R IM THE JOURNAL OF IILM INSTITUTE FOR HIGHER EDUCATION
VOLUME 1 ISSUE 1
Management Review
01
Beyond Twenty Years of Indian Reforms
MARCH 2012 200
Theme
With the country having completed two decades of reforms in 2011, we review how the Indian economy and businesses have been transformed
? Corporate India: From Exuberance to Resilience
By Mahesh Vyas, MD & CEO, Centre for Monitoring Indian Economy
? Reinventing India’s Trade Sector
By Amir Ullah Khan, International Trade Expert and Saleema Razvi, Indian Institute of Foreign Trade
02
03
Research@Work
? Aadhaar: The Promise and Challenges Ahead
By Nandan. M. Nilekani, Chairman, Unique Identification Authority of India
? Skill Development in India: Moving from a Supply-side Model to
Demand-led Interventions By Dilip Chenoy, CEO, National Skill Development Corporation (NSDC) 04
? Understanding the Philosophical Underpinnings of Corporate Social
Responsibility By N.C.B.Nath, Chairman, Foundation to Aid Industrial Recovery 05
? A Review of the State of CSR in India
By V.V.Ranganathan, Chairman & Founder, Pinnacle Opportunities and Trustee, Bharti Foundation 06
? Ideas to Reshape India's Infrastructure Landscape
By Vinayak Chatterjee, Co-founder & Chairman, Feedback Infra 07
? Operational Challenges of Environment Accounting and Reporting
By P. Malarvizhi, Professor of Accounting and Finance, IILM 08
for a New Economics 09
Book Reviews & Resources
? Beyond The Invisible Hand: Groundwork
? Poor Economics: Rethinking Poverty & The Ways To End It
IILM MANAGEMENT REVIEW
Board of Editors
Contents
ANJAN ROY Economist & Corporate Advisor New Delhi.
Theme
BHASKAR DUTTA Professor of Economics University of Warwick United Kingdom.
With the country having completed two decades of reforms in 2011, we review how the Indian economy and businesses have been transformed
Beyond Twenty Years of Indian Reforms
KIRANKUMAR.S.MOMAYA Professor of Strategic Management Shailesh.J.Mehta School of Management Mumbai P.K.JAIN Professor of Finance Indian Institute of Technology (IIT) New Delhi.
RAKESH CHAUDHARY Professor of Strategic Management, IILM RANJANI MATTA Associate Professor - Finance, IILM
SUJIT SENGUPTA Area Chair - Sales & Marketing Associate Professor, IILM SUJATA SHAHI Area Chair & Professor - OB/HR, IILM VANDANA SRIVASTAVA Area Chair & Associate Professor - Information Technology, IILM
EXECUTIVE EDITOR: GEORGE SKARIA RESEARCH ASSOCIATE: SHIPRA JAIN
Owner: IILM Institute for Higher Education Printing Press : Cream Group,1539/2, 3rd Floor, Wazir Nagar, Kotlamubarakpur, New Delhi - 110003 Place of Publication : New Delhi Editor: George Skaria (Executive Editor)
Reinventing India’s Trade Sector By Amir Ullah Khan, International Trade Expert and Saleema Razvi, Indian Institute of Foreign Trade 17
Aadhaar: The Promise and Challenges Ahead By Nandan. M. Nilekani, Chairman, Unique Identification Authority of India
26
Skill Development in India: Moving from a Supply-side Model to Demand-led Interventions By Dilip Chenoy, CEO, National Skill Development Corporation (NSDC)
33
Understanding the Philosophical Underpinnings of Corporate Social Responsibility By N.C.B.Nath, Chairman, Foundation to Aid Industrial Recovery
44
A Review of the State of CSR in India By V.V.Ranganathan, Chairman & Founder, Pinnacle Opportunities and Trustee, Bharti Foundation
49
Ideas to Reshape India's Infrastructure Landscape By Vinayak Chatterjee, Co-founder & Chairman, Feedback Infra 54
Operational Challenges of Environment Accounting and Reporting By P. Malarvizhi, Professor of Accounting and Finance, IILM 63
Publisher: Sapna Popli Printer: Cream Group
09
Research@Work
P. MALARVIZHI Co-Chair, Research & Professor, Accounting & Finance, IILM
Corporate India: From Exuberance to Resilience By Mahesh Vyas, MD & CEO, Centre for Monitoring Indian Economy
Book Reviews
Beyond The Invisible Hand: Groundwork for a New Economics By B.Bhattacharyya
81
Poor Economics by Abhijit V. Banerjee and Esther Duflo By Anjan Roy
85
IILM MANAGEMENT REVIEW
The Editorial Mission Statement IILM Management Review (IMR), the bi-annual journal of the IILM Institute for Higher Education is intended to be research-oriented, scholarly in nature with editorial contributions from the fields of management, business and economics. The primary target of readers are professional managers. Another yardstick for potential papers or articles in IMR would be whether they could be taught to a group of business or management students. In a broad sense, IMR seeks to reach out to thought leaders who influence leadership, management and practice through teaching, consulting, managing and other professional activities. Ideally, articles should be based on research evidence, either quantitive or qualitative. Papers could include what we already know about academic literature but advance our knowledge in the areas of business, management and economics, be they reviews of themes of particular topics, those that have implications for society or public policy and from areas that have been neglected largely in prior research. India is increasingly becoming a global engine of growth and a lot of this growth is being driven by Indian corporations. The country has several well-acclaimed business schools, great managers and reasonably good academic research, but so far, there is no single publication that captures this growing dynamism to disseminate lessons from success and failure. Further, research from the business side is far and few between. At another level, India is also grappling with issues of poverty and corruption. This calls for greater focus on social sector management and governance. Through the Journal, in course of time, we hope to:
! provide a thought leadership platform for Indian business and non-business managers, academics, policy makers and students of management.
! create a world-class management publication to record, understand and disseminate research and knowledge on best practices in Indian business and nonbusiness organisations.
! create a forum for discussing and validating new research, ideas and management innovation across the country and possibly in the future, in emerging economies.
! build a knowledge network involving business schools, academic researchers, business managers, government and other social institutions.
! develop in part a global Indian view of management theory, research and practice.
IILM MANAGEMENT REVIEW
Editorial Policies and Guidelines for Contributors IILM Management Review (IMR) is open to contributions that could be case studies, qualitative research, statistical studies and trend analysis broadly in the areas of business, management and economics. Preferably, authors interested in publishing articles in IMR must first submit a short proposal (of about two pages) outlining their work and get feedback before submitting the full manuscript. However, if the contributors prefer to send full-length manuscripts for submission, we could consider that too. The proposal should ideally include an introduction and summarise the general structure of the planned paper that could address: the main message and theme of the paper; the potential audience for the article; the research basis; its potential implications and whether the paper is based on original information or findings. The manuscript under review at IMR should not be for review elsewhere and should not be submitted to another publication entity during the review period at IMR. The submitted manuscript should be in a Word file. IMR adheres to the British style of writing. Authors should submit a cover sheet with names and complete contact information of the primary author and any co-authors. It should also include an executive summary at the beginning of the paper. Detailed references should be included at the end of the paper. Typically, an article should be about 4000-5000 words. On receipt of the manuscript, after the initial screening by the editor, it will be sent for two reviews. On completion of the review process, the author will be informed of the status of the paper. Typically, in most cases, the entire review and acceptance process should be completed in about three months. Accepted contributions will carry a modest honorarium. Additional questions may be directed to the IMR editorial office. Email: editor.imr@iilm.edu
IILM MANAGEMENT REVIEW
Why Another Journal?
The preceeding few years have been turbulent in many
While many have been eloquent on the potential
ways, especially for the world economy: for its
demographic dividend that India can reap, not only
principal players as well as for those who are at the
vis-a-vis mature developed economies but even
margin, for those who practise trade and for those who
China, there is increasing realisation that the distance
are supposed to train the practitioners, for those who
between the dividend and disaster is not really that
are aghast at the breakdown of some of the most
much, and unless urgent and substantive redressal
hallowed axioms of economic philosophy, for those
measures are taken to improve the quality of
who fumed at the blatant display of personal greed at
education at all levels, the reality after a decade may,
the cost of the millions who never understood high
infact, become worse. Societal harmony which is a pre-
finance, and finally for those who are trying to work
requisite for sustained economic growth needs
out the way forward.
economic inclusion and upward social mobility which
India, fortunately enough though not providentially, came out fairly unharmed. The rather limited scale of
principally can come through access to quality education at an affordable cost.
India's globalisation came in handy. As the developed
This brief recounting of well-known facts is done only
country powerhouses turned brown, the world in fact
to present the context in which the idea of this journal
looked for salvation to the emerging giants of which
got germinated. It was realised that India is really at
India by now has become a chartered member.
crossroads, and that too at a time when there appears
To be fair, there is a lot for which India can feel proud of: a growth rate in GDP which is envious by any count, rising soft power though its utilisation is still rudimentary, an acknowledgement as a superstar in services, a sudden realisation that manufacturing is also an area of strength, a plethora of overseas acquisitions which reminded of Japan few decades
to be a vacuum in the intellectual ecosystem which makes public policy making much more complex and divisive, management of private sector enterprises more prone to heightened uncertainties, limited ability to address severe endogenous and exogerous shocks, and convergence of divergent interest groups only a chimera.
back, and intellectual giants in management who are listened to in the Fortune 500 boardrooms.
It was realised that India is really at crossroads, and that too at a time when there appears to be a
But there is an underbelly as well: people below the
vacuum in the intellectual ecosystem which
poverty line, however defined, is almost astronomical,
makes public policy making much more
the social welfare indices gloomy, record in corruption
complex and divisive, management of private
showing no improvement which many had expected
sector enterprises more prone to heightened
as economic reforms and liberalisation took roots, and
uncertainties, limited ability to address severe
governance in general emerging as a major issue of
endogenous and exogerous shocks, and
concern.
convergence of divergent interest groups only a chimera.
IILM MANAGEMENT REVIEW
In economics and mangement, these perplexities are more abound. While globalisation is a reality — the
The objective is that the fruits of academic
debate whether the world is flat or semi-flat is fairly
research as well as distilled insights of senior
futile — it must also be appreciated that while ideas
industry professionals and other thought
travel in real time, very few ideas can really work
leaders are available to a wider community,
globally. Most ideas to be workable need to be
comprising academics, professionals and
customised for culture, place and time. This is
policy makers. An analysis of current offerings
especially true for both economics and management.
in India revealed a wide void in this segment which we felt needs attention.
While we must know what ideas, policies and strategies, both in the public and private space, are getting developed, debated and implemented across the world, there must also be conscious efforts to see
what the journal would like to do. It will publish
whether these are seamlessly transferable or need
contributions which will have a strong reasearch base,
local adaptation or possibly total rejection. This
but results presented in a manner accessible to all
requires a rational application of intellect, an academic
professionals. The objective is that the fruits of
rigour of a high order and an inquisitive but critical
academic research as well as distilled insights of senior
mind. The objective of this journal is precisely to
industry professionals and other thought leaders are
provide a platform for such intellectual endeavours to
available to a wider community, comprising
develop ideas, applications, as well as strategic
academics, professionals and policy makers. An
thinking, relevant to India's current needs while
analysis of current offerings in India revealed a wide
recognising the global contributons.
void in this segment which we felt needs attention. Hence this journal.
While the editorial policy of the journal has been given at the appropriate place, I can state in one sentence
Theme 1991-2011 Beyond India's Defining Double Decade of Liberalisation
Corporate India: From Exuberance to Resilience By Mahesh Vyas, Managing Director & CEO, Centre for Monitoring Indian Economy (CMIE) Pvt Ltd
Reinventing India’s Trade Sector By Amir Ullah Khan, International Trade Expert and Saleema Razvi, IIFT
IILM MANAGEMENT REVIEW
Corporate India: From Exuberance to Resilience By Mahesh Vyas, Managing Director & CEO, Centre for Monitoring Indian Economy (CMIE) Pvt Ltd
Executive Overview Corporate India's immediate response to liberalisation was enthusiastic. It obviously liked the freedom to raise capital, import capital goods and raw materials, set up capacities and grow. But, large business houses with legacy systems and skill sets honed for a business environment that valued nurturing license dispensers faced serious business continuity risks in a marketsdriven and potentially competitive environment. Thus, their hailing liberalisation was a bit odd then, in at least some sense. The two decades old post-liberalisation period has seen significant changes in the policy and business environment. The corporate sector has reacted differently and performed differently through these changes. The progress of the corporate sector since liberalisation has not been linear. The post-liberalisation period can be divided into three parts. Today, while macro-economic problems of inflation and interest rates continue to fox policy makers, Corporate India has made impressive progress in the liberalised environment. It has displayed remarkable ability to adapt to the new environment and seize new opportunities. The recent forays of Indian corporates into the global markets to raise capital and to gain global market share will be another story to study in a few years.
T
he economic liberalisation unleashed in July 1991 was offered by the policy makers then, to cure India of its macro-economic imbalances caused by a profligate state. High fiscal deficits financed by highpowered money had caused high inflation rates that had made Indian goods uncompetitive in the international markets and this had caused a balance of payments crisis which led to the country having to pledge its gold reserves. It was never demonstrated empirically how the fiscal deficit worked its way through the Reserve Bank of India (RBI) to a balance of payments crisis, but that did not matter. It was also not clear how de-licensing of production, decontrol of distribution and pricing of products, reduction in tariff and non-tariff import controls or decontrol of the capital markets — all announced in July 1991 — would solve the macroeconomic imbalances. But, even this did not matter. Somehow, all the talking heads hailed the liberalisation. Liberalisation obviously meant more competition for enterprise. Entry barriers into industries had been removed. Now, nothing would stop new companies from entering lucrative industries and increasing supplies, which could potentially reduce margins for existing producers. More importantly, Indian companies would face competition from imported goods. This could potentially wipe out entire local industries. The threat was real since import barriers had been dropped substantially. In spite of these threats, Corporate India's immediate response to liberalisation was enthusiastic. It obviously liked the freedom to raise capital, import capital goods and raw materials, set up capacities and grow. But, 09
IILM MANAGEMENT REVIEW
large business houses with legacy systems and skill sets honed for a business environment that valued nurturing license dispensers faced serious business continuity risks in a markets-driven and potentially competitive environment. Thus, their hailing liberalisation was a bit odd then, in at least some sense. The two decades old post-liberalisation period has seen significant changes in the policy and business environment. The corporate sector has reacted differently and performed differently through these changes. The progress of the corporate sector since liberalisation has not been linear. The post-liberalisation period can be divided into three parts. 1. Exuberance (1991-1996). This was a period of instant gratification from liberalisation. Enterprises took the new-found freedom to raise capital and build capacities with great enthusiasm. They flooded the markets with IPOs and then raised matching debt to fuel rapid growth. Healthy domestic demand sustained this growth. 1,379 IPOs hit the market in 1994-95 and 1,454 in 1995-96. Such numbers were never seen again. Nearly Rs. 44,000 crore were raised from these IPOs. Such resources were not raised again till 2004-06. 2. Corrections (1996-2004). The euphoria ended in many ways. The RBI curtailed liquidity sharply in 1997. Domestic demand slowed down following the failure of monsoon in 1996 and 1998. Equity markets turned sour and corporate debts became non-
The two decade old post-liberalisation period
performing assets of the banks. Distress increased. Venture capital stepped in to fund new businesses, but met with an early demise as the dotcom bubble burst. Corporate India saw the end of easy money and thus began the process of restructuring its finances and business. The government raised import barriers to protect domestic industries against cheap imports and it created demand for domestic industries by initiating public funding to improve India's road network. 3. Resurgence (2004-2010). Corporate India emerged much more efficient from the period of correction. It was better focused on its core business, less diversified, more efficient in the management of its working capital and in a better position to raise debt internationally. Corporate India re-discovered the opportunities in the Indian industrial sector. Investments in mining and manufacturing returned and a new era of irrational exuberance arose in real estate and construction. The timeline of exuberance and corrections of the telecom and real estate industries is phased out from the above story. But, the story is the same: one of initial irrational exuberance followed by an external intervention that arrests the irrationality and ushers in a period of correction before a strong but more stable growth settles in. In the following sections we describe the three phases with the help of statistics drawn from CMIE's Prowess database. The description is in terms of growth and efficiency. Data and Methodology
has seen significant changes in the policy and business environment. The corporate sector has reacted differently and performed differently through these changes. The progress of the corporate sector since liberalisation has not been linear.
We use ratios reflecting growth and efficiency of the Indian corporate sector as a whole. These ratios are derived from the normalised audited financial statements of Indian companies that are available in the Prowess database. The Prowess database contains audited financial data for over 25,000 companies. But, the number of
10
F R O M E X U B E R A N C E T O R E S I L I E N C E : C O R P O R AT E I N D I A ' S T W O D E C A D E S O F L I B E R A L I S AT I O N
Performance of Indian Corporate Sector Year ended March
Growth in Growth in Growth in PAT Net of PAT Net of Total Net Fixed PAT (per P&E as % P&E as a Income Assets (%) cent) of Total (%) of (%) Income Avg. Net of P&E Networth
Debt to Equity Ratio (Times)
Interest Cover (Times)
Interest Incidence (%)
Gross Working Capital Cycle (Days)
Total Sales Count of Income / /Avg. Net companies Compensat Fixed ion to Assets Employees (Times) (Times)
1986-87
8.16
13.13
-15.30
1.59
4.87
1.42
1.59
12.47
193.66
9.95
2.18
862
1987-88
12.62
7.06
-7.12
1.69
6.14
1.48
1.70
12.47
176.54
11.84
2.55
1135
1988-89
18.48
12.85
117.14
2.29
8.96
1.74
1.79
11.79
185.69
12.00
2.52
1345
1989-90
18.46
10.13
51.27
2.34
8.89
1.82
1.74
12.03
189.00
11.85
2.68
1691
1990-91
14.12
15.54
19.47
2.82
9.25
1.74
1.79
11.30
194.98
12.17
2.16
1975
1991-92
18.45
20.45
13.91
2.53
8.20
1.79
1.67
12.80
190.54
12.68
2.00
2474
1992-93
13.03
16.19
18.62
2.52
6.75
1.65
1.60
12.29
205.61
12.87
1.75
2829
1993-94
12.10
17.94
71.16
3.88
9.61
1.46
1.83
11.65
214.54
13.51
1.72
3443
1994-95
27.01
30.06
59.22
4.96
11.82
1.20
2.13
11.72
187.04
15.67
1.80
4456
1995-96
21.04
19.00
14.84
4.90
11.23
1.14
2.17
12.10
178.84
15.28
1.80
5394
1996-97
12.54
14.78
-20.91
3.22
7.42
1.22
1.82
12.61
185.05
14.63
1.71
5644
1997-98
6.71
16.00
-1.28
2.76
6.17
1.30
1.72
12.00
188.00
13.66
1.59
5552
1998-99
8.06
9.61
-18.62
2.07
4.74
1.35
1.57
11.95
184.60
13.67
1.58
5893
1999-00
15.78
7.63
8.48
1.91
4.70
1.31
1.60
11.76
168.91
13.71
1.72
6494
2000-01
12.83
5.31
15.69
1.87
4.72
1.30
1.65
11.78
160.47
13.65
1.82
6818
2001-02
2.86
6.48
12.98
1.55
3.71
1.27
1.69
10.93
160.08
13.55
1.66
6942
2002-03
10.39
4.17
50.57
2.51
6.46
1.25
2.10
10.23
153.66
13.53
1.76
7411
2003-04
16.19
4.79
79.28
4.07
10.98
1.09
3.04
8.59
142.35
14.10
1.96
8852
2004-05
20.96
4.77
41.41
5.31
14.99
1.00
3.94
7.96
126.92
14.99
2.22
9741
2005-06
15.77
14.19
18.83
5.80
15.46
0.91
4.49
7.31
127.12
15.78
2.26
10150
2006-07
23.82
14.85
45.68
6.72
17.26
0.85
5.14
7.30
121.13
16.07
2.34
10252
2007-08
19.27
15.50
18.41
6.81
15.89
0.80
4.72
7.84
124.45
15.31
2.28
10294
2008-09
16.47
20.37
-22.05
4.24
9.24
0.88
2.96
8.61
123.46
14.58
2.10
10182
2009-10
4.48
15.40
26.01
5.48
10.42
0.79
3.57
7.48
129.26
14.16
1.82
9650
1986-91
14.30
11.70
25.29
2.15
7.62
1.64
1.72
12.01
187.97
11.56
2.42
1402
1991-96
18.20
20.63
33.43
3.76
9.52
1.45
1.88
12.11
195.31
14.00
1.81
3719
1996-04
10.59
8.51
11.75
2.50
6.11
1.26
1.90
11.23
167.89
13.81
1.73
6701
2004-09
19.22
13.82
17.71
5.78
14.57
0.89
4.25
7.80
124.62
15.35
2.24
10124
Averages
Source : Prowess, Centre for Monitoring Indian Economy, accessible from www.business-beacon.com Note 1 : The count of companies for a year is of those companies for which data is available for the year and its preceding year. Note 2 : Data refer to non-finance companies. This excludes banks and other finance companies.
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companies for any single year is much less and it also varies from year to year. The number of companies covered in a year is of the order of 13,000 in recent years (since 2005-06). The number of companies covered in a year declines in earlier years. Around liberalisation, there were only about 2,000 companies in the Prowess database.
sample companies are a fair estimator of the ratios for the corporate sector. All the data used here was taken from CMIE's www.business-beacon.com, which offers a time-series of the ratios based on the methodology described above. The website offers the ratios from 1980-81. However, the sample size in the early years is small and so we use the data only from 1987-88 when the sample size rises to over a thousand companies. All sample sizes referred to here are those that have at least data for two consecutive years.
The increase in number of companies over time is a reality. However, this and the varying number of companies from year to year leads to complications in creating a time series of the ratios under study. This is resolved as follows: For each year in the time-series, a ratio is computed only based on those companies for which data is available for that year and its preceding year. Since the companies covered in any year is large and well distributed across industries, ownership and size of companies, the resultant ratios based on the
Growth The first half of the 1990s was a period of high consumer demand. The period 1990-91 to 1994-95 was one of relatively high agricultural growth with low volatility in agricultural incomes. Agricultural incomes grew
Gross working capital cycle (days) 240
220
200
180
160
140
120
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
100
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F R O M E X U B E R A N C E T O R E S I L I E N C E : C O R P O R AT E I N D I A ' S T W O D E C A D E S O F L I B E R A L I S AT I O N
at the rate of 3.3 per cent per annum with a coefficient of variation of 3.1 per cent. Never in the past had the agricultural sector in India seen such low volatility and only rarely had it seen a growth of over 3.3 per cent per annum over a five year period. But this was the first in terms of a combination of high growth with low volatility over a five year period. This prosperity of the farming community was one of the important sources of demand that supported the euphoria that followed liberalisation. Companies reacted to this demand and the new freedom to raise resources and build capacity. Resources raised from the primary capital markets soared. They peaked in 1995 at about Rs. 57 thousand crore and in the same year, the growth in bank credit also peaked at 27 per cent. Fiscal 1994-95 saw the fastest growth in net fixed assets of the corporate sector. At 30 per cent, this growth rate has never been surpassed to date. In the five years preceding liberalisation (1986-87 to 1990-91), the net fixed assets of the non-financial corporate sector had grown at the rate of about 12 per cent per annum. In the five years after liberalisation (1991-92 to 1995-96), the net fixed assets of the nonfinance corporate sector grew at a much accelerated rate of 21 per cent per annum. The acceleration in income was modest: from 14 per cent to 18 per cent by the same comparison. Companies built up capacities at a much faster pace than they could put them to use. Yet, this was a time of high profits growth. Net profits after tax adjusted for prior period and extraordinary transactions grew at the rate of 33 per cent per annum during the five year period following liberalisation compared to the 25 per cent per annum growth registered in the five years preceding liberalisation.
Many of the companies which floated IPOs in the boom times turned out to be too weak to withstand the sudden end of the good times. From large steel companies to small terry towel producers, many were vanquished in the late 1990s. Large companies and those with a legacy displayed a better chance of survival. The young and new did not.
profits shrunk 21 per cent and income growth dropped to 13 per cent. Profits continued to shrink in the following two years and income growth dropped to 7 to 8 per cent. These growth rates were below the average inflation rate implying a fall in income in real terms. Growth of the first half of the 1990s was fuelled by a high gearing ratio. The average gearing was 1:1.45 and the average interest incidence was 12.11 per cent. In 1996-97, the average interest incidence spiked to 12.6 per cent. The Asian crisis in 1997 and the RBI's tightmoney policy added to the woes of the corporate sector. Non-performing assets of the banks increased. Many of the companies which floated IPOs in the boom times turned out to be too weak to withstand the sudden end of the good times. From large steel companies to small terry towel producers, many were vanquished in the late 1990s. Large companies and those with a legacy displayed a better chance of survival. The young and new did not.
Net profit margins over total income rose from an average of 2.15 per cent to 3.76 per cent. Return on net worth increased from 7.62 per cent to 9.46 per cent.
Growth in net fixed assets dropped from a peak of 30 per cent in 1993-94 to less than 10 per cent from 1998-99 and then to less than 5 per cent from 2002-03. Growth in total income dropped similarly. In 2001-02 it barely grew (3 per cent) even in nominal terms. The persistent fall in profits led to a sharp fall in the net profit margin. In 2001-02, profitability was at its lowest with the margin on income at 1.55 per cent and return on net worth at 3.71 per cent.
The accelerated pace of growth soon after liberalisation came to an end in the sixth year — in 1996-97, when
This dark period of growth continued till 2003-04. In 2004-05, the net profit margin climbed back to over 5 13
IILM MANAGEMENT REVIEW
Debt:Equity ratio 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20
per cent and the return on net worth was nearly 15 per cent. By 2006-07 and 2007-08, these were at record highs of nearly 7 per cent and 16 per cent, respectively. Investments growth followed the growth in profitability. Net fixed assets growth rose from 8.5 per cent per annum during the dark period (1995-96 to 2003-04) to 13.8 per cent per annum during 2004-05 to 2008-09. The growth in net fixed assets during the five years since 2004-05, however, was much lower than the one recorded during the five years immediately after liberalisation. Corporate India had learnt many lessons during its dark period. One of them was to avoid the pitfalls of runaway asset creation. Thus, while the growth in assets during the period of resurgence is relatively low, the growth in income is not and most importantly, profit margins and returns are at a record high.
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
0.00
Efficiency The period of the slowdown from 1996-97 to 2003-04 is arguably the most important period of the Indian corporate sector. During this difficult period, the strong and resilient companies were separated from the weak and vulnerable ones. It is the period when the corporate sector learnt the ill-effects of wanton growth. It is also a time when investors became a lot more wiser to the promises of the corporate sector's fancy stories of growth and prosperity. The retail IPO investor has been a lot more wary since the heady days of 1993-95. Financial and business restructuring was the corporate mantra in the late 1990s. Large business houses identified core businesses, hived off non-core ones, reorganised their businesses and focused on efficiency in operations. Accounting data of a large set of companies shows the effects of these efforts. At the peak of the early boom, in 1993-94, the gross
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F R O M E X U B E R A N C E T O R E S I L I E N C E : C O R P O R AT E I N D I A ' S T W O D E C A D E S O F L I B E R A L I S AT I O N
working capital cycle was 215 days. The average during the 1991-96 period was 195 days. This average was still a deterioration from a cycle of 187 days in the five years prior to liberalisation. In the dark years from 1996 to 2004, the gross working capital cycle fell drastically from 195 to 167 days. More importantly, when the good times returned after 2004, the working cycle did not deteriorate like it did in the early 1990s. On the contrary, it improved further to a mere 125 days. Reduction in tariff and non-tariff barriers helped reduce the raw material cycle days. This helped reduce the cost of raw materials in the overall cost of manufacturing companies. This reduction in the working cycle duration had a direct impact upon the need for working capital. Corporates also curtailed the growth in net fixed assets during the period of the slowdown. As interest rates came down, corporates swapped loans to reduce costs. Thus, the debt:equity ratio and the interest incidence, both declined. Asset utilisation (the amount of sales generated for every rupee of net fixed assets) deteriorated sharply in the first half of the 1990s. It fell from 2.42 in the second half of the 1980s to 1.81 in the first half of the 1990s. In the period from 1996-97 to 2003-04, the deterioration slowed down substantially and the average ratio during this period was 1.73. Labour utilisation (the amount of income generated for every rupee spent as compensation to labour) improved from 11.6 in the second half of the 1980s to 14 in the first half of the 1990s. A host of voluntary retirement schemes reduced the head count and this slowed the growth in the wage bill. Resilience A combination of cost cutting measures in the early 1990s, business restructuring in the late 1990s, better working capital management in the early 2000s, low gearing and a healthy current ratio helped the corporate sector meet the global financial crisis of SeptemberOctober 2008 better than the companies of any other major economy.
Corporate India was exposed to its greatest test in modern times during this crisis. Even as the financial markets and large corporates the world over sought bailout packages from their governments, Indian corporates faced the crisis squarely without any direct bailout. By March 2008, companies had recorded over five years of accelerated growth in assets and sales. During this period they built up formidable balance sheets with the help of remarkably efficient operations. The difference between the growth of the early 1990s and the mid2000s is the better utilisation of assets, more efficient working capital management, greater reliance on export earnings and comfortable cash reserves and cash flows. Gearing was a mere 0.8 times and more than half the working capital requirements were met through suppliers' credit. Never before, at least since liberalisation, was Corporate India in a better financial position than when it faced the global financial meltdown. In 2009-10, the year after the crisis, India Inc did not look like it was falling into a period of slowdown again. Net fixed assets grew by 15.4 per cent. This was higher than the less-than 14 per cent per annum growth recorded in the 2004-05 to 2008-09 period. Profits bounced back after a fall in 2008-09 and the margins at 5.5 per cent were comparable to the 5.8 per cent average of the preceding five years. The debt-to-equity ratio, current ratio, interest cover and working capital cycle days, are all in a zone that reflects continued financial strength and therefore confirms the resilience displayed during the crisis. While macro-economic problems of inflation and interest rates continue to fox policy makers, Corporate India has made impressive progress in the liberalised environment. It has displayed remarkable ability to adapt to the new environment and seize new opportunities. The recent forays of Indian corporates into the global markets to raise capital and to gain global market share will be another story to study in a few years. mahesh@cmie.com 15
IILM MANAGEMENT REVIEW
Reinventing India’s Trade Sector By Amir Ullah Khan, International Trade Expert and Saleema Razvi1, IIFT
Executive Overview If there was one sector that the economic reforms from 1991 completely transformed, it is that of trade. The pre-reform regime was always worried that India will not be able to compete in the world market and that exports will stagnate. The truth is that exactly the opposite has happened. We import more than we export, and have enough foreign exchange to pay for the import bills. Our imports went up dramatically, from $ 20 billion in 1991 to $ 350 billion this year. In 1991, nearly fifty per cent of our exports were from the agricultural and the textile sectors. Basmati rice was a product that was our monopoly and in textiles, we were counted as the bigger players. But, problems have also emerged like petroleum imports having gone up considerably. The hallmark of India’s economic reforms have been an outward looking and liberal trade policy characterised by removal of quantitative restrictions, rationalisation of tariff levels to match the tariffs in other developing countries, especially ASEAN and removal of licenses for setting up industrial units and removal of licenses and quotas for exports and imports.
O
ver the last two decades, the trade sector in India has completely transformed itself. Those who did not see India in the seventies and the eighties will not really appreciate the extent of this change. Today, India is the world’s largest importer of gold and silver. It was in 1994 that imports were made legal and since then we have been steadily increasing our buying of the two precious metals so much so that this year, about ten per cent of our total imports will be only on account of gold and silver. Compare that to a nil situation about 20 years ago. Today, India also exports 14 per cent of all that it produces2. In comparison, the pre-reform regime was always worried that India will not be able to compete in the world market and that exports will stagnate. The truth is that exactly the opposite has happened. We import more than we export, and have enough foreign exchange to pay for the import bills. Our imports also went up dramatically, from $ 20 billion in 1991 to $ 350 billion this year. What also happened was a huge increase in foreign investment in India, both by way of investors directly opening offices and factories (this is called Foreign Direct Investment or FDI) or through foreigners investing in shares and stocks (called Foreign Institutional Investment of FII). Non-resident Indians, who did not send much money back to India twenty years ago, now repatriate nearly $ 50 billion, the highest by any non-resident community in the world. Several other changes are not too obvious and remain hidden in the trade data.3 Of the $ 20 billion worth of imports in 1991, nearly thirty per cent was on account of machin-
1 Amir Ullah Khan is an Economist working on trade issues and Saleema Razvi is a PhD scholar at the Indian Institute of Foreign Trade working on the services sector, focusing on the opening up of health services. 2 The total figure has changed dramatically. In the year 1991, the total export figure was touching 18 billion dollars. This meant that we were exporting about 7 per cent of our production. Now our export figure is nearly 250 billion dollars and the government wants to take it to 300 billion. 3 In 1990-91, machinery was the second-largest import item, valued at around $ 5.83 billion and accounting for about 24 per cent of India’s total imports of $ 24 billion. Twenty years later, machinery imports are much higher, but account for only about 11 per cent of India’s total imports. This is a sign as much of India’s growing domestic machinery manufacturing capacity as of the economy’s rising demand for capital goods. Clearly, India’s import basket has grown and diversified in these 20 years.
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Tariffs reduce dramatically
years, both agriculture and textiles have lost their dominant position in our export basket. The fear we had earlier that our farmers export everything and we get nothing in the domestic market is quite wrong. Agriculture exports now are less than ten per cent of our total exports and a major contribution to this comes from fruits and vegetables like gherkins, mushrooms, strawberries and grapes that in any case have a small market in the country4. There are of course problems that have cropped up. Our petroleum imports have gone up considerably, showing that we have, on one hand not been able to increase domestic production, and on the other not been able to control demand.5
Source: Economic Survey, various issues
ery imports. Today, only eleven per cent of our imports are on account of machinery. We still import a lot of machinery but produce a lot of it too. And even export our machinery, both to the developed and developing countries. In 1990-91, engineering goods exports were worth slightly more than $ 2 billion and that constituted 12 per cent of total exports. This year, engineering goods exports will contribute nearly $ 60 billion that is nearly 25 per cent of the total. Industrial goods exports have been increasing at very fast rates and have been doing even better than our more fancied software goods. The growth rates for engineering exports in the last few years have also been impressive, making this the largest foreign exchange earning sector, even ahead of software, which fetched $ 59 billion in 2011. Obviously something has happened that has made India’s engineering and industrial sector do so well, and this is by way of better education, skills, input availability and design capacity. In 1991, nearly fifty per cent of our exports were from the agricultural and the textile sectors. Basmati rice was a product that was our monopoly and in textiles, we were counted as the bigger players. In the last twenty
However, rising imports in today’s economy is not the kind of bad news it used to be years ago. Today, a country that is capable of importing large quantities of goods and services is a strong country that can use these imports to produce more goods. Also, it has enough resources to pay for this level of rising imports. The hallmark of India’s economic reforms have been an outward looking and liberal trade policy characterised by removal of quantitative restrictions, rationalisation of tariff levels to match the tariffs in other developing countries, especially ASEAN and removal of licenses for setting up industrial units and removal of licenses and quotas for exports and imports. This has led to a spectacular rise in both export and import levels over
The hallmark of India’s economic reforms have been an outward looking and liberal trade policy characterised by removal of quantitative restrictions, rationalisation of tariff levels to match the tariffs in other developing countries, especially ASEAN and removal of licenses for setting up industrial units and removal of licenses and quotas for exports and imports.
4 From among the traditional commodities we used to export, it is gems and jewelry and leather and leather products that continue to dominate, showing that these were indeed areas in which we had and will have a comparative advantage in. And that export here will continue even if there are no subsidies given by the government. Unlike in the case of textiles where the market disappeared as soon as we cut our subsides and the World Trade Organization(WTO) decided to do away with an agreement called the Multi Fiber Agreement that gave certain benefits to textile exporters. 5 However, what is explained later in the new trade theory analysis is interesting - petroleum products worth half a billion equal to about three per cent of total exports were exported in 1990-91. In twenty years this has risen to a 17 per cent share in total exports in 2010-11. We import increasing amounts of crude oil but export petroleum products at a pace that is even faster.
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IILM MANAGEMENT REVIEW
Share of India's Exports 25 20 15 10 5
EU
USA
UAE
CHINA
SINGAPORE
UK
HONG KONG
GERMANY
ITALY
BELGIUM
JAPAN
NETHERLANDS
SAUDI ARABIA
0
Source: Ministry of Commerce
that have more money have firms that use capital more than labour or land. In countries where there is a large supply of labour, we find labour-intensive industry dominant. Therefore, firms in Japan, where land and labour are both scarce, use more machinery and
EU
Paul Krugman6 argues that countries import minor variants of the goods they export because consumers like diversity. Therefore if Japan is a large exporter of Honda and Toyota cars, it also imports Mercedes from Germany because some Japanese would like to drive a different kind of car. India is a large exporter of gems and jewellery but Indians also would like to buy foreign designs that come from Netherlands and South Africa. Traditional theories that explain trade come from economists like David Ricardo in the 19th century and Hecksher–Ohlin in the early 20th century. David Ricardo explained that countries export those items that they are more efficient at producing than other countries. In his famous example, he had shown how England was a more efficient exporter of cloth because of its fine cotton while it imported wine from Portugal because of the quality of grapes grown there. Hecksher and Ohlin had gone and shown that countries specialise in those items where they use one factor of production more intensively. What this means is that countries
16 14 12 10 8 6 4 2 0 JA PA N R EA M RP A LA YS S IN IA G AP O R K E U W AI T AU IRA Q S TR A G L ER IA M AN Y N IG ER IA SW IR IT ZE AN R LA N D U AE SA U U S D A IA R AB IA C H IN A
New Trade Policy and India
Share of India's Imports
KO
the last decade. India’s share in world trade which was 2.4 per cent in 1941 had reduced to 0.4 per cent in 1990 and has again inched back to the 2 per cent level, aided by a bold reduction in tariffs.
Source: Ministry of Commerce
automation than other countries. All these traditional theories therefore argue that countries would specialise in certain products and export those. However, Krugman’s new trade theory explained why countries imported the same products that they exported, because of the human desire for diversity. The reason many countries produce the same goods is because of economies of scale. This means that more the number of units produced, lesser is the cost of production and therefore higher efficiency and lower prices7. The other major contribution from Krugman was in the field of economic geography. In this new subject area, he focused on questions such as: Why is it that some cities attract more migrants than others? Why do certain crowded cities continue to attract more crowds despite the high costs of real estate, traffic congestion and pollution levels? In the Indian context, we see this phenomenon as more than ten lakh people migrate to the cities of Delhi and Mumbai every year. Hyderabad and Bangalore are the two new cities where we see a great deal of migration in the last two decades despite the pressure on urban infrastructure and the rising rentals. Where workers are free to migrate, the three factors that impact mobility are increased profits, transportation costs and the movement of capital and technology. Policy Reform Trade policy reforms have marked a shift from India’s policy of import substitution and export pessimism.
6 Paul Krugman teaches at Princeton University in the US. He is a well known columnist who writes for the New York Times and has often expressed strong views against the George Bush administration. The Nobel Committee has given its award two years ago for Krugman's contribution to the understanding of why countries import the same goods that they also export and why people migrate to certain places. 7 While a lot of what Krugman has said has focused on the US, Europe and in some measure to East Asia, there are a lot of lessons for India. In a nutshell, what Krugman would suggest to countries like India, are the need for greater openness in trade, no restrictions in the movement of people within the country, or from outside the country, a well regulated financial sector and a well informed Reserve Bank that can take quick decisions in the face of any crisis.
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The mean tariffs on Indian borders for foreign goods have been consistently brought down to meet the country’s WTO obligations and also to bring parity between tariffs in India and elsewhere in the world. From a mean tariff level of around 110 per cent in 1991, the mean tariffs have been brought down to less than 22 per cent on most products, and it should further reduce in the years to come. India attracted FDI equity inflows of $ 1.2 billion during March 20108. While imports have been unshackled almost completely, a small number of goods fall in the ‘restrictive list’ of imports, the restrictions being principally on account of security, health and environment protection issues.9 India’s exports are now reaching a larger number of countries and more and more items of export are being traded. The same story repeats in terms of imports. Trade with European Union and the Gulf has been increasing rapidly. India’s Look East policy has reaped benefits and trade with eastern countries especially in the ASEAN region has grown. Given this strong growth in trade and its diversity, it is important to look at what needs to be done further. What is indeed a welcome sign is that increasingly trade policies are guided not by political interests and mindsets but by the principles of international trade and interdependence. NRI Remittances and the Impact on Trade Deficits
India’s exports are now reaching a larger number of countries and more and more items of export are being traded. The same story repeats in terms of imports. Trade with European Union and the Gulf has been increasing rapidly. India’s Look East policy has reaped benefits and trade with eastern countries especially in the ASEAN region has grown.
Source: http://www.federalreserve.gov/releases/H10/hist
Today, amid the spate of news of a downward trend in incomes, land prices and share prices, there is one bit of news that talks of increased amount of money coming to India from the Non-Resident Indian (NRI). The Reserve Bank of India has announced that NRI repatriation to India will be close to $ 50 billion which will mean that NRIs would have sent money that is more than 5 per cent of the GDP of the country10. The increase in remittance is not surprising given the fact that the rupee has been depreciating in value against almost all foreign currencies. In addition, Indian banks now offer higher interest rates and have been allowed to offer the same high interest returns to Foreign Currency Non Resident accounts and the non-resident rupee accounts11. Of the total 20 million Indians abroad, it is estimated that about 8 million NRIs worldwide send money back home. While West Asia constitutes most of the volumes in terms of the number of transactions, the US leads in terms of absolute value. The obvious questions is that with IT and allied sectors being hit by the crisis due to the troubles their clients, especially in the US are facing, would as many people go abroad and would they still send as much money back home? Indeed so as people will always migrate for better opportunities, the dollar is at a high and is expected to be so for a while, Indian banks are considered much ‘safer’ options to keep money. Since the recent crisis, interest rates overseas are abysmally low and coupled with the fact that the RBI too had increased NRE
8 The cumulative amount of FDI equity inflows from August 1991 to March 2010 stood at US$ 132.4 billion, according to the Department of Industrial Policy and Promotion (DIPP). FDI equity inflows during financial year 2009-10 were US$ 26 billion. 9 Most goods are freely importable on payment of the specified customs duty without licensing requirements. There are some import restrictions on goods reserved for production by the smallscale sector units in the country, or are home or village-based requiring low skills and employing a large number of people. 10 According to various estimates, Andhra Pradesh receives the highest amount of money remitted by Non-Resident Indians to India. Andhra Pradesh receives the highest remittance in India as almost half of the NRIs who remit to India are from the Information Technology sector. While Andhra Pradesh receives about 22 per cent, Maharashtra gets 15 per cent of the total remittances to India. The US and Saudi Arabia are the largest sources of workers' remittances to developing countries. India accounts for over 20 per cent of remittances into developing countries. 11 Five years ago, Non Resident Indians left Non Resident Chinese in the second position when in 2006; NRIs sent back 27 billion dollars and the nonresident Chinese contributed 23 billion dollars to the Chinese economy. What is important to note is that there are at least twice as many nonresident Chinese in the world as non resident Indians.
IILM MANAGEMENT REVIEW
deposit rates, it makes more sence to park money in India12. Remittance of funds by expatriates to their home country depends principally on the origin and destination factors. Non-resident Indians are, in some cases, big earners and in most cases inclined towards savings. These have resulted in India taking the leadership position in inward remittances from its expatriates. The US economy is still passing through a difficult phase which in turn is affecting most countries in the United States
Exports of services
United Kingdom Germany France
400 350 300
Japan Italy
250 USD (Billions) 200 150
Spain Netherlands China
100 50 0
Hong Kong India Ireland
Country
Belgium Austria
Source: www.wto.org
1%
38%
41%
Mode 1 Mode 2 Mode 3
situation attractive13. While loss of jobs and consequent loss of income will somewhat reduce the momentum, this will also see NRIs returning to India. This will again result in a shift of their funds back to the country. The regular remittances, for family maintenance and festivals, will anyhow continue. Exchange Rate Movement: Remarkable Stability Trade in services International trade in services has recorded rapid growth in the recent past. Global exports in commercial services grew by 10 per cent and amounted to $ 2145 billion in 2005. It is expected that by 2050 world trade in services will exceed world trade in manufactured items. Trade in services within Asia went up 14 per cent for the same year14. Technological developments, demographics, growing globalisation of production processes, and economic liberalisation are the driving forces behind the increasing trade in services. While developed countries still dominate trade in services, developing countries are catching up fast. Among the top twenty exporters of commercial services in 2009, five are developing countries with India in the 11th position. In addition, in terms of the share of services export in total exports, India ranks First for the year 2009. India’s share in world exports of services has grown from 0.6 per cent in 1995 to 2.8 per cent in 2010.
Mode 4
Exports of services
20%
Source: www.wto.org
world. Compared to the major developed countries, the Indian economy is still on rails and is likely to sustain an 8 per cent GDP growth in the worst case in the current fiscal year. The banks and financial institutions in India are in a much better and stable shape. Notwithstanding the volatile situation in the stock market, there are good investment opportunities in the country. The increase in the exchange rate makes the
Services are categorised into four different Modes. Mode 1 refers to services supplied from one country to another, such as international telephone calls and business process outsourcing. Mode 2 relates to consumption abroad where consumers or firms of one country make use of services in another country. Examples in this category include medical care, education, and tourism. Mode 3 refers to commercial presence, where foreign companies set up subsidiaries or branches to provide services in another country. Examples include banking, financial and telecommunication services. Lastly, Mode 4 refers to movement of
12 Also, even though the share market and real estate markets in India have taken beatings of late, the valuations are at such amazing levels that any investor would find it an extremely lucrative option to enter. A combination of the last two points would mean that there would probably be a short term shift from the equity and realty markets to risk-free, capital guaranteed deposits in India. 13 India's exchange rate regime, liberalized in 1993, has remained remarkably stable. 14 Services account for more than 60 per cent of world GDP and trade in services has grown. As an economy grows, the proportion of income spent on services increases more than proportionately when compared to income spent on manufactured items, which, in turn, accounts for a higher proportion of income spent on them as compared to agricultural items. The demand for services increases as income increases. On the supply side, the share of services in output also goes up. As the economy grows, firms restructure to use a supply intensive mode of production. This “splintering� refers to the activity where firms start focusing on core functions and sub-contract non-core functions to the services sector.
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offshoring by firms in America and Europe16. The global ITES and BPO market is growing at around 9 per cent. With the industry structure undergoing change, established software service companies have entered into the ITES-BPO arena driven by factors such as cross-selling opportunities, critical mass and strong balance sheets and end-toend service offerings.
natural persons. Examples include IT professionals, scientists and other professionals, traveling from their own country to provide services in another country. The Modes of service delivery and respective share in world trade in services India’s negotiating position on services has changed since the Uruguay Round (UR). During the UR, India had a defensive stance on services. The country was one of the prime opponents of the inclusion of services in the ambit of the multilateral trade negotiations. It was apprehended that any concessions gained in traditional sectors like agriculture or textiles would be offset by the opening up of the government dominated services such as banking, insurance, and telecommunications. However, since the beginning of the GATS 2000 Negotiations and particularly after the Doha Ministerial in 2001, India has emerged as a leading proponent of the services trade liberalisation at the multilateral arena. The change in India’s approach towards trade and investment liberalisation in services is clearly due to the growing importance of the services sector in India’s economy and its trade and investment flows in the recent years15. The impressive growth of the information technology sector has been feasible because of low cost of operations, high quality of product and services and readily available skilled manpower. The ITES-BPO industry has witnessed significant growth in 2005-10, driven by increased
The global ITES and BPO market is growing at around 9 per cent. With the industry structure undergoing change, established software service companies have entered into ITES-BPO arena driven by factors such as cross selling opportunities, critical mass and strong balance sheets, end-to-end service offerings. Even as Indian service providers continue to strengthen their position as providers of Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO) services to companies around the world, the possibility now exists for India to add new stream of services export growth, i.e., Engineering Services Outsourcing (ESO). Most economies are getting increasingly skill-scarce in a relative cost-effective sense, and professionals in India could meet this gap effectively. Each year, India’s universities, technical colleges and other tertiary institutes produce nearly 400,000 engineering and science graduates. India presently accounts for 28 per cent of IT and BPO talent among 28 low-cost countries in the world. India has also emerged as a major software exporting country, growing at a steady rate of over 30 per cent in the recent past. While this cost advantage due to cheap skilled labour and the fluency in English is a major strength for India, the pool is not big enough. Currently only about 25 per cent of technical graduates and 10 to 15 per cent of general college graduates are suitable for employment in the offshore IT and BPO industries, respectively17. Agriculture Trade Indian agriculture suffers from a political environment that treats exports in this sector with suspicion. While industry is encouraged and invited to export, the farmer is bound to domestic markets and the restrictions on exports of farm produce remain, despite more than 15 years of globalising Indian markets. As a result, we witness an ironic situation where India, is on one hand, the largest producer of fruits and vegetables, milk and rice in the world, but exports less than 1 per
15 India's services sector recorded an average annual growth rate of 9 per cent in the 1990s, while India's GDP grew at an average annual rate of 7.5 per cent during the same period. According to the latest RBI Annual Report, in 2009-10, the services sector has recorded a growth rate of 10.3 per cent, contributing almost three-fourths of the overall real GDP growth of India. From a mere 28 per cent in 1950-51, the share of services (excluding construction) in the overall GDP of the economy went up to 63 per cent. 16 Within ITES service lines, customer care and finance have been the two fastest growing segments. Apart from these two, some other important segments in the outsourcing industry include human resources, payment services administration and content development. While presently customer care remains the largest service line, finance and administration services are expected to grow significantly over the next few years. 17 There is a shortfall of nearly 0.5 million qualified employees in the IT and BPO sector. The potential shortage of skilled labors has already led to an increase in wage. Wage costs are rising by around 17 20 per cent per year. India will need a 2.3 million IT and BPO workforce by 2012 to maintain its current market share.
IILM MANAGEMENT REVIEW
cent of the world market. While the Indian agriculture sector exports was worth about $ 10 billion last year, the popular export items are basmati rice, marine products, mango and mango pulp and chutneys, pickles. There is also some noticeable export of fruit juices, canned and dehydrated mushrooms, frozen and canned fruit and vegetables. The main markets for mango pulp are Saudi Arabia, Kuwait, UAE, Foodgrain Production (in MT)
Million Tonnes
250
Coarse Cereals
200
Wheat
150
Rice
100
Pulses
50
Total
0 200102
200203
200304
200405
200506
200910*
Year
Source: Economic Survey, various issues
Netherlands and Hong Kong. Pickles and chutneys are exported to the USA, UK, UAE, Germany and Saudi Arabia. Tomato paste, jams, jellies and juices are exported to the USA, Russia, UK, UAE and Netherlands. About 13 per cent of the Indian export basket of goods comes from the agricultural sector. In absolute terms, such exports are around $ 7 billion dollars a year. Tea, coffee, rice, wheat, sugar and molasses, tobacco, spices, cashew, oil meals, fresh fruits and vegetables, meat and meat preparations and marine products figure prominently in this export basket18. India showed a remarkable agricultural growth in the last five decades. However, the agricultural exports to a proportion of total exports declined steadily in the early years from 44 per cent in 1960 to 32 per cent in 1970 to 31 per cent 1980 to around 15 per cent in 1993 and just about 13 per cent now. The present exports is concentrated on food and other agriculture related exports stand at more than $ 9 billion and are projected to grow to $ 30 billion by 2015.
The policy environment has changed considerably and is far more relaxed than it used to be. No industrial license is required for almost all of the food processing industries except for some items like: beer, potable alcohol and wines, cane sugar, hydrogenated animal fats and oils and items reserved for exclusive manufacture in the small scale sector. Automatic investment approval (including foreign technology agreements within specified norms) up to 51 per cent foreign equity or 100 per cent NRI including equity is allowed for most of the food processing sector, except malted food, alcoholic beverages including beer and those reserved for small scale industries (SSIs). Today, a maximum of 24 per cent foreign equity is allowed in SSI sector. Use of foreign brand names is now freely permitted. Most items can be freely imported and exported except for items in the negative lists for imports and exports. Capital goods are also freely importable, including second hand ones in the food processing sector. The Indian government’s stance on agriculture trade at the WTO has been at once criticised and applauded by various segments of interested parties. India has indicated that it is important for the Multilateral Trade Negotiations (MTNs) to address the inter-linkages among the three pillars in the negotiations, namely, market access, domestic support and export competition. All food-safety issues should be included in the Sanitary and Phyto-Sanitary (SPS) Agreement. Labeling requirement should be considered in the Agreement on Technical Barriers to Trade. On the issue The Indian government’s stance on agriculture trade at the WTO has been at once criticised and applauded by various segments of interested parties. India has indicated that it is i m p o r t a n t f o r t h e M u l t i l a t e r a l Tr a d e Negotiations (MTNs) to address the interlinkages among the three pillars in the negotiations, namely, market access, domestic support and export competition.
18 The 2004 - 2009 had Foreign Trade Policy introduced a Vishesh Krishi Upaj Yojana (Special Agricultural Produce Scheme) to push exports of fruits, vegetables, flowers, minor forest product and their value added variants. Imports of agricultural products account for between 4.5per cent and 5.5per cent of India's imports of goods (excluding services) and pulses, cashew nuts, other fruits and nuts and edible oils account for the bulk of such imports. The absolute import figure is between 2 billion and 3 billion US dollars a year. 19 Recent policy statements and actions by the policy-makers indicate that the farm sector is getting ready for a transformation -- the export cess on a variety of agri-commodities has been withdrawn, 16 states have already consented to revise the APMC Act, and the draft vision on food processing envisages India's share in global processed food industry moving from 1 per cent to 3 per cent. However, there is much ground to be covered, especially in opening up the retail sector and so long as agriculture remains grounded in foodgrain production and is governed by a political structure that believes in thwarting agriculture trade, the prospects look gloomy.
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In the interest of clarity, transparency, and
approach to development of agriculture and allied sectors, with the focus on making agriculture globally
effective reduction of subsidies, there should
competitive19.
be fewer categories. Also, export subsidies
References:
for agricultural produce should be completely eliminated within an agreed time. Similar commitments are also needed for government-supported export credits or credit guarantees.
of domestic support, while developing countries are ill-equipped to provide essential subsidies to their farmers, developed countries can continue to give subsidies to their rich farmers under various categories. In the interest of clarity, transparency, and effective reduction of subsidies, there should be fewer categories or boxes. Also, export subsidies for agricultural produce should be completely eliminated within an agreed time. Similar commitments are also needed for government-supported export credits or credit guarantees. Global market forces are compelling Indian agriculture producers to increase the quality of their farm produce while continuing to maintain their cost competitiveness in order to be able to compete effectively in the global food market. In the chart on the previous page, what is clear is that productivity is now stagnant. This is especially so in the traditional crops being grown in India. There is therefore the urgent need to shift to high value crops. Even in the domestic market, rising per capita incomes and changing demographic profile of the population has ensured the growing demand for processed and convenience foods. Increasing consumer awareness about health and hygiene has shifted the focus of the market to "safe" foods. The Indian foodprocessing sector is undergoing a veritable revolution - all the way from the plate to the plough. It is important to understand the catalysts behind this change in the food-processing sector in the country, and the challenges still faced by this sector in becoming globally competitive. Nearly four decades after the Green Revolution in India, a marked shift is visible in the
1. Burgess, R.; Stern, N. (1991): Social Security in Developing Countries: What, Why, Who, and How? In: Ahmad, Drèze, Hills, Sen (eds.): Social Security in Developing Countries. Wider Studies in Development Economics. Clarendon Press, Oxford, pp. 41-80. 2. Central Statistical Organization, “Selected SocioEconomic Statistics, India 2001”, Ministry of Statistics and Programme Implementation, Government of India. 2003. 3. Economic Survey, 2002-2003, Government of India, Ministry of Finance & Company Affairs, Economic Division. 1. Ahluwalia, I.J. (1991), “Productivity and Growth in Indian Manufacturing”, Oxford University Press, Oxford. 2. Ahluwalia, Montek (2000), “Economic Performance of States in Post Reforms Period”, Economic and Political Weekly, May, pp 1637-1648. 3. Government of India (2008), Report of the Finance Commission, Ministry of Finance, Government of India. 4. Government of India (2010), Approach to Twelfth Five Year Plan, Planning Commission, New Delhi. 5. Gulati, A and Rao, H (1992) "Indian Agriculture: Emerging Perspectives and Policy Issues". Economic and Political Weekly. December. 6. Gulati, A and Sharma, A (1997) "Freeing Trade in Agriculture", Economic and Political Weekly, December. 7. IMF (1995) India: Economic Reform and Growth. Occasional paper 134. 8. Joshi, V. and I.M.D. Little (1994), India's Economic Reforms 1991-2001, Oxford
19 Recent policy statements and actions by the policy-makers indicate that the farm sector is getting ready for a transformation -- the export cess on a variety of agri-commodities has been withdrawn, 16 states have already consented to revise the APMC Act, and the draft vision on food processing envisages India's share in global processed food industry moving from 1 per cent to 3 per cent. However, there is much ground to be covered, especially in opening up the retail sector and so long as agriculture remains grounded in foodgrain production and is governed by a political structure that believes in thwarting agriculture trade, the prospects look gloomy.
9. Keshari, K et al (1995) "Implications of GATT-94 on exports of Indian agro-processing firms". World Trade Research and Information Report. Vol. 1, No. 3. 10. National Sample Survey (NSS), 65th Round, Central Statistical Organisation, Government of India, New Delhi. 11. Patnaik, P (1997) "The context and consequences of economic liberalization in India", Journal of international trade and development, Vol.6, No.2, July 1997. 12. Purcel, G (1996) "Some aspects of the liberalization of South Asian agricultural policies: How can the WTO help?". Draft paper for the Food and Agricultural Organization. 13. Singh Nirvikar and T. N. Srinivasan (2002), “Indian Federalism, Economic Reform, and Globalisation, Paper for Comparative Federalism Project, CREDPR, Stanford.
14. Srinivasan, T.N., (2000), Eight Lectures on India's Economic Reforms, Oxford University Press. 15. Srivastava, V. (2000), The Impact of India's Economic Reforms on Industrial Productivity, Efficiency and Competitiveness, Report of a Project sponsored by the Industrial Development Bank of India, National Council of Applied Economic Research (NCAER), New Delhi. 16. Storm, S (1997) "The unfinished agenda: Indian agriculture under the structural reforms", Journal of international trade and development, Vol.6, No.2, July 1997. 17. Thomas, P et al (1994) "Dunkel Text: Implications for Rural Sector". Economic and Political Weekly. March. 18. Virmani, Arvind (2004c), Economic Reforms: Policy and Institutions, Some lessons from the Indian experience, ICRIER Working Paper No. 121, January 2004.
24
Research@Work Aadhaar: The Promise and Challenges Ahead
Ideas to Reshape India's Infrastructure Landscape
By Nandan.M.Nilekani Chairman, Unique Identification Authority of India
By Vinayak Chatterjee Co-founder & Chairman, Feedback Infra
Skill Development in India: Moving from a Supply-side Model to Demand-led Interventions
Operational Challenges of Environment Accounting and Reporting
By Dilip Chenoy CEO, National Skill Development Corporation (NSDC)
Understanding the Philosophical Underpinnings of Corporate Social Responsibility By N.C.B.Nath, Chairman, Foundation to Aid Industrial Recovery; Visiting Professor, IIM-Bangalore & Independent Director
A Review of the State of CSR in India By V.V.Ranganathan, Chairman & Founder, Pinnacle Opportunities and Trustee, Bharti Foundation
By P.Malarvizhi, Professor of Accounting and Finance, IILM
IILM MANAGEMENT REVIEW
Aadhaar: The Promise and Challenges Ahead By Nandan.M.Nilekani Chairman, Unique Identification Authority of India
Executive Overview More than two years after Nandan.M.Nilekani joined the Unique Identitification Authority of India as its chairman from Infosys Technologies, he brought in his rich managerial experience in India and overseas to create a new organisation that has set benchmarks in the public sector. In this first person account, Mr. Nilekani recounts the potential Aadhaar can bring to the nation, the journey so far, how leadership and management lessons can be applied in complex organisational building and the challenges ahead. Last year, it was exactly two years since I joined the Unique Identification Authority of India (UIDAI). At a personal level, there has been a number of lessons I have learned during this time. Perhaps, the biggest one has been managing the transition from working in the private sector as a leader and manager to performing a leader/manager role in what I would broadly call the public sector. The second change, related in some sense, was that I was moving from an established environment where I was co-chairman of Infosys Technologies which had more than 100,000 people to an organisation which was in effect a start-up. I was its first employee. It was exactly like a start-up, but in a government environment, which had its own unique working characteristics: the need to meet the right people, building the technology platform, creating a high-performance team from different backgrounds, getting budgets approved, and importantly, getting the plan and strategy approved by the Prime Minister and his cabinet colleagues. The Context of Aadhaar
I
n India, an inability to prove identity is one of the biggest barriers preventing the poor from accessing benefits and subsidies. Public as well as private sector agencies across the country typically require proof of identity before providing individuals with services. But till date, there remains no nationally accepted, verified identity number that both residents and agencies can use with ease and confidence.
As a result, every time an individual tries to access a benefit or service, they must undergo a full cycle of
identity verification. Different service providers also often have different requirements in the documents they demand, the forms that require filling out, and the information they collect on the individual. Such duplication of effort and 'identity silos' increase overall costs of identification, and cause inconvenience to the individual. This approach is especially unfair to India's poor and underprivileged residents, who usually lack identity documentation, and find it difficult to meet the costs of multiple verification processes. A clear identity number would also transform the delivery of social welfare programmes by making them more inclusive of communities now cut off from such benefits due to their lack of identification. It would also enable the government to shift from indirect to direct benefits, and help verify whether the intended beneficiaries actually receive the funds and subsidies.
In India, an inability to prove identity is one of the biggest barriers preventing the poor from accessing benefits and subsidies. Public as well as private sector agencies across the country typically require proof of identity before providing individuals with services.
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AADHAAR: THE PROMISE AND CHALLENGES AHEAD
It was in this context that the Unique Identification Authority of India (UIDAI) was established in January 2009, as an attached office of the Planning Commission. India is the first country to implement a biometricbased unique ID system for its residents on such a large scale.
My philosophy and approach from the very beginning has been to reach out to all the stakeholders involved so that I am able build a consensus. Therefore, I spent most of the first year in spreading the message of the
Scope, Scale and Complexity
project, and I think that helped when the
The Unique Identification number (UID) or Aadhaar will only provide identity: the UIDAI's purview will be limited to the issue of unique identification numbers linked to a person's demographic and biometric information. The Aadhar will only guarantee identity, not rights, benefits or entitlements.
project actually started rolling out.
It envisions full enrollment of residents, with a focus on enrolling India's poor and underprivileged communities. Towards this, the UIDAI has partnerships with a number of Registrars Central Ministries, State Governments, Financial Institutions which will help bring large numbers of the poor and underprivileged into the UID system. Registrars will process Aadhar applications, de-duplicate resident information and receive Aadhar numbers. The Authority will also provide authentication services. The UIDAI is also providing standards to enable Registrars maintain uniformity in collecting certain demographic and biometric information. These standards have been finalised by the Demographic Data Standards and Verification Procedures Committee and Biometric Standards Committees which were constituted by the UIDAI. Finally, the UIDAI will not share resident data without consent: it envisions a balance between 'privacy and purpose' when it comes to the information it collects on residents. The agencies may store the information of residents they enroll if they are authorised to do so, but they will not have access to the information in the UID database. Progress So Far The biggest achievement so far is that we rolled out Aadhaars on September 29 2010 and today, we have
crossed 1.8 crore enrollments. However, the next big challenge is to bring in the scale so that we are able to reach a target of enrolling 10 lakh people every day. Building Unique Partnerships: My philosophy and approach from the very beginning has been to reach out to all the stakeholders involved so that I am able build a consensus. Therefore, I spent most of the first year in spreading the message of the project, and I think that helped when the project actually started rolling out. I went around the country meeting Chief Ministers and top officials in various States, met the media and briefed them, met all the key players in banking and telecom sectors, and had meetings with several key officials of various Central Ministries. I was convinced from the beginning that the project will not be successful in the long term unless we are able to build strong partnerships. In some sense this comes from my business background, because in business when you go to a customer and try to convince him to buy your product or service, you try to understand first what motivates him and then you give a value proposition. We did the same here: we met all our partners and figured out why our service would be useful to them whether it is a bank or a PDS system. By articulating that benefit, we were able to win them over as partners. For example, today, we have developed a great partnership with all the key players in the banking system, having worked closely with the Reserve Bank of India (RBI), Ministry of Finance and Indian Bank
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Association (IBA). We also worked closely with State Governments and with ministries having social programmes like the Ministry of Rural Development. The big learning was that this is a much more multistakeholder process. In a public role, the number of stakeholders that we deal with are myriad : the political system, beauracracy, media, NGOs, citizens, State governments and the Central government. In the private sector, it is more narrow: when you have to take a decision you convince the Board and your team and you go and do it. So for me, the learning was that I had to spend much more time in the public world in consensus building, communicating our strategy, vision, goal and getting many people to agree. Forming a Unique Team: The next main task was to build the core team and then the larger team. The initial set of people we were able to find from within the government system: we looked for those who had the passion and aptitude for this kind of a project. I individually met many of the early team members. This very high talented and high performing team came on board because they wanted to participate in this project. Interestingly, I also found out that there are very robust processes in the government, because you are highly accountable, probably more than in the private sector. For example, in the private sector if you want to select a person, you give him a test and if he passes the test you take him on board. But here, one will have to go through a process and show why you have chosen him; there is a lot more rigour in the process.
So for me, the learning was that I had to spend much more time in the public world in consensus building, communicating our strategy, vision, goal and getting many people to agree. A lot of the people who have joined us have done so because they want to be part of this unique project: there is clearly a sense of ownership, mission and participation.
Today, UIDAI is a mix of people from the government, private sector, the technology sector, volunteers, sabbaticals and interns. So we have a fairly diverse mix of people. Together, we have an outstanding team from a mixed background: people from the government and outside. A lot of the people who have joined us have done so because they want to be part of this unique project: there is clearly a sense of ownership, mission and participation. Creating a Unique Technology Platform: It was very important for us that the architecture that we create is robust. Technology undergirds the Aadhar system. The database is stored on a central server. Enrolment of the resident is computerised, and information exchange between Registrars and the CIDR is over a network. Further, authentication of the resident will be online. The Authority has also put systems in place for the security and safety of information. The technology we have built and refining is extremely sophisticated. The UIDAI provides enrolment software which will interface with the biometric devices like camera, fingerprints and iris scanners. The client software will check for image quality and has validations built to ensure demographic and biometric data capture adheres to defined standards. Creating a Unique Brand: After much deliberation, it was decided that the name of the Unique Identification number (UID) will be Aadhaar. The name and logo for the unique numbers to be issued by the UIDAI have been developed keeping in mind the transformational potential of the programme. Together, they communicate the essence and spirit of the UIDAI's mandate to people across the country. The term 'Aadhaar', translates into 'foundation', or 'support'. This word is present across most Indian languages and can therefore be used in branding and communication of the UIDAI programme across the country. The name Aadhaar also communicates the fundamental role of the number issued by the UIDAI, the number 28
AADHAAR: THE PROMISE AND CHALLENGES AHEAD
We s t a r t e d i s s u i n g A a d h a r s f r o m September 2010 and plan to cover 60 crore people within 4 years. The adoption of UIDs is expected to gain momentum with time, as the number establishes itself as the most accepted identity proof in the country.
as a universal identity infrastructure, a foundation on which public and private agencies can build services and applications that benefit residents across India. The design, which has been selected as the logo for Aadhaar, is a sun in red and yellow, with a fingerprint traced across its centre. The logo effectively communicates the vision for Aadhaar. It represents a new dawn of equal opportunity for each individual, a dawn which emerges from the unique identity the number guarantees for each individual. Creating a Unique Ecosystem: During the last two years, the UIDAI identified a range of partners and defined processes for Registrars to commence operations with minimal effort: 1. Enrolment agencies: To enable quick on-boarding of enrolment agencies, UIDAI today has empanelled about 209 enrolment agencies across all States and Union Territories. These agencies have been categorised by technical and financial strength. 2. Device Certification Agency: To support Registrars in deploying the right devices for the enrolment process, UIDAI has appointed STQC (Standardisation, Testing & Quality Certification) as the device certification agency. STQC certifies biometric devices (Fingerprint Scanner & Iris Camera) which satisfy UIDAI enrolment requirements by make and model. 3. Training & Certification Agencies: To bring all enrolment operators to a uniform skill level, UIDAI
has built standardised training content, identified 15 training agencies that are authorised to deliver training and appointed Sify as the testing and certification agency. 4. Financial Institutions: UIDAI has also signed MoUs with various Banks who will open UID Enabled Bank Accounts (UEBA). This will not only pave the way for financial inclusion of residents outside the financial network, but also offer significantly lower cost channels for Registrars to transfer financial benefits directly to residents. 5. Civil Society Organisations: UIDAI is building a network of Civil Society Organisations, who will support the inclusion of marginalised residents by generating awareness and mobilising enrolments. 6. The UIDAI is also working with a number of other public and private sector organisations to enable their applications so that the residents start accruing comprehensive benefits. We started issuing Aadhars from September 2010 and plan to cover 60 crore people within 4 years. The adoption of UIDs is expected to gain momentum with time, as the number establishes itself as the most accepted identity proof in the country. In turn, we hope that UID will have an impact on the nation and its inclusive agenda in ways that we may not have imagined so far. How? Re-imagining Financial Inclusion The financial sector still faces many challenges in offering financial services to the poor, especially in remote locations. High last mile cost and technological limitations, along with low revenue potential of these customers, results in financial services offering to most of them a limited potential for banks. Banks have been implementing many commendable initiatives in this direction and have also recently committed to cover all villages with population of more than 2000 by March 2012. Financial service is one of the most important requirements for the currently excluded segment. Given that
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one of the key objectives of constituting UIDAI is to extend the delivery of services to the currently excluded, UIDAI is actively facilitating the delivery of financial services to the hitherto excluded sections. In this regard, UIDAI believes that the plan of issuing Aadhaar numbers to the intended 60 crore residents over the next 4 years and setting up online biometric authentication service will help address many of the current challenges faced by the banks in delivery of financial services. While covering the entire country may take some time, we believe that these initiatives will ease a large portion of current challenges and help banks accelerate the accomplishment of a much deeper penetration of financial service delivery in the country. The limited access of financial services is prominent in rural areas, where it results in a vicious circle. Because very few residents currently have bank accounts, the service delivery network is very limited and thus fewer people open accounts. As part of the Aadhaar enrolment process, UIDAI is collecting the resident's demographic and biometric information which can also be used for opening bank account for every resident. This enables UIDAI to electronically pass on the resident's consent along with the demographic information to banks for opening the bank account. In addition, residents could also use Aadhaar to open accounts individually at bank branches. UIDAI plans to partner with banks across the country to facilitate opening of bank accounts for the residents during the Aadhaar enrolment process. Aadhar is also in the process of setting up an online Aadhaar authentication system which can be accessed by banks and other service providers to verify an individual's details anytime from anywhere. Finally, UIDAI is planning to run 'Proof of Concept' studies for the entire process of account opening and customer servicing. Re-imagining Primary Education Section 3(1) of the recently passed Right of Children to
Once Aadhar is given at the childhood stage, it can be used for his entire lifetime including the period he is in the education age. Monitoring of dropouts, which constitutes a significant problem
in the elementary
education stage, would become easier.
Free and Compulsory Education Act makes it clear that every child of the age of six to fourteen years shall have the right to free and compulsory education in a neighborhood school till the completion of elementary education. The compliance of this provision would necessitate an exhaustive survey of all children of this age group. Providing Aadhars to these children will help subsequently to find out the children who are out of the education system. Once Aadhar is given at the childhood stage, it can be used for his entire lifetime including the period he is in the education age. Monitoring of dropouts, which constitutes a significant problem in the elementary education stage, would become easier. Re-imagining NREGS Launched in 2006, the National Rural Employment Guarantee Scheme (NREGS) is an attempt to transform the rural economy through legally guaranteed employment for up to 100 days per household. The scheme, run jointly by the Centre and the states, has a total budget allocation of Rs. 39,100 crores. The NREGS has reached several milestones towards its goal, but suffers from the same challenges like most other public projects: corruption and diversion of funds. Incidents of guaranteed minimum wages being denied to workers have been reported from nearly every state where the programme is currently functional. To effectively leverage the UID programme, the NREGS scheme will need to be modified to incorporate
30
AADHAAR: THE PROMISE AND CHALLENGES AHEAD
the UID number into beneficiary interactions. In order to accommodate UID authentication, NREGS will need to reengineer its business processes. Re-imagining the Public Healthcare System Health, and health-related development schemes is an emerging application for the UID. Public health in India is seeing a revolution both in terms of greater commitment towards government financing of public and primary healthcare , pressure to meet the MDG goals and consequent creation of large supply platforms at national and state levels. The UID could further help catalyse a revolution in India's health outcomes. Re-imagining the Public Distribution System The UIDAI has laid out the potential role Aadhaar can play within the PDS. The functioning of the PDS the mainstay of India's food programmes is critical to the implementation of Right to Food in India. The large numbers of fake and duplicate ration cards increase difficulties for the poor in getting a ration card. Large quantities of fake cards compel governments to make verification norms for issuing ration cards more stringent. This tends to penalise poor families, and cuts off large numbers of BPL families who lack necessary documents from accessing rations.
implement Aadhaar within the PDS in stages, beginning with Aadhaar-based identification, and progressing towards Aadhaar-based authentication and an Aadhaar-enabled Management Information System (MIS). The eventual nature of an Aadhaar-linked approach in PDS would depend on the particular benefits the government hopes to gain. Using Aadhaar solely for identification would enable clear targeting of PDS beneficiaries, the inclusion of marginal groups, and expanded coverage of the poor through the elimination of fakes and duplicates. Implementing Aadhaar-based authentication across PDS would enable the government to guarantee food delivery to the intended beneficiary. In addition to powerfully streamlining PDS processes, an Aadhaar-enabled MIS would make possible a more transparent, flexible system, and enable the government to fulfill the objective of food security in times of crises. Aadhaar would thus be a tool albeit, a powerful one in fulfilling the government's overall objectives for the PDS and in ensuring food security for the poor. Implementing such authentication while leveraging the portability of Aadhaar can bring significant benefits. Conclusion: Risks and Threats
Perhaps the greatest value of Aadhaar for the PDS stems from how it can be easily integrated into the existing infrastructure. Aadhaar presents governments with a highly flexible solution states can choose to
It is inconceivable that a project of this magnitude which has national ramifications will not face risks and complexities. Indeed, the Aadhar has over time faced criticism, but it is important that we build consensus and the risks addressed through right solutions and the design of incentives.
It is inconceivable that a project of this
Adoption risks: There will have to be sufficient, early demand from residents for the UID number. Without critical mass among key demographic groups (the rural and the poor) the number will not be successful in the long term. To ensure this, the UIDAI will have to model de-duplication and authentication to be both effective and viable for participating agencies and service providers.
magnitude which has national ramifications will not face risks and complexities. Indeed, the UID has over time faced criticism, but it is important that we build consensus and the risks addressed through right solutions and the design of incentives.
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tion on date of birth and hard to record fingerprints. Technology is a key part of the UID programme, and this is the first time in the world that storage, authentication and deduplication of biometrics are being attempted on this scale. The authority will have to address the risks carefully by choosing the right technology in the architecture, biometrics and data management tools.
Political risks: The UID project will require support from across the political spectrum and state governments across India. The project will also require sufficient support from individual government departments, especially in linking public services to the UID, and from service providers joining as Registrars. Enrolment risks: The project will have to be carefully designed to address risks of low enrolment such as creating sufficient touch points in rural areas, enabling and motivating Registrars, ensuring that documentary requirements don't derail enrolment in disadvantaged communities as well as managing difficulties in address verification, name standards, lack of informa-
Risks of scale: The project will have to handle records that approach one billion in number. This creates significant risks in biometric de-duplication as well as in administration, storage, and continued expansion of infrastructure. Technology risks: Technology is a key part of the UID programme, and this is the first time in the world that storage, authentication and de-duplication of biometrics are being attempted on this scale. The authority will have to address the risks carefully by choosing the right technology in the architecture, biometrics, and data management tools; managing obsolescence and data quality; designing the transaction services model and innovating towards the best possible result. Privacy and security risks: The UIDAI will have to ensure that security of resident data is not compromised. Sustainability risks: Finally, the economic model for the Aadhar will have to be designed to be sustainable in the long-term, and ensure that the project can adhere to the standards mandated by the Authority.
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A A D H A A R : TAHDEV APNRCOEMSI SI N E A MNADN ACGHEAML EL EN NT G E S A H E A D
Skill Development in India: Moving from a Supply-side Model to Demand-led Interventions By Dilip Chenoy CEO, National Skill Development Corporation (NSDC)
Executive Overview With one of the youngest populations in the world currently and projected to have the highest number of people in the working age group of 16-59 years by 2030, demographics can hold the key to India realise its ambition of joining the league of developed nations within the next two decades. This is both a promise and a challenge. The intent to move towards a demand-led system is perhaps reflected in the National Skills Policy of 2009, in which the NSDC was given the responsibility of setting up Sector Skill Councils (SSCs) to define standards for the segments they represent.
G
lobalisation has resulted in economies and businesses linked in more ways than ever. It is clear that many business practices and premises that were relevant in the past would not stand the test in the 21st century. The BRIC report had projected that India would emerge as one of the leading economies by 2050. Some others contest this and say that the business world may be guilty of shortsightedness if they focus only on the BRIC countries. Their reasoning is that the talent pools of other countries around the world are gaining rapidly in relevance and these countries may be more attractive to investors. Damien DeLuca and Han Hu of Mercer state that, "although cost availability and other metrics are important factors in any business location decision, matching the needs of your business to the quality of the workers available is critical. " (A Whole New World: Managing Human Capital in Today’s Global Enterprises. Mercer 2008) With one of the youngest populations in the world
currently and projected to have the highest number of people in the working age group of 16-59 years by 2030, demographics can hold the key to India realizes its ambition of joining the league of developed nations within the next two decades. This is both a promise and a challenge. What’s the challenge? Challenge: Need for Skilling According to a report by the Boston Consulting Group (BCG) done for the Confederation of Indian Industry, India’s workforce in 2006-07 had approximately 484 million people. Out of which, 273 million were working in rural area’s primarily in agriculture (many of them clearly underemployed), another 61 million were working in manufacturing and about 150 million in services. 40 per cent of the current workforce is illiterate and another 40 per cent constitutes school drop-outs. Vocationally trained, diploma holders, graduates and above comprise a mere 10 per cent of the overall workforce, while class XII pass comprise of another 10 per cent. Only 10 per cent of the 300 million Indians in
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Leveraging the famed ‘demographic dividend’ may prove a challenge considering the high rate of school drop-outs, lack of adequate skilling opportunities and the low employability of the vast majority of our youth that could potentially render defunct any aspirations that India may have of emerging as an economic superpower.
the age group of 6-16 years are likely to complete school education and go on to study beyond. Leveraging this famed ‘demographic dividend’ may prove a challenge considering the high rate of school drop-outs, lack of adequate skilling opportunities and the low employability of the vast majority of our youth that could potentially render defunct any aspirations that India may have of emerging as an economic superpower. The high double-digit growths that we are banking on, courtesy a booming services segment and robust manufacturing arena, to take us closer to our goal could completely come unstuck in the absence of a skilled workforce. Many of our companies could also find themselves in a very tough position, or, in a worst case scenario, even be forced out of business if the employability of our workforce does not keep pace with their requirements of trained manpower.
construction workers and bricklayers to school teachers, film artists and IT professionals. The construction sector alone may see a shortage of 33 million people by 2022. What is interesting about this study is that 63 per cent of these people are required at entry level 1, 18 per cent at level 2, 14 per cent at level 3 and 5 per cent at level 4. Is this an India-centric phenomena? Perhaps not as an article in The Economist (18 August, 2007 Capturing Talent ) states: "Despite its booming economies and huge numbers of people, Asia is suffering a big shortage of skills. And is about to get worse. … Some businesses are being forced to reconsider just how quickly they would be able to grow, because they cannot find enough people with the skills they need." While 12.8 million youth enter the job market every year, the annual current capacity for vocational training in India is just around 4.3 million. Net enrolment in vocational courses in India is about 3.5 million per year compared to 90 million in China and 11.3
Educational Qualification of Persons in Finished Leather Sector CA, MBA, & other graduates
1-2%
Engineers, Diploma or equivalent
2-3%
ITI and other vocational courses
1-2%
Class 12th /10 th & below
90-95%
total
Challenge: The Demand for People A study conducted by the management consulting firm IMaCS on behalf of the National Skill Development Corporation (www.nsdcindia.org/knowledge) has forecast that there could be an incremental shortfall of 240-250 million people by 2022 in 20 high growth sectors of the Indian economy and the unorganised segment. As per the IMaCS study, the likely shortage could extend all the way from nurses, welders, carpenters,
Educational Qualification of Persons in Medical Equipment Sector PhD / CA/MBA/M Tech etc
3- 5%
Graduate Engineers
65- 70%
Diploma Engineers
20- 25%
ITI and other vocational courses
5- 10%
Graduates
5- 10%
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S K I L L D E V E LO P M E N T I N I N D I A
million in the United States. What stands out in the case of India is the huge mismatch between the demand for level 1 & 2 training and the existing facilities for providing such training. For example, let’s take the leather and medical equipment sector: While a large percentage of persons employed in the leather sector are those with class XII and below, a corresponding number of skill training seats do not exist. Similarly the mismatch in the medical equipment sector. (Source: Imacs reports for NSDC)
A mere 2 per cent of Indian workers are formally skilled. In-service training is received by only 15 per cent of workers in the manufacturing sector. Significantly, the bulk of the labour force in India – about 93 per cent -who work in the unorganised sector are completely untouched by any kind of formal training.
A mere 2 per cent of Indian workers are formally skilled. In-service training is received by only 15 per cent of workers in the manufacturing sector. Significantly, the bulk of the labour force in India — about 93 per cent — who work in the unorganised sector are completely untouched by any kind of formal training. (NSSO 2004-05)
requirements of India Inc based on their technical and presentation skills, their ability to converse in English, and work as part of a team. The CII- BCG report extends this to the retail, health and other service sectors (Report: India’s Demographic Dilemma Talent Challenges for the Services Sector; Janmejaya Sinha, James Abraham, Rohit Vohra; December 2008) and concluded that overall employability ranged from 15 to 60 per cent for different sectors. (Page 24)
By way of comparison, 96 per cent of the workers in South Korea receive formal skills training. In Japan, it is 80 per cent, and, in Germany, it is 75 per cent. The figure for the UK stands at 68 per cent.
One would expect that if the intake is unskilled, many companies would send workers for training once they are employed. But H Tan and Y Savchenko in their paper, "In-Service Training in India: Evidence from the India Firm Level Investment Climate Survey" World
Software industry body NASSCOM has pointed out that of the 4 lakh odd engineering graduates who pass out every year, only about 20 per cent would meet the
Government Departments : Targets for Skill Development Sl. No. Ministry / Department / Organization 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
National Skill Development Corporation Labour & Employment Tourism Textiles Transport Tribal Affairs Rural Development (RUDSETI) and IL & FS Women & Child Welfare Agriculture HRD Higher Education HRD Vocational Education (Engg. Coll. 2297 Polytechnics 1675) Dept of Heavy Industry Urban Development Department of Information Technology
17 18 19 20
Food Processing Industries Construction Industry Development Council (under Planning Commission ) Health & Family Welfare Micro Small Medium Enterprise Social Justice & Empowerment Overseas Indian Affairs
22 23 24 25
Finance -Insurance/Banking Consumer Affairs Chemicals & Fertilizers Others (Power, Petroleum etc.)
Present number of institutions -33,000 38 277 1 63 156 68 72 10,000(Voc. schls)
Present training capacity per annum ( IN LAKH) -12 .00 0.17 0.15 0.02 0. 06 5.48 17.50 19.81 19.60
Projected number of trained persons by 2022 ( IN LAKH) 1500 1000 50 100 300
14 * 34 1000 (Affiliated centres) + 7 CDAC
* 0.013 1.37
100 150 100
34 147
0.10 4.64
50 200
3802 356 Through NGOs & others In partnership with MSME/ StateGovernment / CII/ NGO * * 6 NA Total
1.35 2.92
100 150 50 50
0.13
0.19 99.46
200 100 200 500
100 100 50 150 5300
* At present these ministries not directly involved in pre-employment training activities
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Bank Working Paper Washington DC World Bank point out that only 17 per cent of manufacturing firms in India provide formal training for their employees. These figures are low compared to China (91 per cent), Bangladesh (27 per cent), and Sri Lanka (38 per cent). What could be the cause? Current Skills Architecture 17 ministries of the Government of India ranging from the Ministry of Labour & Employment to that of the ministries of Human Resource Development and Food Processing Industries are presently engaged in undertaking different training initiatives with the combined objective of skilling 350 million people by 2022. The Ministry of Labour and Employment has entrusted the National Council for Vocational Training (NCVT) to prescribe standards and curricula for the training imparted at ITIs and ITCs. States also play a part in this process through State Councils for Vocational Training (SCVTs). Most of the formal skills-related training in the government happens through the Industrial Training Institutes (ITIs) and Industrial Training Centres (ITCs) which come under the Ministry of Labour & Employment. The Ministry of Human Resource Development provides support for Polytechnics for engineering disciplines. Many of the ITIs have now been brought under the Public Private Partnership route with the private partner responsible for the management of the institution. According to the "Report to the People on Employment" by the Ministry
of Labour and Employment, a total of 8039 ITIs and ITCs have been affiliated to NCVT, out of which 2,133 Government Industrial Training Institutes have a capacity of 432,000 and the private Industrial Training Centers have a capacity of 684,000 making a total of 1.1 million as of March 31, 2010. Most of the entrants to the ITIs or ITCs have to be either have studied till class X with some courses available to those who have studied till class VIII. Informal skills-related training, including those in the traditional arts and crafts of India, is also supported through different Government schemes. Many companies also conduct training programmes to meet the skilling requirements of their own workforce, or sometimes as part of their corporate social responsibility (CSR) initiatives. The Tata Group, for instance, has a large part of its CSR agenda devoted to conducting skilling programmes for youths residing in areas where it has a presence. Many of the IT companies like Infosys, TCS, HCL and others engaged in the services arena also spend a huge amount on in-house training programmes for their employees. Larsen & Toubro, and others run training programmes in the construction sector. Non-government organisations, too, conduct skillsrelated training to address the needs of the segments
Many of the IT companies like Infosys, TCS, HCL and others engaged in the services arena spend a huge amount on in-house training programmes for their employees. Larsen & Toubro, and others run training programmes in the construction sector.
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The NSDC engages in skills-related training through its Private Sector Partners with the intention of skilling 150 million people by 2022 to contribute to the Prime Minister's vision of skilling half-a-billion Indians.
they are working with. For example, the St. Josephs Industrial Training Institute and Don Bosco Centre of Learning in Mumbai. Industry bodies like the Confederation of Indian Industry have also launched skill development initiatives. Despite the efforts of various organisations, the total number of skilled persons is far less than the demand. Millions of India’s educated have no employable skills. There is the paradox of a large labour force; yet industry is grappling with a dearth of labour. Why is this so? An analysis of the current skill development efforts bring out the fact that almost all government programmes and even some private sector programmes are not linked to employability or employment but are focused in giving pre-determined training to those who enroll without any linkages to the needs of the potential employer or entrepreneurial opportunity. What emerges quite clearly that there is a focus on supply side in most cases resulting in a quantity, quality and qualification mismatch. Recent Developments Conscious of the key role that skills-related training can play in promoting the concept of inclusive growth, the Prime Minister, in August 2008, laid out the vision for skill development in India. He stated that “experts have estimated that India has the capacity to create 500 million certified and skilled technicians by the year 2022�.
The Prime Minister also outlined the institutional structure at the national level for coordinated action. This consisted of the establishment of a National Council for Skill Development, chaired by the Prime Minister himself, at the apex to lay down the broad framework for this arena, a National Skill Development Coordination Board coordinated by the Planning Commission to combine public and private prongs of action, and the setting up of a National Skill Development Corporation (NSDC) as a no-profit-noloss company (Section 25 company) through the Public Private Partnership route to catalyse private sector involvement in the skills space. The NSDC also engages in skills-related training through its Private Sector Partners with the intention of skilling 150 million people by 2022 to contribute to the Prime Minister's vision of skilling half-a-billion Indians. In March 2009, the Government announced a new Skills Policy laying down the framework within which it wanted skills-related training to be conducted. The Policy also clarified the roles that different stakeholders government, industry, trade unions and civil society would need to play for the creation of a skills ecosystem in India. Earlier this year, the Government appointed the ViceChairman of India's biggest IT firm, Tata Consultancy Services, Mr.S.Ramadorai, as Skills Advisor to the Prime Minister with the rank of a Cabinet Minister to provide an impetus to the skilling mission. What has changed? First, the focus of skill development has also included employability. Second, is the shift of input based training to competency-based approach. Third, is the move to a sector-led approach wherein the focus is to have stakeholder developed competencies be the outcomes that need to be measured. Evidence the recent Modular Employment Skills programme launched by the Ministry of labour and employment, or the Skill Development Programme launched by the Ministry of Rural Development, or the
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funding for skill development programmes by the Ministry of Textiles and the Ministry of Tourism. All of them have a clause stipulating the need to provide a job or employment for a defined percentage of persons trained. These programmes are mostly delivered in the Public Private Partnership (PPP) mode and reimbursements of costs are linked to employment. So a new model is emerging: training organisations first reaching out to potential employers, finding what competencies are required of persons and then providing training against an assurance of trained persons being provided with a job. The intent to move towards a demand-led system is perhaps reflected in the National Skills Policy of 2009, in which the NSDC was given the responsibility of setting up Sector Skill Councils (SSCs) to define standards for the segments they represent. As per the Skills Policy, the SSCs are supposed to undertake the following functions: a) Set up Labour Market Information Systems (LMIS) to assist in the planning and delivery of training b) Identify skill development needs and prepare a catalogue of skill types c) Develop a sector skill development plan and maintain a skill inventory d) Develop skill competency standards and qualifications e) Standardise the affiliation and accreditation process by participating in affiliation, accreditation and standardisation f) Plan and execute training of trainers, and,
A new model is emerging: training organisations first, reaching out to potential employers, finding what competencies are required of persons and then providing training against an assurance of trained persons being provided with a job.
g) Promote academies of excellence Sector Skill Councils would be employer-driven national partnership organisations that would bring together all stakeholders industry, labour and the academia to achieve their goal of creating a skilled workforce for the segments they represent. The SSCs would operate as autonomous bodies. These could be registered as a Section 25 Company or a Public Limited Company or as an independent division. Funding for the establishment of SSCs is initially done by NSDC. As it grows, each SSC can become a selffunded, for-profit organisation. In Australia, for example, the TVET policy is now industry-led. Industry Skills Councils, representing 10 sectors and composed entirely of industry members, develop standards and qualifications for various occupations. (Source : Education and Skills; Strategies for accelerated development in Asia and the Pacific, Asian Development Bank , 2008 p 94) The SSC initiative has already been successfully adopted by several countries such as Australia, Canada, New Zealand, Netherlands, South Africa and the United Kingdom for addressing their human resource development needs. The NSDC Board has already approved funding for the establishment of SSCs in the automobile, energy, IT/ITeS, media and entertainment, private security and retail segments. Discussions are underway with 27 other sectors. 38
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The Ministry of Human Resource Development, in conjunction with other ministries and the National Skill Development Corporation, is also now working towards framing a National Vocational Education Qualification Framework (NVEQF) to align vocational education with formal education. So what could chart (x) look like if these SSC's operate as they are envisaged to and when the NVEQF is in place? A possible form could be as follows:
Accessibility to skill development programmes is also a major hurdle, with most of the training centres being concentrated in urban settings. Obtaining the required funds for pursuing skillsrelated training also poses a problem with the concept of skill loans still in their infancy in India.
Skilling Challenges in India Skilling in India faces numerous challenges, ranging from the inability of vocational training institutions to attract school drop-outs, tailoring their courses in accordance with the changing needs of industry, and their inability to scale quickly enough. Although many ITIs are now managed by the private sector which has resulted in some modification in course content at these institutions, the lack of scale has resulted in not too high a number of students benefiting from this training. The resultant gains for industry too, have also been quite muted. The lack of scale, however, is also an issue with several vocational training centres run in the private sector. It has been seen that an ITI at a particular place may be offering training in a particular discipline for which there is no local industry buy-in. This has impacted enrollments at ITIs in some instances. Accessibility to skill development programmes is also a major hurdle, with most of the training centers being
concentrated in urban settings. Obtaining the required funds for pursuing skills-related training also poses a problem with the concept of skill loans still in their infancy in India. The current bank financing model for vocational education and training courses has several limitations that result in many people at the bottom of the pyramid being unable to derive any benefit from such loan schemes. As of today, unsecured loans are provided only against guarantees from family members. All those who are not in a position to provide margin money or whose parents have no assured income of their own to provide as collateral are unable to obtain such loans. As of now, Central Bank of India is the only public sector lender active in the skill loans space. Central Bank has entered into an arrangement with the National Skill Development Corporation by virtue of which students at NSDC-funded institutions can obtain skill loans from the bank for pursuing their training.
Skilling in India faces numerous challenges, ranging from the inability of vocational training institutions to attract school drop-outs, tailoring their courses in accordance with the changing needs of industry and their inability to scale quickly enough.
Vocational education and skilling, moreover, carries a 'stigma' in some quarters, with this being seen as the last resort of those who could not make it in the formal education system. With no aspiration factor built in, enrollment at skilling centres is thus not always voluntary and out of choice, and remains on the low side compared to other countries where skilling does not come with a baggage attached.
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With the bulk of skills-related training conducted by industry happening for meeting in-house requirements or from a CSR perspective, the gains from these initiatives are restricted to a select set, and are not in a position to contribute significantly to the development of a skills culture in India. The Promise: New Trends in Private Sector Skilling Initiatives Training initiatives are not new to industry. Several companies undertake skilling initiatives as part of their Corporate Social Responsibility (CSR) agenda or because it is sometimes mandated by various state governments to be eligible for some subsidy/sop from their end. What many enterprises are realizing now is that the need for training has moved way beyond the CSR stage. Skill development is gaining increasing importance due to a variety of reasons. Wage increases are forcing firms to look at productivity, the realization that skilled employees are more productive and lead to increased profitability is adding the need for hiring skilled persons. The pace of technology change and the need for workers who can work with modern day machines and ensure return on capital employed. Changes in the way work is organised leads to the requirement of people with a different set of skills. Workforce skills determine the level of national and international competitiveness. It is possible to develop a scalable, sustainable skill development enterprise provided a conducive eco system is created.
market surveys and addresses the issues of affordability and aceesability. The National Skill Development Corporation (NSDC) was formally launched in October 2009. Its mandate is to catalyze private sector involvement, including that of NGOs, in sustainable training ventures in 20 high growth sectors and the unorganized segment by providing them with funds for this purpose, in order to ensure that they are together in a position to skill 150 million people by 2022. Set up as a Public Private Partnership by the Ministry of Finance, the NSDC is a Section 25 company with a paidup equity capital of Rs 10 crore. The Government holds 49per cent of the equity in NSDC. The private sector has 51per cent shareholding in the NSDC. Private sector equity in NSDC is held through different industry bodies, such as the Federation of Indian Chambers of Commerce and Industry (FICCI), the Associated Chambers of Commerce and Industry of India (ASSOCHAM), Confederation of Indian Industry (CII), Gems and Jewellery Export Promotion Council (GJEPC), NASSCOM, Society of Indian Automobile Manufacturers (SIAM), Confederation of Real Estate Developers Associations of India (CREDAI), Confederation of Indian Textile Industry (CITI) and the Council of Leather Exports (CLE). The 13-member NSDC Board has four Government nominees, including the Chairman Mr.M.V.Subbiah, who is also a former Chairman of the Murugappa Group. Besides Mr.Subbiah, the other Government-
National Skill Development Corporation (NSDC): Helping to realize the promise of skill development. The Prime Minister's Council on Skill Development conceived the idea of a public private partnership to address the skills gap in India. The idea was to have a system that; enables the government provision of training to be delinked from the government financing of training; focuses on output (demand) rather than input (supply); focuses on competencies and not specific skills; is flexible; based on periodic labour
The National Skill Development Corporation (NSDC) was formally launched in October 2009. Its mandate is to catalyse private sector involvement, including that of NGOs, in sustainable training ventures in 20 high growth sectors and the unorganised segment.
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Prospective NSDC partners have to provide at least a 70 per cent employment guarantee for the students who would enroll in their centres to be eligible for funding by NSDC. NSDC partner institutions have tie-ups with industry players and design courses keeping the requirements of the latter in mind.
nominated directors on the NSDC Board are the Secretaries of the ministries of Labour & Employment, and Micro, Small and Medium Enterprises, and an Additional Secretary of the Ministry of Finance. Each of the industry bodies has also nominated its own representatives to the NSDC Board. The Government has thus far provided Rs 1500 crore to the NSDC by way of seed capital to fund training ventures. NSDC assistance to its Partners is provided in the form of soft loans, equity and grants, or even a combination of one or more financing options. Currently, NSDC Partners fall in four categories: i) corporate, ii) educational institution which has diversified into skilling, iii) non-government organisation, and iv)start-up ventures. Any organisation, including start-up ventures, having a scalable and sustainable business model that ensures the employability of the resources trained is eligible for funding by the NSDC. As the NSDC sees itself as a “viability gap catalyst�, the amount of funding could extend up to 75 per cent of the project cost. The debt is offered at subsidized rates with other features like a moratorium built in depending on the nature of the project. Equity infusion by the NSDC is normally capped at 27 per cent of the total paid up capital. Grant funding is considered only in select cases.
The minimum ticket size of a training proposal that the NSDC normally insists on for the purpose of funding is 100,000 people over a 10-year span. The financial template for training proposals seeking funding from the NSDC is given on the home page of its website, www.nsdcindia.org. For the process of funding, the NSDC evaluates the 10year business plan submitted by the prospective private partner, including non-government organisations, for its feasibility, sustainability and whether it meets its lending norms, and only then is a decision taken on whether the NSDC should fund the institution. Prospective NSDC partners also have to provide at least a 70per cent employment guarantee for the students who would enroll in their centers to be eligible for funding by NSDC. NSDC partner institutions have tie-ups with industry players and design courses keeping the requirements of the latter in mind. The certificates issued by NSDC partners therefore have good buy-in within the target industry segment. Once the Sector Skill Councils (SSCs) are in place, a NSDC partner institution offering a course in that particular segment would have to get the curriculum ratified by the relevant Sector Skill Council and also follow the assessment and certification procedure of the SSC. Till date, the NSDC Board has approved the funding of 36 projects including 6 SSCs. Between them, these 36 ventures would train 55 million youth in diverse trades over 10 years. Some of the noteworthy projects that have been approved for funding by the NSDC Board include the formation of a joint venture with Centum Learning, an associate company of the Bharti Group, to train 11.57 million youth in different trades over a 10-year span as well as the establishment of a Special Purpose Vehicle in partnership with IL&FS Education and Technology Services, the education infrastructure development initiative of Infrastructure Leasing & Financial Services, to jointly set up 100 skills schools in industrial
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clusters and economically backward regions nationwide for training 1.94 million youth for varied vocations over a 10-year period. Besides, the picking up of a 27 per cent equity interest in Everonn Skill Development that would train 15 million people over a 12-year span.
The proposed SSCs would develop skill competency standards and qualifications, as well as standardise the affiliation and accreditation process. They would set up labor market information systems (LMIS) to
Apart from providing financial assistance to private sector skill development initiatives, the NSDC is also involved in constituting Sector Skill Councils (SSCs) that would establish quality standards for the segments they represent. The proposed SSCs would develop skill competency standards and qualifications, as well as standardise the affiliation and accreditation process. They would set up labour market information systems (LMIS) to assist in the planning and delivery of training, besides identifying skill development needs and preparing a catalogue of skill types. Promotion of academies of excellence and helping in executing train-the-trainers programmes also fall within the ambit of the SSCs. The first SSC, the Automotive Skill Development Council, is set to come up soon. Prominent stakeholders in the automobile sector such as the Automotive Components' Manufacturers Association (ACMA), Federation of Automobile Dealers Associations of India (FADA) and Society of Indian Automobile Manufacturers (SIAM) have come together to form this body. The NSDC has provided funds for this venture. The NSDC Board has also approved the formation of Sector Skill Councils for the energy, IT/ITeS, private security, media and entertainment, and retail segments. The SSCs would provide the demand side of the equation to the eco system. Many companies are currently making a business out of skilling by embarking on large-scale training projects capable of training a minimum of a hundred thousand or more persons in 10 years either on their own or through consortiums and ensuring that the lack of trained people does not come in the way of the growth of Indian industry.
assist in the planning and delivery of training, besides identifying skill development needs and preparing a catalogue of skill types.
At places, these organisations are even teaming up with ITIs to use the latter's spare infrastructure for running their courses in order to keep costs down and be in a position to start operations quickly. Training centres are being opened across the length and breadth of the country, including in areas affected by extremism. NSDC-funded institution Gram Tarang, for instance, operates centres in the Naxal-affected belt of Orissa. Another NSDC Partner IL&FS ETS proposes to start skill schools in some of the most backward areas of India so that the recipients of the training are in a position to get jobs or become self-employed. Many enterprises are even training people to become house maids or drivers and also helping them find gainful employment. Training organisations are setting up rural BPOs to employ persons trained by them and adding to the revenue streams. Other devise training programmes in such a manner that the output is a product or service that is of value. Companies are coming up with innovative financing models whereby a part of the training costs of students are being taken care of by the potential employers of these trainees. Training firms are more often than not seeking potential trainees with employment letters from companies to mobilise students at their centres. Non-government organisations have also begun looking at sustainable models so that their programmes can benefit more people. Grants are no 42
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While there are many challenges to overcome, each challenge is an opportunity which innovative business models can address. To ensure that India reaps the benefit of the demographic dividend, a new category of skillprenuers would lead the way.
longer being seen as the only mode of raising funds for their activities. Educational institutions, too, are either starting separate courses for skill development or establishing exclusive facilities for skills-related training. Skill development is also spawning a new category of social entrepreneurs. Most importantly, there are definite moves to linking skill development and education to employability and jobs. Training programmes are becoming more outcome-focused, including those run by the Government. There is also a greater recognition of the fact that there is no one solution to address the skills gap that exists, and that every region demands an innovative approach of its own. There is further a greater receptiveness to the idea of Public Private Partnerships in skill development initiatives. Again, demand led interventions.
While there are many challenges to overcome the many issues, each challenge is an opportunity which innovative business models can address. To ensure that India reaps the benefit of the demographic dividend, a new category of skillprenuers would lead the way. New business models; new methods of technology intensive skill delivery systems; e-content and simulators; demand led assessment and certification models; different types of skill development programmes including onsite, in-house; electronic skill exchanges and a combination of E systems with brick and motor would enable this transformation. As clearly identified by experts, the value of the skill development space in India is $ 20 billion annually. A value that can only be realised if those trained are fit for the job, employable or have the ability to contribute as entrepreneurs. There is clear evidence that the demand-led model has the promise to transform the skill landscape in India. This model reduces or in most cases eliminates the need for grants or aid and delivers better outcomes for all stakeholders. The success of this model would be a result of a cooperative and collaborative effort by all stake holders in India. Employers and Entrepreneurs have to lead. The skill sector has the potential to produce the next wave of social business leaders of the world.
Sumali Moitra contributed to this paper.
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Understanding the Philosophical Underpinnings of Corporate Social Responsibility By N.C.B.Nath, Chairman, Foundation to Aid Industrial Recovery; Visiting Professor, IIM-Bangalore & Independent Director
Executive Overview The purpose of this short paper is not to review the state of CSR in India but to raise some issues which need academic consideration. Teaching about CSR has a four-part effort covering a wider span of concerns. Academics need to bring out the different philosophical perceptions in their teaching and help the Generation Next managers to work out their own strategy.
C
orporate Social Responsibility (CSR) has become the latest buzzword in management discourse. Many business schools offer courses on CSR either as an elective or insist on it being taught as a core course. There is growing talk of legislation or administrative instructions to corporates to make CSR an integral part of their business strategy. There are groups working on case writing on the subject which enrich our understanding of the practice. Shankar Venkateswaran, Mira Mitra and Professor Upendra Baxi among others have written very useful books on the various aspects of the subject. The purpose of this short paper is not to review the state of CSR in India but to raise some issues which need academic consideration. They are the philosophical base of CSR thinking. Teaching about CSR has a fourpart effort covering a wider span of concerns from human rights, ethics and governance, the emergence of quasi-mandated CSR as a practice the world over, the structural limitations of Indian industry which makes CSR a ‘minority’ concern and the ‘tougher’ aspects of CSR which as yet do not command the same attention
as the ‘easier’ options of supporting welfare. Much of the CSR discussions I have listened to are as a ‘quid pro quo’ advice. If a corporate is a player in this domain, it is likely to benefit in customer recognition and goodwill, and greater profits. The argument is what one author calls a ‘functionalist trap.’ It is seen as a large C, the corporate; a much smaller S, social; and an even smaller R, responsibility. Is that the only way to look at CSR? Should we not look at it as an obligation by the corporates in the same way as compliance? There is
Much of the CSR discussions I have listened to are as a ‘quid pro quo’ advice. If a corporate is a player in this domain, it is likely to benefit in customer recognition and goodwill, and greater profits. The argument is what one author calls a ‘functionalist trap.’
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another way of looking at it: as exercising power and building abiding bonds with some, if not all stakeholders. There is a third way of looking at it as a ’moral’ responsibility. Perhaps CSR is all the three and more. Academics need to bring out the different philosophical perceptions in their teaching and help the Generation Next managers to work out their own strategy. If the plurality of philosophical perceptions are not emphasied, the functionalist argument will dominate making CSR thinking that much less exciting. CSR does not need a ‘bait’, it needs understanding and commitment. The ‘something-got-for-somethinggiven’ does not do justice to the way the concept is evolving globally. The Larger Context There is an even larger context. One is the newer understanding of stakeholder and their composition; the other is the increasing recognition that business has not only to be profitable in the short run but sustainable in the long run. While sustainability has a wide range of meanings, the core of the understanding is not in doubt. Business has to be ecologically and societally sustainable. This thought is best explained in the triple bottom line concept. A healthy financial bottom line is a necessary but not a sufficient condition. Stakeholder-shareholder debate has gone on for a long time; the oft quoted Freidmanism that the responsibility of business is to make profits is quoted more often to be disagreed with than in approbation. When the shareholder is at best a ‘primus inter pares’ the first among equals, the competing interests of others, some of them not even direct participants in the business, gives a modern corporate a large and disparate group of claimants for its attention. Who are the stakeholders who need immediate attention is always contextual, depends on the circumstances? It is this shifting coalition of groups which determine the content of CSR at any point of time or circumstance. For example, in the mining and extraction sector, the original owners of land which has been acquired are perhaps the most important to be satisfied; in an FMCG context, the customers and those industries which depend on
outsourcing the ethical management of the supply chain. Perhaps there is no one stakeholder array for all businesses or for a given business for all time. This makes CSR discussions that much more challenging and interesting. Our teaching has to bring out this variety and the consequent opportunity and challenge. One way of contextualising CSR is through the stakeholder and sustainability debate and the other is to look at it as a practice arm of a belief and value system of a company which encompasses their commitment to human rights, business ethics and corporate governing practice. Arranged in this order the subjects move from external to internal management issues. For example, human rights a way out for many business school curricula and corporate boardrooms, while corporate governance is internal. While many schools teach CSR and Governance as different courses, not all of them establish the connection. Similarly, business ethics when taught (they are not taught as a course in many) are a standalone. New Thinking Human rights perception of CSR is perhaps the most recent and is yet to crystallise in business school teaching. Global Compact, the efforts of the UN system in bringing human rights concerns in business discussions is perhaps the newest in this area. As of now it is a concern of transnational corporations operating in countries with inadequate human rights regimes. In such circumstances, what are the obligations of international businesses? Should they leave it entirely
One way of contextualising CSR is through the stakeholder and sustainability debate and the other is to look at it as a practice arm of a belief and value system of a company which encompasses their commitment to human rights, business ethics and corporate governing practice.
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private sector).
Much of CSR activism is likely, in future, to be centred round human rights concerns. As teachers, we do not seem to have prepared our students to these newer developments. Perhaps we should.
to the state agencies or should they also contribute? A more widespread concern is the human rights protection in the supply chain context. Should a corporation be concerned about the way their suppliers run their businesses? Or should they turn a blind eye to what is being done outside the perimeter of their manufacturing establishments? It raises viability issues also, because most of the make-or-buy decisions are based on cutting costs. If the corporate cannot benefit by the ‘reasonable’ costs of a supplier, then why buy? This debate while germane in a finance class room is no longer that simple. The famous indictment of Nike in ‘No Logo’ by Klein has made it impossible for businesses at least in the developed countries to plead unconcern about the human rights violations of their suppliers. Guaranteeing human rights in a supply chain is a joint responsibility of the buyers and the sellers. It is analogous to the responsibility of the main employer in the case of contract employment. Sweated industries are no longer able to enjoy customer franchise, at least in global markets. Human rights issues spill over into ‘affirmative action’ practices and gender equality. The former consists of providing opportunities for the socially excluded like the tribals and the Dalits but also the differentlyenabled (people with disabilities). Should or can a company turn a blind eye to them? In the Indian context, there are mandatory obligations for public sector companies (they are not yet obligatory for
Gender justice is never an upfront issue in management schools which are more efficiency and profitoriented. While young women managers do face a glass ceiling of sorts in many organisations, it is rarely a topic of discussion in business schools; similarly sexual harassment which is not new to our educational system. We are used to looking at them as particular aberrations and not as a systemic denial of human rights to our colleagues and those involved in our business directly or indirectly. Much of CSR activism is likely in future to be centred round human rights concerns. As teachers, we do not seem to have prepared our students to these newer developments. Perhaps we should. If human rights discussions are almost a rarity, business ethics are taught in some, if not all schools. It is a difficult subject to teach satisfactorily, without making it didactic. There are excellent text books and courses on ethics but most of them are drawn from cultures which are different from ours. While much of ethics has a universality, culture and context also matter, there are a few Indian text books on ethics. Perhaps we need a lager output for selection. The current popular concern about pervasive corruption in our society makes ethics discussions not only timely but essential. In a manner of speaking, corruption is also denial of human rights to those who are adversely affected by corrupt practices. Business school ethos in India has been ‘para moral’ if not amoral. Such ethical myopia perhaps will not be acceptable in future. Our ethics courses need to be tweaked and contextualised to be meaningful to the younger generation managers. Corporate governance practice is dominated by the twin concerns of compliance of the law and the declaration of allegiance to one or many ‘codes of conducts’ floating around. Some schools do have courses on corporate governance. After the recent, still to be solved Satyam phenomenon, governance concerns should take a more important place in our teaching than before. In a proven or unproven corrupt practice, the corporate is always the enabling party; if they did 46
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not bribe there would be no meeting of corrupt minds. Corporate record in this crucial matter is variable from impeccable behaviour to attempting to sail close to the forbidden line of obvious illegality. The denials of bail to a number of managers in well-known business houses in the 2G scam should make learning about corporate governance a useful survival kit for future managers. International discourse on corporate governance is today focused on the financial sector which very nearly collapsed the world economy with their sub-prime misadventure. The Indian situation is even more complex with a voluminous law, not always effective enforcement and an undemanding public. The Academic Context CSR is the fourth part of this foursome: the action which rights wrongs and establishes abiding values and fairness to the stakeholders involved. If we can teach an interlinked course on CSR with the value forming courses of human rights, business ethics, and corporate governance, the learning will be integrated and CSR will be an inseparable part of corporate strategy. That is what is happening in the best corporates in the world and that is what we should bring to the notice of our students, the corporate managers. The inherited wisdom in CSR lore is that it is voluntary, reflects the values of the company and is chosen to increase the ultimate shareholder value. This may not
International discourse on corporate governance is today focused on the financial sector which very nearly collapsed the world economy with their sub-prime misadventure. The Indian situation is even more complex with a voluminous law, not always effective enforcement and an undemanding public.
hold in many sectors of industry in India. Indian public sector is mandated to spend a percentage of its profits working their CSR programmes in cooperation with partner NGOs and not departmentally. The content is not prescribed as yet but it is an expenditure obligation. The position of the private sector is unclear with contradictory statements in the press. German and French CSR is reported to be mandated and the UK practice is ‘voluntary’ within a soft-law obligation. If it turns out that the trend in CSR is towards mandating, then we need to look at what we teach and whom, in a different manner. The law makers will then become those in need of understanding about CSR trends in the world. We inadvertently talk about Indian industry as an undifferentiated absolute which it is not. It is a highly segmented structure where migration from one segment to another is more an exception than the rule and each has its own unique business, compliance and value ambience. Not surprisingly, CSR means different things to each of these segments. If the MNC group is guided by the home country wisdom, the Indian large sector draws its learning from its origins of successful trade. SME is a further fragmented formulation where they are fighting a battle for survival against the better endowed rivals, that any other thought gets little attention. There is considerable literature on CSR in the global SME sector but it has very limited relevance to us in India. The informal sector which perhaps is the largest in terms of employment sees itself as a recipient of CSR largesse than a contributor. Thus CSR discourse in India as of now is a ‘minority’ concern. Karmayoga.com which runs a CSR database for Indian industry has reported that only half of its sample had any CSR at all and those that had were ‘limited’ versions. At one end, we have companies with elaborate sustainability reports, CSR programmes, membership of global human rights groups like the Global Compact and report their activities in the GRI (Global Reporting Initiative) format and there are many who do not even mention CSR in their public documents.
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CSR in industries which depend on boughtouts critically have to evolve a suitable
with the community, what is projected is noncompliance. CSR academics need to learn and teach about this aspect without fear or favour because none of this can be wished away and in many sectors will form the core of the best CSR practice.
practice. It has a meaning both to the large and SME sector and needs deeper study and identification of best practice.
Corporate CSR Concerns There are tougher CSR concerns which do not always find a respectable place in our teaching, the R&R (rehabilitation) obligation and the responsibility of ensuring an ethical supply chain. It is estimated that there are 20 million people who are victims of involuntary displacement in our public and private development projects. These are festering for decades with the State being the largest transgressor. The Noida and Posco headlines in recent weeks are a small symptom of a larger malaise where law has not caught up with humane practice (the land acquisition law is yet to be amended) and ‘free and voluntary consent’ from the affected is reported to be coerced.
Ethical supply management is not a priority for domestic consumer-based industry (no international company can afford to ignore the obligation). However, both the customers and the industry do not seem to be overly concerned about it. CSR in industries which depend on bought-outs critically have to evolve a suitable practice. It has a meaning both to the large and SME sector and needs deeper study and identification of best practice. Not surprisingly, both practitioners and academics shy away from the tougher aspect of CSR obligation and concentrate on the less controversial welfare measures. This makes our teaching less complete. From the academic point of view, it is both a challenge and a despair, further aggravated by the not always helpful ethos of business schools with their ‘here and now’ success preference. It is the first for the bravehearted innovative and second, for the traditional five courses obligatory teaching-oriented faculty.
There are corporates who have attempted a credible R&R programme, but with the yawning trust deficit
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A Review of the State of CSR in India By V.V.Ranganathan, Chairman & Founder, Pinnacle Opportunities and Trustee, Bharti Foundation
Executive Overview CSR in the private sector in India, barring a few exceptions, still continues to be driven by a variety of different models as business in India is largely controlled even today by powerful family houses. There is no credible data available on CSR activities at an all-India level and this impedes even rudimentary research on the subject. India is a huge country and is still inhabited by very poor people. So any CSR activity that is pan-India is like trying to boil the ocean and such initiatives can only be undertaken by very large corporations and in the future, collectively.
M
ilton Friedman, the American economist said, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engage in open and free competition without deception or fraud.”1 Then in 1969, Henry Ford II said, “The terms of the contract between industry and society are changing. Now we are being asked to serve a wider range of human values and to accept an obligation to members of the public with whom we have no commercial transactions”2. In the above context, therefore, some demystification of the term Corporate Social Responsibility (CSR) will
Some demystification of the term Corporate Social Responsibility (CSR) will be in order. There is a certain amount of cynicism
be in order. There is a certain amount of cynicism associated with CSR largely because some corporate players have used it ingeniously to gain unfair advantage in a fiercely competitive business environment. Greenwashing is one such term coined to uncover the deceptive use of green marketing strategies that are designed to falsely promote perceptions that a company’s policies or products are environmentally friendly. The European Commission (EC) has provided a definition for CSR as, "A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis."3. In the Indian context, the Department of Public Enterprises has issued Guidelines on Corporate Social Responsibility for Central Public Sector Enterprises (PSEs) in India. It says, “Corporate Social Responsibility is a company's commitment to operate in an economically, socially and environmentally sustainable manner, while recognising the interests of its stakeholders.”4. For these PSEs, CSR is mandatory.
associated with CSR largely because some corporate players have used it ingeniously to
India's Champions
gain unfair advantage in a fiercely competitive business environment.
Forbes Asia magazine5 in its March 2010 issue showcased “48 Noteworthy Heroes of Philanthropy”. Interestingly, all the four Indians in that list are women.
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Rohini Nilekani who has donated about $ 40 million to many causes tops the list. The Forbes magazine reports that “her biggest contribution has been to Arghyam6, a Bangalore foundation, that promotes clean water and hygiene, which was set up in 2001 and now has projects in 800 villages”. It is good model where she as a funding agency, works primarily through partnerships — with Government, NGOs and various types of institutions — for impact and scale. The three others on the list are Anu Aga, the former chairman of Thermax for her “Teach for India”, Kiran Mazumdar-Shaw, the Chairman of Biocon for her 1400 bed cancer centre in Bangalore and Kiran Nadar, wife of Shiv Nadar, the cofounder of HCL Technologies for her art museum in Delhi. A similar list published by Forbes in March 2009 had again four Indians but all were men except one. They were Anil Agarwal, Chairman of Vedanta, Sunil Bharti Mittal, Chairman of Bharti Enterprises, Shiv Nadar, Chairman of HCL Technologies and the only woman on the list was again, Rohini Nilekani. India has a few notable social entrepreneurs who have shown considerable leadership and commitment to make a telling impact on poor people in certain pockets. Ela Bhatt is the well known founder of the Self Employed Women’s Association of India (SEWA)7 with about a million members. SEWA organises poor women workers in the unorganised sector for full employment and self-reliance to lift them out of their poverty. They run as many as 20 initiatives including a bank and have interest in insurance, housing, trade facilitation and research. Verghese Kurien is the father of the White Revolution in India and created the Amul brand of milk products through a milk cooperative movement that helped poor dairy farmers to increase milk production and augment rural income while ensuring fair price to consumers. Dr.S.S.Badrinath, the famous ophthalmologist set up the Medical Research Foundation to run Sankara Nethralaya as a charitable, not-for-profit eye hospital. This eye hospital described by the late Nani.A.Palkhivala, the legal legend and former Indian Ambassador to the US, as the “Best Managed Charitable Organisation in India”, has made significant impact in the field of eye care among poor people in the last more than 30 years.
In India, traditionally, the large industrial houses of the Tatas and Birlas have contributed significantly to ameliorate the conditions of the poor. The Tatas are pioneers in CSR in India and have been supporting several social initiatives and their business model itself is very unique.
In India, traditionally, the large industrial houses of the Tatas and Birlas have contributed significantly to ameliorate the conditions of the poor. The Tatas are pioneers in CSR in India and have been supporting several social initiatives and their business model itself is very unique. About 66 per cent of the equity capital of Tata Sons is held by philanthropic trusts endowed by members of the Tata family. An article on their website8 says “in 2009-10, well in excess of Rs. 4 billion (about $ 105 million) was donated to support initiatives in health and education, livelihoods and agriculture, human rights and culture, the environment and more, in India and abroad.” The Aditya Birla Centre for Community Initiatives and Rural Development has institutionalised the enormous CSR activities of the Birlas in several areas such as education, healthcare and family welfare, sustainable livelihood, infrastructure support and social causes. The Birlas run 41 schools and 18 hospitals and spend on these projects approximately Rs. 135 Crores ($ 30 million) annually. I personally know that Kumar Mangalam Birla, like some of the committed entrepreneurs in India, takes a special interest in the CSR activities of the group and provides leadership to professionalise CSR delivery and management. Some of the better governed companies have in recent times created serious and professionally managed CSR programmes that have significant scale and impact like the ones managed by Bharti and Wipro, to name just two. The Satya Bharti School Program is the flagship rural educational initiative of Bharti Foundation 50
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established in 2000 with an aim to deliver free quality education to underprivileged children across rural India. The aim of this large scale programme is to create a replicable, scalable and holistic model of quality education in the country. The Satya Bharti School Program is one of the largest end-to-end education programmes undertaken by a corporate in India. Currently 242 Satya Bharti Primary Schools and five Satya Bharti Senior Secondary Schools are operational across six states of the country, reaching out to more than 30,000 underprivileged children. The Bharti Foundation has a corpus fund of Rs.164 crores ($ 36.5 million) and spends Rs.28.3 crores annually ($ 6.3 9
million) on education . Rakesh Bharti Mittal, the CoChairman of the Foundation says, “Given the enormity of the resource constraints facing the Government, its efforts needs to be complemented by the voluntary as well as the corporate sector.� The Azim Premji Foundation10 which has been working in the school education domain since 2001 has set up a university, enabling people who are really in the trenches to come and apply for admission to this university. The foundation says that it believes rural people have the intelligence and what they lack are the language skills and exposure. The government-owned PSEs, particularly the banks and the oil sector companies have made some important contributions at least in the localities in which they operate. Mining companies that are by law required to rehabilitate displaced people also claim that they
The government-owned PSEs, particularly the banks and the oil sector companies have made some important contributions at least in the localities in which they operate. The PSEs spend substantial amounts on providing and maintaining basic infrastructure and other civic amenities in the townships they create around their factories.
engage in CSR activities. The PSEs spend substantial amounts on providing and maintaining basic infrastructure and other civic amenities in the townships they create around their factories. It is debatable if a PSE or any other private enterprise that sets up social infrastructure without which it cannot do business can in fact classify such expenditure under the CSR head. A charitable interpretation will be to consider them, nevertheless, as CSR spends because CSR is also about capacity building for sustainable livelihoods. The CSR guidelines issued for PSEs are prescriptive. As per the guidelines, companies with net profit of less than Rs.100 crores ($ 22.5 million) will earmark 3 to 5 per cent of profit for CSR, companies with net profit of between Rs. 100 and 500 crores ($ 22.5 million-$ 112.5 million), will utilise 2 to 3 per cent for CSR activities and companies with net profit of over Rs. 500 crores ($ 112.5 million) will spend 0.5 to 2 per cent of net profits for CSR. A CSR Hub has been set up at the Tata Institute of Social Sciences for the PSEs to identify and implement CSR programmes in remote areas11.
The Azim Premji Foundation which has been working in the school education domain since 2001 has set up a university and has received its first batch of students in July 2011, enabling people who are really in the trenches to come and apply for admission to this university.
Different Models of CSR CSR in the private sector in India, barring a few exceptions, still continues to be driven by a variety of different models as business in India is largely controlled even today by powerful family houses. Some of these models are propelled by a sense of trusteeship, others by status and recognition, some others are founder-shareholder driven, a few use CSR to manage perceptions about their image and a host of undeter51
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need to talk about CSR because Indian firms are already outperforming them on this front. India is a huge country and is still inhabited by very poor people. So any CSR activity that is pan-India is like trying to boil the ocean and such initiatives can only be undertaken by very large corporations and in the future, collectively.
minable factors. Post-1991, after the economy opened up, and for the last about 10 years, the educated middle class have also shown their propensity to share their wealth meaningfully, particularly providing access to the poor in the field of education, livelihood creation and skill development. These interventions are not through cheque book donations alone as the donors also actively participate in the delivery of the services. These gestures of the neo-rich are now prompting many more Indian business houses to be less tight-fisted when it comes to CSR spends. There is no credible data available on CSR activities at an all India level and this impedes even rudimentary research on the subject. I have examined annual reports of many companies and even the nominations for CSR awards from nominee companies. They provide very sketchy data. KPMG, the global audit firm, conducts the International Survey of Corporate Responsibility Reporting every three years to gain insight into CSR matters. The last such survey was done in 2008 that covered 22 countries and with more than 2200 businesses around the world. Conspicuously, India doesn’t figure in that report although countries like Romania, Portugal and Spain are covered. Multinational companies operating in India are not on the CSR radar screens yet. Strangely, a few beverage companies talk about rain water harvesting, PET bottle recycling and employing physically challenged people as their CSR initiatives. They have to grow up if they
Infrastructure and real estate companies which employ large workforce try to do some CSR activities to keep the community happy. Given the wealth they generate for themselves, their contributions are really meagre in comparison to many others. National Priorities India is a huge country and is still inhabited by very poor people. So any CSR activity that is pan-India is like trying to boil the ocean and such initiatives can only be undertaken by very large corporations and in the future, collectively. World Health Organisation (WHO) estimates that about 49 per cent of the world's underweight children, 34 per cent of the world's stunted children and 46 per cent of the world's wasted children, live in India. The Human Development Index12 (HDI measures well being and life chances) ranks India at 119 much below Syria, Egypt and Guatemala. There is a growing concern on the official estimates of poverty in this country. With inflation moving north, the predicament of the poor will become even more precarious and these poverty estimates may have become mere academic exercises. Poverty has many other dimensions like lack of access to public services like drinking water, sanitation, rudimentary health care and education. It is in this context as well as in the context of an exceptional GDP growth that the country has managed to achieve that one needs to look at CSR in India as a powerful instrument to promote inclusion. While the government provides the enabling atmosphere to do business and help business entities build wealth, it expects them to also contribute their mite to strengthen its hands to lift more people out of poverty sooner than later. So in India, CSR should have a different connotation. CSR initiatives of the developed world on the other hand don’t have to deal with such abject poverty and a swelling population and therefore they are more focussed on sustainability of environment, fuel economy, noise levels, waste disposals, volunteering social work and similar areas. Indian 52
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corporations and foreign entities operating in India have to collaborate and create large nationwide projects to tackle some of the more serious and immediate problems of poverty and unemployment in consultation with some of the performing social entrepreneurs who have a better understanding of the struggles on the ground. Otherwise, standalone CSR programmes that do not have scale and impact will be like too many irrelevant solutions running after problems without really solving them. Teaming is essential to conserve meagre resources. Philanthropy is relatively easy to do, have tax advantages and demands less effort and commitment across the organisation. CSR on the other hand is not a vehicle for emotional effervescence or random generosity. Companies can no longer afford to relegate CSR as a separate function but will have to make it an integral part of its business strategy. There is a strategic policy initiative by the United Nations called Global Compact for businesses. It has promulgated 10 principles in the areas of human rights, labour, environment and anticorruption. It is a useful framework to report, collect and analyse data. Already, global database containing ESG (environmental, social and governance aspects of corporate performance) information on publicly-listed companies, countries, local authorities, state-owned
companies, and global entities in a Web-based architecture is operational and managed by the Thomson Reuters Corporation. Increasingly, with a wider penetration of the internet, campaigning for transparency and accountability will mount on business entities. References 1. http://www.umich.edu/~thecore/doc/Friedman.pdf 2. Henry Ford speech at Harvard Business school in 1969http://bournemouth.academia.edu/ChristinaKoutra/Papers/ 364499/Holding_Corporate_Social_Responsibility_to_Account _Its_Applicability_In_Tourism_Development 3. http://ec.europa.eu/enterprise/policies/sustainablebusiness/corporate-social-responsibility/index_en.htm 4. http://www.dpe.nic.in/ 5. http://www.forbes.com/forbesglobal/ 6. www.arghyam.org 7. www.sewa.org 8. www.tata.com 9. www.bhartifoundation.org 10. www.azimpremjifoundation.org 11. www.tisscsrhub.org 12. http://hdr.undp.org/en/
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Ideas to Reshape India's Infrastructure Landscape By Vinayak Chatterjee Co-founder & Chairman, Feedback Infra
Executive Overview Throughout these two decades of reforms, the infrastructure sector is one that has been handicapped by lack of political will, bureaucratic red tape and shortage of ideas. In this paper, the author outlines a series of innovative solutions that can transform the sector and give a fillip to investment in the country. Is there a need for a new Ministry of Infrastructure? What about implementing the concept of annuity? What are the bottlenecks and how can they be overcome?
I
n the preface to India’s 11th Five Year Plan document, the following perspective for investments in India’s infrastructure is set out: “Poor quality of infrastructure seriously limits India’s growth potential in the medium term and the 11th Plan outlines a comprehensive strategy for development of both rural and urban infrastructure, defined to include electric power, roads, railways, ports, airports, telecommunications, irrigation, drinking water, sanitation, storage, and warehousing. The total investment in these areas was around 5 per cent of GDP in 2006–07 and the Plan aims at increasing this to about 9 per cent of GDP by the terminal annum 2011–12”. On numerous occasions, while addressing people in India and abroad, the prime minister, the vicechairman of the Planning Commission and the finance minister, along with many other senior ministers have publicly stated that India requires around $ 500-billion worth of investments in infrastructure in the 11th Plan period. The criticality of the infrastructure sector in stimulating demand, creating employment, providing better public services and utilities and being a central theme of the economy is nowhere in doubt. But, strangely, efforts in recreating the infrastructural landscape in the country have been mired in a web of issues that include
lack of innovative ideas, poor implementation, bureaucracy and limited ways to evaluate achievements. How then can this sector be given a fresh fillip? Redefining 'infrastructure' What is infrastructure? If you think this is a strange question, you may wish to consider the following: there are six official entities that attempt to define ‘infrastructure’, statutorily or otherwise. First off the block is the Income Tax Department which defines infrastructure under section 80IA. The Department of Economic Affairs in the Ministry of Finance has its version that relates to the Viability Gap Funding (VGF) mechanism. Next is the RBI, through various circulars. There is then the Insurance Regulatory and Development Authority (IRDA) which takes a shot at it. Finally, there are the groupings that emerge in outputs from the Planning Commission and the Prime Minister’s Committee on Infrastructure. While we are at it, do not forget that elements from the private sector wake up from time to time (most noticeably in February, before the Budget announcements), and demand that various projects in tourism, healthcare, education and real estate be declared officially as infrastructure.
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definition be desirable? Here are seven reasons why:
Huge amounts of investment, particularly from the private sector (domestic and foreign), are expected to pour in — about $ 70 billion in the 11th Plan period as part of the overall requirement of $ 350 billion.
Why, you may well ask, do these differing lists and versions exist? Remember, India is a pluralistic society and every governmental outfit has an ostensible reason to come up with its own list. The finance ministry has the strongest reason, as always! It gives tax breaks and dishes out VGF. The IRDA has to define infrastructure as it seeks to deploy 15 per cent of the long-term funds available with insurance companies as its contribution towards alleviating the asset-liability mismatch inherent in this sector. The RBI is the mai-baap of the banking sector and has its definition of infrastructure to circumscribe commercial banks’ exposure to infra-projects, as well as define conditions for External Commercial Borrowings (ECBs) by infrastructure companies. The Prime Minister’s Committee on Infrastructure and the Planning Commission have their hands full monitoring the progress (or otherwise) of this sector, evolving policy and configuring interventions, and therefore, have their own groupings and long lists. The private sector, as usual, salivates for tax breaks, tax holidays and access to funding under the ‘official’ definition. And indeed, based on representations and prevailing wisdom, the list does get widened from time to time. In last year’s Budget, for example, the FM added port steerage and dredging services as well as cross-country gas pipelines to be within the ambit of the Income Tax definition of infrastructure. But why should a single, scientific, unified list and
It would lead to focused thinking in organising and classifying a sector that historically has not been as methodically organised as the manufacturing sector. Huge amounts of investment, particularly from the private sector (domestic and foreign), are expected to pour in — about $ 70 billion in the 11th Plan period as part of the overall requirement of $ 350 billion. It would help these investors to have one list of ‘official’ infrastructure projects so that the conditions surrounding investment decisions, whether relating to tax, VGF, ECBs or credit exposure norms, can be less fuzzy. The debate and confusion on whether social sector investments in healthcare, education, housing, tourism, agri-cold-chains et al are to be included in the definition of infrastructure, can be settled once and for all. The irrationality of something appearing on one government list and not on another would be removed. Simultaneously, all state governments can be persuaded to adopt this unified list, as most infrainvestments are at the state level. Infrastructure watchers have long been clamouring that a statistic called the GCFI (Gross Capital Formation in Infrastructure as a percentage of the GDP) be quickly organised and disseminated as a key economic indicator of progress. A clear definition of infrastructure will bring clarity to this overdue statistic. The infrastructure sector spans three types of economic activity — asset creation, asset maintenance and assetrelated services. A clear listing of which kind of activities are entertained by the government to be officially classified as infrastructure would indeed be useful. Investors in and financiers of infrastructure SPVs are a confused lot. Earlier, financiers got tax breaks as per Section 10(23-G). That has since been removed. Now there is the pain of pass-through benefits removed (or partially restored) a la the last Budget pronouncements on pass-through benefits for venture funds. A clear list
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distribution). Economists have written voluminous tomes on how to define infrastructure. Two quick
Group C: Urban Infrastructure
points are in order: in developed countries,
Water, sanitation, sewerage, LRT/MRT/MTS, cityenergy distribution, terminals and logistics parks.
the definition has changed with time. Early definitions relate to the core areas of transportation, water supply, energy, waste, sanitation and so on. Later, other non-core areas like industrial parks, agriculture, communication et al tend to get added.
would considerably help investor confidence. Economists have written voluminous tomes on how to define infrastructure. Two quick points are in order: In developed countries, the definition has changed with time. Early definitions relate to the core areas of transportation, water supply, energy, waste, sanitation and so on. Later, other non-core areas like industrial parks, agriculture, communication et al tend to get added. Infrastructure projects can be categorised using one or more of the following dimensions: wide differences in economic returns vis-à-vis project returns; full userpay-charges or subsidy-driven structures; federal, state or third tier subject; asset specificity; lumpiness of one-time investment, usually with a long gestation period; content infrastructure (for example, power generation) where competition is possible to some extent; carriage infrastructure (for example, roads and pipelines) which are typically natural monopolies; and, projects requiring large land acquisition and related resettlement and environmental issues. Using a combination of these perspectives, a possible unified and harmonised list for the country can begin to get structured across the five groups suggested below: Group A: Rural Infrastructure Irrigation, rural connectivity (roads, power, IT), cold chains and mandis, drinking water. Group B: Core Infrastructure Transportation (roads, railways, airports, sea ports, inland waterways); energy (generation, transmission,
Group D: Land-Intensive SEZs, industrial parks, new townships, industrial cluster development, IT parks. Group E: Social Infrastructure Healthcare, education, leisure and entertainment, retail, tourism, housing, exhibition and convention centres, hospitality. Such an initial classification, duly modified after debate and discussion, could lead to targeted policy pronouncements as well as a long-listing of projects/services/enablers under each group that could be the beneficiaries of governmental support and largesse. Ideally, this task of preparing a harmonised universal classification should be done by the finance ministry which gives tax breaks as well as administers VGF. It could equally well be done by the Planning Commission. Implement the Vision of an Independent Regulatory Authority In August 2004, soon after the UPA-I government was sworn in, the Prime Minister announced a slew of measures including “revamping the regulatory framework and a PM-chaired committee to monitor infrastructure projects”. He talked about “a regulatory framework that is transparent, independent, autonomous, world class, independent of government and provides an impartial balance between public sector and private suppliers”. The Planning Commission was then asked by the PM to prepare a paper on ‘regulatory structures’ for different sectors. Acting with alacrity, the government set up a high level committee, headed by the Prime Minister to monitor the implementation of infrastructure projects. The Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, was appointed as the Member-Secretary.
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A Public-Private Infrastructure Advisory Facility, called for an umbrella legislation that could possibly be called the ‘Infrastructure Regulatory Framework Act’. This Act can make a clear break with the past and foster a fresh approach in the areas of regulatory autonomy, empowerment and accountability. It hopes to secure transparency in regulatory functioning and jurisdictional clarity between a sector regulator and the Competition Commission of India. It also proposed setting up a National Infrastructure Appellate Tribunal for adjudication of disputes and building regulatory capacity by having a National Institute for Regulators under the auspices of the Planning Commission. Some of the salient points made in a Planning Commission consultation paper are: A survey of the provisions of the existing statutory and institutional framework suggests the absence of a common regulatory philosophy guiding the evolution of regulatory institutions in infrastructure sectors. Political constraints and ministerial preferences over time seem to have dominated the reform agenda in different infrastructure sectors. The regulator needs to be directly responsible to the legislature. Regulation should aim at removing barriers to competition and eliminating the abuse of market power. In segments of infrastructure services that are amenable to competition, regulation should be light-handed and tariff-setting could be left to competitive markets whereas segments that have elements of monopoly should be subjected to close regulation.
The Regulator needs to be directly responsible to the legislature. Regulation should aim at removing
To focus on regulatory reform and governance, a separate Department of Regulatory Affairs may be created within the ministry of personnel and administrative reforms. Selection should not only be fair, it should also appear to be fair. The chairpersons and members of regulatory commissions could be appointed by the President on the recommendation of the Prime Minister who should choose from of a panel of two or three names empanelled by a committee comprising of the Chairperson of UPSC, Cabinet Secretary and Chairperson of the respective regulatory commission. In the selection and appointments relating to appellate tribunals, the same process could be followed except in case of judicial members who should be appointed on the recommendation of the Chief Justice. Drawing from international experience from several countries, India should consider opting for multisectoral regulators for (a) communications; (b) electricity, fuels and gas; and (c) transport. This would eliminate the proliferation of regulatory commissions, help build capacity and expertise, promote consistency of approach and save on costs. In the case of states, a single regulatory commission for all infrastructure sectors may be more productive and cost-effective as compared to sectoral regulators for each sector. Separate appellate tribunals could be constituted for the three major segments, that is, energy, communication and transport. The other approach could be to constitute a single appellate tribunal for all regulatory commissions with regional benches. Clearly, it is not ideas that are lacking, but the political will to implement them. This is the time, if India is not to miss the infrastructure opportunity once again. A Fully Empowered Ministry of National Infrastructure
barriers to competition and eliminating the abuse of market power.
There are 56 identified strands of the ‘tangled web’ in setting up power sector projects. These 56-odd permissions are given by a wide spectrum of authorities, all in some measure, representing the “sovereign”. These
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authorities include all three levels of constitutional devolution — federal, state and local bodies, and are rich in their diversity as well as in their potential to stall proceedings at any stage. One has to marvel at their sheer variety: village panchayats, municipalities, ministries of coal, railways and environment, state environment committees, state pollution control boards, forest departments, Central Electricity Authority, Power Grid Corporation, Central Electricity Regulatory Commission, state electricity regulatory commissions, state transmission corporations, irrigation departments, civil aviation, Ministry of Power (in case you forgot!), port authorities, Chief Controller of Explosives, Customs Department, and in some specific cases, clearances on account of impact on wildlife, coastal zone and archaeology. In recent times, one of the principal bottlenecks has been in environment clearances. The jury is still out on whether this is because of excessive zeal on preserving the environment or the operating frameworks of the political leadership manning this ministry in recent times. Be what may, there are nine expert committees constituted at the central level dealing with environmental clearance issues for different sectors such as industry, thermal power, mining, river valley and hydro-electric, infrastructure, and construction. The ministry of coal and mines also attracts healthy scepticism in its manner of functioning. But then each sector has its own share of unique permissions required, and its own ‘tangled web’. In the ports sector, national-security clearance is required for prequalification of bidders where foreign investment is more than 15 per cent. Can India wait to gently untie the knots of this tangled web? The key to the solution lies in the ‘sovereign’ itself taking the responsibility to cut through the web of permissions. This was aptly recognised by one of the best techno-bureaucrats in recent times, R.V.Shahi. When he was Power Secretary, he crafted the ultramega power projects with the inherent philosophy that SPVs would be bid out to private sector after all key
permissions and clearances and tie-ups had been put in place by the sovereign. This operating philosophy to make infrastructure projects happen in a clear time-bound manner with the sovereign taking full responsibility for sovereign functions, notably clearances, needs to be pushed institutionally. Hence the proposition of a ministry of national infrastructure taking full responsibility for a clutch of critical mega-projects of great national impact is well worth considering. How will we cut the Gordian Knot of India’s infrastructure tangle? Here is a six-step solution. Step One: Set up a Ministry for National Infrastructure. Step Two: Pass appropriate legislation through an Act of Parliament to empower this ministry to provide all clearances in 90 days to 20 infrastructure projects considered ‘critical and of national importance’. Step Three: Make a list of 20 critical infrastructure projects of national importance. Step Four: Select a minister who is a ‘doer’ and a secretary with impeccable credentials (from the market if need be). Staff the ministry with ‘doers’. Step Five: Have the Prime Minister review progress once a week just like the FIPB used to meet every Saturday in Narasimha Rao’s time when forex reserves was the crisis facing the nation. Step Six: Announce the implementation schedules to
This operating philosophy to make infrastructure projects happen in a clear time-bound manner with the sovereign taking full responsibility for sovereign functions, notably clearances, needs to be pushed institutionally.
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the nation and provide weekly updates. A very simplistic approach? Sure. But somebody has to cut the Gordian Knot.
Japan has a single ministry of infrastructure. It is called the ministry of land, infrastructure
Incidentally, Japan has a single ministry of infrastructure. It is called the ministry of land, infrastructure and transport. France has a ministry for infrastructure (covering transport, spatial planning, tourism and the sea). Israel too has its Ministry of National Infrastructure. Many of these countries have merged various infrastructure-related ministries into one. Create Land Bank Corporations Of the three traditional factors of production — land, labour and capital — there has been no other time in India’s economic history, when ‘land’ has become such an emotive issue as well as a political hot potato. Industrial development, economic activity and job creation are indisputably sovereign functions for which the role of the private sector is crucial; and land is the first critical step. The state cannot be allowed to walk away from its sovereign responsibility of making land available, not just for itself, but for the private sector as well. Unfortunately, that is precisely what the state intends to do. Shorn of the legalese and jargon — what does this actually mean? Assume you are the promoter of a 5,000 acre chemical complex, or a 1,000 acre car factory or a 300 acre textile factory. You cannot now ask any state government for help in acquiring your land. You must acquire 100 per cent yourself. You will not even be assisted with the balance 30 per cent after you have acquired the first 70 per cent as your project is not ‘public purpose’, or ‘useful to the general public’. A parliamentary panel that submitted its recommendations on October 21, 2008 had rejected this 70-30 principle. In the changed circumstances, the private sector can : Acquire great competencies in-house for piecing together the numerous pieces of an archaic landrecords jigsaw puzzle along with the patience to
and transport. France has a ministry for infrastructure (covering transport, spatial planning, tourism and the sea). Israel too has its Ministry of National Infrastructure.
negotiate with up to 10, 000 land-owners of handkerchief-sized plots; take care of local goons; ameliorate local political bosses, handle vast amount of ‘cashtransactions’ and then wade through the legalese for assembly of all these land pieces into one industrial plot; or Throw up a new entrepreneurial class of land-grab entrepreneurs who, on the strength of their having the above-mentioned skills, will quietly and skillfully acquire and consolidate large tracts of land, ensure their ultimate conversion for industrial purposes and sell them to prospective industrial buyers for a hefty profit. No prizes here for guessing their linkages with local mafia and petty politicos. When acquired land is resold, the original acquirer is to distribute 80 per cent of the capital gains to the original owners or their heirs. This implies that every acquirer must track the original owners and their heirs in perpetuity. Also, the resale price of land may be difficult to compute when it is part of a larger deal in which a company is taken over. This Land Acquisition (Amendment) Bill, 2007 comes hand-in hand with a ‘sister’ bill called The Rehabilitation and Resettlement Bill, 2007. This is also up for enactment in the forthcoming session of Parliament. The new legislation provides for benefits and compensation to people displaced by land acquisition purchases or any other involuntary displacement. The bill creates project-specific, state and national authorities to formulate, implement, and monitor the
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Land Bank Corporations could themselves play the role of overseeing Resettlement and Rehabilitation obligations as envisioned in the proposed enactment. In the Indian context, a new generation of central and state-level Land Bank Corporations should be created.
rehabilitation and resettlement process. This bill establishes the post of Ombudsman to address any grievances from the rehabilitation and resettlement process. Civil courts are barred from entertaining any suits related to this matter. Are there any alternative ways of handling this? Yes, it appears that a key intervention would be to wake-up and reshape the moribund ‘State Industrial Development Corporations’. The SIDCs were created at a time and place in history to nurture ground-level entrepreneurship, provide access to capital, develop industrial plots and serve as refinancing receptacles for national level Development Finance Institutions like IDBI, IFCI and ICICI in the old days. These SIDCs have ceased to be relevant in the present context. They or their equivalents should be reshaped to become energetic, visionary State Land Bank Corporations (SLBCs). These SLBCs should use modern satellite imagery for identifying waste or fallow land. They should be empowered under the clause of ‘public purpose’ to acquire large tracts of unused,unusable or waste land to carve-out large-sized Domestic Economic Zones (DEZs) where plots could be made available to future generation of entrepreneurs and investors. And their land acquisition methods should be above-board, humane and genuinely in public interest. They should be sufficiently capitalised by state governments to achieve their objectives, and have the power to lever-
age more finance on the strength of their land-bank inventories. Importantly, these Land Bank Corporations could themselves play the role of overseeing Resettlement and Rehabilitation obligations as envisioned in the proposed enactment. And this is possible. In January 2004, the State of Michigan enacted the Land Bank Fast Track Act to create a Land Bank Fast Track Authority to acquire, assemble, and dispose land for “valid public purpose”, and to assist governmental entities in the assembly and clearance of title to property. The Land Bank of the Philippines in its vision statement states that ‘it shall be the dominant financial institution in countryside development committed to improving the lives of all its stakeholders and working with them to lead the country to economic prosperity’. In the Indian context, a new generation of central and state-level Land Bank Corporations should be created. Existing central institutions like the National Housing Bank or Hudco or Nabard could possibly be reshaped to fulfill this mandate to provide vision and refinance to SLDCs much like the model of IDBI and the state IDCs. It is an idea whose time has come. A New Approach to Urban Development On the one hand, we have an India “shining” in its cities with sparkling malls, multiplexes, condominiums and classy airports. On the other hand, we have a sordid urban India with crumbling infrastructure, unplanned growth, mushrooming slums and utter lack of civic governance and accountability. It is in this schizophrenic context that a report by the McKinsey Global Institute titled “India’s urban awakening: Building inclusive cities, sustaining economic growth” was not just timely, but a loud and clear wake-up call for India to manage its cities better. It is not that enlightened citizens and the government have been totally oblivious of the enormity of the urban problem. A group in Bangalore, comprising eminent corporate citizens and conscientious NGOs, had set up the Bangalore Agenda Task Force (BATF) over a decade ago to rejuvenate the city and provide a clear 60
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model of how citizenry could work alongside the government. Enthusiasts like Swati and Ramesh Ramanathan and V.Ravichandar continue to soldier on for the cause from their Bangalore base.
From time to time, a few bright and committed bureaucrats in urban administration positions provide energetic sparks of reform across a
From time to time, a few bright and committed bureaucrats in urban administration positions provide energetic sparks of reform across a scattering of cities like Thane, Patna, Nagpur, Surat, Indore and so on. They, however, end up getting transferred, and more often than not, the spark dies with their departure. After decades of somnolent existence allotting bungalows to politicians and bureaucrats, the union urban development ministry found an answer to its existential dilemma by getting to implement the widely publicised Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The McKinsey report grimly observed: “This is a stark warning for India. If India continues with its current unplanned urbanisation path, it will result in a sharp deterioration in the quality of life in its cities, putting even today’s rates of economic growth at risk.” The report predicts dire consequences if planned urbanisation is allowed to drift. It notes: “Even at today’s urban scale, India is struggling. The infrastructure of its cities is looking decidedly tattered and access to basic services in urban areas continues to be poor. Superimpose a surge in demand for services from an expanding urban population and rising incomes, and India’s aspiration for social cohesion and sustainable economic growth could reach a breaking point. The risk is that the quality of life in urban India will deteriorate, gridlock will hopelessly compromise productivity, and investors will decide that India’s cities are too chaotic for their businesses to thrive.” Here are a few ideas to revive India's urban areas: Implementing fully the 74th Amendment: What would it take to politically push this through with the states, much like goods and services tax (GST) or the National Rural Employment Guarantee Act (NREGA)? How could the provisions of the 74th amendment be
scattering of cities like Thane, Patna, Nagpur, Surat, Indore and so on. They, however, end up getting transferred, and more often than not, the spark dies with their departure.
made to fire the imagination of the civic electorate, much like the Right to Information Act did? Urban transportation: What are the spectrum of choices and their linkages with urban planning? Creation of new cities: What is the decision matrix in the allocation of outlays for new cities much like decisions relating to Chandigarh and Gandhinagar in yesteryears; or even like Naya Raipur capital city or the Delhi-Mumbai industrial corridor towns under planning. Rural rejuvenation as a solution to urban migration: Under Dr.A.P.J.Abdul Kalam’s presidency, there was much talk about Provision of Urban Amenities to Rural Areas (PURA) as a means of relieving the pressure on urban migration. Where does this model fit, if at all, in discussions on urbanisation? In 1927, US historian Katherine Mayo wrote a book titled Mother India, which was a polemical attack against Indian self-rule. Mahatma Gandhi had dismissed it then as a “gutter-inspector’s report”. Critics of the movie Slumdog Millionaire also chastised it as a gutter-inspector’s production. Bharat Mata, in the early 21st century, may earn the same sobriquet if we do not give our urban infrastructure the urgent attention it deserves. Annuity as a way out Urban infrastructure or non rural infrastructure which includes roads, SEZ’s, power, highways, metro rail is in private interest and follows the PPP model. Within this 61
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option given the insufficient market or politically immaturity in rural parts. Under Annuity, the private sector is invited through bids to build one stretch for a network of roads. The private sector brings it own money, technology, man, machine and build to a specific standard and maintain it for 30 years.
model there are two formats: BOO (Build, Own, Operate) and Annuity. Under BOO model the private entity builds the road and collects toll from the user to recover the cost. It has to take the market risk. But for rural infrastructure which includes rural roads, rural electricity, water supply, drinking water, sanitation, irrigation, cold chains and mandis, collecting toll is not a feasible
Under Annuity, the private sector is invited through bids to build one stretch for a network of roads. The private sector brings it own money, technology, man, machine and build to a specific standard and maintain it for 30 years. It does not collect toll but collects a rent cheque from the government every 6 months. Here the private contractor builds the road on public land, for a year and then maintains it for 30 years but the asset belongs to the government. If the road has been maintained according to the standards laid out he gets paid. The annuity model is well accepted in building national highways and can be easily adopted for rural infrastructure too. People have lost faith in the public procurement and implementation agencies because of corruption , leakages etc., and private sector has grown in stature in terms of being able to handle projects.
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Operational Challenges of Environment Accounting and Reporting By P.Malarvizhi, Professor of Accounting and Finance, IILM
Executive Overview Accounting and Reporting for the environment has become increasingly relevant to companies in this millennium. Corporate visionaries adopt environmentally friendly strategies as a competitive tool, to improve the bottom line. Environmental accounting integrates environmental costs and benefits into day-to-day decision-making. Environmental reporting communicates to different stakeholder groups, as to how, scarce resources are utilised. In India, environmental reporting is relatively a new phenomenon. Current reporting in India is largely incomparable due to lack of standardised reporting guidelines. Hence, this research on environmental accounting and reporting practices of companies operating in India.
“Bearer of all things… Hoard of treasures rare… Sustaining Mother Earth… What of thee I dig out… Let that quickly grow over… Let me not hurt thy vitals, or thy heart…” Atharva Veda (1200 B.C.)
A
ccounting and Reporting for the environment has become increasingly relevant to companies in this millennium. Corporate visionaries adopt environmentally friendly strategies as a competitive tool, to improve the bottom line. Environmental accounting integrates environmental costs and benefits into day-to-day decision-making: Environmental reporting communicates to different stakeholder groups, as to how, scarce resources are utilised. In India, environmental reporting is relatively a new phenomenon. Current reporting in India is largely incomparable due to lack of standardised reporting guidelines. Environmental pollution in India continues to grow despite all efforts of government agencies.
Indian industries are currently required to submit exhaustive regular reports to the State Pollution Control Boards. Yet financial information on environmental performance of Indian industries is not available in the public domain. Hence it is necessary and useful to carry out a research on environmental accounting and reporting practices of companies operating in India. Introduction Over the last two decades, environmental protection has become an important goal for many individuals and groups in the society. Environmental management is accorded high priority in today’s business as it is no more an option but a necessity for survival. Corporate visionaries of this new era focus on adopting an environmental-friendly strategy, as a powerful competitive tool, to improve their companies’ bottom line. With the growing stakeholder awareness towards sustainable development, corporates are no longer perceived as just profit-maximising entities. In the past, accounting theories placed huge emphasis on financial performance of a company. Today the role of accounting and reporting, as driven by the stakeholder expec63
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Globally, stakeholders call for additional disclosures on corporate environmental accounting practices. However, such an international call for additional disclosures are likely to succeed only if the information demanded is feasible and companies are prepared to account and report such financial information.
tation, is to include social, environmental and financial health of an organisation. Therefore, Accounting and Reporting for the environment has become increasingly relevant to companies in this millennium. Further, since environment has bottom line implications, virtually all corporate activities are spearheaded more towards minimising waste and maximising resource efficiency. Emergence of Environmental Accounting and Reporting Environmental accounting is a system in which economic measurements take into account the effects of production and consumption on the environment. In simple terms, it is a system which integrates environmental costs and benefits into day-to-day decision making (EPA, 1995)1 . There is headway in environmental accounting in many countries, where bureaucrats, statisticians, environmentalists and research institutes are working on developing a unified system of environmental accounting. Diverse national and international bodies are issuing guidance documents on environmental accounting and reporting. Norway is the first country to evolve environmental accounting standards as early as 1970. Among the developing countries, Philippines began working on environmental accounting in 1990 and Namibia in 1994 (Hecht Joy.E, 1999)2 . Subsequently notable contributions have emerged from other parts of the world viz., UK, USA, Australia, Germany, Japan and Asia. Company size and its environmental sensitivity were found to be significant determinants of environmental reporting in China (Xianbing Liu and V.Anbumozhi (2009)3 . The
role of stakeholders in influencing the environmental report publication of Chinese companies were found to be weak. In developed countries, increased environmental awareness has put pressure on listed companies to measure environmental costs and benefits for disclosure to different stakeholder groups. Globally, stakeholders call for additional disclosures on corporate environmental accounting practices. However, such an international call for additional disclosures are likely to succeed only if the information demanded is feasible and companies are prepared to account and report such financial information. Currently, there is no standard way of presenting environmental information or any analytical standards for their interpretation. A CIMA-sponsored research reveals that annual reports are the most favoured channel of disclosure, because these are qualified, verifiable disclosures with utmost credibility. (Toms.S.(2001)4. Research carried out by Patten (2002)5 points out, that the determinants of corporate environmental reporting suffers from limitations due to problems in research design and insufficient sampling. In India too, there exists a gap in the availability of literature on corporate environmental accounting and reporting. Globally, environmental agencies of respective nations are issuing guidelines for environmental accounting with respect to direct and indirect spending sectors. For example, there are general government proclamations for corporate disclosure of environmental performance in the Netherlands, Denmark and Thailand. Companies actively create business models as part of their growth strategies through varied environmental protection programmes. However, such reporting is not yielding full benefits in these countries as there are critical implementation issues. India’s rapid environmental degradation and pollution problems also have global implications. Indian industrial units are currently required to submit exhaustive regular reports to the State Pollution Control Boards. Yet financial information on environmental performance of Indian industries with respect to environmental risk assessment, transparency in environmental performance through sustainability
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reporting and independent verification of the same and environmental auditing is not often available in the public domain. Green rating of Indian companies provides environmental profile of companies to stakeholders. These ratings enable regulatory agencies to take note of companies’ environmental performance and its possible impact on the society. Therefore, there is an urgent need to introduce guidelines and tools for quantified corporate environmental accounting and reporting in India. If big companies can take the lead in green accounting by issuing quantified environmental accounting reports in India, then automatically other medium and small-scale companies will follow them in the battle for cleaner environment. Environmental Reporting in India Environmental pollution in India continues to grow despite all efforts of government agencies. This is clearly evident from the rise in Public Interest Litigation on polluting industries. There is currently no system to assess industry performance on environmental management and to empower the civil society with relevant environmental information. In India, environmental reporting is relatively a new phenomenon and not many researches are available on this. Consequently, there exists a gap in the availability of literature on corporate environmental accounting and reporting. The first ever serious nation-wide survey in the year 2000 was carried out in India by Business Today (a business magazine) and The Energy Research Institute (TERI) to discover India’s most eco-friendly companies through a sample of 47 companies (TERI, 2001)6 The results showed that 75 per cent of companies surveyed had environment policy in place; 60 per cent of companies had departments dealing with enviroment; 70 per cent had environmental audit system in place; and out of this, more than 50 per cent of them were carrying out annual mandatory audit. This survey indicated the nascent emerging trends in India’s corporate environmental strategy. Sahay
Indian corporates. He points out in his study that current reporting in India is largely incomparable due to lack of standardised reporting guidelines. This lack of environmental reporting regulation in India continues till date which is evident from more voluntary disclosures. Environmentally conscious investors exert powerful pressure on companies to disclose on corporate environmental performance. A more recent study concludes that Indian companies disclose more environmental information on their official website than in annual reports (Chatterjee B, et al (2008)8 . The Global Reporting Initiative (GRI) hopes to elevate corporate sustainable development reporting to the same level of general acceptance and practice now found in financial reporting. Global Reporting Initiative GRI is the result of an international effort convened in 1997 by the Boston-based non-profit Coalition of Environmentally Responsible Economies. GRI provides a comprehensive set of guidelines recommended for socially-responsible disclosure and a common framework for voluntary reporting of economic, environmental and social impacts. The GRI programme encourages companies to adopt and publicise environmentally sound practices through the use of standardised environmental financial reports (GRI, 2000)9. A survey was commissioned by the International Finance Corporation (IFC) to understand the scale of sustainable investing in four major emerging markets, namely, China, India, South Korea, and Brazil. IFC (a member of the World Bank group) finds
Green rating of Indian companies provides the environmental profile of companies to stakeholders. These ratings enable regulatory agencies to take note of companies’ environmental performance and its possible impact on society.
7
(2004) felt the need for recognising and rewarding good environmental performance and reporting of
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India, to have the lowest standards of environmental and social governance (ESG) implementation, among the countries surveyed in the report (IFC, 2009)10 . This is in spite of Bombay Stock Exchange having a sustainability index called “S&P ESG India Index”, which was initiated and sponsored by the IFC, comprising 50 Indian companies that meet the ESG criteria. However, while many studies have examined environmental disclosures, a number of research questions still remain.
Due to limited research conducted in this field of environmental accounting in India, it is imperative and of significant importance to research on the environmental accounting and disclosure practices followed by Indian and selected foreign companies.
Research Methodology This is a desktop research and exploratory in nature and the survey is based on synthesis of published materials and secondary resources. The researcher used a suitable combination of content and discourse analysis, while examining the environmental disclosures in official documents and websites. Appropriate references were made to the Indian Accounting Standards as issued by the Institute of Chartered Accountants of India and the Companies Act with respect to environmental accounting-cum-reporting regulations and guidelines. This research set out to examine the general trends in corporate environmental accounting and reporting practices. The Sample Population for this research consists of companies listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The sample comprises of 30 companies (Annexure–A) carefully chosen from manufacturing sector, based and operating in India or outside, using convenient sampling techniques. These companies were chosen on the basis, that they probably have greater environmental problems to face and hence are likely to make greater environmental disclosures. Due to limited research conducted in this field of environmental accounting in India, it is imperative and of significant importance to research on the environmental accounting and disclosure practices followed by Indian and selected foreign companies. For the purpose of this research, Indian companies are those
that are incorporated under the Indian Companies Act, 1956 and foreign companies are those that are not registered under the Indian Companies Act 1956, but registered under the (Companies Act) laws of respective countries. This research does not deal with the detailed content of the environmental reports. To evaluate the relevance, completeness and reliability of the information included would require an in-depth knowledge of the operations and environmental context of each company and the challenges it faces. The researcher is concerned rather to establish the approach and the scope of environmental accounting and reporting, as it exists today. Data collection method Data for this study was collected through multiple secondary sources. Initially, environmental disclosure information was collected directly from companies’ official website. Second, wherever required, a crossreference was made to the database of Centre for Monitoring Indian Economy (CMIE, 2011)11 . Finally, related articles published in journals and newspapers were also used in analysis. Most recently available Annual/Financial and Environmental Reports were also used to gather data on publication or non-publication of environmental information for the financial year ending 2010-11. The researcher examined annual reports between the 1st of April 2010 to 31st March 2011 along with the disclosure in their official website accessed during May–June,
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Measurement of Environmental Performance Reporting The most relevant information in an environmental report, as identified by the World Business Council for Sustainable Development (WBCSD) and Global Reporting Initiative (GRI) are environmental policy, environmental impacts, environmental management systems, environmental targets, ecological products, and reference and/or cross-reference to the environmental report. These were identified as the key environmental performance indicators for this research. Based on this, a disclosure index with eleven attributes was constructed to develop an appropriate scoring scheme. Numerous approaches were followed by past researchers like CPAA, (2007)12 ; Hossain et al., (2006)13 ; Belal, (2000)14 on construction of disclosure index and Figure 6.1: Composition of Cluster by Countries' Aggregate
Foreign companies 47%
Indian companies 53%
this survey used un-weighted index to disseminate environmental information. The measurement of environmental disclosure follows a score of 1, if disclosed and 0 for no disclosure. Disclosure index for this study is carried out through content-analysis technique that captures the substance of environmental information disclosed rather than counting the
Figure 6.2: Detailed Composition of Cluster by Countries' Aggregate
16
nd s
1
N et he rla
an y
2
m
rla nd
2
Sw itz e
Ja
pa n
2
G er
3
U K
SA
4
U
18 16 14 12 10 8 6 4 2 0
In di a
Number of Responses
2011. Every report was scrutinised individually from cover to cover for environmental information. Initially, a random selection of ten companies was done to identify the common sections and sub-sections within the annual/financial reports and environmental topics that are discussed under them. These sections and subsections were entered into the database of environmental disclosure parameters to be used as criteria for systematic analysis of financial and sustainability reports.
occurrence of environmental related words. Previous studies on environmental disclosure through content analysis (Ahmed and Sulaiman, (2004)15 ; Cunningham and Gadenne, (2003)16; Toms, (2002)17 shows the determinants of corporate environmental reporting. Data Analysis And Key Research Findings The impact of business on the environment is likely to become increasingly important for managers over the coming decades. Accounting theories in the past identified the role of financial stakeholders and the need for financial performance was emphasised more with less disclosure of social issues and environment. Financial managers, in particular, need to be aware of how environmental matters affect the fundamentals of financial accounting and reporting, including the nature of value itself. Best companies should exceed their existing legal obligations and anticipate future legislation by spending more on environmental issues. Firms should start to appraise such expenditure in the same way as other capital investment. Huge amount of environmental information does not necessarily indicate genuine environmental commitment. This is why quantified monetary disclosures send quality information signals to the market. Following are the key research findings and inferences made by the researcher based on the data analysis. Corporate Environmental Accounting It is interesting to note as a first element of investigation, that generic information relating to environmental issues was found in almost the entirety of the
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Figure 6.3: Presence of Formal Corporate Policy 120%
100%
100%
83%
80%
67%
63%
60%
100 per cent of the companies. It can be seen from Figure 6.3 that social responsibility (100 per cent) is top on the corporate agenda, followed by environmental responsibility (83 per cent), sustainability (67 per cent)
40% 20%
Figure 6.5: Presence of Environmental Accounting
Ethics
Sustainability
Environmental Responsibility
Social Responsibility
0%
No 30%
Yes 70%
sample. Figures 6.1 and 6.2 show the distribution of sample between Indian and foreign companies The break-up of foreign companies (14) clustered in the sample along with Indian companies (16) is schematically represented in Figure 6.2 for better understandFigure 6.4: Presence of Formal Corporate Policy Indian vs Foreign Countries Aggregates 120%
100%
100% 80%
100% 100% 86%
69%
60%
69% 50%
57%
40% 20%
Indian
Ethics
Social responsibility
Sustainability
Environmental Respobsibility
0%
Foreign
ing. The foreign companies group comprise those from USA, UK, Japan, Switzerland, Germany and Netherlands.
and ethics (63 per cent). Companies around the world have begun to shift gears and recognise the deepseated reality that environmental concerns have become a significant force in their business environments. In fact, companies now feel the pressure and necessity to include more such qualitative disclosures. These policy statements help them to show how environmental problems can have consequences on company management and the impact of their activities and products on the environment. The results of this survey reflect a major shift in corporate management attitude inclined more towards environmental stewardship. Environmental stewardship and affirmative environmental-friendly green efforts of companies are believed to reduce risk than by increasing returns for stakeholders..
Corporate environmental policies are generally wellembedded in strategic processes, due to stakeholder pressure, to distribute the socio-economic benefits it derive from the society (Shocker and Sethi, 1974)18. It is encouraging to observe that all companies in the sample are definitely committed to the environment. There exists a formal corporate policy addressing the company's commitment towards environmental responsibility, sustainability, social responsibility and ethics. In fact, environmental problems are relevant to
Figure 6.6: Presence of Environmental Accounting Indian vs Foreign Countries Aggregates
120% 100% 100% 80% 60%
56% 44%
40% 20% 0% Indian
Foreign Yes
No
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Figure 6.8: Purpose of Environmental Accounting Indian vs Foreign Countries Aggregates 120%
100%
100%
100%
100% 80% 60%
44%
44%
44%
40% 20%
Figure 6.7: Purpose of Environmental Accounting
Indian
Voluntary
Internal Management
Mandatory
0%
External Reporting
A more detailed analysis of Indian vs. Foreign companies reveals sharp differences among country-wise aggregates. There exists a very high rate of formal corporate environmental commitment among foreign companies as seen in Figure 6.4. Environmental Responsibility (100 per cent) and Social Responsibility (100 per cent) are addressed virtually by all companies in the sample, followed by Sustainability (83 per cent) and Ethics (57 per cent).
Foreign
80% 70%
70%
70% 60% 47%
50% 40% 30%
23%
20% 10%
Voluntary
Mandatory
Internal Management
External Reporting
0%
The fact that all Indian companies in the sample, Figure 6.4, formally emphasise on Social Responsibility (100 per cent), Environmental Responsibility (69 per cent), Ethics (69 per cent) and Sustainability (50 per cent), is a positive step towards being an environmentallysensitive and responsible corporate citizens. It can be noted from Figure 6.5 that environmental accounting is followed by 70 per cent of the companies and the rest 30 per cent of companies in the sample do not have a system of environmental accounting. But what is important to note is that the entire 30 per cent comprise of only Indian companies which do not follow environmental accounting system. These companies complain that environmentalists are vastly overstating the problems or that technical solutions are not yet available. As a result, it is not surprising that only few Indian firms invest time and money to analyzes their total operations from an environmental viewpoint.
companies. 44 per cent of the Indian companies follow environmental accounting and the rest 56 per cent do not have environmental accounting system. 100 per cent of the foreign companies follow environmental accounting. The fact that 100 per cent of foreign companies in the sample do have a system of environmental accounting is surely due to more stringent legislations they are subject to globally. But it is encouraging to note that even though Indian companies are subject to less severe environmental regulations as compared to foreign companies, the percentage of Indian companies practising environmental accounting, is still quite high. Consequently there is awareness towards environmental accounting at least in the sectors taken for analysis. The purpose of environmental accounting practiced by companies deals with four major parameters, viz., external reporting, internal management, mandatory
Figure 6.9: Relative importance of environmental accounting
30%
70%
Both External Reporting & Internal Management Important
No Importance
Figure 6.6 shows a comparative analysis of environmental accounting as practiced by Indian and Foreign 69
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mandatory requirements for foreign companies (100 per cent) as well as external reporting (100 per cent). As a result, environmental accounting is a necessity for internal management (100 per cent).
requirements and voluntary accounting and reporting, as shown in Figure 6.7. Environmental accounting helps to understand all the costs of a company's environmental impacts and the specific life-cycle costs of its products, rather than only direct manufacturing costs. The purpose of environmental accounting is for external reporting (70 per cent) and internal management (70 per cent). Both these are of equal importance for 70 per cent of companies in the sample. Due to mandatory requirements, 47 per cent of the companies follow environmental accounting and 23 per cent of companies do it voluntarily.
It is interesting to note in Figure 6.9 that there exists an equal weight of importance of environmental accounting between external reporting and internal management by 70 per cent of companies in the sample. The rest 30 per cent do not follow environmental accounting at all. These 70 per cent of companies in the sample are moving ahead of its industry and consumers through its ecologically-oriented strategies, while taking pride in being a good environmental steward. Figure 6.10 shows the type of environmental accounting for internal management as followed by companies in the sample. For internal management, 47 per cent of companies follow the same environmental accounting
Figure 6.8 depicts a more detailed analysis of the purpose behind environmental accounting by Indian vs. Foreign companies. It can be observed that for Indian companies the purpose of accounting is purely voluntary (44 per cent) and the companies are doing it both for external reporting (44 per cent) and internal management (44 per cent). There are more stringent as used for external reporting. 23 per cent of companies follow Global Reporting Initiative (GRI) guidelines, for internal management. It must be kept in mind that 30 per cent of companies in the sample do not follow environmental accounting at all. It is interesting to observe that all foreign companies in the sample use the same set of environmental accounting both for internal management and external disclosure. Indian companies follow GRI guidelines both for internal management and for voluntary environmental accounting disclosure.
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Figure 6.11 schematically depicts the benefits resulted from the introduction of environmental accounting system in the sample. For 70 per cent of companies environmental accounting served as a most efficient tool for internal management and in improving the corporate image. For 63 per cent of companies, there was increased awareness of environmental matters within the organisation. Environmental accounting
Figure 6.13: Corporate Environmental Reporting
Foreign Companies 47%
Indian Companies 53%
helped 57 per cent of companies in understanding and determination of environmental cost incurred. The response of 43 per cent of companies proves that the status of the environmental department has been on the rise within the company due to introduction of environmental accounting. About 40 per cent of companies could get some advance for budgeting as a result of the introduction of environmental accounting. Overall, the benefits of the introduction of environmental accounting is tangible for both Indian and Foreign companies. It must further be noted that these
Figure 6.14: Purpose of Environmental Reporting
Both Mandatory and Voluntary Reporting 47%
Voluntary Reporting 53%
benefits are for those companies that come out with mandatory/voluntary reporting of their environmental performance. From Figure 6.12 it can be observed that companies expect multiple future benefits from environmental accounting. 70 per cent of companies in the sample expect improvement in environmental decisionmaking, discovery of valuables from waste, reduction of environmental burden and development of environmentally friendly products from corporate environmental accounting practice. 57 per cent of companies expect reduction of environmental cost and 17 per cent of companies expect reduction of material cost as future benefits from environmental accounting. With the passage of time simple pollution control is no longer enough. Environmental issues have shifted and the critical new orientations for companies are environmental stewardship and sustainable economic development. This is proved by the results of this research which shows how modern corporations of this new era thrive to be an environmental performance leader. Corporate Environmental Reporting Factors influencing corporate environmental disclosure and environmental performance have always been a subject matter of research (Al-Tuwaijri et al (2004); Patten (2002); Hughes et al (2001). Increased environmental awareness along with the growing needs of stakeholders forced companies to identify, measure, report and manage its environmental impacts (Epstein M.J, 1996). Figure 6.13 gives the breakup of Indian (53 per cent) and Foreign companies (47 per cent) that report on their environmental performance. It is encouraging to note that 100 per cent of both Indian and Foreign companies in the sample do report on the environment. Maintaining environmental balance with economic growth is a subject of state policy in India. Globally, companies believe that reporting on environmental performance would strengthen accountability and increase its environmental transparency. It can be seen from Figure 6.14 that 53 per cent of companies report voluntarily and the rest 47 per cent of 71
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Figure 6.15: Vehicles used for Environmental Reporting 60%
53%
50% 40% 30% 30% 17%
20% 10% 0%
Annual Report
Environmental Report as part of Annual Report
Stand-alone Environmental Report
companies are to issue mandatory reporting and voluntarily go beyond the mandatory guidelines. Voluntary reporting of environmental performance assists in improving the company's relationship with the society in general and the environmental pressure groups in particular. Certain progressive segments of the industry have already adopted state-of-art technologies for pollution reduction, but have never made their performance standards public. Figure 6.15 illustrate the platforms used by companies for environmental reporting. Past studies on this call for clear, identifiable and significant environmental information disclosure within the annual or standalone report (Borghini S. & Salomone R, 1998). This research identified three major vehicles, viz., Annual reports (17 per cent), Environmental Report as part of Annual Report (30 per cent) and Stand-alone Report (53 per cent) used by companies for environmental reporting. Globally, companies adopt different approaches towards environmental disclosure, as environmental reporting is not regulated in many countries. This has exerted substantial pressure on the judiciaries of various nations to intervene and direct polluting
industries towards remedial actions or shutting down. In India environmental reporting is relatively a new phenomenon and not many researches are available on this. As there is currently no method for establishing relative industrial performance, industry leaders in India, are not receiving any recognition for their efforts. The researcher could observe that the quantity of environmental information has seamlessly increased with quality of information being little and concise. In Figure 6.17: External Verification of Environmental Report
No 23% Yes 77%
most of the developing countries there is no specific environmental accounting or reporting rules. Such lack of regulation affects the quality and objectivity of information disclosed (Azzone et al, 1996; Maltby 1997). Environmental disclosure practices normally fall into two categories:
Figure 6.18: Do you follow GRI guidelines?
No 70%
Yes 30%
Figure 6.16: Publication of First Environmental Report 60%
53%
50% 37%
40% 30% 20%
2. Quantitative environmental reporting as developed by Australian, German and Swiss companies
10% 10% 0% 1991-1995
1. Descriptive and performance reporting as commonly practiced by UK companies
1996-2000 Year
2001-2005
It is encouraging to note that virtually all companies in the sample come out with either of the above-discussed 72
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forms of reporting annually.
internet.
The year 1989 marked the beginning of the publication of the first environmental report, by a Norwegian company, Norsk Hydro. After that, there was a steady increase in the number of companies reporting on the environment (Tilt C.A, 1994). Yet, this has not proportionately increased the quality of information published (Salomone. R ,2001). Figure 6.16 demonstrates the year of publication of the first environmental report by companies. 10 per cent of companies published their first environmental report during the period 19911995. A major chunk of 53 per cent of companies released its first environmental report during the period 1996-2000. The rest 37 per cent of companies in the sample issued their first environmental report recently in the period 2001-2005. Companies are using
Figure 6.17 indicate that 77 per cent of companies in the sample get their environmental report externally verified and the remaining 23 per cent of companies does self-environmental auditing. Regular auditing encourages continual improvement and helps companies in identifying the potential hazard and risk areas. Stakeholders expect an alternative form of governance based on public participation, transparency and market-oriented policies
Figure 6.19: Non-financial Environmental Reporting
Environmental targets
23%
Figures 6.18 reveal that 30 per cent of companies in the sample follow GRI guidelines and the rest of 70 per cent companies follow country-specific mandatory regulations. Few companies are finding the actual paperwork problematic, particularly where it does not coincide with existing reporting guidelines. It can be inferred from the results that GRI is yet to come out with internationally unified and standardised reporting guidelines.
23% Staff Training
27% 40%
Environmental Certification
53% 70%
Environmental Management Systems
70% 83%
Environmental Messages
100% 0%
50%
100%
150%
the environmental report as an effective tool of communication. Environmental reporting is actually a part of the overall strategic environmental management of a company. Efforts are underway to standardise the environmental report at the international level. On the other hand, industry segments, which are lagging in environmental performance, do not feel any public pressure to improve, in developing countries. Despite various constraints, all the companies in the sample are able to produce environmental report successfully. The environmental report of all of these companies is a publicly available document. All companies in the sample publish hardcopy as well as soft copy through
Figure 6.19 shows the percentage of non-financial environmental information that is included in the environmental report. Non-financial information is almost qualitative information, which as a matter of fact, it should be given to inform stakeholders of the existence of environmental policies, environmental management systems, environmental targets, environmental friendly products and processes and other environmental related information that may be useful to the reader. This category of disclosure is utilised primarily for publicity reasons and to increase the awareness that environment is one of the company's key risk areas. The extent and the variety of such disclosures vary considerably from one company to the other. The following analysis, according to each single category of information surveyed, helps to evaluate the possible range of variation, even on the basis of the information among the sample. It can be seen that environmental policy (83 per cent), environmental management systems (70 per cent), environmental messages (100 per cent) and environmental monitoring
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! Green Products
Figure 6.20: Qualitative Environmental Reporting
Tangible & Intangible Assets
Environmental Provisions
Environmental Insurance
Environmental Costs
27%
30%
33%
50%
Environmental Investments
63%
Environmental Liabilities
77%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
(70 per cent), are the most common environmental disclosure. Environmental Management System (EMS) A description of the environmental management system in the environmental report contributes in giving stakeholders a greater sense of security that the company really does take care of environmental problems in the best possible way. 70 per cent of the surveyed companies make this type of disclosure. This is certainly an encouraging rate of disclosure, given the importance of this kind of information for stakeholders. Specifics that accompany the information regarding the existence of an environmental management system are those relative to the presence of information on the auditing process (23 per cent), on the activity pertaining to personnel training (27 per cent), on environmental targets (23 per cent), on the specifics of possible certification (ISO 9000, ISO 14000 and/or EMAS) of one or more company's productive sites (53 per cent). Environmental Messages Environmental messages underline the company's commitment in environmental protection activities, though not necessarily connected to their productive activity. It is a real advertising vehicle, which allows the company to quickly give the reader a positive image of its environmental and social commitment. 100 per cent of companies in the sample make such disclosure. All companies certainly show the highest preference for this type of “ecological advertising�.
Disclosures related to environmental products (or processes) are of great interest for stakeholders. 40 per cent of the companies surveyed supply information on the production of possible eco-compatible or low environmental impact products. It is very rare to find companies reporting about the improvements in their environmental performance due to the use of green products.
! Environmental Targets The disclosure of environmental targets is justified by the implementation of a formal HSE management system since target identification is one of its most important requirements. HSE is in a preliminary stage for Indian companies, if disclosure is taken as an indicator. Only 38 per cent of Indian companies from the sample make a formal disclosure, which is a meagre 11 per cent of the total sample size. HSE audits are still relatively uncommon in India. Qualitative information by itself is not sufficient for stakeholders though it gives an ample description of the company's commitment to its environmental issues. Qualitative disclosure must be accompanied by precise and clear financial information that is useful to reconstruct the economic consequences deriving from environmental problems. Proactive companies abandon the idea that the disclosure of environmental financial performances could damage the company and agreed that it would pay off in the long term, by improving the management system. To give significant and comparable financial data across companies, environmental disclosure should be quantified and accompanied by additional information that qualify the financial data presented. Financial disclosure in quantitative terms, especially if located in the financial report, provide an added value to the stakeholder because it increases their awareness of the company's environmental financial performance. Environmental information can be found within other company's publications (Environmental Report, Social Report, website, press releases, etc.), but for the financial reader only the Annual Report allows for more reliable and 74
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the results in terms of emissions reduction and/or energy consumption. Environmental provisions and environmental
Environmental Liabilities
contingent liabilities are generally aggregated with other provisions, so that it is very difficult to have a separate disclosure of these items, but companies now realise the strong necessity of such disclosure.
valuable environmental financial information. The difficult aspect is that information presented in the Annual Report has to be based on acceptable and justifiable accounting criteria and there are few standards relating to environmental data, in particular for environmental expenditure disclosures. The most frequent disclosure of financial information is in relation to environmental liabilities, in fact majority of the disclosures relate to quantified environmental provisions (these reflect the fact that almost all national and international accounting standards require the disclosure of environmental liabilities). However environmental expenditures (current and capital) are another topic considered relevant in the environmental financial disclosure. Figure 6.20 briefly summarises each single financial environmental heading.
From Figure 6.20, it is clear that 77 per cent of the companies in the sample report on environmental liabilities. Financial disclosure of environmental liabilities, particularly environmental reserve is considered very useful for evaluating the financial impact of environmental risks. It is necessary for a company to set up environmental reserves when there is a legal obligation. Such obligation could be as a result of past or present activities, which can be estimated and, if it is necessary, economic resources might be used to honour such obligations (costs of environmental remediation, costs of compensation for damages, etc). In fact, often, companies use standard phrases to recognizes the possibility of coming up against environmental liabilities deriving from uncertain and unpredictable future events. Yet, companies make clear that even such risks and commitments will not have a material impact on the economic and financial position or results of the company's operations in future periods. In some cases, it is possible to find a description of each legal proceeding and of the possible financial exposure if the proceedings are lost.
Environmental Contingencies !
Environmental provisions and environmental contin! Environmental Investments gent liabilities are generally aggregated with other provisions, so that it is very difficult to have a separate Not all the companies that include information on their disclosure of these items, but companies now realise environmental expenses use quantitative data. Many the strong necessity of such disclosure. The importance companies limit themselves to providing information of this disclosure corresponds to the 30 per cent of in a descriptive way without disclosing the amount of companies that were surveyed which includes this operating expenses and environmental investments quantitative information. In fact, some companies add made in its financial year. 63 per cent of the companies a more lengthy explanatory part concerning the in the sample report information on environmental settlement of environmental reserves specifying, the investments, in purely descriptive terms. Companies performance of the reserves in the last three years, merely state that it had undertaken investment projects current year's specific accrues to the reserves, based on related to environmental protection activities or that it which that data has been prepared, difficulties of has invested in eco compatible projects. Some briefly estimation and calculation and other useful informadescribe even the type of the process undertaken and tion necessary to understand the nature and the
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progress of the reserves. Some companies create two different types of environmental reserves the reserves destined to cover future costs of dismantlement, abandonment and restoration of industrial sites, the reserves destined to the restoration and/or remediation activities, which can be attributed to the company's liability.
be less aware of these financial details. In fact none of the Indian companies in the sample report on environmental Insurance. Separate reporting of environmental information, as a stand-alone report, by only 43 per cent of Indian companies, which is a low environmental performance as compared to its foreign counterparts being 86 per cent.
! Environmental Insurance Conclusion The concept of environmental insurance is new in the Indian landscape. It could be observed from Figure 6.20 that only 33 per cent of the companies report about environmental insurance. In general environmental insurance minimise the potential financial impact associated with environmental risks connected with industrial activities. Though the information on environmental insurance is extremely useful to know, up to what level the environmental liabilities are covered by the appropriate insurance, only few companies report about the same. One possible reason for such low disclosure rate could be due to the lack of concept of environmental insurance among the Indian corporates.
Companies in the automobile, chemical, energy, pharmaceutical and iron & steel sectors display higher environmental responsibility. This certainly explains the high percentage of environmental disclosures addressed by the companies surveyed. Further, most companies produce a separate section dedicated to the environmental issues within their Annual Reports or as a stand-alone report. Quantified financial information on environment is still less common. In particular, the research findings show that Indian companies disclose more of descriptive non-financial information, whereas foreign companies have the greatest number of quantitative disclosures of financial environmental information.
! Extraordinary Costs and Environmental Assets In conclusion, despite the fact that this research focused From Figure 6.20 it may be noted that 50 per cent of the companies report on extraordinary environmental costs and 27 per cent of the companies report on environmental tangible and intangible assets. It is encouraging to note that, of late, companies account for the purchase of environmental assets. When plants, machinery or research and development activities are acquired exclusively for environmental purposes, it is capitalised considering the future economic benefits for the company. Reporting on environmental financial information, especially for expenditures, seems to be a practice followed by the majority of the companies surveyed. Environmental capital expenditures, costs, liabilities and provisions are generally the most disclosed information. The survey also showed that information on environmental insurance are well disclosed by foreign companies whereas Indian companies seem to
on those industrial sectors particularly sensitive to environmental problems and despite the fact that the percentages show that it is now common practice to include environmental information within the Annual Reports, the researcher believes that the level of detail of such data is unsatisfactory. Stakeholders do not always succeed in drawing from environmental
Reporting on environmental financial information, especially for expenditures, seems to be a practice followed by the majority of the companies surveyed. Environmental capital expenditures, costs, liabilities and provisions are generally the most disclosed information.
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Environmental disclosure can be misleading if the information is not comparable. These
2 Hecht Joy.E (1999), “Environmental accounting Where we are now, where we are heading”, Green accounting initiative, issue 135, http://www.iucnus.org/greenacct.html.
obstacles can be overcome only when generally accepted standards are issued. Standardisation could in effect reduce differences in the types and location of environmental topics.
3 Xianbing, L. & Anbumozhi,V. (2009). Determinant factors of corporate environmental information disclosure: An empirical study of Chinese listed companies. Journal of Cleaner Production, 17(6), 593-600. 4 Toms.S. (2001), “Eco-logically speaking” Sustainable Development Networking Programme (SDNP).
disclosures precise and comprehensive information, which may be useful for the purpose of decisionmaking. Above all, an attempt to make a comparison among the various companies and nations is arduous: there are differences between national and international accounting standards affecting environmental financial information. Environmental disclosure can be misleading if the information is not comparable. These obstacles can be overcome only when generally accepted standards are issued. Standardisation could in effect reduce differences in the types and location of environmental topics. As reported by FEE in its year 2000 report, over 100 years of experience with financial reporting have shown that qualitative characteristics, such as relevance, understandability, usefulness and comparability, are just as important as the basic (performance oriented) content in establishing the credibility of reported data. While it is good to see more companies reporting explicitly on these issues, there is still more to be done. Without an established measuring system for environmental performance, a company may not attain its “social license” to demonstrate their performances (FEE, 2000). References 1 EPA (1995), 'An Introduction to Environmental Accounting as a Business Management Tool: Key Concepts and Terms', EPA, US Environmental Protection Agency, US, pp. 7-8.
5 Patten, D. (2002). The relation between environmental performance and environmental disclosure: A research note. Accounting, Organizations, and Society, 27(8), 763773. 6 TERI (2001). India's Greenest Companies: A BT-TERI Project. BT-TERI 2001 Survey of Indian Industries, May 6, 2001. 7 Sahay, A. (2004). Environmental reporting by Indian corporations. Corporate Social Responsibility and Environmental Management, 11(1), 1222. 9 Chatterjee, B. & Mir, M. Z. (2008).The current status of environmental reporting by Indian companies. Managerial Auditing Journal, 23(6), 609 626. 10 GRI and ISO (2000), “Environmental Accounting and Auditing Reporter”, vol. 5, no.3, pp.4 -5. 11 International Finance Corporation. (2009). Gaining Ground: Integrating Environmental, Social and Governance (ESG) factors into Investment Processes in Emerging Markets. Washington D.C. USA. 12 CMIE, 2011, www.cmie.com 13 Certified Practicing Accountant, Australia, 2007. http://www.cpaaustralia.com.au, Retrieved October, 2007 14 Hossain, M., Islam, K., & Andrew, J. (2006). Corporate Social and Environmental Disclosure in
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Developing Countries: Evidence from Bangladesh. Conference paper at Asian Pacific Conference on International Accounting Issues. Hawaii. R e t r i e v e d : M a y , 2 0 0 7 f r o m http://ro.uow.edu.au/commpapers/179. 14 Belal, A. R. (2000). Environmental reporting in developing countries: empirical evidence from Bangladesh. Eco-Management and Auditing, 7(3), 114-21. 15Ahmed, N.N.N. & Sulaiman, M. (2004). Environmental disclosures in Malaysian annual reports: A legitimacy theory perspective. International Journal of Commerce and Management, 14(1), 44-58. 16 Cunningham, S. & Gadenne, D. (2003). Do corporations perceive mandatory publication of pollution information for key stakeholders as a legitimacy threat? Journal of Environmental Assessment Policy & Management, 5(4), 523-549. 17 Toms, J. S. (2002). Firm resources, quality signals and the determinants of corporate environmental reputation: Some UK evidence. British Accounting Review, 34(3), 257-282. 18 Shocker, A., & Sethi, S. (1974). An approach to incorporating social preferences in developing corporate action strategies. In S. Sethi (Ed.), The Unstable Ground: Corporate Social Policy in a
Dynamic Society. New York: Wiley. 19 Al-Tuwaijri, S. A., Christensen, T. E., & Hughes, K. E. (2004). The relations among environmental disclosure, environmental performance, and economic performance: A simultaneous equations approach. Accounting, Organizations and Society, 29(5-6), 447471. 20 Patten. (2002). Media exposure, public policy pressure, and environmental disclosure: an examination of the impact of tridata availability. Accounting Forum , 26 (2), 152-161. 21 Hughes, S. B., Anderson, A., & Golden, S. (2001). Corporate environmental disclosures: Are they useful in determining environmental performance? Journal of Accounting and Public Policy, 20(3), 217240. 22 Epstein, M.J. (1996). You've got a great environmental strategynow what? Business Horizons, 39(5), 5359. 23 Borghini, S. (1998). Environmental information in annual reports. Environmental Communication Observatory, No. 2, Milane. 24 Tilt, C.A. (1994), “The influence of external pressure groups on corporate social disclosure: Some empirical evidence�, Accounting, Auditing, and
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Annexure – A S. No
Name of the company
URL
1
ABB Ltd.
http://www.abb.com/ http://www.abb.co.in/
2
Associated Cement Company Ltd.,
http://www.acclimited.com/newsite/index.asp
3
Ashok Leyland Ltd.,
http://www.ashokleyland.com/
4
Bajaj Auto Limited
http://www.bajajauto.com/index.asp
5
Bharat Heavy Electricals Ltd.,
http://www.bhel.com/bhel/
6
Ford Motor Company
http://www.ford.com/ http://www.india.ford.com/servlet/Satellite? pagename=DFY/IN
7
General Motors Company
http://www.gm.com/ http://www.gm.co.in/content_data/AP/IN/en/GBPIN/999/index.html
8 q
GlaxoSmithKline Pharmaceuticals Ltd.
http://www.gsk.com/ http://www.gsk-india.com/
9
Henkel AG &Co.
http://www.henkel.com http://www.henkel-india.com
10
Hindustan Zinc Limited
http://www.hzlindia.com/
11
Honda Motor Company Ltd.
http://www.honda.com/ http://www.hondacarindia.com/default.aspx
12
Indian Oil Corporation Ltd.,
http://www.iocl.com/
13
Indian Tobacco Company
http://www.itcportal.com/
14
Johnson& Johnson
http://www.jnj.com/connect/ http://www.jnjindia.com/ http://www.marutiudyog.com/
15
Maruti Udyog Ltd.,
16
Neyveli Lignite Corporation
17
National Thermal Power Corporation
http://www.ntpcindia.com/
18
Novartis International AG
http://www.novartis.com/
19
Oil And Natural Gas Corporation
http://www.ongcindia.com/
20
Philips Electronics
http://www.philips.com/ http://www.india.philips.com/
21
Proctor and Gamble Co.
http://www.pg.com/en_US/index.shtml http://www.pg-india.com/
22
Ranbaxy Laboratories Limited
http://www.ranbaxy.com/
23
Reckitt Benckiser Plc.
http://www.rb.com/home http://www.rb.com/RB-worldwide/Operations-around-the-world/India
24
Reliance Industries Ltd.,
http://www.ril.com/eportal/home.jsp
25
Royal Dutch Shell Plc.
http://www.shell.com/ http://www.shell.com/home/content/ind/
26
Siemens AG
http://www.siemens.com http://www.siemens.com/entry/in/en/
27
Steel Authority Of India Limited
http://www.sail.co.in/
28
Tata Iron And Steel Company Limited
http://www.tatasteel.com/
29
Toyota Motor Corporation
http://www.toyota.com/ http://www.toyotabharat.com/
30
T V Sundaram Motor Company Ltd.,
http://www.tvsmotor.co.in/
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Book Reviews
Kaushik Basu's Beyond The Invisible Hand: Groundwork for a New Economics By B.Bhattacharyya
Abhijit V. Banerjee and Esther Duflo's Poor Economics By Anjan Roy
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Beyond The Invisible Hand Groundwork for a New Economics Believe nothing, no matter where you read it, or who said it, no matter if I said it, unless it agrees with your own reason and your own common sense Gautama Buddha
Writing on issues whose rigorous analysis often involves abstract theorising and philosophical ambiguities for two such disparate groups of audience is a difficult task even for the most gifted, and to a very large extent, he seems to have succeeded. It does appear likely, however, that the first group will skip a fair number of early chapters and go to the latter ones where current issues such as poverty and globalisation are discussed. The second group will possibly go through the earlier chapters as well and may not find the perspective very novel, as the author himself has anticipated: "When I distance myself from mainstream economics, I am aware that there are contemporary economists who share my concern and would have no problem with my critiques. I am happily reconciled to the fact that the book's novelty value will be limited for them." (Pg.4) But their disappointment may be more when they ultimately arrive at the final chapters and ponder over the policy proposals.
G
oing through Kaushik Basu's latest book has not been easy; but then, it was not supposed to be, especially when the author claims it to be "an ambitious book. It hopes to cater to the interests of the layperson, concerned with everyday issue of economics, politics and society. At the same time, it aspires to make professional economists and social scientists consider some of the foundational assumptions of their discipline". (P. xii)
While reading this book, I recalled at various points John Maynard Keynes. I will share with my readers (if any) each one and explain why they flashed through my mind. 1. "Words ought to be a little wild for they are the assault of thoughts on the unthinking" (Keynes). If we interpret the word 'wild' to include evocative and vivid phraseology to deliver a real punch, Basu excels in this book. I cite one which is a bit longish. "Indeed, there are rich people (admittedly not too
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many) who have expressed abhorrence for the economic system in which we live. Some have taken the line that "given that we do have this system, and since I have the talent to prosper in it, I will do so; but I wish that you had the sense to realise that we have a grossly unjust system that deserves to be altered." One can virtually see such a declaration in the statements and actions of some left-leaning millionaries, successful activist writers, and Holywood radicals. Despite the fact that this may be no more than words, one is grateful for it, especially because it contrasts so sharply with the jaded plans and proposals, like the Washington Consensus that emerges from organisations representing the vested interests of rich countries and the elites of poor nations where the sole aim is to perpetuate the status quo. As Ha Joon Chang argues so persuasiveley, these conservative proposals are really a disguise for kicking away the ladder after one has made it to the top." (P 160). 2. "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of every one" (Keynes). The first Fundamental Theorem of Welfare Economics, whose intellectual origin is traced to Adam Smith's Wealth of Nations states (in the words of Basu): "If we have a competitive economy, where all individuals choose freely according to their respective rational self-interest, then (given a few technical conditions) the equilbrium that will arise will be Pareto Optimal" (Pg. 19). This theorem which Basu has labelled as Invisible Hand Theorem, inviting fairly biting criticism from Adam Smith followers, is central to a vast amount of modern economic literature but its limited usefulness for policy making is possibly known to more than Basu seems to credit with. Still given the centality of this theorem, it does not harm repeated hammering as Basu has done superbly:
freedom gurantees social optimality. On closer scrutiny, ... the theorem no longer provides a case against goverment intervention. This is true even if we rule out the standard conditions under which we conventionally justify government intervention...." (p 26). 3. "When the facts change, I change my mind. What do you do, Sir?" (Keynes) The sheer invincibility of the Neo-classical forte started looking less formidable quite sometime back and the financial meltdown of 2008 has made many of its erstwhile admirers to rethink their position. But the problem is, while the infirmities are quite evident, a proper replacement is still not in place and unfortunately Basu's book only helps in reaffirming our increasing level of discomfort, but little more. It is perfectly possible that this reveiwer may have missed out many important theortical contributions Basu has made towards the 'New Economics' in this book, but the policy prescriptions that have been made are hardly implementable and even if somehow implemented with much imperfection, may not exact put the Amazon on fire. Consider for example, his very passionate exposition on poverty and inequality. Nobody, may be very few, will disagree with the statement that "the level of inequality as we see today... is far too large for complacency. Poverty... is even more intolerable than inequality..." (Pg 164).
It is perfectly possible that this reveiwer may have missed out many important theortical contributions Basu has made towards the 'New Economics' in this book, but the policy prescriptions that have been made are hardly implementable.
" .... the principal appeal of the Invisible Hand Theorem ... resides in the popular belief that a competitive economy with maximal individual 82
BEYOND THE INVISIBLE HAND : GROUNDWORK FOR A NEW ECONOMICS
Though my personal belief, possibly wrong, is that from the perspective of social unrest, inequality rather than poverty is possibly much more explosive. Basu suggests a pro-poor balancing of policy by suggesting that instead of focusing on GDP growth rate, the normative criterion in evaluating a country's well-being should focus on the country's quintile income. Basu is not really dogmatic about the precise figure. "We could focus our attention on an even smaller segement at the bottom end of income distribution, but data at the end, as also with the very rich, become somewhat undependable. The 20 per cent is simply a practical cut off." (Pg 169). He justifies the proposal by invoking the John Rawl's famous maximin criterian. Nearer home, I remember reading somewhere the advice Gandhiji gave to Nehru on public policymaking. Gandhiji's one point advice was: just ask whether the policy will affect the lot of the poorest of the poor. This was much more before Rawl's famous book appeared on the scene. The reason for alluding to this reported story is that India has an intellectual lineage which is sensitive to societal concerns, such as poverty, but its actual reflection on policy formulation and implementation has been below expection, and, therefore, a similar fate may await Basu's formulation as well, even if the objective is laudable. Almost everybody will agree, infact, this no longer seems to be a subject of debate, that political globalisation has immensely lagged behind economic globalisation. The 'whys' of this are mostly known as well; one of them is the inadequacy of the world governance institutions. Established in a world which is almost extinct now, these developed a culture of managing a different world order than what is emerging now. New institutions also have been set up, viz UNEP, UNDP. Infact, if Basu's proposal to have a specialised coordinating body for poverty and inequality issues is followed up, UNDP
I have some doubts on the 'how' of the democratising process of the world governance institutions. It seems Basu is somewhat in favour of World Trade Organization (WTO), as it follows 'one country, one vote' procedure.
will be a candidate among the existing ones. Whether it will be successful is ofcourse a different matter altogether. This brings us to another important point Basu has made. "Even if these governance institutions have not performed well, the way forward is not junking them but strengthening and democratising them." (Pg 190). I have some doubts on the 'how' of democratising process of the world governance institutions. It seems Basu is somewhat in favour of World Trade Organization (WTO), as it follows 'one country, one vote' procedure. Strictly speaking, it is not correct. WTO, following the tradition of its predecessor, GATT, follows a consensus-based decision-making. It envisages only four specific situations for voting, either on a three quarters or two-thirds majority basis. But in the Uruguay Round, it developed a much stronger empowering principle called 'single undertaking' under which the entire outcome has to be accepted in its entirety by all. Simply put, even the smallest member state has a veto power, atleast in theory. Basu has referred to 'green room' methodology of negotiations which to some extent nullifies its basic democratic structure. The negotiating strategy in WTO during the last decade has changed substancially with the emergence of a fair number of groups with cross-cutting memberships and these 83
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multiple platforms have robbed a lot of clout which the green room has historically enjoyed. But the real issue is: is the WTO structure conducive to decisionmaking? From the Doha experience, the answer seems to be in the negative. But again, if the delay in decision-making is strategic because a bad decision is worse than no decision, then the system has worked! Unlike IMF and the World Bank, there is no boardlike structure in WTO. It has a Committee of the Whole where everybody is a member. Administrating effectively, though such a large body may not be an easy task. Therefore, while democratising is important, its efficacy should also not be lost sight of. After reading this book, I just thought that if one targeted audience in the category of interested laypersons gets sufficiently motivated to explore the issues on her own, she would immediately face the huge barrier of high-powered mathematics in the literature she will come across. Since she is not supposed to be math-saavy, she will have to either accept whatever conclusions the author has arrived at as a matter of faith or give it up as a bad case. Basu has correctly observed that one reason why modern
economics has become so much robotic is that theoriticians preferred to focus on those elements which are mathematically malleable; so softer issues, otherewise quite important, such as customs, belief systems, mindsets, are ruthlessly eliminated from the model. To end this review, I cannot resist the temptation to reproduce a story which Samuelson wrote in his paper, 'Economic Theory and Mathematics-An Appraisal.' Coming from Samuelson who arguably was the father of mathematisation of modern economics, it is more telling. Here goes the story: "Without mathematics, you run grave psychological risks... you may even become prey of charlatans who say to you what Euler said to Diderot to get him to leave Catherine the Great's court, "Sir, (a+b)n/n = X. Hence god exists; reply!' And like Diderot you may slink away in shame or reacting against the episode, you may disbelieve the next mathematician who later comes along and gives you a proof of the existence of the Diety".
Book Review by Prof. B. Bhattacharyya
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Poor Economics: Rethinking Poverty & the Ways to End It by Abhijit V. Banerjee and Esther Duflo
in course of the book, they convert into an experimental science. Duflo’s interest in poverty started when she read a comic book on Mother Teresa in the city of Kolkata. Abhijit Banerjee’s started at age six when he lived in his Kolkata home which was not far from the ramshackle houses of the poor. The duo studied development economics and the way the poor lives and takes their decisions. However, instead of handling some general principles and broad macroeconomic variables, or studying the overall impact of foreign aid, they have often tried to go into the way the poor in fact lives. "Poor Economics" is a book about very rich economics that emerges from an understanding of the economic lives of the poor.
T
he rich world, particularly, has been obsessed with poverty, rather with its removal. Economist after economist has written about how to overcome poverty. Some like Professor Amartya Sen have earned rich dividends, including a Nobel Prize in economics, for deliberating among others on poverty, starvation and how to overcome them. Now we have Abhijit Banerji and Esther Duflo coming out with their book "Poor Economics". They call this a radical rethinking of the way to fight global poverty. Indeed it is. Banerji and Duflo began a sentimental journey into poverty which,
This is a book on economics like no other and it adapts a methodology for studying economics which has not been done before. It is as if the book borrows the methodology of clinical trials and pharmacology. In trying to understand the question whether there is a poverty trap in which the poor are caught, can they borrow, save or insure themselves against the risks they face, and, are there ways in which the poor can improve their lives? Banerji and Duflo try to find answers to these questions to formulate action plans to fight global poverty. Poverty Means Hunger On rough and ready estimates, a billion of the world’s population are poor and they do not get enough to eat. Banerji and Duflo do a detailed study of Pak-Solhin, a poor man who lives in a small village in the province of Bandung in Indonesia. Pak-Solhin exemplify the idea of a nutrition-based poverty trap which means that he 85
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gets only so much food which allows him to go through ‘the notions of living or perhaps earning the meagre income that allows him to buy the minimum quantity of food’. As people get richer, they can buy more food and they become capable of greater physical work to earn more. The very poor earn less than they need to do significant work. This is what creates perpetual poverty and a poverty trap.
As people get richer, they can buy more food and they become capable of greater physical work to earn more. The very poor earn less than they need to do significant work. This is what creates perpetual poverty and a poverty trap.
Poverty Means Ill Health Banerji and Duflo, once again examine the issues of health which works towards perpetuation of poverty and why simple solutions like using vaccines to prevent diseases or bed nets to prevent malaria are not adopted even when available at hand. They examine these through randomised controlled trials (RCTs) to test their hypothesis. The technique is often used in clinical trials. The authors have 18 country datasets on use of clean water, bed nets, deworming pills, and fortified flour which have large health benefits. Notwithstanding these, the uses of the preventive and prophylactic treatments are not widely prevalent even though their good effects are known. Does this mean that the poor does not care about health? Once again, the 18 country datasets show that the poor spend considerable amount of their money on healthcare. The authors find that the poor spend money on expensive cures but not on cheap prevention. Poverty Means Illiteracy or Low Levels of Literacy Better education surely gives more opportunity eventually and escape from poverty. Why then, is there a "catastrophic failure" of establishment-led effort to increase education from top down? Building schools and hiring teachers could be useless if there is no strong underlying demand for education. Conversely, if there is demand for skill, demand for education will emerge. So what should come first: demand for education or supply for education? The answer to these questions will critically show the direction of the policies for supply of education or creation of demand for education. There are large number of schools of what Banerji and Duflo call, the supplywallahs and the demandwallahs.
Poverty Also Means Proliferation of Families The poor invariably have large families which leads to malnourishment, ill health and lack of education. Banerji and Duflo studied Pak-Sudarno’s big family to examine poverty trap population and large families. Here of course, there are illustrious examples already given by Nobel Prize winning economist, Garry Becker. Families, Becker argued, (as Banerji and Duflo quotes), face what is called a "a quality-quantity trade off", that is, when there are more children, each of them will be of lower "quality" because the parents will devote fewer resources in feeding and schooling each of them properly. So the theory flows like this: if children born into large families are less likely to receive food and healthcare, and if poor families are likely to be large, this creates a mechanism for "intergenerational transmission of poverty", in which poor parents beget many poor children. However, thereafter, Banerji and Duflo go on to examine why children get less education, because they are poor or they have many siblings. Institutional Factors Leading to Poverty Beyond these case studies and minute details, Banerji and Duflo examine institutional factors in the perpetuation of poverty and issues of microcredit and finance. They assert that the poor, for example, are lik hedge fund managers we hear about in the world of high finance, with only one difference: that they are liable for "100 per cent of their losses" which no hedge fund managers are, and secondly, their levels of income are far too low. This latter factor has huge implications for 86
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perpetuation of poverty or "poverty trap" in that, in case of any loss or misfortune, they fall back deeper into poverty which they show through individual case studies of the poor. They cite the case of Ibu Tina and others which are symptomatic of such travails. The poor lack any insurance back-up which can provide the cushion in case of a misfortune like crop failure, death of an animal meant for husbandry, business loss or illness. Similarly with the credit structure. Ever after the emergence of micro-finance, there are issues with borrowing and more importantly, repayment of loans. It becomes particularly critical in case of business losses when even relatively prosperous and prospering poor tend to relapse into poverty. The poor save what Banerjee and Duflo state "brick by brick". This is not unknown to people living in countries like ours. They spend in similar fashion and therefore end up spending more. Take for instance the hair shampoo sachets, which are exorbitantly costly compared to the bottles. Or for that matter, the casual workers at construction sites, who buy their provisions in small quantities from ordinary shops in the markets and not necessarily from the PDS shops which sell by large volumes and in day times when the workers are working. Typical of their approach, Banerjee and Duflo analyse the psychology of the poor—that is, the loss of hope and sense that it is possible to get out of a bad situation—that play a vital part in the perpetuation of poverty or its alleviation. This is how they analyse: there is a strong association between poverty and the level of cortisol produced in the body. A Mexican study indicate that children of beneficiary mothers of a Mexican programme for cash transfers have significantly lower cortisol levels than comparable children of mothers who have not received cash transfer. And cortisol in the body is important "because it turns out that cortisol directly impairs cognitive and decisionmaking abilities." Good economics. And then we find that the poor end up as entrepreneurs doing the most ingenious businesses. Are there really those billions of entrepreneurs, they ask obviously in a
sceptical reference to the now well-known book, "Billions of Entrepreneurs"? Indeed, going by the stories or case studies that the authors present, they are the reluctant entrepreneurs who are forced into activities in the absence of virtually any other options. The poor are capitalists without capital, they are entrepreneurs of businesses which are too small to generate meaningful surplus. They often do not have enough resources to expand those businesses to yield some reasonable return even for survival. The poor universally have the same desire that their children should be able to get adequate education to get a "government job". Importantly, the authors have refused to give any general principles for development or for overcoming poverty as is done in general by economists. In Place of a Sweeping Conclusion They end their studies with not a detailed universal statement but with a chapter "In Place of a Sweeping Conclusion". The conclusions are nonetheless rather greasy observations such as that the poor often lack critical pieces of information, that there are good reasons why some markets are missing for the poor, that the poor bear responsibility for too many aspects of their lives and so on. But then, in this country, what do we do with poverty and its alleviation? At least, in the last two decades, we have seen the sharpest drops in poverty levels. These have happened as we have freed up our economy and grown faster. There is reason to believe that the fruits of faster growth have percolated, at least to some extent, to the lowest economic levels. So then, we press ahead, in however defective manner, with our efforts to bring about overall development so that the poor gets a little of the benefit. Hopefully, at this rate we will see an end to poverty sooner, than wait for a millennium. The book is an altogether new way of tackling the issue of poverty and how to overcome it. All of us will benefit from its reading and importantly from implementing some of the insights.
Book Review by Anjan Roy 87
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Profile of Authors Mahesh Vyas He is the chief architect of India’s largest integrated database on the economy and business. Mr. Vyas is a Science Graduate with a Post Graduate Degree in Economics & Statistics from Bombay University. He began his professional career as a Research Assistant with Centre for Monitoring Indian Economy (CMIE) in 1980. He then moved to International Economics to research the economics of East Asia and China between 1982 and 1985. He worked with CMIE in various capacities as an Economist, the Database Administrator and Chief Product Developer. In the course of his career, Dr. Vyas initiated and executed CMIE’s expansion plans. He joined CMIE’s Board of Directors in 1996 and now sits on the board of several other institutions.
Amir Ullah Khan Amir Ullah Khan is a noted Indian economist with specialization in trade. In the past he has been associated with several orgaisations in senior roles: the India Development Foundation, Edith Cowan University and Bangalore Management Academy. Currently, he works in a senior position with one of the world’s largest NGO in the area of healthcare, rural development and agriculture. He teaches a course on Indian Economic Policy at the Indian School of Business in Hyderabad and at the Indian Institute of Foreign Trade in Delh. He has worked on various research projects for the European Commission, National Council for Applied Economic Research, Planning Commission, Confederation of Indian Industry and the World Bank and has written on Economics and policy issues. He studied Electronics and Communication Engineer at Osmania University, and Rural Management at the Institute of Rural Management at Anand. He has a PhD in Commerce and Business Studies from the Jamia Millia Central University at New Delhi.
Saleema Razvi Saleema Razvi works on issues related to Public Health. After her schooling at La Martiniere in Calcutta, she studied at the Women's Christian College, Chennai, where she did her Masters in Nutrition and Dietetics. She then completed her M.Phil in Public Health and is currently a Research Scholar at the Centre for Social Medicine and Community Health, Jawaharlal Nehru University. She has worked with the National Council for Applied Economic Research,EPOS Health Consultants, and GE Medical Systems. She has written on consumer protection issues, public health policy, access to health care in rural areas, South Asian cooperation in public health and the impact of Globalisation on Health care. Her areas of interest include Health insurance, Public Health, Health Economics, Maternal and Child health, Consumer issues, and Food safety regulation. She is currently a Doctoral student at the Indian Institute of Foreign Trade, New Delhi. 88
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Nandan M. Nilekani Nandan Nilekani was appointed the Chairperson of Unique Identification Authority of India (UIDAI), and consequent to that, he relinquished the positions of Co-Chairman, Member of the Board and employee of Infosys effective July 9, 2009. He had been the CEO of Infosys Technologies since March 2002. Prior to that, he was the COO and has served as a director on the company's board since its inception in 1981.Nandan became one of the youngest entrepreneurs to join 20 global leaders on the prestigious World Economic Forum Foundation Board. He is listed as one of the 100 most influential people in the world by Time magazine, 2006. Nandan received the Fortune's 'Asia's Businessman of the Year 2003' award and named among the 'World's most respected business leaders' in 2002 and 2003, in a global survey by Financial Times and PricewaterhouseCoopers. In 2005, Nandan was awarded the prestigious Joseph Schumpeter prize for innovative services in field of economy, economic sciences and politics. Nandan is the Vice-Chairman of The Conference Board, a member of ASPEN Institute's Business and Society Advisory Board and serves on the London Business School's Asia Pacific Regional Advisory Board.In 2006, Nandan was conferred the Padma Bhushan, one of the highest civilian honors awarded by the Government of India.
Dilip Chenoy Dilip Chenoy is the Managing Director & CEO of National Skill Development Corporation (NSDC) since May2010. Prior to that, he was earlier the Director General of Society of Indian Automobile Manufacturers (SIAM). Dilip also served as the Deputy Director General responsible for Industry Sectors and Associations Council (ASCON) covering, Agriculture, Life sciences and ICT in the Confederation of Indian Industry(CII). Dilip was the Oil spokesperson and coordinated CM's international work relating to the ASEAN. Prior to his last assignment in CII, Dilip was part of an India team working on the competitiveness of Indian Industry with Prof Michael Porter, Harvard Business School. Dilip has also served as Regional Director for the Southern Region of CII. He worked in industry prior to joining CII.
N.C.B. Nath A pioneer in bringing professional management to the social sector, Dr. Nath worked in top management posts in both, corporate and public sectors. Among the various distinguished positions held by him in his long career are Director (Commercial), Steel Authority of India and Chairman, State Trading Corporation. Dr. Nath has also been actively involved in Indian management education. He was a Chair Professor of Marketing at the Indian Institute of Management (Ahmedabad) and continues to be a Visiting Professor at IIM, Bangalore. Dr. Nath was awarded the AIMS award in 2007 for lifetime contribution to management education. Presently he is the Chairman of Foundation to Aid Industrial Recovery (FAIR) and serves on the boards of several companies. 89
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V.V. Ranganathan V.V. Ranganathan is the Co-Founder and Chairman of Pinnacle Opportunities. He is a professionally qualified accountant with over 30 years of rich experience in India and overseas. He is on the advisory and governing board of some prestigious foundations and on the Board of Companies as a Director. Previously, he served as a Senior Partner with a global professional services firm for several years in various capacities, including that of the Country Leader for Strategic Growth Markets and the Country Head for Quality & Risk Management and as Member of the Governing Council of the firm. He is now associated with a number of social projects driven by social entrepreneurs.
Vinayak Chatterjee Born in 1959, Vinayak Chatterjee is a graduate in Economics from St. Stephen's College, Delhi University (1976-79) and a Post-graduate in Management from the Indian Institute of Management, Ahmedabad (1979-81). He co-founded the Feedback Ventures Group in the early nineties. Feedback Ventures is today India's leading integrated infrastructure development group in the Core, Urban and Social infrastructure arena. He occupies a preeminent position in India as a strategic advisor to leading corporates, government and multilateral/bilateral institutions in the areas of economic policy and infrastructure planning and implementation. In 1998 the World Economic Forum at Davos nominated him as one of the 100 Global Leaders of Tomorrow. He is currently the Chairman of the Confederation of Indian Industry’s (CII) National Council on Infrastructure and Regulation. He was also Chairman of CII-National Committee on Urban Infrastructure for the years 2002-03 & 2003-04 and was the Chairman of CII (Northern Region) for the year 2000-2001.
P. Malarvizhi P.Malarvizhi has over 19 years of experience to her credit and is currently Professor of Accounting & Finance at IILM Institute for Higher Education. She teaches Cost & Management Accounting, Management Control Systems, Strategic Cost Management, Strategic Accounting, Accounting for Decision Making, Taxation and Financial Accounting in the main stream of her specialization. She is a keen researcher in the field of Corporate Environmental Accounting and Reporting. She has published articles in journals and presented research papers at national and international conferences. She has conducted Management Development/Training programmes for corporate executives and officers of Indian Administrative Service. Currently she is serving as an advisor to Department of Environment, Government of Delhi
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