Should India further liberalise FDI rules in sectors with investment caps !!

India introduced financial reforms way back in 1991 with the primary aim of solving the balance of payment crisis. Though the reforms were revolutionary in nature but at the same time the government was hesitant in opening up all the sectors for foreign investors keeping the protest from various sections of the country in mind. As a result these reforms were half hearted and the government relied primarily on the domestic sources for getting out of the crisis.

After 2 decades of the reforms the scene is now changing. A major section of Indian economy is now open for the foreign investors. At the same time there are many sectors where the permissible % of foreign investment is way below the sufficient level. Prominent among these sectors are insurance, retail, private sector banking and defence. Retail which constitutes about 35 % of Indian gdp has the 51% cap for investment in single brand outlet. Similarly in insurance, defence and private sector banking the fdi limit is 26%, 26 % and 49 % respectively.

Obviously, these restrictions have an adverse impact on the level of investments in our country. If we compare India with other developing countries India is way behind them in attracting foreign investment. Last year when the China got the fdi of $90 billion, for India the figure was only $ 30 billion.

According to Anand Sharma, the commerce minister of India, the country aims to attract $ 50 billion of foreign direct investment up to 2012. This ambitious aim can only be realized if India opens the sector like retail, insurance and private banking for foreign investors.

Earlier this year in Indo US CEO forum in Washington, the finance minister told that the government is planning to increase the investment cap in insurance sector from 26 % to 49 %. This is a welcome step .A higher foreign direct investment (FDI) will unshackle the insurance industry and drive growth and long-term development, enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration.

 Similarly the retail sector also has a huge potential in terms of investment .Its potential benefits other than funds are improvement in supply chain, skill development, opportunity for greater sourcing from India, and productivity improvement and growth in market size etc.

These and many other sectors such as private sector banking, defence and civil aviation are in want of huge investment which is only possible by opening the doors for foreign players. These investors will bring not only money with them but will also result in employment generation and skill improvement. Apart from this, it will also results in much needed sophisticated technology, knowledge transfer, linkages and spill over to domestic firms.

In order to maintain and bolster the present rate of growth it is necessary for the government to raise the investment cap in the sectors where permissible level investment is low. This will have a trickledown effect on the other sections of economy and will result in higher rate of growth.

Jayant Yadav

MBA(IB) 2010-12

jayantyad@gmail.com


* This article was published in the Financial Express

INDIA-BANGLADESH RELATIONS: A NEW CHAPTER

Indian Prime Minister concluded his high profile visit to Bangladesh on 7^th September. This was first visit to Bangladesh of any Indian prime minister in the past 12 years. In this meeting both the countries agreed on a range of measures to improve relations between the countries. These measures were of both political and economic in nature. While the long pending border issues were resolved, India also granted concession to Bangladeshi exporters to improve commercial ties. Other issues which were discussed were sharing of River water, Transit facilities to Indian goods through Bangladeshi soil and improvement of cultural ties between both the countries to bring people across the border closer. 

From the commercial point of view, the most important issue discussed between the two countries was reducing the huge Trade Deficit unfavorable to Bangladesh. To meet these objectives, Indian Government has agreed to remove the duty from import of 61 products from Bangladesh, 46 of which are textile products. At present India-Bangladesh Trade is highly skewed in favor of India with India’s net export to Bangladesh being almost 10 times of what India import from it. One of the prime reasons of this trade deficit is the restrictions put forth on Bangladeshi import by Indian Authorities. As many as 480 items feature on the Indian negative list of products for Bangladesh and of those, 154 are related to RMG (Ready Made Garment) sector. Textile industry which is one of the most important industries of Bangladesh from the perspective of International Business and constitutes 75% of total Bangladesh’s exports has greatly suffered from these restrictions. Out of total Bangladesh exports to the world, Textile products (HS CODE: 50 to 63) constitutes more than 85 % in value terms but for India this figure is far below at 40% in 08-09 and 55 % in 09-10. This pact promises to improve the current situation. Exports from Bangladesh to India are expected to increase two to three times the present volume in coming years. In that scenario Bangladesh's annual export to India will cross $1 billion and will help in shifting the balance of trade in favor of Bangladesh.

India and Bangladesh also agreed to the proposal of establishment of 7 Integrated Check Post (ICP) at the India Bangladesh Border. These ICPs are expected to provide the facilities for smooth cross-border movement of persons, goods and transport and would improve the turnaround time of vehicles at the border. They will also address the problem of lack of connectivity faced by Indian North Eastern States, by providing them and easy connectivity to Bangladesh. ICPs will also tackle the issue of illegal cross border trade. Indian states have a long and porous border with Bangladesh which acts as the haven for the smugglers. This not only causes loss in revenue but also hide the true figure of trade between the countries. After the completion of this project not only the local trade between the states and Bangladesh will get a fillip but also the true trade figures can be realized.

In spite of all these measures, still there are some issues that need more efforts from both the sides. The prominent among them are the Teesta River Water Treaty and transit facility to Indian goods through Bangladesh. Of these the latter is of interest to India and Indian authorities expect Bangladesh to finalize the modalities of this agreement as soon as possible. North Eastern states are geographically closer and have better access to Bangladesh. While distance between Agartala and Kolkata (nearest Indian Port) is 1750 k.m., Chittagong (nearest Bangladeshi port) is only 70 k.m away from Agartala. If the region is approached from Chittagong port via Tripura the distance will be considerably reduced.  It will also give a boost to Indian export such as Assam tea and Tripura Rubber from North-Eastern states. This transit facility will not only help Bangladesh in revenue generation but will also help it in improving the infrastructural facility. India has already approved USD 750 million out of the promised USD 1 billion infrastructure loan to Bangladesh to develop rail and road linkage. In future the scope of this transit route can be extended to accelerate commercial activities in whole of South Asia by including Nepal and Bhutan in this broader trade corridor and giving it a transnational face. This will not only promote commercial relations between the countries but will also help India in shedding its Big Brother image. The infrastructure improvement activities in Bangladesh will give a big opportunity to Indian Companies to invest in Bangladesh in development of port, rail and road infrastructure.

Other steps to improve commercial ties include establishment of Special Economic Zone in Bangladesh at Border Areas for Indo-Bangla Joint Venture with a focus on North Eastern states. In the past too CII has shown interest in such a prospect. This SEZ is expected to attract investment worth BDT 1500 Crore (INR 930 Crore). Establishment of “Border Haat” is also a step in right direction. Two countries have opened a “Border Haat” in Meghalaya which along with two others such “Haats” is expected to promote $20 million of bilateral trade annually. This will not only curb the massive illegal trade which goes in this region but will also help in bringing the population of the  two countries residing in Border Area together.

However there are few cautions in this journey. Duty free access for textile products from Bangladesh will adversely hit the domestic Garment industry. One of the steps that can be taken by the government to balance the macro-impact on Indian economy is a pre-condition for the duty-free import that the origin of fabric for these textile products should be in India. This will incentivize the Bangladeshi exporter to give preference to Indian raw products over other sources. Illegal immigration from Bangladesh, Illegal Cross Border Trade and anti-Indian activities in Bangladesh are other Indian concerns. After these Confidence-Building-Measures from Indian side the onus is on the Bangladesh to reciprocate to Indian concessions by addressing these crucial issues.

A peaceful neighbourhood will help India to focus on its economic development and will accelerate the economic growth of whole of South Asia. Hence India- Bangladesh relations are important not only for these two countries but for whole of South Asia. Apart from creating a model for future bilateral agreements in this region, this summit will also help India in shedding its image of regional bully.

Uttarakhand Trekking Experience-4

Continued From:


Day 3:


Date: 20th June
Time: About 5 a.m. in the morning
Location: A hotel in Govindghat.


For the second consecutive day, we started our journey early in the morning. This day was special to us in many aspects. From now onward we were on foot. This day also marked the start of mountain trekking, the flagship feature of our trip. We were to spend next few days on mountains without any connection with the outer world.

At the bridge

The route to Ghanghariya starts after crossing the bridge over Alaknanda. Early in the morning, the view near the bridge was amazing. Hundreds of people were standing near the Gurudwara to cross the bridge notwithstanding the rain which was drizzling from the sky. It was still dark but the vibrant atmosphere at the bridge was defying all the odds. We planned to start early but right from the beginning all our plans fall apart. Before commencing our trekking we needed three essential things- Raincoats, Sticks and Mule to carry our luggage. Unfortunately we were unable to arrange for any of them.

More than an hour passed and we didn’t make any progress. We managed to arrange for sticks but the raincoats and Mule was still out of reach. After some time “Tourist Help Center” opened and we took the raincoats on rent. The quality of the raincoats was far better than the ones which were available in the market. Mule to carry our luggage to the destination was still elusive. Finally we decided to go across the bridge to look for Mule carriers. We managed to talk to a couple of Carriers but all of them had one condition-One person among us should accompany them to Ghanghariya, to this none of us agreed. Finally one Mule Carrier agreed to take our luggage on the condition that he will take his own route and will reach Ghanghariya at his own time. Seeing no other option we agreed to him, knowing little that this will lead to some other crazy incident in the evening.

Finally our trekking started and we marched toward Ghanghariya. Soon our group split into two subgroups. I, Parag, Arjun and Arpit were walking at our pace while Abhinav, Dixit and Pelu were coming behind us. Rain stopped, Sunlight appeared, weather improved and we continued our journey. 

Our fellow traveler

For the first time in our trip we witnessed mountains from such a close distance. A big wall of stone on one side and a thousand feet deep valley on the other was enough to prod us for the journey. Early in the morning we even witnessed the trace of the clouds from close vicinity. The road to Ghanghariya was busy with fellow travelers. Incidentally we were the only group on the path without any Sikh member. The road was populated not only by humans but also by horses which were crossing us at regular intervals. Soon we found a beautiful water-fall along the side of the road. Here we relaxed and clicked some photos. The journey continued with breaks at regular intervals. The whole path was crowded by dhabas which were selling food items at a premium. As the altitude increased, the prices of the food stuff also increased.  By the end of the journey our fatigue and tiredness was at its optimal level. Normal food stuff was not helping any more. To our comfort we found a langar being managed by the volunteers, which was distributing dry fruits and drinks. 

Legendary pic

When we were close to our destination we asked a person to take a group photo of us. While taking the snap he walked few steps back to accommodate all of us and the beautiful scenery behind us in the photo. Suddenly he lost the control and fall on the other side of the road. The scene was funny. He was lying among the plants with his pant torn in a 3 to 4 feet deep pit. We were laughing at the scene and he also joined us in the laugh. He got up, brushed himself and took our snap.

Our 13 k.m. long trekking ended at a Police Chowky which is a sort of landmark in that area. We found our luggage lying there in a dumped state. All of us checked our luggage and I found that my bag has been exchanged with some other bag. Its implications were that all my clothes, blankets and most importantly money has also gone with that bag. The situation was serious not only for me but also for the whole group because it was now my turn to pay the money for our expenses. Hundreds of travellers have crossed that path every hour since morning. Searching for a bag in the thousands of tourists over there was like looking for a needle in a haystack. To make the situation worse the mule owner who brought the luggage here was also missing. I went to Gurudwara and asked the Granthi to make an announcement about a blue bag being exchanged. He asked me to deposit the bag I have at Gurudwara. While at Gurudwara I looked for the bag among hundreds of pilgrims who were staying over there but the chances of locating a small bag among hundreds similar were very remote.

While I was coming back to our base from the Gurudwara, I was looking at the restaurants and dhabas with the hope of finding a clue about my bag and BINGO!!! There was it, lying near a chair, in a dhaba, with a lady. I went to her and said in a polite tone, “Mata Ji, Ye Bag…” and she started in a full Punjabi tone, “Oye Badal Gaya, Oye Badal Gaya”. And here it was, my bag, my and ours group Lifeline for the rest of the tour.

View from the room

We went ahead, looked for the rooms in the hotel, even contemplated about staying in the Gurudwara and finally booked the room at a whopping Rs.4000 for a day. I don’t think any other place in India commands such a high premium. Even a STD call was charged at Rs.20 per minute.

The room was damp, dark and dingy. The only savior was the view that the room provided-beautiful, sky kissing mountains. That was all for the day. Next day we had to visit, “VALLEY OF FLOWERS”.

Our Route (From A to B)

                                                                       To be continued:

Uttarakhand Trekking Experience-3

Continued  from:

Day 2:

Time: About 5 a.m. in the morning.

Date: 19th June.

Location: A Hotel in Rishikesh.

Our day started early in the morning at 5:00 a.m. The room had visible signs that it had witnessed a storm last night which all of us missed because of our deep slumber. After a frenetic packing we all rushed to the Rishikesh Bus Stand where we had to catch the bus for Govindghat. 

The bus was of medium size, having 2 seats on each side. Since we were 7 in number, 1 of us had to sit alone throughout the journey. Unfortunately it was my turn to share the seat with some unknown person. Surprisingly there was huge no. of Bengalis who boarded the bus at Rishikesh Bus Stand. They were headed to the famous Hindu pilgrimage Badrinath/Kedarnath. After a small period in the dark, Sun came out in the hills. The journey was fun, the weather was pleasant and the view from the bus was awesome.

View from the Bus

After a couple of hours, the bus halted near some dhabas where we had a cup of tea. The next stop of the Bus was at another scenic location where we had our breakfast/lunch. From there the bus headed to Joshimath which was the next major stop. The view of the surroundings from the bus was one of the best parts of this trip. Though all of us were seated for most of the period, the scenes which emerged one after another compensated for the same. Throughout the path we witnessed mountainous terrain, deep valley, tree laden hills and full flowing river. Though there were some hiccups in the journey because of road jam but the scenery we witnessed throughout the path was awesome enough to compensate it. Unfortunately not everyone in the bus was enjoying the journey. Our fellow passengers from West Bengal (now Pashchim Bang) who were neither used to the mountains nor to the Bus Ride at such a height developed motion sickness and had an altercation with the conductor of the bus. The bus reached Joshimath near about 3:00 p.m. in the afternoon.

Joshimath has a unique Traffic Control System which is being managed in coordination with the traffic authority at Badrinath.The road from Joshimath to Badrinath is very narrow and can accommodate only one vehicle at a time. To ensure smooth and risk free travel, two gates are installed one each at Joshimath and at Badrinath which operate alternately. When we reached Joshimath the gates were closed and we had to wait for almost an hour for the journey to resume. Govindghat, our destination for that day was only 45 km away from Joshimath.

After a short while the journey resumed and we headed to Govindghat. We were the only group to get down from the bus at Govindghat and rest of the passengers headed to Badrinath/Kedarnath. Govindghat is used by most of the passengers as a base camp for Ghangariya. Though there are many hotels and lodges in that area but initially we had to toil a little in finding the suitable one. After a brief search we found a hotel with appropriate location. Since we were on the cost cutting mode we booked a single room for all 7 of us.

It was almost 7 in the evening and the sun had set down. The area was heavily crowded by the Sikh pilgrims. There was a market over there which is situated in two narrow lanes. Beyond the lanes there was a Gurudwara which plays host to hundreds of pilgrims every day. After roaming in the streets for a short while we went to the bridge which is built across the river Alaknanda. There was huge rush near the Gurudwara and the bridge. The river was flowing at full vigor and the scene was enthralling. The flow of the river was accompanied by the roaring sound which added a special effect to the whole scene. This was the same bridge which we had to cross the next morning. After making few enquiries regarding the next day’s journey we returned back to our hotel.

On our way to hotel we had our dinner and then went to the bed planning to wake up early tomorrow. The next day was supposed to be the most adventurous day of our journey till now.

OUR PATH

                                                                                                                   To be continued ...

“String of Pearls” in Indian Ocean

Indian Ocean has played a vital role in international trade since antiquity. Right from Roman period to Portuguese period this route has been used by various empires to establish trade relations with India and other countries in this region. In current scenario its role has become more even more prominent as half of the world’s maritime trade is shipped through the Indian Ocean. This route connects the Middle East, Africa and East Asia with Europe and America. A very heavy traffic of petroleum and petroleum products from the oil fields of Persian Gulf and Indonesia passes through it. Apart from being a lifeline to international trade this region is also important for offshore oil exploration to which it contributes 40% of the world production.
India and China being two of the most fast developing economy in the world, has vested interest in this trade route. China imports almost 80% of its oil need most of which passes through this region.  This makes the route strategically very critical for China. To ensure its energy security in future, it plans to either secure this route or to find an alternative route.
Similarly for India, this region and route is a natural concern, as it lies in its own backyard.40% of Indian trade with the littoral countries takes place through this route. . The geographical advantage enjoyed by India makes it an obvious naval power in Indian Ocean.
Observing its vulnerability to any hostile Indian action in Indian Ocean, in war or war like situation, China is aggressively planning to increase its naval presence in the region. China has made various naval pacts with countries like Pakistan, Bangladesh, Sri Lanka and Myanmar to maintain regular presence of Chinese naval fleet in Indian Ocean. These pacts include Joint port construction, port enlargement and maintenance etc. Booz Allen Hamilton, an American Public consulting firm, termed this strategy of encircling India as “String of Pearls”.
The “String of Pearls” is a process of methodically establishing a series of highly powerful and interconnected nodes throughout a landscape which accomplish two things:
1) Solidify a critical supply line.
2) Envelop or “choke off” a rival.”
China has naval presence in Gwadar Port in Pakistan, Hambantota Port in Sri Lanka, Coco islands in Myanmar and Chittagong Port in Bangladesh in various capacities. This involvement has both economic as well as strategic dimension. The “String of Pearl” goes further to South East Asian countries like Thailand, Cambodia and Vietnam which shows elaborate Chinese plans of having hegemony on this crucial trade route.
But it will be too early to say that China has established itself as a regional naval super power. Geographical constraints play a big role in this region. In spite of heavy investment and involvement, China has to depend upon the local players to implement its naval strategy. Chinese ports in these countries are as safe as these countries themselves and there is little China can do in this regard. For e.g. Gwadar Port in Pakistan is situated in Baluchistan province where the local sentiments run against the Federal Government and National Army which is dominated by the Punjabis. In 2004, three Chinese engineers were murdered in Gwadar, and in 2007, a bus carrying Chinese engineers was bombed in the southern town of Hub. Ground realities also reflect the same story. Having become operational shortly after the Chinese completed the first phase of development in 2007, the port only received its first commercial cargo ship almost two years later, in July 2009. Similarly Sri Lanka recently recovered from the internal war in which it was indirectly supported by the Indian Government.
Bangladesh also has a Pro -Indian Government headed by Sheikh Hasina Wajed. Finally Myanmar an otherwise close country is playing its cards tactfully. It has developed good relations with both the countries in return of support to its dictatorial Junta regime.
India has cautiously responded to all these developments. At present India have good relations with almost all of its neighbours except Pakistan. The geostrategic advantage enjoyed by India in this region is too big to be nullified by temporary Chinese bases in the Ocean. Moreover, Andaman Nicobar Island provides strategic depth to Indian naval capabilities in the region through which India is in the position of striking deep in the Ocean. India has bolstered its “Look East” Policy to counter China’s activities in this region. It has established strong commercial, cultural and military ties with the Philippines, Singapore, Vietnam and Cambodia. It has also signed free trade agreements with Sri Lanka and Thailand and forged numerous free trade agreements with other East Asian economies. It is also negotiating agreements with Japan, South Korea, and Association of Southeast Asian Nations (ASEAN) member states. South Korea and Japan remain amongst the major sources of foreign investment in India. India is also aiming to breathe fresh life into Indian Ocean Rim Association for Regional Cooperation (IOR-ARC), a grouping of 18 members Indian Ocean nations for greater economic cooperation.
The actions and counter actions by both the countries imply that Indian Ocean will remain a crucial region from geostrategic point of view. As its act as the pipeline of Petroleum products to the world, all these activities concerns not only the regional players but whole world at large. China is trying its best to encircle India but India is also fully prepared to counter these actions. This region will continue to hog the limelight in coming decades.

Jayant Yadav
MBA(IB)
Indian Institute of Foreign Trade- Delhi Batch 10-12

(This article was published in the August edition of "Vishvyapar"-The IB Magazine of "Delhi School of Economics" )