Friday, December 19, 2014

A perspective on the Impact of FDI on the Retail Sector

By Sibin Sabu, Research Intern
Any investment made by a company or entity based in one country, into a company or entity based in another country may be called Foreign Direct Investment. As per OECD (Organization for Economic Co-operation and Development), the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company for it to be considered a FDI. Thus an FDI will give the investor a certain degree of influence over the management of the enterprise.
Foreign investment in India is regulated by the RBI and the Foreign Investment Promotion Board (FIPB) under the Department of Economic Affairs, Ministry of Finance. FDI is not permitted in all sectors in India. The government has prohibited FDI in Atomic Energy, Lottery Business, Gambling and Betting, Business of Chit Fund etc.
Retail Market in India in 2011
Any person or business selling goods to a consumer may be called a retailer. Therefore, wholesalers and suppliers are not considered as retailers. The retail sector accounts for around 15% of GDP and is the largest component of service sector in terms of contribution to GDP. Retailers may be broadly classified into organized retailers (those registered for Sales Tax, Income Tax etc) and unorganized retailers (small local shops). In most of the developed nations, the penetration of organized retail market is usually well over 50%. A major reason for this is FDI in the retail sector.
Until 2011, Indian government did not allow FDI in multi-brand retail, forbidding foreign investors from any ownership in supermarkets, convenience stores or any retail outlets. Even single-brand retail (eg: Reebok, Nike) was limited to 51% ownership and a bureaucratic process. Not surprisingly, organized retail accounted for only 7% in 2011 and the food and grocery Sector which accounts for two-third of retail in India had only 2% organized retailing. In terms of retail sales, only $27 bn out of $470 bn came from organized retailing in 2011.
The FDI reforms in Retail (2011)
In order to tap the potential and advantages of organized retailing, the UPA Government under Dr.Manmohan Singh introduced significant reforms in the retail sector in November and December of 2011. Government allowed 100% FDI with 30% local sourcing requirement in single brand retailing and 51% FDI with no sourcing requirements. The government permitted 100% FDI in cash and carry also.
In multi-brand retail it permitted 51% FDI subject to certain conditions. It should operate only in cities with population in excess of 1 Million and with 30% sourcing from MSME, along with capital and supply chain investment requirements.  Multi-brand retailers must have a minimum investment of US$100 million with at least half of the amount invested in back end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing to considerably reduce the post harvest losses and bring remunerative prices to farmers.
However, the opening of retail competition will be within India's federal structure of government. Thus states of India have the prerogative to accept it and implement it. Even though most of the Congress led states supported the initiative, the communist party is against the move and BJP is strongly opposed to introduction of FDI in multi-brand retail. Hence, even though it is estimated that around 53 cities out of some 7935 towns and cities in India has a population over one million, only 18-20 cities are expected to allow FDI in retail.
What Opponents to this Reform Say
The government’s bold decision to allow FDI in retail did not go down well with the political parties who sharply criticized the government for introducing reforms that will put millions of local shop owners out of business. The move has had several opponents, especially in the political circles, with various reasons being cited to justify their stand.
Opponents argue that, in addition to eliminating the middle-man, suppliers might also be pressured into taking lower margins. Over time, this will reduce the local economy since the small retailer and the middle man play a large part in supporting the local economy by procuring goods and services from the locality. Large retailers, on the other hand, usually acquire goods from other regions and foreign markets, hence reducing the local economy.
They also argue that retailers like Walmart will lower prices to eliminate competition and become a monopoly after which they will charge exorbitant prices. This was allegedly the case of the soft drinks industry (eg: Pepsi and Coca-Cola). However, this is very unlikely to happen because big players like Walmart, Carrefour, Tesco etc are some of the major retail companies that have been in operation for over 30 years in numerous countries and they have not become monopolies anywhere.
Another argument commonly raised against this move is the potential job loss. In reality, it is unlikely that jobs will be lost or created with the introduction of FDI. They will simply be displaced. Those working in the unorganized sector will move on to work in the organized sector. Some jobs will be lost in the unorganized sector. But, jobs will also be created by the organized retail market in equal measure, if not more. Hence, the argument about loss of jobs is not a valid one.
Potential Impact on Key Stakeholders
The impact of these reforms on the key stakeholders presents an interesting picture. The Government is likely to witness improvements in Balance of Payments and Tax Collections while the farmers will have the opportunity to achieve better price realization due to better supply chain and lower wastages arising from better back-end infrastructure. For the consumers, these reforms could mean lower price compared to unorganized retail, better shopping experience and a wider choice.
The Indian Retailers would also benefit from the cost effective and better supplier base created by the foreign investors and will have access to better technology as well as possible capital infusion from international retailers.
For the unorganized sector, this could result in an overall increase in consumption and give them an opportunity to improve operational efficiency. The decrease in their market share, if any, is likely to be just 1-2% according to researchers by 2016.
Another factor in favor of FDI in retail is that competition between Walmart-like retailers will keep food prices and inflation in check as lower food wastage implies lesser inflation. Historically, inbuilt inefficiencies and wastage in distribution and storage account for why 40% of food production doesn't reach consumers. Food often rots in farms, in transit, or in antiquated state-run warehouses.
Cost-conscious organized retail companies will avoid waste and loss, making food available to the weakest and poorest segment of Indian society, while increasing the income of small farmers. Thus, it also offers a ray of hope for the 50 million malnourished children in our country.
The biggest gainers will be our farmers. In an agrarian economy like ours, this in fact becomes the selling point for this reform. Indian farmers get only one-third of the price consumers pay for food staples and the rest is taken as commissions and markups by middlemen and shopkeepers. For perishable horticulture produce, average price farmers receive is barely 12 to 15% of the final price consumer pays. For example, Indian potato farmers sell their crop for Rs. 2 to 3 a kilogram, while the Indian consumer buys the same potato for Rs. 12 to 20 a kilogram.
This scenario will be changed significantly with the introduction of foreign players in the market who will procure goods directly from the farmers, reducing the role of middlemen and giving much better prices for the farmers. This could thus lead to poverty eradication and economic development of farmers in our country and all known farmer associations have come out in the open supporting FDI in Retail. Apex commercial chambers such as CII and FICCI also support this initiative.
We suggest that the current BJP government review its stand on FDI in multi-brand retail and encourage foreign investors to enter our retail market. The idea of implementing this decision at select cities with population of over 1 million initially is a good one as it allows time for the market to adapt and compete with the foreign retailers. However, to make the most out of the potential of FDI, it should gradually be allowed in other states as well.
Another important point to be noted is that introducing the reform is not the end of it. It will not provide sufficient reason for an investor to invest in our country. For that to happen, the government must also develop the proper infrastructure and transport networks facilitating faster movement of goods. The government must also work towards simplifying the registration process and taxation policy. The attempt of reforming the Goods and Services Tax is a step in the right direction.
After careful analysis, we can find that the positives far outweigh the few minor drawbacks of this reform. Trade-off might be the apt word for describing the impact of FDI in retail. If we leave the politics and vested interests aside, FDI in retail should be a win-win proposition for all those involved, more so for the farmers and consumers. It should, instead, be celebrated.

Thursday, November 06, 2014

Forest Resources-State vs. Private Individuals

All innovative measures introduced by the state to tame the rapid degradation of forests in India has not been able to generate positive impacts. These measures could neither halt the pace of degradation nor slow it down significantly to regenerate the lost resources.

The results first. The 2011 Forest Report indicates that 21.05 per cent of the total area in India is comprised of forests. Between the period 2009 and 2011, while some of the states have successfully added to its forest cover, the loss of forests coverage in most other outweighed these additions. The overall loss has been estimated at 367 square kilometres in India. Among these states Andhra Pradesh, Manipur and Nagaland lost more than 100 square kilometres, only the state of Punjab gained a 100 square kilometres forest coverage during the same period. In both the north eastern states the decrease is attributed to shortening of shifting cultivation and biotic pressure. In Andhra, which witnessed the largest decline, it was attributed to management interventions in cultivation and clearing in encroached areas. Kerala lost 24 square kilometres of forest during this period. Illicit felling was reported only in the state of Assam. Most of the decline was in the open forest category while the dense forests gained in coverage area.

The Role of State vs. the Role of the Individual

Garret Hardin’s famous coinage of the “tragedy of commons” has theoretically provided space for justifying the role of the state as well as private players in managing the overuse and degradation of forests. In fact the theory is applicable to all natural resources where out of sheer self-interest, a private individual will always have the motive to exploit unsustainably. Several alternatives were suggested to prevent such exploitation. However, broadly it represented an allocation problem where either the private individual or the state legally assumed the task of managing these resources. In modern times what we have seen is that the state that has ultimately assumed a monopoly power in regulating activities connected with the forest. A key libertarian argument against restrictions by the state is that state officials who implement restrictions in using these resources is not affected by the cost of their action. However, if the rights of using the forests or natural resources are allocated to private individuals, they would surely have to bear the costs of their decision on how to use it. It then follows that the private individual would have more incentive to optimally use these resources and thereby reduce the cost that he has to bear. The Centre for Public Policy Research (CPPR) tries to expand this idea in the context of India to develop our forest coverage through letting individuals bear the benefits and costs of their decisions.

Growth and Environment, the Way Forward

In recent times environmental protectionists have pitched themselves against the advocates of economic growth. Trade-off between environment and growth has been a major political plank for various institutions and groups who participated in this tiff. CPPR believes that economic growth is inevitable and necessary to sustain the ever growing demands of the humans. The level of scientific development that we have achieved today is a sure measure to tackle most of the environmental concerns that we face. As we move further the solutions to environmental concerns would develop through innovation and technological progress. However, if environment is projected as a concern to stall growth, it is highly likely that the progress of human civilization will be intercepted. The law should go beyond prosecution and legal sanctions and restrictions for that matter, and evolve a system where there are incentives to protect the forest. And if these incentive are in monetary terms that will attract more people to participate in owning and using forest sensibly. Beyond the private individual, communities or other interested parties could participate in these initiatives and have a stake in the process. The reasoning should be the same as for the individual. A major contribution should be made by the governments at the local level. Centralization of Acts and Policies have also build a space where officials never were compelled to own responsibilities of their individual acts. Greater stake for local level government would make the process more transparent and would raise the standards for ownership. Forests would thus serve the dual purpose of providing a shield against environmental concerns as well as in developing a pool of wealth and resources for its owners.

The results should be obvious. Private ownership would not only allow individuals to value natural resources and protect it for their own sake but also would make them equally responsible for its degradation. The flip side is that these resources would become an income earning asset for its holders. Of course what prevents this situation is the several road blocks and inefficient laws which exists currently and the overenthusiasm of the state in holding on to these forest resources. We have reached a point where the monopoly of the state is assumed as natural as these natural resources. This has prevented individuals from accessing and using forests more creatively. What is required is to break free these notions.
Rahul V Kumar

Friday, October 03, 2014

India’s Middle East policy is due for an overhaul

By Eli Bernstein*

It is no secret India is about to turn a corner and enter the world stage. Modi is well positioned to steer India from a developing nation to a nation developed. However, this rise should not be limited only to economic development. India, the world’s largest democracy and soon to be the world’s most populous nation is right to insist its voice should be heard on global affairs. This greater role in the international arena should include permanent membership of the UN Security Council and playing a key role in keeping world peace and the fight against international terrorism.

To do this, India must change its foreign policy on a number of fronts.

First, India must recognize that affairs in today’s world are increasingly global. India is not an island. India can — and should — become a diplomatic powerhouse as it grows in economic significance. India has a role to play in forming international policy, in the fight against terrorism, and in keeping world peace, order and and good government.

I do not mean to belittle India’s international contribution to date. India played a leading role in the non-aligned movement, in the BRICS block, and in many other international forums. It is the second largest contributor of peacekeeping troops, having contributed 100,000 troops over the past 50 years — but all that said and done, India’s role on the world stage cannot be said to have been that of a leading actor. It was a supporting actor at best.

India now deserves the spotlight. It has successfully conducted the largest democratic election the world has ever seen, and it did so, without a single ‘hanging chad’. India can proudly stand shoulder to shoulder with China and the US, as one of the world’s captains. India must insist on reform of UN Security Council (and reform of the NPT) so as to ensure it has all the rights and privileges China and the US enjoy. This is a grand moment for India, a juncture in history which it should not miss
Second, India must farewell old alliances, and in particular its role in non-aligned movement, if it plans to stand shoulder to shoulder with the world’s greatest powers.

At the risk of sounding like the boy in the Emperor’s New Clothes, I will say this plainly, the non-aligned movement has long outlived its usefulness. I say this with no disrespect to India’s leadership in the movement and pay no insult to Nehru’s vision, but truth be told, the non-aligned movement was a product of the cold war which should have expired at its culmination.

India does itself no favours in being part of this club whose membership include/d the likes of Zimbabwe’s Mugabe, Castro’s Cuba, Chavez’s Venezuela, Khameni’s Iran, Saddam Hussein’s Iraq, Jong-Il’s North Korea, and Europe’s last dictatorship. India of today must pick its friends more carefully.

While India ought not forget its roots, it must look in the mirror and see has grown beyond that. It has graduated that phase in its development and can now play in a higher league. Every graduation comes with the pain of saying goodbye to old friends. India under Modi’s stewardship, must choose pragmatism over sentimentality; must look forward, and not back. This means diminishing India’s role in the non-aligned movement. As the Hebrew saying goes: ‘rather be the tail of a lion than the head of a fox’.

Third, an opportunity now exists in the Middle East for India to demonstrate leadership in global affairs, and earn its stripes for a permanent Security Council seat. America’s influence in the Middle East is waning with Kerry’s disastrous ceasefire attempt being the last in a series of bungles that left America’s credibility in the Middle East in tatters. Kerry’s flirtation with Qatar and Turkey (which killed any prospect of the Egyptian ceasefire succeeding — back when the death toll was only 70). This is the latest in a series following the USA’s lackluster performance Iraq, its weak commitment in Afghanistan, its empty words of ‘red lines’ in Syria, its circular diplomacy with Iran, and its betrayal of long term allies in Egypt, Saudi Arabia and Israel — all coupled with an incoherent Middle East policy defined by misunderstanding and arrogance. For the rest of Obama’s term in office, he can do nothing of meaning in the Middle East without powerful allies.

These allies are not the UN, the EU and Russia. The Quartet has outlived its purpose and should be retired. The UN has never been useful in doing anything more than issuing words. It has not acted in neutraility and as such can play no productive role going forward. The Europeans have their own house to keep in order — with the rise of Islamic fundamentalism one one side and the revival of fascism on the other — and is better spending its time on domestic issues. Naturally, it can always contribute to peace by donate to a relief fund when called upon. Russia is simply in no position to be at a table discussing war and peace.

Enter China and India.
China has been trying to play a more active role in the Middle East. It has sought entry into the quartet, has sent a high level Special Envoy to the region and tried to host a meeting between Israeli PM Netanyahu and Palestinian leader Abbas in Beijing. India too should enter the foray, and along with China and the US back a regionally-led solution.

The recent US faux pas saw an unusual alliance formed by Egypt, Saudi Arabia, Israel, and the Palestinian Authority (Recent developments against ISIS will only further strengthen that alliance). A peace process led by this group, on the basis of the Saudi plan, would have a far greater chance of success than any US led initiative. Replacing the defunct quartet, the role of India, China and the US could be to facilitate such an agreement, to raise funds for a peace dividend, and to commit international peacekeeping troops.

But before India can do so, it must put a stop to its knee-jerk anti-Israel vote in UN forums. It treats a potential ally as foe and serves as a restrictive precedent for India’s own response options against terror groups. India would be well advised to follow the European model of abstention rather than vote against Israel because of old habits of the Indian foreign office. In the long term, India could play a far more productive role in resolving the conflict, if it can first demonstrate a greater degree neutrality.

Fourthly, as India has learned through painful lessons, terrorism by non-state actors poses a greater risk to India’s security that conflict with its neighbors. In this way, India is at least as vulnerable as the West. India, home to the world’s third largest Islamic population has an interest in promoting a peaceful interpretation of Islam, that does not fan the flames of violence and hatred. A global problem like terrorism can only be addressed through a coordinated global approach, be it in the battlefield of ideas, in the vaults of banks or in combat. India would do well not to stand on the sidelines as these discussions take place.

Finally, India must choose its partners wisely and ensure that it has allied itself on the right side of history. India must not be in a position where its resource dependence affects its Middle East foreign policy. This may require, for instance, the need to diversify its gas suppliers.

The bottom line is this. While Modi campaigned on a domestic platform, he cannot afford to leave the policy making at the foreign office unchecked, as India’s economic, strategic and diplomatic futures are intertwined. It is high time for India to step up and punch its weight in global affairs. To do so, it must first withdraw its role from the non-aligned movement and seek to stand side by side with China and the US in a tri-polar world. India can earn its diplomatic stripes by playing an active role in Middle East peacemaking alongside the fight on terror, but first, its must show its neutrality — through abstentions in anti-Israel resolutions at the UN and by choosing the right set of partners in the Middle East.

*Eli Bernstein is former president of the Australia-India Business Council in WA and blogs on middle east policy for The Times of Israel. He writes this article in his personal capacity.

Wednesday, August 27, 2014

“It is not your fault consumers!”- Understanding Kerala state’s historical mismanagement of the liquor market.

The liquor policy of the government of Kerala announced last week, takes into account the dramatic rise in consumption in the state. However, it smacks trouble for the years to come. Although much time has passed by for contemplating on the new Abkari policy it still appears that the state government has made a hasty decision to implement complete prohibition in Kerala over the next decade. As a prelude, bars will shut shop and the retail outlets owned by the government will be reduced in numbers. The decision is not without consideration of certain facts which researchers in the field have often pointed out. A major concern is the possible rise of illicit liquor production as well as smuggling of liquor from outside the state. According to recent media reports the state government is stepping up its vigil to address this concern by strengthening monitoring through its excise department. All appears fine until this point; but certain questions remain which will pose challenges to the state government in the near-term. Since the present policy has been mostly one-sided with the state government saying and citizens consenting, it is particularly important to understand the State in relation to managing the liquor industry. Two questions are worth examining in this context.

1.     What has been the role of the State in dealing with commodities whose consumption is largely understood only in terms of negative externalities that they generates?

2.     What should be the role of the State?

What has been the role of the State?

Historically consumption of intoxicants have been seen as a ‘bad’ in India. Article 47 of the Indian constitution gives formal authority for the State to take its stand on intoxicants. When a commodity is defined[1] as a ‘bad’ it also creates enough space for bargaining on ‘how to deal with such commodities’. This is a possible source for rent-seeking too. In other words, ‘bad’ commodities generate conditions where power plays an important role. Religion and politics have capitalized on these ‘bads’ from time immemorial to accumulate power and establish their cause. For the State, a ‘bad’ also offers a reason for the State to exist. The reason is that it should exist to protect its citizens from any and all influences of this ‘bad’. The politically most efficient manner of dealing with such commodities then was to introduce piece meal policies which could influence and reduce its harm at various stages. Several such interventions were made by the state in the liquor industry since independence. The current policy of taking a decade to implement prohibition seems to follows this same strategy. Alongside such considerations, as Foucault has pointed out, places of saturation of such ‘bads’ were created where they were allowed to proliferate, while being monitored immeasurably by the state. The dingy bars serving liquor has often manifested as these places of saturation. At its heights it became a visible feature of such joints where one could see the drunk lying outside it on the pavements. Let’s stop here and consider the following effects of the strategies.
The success of defining a commodity as a bad: For Kerala, several decades of discourse on liquor has developed certain observations on the pattern of consumption as well as impacts of consumption on the society. This discourse has generally favoured the state’s current decision. A parallel discourse on how one can make the liquor market efficient has not successfully made an impact. A definite counter strategy would have looked at the possibilities and degrees to which liquor is a ‘bad’. These can provide a space for negotiation with the state policy.
The places of saturation: For a ‘bad’, the state handled liquor as loosely as it has handled other bads. There was no attempt to redefine the status of this commodity. It was left to rot in dingy and notorious bars, shady corners of the streets where you had retail outlets as well as by leaving an entire apparatus of monitoring and control from being transparent and efficient. In the course of time these places were themselves used as points of negotiating with the consumers. Now dark and dingy wayside bars are considered as sources of crime and ill health in the State.
The effect of State intervention - Consumers made to regret for no fault of theirs
Kerala has successfully used these two cards (production of a negative discourse on liquor and creating shady places of saturation) to roll out its latest strategy on liquor. The immediate effect of highlighting the pathetic condition of liquor industry in Kerala is to make its citizens feel guilty about the condition in which their only mistake was that they were consumers.
For a state like Kerala which has strong undercurrents of class and caste tensions, the present government considers this policy to successfully impact the upcoming elections to the legislative assembly. However, we have to ask our State certain questions before addressing the efficiency of these policy. For liquor is a sector which reflects the State’s failure in handling activities which was never meant for it. Kerala government could have focussed its attention on a large number of other issues (and there is no dearth for them) rather than wasting time to be a seller of liquor (no derogation intended on the sector). Such activities (buying and selling of commodities which have a market value) are better played out in the market by private players. States are good, given the extent of resources it possess, to monitor and appoint independent regulators for the efficient functioning of these sector. There can be well drafted rules and regulations which could ensure competition in the market for liquor.
The present state of liquor market in Kerala should be seen more as a failure of the federal state to assume the role of a seller in the market than anything else. Now the burden of this failure is being put on the shoulders of the consumers. The consumers and their dependent are made to feel bad for the federal state’ mismanagement of the sector. How less right could such a policy be for the ruling Right?
What should be the State’s role?                                                                                
The State has time to rethink its liquor policy and change the face of liquor industry in Kerala. Our memory of this sector has been associated with ‘bad’ because of the largely inefficient manner in which the State followed its strategies to saturate the sector in infamous bars and create a one sided discourse over time. The political use of the market is bound to fail in the near-term and raise the social and economic costs of the state. Hence, it is not the fault of the people who have been pin-pointed in all the media reports as well as research documents for the notoriety that the liquor industry in Kerala has earned. It is rather a State failure so glaring but not easily recognizable.
The federal state of Kerala could reconsider its policy. The first step in this regard would be roll back from its current status as a seller of liquor. Hand over this task to people who are serious about this business and who can carry it out in the most professional manner. If tax revenues are a concern, the State could liberalize the sector and allow foreign players to enter the industry. A major benefit in this regards would be that the competition would improve quality standards and make the worst performers pack their bags. The time of shady bars would then be past. The state government can ensure that they monitor and improve the chemical testing laboratories in Kerala and prescribe standards in quality of the product to be supplied here. Liquor and intoxicants have lasted alongside mankind. It will continue to last in different forms. The best way to deal with it, given our current institutional environment, is to facilitate their stay by ensuring standard practices. Banning might just not be a suitable option.
Rahul V Kumar
Research Consultant
Centre for Public Policy Research

[1] This is a very tricky issue. Who should define what is good and bad?

Monday, August 11, 2014

Constraint to long-term strategy: Understaffing in the Indian Foreign Service

By Padmini Gopal*

India’s GDP of US$1.8 trillion[1] and an expected growth rate of 6.4per cent in the year 2015[2] is a testament to India’s present status as a rising world power. Moreover, India’s present nuclear competence and clout, with almost 90-110 nuclear warheads[3], makes India’s current status unequivocal. Despite that, India seems to be plagued with ‘interstate rivalries that resemble 19th century Europe’[4]along with a myriad of challenges that beset the 21st century, such as terrorism, cyber security, climate change and maritime piracy. These challenges are only amplified by the uncertainty omnipresent in the international arena, with Pakistan reluctant to assure India of security from future terrorist strikes, China unwilling to let go of its claim over Arunachal Pradesh, and a Sinhalese led Sri Lanka refusing to give legitimacy to the wishes of the Tamils. So is India capable of living up to its title given the uncertain international arena it is a part of? Can India be taken seriously as a world player when such hurdles bog it down? Lack of a long-term national strategic plan addressing these issues and the role India should play as a world power will soon make India’s status just a dream.

So has India developed a long-term strategy in its foreign policy? Analysis of interviews conducted with Government officials suggest that India has not been able to do so as the officials, in this case the Indian Foreign Service (IFS) officers, are overburdened with multiple responsibilities and portfolios. The problem seems to be attributed to an understaffing problem inherent within the IFS system, which can affect India’s capability of creating a sound long-term national strategy.

This civil service, assigned with the task of conducting diplomatic relations with other countries for India, is one of the most prestigious and powerful government bodies in India. While being a part of the Ministry of External Affairs (MEA), the IFS also works with several other bodies that are tasked with formulating India’s foreign policy, namely, the Prime Minister’s Office (PMO) and the National Security Council (NSC). Ithas been recruiting a meagre number of 36 officers every year, double than what it used to be 30 years ago. The IFS have been struggling with the problem of short staffing for decades now, so the problem is not something new. However, India’s rise in the international arena has brought this problem to the fore.
As of 2013, around 930 professional diplomats staff India’s 120 missions and 49 consulates, smaller than any of the BRICS countries[5]. Despite being the second most populous country in the world, India’s diplomatic strength pales against that of world powers such as China and the US, which have 4000 and 20,000 diplomats respectively.

The small strength of India’s diplomatic cadre can prove to be a significant constraint to formulating long-term national strategy when officers end up getting encumbered with multiple responsibilities and dealing with present challenges, leaving little or almost no time for proactive strategizing. One can only wonder how five diplomats in charge of more than 30 Latin American and Caribbean countries can possibly have the time for long-term strategizing.

The obvious solution to this problem would be to recruit many more diplomats to ease each officer’s burden.  The division of labour that would result from hiring more IFS officers would allow for some officers to solely focus on the formulation of India’s long term strategy. However, this may not strategically be the best way to go about addressing the issue. The IFS would run the risk of further decreasing the quality of its workforce, another issue the IFS seems to grapple with as a result of its lack of lucrativeness and power in comparison to other corporate and government jobs, if it hires more diplomats. Moreover, it may not be the best strategic move to rapidly recruit more diplomatic personnel as it may compel other countries to stand on their guard.
So what is the alternative solution to the problem? While India may consider slowly increasing its diplomatic personnel, it could also take the consultation of national strategic expertise from Indian think- tanks to fill in the capacity gap that seems to put a strain on the IFS’s capability to long-term strategize. However, the IFS’s culture of privacy and security impede the ability of think tanks to conduct useful policy research. Most Indian foreign policy and military archives are classified and inaccessible to the public. ‘IFS officers are quite candid about their lack of reliance on think tanks’[6], writes ManjariChatterjee Miller in an article for the India Review. It is imperative that the IFS change its attitude. It needs to become more transparent and engaged with foreign policy think tanks. Consultations with think tanks can facilitate the IFS in developing a long- term strategy while the IFS recruits more officers dedicated to developing the same. And with a group of IFS officers designated to long-term strategizing, India may be able to live up to its title as a prominent global power.

* The Author worked as Research Intern at CPPR and is currently pursuing her Bachelors in International Relations from Trinity College, CT, USA

[1]World Bank, 2013
[6]ManjariChatterjee Miller (2014) The Un-Argumentative Indian?: Ideas About the Rise of India and Their Interaction With Domestic Structures, India Review, 13:1, 1-14

Wednesday, July 23, 2014

Some Alternatives for an Effective Judicial Environment

Entrepreneurship in traditional legal systems in India are often ‘non-existent’, even if we count the role of law firms or legal consultants, and debarring some very good legal journalism sprouting every now and then. However, from a citizen’s point of view or rather from a consumer’s point of view I just see the concrete in the pillars of justices; from the Supreme Court to lower courts. There was an emerging class of people, mostly lawyers who ‘fixed things’, a plumber like activity which, however with increasing leakages. They earned the tag of ‘settlement lawyers’ who over the years got overshadowed by the ‘administrative courts’, and an unhappy litigant who flew out of the country to seek justice. The concept of courts and justice have become stagnant (even some lawyers say that law has become stagnant thanks to the precedents!). There has been no innovation which has bettered the system to the benefit of its users, the litigants. Alternative Dispute Resolutions (ADR) mechanisms have started functioning as an extension of courts. Specialised professionals have not been able to contribute much to this.
The question is ‘Whether citizens have a choice of forums?’ or an opportunity to seek redressal without going to the courts. I am not talking about the Mafioso or the underworld gang’s and their ‘unjudicial behaviour’. I am talking about fixing issues or settling disputes at the preliminary level. Here again I am talking about simple issues which are given a topping by smart lawyers through complex use of legal language. This case is made out in relation to consumer issues; which have a set of consumer forums and systems from bottom to top. Just imagine when your phone goes out or your SIM recharge didn’t work. We don’t call the lawyer, even if he is your close friend (and hungry). You get custom replies through the service provider’s customer service. Going by the latest TRAI Report on Consumer Grievance Redressal Report; even the most horrible customer service does not perform very badly. Taking cue from this; can we think of similar centres to help the citizens becoming a potential litigant? The Gram Nyayalaya was a good idea but bad in implementation. It should have been outsourced it to someone!
Majority of the issues that hit the consumer courts are those relating to bad service, defects of goods which are largely fixed by the companies who provide the service or manufacture the product. The latest statistics mention that defective products constitute the worst offence (21.3 percent) with Banking the worst offender (16.3 percent). The consumer law has really matured to give them legal protection; but is still wanting in giving them ‘access to justice’. Service delivery mechanisms of government, especially at the local self government level have been suffering all these maladies. Since they are supposed to directly interact with the people; the impact of their activities is directly felt on them. Electricity, water, roads etc. can only progress through better grievance redressal mechanisms, than shying away from responsibility. Few states have enacted Right to Service Act which will be a game-changer if implemented in the right sense. But from various reports, it still follows the same route.
Issues to ponder
1) Number of courts - As per latest figures there are just 632 District Consumer Forums in India, which means one for every 20 lakh population 2) Time - Consumer case disposal in India stands at a good percent of 87 percent. However, the issue is the delay. The mandated time for disposal is 90 days for district courts and 150 days at state level as per Consumer Protection Act, 1986. Just 6 percent and 38 percent in district and state forums were disposed within this time. 3) Awareness - 70 percent of people in India are unaware of Consumer Rights (ASSOCHAM Social Development Foundation (ASDF), 2014). Approximately Rupees 3 is spend per person for Consumer Awareness in India as per 12th Plan Allocation for Jago Grahak Jago; the campaign which costs Rupees 409 Crore. 4) Access - The consumer forums don’t come to the aggrieved; you need to go there. Sounds genuine from a legal perspective; however the cost is high if one believes in the ‘idea of justice’. Not what Amartya Sen propounds but in the context of ‘justice to all’. What is the cost per litigant to approach the court? The argument that Supreme Court is inundated with Delhi litigants supports a rationale argument on proximity of courts.
Now I bring the entrepreneurship element in here. I would dream about start-ups vying each other to develop solutions for legal issues in India. It can be a mobile app to any high end tool which will enable one to dissect and treat disputes of the people. Don’t get me wrong here. It’s impossible to replace fellow lawyers and judges. It’s all about improving the mechanisms and systems which are more effective and efficient. We are far behind; or rather the judicial system has lagged behind when others have atleast jumped into the technology wagon. Other than a very low user-friendly court information system for providing causelist of the cases and judgment reports which you need to be lucky to get the right one, has not progressed much. M.J Antony in Business Standard had emphasized the horrible nature of court websites which are totally useless for a common man. Forget about those consumers who want to know about their rights or the laws existing. There is so much opportunities and lot to be covered. Our brother China has developed systems wherein the Higher Court judges can get the entire story behind the case before him in his screen; reducing wastage of time and ensuring quickness in action. Of course I don’t neglect the fact that judges need to be smart! The strategy should be to enable swiftness in action and precision in purpose which can happen only if we develop more ideas and innovate on solutions available for legal or judicial systems.
There have been some worthwhile attempts in consumer complaints redressal from private initiatives on public service systems. One of the impressive platforms is Akosha who had raised funds from Sequoia capital and Morpheus which has around 7 lakh complaints filed with 61 percent resolved. Another one is Consumer Complaints- Indian Consumer Complaints Forum in addition to the Core Centre run by the Ministry of Consumer Affairs which fails to impress. Such online initiatives will make a difference in the coming years as internet penetration increases. The idea behind such initiatives is to pool those disgruntled consumers and effectively pressurize companies to solve it or face it! Even those remarks on products and services in facebook pages or tweets have been seriously noted by companies to act swift before it jolts into a bigger issue, affecting its brand value. This is the power of technology and media! Just imagine if one post “We are celebrating our 3rd Anniversary. Still hasn’t got my marriage registration certificate”, on facebook, poking fun on the registration department for not issuing the certificate. Will anything happen? Of course you will get lot many likes and many sharing their disappointments or happiness! But the issue is still unresolved. Imagine what if IT Department of the Municipal Corporation traces the post via a developed algorithm to identify the person, cross check the issue and remedy it. Wouldn’t it be great!. Of course we have the technology’ but do we have the will? Look at the available mechanisms for registering consumer complaints; the National Consumer Helpline Number 1800-11-4000. The more you try to call on this number; the more aggrieved and frustrated you become. I often wonder why we have multiple helpline numbers (many of them not working). Can’t we have a single number system which integrates all services instead of forcing us to be a mathematical genius in numbers!! The Jansuvidha programme of Ahmedabad Municipal Corporation tried to work out an integrated system by providing a helpline for consumers under its jurisdiction. It was a good attempt and fairly successful but still needs improvement. With government investing huge money on e-governance initiatives I believe they have understood the importance; but have not been able to translate into action. It is here we need to utilize the services of entrepreneurs, NGO’s, companies who can connect with the consumers and assist in these process. Let the Jago Grahak Jago run with all their support.
The solution lies in different channels. One important thing is to reduce issues turning into disputes. The difference lies in intervention before the court process shall step in.
  1. For consumer related issues; better service and customer management would reduce the percentage of complaints by a huge margin. The government should invest more on improving their service delivery than on campaigns.
  2. Introducing Rating systems for products and services would help to measure and improve quality.  This of course shall need proper Enforcement/Regulation.
  3. Seek redressal locally and improving access to justice shall be a further step.
  4. Use technology in bridging consumers and minimize risks. Interconnectedness helps in effective resolution by quickening the process, bring transparency and minimize the cost.
These suggestions need further focus to really shape into practical solutions which can work for everyone alike. Opening the judicial and legal system is inevitable. We need professionals in court management, case management and even documentation. Judges shall be assisted by a team of such professionals who can support legal research, help them in their duty and facilitate the judicial process. Let Judicial Impact Assessments be carried out in a transparent manner through use of technology. Let the people really connect with the judicial system and remove the fear of the courts. These measures will enable in achieving ‘justice’. Let’s do justice for all!
Madhu Sivaraman

Director (Projects)

Monday, July 21, 2014

Critical understanding of the Indian budget 2014-15: The Case of Excise on Cigarettes

Does a tax on cigarettes serve any purpose? For a layman seeing the budget figures of a very high excise rate on cigarettes would mean that it indeed makes the stick costlier and would lead to a reduction in its usage. However, there are some crucial figures on smoking and the usage of tobacco which could paint a picture more nuanced than a layman’s observation. This picture also allows us to critically understand policy measures of the federal government. Here the federal budget 2014-15 provides us with this platform.

Does an excise increase matter? Costs, benefits and the illegal.

An excise taxes on the stick is likely to have little or no implications in terms of revenue generation (at least to sponsor health expenditure or to provide a source for funding big-budget expenditure) save for the cost burden passed on to the consumers of cigarettes. If that discourages them from smoking then well and good. The reason is simple and has often been cited. The Public Health Foundation of India estimated the economic cost of smoking at several lakh crores of Rupees and the direct cost to be approximately Rupees 16,000 crore. The expected tax gains of approximately Rupees 4,000 crore, from the excise hike, is nothing compared to the budget expenditure of approximately Rupees 18 lakh crores nor sufficient to cover the direct economic cost of smoking. The huge unregistered market for tobacco and intoxicants would just feel relieved following these hikes since it is more likely that people (not all, but at least a few) would shift to these substitutes. The above tax affects the registered legal part of the industry. But what about the unregistered sector and of course the no-smoke versions of tobacco? Unregistered cultivation of tobacco is prevalent in India. Tobacco Atlas by the World Lung Foundation in 2012 showed that out of the 35 per cent (approximately 275 million) adult population in India who uses tobacco a large number of users (164 million) use smokeless tobacco. Beedi and smokeless tobacco constitute 81 per cent of the total consumption. And of course there is a huge risk factor in consuming tobacco. The expected deaths by the year 2030 is 8 million. [1] But strictly speaking majority of this consumption falls outside the new excise structure.

How could the state be responsible?

To make the federal state accountable and responsible for these taxes it should be accompanied by a suitable reform to implement a well-defined objective (say for instance to promote health). The question is how much of these taxes reduce consumption and encourage a healthier life. For one thing, such a reason (to promote health) by increasing the tax rates is highly debatable. The argument is that any excise duty change is likely to influence only the dominant industries in the market; majority of the consumers would resort to other options and the federal and state governments does not yet have a catastrophic situation facing them due to smoking. This would then go on to suggest that the state should not remain a passive observer after the tariff hike; rather it should actively get involved in drafting and implementing a policy and a regulatory apparatus on handling the large illegal market for tobacco in India.  Now the market response to this hike in the budget and post-budget sessions were different. Major tobacco producer Indian Tobacco Company (ITC) found that the hike helped them compete much with the other industry players.[2] The Cigarette industry in India is an oligopoly dominated by ITC, Godfrey Phillips India (GPI) and Vazir Sultan Tobacco Company (VST). VST in which production is dominated by micro filters is likely to be most influenced most by these taxes. Foreign firms have a significant presence in these industries and their responses would depend on their shares. Continuous price rise following excise hikes in each budgets and additional Value Added Tax (VAT) by the federal states have promised a bleak picture for the industry. But not for the people, nor for the state. But yet nobody is interested in banning cigarettes; the reason might be that the externalities of smoke affect only people within a specific radius. Very few people would get irritated or concerned seeing a person smoke half a mile away (until of course you are allergic to the sight of smoke); and very few cares whether that person would die of smoking. And some others would say that this is much better than the soot filled smokes from our public transport vehicles. But a tax on smoking is likely to tickle one of our nerves awake and make us think and respond like a good citizen. A non-smoker would feel proud of the fact that the federal state is aware and concerned of our health; and it would be much appreciable that a health expenditure etc. of the citizens are kept in check. But here again no one knows for sure how much of the total budgeted expenditure on health goes to help the smokers and victims of passive smoking.     

If a tax should matter

If for one thing the excise has to matter it should makes the role of the state more prominent in producing the intended results. However, as mentioned these intentions are not clear. India has a policy of promoting exports of tobacco and we are the third largest producers of leaf tobacco in the world. There is substantial institutional infrastructure on research and development for tobacco. On the other hand this is also a product whose cultivation is influenced by the availability of a large amount of pesticides and child labour. So reducing consumption of tobacco should be preceded by certain institutional reforms and changes. But we don’t see any hurry in any of these requirements. India has already banned smoking in public places. The federal and state governments implemented the Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COTPA) to control smoking in public.  However, the policy has not been efficiently implemented since a complete monitoring would involve tracking each and every smoker constantly. There are obvious challenges if reduction in consumption is an intended result. If the state aims to reduce consumption it would mean that the existing regulatory apparatus should strive hard to bring the approximately 81 per cent of the looming unregistered market (of beedi or smokeless tobacco) within legal limits.  This is a daunting task considering the fact that smoke (or no smoke tobacco) need not come from the organized industrial units alone. On the other hand, the incentives for the state on a complete ban of cigarettes is negligible. 

A Critical Reminder on the Budget

The case of tobacco has significant lessons for the manner in which a budget document is often read or misread. Budgets as a policy statement has more life to it than merely being an accounting fact to understand the difficulty at the implementation level. Annual budgets for most laymen are interesting for the different numbers that they toss in front of us. Some appears interesting; but very few are understood in depth to reveal their underlying implications. But each of these figures are dynamic and has spread effects which goes in various depths with the various linkages that it has in the economy. For cigarettes at least, we see that the story runs deep; imagine what the case would be for the myriad commodities which have been included in the list. So does not the budget make a difference? It is worth thinking about.

Rahul V Kumar

[2] The increase in share value of ITC need not be restricted to its response to excise on cigarettes alone. ITC offers a range of products and the market value of ITC shares could also have been significantly influenced by how these products were dealt with in the budget.  

Monday, June 30, 2014

What should be the State’s stand vis-à-vis the alcohol industry in India?

The growing debate around liquor consumption in Kerala following the delay in issuing the Abkari policy statement in 2014 provides suitable grounds to discuss several important issues surrounding liquor production and consumption in India. A discussion is essential as liquor is going to last for a long time and a complete prohibition should not be expected in the near-term whatever be the stance of the individual state governments. But it is crucial that we understand what we are talking about before taking one or the other side on drafting a tighter liquor policy. The four southern states of India are special because they are not only the states where the state government directly involve themselves in various aspects of production and distribution, but also the states where consumption has remained relatively high compared to the rest of India. This points towards the fact that state control need not necessarily mean control over consumption of liquor, although that is the most prevalent explanation provided. In the northern states of India where license systems exist and private players are allowed entry into retail, consumptions levels are much lower.
The economic rationale behind alcohol industry
The alcohol industry is a major tax payer to the economy and this mostly comes from the steadily increasing customer base. In states like Tamil Nadu and Kerala, the state owned beverages outlets made revenue to the tune of 21,000 crore and 8,000 crore Rupees respectively during the financial year 2012-13. The latest National Sample Survey (NSS) reports estimates that the percentage of households consuming intoxicants (ganja, toddy, country liquor, beer, foreign refined liquor/wine and other intoxicants) have been increasing since 2004-05. Between 2009 and 2012, it has increased for both urban as well as rural areas.[1] In addition, the export and import of liquor has also been steadily rising since 2007.[2] It has been observed that seven of the top twenty internationally sold brands are Indian products.[3] Thus from the point of view of the federal government, the sector cannot be neglected for the sheer economic potential it holds both within and outside the country. Then the next question is, how should the State deal with this sector?
The State’s role
The role of the State should be well defined in this context. Should it be involved in operating the liquor industry (by controlling production to distribution) or should it promote and enforce strict quality regulations alone. Once the State detaches itself from the role of the seller it can assume the status of an unbiased observer and enforce a regulatory authority to monitor the quality and standard of liquor sold in India. We have already delayed ourselves in enforcing standards in production and consumption of liquor. For instance, whiskey is manufactured in India from ethanol made from molasses, which technically is called rum elsewhere. However, very few consumers know these differentiations. It was as late as 2012 that the Food Safety and Standards Authority of India (FSSAI) came up with a draft report on the standards to be maintained in preparing alcoholic beverages in India.
In addition to promoting standards the national government can also promote our products internationally. The popularity of molasses based liquor from India in foreign nations should be exploited to boost sugarcane production which could directly be beneficial to the farmers struck in the vagaries of sugarcane prices. We have approximately 6 million farmers directly involved in sugarcane cultivation who are yet to receive a competitive price for their product. Liquor is a sector that is valuable for the state in terms of revenue earned, but requires a lot of corrections especially with respect to the standards in production and consumption. The role of the State will be most valued in maintaining these standards through a powerful regulatory institution while promoting both the national and international market. India has much to gain by not trivialising these issues to mere moral concerns. Complete prohibition could just backfire in a manner similar to the events that followed the 18th Amendment of the US constitution.

[1] NSS Report No. 555(68 /1.O/1), Level and Pattern of Consumer Expenditure 2011-2012, 68th Round July2011-June 2012, Government of India February 2014
[2] Data for this is available in the World Integrated Trade Solutions (WITS) database.