Good Articles from Economic Times (17th-22nd March)

JNNURM: Hit or Flop 

 The Jawaharlal Nehru National Urban Renewal Mission (JNNURM),the first major intervention by the UPA government in urban development,was used as an incentive fund to bridge the investment gap in urban infrastructure.The uniqueness of JNNURM lay in linking federal grants to reforms in governance.
Its critics say that the JNNURM has had limited impact on cities since it was launched in 2005.If we ask a question regarding the impact of the programme on Indian cities,one thing stands out: in all mission cities,its public impact has been the ubiquitous JNNURM low-floor buses.

The pivot of the JNNURM lay in 
1. reforms and fast-track planned development of identified cities with a focus on efficiency in urban infrastructure and service delivery mechanisms,
2. community participation and 
3. accountability of urban local bodies,or parastatal agencies towards citizens.

Current Scenario

• As of November 2013,of a total 567 projects that were sanctioned as part of the JNNURM,217 were completed,of which water supply projects took precedence,accounting for 30% of all projects (in numbers). 
• In terms of cost,water supply and sewerage projects took the lions share,accounting for one-third and one-fourth of total cost respectively.These are sectors that hold tremendous potential for growth in terms of public-private partnerships and mean the most to the public,given they are basic amenities.
• The programme has made a difference to the size of investments and breadth of coverage across cities and sectors,and in catalysing multiyear investments and reformed development in urban infrastructure.Some cities have prepared city development plans for the first time.
• The JNNURM has disbursed more funds than all urban development schemes in the last 25 years.The programme is the only scheme so far that gives both investment support and is reform-linked.

Reform Agenda

The JNNURM specifies several mandatory and optional reform agenda required to be fulfilled by state governments and urban local bodies.At the local body level,the following mandatory reforms are required by JNNURM: 
1. Movement to double-entry system of accounting,since this reflects the fiscal health of a city accurately.
2. Improvement in property tax coverage to 85% (of all properties).
3. Improvement in property tax collection efficiency to 90%.
4. Full cost recovery for water supply and solid waste.
5. Internal earmarking of funds for services to the urban poor.
6. Provision of basic services to the urban poor.
7. Setting up of e-governance.
 
Besides,there are several statelevel and certain optional reforms required both at the local and state levels that are required for access to JNNURM funds.These relate to the 
1. introduction of property title certification system,streamlining the approval process and,more generally,revision of building by-laws,
2. earmarking 25% developed land in all housing projects for economically weaker sections and low-income groups,all at the local body level,along with other administrative and structural reforms.

Mixed Results

We review the status of only the mandatory local body-level reforms.

• Most mission cities in Maharashtra,such as Mumbai,Pune and Nashik,have successfully fulfilled all local body mandatory reforms.
• The JNNURM website says that 42 of the 63 cities have provided basic services to the urban poor,41 cities have earmarked internal funds for providing basic services to the poor and 34 mission cities have moved over to a double-entry system of accrual accounting which is more accurate. 
• Cities such as Bangalore,Mysore and Chennai have not yet been able to commit to 100% recovery of operation and maintenance costs of providing water supply and solid waste management.
• Delhi has a long way to go in terms of property tax collection efficiency,and most cities have not yet been able to provide basic services to their poor.

Highlighting Problems
However,the journey has begun and on internal earmarking of funds for providing services for the poor,the adoption of the cities has been the highest,based on the scores awarded to cities on this agenda.
While service-level benchmarks have been developed for most basic services,unfortunately,there is no data on physical progress on the services or processes on which the JNNURM funds have been spent.Hence,it is easy for critics to call the programme not a bang but a whimper.Nonetheless,the biggest contribution of the programme is not that it has solved urban problems,but that it has brought them to the fore and has highlighted how important our urban areas are.

India May Board Train to Chinese IT Market   

The Change in Indias Telecom Landscape 

 Recent events in Indian telecom indicate an overhaul of the business in the future.The sector is emerging from a flux and operators are chalking out growth strategies as regulatory clarity emerges.The beginning of 
1. industry consolidation,
2. data-focused spectrum acquisition,
3. shift towards higher tariffs and 
4. collaboration among operators are signalling a transition.

That the recently-concluded spectrum auction earned the government.61,162 crore points to a renewal and change in the competitive landscape.Despite the high cost of spectrum in 900 MHz,incumbents have secured most of their spectrum.The auctions also emphasised investment capabilities of operators and how only the fittest will survive in the Indian market.

The bidding pattern also points to a growing data focus.The auction of almost 80% of airwaves in the 1,800 MHz band indicates operators intent to use this band for high-speed 4G services.By acquiring 1,800 MHz airwaves,operators have not only hedged future launch of data services but also future-proofed their investments in favour of the globally prevalent LTE band.The strengthening of 1,800 MHz holding in their dominant service areas will reduce their dependence on non-metro 900 MHz spectrum.Given that this spectrum is up for renewal next year,the contingency plan of continuing services in 1,800 MHz would save them from desperate bidding in the future.But the auction has again left a major dent on operators balance-sheets.The pre-auction industry debt was pegged at around.2,50,000 crore,and the recent auction outgo will further weigh down on financials.

As an after-effect of increased financial payouts,the overall tariff in the sector is expected to go northwards.The telecom market has seen declining tariffs for 18 years;a phenomenon deemed unsustainable by industry and analysts.But pricing power has started returning to the operators.In 2013,a marginal increase had already been witnessed with operators reducing free airtime minutes and increasing call voucher prices for prepaid customers.A steeper rise of 15-20 % is foreseeable over the next 12 months.

Another predictable change will be the end of price-based competition.The days of India being the lowest-priced telecom market can soon be history.Telcos are unlikely to indulge in price wars on the data front.Operators are likely to create differentiation on the basis of customer experience and service quality,instead of pricing.

The go-ahead on M&A guidelines is welcome and India is likely to see a wave of consolidation in the future.The current market is likely to stabilise to six players.Most subscriber and revenue shares will be with three or four players,in tandem with international standards.This will improve margins,operating profitability and the cash-flow situation.

Moreover,spectrum trading and sharing will also play a part in the sectors consolidation.Currently,spectrum holding of individual operators is very fragmented,which leads to inefficient utilisation of the scarce resource.The final judgement on trading and sharing of airwaves will allow companies to sell off valuable assets in cases where a merger is not as lucrative for the players.With high capital spending,collaboration between operators is likely to increase.Over the past one year,operators have entered into several mutually beneficial arrangements.For instance,2G intra-circle roaming pacts have been signed between operators.Also,operators have partnered to share their infrastructure including towers,optic fibre network inter- and intracity and submarine cable networks.These deals have cut the capex for operators and also led to reduced timeto-market for new entrants.It also accrues additional benefits to the operator leasing its infrastructure in the form of additional income of underutilised assets.

On the regulatory front,many policy decisions are on the anvil like spectrum trading and sharing,and auction of 700 MHz and 800 MHz bandwidths.These will help operators plan their growth strategies.

The Way Forward on Natural Resources 

Over the last decade,about 44 billion tonnes of coal was allocated to the public and nearly 100 private firms global annual production is 7.8 billion tonnes with 142 blocks allocated without competitive bidding.Coal production stayed in the doldrums,leaving power plants mothballed.

Author has suggested the way forward on natural resources :

• The price of a non-renewable resource should grow at the market interest rate,with resource depletion compensated for by returns from substituted capital infrastructure,human capital or money.
• Allocation needs to be via competitive bidding,utilising reserve prices and auction design to prevent collusion.
• Transfer pricing opens up avenues for corruption.Greater transparency of company accounts is needed,with regular monitoring by revenue authorities.As suggested by the Extractive Industries Transparency Initiative (EITI),rigorous standards should be adopted,with audits focusing on commodity trading operations,transfer pricing across concession holder group firms and social expenditure.Resource firms and governments must disclose what they give and receive.
• Pricing of commodities like gas should be market-based,reflecting extraction costs,international pricing and local demand,with appropriate liquidity to avoid interest group capture.
• Equity stake sales of natural resource firms like Coal India and IOC should be conducted at appropriate market prices,instead of being pushed through to meet arbitrary deficit targets.
• Every coal mine has its local conflict.As suggested by IFC and the UN,standard setting for fiscal contracts should adhere to global standards,with accountability enforced through legal mechanisms,investigations and clearly defined sanctions.Local people need to be actively consulted before,during and after the resource extraction phase.To avoid disputes about consultation,independent audits must be conducted.As recommended by the World Bank,transparency about resource allocation should be promoted at local,state and national levels,with concession contracts publicly presented and revenue allocation clearly tracked.
• Unlike a multinational,villagers cannot afford armies of economists and lawyers.Fiscal linkage is critical.The pending mining (MMRDA) Bill needs rework,with royalty rates supposedly set at optimum levels and mining leaseholders supposed to pay an annual amount to the District Mineral Fund (DMF) 26% of profits for coal,100% annual royalty for others for the benefit of affected persons.Seemingly fair,this imposition of additional costs through DMF payments could make mining unviable,particularly in areas with little infrastructure.The DMFs governing council,regulating disbursement,will be composed of various government officials and mining firm representatives,with little representation from affected families.With DMF compensation linked to profits,any shortfall,fair or foul,will be covered by the state government,putting pressure on its finances.
• The push to mine natural resources,with little regard given to the environment and impoverishment,will initiate political movements and revolts.Fair valuation,allocation and equitable distribution is needed.Whether we turn into a Norway or break down into a Venezuela,only time will tell. 

Time to Settle the India-China Border  

The Henderson Brooks report,a survey of the causes of the India-China conflict of 1962 and the reasons for Indias failure then,has been leaked on the net by Neville Maxwell,a retired journalist.The report had been locked up by the government for 51 years after its submission.In an election season,politics will be attributed to the timing of the leak,but that is irrelevant.Only three major things matter.

First,the government has to set a firm commitment to release classified official documents after a certain number of years.Declassification is useful for a variety of reasons: 
*a better understanding of history is an important one,and
*learning from past errors is another useful trait for any society.

Second,it is important for India to understand how badly the military underestimated Chinese capabilities and overestimated its own.This came from a failure of communication between the military establishment and its civilian political masters.This should never happen again.

Three,the report will force both India and China to acknowledge one important historical fact.Both are ancient civilisations but the idea of a nation-state,with defined borders,came to us late.For India,this happened with the advent of the British and consolidation of colonial power.Partition in 1947 created our present borders.The Chinese nation-state is an outcome of its 1949 communist revolution.Given this historical reality,there are bound to be parts of our border that are open to interpretation and dispute.We must resume the border talks that started during the Rajiv Gandhi era,and settle our borders with a mutually-accepted agreement.

SEZ Scheme a Non-starter : 60% Notified Land Still Lying Vacant 

The UPA governments special economic zone (SEZ) scheme,aimed at creating infrastructure to facilitate exports,doesnt seem to have succeeded in doing so and may instead end up turning into a real estate play as had been feared,said analysts and critics of the way in which the plan has been implemented.

Some facts:
1. More than 60% of the total land notified as SEZs is vacant years after the scheme opened in 2006.

2. So far,the government has notified 389 SEZs,envisaged as enclaves of export excellence.Of the total 47,803 hectares of SEZ land notified,only 17,689,or 37%,has been put to use so far,according to ministry of commerce and industry data.

3. Only 185 of the 389 notified units are functional,defined as at least one working export unit.

There are some developers who are simply sitting on land and not doing anything.

SEZs get three years after they are notified to become operational,which is the setting up of at least one unit.However,they can apply for extensions at board of approval meetings.

Not all SEZs have been deliberately delayed though.
1. Many of the notified SEZs do not have full approvals while others are in the process of setting up infrastructure before units can be set up.
2. In a lot of other cases,the units are not coming in. 
3. A number of approvals are stuck due to issues such as environmental clearance,among others.

Changes in tax laws have also made these zones less attractive.Former finance minister Pranab Mukherjee imposed a minimum alternate tax of 18.5% on the book profits of SEZ developers and units located in such zones in 2011-12,which saw drew strong protests.

The original scheme provided for a complete tax holiday for SEZs,including exemption from MAT and dividend distribution tax.However,these units still get 100% income-tax exemption on export income for the first five years,50% for the next five years and 50% of the ploughed back export profit for another five years.

SEZs registered a 31% growth in exports in 2012-13 when Indias overall outbound shipments contracted.In the April-December period this year,exports from SEZs have only grown 7% from last year while overall exports have grown 6%.

Arpita Mukherjee of Icrier said,Land is not the problem in SEZs,else there would not have been such a large area lying vacant.The government needs to assess where its policy went wrong as units do not want to get in, Mukherjee said.

An Opportunity to Boost Forex Reserves   

Volatility is the hallmark of currency markets.The rupee is expected to strengthen,in the wake of huge inflows of portfolio investments,to levels far stronger than warranted by the Indian economys fundamentals.This presents the Reserve Bank of India with an opportunity to buy up dollars and accumulate reserves.It makes no sense to allow fickle capital flows to set the value of the rupee in a way that would harm real economic activity.This is so,even if it is tempting for the government to use a strong rupee to cheapen imports,particularly oil and gas,and hold the price line in the run up to elections.
There are several reasons for the turnaround in the rupees fortunes from being the worst-hit emerging market currency to the most resilient in a matter of eight to nine months.
1. One is the credible and creditable progress in macroeconomic management: 

• the fiscal deficit has been held in check and is on course to fall further,
• the current account deficit will compress sharply to less than 2.5% of the GDP and 
• inflation has begun to ease.

2. Another has to do with the political cycle.It is widely believed that political parties and their backers bring

money back to India using foreign financial institutions,to meet the huge expenditure on the election process.

3. The final touted reason for foreigners newfound fascination for Indian stocks is the prospect of political stability,with poll forecasts suggesting a very strong showing by Narendra Modi.The reality is that a renewed political mandate for the government at the Centre is sufficient to catalyse growth after elections.India has had only shaky coalitions and minority governments since 1989 but the economy has grown at its fastest pace in this period.Regardless of who forms the government,the economy should see renewed vigour after the elections.
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National Solar Mission Way Short of Target   

Three years after Prime Minister Manmohan Singh announced an ambitious plan to generate 20,000 mw of solar power by 2022 under the Jawaharlal Nehru National Solar Mission,the programme is yet to take off in a meaningful way and remains far behind target.

Marred with delays,trade disputes and competition from state-level schemes,the central programme could so far contribute just one-third to the Indias total solar capacity.The programme is losing on time and offering small capacities.
The first phase of the solar mission from 2010-2013 added just 252.5 mw of solar power generation capacity against the targeted 1100 mw.
In the second phase started in 2014,a year later than planned,the government aims to add 10,000 mw solar energy capacity by 2017,under both photovoltaic (PV) and concentrated solar power (CSP) or solar thermal technology.

In a tender floated in January,it bid out PV projects totalling 750 MW,for which it received bids thrice the requirement.Companies are ready to offer more and government could have easily announced a second bid for the surplus amount.

The solar mission would hopefully add around 800 MW this year and all states combined are expected to add another 600 MW.So,we are looking at a miniscule 1500 MW of capacity addition in solar this year and all this after when three years of the mission have already been consumed.

Indias total solar power installation currently stands at 2208 MW,out of which 661 MW has been contributed from projects selected under the national solar mission.The balance is from the state schemes for solar power development,with 70% coming solely from Gujarat.

Madhya Pradesh is looking to add another 800 MW of solar by June 2014.Several independent power producers are lining up to invest in state schemes that come with offers such as costfree land and tax breaks.

Officials at MNRE are,however,hopeful that the mission would meet its target.We were actually thinking of scaling up the target to 1 lakh MW by 2022.But it was prudent to first develop a domestic market and stabilise it and then reach for bigger goals, a senior MNRE official said.

The second phase of the mission was delayed due to trade dispute among the domestic and foreign manufacturers of solar cells,with recurrent changes in the mission guidelines.A case of dumping of equipments against solar companies of China,US,Malaysia and Taiwan is going on.And the US has filed two complaints against India in World Trade Organisation for safeguarding its domestic industry and restricting competition in JNNNSM guidelines.Analysts said such delays hurt a nascent sector like solar.The uncertainty or lull that happened last year is not desirable for a programme of this scale.The bidding in the current phase has undoubtedly been impressive and government needs to keep up with the investment resonance happening in the sector, a renewable energy market analyst said.

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