Raghuram Rajan on FDI and capitalism

From Indian Express interview

In your book, ‘Saving capitalism from capitalists’, you wrote there is a more serious danger to capitalism from incumbents, who do not want new comers. It is here the government plays a big role. Is the idea being debated more actively?

In a sense, I was describing a process in which the power of incumbents was weakening to some extent. You still see it coming time and again. That process is going on and global competition is really helpful. To give an example, the other day Sunil Mittal was talking about how India would have been held back if we had given in to the Bombay Club. But now it was very beneficial, since we now have the Ludhiana Club. I think it would be even more beneficial, if in addition to the Ludhiana Club and the Madras Club and so on, we had in India the London Club and the Washington club.

We have allowed foreign entry. But we still keep making conditions. Foreign entry only if you have tie-ups with local entrepreneur. Sometime it is beneficial since local skills are needed. Sometime, it just holds up the foreign investor and forces him to share 26-30 per cent with the local incumbent. Three years down the line, with the local incumbent providing nothing, he buys out the local incumbent. The guy has got rent, and walks off with a pile of money. We have to figure out where it makes sense.

Govt considers edible oil price cut

BS reports

The Agriculture Ministry called a meeting of oil industries’ associations today to discuss the possibilities of reduction in edible oil prices.

In the meeting, the agriculture secretary informed the industry representatives the government wanted to keep prices of essential commodities, including edible oils, under control. He sought industry’s co-operation in that regard.

Leading industry body like SEA and SOPA said the import duty cut was unwarranted as it would directly affect the interests of growers. “As the mustard and Soya bean crop is arriving in the market, and cheaper imports means they would not get the expected prices,” they said.

Govt mulls ban on export of skimmed milk powder

BL reports

Having successfully deployed the export ban route to contain price increases in sugar and pulses, the Centre has set its sights next on milk. According to reliable information, a move is under way now to ban export of skimmed milk powder (SMP).

The Agriculture Ministry has already sought information from all State co-operative dairy federations on their existing export commitments and stock position of SMP as well as whole milk powder (WMP).

The communiqué, dated January 18, has also asked the federations to furnish details of their SMP/WMP production this year vis-à-vis the previous three years, besides the likely demand-supply scenario in the coming months. A copy of the letter has also been sent out to the National Dairy Development Board (NDDB) and its subsidiary, Mother Dairy.

"This could be the precursor to a ban on SMP exports," sources said.

Ferro alloy firms seek high duty to nip imports

Business Standard reports

The country’s Rs 4,000 crore ferro alloys industry, reeling under acute supply surplus, has sought a rise in import duty to 10 per cent from the current 7.5 per cent in a bid to discourage cheap imports from neighbouring countries.

With the duty reduction to 7.5 per cent in February 2006, imports of ferro alloys logged a significant gain in the first half of this financial year at Rs 346.62 crore.

'reeling under acute supply surplus', it seems. We shouldn't be surprised.

Bastiat wrote back in 1845

Which is preferable for man and for society, abundance or scarcity?

"What!" people may exclaim. "How can there be any question about it? Has anyone ever suggested, or is it possible to maintain, that scarcity is the basis of man's well-being?"

Yes, this has been suggested; yes, this has been maintained and is maintained every day, and I do not hesitate to say that the theory of scarcity is by far the most popular of all theories. It is the burden of conversations, newspaper articles, books, and political speeches; and, strange as it may seem, it is certain that political economy will not have a completed its task and performed its practical function until it has popularized and established as indisputable this very simple proposition: "Wealth consists in an abundance of commodities."

Do we not hear it said every day: "Foreigners are going to flood us with their products"? Thus, people fear abundance.

Has not M. de Saint-Cricq7* said: "There is overproduction"? Thus, he was afraid of abundance.

Do not the workers wreck machines? Thus, they are afraid of overproduction, or—in other words—of abundance.

Has not M. Bugeaud8* uttered these words: "Let bread be dear, and the farmer will be rich"? Now, bread can be dear only because it is scarce. Thus, M. Bugeaud was extolling scarcity.

Has not M. d'Argout9* based his argument against the sugar industry on its very productivity? Has he not said again and again: "The sugar beet has no future, and its cultivation cannot be extended, because just a few hectares of sugar beets in each department10* would be enough to supply all the consumers in France"? Thus, as he sees things, good consists in barrenness and scarcity; and evil, in fertility and abundance.

Do not La Presse, Le Commerce, and the majority of the daily newspapers publish one or more articles every morning to prove to the Chambers11* and to the government that it is sound policy to legislate higher prices for everything through manipulation of the tariff? Do not the Chambers and the government every day comply with this injunction from the press? But tariffs raise the prices of things only because they reduce their supply in the market! Thus, the newspapers, the Chambers, and the government put the theory of scarcity into practice, and I was right to say that this theory is by far the most popular of all theories.

Indian economy is 55.6% free

Heritage Foundation/WSJ's latest report on Economic Freedom says

India's economy is 55.6 percent free, according to our 2007 assessment, which makes it the world's 104th freest economy. Its overall score is 3.3 percentage points higher than last year, partially reflecting new methodological detail. India is ranked 19th out of 30 countries in the Asia–Pacific region, and its overall score is lower than the regional average.

India enjoys strong fiscal freedom, freedom from government, and monetary freedom. The top individual and corporate income tax rates are moderate, and overall tax revenue is not excessive as a percentage of GDP. Government expenditure is relatively low as well, although a significant amount of total tax revenue comes from state-owned businesses. Inflation is fairly low, but government price controls hinder market forces.

Click here to download the whole book.

Govt set to spend Rs 1,000 cr to revive four fertilizer units

FE reports

The government has decided to revive four of the eight closed fertilizer units of Fertilizer Corporation of India (FCI) and Hindustan Fertilizer Corporation (HFC) with an investment of about Rs 1,000 crore.

Initially, efforts will be made to revive Barauni, Durgapur plants of HFC and, Sindri and Gorakhpur plants of FCI through public sector participation. If the formula does not work, Expression of Interest (EoI) will be invited from private players.

If there is an economic case for spending Rs 1000 crore on these plants, the question to be asked is, what is really stopping private sector from making the investment. But that becomes a political question. And that's something that this report doesn't make any reference to.

‘Timing of lifting sugar exports’ ban wrong’

FE reports

The government’s decision to lift ban on sugar exports has not at all enthused the sugar industry. Although the industry welcomed the move, it said the timing was wrong since the industry would not benefit from exports as the international sugar prices are almost the same with that of the domestic market. Sugar prices are quoted at around Rs 1,350 per quintal in domestic and international markets.

A telling example. Shows that when businessmen argue for freer markets (wow, i am really influenced by fuller CAC) it's not for free markets, does this not?

Government in public education and health

TN Ninan argues for a mental transition 'from the notion of being the monopoly (or dominant) provider of a service, to an agency that lets others do the work, supervises to make sure that it is done properly, and manages fiscal transfers to take care of the poor, who would otherwise not be able to afford private sector services in these areas.' He writes

There is no reason why the logic of contracting out and offering choice should not be extended to education, where in any case the trend seems to be for students to switch more to private schools—possibly reflecting greater dissatisfaction with public schools. The Planning Commission has had a furious internal debate in recent weeks on the issue of choice in education, and concluded that once you adjust for the different kinds of students who go to private and public schools, their quality of output is not very different. The logical course of action should then be, since nothing is lost, to offer choice and let the customer decide. In the field of health, the government may well find that an insurance system funded by the government, running in parallel with the public health system, might deliver superior results, and patients would then be free to choose the doctors and hospitals they want. Certainly, most government employees would be happy to go to a private hospital to get treatment, especially if the cost to their employer is no different.

To be sure, entrenched interest groups (like the teachers’ unions) will oppose such change, but schools exist for students, not teachers. Also, it has been shown time and again that the public sector tends to work better when it has to compete with the private sector—the Life Insurance Corporation’s spectacular results of the past year, in the face of stiff competition from private insurers, is testimony to this. Once the focus changes to the user of a service and not its provider, the argument is easy to grasp.

Sinophobia: Haier blocked from starting cellphone arm

FE reports

The Reserve Bank of India has rejected a proposal by Chinese consumer electronics major Haier International to set up a telecom handsets marketing venture in India. This is in line with the government’s stand that any investment by a Chinese company should be scrutinised closely.

Haier is the third Chinese company after ZTE and Huawei to be blocked by an arm of government from setting up operations in the country. The apex bank is of the view that since the proposal was from a Chinese company, even though it falls under the automatic route, it would have to be cleared by the Foreign Investment Promotion Board and the department of telecom.

Check out this one too 'Scrutiny of foreign takeovers is prudent not protectionist' by John Kay - here

the capenter and the market

"i cant make it sir," says the emotional carpenter. "it is better you buy it from the ready made shop. There is a beautiful chair with great curves and "mirror polish" . the entire set sells for about rs 25,000 and a single one you need should be around Rs 5000. I doubt if i can even make it for double the price," he explains misty eyed.

I am looking for a comfortable chair as i spend my a lot of my time in front of computer.

Shops importing low priced furniture have sprung up all over the country. They bring in stuff made in china in a mechanised environment with wood from malaysia or indonesia.
"I cant understand their rates. just the lowest priced wood needed - neem - costs more than their finished product. then there is polish, metals fittings and labour charges," says the young `worker of wood' who has postponed his decision to start a furniture shop after identifying the place.

as the winds of free market blow across the country - some sail faster while others have to buffet the flow. and we have to do whats best for us with the hope that it is best for everyone.

textile upgradation fund may be extended

The Union Minister of State for Textiles, Mr E.V.K.S. Elangovan, on Wednesday indicated the possibility of extension of the textile upgradation fund (TUF) scheme.

He, however, maintained that the outcome would be known only during the Budget session.

Mr Elangovan was responding to the issues raised by the South India Small Spinners Association (SISSPA).

The association, in a memorandum sought the support and consideration of the Centre on five specific issues, such as time extension for TUF scheme, the need for streamlining the process for TUF to reduce the delay in disbursement of funds, special subsidy for combers and autoconers under TUF, initiating schemes for youth to tide over the skilled manpower shortage in the textile industry and reduction in the import duty for autoconers.

here

Newsprint: China brings prices down, domestic industry unhappy

Business Standard reports

Newsprint prices in the domestic market have declined by 4 to 5 per cent over the last three months on account of cheaper Chinese imports and falling international prices.
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"The primary cause for declining newsprint prices could be huge stock with big publications or indiscriminate imports, particularly from China," said Raji Philip, president of the Indian Newsprint Manufacturers' Association and chairman and managing director of Hindustan Paper Corporation.
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According to Philip, newsprint consumption in the country is around 14 lakh tonne, while the production is about 8 lakh tonne. The excess domestic demand is met through imports from Canada, Russia, China and some other countries.

Big domestic newsprint players have lined up capacity additions and the dependence on imports was set to go down. Excessive dependence on imports would be self-defeating for the domestic industry, he said.

Rs 18,750 cr subsidy paid to fertiliser cos: Paswan

PTI/FE reports

Assuring expeditious clearance of subsidy payments due to fertiliser companies, chemical and fertiliser minister Ram Vilas Paswan has said Rs 18,750 crore has been paid to these companies under the head this year.

Admitting that fertiliser companies have expressed concern over delayed subsidy payments, he said another Rs 4,000 crore will be paid to these firms as subsidy in the next few weeks.

India Inc asks FM not to micro-manage

Have you wondered why businessmen have this benign image of free market supporters, despite their never ending attempts to control market using the power of government? It's because of reports like this. FE reports:

India Inc on Wednesday said there was no evidence to prove finance minister P Chidambaram’s views that companies artificially jacked up prices leading to higher inflation. In fact, it wanted the government to stay away from micro-management, which it felt, was a retrograde step.

“In case prices go up due to a supply-demand gap, there are many ways to tackle it. Let the market decide it. In an economy that is seeing such growth, minor spike in prices is fine,” Habil Khorakiwala, president, Ficci told FE in an interview.

I am not suggesting that businessmen today have all the power and consumers have none. But that's how a businessman would like it to be. Nothing against Khorakiwala too. A friend who met him yesterday said he is a very nice guy.

Sops to semi-conductor industry

FE reports

The government is likely to give upfront equity commitment and sops to semi -conductor units set up in select locations, instead of support to all such units. Moreover, this support will have to be partly funded by state governments.

According to officials, a list of such locations will be drawn up soon and will be announced as a part of the proposed National Semi-conductor Policy. The information technology ministry has been demanding an upfront equity commitment from the government other sops including zero interest loans as well as income tax exemptions to all semi-conductor units. Finance ministry feels that such a move will have severe financial ramifications for the government. It is estimated that the equity component for such projects alone will be to the tune of Rs 1,200 crore. Officials have also pointed out that a 100% income tax exemption for 10 years would have a financial implication of around Rs 15,500 crore. In addition, excise duty reductions would also cost the exchequer around Rs 10,000 crore.

When will farmers earn as much as the lowliest government employee?

In a superb piece, BL says

Successive governments at the Centre and the States have tried their hand at reducing the cost of cultivation. Most States supply electricity either free or at highly subsidised tariffs; urea fertiliser is made available at a substantial discount and now banks are being arm-twisted to offer credit at rates below what they charge other customers. Yet even if these inputs were available free, the yield from the farm would be far from princely. Besides, there is a cost to hiring labour and that is not coming any cheaper.

If Sasidharan's family had instead been on dry land — almost 50 per cent of the 141 million hectares of cultivated land in the country is not irrigated — growing coarse cereal, it would have needed a holding in excess of 15 hectares to earn a net income equal to his current salary at Saint Gobain. But such farmers would be rare. Just 1.2 per cent of land holdings in the country exceed 10 hectares each. In contrast, the average farm size in the US was 197 hectares in 1997.

Nine out the every ten farmers (the total number of cultivators is now about 12 crore) will need to give up their land and look at other professions if the farm holdings are to be consolidated into viable sizes of at least 10 hectares each.

That is what has happened in the US, where just 2 per cent of the population now works on the farm as against 21 per cent in 1930 and 41 per cent in 1900.

The spread of education is providing people such as Sasidharan and Nandakumar the passport to an alternative, and far more remunerative vocation. But to transform the lives of more than 10 crore farmers and as many farm workers is a mind-boggling challenge for society, of creating employment opportunities in the services and industrial sector, of managing the shift of workers from the farm — farm labour is already difficult to find in many States at the current wages — and of equipping farm family members with the skills that would fit them in industry and services. Are we ready for it?

I liked even the heading!

States to earn Rs 40,000 cr from liquor, lotteries

BL reports

During the current fiscal, liquor and lotteries are together expected to generate Rs 40,274.13 crore in revenue for States - that is almost 13 per cent of the total amount (Rs 3,10,266.21 crore) they would earn from their own tax and non-tax revenue sources.

According to the Reserve Bank of India's latest report on `State finances: A study of budgets of 2006-07,' liquor (excise) alone is slated to yield Rs 29,533.48 crore, making it the largest revenue source for States after sales tax (Rs 1,20,709.15 crore).

Doing business

A BS report which begins thus - Stung by a recent World Bank report on the difficulties of doing business in India, the government has held a series of meetings to address the problem areas mentioned in the annual document - has this

Four meetings of the Committee of Secretaries have been held on the issue, with at least nine departments, including economic affairs, revenue, shipping, commerce, financial sector, land resources, and small scale industry being asked to respond to specific issues raised in the report.

In their responses, departments like commerce and industry and revenue have questioned some of the findings. Another meeting is scheduled soon, at which the government hopes to finalise corrective measures.

Way to go!
World Bank report - here

General insurers told to restrict motor tariff discount at 20%

FE reports

In a further twist to tale in the detariffing drama in the domestic general insurance industry Insurance Regulatory & Development Authority(Irda) has asked the general insurers not to reduce premium beyond 20 % for motor (own damage) portfolio for next six months.

The regulator while approving the new rates of the general insurers for the detariffing period starting from January 1 has directed the general insurers to seek special permission from the regulator if the rate of discount is more than 20 %.

``The insurers have to justify their demands by giving supporting data for giving a higher discount,’’ said the Irda note to insurers.

Government may offer export subsidies to check sugar prices

FE reports

The government is likely to intervene if sugar prices continue to fall, a senior government official said on Tuesday.

The government may offer export subsidies once the exports are liberalised further and may also offer cane price subsidies to stabilise prices and help companies to pay the farmers, the official said. "Prices have been falling consistently and the outlook going forward remains the same. It is a matter of concern now, the Centre may have to intervene," the food ministry official told NewsWire18. He said falling sugar prices could lead to non-payment of cane prices by companies, which would hurt the farmers' interest.

Sugar prices have been falling consistently and are now over Rs 200 per 100 kg lower than last year's levels. Experts attribute the fall to a possible glut in the country in wake of a bumper sugar output, at over 23 mt, expected in 2006-07 (Oct-Sept). The country produced 19.3 mt of the sweetener in 2005-06. In June, wholesale prices in northern region had topped Rs 2,000 per quintal, while retail prices had touched a high of Rs 2,500 per quintal.

The government had then banned white sugar exports in a bid to check supplies, curb soaring prices and tame inflationary pressure.

Govt will bear additional power cost burden: Andhra CM

BL reports

The Andhra Pradesh Chief Minister, Dr Y.S. Rajasekhara Reddy, on Monday said that the additional burden created on the power sector due to purchase of power from Central generating stations and other utilities would not be passed on to the consumer.

Speaking to reporters here Dr Reddy assured that the Government would "beg, borrow or steal" if necessary for purchase of power and it was not contemplating any hike in power tariff to bridge the gap due to additional purchases.

We will charge the tax payers instead.

CMs form cartel to ban iron ore exports

FE reports

Chief ministers of mineral-bearing states are forming a pressure group to press their demands. As a prelude to the formation of such a group, chief ministers of three states , Chhattisgarh, Jharkhand and Orissa, met here last week and deliberated on various issues relating to minerals like iron ore, bauxite, chromite and coal.

The meeting resolved that there should be a complete ban on iron ore exports and that coal-bearing states should be empowered to levy tax on power generated at the coal pithead for export purpose. It also suggested that at least 12-20% power from generating stations be allotted to the mother states at concessational rates.

Sell-off agenda on the back burner

FE reports

With the ruling DMK government, which came to power in May 2006, making it unequivocally clear that it would not privatise or disinvest the government's holdings in any profit-making state public sector enterprise (PSE) in its election manifesto, it is curtains for the disinvestment process in the state.

The previous government had taken a few steps to close down or disinvest in PSEs. However, the current government, according to sources, is toeing quite a different line. It wants the profit-making PSEs to be put on a fast growth track and at the same time, it is trying to revive still viable, but loss-making units, through strategic alliances or fresh capital infusion.

Even though the earlier government had set the divestment ball rolling by identifying a handful of PSEs for potential privatisation or closure, the process was grounded due to political compulsions. According to available industry information, the state had 59 PSEs with a total investment of Rs 6,192 crore. Of this, over 33 units were identified as loss-making or sick.

Govt seeks more control over pricing of drugs

BS reports

A new pharmaceutical policy, moved by Chemicals Minister Ram Vilas Paswan for Cabinet approval, aims at bringing 34 per cent of all drugs marketed in the country under price control.

It aims at slashing the average market prices from 10 to 30 per cent for low-end brands and from 30 to 60 per cent for high-end ones.

A proposal to check the prices of patented medicines and select medical devices through government-industry talks has also been made.

The proposals, if cleared, would make way for government control over 17,000 specific formulation packs worth around Rs 7,000 crore, industry sources said.

The proposal for more price control, which has been vehemently opposed by the industry, came after the ministry decided to go by a Supreme Court (SC) order asking the ministry to formulate appropriate criteria to ensure that essential and life-saving drugs did not “fall out” of price control.

GSM, CDMA oprs, BSNL oppose ceiling on roaming tariff

New Delhi, Jan 1. (PTI): Telecom regulator TRAI's move to fix a new ceiling on roaming tariffs is being unilaterally opposed by State-run BSNL as well as private GSM and CDMA operators, as they want market forces to determine the rates.

Roaming tariff should be under forbearance and market forces should determine the tariff, officials of BSNL, GSM industry body COAI and CDMA operators association AUSPI said ahead of TRAI's open house tomorrow to review roaming rates.

In fact, there should not be any ceiling on incoming or outgoing national calls. There is forbearance in mobile tariff as there is enough competition in the mobile service segment, the same should be applied to roaming services as well, a BSNL official said.

While BSNL's is buttressing its argument, saying that roaming service is in itself not a 'market', but is a mere mechanism to connect a customer who is out of the home network, the CDMA and GSM operators hold the view that TRAI's interference on micro-management of tariffs is unnecessary on this front.

Cellular Operators Association of India (COAI) said the tariff offered under different packages for different services like rental, local call charges, NLD, roaming and SMS charges are decided based on the overall ARPU (average revenue per user) under each tariff package.

here