ISAS Insights 2005 - 2008 by Institute of South Asian Studies ISAS

ISAS Insights 2005 - 2008

PRIME MINISTER WEN JIABAO’S VISIT TO INDIA, 9 - 12 APRIL 2005 Kripa Sridharan1 Summary 1.1

This brief analyses the Chinese Premier’s recent visit to India. It highlights:i)

the objectives of the visit;

ii)

assesses both the specific and overall achievements of the trip;

iii)

reflects on the steps that both countries might take to further strengthen their mutual ties; and

iv)

explains the implications of closer Sino-Indian relations for this region.

Objectives of the Visit for China 2.1

From China’s point of view the visit was aimed at ‘promoting trust and widening cooperation’ between the two countries. The swing through the region was also aimed to establish the fact that South Asia falls within the ambit of China’s interests and influence despite India’s dominant position in the region. It was also meant to emphasise to India that bilateral ties with the regional states will continue to be important for Beijing even while it was expanding its ties with India.

2.2

Progress on the border issue that has bedevilled the relations between India and China was an important item on China’s agenda. Identifying the guiding principles for future negotiations formed a crucial part of this quest.

Dr Kripa Sridharan is a Senior Lecturer in the Department of Political Science, National University of Singapore. She is also an Associate of the Institute of South Asian Studies.

2.3

Looking beyond the region, China also wanted to signal to the United States that the two Asian giants could get along well despite their unresolved border issue. It is significant that China's eagerness to seek out India and cosy up to it is viewed by some as a reaction to the offer that the United States recently made to help India transform itself into a world power. China is aware that India and the United States share important democratic values and certain common strategic interests, evidenced earlier in India's support for Washington's missile defence programme. The possibility that the United States might enlist India as a counter weight is always of concern to China.

2.4

The visit was also aimed at strengthening trade and investment relations. China recognises the strides India has made in the IT sector and seeks to marry its prowess in hardware to Indiaâ&#x20AC;&#x2122;s much fabled software achievements.

Objectives of the Visit for India 3.1

On Indiaâ&#x20AC;&#x2122;s part, it wanted the visit to put a stamp on the positive turn this relationship has taken in the last few years. More importantly, it sought to make China recognise that India was emerging as a significant entity and that China should be more autonomous in its relationship with New Delhi.

3.2

India had some specific expectations from China such as the recognition of Sikkim as an integral part of India. No doubt, this had been accepted informally by China earlier, but Indiaâ&#x20AC;&#x2122;s aim was to get an unequivocal recognition of its status as part of the Indian Union.

3.3

India was also interested in a robust indication of support from Mr Wen on its claims for a permanent seat in the United Nation Security Council (UNSC).

3.4

New Delhi was equally desirous of using the visit to seek more flexibility from China on the border dispute so that negotiations could move forward. Repeating the stated positions had made the process stagnant.

3.5

An implied interest was also to indicate to the United States that it should not assume that India would automatically participate in its balancing game. India perceives that this could harm its long term interests by preventing it from dictating the pace of its own strategic interests. Washington’s policy of checkmating China holds limited appeal for India at the moment. It is keener to maintain a stable relationship with Beijing which such visits reinforce. In addition, the Mr Wen’s visit was meant to reaffirm the common Sino-Indian views about the importance of a multipolar world devoid of unilateral impulses.

Achievements: China’s Perspective 4.1

China has every reason to feel pleased that the visit accomplished its stated aims. It managed to convey the impression of a balance in its relationship with the South Asian rivals. China was not subjected to any searching questions by India about its nuclear and missile supply relationship with Pakistan even though this causes a great deal of disquiet in India. China appears to have also succeeded in alleviating Indian concerns about its bilateral interactions with India’s smaller neighbours.

4.2

The three tier approach to the vexing border problem has been well received by India. This new initiative comprises "an accord on the guiding principles at the first stage, agreed framework in the second and actual delineation of the border in the third."

4.3

China has also managed to cultivate a sizeable section of Indian opinion which views the burgeoning ties between the two countries in very positive terms. The visit has successfully reinforced this opinion.

4.4

Apart from the progress on the boundary issue a clutch of agreements were signed by both sides dealing with greater opportunities in trade, cultural relations and expansion in aviation links. The two countries also agreed on a five year plan for comprehensive economic cooperation. Taken together, these initiatives could be the building blocks for the 'bridge of friendship' between the two countries that the Chinese Premier enthusiastically alluded to.

Achievements: India’s Perspective – Positive View 5.1

India can also claim a measure of success in its aims. The growing political understanding and the flow of high level visits has created a more favourable neighbourly environment which has reduced the pressure on the border. From India’s point of view, bonding is certainly better than bickering.

5.2

The most satisfying result of the visit for India was Beijing’s stand on Sikkim. The official map endorsing Sikkim as an Indian state was handed over to the Indian government which has done much to assuage India’s feelings, even though some Indian analysts were quick to point out that the recognition has been extended strictly in the context of border trade that China wants to expand.

5.3

The flexibility shown by China on the border issue has been equally satisfying to India. China’s willingness to approach the boundary dispute on the basis of mutual strategic interests and its statement that it is necessary to safeguard the interests of the settled populations is a significant departure from its traditional stand.

5.4

It also appears that China has obliquely acknowledged India’s UNSC claims by stating that it recognises India’s role in the UN and the wider world. If one were to go by the Indian side of the story that China is desirous of seeing India as a permanent member, then this is indeed a significant gain. It is a departure in China’s policy on two counts: first China has been opposed to the expansion of the Security Council and secondly, this shows that it is no longer bound by Pakistan’s policy against Indian membership.

Achievements: India’s Perspective – Cautious View 6.1

Some analysts in India, however, are not so convinced about the visit’s positive effects. They question the limits of this friendship and point to Mr Wen’s evasive position on India’s UNSC membership. They point out that China has not endorsed India's claim.

6.2

Neither are they willing to accept that China’s India policy is autonomous. Despite claims to the contrary, Pakistan and the United States cast their long shadows on the ties between the Himalayan neighbours. Some are of the opinion that India is unduly coy about raising the issue of military cooperation between Beijing and Islamabad. This has been extremely harmful for India's strategic interests since it has allowed "China's creeping hegemony to go unchecked". Amongst other things, the point of special concern here is China's deepening involvement in expanding the capacity of Pakistan's Gwadar port. In combination with the perch that China has acquired in Myanmar's Coco Islands, this amounts to encirclement. Reports about SinoBangladesh agreement on nuclear cooperation which was made during Mr Wen’s recent visit to Dhaka further complicates India’s strategic environment.

6.3

China's eagerness to seek out India and cosy up to it is viewed as a reaction to the offer that the United States recently made to help India transform itself into a world power. China is aware that India and the United States share important democratic values and some common strategic interests as evidenced earlier in India's support for Washington's missile defence programme. The possibility that the US might enlist India as a counter weight is always of concern to China and this more than anything else is seen to be driving China’s policy towards India.

6.4

Even the much-touted benefits on the economic front have failed to convince the sceptics that the two powers are on to a trouble-free relationship. While much has been made of the complementarities between their high-tech industries – India’s software and China’s hardware which Mr Wen likened to ‘two pagodas’ – it is not certain that the two could be comfortably intertwined to make an economic impact.

6.5

Many IT experts are unconvinced about the potential for cooperation in this field. Reacting to the scenario presented by the Chinese Prime Minster, IT leaders point to the barriers in the form of language, legal issues and China’s special treatment of its domestic industries. In their opinion there simply isn’t the required synergy between the two countries’ technologies.

6.6

In fact, one of them went so far as to say that "China is not a straightforward country say like Singapore when it comes to business. You cannot pull out money or transfer it easily. One has to put in some capital and a firm cannot open branch offices with ease." Obviously, not everyone is sanguine about the outcome of a partnership in this area.

6.7

One of the emerging issues of common concern between India and China is energy security. The two countriesâ&#x20AC;&#x2122; efforts to ensure future oil and gas supplies, for which both have an enormous hunger, is expected to become a point of contention. At present, both are trying to put a positive spin on the scope for cooperation in this area and some evidence of this is apparent. For example, in Sudanâ&#x20AC;&#x2122;s Greater Nile Project they are partners and they have acquired equities in Iranâ&#x20AC;&#x2122;s Yadavaran oilfield. But these collaborative efforts cannot be taken for granted once their needs become acute and supply becomes scarce. It is believed that, in such a situation, politics rather than commerce will become the driving force with negative consequences for their friendship.

Overall Assessment 7.1

Despite the misgivings voiced by some in India it does appear that the visit has generated enough goodwill and understanding between the two Asian powers. A qualified success is a more realistic way to describe the outcome of the visit.

What Next? 8.1

Both India and China are bound to build on the gains made so far. Much of this could be in the form of enhancing the potential for regional economic cooperation. Trade has been a pull factor in their interactions. Bilateral trade between the two countries grew to US$7.6 billion annually by 2003 and is expected to cross US$15 billion by 2007. This is not improbable given the fact that two-way trade reached US$13 billion in 2004, surpassing the original goals by over 30%.

8.2

A more determined move towards creating a free trade zone as articulated by China might be a possibility. In addition to their burgeoning trade relationship, the two 6

countries might further improve the opportunities for sub-regional cooperation such as the ‘Kunming Initiative’. 8.3

People-to-people contacts are also being explored in a more purposive manner. Cultural activities are expected to increase and a good indication of this is the designation of 2006 as the ‘Year of China-India Friendship’.

Implications for Southeast Asia 9.1

There is no doubt that friendly ties between the two major Asian powers will lead to more stability and prosperity in the region and even beyond. Their continued economic growth and development has the potential to lift up other states in their vicinity.

9.2

But having said this, India's expanding ties with the ASEAN states and its ‘Look East’ policy has provided it with a trans-regional focus which could clash with China's interests in the region. The expansion in naval cooperation between India and the regional states in an area where China has unresolved maritime claims is not viewed with equanimity by Beijing.

9.3

While it would not be in the interest of the Southeast Asian states to see a bitter competition between Indian and China to extend their influence in the Southeast Asian region, it is also important to be wary of one thing. If China and India succeed in pressing ahead with their economic agenda of comprehensive cooperation, it is likely that the region could be bypassed altogether which may not be a welcome development.

9.4

One particular area of significance is their proposed interest in sub-regional cooperation linking India’s Northeast with China’s South-western region. Both the countries are also actively engaged in reducing the dependence on the Malacca Strait to transport their cargo. India is planning to build a deep sea port in Dawei in Southern Myanmar which would reduce the travel time for shipping goods to Thailand and China. China is also actively engaged in building a deep sea port in Kyaukpyu which is located at a convenient point on the land route connecting 7

Kunming and Sittwe. Except for Myanmar, the benefits of these moves for the other regional countries seem doubtful. Conclusion 10.1

After decades of suspicion and distrust, Sino-Indian relations have become remarkably warm and cordial. Both the powers have moved from enmity to amity and are poised to become strategic partners. But this does not mean that there are no residual concerns. The ultimate shape of the border resolution and Chinaâ&#x20AC;&#x2122;s strategic intentions within the South Asian region and beyond would continue to cause some disquiet in India. Visit diplomacy at the highest level is one way of ameliorating these worries and the most important outcome of the Chinese Premierâ&#x20AC;&#x2122;s visit to New Delhi lies in this.

VISIT BY PRESIDENT PERVEZ MUSHARRAF TO INDIA, 16 – 18 APRIL 2005 Aparna Shivpuri 1

Summary

1.1

This brief analyses the Pakistani President’s visit to India. It highlights the:-

objectives of the visit for both the countries;

specific and overall achievements;

possible steps that both countries may take in their bilateral ties; and

implications of the visit for Asia

Objectives of the Visit

2.1

The relationship between India and Pakistan goes back a long way and they share much more than just a common border. The relationship can be viewed as “stop-go”, where instances of activities and excitement are followed by a prolonged period of stalemate, and even the eruption of violence.

2.2

The stated reason for the recent visit by President Musharraf to India was to witness the cricket match between India and Pakistan. The visit, nonetheless, provided the opportunity for India and Pakistan to discuss and debate several important bilateral issues. These were the Line of Control (LoC); Siachen Glacier and Sir Creek; bilateral trade and economic cooperation; and cross border movement of people. Whilst the two sides agreed on the importance of addressing these four issues, their perspectives and viewpoints, and the desired outcomes, were not altogether similar.

Ms Aparna Shivpuri is a Research Assistant at the Institute of South Asian Studies.

Line of Control / Kashmir

2.3

The Indo-Pakistan border has witnessed violence on a regular basis. For India, the LoC should be recognised as the permanent international border. It has ruled out the possibility of redrawing the border. At the same time, it wants the de-escalation of troops along the LoC. There infiltration of terrorist groups from across the border has compelled India to deploy large numbers of troops to guard the border.

2.4

On the other hand, Pakistan has refused to recognise the heavily militarised LoC as the permanent international border. However, it does condemn cross border terrorism and is acquiescing to the emergence of a â&#x20AC;&#x2DC;soft â&#x20AC;&#x2DC;border.

Siachen Glacier and Sir Creek

2.5

India is very keen on solving the Siachen issue. It wants to demilitarise the area and explore the possibility of utilising the natural resources available in the region. It is also keen on solving the issue of the boundary of Sir Creek, which has been a thorn on its side for years.

2.6

Similarly, Pakistan is open to discussing the Siachen issue and has directed the Defence Secretary to hold the necessary talks with its Indian counterpart in the future. Pakistan also took note of the Sir Creek issue and is hopeful that the matter regarding its boundary would be settled soon.

Bilateral Trade and Economic Cooperation

2.7

India is keen on Pakistan granting it the Most Favored Nation (MFN) status in its international trade for good and services. The current list of Indian imports permitted is very limited. India is also keen to work with Pakistan in the energy sector and wants to partner Pakistan in setting up a gas pipeline to Iran and the Gulf.

2.8

Similarly, Pakistan realises the value of direct trade with India. For instance, most of its textile and clothing machinery comes from India, but routed through Europe. This makes the machinery expensive. However, it views high non-tariff barriers imposed by India on Pakistan’s exports as an issue of concern in the economic relationship between the two neighbours.

Cross Border Movement of People

2.9

India and Pakistan are not dissimilar in their views on the issue of cross border movement of people.

2.10

The bus service between Srinagar and Muzzafrabad, initiated by India, is an important step in the right direction. India wants to increase the frequency of these buses to bridge the cultural gap and bring divided families on both sides together. At the same time, India wants to push for the movement of trucks across the border carrying goods and produce. India also believes that Pakistan can gain from the expertise that India has in the services sector. Pakistan too believes that cross border movement would act as a catalyst for the peace process.

Achievements – India’s and Pakistan’s Perspectives

3.1

India has agreed to set up a Joint Business Council (JBC) with Pakistan to look into the possibility of bilateral trade between the two countries. The idea of a JBC had been floated before also but no action had been taken then. This is a big step towards cementing strong economic ties. Pakistan should have no complains in the idea of the JBC. It stands to gain much more than India, should bilateral trade between the two countries takes off.

3.2

This is the Pakistani president’s second visit to India, the first being in 2001 when he met the then Indian Prime Minister meeting, Atal Bihari Vajpayee. The meeting with the Manmohan government has provided a fresh impetus to re-start discussions with its neighbors. India had stopped all bus and rail

service to Pakistan after the 2001 attack on the Indian parliament by terrorists. Therefore, the recommencement of this service shows a positive beginning.

3.3

Pakistan also agreed to look into the matter of Siachen and Sir Creek and work out a feasible solution.

3.4

India has long wanted access to the oil in Iran and Gulf region but has been prevented from doing so because the pipeline would have to transit Pakistan. Pakistan has agreed that such a project would help generate revenue and trade and therefore it will consider this option.

3.5

India has agreed to handover Jinnah house to Pakistan, greatly enhancing the goodwill between the two countries. This beautiful house in Mumbai has been lying vacant from years. Many years ago, Pakistan had offered to buy this house or to be allowed to set up the Consulate here, a request that India turned down.

3.6

President Musharraf also spoke to Kashmir leaders in Delhi and convinced them that they will not be left out of the talks in the peace process. He met the leaders of both the parties and told them that â&#x20AC;&#x153;Kashmirâ&#x20AC;? was the central issue and will be addressed in accordance with the wishes of the people of Kashmir.

Overall Achievement

4.1

For an informal visit to watch a cricket match, several important issues were discussed. And a joint statement was released, with both sides promising to not retract on the peace process.

4.2

There is much optimism resulting from the visit by President Musharraf. However, this belief that we shall see progress must be juxtaposed with visits in the past. It has been the trend in both countries that visits and meetings by incumbent governments create much euphoria. This eventually dies down and the two countries enter into a period of stalemate or tension.

4.3

While this visit gave an opportunity for the two countries to build bridges, the reality remains that the crux of the matter would be the Kashmir issue. Whether both countries are able to tread on this path smoothly, remains to be seen.

The Road Ahead

5.1

Both India and Pakistan need to take advantage of this opportunity and build on it. The Defence secretaries of both the countries should meet in the near future to work out an amicable solution for Sir Creek and Siachen

5.2

Both countries need to build up their infrastructure to give a push to the free flow of trade. Without the supporting infrastructure to any increase in trade in goods and services will be difficult to sustain.

5.3

India and Pakistan need to look at issues of trade facilitation like cost and time of transportation, customs reforms, etc. This is very essential for the free movement of goods and people.

5.4

India and Pakistan should not forget to involve the people of Kashmir in working out the peace process. The peace process is essentially about them and the politics at Delhi and Islamabad should not overshadow it.

5.5

With the formation of the South Asian Free Trade Agreement (SAFTA) tariffs would naturally going to decrease. This would promote trade.

5.6

The definition of ‘soft border’ needs to be stated and clarified by both nations. A free movement of people across border without a check or requirement for visa would not be conducive. Therefore, what exactly a ‘soft’ border entails should be specified.

Significance to Asia

6.1

There is no denying that peace between these two nations would help greatly to enhance security in the region, especially because both the countries are nuclear powers. Good will among these two countries is also good for the process of regional integration in South Asia as well as the larger Asian region.

6.2

Indiaâ&#x20AC;&#x2122;s turbulent relationship with Pakistan takes up a lot of resources of the Indian economy in terms of money, deployment of soldiers, policy making etc. With peace in this region, India can focus on the other countries in Asia, particularly Southeast Asia to build maritime and economic links.

6.2

Peace between Pakistan and India is also good in order to avoid spillover of ethnic conflicts to countries like Malaysia and Indonesia, which have predominantly Muslim population. It would also set a good example to these Muslim-dominated countries and ensure a balance of power in the region.

6.3

The South Asian region can become a safer and more stable region for investment and bilateral ties. Countries like India have expertise in software and a generous flow of Foreign Direct Investment can boost trade relations between South Asia and Southeast Asia. Trade within the SAARC region can also take a quantum leap if Pakistan and India resolve their dispute.

Conclusion

7.1

It is very difficult to elucidate absolute economic gains that might result from an emerging Indo-Pakistan alliance. The relationship is still extremely sensitive because of geo-political, religious and ethnic reasons. Nevertheless, a positive step has been taken by Musharrafâ&#x20AC;&#x2122;s visit and key issues have been raised. However, all these discussions and promises would be pure rhetoric if no results are seen in the recent future.

************ 6

TRADE POLICY MAKING IN INDIA S. Narayan 1

Trade policy making in India has been perceived as confused, contradictory and ill conceived. While several authors have attributed this to the need to deal with an internal clientele used to a protectionist environment on the one hand and the advantages of openness in trade on the other, very few have recognised the changes in negotiating stances that India has been taking in recent years.

BACKGROUND (1952 TO 1991)

Any analysis of Indiaâ&#x20AC;&#x2122;s existing trade agreements as well as its position on important WTO issues has to bear in mind the economic and policy environment from which these strategies have evolved. On a historical perspective, the period 1947 to 1991 was an era of protectionism based on a development strategy anchored on the concept of large- scale import substitution. The Planning Commission in its first Five Year Plan (1951-1955/56) document had the following to say on matters concerning trade:-

â&#x20AC;&#x153;The expansion of trade has, under our conditions, to be regarded as ancillary to agriculture and industrial development rather than as an initiating impulse in itself. In fact, in view of the urgent needs for investment in basic development, diversion of investment on any large scale to trade must be viewed as a misdirection of resources.â&#x20AC;?

Trade and trade policy were not of primary importance and the latter would be determined automatically by whatever was needed to augment and make more favourable conditions under which domestic industry and agriculture had to operate. Over the years, this gave rise to architecture of permits, permissions and licences to provide protection to domestic industry. At the same time, overseas investments, flow of technology and trade was strictly controlled by bureaucratic mechanisms, a complicated tariff structure and quantitative restrictions. The Chief Controller of Imports and Exports was a powerful figure that could decide the incentives for 1

Dr S. Narayan is a Visiting Senior Research Fellow at the Institute of South Asian Studies. He is the former Economic Adviser to the Prime Minister of India.

exporters, the concessions for importers and thus, alter terms of trade. It has been argued that the two outstanding features of the tariff regime were that of the development of a large confusing system of exemptions and the lack of economic and/or welfare rationale in the tariff structure.

In the international arena, India has been a founder member of GATT since 1948. However, India’s approach to trade issues in the multilateral context was conditioned by its political perception as a spokesperson of the developing world rather than as a negotiator for any trade or commodity bloc. During these years, India did not leverage its position to gain advantage in trade or improve relations for itself or for the developing countries it professed to represent.

By the 1970s, the Quantitative Restrictions regime and the license/permit systems had developed into a very complex and costly administrative system. A process of liberalisation that began in 1980 was slow and fragmented. This was also the period that saw strong debates between trade reformists and the government. Reformists argued that a semi-managed exchange rate should be used to manage trade flows. They also argued that as long as import of consumer manufactures remained banned, industrialists would have strong incentives to raise capital intensity of production, as this was the cheapest way to replace these imports. It was further argued that restricting the imports of capital goods and essential raw materials was inhibiting productivity and creating unnecessary economy-wide inefficiencies.

LIBERALISATION PHASE (1991 TO 1996)

India’s balance of payment position worsened to crisis point in 1991. This led to a change in attitudes and policies. The Eighth Five Year Plan document (1992/31997/8) has the following comments on the 1991 crisis. The excerpt is long, but describes the situation better than any other source:-

“The Balance of Payment situation has been continuously under strain for over almost a decade. During the Seventh Plan period the ratio of the current account deficit to GDP average 2.4 % – far above the figure of 1.6% projected for this period in the Plan documents. This deterioration in the 2

Balance of Payments occurred despite robust growth in exports in the last three years. The already difficult Balance of Payments situation was accentuated in 1990-91 by a sharp rise in oil price and other effects of the Gulf War. With the access to commercial borrowings going down and the non-residents deposits showing no improvements, financing the current account deficits had become extremely difficult. Exceptional financing in the form of assistance from IMF, the World Bank and the Asian Development Bank had to be sought. While the immediate problems have been resolved to some extent, it is imperative that during the 8th Plan steps are taken to curb the fundamental weakness in Indian’s Balance of Payments situation so that it does not cause serious disruption to the economy.”

The events described above finally tipped opinions in favour of reform, and the policy environment became more amenable to change. Internal trade became freer as the license/or permit system loosened its control of economic activity, and increasing emphasis was placed on the need for a more competitive export sector. Slowly but surely, the two biggest events in Indian economic history – the emergence of a market-based reform project and an incremental re-introduction to the global economy – began to take shape. But even in these circumstances, the policy for reform was not led by trade strategy. Rather, the effort was to liberalise licensing, reduce restrictions on production and investment, open up financial markets, and correct fiscal, monetary and currency rate policies. Trade policy reform was slower in coming, and emerged more from restructuring of tariffs and import duties rather than from a clearly articulated vision. This was due to the focus on getting the financials of the country right in the first instance. India prided itself on never having been an external debt defaulter, and policy makers were concerned about keeping up this image. Trade policy, was thus, at best, only a secondary issue.

Consequently, India’s stand in the Uruguay round of trade initiatives strongly suggests that reforms process did not immediately translate into a greater willingness to engage in trade negotiations. On the domestic front, the Uruguay Round (UR) of negotiations seems to have played almost no role at all in moulding or accelerating the liberalization process. Initially India was unhappy with the invitation to a new round in the first place and opposed the inclusion in the GATT agenda of services, 3

intellectual property and trade related investments. A group of developing countries, including Brazil, got together to articulate their objections. However, the position weakened soon and, in the end, India stood alone in its opposition to a new round. Thus, though India engaged in the preliminaries, its absence became conspicuous during the Round itself.

“In the view of unfriendly observers, India has been a pirate: it has made sporadic forays designed to throw negotiation into disarray…However, whether hostile or not, all observers agree that India has not taken any bold initiatives to give a new direction to the proceedings in any of the negotiation groups”.

There appears to be three reasons for Delhi’s reluctance to give anything away in the discussions. First, India was such a small player in international trade that any reciprocal tariff concessions would almost certainly result in a net welfare loss. Second, import substitution had resulted in such a wide variety of industries in India, some of them inefficient, that any reciprocal concessions to economies that a small industrial base would hurt India more than it would the other economy. Thirdly, several internal policies had a distorting effect on the export sector. For example the textile and garment sector was reserved for the small industries sector. The Indian textile industry thus was characterised by a wide array or technologies and production techniques. In short, market access negotiations in the UR were not attractive and India’s attitude to other issues was well-known. This made Indian an unattractive bargainer, which resulted in India being left out or ignored.

At the same time, there were several forays that India made to get some advantage for itself. About the middle of the round of negotiations, with help from Argentina (Carlos Correa) and Brazil (Ricuperco), India participated in an organised pushback on TRIPS. It also took advantage of those situations, particularly in mode 4, where IT professionals could gain access. And even in the area of agricultural strategies, India’s effort to protect its producers and markets was largely successful. In some sense, its marginalisation in the main discussions provided ample time and space to campaign the cause of special and differential treatment and to concentrate on items of its defensive interests. By declining to aggressively seek concessions from its major 4

trading partners, India had found a way to deflect attention from its major own protection levels, and thus effectively prevented UR negotiations from interfering with its reform process at home. This desire to minimise external pressures to liberalize, arising potentially from the WTO and bilateral agreements has remained an important feature of the Indian trade strategy.

CHANGES (1996 TO 2004)

India saw two coalition Governments in 1996 and 1997, which were therefore the years of some political instability. The political environment in 1996 and 1997 put trade and reform issues on the backburner. It was only in 1998 that Parliament had occasion to examine the implications of the Marrakesh agreements. A Parliamentary Standing Committee of the Commerce ministry, headed by the eminent left wing economist and parliamentarian, Ashok Mitra, went into the implications of the agreement for the country. Membership of the committee spanned across the political spectrum, and contained several eminent figures including one who would be a future Minister for Commerce. The report of this committee was tabled in both houses of the Parliament in December 1998. The reports starts with the leftist concern that the Marrakesh agreement calls upon the member countries to surrender some of their sovereign rights to the decisions and wishes of the WTO. It also expresses concern over the lack of transparency in the negotiations, absence of consensus building inside and outside Parliament, and the lack of consultation with the States. The Committee makes the following broad observations:-

Developing countries in general have failed to extract any significant leverage out of the WTO system.

India failed to extract concessions pertaining to its interests in the agreement on IT products.

Global free trade over which WTO presides is quite some distance from the concept of fair and equitable international trade, and that the balance is tilted in favour of the developed world.

India should reiterate its reservation with reference to Articles 70.8 and 70.9 of the TRIPS in ministerial meetings.

There is need to introduce transparency in the government actions in respect of WTO related issues. There is also need to improve coordination between various ministries dealing with WTO issues.

The tabling of the report of the Committee resulted in several very important developments. First, in accepting the multilateral structure, the Committee committed the parliament and the nation to the process of globalisation of trade. The acceptance of the framework of the WTO was am important victory for the managers of Government policy, and from this point, there would be no turning back from engaging with the world in trade.

Second, Commerce Ministers from that day have been careful in reporting to Parliament a step-by-step account of the negotiations and the stance taken by the Government. There have been several Parliamentary questions, call attention notices and debates on issues involving the WTO. Industry associations and interest groups became active in trying to understand and debate the positive as well as negative issues of the agreements. In short, we see the report as the beginning of a stage of transparency in negotiations that persists even today.

Third, administrative coordination between ministries improved. In the run up to the Seattle negotiations, issues and strategies were discussed not only within ministries, but also with industry and trade groups. The delegation to Seattle included a large delegation from industry that was consulted regularly. It also included members of parliament from the opposition. In Seattle, it was clear that India had put a lot of thought behind the negotiations.

EVOLUTION OF TRADE POLICY PROCESSES

Other changes were seen as well from 1999. The consultation process encompassed an active effort to communicate. During that year, over 30 seminars were held in different parts of the country. There were talk shows and media briefings. The 6

Ministry of Industry conducted workshops in most states on the TRIPS agreement and the implications of the product patent regime. The debate on multilateralism became much more inclusive. The Ministry of Commerce and industry (MoCI) lost some of its secretiveness.

Trade policy in India is primarily the responsibility of the MoCI and it plays a major role in defining and setting policy. The MoCI occupies a privileged and exclusive space in Indian politics, and formulates policy largely in isolation earlier, that is, without consulting other government branches, often taking instructions directly from the Prime Minister. The MoCI also negotiates bilateral agreements. However, the consistency of domestic and external policies is addressed at the cabinet with the assistance of advisory committees. Inter-ministerial consultations always include the Ministry of Finance (MoF), and the Ministry of External Affairs (MoEA). Ministry of Textiles (MoT), Ministry of Agriculture (MoA) are involved in the process on specific agenda. A small group of ministers, consisting of the Ministers for Commerce, Finance, External Affairs, Agriculture, assists the Prime Minister at stages leading up to the ministerial decision. The cabinet is invariably consulted on negotiating stances and strategies, and the Prime Minister is kept informed daily on the progress of the negotiations. After each of these, the Commerce Minister briefs Parliament.

India’s trade policy can be said to consist of three levels:- (i) its multilateral negotiating position at the international level; (ii) the framing and operation of importexport policy at home (‘traditional’ trade agenda), and (iii) sectoral policy affected by trade agreements (‘new’ trade agenda). The first level deals mainly with trade agreements, WTO, Free Trade Agreements (FTAs), etc. The second one focuses on changes in the tariff level, duty drawbacks, subsidies, incentives for exporters and the concessions for importers, etc, and in a sense is a support mechanism for the exporters to deal with uncertainties of the exposure to globalisation. The last level deals with emerging sectoral trade agreements such as General Agreements on Trade in Services (GATS).

Though the structure remained the same, there was more interaction and more thought on issues. That this has resulted in greater maturity in handling the WTO agenda can be evidenced from several subsequent developments.

The negotiations and the failure of movement at Seattle demonstrated to the Indian public and legislators the weaknesses of a consensus bound arrangement, and that a lack of consensus could derail the transactions. Introduction of labour standards and Singapore issues were strongly resisted by several countries, including India some several leading groups. At Doha, the stand that India took, considered intransigent by all, won domestic legitimacy to the MOC in the process of negotiation, and the acceptance of Parliament and States. That India was an important client to be consulted, was evident subsequently from the discussions on agriculture, and way forward could be found only after several countries, including India, had agreed on the approach.

TRIPS

One of the most interesting examples of these has been the handling of the obligations under TRIPS. Product patents for pharmaceuticals and agro-chemicals had been done away with in the 1970 Indian Patents Act, which provided for process patenting enabling the patented drugs to be developed and marketed in India without fear of infringement action. A healthy indigenous industry, strong in chemistry developed, and was opposing introduction of product patents that would affect its growth. Commitments under TRIPS required that product patents should be introduced by 1 January 2005, and that a system of Mailbox for applications started by 1997. The latter did not happen in time, and the US took India to the dispute settlement panel, where India lost the case as well as the subsequent appeal.

The Parliamentary Committee report dealt at length on this case, used strong language about the arm-twisting by the US, but finally recommended appropriate legislation that took place in April 1999. In some sense, this served as a wake up call. The MoCI engaged in looking at options for 2005; internally, there was a call to local industry for shaping up and getting prepared for competition; tariff concessions to pharmaceutical industry including major income tax deductions for research and 8

development were announced; and India decided to take the debate international. At Cancun and at Doha India pressed for implementation of TRIPS clauses that provided for technology transfer and for compulsory licensing provisions. The South African case of drug delivery for AIDS patients came up as a strong argument against protecting multinational pharma companiesâ&#x20AC;&#x2122; interests. India took up at WHO and other forums, the inequities to poor nations of a high drug cost product patent regime.

There was sufficient groundswell of support for this position in the country and the Patents Amendment Law was on the brink of not being approved, even as late as December 2004. The required legislation was put through as Ordnance on the last day of the year, and finally accepted by Parliament, after much protest by the left, a few months later. The Government, in this strategy, was able to cater to the requirements of the local industry, and to use the emotions of the critics to push through a legislation that is barely adequate to meet international standards. In fact, some of the clauses of the legislation can be said to be TRIPS non-compliant; but the US has decided against taking the matter up for dispute settlement at the WTO. In effect, not only has India been able to take advantage of all the flexibilities in TRIPS, but has also been able to push the boundaries further than would have been considered possible. In short, the strategy adopted for handling internal dissension, demands of local industry, and its international commitment, can be considered quite clever and effective.

AGRICULTURE

The agreement on agriculture is another area where there has been maturity in dealing with diverse and often contradictory requirements. At Marrakesh, agriculture was put on the backburner for later discussions, as it suited Japan to do so. This was convenient for India, and post-1999, in Doha and at Cancun, India has been able to spearhead the demand for reduction of subsidies by the developed nations. At Doha, inept handling by the US of the concerns of African countries gave India the policy space needed to sensitise internal interests. It was always clear that India would have to give up some subsidies in agriculture, in return for market access for its products. The framework agreement, already moulded in the earlier Government, was inked within months of the new Government assuming power. It provides for flexibility to 9

choose sensitive products for continued protection, and for an adequate time frame to decide on the products that would have to be given up. The battle now is for the numbers to persuade US, EU and Japan to give up more in real terms, not just in nominal terms. The policy makers and the political parties, already accept that agriculture subsidies will be reduced.

DEALING WITH WTO PROCESSES

India has also leveraged the structural advantages of the WTO agreements. At Doha, interventions by India accounted for the inclusion of Public Health concerns in TRIPS. Interventions in Geneva have been pointed and effective. Before the dispute settlement board, there has been considerable success (see some major cases at Annex 1), and some failures. India won the dispute on shrimp fishing against the US and against Turkey on textiles. India defended steel exports to US before adjudication proceedings in the US. Patents issued in the US for items in the realm of public knowledge in India, like the medicinal uses of neem, were effectively contested.

India emerged as a major user of the provisions of anti-dumping and safeguards between 1999 and 2002. Over 300 cases were taken up, and dozens of anti-dumping notifications issued, several against imports from China. In 2003, as a conscious decision to liberalise trade further, recourse to anti-dumping measures was reduced.

ITAT

The agreement on hardware for IT products was one that could have caused some concern. The agreement required India to reduce tariffs on inputs and products for the IT industry to zero by 2005. The agreed list contained several goods that were used by they entertainment industry for the manufacture of televisions etc. With a large indigenous manufacturing pace, it was important to find a soft landing for these agreements. Work on this started as early as 2002. Tariffs for selected inputs were reduced, that would help local industry to add greater value. Tax concessions and excise duty concessions were announced, and simultaneously, the concept of countervailing duty on imported products, to the extent of local duties, was also introduced. Customs tariffs were reduced progressively by 5% every year, starting 10

with input materials, and finally in the budget of 2005, all tariffs in the agreement were reduced to zero. The benefits of this for the computer and the telecom industry have been quite significant.

At the negotiations, India has been able to take an effective position against the Singapore issues that it considers not to be in its interest. In the services sector, for example, issue of access for its professionals is being pushed effectively at various forums.

REGIONAL TRADE INITIATIVES

As a further proof of moving forward, India has, in the last few years engaged itself more openly in advocating regional trade. The initialling of the South Asian Free Trade Agreement may have more to do with politics than with trade, but the FTA with Thailand has opened up opportunities for bilateral trade that did not exist before. In the next few months, the Comprehensive Economic Cooperation Agreement with Singapore would be signed. India is engaging with ASEAN, China and even exploring possible bilateral sectoral arrangements with the US.

The confidence that has developed in trade policy making has had much to do with the performance of the economy since 2000 and the policy measures for liberalisation. Tariff reduction has been doggedly pursued year after year, and from average values of around 47% even five years ago, the country is at around 17% today. Peak rates are down to 15%, except for agricultural products. Exports as well as imports have been growing year on year, at an excess of 25%. Reforms in the financial sector, including dematerialising of stocks, an open architecture for trade, introduction of futures and derivatives trading and commodity futures, have made investments in India interesting and profitable. Inward remittances, and the growth of the software industry afford opportunities for the services sector that can be exploited only through an open architecture for trading. The young middle class is an eager consumer of global products, and manufacturing facilities for televisions and mobile phones are being constructed. Industry and consumers are realising that openness in trade is a good thing, and that inherent competitiveness is good for the economy and for the consumer. 11

THE ROAD AHEAD

At this stage of its development India is looking forward to engage more progressive not only at the multilateral level but also at the bilateral and regional level. The integration of South Asian countries into a trading block may take some time to realize, but would be pursued at a pace that would be acceptable to all constituents. Participation in ASEAN trade is of important and India would pursue this opportunity vigorously. Regional trade pacts with China and with Japan are in the area of consultation. Trade with China will continue to grow.

At the multilateral level Indiaâ&#x20AC;&#x2122;s primary concern would be agriculture and services. On the issue of reduction of agricultural subsidies, India would be seeking enlargement of its list of sensitive products and exert greater pressure on reduction in tariffs by the developed countries. Non-tariff barriers to agricultural trade including psyto-sanitary conditions, and environmental issues would be taken up strongly to increase market access of Indian agricultural products.

In the area of services India would seek to extend opportunities for cross border service. It would seek greater flexibility in movement of technically qualified personnel and greater opportunities for its skilled manpower to work in different countries. It would seek that the agenda for negotiations in the WTO is not enlarged to cover all of the Singapore issues. It would ensure that public health concerns are highlighted and that there are opportunities for its pharmaceuticals products to provide cheaper drug delivery to rest of the world.

At the same time, it would continue the process of reform and liberalization by opening up FDI in more sectors including retail, real estate and infrastructure. Irrespective of the political composition of the country and succeeding governments, progress along the path will perhaps be always be a balance of management of internal constituents and external opportunities.

************

Annex 1

Some of the cases involving India in DSB (WTO)

India â&#x20AC;&#x201C; Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products: Involving India and USA

India maintained quantitative restrictions on the importation of agricultural, textile and industrial products falling in 2,714 tariff lines.

India invoked balance-of-

payments justification in accordance with Article XVIII:B of the GATT 1994, and notified these quantitative restrictions to the Committee on Balance-of-Payments Restrictions.

The Panel was established to consider a complaint by the United States relating to quantitative restrictions imposed by India on imports of agricultural, textile and industrial products. Panel findings were against India.

India â&#x20AC;&#x201C; Measures Relating to Trade and Investment in the Motor Vehicle Sector, complaint by the United States (WT/DS175/1)

This request, dated 1 May 1999, is in respect of certain Indian measures affecting trade and investment in the motor vehicle sector. The United States contends that the measures in question require manufacturing firms in the motor vehicle sector to: (i) achieve specified levels of local content; (ii) achieve a neutralization of foreign exchange by balancing the value of certain imports with the value of exports of cars and components over a stated period; and (iii) limit imports to a value based on the previous year's exports.

According to the United States, these measures are

enforceable under Indian law and rulings, and manufacturing firms in the motor vehicle sector must comply with these requirements in order to obtain Indian import licenses for certain motor vehicle parts and components. The United States considers that these measures violate the obligations of India under Articles III and XI of GATT 1994, and Article 2 of the TRIMS Agreement. On 15 May 2000, the US asked for the establishment of a panel.

India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, complaint by the United States (WT/DS50)

The period of implementation was agreed by the parties to be 15 months from the date of the adoption of the reports i.e. it expires on 16 April 1999. India has undertaken to comply with the recommendations of the DSB within the implementation period. At the DSB meeting on 28 April 1999, India presented its final status report on implementation of this matter, which disclosed the enactment of the relevant legislation to implement the recommendations and rulings of the DSB.

India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, complaint by the European Communities (WT/DS79/1)

India indicated at the DSB meeting of 21 October 1998, that it needed a reasonable period of time to comply with the DSB recommendations and that it intended to have bilateral consultations with the EC to agree on a mutually acceptable period of time. At the DSB meeting on 25 November 1998, India read out a joint statement done with the EC, in which it was agreed that the implementation period in this dispute would correspond to the implementation period in a similar dispute brought by the US (DS50). At the DSB meeting on 28 April 1999, India presented its final status report on implementation of DS50, which report also applies to implementation in this dispute. The report disclosed the enactment of the relevant legislation to implement the recommendations and rulings of the DSB.

United States â&#x20AC;&#x201C; Import Prohibition of Certain Shrimp and Shrimp Products, complaint by India, Malaysia, Pakistan and Thailand against US

At the DSB meeting on 25 November 1998, the US informed the DSB that it was committed to implementing the recommendations of the DSB and was looking forward to discussing with the complainants the question of implementation. At the DSB meeting on 27 January 2000, the US stated that it had implemented the DSB's rulings and recommendations.

The US noted that it had issued revised guidelines

implementing its Shrimp/Turtle law which were intended to (i) introduce greater flexibility in considering the comparability of foreign programmes and the US programme and (ii) elaborate a timetable and procedures for certification decisions. The US also noted that it had undertaken and continued to undertake efforts to initiate 14

negotiations with the governments of the Indian Ocean region on the protection of sea turtles in that region. Finally, the US stated that it offered and continued to offer technical training in the design, construction, installation and operation of TEDs to any government that requested it.

Turkey â&#x20AC;&#x201C; Restrictions on Imports of Textile and Clothing Products, complaint by India.

DSB ruling was in favour of India. At the DSB meeting of 19 November 1999, Turkey stated its intention to comply with the recommendations and rulings of the DSB. On 7 January 2000, the parties informed the DSB that they had agreed that the reasonable period of time for Turkey to implement the DSB's recommendations and rulings would expire on 19 February 2001. Pursuant to the agreement reached, Turkey also is to refrain from making more restrictive restrictions affecting imports of specified textile and clothing products from India, to increase the size of the quotas of India on certain specified textile and clothing products and to treat India no less favourably than any other Member with respect to the elimination of or modification of quantitative restrictions affecting any product covered by the agreement.

European Communities â&#x20AC;&#x201C; Anti-Dumping Investigations Regarding Unbleached Cotton Fabrics from India, complaint by India (WT/DS140/1)

This request, dated 3 August 1998, is in respect of alleged repeated recourse by the EC to anti-dumping actions on unbleached cotton fabrics (UCF), from India.

India

considers, in the light of the information, which has become available before and after the adoption of Regulation 773/98, that the determination of standing, the initiation, the selection of the sample, the determination of dumping and the injury are inconsistent with the EC's WTO obligations. India is also of the view that EC's establishment of the facts was not proper and that EC's evaluation of facts was not unbiased and objective. India also contends that EC has not taken into account the special situation of India as a developing country. India alleges violations of Articles 2.2.1, 2.4.1, 2.4.2, 2.6, 3.3, 3.2, 3.4, 3.5, 4.1(I), 5.2, 5.3, 5.4, 5.5, 5.8, 6.10, 7.1(I), 7.4, 9.1, 9.2, 12.1, 12.2 and 15 of the Anti-Dumping Agreement, and Articles I and VI of GATT 1994. India also alleges nullification and impairment of benefits accruing to it under the cited agreements.

United States - Measure Affecting Imports of Woven Wool Shirts and Blouses, complaint by India (WT/DS33)

The US announced that the measure was withdrawn as at 22 November 1996, before the Panel had concluded its work. Therefore, no implementation issue arose.

India - Measures Affecting Export of Certain Commodities, complaint by the European Communities (WT/DS120/1)

This request, dated 16 March 1998, is in respect of India's EXIM Policy (1997-2002), which allegedly sets up a negative list for the export of several commodities. The EC alleges that under this policy, raw hides and skins are listed as products the export of which requires an export licence, and that these licences are systematically refused. The EC contends that this is in effect an export embargo and violates Article XI of GATT 1994.

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REFERENCES Alves P (2004), ‘Understanding Indian Trade Policy: Implications for the Indo- SACU Agreement, The South African Institute of International Affairs, Trade Report No.5. Lamy Pascal (2004), The future of WTO: two perspectives; speech at the CII Conference, New Delhi, January 19. Ministry of Agriculture, Government of India; http://www.agricoop.nic.in Ministry of Commerce, Government of India; http//www.commerce.nic.in Ministry of Finance, Government of India; http://www.finmin.nic.in Parliament of India (1998), Rajya Sabha – Department related standing committee on commerce, 35th report on India and the WTO. Sen (2003); Lessons not learned: India’s trade policy making process from the Uruguay to Doha, London School of Economics; Sen J (2004), Trade Policy making in India – The reality below the water line, CUTS, Jaipur. World Trade Organisation; http://www.wto.org.

PAKISTAN’S “VISION EAST ASIA” POLICY: ECONOMIC AND SECURITY COOPERATION WITH SINGAPORE Aparna Shivpuri 1

Introduction

In May 2005, the Pakistani Prime Minister, Shaukat Aziz, visited Singapore and several other Southeast Asian countries. The Singapore visit was to reciprocate a trip made by Senior Minister Goh Chok Tong, when he was Prime Minister in June 2004. Pakistan, like the other South Asian countries, wants to build close ties with the Southeast Asian region, in particular Singapore which, with its open economy, eagerness to invest in South Asia and its stance on terrorism, is an ideal ally to have in this part of the world.

In the wake of this recent visit of the Pakistani Prime Minister, this paper looks at the rationale and objectives for the visit, the key issues discussed and the benefits derived by Singapore and Pakistan, particularly in the areas of trade and investment, and security. It concludes by gazing into the future to look at the progression of the relationship between the two sides.

Background

Singapore’s interest in and its efforts to forge closer links with India is well documented. Regular visits have been made by senior members of the governments from both sides. And the two countries will sign the Comprehensive Economic Cooperation Agreement in June 2005. However, the other South Asian countries are not as clearly visible as India on the Singapore radar screen.

Moving beyond South Asia, Singapore is also keen on developing ties with the Middle East. In the last few months, Singapore ministers have visited no less than 10 countries in the Middle East with the aim of strengthening ties and exploring possible 1

Ms Aparna Shivpuri is a Research Assistant at the Institute of South Asian Studies. The author is grateful to Mr Mridul Batra for compiling relevant data for the paper.

trade and investment collaborations. However, the Middle East still remains a relative new and unexplored terrain for Singapore.

Pakistan, on the other hand, knows the Middle East very well. It has a strong relationship with many of the Middle Eastern states. It is ideally located at the crossroads between South Asia, Southeast Asia and the Middle East and thus is well placed to be a strategic partner to bring the countries in the three regions closer to each other.

Pakistan has followed its look east policy, which it calls the “Vision East Asia” aimed at building partnerships with the countries of East Asia and ASEAN, in earnest. The look east policy envisages deepening relations in multiple fields and institutional linkage with ASEAN members individually and collectively. The Southeast Asian economies are growing at a fast pace and offer immense possibilities for increasing economic and trade cooperation.

The visit to Southeast Asia and Singapore by the Pakistan Prime Minister thus offered the potential for further enhancing ties as well as forging closer trade and investment linkages. Besides Singapore, Prime Minister Aziz also visited Malaysia, Brunei and Thailand.

Trade and Investment

Singapore’s trade relations with Pakistan have been modest as compared to some of the other South Asian countries. Singapore’s trade with Pakistan totaled US$1.02 billion last year, making it Singapore’s 45th largest trading partner. 2 Pakistan has been a small trading partner of Singapore and exports primarily cotton, textiles, sugar and rice to Singapore. On the other hand, it has a fairly good appetite for Singapore products and services.

Singapore and Pakistan to Start FTA Talks Next Month, Channel NewsAsia, 11 May 2005.

Figure A: Pakistan Trade with Singapore 1997-98 to 2003-04 3

As we can see from the above figure Pakistanâ&#x20AC;&#x2122;s trade with Singapore has increased significantly over the years. However, imports from Singapore form the major chunk of the trade, totaling more than US$400 million in 2002-2003, as compared to the exports from Pakistan to Singapore, which amounted to less than US$100 million in the same period.

Pakistan has also been actively pursuing the policy of opening up its economy to foreign investment. It has initiated a policy of disinvestment in some of the big state owned companies. With the guiding principles of deregulation, liberalisation and privatisation, Pakistan has adopted a liberal investment policy to attract maximum foreign investment. Foreign investors can hold up to 100 percent equity in several economic sectors. This move by the government reiterates its desire to reach out to international investors. It also reflects its emerging importance as an investment destination in South Asia. Singapore Telecommunications is one of the major contenders for a stake in the disinvestment of Pakistanâ&#x20AC;&#x2122;s telecommunications sector. 4 3 4

Board of Investment, Government of Pakistan. In June 2005, SingTel lost the chance to have a 26 percent stake in Pakistan Telecommunication Company to Etisalat of the UAE. Etisalat offered the highest bid at $1.96 dollars per share, with Chinese firm China Mobile the second highest bidder at $1.06 per share while SingTel of Singapore offered $0.88 per share.

The total Singapore investments in Pakistan increased from a negative -2.1 to 3.5 because of portfolio investment increasing 5 from -5.3 to 1.3 from 2004 to March 2005. Disinvestment in sectors like banking and telecommunications which are of prime interest to Singapore is also an added advantage for Singapore. Temasek Holdings bought a 25 percent stake in Pakistan's NIB Bank for US$46 million (S$76 million) in March 2005.

The major items of export to Singapore include cotton fabrics, wheat, synthetic fibers, hides skins, fruit and vegetables (the famous mandarin orange) while the major items of import from Singapore include machinery and its parts, chemical elements and their compounds, crude rubber etc.

Singapore businessmen and investors have seen to be showing greater interest in the Pakistan economy in recent times and the potential for greater trade and investment remains a possibility. Besides telecommunications and banking, a few priority sectors have been identified for investment by Singapore in Pakistan. These include:•

Agro-food industry

•

Chemicals and petrochemicals

•

Electrical goods, electronics and software

•

Value added textiles and leather

•

Infrastructure projects/construction industry

•

Tourism, hotels and theme parks

•

Sea food/fish processing industry.

The recent visit of the Pakistani Prime Minister strengthened the commitment that Pakistan has towards building links with Singapore. He made Singapore his first stop to promote Pakistan sovereign bonds. There is potential for a growing Pakistan to act as a rich source of opportunities for Singapore companies while Singapore could be a centre for financing, services and expertise for Pakistan.

Board of Investment, Government of Pakistan.

The leading Singapore-based companies in sectors such as infrastructure, real estate, finance and health care, which have till now provided their expertise in China and India, have shown the desire to do the same in Pakistan. The Singapore Business Federation announced that it shall use these capabilities and opportunities to forge links between the two countries.

Pakistani companies’ forays into the Middle East have been going for a long time now. However, Southeast Asia and East Asia are relatively new to the Pakistan business community. Singapore can also serve as a springboard for Pakistani companies to the Southeast Asia, China and rest of the region. Pakistani companies seeking to export their goods and provide their services to the region can use Singapore as a base, to market their products and services, tap its infrastructure and find business partners here. With China and Pakistan pushing for greater bilateral strategic alliances, Singapore can play a useful role as springboard for Pakistan’s businesses into China.

Similarly, Singapore can be the gateway for Pakistan to Southeast Asia. The region is a booming market of more than 500 million consumers. Southeast Asia’s exports to Pakistan were about US$3 billion, but Pakistan’s exports to Southeast Asia were only a fraction of this, at US$250 million in 2002-2003. 6 There is a clear opportunity for Pakistani companies to sell more to Southeast Asia. Regions as far away as the state of Brandenburg in Germany have set up centres in Singapore to promote their products and help their companies reach out to the region. Pakistani companies could do likewise – they can tap on Singapore’s strategic location and expertise to market their exports to Southeast Asia.

Pakistan is also keenly interested in becoming a full dialogue partner of ASEAN. It has Singapore’s support, along with Brunei, Thailand and Malaysia. It thus makes sense for Pakistan to be interested in the Southeast Asian region and to forge deeper alliances with the countries here.

Speech by Dr. Balaji Sadasivan, then Singapore Minister of State for Health, to the Lahore Chambers of Commerce & Industry, Lahore, 23 April 2004.

The recent visit to Singapore by President Aziz also saw the conclusion of the exploratory discussions on a Free Trade Agreement (FTA), that started in Islamabad in February this year, paving the way for the two nations to commence the first full round of FTA negotiations in June 2005. Both governments have promised that the FTA would be of a high standard. It is hoped that the FTA would remove trade barriers and create investment opportunities for both countries.

Pakistan is keen on Singapore investment in its banking, bio-technology, tourism and info-technology sectors. Pakistan companies will be encouraged to list in Singapore to deepen business ties between the two countries, which are due to start talks in June 2005 on a possible FTA.

Security Cooperation

Another area of cooperation and mutual interest between Singapore and Pakistan is security and promotion of a safe and peaceful environment. Post-September 11 Southeast Asia has become the centre stage in the fight against terrorism. This is compounded by fears of a spillover of the terrorism from the Middle East into the region. Therefore, an important criterion for promoting a strong relationship with both India and Pakistan, by Singapore, has been to ensure security cooperation in the region. Even though Singapore is not directly involved in the Kashmir issue, it acknowledges that a stabilised India-Pakistan relationship is good for the wider Asian region.

Singapore is high on the list of targets for terrorist action. The extremist regional network Jemaah Islamiyah (JI), which is intent on subverting governments in the region, has targeted Singapore before. Singapore will continue to be vulnerable because of the very strong stand it has taken against terrorism, the arrests it has made to crack down on JI in Singapore, the assistance it has extended to regional efforts against terrorist groups, and the support it has given to the American reconstruction efforts in Afghanistan and Iraq.

During his visit to Singapore, the Pakistani Prime Minister spoke at a lecture organised by the Institute of South Asian Studies where he acknowledged that 6

Pakistan has had a troubled neighbourhood with Afghanistan on one side and India on the other side. The situation has improved recently with the election of a new President in Afghanistan and the opening up of communication between India and Pakistan.

According to the Prime Minister, a viable architecture of security and cooperation in South Asia rests on four pillars:- 7

First

Dialogue for peaceful settlement of existing disputes and mechanisms to address issues in the future on a bilateral and multilateral basis.

Second

Strategic restraints and avoidance of an arm race in South Asia.

Third

Strengthening

cooperation

especially

trade,

investments, people-to-people contacts and cultural fields in a peaceful environment on bilateral basis and within the framework of SAARC.

Fourth

Inter-regional cooperation between South Asia and other sub regions of the Asian continent for enhancing security and mutually beneficial economic cooperation.

Pakistan’s sincerity to work with Singapore to counter terrorism and strengthen security ties was reflected in the signing of the Memorandum of Understanding (MoU) on “Combating Terrorism and Other Trans-national Crimes” during Prime Minister Aziz’s visit to Singapore. Pakistan is already a member of the Asian Regional Forum, giving it some access to the bloc’s discussion on security issues.

Speech by Prime Minister H.E. Shaukat Aziz at the Second ISAS Distinguished Visitor Lecture. For more details, see www.isas.nus.edu.sg.

With this background, the prime ministers of both the countries reaffirmed their commitment to the principles of the United Nations charter and belief in the equality, respect and sovereignty, territorial integrity, non interference in internal affairs and peaceful settlement of disputes as the fundamental principles of friendly relations among states. The two ministers condemned terrorism in all its manifestations and agreed to continue their endeavors in this regard. Pakistan signed the treaty of Amity and Cooperation with ASEAN and is also ready to sign an agreement on counter terrorism.

The India Factor

In assessing the relationship between India and Pakistan, it is not unfair to state that the actions taken of one neighbour are the direct result or consequence of actions taken by the other neighbour. This is perhaps applicable to the efforts undertaken by the two countries in forging ties with Southeast Asia.

Like Pakistan, India too sees ASEAN as an important trade and investment, and strategic partner. The impetus for greater co-operation between India and ASEAN can be attributed to India’s “Look East” policy, first advocated by Mr Narashima Rao, India’s former prime minister, in 1991. India’s “Look East” policy was aimed at renewing political contacts with ASEAN, enhancing economic interaction and forging defence links and understanding. Successive Indian prime ministers continued to advocate the same policy with equal fervor and enthusiasm.

India’s “Look East” policy has certainly bore dividends. Trade between India and ASEAN has grown from a mere US$3 billion in 1992 to more than US$12 billion by the end of 2003. It is expected to hit US$15 billion by the end of this year. Beyond trade, India is a strong political and security partner of ASEAN. It became a sectoral partner of ASEAN in 1992 and a full dialogue partner in 1995. In 1996, India became a member of ASEAN Regional Forum, aimed at confidence building, conflict resolution and preventive diplomacy. And in 2003, India and ASEAN signed the ASEAN-India Framework Agreement on Comprehensive Economic Agreement.

In some ways, Pakistan is playing catch up. It developed its “Vision East Asia” policy in 2003. Its trade and investment ties with the Southeast Asian region are small by any standards but there is potential for growth in this area. Similarly, Pakistan’s strategic involvement in the region – its inclusion as a member of the ASEAN Regional Forum and its efforts to be a full-dialogue partner – follows the footsteps of its neighbour. It is clearly evident that it wants to play a larger role in the region.

Pakistan realises the need to be more proactive and engaging in Southeast Asia, lest it be left behind the relationship-building race with its neighbour. It cannot compete with India on the economic front but it can develop strong ideological and strategic alliances with the Southeast Asian region. The visit by Prime Minister Aziz to the various Southeast Asian countries and the call for greater commitment to trade and investment, and security cooperation are clearly reflective of the Pakistan’s effort to bring itself closer to the region.

The United States Factor

In the war against terrorism, Pakistan emerged to become an important front for the United States in South Asia. President Musharraf’s support for the American war against the Talibans in Afghanistan and his continuous efforts to combat terrorism along Pakistan’s border and within the country has resulted in Pakistan being seen a strong ally of the United States. The allegiance and affiliation has not been without its rewards. For instance in 2004, the then Secretary of State for the United States, Colin Powell, recognised Pakistan as a “major non-NATO ally” for all military-to-military purposes. 8

However, Pakistan realises the need for it to develop its own foreign policy agenda beyond the United States. It is clearly not the Arab world’s good books for its support for the United States and it is fully aware of that. At the same time, it is aware that “there are no permanent friends and foes, just permanent interests”. It needs to

The United States gives members of this club preferential treatment in the purchase of excess United States’ defense materials. They can stockpile American military hardware, and participate in cooperative defense research and development.

propagate its own interest and forge ties with other countries and other regions. It cannot possibly rely on the United States to play ally forever.

With the recent visit by the Chinese premier to Pakistan and Prime Minister Aziz trip to Southeast Asia, Pakistan sends a strong message to Washington that it is not entirely reliant on the United States. It will continue to develop ties in the pursuit of its own national and strategic interests. Such initiatives by Pakistan would also perhaps also help placate Pakistan bashers in the Muslim world who see Pakistan aligning itself too closely to the Americans.

Moving Ahead

The recent visit by the Pakistan Prime Minister was important for Pakistan in several regards. It showed the keen desire of the Pakistan government to forge and strengthen ties with Southeast Asia and Singapore. It has strong links with the Middle East but its overtures into ASEAN have been less notable. The progress on the FTA and the signing of the anti-terrorism MoU highlighted Pakistanâ&#x20AC;&#x2122;s commitment to engage Singapore. Economic development and security cooperation are key to ensuring long term peace and trade relations between both the countries.

The visit also opened economic possibilities for Pakistan and Singapore, and for Pakistan and Southeast Asia. There is a great deal of potential in areas such as infrastructure development â&#x20AC;&#x201C; roads, power and telecommunications, electronic and banking. Pakistanâ&#x20AC;&#x2122;s trade volume with the Southeast Asian countries is expected to increase as it forges ahead with its free trade agreements.

Pakistan has also been able to send the message to its South Asian neighbours and the international community that it has the desire and the will to forge alliance aimed at achieving its objectives and protecting its interest. It wants to build bridges beyond just the United States and it is willing to compete with India for the attention and interest of Southeast Asia.

Whilst Pakistan offers opportunities for Singapore, there are key challenges facing the country. Its legal system (as in the case of most South Asian countries, with perhaps 10

the exception of India) lacks the depth of skilled personnel and its infrastructure suffers from bottlenecks. At the same time, there is the question of the governmentâ&#x20AC;&#x2122;s long-term political stability, although the Musharraf government has shown considerable resolve to crush dissenting groups and ensure its stranglehold on the country. The countryâ&#x20AC;&#x2122;s western border is a volatile region, and there have been instances of sectoral clashes and violence, and sporadic terrorist attacks within the country.

These challenges notwithstanding, Pakistan has shown its mettle in dealing with its internal challenges. Its economy is expanding and growing. 9 The governmentâ&#x20AC;&#x2122;s policy of disinvestment and liberalisation makes it an ideal investment destination. A stable and strong alliance between Pakistan and Singapore will pave the way for further economic and geopolitical integration in the Asian region and promote an environment of peace, prosperity and security.

************

The economy saw a growth rate of 8.4 percent as of May 2005.

PRIME MINISTER DR MANMOHAN SINGHâ&#x20AC;&#x2122;S VISIT TO THE UNITED STATES, 18-20 JULY 2005 Rajshree Jetly 1 Summary 1.

This paper analyses the recent visit of the Indian Prime Minister, Dr Manmohan Singh, to the United States. It :-

considers the objectives of the visit;

ii)

analyses the outcomes and achievements of the visit in light of both the United States and Indian perspectives;

iii)

assesses the future of Indo-United States relations; and

iv)

examines the significance of Indo-United States relations for Southeast Asia.

Despite being respectively the largest and oldest democracies in the world, India and the United States have, at best, had a lukewarm relationship with several ups and downs in the past few decades. A confluence of strategic and economic factors since the 1990s has brought about a positive change in IndoUnited States relations. The Indian Prime Ministerâ&#x20AC;&#x2122;s visit to the United States builds on this platform of interlinked strategic and economic issues.

Objectives of the visit for the United States

Democracy and Combating Terrorism

The United States is increasingly using democracy as a yardstick to determine its political and economic engagement with other countries. An important objective for the United States was to strengthen its relationship with India to

Dr Rajshree Jetly obtained her PhD in Political Science and International Relations from the Australian National University in 1999. This paper has been prepared for the Institute of South Asian Studies.

bring together the most powerful (the United States) and the largest (India) democracies in the world, which will help foster a global partnership that can effectively spread democracy and peace throughout the world.

The events of September 11 awakened the United States to the threat of fundamentalist Islamist terrorism, which India has had to contend with for decades. Recognising that they have a common cause, the United States sees India’s cooperation as vital in the war against terrorism, given the madrasahs and training camps operating in India’s neighbouring countries, Pakistan and Afghanistan.

Economy

India’s high growth rate continues to be sustained and is projected to be around 7-7.5% for 2005. The United States, which is already India’s largest trading partner with two-way trade in the first five months of 2005 exceeding US$10 billion, is keen to tap the booming Indian market and enhance its investment opportunities.

American companies can increase their competitiveness through low cost outsourcing of information technology and backroom services. India is an attractive location for American firms engaging in production of high-end services in software, engineering design and pharmaceutical research. India has a large pool of highly skilled, English speaking population which provides a valuable source of human resources for service industries.

Nuclear Issue

The United States has a clear objective to engage with India as a responsible nuclear power in the changing world order. Rather than continuing to treat India as a Non-Proliferation Treaty (NPT) outcast, the United States has agreed to cooperate with India on the transfer of civil nuclear energy, reversing its past policy of denying nuclear technology to India. In return,

India will subject itself to greater international scrutiny of its nuclear programme.

Regional Security

The United States also has a strong interest in maintaining peace and stability in South Asia, particularly in light of various conflicts that have bedevilled the region. For a stable South Asia, it is important for the United States to engage constructively with India so that it can create an environment that is conducive to fulfilling its other objectives in the region, such as containing fundamentalist terrorism and checking the proliferation of nuclear weapons.

Some sceptics argue that a hidden objective of the United States is to use its new-found relationship with India to counter the rising strength of China, both in strategic and economics spheres. The United States can use India as an alternative to China to increase its leverage in extracting greater concessions from China on contentious economic and political issues. In the textiles area for example, Walmart is now shifting more of its orders to India, boosting purchases by 30% due to the Chinese revaluation of the Yuan.

Objectives of the Visit for India

10.

An important objective of Prime Minister Singhâ&#x20AC;&#x2122;s visit to the United States was to secure its cooperation in the transfer of civil nuclear technology in order to meet its energy crisis. India wanted to do this without having to sign the NPT.

11.

From the Indian perspective, there was recognition that democracies, with their commitment to open societies and individual freedom, are particularly vulnerable to terrorist activities. India, in particular, has to respond to diverse constituencies and it clearly wants a powerful partner at the global level to support its commitment to defeating terrorism.

12.

Another important objective was to enhance economic interaction with the United States in order to accelerate growth through increased trade and transfer of technology and knowledge. In addition, a key objective was to attract more foreign direct investment (FDI), especially to modernize and develop India’s infrastructure, which is critical to India’s economic development, and to close the gap with China. India’s aim is to more than double its annual FDI to US$15 billion, which is still a long way from China, which already attracts about US$50 billion in annual FDI.

13.

India is also pushing for an expansion of the United Nations Security Council (UNSC) with a view to gaining the United States’ support for India’s inclusion as a permanent member.

14.

Prior to Prime Minister Singh’s visit to the United States, positive dialogue had taken place between India, Pakistan and Iran on the gas pipeline project to ease both Pakistan and India’s energy crises. One of India’s aims was to seek the United States’ support to garner international financial backing for the $US4 billion pipeline which would supply natural gas from Iran.

Achievements and Outcomes

15.

Based on their mutual objectives and shared vision, India and the United States issued a Joint Statement on 18 July 2005, reflecting the areas in which consensus was achieved. Both parties agreed not only to strengthen their bilateral relationship but also to establish a global partnership to tackle some of the issues of international concern.

Democracy and International Terrorism

16.

It is apparent that the leadership in both the United States and India view the protection and promotion of democratic practices as paramount. They have agreed to work together through the new United States-India Global Democracy Initiative to promote democratic values and institutions in countries which need such assistance. 4

17.

As victims of international Islamist terrorism, both the United States and India have an urgent common objective to foster international cooperation in the war against terrorism.

Both leaders affirmed their commitment to the

conclusion of a United Nations comprehensive convention against international terrorism by September 2005.

Economy

18.

Both leaders agreed to revitalise the United States-India Economic Dialogue and establish a Chief Executive Officer Forum to allow business leaders to acquire a greater understanding of each other’s perspectives as well as to allow the government to draw on the expertise of these people to fully realise the economic potential of the Indo-United States relationship. There was also the United States’ commitment to invest in India’s infrastructure to facilitate the continued growth of the Indian economy.

19.

Two keys areas of economic growth were identified during the visit. These are outsourcing and agriculture. India is projected to garner 25% of the outsourcing market in the information technology enabled sector, with the United States providing 60% of the business. The two leaders also agreed to launch a second ‘green revolution’ similar to the first one in 1960s that helped India to become self-sufficient in food production.

Security and Technology

20.

There was general approval of the various initiatives for collaborations in high technology research, space exploration and disaster relief as well as nonproliferation of weapons of mass destruction.

Energy and Environment

21.

Energy security issues loomed large on the leaders’ agenda and there was recognition of the need to develop more efficient, affordable and diversified energy technologies. The United States-India Energy Dialogue launched on 5

31 May 2005 was given the task of carrying the energy agenda forward. India’s current energy demands exceed supply by 11% and projections are that India’s energy requirements will double by 2020 if present growth rates are to be sustained.

22.

India presently imports 70% of its oil. The lack of domestic energy resources and the spiralling cost of imported energy present India with an imminent energy crisis. Two critical sources of energy that India is keen to develop for which the United States’ support was sought during the visit were civil nuclear energy and natural gas, piped from Iran.

Civil Nuclear Energy

23.

The nuclear agreement is the most significant outcome of Prime Minister Singh’s visit, as the United States and other nuclear powers had banned the supply of nuclear technology to India following its ‘peaceful nuclear explosion’ in 1974. India has also been increasingly isolated internationally after its nuclear tests in 1998.

24.

As a result of this, India’s nuclear energy programme has faltered due to lack of fuel and technology. For example, the key nuclear power station at Tarapur has limited fuel supplies, which are projected to run out in 2006. The nuclear agreement is a major breakthrough as it provides access to much needed foreign capital, fuel and reactors. This will allow India to significantly increase its nuclear energy, which presently accounts for only 3% of its total power generation.

25.

In the Joint Statement, President Bush pledged to ‘seek agreement from Congress to adjust the United States’ laws and work with other nations to enable full civil energy cooperation and trade with India, including but not limited to expeditious consideration of fuel supplies for safeguarded nuclear reactors at Tarapur.’ This agreement is a significant departure from the United States’ policy of banning nuclear assistance to any country that is not a signatory to the NPT. 6

26.

In exchange for access to American nuclear technology and conventional weapons systems, Prime Minister Singh gave the assurance that India “will identify and separate its civilian and military nuclear facilities in a phased manner and voluntarily place its civilian nuclear facilities under the International Atomic Energy Agency safeguards.”

27.

In addition, Prime Minister Singh agreed to various other conditions regulating and controlling nuclear technology, including a unilateral moratorium on nuclear testing, supporting international efforts to limit the transfer of nuclear technology and to follow the Missile Technology Control Regime and Nuclear Suppliers Group (NSG) guidelines in procuring nuclear weapons and technology; in effect, committing itself to NPT criteria, even if not being a formal signatory.

28.

The agreement has been criticized in both the United States and India. In the United States, sceptics are concerned of a potential floodgate effect, whereby if an exception is made for India, other countries may also demand similar concessions. Further, there is the concern that this deal would undermine efforts to confront North Korea and Iran over their nuclear programmes. It also provides an incentive for countries such as Brazil, Japan and South Korea, who have so far refrained from producing nuclear weapons to establish themselves as nuclear powers, may do so and then demand similar treatment from the United States.

29.

The United States’ action also provides a precedent for other nuclear countries to flout the NSG mandate. This leads to the possibility of Russia providing nuclear assistance to Iran, and China doing the same with respect to Pakistan. It has even been argued that the United States is naïve in assuming that India will not divert the nuclear products intended for civilian facilities to its military programme.

30.

United States advocates argue that India deserves to be treated differently from Iran and North Korea, which signed the NPT but then failed to comply with the terms.

India has demonstrated its sincerity in behaving as a 7

responsible nuclear power, which has committed itself to non-proliferation. The nuclear agreement is illustrative of the two leaders’ shared approach of balancing pragmatism and principle.

31.

From the Indian perspective, the United States has tacitly recognized India’s nuclear status, and by entering the nuclear agreement, has informally treated India as a member of the privileged nuclear club (the United States, Britain, France, China and Russia). This agreement allows India to acquire the same benefits and advantages as states which have signed up to the NPT, without itself being a signatory. It is also important as it does not require India to cease production of weapons-grade uranium, which enables India to expand its nuclear arsenal, if it decides to do so.

32.

There is however, strong domestic criticism from the left wing of the ruling coalition as well as the opposition of Prime Minister Singh’s commitment to open Indian civilian nuclear facilities to international inspections. According to the former Prime Minister, Mr Atal Bihari Vajpayee, the agreement may have long term national security implications as it will be very difficult to separate India’s civilian and military programmes. Further, it may also deny India any flexibility in determining the size of its nuclear deterrent which needs to be assessed periodically.

33.

To allay these fears, Prime Minister Singh, in his post-visit address to the Indian Parliament on 29 July 2005, was categorical in stating that India will retain complete autonomy over its strategic nuclear weapons programme and that its commitments under the agreement were “conditional upon, and reciprocal to, the United States fulfilling its side.”

Gas Pipeline and UNSC

34.

While there was agreement on most issues, from the Indian perspective, there were two objectives that were not achieved: support for the gas pipeline and the expanded UNSC.

35.

The United States’ strategic reasons for not backing the gas pipeline project included the possibility that Iran could use the hard currency from the deal to develop its own nuclear program and the concern that India and China were doing energy deals with countries such as Iran and Sudan, which the United States perceive as threatening global stability and energy security.

36.

One can also speculate that the United States is not keen on the pipeline which will connect Iran, India, Pakistan and possibly China, as this will increase energy cooperation between these countries and potentially mount a unified challenge to the unilateral domination of the United States.

37.

Coincidentally, after the United States visit, Prime Minister Singh reportedly expressed concern over the viability of the pipeline on the grounds that the project is too risky to attract sufficient international financial backing. There is speculation that Prime Minister Singh’s new position on the pipeline may well be a trade off with the United States for its concession on the nuclear agreement.

38.

The United States, with its own agenda for United Nations reforms, also did not support India’s aspirations for an expanded UNSC with a seat for India, although President Bush acknowledged that India’s central and growing role on the international stage would eventually have to be recognised.

Future of Indo-United States Relations

39.

President Bush has accepted Prime Minister Singh’s invitation to visit India in 2006 and that visit will serve as a useful gauge to determine the extent to which this new relationship will develop. The future of Indo-United States relations hinges on the extent to which the issues in the joint statement are translated into concrete actions. This would mean that both the United States and India have to honour their respective commitments to make this a basis for their future interactions.

40.

On the nuclear issue, for example, the challenge is for President Bush to persuade Congress to amend the law that prohibits the United States from providing nuclear energy assistance to nuclear weapons states that have not signed the NPT. President Bush will also have a difficult task convincing the other nuclear powers to support the United States’ position with respect to India.

41.

Both leaders will also have to win over the critics in their own constituencies. President Bush will have to pacify those who are concerned that the deal may open a Pandora’s Box that has so far been contained thus far by long established policy. Prime Minister Singh will have to allay public concern in India that its national security interests have been compromised. He will also have to placate the opposition, and more importantly, the left wing parties that are part of his ruling coalition in India. This is critical in the Indian context given its history of fragile coalition governments.

42.

It should be noted that even though the United States has made some concession in terms of cooperation in civil nuclear energy and recognised India as a responsible nuclear power akin to the five nuclear powers that are on the UNSC, it has nevertheless not supported India’s claim to a permanent seat on an expanded UNSC, lending credence to the voices of sceptics in India.

43.

The visit of Prime Minister Singh will have a positive impact on India’s economy. Fostering a closer relationship between the countries will provide an advantage, as seen in Air India’s awarding of a US$6.9 billion contract to United States-based Boeing rather then French-based Airbus, following personal intervention by President Bush. India can capitalise on the goodwill generated by the successful visit and dramatically increase FDI if it takes concrete steps to continue with reform of its administrative, regulatory and taxation regimes as well as further liberalising the key sectors of banking, insurance, aviation, retail, civil aviation, telecommunications and construction.

44.

The United States, for its part, may need to ease back on immigration restrictions to facilitate greater mutual trust and freer movement of people. United States firms already lead the foreign investment drive in India and, according to Prime Minister Singh, 400 of the Fortune 500 companies already have a presence in India. Further, the strong presence of Indians in high technology industries in the United States is an additional catalyst to the existing economic synergies.

45.

In terms of regional stability, the Indo-United States relations may have some impact on bilateral relations within the complex geopolitical matrix of India, Pakistan and China. Any substantial improvement in Indo-United States relations is contingent on convincing China and Pakistan that Indo-United States cooperation will not be at the expense of either Chinese or Pakistani interests. Both the United States and India are acutely aware of Chinese and Pakistani concerns and United States Secretary of State, Condoleezza Rice and Prime Minister Singh were quick to issue statements to reassure Pakistan and China.

46.

It is important that China and Pakistan view Indo-United States relations positively; otherwise, there is a possibility that China and Pakistan may feel compelled to strengthen their strategic and military (including nuclear) cooperation, to balance the new Indo-United States relationship. Pakistani discontent at closer Indo-United States relations may also fuel reprisals in India through Islamist terrorism.

47.

Pakistan has already demanded that it receive equal treatment on defence and nuclear matters. The United States, which needs to engage with both India and Pakistan to protect its strategic interest in South Asia, has taken the position that it has to develop independent relationships with India and Pakistan, that is, de-hyphenate the two countries in terms of its strategic framework for South Asia, particularly in the case of civil nuclear cooperation.

48.

With respect to China, even though both India and the United States have categorically denied that their relationship is directed against China, there is 11

no doubt that it empowers India to play a more important role in the region and of balancing Chinese power, should a serious rivalry between the US and China emerge in the future. Nevertheless, India and China will continue to cooperate bilaterally, particularly in terms of their energy needs and their economies. During Chinese Prime Minister Wen Jiabao’s visit to India in April 2005, both countries agreed to boost bilateral trade to US$20 billion by 2008.

49.

Energy cooperation is another strong priority for both nations. India and China have partnered each other in oil and gas ventures in the Yadavaran oilfield in Iran, the Greater Nile Project in Sudan and are considering purchasing some of the assets of the Yukos Oil Company in Russia. Both countries are pouring billions into overseas gas and oil exploration. China National Petroleum Corporation has earmarked US$18 billion between now and 2020, while India’s Oil and Natural Gas Company has already invested US$3.5 billion since 2000.

50.

It may be mentioned here that even as China seeks better relations with India, it will not do this at the expense of its friendship with Pakistan.

51.

At the same time, Indo-United States relations may have some repercussion on other major powers that have an interest in the region, especially Russia and Japan.

52.

India’s foreign policy is increasingly being dictated by energy security. Indeed, India’s Minister for Petroleum and Natural Gas, Manishankar Aiyar, has publicly stated that India ranks energy security as highly as national security.

This being the case, Russia, with its natural gas and nuclear

technology, becomes a very important player in New Delhi’s foreign policy calculations.

53.

Russia has previously had to buckle under United States pressure in 2001 and stop supplying nuclear fuel for the Tarapur nuclear plant. Following the IndoUnited States nuclear agreement where the United States reverse its policy on 12

civil

nuclear

energy

cooperation

with

India,

Indo-Russian

nuclear

collaboration should be considerably eased, further strengthening the historical friendship and close ties shared by the two countries.

54.

In 2004, Russian President Vladimir Putin visited India and the two countries signed a memorandum of understanding for joint exploration and distribution of natural gas in the Caspian Basin. India is also investing heavily in the Russian energy sector and Russia has welcomed this to counter United States dominance over the energy sector in the region.

55.

Russia and India are also linked through the Shanghai Cooperation Organisation (SCO). Comprising four Central Asian republics, China and Russia, with Iran and India joining in as observers, the SCO is seen as another strategic move to curtail the unilateral dominance of the United States by checking its military presence in Central Asia.

56.

The recent visit of Prime Minister Singh will also have implications for Japan, an important Asian power and an ally of the United States. Japan has been critical of India’s 1998 nuclear tests and its refusal to sign the NPT. The IndoUnited States nuclear agreement may force Japan to rethink its policy towards India and may give Japan the opportunity to develop closer links with India. Bilateral trade between India and Japan was over US$4 billion in 2003-2004, leaving tremendous potential for growth.

57.

Strategically, it is important for Japan that, as India’s relation with the United States and China grows, Japan should not be sidelined. Not surprisingly, Prime Minister Junichiro Koizumi visited India in April 2005, just two weeks after Chinese Prime Minister Wen Jiabao’s visit. It should also be noted that Japan and India have supported each other in pushing for each other’s inclusion in an enlarged UNSC.

58.

A final observation on the future of Indo-United States relations is that the nature of the relationship will change as India closes the gap with the United States as a true global power. At this point, the relationship may be subject to 13

the pulls and pressures that inevitably arise when an aspiring global power begins to, or is perceived to, threaten the existing global superpower.

Implications for Southeast Asia and Singapore

59.

Singapore welcomes the United States’ engagement in Asia, especially in light of the emergence of China and India as major global powers. From Singapore’s perspective, the United States remains a vital player in the region’s security. By engaging India as well as China, the United States can play a valuable role in maintaining the regional balance of power in Asia.

60.

Greater economic cooperation between the United States and India may have beneficial spin-offs for Southeast Asia as neither Indian nor Chinese companies can create the investment and employment opportunities that American multinational corporations can. India’s engagement with the United States is a strong signal that it intends to continue on its path of liberalisation, which will be reassuring to its regional neighbours, including Southeast Asia.

61.

Singapore, which has recently signed the Comprehensive Economic Cooperation Agreement with India, stands to benefit from India’s enhanced economic cooperation with the United States. Singapore is India’s fastest growing export market with recently released data showing a record 79% increase in exports and 50% increase in imports in 2004 over 2003.

62.

On the downside, if there is any fallout affecting regional stability in South Asia as a result of Chinese or Pakistani dissatisfaction with the new IndoUnited States relationship, Southeast Asia will inevitably feel some of the repercussions given the interconnectedness of the global economy and political landscape.

Conclusion

63.

Indo-United States relations have historically been in the shadow of the Cold War. It is a positive development that these two great democracies have been able to put their past behind them, strengthen their bilateral relations and forge a global partnership that can only benefit the emerging world order.

64.

Given their mutual economic interests and shared democratic values, IndoUnited States relations have the right synergies for a successful partnership, notwithstanding the fact that there will always be some issues on which both countries will not see eye to eye. Also, any successful Indo-United States relationship must take into the account the sensitivities of China and Pakistan, which have vital stakes in the region and will need to be accommodated in order to maintain regional stability in South Asia and beyond.

65.

The visit also highlights the paramount significance of energy as the driving force of Indiaâ&#x20AC;&#x2122;s foreign policy. As such, the United States, China and Russia will remain key interconnected players in Indiaâ&#x20AC;&#x2122;s foreign policy, weaving a complex web of interdependent bilateral and multilateral relationships. India will therefore have to engage with these countries both as allies and competitors,

negotiating

partnerships

interests.

************

without

compromising

strategic

ISAS Insights No. 6 – Date: 5 September 2005 (All rights reserved) Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 68746179 Fax: 67767505 Email: isaspt@nus.edu.sg Wesbite: www.isas.nus.edu.sg

INDIA-SINGAPORE CECA: A STEP TOWARDS ASIAN INTEGRATION? Jayan Jose Thomas i

Summary

This paper argues that the Comprehensive Economic Cooperation Agreement (CECA) signed between India and Singapore appears to be part of a larger process of Asian integration.

Singapore, along with many other East Asian countries, has achieved spectacular levels of economic development over the past half-century. Singapore’s strategy of development relied heavily on foreign direct investment and international trade. Development strategy of post-independent India focused on building self reliance, especially in the areas of science and technology, through import substitution industrialization. After decades of unimpressive growth, India’s economy is today on a high growth path. Given its success in knowledge-intensive sectors, particularly information technology, there is widespread optimism that India will soon emerge as a major economic power. In this context, it is in the interests of the Association of Southeast Asian Nations (ASEAN), Singapore in particular, as much as in the interests of India, to build closer economic ties with each other.

And indeed this is happening. Relations between ASEAN and India have been strained for long due to ASEAN’s concerns over external security, which could not accept India’s close relations with Soviet Union or its recognition of Vietnam-backed

government in Cambodia in 1980. A change, however, occurred, slowly from 1985, and at a faster pace after 1991, when India initiated ‘Vision East’ policy in its foreign relations. India is today a full dialogue partner of ASEAN and a member of ASEAN regional forum. It also holds annual summit level interactions with ASEAN. A free trade agreement between India and ASEAN is likely to come into force in less than 10 years. Singapore has played a major role in building bridges between India and ASEAN.

With India-Singapore CECA coming into effect, tariff barriers between India and Singapore on a wide range of goods will be eliminated or reduced substantially. Investors and service suppliers will receive national treatment in each other’s country. Standards and technical regulations in the two countries will be mutually recognised. Three Singaporean banks will be allowed to operate in India almost like any Indian bank. These measures are expected to expand the volume of India-Singapore trade and cause large investments to flow between the two countries. India welcomes Singaporean investment in several areas, including, importantly, infrastructure and also small and medium industries. The two countries will cooperate with each other in knowledge-intensive industries, science and technology and education. India will also be able to meet, to a large extent, the demand for technically qualified professionals in Singapore.

In the context of India-Singapore CECA, it is important to recognize that regional trading agreements have been on the rise in the 1990s, particularly in Asia. The rise of regionalism in Asia is in part necessitated by the current pattern of global trade and investment, which – despite the claims of globalization – is largely confined within the developed economies of North America and Europe. There is also a view that regionalism in Asia is in response to the East Asian financial crisis, as an initiative by East Asian countries to guard their interests in the face of pressures from the United States and international financial institutions.

ASEAN, and Singapore in particular, has been successfully playing the role of a gobetween in the task of bringing Asian countries together. It appears that with the economic rise of India and China, East Asia and South Asia will not remain distinct entities, as they used to be earlier. Improvement in relations between India and China, 2

and between India and Pakistan, will go a long way towards a more unified Asia. Improved India-Pakistan relations, in particular, open up the possibility of energy cooperation between the energy surplus regions of West and Central Asia and the energy deficient regions of South and East Asia. There are, however, several obstacles to the goal of greater regional cooperation in Asia, the principal ones being the opposition to such cooperation from the US and the divisions within the Asian region, particularly between China and Japan.

INDIA-SINGAPORE CECA: A STEP TOWARDS ASIAN INTEGRATION?

Jayan Jose Thomas

The visiting Singapore Prime Minister, Mr Lee Hsien Loong, signed the Comprehensive Economic Cooperation Agreement (CECA) with his Indian counterpart, Dr Manmohan Singh, in New Delhi on 29 June this year. The CECA, which came into effect from 1st August 2005, envisages free trade in goods and services and promotion of bilateral investment between Singapore and India. There are also agreements on avoidance of double taxation and for cooperation in science and technology and education between the two countries. This article argues that the India-Singapore CECA is a step in the direction of increasing economic integration among Asian countries. Singapore has played an active role in bringing India closer to the Association of Southeast Asian Nations (ASEAN); the country is today seeking new allies in South Asia and the Middle East. It is recognised that with the economic rise of China and India, greater economic linkages between East Asia and the rest of Asia will benefit all in the region.

Development Trajectories: Singapore and India

In 1965, Singapore became an independent country -- a small island state in Southeast Asia, comprising a total surface area of 1,000 sq km and having a population of 4 million people (in 2002). With independence, Singapore was politically separated 3

from the Malaysian mainland, and was left with a small domestic market and very little natural resources. Over the past four decades, Singapore’s strategy of development relied heavily on foreign direct investment (FDI) and international trade. The country benefited enormously as multi-national companies (MNCs) shifted their manufacturing operations to cheaper wage locations across Asia. Huff (1995) shows that between 1980 and 1990, Singapore received the largest chunk, in absolute terms, of FDI in less-developed countries. In 1992, wholly-and majority-owned foreign companies accounted for 74.2 per cent of manufacturing output and 84.5 per cent of direct manufacturing exports of Singapore (Huff, 1995, p. 1426).

Singapore has also been upgrading itself, slowing climbing the technology ladder, and today, the country is poised to become a ‘knowledge economy’. Gourevitch et al. (2000) show how Singapore moved up the value chain in the hard disk drive industry, in response to rising labour costs -- from assembly of low-end drives to media fabrication, assembly of high-end drives and semiconductor wafer fabrication. While electronics, precision engineering and chemicals have traditionally been the pillars of Singapore’s manufacturing strength, the country now strives to emerge as a global leader in biomedical research (Burton, 2005). Singapore is developing One-North, a 200-hectare area, into a world-class knowledge hub. The One-North area comprises Biopolis, a research and development hub in biomedical sciences, and Central Exchange, a development hub in information and communication technology (ICT) and media industries. Propelled by its high domestic savings, Singapore is also a major investor, mainly in the Southeast Asian countries, and is now looking for newer investment opportunities.

The state played a very significant role at each stage of Singapore’s development. According to Huff (1995), government policies in Singapore helped to maintain a high savings rate and macro-economic stability, and also ensured that wages did not rise faster than productivity. State-owned enterprises invested in strategic sectors including communications, airlines and shipping (Huff, 1995). Government and its agencies have been highly committed to economic growth in Singapore. Gourevitch et al. (2000) point out that the promotional measures of the Economic Development Board in Singapore, which include its highly efficient regulatory process, have been an important factor that contributed to hard disc drive companies locating their 4

manufacturing operations in Singapore. Parayil (2005) argues that in Singapore’s foray into biotechnology, the state, universities and industry are interacting with each other in a triple helix model of innovation.

Compared to Singapore, India is much bigger, but also economically less–developed. India’s surface area is 3,287 times and population is 262 times that of Singapore (all figures for 2002). At the same time, in 2002, India’s per capita gross national income of US$470 was only a small fraction of the corresponding figure for Singapore, which was US$20,690 (World Bank, 2004). The developmental path followed by India has been vastly different from that of Singapore. While, as in Singapore, the role of state has been significant, trade played a substantially less important role in India’s importsubstitution industrialization strategies. In India, great emphasis was laid on building self reliance, especially in the areas of science and technology, through public investment. At the same time, the country’s policy makers have not been very optimistic about the prospects for India’s export growth. In the early 1990s, combined imports and exports as a proportion of gross domestic product (GDP) hovered around 17 per cent in India, whereas the corresponding proportion for Singapore was well over 200 per cent (Chortareas and Pelagidis, 2004).

Large sections of Indians still suffer from age-old problems of poverty, illiteracy, and social exclusion. In 2001, as per India’s decadal census, literacy rate among females (aged 7 and above) was only 54 per cent. These problems notwithstanding, India’s economy has been growing fast in recent years. Srinivasan (2004) notes that India (growth of 6 per cent) and China (growth of 10 per cent) were the “star performers” with respect to average annual growth of GDP during the period from 1980 to 2001. The period from the mid-1980s and more specifically after 1991 was one in which India initiated wide ranging measures for liberalizing its economy. Many observers attribute the new dynamism in India’s economy to the reform process.

Since the 1990s, India has been a major exporter of software and informationtechnology enabled services. India’s software industry grew at average annual rates of over 50 per cent between 1992-93 and 2001-02. By 2008, exports by the information technology (IT) industry in India are expected to reach US $ 50 billions, which will then account for 6 per cent of the total global IT exports (cited in Thomas, 2005). 5

India is progressing well in other knowledge-intensive sectors as well, notably pharmaceuticals, biotechnology and space research. India’s great advantage in knowledge-based industries is its large army of English-speaking, technically qualified professionals – which, in fact, is a creation of public investment in the country in higher education and technology from the 1950s. In the words of Mr Lee Kuan Yew, the first Prime Minister and now Minister Mentor of Singapore, “India is the outsourcing service centre [of the world], first in call centres and now moving to more sophisticated business process operations and clinical research activities of global corporations.” ii India is expected to emerge as the third largest economy in the world, behind China and the United States, in the next 30 years. iii India, along with China and the United States, is today rated to be among the top three ‘hot’ destinations for FDI in the world. iv

ASEAN, India and Singapore: Changing Relations

Relations between India and ASEAN – which includes Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand (ASEAN-6), and Cambodia, Laos, Myanmar and Vietnam (ASEAN-4) -- have undergone several transformations over the past four decades. Some authors argue that India’s foreign policy towards ASEAN in the earlier decades was characterised by ‘benign neglect’ (Tan, 1997), and by “inconstancy and some ambiguity” (Sridharan, 1996, p.225). At the same time, India, which was seeking export markets for its industrial goods in ASEAN member countries, was an ardent supporter of the proposals for regional economic cooperation in Asia in the 1950s and 1960s. India backed the proposals for the Asia Clearing Union, regional trade liberalization and the Asia Reserve Fund in the Asian Ministerial Conference held in Kabul in 1970. These proposals, however, did not take concrete shape. In any case, it can be seen that India emphasised regional cooperation with Southeast Asian countries in economic spheres rather than in military or security spheres (Sridharan, 1996).

However, the Southeast Asian countries were mired by concerns over external security, and were not very enthusiastic about India’s overtures to economic cooperation. India’s close relations with the Soviet Union and its support for North 6

Vietnam were factors that led to estrangement in India-ASEAN relations. Also, India lost out to Japan as a provider of capital and technology to ASEAN member countries. In fact, Southeast Asian countries turned their attention to East Asia, as the latter emerged as a major economic power over the past three decades or so. In 1976, India approached ASEAN for granting it the status of a dialogue partner. ASEAN made only a lukewarm response; and when India recognized the Vietnam backed government in Cambodia in July 1980, relations between ASEAN and India hit a new low (Sridharan, 1996).

Relations between India and ASEAN improved only after 1985 (Sridharan, 1996). This was a period when India began partial measures for economic liberalization. At the same time, after two decades of fast growth, ASEAN member countries were facing several economic problems, mainly due to reduced demand and prices for their primary products. This set the stage for a revival of economic relations between India and individual countries of ASEAN (Sridharan, 1996). After 1991, major measures for economic liberalization in India also coincided with a ‘look east’ policy in the country’s foreign relations. India’s relations with ASEAN have been on a fast track ever since.

India became a sectoral dialogue partner of ASEAN in January 1992, although the dialogue relationship was limited to the areas of trade, investment and tourism. India became a full dialogue partner of ASEAN in December 1995 and a member of ASEAN regional forum in July 1996. India and ASEAN now hold annual summitlevel interactions; the first such summit-level interaction between India and ASEAN was held in Phnom Penh in Cambodia in November 2002 (Sen et al, 2004). IndiaSingapore CECA is a precursor to a similar agreement for comprehensive cooperation between India and ASEAN, framework agreement for which was signed at the ASEAN annual summit held in Bali in October 2003. The free trade agreement between India and ASEAN is likely to come into force in less than ten years. India is holding negotiations with Thailand and Malaysia to conclude economic cooperation agreements with these countries.

India is now part of several regional groupings involving the Southeast Asian countries. They include the Indian Ocean Rim Association for Regional Cooperation, 7

and Mekong-Ganga Cooperation (which include India, Myanmar, Thailand, Cambodia, Laos and Vietnam). Another such regional grouping is the Bangladesh, India, Myanmar, Sri Lanka and Thailand Economic Cooperation. This grouping later included Nepal and Bhutan into its fold, and has been renamed as the Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation. In November 2004, the first India-ASEAN car rally was flagged off in Guwahati in India. The rally, which covered 8,000 km and eight ASEAN countries before finishing in Indonesia’s Batam island, was an important step in the plans to link up India’s north-eastern region with the Southeast Asian countries. There are proposals to build a 1,400 kmlong highway that will link India, Myanmar and Thailand (Pardesi, 2004).

Singapore has always taken the lead in building bridges between India and ASEAN. In 1968, the then Indian Prime Minister, Mrs Indira Gandhi, visited Singapore upon invitation from Singapore Prime Minister of the time, Mr Lee Kuan Yew. It is interesting that during the visit, Mr Lee invited India’s greater involvement in providing a security cover for the Southeast Asian countries (in the context of the departure of British military from the region). Mrs Gandhi, however, was reluctant to take up such a role for India, while at the same time she stressed India’s commitment to “positive, creative and mutually profitable” regional organisations (cited in Duttaray, 1994). The next visit by an Indian Prime Minister to Singapore occurred only 26 years later, when in 1994, Mr P. V. Narasimha Rao, committed to the new ‘look east’ policy in India’s foreign relations, visited several Southeast Asian countries (DattaRay, 1994). Mr Rao’s visit to Singapore was preceded by a visit to India by the then Singapore Prime Minister Mr Goh Chok Tong, who was most instrumental in generating an “India fever” in Singapore. India looked to Singapore as an entry to the ASEAN region. v Singapore strongly supported India’s bid to be ASEAN’s dialogue partner and later part of ASEAN regional forum. vi

The increasing interest among ASEAN member countries, Singapore in particular, in deepening their relations with India is clearly linked to India’s growing economic strength. According to Mr Goh, who is currently Singapore’s Senior Minister, Singapore now has the chance to “hitch a ride” with the fast expanding economies of China and India (Goh, 2005). With the rise of India, ASEAN member countries can reduce their dependence on Japan, the western countries and China and for trading 8

and economic relations. Between 1991-92 and 2001-02, India’s exports to ASEAN increased from US$1 billion to US$3.4 billion (7.7 per cent of India’s exports to world), and India’s imports from ASEAN increased from US $ 1.3 billion to US$4 billion (7.8 per cent of India’s imports from the world) (Sen et al, 2004). However, as a proportion of ASEAN’s total trade, ASEAN’s trade with India is still very low (less than 2 per cent in 2002) (Gaur, 2003). The potential for expanding ASEAN-India economic cooperation is, therefore, very high. In fact, two-way trade between India and ASEAN is expected to increase from US$12.1 billion in 2002 to US$30 billion in 2007 (Gaur, 2003).

CECA and Areas of India-Singapore Cooperation vii

As per the CECA between India and Singapore, Singapore will fully eliminate customs duties on all products from India including beer. India, on its part, has offered trade concessions to Singapore on products that cover 80 per cent of Singapore’s exports to India at present. On 506 products that come under the ‘early harvest line’, India will fully eliminate customs duties to products from Singapore, with effect from 1 August 2005. Products belonging to electronics, instrumentation, pharmaceuticals, and publishing industries, among others, come under the ‘early harvest line’. For the remaining products that are covered under concessions, India will either fully eliminate or substantially reduce customs duties in a phased manner over the period between August 2005 and April 2009. The CECA includes mutual recognition agreements (MRAs) that will recognise standards, technical regulations, and sanitary and phytosanitary measures in specified sectors in each other’s country. With the MRAs coming into effect, products tested and certified for standards in one country will not be retested and recertified in another. The MRAs will be applicable to electrical, electronic and telecommunication equipments, egg products, dairy products and packaged drinking water, greatly facilitating India-Singapore trade in these products.

Data for the first half of 2005 shows that in Singapore’s total trade, the share of India as well as that of China and the middle-eastern countries has risen; at the same time, the shares of Singapore’s traditional trading partners, the US, European Union and 9

Japan, have fallen. By the first half of 2005, India’s share in Singapore’s total trade increased to 2.7 per cent; and India became the 10th largest market for Singapore’s non-oil domestic exports, ahead of Australia. viii With the CECA having come into effect in August 2005, the volume of India-Singapore trade is expected to increase further. The CECA opens the doors for greater linkages between Indian and Singaporean firms -- through, for example, sourcing material and components from each other – in several industries, particularly electronics, telecommunication and pharmaceutical industries.

There have been fears that upon signing the CECA, cheap imports from ASEAN member countries and China routed through Singapore will reach the Indian market. Therefore, the CECA involves rules of origin, which stipulate that only goods having 40 per cent local (Singapore or India) content will be eligible for tariff concessions. In addition, as per the CECA, customs law, regulations and procedures of both the countries will be made publicly available.

Singapore is already one among the top foreign investors in India. Between January 1991 and May 2003, approvals for FDI from Singapore to India amounted to US$1.2 billion, which was 2.35 per cent of the total approvals for FDI to India during the same period. ix A Singapore-based company, Ascendas Private Limited, is one of the partners in Information Technology Park, Bangalore. Port of Singapore Authority is involved in the management of Pipavav Port in Gujarat and Tuticorin Port in Tamil Nadu. SingTel, a major telecommunication firm in Singapore, has a joint venture with Bharati Telecom. The Government of Singapore Investment Corporation and Temasek Holdings, which is Singapore Government's investment arm, have major investments in India.

With the CECA having taken effect, Indian and Singaporean firms will find it easier and more profitable to invest in each other’s country. As per the CECA, national treatment (that is, same treatment as given to a local) will be given to Singaporean investors in India and Indian investors in Singapore. The CECA also provides for an improvement of a 1994 agreement between India and Singapore on avoidance of double taxation of income earned in one country by a resident of the other country. A

major feature of the improved agreement is that India will extend capital gains tax exemption to Singapore; this was previously available only to Mauritius.

It is expected that these measures will bring in large investments to India from Singapore. India welcomes investment from Singapore in the infrastructure sector; Singapore is keen on investing in India in the telecom, banking, automobiles, pharmaceuticals and energy sectors. Singaporean companies, given their good track record in small and medium industries, can invest in Indiaâ&#x20AC;&#x2122;s small and medium sector, infusing it with the much needed capital and technology. Singapore is a major sea cargo and air cargo logistics hub; it has several companies with proven competencies in the storage, transport and supply of food items, ensuring very high quality standards. A recent study by Viswanadham (2005) showed that there is potential for Singapore companies to invest in India in the processing, packaging and supply of food (Viswanadham, 2005).

As per the CECA, service suppliers from India and Singapore will have unlimited market access in each otherâ&#x20AC;&#x2122;s territory in certain specified areas in the service sector; they will also receive national treatment in these sectors. Three Singaporean banks -Development Bank of Singapore, United Overseas Bank and Overseas Chinese Banking Cooperation -- can set up wholly owned subsidiary in India and enjoy treatment on par with Indian banks in branching, places of operation and prudential requirements. This proposal has raised some eyebrows in India, as it goes against the guidelines by the Reserve Bank of India that foreign banks may be given national treatment only after 2009. x Singapore, on its part, has agreed to grant qualified full banking privileges to three Indian banks. In the case of most telecommunication services, including basic, cellular, and long distance services, India will raise FDI limit for firms from Singapore from the current 25 per cent to 49 per cent. In the case of internet and telecom infrastructure services, the FDI limit in India for Singaporean firms will be 74 per cent.

India and Singapore look to each other for collaboration in various areas of knowledge economy. The major focus in the visit to India by the then Singapore Prime Minister Mr Goh in January 2000 was on building tie-ups between the two countries in high-tech areas, particularly information technology (Ghosh, 2000). As 11

per Singapore’s Science and Technology 2005 Plan, Singapore is seeking partnerships with top-class research organizations worldwide; the country is also hunting for global talent to meet its large requirements for research scientists and engineers. There exists lot of opportunities for engineers and research professionals in India to work in Singapore. The CECA provides for easier movement of professionally qualified people between Singapore and India. As per the CECA, professional bodies in Singapore and India in the areas of accounting and auditing, architecture, medicine, dentistry and nursing will enter into agreements that will recognise each other’s educational and professional qualifications. More professional bodies in the two countries are expected to enter into mutual recognition agreements. The CECA also relaxes rules for temporary entry of business persons and professionals into each other’s country.

The two countries have agreed to cooperate in science and technology and in education. The National University of Singapore has recently signed a memorandum of understanding with Indian Institute of Technology, Mumbai to jointly offer courses in advanced engineering material science. As per the CECA, there will be more of such joint post-graduate programs between Indian Institutes of Technologies and Singapore Universities. Degrees specified by India’s University Grants Commission and Singapore universities will be recognized for admission purposes by universities in both the countries.

Another potential area for engagement between the two countries is tourism. While India’s rich cultural traditions and historical monuments may be amusing to visitors from Singapore, the first world experience and opportunities for shopping in Singapore will be valued by affluent tourists from India. In 2001, the number of Indian tourists visiting Singapore was 339,800 and the number of Indian tourists visiting ASEAN countries as a whole was 763,000. The numbers of tourists from Singapore and from ASEAN member countries as a whole visiting India in 2001 were, however, substantially smaller – only 140,000 and 43,400 respectively (Rahul et al, 2004). The CECA provides for future negotiations on enhancing air services connectivity between India and Singapore. This should give a boost to tourism in the entire region.

The Rising Tide of Regionalism in Asia

As can be seen from the above section, the CECA signed between India and Singapore involves free trade agreement (FTA) in goods and services, as well as envisages cooperation between the two countries in other spheres, including investment, science and technology and education. FTAs are a form of regional trading agreements (RTA), in which the level of economic integration between member states is minimal. Customs union, common market and economic union, in that order, are RTAs that commit member states to greater levels of integration. In a free trade agreement, while trade barriers between the two member states involved are reduced to a minimum, each member state continues to maintain its own tariff barriers with the rest of the world. At the highest level of integration, in an economic union, member states harmonize their tariff barriers, customs and financial laws with the rest of the world; allow free movement of labour and capital across borders of these countries; evolve common economic policies and follow a single currency. There is a continuing debate on whether RTAs are “building blocks or stumbling blocks” to global trade liberalisation (see Krueger, 1999).

RTAs have been on the rise over the past several years, particularly from the 1990s. By the end of 2003, 290 RTAs have been notified to the WTO; the corresponding number in 1990 was only about 50 (Ghosh, 2004). Asia has been the scene of a large number of RTAs. ASEAN countries are committed to the creation of the ASEAN Free Trade Area (AFTA). From January 1, 2002, ASEAN-6 countries have reduced tariff barriers between them to a maximum of 5 per cent. The ASEAN summit in Bali in 2003 envisaged the establishment of an ASEAN economic community by the year 2020. ASEAN is expected to conclude FTAs with China by the year 2010, with India by the year 2011, and with Japan by the year 2012. There is progress towards the creation of an East Asian economic community, which seeks to build partnerships among ASEAN+3 countries (that is, ASEAN member countries, China, Japan and South Korea). In the aftermath of the East Asian financial crisis, there have been several moves towards ‘monetary regionalism’ in Asia, including the ‘Chiang Mai Initiative’ in May 2000 in which ASEAN+3 countries agreed to form a regional

network of foreign currency swaps to avert future currency crises (Tourk, 2004). It is important to understand the reasons behind this rising tide of regionalism in Asia.

Firstly, it can be seen that regionalism in Asia, as elsewhere in the developing world, is necessitated by the current pattern of global trade. Evidence shows that, despite claims to the contrary, economic globalization is just a “myth”, and that the forces behind regionalism are far stronger than the forces towards globalization (Kleinknecht and Wengel, 1998). Global trade is largely conducted between geographically proximate partners, particularly those among the developed countries (Chortareas and Pelagidis, 2004). Kleinknecht and Wengel (1998) show that between 1960 and 1995, the European Union (EU) countries increased their trading relations with each other, whereas, during the same period, EU’s trade with non-EU countries stagnated (Kleinknecht and Wengel, 1998). For the US, the major export market is its neighbouring Canada (Chortareas and Pelagidis, 2004). FDI, particularly in technology-intensive industries, is largely circulated within developed countries (Kleinknecht and Wengel, 1998). Against such a pattern of global trade and investment, Asian countries are increasingly looking towards each other for enhancing their economic strength. Exports from countries in Eastern and Southern Asia (ESA) region (which includes China) to other countries within the ESA region increased from 33.1 per cent in 1990 to 42.5 per cent in 2003 (United Nations, 2004, Table A.14).

Secondly, there is a point of view that the rise of regionalism in Asia in recent years has been in response to the Asian financial crisis of 1997. Of course, regional economic networks were very much in existence in East Asia in the 1980s and 1990s, and this was the result of a market-led process, that is, as a result of the activities of multinational corporations (MNCs) and Chinese overseas business community. According to Bowles (2002), what distinguishes the post-(Asian financial) crisis regionalism in Asia is that it is led by the state, not by market forces, and that it is part of the efforts by Asian countries at restoring their autonomy vis-à-vis the rest of the world, especially the US and international financial institutions (Bowles, 2002).

In 1997, when several East Asian currencies drastically fell in value as if on a ‘contagion’, the International Monetary Fund (IMF) stepped in to bail out these crisis14

ridden economies. The IMF prescribed several remedial measures to these economies, importantly major cuts in government spending and reform of their financial sectors. It is widely recognised that the reform measures prescribed by the IMF and other international institutions have exacerbated the East Asian crisis (Bowles, 2002). In fact, it is also argued that the East Asian crisis was a result of over accumulation of dollar-denominated reserves by Japan and other East Asian countries, which helped to maintain a high consumption-low savings economy in the US (Nordhaug, 2005). As a result of all this, a view emerged among several Asian countries that their economies were vulnerable to the vested interests of international institutions and to the domineering role of western countries, especially the US. It was felt that regional economic cooperation was the best way to safeguard Asia’s interests (Bowles, 2002). ASEAN’s Secretary-General, Rodolfo C. Severinto, argued in 1999 that, given the unevenness in global economic power, “weaker states must band together regionally, strengthening their solidarity and advancing their common interests” (cited in Bowles, 2002, p.262).

Towards Asian Economic Integration?

The CECA is Singapore’s first FTA in South Asia and India’s first FTA outside South Asia. It might well be the beginning of a grand alliance in economic relations between South Asia and East Asia. In fact, for a major part of the past half-century, India and the rest of South Asia were waiting by the sidelines while East Asia, led by Japan and China, paced ahead in economic and strategic importance. This is set to change, largely due to the rising graph of India’s economic growth. In a speech titled “Reconceptualizing East Asia”, Senior Minister, Mr Goh, points out that, “India’s [economic] rise compels us to look at our environment in new ways. It will be increasingly less tenable to regard South Asia and East Asia as distinct strategic theatres interacting only at the margins” (Goh, 2005). Goh (2005) argued that East Asian regionalism must be “forward looking”, adapting itself to benefit from partnerships with India and the rest of South Asia.

ASEAN, and Singapore in particular, has been successfully playing the role of a gobetween in the task of bringing Asian countries together. This, of course, is very much 15

in their interests, and in the interests of the rest of Asia. According to Singapore Prime Minister Mr Lee Hsien Loong, ASEAN is “strategically located between China and India….[and]…is well placed to tap the growth of both giants.” xi At its annual summit in Phnom Penh in 2002, ASEAN concluded separate agreements for cooperation with three major Asian powers -- China, Japan, and India. It is argued that these three ASEAN countries did not want to lose out to each other in building links with ASEAN (Acharya, 2002). Pakistan is a member of ASEAN regional forum and is keen to become a full dialogue partner of ASEAN. The visits by Singapore’s Prime Minister to Pakistan in June 2004 and Pakistan Prime Minister to Singapore in May 2005 are in line with Pakistan’s “Vision East Asia” policy and Singapore’s attempts to forge partnerships in South Asia beyond India. Singapore is now trying to strengthen its ties with Middle-Eastern countries (Shivpuri, 2005). According to Singapore’s Foreign Minister George Yeo, Singapore is like a “crystal with many facets” with respect to its strategy of developing trade and economic partnerships with as many countries as possible. xii

The moves towards Asian integration have been going forward in other directions as well. Significantly, India and China are coming closer. There is substantial progress in resolving the prickly border dispute between the two countries while new avenues for collaboration in economic and scientific spheres are sought. Chinese Prime Minister Wen Jiabao’s visit to India in April this year began in Bangalore - India’s IT capital where he spoke about the potential for blending India’s skills in software and China’s expertise in hardware. “If India and China cooperate, it will signify the coming of the Asian century in IT”, according to the Chinese Prime Minister (Menon, 2005). China is making impressive advances in biological sciences just as India is making considerable progress in pharmaceutical industry (Cookson, 2005). India and China have identified several areas for scientific collaboration, including genomics, nanotechnology, space research and micro electromechanical systems (Menon, 2005). India and China are also considering the possibility of signing a free trade agreement, which, in the words of Singapore Prime Minister Mr Lee Hsien Loong, “will change [Asia’s] landscape economically”. xiii

India-Pakistan relations have improved considerably over the past two years. The FTA between India and Sri Lanka came into existence in March 2000, while the FTA 16

between Pakistan and Sri Lanka came into effect in June 2005. All this raises the chances of forward movement in concluding the South Asian Free Trade Agreement, which has been delayed for more than a decade due to India-Pakistan political rivalry. But the greatest economic benefit from improved India-Pakistan relations will be the possibility of energy cooperation among Asian countries. Negotiations are going on between India, Pakistan and Iran for laying a 2,600-km pipeline that will transport natural gas from Iran to India through Pakistan. There are proposals to extend this pipeline into Myanmar and the Chinese province of Yunnan. xiv Central Asian countries including Turkmenistan, Kazakhstan and Tajikistan are keen to export their oil reserves to China and India through the land route. There is no doubt that greater linkages between the energy surplus regions of West and Central Asia and the energy deficient regions of South and East Asia will have enormous benefits (Varadarajan, 2005).

There are, of course, several obstacles to such continent-wide cooperation in Asia. The United States will be a key player, who certainly does not want to see its influence diminished in the region. It has openly expressed its dislike for the IndiaPakistan-Iran gas pipeline proposal. There are fears that the increasing bonhomie between the United States and India, importantly a proposal for a defence relationship between the two countries, forms part of a US strategy to contain the influence of China. During the recent visit by the Indian Prime Minister, Dr Manmohan Singh, to the United States, several important agreements for mutual cooperation between India and the United States have been signed, including an agreement for cooperation in civilian nuclear energy. Another factor that can wreck the forward movement towards Asian unity is divisions within the Asian region, particularly the recent spurt of rivalry between China and Japan. Japan is becoming militarily more aggressive while China witnessed anti-Japanese protests in April this year over what was perceived as misrepresentation of Japanâ&#x20AC;&#x2122;s Second World War crimes in Japanese textbooks. It is reported that nationalist sentiments are on the rise in South Korea as well (Mallet, 2005).

Conclusion

With the India-Singapore CECA having come into effect in August this year, trade and investment relations between the two countries are bound to expand greatly. Singapore has taken the lead in improving relations between India and ASEAN; and is today building new links with other South Asian and Middle Eastern countries. Singapore and ASEAN as a whole recognises the enormous potential for greater economic integration in Asia, particularly in the context of the economic rise of China and India. Indeed, regional economic links have been on the rise in Asia in recent years in response to the East Asian financial crisis and to the growing economic interdependencies among countries of North America and Europe. Improvement in bilateral relations between India and China and between India and Pakistan opens up newer possibilities for Asian cooperation.

End Notes i

iii iv

vii

viii ix

xii

Dr Jayan Jose Thomas is a Visiting Research Fellow at the Institute of South Asian Studies. He can be contacted at isastjj@nus.edu.sg. Keynote speech by Mr Lee Kuan Yew at the official opening of the Lee Kuan Yew School of Public Policy, Singapore, 4 April 2005, downloadable from <http://app.sprinter.gov.sg/data/pr/2005040401.htm> According to predictions by Goldman Sachs; cited in Goh (2005). For the year 2004-05, based on the findings of a joint United Nations Conference on Trade and Development (UNCTAD) -- Corporate Location Survey of international location experts. See UNCTAD Press Release, dated 13 April 2004, downloadable from <http://www.cgitoronto.ca/UNCTADonFDI.htm> For example, in 1994, India’s Minister of State for External Affairs of the time, Mr Salman Khurshid expressed the hope that Singapore would be a hub for an Indian trade and business presence in the ASEAN region. See the Straits Times, August 14, 1994. In the words of the then Prime Minister Mr Goh Chok Tong, Singapore welcomed the “deepening and broadening” of India-ASEAN relations and supported India’s elevation to a full dialogue partner of ASEAN. See the Straits Times, January 4, 1995. The full document and other related information on the India-Singapore CECA is available from the website of Singapore Ministry of Trade and Industry (see <www.mti.gov.sg>). Data released by IE Singapore, published in the Business Times, July 19, 2005. Data available from the website of Federation of Indian Chambers of Commerce and Industry (<www.ficci.com>) See ‘Triumph of Bilateralism’, Economic and Political Weekly, Editorial, July 2, 2005. Speech by Singapore Prime Minister Mr Lee Hsien Loong at the US-ASEAN business council, 12 July 2005, Washington DC, downloadable from <http://app.sprinter. gov.sg/data/pr/20050712992.htm> See ‘Making things crystal clear’ in the Straits Times, July 1, 2005. 18

xiii xiv

See Suryanarayana (2005). ‘ Meeting the Growing Appetite for Gas’, The Hindu, Editorial, June 18, 2005.

References Acharya, Amitav (2002), ‘An Opportunity not to be Squandered’, Straits Times, November 29. Bowles, Paul (2002), ‘Asia’s Post-Crisis Regionalism: Bringing the State Back in, Keeping the (United) States Out’, Review of International Political Economy, Vol.9, No.2. pp. 244-70. Burton, John (2005), ‘Singapore Aims to be a Biotechnology Hub’, Financial Times, June 10. Chortareas, Georgios E. and Theodore Pelagidis (2004), ‘Trade Flows: A Facet of Regionalism or Globalization?’, Cambridge Journal of Economics, Vol. 28, No.2, pp. 253-71. Cookson, Clive (2005), ‘Eastern Rebirth of the Life Sciences’, Financial Times, June 10. Datta-Ray, Sunanda K. (1994), ‘India looking to Singapore to widen its role in Asia’, Straits Times, August 31. Gaur, Seema (2003), ‘ASEAN-India Ties Entering a New Phase’, Business Times, October 8. Ghosh, Jayati (2004), ‘Regionalism, Foreign Investment and Control: The New Rules of the Game Outside the WTO’, presented at the International Development Economics Associates (IDEAs) International Conference on The Economics of the New Imperialism, Jawaharlal Nehru University, New Delhi, 22-24 January 2004, downloadable from <www.networkideas.org> Ghosh, Nirmal (2000), ‘PM pledges win-win ties with India’, Straits Times, January 19. Goh, Chok Tong (2005), ‘Reconceptualizing East Asia’, Keynote address at the official launch of the Institute of South Asian Studies, 27 January 2005, Institute of South Asian Studies, Singapore. Gourevitch, Peter, Roger Bohn and David Mckendrick (2000), ‘Globalization of Production: Insights from the Hard Disk Drive Industry’, World Development, Vol. 28, No.2, pp. 301-17. Huff, W.G. (1995), ‘The Developmental State, Government, and Singapore’s Economic Development Since 1960’, World Development, Vol. 23, No.8, pp. 142138. Kleinknecht, Alfred and Jan ter Wengel (1998) ‘The Myth of Economic Globalization’, Cambridge Journal of Economics, Vol. 22, No.4, pp. 637-647. Krueger, Anne O. (1999), ‘Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist?’, Journal of Economic Perspectives, Vol. 13, No. 4, pp. 105-124. Mallet, Victor (2005), ‘A Stir in Asia: Nationalism is on the Rise Even as the Region’s Economies Intertwine’, Financial Times, July 19th. Menon, Parvathi (2005), ‘Business as Bridge’, Frontline, Vol. 22, No.9, April 23May 6. Nordhaug, Kristen (2005), ‘The United States and East Asia in an Age of Financialization’, Critical Asian Studies, Vol. 37, No.1, pp. 103-16.

Parayil, Govindan (2005), ‘From “Silicon Island” to “Biopolis of Asia”: Innovation Policy and Shifting Competitive Strategy in Singapore’, California Management Review, Vol. 47, No.2, pp. 50-73. Pardesi, Manjeet S. (2004), ‘India maps closer links with ASEAN’, Straits Times, November 26. Sen, Rahul, Mukul G. Asher and Ramkishen S. Rajan (2004), ‘ASEAN-India Economic Relations: Current Status and Future Prospects’, Economic and Political Weekly, July 17, pp. 3296-3307. Shivpuri, Aparna (2005), ‘Pakistan’s “Vision East Policy”: Economic and Security Cooperation with Singapore’, ISAS Insights No.04, Institute of South Asian Studies, Singapore. Sridharan, Kripa (1996), The ASEAN Region in India’s Foreign Policy, Dartmouth, Aldershot. Srinivasan, T.N. (2004), ‘China and India: Economic Performance, Competition and Cooperation: An Update’, Journal of Asian Economics, Vol. 15, No.4, pp. 613-636. Suryanarayana (2005), ‘Great Potential for India-Singapore Trade’, The Hindu, June 27. Tan, Tai Yong (1997), ‘India-ASEAN Relations: Moving Cooperation Forward’, Paper presented at the ASEAN-India Colloquium, Institute of Defence and Strategic Analyses, New Delhi, 24-25 January 1997. Thomas, Jayan Jose (2005), ‘New Technologies for India’s Development’, in Parikh, Kirit S. and Radhakrishna, R. (eds.) (2005), India Development Report 2004-05, Oxford University Press, New Delhi, pp.126-40. Tourk, Khairy (2004), ‘The Political Economy of East Asian Economic Integration’, Journal of Asian Economics, Vol. 15, No.5, pp. 843-888. United Nations (2004), World Economic and Social Survey 2004: Trends and Policies in the World Economy, Department of Economic and Social Affairs, downloadable from <www.un.org/esa/policy/wess/> Varadarajan, Siddharth (2005), ‘Power Grids and the New Silk Road in Asia’, The Hindu, July 11. Viswanadham, N. (2005), ‘Cold-Chain Management: India-Singapore Initiative’, Unpublished Paper, Institute of South Asian Studies, Singapore. World Bank (2004), World Development Indicators 2004, data for selected indicators and years available from <http://www.worldbank.org/data/>

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ISAS Insights No. 7 â&#x20AC;&#x201C; Date: 19 September 2005 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 68746179 Fax: 67767505 Email: isaspt@nus.edu.sg Wesbite: www.isas.nus.edu.sg

Examining the Business Landscape in India Aparna Shivpuri Singh and Mridul Batra 1 Introduction In recent years, considerable attention has been given to India. Countries have come to realise the potential that India has because of its investment climate, skilled work force and large market. The largest democracy in the world, India is home to 1.08 billion people (approximately 16.7% of the world population) and is projected to have 823 million people in the working age group by 2015. In this paper, we highlight the key economic developments and indicators which show the huge potential of the country. The paper also talks about the Comprehensive Economic Cooperation Agreement (CECA) and its provisions. At the same time, it looks at the key considerations for doing business and investing in India. Finally, it touches on the challenges of making economic inroads into India. Economic Development and Indicators India is a vibrant and diverse country whose economy is rapidly integrating with the rest of the world. The business environment is considered conducive for achieving high levels of sustainable growth. The country's skilled managerial and technical work force match the best available in the world. GE Capital terms it 'unique'. PepsiCo finds it one of the fastest growing countries and Motorola is convinced that India can be a key sourcing centre. Indiaâ&#x20AC;&#x2122;s GDP at market prices is nearly US$800 billion a year. In the latest four quarters for which data is available, India earned US$133 billion on the current account through earnings from merchandise and invisibles. India also achieved a GDP growth rate of 6.9% due to the strong performance of its manufacturing and services sectors. In the current 2005-06 fiscal year, the government is relying on continuous strong manufacturing and services growth, with a good summer monsoon and agriculture production, to achieve around 7% growth. In 2005-06, the direct tax-GDP ratio is expected to cross 5%. 2 1

Ms Aparna Shivpuri Singh is a Research Associate at the Institute of South Asian Studies, an autonomous research institute in the National University of Singapore (NUS). Mr Mridul Batra is a Graduate Student in Economics at NUS. HE Mr P. Chidambaram, The Decade Ahead for the Indian Economy, First SICCI-ISAS Global Business Leaders Lecture, 28 March 2005.

The following are some interesting developments in India:- 3 a)

The investment rate in India rose by 3.7 percentage points of GDP in 2001-02 to 26.3% in 2003-04.

Overall public issues of stocks grew by roughly five times to Rs35,859 crore (approximately US$7,960 million) in 2004. The growth was concentrated in equity issues, particularly in equity initial public offerings. The benchmark Bombay Stock Exchange Index has increased at least 38% since last year.

Bank credit expanded by over 20% in 2004-05.

The incremental credit-deposit ratio, since September 2004, has been over 100%.

India's process of economic reforms has emerged from a political consensus spanning diverse political associations and ideologies. The democratic institutions, which have taken root for more than 50 years, are deeply entrenched in the countryâ&#x20AC;&#x2122;s system. India has been a bloomer as far as Asian economies are concerned and the reasons for these are, the colonial past and the time taken for the implementation of the democratic norms and rules after independence. When India gained independence in 1947, import substitution was the key word and the focus was on attaining self-sufficiency. Economic growth was inadequate until the government reduced state control of the economy during the 1970s. The balance of payment (BOP) crisis in 1991 led to changes in attitudes and policies in India. This deterioration in the BOP occurred despite robust growth in exports in the preceding three years. The already difficult BOP situation was accentuated in 1990-91 by a sharp rise in oil prices and the effects of the Gulf War. With the access to commercial borrowings going down and non-residents deposits showing no improvements, financing the current account deficits had become extremely difficult. Exceptional financing assistance from the International Monetary Fund, the World Bank and the Asian Development Bank had to be sought 4 . With time and a conscious effort by the Indian government, trade became freer and barriers to external trade and investment were lowered or removed. There was an emergence of a market-based reforms and India became more active in the global trading system. Reforms and growth in the financial and IT sector have created opportunities for investments in India and there has been an increased in inward remittances. On the other hand, the growing middle class is an eager consumer and is sees the benefits of globalisation and the opening up of the Indian economy. In 2003-04, Indiaâ&#x20AC;&#x2122;s gross trade flows amounted to US$225 billion, or 35% of GDP. This ratio has been rising by roughly one percentage point every year. This suggests that we might be at a trade-GDP ratio of 45% by 2015. Gross flows on the capital account went up from 15% to 20% of GDP. Summing up, India now has over 10 years of experience of total integration with the process of steady modernisation of the external sector through a mixture of a market 3 4

Ibid. S. Narayan, Trade Policy Making in India, Visiting Senior Research Fellow, Institute of South Asian Studies, June 2005.

determined exchange rate and genuine two-way exchange rate flexibility. On the policy front, India has undertaken a calibrated process - the rupee is convertible on the current account and virtually convertible for all except resident Indians on the capital account. 5 In the past few years India has been focussing on signing free trade agreements (FTAs). The South Asian Free Trade Agreement will come into effect from January 2006 and it will lead to a reduction in tariffs, and promote intra-regional trade. India has also been pursuing bilateral FTAs vigorously with various countries. As part of the Look East policy, it has already signed a FTA with Thailand and is in the process of negotiating an ASEAN-India FTA. However, it is the Comprehensive Economic Cooperation Agreement (CECA) with Singapore that has been seen as a milestone initiative. Signed in June 2005, the CECA is more than a FTA. It is India’s first comprehensive economic trade pact with bilateral economic integration agreement in services. In addition to trade in goods, it covers trade in services, intellectual property rights and double taxation avoidance agreement (DTAA), among others. Comprehensive Economic Cooperation Agreement 6 India and Singapore signed the CECA on 29 June 2005 and it came into effect on 1 August 2005. The CECA encompasses trade in goods and services, investments, and economic cooperation in education, science and technology, air services and intellectual property. The CECA perhaps best illustrates India’s efforts and desire to develop links with countries in the region, which, it believes would augment it efforts to develop its economy as well as open a gateway for it to Southeast Asia. India has committed to allowing 26% foreign direct investment (FDI) in life and non-life insurance, 74% in banking (inclusive of both FDI and foreign institutional investors), 49% in telecommunications and 74% in four areas, namely, internet service provider (ISP) gateway, ISP without gateway, Infrastructure Provider (IP) -1 and IP-2. Value added services in the telecom sector will be bound at 51%. Under the CECA, three Singapore banks - the Development Bank of Singapore Holdings, the United Overseas Bank Ltd, and the Overseas Chinese Banking Corporation Ltd - will be allowed to incorporate one insurance company, provided none of them individually or collectively holds more than 26% equity. The three banks have also been allowed to establish 15 branches in a period of four years. India will accord ‘national treatment’ to wholly owned subsidiaries of Singapore banks in terms of branching, places of operation and prudential requirements. Singapore has also agreed to grant full banking privileges to three Indian banks with or without operations in Singapore. Moreover, Singapore's key investment vehicles, Temasek Holdings and any Singapore Government Investment Company (GICs) can invest up to 20% in Indian companies. India and Singapore expect this deal to have a multiplier effect. By 5

HE Mr P. Chidambaram, The Decade Ahead for the Indian Economy, First SICCI-ISAS Global Business Leaders Lecture, 28 March 2005. Information collated from the CECA document is downloadable from the Ministry of Trade and Industry’s website at www.mti.gov.sg.

easing visa curbs, Singapore can now use qualified Indian professionals to power its own economy. Asset managers based in India or Singapore and offering mutual funds to investors in India have been permitted to invest US$250 million in equities and instruments in the Singapore Stock Exchange over and above the existing cap of US$1 billion allowed for all mutual funds put together. Under the DTAA, capital gains concession accorded to Mauritius has been extended to Singapore. Accordingly, capital gains from sale of shares earned by a Singapore resident will be liable to tax only in Singapore. In addition, while the import of capital goods into India is allowed at preferential tariffs in case of specified infrastructure projects, a provision has been included in the CECA to provide a case-by-case basis exemption for Singapore from customs duties. A special carve-out has been agreed under the CECA for education, audiovisual, telecommunication and financial services. In all these sectors, there will be ownership or control by persons from both countries. Singapore stands much to gain from the opening up of financial services markets in India. Singapore can make forays with much depth into the South Asian region as well. In addition, with the restrictions on visa and stay in Singapore removed or reduced, the expertise of the Indian skilled work force can be utilised in core sectors such as science and technology. With favourable tax treatment, investment guarantees, and lower barriers in the goods markets, Singapore certainly stands to gain much from the CECA. With a favourable deal for businessmen on both sides facilitated by the governments, the business community will now have to take the necessary steps to realise these offers. Special Investment Considerations The CECA has opened a plethora of opportunities for Singapore to invest in India. On its part, India has made certain provisions at both the central and state levels to attract foreign investments into the country. The Special Economic Zones (SEZs), tax concessions and state government initiatives are some examples of the efforts in this regard. Special Economic Zones 7 The SEZs serve to provide an internationally competitive and a hassle free environment for exports. Units may be set up in the SEZs for manufacturing and the rendering of services. Units in the SEZs have to be net foreign exchange earners but are not subject to any predetermined value addition or minimum export performance requirements. Sales in the domestic tariff area for the SEZ units are subject to positive foreign exchange earnings, and the payment of full customs duty and the import policy in force.

For more information, see Special Economic Zones in India at www.sezindia.nic.in.

The policy provides for the setting up of the SEZs in the public or private sector, joint private-public sector or by the state governments. The central government converted some of the existing Economic Processing Zones (EPZs) into SEZs as in Kandla and Surat (Gujarat), Santa Cruz (Maharashtra), and Cochin (Kerala). The EPZs in these locations became operational as SEZs in May 2004. To date, the government has approved at least 42 more locations for the setting up of the SEZs in various parts of the country. Taxes on Corporate Income and Gains India has a well-developed tax structure, with the authority to levy taxes divided between the central government and the state governments. In the wake of economic reforms, the taxation system has undergone tremendous changes in the past eight to ten years. The tax rates have been rationalised and compare favourably with many other countries. Further, tax laws and procedures have also been simplified to ensure better compliance. The recent adoption of a uniform value-added tax by all states in the country is a step towards simplifying the complexities of tax structure in India. State Government Initiatives Research at the Institute of South Asian Studies has documented the role of the federal government in promoting growth. It emphasises the role of a common governing philosophy, expectant citizenry and a cohesive and responsible administration as important attributes of growth. In this regard, it is important to recognise the role of individual state governments in attracting investments both nationally and internationally. States such as Gujarat, Maharashtra, Tamil Nadu, Karnataka, and a few others have eased regulatory and administrative burdens considerably. These states, in the process, have also set up exclusive bodies to facilitate direct investment and to service the business community. The Industrial Extension Bureau in Gujarat is one such example. The situation is now akin to competition among states for capital and investments. Challenges in Doing Business in India While there are innumerable opportunities that markets in India offer, there are challenges as well. There are some usual risks involved in every country but these risks are specific to each of them. The democratic structure of the Indian government with an intense bureaucratic presence is known to have often impeded growth and process management. According to a report by Transparency International, corruption is rampant in India and India was ranked 90th out of 146 countries. There are legal and administrative roadblocks in the smooth functioning of business in India and the foreign investor needs to be aware of these. For instance, in the recent report by the International Finance Corporation called â&#x20AC;&#x2DC;Doing Business 2006â&#x20AC;&#x2122;, India has been ranked 116th out of 155 countries when it comes to ease of doing business. The report also points out that the time taken to start a new business in India has come down from 89 days in the last report to 71 days. However, this is still much higher than the South Asia average of 35 days. 8 Besides, 11 formalities are required to be completed in India. The report also says it takes 270 8

Business in India is quite a task, Business Standard, 14 September, 2005.

days to obtain a license in India, against a regional average of 195 days. India, however, fares better on the legal rights index, fetching five on a scale of 10, compared with the regional average of 3.8. Nonetheless, this figure is far below Singapore, Hong Kong and the United Kingdom, each scoring a perfect ten. The government administrative procedures suffer from many loopholes and are often marked by red tape. The existence of three-tier governments at the centre, state and local levels have implications on policy as well. There are elections being held quite regularly in some parts of the country for various positions. This may sometimes lead to a discontinuity of policy, which could have an impact on investments and business developments. Moreover, the supernumerary political parties that exist are of different hues and ideologies, further adding to the complexities in the country. The presence of communist leaders, for example, in the present coalition government has caused industry-wide concerns about the interests of capital. At the present moment, such fears have been quite effectively handled by the present United Progressive Alliance. At the same time, some parts of India have been subjected to insurgencies, which inevitably affect the business and investment climates in these regions. With the absence of investment opportunities, these parts of India lag behind the rest of the country. Naturally, migration from a poorer to a richer state or region can be expected, resulting in social problems in the recipient state or region. Moreover, state-level inequality and comparisons can lead to tension between states, a concern which the central government needs to manage. One also cannot overlook Indiaâ&#x20AC;&#x2122;s infrastructural deficit. The roads, the ports, the transport systems, the power and telecommunication sectors, and the banks fall far short of the requirements of a growing economy. Problems of electricity and water shortage are also persistent in many cities. Conclusion The initiation of economic and financial reforms in the early 1990s by the Indian government has put the country on the path of economic growth and development. The attraction of FDI and the removal of various regulations have bolstered the countryâ&#x20AC;&#x2122;s image as an increasingly liberal economy. Overall, the reform efforts have resulted in Indiaâ&#x20AC;&#x2122;s rapid and significant economic growth and its smooth integration into the global economy. India today possesses a wealth of knowledge and technical work force that makes it an ideal place for sourcing for exports. India has also become a giant consumer with massive purchasing power mainly because of the burgeoning middle class. There is no denying that it is an IT superpower in the making and investors all over the world stand to reap the benefits of these phenomena. These factors have captured the attention of investors everywhere, including Singaporeans. However even though investing in India seems like an enticing proposition and offers immense opportunities in various sectors, it is important to do the necessary groundwork and to understand the workings of the Indian federal and state governments to be able to fully capitalise on the opportunities and advantages that India has to offer.

To do business in any part of the world, a detailed understanding of the diverse markets that the country concerned have to offer is necessary before any ventures are made in the country. It is no different for India. It is important to remember that India is a large country with 28 states having their own legislation and issues. Anyone planning to do business in India should follow a policy of cautious optimism. As the famous physicist, Nobel laureate Nils Bohr said, â&#x20AC;&#x153;Prediction is very difficult, especially if it's about the futureâ&#x20AC;?.

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ISAS Insights No. 8 – Date: 25 October 2005 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 68746179 Fax: 67767505 Email: isaspt@nus.edu.sg Wesbite: www.isas.nus.edu.sg

ECONOMIC IMPACT OF TERRORISM ON THE SOUTHEAST ASIAN REGION 1 S. Narayan 2

Introduction

The most important sea-lane of communication (SLOC) in the Southeast Asian region is the Straits of Malacca, the main passage between the Indian Ocean and the South China Sea. It is 600 miles long and 300 miles wide on its western side. The length of the Singapore Straits, which connects Malacca with the South China Sea, is 75 miles, with an overall width of less than 12 miles. The Malacca and Singapore Straits provides the artery through which a significant proportion of global trade is conducted. Some 50,000 ship movements carrying as much as one quarter of the world’s commerce and half the world’s oil pass through these Straits each year.

The second SLOC is the wider and deeper Lombok. It is less congested than the Straits of Malacca, is quite often used as an alternative passage and is considered a safer route.

The third SLOC is the 50-mile long Straits of Sunda, another alternative to Malacca. Because the currents are strong and the depth of the water is limited, deep draft ships do not use these straits. The largest SLOC is the South China Sea. It stretches 1,800 nautical miles from Sumatra to Taiwan and is home to four principal island groups and three major zones of

This paper was presented at the “Homeland & Maritime Security Asia 2005” International Conference in Singapore on 12 October 2005. Dr S. Narayan is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute in the National University of Singapore. He is the former Economic Adviser to the Prime Minister of India.

petroleum exploration. Regional and global powers, in terms of regional maritime security stability and seaborne trade, consider the Straits of Malacca and the South China Sea to be the most important, and the Straits of Malacca are one of the busiest routes in the world.

Maritime transport in these SLOCs is divided into three major categories: dry bulk (dominated by iron ore, grain and coal); liquid bulk (dominated by crude oil and petroleum products); and general cargo (dominated by containers). Tonnage via Malacca and Spratly Islands is dominated by liquid bulk such as crude oil and liquid natural gas, with dry bulk (mostly coal and iron ore) in second place. Coal from Australia and Iron ore from India, as well as crude oil and liquid gas originating in Malaysia and Indonesia; determine the directions of the flow. Container movements originate largely from China and Taiwan, though increasingly, products from Thailand, Indonesia, Malaysia and Vietnam are occupying container space.

International sea-lanes through Southeast Asia are important to the economic and political well being of billions of people throughout the world. The commercial and strategic significance of the Southeast Asian sea lanes requires little elaboration. The sea is a major source of food for the region, and the sea-lanes are the lifeline of East Asian economies heavily dependent on unimpeded access to raw materials and market and investment opportunities throughout the region. All countries have depended on the free passage of goods across the seas, and the majority of Asian Pacific countries, with their export-oriented economic structure, have depended even more on maritime transportation. An uninterrupted and secure flow of shipping is critical to survival and prosperity of regional countries.

South Asia is also a stakeholder in trade passing through these waters, as the South Asian countries depend on these waterways to access all Asian and Pacific Rim destinations including the western coast of North America. Security of these waters is therefore of paramount economic importance to all these countries.

Issues of Maritime Security

Issues of maritime security arise from several different threat perceptions and are outlined below:-

Terrorism

Several Southeast Asian guerrilla and terrorist groups possess substantial maritime capabilities. Since 2000, Al-Qaida, the Moro Islamic Liberation Front, the Abu Sayyaff Group, Jemaah Islamiyah, the Kumpulan Militan Malaysia, the Gerakan AcehMerdeka, and Laskar Jihad have all been suspected of planning or executing maritime attacks. Other groups have used the sea to transport weapons, move forces, and raise funds. The most successful has been Abu Sayyaff, which has conducted dozens of successful maritime operations in the southern Philippines, metropolitan Manila, and East Malaysia.

There is also the question of greater vulnerability of ports as compared to the security of airports. While airport security has been enhanced considerably, sea-ports remain vulnerable. Increasing containerization of trade also means that goods transported by sea do not undergo the kind of physical checks that air freights undergo. Bulk and liquid cargo also have the problem of rerouting, leading to the difficulty in tracing origins and destinations of sea cargo.

Marine Crime and Piracy

Transnational maritime crime involves such economically motivated activity as piracy, smuggling, and illegal migration. Transnational maritime crime has substantial security ramifications. It is costly in human terms and is a major drain on national resources. Furthermore, it has a synergetic effect that exacerbates interstate conflict and non-state political violence. Illegal migration fuels tension between several countries. Transnational maritime crime provides terrorist and guerrilla groups the means to move weapons and personnel, raise funds, and recruit new members. Islamist terrorists are believed to maintain routes in the Celebes Sea to move operatives, explosives, and firearms between Indonesia, Malaysia, and the Philippines.

Piracy may have a nexus with terrorism. Security officials have suggested that terrorists might work with pirates or adopt their techniques. A case in point was the March 2003 hijacking of the chemical tanker Dewi Madrim, during which pirates wielding assault rifles and VHF radios disabled the shipâ&#x20AC;&#x2122;s radio and took over the helm for about half an hour before kidnapping the captain and first officer for ransom. What looked like just another act of piracy may in fact have been, as many observers have suggested, a training run for a future terrorist mission.

Reported Piracy and Sea Robbery Attacks in Southeast Asia 2003

2002

2001

2000

1999

1998

Global Attacks

445

370

335

469

300

202

Attacks in Southeast Asia

189

170

257

167

Damage to Marine Environment

Although less frequently discussed, damage done to the marine environment and tropical reefs, oil spills, overexploitation of fisheries, etc., have also impacted Southeast Asian security. For example, the destruction of reefs and overexploitation of fishing groups are contributing to Indonesian poverty and exacerbating domestic violence. Similarly, guerrillas in the southern Philippines have targeted foreign trawlers because these are seen as holding unfair technical advantages in the race to harvest fish from traditional Moro fishing grounds. The impact of natural calamities such as the tsunami that struck these seas in December 2004 could well be exacerbated by the damage done to the marine environment. Entire communities of fishing villages were decimated by the tsunami.

Territorial Issues

In recent years states have been increasingly willing to allow infringement upon or qualification of their sovereignty for the sake of improved maritime security. Perhaps most significantly, in 1998 Malaysia and Indonesia requested the ICJ to arbitrate the ownership of Litigan and Sipadan Islands, and in 2002 Indonesia accepted a ruling in favor of Malaysia.

Today, all extra regional powers involved in Southeast Asian maritime affairs have aligned their interests toward maritime security cooperation, especially in protecting navigation in strategic sea-lanes from transnational threats. Most important among these powers are the United States, Japan, and China. Australia and India, two large neighbors with substantial navies, have also demonstrated commitment to maritime security cooperation in Southeast Asia. This convergence of interests not only removes inhibitors previously at play but also encourages new cooperation.

India also has become increasingly involved in Southeast Asian maritime security, as part of its reinvigorated activism in the wider Asia-Pacific region and its â&#x20AC;&#x153;Look Eastâ&#x20AC;? policy, aimed at

strengthening its influence in Southeast Asia. As seen above, in 2002 the Indian and U.S. navies worked together to ensure the safe transit of high-value units through the Straits of Malacca. In 2003 a Singapore-India agreement to improve maritime and counterterrorism cooperation resulted in the planning for joint exercises on sea-lane control, and the first Indian exercise in Singaporean waters. Shortly after the previously described Indonesia-MalaysiaSingapore coordinated trilateral patrols of the Straits of Malacca began, India raised the possibility of participating and contributing to the operations and exercises.

Economic Issues

Financial losses from pirate attacks are estimated to run into the billions of dollars. An OECD report estimated that the overall cost of a major terrorist attack on shipping in a strategic location would likely be measured in the tens of billions of dollars. Oil accounts for half of Asia’s energy consumption. Japan imports 98 per cent of its oil, and by 2020, China’s oil consumption will nearly double its present consumption. Much of that oil will transit through the narrow straits of Southeast Asia. Oil tankers are an especially juicy target; in addition to disrupting energy supplies to and from the region, a single well-placed attack on a large tanker could block a chokepoint like the Strait of Malacca altogether, throwing the entire shipping industry into chaos.

In contemporary times, the Straits of Malacca has assumed critical maritime significance because of the very large volume of trade transactions. The World Bank has predicted that by 2020, seven of the world’s top ten economies would be China, India, Indonesia, Japan, South Korea, Taiwan and Thailand, and those in Europe – France and Germany. The size of the Chinese economy is expected to be about 40 per cent larger than that of the United States. Asia in particular has become the focal point of world interest as Asian economies grow at an astonishing rate in comparison to those of the West. Besides, 60 per cent of the world’s population lives in Asia. Asia also produces 50 percent of the world’s Gross Domestic Product. This is expected to grow to 75 per cent over the next ten years.

The Indian economy has been growing at an impressive rate of 6.5 per cent. In the second quarter of 2005, India has recorded an impressive 8.1 per cent growth. During 2003-2004, merchandise goods exports were valued at US$ 63.5 billion, recording a growth rate of 20.4 percent in dollar terms. They are likely to cross US$ 80 billion in 2005-2006. Asia and Oceania

accounted for nearly 46 percent of India’s exports. Exports to China registered a growth rate of 49.8 per cent and China and Hong Kong together accounted for about 10 percent of India’s exports. Similarly, imports by India from the Asia Pacific countries have seen an impressive rise.

In 2004, India also announced a comprehensive Foreign Trade Policy (FTP). The FTP takes an integrated view of the overall development of India’s foreign trade and its primary objective is to double India’s percentage share of global merchandise trade by 2009. Over 75 per cent of India’s trade by volume and 75 per cent by value are seaborne. If one follows the direction of trade of India’s exports and Asia Pacific imports from India, the above statistics are a clear indicator that much of the trade transit through the Straits of Malacca. Therefore, safety and security of these straits is vital for India’s economic growth.

As regards energy requirements, 67 per cent of India’s need is sourced from the Persian Gulf and 17 percent from West Africa. There is very little that is sourced from the Southeast Asian countries. However, keeping in mind the vulnerability of energy security, both in terms of sourcing and transportation, India may, in the future, look towards the Southeast Asian markets. Such supplies will have to transit through the Straits.

India’s Exports to Asia Pacific Countries (US$ Million) Country

2001-2002

2002-2003

2003-2004

Growth (%)

China

755.99

1975.48

2959.22

49.80

Hong Kong

1921.23

2613.33

3250.32

24.37

Indonesia

423.86

751.65

996.33

32.55

Japan

1266.33

1864.03

1714.34

-8.03

South Korea

382.62

544.88

42.41

Malaysia

669.94

634.51

-5.29

Singapore

789.52

1421.58

2116.54

48.89

Thailand

503.65

600.42

19.21

Chinese Taipei

299.48

460.53

53.78

Philippines

201.71

423.89

110.14

36011.45

42734.57

Total

Source: India’s Foreign Trade Update, October 2004, Economic Division, Department of Commerce, Ministry of Commerce and industry, Government of India, New Delhi, p.38.

Indiaâ&#x20AC;&#x2122;s Imports from Asia Pacific Countries (US$ Million) Country

2002-2003

2003-2004

Growth %

China P.R

2792.04

4048.35

45.00

Hong Kong

972.59

1492.57

53.46

Indonesia

1380.87

2096.35

51.81

Japan

1836.33

2642.26

43.89

South Korea

1522.01

2453.57

61.21

Malaysia

1465.42

2045.20

39.56

Singapore

1434.81

2029.96

41.48

Thailand

379.00

608.96

60.68

Chinese Taipei

460.53

53.78

Source: Indiaâ&#x20AC;&#x2122;s Foreign Trade Update, October 2004, Economic Division, Department of Commerce, Ministry of Commerce and industry, Government of India, New Delhi, p.51. Regional maritime security cooperation has also been limited by a lack of resources. Not only have many of the Southeast Asian states faced challenges to their economic development, but also most of them possess sea territories disproportionately large with respect to their land areas and cannot properly patrol them. Only Singapore and Brunei, relatively wealthy states with modest territorial seas, are capable of adequately securing their maritime territories. This is one of the reasons states have generally given their own operations priority over international cooperation. Resource shortages were exacerbated by the Asian financial crisis of 1997, which caused several states, including Malaysia, Singapore, and Thailand, to delay plans to expand and improve their maritime capabilities. The effect was especially profound in Indonesia, where economic hardship and an American spare-parts embargo have so immobilized the national fleet that only an estimated 15 percent of Indonesiaâ&#x20AC;&#x2122;s naval and law enforcement ships can get under way at any one time.

In recent years, Southeast Asian economies have recovered, and the resources necessary to sustain the deployment, and in some cases even expand the capabilities, of maritime forces are again available. Since 2001, Malaysia, Singapore, the Philippines, and Thailand have all taken possession of new naval ships. Malaysia is committing the resources necessary to establish a new coast guard force to relieve its currently overburdened navy and maritime police. These trends are expected to accelerate in the near future, and regional governments are expected to double their expenditures on new naval ships by 2010. This is not to say that the problem of

resource shortages has been solved. Most significantly, in the state with the largest sea territory, the Indonesian maritime forces continue to suffer from a critical lack of resources and domestic military support to maintain and operate their ships. However, speaking generally of the region, economic recovery is encouraging improved maritime security cooperation.

For example, according to some studies, Indonesia requires more than 300 vessels, large and small to protect its maritime space and resources, as well as plenty of port facilities, human resources and technology for that purpose. It has only about 115 vessels, and out of these there are only about 25 vessels that are operating at se at a particular moment. Indonesia would require enormous resources to protect its maritime zones.

The controversy over the idea of U.S. participation in joint anti-piracy patrols in the Malacca Straits as part of the Regional Maritime Security Initiative (RMSI) highlighted the divergence of interests between Singapore and its neighbors. Singapore allowing US Customs Service officers to inspect US-bound containers in Singapore under the Container Security Initiative (CSI), and whether the costs of implementing the initiative are worthwhile are still to be made evident. Even if the direct cost is not viable, the indirect benefits are reported to be very high. Australia, US and Singapore also conducted their first joint exercise under Operation Saber. Singapore has thus become the only country receiving US patronage in maritime security issues. As a consequence, it is likely that in the future as well; other ports which are incapable of implementing the CSI might be forced to feed their cargo to Singapore. Singapore would then become the key hub for Southeast Asia. This is a likely advantage to Singapore under the CSI.

Maritime security concerns compete for attention with traditional military threats, guerrilla insurgencies, narcotics production, organized crime, and poverty; accordingly they have historically held rather low positions in the interest hierarchies of most Southeast Asian states, even those with large maritime territories, such as Indonesia and the Philippines.

Cooperation Measures

Global cooperation is characterized by the accession of states to international conventions or other cooperative agreements of worldwide scale. Post 11 September, the United States has pushed for greater surveillance of the oceans, and the IMO convention of December 2002

chalked out a new, comprehensive security regime for international shipping. The most far reaching of these is the new International Ship and Port Security Facility Security Code (ISPS code). The code contains detailed security â&#x20AC;&#x201C; related requirements for Governments, port authorities and shipping companies in a mandatory section (Part A), together with a series of guidelines on how to meet these guidelines in a second, non-mandatory section. In essence the Code takes the approach that ensuring the security of ships and port facilities is a risk management activity and that to determine what security measures are appropriate, an assessment of the risks must be made in each particular case. This puts additional burden on risk mitigation measures, including costs of marine insurance.

South East Asian states, with the exception of Singapore, will most likely be followers rather than leaders in the development of these measures, complying with initiatives that offer net advantages. Singapore, a relatively rich nation with a strong maritime outlook, a critical dependence on international trade, and a security strategy that relies heavily upon international cooperation, may lead the way.

Even when extra regional powers participate, a multilateral cooperative arrangement maybe considered regional if its goals are primarily regional. In South East Asia, the development of stronger multilateral arrangements for maritime security cooperation has received wide discursive endorsement. Such cooperation could come in the form of new multilateral agreements or be superimposed on an existing organization, such as ASEAN, ARF or APEC.

Bilateral agreements are most likely to be operationalized between states that have generally cooperative outlooks, are least distrustful of each other, and share security interests. A prototype would be the coordinated Malaysian-Thai border patrols. Recently, Singapore and Malaysia have conducted joint patrolling exercises.

If bilateral agreements are more likely than multilateral endeavors to produce operational cooperation, the most profitable form of future cooperation will be a synergetic network of bilateral arrangements. Because they are based on bilateral agreements, networked cooperation arrangements enable states to customize the most direct relationships so as to maximize value and minimize risk. The networks, however, also increase trust and understanding between all their members, thus reducing the costs of building further cooperative relationships. Such

networks would be informal at first, but once formalized would provide benefits to parallel those of multilateral arrangements.

Conclusion

It is possible to draw certain clear directions from the trends. Firstly, maritime security in the South East Asian seas has to take note of the interests of stakeholders like India and the South Asian countries, who use these seas as a major trade route. These stakeholders have already evinced their interest and willingness by participating in joint security exercises and in strategic initiatives. Secondly, the issues of maritime security overarch issues of terrorism as well as trade and have to be handled holistically.

The costs of increased surveillance, risk mitigation, CSI and other measures may have to be viewed against the benefits of clearing the area of all these threats. Recent terrorist events, most recent Bali bombings, have highlighted the vulnerability of this region. Thirdly, it is clear that economic growth in Asia in the next two decades will outpace the rest of the world, and that commodities, fuel as well as finished products will overwhelmingly have to depend on these trade routes to integrate into world trade flows. Initiatives and co-operation, therefore, cannot be viewed through the narrow prism of immediate cost-benefits alone, but through a larger worldview of regional security.

****************

ISAS Insights No. 9 – Date: 5 December 2005 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 68746179 Fax: 67767505 Email: isaspt@nus.edu.sg Wesbite: www.isas.nus.edu.sg

INDIA’S NEXT ECONOMIC WAVE: ANIMATION AND INTERACTIVE MEDIA INDUSTRY Jayan Jose Thomas and Indu Rayadurgam ∗

Introduction

The liberalisation efforts by the Indian government have resulted in the emergence of numerous sectors, which offer great possibilities for India’s development. One such recent sector is interactive media and animation, along with information and communication technologies (ICTs).

The animation and interactive media industry in India has been making headlines of late, not so much for its impact on the domestic market, but as a premier outsourcing destination for western animation companies. This paper examines the growth and development of the interactive media and animation industry in India. It discusses India’s position and India’s advantages in the global animation industry, the challenges that India faces in this industry, the path ahead, and opportunities for international collaboration in this sector.

II.

India in the Global Animation Industry

The global animation industry is expanding fast. The Animation Council of Philippines estimates that the revenues from animation industry worldwide have been growing annually at 20% to 30% over the past few years. According to India’s National Association of ∗

Dr Jayan Jose Thomas is a Visiting Research Fellow at the Institute of South Asian Studies, autonomous research institute in the National University of Singapore. He can be contacted at isastjj@nus.edu.sg. Ms Indu Rayadurgam is a Research Associate at the same Institute. She can be contacted at isasir@nus.edu.sg.

Software and Services Companies (NASSCOM), revenues from the global animation industry will amount to US$50-US$70 billion by end-2005. Today, animation products are increasingly used in films, TV programmes, commercials, games and online education. Following Walt Disney’s 1988 production Who Framed Roger Rabbit, worldwide interest in animation feature films has been rising. Four major animation movies released in 2004 collected record revenues. Children’s channels across the world have seen their numbers rising ever so rapidly in the last few years. Animation products also have applications in the medical, architecture, and legal fields. 1 The global non-entertainment animation industry, including work in scientific and medical animation, now accounts for revenues worth $15 billion. 2

The global animation industry is highly fragmented. There are about 7500 animation companies, but only a handful of them reap revenues of US$1 million and above annually. The global animation industry is also witnessing major structural changes. Importantly, companies are outsourcing computer animation jobs in a big way. Any animation-related production in the Unites States or Canada is not exclusively produced in that country alone. Work is outsourced to many Asian countries like the Philippines, China, Singapore and India. These Asian countries are not only cost competitive, but are also high on quality and availability of skills. In addition to reducing their costs, western companies outsourcing animation jobs to Asia can tap the creative skills of Asian professionals.

Outsourcing of animation jobs produces several benefits for developed and developing countries. 3 It democratizes the financing of animation. The industry is opened up to a much wider pool of independent creators. Outsourcing expands the market (leading to the creation of more movies, shows and games because of the lower costs); protects creative jobs and generates new employment opportunities in the developing world in an industry characterised by the boom and bust cycle of big budget productions.

2 3

Estavillo, E. Maricel, ‘Focus digital animation, medical transcription: sunshine ventures in business outsourcing’, 7 September 2005, Business World. Anjali Prayag, ‘Medical animation gaining importance’, Business Line, 13 October 2005. Macedonia has low wages, high unemployment, but near European levels of education and access to technology. In order to reap the benefits offered by the animation industry, the government in Macedonia has created e-information by wiring every school with computer labs equipped with broadband connection. FX3X, an innovative studio has proposed 3D@E-schools, a distance learning program. It has been a successful experiment with about 400 students attending the first level of training. See Brad deGraf, ‘The Balkanization of animation’, Computer Graphics World (www.cgw.com), August 2004.

India is a new player in the outsourcing of animation products. Till the past year or so, the post-production segments of Hollywood were outsourced to Japan, Korea and Taiwan. But very recently, India has become a favourite destination for outsourcing of animation jobs. Even animation companies in other Asian countries are outsourcing their jobs to India due to the high savings in labour costs involved. Global entertainment giants like Walt Disney, Fox Entertainment and Time Warner have been active players in the Indian market. MTV is considering India as an outsourcing destination next to Korea and Philippines. And Cartoon Network is buying programs made in India. Indian companies draw each scene, sketch each character and animate them on the computer after receiving the concept, storyline and script from the client. Then the overseas clients add the voiceover and music.

It is expected that India will be able to stake claim to an increasingly larger pie of the growing world market for animation products. According to India’s NASSCOM, the animation production and services sector in India will generate US$1.5 billion in revenues in this financial year (2005). A study by Anderson Consulting indicates that the Indian animation industry is expected to grow at an average annual rate of 30% for the next three years and reach US$15 billion by 2008. 4 In 2002, the Indian-made Ali Baba and the 40 Thieves was nominated for an Oscar. Table 1: Animation Production, India and the World, Values in US$ Billion 2000

2002E

2005F

Total global animation production

31.5

45.0

51.7

Demand from Entertainment Sector

22.7

32.4

Demand from Non Entertainment Sector

8.8

12.6

14.7

Animation Production by India

0.6

1.5

E-Estimate, F- Forecast Note: Non-entertainment comprises the industrial & commercial applications of animation Source: NASSCOM Animation report

See Dhillon Amrit, ‘Animated India joins the cartoon connection’, 16 July 2005, The Age.

III.

India’s Advantages in the Animation Industry

India’s attractiveness as an animation hub lies in the presence of an English-speaking workforce, high-quality software engineers, a large pool of creative talent, good studios and low costs. The cost of producing a 30-minute 3D animation programme in India is US$60,000 compared to US$250,000-400,000 in the United States and Canada. India has a cost advantage compared to the Philippines, which is another low cost producer of animations. The average monthly salary of an animation professional in India is US$600 compared to US$1,000-US$1,200 in the Philippines. The cost of outsourcing one hour of animation work to India is estimated to be 30% to 40% of the corresponding costs in leading animation centres in Korea, Taiwan and the Philippines.

India’s advantages in low costs have been exploited by many multinational firms and production studios. The advent of digital animation coincided with the liberalization of the Indian economy and India offered the benefits of lower production costs, strong creative and technical skills and a large English speaking population. This has led to the development of state of the art animation studios in several Indian cities, and these studios are collaborating with global entertainment companies.

IV.

Indian Firms in the Animation Industry

Given the vast business opportunities, animation companies have mushroomed across India. The major centres for the production of animation and interactive media in India are Mumbai, Chennai, Bangalore, Hyderabad, Thiruvananthapuram and Kochi. These cities possess a unique combination of software expertise, production and animation expertise, and infrastructure, which are upgraded from time to time in order to meet international standards.

Major animation firms in India include Pentamedia Graphics in Chennai, Jadoo Works in Bangalore, CD India in Chandigarh, UTV Toons in Mumbai, Moving Picture Company in Film City, Noida, Heart Entertainment and Colour Chips India in Hyderabad, and Toonz Animation India in Thiruvananthapuram in Kerala. They also include Crest Communication, Maya Entertainment, Silvertoon Studio and Dhruva Interactive. Ramoji Film City in Hyderabad has been involved in the making of Hollywood motion pictures by providing

equipment, crew, sets and post-production facilities. In Mumbai, ace director Subhash Ghai's Mukta Arts is building a network of global clients.

It is reported that the top ten animation firms in India conduct business worth US$10-US$12 million a year. Toonz Animation, for example, recorded revenues of US$20 million in 200405 and projects a growth up to US$30-US$35 million in the next financial year. Maya entertainment, started in 1996 with eight animators, has now expanded to a 150 strong team. Tata Elxsi, headquartered in Bangalore, is also on a high growth path, with a strong network of over 20 offices worldwide. 5

UTV Toonz has recently signed a three-year US$10 million deal with the US-based animation distributor, BKN New Media, for the production of a series of animation products, including the ‘Kong’ series of serials and movies. Indian animation companies have been involved in the production of full-length animated feature films such as The Legend of Buddha, Gulliver's Travels and Tommy and Oscar. Crest animation has been involved in 40 episodes of a cartoon show called Jakers, The Adventures of Piddley Winks and Pet Alien on Cartoon Network. Rhythm and Hues (India), a subsidiary of the Los Angeles studio under the same name, has contributed to works such as Scooby Doo 2, Garfield and future releases including The Lion, The Witch and The Wardrobe.

Animation Products for Illiterates

The interactive media and animation industry in India has a large domestic market too to tap on. A field-study based research conducted by one of the authors in July-August 2004 on the diffusion of ICTs in India’s rural areas offers some interesting results in this regard. 6 The study showed that television is a highly popular medium as a source of information in the Indian countryside, as it combines visual and audio effects and is less demanding of the cognitive skills of the user. Almost 35 per cent of India’s over 1 billion population is illiterate. There is great demand from this segment of Indian population for an innovative medium that facilitate communication and information sharing, while at the same time, being 5 6

See Pradeep, Priya, ‘India toons into animation’, Siliconindia, September 2005. Thomas, Jayan Jose (2005), ‘Informational Development in Rural Areas: Some Evidence from Kerala and Andhra Pradesh’ in Political Economy and Information Capitalism in India: Digital Divide, Development Divide and Equity, edited by Govindan Parayil and published by Palgrave Macmillan Ltd., forthcoming (in 2005)

easily accessible to the masses via the television. Products of interactive media and animation can fill this demand gap to a large extent; they can be great tools for education, entertainment and awareness among illiterates in India’s rural and urban areas.

VI.

Challenges to Growth of India’s Animation Industry

While it is true that India’s animation industry is growing at a remarkable pace, the fact remains that this growth is largely a result of the mushrooming of “studios-for-hire.” In animation feature films, for example, while Indian companies carry out the animation work, most of the writing, character design, and storyboarding are done abroad. India is yet to become a successful player in concept creation, the high value-adding segment of the industry which remains a preserve of western firms. India’s advantages of low costs in this industry will be too short-lived, and sooner rather than later, the country will have to start developing its own intellectual property. There are several challenges faced by the Indian animation industry.

Lack of Finance

Indian animation firms cannot match their western counterparts in financial strength. It is pointed out that state support in the form of tax holidays is crucial for success in the animation business. Canada, for example, offers major incentives to its studios for developing animation products. However, financial institutions in India have not been much forthcoming in funding projects in animation and interactive media. The long gestation period before fruition of projects discourages potential investors. This can be a major hurdle, and it has, in fact, led to the stoppage of a few production ventures. For example, Jadooworks had to stop production of animated epic of Krishna due to technical problems and lack of funding. The firm was supposedly on the verge of bankruptcy and this has led to the retrenchment of about 250 workers. 7 Interestingly, Jadooworks is the same firm which drew appreciation from Thomas Friedman in an article in February 2004 for employing traditional artistes and

See ‘Jadooworks scripts its own tragic story, Times News Network, 13 December 2004, (<http://infotech.indiatimes.com/articleshow/956947.cms>)

transforming their skills to computerised digital painting – he was arguing that globalisation can have beneficial impact on traditional artists. 8

The experience of Jadooworks underlines the fact that it is still too ambitious for Indian companies to single-handedly enter into animation projects. Even a small project in the animation industry entails a budget of US$30 million, which is not affordable for Indian firms.

International Attention

Tata Elxsi Visual Computing Labs (VCL) in India tied up with Prologue Films in the United States to design the computer generated graphics for display at the academy awards in March 2004. This fact is not very well known. What this highlights is another challenge faced by the Indian animation industry – attention at the national and international level. While Indian animation companies do contract work for western firms, the entire credit, including ownership of copyrights, for the work goes to the western firm.

Paucity of Physical and Legal Infrastructure

As per the recommendations by a NASSCOM study, improvement of animation studios and better training for Indian animators are important for India’s long term success in the animation industry.

India should develop an organized animation sector and also frame suitable laws and copyright rules. The infrastructural facilities have to be improved to attract more foreign investment and to enhance the efficiency of the industry. Also more emphasis has to be placed on the domestic industry as the domestic demand for animation in the entertainment; gaming and computer sectors are expected to grow multifold.

Friedman, Thomas. L, ‘Animators draw global lessons’, Times Union., 26 February, 2004, (downloaded from <www.factiva.com>)

Need For Training

"There are no academic institutes like Indian Institutes of Technology, Regional Engineering Colleges, Polytechnics, etc., churning out animators by the thousands. What we have are only fine arts schools which teach the fundamentals but not the technical skills required for production," points out K. Chandrasekhar, General Manager, Media Works, Tata Elxsi. According to him, this is a major drawback for the industry in India.

Education in new media has to be embedded into the mainstream curriculum. Students have to realise that they can have a lucrative career as animators, and the government as well as educational institutions have to start programmes for their career development. The animation sector will benefit greatly by giving encouragement to the community of traditional artists as much as to technically trained professionals. In other words, integration of the rural and urban talent will prove highly beneficial. Also, NASSCOM’s President Kiran Karnik believes that there is a need for an animation academy to build a steady inflow of animation professionals in the industry. NASSCOM extended its help to the government for framing the curriculum and also work with the industry players to enhance the academic-industry interface. 9

Government Support

Mr. Kapil Sibal, Minister of State for Science and Technology, identified animation industry as one of the important sector for India’s export oriented growth. 10 However, compared to governments in other countries, efforts by the Indian government to encourage the sector have been very minimal. The government of South Korea funds animation ventures on a partnership basis. 11 Bangladesh has a World Bank-funded support programme for the animation industry. In contrast, there have not been many initiatives from the Indian government to promote the animation industry, at least till the past one year.

The Indian government signed co-production treaty with France about 20 years ago and efforts are on to reactivate it. A treaty was signed with the Italian government, which in turn sent a delegation to Goa. Efforts are also on to sign similar agreements with Britain, Japan, 9

10 11

Interview by NASSCOM President Kiran Karnik on the current state and potential future of animation industry in India. (see www.animationexpress.com). ‘Extent of market depends on affordability, says Sibal’, Financial Express, 28 October 2005. Peeyush Agnihotri, ‘Suspended Animation’, The Tribune, 14 July 2003, (<www.tribuneindia.com>)

Brazil, Canada, Netherlands and China. These treaties will lead to sharing of costs by partner nations and also the dispersion of technical know-how amongst the partner nations.

VI.

The Way Ahead

According to a report by Goldman Sachs, India, Russia, China and Brazil, the BRIC economies, are the fastest growing in the world and India has the potential to become the third largest economy in the world. The Indian animation and entertainment sectors will reap benefits from the general economic growth in the country. India has the potential to become the global animation hub. 12 Indian animation companies are collaborating with international production studios and animation companies.

India has recently produced the first fully indigenous, full length animated feature – Bhaggmati. This is a major step forward. Bollywood movies, with their colourful dance and song sequences, are now becoming popular in foreign markets, notably in western markets. It is possible that animated stories from Indian epics and folklores too will find a global audience. Toonz Animations created an indigenous production, The Adventures of Tenali Raman, which is today regaling television audiences in Singapore, North America and Europe – probably a sign of things to come.

Institutes for training in animation are springing up in different parts of the country. The Maya Academy of Advanced Cinematics, an animation and visual effects institute, opened its training centre in Chennai in June 2005. Picasso Digital Media has recently announced plans to set up two animation education and production facilities in Hyderabad and Delhi. These are all positive developments.

At the same time, Indian information technology companies are coming up with some innovative tools for the media and animation industry. For example, Beehive Systems has introduced a unique laptop-based solution for transferring superior quality video clips over low bandwidths from the field. Another company, Prologix Software Solutions, has created text-to-speech software, Vaachak, which has the capability to convert text in Hindi, English

‘Huge scope seen for animation industry’, Business line, 19 September 2005.

and other Indian languages into high quality, natural sounding speech. Cambridge Animation Systems’ animo software is voted to be the most popular production software in India.

New Moves by the Private Sector

Ittina Group, a property development firm, has invested US$5 million in an animation studio and school, Takshaa, in the Indian city of Hyderabad. The company plans to invest US$20 million by the year 2007. The school has the capacity to train 250 students and boasts of inculcating traditional artistic skills in addition to software training. The team heading this venture is renowned for its contribution to the global animation sector. 13 It is planning to collaborate with universities in Germany and Singapore to offer university programmes.

Maya Entertainment has collaborated with international clients such as BBC, Nickelodeon (UK) and Electronic Arts among others. Toonz Animation's top customers are Disney, Hallmark, Paramount and Marvel Pictures. It also has co-production agreements with Eva (France) and Viva Vision (Canada). Maya Entertainment was nominated for the ‘Best Cinematics’ award at the game developers conference for their work at the Electronic Arts School in 2004. It was also nominated for the Puldnella awards in animation for its work for the TV series The Tale of Jack Frost made for BBC. Tata Elxsi, in addition to the computer graphics work it did for the 2004 academy awards, also helped New York designers in their bid for the 2012 Olympics Games. Hungama TV (in which more than 80% of the capital is contributed by UTV) has plans to acquire overseas strategic investments. UTV has the option to invest up to 20% of the capital in a joint venture deal with Malaysia’s Astro All Asia network for setting up a kids channel in Malaysia, Indonesia, Singapore and Brunei within three years.

Sun Network TV is planning to launch a kids cartoon channel in association with UTV. As per the discussions conducted so far, UTV will take care of the programming and marketing of the channel while the distribution of the channel will be handled by Sun TV.

Plans are on to create an Indian version of Sesame Street and the local version is expected to be called Gali Gali Simsim, and this will be launched on Cartoon Network. An educational 13

See ‘Reality firm Ittina to foray into animation’, Business Line, 6 October 2005.

research team led by Dr. Asha Singh is in the process of developing an innovative curriculum keeping the Indian kids in mind.

Animation Company Colour Chips has entered into an alliance with a South Korean government agency to explore possibilities for Korean film makers to tap the low cost technical expertise in India

Professional Bodies in Indian Animation Industry

The Animation Society of India (TASI) and Association Internationale Du film D'Animation (ASIFA) have been involved in various animation workshops and events since their inception. Experts feel that it is a very important time for the Indian animation industry, both for professionals and budding animators. Organisations like ASIFA India and TASI have been nurturing talented artists in the animation industry

TASI has been in the business for almost four years and has been involved in more than 80 interactive sessions and numerous full day workshops. According to TASI secretary, Ranjith Singh, the objective of TASI is to promote the cause of animation industry through collaborative efforts with other organizations.â&#x20AC;&#x2122;

ASIFA, the only internationally recognized organisation for animation, has opened up it first ever national chapter in India. The Indian chapter of ASIFA will be located in the Toonz Studios in Techno Park, Trivandrum. The need for creating more awareness about the animation industry among the public and market players was stressed by ASIFA. It will act as a manpower consultant providing artists to studios around India. It has also given a representation to the Indian Government to recognise the animation industry as a part of the information technology industry.

New Government Initiatives

A 25-acre Special Export Zone (SEZ) is going to be constructed in the outskirts of Thiruvananthapuram exclusively for the animation industry. The commerce ministry is said to have approved the creation of the SEZ within the Film and Video Park (FV Park) set up by the Kerala Industrial Infrastructure Development Corporation near Thiruvananthapuram. The 11

state government is said to have created a 15,000 sq metres animation facility to welcome animation houses to create their bases. The FV Park made a good start when the Chennaibased Prasad Labs has made it its base to process all Malayalam films for the next two years. Kerala has been making efforts at convergence in the areas of information technology and cinema.

â&#x20AC;&#x2DC;Ready to go? Animateâ&#x20AC;&#x2122; is a new animation academy in Kolkata. This offers programmes in basic and advanced 2D and CG (computer generated) animation with a curriculum that focuses on hands-on training. An alliance has been formed with Los Angeles-based Gigapix Studios to facilitate technical support, co-production and co-finance animation projects. The state government of West Bengal is providing much encouragement to the animation industry.

The Animation Production Association of India recently suggested to the Information and Broadcasting Ministry of India that all TV channels must ensure 10% reservation for local animated content. The government can further encourage investments and participation in this sector by providing tax benefits. It can provide grants to Indian animators for participation in international conference and for taking up training programs abroad.

VII.

Opportunities in Collaborations

Indian companies are trying to improve quality and making attempts to compete globally with the market leaders in the industry. It is said that the year 2004 is a watershed for the Indian animation and gaming industry (according to the Federation of Indian Chambers of Commerce and Industry [FICCI] report on the Entertainment Industry). The year was marked by increased use of animation in the Bollywood segment. According to the FICCI report, the increasing demand for downloads of games on mobile phones will enhance the opportunities for gaming companies and bring in new entrants.

Several Indian companies are entering into collaborations with foreign new media companies, which outsource their work to the Indian companies. Recently, Toonz Animation floated a joint venture with First Serve International LLC, a global media company which aims to produce and distribute top-notch animation programming for the world market. The new

venture will be headed by former Walt Disney executive Ed Borderding. In 2004, a Chinese company also invested in India Games Ltd.

Toronto-based entertainment products company Kahani is collaborating with Mumbai based Animation Bridge. In this venture, Kahani is expected to invest US$30-US$40 million over the next three years to engage in film production. The storylines and scripts will be completed in Canada whilst product development and promotion are expected to be done in India. The company is also planning to tie up with Bangalore and Hyderabad-based studios. Zee’s animation arm, Padmalaya Telefilms, has signed a US$14 million contract with Italian producer-distributor, Mondo TV, to co-produce four new animated series. Padmalaya also has collaborations with British animation companies Mallard Media and Ealing Animation.

International Cooperation in the Animation industry

The Indian government is signing co-production treaties with other countries. Professional organisations too are trying to promote the Indian animation sector abroad. ASIFA, India, organises film festivals, conducts workshops and animation film competitions at the international level. Kahani and Animation Bridge have showcased their animation shows at Cannes Mipcom (a summit where mobile, broadband and interactive professionals from 95 countries interact with broadcasters, producers and distributors) in October 2005.

X-media Lab has been floated to help local, independent digital media producers reach their ideas successfully to the market with assistance from outstanding international new media professionals, who act as mentors to the companies and project teams. The second lab held in Singapore from 17 – 19 November 2005, "Creating Successful Computer Games”, attracted worldwide response. Indian developers have also been invited to interact with eight of the best games people in the world. There is also a plan to do a lab in India next year. 14

According to Mohit Anand, Country Manager, Microsoft Entertainment and Devices Division, Microsoft India, “Gaming in the last 7-8 years has really come a long way but it still has a long way to go. Critical factors like PC penetration, organised retail, broadband, and gaming hardware need to be addressed to help the industry. Those factors are gradually

See interview with Brendan Harkin of X media lab in <www.indiatimes.com\anex>

changing and the future definitely looks bright. India is the youngest country in the world, and the new generation is completely tech savvy. We believe that gaming is definitely here to stay and evolve.â&#x20AC;? 15

What are the opportunities for engagement between India, Singapore and other Southeast Asian countries in the field of interactive media and animation industry? To begin with, Singapore and Southeast Asia will be an important market for products from Indiaâ&#x20AC;&#x2122;s animation industry. Singapore has significant expertise in telecommunication and media industry. Harnessing the favourable trade and investment climate offered by the Comprehensive Economic Cooperation Agreement between the two countries, firms in Singapore should consider investing in Indiaâ&#x20AC;&#x2122;s animation and media business. Maya Academy of Advanced Cinematics, a leading player in the Indian animation industry, is planning to extend its operations to Singapore. It is currently working on a project for BBC and has also been involved in the video games division.

Entertainment is one of the fastest growing sectors in India-ASEAN relations. The entertainment industry is expected to grow at a compound annual growth rate of 20 percent from 2002 to 2007. The entertainment industry, with total revenues of US$3.6 billion in 2002, is projected to grow up to US$8.7 billion by 2007. ASEAN is a big market for Indian films. There are tremendous collaboration opportunities between India and ASEAN in the area of 3D animation, graphics, etc.

The Philippines was, until recently, a fast growing animation industry, rich in creative talent, and it was a major destination for outsourcing by animation firms in the United States. However, with rise in costs, the animation industry in the Philippines has begun to decline, and Filipino workers in the industry have been migrating to India and Singapore in search of jobs. India, the Philippines, Singapore and even China must realise that there is little to be gained in the animation industry in the long run by competing with each other on costs. Rather, they should seek avenues for cooperation, and direct their efforts at acquiring intellectual property rights in this creative industry.

See the interview in <www.indiatimes.com\anex> (17 November, 2005).

VII.

Conclusion

The Indian interactive media and animation industry has seen tremendous growth in the last year or so. It is fast emerging from being an outsourcing destination for western animation companies to develop and showcase its own capabilities and potentials. The emergence of various industry-related organisations and companies, and the availability of affordable and talented expertise, point to tremendous potential this sector has to offer.

Whilst there are internal challenges to the Indian interactive media and animation industry, given the efforts being undertaken by the government and like-minded organisations, it will be sooner rather than later, that India lays a strong claim as a major international player in this industry. It is thus opportune for Singapore and countries in the region to identify potential opportunities for collaboration so that we are able to ride on the waves of the Indian interactive media and animation industry.

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ISAS Insights No. 10 – Date: 30 December 2005 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 68746179 Fax: 67767505 Email: isaspt@nus.edu.sg Wesbite: www.isas.nus.edu.sg

EAST ASIA SUMMIT – AN APPRAISAL DS Rajan and Raakhee Suryaprakash ∗ The East Asian Summit (EAS) held at Kuala Lumpur on 14 December 2005 after a 15-year gestation period was an important event in the evolution of Asian relations. The former Malaysian Premier Dr Mahathir first mooted the idea in 1990. Sixteen world leaders from ASEAN, China, Japan, South Korea, India, Australia and New Zealand, representing half the world’s population attended the summit. The Russian President Vladimir Putin also addressed the summit after attending the first ASEAN-Russia meeting. Russia has been keen on becoming a part of the EAS. The summit leaders in their Kuala Lumpur Declaration of 14 December 2005 pledged themselves to work towards realising the dream of building the Asian Community. This will be done through a “broad based dialogue on strategic, political and economic issues of common interests”. In this dialogue process, the significance of issues like “financial stability, energy security, economic integration, growth, and trade and investment expansion, narrowing down of the developmental gap and eradication of poverty, and good governance” were highlighted. The persisting differences among the participants, particularly China, Japan and South Korea were set aside for the duration of the conference, as the participants were well aware that the EAS countries account for a fifth of the global trade and is expected to be the growth engine of the future global economy. With the significant economic growth registered by the Asian giants, China and India, the revival and reforms in the Japanese economy and the economic dynamism being displayed by ASEAN, the EAS looks certain to emerge as the growth centre of Asian and world economies. The economic thrust of the region has also given it a considerable political clout, which was articulated by the Filipino leader Ms Gloria Arroyo when she said “together, the political clout of this grouping is considerable”. The key to the success of the EAS therefore lies in “togetherness”. The deep differences that were visible during the summit, as China and South Korea separately refused to have bilateral interaction with Japan, will have to be either harmonised for or isolated from the regional priorities. There is a natural balance of forces emerging in the region and the challenge before the EAS leaders is to make this balance constructive and conducive to the interests of the larger community. The signing of the summit declaration after resolving divergent view ∗

Mr D. S. Rajan is a Research Fellow at the Observer Research Foundation in India. Ms Raakhee Suryaprakash is a Research Intern at the same organisation. The paper was prepared for the Institute of South Asian Studies, autonomous research institute in the National University of Singapore.

points, underlines the fact that the EAS leadership has the necessary foresight and resilience to meet this challenge now as well as in future. The key to constructive engagement in the region lies with ASEAN, which is set to form the core of the emerging community and drive the EAS in desired direction. China may want to join this core to play a leading role in shaping the regional dynamics as it has repeatedly laid the thrust of “ASEAN + 3” formation (China is a part of +3). Chinese Premier Wen Jiabao’s comments that “the East Asia summit should respect the desires of the East Asian countries and should be led by East Asian countries” reflected China’s aspirations. China also has the material strength of its extensive economic engagement with the region and growing military capabilities to buttress its claims to do so, but a Chinese insistence in this respect, beyond a limit will arouse hidden apprehensions about China’s possible desire to dominate the region. This may provoke anti-Chinese forces in the region to stoke the smouldering fires of regional rivalries to weaken and sabotage the EAS movement. The EAS, accordingly should avoid the so called “class differences” between “ASEAN+3” and “ASEAN+1”. Malaysian Prime Minister and the host of the summit did well to reiterate that “the East Asia Summit together with the ASEAN+3 and the ASEAN+1 process could play a significant role in community building in the region.” The essence of unity lies in aggregating interests and aspirations and not in asserting them. The Summit Declaration, therefore, rightly emphasised the “principles of equality, partnership, consultation and consensus”. The Declaration also made it clear that the ASEAN remains the “driving force” of the EAS and the community building endeavour will be “consistent with and reinforce the realisation of the ASEAN community”. Yet another challenge before the EAS is to work faster for bridging economic differences in the region. The EAS was a gathering of rich as well as poor countries, of the faster developing and slow growth economies. The economic divide within the ASEAN, which the former Singapore Prime Minister Goh termed as the “digital divide” between the old ASEAN 6 and the new ASEAN 4, namely Cambodia, Myanmar, Laos and Vietnam, is wide and striking. There are also questions of political order (democracy) and human rights that insert divergence in the emerging community. These questions will have to be addressed within the parameters of sovereignty and freedom of internal affairs. Here again ASEAN has evolving mechanisms, which can be improved and implemented in the interests of the whole community. India looks at the EAS as a firm move in the direction of realising its long cherished dream of building Asian community. India strongly supports ASEAN as core of the EAS as it has been supporting the ASEAN Regional Forum to remain ASEAN driven. India’s Prime Minister Dr Manmohan Singh made this clear on the eve of his departure to Kuala Lumpur on 13 December 2005 when he described ASEAN as the “experienced driver”. He also emphasised the growing co-operation with the other Asian giant, China, rejecting the speculation that India is interested in containing or balancing China in the region. The emphasis on constructive engagement with China was evident during his meeting in Kuala Lumpur with his Chinese counterpart. India sees the EAS as an Asian arc of advantage. To concretise this perspective, India has committed itself to contribute to the stability and prosperity of the region. To fulfil its prevailing and future commitments, India has to reform its economy faster so as to prepare itself for active participation in the Pan-Asian Free Trade Agreement that found echo during the summit. It has also pledged all possible support, ranging from credit lines to building human resource and technological capabilities, to the weaker members of the region. India will welcome the opportunity, as and when it comes, to join the APEC in reinforcing its commitment to the whole region. In playing its positive role in the region,

India will be guided by its legitimate interests in conformity with “peace, stability and prosperity of the region” as a whole, and not by old animosities or new affinities. The EAS is the first step in the direction of a vision of the Asian people. Through bilateral and multilateral interactions and dialogue on “broad strategic, political and economic issues of common interests and concerns”, the members would “strive to strengthen global norms and universally recognised values”. India’s participation in the EAS is a real opportunity to broaden and deepen its engagement with the emerging Asia.

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ISAS Insights No. 11 – Date: 9 January 2006 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 68746179 Fax: 67767505 Email: isaspt@nus.edu.sg Wesbite: www.isas.nus.edu.sg

INDIA’S ENERGY POLICY: REQUIREMENTS, SUPPLY AND CHALLENGES S. Narayan ∗ The Draft Report of the Expert Committee on Integrated Energy Policy was put out by the Planning Commission in December 2005 for comments. 1 The report examines the issues from the point of view of energy requirements and the supply options, and attempts to address issues of energy security. The per capita level of energy consumption in India is half of that in China and one third the world average. GDP per capita and energy consumption have a close correlation, and therefore energy needs are likely to rise dramatically as the economy grows at 7-8% a year. The elasticity of total primary commercial energy consumption is around 0.82 for India, consistent with cross-country regression figures. In addressing energy policy issues, the report attempts to move away from the traditional approach of determining optimal supply strategy with quantitative targets. The report takes a broader approach of recommending an enabling environment such that relative economics of alternatives are left to the combination of technology and prices, and choices left to the economic decision takers. As such, the document recommends broad policy alternatives, and has to be viewed against this context. The commercial energy requirements have been estimated to the year 2031-32, assuming a population of 1.46 billion at that time. At a 7% rate of growth, GDP would be over 5.5 times that of today, and at 8% growth, over seven times. The scenarios depict a four to five times growth in energy consumption, with electricity requirements going up from 633 BkWhr to over 3,000 BkWhr, requiring a five to six fold increase in installed generating capacity from 131,000 GW in 2003-2004. This increase is expected to come from an increase in Hydro from 75 BkWhr to 500 BkWhr, Nuclear from 18 BkWhr to 441 BkWhr, with coal based energy generation projected at 78% of energy demand in 2031-32 and gas based generation set to increase to 20% from the current level of 12%. The estimates for domestic energy have been projected assuming that pattern of fuel use for a particular monthly per capita consumption expenditure class remains the same as observed in the last NSS survey. The

∗

Dr S. Narayan is a Visiting Senior Research Fellow and Head of Research at the Institute of South Asian Studies, an autonomous research institute in the National University of Singapore. He is the former Economic Adviser to the Prime Minister of India. The Draft Report of the Expert Committee on Integrated Energy Policy was prepared under the chairmanship of Mr Kirit S. Parikh, Member (Energy), Planning Commission, India. A copy of the draft report is available at http://planningcommission.nic.in/genrep/intengpol.htm.

projections continue to show a heavy dependence on traditional fuels like firewood and dung cake of around 62% in 2031-32 (down from around 81% currently). The interesting numbers are that crude oil use is expected to increase from around 105 MMT in 2001 to a range between 264 to 324 MMT in 2024-25; demand for natural gas has been estimated to grow from 62 MMSCMD in 2001 to a range between 195 and 225 MMSCMD in 2025, and demand for coal from 473 MTe in 2006-07 to over 1100 MTe in 2024-25. The scenario summary, given a range of alternatives to choose from, including coal dominant, forced hydro and forced nuclear scenarios, indicates that the fuel mix in 2031-32 could vary between 42% to 65% for coal, and up to a maximum of 6% for nuclear and 4% for hydro. Oil would be in a range of 28% to 33% of the fuel mix and Natural gas between 7%and 12%. There is emphasis on realization of full potential of hydro-energy and a fast growth in nuclear energy. Hydro potential for India has been estimated at 150000 MW, and the report recommends its realization. Nuclear energy is recommended to grow 20 times to meet over 6% of primary energy requirements by 2031-32. The real concerns in the study emerge in the supply side. Given that transportation fuels for aviation, ships and road transport are likely to depend heavily on petroleum products, and that the growth of urbanization would increase LPG and kerosene use significantly, there is only limited flexibility in substitution of petroleum products. The best estimates of domestic oil production in 2025 do not exceed 50 MTe. Therefore, imports would have to increase from around 80 MTe of crude currently, to over 200 MTe in 2025. The world pumps around 87 million barrels of oil daily, and Indiaâ&#x20AC;&#x2122;s total annual imports of crude are equivalent to around a week of global crude production, or less than 2% of traded oil. Recent estimates, including testimonies accepted by the US House of Representatives from experts as late as December 2005, indicate that while global oil production is unlikely to peak for the next 20 years, the supply is likely to increase by 25% per day by 2015. The draft report envisages that, even in the low growth scenario, Indian imports would have to double by 2015. This raises serious concerns about availability as well as prices. This is true for natural gas as well. Global production is growing at around 2% per annum, and there are no signals that this rate of growth would accelerate in the next decade. Yet the natural gas demand has been projected to double by 2015, and the availability of this fuel would be constrained. The worries about coal, the base fuel of the report, are even more serious. Of the total global coal production of 4 billion tons per annum, coal trade is of the order of 700 million tons. The requirement of coal as per the projections increases from 415 million tons in 2004-2005 to 2.7 billion tons in 2031-32, that is, in volume terms, 68% of global production and nearly four times the current volume of global trade. Even in the scenario wherein there is full development of hydro and acceleration of nuclear generation, the demand for coal is 2.1 billion tons per annum in 2031. Given extractable indigenous coal and lignite reserves of around 14 billion tons, this represents around seven years domestic availability, nor is it likely that global production and trade would grow to an extent that a reasonable management of own resources could be supplemented by adequate imports. The heavy reliance in the report on market mechanisms to arrive at an optimal policy mix do not seem to have adequately taken note of the above global supply side limitations. Further, there are already distortions in the fuel price market, in terms of inefficient labour intensive coal production, multiple prices for gas and regulated prices for petroleum products. There

are also historical factors that have resulted in industry, including steel plants, using cheaper gas. In fact, the political choice of the locus of the gas pipeline has resulted in the acceleration of a particular development along the pipeline. The report is silent about the costs of removing these distortions, and who would pay for them. The report is also silent about the investments needed to develop the massive infrastructure needed to develop the port and transport infrastructure needed to handle the massive imports, and whether they are to be added on to the fuel costs or to be treated as public goods. It would have been useful if the report had followed through on its premise of market management of fuel choices, had identified distortions and obstacles, and suggested solutions. Finally, the suggestions for alternate approaches and technologies do not appear to be well argued. Efficiency of energy use, in coal fired power stations, automobiles, and in domestic use is indeed important but it is difficult to see the steps that the report is suggesting beyond those that have been pursued all these years. The enthusiasm about gas hydrates, hydrogen fuel, solar power and alternate energy sources has remained undiminished across many energy committee reports; and this document offers no illumination why future efforts in the country would be any different from the past. It would have been useful if the report had examined why these have not taken off, and suggested changes in strategy, structures, institutions as well as approaches from lab to use. As it stands, the reader has an apprehension that the experts are clutching at straws. The report is an important one in that there has been an attempt to look holistically at different energy scenarios in the context of a 7% to 8% GDP growth and has to be commended for its analysis.

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ISAS Insights No. 12 – Date: 16 January 2006 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 65166179 Fax: 67767505 Email: isaspt@nus.edu.sg Website: www.isas.nus.edu.sg

Informational Development in Rural Areas: Some Evidence from Andhra Pradesh and Kerala ∗ Jayan Jose Thomas** In Political Economy and Information Capitalism in India: Digital Divide, Development Divide and Equity, edited by Govindan Parayil and published by Palgrave Macmillan Ltd in 2005. I. INTRODUCTION This chapter examines the factors associated with the diffusion of information and communication technologies (ICTs) in rural areas, and in doing so it looks at the potential role that ICTs can play in the development of rural areas. Empirical support for the chapter is based on field studies conducted in July-August 2004 in two rural locations in two South Indian states—Kuppam in Andhra Pradesh and Malappuram in Kerala. Various projects and programmes to use ICTs for enhancing developmental opportunities are going on in both locations. A major conclusion of this chapter is that ICTs can play a potent role in rural development, but only if the basic obstacles to rural prosperity are removed through radical changes – through land reforms, revitalisation of rural credit, and greater state intervention in rural infrastructure, and primary education. India has made impressive gains in the software industry and information technology enabled services (ITES) in recent years. The annual rates of growth (over the previous year) of India’s software production (in current prices) were over 50 per cent in six of the

∗

I thank the National University of Singapore (NUS) for providing a research grant to carry out this study. I received excellent research assistance from Askarmon, George V. Thomas, M. Hemasekhar, J.K. Manjunath, K. Purushotham, and Sebastian K. Jose while carrying out the survey. Govindan Parayil, V.K. Ramachandran, Madhura Swaminathan and Milagros Rivera provided useful suggestions and criticism on this study. I am very grateful to all of them. ** Dr Jayan Jose Thomas is a Visiting Research Fellow at the Institute of South Asian Studies, an autonomous research within NUS. He can be contacted at isastjj@nus.edu.sg.

nine years between 1992-93 and 2001-02. 1 There has been a phenomenal increase in the outsourcing of business operations to India by firms in western countries. India’s English-speaking population, that numbers 30-50 million, and particularly the Englishspeaking technical professionals, whose labour costs are low by western country standards, is the major attraction for firms in the developed world. The Central government and various State governments in India have been giving great attention to the growth of the information technology industry. India has a population of more than 1 billion people, 70 per cent of which live in rural areas, 29 per cent are below the poverty line, and 34.6 per cent are illiterates. 2 Indian development today faces a paradoxical situation: the much-talked about growth of industries based on ICTs in some Indian cities along with the continuing impoverishment in India’s rural areas. The case of the State of Andhra Pradesh is much telling in this regard. Andhra Pradesh, and in particular its capital-city, Hyderabad, has received widespread attention in recent years for attracting sizeable investments in the IT industry. Over the same period of time, however, Andhra Pradesh has been passing through a phase of unprecedented rural distress, including cases of starvation deaths, distress migration of landless agricultural labourers, and suicides among handloom textile workers. 3 The former Chief Minister of Andhra Pradesh, Mr. N. Chandrababu Naidu, had won great adulation in the national and international media for the proactive policies of his government for the IT industry. However, Naidu’s nine-year old government (between 1995 and 2004) fell flat after suffering a major debacle in the elections held in May 2004. There was, reportedly, great popular discontent against his government’s neglect of livelihood issues of the poor (Hindu, 2004). It

obvious

that

enclave-type

growth

the

industry

benefiting only sections of urban population and not making any noticeable change in the lives of vast masses of rural people is bound to generate contradictions and social tensions (see D’Costa, 2003). 4 In India and in other developing countries, it is a challenge for public policy to reach the benefits of ICTs to people in rural areas. The aim of this paper is to discuss some aspects of this challenge.

See Government of India (2001a), p. 35-6 and Government of India (2001b), pp. 1-7, p.15. See also Economist (2001b), Paul (2002), and Ashish and Athreye (2002). 2 Poverty data for 1993-94, measured by Head-count ratio, from Drèze and Sen (2002), Table A.3. Literacy rates from Census of India, 2001. 3 See Krishnakumar (2001) and Sainath (2003). 4 According to D’Costa (2003), an enclave-type growth of the IT industry has led to “uneven and combined development” in India. 1

There are seven sections in this paper. The next section (section 2) examines the potential of ICTs in development, and some of the challenges in realizing this potential. Section 3 outlines the experiences of Andhra Pradesh and Kerala in regard to information technology and development. Section 4 is a note on the methodology and study areas for the field research for this paper. Section 5 discusses the diffusion of ICTs in rural areas and section 6 discusses the potential role of ICTs in the development of rural areas. Section 7 concludes the paper.

II. ICTs FOR RURAL DEVELOPMENT: POTENTIAL AND CHALLENGES There is great optimism in policy-making circles that the new technologies, more specifically ICTs and biotechnology, will benefit the less-privileged sections of the world’s population. Human Development Report 2001 expresses the hope that advancements in ICTs and biotechnology “will lead to healthier lives, greater social freedoms, increased knowledge and more productive livelihoods” (UNDP, 2001, p.1). According to many of the ongoing policy discussions, the real potential of ICTs lies in the fact that ICTs have revolutionized the means for transmission of information and communication of knowledge. Information and knowledge are going to be the basis for economic development in the coming decades, as per these policy discussions (see World Bank, 1999). 5 No doubt, information aids the process of development in several ways. Information about markets and technology can lead to increase in incomes of poor households in rural areas. With the opportunities offered by communications technology, a small business unit in a remote town can establish commercial links with distant corners of the world and update itself with the latest developments in production technology. In developing countries, poor farmers and craftsmen have traditionally been exploited by middlemen because of the former’s lack of information about prices (Eggleston et al, 2002). By providing information about prices, ICTs can be powerful tools for empowerment of the disadvantaged sections of society. Economist (2001a) reports that, using mobile phones, fishermen in Kerala keep themselves informed of fish prices -which fluctuate throughout the day and between the various landing spots -- while at sea; World Development Report 1998/99 notes that knowledge is the basis for economic development and that it is because of information gaps and knowledge gaps that poor countries lag behind richer ones.

in this way, they manage to get higher prices than what they used to get earlier by selling their catch to middlemen. ICTs can be instruments of participation for the excluded sections of society. For instance, members of an isolated community can voice their development needs through the Internet. ICTs have great applications in health and education. With the emerging area of telemedicine, medical advice and advanced medical services can be delivered to patients in a village dispensary through satellites. 6 Applications of ICTs such as multimedia are used in programmes of distance learning for working adults. 7 ICTs can considerably improve the efficiency of governance and state intervention, particularly of local bodies. They can, for instance, aid the speedy issuance of government certificates to citizens, and the sending of e-mail complaints by citizens to the administration (UNDP, 2001; World Bank, 1999; UNDP, 1999) . 8 Challenges, with special reference to the case of India However, there are several reasons to believe that the above-referred policy discussions are overly optimistic of the impact of ICTs on development (see Heeks, 2002; Keniston, 2002; Sreekumar, 2003).9 It will be argued in this paper that there are two major concerns with respect to the potential of ICTs for rural development. These concerns are related to, first, whether people in rural areas have the capabilities to use the new technologies, and secondly, whether people in rural areas have the capabilities to use the information provided by the new technologies A major factor that impairs the capabilities to use ICTs by people in rural areas is the poor level of physical infrastructure, including deficient telecommunication networks, low penetration of personal computers and poor Internet connectivity. In India, per 1000 population, there are only 50 telephone lines (in March 2003), and only 0.38 Internet subscribers (in September 2002). These are averages for India as a whole, which conceal the huge variations between different Indian States and between urban and rural areas of

On the use of ICTs in the delivery of health services, see Chandrasekhar and Ghosh (2001) and Reddy and Graves (2000). 7 See, for example, Patel (2002). 8 ICTs also help to collect and report data at the local level. â&#x20AC;&#x153;Local reporting combined with global informationâ&#x20AC;? is the key to effective developmental action, writes Gage (2002). 9 Heeks (2002) writes that, with respect to the impact of ICTs on development, a large part of the present discussion takes a highly optimistic and technologically deterministic view. A less optimistic and socially deterministic view will be more realistic, Heeks (2002) argues. 6

each State. 10 The cost of a telephone or Internet connection in India, in absolute figures and as a share of household’s total income, is considerably higher than the corresponding costs in many other countries including South Korea and China (UNDP, 2001, Table A2.4). Telecom reforms in India from the 1990s have resulted in very impressive gains to the country’s telecom infrastructure; yet the reforms so far have not been very successful in extending telecom connectivity to India’s rural areas. 11 Mansell and Wehn (1998) write that the capabilities for producing software and information content that are relevant to people in rural areas and the capabilities required for converting information into useful knowledge are equally important for realizing the opportunities promised by ICTs. 12 For effective spread of the Internet to rural areas, information content needs to be created in the local languages; at present, most of the content available on the Internet is in the English language. It is also pointed out that, while research in technologies is more often carried out in developed countries and cater to the demand for technologies in these countries, the specific needs for technologies in poor countries are often neglected (UNDP, 2001). 13 In India, there has been some progress in developing information and communication technologies that are cheaper and are suited to the country’s needs, including technologies like simputer, wireless in local loop (WiLL), voice over Internet protocol (VoIP) and Ka-band satellite communications. 14 It is matter of concern, however, that research and development expenditure by the private and public sector India has declined over the 1990s. 15 The impact of technologies depends on the structure of the society upon which the technologies are applied, and this is true in the case of ICTs as well. 16 Under the prevalence of a regressive social structure, ICTs can aggravate inequalities -- between people in urban and rural areas, between the well- educated and illiterates, and between those who possess some form of entitlements and those who do not. 17 Diffusion of new technologies will be very difficult among persons whose educational levels are low. It will Information on Internet from the Ministry of Telecommunication, Government. of India; on telephones from Press Information Bureau, Govt. of India cited in www.indiastat.com (See Thomas, 2005a), Table 8.5. 11 See Chandrasekhar (2003) and Pukayastha (2002). 12 See Velden (2002) on this. 13 It is argued, therefore, that developing countries have to build national systems of innovation in order to facilitate transfer of technologies from advanced countries and to create technologies that are appropriate to the needs of developing countries (see Mowery and Oxley, 1995). 14 See Jhunjhunwala (2001). 15 See Government of India (2001b) p.144 and Thomas (2005a), Table 8.6. 16 According to Parayil (1999), technological change can be conceived as an evolutionary process operating within a contingent social milieu. See also Eischen (2000). 17 For a review of some of the arguments of this nature, see Schech (2002). 10

also be difficult when social and asset-based inequalities are rampant, as when a person belonging to the scheduled caste (socially oppressed class) is barred from using a village community Internet server. 18 In India, high levels of illiteracy and forms of social exclusion based on caste and gender continue to prevail in several regions of the country. Literacy rates in India are particularly low in rural areas, among females, among members of socially disadvantaged tribes and castes, and in States like Bihar, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh. While adult male literacy rate for India as a whole was 76 per cent (in 2001), literacy rate was below 5 per cent among rural scheduled caste women (in 1991) in several districts of Rajasthan. 19 Successive governments in India have not been greatly committed to ensuring basic education for the masses: the country has still not achieved the goal of providing free and compulsory education to all until the age of 14 (DrĂ¨ze and Sen, 2002, pp. 146-67). Evidence presented in this paper will show that backward social conditions place limitations not only on the capabilities to use ICTs, but also on the capabilities to use the information provided by ICTs. III. INFORMATION TECHNOLOGY AND DEVELOPMENT: EXPERIENCES OF ANDHRA PRADESH AND KERALA The field study for this paper was carried out in July-August 2004 in two rural locations, one in Kuppam in Andhra Pradesh and another in Malappuram in Kerala. Experiments to use ICTs for the betterment of livelihoods of marginalised sections of the population are going on in various places in India. These include the use of personal digital-assistants by health workers in Rajasthan (Reddy and Graves, 2000); a project to impart functional literacy among working adults reported to be going on in some 80 locations in Andhra Pradesh (Patel, 2002); attempts by the MS Swaminathan Research Foundation (MSSRF) in a few villages in Pondicherry to reach the benefits of ICTs among farmers and fishing community (Dugger, 2000); the use of a centrally linked IT network by sugarcane farmers in Warana region in Maharashtra (Vijayaditya, 2000); the Gyandoot project of eUNDP (1999) reports that people who access the Internet are more often the better educated and higher income groups; men rather than women; and younger rather than older people. A study by Arun and Arun (2002) showed that ICTs may reproduce or even intensify many of the broader gender inequalities. 19 Census 2001 data on literacy rates among rural scheduled caste women in districts of Rajasthan is not yet available. 18

governance in Madhya Pradesh; and the TARAhaat and Drishtee rural IT projects currently going on in Punjab and Haryana respectively (Kaushik and Singh, 2004). 20 It is relevant to explain here why, from among such many experiments, the experiments in Kuppam and Malappuram have been chosen for the field study. In April 2002, the State Government of Andhra Pradesh and Hewlett Packard Ltd. have jointly launched a programme to build an “inclusive community” (i-community) – a community that makes use of information and communication technologies to ensure widespread participation of its members in economic growth -- in the Kuppam region. 21 The key feature of the Kuppam i-community project is a network of community information centres, operated by local entrepreneurs, who receive financial and technical assistance from the State Government, Hewlett Packard and World Corps India (a nongovernmental organization committed to rural development). This project aims at creating several developmental opportunities in Kuppam. 22 The State Government of Kerala has launched the Akshaya project in Malappuram in November 2002. The most important feature of the project is a network of Akshaya information centres operated by local entrepreneurs, with assistance from local-self governing bodies. The project aims to impart IT literacy to at least one member of each household in Malappuram, to cater to the information and communication requirements of people, and thus create “powerful social and economic e-networks” in the region. As a result of the project, in August 2003, Chamravattom village in Malappuram district of Kerala has secured the distinction of being the first fully e-literate village in India, by imparting basic computer skills to at least one person in each of the 850 households in the village. 23 Andhra Pradesh has been highly celebrated in recent years for its successes in IT. The State’s capital, Hyderabad, is home to several large IT firms, public and private sector research centres, and is expected to join the select group of cities all over the

See <www. gyandoot.nic.in> on the Gyandoot project; see Satyanarayana (2000) and Kumar (2000) on the e-governance projects in Andhra Pradesh; and see <www.keralaitmission.org/> on the e-governance projects in Kerala. 21 See <www.hp.com/e-inclusion/en/project/kuppam.pdf> (downloaded on 09-06-2004). See also the report by Dunn and Yamashita (2003) in Harvard Business Review 22 The assembly constituency of Kuppam has been returning Chandrababu Naidu to the State Legislative Assembly continuously from 1989 -- and even in the most recent elections held in 2004. 23 See the Editorial in The Hindu, August 9, 2003. 20

world, identified as top global hubs of innovation. 24 Andhra Pradesh sends large numbers of software professionals to the USA very year: software professionals from Andhra Pradesh accounted for 23 per cent of all Indian software professionals working in the USA in 1998 (Ramachandraiah, 2003). Number of engineering colleges in Andhra Pradesh increased from 36 in 1994-95 to 237 in 2004. According to the Government of Andhra Pradesh, ‘IT industry’ (including IT hardware, IT software and ITES) grew at a compound annual growth rate of over 80 per cent in Andhra Pradesh during the period between 1999 and 2002. 25 Kerala, although capable of more, is, today, far behind Andhra Pradesh in the growth of software or ICTs industry. In 2000-01, software exports through software technology parks of India (STPIs) was Rupees 1.4 billion (or 0.7 per cent of the total software exports through STPIs in India) in Kerala compared with Rupees 20.17 billion (or 10.06 per cent of the total in India) in Andhra Pradesh. 26 However, for all its noted successes in the IT industry, the growth of per capita State Domestic Product in Andhra Pradesh in the 1990s was slower than the national average, and noticeably slower than the corresponding growth in Kerala. 27 Poverty level, measured by Head Count Ratio, in Andhra Pradesh is considerably higher than in Kerala (see Tabe 1). In 1999-2000, average household per capita expenditure in Kerala was the highest among all Indian States, and much higher than the per capita expenditure in Andhra Pradesh (Drèze and Sen, 2002, Table A.3; see also Table 1). In 2003, per 1000 population, there were 78.5 telephone lines in rural Kerala compared to 20.3 only in rural Andhra Pradesh (see Table 1). Much more striking are the variations in social achievements between the two States. Kerala has been widely praised for its exceptional achievements in social spheres, particularly in health and education. 28 Andhra Pradesh’s social achievements are, on the other hand, far from noteworthy. In 2001, female literacy rate was only 51 per cent in Andhra Pradesh compared to 88 per cent in Kerala. In 1993-97, an average male could expect to live for 61.2 years in Andhra Pradesh compared to 70.4 years in Kerala (see According to Wired magazine, cited in UNDP (2001), p.38. ‘Information and Communication Technology Policy of the Government of Andhra Pradesh 2002’, Government Order Ms. No. 27, dated 27-06-2002 (downloaded from <www.apit.com/ictpolicy02.pdf> on 09-06-2004). 24 25

<.http://planningcommission.nic.in/plans/stateplan/sdr_punjab/sdrpun_ch13.pdf>(downloade d on 05-10-2004). 27 See Thomas (2005b) for details on Kerala’s economic and industrial growth over the decades. 28 For details on Kerala’s development experience, see Ramachandran (1996) and the set of essays in Parayil (2000).

Table 1). Kerala has had a relatively successful programme of land reforms, and shows relatively low levels of inequality between members of different caste, gender, and between people in urban and rural areas; in all these, Andhra Pradeshâ&#x20AC;&#x2122;s track record is far less impressive. Keralaâ&#x20AC;&#x2122;s development achievements are, largely, the achievements of public action: of democratically elected State governments, of political and social movements, and of its people, acutely aware of their rights and responsibilities. Public action of a similar nature is yet to happen in Andhra Pradesh.

Table 1: Selected indicators of development, Andhra Pradesh, Kerala and India Andhra Pradesh

Kerala

India

275

3288

1027

61.2

70.4

60.4

541

810

589

Growth of real per-capita State domestic product (% per year) 1990-1 to 1998-99

3.5

5.1

Poverty Index: Head-count ratio (%), 1993-94

Telephones (per 1000 people), rural, 2003

20.3

78.5

14.9

Number of institutions for higher education, 1993-94

850

234

9003

323

Area (thousand square kilometers) Population, 2001 (millions) Life expectancy at birth, males, 1993-7 (years) Literacy rate, age 7+, females, 2001 (%) Average house hold expenditure per capita 1999-2000 (Rs/month)

Number of engineering colleges, 1993-94

Source: For indicators of economic growth and social development, and for population, see DrĂ¨ze and Sen (2002), Table A.3. For indicators on development of new technologies, see Central Statistical Organisation (1999). For indicators of telecom infrastructure, see Press Information Bureau, Government of India cited in <www.indiastat.com>.

IV. METHODOLOGY AND STUDY AREA The field study for this research included discussions with officials of government and non-governmental agencies involved in programmes for diffusion of ICTs in Andhra Pradesh and Kerala. It also included interviews with entrepreneurs operating the information centres in Kuppam and Malappuram. The core data for this research came from a stratified sample survey of households in selected areas in Kuppam and in Malappuram. 29 The Andhra Pradesh government-Hewlett Packard (HP) i-community project is carried out in the Kuppam area or the State Legislative Assembly constituency of Kuppam, which comes within Chittoor district of Andhra Pradesh. In Andhra Pradesh, for administrative purposes, each district is subdivided into mandals, mandals are further subdivided into grama panchayats, and each grama panchayat consists of a number of villages or habitations. The Kuppam area has a population of approximately 320,000

The methodology for field study for this paper is motivated by field studies conducted in Ramakumar (2004), Pais (2003) and Rawal (2001). It also benefited from an ongoing study conducted by V. Surjit of the Indian Statistical Institute, Kolkata.

people and is spread over five mandals: Gudupalli, Santipuram, Ramakuppam and Venkatagiri Kota. There are, in total, 99 grama panchayats and 714 villages in the five mandals that constitute the Kuppam area. At present, 13 community information centres (CICs) operate in different parts of the Kuppam area as part of the i-community project. Five of these CICs started operations in April 2002, three of them in September 2003, and another five of these CICs were started in April 2004. After discussions with officials of HP, officials of the concerned Mandal revenue office, and entrepreneurs of CICs in the Kuppam area, it was decided that the sample survey would be conducted in Kadepalle village in Gudupalle mandal and Venkatepalle village in Santipuram mandal. These villages are located within a 3 km. radius of a CIC started in April 2002. I prepared a list of all the 141 households in Kadepalle village and 168 households in Venkatepalle village, with names of head of household and ownership of land holdings. 30 This list formed the sampling frame for the survey. A representative sample of 45 households was then chosen from the sampling frame, the representative sample consisting of 20 households from Kadepalle and 25 households from Venkatepalle (representing, respectively, 14.2 per cent and 14.9 per cent of the sample population in the two villages). Stratified random sampling procedure with stratification on the basis of the size of land holdings was adopted in the choice of representative samples. Compared to the Kuppam i-community project, the Akshaya Project in Malappuram is carried out on a larger scale. The Akshaya project covers an entire district (Malappuram), and there are 582 Akshaya centres operating in different parts of Malappuram district as part of the Akshya project. 31 In Kerala, for administrative purposes, districts are subdivided into taluks, and taluks are further subdivided into villages. 32 There are a total of six taluks and 135 villages in Malappuram district. 33 After discussions with officials of the Akshaya project, officials of the district and local-level administration, and entrepreneurs of the concerned information centres, it was decided As part of the Integrated Child Development Services (ICDS) Project, which is being carried out in the Kuppam area, Anganwadi teachers conduct a door-to-door survey of all households in their village, collecting socio-economic information about households as well as health information of children in the households. I have used this information collected by Anganwadi teachers in Kadepalle and Venkatepalle in the preparation of sampling frame. 31 <http://www.akshaya.net/itmission/akshaya/vitem.asp> 32 There is a difference between a village in Andhra Pradesh and a village in Kerala. In Kerala, a village is an administrative sub-division of a Taluk. For purposes of local self governance, Malappuram district (district panchayat) is subdivided into 14 block panchayats and 100 grama panchayats. 33 The six taluks are Nilambur, Ernad, Perinthalmanna, Tirur, Ponnani and Tirurangadi. 30

to conduct the sample survey in Karachal ward (which is Ward No.2 in the village) of Pullippadam village located in Nilambur Taluk; an Akshaya information centre is presently operating in Karachal ward. I prepared a list of all the 381 households in Karachal ward with names of head of household and their ownership of land holdings. 34 A representative sample of 45 households (representing 11.8 per cent of the sample population) was selected from this sampling frame using stratified random sampling procedure, with stratification was done on the basis of size of landholdings. It may be noted that the Kuppam i-community project and the Akshaya project are still in their initial stages: both these projects were begun in 2002. It is still too early to make any attempts to judge the success of the programme. Clearly, this was not part of the aims of the survey either. The sample survey focussed on how socioâ&#x20AC;&#x201C;economic conditions affect the diffusion of technologies in rural areas. Description of Study Areas In the 45 households in which the survey was conducted in Kuppam, there were a total of 215 persons (113 males and 102 females) â&#x20AC;&#x201C; thus 4.8 persons on an average per household. The total number of persons in the 45 households in which the survey was conducted in Malappuram was 240 (118 males and 122 females) â&#x20AC;&#x201C; thus 5.3 persons on an average per household. The total number of persons above the age of seven in the surveyed households in Kuppam and Malappuram were, respectively, 196 and 223. In the surveyed households in Kuppam, primary occupation of the head of household was cultivation in 28.9 per cent of households, and agricultural labour in 17.8 per cent of households; in 15.6 per cent of all surveyed households, head of household was engaged in cultivation in addition to working as agricultural labourer. In all, 62.2 per cent of all surveyed households in Kuppam depended primarily on agriculture for their livelihood. Heads of 13.3 per cent of all surveyed households earned their livelihoods as non-agricultural labourers, which included construction workers as well as workers engaged in other jobs like the making of incense sticks. In 8.9 per cent of surveyed households, head of household ran small businesses including a small hotel and a shop for selling vegetables and fruits. Heads of 13.3 per cent of surveyed households worked in the service sector, in jobs including teacher, post-man, railway gang-man and labtechnician. As part of the Akshaya project, entrepreneurs running Akshaya centres have prepared a list of all households with their relevant socio-economic information. I have used this information in preparing the sampling frame.

Compared with the surveyed households in Kuppam, there was greater diversification of employment opportunities among the surveyed households in Malappuram. In total, 19 of the 45 surveyed households (or 42.2 per cent of all surveyed households) in Malappuram depended on agriculture for their livelihoods. These included 5 households in which the head of households were cultivators, 12 households in which the head of households were agricultural labourers, and 2 households in which the head of household reported no occupation but the major source of household income was agricultural labour by one or more household members. Heads of 6.7 per cent of surveyed households were non-agricultural labourers, mainly head-load workers; heads of 11.1 per cent of surveyed households were engaged in some small businesses, including working as a middleman for land transactions, running grocery shops and selling books; heads of 8.9 of surveyed households were engaged in other jobs, including estate supervisor, post-master and bus driver; and heads of 8.9 per cent of households were reported to be working in the Gulf countries. In total, in 26.7 per cent of all surveyed households in Malappuram, one or more member (not necessarily head of household) worked in the Gulf countries. The major agricultural crops in the surveyed households in Kuppam are paddy, ragi, groundnut, tomatoes, chamanthi flower, and vegetables. The major agricultural crops in the surveyed households in Malappuram are rubber, coconut, arecanut, pepper, and banana. In Kuppam, of the 45 households surveyed, 26 households belonged to a Hindu backward caste (officially, other backward caste or OBC); 3 households to other Hindu castes; 9 households to a scheduled caste (SC), and 7 households belonged to the Muslim community. In Malappuram, of the 45 households surveyed, 6 households belonged to a Hindu backward caste (OBC), one household to other Hindu caste, 2 households to a scheduled caste or scheduled tribe (SC or ST); 31 households belonged to the Muslim community, and 5 households belonged to the Christian community. With respect to literacy status and level of education, the surveyed households in Malappuram were distinctly ahead of the surveyed households in Kuppam. Literacy rate among persons above the age of seven in the surveyed households in Kuppam was 63.3 per cent; the corresponding figures for Andhra Pradesh and Chittoor district, according to Census of India 2001, are 61.1 per cent and 67.5 per cent respectively. Literacy rate among persons above the age of seven in the surveyed households in Malappuram was

96.4 per cent â&#x20AC;&#x201C; higher than the corresponding figures for Kerala and Malappuram, which were, respectively, 90.9 per cent and 88.6 per cent in 2001. 35 In the surveyed households in Malappuram, persons who received 8-10 years of formal education and persons who received above 11 years of formal education, both as proportions of all persons above the age of seven, were, respectively, 41.7 per cent and 22.9 per cent. The corresponding proportions were much smaller in the surveyed households in Kuppam: 14.8 per cent and 10.2 per cent respectively. In the surveyed households in Malappuram, 28.3 per cent of all persons above the age of seven were attending some educational institution at the time of the survey; the corresponding proportion in Kuppam was 19.4 per cent. V. DIFFUSION OF TECHNOLOGIES IN RURAL AREAS: ITS NATURE AND RELATED FACTORS To understand the nature of the diffusion of information and communication technologies among people, four questions were asked to the head of each surveyed household. These questions were the following. Have you or any of your family members heard about computers? Have you or any of your family members heard about the information centre in your locality? Are you or any of your family members aware of the

services of the information centre in your locality? Have you or any of your family members ever made use of the services of the information centre in your locality? Table 2 presents the responses to these questions by the head of households in Kuppam and Malappuram. It is of note that the above-mentioned questions were asked to the head of each surveyed household. At the same time, opinions were sought and carefully noted from each of the family member present in the household at the time of the survey to verify the responses made by the head of household. It was found in the survey that it is more often the younger members who have heard about computers and have used the facilities of the information centre in the locality. In cases where none of the younger members of the family were present in the household at the time of the survey and where the head of the household had insufficient information regarding a family memberâ&#x20AC;&#x2122;s familiarity with computers, the responses made by the head of the household may not be correct.

See the results of Census of India 2001 in <www.censusindia.net>

Therefore, the results in Table 2 may be seen as responses made by head of surveyed household subject to the information available to her/him at the time of the survey.

Table 2: Some indicators of the diffusion of computers among surveyed households, Kuppam and Malappuram, 2004 Kuppam

Malappuram

Number

% share of total

number

% share of total

Households in which at least one member has heard about computers

62.2

100.0

Households in which at least one member has heard about the information centre in the locality

40.0

91.1

Households in which at least one member is aware of the services of the information centre in the locality

22.2

71.1

Households in which at least one member has made use of the services of the information centre in the locality

17.8

64.4

Total number of surveyed households

100

100.0

Note: These results are from the responses made by heads of surveyed households, subject to the information available to her/him at the time of the survey. Source: Survey data, July-August 2004.

Table 3: Penetration of computers and media technologies among population in the surveyed households, Kuppam and Malappuram, 2004 Kuppam

Malappuram

number

% share of total

number

% share of total

Persons who read newspapers

38.8

181

81.5

Persons who watch TV

148

75.5

159

71.6

Persons who hears radio

103

52.6

165

74.3

Persons who operates a telephone

48.0

187

84.2

Persons who operate computers

7.7

30.2

196

100

222

100

Total number of persons who are above age 7 Source: Survey data, July-August 2004

Broad Trends Results in Table 2 indicate that at least one family member has heard about computers in all the surveyed households in Malappuram and in 62.2 per cent of all surveyed households in Kuppam. The proportion of the sample of households in which at least one member has heard about the information centre in the locality was 91.1 per cent in Malappuram and 40 per cent in Kuppam; the proportion of the sample in which at least one member is aware of the services of the information centre in the locality was 71.1 per cent in Malappuram and 22.2 per cent in Kuppam (see Table 2). The use of computers by people in the sample of households was far more widespread in Malappuram than in Kuppam. Questions were asked to the head of surveyed households regarding the use of computers, newspaper, radio and TV by each household member. Results of the responses, given in Table 3, show that 30.2 per cent of all persons above age seven in the surveyed households in Malappuram have operated a computer; the corresponding proportion in Kupam was 7.7 per cent (see Table 3). In Malappuram, at least one family member in 75.6 per cent of all surveyed households has operated a computer. The Akshaya programme in Malappuram has been successful to some degree with respect to its stated aim of imparting e-literacy to at least one person in every household. One or more family members have made use of the services of the information centre in the locality in 64.4 per cent of the sample of households in Malappuram; the corresponding proportion in Kuppam was 17.8 per cent (see Table 2). In many surveyed households in Malappuram, more than one household member has taken part in the e-literacy programme conducted by the information centre. It was learnt that members belonging to Paniyar community (a socially backward community of scheduled tribes) have taken part in the e-literacy programme in some of the Akshaya centres in Malappuram. Female members have actively taken part in the eliteracy programme and also made use of other services at the Akshsya information centres in Malappuram. The main instructor in the Akshaya centre in Karachal ward is a 21-year old Muslim woman who holds an undergraduate degree in Arabic and has also completed a course in computers. Diffusion of Computers and Socio-economic Characteristics of Households The study shows that a relatively high level of literacy and education aids the diffusion of information and communication technologies. As shown in section IV, the literacy rate and educational level in Malappuram are much higher than the corresponding rate and

level in Kuppam. This has contributed to the better awareness about computers, the more widespread use of computers, and the more widespread use of the services of information centre by members of the surveyed households in Malappuram. In several households in the sample in Malappuram and Kuppam, an important source of awareness about computers was school going children, who learn about computers as part of their academic curriculum. There were many surveyed households in Malappuram in which one or more household members have either completed or have been participating in a professional training course in computers, after completion or along with their formal education. The association between literacy and awareness about computers is evident in an analysis of the results for the sample of households in Kuppam. As shown in Table 4, of the 28 surveyed households that have heard about computers in Kuppam, 19 (or 67.9 per cent) are ‘literate households’ or households in which the proportion of literates among total household members is more than 50 per cent. On the other hand, of the 17 surveyed households that have not heard about computers, 15 (or 88.2 per cent) are ‘illiterate households’ or households in which the proportion of literates among total household members is less than or equal to 50 per cent (see Table 4). There is evidence for a positive association between diffusion of computers and level of education of household members. In Kuppam, the average number of persons per household who attend an educational institution is 0.47 among surveyed households in which no household member has heard about computers; the corresponding figure in Kuppam is 1.07 among surveyed households in which one or more household members have heard about computers. In Malappuram, the average number of persons per household who attend an educational institution is 0.73 among surveyed households in which no household member has operated a computer, whereas the corresponding figure is 1.62 among surveyed households in which one or more members have operated a computer (see Table 5). Diffusion of computers among surveyed households is seen to be positively associated with levels of assets. Ownership of land holdings is a good indicator of assets in the surveyed villages in Malappuram and Kuppam. In Kuppam, the average size of landholdings among households in which no member has heard about computers is 0.67 acres. The corresponding figure for households in which one or more members have heard about computers is 1.93 acres. In Malappuram, average size of landholdings among households in which no member has operated computers is 0.25 acres, while the

corresponding figure for households in which one or more members have operated computers is 0.78 acres (see Table 5). Table 4: Households whose members have and have not heard about computers and the local information centre, by literacy status of household members, Kuppam, 2004 Computers

Information centre

Households in which one or more member has heard about:

Of which proportion of literates among total household members is more than 50 per cent

2 as per cent share of 1

67.9

77.8

Households in which no member has heard about:

Of which proportion of literates among total household members is less than or equal to 50 per cent

4 as per cent share of 3

88.2

59.3

Notes: Total number of household surveyed = 45 Source: Survey data, July-August 2004

Table 5: Penetration of computers, average number of persons attending an educational institution, and average size of landholdings owned, surveyed households, Kuppam and Malappuram, 2004

Type of surveyed household

Kuppam Households in which no member has heard about computers Households in which one or more member has heard about computers

Average number of persons attending an educational institution

Average size of land holdings (in acres)

0.47

0.67

1.07

1.93

0.73

0.25

1.62

0.78

Malappuram Households in which no member operates computers Households in which one or more member operate computers

Notes: Total number of household surveyed = 45. Number of households in which none of the household members operate computer is 11 in Malappuram. Source: Survey data, July-August 2004

Diffusion of Computes and the Nature of Implementation of Rural ICT Programmes It was shown that the proportion of surveyed households which were aware of the local information centre in Kuppam was 40.0 per cent, much smaller than the corresponding proportion in Malappuram, which was 91.1 per cent (see Table 2). Two points may be noted in this regard. First, in Kuppam, the proportion of surveyed households which were aware of the local information centre was noticeably smaller than the proportion of surveyed households which were aware of computers (62.2 per cent) (see Table 2). More over, of the 27 surveyed households which were not aware of the information centre in Kuppam, 11 households (40.7 per cent) were â&#x20AC;&#x2DC;literate householdsâ&#x20AC;&#x2122;, households in which the proportion of literates among total household members is more than 50 per cent (see also Table 4). Clearly, the low level of awareness about information centre in Kuppam is not all due to low level of literacy. Some of the differences between Kuppam and Malappuram with respect to the awareness about information centres are related to the nature of implementation of the programme in the two places. In Kuppam and Malappuram, information centres are run by small entrepreneurs, belonging to the locality. The Akshaya programme in Malappuram is implemented through panchayat raj institutions or local self-governments. Therefore, local entrepreneurs running Akshaya information centres work in close association with and receive support from officials of local self-governments, local politicians and social activists. Entrepreneurs of information centres in Kuppam do not receive such local support. Officials of the State government, HP and World Corps India oversee the operations of information centres in Kuppam, but none of these officials have any deep links with the local community. This is one reason why the information centres in Malappuram are more popular with the village population than the centres in Kuppam. The two-week training programme to impart basic IT skills to at least one member of every household has been highly effective in popularizing the Akshaya information centres in Malappuram. In the information centres in Kuppam, according to entrepreneurs running the centres, the main users of computers and Internet were not local people, but officials of government offices and students of two professional colleges located in Kuppam who mostly do not belong to the village. Interestingly, the icommunity project is sufficiently advertised.

Large hoardings showing pictures of

villagers using computers greet a visitor as she passes through various parts of the Kuppam area. Calendars with pictures of the i-community project were hung from the walls of many of the surveyed households. Apparently, such advertisements have not been very helpful as members of some of the households in the sample expressed their 19

ignorance about information centre in their locality standing in front of a calendar advertisement. This points out that the creation of awareness about technologies at the grass root level is important for diffusion of technologies in rural areas. VI. DEMAND FOR INFORMATION AND POTENTIAL ROLE OF TECHNOLOGIES IN RURAL AREAS In the case of Kuppam i-community project and Akshaya project, efforts are going on at present to make use of information and communication technologies in a range of areas that affect the daily lives of people: agriculture, health and medicinal care, and education. These projects aim to provide farmers access to information about new and better agricultural practices, and information about agricultural markets, specifically agricultural prices. They also aim to provide information about educational and vocational opportunities, and information about health-care facilities. In July-August 2004, when the field study for this paper was carried out, the Kuppam i-community project was building a ‘farming information system’, ‘tele-agriculture’, and an ‘expert system’ for farmers. It proposes to create an electronic employment exchange and an electronic ‘public grievance system’; through ‘Yojanalu’, a scheme of the Kuppam project that is already under implementation, people can submit online applications for various government programmes. 36 The Akshaya information centres in Malappuram propose to develop and provide information content on education, jobs, agriculture, health, and law. These centres will provide modules on spoken English, vocational training, personality development, career planning and accounting. 37 The above-mentioned programmes are yet to be fully implemented in Kuppam and Malappuram. Therefore, it was not possible to ask members of the surveyed households how they benefited from the information content from some specific programme. Instead, the survey attempted to understand the demand for the information proposed to be provided by the above-mentioned programmes. The questions that were asked to the head of households to understand the nature of demand for information included the following. Are you aware of the prices of agricultural goods produced in your locality? What, in your opinion, are the major constraints to agricultural growth in your region?

36Discussions

with officials of the Kuppam i-community project; See <http://www.hp.com/e-inclusion/en/project/kuppam.pdf.> (accessed on 29-04-04). 37 Department of Information Technology, Government of Kerala.

also

Are you or any of your family members searching for jobs? Do any of your family members have plans to pursue higher studies? Demand for Information from Rural Households As shown earlier, the dependence on agriculture for livelihoods is greater in Kuppam than in Malappuram. One, therefore, expects that the demand for and potential role of information on agriculture from the surveyed households are greater in Kuppam than in Malappuram. Evidence from field studies indicates that this is not the case. First, 22.2 per cent of all surveyed households in Kuppam did not possess land (see Table 6). In 70 per cent of these landless households (or 15.6 per cent of all surveyed households), heads of households were agricultural labourers; given the meagre employment opportunities in agriculture, these households survived under distressful living conditions. In Kuppam, households of landless labourers did not have much to gain from information on better agricultural practices or agricultural prices for the simple reason that these households did not have land to cultivate crops, did not have agricultural crops to be sold in the market, and also did not have the bargaining power to convert an increase in agricultural prices into a corresponding increase in wages. Information on better agricultural practices or agricultural prices did not have great usefulness to a large number of land-holding households as well in Kuppam. In Kuppam, 33.3 per cent of all surveyed households owned land that was not irrigated. Agricultural production in many of the land-holding households in the sample suffered from small size of land-holdings and absence of irrigational facilities; these households were not selling their agricultural produce in the market. In fact, the survey showed that households selling their agricultural produce in the market as a proportion of all surveyed households was 35.6 per cent in Kuppam. According to 51.1 per cent of all households in the sample (or 65.7 per cent of all land-owning households in the sample) in Kuppam, the major constraint to agricultural growth was the absence of irrigational facilities. A substantial number of surveyed households in Kuppam (17.1 per cent of all land-owning households in the sample) noted that non-availability of credit is the major problem they faced with respect to agricultural growth. It is noteworthy that the there was only a single source of institutional credit in the surveyed villages in Kuppam -- a Grameen Bank under the management of a religious institution. Not any of the scheduled commercial banks or cooperative banks operated in the surveyed villages in Kuppam. Absence of adequate

physical infrastructure for marketing agricultural goods was another important problem faced by the sample of households in Kuppam. The head of one of the surveyed households, who is the owner of a six-acre agricultural plot and a High School English teacher by profession, pointed out that he was keen to adopt new agricultural practices and venture into cultivation of new crops, but he was concerned as to how he would be able to sell his agricultural products. Sharp fall in recent years in the prices of many of the agricultural commodities produced in the village, particularly tomatoes, is another issue of great concern to the cultivating households in Kuppam. Given the persistence of fundamental constraints to agricultural growth as discussed above, there was only limited demand from the surveyed households in Kuppam for information on better agricultural practices or agricultural prices. The demand for information on agriculture from the sample of households in Malappuram was high compared to the sample of households in Kuppam. In Malappuram, 46.7 per cent of all surveyed households were aware of the prices of agricultural goods produced in their village; the corresponding proportion in Kuppam was 28.9 per cent (see Table 6). Most of the surveyed households in Malappuram used to regularly keep track of the news about agriculture from newspapers, TV and radio. The fluctuations in the price of rubber, the major agricultural produce in the village in Malappuram, were a topic of every-day conversation in public places in the village. Many households in the sample in Malappuram were keen to know about better agricultural practices and venture into production of new crops like vanilla. What are the reasons for the greater demand for information on agriculture from the sample of households in Malappuram than from the sample of households in Kuppam? First, unlike in the case of Kuppam, all households in the sample in Malappuram possessed some plot of land, which was more than 5 cents in the case of 97.8 per cent of the sample and was more than 10 cents in the case of 84.4 per cent of the sample. Most households in the surveyed village in Malappuram (as in the rest of Kerala) had a well dug up in their plot of land; and given the plentiful rainfall in the region, availability of water was not a major constraint to agricultural production in Malappuram. Even a household in possession of only 5 cents of homestead land could cultivate vegetables or some other agricultural crops. The major agricultural crops in the village in Malappuram - rubber, coconut and arecanut â&#x20AC;&#x201C;are high value-adding commercial crops. The surveyed households in Malappuram received credit from more than six different sources of institutional credit, including scheduled commercial banks and co-operative banks. In

respect of the physical infrastructure for marketing agricultural products, the sample of households in Malappuram was found to be far better placed than the sample of households in Kuppam. Agricultural workers in Malappuram, like agricultural workers in the rest of Kerala, have sufficient organizational strength to convert an increase in prices of agricultural crops to an increase in wages. Therefore, in Malappuram, even agricultural labourers who do not produce any agricultural crop to be sold in the market are still interested in knowing about agricultural prices. The demand for information about employment opportunities and higher studies was significantly higher among the sample of households in Malappuram than among the sample of households in Kuppam. One or more household members were searching for jobs in 57.8 per cent of the surveyed households in Malappuram; the corresponding proportion in Kuppam was 26.7 per cent. Members in 35.6 per cent of the surveyed households were interested in pursuing higher studies in Malappuram compared to 6.7 per cent only in Kuppam (see Table 6). One or more members in 26.7 per cent of all sample households in Malappuram were working in the Gulf countries (see Table 6). In comparison, a family member was working outside the village (but not outside the country) only in 4.4 per cent of the surveyed households in Kuppam. In Malappuram, 84.2 per cent of all persons above the age of seven in the surveyed households have used a telephone compared to 48.0 per cent in Kuppam (see Table 3). To the households in Malappuram, Internet offers a cheaper and much-needed means of communication with their dear ones in the Gulf. Demand for Programmes in E-Governance There is evidence for greater interaction between government and people among the surveyed households in Malappuram than among the surveyed households in Kuppam; therefore, measures for e-governance will produce greater benefits in Malappuram than in Kuppam. The proportion of surveyed households in which one or more household member has ever visited a government office is 93.3 per cent in Malappuram and 82.2 per cent in Kuppam. The proportion of surveyed households which have received loans from formal financial institutions is 73.3 per cent in Malappuram and 62.2 per cent in Kuppam (see Table 6). Most of the proposed initiatives in E-governance are aimed at reducing the time and transaction costs involved in government-people interaction. Two points may be noted in this regard. Among the surveyed households in Kuppam and Malappuram,

respectively 62.3 per cent and 68.9 per cent answered that they did not face any difficulty â&#x20AC;&#x201C; and made two or less trips to a government office per transaction â&#x20AC;&#x201C; while interacting with government offices. An explanation for this relatively high degree of satisfaction in transactions with the government offices is that the opportunity cost of the time spent in transactions is likely to be low for people rural areas. Secondly, the surveyed households in Kuppam and Malappuram pointed out that their interaction with the government happens mostly at times when the government introduces new schemes or programmes like food for work. These suggests that the programmes for computerization of government to people interaction will have less demand in rural areas than in urban areas, and of course, the demand for these programmes are limited by the schemes and programmes that the government introduces. The observed differences between Malappuram and Kuppam in the demand for and potential use of information are, as evident from the earlier paragraphs, related to the differences in socio-economic structures between the two locations â&#x20AC;&#x201C; in turn, due to the differences between Kerala and Andhra Pradesh in bringing about positive transformation in the countryside (see section 3). The association between existing socioeconomic status and demand for information is clear, also when we extend our analysis to the various land owning categories of sampled households in Malappuram and Kuppam. The proportion of households which were aware of agricultural prices, whose members were searching for jobs, and whose members were interested in pursuing higher studies are the highest in the highest land-holding category in Kuppam and Malappuram; it was in the same category of households that the proportion which have received loans from formal sources of credit was also the highest in Malappuram. Landlessness among labouring households is a continuing feature in several parts of rural India; a relatively successful programme of land reforms was implemented only in two Indian States, Kerala and West Bengal. There has been a significant slow down in public investment in agriculture and rural infrastructure in India particularly during the period of economic reforms (after 1991) (Ramachandran and Swaminathan, 2003). There was also a decline in the volume of rural credit disbursed by banking institutions over this period of time (Ramachandran and Swaminathan, 2002). Landlessness, absence of irrigational facilities and institutional credit, and illiteracy are among the fundamental constraints to the freedoms of labouring women and men and to the growth of agricultural incomes in the Indian countryside. The evidence presented in the earlier paragraphs showed that these fundamental constraints also significantly affect the

demand for information and the usefulness of ICTs in rural areas. ICTs can play an extremely potent role in rural development; but only if the basic obstacles to rural prosperity are removed through radical changes â&#x20AC;&#x201C; through land reforms, revitalisation of rural credit, and greater state intervention in rural infrastructure and primary education.

Table 6: Some indicators on the potential role of information and communication technologies in development, surveyed households, Kuppam and Malappuram, 2004 Kuppam

Malappuram

number

% share of total

number

% share of total

Households which are landless

22.2

0.00

Households which are aware of the prices of agricultural goods they produce

28.9

46.7

Households in which one or more members are looking for a job in the organised sector

26.7

57.8

Households in which one or more members are looking for higher studies

6.7

35.6

Households in which one or more member is working in a foreign country

0.0

26.7

Households in which one or more members have visited a government office at least once

82.2

93.3

Households which have received some loans from formal sector

62.2

73.33

Total number of households

100.0

Source: Survey data, July-August 2004

VII. CONCLUSIONS There is abundant optimism today about the potential impact of information and communication technologies in the development of rural areas. This optimism originates from the fact that ICTs are a revolutionary means for the transmission of information, and also from the belief that information is a key aid in the process of development. Information about prices, markets and opportunities will enhance incomes and empower the less-privileged and the rural population, so the argument goes. This paper attempted 25

to examine the validity of this argument. It is based on field studies of the Kuppam icommunity project in Andhra Pradesh and Akshya project in Kerala. Kerala is much ahead of Andhra Pradesh in respect of indicators of social development, and this provides an interesting context to the study. The study shows that the capabilities to use information and communication technologies are associated with the existing level of socio-economic development. The diffusion of ICTs is faster among literates than among illiterates; diffusion of ICTs is also faster, the greater the level of education and greater the level of assets. Compared to Kuppam, the diffusion of ICTs was more widespread in Malappuram, where ICTs were used by women in large numbers and also by the socially backward class of scheduled tribes. The Akshaya programme in Malappuram elicited greater public participation as it was implemented through local self-governments with support from social and political activists in the locality. It is found that the capability to use information or the demand for information is also crucially dependent on the level of social and economic development already achieved. There is no doubt that information about better agricultural practices helps the expansion of rural incomes. Such information, however, will be irrelevant to landless agricultural labour households or to land-holding households who suffer from problems such as absence of irrigational facilities and institutional credit. There will be little demand for information about jobs and higher studies from the less-educated. The demand for information from the surveyed households was greater in Malappuram than in Kuppam, and this is seen to be associated with the better indicators of socio-economic development in Malappuram than in Kuppam. Among the surveyed households in Kuppam and Malappuram, the demand for information was greater, the larger the ownership of land-holdings. The evidence presented in this paper has great implications for the developmental discourse in India and other developing countries. It shows that while ICTs offer great possibilities, they are no elixir of development. In fact, ICTs can offer little help as long as fundamental constraints to development â&#x20AC;&#x201C; including unequal distribution of assets and illiteracy â&#x20AC;&#x201C; persist. The current policy enthusiasm with information technology should in no way detract attention from the much needed policy interventions in income growth and distribution, including land reforms and public investment in health and basic education.

Another policy implication is that the focus in programs to introduce ICTs in rural areas should be not only on supply-related factors like physical infrastructure for ICTs, but also on creating demand for ICTs and for the information provided by ICTs. REFERENCES Arora, Ashish and Athreye, Suma (2002), ‘The Software Industry and India’s Economic Development’, Information Economics and Policy, Vol. 14, No.2, pp. 253 -73. Arun, Shoba and Arun, Thankom (2002), ‘ICTs, Gender and Development: Women in Software Production in Kerala’, Journal of International Development, Vol. 14, No.1, pp. 39-50. Bhatnagar, Subhash and Robert Schware (eds.) (2000), Information and Communication Technology in Development: Cases from India, Sage Publications, New Delhi. Central Statistical Organisation (1999), Statistical Abstract of India 1998, Department of Statistics and Programme Implementation, Government of India, New Delhi. Chandrasekhar, C.P. (2003), ‘The Diffusion of Information Technology: The Indian Experience’, Social Scientist, Volume 31, Numbers. 7-- 8, July –August. Chandrasekhar, C.P. and Jayati Ghosh (2001), ‘Information and Communication Technologies and Health in Low Income Countries: The Potential and the Constraints’, Bulletin of the World Health Organisation, Volume 79, Issue 9. D’Costa, Anthony P. (2003), ‘Uneven and Combined Development: Understanding India’s Software Exports’, World Development, Vol.31, No.1, pp. 211-26. Drèze, Jean and Sen, Amartya (2002), India: Development and Participation, Oxford University Press, New Delhi. Drèze, Jean and Sen, Amartya (eds.) (1996), Indian Development: Selected Regional Perspectives, Oxford University Press, New Delhi. Dugger, Celia W (2000), ‘Connecting Rural India to the World’, New York Times, May 28. Dunn, Debra and Yamashita, Keith (2003), ‘Microcapitalism and the Megacorporation’, Harvard Business Review, August, pp.46-54. Economist, the (2001a), ‘Mobile Phones in India: Another Kind of Network’, The Economist, March 3. Economist, the (2001b), ‘Islands of Quality’, The Economist, June 2. Eggleston, Karen, Jensen, Robert, and Zeckhauser, Richard (2002), ‘Information and Communication Technologies, Markets, and Economic Development’ in Kirkman et al (2002). Eischen, Kyle (2000), ‘Building a “Soft Region” on Hard Legacies: The Development of an Informational Society in Andhra Pradesh, India’, Centre for Global, International and Regional Studies and the Department of Sociology, University of California (downloadable from <http://repositories.cdlib.org/cgirs/CGIRS-2000-3>). Gage, John (2002), ‘Some Thoughts on How ICTs Could Really Change the World’ in Kirkman et al (2002). Government of India (2001a), India as Knowledge Superpower: Strategy for Transformation, Task Force Report, Planning Commission, New Delhi. Government of India (2001b), Report of the Working Group on Information Technology for Formulation of the Tenth Five Year Plan, Ministry of Information Technology, New Delhi. Heeks, Richard (2002), ‘i-Development not e-Development: Special Issue on ICTs and Development’, Journal of International Development, Vol. 14, No.1, pp. 1-11. Hindu, the (2004), ‘Pro-rich Image, Pessimism about Reforms did Naidu in’, The Hindu, May 12 (downloadable from <www.hinduonnet.com/2004/05/12/stories/2004051207311100.htm>). Jhunjhunwala, Ashok (2001), ‘Looking Beyond NTP 99’ in 3iNetwork (2001). Kaushik, P. D. and Singh, Nirvikar (2004), ‘Information Technology and Broad-Based Development: Preliminary Lessons from North India’, World Development, Vol.32, No.4, pp. 591-607. Keniston, Kenneth (2002), ‘Grass Roots ICT Projects in India: Some Preliminary Hypothesis’, ASCI Journal of Management, Vol. 31, Nos. 1 &2.

Kirkman, Geoffrey S., Cornelius, Peter K., Sachs, Jeffrey D., and Schwab, Klaus (eds.) (2002), The Global Information Technology Report 2001-2001: Readiness for the Networked World, Oxford University Press, New York. Krishnakumar, Asha (2001), ‘Weavers in Distress’, Frontline, Volume 18 - Issue 08, April 14 – 27. Kumar, Asok (2000), ‘Computerisation of Mandal Revenue Offices in Andhra Pradesh: Integrated Certificate Application in Bhatnagar and Schware (eds.) (2000). Mansell, Robin (2002), ‘From Digital Divides to Digital Entitlements in Knowledge Society’, Current Sociology, Vol. 50, No.3, pp. 407-426. Mansell, Robin and Uta Wehn (eds.)(1998), Knowledge Societies: Information Technology for Sustainable Development, United Nations Commission on Science and Technology for Development, Oxford University Press, New York. Mowery, David C. and Oxley, Joanne E. (1995), ‘Inward Technology Transfer and Competitiveness: The Role of National Innovation System’, Cambridge Journal of Economics, Vol. 19, No.1, pp. 67 – 93. 3i Network (2001), India Infrastructure Report 2001, Oxford University Press, New Delhi. Pais, Jesim (2003), Production Units and the Workforce in the Urban Informal Sector: A Case Study from Mumbai, PhD thesis, Indira Gandhi Institute of Development Research, Mumbai. Parayil, Govindan (ed.) (2000), Kerala -- The Development Experience: Reflections on Sustainability and Replicabilty, Zed Books, London and New York. Parayil, Govindan (2002), Conceptualizing Technological Change, Rawman & Littlefields Publishers, INC., Newyork. Patel, Ila (2002), ‘Information and Communication Technology and Distance Adult Literacy Education in India’, Working Paper No.166, Institute of Rural Management, Anand, Gujarat. Parikh, Kirit S. and Radhakrishna, R. (eds.) (2005), India Development Report 2004-05, Oxford University Press, New Delhi. Paul, Anthony (2002), ‘Can India Catch Up?’ Fortune, Friday, April 19, 2002. Purkayastha, Prabir (2002), ‘Skimming the cream’, Frontline, Volume19, Issue 2, January 19February 01. Ramachandraiah (2003), ‘Information Technology and Social Development’, Economic and Political Weekly, March 22 –29, pp. 1192-97. Ramachandran, V. K. (1996), ‘On Kerala’s Development Achievements’ in Drèze and Sen (eds.) (1996). Ramachandran, V. K. and Swaminathan, Madhura (2002), ‘Rural Banking and Landless Labour Households: Institutional Reform and Rural Credit Markets in India’, Journal of Agrarian Change, Vol.2, No.4, pp. 502-44. Ramachandran, V. K. and Swaminathan, Madhura (2003), ‘Introduction’ in Ramachandran, and Swaminathan (eds.) (2003). Ramachandran, V. K. and Swaminathan, Madhura (eds.) (2003), Agrarian Studies: Essays on Agrarian Relations in Less-Developed Countries, Tulika Books, New Delhi, and Zed Books, London and New York. Ramakumar, R. (2004), ‘Socio-economic Characteristics of Agricultural Work: A Case Study of a Malabar Village’, Ph.D. thesis submitted to the Indian Statistical Institute, Kolkata. Rawal, Vikas (2001), ‘Agrarian Reform and Land Markets: A Study of Land Transactions in Two Villages of West Bengal, 1977-1995’, Economic Development and Cultural Change, Vol.49, No.3, pp. 2537-44. Reddy, Naresh Kumar and Mike Graves (2000), ‘Electronic Support for Rural Healthcare Workers’ in Bhatnagar and Schware (eds.) (2000) Sainath, P (2003) ‘The bus to Mumbai’, The Hindu, June 15, 2003. Satyanarayana, J. (2000), ‘Computer-aided Registration of Deeds and Stamp Duties’ in Bhatnagar and Schware (eds.) (2000). Schech, Susanne (2002), ‘Wired for Change: The Links between ICTs and Development Discourses’, Journal of International Development, Vol. 14, No.1, pp. 13-23.

Sreekumar, T.T. (2003), ‘De-hyping ICTs: ICT Innovations by Civil Society Organizations in Rural India’, Information for Development, Vol.1. No.1, pp. 22-27. Thomas, Jayan Jose (2005a), ‘New Technologies for India’s Development’, in Parikh and Radhakrishna (eds.) (2005). Thomas, Jayan Jose (2005b), ‘Kerala’s Industrial Backwardness: A Case of Path Dependence in Industrialization?’ forthcoming in World Development, Vol.33, No.5. United Nations Development Programme (UNDP) (1999), Human Development Report 1999: Globalization with a Human Face, Oxford University Press, New York. United Nations Development Programme (UNDP) (2001), Human Development Report 2001: Making New Technologies Work for Human Development, Oxford University Press, New York. Velden, Maja Van Der (2002), ‘Knowledge Facts, Knowledge Fiction: The Role of ICTs in Knowledge Management for Development’, Journal of International Development, Vol. 14, No.1, pp. 25-37. Vijayaditya, N. (2000), A Wired Village: The Warana Experiment’ in Bhatnagar and Schware (eds.) (2000). World Bank (1999), World Development Report 1998-99: Knowledge for Development, Oxford University Press, Oxford and New York.

ISAS Insights No. 13 – Date: 23 January 2006 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 65166179 Fax: 67767505 Email: isaspt@nus.edu.sg Website: www.isas.nus.edu.sg

TRADE-OFF BETWEEN GOVT DEFICIT AND EXPENDITURE ON SOCIAL INFRASTRUCTURE S. Narayan ∗

Debate: Fiscal Deficit – Good, Bad or Neutral There is no agreement among economists either on analytical grounds or on the basis of empirical results whether financing government expenditure by incurring a fiscal deficit is good, bad, or neutral in terms of its real effects, particularly on investment and growth.

Theories

The Neo-Classical View This view says that fiscal deficits increase aggregate consumption in the economy which leads to a reduction in national savings, resulting in higher real interest rates (in a closed economy). This, in turn, depresses investment and overall economic activity. In an open economy, higher fiscal deficits are reflected in higher capital flows and a real appreciation leading to lower net exports and again, a reduction in overall activity. In either case, a fiscal deficit crowds out investment/net exports and hence, brings about reduction in overall activity. The decline in current investment and buildup of external debt has adverse implications for future output. ∗

The Keynesian Paradigm

An implicit assumption in the neoclassical approach is that the economy is operating at full employment. In conditions of less than full employment, the Keynesian approach argues that fiscal deficits would not lead to any crowding out. Given sticky wages/prices, shifts in aggregate demand induced by changes in government spending and taxes affect the utilisation of the economy's factors of production, increasing domestic output. An expansionary fiscal policy according to the Keynesian approach is, therefore, conducive to growth.

Ricardian Equivalence

In contrast to the neoclassical and the Keynesian approaches, the Ricardian approach argues that fiscal deficits would be neutral as immortal economic agents internalise variations in government expenditures. These rational agents adjust their consumption/saving one-to-one in relation to movements in fiscal deficits thereby fully offsetting fiscal policy. With overall savings remaining unchanged, fiscal deficits do not have any impact on economic activity in the Ricardian approach.

The Endogenous Growth Theorists

The endogenous growth theory suggests that economic growth is an endogenous outcome of the system. Since growth is endogenous, public policy can influence its magnitude and the role of government in economic development acquires significance. Public capital or public investment in areas such as infrastructure, human capital, and science and technology exerts a positive influence on output. Similarly, government activities in protection of property rights and the taxation of economic activity influence growth in an endogenous manner. Thus, unlike the neoclassical growth theory, the endogenous view of growth stresses that fiscal policy can affect long-run growth performance.

The â&#x20AC;&#x2DC;Tax and Spendâ&#x20AC;&#x2122; Hypothesis

In this view, raising taxes with a view to cutting down deficits would not work because it would only encourage the politicians to spend more. The result would be that, while the deficit would remain the same, in the long run, the size of the private sector would be cut down. In this view, a tax cut, which puts pressure for contraction of government spending leaving deficits and national savings unchanged, and which leads to an increase in private consumption, should be considered more desirable. The main problem is that when government expenditure does not fall, it has to run a deficit, which raises interest payments and causes total government expenditure including interest payments to rise as a share of gross domestic product (GDP).

Empirical View

Empirical studies on the influence of fiscal policy on growth found a negative impact of government spending on output growth rates, lending support to the notion that smaller government sectors are associated with faster growth rates. On the other hand, empirical exercises on the effects of government spending which distinguish between government consumption and government capital accumulation suggest that government capital stock has a positive impact on productivity growth and that government spending had a positive and highly significant impact on output growth rates.

An increase in current expenditure has positive and statistically significant growth effects while a negative relationship is detected between the capital component of public expenditure and per capita growth. The productive expenditures, when used in excess, turn unproductive and that several components of current expenditure, such as operations and maintenance, may have higher rates of return than capital expenditure.

The focus on capital expenditures by developing country governments has the implication that they may have been misallocating public expenditures in favour of capital expenditures at the expense of current expenditure, losing out in terms of growth in that process.

While a negative and significant correlation between the budget deficits and growth has been found, the correlation has not been found to be robust. Another aspect 3

generally examined in the context of budget deficits is the long-run inflationary potential of expansionary fiscal policy. Inflation emanating from monetisation of fiscal deficits may lead to greater uncertainty about future inflation and hence have an adverse effect on growth.

Crowding-In/Out Some of the important issues that have been noted in the literature are:

whether fiscal deficits have crowded out private investment by putting pressure on interest rates, thereby adversely affecting growth;

ii)

whether continued high levels of fiscal deficits, resulting in growing interest payments, have crowded out government capital expenditure; and

iii)

whether public investment financed by fiscal deficits has the potential of crowding-in private investment, thereby positively affecting growth.

High fiscal deficits, by raising real interest rates, crowd out private investment, especially in the context of the government borrowing being predominantly used to finance revenue deficits. A number of studies that have estimated private sector behaviour in India suggest that crowding-out/in effect of public investment is sectorspecific. Public investment exerts a short-run crowding-out but establishes long-run complementarity with private investment. In the case of total private investment, the positive effect (complementarity) almost cancels out the negative effect (crowdingout), whereas in the case of private corporate investment, the positive effect seems to dominate the negative effect.

Other studies indicate that while there is some complementarity in certain sectors, the evidence on the overall impact of public investment on private investment is not definitive. The Reserve bank of India has noted that raising public sector investment to boost aggregate demand in the economy crowds out both private consumption and investment with no long-lasting impact on output. On the other hand, infrastructure investment by the public sector crowds in private investment while public investment in manufacturing crowds-out private investment.

Fiscal Responsibility and Budget Management Act A major policy initiative that has implication for the availability of resources for financing the Plan is the Fiscal Responsibility and Budget Management (FRBM) Act enacted on 26 August 2003. The Act originally provided for reducing the gross fiscal

deficit to 3 per cent of GDP and completely eliminating the revenue deficit at the Central level by end March 2008, but the target year has had to be moved further out to 2008-09 in the 2004-05 finance bill. The need to achieve FRBM targets in the medium term perspective could affect public sector resource raising for the Plan. A trade-off between development and adjustment could become an issue if this does not materialise. There are some areas in which policy and procedural changes could increase resources and improve growth prospects. The balance from current revenues could be improved through a strategy focused both on revenue raising as well as on curtailing unprofitable expenditure and reducing leakages.

Rationalising Direct and Indirect Tax Measures

There is scope for rationalising direct and indirect tax measures and user charges based on the twin principles of equity and economic neutrality and focusing on improving compliance and tax administration. Tax tools and governance can be better managed to promote entrepreneurship and superior economic performance so that the resultant improvement in growth is reflected in increased budgetary inflows.

On the direct tax front, there is substantial scope for taxpayer-friendly automatised and computerised administration that can reduce collection costs, improve compliance and curtail rent-seeking and harassment. Tax-revenues can be raised through broadening the tax base, taxing untapped/under-tapped sources, rationalizing tax rates, introducing uniform value-added tax, taxing agricultural income and raising efficiency in tax collections. The major thrust area on the tax side must, however, be on indirect taxation.

The most critical reform required is in the area of domestic consumption taxation. The coordinated countrywide goods and service tax indicated by the Task Force on the FRBM appears as of now to be only a distant goal. The full reform of the indirect tax structure that is necessary to maintain revenue growth while coping with pressures of globalisation is still only at a preliminary stage.

A thorough revamp of the indirect tax structure through rationalisation of the tax base, constitutional and statutory reform and better administration can release the potential 6

of local industry and business and contribute significantly to higher competitiveness and growth. The goal should be movement to a comprehensive consumption tax regime at the level of both the states and the centre.

Restructuring the Expenditure

The crucial issue is to bring about improvement in the central and state finances with a view to restructuring the expenditure in favour of developmental expenditure in order to enable a higher growth. Fiscal adjustments based predominantly on expenditure reduction, particularly when government expenditure in India are already substantially lower than that in the Organisation for Economic Co-operation and Development countries, may involve welfare losses and could also have adverse implications for the growth process.

As against this, the fiscal strategy based on revenue maximisation would provide the necessary flexibility to alter the pattern of expenditure so as to ensure productive utilisation of resources.

Expenditure Prioritisation Required

In the current economic scenario, higher fiscal deficits should be used for accommodating higher expenditure on infrastructure and social sectors. While an increase in expenditures in some of these areas may be desirable and even necessary, they ought to be undertaken in such a way that there is no increase in primary deficit and debt-GDP ratio. Expenditure prioritisation is thus requisite under such a situation.

Mid Year Economic Review

In conformity with the National Common Minimum Programme (NCMP) objectives, outlays on social services and rural development have gone up from Rs51,497 crore in 2003-04 to Rs57,724 crore in 2004-05 (RE) and further to Rs66,691 crore in 2005-06 (BE). Against the budget outlay of Rs7,156 crore for the Sarva Shiksha Abhiyan (SSA) programme, by November 2005, 79 per cent amounting to Rs5,662 crore has

been released. The contribution of state governments/Union Territories up to September 2005 for their share of the scheme was Rs1,018 crore.

The utilisation of funds under SSA by the state governments/Union Territories was Rs3,361 crore by September 2005, which is 55 per cent of the funds available with the state governments/Union Territories. While the fund requirements for these ambitious programmes are large, the government proposes to achieve economy in expenditure through convergence of the various ongoing social and rural infrastructure and employment-related programmes.

The National Rural Health Mission (NRHM) envisages strengthening and upgrading of the public rural health infrastructure and services aimed at delivering quality health care in the rural areas of the country. The NRHM, with an initial outlay of Rs6,731.2 crore in 2005-06, proposes to cover all the states in the country with special focus on the 18 states that have weak health infrastructures and demographic indicators.

Central Government Finances: Overview of Fiscal Trends (April â&#x20AC;&#x201C;September 2005) The key fiscal indicators during the first half of the year, that, is April-September 2005, reflect the ongoing process of fiscal consolidation even as they indicate the challenges likely to be faced in the endeavour to achieve the targets laid down under FRBM Act 2003 and rules made thereunder. With adjustments for the impact of debt swap scheme in 2004-05, all the three deficit indicators showed improvement in the first half of the current year vis-Ă -vis corresponding period of the previous year.

Plan Expenditure

In the overall increase of Rs12,750 crore in the Central Plan expenditure between April-September 2005 over the corresponding period of the previous year, two of the departments which have registered the highest growth were Road Transport and Highways, and Elementary Education and Literacy.

Assessment vis-Ă -vis FRBM

All the three fiscal indicators in nominal terms in the April-September 2005 Central Plan expenditure were inferior to those in the corresponding period of the previous year. Fiscal and revenue deficits were higher by Rs30,608 crore and Rs5,146 crore respectively and the primary deficit turned from a surplus of Rs2,164 crore to a deficit of Rs29,903 crore. The key parameters of non-debt receipts, fiscal deficit and revenue deficit, were also short of targets prescribed under Rule 7 of the FRBM Rules, 2004. Under the Rules, the government is required to take appropriate corrective measures in case the outcome of the second quarterly review shows that:

total non-debt receipts are less than 40 per cent of BE; or

ii)

the fiscal deficit is higher than 45 per cent of the BE; or

iii)

the revenue deficit is higher than 45 per cent of the BE prescribed under Rule 7 of FRBM Rules, 2004.

INFORMATION/DATA Indirect tax revenue collection data released by the Finance Ministry on 13 January 2006 Though service tax revenues of the Union government has surged by 65.41 per cent to Rs13,782 crore in the first nine months of the current fiscal as against Rs8,332 crore collected between April and December 2004, the growth in revenue collections on the excise front is, however, lower than the budgeted level for 2005-06.

The Centre's Customs collections grew by 15.78 per cent between April and December 2005 to Rs47,715 crore as against a level of Rs41,212 crore between April and December 2004. As regards overall indirect taxes, the revenue collections increased by 15.73 per cent between April and December 2005 to Rs1,36,517 crore (Rs1,17,965 crore).

Mid Year Economic Review Accounts at a glance Rupees Crore ACTUALS

Percentage to BE

Budget 5 Years Up to Estimates Up to Moving 2005-06 09/2005 COPPY 09/2005 COPPY Average

1. Revenue Receipts

3,51,200 1,22,845 1,06,507 35.00% 34.40% 36.80%

2. Tax Revenue (Net)

2,73,466

96,249

77,860

35.20% 33.30% 34.20%

3. Non-Tax Revenue

77,734

26,596

28,647

34.20% 38.00% 43.20%

4. Capital Receipts (5+6+7)

1,63,144

88,138

89,066

54.00% 52.90% 48.60%

Non Debt Capital Receipts

12,000

4,295

35,831

35.80% 115.20% 68.90%

5. Recovery of Loans

12,000

4,284

35,639

35.70% 131.50% 100.70%

192

4.80%

7. Borrowings and other liabilities

1,51,144

83,843

53,235

55.50% 38.70% 44.20%

8. Total Receipts (1+4)

5,14,344 2,10,983 1,95,573 41.00% 40.90% 41.40%

9. Non-Plan Expenditure

3,70,847 1,51,577 1,42,299 40.90% 42.80% 42.70%

10. On Revenue Account

3,30,530 1,41,819 1,31,716 42.90% 44.90% 42.00%

11. of which Interest Payments

1,33,945

53,940

55,399

40.30% 42.80% 40.60%

40,317

9,758

10,583

24.20% 27.40% 50.50%

13. Plan Expenditure

1,43,497

59,406

53,274

41.40% 36.60% 38.20%

14. On Revenue Account

1,15,982

46,123

34,742

39.80% 37.80% 38.30%

27,515

13,283

18,532

48.30% 34.50% 38.00%

6. Other Receipts

12. On Capital Account

15. On Capital Account

8.10%

16. Total Expenditure (9+13)

5,14,344 2,10,983 1,95,573 41.00% 40.90% 41.40%

17. Revenue Expenditure (10+14)

4,46,512 1,87,942 1,66,458 42.10% 43.20% 41.20%

18. Capital Expenditure (12+15)

67,832

23,041

29,115

34.00% 31.50% 43.00%

19. Revenue Deficit(17-1)

95,312

65,097

59,951

68.30% 78.70% 55.20%

1,51,144

83,843

53,235

55.50% 38.70% 44.30%

20. Fiscal Deficit {16 – (1+5+6)} 21. Primary Deficit (20 – 11)

17,199

29,903 (-)2,164 173.90% (-)27.4% 100.40%

Notes: 1. The figures of Railways have been netted as in Budget. 2. COPPY - Corresponding Period of Previous Year 3. Borrowings and other liabilities (Item 7) do not include net borrowing under Market Stabilization Scheme (Rs3116.41 crore), which is not to be used for bridging the shortfall in receipts.

Source: Mid Year Economic Review 2005

Tax Revenues Rupees Crore

2005-06

2004-05 Percentage to BE

ACTUALS Up to % 09/2005

ACTUALS Up to 09/2005 %

1 Corporation Tax

110573

33925.71

31% 88436

20337.25 23%

2 Taxes on Income

66239

21083.47

32% 50929

25175.11 49%

265

98.56

4 Customs

53182

31276.33

59% 54250

5 Union Excise Duties

121533

40415.92

33% 109199 36622.39 34%

6 Service Tax

17500

8159.01

47% 14150

4899.05

35%

7 Other taxes

732.52

2583.02

353% 624.02

583.85

94%

GROSS TAX REVENUE

370024.5

137542

37% 317733

112843

36%

NET TAX REVENUE

273465.5 96248.61

3 Wealth Tax

37%

145

20.6

14%

25204.79 46%

35% 233906 77860.25 33%

Note: Actuals for 2004-05 in respect of Corporation Tax and Taxes on Income need to be readjusted due to misclassification in challans noticed in the early stages of introduction of OLTAS. The readjusted figures would be Corporation Tax: Rs26,457.08 crore and Taxes on Income: Rs19,055.28 crore.

Source: Mid Year Economic Review 2005

Budget – 2005-06 The overall expenditure (Plan and Non-Plan) on health and education has gone up by more than 22 per cent and 36 per cent respectively in 2005-06 BE. While plan allocations have increased sharply (by 38 per cent), non-plan expenditure has gone up by only 3 per cent on health and education. As per the NCMP, the spending on education and health is to be raised to at least 6²/3 per cent of GDP respectively.

Though the overall expenditure on health and education has increased, it is still less than what was promised in the NCMP. Though this is broadly in conformity with the NCMP, it will have an impact on the government’s capacity to abide by the FRBM Act in 2005-06.

The NCMP aimed at increasing expenditure on agriculture and rural development, infrastructure, social sectors and employment generation. To fund the plan outlays there has been higher reliance on Internal and Extra Budgetary Resources (IEBR) than budgetary support. At the aggregate level the IEBR for the above-mentioned areas has been increased by 62 per cent as compared to a 33 per cent rise in the budgetary allocation to plan outlays. The plan expenditure for social services has been raised by 35 per cent. As per NCMP the public investment in agriculture, rural infrastructure and irrigation will be increased. Increased plan expenditure in agriculture and allied activities, rural development and irrigation and flood control reflects the governmentâ&#x20AC;&#x2122;s intension to fulfil promises made in the NCMP.

The plan expenditure on social services has risen by a faster rate than economic services. Plan expenditure for education and health have been budgeted to increase by 47 per cent and 25 per cent, respectively. The central plan outlay for infrastructure has been budgeted to increase by 52 per cent. Within infrastructure, the sharpest rise of about 200 per cent has been witnessed in road transport and shipping. Plan Expenditure by Key Heads of Development Rs Crore

Growth

2003-04 2004-05 RE 2005-06BE 2004-05 RE

200506BE

Social Services

28021

35404

47665

26.35

34.63

Education Art & Culture

7839

10106

14820

28.92

46.65

Health & Family Welfare

5564

6944

8711

24.80

25.45

Water Supply, Sanitation, Housing and Urban 6802 Development

7930

9029

16.58

13.86

Welfare of SC/ST and other backward classes

1128

1250

1490

10.82

19.20

Labour and Labour Welfare

118

157

208

33.05

32.48

Social Welfare and Nutrition

2173

2423

3819

11.50

57.61

Source: Budget Documents â&#x20AC;&#x201C; 2005-06

oooOOOooo

ISAS Insights No. 14 – Date: 7 March 2006 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel : 65166179 Fax: 67767505 Email : isaspt@nus.edu.sg Website: www.isas.nus.edu.sg

SIGNIFICANCE OF PRESIDENT GEORGE W. BUSH’S VISIT TO INDIA Kripa Sridharan SUMMARY AIMS AND INTERESTS The visit reflects three important US aims: ¾ India needs to be strengthened as a strategic partner ¾ It can be an important player in Asia ¾ A greater access to India’s market India’s aims: ¾ Enhancing its regional and international profile ¾ Resolving its energy problem through civilian nuclear cooperation ¾ Accessing other high tech resources from the US ACHIEVEMENTS From the US point of View: ¾ Gaining a measure of control over India’s nuclear programme: only a partial freeze and capping has been achieved but it is a beginning. ¾ China cautioned by the conclusion of the nuclear deal ¾ Access to Indian market, civil and military, including $30bn of reactors is now possible. ¾ But there are problems: the deal has to be endorsed by the Congress which has to amend its laws.

¾ The slowness of India’s economic reforms and its poor infrastructure development are serious impediments From the Indian point of view: ¾ Recognition as an international power ¾ Better prospects for energy self-sufficiency ¾ End of technological isolation ¾ Its fast breeder-reactors remain outside the purview of the nuclear deal ¾ Partnership with the US has created parity with China ¾ No similar US nuclear deal with Pakistan ¾ US agrees to raise the number of H1B visas it grants to the Indians ¾ But the fears are: India has lost its autonomy in nuclear decision-making and to some extent in its foreign policy choices ¾ Jeopardised its strategic options ¾ US-Pakistan relations will continue to trump India’s security ¾ The understanding with the US could affect Sino-Indian ties ¾ The special safeguards envisaged by the IAEA may not suit India ¾ The US Congress may prove obdurate by defeating the deal OVERALL ASSESSMENT ¾ Successful in broad terms ¾ Details of the deal could pose problems as the deal moves through various stages – US Congress, Indian Parliament, NSG, IAEA and so on ¾ Modus vivendi could be problematic given a strong anti-US bias in some quarters WHAT NEXT? ¾ Bush administration has to convince a sceptical Congress to endorse the deal ¾ The Left parties could make things difficult for the Indian government ¾ India’s Nuclear establishment will not be that happy with the compromises ¾ China could decide to extend a similar deal to Pakistan

¾ The Indo-US accord will accelerate Pakistan’s search for a nuclear friend to provide it with the same benefits that India has been promised ¾ Pakistan, unlike India, is not subject to any safeguards at all which given its proliferation record is dangerous ¾ Negotiating an Additional Protocol with the IAEA could raise some issues for India ¾ No assurance that India will be apart of the Nuclear Suppliers Group. It will only be a buyer of nuclear fuel with no right to reprocess the fuel which it will find irksome to accept FROM SOUTHEAST ASIA’S PERSPECTIVE ¾ Better Indo-American relations would be beneficial to the region in economic and strategic terms ¾ Engagement with India shows America’s continuing interest in Asian affairs despite its other pre-occupations ¾ Southeast Asia’s hope and belief is that India is far too independent to fall for America’s ‘containment of China’ game ¾ Better Indo-US economic interactions would mean a bigger market for Southeast Asian goods and services ¾ Nuclear energy will lead to less pollution in the region ¾ A cautionary note: President Bush’s statement about a shared understanding with India about human rights and democracy in Myanmar bears watching CONCLUSION ¾ The deal impacts on the prevailing international proliferation norms where an exception has been made ¾ This has the potential to encourage other aspiring nuclear powers ¾ But the agreement between India and the US reflects the distinction made by the Bush administration between responsible and irresponsible international actors ¾ Overall, the visit and the deal confirm the growing convergence of interest on many fronts between India and the US ¾ This could result in a broader strategic cooperation between the two and enhance India’s regional and global profile

PRESIDENT GEORGE W BUSH’S VISIT TO INDIA AND ITS IMPLICATIONS INTRODUCTION This paper attempts to explain the significance of President George Bush’s recent trip to India. Visit diplomacy is the most visible form of diplomacy and despite the emphasis on ceremony it does accomplish important goals. Indo-US relations have never been as robust as they are now. Among the indicators of the deepening relationship between the two countries are the visits by two successive US presidents, albeit in their second terms. American analysts also see the visits by both a Democratic and a Republican President to India as evidence of bipartisanship and foreign policy continuity that shows a strong preference for enhanced Indo-US ties. It is inferred that ‘a trip to India is no longer just a desired, but a required part of American President’s itinerary during his term in office’. Bipartisanship is also evident in India. The present government has built on the legacy of the previous government, which was primarily responsible in lifting this relationship to a new height. 1. US AIMS AND INTERESTS 1.1

US foreign policy generally is driven by two overarching goals: its own security and market access in other countries. Its approach to India is no different in this respect. And now that the Indian economy is growing at between 7 and 8 per cent annually, with every prospect of sustained growth arising from further reforms and liberalisation, the commercial attraction is fairly obvious. India offers a huge potential market for US services, especially financial services which India has been rapidly opening up. One thing to bear in mind is that unlike with many other countries there is essentially no big trade row between India and the US. This is mostly owing to the modest volume of trade in goods between the two. (In comparison to the US$300 billion Sino-US merchandise trade Indo-US trade amounts to only US$30 billion). But if services are

brought into the picture then there is scope for friction as white collar workers in the US are beginning to fret about job losses due to out-sourcing. 1.2

The security aspect is the recognition of a fait accompli by India on nuclear weapons. It is also borne out of the belief, widely held in America, that India can be an insurance against a rising China or even be a rival pole.

The best way to understand the

partnership is perhaps to view it through the objectives of an alliance relationship with the difference that there is no formal treaty but an economic and nuclear quid pro quo. The means are different; the aim is the same. 1.3

The Bush administration views India as an important player in Asia, and as a strategic partner that needs to be strengthened. India’s economic and military potential, its resilient democratic political system and pluralism seem to have added to its attractiveness. No less important is the fact that India has a proven record of setting credible safeguards on its nuclear programme which, according to President Bush, deserves better recognition.

1.4

The US is aware of India’s energy needs and its dependence on oil imports. It is this imperative that has made the nuclear issue critical as India continues to search for an effective alternative. There is some appreciation of India’s difficulties in this area and therefore the US is desirous of crafting a common energy framework.

2. INDIAN AIMS AND INTERESTS 2.1

India has the same security concerns as the US, arising out of the emergence of China, terrorism, instability in West Asia, maritime security, container security, and Iran’s nuclear push. In that sense the two countries are “natural allies” and it makes sense for them to act together within a broader framework of cooperation.

2.2

The Indian elite has had a longstanding desire to become a part of the world’s ‘Top Ten’. It feels that, for far too long, India has not lived up to its potential. This visit and its outcome give the Indian elite a chance (or an illusion) that it has moved up in status. The importance of this cannot be under-emphasised.

2.3

India has the market, resources, managerial talent and abundant cheap labour. What it doesn’t have is high tech, especially for agriculture but also for civilian nuclear power. The agreements signed during the Bush visit ought to help it get greater access to high tech.

3. ACHIEVEMENTS OF THE VISIT 3.1

The American View The Optimistic Line i.

Nuclear non-proliferation: A freeze, cap, and perhaps even a rollback of India’s nuclear programme are now within the realm of possibility. Even though only a partial freeze and capping has been achieved, it is a beginning.

ii. China has been cautioned by America’s interest in recognising India as a great power in the 21st century. The US has begun referring to India as one of the five great powers of the world, which does not sit well with China. iii. A greater American access to Indian market, civil and military, including US$30 billion worth of reactors. The Pessimistic Line i.

Worries remain about the gap between promise and performance on the nuclear deal especially since it has to be sold to a vast constituency of sceptical elites who usually take an anti-American line.

ii. Misgivings about the speed of economic reforms in India, especially the slow progress in reducing the restrictions on investment in the banking, insurance and retail sectors. iii. Poor infrastructure development and the heavy hand of the bureaucracy which puts off US businesses.

3.2

The Indian View The positive side i.

India can now dream of energy self-sufficiency. The nuclear deal has also ended its technological isolation.

ii. The process that was started in July 2005 has been taken further in a definitive way. Civilian nuclear energy cooperation can be expected to occur soon. iii. While India has agreed to the plan of separating the civilian and military nuclear reactors the US has had to accept that India’s fast-breeder reactor will be kept out of the civilian list. This is a major victory. iv. The nuclear deal has helped create parity with China since India can now hope to access the international nuclear markets as China does. v. India is reassured by US recognition and engagement that it is a significant power with a global role. vi. Some Indian analysts compare the present Indo-US partnership to that of US’ rapprochement with China that changed the general international balance of power and raised Beijing’s profile. A similar trajectory for India is now anticipated. vii. India is quite satisfied with the statement made by Condoleezza Rice that no similar nuclear deal for Pakistan was envisaged given its poor proliferation record and other risk factors. viii. The visit has led to the launch of the Knowledge Initiative on Agriculture with a three year investment of US $100 million.

ix. President Bush’s promise to work for augmenting the presence of Indian scientific talent in the US went down well in New Delhi. This suggests a possible increase in the H1B visas. The Cautious View i.

It is believed that India has compromised its ability to have full control over its nuclear programme by agreeing to separate the nuclear reactors/establishments along civilian and military lines. Once the agreement is formalised there can be no turning back on this commitment. This might have negative consequence for its strategic options in the face of future threats. A related worry is that while India is now subject to safeguards of various sorts no such limitation hobbles Pakistan. This asymmetry could prove costly. Added to this is the fear that China might extend a similar kind of deal to Pakistan without comparable safeguards.

ii. Pakistan: The US will not be able to successfully perform a balancing act to India’s satisfaction. Pakistan is a Non-NATO ally of the US and will continue to be treated in a manner that goes against Indian interests, especially in the matter of supply of arms and turning a blind eye to the export of terrorism to India. iii. China: New Delhi does not want to be drawn into a ‘containment game’ since it wants to keep its relationship with China autonomous. It has worked hard to improve cross-border ties leading to an impressive growth in bilateral trade. It does not want to rock the ‘bridge of friendship’ and unduly complicate its relations with China. iv. Kashmir: The US says it will not act as a mediator. That may be so in a de jure sense but in fact, Washington has very much become a part of the South Asian story. India needs continual US pressure on Pakistan to accept the line of control as the international border and to stop treating Kashmir as disputed territory. At the same time, it is leery of permitting the US to play a formal mediatory role.

v. International Atomic Energy Agency (IAEA): The Agency may devise a special safeguards regime to satisfy the Nuclear Suppliers Group (NSG) but this may not suit India. Secondly, China within the NSG could prove obdurate since it is clearly unhappy that India has been made an exception to the nuclear rule. It is also likely that it would be pressured by Pakistan to create difficulties for India. vi. US Congress: The deal will be opposed and even if it goes through eventually, it will be significantly delayed. Analysts point out that there are several stages in the process of nuclear acceptability and none of them are smooth. 4. OVERALL ASSESSMENT 4.1

Despite the misgivings voiced by some in India it does appear that the visit has generated enough goodwill and understanding between India and the US. The fear that the nuclear deal would remain elusive now stands belied. Many in India thought that the US would not honour the July 2005 agreement.

4.2

The deal has received a favourable response from other countries except China which has warned that â&#x20AC;&#x153;the move will set a bad example for other countries as India has refused to sign the NPTâ&#x20AC;?.

4.3

India has also moved closer to the centre of US screen. The US wants to promote India as a major international actor.

4.4.

While the visit has been broadly successful details over the nuclear deal could prove difficult as it moves from one stage to another.

4.5

Modus vivendi could be problematic especially over issues on which Indian political parties have strong views, such as Iran, Iraq, Israel etc.

5. WHAT NEXT? The action now shifts to the US Congress and the Nuclear Suppliers Group (NSG), which must approve the change in non-proliferation rules in favour of India. Finally, India specific safeguards have to be crafted by the IAEA. 5.1

US Congress Response: Uncertain but will depend on the usual give and take of American politics. In all likelihood, it will be approved. Senator Kerry, while visiting India, endorsed the deal. However, the impression that the deal is overly beneficial to India will have to be erased to sell it to the Congress.

5.2

Indian Fears: No less problematic is its endorsement in India where many believe that it will circumscribe India’s freedom of action in determining its strategic needs. Nuclear experts also have their own misgivings about US intrusion in India’s nuclear decision making process.

5.3

Chinese Response vis-a-vis Pakistan: China has already offered Pakistan 8 nuclear reactors. It will do its best to neutralise the effects of the deal by acting more closely with Pakistan.

5.4

Pakistani Response: Not clear yet but the Indo-US deal could prompt it to accelerate its search for similar benefits from other quarters particularly from China. Their converging interests could once again pose a challenge to India.

5.5

NSG Response: Mixed. China could obstruct. For the rest, it will depend on how they agree to divide up the Indian civilian nuclear power market. The US will try to impress upon the members that India should be treated as an exception which will be difficult to do given America’s vehement opposition to allow the same for Iran or North Korea.

5.6

IAEA Response: Mohd Elbaradei, the IAEA chief, has noted that the Indo-US nuclear deal is a “step towards universalisation of the international safeguards regime and will make India an important partner in non-proliferation regime”. Clearly, safeguards will be customized for India by the IAEA although the military part will remain outside the

safeguards. Even the fast breeder reactors will remain outside. But the US wants Indian facilities to be safeguarded by the IAEA in perpetuity. None of the facilities placed by "other leading countries with advanced nuclear technology, such as the United States" — the phrase is from the July 18 agreement — are under perpetual IAEA safeguards. Also, the official nuclear weapon states have the right to redesignate safeguarded civilian facilities as military. While India may not want to do so, assured fuel supply for the safeguarded reactors as well as the principle of non-discrimination is something that will have to be addressed. Negotiating an Additional Protocol with the IAEA could prove difficult. 6. FROM SOUTHEAST ASIA’S PERSPECTIVE 6.1

Southeast Asian nations have always been puzzled by India’s reticence and its unwillingness to play to its size, not in a negative way, but in a constructive manner befitting its position in the region. Therefore a transformation in India’s policy which sees merit in engaging the major powers ought to go down well in the region. America’s interest in India can be beneficial both in strategic and economic terms. Its sustained policy of cooperation with India indirectly confirms that Asia is of importance to the US and it is not abandoning the region because of its pre-occupations elsewhere. A resurgent India in partnership with the US can have a stabilising effect on a region which is not comfortable with any one power, in this case China, dominating the regional scene.

6.2

A residual concern about the possibility of US using India as a strategic counter weight to China might be there but the region is equally aware that India does not want to act as America’s lackey and indulge in a game of containing China. India’s US policy has not shown that tendency in the past and it is unlikely to do so now and therefore, the newly strengthened links between the two do not portend any risks.

6.3

A rapidly growing Indian economy means a bigger market for Southeast Asian goods and services. A reduction in reliance on fossil fuels means less pollution in the region as a whole, and manageable prices of oil.

6.4

Interestingly, President Bush in his 2 March remarks alluded to the two countriesâ&#x20AC;&#x2122; common interest in democracy by specifically referring to Myanmar and Nepal. Since the ASEAN countries have their own particular view on the situation in Myanmar this remark should be closely studied to see whether the US expects India to endorse its position on the military regime and change its policy towards it.

7. CONCLUSION 7.1

The key takeaway is that the entire nuclear regime has been modified to accommodate India. However, the India-US nuclear deal does not explicitly recognize India as a nuclear weapons state. But India can reasonably expect to get all the benefits associated with being such a state.

7.2

The nuclear agreement could become the basis for effecting a broader strategic alliance. However, there will be a lot of domestic opposition to this in India. The government has to particularly contend with obstruction from the Left parties on whose support it depends.

7.3

The deal could encourage other countries to conclude that it pays to defy the NPT although India would be averse to being labelled as a norm-breaker. The only reason that such a label will not stick is because the nuclear deal is an acknowledgement and even a reward for Indiaâ&#x20AC;&#x2122;s scrupulous record on maintaining strict controls on its nuclear technology and safeguarding its nuclear programme for the past three decades.

7.4

In very broad terms, unless there is a repetition of what happened in the 1960s, when the US and India came very close only to drift far apart, it would be correct to say that a major change in international relations has just been formalized by the Indo-US accord. The US President ended his trip on a euphoric note by affirming that the partnership between his country and India has the power to transform the world.

ISAS Insights No. 15 – Date: 1 October 2006 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel : 65166179 Fax: 67767505 Email : isaspt@nus.edu.sg Website: www.isas.nus.edu.sg

THE RE-EMERGENCE OF THE BALUCH MOVEMENT IN PAKISTAN Rajshree Jetly ∗ INTRODUCTION 1.

The Baluch movement in Pakistan, after a dormant period of almost two decades, has been reignited with renewed vigour and threatens to destabilise Pakistan and potentially cause problems with regional security and economic development in South Asia. This paper will: a.

provide an overview of the Baluch movement in Pakistan;

explain some of the causes that have propelled and sustained the movement; and

consider the implications of the resurgence of this movement over the last few years on the stability of Pakistan and the region.

OVERVIEW OF THE BALUCH MOVEMENT IN PAKISTAN 2.

Baluchistan, situated on the southwest border of Pakistan, is the traditional homeland of the Baluch. It is a vast area covering 222,000 square kilometres and occupying almost 43% of Pakistan’s total land area. Baluchistan is a land abounding in national resources with large reserves of gas, minerals, fisheries, and coal. Apart from its wealth in natural resources, Baluchistan is also geo-strategically very significant, given its location.

It shares borders with Afghanistan to the northwest and Iran to the west. Apart from regional importance, Baluchistan has always been relevant at the international level during the Cold War and now in the era of global terrorism. Its coastline is along the Persian Gulf and, significantly, it is along the major sea lanes near the Straits of Hormuz through which about 40% of the world’s oil tankers pass.

∗

Dr Rajshree Jetly is a Research Fellow at the Institute of South Asian Studies, autonomous research institute in the National University of Singapore. She can be contacted at isasrj@nus.edu.sg.

The Baluch are a tribal minority and constitute a mere 5% of Pakistan’s population. The Baluch are fiercely protective of their identity and take great pride in their community bonds, tribal affiliations, language, folk lore and community. There are 17 major tribal groups and many sub-groups. Each major group is headed by Sardar, who is a leader of the group and exercises considerable authority.

Baluchistan remains the most underdeveloped region as evidenced by the socioeconomic growth indicators – health, literacy, civic amenities, industrial infrastructure and per capita income which point to its backwardness and underdevelopment. For example, literacy rates in Baluchistan have always lagged behind the national average. In 1981, literacy rate in Baluch was 10% while national average was 26%. Even as recently as 2004-05, Baluchistan’s literacy rate was the lowest (37%) as compared with other provinces (Sindh 56%, Punjab 55%, north western frontier province 45%) and the national average at 53%.

BACKGROUND AND CAUSES OF THE MOVEMENT 6.

The Baluch have been involved in many armed rebellions against the federal government, with the last major insurgency in the 1970s, which was largely fuelled by the Baluch’s perception of disenfranchisement by the federal government in terms of their economic, social and political expectations.

The Baluch Perspective 7.

Economically, the Baluch feel the central government in Pakistan is treating Baluchistan as a colony, exploiting its resources without sharing the benefits. Natural gas was discovered in the Sui fields in the province in 1953 and by 1964, the gas was being piped to Multan and Rawalpindi in Punjab. Quetta, the capital of Baluchistan, received none of the gas from its own land until 1986.

Baluchistan also does not receive a fair share of the royalties from its natural resources. The federal government has under-priced Baluch gas, as compared with other provinces and, further, has only paid 12% of the royalties due. The Baluch have been demanding a revision of royalties on Sui gas which have remained the same since 1952.

Socially, most Baluch feel that they are marginalised in their own land. The federal government, dominated by Punjabis, has allowed many Punjabi civilian and military personnel posted to Baluchistan to buy prime land in the province.

10.

Development projects which were launched by the federal government such as the Pat Feeder canal, RCD highway and Hub-chowki were viewed with suspicion. For example, there was cynicism that the Hub-Chowki project was not intended to benefit the Baluch. It was located near the border with Sindh, close to Karachi and has attracted mainly non-Baluch workers. The development of infrastructure, especially construction of roads to connect Baluchistan with other provinces, was also seen as a means to provide access to the central government to penetrate Baluchistan and control it, rather than to facilitate development.

11.

Politically, Baluch discontentment and feelings of relative deprivation have functioned at two levels – the federal level and the provincial level. The federal government is largely Punjabi and the Baluch feel that the Punjabis are disproportionately represented in terms of wielding power at the centre. At the provincial level, the ire was directed towards the Pashtuns who flooded the province after the Afghanistan crisis in the 1980s. The Pashtuns soon dominated the business sectors, especially construction and transport.

12.

Apart from being socio-economically disadvantaged, the Baluch are also politically disenfranchised at the provincial and central levels, with poor representation in the civil service and armed forces. For example, in 1972, only 5% of the provincial civil service in Baluchistan itself was made up of Baluch.

13.

At the federal level, a quota system was implemented by Zulfiqar Ali Bhutto to facilitate proportionate representation of all provinces in the civil service. This operated to the disadvantage of the Baluch due to the fact that the Baluchistan population only constituted a very small percentage of the national population and further, the Pashtuns and Punjabis domiciled in Baluchistan were able to count themselves under the Baluchistan provincial quota, further diluting ethnic Baluch representation.

The Pakistani Government’s Perspective 14.

The Pakistani government views the Baluch as an insular community that is unwilling to break away from its tribal ways and integrate into the national mainstream.

15.

The government has been pumping vast amounts of money into the province to boost development and to win over the Baluch. For example, during the 1970s, when the insurgency was at its height, the government raised its grant-in-aid from Pakistan Rs12.6 million in 1971-72 to Pakistan Rs717.2 million in 1978-79. Government officials maintain that much of the money was embezzled along the way at the provincial level and did not reach the people.

16.

There is also a strongly held view that tribal chiefs have politicised development issues in order to maintain the status quo and thus preserve their power. It is always in the interest of leaders of discontented groups to ensure that conflict continues, as that guarantees their leadership positions as well as access to funds and support. As one government official put it recently, “While the tribesmen remain in primitive conditions, the leader of the Bugti tribe, Sardar Nawab Bugti and his family enjoy scores of other perks and privileges.”

17.

Whatever the views of both parties, the reality is that the Baluch feel a strong sense of injustice and this perception has not been fully addressed by the Pakistani government, which is why history is repeating itself. This paper compares the 1970s insurgency with the present to highlight the common features that sustain this movement and to speculate on possible future scenarios based on new variables in the equation.

RESURGENCE OF THE BALUCH MOVEMENT 18.

The Baluch are presently in the midst of another crisis that gained momentum in 2004. The civil war of the 1970s and the present insurgency have many striking parallels and most of the issues that dominated the 1970s civil war have also contributed to the present crisis. Underdevelopment of the province, lack of economic and political participation at the national and provincial levels, exploitation of the province and lack of trust between the Baluch and the federal government are common themes in both cases.

Commonalities with the 1970s Insurgency 19.

In the past, projects such as the Pat Feeder Canal and Hub-Chowki were seen as generating employment for non-Baluch and to serve the strategic interest of the federal government. Similar suspicions surround today’s projects. For example, the construction of the new port at Gwadar and the Ormara Naval base along the Mekran coast has raised several concerns.

20.

The Gwadar port project has been controlled exclusively by the federal government, with negligible participation by Baluch, thus depriving them of any meaningful role in the development process. Gwadar, which also has a defence and strategic function, could see an increased presence of the Pakistani military in the region, and this raises concerns amongst the Baluch of greater interference by the federal government. It also risks diluting the Baluch’s presence, with the influx of people from other provinces seeking employment opportunities.

21.

The Baluch already feel deprived of employment opportunities at Gwadar. For example, of the 600 people employed in the first phase of the project, only 100 of them were Baluch, largely in the lower end jobs. Nawab Akbar Bugti, the late veteran leader of the Baluch movement, had lamented that even though “the government had promised that all jobs that the locals could do would be given to them…people are being brought in, even for unskilled labour.” Similarly, the Ormara naval base project has hardly involved the Baluch.

22.

Related to the Gwadar project is the fear that Baluch are being dispossessed of their land. The government acquired the land around the port at below-market value and distributed much of it to navy and coastguard personnel who are largely non-Baluch. It has also created a speculative market, with the cost of land in Gwadar soaring. According one newspaper report, a 500 square yard plot that used to cost US$130 has shot up to US$7,000.

23.

A further parallel to the 1970s insurgency is seen in the Baluch’s response to the highhanded approach of the Pakistani government. In 1973, the Bhutto government decided to flex its muscles by dismissing the provincial government in Baluchistan and following that with a massive military offensive in 1974. These actions triggered a civil war and insurgents resorted to guerrilla warfare tactics, blocked main roads, disrupted rail links and obstructed oil drilling and survey operations. The federal government responded with all its might and, with assistance from Iran, managed to quell the uprising and eventually took full control of Baluchistan. It arrested the three

main leaders – Ghous Bakhsh Bizenjo, Khair Bux Marri and Ataullah Mengal – and stationed the Pakistan army in the province to restore order. 24.

In the recent escalations of violence from 2004, the Baluch forces have resorted to similar tactics. In January 2006, the rape of a female doctor by Pakistani soldiers in a Sui hospital complex sparked off widespread protests and Baluch guerrillas attacked railway lines, gas supply lines and gas installations affecting gas supply to the rest of the country, and causing power failure in the capital city of Quetta and other areas. The Pakistani military responded with full force, killing many of the insurgents, and ultimately leading to the death of Akbar Bugti.

Differences with the 1970s Insurgency 25.

There are some critical differences which could make the picture more complex and complicate matters for the Pakistani government. In the 1970s, the insurgency declined for a variety of reasons. For one, Zia’s multi-pronged policy of coercion, cooption and conciliation turned the tide in Baluchistan in favour of the federal government. Second, there were intra- and inter-group cleavages and clashes of personalities, ideologies, strategies and goals of the various leaders.

26.

The Pakistan National Party, successor to the old National Awami Party was formed under Bizenjo and argued for greater provincial autonomy for Baluchistan. Another organisation, the Baluch People’s Liberation Front wanted to create a greater Baluchistan to include the Baluch in Iran, Pakistan and Afghanistan. A third group called the Baluch Students Organisation wanted an independent Baluchistan.

27.

These differences were exploited by Zia who managed to buy out some of the Baluch who were by now directionless. The movement also had never enjoyed wide popular support as it was driven by a few tribes. Finally, the movement failed because it did not enjoy sufficient external support to advance their cause. Afghanistan was experiencing its own crisis in the late 1970s and Iran was in favour of the Pakistani government as it did not want the insurgency to spread to its own Baluch population. India had no real incentive to help the Baluch although it was willing to exploit the situation in its conflict with Pakistan.

28.

Today, the situation is very different. The Baluch are no longer as fragmented and guerrilla fighting is being carried out under the aegis of the Baluch Liberation Army (BLA), which comprises the Marri, Bugti and Mengal tribes. In the 1970s, there was some friction and rivalry between these tribes, whereas today, there is much greater cooperation. Indeed, when Bugti’s tribal territory came under attack by Pakistani troops, the Marris offered him sanctuary in their tribal area. This suggests much greater cohesion and cooperation amongst the various Baluch tribes.

29.

The BLA has also attracted many educated Baluch from a middle class background into its fold and the leadership also appears to be more united in pursuing the goal of greater provincial autonomy. The four main Baluch political parties [Baluch National Party (Mengal), the Baluch National Party, the National Party and Nawab Akbar Bugti’s party, the Jamhoori Watan Party(JWP)] have come together for a common cause under the umbrella of Baloch Ittehad.

30.

This could make it more difficult for President Musharraf to exploit differences between the various tribes, which General Zia was able to do successfully in the 1970s, as described above. Furthermore, the Baluch are now better equipped with heavy weaponry and sophisticated equipment.

31.

More importantly, the biggest difference between the 1970s and now is that the Pakistani military is stretched to its maximum, as it is engaged on three visible fronts – the US-led global war on terrorism in the north-western frontier province and the Afghan border, the Line of Control in Kashmir and the revived Baluch insurgency.

32.

Further, the external support dimension may also be very different. In the 1970s, Pakistan had received assistance from Iran but it may be less likely for such assistance to be forthcoming, especially if the Baluch make it clear that their goal now is only for greater provincial autonomy and not an independent or greater Baluchistan, which could have repercussions in Iran. There is also speculation that Al-Qaeda is moving into Baluchistan and there is therefore a possibility of the United States forces collaborating with Pakistan to enter Baluchistan both to fight Al-Qaeda and, more relevantly, to prepare for a potential strike against Iran. The United States rhetoric on Iran lends credence to this speculation, and it may, therefore, be in Iran’s interest to ensure that Baluchistan does not come under the full control of the Pakistani military.

33.

Iran, in collaboration with India, has built the Chabahar port to compete with the Gwadar port in order to remain a key player in the shipping routes and energy trading related to Central Asia. Any conflict that delays the Gwadar port project could be viewed as advantageous to both Iran and India.

34.

In terms of India, it is likely that it is providing active support for the Baluch. India’s interest may not be in de-stabilising Baluchistan per se but there are some collateral benefits to India. First, the Gwadar port is clear competition to the Chabahar port in which India has an interest. Second, India has a strategic interest in checking the extension of Chinese influence in the Indian Ocean region which the Chinese may be able to achieve through their involvement in the Gwadar port. The strengthening of relations between China and Pakistan will also be viewed with concern by India. Third, prolonging or intensifying the Baluch conflict may compel Pakistan to increase its military engagement in the area. This may result in Pakistan having to divert some its military resources away from its conflict with India over Kashmir.

35.

Thus, the new Baluch crisis, while arising from the same causes as the earlier crisis, is operating in a geo-political environment that is different and therefore may be less predictable. While it is too early to draw any conclusions, one can however imagine several possible scenarios.

IMPLICATIONS OF THE INSURGENCY ON PAKISTAN AND SOUTH ASIA 36.

First, the killing of Bugti could well intensify Baluch operations against the Pakistani government and provide a rallying point for future Baluch generations. President Musharraf’s recently vowed to get Bugti, saying, "I do not consider him Nawab (baron) any more, he and two other tribal chieftains are indulging in anti-state activities with the help of foreign money and weapons. We will soon sort them out."

Soon after, Bugti died at the hands of the Pakistani military. This could well make a martyr out of the late Baluch leader. 37.

Second, if the Baluch do incline towards greater militancy, it will lead to a protracted struggle rather than a quick solution to the problem. Provoking a more intense or lasting confrontation could be disastrous to Pakistan’s economic stability, as Pakistan is already spending a huge proportion of its finances on domestic and cross-border conflicts.

38.

Third, the new crisis could provide Al Qaeda with a strategic opportunity to exploit differences between the Baluch and the federal government to undermine President Musharraf. The Baluch are essentially secular in outlook and have in the past not shown an inclination to join hands with Islamic fundamentalist elements. However, with the Al-Qaeda now using Baluchistan as a base for its operations, there is a risk that the Baluch will cooperate with Al-Qaeda/Taliban forces for strategic reasons, thus enhancing the internal security threat in Pakistan. President Musharraf is in a difficult position as he balances the various competing interests of Pakistan’s domestic politics and the United States’ strategic interests in its war on terrorism.

39.

Fourth, a continued military confrontation in Baluchistan could spill over to neighbouring Sindh which has been tense in the past, and trigger ethnic disturbances. These could have an adverse impact on the already fragile political and economic fabric of the country.

40.

Fifth, the killing of Bugti could also provide an opportunity for pro-democracy forces to get together and work against the military regime. Already, leaders of the main opposition parties, such as Muttahida Majlis-i-Amal (MMA) and Alliance for the Restoration of Democracy have found common cause in cooperating with each other and are pressing for the setting up of a judicial commission to probe into the death of Bugti. The MMA had differences with Bugti and his party, JWP, in the past, but Bugti’s killing has brought the democratic elements together against the military establishment. This could have important implications for the forthcoming elections of 2007 which will be a litmus test for President Musharraf and the pro-democracy forces.

41.

Sixth, the Pakistan army could use force and successfully quell the rebellion as it did in the past. However, this will not guarantee any permanent solution. In the 1970s, Pakistan did manage to subdue the insurgents, but as we are witnessing, the insurgency has resurfaced.

42.

Seventh, apart from the heavy cost to both the Baluch and the Pakistani state, this ethnic conflict may have broader implications on the region as a whole, as any instability in Pakistan will have a ripple effect on South Asian regional peace and security. Ethnicity in this region is heavily interlinked and a flare-up in Baluchistan could quite easily spread across borders.

43.

Eighth, if, as contemplated above, the Al-Qaeda-Baluch nexus develops, it could well be the tinderbox of fundamentalist terrorism that will engulf the region. Given the interconnectedness of oil and gas pipelines, ports and trade routes, the entire South and Central Asian regions could well end up being hostage to a continued Baluch crisis. 7

CONCLUSION 44.

The Baluch crisis is not going fade away by itself. To resolve the problem, the government will have to allay the apprehensions of the Baluch and give them a vital stake in being part of the political and economic process of the country. At the end of the day, perceptions are very important and unless both sides are able to arrive at a mutual understanding and demonstrate a genuine willingness to improve relations with each other, the problems will remain.

45.

The Baluch movement may wax and wane depending on the prevalent situation. In most ethnic conflicts, it is the nature of the movement which includes its organisational structure and leadership that ultimately decides its future.

46.

The state also plays a crucial role in exacerbating or reducing ethnic tensions â&#x20AC;&#x201C; the nature and timeliness of the stateâ&#x20AC;&#x2122;s response will determine whether the movement is contained or assumes a more confrontational form. Finally external support also remains a crucial factor in fostering an ethnic movement.

47.

The interplay of all these factors has decided the fate of the Baluch movement in the past and it is suggested that similar dynamics will help to shape the course of the movement in the future.

***********

ISAS Insights No. 16 – Date: 28 November 2006 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel : 65166179 Fax: 67767505 Email : isaspt@nus.edu.sg Website: www.isas.nus.edu.sg

THE VISIT OF CHINESE PRESIDENT, HU JINTAO, TO INDIA (20 – 23 NOVEMBER 2006) Rajshree Jetly ∗

INTRODUCTION

The legacy of hostility and indifference that characterised Sino-Indian relations has been replaced with some degree of geniality and mutual engagement. This positive change has been catalysed by a confluence of strategic and economic factors since the 1990s and, as it appears from this recent visit by China’s President Hu Jintao to India, the leaders of both countries seem willing to take Sino-Indian relations a step further by capitalising on the opportunities offered by globalisation and the shifting sands of the 21st century’s geo-strategic landscape.

In this brief insight on the visit, this paper:-

considers the objectives of the visit and analyses some of the outcomes and achievements;

∗

ii)

identifies existing challenges and prospects for Sino-Indian relations; and

iii)

examines the wider implications of Sino-Indian relations beyond the region.

Dr Rajshree Jetly is a Research Fellow at the Institute of South Asian Studies, autonomous research institute in the National University of Singapore. She can be contacted at isasrj@nus.edu.sg.

OBJECTIVES OF THE VISIT FOR CHINA

The recent visit of the Chinese President (the second ever visit of a Chinese President to India) marks a landmark in Sino-Indian relations and sends a positive signal that China is committed to carrying forward the process of Sino-Indian cooperation.

From China’s perspective, this visit was intended to facilitate a comprehensive partnership with India as agreed to in April 2005 during Prime Minister Wen Jiabao’s visit to India. President Hu’s visit was to reiterate China’s view that a ‘dynamic India-China friendship would lead to peace, stability and prosperity not only in Asia but the world as a whole.’

A key objective for China was to step up economic cooperation with India to build on the momentum of bilateral trade between the two countries, which has grown steadily over the years and was estimated to have reached US$18.7 billion in 2005. This is an almost 150 percent jump over the 2003 trade figures.

China is also keen to sign a free trade agreement (FTA) with India, which could create the biggest free trade region in the world and provide an enormous boost to economic relations between the two countries.

OBJECTIVES OF THE VISIT FOR INDIA

The most important aim for India was the resolution of the border issue which, from India’s point of view, was the key to unlocking Sino-Indian relations. India wanted an early settlement of the border problem on the basis of the Agreement on Political Parameters and Guiding Principles signed between the two countries in April 2005.

New Delhi also wants Chinese support for the civilian nuclear agreement signed between India and the United States which, after being approved by the United States Congress, would provide India with access to nuclear fuel and technology. China’s support is significant because the deal would need to be ratified by the 45-member Nuclear Suppliers Group of which China is an important member. There have been

indications in developments after the visit that China is willing to support New Delhi on this.

In terms of economic cooperation, India is keen to not only accelerate bilateral commerce and trade with China but also to widen the scope of cross-border trade by proposing the opening of two more border points with China, namely Demchok in Ladakh and Bumla in Arunachal Pradesh. These would be in addition to the Nathu La pass, a trade point linking Tibet and Sikkim which was re-opened for trade earlier in July 2006 almost 44 years after it was closed due to the Sino-Indian war of 1962.

OUTCOMES AND ACHIEVEMENTS

10.

A Joint Declaration was issued by India and China in New Delhi on 21 November 2006 reflecting the shared vision and mutual objectives of the two countries in a number of important areas. Both sides acknowledged that the relationship between India and China, the two biggest developing countries in the world, was of global and strategic significance and that a strong platform for common development existed.

11.

More importantly, they stressed that they were not rivals or competitors but partners for mutual benefit with a responsibility to the developing world. This is a critical message – if the two can truly overcome their differences and work together, a strong partnership between India and China will directly benefit over one third of the world’s population and position Asia as the potential leader of the future world order.

12.

From the security perspective, both sides were of the view that greater Sino-Indian cooperation could pave the way for India and China to exercise real influence in the future of global politics and international relations. The two countries agreed to revitalise and expand the India-China Dialogue Mechanism on Counter-Terrorism and to engage the United Nations in promoting a peaceful world order that ensured balanced representation of developed and developing nations. To that end, China acknowledged and supported India’s aspirations to have a stronger presence in the United Nations, but stopped short of supporting India’s bid for permanent membership of the United Nations Security Council.

13.

Both leaders committed themselves to a ten-pronged strategy to shape Sino-Indian relations and signed a series of 13 agreements touching on various areas, including trade, investment, cultural heritage, education and agriculture.

Key Aspects of the Joint Declaration Economic Cooperation 14.

Both sides acknowledged that the key driver of Sino-Indian relations would be comprehensive economic and commercial engagement. In furtherance of this, the countries aimed to double annual bilateral trade to US$40 billion by 2010. In addition, efforts would be made to â&#x20AC;&#x2DC;diversify their trade basket, remove existing impediments, and utilise the present and potential complementarities to sustain and strengthen bilateral commercial and economic cooperation.â&#x20AC;&#x2122;

15.

Another important outcome of the visit was the signing of the Bilateral Investment Promotion and Protection Agreement (BIPA). India began negotiating and signing BIPAs as part of its liberalisation in the 1990s to assure investors that their investments in India would be protected. To-date India has signed BIPAs with more than 50 countries. The BIPA with China will be in force for 10 years and will go a long way in boosting investment and trade opportunities between the two countries.

16.

More specifically, the BIPA could allay the fears of Chinese companies wanting to invest in sectors such as ports and telecommunications, deemed sensitive by the Indian government. For example, in the past, the Chinese consortium of Kaidi Electric Power Company and China Harbour Engineering, and Huawei Technologies were not considered for investment in ports and telecom respectively for security reasons.

17.

A Joint Task force was also formed to assess the feasibility and benefits of an IndiaChina Regional Trading Arrangement with the feasibility report to be submitted by October 2007.

International Economic Order and Regional Cooperation 18.

The two sides reaffirmed their desire to strengthen their cooperation in the World Trade Organization and supported an equitable, transparent and rule-based multilateral trading system as well as the early resumption of the Doha negotiations. 4

In addition, the two sides are increasingly engaging each other in various regional groupings and meetings. For example, they have agreed to cooperate closely in the East Asia Summit and to expand cooperation on issues of common interest under the Shanghai Cooperation Organisation. India has also welcomed China’s observer status in the South Asian Association for Regional Cooperation and China has welcomed India’s membership of the Asia-Europe meeting.

19.

India and China, with their booming economies and large population, are major competitors in the quest for energy.

Both sides agreed to fully implement the

provisions of the Memorandum on Cooperation in the field of Oil and Natural Gas signed in January 2006 and to cooperate in the exploration and development of oil and gas resources.

Civil Nuclear Cooperation 20.

The significance of energy security is reflected in the fact that the Sino-Indian Joint Declaration specifically refers to civil nuclear cooperation between the two countries – this is a major step. Both sides have agreed to promote cooperation in the field of civil nuclear energy consistent with their international commitments and in line with international non-proliferation principles.

21.

This has raised hope in some Indian quarters that China may be softening its earlier stance of criticising the Indo-United States deal as violating the Nuclear NonProliferation Treaty. It is likely that this subtle change in China’s stand has been dictated by pragmatism, both in terms of yielding to the inevitable, and in terms of positioning itself to bid for the lucrative contracts that would invariably come up following the Indo-United States nuclear deal.

Boundary Question 22.

An early settlement of the boundary question was seen by both sides as a ‘strategic objective’. It was emphasised that pending an eventual solution to the boundary question, both countries would work together to maintain peace and tranquility in the border areas in accordance with the agreements of 1993, 1996 and 2005. China was open to ongoing negotiation in order to find a fair, reasonable and mutually acceptable solution on the contentious boundary issue, but offered no immediate measures. 5

23.

It was also decided to expedite work on clarification and confirmation of the Line of Actual Control (LAC) and complete the process of exchanging maps indicating their respective perceptions of the entire alignment of the LAC on the basis of already agreed parameters. India claims the Chinese controlled Aksai Chin of approximately 35,000 sq km as part of the territory in Ladakh, whilst Beijing claims 90,000 sq km in the Indian state of Arunachal Pradesh.

Cultural Exchanges and Tourism 24.

The two sides agreed to strengthen cooperation in the area of spiritual and civilisational heritage. Discussions were held for collaboration between the two countries in the digitisation of Buddhist manuscripts available in China and the redevelopment of Nalanda as a major centre for learning with the establishment of an international university on the basis of regional cooperation.

25.

It was also decided to have 2007 as the India-China year of friendship through tourism and both sides planned to jointly organise a ‘Festival of India’ in China and a ‘Festival of China’ in India to create greater awareness of each other’s cultures. Both countries would also open new consulates in Kolkata and Guangzhou respectively to facilitate trade and tourism. The Chinese government has also proposed to invite 500 young people from India to visit China in the next five years.

CONTINUING CHALLENGES

26.

It is apparent that there are synergistic forces that are capable of propelling SinoIndian relations to a new level. But it would be premature to ring the wedding bells for these two giants. There are significant geo-political, economic and strategic hurdles in the way. In addition, the two countries are natural competitors for markets and resources, with aspirations to be global powers while trying to provide for their respective populations of over one billion people.

Geo-political Issues 27.

India and China have a long standing territorial dispute that led them to war in 1962 and which remains unresolved.

Despite a fairly comprehensive framework for

resolving the border issue being agreed to during Chinese Premier Wen’s visit in 6

2005, there has been little, if any, movement since then on the final delineation and demarcation of the LAC.

28.

The vexing question of China’s opposition to the Dalai Lama’s presence and activities in India further underlines the inherent uncertainties in the unresolved border. From the Indian perspective, the border issue is the key, and must be addressed with greater urgency before Sino-Indian relations can truly blossom. However, China’s priority is the commercial and economic aspects of the bilateral relationship and it does not want the border issue to detract from the economic and commercial relationship.

Economic Issues 29.

Economic cooperation between India and China is clearly the dominant feature of the relationship between the two countries. Yet, the two countries are also competitors for natural and energy resources, markets and global influence. India and China need to manage this paradox of simultaneous cooperation and competition.

30.

India’s and China’s quest for energy is a classic example of this paradox. Even as they compete with each other for oil and gas, the two countries are collaborating in new projects. During President Hu’s visit, India’s Petroleum Minister, Murli Deora, arranged a personal meeting with Ma Kai, the Chairman of the National Development and Reform Commission, and both countries agreed in principle to jointly bid for oil and gas properties in Africa and Latin America, with a formal agreement likely to be signed in January 2007.

31.

While China is keen on an FTA, India is concerned that such an agreement would flood its markets with cheap Chinese goods and hurt Indian manufacturers and exporters. India’s main export to China consists of primary commodities, especially iron ore, which does not guarantee long-term sustained growth. An FTA may also affect the balance of trade against India’s interest. China, on the other hand, is not happy that it is being denied access to important sectors in India such as ports and telecommunication.

32.

This is an area where the leaders’ pragmatic stated aim of trying to ‘utilise the present and potential complementarities’ needs to be fully exploited. There must be give and 7

take, with an eye on the bigger picture. While Chinese manufacturers are more competitive, India has the edge in terms of software and service capabilities. The complementarity is starkest in the booming field of information technology, where Chinese hardware manufacturers and Indian software engineers can benefit from each other.

33.

To successfully exploit their complementary strengths, both countries need to change some long held policies and practices. India needs to shift away from its protectionist mentality and accept that its uncompetitive manufacturing industry may have to suffer in the short term. China has to respect intellectual property rights and the rule of law to ensure that India’s service industry and software exports are not misappropriated.

Strategic Issues 34.

While there is no overt hostility between India and China, and both countries are genuinely reaching out to each other, there are at least four challenges to improved Sino-Indian relations. First, the two countries have a latent mistrust of each other born of a history of conflict and a lack of understanding of each other as nations and peoples. Secondly, China has always been a supporter of Pakistan, and that creates a natural axis of conflict. Thirdly, both China and India have regional aspirations and compete for influence in South and Southeast Asia. Fourthly, both China and India are major global players and are involved in a delicate balance in terms of each other’s engagement with the sole superpower, the United States, which has its own vested interests.

35.

The mutual mistrust means that neither country is able to dramatically lower its military capabilities that are committed to potential threats from the other. It also means that both countries are less enthusiastic about supporting the other in playing a greater role in regional and global politics.

36.

For instance, China is critical of India’s nuclear capabilities and has adopted an ambiguous stance on India’s aspirations to permanent membership of the UN Security Council. India, on its part, remains guarded about China’s role in South Asia, fearing that China might exert undue influence in what India would consider to be its backyard. China sees India as exerting hegemonic ambitions in the region. 8

37.

Pakistan is a major sticking point in Sino-Indian relations and it is sparing no effort in strengthening its ties with China. Immediately after President Hu’s visit to India, he visited Pakistan where he was conferred Pakistan’s highest civilian honour Nishan-ePakistan. The two countries also signed a wide ranging FTA and the new Haier-Ruba Economic Zone was inaugurated by President Hu. The two countries also aim to triple annual bilateral trade to over US$15 billion by 2010. Pakistan is forging ahead with this despite the fact that the balance of trade was 75 percent in favour of China and critics have argued that Chinese goods have flooded the Pakistan market. Clearly, the strategic aspects of the relationship are paramount for Pakistan.

38.

China also has a clear strategic interest in Pakistan, as a counter to India’s growing strength and improving relationship with the United States. Despite China’s visible dilution of support in recent years for Pakistan’s stand on Kashmir, there are no signs of any weakening of the military and political ties between the two countries. Pakistan continues to receive advanced military and nuclear technology from China and President Hu reiterated its strategic commitment to Pakistan during his recent visit by quoting an evocative Chinese proverb, “China may forsake gold but not friendship.”

39.

There is a concern in India that, following the Indo-United States nuclear agreement, there is bound to be greater Pakistani pressure on China for nuclear supplies. During the current visit of President Hu to Pakistan, there was only reference to continued joint development of nuclear energy, but there are unconfirmed reports of China agreeing to help Pakistan build six more reactors to meet its growing energy demands; an arrangement some would say could even be comparable to the Indo-United States nuclear deal.

40.

In terms of regional impediments to Sino-Indian relations, India has concerns about China’s carefully crafted linkages, particularly in the military arena, with India’s other neighbours in the region. For example, China has recently signed an agreement on the peaceful use of nuclear energy with Bangladesh. It has also cooperated with Myanmar to establish electronic intelligence and maritime monitoring facilities on the Coco Islands in the Bay of Bengal. These initiatives are seen by India as deliberate moves by China to encircle India from its eastern flank.

EXTERNAL IMPLICATIONS OF SINO-INDIAN RELATIONS

India-US-China 41.

India, China and the United States have, singly and collectively, been three of the most influential actors in shaping regional dynamics and the balance of power in Asia.

42.

With the steady rise of India, it is seen as a major strategic power by both the United States and China, and each has sought a strategic partnership with India. China is pursuing a strategic and cooperative economic partnership with India and the United States has offered to help India transform itself into a world power.

43.

There is a view in some quarters that the emerging partnership between the United States and India is driven by the growing Chinese interest in improving ties with India on the one hand and widening differences between China and the United States on the other. It is unlikely that there will be any firm entente or triangular relationship between India, China and the United States in the near future, as these countries historically have not trusted each other and presently have divergent strategic perspectives and competing aspirations.

44.

What is likely to happen is that these countries will gradually weave interlinking bilateral and multilateral strategic and economic ties with each other. Eventually, these various strands will become so interconnected that a web of equilibrium will be achieved, balancing the interests and tensions of the three countries.

Asia-Pacific 45.

With the new forces of globalisation, it is becoming increasingly more difficult for South Asia and East Asia to remain as distinct entities interacting only at the margins. This offers both opportunities and challenges to Southeast Asia, which lies at the junction of these two regional bodies.

46.

It is only in the last decade that Indiaâ&#x20AC;&#x2122;s growing economic power and its â&#x20AC;&#x2DC;Look Eastâ&#x20AC;&#x2122; policy have extended its reach into the broader region. China, on the other hand, has historically played a crucial role in the Asia-Pacific region for both political and economic reasons and will continue to do so. China is also a key player in the 10

ASEAN region because of the large Chinese Diaspora, geo-political compulsions and extensive trade and investment linkages with the member countries.

47.

Japan, which is the other major player in the Asia-Pacific, will be closely monitoring Sino-Indian relations. Following India’s warming of relations with the United States, Japan acted quickly to firm up its own relationship with India. Similarly, closer SinoIndian relations will galvanise Japan to enhance its own ties with India to ensure that it is not sidelined. As a historic rival of China, Japan has a vested interest in ensuring the regional balance of power involving India, China and US does not tilt in China’s favour at Japan’s expense.

48.

India has revitalised its ties with ASEAN countries after years of relative neglect. India has signed an FTA with ASEAN which is due to take effect in January 2007 and has pursued individual bilateral agreements with selected ASEAN states, for example the Comprehensive Economic Cooperation Agreement with Singapore and Thailand. India is also strengthening its defence ties in the region, especially in terms of naval cooperation. India’s expansion of its naval and maritime influence in Southeast Asia will not be welcomed by China, which has ongoing maritime disputes in the region. India’s inclusion in the East Asia Summit is a further testament to its growing interaction with the region.

49.

Given the important role of China and India in the region, Southeast Asia remains sensitive to the future course of Sino-Indian relations. Friendly and cooperative relations between India and China are widely seen as beneficial to Southeast Asia’s long term economic and political stability. Being huge economies, they can play an important role in significantly raising the economic profile of the region and giving a lift to ASEAN states. While there is a risk that, if India and China are too successful in their mutual engagement, the ASEAN region may be sidelined in the process, it is more likely that this is outweighed by the opportunities provided by improved SinoIndian relations.

CONCLUSION

50.

Despite the inevitable undercurrents of competition and contest, Sino-Indian relations will be marked by a strong desire for mutual engagement and cooperation. One can speculate that relations between India and China will remain largely stable and stay on course with little or no possibility of confrontation in the foreseeable future. Indeed, the leaders have pledged in the Joint Declaration that the forward direction of the relationship is intended to be irreversible.

51.

Relations between India and China have a very important bearing in shaping the future of Asia and the world at large. Closer cooperation between the two Asian giants will go a long way in promoting peace, stability and prosperity in the region and beyond. The sentiments in the Joint Declaration offers hope. Both leaders have declared that India and China are not rivals but partners for the future, and both leaders have stressed that Sino-Indian relations will go beyond the two countries and serve the interests of the rest of the world, especially the developing world.

52.

Nevertheless, there are two potential impediments. First, it is apparent that there is some degree of cross-purpose in the dialogue in Sino-Indian relations. Indiaâ&#x20AC;&#x2122;s priority remains the resolution of the border dispute whereas Chinaâ&#x20AC;&#x2122;s is the development of trade and commerce. Secondly, India and China are giant economies that can survive on their own, thus making mutual engagement a desirability rather than a necessity.

53.

The existing political realities on the ground have to be attuned if economic cooperation between India and China is to achieve its full potential. Otherwise, the two countries will simply continue to plod along. But, if the reality matches the rhetoric and if these two giants unleash the full potential of their partnership, the outcome will be nothing short of revolutionary and could herald a new Asian renaissance in the global order.

oooOOOooo

ISAS Insights No. 17 â&#x20AC;&#x201C; Date: 19 December 2006 Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel : 65164239 Fax: 67767505 Email : isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

BHUTANESE AND TIBETAN REFUGEES IN NEPAL: IMPLICATIONS FOR REGIONAL SECURITY Nishchal N. Pandey *

BACKGROUND

The condition of the 100,000 Bhutanese refugees currently stranded in the seven makeshift camps in eastern Nepal is getting precarious with each passing day. For the last 15 years, there have been little progress in the repatriation of these refugees of Nepalese origin as well efforts to improve the conditions in their camps, particularly relating to proper sanitation, drinking water, safety and in meeting basic daily needs. It is evident that the political instability in Nepal and the dilly-dallying tactics adopted by Thimpu have caused insurmountable trouble to the refugees. The Druk regime wants to deliberately buy time and wait for the refugees to forget about going back to southern Bhutan. Kathmandu, on the other hand, has been engrossed with its own internal troubles that the issue has remained on the backburner for a considerable length of time.

With 15 governments in 15 years, Nepalâ&#x20AC;&#x2122;s approach towards Bhutan on this issue has been subject to frequent review of approaches and positions. Its bureaucrats seem to be worn out by the countless rounds of negotiations with their Bhutanese counterparts. A new ray of hope emerged in November 2006

Nishchal N. Pandey is a Visiting Research Fellow at the Institute of South Asian Studies, autonomous research institute in the National University of Singapore. He is the Executive Director of the Kathmandu-based Institute of Foreign Affairs. He can be contacted at isasnnp@nus.edu.sg.

when Ms Ellen Sauerbrey, the United States Assistant Secretary of State for Refugee Affairs, said that, “the United States can take in 50,000 to 60,000 refugees within the next three to four years.” Almost immediately, Canada, Australia and some European countries also indicated their willingness to resettle the remaining refugees in their countries.

In addition to the Bhutanese, there are more than 20,000 Tibetan refugees in Nepal. The Refugee Welfare Office situated in Kathmandu began operation after the Dalai Lama fled into exile to India in 1959, and has helped to ensure the safety and well-being of tens of thousands of Tibetans crossing into Nepal from Tibet, many of them on their way to India and the United States. However, it has been a standard policy of Nepal not to call them “refugees” but rather citizens of the Tibet Autonomous Region (TAR) of China, “illegally” entering into Nepal. The Refugee Welfare Office has occasionally been shut down and re-registration denied, following pressures from China.

Hundreds of Tibetans risk their lives to cross the Himalayan range into Nepal every year. Most of them arrive in need of emergency medical care due to high altitude and freezing conditions while others are arrested mid-way through their journey. Sometimes, the Nepal government hands them over to the Chinese police which results in strong criticism from the western countries and human rights organisations. A new controversy arose on 30 September 2006 when Chinese border troops opened fire at a caravan of 73 Tibetans fleeing to Nepal through the Nangla Pass in the Himalayas. A Romanian film crew on its way to the Mount Everest and Mount Makalu region recorded the shootings.

CHALLENGE FOR NEPAL

Crippled with the destruction caused by the bloody Maoist insurgency which has taken 13,000 lives since 1996, Nepal has the additional burden of harbouring refugees from the neighbouring countries. Jhapa and Morang that shelter the Bhutanese refugees are considered the two most politically volatile 2

districts of the country. The refugees entered Nepal through India in the early 1990s as Nepal and Bhutan do not share a border with each other. At times, the refugees forcefully have tried to do the same in their quest to go back to their rightful motherland. On 3 August 2005, about 300 refugees from Beldangi Camps I, II and III moved towards the Mechi Bridge in the IndoNepal border. They were led by Mr S. B. Subba (Chairman, Human Rights Organization of Bhutan) and others from the Bhutan Gorkha National Liberation Front. There was a stone-throwing incident and three journalists were injured as the refugees were not allowed to cross into Indian territory by the Sashastra Seema Bala, India’s para-military force. This incident naturally exposed the double-standard policy adopted by India concerning the Bhutanese refugees while greatly embarrassing Thimpu as the clash at the Indo-Nepal border received international media coverage.

It might be recalled that, according to the Indo-Bhutan Treaty of 1949, India looks after the defence and foreign affairs of Bhutan. It wishes to see an early settlement of this issue as Jhapa is close to the ‘chicken-neck’ area in which a tiny piece of Indian territory separates the northeast from the rest of the country. There are reports of the formation of a Bhutan Communist Party (Maoist) and its budding association with like-minded groups throughout the red corridor that stretches from Nepal to Andhra Pradesh in India.

There are deep frustrations as the second generation of refugees, now in their teens, is keen for an armed struggle rather than “wasting time” in dialogue or negotiations. In fact, radicalisation may take different forms. Many refugees are encouraged from the success of the Nepalese Maoists while others want to shake hands with separatist groups such as the United Liberation Front of Asom. The million-strong Nepali Diaspora in India can also turn sympathetic to the cause of their fellow brethrens in Bhutan. A sub-region that is already unstable due to several ethnic and separatist movements could turn explosive if the Bhutanese refugee problem is not resolved as soon as possible.

In this rather precarious environment, the recent American assurance to accommodate 60,000 refugees surprised everyone. Immediately, a group of 3

Bhutanese refugees appealed to the Nepali government to speed up the implementation procedures regarding the United States’ proposal of relocating them to its shores. This group of refugees issued a joint statement saying that a total of 399 families inside the camps were willing to submit applications for relocation. But the refugee leaders were more cautious in their approach. They termed the United States’ statement “unclear” and saw a conspiracy to sideline the main issue of repatriation by taking the refugees away from Nepal. Refugee leader Mr D. P. Kafle said that influential countries should rather help the refugees return to their own homeland rather than transferring them to distant places. In addition, as has been remarked several times by Mr Abraham Abraham, the resident coordinator of the United Nations High Commissioner for Refugees (UNHCR) in Nepal, the economic burden of providing food to the refugees is huge but the donor support has been shrinking in the last few years.

The process of relocating such a large number of people who neither have a passport or any other form of travel document requires substantial resources and manpower increase in the United States’ mission in Kathmandu. Also, there are concerns on what these mostly illiterate and ageing refugees will do if they are taken to America.

10.

At the same time, analysts are curious about the United States’ motives behind this charitable gesture. It may possibly be an American design to enter into Bhutan’s domestic affairs as it is the only South Asian country with which the United States does not have diplomatic relations. Harbouring 60,000 Bhutanese in the United States will provide it with considerable leverage in dealing with India, Nepal, Bhutan and even TAR (China) in the coming years and will place itself strongly among the community of nations in the Himalayan range. Lately, the United States has also shown interest for an observer status in the South Asian Association for Regional Cooperation just like China and Japan. Of course, it could also just simply be a humanitarian assistance initiative on the part of the United States, keeping in mind the concerns of the UNHCR. In an efforts to placate the growing anxiety among the diplomatic community on the United States’ motives, American envoy in 4

Kathmandu, Mr Jim Moriarty, stated that since refugee camps are “witnessing terrorist activism which could affect north-eastern India, we are trying to help India.”

11.

Regardless of what happens in the next round of negotiations between Nepal and Bhutan, it is clear that India’s role in settling this dispute between its two squabbling neighbours will be most crucial. It has considerable influence over both the Himalayan kingdoms and it would not like to see further mishandling of this problem Will India be positive towards the relocation proposal thereby internationalising this crisis or will it still push for a bilateral settlement of the dispute among Nepal and Bhutan themselves? Veteran Indian journalist Mr Kuldip Nayar recently criticised the indifferent attitude of both Delhi and Thimpu on this problem and said that, “it would be better if nations can set examples on how to live together rather than embarking on ethnic cleansing”. Allowing these refugees to go to America and western countries will place them on the same level as their Tibetan counterparts, thereby attracting significant international media attention. Letting them languish in the camps for an unlimited time will invite conflict in an area that has no shortage of insurrections. Both alternatives point to potential dangers in the coming years if India itself does not tactfully impress upon both countries to end this impasse once and for all.

OUTPOURING OF TIBETAN REFUGEES: UPSETTING THE DRAGON

12.

Of the estimated 131,000 Tibetans living outside Tibet, there are 100,000 in India, 25,000 in Nepal 2,000 each in Bhutan and Switzerland, 600 in Canada and 1,500 in the United States. Under a “gentleman’s agreement” between Nepal and the UNHCR, Tibetans arriving in Kathmandu are permitted to transit safely through Nepal. Most refugees are then transferred to the government-in-exile set up by the Dalai Lama in Dharamsala in northern India, while others apply for visa for the United States and its embassy in Kathmandu provides them with the travel permit. Those who prefer to live in Nepal enter the lucrative carpet-weaving business whereas others open up 5

lodges and hotels. Most of the hotels in Boudha or Thamel area of Kathmandu are run by Tibetans. This has been the established pattern for the last half a century.

13.

It is only when the refugees begin engaging in anti-China activities that irate the Nepal government. With nudges from Beijing, the Nepali administration sometimes hands over identified activists in the guise of refugees to the Chinese police and even closes down the Refugee Welfare Office like it did in January 2005. Immediately after the closure, Mr Brad Adams, Asia Director of the Human Rights Watch, said, “The Refugee Welfare Office has been a critical safety net for tens of thousands of persecuted Tibetans. Closing the office leaves thousands of Tibetan refugees without crucial support. It is unclear how the United Nations High Commissioner for Refugees, which has worked closely with the Tibetan Refugee Welfare office, can continue its activities in support of Tibetan refugees in Nepal.”

14.

The government’s notice of closure stated that the office was not properly registered under the Nepali law as Tibetan refugees in Nepal do not have the right to register associations or institutions in their name. Despite these stringent measures, sometimes the Nepal government itself gets caught by surprise such as in the case of the fleeing Karmappa Lama in 2000 where he was supposed to have used a helicopter from within its territory and then travelled to India where he still lives in exile. The incident, while greatly embarrassing Beijing, proved that Nepal remains an easy entry and exit point from Tibet. As such, an unfriendly regime in Kathmandu could wreck China’s tight grip over TAR (China).

15.

Similarly, in June 2003, Nepal handed back escaping refugees to China and received international condemnation including that from the United States senators, the State Department, the European Union parliamentarians and the UNHCR itself. Human rights organisations, in criticising the action said, “It has set a frightening precedent for the treatment of Tibetans trying to flee to safety.” However, one can understand Nepal walking on a tight rope – squeezed by two giants on either side; it has to tread carefully in between 6

major international powers, donor countries and multilateral financial institutions. It can ill-afford to annoy anyone of them and this, at times, becomes a grueling diplomatic task.

16.

There is little doubt that with massive mainland investment and support, Tibet is growing at a fast pace. Its population dynamics has changed too. More Han Chinese are said to be living in Tibet than the Tibetans themselves. This means that more Tibetans live outside Tibet than within. While there have been difficulties, things are getting better and constructional development, in the form of highways, bridges, dams and buildings, is the touchstone for prosperity of life in Tibetâ&#x20AC;&#x2122;s rugged terrain. With the successful operation of the Golmud-Lhasa rail network, Tibet could see a further enhancing of its infrastructure and communication facilities in the years ahead. There are also plans to extend the rail network to Shigatse within a couple of years.

CONCLUSION

17.

By the year 2050, India is projected to become the third largest economy in the world, behind China and the United States. But both these Asian countries need internal stability and the removal of political and structural barriers to growth. More importantly, they need a peaceful neighbourhood so as to concentrate on their own economic progress. The implications of a troubled neighbourhood, due to refugee crises or ethnic and separatist movements, would be very large indeed. This will only facilitate unnecessary meddling of extra-regional powers in their vicinity. .It could also raise questions about the future stability, security and economic viability of the region while igniting ethno-territorial separations and, thereby, reversing the economic progress made thus far.

18.

The settling of long-standing feuds, be they insurgencies, separatist movements, refugee or humanitarian crises in the South Asian nations, will, therefore, reflect positively on these two emerging Asian powers. The settling

of Bhutanese and the Tibetan refugee problems is as much in the interest of India and China as they are to Nepal, Bhutan and the refugees themselves.

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ISAS Insights No. 18 – Date: 26 January 2007 Institute of South Asian Studies 469A Tower Block Bukit Timah Road #07-01 (259770) Tel : 65166179 Fax: 67767505 Email : isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Nepal’s Peace Process: Prospects and Hurdles Nishchal N. Pandey 1 Background Nepal has been in the news from the past couple of years for all the wrong reasons. A country renowned for being the birthplace of Lord Buddha, the Mt. Everest and honest Gurkha soldiers has turned into a boxing ring of fighting politicians. The Maoist insurgency costing more than 13,000 lives since 1996 took a heavy toll on the country’s infrastructure, sociopolitical life, and economy. Physical infrastructure worth at least US$250 million was destroyed. More than 400,000 rural families were internally displaced while thousands crossed over to India. Tourism and garment industries that have been a mainstay of the economy for decades are today in shambles. Unemployment rate has soared forcing youngsters to go abroad for work. Those that can’t find foreign employment remain as potential recruits for the insurgency completing a vicious enclose of poverty, malgovernance and insurrection. The triangular nature of the Nepali conflict involving the monarchy/army, the centrist political parties and the Communist Party of Nepal (Maoists) has shaken the very foundation of the Nepali state. With 15 Prime Ministers in 15 years, the people were exhausted with a revolving door charade of governments coming and going out without contributing anything tangible to the people and the nation at large. It forced the King on 1 February 2005 to try his own hand in resolving the problem but his direct rule was viewed largely as a power grab. In fact, his actions facilitated the coming together of the political parties and the Maoists to forge a united struggle in April 2006 which forced him to relinquish absolute rule in the Kingdom and a broad coalition of seven political parties under 84 year-old Girija Prasad Koirala formed a government. A ceasefire was announced and an agreement signed with the Maoists to end the decade-long insurgency. Election for a constituent assembly to draft a new constitution for the country would be held within April/May 2007. Both sides also agreed to invite the United Nations to oversee the management of arms of both the state and the Maoist guerrillas. The UN Security Council (UNSC) likewise backed a call by UN Secretary General Ban Ki-moon to set up a UN political mission in Nepal to monitor the peace accord between the government and Maoists.

Nishchal N. Pandey is a Visiting Research Fellow at the Institute of South Asian Studies, autonomous research institute in the National University of Singapore. He is the Executive Director of the Kathmandubased Institute of Foreign Affairs. He can be contacted at isasnnp@nus.edu.sg.

In a report to the Council in early January, Ban called for the UN Mission in Nepal to be established for a period of 12 months, covering the aftermath of elections for an assembly which is to decide the constitutional future of the country. Nepal’s northern neighbour, China, a permanent member of the UNSC, however, insisted that the mission stay in Nepal only for six months. It will comprise up to 186 unarmed active and former military officers to monitor Maoist cantonments and Army barracks, together with deployment of a small team of monitors to review all technical aspects of the electoral process and a UN police advisory team to help ensure “critical” security during voter registration, campaigning and polling. The ceasefire declared by both sides, agreement to end the people’s war, the promulgation of the interim constitution, formation of the interim parliament and the current efforts towards bringing the Maoists in an interim government are all positive steps towards establishing lasting peace in the country. The Maoists have likewise selected a group of 83 individuals as members of the interim parliament representing their party which also demonstrates that they have finally given up the dream of capturing state power by violence. In addition, their parallel local governments and kangaroo courts set-up at various locations around the country have been ordered by Chairman Prachanda to be dissolved. During meetings with local industrialists, he along with Dr Baburam Bhattarai who is the second-in command have repeatedly acknowledged the fact that the Soviet Union or North Korea type of economic structure is not suitable for Nepal and they will not reverse the fiscal policies based under free market economy being pursued by the country from the last one decade. Despite these encouraging signs, there are other avenues of confrontation left out that needs urgent correction when there is still time. Pitfalls of the Interim Arrangement With the promulgation of the interim statute, the 1990 Constitution viewed by many as “one of the best Constitutions of the world” has been officially annulled. It must not be forgotten that Nepal has become almost a living laboratory for experimenting with one Constitution and another yet the people remain dissatisfied with the one they have nevertheless endeavor to draft a better one. Very few countries have had so many Constitutions in the last half a century. Another paradox is that the Constitution of 1962 drafted by the legendary Late Rishikesh Shaha under the autocratic Panchayat system managed to survive for 30 years with several amendments but the Constitution of 1990 hailed as being democratic with all the essential tenets of multi-party system of governance, free and independent judiciary, freedom of speech, sovereignty vested on the people etc. could stay alive for altogether 16 years. No amendment was done to the Constitution before throwing it into the dustbin of history. Not all is well with the provisional arrangements and risks of another political deadlock are extraordinary. The interim constitution and the formation of the interim government and interim parliament has been criticized mainly for its non-inclusiveness of even the recognized political parties (such as the RPP, Janshakti party and the Nepal Sadbhavana Party-Mandal) that were getting sizeable seats in the previous parliament (s). Furthermore, a rare joint sitting of Supreme Court judges sent a memorandum to the Prime Minister for a review of several provisions that may curb the erstwhile independent judiciary of the country but even their voice was unheard. “Independent judiciary is one of the prerequisites of any democratic system of the world. We want to see independent and competent

judiciary not a committed judiciary,” said advocate Kumar Regmi. Similarly, Article 38 of the interim Statute states that the Prime Minister will be chosen under the “political understanding of eight political parties”. Ironically, there is no provision to remove the Prime Minister even by a two-third majority vote. Another article explicitly says eight parties will include Nepali Congress, CPN-UML, Nepali Congress (Democratic), United People’s Front, Nepal Sadvabana Party (Anandadevi), Nepal Workers and Peasant Party, United Left Front and CPN-Maoist. In essence, it makes all other political parties and individuals not associated with either of these groupings naturally disqualified from decision-making processes of the state. Voicing his objection on the way the Constitution was promulgated, the President of RPP, Pashupati Shumsher Rana, said, “We were proud when the parliament restored after the people's movement was declared sovereign. But it appears we are no more than respected rubber stamps. We did not have any status even to thoroughly discuss the Interim Constitution,” Rana said, “All tradition, norms and values of parliamentary system have been violated by the manner in which this Interim Constitution is being promulgated.” At least the 1990 Constitution was drafted by an all-inclusive committee comprising of the Nepali Congress, Left Front and the palace nominees which characterized the entirety of the then Nepal. It is apparent that the mind-set prevailing among the current eight-party alliance is to exclude people that were against the April 2006 People’s Movement. Therefore, one side of the conflict (the monarchy and the 90,000-strong Nepal Army) will be deliberately barred from all the important decisions taken to enter into a “new Nepal”. After turning the country into a secular state from the world’s only “Hindu monarchy”, the eight political parties are also talking of deciding the fate of monarchy through a simple majority vote on the first session of the Constituent Assembly. This has prospects of taking Nepal into further rounds of instability, uncertainty and chaos. It was under the guardianship of the 300 year old institution of monarchy that the Nepali state willy-nilly survived as a sovereign country during the British raj in the Indian sub-continent. And even till today, it enjoys respect especially in the rural areas of the country where the dominant religion is Hinduism. The late nineteenth century experiments in Iran and Afghanistan where monarchy was abolished with the hope of establishing secular democracy miserably failed to meet the desired expectations. There are fears that Nepal could turn into a hotbed of extremism and radical communism once and if the monarchy is done away with. In this context, the example of Iraq is also relevant where the former Bathists were excluded and purposely disqualified from the CA elections, the government, administration and getting into the state security forces which has resulted almost in an unending battle involving the lives of countless Iraqis and U.S. troops. Excluding a group naturally creates a dissident bloc and then paves the way for that particular group to cash in from the mistakes and unpopularity of those in power. As a corollary effect, ‘Jantantrik Terai Mukti Morcha’ (JTMM) has now emerged as one additional rebellious armed group demanding the separation of the Terai region by calling incessant strikes and bandhs. Nearly a dozen people have been killed by the JTMM within two months and its leaders are already calling for the newly promulgated interim constitution to be scrapped. For the first time in history, there was a communal riot on 26 December 2006 in Nepalgunj, a western town in the terai that shares border with India leaving one dead and injuring at least 18.

Similar outfits such as the JTMM demanding autonomy or total separation along caste or ethnic lines have sprung up across in a country which has 52 different ethnic groups. Likewise, Kathmandu is witnessing scuffles between various groups and factions having affiliation with one political party or another on a daily basis. There was a two-day general strike called by the Nepal Transport Entrepreneurs’ Federation on 21 January 2007 that forced Kathmandu and other major cities to come a standstill. People were euphoric when the Maoists joined the parliament and reached a peace deal with the government but the recent incidents of violence in eastern and mid terai have disheartened the people. Innumerous incidents of killing, extortion, abduction and vandalism in terai have terrorized the Madhesi population and caught the SPA-M alliance by surprise. The local administration was forced to impose curfew in Siraha district on 20 January after Maoist cadres shot dead a member of the JTMM. Three innocent people lost their lives and more than four dozen were injured when police opened fire on a crowd of protestors the following day in Lahan. Reports quoted police officials as saying that they had to open fire in self defense as the protesting crowd led by a little known Madhesi People’s Rights Forum (TPRF) tried to bring down the local Police Post. Prime Minister G. P. Koirala had to hurriedly call for an emergency meeting of the senior leaders of eight-party alliance to sort out a common plan of action to deal with the JTMM and the TPRF. Koirala negotiated successfully with the Maoists but within a month, the JTMM and the TPRF of Jwala Singh, Jay Krishna Goit and Krishna Singh that are splinter off-springs of the Maoist party itself are becoming equally powerful. If the present situation continues, it will jeopardize the constituent assembly elections enabling the politics of gun to terrorize Nepal for a long time to come. Therefore, while the government must be stern in dealing with these criminal activities and simultaneously opening channels of communications with the JTMM and the TPRF, the Maoists too need to demonstrate by action that they are truly committed to multi-party system of governance. For instance, violating the code of conduct, they carried out a series of protest programs demanding annulling of the decision to appoint 14 ambassadors to various capitals. Their demand was that they should be “consulted” before any important decision is made by the current coalition government. In reality, it would be like handing over the power to the Maoists and the centrist parties were in no mood to do so especially before the Constituent Assembly elections which can be influenced by whosoever runs the caretaker administration in between these turbulent few months. But the Maoists are avowed to rule by proxy. They are still not allowing the government to set-up police posts at various places in the rural areas to run the election in a free and fair manner. U.S. Ambassador James F. Moriarty has even said that they are purchasing various types of “crummy weapons from Bihar” to be handed over to the United Nations monitoring team and keeping back the modern armaments for future usage. Businessmen are still complaining of having to pay regular levy to the Maoists despite Chairman Prachanda’s promise of stopping it. Conclusion Situated between India and China, a chaotic and a messy Nepal unable to govern itself could have dangerous repercussions for both the neighbors as it has possibilities of extra-regional powers taking unnecessary interest in the internal affairs of Nepal. Both are already wary of the UN peacekeeping mission having to stay in Nepal for a prolonged period. Furthermore, the adjoining areas of India and China bordering Nepal are the most backward regions of these two emerging Asian giants. A country that could have been a transit state and facilitated

cross-border trade and economic links between heartlands of Uttar Pradesh, Bihar and West Bengal with Tibet has instead chosen to be a spoilsport and a headache for both the countries. Much depends therefore on how the current political dynamics will be played out between the major political actors and what role India will play in the whole affair especially in lieu of the Naxalite movement gaining strength in Bihar, Chhattisgarh, Andra and parts of Madhya Pradesh. Chairman Prachanda insists that the Nepali Maoists do not have any working alliance with their Indian counterparts. Indian Home secretary V. K. Duggal also said in the last week of December that there are no reports of Nepali Maoists assisting the Indian Naxalites in carrying out disruptive activities. It seems that the Government of India desires to see the Nepali Maoists joining political mainstream that would have an inspirational effect on the Indian Naxalites as well. But a representative of the Communist Party of Nepal (Maoist) told a meeting of seven Maoist parties of the South Asia region held at an undisclosed location recently that it is “very close to seizing state power” in Nepal. A statement issued by the party said it told the meeting of the Maoist parties, which are members of the London-based Revolutionary International Movement that the CPN (M)-led revolution has now entered into the phase of “decision-making”. It is these confusing signals coming out from the Maoists and the almost daily incidences of violence across the country that may delay the constituent assembly polls and thereby jeopardize the entire peace process. It is all the more imperative therefore to include all the stakeholders of the Nepali polity and society before such a high-risk venture of the CA is implemented. Otherwise, the chances of Nepal settling down even in the post-Constituent Assembly phase look grim. Betrayed by almost every government that comes to power and hapless to do anything, frustration has now sneaked in deeply into the psyche’ of a common Nepali. It was first the rural areas that were in control of anarchy but now even the cities have become unsafe. The need of the hour is for all the three power centers of the country to rise above partisan politics and rescue the country from an eventuality of total devastation.

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ISAS Insights No. 19 – Date: 2 March 2007 Institute of South Asian Studies 469A Tower Block Bukit Timah Road #07-01 (259770) Tel : 65166179 Fax: 67767505 Email : isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Regional Integration in South Asia: The Era of the South Asian Free Trade Agreement ∗ Aparna Shivpuri Singh +

Abstract South Asia accounts for 22 percent of the world’s population, two percent of the world’s gross national product and is home to about 40 percent of the world’s poor. However, the region’s seven countries contribute only about one percent to world trade. Combining this low level of economic development with political and ethnic disparities makes this region economically and politically very sensitive. With the ratification of the South Asian Free Trade Agreement (SAFTA) in March 2006 by all the member states, the process of liberalising trade and investment has been set in motion. It has been two decades since the South Asian Association for Regional Cooperation (SAARC) came into being and even though the process of trade liberalisation has been slow, it has not died. This paper highlights the journey of South Asia from the SAARC to the South Asian Preferential Trading Arrangement and now to the SAFTA and draws comparisons between the provisions. It also brings forth the issues that need to be addressed if the South Asian economies want to benefit from this free trade agreement (FTA). The paper argues that South Asia needs to re-look at some fundamental trade and political issues and give precedence to trade if it wants a well-implemented FTA encompassing substantial trade among the member states.

∗

This paper was presented at the International Workshop on Regional Groupings in International Relations: SAARC and ASEAN Experiences, Netaji Institute for Asian Studies & Peace Studies Group, University of Calcutta, Calcutta, 2 December 2006. Ms Aparna Shivpuri Singh is a Research Associate at the Institute of South Asian Studies, an autonomous research institute in the National University of Singapore (NUS).

Introduction The process of regional integration has gone hand in hand with multilateralism for several decades. Following the collapse of the Soviet Union and the end of the bipolar cold-war world, the process of regionalism intensified. The European Commission single market, the North America Free Trade Agreement, ASEAN Free Trade Agreement and the Southern Common Market are evident instances of this process. Now with the collapse of the Doha Round, developing countries have started pursuing regional and bilateral agreements with a new vigour. South Asia has not been a forerunner in the movement of regional integration. It remained untouched by the initial wind of regionalism that swept different sub-regions of Africa and Latin America in the early 1960s. The region, from the beginning, has been embroiled in geopolitical tensions, leading to distrust which has reflected in the hurdles that it has faced with every step towards regional integration and its integration with the rest of the world. South Asia accounts for 22 percent of the world’s population, two percent of the world’s gross national product, and is home to about 40 percent of the world’s poor. To top this, the region’s seven countries contribute only about one percent to world trade. Combining this low level of economic development with political and ethnic disparities makes this region economically and politically very sensitive. First Milestone These ethnic, geopolitical and economic disparities were the very reasons that the then Bangladesh President Zia-Ur-Rehman took the initiative to establish a regional cooperation forum in South Asia in 1983. This decision was, to a certain extent, also influenced by the formation of the ASEAN and to enable the states of South Asia to consider and react collectively to international events. The Soviet attack on Afghanistan and the United States’ direct military links with Pakistan to counter the Soviet Union hastened the pace of formation of this regional bloc. Initially, India and Pakistan did not take easily to the idea. While India thought that it was an attempt by the smaller nations to gang up against India and put collective pressure on it regarding matters that affect them. Pakistan thought that it would deepen the hegemonic powers of India and simultaneously hamper Pakistan’s integration with West Asia. Nevertheless, in spite of these misgivings, the South Asian Association for Regional Cooperation (SAARC) came into existence in 1985 when its charter was officially adopted with the aim to promote political stability and deal with external developments. Second Milestone Cooperation under the SAARC did not extend to hard-core economic areas of trade, manufacturing and finance for nearly 10 years after the establishment of the Association. Trade was brought under the ambit of the SAARC in 1991 with the signing of the South Asian Preferential Trade Agreement (SAPTA) which was operationalised in 1995 when the outcome of the first round of trade negotiations were notified. In 1998, the SAARC also put in place SAARCFINANCE with the aim to propose harmonisation of banking legislations and practices within the region to monitor global financial developments and promote research on economic and financial issues. However, the achievements of this body leave much to be desired.

The SAPTA did not achieve much either in terms of increasing intra-regional trade in South Asia. Intra-SAARC trade, as a percentage of South Asiaâ&#x20AC;&#x2122;s world trade, increased from 2.42 percent (US$1.59 billion) in 1990 to 4.56 percent (US$6.53 billion) in 2001 and marginally improved to 4.7 percent by 2003. 1 This slight increase has been mostly attributed to rapid liberalisation under bilateral trade agreements and World Trade Organization (WTO) regimes, rather than to the SAPTA. Third Milestone The idea for the SAFTA was first brought to the discussion table in 2002 and culminated into an agreement in 2004. The SAFTA came into effect in January 2006 and was ratified by all the member states by March 2006. The SAFTA lists additional measures not included under the SAPTA such as the harmonisation of standards, reciprocal recognition of tests and accreditation of testing laboratories, simplification and harmonisation of customs clearance, import licensing, registration and banking procedures; removal of barriers to intra-SAARC investment, etc. Intra-regional Trade The trade performance of South Asia has been dismal in comparison to other regions. The levels of inter- and intra-regional trade in South Asia have remained extremely low. Intraregional trade as a percentage of total trade volume has hovered below five percent since 1980. Among all the regions, South Asia is the least integrated when measured as a share of GDP (Figure 1). Intra-regional trade in South Asia is only 0.8 percent of gross domestic product (GDP), a fraction of East Asiaâ&#x20AC;&#x2122;s nearly 27 percent of GDP and is even lower than Sub-Saharan Africa. 2 Figure 1: Intra-regional trade as a share of GDP, 2002

Intra-regional trade as a share of GDP,2002 30 25

20 15

Series1

10 5

SubSaharan

South Asia

Middle East &

Latin America

Europe &

East Asia

Source: Taking Advantage of Regional Trade: Review of SAFTA and Bilateral FTAs, Zaidi Sattar, World Bank. 1 2

South Asian Regional Agreements: Perspectives, Issues and Options, Jayanta Roy, CII, June 2005. Ibid.

Table 1: Intra- regional trade (as a percentage of total trade 1980-2004) Regional Bloc

1980

1985

1990

1995

2000

2004

Imp

EU-25

CARICOM

MERCOSUR

NAFTA

ASEAN

SAARC

Source: UNCATD handbook of statistics, www.unctad.org (accessed on 26 January 2007).

As we can see from Table 1, the level of intra-regional trade in the SAARC has never gone above five percent of the total trade. The reasons for low level of intra-regional trade are evident and glaring. Firstly, there is lack of trade complementarity. Most of the South Asian countries have expertise in the production and export of the same primary products in agriculture as well as in textile and clothing, and other labour-intensive goods. For instance, both India and Sri Lanka export tea and compete to secure overseas markets. Secondly, there is prevalence of informal trade in the region. High tariff and non-tariff barriers, coupled with weak transportation links, are responsible for the informal/unaccounted trade that takes place between South Asian countries. The cost and time of transportation, along with security issues, hamper cross-border trade. For instance, all Nepalese export/import is routed through the port of Kolkata in India and the absence of a direct rail link between Kolkata and Nepal has been a major impediment to trade.3 Countries in South Asia tend to impose the highest tariff on the most-traded commodities. They, thus, elude the benefits of trade liberalisation. Therefore, as of now, trade liberalisation would not have any trade diversion effects since the members are not currently taking advantage of the goods in which they have comparative advantage. Thirdly, the region is bedevilled by intra-state conflicts and border disputes – notably the intractable dispute between India and Pakistan over Kashmir – which goes to show that politics dominate economics in this region. This is in contrast with Southeast Asia, which has largely succeeded in transforming its region from a battlefield to a market place. These political tensions have also led to the re-routing of trading between the SAARC nations. Of the US$2 billion India’s informal trade with Pakistan, almost half is traded through third countries like Afghanistan and Dubai. Political differences between neighbours can often create inefficiencies in the trading system. Pakistan, for example, imports tea from Kenya at a much higher price when it can secure it more cheaply from within the region. Given the prominence of the two in South Asia, IndoPakistan relations will mould the progress of regional cooperation in the future. Their relations have been volatile, though there has been resumption in economic ties of late. It is noted that defense services accounts for 20.34 percent and 16.13 percent of the total budget expenditures for Pakistan and India respectively (Budget 2005-2006). 4 India is the largest player in the region in terms of size, GDP and trade capacity. Table 2 shows the percentage share of other south Asian countries in India’s total trade. Table 2: Percentage share of SAARC countries in India’s total trade Country

2001-02

2002-03

2003-04

2004-05

20005-06

Bangladesh

1.11

1.08

1.28

0.87

0.71

Bhutan

0.03

0.06

0.10

0.08

0.07

Sri Lanka

0.73

0.89

1.07

0.92

1.03

Nepal

0.60

0.55

0.67

0.56

0.49

Pakistan

0.22

0.24

0.32

0.34

Maldives

0.03

0.02

0.03

Source: http://dgft.delhi.nic.in 3 4

Trade Facilitation – Reducing the Transaction Cost or Burdening the Poor, Centre for International Trade, Economics and Environment (CITEE), Jaipur, India, 2004. South Asian Regional Agreements: Perspectives, Issues and Options, Jayanta Roy, CII, June 2005.

All South Asian countries, except Sri Lanka, contribute less than one percent to India’s foreign trade. According to a study by the Associated Chambers of Commerce and Industry of India, India’s trade with the SAARC countries declined from 3.39 percent in 2003 to 2.84 percent in 2006. 5 Due to the landlocked nature of Bhutan and Nepal, trade takes place primarily with India. While Nepal has consciously tried to reduce its trade dependence on India, Bhutan remains dependent on India both as a supply source and export destination. India and Bhutan signed a 10 year agreement in July 2006 and, under this agreement, Bhutan will get four more entry and exit points in to India. The pact also simplifies import and export procedures between the two countries. Till 2004-05, Bangladesh was the largest trading partner of India, in the region. Major items of exports from India to Bangladesh are cotton yarn, fabrics, machinery, instruments, glass/glassware, ceramics and coal. India imports raw jute, jamdani saris, inorganic chemicals, leather, etc., from Bangladesh. Bangladesh’s trade deficit with India increased from from US$1.2 billion to US$1.5 billion between 1998/99 and 2003/04. However, Sri Lanka overtook Bangladesh this year. The rise in bilateral trade between India and Sri Lanka can also be attributed to the recent tariff cuts by Sri Lanka on major imports from India such as cement. Sri Lanka’s bilateral trade deal with India requires tariffs to be phased out over an eight-year period for goods that are not in the sensitive list. South Asian Preferential Trading Arrangement and South Asian Free Trade Agreement A free trade area (FTA) takes a regional trade agreement to the next level. While under a preferential trading agreement, a country can put quantitative restrictions on the preferential treatment it would like to give to a member country. Under an FTA, all tariff barriers to a member country are removed. The Eminent Persons Group report has pointed out that the process of the SAFTA will have to be much different from the SAPTA. The SAPTA was based on a preferential agreement under the enabling clause of the WTO. The SAFTA, on the other hand, is required to be justified under the more rigorous Article XXIV of the General Agreement on Tariffs and Trade. 6 The SAFTA is a SAPTA-plus in terms of national treatment, dispute settlement and modification and withdrawal of concessions. For instance, Article 5 of the SAFTA makes provisions for national treatment while there are no provisions under the SAPTA for the same. The SAFTA also addresses the issues of revenue compensation and simplification of banking procedures for import financing, the SAFTA was ratified by all nations in March 2006 and three major agreements were signed in the last SAARC Summit in November 2005. 7 The Dhaka Declaration made at the end of the Summit covered among others issues of poverty alleviation, environmental challenges and natural disasters, social challenges, funding mechanisms and combating terrorism. 5 6

www.centad.org Article XXIV of GATT needs to be notified to the WTO and has to fulfil conditions such as “covering substantially all trade between the members” whereas the Enabling Clause is meant mainly to pursue schemes such as GSP (Generalised System of Preference) or enable developing countries to get together and offer preferential treatment. Three major agreements signed during the Summit, are- the avoidance of double taxation, mutual administrative assistance in Customs matter and the creation of a SAARC Arbitration Council.

Table 3: India’s Direction of Foreign Trade with the SAARC Countries (US$ million) Country

Year 2000-01

2001-02

2002-03

2003-04

2004-05

2005-06 P

Export

Import

Export

Import

Export

Import

Export

Import

Export

Import

Export

Import

935.0

80.4

1002.2

59.1

1176.0

62.1

1740.7

77.6

1631.1

59.4

1632.4

118.8

Bhutan

1,1

21.1

7.6

23.9

39.0

32.2

89.5

52.4

84.6

71.0

99.1

88.9

Maldives

24.6

0.2

26.9

0.4

31.6

0.3

42.3

0.4

47.6

0.6

67.2

2.0

Nepal

140.8

255.1

214.5

355.9

350.4

281.8

669.4

286.0

743.1

345.8

859.4

380.0

Pakistan

186.8

64.0

144.0

64.8

206.2

44.8

286.9

57.6

521.1

95.0

681.9

177.5

Sri Lanka

640.1

45.0

630.9

67.4

921.0

90.8

1319.2

194.7

1413.2

378.4

2018.5

571.7

Bangladesh

Source: Ministry of Commerce – www.commerce.nic.in (accessed on 17 October 2006).

The Heads of State of the South Asian governments decided to put in place a SAARC Poverty Alleviation Fund with contributions, both voluntary and/or assessed, as may be agreed. They called upon the Finance Ministers to formulate recommendations on the operational modalities of the Fund, taking into consideration the outcome of the Meeting of the Financial Experts. They also approved the SAARC Development Goals, as recommended by the Commission, and called for follow-up and implementation of the Plan of Action on Poverty Alleviation, adopted at the 12th SAARC Summit. 8 Under the SAFTA, provisions have been made for liberalising trade and for special and differential treatment for least developed countries (LDCs) of the region namely, Bhutan, Nepal, Maldives and Bangladesh. Under the Trade Liberalization Programme (TLP), the non-LDCs of the region have been given seven years (Sri Lanka will get eight years) to reduce their tariff rates to 0-5 percent while the LDCs have been given 10 years for the same. 9 The non-LDCs will reduce their duties for the products of the LDCs to the free trade level within three years compared to the five years to be taken for reducing duties to that level on the developing countries imports. Table 4: Tariff Reductions under the SAFTA Countries

Existing Tariff Rates

Proposed SAFTA Reduction

Timeline

First Phase India , Pakistan, Sri Lanka

>20 percent <20 percent

Reduce to 20 percent Further annual reduction

2 years 2 years

Bangladesh, Bhutan, Maldives, Nepal

> 30 percent < 30 percent

Reduce to 30 percent Further annual reduction

2 years 2 years

Second Phase India, Pakistan , Sri Lanka

â&#x2030;¤20 percent

Reduce to 0-5 percent

2 years

Bangladesh , Bhutan, Maldives and Nepal

â&#x2030;¤ 30 percent

Reduce to 0-5 percent

3 years (primary products) 5 years (other products)

Source: South Asian Free Trade Area: An Analysis for Policy Options for Bangladesh, Bangladesh Institute of Development Studies.

The 13th SAARC Summit: A Step in the Right Direction, Aparna Shivpuri Singh, Institute of South Asian Studies Newsletter, http://isas.dreamvision.com.sg/newsletter/Newsletter percent20- percent20J an percent202006. pdf The non-LDC countries will reduce their tariff to 20 percent in the first 2 years. Subsequently they will be given 5 years (except SL which gets 6 years) to reduce from 20 percent to 0-5 percent. The LDCs have been asked to reduce their tariffs by 30 percent in the first two years. Subsequently, they will be given 8 years to reduce their tariffs from 30 percent to 0-5 percent.

Table 4 gives a clear picture of the time frame given to the various SAARC members regarding tariff reductions. These provisions will not apply to the products under the sensitive list, but this sensitive list will be reviewed after every four years or earlier as decided by the SAFTA Ministerial Council with a view to reducing the number of items under the sensitive list. A Committee of Expert has also been instated which will have a number of functions, including acting as the Dispute Settlement Body and monitoring and facilitating the implementation of the provisions. The contracting states recognise that the least developed contracting states may face loss of customs revenue due to the implementation of the TLP under this Agreement. Until alternative domestic arrangements are formulated to address this situation, the contracting states agree to establish an appropriate mechanism to compensate the least developed contracting states for their loss of customs revenue. This mechanism and its rules and regulations shall be established prior to the commencement of the TLP. 10 Notwithstanding any of the provisions of this Article, safeguard measures under this article shall not be applied against a product originating in a least developed contracting state as long as its share of imports of the product concerned in the importing contracting state does not exceed five per cent, provided the least developed contracting states with less than five percent import share collectively account for not more than 15 percent of total imports of the product concerned. 11 These above-mentioned provisions do address the concerns but leave the solutions to further negotiations. Special attention has been paid to the needs of the LDCs. However, certain issues affecting smooth flow of goods and services need to be addressed. To start with, there is the Issue of Rules of Origin (RoO). Generally, the RoO are based on three methods: 12 1. 2. 3.

minimum domestic value addition; tariff classification at the four-digit level; and product specific process tests.

Under the SAPTA, the RoO were based on the first option of the minimum domestic value addition. However, these percentages are specified not in terms of local value addition but in terms of maximum allowable import content. The percentage test applied is that the products manufactured in a SAPTA member should not have the total value of import content exceeding 60 percent of the free-on-board value of the product, to be eligible under the SAPTA preferential tariff arrangement. Products originating in the least

10 11 12

www.saarc-sec.org/data/agenda/economic/safta/SAFTA percent20AGREEMENT.pdf â&#x20AC;&#x201C; Ibid. Background Paper: SAFTA- Problems and Prospects, Prof. Muchkund Dubey, The Commonwealth Business Council SAFTA Roundtable, New Delhi, December 2004.

developed SAPTA members are allowed 10 percent concession over the percentage applicable to other countries. The SAPTA as well as the SAFTA excludes services from the agreement. Services have become an important driver of the economies of the SAARC countries and account for being the single largest contributor to GDP in South Asia, (40-50 percent of the GDP). 13 Accounting for nearly 50 percent of the GDP of most of these countries, they also figure prominently in the informal trade that is taking place in the region, particularly between India and other member countries. Energy cooperation is another area that needs attention. Cross-border energy trading can increase the reliability of power supply, achieve economy in the operation of power plants and can act as one of the most effective confidence building measures between countries whose relations are marked by frequent tensions and strife. A number of studies have been conducted on the potentialities, prospects and measures for energy cooperation, and the single most important conclusion common to all these studies is that there is a need for a common distribution system in the region based on a single regional energy grid, which interconnects the national grids. This point was underlined in the Declaration adopted at the 12th SAARC Summit which called for â&#x20AC;&#x153;a study on creating South Asian Energy Co-operation, including the concept of an Energy Ringâ&#x20AC;? to be undertaken by the Working Group on Energy. 14 The South Asian countries also need to put in place a mechanism for ensuring easy movement of goods. Increased intra-regional trade and investment require welldeveloped infrastructure which is missing in this region. Even though three new agreements were signed in the last SAARC Summit to promote intra-regional trade, liberalisation of investments in the region has been ignored. Free movement of capital is an important factor for development and trade and removal of constraints to free movement of capital is essential. Trade facilitation is also an important issue especially for a landlocked country like Nepal and no drastic measures have been initiated under the SAFTA to facilitate trade across borders. The southern border of Tripura is only 75 kilometres (kms) from the Chittagong port. Nevertheless, since no access for Indian goods is allowed to the Chittagong port, goods from Agartala have to cover a distance of 1,645 kms to reach Kolkata. If transit was allowed through the Bangladesh territory, the distance for reaching the Kolkata port would have been reduced to 350 kms. Similarly, if shipment of Assam tea was allowed through the Chittagong airport, which was the traditional route, it would have been possible to cut the journey by 60 percent. 15

13 14 15

Improvement Needed in SAFTA: Menon, The Hindu, May 2006. Background Paper: SAFTA- Problems and Prospects, Prof. Muchkund Dubey, The Commonwealth Business Council SAFTA Roundtable, New Delhi, December 2004. Ibid.

In terms of paperwork related to trade, the number of required documents is roughly the same as in ASEAN-4 and China but the number of signatures required on these documents is considerably higher in South Asia. While it only takes an average of five signatures to export goods and seven to import in ASEAN-4, the corresponding number of signatures in South Asia is 12 to export and 24 to import. In India, the number is as high as 22 to export and 27 to import. It takes a long time to clear goods for export and import through customs in South Asia. The slow processing time is mainly due to lack of computerisation in customs and the excessive number of signatures required. Many steps in customs clearance require manual intervention, including extensive physical examination of goods. It takes more than 10 days to get customs clearance on a container in South Asia compared to less than five days in East Asia. 16 The costs of road transport can be high. For example, the average transport costs on the Kolkata-Petrapole route between Bangladesh and India is Rs2,543 (approx. US$57) which is about 40 percent higher than other highways. 17 Other restrictions are based in licensing restrictions, for example, foreign trucks are not permitted to enter Bangladesh. All of these conditions prevent shippers from taking the most efficient routes â&#x20AC;&#x201C; extending time and cost which impede opportunities for international and intra-regional trade. Compared to East Asia, South Asia continues to lag behind in deploying technology in customs administration. For example, Electronic Data Interchange (EDI) is widely adopted in Southeast Asian countries such as Singapore, Thailand, the Philippines and Indonesia. In contrast, the EDI systems are not yet to be implemented in Bhutan, Nepal, and Sri Lanka. India moved to adopt the EDI systems in 1992. Countries in the South Asia region have moved over the past decade, however, to improve customs. For example, India has launched a modernisation project in customs that includes leveraging EDI technology which allows exchanging documents and forms electronically, to streamline clearances. With assistance from the World Bank, Pakistan has started reforms in the Central Board of Revenue, including customs offices, and is expected to have a revenue increase by Rs.65 billion (US$1.40 billion) in the fiscal year 2004-5. Pakistan has also introduced electronic filing of a single shipping document at Port Qasim as part of an effort by its customs service to reorganise clearance and trim down transaction costs. In Bangladesh, the steps required for import and export clearance of fiber, fabric, and garments have been reduced by 75 percent. Afghanistan is working on customs modernisation in a new US$31 million World Bank project. Nepal is currently undertaking reforms under a Three-Year Customs Reform and Modernization Action 16 17

Conference on SAFTA - Business Opportunities and Challenges, Special Address by Michael Carter, Country Director, World Bank, New Delhi March 13, 2006. Trade Facilitation & Regional Integration: Accelerating the Gains to Trade with Capacity Building, The World Bank/ International Monetary Fund 2004 Annual Meetings, John S. Wilson & Tsunehiro Ostuki, Washington D.C, 1 October 2004.

Plan. Reforms include upgrading physical facilities, administrative structure, automation of customs, and simplification and harmonisation of procedure (Government of Nepal Ministry of Finance). When considering intra-regional trade, if countries in South Asia raise capacity halfway to the East Asia’s average, trade is estimated to rise by US$2.6 billion. This is approximately 60 percent of the total intra-regional trade in South Asia. The category of trade facilitation that will produce the greatest gains is service-sector infrastructure (US$1,224 million), followed by efficiency in air and maritime ports (US$712 million) 18 . The agreement does not subscribe categorically the phasing out of the sensitive list. The Agreement only provides that the sensitive list “shall be reviewed after every four years, with a view to reducing the number of items”. Moreover, a lot will depend on the size of the list. If it is too long, it will limit the scope of free trade and detract from the provision of Article XXIV of GATT (1994) that a free trade area should cover “substantially all trade”. However, notwithstanding the provisions made in the paragraph above, the nonLDC countries shall reduce their tariffs to 0-5 percent for the products of LDCs within a period of three years beginning from the date of coming into force of the agreement. Conclusion All the above state evidence shows that while the SAFTA has taken cognizance of a number of issues it has also failed to make any substantial progress on a number of important issues which are essential for trade and economics. The SAFTA should be a stepping stone towards a Custom Union but it needs to buckle up and tackle the much obvious and discerning issues. That is the only way regional integration can gather momentum. The member countries need to ask a few questions to them, namely, are they pooling science and technology resources adequately for the development of the region? Do they intend to include services in the agreement in the very near future? Would they be ready to talk about energy cooperation under the ambit of the SAFTA? Do they intend to put together funds for the development of infrastructure and human resource in the region? The South Asian countries have been pursuing bilateral FTAs with their neighbours like Singapore and ASEAN and Japan in a big way. During this period of external expansion, it is very essential for the SAARC to maintain its relevance and importance and to assess its objectives in view of moving towards a Custom Union. The South Asian countries, especially India, are the forerunners at the multilateral level for liberalisation of Mode 4. The member countries of the SAARC need to realise that benefits of trade liberalisation can only be maximised if factors of production like labour and capital are allowed to move freely and adjust to the demands of the market. However, at the regional level, the countries are reluctant. Trite as it may sound, the border 18

Trade Facilitation & Regional Integration: Accelerating the Gains to Trade with Capacity Building, The World Bank/ International Monetary Fund 2004 Annual Meetings, John S. Wilson & Tsunehiro Ostuki, Washington D.C, 1 October 2004.

problems between India and its neighbours seem to have cast a dark shadow on the progress of regional integration. Pakistan, for instance, has refused to grant the mostfavoured nation status to India under the SAFTA which hampers Indiaâ&#x20AC;&#x2122;s market access into Pakistan. Another important area of coordinated action is the laying of pipelines across the region, for transporting gas from Iran, Qatar, and Turkmenistan in the West and from Bangladesh and Myanmar in the East, to the energy deficit countries of the region, mainly India and Pakistan. The low level of foreign direct investment (FDI) also reflects the potential that the region has. With the right domestic regulatory environment and encouraging long term FDI, the South Asian countries can boost employment opportunities, provide backward linkages. However, the south Asian countries need to be open to this. FDI is not a panacea for all economic evils plaguing a country. The quality of FDI is important. It is also important to devise national strategies to attract right kinds of FDI in right sectors. The creation of a common investment area in the SAARC could enhance the credibility of smaller and weaker nations. However, this idea has not been pursued. The standardisation of the Harmonised System (HS) codes is also extremely essential. Different HS codes are used by different South Asian countries. For instance, though India and Bangladesh maintain the HS codes at the 8-digit level for levying custom tariffs, the total number of HS codes and the codes differ from each other. Also, for the purpose of levying excise duty India still uses 6-digit codes. 19 Also, currently, there are two product classification systems being used in the region which makes it difficult to list and compare goods. All of the countries, except Pakistan, use the HS codes to identify and codify commodities. Pakistan uses the Standard International Trade Classification, a statistical classification designed to provide the commodity aggregates needed for economic analysis and international comparison. This issue also needs to be sorted out. There is no denying that the SAFTA needs to broaden its scope and deepen its impact by including trade in services and putting in a mechanism for phasing out the sensitive list but the SAFTA on the positive side will provide the smaller countries with a bigger playing field and at the same time give them special and differential treatment. But we also need to figure out that co-existence of the SAFTA and the other bilateral agreements that the south Asian countries have with each other. A different set of rules will only lead to a â&#x20AC;&#x153;spaghetti bowlâ&#x20AC;? effect. There is no need to reiterate the importance of political stability and harmony in the region, to promote trade and investment linkages. At present, Pakistan is all set to begin its second phase of agreed tariff reduction under the SAFTA. The tariff reductions will be applicable on 1,077 products from India 19

Harmonization & Classification Issues: Is Harmonized commodity Description & Coding System an Impediment to Indo-Bangladesh Ties?, Dr. Mostafa Abid Khan, Bangladesh Enterprise Institute, Dhaka, November 2004.

figuring in the positive list. In case of Bangladesh, the Maldives and Nepal, the reduction will be on 4,800 tariff lines. India has also decided to reduce the tax on refined edible oils imported from Sri Lanka and Pakistan from 68.75 percent to 52.5 percent, making the tax levied the same for all the South Asian countries. The duty on crude palm oil from the SAFTA member nations has been reduced to 50 percent by India. To conclude, the SAFTA has the potential of making a much deeper impact on the member states and bringing about changes that would promote intra-regional trade and push forward the laggard economies. Much depends on the spirit of the member countries and how they implement the provisions and uphold the provisions of Article XXIV of the GATT. Many compromises will have to be made, a lot of push will be required to overlook political tensions but that is the only road ahead, a road less travelled but a road that leads the region to its destination. *************

ISAS Insights No. 20 â&#x20AC;&#x201C; Date: 3 July 2007 Institute of South Asian Studies 469A Tower Block Bukit Timah Road #07-01 (259770) Tel : 65166179 Fax: 67767505 Email : isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Reflections on Monetary Policy D. M. Nachane +

I Among economic historians, it is conventional to view the collapse of the Bretton Woods arrangement in the early 1970s as marking a transition from a post World War II Golden Age (of low real interest rates, low levels of sovereign indebtedness, little speculative trading in global financial markets and a high degree of financial stability) to a Leaden Age (characterized by slow growth, high unemployment, severe business cycles and a growing incidence of financial crises). Without necessarily attaching to it any of the pejorative connotations intended by the originator of the term (Mrs. Robinson (1956), and her followers such as Foley (1986) and Pollin (1998)), nor claiming for the term a universal applicability across all countries, Leaden Age could still serve as a succinct and convenient phrase to capture the generally heightened uncertainty surrounding national policy making in the post Bretton Woods scenario. The process of financial change in the aftermath of the abandonment of Bretton Woods 1 impinged on the United States and the United Kingdom financial systems in the 1970s, on +

Professor Dilip M. Nachane is Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute in the National University of Singapore (NUS). He is a Senior Professor at the Indira Gandhi Institute of Development Research, Mumbai, India.

most other advanced countries in the 1980s and on the LDCs only in the last decade. The change has been unevenly distributed across countries, and even though the general direction of movement has been unambiguously forward, the pace has varied between countries owing to intrinsic structural differences rooted in contestability of markets, structure of competition, industrial concentration and general “financial literacy”. At the outset, I must clarify that this article is not intended as a critique of financial liberalization and globalization per se. Rather its preoccupation is with understanding how key features emanating from these twin processes, (especially the growing ascendancy of domestic and financial markets), have considerably narrowed the manoeuvring window of monetary policy. Much of the discussion surrounding these issues has been spearheaded by academicians and central bankers alike, monetary policy being one area of economics, where dialogue between theorists and policymakers has been thriving fruitfully (Goodfriend (2005)).

II Prior to the onset of financial liberalisation, the prevailing paradigm for monetary policy rested on the famous triad of instruments-intermediate targets/indicators-objectives. 2 The guiding principles behind the triad were essentially threefold: (i)

The intermediate targets (usually simple-sum or Divisia monetary aggregates) were “controllable” via the instruments (either a short-term interest rate or the monetary base) within tolerable margins of error.

(ii)

The monetary targets bore a stable relationship with macroeconomic aggregates (such as output, inflation and long-term interest rates), so that the intermediate targets served both as early warning signals of portending changes in the macro-aggregates, as well as guideposts for the intended trajectories of these aggregates.

(iii)

The flexible exchange rate regime currently in operation, implied a certain independence for the pursuit of national monetary policies (in the case of the EU, this statement had to be suitably qualified).

Let us refer to the three principles above as the Old Trinity. Financial liberalization seems to have irreversibly jeopardized all three of the above premises. Firstly, as noted by Tobin (1983), the leverage exerted by the monetary authorities on non-financial variables, was precisely because money bore an exogenously fixed nominal interest rate, inducing portfolio substitution between “money” and “non-money” assets, in response to changes in interest rate levels. The process of financial liberalization implies a greater role for market forces in the pricing of bank deposits, whose demand thus becomes more dependent on the spread (between nominal rates on money and near- money assets) than on the level of nominal rates. Since monetary authorities are much better at influencing short-term rate levels than the spread, this factor seriously erodes their ability to control monetary aggregates. 3 A similar argument can be developed in the context of monetary base control, using the classic Brunner-Meltzer money supply model (Jordan (1984)). Secondly, the link between monetary aggregates and important macroeconomic magnitudes (especially nominal income) has been rendered tenuous (in the wake of financial liberalisation) due to a host of factors, such as (i)

the blurring of the distinction between money and near-money.

(ii)

the breakdown of the money demand function (Akhtar (1983), Cotula (1984) etc.) 4

(iii)

the easing of credit and liquidity constraints (owing to the emergence of variable rate lending and large-scale “liability management”- see Goodhart (1986, 1989)) and

(iv)

the rising role of arbitrageurs in financial markets, which has introduced volatility in the yield curve (Brown & Manasse (1989)).

Finally, the international dimension of financial liberalisation is reflected in a greater integration of global capital markets in recent years. International capital flows, always on the lookout for profitable portfolio opportunities, are quick to respond to domestic interest changes, setting up a tendency for real interest differentials between countries, to become insignificant. This implies, of course, that the pursuit of domestic monetary policy is seriously circumscribed by the unpredictable responses of global capital flows (see on this aspect, the detailed academic analyses of Felix (1997) and Calvo et al (1996) with the policy implications being fully spelt out by Rangarajan (2000) and more recently by Reddy (2005), p. 11-19). The upshot of the previous discussion appears to be a vastly reduced potency of monetary policy consequent to financial liberalisation 5 .

III As the forces of financial liberalization and global capital flows unleashed themselves in the 1970s and 1980s, central bankers the world over came to realize the futility of the Old Trinity, and the quest for new guiding principles for monetary policy assumed an almost obsessive urgency. In retrospect, what is most remarkable about the years subsequent to this disillusionment is the emergence of a broad consensus on the theory and practice of monetary policy. The theoretical aspects of the consensus pertain to the widespread acceptance of dynamic New Keynesian models of monetary policy, encompassing key concepts from Keynesian, monetarist, rational expectations and real business cycles schools of thought (Goodfriend & King (1997), Clarida et al (1999), Woodford (2003) etc.) but occasionally also incorporating additional eclectic features such as credit market frictions, financial accelerator mechanisms etc. (e.g. Bernanke et al (2002)). On the policy side, inflation emerged as the single dominant concern of central bankers the world over, with other

objectives such as growth, exchange rate stability, financial stability, etc., receiving varying degrees of emphasis. A New Trinity reflecting this consensus started building around the three facets of (i)

a flexible exchange rate

(ii)

an inflation target, and

(iii)

a monetary policy rule.

The New Trinity spans a wide spectrum of flexible exchange rate arrangements. The inflation target could be explicit or only an implicit target band, and the monetary policy rule may be nothing more than a “ contingency plan” specifying “ how the central bank should adjust the instruments of monetary policy in order to meet its inflation and other targets” ( Taylor (2001), p.263). The above discussion should be of help in putting in perspective several issues of practical relevance for monetary policy. Below, we take up for brief discussion a smorgasbord of such issues in the Indian context.

IV The primary issue relates, of course, to whether (and to what extent) financial liberalization has transformed the way monetary policy measures impact the economy. This is largely an empirical issue, with a considerable body of evidence accumulated for the developed economies. In two earlier papers, I (along with a colleague) have attempted an econometric investigation of the Indian evidence in this regard ( Nachane (2001), and Nachane & Laxmi (2004 ) ). Not only are the monetary policy lags “ long and variable” as famously conjectured by Friedman (1961 ), two further complications seem to emerge. Both, the magnitude of the “elasticity” of output and prices with respect to monetary policy, as well as the multiplicative

uncertainty ( a term due to Goodhart (1999)) associated with its measurement, have been amplified by financial liberalization in India. This seems to be the main reason for the cautious approach to the conduct of monetary policy, much in evidence all over the world (the Indian case being no exception), and not really to any inherent conservatism of central bankers per se, or their tendency to “down weighting of small probability events”, and even less to their lack of initiative in reacting “ very slowly to new information and risks” as often alleged (e.g. Nowaihi & Straca (2003), p.35-36).

V The second issue that I believe to be important, relates to “ fiscal dominance” of monetary policy. The issue tends to get slurred in the simplistic IS-LM framework, because of what Kuttner (2002) refers to as the common funnel assumption (aggregate GDP responds identically to a demand shock, irrespective of whether the stimulus is fiscal or monetary). Practitioners know this to be a gross over-simplification. Apart from the well-documented effects of the fiscal-monetary policy mix on the composition of output, on the real interest rate and on the current account (e.g. Brimmer & Sinai (1986)), recent work has stressed the fact that the government’s inter-temporal budget constraint seriously undermines the central bank’s ability to control inflation ( e.g. Huang & Padilla (2002)). Central bank autonomy may be partly a solution to “fiscal dominance” but such autonomy can never be complete, and given the nature of modern democracies the fiscal authority will continue to command enormous countervailing power, given that those entrusted with it are elected representatives, who additionally have, in many countries, a large say in making higher appointments to the central bank 6 . There is a growing literature that traces the consequences of “ fiscal dominance” and “co-ordination failures” between the two authorities ( e.g. Dixit & Lambertini (2002), Eggertsson (2002) etc.).

In India, monetary policy right up to recent times was often viewed as a “handmaiden” to fiscal policy. Some moves in the direction of RBI autonomy have been made in the last decade (Mohan (2005) and Jadhav (2003)) but fall considerably short of the norms prevailing globally (Blinder (2000)). The FRBM Act 2003 has been welcomed in several quarters as a step towards granting adequate safeguards to monetary policy commitments from the consequences of fiscal exuberance

and ensuring better monetary-fiscal co-ordination

generally (e.g. Goyal (2002)), but some of its provisions such as RBI’s proposed withdrawal from the primary market for government securities seem controversial. The professed rationale of this measure (viz. that it will tighten fiscal discipline overall, and one may add, establish a yield curve more accurately mirroring the market’s inflationary expectations) is overshadowed by the legitimate concerns raised about the ensuing high real interest rates and the steep rise in the government interest burden ( EPW Research Foundation (2005)) as also the virtual relinquishing of RBI influence on the long-term rate of interest (of critical importance in translating monetary policy impulses to the real side of the economy).

VI The stock market, apart from being a sensitive barometer of macroeconomic conditions, has also emerged as an important channel of monetary transmission, in the current liberalized financial environment 7 . Thus, it should hardly come as a surprise that the stock market looms large on central bankers’ consciousness. A key issue then is whether and to what extent, monetary policy should respond to stock market developments (see e.g. Borio & Lowe (2002), Bernanke (2003), Lansing (2003) etc.). It is best to distinguish two contrasting situations. The first refers to the emergence of a “speculative bubble”, which some see as a fit occasion for the central bank to intervene, pricking the bubble before it assumes dangerous

proportions. Most economists and policymakers, however, advise against the idea on two grounds – firstly, bubbles may be difficult to diagnose ex ante, and secondly, the monetary intervention required might be forbiddingly large, exposing the economy to the risk of a deep depression. 8 The consensus of opinion favours the use of micro-prudential measures for this purpose (in India such measures are superintended by the SEBI). The second situation refers to the potentially adverse impacts that a monetary policy restraint could have on the stock market. There is, in evidence, a certain hesitation among central bankers to apply the brakes on an overheated economy, for fear of spoiling the stock market party. The stock market’s possible reaction then appears as an important constraint on policymakers’ ability to tighten monetary policy in the face of an inflationary threat. 9

VII The theoretical ascendancy of the rational expectations school has had important repercussions on policy making, and in particular one principle has emerged as sacrosanct viz. that, that policy is best which “surprises” markets the least 10 . As a logical corollary, monetary policy is adjudged accordingly as it is aligned with market expectations or not. In practice, however, the line dividing what markets expect from what markets want

is an

extremely thin one. And hence monetary policy in its eagerness to track market expectations, may quite likely find itself being driven by market desires – a classic case of the tail wagging the dog. Because markets in general, and financial markets in particular, have rather short horizons, excess zeal towards keeping financial markets happy is often likely to compromise important long-term objectives of monetary policy 11 . The financial press ideally should have an important role to play as a communications channel between policymakers and markets, clarifying for the latter the macroeconomic fundamentals on which good policy bases itself, thus reducing the likelihood of policy “surprises”. In India (and perhaps to

varying extents the world over), the financial press has long abdicated this responsibility, setting up instead , what Blinder (1997) so graphically describes, as an “incessant din of market chatter”

besides installing its own “grading system” for monetary policy12 . This has

had the undesirable effect of keeping the monetary authority under tremendous pressure to perform its tasks without incurring the displeasure of financial markets. On this, I can do no better than to quote Blinder (1997) again “ ..it is just as important for a central bank to be independent of markets as it is to be independent of politics”.

VIII The above discussion can lay no claim to exhaustiveness. There are several other issues of relevance for the conduct of monetary policy in a financially liberated environment viz. whether monetary authorities should adopt explicit Taylor-type rules (see e.g. Taylor (1993), Clarida et al (1998)), whether monetary policy should respond only to the final targets of inflation and output or also to intermediate targets such as asset prices and exchange rate movements (see e.g. Cecchetti et al (2000), Filardo (2000) etc.), the regional dimensions of monetary policy (see Nachane et al (2002)) and so on – the list is virtually endless There is one final point which seems to have virtually attracted no attention in the literature. This refers to the fact that in most

LDCs financial liberalisation is often “government

driven” rather than an autonomous evolution in response to market forces. Additionally, the financial innovations, very often, are virtually transplanted from abroad, with little adaptation to domestic conditions. Together, these features imply that the financial liberalisation process in LDCs lacks spontaneity, is somewhat artificial and often premature, and hence may interface with policy in ways quite distinct from the pattern recorded in advanced countries. In particular, it would be a topic of considerable research interest to examine whether this

feature implies higher â&#x20AC;&#x153;sacrifice ratiosâ&#x20AC;? 13 for LDCs as compared to developed countries, in the pursuit of financial stability as an explicit objective of monetary policy.

Endnotes 1 2 3 4

6 7

It would be interesting to explore if a causal nexus exist between these developments. This framework still survives in many countries, albeit in a somewhat battered form. Currency, no doubt, is an exception to this phenomenon, but most likely, an increasingly unimportant one. This feature is somewhat mitigated if Divisia indices, rather than simple-sum aggregates, are used in the definition of money (Gabb & Mullineux (1995)). This conclusion is not true in its entirety. Several transmission channels will still remain open, and a few new ones will emerge. A change in interest rates could still affect aggregate consumption via its impact on permanent income, as well as through intertemporal substitution (Bayoumi & Koujianou (1989)), though this channel is likely to be a sluggish one. More importantly, as stressed by Goodhart (1989), the increased elasticity of global capital inflows to domestic monetary policies, implies that the reduced effects on domestic demand are compensated by a greater impact on exchange rates. The latter has, as a matter of fact, emerged as a major channel of monetary policy in several OECD countries, in recent years. A major advantage of the exchange rate channel is claimed to be its direct effect on input prices and inflation, but on the flip side, it makes investment in the manufacturing sector tradeables, unduly dependent on the vacillations in domestic monetary policy (thus impeding the long-term growth prospects of the economy). This point is also of crucial significance in the Indian context. As is well-known this channel operates primarily via a wealth effect as also alterations in firms’ cost of capital (see Rigobon & Sach (2003)) “Opponents of bubble-popping often cite the example of the Great Depression, claiming it was exacerbated by the Fed’s overzealous attempts to rein in speculative stock market excesses” (Lansing (2003), p.2) This overriding concern with stock markets seems largely to be unwarranted, the observed impacts of the stock market being transitory in a majority of the cases. This conclusion is critically conditioned on its twin premises (rational expectations and efficient markets), both of which have been increasingly questioned in recent years (see e.g. Barberis & Thaler (2002), Mullainathan (2002), Shiller (2003) etc.). “I believe that markets tend to get hyper-excited by almost any stimulus, sometimes succumb to fads and fancies and are often short-sighted. ….If this is true, a central banker who follows the markets too assiduously is liable to overreact to current data and tacitly adopt the markets’ short time horizons as his own” (Blinder (1997), p.15) The judges in this system are usually the captains of industry and finance, who use these occasions “to hold up for our inspection their financial fashion plates” (to use one of Keynes’ favourite expressions—see Keynes (1972)[1931], p.192). Parenthetically speaking, I may add that professional economists are conspicuous by their virtual absence in the financial press—whether it is a deliberate retreat on their part or whether they have been banished from this realm, could be a matter of debate. The sacrifice ratio may be defined as the aggregate of welfare sacrificed (if any) with respect to objectives such as inflation, output growth, exchange rate stability etc. for achieving a given level of financial stability. Needless to say, the computation of such ratios in practice, would prove a forbidding task.

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ISAS Insights No. 21 â&#x20AC;&#x201C; Date: 9 July 2007 Institute of South Asian Studies 469A Tower Block Bukit Timah Road #07-01 (259770) Tel : 65166179 Fax: 67767505 Email : isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Urban Policy Initiatives in the European Union, Beijing-Seoul-Tokyo Cooperation and ASEAN: Perspectives for SAARC Countries Indu Rayadurgam + The world is urbanizing at par with economic openness and industrialization. In many developing nations, due to the reduction in the contribution of agriculture to the national income and the lack of a strong non-farm sector, the rural-urban migration is on a rise. Cities and towns are becoming major economic, employment generation and revenue earning centres. In many countries, employment generation is generally perceived to be higher in the urban areas and its surrounding localities. Developing countries have adopted many policies to tackle the growing needs for infrastructure (roads, railways, ports, airports among the many). But, with the booming infrastructural requirements and the necessity for efficient management of resources in urban areas, it is very hard for national public sector undertakings alone to be involved in planning and policy. Therefore, cooperation in the form of exchange of ideas and technical expertise between governments and cities will be beneficial, especially when the process of economic, defence and political cooperation between nations is progressing, during the past few decades. It is also a fact that different countries have their unique urban development policies. Here, urban development is defined to cover a variety of issues like low income housing for urban poor, alleviation of urban poverty and unemployment, mass urban transportation systems in metropolitan cities, improvement of urban environment, promoting private sector participation in the provision of public infrastructure and also in urban planning and management of specific components of urban services and municipal governance. All these domestic issues are likely to be reflected in the foreign policy priorities of the nations. The competition between major urban areas in various countries is also on a rise. In a not so parallel terrain, countries are entering into different types of trade agreements. Hence, the performance of any economy would be mostly dependent on the availability of infrastructural and other facilities, which will facilitate in market and other economic interactions. In this essentially liberalized world heightened interactions between economies is an intricate part of its functioning. Employment and income generating economic activities will definitely be on a rise. +

Ms Indu Rayadurgam is a Research Associate at the Institute of South Asian Studies, an autonomous research institute in the National University of Singapore (NUS).

But, how can countries cooperate to balance the development and management of their centres of growth? Even if a region has strong economic and political linkages, differences in functioning and management of cities have to be accepted. Therefore, countries have to undergo competition and cooperation, in order to ensure sustainable development. Against this backdrop, the objective of this paper would be to analyze how countries have cooperated in the development and linking of their major cities, especially in the wake of the rampant Free Trade agreements (FTAs) and Preferential Trade Agreements (PTAs). This paper elucidates the approaches adopted by regional cooperation initiatives to tackle the growing challenges of urbanization, especially with respect to city management, transportation and regional trade linkages. The first section of this paper will deal with the overview of urban development at the aggregate international level, followed by the initiatives by the European Union (EU), ASEAN, East Asia and SAARC, and the third and concluding section will draw out some effective measures which can be implemented with the SAARC framework. Overview of the Regional Urban Planning and Management Models Table 1: Urban Population Growth across the Globe Urban Population Growth across the Globe

Africa Asia Latin America & Caribbean Oceania Europe North America Global Total Increase

in Millions % of total in Millions % of total in Millions % of total in Millions % of total 1900 1950 2000 2030 32 14.7 295 37.2 787 52.9 244 17.4 1376 37.5 2679 54.1 70 391 608 84.0 41.9 75.4 8 61.6 23 74.1 32 77.3 287 52.4 534 73.4 540 80.5 110 63.9 243 77.4 335 84.5 ~250 ~15 751 29.8 2862 47.2 4981 60.2 14.8 17.4 13.0 501 2111 2119

Source: United Nations, 2002.

Table 1 reveals that there has been a steady increase in the growth percentages from 1950 till 2000, even if the projected figures are showing a decline for 2030.The projected figures for Asia and Africa are reflecting an increase by over 15%, even if the percentages are not as high compared to the developed nations. According to existing literature, the challenges for the study of urbanization have been due to the problems of accurate projections of future growth hampered by difficulties in data collection and projections. Another obstacle has been the demarcation of factors to differentiate between rural and urban population. 1 The definitions of urbanization differ widely and any range from 2,500 to 25,000 settlements has been classified as urban areas (UNDP). Urban communities can be defined in any number of ways including population size, population density, administrative or political boundaries, or economic function. Some countries define their urban population based on certain administrative boundaries â&#x20AC;&#x201C; such as administrative centers or municipios (El Salvador) , municipality councils (Iraq) , or in places having a municipal corporation, a town committee or a cantonment board (as in Bangladesh or 1

Barney Cohen, â&#x20AC;&#x2DC;Urbanization in developing countries: Current Trends, future projections and key challenges for sustainabilityâ&#x20AC;&#x2122;, Technology in Society 28 (2006) 63-80.

Pakistan).There can be wide discrepancies in comparison of data. 2 According to the World Development Report, irrespective of the criteria used, the number of people living in the cities is on the rise (World Development Report 1999-2000). This along with the rising importance of urban areas as financial and economic centres of nations and regions, necessitates efficient planning and management. Urban areas offer comparative advantages in terms of resource sharing between household and commercial centres. For public services like sewage, water, and highways, firms locating in rural areas or residential developments in suburban areas either have to induce counties or states to provide this infrastructure or pay for such linkages themselves. In this regard, central cities and inner suburbs are ideal locations for starting small businesses that cannot afford such services on their own. 3 Any study on urbanization should encompass social, economic and developmental factors. This mandates the existence of a plethora of policies to address every specific issue. Nations tend to learn from the successes and mistakes of their counterparts. Any efficient existing policy can be tried if it leads to enhancement of the nation’s economic and social fabric. Hence, there is a need for comparisons of the policies adopted by regional organizations and derive lessons from their experiences. The next section will deal with the urban management policies of the EU, ASEAN, BeSeTo (Beijing Seoul Tokyo Cooperation) and EU-Latin America ties. The European Union The priority for contemporary urban issues in the EU gained focus with the publication of the Green Paper on the Urban Environment in 1990 , followed by the European Committee Expert Group on the urban environment in 1991,the initiation of the European sustainable cities project in 1993 and the launch of the European Sustainable Cities and Towns Campaign in 1994.It has been stated that the majority of problems faced by EU urban cities are multifarious to include degradation of the natural environment,crime,uneven distribution of resources within spatial economic structures. Another important project launched by the EU was the determination of efficient urban policies through the URBAN community initiative through which the union currently delivers support to 70 towns and cities across 15 member states. ‘The basic principle is that of integration between social, environmental and economic dimensions in order to stimulate the process towards sustainability.’ 4 In 1997, the European Consultative Forum on the Environment and Sustainable Development was established (Commission Decision 97/150/EC) within the framework of the 5th environmental action programme. The Working Group notes that "...the ESDP is related to a number of other European and global initiatives, such as: • • •

2 3

Eurocities (a network of 81 cities in 25 European countries). the International Council for local environmental initiatives (ICLEI). the Local Agenda 21.

Ibid. policy.rutgers.edu/faculty/lahr/Lahr&amp;Haughwout_<wbr>Properties_Economic%20Case%20for%20<b> Regional</b>%20Cooperat... According to the working group discussions at the 22 September 1997 Expert Group Plenary meeting, contributions from the 7 November 1997 Workshop involving invited experts, and the conclusions of the 25 November 1997 European Event Promoting Sustainable Development & Local Agenda 21.

• • • • •

the European Community programme of policy and action in relation to environment and sustainable development (fifth environmental action programme). The European Commission expert group on the urban environment. the directive of the European Commission on habitat protection (Natura 2000). the trans-European networks. the Habitat II Initiative.

The various measures and policy stances initiated by the countries of the European Union reveals the extent of trans-nationalization of urban issues. The factors span from transport systems through the trans-European networks, protection of environment with the Habitat II initiative and the expert group on environment and the linking of major cities with the Eurocities project. 5 All these proposals reveal the importance endowed by the regional grouping to balance economic growth. These methods will also help the smaller and less privileged nations within the EU and outside, like the East European countries to obtain ideas and feedback from their counterparts. The EU-Latin America economic and trade agreement has made provisions for collaborations on urban and city management. This type of trickle down effect of technical expertise and efficient policies would prove beneficial for developing nations. The BESETO Network The BESETO stands for Beijing-Tokyo-Seoul network, an initiative suggested for Japan, South Korea and China to link their industrial and urban regions in the 1990s due to an accelerating economic growth. In East Asia, It was argued that, given the openness of the economy of the cities, it is impossible for the ULBs to prepare a development plan without a regional perspective, combining contiguous cities of various countries. 6 In the late 1990s, a major effort to link the major cities in East Asia began with the ‘ecumenopolis’ (a borderless urban corridor), the inverted S-shaped corridor from Beijing to Tokyo via Pyongyang and Seoul. These areas cover about 98 million inhabitants and 112 cities as reflected in Table 2. This region covers the most industrially developed areas of the countries involved, by railroads and highways and also air connectivity. Table 2: Urban Population and Number of Cities in the Beijing-Pyongyang-Seoul-Tokyo Corridor in 1990 Population ('000) No. of Cities Over 200,000 Bohai Rim Corridor, China

31,556

Shinuiju-Kaesong Corridor, North Korea

4,997

Seoul-Pusan Corridor, South Korea

22,642

Fukuoka-Tokyo Corridor, Japan

39,269

Total

98,464

112

Source: The transnationalization of urban systems: The BESETO ecumenopolis, http://www.unu.edu/unupress/unupbooks/uu11ee/uu11ee1h.htm

5 6

http://www.ucl.ac.uk/euroconference/participate/fora/regional.html The transnationalization of urban systems: The BESETO ecumenopolis, http://www.unu.edu/unupress/ unupbooks /uu11ee/uu11ee1h.htm

A high rate of urban development was viewed with a certain amount of caution due to the unmistakable divide between the urban and rural areas, especially when growth is left to the whims and fancies of the market forces. This is the case for Japan, South Korea and China, their national policies reflecting their respective concerns. Also, it has been identified that any evolving urban system will have implications in both nationalization and international urbanization policies. Inspite of various reservations about the concept of urbanization as a whole, it is also certain that urban development is an emergent factor in the continuous process of globalization and economic development. Therefore, when the BeSeTo idea was conceived by Seoul in the 1990s, the existing complementarities between countries in North-East Asia were taken into consideration. 7 China could use the backing of its technologically advanced and capital rich countries of Japan and South Korea, whereas the latter two could tap the human and natural resource base of their neighbour. On the flip side, the BeSeTo proposal made by Seoul has not been actively followed upon. But, in 1995, Beijing, Seoul and Tokyo signed a Memorandum of Understanding (MoU), which set the pace for inter-city cooperative relations including all types of relations at both public and private levels. 8 But, existing sources reveal that the cooperation has been very customary and not much effort has been taken to enhance the decentralized system of governance. Association of South East Asian Nations (ASEAN) The Initiative for ASEAN integration (IAI), the roadmap for the integration of ASEAN (RIA) have developed into a vision of the ASEAN Economic Community (AEC) by 2020, which will make ASEAN into a single production and market base with free flow of goods and services, investment, skilled labor and free flow of capital between all ASEAN countries. In order to ensure a better connectivity between the nations, and also to enhance a balanced development, the ASEAN transport network was envisioned in 1990s. The integration and efficiency of the transportation links within ASEAN is expected to enhance the prospects for AFTA and to convert South East Asia into a ‘One market zone and a single production base for free flow of trade, goods, services, investments, skilled labour, capital, etc. In order to facilitate the achievement of this objective, there have been many initiatives from the sub-regional groups, notable amongst them being the ‘ACMECS’- the Economic Cooperation Strategy of five countries namely Cambodia, Laos, Myanmar, Thailand and Vietnam. 9 The topmost priority of ACMECS has been the building of physical infrastructure, including roads, bridges and railroads. The ‘rectangular strategy’ initiated by the government of Cambodia involves the rehabilitation of road infrastructure and also improve economic development by linking cities and urban areas to local areas, linking production areas to market places. 10 Another significant aspect has been the introduction of ASEAN heads of population programme (AHPP) as early as 1981, which brought in the phenomena of migration and urbanization within the purview of cooperative demographics and development agenda. 11 7 8 9 10 11

http://www.nira.go.jp/publ/seiken/ev12n04.html Hee Yun Jung (2005), Seoul-Toward a Regional Hub City in the Northeast Asia, Seoul Development Institute http://www.cnv.org.kh/2004_releases/231104_transport_asean.htm Ibid. http://www.aseansec.org/10039.htm

Initiatives have also been made to link major cities and economic centres by rail, road, air, and also through other means. It is evident that an overview of ASEAN’s transport and other policies reflects a plan between ASEAN countries to acknowledge that urban development is an integral process of economic progress. The planning process also reflects the need for countries to integrate for economic enhancement inspite of political differences. South Asian Association for Regional Cooperation The members of the South Asian Association of Regional Cooperation (SAARC) have identified many issues in the course of the organization’s existence since 1985. But as opposed to its counterparts in other regions, the incorporation of urban policies and joint infrastructural plans have not yet been planned and implemented. But, it should be noted that European Union started its cooperative urban and infrastructural planning only in the 1990s, almost 40 years after its existence. In the wake of continuous economic and market liberalization, cities have become economic powerhouses of countries. On a parallel track, countries are also entering into free trade and preferential trade agreements, eventually aiming to transform the areas into free trade areas and customs unions. SAARC also has a similar agenda in the form of South Asian Free Trade Agreement (SAFTA) which came into effect on January 1, 2006. A perusal of the SAARC policies and documents reveal that even if there are no direct plans to integrate city management and planning into the main framework, there have been few agreements which have addressed these issues indirectly. The ‘Science and Technology, and Meteorology’ wing of SAARC is in the process of finalizing a ‘State-of-the-art Report on Building, Materials and Housing Technologies.’ 12 This could be used as a template for the future construction of cities. The Sixth SAARC summit in December 1991 enunciated the need for scientific and technological cooperation to transcend national boundaries and derive benefits for the well-being of the people. 13 The areas of environment preservation, disaster management and the effects of greenhouse gases were also stressed upon as early as 1987 in the third SAARC summit. The South Asian Development Fund (SADF) was created in 1996 by merging the SAARC fund for regional projects (SFRP) and SAARC Regional Fund (SRF). The SADF objectives are to support industrial development, poverty alleviation, protection of environment, institutional /human resource development and promotion of social and infrastructure development projects in the SAARC region. The Fund is to be utilized for projects in one or more SAARC countries which are of significant economic interest of two or more countries. 14 Subsequently, the 13th SAARC summit decided to convert the SADF into SAARC development fund (SDF), with an initial fund of USD 300 million for the social window. The Social Window would primarily focus poverty alleviation and social development projects. The Infrastructure Window would cover projects in the areas such as energy, power, transportation, telecommunications, environment, tourism and other infrastructure areas. The Economic Window would primarily be 12 13 14

http://www.saarc-sec.org/main.php?t=2.6 Ibid. Funding Mechanism, SAARC Secretariat, http://www.saarc-sec.org/main.php?t=2.14.

devoted to non-infrastructural funding. 15 Working Groups have been created to focus on five new and emerging areas, namely, Energy, Tourism, Information, Communications and Technology, Intellectual Property Rights and Biotechnology. SAARC and ASEAN are also partner members of the multilateral initiative called ‘The Urban Governance Initiative’ (TUGI) led by United Nations Development Programme (UNDP) from 1998.This is mainly aimed at building capacities for good governance in the Asia-Pacific region.UNDP-TUGI has led pilot projects at the micro level in various countries and is planning to come up with a detailed report on efficient planning and management of cities in the Asia Pacific. This enterprise covers many issues including gender and development, water and sanitation, AIDS, waste collection and disposal, public transportation, urban poverty, employment and job creation and overall good governance. Comparisons of Regional Cooperation Mechanisms and Lessons for SAARC The European Union (EU) started its urban policy initiatives in the early 1990s based on the agenda that many urban areas in EU suffer from common problems like housing degradation, urban poverty, traffic congestion, degradation of the built in environment and trans national problems such as atmospheric pollution. It is also stated that the European cities have a common historical and cultural heritage that needs to be preserved. There have been initiatives to address social, economic and developmental problems, despite the absence of demarcation, as a contrast to SAARC which has identified Social, Economic and Infrastructure Windows. The absence of demarcation in EU could be due to the presence of standard infrastructural and economic conditions amidst stagnating social indicators’ has also extended its policy support and transfer to the countries of Latin America through various agreements. On the other hand ASEAN’s approach to linking of urban cities have been mostly transport oriented, paving way for better access to economically viable locations in order to strengthen the economic conditions. The linkages of cities through transport networks are aimed to create a balanced development of the region and make it an attractive investment destination. The BeSeTo plan is more at its nascent stage inspite of its origin as early as 1990. The discrepancies between the national and regional policies. The emergence of extended borderless metropolitan regions, as envisaged by BeSeTo will lead to globalization of problems, leading to the coining of collective solutions. It has been stated that the rapid economic growth will lead to a new international division of labor, transcending urban and regional structures. This will lead to uneven distribution of capital and income. There is a necessity for a new Asian network, characterized by transnational hierarchy of cities. 16 There have been many difficulties in the forward movement of this plan due to political and economic differences of China, Japan and South Korea. But this plan has concentrated mainly on the reorganization of industrial and spatial structures through the distribution of economic and infrastructural networks.

15 16

Ibid. The transnationalization of urban systems: The BESETO ecumenopolis, http://www.unu.edu/unupress/ unupbooks/uu11ee/uu11ee1h.htm

The UNDP-TUGI initiative has adopted a holistic approach to the entire issue of urban governance. Therefore, an analysis of the policy stances adopted by various regional and transnational initiative have led to the conclusion that priorities are mostly directed in the areas of economic and infrastructural development (ASEAN and BeSeTo) and a more comprehensive picture in the case of EU and TUGI. Even if there is no direct reference on economics and urbanization in SAARC, there are various initiatives like the South Asian Development Fund and the State of Arts Technology reports which can be used to help bring in the issues of urban policy and infrastructural development within the SAARC framework. Urbanization, as a holistic approach is essential for a sustained economic growth for resource sharing among nations within a region, considering that many problems arising are trans-national by nature. Also, it is important to note that political issues are being sidelined in many regional initiatives. The priorities of sustainable economic development should find a place with the SAARC framework. Cooperation combined with sound infrastructure and economic planning, could pave way for a comprehensive understanding of urban problems and better management of SAARC cities in order to ensure balanced and uniform development of the region as a whole.

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ISAS Insights No. 22 â&#x20AC;&#x201C; Date: 19 July 2007 Institute of South Asian Studies 469A Tower Block Bukit Timah Road #07-01 (259770) Tel : 65166179 Fax: 67767505 Email : isasijie@nus.edu.sg Website : www.isas.nus.edu.sg

Election Prospects in Pakistan Ishtiaq Ahmed + Elections are expected to be held in Pakistan towards the end of 2007 or early 2008. The current assemblies were elected in 2002. The principle is that the Election Commission should be given three months to organise the elections, which means that after October when the term of the current assemblies is completed new elections can be called anytime between November and January. The Pakistani electoral system is based on the first-past-the-post procedure as prevalent in Britain and India. Several parties take part in elections but the practice of elections and civilian governments is weakly developed in Pakistan. Therefore, it is not certain that elections will be held. General Pervez Musharrafâ&#x20AC;&#x2122;s term as president of Pakistan ends in November 2007. He has declared that he is a candidate for the post of president for another term, which he wants to contest while simultaneously retaining his post of chief of army staff. Further, he wants that the election of the president should be held before the general election. According to procedure as laid down in the pristine 1973 constitution (heavily amended since), the members of the national and provincial assemblies are elected by the people directly on the basis of universal adult franchise. The elected representatives of the national and provincial assemblies then elect the president. Musharraf wants the members of the current assemblies to be assigned this task and not those who will be returned after the election. The pro-Musharraf Muslim League-Q and its allies have a comfortable majority in the various assemblies. Therefore, his opponents accuse him of arranging his election in a distorted and illegitimate manner. On 7 July 2007, some of the opposition leaders met in London and pledged not to accept him as a president-in-uniform elected by the current assemblies. But Pakistani politicians are not known to speak consistently with one voice or in a principled manner when it comes to democracy and constitutionalism. With few exceptions, they are notorious for their corrupt ways, opportunism and general incompetence. The military have since a long time been exploiting contradictions deriving from the clash of ideology, interest and ambition among them.

Professor Ishtiaq Ahmed is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute in the National University of Singapore (NUS). He can be reached at isasia@nus.edu.sg.

The Muslim League, which led the struggle for Pakistan, was a weak collection of regional Muslim leaders, landlords and the Muslim intelligentsia who had joined ranks against power being transferred to the Congress Party in a united India, alleging it will result in permanent Hindu domination. But once Pakistan had been attained in August 1947, the different factions and caucuses fell out over sharing of power and positions and the Muslim League disintegrated. On the other hand, the powerful civil service and the military were the two best organised institutions that Pakistan inherited from the colonial past. Initially, the civil servants called the shots and weak civilian governments were formed and dissolved by them. But in October 1958, the military led a bloodless coup and General Ayub Khan came to power. Since then, the military has been a prominent player in Pakistani politics and has eclipsed the civil servants. The result has been that Pakistan has been ruled by military bosses for most of its chequered history – 2007 happens to coincide with the 60th anniversary of its founding. Different permutations, ranging from pure martial law regimes to mixed type of civilian and military rule headed by the army chief, have existed. Even when civilian governments have been in power, they have had to bow to the will and power of the top generals. Consequently, the institutionalisation of parliamentary democracy and concomitant electoral processes and procedures is weak and brittle in Pakistan. Perhaps more interesting and intriguing is the fact that although Pakistan enjoys the reputation of being a conservative and authoritarian polity in which oppressive religious laws menace the lives particularly of women and religious minorities, at no point in its history have the Islamists enjoyed more than 10 to 12 per cent of the national vote or seats in the legislative assemblies. Also, the sectarian and sub-sectarian divisions that obtain in Pakistan among Muslims play some part in making a rigid Islamicisation of Pakistan unattractive to significant portions of the Muslim population. Of an estimated total population of 165 million, 97 per cent is considered to consist of Muslims. Of these, some 15-20 per cent are Shias, while the rest belong to the majority Sunni community. But doctrinal tensions and sub-divisions exist even among Sunnis. Therefore, reaching a consensus on a Sharia-bound Islamic state is not easy to achieve for the clerics. Given a choice, most Pakistanis vote for middle parties or even leftpopulist parties that are respectful of Islam and are pragmatic in their programmes. The exception is, of course, the current composition of the assemblies. In the 2002 election, the main middle parties, the Pakistan People’s Party led by Benazir Bhutto and the Muslim League-N led by Nawaz Sharif, were banned from taking part in it. The Muslim League-Q won a majority in the National Assembly and in the provincial legislatures of Punjab and Sindh amid cries of vote rigging by the opposition. In the North West Frontier Province, however, an alliance of Islamist parties – the Muthidda Majlis-e-Amal (MMA) comprising mainly of the Jama’at-e-Islami (JI) and Jami’at-e-Ulema-e-Islam (JUI) – won a majority while in Balochistan its strength increased significantly. It is important to note that both the JI and JUI (in 1947 it was a part of the Jami’at-e-Ulemae-Hind) were opposed to the creation of a national state for Muslims. The former was of the view that a national state based on secular principles had no theological support in Islam

while the latter feared that not only that Pakistan would not be a true Islamic state but that the Muslim community of India would be partitioned and thus divided and weakened. However, once Pakistan came into being the JI, JUI and other Islamist parties began a campaign to convert Pakistan into an Islamic state based on the strict application of the Sharia in all departments of government, civil society and the private sphere. A liaison between the military and the Islamists has existed in Pakistan since at least the time of the Afghan Jihad, but it originated already in the late 1960s when Pakistani politics polarised into right and left as well as centrist and regionalist axes. In recent months, relations between President Musharraf and the MMA have soured as the former is seen to bow before US pressure and order bombardment of suspected terrorist strongholds in the tribal areas close to the border with Afghanistan. The two mainstream parties with large followings in Pakistan are the Pakistan Peopleâ&#x20AC;&#x2122;s Party and the Muslim League-N but their leaders, former prime ministers, Benazir and Sharif, are currently living in exile. Against the former a number of cases of alleged misappropriation of government money and abuse of office are pending in European as well as Pakistani courts. If she were return without entering into some understanding with the government, she would most certainly be arrested. The latter was overthrown by General Musharraf in 1999 and banned from taking part in politics for 10 years and sent into exile to Saudi Arabia. He was accused of endangering the lives of General Musharraf and hundreds of passengers on a Pakistan International Airlines flight returning from Sri Lanka by ordering that the plane not be allowed to land on Pakistani soil. A new national stature politician has emerged in Pakistan in recent years. He is the legendary cricket hero, Imran Khan, who heads the Insaaf Tehrik (Justice Movement). While Benazir enjoys the reputation of being ideologically left of centre and Sharif right of centre, Khanâ&#x20AC;&#x2122;s ideological inclination remains unclear. Initially, he was noted to have been apprenticed in politics by hawkish former generals such as General Hamid Gul who headed the all-powerful Inter-Services Intelligence, but seems to have adopted an independent position in favour of the rule of law and constitutionalism. His popular following after he changed course and became a champion of citizen rights and rule of law has yet to be put to test, but in the election of 2002 he was rejected by the people. In addition, the Muttahida Qaumi Movement (MQM), with its strong base in Pakistanâ&#x20AC;&#x2122;s megacity of Karachi and in the urban areas of Sindh Province, is another important player in Pakistani politics. It is represented both in the National Assembly and in the Sindh Assembly where it heads a coalition government. The MQM initially gained notoriety in the late 1980s as a neo-fascist ethnic party as it was violence prone and used it extensively against other nationalities as well as dissenters within the Urdu-speaking group, but then gradually toned down that image and began to advocate secular and enlightened ideas in opposition to the pro-Jihadi elements striving for a Taliban-type of regime change in Pakistan. The MQM became a close ally of General Musharraf, who it may be noted is also of Mohajir origin. For several weeks now Pakistan has been witnessing protests and demonstrations, mainly by lawyers and political cadres, in the wake of the legal and constitutional crisis precipitated by General Musharraf declaring Chief Justice Chaudhry of the Pakistan Supreme Court a nonfunctional (a novel term meaning practically removed from his office) on allegations of misuse of office.

It is widely believed that Justice Chaudhry had told General Musharraf that he could not contest elections while remaining in uniform and that his election as president had to be carried out before the end of 2007. Moreover, he had taken up several cases of Pakistani citizens, mainly critical journalists and political activists, abducted by the security forces to produce those individuals in court. He also ordered a stop to the sale of Karachi Steel Mill below market price which the government had agreed to. However, on 12 May 2007, the MQM again displayed its proclivity towards violence when its cadres openly carrying guns and automatic weapons clashed with supporters of Justice Chaudhry when he visited Karachi to deliver a speech on the invitation of the Karachi Bar Council. Another major crisis faced by the government has been the very visible defiance of government writ and authority by Islamic radicals in the Pakistani capital, Islamabad. Some months earlier, the female students of that Lal Masjid (Red Mosque) seminary created a stir by raiding an alleged brothel and arresting the woman believed to be running. Later, they declared that Islamic law or Sharia will be enforced by them in Islamabad and elsewhere in Pakistan. The government prevaricated for a long time but a showdown was in the offing since a long time because the hardcore jihadis kept on increasing their level of open defiance and flagrant disregard for the government accusing Musharraf of serving US interests in the war against terror by attacking strongholds of pro-Taliban forces in Pakistan. The Islamists were laced with mortars and machine guns and other automatic weapons. How did they acquire sophisticated weapons literally under the nose of the government is a question which suggests that some rogue elements within the military establishment must have provided them to the militants. In any event, finally determined military action was ordered by the government to flush out the Islamists from the mosque on 11 July 2007. Of the 1,500 men and women who were barricading inside the mosque and its various rooms and compounds some 1,300 accepted the amnesty offered to them by the government but the rest kept resisting as Operation Silence unfolded. The main ringleader, Abdul Rashid Ghazi, and some others fell fighting. His elder brother, Abdul Aziz Ghazi, however, was arrested a few days earlier trying to escape in the dressed up in a burqa (head to foot clothing worn by conservative Muslim women). Thus two very different types of crises – one constitutional and the other based on street power – have burst out in Pakistani politics in recent days. How will they affect President Musharraf’s future is a question many people are posing. While the menace of the Islamists has been crushed in Islamabad and the stern action that was taken may please sections of the population who want law and order to prevail, the Islamists are totally incensed. They have carried out a number of suicide bombings and threaten to kill the president. However, as long as the army remains loyal to Musharraf he can continue to hold on to the reigns of power. Before 9/11, some 30 per cent of the Pakistan military all ranks were estimated to harbour Islamist sympathies and in some of the attempts on Musharraf’s life such elements were involved. Most such people at the officer level have been retired. The top generals are pragmatists like Musharraf. There is no known Islamist lobby among them. However, the military may consider that Musharraf has become a liability and must go. This can be achieved short of a coup.

There is no tradition of the generals staging a coup against their chief, but chiefs have been told to go by their peers and that might mean Musharraf being replaced by another general. On the other hand, a coup led by middle-ranking officers harbouring Islamist sympathies is very unlikely because the army is organised and administrated in a manner that only generals can muster enough support to launch a full-fledged coup. Although Musharraf has up to now been considered by the West as essential to stability and some sort of moderation in Pakistan, quite different signals are now being given by the United States as well as the European Union. While praise has poured in for stern action ordered by Musharraf against the Islamists in Islamabad, the overall policy has been critiqued from not doing enough to root out extremist Islam altogether. There can be no denying that Musharraf’s popularity currently is on the decline. His idea of moderate Islam has failed to consolidate as an alternative to extremist Islam. He has not demonstrated enough resolution and firmness in dealing with the extremists in the tribal areas along the border with Afghanistan. The law and order situation remains bad, public services are grossly inadequate and inefficient, and charges of corruption and abuse of power have been mounting against his government. What would happen if Musharraf were suddenly no longer in power? As argued above, the Islamists will not be able to capture power unless the military backs them, but there is little evidence that such support will be forthcoming under the present circumstances. It is possible that the United States may consider a change in Islamabad necessary if a popular mass movement in favour of constitutionalism and democracy gets underway, but at present the situation is volatile and unpredictable. If the United States decides that it is time for a replacement, it may abandon Musharraf and back another general or reach some understanding with Benazir and/or Sharif and support the demand for an election. Therefore, calls have been made by the Bush administration as well as democrats that Pakistan should hold free and fair elections. Some weeks earlier, rumours were rife that the Pakistan government and Benazir were in touch and a deal was in the offing, but after the judicial crisis assumed a popular character, Benazir seemed to have decided not to go ahead with it. But after the military action against the Lal Masjid radicals, she has come out strongly in support of the government’s response. Could this open new channels for a compromise between her and Musharraf? Such a possibility cannot be dismissed, but as long as the constitutional crisis over the virtual dismissal of the chief justice is not resolved, it is doubtful she would risk striking a deal with the government. The general assessment of the observers of Pakistani politics is that in a free and fair election the Pakistan People’s Party and Muslim-League-N will win a majority of seats. A coalition government, comprising both Benazir and Nawaz, is possible but no such agreement exists at present. Imran Khan’s electoral fortunes remain a matter of speculation. The Islamist parties will probably gain their normal share of 10 to 12 per cent votes. Whether a new democratically elected government will take up the challenge and establish the rule of law, respect for constitutional procedure and use its power to curb extremism and terrorism remains to be seen. But first of all, a free and fair election has to take place.

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ISAS Insights No. 23 – Date: 27 August 2007 Institute of South Asian Studies 469A Tower Block Bukit Timah Road #07-01 (259770) Tel : 6516 6179 Fax: 6776 7505 Email : isasijie@nus.edu.sg Website : www.isas.nus.edu.sg

Problems on the China Front: Can India be the Next Manufacturing Hub? K. V. Ramaswamy ∗ Introduction China’s manufacturing reputation is in trouble. Recently, Mattel, the American toy company, is reported to have recalled more than 400,000 toy cars and 18 million toys worldwide. The China-made and -supplied toys had used lead-based paint and contained small magnets that could prove to be health hazardous and would have serious medical consequences. This was followed by the world famous British toy seller, Hamleys, taking off from its shelves two jewellery products imported from China containing potentially fatal levels of lead. The problem of flawed toy dolls and toy cars may not have caused much damage to China’s exports but they have certainly raised serious concerns not just among American corporates and consumers but in many parts of the world. Consumer confidence has suffered a severe jolt by these incidents. If we look at the crux of the matter, the issue is really about the outsourcing strategy of overdependence on China (single country strategy) and the difficulties or ineffectiveness of monitoring quality from a distance. Whilst one Asian giant picks up the pieces of its manufacturing fall-out, attention is perhaps turned to another rising Asian giant – India. Can India fill in the shoes of its East Asian counterpart? Can it emerge as an alternative manufacturing hub? India, for a start, is not a big player in the toy industry. However, to immediately dismiss this as a non-event from the Indian viewpoint would be a mistake. When one considers the possible alternatives of outsourcing countries for a variety of products like garments, toys, consumer durables and auto-components, India’s name is, quite naturally, thrown up. In March 2007, India’s manufacture exports were valued at US$80 billion and constituted more than 65 percent of total commodity exports. This is in the same ball park as Brazil (US$62 billion), Thailand ($84 billion) and Malaysia ($89 billion, excluding re-exports) in 2005. India’s manufactures export growth is remarkable – the figures stood at US$13 billion in 1990-91 and US$35 billion in 2000-01. ∗

Dr K. V. Ramaswamy is a Visiting Senior Research Fellow at the Institute of South Asian studies, an autonomous research institute at the National University of Singapore. He can be reached at isaskvr@nus.edu.sg.

The structure of Indian exports has also undergone significant changes when compared to a decade ago. Two key product groups that have gained prominence are engineering and electronics (US$29 billion in 2007) and chemical goods (US$17 billion in 2007). Here chemicals include drugs and pharmaceuticals. India’s chemical products registered an annual growth of 17 percent in the last three years, consistent with the high growth of world trade in chemicals (WTO Annual Report, 2005). Automobile exports crossed the US$2 billion in 2005-06. The automobile industry produced 1.7 million four wheelers and over eight million two and three wheelers. The auto-components industry has done even better, recording a growth rate 28 percent between 1998 and 2006. It had a turnover of US$10 billion and exports of US$1.8 billion last year. The Automotive Component Manufacturers’ Association of India expects the auto component sector to grow at a compound annual growth rate of 31 percent between 2005 and 2014 to reach US$40 billion. It is also interesting to note that leading international companies have established manufacturing units in India. Similarly, domestic companies have scaled up to meet global requirements. Tata Motors, following the success of Tata Indica, is bringing out 600cc, four door sedans that will cost a mere US$2,500 at current exchange rates (Economist, 27 August 2007). Tata estimate that its engineering costs would be half of what they would be in Europe or the United States. Tata Indica V2, India's first indigenously-designed and manufactured passenger car, has been a phenomenal success. Hyundai India has become the global manufacturing hub of Hyundai’s small car and plans to convert its India production base as the global hub for mid-sized cars. Toyota Kirloskar is outsourcing components from its Bangalore plant. Similarly, Ford has a plant in Chennai which exports completely knocked down kits and auto components. Maruti Suzuki supplies to the European markets from India. Electrical equipment leaders ABB, Siemens and Cummins have a large capacity in India. Bajaj Auto, which is also one of the largest two-wheeler manufacturers in the country, exports nearly eight percent of the total sale of its two-wheelers. Hero Honda is considered to be the world’s largest manufacturer of two-wheelers. In cotton textiles and clothing, India has the capability to be the full-package supplier with many companies completing backward and forward integration in recent years. In hardware manufacturing, Moser Baer is the world’s largest producer of compact discs and other optical media storage products. LG India (mobile and other consumer durables) is expected to become the export hub for LG worldwide, catering to the West Asian and African markets. Nokia has already invested more than US$1 billion in India. Nokia Siemens Network facility has announced a US$100 million investment in a telecommunication equipment manufacturing. Nokia India Director, in expressing his confidence in India, said, “The Indian manufacturing facility is key to our global manufacturing system and we will make additional investment if the need arises” (Business India, 12 August 2007). The Nokia Chennai plant is reported to produce 230,000 handsets in a day. Nokia exports 50 percent of its Chennai plant output which adds up to 60 million handsets since it was set up 18 months back (The Economic Time, 24 August 2007). Favourable Factors There is little doubt that India has been moving progressively to becoming a competing manufacturing hub to China and other developing countries. There are several reasons for India’s manufacturing competitiveness:-

Cheap raw materials: India is the lowest cost producer of steel, cement and aluminum. It exported 3.5 million tonnes of finished (carbon) steel in 2005-06.

Manufacturing quality and skills: India’s manufacturing quality and engineering skills have improved significantly over the year. Ten Indian companies have won the Deming prize for total quality management. Another 18 plants in 10 Indian companies have been recognised by the Japanese Institute of Plant management for excelling in total productive management in 2004. Tata Motors has set up two in-house engineering research centres, including India’s only certified crash-test facility. The company has implemented several environmentally-sensitive technologies in manufacturing processes. A number of Indian pharmaceutical companies have received international regulatory approvals for their plants from agencies such the United States Food and Drug Administration (USFDA), Medicines and Healthcare Products Regulatory Agency (United Kingdom) and Therapeutic Goods Administration (Australia). India has the largest number of USFDA-approved plants for generic manufacture. In hardware manufacturing, India has the potential to move up the value chain by offering design capabilities and not merely low cost facilities (for example, WeP peripherals in UPS market and D-Link in network products).

Software and service support: India’s software skills and information technology (IT) industry provide great complementary advantage in supporting the country’s manufacturing growth. Engineering manufacturing services have been the fastest growing segments in the world electronics industry. Several leading players have moved to India or acquired Indian firms. Examples include Solectron, Flextronics, Jabil Circuit and Celetron. Motorola chip design had software developed in Bangalore.

Competitive labour cost: The benefit of labour arbitrage continues to provide the basic comparative cost advantage. In the automobile sector in India, available data indicates annual wages cost to be less than US$4,000 compared above US$30,000-$40,000 in the United States (the wage cost for comparable skilled worker in China is not known but it is indicated to be higher by industry managers in India).

Large domestic market advantage: India’s gross domestic product grew by nine percent in the last two (fiscal) years. India grew at six percent in the 1990s, compared to five percent in the 1980s. This large, rapidly growing market will be the key to India’s manufacturing base. India’s mobile market is the world fastest growing market with over 6 million new subscriber additions every month. Companies in India can leverage on this domestic market growth to attain export competitiveness through scaling up capacities. Domestic scale restrictive policies such as the reservation for small-scale industries have been largely removed and are no longer an entry barrier in many labour-intensive industries like garments, toys and sports goods.

Global supply capability: Many India firms are building up the global supply capability model by accessing the China market for components, acquiring stake in foreign companies to facilitate marketing, servicing, and establishing local assembly and/or manufacturing units abroad (for example, TVS Motors and Bajaj in Indonesia). This is a completely new mindset of globalising Indian companies.

Possible Bottlenecks Whilst the Indian manufacturing sector holds great promise, it is perhaps a bit premature to carry the Indian manufacturing flag too high up. There are several critical areas in the manufacturing chain that could derail Indiaâ&#x20AC;&#x2122;s effort to becoming a manufacturing centre, let alone competing and taking over from China in this regard. The key obstacle for India is its poor infrastructure, especially in ports and shipping facilities and power. These are important entities and India need to invest significantly in infrastructure. Equally important but perhaps less challenging is the need for India to build the reputation of the â&#x20AC;&#x153;made in Indiaâ&#x20AC;? brand label. The dominating industry rule, whether it is toy cars or real car components, is supply chain management which ensures timely and quality supply. The supplier needs to meet the quality standards set by the buyer. India enjoys the reputation of high quality and delivery in the IT and IT-enabled industries (Business Process Outsourcing). However, it needs to set up a large number of product quality testing laboratories to meet environmental and sanitary standards required to sell in the global market. One possibility is to rapidly upgrade university laboratories by encouraging industry-government-university collaborations. Conclusion The concerns with China-manufactured products have provided the opportunity for India as well as other developing countries to try and claim some portion of the manufacturing pie from China. India has made significant progress in the manufacturing sector and has many factors in its favour. However, it faces several serious challenges which hamper the growth of its manufacturing sector. Nonetheless, despite these handicaps, India has been able to achieve remarkable growth in the manufacturing sector in recent years. India has the potential and capacity to become the next manufacturing hub. If the recent incidents relating to China-made products continue to haunt consumers worldwide, and if India is able to further build its reputation in the manufacturing sector in the coming years, the world will soon be asking for Indian-manufactured products and not Chinese.

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ISAS Insights No. 24 – Date: 31 August 2007 Institute of South Asian Studies 469A Tower Block Bukit Timah Road #07-01 (259770) Tel : 6516 6179 Fax: 6776 7505 Email : isasijie@nus.edu.sg Website : www.isas.nus.edu.sg

Pakistan: The Road Ahead Ishtiaq Ahmed Rajshree Jetly Iftikhar A. Lodhi * This paper probes the direction in which the Pakistani polity can or will move in the immediate period at hand and in the next few years. We examine the challenges and options facing the state, the present government and the economy. The Terrorist Threat Some American and Indian security analysts have recently expressed grave concern over a possible Islamist takeover in Pakistan. The doomsday scenario sees the Islamists capturing the state by overthrowing the government of General Pervez Musharraf, gaining control over its nuclear arsenal and, thus, posing a veritable threat to its neighbours and indeed ultimately to the United States. We shall demonstrate below that the probability of such a dramatic change in Pakistan is rather small and remote. Indeed we have to begin with 11 September 2001 and its impact on the Pakistani state. It was a turning point in contemporary world politics as Al-Qaeda hijacked a number of civilian planes in the United States full of passengers and then struck prestigious targets – the World Trade Building in New York and the Pentagon in Washington DC – by crashing into them and causing the death of several thousand innocent people. Although the culprits turned out to be Arabs, mainly Saudi citizens, many of whom had been training in the West for a long time for such an undertaking the Al-Qaeda leadership, suspected of being the mastermind behind the plot, was suspected of hiding in Afghanistan and Pakistan. Thereafter began a worldwide military campaign led by the Americans to destroy the Al-Qaeda network. On 8 October 2001, the United States began to bomb suspected Al-Qaeda hideouts in Afghanistan and also sent forces to that country along with those despatched by the United Nations. Pakistan was served virtually an ultimatum – join the campaign or face the consequences. The Pakistan government headed by General Musharraf decided to join the war on terror and denounced Al-Qaeda. In the period that followed, the government took an active role in *

Professor Ishtiaq Ahmed is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg. Dr Rajshree Jetly is a Research Fellow while Mr Iftikhar A. Lodhi is a Research Associate at the same institute. They can be contacted at isasrj@nus.edu.sg and isasial@nus.edu.sg respectively.

tracing down alleged Al-Qaeda operatives in Pakistan and handed them over to the Americans in-lieu of handsome rewards. Pakistan has also been engaged in several military operations against foreigners hiding in the tribal areas alongside the Pakistan-Afghanistan border. The main ally of Al-Qaeda, the Talibans, has a strong presence in those rugged, mountainous areas. But more importantly, the United States provided evidence to the Pakistan government of its nuclear scientists of being involved in extensive illicit trade in nuclear technology and equipment with states that the Americans consider rogues in the international state system such as Iran and North Korea. The Musharraf regime moved quickly and decisively to stop such activities. The central figure in the nuclear technology proliferation scandal, Dr Abdul Qadeer Khan, was dismissed from his post and put under house arrest. Other collaborators of his were also removed from their jobs. The weeding out process was extended to senior generals and other bureaucrats suspected of harbouring Islamist or Al-Qaeda sympathies. Also, the government declared that it will drastically curtail the madrassahs (religious schools) that mushroomed during the Afghan jihad largely with the ideological and monetary support of the United States and Saudi Arabia. Some 15,000 madrassahs with 1.7 million pupils had come into existence (originally there were less than 250). In most of these schools besides teaching theological subjects, the students were indoctrinated into the ideology of militant jihad. The University of Nebraska was given US$51 million to produce picture textbooks in which killing Russians (later generalized to cover all non-Muslims) was made entertaining through drawings. How effective was the government in dismantling such jihadoriented madrassahs is not clear as no proper study of it has been undertaken. There is no doubt that many of the terrorist outfits that have blasted bombs in the Indian-administered Kashmir and in India such as the Lashkar-e-Tayyaba, Jaish-e-Muhammad and others recruited their cadres from these madrassahs. There should be thousands of them dispersed in Pakistani society but how many remain active is difficult to assess. These measures, nevertheless, earned General Musharraf the gratitude and praise of the United States, but within Pakistan, the Islamists perceived such policy a betrayal of Islamic causes and a negation of Pakistani sovereignty. It is important to note that the Islamists in Pakistan include not only the militant clerics and their cadres but naturally also those generals and scientists who have been recently been given the kick. In July 2007, an armed Islamist insurgency made an appearance in the capital which the government had to crush with overwhelming force through Operation Silence. Although Musharraf was again praised for taking a determined stand against Islamism, the Americans have been demanding even more determined action against Al-Qaeda leaders and operatives suspected of hiding in the tribal areas as well as the Talibans who are based in those areas. In case Pakistan did not comply, the Americans have threatened to hit targets directly within Pakistan. After protests from Pakistan, the United Statesâ&#x20AC;&#x2122; State Department toned down that message, saying that it preferred to work in cooperation with Pakistan. But certainly if the Islamists were to capture power, American military action can be expected to be quick and determined. However, as argued above, the key position holders in the Pakistan nuclear establishment as well as in the military have been removed from their posts. Without them being involved in a successful plot to capture Pakistanâ&#x20AC;&#x2122;s nuclear bombs, the extremists cannot access and use such weapons. Thus, even if General Musharraf were to be removed from office through the political process or something as dramatic as an assassination, the state institutions would still not automatically fall into the hands of the Islamists. The reason is that the generals who are

currently in positions of command are pragmatists, and most of them have had close relations with the Pentagon and would continue the policy of cooperation with the Americans. Moreover, an Islamist takeover will also gravely threaten the existence of Pakistan. The Islamists coming to power through a general election is even more unlikely. All the Islamist parties and factions together have not won more than 10 per cent of the total votes. Thus unless a grave lapse in intelligence gathering has occurred at the highest levels of the state there are good reasons to believe that an Islamist takeover scenario is far-fetched. Arms Race The second thing to consider is if a possible United States-India nuclear deal will set in motion another arms race between India and Pakistan. Currently, it seems that the Indian government is going to face great difficulties in obtaining parliamentary approval on that deal as both left and right sceptics perceive Indian sovereignty compromised and, specifically, its control over its weapons programme severely restricted. But assuming that the deal is completed, ratified and closed by both sides, the balance of power will incontrovertibly tilt in favour of India. Would Pakistan then seek to enter into a comparable deal with another power with a view to re-establishing the balance of power? This seems to be the natural response for Pakistan but one can wonder if there is a willing nuclear power to enter into such an alliance. Often times, China is mentioned as the counterweight that Pakistan will try to cultivate. There is a long history of close relations between both countries and that relationship remains stable. However, the Chinese are not known to entering into military alliances. Some informal understanding between the two countries may take place to counter perceived Indian hegemony in South Asia. On the other hand, relations between India and China are improving quickly and that factor could also play a role in China not wanting to enter into a South Asian arms race. One can also envisage that both India and the United States will make efforts to assuage Pakistan that such a deal is not directed against Pakistanâ&#x20AC;&#x2122;s integrity and sovereignty. In particular, India may respond to Pakistani concerns by offering concessions on Kashmir that uphold its position that the borders cannot be redrawn but some sort of joint responsibility for Kashmir, as Pakistan has suggested, can be agreed. Equally, the United States is not likely to abandon Pakistan altogether, in spite of the so-called strategic understanding with India that the deal has been described. Pakistan will continue to be important to monitor the volatile tribal areas on the western border with Afghanistan. Can Pakistan expect Saudi Arabia, a traditional economic backer, to finance the Pakistani arms race? This possibility must be discounted because the former has recently been developing good relations with India and, in any case, it has its own worries uppermost with a possible Iranian graduation to a nuclear weapon state. Under the circumstances, the traditional arms race scenario is not likely to be pursued by Pakistan. It may, however, continue to develop its nuclear weapons capability based on its doctrine of minimum nuclear deterrence. In the longer run, it may be persuaded to reconsider if relations with India cannot be grounded on some more sophisticated values such as economic cooperation and joint ventures, including some sort of regional South Asian defence structure.

Internal Rebellion The territorial unity and integrity of Pakistan has been a major worry of the ruling elite. Pakistan has once been dismembered in 1971 when East Pakistan broke away to become Bangladesh. Actually centrifugal tendencies originated first in western Pakistan when Pukhtun nationalists and some Baluch leaders began to complain of Punjabi domination. Later, even Sindhis developed resentment against the Punjabi-dominated centre. The lack of consistent democratic government has meant that relations between the centre and provinces have not as yet stabilised. In recent days, Pukhtuns in both the North West Frontier Provinces and Baluchistan have given calls for the creation of an Afghania province. This complicates relations not only between the centre and Pukhtuns but also between the centre and Baluch nationalists who have been involved in several armed encounters with the Pakistan military. A Reformed Futuristic Vision Functioning successfully as a nation and society in the era of globalisation requires skills and strategies which are more variegated than those that served well the needs for security and integrity of nation-states. In the case of Pakistan particularly, it should now be quite clear that much time and energy have been wasted in a vain attempt to establish an Islamic state which can also be a democracy. Pakistan can either be normal type of civilian state within a democratic framework that grants equal rights to all its bona fide citizens, irrespective of their caste, creed, colour or gender, or a retrogressive and closed polity that institutionalises discrimination of minorities and women. Saudi Arabia and Iran are cases in point of the latter type of Islamic polities that have promoted Islamist ideology worldwide. They have been able to do so because for all practical purposes, they are rentier states that can afford to waste huge chunks of their oil wealth in such projects. Pakistan does not the have any such asset it can squander away with impunity. Given the intense economic activism in India and in South East and East Asia, there is reason to believe that Pakistan will increasingly be compelled to consider partaking in such activism. The road to prosperity lies in sound finances and skilful economic planning and management. A reorientation in such a direction would require a climb down from ideology and a pragmatic approach to societal matters. A â&#x20AC;&#x2DC;Normal Roleâ&#x20AC;&#x2122; for the Military Observers and analysts of Pakistani politics would have little difficulty in agreeing that the Pakistani military, more precisely the huge army, is the most powerful institution in that country. Historical-structural analyses originating in the colonial period and those rooted in the Cold War epoch furnish abundant evidence of the ubiquitous presence of the Pakistan military in the politics of Pakistan. It has enjoyed practically veto powers in relation to the elected representatives of the people and, in the process, has arrogated to itself the role of guardian and custodian of the Pakistan national interest. At the same time, the Pakistan military has had an unmistakable pro-Western orientation while also acquiring very visible signs of an assertive Islamist fighting force from the early 1980s onwards. The Americans would exert great pressure on Pakistan to choose one of these two orientations. Moreover, in the absence of civilian supremacy, the praetorian guards have been corrupted by too much power â&#x20AC;&#x201C; this power is not simply military or political but also economic. The military runs its own banks, insurance companies, productive enterprises and, recently, have

been involved in hectic real estate deals and so-called land development schemes. Charges of rampant and extensive corruption by the military top brass are now commonplace in Pakistani political parlance and frustration can be sensed in all sections of society. Military officers now occupy senior positions in all major public sector institutions, preventing promotion of civilians. There is simply no system of check-and-balance in place to monitor the economic activities of the military. It is very doubtful if such a privileged position is tenable in the longer run. Musharraf’s Options The foregoing section reveals that Pakistan is in a critical state today and faces several crises internally and externally. It would be fair to say that Musharraf is facing the worst period of his rule as President. The big picture problems facing Pakistan and Musharraf are international Islamist terrorism, domestic insurgency and ethnic conflict, and the demands for a return to democracy. These challenges have been compounded further in recent months by a series of events. One, the invasion of the mosque in July 2007 which was one of the biggest challenges faced by Musharraf government in the eight years of its rule. The attack was significant as it marked one of the biggest crackdowns on Islamic elements since Musharaff came to power. The fact that it happened right in the heart of the city, the federal capital Islamabad, in close proximity to the presidential palace and parliament, was just as much of a concern as the fact that it pointed to the possibility of religious extremism spreading from the Frontier areas into the interior of the country. If history is any guide, the Lal Masjid attack, quite like the attack on the Golden Temple, could have a serious impact on Pakistan’s fight against terrorism, especially after its enlistment as a frontline state post-Septmber 11 to assist the United States in its war on terror. It could cost Musharraf support from the Islamic parties and right wing factions in the country who see the invasion of the mosque as a sign that Musharraf is willing to turn on his own people in his support for the United States. The alliance between the government and jihadists is already precarious; the Lal Masjid episode could inflict an irreversible damage on this association. Two, the crisis precipitated by the dismissal of the Chief justice of the Supreme Court, Mr Iftikhar Chaudhry, on charges of misconduct and nepotism by General Musharraf. The dismissal sparked riots on the streets and emboldened the masses to openly defy Musharraf’s regime. The removal per say was not as surprising as how swiftly it transformed into a mass agitation spreading to different cities, including Lahore and Karachi, and the extent to which it was able to galvanise opposition against Musharraf. The Chief Justice had locked horns with the government on a host of issues but his anticipated opposition to Musharraf contesting elections as President whilst retaining his uniform is what is rumoured to have precipitated his ouster. The movement gave ammunition to the pro-democracy forces and called for restoration of democracy, rule of law, fair and free elections and an independent judiciary. The reinstatement of the Chief Justice by the Supreme Court has further weakened Musharraf’s case, alienating the progressive secular forces who may have comprised his support base. Three, Pakistan’s relationship with the United States which had supported Pakistan as an ally in the war on terror and propped up the Musharraf regime through diplomatic and financial support, has recently also faced some hiccups. The United States has openly stated that Pakistan is not doing enough to contain terrorism in its backyard and there have been veiled

threats of unilateral Americam military action on Pakistani soil, an eventuality that would be wholly unacceptable to the people of Pakistan and who would blame Musharraf if this were to happen. Musharraf is caught between a rock and a hard place as he tries to balance his foreign policy concerns with domestic considerations. These events have exerted immense pressure on Musharraf. Equally significantly, these events, especially the judicial crisis, have given huge moral support to the pro-democracy factions. Where does this leave General Musharraf and what are the options ahead of him. Even though the political climate is highly volatile and dynamic, five possibilities present themselves. 1) Musharraf cuts a deal with political parties The Pakistan Peoples Party (PPP) leader Benazir Bhutto has reportedly been in touch with Musharraf on a possible power sharing arrangement. Musharraf could make strategic compromises with Benazir to remain in power. But he will need to explain how he is making a deal with those he branded earlier as corrupt and not capable of managing the country’s affairs. Similarly, Bhutto will have to explain how she justifies joining hands with a military dictator when the PPP has all along advocated a different line. Any deal with the PPP would, therefore, be complicated. 2) Return of democratic forces through free and fair elections There is now a real chance for the return of democratic forces. The mood has already been set by the media and intelligentsia, which have mobilised public opinion in favour of democracy. The two leading opposition parties – the PPP and the Pakistan Muslim League (N) [PML (N)] – formed a Grand Alliance for the Restoration of Democracy and signed a Charter of Democracy last year, demanding democratic, constitutional rule and return of the army to the barracks. These are welcome developments, and if free and fair elections are held, both the PPP and PML (N) are likely to register a strong presence in the political arena. But rhetoric and high intentions will have to be tempered by the fact that these parties do not have a very good track record at protecting and preserving democracy. 3) Musharraf engineers his re-election The re-election of Musharraf as President by the present national assembly and provincial legislatures, with or without uniform, is no longer a given. Even with the President seeking support of the assemblies before the conclusion of their present term, his re-election may not be easy. The Muttahida Majlis-e-Amal, a coalition of religious parties which were instrumental in supporting him in the 2002 elections, may not be as willing to support him now following the Lal Masjid siege. To gain their support and rebuild the military-mullah alliance, Musharraf will have to make concessions, which he can ill afford to make for fear of upsetting the United States. Alternatively, elections can be rigged as was alleged in 2002. But given the reinstatement of the Chief Justice and a public that is willing to take to the street to protect the rule of law, any such attempt by Musharraf will certainly be challenged, and most likely successfully. The Chief Justice has already led the Supreme Court in delivering two judgments highly unfavourable to Musharraf, namely the release of PML-N ActingPresident, Makhdoom Javed Hashmi, and the ruling in favour of the return of former Prime Minister Nawaz Sharif and his brother from their “forced exile”.

4) Musharraf resigns No military ruler has given up power voluntarily â&#x20AC;&#x201C; both Ayub Khan and Yahya Khan resigned in the face of acute crises which plagued their administrations, and Zia-ul Haq died in office. If history is any guide, Musharraf will cling on to the very end but when the end is nigh, there is a real possibility that he will bow to the inevitable and resign. Another possibility is that the army itself sees him as a liability and asks him to step down to preserve its own image. This will only mean that another General replaces Musharraf and a new equation is worked out. 5) Musharraf declares a State of Emergency Under Pakistan's Constitution, the President may declare a state of emergency if it is seen that the country is threatened by war or external aggression, or by internal disturbance beyond the government's authority to control. According to some reports, Musharraf was on the verge of declaring a state of emergency and ruling under martial law. However, had he done so, or considers it as possible future option, it is certain that he will lose credibility in the eyes of the people. It will be seen not as a measure to protect the peace and security of the state but merely as a ploy to delay elections and perpetuate his rule. Also, the United States is unlikely to be keen on this option and will exert pressure on Musharraf not to do so. Whether Musharraf rides this storm or not, there is no denying the fact that his authority has been severely compromised. The stakes are high as new variables have been introduced into the picture providing another historic opportunity for democratic forces to re-emerge on the political scene. This is the right time to push for change and it will be a pity if the moment is lost. Economic Situation Last but not the least, we are of the opinion that the Pakistan economy is ready and mature to partake fruitfully in economic activity that will generate greater prosperity if it is provided able leadership. Despite all the political instability, Pakistan has maintained an average five percent gross domestic product (GDP) growth over the last 50 years and has been growing by seven percent in recent years. Pakistanâ&#x20AC;&#x2122;s foreign exchange reserves reached US$16 billion and foreign direct invsetment (FDI) totalled US$7 billion in FY2006-07 from a mere few hundred millions at the start of this century and gorss national product per capita grew from US$470 to US$960 during the same period. Full credit must be given to the Musharraf regime for recruiting capable and innovative experts who have turned the economy around so well. All the macro economic indicators show healthy signs of a growing economy particularly the improved fiscal discipline. In recent years, public and private investment witnessed 40 percent and 30 percent growth respectively constituting 23 percent of GDP as compared to 16 percent in 2001. Private investment is largely in deregulated sectors of oil and gas, power, communications and finance, and origins of FDI include the United States, the United Kingdom, the United Arab Emirates, Saudi Arabia, Norway, Japan, Hong Kong, Singapore and China. Karachi Stock exchange is growing steadily and the sovereign bonds launched by the government were oversubscribed showing a strong investor confidence. The Singapore government has invested more than US$160 million in last five years. Port Authority of Singapore took over management of Gwadar port and has plans to invest US$8 billion over the next 40 years.

There is, of course, a rider that needs to be kept in mind – the critics see it as a “trickle down economy” largely driven by privatisation and liberalisation. The fact that the growth is unable to make any significant dent in unemployment (6.5 percent in a 42 million labour force) and high levels of underemployment raises doubts about the overall policy framework. Moreover, inflation remains a formidable challenge even when adjusted with high oil prices. Poverty is another daunting challenge which was moderately brought down from 32 percent (national poverty line) to 26 percent in the last eight years. These challenges demand from the government to make momentous efforts to bring the benefits of growth to the poor people. An equitable growth will not only ensure a prosperious Pakistan but will substantially compliment government’s endeavors to fight extremism and terrorism who pray on the poor of the country. The most urgent of all ongoing reforms is the education system of Pakistan. The government has been reasonably successful in reforming the economy, bureacracy, revenue department and remained moderately successful in case of judiciary and the police. However, the education reforms have been confined to higher education. No doubt, higher education is crucially important but so is the universal primary education. Enormous resources and effort is required to incorporate the traditional madrassahs (15,000) and to absorb their 1.7 million students. All these reforms and economic growth can stall or even reverse if the growth is not inclusive where all parts of the society benefit. Conclusion We have tried to demonstrate that, notwithstanding mounting difficulties faced by Pakistan, it remains a relatively stable state in South Asia. The state institutions of the civil bureacracy and military remain integrated, coherent and strong and can ward off internal and external threats. The dominant position of the military in Pakistani politics needs to be corrected so that a civilian government can come to power and democracy can be put into practice. The Musharraf regime will probably face greater internal and external pressure to permit democratic elections to take place. His own future as the president of Pakistan, in particular, seems highly uncertain. A democratically-elected government can continue to pursue the economic policies worked out during the Musharraf period and, thus, put Pakistan on the road to economic development, in consonance with the strategies being pursued by India and by the more successful countries of Southeast Asia. This should be the rational choice of Pakistan and the road ahead for it in the forseeable future. There is reason to be optimistic that Pakistan will change course and start greater integration in the economies eastwards.

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ISAS Insights No. 25 – Date: 3 January 2008 469A Bukit Timah Road #07-01 Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

THE LEGACY OF GANDHI: A 21ST CENTURY PERSPECTIVE Contents 1

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The Gandhian Legacy of Hindu-Muslim Relations Professor Ishtiaq Ahmed Visiting Senior Research Fellow Institute of South Asian Studies

Mahatma Gandhi’s Influence on India’s Foreign Policy Mr Rajiv Sikri Consultant, Institute of South Asian Studies, and Former Secretary (East), Ministry of External Affairs, India

Gandhian Economic Thought and Its Influence on Economic Policymaking in India Dr D. M Nachane Senior Professor Indira Gandhi Institute of Development Research, Mumbai, India

Mahatma Gandhi and the Legacy of Democratic Decentralisation in India Professor Partha Nath Mukherji S. K. Dey Chair (Instituted by the Ford Foundation) Institute of Social Sciences, India

The papers were presented at a seminar on “The Legacy of Gandhi: A 21st Century Perspective” on 2 October 2007 in Singapore. The seminar was organised by the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore.

The Gandhian Legacy of Hindu-Muslim Relations Ishtiaq Ahmed 2 The great historian Eric Hobsbawm described the 20th century as the century of extremes. Economic growth through burgeoning industrialisation, scientific breakthroughs in the fight against disease and rising standards and human survival, the end of colonial domination, and the spread of democracy were some of the outstanding achievements of that period, but, on the other hand, bloody wars, two of them known as world wars, fought in the name of nationalism and racist ideologies, killed altogether 110 million people (35 million in World War I and 75 million in World War II). Also, despite enormous economic growth and end of colonialism poverty and poverty-related other forms of human degradation continued to afflict the wretched of the earth most of whom were found in Africa, Asia and Latin America. The 20th century ended without the extremes being eliminated or a middle path getting established. One cannot deny, however, that the 20th century epitomised the leadership of the West. That leadership became a fact of history from at least the beginning of the 19th century when European powers completed their expansion into Asia and Africa, while in the 20th century those empires received severe blows emanating from within the Western civilisation. Mahatma Gandhi lived and worked out his social and political philosophy in the 20th century although his long stay in South Africa began already in the end of the 19th century. He faced discrimination and racism in that British colony and later developed novel methods of challenging the abuse of power and authority. Among those methods the most famous is Satyagraha, or non-violent civil disobedience and resistance. It not only influenced the Indian freedom struggle but also struggles for national liberation and social emancipation in many other parts of the world. These days one hears quite so often that the 21st century is going to be an Asian century. Such optimism is justified because after several centuries we find Asian societies exuding great dynamism and progress. East Asia, South East Asia, China and now India are emerging as engines of great economic growth and many hope that this contagion will spread westwards into the mainly Muslim-majority countries of west and central Asia. But a 21st Asian century characterised by economic growth and rapid industrialisation and urbanisation will be very different from Gandhijiâ&#x20AC;&#x2122;s worldview of a good society constituted by self-sufficient villages based mainly on a natural economy. Rather his idyllic good society will be a sure casualty of the 21st century market economy Juggernaut impacting Asia. But one can wonder if it will suffice to pursue economic growth and become successful consumers of ever increasing gadgetry? In that case will this not be a century of extremes too or perhaps of contrasts between the successful and the failed; the haves and the have-nots; the powerful and the weak? Will it not then be a continuation of the Western century but with some Asian trappings? After all, the 20th century bequeathed one of the most dangerous legacies of international terrorism. A well-trained, international network of Islamic warriors laced with jihadi ideology sponsored by the United States and Saudi Arabia was deployed against the Soviet Union in Afghanistan. Those jihadis then turned there guns against the West once Afghanistan was freed of Soviet occupation. It culminated in the terrorist attacks of 9/11 in the United States. 2

Thousands of innocent lives were lost in that outrage. In some bizarre sense it unleashed a clash of civilisations, thus perpetuating societal dichotomies as in the past; but instead of class and race, ‘civilisations’ became the basis of polarisation. Such a situation is going to become even more complicated in the future as globalisation imposes increasing, cultural and religious heterogeneity on the world. How would two fellows living next door to each other deal with each other if they happen to belong to two different civilisations? Would even deadlier weapons and surveillance systems suffice to contain the threats posed by those who become civilisational enemies and threats? How will terrorism and minority bashing and killing be dealt with in the 21st century? One can go on and on to point out the limits of a worldview based on immutable and eternal tribal rivalries and conflicts. Relevance of Gandhian Thought in our Own Times While answers to these questions can only be tentative we cannot escape the responsibility to take a position on the perennial question: are human beings intrinsically united or estranged in their essence. Perhaps the safe answer is: both. Human beings are capable of great sympathy and solidarity as well as deep iniquity and hostility. But a choice between humanism and tribalism will have to be made in order to make sense of the world around us and to prevent impending man-made disasters created by extremes and contrasts culminating in some terrible, irreparable catastrophe for the whole humankind. Nobody comes to my mind as a more appropriate source of inspiration and role model than Mahatma Gandhi. Gandhi an Eclectic but Original Thinker Although born a Hindu and one who remained deeply spiritual in his approach to human relations Gandhi was not a dogmatic thinker. The influence of Tolstoy and his ideal of small Christian village communities, of Jainism from where he developed his firm commitment to non-violence, of the techniques and methods of peaceful civil disobedience that he witnessed in England during his stay in that country combined with his reading of Hindu, Islamic, Christian and other sacred scriptures to furnish an elaborate philosophy of social activism and reformism that was not a sum total of those diverse sources but a new, modern approach to politics and questions of social amity and justice. If Gandhi’s moral and social philosophy is to be summed up in a few words it would be that human beings are intrinsically good and therefore through love and solidarity societal differences – cultural, religious, economic and political – can be transcended. However, he did not believe that goodness can prevail on its own; constant efforts have to be made to establish justice in society. Thus while declaring himself an orthodox Hindu he did not hesitate to reject untouchability as a great social evil within Hindu society. Much of his reform efforts were directed at the eradication of untouchability. Hindu-Muslim Relations Given the challenges of cultural and religious diversity and the threats of terrorism that the 21st century will face, there are good reasons to believe that Gandhian social and political ethics will witness a revival and would need a new interpretation because massive injustices and grievances continue to haunt the destiny of humankind. Gandhi would probably define civilisation as the ability of people to live in peace in a just and fair social order, notwithstanding their differences in beliefs and cultural affiliations. On the other hand, barbarism to him would be a celebration of tribalism in its various garbs. All this can be verified by having a close and dispassionate look at how he approached Hindu-Muslim

relations. He employed a number of regular practices to enhance Hindu-Muslim understanding. He also took part in some political events to create better understanding between the two communities. It would be fair to say that his practices and efforts were motivated by two primary objectives: to bring British colonial rule to an end and to keep India united. Equal Respect for All Religions The most important idea and practice that he introduced in his daily public interaction with people was to declare that all religions deserve equal respect. The correct wording for it is Sarva Dharma Samabhava. In its original Sanskrit meaning this Vedic adage stood for ‘all religions are equal and harmonious to each other’ and one can consider it the most original principle emanating from the Indic civilisation. In contrast, Middle Eastern monotheism has had great difficulty in accepting such an outlook. However, in the increasingly pluralist societies of the contemporary era equal respect for all religions is an imperative so as to create a sufficiently stable basis for social harmony. In the deeply religious and communitarian cultures of Asia Sarva Dharma Sahabhava needs very special emphasis since it corresponds more readily to the fact of strong religious affiliations and associations among individuals. However, as already noted, Gandhi did not imply by respect for all religions a dogmatic or uncritical approach to how established religion impacts on society and social relations. His struggle against untouchability as alien to the spirit of what he believed was Vedic Hinduism is ample testimony of his efforts at reform from within. When he spoke about religion he had in mind the deepest moral and spiritual values such as truth and kindness within religious systems that he emphasised. With regard to HinduMuslim relations his morning sessions of public prayers are particularly significant. He began the day with recitations from the Bhagwad Gita, Quran, Bible and other sacred scriptures. Doing this was an exceptional way to demonstrate that all paths lead to the same God. Many Muslims who witnessed the morning prayers have admitted to the present author that they were deeply touched by the sanctity Gandhiji accorded to the Quran. Thus Gandhi elevated Sarva Dharma Sahabhava the leitmotif of his social philosophy and gave it a dignity in his daily actions that did not exist in the past. Statements on Hindu-Muslim Amity and Solidarity Gandhi was a prolific writer who wrote and spoke regularly on the need to build bridges between Hindus and Muslims. His statements cover a span of almost 50 years. Some of his quotes are given below and they represent two different contexts, one, when India was not partitioned and the other when India and Pakistan had come into being. •

If not during my life-time, I know that after my death both Hindus and Mussalmans will bear witness that I had never ceased to yearn after communal peace. (1921)

•

My longing is to be able to cement the two [Hindus and Muslims] with my blood, if necessary. 1924)

•

[Hindu-Muslim unity] has been my passion from early youth. I count some of the noblest of Muslims as my friends. I have a devout daughter of Islam as more than daughter to me. She lives for that unity and would cheerfully die for it. I had the son

of the late Muezzin of the Jama Masjid of Bombay as a staunch inmate of the Ashram. (1938) •

The lawlessness [of communalism] is a monster with many faces. It hurts all in the end, including those who are primarily responsible for it. (1940)

•

If one side ceases to retaliate, the riots will not go on. (1946)

•

My one aim with respect to the Hindu-Muslim question is that the solution will be complete only when the minority, whether in the Indian Union or Pakistan, feels perfectly safe, even if they are in the minority of one. (1947)

•

The minorities must be made to realise that they are as much valued citizens of the State they live in as the majority to look to for justice. (1947)

Patriotism versus Nationalism An important distinction needs to be made between nationalism and patriotism although the two words are often used as interchangeables and in some situations the two can coincide. Patriotism is love for the land of birth and is an inclusive term. It is perhaps one of the most universal sentiments. It does not mean hatred of others. Gandhi was committed to such an understanding of the love for India. Thus he wanted an end to British rule but did not hate the British as a people. He could even envisage Englishmen settling in India and becoming a part of South Asian society, enriching its already very diverse pluralist social and cultural order. On the other hand, nationalism in its strong sense is essentially an ethnic term. It divides the world into different nations or tribes and assumes tension and conflict between them as inevitable. In the milder sense of course nationalism means the right of a people to exercise sovereignty and that can coincide with patriotism. When it comes to Muslims, as argued above, Gandhi wanted to bring the Muslims into the patriotic anti-colonial struggle against the British. He recognised that Indian Muslims were in an emotional and religious sense affiliated with a universal community, but rather than hold this against them he tried to win them over by coming out openly in favour of the Khilafat Movement. The Khilafat movement (1919-24) originated in India in the aftermath of Ottoman Turkey’s defeat in the First World War. The institution of Khilafat or caliphate was established in 632 following the death of the Prophet Muhammad. Thereafter, it symbolised continuity of Islamic political sovereignty. Sunni Muslims all over the world recognised the Ottoman sultan as their caliph – more in a symbolic and emotional rather than political sense. Thus, when the war broke out, Indian Muslims were confronted with a veritable moral and religious crisis: how to continue associating themselves religiously with the caliphate while simultaneously maintaining good relations with their British rulers. A way out was found by agreeing to remain loyal to the British on the understanding that the caliphate will be spared and suzerainty over the Muslim holy places in the Middle East continue to be vested in the Ottoman sultan. However, an Arab revolt in 1916, masterminded by British agents, under the leadership of Sharif Hussain of Mecca hastened the defeat of the Turks. The victorious allies now wanted to penalise the Ottomans severely by depriving them of their remaining nonTurkish areas. Among them, British Prime Minister Lloyd George was the most vengeful. Most crucially, the allies wanted to confer sovereignty over the holy lands on their Arab protégés. The Treaty of Sevres aimed virtually at reducing Turkey to an Anatolian rump state.

Indian Muslims felt cheated. They suspected that a sinister conspiracy against Islam and Muslims existed. Consequently many stalwarts stepped forward to mobilise support for Turkey. 1n 1919 some Western-educated Muslims as well as many ulama and some Sindhi pirs (spiritual divines) came together to establish the Khilafat Committee. The Muslim realised that without the support of Hindu leaders and masses they could not challenge British authority. They were therefore greatly pleased when Gandhi declared the Khilafat cause just and offered his support. He was invited to join the All-India Khilafat Committee that was set up in 1919. He served for a while as its president. Consequently, a genuine patriotic upsurge took place in which Muslims and Hindus joined ranks at all levels against colonial rule. Muhammad Ali Johar and his brother Shaukat Ali, Maulana Abdul Bari of Firangi Mahal, Mahmud Hasan of Deoband, Zafar Ali Khan and Abul Kalam Azad were some of the leading Muslims who took part in the movement. Some of them were incarcerated or confined to remote areas. Civil disobedience, boycott of foreign goods, rejection of government grants, titles and employment were some of the tactics employed. However, Gandhi suddenly called off the support when in some areas violence was used by the protestors. From 1922 onwards the Muslim-Hindu alliance began to crumble and instead rioting took place in many places. The most well-known being the uprising of Muslim peasants called Moplahs against their Hindu landlords. Gandhi was attacked by liberal Muslims such as Jinnah who were opposed to mass politics and mixing of religion and politics, while rightwing Hindu leaders felt that Gandhi provided a popular forum to the ulema and thus conferred legitimacy on their radical type of Islamism. Unity versus Separatism Individual Hindus as well as Muslims had talked of separate nationhood since the late 19th century but the first notable demand for the division of India on a religious basis was made by Hindus in the Punjab in the 1920s following the activism and radicalism of the ulema during the Khilafat Movement. Among prominent Muslims the first to demand a separate Muslim state was Allama Iqbal, who took up the issue at the annual session of the Muslim League in Allahabad in 1930. Only a year earlier, the Indian National Congress at Lahore had demanded independence for an undivided India. While much has been written on the separatist tendency among Muslims, especially the landed elites who felt threatened by the Indian National Congress’s anti-feudal thrust one needs to bring into the picture the role of rightwing Hindu leaders and organisations. In 1923 the Hindu Mahasabha (founded 1915) leader Vinayak Damodar Sarvarkar threw up the idea of “Hindutva” — an ethno-cultural concept purporting to bring all Hindus into a “communitarian” fold. Non-Hindu Indians were urged to accept a Hindu cultural identity and declare that their prime loyalty was to India. It is important to point out that until the mid-1930s separatist ideas from both Hindu and Muslim sources remained marginal and nobody took much notice of them. The 1930 (Allahabad) session of the Muslim League, for example, was so poorly attended that the organisers had to run around town to bring people to meet the quorum requirement (75) to adopt the resolutions. The stage for broad-based electoral politics was set by the Government of India Act of 1935. The 1937 elections resulted in a victory for Congress in six provinces and for regional parties elsewhere. The Muslim League did very poorly in the Muslimmajority provinces. The Congress then blundered by not extending a generous hand towards the Muslim League. For example in Uttar Pradesh where some informal understanding existed between the Congress and Muslim League to share power the Congress after

trouncing completely in that province demanded that Muslim Leaguers should first join the Congress before they could be considered for a ministerial post. Most scholars have noted that it was the beginning of the real rise of Muslim separatism. It was in these circumstances that Madhav Saashiv Gowalkar, the leader of the Rashtriya Swayamsevak Sangh (RSS, founded in 1925) made a most provocative statement in 1938: “The foreign races in Hindustan must either adopt the Hindu culture and language – [they] must learn to respect and hold in reverence Hindu religion, must entertain no ideas but those of the glorification of the Hindu race and culture... or may stay in the country, wholly subordinated to the Hindu Nation, claiming nothing, deserving no privileges, far less any preferential treatment not – even citizen’s rights (We, Our Nationhood Defined, 1938). The RSS adopted a semi-military style of organisation to instill “martial arts” among Hindus. Both the Hindu Mahasabha and RSS looked upon Muslims as the main threat to Indian unity. Conversions to Islam – as well as Christianity – were viewed with dismay. Fascistic ideas gained ground among some Muslim groups too. Military drill and strict discipline were introduced by the militant Khaksar movement founded in the Punjab by Allama Inayatullah Khan Mashraqi in 1931. Ideologically, the Khaksars wanted to establish an Islamic state all over India. In practice, they remained anti-British rather than anti-Hindu or -Sikh. Another radical Islamic movement, the Majlis-e-Ahrar, founded in 1929 in the Punjab was loudly anti-British and a close ally of the Congress. It had a fairly large membership throughout the Punjab. The Ahrar never supported the division of India. Also, the Deoband ulema remained loyal to the Congress. The Muslim League’s demand for a separate state assumed a mass character only in 1940 when the Lahore resolution was passed in an open public meeting: No constitutional plan would be workable or acceptable to the Muslims unless geographical contiguous units are demarcated into regions which should be so constituted with such territorial readjustments as may be necessary. That the areas in which the Muslims are numerically in majority as in the NorthWestern and Eastern zones of India should be grouped to constitute independent states in which the constituent units shall be autonomous and sovereign. Thereafter, the march towards a separate state became the main goal of the Muslim League which, as mentioned above, till 1937 had been no more than a party of the Muslim gentry seeking protection of their interests in a decentralised but united India. If we place Mahatma Gandhi’s efforts to bring Hindus and Muslims together into a single anti-colonial front in the context of the politics of confrontation and ethno-nationalism that had grown at that time we can understand that he was confronted by very powerful forces loaded against him. He did however, very perceptively, warn many times that the partition of India will result in bloodshed because no division of the subcontinent would be acceptable to all communities.

The Quit India Movement Whereas Gandhi attached the greatest importance to the unity of India and to Hindu-Muslim unity as a prerequisite for it to happen it is a great irony of history that it was because of his colossal miscalculation in launching the Quit India Movement on August 9, 1942 that facilitated the partition of India. Gandhi believed that the British were about to be defeated by the Japanese who were advancing rapidly towards eastern India from Burma. Under the circumstances power should be handed over to Indians by the British and they should leave. The mass agitation that he launched was met with a firm and resolution response by the colonial government. The Viceroy Lord Linlithgow ordered the arrest of Congress leaders from top to bottom and not until the end of World War II were they released. During this period the Muslim League, which had decided to support the war effort was able to disseminate its message of Pakistan among the Muslims. It was able to make breakthroughs in the key province of Punjab as well as in other Muslim majority provinces. The Muslim voters were convinced by the Muslim League that they would escape the humiliation of caste oppression as well as the economic tyranny of Hindu and Sikh moneylenders if they supported the creation of Pakistan. The 1946 Election The provincial elections held in 1946 were fought by the Congress and Muslim League from two diametrically opposite platforms: the former wanted a mandate to keep India united while the latter stood for a separate and independent, sovereign Pakistan. The election results vindicated the contradictory claims of both parties. Congress secured 905 general seats out of a total of 1585 while the gains of the Muslim League were even more impressive. It won 440 seats out of a total of 495 reserved for Muslims. It is to be noted that Muslims in the Hindumajority provinces also voted massively in favour of the Muslim League. The post-war Labour Government of Clement Atlee sent a high-powered mission to probe the possibility of a rapprochement between the two adversaries. The Cabinet Mission Plan of 16 May 1946 recommended a loose federation and overruled the demand for Pakistan. The Muslim League reluctantly accepted the Plan, but the Congress rejected it. The factor that sealed the fate of unity was the eruption of large-scale communal violence following Jawaharlal Nehruâ&#x20AC;&#x2122;s ill-considered press statement of 10 July 1946 in Bombay declaring that Congress would enter the Constituent Assembly 'completely unfettered by agreements and free to meet all situations as they ariseâ&#x20AC;&#x2122;. Compassion versus Revenge On 29 July 1946, the Muslim League leader, Mohammad Ali Jinnah gave the call to direct action to Muslims to protest the alleged anti-minority attitude of Nehru. 0n 16 August 1946, communal massacres, initiated by hotheads despatched by the Muslim League chief minister of Bengal, Hussain Shaheed Suhrawardy, took place in Calcutta, which left thousands of people, mostly Hindus, dead and homeless. The Hindus retaliated with great ferocity. More Muslims died in the counter-attack. At that critical juncture Mahatma Gandhi came to Calcutta and personally took part in preaching cessation of violence and revenge. His efforts bore fruit and peace returned to that bleeding city. The Great Calcutta Killings of August 1946 in which both Hindus and Muslims lost lives in the thousands transformed forever the nature of the Congress-Muslim League standoff from a constitutional imbroglio to a violent

communal conflagration that culminated in the subcontinent bleeding, burning and partitioned in mid-August 1947. A Gandhi-Jinnah peace appeal was issued as early as mid April 1947, but it did little to change the situation on the ground. Although Delhi was not administratively a part of Punjab its Muslims had to bear the fallout of the Punjab bloodbath. The late Dr Ishtiaq Hussain Qureshi, who retired as Vice-Chancellor of Karachi University and was a very keen supporter of the demand for Pakistan has written about what happened to thousands of desperate Muslims in Delhi who were surrounded by armed Hindus and Sikhs wanting to kill and loot them. The Muslims pleaded to Gandhi to save them. He promised to do his best. Dr Qureshi notes that most of the Muslims survived and concluded that Gandhiji must have kept his word. The Assassination of Gandhi The partition of India shattered Gandhi’s ideal of Hindu-Muslim unity. But that did not deter him from continuing to hope that the relations between the two communities can become friendly once again. He even declared that he will spend one month in India and one in Pakistan. However, relations between the two states became even more hostile when both made claims to the princely State of Jammu and Kashmir. A war between the armies of the two countries broke out in Kashmir. Consequently India refused to pay to Pakistan a sum of Rs.550 million that was due to the latter as its share of the treasury of the former colonial government. On 13 January 1948, Mahatma Gandhi commenced his fast to persuade the Indian government to release the assets due to Pakistan. That was considered treason by the rightwing Hindus and on 30 January 1948, Nathuram Godse, a Maharashtrian Brahmin, shot him dead in Delhi. Not only in India did that assassination result in great outpouring of grief but also in Pakistan. In the famous first person account of the partition of India, Freedom at Midnight, Larry Collins and Dominique Lapierre observe: In Pakistan, millions of women shattered their baubles and trinkets in a traditional gesture of grief. In Lahore, now almost entirely Moslem, newspaper offices were swarmed with people clamouring for news (p. 512). India-Pakistan Relations It is not difficult to conclude that Gandhi correctly anticipated that partition would create lasting enmity between India and Pakistan and sow discord between Hindus and Muslims. The successor states of India and Pakistan became not only rivals but also enemies who have up until now fought three major wars – in 1948, 1965 and 1971 – and both acquired nuclear weapon capabilities in May 1998. Both fought a limited war at Kargil on the Kashmir front in May 1999. Some people suspected that it could have escalated into a nuclear confrontation with irreparable devastation caused to South Asia and its people. One can reasonably argue that the founding fathers of modern India tried to institutionalise the Gandhian vision of equal rights for all citizens and respect for all religions in the Indian constitution. Thus today more than 13 per cent of the Indian population of one billion consists of Muslims. In 1947 their percentage was slightly more than 11 per cent. But rightwing Hindus constantly intimidate the Indian Muslim minority blaming them for the partition of India. Periodically violent attacks on Muslims take place. In the case of Pakistan, privileging

Islam as the state religion has inevitably meant that non-Muslims felt they were second-class citizens. Most of the Hindus left for India after the partition from areas that became Pakistan. However, the Human Rights Commission of Pakistan has been reporting that the tiny Hindu minority in the Sindh province constantly faces the threats of forced conversions and from time to time it is subjected to violent attacks by the Muslims. The Wagah-Attari Border Nothing epitomises the India-Pakistan and by that token Hindu-Muslim estrangement more graphically than the daily flag lowering ceremony at the Wagah-Attari border between Amritsar and Lahore. Before partition some people used daily to catch the early train from either of these cities, do their job or business in the other, and return. The distance is some 45 kilometres between them. The soldiers symbolically seal the border every night by ramming the iron-gates with a fierce bang to indicate that an impassable barrier exists between the two countries and their peoples. The whole scene acquires an even more bizarre character because crowds on both sides who watch this awe-striking spectacle add zest to the ceremony by nervous clapping and making hostile gesticulations towards each other. A Change of Heart on the Way? In July 2001, President Pervez Musharraf visited India on the invitation of Prime Minister Atal Bihari Vajpayee to Agra to discuss peace. Musharraf had been the architect and mastermind behind the Kargil mini-war of May 1999. It had resulted in hundreds of deaths on both sides and generated considerable acrimony. Now, before going to Agra he paid the conventional visit to the Gandhi Samadhi in Delhi where in the visitorsâ&#x20AC;&#x2122; book he wrote that Mahatma Gandhiâ&#x20AC;&#x2122;s ideas on peace and unity of humankind were needed now even more than ever before. Invoking Gandhiâ&#x20AC;&#x2122;s ideas was undoubtedly an admission of the realisation that there was no military solution to the disputes between the two countries. Conclusion A revival of the Gandhian legacy on Hindu-Muslim relations is an imperative to save South Asia from the disaster of an armed confrontation between India and Pakistan that could involve the use of nuclear weapons. Such a war will render this region unfit for human habitation for centuries. But his message of peace and peaceful resistance to injustice is for all humanity and all societies can learn a lot from his idea of equal respect for all religions. Therefore, the Gandhian legacy on inter-communal relations deserves to be studied once again.

Mahatma Gandhi’s Influence on India’s Foreign Policy Rajiv Sikri 3 It is widely believed, not without reason, that it was Jawaharlal Nehru who shaped India’s foreign policy. After all, he was independent India’s Prime Minister and External Affairs Minister for the first 17 years. Among all the leaders of India who fought for India’s independence, he was the one who had genuine interest in, and considerable knowledge of, foreign affairs. What is often insufficiently appreciated is the influence of Mahatma Gandhi’s thinking and philosophy on India’s foreign policy. The essential elements of Gandhi’s philosophy were the concepts of non-violence, the importance of the moral dimension in the conduct of men as well as nations, and satyagraha or the struggle for truth, compassion and justice. All these principles continue to influence India’s foreign policy even today. India’s foreign policy has its roots in its freedom struggle that was largely shaped by Gandhi’s values. The defining characteristics of India’s foreign policy in the first few decades after India’s independence were unquestionably inspired by Gandhi. These were: •

non-alignment or the right to follow an independent foreign policy and to decide foreign policy issues on merit;

•

moral, diplomatic and economic support for the struggle against colonialism, racialism and apartheid;

•

non-violence and the quest for nuclear disarmament; and

•

India’s role as an international peacemaker.

India’s position on world issues was informed by a rare moral clarity and courage which won India many admirers, made India the leader of the developing countries and gave it an influence in world affairs out of proportion to its real economic and political strength. Outsiders’ perceptions of India were significantly shaped by Gandhi’s message. At a conceptual and intellectual level, India’s freedom struggle, at least in the two or three decades or so before 1947, was not just about gaining India’s freedom from British rule but part of a wider global anti-colonial movement. This internationalist aspect of India’s movement for independence emanated from Gandhi’s own defining experiences in South Africa. Just as Gandhi was deeply influenced by the blatant racism and widespread discrimination prevalent in South Africa, India’s independence provided the inspiration for many other countries in Asia and Africa suffering under colonial rule. It is, therefore, hardly surprising that, from the very beginning, India’s foreign policy concerned itself, not only with India’s narrow national interests, but also how it would impact other similarly placed Asian and African countries. India’s economic and technical assistance 3

Mr Rajiv Sikri is a Consultant at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was formerly Secretary (East) at the Ministry of External Affairs, India. He can be contacted at rajivsikri@gmail.com.

to developing countries, now widely known as the Indian Technical And Economic Cooperation programme, was premised both on principles and the reality that the political independence of the newly-independent countries would be unsustainable without a matching economic autonomy. It is perhaps inadequately recognised even today that the internationalist perspective in India’s foreign policy did serve India’s broader national interest. One of the key concerns of India was its survival as a united, sovereign and independent state. The odds were against India. Even many years after India became independent, skepticism was widespread. Would India have survived if it alone had been decolonised? There can be little doubt that the spread of the movement against colonialism and racism, leading to the emergence of large numbers of independent countries, buttressed India’s own independence. At the same time, there are many valid criticisms of India’s foreign policy in the first few decades after India’s independence. It was considered as naive and idealistic, divorced from ground realities. Among the mistakes that India made in its Gandhi-inspired and Nehrudirected foreign policy were the referral of the Kashmir issue to the United Nations in 1948, the ‘bhai-bhai’ (brother-brother) policy towards China and the missed opportunity in Nepal to fully integrate it into the Indian security system. Today, as India has become stronger and richer, it has become a ‘wannabe’ developed country, whose interests are seen to lie more with the developed countries than with the developing countries. More attention is understandably given to the G-8 and the P-5 than to the G-77 and the G-15. The Non-Aligned Movement has survived but is aimlessly adrift. Yet India should not forget its old friends. For it is from among the developing countries that India will get both the resources to fuel India’s economic growth and the political support to fulfill its aspirations to become a permanent member of the United Nations Security Council. India’s unique strength lies in its reputation as the leader of the developing countries and its potential of, once again, assuming such a leadership role. The pride and self-respect that Gandhi engendered among the people of India gave India the courage to stand up and follow an independent foreign policy rather than submit to pressures to join one of the Cold War blocs. This has stood India well. It has consistently remained a defining feature of India’s foreign policy for over six decades. The ongoing political and public controversy in India over the India-United States nuclear deal is essentially about whether India would continue to follow an independent foreign policy or whether it would be co-opted as a junior partner of the United States in the latter’s wider strategic plans. So deeprooted and widespread is the conviction that an independent foreign policy is the right policy for India to follow that no government in India can openly call for any change in approach. That is presumably why the Indian government continues to emphasise that this is a deal ostensibly only about civilian nuclear energy. The dilemma for the government is that there is no easy way to forge a strategic relationship with the United States without abandoning India’s traditional principles of foreign policy that have been inspired by Gandhi. It is harder to justify morality in foreign policy, particularly as many critics have argued that India itself has used strong-arm tactics in its neighbourhood. The realist or pragmatic school of foreign policy that holds sway in India – and the world – today scoffs at any suggestion that morality has a role in world affairs. They believe that power flows out of the barrel of a gun, and that, non-violence, as one critic has eloquently put it, is “a form of masochistic surrender”. While there is substance to this criticism, morality cannot be wished away. It

continues to guide individual human behaviour. It remains a core principle of all religions. In politics and international affairs, it is a widely employed strategic psychological tool. The practitioners of realpolitik in all countries, including India, invariably rely on moral arguments – be it to persuade, to convince or to justify. The veneer of morality is what gives legitimacy to arbitrariness. The virtual collapse of the movement for disarmament would seem to imply that the moral argument for pursuing nuclear disarmament has lost out. The Non-Proliferation Treaty has been indefinitely extended, and the Comprehensive Nuclear-Test-Ban Treaty has not come into force. India’s former Prime Minister Rajiv Gandhi’s ambitious Plan for a NuclearWeapons Free World of 1988 has been given a quiet burial. A decade later, India went openly nuclear in 1998. India is now keener to get recognition as a nuclear-weapons power and have the right to conduct future tests than be a leader of the movement for disarmament. But the road ahead is neither simple nor clear. Nuclear weapons have not made India safer. They cannot counter either the spread of internal insurgencies or cross-border terrorism. Nor is the world more secure. The Soviet Union collapsed despite its formidable arsenal of nuclear weapons. The largest nuclear power, the United States, feels insecure because North Korea has nuclear weapons and Iran is suspected of developing them. It is noteworthy that in January 2007, four United States veteran policy makers, Henry Kissinger, Sam Nunn, William Perry, and George Schultz, some of whom were nuclear hawks in the past, stated that, “Reassertion of the vision of a world free of nuclear weapons would be, and would be perceived as, a bold initiative consistent with America’s moral heritage. The effort could have a profoundly positive impact on the security of future generations. Without the bold vision, the actions will not be perceived as fair or urgent. Without the actions, the vision will not be perceived as realistic or possible. We endorse the goal of a world free of nuclear weapons and working energetically on the actions required to achieve that goal.” Some time last year, the International Atomic Energy Agency Director-General stated that there were “no legitimate nuclear weapon powers”. Perhaps there is reason for hope, howsoever slim it may be. Moving from generalities to specific examples, one can look at two areas of India’s foreign policy where Gandhi’s policies and approach have had a lasting impact. The first is Pakistan. Gandhi, we know, was opposed to the partition of India. Critics have argued that he did not oppose it firmly enough, say by threatening a fast unto death as he did on other issues. Perhaps he realised the futility of it. As early as April 1940 he said, “I know of no non-violent method of compelling the obedience of Rs 8 crores (eighty million) of Muslims to the will of the rest of India, however powerful a majority the rest may represent. The Muslims must have the same right of self-determination that the rest of India has. We are at present a joint family. Any member may claim a division.” But he insisted that Pakistan be treated fairly. Whereas many were arguing that after Pakistan’s invasion of Kashmir, India should hold on to the Rs 55 crores (Rs 550 million) that India owed Pakistan, Gandhi went on a fast unto death to press his point. Ultimately the government relented. Such an attitude, seen again at the Simla Conference in 1972, has led Pakistan’s rulers to conclude that India lacks ‘a killer instinct’ and that India is simply a flabby giant. This erroneous mindset has led to many avoidable conflicts and tragedies on the sub-continent. Gandhian morality does not seem to have served the interests of the people of the region.

Fortunately, of late, there is a growing sentiment among the people of the sub-continent that the partition of undivided India has hurt all – India, Pakistan and Bangladesh. There is recognition that the time has come to set aside differences and move towards mutually beneficial cooperation. Progress is slow, but encouraging. India’s relations with Pakistan have never been better. India and Pakistan are seriously talking about building a pipeline to transport Iranian gas across Pakistan to India, something that was unthinkable a few years ago. No longer are cricket matches between India and Pakistan regarded as surrogate military battles. India is more relaxed and conscious of the need to be unilaterally generous to its neighbours. This does not mean that the sub-continent will overcome its divisions and be reunited. Perhaps it never will. But sometimes dramatic developments do occur. Gandhi’s speech at his prayer meeting on 4 January 1948 may turn out to be prophetic. He said: “Mistakes were made on both sides. Of this, I have no doubt. But this does not mean that we should persist in those mistakes. For in the end we shall only destroy ourselves in a war and the whole of the sub-continent will pass into the hands of some third power. That will be the worst imaginable fate for us. I shudder to think of it.” That is something to ponder over. The second area where Gandhi’s thinking had an enduring impact on India’s foreign policy is Palestine. Gandhi’s editorial in the Harijan of 11 November 1938 was a major policy statement that guides India’s policy on Palestine to this day. The rights of the Palestinian people is a very sensitive political question in India and is one of the few specific foreign policy issues that figures in the Common Minimum Programme of the current ruling coalition, the United Progressive Alliance. Despite his sympathy for the Jews who had been subjected to discrimination and persecution for centuries, Gandhi was clear about the rights of the Palestinians. “My sympathy,” he said, “does not blind me to the requirements of justice. The cry for the national home for the Jews does not make much appeal to me… Why should they not, like other peoples of the earth, make that country their home where they are born and where they earn their livelihood? Palestine belongs to the Arabs in the same sense that England belongs to the English or France to the French. It is wrong and inhuman to impose the Jews on the Arabs… Surely it would be a crime against humanity to reduce the proud Arabs so that Palestine can be restored to the Jews partly or wholly as their national home.” Gandhi’s statement constitutes the nub of the problem that has defied solution for six decades. It is not merely a matter of deep global concern, but of real danger, that the Palestine problem has become more intractable than ever. Desperation among the Palestinians has increased, as has the insecurity of the Israelis. It is the principal issue that unites Muslims around the world and that led to the formation of the Organization of Islamic Conference. It is an issue which has spawned terrorism and al-Qaeda, created avoidable suspicion of Islam in the West and threatens to re-kindle the medieval conflicts between Islam and Christianity. The inability of the world to resolve the Palestine question is an important factor behind the ongoing conflicts and confrontations in Afghanistan, Iraq or Iran. Will the world ever have the courage to recognise this? If there is one figure that the rest of the world associates with India, it is Gandhi. He may not have won a Nobel Peace Prize, but he has probably done more for the cause of peace and the image of India abroad than any other Indian. The eminent biographer of Mahatma Gandhi, B. R. Nanda, has rightly stated, “Mahatma Gandhi instigated, if he did not initiate, three major revolutions of our time, the revolution against racialism, the revolution against colonialism, and the revolution against violence. He lived long enough to see his success of his efforts in the first two revolutions....” Has the escalating level of violence in the world, which has brought suffering and misery to millions, finally awakened the world’s conscience to the need

for a revolution against violence? The best tribute to Gandhiâ&#x20AC;&#x2122;s contemporary relevance, and his lasting influence not just on Indiaâ&#x20AC;&#x2122;s foreign policy but on the world as a whole, is that today is being celebrated by the United Nations as the International Day of Non-Violence. Gandhi, it seems, was right, after all.

Gandhian Economic Thought and Its Influence on Economic Policymaking in India D. M. Nachane 4 “Gandhi enunciated his economic position in the language of the people, rather than that of academic economists. And so the economists never noticed that he was, in fact, a very great economist in his own right…” ….Schumacher (1978) Introduction Any attempt to understand Gandhiji’s economic ideas must be contextualised in the economic circumstances prevailing in the closing decades of the 19th century and the early decades of the 20th century. Briefly, these circumstances may be viewed as composing the following interrelated features (i)

A highly neglected agriculture sector subject to frequent famines and droughts, resulting in an impoverished rural population.

(ii)

Decline of traditional textiles and other handicrafts in India. This decline was directly attributable to the series of measures passed by the British parliament in the 18th century to discourage the use of Indian textiles in Britain. These measures enabled the British textile industry to develop behind a tariff wall, unhindered by competition from Indian exports. By the middle of the 19th century, the technological superiority of British textiles enabled them to penetrate the Indian home market, seriously threatening the very existence of the handloom cottage industry in India. The decline in textiles triggered off a decline in several other cottage industries (oil crushing, for example). Unfortunately, this decline was not offset by compensation gains in agricultural productivity as had happened in Sri Lanka and Malaysia, for example, with the emergence of plantations. The displaced artisans thus simply swelled the ranks of agricultural wage labourers with an associated intensification of rural poverty. The starkness of this process explains both the emergence of Gandhiji’s ideas on Swadeshi as also the strong appeal this had for the general masses.

(iii)

Colonial neglect of infrastructure.

(iv)

Active discouragement to the emergence of Indian entrepreneurship.

Gandhiji’s views on economics have usually been termed as utopian by many (including Indian) socio-economic thinkers, and this characterisation has tended to evoke two diametrically opposite reactions among policymakers and the general population – the majority respect his views in so far as they are a reflection of his deep spirituality but tend to be extremely skeptical about their applicability to the real world; a small minority, however, see in this utopian view the only alternative available to a poor country to correct an

Professor Dilip M. Nachane is Director at the Indira Gandhi Institute of Development Research, Mumbai, India. He was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from June to October 2007. He can be reached at nachane@igidr.ac.in.

economic situation distorted by a history of colonial exploitation. This paper tries to explore the substantial middle ground between these two extreme viewpoints. Intellectual Influences There are several intellectual influences on Gandhiji, and below I present the ones I believe to be the most important ones in shaping his economic ideas: i)

First and foremost there is in Gandhiji, a “pastoral romanticism” a la Rousseau and David Thoreau. This led him to a belief in the intrinsic goodness of all men, including one’s opponents. 5 The “non violent civil disobedience” movement that Gandhiji initiated in the 1920s was strongly influenced by Thoreau’s ideas and appealed to the “sense of fairness” of the British rulers.

ii)

Secondly, Gandhiji was very much enamoured by Ruskin’s heterodox doctrine that the wealth of a nation consisted, not in its production and consumption of goods, but in its people.

iii)

There was in Gandhiji a remarkable belief in the efficiency of truth and non violence, which most likely stemmed from his familiarity with the (later) writings of Count Leo Tolstoy, as well as his detailed knowledge of Hindu and Christian theology.

iv)

One does detect in Gandhiji’s writings elements drawn from the labour theory of value of Adam Smith and David Ricardo, which led him to emphasise labour as the primary source of economic value.

Gandhiji was also to some extent influenced by the Marxian doctrine of egalitarianism, and its emphasis on the “exploitation of labour”. However the Marxist idea of a violent revolution was an anathema to him. He recognised the importance of class conflict, but sought to reconcile it within the framework of his new concept of Trusteeship, wherein corporations and industrial houses held profits in “trusts” for the social welfare of their workers and of the society in general.

It is hardly surprising that, with such a distinguished intellectual lineage, 6 Gandhiji’s economics transcended the purely technical aspects of traditional value free economics, and became instead an ethical charter of organising the productive resources of an economy. In an article in Young India (13 October 1921), for example, he confessed that he did not draw “a sharp line or make any distinction between economics and ethics”. He reiterated this position even more strongly in a later article, “True economics never militates against the highest ethical standards just as all true ethics, to be worth its name, must at the same time be also good economics….True economics stands for social justice; it promotes the good of all equally, including the weakest and is indispensable for decent life”. (Harijan 9 October

Gandhiji and his followers never regarded the British as “enemies”, only as opponents to their cause. This explains why the Indian Independence struggle involved far less bloodshed than other similar struggles, and also the friendly relations of post-Independent India with Great Britain and other Western powers. The phrase is not intended to suggest that in any sense Gandhiji was a follower or disciple of any of the doctrines mentioned above. Rather various components of these doctrines were selectively integrated in his overall philosophy, leading to a consistent system which was distinctly original, and in which all these doctrines co-existed in an almost felicitous harmony.

1937). For the modern reader, it is important to bear this orientation of Gandhian economics in mind, in order to fully appreciate the import of his various theories. We now turn to a discussion of some of the essential features of Gandhian economics. The Concept of Swadeshi Gandhiji’s himself defined Swadeshi as “the spirit in us which restricts us to the use and service of our immediate surroundings to the exclusion of the more remote” (Unnithan 1956 p. 54). The Swadeshi movement that Gandhiji launched in the 1930s was the direct outcome of the visible decline of the handicrafts industry that he witnessed around him, and which he rightly blamed as the root cause of Indian rural poverty. The movement sought to buttress the declining demand for ancient crafts by boycott of European goods and thus, in effect, was a programme of the revival of village industries. The Swadeshi movement achieved its most explicit manifestation in the Khadi (home spun cloth) struggle, which drawing inspiration from Gandhiji’s Ahimsa (non-violence) was elevated into a moral principle. Thus, Khadi at once became a propaganda weapon in the liberation movement with a strong moral appeal to Indian intellectuals, western sympathisers as well as the rural masses. Writing retrospectively, Zealey (1958) notes “At the time of its inception, the constructive programme on Khadi was indeed a stroke of genius… nationally, it provided a rallying symbol which the humblest villager could easily understand. Politically, it was a powerful weapon providing a means whereby a sense of united action could be expressed in concrete form. Economically it was whereby the formidable problem of rural under development could be turned to productive use.” Thus Gandhiji’s central economic concern is the protection of village crafts against further encroachment from foreign industry and the Swadeshi concept which embodied this concern becomes the progenitor of his entire thinking on economic issues. It would possibly be unfair to attribute to Gandhiji, a position of complete denial of international trade and exchange. His intellectual stance seems to be closer to the modern theory of “trade among unequal partners” propounded by economists such as Pomfret (1988), which would argue for a less discriminatory trade regime against the Third World. 7 This is quite clear from the following extract from one of his articles, wherein he distinguishes between isolated independence and voluntary interdependence. “The better mind of the world desires today not absolutely independent states warring against one another, but a federation of friendly interdependent states. The consummation of that event may not be far off. …I desire the ability to be totally independent without asserting the independence. Any scheme that I would frame, while Britain declares her goal about India to be complete equality within the Empire, would be that of alliance and not of independence without alliance” (Young India, 26 December 1924, p.425). Views on Industrialisation and Technology Opposition to industrialisation is a very prominent feature of Gandhian economics, and here the influence of both Ruskin and Tolstoy (who themselves were deeply moved by some of the social displacement and labour exploitation excesses of the Industrial Revolution in Europe) is very discernible. But there was also a pastoral romanticism in this opposition, which gets reflected in an exclusive emphasis on the village community as an idyllic form of 7

Schumacher, for example, notes that the affluence of a small part of the world was pushing the rest of the world into the three concurrent crises of resources, ecology and alienation.

social existence to be preserved in its pristine form against all change. This led Gandhiji’s to oppose all forms of modern industrialisation (whether foreign or domestic). This opposition to domestic industrialisation (on modern lines) was probably based on his empirical observation that even though considerable development of modern industry had occurred in British India over the fifty years 1881-1931, there was no appreciable increase in gainfully employed workers over this period – whatever increase in employment had occurred in the organised sector was counterbalanced by the fall in employment in the traditional sector. Gandhiji’s antagonism to industrialisation (in the modern sense) finds expression in several of his writings. We reproduce two typical comments. The first is from Young India (1931) wherein he writes – “Industrialism is I am afraid, going to be a curse for mankind.” The second is from Harijan (1936), “Industrialisation on a mass scale will necessarily lead to passive or active exploitation of the villagers as the problems of competition and marketing come in.” Gandhiji’s model of development was one in which every village produced all its necessities and a certain percentage in addition for the requirement of cities. But he is no obscurantist, and he recognises that a moderate amount of industrialisation may be necessary for a nation’s survival. He therefore concedes the existence of heavy industry, only cautioning that “Heavy industries will needs be centralised and nationalised. But they will occupy the least part of the vast national activity which will be mainly in the villages.” (M. K. Gandhi (1941)). This opposition to industrialisation sets Gandhiji apart from other nationalists of the period (as well as his mentors such as Mahadeo Govind Ranade and Gopal Krishna Gokhale) who saw large scale industrialisation as the only way out of mass poverty, and one of whose major criticisms against British Rule was the that the state was not proactive in promoting development. Gandhiji’s skepticism related to technology was a concomitant of his deep rooted antagonism to industrialisation. Firstly, there is in his writings a Luddite kind of view of technology as a factor inimical to employment. But his antagonism went considerably further than the usual “technology displacing labour” argument. To Gandhiji, technology was to be feared because it threatened the very basis of a dignified human existence. “In modern terms, it is beneath human dignity to lose one’s individuality and become a mere cog in the machine. I want every individual to become a full blooded member of the society. The villages must become self sufficient. I see no other solution if one has to work in terms of ahimsa” (Harijian 1939, p. 439). This view led Gandhiji to oppose technology not only in modern industry but also in village manufacturing enterprises. He insisted that it was the governments duty “to encourage the existing industries and to revive where it is possible and desirable the dying or dead industries of villagers according to the village methods, that is, the villagers working in their pawn cottages as they have done from times immemorial.” (Harijian 16 Nov. 1934, p. 33). Here again, one must guard against an extreme interpretation of Gandhiji’s position. His main aversion was to the modern Western technology, which was essentially “labour replacing” and often “labour degrading”. But he was not opposed to technology per se. As a matter of fact, he set up two criteria for the appropriateness of technology – first that it should not be labour displacing (cf. “I have no objection if all things required by my country could be produced with the labour of 30,000 instead of that of 30,000,000. But those 30,000,000 must not be rendered idle or unemployed” quoted in the chapter by M. R. Masani in D. G. Tendulkar et al. (1945) p. 88-89) and second, that it should increase the general well being (cf. “I welcome the machine that lightens the burden of millions of men living in cottages and

reduces man’s labour” Ibid., p. 88). In a catch-phrase of the 1980s, he was really making out a case for “appropriate technology”. Dignity of Labour There is another important reason why Gandhiji assigned pride of place to the village crafts in his schemata for the economic regeneration of India – the influence on him of writers like Ruskin and Tolstoy who glorified the dignity of manual labour and extolled the moral superiority of self employment and independent work to wage employment. Writing in Young India, (2nd May, 1929) he deplored the concept of wage employment and said he was prepared to tolerate it only in those villages “where people are in perpetual want because they do not get enough from agriculture and because they have leisure”. Gandhiji’s apathy to wage employment was a natural reflection of his antagonism to the modern factory system of production. However he was not entirely opposed to production for the market as his advocacy of cooperation in marketing and raw materials purchase would serve to indicate. Evils of Urbanisation Gandhiji’s stand on urbanisation was a logical corollary of his views on industrialisation. He saw in the phenomenon an instrument of devastation of the idyllic rural way of life. To a large extent, Gandhiji’s analysis of this phenomenon was typically perspicacious. The cities which emerged under British rule in India conferred virtually no benefit on the village economy of India. This is in sharp contrast to the situation in England and elsewhere in Europe (especially Holland) where the prosperity of the town had direct spillover effects on the village community (see e.g. Adam Smith(1776)). In the colonies on the contrary, what emerged was typically a dual economy (Lewis 1954) with a modern sector flourishing under the colonial ruler’s patronage in the cities and a traditional rural sector largely isolated from any pervasive modernising effect of the urban sector. Indeed Amlan Datta (1989) (in a delineation of the economic conditions prevailing in British India) goes even further and says that the relationship was not even one of passive non interaction but active exploitation “the actual situation is in some respects, even worse. The city attracts to itself talent, capital and other resources from the rest of the country. By ruining old handicrafts, it upsets the natural balance between agriculture and village industry. Rural society is robbed of its potentially more progressive leaders, its economic life is disorganised and social cohesion is steadily undermined; the city afflicts the country with a peculiar sickness”. Thus, whereas the Marxists theorised about the proletariat class being exploited by the capitalists, Gandhiji saw the city as a whole in the role of exploiter of the villages. In the city capitalists, liberal professionals and administrators as well as the industrial working class live at a higher standard of living than that of the rural masses – a standard based on the exploitation of villages. This perception enable us to throw light on a somewhat perplexing aspect of Gandhiji’s philosophy viz. the scant sympathy he had for the urban based crafts and for the millions subsisting on a pittance in urban trade and services – all such people he extorted to return to their native villages. Limitation of Wants It is only fair to say that Gandhiji’s concept of economic development was not so much concerned with the raising of living standards as with the spiritual development of man. He was interested in economic development to the extent that it lifted the masses out of poverty for in his view “No one has ever suggested that grinding poverty can lead to anything else

than moral degradation” (Mahatma Gandhi: His Life, Writings and Speeches (Madras 1921, p. 350)). In this sense, his views are similar to Amartya Sen’s views on “empowerment”, enunciated seventy years later. But he certainly did not envisage a society in which industrialisation would make available a plethora of consumer goods for the masses and foster consumerism. A consumerism society is the very anthesis of everything that he stood for. His reading of Hindu scriptures as well as other religious and secular works had instilled in him deep reverence for frugality and asceticism. His central motto may be summed up as “Civilisation, in the real sense of the term, consists not in multiplication but in deliberate and voluntary restriction of wants.” This led him to iterate time and again that there was no salvation for India “unless the richly bedecked stripped themselves of their jewellery and held it in trust for the starving millions”. Gandhiji’s views may seem somewhat similar to the Protestant ethics of thrift but with this crucial difference that with the latter thrift was a means of capital accumulation for higher consumption levels in the future, whereas for Gandhiji frugality was a permanent desired state, not simply a postponement of present for higher consumption. Thus, Gandhian precepts come directly into conflict with the modern capitalist as well as Marxian doctrines, both of which accord a critical role to capital accumulation in the growth process. Gandhiji deplored the profit motive for accumulation and even though he was opposed to the forcible expropriation of the means of production from capitalists, he felt that they should voluntarily renounce their assets to the state or continue to hold them only as “trustees” of society. The concept of “trusteeship” in Gandhiji’s economic writings has been extensively debated and we would not like to go into the entire debate here. What Gandhiji really meant by the concept was that capital would be owned, operated and managed for the benefit of society and not for the capitalist’ private gain. If capital is viewed in these terms, the usual conflicts between capitalists and workers over the splitting of their joint produce would cease to exist, since each would willingly concede the rights of the other to a fair return. While Gandhiji certainly agreed with the socialist principle of universal brotherhood and income equality, the very concept of a violent class struggle was an anathema to his mode of thinking. He was equally critical of laissez-faire enthusiasts who in the tradition of Adam Smith believed in the ultimate good of society resulting from the selfish and relentless pursuit of individual economic gain. Trusteeship was a uniquely Gandhian golden mean between the ruthless acquisitive philosophy of capitalism and the destructive violent philosophy of communism. Gandhian Influences on India’s Economic Policymaking Having taken a broad review of the important aspects of Gandhian economic thought, we will now try to assess the impact that his philosophy seems to have had on India’s planned industrialisation strategy in the post-independence era. In this context, it may be useful to distinguish three distinct phases of the Indian economy, guided by three differing economic philosophies. The first period is broadly the Nehruvian period (1947-1965), which encompassed the first three Five Year Plans, and in which the prevailing economic philosophy is usually viewed as a highly centralised system of planning but incorporating some scope for markets. The next phase that we distinguish is (1966-1984) which was the period characterised by a highly bureaucratised system of planning (the so-called License Raj), with considerable intervention in market forces and an inward looking industrialisation

policy. The last phase (1985 onwards) is the period of opening up of the economy, rapid dismantling of controls and a general movement in the direction of markets. It is also interesting to juxtapose the actual changes in the economic policy framework with the evolution of Gandhian economics in the post- Gandhi phase. As Myrdal (1968, Vol.2, p. 1215) has pointed out, two distinct strands of Gandhian economics seem to have emerged – a rigid version maintaining Gandhiji’s original opposition to modern forms of industry and a more moderate version. The rigid version is best exemplified in the writings of Kumarappa (1984) who characterised a money-based capitalist economy as a “parasitic” economy and wanted the principle of “service (to others)” as the basis for a non-violent economy. The moderate view by contrast was not opposed to industrialisation as long as it did not interfere adversely with the village economy (see Narayan (1970), Pani (2002) etc.). We now proceed to analyse the influence of Gandhian ideas on the actual economic policy followed in postIndependent India. Phase 1 (1947-1965): As is well known, the actual policy which emerged in the two decades post-independence was one based on aggressive Soviet-style modernisation with a heavyindustry tilt. This strategy was adopted largely under the influence of Nehruvian ideology with its emphasis on science and technology. Nehru’s economic ideas had always been in sharp conflict with those of Gandhiji, and as early as 1945, we find him writing to Gandhiji “it seems to me inevitable that modern means of transport as well as many other modern developments must continue…..if that is so inevitable a measure of heavy industry exists. How far that will fit in with a purely village society? The question of independence and protection from foreign aggression, both political and economic, has also to be considered in this context. I do not think it possible for India to be really independent, unless she is a technically advanced country”. (Tendulkar 1962, Vol 7, pp. 15-16). Nehru sought to assuage Gandhiji’s reservations about industrialisation by emphasising that many of its alleged evils (such as concentration of economic power and conspicuous consumption of the wealthy) would be kept in check by the principle of democratic socialism, which he (Nehru) proposed as the central guiding political philosophy in Independent India. Gandhiji however remained far from being assured. To a visiting American journalist, for example, he remarked as follows “Nehru wants industrialisation because he thinks that if it is socialised, it would be free from the evils of capitalism. My own view is that the evils are inherent in industrialism and no amount of socialisation can eradicate them” (Tendulkar (1954), Vol. 5, p.336). But even though Gandhiji was opposed to a highly centralised system of economic planning led by heavy industry, he was never an opponent of the capitalist order. He, as a matter of fact, favoured capitalist ownership and operations 8 but not an exclusive concern with profits. But, however, different the outlooks of Gandhiji and Nehru on the issue of industrialisation, the latter had too much respect for his mentor’s views to ignore them altogether. An acceptance of the basic tenets of the moderate Gandhian strand of thought ( see above) seemed to provide an ideal compromise solution – a rapid industrialisation programme but one which protected the village handicrafts, especially khadi. This compromise also had an economic rationale – modernisation with its emphasis on capital intensive heavy industry just could not provide the increases in employment needed to absorb the rapidly growing labour force; the role of a reservoir for the unemployed could be played by the village industries. 8

This was of course strictly confined to domestic entrepreneurship. Gandhiji was opposed to foreign capital in general and by implication we can safely infer that he would have opposed the large scale entry of transnational corporations if these had existed during his days.

This rationale is succinctly expresses by Mahalanobis, the architect of India’s Second Plan as follows: “in view of the meagerness of capital resources there is no possibility in the short run for creating much employment through the factory industries. Now consider the household or cottage industries. They require very little capital. About six or seven hundred rupees would get an artisan family started. With any given investment, employment possibilities would be ten or fifteen or even twenty times greater in comparison with corresponding factory industries (Mahalanobis (1955)). Thus, by paying a measure of respect to Gandhian concepts, the Indian planning process simultaneously became politically palatable to a wide spectrum of influential opinion as well as to the masses at large. The Gandhian influence is most evident in the government’s attitude to small scale industry. In this connection, it is interesting to observe that Gandhiji’s original concerns for the village crafts were conveniently broadened by Indian planners to include not only urban crafts but also small scale unit as a whole. The official definition of small scale industry (SSI) used in India has undergone several successive changes. In 1973-74, the First SSI census for India defined a small scale unit as a unit with investment in plant and machinery less that Rs.7.5 lakhs. This limit was subsequently raised to Rs.35 lakhs in the 1987-88 Second SSI census. The most recent (Third) SSI Census has introduced a threefold distinction viz. between micro enterprises, small enterprises and medium enterprises. Micro enterprises are those with investment in plant & machinery below Rs.25 lakhs in the manufacturing sector (and below Rs.10 lakhs in the service sector); the corresponding figures for small enterprises is between Rs.25 lakhs and Rs.5 crores for manufacturing (between Rs.10 lakhs and Rs.2 crores for service enterprises) and that for medium enterprises between Rs.5 crores and Rs.10 crores (manufacturing) and between Rs.2 crores and Rs.5 crores (services). The small scale sector as a whole was the beneficiary of a number of protective measures over the five decades since Independence – it was insulated form large scale industry competition by import restriction, by the prevailing licensing requirements for capacity expansion of large scale units under the MRTP Act as well as by reservation of certain lines of production (about 1,400 items of production were reserved for exclusive production by the small scale sector). Additionally several subsidies and concessions were granted to small scale industry and as a result this sector not only survived but even managed to flourish, accounting for about 40 percent of total manufacturing output today. There were other features of the Gandhian system which found expression in the economic policies of this period. The Gandhian emphasis on austerity was reflected in the import restrictions on several items of luxury consumption, the curbs on production of goods in the so-called U-sector (upper sector) and high marginal rates of personal income taxation. Heavy corporate taxation was also partly an operationalisation of Gandhiji’s trusteeship concept. Phase 2 (1966-1984): Except for a brief interregnum (1977-80), this period was marked by a highly centralised Congress rule under the charismatic (if controversial) Indira Gandhi. Following her split with the so-called Syndicate in 1969, she tried to create a party apparatus based on personal loyalty to replace the elaborate and decentralised party structure that prevailed in the Nehru era (and which was taken over by the Syndicate). In a predominantly poor country with a large agricultural base, such a strategy (of cultivating personal loyalty) had to be based on the creation of vote banks among the poor (especially the rural poor), and sources of patronage among the industrial elites (for the mobilisation of electoral funds) (see Bardhan (1984), Chibber (1999), Hankla (2006) etc.). Thus, largely driven by political compulsions, Indira Gandhi nevertheless, adopted espoused three of Gandhiji’s cherished

ideals viz. poverty alleviation, redistribution and Swadeshi. In all fairness, it must be emphasised that she did make sincere efforts to fulfill these objectives. Among her many initiatives, the following five deserve special mention: (i)

Nationalisation of banks in 1969, with the objective of improving rural credit delivery and making a dent on rural poverty.

(ii)

The passage of the MRTP (Monopoly & Restrictive Trade Practices) Act in 1969, with the aim of controlling the power of big business.

(iii)

High rates of income taxation with the marginal rates of income tax well above 70 percent for the upper income brackets, and a peak rate of 97.75 percent.

(iv)

A strengthening of the import substitution strategy (initiated in the Nehru era) following the Balance of Payments crisis of 1973-74.

(v)

Special centrally sponsored schemes to alleviate rural poverty such as the Garibi Hatao Programme (or Poverty Removal Programme) launched in early 1970s and reinforced in 1975 via the 20 Points Programme.

As mentioned above, there was an interregnum from 1977-80, when the country was ruled by a coalition government. This coalition government included several ministers with considerable affinity to Gandhiji’s ideals. This was reflected in the launching of the IRDP (Integrated Rural Development Programme) in 1979, a massive poverty reduction programme with emphasis on providing subsidised credit to rural households below the poverty line (including small and marginal farmers, agricultural labourers, artisans, scheduled castes, physically handicapped etc.). There was also a deliberate attempt to shift the emphasis in the Sixth Five Year Plan (1980-84) from growth to employment and redistribution, with greater attention being paid to the production of basic and light consumer goods. It is all too well known that very often many of the so-called “Gandhian” ideas were inspired by political considerations such as the widening of the electoral base. But even when the motives were less self-seeking, either the ideas did not go beyond the “slogan level” or their full implications were not properly worked out. As a result, the consequences were often quite unexpected and contrary to what Gandhiji himself would have envisaged. Disenchantment with Gandhian Economic Ideas: While critics of Gandhian economic ideas were not uncommon in the 1930s and 1940s 9 , his great moral and political stature kept the criticisms subdued. Anyway, in the pre-Independence era such discussion naturally had to be purely academic. In the Nehruvian era certain aspects of Gandhiji’s economic policies were viewed as being in conflict with the prevailing Nehru-Mahalanobis brand of democratic socialism, especially his views on industrialisation, technology, business houses and private property. But as we have mentioned above, this period was characterised more by a neglect of Gandhian ideas, (which were largely considered otiose) and by some concessions in the policy arena laced with a large measure of lip sympathy, rather than by any active criticism (see Natarajan (1962)) 10 . However there was an incipient literature from the 1960s onwards, which started criticising Nehruvian ideas from a more market oriented perspective. Ironically, 9 10

Two prominent critics of this period are Sankaran Nair (1922) and Babasaheb Ambedkar (1940). Two particularly virulent criticisms of this period come from Shah (1963) and Lohia (1963), the first from an orthodox Marxian perspective, the second from a somewhat heterodox socialist perspective.

the aspects of Nehruvian policies which came in for the sharpest criticism viz. small scale industry protection and import substitution were precisely those which could be traced to Gandhian influences. Firstly, the basic rationale that small scale industry deserves support on account of its lower capital intensity was challenged on empirical grounds by the studies of Dhar and Lydhall (1961) and Sandesara (1966). Both these studies cast grave doubts on the employment creating potential of small scale industry. For the market liberalisers of three decades later, these and other similar studies furnished an excellent illustration of well-intentioned Gandhian ideas producing results far from those expected. This seemed to be a common failing in other areas too. The Gandhian concept of Swadeshi was invoked to afford massive and politically motivated protection to Indian large and small industry from foreign competition under the import substitution regime from 1956-1991. Firstly, it must be clarified that Gandhijiâ&#x20AC;&#x2122;s concern was primarily protecting the weak native cottage industry from both domestic and foreign industrial competition. Secondly, while it was true that he often expressed a desire to see domestic entrepreneurship develop uninhibited by unfair competition from foreign industry in pre-Independent India, it is not clear whether he would have favoured the massive and complicated system of industrial tariffs, quotas and licenses which sprang up in the 1970s under the rubric of domestic self sufficiency. It is now generally agreed that the net result following from this latter policy has been an inefficient and high cost domestic industrial structure, not to mention the emergence of a black economy based on import duty evasion. As is well known, serious efforts to redress this situation were initiated after 1991 (see Srinivasan & Bhagwati (1999). Another market oriented criticism is directed towards the entire gamut of subsidies for the agriculture sector, which also has its moral justification in Gandhijiâ&#x20AC;&#x2122;s concern for the rural masses. According to this line of criticism, this sector has been under taxed, has reaped heavy subsidies on inputs like fertilizers, credit, seeds and electricity and has been supported by generous purchases prices. It is further alleged that most of the benefits have not gone to the intended beneficiaries but have been reaped by middlemen and large farmers. On the other hand, these subsidies have strained the public exchequer and generated steep inflationary pressure which have aggravated poverty amount the masses. Similar criticisms have also been voiced as regards the PDS (public distribution system) which was designed to insulate the urban poor from inflation in the commodities of basic consumption (the so-called wage goods). Phase 3 (1985-): The complete abandonment of Gandhian economic concepts really begins with the onset of structural reforms, which were initiated hesitatingly in the mid-1980s, put on firm track in the early 1990s and moved into high gear after 1997. To the newly emerging affluent class in India (who have been the major beneficiaries of the reforms process), Gandhian concepts like indigenous /appropriate technology, frugality, Swadeshi, etc. have an anachronistic and archaic ring to them. Perhaps the clean break with these ideas was inevitable, and judged solely by the accolades piled upon the architects of the process by a doting domestic and foreign media, the reforms have been a grand success. But it is being increasingly realised that behind the stratospheric growth rates there lies a reality far hasher than our policymakers are prepared to admit. Firstly, short term macroeconomic stability is being increasingly jeopardised by burgeoning capital inflows, a bubble like situation in the stockmarket and the appreciating exchange rate. Past experience has shown the futility of expecting a mere acceleration of economic reforms to alleviate these problems in any

significant manner. But the real threat is in the long run. Fundamental and endemic problems on the poverty, inequality, unemployment, corruption and natural resources fronts have not only remained unsolved in the reforms process, but have aggravated in an alarming fashion (see Nachane (2007)). The trickle down effect , on which the Indian reformers have placed so much faith in recent years, in particular, (if at all it exists), seem to be both protracted and slow. If bold and imaginative initiatives are not undertaken at this stage to address these issues, rising societal tensions and political compulsions will inexorably force a crisis unparalleled in our recent history. Conclusions Our discussion clearly indicates that modern India has traveled far in a direction quite the opposite of the one the Father of the Nation would have advocated. In the early years of planning (Phase 1 above), there were some efforts (by and large, sincere and well-intentioned) to incorporate some Gandhian elements within the policy framework. Later, (in Phase 2 above), realising their potential for mass mobilisation, attempts were made to apply some of the Gandhian ideas, more often than not, with ulterior motives to produce results quite contrary to Gandhiji’s original vision. By the 1990s, however, even the lip service to Gandhian values was abandoned. Through a succession of cleverly crafted steps by the various regimes holding power in the last two decades, the nation has now been taken to a stage where it is impossible to retrace our steps and the contemporary Indian milieu is one in which the Mahatma would have felt hopelessly lost. It is a milieu in which, in spite of all the official rhetoric about inclusive growth, 255 million Indians live in stark poverty, 17,000 farmers commit suicide and the rulers wave their flags at the 46 Indian billionaires who have made it to the exclusive Fortune 500 list. This is certainly not the Ram Rajya that he dreamed of for his beloved land of birth. As long as no serious efforts are undertaken to ameliorate poverty, reduce inequality and raise employment, the annual pilgrimage by our rulers to Rajghat on 2 October will remain an elaborate and empty ritual. References Ambedkar, B.R. (1943): “Ranade, Gandhi and Jinnah” in Collected Works of Babasaheb Ambedkar, Vol. 1, Thacker & Co. Bombay [originally lecture at Deccan Sabha, Poona, 18 January 1940] Datta, Amlan (1989). An introduction to India’s Economic Development since the Nineteenth Century, Sangam Books, Calcutta Dhar, P.N (1958): Small Scale Industry in Delhi, Asia Publishing House, Bombay Gandhi, M. K. (1952): Rebuilding Our Villages, Navijivan Publishing House, Ahmedabad Gandhi, M.K. (1958-1994) : “ Constructive Programme : Its Meaning and Place” in The Collected Works of Mahatma Gandhi, Vol. 75 , Ministry of Information & Broadcasting, Government of India [ originally published in 1941] Johnson, R.L. (2006): Gandhi’s Experiments with Truth: Essential Writings by and about Mahatma Gandhi, Lexington Books, Mass. USA

Kumarappa, J.C. (1984): Economy of Performances, Sarva Seva Sangh Prakashnan, Varanasi Lewis, W.A. (1954): “Economic Development with Unlimited Supplies of Labour “Manchester School, pp. 139-191. Lohia, Ram Manohar (1963): Marx, Gandhi and Socialism, Nava Hind Publications, Hyderabad Mahalanobis, P.C. (1955): “The Approach of Operational Research to Planning in India” Sankhya, Vol 14 (4). Muzumdar, H.T. (1952): Mahatma Gandhi: Peaceful Revolutionary; Charles Scribner’s & Sons, New York Myrdal Gunnar (1968): Asian Drama: An Inquiry into the Poverty of Nations, 20th Century Fund, New York. Nachane, D.M. (2007): “Post-Reforms Indian Growth: Miracle or Euphoria?” in Singh, H. (ed.) South Asia in the Global Community: Towards Greater Collaboration and Cooperation, ISAS-NUS Publication, Singapore. Nair, Sankaran, C. (1995): Gandhi and Anarchy, Mittal Publications, Delhi [originally published 1922] Narayana, Sriman (1970): Gandhian Economics, Navjivan Publishing House, Bombay Natarajan, S. (ed.) (1962): A Century of Social Reform in India, Asia Publishing House, Bombay Pani, N. (2002): Inclusive Economics: Gandhian Method and Contemporary Policy, Sage Publications, New Delhi Pomfret, R. (1988): Unequal Trade: The Economics of Discriminatory International Trade Policies, Basil Blackwell, Oxford, UK Shah, C.G. (1963): Marxism, Gandhism and Stalinism. Popular Prakashan, Bombay Smith, Adam (1776): Wealth of Nations, (ed) E. Cannan, Methuen, London (1961). Sandesara, J.C. (1966): “Scale and Technology in Indian Industry” Oxford Bulletin of Economics and Statistics, vol. 28(3), pp.181-198. Schumacher, E.F. (1978): A Guide for the Perplexed, Harper Collins, New York Srinivasan, T.N. & Bhagwati, J. (1999): Outward Orientation and Development: Are Revisionists Right ?, Yale University Centre, Discussion Paper No. 806. Tendulkar, D.G. (1951-54): Mahatma: Life of Mohandas Karmachand Gandhi, (8 volumes) Published by Vithalbhai Jhaveri & D. G. Tendulkar, Bombay.

Unnithan, T.K.N. (1956): Gandhi and Free India: A Socio-Economic Study, J.B. Wolters, Groningen, Netherlands. Zealey, P. (1958), â&#x20AC;&#x153;Comments on Khadiâ&#x20AC;? Gandhi Marg, Vol 2 (40), pp. 295-300.

Mahatma Gandhi and the Legacy of Democratic Decentralisation in India Partha Nath Mukherji 11 Generations to come will scarce believe, that such a one as this ever in flesh and blood walked upon this earth. Albert Einstein Introduction Was Mahatma Gandhi a product of his milieu, and his relevance circumscribed by place and time? Was he an ordinary person who rose to extraordinary heights or a person extraordinary? These and similar questions invoke endless debate and discussion. It can be safely argued, however, that the same milieu of British colonialism, the two World Wars, of racism, of apartheid, produced many great personalities but only one Gandhi that the world recognised as unique personality. I would like to submit that the relevance of Gandhi is best assessed not just in terms of his contextual responses to the objective conditions of his time and place for bringing about social transformation – like non-violent non-cooperation (Satyagraha) the spinning wheel (charkha), self-reliance (swadeshi), the communitarian village republic (panchayati raj), ‘wantlessness’ (aparigraha), unto the last (antyodaya) and so on – but in terms of the conceptual and theoretical abstractions that lie embedded in these. If I were to single out some of the most significant abstractions of universal import which many in the world have come to recognise, these would be: •

The transformatory power of truth and non-violence in thought and deed (the nonviolent revolt by Buddhist monks for restoration of democracy in Myanmar; the nonviolent ouster of authoritarian regimes as in Iran and the Philippines; and other examples)

•

The concept and theory of participatory democracy embedded in his vision of Panchayati Raj. This is a counter to the elitist representative democracy in the western formulation.

•

The search for a non-exploitative technology, a cooperative mode of production and trusteeship that would make for an economic order commensurate with distributive and social justice.

•

Emancipatory power of women and the rejection of social inequalities.

•

Priority of preventive health care over prescriptive medication.

•

Humankind as an integral part of Nature, and not apart from Nature. A principle that is invoked by ecologists and environmentalists the world over.

Professor Partha Nath Mukherji holds the S. K. Dey Chair (Instituted by the Ford Foundation) at the Institute of Social Sciences, India. He can be reached at partha.mukherji@gmail.com.

•

The primacy of obligations over rights. Rights as being embedded in one’s obligation to the other.

•

The paradigmatic alternative to the western concept of the nation and nation-state.

I shall restrict myself to the legacy of democratic decentralisation and the deepening of democracy in India, and presumably in the world, 12 that Gandhi bequeathed for the future. Embedded in his search for an ideal polity based on panchayati raj lies the formulation of participatory democracy. Like most of his ideas, participatory democracy is a contested terrain of clashing and competing interests and ideologies. I wish to demonstrate that in India, the dialectics of contestation over panchayati raj, has taken an irreversible, albeit a zig-zag direction, consistent with Gandhi’s formulation of participatory democracy. My focus will be on rural India. Indigenous Polity and Grassroots Democracy At a time when democracy was defined exclusively in terms of western representative democracy of the West (parliamentary or republican), Gandhi was for a democratic polity that would be ‘centred’ on the innumerable self-governing village communities, in which the individual will be the unit and ‘every village will be republic or panchayat having full powers’. This would not ‘exclude dependence on and willing help from neighbours or the world.’ In such an arrangement ‘there will be ever widening, never ascending circles.’ (1946: 8-10) His vision was that of ‘complete republic, independent of its neighbours for its vital wants and yet interdependent for many others in which dependence is a necessity…Nonviolence with its technique of Satyagraha and non-cooperation will be the sanction of the village community.’ (1942: 12) His elaborations, from time to time, on gram swaraj were so many attempts at an ongoing exercise to portray a holistic picture of the village republic ‘though never realisable in its completeness.’ (1946 (a): 16-17) Embedded in this romanticisation was the hard structural reality of rural governance that was native and indigenous to India’s unparalleled complexity. During the Indian national movement, he spearheaded the establishment of village panchayats by the Congress Committee, and was fully aware of the problems these panchayats suffered from 13 . Consistent with his bottom-up approach, he had proposed an alternative to the Westminster model: There are seven hundred thousand villages in India each of which would be organised according to the will of the citizens, all of them voting. Then there would be seven hundred thousand votes. Each village, in other words, would have one vote. The villagers would elect the district administration; the district administrations would elect the provincial administration, and these in turn elect the President who is the head of the executive (Quoted by Mehta 1964: 43).

Scholars and political persons from several countries (like Pakistan, Afghanistan, Sri Lanka, South Africa, Brazil, Bolivia, and other countries) have evinced keen interest in the Indian experiment of democratic decentralisation. For details see my paper on ‘Participatory Democratisation: Panchayati Raj and the Deepening of Indian Democracy’ (2007: 9)

Gandhi believed that the real development of India was possible through its indigenous political system in which the centralised state would wield only such power as was not within the scope of lower tiers of participatory governance. The state was not the architect but the facilitator of development. More positively, he was for a multi-layered autonomous vertical integration of political institutions with its base as India’s villages and its superstructure at the Centre – manifesting a descending level of power over the people as one moved from base to superstructure. 14 In the post Second World War all-pervasive western paradigm of modernity, traditional values and institutions were regarded as obstacles to development, consequently, it was in opposition to Gandhi’s ideals of gram swaraj and panchayati raj. India witnessed a contestation between forces of ‘modern’ representative democracy, and those convinced that the inadequacies of representative democracy could only be met by making democracy more participatory through the introduction of panchayati raj, transforming villages into ‘units of self government’. The contestation begins with the writing of the Constitution for free India. Draft Constitution and Willful Omission of Panchayati Raj Babasaheb Ambedkar, the architect of the Indian Constitution, had a polar opposite view of village republics. He found no merit in the mere survival of village republics that were the cause of ‘the ruination of India’. They were nothing ‘but a sink of localism, a den of ignorance and communalism.’ (Constituent Assembly Debates 1989: 38) With an air of finality, he had concluded, ‘I am glad that the Draft Constitution has discarded the village and adopted the individual as its unit.’ (Ibid: 38) The willful omission of the village panchayat from the architecture of the Indian polity met with a barrage of criticism, from the time the draft was tabled (4 November 1948) until a resolution had to be passed (22 November 1948). A host of distinguished members including, H. V. Kamath, Arum Chandra Guam, T. Parkas, K. Santana, Shebang All Sabena, Allude Krishnaswamy Ayyar, N. G. Ranga, M. Ananthasayanam Ayyangar, Mahavir Tyagi, K.T. Shah and others voiced their inability to accept this gross omission. Resolution after resolution for amendment was tabled. The points that recurrently echoed in the debate were: (i) Ambedkar’s view about village republics was narrow and factually erroneous; (ii) far from villages being the cause of India’s ruination, it was the villages that were ruined by colonial exploitation; (iii) the Constituent Assembly that was now engaged in scripting India’s Constitution, owed its very existence to the rural masses who had contributed principally to the national movement for independence; (iv) none of the members of the Drafting Committee, except one, had participated in the freedom struggle, hence their inability to appreciate the contribution of the rural masses and their potential power to transform the country. (Ibid: 520-527) The debates dwelled on issues of theoretical significance. Kamath posed the fundamental question: ‘Now what is the State for? …The ultimate conflict that has to be resolved is this: whether the individual is for the State or the State for the individual?’ (Ibid: 221) Ranga asked, ‘Sir, do we want centralisation or decentralisation? Mahatma Gandhi has pleaded over a period of thirty years for decentralisation.’ He went on to add, ‘Sir, one of the most important consequences of over centralisation and strengthening of the Central Government

In western technical parlance this is known as the principle of subsidiarity.

would be handing over power not to the Central Government but to the Central Secretariat.’ (Ibid 350) When Gandhi came to learn of this willful omission, his trite observation was: I must confess that I have not been able to follow the proceedings of the Constituent Assembly (the correspondent) says that there is no mention of or direction about village panchayat and decentralisation in the fore-shadowed Constitution. It is certainly an omission calling for immediate attention if our independence is to reflect the people’s voice. The greater the power of the panchayat, the better for the people.’ (Quoted by Mehta 1964: 43) Finally, Ambedkar very graciously accepted the following historic resolution moved by K. Santhanam on 22 November: That after Article 31, the following article be added: ‘31-A. The State shall take steps to organise village panchayats and endow them with such powers and authority as may be necessary to enable them to function as units of selfgovernment’ (Constituent Assembly Debates 1989: 520; emphasis added). Failed Experiments and Renewed Faith in Participatory Democratisation Clearly the nationalist elite were divided in their conviction over the efficacy of the role and capacity of grassroots village-level democracy in bringing about rapid economic transformation. No less a person than Jawaharlal Nehru preferred to maintain silence during this heated debate. Steeped in the history of India that he himself had authored, he seemed trapped between the ambiguities of western modernity, and the prospects embedded in a rich civilisational heritage. The traumatic Partition of the sub-continent (India–Pakistan) contained a stark warning for the future. It is understandable that he veered towards a centralised democratic state to keep the nation in tact and make it the agency of rapid economic development. His approach was eclectic. He spoke of a ‘third way’, ‘which takes the best of formally existing systems – the Russian, the American and others – and seeks to create something suited to one’s own history and philosophy.’ (Frankel 2005: 3, citing Karanjia) Impatient for change, he went in a big way for mega-projects: multipurpose hydel projects, land reforms, irrigation schemes, modern agricultural inputs etc. to boost Indian agriculture. He put a lot of expectations in the US model of Community Development Programme (CDP) and National Extension Service (NES) and forged a partnership with the USA to bring about rapid rural transformation through people’s cooperation. Once this experiment conclusively failed, his mind was clear on the primacy that Gandhi had accorded to village-centred development and village-oriented polity. His decision to create a new Ministry of Community Development, Panchayati Raj and Cooperation (18 September 1956) with S. K. Dey at its helm, testified the new resolve with which democratic decentralisation would be pursued. He never looked back thereafter. In 1957, Pandit Govind Ballabh Pant, Chairman of the Committee on Plan Projects appointed a high-level Committee under the Chairmanship of Balvantrai Mehta, a veteran Gandhian and Congressman. The Committee was mandated: (a) to review the Community Development

Programme and the National Extension Service, and (b) to evolve a system of local selfgovernment. The Committee concluded: Development cannot progress without responsibility and power. Community development can be real only when the community understands its problems, realises its responsibilities, exercises necessary powers through its chosen representatives and maintains a constant and intelligent vigilance on local administration. (Cited in Mehta 1978: 2-3; emphasis added) It goes to the credit of Dey that he put in place the three-tier structure of sub-State level administration in a very short period of time. The Panchayat Samiti became the strategic level for the formulation of the District Plan. The decentralised administrative system hereafter would be formally under elected bodies. The State of Rajasthan became the first to adopt the new scheme (2 October 1959) followed closely by Andhra Pradesh. The qualitative changes brought about in the administrative and governing structure sought actually to delegate power to elected representatives of the Panchayati Raj institutions for the effective implementation of the Community Development Programme, not yet in their formulation. The development model consisted of an intensive phase with heavy resource flow from the Central government; to be followed by a less intensive phase with the expectation that heightened people’s involvement will be matched by a reduced contribution from the Centre, eventually paving the way for self-sustaining development. Reality proved otherwise. This made Balwantrai Mehta to observe that a further change had to take place ‘from a government programme with people’s participation to a people’s programme with government participation’. (cited in Wadhwani and Mishra 1996: 173) In spite of the fact that by 1959 ‘all the States had passed the panchayat acts and by the mid1960s panchayats were established throughout India…local administration resisted devolution of functions and powers’, and regular elections were not taking place. (Kaushik 2005: 80-81) Mathew attributes this lapse on the electoral front to the fear of ascendancy of panchayat leadership. (Mathew 2001: 183-184) Continuity in Gandhian Praxis: Sarvodaya Movement After Gandhi’s death in 1948, the newly constituted Sarva Seva Sangh, under the leadership of Vinoba Bhave, was committed to carry forward the programme of rural reconstruction and the creation of a sarvodaya samaj. 15 The movement came into limelight in the context of the fierce armed Telengana, anti-feudal struggle led by the Communist Party of India. The armed agrarian movement had to succumb to the intervention of the Indian army employed to integrate the feudatory province of Hyderabad (then under the titular rule of the Nizam) with the Indian State. The concept of voluntary gift of land for removing landlessness – bhoodan – was given shape and content by Vinoba when he received the first land gift of 100 acres from Ramchandra Reddy in Village Pochampalli in April 1951. 16 The momentum gained in the bhoodan movement developed into a collective initiative for voluntary pooling of land gifts in villages for self-government (gramdan) through gram 15

Sarvodaya literally means ‘welfare of all’. Samaj refers to ‘society”. Sarvodaya Samaj is thus an ideal society in which the ‘welfare of all’ is guaranteed. For details on the bhoodan-gramdan sarvodaya movement see my paper ‘Sarvodaya after Gandhi.’ (Mukherji 1986).

sabhas (village assemblies). The movement attracted nationalist freedom fighters like Jayaprakash Narayan, Balvantrai Mehta and others. Millions of acres of lands in gift (bhoodan) and thousands of village-in-gifts (gramdan) became unmanageable for the movement to control even as the government dragged its feet over lands to be redistributed. The All India Panchayat Parishad (AIPP) under the leadership of Jayaprakash Narayan received support from Nehru, and the Ministry of Community Development and Panchayati Raj and Cooperation. It consistently pressed for legislation that would make Article 40 of the Constitution mandatory. Reverse Swing towards Centralisation and Authoritarianism The regime after Nehru did not subscribe to democratic decentralisation. On 24 January 1966, the day Indira Gandhi assumed office as Prime Minister, the Ministry of Community Development, Panchayati Raj and Cooperation was ‘closed and merged with the extensive empire of the Ministry of Food, Agriculture and Irrigation. (Dey 1982: 89) The new agricultural strategy relied on centrally-sponsored programmes such as, ‘Intensive Agricultural District Programme, Small Farmers Development Agency, Drought Prone Area Programme, Intensive Tribal Development Programme, etc. downgrading the Ministry of Community Development into a department under the Ministry of Food and Agriculture.’ (Kaushik 2005: 81) Indira Gandhi’s regime spanning 24 January 1966 till 24 March 1977, followed a continuous policy of centralisation of power, culminating ultimately in the National Emergency and imposition of the President’s Rule on 25 June 1975. The convincing defeat of the Congress Party in the General Elections after the withdrawal of the Emergency was a lesson for Indira Gandhi and the country that democracy in India had come to stay. Restoration of Democracy and the Process of Democratic Decentralisation Immediately on assumption of power by the then opposition Janata Party, the process of decentralisation was revived with the Asoka Mehta Committee reopening the subject. The most significant feature of the Committee’s report was the linking of ‘institutions of democratic decentralisation with socially motivated economic development.’ (Mehta 1978: 6) In contrast to the key importance given to the block-level Panchayat Samiti by Balvantrai Mehta in the formulation of district plans, it was suggested that ‘the district should be the first point of decentralisation, under popular supervision, below the State level.’ (Ibid: 178) The dissenting note by the veteran Gandhian Siddharaj Dhadda pointed out that the ‘very foundation of the structure of Panchayati Raj was missing.’ (Mehta 1978: 173) The ‘purpose of decentralisation was not merely to help development, however it is defined, but the creation of an integrated structure of self-governing institutions from the village and small town onwards, to the national level in order to enable people to manage their own affairs.’ (Mehta 1978: 173) Dhadda was invoking the principle of subsidiarity, which Gandhi had spelt out for gram swaraj.

The distinguished Marxist leader Namboodiripad could not ‘think of PRIs 17 as anything other than the integral parts of the country’s administration with no difference between what are called “development” and “regulatory” functions.’ (cited in Kaushik 2005: 103) He observed, ‘I am afraid that the ghost of the earlier idea that PRIs should be completely divorced from all regulatory functions is haunting my colleagues.’ (cited in Kaushik 2005: 104) He, too, was for nothing short of comprehensive devolutionary democracy. Article 40 Vindicated The pragmatist in Rajiv Gandhi, successor to Indira Gandhi as Prime Minister, finally vindicated the Gandhian position. He was confronted with a straightforward question: How is it that only ten per cent of the enormous revenue of the State reached the village for the uplift of the poor beneficiaries? His answer was forthright: If we continue to device schemes from above large sections of the populations will be left high and dry, and flow of benefits from development will pass over their heads like water on a ducks back, for it is not possible for government agencies to reach each and every individual and to guide him and tell him to do this or that. (cited in Bandyopadhyay 2004: 148) He argued that it was quite ‘apparent that if our district administration is not sufficiently responsive, the basic reason [was] that it [was] not sufficiently representative.’ (cited in Bandyopadhyay 2004: 150 emphasis added) When the 73rd and 74th amendments to the Constitution were enacted, India had created history in democratic practice and governance. For the first time the institutionalised organs of participatory democracy constituted the third stratum of the Indian state, empowered by affirmative action requiring one-third representation of elected women members and functionaries, and the representation of dalits 18 in proportion to their population in the region. The structural requirement enabling them to shape as agents of their destiny and that of the nation was met. What they needed now was only to comprehend and realise the power that is vested in them to surmount the cultural, political and class barriers that come in the way. Prospects and Challenges for the 21st Century In the past 13 years, almost all states, with the notable exception of Jammu and Kashmir, have gone through the process of electing the PRI functionaries conforming to the 73rd Amendment at least once. Elections have taken place in 504 District Panchayats (Zila Parishads), 5,912 Block Panchayat Samitis and 231,630 Gram (Village) Panchayats. Corresponding to each of these tiers of sub-State governance, 1,581; 145,412; and 2,971,446 – a total of 3,132,673 – representatives have been directly elected from their respective constituencies. More than a million of these are women and above 800,000 belong to the Scheduled Castes (dalits) and the Scheduled Tribes. The Houses of Parliament have elected 800 members, whilst the 28 States and two Union Territories have elected 4,508 members. The sheer size of the elected members from the village panchayats to the national parliament is a staggering 3,137,754. (Mathew 2003: 20) Democracy in India has reached a new threshold, unprecedented in the world. 17 18

PRIs refer to Panchayati Raj Institutions. Ex-untouchable castes.

Yet devolution of power is easier enacted than promulgated. The problem of devolution takes two forms. First, when out of the list of 29 subjects (Ghosh 2000: 37) that have been recommended for devolution by the XI Schedule of the Constitution, there is a wide variation between States on the number of subjects actually devolved (administrative devolution). Second, when the financial resources of the local governments are incommensurate with the administrative responsibilities reposed on them (fiscal devolution). As of now, eight States and one Union Territory, in letter, if not all in spirit, have devolved all the 29 subjects to the panchayati raj institutions. 19 (Ministry of Panchayati Raj 2006) We cannot remain oblivious to the numerous problems that confront the worldâ&#x20AC;&#x2122;s largest and most complex democracy. It is not within the scope of this presentation to get into these. I shall mention only 12 challenges to our system of local self-government, if only to keep us anchored to reality. (1)

There is the factor of the local political economy and the high probability of elite capture of resources.

(2)

Central and State-level political elite feel threatened having to vie with the local political elite, trying to win support from a common constituency.

(3)

The non-elected resource-rich NGOs/INGOs with their primary accountability to the donors operate within panchayat jurisdictions as competing structures of influence and power.

(4)

There are State and central-level projects that bypass the authority of the PRIs.

(5)

Problems of accountability and transparency often associated with rent-seeking behaviour characterise many functionaries at all levels.

(6)

Gram sabhas, which are the fundamental units of direct democracy, are often convened at irregular intervals with poor attendance.

(7)

There is the problem of what is known as â&#x20AC;&#x2DC;proxy panchayatsâ&#x20AC;&#x2122;, where the husband/male members of the family act on behalf of the elected women representatives.

(8)

Social-institutional barriers often inhibit the role of dalits (the Scheduled Castes) and the Scheduled Tribes in the Panchayati Raj system.

(9)

A resistant bureaucracy is tardy in implementing devolution of power.

(10)

Political and economic clientelism in an iniquitous agrarian and caste structure perpetuates the role of dominant powers.

(11)

There are problems relating to ambiguities in the distribution and sharing of power at the various sub-State levels.

The states are Andhra Pradesh, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Rajasthan and West Bengal. The Union Territory is: Dadra and Nagar Haveli.

(12)

Most importantly, there are problems of poverty, illiteracy and malnutrition that provide structural barriers to the improvement in life-chances of the deprived and marginal groups.

In conclusion, the dialectics of contestation has entered a new phase after the constitutional breakthrough. The process of contestations that I have highlighted in the presentation points to the resultant, irreversible ascendance of the forces of gram swaraj. It must be distinguished from the wave of decentralisation in many developing countries prompted by structural adjustment programmes since the 1980s that seek efficient service delivery as its main objective. Decentralisation per se is not necessarily democratisation. Neither deconcentration nor delegation of power is a sufficient condition for effective democratisation. What is important is real devolution of power to the constitutionally-elected representatives at the level of local self-government. Had Babasaheb Ambedkar been with us today, he would have been pleased to note that the serious apprehensions he had nurtured about panchayati raj at the time of drafting the Constitution, no longer remain in the same measure. Had Gandhi been alive he would remind us that if only the people were able to hold on steadfastly to truth, non-violence and love the process would be so much the easier. References Bandyopadhyay, D. (2004), “Panchayat and Democracy” in Bandyopadhyay D. and Amitav Mukherji, New Issues in Panchayati Raj, New Delhi: Concept Publication Company. Constituent Assembly Debates (1989), Vol. VII (4 Nov. 1948 – 8 Jan. 1949), reprint, New Delhi: Lok Sabha Secretariat. Dey, S.K. (1982), Destination Man, New Delhi: Vikas Publishing House. Frankel, Francine (2005), India’s Political Economy 1947-2004: The Gradual Revolution, Second Edition, New Delhi: Oxford University Press. Gandhi, M. K. (1942), “My Idea of Village Swaraj”, Harijan, 26 July 1942. Gandhi, M. K. (1946), “Panchayats in Independent India”, Harijan, 28 July 1946. Gandhi, M. K. (1946[a]), “All Round Village Development”, Harijan, 10 November 1946. Ghosh, Buddhadeb (2000), “Panchayati Raj: Evolution of the Concept”, ISS Occasional Paper Series – 25, New Delhi: Institute of Social Sciences. Kaushik, P.D. (2005), “Panchayati Raj Movement in India: Retrospective and Present Status” in Debroy, Bibek and P.D. Kaushik eds., Emerging Rural Development through “Panchayats”, New Delhi: Academic Foundation. Mathew, George and Mathew, Anand (2003), “India: Decentralization and Local Governance - How Clientelism and Accountability Work” in Hadenius, Alex ed., Decentralization and

Democratic Governance: Experience from India, Bolivia and South Africa, Stockholm: Almquist and Wiksell International. Mehta, Asoka (1978), Report of the Committee on Panchayati Raj Institutions, Ministry of Agriculture and Irrigation, Government of India, New Delhi, August. Mehta, Balwantray (1964), “Seminar on Fundamental Problems of Panchayati Raj”, speech delivered at the All India Panchayat Parishad, New Delhi. Ministry of Panchayati Raj (2006), A Mid-Term Review and Appraisal, Volume II, 22 November, New Delhi: Ministry of Panchayati Raj, Government of India. Mukherji, Partha Nath (2007), “Participatory Democratisation: Panchayati Raj and the Deepening of Indian Democracy”, ISS Occasional Paper Series - 34, New Delhi: Institute of Social Sciences. Mukherji, Partha Nath (1986) ‘Sarvodaya after Gandhi: Contradiction and Change, in Ramashray Roy (Ed) Contemporary Crisis and Gandhi, New Delhi, Discovery Publishing House. Wadhwani, M. and S.N. Mishra (1996), Dreams and Realities: Expectations from Panchayati Raj, Appendix I: Summary of Balwantrai Mehta Committee Report (1958), New Delhi: Indian Institute of Public Administration.

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ISAS Insights No. 26 – Date: 28 March 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

South Asia’s Inflation Challenges Mohammad Shahidul Islam * Executive Summary Most South Asian economies are now faced with exorbitant price hikes in fuel and non-fuel commodities. The current hikes have exposed the vulnerability of the low and middle income groups and the government exchequers, particularly in Sri Lanka, Bangladesh and Pakistan. The point-to-point inflation in these three countries is now double-digit. India is relatively less vulnerable to the current inflationary shock. Nevertheless, of late, the Reserve Bank of India (RBI) acknowledged that price spiral in the economy is artificially “suppressed” as higher international oil prices have not been passed on to domestic consumers. The inflation scenario in Nepal is likely to follow the price level in India, largely because the former’s domestic currency is pegged to that of the latter. Apart from the current global commodity boom, inflation has surged in these South Asian countries due to low per capita agricultural production, the Central Bank’s lax monetary policies or lagged effects of earlier monetary expansion, undervalued exchange rate polices (in economies other than India) and internal political instabilities. Inflation in India, Pakistan, Bangladesh, and, to some extent, in Sri Lanka, could have been far worse than the current level had the exchequers not absorbed a substantial portion of the oil import bills as subsidies. For the South Asian countries, the challenges of inflation are two-prongs. Firstly, galloping inflation could significantly destabilise key macro-economic variables. Secondly, price volatilities pose political dangers. If the United States dollar continues to slide, oil prices remain high, strong demand for commodities persists and more and more oil-seeds and staples channel towards bio-fuel production, the South Asian economies may witness even higher than the current level of inflation in the coming months. Nevertheless, the flip side of this forecast is that the slow down in the United States and some other major economies may have a dampening effect on prices. Moreover, if China and other major emerging markets prioritise inflation check over growth, then the current sky-rocketed trend of commodity prices may slow down. *

Inflation control should receive priority over growth in South Asia. Both fiscal and monetary policy tools should be applied to contain price hikes. In India, currency appreciation continues to be used as a major instrument to contain imported inflation, though widening current account deficit is a concern for the policy makers. Following the latest Fed rate cut, the RBI may increase its key policy rates slightly. In an election year, the current United Progressive Alliance government may prefer inflation check as a priority even if such move would slow down Indiaâ&#x20AC;&#x2122;s economic growth. Bangladesh can afford to keep its currency slightly stronger, thanks to its favourable current account position. The monetary policy should be more contractionary even if it affects the countryâ&#x20AC;&#x2122;s economic growth. Sri Lanka and Pakistan have to rely on the interest rates hike, as the current account deficits in these economies have been widening. Fiscal policy tools, including a reduction in import and excise duties, could be applied to contain imported inflation, among others.

Introduction After recovering from the two oil shocks in 1974 and 1979, the global economy enjoyed fairly stable price levels till early 2000 (see Figure 1). It is widely viewed that globalisation has had a positive impact on prices for over one and a half decade by increasing competition both on the demand and supply side. Central bankers, especially those pursued inflation targeting monetary policies, have widely been credited for keeping inflation low. However, many economies (net commodity importing countries, in particular) around the world are now faced with exorbitant price hike in fuel and non-fuel commodities (ss Figures 1 and 2). Since early 2007, oil and many agricultural commodities have been witnessing an abrupt price hike (see Table 1, and Figures 1 and 2). In the past year alone, prices of rice and wheat have hardened 52 and 112 percent respectively, and oil is now traded over US$100 a barrel. In South Asia (excluding India), the current hikes have exposed the vulnerability of the low and middle income groups and the government exchequers. The price hike of primary commodities in most South Asian countries has further worsened due to low per capita agricultural production, the Central Bank’s lax monetary policies (or lagged effects of earlier expansionary monetary policies), undervalued exchange rate polices (economies other than India and Nepal), and internal political instabilities. South Asia’s largest economy, India, is relatively less vulnerable to the current inflationary shock, thanks largely to its higher domestic production capacity of agricultural commodities and recent appreciation in its currency, inter alia. Nevertheless, oil price volatilities in the world market remain a worry for the economy. In its latest issue of Macroeconomic and Monetary Developments, the RBI acknowledged that “since pass-through of higher international oil prices to domestic prices remains incomplete, inflation has remained suppressed.” The other major economies in the region viz, Pakistan, Bangladesh, Sri Lanka who largely depend on international markets for fuel and, to lesser extent, for non-fuel commodities face much more daunting challenges than India to contain inflation. The inflation scenario in Nepal is likely to follow the price level in India, largely because the former’s domestic currency is pegged to that of the latter. According to the Economist Intelligence Unit (EIU), the CPI inflation in Sri Lanka recorded 17.5 percent in 2007, followed by Bangladesh (9.1 percent), Pakistan (7.6 percent), India (6.4 percent), and Nepal (5.3 percent) (see Figure 3). For the South Asian countries, the challenges of inflation are two-prongs. Firstly, galloping inflation could significantly destabilise key macro-economic variables, including gross domestic (GDP) growth. Higher oil import bills that most economies in the region absorb through subsidies could further swell their fiscal deficits. Secondly, price volatilities pose political danger. South Asia hosts the largest number of poor people in the world and the correlation between per capita income and food weight in total CPI is generally higher for low-income group consumers. Rising food prices are effectively a regressive tax. If the past is any guide, price volatilities of South Asian staples, rice and wheat, could result in political instability in the region. The World Food Programme cautioned that the rising prices of food items, especially rice, may cause political instability, since poorer households spend up to 80 percent of their income on food.

Against this backdrop, this paper briefly analyses the ongoing inflation in South Asia. It also suggests some anti-inflationary measures for these economies. Inflation Scenarios in South Asia Among all South Asian economies, Sri Lanka is the hardest hit by the current price spiral. The New Colombo CPI reached 21.6 percent in February 2008 while the annual average inflation moved up to 17 percent, according to the Central Bank of Sri Lanka (CBSL). Unlike the other economies of South Asia, Sri Lanka has revised its administered energy prices upward in several stages since 2000. The country imports almost 100 percent of its oil needs, and petroleum price hike in the international market is substantially being pass-through to its consumers albeit the Exchequer absorbs diesel and kerosene price rise to some extent. 1 As a result, oil price hike has had a direct impact on the economy’s CPI inflation. Secondly, apart from oil, price hike in most soft commodities in the international markets, has had an impact on the country’s inflation. Thirdly, the real wage increase in the recent past has put additional pressures on prices. 2 Fourthly, due to a setback in Sri Lanka’s agriculture sector, the prices of domestically-produced agricultural commodities, that accounts for 78 percent of the total consumption basket in the CPI, have increased significantly. Fifthly, inflation has been exacerbated due to the distribution disruptions of agriculture produces following the adverse security developments in the Northern and Eastern provinces. Sixthly, imported inflation has soared as the Sri Lanka Rupee has weakened in recent years 3 (see Figure 7). Last but not least, between May and September last year, the CBSL issued currency worth of 49 billion Rupees (US$457 million). The extra cash injection in the economy, along with high government spending and rapid growth in credit, has also been exerting the price rise. Consumers in Bangladesh have been observing the exorbitant price hike of primary commodities. The Bangladesh Bank, the central bank of Bangladesh, reported that inflation was 11.43 percent on a point-to-point basis in January 2008 whereas food-inflation hit 14.20 percent in the same period. The price hike of fuel and non-fuel commodities in the international markets is widely blamed for the current inflation in Bangladesh. Secondly, Bangladesh faced two major natural disasters (summer floods and cyclone Sidr) in 2007 which damaged standing crops, among others, and escalated food prices. Moreover, in recent years, growth in the agriculture sector has been sluggish. Thirdly, the recent ban on exports of some essentials such as rice, wheat, lentil and onion by neighbouring India has been a major supply shock for the economy. Fourthly, the current caretaker government’s drives against corruption have exacerbated the supply-side problem. The actions against the so-called unscrupulous business people have greatly handicapped the country’s business, including commodity trading. Consequently, there has been a supply side constraint in the food grain market. Fifthly, the depreciation in the country’s currency unit, the Bangladesh Taka against its major trading partners, the expansion of broad money and credit have also played a part in raising prices. In its latest Monetary Policy Statement, the Bangladesh Bank acknowledged that the lagged effects of higher than programmed monetary expansion during fiscal year 2007 and excess liquidity played a part in raising prices.

2 3

In January 2007, the prices of petrol increased to 127 Rupees (US$ 1.16) per liter from 117 Rupees and the prices of diesel and kerosene rose to 80 Rupees and 70 Rupees respectively. The gas price has also seen a similar trend. Public sector wages were increased from January 2007. The Sri Lankan Rupee depreciated by around 5 by September 2007, compared with 1.6 in the same period of 2006.

The inflation scenario in Bangladesh could have been much worse had the Exchequer not absorbed a substantial portion of the oil import bills as subsidies. The country imports 90 percent of its oil requirements from international markets but does not pass-through the full oil import bill directly to its consumers. The Bangladesh Petroleum Corporation (BPC), the state-owned energy entity, sells petroleum products at much lower prices in the domestic market than its actual import costs, and the difference (import price minus local market price) is being absorbed by the government of Bangladesh as subsidies. The BPC’s losses are estimated at US$794 million or 1.1 percent of GDP in the fiscal year 2008, according to the Asian Development Bank (ADB). The Bangladesh government is under severe pressure from the World Bank and the International Monetary Fund to pass-though the oil prices instead of increasing its fiscal burden. The economy’s fiscal deficit is projected to expand to five percent of its GDP in 2008 from 4.4 percent in 2007 (see Figure 4). In Pakistan, the year-on-year consumer price inflation reached 11.3 percent in February 2008, largely owing to the extraordinary high food prices apart from higher energy prices. The food inflation reached 18.3 percent – the fifth consecutive month with a double-digit increase, according to the EIU. Pakistan is an oil producer but relies on imports for more than 80 percent of its consumption. The oil price hike in the international markets is absorbed partly by the government and partly by the consumers. As a result, the recent oil price hike pushed the CPI upward as well as added an extra burden on the government’s fiscal health. The energy prices were revised upward in March 2008. 4 The government’s domestic borrowing exceeded 350 billion Rupees (US$5.7 billion) out of which 150 billion Rupees (US$2.45 billion) went to the oil subsidies. Consequently, Pakistan’s fiscal deficit is projected to increase to 5.3 percent in 2008 from 4.6 percent in 2007, according to EIU (see Figure 4). In its latest Monetary Policy Statement, the State Bank of Pakistan reported that inflation has been exacerbated due to high growth of money supply in current fiscal year. The broad money growth in the current fiscal year was 19.3 percent which exceeded its target level (5.8 percent). Further, like Sri Lanka and Bangladesh, the depreciating Pakistan Rupee has contributed to imported inflation (see Figure 8). In India, the CPI inflation was in the range of 5.1 to 5.9 percent during November-December 2007. Inflation based on the wholesale price index soared to a 12-month high of 5.92 percent as on 8 March 2008 which is above the five percent limit set by the RBI for this fiscal year. India imports 70 percent of its oil requirements, and the petroleum import bill is largely absorbed by the Indian government and its public sector energy entities through oil bonds so that oil price hike in the international markets do not hurt the consumers and the central government’s fiscal book. In his 2007-08 Union Budget speech, the Indian Finance Minister, P. Chidambaram, too reckoned that there is pressure on domestic prices of food articles in India. He contended that, “Managing the supply side of food articles will be the most crucial task in the ensuing year and keeping inflation under check is one of the cornerstones of our policy”. Growth in India’s agriculture sector has been sluggish in recent years. However, the country is expecting a record harvest in 2008. The total food grains output in India in 2007-08 is expected to be 219.32 million tones. To avoid food price spiral in its domestic market, the authorities have banned exports of several commodities and fixed higher prices of exportable 4

The price of gas rose 6.9 percent to 62.81 rupees (US$1.03) per liter. Diesel rose 7.2 percent to a little over 40 rupees (US$0.65) per liter.

agriculture produces. Further, Rupee appreciations since late 2006 have insulated the economy from imported inflation (see Figure 6). The headline inflation in Nepal remains broadly in line with price developments in India. The appreciation of the Nepalese Rupee had contained the imported inflation. However, food and oil prices continue to push the prices up. In January 2008, the authorities have increased energy prices, 5 and, since October 2007, the prices have adjusted upward three times, as losses for Nepal Oil, the state-owned energy entity, have been soared due to global oil price increase. The Nepal Rastra Bank expects that inflation will remain about five percent in 2007-08, whereas the ADB projects that the figure will be 5.3 to 5.4 percent. Based on the above analysis, we can summarise the current state of South Asia’s inflation as follows: 1)

Sri Lanka, Bangladesh and Pakistan are highly vulnerable to fuel and food price hike.

The CPI figure in Sri Lanka is much higher vis-à-vis its neighbours, as the country adjusted oil prices upward instead of putting additional pressure on its fiscal sector. The reason is that the fiscal deficit in Sri Lanka has already exceeded the danger level (6.7 percent of the country’s GDP in 2007) as the government’s expenditure outweighed its revenue income alarmingly. In Bangladesh and Pakistan, fiscal deficit has been swelled due to petroleum subsidies, among others.

The nominal effective exchange rate (NEER) and the real effective exchange rate (REER), except for the Indian Rupee, have been moving in opposite directions (see Figures 6 to 9). Generally, the NEER and the REER move quite closely together, with the exception being in high inflationary environments. In Figure 6, we see that, in 2007, the NEER and the REER of the Indian Rupee moved in the same direction largely owing to low to moderate inflation in India. Though the rapid depreciation in the Sri Lankan Rupee, the Bangladesh Taka and the Pakistani Rupee against the United States Dollar, in the recent past, has slowed down lately (the Bangladesh Taka even appreciated slightly), it has to be remembered that the United States Dollar has seen a sharp depreciation against major currencies which is known as the United States Dollar index of late. Consequently, India’s exchange rate policies (so is Nepal’s) have been of help in weathering imported inflation. In other countries, undervalued (competitive) exchange rate polices have exacerbated their domestic inflation. Economic theories too support that if the nominal exchange rate does not allow sufficient appreciation, real exchange rate adjustment only happens through increase in the price level over time, relative to trading partners. The Chinese economy also experienced a similar situation recently until its currency, the Yuan, was allowed to appreciate.

Monetary policies in most economies have been lax which is reflected by the fact that money supply has increased steadily in these economies in recent years. Even if the broad money and credit growth have declined in Bangladesh in the recent quarters (see Figure 5), there is a lagged effect of these variables on prices.

In January 2008, diesel prices were increased by nine percent to 61 rupees (96 US cents) and kerosene prices by 19.6 percent, also to 61 rupees. Liquid petroleum gas prices were also raised by 16 percent to 1,250 rupees per cylinder.

In Bangladesh and Pakistan, the supply-side of the commodity market has been disrupted by the internal political unrests and emergency rules, and in Sri Lanka, the market is disturbed by the ethnic conflicts.

Near Term Inflation Expectations Although the global commodity prices worked predictably in line with the Prebisch and Singer (1950) hypothesis which states that the prices of commodities relative to that of manufactured goods will tend to decline over time, however, the recent trends show that the ongoing upturn in the global commodity markets has been large and rapid. If the United States Dollar continues to slide, oil prices remain high, strong demand for commodities (particularly from emerging markets) persists, and more and more oil-seeds, and staples channels towards bio-fuel production, the South Asian economies may observe even higher than the current level of inflation in coming months. Nevertheless, the flip side of this forecast is that the slow down in the United States and some other major economies may have a dampening effect on prices. Moreover, if China and other major emerging markets prioritise inflation checks over growth, then the sky-rocketed trend of commodity prices might slow down. The EIU’s inflation forecast for Sri Lanka, Bangladesh, India and Pakistan for 2008 shows that the prices in these economies are likely to follow the 2007 prices (see Figure 3). As discussed, India’s inflation is still at a tolerable level. Moreover, the country is expecting a record harvest in 2008. To avoid food inflation, the authorities have banned exports of several commodities and fixed higher prices of exportable agriculture produces. Nevertheless, the potential risk of price hike in the economy may arise from three avenues. First, foreign portfolio investor’s increasing appetite for the Indian market will continue to put pressure on the Indian Rupee. If not fully sterilised, the economy will have excess liquidity that can induce inflation. Following the sub-prime crisis, the Fed cut interest rates a few times and this has put pressure on the RBI to revise its key interest rates downward. However, the dilemma for the RBI is lowering interest rates will aloft inflation. Secondly, roughly 10 million public sector employees in India are likely to get a 40 percent pay rise this year. If wages go up, prices are also set to increase. Thirdly, the country is preparing for a parliamentary election early next year. Government expenditures and political parties’ budget (both disclosed and undisclosed) tend to increase in election years. If all these issues left unchecked, inflation might surpass the RBI’s expectations in coming months. Fiscal and Monetary Measures to Contain Inflation Both fiscal and monetary policies have a role to play in containing inflation. Fiscal policy tools, including a reduction in import and excise duties, could be applied to contain imported inflation. Indeed, such tools have applied in Bangladesh 6 and, lately, import duties on a number of essential commodities, in particular, edible oil, have been reduced in India. Sri Lanka had earlier reduced import duties but later re-imposed them with a view that the revenues generated from this avenue are too important to forgo, even albeit temporarily.

The import duties on a number of essential commodities, including rice and wheat, have been withdrawn.

Monetary- and exchange-rate policies in these inflation-hit economies should be applied prudently. Most emerging market economies are now fighting inflation either by appreciating their currencies or hiking policy rates or applying both, depending on their macro economic conditions. In India, currency appreciation is continue to be used as a major instrument to contain imported inflation, though widening current account deficit is a concern for the policy makers (see Figure 10). Nevertheless, as most of India’s competitor economies, including China, are now appreciating their currencies to contain inflation, the competitiveness concern for the economy is becoming a less pressing issue. Following the latest Fed rate cut, the RBI may increase its key policy rates slightly. In an election year, the current United Progressive Alliance government may prefer inflation check as a priority even if such move (containing credit and money supply growth) slows down India’s economic growth. Bangladesh can afford to keep its currency slightly stronger, thanks to its favourable current account position, albeit the current account surplus in the economy is projected to decline in 2008 (see Figure 10). The Bangladesh Bank has already tightened the broad money supply and credit growth though there is a lagged effect of its previous expansionary monetary policies. The monetary policy should be more contractionary even if they cost the country’s economic growth. Sri Lanka and Pakistan have to rely on the interest rates hike, as the current account deficits in these economies have been widening (see Figure 10). Apart from fiscal and monetary measures, it is important for the South Asian states to address domestic supply-side bottlenecks. There is a need to tackle the supply-side constraints in the commodity markets, particularly in Bangladesh, so that international market prices can converge with the domestic prices. The South Asian economies, other than India, may also need to rely on external aid if their agriculture sectors fail to provide a good harvest in coming months. There is a need for fuel cost economisation in most South Asian economies. However, automatic adjustment of oil prices in the midst of ongoing sky-rocketing inflation might bring countervailing results, especially in Bangladesh and Pakistan. At the same time, there is a high fiscal risk of petroleum subsidies in these economies. Gradual price adjustment for the high-end energy products might be a viable option. In the absence of a vibrant financial sector, bond markets in particular, India’s strategy to cushion off the consumers and the fiscal sector from the ongoing oil price hike may not be a feasible solution for other countries in South Asia.

Figure 1:

Commodity Research Bureau Spot Index (1967=100): January 1947 to February 2008

Source: Commodity Research Bureau (http://www.crbtrader.com/)

Figure 2:

Indices of Primary Commodity Prices: 1995-2007 All Primary Commodities Non-Fuel Energy

500 400 300 200 100 Sept'07

2006

2005

2004

2003

2002

2001

2000

1999

1998

1995

Note: 1995=100, Non-fuel commodities comprise of cereals, vegetable oil and protein meals, meat, sugar, bananas, oranges, Beverages, industrial inputs, agriculture raw materials, and metals. Source: Based on International Monetary Fundâ&#x20AC;&#x2122;s Primary Commodity Price data

Table 1:

Actual Market Prices for Selected Fuel and Non-Fuel Commodities: 2004February’ 2008

Commodities

Units

2004

2005

2006

2007 Q2

2007 Q4

February 2008

Wheat

$/MT

157

152

192

206

342

425

Rice

$/MT

246

288

304

323

357

481

Soybean Oil

$/MT

590

496

551

751

965

1308

Palm Oil

$/MT

435

368

417

711

862

1109

Copper

$/MT

2863

3676

6731

7649

7203

7941

Aluminum

$/MT

1719

1901

2573

2768

2445

2785

Dubai Brent

$/bbl

33.5

49.2

61.4

64.7

83.2

90.0

Source: International Monetary Fund’s Primary Commodity Price data

Figure 3:

CPI Inflation in Selected South Asian Economies: 2007 and 2008*

CPI (av; %) 2007

CPI (av; %) 2008 16

8.7 9.1 7.9 7.6

an Sr Pa gl iL ki ad an In st es di an ka h a

17.5

5.8 6.4

Note: * indicate forecast value Source: Based on Economist Intelligence Unit

India

Pakistan

Sri Lanka

Fiscal Deficit in Selected South Asian Countries (% of GDP): 2007 and 2008

Bangladesh

Figure 4:

0 -2 -4 -6 -8 Fiscal Deficit 2007

Fiscal Deficit 2008

Note: * indicate forecast value Source: Based on Economist Intelligence Unit

Figure 5:

Broad Money Growth in Selected South Asian Economies (in %): 20062007

Pakistan

Bangladesh

Sri Lanka

India

24 22 20 18 16 14 12 10 1Q:06

2Q:06

3Q:06

4Q:06

Source: Based on Economist Intelligence Unit

1Q:07

2Q:07

3Q:07

Figure 6:

NEER and REER Movements of Indian Rupee: January 2007- December 2007

REER

NEER

110 100 90 80 70 J

Source: Based on Reserve Bank of India

Figure 7:

NEER and REER Movements of Sri Lanka Rupee: October 2006October 2007

NEER

REER

110 100 90 80 70 60 O

Source: Based on Central Bank of Sri Lanka

Figure 8:

NEER and REER Movements of Pakistan Rupee: January 2007December 2007

NEER

REER

110 100 90 80 70 60 50 40 J

Source: Based on State Bank of Pakistan

Figure 9:

NEER and REER Movements of Bangladesh Taka: March 2005-June 2007

Source: Bangladesh Bank

Current Account Balance in Selected South Asian Countries (% of GDP): 2007 and 2008*

Note: * indicate forecast value Source: Based on Economist Intelligence Unit

iL an ka

Current Account Balance 2008

Pa k is tan

Ind ia

2 1 0 -1 -2 -3 -4 -5 -6 -7 -8

Ba ng lad es h

Current Account Balance 2007

Figure 10:

ISAS Insights No. 27 â&#x20AC;&#x201C; Date: 11 April 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

The Pakistan Federal Cabinet: More of the Same or Something New? Ishtiaq Ahmed 1 The Islamic Republic of Pakistan is a federal, parliamentary democracy which exercises its authority within the limits imposed by Islamic injunctions. The Pakistan Constitution vests executive powers for the federation as a whole in the prime minister and his cabinet, but through a number of ordinances and amendments enacted during the dictatorships of General Zia-ul-Haq and General Pervez Musharraf, the president has been given extraordinary powers to dismiss the prime minister and to dissolve parliament in case he is convinced that the government is not functioning properly. It will be interesting to see if the newly-elected government will seek to change this situation in favour of a strong prime minister and make the presidency a titular office. The Pakistan Parliament is bicameral. It consists of an upper house, the Senate, elected by the provincial assemblies and the Federally Administered Tribal Areas (FATA), and a lower house, the National Assembly, elected directly by the citizens on the basis of universal adult franchise. After the recent elections in Pakistan on 18 February 2008, a coalition government comprising the two main winners the Pakistan Peopleâ&#x20AC;&#x2122;s Party (PPP), the Pakistan Muslim League-Nawaz (PML-N), as well as the Awami Nationalist Party (ANP) Jamiyat Ulema-eIslam-Fazlullah (JUI-F) and an independent member from FATA. Prime Minister Yousaf Raza Gilani was sworn in by President Pervez Musharraf on 24 March 2008 in a solemn and tense ceremony as the leaders of the PPP, PML-N and ANP boycotted it. Slogans were shouted by some of the PPP leaders in favour of the assassinated Ms Benazir Bhutto. The swearing in of the federal cabinet on 31 March 2008 was even more charged with tension and anxiety as the ministers from the PML-N initially were reluctant to be sworn in by President Musharraf but later took the oath of office wearing black armbands to express their objection to him continuing in office. In any case, the formalities were completed then. There are 11 PPP, nine PML-N, two ANP, one JUI-F ministers and one minister from the independents. The distribution, according to political party and portfolios, is as follows: i)

The ministers from the PPP are Chaudhry Ahmed Mukhtar (Defence); Makhdoom Shah Mehmood Qureshi (Foreign Affairs); Sherry Rehman (Information and Professor Ishtiaq Ahmed is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg.

Broadcasting); Qamar Zaman Kaira (Kashmir Affairs and Northern Areas); Syed Khursheed Ahmed Shah (Labour, Manpower and Overseas Pakistanis); Senator Farooq H Naik (Law and Justice); Nazar Muhammad Gondal (Narcotics Control); Humayun Aziz Kurd (Population Welfare); Syed Naveed Qamar (Ports and Shipping, with additional charge of Privatisation and Investment); Najamuddin Khan (States and Frontier Regions); and Raja Pervaiz Ashraf (Water and Power). ii)

The ministers from PML-N are Chaudhry Nisar Ali Khan (Senior Minister, Communications with additional charge of Food, Agriculture and Livestock); Shahid Khaqan Abbasi (Commerce); Tehmina Daultana (Culture); Ahsan Iqbal (Education, additional charge of Minorities); Muhammad Ishaq Dar (Finance, Revenue, Economic Affairs and Statistics); Khawaja Muhammad Asif (Petroleum and Natural Resources, with additional charge of Sports); Sardar Mehtab Abbasi (Railways); Rana Tanveer Hussain (Defence Production); and Khawaja Saad Rafique (Youth Affairs, Science and Technology).

iii)

The other ministers include JUI-F’s Senator Rehmatullah Kakar (Housing and Works); ANP’s Haji Ghulam Ahmad Bilour (Local Governments and Rural Development); and Nawabzada Khawaja Muhammad Khan Hoti (Social Welfare, Special Education); and FATA MNA Hameedullah Jan Afridi (Environment).

The post of foreign minister has been given to PPP’s Shah Mahmood Qureshi. He was one of the persons in the competition for the post of prime minister. He has almost the same background as Prime Minister Gilani in that he comes from an influential, perhaps the most influential, landowning family of Multan who are custodians of the most revered Sufi masters – Shaikh Bahauddin Zakariya and Shah Rukhne Alam – in that ancient town of southern Punjab. Qureshi is a PPP heavy weight and may have been given the foreign ministry by PPP President Asif Ali Zardari with a view to maintain a balance between these two influential families. He does not have any previous experience of foreign affairs but has been elected a member of the national assembly in the past too. He will probably maintain the policy already established by the Foreign Office of normalising relations with India and Afghanistan and maintaining good relations with China, the Arab world and the Muslim nations in general. Zardari and Sharif have, in recent times, given statements favouring increasing economic interaction with India and more people-to-people contacts through the liberalisation of visa and related matters. Also, on Kashmir, the ideas expressed by them suggest that it will not be allowed to obstruct the normalisation of ties with India. Qureshi will probably tow this line as it seems now to be anchored in the Pakistan Foreign Office as well. The defence ministry has gone to PPP’s Chaudhry Mukthar Ahmed. He belongs to a wealthy industrial family of Lahore which has made its fortune by pioneering factory-level manufacturing of shoes. They own the Services Industries with headquarters in Gujarat, north of Lahore. Ahmed has also been steadfast member of the PPP since a long time. He too was tipped as prime minister, but in the subsequent horse-trading that followed behind closed doors, he was given the defence portfolio. Upon becoming minister, he reportedly described Musharraf as a great asset for Pakistan but has subsequently denied that he said so. He is generally considered to have good relations with Musharraf and the military establishment. He is also a friend of Zardari – both met in jail when they were charged with various financial irregularities. The defence ministry enjoys a high status as it is the link between the civilian government and the military establishment.

The finance ministry has been allotted to PML-N’s Ishaq Dar from Lahore. It was expected that, since Nawaz Sharif and his brother, Shahbaz Sharif, belong to an industrial family and have a keen interest in promotion of commerce and production this key ministry will go to their party. Since neither of them are, at present, a member of parliament because of some legal hurdles, Dar has been given this portfolio. He is of Kashmiri descent and a relative of Nawaz Sharif. He served as Finance Minister in Nawaz Sharif’s government which was toppled by General Musharraf in 1999. During that period, he distinguished himself by making export-oriented growth the cornerstone of his economic strategy. After sanctions were imposed on Pakistan when it tested nuclear devices in the end of May 1998, Dar successfully negotiated an International Monetary Fund (IMF) rescue package to avert an economic crisis. That package was not able to prevent the crisis hitting Pakistan severely but it is generally recognised that those measures mitigated the impact of the sanctions. He enjoys the reputation of being business friendly and in favour of globalisation and Pakistan’s greater integration into the world economy. He will certainly favour greater trade with India and can even be induced to evolve a Pakistan ‘Look East’ policy, if he has not been thinking of one already. Some other important political figures in the federal cabinet are PPP’s Sherry Rahman, a prominent lady journalist of Urdu-speaking origin from Karachi, a human rights activist and a close friend and aide of Benazir Bhutto. She has been assigned the Ministry of Information and Broadcasting. In the last few days, some ministers from the last government, the Chief Minister of Sindh, Arbab Ghulam Rahim, and Federal Minister, Dr Sher Afghan Niazi, have been physically assaulted by angry mobs. The attack on Rahim being shown on private television channels was pull off the air and questions have been asked if Rehman issued the orders to that effect. Another heavy weight in the federal cabinet is PML-N’s Chaudhry Nisar Ali Khan (Senior Minister, Communications with additional charge of Food, Agriculture and Livestock). He hails from northern Punjab and has been an elected Member of Parliament many times from Rawalpindi district. He served as Federal Minister for Petroleum and Natural Resources, and Provincial Coordinator during 1990-1993 in the government of Nawaz Sharif. Again from 1997-1999, he was Federal Minister for Petroleum and Natural Resources and Special Assistant to the Prime Minister. The PPP has its strongest hold in Sindh from where both Benazir Bhutto and Asif Zardari hail. Makhdoom Amin Rahim, custodian of a famous Sufi shrine and landlord was initially tipped as the frontrunner for the post of prime minister but Zardari overruled him probably because he enjoyed a strong position in the PPP rank and file besides being a leading member of Sindhi feudal society and could, therefore, be difficult for Zardari to control once he became prime minister. Zardari has chosen to balance the Sindhi presence in the federal cabinet by including PPP’s Syed Khursheed Ahmed Shah (Labour, Manpower and Overseas Pakistanis) and Syed Naveed Qamar (Ports and Shipping, with additional charge of Privatisation and Investment). Both are important members of the PPP and enjoy significant influence in the Sindhi feudal society. Qamar Zaman Kaira of the PPP has been given the Ministry of Kashmir Affairs. He hails from Punjab. He is known as a hard working party worker who has helped greatly in organising the PPP in the Punjab. Although the Kashmir ministry is primarily responsible for the affairs of the Pakistani-administered Azad Kashmir, it also monitors the overall situation in the Indian-administered Kashmir. It remains to be seen what specific ideas of his own that

he will propose to solve that outstanding issue with India. Prime Minister Gilani and Indian Prime Minister Manmohan Singh have exchanged conventional greetings and spoken to each other. The media has reported that the Indian premier is likely to visit Pakistan soon. It is very unlikely that the new cabinet will spoil its relations with India by assuming some intransigent position on Kashmir. Given the recent history of violence and terrorism as well as the arrest of peaceful agitators against the authoritarian policies of President Musharraf from March 2007 onwards when he declared Chief Justice Iftikhar Mohammad Chaudhry non-functional, the new government will face an uphill task of establishing law and order in the country. This crucial task has been assigned to PPP’s Senator Farooq H Naik who is the new Minister for Law and Justice. He is a Punjabi. He is a lawyer with very close relations with PPP’s chief Zardari. He has represented Benazir Bhutto and her husband in several legal cases. He will have to bring under control the spiraling violence that has taken place recently when two former close members of the pro-Musharaf’s administration, Ghulam Rahim and Afghan Niazi, were badly hit by angry mobs. There have been ugly scenes of violence in Karachi as well where nine people, six of them lawyers, have been killed in clashes between different political factions. Naik has condemned, in very strong words, the stoning to death of a man and women in the tribal areas after a self-styled Islamic Court found them guilty of adultery. He has also ordered an inquiry into the death of a Hindu worker at the hands of his Muslim coworkers at a garment factory in Karachi after a heated discussion on religion. He was accused of blasphemy and gruesomely killed by fanatical Muslims. On the whole, the post of prime minister and other key ministries (foreign affairs, finance, defence and law and order) have been allotted to Punjabis, whose province, Punjab, is Pakistan’s largest in terms of population as well as the dominant one in terms of the origins of the military and bureaucratic apparatuses. While the federal cabinet and federal governments and cabinets are now taking shape, there are rumours that Zardari may be planning to secure the prime minister post for himself but that remains to be seen. There can be no denying that serious differences exist between the two leaders, Zardari and Sharif, on the acceptance of Musharraf as president and on the restoration of the chief justice and other judges of the Supreme Court deposed by Musharraf. It is widely believed that Zardari and before him, his wife Benazir Bhutto, had already worked out a deal brokered by the United States with Musharraf on power-sharing. Zardari continues to be working on such an agenda while Sharif is adamant that Musharraf should be removed as president through legal and constitutional means, and the chief justice and other judges be put back on the benches. But both Zardari and Sharif are not at present members of parliament. Therefore, it will be interesting to see if the federal cabinet develops internal cohesion and works as one team led by an independent prime minister or it will take its cue from the party bosses. Although suicide bombing has declined noticeably in Pakistan after the new government announced that it will seek to end terrorism but not only through military means. It will seek political solutions too and bolster such efforts with economic support to the poverty-ridden tribal areas of Pakistan from where most of the suicide bombers are recruited. The fact that the PML-N is part of the coalition government and its leader, Nawaz Sharif, has had a soft spot for conservative Islamic ideas, can mean that channels of communication with the militants can be established with greater ease and trust. Such a liaison can also mean that the extremists gain concessions on greater adherence to dogmatic Islamic law by the government. On the whole, the federal cabinet consists of urbane, modern educated individuals who would probably eschew close identification with either the left or the right.

It is, however, far from certain that the new government will survive and consolidate. The coming days and weeks will severely test its ability to govern Pakistan successfully, and if it survives, then the transition to a civilian, democratic and peace-oriented government will be strengthened.

oooOOOooo

ISAS Insights No. 28 – Date: 24 April 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

India: Towards a Knowledge Superpower? – A View from Outside † * Gopinath Pillai x Introduction From the very dawn of history, whether it is for matters of the mind or material, India has always been a fertile land. The first references to astronomy are found in the Rig Veda which dates back to 2000 BC. 1 Mathematics has its roots in the nearly 4,000 years old Vedic literature. Indians developed many important mathematical concepts, including the base-ten decimal system. 2 India’s Panini is well-regarded as the founder of linguistics, and his Sanskrit grammar is still considered to be the most sophisticated of any language in the world. 3 Even in manufacturing, India had an important position. According to the Yale historian, Paul Kennedy, India accounted for roughly 25 percent of global industrial output in the 1770s. 4 India’s tangible and intangible assets had always attracted external worshippers and warriors alike. Today, India’s economic story is still impressive. The economy has been performing well, growing by an average nine percent in the last three years. Many high-tech industries have emerged and grown in India. These include information technology and communications, defence and space technology, pharmaceuticals and bio-technology. This rapid expansion of the Indian economy has resulted in gross domestic product (GDP) per capita increasing from US$1,378 in 1998 to US$2,777 in 2007 (in purchasing power parity [PPP] terms). 5 Indian scholars have excelled in the areas of literature, physics, medicine, physiology, information technology, and bio-technology, among others. The nation has half-a-dozen Nobel Prize winners to its credit. Whilst one does not doubt India’s economic rise, can one also then conclude that India has the potential to become a knowledge superpower? I shall discuss the question of whether India is a knowledge-based economy, as that will allow us to ascertain if it can become a knowledge superpower. I shall examine the key knowledge-based sectors in India as well as the advantages India has in pushing forward its knowledge-based industries. I shall then compare India with other knowledge-based countries. I shall also highlight the challenges facing India in this regard.

Definition of a Knowledge-Based Economy I think the first task of this paper is to define the term “knowledge-based economy”. What is a knowledge economy? It is basically an economy that creates, disseminates and uses knowledge to enhance its growth and development. A country’s success in the knowledgebased economy depends on the creation, acquisition, dissemination and application of knowledge. 6 Knowledge creation depends on the intensity of research and development (R&D) conducted in a country, and the availability of human resources needed for R&D. Knowledge acquisition is reflected in intellectual content embedded in imports from other knowledge-based economies (or through multinational corporations [MNCs]). Linguistic skills will help to plug into the global knowledge network. Knowledge dissemination depends on the resources allocated to develop information infrastructure, basic information technology (IT) and linguistic skills to tap into the infocommunication technology (ICT) network. Finally, knowledge application is reflected in an economy’s job market that demands and allows workers to apply knowledge extensively, and its ability to create new business models for generating, acquiring, diffusing and applying new ideas and processes. The basic difference between a traditional and knowledge-based economy is that the former depends on quantitative factors such as labour, raw materials, premises and bulk transportation, among others, whereas the latter relies more on qualitative factors, namely, qualifications, R&D and good infrastructure. Resource-driven economies sometimes depend on a protectionist environment, whereas knowledge-based economies thrive in a friendly and open policy environment, and on innovation and qualified labour. India’s Key Knowledge-based Industries The economic rise of India has seen Indian industries emerging as global players. I shall look at the development of several of the key knowledge-based industries in India. Information and Communications Technology The success story of India’s IT and IT-enabled industries (ITES) is well documented. India’s software industry grew at an average annual rate of approximately 50 percent between 199293 and 2000-01. The Indian IT-business process outsourcing (BPO) revenue aggregate is expected to grow by over 33 percent and reach US$64 billion by the end of FY2008. IT exports, (including hardware exports), are expected to cross US$40.8 billion in FY2008 as against US$31.9 billion in FY2007, a growth of 28 percent. The domestic IT market (including hardware) is estimated to reach 23.2 billion in FY2008 as against US$16.2 billion in FY2007, a growth of 43 percent. The direct employment in this sector is expected to reach nearly two million in FY2008, an increase of about 375,000 professionals over FY2007. The services exports, BPO exports and the domestic IT industries provide direct employment to 865,000, 704,000 and 427,000 professionals respectively. 7

As a proportion of national GDP, the Indian technology sector revenue grew from 1.2 percent in FY1998 to an estimated 5.5 percent in FY2008. In 2007, there were more than 6,000 software exporting companies in the Software Technology Parks of India, spread over 21 cities, with a share of 73 percent of the exports. To reap the comparative advantages offered by the Indian software industry, about 250 of the Fortune 500 companies are now clients of Indian IT. As in December 2006, a total of 90 Indian companies have received the Software Engineering Institute, Capability Maturity Model certificate. This is higher than any other country in the world. India started by offering simple software solutions. It now is the favoured destination for high skilled, knowledge intensive activities. A majority of the Fortune 500 and Global 2000 corporations are sourcing IT-ITES from India. HCL and Wipro carry out outsourcing for innovation through MNCs like Boeing. IBM, Motorola, Hewlett-Packard, Cisco Systems and Google have set up R&D centres in Indian cities. General Electric’s research centre in Bangalore is equal to its global research headquarters in New York. All the top 10 global fables design companies have operations in India. Fables designs are hardware devices implemented on semiconductor chips. Having made an ineffaceable mark in the BPO business, India has now become an important Knowledge Process Outsourcing (KPO) destination. According to a recent report released by KPMG, 8 India will continue to be the preferred location for the global KPO destination and the industry is projected to be worth between US$10 billion and US$17 billion by 2010. However, the same report reveals that the shortage of skilled workers, Rupee appreciation, and under resourced and inadequately empowered legal framework and compliance within KPO providers are costing the competitiveness in this sector. Defence and Space Technology Although India has been starved of imported nuclear technology for almost three decades now, it has developed a competitive advantage in thorium-led nuclear technology. It has the world’s second largest reserve of thorium just falling behind Australia. By producing the world’s first U233-fuelled prototype reactor, Kamini, India has not only entered into Stage Three of its Nuclear Power Programme, it could also become the largest supplier of radioactive thorium by 2011. Incidentally, Kamini, with 30 kilowatt capacity, is the only operating reactor in the world with U233 fuel. 9 As the Indian Department of Atomic Energy progresses in the harnessing of fusion energy and in the development of thorium-based Fast Breeder Reactors, it is believed that India may well develop the capabilities to be nuclear self-sufficient. This has made it the world leader in thorium technology. The technology that has been used to operate the Canadian reactor CIRUS and to develop the 900 Mega Watt Pressurized Heavy Water Reactors is Indian as well. India has come a long way in the development of nuclear technology. It began modestly with the commissioning of a Cirus 40 Mega Watt heavy-water-moderated research reactor from Canada in 1960. 10 Now, India provides the services of its scientists for expert assignments to other countries through the auspices of the International Atomic Energy Agency and through bilateral agreements for cooperation in the field of peaceful uses of atomic energy. This highlights India’s leading position in nuclear technology in the world. 11 It also underlines

India’s self-reliance as it has mastered the expertise covering the complete nuclear cycle from exploration and mining to power generation and waste management. In space technology, India too has developed advanced capabilities. Its seven communication satellites, the biggest civilian system in the Asia-Pacific region, now reach some of the remotest corners of the country, providing television coverage to 90 percent of the population. The system is also being used to extend remote healthcare services and education to the rural poor. 12 For instance, it has already linked 69 hospitals in remote areas of India to 19 hospitals in India’s main cities. This allows a health worker in a rural location to transmit a patient’s medical information to a specialist in seconds and, as in many cases, a video consultation is sufficient for diagnosis. This reduces the need for the patient to travel long distances unless it is absolutely necessary. India’s space programme is a money-earner as the Indian Space Research Organisation (ISRO) sells infrared images from its remote-sensing satellites to other countries, including the United States, where they are used for mapping. 13 Although India’s initial few rocket launches ended tragically, its Polar Synchronous Launch Vehicles (PSLV) have been successful since September 1993. Three percent of the ISRO’s US$3.3 billion five-year budget is devoted to the planned moon mission. This features a reconfigured PSLV rocket which will lift the Chandrayan to 36,000 kilometres, after which the craft’s own engines will take it to the moon. The Chandrayan will create history by producing 3D maps of the moon’s surface at a resolution of between 5 and 10 metres. 14 The Madras School of Economics estimates that the ISRO’s projects have increased India’s GDP by about three times the organisation’s budget. As India becomes a model for its space programme, which meets its societal demands for the needy in a cost effective manner, developing countries around the world seek the ISRO’s consultative assistance. Pharmaceuticals Today India is recognised as one of the leading global players in pharmaceuticals. It is internationally recognised as one of the lowest-cost-producers of drugs. India is the fourth largest producer of pharmaceutical in the world. 15 The value of the pharmaceutical industry’s output is reported to have grown more than ten-fold from Rs.50 billion in 1990 to Rs.650 billion in 2006-07. 16 In 2005, there were 84 manufacturing units in India approved by the United States’ Food and Drug Administration (FDA) – this was the largest number of FDAapproved manufacturing facilities in any country outside the United States. Indian companies are reported to be seeking more Abbreviated NEW Drug Approvals in the United States in specialised segments like anti-infectives, cardiovasculars and central nervous systems. 17 In 2006-07, India exported drugs and pharmaceuticals worth US$1.3 billion. India exports pharmaceutical products to a large number of countries, including the United States, the United Kingdom, Germany, Russia and China. Several indicators suggest that this success is due to its excellent qualities. In 2005, the Indian pharmaceutical industry consisted of 300 large to moderate firms and approximately 5,000 smaller firms. Some of the key players in this field are Biocon, Dr.Reddy’s Laboratories, Ranbaxy and Piramal Pharmaceuticals. Leading pharmaceutical firms in India have been making higher allocations for R&D spending and trying to acquire patents abroad. In the case of Dr.Reddy’s Laboratories, R&D charges, as a proportion of sales revenue, increased from 0.6 percent in the three-year period ending in 1987 to 2.8 percent and

11 percent respectively in the three-year periods ending in 1994-95 and 2005-06. Ranbaxy made 698 patent filings in the first nine months of 2005, compared to 428 patent filings in the first nine months of 2004. Ranbaxy has set the target of becoming ‘one of the top five generic drug makers in the world by 2012’ and spends approximately seven percent of its global revenue on R&D. Multinational companies have started outsourcing clinical trials to India as the cost reduction involved is substantial. Given the need for skilled manpower in this sector, the Indian government has decided to set up six new National Institutes of Pharmaceutical Education and Research. 18 The R&D expenditures at the aggregate levels has recorded a 40 percent increase from 20002006. 19 But, in terms of innovation capabilities, even if firms develop new modules, the skills for advancing such modules to clinical trials and regulatory stages are limited. Hence, a major challenge for the Indian firms will be to focus on advanced research and to collaborate with developing markets. Biotechnology Biotechnology is an emerging knowledge-intensive sector in India. Within the biotechnology sector, the key opportunity segments are bio-pharmaceutical, bio-agriculture, bio-industry, bio-informatics and bio-services, namely, R&D, clinical trials and manufacturing on contract. According to the Journal of Commercial Biotechnology, the sector crossed the US$2 billion mark during 2006-2007. While this figure accounts for only roughly one percent share of the global biotechnology market, this sector has grown by over 35 percent annually over the last five years. It could reach to US$25 billion by 2015. As support for this sector, the Indian government increased the Department of Biotechnology’s budget by four-fold from US$30 million to US$120 million between 1999 and 2005. Inspite of the increase in funds, fears have been expressed that the firms deal only with contract research, clinical trials and validation studies for MNCs and that adequate emphasis has not been given for the development of innovation skills. The Indian biotechnology sector today comprises over 325 companies. 20 Many Indian biotechnology firms have achieved global reputation and have brought the cost of drugs and other life-saving medicines down significantly. For instance, Shantha Biotechnics of Hyderabad today supplies 40 percent of the United Nations Children’s Fund’s global Hepatitis B vaccine supplies. 21 The biotechnology sector is set to provide the next wave of opportunities in India. In recognition of its huge potential, some analysts have compared the Indian biotechnology sector to a baby elephant which means that, when it matures, it will occupy much of India’s economic space. India’s Ranking as a Knowledge-Based Economy Looking at these industries, one can safely conclude that India has made significant progress in its knowledge-based sectors. But how does India compare with other knowledge-based economies such as Ireland and Israel, or emerging knowledge-based economies like China? I must confess that the data is rather limited for some variables but I shall try to present an overview based on available data.

According to the World Bank’s Knowledge Economy Index (KEI) 22 that takes into account the conduciveness of an economy’s environment for knowledge to be used effectively for economic development, India ranked 101st out of 140 countries in 2007. 23 Ireland, Israel and China ranked 14th, 22nd and 75th respectively. The same source showed that, while China and other emerging economies have improved their position significantly, in terms of innovation, education and ICT, India’s ranking remained the same in 2007 when compared to the 1995 figures. I have some doubts on the reliability of this figure. But it is possible that India lags behind the other countries in terms of R&D and education. India’s position, in terms of the publication of technical journal articles, patent granted by the United States Patent and Trademark Office, gross tertiary enrolments, computer usage per thousand population, internet users per thousand people, and the number of telephone per thousand people, is still low when compared to other knowledge-based economies. According to the Switzerland-based IMD World Competitiveness yearbook 2007, 24 India is the 27th most-competitive economy out of 55 countries in the survey based on economic performance, government efficiency, business efficiency and infrastructure. It also showed that R&D expenditure in India (as percentage of GDP) declined in recent years. In 1998, India’s R&D expenditure was 0.81 percent of its GDP but declined to 0.61 percent in 2005. China’s R&D expenditure increased from 0.65 percent (US$6,656.52) in 1998 to 1.33 percent (US$36,910.23) of its GDP in 2005. The same source also reported that, in 2005, Singapore R&D expenditure was US$2,752.74 equivalent to 2.36 percent of the country’s GDP. Israel’s R&D expenditure was 4.53 percent (US$6,440.31) of its GDP in 2006. In 2005, India’s per capita R&D expenditure was US$4.41, whereas, China’s and South Korea’s per capita R&D expenditure were US$22.87 and US$1,537.57 respectively. The OECD Fact Book 2007 also painted a similar picture of India’s expenditure in R&D. However, in terms of availability of information technology skills, development and application of technology, the IMD World Competitiveness Center states that India ranks favourably vis-à-vis Israel and China, among others. The same source reports that science education in the Indian schools is being sufficiently emphasised when compared to Israel and China (See Table 1). In some areas, India is ahead of its peers. For instance, as mentioned earlier, in the pharmaceutical sector, India has the largest number of FDA-approved plants after the United States. India’s Strategic Advantages The available data does not rank India as impressively as some of the other knowledge-based economies in the world. This is perhaps understandable, given that India’s liberalisation efforts, when compared to other knowledge-based economies, are a recent phenomenon. However, India has several key advantages which could work in its favour in the “knowledge-based economy” game. These are:a)

Young population – India enjoys the advantage of having a young population. In 2004, the proportion of population below 15 years of age was 32.5 percent in India, compared to 22 percent for China. It is estimated that, in 2020, an average person will only be 29 years old in India, compared to 37 years in China, 45 years in Western Europe, and 48 years in Japan. Therefore, it is argued, India possesses the potential to benefit from the ‘demographic dividend’ many long years into the future. However, India will only be able to reap the benefits of its young populace if it is able to provide the education and skills needed to meet the demands of its high-technology industries.

As will be discussed later, the education sector is a key challenge in India’s push to becoming a knowledge-based economy. b)

Critical mass of English-speaking workers – In 2001, India’s English speaking population was estimated to between 30 and 50 million, which is almost as large as the population of a medium-sized country. 25 At present, it is estimated to beyond 70 million. Such linguistic skills are important to allow Indians to connect with the rest of the world and to benefit from the opportunities in the global market place. Singapore opted for English as the main language for two reasons. Firstly, it provided a level playing field for the different races to compete in. Secondly, it enabled the nation to plug directly into the science and technology sector without going through a translation. India must use the English language for the same purpose.

Large and fast growing domestic market – Its relative domestic market size makes it one of the world’s largest. This is true regardless of the conversion factor one chooses to use. Using the new conversion factor, India’s GDP at PPP is estimated at US$3.19 trillion, making it the fifth largest economy in the world. At the nominal exchange rate (which means the value of a country’s currency in relation to other currencies without adjustment for the inflation rate), India’s GDP is projected be US$1.16 trillion in 2007-08. India’s per capita GDP at market prices (constant 1999-2000 prices) grew by at an average rate of 7.2 percent per annum during the last five years (2003-04 to 2007-08). At this rate, India’s average income would double in a decade. The growth rate of per capita consumption has also accelerated during the last five years to 5.1 percent as against the average growth rate of 2.6 percent in the 1990s. 26

Large and impressive diaspora – The Indian diaspora allows for invaluable knowledge linkages and networks globally. At the same time, the highly influential diaspora of Indian professionals and entrepreneurs have been instrumental in bringing high technology investments to Bangalore, Hyderabad and other Indian cities. The decision by the Indian government to allow for dual citizenship has provided further impetus to the diaspora to continue to stay rooted to India. India currently holds non-resident Indian (NRI) investments worth US$35 billion, with annual accretion of US$2-3 billion. 27 Remittances form nearly three percent of India’s GDP and have almost doubled over the last five years. The World Bank estimates have placed India as the largest recipient of remittances in the world and have predicted that India would receive more than US$200 billion remittances over the next five years. 28

Emerging financial sector – In recent years, India has attained macroeconomic stability and has made significant strides in institutional developments, including having a well-functioning financial sector. Currently, the Indian financial sector is more efficient at capital allocation than many other Asian countries. Small and medium enterprises account for 45 percent of banks’ business loans in India, compared to 26 percent in China. 29 India continues to attract foreign investments and presence in its banking sector due to its sheer potential alone. The total asset size of the Indian banking sector was US$270 billion in 2006 while total deposits amounted to US$220 billion. Revenues of the banking sector have grown at six percent (compound annual growth rate) in recent years to reach US$15 billion in 2006. This has resulted in commercial banks no longer simply catering to short- and mediumterm financing requirements, but also joining national-level and state-level financial institutions to provide project financing. 30

The deregulation of the banking industry has contributed to improved capital access as it has increased the presence of foreign banks in India. In accordance with the first phase of this deregulation, between March 2005 and March 2009, foreign banks may establish a presence by way of setting up a wholly-owned subsidiary (WOS) or conversion of existing branches into a WOS. This has prompted some of the world’s largest banks such as Citibank, ABN AMRO, HSBC, DBS and Standard Chartered Bank, among others, to have a significant presence in India. Key Challenges Whilst India enjoys significant advantages, it also faces several challenges which may impede or hinder it from becoming a knowledge superpower. I shall highlight the key challenges. Education India’s premier technical institutions, namely, the Indian Institutes of Technology (IITs) and the Indian Institutes of Management (IIM) have been the source of entrepreneurship in recent years. India has emerged as an important player in the world-wide ICT revolution on the basis of the substantial number of skilled professionals in software and hardware. Over the decades of planned development, India has built a fairly extensive system of higher education. This existing system is of varying quality. In March 2005, there were 343 institutes of higher education and 16,000 colleges. The total enrolment in higher education is estimated to be 9.3 million. However, India’s system of higher education suffers from several limitations. 31 Firstly, the gross enrolment ratio in higher education is less than nine percent in India, compared to 15 percent in China and more than 20 percent in many developing countries such as Mexico, Malaysia, Thailand, Chile and Brazil. In the case of IT, enrolment is 40 to 50 percent more in developed countries. 32 Secondly, the enrolment ratios vary across Indian states, with the southern and western states faring better than their eastern counterparts. Furthermore, the share of students enrolled in science was less than 20 percent in 2002-03 while the share of student enrolment in medicine and engineering/technology accounted for less than 12 percent of total student enrolment. In the case of youth literacy, India lags substantially behind all the other BRIC (Brazil, Russia, India, and China) countries. India’s achievements are well below the average of all developing countries (See Table 2). In India, 93.4 percent of all elementary-school-age children (6-14 year olds) were enrolled in school in 2006. Enrolment, however, is only the first step. A child must complete eight years of basic schooling. However, based on the Planning Commission Report of 2006, the drop-out rate in primary schools for the country as a whole was around 31 percent in 2003-04 and it was much higher in many states. The picture is not very rosy for secondary education, with gross enrolment ratio in 2003-04 estimated to be only 39 percent. The problem in the education sector is further compounded the lack of proper teaching facilities and best-practices, especially in the rural areas. According to the Third International Mathematics and Science study, 9th and 11th grade students in India scored way below the international average. 33 Some of the causes identified by education experts are a high teacher to pupil ratio, at 1:42 in some states and as high as 1:83 in others. There are also no standard

teacher training processes in place, and accountability and benchmarking are almost absent. The outdated rote learning is also in practice, without sufficient conceptual understanding. 34 Another challenge for the education sector is bridging the digital divide in the country. If India aspires to be a knowledge-based economy, it will have to ensure that most, if not all, of its people are equipped, prepared and ready to contribute to its development in this regard. At the moment, there is an urgent need to ensure affordable access to locally-relevant IT applications at a broad level. As it stands, less than two percent of the population in India owns a computer, only two percent of all schools have computers and about six percent of the total population is internet users. 35 A key development in the Indian education sector in recent times is the emergence of private schools. The Planning Commission reported in 2006 that private aided and unaided schools accounted for 58 percent of the total number of secondary schools and 25 percent of the student population. The proportion of private schools has certainly gone up in recent years. However, these schools have largely benefitted the relatively better-off sections of the Indian society. India needs to reduce this growing inequality in educational opportunity through state intervention and public investment in education. The Indian government has been taking steps to address the challenges of the education sector. The annual budget allocation for education has been increasing over the years. The government allocation for education grew from Rs.18,337 crore in FY2005-06 to Rs.28,674 crore in FY2007-08. This accounted for three percent and four percent of the budget in FY2005-06 and FY2007-08 respectively. Expenditure on education will increase by 20 percent over FY2007-08 to Rs.34,400 crore in FY2008-09, accounting for 4.5 percent of the budget. 36 Also, in the Budget of 2008, the Indian Finance Minister announced the establishment of three Indian Institutes of Science Education and Research (IISERs) at Mohali, Pune and Kolkata while an IIT has started operations at Kanchipuram. At the same time, the government will to set up 16 central universities in each of the hitherto uncovered states; three IITs in Andhra Pradesh, Bihar and Rajasthan; two IISERs at Bhopal and Tiruvananthapuram; and two Schools of Planning and Architecture at Bhopal and Vijayawada. It provided Rs.5 crore grant to Deccan College, Postgraduate and Research Institute, Pune while Rs.85 crore has been allocated for Innovation in Science Pursuit for Inspired Research which will include scholarships for young learners (10-17 years), scholarships for continuing science education (17-22 years) and opportunities for research careers (22-32 years). Also, Rs.100 crore has provided for establishing the National Knowledge Network. Over-regulated and Cumbersome Bureaucracy India has more than 17 million state and federal government employees. “About 20,000-odd federal officers control the collection and disbursement of over US$71 billion federal revenue every year”. 37 Transparency International, a global watchdog body on corruption, ranked India 72nd out of the 179 countries in its corruption perception index in 2007, One recent study by the Center for Media Studies, New Delhi, on corruption in urban services revealed that “nearly half of those who avail the services of the most frequently-visited public departments of the government in the country have had first hand experience of greasing palms at least once.” 38

At the same time, the “Inspector Regime” or “Licence Raj” has its inherent problems and, unfortunately, India has not done away with the old structures. A World Bank report ranks India 120th out of 178 countries in ease of doing business in 2006. The time to obtain a business licence in India ranges from 35 days in the financial hub, Mumbai, to 522 days in the eastern city of Ranchi. In contrast, a start-up takes five days in Singapore, and 17 days in the countries of the Organisation for Economic Co-operation and Development. 39 In sectors where 100 per cent foreign ownership is allowed under the “automatic route”, NRI Overseas Corporate Bodies (OCBs) have to get the Foreign Investment Promotion Board’s permission to purchase even one share in an Indian company. And it takes a minimum of four to five weeks to get the approval of the Reserve Bank of India (RBI). The whole process for approval for a normal case for NRI OCBs can take between three to four months. In the interim period, the market conditions could change. It is estimated that investors setting up shop in India require up to 70 different approvals. The World Bank estimates that there are 47 national laws and 157 state regulations governing employment in India. 40 Infrastructure Development This is an often-spoken subject in many forums. To develop a knowledge-based economy, the role of ICT, education and scientific infrastructure are necessary. However, equally critical is the need for supporting physical infrastructure such as railways, roads, ports, telecommunications and energy. A good infrastructure does not only enhance an economy’s productivity, it is also a crucial determinant in attracting investments into the country. India needs to develop of its infrastructure. It remains one of the lowest per capita energy consuming countries, only ahead of the African countries. Only half of the total households have access to electricity. The IMD World Competitiveness Online database shows that, based on survey data, India graded poorly in terms of the distribution infrastructure of goods and services, the maintenance and development of infrastructure and energy infrastructure, among others (See Table 1). On education, scientific and technological infrastructure, India needs improvement in terms of R&D expenditure, enforcement of intellectual property rights, the number of computer and Internet users, and knowledge transfer between universities and companies, inter alia. Role of Government in R&D The state has an important role in transforming the economy from a traditional to a knowledge-based one, as the private sector may not always invest in areas like education, infrastructure and R&D, if there a mismatch between the firm’s revenue and cost. In this context, Nobel Laureate Economist Joseph Stiglitz’s view is worth mentioning. Citing knowledge as a public good, Stiglitz expressed the view that the state must play some role in the provision of such goods. 41 Otherwise they will be undersupplied. To him, governments have pursued two different strategies in addressing the concern. The first is to increase the degree of appropriability of the return to knowledge by issuing patents and copyright protection. The second strategy for dealing with the appropriability problem entails direct government support. These two sets of issues are highly linked with an economy’s basic, scientific and information technology infrastructure.

Cross-border cooperation in R&D is another way to enhance a country’s scientific research. Countries in consideration can share their expertise based on comparative advantages. India has such an agreement with Israel, known as India-Israel Cooperation in Science and Technology. It could explore more of such collaborations, especially with countries which have made great strides in knowledge-based industries. In such instances, the government needs to take the lead. Sharing the Singapore Experience Before I conclude, I would like to share the experiences of Singapore in its push towards becoming a knowledge-based economy. One may argue that there is really no comparison between the two countries, given the size and complexities in India. However, I believe that we can draw some lessons from the tiny island state which could be useful and relevant to India. Firstly, the Singapore government takes the lead to promote sustained innovation as a driver of Singapore’s economy. In this regard, it aims to increase R&D in three key areas. Based on their growth trajectory in Asia, the Singapore government anticipates biomedical science, environment and water technology, and media industries to be key economic drivers in the future. Intensive R&D will, thus, help these industries achieve their potential. Singapore’s aggressive R&D pursuit includes a government commitment to increase research investment in these areas to three percent of its GDP by 2010 from the current 2.1 percent. This will increase Singapore’s overall research expenditure by three-fold from the current US$6.1 billion to reach US$19 billion in 2010. 42 Each of these growth sectors contributes to the development of a knowledge-based Singapore. An extensive and reliable ICT infrastructure supports knowledge building in the country. In this regard, the info-communication authorities in Singapore have been instrumental in developing the Intelligent Nation 2015 masterplan. 43 This plan was hatched after a year-long consultation with the public and private sectors to develop Singapore as an intelligent nation. The main objective of this masterplan is to establish an infocommunication infrastructure that will create the information superhighway to support the future generations of knowledge-based Singapore. This proposed infrastructure would consist of a wired and wireless network that would ensure the entire country is connected at home and everywhere. Human capital is arguably the most valuable asset that India has. It is this strength that possesses the potential of propelling India into a knowledge-based economy if carefully nurtured. 44 Singapore, like India, also depends heavily on its human capital to facilitate this transition. Without any other resource, Singapore has relied heavily on human capital to drive its growth and, in doing so, has built up a resource base that is resilient enough to withstand shocks and flexible enough to meet the demands of globalisation. Education has been a fundamental component of this process. Singapore has ensured that it provides the primary English, Mathematical and Science foundations needed to survive in this competitive environment. 45 However, this is insufficient for the society to transcend into an effective knowledge society and cope with the demands of a global workforce. The Singapore government introduced vocational education early on in its development history. This has helped to provide the talent needed for a skills-based section of the workforce. Further, by tapping on alternate talents than strict academic education, Singapore has ensured

that every spectrum of the society contributes positively to the overall knowledge attainment. In this regard, Institutes of Technical Education and polytechnics plug this gap for a technically- sound workforce. Conclusion The growth of a knowledge-economy is highly dependant on a robust policy environment. Countries aspiring to be knowledge-based economies must ensure a stable political and economic environment so that foreign direct investment and foreign expertise come in with their capital and other intangible assets. At the same time, local companies and talents will find it conducive to apply their knowledge and flourish in India. In conclusion, India has progressed well since it initiated its liberalisation drive in the early 1990s. It has emerged to become an important global economic power and it will continue to witness good growth. Its key knowledge-based industries have also moved out of its borders to compete and collaborate with some of the best around the world. However, I would add that India faces several key challenges. These are, by no means, small but, at the same time, they are not insurmountable. They can be overcome but this would require a direct and more proactive approach from the Indian government and the large Indian conglomerates.

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Table 1: Comparisons: Israel, India and China in the K-economy

Education University education meets the needs of a competitive economy (score 0-10), 2007 data Knowledge transfer between universities and companies (score 010), 2007 data Scientific Infrastructure Total Expenditure on R&D (% of GDP), 2005 data Total Expenditure on R&D per capita (US$ per capita), 2005 data Basic Research (score 0-10), 2007 data Science in school sufficiently emphasised (score 0-10), 2007 data Youth interest in science (score 0-10), 2007 data No. of patents granted to residents , 2004 data No of patents securing abroad, 2005 data Intellectual property rights are adequately enforced (score 0-10), 2007 data Technological Infrastructure Communication technology meets business requirements, 2007 data No. of computers per 1,000 people, 2006 data No. of Internet users per 1,000 people, 2006 data Information technology skills (score 0-10), 2007 data Technological cooperation between companies, (score 0-10), 2007 data Development and application of technology, (score 0-10), 2007 data Funding for technological development, (score 0-10), 2007 data High-tech exports (% of manufactured exports), 2004 data Basic Infrastructure The distribution infrastructure of goods and services (score 0-10), 2007 data Maintenance and development of infrastructure (score 0-10), 2007 data Quality of air transportation Energy infrastructure (score 0-10), 2007 data Energy intensity (Commercial energy consumed for each dollar of GDP in kilojoules)

Israel

India

China

7.33

6.07

4.98

8.62

4.70

3.98

4.53 905.81 7.08 5.33 6.10 N.A 1633 6.79

0.61 4.41 5.30 6.63 6.73 695 710 5.29

1.41 28.08 6.56 5.98 5.94 11798 716 5.40

9.08

7.63

7.67

606.72 637.67 9.28 7.79

19.18 61.70 8.75 6.03

56.04 103.59 5.81 5.08

8.05

6.57

6.44

7.74 18.82

6.37 4.88

4.12 29.81

6.65

4.77

6.58

5.59

3.37

6.17

6.67 6.05 7,094.46

6.83 2.92 22,144.9 2

7.38 5.48 27,314.0 9

73108.87 71105.44

9462.01 20257.29

12772.32 14795.88

6.15

5.73

5.38

Productivity & Efficiency Overall productivity, GDP per person employed, US$, 2006 data Productivity in services, GDP per person employed in services, 2006 data Productivity of companies is sufficiently supported by global strategies, (score 0-10), 2007 data

Source: IMD World Competitiveness Yearbook, various years

Table 2: Youth Literacy Rates (15-24 year olds): Latest available between 2000-04 Country India China Brazil Russian Federation World Developing Countries

Total 76.4 98.9 96.8 99.7 87.3 84.8

Male 84.2 99.2 95.8 99.7. 90.5 88.6

Source: Extracted from Table 1 in Kingdom (2007)

Female 67.7 98.5 97.9 99.8 84.1 80.9

Endnotes †

2 3 4

5 6

7 8

9 10 11 12 13 14

15 16 17 18 19

20 21

23 24 25

26 27 28 29 30

31 32 33

34 35 36

This paper was presented at the 1st IISS-CITI India Global Forum on “India as A Rising Great Power: Challenges and Opportunities”, held in New Delhi, India, from 18 – 20 April 2008. The author would like to thank Mr Hernaikh Singh, Head, Administration and Corporate Communications at the Institute of South Asian Studies (ISAS), and Mr Mohammad Shahidul Islam, Ms Indu Rayadurgam, Mr Iftikhar Lodhi and Mr Malminderjit Singh, Research Associates at ISAS, for their assistance in the preparation of this paper. Mr Gopinath Pillai is Chairman of the Management Board of the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. Mathematics and Science in Ancient India, available at < http://www.sfusd.k12.ca.us/schwww/sch618/India/ Math_and_Science.html > History of Indian Science & Technology, available at < http://www.indianscience.org/ > History of Indian Science & Technology, available at < http://www.indianscience.org/ > Quoted in then Minister of External Affairs of India, K. Natwar Singh’s address at McGill University and the Canadian Institute of International Affairs, Montreal, 27 September, 2005. Economist Intelligence Unit. For details, see Mapping Singapore’s Knowledge-based Economy, Economic Survey of Singapore (Third Quarter, 2002). NASSCOM Strategic Review 2008. Available at <http://www.kpmg.co.uk/news/docs/ita_KnowProOutsourcing2008 percent20web percent20and percent20links.pdf > Bhabha Atomic Research Center website [http://www.barc.ernet.in/webpages/technologies/home.html] India Department of Atomic Energy [http://www.dae.gov.in]. Ibid. New Scientist magazine, Issue 2487, 19 February 2005. Ibid. Ibid. The Economic Survey 2006-07, Ministry of Finance, India The Economic Survey 2007-08, Ministry of Finance, India. The Economic Survey 2006-07, Ministry of Finance, India. The Economic Survey 2007-08, Ministry of Finance, India. Compiled from Jayan Thomas( 2007) and ‘ Where will the Indian drug companies be in five years?- If they Innovate’, prepared by Wharton and Bain & Company, www.bain.com/bainweb/pdfs/cms/hotTopics/Bain_ India_Pharma.pdf , accessed on April 3, 2008 http://www.bangalorebio.in/biotechnology_show.html Asian Science Park Association < http://cyberaspa.org/chi/board/sub02_view.php?page=21&id=233&no=& cid=1&code=asia_eco > The World Bank’s Knowledge Assessment Methodology consists of 83 structural and qualitative variables for 140 countries to measure their performance on the four Knowledge Economy pillars: Economic Incentive and Institutional Regime, Education, Innovation, and Information and Communications Technologies. World Bank, “Knowledge Assessment Methodology, available at < http://www.worldbank.org/kam > Available at < http://www.imd.ch/research/centers/wcc/index.cfm > The Economist, 2001. The Economic Survey 2007-08, Ministry of Finance, India. P Chidambaram, Pravasi Bharatiya Diwas 2007. Anil Kapur, Pravasi Bharatiya Diwas 2007. Reforming India’s financial system, Mckinsey Quarterly, September 2005 Indian Ministry of External Affairs Report on Financial Sector < http://meaindia.nic.in/indiapublication/ Financial sector.htm] Kapur and Mehta 2004 and Hashim (2008). See Cited by Hashim (2008) based on PROPHE, http://www.albany.edu/dept/prophe/data/data.html. World Bank (2006), Secondary Education in India, http://info.worldbank.org/etools/docs/library/235784/2 Amit%20Darsecondary.pdf UNICEF (2006), “Global Campaign for Education”, http://www.unicef.org/india/education_1551.htm “India’s Digital Divide may be shrinking”, Marketplace website, 22 March 2005 These figures represent the central government’s expenditure on education and were calculated by the Institute of South Asian Studies from the Indian budget for the respective years.

42 43 44

“India Tries to root out bureaucratic corruption”, Asia Times, 07 August 2003, http://www.atimes.com/ atimes/South_Asia/ EH07Df01.html Ibid “The Investment Climate in Brazil, India, and South Africa: A Contribution to the IBSA Debate”, World Bank, 2006, “Indian Bureaucracy as a Deterrent”, Rediff Business Online, June 2003, http://www.rediff.com/money/2003/jun/27guest.htm Knowledge as a Global Public Good < http://www.worldbank.org/knowledge/chiefecon/articles /undpk2/ index.htm> Dr Balaji Sadasivan, Speech delivered at The Pravasi Bharatiya Divas 2008, New Delhi, 8 January 2008. Ibid. Shri Atal Bihari Vajpayee, The Annual Singapore Lecture 2002, “India’s perspectives on ASEAN and the Asia Pacific Region”, Singapore, 9 April 2002. Rear-Admiral (NS) Teo Chee Hean, East Asia Economic Summit Plenary Session, World Economic Forum, “Building Competitiveness in the Knowledge Economy – how is Asia Facing up to the Task?” Singapore, 19 October 1999.

Key References Basu. K. and Annemie Maertens, “The pattern and causes of economic growth in India” Oxford Review of Economic Policy, Volume 23, Number 2, 2007, pp.143–167. Dahlman, C. and Utz, A. (2005); “India and the Knowledge Economy; Leveraging Strengths and Opportunities: Overview”; Finance and Private Sector Development Unit of the World Bank’s South Asia Region and The World Bank Institute, Washington, D.C. http://info.worldbank.org/etools/docs/library/145261/India_KE_Overview.pdf (Accessed on 2 April 2008). “India as Knowledge Superpower”, Planning Commission of India 2001. “Outsourcing to India: Back Office to the World”, The Economist, 5 May 2001. Kingdon Gandhi Geeta (2007). “The progress of school education in India”, Oxford Review of Policy, Volume 23, Number 2, 2007, pp.168-195. Hashim, S.R., (2008), “State of Higher Education in India”, in R. Radhakrishna (Ed), India Development Report 2008, Oxford University Press, New Delhi. Kapur Dives and Pratap Bhanu Mehta (2004), “Indian Higher Education Reform: From HalfBaked Socialism to Half-Baked Capitalism” CID Working Paper No. 108, September 2004. Planning Commission (2006), “Towards Faster and Inclusive Growth: Approach to the 11th Five Year Plan: 2007-2012”, Yojana Bhavan, New Delhi. Available at www.planning commission.com. Accessed on 3 April 2008. Thomas, Jayan Jose (2008), “India’s Rise in the New Economy: Implications for Labour”, ISAS Working Paper 35, Institute of South Asian Studies, Singapore. Thomas, Jayan Jose (2005), “New Technologies for India’s Development”, in Parikh, Kirit and R. Radhakrishna (eds), India Development Report 2004-05, Oxford University Press, New Delhi, pp126-40.

ISAS Insights No. 29 – Date: 28 April 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Development Trends in Selected Indian States – Issues of Governance and Management * S. Narayan † The southern and western states in India are regarded as high growth and high growth potential areas. This paper examines the management of government finances and expenditure in the states of Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Kerala and Tamil Nadu. Table 1 indicates that Gujarat has grown the most in recent years, considerably above the national average. Table 1: Gross state domestic product (current prices) (Rupees crore)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

2005-06 236,034 216,651 170,741 118,998 432,413 223,528

2006-07 269,173 247,681 189,044 132,739 482,328 246,266

2007-08 (E) 298,459 283,156 209,308 146,952 538,004 274,378

2008-09 (E) 330,930 323,712 231,745 162,687 600,107 308,136

Growth rate (%) 10.88 14.32 10.72 10.71 11.54 9.08

Source: National Income Statistics, CSO; Estimates by BIU In terms of per capita net state domestic product current prices, Tamil Nadu ranks 12th in the country (Rs. 29,958), behind Haryana, Maharashtra and Punjab, among major states. Among the southern states, Tamil Nadu is just behind Kerala, but higher than the other three states. The estimates of gross state domestic product (GSDP) growth as well as population growth reveal that Gujarat could lead in per capita net state domestic product over the next two years (see Table 2).

* †

In the tables in the paper, Rs. 1 crore is about US$250 million. Dr S Narayan is a Visiting Senior Research Fellow and Head of Research at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He is the former economic adviser to the Prime Minister of India. He can be reached at snarayan43@gmail.com.

Table 2: Per capita net state domestic product (current prices) (Rupees)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

2005-06 26,226 34,157 27,101 30,668 37,081 29,958

2006-07 29,582 43,324 32,447 33,609 32,733 35,668

2007-08(E) 35,879 50,400 36,058 42,961 49,579 40,127

2008-09 (E) 36,100 57,048 39,548 47,372 54,863 43,595

Growth rate (%) 9.18 10.63 8.59 8.06 8.13 7.62

Source: National Income Statistics, CSO; Estimates by BIU An analysis of the budgets of these states for 2008-09 shows that Maharashtra and Andhra Pradesh have healthy revenue receipts, and are managing their revenue expenditures within the receipts. It may be recalled that, only a few years ago, these two states used to report massive revenue deficits. The lack of fiscal prudence and management is a function of governance. In Karnataka, ineffective and weak governments in the past five years have led the state into fiscal decline. In Kerala, the ruling coalitions have been unable to strategise a clear developmental path, and the budgets reflect these infirmities. Table 3: Revenue receipts/expenditure and deficit position (budget estimates 2008-09) (Rupees crore) State Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

Revenue receipts

Revenue expenditure

70,927 38,278 46,189 24,936 79,911 51,506

70,218 38,226 31,787 28,303 78,946 51,422

Revenue surplus(+)/deficit(-) 709 484 -2,973 -3,367 965 84

Source: State Budget documents A similar trend is evident in the case of interest payments as well, with high commitments in the case of Karnataka and Kerala. Interestingly, Table 4 also indicates the overhang of past borrowings in the Maharashtra case â&#x20AC;&#x201C; there was a period when the state was even borrowing for salary payments. The high debt service burden is being slowly reduced through better management, but reflects the burden of poor governance on successor governments. Table 4: Interest payments vis-Ă -vis revenue expenditure (2008-09 BE) Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

Interest payment (2008-09 BE) 8,985 7,384 5,278 5,144 12,389 5,957

Interest payment as % of total revenue expenditure 12.80% 19.32% 16.60% 18.17% 15.69% 10.82%

Source: State Budget documents The fiscal indicators calculated in Table 5 indicate that the better governed states have had better performances. Tamil Nadu has been consistently a better fiscal performer among the 2

key states. Both in terms of gross fiscal deficit and revenue deficit as percentage of GSDP, its ratios are better than that of other states in Table 5. This has been possible as tax revenues, as a percentage of GSDP, have been high in Tamil Nadu. However, both Andhra Pradesh and Karnataka have better development expenditure/GSDP ratios. In terms of social sector spending, there is little to choose between Andhra Pradesh, Karnataka and Tamil Nadu. However, Andhra Pradesh and Karnataka have better capital outlay ratios in relation to the respective GSDP. Table 5: Key fiscal indicators (2008-09 BE)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

GFD/ GSDP (2.92)

RD/ GSDP 0.21

OTR/ GSDP 11.44

*DEV/ GSDP 15.3

*SSE/ GSDP 8.0

CO/ GSDP 5.39

(0.15) (2.31) 4.26 (2.19) (2.98)

0.15 (1.22) (2.07) 0.16 0.03

9.17 12.89 9.70 10.14 10.10

10.3 15.1 10.4 9.8 12.7

5.3 8.0 7.2 6.0 7.8

3.47 4.17 0.96 2.41 3.01

GFD-Gross Fiscal Deficit DEV-Development Expenditure RD-Revenue Deficit SSE-Social Sector Expenditure OTR-Own Tax Revenue CO-Capital Outlay Source: State finances; a study of budgets of 2007-08; RBI* * Since estimates for all the states are not available for 2008-09, comparison has been made using 2007-08 figures. The pattern of growth strategies can be seen in the estimates of capital expenditure as well. Karnataka and Kerala have low growth (though in the case of Kerala, RE 2006-07 is an aberration due to a lumpy project commitment). Interestingly, fiscal prudence in Maharashtra is keeping capital expenditure growth low. There is focus in that state on more public-private partnership projects even for infrastructure, thus moving capital expenditure away from government budgets. Table 6: Capital outlay (Rupees crore)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

2005-06 (Accounts)

2006-07 (RE)

2007-08 (BE)

17,852

Growth rate (06-07 over 05-06) 30.37%

Growth rate (07-08 over 06-07) 38.26%

9,904

12,912

9,990 8,900 903 11,591 6,604

9,502 9,330 1,499 13,406 8,327

11,229 10,169 1,562 14,471 9,876

-4.88% 4.83% 66.00% 15.66% 26.09%

18.18% 8.99% 4.20% 7.94% 18.60%

Source: State finances; a study of budgets of 2007-08; RBI It is interesting to look at the focus on the social sectors in these states. All these states have spent more than 10 percent of their outlay on education, with Kerala consistently allocating 3

15 percent to 19 percent. It is possible to argue that, in Karnataka, Kerala and Maharashtra, there is continuing attention and investment in education of a high order, whereas in the other three states, though there has been attention to education, there have been years where investments have lagged the previous years. Table 7: Education share in total disbursement (Percent)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

2000 -01 13.3

2001 -02 12.5

2002 -03 11.7

2003 -04 11.6

2004 -05 9.8

2005 -06 11.1

2006-07 (RE) 11.7

2007-08 (BE) 10.4

Average

13.6 17.7 20.0 22.3 18.0

12.7 16.0 19.0 22.1 17.3

13.5 14.8 17.6 18.9 13.8

11.2 12.9 15.7 15.5 12.6

11.5 12.7 16.2 14.0 11.2

12.6 14.0 16.6 15.7 13.6

12.2 13.5 17.2 16.2 13.2

12.2 14.5 18.1 15.0 15.1

12.44 14.51 17.55 17.46 14.35

11.51

Source: State finances; a study of budgets of 2007-08; RBI The Indian National Planning Commission, and indeed the Common Minimum Programme of the United Progressive Alliance (UPA) have focused on providing three percent of all public expenditure for health. The selected states have been doing this on a regular basis. Three points are of note. First, Kerala and Tamil Nadu have been consistently high spenders and, surprisingly, allocations in Gujarat have been among the lowest in this set, as a percentage. Perhaps a per capita analysis might lead to a different picture, as population densities in Gujarat and Kerala are very different. A second point is that, in spite of four years of the UPA government and the announced emphasis on public health, there is little evidence of any sharp increases in public health expenditures. Thirdly, as the fiscal situation in the states improves, there is evidence of greater attention to public health (and to education). This is a commentary to the fact that, when finances are stressed, allocations to these two sectors are under pressure. In an ideal situation of good governance, these two sectors should be the last to face the expenditure axe, but this does not seem to have been the case.

Table 8: Public health and family welfare expenditure as percentage of aggregate disbursement (Percent)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

200001 4.7

200102 4.4

200203 4

200304 3.7

200405 3.2

200506 3.4

2006-07 (RE) 3.4

2007-08 (BE) 3.3

Average

3.4 5.1 5.3 3.9 4.9

2.8 4.9 5.8 4.3 4.9

3.2 4.2 4.8 3.7 4.1

2.7 3.4 4.3 3.2 3.8

2.8 3 4.5 2.7 3.2

3.1 3.3 4.7 3.2 4.2

2.9 3.6 4.9 3.3 3.7

3.1 3.9 4.6 3.3 4.2

3.00 3.93 4.86 3.45 4.13

3.76

Source: State finances; a study of budgets of 2007-08; RBI Tables 9 and 10 make interesting reading, and give an indication of the mindsets of the governments in power in the individual states. The government in Gujarat, for the last 10 years, has prided itself in being market-oriented, with consumers having to bear the costs of 4

services. Electricity for agriculture and the price of products in the public distribution system reflect a philosophy of providing infrastructure and amenities at reasonable cost, and with little subsidy. The benefits have been in the form of a phenomenal growth and per capita incomes that the citizens of the state have benefited from. The picture in Andhra Pradesh, Maharashtra and Tamil Nadu is different. The state governments need to protect election promises of subsidies and social welfare grants and the sharp increases in expenditure in the last three to four years is palpable. These are clearly crowding out other commitments in these states, as the percentage of amounts spent on the social sectors increases. Karnataka is a picture of politics, where, suddenly in 2007-08, there is a sharp increase in expenditure in the social sectors, as the government teetered into uncertainties and collapse. Table 9: Expenditure on social welfare (Rupees crore)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

200708 (BE) 28,247

Average

14,900

200607 (RE) 21,119

10,995 11,675 7,524 24,268 14,297

13,055 15,479 9,768 29,928 18,778

13,378 19,225 10,472 31,307 21,221

4.73% 14.30% 10.39% 10.64% 11.97%

200001

200102

200203

200304

200405

200506

10,006

10,876

11,179

13,367

13,821

9,681 7,541 5,242 15,429 9,618

9,029 7,642 4,932 15,452 9,190

8,177 7,570 6,338 15,704 9,662

8,992 8,315 5,924 18,877 11,586

10,127 9,764 7,344 20,433 13,617

15.98%

Source: State finances; a study of budgets of 2007-08; RBI Table 10: Social expenditure to total expenditure (Percent)

Andhra Pradesh Gujarat Karnataka Kerala Maharashtra Tamil Nadu

2000- 2001- 2002- 200301 02 03 04 35.6 35 32.5 33.3

200405 29.3

200506 30.8

2006-07 (RE) 34.8

2007-08 (BE) 36.1

Average

35.6 38.3 39.9 36.6 39.4

29 28.5 36.2 28.1 32.6

32.1 33.4 35.6 35.3 36.9

33.6 34.9 34 38.2 35.3

32.1 39.1 34.1 37.9 37.9

31.91 33.60 35.60 34.59 35.68

35.2 34.8 37.6 36.4 37

30.4 31.4 37.4 33.3 32

27.3 28.4 30 30.9 34.3

33.43

Source: State finances; a study of budgets of 2007-08; RBI It is possible to draw some broad conclusions from Tables 9 and 10. Along with Haryana and Punjab, these are among the more progressive of the larger states of India. They are characterised by high growth rates of GSDP, and this is reflected in the steady increases in per capita incomes. The last three years have witnessed a steady attempt to increase state revenues, and to keep revenue expenditures within revenue receipts, an attempt at which most of these states have been successful. This has, in part, been possible through increases in revenue receipts, buoyed by the value-added tax introduced in 2005. Interest payments, as a percentage of expenditure, have fallen, and the state finances are on a sounder footing. Within the environment of the overall improvements in the macro economy, the individual states have pursued somewhat different paths. These have been determined more by local 5

political considerations of the governments in power in the state rather than by any perceived long term strategy. Certain long term investment trends, especially in Kerala in respect of education and health, continue to be maintained but there are variations seen in the other states. The pattern in Gujarat appears to have stabilised towards a market-oriented liberal environment with the state taking the responsibility of providing public goods at a reasonable price in an efficient manner. The political compulsions of governance are considerably more apparent in Tamil Nadu, Andhra and Karnataka, where exiting governments are replacements of earlier political entities in power â&#x20AC;&#x201C; the need to do something different is apparent in the patterns of expenditure. Typically, this is visible in additional allocations for social welfare. Outside of the presentation in the tables, this has also been visible in the large announcements for subsidies for food grains in public distribution systems, freebies like television sets for all, and, in many ways, an attempt to ingratiate, through free gifts, the populace. Capital expenditure and plan expenditure have suffered, and it is possible to argue that the long-term investment gets crowded out through these ad hoc welfare measures. It is difficult to argue, in the long term, which of these would have sustainable effects. Conventional arguments would say that a liberal market-oriented environment, coupled with investments in education and health, would lead to a long-term sustainable pattern of growth of per capita incomes, while grants and subsidies do not create wealth or employment. If this argument holds true, then, among these Indian states, perhaps Gujarat, Kerala, and even Maharashtra, appear to be on a more sustainable growth path than Tamil Nadu, Andhra Pradesh and Karnataka.

oooOOOooo

ISAS Insights No. 30 – Date: 5 May 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Of Agflation and Agriculture: Time to Fix the Structural Problems M. Shahidul Islam ∗ "If agriculture goes wrong, nothing else can go right.” M. S. Swaminathan Agricultural commodity prices have reached nosebleed levels in recent months. 1 The impact of the ongoing agflation across the world, especially on the low and fixed income groups, is so severe that the World Food Programme has described the phenomenon as a ‘silent tsunami’. 2 The current food shortage is also seen as the first truly global food crisis since World War II. The Asian Development Bank thinks that one billion people in Asia are seriously affected by surging global food prices. 3 As there is a direct nexus between access to food and poverty, it is feared that soaring food prices will push more people under the poverty line and this could jeopardise the progress towards the millennium development goals. The World Bank believes that the current food crisis imperils 100 million people in poor countries. 4 Nevertheless, the World Bank’s explanation of extreme poverty (people who earns less than US$1 a day) underestimates the actual number of poor people in the world, as the sliding United States dollar and higher food and energy prices have made the definition somewhat obsolete. However, there are some winners of the current soft commodity boom too. Net food exporting countries have been enjoying improved terms of trade. There are several explanations for the ongoing high food prices. Rising demand from emerging markets, sliding United States dollar, higher energy prices, excessively loose monetary conditions, commodity speculation, weather woe, and developments of bio-fuels, inter alia, are the drivers of the current agflation. Further, to fuel the fire, some Asian ∗

3 4

Mr Mohammad Shahidul Islam is a Research Associate at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be reached at isasmsi@nus.edu.sg. For instance, in the last one year, the prices of rice, wheat and palm oil has increased 78 percent, 120 percent and 102 percent respectively, according to the International Monetary Fund Commodity Prices. In 2007, international food price index increased by roughly 40 percent, and in the first three months of 2008 prices rose by about 50 percent, according to the International Food Policy and Research Institute. Press Release, The World Food Programme, available at http://www.wfp.org/english/?ModuleID=137& Key=2820 International Herald Tribune, 3 May 2008 Robert Zoellick, the World Bank President, commented at the International Monetary Fund-World Bank Spring Meetings in Washington on 14 April, 2008.

countries, including China, India and Vietnam, have banned or restricted several key cereal exports that have created food shortages in many parts of Asia. These factors, mostly demand-driven one, are pushing food-inflation up. However, the ongoing agflation is also linked to some fundamental supply-side factors associated with agriculture. Nonetheless, the current global food crisis can be a tipping point for the civilisations’ most primitive sector, if history is any guide. New Dynamics in Food Supply-Demand In the last four decades, cereal production has more than doubled largely owing to the Green Revolution in the late 1960s, outnumbering population growth. 5 However, these great achievements have been overshadowed by chronic hunger and malnutrition that still haunt over 800 million people, mostly in Sub-Saharan Africa and many parts of Asia and Latin America. 6 After maintaining equilibrium in the food grain market for a long period, some important factors have emerged in the global food supply-demand scene in recent years. Firstly, there has been a sudden shift from demand-constraint to supply-constraint environment in the agriculture market. Despite a 3.5 billion increase in global population since 1960, world food supplies have been 20 percent higher per person and real prices are 40 percent lower than they were in 1961, according to the Food and Agriculture Organization (FAO). 7 As there has been a dampening effect on agricultural commodity prices, cereal and other food grain production have started to increase at a decreasing pace, especially in India, China and some other parts of the world. 8 Since early 1990s, agricultural productivity growth (particularly rice, wheat and maize) has shown a declining trend. 9 Since 2007, higher demand has been surging the food prices, as supply are not being able to cope with it. Secondly, as the per capita income increases, the demand for meat and dairy products tends to increase. In recent years, per capita calorie intake has been increasing steadily in developing countries, particularly in Asia. Since China and other emerging economies’ higher gross domestic product (GDP) growth has lifted millions of people out of extreme poverty, the demand for high-protein diets has increased. As a result, meat consumption has increased tremendously. The end result is more and more cereals have diverted to produce poultry and other meat. For instance, in China, the 2005/1990 ratios of per capita consumption for cereals, meat, milk and vegetables were 0.8, 2.4, 3.0 and 2.9 respectively. 10 It is estimated that, for the production of one kilogramme of meat, on average at least three

8 9 10

Borlaug, Norman E. et al (2003), “Feeding a world of ten billion people: A 21st century challenge”, Proceedings of the International Congress “In the Wake of the Double Helix: From the Green Revolution to the Gene Revolution”, 27-31 May 2003, Bologna, Italy. Food and Agriculture Organization (2005), “The State of Food Insecurity in the World” available at ftp://ftp.fao.org/docrep/fao/008/a0200e/a0199e.pdf. Food and Agriculture Organization (2003), “World agriculture: towards 2015/2020: an FAO perspective”, FAO, Rome, Italy. FAOSTAT , available at <http://faostat.fao.org/ > World Development Report 2008. Braun, Joachim Von (2008), ‘High and Rising Food Prices, International Food Research Institute (IFPRI), Presented at a USAID conference on ‘Addressing the Challenges of a Changing World Food Situation: Preventing and Leveraging Opportunities, Washington, D.C, 11 April 2008.

kilogrammes of cereals are needed. 11 Consequently, the world’s cereal demand is likely to increase by 40-50 percent, driven strongly by rapidly growing animal feed use and meat production. 12 Thirdly, climate change concerns have promoted the development of alternative energy market. For instance, the road to biofuel was paved with good intentions. But the end result – the diversion of food to fuel – is doing more harm than good. The European Union, the United States and some other countries subsidise farmers to grow crops for alternative energy. The United States farmers have shifted their cultivation towards biofuel crops substantially in recent years. It is estimated that, in 2008, roughly 30 percent of United States maize production will be diverted to ethanol production 13 and such transformation is largely at the cost of wheat and soybean cultivation. The United Nations has dubbed this phenomenon as the crime against humanity. Though staples like rice and wheat are not used in biofuel production, however, if the use of maize in biofuel makes it more expensive then the consumers might be forced to substitute maize for cheaper wheat and rice. As a result, the prices of rice and wheat would increase in tandem with the price of maize. Last but not least, the world is depleting resources much faster than they are being replaced. There has been increasing damage to the ecological foundations of agriculture such as land, water, forests, biodiversity and atmosphere, among others. The higher energy and food prices are giving a signal that the prices of these commodities have been under-priced and the supply-demand mismatch could lead to even higher prices for non-renewable and quasinonrenewable commodities. For instance, oil is believed to be under priced relative to the cost of carbon emissions. Similarly, biodiversity losses due to environmental degradation are not being replaced which had has an adverse impact on agricultural productivity. Such scenario could prove the Club of Rome right, which predicted in 1972 that, “If present growth trends continued unchanged, a limit to the growth that our planet has enjoyed would be reached sometime within the next 100 years.” 14 Structural Change in Asia’s Agricultural Production Asia accounts for 42 percent of global cereal (91 percent of global rice production) and 39 percent of meat production. 15 China and India are the two largest homes to agriculture which constitute roughly 28 percent (China’s share 18 percent and India’s 10 percent) share in world cereal production. 16 These two economies, along with some other Asian countries, have shown tremendous success in terms of food production since 1970s. However, in current decade, the portfolio of Asia’s agriculture, particularly the Chinese, has changed significantly. The share of cereal in total agriculture produces has declined both in China and India compared to the period of 1999-2000. 17 However, cereal production has increased in Vietnam, Indonesia and Thailand. In 2006, global cereal stocks, particularly wheat, were at their lowest levels since the early 1980s. Stocks in China, which consists about 40 percent of 11

13 14 15 16 17

According to the Europa Bio, available at < http://www.europabio.org/Biofuels/PressBrief/Food_ March08.pdf > Borlaug, Norman E. et al (2003), “Feeding a world of ten billion people: A 21st century challenge”, Proceedings of the International Congress “In the Wake of the Double Helix: From the Green Revolution to the Gene Revolution”, 27-31 May 2003, Bologna, Italy. Rising Food Prices: What Should be Done?, IFPRI Policy Brief, April 2008. The Club of Rome (1972), “The Limits to growth”, available at www.clubofrome.org/docs/limits.rtf. Reducing Poverty and Hunger in Asia, IFPRI Brief No. 6, March 2008. FAOSTAT. Ibid.

total stocks, declined significantly from 2000 to 2004 and have not recovered in recent years. 18 Nevertheless, meat, vegetables, fruits and fish production have witnessed a tremendous growth in China which comprises approximately 37 percent and 29 percent share of the world’s vegetables and fruits, and meat production. 19 As a result, China’s food production index increased from 59 in 1990 to 127 in 2006. 20 India also witnessed a steady growth in its food production index until 2001 after which the country’s food production has been less than stable. 21 India’s agricultural sector grew by 1.66 percent annually from 1996-97 to 2004-05, compared to 3.29 percent growth from 1980-81 to 1989-90. 22 Consequently, the share of agriculture to total GDP has declined without a commensurate decline in the number of agricultural workers. Apart from India’s one billion plus population, the country has been a major import source for cereal and numerous food items until recently. Noted agronomists have studied the crisis in the Indian agriculture sector, both quantitatively and qualitatively. Generally, agricultural output is a function of rainfall, terms of trade between agriculture and non-agriculture, fertiliser, irrigation, crop intensity, institutional credit, public investment in agriculture, among others. In India’s case, a study focusing on the aforesaid explanatory variables has found that, after 1996-97, almost all factors, except credit, turned unfavourable for the growth of agricultural output. 23 Increasing farmer suicides in India in recent years is an obvious reflection of agrarian crisis in the country. As the recent growth in the Indian agricultural sector has been below its population growth, the country has lost its position as a food surplus country. The food grain growth rate (1.2 percent) in India was lower than its population growth rate (1.82 percent) in 1990s though the latter has declined in recent years. As a result, India’s share in food export has declined from 16 percent in 1990 to nine percent in 2005. 24 India’s recent poor agricultural performance has caused food problems in many parts of Asia. For instance, one of the reasons for the ongoing high food-inflation in Bangladesh is due to India’s ban on all but non-basmati rice and some other agriculture produces. Agriculture diversification in China, coupled with higher demand for protein meal, has forced the country to slash its food export steadily. Its share in food export has also declined alarmingly from 13 percent in 1990 to three percent in 2006. 25 The recent decline in cereal production in China and India has not been fully compensated by production increase in other parts of Asia, particularly in Vietnam, Indonesia and Thailand. 26 Subsidy, Tax, and Market Access: Major Roadblocks for the Agriculture Sector Traditionally, developed countries subsidise and developing countries tax their agriculture sector. Nevertheless, the developing countries’ agriculture tax policies underwent some

19 20 21 22

23 24 25 26

International Food Research Institute (2007): “The World Food Situation”, Policy Report No. 18, available at http://www.ifpri.org/pubs/fpr/pr18.asp. FAOSTAT Ibid. Ibid. Chand, Ramesh et al (2007), “Growth Crisis in Agriculture: Severity and Options at National and State Levels”, Economic and Political Weekly, 30 June 2007. Ibid. The World Development Indicators, available at www.worldbank.org/data. Ibid. FAOSTAT.

changes in the 1980s and 1990s, and both direct and indirect taxes were reduced. 27 Market access barriers and agriculture subsidies in the countries of the Organisation for Economic Co-operation and Development (OECD) are two major hurdles for the farmers in developing countries as well as free-flow of agriculture commodities across the world. Estimation shows that more than 90 percent of the global costs come from market access restrictions through tariffs rather than from export subsidies and domestic support. 28 According to the World Bank, the economic and social cost of today’s trade, price and subsidy policies in world agriculture is large and they depressed international commodity prices by five percent on average and suppress agricultural output growth in developing countries. 29 The United States, the European Union and other industrialised countries’ generous subsidies to their domestic farmers, 30 trade policies including dumping, among others, have kept agriculture commodity prices low. The developed nations’ agricultural and trade policies have barred the developing countries access to the global agricultural market. Such distortions have made the developing nation’s comparative advantage in agriculture redundant. Estimation shows that developed countries’ agricultural policies cost developing countries US$17 billion a year. 31 As the agricultural produces have been under-priced for a long period, developing countries terms of trade has deteriorated vis-à-vis its developed counterpart. There have been little incentives to stay in the paddy field than rushing to metropolis for off-firm jobs or migrating to the Gulf and other booming economic zones. Indeed, one of the reasons for the Chinese moves from cereal to vegetables, fruits and meat production in the late 1990s and in early 2000s is that oversupply caused the grain prices to fall. 32 Had there been no bar to flow these surplus grain in other parts of the world, China (so as other developing countries) could maintain its higher cereal production record. These market distortion policies have had adverse consequences on developing countries agriculture sector. Is the Era of Cheap Food over? Is the current agflation is a signal to produce more food which could lead to a fall in food prices? Or the higher food prices are here to stay? Generally, when demand for a particular product goes up, the market reacts by producing more. As a result, the demand-supply interactions stabilise the prices in the medium to long term. If this is the case, then farmers will grow more crops in coming seasons and the prices of agricultural commodities are expected to go down. Unfortunately, the scenario is not that straightforward for agricultural produces, as the sector has been suffering from some structural problems. The global commodity prices, including agricultural commodities, work predictably in line with the Prebisch and Singer (1950) hypothesis 33 which states that the prices of primary 27 28 29 30

31 32

World Development Report 2008, Chapter 4. Ibid. Ibid. Though the average support to agriculture producers in the OECD countries fell from 37 percent of the gross value of farm receipts in 1986-88 to 30 percent in 2003-05, the amount support increased over the same period from US$242 to US$273 billion. World development Report 2008, Chapter 4. OECD (2005), “Agriculture Policy reform in China”, Available at www.oecd.org/dataoecd/3/ 48/35543482.pdf. Prebisch, Raúl (1950), “The Economic Development of Latin America and its Principal Problems, reprinted in Economic Bulletin for Latin America, Vol. 7, No. 1, 1962, 1- 22.

commodities relative to that of manufactured goods will tend to decline over time. However, recent trends show that the ongoing upturn in the global agricultural commodity markets has been large and rapid. 34 There is a little reason to hope that food prices will return to their long-term trend soon unless there is sea-change in the agricultural sector. Even if all factors work favourably for the agricultural sector in the short-run, it is a daunting task to shift the agricultural supply curve rightward. Higher food prices are, therefore, likely to stay in the next few years. After that, a greater involvement of the market and the state could augment cereal production and other food items. To make change happen, there is a need for significant policy changes pertain to agriculture both at the local and global level. Agriculture has been neglected both by the state and multilateral organisations for a long period. For example, the World Bank’s lending to agriculture amounted to US$1.75 billion in 2006, just seven percent of total bank lending, compared with more than 30 percent in 1982. 35 A mere four percent of official development assistance goes to the agriculture sector in developing countries. 36 According to Oxfam, overall global aid to agriculture had declined by two-thirds, from US$11.5 billion from 1987 (from which year) to US$3.9 billion in 2005. 37 Intensive research and development in the agricultural sector and more investment in irrigation, fertilizer and seeds, among others, could increase agricultural productivity, even if there is a constraint to expand the sector horizontally. For instance, it is estimated that 85 percent of increases needed in global food production must come from agricultural land already under cultivation. 38 According to the FAO, some 80 percent of future increases in crop production in developing countries will have to generate from higher yields, increased multiple cropping and shorter fallow period. 39 Technology and economic forces can spur solutions. Recent developments in bio-technology could increase crop intensity and overall agricultural productivity substantially. But all these developments will take substantial time to have an impact. But there is a flip side too. The current export ban on key agricultural commodities by many agricultural commodity producing countries is giving a wrong signal to farmers to judge the actual demand and such actions are depriving them of getting the right price for their produces. Further, climate change could emerge as a major barrier to increase food production, both vertically and horizontally, especially in Asia. Water shortage is another huge challenge to 34

35 36 37 38

For details see the IMF Primary Commodity Prices, available at < http://www.imf.org/external/np/res/ commod/index.asp > and Braun, Joachim Von (2008), ‘High and Rising Food Prices, International Food Research Institute (IFPRI), Presented at a USAID conference on ‘Addressing the Challenges of a Changing World Food Situation: Preventing and Leveraging Opportunities, Washington, D.C, April 11, 2008. Third World Network, http://www.twnside.org.sg/title2/susagri/susagri017.htm. Agence France Presse, 20 October 2007. Third World Network, http://www.twnside.org.sg/title2/susagri/susagri017.htm. Braun, Joachim Von (2008), ‘High and Rising Food Prices, International Food Research Institute (IFPRI), Presented at a USAID conference on ‘Addressing the Challenges of a Changing World Food Situation: Preventing and Leveraging Opportunities, Washington, D.C, April 11, 2008. Food and Agriculture Organization (2003) World agriculture: towards 2015/2020: an FAO perspective. FAO, Rome, Italy.

increasing food production. In Asia, due to rapid industrialisation, water is increasingly transferred out of agriculture to meet growing demands from domestic and industrial sectors. Moreover, water is major source of contention in many parts of Asia. Moreover, as many Asian economies are rapidly industrialising, the wage level is rising both in farm and off-farm. As a result, the cost of producing food and other agricultural produces is set to increase. There is also a direct association between energy prices and agricultural production cost. As higher oil prices are likely to stay in the near-term, so is agriculture input and output cost. Last but not least, cheap food is a double-edged sword. High food prices are essentially a regressive tax to poor, especially those who are net food buyers. Asia is home to two-thirds of the worldâ&#x20AC;&#x2122;s poor with 1.5 billion people. At the same time, any attempt to keep food prices low will do more harm than good, as farmers should be properly compensated for their hard work and increasing uncertainties in food production. The world should search for the answer for a right food price. The Way Forward Asia is the largest home to agriculture and the region is also highly vulnerable to the ongoing agflation. There is a need for both short- and long-term solution to address food security in the region. The current food (and agrarian) crisis indeed is an opportunity to fix the structural problems in the agriculture sector. Food aid can help to avoid hunger and starvation in the short run. But higher cereal and other food production are the ultimate solution to stabilise the prices in the medium to long run. Distortions in the agricultural sector and agricultural trade (through tax, subsidies and market access) should be addressed sooner rather than latter. Agriculture, among others, has brought the Doha trade negotiation round to a standstill. Chances are still bleak that the world leaders will reach to a consensus over key issues concerning agriculture soon. Moreover, neither the United States nor the European Union has shown any sign that it would revise its current biofuel policies that are driving up food prices across the world, inter alia, as it is energy that affects developed countries consumer price inflation greatly, not food. As there is little hope that the OECD countries will address the longstanding agriculture trade policies or that the United States and the European Union will change their bio-fuel policies, an Asian solution is the need of the hour. Thailandâ&#x20AC;&#x2122;s recent proposal to form an OPEC-style cartel with some of its Southeast Asian neighbours will create further distortion in the grain market. Such an oligopolistic structure does not sound like a viable policy in the long-run, as unlike oil, rice is renewable commodity and it has close substitutes. Policy makers in this part of the world should rather address issues like research and development in agriculture, technology share, water sharing, market access and potential free flow of agriculture commodities within the region, among others. Asia needs to act now â&#x20AC;&#x201C; any further delay could exacerbate the current food crisis and it would lead to greater economic and political uncertainties, if not conflicts, in Asia. oooOOOooo

ISAS Insights No. 31 – Date: 16 May 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Higher Education in India – Ducking the Answers Bibek Debroy ∗ Introduction In 2005, the World Bank published a report on India and the knowledge economy. 1 The thrust of the World Bank report was on education’s role as a fundamental enabler of the knowledge economy and the knowledge economy’s requirement of a new set of skills and competencies. In a simple sense, a country’s per capita national income is nothing but a measure of the average productivity of its citizens. 2 With ageing populations in developed countries, and even in countries like Russia and China, there has been talk of India’s demographic dividend. 3 That the demographic dividend argument works, is known. For East Asia, several studies suggest that between 25 to 40 percent of the East Asian miracle was due to the demographic dividend. 4 Other than East Asia, it has worked in Japan in the 1950s, China in the 1980s and Ireland in the 1980s and the 1990s. Several factors explain the demographic dividend. 5 First, there is the obvious increase in working-age populations, with a reduction in dependency ratios, and the direct impact of a larger quantity of labour input. To take but one dramatic number, between 2001 and 2026, India’s total population is estimated to increase by 371 million and 83 percent of the increase ∗

Professor Bibek Debroy is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasbd@nus.edu.sg or bdebroy@gmail.com. India and the Knowledge Economy, Leveraging Strengths and Opportunities, Carl Dahlman and Anuja Utz, World Bank, Washington, 2005. Per capita national income is national income divided by population. More accurately, national income divided by the working-age population is a measure of average level of labour productivity. “India: On the Growth Turnpike,” Vijay Kelkar, 2004 K.R. Narayanan Oration, Australian National University, reprinted in Raghbendra Jha edited, The First Ten K.R. Narayanan Orations, ANU Press, 2006; Can India grow without Bharata?, Shankar Acharya, Academic Foundation, 2007; “The Indian Model,” Gurcharan Das, Foreign Affairs, July/August 2006; India rising; a medium term perspective, Deutsche Bank Research, May 2005; “Growing Old the Hard Way: China, Russia, India,” Nicholas Eberstadt, Policy Review, Hoover Institution, April/May 2006; and “Dreaming with BRICs: The Path to 2050,” Dominic Wilson and Roopa Purushothaman, Global Economics Paper No. 99, Goldman Sachs, October 2003, are some instances. See, David E. Bloom, David Canning and Jaypee Sevilla, “Economic Growth and the Demographic Transition,” NBER Working Paper 8685, December 2001. The empirical and theoretical literature is reviewed in World Economic Outlook, The Global Demographic Transition, IMF, September 2004.

will occur in the age-group of 15-59 years. 6 Second, the quality of the labour input can increase and this is reflected in what economists call total factor productivity (TFP) growth, measured after netting out the contribution of increased labour and capital inputs. 7 Third, when dependency ratios decline, savings rates increase, leading to increases in investment rates and higher rates of gross domestic product (GDP) growth. Fourth, if the decline in dependency ratios is at the lower end of the age spectrum as a result of fertility declines, female work participation rates increase. However, there is no automaticity about a demographic dividend leading to sustained high growth rates. Among other things, one requires an improvement in health and education indicators, with a shortage in required skills already being felt. Nor should one forget the regional dimension, since high absolute and relative growths in population will happen in states like Assam, Bihar, Delhi, 8 Haryana, Madhya Pradesh, Rajasthan and Uttar Pradesh. 9 While the National Human Development Report 10 is now dated, it brings out these regional differences. When the education system has to adjust to tap the demographic dividend and opportunities thrown up by the knowledge economy, one must have in mind Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Rajasthan, Uttar Pradesh and Orissa and India’s 150-odd backward districts. 11 The Education Report Card In December 2006, the Planning Commission produced the Approach Paper to the 11th Five Year Plan (2007-12). 12 This has a sub-title on faster and more inclusive growth. The introductory chapter of this document states, “It is important to recognise that better health and education are the necessary pre-conditions for sustained long-term growth”. There can be no quarrel with this generic statement. Further down the chapter we have, “A key element of 11th Plan strategy should be to provide essential education and health services to those large parts of our population who are still excluded from these. Education is the critical factor that empowers participation in the growth process but our performance has been less than satisfactory, both overall and in bridging gender and other divides. Overall literacy is still less than 70 percent and rural female literacy less than 50 percent with corresponding rates even lower among the marginalised groups and minorities. While the Sarva Shiksha Abhiyan has expanded primary 6

8 9

10 11

Population Projections for India and States 2001-2026, Report of the Technical Group on Population Projections Constituted by the National Commission on Population, Office of the Registrar General and Census Commissioner, May 2006. Some skepticism of TFP estimation is warranted. However, one study that contrasted India and China in two sub-periods, 1989-1995 and 1995-2003, is worth mentioning, since it found that the labour contribution to India’s growth was driven more by quantity than quality. See, Dale Jorgenson and Vu Khunog, “Information Technology and the World Economy,” Scandinavian Journal of Economics, Vol. 107, No. 4, 2005. For Delhi, this is primarily because of in-migration. See, India Labour Report, A Ranking of Indian States by their Labour Ecosystem, TeamLease and Indicus Analytics, 2006. National Human Development Report 2001, Planning Commission, Government of India, March 2002. Of India’s 600 districts, 100 are truly backward, by any criterion. The National Food for Work Programme had a list of 150 backward districts and the Rashtriya Sama Vikas Yojana (RSVY) increased the number to 167. The National Rural Employment Guarantee Act (NREGA) initially identified 200 backward districts, but has now been extended to all rural areas. Towards Faster and More Inclusive Growth, An Approach to the 11th Five Year Plan, Planning Commission, Government of India, December 2006, http://planningcommission.nic.in/plans/planrel/app11_16jan.pdf

school enrolment, it is far from providing quality education. Looking ahead, we cannot be satisfied with only universal primary education; we must move towards universal secondary education too as quickly as possible.” This is also almost generic, though question marks can be raised about success indicators like increased primary school enrolment and the degree to which Sarva Shiksha Abhiyan can alone obtain the credit. 13 Still further down the chapter, we have extensions of this argument, “While both education and curative health services are available for those who can afford to pay, quality service is beyond the reach of the common people. Other privately provided services are of highly variable quality. In this situation, access to essential services can only be through public financing. In most cases, this means public provision or partnership with non-profit and civil society organisations. A major institutional challenge is that even where service providers exist, the quality of delivery is poor and those responsible for delivering the services cannot be held accountable. Unless such accountability is established and cutting edge service providers trained, it will be difficult to ensure significant improvement in delivery even if large resources are made available.” Although this statement is about education at a very general level, some additional points have now been flagged. First, there is a question of access to the relatively poor. Second, flowing from the first argument, a case has been made for public financing, which is then equated with public provisioning, without making the jump from the one to the other at all clear. Third, an implicit argument has been made about regulation. Fourth, another implicit argument has been made about lack of accountability in public expenditure. Let’s go back to the afore-mentioned World Bank report on India and the knowledge economy. This sets out the main issues, as perceived by the Bank, in strengthening India’s education system. Paraphrased, these issues are – (a) improving efficiency in use of public resources; (b) making the education system responsive to market needs; (c) ensuring that access doesn’t mean the crowding out of the relatively poor; (d) ensuring quality, relevance and practical skills; (e) in higher education, shifting the focus of the government from administrative management to regulation; and (f) relaxing entry barriers and accreditation systems for private players, including foreign ones. In its chapter 14 on strategic initiatives for inclusive development, the Approach Paper divides the education discussion into five segments – elementary education, secondary education, technical/vocational education and skill development, higher/technical education and adult literacy. Since education is a continuum and access to higher education is a function of access to school (elementary and secondary) education, such water-tight compartmentalisation doesn’t always make sense. However, if the expression “higher education” is used, most people would interpret it as technical/vocational education and higher/technical education, probably the latter. Once one has pinned down the expression, one should ask how the World Bank’s six issues should be addressed for this sector. If we interpret higher education as higher/technical education, to the exclusion of technical/vocational education and skill development, this is what the Approach Paper tells us. “India has a well-developed and comprehensive higher education system which has served us well thus far but is now inadequate. The extent of access it provides is limited. Only about 10 percent of the relevant age group go to universities whereas in many developing countries, the figure is between 20 and 25 percent. There is an overwhelming 13 14

As opposed to the mid-day meal scheme. Chapter 4.

need to undertake major expansion to increase access to higher education. The system also suffers from a serious problem of quality. While some of our institutions of higher education have the potential to become comparable with the best in the world, the average standard is much lower. High quality institutions are finding it difficult to get quality faculty given the enormous increase in private sector opportunities for the skills most in demand.” These are not points that are being flagged for the first time. For instance, in 2002, the S. P. Gupta Special Group 15 constituted by the Planning Commission stated, “It should be noted, however, that on the average the skilled labour force at present is hardly around 6-8 percent of the total, compared to more than 60 percent in most of the developed and emerging developing countries.” In 2001, the Montek Singh Ahluwalia Task Force 16 , again constituted by the Planning Commission, stated, “Only five percent of the Indian labour force in this age category 17 has vocational skills whereas the percentage in industrial countries is much higher, varying between 60 percent and 80 percent, except for Italy, which is 44 percent. The percentage for Korea, which has recently been categorised as an industrialised country, is exceptionally high at 96 percent. The developing countries listed have percentages which are significantly lower than the developed countries but they are still much higher than India, for example, Mexico at 28 percent and Peru at 17 percent. Differences in definition may make inter-country comparison somewhat unreliable but the level in India is clearly far too low.” However, both these quotes have more to do with vocational education. On higher education proper, the present regulatory and control structure is a maze. Although the Ministry of Human Resource Development is involved, directly or indirectly, there are multiple layers. First, there are 20 central universities, funded by the centre and, therefore, under direct central control. 18 Second, there are 109 deemed universities under the University Grants Commission (UGC) Act, five institutions established under state legislation and 13 institutes of national importance established under central legislation. Till 1976-77, higher education was in the State List of the Seventh Schedule. The 1976-77 amendment moved it to the Concurrent List. Third, in addition to central universities and deemed universities, there therefore exist 222 state universities and colleges, 19 with the coordination function supposed to be exercised by UGC and the Central Advisory Board of Education. There are 18,064 colleges, including 1,902 women’s colleges. Fourth, some universities are affiliating, others are unitary. Some are single campus, others are multi-campus. 20 Fifth, several forms of professional education are regulated by statutory councils like All India Council for Technical Education (AICTE), Distance Education Council, Indian Council for Agriculture Research, Bar Council of India, National Council for Teacher Education, Rehabilitation Council of India, Medical Council of India, Pharmacy Council of India, Indian Nursing Council, Dentist Council of India, Central Council of Homeopathy and Central Council of Indian Medicine. This creates multiplicity and confusion, the artificial distinction between diplomas and degrees in the same subject and for the same duration being a case in point.

17 18

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Report of the Special Group on Targeting Ten Million Employment Opportunities per year over the Tenth Plan Period, Planning Commission, May 2002, http://planningcommission.nic.in/aboutus/committee/tsk_sg 10m.pdf Report of the Task Force on Employment Opportunities, Planning Commission, July 2001, http://planning commission .nic.in /aboutus /taskforce/tk_empopp.pdf 20-24 age-group. These figures are from the Ministry of Human Resource Development’s Annual Report for 2006-07, http://www.education.nic.in/AR/AR0607-en.pdf 138 colleges are now autonomous. This problem also renders cross-country figures on higher education institutes somewhat misleading.

On the base that existed at the time of independence, the numbers, including those on student enrollment and number of teachers, represent an impressive increase. But a few uncomfortable questions need to be asked. How many of these institutes of higher education are of requisite quality? Even if one ignores international rankings of universities and colleges, 21 which can be subjective and, therefore, exhibit different rankings across different surveys, why is it that most of Indiaâ&#x20AC;&#x2122;s universities and colleges have excess and underutilised capacity while only a few have excess demand? Why is it that a large number of Indian students head abroad, and not just to the United States? Incidentally, this exit option is only available to the relatively richer segments of society. Why has there been a decline in the number of overseas students who come to India to study? Through the World Trade Organization, there are no commitments right now in higher education. However, eventually, higher education is bound to be opened up. Are Indian institutes equipped to handle that eventual challenge and have the supply-side changes occurred? Why are legitimate and better foreign universities not allowed to operate in India while lesser known ones function through a grey area in the law? Why are Indian institutions of higher education more interested in setting up shop overseas (the Middle East, Southeast Asia and even China) than in India? The Policy Dead End One looks to the Planning Commission to provide answers to these uncomfortable questions and address policy issues. Yet, if one reads the Approach Paper, all that one finds is concern over regional divides. The clichĂŠd answer is that more colleges and universities must be set up, presumably through public resources. There must be reservation of seats for deprived segments (identified through collective identities like caste instead of individual identities like class) in institutions of higher education. This is in line with the standard prescription that public expenditure on education, including higher education, must be increased, a point that is also made by the National Common Minimum Programme (NCMP). The NCMP states that public expenditure on education must be increased to six percent of GDP, a target that was originally articulated in the National Policy on Education (1986). Since half of this is to be spent on primary and secondary education, the remainder will be spent on other forms of education, including higher education. 22 Before elaborating on these points, let us turn to the National Knowledge Commission (NKC), which elaborates on policy issues much more cogently than the Planning Commission does. The NKC prepared a note on higher education. 23 Part of this note is devoted to a description of the present malaise, which it is unnecessary to reiterate. On the philosophy behind concrete policy changes, we have, â&#x20AC;&#x153;We recognise that a meaningful reform of the higher education system, with a long-term perspective is both complex and difficult. Yet, it is imperative. And we would suggest the following building blocks in this endeavour. First, it is essential to reform existing public universities and undergraduate colleges. Second, it is necessary to overhaul the entire regulatory structure governing higher education. Third, every possible source of financing investment in higher education needs to be explored. Fourth, it is important to think about pro-active strategies for enhancement of quality in higher education. Fifth, the time has come to create new institutions in the form of national universities that would become role models as centres of academic excellence. Sixth, 21

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Rarely do institutions other than the IITs and some business schools perform well in such cross-country rankings. Public expenditure on higher education is around 0.7 percent of GDP now. Note on Higher Education, National Knowledge Commission, 29th November 2006, http://www.knowledge commission. gov.in/downloads/recommendations/HigherEducationNote.pdf

the higher education system must be so designed that it provides access to marginalised and excluded groups.” Amplifying further, there are recommendations about the number and size of universities (1,500 by 2015), curriculum, examinations, research, faculty, finances, 24 infrastructure, governance, the system of affiliation of colleges, regulation, incentives and access. Of these, the section on regulation also deserves a quote, “There is a clear need to establish an Independent Regulatory Authority for Higher Education (IRAHE). Such a regulatory authority is both necessary and desirable. It is necessary for two important reasons. First, in India, it requires an Act of Legislature of Parliament to set up a university. The deemed university route is much too difficult for new institutions. Entry through legislation alone, as at present, is a formidable barrier. The consequence is a steady increase in the average size of existing universities with a steady deterioration in their quality. The absence of competition only compounds problems. Second, as we seek to expand the higher education system, entry norms will be needed for private institutions and public-private partnerships….The present regulatory system in higher education is flawed in many respects. The barriers to entry are too high. The system of authorising entry is cumbersome. And there are extensive rules after entry, as the UGC seeks to regulate almost every aspect of an institution from fees to curriculum. The system is also based on patently irrational principles….In higher education, regulators perform five functions: (1) Entry: licence to grant degrees; (2) Accreditation: quality benchmarking; (3) Disbursement of public funds; (4) Access: fees or affirmative action; and (5) Licence: to practice profession. India is perhaps the only country in the world where regulation in four of the five functions is carried out by one entity, that is, the UGC. The purpose of creating an IRAHE is to separate these functions.” To this, let’s add a quote on financing of higher education, “There is no system of higher education in the world that is not based upon significant public outlays. And government financing will remain the cornerstone of any strategy to improve our system of higher education. The present support for higher education, at 0.7 percent of GDP, is simply not adequate. In fact, over the past decade, in real terms, there has been a significant decline in the resources allocated for higher education, in the aggregate as also per student. In an ideal world, government support for higher education should be at least 1.5 percent, if not two percent of GDP, from a total of six percent of GDP for education… The time has come to rethink, as we have no choice but to rationalise fees. It is for universities to decide the level of fees but, as a norm, fees should meet at least 20 percent of the total expenditure in universities…. In three professions – engineering, medicine and management – there has been a de facto privatisation of education so that two-thirds to three-fourths of the seats are in private institutions. But private investment in university education, where more than 70 percent of our students study, is almost negligible. It is essential to stimulate private investment in higher education as a means of extending educational opportunities. We must recognise that, even with the best will in the world, government financing cannot be enough to support the massive expansion in opportunities for higher education on a scale that is now essential.” Barring one area, these quotes raise the fundamental policy questions. The only area where the NKC ducks is on the question of allowing profit-making institutions of higher education. Let’s restate the issues differently. First, contrary to what is sometimes felt, education, and 24

“In general, about 75 percent of maintenance expenditure is on salaries and pensions. Of the remaining 25 percent, at least 15 percent is absorbed by pre-emptive claims such as rents, electricity, telephones and examinations.”

certainly higher education, is not a public good. 25 Second, the message of the post-1991 reforms has been on ensuring competition and entry as drivers for better quality and choice. If that has worked for other areas, why should higher education be different? The present regulatory system is not one designed for regulation, but for licensing and control, a phenomenon that has been discarded everywhere else. There is already de facto privatisation, not just in the three areas mentioned by the NKC but elsewhere too. Third, there is no reason why higher user charges should not be imposed, with actual user charges today typically lower for higher education than for school education. Fourth, cross-country evidence does not suggest that privatisation leads to crowding out of the relatively poor, since systems of scholarships and loans do exist. However, to the extent that such crowding out is a problem, no one argues against government financing through scholarships and loans. The argument is against the present inefficient system of public expenditure through salaries and pensions, so that colleges and universities do not face hard budget constraints that would have compelled them to reform. Public subsidies are perfectly in harmony with principles of choice, provided the subsidies are targeted towards those who actually need them, that is, students. It is because there is lack of clarity on these policies that courts have often stepped in, interpreting the law as it stands today, rather than creating it. 26 Whichever way one looks at it, higher education reform must begin with a complete revamping and replacement of the Department of Higher Education in the Ministry of Human Resource and Development, the UGC and AICTE.

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In terms of the classic definition of a public good used by economists. For a brief review of this court intervention, see Devesh Kapur and Pratap Bhanu Mehta, “Higher Education”, in The Oxford Companion to Economics in India, edited by Kaushik Basu, Oxford University Press, 2007. Also see, “Higher Education: Regulation and Control”, Bibek Debroy, in the same volume.

ISAS Insights No. 32 – Date: 30 June 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

India’s Nuclear Dilemma: To Drop the Deal or to Drop the Left S. D. Muni 1 The fate of the Indo-United States nuclear deal is on the brink. The 9th Meeting of India’s ruling United Progressive Alliance (UPA) and its Left supporters, held in New Delhi on 25 June 2008, drew the parting line but ducked the final verdict. This was done in the interest of buying some more time to work out the least painful way of separation. After unusual hectic political activity for at least a week preceding the meeting, in a cold statement, the Convener of the Meeting and Minister of External Affairs, Pranab Mukherjee, said, “The Committee completed its discussions on all aspects of the India-United States Nuclear Cooperation Agreement. The next meeting of the Committee, to be convened in due course, will finalise its findings”. The Differences and the Issues Behind this vague statement are sharp differences on the issue. The Left parties, supporting the UPA government from outside with their 59 members in Parliament, are adamant in not allowing the deal to go through. Their objections are at two levels; one, at the policy level, against India’s growing strategic proximity with the United States and; two, with regard to the contents and implications of the deal. In their view, the deal, besides forcing India to compromise on further nuclear tests and reprocessing of the spent nuclear fuel, will also impose constraints on its relations with countries such as Iran, due to the overall Hyde Act of the United States Congress, which governs the bilateral agreement. The Indian government, particularly Prime Minister Dr Manmohan Singh, is strongly committed to the deal as it promises to break India’s nuclear and hi-tech isolation and offers an additional source of energy at a time when hydro-carbon dependence looks costly and grim. The government does not accept the objections raised by the Left and claims to be confident that it can deal with the foreign policy constraints as they are more notional than real. The government side circulated a ‘Note’ at the meeting underlining the competitive nature of the nuclear power. It explained that, by importing nuclear reactors or fuel under the deal, India would be able first to reduce to 7GWe by 2020 and then to “practically wipe out in 2050” its expected energy deficiency of 412GWe.

Professor S. D. Muni is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassdm@nus.edu.sg.

There is more to the Left-Congress Party policy and ideological differences on the IndoUnited States nuclear deal. There exists a serious trust deficit between the two sides. The Left is annoyed at the Congress Party of cosying up with the United States on foreign policy issues and the Congress Party suspects that the Left is toeing the China line on keeping India away, not only from the United States strategically, but also from its legitimate status as a major international player. Media and overall political opinions are also divided along these lines. The Left accused the Prime Minister of not taking them into confidence while negotiating the deal with the United States and the Prime Minster had challenged the Left to withdraw support to his government if they want to (“so be it”) on the nuclear issue. The Prime Minister is personally convinced that the deal is in India’s supreme national interests and has made a personal commitment to the United States President, George Bush, to deliver this deal from India’s side. The issue at stake in the 25 June 2008 meeting was to let India go ahead and sign the nuclear safeguards agreement with the International Atomic Energy Agency (IAEA). The negotiations on this issue have been finalised between India and the IAEA and a draft agreement has been prepared. These negotiations were carried out after seeking support of the Left under the condition that the government will get back to this Committee to brief the Left and other alliance partners on the outcome of these negotiations before signing the agreement with the IAEA. The government’s ‘Note’ in the meeting clarified that, “The safeguards will be restricted to the facilities that India identifies as civilian and such facilities will be eligible for international co-operation”. The ‘Note’ further said that, “All externally-supplied items will come under the IAEA safeguards”. Once the government signs this agreement, the United States will follow it up, first, by getting the necessary waiver from the Nuclear Suppliers Group (NSG) on the Indo-United States deal and, then, by finally approving it in the United States Congress. The Left’s opposition to the government signing the safeguards agreement was explained at the 26 June 2008 meeting by the Communist Party of India (Marxist) [CPI (M)] leader, Prakash Karat, who, after reiterating the Left’s position on the deal and the Hyde Act, said that, once the IAEA agreement is singed, the deal will go on “auto-pilot” where only the United states will carry it through and India (and the Left) will not be left with much scope to have its say. The Left also grumbled that the government has not shared the full text of the proposed IAEA agreement with them. The Congress Party’s UPA allies are also in favour of the deal as they find it in India’s national interests but they do not want the government to fall over the differences with the Left. In fact, no one wants the government to fall, except the Bhartiya Janata Party (BJP)-led National Democratic Alliance (NDA), which is in opposition. All the components of the ruling party combine are hesitant to plunge into elections at a time when inflation is more than 11 percent and rising. The combined impact of the skyrocketing oil prices and implications of the global sub-prime crisis have put heavy strains on the economy and, hence, on the common man in India. A heavy political price may be extracted by the voters if the government goes to polls without softening the economic burden. Rastriya Janata Dal (RJD) Chief and Minister for Railways in the UPA government, Lalu Prasad Yadav, cryptically remarked, “The country needs energy and for that the deal is important. But inflation is a much more pressing issue affecting the common masses. It has to be reined in”. Yadav’s concern is more specific because in his home state, where his party’s government was defeated in the last elections, his electoral base has eroded and his rival provincial government headed by Nitish Kumar is doing much better. The Congress Party has also suffered electoral reverses in recently-held state assembly elections, the latest being in Karnataka in June 2008. In these elections, the BJP and the NDA allies made gains.

Even the Left has electoral worries both in West Bengal and Kerala, their strongholds. In West Bengal, issues such as the Nandigram Special Economic Zone have dented their electoral hold in nearly 10 constituencies, including Kolkata, Barrackpur, Jadavpur, Sreerampur, Tamluk and Haldia. In Kerala, the Christian votes that favoured the CPI (M) in the last elections have been alienated. Muslim-dominated Malappuram and Kozhikode are also unhappy with the Left front on a text book controversy. The Christians (20 percent) and Muslims (25 percent) in Kerala together constitute a decisive factor in six parliamentary constituencies. As a result, though the Left leader, Karat, put up a brave face by being prepared to go to elections, he pleaded with other UPA allies such as Dravida Munnetra Kazhagam leader, M. Karunanidhi, and the Nationalist Congress Party leader, Sharad Pawar, to persuade the Congress Party to avoid the split. No one in the ruling coalition is looking forward to immediate elections. The Options The opinions in the UPA and, the country as a whole, are polarised along three policy options. One is to drop the deal as being suggested by the Left and develop India’s indigenous civil nuclear power through thorium (which India has in abundance) cycle, even if takes time. Or renegotiate the deal with the United States, if necessary, with the next administration. India is of as critical a value to the United States as the United States is to India in the emerging dynamics of global power equations. This will spare India from making any compromises with the United States in the freedom of its foreign policy and strategic options, though it may delay its nuclear energy programme. In any case, according to a section of the scientific community in India, the Indo-United States deal will also not deliver energy any time sooner. For energy security, the nuclear option is not the only way out. Vast potential of hydro-power lies unharnessed within India as also in the neighbouring countries and Indian scientists are working hard to develop the thorium cycle to generate power. Besides, renewable and newer sources of energy should also be harnessed. Thus, dropping the deal will help cement UPA-Left alliance, not only during the coming elections, but also in the post-election process of government formation. The second option is to drop the Left and sign the deal. This will ensure India’s credibility in the international community, and that of the Indian Prime Minister and the Congress Party within India. The Prime Minister and the UPA have given enough margin to the Left without effecting even the slightest change in the Left’s attitude. The Left has seldom let a chance to embarrass and oppose the government go without taking full advantage of it. The Left refuses to see the positive aspects of the deal regarding energy and global access to strategic technologies and material. The UPA can no longer continue to be dictated by the Left on issues of vital national concern. This option is against any delay in the decision because there is a serious need to ensure continuing supply of uranium for the currently-operating reactors. The Prime Minister also has to attend the G8 Summit in Tokyo in early July 2008, where he is likely to meet world leaders, including President Bush, and apprise them of India’s progress on the nuclear deal. Moreover, a delayed decision will only buy the government four more months in power because, if the government falls now, elections will have to be held by November/December 2008; but if it does not, elections have to be held in April 2009, when the term of the present government comes to an end. These extra four months may not offer any great political advantage to the government. The third option is to avoid any of the above precipitate actions and as buy as much time as possible. In this time, efforts should be made on various fronts namely; (a) finding a mutually

acceptable compromise between the UPA and the Left on the deal; (b) improving the economic situation with the help of good monsoon, bold monetary initiatives and in the hope that the global economy will show signs of improvement; and (c) pleading with the United States to cooperate in getting the deal finalised in November or December 2008 rather than in the forthcoming session of the Congress. This may be somewhat technically difficult but not impossible, and politically still feasible for the Bush administration. The Bush administration becomes a lame duck only after the Presidential elections. In fact, the United States administration has assured India that it will work for the deal until 20 January 2009. The State Department spokesman, Tom Casey, said on 19 June 2008, “From now until January 20, we’ll continue to work to support this agreement. We will continue to encourage the Indian government to approve it.” He further hoped that the next administration would “move forward” with the deal. It is argued under the third option that a precipitate action will surely provoke the Left into withdrawing the support. This would make the government either a lame duck, if a vote is carried against it in the Parliament or a minority government if a parliamentary vote can be avoided. 2 In both these cases, the government’s bargaining position vis-à-vis the United States will be compromised at the two pending stages of the NSG waiver and the Congressional endorsement. There are elements opposed to the deal at both these stages within the NSG and in the United States Congress. The third option appeals to the core political instinct of survival among the political parties. It also gained acceptability in the given context of economic hardships and the BJP’s recent political gains. To some extent, hectic political maneuvers by the Left to scare the Congress Party and the UPA allies from taking a precipitate action of going ahead with the deal also whipped up this option. But this option does not have a longer life span, for it has already been in operation for the past more than one year. The possibility of the UPA exercising the first option is least likely as that will tarnish the image of its Prime Minister and the Congress Party, while sacrificing what it considers as in India’s national interests. The UPA seems to be gradually gearing towards the second option. There are indications that the Congress Party President, Mrs Sonia Gandhi, has already asked the Congress Party to rally round the Prime Minister. She has discounted the exaggerated fears that going with the India-United States deal would necessarily result in the alienation of the Muslim votes, a threat branded by the Left. There are also signs of the Congress Party mobilising support among the other smaller parties that have remained out of the UPA and NDA and formed another grouping in the name of the United National Progressive Alliance (UNPA), led by Samajwadi Party (SP) of Mulayam Singh, to represent the ‘third force’ in Indian politics. 3 In the event of the Left pulling the rug, these parties may come forward to offer the necessary numbers for the survival of the UPA government. The SP has 39 members in Parliament and with the addition of other smaller parties support (Rastriya Lok Dal of Ajit Singh with three seats, Janata Dal(S) of Deve Gowda with three seats and some floating votes), the UPA may retain majority after the Left pulls out. The effective strength of the Parliament is 542 and the UPA needs the support of 272 to win the confidence vote. Will the Congress Party succeed in creating counter balances against the Left and mustering the political will of its allies and self to exercise the second option, however, remains to be seen, as the UNPA will decide only on 3 July 2008? 2

A legitimate minority government can continue to function even after the withdrawal of support by the Left if the Left or the opposition NDA does not force a confidence vote on the floor of the Parliament. The Congress Party has been actively pursuing Mulayam Singh for support as both the parties stand to gain even in Uttar Pradesh where Congress Party has fallen out from its erstwhile ally and the SP rival, Mayawati’s Bahujan Samaj Party.

The both the Left and the Congress Party are also trying to make their parting as less painful as possible. For achieving this, the Congress Party and the Left are in touch with each other. The Congress Party’s plea with the Left would be that when the government goes to the IAEA to endorse the safeguards agreement, the Left may politically distance itself but avoid writing to the President that they have no confidence in the government. In that situation, it will be upon the BJP/NDA to move the motion of no-confidence against the government in Parliament. If and when the BJP moves such a motion, the Left may criticise and oppose the government during the debate on the no-confidence, short of voting with the BJP. It can walk out or abstain at the time of voting. The government may then survive either with the help of the SP and other smaller parties or it will be turned into a minority government without being voted out of office. The possibility of postponing the monsoon session, scheduled for July to August or September 2008 to keep any possibility of a non-confidence vote on hold is also being actively considered. Both the Left and the UPA, notwithstanding their sharp differences on the nuclear deal seem to be of the view that no political advantage should accrue to the BJP. The Communist Party of India leader, A. B. Bardhan, has already gone on record to say that his party will not vote with the BJP to oust the government. The Indo-United States nuclear deal is, perhaps, the first foreign policy issue in the past decades that has polarised Indian politics so sharply and precipitated a crisis of survival for the government. In 1962, Jawarharlal Nehru’s China policy came close to this in view of China’s war on India. That political crisis was quickly diffused by Nehru by sacrificing his friend and then Defence Minister, Krishna Menon, to silence the critics of his China policy. Mrs Sonia Gandhi does not seem to be contemplating the possibility at all of reinforcing her grand-father-in law’s precedence by sacrificing Prime Minister Manmohan Singh in the interest of UPA-Left alliance. She herself is committed to the Indo-United States nuclear deal. India has now entered a phase of coalition politics which has eroded the broad foreign policy consensus prevailing for a long in the country. This is not a very happy development for a country that is still struggling to secure its rightful place in the global community. The world will naturally monitor closely the evolving interface between the coalition regimes and critical foreign policy issues in India.

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ISAS Insights No. 33 – Date: 9 July 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

The First Budget by the New Coalition Government in Pakistan: Economic Situation and Policy Directions Iftikhar A. Lodhi 1 The troubled coalition government passed its first federal budget (Fiscal Year 2008-09) 2 on 22 June 2008, after being in office for a hundred days, amid growing economic woes, political instability, and a deteriorating law and order situation. This paper analyses the budget in a broader macroeconomic framework and examines the policy initiatives that could put the economy back on track and provide the much needed relief to the common man. This is the first budget presented jointly by two major rival parties, the right-centre, the The PPP has come a long way to believe in Pakistan Muslim League Nawaz (PML-N), “private sector as engine of growth”, and the left-centre, the Pakistan People’s “open markets”, and “deregulated, Party (PPP). Despite the fact that the PPP, decentralised and privatised economy”; the leading coalition party, is perceived as a since sweeping away its first elections in populist party and the PML-N as pro- 1970 with an agenda of establishing a business, there are no major differences, if at “socialist order” (by “nationalising all all, between the two on the economic front. major industries”, while “accepting the Moreover, their economic policies do not possibility of existence of a private differ from the previous government. sector”). Consequently, the budget is, by and large, a continuation of the policies set forth by the previous government. However, the budget has been overshadowed by the overall macroeconomic challenge of slowing growth, soaring inflation and widening fiscal and current account deficits. Following the 18 February 2008 polls, the new government was faced with a political and economic crisis, along with a deteriorating law and order situation. The year 2007 saw Pakistan suffering from chaos and economic abyss, starting with the judicial crisis in March 2007, growing terrorist acts in urban areas, emergency rule, and the assassination of the PPP’s leader, Benazir Bhutto. Besides domestic issues, global developments such as the slowdown in the United States’ economy, the liquidity crisis, and soaring oil and primary commodity prices, also added to the Pakistan’s economic woes, given the historical vulnerability of the country’s economy to external shocks.

1 2

Mr Iftikhar Lodhi is a Research Associate at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be reached at isasial@nus.edu.sg. The fiscal year in Pakistan starts from 1 July and ends on 30 June.

Budget Highlights Against all odds, Pakistan’s economy has once again shown extraordinary resilience. The FY2007-08 registered a respectable 5.8 percent gross domestic product (GDP) growth, though far below the target of 7.2 percent, and the actual growth rate of 6.8 percent in FY2006-07, pulling down the seven percent average GDP growth of the last four years. 3 Other macroeconomic indicators also showed a reverse trend. Explaining the troubled economic situation, the Finance Minister, Syed Naveed Qamar, charged the previous government of “policy inaction” in the face of economic crisis shifting the “brunt of all ills that were associated with these crises” to the current government. Nevertheless, he acknowledged the economic achievements of the outgoing The Targets administration, alluding it to the The budget FY 2008-09 presents a “long term “windfalls of the aftermath of 9/11”, an perspective” in the backdrop of the following apparent hint to the increased formal “key assumptions about the macroeconomic remittances and a sizeable support, both in conditions” in the year ahead: kind and in cash, from the partners in the • The GDP will grow by 5.5 percent in the “war on terror”. 4 year 2008-09. •

Inflation will be contained at 12 percent.

The total outlay is estimated at Rs.2,010 billion (US$29.55 billion), 5 a 7.4 percent • Gross investment to GDP ratio will be maintained at 25 percent. increase from Rs.1,871 billion last year. The budget includes development • The fiscal deficit will be contained to 4.7 percent. spending of Rs.550 billion (US$8.08 billion), as compared to a revised spending • The current account deficit will be reduced to six percent of the GDP. of Rs.458 billion last year. This reflects a 20 percent increase. Keeping in view the • Foreign exchange reserves will be increased to US$12 billion. worsening domestic and international economic situation, it would have taken extraordinary structural initiatives to make the current budget “poor-friendly”. Nevertheless, the budget announced some meager populist measures, such as the Rs.34 billion (US$500 million) “Benazir Income Support Program”; and the Rs.28 billion (US$411 million) “People’s Works Program”, along with a 20 percent increase in basic pay of all federal and defence personnel with a similar increase in pensions.

The data in this paper, unless otherwise stated, is from the “Economic Survey of Pakistan, FY 2007-08”, “Finance Minister Budget FY 2008-09 Speech”, and “Budget FY 2008-09 in Brief”. These three documents are published by the Ministry of Finance, Government of Pakistan. They are available online at http://finance.gov.pk/admin/images/budget/budget[1].pdf. a) Pakistan received US$10 billion from the United States since 9/11, though two-thirds of this amount is reimbursement payments for the expenses of 100,000 troops deployed on the Pakistan-Afghanistan border. b) The International Financial Institutions rescheduled Pakistan’s debt after it joined “the war on terror” in the aftermath of 9/11. Similarly, the military assistance given to Pakistan for being a major non-North Atlantic Treaty Organization (NATO) ally reduced pressures on the domestic resources. Pakistan’s Paris Club debt of US$12.5 billion was rescheduled in 2002. In April 2003, US$1 billion American bilateral debt was written-off. This is a clear signal for the capital markets that Pakistan is “too important to default” for geo-strategic reasons. c) In another development, increased economic activity was witnessed, particularly in the transport, construction and commodity sectors, due to the supplies to NATO’s International Security Assistance Force in Afghanistan. By current interbank rates, Rs.68 = US$1. The June 2008 average was Rs.67.50.

However, these measures are undermined by the two most important policy changes; one, the phasing out of several subsidies, including petroleum, electricity, textile and food, which currently amounts to Rs.407 billion (US$6 billion); and second, a blanket increase in the General Sales Tax from 15 to 16 percent. Both these measures are bound to add to the existing double-digit inflation in the short-run, irrespective of the distortive character of subsidies and long-run benefits of doing away with them. Another major policy shift in the current budget was the discussion over defence spending in the National Assembly for the first time since the defence budget was classified in 1965. Despite Prime Minister Gillani’s veiled promise to “freeze the defence budget at current levels”, the actual defence budget jumped seven percent to Rs.296 billion (US$4.35 billion) from last year's Rs.277 billion. Nonetheless, as compared to last year’s 11 percent increase, this is a welcome move. The budget seeks to restore economic stability, growth momentum and investor’s confidence by fiscal austerity; increasing agriculture and manufacturing productivity and competitiveness; spurring infrastructure development; reducing current account deficit; increasing revenue generation; and building up foreign exchange reserves while focusing on higher exports, employment generation, and increased social spending for a “meaningful change” in the social indicators. However, the targets (“assumptions”) actually reveal the limited space for maneuverability for the government in the face of evolving structural changes and external shocks. The targets, to begin with, are very modest, which, even if met successfully, would only slightly decelerate the economic downturn. But more significantly, many of the rhetorical measures adopted could simply fail in the face of waning state capacity to execute these policies. The Twin Deficits: Impact of International Energy and Food Crisis The fiscal deficit grew to seven percent of GDP, with an equally large current account deficit, against the target of 4.7 percent in FY 2007-08. 6 Both the deficits are largely due to international oil and commodity price hikes; apart from less than targeted revenue collections and export growth. 7 A lack of appropriate demand estimation and price foresight on the previous government’s end contributed to the wheat crisis earlier this year. The government allowed wheat exports 6

The current account deficit is expected to be well above 7.3 percent of GDP far above the targeted five percent, a 40 percent increase from the previous year. This was a direct result of 28 percent increase in imports, fuelled by strong demand and high oil prices, and only 7.6 percent increase in exports, far below the target of 12.9 percent but still impressive as compared to last year’s three percent. Nonetheless, the adverse effect on overall balance of payments was cushioned by an impressive growth in remittances. Remittances grew by 19 percent, totaling US$5.9 billion (July 07-May 08). Note: The impact of the rising current account deficit on the balance of payments was further compounded by capital outflows and delays in the planned floatation of a sovereign bond. Subsequently, the exchange reserve buildup began to shrink from US$16.5 billion in October 2007 to less than US$11.2 billion at the end of May 2008. The Rupee depreciated against the United States dollar by 6.4 percent between July 2007 and April 2008, despite the United States dollar’s own depreciation against major currencies. Oil prices surged from US$55 per barrel in January 2007 to US$140 per barrel in May 2008, a jump of more than 155 percent. Similarly international food price index increased by roughly 40 percent in 2007 and, in the first three months of 2008, prices rose by about 50 percent. The prices of rice, wheat and palm oil have also increased by 78 percent, 120 percent and 102 percent respectively between April 2007 and April 2008. (Islam 2008; “Of Agflation and Agriculture”)

when prices were still low in June last year, only to be imported again at much higher prices earlier this year. Food and petroleum contributed to two-thirds of the increase in import bill.8 However, much of this increase in import bill was borne by the government in the form of subsidies, resulting in a large fiscal deficit. The outgoing administration funded deficit through borrowings from the central bank – the State Bank of Pakistan (SBP). 9 The result was compounded inflation, making monetary management difficult.10 The Way Forward Inflation was precisely the reason, in the first place, for not passing the burden to • Phasing out subsidies on petroleum and electricity. the consumer. •

The experts are convinced that energy and food prices will stay higher than their current levels in the foreseeable future. Therefore, it is imperative for the governments, as well as international institutions, to formulate policies for long-term solutions. 11 The current government, upon assuming office, has adopted a multi-pronged strategy to tackle the challenges. In the long-run, subsidies on petroleum and food will be phased out and resources will be enhanced through increased productivity, infrastructure development and a shift towards other alternatives of oil. In the short run, a tight monetary policy, foreign assistance and borrowings are the only options. As a first move, the government has sought 8

Further shift towards natural gas for transportation and electricity generation. Exemption from tax and custom duty for energy saving equipment/CNG buses. Accelerated efforts to import natural gas and build dams, in addition to increasing domestic exploration and production. Inviting foreign investments in the farm sector. Large tracts of land will be made available to foreign investors to induct capital and technology. Exemption from sales tax and other duties on imported and local supply of fertilizers, pesticides and machinery. Exemption from the 10 percent custom duty on import of rice seeds. Availability of farm credit on easy terms. Increased subsidy on fertilizer from Rs.25 billion to Rs.32 billion.

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Pakistan imported 80 percent of its 127.75 million barrels of oil in FY2006-07, constituting 27 percent of its import bill. Petroleum imports grew by 41 percent between July 2007 and May 2008 to reach US$9.39 billion, as compared to US$6.63 billion over the same period last year. Food and dairy imports grew by 45 percent to US$3.28 billion from July 2007 to May 2008, as compared to US$2.26 billion over the same period last year, mainly due to wheat and palm oil. “Interim Monetary Policy Measures”, State Bank of Pakistan, May 2008, p. 10. http://www.sbp.org.pk/m_ policy/MPS-MAY-FY08-EN.pdf. Note: a) The subsidies increased from a provision of Rs.114 billion (US$1.67 billion – 1.1 percent of GDP) in last year’s budget to Rs.407 billion (US$6 billion – 3.9 percent of GDP). As much as Rs.551 billion (US$8.10 billion - up to May 2008) has been borrowed from the Central Bank against the full year budgeted estimate of Rs399 billion (US$5.86 billion), which is unprecedented in the country’s history. b) The shortfall in external financing receipts due to tight liquidity and strong credit demand made it difficult for the government to mobilise substantial amounts through treasury bills, which could have eased up inflationary pressures. Consumer Price Index (CPI) inflation soared to 10.8 percent in May 2008, as compared to 7.8 percent last year on a 12-month moving average. The highest rise was registered in May 2008 when CPI inflation jumped to 19.3 percent on year-on-year basis, while food inflation touched 28.5 percent during the same month – the highest in three decades. Islam, M. Shahid, “Of Agflation and Agriculture: Time to Fix the Structural Problems”, ISAS Insight No. 30, 5 May 2008 - Quoted International Monetary Fund. http://www.isasnus.org/events/insights/31.pdf.

Saudi Arabia’s support for the deferred payments on oil, a one-time US$300 million waiver, and future help in building strategic oil reserves. Monetary Stance The SBP, in a knee-jerk reaction to the mounting pressures, tightened its monetary policy in the last week of May 2008, the second time within four months. 12 In addition, to manage the exchange rate effectively and to stabilise the volatile stock exchange, the SBP introduced new regulations. 13 Despite the fact that the current inflationary pressures are largely due to higher government borrowings, a monetary response alone is not enough, given the lag between monetary adjustments and the real economy’s response. Moreover, a tight monetary policy is likely to affect only non-energy-non-food inflation at the cost of growth. Therefore, government’s decision to phase out subsidies and other announced initiatives point towards the right direction. Fiscal Developments The tax revenue collection fell substantially short of its targets last year. The budget aims to raise tax revenues by 25 percent in the year ahead. 14

Direct Taxes • •

Pakistan’s tax-to-GDP ratio has stagnated at about 10 percent in the last decade, as compared to 17 percent average of developing countries. The previous government embarked on a large-scale reform agenda but remained unsuccessful in raising the tax-to-GDP ratio to any significant level. Despite a 20 percent annual increase in the number of tax payers in the last three years, less than two percent of the population pays tax, among the minimum in the region. There is a dire need to broaden the tax base. However, how the government tackles this problem has not been described in any specific terms.

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Indirect Taxes • • •

On the contrary, the current budget plans to raise direct taxes ostensibly to balance the “mismatch” between direct and indirect taxes, since the latter make up 62 percent of total taxes. As a first step, the government has withdrawn 35 different income tax exemptions, in addition to introducing a 12 13 14

Withdrawal of 35 income tax exemptions. A liberal "Investment Tax Scheme" whereby taxpayers can voluntarily declare assets and pay two percent on their market value. The lower bracket for tax exemption raised by 20 and 30 percent for salaried men and women taxpayers respectively. A progressive 5 to 15 percent tax on property income rather than the existing fixed five percent. A Rs.100 per square foot tax on real estate developers.

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Increase from 15 – 25 percent import duty on luxury items to 30 – 35 percent. Increase from 90 to 100 percent custom duty on luxury vehicles. Increase in the sales tax from 15 to 16 percent. Increase in the Federal Excise Duty on telecommunication services from 15 to 21 percent and on banking, insurance and franchise services from 5 to 10 percent.

The SBP has raised its lending rate by 1.5 percentage points to 12 percent and the cash reserve ratio requirement by one percentage point to nine percent for all deposits with a maturity of more than 12 months. For details of regulations see “Interim Monetary Policy Measures”, State Bank of Pakistan, May 2008. http://www.sbp.org.pk/m_policy/MPS-MAY-FY08-EN.pdf To Rs.1,250 billion (US$ 18.38 billion) from Rs.1,000 billion (US$14.70 billion) in FY 2007-08.

progressive property tax. On the other hand, import duty on luxury items has also been raised along with a one percent increase in sales tax. Resultantly, any proportional change is unlikely to transpire. The measures essentially mean an increased tax burden rather than an emphasis on broadening the tax base. In addition to increasing revenue, the government targets to reduce expenditure substantially by phasing out subsidies and drastic cuts on non-development, non-salary expenditure, along with freezing the defence budget. 15 However, reining in expenditure could prove difficult as the need for large infrastructure investments and on-going large scale administrative reforms would require extra resources. 16 Moreover, besides political costs, the plans for a phased end to subsidies will not be trouble free. For example, the big business lobby in the textile sector has already made inroads to avail Rs.30 billion discriminatory subsidies, without any such provision in the current budget. 17 On the other hand, public debt, which was brought down to 55 percent of GDP at the end of FY2006-07 from 85 percent in 2000, has started to grow due to a sharp depreciation of the rupee vis-à-vis the United States dollar, besides the twin deficits. This trend is likely to continue as the current government would have to bear the brunt of increased interest payments, payments on maturity of the sovereign bonds, and Paris Club payments. 18 The privatisation proceeds are also likely to decline. Although the budget announces 10 percent shares for the workers of privatised enterprises, the government still runs into the danger of a political backlash during the process. 19 To finance the debt and deficit, following the footsteps of the outgoing administration, the current government plans to introduce different short-term sovereign bonds and to encourage global depository receipts (GDRs) by public (and private) entities. It also plans to increase interest rates on national saving certificates. 20 These steps intend to curtail borrowings from the SBP, which reached “alarming levels”. 21 However, the recent degrading of Pakistan’s credit ratings by Moody’s and Standard & Poors (S&P), and looming political and economic uncertainties have already eroded investor confidence, making it difficult for the coalition government to pursue such policies with greater success. 22 15 16 17 18 19

20 21

Some of the proposed measures include ban on purchase of assets, and budgetary cuts for the Prime Minister Secretariat, National Assembly and Senate. The revised total expenditure for FY2007-08 stands at Rs.2,228.9 billion (US$32.77 billion), actually budgeted at Rs.1875 billion (US$27.5 billion). “ECC set to grant Rs30bn subsidy to textile sector”, Pak Tribune, 1 July 2008, http://www.paktribune. com/news/index.shtml?202627 The oversubscribed US$500 million Eurobond will mature in 2009 and Sukuk will mature in 2010. Moreover, The Paris Club payments that were rescheduled in 2002 will be due in 2009. The privatisation proceeds stand at Rs.1.65 billion in FY2007-08 against the actual target of Rs.75 billion. All the public entities, which were privatised, witnessed workers strikes in which the PPP trade unions played an active role. Pakistan Telecommunication Corporation Limited incurred huge costs in laying off workers after Dubai-based Etislat purchased 26 percent shares. The privatisation of Pakistan Steel Mills was stopped by the Supreme Court on charges of a non-transparent process. The previous government launched controversial sovereign bonds (Euro 2004, Sukuk 2005) and a number of GDRs by public and private entities, to raise capital from international markets. The SBP also advised the government to amend the Fiscal Responsibility and Debt Limitation Act 2005 to disallow borrowings from the SBP. The law introduced greater fiscal discipline and transparency along with guidelines on social sector spending. Both Moody’s and S&P cut Pakistan’s credit ratings to five levels below investment-grade from B1 to B2. Though Moody’s maintained a stable outlook, S&P, however, opted for a negative outlook. Moody’s report read; “weak governance, political tensions and flaws in the legal system will undermine institutions…sharply widening [twin] deficits … are reversing a multi-year trend of fiscal consolidation and

Growth and Investment A dismal performance of the agriculture sector significantly contributed to a lower GDP growth where it grew by only 1.5 percent against 3.7 percent last year. While the services sector grew by 8.2 percent, the manufacturing sector registered a modest growth of 5.2 percent, with the major share coming from construction. The agriculture sector, despite its decline in overall GDP to 19 percent, still employs half of the labour force and contributes directly or indirectly to 60 percent to the total exports. Therefore it is imperative to enhance its productivity. The government has prioritised agriculture and allocated Rs.75 billion for improved water access, along with doubling subsidies on fertilizers and raising wheat support price, in addition to tax incentives and inviting foreign investment. The acute power shortages and a poor infrastructure significantly reduced productivity of the manufacturing and agricultural sectors. Besides measures to deal with infrastructure deficiencies, custom duty on many raw materials and equipments such as port dredgers and power plants has been reduced to zero. In addition, investments of more than US$50 million are made free from any domestic partnership. Capital gain tax exemptions on foreign capital and tax holidays are expected to attract more foreign investment. Investment has been the main driver of recent economic growth, followed by consumption, standing at above 20 percent of GDP. However, this level of investment is unsustainable, due to political uncertainties and the international situation. Economic hardship has visibly affected national and domestic savings, which declined to 14 and 11.7 percent of GDP from 18 and 16 percent respectively. Moreover, there has been an increase in share of private visà-vis public investment from 64 percent to 74 percent in the last five years, making the economy more sensitive to investor confidence. Foreign investments have declined to US$3.6 billion (July-April) against US$5.3 billion in the same period last year, largely due to the decline in portfolio investments. If the political uncertainties continue, direct investments are likely to decline. Social Sector Pakistan, being a classic example of “growth without development”, attracts special attention. Despite maintaining an average five percent GDP growth over the last 50 years, it ranks relatively very low (136) on the human development index. For decades, successive governments have neglected the social sector due to huge interest payments and defense budget. There have been some achievements in terms of increased per capita income and reduced poverty incidence in recent years. 23 However, spending on education and health remains low. The demographic dividend poses major challenges in terms of employment generation, given the seven percent unemployment, and a large underemployment incidence. 24

debt reduction … renewed political discord is unlikely to provide the stable and orthodox policy framework necessary for quickly limiting these macroeconomic imbalances”. “Pakistan Risks Losing Investor Confidence”, Business Recorder, June 14, 2008. http://www.brecorder.com/latestindex.php?latest_id= 8152&cindex=23&current_page=1 The per capita income has grown at an average rate of 13.5 percent per annum during the last six years rising from US$586 in 2002-03 to US$1,085 in 2007-08, thanks to a four-fold increase in remittances. Poverty (headcount ratio on Rs.994 per month poverty line) incidence has fallen from 28 percent to 23 percent during the same period. Since 60 percent of the population is under 25 years of age.

The government has decided to double the development budget for education. However, there is no substantial change in the health budget, which stands at 0.6 percent of gross national product. The “Benazir Income Support Program” is introduced to protect the poorest of poor through distributing Rs.1,000 per month cash grants to each qualifying household. The “People’s Works Program” will provide employment while engaging in local infrastructure development. However, both of these programs run the danger of bureaucratic red tapes and corruption. It is highly likely that the benefits would not reach to the target groups. 25 Nevertheless, only doubling of the development budget for education seems to be the step forward. Conclusion Pakistan’s economy has shown resilience, and despite all odds, it has continued to grow. However, international oil and commodity prices, along with a slow growth in agriculture and exports have posed serious challenges. Continued political instability, violence, and wrangling over power between the PPP and the PML-N have put economic management on the back burner. The economic challenges are compounded by the fact that both parties do not have a commendable record on economic management. Increased policy uncertainty is likely to impede both domestic and foreign investment. Moreover, the lack of political direction can further weaken the government’s capacity to implement the policies spelt out in the budget. However, the previously-initiated structural changes in the economy are unlikely to be reversed. The budget FY2008-09 has set modest targets but remains largely rhetorical. The coalition partners have repeatedly made similar promises in their earlier tenures. What would make the results different this time around remains anybody’s guess. oooOOOOooo

There are empirical studies showing the number of such programs, which failed to do what they intended to.

ISAS Insights No. 34 – Date: 10 July 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

India’s Employment Exchanges – Should they be revamped or scrapped altogether? Bibek Debroy ∗ “There have been no attempts, so far, on collecting statistical material on employment and unemployment; the only published figures at present available are the registrations and placements of employment exchanges. These figures cannot, however, give an idea of the total volume of unemployment. Firstly, employment exchanges are confined to industrial towns and the figures of registrations and placements which they compile are restricted mostly to the industrial and commercial sector. Secondly, even in the industrial sector, there is neither compulsion for the unemployed, to register with the exchanges, nor is there any obligation on the part of the employer to recruit labour only through these exchanges. Even the information regarding unemployment among the industrial workers is, thus, inadequate. Thirdly, in the nature of the case, employment exchange statistics cannot indicate the amount of disguised unemployment which is otherwise believed to exist. This means that the extent to which qualified persons have to accept work which does not give them the income which persons with similar qualifications get elsewhere cannot be assessed from these data. There is also to some extent registration of persons who are already in employment and who desire to seek better jobs. This tendency is reported to exist in the more qualified section of registrants, but to the extent a region maintains these persons on the register of employment seekers, there is an overestimate of the number unemployed.” This was not written yesterday. It is a quote from India’s First Five Year Plan (1951-56) document. 1 Nothing would substantially change if this were to be written now. In September 2007, the National Commission for Enterprises in the Unorganized Sector submitted a report. 2 It estimated that, in 2004-05, out of a workforce of 457 million, 92 percent was in the unorganised sector, a workforce of around 394 million. However, since there are informal workers also in the organised sector, the total number of informal/unorganised workers was 423 million, and 256 million of them were in agriculture. Of the remaining 167 million workers who were unorganised, 100 million were selfemployed. But this still leaves a relatively large figure of 67 million workers in nonagricultural wage employment. Till the National Sample Survey (NSS) large-sample data for 2004-05 became available, there were question marks about whether Indian reforms had led ∗

1 2

Professor Bibek Debroy is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasbd@nus.edu.sg or bdebroy@gmail.com. Chapter 39, Employment. Report on Conditions of Work and Promotion of Livelihoods in the Unorganized Sector, September 2007.

to an increase in employment. In December 2006, after the NSS 2004-05 became available, the Approach Paper to the 11th Five Year Plan (2007-12) stated that, “Growth without jobs can neither be inclusive nor can it bridge divides... Employment is an area which shows up where our growth process is failing on inclusiveness. The number of workers is growing, particularly in non-agricultural employment, but weaknesses appear in unemployment, the quality of employment, and in large and increasing differentials in productivity and wages.” 3 Pointing to the quality of employment (informal, low productivity, low wages and lack of protection) is one thing (as the National Commission for Enterprises in the Unorganized Sector did). Saying that there is an overall non-agricultural employment problem is another. The industry perception is unambiguous. Workers are not available. This is often a comment on lack of requisite skills, but is also increasingly a comment on non-availability, regardless of skills. The broader point about the lack of skills and low educational attainments is well taken and is often talked about in reports emanating from within India and from without. For instance, it figures in a list of 10 things a recent Goldman Sachs report wants India to focus on. 4 What is, however, often missed is a regional-cum-spatial mismatch. Purely in passing, the Goldman Sachs report states that, “As with other aspects of Indian life, there are considerable differences in organisational structures for education in different states, so broad generalisations are difficult.” The Approach Paper dismisses this mismatch issue in half a sentence and the Economic Survey 2007-08 does not even mention it. There are geographical areas and segments where there is excess demand and ones where there is excess supply. The demographic dividend accrues in parts of the country. But that is not necessarily where jobs are being created. Earlier, public sector (and even private sector) establishments could be set up in locations where there was labour. But with de-licensing, this is no longer a possible option. Unorganised sector male wage employment is primarily in manufacturing, construction, trading and transport. For women, trading and transport can be replaced by domestic services. Depending on how we count, the total is around 70 million. These figures are from 2004-05. They must have increased since then and it is a considerable number. Hence, one should ask the question: How do these workers find out jobs are available and decide on temporary or permanent migration? The answer is simple. Barring limited instances of job offers at factory gates, there are only two channels: informal (family, caste, community) networks and labour contractors. This kind of information dissemination cannot be efficient, apart from commissions paid to agents. Clearly, one needs efficient clearing houses that match supply and demand. Is that not what employment exchanges were supposed to do? Not quite. First, the system started (in 1945) because of the need to resettle demobilised defence service personnel and later (1948) displaced persons from Pakistan. Second, the mandatory Employment Exchanges (Compulsory Notification of Vacancies) Act of 1959, applicable to public sector and private sector units (excluding agriculture) that employ more than 25 people, is not as compulsory as one may think. For the private sector, the mandatory requirement only applies below a threshold level of wages and these have not been revised for years. Whatever the law may say de jure, there is nothing mandatory about employment exchanges de facto. For the public sector, a Supreme Court judgement in 1996 said that appointments no longer had to be from the pool that was registered with employment exchanges, as long as job vacancies were 3 4

Towards Faster and More Inclusive Growth, An Approach to the 11th Five Year Plan, December 2006. Ten Things for India to Achieve its 2050 Potential, Global Economics Paper No. 169, Goldman Sachs, June 2008.

suitably publicised. The public sector also set up channels like Staff Selection Commissions, Banking Service Commissions and Railway Recruitment Boards. The Directorate General of Employment and Training’s (DGET) website states that, “Therefore Employment Exchanges are left with only stray cases that too at the lower levels of employment. Therefore in the placement side (regular wage employment) the role of Employment Exchanges is definitely going to be not very significant.” 5 One cannot be more honest than that. The aforementioned National Commission’s report stated that, “A few workers said they had registered at the Employment Exchange where they received unemployment allowance of Rs50 per day. But they stopped going to the Exchange since it costs them Rs80 each day to reach there.” The apparent attraction of employment exchanges is that they are free. Private placement agencies charge, and the DGET also tells us that these private ones may be fraudulent, besides being city-centric. What do the 947 employment exchanges (82 are physically located in universities) do? There will be a song and dance about the training services they provide. But training is a separate issue. On matching supply and demand and providing employment, as of 31 December 2007, 39.97 million people were registered with employment exchanges to seek jobs. As far as employment exchange performance is concerned, in 2007, 263,540 people got jobs through employment exchanges and 7.3 million registered themselves with employment exchanges in 2006. To reinforce the spatial point made earlier, most placements were in Gujarat (178,346), Tamil Nadu (23,757), Kerala (10,962), Maharashtra (8,207), West Bengal (5,304) and Rajasthan (4,544). 6 If one leaves out Gujarat, the numbers are insignificant. Most new registrations are in Uttar Pradesh (with most of the backlog in West Bengal). Administration and expenditure on employment exchanges are now state subjects, an earlier matching grant from the Centre having run its course. In 1952, a committee known as the Training and Employment Services Organization Committee (popularly known as the Shiva Rao Committee) was set up and it recommended that the administration of employment exchanges should be handed over to state governments. Till 1969, funding came through central sources. However, once this system was scrapped, though the service per se continues to be a joint responsibility, expenditure comes out of state government budgets. Hence, it is difficult to get data on expenditure on employment exchanges, or on what it costs the budget to get people those 263,540 jobs. A back-of-the-envelope computation with the Delhi government’s budget suggests that it costs the government (and, therefore, citizens) Rs228,381 for a single placement. 7 An employment exchange exists in Chitradurga in Karnataka, staffed with bureaucracy. But this has not provided a single job in the last four years and Chitradurga is not an exception. This is not efficient usage of scarce public funds and equally scarce infrastructure in those 947 exchanges. The Mid-Term Appraisal of the Tenth Five Year Plan (2002-07) was fairly forthright about what should be done with the employment exchanges. 8 “At present, the employment exchanges function as offices of the state governments, as is prescribed under the Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959. These exchanges also collect data on the number of workers employed in the establishments in their respective areas, which is used by the government for statistics relating to employment in the organised sector. The coverage of the establishments is very poor and the data fails to capture 5 6 7 8

http://dget.gov.in/ Rajya Sabha Parliamentary Question, 18 March 2008. State of Governance: Delhi Citizen Handbook, Centre for Civil Society, 2006. Mid-Term Appraisal of the Tenth Five Year Plan, Chapter 8, http://planningcommission.nic.in/midterm/ english-pdf/chapter-08.pdf

the changes in employment. A role for employment exchanges can be considered for providing employment-related information services for new initiatives like the National Food for Work Programme and the proposed employee guarantee scheme, in both of which work on projects in rural areas is to be assured at the level of the household. However, their functions will have to be restructured and they will have to be relocated to the rural areas. Currently, they are located at the District Headquarters in most parts of the country. So far, very few states have set up web-based information systems on employment services. Egovernance initiatives should be used for generating and maintaining information for providing employment services for the rural areas. The delivery of employment-related information services by private employment exchanges should be encouraged in the urban areas. The Employment Exchanges Act should be amended to allow private employment exchanges to provide job placement services to both private sector and public sector/government establishments and to collect the data on the creation of employment opportunities at the level of the establishments.” This city-centric focus of the present employment exchanges is something the Communist Party of India (Marxist) also accepts. M. K. Pandhe, the President of Centre of Indian Trade Unions wrote, “However, they collect data only for the organised sector while the vast area of unorganised sector is out of the purview of these exchanges. Moreover, these employment exchanges are only operating in the urban areas and have no centres in the rural areas.” 9 The Ministry of Labour estimates that there are around 800 private placement agencies that are large and are not fraudulent. If one sets up a regulatory structure, fraudulent ones will be eliminated and informal networks (family, caste, community, contractors) will become large and formalised, ensuring economies of scale and scope in information processing, dissemination and intermediation. Some states have experimented with reforming employment exchanges. In 2002, an Administrative Reforms Commission (the Harnahalli Ramaswamy Commission) recommended that employment exchanges should be downsized. States like Gujarat 10 and Rajasthan 11 have experimented with allowing private placement agencies to get into the matching function. Even a state like West Bengal has permitted private training organisations to offer training at employment exchanges. However, no state has yet taken the logical step of winding down public employment exchanges and handing the assets over to private placement agencies for management. Since this has been contemplated for industrial training institutes, there is no reason why it should not be done for employment exchanges as well. Instead, the wheel has turned in the opposite direction. For example, in the specific case of the labour market, the reform-driven thrust of the Mid-Term Appraisal of the Tenth Plan is conspicuously missing in the Approach Paper to the Eleventh Plan. This is in consonance with the mindset of the United Progressive Alliance (UPA) government. The argument is that public employment exchanges need to be revamped and computerised, not scrapped. “The DGET, responsible for “National Employment Service” and “National Vocational Training” in the country, has taken initiatives to achieve wide spread applications of IT in all possible areas of employment service and vocational training.” 12 As Indian budgets go, this 9 10

11 12

“The National Employment Service – A Hoax,” People’s Democracy, 6 June 2004. These are called Rozgar Sahay Kendras in Gujarat, labeled as public-private partnerships. The public employment exchange provides a database of people on the register (the supply of labour, so to speak) and the private agency matches it with demand. Job “melas” have been organised in Rajasthan. Annual Report of the Ministry of Labour, 2007-08, Chapter 30, http://www.labour.nic.in/annrep/annrep0708/ english/Ch-11.pdf

computerisation plan does not involve a great deal of money, between Rs6 to Rs7 billion and is expected to be completed by 2010. One-third of the 947 employment exchanges are apparently already computerised. However, such plans and talk of ISO certification should be considered against the backdrop of inefficient public expenditure and opportunity costs of those resources. An audit report for 2004-05 for West Bengal stated that, â&#x20AC;&#x153;The Directorate of Employment, West Bengal, through its network of Employment Exchanges, caters to activities like registration of job seekers, renewal of registration and submission of list of eligible candidates to employers. Computerisation of 40 employment exchanges in the state was taken up along with network connectivity and the work was entrusted to the ET & TDC on a turn-key basis. However, even after spending Rs6.52 crore, the computerised system installed in the employment exchanges have been lying inoperative for last 30 to 46 months, owing to a default timer-based lock implanted by the vendor, the non-completion of the creation of the database and the non-installation of the software due to the abandonment of work by the vendor, largely frustrating the basic objective of the scheme. The application software also lacked in data processing and data manipulation controls. Absence of data disaster recovery strategy led to substantial data loss.â&#x20AC;? 13 This is symptomatic of much that the UPA government has sought to do. With the UPA tenure coming to an end, perhaps one will get back to reforms. Since revamping is pointless, public employment exchanges should be scrapped. While this is fundamentally a state government subject, the centre does have a catalytic and triggering role to play. oooOOOooo

www.intosaiitaudit.org/hosted_external_publications/India_3WEST_BENGAL.pdf.

ISAS Insights No. 35 – Date: 15 August 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

The Pakistan Inter-Services Intelligence: A Profile Ishtiaq Ahmed1 In the past few weeks, Pakistan has come under intense pressure from the United States, Afghanistan and India to curb alleged involvement of its Inter-Services Intelligence (ISI) in terrorist activities. Such pressure has built rapidly in the aftermath of bomb blasts, some carried out by suicide bombers, in July 2008 in many parts of South Asia. Those outrages caused well over a hundred deaths. Much before the recent attacks, the ISI’s power and influence in politics had gained it the reputation of “a state within a state”, suggesting that Pakistani governments, especially those formed by civilians, have little or no control over its activities. The ISI rejects such accusations, claiming that it is a professional organisation dedicated fully to gathering intelligence that would strengthen Pakistan’s national survival and security. Existing literature on spy agencies is replete with data suggesting that acting irregularly and even in illegal ways is not unusual for such organisations. Even in stable and strong democracies, governments are not always fully in control of them and they can set up their agenda rather freely. Charges that the Central Intelligence Agency (CIA) and the Federal Bureau of Investigation sometimes act in defiance of United States governments have been made several times, but since such organisations work in great secrecy, it is not easy to find solid corroborative evidence against them that can show that they do act against the will of the government. However, the general assumption underlying the functioning of such entities is that they act under a coherent chain of command, and, in principle, their activities are purported to enhance national security. Pakistan’s President, Pervez Musharraf, has described the ISI as “Pakistan’s first line of defence.”2 On 5 August 2008, the Pakistan government criticised the Americans for blaming Pakistan for the recent terrorist activities. It was claimed that, on 24 May 2008, Pakistan provided the Americans with the exact location and movement of the Taliban leader, Baitullah Mehsud, who had driven to a remote South Waziristan mountain post in his Toyota Land Cruiser to address the press [among the journalists present was the BBC Pakistan correspondent]. He returned back safely to his abode. The statement went on to say that the United States military has the capacity to direct a missile to a precise location at very short notice as it has done close to 20 times in the last few years to hit al-Qaeda targets inside 1

Professor Ishtiaq Ahmed is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg. Statement published in the Pakistani newspaper, The News, 6 August 2008.

Pakistan. However, no action was taken against Mehsud. This attitude was described by Pakistan as intriguing and confusing. Pakistan also alleged an Indian hand in the trouble in Baluchistan as well as the Afghanistan government in protecting Baluch secessionists. Making allegations and counter-allegations is typical of spy agencies and the exact truth may never be known to the public at large. On the other hand, it is possible that, for the resurgence of terrorism, the factors that have created the present situation may be far more complex and may include many other players. In any event, it is worth recapitulating the chronology of the July terrorist attacks. On 6 July 2008, in a suicide bombing in Islamabad, 21 people lost their lives, including 15 policemen. The next day in Karachi, six crude bombs exploded in different parts of the city, causing grievous injury to 25 people. Pakistan blamed Mehsud for the attacks â&#x20AC;&#x201C; he was also blamed for the assassination of Ms Benazir Bhutto on 27 December 2007. However, it was after the attack on the Indian embassy in the Afghanistan capital, Kabul, on 7 July 2008 that killed more than 60 people, including four members of the Indian diplomatic staff, that protests began to be aired directly against the ISI. The Afghans immediately started claiming that the attack had been masterminded by an intelligence agency of a neighbouring country. Given the strained relations between Afghanistan and Pakistan, it was not difficult to apprehend that the Afghans were pointing the finger at Pakistan. A few days later, India made similar accusations. President Hamid Karzai of Afghanistan went on to claim that his government had convincing evidence that suggested that the attack had been masterminded by Pakistani intelligence. The CIA chief, Robert Gates, initially said that he had not seen any evidence of a Pakistani involvement, but soon afterwards, the United States position changed when the Afghan and Indian point of view was presented to the Bush administration. In the meantime, terrorist outbursts continued and bomb blasts took place in the Indian city of Bangalore on 25 July 2008 and in Ahmedabad on 26 July 2008. Some 60 people lost their lives and many more were injured. The Indian police claimed to have found dozens of unexploded bombs in Surat and other Indian towns and cities. There was no doubt that some forces were trying to instigate communal clashes between Hindus and Muslims in India, and indeed aiming at undermining the efforts that had gone on for quite some time to develop better understanding and relations between India and Pakistan. India did not directly name the ISI for those attacks, but alleged that a Pakistani involvement in them was present even when the actual blasts may have been carried out by Indian Muslims recruited by extremist organisations. Under the circumstances, the recent visits of Pakistanâ&#x20AC;&#x2122;s newly elected Prime Minister, Mr Yousaf Raza Gilani, to the United States and Sri Lanka were marred by constant barrage of questions and comments about Pakistanâ&#x20AC;&#x2122;s alleged inability to control the terrorists, who were receiving support from the ISI. Thus, what was supposed to be an excellent occasion to showcase his vision of Pakistan and what he hopes to achieve as prime minster became instead an embarrassing exercise in finding arguments to exonerate Pakistan from charges of inability to control rouge elements in Pakistani society. In the United States, President George Bush, as well as presidential candidates, Mr John McCain and Mr Barrack Obama, and other leaders whom Mr Gilani met, urged him to do much more to root out extremism and terrorism. The same were the concerns raised by the American media. The only positive gain was that the Congress voted in favour of a US$15

billion aid package to Pakistan, of which the major portion would be spent on economic development. The South Asian Association for Regional Cooperation Summit which he attended immediately afterwards was dominated by Mr Gilani assuring his South Asian counterparts that his government was determined to fight terrorism. In an interview with a Sri Lankan newspaper, he rubbished all accusations that the ISI was involved in the Kabul bombing, asserting that it took orders from him and reported to him in accordance with requirements laid down in the Pakistan constitution. In any case, in a 45-minute long meeting with Indian Prime Minister, Dr Manmohan Singh, Mr Gilani pointed out that Pakistan too was a victim of terrorism and that both Pakistan and India should work together to fight that evil. In a separate meeting with President Karzai, he promised to carry out an investigation to find out if there was any involvement of the ISI in the Kabul bombing. The question, of course, is, does Mr Gilani enjoy real powers as the chief executive of the Pakistan government? Mr Gilani was indeed making a technically correct statement when he said that, constitutionally speaking, the ISI was under his jurisdiction and reported to him, but for all practical purposes, it is the Chief of Army Staff to whom the ISI reports and takes orders from. In the past, whenever a civilian government had tried to establish its control over the ISI by appointing a general it trusted, but who was unacceptable to the military establishment, the latter trumped over it by appointing its own men to strategic positions dealing with intelligence on internal politics. This way, the ISI continued to maintain a watch on the activities of the civilian government itself. In order to make sense of why the ISI enjoys, in actual reality, such wide discretionary powers and is allegedly involved in terrorism, we need to look at it in a historical perspective. The ISI was founded in 1948 to facilitate intelligence gathering and sharing between the three main sections of the armed forces: the army, navy and air force. There are other military and civilian intelligence agencies too, but the ISI is undoubtedly the most powerful and the most politicised among them. The exact number of people who work for it is not known but estimates suggest it has at least 25,000 employees. Another 30,000 serve as informants and in other related roles. Although its official brief is about enhancing national security and, therefore, concerned primarily with intelligence gathering and other related activities pertaining to external threats to Pakistan, it was given a political task already in the late 1950s when General (later Field Marshal) Mohammad Ayub Khan (1958-1969) ordered it to monitor oppositional politicians from East Pakistan because he did not trust that Bengali police officers of the Criminal Investigation Department (CID) would do that sincerely. Similarly, Prime Minister Zulfikar Ali Bhutto (1971-1977) ordered the ISI to collect intelligence in Baluchistan after an arms cache allegedly dispatched by Iraq to help Baluch separatists was uncovered in 1973. Bhutto too did not trust the Baluchis working in the CID. General Muhammad Zia-ul-Haq (1977-1988) tasked the ISI to bolster the Mohajir Qomi Movement in the Sindh Province as a counterweight to the Pakistan Peopleâ&#x20AC;&#x2122;s Party, led by Benazir Bhutto, but the real big boost to the ISIâ&#x20AC;&#x2122;s status and importance came during the Afghan jihad of the 1980s. He assigned the ISI the crucial task of setting up bases in Pakistan where Mujahideen (Islamic warriors) could be indoctrinated and trained to fight the holy war against the Soviet Red Army that had marched into Afghanistan in 1979, with a view to bolstering the fledgling communist regime that had come to power the previous year though a military coup. During this time, thousands of Islamic schools called madrassas were set up by the Islamists, where hundreds of thousands of pupils (Talibans), mainly from the Pushto-

speaking tribes on both sides of the Pakistan-Afghanistan tribal belt, were indoctrinated in a severely militant type of Islamic ideology. This massive undertaking was given full help by the United States and Saudi Arabia. The ISI did not have any direct involvement in the setting up of the madrassas, but naturally the pupils indoctrinated in them were drafted into jihad operations in Afghanistan and, later, in the Indian-administered Kashmir. After the Soviets withdrew in 1989 and the Americans hurriedly left without ensuring a smooth and stable transfer of power to Afghan politicians, a fierce and bloody power struggle irrupted among rival political and ethnic factions constituting Afghan society. While Pakistan backed the predominantly Pushtun Talibans, arch rival India threw its weight behind the Northern Alliance, comprising the Uzbek, Tajik, Hazara and other ethnic groups. The Talibans emerged victorious in that gory encounter and Pakistan’s influence in Afghanistan increased dramatically. It should not be surprising that, in that process, some officers in the ISI became hardcore Islamists although the ISI, as a body, may have remained a professional organisation focusing primarily on national security. Moreover, some top military and ISI officers began to nurture the dream of establishing an Islamic super state that would initially comprise Pakistan and Afghanistan, but would then expand into the Indian-administered Kashmir through successful jihad, and later to the Central Asian republics, and even Iran could possibly be integrated into it. From the Pakistan military’s point of view, such expansion westwards would provide Pakistan “strategic depth” vis-à-vis arch rival India. The Kashmir jihad which took off soon after the withdrawal of the Soviet Union from Afghanistan was spearheaded by militant Pakistani organisations such as Laskhar-e-Toyyaba (LeT) and Jaish-e-Muhammad (JM). These outfits actively supported a popular uprising of Kashmiri Muslims that had emerged against Indian rule and, as a result, were involved in violent conflict with Indian troops. Later, these organisations began to expand their activities into India and the result was several terrorist outrages in both Indian-administered Kashmir as well as in other parts of India. It was widely suspected that the ISI maintained close connections with the LeT and JM. Given these major assignments and concomitant involvement in militant operations, it should not be surprising that the ISI appropriated far more power and acquired much greater influence than is normally the case with intelligence agencies of middle level powers such as Pakistan. Also, the fact that democracy and civilian institutions never took a firm root in Pakistan and the military dominated the political scene meant that the ISI, the primary military intelligence agency, began to be dreaded as a state within a state. However, the 9/11 terrorist attacks on the United States set in motion a worldwide campaign against terrorism. While Pakistan joined the “war on terror” and the Musharraf regime began to arrest Al Qaeda operatives, militants active in the Indian-administered Kashmir continued to be described by it as freedom fighters. However, after the 13 December 2001 terrorist attack on the Indian Parliament, pressure on President Musharraf to dissociate with such militancy increased enormously. In an important address to the Pakistani nation on 12 January 2002, President Musharraf declared that Pakistan remained committed to the just struggle of the Kashmiri people against Indian dominance, but, in future, militant organisations such as the LeT and JM will not be allowed to organise jihad on Pakistani territory for engagement in the Indian Kashmir.

Such utterances did not go down well with sections of Pakistani society that sympathised with the militants, among them were indeed serving and retired military officers, including senior officers in the ISI hierarchy. Several unsuccessful assassination attempts on President Musharraf and his loyal generals took place. It was found that some insiders were involved in those attacks. Consequently, a reshuffling of key positions in the military and the ISI took place as President Musharraf placed his trusted men in those positions. It is, however, possible that such actions were not thorough and, therefore, some dissident ISI functionaries who harboured sympathies for the Talibans and militant organisations remained undetected. In any case, former ISI Director, Lieutenant-General Hameed Gul, and other retired military officers as well as rightwing Islamist leaders began openly to blame the government for making Pakistan national interests subservient to those of the United States. Voices were also raised in favour of the Kashmir jihad. During 2007, the terrorists directed their wrath at the Pakistan military personnel and installations. Almost every other day, bomb blasts and suicide attacks took place. As a result, hundreds of fatalities and injuries were suffered by the military. President Musharraf blamed the Talibans, but it is possible that dissident elements from the military and especially the ISI aided the Talibans in carrying out the attacks. It is widely believed by the Pakistani military establishment that the Karzai government is closely allied to India and, therefore, Indian influence has increased significantly in Afghanistan. Such developments are seen as inimical to Pakistani interests. It is, therefore, possible that, in the attack on the Indian embassy in Kabul, such considerations may have played some role. The Americans claim to have intercepted messages exchanged between the ISI officers and the Talibans in which the former provided information to the latter on the movement of North Atlantic Treaty Organization troops. On the other hand, within the Pakistani tribal areas, bloody clashes between the Talibans and the Pakistani military continue. In the last few months, hundreds of Pakistani military personnel lost their lives in such encounters. The military and the ISI have also continued to render help to the Americans in tracking down Al Qaeda operatives. Thus, the military establishment, which includes the ISI, apparently plays contradictory roles in the current situation. It is, however, very unlikely that the mainstream ISI, headed currently by General Nadeem Taj, and previously by General Pervez Kayani (currently Chief of Army Staff), have been acting in defiance of the policies of President Musharraf, when he was firmly in power before the 18 February 2008 general elections. However, after the civilian government took over in the end of February 2008, that chain of command may have become less effective. There is nothing to suggest that the linkages and networking between the ISI officials and the Talibans and militant organisations such as LeT and JM have been severed altogether. In any event, the pressure on Pakistan to deal effectively with terrorist networks within its territory will remain. Given the thriving market for conspiracy theories in Pakistan, some people believe that the United States, Afghanistan and India are developing a joint strategy against Pakistan. If that be true, then instead of the Talibans, Al Qaeda, LeT, JM and the ISI being blamed for terrorism, the Pakistani state itself may be viewed as a rogue entity that needs to be dealt with severely. In one sense, that would be a self-fulfilling prophecy of those who believe that Pakistan is a victim of some international plot against it.

It is, therefore, in Pakistanâ&#x20AC;&#x2122;s interest that it strives hard to crush all networks and organisations that may be involved in terrorism. The ISI should indeed play its legitimate role in gathering intelligence imperative to strengthen Pakistanâ&#x20AC;&#x2122;s security, but such activities should conform to the overall norms and standards that international law approves for the conduct of nations. Equally, it is important that regional and world powers should assist Pakistan in strengthening its democratic institutions and in establishing hegemony of civilian rule. Also, efforts should be made to persuade the Pakistani and Indian military establishments and their spy agencies not to engage in a perpetual zero-sum combat to gain influence in South Asia and Afghanistan. There is the need to radically re-orient the politics of South Asia in a positive direction so that this region may benefit from the economic opportunities that are at hand. A destabilised Pakistan will inevitably carry adverse repercussions for its neighbours Afghanistan and India. Given the fact that Pakistan is a nuclear weapon state, such an outcome can spell disaster for the South Asian region as well as the rest of the world.

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ISA S Insights No. 36 – Date: 8 September 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Bangladesh-China-Northeast India: Opportunities and Anxieties M. Shahidul Islam ∗ A recent workshop in Kolkata on Southern Silk Route: Historical Links and Contemporary Convergences explored the historical connections between Bangladesh, China, 1 India, 2 and Myanmar (also known as BICM). These countries were believed to be connected via the Southern Silk Route for centuries. 3 The workshop that drew nearly 30 academics and diplomats from different parts of the world also examined how century-old economic and cultural linkages can be re-exploited for economic and other benefits for the region’s roughly 300 million people. The gathering also drew substantive attention to India-Bangladesh relations and China’s growing interest in Bangladesh, inter alia. There has been some exasperation among Indian scholars and diplomats regarding Bangladesh’s position on transit facilities to India, gas exports to India, and its possible involvements with the insurgency in northeast India among other matters. China’s increasing influence over Bangladesh in recent years also caused some anxiety among some Indian participants at the workshop. Against this backdrop, this paper attempts to explore some key Indo-Bangla bilateral issues, particularly those critical to northeast India’s potential engagement with Bangladesh and other countries through the Kunming Initiative. 4 It also examines whether China’s engagement with Bangladesh goes beyond economic interests.

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1 2 3

Mr M. Shahidul Islam is a Research Associate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contact at isasmsi@nus.edu.sg. Particularly, Yunnan province of China. Mostly, northeast part of India. Historical evidence shows that a South-West Silk route was in use between India and China long before Marco Polo established a silk route over the Karakoram in the 13th century (Sobhan, 2000). According to Verghese, the Southern-most route passed through Mytkynia, the Hukwan valley and into the Paktai and Nagai hills to Assam (Verghese, 1998). In more contemporary times the Southern Silk route or Burma road which was possibly used by Chinese emperor Kubli Khan’s armies to conquer Burma, was resurrected as an important logistical artery by General Joe Stilwell, the U.S. officer commanding allied forces on the IndoBurmese front and designated to liaise with the Chinese forces resisting the Japanese occupation of China during World War II (Tuchman, 1977). The Kunming Initiative is a byproduct of the conference on “Regional Cooperation and Development among China, India, Myanmar and Bangladesh” held in 1999 in Kunming, the capital of Yunnan Province located in the Southwestern region of China. Over 100 officials and scholars from BCIM countries have called for forging a long-term relation of friendship and joint efforts to accelerate economic development in the region.

Integration Prospects of Bangladesh and Northeast India: Major Hurdles Both Bangladesh and northeast India share a long history, culture and a long border. 5 The historic ties between Bangladesh and the northeastern part of India dates back to centuries. Northeast India was integrally linked to the mainland India through the areas of what is now Bangladesh. Its outlays to the sea were through Chittagong port in Bangladesh and via Bangladesh’s rivers to Calcutta port. The region shipped tea and other exportable by inland water transports through the rivers of Bangladesh for overseas shipment from Calcutta. 6 However, with the partition of India the region was cut off from its hinterland, formerly East Bengal. Northeast India, which consists of eight states 7 of India, is geographically more aligned with Bangladesh (see Map 1), Myanmar and China than its own mainland. It is an economic imperative for the landlocked region to seek benefits for itself through greater regional integration. Bangladesh too has an abiding interest in northeast India as it sees that the region can be its natural trading partner due to geographical proximity and historic linkages, among others. However, less than friendly relations between Dhaka and New Delhi have been an impediment to increase trade, business and transportation networks between northeast India and Bangladesh. Owing to several factors, notably non-tariff barriers and high transaction costs (due to poor infrastructure and communication networks), northeast India-Bangladesh trade and other economic relations have not been developed despite their close geographical proximity. Moreover, a myriad of bilateral issues that has been a major bone of contention between New Delhi and Dhaka equally hinders the prospects of Bangladesh-northeast India economic integration. Further, to integrate northeast India with its mainland, New Delhi is consistently seeking transit facilities from Dhaka that the latter is reluctant to allow unless the former provides a similar opportunity to Bangladesh to access the landlocked Himalayan countries. In this paper, we will focus on two issues – trade and transportation – that are critical for both countries’ economic engagements. In recent years, trade barriers have declined, both in Bangladesh and India, in line with their commitments to World Trade Organization and South Asian Preferential Trade Arrangement (SAPTA). Moreover, India has given preferences to Bangladesh on approximately 2,925 tariff lines under SAPTA. Nevertheless, Bangladesh’s export to India accounts for less than seven percent of its total import from the latter. As a result, it has a massive trade deficit with India. 8 Moreover, large volumes of informal imports from India cross the land border avoiding Bangladesh import duties. There are allegations from Bangladesh that its products often face India’s non-tariff barriers and other bureaucratic hurdles. 5

6 7

Bangladesh is geographically surrounded mostly by northeast India except for small border with Myanmar to the far Southeast and the Bay of Bengal to the South. Sobhan (2000). Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura. Also often cited as seven sisters (except Sikkim). For instance, in 2006, India's exports to Bangladesh were US$ 2230.77 million, whereas the latter’s exports to the former were only $146.93 million (International monetary Fund: Direction of Trade Statistics Yearbook, 2007).

It is a very common experience that two neighbouring countries can have trade imbalances. One needs to see whether Bangladesh has not been able to improve its trade imbalances with India only due to the latter’s non-tariff barriers. One way of examining the case is how much complementariness they have in terms of trade. Trade Complementarity Index 9 shows that trade complementarity between Bangladesh and India is very low (5.42). 10 This low level of trade complementarity between these two neighbours is hardly surprising as a) Bangladesh’s export basket is not very diversified; and b) it is highly concentrated on readymade garment product which is not a significant import item for India. One of the reasons why India remains Bangladesh’s second most important import destination is due to India’s broad export basket and close geographical proximity which, in turn, have helped Bangladesh to source for many commodities and final products with comparatively cheaper price, at least until recently. New Delhi’s close attention to its nontariff barriers and its bureaucratic bottlenecks can augment Bangladesh’s trade to India to some extent but policy makers in Bangladesh should understand that this is not the panacea to redress the imbalances. Bangladesh does have similar trade imbalances with China, but one observes fewer hue and cries in the Chinese case as we do in Indo-Bangla trade deficits. Another issue that has been affecting Indo-Bangla relations is India’s demand for transit facilities through Bangladesh. In the absence of a land transit link between India and Bangladesh 11 , the traffic between Kolkata and Assam is mainly carried by rail and road links through the Siliguri Corridor 12 and the requirements of additional transport costs for carrying goods is staggering. To transport goods to and from the northeast through the corridor the Indian government provides 25 percent transport subsidy. 13 It is estimated that seven billion Rupees are being spent as additional costs to transport goods and services to and from northeast India. 14 The figure is estimated in 1990s and it is expected that the cost has increased in tandem with economic growth both in northeast India and the rest of India. As such, as a transit route through Bangladesh can integrate the northeast India with its mainland and is set to reduce transportation cost significantly. However, an inland waterway transit exists between these two neighbours. After gaining independence, Bangladesh restored the “Protocol on Inland Water Transit and Trade” in 1972, which was suspended by the then-Pakistan following the Indo-Pak war of 1965. Now the question is why Bangladesh is reluctant to permit such facilities to India. It wants similar transit facilities from India to access Nepal and Bhutan. These landlocked Himalayan countries are geographically quite close to Bangladesh but they are surrounded by India. Nepal and Bangladesh are separated by a narrow piece of Indian territory of about 15 kilometres in the southeast (See Map 1). Had there been transit facilities (Nepal-India9

10 11

13 14

The trade complementarity (TC) index can provide useful information on prospects for intraregional trade in that it shows how well the structures of a country’s imports and exports match. The TC between countries k and j is defined as: TCij = 100 – sum(|mik – xij| / 2). The index is zero when no goods are exported by one country or imported by the other and 100 when the export and import shares exactly match. This figure is taken from Rahman at el (2007). It is worth noting here and as discussed earlier there has been a developed transportation infrastructure between, particularly rail and riverain links, between India and East Bengal until 1965. Following the IndoPak war these links were disrupted. The total amount of inward and outward traffic is estimated at 10 million tons a year, of which only about 50000 tons passes through Bangladesh, mostly by river transit. Verghese (1998 ) Sobhan (2000)

Bangladesh), landlocked Nepal (so is Bhutan) could use Chittagong and Mongla port of Bangladesh that could cut down its transportation cost dramatically and one could see better trade and tourism relations between these two countries. But New Delhi is unenthusiastic to respond such calls. India keeps close eyes on these Himalayan countries, largely due to the China factor, and it is apparently less enthusiastic in wanting to integrate them with their close neighbours. Another roadblock in solving Indo-Bangla transit problem is that Dhaka wants to solve all bilateral issues with New Delhi in a single package. Indeed, this is one of the reasons why the tripartite gas pipeline project (Myanmar-Bangladesh-India) had not implemented finally. So, it is not entirely true that Bangladesh is reluctant to allow India to use its territory to access northeast India but what it wants is a continental transit facility, especially in the southern part of the SAARC region (Bangladesh-India-Nepal-Bhutan) which does make more economic sense. The deadlock on transit issues has been costing India and Bangladesh’s transport and other communication links. There is an overwhelming consensus that, to integrate South Asia with southeast- and other parts of Asia, there is a need for greater transport network across Asia. But India and Bangladesh have significant differences on the selection of the Asian Highway Network (AHN). Bangladesh opposes the proposed route (India-Bangladesh portion) that enters into Bangladesh from India and goes back into India (see map 2). Bangladesh wants to initiate a route that connects it with Southeast Asia as well going through Chittagong and Myanmar (see Map 3), as the proposed route, as it argues, will virtually become a transit route for Indian goods between rest of India and northeast India. Bangladesh wants to link the AHN with transit issues (to northeast India through Bangladesh and to Nepal and Bhutan through India) that has handicapped Dhaka-Delhi relations greatly in recent years. If Bangladesh does not join the AHN, the length of the final route (See Map 4) will be much longer than either the proposed route or the route Bangladesh has suggested. As a result, an AHN that excludes Bangladesh will make both northeast India and Bangladesh worse off. The others issues, especially Bangladesh’s reluctance to gas exports to India and its involvements with the insurgency problems in the northeast India, have largely been muted in recent times. With regards to gas exports, it has become very evident that Bangladesh itself could become an energy scarce country in the near future if it continues to maintain its current gross domestic product growth rate. 15 New Delhi believes that some Bangladeshbased Islamic terrorist groups collaborate with the northeast separatist movements with the help of Pakistan Inter-Services Intelligence. There is no clear evidence that the Bangladesh state itself fuels the insurgency problems in northeast India, but it is true that some northeast insurgency groups find safe haven in Bangladesh. This is not because the state itself patronises them but Dhaka does not have much control over northeast India-Bangladesh border. The current caretaker government has taken some genuine steps to control Islamic fundamentalism in Bangladesh, including hanging some terrorist leaders.

For details see Wood Mackenzie & Petrobangla, “Revised Interim Report on Development of Gas Sector Master Plan”, 2005. Available at <http://www.energybangla.com/pdf/WM%20GSMP%20Rev%20Interim %20Report.pdf>

China-Bangladesh Relations: India’s Concerns As mentioned earlier, another important issue that has caused some anxiety to some Indian policy makers is China’s growing interest in Bangladesh. China and Bangladesh are old friends. However, in recent years, Dhaka-Beijing relations have reached new heights as China has become Bangladesh’s number one trading partner, replacing India, and there has been a remarkable increase in Chinese investment in Bangladesh. Total trade between China and Bangladesh was around US$3.5 billion for 2007. Further, Beijing has become a key source of funds for Bangladesh’s infrastructure development, having already funded the construction of six friendship bridges. Further, Bangladesh-China Cooperation Agreement on the Peaceful Usage of Nuclear Energy, that was signed in 2005, among eight other treaties when the Chinese Premier paid a state visit to Bangladesh, is aimed at assisting Dhaka in the peaceful development of nuclear energy for power generation and other development purposes. The ties between China and Bangladesh are even more comprehensive when one looks at security cooperation. Being the largest supplier of military hardware and training to Bangladesh’s armed forces, Beijing plays a key role in moulding Dhaka’s security apparatus. Indeed, in 2002, Bangladesh signed a Defence Co-operation Agreement with China which is the first such agreement ever signed by Bangladesh in its history. All these developments indicate that China has both economic and strategic interests in Bangladesh. Does it mean that China’s strategies and interests are designed to contain India, especially when one also views its engagement with Myanmar and Pakistan, in addition to Bangladesh? Why is Bangladesh aligning more with China in recent years? Can Bangladesh afford to engage China and strategically ignore India’s concerns? To understand the dynamics of Sino-Bangla relations, especially from Bangladesh’s perspectives, one needs to understand three crucial areas – Bangladesh’s economic aspirations, its relations with India and the dynamics of its domestic politics. First, on the economic front, Bangladesh is an untapped market and China understands its significant economic potential. Bangladesh too has abiding interest in China’s rising economic prowess. Increasing Chinese export and investment in Bangladesh, especially in telecommunications, manufacturing, RMG, mining, power and agriculture, and the Chinese government’s incentives to import Bangladeshi products has made China Bangladesh’s number one trading and an important economic partner. Second, as discussed, Bangladesh’s and India’s economic engagement has not been developed in tandem with their engagement with the outer world. Like many neighbouring countries, they have some outstanding issues to resolve. This has prompted Bangladesh to seek closer ties with China. Moreover, as Bangladesh’s bilateral ties with India are less than friendly, and being a small state in the Indian neighbourhood, it faces a psychological threat. So apart from economic reasons, its security concerns are another motivating factor behind this alignment, and we can see such trends elsewhere in the world – perhaps more vividly in the Caucasus. Third, one needs to look at Bangladesh’s two major political parties’ relations with New Delhi in order to understand the dynamics of Sino-Bangla and Indo-Bangla relations. The Bangladesh Awami League (AL), left-winged and relatively secular, is branded as a pro-

Indian, whereas the Bangladesh Nationalist Party (BNP), right-winged and closely associated with Islamic parties, utilises anti-Indian sentiment to achieve its political objectives. The AL does not publicise its close ties with New Delhi. However, during Sheikh Hasina’s tenure (1996-2000), Dhaka-New Delhi relations witnessed a marked improvement and Bangladesh and India signed two important treaties – the Chittagong Hill Tract Peace Treaty and the Ganges Water Sharing Treaty – which seemed a distant reality during her predecessor Khaled Zia’s premiership in the period of 1991-1995. After a brief pause, a less than friendly relation between these two neighbours re-emerged when the BNP-led four party alliances returned to power in 2001 Dhaka-New Delhi bilateral relations again reached the pre-Hasina era. On the other hand, the BNP’s association with Beijing is just the reverse of its relations with New Delhi. China-Bangladesh relations gained momentum from 2002 when the BNP-led four-party alliance adopted a “Look East” policy. Further, the then-Bangladeshi Prime Minister’s visit to Beijing was a significant landmark in shaping the Sino-Bangla relations.16 A Dhaka-New Delhi standoff on some key bilateral issues, little progress in South Asian regionalism and the psychological threat it perceives from its largest neighbour had convinced the then-government of Bangladesh that it should take advantage of the rise of China. The latter’s reciprocal interest, especially Bangladesh’s market potential and its geopolitical importance, has given the Sino-Bangla relation a big thumbs up. Bangladesh’s engagement with China is, therefore, partly driven by its economic interest. The long-standing mistrust between Dhaka and New Delhi has also prompted Bangladesh to align itself with China. Moreover, the dynamics of Bangladesh’s domestic politics, particularly its two major political party’s relations with New Delhi, and India’s hegemonic attitude have helped China to increase its engagement with Bangladesh. Despite these facts, good relations with India are equally important for Bangladesh, owing to its economic dependency, people-to-people connections and cultural linkages. It is believed that several millions Bangladeshis have found their shelter, mostly illegally, in different parts of India. Moreover, Bangladesh’s dependency on India became very visible in the recent past when India imposed export ban on several agricultural commodities in the wake of burgeoning food crisis. But India too failed to utilise the opportunity to alleviate the mistrust between two countries. One noticed a huge frustration among Bangladeshis when India made an extraordinary delay in delivering rice to Bangladesh (Dhaka was even ready to pay the international market price) when the country badly needed it. There are growing concerns that India is losing Bangladesh to China, as we observed in the case of Myanmar, or Bangladesh’s relations with China will slowly emulate the Sino-Pak relations which are believed to be designed to contain India. But Bangladesh is no Myanmar, as it is culturally more aligned to India, and the geo-political dynamics of Pakistan are far more diverse than that of Bangladesh. Even though the common people in Bangladesh have some suspicions about India, they are not hostile towards it. Moreover, it is true that a section of people, particularly the ultrarightists within the establishment of BNP take an anti-Indian stance but the liberal section of 16

Three important treaties and a Memorandum of Understanding were signed between two countries on military cooperation, economy and technology and China promised interest-free loans to built infrastructure in Bangladesh.

the party believes in peaceful coexistence with India. The civil society in Bangladesh too sees the Sino-Bangla relations as largely driven by economics. Though security is another building block in this regard, they think it is designed to protect the country from any external aggressions. However, if the BNP’s central command falls into the ultra-rightists hand, then they might resort to India bashing to gain their political objectives. Further, Bangladesh’s relations with the United Sates is another critical factor as both the AL and the BNP keep close relations with Washington which has significant influence over Dhaka. So no matter which party assumes power, the degree of Chinese influence over Bangladesh is not absolute. India Needs to Make a New Case As discussed earlier, two issues, trade and transit, which have handicapped Indo-Bangla bilateral ties, can be solved if both countries look at these issues afresh. New Delhi’s close attention to its non-tariff barriers can give some comfort to Dhaka. It is clearly noticeable that the mere correction of non-tariff barriers will not significantly improve Bangladesh’s trade imbalances with India but a serious attempt can prevent India from being the perfect scapegoat for Bangladesh’s own problems in this regard. On transit issues, unless India offers similar opportunities to Bangladesh, any breakthrough on it is a distant reality. The real downside risk pertaining to transit is if Bangladesh finally remains isolated from the AHN, it could make both countries worse-off. Bangladesh’s alignment with China is not necessarily a barrier to forge plausible Indo-Bangla ties. Indeed, a growth quadrangle comprising Bangladesh, the Yunnan province of China, Myanmar and northeast India can change the economic geography in this part of the world. The region is blessed with diverse natural resources, rich bio-diversity and enormous hydroelectricity potential, among others. However, with regards to northeast India’s integration with Bangladesh and Southeast Asia, New Delhi should first make up its mind to what extent it wants to integrate its northeastern part with the rest of South Asia, as it has both economic and security concerns pertaining to the region. It has some fear that opening up of northeast India can soon turn it a readymade market for Chinese goods, and the northeastern states that are fighting for autonomy from the centre or even for sovereign states might go beyond New Delhi’s control. Indeed, one of the speakers at the conference identified India as a rather reluctant participant in the BCIM due to these concerns, inter alia. The differences over bilateral issues between two close neighbours are very common elsewhere in the world but most countries have prioritised their economic benefits even while keeping their political differences alive. In the case of India and Bangladesh, both parties need to revisit the bilateral differences. Being a big economic power and the largest country in the South Asia, India, in this case, has the upper hand. New Delhi needs to make a new case for its neighbourhood policies and it needs to act fast to change the course of IndoBangla relations.

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References Aneja, Urvashi (2006), “China-Bangladesh Relations: An Emerging Strategic Partnership? Institute of Peace and Conflict Studies (IPCS) Special Report, 2006. B.G. Verghese (1998), “India’s northeast Resurgent”, Konark Publishers, New Delhi. Rahman et al (2007), “BCIM Economic Cooperation: Prospects and Challenges”, Centre for Policy Dialogue Occasional Paper No. 64. Sobhan, Rehman (2000), “Rediscovering the Southern Silk Route: Integrating Asia’s Transport Infrastructure” The University Press Limited, Dhaka. De, Prabir and Bhattacharyay, Biswa, N (2007), “Deepening India-Bangladesh Economic Cooperation: challenges and Opportunities”, Research and Information System for Developing Countries (RIS) Discussion paper No. 130. Barbara W. Tuchman (1977), “Stillwell and the American Experience in China, 1911-1945, McMillan. Strategic implications of Bangladesh-China relations, The Daily Star, 15th Anniversary issue, <http://www.thedailystar.net/suppliments/2006/15thanniv/bangladesh&theworld/bd_world12 .htm > World Bank (2006), “India-Bangladesh Bilateral Trade and Potential Free Trade Agreement”, Bangladesh Development Series Paper No. 13. Wood Mackenzie & Petrobangla (2005), “Revised Interim Report on Development of Gas Sector Master Plan”, 2005. Available at http://www.energybangla.com/pdf/WM%20GSMP% 20Rev%20Interim%20Report.pdf South Asian Enterprise Development Facility, SEDF (2004), “northeast India-Bangladesh Initiatives Map. International Monetary Fund, Direction of Trade Statistics Yearbook, 2007. Census 2001, Government of India. Economic Survey, 2007-08, Planning Commission, Government of India. Statistical Pocket Book Bangladesh 2007, Bangladesh Bureau of Statistics. CIA Fact book 2008. http://hei.unige.ch/sas/files/portal/spotlight/country/asia_pdf/asia-india-2004.pdf > http://horizonspeaks.wordpress.com

Map 1: Map of South Asia

Source: http://www.sgs.utoronto.ca/sas/images/large-map.gif

Map 2: The Asian Highway Network: The South-Asian Segment of the Road Network

Source: http://horizonspeaks.wordpress.com/2005/12/15/asian-highway-the-past-and-futuremaps/

Map 3: The Asian Highway Network: Bangladesh Governmentâ&#x20AC;&#x2122;s Proposed Route

Source: http://horizonspeaks.wordpress.com/2005/12/15/asian-highway-the-past-and-futuremaps/

Map 4: The Asian Highway Network, Excluding Bangladesh

Source: http://horizonspeaks.wordpress.com/2005/12/15/asian-highway-the-past-and-futuremaps/

ISA S Insights No. 37 – Date: 19 September 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

Inter-Regionalism and its Possibilities 1 Ong Keng Yong 2 Southeast Asia has the Association of Southeast Asian Nations (ASEAN) and South Asia has the South Asian Association for Regional Cooperation (SAARC). Both regional organisations were founded to minimise and settle disputes without the use of force, and to maximise growth through economic development and trade. In other words, peace and prosperity are the goals of ASEAN and SAARC. There will be security and stability. There will be benefits for the people. Other nations outside Southeast Asia and South Asia will desire stronger relations with the two regions, which means greater links with the world, and the multilateral international system is therefore more open and further strengthened. Put simply, we will have a vast region of cohesive and progressing nations externallyoriented and committed to peace, prosperity and a people-centered future. Are we there? If not, what can be done to bring us there? There is now a closer network of regional cooperation between South Asia and Southeast Asia. We see a range of overlapping structures, from the ASEAN Regional Forum (ARF) to the Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation (BIMSTEC), shaping the framework of cooperation of our regions. India and Pakistan are Dialogue Partners of ASEAN. India, Pakistan, Bangladesh and Sri Lanka are also members of the ARF. India is a member of the East Asia Summit (EAS) process. India has also proposed an iconic cultural project - the Nalanda University. This project has the potential to bring South Asia and Southeast Asia even closer together and revive the old civilisation links. Nalanda is also meant to bring us closer to the Northeast Asian nations - China, Japan and Korea - through its core action of rejuvenating Buddhist studies and reinforcing inter-faith understanding. Throughout ASEAN and SAARC, influences originating from the Indus civilisation are prominent. This is not just about the great religions and their inclusiveness. It is about how the magnanimity of power through the centuries before us created new culture, life and zeal for the flourishing of the human spirit. Mother India is omnipresent and so, we need to see how the India of today fares in the cooperation of our two regions. 1

This paper was the keynote address for the Workshop on “Inter-Regional Relations: South Asia and Southeast Asia”, organised by the Institute of South Asian Studies on 9 September 2008. The author is Ambassador-at-Large at the Ministry of Foreign Affairs in Singapore. He was SecretaryGeneral of the Association of Southeast Asian Nations from 2003 to 2007. His diplomatic postings have taken him to Saudi Arabia, Malaysia, the United States of America, India and Nepal.

India is an important neighbour and stakeholder. A strong ASEAN-India partnership is the key to tackling current and future challenges. Among South Asian countries, India’s relations with ASEAN are the most entrenched. Singapore believes that, as a major power, India can play a positive role in Southeast Asia with others like the United States of America, China and Japan, and India has a critical stake in ASEAN’s peace and prosperity. That is why Singapore has always encouraged greater engagement of ASEAN by India and why Singapore pushed strongly for India’s inclusion in the EAS process. Over the past decade, with India’s economic opening up and its “Look East” policy, ASEAN and India are increasingly partaking in each other’s growth. Prime Minister Manmohan Singh has articulated India’s “Look East” policy in his vision of an “Arc of Advantage” - an Asian economic community consisting of an integrated market, linked closely by rail, road, air and sea. Prime Minister Singh’s commitment to the expeditious conclusion of two key building blocks in this architecture - the ASEAN-India Free Trade Area and the ASEAN-India Open Skies Agreement - is a signal of the resolve of today’s India to become a key player in shaping the regional architecture. Underpinning the thriving ASEAN-India relationship is the convergence in our strategic outlooks that view each other as natural extensions of strategic and economic space. It is likely that this geostrategic logic provided strong impetus in driving the recent conclusion of the Goods chapter in the ASEAN-India Free Trade Agreement (FTA), even if the negotiations may have been a drawn-out process. The conclusion of the investment and services chapters, aimed for 2009, will further anchor the strategic and economic relationship between ASEAN and India. In 2007, ASEAN’s trade with India grew to US$38 billion. This figure represents just two per cent of ASEAN’s global trade. The ASEAN-India FTA has the potential to catalyse economic linkages between the two regions, even as it acts to further anchor ASEAN-India relations. During his visit to Indonesia in April 2005 for the 50th anniversary of the Bandung Conference, Prime Minister Singh stated that India intended to stay engaged by sharing experiences gained from India’s own development process with the Asian nations. He said that, “Human resource development holds the key to employment and wealth creation, particularly in this age of globalisation. This has been our strategy and we have laid particular emphasis on training and skills development as we globalize…” Indeed, India has set up training centres in ASEAN member states to impart technical knowledge, English as a language of international communication and commerce, and foundation learning for the young of Southeast Asia. Therefore, India has strengthened economic ties, pursued educational cooperation and reinforced strategic relationships. This combination of hard and soft power is still in its infancy. A consolidation of this approach will lift India’s engagement to an unprecedented level. It is important to bear in mind three things that India can offer Southeast Asian nations which no other Asian power is able to do likewise. These are English language skills; management of “unity in diversity” (that is, a multi-ethnic and multi-cultural society); and capacity building for a democratic governance (for example, an independent and functioning Election Commission).

The emerging assessment is quite positive for India’s role in advancing cooperation between Southeast Asia and South Asia. The challenge is to sustain this good progress. There is no doubt that domestic politics in India will draw attention away from this endeavour. Perhaps, the way forward is to get SAARC to carry the task into the future through an institutionalised partnership between the two regional organisations. Is this possible? Let us see what has happened in ASEAN-SAARC collaboration. ASEAN and SAARC have been stepping up their engagement in recent years. Officials from both sides have met to exchange information and best practices in areas ranging from trade to tourism, and to tackling HIV/AIDS and Avian Influenza. Looking ahead, we can expect cooperation to increase in scope and intensity as the two regional bodies continue to mature and develop, and as we find more areas of common interest. ASEAN is moving purposefully towards the ASEAN Community by 2015 based on the three pillars of political/security cooperation, economic integration and socio-cultural cooperation. The ASEAN economic integration will create a single market and production base in Southeast Asia. Many small and technical steps have been undertaken by ASEAN. Economic integration may not be very obvious to the layman but it is for real. In any case, ASEAN cannot stop this or move backwards because the geopolitical, economic and strategic drivers are in motion. SAARC has also started its own free-trade agenda and is moving on small and technical steps. ASEAN and SAARC can share experiences, in the spirit of what Prime Minister Singh stated during his visit to Indonesia in April 2005 for the Bandung Conference commemoration. The trade liberalisation initiatives in South Asia and Southeast Asia will create new opportunities to forge stronger economic and political ties. Some experts and scholars have been depressed by the slow progress and minimal developments to date. They argue that the huge size of India and its devotion to the maintenance of India’s advantage in the sub-continent have been the drags on SAARC’s own evolution and transition. Their contention is that the South Asian nations are in a continuous state of fire-fighting, managing one crisis after another arising from hubris and political manoeuvres. As such, this region is not well connected with the external actors and cannot do much with ASEAN in a common endeavour of regional cooperation and collaboration. However, in my view, there is enlightened leadership in the South Asian nations and it has been shown to exercise statesmanship and manifest a regional ego. Political will can be delivered if mutual interests are articulated and demonstrated well. Globalisation and its attendant consequences, particularly the increased inter-dependence, require all governments and leaders to seek new policy options and competitive designs. In any case, the challenges looming ahead, such as climate change, environmental degradation, natural disasters, and rising cost of energy and food, are all transnational in nature and would need multi-lateral strategies to manage. Working together with ASEAN and Southeast Asia gives the extra wherewithal. I hold the view that India and SAARC have contributed to inter-regional partnership. They are supported by the positive attitudes of the other South Asian countries, especially Pakistan, Bangladesh and Sri Lanka. It is a real treat to see these four partners of ASEAN working constructively for the regional good at ASEAN-led forums. ASEAN’s trade with Pakistan reached US$3.3 billion in 2006. Pakistan is attracting more investments from ASEAN

member states such as Malaysia, Singapore and Thailand. Bangladeshâ&#x20AC;&#x2122;s and Sri Lankaâ&#x20AC;&#x2122;s trade with ASEAN individually totalled more than US$1 billion in 2005. There is also a large work force from Bangladesh and Sri Lanka in ASEAN consisting not merely of manual labour but high-skilled professionals as well. Enhanced cooperation in the field of transnational crime has taken place, notably in the exchange of information on drug and human traffickers, and international terrorists. What else can be done to obtain more benefits from inter-regional cooperation? Let me suggest the following possibilities:1.

Educational exchanges between 10 universities from ASEAN and 10 from SAARC;

Twinning 10 cities in ASEAN with 10 in SAARC;

Starting dialogues between Track II parties and inviting them to observe ASEAN/SAARC official meetings;

Connecting youth bodies via the e-net and other technological innovations;

Linking up Parliamentarians through intellectual pursuits and sports;

Harnessing the latest technologies in increasing productivity, especially at the SMElevel and in agriculture and aqua-culture;

Improving transportation links to facilitate movements of people and tourists;

Working together in international bodies and forums which have programmes and projects for the protection of children, women and the elderly and helping them to contribute in their own ways to society;

Those South Asian countries in the ARF can initiate more confidence-building and conflict prevention activities for ARF participants, especially joint training of relevant personnel; and

10.

Foster a general atmosphere of good neighbourliness and positive governance where all ASEAN and SAARC member states contribute to the preservation of peace and security in the entire region.

In conclusion, while we cannot claim to have a rosy picture, there is cause for optimism. The potential is huge. ASEAN is committed to the ASEAN Community where political cooperation is buttressed by a solid single market from economic integration and assisted by a salubrious socio-cultural milieu. South Asia can leverage on this to reach a new height in its own vision of peace, prosperity and people-centered future sooner than later.

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ISA S Insights No. 38 – Date: 10 November 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

India-United States Relations under the Obama Administration Sanjaya Baru1 What would an Obama Administration in Washington D. C. mean for India and for IndiaUnited States relations? United States President-elect Barack Obama’s most recent and most detailed comment on relations with India is contained in the personal letter he addressed to Prime Minister Manmohan Singh when the latter visited Washington D. C. in September 2008. Obama said, “I would like to see United States-India relations grow across the board to reflect our shared interests, shared values, shared sense of threats, and ever burgeoning ties between our two economies and societies.” As a “starting point”, Obama said, “our common strategic interests call for redoubling United States-Indian military, intelligence, and law enforcement cooperation.” He went on to add that “the recent bombings (in New Delhi) remind us that we are both victims of terrorist attacks on our soil, and we share a common goal of defeating these forces of extremism.” He wanted the United States and India to work together “to promote our democratic values and strengthen legal institutions in South Asia and beyond. We should also be working hand-inhand to tap into the creativity and dynamism of our entrepreneurs, engineers and scientists to promote development of alternative sources of clean energy. Imagine our two democracies in action – Indian laboratories and industry collaborating with American laboratories and industry to discover innovative solutions to today’s energy problems. That’s the kind of new partnership I would like to build with India as President.” India’s relations with the United States have evolved considerably during the past decade. The turning point was President Bill Clinton’s visit to India in 1999. The foundation for the transformed India-United States relationship was laid in the last year of the Clinton Administration and the first term of the Bush Administration. The conclusion of the historic India-United States civil nuclear cooperation agreement marked the high point of that transformation. Obama takes charge at a time when there is bipartisan support in the United States, and the dominant parties’ support in India, for a stronger and deeper bilateral relationship.

Professor Sanjaya Baru is a Visiting Senior Research Fellow at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore. Prior to joining ISAS, he was the Media Advisor to India’s Prime Minister, Dr Manmohan Singh. He was also the Prime Minister’s spokesperson and principle speechwriter. He can be reached at sppsb@nus.edu.sg.

Two sets of factors have shaped this transformation. These can be classified as ‘real’ and ‘ideological’. The ‘real’ factors include India’s economic growth and openness, the growing influence of the Indian American community in United States political and economic life, a shared concern with jehadi terrorism and for greater energy security. The ‘ideological’ factors include a shared desire to ensure a multi-polar Asia, with the rise of China, and a shared commitment to democracy and pluralism. While George Bush may not have been interested in a multi-polar world, Obama has shown greater willingness to work even at the global level with other ‘major powers’, including India. On the other hand, Obama may be less wary of a rising China than Bush was. All these factors will endure and continue to work for improved India-United States relations in the foreseeable future. The two countries will, however, have differences on issues such as climate change and multilateral trade policy. While differences are likely to persist on other issues such as nuclear non-proliferation and some expect old differences to crop up on issues such as ‘Kashmir’, these are by no means unmanageable. Thus, there is no reason to expect a reversal of the recent trend of improved bilateral economic, political and strategic relations, evolving in the direction of a full-fledged strategic partnership. President-elect Obama’s ‘First 100 Days’ in office will coincide with the ‘Last 100 Days’ of Prime Minister Singh’s present term. However, for both of them the economy and terrorism will remain the main pre-occupations.

The Economy While domestic economic issues will remain the major pre-occupation for both heads of government in these 100 days, both will remain equally focussed on the global economic situation. These issues will dominate the agenda at the first meeting that Obama and Dr Singh will have on 15 November 2008 in Washington D. C. Dr Singh is likely to find a more sympathetic listener in Obama than President Bush. India and the United States have the potential to work together to address global economic management issues. They should. Indo-United States economic relations are poised to enter a new phase with the conclusion of the civil nuclear cooperation agreement. The possibility of increased high-technology trade and trade in defence, space, nuclear and other strategic areas has the potential to sharply increase bilateral trade, especially United States exports to India. Faced with the task of pulling the United States economy out of a potential depression, Obama is unlikely to harm this process by reversing any of the initiatives taken by the Bush Administration that have opened up new business opportunities for United States companies in India. However, renewed protectionism in the United States could harm Indian business interests. India will have to be pro-active in ensuring that any economic rescue package in the United States does not harm Indian trade interests. Obama’s two key economic advisors, Paul Volcker and Lawrence Summers, are personal friends of Prime Minister Singh. They have high professional regard for him and deep interest in closer economic relations with India. Both are likely to favour a larger role for India in global economic management as well. Prime Minister Singh’s positive approach to finding consensual global solutions to the global economic crisis, his focus on improved regulation and strengthening of multilateral institutions, and his commitment to stay the

course on domestic economic policies will add resonance to India’s voice at the forthcoming G-20 heads of government meeting. India would watch closely what position Obama adopts on the Doha Development Round of multilateral trade negotiations. More specifically, India would be interested in his Administration’s approach to outsourcing and to investments by United States firms in India. It is likely that the Obama Administration would restrict H1-B visas. However, this is no longer a major issue in India, given the skill shortage within India and the emergence of other destinations for software engineers. However, outsourcing and services export opportunities remain important for India as its merchandise trade deficit grows.

War on Terror India would welcome the tone of Obama’s reference to terrorism in the region in his letter to Prime Minister Singh. Obama said, “I deplore and condemn the vicious attacks perpetrated in New Delhi earlier this month, and on the Indian embassy in Kabul on July 7. The death and destruction is reprehensible, and you and your nation have my deepest sympathy. These cowardly acts of mass murder are a stark reminder that India suffers from the scourge of terrorism on a scale few other nations can imagine. I will continue to urge all countries to cooperate with Indian authorities in tracking down the perpetrators of these atrocities. My thoughts and prayers are with the victims and their families.” It is not often recognised that the Indian view on the so-called “war on terror” is closer to the Obama view than the Bush doctrine. Prime Minister Singh has not been given adequate credit for speaking out openly against the war in Iraq. Even in July 2005, on the very day the decision to seek a civil nuclear cooperation agreement was announced in Washington D. C., Prime Minister Singh said at the National Press Club in Washington D. C., ‘‘it was our sincere view that it (invasion of Iraq) was a mistake….’’2 Equally, India has always sought more focussed global attention on the situation in Afghanistan. India had been critical of the decline in the North Atlantic Treaty Organization’s focus on Afghanistan. Hence, Obama’s renewed focus on Afghanistan would be welcomed by India. However, concern has been expressed by some commentators about Obama’s statements linking the situation in Afghanistan and Pakistan to that in Kashmir and the possibility of a revival of the ‘hyphenation with Pakistan’ in the India-United States relationship.3 One of the great achievements of the Bush Administration has been the ‘dehyphenation’ of the India-Pakistan equation from the India-United States relationship. India would hope that Obama does not reverse the clock on this. Pakistan may well seek a re-hyphenation for its own political and diplomatic reasons, especially at a time when it is desperately seeking an economic lifeline. On the other hand, such a re-hyphenation could jeopardise progress at the India-Pakistan bilateral level. Moreover, Indian and Pakistani public opinion would favour a 2

Dr Singh recalled this fact while speaking in Parliament during the debate on the vote of confidence in July this year. He said, “We have differed with the USA on their intervention in Iraq. I had explicitly stated at a press conference at the National Press Club in Washington D. C. in July 2005 that intervention in Iraq was a mistake.” Prime Minister Manmohan Singh’s speeches at www.pmindia.nic.in C Raja Mohan, “Barack Obama’s Kashmir Thesis”, Indian Express, 3 November 2008. Also see Barack Obama, “Renewing American Leadership”, Foreign Affairs, July/August 2007.

bilateral solution to the Kashmir issue rather than one actively mediated by the United States. Some elements in Pakistan army may favour United States involvement to divert United States attention away from the real battle against terrorism in the sub-continent, but no United States interest would be served. One of the significant developments in India-Pakistan relations has been the enormous progress made, to a considerable extent, through the “back channel” in bilateral diplomacy. This bilateral diplomacy was initiated, on the Indian side, by then-Prime Minister Atal Behari Vajpayee and sustained, widened and deepened by Dr Singh; and on the Pakistan side by then-President Pervez Musharraf. President Asif Ali Zardari has also walked the same path so far and ‘credible’ options for ‘solving’ the ‘Kashmir problem’ exist. Indian, Pakistani and ‘Kashmiri’ political leaderships have shown remarkable maturity in developing such options. Concrete progress has been delayed by political developments in Pakistan during 2007-08 and could be resumed once the political leadership in Pakistan feels more settled and confident. Obama would have to resist attempts by his advisors or other self-proclaimed do-gooders to get the United States back into this equation. The United States knows well that no IndiaPakistan bilateral agreement can survive without its blessings. The Bush Administration was wise to restrict its involvement to “blessing” the Manmohan-Musharraf and the ManmohanZardari dialogue. That is exactly what Obama should do as well.

Nuclear Issues Several analysts have pointed to the influence of the so-called “Ayatollahs of nonproliferation” within the Democratic Party, in general, and among Obama advisors, in particular. While Obama was responsible for a key, aborted, “killer amendment” to the Hyde Act, he subsequently recanted and supported the 123 Agreement. In his letter to Prime Minister Singh, he wrote, “I also want to take this opportunity to express my great admiration for the courage you showed in shepherding the civil nuclear cooperation agreement through your Parliament, the IAEA, and the NSG. I was pleased to vote by proxy for the agreement in (Senate Foreign Relations) Committee today, and I very much hope we can vote on this agreement before the US Congress goes out of session. As you know, there are some procedural obstacles that may prevent a vote this year, …when it does come up for a vote, however, I will of course vote in favour. If time should run out in the current Congress, I will resubmit the agreement next year as president.” Obama said, “I strongly support civil nuclear cooperation, because I believe it will enhance our partnership and deepen our cooperation on a whole range of matters. Importantly, it will help India to meet its growing electricity demands while aiding in the important effort to combat global warming. But I see this agreement only as a beginning of a much closer relationship between our two great countries.” What New Delhi would want elaboration of and clarification on, presumably, would be Obama’s statement that the “civil nuclear cooperation agreement can open the door to greater collaboration with India on non-proliferation issues”, as well as his assertion of commitment to the Comprehensive Test Ban Treaty. India would, however, welcome Obama’s statement that he is “committed to the goal of a world without nuclear weapons, and will make this a

central element of US nuclear weapons policy.” India has already welcomed the Kissinger, Nunn, et al proposal on this.

The Obama Team Individuals matter in the United States system. In the Bush Administration, for example, the approach towards India changed markedly after Condoleezza Rice replaced Colin Powell as Secretary of State. Hence, India will wait to see who the key officials will be in an Obama Administration. India would expect strong support for good India-United States relations from VicePresident-elect Joe Biden. He played an influential role in securing the Democratic Party’s support for the civil nuclear cooperation agreement. India also enjoys a good equation with John Kerry, who could become Secretary of State. Biden, Summers and Kerry would be influential members of an Obama Administration favourably disposed towards India. Biden and Kerry visited India and publicly endorsed the civil nuclear agreement, helping forge the strong bilateral support that it received in the United States Senate and House. John Hamre, head of the Center for Strategic and International Studies (CSIS), has been mentioned as a possible Secretary of Defence. Hamre chaired the first ‘track two’ United States-Japan-India Strategic Dialogue in Tokyo in 2007 and, under his leadership, CSIS has taken keen interest in the United States-India strategic and defence relationship. Others named as possible senior cabinet officials in an Obama Administration such as Chuck Hagel, Richard Lugar, Richard Danzig and Richard Holbrooke have visited India in the past year and have had meetings with Prime Minister Singh. The last United States President to visit India in his first term was Jimmy Carter in 1979. Both Clinton and Bush visited India only in their second term. A first term visit by Obama to India, perhaps in early 2010, a year after a new government takes charge in Delhi, would ensure that the momentum gained in the bilateral relationship in the past four years is sustained.

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ISA S Insights No. 39 â&#x20AC;&#x201C; Date: 12 November 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

For Illiberal Finance: Building Dams, Constructing Conduits Romar Correa* Finance and Real Development The context of financial liberalisation in India was the inefficiencies created by the governmentâ&#x20AC;&#x2122;s control of prices and quantities in the financial markets. One alleged legacy has been the stockpiling of non-performing assets in connection with funds requisitioned for given sectors. Here, as well as elsewhere, more discrimination must be exercised in passing judgment. In Appendix Table III.29 (A) of the Report on Trend and Progress of Banking in India 2006-2007 by the Reserve Bank of India, 2007, it is stated that non-performing assets of public sector banks are 60 percent in connection with the priority sector, and 40 percent in connection with the non-priority sector. Reform has meant the cautious relaxing of these constraints. The recent worldwide conflagration has brought to the fore the inherent fragility of financially sophisticated economies. The dynamics of modern economies is written by real-financial couplings. Over good times, conservative postures give way to excessive risktaking. Financial innovations abound, securitisation being a recent illustration. At some time during the euphoric upswing, the correspondence between securities and the underlying assets is called and then a downward cascade results. In the case of developing countries as well, the link between financial liberalisation and crises is quite robust.1 The response of societies in history has been twofold. Since banks have been the lynchpin of financial systems anywhere, firewalls were constructed between their different functions. The principle was to protect the items on their balance sheets that pertained to deposit taking and lending for productive purposes from investment activity. Thus, the bulwark of the New Deal Financial Reform in the United States was The Banking Act of 1933. The Glass-Steagall subsections separated commercial and investment banking on the sole criterion of systemic stability. The Act was repealed in 1999. The Indian trajectory has not been dissimilar, earmarking financial institutions such as the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India and others for developmental purposes. In the current dispensation of universal banking, the separation of functions is blurred. Perhaps, as a result, a slight downward trend since 2001-02 is to be found in financial assistance, both *

Professor Romar Correa is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from October to November 2008. He is a Professor of Economics at the University of Mumbai, India. He can be reached at romar77@hotmail.com. Arestis, P. and L F de Paula, 2008, Introduction in Financial Liberalization and Economic Performance in Emerging Countries (eds) P. Arestis & LF de Paula, New York: Palgrave Macmillan.

sanctioned and disbursed by all financial institutions (Tables 85, Handbook of Statistics on the Indian Economy, Reserve Bank of India, 2007). The second response was to build in macro-economic stabilisers in the form of monetary and fiscal policies. Countries in Asia that grew rapidly and in a broad-based fashion in recent times added direction to macro-economic instruments by indicating the sectors such as exports which should be the attractors of policy. At any rate, the development of financial markets was never regarded as autonomous of the development of commodity and labour markets. The late Professor Sukhamoy Chakravarty, the architect of the Chakravarty Committee Report which laid the foundations of monetary planning in India, would have recommended an instrumental approach. In the similar modern language of backward induction, we specify the future states that the economy is expected to achieve and then work towards the present ensemble of institutions that must be constructed to deliver. There can be no question that, for a country with deep and extensive poverty, employment generation must be a fundamental objective. However, the relationship between financial and real outcomes is less than clear. James Ang, 2008, Journal of Economic Surveys, 22, 2, 536-576, summarises the tensions in the econometric evidence. Two theses go back a long way. One is where growth leads, output follows; the other is the finance-leading-growth proposition. When financial development is specified as the dependent variable, some country studies show that economic development positively impacts financial development. Recently, Rajan and Zingales have pioneered panel studies, exploiting firm- or industry-level data. However, the regressions are subject to uncontrolled variable problems or heterogeneity bias. When the unobserved country-specific effects are included in the error term, the result is biased and with inconsistent estimates. Holding country-specific elements constant in panel regressions generates a spurious aggregate relationship as the reported relationship is due to inter-country differences rather than intra-country differences over time. A conclusion is the danger of cross-country regressions. These studies construct a series by averaging out variables. Grouping countries carries more than the obvious dangers. For instance, when legal and social factors have been controlled for, the positive association between stock markets and growth in some exercises vanishes. Time series studies are no less inconclusive. The limitations here are short series and arbitrary choice of lag lengths. Demetriades and Luintel are pioneers. While they conclude that, in India and Malaysia, financial repression negatively impacted on financial development, the South Korean experience was the opposite. The reason is the solid institutional structures in South Korea. The finance, as engine thesis, finds scant support in Mauritius, Pakistan and Thailand. Instead, financial and real development are joint products. In all instances, the neo-classical impetus for financial opening up finds little support as the effects of real interest rates was insignificant. In a study for India using annual data over the period 1951-1995, financial aggregates are shown to have preceded increases in both investment and growth, while the financial sector has no influence on the total factor productivity of manufacturing industries. Annual data for 10 Asian countries reveal that finance pushes investment. At the same time, the influence of finance on output is weak. The explanation might lie in expectations. If businessmen forecast robust economic performance, they might be tempted into financial services-related investments in anticipation of future returns. Then financial development would be no more than a leading indicator. Granger causality would be a misleading conclusion.

The Dilemma of Regulation It is well known that, despite over a decade of financial liberalisation, the appetite of the banking sector in India for riskless government paper has remained as strong. Correspondingly, the inducement to support private investment has been weak. The following numbers from Appendix Table 1 of the Annual Report 2007-08 by the Reserve Bank of India, 2008, only underscore the familiar pattern.

Scheduled Commercial Banks (% change)

2005-06

2006-07

2007-08

30.8 31.8 -2.7

28.1 28.5 10.7

22.3 23.0 23.5

Bank Credit Non-Food Credit Investments in Government Securities

The problem is that, even if Indian banks were to be suddenly seized by an inducement to lend to private enterprise brought about, say, by a spate of interesting projects, Basel I and Basel II norms will effectively stymie such a movement.2 Almost all studies of the microeffects of bank capital regulation report that the short-run effects are a reduction in individual bank lending and, in models that include endogenous loan-market adjustments, an increase in the equilibrium loan rate. The longer run effects are an increase in bank capital both absolutely and relative to bank lending. The interesting point is that there is no convincing evidence that the imposition of binding risk-based capital requirements contributed significantly to an increase in actual bank capital ratios. Pre- and post-regulation behaviour of banks remained almost the same. Since the demand for credit and the supply of deposits varies positively with the level of economic activity, bank activity as well tends to be pro-cyclical. Regulation augments the cycle. The supervisory process obliges banks to constrict lending during contractions to protect bank bottom lines from the risks inherent in downturns. During upswings, on the other hand, regulators tend to adopt a laissez-faire attitude. Capital regulation reduces the ability of central banks to influence bank lending. Banks must employ onerous screening standards and, consequently, would be prone to respond to a monetary expansion by boosting deposits and security holdings, thereby operating like mutual funds. In the long run, however, an expansionary monetary policy stance will induce banks to expand equity which, under risk-based capital regulation requirements, would enable bank credit to expand. Building Dams: Deposit-Creating Institutions B. Bossone and A. Sarr3 of the World Bank/IMF have devised a monetary scheme to initiate activity in a non-destabilising fashion in desperately poor economies. The proposal is to construct a firewall between the lending and the deposit-creating functions of banks. Depositcreating institutions (DCIs) would collect non-interest-bearing deposits and would distribute money on a non-lending basis, that is, with no condition to restitution. Their liabilities would be backed by the central bankâ&#x20AC;&#x2122;s money. Every deposit balance would be augmented by a 2

VanHoose, D., 2008, Bank Capital Regulation, Economic Stability, and Monetary Policy: What does the Academic Literature Tell Us? Atlantic Economic Journal, 38, 1, 1-14. Bossone, B. & A. Sarr, 2005, Non-Credit Money to Fight Poverty in The Monetary Theory of Production (eds) G. Fontana and R. Realfonzo London: Palgrave Macmillan

proportion of the depositor’s own holdings calculated over a reference period. DCIs would not extend credit but would earn revenue from fees charged for payments services. They would not be permitted to distribute their liquidity to businesses or non-DCI intermediaries. The latter would fund their assets exclusively with non debt instruments. The proposal is distinct from the institution of narrow banking which is concerned with deposit acceptance. At the same time, there are some resemblances. In both instances, the objective is to ensure the complete integrity of the money supply process and both innovations involve a firewall. Banks create the economy’s medium of exchange while non-blank financial intermediaries transfer savings from surplus units to deficit units. Under the Bossone-Sarr scheme, these financial institutions would operate under securities firm regulation. Their innovative impulses would not be impaired. Their non-monetary financial activities would be backed by non-guaranteed funds and they would be allowed to fail. The motive force behind the scheme is to kick-start activity from a position of near inactivity. We have extended the model to suggest that the money be disbursed as wages to workers in production.4 The demand for food, clothing, and housing would rise. Production and production finance for these goods would be stimulated. Higher output would mean greater capital accumulation and so on in second and higher order effects. Constructing Conduits: Monetary-Fiscal Coordination The macro-economic dynamics of the private sector of a relatively closed economy like India must be narrated in terms of savings and investment. The components of each of the figures in Appendix Table 11 of the Annual Report 2007-08 by the Reserve Bank of India, 2008, show a tepid increase over 2004-05 to 2006-07. New capital issues by non-government public limited companies has displayed a steady downward trend from the latter half of the 1990s only to pick up over the last few years (Table 82, Handbook of Statistics on the Indian Economy, Reserve Bank of India, 2007). Table 83 shows that bonds issued by public sector undertakings have tapered off since the beginning of this century. Absorption of private capital issues has also been fluctuating in a downward direction since the latter part of the last century. One may recall that, over the 1970s, India recorded a trend break in savings and investment. Gross capital formation increased in tandem. Kaushik Basu (Journal of Economic Literature, 2008, XLVI, 2, 396-406) has noted that the cause of the increase in savings was the nationalisation of banks in 1969. Banks had to open branches in remote rural areas. We regard it as incontrovertibly true that the purpose of financial liberalisation must be the generation of employment and growth. Furthermore, given the fact that the deceleration of employment has been particularly acute in the rural sector and that over 60 percent of the labour force is sustained by agriculture, our task is cut out. The agenda must be to plan in terms of agriculture-industry linkages, between items consumed by the working class and those consumed by others. The macro-economic counterpart of the requirement would be captured by reviving the “employer of last resort” function of the Reserve Bank of India.5 The notion dates back to the 17th century in the period after the Industrial Revolution when it was seen that existing enterprises were in no position to facilitate a state of full employment. In 1662, William Petty recommended a scheme for public employment for the purpose of building infrastructure. The government was to become a market maker for labour by 4

Correa, R., 2008, Heterdox Macroeconomics and the Design of Monetary Institutions, Working Paper 26/4/2008, Department of Economics, University of Mumbai Papadimitriou, D.B., 2008, Promoting Equality through an Employment of Last Resort policy, Working Paper No. 54, The Levy Institute of Bard College

building up a ‘buffer stock of labour’. Thus, the government, in a sense, would purchase all the unemployed workers at a fixed price or sell them to the private sector at a higher wage. Counterpart government spending would increase commercial bank reserves. Excess reserves drive down overnight interbank rates. In order to keep them positive, the government would borrow from these reserves. As borrower of last resort, it can effectively set the interbank rate. Interest rates, then, are not constrained by the willingness of the private sector to buy government debt or by the size of the government deficit. Fiat currency absolves the government from borrowing or issuing debt to deficit spend. Governments can spend by crediting bank accounts and tax by debiting them. Excess reserves are drained as part of the interbank interest rate targeting procedure. This is the agenda of functional finance. A proposal to direct credit into appropriate channels can be culled from a scheme of Asset Based Reserve Requirements (ABRR) proposed by Thomas Palley.6 Under such a system, financial intermediaries would hold reserves against their assets. The reserve requirement for each asset class would be set by the monetary authority. In order to prevent regulatory arbitrage, the ABRR would apply to all financial intermediaries. Thus, a wedge would be created between interest rates on asset classes and the central bank’s policy rate. By varying the size of the wedge, the authority would change relative returns across asset classes and, thereby, influence portfolio and lending decisions. For instance, if the central bank wants to pierce a property bubble, it would impose reserve requirements on new mortgages. The cost of mortgages would rise without raising the general level of interest rates. Similarly, if the authorities want to direct investment to particular areas, it could impose zero or negative reserve requirements on loans directed at those sectors. Some merits in connection with our discussion are relevant. The ABRR are counter-cyclical. When asset prices fall, reserves would be released as required reserves are based on the market value of the asset. Relatedly, the ABRR are automatic stabilisers. When asset prices rise, financial firms need to increase their reserve holdings, thereby putting brakes on the upswing. Finally, the ABRR restore the demand for central bank liabilities. Any process of disintermediation would be halted and the monetary transmission process strengthened. The Spectre of Financialisation in India We have indicated that the relationship between finance and growth is complex. One thesis is that financial markets are best described in the words of Charles Kindelberger as arenas of manias and panics. All regulatory measures that arise in response will suffer a version of Goodhart’s Law, that is, financial entrepreneurs will arise to work around what we have called dams and conduits. Is India, then, condemned to financialisation? The term connotes the increasing role of the financial circulation relative to the real and the attendant atrophy of the real. Consider the former characteristic. In India, the lure of exotic financial fruits has not been tempting. All the same, it is worth noting in Appendix Table III.11 of the Report on Trend and Progress of Banking in India 2006-2007 by the Reserve Bank of India, 2007, bank group-wise lending to the sensitive sectors, exposure to the capital market by other public sector banks has increased from 2.8 percent to 4.16 percent while the comparable figures for the new private sector banks are 2.3 percent and 2.19 percent respectively. All banking groups display decent and increasing advances to real estate. The financial markets in India display the same flux as financial markets anywhere. For instance, the net resources mobilised by mutual funds display wild year-on-year fluctuations (RBI, 2007, Handbook of 6

Palley, T., 2008, Asset Price Bubbles and Monetary Policy: Why Central Banks Have Been Wrong and What Should be Done, Macroeconomic Policy Institute Working Paper 05/2008

Statistics on the Indian Economy, Tables 78-80). As for the latter aspect, allowing for the qualifications about provisional, quick, and revised estimates, the following numbers do not paint a sanguine forecast of the economy by conventional standards (RBI, 2008, Annual Report, Appendix Table 2).

Sector Agriculture & Allied Activities Industry Services

2005-2006 5.9 8.0 11.0

Growth Rate 2006-2007 2007-2008 3.8 10.6 11.2

4.5 8.1 10.7

The performance of the services should be noted particularly since its share in real gross domestic product continues to be high and increasing at around 60 percent. oooOOOooo

ISA S Insights No. 40 â&#x20AC;&#x201C; Date: 12 November 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Locking in Private Investment in Indian Agriculture Romar Correa* Private and Public Investment are Complements Experience has conclusively established that investments in agriculture made by developing countries are pro-growth and pro-poor.1 Agriculture continues to provide a labour-intensive source of employment, cheap food, raw materials, labour, savings, and the demand for nonagricultural goods. Yet, over the last three decades, there has been a significant systemic bias against the rural economy in the allocation of public resources. This scenario is inefficient because no developed economy of significant size became so without the agricultural sector recording substantial productivity gains. There is some historical evidence that a Green Revolution preceded the Industrial Revolution in Europe, its offshoots, and Japan. Recent scholarship has excavated the importance of pre-war agricultural growth to the post-war industrialisation of Taiwan and South Korea. Cross-country studies which seek to track the sectoral sources of growth in developing countries unambiguously report that a dynamic agriculture has the strongest linkage to growth in other sectors and aggregate growth. India has a long way to go in this transition.2 In the 1970s, India had a larger proportion of the workforce engaged in the organised sector in comparison with Thailand and Indonesia. By the early 1990s, the ratio was three times more, and in Indonesia, 2.3 times more. While the stagnation of output in agriculture can increase with improvements in infrastructure and technology, it is not clear that such changes lead to large increases in rural employment. The problem can only be addressed by generating demand for unskilled employment outside the agricultural sector. Here is where the labour absorptive capacity of organised manufacturing comes in. The evidence for India of the past few years, as given in the Handbook of Statistics on the Indian Economy 2007 by the Reserve Bank of India, is unimpressive. Table 17 of the Handbook shows a flat trend of agricultural production of foodgrains. The pattern of land use and select inputs for agricultural production, including net and gross sown area, net and gross irrigated area on Table 24 of the Handbook, display anything but a dynamic agriculture. The following table, which is Table 18 of the Handbook on index numbers of area, production, and yield of foodgrains, non-foodgrains and all crops, is clear. *

Professor Romar Correa is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from October to November 2008. He is a Professor of Economics at the University of Mumbai, India. He can be reached at romar77@hotmail.com. Bezemer, D. & D. Headey, 2008, Agriculture, Development, and Urban Bias, World Development, 36, 8, 1342-1364. Bose, A., 2007, Employment in The Oxford Companion to Economics in India (ed) K. Basu, New Delhi: Oxford University Press, 124-126.

Production Yield

2003-04 155.1 121.0

2004-05 144.2 115.6

2005-06 152.5 120.8

2006-07(advanced estimates) 158.6 123.2

A ringing message from past and recent history is that public support programmes are a necessary precondition for growth in agricultural productivity. The large multiplier effects of agriculture mentioned above are externalities to the sector itself. Private investors will not be induced to invest. Besides, market failure is endemic. Consequently, a purposive “industrial policy” towards agriculture is called for. In South Korea and Taiwan, for instance, the governments absorbed risks and invested in new agricultural technologies. Effete governments, in contrast, struggled with land reforms and kept prices low without the backing of sufficient public expenditure, particularly in research and development, and extension activities. The government, in the form of the public sector and public institutions, would be the natural ground for the creation of jobs, given the objective of creating employment “for the sake of employment”.3 While more employment leads to more demand, more employment requires a startup of exogenous demand in the first place. Once some initial demand is created, say by an employment guarantee scheme, the production response creates income. Further demand is stimulated in a well-known multiplier process. Massive state intervention with budget deficits is not called for. All that is required is an initial push. With a savings rate of 25 percent, the ultimate back-of-the-envelope increase in demand would be 400 percent of the initial impulse. What is the record of India in this regard? In Table 111 on Public Sector Plan Outlay (at current prices) in the Handbook of Statistics on the Indian Economy 2007 by the Reserve Bank of India, we ignore the figures from 2004-05 onwards as they are taken from the Economic Survey, 2006-2007. The following figures (in rupees crores) for the earlier years speak for themselves.

Year: Agriculture & Allied Services Total

2000-01

2001-02

2002-03

2003-04

7577 185736

8248 186315

7655 210203

8776 224827

The Objective Small scale enterprises (SSIs) are an adjunct to agriculture and require long-term and shortterm capital. Long-term capital is provided by institutions such as the Small Industries Development Bank of India (SIDBI), State Financial Corporations (SFCs), State Industry Development Corporations (SIDCs), and so on while short-term capital is provided by the banking sector. SSI lending falls under priority sector lending. The overall picture which is an extension of earlier trends is not comforting. Under Non-food Gross Bank Credit, the figure for agriculture and allied activities has stagnated at 12.4 percent (18 March 2005), the same for 31 March 2006 and 12.8 percent outstanding on 30 March 2007. Industry (small, medium and large) has steadily declined from 42.1 percent to 38.2 percent to 38.5 percent recorded at 3

Bose, A., 2007, Employment in The Oxford Companion to Economics in India (ed) K. Basu, New Delhi: Oxford University Press, 124-126.

the same time points. Priority sector advances have declined from 37.3 percent to 36.4 percent to 35.2 percent. Outstanding credit to services, on the other hand, has shown an increase from 20 percent to 22.8 percent to 23.3 percent, once again reported at the end of the financial years (RBI, Report on Trend and Progress of Banking in India 2006-2007, 2007, Appendix Table III.3). Since the growth of small and medium enterprises (SMEs) cannot be regarded as inferior to the growth of other sectors in a transforming economy such as India, a subgroup on the flow of private investment to the SME sector was constituted. The definitions that were applied were provided by the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. Traditionally defined small scale enterprises (TDSSIs) are units with investment in plant and machinery up to Rs.1 crore. The scope was broadened to include newly-defined SSIs (NDSSIs) as units having investment in plant and machinery between Rs.1 crores and Rs.5 crores. The Act also introduced the concept of medium scale enterprises (MSEs) as enterprises having investment in plant and machinery between Rs.5 crores and Rs.10 crores. The methodology used was as follows. An average growth rate of gross domestic product of 8.5 percent during the 11th Plan was assumed. Production data for TDSSIs in current prices was extrapolated assuming an average growth rate of 12 percent and an inflation rate of 4.5 percent. Data on NDSSIs is not easily available so the subgroup, after experimenting with alternative econometric techniques, generated a series based on the proportionate share of the subsector in relation to the total. An average growth rate of 12 percent was arrived at. The MSE sector partook more of the dynamics of the industrial sector. Hence the projected growth rate was 10 percent. Working Capital Requirements A regression equation established a strong linkage between SSI production and bank credit. Outstanding bank advances to the TDSSI sector was estimated to be of the order of Rs.1 lakh crores at the end of the 10th Plan to increase to the order of Rs.2 lakh crores in 2011-12, the terminal year of the 11th plan. A similar regression equation for NDSSIs was run and the total working capital requirements were of the same order as above, the addition of the latter being slight. Another regression line for the MSE yielded an estimate of the order of Rs.18,000 crores at the end of the 10th Plan to increase to the order of Rs.38,000 crores in 2011-12. The numbers were found to be consistent with the Government of India/Reserve Bank of India directives to public sector banks to double their credit to the SME sector between 2005-06 and 2009-10 with not less than a growth rate of 20 percent. Fixed Capital Projections Here, along with regression analysis, the so-called institutional capacity was estimated. The numbers were of the order of Rs.72,000 crores for TDSSIs, Rs.20,000 crores for NDSSIs and Rs.9,000 crores for the MSE sector. It is worth noting that the requirements for the sector, as a whole, implied a growth of almost 40 percent over the 10th Plan estimate. Small and medium scale entrepreneurs approached SIDBI, the SFCs and the SIDCs with their business plans. Projections were made on the basis of this data, assuming a smartly growing industrial sector. It was found that the carrying capacity of these institutions was a disbursement of the order of Rs.1 lakh crores loans during the 11th Plan as against a disbursement of the order of Rs.45,000 crores during the 10th Plan period, an increase of 130 percent.

Towards New Private Initiatives The share of priority sector advances in total non-food credit of scheduled commercial banks has been more or less constant at 37 percent since 1999. According to Table 33 in the Annual Survey of Industries-Principal Characteristics, the number of factories have steadily declined over the last 10 years. The number of workers was less in 2004-05 than it was in 1997-98. Hardly any change can be noticed between fixed capital and working capital comparing 1997-98 and 2004-05. Wages have increased only slightly. Gross fixed capital formation is only slightly higher in the period, net fixed capital formation lower. Along traditional lines, there is a need to reinvigorate public investment.4 There is a large public sector in India, huge portions of which are efficient as evidenced by their rising profitability. Many of them are in the infrastructure business, producing and generating power, in roads, railways, ports, and telecommunications. In addition, while funds are likely to continue being released through reductions in the cash reserve ratio, the Reserve Bank of India should return to the system of sector-specific refinance facilities that induce banks to lend to agriculture and SMEs.5 We have recommended the encouragement of venture capital in order to finance entrepreneurial schemes in agriculture.6 The motivation comes from the financial systems paradigm in micro-finance. According to this view, micro-finance providers should be resolved to covering their costs since anything less would undermine their ability to achieve the scale necessary to make any inroad into the unfulfilled demands of their clients. Their outreach is to be based on the offering of tailor-made products rather than eligibility rules or other measures denying access. Time should be spent on unearthing services that groups are willing and able to pay for rather than measuring the impact of their services on clients. Proponents of this perspective regard the reduction of poverty as a by-product of the numerous ways in which access to financial services helps poor households. The belief is that by reaching massive scale, micro-finance providers are likely to reach more of the very poor than many smaller agencies devoting their resources to directly reaching them. A key problem with micro-finance is sustainability, that is, the ability to withstand massive stochastic shocks. There might be a tradeoff between lending to the very poor and sustainability. The ability to attract deposits is often taken to be an index of financial viability. However, while depositor funding may leverage donor funding to attain a large scale of operations, sustainability might be a casualty. Deposits can be withdrawn without notice in times of crisis. The central issue remains sustainability without the continuous infusion of external subsidies. The conclusion is that sustainable financial institutions by this criterion tend to have a low dependence on deposits. Venture capitalists (VCs) who finance and advise start-up enterprises can be regarded as an important adjunct to this perspective on micro-finance. The case here is that a sophisticated venture capital industry makes young firms grow faster, increases value and creates more jobs. VCs screen projects, structure contracts and monitor firms. The joint inputs of both entrepreneurs and VCs interact to determine the long-term fortune of start-up enterprises. 4

Sengupta, A., 2008, A Monetised Deficit for Sustaining Growth amidst the Meltdown, Economic & Political Weekly, XLIII, 42, 10-11. EPW Research Foundation, 2008, Paradigm Shift in Financial Policies: Need of the Hour, Economic & Political Weekly, XLIII, 42, 22-28. Correa, A., & Correa, R., 2008, Microfinance: Debt and Equity Contracts, Applied Financial Economics Letters

Entrepreneurs provide the novel technological inputs but tend to be inadequate financially. VCs support the firm with their financial expertise. They embody the best of principal-agent monitoring, thereby reducing risk. A special trait of VCs is that they are oriented towards exit. Thus, the infinite dependence on infusion of inputs like cash is obviated from the outset. Yet another source of private investment in agriculture might be the routing of international long-run financial investors (LRFIs) to India.7 Mainly pension funds and insurance companies, LRFIs collect contractual savings and support long-run commitments on them but their contracts are founded on trust. Due to the sheer size of their portfolios, their strategy of divergence makes them universal owners. They are concerned with macro risks and returns over time. Importantly, they have an incentive to internalise external risks generated by venturing into strange pastures. With dynamic and not static portfolios, the base of diversification is the long-term bond, a riskless asset, not a short-term security. In conclusion, the dramatic contrast between investment in India and China can be cited.8 The growth of the capital stock in China is more than double that of India. During the period 1980-2003, investment in China grew at an annual average rate of 11.7 percent in comparison with 6.8 percent in India. The comparison is not odious as Chinaâ&#x20AC;&#x2122;s trajectory in this regards mirrors the experience of countries like Singapore and Korea.

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Agietta, M., 2008, Corporate governance and the long-run investor, International Review of Applied Economics, 22 ,4, 407-427. Felipe, J., LaviĹ&#x2C6;a, E., & Fan, E.X., 2008, The Diverging Patterns of Profitability, Investment and Growth of China and India during 1980-2003, World Development, 36, 5, 741-774.

ISA S Insights No. 41 â&#x20AC;&#x201C; Date: 1 December 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Some Approaches to Pricing Controls for Patented Drugs in India S. Narayan â&#x2C6;&#x2014; Summary The Government of India has constituted a Group of Ministers (GOM) to finalise the National Pharmaceutical Policy. One of the issues before the GOM is the question of price controls for patented drugs and formulations. Though such controls are distortionary, it appears that there is a direction to propose such controls. This paper examines the features of price control mechanisms in different countries and suggests two alternatives. The first is a Vietnam-like approach where prices are negotiated for government purchases, and are merely intimated and approved for public markets. The second is a mechanism where the price fixed is not higher than the lowest in any of the comparator countries. The paper describes the processes involved in making this mechanism work. Introduction In 2006, the Indian government announced that it would adopt a National Pharmaceutical Policy, and circulated a draft policy outlining its intentions. To finalise this policy, a Group of Ministers (GOM) was set up by the government in 2007. The GOM has met several times, and the National Pharmaceutical Pricing Authority (NPPA) has also made a presentation to the GOM in April 2008. One of the elements of the proposed policy is that patented drugs (formulations under the Product Patent protection) that were launched in India after 1 January 2005 would be subjected to price negotiations before approval is given for them to be marketed. A Committee (hereinafter called the Committee), under the chairmanship of Director (Pharmaceuticals) in the ministry, was also formed to propose a system of reference pricing/price negotiations/differential prices which may be applied for price negotiations of patented drugs and medical devices before their marketing approval in India. 1 It should be noted that only a few medicines in India are patented, with the vast majority not covered by any patents. Under the Drug Prices Control Orders, the government has been regulating prices of drugs and formulations since 1970. Initially, there was a 100-percent control on all drugs and formulations. However, progressive liberalisation reduced it to 74 bulk drugs in 1995. An â&#x2C6;&#x2014;

Dr S. Narayan is a Visiting Senior Research Fellow and Head of Research at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassn@nus.edu.sg and snarayan43@gmail.com. Letter from Under Secretary, Ministry of Chemicals and Fertilizers 5/80/2006-PI I dated 22 February 2007.

attempt to reduce it further to 25 bulk drugs in 2002 was unsuccessful, with litigation against the move. The United Progressive Alliance government that came to power in 2004 has been leaning towards greater controls over pricing and, of late, the NPPA has been fairly stringent in monitoring retail prices of drugs and has attempted to levy fines on manufacturers that have transgressed. These issues are in dispute at various forums and relate entirely to generic drugs and formulations. However, it is clear that the government is concerned about the availability of drugs at reasonable prices and this is a key issue for the Committee that is considering approaches to pricing of patented drugs. The approach of the Committee in its deliberations so far has been towards finding a suitable model of pricing control to apply to patented drugs. This is based on the basic premise that the absence of controls would subject the availability as well as the use of these drugs to market forces which may set prices at unaffordable levels. The Committee has been examining drug price regimens in use in several countries such as Canada, France, the United Kingdom, Australia, Egypt, Brazil, South Africa, Philippines, etc., to find a model that would be replicable in the conditions prevailing in India. An important element in India is the fact that the majority of the drug costs are privately paid for, in the absence of an effective health insurance system that provides access and availability to all. As per the World Health Organization data, only 21.3 percent of the total expenditure on medicine in India is accounted for by the government or insurance, with the balance of nearly 78.6 percent paid for privately. In the United Kingdom, public health and insurance takes care of 83.4 percent of the spending on medicine, and in Germany, it is 78.5 percent. Price regulation in most countries is, therefore, oriented towards the determination of prices at which governments purchase the medicine for delivery through the public health system or to fix the reimbursement rates against insurance claims, but seldom to fix prices prevailing in the open market. The task of the Committee is made more onerous by the need to work out a policy and a process that would be easy to implement in India and, at the same time, be monitorable, effective and efficient. Price Control of Patented Drugs â&#x20AC;&#x201C; Considerations Several countries have adopted a model at arriving at pre-determined prices for drugs and pharmaceuticals, and at the forefront are those that have a well established national health system such as the United Kingdom, Australia and Canada. However, the determination of prices that manufacturers would be entitled to is invariably arrived at through a transparent, public process, and there is recourse to remedy decisions through appellate forums. Prices in general reflect an understanding of the need to reward innovation and the critical nature of research and development (R&D). At the same time, it is important to examine some of the concerns that have been expressed about the concept of price control for patented drugs in order to take note of the limitations to this approach. In academic literature as well as industry analyses, there is a consensus that there is no acceptable way to set prices to reward innovation in life sciences and that those who set prices do so with a focus on reducing costs rather than providing incentives for innovators to continue their R&D endeavours. 2

Caffee, John, Pharmaceutical Market Competition Issues; American Enterprise Institute, Washington, June 2008.

There is a wide body of published literature 3 whose conclusions can broadly be summarised into four major themes. First, R&D investment in the pharmaceutical industry is motivated by the size of the potential market, as determined by volumes and prices, and the opportunities of risks and rewards on proposed investments. This has led to facile complaints that the industry only seeks to maximise profits and does not have improved health outcomes as a primary concern. It is also maintained that where the size of the market is small, in terms of volume as well as ability to pay, there is little incentive for innovation, and non-government organisations (NGOs) have been quick to point out that there is very little R&D in respect of several known so-called “neglected” diseases. The answer perhaps is in treating R&D in these diseases as a public good and providing for public expenditure through government-supported institutions such as the Council for Scientific and Industrial Research and the Indian Council of Medical Research. This would have two positive consequences. One, there would be national mission to develop drugs that are considered a priority for a country. Two, the costs of R&D would become open and transparent, and thus subject to public scrutiny. Second, there is sufficient evidence to show that the combination of regulation and economic disincentives, for example, mandatory price reductions, tend to discourage both rapid entry of generics as well as price cutting after entry. Controls 4 appear to affect openness of competition as well as the availability of alternatives. 5 Third, evidence from European Union (EU) markets indicates that the EU drug price controls have brought a reduced number of drugs to the market, and that these markets offer significantly lower rewards for R&D. Finally, there is adequate evidence to indicate that the introduction of new drugs tend to yield important offsets in the form of savings in health-care expenditure elsewhere in the system through reduced hospitalisation, after-care, doctor’s fees and the like. In addition to the above are the worries that the future of new discoveries may be less in the realm of chemicals and much more in the area of biotechnology. This is because the biopharmaceutical industry is not in the business of catering to the tastes of the market looking for the next-generation cell phone, but rather it is trying to decipher the intricacies of complex diseases such as diabetes and cancer which require ever more sophisticated scientific techniques. It is not impossible to imagine region-specific and even patient-specific drugs in the future, all of which would be hard put to fit into any standardised price-discovery mechanism. Any policy on price controls over patented drugs is, therefore, fraught with the above concerns. Ostensibly, the government and public policy initiatives are focused on providing cutting-edge drugs at affordable prices. At the same time, there is strident media and NGO comment 6 about the supposed profits that multi-national corporations (MNCs) are making, 3

For example, Danzon and Li-Wei Chao (2000); Does regulation Drive out Competition in Pharmaceutical Markets?; Journal of Law and Economics, Vol. 32, No. 2, pp 311-357. Danzon and Furakawa; International Prices and Availability of Pharmaceuticals in 2005; Health Affairs, Vol. 27, No. 1, pp 221-233l. Danzon and Furakawa; Prices and Availability of Pharmaceuticals – Evidence from Nine Countries; Health Affairs Web Exclusive; 2007l. For example, Francis, P.A.; Pricing Patented Drugs; Pharmabiz; 19 November 2008.

that is to say, that there is a justification for controls simply because, according to the writers, MNCs make huge profits. It is fervently hoped that the Committee recognises these arguments as being particularly uninformed and that the sale of patented drugs will, for the foreseeable future, constitute a miniscule proportion of all drugs sold in India and a small fraction of the total sales worldwide. Any form of government pricing controls need to be justified only on the basis of improving affordability to the majority of Indians and there must be mechanisms to ensure that prices finalised are implemented in the form of availability in the general market, outside government purchases, at these prices. Without this, the entire exercise would be futile. Pricing of Patented Drugs – Suggested Approaches The mandate for the Committee, therefore, comes down to a determination of how prices might be negotiated, who would be responsible for the negotiations and how to monitor the availability of the drugs in the open market at the negotiated prices. Arising from this are several issues that need to be addressed: • • • • • • • •

Who would constitute the decision-making group? Are price controls to apply to all patented drugs or only selected ones? Can those below a certain threshold level be left out? What inputs would the group need? What criteria are to be adopted? What should be the principles for arriving at the pricing? What will be the period of controls? When would they take effect and how often would they be negotiated? If using an international reference pricing system, what should be the comparator countries? How are the prices and volumes to be monitored post-introduction?

In this context, the Committee has been studying the practices prevailing in several countries, including Canada, the United Kingdom, France, Germany, Egypt, South Africa, Brazil, Malaysia, Vietnam, Pakistan, etc. As already pointed out, in almost all the countries, price controls apply to those drugs that are purchased for delivery through the public health systems and as a benchmark, for insurance, reimbursement claims, and there is no clear methodology available for ensuring the monitoring of open market prices. In that respect, the initiative is likely to be unique to India. Constitution of the Group The approach of the Committee has been to examine the practices prevailing in several developing and developed countries to identify approaches that would be relevant for India. The common feature of all the countries is that there is a body or group, duly constituted, either by law or by executive orders, that is authorised to act on this. The constitution of the group varies but the Canadian concept of the Patented Medicines Prices Review Board 7 appears to be relevant. In the case of France, the United Kingdom and in most European countries, 8 the concerns are primarily with reimbursement of medicine costs through insurance and the public health system. 7 8

Global Insight Report: Health Infrastructure; Canada; 2008 www.globalinsight.com. Global Insight Report: Health Infrastructure; 2008 (relevant countries) www.globalinsight.com.

In India, pricing is approached as a direct intervention in the market and is likely to affect supply and demand. Therefore, the constitution of the group becomes important, for it has to be relevant, transparent and objective. The important constituents should include representatives from the NPPA and Drug Controller General of India. The Department of Pharmaceuticals, as such, may like to keep out of the group as decisions of the group are likely to be debated, discussed, and, sometimes, disputed. It would, therefore, lend greater credibility to the group if it were to be headed by an eminent public figure such as a scientist. The group should contain representatives of the medical profession as well. Practices in other Countries In brief, free pricing is available in the United States and in some European countries including Denmark. 9 Malaysia also adopts a free pricing system. In France, 10 there is an agency for market authorization called the ComitĂŠ ĂŠconomique des produits de santĂŠ (CEPS) that decides on the entry of new drugs after an expert-based examination of their therapeutic values. The CEPS sets the reimbursable medicinal costs which are adopted by all the insurers and the public health authorities. The CEPS ensures that prices set are similar to those in Germany, Italy, Spain and the United Kingdom which are taken as the comparator countries for this purpose. In the United Kingdom, 11 prices for patented products are set through a voluntary agreement between manufacturers and the Pharmaceutical Price Regulation System, and these prices remain in force for a period of five years. At the other end of the spectrum are Brazil and Egypt, where price controls are arbitrary. Brazil has introduced a price freeze for the last three years. In Vietnam, 12 the companies submit a price list to the Ministry of Health (MOH) that needs to be approved. There is a two-tier arrangement whereby government purchase prices are negotiated by the ministry separately, with an undertaking on volumes, while open market prices could be different, though they need the approval of the MOH. The prices of patented drugs in Canada are subject to capping and should not exceed the maximum price in seven reference countries, namely, France, Germany, Italy, Sweden, Switzerland, the United Kingdom and the United States. The Price Monitoring and Review Committee is committed to transparency, and publishes the prices every month on its website. There are, as such, three different models. At one end are countries where there are no price controls and, at the other, where they are arbitrary price freezes from time to time. Among the countries that do try to apply principles to pricing of patented products, the overwhelming majority is concerned with costs of reimbursement for its own government insurance schemes, and not with market prices per se. In other words, companies are free to price their drugs as they see fit in the open market. Evidence from a study of prices in nine countries (Danzon and Furakawa 2007 indicates a range of between 6 and 23 percent from the prices prevailing in the United States for the same drugs). As argued earlier, in the context of India, it is important to recognise that only 20 percent of the drug delivery is through the public health system and that insurance is not yet widespread. Therefore, a substantial quantity of medicines is purchased directly from the market. 9

11 12

Pharmaceutical Pricing and Reimbursement and Information; European Union reports- Directorate of Health and Consumer Protection; Denmark; February 2007. Pharmaceutical Pricing and Reimbursement and Information; European Union reports- Directorate of Health and Consumer Protection; France; October 2007. Global Insight Report: Health Infrastructure; U.K. 2008 www.globalinsight.com. Global Insight Report: Health Infrastructure; Vietnam 2008 www.globalinsight.com

Issues before the Group The basic issues that need to be settled ab-initio are whether all drugs that are granted patents after 1 January 2005 would be subject to price negotiations, and what would be the criteria that would be applied. In the initial stages, it does not appear to be feasible for the group to engage itself in negotiations over a very large number of products – it would delay the introduction of the products and prolong the process. There may be drugs that would have only small volumes and of limited relevance. In most countries, the drug companies prepare estimates of the likely volumes of the drug in the market before its introduction. These could be used to determine whether price controls need to be applied or not. The deciding group could arrive at a threshold of forecasted sales of a particular medicine. If the sales are less than a specified threshold of volume, in terms of quantities sold (for example, one million doses a year), there is little purpose in bringing the drugs under control. Price control mechanisms could, therefore, work above a particular pre-set threshold in terms of volumes and revenues. The total volumes would then be monitored annually to ensure that the drugs move into the price control regime when the volumes cross the threshold. There could be a simple criteria for the applicants to submit anticipated volumes of sales in the first five years, and drugs that have a threshold of actual sales below a particular volume could be excluded, 13 with the stipulation that if the actual sales are higher than that threshold in any year, the companies would be up for negotiations in the following year. The group would need inputs from the manufacturers that should include anticipated volumes of sales, the price and strength of formulations in other countries, details on dosages and clinical administration to determine the quantities required for treatment (this would help determine total patient cost). There is little purpose served in looking at company balance sheet data to arrive at R&D costs, overheads and profits – these would be subject to interpretation and dispute, and, in any case, vary from company to company and even from country to country. It is important to reiterate that the purpose of the price controls would be to ensure availability and affordability, not to question the commercial operations of the manufacturers. The group should be satisfied that the prices are lower than those in comparator countries and this could be a simple and straightforward approach to adopt. The Canadian example of using the seven reference countries and ensuring that the prices in Canada are not above any of those could be used in reverse to ensure that the prices offered are the lowest among the comparator counties. Once the price for a dosage is available, then alternate dosages or formulations could broadly be based on the per unit prices to ensure that they are not excessive. In short, since the focus is on costs to the patient, it needs only to be ensured that the costs are lowest, as compared with the comparator countries. Any attempts at averaging, or mean or median pricing are likely to be difficult to interpret. The group should always consider inflation or increases in prices on an annual basis, and this should be in reference to all drugs and formulations, and not to the patented ones alone. An important consideration would be whether the drug is “first-in-class”, or alternative drugs or clinical regimen are available. The group would need to satisfy itself about this from medical experts. In the case of a “first-in-class” drug, the price should be fixed simply as at the lowest prevailing price in the comparator countries, and in the case of drugs where alternatives are available, with reference to the price of the alternatives.

Similar approaches are available in other countries.

Comparator Countries There has been an argument that the practices in developed countries such as the United Kingdom, France, etc., are not relevant in the Indian context. There have been some arguments in favour of the Canadian model, primarily because of its simplicity of approach â&#x20AC;&#x201C; the manufacturers are required to give information about prices in other countries, the volumes expected and alternative formulations. As an approach, its simplicity is its elegance while, at the same time, the price levels arrived at may not be relevant for India. Perhaps a combination of the Canadian approach to the prices prevailing in similarly-placed countries could be considered relevant for comparison. The comparator countries need to be chosen carefully with reference to the size and state of the economy, the public health delivery systems, the size of the drug industry and the total volumes and sales. At the bottom end, there is no merit in arguing for price levels that are even lower than in other South Asian countries such as Pakistan and Bangladesh, for Indians pride themselves as being better off. Post-price Fixing Activities There are two issues here. The first is data collection on the efficacy of the drugs, volumes sold and comparable therapy, and the second is the monitoring and implementation of the prices set. In a large country such as India, with a federal set-up, this is possible only through the cooperation of state governments. It is important to include them as stakeholders in the exercise; though involving them at the level of price negotiations would be cumbersome and would lead to complaints of bias. It is possible to conceive of a mechanism whereby the notified prices are applicable all over the country, with only variations being due to local taxes. The concept of Maximum Retail Price-based pricing exists in many products and needs to be extended to patented products as well. Once this is done, it is important that the state governments do not engage in fresh discussions and negotiations with the manufacturers for their government purchases, for this would fragment the market and distort prices more than they would be already. Finally, a two-price format for government purchases as well as for the open market is still an option to be considered, with the pre-set prices being determined as per suggestions above. These preset prices would be applicable to all government purchases, state or centre, while the sale in the open market could be free from controls. A system modelled on that of Vietnam, where open market prices are not negotiated but intimated in advance to the government, could also be considered.

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ISA S Insights No. 42 – Date: 9 December 2008 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Pakistan’s Economic Crisis and the IMF Bailout Package Iftikhar A. Lodhi + The International Monetary Fund (IMF) has approved a US$7.6 billion bailout package to prevent Pakistan from defaulting on its external debt. The 23-month Stand-By Arrangement under the Fund’s fast-track Emergency Financing Mechanism has provided an immediate US$3.1 billion funding to strengthen the country’s fast deteriorating foreign exchange reserves. The programme seeks to preserve social stability and restore investor confidence in Pakistan by addressing its current macro-economic imbalances. At the same time, it sends a strong signal to the international donor community about the country’s improved macroeconomic prospects. Pakistan approached the IMF for assistance in November 2008 to avert a default on its foreign payments. The country requires roughly US$15-US$20 billion over the next two years to avoid a Balance of Payment (BoP) crisis. The Pakistani authorities were initially reluctant to turn to the IMF because of the expected stringent conditions, terming it Plan C – the last option. Plans A and B included frontload disbursements from multilateral institutions, borrowing from the international market and making an approach to friendly countries for help. Despite receiving some support from multilateral lenders and some friendly countries, Pakistan’s primary request for immediate cash infusions were turned down, given weakened investor confidence in the economy. The government then turned to the IMF. This paper seeks to examine three key issues. Firstly, how did an economy with robust macroeconomic indicators until last year reach this critical stage? Secondly, why did Pakistan’s closest allies, including the United States and China, let it down? Lastly, what will be the likely economic and political implications of the IMF arrangement? Anatomy of the Crisis There is no doubt that an adverse external economic environment in the shape of unprecedented high levels of oil and commodity prices earlier this year and the current global financial crisis have largely contributed to the crisis in Pakistan today. Nevertheless, the genesis of the current crisis is internal. The key reasons for the current meltdown of the

Mr Iftikhar A. Lodhi is a Research Associate at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be reached at isasial@nus.edu.sg.

economy are continued political turmoil, deteriorating security, structural issues and the unsustainable growth policies in recent years. Pakistan’s economy has dramatically slid from high growth rates and burgeoning foreign exchange reserves to a state of crisis in less than a year. Real gross domestic product (GDP) growth has declined, foreign exchange reserves are depleted, the current account and fiscal deficits have blown up, net capital inflows have reversed significantly, inflation hovers around 25 percent and the Rupee has depreciated sharply by around 25 percent. The Karachi Stock Exchange has been in a free fall, nose-diving from the year high of 15,000 points to 9,200 in three months, forcing the government to intervene by placing a floor and proposing a bailout plan. 1 An imminent BoP crisis loomed large when the current government assumed office in March 2008. The current account deficit (CAD) more than doubled in the fiscal year 2008 (ending at 30 June 2008). The CAD soared to US$14.04 billion (8.4 percent of GDP) from US$6.87 billion last year (see Figure 1), the highest in the history of the country. The fundamental source of such a steep increase in the CAD was a 57-percent expansion in the trade deficit over the year, in addition to an increase in net outflows from income account. Since 2001, the fast-paced liberalisation of the economy, leading to sharp reductions in tariffs and robust demand growth, caused a steady increase in imports. On the other hand, the growth in exports could not keep pace with imports, resulting in huge trade deficits (goods and services) over the years. The trade deficit rose to US$21.6 billion in FY2008 from US$13.9 billion in FY2007 and a mere US$361 million in FY2003 (see Figure 1). Consequently, the current account balance deteriorated steadily from a surplus of US$4 billion in FY2003 to a deficit of US$14 billion in FY2008, despite a robust growth in remittances.

6 4 2 0 -2 -4 -6 -8 -10 -12 -14 -16 -18 -20 -22

6 4 2 0 -2 -4 -6 -8 -10 -12 -14 -16 -18 -20 -22 FY2003

FY2004

FY2005

FY2006

FY2007

% of GDP

US$ billion

Figure 1: Pakistan’s Trade and Current Account Balance (FY2003 – FY2008)

FY2008

Trade Balance (Goods & Services) (US$ bn)

Current Account Balance (US$ bn)

Current Account Balance % of GDP

Trade Balance (Goods & Services) % of GDP

Data Source: State Bank of Pakistan and the IMF 1

All data, unless otherwise stated, is from the State Bank of Pakistan and the International Monetary Fund.

Almost half of the additional merchandise import bill in FY2008 came from the food and oil sectors, which registered 46 percent and 43 percent growth respectively. 2 Nevertheless, nonoil and non-food imports grew by 21 percent, as compared to a 12 percent growth in exports. In the first four months of the FY2009 (July-October 2008), a similar trend continues. The trade deficit reached US$7.55 billion against US$5.47 billion in the same period last year, a 37 percent increase. Furthermore, net inflows have reduced substantially, resulting in almost a doubling of the CAD to US$5.95 billion from US$2.99 billion over the same period last year. A sustainable moderate CAD may not pose a problem as such. However, the previous government financed the deficit by unsustainable and expensive portfolio investments and borrowings. Moreover, the rise in commodity prices was not passed on to consumers, due to the political turmoil faced by the previous government, which resulted in large amount of subsidies. The resultant fiscal deficit was financed by borrowing from the central bank and this contributed in a double-digit inflation and the deterioration of country’s international reserves. Furthermore, the pressure on the Rupee resulted in a 25-percent depreciation against the United States dollar in the last six months. Pakistan’s economic vulnerabilities stem from structural problems, three of which underscore the nature of the BoP crisis that the country faces time and again. First, the economy is heavily dependent on imports (including capital import, as domestic saving rate historically hovers around 13 percent of GDP), which always surpasses exports. Exports, on the other hand, are limited in commodity type and destination countries, leaving the country in the current account deficit and vulnerable to external shocks. Second, the tax-to-GDP ratio (10 percent) is far below the average 17 percent of developing countries and less than two percent of the population is covered by the tax net. The huge government expenditure on debt payments, and defence and current spending resulted in huge fiscal deficits that reached 7.4 percent of GDP in FY2008. Last but not least, public debt remains as high as 55 percent of GDP, albeit a significant improvement from 90 percent of GDP in FY2000. External debt makes up 27 percent of GDP (FY2008), down from 43 percent in FY1999. However, much of the improvement in the country’s debt position was the result of a favourable external environment. Pakistan’s cooperation with the United States in the ‘war on terror’ resulted in relief in public debt amounting to about US$3.7 billion, coupled with a rescheduling of a US$12.5 billion Paris Club debt. These resulted in a substantially reduced debt service burden which was 12.8 percent in FY2008, as compared to 28 percent in FY1999. The military and economic assistance provided by the United States helped, to some extent, to ease the burden on fiscal resources. Moreover, the liberalisation of the capital account and international controls over informal money transfers after the September 11 attacks resulted in increased investments and remittances. Since the start of FY2008, the external and internal environments have become less favourable for borrowing. There has also been a significant decline in capital inflows. Consequently, the government failed to 2

Oil prices surged from US$55 per barrel in January 2007 to US$140 per barrel in May 2008, a jump of more than 155 percent. Similarly international food price index increased by roughly 40 percent in 2007 and, in the first three months of 2008, prices rose by about 50 percent. The prices of rice, wheat and palm oil also increased by 78 percent, 120 percent and 102 percent respectively between April 2007 and April 2008. Islam, M. Shahid, “Of Agflation and Agriculture: Time to Fix the Structural Problems”, ISAS Insight No. 30, 5 May 2008 – Quoted International Monetary Fund. http://www.isasnus.org/events/insights/31.pdf.

float planned sovereign bond and global depository receipts, due to the political turmoil at home and as a result of the global financial crisis. For all the above reasons, the foreign exchange reserves began to shrink from US$15.6 billion in October 2007 to less than US$3.5 billion in October 2008, merely enough to support four weeks of imports, in the face of maturing liabilities. As a result, external debt and liabilities, as a proportion of foreign exchange reserves, reached a staggering 900 percent at the end of September 2008, against 300 percent a year ago, making it impossible to fulfil international obligations. Friends of Pakistan: Economics and the ‘War on Terror’ After failing to mobilise capital from the international market, Pakistan turned to several friendly countries. Saudi Arabia, a longtime friend of Pakistan which helped the country out of a similar crisis in 1999 after the nuclear tests, was less than enthusiastic about Pakistan’s requests for deferred payments on oil imports. Nevertheless, Pakistani government sources claim that it received a ‘positive response’ from the Kingdom. China, another all-weather friend of Pakistan with huge excess foreign reserves, declined any major cash infusion and President Asif Ali Zardari’s visit to China in October 2008 only yielded US$500 million, with promises of investments and trade opportunities to help Pakistan. It is likely that Beijing wants to keep a low profile. Its growing investments and cooperation with Pakistan have already raised eyebrows in Washington and New Delhi. There have been suspicions that, after the India-United States nuclear deal, China and Pakistan may attempt a similar nuclear cooperation. Furthermore, it is only wise for China to let the Americans take care of their ‘front line ally’ in the ‘war on terror’. The United States, wary of Islamabad’s commitment (and capacity) to fight militants mounting insurgency in Afghanistan against United States-led forces, has been moving towards a multilateral approach in tackling Pakistan’s crisis. The Bush administration, bogged down by the worst financial crisis since the Great Depression, has also dragged its feet on a bill promising US$1.5 billion annual economic aid over a period of 10 years for Pakistan. The aid is conditional upon Islamabad’s ‘performance’ in the fight against militants. Washington reportedly wants Pakistan to refocus its military strategy to fighting the militants and normalising relations with India, said a Pakistani diplomat privy to the negotiations while talking to the daily Dawn. 3 Therefore, by involving major stakeholders in regional stability, Washington wants to share its burden on the ‘war on terror’. Washington threw its weight behind the formation of the Friends of Pakistan (FoP) 4 group to help Pakistan overcome its political and economic challenges by developing a comprehensive and coordinated approach to security, development and institutional issues facing the country. The group reportedly demanded Pakistan to get an IMF loan approval which would assure careful management of the economy and provide greater investor confidence. The IMF Arrangement and its Implications In fact, “by providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country’s improved macro-economic prospects,” said IMF 3

Iqbal Anwar (2008), “IMF not Pressing for defence Cuts”, Dawn, 26 October, http://www.dawn.com/ 2008/10/26/top18.htm The FoP was formed during President Zardari’s visit to America in September 2008 on the margins of the United Nations General Assembly session. The FoP includes the G7 countries, plus Australia, China, Turkey, Saudi Arabia, the United Arab Emirates, the United Nations and the European Union.

Deputy Managing Director, Takatoshi Kato. The Managing Director of the Fund, Dominique Strauss-Kahn, urged the donor community to “work together and act quickly to support Pakistan’s programme in order to mitigate the impact of the current economic difficulties”. The IMF arrangement is part of a broader package which involves other multilateral institutions and donor countries. It aims to restore macro-economic stability and investor confidence through a tightening of fiscal and monetary policies, while simultaneously preserving social stability and adequate support for the poor, stated the press release issued by the IMF. The loan tranches are subject to quarterly reviews by the IMF which has set forth certain conditions. Nevertheless, most of the ‘conditions’ are already part of the government’s economic agenda announced during the FY2009 budget in June this year. The Fund stipulates bringing Pakistan’s fiscal deficit down from 7.4 percent of GDP in FY2008 to 4.5 percent in FY2009 and 3.3 percent in 2009/10 by phasing out energy and electricity subsidies and strengthening revenue mobilisation through tax policy and administration measures. These measures, if implemented successfully, will help to meet the target to some extent, particularly the phasing out of subsidies. 5 In the short run, reforms in tax administration and, particularly the one percent increase in the general sales tax (from 15 to 16 percent implemented in the FY2009 budget) will help raise tax-to-GDP ratio. In the medium-term, the government will have to take a number of measures such as eliminating exemptions in the general sales tax and the income tax, and introducing a commercial agriculture tax. 6 There will also be cuts on development projects through ‘reprioritisation’, depending on loans from elsewhere. To provide support to the poor and vulnerable, spending on the social safety net will be increased from 0.6 to 0.9 percent of GDP in FY2009 with the help of the World Bank. The IMF arrangement also stipulates tightening the country’s monetary policy, bringing down inflation to six percent in FY2010 and ensuring zero government borrowing from the central bank. These measures too are in congruence with the State Bank of Pakistan’s (SBP) announced monetary policy goals. In fact, the SBP has raised interest rates three times since January 2008, reaching 15 percent in November 2008. Nevertheless, inflation remains uncontrollable. While food and energy inflation is expected to come down with the easing of supply shortages and a fall in international oil prices, the persistent acceleration in core inflation remains a matter of concern. By October 2008, the year-on-year non-food-non-energy core inflation rose to 18.3 percent from 13 percent in June 2008. 7 If this trend continues, the FY2009 inflation could reach 21 percent, far above the target of 11 percent set for the current year, according to the IMF and the SBP estimates. The Debate Pakistan is in a ‘Catch-22’ situation. As a matter of fact, the current inflationary pressures are largely due to higher government borrowings, besides exogenous price shocks. However, the 5

The subsidies increased from a provision of Rs.114 billion (US$1.67 billion – 1.1 percent of GDP) in the FY2008 budget to Rs.407 billion (US$6 billion – 3.9 percent of GDP). The government also envisages, in the budget, to increase tax to GDP ratio from 10 percent to 15 percent within the next five to seven years. The 20-percent weighted trimmed measure of core inflation reflects steeper inflationary pressure as it rose to 21.7 percent in October 2008 from 17.2 percent in June 2008.

measures taken (revoking subsidies, increasing sales tax, etc.) to arrest growing fiscal deficit are fueling inflation. The large external account deficit and slowdown of capital inflows, due to domestic turmoil and international crisis, are also exerting pressure on the Rupee, which has depreciated 25 percent in six months. The net effect of depreciation in value of the Rupee, in the presence of huge inflation, has exacerbated inflation by raising input costs. Moreover, the recession in Pakistan’s top export markets is also likely to hurt export growth. The IMF has already reduced Pakistan’s GDP growth projections to 3.5 percent in FY2009. This vicious cycle is likely to cause a less than expected revenue generation and a more than targetted fiscal and current account deficit. In view of such a situation, a contractionary monetary policy and austere fiscal measures are not enough. Many analysts in Pakistan and abroad have criticised the IMF and the Pakistan government. A case in point is an editorial in the Wall Street Journal (WSJ) saying, “Pakistan needs market-oriented reforms along the Chilean and Irish models, not the IMF’s austerity prescriptions.” 8 Though many in Pakistan may not agree with the alternative suggested by the WSJ, there is an increasing concern over the high interest rates, cuts on development expenditure and the increase in taxes. The IMF and the Pakistani authorities, on the other hand, are of the view that the economic crisis in Pakistan is different from global developments where many developed and developing countries have gone for fiscal stimulus and monetary easing. In contrast, Pakistan, says the SBP report, “...hit by the global commodity price shock and given the delays in pass through of this price effect, witnessed a growth in its fiscal and external current account deficits that reached unsustainable levels and alarmingly high inflation. With stagnating tax to GDP ratio, this not only enhanced recourse to borrowings from the SBP but also resulted in a fall in foreign exchange reserves, triggering depreciation in the exchange rate. Since there are significant differences in ‘diagnostics’ among Pakistan and other countries it must be recognised that the policy solutions will also be different.” 9 The IMF pointed out in its press statement that “the program and its conditionality is based on the targets and measures that the authorities have themselves set for the next two years. The IMF is convinced that the best implemented programs are the ones that are home grown and fully owned by the country”. Alongside the IMF’s financial support, “there is an urgent need to mobilise additional donor support to strengthen Pakistan’s resilience to potential shocks, help finance the expanded social safety net, and allow for higher spending on development programs”, said the statement. 10 To be fair, the above ‘conditions’ have nothing to do with the current IMF loan and were on the government’s agenda earlier. Nevertheless, the Fund’s oversight will restore some confidence in the economy. At the moment, Pakistan’s foreign credit rating is practically at rock bottom. Standard & Poor’s has lowered Pakistan’s foreign credit rating three times in 8

“Pakistan’s Plan C, Does the IMF has no Fresh Ideas?”, The Wall Street Journal, 28 October 2008. http://online.wsj.com/article/SB122513397704572755.html?mod=relevancy “Interim Monetary Policy Measures”, State Bank of Pakistan, November 2008. http://www.sbp.org.pk/m_ policy/MPS-MAY-FY08-EN.pdf “IMF Executive Board Approves US$7.6 billion Stand-By Arrangement for Pakistan”, International Monetary Fund”, 24 November 2008. http://www.imf.org/external/country/PAK/index.htm

the current year to ‘CCC’, eight levels below investment grade and it has kept Pakistan on the watch list. Both the IMF and the Pakistani authorities are hoping that investor confidence will be restored and foreign capital will start flowing in. There has also been an intensive debate in Pakistan in favour of and against the expected IMF ‘conditions’. Two such reported ‘conditions’ included the cuts on defence expenditure and the imposition of an agriculture tax. However, in reality, there were no discussions whatsoever on the defence budget in the negotiations with the Fund 11 while the tax on commercial agriculture was set as a medium- to long-term agenda. In fact, tax on commercial agriculture in Pakistan is less likely to hurt the poor than the feudal landlords. There have been calls for an agriculture tax for a long time but this has always been put down by the powerful landowners who also sit on the legislative benches. Conclusion Apart from the Musharraf regime, no other Pakistani government has been able to meet the benchmarks of economic reforms imposed by the Fund since the first agreement between the IMF and Pakistan in the 1980s. This has resulted in the premature termination of these agreements. The Musharraf regime owed its performance to its undemocratic origins and to indirect (and direct) assistance from the United States. It remains to be seen if Pakistan will abide by the IMF conditions this time around. How these measures would help or hurt the economy depends on several factors, including oil and food prices, the global financial crisis, and Pakistan’s domestic security and its political situation. In the final analysis, much would depend on Islamabad’s ability to quell militancy and keep Washington and other donors on its side by providing stable and secure business climate through good governance.

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And rightly so, given the current security situation, it would be naive to think that the IMF would cut defence expenditure.

ISA S Insights No. 43 – Date: 17 December 2008 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

An Overview of the November-December 2008 Provincial Elections in India Paranjoy Guha Thakurta∗ Introduction The outcome of the elections to the legislative assemblies of five Indian provinces or states, namely, Chhattisgarh, Delhi, Madhya Pradesh, Mizoram and Rajasthan, that became known on 8 December 2008, indicates that voters in the world’s largest democracy are becoming increasingly mature. Even as votes are cast in favour of candidates and political parties that provide (and not merely promise) good governance, anti-incumbency sentiments remain pronounced in many parts of the country. In addition, India’s voters – poor and uneducated though many of them may be – appear to be less prone to be influenced by emotive issues related to terrorism, religion, caste and community and seem to be more concerned with what could be considered substantive issues pertaining to economic and social development. The results of the recently-concluded assembly elections have made the country’s two largest political parties, the Indian National Congress (INC) and the Bharatiya Janata Party (BJP), introspect about their future while drawing up strategies in the run-up to the forthcoming fifteenth general elections that, it now seems, will be conducted on schedule in April-May 2009. The Backdrop In December 2003, the right-wing, Hindu nationalist BJP, leading the National Democratic Alliance (NDA) coalition, which was then in power in New Delhi, was exuding confidence. That month, the party had, without the support of its allies, comfortably won the elections to the assemblies of Chhattisgarh, Madhya Pradesh (in central India) and Rajasthan (in the west). What was small consolation for the INC, then in the opposition, was that the country’s centrist ‘grand old party’ managed to retain its hold over the government of the National Capital Territory of Delhi. At that time, a section within the BJP was rather keen on bringing forward the fourteenth general elections in India that could have been held as late as September-October 2004. This section argued that the party’s ‘India Shining’ advertising campaign would persuade a substantial section of the electorate to return the BJP-led NDA coalition to power. It was even contended by some in the party that the BJP would have more ∗

Mr Paranjoy Guha Thakurta is a journalist and the founder of “School of Convergence” in India. This paper was prepared as part of a consultancy for the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. Mr Thakurta can be reached at paranjoy@gmail.com.

members of parliament (MPs) in the Lok Sabha (the Lower House of India’s Parliament) and would be less dependent on its coalition partners. Elections were conducted ahead of schedule in April-May and on 13 May 2004, after the poll outcome was clear, leaders of the BJP were shocked to realise that their party had shrunk in size and that the NDA coalition would not be in a position to form India’s federal government. A centre-left coalition led by the Congress, called the United Progressive Alliance (UPA), went on to form the government with crucial ‘outside’ support from a group of 60-odd MPs belonging to four Left parties led by the Communist Party of India (Marxist) (CPI-M). Four years down the line, the Congress went on to lose a series of state elections in different parts of the country. On 22 July 2008, the UPA won a vote of confidence in the Lok Sabha after parting ways with the Left – following a bitter dispute over the nuclear agreement between India and the United States – and after obtaining the support of the regional Samajwadi Party that currently has a notable presence in the country’s most populous state, Uttar Pradesh. Given past experience, most political observers are of the view that the November-December 2008 elections to five state legislative assemblies of Chhattisgarh, Delhi, Madhya Pradesh, Mizoram and Rajasthan should not be seen as a ‘curtain raiser’ or a ‘semi-final’ of sorts before the fifteenth general elections that are scheduled to take place in April-May 2009. (The results of the elections to the Jammu & Kashmir assembly would be known on 24 December 2008) At the same time, the outcome of the five assembly elections was closely watched for possible pointers to the political mood that would prevail in the country before the general elections. The 26-28 November 2008 terrorist attacks in Mumbai took place when the elections were on in particular states. The upsurge in belligerent nationalism that followed the terrorist attacks, especially among sections of the urban middle and upper classes (that had avidly viewed the live television coverage of the incidents in Mumbai) was expected to lead to more votes being cast in favour of the BJP that has accused the Congress of being ‘soft’ on terror. The high – in some cases, record – voter turnout in the national capital of Delhi and other states was interpreted to mean that sections of the electorate would exercise their franchise against incumbent governments. But that was not to be – not in Delhi, Chhattisgarh and Madhya Pradesh. Anti-incumbency sentiments have strengthened across India in recent years. Roughly 40 percent of the MPs and half the members of legislative assemblies (MLAs) have not been reelected in national and state elections that have taken place over the last decade and a half. While some MPs and MLAs have been rejected by their parties as candidates, most were voted out. Each of the last four Lok Sabhas constituted in 1996, 1998, 1999 and 2004 saw around 250 new faces in a Lower House comprising 543 members. States where antiincumbency sentiments have not been evident in recent years have been few and far-between and include West Bengal, Bihar, Gujarat and Madhya Pradesh. The November-December 2008 assembly elections witnessed anti-incumbency sentiments prevailing in all the states that went to the polls barring one, that is, Chhattisgarh. These sentiments were, however, not strong enough to dislodge the ruling party in three out of the five states, Delhi, Madhya Pradesh and Chhattisgarh, while in Rajasthan and Mizoram, the

incumbent regimes were replaced by the Congress. The number of MLAs belonging to the ruling parties came down in each of the five states with the notable exception of Chhattisgarh. One way anti-incumbency sentiments were countered was by refusing tickets to sitting MLAs considered less than capable or responsive to their constituents. In both Chhattisgarh and Madhya Pradesh, the BJP Chief Ministers, Dr Raman Singh and Shivraj Singh Chouhan (respectively), denied tickets to over a third of the legislators who had been elected in 2003 – this strategy considerably helped the governments in these two states retain power. A similar strategy has in the past assisted the ruling Left Front led by the CPI-M in West Bengal and the BJP government in Gujarat headed by Narendra Modi. Delhi The biggest surprise of the recently-concluded assembly elections was the victory of the incumbent Congress government in Delhi led by Sheila Dikshit. No Chief Minister of Delhi has served two full terms like Dikshit, leave alone three terms. Few within the Congress – not to mention the BJP – could have imagined that she would lead her party to a third straight victory and join the ranks of venerable chief ministers of the country with long terms – these include individuals such as Jyoti Basu (West Bengal), Gegong Apang (Arunachal Pradesh), Mohan Lal Sukhadia (Rajasthan), M. G. Ramachandran (Tamil Nadu) and Manik Sarkar (Tripura). Clearly, many voters in the national capital believed that her administrative capabilities would be superior to those of her political rival from the BJP, Dr Vijay Kumar Malhotra, who had earned a reputation of being a ‘giant killer’ after he defeated (current Prime Minister) Dr Manmohan Singh from the South Delhi Lok Sabha constituency in the 1999 general elections. Dikshit’s victory also reinforced the point that a tall leader can make voters repose faith in a political party that may not exactly be becoming more popular. Delhi’s voters were also able to distinguish between local issues, regional issues and even larger national issues. If the BJP could have replicated its performance in the April 2007 elections to the Municipal Corporation of Delhi – when it won 168 out of 272 wards with the Congress winning in only 64 wards – the party should have won the 2008 assembly elections with a comfortable majority. But this did not happen, surprising many political observers. An important factor that helped Dikshit was divisions in the BJP; the party’s general secretary Arun Jaitley was first selected as the BJP’s Chief Ministerial candidate for Delhi but Malhotra was selected after Jaitley decided he was not interested in aspiring for the post. In 1993, the BJP won 49 out of the 70 seats in the assembly while the Congress won 14 seats; in 1998, the Congress won 52 seats and the BJP 15, while in 2003, the Congress won 47 seats and the BJP won 20. The number of Congress MLAs in the Delhi assembly has come down to 42; the party’s vote share declined from 48.1 percent in 2003 to 40.3 percent in 2008. The number of seats won by the BJP went up by three to 23; the party’s vote share rose from 35.2 percent to 36.4 percent. The Bahujan Samaj Party (BSP), led by Mayawati (currently Chief Minister of Uttar Pradesh), opened its account in the Delhi assembly with two seats, the party’s vote share more than doubling from 5.8 percent in 2003 to 14 percent in 2008. The BSP played ‘spoiler’ to both the Congress and the BJP in over a dozen seats. Chhattisgarh In November 2000, when Chhattisgarh became a separate state, the Congress held 62 seats in the Vidhan Sabha or state assembly, the BJP had 22 MLAs while five seats were held by

other parties. In December 2003, after assembly elections were held in the new state for the first time, the BJP swept the polls with 50 seats while the Congress obtained only 37 seats. The BJP was able to repeat this performance, thanks to Chief Minister Dr Raman Singh’s relatively non-controversial image. More importantly, what clinched the election for the incumbents was the state government’s decision to provide poor families rice at Rs 3 per kg – the public distribution scheme was strengthened considerably and corruption reduced. The number of BJP MLAs in the Chhattisgarh assembly remained constant between 2003 and 2008 at 50, with the party’s share of the total votes cast going up marginally by one percent, from 39.3 percent to 40.3 percent. The number of Congress MLAs in Chhattisgarh went up by one, from 37 in 2003 to 38 after the 2008 election although the party’s vote share rose by nearly two percent from 36.7 percent to 38.6 percent. What hurt the Congress was factionalism – former Chief Minister Ajit Jogi did not see eyeto-eye with former leader of the opposition in the assembly Mahendra Karma on the issue of supporting the ‘Salwa Judum’ force in the southern part of the state dominated by left-wing extremists (Maoists or Naxalites). Supporters of the ‘Salwa Judum’ grouping of ‘special police officers’ describe it as a spontaneous response of local villagers against violence by underground Maoists while its critics describe it as a government-sponsored vigilante group. Unlike Karma, a former Communist who spearheaded the formation of the group, Jogi concurs with the view of civil rights activists who claim that the ‘Salwa Judum’ represents a failure of the state administration to enforce law and order, and curb left-wing extremism in the tribal-dominated Bastar division of the state. Eventually, the BJP ended up gaining by winning key assembly constituencies in the division. Madhya Pradesh The Congress won 174 seats and 172 seats in the undivided 320-member Madhya Pradesh assembly in 1993 and 1998 respectively, while the BJP won 117 seats and 119 seats in the elections held in these two years. In November 2000, the state was bifurcated. Chhattisgarh became a separate state and the number of members in the Madhya Pradesh assembly shrunk to 230. Digvijay Singh of the Congress had served as Chief Minister for two terms from December 1993 to December 2003. In the December 2003 elections, the BJP won as many as 173 seats in the 230-member assembly while the number of seats with Congress drastically shrunk to 38 seats. After the December 2008 elections, the number of BJP MLAs in the Madhya Pradesh assembly fell from 173 to 143; the party’s vote share came down from 42.5 percent to 37.6 percent or a fall of almost five percent. The number of seats won by the Congress rose from 38 to 71, although the party’s vote share increased by less than one percent from 31.6 percent to 32.4 percent. The BSP increased its tally from two to seven, its share of the vote rising from 7.3 percent to 9 percent; the party had 11 MLAs in the undivided Madhya Pradesh assembly in 1993 and 1998. The Ladli Lakshmi scheme to provide education grants to young women made Shivraj Singh Chouhan popular as Chief Minister in Madhya Pradesh. Similar schemes had been initiated in different states, including in Uttar Pradesh during the Mulayam Singh Yadav government. However, the difference was that the scheme was implemented efficiently in Madhya Pradesh. Chouhan took a leaf out of the book scripted in 2004 by Andhra Pradesh Chief Minister Y. S. Rajshekhar Reddy by making direct contact with people in rural areas. In the

process, many voters chose to ignore a scandal involving purchases of road rollers and dumpers by a firm close to the Chief Minister’s family. Chouhan became Chief Minister of Madhya Pradesh three years ago in November 2005 after the BJP leadership made Babulal Gaur step down from the post. In August 2004, Gaur had replaced Uma Bharti after she was sworn in as Chief Minister of Madhya Pradesh after the December 2003 elections. Bharti later rebelled against her party’s leadership and formed her own party, the Bharatiya Janshakti Party. It won five seats in the latest round of polling in 2008, though she herself lost the elections. The BJP in Madhya Pradesh under Chouhan could not have performed as well as it did had it not been helped greatly by deep divisions in the Congress that had various factions led by former Chief Minister Digvijay Singh, Union Commerce Minister Kamal Nath, MP Jyotiraditya Scindia (son of prominent Congress leader, the late Madhavrao Scindia) and Ajay Singh, son of Union Human Resources Development Minister Arjun Singh (who was Chief Minister of the state between June 1980 and March 1985 and again between February 1988 and January 1989). As if these factions were not enough, Congress President Sonia Gandhi and her confidantes ‘parachuted’ Suresh Pachauri to Bhopal (capital of Madhya Pradesh) from New Delhi to head the party in the state. Pachauri, a former minister in the Union government in New Delhi and member of the Rajya Sabha (the Upper House of India’s Parliament) for four six-year terms, could not rejuvenate the Congress in the state and acknowledged responsibility for the party’s poor performance. Rajasthan The electoral contest in Rajasthan in 2008 was quite close. The Congress did not obtain a majority in the 200-member state assembly – it won 96 seats – and depends on the support of a number of independent MLAs. The party’s vote share went up a bit over one percent, from 35.7 percent in 2003 to 36.8 percent. The number of BJP MLAs in the Rajasthan assembly declined from 120 to 78; the party’s vote share came down significantly by nearly five percent from 39.2 percent to 34.3. The BSP’s vote share rose from four percent to 4.6 percent while the number of its MLAs went up from two to six. After Mohan Lal Sukhadia, who was Chief Minister of the Rajasthan continuously from November 1954 till July 1971, the only individual to have served two consecutive terms as Chief Minister was Bhairon Singh Shekhawat between March 1990 and November 1998 – he had earlier served as Chief Minister of Rajasthan between June 1977 and February 1980. Shekhawat went on to become the Vice President of India. Ashok Gehlot, the current Chief Minister, had served as Chief Minister of the state between December 1998 and December 2003. In the Rajasthan assembly, the Congress won 76 seats in 1993, 153 seats in 1998 and 56 seats in 2003 while the number of BJP MLAs was 95, 33 and 120 respectively in these three elections. Former BJP Chief Minister Vasundhara Raje was perceived as ‘feudal’, ‘haughty’ and ‘imperious’ in her style of functioning. She apparently sought the support of BJP veterans in the state, Jaswant Singh (former Union Minister who held the External Affairs and Finance portfolios) and Shekhawat, rather late in the day. Besides the fact that factionalism was rampant in the state, what made Raje’s government unpopular was the fact that police fired on members of the Gurjar community and farmers in the state on more than 20 occasions

during her tenure as Chief Minister. Large sections of Gurjars had disrupted normal life in Rajasthan during 2007, agitating for Scheduled Tribe status for the community. The pattern of voting during the current round of elections in Rajasthan seems to have cut across what is often described by political analysts as ‘vote banks’. Whereas political parties put up candidates belonging to particular castes and communities in specific constituencies, social formations like the Brahmins, Rajputs, Jats, Yadavs, Gurjars and Meenas did not vote along party lines in Rajasthan. This is a clear indication of voters becoming politically mature. Mizoram After the June 1986 agreement between the then-Indian Prime Minister Rajiv Gandhi and the one-time underground Mizo leader Laldenga (one word), Mizoram has been relatively free from the influence of violent insurgency that has prevailed in most other states in northeastern India. Mizoram is also among India’s most literate states. The Congress had dominated the polity of Mizoram from the mid-1980s till the late-1990s. In December 1998, Zoramthanga of the Mizo National Front became the state’s Chief Minister after his party won 21 out of the 44 seats in the state assembly. He was re-elected five years later. The 2008 assembly elections in Mizoram saw the Congress return to power with an impressive majority obtaining 32 out of 40 seats with the party’s vote share going up from just over 30 percent to nearly 39 percent. The decline in the vote share of the MNF was relatively small, from 31.7 percent to 30.6 percent, but the number of MLAs belonging to the party fell drastically from 21 to three with former Chief Minister Zoramthanga himself losing the elections. The current Chief Minister of the state, Lalthanhawla, had earlier held the same position on two occasions between May 1984 and August 1986 and again between January 1989 and December 1998. Conclusion The message emanating from the outcome of the five assembly elections is that politicians and political parties are supported when they deliver on their promises – when they not merely announce programmes and schemes for economic and social development but ensure that these are actualised and executed efficiently. In the four states in north India where assembly elections took place, the battle was between the two largest political parties in India, the Congress and the BJP. A similar situation exists in only four other states (Gujarat, Himachal Pradesh, Uttarakhand and to a lesser extent, Karnataka). In each one of the 20 other states in India, there is at least one other important political party of consequence. The aggregation of outcomes of elections in these 28 states put together has brought about a fragmentation of the country’s polity. It would, therefore, be simplistic to look at the 2008 assembly elections for indicators to the likely outcome of the forthcoming general elections that are scheduled for April-May 2009.

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