Home to one-third of the world’s population, India and China adopted similar development strategies prior to adopting a market economy. While China’s first steps were taken in 1970s, India’s piecemeal reforms were launched in early 1980s. The 1990s saw an acceleration in these reforms due to the arrival of the WTO in 1995. While India was a founding member of the WTO, China made hectic efforts to join it in 2001. Today, both the countries are the cynosure of all eyes in the world: China has become the factory of the world due to cheap manufactures, and India performing the back office role for the rich world. As a result, there is increasing heat from rich countries, stoked by protectionist forces. Nevertheless, both China and India see synergies in the IT sector i.e., Chinese hardware offering a partnership to Indian software.

The possibility of such a relationship extends to hundreds of others goods being made by either country. No wonder then that bilateral trade between India and China has grown a huge amount just in the last decade: from $1 billion to $18.7 billion. Commerce minister Kamal Nath believes that this will double by the end of this decade.

Together, the two countries seem set to consign the ghost of 1962 to the dustbin, and follow Deng Xiaoping’s advice: “Intractable issues should be kept aside and progress should be made on other fronts”. Such a regional peace can transcend into better trade and economic ties, from which both India and China can gain. Such gains generate the confidence and trust to tackle global issues as well. The WTO is another platform where both China and India, along with several other countries, are pushing an agenda to reform the distorted agriculture subsidy regime in the rich countries. The agenda is not moving, but the alliance is also not weakening.

China and India (or Chindia, as some commentators will have it) will continue to plod in a partnership mode through both bilateral and multilateral issues and third country settings. Such a partnership will be based on a healthy mix of complementarity, competition and some amount of conflict as well. Competition in the area of tradeables is likely to heat up. This can be in the area of manufactures, where India is slowly moving up. In the context of WTO, both are being targeted with non-tariff barriers, such as labour standards. This is one area, where both can dig their heels in at the WTO to stop the same being mainstreamed, as environment has already been done.

One area of conflict arises here, when numbers show that India is now a major user of anti-dumping provisions, while China is facing majority of antidumping actions. This will require some attention by India’s policy makers to see that it doesn’t cause harm to our closer economic cooperative agenda.

The WTO is one example of complementarity. For China, it does not matter if it has to maintain a low profile, even if India (along with Brazil) is at the vanguard of the G-20 alliance at the WTO. The balance of power is shifting. On the other hand, it is just not the rich countries driving the global economy. China and India are now also in the same league. This has some reverberations in international policy making circles, such as in the IMF. Discussions are on to change the voting powers to reflect the new politic; how quickly this will happen is not known, but it will happen sooner than later.

Growing economies need a larger amount of energy than before. This is another area where both China and India have adopted a cooperation mode. In the area of oil, since 2004, Indian firms had faced competition from Chinese firms. In three cases, Indian firms were outbid by their Chinese counterparts: Angola, Kazakhstan and Equador. The first cooperative venture succeeded in Syria, and more are likely to follow. Wisdom has prevailed over myopia.

Published: The NEWS, Pakistan, May 28, 2006
By Pradeep S Mehta and N C Pahariya

"A Free Trade Union, comprising the whole of Central, Eastern and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt and India, might do as much for the peace and prosperity of the world as the League of Nations itself." John Maynard Keynes, 1919

Trade and commerce have been the most effective way of establishing peace between rival nations. History offers great many examples to support this viewpoint.

The Second World War witnessed the worst enmity between the Allied forces led by Great Britain and the United States, on the one hand, and the Axis powers, led by Germany, on the other. It took several decades after the war to mend relations between the people of these countries. But as soon as the European Union was formed, the situation started changing dramatically. The union gave rise to higher levels of economic well being resulting from enhanced economic cooperation and was instrumental in reducing the enmities and the memories of the atrocities of the World War II in the minds of most people especially the next generation that came of age by the 1970s.

Famous economist Wilfred Pareto (1889) wrote, "customs unions and other systems of closer commercial relations (could serve) as means to the improvement of political relations and the maintenance of peace".

History provides ample evidence that no neighbouring countries have ever survived and progressed on prolonged belligerent relations. The drive for economic integration often begins with political objectives. The newly established democracies of the Southern Cone -- following the example of France and Germany which laid the foundation stone of EU in 1950s -- formed Mercosur in the mid-1980s hoping to dampen traditional military hostility between major regional powers: Argentina and Brazil. Southern African Development Community (SADC) originated in the 1980s as a coalition opposed to apartheid in South Africa and has more recently turned to creating a free trade area. Some observers note that African customs unions and free trade areas are as active in conflict resolution as in trade liberalisation. Finally, many see relaxed tensions between India and Pakistan as the real payoff from the Safta agreement.

Regional Trade Agreements (RTAs) can also provide institutions and a forum for bargaining and negotiations to address tensions before they erupt into conflicts. European integration, Association of Southeast Asian Nations (Asean), and Mercosur are often used as venues for improving political-military relations.

Many current studies also point out that RTAs that expand trade flows appear to have a substantial dampening impact on conflict. Mansfield and Pevehouse in a 2000 study have attempted to identify empirically the role of RTAs in ameliorating conflict. They found that, on an average, the likelihood of the outbreak of a militarised interstate dispute declines by around 50 per cent if the states belong to the same RTA. Only RTAs that expand trade flows, however, appear to have a substantial impact on conflict. In Africa, for example, RTAs that address the management of cross-border resource issues (such as water) are more effective in reducing military conflict than other RTAs.

In a similar vein, the formation of South Asian Free Trade Area (Safta) between India and Pakistan along with five other South Asian nations (Bangladesh, Nepal, Bhutan, Maldives and Sri Lanka) may provide a life-time opportunity to forge sustained peaceful political and economic relations between the two nations based on mutual respect and cooperation much similar to what the European nations have developed under the umbrella of the EU.

But first a bit of history. South Asian Association for Regional Cooperation (Saarc) was formed by seven South Asian countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka) in 1985 for increasing political-economic cooperation. Over time, the economic focus of Saarc was gradually sharpened leading to the signing of the South Asian Preferential Trade Agreement (Sapta) in 1995. Nothing substantial happened for a lot of years but talks continued nevertheless, ultimately resulting in the signing of Safta in 2004. The Agreement came into force on January 1, 2006 and its implementation will begin on July 1, 2006.

This, however, does not mean that Safta has put an end to any trade-related problems in South Asia in general and between India and Pakistan in particular. Though it's heartening to see that the two countries are moving closer to each other, the pace at which these developments are taking place is extremely slow, sometimes not without reason. For instance, there are apprehensions in Pakistan that under free trade its economy will be swamped by a much larger Indian economy.

Though China too has a surplus in its trade balance with Pakistan, but somehow that is not seen as a problems. In the case of bilateral trade with India, Pakistan's response has been to stick to a positive list, which allows it to decide the opening of trade on item to item basis. This goes against the spirit of free trade agreements, where trade is generally allowed in all commodities other than those contained in a negative list of sensitive ones. Since others in Safta are following a negative-list approach, the success of the agreement will depend on Pakistan also coming on board.

Also, despite the fact that both India and Pakistan are the members of the World Trade Organization (WTO), only former has accorded the most favoured nation (MFN) status to the latter which has linked reciprocity to the Kashmir dispute between the two countries.

It will be futile, though, to expect Pakistan's political apprehensions or its fears of being swamped by a much larger Indian economy to disappear overnight. What we can hope for is that once Pakistan realises the benefits of increasing trade, its suspicions will recede.

A series of (successful) deals, may be molasses-for-tea deal or a sugar deal, should remove Pakistani fears of free trade. Furthermore, its willingness to expand the positive list to 1013 from existing 773 items is also a pointer to the right direction. A small one, perhaps, but a significant one nonetheless.

This article can also be viewed at:
URL: http://jang.com.pk/thenews/may2006-weekly/nos-28-05-2006/pol1.htm#4

Hauling up cement and oil cartels

Published: The Economic Times, May 23, 2006
By Pradeep S Mehta

While the sensex continues to take a big and unprecedented tumble, both cement and oil prices have been going north. A very peculiar situation, but what is the correlation.

Firstly, with the cement shares showing an improvement, the sensex had became a bit stable. Oil has not been a cause of the diving sensex. But, in future it will, and this is an area where the government can do little, unless it responds through some out of box thinking.

To tackle the cement issue, commerce and industry minister Kamal Nath cajoled and coaxed the cement cartel into lowering prices. What came out is but a consolation, that the manufacturers will offer a voluntary 5% discount on government purchases.

Admittedly, such advices are anachronistic with a modern liberalised economy, where the market forces determine the prices.

However, a modern liberalised economy doesn’t mean laissez faire. Therefore countries have competition and regulatory regimes to control restrictive and unfair business practices in the marketplace. In India, we are on the way to have a modern competition law, but when, is a million dollar question.

Probably world over, cement cartels have been hauled up and penalised where ever an effective competition regime exists. The situation in India is no different.

Cement industry has been unsuccessfully enquired into for possible cartelisation on few occasions under the extant competition law: the MRTP Act, 1969. Colluding firms do not record their agreements, which are always oral, and executed in good faith. On the other hand, courts do not accept evidence of implicit cartels based on parallel price movements.

One just has to look at the balance sheets of cement companies, whose prices have increased by almost 50% over the recent months, that they have been making far bigger profits than before.

In his parleys with the cement cartel, Mr Kamal Nath observed: “[l]imitless profiteering is not acceptable and that various studies conducted show that the increase in input prices is not commensurate with the extent of the cement price increase”.

The world’s largest cement company, Lafarge was fined by the EC in 2003 for participating in a cartel in the German cement market. In December 2002, the price of cement had fallen to an exceptionally low E£125 a tonne in Egypt. The drop had caused serious worry among the cement producers.

In response, almost all local cement producers met and set a price range for cement between E£167 and E£176 a tonne. There was an outcry, but no action could be taken as Egypt did not have a competition law. (Now it has one, which is under implementation). There are scores of such examples.

The suggested strategy of the government could be a wrong medicine for a recurring disease with associated side effects. Asking the Cement Manufacturers Association (CMA) to find measures to reduce the price is quite similar to the control era when government used to negotiate prices with them.

In fact the alleged collusive activities spearheaded by CMA could be a legacy of the erstwhile control regime, when CMA used to negotiate prices on behalf of its members.

Thus cement companies must behave responsibly in the interim while, the government must install a functional competition authority as soon as possible.

When our new competition regime becomes a reality, it could be expected to deal with the cement and hundreds of other cartels, but its ability to deal with the oil export cartel is rather remote.

At every possible competition event that I have participated in, people ask in absolute puzzlement about the Opec cartel and why governments cannot take action against it. The stock answer is that it is a sovereign act of governments and therefore another government cannot take action.

In the case of the cement cartel in India, when the government was unable to anything about it in the year 2000, the Builders Association of India launched a selective boycott, which succeeded.

This was not against any sovereign activity, but boycotts have been used successfully in many mercantile and political situations when the law fails. Our freedom movement is replete with such episodes. There is no sound reason that we cannot boycott oil on a symbolic basis, which will send a strong signal to oil exporters.

This article is not looking into the political economy of the oil industry, but is just about raising some issues, which have not been thought of so far. Not so long ago, former petroleum minister Mani Shankar Aiyer had floated the idea of forming a buyers’ cartel of net consuming countries, but that did not move far.

If India and China can jointly explore oil in third countries, I see no reason why they cannot join up to get better deals on oil purchases.

Everyone from IMF to ADB, and all the economic supremos in India, are crying hoarse on the possible deleterious effects of the oil fire, and how it will affect vulnerable economies adversely.

The Opec, in a passing-the-buck mode claims that it is toothless to tame high oil prices, because of supply-driven distortions in the face of a robust demand.

Opec could be sued for price-fixing in the US, if a radical bipartisan bill tabled in the US Congress is passed. The bill will also make oil company mergers in the US more difficult.

There are actually two intertwined issues here. First, that foreign crude oil producers are raising prices abnormally, and secondly that petroleum companies in the US have been reaping vulgar profits riding on the Opec action. What happens to the bill is yet to be seen, but the rationale behind the move is quite valid.

Like most jurisdictions, the new competition law in India has provisions for extra territorial jurisdiction, and it too can take on abusive cartel behaviour abroad. But when will the new law be implemented, and whether it will have the imagination to take on the Opec is a moot question.

After all, most foreign oil producers are government companies rather than the state itself. If most competition laws do not exempt government businesses from the purview of their competition law, I see no reason that competition authorities anywhere cannot sue oil companies abroad, whether in private or public sector. For this, we need a concerted global action.

This article can also be viewed at:
URL: http://economictimes.indiatimes.com/articleshow/1543086.cms

Amend the post office amendment bill

Published: The Financial Express, May 17, 2006
By Pradeep S Mehta

The Government of India (GoI) has drafted an amendment to the more than a century old Indian Post Office Act (1898). From the outset, a wide range of experts would agree on the necessity of introducing changes to this anachronistic bill. However, at this point the conformity ends and disputes begin. Surprisingly (or not), the debate in the recent past has been focused primarily on whether the Department of Post (DoP) should have the monopoly to carry all letters weighing less than 300 grammes; second, who ought to bear the burden of financing the Universal Service Obligation (USO); and third, the setting up of a postal regulator.

The GoI’s point of view is rather simplistic: India, as a member of the Universal Postal Union, has an obligation to provide mail services at affordable prices to the whole country, including far-flung rural areas that are commercially unviable. The government is using this as the main plank to argue for monopoly for the DoP in the less than 300 g segment and the setting up of a USO fund. On the surface, this proposal appears to do justice with the DoP. But do courier companies and the DoP compete for the same segment of the market?

The Express Industry Council of India (EICI) argues rightly that, “[c]ourier and express operators do not carry ordinary mails. They are not in competition with DoP for this business but do compete, head-on, for value-added services provided by Speed Post and Express Post.” Common sense suggests that customers who desire express service pay a significantly higher rate than they would do to the Posts, but use the latter for sending ordinary mail. Thus, in the current scenario when there is already segmentation of the market for postal services (ordinary mail vs express), the government should seek to preserve this, rather than create further segmentation.

Moreover, does the government have the ability to utilise these funds properly? A similar USO fund was set up in the telecom sector in 2002-03. However, of the Rs 10,753 crore collected by the GOI since 2002-03, almost two-thirds of it (Rs 7,189 crore) is lying unutilised, and this amount is likely to go up to Rs 25,000 crore in 2010. What is the government doing with all this unspent money, while so many rural areas are still without any telecom facility at all? Can we afford another fiasco?

• Postal dept and courier cos don’t compete for the same customer segment
• As for a USO Fund, will the government be able to utilise the money properly?
• But a postal regulator to oversee this industry is certainly needed

How will the DoP fund the mail services without curtailing the courier companies’ revenues, and whose services are vital for foreign companies as well as for various government departments?

Inherently, the answer lies in the postal department’s anachronistic management system. The fact is that the DoP already enjoys an advantageous position, i.e. a nationwide network. But it requires a bit of imagination for the DoP to reinvent itself and develop new niches. For example, Deutsche Post concludes that the US post delivers more than twice the average mail volume in Europe due to the payment collection services it renders to other agencies. In India, only governmental companies like BSNL allow the customer such an option. If the DoP is allowed to charge a small commission from private companies to permit citizens to pay their bills at the local post office, it can turn out to be a win-win situation for all parties.

A welcome step: it was recently reported that private cellular operators have struck a deal with the DoP to promote mobile services, especially in rural areas. Other similar avenues are already being explored in the non-mail services and have a huge potential in the growing Indian market. For e.g., insurance and other financial service providers are allowed to sell their products through post offices.

As for a postal regulator, there is an absolute need for it. Such a regulator should also look into the development aspect of the industry, which could include measures the DoP can take to cut losses and make profits.

While the government’s objective to serve rural and remote areas is benign, the strategy to attain this via the proposed amendments is a retrograde measure. We need to look at amendments to the 2006 amendment bill which will uphold the government’s commitment to place India’s economic progress first, rather than opportunistic interests.

This article can also be viewed at:
URL: http://www.financialexpress.com/fe_full_story.php?content_id=127302

New mantras of regional economic co-operation

Published: The Hindu Business Line, May 16, 2006
By N C Pahariya

India has drawn up an ambitious agenda for negotiating trade and economic cooperation agreements from countries in the Far East to those in the European Union and Latin America.

India has, of late, engaged in forming bilateral/regional economic co-operation in a variety of forms. In the past, India had adopted a very cautious approach to regionalism, and was engaged in only a few bilateral/regional initiatives, mainly through Preferential Trade Agreements (PTAs). Recognising that PTAs would continue to feature in world trade for a long time and with the intention of expanding its export market, India began concluding in principle agreements as a possible step towards Comprehensive Economic Co-operation Agreements (CECAs), which cover FTA in goods (zero Custom duty regime within a fixed time frame on items covering substantial trade, and a relatively small negative list of sensitive items with no or limited duty concessions), services, investments and identified areas of economic co-operation.

The new pillars
The trade agreements are the new pillars of India's economic diplomacy. Having realised that free trade pacts are a sine qua non for economic development, India has drawn an ambitious agenda for negotiating trade and economic cooperation agreements from countries in the Far East to those in Latin America and the European Union. The pacts will not only cover every country in the region spanning the Persian Gulf to the Malacca Straits but also Mauritius, Israel, Russia, Mongolia, Japan, China, South Korea, Afghanistan, Egypt, Chile, the South Asian Custom Union (SACU), the African Union, the Mercosur, the European Union and the Association of South-East Asian Nations (ASEAN).

The India-Thailand Framework Agreement has been signed. Negotiations on all aspects of the South Asia Free Trade Area (SAFTA) agreement concluded recently and the tariff liberalisation programme is scheduled to be implemented from July 1. Framework Agreement on Comprehensive Economic Cooperation between ASEAN and India, Framework Agreement for Bangladesh, India, Myanmar, Sri Lanka and Thailand Economic Cooperation (BIMSTEC) FTA on goods, services and investment are under negotiation. India-China, India-Japan, and India-South Korea joint study groups have also been set-up.

Both developed and developing countries see regional economic integration as a means of strengthening their international competitiveness and as an engine of economic growth. In a lecture in November, the Prime Minister, Dr Manmohan Singh, said, "The new-found interest in regional arrangements is based not just on trade promotion but on exploiting the potential of efficiency-seeking restructuring of industry on a pan-regional basis."

Preferential trade pacts, preferential trade agreements and regional unions now account for over 50 per cent of the world trade. In the NAFTA, for example, trade among member-countries jumped from $289 billion in 1993 to $689 billion in 2004. Experts also argue that India's share in world trade, although growing, still languishes at 0.8-0.9 per cent, while countries such as South Korea and Singapore that are engaged in some form of regional grouping have a share of over two per cent.

Looking at our own situation one finds that, India's free trade agreement with Sri Lanka saw its exports to the island nation jump from $500 million in 2000-01 to $1.3 billion in 2003-04. Similarly, India has emerged as the third largest source of foreign capital for Sri Lanka against a negligible share a few years ago. A similar agreement with Thailand provides for a free trade area in goods by 2010 and negotiations are on to add more items to the list of 82 that have already been identified for tariff reduction in a phased manner.

"The India-Thailand free trade agreement should lead to a 20 per cent jump in exports to India, which is a big market for us," said Mr Uraiwan Anukul, Director of Thailand's Export Trade Centre. "So far, we have been focusing on countries like Japan and the US and the EU. Now we are encouraging Thai companies to look to new markets in China, India, Africa and the Middle East," said Mr Anukul, reflecting a similar mood among the Indian policy-makers.

The Commerce Minister, Mr Kamal Nath, has been reported as saying that, "economic cooperation agreements will be building blocks and drivers of global trade. The multilateral system cannot drive South-South trade."

The common denominator
Economic commentators, say, a common market in South Asia with complete withdrawal of trade barriers is key to the region's development, since poverty is a common denominator here. Proliferation of PTAs is the clearest evidence of Asian countries' desire to forge closer economic relationships. The growing importance of CECA's indicates that such agreements are becoming deeper, extending to areas beyond just tariff reduction; intra-regional trade and investment require building up of shared infrastructure.

Many Asian countries have joined together to develop cross-border infrastructure to lay the foundations for closer trading relationships and increased connectivity . The Greater Mekong Sub region is quite advanced in the endeavour. Similar initiatives are underway in South Asia and in Central Asia, with exciting prospects for future development. The spirit of enhanced monetary cooperation in Asia is evidence from initiatives such as the Chiang Mai Initiative and the Asian Bond Fund having major potential for financing regional investments.

This article can also be viewed at:
URL: http://www.thehindubusinessline.com/2006/05/16/stories/2006051600411000.htm

Published: The Financial Express, May 08, 2006
By Shrawan Nigam

Not a day passes when we do not hear India’s petroleum PSUs bemoaning the losses they incur by holding the price line for petrol, diesel, kerosene and LPG, in spite of rising international prices of crude oil. Yet in the same sector, Reliance Industries Ltd announced that the profit margin of the group had been lifted by an unprecedented increase in the refinery profit margin, of $10.3 a barrel, in 2005-06. Are the oil PSUs hemorrhaging or are they trying to pull wool over our eyes?

The Rangarajan committee report on pricing and taxation of petroleum products had estimated that petro products get a protection level of 40%. It recommended the customs duty on petroleum products be reduced. Yet, the Budget came and went with no reduction in customs duty on petrol and diesel, and the oil PSUs continue to be provided with 40% protection for their value addition. It is this loss of super-normal profits that the oil PSUs cry about, not real losses. As there is almost no import of diesel or petrol, government revenues would not be affected even if import duty on them were abolished.

The continuation of the high import duty on diesel and petrol is surprising, as for all other industrial products it was reduced to a maximum of 12.5%. The NCAER’s latest quarterly economic update, released in April 2006, has estimated GDP to grow at 7.7% in 2006-07, a drop from 8.1% in 2005-06. This factors in an increase of 8% in the price of domestic crude and recommends an early increase in the price of petro products. If GDP is likely to decline, should the government raise the prices of diesel and petrol, an action that could make GDP decline steeper? Are petrol and diesel under-priced? If it were so, could Reliance Industries have earned high profit margins from their refinery operations?

The problem is in the methodology adopted for fixing retail prices. Domestic prices are determined on import parity based pricing, in which the notional import duty, notional sea transport cost and notional port handling costs are added, though these are not incurred. The oil companies have become so used to these unearned profits that they do not want the pricing to be based on costs.

• The method of fixing retail prices based on import parity is irrational
• The lowering of customs duty to 5% should be done without more delay
• Our economy pays a high penalty for not allowing market-based pricing

Energy is the driving force for economic growth. Public policy should ensure no scope for over-pricing energy products, as that retards growth. There is no reason why the customs duty rate on petroleum products cannot be reduced now. A lowering of the duty to 5%, the same as for crude, would also promote competition, as it would allow private marketers to recommence operations. The opening of the Indian economy in the 1990s was followed by policy announcements to allow freedom in marketing of petroleum products. Private sector marketing of LPG was initiated and, more recently, of petrol and diesel. Many private players entered, but due to the implicit subsidy, the prices prevailing ensured private marketers could not run profitable operations.

The skewed pricing of petro products not only affects tax revenues, but also leads to misallocation of resources through the economy. The additional investments that could have been made are lost, with the jobs this extra investment would have generated. The development of non-conventional energy sources is deferred because these are not commercially viable in the face of low-priced petroleum products. Moreover, the prices of petroleum products, by not reflecting their scarcity value, lead to wasteful use. The result is that energy efficiency in India is among the lowest in the world.

The government-dictated retail prices are adversely affecting private oil marketing companies. Reliance Industries has sought a level playing field with the PSEs by demanding that private sector marketers also be given a subsidy equal to what the PSEs implicitly get. An essential element of competition is the ability of companies to determine prices based on market conditions. For this to happen, the Administered Pricing Mechanism needs to be truly buried.

There is a silver lining: the Petroleum and Natural Gas Regulatory Board Bill, introduced in Parliament in December 2005, is expected to be passed soon. It is expected that as with other regulatory bodies, the principles of competition will be enforced by the Board.

This article can also be viewed at:
URL: http://www.financialexpress.com/fe_full_story.php?content_id=126263

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