India’s Foreign Trade Policy

Article 1: Fresh Framework for Broadband

(Economic Times, 17th Jul 2010)

Broadband has changed our lives dramatically. It has become an integral and basic part of our
everyday life. Thus, more and more countries have developed policies for its faster growth
and penetration. Countries like USA, Australia, Sweden, Japan and Austria have set aside
special stimulus packages worth billions of dollars to develop the broadband infrastructure.
Most of these plans seek to accelerate the linkages between existing networks and faster
fixed-line backbones comprising the next generation networks. Broadband initiatives are seen
not only as contributing to job creation but also to productive efficiency of all sectors of the
economy.
In the case of developing countries, and similar to the effect of telecom on growth,
the effect of broadband is stronger than in developed ones and is more pronounced than that
of mobile and Internet. Such effects become even more significant, once a critical mass of
users is reached. In developing countries the broadband density is very low. In developed
countries it is almost 25 times more. In a country like India, where there is considerable rural
disparity, the difference in the deployment of broadband has been mostly in urban areas. This
difference also shows the difference in the competitiveness of economies.
Therefore, India needs to develop a national agenda for broadband deployment. This
will enhance the competitiveness in an increasingly digital, knowledge oriented, global and
service oriented economy, but will also reduce the inequities between the urban and rural
area. Therefore, National Broadband Initiative (NBI) needs to be setup. Its framework should
take the following into account:
1. Public-private partnerships (PPP): A national broadband infrastructure needs to be put in
place with significantly good characteristics, this will require good public funding apart from
investments from private sector. This model will tap into the efficiencies of private sector
using the funds from public.

2. Increasing the role of mobiles and wireless: Though the mobile market has grown
exponentially but the mobile broadband infrastructure has failed to catch up. Thus a strategic
plan to manage spectrum and licensing is crucial.

3. Integrate with initiatives of other infrastructure projects: It is important to integrate the

various other infrastructure initiatives to provide ducting, access to poles etc., and provide
access to service providers at low costs. This should be done for all government
infrastructures, including highways, waterworks, buildings, etc.

4. Integrate with initiatives of other social development projects: The NBI needs to work
closely with various entities in sectors such as health, education, agriculture, etc., as without
enabling services that ride on the broadband infrastructure, it would have little impact.
5. Make it visible: Just as the national highway programme became a highly visible
programme, and the benefits derived from it led to a lot of public support for it, the national
broadband initiative should be made highly visible. This would put pressure on decision-
makers to put strong processes for selection and implementation of projects.

Article 2: In finance we distrust

(Economic Times, 19th Jul 2010)

There has been a considerable debate about financial regulation around the world. A number
of arguments and proposals are making rounds, often competing with one another and leading
to public and political confusion. Governments in the end may just decide to limit the size
and scope of financial institutions to reduce the risk attached to them. A second, hotly
debated argument is that limiting banks’ size and scope has relatively low costs in terms of
performance. This point is used to strengthen a third argument: large institutions have undue
political influence and thus influence their regulators. Thus, large and profitable financial
institutions will find a way to get the regulator system that they want, one that is compatible
with a highly profitable trading superstructure that goes beyond the requirements of hedging
and seeks to maximise short-term gains.

A second approach, on which there is substantial agreement in principle, is to limit

leverage. The main argument is that high leverage contributes powerfully to systemic risk, a
condition in which asset prices move in a highly-correlated way, and distress, when it occurs,
spreads quickly. Leverage is also partially caused by misperceptions of risk and mispricing of
liquidity. It is desirable to constrain leverage, but not to the point of increasing the cost of
capital and investment. Rigorous disclosure requirements that include conflict of interest are
one way to limit the potential damage. Or the conflicts can be limited by regulating the scope
of financial institutions. There are two other ways to address complexity and asymmetries.
One, widely adopted in developing countries, is to impose restrictions on products (for
example, derivatives and hedge funds) on the grounds that the upside in terms of risk
avoidance far outweighs the costs: less access to capital and reduced risk spreading. The
other way is to try to reduce the information gaps or their impact by regulating the expertise
and incentives surrounding the rating process.

It now seems universally accepted that government should establish the structure and
rules for the financial system, with participants then pursuing their self-interest within that
framework. If the framework is right, the system will perform well. The rules bear the burden
of ensuring the collective social interest in the system’s stability, efficiency and fairness. But
in a complex system in which expertise, insight and real-time information are not
concentrated in one place, and certainly not in government and regulatory circles, reliance on
such a framework seems deficient and unwise. A better starting point is the notion of shared
responsibility for the stability of the system and its social benefits shared. The suspicion that
underlies much of today’s public anger is that these institutions, having influenced the
formulation of the legal and ethical rules, could do more to contribute to stability than just
obey them.
 Article 3: Quo vadis, FDI in Indian retail?
(Economic Times, 20th Jul 2010)

A few months ago, most people would have bet that FDI in multi-brand retailing would never
be implemented well. Many analysts believed that the lack of political will and consensus
would not permit progress on allowing FDI in multi-brand retailing. But, the recently
released discussion paper by the department of industrial policy and promotion (Dipp) has
strongly pressed for allowing FDI. This represents a significant change in the stated policy of
the government.

The change in policy has resulted due to three factors. The first is the realisation that
investments in only the backend and infrastructure is not an attractive proposition for foreign
retailers, the second that not enough local funding is available for the investments required
while there is surplus foreign capital, and finally, most importantly, the rising food inflation.
It is clear that the government’s policy of trying to attract investments only in the backend
has failed. None of the large global retailers have made significant investments in creating the
backend infrastructure, even though some have set up cash and carry outlets.

Experience in other countries suggests that foreign retailers invest in an integrated

retail value chain. Global experience has shown that a rapid scale-up in retail operations
requires a long term investment. The capital is required for creating the front and backend
infrastructure and in funding the initial years’ losses. The current situation in global markets
is to India’s advantage. The developed markets do not offer many investment opportunities.
Hence, investment in Indian retail sector would appear even more attractive. The most
important reason for the shift in policy is the rising food inflation. The last few months have
witnessed double digit food inflation. Given the increased urbanisation, it is unlikely that the
area under cultivation would increase significantly. Increase in agricultural productivity and
reduction in wastage are the only two ways to address the food inflation and security issue.

Studies have shown that the current inefficient farm to store supply chain contributes
to high levels of wastage and inefficiencies. FDI in retail would allow for investments in the
food supply chain that will reduce these losses and result in increased food supply. The next
logical and politically sensitive step would be to look at bold means to improve the farm
productivity. While the initial reaction to the Dipp paper has been positive, the question on
everyone’s minds is whether this would translate into policy change and action. It is believed
that FDI in multi-branded retail does require broad political support. There is a need for a
holistic construct to debate and deliberate on the issues by key stakeholders and then also
translate this into action.
 Article 4: Spirit of Success
(Economic Times, 21st Jul 2010)

BILL Gates Sr, father of Microsoft founder Bill Gates, was once asked on a public TV
programme about how he had brought up the world’s wealthiest entrepreneur. He replied
saying that his son had a great mother. Then, in a more thoughtful mode, he recalled that his
son was so headstrong and rebellious that the parents had to consult a counsellor. After
meeting with Bill Gates, the counsellor advised the parents that in the on going war with the
son, he was going to win. The parents did not react to this by asserting parental authority or
by trying to curb the child. Bill Gate’s father said that a part of the trick was to take Bill gates
seriously.

This led to a surge of self-confidence in Bill Gates which helped him in building up a
company as a 21-year-old dropout from Harvard and selling software to people twice or
thrice his age. Writer Malcolm Gladwell offers a different take, according to him, along with
talent and timing, being at the right place at the right time is everything. That almost sounds
like astrology; one has to be lucky enough to go to the one private school in Seattle that has a
new computer linked to a larger machine downtown. That means one can learn programming
without being bogged down in the laborious punch-card process used for programming
computers just a year or two earlier than that. Gates had thousands of hours of programming
experience by the time the new Altair came out and was able to take full advantage of the
ensuing PC revolution.

But he was also a more tenacious businessman. According to Gates, success is a lousy
teacher; as it seduces smart people into thinking that they can’t lose. Even though Gates was
at the forefront during the PC revolution, he didn’t catch the true potential of the Internet on
its debut.
SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES
(SIMS)

(Constituent of Symbiosis International University)

India’s Foreign Trade Policy

Assignment no. 1

Submitted to: Mr K.G.Awale

Submitted on: 26th July 2010

Submitted by:

Vaishnavi Karad

Section: II-B

Roll No. 33
 Article 1: Getting Smart with infrastructure
(Economic Times, 17th Jul 2010)

The infrastructure of a city plays a vital role in its development. Cities need to better manage
their core operational systems such as transport, communication, water and energy. With
advances in technology today, new intelligence can be infused into our existing
infrastructure. Such advanced cities drive economic, social and cultural development.

Everything, including how to get from point A to Point B, would require rethinking
on how to add new technology and new policies to old assumptions and habits. A smart city
requires an ultra-high speed network that allows people, businesses and government to
connect with each other seamlessly. Urban infrastructures built over the next thirty years will
determine whether cities will be a major driver for environmental destruction or a sustainable
future.

Following steps need to be taken to build smarter cities:

1. Assemble a team: City administrators need to work closely and effectively with other
levels of government in order to tackle issues regarding infrastructure. In addition to
formulating new policies themselves, cities must be able to withstand challenges they may
face when policies are made elsewhere.

2. Think revolution, not evolution: Building a next generation city requires a municipality to
be more than focused and efficient. City leaders need to improve systems, most of which are
interconnected, and enable people and objects to interact in new ways. By using intelligent
systems, cities can respond to changes quickly and accurately, along with the ability to better
predict and plan for future events.

3. Target all city systems, not just one: The inter relationships between the various systems
operating in a city mean that while cities obviously must prioritise their challenges, solving
problems in just one system is not a long-term option. A broad strategy that looks at all of the
systems and feed-back mechanisms is a better way to provide for a sustainable prosperity.

Since, a large number of people from rural area will become a part of urban population; it
becomes imperative that future investments are made in sustainable solutions. Efforts are
underway in countries across the world towards creating a truly smart city. Many cities are
working to reduce both traffic congestion and air pollution through intelligent solutions,
including predictive tools to route vehicles around traffic accidents. The goal is to move
people and goods fast in a transportation system that can fuel economic development without
increasing automobile or truck traffic. The future is smart cities using intelligent grid
technology in connection with city planning. Here in India, we have endeavoured to build
many of these smart applications. However, the scale and pace of deployment still needs to
be stepped up. Greener and efficient municipalities can be created by understanding and
utilising the knowledge gained from mistakes committed in smaller cities.

Article 2:Don’t take savers for granted

(Economic Times, 19th Jul 2010)

The Reserve Bank of India (RBI), in a few days, will come out with the second quarter
review of its monetary policy for 2010-11. Predictably, industry chambers have begun
lobbying against a hike in policy rates that would push up interest rates on the grounds that
this will raise the cost of funds and imperil the on-going recovery. Every time there is talk of
a rate hike, industry goes up in arms, never mind that the underlying macroeconomic
conditions might warrant the hike. This is not surprising. Industry is only being rational when
it seeks to keep interest rates low since a lower rate of interest means higher profits, assuming
nothing else changes.

Household savings, which account for the bulk of gross domestic savings, are not
driven only by interest rates, but by a number of other variables such as personal disposable
income, financial deepening, financial literacy, availability of safety net and so on. In
layman’s language, household savings are not significantly affected by interest rates. It may
sound counter-intuitive and illogical to most, and it indeed is. If the interest rate affects
demand for credit, it should, logically, affect the supply of household savings. But then that’s
what the Keynes theory and the models suggest. The bottom line is household savings,
especially in financial instruments, which in the Indian context means mostly bank deposits,
are influenced by interest rates. In a scenario where government savings have turned negative
(and are likely to remain so for a while) and corporate savings are unlikely to increase (as
they invest to keep pace with rising demand), household savings must take up the slack.
Failing which it will not be possible for investment to continue at a high level without leading
to a balance-of-payments crisis.

As the RBI weighs the pros and cons of a rate hike, it would do well to keep this in
mind. For too long has it focused on the interests of borrowers at the cost of the savers, and
the effect has begun to tell. People are no longer willing to be taken for a ride, i.e. save to get
a negative return. A famous politician had once said “You can fool some of the people all of
the time and all of the people some of the time, but you can’t fool all of the people all of the
time”. This holds true whether in the context of interest rates or politics.

Article 3: The Chess Board of Endgames

(Economic Times, 20th Jul 2010)

Teleology, which is the study of design or ultimate purpose to describe the process of all
phenomenon, is a word that’s known to every scientist. In biology, for instance, Darwin set
this line of thought when he said that to explain the eye, it wasn’t necessary to put some
‘motive’ or ‘force’ behind its development just because its structure seemed to be so
complex. The process of natural selection can quite comfortably deal with the problem, and
natural selection is blind. Evolution doesn’t see what an eye does but only that it happens to
be helpful to an animal that possesses one. No matter if space, time or the universe existed or
not, no matter if there is a God or there isn’t.

The physicist Paul Davies once elaborated his take on teleology without assuming a
direction of the universe towards the final goal, which is set by the creator. According to him
take a 64-square black-and-white board and ask a bunch of people unfamiliar with chess or
any other board play, to make up the rules of a game that could be played on it. Chances are
anyone can do this, although it might not be interesting or deeply organised. One may say,
keep eight pebbles along opposite edges and try to make it to the other end as fast as possible
moving eight columns at a time.

It is a game, but no one in their right minds want to play it. On the other hand, the
rules of chess have been very carefully selected in such a way as to lead to an almost endless
variety of interesting play. But the point is that having decided the rules, the details of a given
chess game is not fixed in advance because that ultimately depends on the player and the
game played. In fact, some people are good at it, some aren’t and some don’t even know how
to make their moves. However, this doesn’t mean a better and more attractive game than
chess cannot be designed by anyone.
 Article 4 : In Defence of Credit Rating
(Economic Times, 21st Jul 2010)

There has been some debate on the value addition by credit rating agencies (CRAs) as they
did not predict the crisis and perpetuated the same by providing favourable ratings to low
rated instruments to enhance their own profits. This conflict of interest justifies the need to
overhaul the concept of credit rating and its implementation. The purpose of credit rating is to
bridge the information asymmetry between the issuer and investor of a financial instrument.

The CRA provides an unbiased view on the state of the entity and its ability to meet
its commitment on time. While some large firms may have in house expertise to do so, most
investors would need this opinion from a neutral party. CRAs clarify that they are paid by the
companies they rate and that ratings are only opinion and not predictions of the risk of a
given instrument. Often investors use this rating as the only basis for an investment decision.
CRAs do work on the basis of reputation and hence have to retain their credibility. There are
basically two reasons why rating agencies have not been spot on during a crisis: one, the
agency does not understand the product that it rates, as with derivatives, and secondly, more
seriously, a favourable rating is provided to large clients in return for a healthy fee.

However, what has taken place during the crises was more of an exception than a rule.
There is simply no alternative signal available to the market about the worthiness of a
financial instrument. Internally, CRAs need to hone skills in the products being evaluated.
Internal systems must be tightened as CRAs can be viewed as the first tier of regulation in the
rating system hierarchy and they also are self-regulatory bodies. The rating process has to be
unbiased and should be driven by an external rating committee approach so that the final
decision actually vests with a panel of experts who have no business consideration of CRAs.
Another step would be to ensure that the analysts do not have an interest in the company they
are rating.

At a large level, the overall environment under which the CRAs function must
change. The regulatory processes need to be firmed up and their compliance needs to be
ensured. Periodic process and compliance audit is strongly recommended in accordance with
the Iosco Code. The main performance parameter of CRA is stability of its ratings and by
making its performance public, they would be forced to perform better as their credibility
would be at stake. We do need a credit rating as there is no other signalling mechanism today
that is available to all investors. More importantly, the CRAs need to reiterate to the users of
the rating the fact that ratings cannot and should not be the sole indicator used for taking
investment decisions.