Beware of fiscal complacency Other challenges for India's deficit besides oil subsidies

In a few short weeks, India's fiscal state has undergone a dramatic change. When the government's first Budget was presented in July, there was great scepticism about its ability to meet the fiscal deficit target of 4.1 per cent of gross domestic product, or GDP. Now, there is virtual unanimity that it will be more than met. In the meantime, global rating agency Standard & Poor's raised India's outlook from "negative" to "stable", implying a reduced likelihood of a rating downgrade over the next two years. The primary reason for this swing of the fiscal pendulum is the drastic fall in global crude oil prices. From somewhere around the $108-a-barrel mark when the Budget was presented, the benchmark Brent crude oil has fallen to around $86 a barrel. This has effectively terminated the subsidy on diesel, facilitating the much awaited and appreciated deregulation of this product, and significantly reduced the subsidies on liquefied petroleum gas, kerosene and, importantly, fertilisers. Overall, assuming that it endures, this development will prove to be a huge windfall for public finances. However, it is important that the government should not allow complacency to lower its guard against fiscal stress. There are a number of potential threats looming, which could erode much of the benefits of reduced subsidy bills.

The first of these is the recommendations of the Seventh Pay Commission, which will be implemented in 2016. As in the past, this commission is virtually certain to suggest significant increases in compensation while asking for changes in performance evaluation and a leaner organisational structure. In the past, governments have typically accepted the first bit and rejected the second. If this trend continues, there will be a large bump up in the salary bill without any commensurate increase in efficiency. The government would do well to take an integrated view of the recommendations made by the Pay Commission and the Expenditure Management Commission, but if this does not happen, it should brace itself for a wages and salaries shock. Second, the report of the 14th Finance Commission will be submitted by January 2015. Being mandatory, these recommendations will have to be immediately built into the Budget for 2015-16. While this has not been a disruptive process in the past, larger commitments to states might have to be made. Add to this the compensation provisions that the Centre will have to make to get the states to sign on to the goods and services tax (GST) and the fiscal dividend from oil prices could be substantially reduced.

Third, public-sector banks are reeling under an unusual asset-quality burden, due significantly to their large exposures to stalled or unviable infrastructure projects. There is a larger need to address infrastructure problems here, but meanwhile, if banks have to keep lending to businesses and individuals, they will need regular infusions of capital, which, realistically, only the government can provide, given the asset-quality situation. Substantial funds will have to be provided for this, more so if the government shrinks from firm handling of the unhealthiest banks for political reasons. In sum, while the fiscal consequences of the drop in oil prices are significant and positive, it would be wise not to give into the temptation to see it as a justification to go slow on other fiscal initiatives. The road to fiscal hell is paved with complacency

The great oil price game Will oil prices continue to decrease, and will Saudi Arabia then step in to arrest their decline?

It has taken just a few weeks for oil prices to drop by close to 25 per cent, sending shockwaves around the world and raising as many economic questions for the future, as well as geopolitical and strategic ones - these three domains being always closely intertwined when it comes to oil.

The key question that comes to mind is whether this steep drop in prices is the result of cyclical factors - economic stagnation in Europe, the slowdown in countries such as China, Brazil and Indonesia - or whether it reflects a more fundamental trend.

The most likely answer is the latter. On the one hand, the demand for fossil fuel will continue to grow for the foreseeable future, whatever progress is made in the development of alternative energies, with emerging markets - the new growth countries - representing more than 80 per cent of the increase in demand for the next 20 years. But on the other hand, we are just beginning to see the impact of the shale oil and gas revolution in the United States over the last few years, which has turned on their heads many assumptions regarding the global oil picture.

As has been often mentioned, the United States is well on its way to becoming energy self-sufficient over the next 15 to 20 years and has already reduced very substantially its reliance on external energy sources, with oil and gas imports declining steadily since 2009. As an example,Nigeria - which used to be the fifth external supplier of oil for the United States - has not exported a single barrel to this country since July. The United States shale oil and gas revolution is complemented by a similar development in Canada and the soon to be felt impact of the structural reform of the energy sector in Mexico, which should rapidly translate into additional production capacity. So a slowing down of demand combined by an increase in supply capacity is bound to create a sustainable downward pressure on prices.

There are, of course, clear winners and losers from this trend. Among the winners come the economies of countries completely dependent on oil imports, with India and Japan coming first to mind; but also the consumers in Europe and in the United States - Moody's estimates $1.2 billion in savings for United States consumers for each percentage-point decline in the price of gasoline every year. On the losing side, one has to look at Russia whose economy - already on the verge of recession - is so dependent on oil revenues; at countries such as Venezuela, on the verge of bankruptcy; and Iran. The Tehran regime is crucially dependent on its oil revenues to finance the subsidies that help maintain social stability. It is now selling oil at $85-86 a barrel, against $114-115 a barrel last spring. One can imagine the impact on the Iranian economy as this steep drop in prices is aggravated by a reduction of production since July.

The picture is more complex when it comes to Saudi Arabia. Riyadh has so far refused to reduce its production to contain the decrease of oil prices. The key strategic objective for the Saudis is to preserve their role as the global swing producer and the economic and strategic benefits gained from such a privileged position. So they seem ready to stomach the loss created by declining prices. The fact that Saudi Arabia has around $750 billion of reserves makes it relatively easy for the kingdom to sustain a sharp decline of revenues for the time being. It could expect that the sacrifice would be worth it if such a decline in oil prices were to hamper the development of United States shale oil and gas that require higher energy prices to be economically sustainable. Thus, Saudi Arabia would be able to "neutralise" or to slow significantly the development of a competition that threatens its role as a swing producer capable of shifting the global oil market in one direction or the other.

However, the regime in Riyadh has to take into account some troublesome realities: first, Saudi Arabia's per capita energy consumption is the highest in the world due to a considerable waste of energy that all efforts deployed so far have been unable to constrain. Saudi Arabia has now to take away three million barrels a day for domestic consumption and an even higher percentage of production will be eaten up by domestic needs in the coming years. Second, the regime has had to devote more and more subsidies and handouts in the last few years to trying to assuage the growing frustration of the young and a fledgling middle class that is more and more exasperated by the lack of freedoms and rigidities imposed on Saudi society, thanks to religious taboos enforced by a hated religious police.

The regime is now spending an estimated $130 billion a year on subsidies, and pressures are mounting given the explosion of the population from 20 million people in 2000 to 28.5 million in 2013 - and increasing water scarcity. Five year ago, Saudi Arabia needed an oil price of about $85 a barrel to balance its budget. Today, it needs $100 a barrel.

So the Saudis will have to calibrate their position in the coming period. According to some estimates, pushing a barrel of oil back to around $100 would require a reduction of production of about two million barrels a day - a cut that would fall predominantly on Saudi Arabia. Riyadh may expect to face some pressures at the next meeting of Organization of the Petroleum Exporting Countries, scheduled for mid-November. Any calculation by the Saudi rulers on their oil strategy will almost surely be influenced by their concerns about what they perceive as the Obama administration bending backwards to get an agreement with Iran on the nuclear issue - which would re-establish the international legitimacy of Tehran and impact negatively on Saudi Arabia in its contest for power and influence in the Gulf.

However, the situation is also complex - albeit in a different way - in the United States. The tremendous benefits derived from the decline of oil prices for the American consumer have to be weighed with the impact such decline might have on the development of shale oil and gas, and, thus, on the United States achieving its strategic objective of energy self-sufficiency by 2030-35. The shale industry should be able to pursue its development at price levels of $80-85 a barrel. The key issue is, thus, to ensure that prices don't drop further. But the dynamics of the market are difficult to predict at the moment.

As a new global picture for oil is emerging the levers of control of the market are changing hands and the rationales for decisions on production levels and prices are also changing. If the United States emerges as one clear winner of the present shift, and countries such as Russia and Iran as losers, there is no way this will not have strategic and geopolitical implications in the medium term. The rulers in Riyadh are certainly pondering their game very carefully at the moment to make sure that whatever they decide will help protect their position - and their alliances - in the future.

Government to commemorate Sardar Patel’s birthday on October 31 as ‘Rashtriya Ekta Divas’.

Government of India has decided to commemorate the birth anniversary of Sardar Vallabhbhai Patel on October 31, as‘Rashtriya Ekta Divas’ or the National Integration Day. Briefing media persons, after attending an official meeting called by the Governor of Maharashtra in Mumbai today, Union Minister for Information & Broadcasting, Prakash Javadekar said, government wants to create awareness about the contribution of Sardar Patel during India’s Independence Movement and towards ensuring national integration in India. He said Sardar Patel, who is also known as the iron-man of India was instrumental in merger of princely states, to create a modern India, just after independence. “Celebrating his birth anniversary as national integration day is very appropriate” added the Minister. Union Energy Minister Piyush Goyal, who also attended today’s meeting, said that awareness about Sardar Patel’s contribution is very low, which is very unfortunate. He said, recently he came to know that in the history book of Class X, there is mention of Sardar Patel only once. The government has decided to make ‘Rashtriya Ekta Divas’ a popular mass movement, inviting participation from all sections of the society. The participation will be voluntary. Giving details of the action plan for the day, Mr. Javadekar said, ‘run for unity’ will be organized at various places, including towns and villages all over the country, on the morning of October 31. Prime Minister Narendra Modi will himself participate in the event and also broadcast a short radio address on the occasion. Mr. Javadekar informed that in the evening, Police and other organizations like NCC, NSS, Scouts and Guides, Home Guards etc would perform a march-past on the streets in all the district headquarters. He said, necessary instructions have been issued to concerned departments. The Minister also informed that details about how people can register for the run, will be communicated through website and advertisements in a day or two. Vallabhbhai Patel was born on October 31, 1875 at Karamsand in Gujarat. A barrister with a successful law practice, Vallabhbhai Patel joined the Indian National Movement under Mahatma Gandhi and grew up to become one of its tallest leaders. He played key leadership roles in organizing peasants’ movements in Kheda, Borsad and Bardoli in Gujarat and promoting the Quit India Movement against the British Raj.. The credit for the integration of over 500 independent princely states in 1947-49 by their merger from what was then a divided India to make it what it is today is due solely to Sardar Vallabhbhai Patel.

UPPCS-2014 MAINS TIME TABLE,SAMVEG IAS DEHRADUN

http://uppsc.up.nic.in/View_Notices.aspx?ID=news&N=246

IAS-2014 MAINS TIME TABLE,SAMVEG IAS DEHRADUN

http://www.upsc.gov.in/exams/time-tables/csm/2014/CSM2014TIMETABLE_Eng.pdf

No endgame in Hong Kong

Beijing is likely to restore order in the short term. But does it have a long-term solution to the crisis of governability?

The most sensible way of ending the stalemate would be offering face-saving but mainly symbolic concessions to the protesters. Technically, such concessions are not impossible.

The pro-democracy demonstrations organised by students in Hong Kong seem to have peaked. But the crisis of governability in Asia’s vital commercial hub is far from over. When tens of thousands of protesters were blockading Hong Kong’s government offices and main shopping districts in the beginning of October, the question on most people’s minds was whether the Chinese government would sanction the use of force, Tiananmen-style, to disperse the protesters. Today, in the middle of a stalemate, the right question to ask is what the endgame is.

At the moment, nobody seems to know the answer. The negotiations between the Hong Kong government and the protesters have been cancelled because of deep mutual distrust. The protesters, fearing the loss of their bargaining power, have refused to call off their dwindling protest that is still causing traffic disruptions in the city’s commercial centre. They also believe that the Hong Kong government is merely acting as Beijing’s puppet and lacks the necessary authority to strike a meaningful deal.

For the Hong Kong government, its priority is to get the protesters off the street and restore the city’s life to normalcy — without promising anything in return.

This stalemate, of course, cannot last forever. The protesters have no desire to return home empty-handed. The demonstrations were sparked by Beijing’s refusal to honour its pledge of universal suffrage and allow Hong Kong’s voters to choose the city’s chief executive in 2017. The pro-democracy forces are demanding that Beijing retreat from its uncompromising position. If the protesters are unable to gain any meaningful concessions, they may be motivated to escalate their protests or, alternatively, they may decide to concede defeat and fold their short-lived movement.

The Hong Kong government also faces a dilemma. The longer the stalemate lasts, the more the erosion of its authority and the greater the impact on the city’s image and economy. While it has no real power to make any concessions to the students, it also has no desire to create an everlasting impression of political impotence and illegitimacy.

So for now, China’s short-term plan to deal with the protesters’ demand is to let the pro-democracy movement self- destruct. Chinese leaders believe that the student-led movement is not sustainable because of its lack of organisation and enduring mass support. They also assume that, given the generational split in Hong Kong’s society (the younger generation is much less identified with the mainland than the older generation), the pro-democracy movement will alienate a sizeable segment of Hong Kong’s public because of the disruptions to traffic and commerce the protests have caused. Finally, Beijing hopes that fissures will emerge inside the pro-democracy camp because of the differences in tactics and objectives among the diverse groups that form the protest movement.

Should Beijing’s cold calculations be borne out, we could expect the size of the protest to dwindle and public ire against the protesters to rise, thus making it both tactically and politically less costly for the Hong Kong authorities to clear out the protesters at a convenient time. Under normal circumstances, Beijing would not have allowed the protests to drag on for so long. But this time, because of the coincidence of the annual plenum of the Communist Party of China’s (CPC) Central Committee (October 20-23) and the Apec summit in Beijing (November 6-11), Chinese leaders obviously have little desire to spoil the two parties with a crackdown that could produce ugly pictures and cause international outrage. In all likelihood, the most politically convenient time for Beijing to end the street protests in Hong Kong would be shortly after the conclusion of the Beijing Apec summit. After foreign leaders, including US President Barack Obama and Indian Prime Minister Narendra Modi, leave Beijing, China will have a much freer hand in dealing with the problem in Hong Kong. The most sensible way of ending the stalemate would be offering face-saving, but mainly symbolic, concessions to the protesters so they could claim victory and go home. Technically, such concessions are not impossible. For example, the moderates among the pro-democracy forces are floating the idea of changing the rule that elects the committee that will screen the nominees for the chief executive (Beijing insists that only two or three candidates who have received more than half of the votes from this committee can run, thus effectively giving the pro-Beijing committee the power to disqualify candidates considered unfriendly to Beijing). However, even a minor concession would be a bitter pill for the CPC to swallow. Ever since the Tiananmen massacre in 1989, the party’s rule has been based on effective deterrence. It has painstakingly cultivated the impression that it will suppress any anti-regime movement regardless of costs or consequences. Therefore, making even the least substa ntive concessions risks undermining the party’s image of toughness. If this is the case, even the short-term solution to Hong Kong’s stalemate could be quite ugly. We should expect to see — and, indeed, have seen — the use of anti-riot police, mass arrests and forcible clearing of the protesters. Such operations will be followed by the announcement of strict regulations that would make similar protests illegal or very difficult to stage in future. But this pyrrhic victory for Beijing by no means ends the crisis of governability in Hong Kong. The protests have fundamentally altered the politics in the former British colony. The “one country, two systems” model that has governed Hong Kong is now all but dead. The leadership hand-picked by Beijing has lost credibility and significant public support. A very large section of Hong Kong society, most importantly its young people, is demanding their democratic rights and revolting against the CPC. Beijing may have a clever plan to restore order in the short term, but it is doubtful that it has any long-term plan for ending the political revolt in Hong Kong. -

An exit that shows the way

A new generation of Indian entrepreneurs is looking to leaders like Murthy, Nilekani and Gopalakrishnan on how to do it right.

When Infosys executive chairman Narayana Murthy declared in June this year that he was relinquishing his job and hanging up his Infosys boots and that the last of the founders would exit executive roles, this newspaper launched a frantic hunt for a photo. A vintage snapshot of all the founders at the iconic firm’s naissance 33 years ago would have been most appropriate for the feature in the Sunday pages.

For Murthy and his cohort, there could have been no more opportune a moment to make a graceful exit.

Many grainy images of the founders in the early days were available. One had a couple of founders and wives at what looked like a birthday cake-cutting. Another showed a few founders in geeky glasses squatting on a flight of steps. Yet another sepia-toned photo showed two founders and their wives at a picnic. However, not a single photo was available of the founders together in 1981, the year Infosys was founded, or even just after.

So it was more than ironic that earlier this month, six formally dressed men offered a variety of “photo ops” on what was their farewell as the founders of Infosys. The final day line-up was complete. There was Murthy himself, alongside N.S. Raghavan, Nandan Nilekani, K. Dinesh, Kris Gopalakrishnan and S.D. Shibulal. The only missing face was of Ashok Arora, who quit the startup team early on. It was an emotional moment for the firm and its founders, though they laughed and joked their way through the day.

Soon, the founders will turn into ordinary shareholders of Infosys, a move that is beneficial not just to the firm but to themselves as well. In turning into regular shareholders, the founders’ (and their families’) total shareholding of almost 16 per cent in the company will be considered to be free-floating shares and enhance its appeal to investors. Their new status as public shareholders will give them the freedom to sell their shares when they choose, without board sanction.

For Murthy and his cohort, there could have been no more opportune a moment to make a graceful exit. A new CEO is in place and seems to have gotten off to a good start by presenting better than expected profits in his first quarter of taking over — a 28.6 per cent rise in net profit for the quarter ended September 30 and a 2.9 per cent growth in revenues. Making a clean break at this juncture will give the firm’s new professional leadership a chance to shape and steer the company’s future from here on.

At the farewell meeting, Murthy talked about his decision not to keep the ceremonial title of “chairman emeritus” at Infosys in order to avoid any perceived conflict. Murthy was the epitome of Infosys values when he said he wants to be a “Regular Joe” instead. There is nothing average or regular, however, about Murthy and his cohort, who built not just the Infosys brand but, in parallel, also helped grow India’s brand as a globalising, forward-looking country with an enormous talent pool. Infosys’s listing on Nasdaq in 1999, the first Indian company to list on an American stock exchange, was a landmark event. Since then, the Rs 28 crore firm has grown to Rs 2,00,000 crore in market capitalisation. Infosys has had its share of challenges. It was not until the company ran out of founders to fill the chief executive position that an outsider was finally brought in earlier this year, much to the disappointment of its investors, who watched its performance slide during the last few years. Again, last year, it faced censure when Murthy jumped out of retirement and was back in the thick of things — trying to resurrect the flailing firm with his son Rohan as his executive assistant. Despite these transgressions, though, no company has influenced India’s corporate landscape as much as Infosys, with its clean governance principles and adherence to high ethical standards. In their graceful and absolute exit, too, Infosys’s founders showed the way to corporate India, where even the biggest firms are fond of parachuting sons, daughters and assorted relatives into executive and board positions. The founders will no longer associate with the company or exercise any control over its affairs. It will be a clean break. They may have departed from Infosys but in their wake, a new generation of Indian entrepreneurs is looking to leaders like Murthy, Nilekani and Gopalakrishnan on how to do it right in India. Many Average Joe Indians will watch them to see how they employ their enormous personal wealth to doing work with a social conscience. In other words, the founders may have left Infosys, but they can never really stray from the public eye. -