monetary framework that had to balance the burden

of inflation occasioned not just by supply constraints but by demand pressures

with the impulses of a weak economy in which demand reduction could affect
investment and supply.As he had said then, This is a balancing act which requires
the RBI to act firmly so that the economy is disinflating even while allowing the
weak economy more time than one would normally for it to reach a comfortable
level of inflation.But success here depends as much on New Delhis initiatives to
augment not just supply but also investments, so that the malign effects of
disinflation are mitigated.From the safe and cautious path that the bi-monthly
policy statement treads, it is clear that the Central bank is waiting for those
initiatives from Delhi to set into motion more easy monetary policies.The
statement also makes clear that the Indian economys bounce-back depends a lot
on the global atmosphere.
Global factors

This is a timely reminder to those who think an individuals messianic zeal for
development can work wonders in an economy enmeshed into the global one.The
trajectory of the global economys path, in particular the fortunes of the US and
EU, therefore, matters more than we would like to admit.It would be appropriate
to remember that the years of high growth were also those of robust global
growth till events in 2008 and subsequently brought the edifice down. The RBI
sees some growth traction in the US and UK, but not in the EU. And till that
happens, Indias leading export sector, IT, will flounder; in the meantime,
competing developing countries such as the Philippines are muzzling in, and that
can spell some fierce competition for an industry that had become complacent
about its well-deserved reputation in the global IT space.
Growth in sight

The RBI admits to sluggishness in the domestic economy and expects growth to
pick up in the coming quarters, perhaps from September on. In the meantime, in
a generous giveaway it has enhanced the limit of outward remittances under the

Liberalised Remittance Scheme to $125,000 in view of the recent stability in the

foreign exchange market with just a few end-use restrictions.The RBI has taken a
bold step forward even if gingerly; the first under the new regime that
acknowledges the pent-up urges of the organised economy. The reduction in the
SLR is to allow banks more elbow room to lend an anticipated pick-up in
investment demand. However, the Reserve Bank is also cognisant of the
significant on-going financing needs of the Government a thought that
tempers its hand to just a 50 basis point increase in liquidity for the private
sector.And the Central bank makes it clear that any further change will of course
depend on the fiscal consolidation that the new Government can achieve.In its
first policy statement after the new regime has taken charge, the RBI has perhaps
tried to tune into the new regimes music and yet kept its distance by making a
few points clear: first, that the success of monetary policy depends on the ability
of public policy to affect supply changes, that its ability to release funds calls for
fiscal consolidation and that the fortunes of the domestic economy depend a
great deal on the global economy.It is the interweave of these factors that will
determine the RBIs future moves both with regard to inflation and growth.
10. Signs of normalisation
As expected, the Reserve Bank of India maintained the status quo on policy
rates in its bi-monthly policy statement yesterday. With the benchmark Consumer
Price Index (CPI)inflation rate still holding stubbornly above eight per cent, it
would have required a significant change of heart on the part of
Governor Raghuram Rajan to do otherwise. This clearly was not on the cards.
Having committed to a particular trajectory in its quest against inflation, it makes
little sense to change it in the absence of any easing of inflation. In fact, the
baseline projection of the CPI inflation rate for March 2015 is indicated at 8 per
cent, which, effectively, rules out any rate cuts until then. However, the policy
statement opens up some possibilities of that happening, stating that the risks
around the baseline are evenly balanced. On the upside, the main danger is the El
Nio threat to the monsoon, which can cause trouble through higher food prices.
On the downside is the prospect of the new government getting to grips with the
many supply-side problems and fiscal stresses that the economy is struggling

with. On balance, though, it would perhaps be naive to expect the RBI to begin to
stimulate demand any time soon.
However, while maintaining its stance on the policy rate, the RBI has taken a
number of steps that reflect something of an easing as well as a signal that the
currency situation is returning to normal. As regards easing, the statutory liquidity
ratio (SLR) was brought down by 0.5 percentage point to 22.5 per cent of banks'
net demand and time liabilities. This may not seem like much, but it achieves two
objectives. One, it increases the banking system's capacity to increase credit
quickly, should some growth momentum emerge. Two, importantly, it reduces
the government's access to bank funds, creating one more incentive to contain
the deficit. Expectations of normalisation on the external front are manifested by
three measures. One, liquidity facilities against export credit have been rolled
back and offset by an increase in unconditional facilities. Two, outward capital
flow limits, which had been reduced during the rupee turbulence last year, have
been partially restored. Three, foreign institutional investors (FIIs) are now
allowed to hedge their rupee exposure in the domestic derivatives markets, with
an additional allowance of 10 per cent. The last measure is likely to contribute
significantly to market development.In sum, on the monetary policy front, the RBI
has stuck to its guns, asserting that it will not back down from its fight against
inflation. This may, of course, get the government's back-up, but, as the RBI
governor has made very clear, he alone decides monetary policy. The government
would be well-advised not to go down the route of confrontation. It is far more
important to begin to quickly address the supply constraints that are combining to
keep inflation high. Only if the responses are visible and credible can the RBI
justify a reversal in its position. Of course, in the absence of appropriate actions
and the El Nio threat materialising may induce the RBI to tighten rather than
loosen its stance over the next few months. As it has been for a long time, the ball
is firmly in the government's court.