Political India: Engaging America

A recent report by the Organisation for Economic Cooperation and Development has suggested that while India’s growth record in recent years was unprecedented, a focus on labour markets and agricultural growth could spur the country to a better poverty alleviation record.

The report, “Perspectives on Global Development in 2012: Social Cohesion in Shifting World” noted that China stands out for its remarkable rise in its private and public savings rate, from 33.3 and 5.7 per cent of GDP in 1992 respectively, to 44.7 and 6.2 per cent in 2008.

However the report also said “China is not alone,” in particular adding that “India possesses high and rising levels of national savings, which include rapidly growing corporate savings.”

Suggesting that these funds could be channelled into areas such as poverty alleviation the OECD report added, “Higher savings endow converging countries with a greater capacity to confront the major challenges of investment in human and physical infrastructure.”

The study delved deep not only into the economic dimensions of development but social aspects too. For example, touching upon the relevance of India’s caste system on development outcomes, the study quoted samples from several Indian rural villages showing that “Low-caste households living in low-caste dominated villages have a higher income than those in villages dominated by a high caste.”

The OECD also praised India’s overall development model and drew attention to the structural factors underlying its recent decades of rapid economic growth. In its report the OECD said, “With sustained high growth over several decades the depth of structural change in large Asian economies such as India is remarkable and without historical precedent.”

Citing the rapid rise in labour productivity as a key factor driving this growth the study noted that in the case of India structural transformation in labour markets had made the services sector a key source of employment unlike China, where manufacturing appeared to dominate.

While this labour reallocation in India had resulted in an average annual productivity improvement of 0.9 per cent, the OECD said, “Labour has also moved from formal to informal employment, which offsets the positive impact on productivity.”

Further in comparative terms China appeared to have better realised the link between poverty alleviation and agricultural growth, while India’s modest achievements in poverty reduction may be associated with the relatively poor performance of its agricultural sector, the report noted.

While markets will be eyeing this week's G20 meeting in Cannes for the actions it takes towards stabilising the Euro-zone economic crisis, there is a growing concern that the G20's aid and development agenda may get less attention. But what about the plight of the poor during this time of economic troubles? On the eve of the summit the G20 held a 75-minute session with Bill Gates, co-chair of the Bill and Melinda Gates Foundation and chairman of Microsoft, who presented a report titled “Innovation with Impact: Financing 21st Century Development.”


Ahead of his address to G20 heads of state, Mr. Gates spoke to Narayan Lakshman about why it was important for these nations to keep up their aid commitments through the downturn, and the challenges that his financing proposals could face from powerful industry lobbies. An edited transcript of the telephonic interview:

Many of the solutions you have proposed relate either to technical and financing issues or in some cases the allocation of national resources. However, many G20 countries have political and institutional barriers that make it harder to take up these solutions. What incentives do your proposals contain to get G20 members to actually adopt these innovative solutions?

The G20, in a broad sense, is meeting to help improve the world economy, both in the near term and in the long term. They are doing that because economic progress is good for the human condition in terms of food, well-being and so many different things. The rich countries are already engaged in providing quite a bit of aid to other countries. So the report in some ways is telling them how they can focus on innovative activities and measurable activities.

Now, those aid budgets are under pressure because of budget deficits. But the report encourages them not to cut [aid budgets], ideally not at all, but do what Britain has done, which is to prioritise aid. It is actually increasing [in Britain]. [The report asks nations] at least to not make dramatic cuts in the aid that they are giving.

For countries like Brazil and China, which are no longer aid recipients, [the report] talks about how they have innovative capabilities and how they should get involved, even if the financing comes from others, in areas that they can help innovate in.

India is kind of a special case because it fits the Brazil and China case where it has a lot of expertise. I cite specifically the low-cost vaccine manufacturing as exemplified by [the] Serum [Institute, which was the first globally to develop the Meningitis-A vaccine] but there is a lot of deep technical expertise in India.

But it is still a substantial aid recipient as well. So it fits both my second category, of middle-income, people-who-need-to-get-into-the-aid-and-innovation-for-the-poorest-game, and [the first category of] recipients of aid who need to grow tax [revenue] better and grow their domestic budgets focused on the most catalytic areas, particularly health and agriculture.

The countries are there to come up with these ideas to make improvements. The situation is quite novel in that they have not had a non-government person, like a foundation person, speaking to them before. But they have put aside 75 precious minutes to discuss the report and related issues, so having an audience like that is a huge privilege and I am going to try and stimulate their thinking.

I will be a little more upbeat than some people because when you look at the history of innovation, whether it is innovation that grew economies or whether it was innovation that improved the human condition over the last ten, twenty or fifty years, it has been pretty phenomenal.

Do you feel that given the pressures of the global economic downturn, countries may be reluctant to take on any commitments to increase or even keep at the same level their aid commitments right now? Specifically in the case of India you have spoken of an “aid dividend.” What has been the record of countries like India during the downturn – have they sustained or has it dropped, and how would you, in an ideal world, get them to keep those aid commitments up?

India is more of an aid recipient than a provider of aid. Over time, yes, India will probably get involved in providing aid and it has a small programme right now. The key thing that India can do is participate in this innovation activity. Beside the Serum vaccine example, I give an agricultural example where India has done a really great job deploying a new rice variety that is flood tolerant, called Strasa; and it is involved in a lot more crop improvements, including more characteristics to make rice better but maize and wheat as well. So it is a big play on the innovation side because of [India’s] technical capabilities and it should make the regulations and the willingness to take up those innovations very strong.

In terms of its own budget, India is going to need to spend more on healthcare and, over the next probably ten to fifteen years, it will be getting a lot of aid from others in that area. The health budget has gone up, but not even as much as people have talked about. That is going to have to continue to grow. India is going to move towards being more reliant on its own domestic resources, which will free up aid for poorer countries in other parts of Asia and Africa.

With your arguments for sustaining aid, do you have any concerns about aid conditionality leading, for example, to even more land grabs in Africa? Is that an inherent risk of relying too much on aid?

You certainly have to be careful whenever you are spending money that it is spent well. If you are not careful, a country will not develop its own tax system or will not allocate its domestic resources to high-priority areas that really help its people, [including] agriculture. If you are aid-dependent and something goes wrong in the country that has been sending you aid, then you can have an abrupt drop-off in resources for critical areas.

Everybody likes the fact that those countries get economic innovations and fix their domestic budgets, that they move towards being aid-independent and in extreme cases like [South] Korea actually go from being a substantial aid recipient to being a substantial aid donor.

Certainly in the case of India, aid as a percentage of Gross Domestic Product is much, much lower today. It was as high as above 5 per cent if you go back about 50 years ago. Now it is in the one to one-and-a-half percent category. As I said, over time that is going to go down.

Fortunately for India, it has got a growing economy. If it is doing the right things with taxation and focusing on the right areas for human development, it is going to have no problem, over a period of time, taking care of its own needs.

A lot of things in the report about innovation, about eventually giving to others...apply very directly to India.

Do you think that India has a lot of potential to raise additional revenues for development via tax reform?

I am not an expert on tax systems like I am on vaccines or agricultural [innovations]. There is no doubt that as an economy grows in a great way like India has, that you have to step back and change your tax systems, because you start to get more disparities of wealth. How you tax the middle class and the most wealthy is always a challenging issue. But I do not have particular recommendations relative to India’s tax system.

The [Bill and Melinda Gates] Foundation is looking into the very poorest countries and what they do on tax systems. The International Monetary Fund and the World Bank tend to focus on this. I do think there is room to really help the poorest countries get their tax systems right.

For India, obviously it will be determined by political decisions. Fortunately the growing economy is raising additional taxes. But are they structured in the right way? Fortunately you have a democracy that in its complex way gets to have the final say on that.

You have proposed some very innovative new revenue streams for financing development, health, and climate change. Do you however worry that each of your proposed financing options may face stiff opposition from powerful lobbies representing banks, tobacco companies, and airline and shipping companies?

Absolutely. Whenever you promote a tax, it is easy to say, ‘No, that tax is not a good thing.’ But the practicalities of government are that you want to raise revenue for issues like health, agriculture, and education. [There are] three taxes that I suggest countries take a hard look at.

India could absolutely raise its tobacco taxes. That is a big win because you have less smoking and you can then apply that tax revenue to other health improvement areas.

The financial transaction tax will probably be the most controversial in some ways. There actually are some countries, including the United Kingdom and Hong Kong, which already have some form of those taxes. If you make them modest enough, then people do not work their way around them. It turns out the United States is not likely to adopt that tax, so the question is: are Europe and other people likely to choose to [adopt it]?

Finally that fuel tax – aviation and marine fuel tax – we know that the damage caused by climate change affects the poorest countries and farmers in the poorest countries the most. They are not the ones who caused the problem. So we need to find some revenue source to dramatically increase how we are helping those poor farmers with their agricultural systems. The tax I mentioned there would raise substantial money and make a huge difference.

But all taxes get gigantic resistance so whether or not those become an additional source of aid or funding and innovation for aid, I do not have a prediction.

Taking a step back, would you agree that your proposals underscore the tension that exists between the need for rapid economic growth, especially in this downturn, on the one hand and poverty alleviation on the other? For example on the question of tax, the lobbies would argue that it increases transaction costs or depresses business activity. Is that in some ways the fundamental tension that we are grappling with here?

No, I would say that bringing more food supply into the world economy or getting African countries, with their resources and abilities, into the world economy on the supply and demand side is great for economics. The trade-off is that a lot of these investments I talk about [in the G20 report] have huge returns in [terms of the] human condition and even economic benefit. But they do require taking a long-term view, like do you help people farm or do you send food relief? Helping the person farm is the better long-term investment. I think a lot of what the report is about is continuing the focus on the long-term, high-return activities even while dealing with the short-term crisis.

From The Hindu

The question of whether economic reforms in India have been progressing quickly enough is likely to be a major debating point during the second India-United States Financial and Economic Partnership talks, if comments by Indian Finance Minister Pranab Mukherjee and U.S. Treasury Secretary Tim Geithner indicated the general mood here.

Speaking at a panel discussion organised jointly by the Confederation of Indian Industry and the Brookings Institution Mr. Geithner hinted that the U.S. hoped for a more rapid pace of reforms. He said, “From our perspective the key thing is the outlook for reform... India is now at the point where future growth will depend on the success of the next wave of reforms, not just in the financial sector, but importantly in the financial sector.”

Arguing that the Indian economy had “outgrown its financial system,” Mr. Geithner also said he would be speaking to Mr. Pranab “about things that are important to us as the Indian authorities look for ways to improve the quality of the investment environment.”

Yet Mr. Pranab appeared to disagree with such an assessment of the investment climate and pace of reform. He said that in India “the rate of savings and investment is reasonably high” and “the various structural reforms that we had undertaken and which will come in the course of time... will ensure that there is an investment-friendly environment, which can attract investment from different parts of the world.”

The Minister added that while questions had been raised over the drop in foreign institutional investment flows in the Indian economy earlier this year, “Almost every year, in the first few months of the calendar year, FII flows slow down.” However this gets offset by a rise in flows in later parts of the year, he said.

Deeper social-structural concerns also appeared to be topmost on the minds of Indian officials speaking at the event, including the thorny question of land acquisition for infrastructure and other projects.


While both the Minister and the Secretary admitted that there was $1 trillion worth of untapped potential for investments to meet India’s infrastructural demand, R. Gopalan, Secretary of the Department of Economic Affairs of India, said, “There are issues such as land acquisition, environmental clearances, rehabilitation of displaced persons which cause concern on account of their potential to introduce time and cost overruns.”



Mr. Mukherjee also sought to defend the case that India was expending considerable effort toward reform by citing the Direct Tax Code, India’s role in the Financial Action Task Force, the fact that foreign entities meeting Know-Your-Customer conditions could invest directly in mutual funds, and the evolving National Manufacturing Policy as examples of actively debated policies.

Even as the Minister explained that “To make the FDI policy more user-friendly, all prior regulations guidelines have been consolidated into one comprehensive document, which is reviewed every six months,”, Mr. Geithner pressed him further on the question of what the U.S. hoped to get out of this dialogue with India.

Mr. Geithner said that even though the U.S. valued “the relative absence of drama” in its strategic relationship with India, the most important thing that the U.S. wanted to see was more progress with financial sector reform that provided deeper, more liquid capital markets, but also for India “allow a little bit more access” of U.S. firms to participate in those markets.

The Treasury Secretary also predicted that with the gradual rise in wages in India, the outsourcing industry may be impacted as some economic activities shifted back to the U.S. However this “modest shift” would pose no risk to India’s growth, he added.

There was however strong appreciation from the U.S. side on India’s role in the G-20, as indeed for the expanded role of the G-20 itself in addressing major global issues.

India faces a burgeoning inflow of high-quality counterfeit currency that is primarily produced in Pakistan and then smuggled to India through multiple international routes, according to a report by the United States State Department.

In the 2011 International Narcotics Control Strategy Report (INCSR), the State Department said criminal networks exchanged counterfeit currency for genuine notes and this facilitated money-laundering on a scale that “represents a threat to the Indian economy.”

While a key focus of the INCSR was the drug and chemical control, a significant section of the report considered the impact of money-laundering and financial crimes in the context of narcotics production and distribution.

Significant target

In that regard, the report argued that India's economic and demographic expansion made the country an “increasingly significant target for money-launderers and terrorist groups,” adding that India's extensive informal economy and remittance systems, porous borders, strategic location, persistent corruption, and historically onerous tax administration contributed to its vulnerability to financial and terrorist-related crimes.

On the subject of the counterfeit currency flows from Pakistan, officials noted that most terrorist activities were conducted by international terrorist groups and entities linked to the global jihad, with the support of both state and non-state external actors, all of whom “often use counterfeit currency and hawaladars, as well as physical cross-border currency smuggling, to move funds from external sources to finance their activities in India.”

‘Particularly prone'

India was particularly vulnerable to such illicit currency flows given its location between heroin producing countries in the Golden Triangle and Golden Crescent, the INCSR explained.

The report also pointed out that India was itself a major producer of licit acetic anhydride, a precursor chemical required to convert morphine base into heroin, and this made producers susceptible to abuse by illicit networks. In any case, India was “a significant target for terrorist groups, both external and domestic,” the State Department said.

Annual report

The INCSR is an annual report supplied to the U.S. Congress and its purpose is to describe the efforts of key countries to attack all aspects of the international drug trade during 2010.

From The Hindu

The International Monetary Fund has cautioned that “global financial stability is still not assured and significant policy challenges remain to be addressed,” even four years after the onset of the largest financial crisis since the Great Depression.

The Fund also warned that the world was still very much witnessing a “two-speed recovery,” with progress in advanced economies significantly slower than that of emerging markets.

Releasing updates to two closely-watched reports, on “Global Financial Stability” and “World Economic Outlook,” the IMF voiced concern that for many key financial institutions “Balance sheet restructuring is incomplete and proceeding slowly, and leverage is still high.”

According to the IMF the interaction between banking and sovereign credit risks in the euro area remained a critical factor, and policies were needed to tackle fiscal and banking sector vulnerabilities.

At the global level, regulatory reforms were still required to put the financial sector on a sounder footing even if accommodative policies in advanced economies and relatively favourable fundamentals in emerging market countries had spurred capital inflows.

In the emerging market countries the Fund recommended that policymakers “will need to watch diligently for signs of asset price bubbles and excessive credit.” However it added that unlike advanced economies, where growth remained subdued and unemployment high, emerging economies were still buoyant.

In fact the scenario in emerging economies was beginning to suggest that inflation pressures were emerging, the IMF said, and there were now some “signs of overheating.”

Exhorting Euro area policymakers to embark on “comprehensive and rapid actions to overcome sovereign and financial troubles,” the IMF noted that such action would be essential to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally.