Foreign investment push into renewable energy segment

Investments of up to Rs 40,000 crore expected in next 2 years; however, implementation challenges need to be addressed, caution many

There seems a rush of foreign investors in India’s renewable energy (RE) sector, following the government’s stated ambition to add 175 Gw of capacity in this segment by 2022, to the existing 36.3 Gw.

Italian energy renewables entity ENEL Green’s $33 million buy-out of a majority stake in BLP Energy has followed US-based SunEdison acquiring Continuum Wind Energy for $650 mn three months earlier.

Ambit Corporate Finance, which is advising foreign strategic and institutional investors to invest in the sector, says Rs 40,000 crore of investments are expected in the next two years. This will be to build 7-8 Gw annually, at an average cost of Rs 4-5 a Mw.

"What is attracting investors is that rates are fixed for the useful life of an RE plant, usually 25 years," says Rahul Mody, managing director of Ambit.

UBS Investment Bank, financial advisor to BLP Energy for the investment from ENEL Green, is also expecting a surge. “We have already seen a significant fall in cost of power generation from RE sources,” says Sawan Kumar, executive director. “As the technology improves, economy of scale comes and efficiency improves. The hope is that cost of renewable power will become equivalent to that of conventional power in the next two to three years. It would also depend, he cautioned, on the behaviour of coal prices.

“Risk is not being appropriately considered right now. People are assuming the government is going to deliver on the challenges plaguing the power industry for long. if they do not, there will be a similar situation to that on the conventional side,” says Sumant Sinha, founder and chief executive officer at Goldman Sachs-backed ReNew Power. This entity claims to be the largest Indian player in the space, with 1,000 Mw in construction and operational wind and solar energy projects.

”There are concerns such as grid evacuation and financial health of distribution companies.  If these are not addressed simultaneously to the expected capacity addition, then perhaps the payment issues will start,” says Sinha.

The rush of foreign investors is also because India is attractive for large companies in the segment looking to diversify geographically into Asia. The Indian market is considered easier to enter than the Chinese one.

Renewable	Current Capacity (MW)	Target by 2022 (MW)
Wind Power	23,763	60,000
Solar Power	4,061	1,00,000
Small Hydro Power	4,102	5,000
Biomass power	4,419	10,000
Total	36,344	1,75,000
Source: Care Ratings

"Currently, the Indian energy generation market is considered risky, considering almost all of the Indian utilities are severely in debt; paying developers on time can make or break the market,''says Raj Prabhu, head of Mercom Capital Group, a global clean technology communications and research entity.

Source: http://www.business-standard.com/article/companies/foreign-investment-push-into-renewable-energy-segment-115092800464_1.html

Water sector - Privatisation or Remunicipalisation

Privatisation of urban water supply: The muddy picture

The municipal body’s financial losses from water works has reportedly increased by Rs 60 crore per annum, leading to demands, from both opposition parties and the local community, for the ouster of the private player.

As the government pushes for more private sector investments in urban infrastructure and basic service provision, it has chosen to showcase Nagpur as its model for water supply privatisation. At Smart City conferences in Delhi, officials have been hailing the Nagpur model as worthy of emulation. But the situation on ground is different. In 2012, the BJP-led municipal body in Nagpur handed over its water supply to a subsidiary of the French water corporation, Veolia, for 25 years. Since then, the project has seen allegations of corruption, four increases in water tariffs, cost overruns, and delays in plugging leaks. The municipal body’s financial losses from water works has reportedly increased by Rs 60 crore per annum, leading to demands, from both opposition parties and the local community, for the ouster of the private player. Nagpur was the first large city in India to hand over its entire water service to a private firm. Smaller experiments in privatisation in Khandwa, Mysore, and Aurangabad, among others, have followed similar trajectories. Social mobilisation against the introduction of PPP (Public-Private Partnership) projects in metros such as Mumbai, Delhi and Bangalore have led to the plans being aborted. Although water is a state subject, the Centre’s proposed model concession agreement for PPP in water distribution will likely receive a leg-up from the emphasis on private funding in the flagship urban missions, Smart Cities and AMRUT. This will create an enabling environment for private participation in the urban water supply and distribution sector, which until now has remained the most essential of public services. The government’s move, however, runs counter to an accelerating global trend towards remunicipalisation of water supply. A 2014 study by the Transnational Institute lists 180 case studies in the last 15 years of public authorities wresting back control from private players — including in capital cities such as Paris, Berlin, Buenos Aires, Budapest, Kuala Lumpur and Bogota. 75% of these cases have been in high-income countries. The US has seen the largest number of cases — 59 — followed by France (49), home to the world’s largest water corporations, Veolia and Suez, and the country with the longest history of water privatisation. Forty-four cases were recorded in middle- and low-income countries. The smaller number has been attributed to the fact that these countries are more likely to be subject to conditionalities of multilateral lenders. Also, the transaction cost of remunicipalising often involves paying huge compensation to the private operators for lost profits. And yet, there have been instances such as Johannesburg, where the introduction of prepaid meters that stopped dispensing water until further water credit was purchased, triggered massive unrest in the slums; and Cochabamba and La Paz-El Alto in Bolivia, where intense water wars led to remunicipalisation. Closer home, the former Congress Chief Minister, Vilasrao Deshmukh, had handed over water services in his hometown of Latur to a private operator — but within a few years, the Maharashtra water supply department had to take back control after high tariffs without any improvement in water quality triggered strong protests. In all 180 cases, contracts were not renewed, or terminated abruptly, as private operators failed to fulfill obligations in terms of holding tariff lines, improving coverage and quality, reducing water losses, and ensuring financial transparency. Even Manila, which is claimed to be a success, has witnessed complaints of a 7- to 10-time increase in water tariff post-privatisation. The basic premise of the PPP model, promoted in the global South by the World Bank’s International Finance Corporation, is that water should be treated as an economic commodity whose full costs must be recovered from users, so as to ensure efficiency in service provision. Of all the arguments against treating water as anything other than a basic right, the most compelling has been its repercussions on the health of populations. In rural Ontario, immediately after water-testing was taken over by a private company, there was an E. coli outbreak that killed seven people. The company said that it had detected the contamination early on, but the test results were not made public as they were “confidential intellectual property”. Similarly, in South Africa’s rural KwaZulu Natal, where a couple of hundred died following a cholera outbreak in the early part of the last decade, studies showed the epidemic to be the direct outcome of private companies stopping free water supply from communal standpipes. This was replaced by a system of prepaid water meters, forcing the poor to use unsafe water sources. However, merely remunicipalising, or continuing public operators, will not necessarily help in plugging leakages or expanding coverage. In most successful models of remunicipalisation in France, Argentina and Spain, public operators significantly increased their investment in water systems, and kept charges low for the poor. An emerging alternative to the World Bank’s Public-Private Partnership model is Public-Public Partnership, which encourages global partnerships between public water operators in knowledge and technology sharing, as well as in capacity-building measures. The idea is supported by the UN Secretary General’s Advisory Board on Water and Sanitation. India is currently on track in terms of the Millennium Development Goals target for sustainable access to clean drinking water. Under a system of publicly owned and controlled water utilities, the proportion of urban households with access to clean water sources has increased from 87% in 1990 to 95.3% in 2012. A staggering 65 million people live in urban slums in India, and any reversal of gains made so far in terms of access to water will also hit the modest gains in health, education and gender parity among the urban poor. 

- See more at: http://indianexpress.com/article/explained/privatisation-of-urban-water-supply-the-muddy-picture/#sthash.z5bjROrt.dpuf

Huawei’s Culture Is the Key to Its Success

Today, Huawei is the only Chinese company – out of the 91 mainland Chinese companies listed on the Fortune Global 500 list – earning more revenue abroad than in China. Huawei’s revenue from overseas markets exceeded that from the Chinese market for the first time in 2005. In 2012, Huawei surpassed Ericsson – at that time the world leader in telecommunications and networks – in terms of sales revenue and net profit, and this trend continued in the fiscal year of 2014 when Huawei reached an all-time high sales revenue of $46.5 billion and net profits of $4.49 billion.

Customer-First Attitude

Strong leaders provide a sense of purpose to their people, and Ren Zhengfei is no exception. His first and foremost concern is the customer. Many companies adopt a customer-focused attitude, but how many of them truly live it? Huawei distinguishes itself from the competition in this regard. In our conversation, Ren Zhengfei mentioned repeatedly how in the early years of Huawei everyone in the company had to turn their eyes to the customers and their backs to the bosses.

Another example of this customer-first attitude comes from another early episode in their history that’s since become something of a company legend. In desert and rural areas in China, rats often gnawed the telecom wires, severing customers’ connections. The multinational telecom companies providing service at that time did not consider this to be their problem, but rather that of the customer. Huawei, in contrast, viewed the rat problem as one the company had the responsibility to solve. In doing so, they acquired extensive experience in developing sturdier equipment and materials – such as chew-proof wires — which helped them later on to gain several big business accounts in the Middle East, where similar problems stymied the multinational firms.

Since then, there have been other projects where Huawei experienced severe climate challenges, such as building the highest wireless communication base station in the world (6,500 meters high on Mount Everest) and building the first GSM network within the Arctic circle. These, too, have helped acquire useful knowledge. For example, when Huawei expanded their 3G market in Europe, they noticed that European carriers expected base stations to be more compact, easier to install, greener, and more energy efficient, while offering wider coverage. Based on these customer needs, Huawei became the first company to launch the concept of distributed base stations that enables radio access for large to small private networks. This innovation made it cheaper for carriers to deploy base stations, and was popular with European carriers.

Employee Dedication

Huawei emphasizes that the only way to obtain opportunities is through hard work. For example, in the early years of the company, every new employee was given a blanket and a mattress. Many of them would work late into the night, then sleep in their offices, perhaps taking a catnap during lunch again the next day. As one Huawei employee said: “The pads were to us a representation of hard work in the old days and this idea has now been translated into the spirit of being dedicated to do the best in anything we do”.

Knowing that a dedicated and committed work force makes companies more competitive is not a too difficult concept to understand. The way to promote dedication and make it accepted by its employees – as it is the case in Huawei – is, however, a more difficult nut to crack. Huawei does it in part with the type of incentive performance system the company employs. Huawei is not a public company, and is in fact owned by the employees. Ren Zhengfei’s shares account for nearly 1.4% of the company’s total, and 82,471 employees hold the rest (as stated in Huawei’s 2014 Annual report). This employee shareholding system is referred to within Huawei as the “silver handcuff.” It is a system that is different from the more common stock option arrangement, which is often termed the “golden handcuff.” The idea underlying this scheme is that Ren Zhengfei wants to share both responsibilities and benefits with his colleagues. As he puts it, he wants everyone to act like the boss. Important to note, however, is that that only those who perform well enough qualify to participate.

There’s a shared belief within the company that an IPO would result in only a few people getting very rich, and the majority losing their motivation. Ren Zhengfei has emphasized that avoiding an IPO and hewing to the current employee-ownership structure is what helps the company maintain a strong collective fighting spirit.

Long-Term Thinking

The employee-ownership arrangement not only helps Huawei attract and retain dedicated employees, but also allows the company to plan for the long term. Ren Zhengfei has also credited it with allowing them to stay close to their goals and long-term vision. For example, Huawei plans the development of the company by decade, whereas most of their competitors such as Ericsson and Motorola plan it by financial quarter or year. Being privately held has allowed Huawei to work on its 10-year plans, while its competitors struggle to follow near-term fluctuations of the capital market.

For example, Huawei has introduced the use of a rotating CEO system in which three deputy chairmen take turns acting as CEO for six months each. At the same, time Ren Zhengfei maintains his oversight role, acting as a mentor and coach for the acting CEO. This innovative management structure is inspired by a book on new leadership calledFlight of the Buffalo (authors James Belasco and Ralph Stayer). While it will make the company less vulnerable if one chief fails or derails, it’s hard to imagine a publicly held company getting away with such an unusual plan.

Gradual Decision-Making

Ren Zhengfei is known for avoiding quick decisions and forcing himself to take time to reflect. His company reflects these traits. Again, he ties this in part back to their ownership structure: it keeps the decision-making power under company control – no outside investor will gain relative control over Huawei. As we’ve seen, they have much more freedom and less pressure from the market to consider their next steps to take. Their system of rotating CEOs helps support a gradual, more democratic decision-making process. It also helps Ren Zhengfei make a gradual decision about his ultimate successor.

Huawei also emphasizes what they call “the power of thinking.” The company philosophy is that the most valuable thing is the power to think. For example, efforts are made to ensure that intellectual exchange happens as a matter of routine. Executives are urged to read books outside their area of expertise and books have to be present in each office. Furthermore, ideas are communicated frequently to every employee by both senior executives and Ren Zhengfei. Importantly, however, and demonstrating the international character of a once-Chinese company, feedback is always invited across the company to improve those ideas that will ultimately feed the future vision of the company.

As many people know, Ren Zhengfei is a man with an army background – he served in the People’s Liberation Army – an experience he credits for his drive to fight and survive, qualities that are reflected in one of his favorite slogans in the early days of Huawei: We shall drink to our heart’s content to celebrate our success (ren sheng de yi xu jin huan), but if we should fail let’s fight to our utmost until we all die (ju gong jin cui, si er hou yi). So far, Huawei has had many successes to celebrate.

Source: Harvard Business Review, June 11, 2015

Will AIIB Change Asia's Multilateral Financing Landscape?

It is a well-known fact that for any country to achieve sustainable economic growth a strong infrastructure is a key foundation, both in terms of quantity and quality. Asia, the giant who has led the tremendous economic growth since last decade (6.7% annually from 2000-2012) and increasingly assuming central role in world economy, is under severe pressure to improve its infrastructure needs and scale up to meet the global standards if it were to sustain its remarkable economic growth rates.

The changing demographics, the distinct shift of population from rural to urban areas, the rising economic power status and the growing inter-connectivity and dependence with the developed regions has led to immense pressure on creating a world class infrastructure in Asia. Currently, the inadequacies in infrastructure is proving to be a bottleneck in Asia's rapid economic growth, a threat to competitiveness and an impediment to reduction in poverty. And, the major challenge in bridging the infrastructure gap (normally defined as the difference between country's development goals and its actual capability to achieve those goals), is the lack of investment financing. The lack of public investment in infrastructure due to fear of adding to fiscal burden, the dearth of private-sector participation and deficiency of long-term capital market financing has enlarged the existing infrastructure gap.

According to the 2014 WB report, Reducing Poverty by Closing South Asia's Infrastructure Gap South Asian countries will have to invest as much as $2.5 trillion over the next ten years: one-third to be spent on transport, one-third on electricity, and the remainder on water supply and sanitation, solid waste management, telecommunications, and irrigation. And according to the Asian Development Bank (ADB), infrastructure investment needs in Asia could reach $750 billion annually during the period 2010-2020; while ADB's estimated lending approval each year is just around $13 billion! 

Thus, realizing the importance of fulfilling Asia's infrastructure financing needs, China, in October 2014, announced the launching of Asian Infrastructure Investment Bank (AIIB) backed by an initial paid- up capital of $50 billion and with authorized capital of $100 billion. The AIIB has approved 57 countries as founding members as on March 2015. The 57 founding members cover five continents, including Asia, Oceania, Europe, Latin America and Africa. 

The AIIB's main focus is to provide funding exclusively for infrastructure projects such as roads, ports, dams, bridges, railways in underdeveloped Asian countries, which differentiates it from the ADB's broader mission of reducing poverty. Besides, with the rise of trade in value-added and production networks in the Asian region, contributing to industrial upgrading and competitiveness for many countries, it becomes essential to move beyond the national projects and create a steadfast network of cross-border infrastructure. And AIIB intends to also move in this direction by developing and financing the cross-border regional connectivity infrastructure projects like road systems, ports and telecommunications network.

Though AIIB has been able to garner initial attention, it remains to be seen how far the bank will be able to deliver in terms of good governance, flexibility, transparency, predictability, which will, in the long-run determine its eventual success!

Source: www.guizzetti.org

One year of Modi govt: A glass half full

In the run-up to the 16th general election, opinion on Narendra Modi was polarized. Once again, as Prime Minister Modi prepares to celebrate his government’s first year in office, the view is split down the middle.

Constant critics, like Congress vice-president Rahul Gandhi who gave Modi a zero rating, would have us believe that this is a nowhere regime which has belied the electoral expectations aroused during the campaign. Supporters, on the other hand, would equally belligerently argue: the new regime is off to a good start and that the best is yet to come.

Obviously both are extreme views and the truth is somewhere in between. Here again the assessment would differ: whether the glass is half empty or half full. It is my argument that the glass is half full. Here is why:

First off, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) inherited a severely damaged economy along with a nation severely traumatized by allegations of corruption in public office. If this was not enough, within a few weeks it was apparent that not only was the annual monsoon projected likely to be deficient, there were also fears of the onset of a drought (both of which actually panned out). However, there were offsetting factors too. The global commodity super cycle had ended and along with it came the fall in crude oil prices.

In response, the government undertook several measures, some of which were pure fire-fighting efforts. To a large extent the NDA’s majority win—the first in 30 years—worked to calm nerves all around. It also provided a certitude to decision-making in government, something that was totally absent from the previous regime. The oil price fall cushion was used wisely—unlike in other countries, the government did not pass on the benefits to consumers in the form of reduced prices; instead it burnished its green credentials by increasing the indirect taxes on fuel prices and the exchequer pocketed the extra returns to fund the fiscal deficit burden.

Even better, growth is on the mend and inflation is on the wane—hopefully it will convince the Reserve Bank of India to cut interest rates and set the ball rolling afresh on investments, especially in manufacturing and infrastructure.

Second, it very early showcased its ability to think out of the box and willingness to back politically risky initiatives, presumably something that exudes from the sense of power the BJP draws from having 282 elected members in the Lok Sabha. Among the earliest decisions which Modi undertook—actually within the first 18 hours after taking office—was to invite the leaders of neighbouring countries for the swearing-in ceremony. In one stroke he demonstrated vision, as well as the fact that foreign policy would be a key element of his administration. It is another matter that subsequent events have not panned out to script, but nonetheless, India conveyed its desire to reset relations in South Asia.

Third, it has rewritten the lexicon of governance in Delhi—previously defined by a cosy self-serving cabal of politicians, bureaucrats, middlemen and journalists—and undertaken initiatives to transition the country to a rules-based regime. The successful conduct of the auction of coal mines is a perfect example, where discretion in policy implementation was given a quiet burial.

Fourth, it has ensured continuity in policy, even while pursuing its own version of change, and more importantly, not allowed churlishness to define its policy choices. It has therefore retained good ideas promoted by the preceding Congress-led United Progressive Alliance (UPA). Aadhaar, the plan to equip every resident of India with a unique identity number, spearheaded by Infosys co-founder Nandan Nilekani, is a good example of continuity with change. Similarly, it brought forward the financial inclusion agenda proposed by the UPA, rechristened it the Jan Dhan Yojana and put the entire political might of the government behind it.

Fifth, the NDA has hit the reset button on the fiscal polity of this country by accepting the recommendations of the Fourteenth Finance Commission. Not only has the share of states in the centre’s tax receipts been raised to 42%, they have also been given the power to customize their expenditure—as opposed to the previous one-size-fits-all policy pursued by centrally sponsored schemes. In short, the NDA believes that the states no longer need hand-holding.

Sixth, the government has eschewed any doublespeak on business. Traditionally, most politicians and governments shy away from any overt claims (something that has invited the sobriquet of suit-boot ki sarkaar). It discovered ideological justification in its slogan: pro-poor and pro-rich. Accordingly, it has worked towards improving the ease of doing business, including repealing nearly 1,000 redundant laws.

A lot of reform initiatives in this context so far have been incremental in nature. Largely aimed at improving the plumbing, these have been panned by several critics as a waste of social capital. But then think of the consequences of a clogged drain and the objectives will be clear. Yes, it may still be a halfway house, but the improved plumbing will ensure less wastage and consequently a bigger bang for the buck.

Seventh, this government has taken the first steps toward creating a social security infrastructure for all. The idea of financial inclusion is that eventually every household will be part of the economic mainstream. Similarly, the pension and accident insurance schemes introduced in the Union budget go a long way towards strengthening the social safety net.

The idea of Swachh Bharat, which is yet to acquire a concrete blueprint, will be crucial if the country has to turn the corner on common diseases like diarrhoea; most Indians in lower income groups are considered to be just a disease away from falling back into poverty.

These initiatives are consistent with rapidly growing aspirations in society. Unlike in the past, the preference is no longer for entitlements. People would rather be taught how to fish than be given a fish—exactly why initiatives like the skills programme (again an inheritance from the UPA) are key to empowerment across classes.

By now you must be wondering why the glass should only be half full. I would argue that it is also a fact that the NDA has been wanting on some fronts.

First, it seems to have misread the rural distress. It is one thing to firefight to mitigate the damage to the farmer due to unseasonal weather. But it has failed to gauge the structural fault lines in the agrarian sector and as a result,its response has been underwhelming (in an interview to Mint on Page 5, BJP president Amit Shah maintains that a long-term response is being debated within the government).

The current crisis in agriculture has been triggered by the drought last year, the collapse of the global commodity super cycle and fears of another bad monsoon this year. The shrinking spending on social sector programmes—or death by neglect, as in the case of the Mahatma Gandhi Rural Employment Guarantee Scheme—has only compounded the problem.

In addition, the nature of farming has undergone a major overhaul. For example, horticulture has emerged as the dominant segment of the agrarian economy. Horticulture production (268.9 million tonnes) surpassed foodgrain output (257 million tonnes) for the first time in 2012-13. Given its perishable nature and link to the price cycle, it is prone to volatile risk behaviour—and this can’t be addressed by short-term fiscal sops.

Second, the BJP has been unable to shut out the distractions served up by fringe groups of the party. Not only are they fodder for their political opponents, they tend to take the sheen off the progressive image that the party seeks to project. Uncontrolled, they can undermine the best efforts.

Third, it is one thing to launch a great initiative, quite another to guarantee implementation. To be fair to the NDA, though, one year is too short a time to gauge its ability to deliver. Just like the opposition is judging it by the electoral promises that were made, the NDA will be assessed on how it delivers on all the initiatives in the next four years.

In the final analysis, it is clear then that taken together, the glass is half full. A complete verdict—when India heads into its 17th general election—will, however, take another four years.

Author: Anil Padmanabhan

Source: Live Mint, May 24, 2015

How can Europe deal with its debt?

For a while, the storm seemed to have passed and the Eurozone entered a welcome tranquil period. Now, Greece has once again triggered the alarm and, while the financial and economic resilience of many member countries has improved, their political resilience has not. Greece is special in many ways and will have to be dealt with in a different way from the other member countries, but the renewed turbulence it has caused once again has highlighted that the construction of the monetary union remains incomplete.

In the inaugural report in CEPR’s new Monitoring the Eurozone series (Corsetti et al. 2015), the authors1 call for a reconsideration of the Eurozone’s architecture. The report is available to download here.

Important institutional steps have certainly been taken, but the weight of crisis-fighting has fallen heavily on the ECB, which increasingly faces the danger of becoming overburdened – while being criticised simultaneously by those who think it is doing too much and those who wish for more.

While the ECB is not the only central bank in danger of being overburdened, the political and institutional structure of the Eurozone makes the problem more complex and potentially divisive. Meanwhile, reforms at the European level have come to a standstill and all debates on increasing fiscal and political integration have remained moot. Some countries have implemented significant fiscal consolidation and structural reforms, but others have lagged.

Slow growth and the debt overhang

Fundamentally, the Eurozone remains vulnerable because growth is anaemic. A key reason behind this is a debt overhang, which discourages investment and consumption growth. Several countries are currently caught in a low-activity equilibrium involving weak demand, high unemployment and rising nonperforming loans. With a high outstanding debt stock, a new shock – whether external or within the Eurozone – could easily set off a new crisis.

The Eurosystem remains vulnerable to fiscal shocks since there is no room left for fiscal manoeuvre in a number of countries. In addition, the diabolic loop between banks and sovereigns is alive and well. While the Single Supervisory Mechanism and the Single Resolution Mechanism are critical to reversing financial fragmentation, they are not sufficient, particularly in the near and medium terms. High borrowing costs of banks and – by extension – corporates and households in peripheral countries are still related to continued sovereign risk.

In this setting, attempts to implement necessary reforms of the fiscal governance in the Eurozone are stillborn. The existing rules did not prevent countries from issuing too much debt, nor providing liberally excessive lending, as both private agents and the governments correctly anticipated that the Treaty was too weak to make the no-bailout clause credible. Under a credible no-bailout clause, correct pricing of risk should have deterred excessive debt accumulation ex ante.

This did not happen. By now, all the potential beneficial effects of deterrence are long gone. In the present situation, with debt levels already very large and a still developing and untested institutional framework to protect countries from adverse spillovers, debt restructuring involving the private sector is not an attractive option. All that is left are the adverse ex post consequences of overly large stocks of private, but especially public, debt, including the vulnerability to runs. This is why, in the present circumstances, the difficult inheritance of the recent past is bound to frustrate and undermine fiscal governance reform capable of reining in moral hazard. Any hope of proceeding from here will necessarily require a change in the initial condition, to be brought about with a courageous and convincing Eurozone political initiative, to back a technically well-designed, sizeable reduction in existing debt levels.

Three proposals

The report, A New Start for the Eurozone: Dealing with Debt, focus on three issues because they are important and they can be addressed without a fully-fledged fiscal federation or changes to the Treaty:

1. A one-time debt stock operation to rapidly reduce sovereign debt, particularly in the highly indebted peripheral countries. The authors offer a menu of options, one of which is a debt buyback through the commitment of future revenues, which could include seigniorage, VAT or a wealth (transfer) tax. This does not involve any redistribution across members of the currency union, but it would not be sufficient to eliminate the overhang. Therefore, they discuss a number of other choices, including a European solidarity tax with some limited redistribution across countries and ‘debt-equity’ exchange with GDP-indexed bonds.
2. A strengthened sovereign lending framework for the ESM, which both creates strong market-based incentives to avoid excessive debt levels in the future and makes future debt restructuring – should it become necessary – less painful than is currently the case.
3. A set of regulatory changes that discourage and limit the exposure of banks to sovereign debt, particularly that of their own sovereign. This should be complemented by the creation of a European synthetic bond that does not require mutualisation, but would constitute a safe asset and could facilitate unconventional monetary policies by the ECB.

Certainly, the goal is ambitious. The proposals aim to kill, with one stone, the three birds of enforcing long-run fiscal discipline, dealing with the legacy debt overhang and breaking the sovereign bank loop.

This would require a concerted effort and significant investment of political capital, which may only become available if the fragility of the present situation becomes apparent. However, the solutions to these three problems are strongly complementary and would generate large welfare improvements for Eurozone citizens if implemented jointly. Indeed, the authors stress that the package proposed should not be unbundled and nor should the implementation be partial.

Source: Article by Richard Baldwin, World Economic Forum (April 16 2015)

Times of India: Farming the farmer: By tying peasants to land, political parties propagate an insidious new caste system

The moment a budget is presented in Parliament or assemblies, it’s standard theatre for opposition members to rush out and denounce it as anti-poor or anti-farmer. They paint the government to be representing corporates, intent only on selling farmers’ land to industries at a throwaway price. They demand imposition of more and more taxes on the rich and distribution of these to the poor.

The government also comes forward with the claim of presenting a pro-poor, pro-farmer budget followed by a laundry list of freebies provided for the poor. The opposition claims ‘rich are getting richer and poor poorer’.

All these suggest that budgets should be prepared solely for the poor. The middle class or rich do not exist, even if they do nothing need be done for them. Everything must be done for the poor because they vote in large numbers.

So, is poverty a virtue? Does one commit a crime by earning well? ‘Industry’ is presented as a dirty word. The overwhelming perception is that any industrialist sets up industry for the exploitation of labour, society and farmers. He is therefore undeserving of any mercy. The more merciless the government can be towards the corporate, the more popular it supposedly becomes.

‘Profit’ too is a dirty word, but unless the industrialist earns a good profit why should he set up any industry? There is no need for him to make the effort, overcoming a myriad governmental and societal obstacles.

There is not a single chief minister or prime minister in independent India who has not made untiring efforts to draw industry to his domain. Even the very pro-poor, pro-farmer Left Front government in West Bengal had to do so, at the risk of losing power. And they all do it to eradicate poverty. To create jobs and employment. To increase per capita income. To improve people’s standard of living.

Most farmers approach politicians, MPs, MLAs, ministers to get a job for their wards in industry, not in the farming sector. Because there is no profit in agriculture. While this is the reality on one side, on the other farmers are incited to resist when industry comes.

By improvement of the standard of living of the poor we mean converting an earthen house to pucca, provisioning a washing machine, a refrigerator or even an air conditioner and a two wheeler.

These rescue the women from the drudgery of washing clothes; prevent wastage of vegetables and other food items; provide more comfort leading to increase in efficiency and some leisure. And we require electricity to run them. Without industry who would provide the cement, steel, pipes, power needed for all these accessories to a decent standard of living?

Land acquisition is now encountering stiff resistance even for roads, irrigation, power generation, atomic energy and defence projects. But during the 67 years of Independence, all the cities and towns of India have expanded enormously all around, essentially on farmland. And farmers have often willingly sold their land for a good price.

Around Sanand in Gujarat, where the Tatas set up their Nano car manufacturing facility after being booted out from Singur in Bengal, international automobile companies such as Peugeot of France, the US General Motors and Suzuki of Japan have developed their factories by purchasing farmlands. The farmers losing land have told media that they haven’t seen as much money in generations as they are doing now, enabling them to get rid of indebtedness for the first time. Other land owners demand their land be sold.

So, should a farmer remain tied to farming for generations? Can’t he be allowed to shift occupation to get rid of poverty?

It sounds satisfying to say that while the rich are getting richer the poor are getting poorer. But are the poor really getting poorer in a liberalised economy? Planning Commission estimates show 22% to be below the poverty line two years back, compared to 37.2% a decade back. In most states the actual land owner has shifted to urban areas for a better lifestyle, farm labourers and share croppers are the real land owners now. They, too, have raised their standard of living to an extent.

In today’s globalised world merit is the main criterion. The more efficient or skilled one is, the more prosperous one grows. Today’s liberal democracies provide equal opportunity to all, which hasn’t happened in history before. Therefore, ‘capitalist’ and ‘industry’ should not be dirty words.

All capitalist states have turned into welfare states. They make the poor more competitive through capacity building, teaching them to fish rather than simply distributing fish. The Indian government should not aim to be ‘mai-baap’, infantilising people and making them depend on it for everything. The citizen must not be rendered a passive fatalist.

Rather, he must be taught to dream so that the dream can materialise one day. He must think, poverty is a curse. He must make every effort to get rid of it. He must not remain a beggar for government doles. Instead, the state should remove all hurdles to his becoming competitive in today’s economy.

Source: M A Kharabela Swain (The writer is a former MP from Odisha) - Times of India, April 23rd, 2015