China’s Belt and Road and India’s Infrastructural Ambitions – Where is the line to be drawn?

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When in 2017, China organized the first-ever Forum on Belt and Road, almost 130 countries from all over the world, including the United States had sent in their representatives to witness and be part of the diplomatic showcase of China’s global ambitious project, which aims to create an interlocked trade, financial and cultural network stretching from East Asia to Europe and beyond. There was, however, one notable miss, India. India was always opposed to Chinese ambitions of erecting this vast infrastructural network and the primary reason was that it violated India’s state sovereignty. The showcase arm of the Chinese Belt and Road happens to be the China-Pakistan Economic Corridor, a $62 Billion pet project of Chinese President Xi Jinping and traversing the entire length and breadth of Pakistan with nodal points in Xinjiang province of China, and Pakistan’s port town of Gawdar. CPEC is marked by modern infrastructure of transportation networks, special economic zones, industrial clusters and energy hubs, and considered China’s main plank of Belt and Road Initiative aimed to underscore China’s economic might and dominance over the Asian-Pacific seas. That a segment of CPEC cuts through the disputed territory of Pakistan Occupied Kashmir has irked India no ends, which it considers a direct, uncalled-for and aggressive nature of China’s global ambitions at the cost of state sovereignty. Though, the CPEC is yet to be fully commissioned, some segments have started to function. This is turning out to be major bone of contention between the two Asian economic giants. But, relations have a gotten a bit murkier since 2017, and two major geopolitical events have confounded matters further. 

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The first one is the Doklam Standoff between China and India. This tiny plateau nestled between China, India and Bhutan witnessed a three-month standoff between the two largest armies in the world over a road that the Chinese were building and which India apprehended would function more as a surveillance apparatus over the narrow path of land that connects the Indian mainland with the Northeastern states. Though the tension was eventually diffused, the state of affairs between China and India never really thawed as could have been anticipated. It was in 2017 that India and Pakistan became newly installed members of the Shanghai Cooperation Organization (SCO), having been elevated from observer states. China, anticipating an increasing amount of divisiveness within a regional economic and security organization by being accustomed to extreme comity and cooperative discussions was frustrated at India’s becoming a member state that Russia, another founder-member of SCO pushed for. Russia wanted to constrain China’s growing influence in the organization as it was concerned that post-Soviet SCO members were drifting too far into the Chinese geostrategic orbit. Moscow had long delayed implementing Chinese initiatives that would have enabled Beijing to reap greater benefits from regional trade. As China gained more clout in Central Asia, Moscow choice New Delhi’s inclusion to slow and oppose Beijing’s ambitions. It is under these circumstances that New Delhi would likely continue to criticize the CPEC in the context of the SCO because, as a full member, India now has the right to protest developments that do not serve the interests of all SCO members. The SCO also offers another public stage for India to constantly question the intent behind China’s exceptionally close ties to Pakistan.

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The second is the recent escalation of hostilities between India and Pakistan, and how Pakistan felt betrayed over China’s so-called neutral stand by asking both countries to take recourse to meaning dialogue in resolving the contentious issue of Kashmir and Terror and cease all military adventures. It is to be noted that the second convention of the Belt and Road Forum is to take place in April this year, and China is all hopeful to get India’s positive support for its infrastructural might. India’s notable absence from the 2017 meet has hit Chinese plans, and the latter wants to reverse the course this time around. Even if India were to take part this year, or send in their dissent note via an official communique, it would reliably and reasonably highlight the contradiction between China’s stated anti-terrorism goals and the reality of its policy. Most notably, Beijing has consistently looked the other way as Pakistani Intelligence Services continue to support terrorist groups in Afghanistan and Pakistan. Moreover, because India is particularly close to the Afghan Government, it could seek to sponsor Afghanistan to move from observer status toward full SCO membership. This would give India even greater strength in the group and could bolster Russia’s position as well.  

Lingering border disputes and fierce geostrategic competition in South Asia between China and India is likely to temper any cooperation Beijing might hope to achieve with New Delhi in latter’s inclusion at the Forum. Mutual suspicions in the maritime domain persist as well, with the Indian government shoring its position in the strategically important Andaman and Nicobar island chain to counter the perceived Chinese “string of pearls” strategy – aimed at establishing access to naval ports throughout the Indian Ocean that could be militarily advantageous in a conflict. Such mutual suspicions will likely impact Forum’s deliberations and discussions in unpredictable ways. Although India may be an unwelcome addition and irritant, China’s economic and military strength makes it far more formidable on its own – a point that is only magnified as Russian influence simultaneously recedes, or rather more aptly fluctuates. Even when India rejected Beijing’s Belt and Road Initiative overture, China remains India’s top trading partner and a critical market for all Central and South Asian states, leaving them with few other appealing options. India’s entry into the Forum, however, could put Beijing in the awkward position of highlighting the value, while increasingly working around or outside of it. Outright failure of the Forum would be unacceptable for China because of its central role in establishing it in the first place. Regardless of the bickering between countries that may break out, Beijing can be expected to make yet another show of the importance, with all of the usual pomp and circumstance, at the upcoming summit in April, 2019.

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What then is India’s infrastructural challenge to Belt and Road? India’s Prime Minister Narendra Modi instantiated the need for overhauling the infrastructure in a manner hitherto not conceived of by emphasizing that the Government would usher in a ‘Blue Revolution’ by developing India’s coastal regions and working for the welfare of fishing communities in a string of infrastructure projects. That such a declaration came in the pilgrim town of Somnath in Gujarat isn’t surprising, for the foundations of a smart city spread over an area of about 1400 acres was laid at Kandla, the port city. The figures he cited during his address were all the more staggering making one wonder about the source of resources. For instance, the smart city would provide employment to about 50000 people. The Blue Revolution would be initiated through the Government’s flagship Sagarmala Project attracting an investment to the tune of Rs. 8 lakh crore and creating industrial and tourism development along the coast line of the entire country. Not just content with such figures already, he also promised that 400 ports and fishing sites would be developed under the project. One would obviously wonder at how tall are these claims? Clearly Modi and his cohorts are no fan of Schumacher’s “Small is Beautiful” due to their obsession with “Bigger is Better”. What’s even more surprising is that these reckless followers of capitalism haven’t even understood what is meant by “Creative Destruction” both macro- or micro- economically. The process of Joseph Schumpeter’s creative destruction (restructuring) permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets. At the microeconomic level, restructuring is characterized by countless decisions to create and destroy production arrangements. These decisions are often complex, involving multiple parties as well as strategic and technological considerations. The efficiency of those decisions not only depends on managerial talent but also hinges on the existence of sound institutions that provide a proper transactional framework. Failure along this dimension can have severe macroeconomic consequences once it interacts with the process of creative destruction. Quite unfortunately, India is heading towards an economic mess, if such policies are to slammed onto people under circumstances when neither the macroeconomic not the microeconomic apparatuses in the country are in shape to withstand cyclonic shocks. Moreover, these promotional doctrines come at a humungous price of gross violations of human and constitutional rights of the people lending credibility once again to the warnings of Schumacher’s Small is Beautiful: A Study of Economics as if People Mattered…

So, is there any comparison between Belt and Road and Blue Economy? Well, pundits could draw far-fetched comparisons between these infrastructural advances, but, for the Chinese, Belt and Road is geographically much vaster as compared to Indian Blue Economy, which is more confined to domestic consumptions but do have elements of exim and trade aspects to it. Apart from that, when it comes to fulfilling these ambitions, China with its economic might have much better resources at commissioning the initiative, whereas India, with its faltering banking industry and waning investor confidence is finding its increasingly difficult to map out routes of funding and financing. On a more geopolitical note, and especially in the wake of current events between India and Pakistan, china would do well to factor in the larger perspectives of its relations with South Asia. It’s well known that China has been using Pakistan as a foil against India since the 1960s, and with its CPEC has upped its commitment to Pakistan that includes the assurances of Pakistani well-being. But can China remain oblivious to Pakistan’s scorpion-like behavior of devouring itself? On the other hand, a stable India is providing opportunities for Chinese companies to expand themselves. The reset in Sino-Indian ties following the Wuhan Summit of 2018 has created conditions which can be of great benefit to Beijing in an era when it is facing a fundamental challenge from the United States. Who knows, New Delhi may even consider supporting the Belt & Road Initiative in some indirect fashion as the Japanese are doing?  

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Demonetization – One Year Of A Rudderless Cacophony (A Booklet of Compilation of Blog Posts)

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On the midnight of 8/11/16, in a single pronouncement, the Prime Minister of India made higher denominations of Rs. 500 and Rs. 1000 illegal tender under the pretense of curbing black money, arresting tax evasion, stopping funding of terrorist activities and counterfeiting of currency. Those who had these notes were given a time frame of less than 2 months to deposit them and withdraw new denominations in different slabs of limits set by the RBI. The Indian economy, which is predominantly cash based and the Indian people, a great section of who are financially excluded, existing solely on hard currency, would somehow have to manage through this ‘temporary crisis’ for the greater good of the nation. This was the call of the Prime Minister to undergo ‘temporary hardships’ to root out the ills of the Indian Economy.

And so what happened? The country panicked and people rushed to banks to deposit their cash savings, exchange high denominations and lines formed. Long lines, winding unending lines full of people waiting to deposit and get new notes. People died in those lines, many patients could not get timely medical help, many social functions – marriages and burials got drowned in questions of “why cant you suffer a little for the country, when soldiers are giving their blood in the borders to protect you”. But what about people who never had a bank account? Or those too far away from a branch or ATM to withdraw or exchange? Or those whose earnings were so marginal that they could not spare losing a day’s work waiting in lines? Or women who had painstakingly collected money for emergency over many years? What about those crores of rupees that was saved through co-operative banking system, still far away from the mainstream banking operations – but was safeguarding the money of crores of people in many states? Modi’s solution for those suffering was clearly evident on the morning of the 9th, plastered on almost every major newspaper “abhi ATM nahin, Paytm Karo.”…..

Demonetization – One Year Of A Rudderless Cacophony

 

Financial Analysis of the Blue Economy: Sagarmala’s Case in Point

Let us begin with the question. Why is infrastructure even important? Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy. Well-developed infrastructure reduces the effect of distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions. In addition, the quality and extensiveness of infrastructure networks significantly impact economic growth and affect income inequalities and poverty in a variety of ways. A well- developed transport and communications infrastructure network is a prerequisite for the access of less-developed communities to core economic activities and services. Effective modes of transport, including quality roads, railroads, ports, and air transport, enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable jobs. Economies also depend on electricity supplies that are free of interruptions and shortages so that businesses and factories can work unimpeded. Finally, a solid and extensive communications network allows for a rapid and free flow of information, which increases overall economic efficiency by helping to ensure that businesses can communicate and decisions are made by economic actors taking into account all available relevant information. There is an existing correlation between infrastructure and economic activity through which the economic effects originate in the construction phase and rise during the usage phase. The construction phase is associated with the short-term effects and are a consequence of the decisions in the public sector that could affect macroeconomic variables: GDP, employment, public deficit, inflation, among others. The public investment expands the aggregate demand, yielding a boost to the employment, production and income. The macroeconomic effects at a medium and long term, associated with the utilization phase are related to the increase of productivity in the private sector and its effects over the territory. Both influence significantly in the competitiveness degree of the economy. In conclusion, investing in infrastructure constitutes one of the main mechanisms to increase income, employment, productivity and consequently, the competitiveness of an economy. Is this so? Well, thats what the economics textbook teaches us, and thus governments all over the world turn to infrastructure development as a lubricant to maintain current economic output at best and it can also be the basis for better industry which contributes to better economic output. So far, so good, but then, so what? This is where social analysts need to be incisive in unearthing facts from fiction and this faction is what constitutes the critique of development, a critique that is engineered against a foci on GDP-led growth model.

Rewinding back to earlier this year in April, when the occasion was the inauguration of the 2nd annual meeting of New Development Bank (NDB) by the five member BRICS (Brazil-Russia-India-China-South Africa) countries in New Delhi, Finance Minister Arun Jaitley stressed that India has a huge unmet need for investment in infrastructure, estimated to the tune of Rs 43 trillion or about $646 billion over the next five years, 70% of which will be required in the power, roads and urban infrastructure sectors. He reiterated that in emerging markets and developing economies (EMDEs), the overall growth is picking up, although growth prospects diverge across countries. Further,

But there are newer challenges, most notably a possible shift towards inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and increased geopolitical tensions, including unpredictable economic policy of USA. Most importantly, the EMDEs need to carry out this huge investment in a sustainable manner. The established Multi-lateral Development Banks are now capital constrained, and with their over emphasis on processes, are unable to meet this financing challenge. We shall work with the NDB to develop a strong shelf of projects in specific areas such as Smart Cities, renewable energy, urban transport, including Metro Railways, clean coal technology, solid waste management and urban water supply.

This is the quote that reflects the policy-direction of the Government at the centre. Just a month prior to Jaitley’s address, it was the Prime Minister Narendra Modi, who instantiated the need for overhauling the infrastructure in a manner hitherto not conceived of, even though policies for such an overhauling were doing the rounds in the pipeline ever since he was elected to the position in May 2014. Modi emphasized that the Government would usher in a ‘Blue Revolution’ by developing India’s coastal regions and working for the welfare of fishing communities in a string of infrastructure projects. that such a declaration came in the pilgrim town of Somnath in Gujarat isn’t surprising, for the foundations of a smart city spread over an area of about 1400 acres was laid at Kandla, the port city. The figures he cited during his address were all the more staggering making one wonder about the source of resources. For instance, the smart city would provide employment to about 50000 people. The Blue Revolution would be initiated through the Government’s flagship Sagarmala Project attracting an investment to the tune of Rs. 8 lakh crore and creating industrial and tourism development along the coast line of the entire country. Not just content with such figures already, he also promised that 400 ports and fishing sites would be developed under the project, of which the state of Gujarat along would account for 40 port projects with an investment of about Rs. 45000 crore.

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The Government, moreover plans to help the fishermen buy fishing boats at 50% subsidized rates, where five poor fishermen could form a cooperative and avail 50% subsidy and Rs 1 crore loan from Mudra scheme1. Fishermen can buy a fishing trawler with cold storage facility and increase their income (emphasis mine).

One would obviously wonder at how tall are these claims? Clearly Modi and his cohorts are no fan of Schumacher’s “Small is Beautiful” due to their obsession with “Bigger is Better”. What’s even more surprising is that these reckless followers of capitalism haven’t even understood what is meant by “Creative Destruction” both macro- or micro- economically. The process of Joseph Schumpeter’s creative destruction (restructuring) permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets. At the microeconomic level, restructuring is characterized by countless decisions to create and destroy production arrangements. These decisions are often complex, involving multiple parties as well as strategic and technological considerations. The efficiency of those decisions not only depends on managerial talent but also hinges on the existence of sound institutions that provide a proper transactional framework. Failure along this dimension can have severe macroeconomic consequences once it interacts with the process of creative destruction. Quite unfortunately, India is heading towards an economic mess, if such policies are to slammed onto people under circumstances when neither the macroeconomic not the microeconomic apparatuses in the country are in shape to withstand cyclonic shocks. Moreover, these promotional doctrines come at a humungous price of gross violations of human and constitutional rights of the people lending credibility once again to the warnings of Schumacher’s Small is Beautiful: A Study of Economics as if People Mattered (emphasis mine). After this pretty long sneak peek via introduction, let us turn to Blue Economy/Blue Revolution.

Blue Economy or Blue Revolution?

What exactly do these terms mean? What is the difference between the ocean economy and the blue or sustainable ocean economy? Is it simply that a sustainable ocean economy is one where the environmental risks of, and ecological damage from, economic activity are mitigated, or significantly reduced? Is it enough that future economic activity minimizes harm to the ocean, or rather, should aim to restore its health? These are pressing questions, and thus a working definition of what blue Economy is, or rather more aptly how Blue Economy is conceived the world over is an imperative.

A sustainable ocean economy emerges when economic activity is in balance with the long-term capacity of ocean ecosystems to support this activity and remain resilient and healthy.

The ocean is becoming a new focal point in the discourse on growth and sustainable development, both at national and international levels. The world is in many ways at a turning point in setting its economic priorities in the ocean. How this is done in the next years and decades, in a period when human activities in the ocean are expected to accelerate significantly, will be a key determinant of the ocean’s health and of the long- term benefits derived by all from healthy ocean ecosystems. The idea of the “blue economy” or “blue growth” has become synonymous with the “greening” of the ocean economy, and the frame by which governments, NGOs and others refer to a more sustainable ocean economy – one, broadly, where there is a better alignment between economic growth and the health of the ocean. Increasingly, national ocean development strategies reference the blue economy as a guiding principle, while policy-makers busy themselves filling in the gaps. These gaps are very considerable. Stimulating growth in the ocean economy could be comparatively straightforward; but what is not always clear is what a sustainable ocean economy should look like, and under what conditions it is most likely to develop. It is at this point where the Government and the communities dependent on oceans for life and livelihoods come to friction, and most of the time, it is the communities which find themselves at the receiving end for whenever policies pertaining to oceans and economies thereof are blue-printed, these communities seldom have a representation, or a representational voice. As could be made amply clear from the above description of what Blue Economy entails, it is the financialization of and economics of the ocean, that gets the prerogative over pretty much everything else. Indian schema on the Blue Economy is no different, and in fact it takes the theory into a derailed practice with Sagarmala Project.

What then is Blue Revolution? As has been the customary practice of the Government of India in changing names, this ‘Revolution’ too has come in to substitute ‘Economy’ in Blue Economy. This runs concomitantly with the major principles of Blue Economy in recognizing the potential and possibilities of the fisheries sector by unlocking the country’s latent potential through an integrated approach. In the words of the Government2, the Blue Revolution, in its scope and reach, focuses on creating an enabling environment for an integrated and holistic development and management of fisheries for the socio economic development of the fishers and fish farmers. Thrust areas have been identified for enhancing fisheries production from 10.79 mmt (2014-15) to 15 mmt in 2020-21. Greater emphasis will be on infrastructure with an equally strong focus on management and conservation of the resources through technology transfer to increase in the income of the fishers and fish farmers. Productivity enhancement shall also be achieved through employing the best global innovations and integration of various production oriented activities such as: Production of quality fish seeds, Cost effective feed and adoption of technology etc.

The restructured Plan Scheme on Blue Revolution3 – Integrated Development and Management of Fisheries has been approved at a total central outlay of Rs 3000 crore for implementation during a period of five years (2015-16 to 2019-20)4. The Ministry of Agriculture and Farmers Welfare, Department of Animal Husbandry, Dairying & Fisheries has restructured the scheme by merging all the ongoing schemes under an umbrella of Blue Revolution. The restructured scheme provides focused development and management of fisheries, covering inland fisheries, aquaculture, marine fisheries including deep sea fishing, mariculture and all activities undertaken by the National Fisheries Development Board (NFDB).

The Blue Revolution scheme has the following components:

  1. 1  National Fisheries Development Board (NFDB) and its activities
  2. Development of Inland Fisheries and Aquaculture
  3. Development of Marine Fisheries, Infrastructure and Post-Harvest Operations
  4. Strengthening of Database & Geographical Information System of the Fisheries Sector
  5. Institutional Arrangement for Fisheries Sector
  6. Monitoring, Control and Surveillance (MCS) and other need-based Interventions
  7. National Scheme of Welfare of Fishermen

One cannot fail to but notice that this schema is a gargantuan one, and the haunting accompaniment in the form of resources to bring this to effectuation would form the central theme of this paper. Though, there is enough central assistance, the question remains: where would these resources be raised/generated? Broad patterns of Central funding for new projects broadly fall under four components,

  1. National Fisheries Development Board (NFDB) and its activities,
  2. Development of Inland Fisheries and Aquaculture,
  3. Development of Marine Fisheries, Infrastructure and Post- Harvest Operations and
  4. National Scheme of Welfare of Fishermen are as below:
  • 50% of the project/unit cost for general States, leaving the rest to State agencies/ organizations, corporations, federations, boards, Fishers cooperatives, private entrepreneurs, individual beneficiaries.
  • 80% of the project/unit cost for North-Eastern/Hilly States leaving the rest to State agencies/Organizations, Cooperatives, individual beneficiaries etc.

  • 100% for projects directly implemented by the Government of India through its institutes/organizations and Union Territories.

Projects under the remaining three components scheme namely (i) Strengthening of Database & Geographical Information System of the Fisheries Sector, (ii) Institutional Arrangement for the Fisheries Sector and (iii) Monitoring, Control and Surveillance (MCS) and other need-based interventions shall be implemented with 100% central funding. Individual beneficiaries, entrepreneurs and cooperatives/collectives of the Union Territories shall also be provided Central financial assistance at par and equal to such beneficiaries in General States. As far as the implementing agencies are concerned, such wouldn’t really be an eye-opener.

  • Central Government, Central Government Institutes/Agencies, NFDB, ICAR Institutes etc.
  • State Governments and Union Territories
  • State Government Agencies, Organizations, Corporations, Federations, Boards, Panchayats and Local Urban Bodies
  • Fishers Cooperatives/Registered Fishers Bodies
  • Individual beneficiaries/fishers, Entrepreneurs, Scheduled Castes(SCs), Scheduled Tribes (STs) Groups, Women and their Co-operatives, SHG’s and Fish Farmers and miscellaneous Fishermen Bodies.

But, there is more than meets the eye here, for Blue Revolution isn’t all about fisheries, despite having some irreparable damages caused to the fisher community inhabiting the coastline for centuries. This revolution is purported to usher in industrialization, tourism and eventually growth through a criss-cross of industrial corridors, port up gradations and connectivities, raw material landing zones, coastal economic zones through what the adversaries of Blue Economy/Revolution refer to as Ocean Grabbing.5 In order to understand the implications of what ‘Ocean Grabbing’ refers to, one must look at it in tandem with Sagarmala Project, the flagship project of the Government of India, and a case study of instantiation of Blue Economy/Revolution. Here is where we turn to in the next section.

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Sagarmala

The contours of Sagarmala Project were laid out in the April 2016 perspective plan of the Ministry of Shipping. The plan involves a four-pronged approach that includes port modernization, port connectivity and port-led industrialization. It identifies Coastal Economic Zones (CEZ) and industrial clusters to be developed around port facilities mirroring the Chinese or European port infrastructure. The ambitious programmes spread across 14 ports is aimed to make domestic manufacturing and EXIM sector more competitive.

The project falls in line with Blue Revolution’s coastal community development. By “improving and matching the skills” of coastal communities, the plan seeks to ensure “sustainable development”. The plan seeks to improve the lives of coastal communities, implying that there is no contradiction between these objectives of port-led development and that of enhancing the lives of coastal residents. This seemingly win-win agenda is also endorsed by NITI Aayog’s mapping of schemes that are to help India achieve its Sustainable Development Goals (SDGs). Sagarmala is one of the ways Goal 14 will be met by 2030. Goal 14 is to conserve and sustainably use oceans, seas and marine resources.

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The Kutch coast of Gujarat tops the list of potential coastal economic zones (CEZs)6 in the 2016 perspective plan. The region is not unaccustomed to the consequences of this vision of port-centred development. The environmental impact assessment (EIA) for a large port development project in Mundra, Kutch, described the lands on which the SEZ was to be set up as “non-agricultural, waste, barren or weed infested land.” But that was far from the truth. These statements have been contested by local residents through endless administrative complaints and court cases. The litigation challenging projects in coastal Gujarat have brought up elaborate arguments regarding the complex web of valuable land uses that were blotted out to make this transformation possible.

Notwithstanding the contestations over such plans for coastal land use transformation in several regions like in Kutch, the Sagarmala plan document lays out its goals as if the coast has been an empty or unproductive space, and is now poised to be a “gateway” to growth. India’s coastline currently has about 3200 marine fishing villages. Nearly half of this population (over 1.6 million people) is engaged in active fishing and fishery-related activities. While such statistics may be quoted in the plan, the official proposal views these as mere numbers or as a population that will simply toe the line and play the role assigned to them in the plan.

Port expansions involve massive dredging into the sea that destroys large stretches of fertile fishing grounds and destabilizes jetties. Fishing associations bring out a range of concerns.7 Over the years there is reduced parking space for small artisanal boats, curtailed access to fishing harbours, and unpredictable fish catch. These changes keep them in a state of permanent anxiety or turn them into cheap industrial and cargo handling labour. These families also suffer the impacts of living next to mineral handling facilities and groundwater exhaustion. India has had laws to regulate environmental impacts, but these have been mostly on paper. So, the Minister for Road Transport & Highways, Shipping and Water Resources, River Development & Ganga Rejuvenation, Nitin Gadkari’s assurances that all air and water pollution norms will be met in the implementation of the Sagarmala plan may not cut any ice with coastal dwellers. Can India afford such an imagination of ‘frictionless development’? After all, we don’t yet have a Chinese model of governance.8 Running after the Chinese model of development9 is a still a dream in the corridors of power in New Delhi.

Late last year, the Minister Nitin Gadkari exuded confidence in promoting the port-led development by confidently asserting that the project would fetch 10-15 lakh crore capital investments, generate direct and indirect employment for around two crore people and provide a huge fillip to the country’s economic growth. Gadkari, when he inaugurated the Sagarmala Development Company, a unit under his ministry, and which would act as a nodal agency for the Project said Rs 8-lakh crore investment is expected as industrial investment while an additional Rs 4 lakh crore might go into port-led connectivity. It must be noted that Sagarmala Development Company10 has Rs. 1000 crore initial-authorized capital and is registered under the Companies Act, 2013. That the Government is going ahead full steam with the implementation of the Project, howsoever ill-conceived and fuzzy it might be could be gauged by the fact that a significant portion of the Project needs to be underway till the General elections of 2019. Gadkari said that projects worth Rs 1 lakh crore under the Sagarmala programme are already under various stages of implementation and by the completion of the present dispensation’s current tenure in 2019, projects worth Rs 5 lakh crore are expected to commence. He further stressed that a national perspective plan under the Sagarmala project has been prepared and projects worth Rs 8 lakh crore have been identified. That there is a lack of transparency in garnering these funds in the public domain could easily be decipherable from what Nitin Gadkari said,

I don’t have any problem with financial resources. We have already appointed an agency to help us raise funds.

What this agency is is anyone’s guess, or maybe locating the coordinates of it is as hard as finding a needle in the haystack. But, probably, here is the clue. In order to have effective mechanism at the state level for coordinating and facilitating Sagarmala related projects, the State Governments will be suggested to set up State Sagarmala Committee to be headed by Chief Minister/Minister in Charge of Ports with members from relevant Departments and agencies. The state level Committee will also take up matters on priority as decided in the National Sagarmala Apex Committee (NSAC)11. At the state level, the State Maritime Boards/State Port Departments shall service the State Sagarmala Committee and also be, inter alia, responsible for coordination and implementation of individual projects, including through Special Purpose Vehicles (SPVs) (as may be necessary) and oversight. The development of each Coastal economic zone shall be done through individual projects and supporting activities that will be undertaken by the State Government, Central line Ministries and SPVs to be formed by the State Governments at the state level or by Sagarmala Development Company (SDC) and ports, as may be necessary.

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Before getting into the financial ecosystem of Sagarmala, it is necessary to wrap this brief section on introducing Sagarmala with a list of the kinds of development projects envisaged in the initiative. This is also kind of summarizes the Blue Economy/ Revolution, Sagarmala Project and the hunger for infrastructural development by instances: (i) Port-led industrialization (ii) Port based urbanization (iii) Port based and coastal tourism and recreational activities (iv) Short-sea shipping coastal shipping and Inland Waterways Transportation (v) Ship building, ship repair and ship recycling (vi) Logistics parks, warehousing, maritime zones/services (vii) Integration with hinterland hubs (viii) Offshore storage, drilling platforms (ix) Specialization of ports in certain economic activities such as energy, containers, chemicals, coal, agro products, etc. (x) Offshore Renewable Energy Projects with base ports for installations (xi) Modernizing the existing ports and development of new ports. This strategy incorporates both aspects of port-led development viz. port-led direct development and port-led indirect development.

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Table12

What does the Government want to make us believe about this ambitious Project, i.e. raison d’être for undertaking this? The growth of India’s maritime sector13 is constrained due to many developmental, procedural and policy related challenges namely, involvement of multiple agencies in development of infrastructure to promote industrialization, trade, tourism and transportation; presence of a dual institutional structure that has led to development of major and non-major ports as separate, unconnected entities; lack of requisite infrastructure for evacuation from major and non- major ports leading to sub-optimal transport modal mix; limited hinterland linkages that increases the cost of transportation and cargo movement; limited development of centers for manufacturing and urban and economic activities in the hinterland; low penetration of coastal and inland shipping in India, limited mechanization and procedural bottlenecks and lack of scale, deep draft and other facilities at various ports in India.

The Financial Ecosystem of Blue Revolution/Economy and Sagarmala Project

Let us begin with a shocker. In the words of Nitin Gadkari14,

With bank credit drying up for large infrastructure projects, the National Democratic Alliance (NDA) government is exploring a plan to raise Rs 10 trillion from retirees and provident fund beneficiaries15.

The plan aims to raise money in tranches of Rs10,000 crore by selling 10-year bonds at a coupon of 7.25-7.75%. Each tranche will be meant for a specific project. India plans to invest as much as Rs 3.96 trillion in the current financial year to bankroll its new integrated infrastructure programme which involves building of roads, railways, waterways and airports.16 It needs to be recalled that in 2015, the Government set up the National Investment and Infrastructure fund (NIIF) to raise funds for the infrastructure sector with an initial targeted corpus of Rs 40,000 crore, of which Rs 20,000 crore was to be invested by the government. The remaining Rs 20,000 crore was to be raised from long-term international investors, including sovereign wealth funds, insurance and pension funds and endowments.

Using this option is a risky affair, not that it hasn’t been used elsewhere and for a time now, but it still retains the element of risk. The risk factor is cut if the interest rates are high, for then these retiree (pension17) and provident funds are used to buy bonds that would mature when there is a need to payout. But as interest rates fall, which is very much the case with India at the moment with fluctuations and a dip in growth post-demonetization and the banking system under stress due to NPAs, these funds are likely to face up with a dilemma. Staying heavily invested in bonds would force the Government to either set aside more cash upfront or to cut promises pertaining to retiree (pension) and provident funds. If this is the two-pronged strategy of the government on one hand, then on the other, these funds, if they are allowed to raise capital from the international markets (which, incidentally is cashing and catching up in India) radically change their investment strategies by embracing investments that produce higher returns, but are staring at more risks associated with the market. Though, this shift is in line with neoliberal market policies, this has replaced an explicit cost with a hidden one, in that the policy-makers would have to channel more capital into these funds, cut back benefits or both when the stock market crashes18 causing the asset value of these funds to decline.

A project of this magnitude is generally financed using the instrument of Project Finance. So, it becomes necessary to throw light on what exactly is entailed by the term. Project Finance is looked upon as the most viable form of financing that there is with highly mitigated levels of risks, at least, according to the financial worldlings! Although, there are difficulties and challenges/needs/necessities (in short applied/application), these need to be delineated. Additionally, a study on Project Finance leads inherently to a study on Public Private Partnerships (PPPs), another preferred mode in use in India at present. One of the fundamental trade-offs for PPPs designing is to strike a right balance between risks allocations between the public and private sector, risk allocation within the private sector and cost of funding for the PPP company. This again has potentials for points of conflict with specially designed Special Purpose Vehicles (SPVs) out there to bend inclinations due to lack of disclosure clauses that define Project Finance in the first place. The factorization of PPPs and SPVs is often channeled through what is currently gaining currency the world over: Financial Intermediaries (FIs). Let us tackle these one by one in order to know the financial ecosystem that would be helpful in tracking funds and investments flowing through into the Blue Revolution/Economy and Sagarmala Project.

A project is characterized by major productive capital investment. Now, there are some asymmetric downside risks associated with a project in addition to the usual symmetric and binary ones. These asymmetric risks are environmental risks and a possibility of creeping expropriation (due to the project). Demand, price; input/supply are symmetric risks in nature, while technological glitch and regulatory fluctuations are binary risks. All that a project is on the lookout for is a customized capital structure, and governance to minimize cash inflow/outflow volatility. Project finance aims to precisely do that. It involves a corporate sponsor investing through a non-recourse debt. It is characterized by cash flows, high debt leading to a need for additional support, bank guarantees, and letters of credit to cover greater risks during construction, implementation (commissioning as the context maybe), and at times sustainability. Now funding is routed through various sources, viz. export credits, development funds, specialized assets financing, conventional debt and equity finance. This is archetypal of how the corporate financial structure operates as far as managing risks is concerned from the point of view of future inflow of funds. It has a high concentration of equity and debt ownership, with up to three equity sponsors, syndicate of banks and financial institutions to provide for credit. Moreover, there is an extremely high level of debt with the balance of capital provided by the sponsors in the form of equity, while importantly, the debt is non- recourse to the sponsors.

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The attractiveness of project finance is the ability to fund projects off balance sheet with limited or no recourse to equity investors i.e. if a project fails, the project lenders recourse is to ownership of actual project and they are unable to pursue the equity investors for debt. For this reason lenders focus on the project cash-flow as this the main sources for repaying project debt. The shareholders will invest in the SPV with a focus to minimize their equity contributions, since equity commands a higher rate of return, and thus is a more risky affair compared with a conventional commercial bank debt. Whereas, the bank lenders will always seek a comfortable level of equity from shareholders of SPV to ensure that the project sponsors are seriously committed to the project and have a vested interest in seeing the project succeed.19

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The figure above delineates what Project Finance could do advantageously, but at the same time is a sneak peek into what the disadvantages are.

  1. Project Finance mandates greater disclosure of information on deals and contracts, which happen to be proprietary in nature.
  2. Extensive contracting restricts management decision-making, by looping it into complexities, where decisions making nodes are difficult to make.
  3. Project debt is more expensive.

To turn around the disadvantages of PPPs model, an SPV is introduced. SPV is generally taken as a concessionary authority, where the concession authority is the government itself, and grants a concession to the SPV, a license granting it exclusive ownership of a facility, which, once the term for the license is over is transferred back to the government, or any other public authority. The concession forms the contract between the government and SPV and goes under the name of project agreement. Things begin to get a bit murky here, for the readers be forewarned that this applicability is becoming a commonality in the manner in which infrastructure projects are funded nowadays. Let us try and extricate the knots here.

Consider a Rs. 100 crore collection of risky loan, obligations of borrowers who have promised to repay their loans at some point in future. Let us imagine them sitting on the balance sheet of some bank XYZ, but they equally well could be securities available on the market that the Bank’s traders want to purchase and repackage for a profit. No one knows whether the borrowers will repay, so a price is put on this uncertainty by the market, where thousands of investors mull over the choice of betting on these risky loans and the certainty of risk-free government bonds. To make them indifferent to the uncertainty these loans carry, potential investors require a bribe in the form of 20% discount at face value. If none of the loans default, investors stand a chance to earn a 25% return. A good deal for investors, but a bad one for the Bank, which does not want to sell the loans for a 20% discount and thereby report a loss.

Now imagine that instead of selling the loans at their market price of Rs. 80 crore, the Bank sells them to an Special Purpose Vehicle (SPV) that pays a face value of Rs. 100 crore. Their 20% loss just disappeared. Ain’t this a miracle? But, how? The SPV has to raise Rs. 100 crore in order to buy the loans from the Bank. Lenders in SPV will only want to put Rs. 80 crore against such risky collateral. The shortfall of Rs. 20 crore will have to be made up somehow. The Bank enters here under a different garb. It puts in Rs. 20 crore as an equity investment so that the SPV has enough money now to buy the Rs. 100 crore of loans. However, there is a catch here. Lenders no longer expect to receive Rs. 100 crore, or a 25% return in compensation for putting up the Rs. 80 crore. SPV’s payout structure guarantees that the Rs. 20 crore difference between face value and market value will be absorbed by the Bank, implying treating Rs. 80 crore investment as virtually risk-free. Even though the Bank has to plough Rs. 20 crore back into the SPV as a kind of hostage against the loans going bad, from Bank’s perspective, this might be better than selling the loans at an outright Rs. 20 crore loss. This deal reconciles two opposing views, the first one being the market suspicion that those Bank assets are somehow toxic, and secondly that the Bank’s faith that its loans will eventually pay something close to their face value. So, SPVs become a joint creation of equity owners and lenders, purely for the purpose of buying and owning assets, where the lenders advance cash to the SPV in return for bonds and IOUs, while equity holders are anointed managers to look after those assets. Assets, when parked safely within the SPV cannot be redeployed as collateral even in the midst of irresponsible buying spree.

Now, this technically might spell out the reasons for why an SPV is even required in the first place. But, enter caveat, for the architecture of an SPV is what lends complexity and a degree of murkiness to it. If one were to look at the architecture of SPV holdings, things get a bit muddled in that not only is the SPV a limited company registered under the Companies Act 2013, the promotion of SPV would lie chiefly with the state/union territory and elected Urban Local Body (ULB) on a 50:50 equity holding. The state/UT and ULB have full onus to call upon private players as part of the equity, but with the stringent condition that the share of state/UT and ULB would always remain equal and upon addition be in majority of 50%. So, with permutations and combinations, it is deduced that the maximum share a private player can have will be 48% with the state/UT and ULB having 26% each. Initially, to ensure a minimum capital base for the SPV, the paid up capital of the SPV should be such that the ULB’s share has an option to increase it to the full amount of the first installment provided by the Government of India. There is more than meets the eye here, since a major component is the equity shareholding, and from here on things begin to get complex. This is also the stage where SPV gets down to fulfilling its responsibilities and where the role of elected representatives of the people, either at the state/UT level or at the ULB level appears to get hazy. Why is this so? The Board of the SPV, despite having these elected representatives has in no certain ways any clarity on the decisions of those represented making a strong mark when the SPV gets to apply its responsibilities. SPVs, now armed with finances can take on board consultative expertise from the market, thus taking on the role befitting their installation in the first place, i.e. going along the privatization of services in tune with the market-oriented neoliberal policies. Such an arrangement is essentially dressing up the Economic Zones in new clothes sewn with tax exemptions, duties and stringent labour laws in bringing forth the most dangerous aspect of Blue Revolution/Economy/Sagarmala Project, viz. privatized governance. In short, this is how armed with finances, the doctrine of privatized governance could be realized, and SPV actually becomes the essence to attain it.

Turning our focus to what is often termed the glue in Project Finance, the instrument widely practiced today and what often joins PPPs and SPVs into a node of financing, Financial Intermediaries. Although, very much susceptible to abuse for the way it has been implemented, these are institutions that provide the market function of matching borrowers and lenders or traders. Financial intermediaries facilitate transactions between those with excess cash in relation to current requirements (suppliers of capital) and those with insufficient cash in relation to current requirements (users of capital) for mutual benefit. Now these take on astronomical importance considering that almost every other Non-Banking Financial Institution or an SPV could potentially be a financial intermediary. For example, insurance companies, credit unions, financial advisors, mutual funds and investment trusts are financial intermediaries. Financial intermediaries are able to transform the risk characteristics of assets because they can overcome a market failure and resolve an information asymmetry problem. Information asymmetry in credit markets arises because borrowers generally know more about their investment projects than lenders do. The information asymmetry can occur “ex ante” or “ex post”. An ex ante information asymmetry arises when lenders cannot differentiate between borrowers with different credit risks before providing loans and leads to an adverse selection problem. Adverse selection problems arise when an increase in interest rates leaves a more risky pool of borrowers in the market for funds. Financial intermediaries are then more likely to be lending to high-risk borrowers, because those who are willing to pay high interest rates will, on average, be worse risks. The information asymmetry problem occurs ex post when only borrowers, but not lenders, can observe actual returns after project completion. This leads to a moral hazard problem. Moral hazard arises when a borrower engages in activities that reduce the likelihood of a loan being repaid. An example of moral hazard is when firms’ owners “siphon off” funds (legally or illegally) to themselves or to associates, for example, through loss-making contracts signed with associated firms.

The problem with imperfect information is that information is a “public good”. If costly privately-produced information can subsequently be used at less cost by other agents, there will be inadequate motivation to invest in the publicly optimal quantity of information. The implication for financial intermediaries is as follows. Once banks obtain information they must be able to signal their information advantage to lenders without giving away their information advantage. One reason, financial intermediaries can obtain information at a lower cost than individual lenders is that financial intermediation avoids duplication of the production of information. Moreover, there are increasing returns to scale to financial intermediation. Financial intermediaries develop special skills in evaluating prospective borrowers and investment projects. They can also exploit cross- sectional (across customers) information and re-use information over time. Adverse selection increases the likelihood that loans will be made to bad credit risks, while moral hazard lowers the probability that a loan will be repaid. As a result, lenders may decide in some circumstances that they would rather not make a loan and credit rationing may occur. There are two forms of credit rationing: (i) some loan applicants may receive a smaller loan than they applied for at the given interest rate, or (ii) they may not receive a loan at all, even if they offered to pay a higher interest rate.

In other words, financial intermediaries play an important role in credit markets because they reduce the cost of channelling funds between relatively uninformed depositors to uses that are information-intensive and difficult to evaluate, leading to a more efficient allocation of resources. Intermediaries specialize in collecting information, evaluating projects, monitoring borrowers’ performance and risk sharing. Despite this specialization20, the existence of financial intermediaries does not replicate the credit market outcomes that would occur under a full information environment. The existence of imperfect, asymmetrically-held information causes frictions in the credit market. Changes to the information structure and to variables which may be used to overcome credit frictions (such as firm collateral and equity) will in turn cause the nature and degree of credit imperfections to alter. Banks and other intermediaries are “special” where they provide credit to borrowers on terms which those borrowers would not otherwise be able to obtain. Because of the existence of economies of scale21 in loan markets, small firms in particular may have difficulties obtaining funding from non-bank sources and so are more reliant on bank lending than are other firms. Adverse shocks to the information structure, or to these firms’ collateral or equity levels, or to banks’ ability to lend, may all impact on firms’ access to credit and hence to investment and output.

This section started with a shocker, and then weaved the plot generically in a deliberate manner to highlight the financial instruments in use for funding the massive Blue Revolution/Economy and Sagarmala Project. From the generic sense, it is time to move on to the specifics, where in the next section, one could easily fathom the generic nature of these instruments in use. this section was indeed technical, but a major collaborator to understanding the contours of Project Finance, and how is it that such instruments govern the polity and the policy of the ruling dispensation. Let us therefore, turn to what engineers the funding of this infrastructural giant.

Engineering Finance for Blue Revolution/Economy and Sagarmala Project

To reiterate, at the Central level, the Sagarmala Development Company (SDC) has been set up under the Companies Act, 2013 to assist the State level/zone level Special Purpose Vehicles (SPVS), as well as SPVs to be set up by the ports, with equity support for implementation of projects under Sagarmala to be undertaken by them. The formation of SDC was approved by the Cabinet on 20th July 2016 and was incorporated on 31st August 2016. It may be clarified that the implementation of the projects shall be done by the Central Line Ministries, State Governments/State Maritime Boards and SPVs and the SDC will provide a funding window and/or take up only those residual projects that cannot be funded by any other means/mode. The SDC will primarily provide equity support to the State-level or port-level SPV. All efforts would be made to implement these projects through the private sector and through the Public Private Participation (PPP) wherever feasible, strictly following the established guidelines and modality of appraisal and sanction of PPP projects. Projects in which SDC will take an equity stake, are expected to start giving returns only after 5-6 years. Therefore, SDC will be supported during initial 5-6 years through budgetary allocation of Ministry of Shipping. SDC will also be raising funds as debt/equity (as long term capital) from multi-lateral and bilateral funding agencies, as per the requirements, in consultation with Department of Economic Affairs. The SPVs in which SDCL will invest may start giving dividends once they become profitable and will constitute a revenue stream. The expenses incurred for project development will be treated as part of the equity contribution of SDC. In case SDCL is not taking any stake or the expenses incurred are more than the stake of SDC, then it will be defrayed by the SPV to SDC. SDC may, in future, want to divest its investment in any particular SPV to recoup its capital for future projects. At the State level, the State Maritime Boards/State Port Departments shall service the State Sagarmala Committees and also be, inter alia responsible for coordination and implementation of individual projects, including through SPVs and oversight. The State Governments/State Maritime  Boards (SMBs) shall implement such identified projects either from their own budgets or through SPVs wherein the SDC may provide equity support, as may be required and necessary. Funds will be sought for the implementation of residual projects from time to time in the budgets of the respective ministries/departments which will be implementing the projects. The Ministries/State Governments/Maritime Boards shall implement such identified either from their own budgets or through SPVs wherein the SDC may provide equity support, as may be required and necessary. Projects considered for funding (other than equity support) under Sagarmala’s budget shall be appraised and approved under the extant instructions and guidelines of the Ministry of Finance. Road and rail connectivity projects, already appraised and approved by the Ministry of Road Transport & Highways and Ministry of Railways respectively, will be considered as appraised projects. A representative of Ministry of Shipping could be a member of the project appraisal committee, set up by the relevant Ministries. Projects considered for equity support under Sagarmala and to be financed by SDC, will be independently appraised and approved by SDC as per its procedure. One can see that even if the title of the section is engineering, it is actually the architecture of who gets to fund what that is slowly building up the complexity of Sagarmala. Let us take a brief look at the numbers before getting back to engineering of funding.

As of March 2017, under Sagarmala, 415 projects, at an estimated investment of approximately Rs. 8 lakh crore, have already been identified across port modernization & new port development, port connectivity enhancement, port-linked industrialization and coastal community development for phase wise implementation over the period 2015 to 2035. As per the approved implementation plan of Sagarmala, these projects are to be taken up by the relevant Central Ministries/Agencies and State Governments preferably through private/PPP mode.

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Some of the key projects are:

  • Rs. 58.5 Crore released for capital dredging for Gogha-Dahej RO-Pax Ferry Services project
  • Rs. 50 Crore released for construction of RoB cum Flyover at Ranichak level crossing at Kolkata Port
  • Rs. 43.76 Crore released for RO-RO Services Project at Mandwa
  • Rs. 20 Crore released for setting up second rail line from Take-off Point A cabin atDurgachak (Haldia Dock Complex)
  • Rs. 20 Crore released for Vizag Port road connectivity to NH5
  • Rs. 10 Crore released for development of a full-fledged Truck Parking Terminal adjacent to NH7A (VOCPT)

As part of the Sagarmala Programme, 6 new port locations have been identified, namely – Vadhavan, Enayam, Sagar Island, Paradip Outer Harbour, Sirkazhi and Belekeri. The current status of each of the proposed new port locations is as follows:

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Increasing the share of coastal shipping and inland navigation in the transport modal mix is one of the key objectives of Sagarmala. In order to equip ports for movement of coastal cargo, the scope of coastal berth scheme has been expanded and merged with Sagarmala. Under the scheme, the financial assistance of 50% of project cost is provided to Major Ports/State Governments for construction of Coastal Berths, Breakwater, mechanization of coastal berths and capital dredging. Rs. 152 Cr has been released for 16 projects under this scheme. To augment transshipment capacity in the country, Vizhinjam (Kerala) and Enayam (Tamil Nadu) are being developed as transshipment ports. Vizhinjam is being developed as transshipment hub under PPP mode by Government of Kerala with Viability Gap Funding22 from Government of India.

Switching back to engineering, projects considered for funding under Sagarmala will either be provided equity support (SPV route) from SDC or funded (other than equity support) from the budget of Ministry of Shipping. Port projects will be primarily funded through the SPV route. Once the project is funded after due appraisal and approval, to the extent and limits prescribed under the guidelines, funds shall be released once all the clearances are in place. Most importantly, no other guarantees23 will be provided to the projects considered for funding.

The fund contribution from Sagarmala (from the budget of Ministry of Shipping) in any project will be limited to 50 per cent of project cost as per the Detailed Project Report (DPR) or tendered cost, whichever is lesser. 50 per cent is the cap of assistance from all sources/schemes of Government of India and will be provided in three tranches24 based on project milestones, In case of UTs, where no other sources of funding are available, the limit of 50 per cent could be relaxed. The fund released for a project being implemented in convergence mode with the schemes of other Central Line Ministries will not be higher than the approved ceiling of financial assistance under the concerned Central Sector Scheme (CSS). Projects having high social impact but with no return or low Internal Rate of Return (IRR)25 (e.g. fishing harbour projects, coastal community skill development projects, coastal tourism infrastructure projects etc.) may be provided funding, in convergence with the schemes of other Central Line Ministries, for implementation under Engineering, Procurement and Construction (EPC) mode. EPC mode is an interesting digression from PPP model as the former has a slight edge over the latter. In an EPC mode, the Government bears the entire financial burden and funds the project by raising capital through issuing bonds. In PPP, private entity would do cost-benefit analysis and would bid for project. Cheapest bid would be selected. So incentive is to reduce bid price. But as construction starts, there are local protests against land acquisition, and thus work halts. That means now costs would go up. Project faces market risk. Private entity will suffer loss and would refuse to work on pre-agreed bid. He would ask for more funding from Government. Government machinery, lethargic or may be skeptic of bidder’s intentions, would also make counter-arguments. And so there would be litigations. In EPC, it is government who is going to take up engineering. But, does government has engineering expertise? No, so government would call for bids for engineering knowledge. Thereafter, the government would give out calls for procurement of raw material and construction expertise. Under an EPC contract, the contractor designs the installation, procures the necessary materials and builds the project, either directly or by subcontracting part of the work. In some cases, the contractor carries the project risk for schedule as well as budget in return for a fixed price, called lump sum or LSTK26 depending on the agreed scope of work. So here, if project halts due to say local protests, government will deal with it. The private entity is saved from political questions. Anyway private entities are there merely for bottomline, whereas government is there for political tussle and governance. Thus EPC makes more sense and is an alternative for PPP. But, barring a few exceptions, the Government is still holding on to PPP as the preferred mode.

The equity contribution from SDC, in any project SPV, will be decided based on the project equity as per its DPR and will generally not exceed 49 per cent of the project equity. SDC can take equity contribution in existing or newly incorporated SPVs formed by State Governments/Maritime Boards/Ports etc. provided that these SPVs have projects which are ready for implementation. SDC can take equity in an existing or newly incorporated umbrella SPVs formed by State Governments/Maritime Boards/Ports etc. provided the same has been duly approved by the competent authority. SDC’s participation in the umbrella SPV would not restrain SDC from taking part in any other project SPV created by the same State Governments/Maritime Boards/Ports. SDC shall take only token equity to initiate/assist the process of project development in those SPVs which are scouting for projects or having projects under development stage only. As it would be difficult to ascertain the revenue flow from a particular project, a separate accounting for each project is an important clause in the contract document of the SPV. Continuing in line with equity-based funding, the question then arises as to what would be the recommended monitoring parameters for funded projects for equity and for those other than equity? Projects which are provided equity support (SPV route) by SDC will be monitored by the SPVs as well as SDC and Ministry of Shipping through an appropriate monitoring and evaluation mechanism. For projects which are provided funding (other than equity support), the fund recipients/project proponents will submit monthly progress report (physical and financial) of projects as per the electronic format/ MIS prescribed by SDC. SDC along with the fund recipients/project proponents will monitor the progress of projects based on the same. Additionally, the fund recipients/ project proponents will submit the utilization certificate for the fund released in the previous tranche for claiming release of subsequent installments/tranches. Wherever possible, the fund recipients/project proponents will submit a completion certificate, issued by an independent 3rd party agency, along with the final utilization certificate to claim the final tranche of fund. The 3rd party agency is to be appointed by the Ministry of Shipping from the approved panel maintained by the Indian Ports Association (IPA) for this purpose. The cost of appointing and functioning of the 3rd party agency will be borne by the Ministry of Shipping. The fund recipients/project proponents will maintain financial records, supporting documents, statistical records and all other records, to support performance of the project.

Although the monitoring mechanisms look neat on paper, there is absence of any transparency and accountability of whether these are in existence, or are these to be invoked at a stage when funds reach a point of questionability either in the sense of non- repayment, or by stressed assets, the consequent of which are the Non-Performing Assets. Still, what is not very clear is who are the funders involved apart from Government of India and State Governments. It is absolutely clear though, that both these entities would be taking recourse to National Financial Institutions (NFIs) and Non-Banking Financial Institutions (FIs) in addition to packing coffers in the budgets (both at the central and at the state levels) towards the massive investments in point. But, what of the International Financial Institutions (IFIs), or bi-lateral development institutions? This question is slightly jumping the gun, and would be understood in the perspective of what has now come to be called Blue Growth Initiative (BGI). Let us park this for a section and turn to looking at Sagarmala with some of its humungous initiatives that would give an idea behind numbers and figures.

Multi-headed Hydra (Projects envisaged under Sagarmala)

That the Government is going full steam on infrastructure cannot be fathomed by looking at Sagarmala in isolation. This has to be looked in tandem with industrial corridors, coastal economic zones, inland waterways, and tourism among a host of infrastructural stressed-upon points. Though, much of that is largely outside the scope of this chapter, it nevertheless is crucial to hover the compass of analysis in a loci around these allied infrastructures.

Starting with port modernization and new port development, Sagarmala is a gamut of 189 projects tipped at a whopping 1.42 lakh crore. Of these, the masterplans have already been finalized for 12 major ports; 142 projects at a cost of Rs. 91, 434 crore identified for implementation till 2035; and 42 projects worth Rs. 23, 263 crore are already under implementation.

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Port modernization along with new port development and major port operational efficiency improvement is to be integrated into what is now referred to as promotion of cruise tourism, foe which a task force has already been constituted and where now foreign flag vessels with passengers on board would be allowed to call at Indian ports without obtaining a license from director General of Shipping. Well, isn’t this what globalization is all about? Yes, largely, and more concertedly if the operating procedures effectuating these get standardized, and this is what has precisely happened for promoting cruise tourism in consultation with Bureau of Immigration, Ministry of Home Affairs, Central Board of Excise and Customs, Central Industrial Security Force and Port Authorities. The collaborative efforts of these authorities have led to the constitution of port-level committees to address manpower, coordination and logistical support. It is under the aegis of Sagarmala that cruise terminals are under development at Chennai and Mormugao in Goa.

Under the umbrella of port connectivity enhancements, 170 projects are either approved or in the pipeline at a cost of Rs. 2.3 lakh crore comprising of rail connectivity projects, road connectivity projects, multi-modal logistics parks and coastal shipping. Rail and road connectivity are precisely the components of freight corridors also launched under the name of industrial or economic corridors. Coastal shipping on the other hand is closely amalgamated with inland waterways. On a project-wise scale, there are plans to implement road projects under Sagarmala including 10 freight friendly expressways (E.g. Expressway from Ahmedabad to JNPT). Other proposals include awarding implementation of Heavy Haul Rail Corridor project between Talcher & Paradip in coordination with Ministry of Railways, proposing Cabotage relaxation for 2 years subject to level playing field for Indian flag ships, and bringing out a modal shift incentive scheme for Inland Water Transport sector by developing 37 prioritized National Waterways.

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On the port-led industrialization front, 33 projects are either approved, or in the pipeline at a cost of Rs. 4.2 lakh crore with perspective plans prepared for 14 coastal economic zones (CEZs). Moreover, 29 potential port-linked industrial clusters identified across Energy, Materials, Discrete Manufacturing and Maritime sectors are identified. The futuristic plans for port-led industrialization involves developing master plans for the 14 coastal economic zones in a phased manner with the first phase covering the states of Gujarat, Maharashtra, Andhra Pradesh and Tamil Nadu. The proposals also include developing detailed project reports (DPRs) for maritime clusters in Gujarat and Tamil Nadu. Crucially, the integration of smart cities with Sagarmala would be the implementation of Kandla & Paradip Smart Port Industrial Cities. What the Government has achieved through the New Shipbuilding Policy is granting shipyards infrastructure status, thus helping avail cheap working capital. The policy also has provided exemptions on taxes and duties, and made recommended arrangement for financial assistance to the tune of Rs. 20 crore of the initial cost flowing in from the center.

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The Coastal Community Development could be looked at under two broad categories, viz. skill development and fisheries development. Under the category of skill development, Rs. 30 crore have been sanctioned, of which Rs. 10 crore are already released towards safety training for workers in Alang-Sisoya shipyard. For the Coastal Districts Skill Training Project under Deen Dayal Upadhyay Grameen Kaushal Yojana (DDU-GKY), Rs. 13.77 crore have been sanctioned & Rs. 6.9 crore are already released. The Ministry of Shipping is undertaking skill gap analysis in 21 coastal districts, and the action plan for 6 districts in Gujarat, Maharashtra & AP are already prepared with projects from the same to be implemented under DDU-GKY. Under fisheries development, the Ministry of Shipping is part-funding select fishing harbour projects under Sagarmala in convergence with Department of Animal Husbandry Dairying & Fisheries (Ministry of Agriculture). On a more specific project-wise data, Rs. 52.17 crore is sanctioned for modernization & upgrading of Sassoon Dock. Upgradation of Kulai, Veraval and Mangrol fishing harbours are in the pipeline. For the Ministry of Shipping, this would support development of deep sea fishing vessels and fish processing centers in convergence with Department of Animal Husbandry Dairying & Fisheries.

The scale is massive and thus makes the moot question of who is financing Sagarmala all the more pressing. The disclaimer is: not much is known as there is a tremendous lack of transparency and accountability as regards this. But, information from discrete sources that are in the public domain at least gives a fair enough idea of who could be behind this gigantic infrastructure? At the same time, one needs to look at the intricate knot between the financiers and Blue Growth Initiative to draw out a clear message, which shouldn’t be shocking anymore, and that being the policies and funds are internationally-oriented. It is this section, the penultimate one in the chapter that we now turn to.

Who possibly could be driving the impetus for Blue Revolution/Economy and Sagarmala?

Are there International Financial Institutions involved? Hopefully by the end of this section, there would be some clarity to the muddied waters. Shipping ministry is roping in global multilateral agencies to extend a helping hand to entrepreneurs looking to explore Rs 3.5 lakh-crore of investment opportunities under the Sagarmala project, which was aimed at port-led development along 7,500-km coastline. Devendra Kumar Rai, Director at the Ministry of Shipping, said Sagarmala Development Company, with an equity base of Rs 1,000 crore, would chip in for investments and viability gap funding to help entrepreneurs achieve viable returns on their investments. He also said that the company was also seeking the support of Asian Development Bank (ADB) and other multilateral agencies for program loans to various initiatives under the Sagarmala project.27 Admitting that not all the projects being contemplated under the Sagarmala project would offer attractive returns on investments, Rai said, “The shipping ministry views that unless there is at least 13 per cent IRR, no private investor would come forward to invest.” To address the issue of not so attractive returns, the ministry would encourage some projects under the public-private partnership model and even extend the viability gap funding (VGF) up to 40 per cent of the project cost to turn the projects viable, Rai said. MT Krishna Babu, chairman of Visakhapatnam Port Trust, said various development projects will be thrown open for private participation. “The five greenfield ports alone would involve investments of around Rs 25,000 crore each in phases.” Babu said it will mobilise funds from government and global agencies like ADB and Japan International Cooperation Agency (JICA) and decide on the nature of funding to the unviable projects – whether equity or VGF.28

Asian Development Bank (ADB) has been giving boosters to India’s infrastructure development program from time to time, and injected yet another towards the end of June this year, when it promised the country its commitment to investing $10 billion over the next five years. Half the sum, or $5 billion were to be used for developing the 2,500 km East Coast Economic Corridor, which will ultimately extend from Kolkata to Tuticorin in Tamil Nadu. ADB had last year approved $631 million to develop the 800-km industrial corridor between Visakhapatnam and Chennai.29 The East Coast Economic Corridor also aligns with port-led industrialization under Sagarmala initiative and Act East Policy by linking domestic companies with vibrant global production networks of east and southeast Asia.

The World Bank, on the other hand, might not seem to have a direct hand in the funding of Sagarmala, but thinking it thus would be like missing the woods for the trees. Though the Bank is heavily investing in industrial corridors with a significant share in Amritsar-Kolkata Industrial Corridor, and seed capital along with creating conditions ripe for Viability Gap funding along the Delhi-Mumbai Industrial corridor, its involvement in Sagarmala is like an advisory to the Government of India. The World Bank, which has been advising the shipping ministry on the development of the inland waterways and the Clean Ganga mission, has approved an assistance of Rs 4,200 crore for the development of the existing five national waterways. Incidentally, India has jumped 19 places in the latest World Bank ranking in the global logistics performance. The World Bank in its latest once-in-two-year Logistics Performance Index (LPI) said India is now ranked 35th as against the 54th spot it occupied in the previous 2014 report. Such rise in position on the global logistics performance is the policy shot in the arm for India, thus making it conducive for investments to flow in.

But, to understand the policy initiatives behind Blue Revolution/Economy and Sagarmala, one needs to keep a tab on what is known as the Blue Growth Initiative, which happens to be the climate initiatives platform of the United Nations Programme on Environment. The Food and Agriculture Organization of the United Nations (FAO) Blue Growth Initiative (BGI) aims at building resilience of coastal communities and restoring the productive potential of fisheries and aquaculture, in order to support food security, poverty alleviation and sustainable management of living aquatic resources. Promoting international coordination is crucial to strengthen responsible management regimes and practices that can reconcile economic growth and food security with the restoration of the eco-systems they sustain. The initiative works towards two major goals, viz.

  1. Enabling environment (capacity building, knowledge platform, and improved governance) established within 2 to 3 years in 10 target countries.

  2. 10% reduction of carbon emissions in the 10 target countries in 5 years and 25% in 10 years.
  3. 3. Reduction of overfishing by 20% in the target countries in 5 years and 50% in 10 years.
  4. 4. “Blue communities” established in 5 target countries and resource stewardship ownership with 30% improved livelihoods.
  5. 5. Ecosystem degradation reversed in the target countries and 10% ecosystems restored in 4 target countries within 5 years.

These goals are to be attained by improving the evaluations of ecosystem services in Large Marine Ecosystems including coastal zones and Lakes for local and regional integrated and spatial planning. Also, strengthened fisheries and aquaculture governance and institutional frameworks would augment clear objectives and development paths for the sector; by increasing contributions from the small-scale fisheries and aquaculture sectors – through improved fisheries management, aquaculture development and improved post-harvest practices and market access. The initiative plans to attain increased resilience to climate change, extreme events and other drivers of change through improved knowledge of vulnerability and adaptation and disaster risk management options specific to fisheries, aquaculture and dependent communities who are at the front line of change and thereby providing technical and financial support to transitioning the sector to low-impact and fuel/energy efficiency and Blue Carbon enhancements30. for the medium and long term, the BGI is being promoted as an important vehicle for mobilizing resources and advocacy in international fora. In the global arena, the Initiative is enabling FAO to align with major global initiatives such as the Green Economy in a Blue World (UNEP/IMO/FAO/UNDESA/IUCN/World Fish), the Global Partnership for Oceans GPO (World Bank), the Coral Triangle Initiative, the Oceans SDG, Fishing for the Future (World Fish/FAO), the World Ocean Council and GEF6, as well as commitments stemming from the Rio+20 Conference. The oceans with a current estimated asset value of USD 24 trillion and an annual value addition of US$2.5 trillion, would continue to offer significant economic benefits both in the traditional areas of fisheries, transport, tourism and hydrocarbons as well as in the new fields of deep-sea mining, renewable energy, ocean biotechnology and many more, only if integrated with sustainable practices and business models. With land-based resources depleting fast, there are renewed attempts to further expand economic exploitation of the world’s oceans. However, if not managed sustainably, growing economic engagement with the oceans could risk further aggravation of their already strained health with serious impact on their natural role as the single most important CO2 sink and replenisher of oxygen. This in turn could accelerate global warming with catastrophic effects on fish stocks, climatic stabilization, water cycle and essential biodiversity. With arguments like these, UNFAO sure needs voices from the communities who would be severely impacted by these policies slapped on them.

So, even if India is not officially a participating nation in the Blue Growth Initiative (BGI), it could easily be drawn that the whole rationale for the Blue Revolution has sprung up from UNFAO. So, what is the viability of Blue Revolution/Economy and Sagarmala? It is to this section we turn now by way of conclusion.

Conclusion

Even while this chapter was being written, another mega infrastructure project in the form of country’s first bullet train was inaugurated to be laid between the Financial Capital Mumbai and Ahmedabad. As Prime Minister Narendra Modi and Japanese Prime Minister Shinzo Abe lay the foundation stone for the Mumbai-Ahmedabad bullet train project in Gujarat, tribals in Maharashtra and Gujarat will meet tehsildars of tribal areas that will be impacted by the project and submit letters of protest.31 Criticisms of the kind are expected and are already taking shape across the coastline.32 But, since this chapter is geared towards understanding the financial and economic ecosystem of Blue Revolution/ Economy and Sagarmala, let us divert our attention to financial critiques of mega infrastructural development projects.

The corporates and multinational Companies have joined together with the intention to grab the ocean and the coast. State and Central governments have become agents of the corporates and are permitting the foreign trawlers in the India deep seas, constructing atomic thermal power stations, disastrous chemical industries, hotels and big resorts and coastal industrial corridors at the coasts. These projects have several illegalities in formulation, approval, sanction and implementation. The livelihood of the fishworkers has not been considered by the elected government.33 The corporates have freedom to pour toxic affluent in the coastal area and sea soar. As a result fishes died and disappeared. So far more than twenty commercial species of fish have been disappeared from the sea at Kachchh, Gujarat. Similar is the case in other sea areas. Mangroves have been destroyed and land are being used by corporates. Solid toxic wastes and inflatable toxics dumped in forest and other empty threatens human and animal lives in the coastal area.34 This is not a mirror into the post-apocalyptic, run over by hungry capitalism scenario, but a reality that is very much brewing across the coastline of the country from Gujarat in the west to West Bengal in the east.

Economically and financially, there are three major challenges that are encountered in infrastructural mega-projects. In one influential study, Bent Flyvbjerg35, an expert in project management at Oxford’s business school, estimated that nine out of ten go over budget. Second challenge is the time overrun, which directly leads to cost escalation. Finally, the premise that projects need to work on two levels – in the short term for recovering financial outlays and the longer term for creating social impact – often becomes a barrier to taking action. Even projects that are needed do not get executed, especially in places where revenues from a project are unlikely to cover its cost. the enormity of Sagarmala leaves it vulnerable to unviability. In addition to three reasons cited above as to what could challenge a mega-project, these three reasons are most likely to be attributable to why Sagarmala could remain an unfinished dream, and in a dire attempt to realizing it could have enormous adverse effects of the socio-environmental and economical life of the communities coming under its fire.

  1. Overoptimism and overcomplexity. In order to justify a project, sometimes costs and timelines are systematically underestimated and benefits systematically overestimated. Flyvbjerg argues that project managers competing for funding massage the data until they come under the limit of what is deemed affordable; stating the real cost, he writes, would make a project unpalatable. From the outset, such projects are on a fast track to failure. One useful reality check is to compare the project under consideration to similar projects that have already been completed. Known as “reference-class forecasting,” this process addresses confirmation bias by forcing decision makers to consider cases that don’t necessarily justify the preferred course of action. But, sadly, India does not have any avenues to a “reference-class forecasting”, for the country has hitherto not known anything on this scale.

  2. Poor execution. Having delivered an unrealistically low project budget, the temptation is to cut corners to maintain cost assumptions and protect the (typically slim) profit margins for the engineering and construction firms that have been contracted to deliver the project. Project execution, from design and planning through construction, is riddled with problems such as incomplete design, lack of clear scope, ill-advised shortcuts, and even mathematical errors in scheduling and risk assessment. In part, execution is poor because many projects are so complex that what might seem like routine issues can become major headaches. For example, if steel does not arrive at the job site on time, the delay can stall the entire project. Ditto if one of the specialty trades has a problem. Higher productivity will not compensate for these shortfalls because such delays tend to ripple through the entire project system. Another challenge is low productivity. While the manufacturing sector in India is languishing, raw materials for such mega-projects would always be hindered through supply lines, thus leading to either stalling of the projects, or an exponential cost escalation.
  3. Weakness in organizational design and capabilities. Many entities involved inbuilding megaprojects have an organizational setup in which the project director sits four or five levels down from the top leadership. The following structure is common:

    Layer 1: Subcontractor to contractor

    Layer 2: Contractors to construction manager or managing contractor

    Layer 3: Construction manager to owner’s representative

    Layer 4: Owner’s representative to project sponsor

    Layer 5: Project sponsor to business executive

This is a problem because each layer will have a view on how time and costs can be compressed. For example, the first three layers are looking for more work and more money, while the later ones are looking to deliver on time and budget. Also, the authority to make final decisions is often remote from the action. Capabilities, or lack thereof, are another issue. Large projects are typically either sponsored by the government or by an entrepreneur with bold aspirations, where completion times are most often than not compromised.


Notes:

1 Micro Units Development & Refinance Agency Ltd. (MUDRA) is an institution set up by Government of India to provide funding to the non-corporate, non-farm sector income generating activities of micro and small enterprises whose credit needs are below ₹10 Lakh. Under the aegis of Pradhan Mantri MUDRA Yojana (PMMY), MUDRA has created three products i.e. ‘Shishu’, ‘Kishore’ and ‘Tarun’ as per the stage of growth and funding needs of the beneficiary micro unit. These schemes cover loan amounts as below:

  1. a  Shishu: covering loans up to ₹50,000
  2. b  Kishore: covering loans above ₹50,000 and up to ₹5,00,000
  3. c  Tarun: covering loans above ₹5,00,000 and up to ₹10,00,000

All Non-Corporate Small Business Segment (NCSBS) comprising of proprietorship or partnership firms running as small manufacturing units, service sector units, shopkeepers, fruits/vegetable vendors, truck operators, food-service units, repair shops, machine operators, small industries, food processors and others in rural and urban areas, are eligible for assistance under Mudra. Bank branches would facilitate loans under Mudra scheme as per customer requirements. Loans under this scheme are collateral free loans.

2 Press Information Bureau, Government of India, Ministry of Agriculture. Mission Fingerling with a total expenditure of about Rs. 52000 lakh to achieve Blue Revolution. 11 Mar 2017 <http://pib.nic.in/ newsite/PrintRelease.aspx?relid=159159>

3 Government of India, Ministry of Agriculture and Farmers Welfare Department of Animal Husbandry, Dairying & Fisheries. Central Sector Scheme on Blue Revolution: Integrated Development and Management of Fisheries. Jun 2016 <http://dahd.nic.in/sites/default/files/ Guidelines.BR-30616.Fisheries.pdf>

4 Press Information Bureau, Government of India, Cabinet Committee on Economic Affairs (CCEA). Integrated Development and Management of Fisheries – a Central Sector Scheme on Blue Revolution. 22 Dec 2015

5 The term “ocean grabbing” has been used to describe actions, policies or initiatives that deprive small- scale fishers of resources, dispossess vulnerable populations of coastal lands, and/or undermine historical access to areas of the sea. Rights and access to marine resources and spaces are frequently reallocated through government or private sector initiatives to achieve conservation, management or development objectives with a variety of outcomes for different sectors of society. For a reallocation to be considered ocean grabbing, it must: (1) occur by means of inadequate governance, and (2) be implemented using actions that undermine human security and livelihoods, or (3) produce impacts that reduce social- ecological well-being.

6 The Sagarmala initiative would also strive to ensure sustainable development of the population living in the Coastal Economic Zone (CEZ). This would be done by synergising and coordinating with State Governments and line Ministries of Central Government through their existing schemes and programmes such as those related to community and rural development, tribal development and employment generation, fisheries, skill development, tourism promotion etc. In order to provide funding for such projects and activities that may be covered by departmental schemes a separate fund by the name ‘Community Development Fund’ would be created.

7 In the words of T Peter, General Secretary, National Fish Workers Forum (NFF), “Governments support corporates and no one is concerned about the livelihood of the people. Now, the Union government is bent on supporting Adani group on the pretext of developing ports across the country. The Sagarmala project, which proposes setting up industrial corridors, 52 new ports and petrochemical region will deplete the vulnerable coastline and will leave the survival of the fishermen community at stake. It will only support real estate majors and industrialists.” Fishermen oppose Sagarmala project. Times of India. 23 Dec 2016 <http://timesofindia.indiatimes.com/city/thiruvananthapuram/fishermen-oppose-sagarmala- project/articleshow/56140852.cms>

8 Kohli, K. & Menon, M. Of a frictionless development : Ports have the potential to endanger the environment. Daily News and Analysis (DNA), 21 May 2017 <http://www.dnaindia.com/analysis/ column-of-a-frictionless-development-2445597>

9 India has around 7,500-km long coastline, but the country transports only 6 per cent of its cargo through the waterways compared with around 55 per cent on roadways and 35 per cent by the railways. As a result, India’s logistics costs as percentage of its GDP is as high as 19 per cent compared with 12.5 per cent in China. According to the echoes in New Delhi, India’s exports would go up by one and a half times if the country was able to reduce its logistics costs to 12 per cent. India’s cargo traffic growth is expected to increase to 2,500 MT in 2024-25 from 1,072 MT in 2015-16. In India, share of coastal and inland water transport is 2-3 per cent compared to China’s 25 per cent.

10 Sagarmala Coordination and Steering Committee (SCSC) is constituted under the chairmanship of the Cabinet Secretary with Secretaries of the Ministries of Shipping, Road Transport and Highways, Tourism, Defence, Home Affairs, Environment, Forest & Climate Change, Departments of Revenue, Expenditure, Industrial Policy and Promotion, Chairman, Railway Board and CEO, NITI Aayog as members. This Committee will provide coordination between various ministries, state governments and agencies connected with implementation and review the progress of implementation of the National Perspective Plan, Detailed Master Plans and projects. It will, inter alia, consider issues relating to funding of projects and their implementation. This Committee will also examine financing options available for the funding of projects, the possibility of public-private partnership in project financing/construction/ operation.

11 A National Sagarmala Apex Committee (NSAC) is geared for overall policy guidance and high level coordination, and to review various aspects of planning and implementation of the plan and projects. The NSAC shall be chaired by the Minister in-charge of Shipping, with Cabinet Ministers from stakeholder Ministries and Chief Ministers/Ministers in-charge of ports of maritime states as members. This committee, while providing policy direction and guidance for the initiative’s implementation, shall approve the overall National Perspective Plan (NPP) and review the progress of implementation of these plans.

12 Ray, S. S. Infrastructure: How Sagarmala project can be a shot in the arm for the economy. Financial Express. 21 Nov 2016 <http://www.financialexpress.com/economy/infrastructure-how-sagarmala-project- can-be-a-shot-in-the-arm-for-the-economy/450802/>

13 Indian ports handle more than 90 percent of India’s total EXIM trade volume. However, the current proportion of merchandize trade in Gross Domestic Product (GDP) of India is only 42 percent, whereas for some developed countries and regions in the world such as Germany and European Union, it is 75 percent and 70 percent respectively. Therefore, there is a great scope to increase the share of merchandising trade in India’s GDP. With the Union Government’s “Make in India” initiative, the share of merchandise trade in India’s GDP is expected to increase and approach levels achieved in developed countries. India lags far behind in ports and logistics infrastructure. Against a share of 9 percent of railways and 6 percent of roads in the GDP the share of ports is only 1 percent. In addition high logistics costs make Indian exports uncompetitive. This is another of the reasons from the economic front that the government wants to drill into the populace as a justification for the launch of the initiative.

14 Sood, J. Govt mulls Rs10 trillion public financing for infrastructure projects. LiveMint. 12 Sep 2017 <http://www.livemint.com/Home-Page/G63KRD11vfvag0lOWJtBIN/Govt-mulls-Rs10-trillion-public- financing-for-infrastructure.html>

15 As there are limited options available to raise funds for infrastructure finance, the plan to raise money from retirees and provident fund beneficiaries comes as Indian banks, loaded with bad debt, have turned averse to funding infrastructure projects. With many large conglomerates and infrastructure companies weighed down by debt, the onus of creating infrastructure has fallen on the government.

16 India needs funds for its ambitious plans such as Sagarmala (ports) and Bharatmala (roads) to improve its transport infrastructure. While the total investment for the Bharatmala plan is estimated at Rs10 trillion – the largest ever outlay for a government road construction scheme – the country has envisaged Rs8 trillion of investment until 2035 under the Sagarmala programme.

17 We should have more to talk about Financial Intermediaries in a while, but is is important to note that pension funds belong to this category. Pension funds may be defined as forms of institutional investor, which collect pool and invest funds contributed by sponsors and beneficiaries to provide for the future pension entitlements of beneficiaries. They thus provide means for individuals to accumulate saving over their working life so as to finance their consumption needs in retirement, either by means of a lump sum or by provision of an annuity, while also supplying funds to end-users such as corporations, other households (via securitized loans) or governments for investment or consumption.

18 The volatility of stock returns is why pension funds invested in bonds in the first place. The theory with alternatives is that they earn a premium return in exchange for the difficulty of investing in them. Small investors lack easy access to these asset classes, and the investments are often illiquid. As a result, by investing in alternatives, pension funds should be able to get either returns similar to those of equities at a lower risk, or higher returns at a similar level of risk. That’s the theory. The evidence on alternative investments is considerably more mixed. Hedge funds are supposed to pursue equity-like returns with lower levels of risk. Hedge funds don’t have to report their performance to public databases, and are more likely to do so when returns are good. They often engage in strategies that produce modest regular returns at the expense of rare catastrophic losses, which may make their track records look misleadingly strong.

19 This could be acted upon, with a specific case study that underlines the knowledge-base requisite for any understanding of financials involved in the project. Knowledge-base could encompass: issues for the host government/legislative provisions, public/private infrastructure partnerships, public/private financial structures, credit requirement of lenders, and analytical techniques to measure the feasibility of the project. In case of Project Finance, the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.

20 This might sound like an argument from a Devil’s Advocate, for financial intermediaries are nowadays increasingly used as markets for firms’ assets. Financial intermediaries appear to have a key role in the restructuring and liquidation of firms in distress. In particular, financial intermediaries play an active role in the reallocation of displaced capital, meant both as the piece-meal reallocation of assets and, more broadly, as the sale of entire bankrupt corporations to healthy ones. A key part of reorganization under main bank supervision or management is the implementation of a plan of asset sales with proceeds typically used to recover bank loans. Knowing possible synergies among firms, banks can suggest solutions for the efficient reallocation of assets and of corporate control and that in several countries there is widespread anecdotal evidence, though not quantitative one, on this role of banks. Healthy firms search around for the displaced capital of bankrupt firms but matching is imperfect and firms can end up with machines unsuitable for them. Financial intermediaries arise as internal, centralized markets where information on machines and buyers is readily available, allowing displaced capital to migrate towards its most productive uses. Financial intermediaries can perform this role by aggregating the information on firms collected in the credit market. The function of intermediaries as matchmakers between savers and firms in the credit market can support their function as internal markets for assets. Intuitively, by increasing the number of highly productive matches in the credit market, intermediaries increase the share of highly productive second hand users in the decentralized resale market. This improvement in the quality of the decentralized secondary market reduces the incentive of firms to address financial intermediaries for their ability as re-deployers. However, by increasing the number of highly productive matches in the credit market, intermediaries create also wealthy buyers without assets and contribute to decrease the thickness of the decentralized resale market. This makes the decentralized market less appealing and increases the incentive of firms to use intermediaries as resale markets. When the quality improvement in the decentralized market is not too big and the second effect prevails, better matchmaking in the credit market supports the function of intermediaries as internal markets for assets.

21 Economies of scale is an economics term that describes a competitive advantage that large entities have over smaller entities. It means that the larger the business, non-profit or government, the lower its costs. For example, the cost of producing one unit is less when many units are produced at once. This is confusingly used with economies of scope. It is worthwhile to differentiate the two here. Economies of scope occur when a company branches out into multiple product lines. When companies broaden their scope, they benefit by combining complementary business functions, product lines or manufacturing processes. For example, most newspapers diversified into similar product lines, such as magazines and online news, to diversify their revenue from declining newspaper sales. They achieved some economies of scope by taking advantage of their advertising sales teams, who could sell advertising in all three product lines.

22 Viability Gap Funding (VGF) is a special facility to support the financial viability of those infrastructure projects, which are economically justifiable but not viable commercially in the immediate future. It involves upfront grant assistance of up to 20% of the project cost for state or central PPP projects implemented by the private sector developer who is selected through competitive bidding. An Empowered Committee has been set up for quick processing of cases. Sectors shortlisted for availing Viability Gap Funding Assistance include Roads and bridges, railways, seaports, airports, inland waterways, Power, Urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas. Infrastructure projects in Special Economic Zones and International convention centers and other tourism infrastructure projects.

23 The use of guarantees offers extra security to the lender or business who is providing the finance. For an SME with only one director in the company, the lender relies heavily on their ability to pay it back. But with another person or company to back up the loan agreement, there is extra security that the lender will be able to recover their funds. In particular, for those companies or directors with an adverse credit record, they may rely on the use of a guarantor in order to secure the funds they need. Every extra guarantee added gives the lender more confidence, especially when guaranteed by individuals or firms with strong credit records and reputations. Guarantees are primarily of two types: (1) A pure guarantee ensures that the third party meets their financial obligations. They are legally obliged and responsible to be a guarantor. (2) A conditional payment guarantee means that they are liable to pay any amounts outstanding.

24 Tranches are pieces, portions or slices of debt or structured financing. Each portion, or tranche, is one of several related securities offered at the same time but with different risks, rewards and maturities. For example, a collateralized mortgage obligation CMO offering a partitioned mortgage-backed securities MBS portfolio might have mortgage tranches with one-year, two-year, five-year and 20-year maturities, all with varying degrees of risk and returns. A tranche is a common financial structure for debt securities such as mortgage-backed securities. These types of securities are made up of multiple mortgage pools that have a wide variety of mortgages, from safe loans with lower interest rates to risky loans with higher rates. Each specific mortgage pool also has its own time to maturity, which factors into the risk and reward benefits. Therefore, tranches are made to divide up the different mortgage profiles into slices that have financial terms suitable for specific investors.

25 Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected. IRR does not measure the absolute size of the investment or the return. This means that IRR can favor investments with high rates of return even if the dollar amount of the return is very small. For example, a $1 investment returning $3 will have a higher IRR than a $1 million investment returning $2 million. Another short-coming is that IRR can’t be used if the investment generates interim cash flows. Finally, IRR does not consider cost of capital and can’t compare projects with different durations. IRR is best-suited for analyzing venture capital and private equity investments, which typically entail multiple cash investments over the life of the business, and a single cash outflow at the end via IPO or sale.

26 LSTK stands for Lump Sum Turn Key. This is a contractual agreement in which a fixed price is agreed for the execution of a project or part of a project. Once the final development is completed a finished functioning asset is handed over to the client, hence the term “Turn Key” which effectively means ready to operate.

27 The Economic Times. Government roping in multilateral agencies for Rs 3.5 lakh crore Sagarmala project. 12 Feb 2016 <http://economictimes.indiatimes.com/news/economy/infrastructure/government- roping-in-multilateral-agencies-for-rs-3-5-lakh-crore-sagarmala-project/articleshow/50956475.cms>

28 ibid.

29 Bhaskar, U. ADB to invest $10 billion over five years in Indian infrastructure. LiveMint. 30 Jun 2017 <http://www.livemint.com/Politics/CTTTI4B5VWYVdkh6qOnV4J/ADB-to-invest-10-billion-over-five- years-in-Indian-infrastr.html>

30 The idea of blue economy was argued during the Rio+20 preparatory meetings, where several Small Islands Developing States (SIDS) observed that ‘Green Economy’ had limited relevance for them; instead, ‘Green Economy in a Blue World’ was a good concept and most suitable for the sustainable development and management of ocean resources.

31 Phadke, M. Tribals, farmers in Gujarat and Maharahshtra who will lose land protest bullet train project. The Hindustan Times. 14 Sep 2017 <http://www.hindustantimes.com/mumbai-news/tribals-and- farmers-in-gujarat-and-maharahshtra-who-will-lose-land-to-the-bullet-train-project-protest-against-it/ story-AWbl8Z6VR3EOdOTP73twtI.html>

32 Thozhilalar koodam. Sea is for the fishing communities – Coastal Yatra by NFF in Tamil Nadu. 15 Jul 2017 <http://tnlabour.in/fish-workers/5654&gt;

33 The proposed Enayam International Container Transhipment Terminal (EICTT), a port to be developed at Enayam, Kanyakumari, has witnessed a lot of opposition from the fishing community over the last year. The port, which was earlier proposed to be established at Colachel, was shifted 10 km away to Enayam last year. There has also been criticism over the proximity of the proposed Enayam port to the upcoming Vizhinjam port in Trivandrum and Vallarpadam port at Cochin. The National Fishworkers’ Forum (NFF) has also raised concern about Idinthakarai, which has been the epicentre for protests against the Kudankulam Nuclear Power Plant (KNPP), since 2012. Fishermen and environmentalists have been opposing the nuclear power plant as it could have drastic impact on the livelihood of the fishing community.

34 Sagarmala project: Serious concerns being raised about environmental effects on coastal areas. counterview.org. 21 Nov 2016 <https://counterview.org/2016/11/21/sagarmala-project-serious-concerns- being-raised-about-environmental-effects-on-coastal-areas/>

35 Flyvbjerg, B. What You Should Know About Megaprojects, and Why: An Overview. 2014 <https:// arxiv.org/pdf/1409.0003.pdf>

Sino-India Doklam Standoff, #BRICS and Shanghai Cooperation Organization (SCO). How the Resolution Could Have Been Reached?

The National Security Adviser of India, Mr. Ajit Doval was posed with a blunt question by China’s state councillor Yang Jiechi when the two met on July 27 to make a settlement over the disputable patch in the Bhutan-owned Doklam stretch. He was asked: Is it  your territory? However, this tough question failed to faze Doval, who, according to reliable sources, had most calmly replied that the stretch of land in question is not China’s territory either – Does every disputed territory become China’s by default? Doval asked in return. This has the potential to read a lot in between and thus without getting awed by the response, deconstructing what transpired is the imperative. This sharp exchange between the two countries was followed by several rounds of negotiations between the two sides in Beijing, with India’s foreign secretary S Jaishankar and India’s ambassador to China Vijay Gokhale trying to reach out to a mutually acceptable solution. These meetings were also sanctioned by the prime ministers of both the countries, especially when they met in Hamburg on the sidelines of G20 meeting on July 7. In fact, the Indian Prime Minister Narendra Modi and his Chinese counterpart Xi Jinping also agreed to the fact that the negotiations should be held at the NSA level in order to let the dispute not escalate any more. Modi later asked his diplomatic team to reach to a solution at the earliest as this dispute had been the worst in numerous years and the two countries cannot afford to lose each other’s support any more.

This is Doklam, the tri-junction between India, Bhutan and China.

Doklam Plateau-3

2300-chinaindia0818-1024x995

It was here that India and China were involved in a three-month standoff with the two largest militaries in the world in a eyeball-to-eyeball contact. While, it was in everybody’s interest that the countries do not spark a conflagration, the suspense over this tiny out-of-bounds area had consequences to speculations trajectory. It all started in June this year, when the Indian troops crossed over the disputed territory claimed by both China and Bhutan as its sovereign territory to halt a road construction at Doklam, which could have given China the surveillance and access mechanism over India’s Chicken Neck, the narrow strip that connects the NE Indian states with the mainland. But, other reason for India’s crossing over the boundary lies in a pact with Bhutan where the country would defend any incursions into Bhutan. The standoff was pretty tense with piling up of the war machinery and the troops from either side in a ready-to-combat stature, but still showed extreme presence of mind from getting involved in anything adventurous. China’s blistering state-owned media attacks from instigating to belligerent to carrying out travel advisories on the one hand, and India’s state-purchased media exhibiting peppered nationalism to inflating the 56″ authoritarianism on the other did not really help matters boil down to what was transpiring on the ground. We had pretty much only these two state-owned-purchased behemoths to rely upon and imagine the busting of the myths. But, this week, much to the respite of citizens from either side of the border and the international community at large keenly observing the developments as they were unfolding, the tensions eased, or rather resolved almost dramatically as they had begun in the first place. The dramatic end was at least passed over in silence in the media, but whatever noises were made were trumpeting victories for their respective sides. Even if this were a biased viewpoint, the news reports were quantitative largely and qualitative-ness was generally found at large. The resolution agreed on the the accelerated withdrawal of troops from the site of the standoff.

China still vociferously insists that the territorial dispute in Sikkim was resolved as long ago as in 1890, when Beijing and the British Empire signed the so-called Convention of Calcutta, which defined Sikkim’s borders. As per Article (1) of Convention of 1890, it was agreed that the boundary of Sikkim and Tibet shall be the crest of the mountain range separating the waters flowing into the Sikkim Teesta and its affluents, from the waters flowing into the Tibetan Mochu and northwards into other rivers of Tibet. The line commences at Mount Gipmochi, on the Bhutan frontier, and follows the above-mentioned water-parting to the point where it meets Nepal territory. However, Tibet refused to recognise the validity of Convention of 1890 and further refused to carry into effect the provisions of the said Convention. In 1904, a treaty known as a Convention between Great Britain and Tibet was signed at Lhasa. As per the Convention, Tibet agreed to respect the Convention of 1890 and to recognise the frontier between Sikkim and Tibet, as defined in Article (1) of the said Convention. On April 27, 1906, a treaty was signed between Great Britain and China at Peking, which confirmed the Convention of 1904 between Great Britain and Tibet. The Convention of 1890 was entered by the King of Great Britain on behalf of India before independence and around the time of independence, the Indian Independence (International Arrangement) Order, 1947 was notified by Secretariat of the Governor-General (Reforms) on August 14, 1947. The Order provided, inter alia, that the rights and obligations under all international agreements to which India is a party immediately before the appointed day will devolve upon the Dominion of India. Therefore, in terms of Order of 1947, the government of India is bound by the said Convention of 1890. However, India’s affirmation of the Convention of 1890 was limited to the alignment of the India-China border in Sikkim, based on watershed, and not with respect to any other aspects. However, India-backed Bhutan is convinced that Beijing’s attempt to extend a road to the Doklam area goes against a China-Bhutan agreement on maintaining peace in the region until the dispute is resolved.

The question then is: how could have the tensions that were simmering just short of an accident resolved? Maybe, for the Indians, these were a result of diplomatic procedures followed through the time of tensions, whereas for the Chinese, it was a victory and yet another lesson learnt by the Indians after their debacle in the 1962 conflict. The victory stood its claim because the Chinese maintained that even if the Indians were withdrawing from the plateau, the Chinese would continue patrolling the area. Surprisingly, there isn’t a convincing counterclaim by the Indians making the resolution a tad more concessionary as regards the Indians. It was often thought that amid tensions over the dispute, there had been growing concerns over whether Indian Prime Minister Narendra Modi would skip the upcoming BRICS summit in China as he did in May when Beijing hosted an international event to celebrate the One Belt One Road Initiative championed by Chinese President Xi Jinping. Harsh Pant, a professor of International Relations at King’s College, London, and a distinguished fellow at Observer Research Foundation, said,

If the road is not being built, it’s legal enough for India to pullback, because the boundary dispute is not the problem and has been going on for ages. The real issue was China’s desire to construct a concrete road in this trijunction under dispute. If the Chinese made the concession to not build the road, the whole problem went away.

The Chinese Foreign Ministry’s spokeswoman said on Tuesday that China would adjust its road building plans in the disputed area taking into account of various factors such as the weather. In his turn, Prime Minister Modi would not have gone ahead with the visit to China if the border dispute remains unresolved, according to the expert. Following the resolution of the border dispute, India’s MEA said that Modi plans to visit Xiamen in China’s Fujian province during September 3-5, 2017 to attend the 9th BRICS Summit. But, the weather angle refused to go, as in the words of Hu Zhiyong, a research fellow at the Institute of International Relations of the Shanghai Academy of Social Sciences,

The weather condition is still the main reason. We all know that heavy snowfall is expected in the Donglang region by late September. The snow will block off the mountain completely, making it impossible to continue road construction. This incident has allowed China to clearly understand potential threat from India. I would call India an ‘incompetent bungler.’ That’s because India always is a spoiler in all the international organizations it becomes a part of. It always takes outrageous and irrational actions. After this incident, China realized that India is not a friendly partner, but a trouble-maker.

The Shanghai-based expert pointed out that the recent standoff has helped China better understand the potential harm India can cause. Chinese Foreign Minister Wang Yi said that Beijing hopes that New Delhi will remember the lessons of latest border confrontation and will avoid such incidents in the future. Despite both China and India agreeing to deescalate the border dispute for the sake of the BRICS summit, the temporary compromise may not last long, as tensions could quickly flare again. In the words of Brahma Chellaney, a professor of strategic studies at the New Delhi-based Center for Policy Research,

The standoff has ended without resolving the dispute over the Doklam plateau. The Indian forces have retreated 500 meters to their ridge-top post at Doka La and can quickly intervene if the Chinese People’s Liberation Army (PLA) attempts to restart work on the military road – a construction that triggered the face-off. As for China, it has withdrawn its troops and equipment from the face-off site, but strongly asserts the right to send in armed patrols. A fresh crisis could flare if the PLA tries again to build the controversial road to the Indian border.

Hu, the Shanghai-based Chinese professor, asserted that the recent standoff has allowed China to better prepare for future border disputes with India. The Chinese Defense Ministry said that China will maintain a high combat readiness level in the disputed area near the border with India and Bhutan and will decisively protect China’s territorial sovereignty.

So, where does Shanghai Cooperation Organization (SCO) fit in here?

With India and Pakistan as newly installed members of the Shanghai Cooperation Organization, or SCO, China is likely to face an increasing amount of divisiveness within a regional economic and security organization accustomed to extreme comity and cooperative discussions. India’s entry could especially frustrate Beijing because of rising geopolitical competition between the Asian giants and different approaches to counterterrorism. Beijing may not have even wanted India to join the SCO. Russia first proposed India as a member, likely in part to complement bilateral economic and security engagement, but mainly to constrain China’s growing influence in the organization. Russia is increasingly concerned that post-Soviet SCO members  –  Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan – are drifting too far into China’s geostrategic orbit. Moscow had long delayed implementing Chinese initiatives that would enable Beijing to reap greater benefits from regional trade, including establishing an SCO regional trade agreement and bank. As China gains more clout in Central Asia, Moscow may welcome New Delhi by its side to occasionally strengthen Russia’s hand at slowing or opposing Chinese initiatives. Indeed, during a visit to Moscow, Modi said, “India and Russia have always been together on international issues.”

Going forward, this strategy is likely to pay big dividends. New Delhi has a major hang-up related to the activities of its archrival Pakistan – sponsored by Beijing at the 2015 SCO summit to balance Moscow’s support of India – and continues to be highly critical of China’s so-called “all-weather friendship” with Islamabad. In May, New Delhi refused to send a delegation to Beijing’s widely publicized Belt and Road Initiative summit, which was aimed at increasing trade and infrastructure connectivity between China and Eurasian countries. According to an official Indian statement, the flagship project of the Belt and Road Initiative – the China-Pakistan Economic Corridor – was not being “pursued in a manner that respects sovereignty and territorial integrity.” Indian opposition stems from the plan to build the corridor through the disputed Kashmir region and to link it to the strategically positioned Pakistani port of Gwadar, prompting Prime Minister Narendra Modi to raise the issue again during his acceptance speech at the SCO summit last month. New Delhi likely will continue to criticize the corridor in the context of the SCO because, as a full member, India has the right to protest developments that do not serve the interests of all SCO members. The SCO also offers another public stage for India to constantly question the intent behind China’s exceptionally close ties to Pakistan.

India-Pakistan tensions occasionally flare up, and Beijing may have to brace for either side to use the SCO as a platform to criticize the other. In the absence of a major incident, Beijing has admirably handled the delicacy of this situation. When asked in early June whether SCO membership would positively impact India-Pakistan relations, China spokesperson Hua Chunying said: “I see the journalist from Pakistan sit[s] right here, while journalists from India sit over there. Maybe someday you can sit closer to each other.” Additionally, the Chinese military’s unofficial mouthpiece, Global Times, published an op-ed suggesting that SCO membership for India and Pakistan would lead to positive bilateral developments. Even if that is overly optimistic, it would set the right tone as the organization forges ahead. But the odds are against China’s desired outcome. Beijing needs to look no farther than South Asia for a cautionary tale. In this region, both India and Pakistan are members of the multilateral grouping known as the South Asian Association for Regional Cooperation. New Delhi, along with Afghanistan, Bangladesh and Bhutan, boycotted last year’s summit in Islamabad because it believed Pakistan was behind a terrorist attack on an Indian army base. Even with an official ban on discussing bilateral issues in its proceedings, SAARC has been perennially hobbled by the intrusion of India-Pakistan grievances. Beijing can probably keep its close friend Islamabad in line at the SCO, but this likely won’t be the case with New Delhi. Another major issue for the SCO to contend with is the security of Afghanistan. An integral component of the organization is the Regional Anti-Terrorist Structure, aimed at combating China’s “three evils” – terrorism, extremism, and separatism. India, however, is likely to reliably and reasonably highlight the contradiction between China’s stated anti-terrorism goals and the reality of its policy. Most notably, Beijing has consistently looked the other way as Pakistani intelligence services continue to support terrorist groups in Afghanistan, including the Afghan Taliban and Haqqani Network. Moreover, because India is particularly close to the Afghan government, it could seek to sponsor Afghanistan to move from observer status toward full SCO membership. This would give India even greater strength in the group and could bolster Russia’s position as well.

Lingering border disputes and fierce geostrategic competition in South Asia between China and India is likely to temper any cooperation Beijing might hope to achieve with New Delhi in the SCO. Mutual suspicions in the maritime domain persist as well, with the Indian government recently shoring up its position in the strategically important Andaman and Nicobar island chain to counter the perceived Chinese “string of pearls” strategy – aimed at establishing access to naval ports throughout the Indian Ocean that could be militarily advantageous in a conflict. Such mutual suspicions will likely impact SCO discussions, perhaps in unpredictable ways. Although India may be an unwelcome addition and irritant to Beijing at the SCO, China does not necessarily need the SCO to achieve its regional objectives. From its announcement in 2001, the SCO gave Beijing a productive way to engage neighbors still dominated by Moscow. But today, China’s economic and military strength makes it far more formidable on its own – a point that is only magnified as Russian influence simultaneously recedes, or rather more aptly fluctuates. For instance, even though India rejected Beijing’s Belt and Road Initiative overture, China remains India’s top trading partner and a critical market for all Central and South Asian states, leaving them with few other appealing options. India’s entry into the SCO, however, could put Beijing in the awkward position of highlighting the organization’s value, while increasingly working around or outside of it. Outright failure of the SCO would be unacceptable for China because of its central role in establishing the forum. Regardless of the bickering between countries that may break out, Beijing can be expected to make yet another show of the importance of the SCO, with all of the usual pomp and circumstance, at the next summit in June 2018. China as host makes this outcome even more likely.

Taking on the imagination to flight, I am of the opinion that its the banks/financial institutions, more specifically the Shanghai Cooperation Organisation (SCO) and the upcoming BRICS Summit that have played majorly into this so-called resolution. India’s move to enter Doklam/Donglang was always brazen as India, along with Pakistan entered the Shanghai Cooperation Organisations (SCO) shortly before India entered Chinese territory. In this sense, India was almost mocking the Shanghai Cooperation Organisation by refusing to utilise the SCO as a proper forum in which to settle such disputes diplomatically. So, even if diplomatically it is a victory for #BRICS, materially it is #China‘s. Whatever, two nuclear-powered states in a stand-off is a cold-threat to….whatever the propaganda machine wants us to believe, the truth is laid bare. This so-called diplomatic victory has yielded a lot of positive, and in the process have snatched the vitality of what economic proponents in the country like to express solemnly of late, growth paradigm, wherein the decision is rested with how accelerated your rate of growth is, and thus proportionally how much of a political clout you can exercise on the international scenario. India’s restraint is not to be taken as how the Indian media projects it in the form of a victory, for that would indeed mean leading the nation blindly at the helm of proto-fascism. This could get scary.

Why Should Modinomics Be Bestowed With An Ignoble Prize In Economics? Demonetization’s Spectacular Failure.

This lesson from history is quite well known:

Muhammad bin Tughlaq thought that may be if he could find an alternative currency, he could save some money. So he replaced the Gold and Silver coins with copper currency. Local goldsmiths started manufacturing these coins and which led to a loss of a huge sum of money to the court. He had to take his orders back and reissue Gold/Silver coins against those copper coins. This counter decision was far more devastating as people exchanged all their fake currency and emptied royal treasure.

And nothing seems to have changed ideatically even after close to 800 years since, when another bold and bald move or rather a balderdash move by the Prime Minister of India Narendra Modi launched his version of the lunacy. Throw in Demonetization and flush out black money. Well, that was the reason promulgated along with a host of other nationalistic-sounding derivatives like curbing terror funding, expanding the tax net, open to embracing digital economy and making the banking system more foolproof by introducing banking accounts for the millions hitherto devoid of any. But, financial analysts and economists of the left of the political spectrum saw this as brazen porto-fascistic move, when they almost unanimously faulted the government for not really understanding the essence of black money. These voices of sanity were chased off the net, and chided in person and at fora by paid trolls of the ruling dispensation, who incidentally were as clueless about it as about their existence. Though, some other motives of demonetization were smuggled in in feeble voices but weren’t really paid any heed to for they would have sounded the economic disaster even back then. And these are the contraband that could give some credibility to the whole exercise even though it has turned the world’s fastest-growing emerging economy (God knows how it even reached that pinnacle, but, so be it!) into a laughing stock of a democratically-elected dictatorial regime. What is the credibility talked about here? It was all about smashing the informal economy (which until the announcement of November 8 contributed to 40% of the GDP and had a workforce bordering on 90% of the entire economy) to smithereens and sucking it into the formal channel through getting banking accounts formalized. Yes, this is a positive in the most negative sense, and even today the government and whatever voices emanate from Delhi refuse to consider it as a numero uno aim.

Fast forward by 3 (period of trauma) + 8 (periods of post-trauma) months and the cat is out of the bag slapping the government for its hubris. But a spectacular failure it has turned out to be. The government has refused to reveal the details of how much money in banned notes was deposited back with the RBI although 8 months have passed since the window of exchange closed in January this year. Despite repeated questioning in Parliament, Supreme Court and through RTIs, the govt. and RBI has doggedly maintained that old banned notes were still being counted. In June this year, finance minister Arun Jaitley claimed that each note was being checked whether it was counterfeit and that the process would take “a long time”. The whole country had seen through these lies because how can it take 8 months to count the notes. Obviously there was some hanky panky going on. Despite statutory responsibility to release data related to currency in circulation and its accounts, the RBI too was not doing so for this period. They were under instructions to fiddle around and not reveal the truth. Consider the statistics next:

As on November 8, 2016, there were 1716.5 crore piece of Rs. 500 and 685.8 crore pieces of Rs. 1000 circulating the economy totaling Rs. 15.44 lakh crore. The Reserve Bank of India (RESERVE BANK OF INDIA ANNUAL REPORT 2016-17), which for a time as long as Urjit Patel runs the show has been criticized for surrendering the autonomy of the Central Bank to the whims and fancies of PM-run circus finally revealed that 99% of the junked notes (500 + 1000) have returned to the banking system. This revelation has begun to ricochet the corridors of power with severe criticisms of the government’s move to flush out black money and arrest corruption. When the RBI finally gave the figures through its annual report for 2016-17, it disclosed that Rs. 15.28 lakh crore of junked currency had formally entered the banking system through deposits, thus leaving out a difference of a mere (yes, a ‘mere’ in this case) Rs. 16,050 crore unaccounted for money. Following through with more statistics, post-demonetization, the RBI spent Rs. 7,965 crore in 2016-17 on printing new Rs. 500 and Rs. 2000 notes in addition to other denominations, which is more than double the Rs. 3,421 crore spent on printing new notes in the previous year. Demonetization, that was hailed as a step has proved to be complete damp squib as the RBI said that just 7.1 pieces of Rs. 500 per million in circulation and 19.1 pieces of Rs. 1000 per million in circulation were discovered to be fake further implying that if demonetization was also to flush pout counterfeit currency from the system, this hypothesis too failed miserably.

Opposition was quick to seize on the data with the former Finance minister P Chidambaram tweeting:

Untitled

He further lamented that with 99% of the currency exchanged, was demonetization a scheme designed to convert black money to white? Naresh Agarwal of Samajwadi Party said his party would move privilege motion against Urjit Patel for misleading a Parliamentary Panel on the issue.

But, what of the immense collateral damage that the exercise caused? And why is the government still so shameless in protecting a lunacy? Finance Minister Arun Jaitley on asserted that any attempt to measure the success of the government’s demonetization exercise on the basis of the amount of money that stayed out of the system was flawed since the confiscation of money had not been the objective. He maintained that the government had met its principal objectives of reducing the reliance on cash in the economy, expanding the tax base and pushing digitisation. Holy Shit! And he along with his comrades is selling and marketing this crap and sadly the majority would even buy into this. Let us hear him out on the official position:

Denying that demonetisation failed to achieve its objectives, Finance Minister Arun Jaitley said the measure had succeeded in reducing cash in the economy, increasing digitisation, expanding the tax base, checking black money and in moving towards integrating the informal economy with the formal one. “The objective of demonetisation was that India is a high-cash economy and that scenario needs to be altered,” Jaitley told following the release of the Reserve Bank of India’s (RBI) annual report for the last fiscal giving the figures, for the first time, of demonetised notes returned to the system. The RBI said that of the Rs 15.44 lakh crore of notes taken out of circulation by the demonetisation of Rs 500 and Rs 1,000 notes last November, Rs 15.28 lakh crore, or almost 99 per cent, had returned to the system by way of deposits by the public.”The other objectives of demonetisation were to combat black money and expand the tax base. Post demonetisation, tariff tax base has increased substantially. Personal IT returns have increased by 25 per cent,” the Finance Minister said. “Those dealing in cash currency have now been forced to deposit these in banks, the money has got identified with a particular owner,” he said. “Expanding of the indirect tax base is evident from the results of the GST collections, which shows more and more transactions taking place within the system,” he added. Jaitley said the government has collected Rs 92,283 crore as Goods and Services Tax (GST) revenue for the first month of its roll-out, exceeding the target, while 21.19 lakh taxpayers are yet to file returns. Thus, the July collections target have been met with only 64 per cent of compliance. “The next object of demonetisation is that digitisation must expand, which climaxed during demonetisation and we are trying to sustain that momentum even after remonetisation is completed. Our aim was that the quantum of cash must come down,” Jaitley said. He noted in this regard that RBI reports that the volume of cash transactions had reduced by 17 per cent post-demonetisation. A Finance Ministry reaction to the RBI report said a significant portion of the scrapped notes deposited “could possibly be representing unexplained/black money”. “Accordingly, ‘Operation Clean Money’ was launched on 31st January 2017. Scrutiny of about 18 lakh accounts, prima facie, did not appear to be in line with their tax profile. These were identified and have been approached through email/sms. “Jaitley slammed his predecessor P. Chidambaram for his criticism of the note ban, saying those who had not taken a single step against black money were trying to confuse the objectives of the exercise with the amount of currency that came back into the system. The Finance Ministry said transactions of more than three lakh registered companies are being scrutinised, while one lakh companies have been “struck off the list”. “The government has already identified more than 37,000 shell companies which were engaged in hiding black money and hawala transactions. The Income-tax Directorates of Investigation have identified more than 400 benami transactions up to May 23, 2017, and the market value of properties under attachment is more than Rs 600 crore,” it said. “The integration of the informal with the formal economy was one of the principle objectives of demonetisation,” Jaitley said. He also said that demonetisation had dealt a body blow to terrorist and Maoist financing that was evident from the situation on the ground in Chhattisgarh and Jammu and Kashmir. One thing is for sure: more and more of gobbledygook is to follow.

One of the major offshoots of the demonetisation drive was a push towards a cashless, digital economy. Looking at the chart below, where there is presented the quantum of cashless transactions in some of the major economies of the world…one could only see India’s dismal position. Just about 2% of the volume of economic transactions in India are cashless.

12052016-Volume-equitymaster

Less cash would mean less black money…less corruption…and more transparency. Is it? Assuming it is, how far the drive would go on driving? But was India really ready to go digital? There were 5.3 bank branches per one lakh Indians in rural India 15 years ago. On the eve of demonetization, the figure stood at 7.8 bank branches per one lakh Indians. This shows that a majority of rural India has very little access to banks and the organized financial sector. They rely heavily on cash and the informal credit system. Then, we have just 2.2 lakh ATMs in the country. For a population of over 1.2 billion people, that’s a very small number. And guess what? A majority of ATMs are concentrated in metros and cities. For instance, Delhi has more ATMs than the entire state of Rajasthan. Given the poor penetration of banks and formal sector financial services in rural India, Modi’s cashless economy ambitions were always a distant dream. Then there are issues of related to security. Were the banks and other financial institutions technologically competent to tackle the security issues associated with the swift shift towards a digital economy? Can the common man fully trust that his hard earned money in the financial system will be safe from hackers and fraudsters? And the answer does not seem be a comforting one!

“Those dealing in cash currency have now been forced to deposit these in banks, the money has got identified with a particular owner” So surveillance was the reason. Makes sense why they are so desperate to link aadhaar to bank accounts. Some researchers have considered couple of factors which have actually caused demonetization in India. First one includes the refinancing of public sector banks in India. 80% of banks in India are run by government, during the last two decades these banks have been used to lend out loans to corporations which stink of cronyism. These politically-affiliated businesses did not pay back their money which has resulted into the accumulation of huge amount of non-performing assets (NPAs) within these banks. From last three years warning signals were continuously coming about their collapse. Through demonetization millions of poor people have deposited their meagre sums within these banks which have resulted into their refinancing, so that they can now lend the money to the same guys who earlier do not paid back their loans. sounds pretty simplistic, right? Sad, but true, it is this simple. The second factor is the influence of technological and communications companies on the government, as these companies are among the fastest growing ones during the last two decades. Making payments through digital gate ways will be very beneficial for their growth. They can expand their influence over the whole human race. The statements from technological giants like Apple, Microsoft, MasterCard, Facebook, Google etc. clearly shows their intentions behind cashless society. Tim Cook the chief executive of Apple said that “next generation of children will not know what money is” as he promotes “apple pay” as an alternative. MasterCard executives consider apple pay as another step towards cashless society. MasterCard is mining Facebook users data to get consumer behaviour information which it can sell to banks. Bill gates said India will shift to digital payments, as the digital world lets you track things quickly. The acquisition of artificial intelligence companies by Google, Facebook and Microsoft is also on its peak. Over 200 private companies using AI algorithms across different verticals have been acquired since 2012, with over 30 acquisitions taking place in Q1 of 2017 alone. Apple acquired voice recognition firm “Vocal IQ and real face Google has acquired deep learning and neural network, Facebook acquired Masquerade Technologies and Zurich Eye. So what is actually going on, as private corporations and governments are desperate to introduce cashless economy through biometric payment system.

No black money was unearthed by Modi’s historic folly. Terrorism has also not gone down after demonetization and neither has circulation of counterfeit currency. So, it was a failure on all counts, a point that has been predicted by economists worldwide. What the note ban did was cause untold suffering and misery to common people, destroy livelihoods of millions of wage workers, caused bankruptcy to farmers because prices of their produce crashed and disrupted the economic life of the whole country. The only people who benefited from the note bandi were companies that own digital payment systems (like PayTM, MobiKwik etc.) and credit card companies. It also seems now that ultimately, the black money owners have benefited because they managed to convert all their black wealth in to white using proxies.

100 Days of #Demonetization. Citizens’ Protest on 19th February 2017.

demonetization-poster

The highs of demonetization when the Government can’t be LYING low.

Countering the Economic Emergency imposed ON the people. 
The Government has redefined Democracy, A form of Government BY the people, FOR the people, OF the people and crucially, ON the people. Rather than democracy, Demonetization has shown what DEMONcracy is all about. Please join in huge numbers on the 19th February 2017 for a Citizens’ Protest and shout out to the Government that Enough is Enough. 

#Demonetization #100DaysofDemonetization #CitizensProtest #JantarMantar

 नोटबंदी के 100 दिन 

धरना और रैली

19 फरवरी, 2017, रविवार , 12 बजे से 

मंडी  हाउस  से जंतर मंतर तक 

जंतर मंतर पर जनसभा और सांस्कृतिक कार्यक्रम

इसमें कोई गुंजाईश नहीं कि पिछले 100 दिनों में भारतीय जनता आर्थिक आपदा से जूझ रही है. 8 नवंबर 2016 की रात को प्रधानमंत्री ने 500 और 1000 के नोटों का विमुद्रीकरण कर इनके चलन को अवैध घोषित कर दिया और दावा किया कि इससे कालाधन पर रोक लगेगा, कर चोरी रुकेगी, आतंकवादी गतिविधियों के फंडिंग पर रोक लगेगी और जाली नोटों पर लगाम लगेगा. जिनके पास ये नोट थे, उन्हें जमा करने के लिए करीब 2 महीनों की मुहलत दी गयी और निकासी के लिए  भारतीय रिजर्व बैंक ने कई स्तर की सीमाबद्धता निर्धारित कर दी. भारतीय अर्थव्यवस्था जो मुख्य रूप से नकदी पर आधारित है और इसमें भी एक बड़ी तादाद ऐसे लोगों का है जिसे इस पूरे आर्थिक तंत्र से बाहर कर दिया गया है, वह केवल और केवल नकदी मुद्रा पर निर्भर है. यह गुहार किया गया कि “फौरी तौर पर थोड़ी तकलीफ सह लें” क्योंकि यह देश की सेहत के लिए बहुत जरूरी है. प्रधान मंत्री का यह आह्वान था कि इस “तात्कालिक मुसीबत” को झेल लेने से भारतीय अर्थ व्यवस्था की सारी बीमारियाँ ठीक हो जायेंगी.

लेकिन हुआ क्या? पूरे देश की जनता अपने बचत को जमा करने और नोट बदलवाने के लिए बदहवास बैंकों की कतारों में लगने को मज़बूर हुई. नए नोटों के लिए लम्बी और अंतहीन कतारों में लोग लगे रहे. इन कतारों में कई लोगों की जानें चली गयीं, बीमारों का समय पर इलाज़ नहीं हो पाया, सामाजिक कार्यक्रम जैसे शादी और मैयत के लिए लोगों को दर-दर की ठोकरें खानी पड़ी और ताने ये दिया जा रहा था यह कि देश की सरहद पर हमारे सैनिक अपना खून देकर आपकी रक्षा कर रहे हैं, और आप थोड़ी तकलीफ नहीं झेल सकते? पर उनका क्या जिनका किसी बैंक में खाता तक नहीं है. या उनका क्या जो बैंक या एटीएम से काफी दूरी पर हैं,वो अपना  नोट कैसे बदलवायें? उन लोगों का क्या जो अपनी छोटी-छोटी बचत को जमा करने के लिए अपनी दिहाड़ी छोड़ कर दिन भर कतारों में लगे रहे? उन महिलाओं का क्या जो बड़ी मेहनत और जतन से किसी विपदा के लिए वर्षों से कुछ बचा कर रखीं थीं? उन करोड़ों रुपयों का क्या जो कोआपरेटिव बैंकिंग सिस्टम में बचत कर के रखा गया था, जो अभी भी मुख्यधारा के बैंकिंग तंत्र से कोसों दूर हैं, लेकिन ये कई राज्यों में  करोड़ों लोगों के पैसे को हिफाज़त से रखते हैं? जो लोग इस मुसीबत को झेल रहे थे, मालूम हैं उनके लिए पी.एम. मोदी का समाधान क्या था? 9 नवंबर को लगभग तमाम अखबारों में विज्ञापन दिखा “अभी एटीएम नहीं पेटीएमकरो”

ऐसी क्या मज़बूरी थी कि सरकार यह नहीं बताना चाह रही थी कि अस्थाई मुसीबतें कैसे हमारे जीवन को, आजीविका को और अनौपचारिक क्षेत्र की अर्थव्यवस्था को स्थाई रूप से तबाह कर देगी . सरकार को पता होना चाहिए था  थ कि इस कदम के लिए न तो आरबीआई और ना ही बैंक पूरी तरह से तैयार थे, और यह कदम उल्टा पड़ सकता था. प्रधानमंत्री को यह निश्चित तौर पर मालूम था कि इससे कालाधन पर रोक नहीं लगेगा. अमेरिका-मेरिल लिंच बैंक के एक अध्ययन के मुताबिक अनुमान है कि सकल घरेलू उत्पाद में 25 % धन काली अर्थव्यस्था का है और इसमें महज 10 प्रतिशत हिस्सा ही नकद रूप में है. यानी कि 90 फ़ीसदी कालेधन का कभी भी नकदी के रूप में प्रयोग  नहीं रहा.  यह सच्चाई श्रीमान मोदी, श्रीमान जेटली और श्रीमान शाह अच्छी तरह जानते थे. आखिर क्या वजह है कि सरकार उसी जनता से लगातार झूठ बोल रही है, जिसके वोट से ये सत्ता में आये हुए हैं. आखिर किसके हितों को इस नोटबंदी के जरिये साधा गया.

जहाँ तक जाली नोटों का सवाल है, RBI का आंकड़ा दिखाता  है कि करीब 90.26 अरब भारतीय मुद्रा के नोट 2015-16 में चलन में थे, इसमें से मात्र 0.0007% ही जाली नोट थे. 2015-16 में इन नोटों का कुल मूल्य मात्र 29.64 करोड़ रुपये था जो कुल चलन में 16.41 लाख करोड़ रुपये का महज .000018 फ़ीसदी ही है. नोटबंदी का वास्तविक असर जैसा कि ढिंढोरा पीटा जा रहा था, बहुत ही आंशिक रहा . पुरानी कहावत  है कि “एक चूहे को पकड़ने के लिए पूरे घर को जला दिया गया”. इस नोटबंदी के पीछे यह भी तर्क दिया गया कि इससे देशद्रोही गतिविधियों के लिए फंडिंग रुकेगी. लेकिन क्या आज तक एक भी उदहारण देखने को  मिला जिससे कि आतंकवादी गतिविधियों में कोई रुकावट आयी हो? यदि कुछ प्रभाव पड़ा भी तो महज क्षणिक ही प्रभाव रहा जबतक कि नए नोट बदल नहीं लिए गए. नए  2000 और 500 के नोट पुराने 1000 और 500 के  नोट से कहीं ज्यादा देशद्रोही गतिविधियों के लिए माकूल हैं. तमाम गतिविधियों में नकदी का चलन बहुत छोटा हिस्सा है, यह ना तो आतंक का प्रेरणा स्रोत है और ना ही आतंकवादी गतिविधियों का मूल कारण. केवल एक ही दहशतगर्दी दिखी, वह थी सरकार द्वारा देश की जनता पर चलाई गई आर्थिक दहशतगर्दी.

आखिर यह पूरी कवायद क्या थी. हम भारत के लोग, पूरी शिद्दत के साथ अपनी आवाज बुलंद करते हैं कि हमें किसी अतिमानव (सुपर हीरो) की जरूरत नहीं जो अलोकतांत्रिक ढंग से काम करता हो और हमें सपने दिखाता  हो, और सपने बेच कर हमें उल्लू बनाता हो. हमें जनपक्षीय सरकार की जरूरत है ना कि कॉर्पोरेटपरस्त आर्थिक आपदा की. हम इस प्रकार के किसी भी आर्थिक और राजनीतिक  विमुद्रिकरण को अस्वीकार करते हैं, और पूरी शिद्दत के साथ मांग करते हैं कि हमें पारदर्शी और जवाबदेह सरकार चाहिए जो वर्त्तमान सरकार के कुतर्क तर्क और झूठे दावे “हमें मालूम है लोगों को क्या चाहिए” को पलट दे. हम आधार स्कीम के तहत सरकार के तानाशाही और दमघोंटू मुहिम का पुरजोर विरोध करते हैं और मांग करते हैं कि इस मुहिम पर तत्काल प्रभाव से राजनीतिक और न्यायिक दखल कर रोक लगाई जाय. हम मांग करते हैं कि सरकार नोटबंदी पर श्वेतपत्र जारी करे कि लोगों की जिंदगी और उनके आजीविका पर कितना प्रभाव पड़ा है और इसका तुरंत हर्जाना दे. हम मांग करते हैं कि कॉर्पोरेट द्वारा “कैशलेस” मुहिम को तत्काल वापस लिया जाय.

Indian people have undergone nothing less than an Economic Emergency for the last 100 days. On the midnight of 8/11/16, in a single pronouncement, the Prime Minister of India made higher denominations of Rs. 500 and Rs. 1000 illegal tender under the pretense of curbing black money, arresting tax evasion, stopping funding of terrorist activities and counterfeiting of currency. Those who had these notes were given a time frame of less than 2 months to deposit them and withdraw new denominations in different slabs of limits set by the RBI. The Indian economy, which is predominantly cash based and the Indian people, a great section of who are financially excluded, existing solely on hard currency, would somehow have to manage through this ‘temporary crisis’ for the greater good of the nation. This was the call of the Prime Minister to undergo ‘temporary hardships’ to root out the ills of the Indian Economy.

And so what happened? The country panicked and people rushed to banks to deposit their cash savings, exchange high denominations and lines formed. Long lines, winding unending lines full of people waiting to deposit and get new notes. People died in those lines, many patients could not get timely medical help, many social functions – marriages and burials got drowned in questions of “why cant you suffer a little for the country, when soldiers are giving their blood in the borders to protect you”. But what about people who never had a bank account? Or those too far away from a branch or ATM to withdraw or exchange? Or those whose earnings were so marginal that they could not spare losing a day’s work waiting in lines? Or women who had painstakingly collected money for emergency over many years? What about those crores of rupees that was saved through co-operative banking system, still far away from the mainstream banking operations – but was safeguarding the money of crores of people in many states? Modi’s solution for those suffering was clearly evident on the morning of the 9th, plastered on almost every major newspaper “abhi ATM nahin, Paytm Karo.”

What the government did not tell us was that these temporary hardships would leave a permanent damage on lives, livelihoods and disturb a major chunk of the informal economy. The Government should have known that with underprepared RBI and unprepared banks, the move was bound to backfire. In retrospect, the Prime minister surely knew that demonetization wasn’t about black money; it wasn’t about funding the terrorists; and it certainly wasn’t about counterfeit currency.  A study done by Bank of America-Merill Lynch estimates black economy at 25% of GDP and quantifies the cash component at 10% of the above. Hence, 90% of black wealth was never in cash. A fact that was well known to Mr. Modi, Mr. Jaitley and Mr. Shah. Why did the Government then lie to the citizens of India who voted them to power? Whose interest are being pushed through demonetization?

As for counterfeiting, RBI data shows that, of the 90.26 billion Indian currency notes in circulation in 2015-16, only 0.0007%, were detected as fake. The value of these fake notes in 2015-16 was Rs 29.64 crore, which is 0.0018 per cent of the Rs 16.41 lakh crore currency in circulation. The actual impact of demonetization is then so marginal that the ideology behind its application can best be captured by the old saying, “burning down the house to catch a mouse.” Seditious funding was also given as a reason for demonetization, but did we ever hear of any examples of how terrorism was halted by this move? Even if there was any impact, it can only have been temporary, until new cash replaced the old! The new Rs.2000 and Rs.500 note is as seditious as the old Rs.1000 and Rs.500 note then! Cash is merely one of many conduits; it is neither the source, the motivation nor the act of terrorism. The only act of terrorism seems to be by the government in economically terrorizing the entire population of the country.

So, what exactly was the drive for? We, the people of India, affirm that we do not need a superhero, who does not act democratically and instead is all about weaving and selling dreams. We need people oriented governance and not corporate driven economic emergency. We reject the economic and political premises of demonetization and affirm that a transparent and accountable government is required to replace the current logic of ‘we know what is good for the people’. We reject in totality the authoritarian drive to push the UID/Aadhar scheme down people’s throats and demand political and judicial intervention to stop the drive immediately. We demand that the government produce a white paper on the impacts of demonetization on people’s lives and livelihoods and compensate for the lives and livelihoods. We demand that the corporate driven ‘cashless’ economy plan be immediately withdrawn.

Demonetisation, Cashless Economy and PayTM

Disclaimer: This was written with specifically activists, grassroots movements in mind and is all set to be translated into Hindi after undergoing editions.

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Almost everyone remembers Narendra Modi’s full-page cover ad in leading newspapers, where PayTM congratulated him on the boldest ever financial decision made in Independent India. And almost everyone was stunned by the fact that the Prime Minister could actually endorse a private entity. Rewinding back, the date was 9th of November, an evening after Modi took the decision to demonetise Rs. 500 and Rs. 1000, stripping these bills of their legal tender pushing millions of Indians in a state of chaos with serpentine lines almost in every nook and corner of the country outside of banks and post offices either to exchange old denominations with new ones or deposit currencies in old denominations. With numerous fatalities resulting from this move, the Government is bent on marketing the rhetoric of cashless economy and has even announced a spate of tax exemptions and rewards for those going on to digital transactions. Recently, Chandra Babu Naidu, CM of Andhra Pradesh, who is often credited with floating the idea of demonetisation way back in 2013 expressed his utter helplessness in trying to get the situation under control, and the story is afloat across the political spectrum, but for the ruling dispensation, who sees this move as glorious in order to curb black money, counterfeiting, terror funding and tax evasion. But, for the last, the first three are misplaced as eminent economists from left as well as right have called demonetisation as sickly implemented bringing vainglory to the plan and extreme hardships on the common citizenry, which continues unabated even today. The logics have changed from the four parameters that demonetisation was supposed to effectuate towards going cashless, or digital. PayTM is one such intermediary that seems to have captured the imagination of the country. But, would this be the future of cashless economy, or would Indians be able to sink going cashless is too early to state at the moment. Let us turn our attention to what exactly is the scheme all about.

To begin, let us try and understand what is digital money. Ely, B.  in his Electronic Money and Monetary Policy: Separating Fact from Fiction says, “Digital money or electronic money is the money balance recorded electronically on a “stored value” card, often called “smart cards” that have a microprocessor embedded which can be loaded with a monetary value.” But, that is one form of such money, while the other form is network money, where the software allows the transfer of value on computer networks, particularly the Internet. Just like a travellers’ cheque, a digital money balance is a floating claim on a private bank or other financial institution that isn’t linked with any particular account. this money is issued by both public and private institutions and is raising concerns about the futuristic ability of central banks to set monetary supply targets, to which we would turn later. So, how does one envisage cashless economy for India? And before that, what exactly is cashless economy? Cashless Economy is when the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, and payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) in India. Since, India has been a cash-rich economy, post demonetisation, the government has launched itself into the cashless drive. But, before venturing any further, we must have to deal with statistics. In India, cash-to-GDP ratio hovers around 12%, which is enormously high and is attributable to lack of banking access resulting in high cash transactions; almost zero costs incurred in cash transactions; and a large unorganised sector with overwhelming majority of retailers, suppliers and service providers banking on cash rather than going the digital way.

Pros and Cons of cashless economy for India:

The cashless economy has its own advantages. The transaction costs are coming down and will further go down. Once a substantial part of transactions are cashless, it would bring down the cost of printing, managing and moving money around. Further, the cashless economy automatically solves the problems of cash out on long holidays, risk of carrying currency notes etc. Further, the lesser use of cash strangulates the grey economy, prevents money laundering and increase tax compliance. Increased tax base would result in greater revenue for state and greater amount available to fund the welfare programmes. Lastly, Cash being material, can be prevented from circulation but electronic channels alleviate this friction and increase circulation of currency.

But, it also has its series of disadvantages, and for a country like India, these are gargantuan, for the basic prerequisite to going cashless is Internet literacy, and whatever may be ascribed to India being a IT giant, its large swathes of population are still bereft of the basic of network and communication technology. Even if India is touted as the largest growing smart phone market in the world, the permeability isn’t much to hope for as a significant population of the country resides in pockets where networks either are weak or do not have any presence. Apart from this, hacking and cracking pose a serious danger as digital wallets, how much ever secured they are touted to be are vulnerable to security breaches where encryption-decryption keys could be easily manipulated and therefore used for vested and malicious intent. The third important danger to be factored here is biometric usage in accessing cashless-driven economy, where rates of failure are high with concomitant hardships faced by the consumers. These cons counter the pros in making cashless economy a distant dream and there is indeed a long way to venture before the Governmental claims can make this happen and turn this into a reality through a magical wand.

Anyways, moving on, what are the prerequisites of bringing about a cashless economy? Enabling access to banking is a pre requisite to promote cashless economy. A robust payments mechanism to settle a digital transaction is also needed, though the National Electronic Funds Transfer and Real Time Gross Settlement services. The Reserve Bank of India will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development. This part is definitely undergoing a sea change as the role of RBI seems to have undergone precisely that under the Chairmanship of Urjit Patel. The expansion of telecom and smart phones would provide a digital shift to the economy in near future. The private sector the driver of this change. Government is also mulling to provide incentives for electronic payments for example waiver of tax when electronic settlements are used, which it has already initiated. But moving back the circle, the question remains whether India is ready for this cashless transition? Looking at the reports published by the Economic Times, while the jury is still out whether government’s move at demonetisation to arrest black money would backfire, one thing is certain that it has brought digital in the centre of payments debate, and as banks and vendors are trying to capitalise on the country’s severe cash crunch, the verdict of going cashless would all boil down to the people. As ET asked, will this shove finally make people conscious of the cost of cash?

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Consider this Trilogue,

At a fish vendor, an erudite lady buys fish and wants to transact the purchase with the vendor using her debit card. An esquire is in the queue eavesdropping on the conversation.

Lady: So, do you accept payment through cards?

Vendor: Not by cards, but you could PayTM me. 

Lady: Isn’t it true that while suing PayTM, you are being charged 1.5% as surcharge that goes to the Government? 

Man: No, it isn’t 1.5%, but hovers between 1.5% – 2.5% depending upon the volume of purchases. 

Lady: So, it goes to the Government, right?

Vendor: (exasperatedly) To the Government? No, it goes to the company. 

Lady: But, isn’t PayTM a Government undertaking? 

Vendor: (shockingly) From all that I am aware of, it is not Government-owned or Government-run,  but the money goes to the company. 

Man: PayTM has nothing whatsoever to do with the Government, as it is a purely private company/corporation/institution. 

Lady: (anguished) Then why is it that the Modi Government is advertising for a private corporation? 

The trilogue isn’t fictional, but happened a couple of days back in Delhi’s upmarket INA, and narrated by a colleague of mine, who incidentally happened to be the esquire in the conversation.

But, it needs to be noticed here that Paytm had scrapped the merchant transaction fees for offline transactions (i.e. while using Paytm for payments at physical shops) back in Feb 2016, which means the merchant also need not bear any extra cost while accepting payments through Patym.

Welcome to the world of PayTM.

PayTM, owned by One97 Communications, is a digital payments platform that allows you to transfer cash into the integrated wallet via online banking, debit cards, and credit cards, or even by depositing cash via select banks and partners. Using the money in the PayTM wallet, you can pay for a number of goods without using cash. PayTM Wallet, as mentioned above, is the digital payment instrument where you can transfer money from your bank account or credit card to use for transactions on the platform. You need to set up an account using your mobile phone number and email ID to setup a PayTM account and transfer cash to the wallet. You can add up to Rs. 10,000 in a month in the Wallet; if you want to increase the monthly limit, then you can get the KYC (Know Your Customer) processor done. With this, you can have up to Rs. 1 lakh in the PayTM Wallet at any point of time. No, the obvious question is: is this digital wallet safe and secure? PayTM – which is an RBI-approved wallet – says it keeps the money you put in the Wallet is “protected under Escrow account with a reputed bank.” PayTM uses Verisign-certified 128-bit encryption technology, which means that the secret key used in transactions is a sequence of 128 bits and does not reveal anything about the password length or contents. The platform is PCI DSS 2.0 certified, which means it does not store credit card data in unencrypted form. Technicals aside, PayTM could be used for online as well as offline payments. By online would mean, payment over the internet, and by offline would connote scanning the Quick Response (QR) code/barcode along with an OTP, One Time Password to realise the payments at a vendor’s.

PayTM is an e-commerce fin-tech web portal with services in online shopping based out of NOIDA in the National Capital Territory of Delhi. Owned by One97 Communications, Vijay Shekhar Sharma is the CEO of the firm. In March 2015, Indian industrialist Ratan Tata made personal investment in the firm. The same month, the company received a $575 million investment from Alibaba Group of China, after Ant Financial Services Group, an Alibaba Group affiliate, took 25% stake in One97 as part of a strategic agreement. Paytm borrowed 300cr from ICICI Bank in March 2016 as working capital. These three make up for the chief funding sources of the firm.

Let us focus on how PayTM works and how it earns its share of monies or profits? Once a user registers on PayTM, it creates a escrow account (virtual code) against which a ledger is made with an entry of Rs.10k (Rs. 20k till Dec. 31, 2016). Whenever a buyer adds some money to PayTM wallet, a debit entry is created in the ledger account with the amount entered by the user. Suppose, a buyer enters Rs. 1000 and keeping the maximum limit of wallet to Rs.10k then in the ledger a debit entry will be created with Rs.1000 and the balance will be shown as Rs.9000. Now suppose the user makes a transaction of Rs. 500 from the wallet, then a credit entry is created in the ledger with Rs. 500 and making the balance amount to Rs.9500 and wallet balance to Rs.500. Suppose the user receives a cashback of Rs.50 into his PayTM wallet. In this case again a debit entry of Rs.50 is created on the ledger leaving the balance in the escrow to Rs. 9450 and wallet balance to Rs. 550. PayTM is more about escrow economy. PayTM does recharges and bill payments. While Government entities may not entertain commissions to PayTM they surely hook the customer to PayTM’s wallet for payments because PayTM gives CashBack on all of these in the form of Wallet Cash which can only be redeemed against any payment made via its network and can be withdrawn into one’s bank account. It is important to note here that PayTM negotiates hard on the Settlement time to these vendors i.e. there is a time lag in which you pay PayTM and PayTM pays the Vendor. Assume Your Due date for payment of Light Bill is 1st of the Month – You pay it by that date, PayTM will release the same money to the vendor by say 8th of the Month (Your Electricity will not be disconnected because PayTM has given confirmation to the vendor that the payment has been settled) and thus PayTM in turn will make money out of the interest that it earns out of the lying deposits in the wallet.

How is PayTM any different from normal debit or credit cards? It is not feasible to physically carry point of sale (POS) machine to swipe the card at every location. Thus Payment Gateway comes to the rescue, The payment gateway, or PayTM in this case acts as a virtual POS on the webpage/portal to accept money. Lets assume a customer made a purchase of 1000 INR on the website of the merchant, the merchant did some 9 similar transactions in the week i.e. Total Value of Weekly sale is 10,000 INR, now at the time of settlement from the payment gateway (PG) to the seller the PG will get a discounted amount from the bank, since the PG has a higher bargaining power with the bank on account of its large transaction volume the bank agrees to cut down Transaction Discounting Rate (TDR) from 2% to 1.5% (assume). Thus the PG will receive (10,000 * (1-1.5%*(1+14.5%))) = 9828.25 INR and will further discount it by 1% (assume) to pass it on to the merchant i.e. the merchant will finally get about 9715 INR (9828.25 * (1-1% * (1+14.5%))). Thus in the whole process, the Card Issuer made the same amount of money, the bank made slightly lesser money on account of customer acquisition and the payment gateway made some money. It is not about promoting PayTM at all, it is as I said the escrow economy which economically/financially is better at cost-effectiveness that I (used metaphorically) would be most benefitted by. The larger picture is thus to be considered vis-a-vis debit/credit cards, where banks are charged higher by the issuers, even if these are bank-owned cards. For instance, a MasterCard issued by the SBI would have a charge that the SBI would be mandated to pay the MasterCard, which itself acts as a payment gateway.

To end this, I did mention about how the Central Bank, Reserve Bank of India in our case would be finding it challenging to decide on monetary supply with an economy that is increasingly going cashless. If electronic money is issued through the conversion of banknotes or sight deposits, it does not change the money supply and price stability is not endangered. However, if electronic money is issued as a consequence of credit, private issuers have incentives to supply additional amounts of electronic money as long as the difference between the interest charged on the credit and the one paid on electronic money covers the credit risk premium, the provision of the payment service, and possibly also the cost of refinancing. Given the low marginal cost of producing electronic money, its issuance could in principle proceed until the interest rate charged on the credit extended for the provision of electronic money is equal to the credit risk premium. This, by lowering the level of interest rates, could in turn endanger the maintenance of price stability. The risk of overissue would be limited by two factors which increase the costs of issuing elec- tronic money, thereby limiting its supply: first, in a competitive environment, electronic money balances could be remunerated; second, and more importantly, a redeemability requirement could oblige the issuer to possess central bank money. An even stronger measure, which could be con- sidered in the light of future developments in electronic money, would be to introduce a coverage requirement on electronic money, i.e. to request issuers of electronic money to cover part or all of their liabilities with base money. Another way to limit the risk of overissue would be to require rapid clearing of electronic money balances in central bank money. Thus, it appears that there are several reasons to assume that the risk of overissue of electronic money can be contained. However the issuance of electronic money may have an impact on the conduct of monetary policy, as I have been claiming for quite a time now. Or else, switch to bitcoins!!!

blockchain-ledger

Recapitalisation and Demonetisation. Is the link exaggerated?

What has been witnessed in the aftermath of demonetisation is the declining yield on Government securities, and as a consequent of which treasury gains for public sector banks have already surpassed capital infusion. With a sluggish economy, high levels of stressed assets and eroding bottom-lines, banks have been pushed to the corner to regulate lending. The aim of recapitalisation, and/or capital infusion is geared towards shoring up the lending capacities of banks, public sector banks in this case as countenance  against these erosions. To understand what recapitalisation is, let us take a jaunt to Indradhanush 2015, the seven colours or A2G meant for reviving the banking industry in the country. The seven colours talked about are: Appointments, Bank Board Bureau, Capitalisation, De-stressing PSBs, Empowerment, Framework of Accountability, and Governance reforms. The third colour, i.e. capitalisation (Capital Infusion or Recapitalisation) is an exercise to estimate the capital requirements based on credit growth rate of 12% for the current year and 12 to 15% for the next three years depending on the size of the bank and their growth ability. It has been presumed that the emphasis on PSBs financing will reduce over the years by development of vibrant corporate debt market and by greater participation of Private Sector Banks. Based on this exercise, it is estimated that as to how much capital will be required this year and in the next three years till FY 2019, despite the banks being under a lot of stress and still adequately capitalised and meeting all Basel-III and RBI norms. It must be noted that under Basel III, a bank’s tier 1 and tier 2 capital must be at least 8% of its risk-weighted assets. The minimum capital adequacy ratio (including the capital conservation buffer) is 10.5%. The capital conservation buffer recommendation is designed to build up banks’ capital, which they could use in periods of stress; where tier-1 capital is the core capital and includes equity and disclosed reserves, while tier-2 capital are hybrid capital instruments, loan-loss and revaluation reserves as well undisclosed reserves.

After excluding the internal profit generation which is going  to be available to PSBs (based on the estimate of average profit of the last three years), the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about huge amount of Rs.1,80,000 crore.

Out of the total requirement, the Government of India proposes to make available Rs.70,000 crores out of budgetary allocations for four years as per the figures given below:

(i) Financial Year 2015 -16 Rs. 25,000 crore
(ii) Financial Year 2016-17 Rs. 25,000 crore
(iii) Financial Year 2017-18 Rs. 10,000 crore
(iv) Financial Year 2018-19 Rs. 10,000 crore
Total  Rs. 70,000 crore

According to the document itself, PSB’s market valuations will improve significantly due to (i) far-reaching governance reforms; (ii) tight NPA management and risk controls; (iii) significant operating improvements; and (iv) capital allocation from the government. Improved valuations coupled with value unlocking from non-core assets as well as improvements in capital productivity, will enable PSBs to raise the remaining Rs. 1,10,000 crore from the market.  Moreover, the government is committed to making extra budgetary provisions in FY 18 and FY 19, to ensure that PSBs remain adequately capitalized to support economic growth. The banks can raise capital from the capital markets as well be availed of tranche facilities running over three tranches, and nowhere is there any mention of such budgetary allocations meant for capital infusion or recapitalisation on the substitute for the process of demonetisation. Before moving on to demonetisation, it must be remembered that capitalisation, recapitalisation or capital infusion (the first two are generally used interchangeably and depends on who the user is, with the former lying squarely with the banks, while the latter with academics, if that wasn’t too generic a distinction, I be forgiven!) is through budgetary allocations. Let us underline this.

Demonetisation is when the Central Bank, RBI in our case strips the bill of its legal tender. What happened post November 8 was stripping bills of Rs. 500 and Rs. 1000 of their legal tender, thus rendering them invalid.

Almost everyone seems to be collaging demonetisation and black money, terror funding, illicit and counterfeit money flows. Not that there isn’t correlation between these, but the whole of argumentation is getting reducible to these aspects and what seems to be totally sent to oblivion is tax evasion. Though, some talks do touch upon these, many of these commit the folly of citing tax havens like Mauritius and Singapore and black money hoarded and channeled through there. A populist line of thought, without considering the fact that a recently concluded tax treaty between India and Mauritius has choked the tax haven significantly. One with Singapore is in the pipeline, and once that gets concluded, the two tax havens would then need to seep through populist discourse as no longer the culprits before the narrative changes sense. A tall order from a half-baked recipe.

On the other hand, even if terror funding is caused by higher denominations, one shouldn’t belittle other ingenious ways of carrying out the same. Though, flushing the economy of higher denominations could trickle down to curbing such illicit fundings, the government should not be gung-ho over this as the be-all end-all to choke such flows, for such denominational crushes would only exaggerate Kosher funds, funds through oil economics, extortion and crucially politically-motivated funds slipping through religiously-fundamentalist and right-wing techno geeky consortiums.

So, whether the move is short-term distress or long-term satisfactory should not be decided on subjectivities, but rather on economic complexities, the answers to which sadly the Government doesn’t have at the moment and no wonder crying foul over any resistances to its move. The same goes true for even those calling the government to dock, for the problem is economics should not be totally (read: wholly) studied sociologically anymore, but all the more importantly, sociology needs to be studied as a consequence of economics, and once the order goes for a tailspin, its only fertile for such sentimental concerns, not that anythings wrong with such concerns, but for the fact these have tendencies to become authoritarian. By authoritarian, what is meant is surely Prime Minister’s grand designs. Unlikely entities in the form of Ratings Agencies is stifling PM’s grand designs. But, all of that could change. With demonetisation of notes and GST, hopefully not this quarter but over the next six-seven quarters, there will be an improvement in the fiscal debt-to-GDP ratio by virtue of expansion of denomination, and improvement in the fiscal tax-to-GDP ratio by virtue of better tax collection. Meaning, a possible upgrade from Baa2 (Moody’s) and BBB- (S&P), a notch over the junk. Consequentially, it’d mean all the big three seeing this war on people capitalistically profitable. a sort of double bind, ain’t it? And, here I am guilty of parsimonious arguments, for reasons that most of these are in liberal supply on the media. So, the basis is to look out at connectors and/or disconnectors between recapitalisation and demonetisation, which is still within approaching distance from here on.

With demonetisation has come massive exchanging of old currency for new denominations of Rs. 2000 and Rs. 500 on one hand and depositing old currency in accounts till 30th of December 2016. The deposits have spiked and banks are faced with surplus liquidity, which they are finding hard to find avenues to disburse, say in the form of investments. The cause, which has been reactionary has left the effect no less reactionary, and the culpability lies squarely with planning and implementation of the scheme. Well, thats a different matter, and thus at best put aside. But, the fractures within the social fabric caused due to this lack of implementation has had fatalities that have been extremely costly. As the Financial Express was prescient in noting, there was ecstasy with deposits rising just at beginning of the busy season. Consumerism had shown strong signs in the period leading to Diwali and the good times were to come along supported by banks, which were running tight on deposits. In fact, RBI has been supplying funds through OMOs all through, and it is against this background that banks became ecstatic as deposits rolled in. Most households were in a panic mode and were just keen on getting rid of old notes safely and, hence, most of this money went into savings deposits. The consequences were significant. First, banks automatically started lowering the deposits rates as they no longer had to wait for RBI to announce changes in the repo rate. This also meant that the lending rates could be reduced without a prod, which was a win-win situation for the system. The transmission mechanism became smooth under the compulsion of market forces. In fact, some sections of the market believed that RBI need not lower the repo rate in the December policy, as circumstances have already delivered the result unobtrusively. Banks were also pepped up as the G-Sec yields had crashed with the 10-years paper going down to 6.3% with sentiment providing a guidance of sub-6%. This meant there were capital gains to be had, which would prop up income and banks would be better able to manage provisioning for their NPAs. But, the downside is that the banking sector does not have the capacity to absorb so much of liquidity, and with a low demand for credit, the alternative is to approach G-sec (Government Securities) market. Now, the catch. With stringency to the fiscal target, having additional paper in the primary segment would be self-defeating, and thus another turn, which happens to be the secondary segment for banks to target. This has led to the yields coming down sharply. Given that banks have been paying a minimum of 4% interest on deposits, a positive net return is what they would have wanted. The reverse repo window has been used widely to park these funds where the return could go to 6.25%, which would just about cover their operating cost to assets ratio of 2-2.5%.However, RBI has limited G-Secs in its balance sheet, which is around R7.5 lakh crore, and in case deposits do shoot up to R10 lakh crore, it would not be possible to satiate the market. One option is seeking recourse to MSS bonds (market stabilisation bonds), which have been used in the past when money supply increased mainly due to the influx of foreign currency in the system leading to sharp appreciation in currency. But given the quantum involved (between Rs. 5-10 lakh crore ultimately if the target is reached and cannot be used for lending), this would push up government debt substantially. In fact, it will also add directly to the fiscal deficit, which is not acceptable.

So, what has the RBI proposed? Locking in liquidity on an ex-post basis. It has increased Cash Reserve Ratio (CRR) by 100% of net demand and time liabilities (NDTL),  which is the difference between the sum of demand and time liabilities (deposits) of a bank and the deposits in the form of assets held by another bank. Formulaically,

NDTL = demand and time liabilities (deposits) – deposits with other banks.

The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy. towards the end of November, the RBI hiked the incremental CRR by 100%. The incremental cash reserve ratio (CRR) prescribes the reserve ratio based on the extent of growth in resources (deposits). It im­mobilises the excess liquidity from where it is lodged (the banks which show high growth), unlike the average ratio which impounds from the banks which are slow-growing as well as banks which are fast-growing. It also avoids the jerkiness of the average ratio. This means it has literally mopped the surplus liquidity that has gone into the banks as deposits in the wake of demonetisation. So, banks do not have capital to lend.  There is a formula on how much a bank could lend. It is:

Lending = Deposits – CRR – SLR (statutory liquidity ratio) – provisioning

; SLR is the amount of liquid assets such as precious metals (Gold) or other approved securities, that a financial institution must maintain as reserves other than the cash.
Formulaically,

SLR rate = (liquid assets / (demand + time liabilities)) × 100%

As of now, the CRR and SLR rates are 4% and 23% respectively. Hence, the bank can only use 100-4-23= 73% of its total deposits for the purpose of lending. So, with higher CRR, banks can give less money as loan, since with higher interest rates, it becomes expensive to lend. This can curb inflation (and this is one of the main arguments of pro-demonetisation economists), but may also lead to slowdown in economy, because people wait for the interest rates to go down, before taking loans.

To reiterate: This move by RBI was necessitated by the fact that the central bank at present holds Rs 7.56 lakh crore of rupee securities (G-Secs and T-Bills) and will soon run out of options of going in for reverse repo auctions, where it sells G-Secs in return for cash from banks, which have surplus deposits. These transactions have been reckoned at rates between 6.21%-6.25%. There are expectations that the volume of deposits will increase by up to Rs10 lakh crore by December because of the demonetisation scheme. The present equation of Rs3.24 lakh crore impounded by CRR and Rs7.56 lakh crore to be used as open market option (OMO) or reverse repo auctions broadly covers this amount, leaving no extra margin. There are two implications out of this: One being, as the level of deposits keep increasing, banks may have to park the increments as CRR with RBI which will affect their profit and loss (P&L). The expectation till today morning had been that the RBI would lower the repo rate aggressively in the December policy by 50 basis points (bps), i.e. today, which it did not do. This surely is deferred till stability due to demonetisation is achieved in the system. The other being on interest rate transmission. Banks could have delayed cutting their lending rates given that they had promised at least 3-4% interest rate to savings account depositors, and not be receiving any interest on the deposits impounded for CRR, which they haven’t as on individual levels, they have been cutting lending rates to approach RBI rates. This culminates into liquidity to tighten and send bond yields on a northward blip, and this is where lending would shrink automatically. And, that is the connector spoken about above, where when the lending spigots are tightly controlled due to tightening of liquidity, the logic behind capital infusion, which anyways comes in through budgetary allocations gets defeated. The real constraining factor could arise when Large Exposure Framework (LEF) gets kickstarted next financial year confining banking sector’s exposure to highly leveraged corporates through a cap scanning risk environs along the way. But, these consequences are still in a speculative realm, though definitely geared to life via demonetisation.