Saturday, May 9, 2015

Koan Partner Vivan Sharan on "Setting Standards for the Indian Services Economy"

Historically, the thrust of Indian standards has been on manufacturing sector products, with few standards for services. The nodal authority for standards, the Bureau of Indian Standards (BIS), is contemplating a renewed emphasis on developing standards for services. Given India’s domestic context and rapid developments in the global trade regime, this would be most timely. 
In April 2015, the Ministry of Consumer Affairs moved a cabinet note for making amendments to the Bureau of Indian Standards Act, 1986. The amendments will likely give the BIS more teeth in enforcing standards. Contravention of this Act currently attracts nominal punishment. Simultaneously, the BIS must aim to create pro-competition and pro-consumer service-standards benchmarks, so that industry can take a cue and eventually, take the lead.   
It is no secret that services have been the primary driver of India’s GDP growth since the early days of economic liberalisation in the 1990s. The service sector broadly constitutesinfrastructure services such as financial, telecommunications and transport on the one hand, and social services such as education and health on the other. 
Globally, services account for around 20 per cent of trade in balance of payment terms and around 42 per cent of trade in value added terms. The difference in the two metrics is because most products have a service component in their production – the value addition of which gets hidden in the ultimate product cost. 
Notably, the service component of Indian exports case is over 50 per cent – more than most other countries and at par with Hong Kong, China, Singapore, Iceland and the EU27. Some of the sectors in which India's exports are consistently growing are in education, health and in business services such as business processing outsourcing and other ICT related services.
It can be argued that the service sector will necessarily represent India’s competitive advantage in the Global Value Chains (GVCs) of trade. Micro Small and Medium Enterprises (MSMEs) are the largest source of employment after agriculture, and goods and services produced by them account for close to 40 per cent of exports. 
Even as the employment generation imperative becomes starker on account of the country’svast andyoung demographic, MSMEs will be absorbing a significant proportion of the workforce. MSMEs are also likely to be structurally more nimble than large firms. Capacity building by government and private sector can make MSMEs more adaptive to the dynamic GVCs than their larger industry counterparts.
Moreover, given India’s talent pool in service areas such as ICT, the global demand for well-run MSMEs will only grow.
The global trading regime for services trade is underpinned by the General Agreement on Trade in Services (GATS). The GATS came into force in 1995 and similar to its merchandise trade counterpart the General Agreement on Tariffs and Trade (GATT), GATS is a rules-based system for global trade in services. It is equipped with a “built-in” agenda aimed at achieving progressively higher levels of trade liberalisation through successive rounds of negotiations.
These negotiations aim at the reduction or elimination of the adverse effect on trade in services of measures as a means of providing effective market access. As part of the Doha Round's in-built agenda of services negotiations is a rules component which is inter alia, negotiating the establishment of disciplines on domestic regulation, including on technical standards.  
The objective is to ensure that such technical standards do not constitute a barrier to trade in services. Twenty years have passed since the GATS was created and no progress has been made on technical standards, while the global trading regime is evolving fast. 
In spite of the lack of progress at the WTO, technical standards are nonetheless being rapidly developed in parallel processes. As of April 2015, the WTO had received notifications of some 612 Free Trade Agreements (FTAs)/Regional Trade Agreements (RTAs). 
Currently three ‘mega FTAs’ are also on the anvil. The Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are being led in large part by the United States and the European Union, while ASEAN countries are leading discussions on the Regional Comprehensive Economic Partnership (RCEP). India is not a part of the TPP and TTIP – expected to cover a majority of world trade by value, particularly if China joins the TPP as is expected. Similarly, India is not a part of the Trade in Services Agreement (TISA), another FTA-style trade agreement, being negotiated between 24 members of the WTO. 
Owing to its non-participation inthe TPP, TTIP and TISA, Indian companies, particularly MSMEs with limited capacities to respond to strict standards regimes will lose out on the opportunity to shape such standards as well as to benefit from emergent GVCs. And in losing a seat at the table are other domino-effects including becoming norm takers as the regulatory disciplines in these mega FTAs/RTAs will inevitably end up in the multilateral trading system, this time being pushed by what will then be a North-South coalition- which is the composition of some of these initiatives, making it that much harder for India to contest. This demands an urgent response. 
The Indian private sector will necessarily be at the forefront of the response. Given that goods and services are often closely tied in value chains of production, supply chain management will become increasingly important for firms to stay competitive in the global economy. In a reflection of this, globally, standardisation has already moved into systems rather than product areas (an example is the ISO 9000 series of voluntary systems standards). 
The Indian Government also has its work cut out. It will have to build requisite capacities to ready industry. New service standards will have to respond to the fact that services are innately unique from merchandise goods. Unlike in the case of merchandise goods, both production and consumption of services can be simultaneous. Moreover, physical specifications for services are not feasible and therefore laboratory testing cannot be carried out to ensure service quality. 
Globally, standards tend to apply to service suppliers and the physical equipment used rather than the service itself. 
However the economic footprint of services such as ecommerce is bound to change this. India would do well to take the lead on ecommerce standards, with a view to protecting the consumer without killing the competitiveness of job-creating firms. Moreover skill development related standards particularly for skill redevelopment in technical sectors is an urgent imperative.
In addressing skills development challenges, priority focus should go to sectors in which India is currently exporting so as to leverage existing strengths.  Such work will need to be done in collaboration with all relevant stakeholders as well as key destination markets such that this standard development process can also be used as a means to propel India's export growth in these sectors by helping to open markets, and keep them open.
Taking a step back from the nuances of standard setting, the Indian Government must at the outset aim to answer two questions:Is it willing to let the private sector take a lead in creation of industry standards? And what is the strategic objective of setting service standards – domestic supply chain efficiency or aspirations to match global benchmarks?
But creating such standards will be no easy task.  Technical standards are by their very nature complex and intrinsically sector and even sub-sector specific.  Standards for telecom are not similar to travel and logistics or to financial services, and certainly not to health.  It will therefore take concerted effort and collaboration between government, private sector specialists and all other relevant stakeholders including from civil society and consumer interest groups. Long and complex as it is though, the process must start.

Vivan Sharan, Partner, Koan Advisory Group
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Koan Partner Vivan Sharan on "Goods and Services Tax"

बहुचर्चित वस्तु एवं सेवा कर (जीएसटी) संबंधी संविधान संशोधन (122वां संशोधन) विधेयक, 2014 पर लोकसभा में सरकार कांग्रेस का समर्थन पाने में सफल रही। लेकिन सरकार की असली परीक्षा राज्यसभा में होगी, जहां सरकार के पास विधेयक पारित कराने लायक बहुमत नहीं है। जीएसटी लागू होने से घरेलू स्तर पर वस्तुओं और सेवाओं के विनिर्माण, बिक्री और उपभोग पर एक समान और व्यापक कर व्यवस्था लागू होगी। इसके तहत केंद्र एवं राज्यों के सभी अप्रत्यक्ष कर समाहित हो जाएंगे, जिनमें उत्पाद शुल्क, सेवा कर, बिक्री कर, मूल्यवर्द्धित कर, चुंगी, विलासिता व मनोरंजन कर और अन्य उपकर व अधिभार शामिल हैं।

इसमें राज्य और केंद्रीय जीएसटी के दोहरे ढांचे को समाहित करने की कल्पना की गई है। एकीकृत जीएसटी वस्तुओं और सेवाओं पर विभिन्न राज्यों द्वारा नियंत्रित बिक्री कर की मौजूदा व्यवस्था को खत्म करेगा। राज्य एवं केंद्रीय करों के बीच के अंतर को कायम रखते हुए जीएसटी सभी अप्रत्यक्ष करों को सरल बनाएगा। कथित तौर पर इसके कई लाभ हैं। मसलन, विभिन्न करों को एकीकृत करने से इसका प्रबंधन सरल हो जाएगा। जीएसटी लागू होने से सकल घरेलू उत्पाद में भी एक से दो फीसदी वृद्धि का अनुमान है और उपभोक्ताओं को भी प्रतिस्पर्धी मूल्य से राहत मिलेगी। पर राज्यों को इसकी चिंता है कि अगर केंद्रीय बिक्री कर को खत्म कर दिया जाता है, तो उनके कर राजस्व का बड़ा हिस्सा खत्म हो जाएगा। राज्यों को होने वाली इस क्षति की भरपाई के लिए शुरू के कुछ वर्षों के लिए एक सांविधानिक ढांचे की व्यवस्था की गई है। मसलन, वस्तुओं के एक राज्य से दूसरे राज्य में जाने की स्थिति में दो वर्षों के लिए एक फीसदी का अतिरिक्त कर लगेगा, जो केंद्र द्वारा वसूल कर राज्यों को सौंप दिया जाएगा। हालांकि कुछ राज्यों को इस दर को लेकर आपत्ति है। इसके अलावा, शराब को जीएसटी के दायरे से बाहर रखा गया है, जबकि पेट्रोलियम पदार्थ अभी जीएसटी के अधीन नहीं है। कई राज्यों के लिए ये दोनों राजस्व के बड़े स्रोत हैं।

इसके अलावा, कई ऐसे मुद्दे हैं, जिनसे निपटने की जरूरत होगी। मसलन, इससे एक तटस्थ राजस्व दर अस्तित्व में आएगी। तटस्थ राजस्व दर वह दर है, जिससे कर ढांचे में बदलाव होने पर भी राज्यों के राजस्व पर कोई असर नहीं पड़ेगा। कुछ विशेषज्ञों का मानना है कि यह दर 20 से 24 फीसदी के बीच रहेगी। हालांकि सरकार अभी इस पर विचार ही कर रही है।

जीएसटी मौजूदा केंद्रीय बिक्री कर की जगह लेगा, जो उत्पादन स्थल आधारित कर है। हालांकि गुजरात एवं महाराष्ट्र जैसे विनिर्माण करने वाले राज्य इससे चिंतित हैं कि यह उनके हित में नहीं होगा। जीएसटी को अप्रैल, 2016 से लागू करने का लक्ष्य रखा गया है। इसके लिए राज्यों में कर अधिकारियों को मुस्तैद करने की जरूरत होगी। हालांकि इसकी गारंटी नहीं है कि तब तक जरूरी तकनीकी और मानव संसाधन क्षमता मुहैया करा दी जाएगी।

अगर यह विधेयक संसद में पारित हो जाता है, तब भी राज्य विधानमंडलों में इसे दो तिहाई बहुमत से पारित कराना होगा। यह इसे लागू कराने में एक बड़ी बाधा साबित हो सकता है, क्योंकि राजनीतिक दल रणनीतिक रूप में आर्थिक सुधार कार्यक्रमों को राज्य स्तर पर रोकने का फैसला कर सकते हैं।

Koan Partner Vivan Sharan on "Reviving Indian Agriculture"

The recent political discourse has centred on the many woes of the Indian farmer, and has become particularly amplified following the suicide of a farmer at a political rally in the capital. While the government has stood its ground on the proposed Land Bill seen by opposition parties as fundamentally “anti-farmer”, it is increasingly clear that the BJP and its allies will have to confront the core issues at stake. Even if the successive failures of previous governments in assuaging the farmer’s challenges are not reason enough, a gridlock on the economic reforms mandate as a result of political developments should provoke a comprehensive response.  
Despite the elevated status of the services sector post economic liberalisation, agriculture remains critical to the Indian economy. The sector accounts for the largest share of jobs. Yet, it also accounts for adwindling share of value added. The National Sample Survey suggests that the number of rural workers in agriculture has dropped from a share of 74 per cent of total workers in 1999 - 2000 to 61 per cent in 2010 – 11, and to even fewer today. 
While states such as Madhya Pradesh have shown stellar agricultural performance in recent times, many others have not. Unseasonal rains and hailstorms have diminished farm yields. To make matters worse, a slew of ‘legacy policies’, such as Minimum Support Prices (MSP), have created perverse incentives to farm low value, highly susceptible crops. Rice and grains account for account for over two thirds of agricultural produce. They simultaneously account for around a fourth of the value of all agricultural produce. Concomitantly, the cropping of high value produce such as vegetables and fruits remains restricted, leading in turn to lower farm incomes. 
As a result of inefficient market functioning on both the input and output side farm profitability has suffered. The proliferation of intermediaries in the sector is a well-recognised problem with few systemic solutions or so it seems. As are other aspects such as low productivity and fragmented production owing to factors such as small land holdings and low levels of farm mechanisation. 
There is certainly no panacea for the ailing sector; however the government may find it prudent to focus its energy on five areas.
First, the rejuvenation of the agricultural sector merits a deeper look at how the state has (mis)conducted natural resource management. Agricultural policies must be assessed through multi-disciplinary lens. This has not been the case and as a result, despite the acute land scarcity in the country, low value crop production has been encouraged; and despite acute water scarcity, India is the largest exporter of water through agriculture (through exports of basmati rice in particular). The government shouldtherefore strive to articulate an agricultural policy framework premised on an integrated natural resources management approach. 
Second, small and marginal farmers across the country require extension services, ranging from technical training to weather and market related information. Extension services come under the scope of Departments of Agriculture across states, as well as other government entities such as Krishi Vigyan Kendras, private entities such as the seed industry, farmers’ groups, registered producers associations, NGOs etc. There is a need to consolidate the efforts of different stakeholders across states, and build upon existing capacities. There is also a large opportunity in the waiting, for private sector interventions. The key here is for the government to showcase successful case studies, of which there are more than a few, and provide the requisite incentives for private sector participation. 
Third, an important determinant, of agricultural growth is the availability of infrastructure in rural areas in the form of roads and power in particular. Perhaps it is time to look at schemes that are analogous to the ‘Provision of Urban Amenities in Rural Areas’. The key question here too would be that of financing. However, most Indian states are fiscally sound – and have greater room to manoeuvre than intuition would suggest. For instance, Bihar, which is one of the poorest states in the country on a per capita basis, is also a state which has budgeted for a revenue surplus of INR 11,980 crore, which is expected to be invested into physical infrastructure. The states should therefore lead the charge on creation of infrastructure in rural areas, and the centre should in turn, play a facilitators role. 
Fourth, an increased emphasis on high value activities such as animal husbandry and fisheries is warranted given the high profit margins and the visible investment demand for industries such as dairy, both domestically and internationally. Capital intensive animal husbandry and fisheries should be promoted through mezzanine financing schemes. 

Similarly, there is a need to actively develop the agricultural supply chain for high value agricultural produce, such as cold storage and transportation, through investment programmes. It is imperative for local entrepreneurs to get involved and this will require government to focus on market efficiency. Rent seeking and business cartels act as barriers to entry that demand and supply economics cannot reasonably explain.
And finally, no agricultural sector framework would be complete without a consistent focus on agricultural credit and micro-insurance. While the MUDRA bank may be a good idea, the government is not necessarily a good manager of money. Moreover, the existing micro – insurance products in the market, particularly weather based insurance products, are not necessarily effective tools to mitigate price and income risks faced by farmers. The reasons for this include lack of product awareness and simply bad product innovation – more than a few credible studies already exist meticulously enumerating the flaws and how to address them. Aside from seriously deliberating on the credit challenges, the government would also do well to provide channels for global capital, available at historically low interest rates, towards the agricultural sector. This would benefit food processing and mega food park plans that are capital intensive andare perhaps only unattractive owing to high domestic rates of interest. 
The author, Vivan Sharan, is Partner, Koan Advisory Group, India
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