Global financial alternatives New Asian bank to increase India's funding options

Close on the heels of the announcement at the BRICS Summit in July that the five-nation group would set up a development bank, another similar initiative has been set in motion. Last week, India, China and 19 other Asian countries signed an agreement to set up the Asian Infrastructure Investment Bank, or AIIB, with an initial capital base of $50 billion, to be subscribed by the member countries in proportion to their gross domestic product (measured in purchasing power parity terms). By this formula, China will be the largest shareholder, by a significant margin, while India will be next on the list. Both the BRICS Development Bank and the AIIB are essentially motivated by the same concerns. The global financial system in general and the multilateral financial institutions (MFIs) in particular are dominated by the developed economies, particularly the United States. These are now consumed with a set of financial challenges somewhat removed from the development agenda. Even relatively small steps to reform their governance structures to give emerging economies a larger role are being stonewalled. Meanwhile, the need for large investments in infrastructure in these countries is becoming more and more pressing, if reasonable growth and development objectives are to be met. The solution so far has been to form your own bank. And now that both the BRICS Development Bank and the AIIB are a reality, questions on whether they offer a genuine alternative to the established MFIs are likely to be raised.

It is to be noted that the great strength of the MFIs is their ability to access global capital on the sovereign ratings of their largest shareholders. Even the regional institutions are predominantly owned by developed economies. In effect, they have been intermediating between savings in the developed economies and investment in emerging ones. Without these high-rated economies, the new institutions are constrained in their ability to raise funds by the relatively lower ratings of their shareholders. Of course, this is not their intent in any case. In both institutions, Chinese resources, as reflected in their huge foreign-exchange reserves, will constitute a significant proportion of the capital base. But without the capacity for leverage that the MFIs have, the lending capacity of these new institutions will be relatively small. Then, of course, there is the concern that China will effectively control the lending agenda, ensuring that all the projects financed are consistent with its strategic interests. As lopsided as the governance structure of the MFIs may be, there is some protection against its complete capture by a single dominant interest. This will be much more difficult in institutions owned and financed by a smaller number of countries, with one of them clearly dominant.

Nevertheless, in a larger picture, these banks can be seen as the first steps in creating a financial architecture based exclusively on development objectives and funded exclusively by emerging economies. Governance and operating principles will take time to emerge through what will almost certainly be a contentious process, but that is how things work. India's need for infrastructure finance is so large that no door should be closed. These experiments may or may not work, but the process has to be set in motion.

Different kinds of partnership The quality and bandwidth of India's strategic ties with Japan, the United States, and China are not the same

On assuming office, Prime Minister Narendra Modi inherited aforeign policy marked increasingly by drift and uncertainty in the face of a sinking economy, growing global challenges and far-reaching changes in the power dynamics of Asia. With characteristic self-confidence, Mr Modi has since rapidly restored India's stature in the international arena and redefined the terms of its strategic outreach to major powers.

While handling important summit meetings with precision and poise, Mr Modi has struck a fine balance between transformative and transactional elements to build subtly differentiated partnerships with Japan, China and the US. This augurs well for the forthcoming round of regional and global summits on which he will embark in November.

The PM's brand of strategic ambition has several distinct components. It is aimed at restoring India's credibility. It signals pragmatic engagement of all major powers, each on its own merit. It raises India's profile by leveraging the soft power of democracy and the universal values that Indiaupholds. It signals the full alignment of foreign policy with India's domestic economic goals, security interests and global aspirations. It marks the interjection of India's role and responsibility in shaping the Asian and global power balance. It displays flexibility on economic engagement, firmness on meeting security challenges and resolve in safeguarding India's "core" sovereign and territorial interests. And finally, it promises the rapid operationalisation of commitments made with foreign partners, as witnessed by the constitution of a "Japan Plus" team and Core Group within a month of Modi's Tokyo visit. Each component is driven by strategic intent.

A new "Modified" framework for strategic engagement to advance India's national interests is emerging.

The foreign ministry has tended to use the terminology of "strategic partnership" rather liberally and without appropriate categorisation. There is need for much greater rigour to shape the nature of these partnerships in line with long-term global assessments and a long-overdue national strategic doctrine.

If India is to build genuine "strategic partnerships", these need to be better understood and defined.

Various categories of mutually beneficial partnerships can come into play when there are congruent interests between countries in multiple domains.

However, a far more accurate definition of "strategic partnership" would be a broad convergence of interests between two countries which has the capacity to fundamentally impact the balance of power to their mutual advantage, regionally and globally. In other words, this transformative element of serving each other's fundamental national interests is inherent to relations between strategic partners. Commitments are reciprocal, so trust and credibility become indispensable.

Evaluated against this definition, distinctions among the strategic partnerships which Mr Modi has sought to advance become clear.

India and Japan share democratic values and a commitment to each other's national strength and economic vitality. They have a common vision of a balanced regional security order with strong normative frameworks to underpin economic prosperity in an Asian Century. Together, they can make a lasting contribution to Asia's power balance, security and stability.

With the United States, PM Modi has restored strategic direction and engaged vital constituencies to sustain a long-term strategic partnership. Apart from affirming support for Mr Modi's domestic agenda and India's economic rise, the Modi-Obama summit has signalled transformative change in bilateral defence and defence industrial cooperation, as well as security cooperation to advance shared interests in regional peace and stability, both bilaterally and in conjunction with other Asia Pacific partners like Japan. India-US relations may continue to witness some short-term stress, but in the long term their interests are more than likely to be aligned.

In comparison, the "strategic" threshold signalled by the India-China summit has restricted bandwidth. India and China have a strategically important relationship with cooperative, competitive and adversarial components, not a "strategic partnership". Mr Modi went out of his way to welcome the Chinese President but made it clear that even progress on economic relations would be difficult to sustain in the face of repeated Chinese border transgressions and the absence of progress in resolving the boundary dispute.

While we can reserve judgment on the future of India's partnerships with the European Union and Russia till after the next India-EU and India-Russia summits, constraining factors are already emerging. With the EU, there can be meaningful economic engagement but the "strategic" element will be limited as the EU lacks the capacity or the inclination to help shape the balance of power in Asia. Russia's importance for India in the areas of defence and energy will continue, but long-term prospects will depend on what kind of Asian order Russia will support.

Meanwhile, India's strategic horizon has already expanded. Taken together, the outcomes of the summits with Japan and the US have enlarged the scope of India's commitments on regional stability and security. If India is to measure up, it will need to scale up contributions to the power equilibrium in the Asia Pacific. It will also need to forge new strategic partnerships in Southeast Asia to support regional order and stability.

The PM recognises this responsibility. In his address to the Combined Commanders Conference on October 17, he observed that the world is looking at India with renewed interest and there is "a universal current of expectation from India to emerge not only as one of the poles of the global economy, but also as one of the anchors of regional and global security".

The EAS summit in Myanmar and the G-20 summit in Australia next month will provide further opportunities for Mr Modi to continue his transformative impact on India's strategic partnerships. Aspirational India will stand to benefit.

Green buildings aren't that green

So are green buildings really green? I want to follow up on our discussions on this critical issue. The building sector is set to grow exponentially. It already has a huge environmental footprint - the domestic and commercial sectors consume some 30 per cent of India's electricity. So the imperative to go green is clear. The question is where India is and where it should go.

The Bureau of Energy Efficiency (BEE) has issued the Energy Conservation Building Code (ECBC) to improve the energy performance of buildings. It is expected that an ECBC-compliant building will use anywhere between 40 and 60 per cent less energy than its conventional counterpart. State governments are now adopting this code in their building permissions - Odisha and Rajasthan have made it mandatory. But enforcement of this code - which is largely prescriptive in terms of building design - remains a challenge.

The code itself has problems but these can be fixed in its next revision. The problem is bigger, when you understand that the code is for building design, with certain assumptions that its implementation will reduce energy use. But a big problem is that the use of the code in design is not linked to the actual performance of the building after it has been commissioned.

What the BEE has in addition is a voluntary star rating scheme, which sets the Energy Performance Index (EPI) of four categories of buildings -day use office, IT/BPO (with extended hours of work), hospitals and retail malls. The EPI is calculated differently for different climatic zones - hot and dry, temperate, composite, and warm and humid. But the rating, which is for an operational building, has no direct link to the ECBC. So there is no data to show what the design has actually achieved and there is no feedback loop that would improve design based on operational experience. Also, as yet, the BEE has not rated any building based on its index.

There are two other green-building certifying agencies in the country. The Indian Green Building Council (IGBC) started out as a United States initiative but is now wholly Indian and is promoted by the Confederation of Indian Industry (CII)-Sohrabji Godrej Green Business Centre. It runs a certification programme that rates buildings platinum, gold or silver, based on different criteria. Delhi-based The Energy and Resources Institute has its Green Rating for Integrated Habitat Assessment (GRIHA). Many state governments provide fiscal incentives and even bonus floor area ratio, or FAR, to builders who produce green certificates from these agencies.

The actual proof will, however, be in the actual data on the use of energy and water in a commissioned building. But there is little data on this. In other words, governments are giving away largesse without any verification. A few months ago, the IGBC put on its website information on the actual energy and water consumption of 50 of the buildings it had rated, out of some 450 in total. When my colleagues at the Centre for Science and Environment (CSE) analysed this data, all hell broke loose.

Why? Because we found that many reputed companies that had been given platinum rating were actually energy and water guzzlers. Obviously, this is not easy for companies to accept. The CII has written on their behalf arguing that we have got our analysis wrong because we have mixed up the typologies for the buildings. So, they say, ITC Saharanpur is a factory building, which has been compared to an office building. But IGBC gives its rating only for the office operations of a "factory". The CSE in its analysis used the EPI set by the BEE for an office building and found that as against the EPI of 190 for a composite climate, the ITC building has an EPI of 379, which is almost double.

Wipro in Gurgaon is an IT building, with server loads operating for 24 hours. It has been compared against performance benchmarks for an office building, says the CII. But the CII misses the fact that when the CSE compared the same building using the EPI for an IT/BPO complex - calculated as the annual average hourly EPI to take into account its extended hours - it exceeded the energy limits for them as well. Similarly, Wipro's office in Kolkata was found to be more than nine times higher than the minimum benchmark set by the BEE for a warm and humid climate.

The CSE analysis also finds that there are IGBC-rated buildings that match or are below the EPI set for their category for their climatic zone. So something is working, and we hope the CII and its partners will ask how they can learn from the best example so that expensive green features pay off in terms of performance.

More importantly, regulators need to get their act together on this issue. The CSE analysis is based on self-disclosure by companies, which is not verified or audited. The government needs to build a credible system of assurance, so that it can really push what is green, and not just what looks green from the outside but may be brown inside. It is time, as we say, to go beyond the green façade

UN climate change draft sees risks of irreversible damage

Risk of “serious, pervasive and irreversible impacts”; governments, scientists to meet in Copenhagen on UN report; still time to limit warming, says IPCC draft

Climate change may have “serious, pervasive and irreversible” impacts on human society and nature, according to a draft U.N. report due for approval this week that says governments still have time to avert the worst.

Delegates from more than 100 governments and top scientists meet in Copenhagen between October 27, 2014 and October 31, 2014 to edit the report, meant as the main guide for nations working on a U.N. deal to fight climate change at a summit in Paris in late 2015.

They will publish the study on November 2.

European Union leaders on Friday agreed to cut emissions by 40 per cent below 1990 levels by 2030, in a shift from fossil fuels towards renewable energies, and urged other major emitters led by China and the United States to follow.

“The report will be a guide for us,” Peruvian Environment Minister Manuel Pulgar-Vidal, who will host a U.N. meeting of environment ministers in Lima in late 2014 to lay the groundwork for the Paris summit, told Reuters.

He said the synthesis report by the Intergovernmental Panel on Climate Change (IPCC), drawing on three mammoth scientific reports published since September 2013, would show the need for urgent and ambitious action in coming years.

Many governments want the 32-page draft to be more clearly and punchily written in warnings of more powerful storms, heat waves, floods and rising seas. The United States said some tables “may be impenetrable to the policymaker or public”.

In a paragraph summing up the risks, the draft says that a continued rise in world greenhouse gas emissions is “increasing the likelihood of severe, pervasive and irreversible impacts for people and ecosystems”.

It adds that “a combination of adaptation and substantial, sustained reductions in greenhouse gas emissions can limit climate change risks”.

ALL AFFECTED

Among more than 2,000 comments on the text by governments, the European Union said the IPCC should add that “all regions are affected, regardless of wealth”.

The United States called for clarification of the meaning of “irreversible”. Jonathan Lynn, spokesman of the IPCC, said that the meeting would take account of all comments.

Past reports have warned that warming could, for instance, trigger impacts irreversible on human time scales such as a runaway meltdown of Greenland’s ice that would raise sea levels and swamp coasts from Florida to Bangladesh.

Two artists were to unveil 100 tonnes of ice on Sunday in 12 massive blocks brought from near Nuuk, Greenland, outside Copenhagen’s City Hall to remind delegates of the risks.

“We can save the ice by burning less coal, conserving electricity, and driving better cars,” Danish Climate Minister Morten Helveg Petersen said of the Ice Watch exhibit.

The IPCC says that it is at least 95 per cent certain that human activities, led by the burning of fossil fuels, are the main cause of climate change since 1950, up from 90 per cent in the previous assessment in 2007 and 66 per cent in 2002.

Opinion polls indicate many people, especially in the United States, are unconvinced and suspect that natural variations in climate are to blame. That gap between public and scientific opinion is a big complication for work on the Paris accord.

India off Fragile Five list, says IMF

‘If government undertakes structural reforms it can achieve 7-8 per cent growth’

The International Monetary Fund’s (IMF) India Mission Chief has said that among emerging markets and BRICS countries, India stands out for accomplishing the sharpest turnaround in its macro economy since the U.S. Federal Reserve started reversing its zero-interest rates monetary policy. As a result, of all these economies, India is best prepared to deal with the Fed’s monetary policy actions.

Earlier this month, the IMF raised its 2014 India growth forecast to 5.6 per cent as against its 5.4 per cent April projection while cutting its world Gross Domestic Product (GDP) growth projection to 3.3 per cent. If the new government follows through with structural reforms India can see a growth of 7 per cent to 8 per cent, IMF India Mission Chief Paul A. Cashin told The Hindu.

“India is the odd man out from the emerging markets and BRICS economies that were being called the Fragile Five last year… But the story for India changed quickly… India is better prepared for shocks today than when the U.S. Fed’s tapering started and more prepared than other emerging markets,” Mr. Cashin said.

The Fed’s initiation of the tapering of its monetary policy triggered sharp volatility in the rupee and a spike in the current account deficit. The CAD is down from the level of 4.7 per cent of the GDP to 1.7 per cent of GDP. “Three percentage points down is a lot... in the IMF’s history there are very few cases of that,” Mr. Cashin said. Substantial dollar inflows have led to India’s foreign exchange reserves rising from $270 billion in August to $315 billion.

The only red flags that Mr. Cashin raised were on retail food inflation and structural reforms in the infrastructure, labour and energy sectors. “Retail food inflation in India has been growing at a 10 per cent plus rate … Few countries have had such problems for such long periods of time,” he said.

Walking is a super pill, says survey

“Walking is super pill,” according to the findings of a recently released survey which was conducted among doctors who are treating the four most rampant chronic diseases in the present times -- obesity, cardiovascular, asthma, joint and backache.

“If sitting is the new smoking of the current generation then walking is the super pill prescribed by doctors across categories. But the survey found that the patients are not always following the right dosage of the pill for the desired effects,” noted the findings of the Max Bupa survey.

‘The Max Bupa Walk for Health Survey 2014’, the first of its kind conducted among doctors noted that the aim of the project was also to decode the benefit of walking for patients suffering from various ailments. For the study, general physicians, specialists in respiratory diseases, orthopaedics and cardiologists were interviewed along with 1,000 patients in Delhi and Mumbai.

The study noted that walking is the most prescribed exercise for obese patients (84 per cent), followed by diabetics (76 per cent) and patients suffering from blood pressure (72 per cent), cholesterol (65 per cent) and cardiovascular diseases (56 per cent).

Right pricing petrol & diesel

companies should price their products according to their own cost structures

Fuel pricing has been the bugbear of many a government in India. Though de-licensing of oil refining and marketing, and decontrol of products such as naphtha, fuel oil, lubricants and aviation turbine fuel were one of the first accomplishments of the reform process in the early 1990s, freeing the pricing for transportation fuels — petrol and diesel — remained a challenge.

Last week’s decision by the Centre to deregulate diesel prices has to been seen in this context. For the first time since the short-lived experiment in 2002 when petrol and diesel prices were freed for a short period, oil companies will have the freedom to manage retail price of diesel on their own and adjust it at periodic intervals to reflect market levels. Petrol prices were deregulated in June 2010 but fortnightly revisions have been a reality only since January 2013.

Both petrol and diesel are politically sensitive commodities but unlike petrol, diesel price changes have a cascading effect across the economy on everything from bus and rail fares to vegetable and fruit prices. Governments have, therefore, been wary of freeing diesel pricing and the sustained rise in global oil prices from 2002 until the crisis in 2008 did not help matters. The Modi government has now grabbed the opportunity provided by a falling global oil price regime — prices of benchmark Brent have fallen from around $105 a barrel in April to about $86 a barrel now— to push through deregulation of diesel and it needs to be complimented for this. Yet, deregulation of diesel, noteworthy as it is, is only the first step in much-needed reform of the oil sector.

What we immediately need is some transparency and reform of the methods followed by the oil companies while setting fuel prices, whether petrol and diesel or cooking gas and kerosene. The concept of ‘under-recovery’ has to be jettisoned and competition between the different players — public and private — needs to be encouraged. That alone will allow proper price discovery for these economically sensitive fuels.

The concept of ‘under-recovery’ is unique to India. ‘Under-recoveries’ are nothing but the difference between the oil companies’ ‘desired’ price of a fuel, say diesel, and its prevailing retail price in the domestic market. This ‘desired’ price is calculated on trade-parity basis that takes into account the landed cost of imported fuel and the price at which it is exported by domestic refineries. Presently, the ratio is 80:20 in favour of landed cost. For instance, if the price of a litre of diesel as calculated on trade-parity basis is, say, Rs.70 a litre and the oil companies are selling diesel in the retail market at Rs.65 a litre, the ‘under-recovery’ will be Rs.5 a litre.

‘Under-recovery’ is not the same as a loss which happens when a producer is forced to sell his product below cost. Oil companies refine crude oil to produce diesel (and other products such as petrol, cooking gas and kerosene) in their own refineries in India. They have not been importing diesel or petrol for a decade now, thanks to a sharp increase in domestic refining capacity.

Given this, why should the landed cost of imports, which includes items such as freight, insurance, handling charges and, of course, customs duty, be considered for fixing domestic retail price? This is the unfair part about ‘under-recoveries’, a word that is often cleverly used interchangeably with losses. Let this be clear: ‘under-recovery’ is a notional concept and does not necessarily mean a loss. The only exception when it could include a loss is where global crude oil prices surge to abnormal levels and the retail price of fuels remains unchanged. There has not been such a situation in recent years.

But why do oil companies harp on ‘under-recoveries’ and demand that domestic price should be linked to that? Simply because the landed cost, which includes duties and other levies, offers them protection to cover up possible inefficiencies in their operations. This protection is unnecessary and unfair to domestic consumers and all it does is promote inefficiency. It is no secret that the public sector oil companies are saddled with high costs for reasons ranging from excess staff to duplication of facilities between them. By linking retail price to ‘under-recovery’ all that the government does is ensure that such inefficiencies are passed on to consumers. Again, global prices of crude oil and refined fuels such as petrol and diesel do not always move in tandem. The forces that drive their respective markets are different. For instance, the international market price of petrol and diesel can spike if there is a refinery outage somewhere in the world causing supply disruption. There have been instances in the past when refined fuel prices have surged due to a fire or a maintenance shutdown by a particular refinery. Crude oil prices are not affected by such factors. By taking into account landed cost of refined fuels rather than crude oil, the oil companies may be forcing consumers to pay a higher price when there is really no supply problem within the country.

Cost-plus pricing

The ideal way to go is for oil companies to price their products according to their own cost structures. Each company has a unique cost structure which is a factor of its refining efficiency. The final market price should be discovered on the basis of the cost of crude plus refining costs and the margin of the oil company.

This can happen only in a competitive environment where the oil companies compete with each other and against the three private players — Reliance Industries, Essar and Shell. As of now , the PSUs operate as a cartel when pricing their products, which is an anti-competition practice. Clearly, the next item on the agenda for the government should be to push the oil companies truly into the market era where fuel prices are linked to efficiencies and vary not just between the different players but between petrol stations of the same player based on which one is more efficient. That will be real reform.