Sprawling Metropolis seeks Infrastructure

The State of Karnataka, home to India’s tech hub Bangalore, is considering a policy initiative that could transform the unforgiving metropolis and surrounding areas into a livable urban setting, reports the Times of India. Provided the plan is executed in a manner consistent with its guiding principles, it could prove to be a useful development model for India’s otherwise anemically funded state governments that face swelling urban populations.  Bangalore recently implemented this model with notable success to renovate two of its main arteries, Bannerghatta Road and Airport Road.

By providing incentives to private developers, such as long-term advertising rights or concessional rates on property, officials hope that corporate stakeholders in the city can shoulder the infrastructure burden.  The plan also provides for a “third-party body” to oversee the work’s progress. While this approach is certainly tried and tested in its ability to carry a large project through to completion, whether it will make Bangalore a better planned city is another question. Because money will flow to areas on a project-by-project basis and will be predicated on the bottom-line of major corporations, there is little hope for a unified web of infrastructure that ties the city together. Instead, the piecemeal approach may entail high long-term maintenance costs when, for e.g. the population relying on the newly constructed roads and bridges outpaces the rate of development. The sustained success of these projects, and consequently growth in economy, will depend in large part on how the government provides for infrastructure maintenance and coordination.

Livemint.com reported that India came in second to China in the amount of private equity investments made in the first half of 2007. However, the average deal size in India was larger than China’s, $15.2 million as compared to $14.5 million. At least in the foreseeable future, this trend will continue to grow in favor of India if the public-private model ultimately benefits the businesses that took the plunge.

Towards Uniform Accounting…Can India Catch Up?

The WSJ reported, on June 21st, that the SEC unanimously voted to propose allowing non-U.S.-based companies to file financials using international financial reporting standards (IFRS) as set by the International Accounting Standards Board without reconciling the differences to U.S. generally accepted accounting principles (GAAP). This move is yet another indication from the SEC that it has duly noted the “flight of capital” from America’s markets to foreign exchanges, particularly London and Asia. The proposal is now open for public comment for 75 days at which point the SEC will deliberate the adoption once more and reach a final decision.

What this means for Indian based companies and India’s policymakers is, act now: 1) companies should voluntarily adopt IFRS as a routine method of reporting 2) the federal government should nationally adopt IFRS as the preferred method of reporting in addition to reforms in other areas of corporate governance with an aim towards making India’s markets more inviting.

With respect to some of India’s larger companies such as Infosys and HDFC Bank, the cause for urgency is less pronounced given that they have voluntarily adopted improved standards of accounting and corporate governance. In fact, the Asian Corporate Governance Association (ACGA) noted in its “country snapshot” that India is the only country in the region where the business sector, rather than the government, initiated corporate governance reform in an effort to attract foreign direct investments and increase the companies’ competitiveness, visibility and level of respect. However, the ACGA emphasized significant weaknesses in India’s regulatory infrastructure which fell into three categories: 1) lack of emphasis on enforcement and oversight 2) weak or non-existent protection of shareholders’ rights 3) a general pattern of corruption and aversion to inter-agency cooperation that characterizes Indian governance.

A leading expert on corporate governance and a professor of Finance and Control at the Indian Institute of Management (IIM), Mr. R. Narayanaswamy, echoed these concerns in an interview with The Hindu’s “Business Line“.  One natural consequence arising from a lack of cooperation is what he noted as a multiplicity of accounting standards arising from several competing bodies such as the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI) and the Institute of Chartered Accountants of India (ICAI), to name a few. Narayanaswamy is a strong proponent of adopting uniform international standards, strengthening domestic regulatory agencies such as SEBI and the Ministry of Company Affairs (MCA), and streamling their enforcement and oversight functions.

“‘I doubt if anyone is monitoring compliance. Both the SEBI and the MCA do not have the kind of technical staff they need.’”

In addition to its weak regulatory structure, India’s laws protecting shareholders’ rights are notably weaker than their American or even Asian counterparts. For example, as it stands now, shareholders are unable to sue their company’s management derivatively, on their company’s behalf for reckless management practices. Strengthening this area of the law is also critical to ensuring growth in India’s capital markets. Narayanaswamy cites the SEC of the U.S. as a strong model to emulate although he worries that future abuses by companies may jeopardize trust in the capital markets and lead to “horrible rule-based accounting standards.” In the States, Sarbanes-Oxley is viewed by many as exactly what Narayanaswamy fears may befall Indian companies.

For its part, the SEC is exploring ways for U.S. companies to report under international accounting standards by giving them a choice between U.S. GAAP and the IFRS. Critics worry this may provoke companies to cherry-pick the kind of reporting that casts their business in the most favorable light but proponents maintain that this will be a necessary step towards a convergence of global accounting standards. Whatever course the SEC may chart, prudence counsels Indian companies to heavily invest in tightening up their reporting mechanisms in accordance with IFRS regardless of whether Indian law requires it. Prudence also counsels New Delhi to take this latest move by the SEC as a signal to invigorate its own efforts towards reform. Promulgating stronger, across-the-board standards with effective oversight and enforcement will not only make India’s markets attractive for foreign investors but will increase faith in Indian-based companies (big and small) overseas, thereby making it easier for them to list in foreign exchanges for additional capital generation.

Large Corporations Issue Report on How to Help Globalization’s “Losers”

The WSJ reported today that the Financial Services Forum (FSF), a non-profit/non-partisan group made up of CEOs of the world’s largest financial-services corporations, offered suggestions on what to do about workers “on the losing end of globalization”. Although similar concerns were raised by the OECD (and reported by the Wire here), the WSJ notes that the FSF report “marks one of the first times top business leaders have sought to weigh in collectively in the globalization debate”. Many of the companies represented within the FSF are worried that a public backlash against globalization could manifest itself in protectionist legislation and “the banking, investment and other CEOs who belong to the group have consistently cited protectionism as the leading threat to continued U.S. and global economic growth.”

The members of the FSF, including Lloyd Blankfein (CEO of Goldman Sachs) Stan O’Neal (CEO of Merrill Lynch), and Kenneth Lewis (CEO of Bank of America), noted in a statement that:

“Our open-trade and investment policies have significantly enhanced the economic well-being of American citizens, although not everyone has shared equally in the benefits of globalization.”

Along with this, the report offered the following positive statistics:

• Living standards in the US are $1 trillion higher per year because of globalization
  • This translates to a gain of $10,000 a year per US household
• If trade and investment is allowed to continue without restriction, annual US income could be $500 billion higher, with an additional gain of $5,000 a year per household

These developments were contrasted by evidence that:

• From the mid 1970s to late 1990s, the income growth of less-skilled workers in the US lagged behind “economy-wide productivity gains” as well as the income growth of “their more skilled counterparts”
• Since 2000 “the large majority of American workers have seen poor income growth”

In addressing these concerns, the report offered a wide range of policy suggestions. The WSJ noted:

“Its ideas range from the familiar — such as raising taxes on the wealthy to address income disparities — to the novel, such as insuring communities against “sudden economic dislocation” caused by a plant shutdown or other factors.”

Notable among these recommendations are the following:

• Merge all worker assistance (unemployment, wage insurance, and trade-adjustment assistance) into a single program
• Increase the progressivity of the overall tax system and ensure broader sharing of the benefits of America’s participation in the global economy
  • This would include elimination of the payroll tax for those earning less than the national average
• Policymakers should begin knitting individual free trade agreements into the basis for wider agreements
• Congress should significantly expand the resources available for enforcement of U.S. trade agreements
• Congress should limit the scope of inward investment reviews by the Committee on Foreign Investment in the United States.

Another area of importance touched upon is “one of the most frequently talked-about prescriptions for success in a global economy — improving workers’ skills through continued education.” Although the three economists who authored the report agree that education can have a role in reducing negative impacts of globalization in the future, greater training is deemed in adequate in its ability to address problems plaguing low-skilled Americans right now. Illustrating this, one of the authors, former Bush Administration economist and current Dartmouth College professor Matthew Slaughter, noted that “it has taken 60 years for the percentage of Americans with college degrees to grow to 30% from 6%.”

Apparently keen to see government consideration of its suggestions, the WSJ reports that the paper’s authors met with legislators this past Friday. However, the article cautions that “many of the paper’s recommendations are likely to be politically difficult to achieve.”

US Official Rips India for Failure of Trade Talks

As the Wire reported below, recent trade talks between the US, EU, India, and Brazil ended in failure as participants were unable to reach any comprehensive agreement. The dispute centered on the developing countries demands for reduced farm subsidies in the US and EU combined with the West’s insistence on greater access to domestic markets in India and Brazil.

In the wake of the Potsdam conference, senior negotiator and US Trade Representative Susan Schwab (pictured) indicated in an interview that she was “surprised” by India and Brazil’s “rigid negotiating positions”. Schwab felt that negotiators from these countries had been much more willing to compromise in previous negotiation sessions. Schwab speculated that the major reason behind this shift could be fears over trade deficits with China. Currently, India has a small trade surplus with China but there are concerns this may eventually become a deficit. In the interview she noted:

“There has been some backtracking [by developing countries] in the last two months because of concerns about China. Another factor is the sense that some of the more protectionist developing countries could hide behind the differences of others. It was only when the EU and the US made progress on agriculture that their positions were smoked out. They [Brazil and India] came to Potsdam with very rigid positions.”

Schwab also accused Brazil and India of selling out to other developing countries in order to find a common negotiation position, making it harder for their negotiators to be flexible when presented with offers by the US and EU:

“What you have seen is they spend huge amounts of time and political capital fighting it out internally and then they preclude their leaders [Brazil and India] from taking different positions – at Potsdam, Brazil and India were taking the same positions as they had almost two years ago.”

Although she expressed her disappointment regarding India and Brazil’s mutual inability to “provide leadership to the developing world” she was most critical of India, which many have accused of coming to the trade talks “expecting the negotiations to fail”. According to Schwab, India was able to get Brazil to choose “[developing country] solidarity over its economic interests”.

Photo of Susan Schwab from USTR

Pointing Fingers in Potsdam: Trade Talks Collapse

Trade talks between the US, EU, Brazil, and India ended today with each side blaming the other for the lack of progress. The WSJ reports that although the three-day event did not involve the participation of all 150 WTO members, the inability of the organization’s four most powerful parties to reach a compromise makes more a comprehensive trade agreement much more unlikely.

As with the Doha Round of trade talks, which began in 2001, the major area of disagreement on eliminating barriers to trade focuses on farm subsidies in industrialized nations and closed markets in developing countries.

For the part of developing countries, EU Trade Commissioner Peter Mandelson placed the blame on India and Brazil noting,

“It emerged from the discussion … that we would not be able to point to any substantive or commercially meaningful changes in the tariffs of the emerging economies, as a reasonable return on what we are paying into the round.”

Echoing this, President Bush accused India and Brazil of being more concerned with their own interests than helping more impoverished countries adding through a spokesman,

“[that he was] disappointed that certain countries are blocking an opportunity to expand trade and large economies like Brazil and India should not stand in the way of progress for smaller, poor developing nations.”

In response, Brazil Foreign Minister Celso Amorim and Indian Commerce Minister Kamal Nath blamed the US and EU for the talks’ collapse saying,

“It was useless to continue the discussion given what was on the table … This round is about trade flows from developing countries to developed countries, not the other way round [but the West was only interested in] perpetuation of the inequalities in global trade.”

The insistence of Brazil and India that farm tariffs be lowered has been problematic, particularly for the EU, which protects its farmers through high tariffs on agricultural imports. Similar difficulties have resulted from calls for the US to reduce its level of farm subsidies. Developing countries argue that both these policies result in a lower price for agricultural goods on the international market, negatively impacting their ability to achieve economic growth through greater exports.

Although officials reported that the EU had exhibited a degree of flexibility on the farm tariff issue, increasing a tariff cut on protected products from 60% (last offered in 2005) to 70%, India was unwilling to open its agricultural sector to greater foreign competition. Both Brazil and India offered significantly less market access than the US and EU had hoped for. Addressing this concern, US Agricultural Secretary Mike Johanns has noted that India’s proposal that 20% of its existing farm tariffs be left untouched would result in “an outcome [that] would shield up to 95% of what India imports from cuts”.

Although Foreign Minister Amorim described the failure as a definite “setback”, US Trade Representative Susan Schwab (pictured) noted that the US was not ready to “give up on negotiations”.

Picture of WTO OMC: ©AFP/File – Fabrice Coffrini

Picture of Susan Schwab: ©AFP/File – Eric Piermont

“Reverse Outsourcing”

Sure there are one-way streets but no one can guarantee they’ll point the same way forever. So it is with outsourcing and in case Obama or any other presidential candidate wants to make a stop at the “trash-foreign-workforces-station” on their campaign trail, it would behoove them to examine job-flow trends past and present to reach a sound conclusion. In a June 19th article, The Hindustan Times quoted analyst John McCarthy of Forrester Research Inc (FORR) as saying, “The Indians are doing to the world’s IT processes what the Japanese did to manufacturing.” Indian companies such as Wipro, Infosys and the largest offshoring firm, Tata Consultancy Services (TCS) are increasingly hiring American workers in cities such as Austin, TX and Atlanta, GA where there are significant tech talent pools.

The companies cited several business considerations that justified the recent trend; 1) the need to hire local talent in order to satisfy local customers 2) the relative increased cost in shipping Indian workers to the States on H-1B foreign worker visas and providing temporary housing 3) the recent appreciation of the Rupee made hiring Americans cheaper and prospectively, due to stiff competition in India, tech-sector wages there are projected to increase 12 to 15% a year.

In sum, the Hindustan reports that Indian firms are poised to become “major employers in the U.S. economy.” Consider this in light of Nick’s recent posting on the OECD’s employment outlook report. The report expressed reservations about globalization’s adverse impact on low-wage workers in developed economies. If the idea is to keep low-wage workers at low-wage then globilization is certainly a serious policy concern for the OECD’s 30 members. On the other hand, if the idea is to move human resources to a higher state of utility and raise the low-wage sector’s standard of living, the serious policy concern should be how OECD’s member states can begin to satisfy the growing demand for skilled-labor that companies like Wipro, Infosys and TCS will inevitably present.

Economic Losers: OECD Concerned about Globalization Backlash

In its annual Employment Outlook report issued today, the Organization for Economic Cooperation and Development (OECD), a group comprised of 30 developed countries maintaining free market economies and democratic politcal processes, indicated that increasing public concern over the negative impacts of globalization could “undermine”, as the WSJ put it, “politicians’ support for cross-border trade and investment”.

While the protectionist trend in American politics is well-documented as of late, people like Treasury Secretary Henry M. Paulson Jr. have been successful in forestalling anti-trade legislation like a bill proposed by Senators Chuck Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) that would levy a 27.5% tariff on all imports from China. Despite the efforts of Secretary Paulson, the OECD reports that the Lou Dobbs of the world will no doubt be encouraged by data showing that competition with developing countries like China and India is impacting labor markets in industrialized economies like the US and Europe, particularly for low-wage workers.

Again, the notion that certain segments of industrialized economies are being squeezed by lower-cost foreign labor is both consistent with accepted economic theory and hardly news. However, it is remarkable that the OECD, traditionally a “bastion of economic orthodoxy, which champions open, competitive markets” has expressed reservations about some of globalization’s impacts.

On the whole, the OECD reaffirms its belief that all nations are better off with freer trade, even economies with workers that may be facing depressed wages. Calling the “vulnerability” of these workers a significant concern, the group maintains that other factors, like the spread of computer technology allowing certain jobs to be more easily outsourced, plays a greater role in increasing income inequality than trade alone.

Cyber Mangoes

  Mangoes of all shapes, sizes and flavors, born and raised in various parts of South India, will be available for online-trading beginning this month, according to a report in the June 15th edition of the Hindu. The Safal National Exchange of India (SNX), which specializes in providing an online marketplace for perishable commodities, matches seller-farmers with prospective buyers allowing farmers to get a fair return on their produce. SNX also provides a counter-party guarantee with respect to all trades as well as arranging for quality certification, warehousing and logistics.

What’s exciting for any mango enthusiast who is familiar with India’s mangoes is that now, they will be more accessible to buyers across the globe in the myriad species that delight Indians every year.  No less important is the fact that the conscientious buyer can rest easy knowing that the farmers are getting a fair and competitive price. The India Times reported that the first day of trading saw 24 tons of mangoes traded followed by 16 tons on the next day. The mechanics are quite similar to any online trading system. Farmers set prices according to prevailing market conditions and the prices are displayed on the trading portal. Once a buyer finds a seller, the trade is complete and farmers receive their money within two days of the trade. The delivery deadline is set for the end of the following trading day. SNX seems to impose a 10% penalty for failure to execute on either the buyer or seller’s part.

What will be interesting to monitor is when online mango trading takes off on a global scale and foreign buyers seek enforcement of any unfulfilled contracts. SNX’s growth as a self-regulated organization with effective remedial procedures is vital to its sustained success.

The Growth Model Mirage

The Hindu, one of India’s leading newspapers, in a June 12th article reported that India’s industrial output “surged” 13.6 per cent year-on-year growth in April this year, compared to 9.9 per cent rise in the same month last year. Paired with this optimistic retrospective, the newspaper also reported that India is expected to witness continued growth in the job market with a net employment outlook of 39 % for the third quarter. The “Manpower Outlook Survey” predicts that South India specifically will see a 44% increase in employment with growth in sectors such as finance, insurance, real estate, manufacturing, mining, construction, public administration, education, services, transportation and retail.

While the employment outlook is certainly encouraging, how the growth is spread across sectors in the months to come will determine whether progress was made where it was most needed. Another article in The Hindu published January 9th, 2007, “Growth and employment in organized Industry”, analyzing the relationship between Indian industrial growth and employment over roughly the past decade, presented a strong case for skepticism when reports tout the country’s booming industrial sector. The major points it addressed were the following:

·        When India’s economy began liberalizing in the early 90’s, opening itself to more trade, it experienced a sharp increase in rates of industrial growth. The authors note however, that the rate of growth over the next decade displayed greater instability than in previous periods because 1) an open market led to a sudden increase “import intensive manufactured goods” that often depend on domestic demand for foreign items and 2) the “import intensive goods” are typically “consumer durables” such as cars, refrigerators, etc. that often depend on extensions of consumer credit for their sales. Therefore, confidence of both lenders and borrowers becomes crucial to the stability of such an economy. So it follows that manufacturing growth prospectively depends on “highly speculative factors”.

·        Aggregate employment in the manufacturing sector, in absolute terms has been on a steady decline since the mid-nineties. The authors note that the same inverse relationship between high output growth and low employment growth is apparent in China during its years of economic liberalization. They proffer a couple of reasons for this trend, the main one being that open economies compete internationally and therefore players must reckon with more efficient technologies in order to stay competitive. By adopting these technologies companies increase their labor productivity, often at the expense of the labor force.

·        In support of their theory, the authors point to the “sharp and persistent” increase in labor productivity measured by the “net value added” per worker as compared to the equally sharp and persistent decline in shares of wages in value added. Not surprisingly, they conclude that the companies enjoy the benefit of increased labor productivity, not the workers.

This analysis plays out well in the case of Bajaj Auto, India’s No. 2 motorcycle manufacturer. In an article published by the International Herald Tribune, June 1, 2006, “Commentary: In India, taking the sting out of joblessness”, Andy Mukherjee examined the imminent “youth bulge” and the implications unemployment would have in bringing about a “blue-collar tragedy”. Between 2006 and 2010, India’s working population is expected to grow by 71 million. However, a rather discomfiting trend accompanying the youth bulge is the tack adopted by companies like Bajaj Auto. Between 1997 and 2005, Bajaj tripled its revenue by slashing 11,000 jobs and increased its assets per worker sevenfold through investments in high-tech robots and automation. In the article, economist Chetan Ahya of Morgan Stanley cited a recent study he released that concludes that more than 80 million people, or 20% of the population may be out of work. To “take out the sting”, Ahya recommends that the Indian government take supply-side measures such as reducing the cost of conducting business by investing in infrastructure and loosening some of the stringent labor restrictions that IMF economist Raghuram Rajan has labeled a “supply-side” bottle-neck. Protective labor laws, he argues, in fact harm labor interests by preventing the emergence of labor-intensive firms altogether, firms that would benefit from having a fluid labor market.

Unsurprisingly, the sector projected to experience the highest rate of employment growth in the third-quarter according to the Manpower report is services. The lowest projection is the public administration and education sector at 27%.

What does all this mean for the future? The biggest challenge for India will be to increase the demand for blue-collar work in labor intensive sectors in order to absorb the swell of working age Indians. However, in doing so, the government should hesitate to tout any increase in employment when it is tied to speculative industry sectors such as import-driven, high-end consumer durable goods which typically do not promise stable job growth or real increase in wages.