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Why States Need to be Involved in India’s Foreign Policy

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Image credit: The Aspirant Forum

By Ratish Srivastava (@socilia13)

The involvement of states in India’s foreign policy making could be vital in launching India onto the next phase of development. The centre holds executive power in all matters related to foreign policy as stipulated in Article 246a, 7th schedule. Indian states already have many responsibilities like improving infrastructure for public health services, agriculture, transportation, etc. However, there is a heightened need to improve their economic performance and generate enough revenue so as to not depend on the centre for funding and help improve foreign relations with other nation-states.

States can and have proven themselves to be important players in improving India’s ties with other countries and at the same time improve their economic performance. States like Gujarat and Maharashtra have shown great promise with exports, contributing as much as 46% of India’s exports. Combining the exports of Tamil Nadu, Andhra Pradesh and Karnataka with the exports of Gujrat and Maharashtra increases the figure to about 70% of the total exports of India.

These states have accessed global economic opportunities, and have witnessed tremendous growth. These states have struck deals with major players in the international market, like Maharashtra’s deal with Enron in 1996, although the deal ended with the Enron scandal, which rendered the Texas-based company bankrupt. It is still worth noting the role a state can play in striking deals with international companies. Another example would be Andhra Pradesh’s ability to negotiate a state-level World Bank development loan in 2002 under the leadership of Chandrababu Naidu, proving that states can meet their development goals without help from the central government.

States in India who lag behind in these areas need to come up with a stronger structure for engaging in exports. A major concern for states with no ports, or states who depend on other states for container facilities and ports is that their export figures are being undervalued. This is because the point of origin code is filled by clearing agents rather than the exporters themselves, as the agents see no significant importance of the point of origin.

States need to understand the importance of having a state export policy, like Gujarat, which has a five-year export policy. This policy will not only address the supply side of the problems but will also address the need for adequate infrastructure and appropriate labour laws to make the state a more attractive destination for trade.

Chief Ministers of state should travel abroad to negotiate with industrial houses (Maharashtra-Enron), international organisations (Andhra Pradesh-World Bank) and commercial wings of foreign governments with the aim of achieving investment deals for their own states and to be part of intergovernmental negotiations within the World Trade Organisation (WTO). To improve the infrastructure the state needs more FDI inflows and they need to increase taxes to generate the revenue necessary for making such changes.

Apart from the economic benefits a state could reap, there is motivation for states to be involved in neighbourhood policies. Matters such as illegal trade and immigration (border security) and improving relations with the Indian diaspora in the neighbouring countries with which they have socio-cultural ties also contribute to a state’s involvement in foreign policy. Improving trans-border regional links and trans-border neighbourly contacts through the involvement of states can have positive effects on India’s foreign policy.

State interference can also have adverse impact on foreign policy, for instance, the fiasco regarding the Teesta water treaty with Bangladesh in 2011 and pressure from DMK on the central government to vote against Sri Lanka in the United Nations Human Rights Council. in 2013.

On the other hand, the role that a state can play in improving relations with India’s neighbours is huge. Border states, with historical, cultural, linguistic, religious, and ethnic links can help provide a platform for the central government to build stronger ties and improve border security. They can help improve socio-cultural ties as well, case in point, the Chief Minister of Bihar Nitish Kumar and the Deputy Chief Minister of Punjab Sukhbir Singh travelling to Pakistan in 2012 to leverage socio-cultural ties.

India can also improve border security if it allows the states who have borders with other countries to be involved in the process. It can help the centre make policies accordingly as states understand the ground realities better at the border which will help strangle illegal drug trade and immigration.

The benefits for state involvement in foreign policy has been underplayed, with much of the focus being put on the negative impact it can have. However, the positive impact could outweigh the negative as it allows states to have the power to improve its situation.

Ratish Srivastava (@socilia13) is a research intern at Takshashila Institution.

This post is the part of a series of blogposts on ‘States in Foreign Policy’.

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Changes in FDI Regulation in 2015

An overview of the significant changes in FDI regulations in 2015. 

2016 saw the highest FDI inflows into India. Amount in USD million. Data source: RBI, chart by author

2015 saw the highest FDI inflows into India. Amount in USD million. Data source: RBI, chart by author

The financial year 2015 has been an exemplary one for foreign investments. Both FDI and FII have peaked in 2015. Net FDI inflows into India were a staggering $35billion, a 62 per cent jump from the previous fiscal year, which saw $21.6 billion. A report by the Japanese brokerage firm Nomura calculated that FDI forms 1.7 per cent of GDP, up from 1.1 per cent in the previous year.

  • The report attributes the higher net FDI to two factors: growing investor confidence in the country and lower outbound FDI following weak balance-sheet of domestic companies coupled with a weak global growth outlook. “We expect FDI inflows to pick up further in FY 2016, driven by an improving domestic growth outlook, recent liberalisation of FDI limits and government efforts to improve the ease of doing business,” the report says.
  • A sector wise breakup of the FDI inflows reveals interesting information. FDI into manufacturing, which the government has been trying to promote, has been modest. The auto industry has been an exception. Telecom, pharma and financial and business services were the largest recipients over the first three months of this fiscal year. The report speculated that some of the inflow was due to fund-raising in the e-commerce sector.
  • The government’s ‘Make in India’ campaign and higher FDI in the defence, insurance and other sectors are likely to see a further fillip in the net inflows.
  • The government’s move to put most of the sectors onto the automatic route and out of the RBI purview, as part of the grander plan for FDI liberalisation, has helped immensely. Further, increased caps on many sectors such as defence and insurance have helped.
  • FDI limits have been hiked in teleports (uplinking hubs), DTH (direct-to-home) and cable networks to 100 per cent with government approval required beyond 49 per cent. Further, news and current affairs TV channels and FM radio companies can now bring in up to 49 per cent FDI under the government route compared with 26 per cent earlier. For non-news and down-linking of TV channels, 100 per cent FDI has been permitted under the automatic route.

Apart from increasing the ceiling, the government has undertaken other steps towards FDI liberalisation. Some of them are:

  • Companies need not approach the Foreign Investment Promotion Board (FIPB), which is the nodal agency for attracting foreign investment, for M&As in sectors where FDI is allowed under the automatic route.
  • The circular also said the government permission will not be required for issuing ESOPS (employees’ stock option scheme) in sectors under the automatic route.
  • Allowed the Foreign Investment Promotion Board (FIPB) to clear proposals up to Rs 5,000 crore from Rs 3,000 crore earlier.
  • In construction industry, where India has traditionally fared poorly, area restriction (20,000 sq m) and minimum capitalisation requirement of $5 million to be brought in within six months of commencement of business have been removed. Further, foreign investors can exit and repatriate investments before a project is completed, but with a lock-in of three years.
  • In banking, the government has introduced full fungibility, meaning FIIs/ FPIs/ QFIs can now invest up to the sectoral limit of 74 per cent subject to the condition that there is no change in control and management of the private bank.
  • Manufacturers have been allowed to sell their products through e-commerce without government approval.
  • Another major booster for companies such as IKEA, a single-brand retail company with 100 per cent FDI, has come in the form of dilution in sourcing norms. Earlier, such companies had to ensure sourcing to the extent of 30 per cent of the value of goods from the date of FDI receipt. Now, it has been changed to opening of the first store.
  • In case of “state-of-the-art” and “cutting-edge technology” ventures under the single-brand route, sourcing norms have been relaxed. Further, single-brand retail companies can also undertake e-commerce business, not allowed at present.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

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Has Modi lost the Narrative Dominance?

Modi’s PR machinery, which achieved such narrative dominance during the elections, has failed to take a hold of public discourse in the recent past.

It’s barely 18 months ago when there was jubilation from all corners when Mr. Modi took the office of Prime Minister of India. In the analytical circles, it was largely commented that the Modi narrative of development won the election much before the results came out in May 2014. Modi campaigned by building on the narrative of development, higher economic growth, rising incomes of the Indian population, etc. He promised better roads and bridges, better educational facilities, healthcare and overall, a better standard of living. He was especially successful in reaching out to the middle class. He tapped into their aspiration and made them believe that he would deliver in realising those aspirations. He also succeeded in getting the support and backing of the business community by his emphasis on governance over government. He made assurances of easier procedures to do business, cutting red-tapism, and improving the investor confidence in the India story. Given all of this and the exhaustive election campaign trail, the result of the elections was decided a long time before the actual votes were cast.

There were other narratives too. Competing, but not compelling – ‘The ‘Harbinger of Death’ and the communal agent. Godhra was thrown about without any hesitation. There were other stories existing as well. A dictator and an autocrat in the making, who would centralise all power. However, these narratives failed to gain traction despite a protracted effort by the opposition and Modi won the election with a comfortable margin. Modi’s PR machine, spin doctors and campaign managers were simply better.

This post is not to deal with whether the promises made by Mr. Modi were kept up; rather, it is to explore how he lost the narrative dominance in India. The issues that have been discussed in the media recently have nothing to do with what Mr.Modi achieved or failed to achieve. There have been a few achievements surely, but that has not gained the kind of national attention that his promises gained. The opposition has been extremely successful in taking charge of the national discourse and has diverted it from economic issues to more political ones. Dadri got more attention that the rural electrification program; ‘intolerance’ over the fact that 2015 saw the largest FDI inflows into India (double than that in 2014), Rohit’s death over Startup India. This is not to say that any of these issues are not important, but it is a cause of wonder as to how the BJP’s PR machine has entirely broken down and allowed their achievements to be sidelined while simultaneously giving way for constant criticism. The very same BJP’s campaign managers who successfully deflected attention away from these very issues and fears of communalism into the development story are failing miserable these days. Where are the spin doctors now?

Modi’s silence has not helped either. An extremely vocal person against his critiques during the election trail, he now barely responds to criticism. When the entire nation is worried, justified or not, over intolerance or minority persecution in the country, it is the duty of the Prime Minister to speak up and placate the citizens. Silence from him is handing over the narrative dominance to the opposition.

There’s also an appreciable lack of ‘chest-beating’ from the BJP about their achievements. People are not barged with full page ads, social media campaigns, etc about their achievements so far. There are a few ‘bhakts’ who religiously try to highlight the economic achievements, but these are not taken seriously as the label itself is designed to remove credibility.

Whether the BJP has actually achieved all that they wanted to or not is an entirely different matter. Achievement, usually, in Indian politics has nothing to do with publicity. And what the Modi government desperately lacks is clear messaging, a publicity strategy, and a hold on public narrative. They have allowed themselves to be sucked into issues from which they would rather stay far away.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

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Potential Areas for Reforms

With most parliamentary sessions in 2015 being washed out due to noncooperation by the opposition, there is a lot left to done by the Modi government. Depending on the success of Modi’s talks with the opposition, here’s a few things that can be achieved in 2016.

The February session promises to be action packed with a few interesting bills lined up:

GST: The goods and services tax, once approved, will simplify India’s tax regime by integrating the central excise tax, service tax, and state value-added tax. India currently has as many as 14 state level taxes, each of which differ from state to state in levels and implementation. The simplification and unification of these taxes is, according to some estimates, poised to add 2% to India’s GDP. The GST, which has been adopted in several other countries with good results, is expected to boost export volumes, create employment opportunities, encourage competition between states, and increase the tax collection for the government.

Pushing the GST through the parliament has not been easy though. Despite a clear majority in the lower house, the BJP has not been able to pass the bill in three consecutive parliamentary sessions, due to opposition from the Congress party. The latest winter session was again washed out without any major reform going through. Since then, however, PM Modi has had several political talks with the opposition leaders with GST as the specific agenda and the Finance Minister Arun Jaitley commented on January 3, 2016 that he was reasonable confident of passing the GST in the February session. Mr. Modi will have to spend a great deal of capital to pass the GST in the upcoming session, and even then, the bill that gets passed might be a slightly diluted form of the ideal bill.

Bankruptcy Reforms: The average time taken for insolvency proceedings in India is a staggering 4.3 years, whereas the comparable figure in the US is 1.5 years and 1 year in the UK. Having a clearly defined bankruptcy law is essential for providing a favourable investment climate in any country. Exit norms are as important as easy of entry. The new bankruptcy law is expected to not only reform domestic bankruptcy law but also set the framework for developing an effective system for addressing cross-border insolvencies in India. The Insolvency and Bankruptcy Code Bill, which was introduced in the 2015 winter parliamentary session, is currently stalled in a joint committee between the two Indian houses of parliament. However, because bankruptcy reform is a priority area for the Modi government, we expect to see movement on this important matter in the next parliamentary session.

Banking Reforms: The Indian banking sector is dominated by the public sector banks, which are starved for capital and have huge Non-Performing Assets. The pace of stressed asset creation has also been high, which had prompted Moody’s to keep a ‘negative’ outlook for Indian banking sector. However, the Modi led government has been talking of reforming the banking sector with the Finance Minister introducing a 7 point programme to revitalize the public sector banks. The revitalization plan includes creation of a Bank Board Bureau, improving governance standards, and additional capital infusions. Though privatization of the banking industry is the need of the hour, which is unlikely to happen any time soon, this is the first step in the right direction. 2016 should see some significant improvements in the banking industry. Moody’s has already changed its outlook to ‘stable’, following the reduced pace of stressed assets addition.

Legal reforms: Opening up the legal sector in India, i.e., allowing foreign firms to practice and set up offices in India will be crucial to improving the ease of doing business. Inflow of FDI is hampered by concerns over legal cover and arbitration. Companies investing in India want the assurance that they can rely on sound legal advice, judges, and courts.  In 2015, the government began discussions surrounding a gradual opening of the legal services sector to foreign attorneys. The Prime Minister strongly supports legal reform in India and though India is adopting a cautious approach, it has taken the first steps by informing the World Trade Organisation in August 2015 that it would open its legal sector to foreign lawyers and law firms, but would do so only after consultations with all stakeholders, including the Bar Council of India (BCI). As the first step, the benefits of an open legal sector would only be provided to those countries that offer similar treatment to Indian lawyers and firms.

The proposal being considered by the CoS recommends that international arbitration and mediation services and only advisory or non-litigious services in home country law of the foreign lawyer, third country law and international law may be allowed. It proposes that foreign lawyers could be permitted to practise in India in conjunction with Indian lawyers, as a joint venture, with a cap on foreign participation.

Increased Ceiling for FDI: The Modi government has increased the ceiling for FDI in India in many sectors since 2014. It has also cleared many sectors to be considered under the automatic route and has allowed up to 100% FDI, without prior approval of the RBI. The long-standing 10 percent limit on single institutional investors still exists and continues to inhibit growth. Furthermore, even in sectors where the investment limit has been increased to 49 percent, barriers still exist. For example, in the insurance sector, even though the government raised the FDI cap to 49 percent, no foreign company has been able to increase its investment due to India’s restrictive interpretation of management control.

There are some exciting times ahead. If the Modi government can push through some of these long pending reforms, India can look forward to the next wave of growth.

Anupam Manur is a Policy Analyst at the Takshashila Institution and blogs @anupammanur

 

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Farmers Suicide in West Bengal

Aditya Dash

Around 25 shrimp farmers committed suicide in West Bengal.

They did not end their lives due to a drought or other calamities leading to the destruction of their crops. Their calamity was that there was no one to sell to and the market price for shrimps had crashed. Most others are currently selling at 30 percent below their cost of production.

The reason for this market outcome is that there has been an increase in global supply compared to last year while the global demand has decreased. Last  year, global supplies were hit by various calamities such as floods in Thailand and Vietnam and disease outbreaks in Vietnam and Indonesia. This was the main reason why a lot of shrimp farmers in India made extra money, as more shrimp was sourced from India. This year, no such disaster occurred in any major shrimp producing area and hence there has been a steady increase in the supply of shrimp. As far as the demand is concerned, most developed markets have high inventories from last year so the demand has been fairly low possibly due to the global economic slowdown.

For West Bengal things have been particularly bad. Majority of the produce is meant for export and specifically to Japan. Shrimp processors in West Bengal did not think about hedging their exposure to a single country of origin. Some of you might have read about the rejection of Indian origin shrimps in Japan due to the presence of Ethoxyquin. Ethoxyquin apart from being an unappealing term to be found in a food item is a food preservative used as an anti-oxidant in fish meal and fish feed to prevent rancidity. We feel that this year the detection of Ethoxyquin might have been due to the usage of imported shrimp feed of Malayasian and/or Vietnam origin. What is curious about the Japanese regulations is that the tolerance level of Ethoxyquin for shrimp is 0.01 PPM while the tolerance level for fish is 1 PPM. So as per Japanese regulations, it is acceptable for fish to have 100 times the amount of Ethoxyquin as shrimp. All the containers that have been detained in Japan are in compliance with WHO’s CODEX standards.

Although shrimp is not an integral part of the Indian diet, at such low prices clearly an arbitrage opportunity exists. However arbitrageurs will be constrained by the availability of cold chain infrastructure. Most shrimp processors have already bought plenty of raw materials and have no space left. Maybe things would have been better if there was 100 percent FDI in retail. Walmart and other similar entities would have leaped at this opportunity and stocked up on frozen shrimp.

Apart from the demand constraints one should also focus on the West Bengal shrimp farmer. Their cost of production is higher compared to the farmers of Odisha and Andhra Pradesh. The primary reason for that is the lack of awareness and education amongst the farmers. They tend to indiscriminately use Probiotics and other chemicals for maintaining adequate water conditions. Feed is given in a non-scientific manner which leads to higher Feed Conversion Ratios (amount of feed required for 1Kg of growth). Part of the blame lies on feed and shrimp farming input manufacturers and their marketing tactics. We have mostly illiterate and ignorant farmers operating in a highly technical field without any knowledge about quality parameters and basic economics. State governments should invest in translating and disseminating freely available technical information amongst the farming community. Steps should also be taken so that technical knowledge could be imparted at the matriculate level. West Bengal’s infrastructure is not as good as Andhra Pradesh, which has produced a record high number this year. Better road connectivity combined with regular electricity supply would drastically reduce their cost of production and improve product quality too. Conditions in Andhra Pradesh and Odisha are not very good either, however since the cost of production was highest at West Bengal the first round of suicides took place there. Although the financial strain will be felt by Odisha and Andhra cultivators, due to their lower cost of production things should not get that desperate.

Maybe the trade diplomacy team of the Indian government will resolve this matter as soon as possible. Maybe a screening of Ikuru to Japanese health authorities might awaken them to rationalise such a norm which has had such far reaching consequences. In Ikuru a lifelong bureaucrat comes to know that he has a year to live and tries to give his life a sense of purpose. He does so by taking responsibility of a project to transform a malarial swamp into a children’s’ playground. A senior bureaucrat once explained to me that the following are given importance in descending order cereals, horticulture, diary, animal husbandry, poultry and finally aquaculture.

While the suicides have been tragic, a silver line amongst such dark clouds is that aquaculture might get some more attention from the government.

Aditya Dash is a shrimp exporter.

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FDI- A classic example of why policy reforms are difficult to implement in India

Ankit Agrawal

The government wishes to allow FDI in multi-brand retailing to the tune of 51 percent which is being vehemently opposed by opposition/coalition parties and various interest groups. According to the rational actor model, the state is a monolithic unitary actor, capable of making rational decisions based on preference ranking and value maximisation.

In reality, the organisational behaviour model and the government politics model supplement this model and the latter only provides guidance to the ideal scenario. India follows a parliamentary system of governance which has a collective executive in the form of a cabinet so policy-making is joint decision-making. Decision-makers refract every policy through the prism of ideology and interest. A policy emerges only if harmonisation of multiple policy preferences can be achieved. India has had coalition governments for almost two decades now which makes persuasion and bargaining central to all policy-making and often results in no outcomes. Various parties weigh the potential benefits and impact on their electoral base while adopting positions on issues.

The same is being observed in the case of this reform proposal. Parties dependent on farmers, traders or the economically backward for votes are vehemently opposing the proposal. FDI in multi-brand retail may be economically rational on grounds of efficiency. But relative weights assigned to equity and efficiency and the question of what constitutes equity are points of contention between those advocating a neo-liberal approach and those who advise a people-centred approach to economic reforms. Currently, advocates of the latter seem to be enjoying the upper hand, even though it could be a matter of debate whether the supporting narratives they promote are spurious and irrational.

One can’t treat the government, its operating environment and the external environment in which the government is embedded as black boxes. The “window of opportunity” for reform is open only when the three streams of problem, solution and politics come together. Electoral compulsions like upcoming elections in states, threat of withdrawal of support by recalcitrant coalition partners and refusal on their part to negotiate has stalled this reform at various stages.

Given the current dominance of the politics of transparency and stakeholder consultation, public interest groups have acquired considerable influence on decision-making in the government. This is being observed in the FDI case where lobbies of traders, middlemen and farmers have sought to pressurise the government through high-visibility tactics ranging from demonstrations to outright violence. Technically, the proposed reform is an executive decision which by definition doesn’t need ratification by the Parliament and is non-binding on individual states since retail is a state subject. Yet, sustained pressure exerted through media outlets and the potential sweep of the policy has forced the government to suspend the proposal.

Even so, strategic incrementalism in the form of allowing cash-and-carry format stores and upto 100 percent FDI in single-brand retail is being practised, aimed at bringing elements from the realm of context of appreciation to context of influence. In sum, divergent interests and electoral compulsions of coalition partners, public interest groups, the reigning paradigms of governance and a free but hyperactive and sometimes irresponsible media, form a potent mix and make implementing reforms difficult.

Ankit Agrawal is an Equity Research Analyst based in Delhi

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