Global Prospective: Energy in India

Energy in India
The Economist, 21-Jan-2012
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[Coal is to India what hydro is to Nepal - lot of potential but not much to show for it. Nepal can learn a thing or two from India's experience]

Power is essential for India’s long-term growth. But electricity is unlikely to flow fast enough

STAB a finger at the middle of a map of India and you will hit Nagpur. Some 20 miles (32 kilometres) north-west of the city is a sloping tunnel bored into the rock. Ride two miles down into the gloom, hanging from a wire, and after a torch-lit hike past underground streams and conveyor belts you arrive at a black wall. Sweating men are rigging it with tubes of explosives and wire detonators. Soon they will blast it apart, and down should tumble tonnes of India’s most important commodity: coal.

In coal India has something as abundant as people. As more Indians enjoy the trappings of middle-class life and the country industrialises, demand for coal-fired electricity will continue to rise smartly, roughly in line with economic growth. India may not have much oil or gas to call its own but it has the world’s fifth-largest coal reserves. And it has successfully raised a mountain of the other raw material needed to turn carbon into sparks: capital. Some $130 billion has been ploughed into the power industry in the past five years. Of that, $60 billion or so has come from the private sector—probably the largest-ever private-sector investment India has seen.

Possessing coal and capital is no guarantee that India’s energy boiler will work properly, however. It also involves multiple states, government ministries, regulators, mandarins, politicians, tycoons, environmentalists, villagers, activists, crooks and bandits. There are the usual gripes of an emerging economy: blackouts (during peak hours the system delivers 10% less electricity than customers want) and an inadequate grid that does not reach some 300m people (although it has improved a lot in recent years).

There is also a risk that India cannot deliver the long-term increase in electricity generation that its economy needs to fulfil its potential. On January 18th a group of influential businessmen gathered in Delhi to bend the prime minister’s ear on this very matter.

The problem is partly one of design. Coal is dug up by a state-monopolist that has failed to boost output significantly in recent years, unlike China (see chart 1), and so cannot keep up with demand. Power is distributed to homes and firms by publicly owned grid companies that are often bankrupt, their tariffs kept too low by local politicians. Trapped in the middle are the firms that run power stations. In desperation they are importing pricier foreign coal, but the grid companies cannot afford the power it produces. With too little coal and wobbly customers, the private firms that have built new power stations are in financial trouble. Another wave of private investment looks unlikely.

In India, though, no one expects perfect design. The economy sits somewhere between the old command-and-control approach and the new ways of markets and private capital. What is worrying is that India’s talent for improvisation—a collective ability to muddle through—has deserted it when it comes to providing electricity.

The problem has been clear for ages. A circuitous blame game is taking place. Ministries squabble but no one knocks heads together. If you trawl round the offices of industry bosses the livid letters they brandish trace their incandescent correspondence with each other. Power, so vital for growth, is India’s biggest bottleneck. The danger is that it becomes a metaphor for the whole economy: many fear that the muddle-through approach of the past two decades of boom has diminishing returns.

One dam thing after another

It wasn’t always all about coal. Jawaharlal Nehru, the country’s first prime minister after independence, was obsessed with hydroelectric dams, calling them the “temples of modern India”. It would have been good for India’s environment, and the world’s, had many more temples been raised. The fad for hydro trickled away and it now provides only 14% of India’s power compared with up to a half in the 1960s.

That seems unlikely to change—India is too chaotic and free a place to manage the feats of national machismo that allowed China to build the Three Gorges dam. Although new projects are planned in places such as Kashmir and neighbouring Bhutan, harnessing Himalayan rivers to power all of India is for now a dream, not a policy.

The subcontinent has plenty of sun and wind, and states including Gujarat and Tamil Nadu are keen to encourage investments in renewable energy. These are likely to be niche sources of power, thanks to problems getting land and their high cost.

As for nuclear power, India’s attitude has long been hyperbolic on paper and ambivalent in practice, despite striking a civilian nuclear deal with America in 2005. Foreign companies are put off by the prospect of unlimited liability in the event of an accident. Nuclear plants face opposition from hostile state governments and protesters. Events in Japan have not helped. “By the time people forgot Chernobyl, along came Fukushima,” says one industry bigwig.

The result is that, as in China, fossil fuels will dominate the energy mix (see chart 2). Carbon emissions will rise in tandem, by about two-and-a-half times between 2010 and 2030 according to McKinsey, a consultancy. The growth of India’s power industry—assuming it is built and largely fired by fossil fuels—would contribute about a tenth of the total global rise in emissions over the period. Most Indians do not feel too guilty, arguing that dirtier rich countries, not poor ones, should show restraint. India’s emissions will remain far below those from America and China both in absolute terms and per head.

Fossil hunting

India has some oil and gas, mainly offshore and in Rajasthan, although production has been faltering. It lags China in developing pipelines from energy-rich Central Asia. Coal, then, is key. India’s is not of a high quality—it contains too much ash—but there is lots of it. The British started swinging picks in earnest in the mid-19th century, to meet the demand of a burgeoning railway system, and undertook geological surveys in Bengal. Today east India remains coal’s heartland and control of the sooty stuff lies with one of the most important companies that most people have never heard of: Coal India.

It is a mighty odd beast. Its blood is of the public sector, with modest buildings, 375,000 staff, an empire of largely opencast mines and company towns, and even its own song. Its managers are proud scientists and engineers. And prices are fixed by the state, at far below international levels. Yet its brain has some capitalist cells.

After privatisation in 2010, a tenth of its shares are listed (the rest are owned by the state) making it India’s third-most-valuable firm, worth $44 billion. It makes a huge return on equity of over 35%, has $11 billion of unused net cash and reinvests only a fifth of its gross cashflow. It even has a financial gnat on its hide in the form of TCI, a London-based activist hedge fund famed for its stagy belligerence.

What is beyond doubt, though, is that Coal India is not digging fast enough (see chart 3). Output has been flat for the past two years—a dire result. India’s ratio of production to reserves is middling by global standards and is well below China’s. Assuming production picks up and grows in line with the long-term average, a vast shortfall in production will still stunt growth in power generation.

From his office in Kolkata, outside which street vendors boil vats of soup on coal stoves, the firm’s outgoing chairman, N.C. Jha, says that Coal India is being made a scapegoat. The lag in production partly reflects one-off factors, such as bad weather, but is mainly the result of a deliberate clampdown by the central government on new permits for buying and clearing land, and an explosion of red tape. “Give me land, and I will give you coal,” says Mr Jha.

This complaint is reasonable. At Gondegaon, a vast opencast mine in the Nagpur field, engineers need more space to dump the earth and rock that is dug up with coal. A map shows the pit hemmed in by villages and scrub land. Acquiring the land, compensating the villagers and making sure they shift poses a challenge harder than geology, says the company. “We do not have a magic wand in our hand to increase production,” says D.C. Garg, boss of the Coal India unit responsible for the area. In east India the firm faces another problem: most reserves are in remote areas where Maoist guerrillas operate.

Yet for all the hurdles it faces, many say Coal India is part of the problem. A senior government official says it is riddled with trade unionism and gangs who steal coal—something the private sector would resolve by sending in “the toughest son of a bitch” they could find. The boss of one smallish state-owned electricity generator details how local Coal India employees collude with middlemen to steal his fuel. He says that its local chief is “hugely compromised” by corruption.

And no one really knows what Coal India’s mission is, thanks to its hybrid status. Should it maximise profits and the dividend it pays to a cash-strapped government, despite the fact it is a near-monopoly and unregulated? Or is its job to deliver cheap fuel for the nation and accept lower returns by investing more on new mines?

Let’s burn Australia instead

Private generating firms are not waiting to find out the answer to this identity crisis. Instead they have assumed that the state will not deliver enough and are prepared to import vast amounts of coal to fire their plants, either by acquiring it from wholesalers or by buying foreign coal mines. Some $7 billion has been spent in the past six years on pits in Australia, Indonesia and Africa. Gautam Adani, a Gujarat-based tycoon, is building a private network of mines abroad that feeds ports and power stations in India.

Amish Shah of Credit Suisse reckons that by the year to March 2017 domestic coal production will meet only 73% of demand, leaving a gap of some 230m tonnes, almost five times the level of 2012. Include other industries that use coal, such as steel, and some analysts calculate that India’s total imports by 2017 could reach some 300m tonnes. That is on a par with the current exports of Australia, or those of Indonesia, South Africa and Canada combined.

Even if India could improve its ports and already stretched railways, and adapt its power plants to burn alien coal, can it afford to import so much? Coal prices have soared in recent years (the benchmark price is some 50% above its average in 2009), partly due to Chinese demand. Indonesia has imposed new rules that hamper foreign mine owners from exporting coal at below market rates. So, adjusted for quality, foreign coal is perhaps four times pricier than the local stuff. The cost of shopping abroad could be as much as $20 billion by 2017—or 1% of today’s GDP.

That would swell India’s overall annual energy-import bill. Include coal used for purposes other than power, liquefied natural gas and oil and it could rise by $65 billion or so by 2017, compared with the year to March 2011, according to Sanjeev Prasad of Kotak, a broker. That would put a huge strain on the balance of payments. Even if India can afford to import all this coal, the next question is whether it can persuade its population to fork out for the electricity it produces.

Torture boards

Electricity meters are installed in unexpected places. Power in Dharavi, a giant Mumbai slum, is now largely tolled, with meters nestling next to curing factories piled with goat skins and people melting down used plastic cutlery. But the city, where power is distributed mainly by two private firms, is an exception: almost everywhere else state electricity boards operate the grid, usually badly. They typically lose about a third of the power they buy through theft or inefficient kit, and one executive reckons that up to another third is delivered legally to rural customers who pay subsidised prices or get it free. The result is that a small proportion of customers foot the bills.

Although tariffs are notionally set by regulators, local politicians often hold sway and keep them low to win votes. The legislation that governs power is reasonable but unenforced. The electricity boards haemorrhage cash as a result. They lost $11 billion, excluding any subsidies, in the 12 months to March 2010—the last year for which reliable figures are available.

The consequences are twofold. First, there is not enough money to upgrade the network: up to $200 billion of capital investment is required. And second, if the cost of the power rises because of the expense of imported coal, these outfits are neither strong enough to absorb the financial hit themselves nor capable of easily passing it through by raising prices to customers. That means it is their suppliers, the generating companies, that get squashed.

“I can see if someone is sleeping on the job,” boasts Arup Roy Choudhury, the chairman of NTPC, the country’s biggest electricity generator. In the floor above his office in Delhi a CCTV studio allows him to spy on his empire. He can zoom in on a giant construction site in Mouda, near those mines in Nagpur, where in March a new plant will fire up, fuelled by coal produced by Coal India. NTPC is likely to get the coal it needs partly because it is state-owned and big.

Another power firm in the same state with a new plant coming on line in March expects to get only half the fuel originally promised by Coal India. Private-sector firms with plants coming on line often assume they will be last in the queue for domestic fuel. If they substitute imported coal for domestic coal they worry that they may not be allowed to pass on the costs and that if they are, the electricity boards won’t be able to pay.

Generation should be a success story. After a false start in the 1990s, during which even Enron was briefly and disastrously tempted in, mainly local firms, including Tata Sons and Reliance Group, have piled in once more. Special rules were created to fast-track “ultra-mega power plants”, among the largest in the world, with their own captive coal supply and exemptions from some red tape. Total capital investment (including NTPC) has been perhaps $60 billion in the past five years. Yet now share prices have slumped and the central bank has been forced to reassure financial markets that a wave of defaults in the sector will not hurt the banks, which have about 7% of their loans to the power industry, mainly to generation firms.

The true cost to the country is not a few bad debts but a reduction in long-term investment plans as confidence wanes. Across the industry “projects are taking a hit, due to a lack of fuel among other things,” says J.P. Chalasani, the chief executive of Reliance Power, a generation firm. For the economy to expand at 8-9% it will need to add large amounts of generation, consistently. “We are nowhere near that unless immediate action is taken. At some point all this will hit our GDP growth.”

In theory there are two solutions to the looming power problem. One is to privatise the electricity boards, end Coal India’s de facto monopoly or break it up, create new regulators and give teeth to existing ones, and then hope that market forces raise standards, tariffs and production. The other is to resort to command-and-control, with a single authority breaking heads.

Either of these approaches might be better than today’s squabbling and passivity. Unfortunately, neither is likely. Privatisation is too politically sensitive, as is allowing private firms, let alone foreigners, to run riot over India’s coal beds. And the mesh of states, law courts, ministries and coalition politics means iron fists come out only in a crisis.

Watch while we juggle

That leaves an alternative approach of administrative fiat and improvisation. It hasn’t worked so far but there are some grounds for hope. A recent court ruling has prodded many electricity boards to raise tariffs. Crafty ways are being cooked up to allow private miners to do the digging while Coal India retains its notional title to the coal, and to grant permission for more “captive” mines where a private generator digs up its own fuel.

Banks seem to have been given the nod by the central bank to ease the terms of their loans to power firms without booking losses. Government officials talk of spreading the cost of imported coal across all firms, so it is not borne by a few, and dream of open access where a power station could bypass the state grid operators and plug into customers directly.

It is a safe bet that India’s skills of improvisation will recover—helped by stern words from the prime minister. The lights will not go out anywhere for long enough to annoy voters unduly, and by historical standards there will be decent improvements in the reach and availability of electricity. Companies which need reliable power supplies, including India’s technology giants, will carry on building their own generators just to be sure. Those states that can guarantee power supply, such as Gujarat, will attract the majority of energy-intensive investment, such as car factories.

If the test is avoiding a national catastrophe, India’s power sector will pass it. But if it is delivering the infrastructure that can allow the economy to grow at close to a double-digit pace and industrialise rapidly, India is failing.

Africa’s Hopeful Economies

Africa’s Hopeful Economies
The Economist, 3-Dec-2011

The continent’s impressive growth looks likely to continue

HER $3 billion fortune makes Oprah Winfrey the wealthiest black person in America, a position she has held for years. But she is no longer the richest black person in the world. That honour now goes to Aliko Dangote, the Nigerian cement king. Critics grumble that he is too close to the country’s soiled political class. Nonetheless his $10 billion fortune is money earned, not expropriated. The Dangote Group started as a small trading outfit in 1977. It has become a pan-African conglomerate with interests in sugar and logistics, as well as construction, and it is a real business, not a kleptocratic sham.

Legitimately self-made African billionaires are harbingers of hope. Though few in number, they are growing more common. They exemplify how far Africa has come and give reason to believe that its recent high growth rates may continue. The politics of the continent’s Mediterranean shore may have dominated headlines this year, but the new boom south of the Sahara will affect more lives.

From Ghana in the west to Mozambique in the south, Africa’s economies are consistently growing faster than those of almost any other region of the world. At least a dozen have expanded by more than 6% a year for six or more years. Ethiopia will grow by 7.5% this year, without a drop of oil to export. Once a byword for famine, it is now the world’s tenth-largest producer of livestock. Nor is its wealth monopolised by a well-connected clique. Embezzlement is still common but income distribution has improved in the past decade.

Severe income disparities persist through much of the continent; but a genuine middle class is emerging. According to Standard Bank, which operates throughout Africa, 60m African households have annual incomes greater than $3,000 at market exchange rates. By 2015, that number is expected to reach 100m—almost the same as in India now. These households belong to what might be called the consumer class. In total, 300m Africans earn more than $700 a year. That’s not much, and many of those people could be pushed back into penury by a small change in circumstance. But it can cover a phone and even some school fees. “They are not all middle class by Western standards, but nonetheless represent a vast market,” says Edward George, an economist at Ecobank, another African banking group.

As for Africans below the poverty line—the majority of the continent’s billion people—disease and hunger are still a big problem. Out of 1,000 children 118 will die before their fifth birthday. Two decades ago the figure was 165. Such progress towards the Millennium Development Goals, a series of poverty-reduction milestones set by the UN, is slow and uneven. But it is not negligible. And the mood among have-nots is better than at any time since the independence era two generations ago. True, Africans have a remarkable capacity for being upbeat. But it is seems that this time they really do have something to smile about.

Lions and tigers (and bears)

Since The Economist regrettably labelled Africa “the hopeless continent” a decade ago, a profound change has taken hold. Labour productivity has been rising. It is now growing by, on average, 2.7% a year. Trade between Africa and the rest of the world has increased by 200% since 2000. Inflation dropped from 22% in the 1990s to 8% in the past decade. Foreign debts declined by a quarter, budget deficits by two-thirds. In eight of the past ten years, according to the World Bank, sub-Saharan growth has been faster than East Asia’s (though that does include Japan).

Even after revising downward its 2012 forecast because of a slowdown in the northern hemisphere, the IMF still expects sub-Saharan Africa’s economies to expand by 5.75% next year. Several big countries are likely to hit growth rates of 10%. The World Bank—not known for boosterism—said in a report this year that “Africa could be on the brink of an economic take-off, much like China was 30 years ago and India 20 years ago,” though its officials think major poverty reduction will require higher growth than today’s—a long-term average of 7% or more.

There is another point of comparison with Asia: demography. Africa’s population is set to double, from 1 billion to 2 billion, over the next 40 years. As Africa’s population grows in size, it will also alter in shape. The median age is now 20, compared with 30 in Asia and 40 in Europe. With fertility rates dropping, that median will rise as today’s mass of young people moves into its most productive years. The ratio of people of working age to those younger and older—the dependency ratio—will improve. This “demographic dividend” was crucial to the growth of East Asian economies a generation ago. It offers a huge opportunity to Africa today.

Seen through a bullish eye, this reinforces exuberant talk of “lion economies” analogous to the Asian tigers. But there are caveats. For one thing, in Africa, perhaps even more so than in Asia, wildly different realities can exist side by side. Averaging out failed states and phenomenal success stories is of limited value. The experience of the leaders is an unreliable guide to what will become of the laggards. For another, these are early days, and there have been false dawns before. Those of bearish mind will ask whether the lions can match the tigers for stamina. Will Africa continue to rise? Or is this merely a strong upswing in a boom-bust cycle that will inevitably come tumbling back down?

More than diamond geezers

Previous African growth spurts undoubtedly owed a lot to commodity prices (see chart 1). After all, Africa has about half the world’s gold reserves and a third of its diamonds, not to mention copper, coltan and all sorts of other minerals and metals. In the 1960s revenues from mining paid for roads, palaces and skyscrapers. When markets slumped in the 1980s the money dried up. The skylines of Johannesburg, Nairobi and Lagos are still littered with high-rise flotsam from the high-water marks of previous booms.

Recently revenues from selling oil and metals have helped to fill treasuries, create jobs and feed an appetite for luxury. In gem-rich Angola, high-grade diamonds are reimported after being cut in Europe to adorn the fingers of local minerals magnates and their molls.

Overall, though, only about a third of Africa’s recent growth is due to commodities. West and southern Africa are the chief beneficiaries. Equatorial Guinea gets most of its revenues from oil; Zambia gets half its GDP from copper. When commodity prices soften or tumble such countries will undoubtedly suffer. But it is east Africa, with little oil and only a sprinkling of minerals, that boasts the fastest-expanding regional economy on the continent, and there are outposts of similar non-resource-based growth elsewhere, such as Burkina Faso. “Everything is growing, not just commodities,” says Mo Ibrahim, a Sudanese mobile-phone mogul who is arguably Africa’s most successful entrepreneur.

When the world economy—and with it commodity prices—tanked in 2008, African growth rates barely budged. “Africa has great resilience,” says Mthuli Ncube, chief economist of the African Development Bank. “A structural change has taken place.”

A long-term decline in commodity prices would undoubtedly hurt. But commodity-led growth on the continent is not as reversible as it used to be. For one thing, African governments have invested more wisely this time round, notably in infrastructure. In much of the continent roads are still dire. But there are more decent ones than there used to be, and each new length of tarmac will boost the productivity of the people it serves long after the cashflow that paid for it dries up. For another, Africa’s commodities now have a wider range of buyers. A generation ago Brazil, Russia, India and China accounted for just 1% of African trade. Today they make up 20%, and by 2030 the rate is expected to be 50%. If China and India continue to grow Africa probably will too.

More jaw-jaw, less war-war

What’s more, many foreign participants in the African commodity trade have become less short-termist. They are likely to stick around after they finish mining; Chinese workers, of whom there are tens of thousands in Africa, have shown a propensity to morph into local entrepreneurs. A Cantonese construction company in Angola recently set up its own manufacturing arm to produce equipment that is difficult to import. Few Western competitors would do the same (though many of their colonial forebears did).

Commodity growth may be more assured than it used to be. But two big drivers of Africa’s growth would still be there even if the continent held not a barrel of oil nor an ounce of gold. One is the application of technology. Mobile phones have penetrated deep into the bush. More than 600m Africans have one; perhaps 10% of those have access to mobile-internet services. The phones make boons like savings accounts and information on crop prices ever more available.

Technology is also aiding health care. The World Bank says malaria takes $12 billion out of Africa’s GDP every year. But thanks to more and better bed nets, death rates have fallen by 20%. Foreign investors in countries with high HIV-infection rates complain about expensively trained workers dying in their 30s and 40s, but the incidence of new infection is dropping in much of the continent, and many more people are receiving effective treatment.

The second big non-commodity driver is political stability. The Africa of a generation ago was a sad place. The blight of apartheid isolated its largest economy, South Africa. Only seven out of more than 50 countries held frequent elections. America and the Soviet Union conducted proxy wars. Capital was scarce and macroeconomic management erratic. Lives were cut short by bullets and machetes.

Africa is still not entirely peaceful and democratic. But it has made huge strides. The dead hand of the Soviet Union is gone; countries such as Mozambique and Ethiopia have given up on Marxism. The dictators, such as Congo’s leopard-skin-fez-wearing Mobutu Sese Seko, that superpowers once propped up have fallen. Civil wars like the one which crippled Angola have mostly ended. Two out of three African countries now hold elections, though they are not always free and fair. Congo held one on November 28th.

Friends and neighbours

Even if many of the world’s most inept states can still be found between the Sahara and Kalahari deserts, governance has improved markedly in many places. Regulatory reforms have partially unshackled markets. A string of privatisations (more than 100 in Nigeria alone) has reduced the role of the state in many countries. In Nigeria, Africa’s biggest resource economy, the much-expanded service sector, if taken together with agriculture, now almost matches oil output.

Trade barriers have been reduced, at least a bit, and despite the dearth of good roads, regional trade—long an African weakness—is picking up. By some measures, intra-African trade has gone from 6% to 13% of the total volume. Some economists think the post-apartheid reintegration of South Africa on its own has provided an extra 1% in annual GDP growth for the continent, and will continue to do so for some time. It is now the biggest source of foreign investment for other countries south of the Sahara.

Somewhat belatedly, Africans are taking an interest in each other. Flight connections are improving, even if an Arab city, Dubai, is still the best hub for African travellers. Blocks of African economies have taken steps towards integration. The East African Community, which launched a common market in 2010, is doing well; the Economic Community of West African States less so. The Southern African Development Community has made the movement of goods and people across borders much easier. That said, barriers remain, and the economy suffers as a result. Africans pay twice as much for washing powder as consumers in Asia, where trade and transport are easier and cheaper.

As in Asia a generation ago, relatively small increases in capital can produce large productivity gains. When, after decades of capital starvation, outside investors started to take that disproportionate return seriously, they helped Asia blossom. Now some of those investors are eyeing Africa. In financial centres such as London barely a week goes by without an Africa investor conference. Private-equity firms that a decade ago barely knew sub-Saharan Africa existed raised $1.5 billion for projects on the continent last year. In 2010 total foreign direct investment was more than $55 billion—five times what it was a decade earlier, and much more than Africa receives in aid (see chart 2).

Foreign investors are no longer just interested in oil wells and mines. They are moving on to medium-sized bets on consumer goods. The number of projects—for example by retail chains such as Britain’s Marks & Spencer—has doubled in the past three years. Despite the boom in mining, the share of total investment going into extractive activities has shrunk by 13%. That said, the riches are far from evenly spread: three-quarters of all investments are in just ten big countries.

The increased interest from outsiders that has been triggered by Africa’s political and technological changes is not, though, the heart of the story. Economic change has made life more rewarding for Africans themselves. They have more opportunities to start businesses and get ahead than they have enjoyed in living memory, and governments are showing some willingness to get out of their way. According to the World Bank’s annual ranking of commercial practices, 36 out of 46 African governments made things easier for business in the past year.

No end to worries

That said, most African countries are still clustered near the bottom of the table. In all sorts of ways African governments need to run their countries more efficiently, more accountably and less intrusively. They also need to offer much better schooling, an area in which Africa woefully lags behind Asia. African businessmen constantly complain about the shortage of skills. Hiring qualified staff can be prohibitively expensive. The return of skilled exiles has helped in some newly peaceful countries, but often foreigners are needed, usually other Africans. Without better education, Africa cannot hope to emulate the Asian miracle.

Africa’s demographic dividend, too, is far from guaranteed. A growing population and a bulge of working-age citizens proved a blessing in Asia. But population growth always has its costs. All those extra people must be fed, educated and given opportunities. If illiberal policies obstruct growth and discourage firms from hiring, Africa’s extra millions may soon be jobless and disgruntled. Some may even take up arms—a sure recipe for disaster, both human and economic.

An abundance of young people is like gearing on a balance sheet: it makes good situations better and bad ones worse. It is worrying that some of Africa’s fastest-growing populations are in economies not performing well at the moment; and fertility rates are not declining as uniformly, or as swiftly, as they did in Asia.

Africa’s extra people are flocking to cities. Some 40% of Africans are city dwellers now, up from 30% a generation ago. By 2025 the number is likely to be 50%. In Asia the rate is currently 52%. This is usually a good thing. Productivity is higher in cities. Transport costs are lower and markets are busier when people live close to each other. In bad times, the tight ethnic jumble of the city can be a powder keg. That said, Africa’s worst wars, such as those in Congo, Rwanda, Sudan and Somalia, have been fought in countries where most people are peasants or livestock herders.

Extra mouths will need to be fed. There is scope for this. Though Africa is now a net food importer, it has 60% of the world’s uncultivated arable land. It produces less per person now than in 1960. Africa’s land is often hard to farm, with large year on year variations in climate (a problem likely to get worse as the Earth heats up). Farmers lack access to capital for fertiliser and irrigation. More roads and storage depots are also needed; much of the harvest rots before it gets to market. And land ownership often raises thorny issues about who belongs to a place and who does not.

Agriculture is a long-term worry. A shorter term concern is how to deal with a coming slowdown and recession in the north. Investors fleeing risky assets in Europe are unlikely to put their cash into Africa. More likely they will pull back some of the money they have already invested there. The signs are that this is already happening. Bankers say the deal flow is slowing. But many remain generally bullish on Africa, convinced that its growth potential will reward patient investors and eventually lure back fickle ones.

Africa’s growth is now underpinned by a permanent shift in expectations. In many African countries people have at last started to see themselves as citizens, with the rights that citizenship brings. Greater political awareness makes it harder for incompetent despots to hold on to power, as north Africa has discovered. Bastions of the continent’s past—destitute, violent and isolated—are becoming exceptions.

Africa is not the next China. It provides only a tiny fraction of world output—2.5% at purchasing-power parity. It is as yet not even a good bet for retail investors, given the dearth of stockmarkets. Mr Dangote’s $10 billion undeniably makes him a big fish, but the Dangote Group accounts for a quarter of Nigeria’s stockmarket by value: it is a small and rather illiquid pond. Nonetheless, Africa’s boom will continue to benefit Africans, serving the billion as well as the billionaires. That is no small feat.

Learning Lessons from Bihar

Building on Bihar
Himal South Asian, December 2011
By Blair Glencorse

As a new government is formed in Kathmandu, how can Nepal not only learn from the changes underway in Bihar, but capitalise on them?

Poor infrastructure, weak human capacity, politicised local bureaucracies, difficult caste relations, debilitating power shortages and deeply entrenched poverty – driving around Bihar recently, it was clear that the state has yet to transform into the orderly, prosperous society that recent press coverage has suggested. That said, there is no doubt that a nascent but carefully structured institutional reform process is allowing for the slow emergence of a ‘naya’ Bihar. Since 2005, the government of Nitish Kumar has consolidated rule of law, built critical infrastructure, begun to deliver services, increased revenues and expenditures, improved bureaucratic functionality, and generated an important sense of citizenship among many of the state’s communities. The economy has grown at over 10 percent per year for the past six years, despite the separation of resource-rich Jharkhand in 2000, periodic floods and droughts, and the recent global financial crisis.

Fifteen years ago, Nepalis would look to Bihar and bemoan their luck for being located next door to one of the most corrupt, crime-prone and povertystricken states in India, from which migrants would flood northwards in search of livelihoods. Now it is the Biharis that look across the border, wondering when criminal gangs will be brought under control and seeking to draw on Nepali labourers to support the state’s construction boom. In many ways, Nepal is far wealthier than Bihar in terms of relative capacities, structures and assets. The difference is that the current administration in Patna is moving to consolidate positive changes and create a virtuous circle of growth and development – albeit starting from a low base – while Nepal continues to struggle with difficult issues of stateand market-building. While the ongoing changes in Bihar must be considered in the context of their own unique history, the current situation nonetheless poses two, inter-related questions: What broad trends can be identified from the recent history of Bihar that might be relevant for Nepal? And how can Nepal benefit from the positive changes happening to its south?

Most writings on the recent history of Bihar look toward plans put in place by Nitish Kumar’s governments across a broad spectrum of issues. These have included the rule of law (drafting 11,000 policemen), infrastructure (building nearly 25,000 km of roads), governance (signing the Bihar Special Court Bill and the Anti-Corruption Act), and service delivery (the appointment of 300,000 teachers and the dramatic improvement in public-health facilities). These are all important changes, but such explanations are often more descriptive than analytical, and provide a simplistic, linear conception of transformation.

At its core, Bihar’s transition has been based on a combination of several closely linked factors. The first is strong leadership by Nitish Kumar and his team. The key decision-makers in Bihar have spent periods of service in the national government, which has provided important experience in the management of complex organisations and has expanded conceptions of what is possible in governance terms. Traditionally, Biharis have respected power, but now power is being combined with legitimate authority, which is allowing for progress.

Second, the government has recognised the feasibility of change and the inter-dependence between state functions. Through a carefully sequenced and prioritised approach to state-building – beginning with rule of law – the Nitish Kumar administration has worked to enable change where possible, and to generate a self-reinforcing sense of progress that in turn has allowed for further reform. Third, the state has moved from dysfunctionality, during which there was deliberate abuse of public financial-management systems, into a ‘control’ phase, with supervision established over public finance and adherence to external oversight mechanisms.

Fourth, the government has generated constituencies for change by building political support through the moulding of disparate groups into coherent stakeholders in the state. Bringing in citizens from both ends of the caste hierarchy and indicating that development is a positive-sum rather than a zero-sum set of processes has allowed the government to push through wide-ranging reforms. Fifth, the current administration in Patna has used existing structures, rules and tools to work on behalf of governance rather than against it. This has allowed for ‘quick win’ initiatives and a benchmarking process against previous standards and outcomes.

Despite all of this, the changes in Bihar are as much perception as they are reality. Change can be as much about signalling intent as it is about implementation, and the current administration has put in place a carefully calibrated communications strategy to sell its successes. This is important internally – particularly in a society where a significant minority is illiterate – and externally, from where change can be catalysed and supported. To a certain degree, the story of Bihar indicates not what good governance can do, but what it cannot do. That is to say, a miracle has not occurred in Bihar, but tangible changes have taken place through implementation of efforts to build accountability. This has created a sense of hope that is, in turn, bolstering further change.

Momentum for change
Bihar’s changes are idiosyncratic, of course, and cannot be replicated exactly in Nepal. It is worth considering, however, how Nepal might learn from the nascent transition to its south. In governance terms, Nepal has a set of institutions and legislation that could generate transparent and accountable government – the authority of the Commission for the Investigation of Abuse of Authority (CIAA), for example, is as robust as that provided by the Anti-Corruption Act in Bihar. A problem arises in terms of implementation of rules, however, and in ensuring that bodies responsible for transparent use of resources are themselves adequately staffed, monitored and overseen. At the same time, the Patna government has proven the malleability of a stratified society and has brought people together behind a common developmental agenda. It has proven that the political system can help all of society, and does not have to be about caste, ethnicity or geography. If the political will could be mobilised behind small but catalytic governance changes in Nepal in a similar manner, the multiplier effect on development could be significant.

In Bihar, the current government has understood that devolution of power to legitimate local bodies can allow for more nuanced and effective development based on inputs from citizens. But it has also understood that decentralisation requires a strong centre. Moreover, the government has begun to face the reality that effective and sustainable wealth creation comes from a balance between market-based growth and the reinvestment of some of these revenues in equitable social programming at the local level. If the discussion on the future shape of Nepal could be shifted to revolve not around considerations of federal boundaries but rather about citizen-centred development, similar changes are entirely feasible. In Nepal, the debate over federalism indicates that the form and function of government sometimes seem to have become confused. Federal systems can be highly effective, as in Canada, for example, or highly ineffective, as in Nigeria; the same can be said for unitary systems. The key is understanding the functions and levels of governance within a given system, and what government responsibilities need to be carried out at which levels and with which tools.

With regard to service delivery, a central developmental constraint in Nepal is the inability of the government to spend domestic or international resources. The government continues to commit to a variety of social programmes (often politically rather than functionally motivated) that may not prove affordable or sustainable in the long-term. At the same time, a significant constraint exists in terms of capital expenditure; in fiscal year 2010-11, for instance, the government spent just 39 percent of allocated capital funding. The juxtaposition of unspent government funds with lack of infrastructure and employment continues to fuel the sense that Nepal’s political discourse is increasingly divergent from the realities of implementation.

Meanwhile, the reverse is true in Bihar. This is because the government has explicitly prioritised efforts to draw funds from the New Delhi government and to seal revenue leakages to fund catalytic infrastructure that benefits the population. Capacity has been built within the construction industry, and security has improved as public-private partnerships have been developed around roads and bridges. This has facilitated market-based activities, generated linkages among and between disparate communities, and generated a feeling of hope that creates additional momentum for change.

Development in Nepal remains a disparate and uncoordinated process in which separate projects are pursued simultaneously, implementation is often poor, and outcomes are less than optimal. Corruption and cronyism across a wide breadth of sectors are facilitated by a culture of impunity that pervades governance and the market alike, undermining the trust of the people both in political actors and in the market-based economy more broadly. The system continues because the legitimacy of political actors is derived not from delivery of services, or citizen-focused reforms, but rather from participation in these deeply entrenched patronage networks.

Bihar has slowly begun to overcome similar issues and to move beyond identity and group politics in a way that is illustrative for Nepal, particularly through developing specific programmes to build functionality and deliver citizen-centred reforms. It has started to shift away from a patronage system (in which leaders dispense favours in return for political support) to programmatic politics, where policymakers deliver benefits to all citizens. The programmes developed are far from perfect in terms of implementation, but they have initiated a process whereby rules have been set and parameters for action defined. This has helped to mobilise government, the private sector and citizens. In Nepal, a programmatic approach in just one or two sectors – rural irrigation, for example – could provide a means by which to improve coordination, increase expenditures and begin a similar transition.

Over the past five years or so, an emphasis on cooperatives as a central part of Nepal’s future seems to have taken root, with the idea of these groups as a third and equal pillar of the economy (alongside the state and the private sector) articulated in the most recent government budget. The initial plans for their development, however, does not outline exactly how cooperatives will function in this way, how connections to larger-scale development plans will be made concrete, or how cooperative-led growth will be sustainable.

In Bihar, a dairy-cooperative model might serve as an example of how Nepal’s cooperatives could be leveraged and expanded as part of a larger growth strategy. The Bihar State Cooperative Milk Producers Federation (Sudha) has built revenues from USD 73.5 million in 2001 to USD 136 million today, by bringing together some 8600 dairy outlets (with more than 450,000 members) covering 84 towns to export milk to West Bengal, Uttar Pradesh, Jharkhand and (more recently) Delhi. Twice daily, milk is collected from village dairy cooperatives and brought to district milk unions, which have plants to process the milk for urban consumers. Products are then packaged and marketed under the Sudha brand. The federation is now working to route the entire milk production in Bihar through the federation. Understanding how to build on local capacities within a broader framework of this sort might be instructive within the Nepali context.

Patna focus
This is all very well, one might argue, but what can Nepal do now to build on Bihar’s progress and growth as it is happening? Where could real, politically feasible change be initiated? Here are an initial set of ideas across four key areas. First, Nepal can build on the gains in rule of law to the south. To some degree, security improvements in Bihar have had a knock-on effect into Nepal in a negative way, with various criminal elements having been forced across the open border to the north and inevitably effecting security in the Tarai plains. But there is also an opportunity for Nepal in this situation, by working with Bihari counterparts on collective, crossborder approaches to law and order. Efforts by Nepali customs and law-enforcement officials to raise standards, share information and build a network for knowledge-sharing would be useful. Currently, security issues in Nepal more broadly seem to be improving somewhat; if the rule of law can now be consolidated for the average citizen, the effect could prove catalytic for crossborder economic growth.

Second, Nepal must capitalise on the potential for economic symbiosis with Bihar. There are around 250 million Indians living within a few hundred miles of the Nepali border, and more than a 100 million in Bihar alone. The purchasing power of these consumers is significant and is increasing rapidly as a result of economic growth. The roads on the Indian side of the border still need significant work, but have improved over the past six years – clearly a potent trade opportunity for Nepal, if the right connections can be made. Arguably, a decent road connection from Kathmandu to Patna (and indeed to Lucknow) could transform the Nepali economy more than almost any other single action. At the border, India is streamlining customs processes and creating ‘single window’ registration points. Such straightforward services are noticeably absent in Nepal, though efforts in this regard would do much to facilitate trade, create jobs and improve revenue collection.

Third, the new government in Kathmandu must seek to better understand and capitalise upon watermanagement linkages. All 38 districts in Bihar in recent years have seen flooding, partially as a result of the absence of water-management processes – such as small and mid-size dams – in Nepal. Most of the rivers in northern Bihar have their headwaters or catchment basins to the north, but despite discussions between the Nepali and Indian governments to control flooding, no agreement has yet been reached. In part, this is due to the massive maintenance obligation that large-scale dams would involve. Yet water provides a key opportunity for crossborder – and indeed regional – growth, and the basis for broader cooperation between Nepal and its neighbours. In the absence of larger agreements with India on flood control, Nepal can begin to put in place the necessary economic and legal conditions for upstream water-harnessing processes and work further in support of hydropower generation. In the shorter term, microhydro development through a coherent government-led programme still presents the most feasible, and least politically divisive, means of harnessing Nepal’s water resources.

Finally, Bihar and Nepal are closely connected geographically, making up part of the only open border in the Southasia region. Over time, this will lead to greater political linkages on an individual and collective basis. The effect that this might have on political issues and relationships within the Tarai remains to be seen, but the Indian sphere of influence will only grow in southern Nepal. Where possible, the government, business associations and civil-society groups in Nepal could consider laying the framework for regular dialogue with counterparts in Bihar to ensure understanding of these key issues, to put in place the mechanisms ahead of time to deal with potential problems, and to facilitate collaboration where feasible.

There remains a lack of trust between India and Nepal at the governmental level, which impedes progress on a host of issues. But India is not homogenous, and individual states have their own incentives and interests. As such, efforts are also required in Patna to build on areas of relative autonomy from the Union government, while Nepali politicians will need to understand that productive meetings in Patna are more worthwhile that mediafriendly trips to New Delhi. In moving forward, creating ways to generate trust at a personal level with Bihar needs to be a central component of the relationship between Nepal and its neighbour.

These are not easy principles to integrate into policymaking, or straightforward changes to make in the ways in which Nepal thinks about its linkages to Bihar. As pointed out, the government of Nitish Kumar also faces a plethora of difficult problems of its own. The central issue, however, is that Nepal and Bihar are bound by geographical ties that cannot be broken. For a collectively prosperous future, economic, cultural and political ties between Nepalis and Biharis must prove equally robust.

Blair Glencorse is an expert on issues of development and governance. Follow him on Twitter @blairglencorse.

South Asia’s Water: South Asia’s Water

South Asia’s Water: South Asia’s Water
Economist, 19-Nov-11

A growing rivalry between India, Pakistan and China over the region’s great rivers may be threatening South Asia’s peace

SONAULLAH PHAPHO has spent half a century picking a living from Wular lake high in Indian-controlled Kashmir. Today he is lucky if he scoops a fish or two out of the soupy mess. Push a boat into the knee-deep lake and the mud raises a stink of sewage. A century ago Wular and its surrounding marshes covered more than 217 square kilometres (84 square miles), making it one of Asia’s larger freshwater lakes. Now, thanks to silt and encroachment, the extraction of water by nearby towns and tree planting on the shore, it measures only 87 sq km and is shrinking.

Compared with much of South Asia, Kashmir, a disputed territory in northern India, has many rivers and relatively few people. But even here fresh water is running short. To see how contentious this can be, drive half a day south to where the Baglihar dam (shown above) is rising up. An enormous wall bisects the valley, dressing it in white spray, and three huge jets of water blast from its sluices.

Half complete, the dam is already a local wonder that tourists gape at. It generates 450MW for the starved energy grid of Jammu and Kashmir. Once the scheme fully tames the water, by steering it through a tunnel blasted into the mountain, the grid will gain another 450MW.

The river swirls away, white-crested and silt-laden, racing to the nearby border with Pakistan. But there Baglihar is a source of bitterness. Pakistanis cite it as typical of an intensifying Indian threat to their existence, a conspiracy to divert, withhold or misuse precious water that is rightfully theirs. Officials in Islamabad and diplomats abroad are primed to grumble about it. Pakistan’s most powerful man, the head of the armed forces, General Ashfaq Kayani, cites water to justify his “India-centric” military stance.

Others take it further. “Water is the latest battle cry for jihadis,” says B.G. Verghese, an Indian writer. “They shout that water must flow, or blood must flow.” Lashkar-e-Taiba, a Pakistani terror group, likes to threaten to blow up India’s dams. Last year a Pakistani extremist, Abdur Rehman Makki, told a rally that if India were to “block Pakistan’s waters, we will let loose a river of blood.”

Assorted hardliners cheer them on. A blood-curdling editorial in Nawa-i-Waqt, a Pakistani newspaper, warned in April that “Pakistan should convey to India that a war is possible on the issue of water and this time war will be a nuclear one.”

Upstream such outbursts are usually dismissed as proof that troubled Pakistan is, as ever, spoiling for a fight. Water is merely the latest excuse. India is not misbehaving, says Mr Verghese placidly. It fails to take all it is entitled to from cross-border rivers in Kashmir. Run-of-the-river dams like Baglihar consume nothing, since water must flow to run turbines. Such a dam, he says, merely briefly delays a river.

Indians point out, too, that Pakistan enjoys a rare guarantee: the Indus Water Treaty, struck in 1960 by far-sighted engineers and diplomats who saw that after the partition of land, water had to be shared out too. The treaty, which has survived three wars, details exactly how each side must use cross-border rivers. Mostly this applies to the tributaries that flow from Kashmir to form the massive Indus river, Pakistan’s lifeblood.

If Indians abide by the treaty, then in theory at least they cannot be misbehaving. They see Baglihar as proof of co-operation, not a threat. When Pakistan objected to the dam’s design, India accepted international arbitration, the first case in the treaty’s history. Outside experts studied the dam and ordered small changes. But in effect they said it posed no threat to Pakistan. And last year the dispute was officially ended by the two governments.

Downstream, however, few sound satisfied. “The Baglihar decision…allowed a reservoir on a river coming into Pakistan, and now a precedent is set,” laments John Briscoe, a water expert formerly of the World Bank who advises Pakistan. The Pakistanis fear Indian control over the headwaters of the Indus. And Indian bureaucrats fuel these fears with obsessive secrecy about all water data.

Bashir Ahmad, a geologist in Srinagar, Kashmir who studied the Baglihar dam, gives grim warning about the Indians’ future intentions: “They will switch the Indus off to make Pakistan solely dependent on India. It’s going to be a water bomb.” A less excitable report in February by America’s Senate offered a similar assessment: “The cumulative effect of [many dam] projects could give India the ability to store enough water to limit the supply to Pakistan at crucial moments in the growing season.” Dams are a source of “significant bilateral tension”, the report concludes.

More dams are to come, as India’s need to power its economy means it is quietly spending billions on hydropower in Kashmir. The Senate report totted up 33 hydro projects in the border area. The state’s chief minister, Omar Abdullah, says dams will add an extra 3,000MW to the grid in the next eight years alone. Some analysts in Srinagar talk of over 60 dam projects, large and small, now on the books.

Any of these could spark a new confrontation. The latest row is over the Kishanganga river (called the Neelum in Pakistan) as each country races to build a hydropower dam either side of Kashmir’s line of control. India’s dam will divert some of the river down a 22km (14-mile) mountain tunnel to turbines. To Pakistani fury, that will lessen the water flow to the downstream dam, so its capacity will fall short of a planned 960MW.

Pakistan also claims (though the evidence is shaky) that 600,000 people will suffer by getting less water for irrigation. Again it insisted on international arbitration at The Hague. In September, to Pakistani delight, India was ordered to suspend some of its building for further assessments to be made. But India still looks likelier to come away happy in the end, as the treaty foresaw and permitted the Indian design, and India is likely to finish its dam ahead of Pakistan in any case, by 2016 rather than 2018.

When China’s upstream

Countries downstream have genuine reasons to fret. Pakistan is exposed. Like Egypt it exists around a single great river, though the Indus is nearly twice the Nile’s size when it reaches the sea. It waters over 80% of Pakistan’s 22m hectares (54m acres) of irrigated land, using canals built by the British. In turn that farming provides 21% of the country’s GDP, as well as livelihoods for a big proportion of its 180m people. Many of them are already thirsty.

On average each Indian gets just 1,730 cubic metres of fresh water a year, less than a quarter of the global average of 8,209 cubic metres. Yet that looks bountiful compared with each Pakistani’s share: a mere 1,000 cubic metres. Worse yet, South Asia’s fresh water mostly falls in a few monsoon months. The dreadful floods this year and last showed that untamed and unpredictable rivers can be both resource and threat.

More rows between India and Pakistan are certain. India may keep on dismissing them as Pakistani bluster, an easy thing to do if you are upstream. But India is downstream in another highly tricky area: its border with China.

Tension already exists over the status of India’s Arunachal Pradesh state, which China refuses to recognise. A quarrel over rivers in the region could serve as a focus for wider disputes about territory. A measure of the recent slump in relations came when, to the fury of India’s authorities, China blocked an attempt by the Asian Development Bank to prepare for a dam project in Arunachal Pradesh. And one of India’s largest rivers, the Brahmaputra (Tsangpo in China), flows south from the Tibetan plateau and into Assam not far from the disputed land.

Angry Indian politicians, activists, bloggers and journalists claim that water-starved China (with 8% of the world’s fresh water but 20% of its population) has plans to divert the Tsangpo/Brahmaputra to farmers in its central and eastern regions. Feelings are running so high that India’s prime minister, Manmohan Singh, felt obliged to issue a statement on August 4th saying that China’s leaders had assured him there were no such plans afoot. And though a few run-of-the-river hydroelectric schemes are being built upstream on the Tsangpo, none of these could change the river’s course. Cool heads point out that speculation about China channelling the torrent from near the border, at a spot known as the Great Bend, looks fantastical, at least at present.

Chinese engineers would need to use nuclear explosions to have a chance of making tunnels through a series of ridged mountains to get water east from the Great Bend. Although plans have existed since the fourth century to take water from China’s west to the east, and the scheme was pushed by Mao Zedong, the engineering, at least for now, appears to be technically impossible. Yet broader Indian strategic fears—the fact that the Chinese control the Tibetan plateau, which is the source of water for parts of densely populated northern India—will evaporate no more easily than Pakistani fears of India.

An ever-thirstier region

The scarcity of water in South Asia will become harder to manage as demand rises. South Asia’s population of 1.5 billion is growing by 1.7% a year, says the World Bank, which means an extra 25m or so mouths to water and feed: imagine dropping North Korea’s entire population on the region each year. Greater wealth in South Asia brings with it a soaring demand for food, especially for water-intensive meat and other protein. Industry and energy-producers also use water, though unlike farms they return it, eventually, to the rivers.

Worse, overall supply will not only fail to keep up with rising demand but is likely to fall (unless a cheap way is found to turn sea water fresh). The Himalayan glaciers are melting. A Dutch study last year of the western Himalayas reckoned that shrunken glaciers will cut the flow of the Indus by some 8% by mid-century. Flows may also get less regular, especially if glacial dams form, withholding water, and then collapse, causing floods.

Others give even scarier predictions. Sundeep Waslekar, who heads a Mumbai think-tank, the Strategic Foresight Group, which has picked water as a long-term threat to Asian stability, sees a “mega-arc of hydro insecurity” emerging from western China along the Himalayas to the Middle East and farther west. The strain of bigger populations, diminishing water tables and a changing climate could all conspire to produce a storm of troubles. South Asia is especially vulnerable: Mr Waslekar sees a cut of 20% in total available fresh water over the next two decades.

The greatest threat of all would be from any change to the monsoon, which delivers most of the region’s fresh water each summer. Here, again, worries arise. Indian meteorologists who have studied rainfall data from 1901 to 2004 have noted signs in recent decades of more dry spells within the peak monsoon months. If these lead to weaker, or less predictable, monsoons in future (though this year’s was about normal) the consequences for farmers could be dire.

In any case, the cost of running short of water is already becoming clearer. The Lancet, a British medical journal, reported last year that up to 77m Bangladeshis had been poisoned by arsenic—the largest mass-poisoning in history. It was the result of villagers pumping up groundwater from ever deeper aquifers. The same poison is now entering crops and more of the food chain.

Filthy water and bad sanitation spread diseases, such as diarrhoea and cholera, which kill hundreds of thousands of Indian children every year, says Unicef, the UN’s children’s agency. Several South Asian rivers, suffering from weaker flows, have become a sludge of human and animal waste, dangerous to drink and wash in and unsafe even for watering crops.

All over the region water tables are dropping as bore holes drive deeper. In the dry season even some of the larger rivers slow to a trickle. Knut Oberhagemann, a water expert in Dhaka, Bangladesh, says that the flow of the mighty Ganges where it enters Bangladesh is at times a pitiful few hundred cubic metres a second, so low that “you can walk across the river”. When the same river, at this point called the Padma, reaches the coast, it is often so feeble that the sea intrudes, poisoning the land with salt.

The same problem curses the delta of the Indus in Pakistan. There a semi-desert was turned into some of the most fertile land on earth by British-built irrigation canals. But as the sea encroaches on low, flat land, rivers at times are flowing backwards, laments a local environmental activist. Take away the fresh water—around 60% of which is now lost to seepage and evaporation because of the bad management of those canals—and the desert will eventually come back.

Save or snatch

Governments in South Asia can respond to growing scarcity in one of two ways. The first is to improve the way they use the water they have, both by managing it better and by co-operating with one another. The second is to try to grab as much water as they can from their neighbours.

Better management of irrigation canals and better farming techniques would help hugely to cut waste. In Pakistan bitter rows between provinces have long scotched coherent planning. Wealthy Punjab, a big farming province, is routinely accused by downstream Sindh (and by others too) of taking an unfair share of the water.

And Pakistan badly needs more dams to control floods, store monsoon water and make electricity (China is said to have offered to help Pakistan build a series of big dams, and has already sent engineers to help speed along the new one on the Neelum/Kishanganga). Only about 10% of the potential hydropower of the Indus has been tapped so far, and only 30 days’ average river flow can be stored (by contrast, the Colorado in America has dams to store 1,000 days’-worth).

Many governments are at least thinking in terms of dams and co-operation. Mr Waslekar reckons that 60-80 big dams (mostly for energy) will be built in South Asia in the next two or three decades, at a cost of hundreds of billions of dollars. In many cases—as for example in mountainous Bhutan, where the economy gets a huge boost from selling hydropower to India—this can foster economic and diplomatic co-operation. India has visions of one day persuading unstable but immensely water-rich Nepal to follow suit. The country is the source of more than 40% of the Ganges’s water, and Indian analysts talk dreamily of 40GW of hydropower potential waiting to be used.

Other cross-border water deals are pending. Cosy ties with Bangladesh’s government mean that India can more easily build dams on some of the several dozen rivers that cross their shared frontier. In September Mr Singh visited Dhaka to sign a deal with Bangladesh to allow the latest hydro dam to go up on the Teesta river. Though the deal was postponed at the last minute by a row with a regional Indian leader, it now looks set to go ahead. However there are bitter memories in Bangladesh of an earlier deal, on the Ganges, which allowed India to put up a barrage to block the river’s flow in the dry season.

Tentative signs of wider co-operation exist. China issues twice-daily reports on the Tsangpo river flow in the flood season, separately to India and to Bangladesh. This could be seen as encouraging, if the two giants of the region wished to consider getting together over water. Indeed if full-scale friendliness were ever sought, an immense opportunity awaits.

Mr Verghese points out that the Tsangpo/Brahmaputra falls 2,450 metres (8,000 feet) over a few kilometres in China just before it reaches the Indian border. Send it through a 100km tunnel from the Tibetan plateau down to Assam and an enormous 54,000MW could be generated. One day its power could light not only much of north-east India and Bangladesh, but nearby Myanmar and beyond. Such a mega-structure would become a keystone for regional co-operation.

It will almost certainly never be built. Analysts have suggested that, given the generally dire relations between South Asian countries, water will provoke clashes rather than co-operation. A 2009 report for the CIA concluded that “the likelihood of conflict between India and Pakistan over shared river resources is expected to increase”, though it added that elsewhere in the region “the risk of armed interstate conflict is minor”. And a Bangladeshi security expert, Major-General Muniruzzaman, predicts that India’s “coercive diplomacy”, its refusal to negotiate multilaterally on such issues as river-sharing, means that “if ever there were a localised conflict in South Asia, it will be over water.”

Global Perspective: The Hindu rate of self-deprecation

The Hindu rate of self-deprecation
Economist, 20-Apr-11

Listen to the critics and India’s economic miracle seems, well, miraculous

FOR all its success in recent years, India’s economy has disappointed its boosters in at least one way: growth has remained slower than China’s. In terms of national income per head, China overtook India only two decades ago. The gap has widened relentlessly since. Yet last year, according to the IMF’s World Economic Outlook, India’s economy grew by 10.4%, outpacing China’s, albeit by six-hundredths of a percentage point (see article). That number may not be wholly reliable. India’s government, which measures GDP in a different way, puts growth at 8.6%. But even that is spectacular compared with the lumbering “Hindu rate of growth” of not long ago, and most economists now accept the possibility that in a few years’ time India might supplant China as the world’s fastest-growing big economy.

So foreign and local businesses alike should be oozing confidence. Yet last year foreign direct investment into India fell by almost a third. This January, the year-on-year decline was 48%. And, to judge from two recent conferences, when Indian businessmen or experts get together, they do so not to praise the country’s business environment but to bury it in withering criticism.

Their observation is borne out by surveys. In the World Bank’s “Ease of Doing Business” index, India ranks 134th out of 183 countries, scoring particularly badly on ease of starting a business (165th) and, above all, enforcing contracts (182nd, behind Angola but pipped by Timor-Leste for the bottom slot). Another index, on “Entrepreneurship and Opportunity”, produced by the Legatum Institute, a think-tank, puts India 93rd out of 110 countries.

That low rank is in large measure a consequence of the expense of starting a business. And there are plenty of other obstacles in the way of both local and foreign entrepreneurs. India is still tangled up in red tape. It takes time and trouble merely to discover what permits a business needs. Rules differ across the country. In Mumbai there are, according to the World Bank, 37 procedural hoops to jump through to gain approval to build a warehouse. It takes 200 days to secure them and costs 2,718% of national income per head. In Kolkata a mere 2,549% of income and 27 permits are needed, but they take 258 days to procure.

Then there are India’s infrastructural shortcomings. For all the improvements of recent years, the road network remains dreadful, the railways overloaded, seaports clogged, airports struggling to cope with the huge increase in flights and electricity and water supplies in many places shockingly unreliable. Faced with unflattering comparisons with China, Indians used to cheer themselves up by boasting of their superior “soft infrastructure”, of accountable institutions and the rule of law. But the backlog of cases in the legal system is estimated at more than 30m.

Business as a whole is disappointed by the timidity of the government of Manmohan Singh. A Legatum Institute survey of entrepreneurs in India and China found that only 11% of Indians thought their government was doing “a very good job”, compared with 30% in China. The grand liberalisation of the Indian economy Mr Singh ushered in 20 years ago as finance minister has been replaced by creeping, incremental reform. Nobody now expects his government to tackle one big, unreformed obstacle to business: employment-destroying labour laws.

None of this, however, entirely accounts for the strange disconnect between high growth and low index rankings. After all, that Legatum Institute survey found that 83% of Indian business owners also thought the country “a good place for entrepreneurs to succeed”. Nearly half expected India to be the world’s biggest economic power in 20 years’ time, which would be a real miracle. All the gripes about the business climate seem like muttering about the weather. Everyone complains about it but no one does anything about it. And it does not seem enough to detract from India’s underlying strengths—the long-lasting benefits of the liberalisation of the 1990s; its favourable demographic profile; its successful diaspora now returning home in large numbers to invest; and its thriving businesses in those areas such as information technology where the government has got out of the way.

Two grouses, however, do seem fundamental. Businesses of all kinds complain about the difficulty of finding and retaining qualified staff. Garment-makers cannot find enough workers with even the basic literacy they need. Hotels and shops see English-speaking staff lured away by call centres. The big IT and outsourcing firms have to invest more and more in teaching graduates what they should have learnt in college. Over the next decade the Indian workforce will increase by at least 80m. That is the “demographic dividend” underpinning much economic optimism. But agriculture is fully staffed. Poor basic education and restrictive labour laws will make it hard for many to find jobs in manufacturing, and there is a limit to how many can work in services. The dividend may prove hard to cash.

Angry at last

The second grumble is corruption. Endemic for decades, it has at last become the subject of genuine rage throughout society and business (even though business, is, of course, complicit). “It’s like living in a pile of vomit,” snarls one Mumbai entrepreneur. This, however, is a little odd. Information technology may actually be reducing some forms of corruption. There are fewer meetings across tables under which envelopes can be passed. Moreover, bribes in India used to be of dubious value, since the recipient would often prove unable or unwilling to fulfil his side of the bargain. Now, the evidence of the growth figures is that corruption has become less inefficient. The mobile-telephone network, for example, despite huge scandals, has expanded tremendously. It is tempting to ask whether India has tired of corruption just as it was beginning to show some results.

Global Prospective: Onion Prices Propelling India's Swap Gap to Two-Year High

Onion Prices Propelling India's Swap Gap to Two-Year High
Bloomberg, 3-Jan-11
By Anurag Joshi

Food inflation in India will certainly spill into Nepal as Nepal imports large quantity of food and food products from India. India's ban on onion exports to Nepal (Nepal depends on India to meet 95% of demand) has caused wholesale price to jump 50% in a week. Moreover, tightening monetary policy in India will likely cause Nepal's interest rates to remain at elevated levels. It will be interesting to see how it all plays out.

India’s one-year interest-rate swap climbed to the highest relative to the benchmark lending rate since July 2008, as rising prices of onions and lentils increased concern policy makers may lose control over inflation.

The spread between the swap rate, the fixed cost to receive floating payments, and the Reserve Bank of India’s repurchase rate widened to 90 basis points from 57 on Nov. 30. The spread was at 73 basis points, or 0.73 percentage point, on Nov. 1, the day before the central bank last raised borrowing costs.

“The central bank will have another round of rate hikes in January to send a signal to the market that inflation is not yet under control and that the RBI means business,” Madan Sabnavis, chief economist at Care Ratings in Mumbai, said on Dec. 30. “They are clearly behind the curve.”

The price of onions, a key ingredient in the country’s curries and snack foods, soared 40 percent in the week ended Dec. 18 from a year ago and the finance ministry said the jump drove food inflation to a 10-week high. India’s one-year swaps climbed 208 basis points in 2010 to 7.14 percent, compared with a 113 basis point increase in China, a 161 basis point advance in Brazil and a drop of 205 in Russia.

India’s central bank lifted the repurchase rate by 150 basis points last year, the most of any monetary authority in Asia. The repurchase rate, at which lenders borrow from the central bank, may be raised 25 basis points to 6.5 percent at the next review Jan. 25, the highest level since December 2008, according to 11 of 16 economists in a Bloomberg survey on Dec. 15. The rest expect no change.

Milk, Fruit

An index measuring wholesale prices of agriculture products including lentils, rice and vegetables jumped 14.44 percent in the week ended Dec. 18, a two-month high, government figures showed on Dec. 30. Food makes up about 14 percent of the wholesale price index that India uses as its inflation barometer.

India placed an indefinite ban on exports of onions last month. The country eliminated import duties for the vegetable and ordered state-owned trading companies to ship supplies from overseas, Trade Secretary Rahul Khullar told reporters in New Delhi Dec. 22.

“The fluctuation in milk, fruit, vegetables and certain commodities have contributed to inflation,” Finance Minister Pranab Mukherjee said in New Delhi Dec. 30, when he raised his target for wholesale-price inflation to about 6.5 percent by March 31, from 6 percent. India’s central bank said in a Dec. 30 report that inflation is at “elevated levels.”

“Comments from RBI are clearly pointing to an upside risk to both growth and inflation,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. “Rate increases will help.”

‘Deeply Conscious’

India’s central bank needs to keep a balance between curbing price increases and making sure the economy has enough money to grow. The Reserve Bank pumped almost 414 billion rupees ($9.3 billion) into the financial system in December by buying sovereign bonds to help ease the worst cash crunch in 10 years.

Reserve Bank of India Governor Duvvuri Subbarao said Dec. 9 he’s “deeply conscious” of the cash shortfall, which was aggravated as companies raised a record 1.16 trillion rupees last year by selling shares.

The Reserve Bank of India bought back 115.02 billion rupees of government notes Dec. 29. Banks borrowed an average 918 billion rupees last quarter using the repurchase auction window, compared with 239 billion rupees in the previous three months, according to data compiled by Bloomberg.

Debt Repurchase

The nation’s 10-year bonds rose last week after the central bank repurchased debt to ease the cash crunch in the banking system. The yield on the 7.8 percent bond due in May 2020 fell four basis points to 7.91 percent, according to the central bank’s trading system. It climbed four basis points to 7.95 percent today. The 10-year bond yield rose 32 basis points in 2010 as the central bank boosted interest rates six times to damp inflation. Indian sovereign bonds returned investors 5.2 percent in 2010, compared with 21 percent in Indonesia, HSBC Holdings Plc indexes show.

The cost of protecting debt of State Bank of India from default for five years rose 42 basis points to 160 in 2010, and is down from a high of 239 basis points in May after the credit outlook improved in the second half. Some investors use State Bank as a proxy for sovereign credit-default swaps.

India’s rupee rose 4.1 percent in 2010 after gaining 4.9 percent in 2009, and slumping 19 percent in 2008. The currency, which appreciated 0.6 percent Dec. 31, was little changed at 44.70 per dollar today.

Money Flows

Global money managers poured a record $29.3 billion into Indian equities last year, according to data from the Securities & Exchange Board of India. They invested $22 billion in Japan and $20 billion in South Korea. Fund inflows are poised to increase as economic growth and slowing inflation boost returns from local assets, according to Mumbai-based Yes Bank Ltd.

The central bank’s Deputy Governor Subir Gokarn said Dec. 22 that inflation risks remain and food costs aren’t dropping enough. Finance Minister Mukherjee told reporters Dec. 30 that the government is taking measures to curb prices.

“We haven’t seen food prices coming down this winter, unlike earlier years,” said Pradeep Madhav, managing director at Mumbai-based Securities Trading Corp. of India. “Rains have taken a toll on not only onions, but all other food articles.”

Inflation risks have “come to the fore,” the central bank said in a report on its website Dec. 30. The bank blamed higher food prices on rising wages and changing consumption patterns.

“The one-year swap may rise to 7.2 percent ahead of the next RBI review,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. “We may see a moderation in prices of food products by mid January.”

Global Perspective: India Revives 45-Year-Old Strategy China Adopted to Lift Exports

India Revives 45-Year-Old Strategy China Adopted to Lift Exports
Bloomberg, 17-Nov-10
By Tushar Dhara

It takes more than an hour to drive the 25 miles of clogged highway linking New Delhi to Noida Special Economic Zone. Inside the gate, a smooth four-lane road leads to electronics, engineering and textile plants that are at the heart of India’s plan to imitate China’s export success.

“It’s the kind of place where one can think of doing business,” said Vishnu Pal Singh, 51, whose Noida-based Optic Electronic India Pvt. sells night-vision devices for rifles and tanks to Germany and Poland. “The zone offers top class infrastructure and tax benefits.”

India is counting on entrepreneurs such as Singh to revive a system it pioneered 45 years ago: using enclaves that provide lower taxes, faster permits and even their own power source to boost exports. While India switched focus in the 1970s to industry tax breaks, China adopted the zone idea a decade later.

The system turned the former fishing village of Shenzhen into an export hub of 8.5 million people in 30 years and made China, with overseas sales of $1.2 trillion last year, the world’s largest exporter.

Now India, which shipped $165 billion worth of goods and services in the same period, is reviving zones as Prime Minister Manmohan Singh tries to raise manufacturing to 22 percent of the economy from 17 percent and double exports to 4 percent of global trade by 2020.

‘Islands of Excellence’

Investment in the special economic zones may double to about 3 trillion rupees ($66.2 billion) by 2012, India’s Commerce Ministry said. Exports from the SEZs more than doubled in the 2009-2010 fiscal year over the previous year, to 2.2 trillion rupees, a quarter of India’s total.

“Improving infrastructure in the entire country will take a long time, so if you want to promote industry, you need to create more islands of excellence, which these SEZs are,” said Dharmakirti Joshi, chief economist at Crisil Ltd., the Mumbai- based Indian unit of Standard and Poor’s. “India needs manufacturing to grow rapidly now to absorb the growing workforce.”

India set up its first zone in 1965 in Kandla in the western state of Gujarat and had established another by 1975, said Lalit Behari Singhal, former director general of the Export Promotion Council of Export Oriented Units and Special Economic Zones in Delhi. In the next 25 years, six more were set up.

Poor land selection, insufficient fiscal incentives and inadequate transport ensured that the zones didn’t prosper, said Rajesh Sonthalia, a founding member of the export promotion council.

Zones and Jobs

Only since 2005, when the government enacted laws favoring the zones, have they taken off. About 100 zones have opened since 2006, attracting 1.6 trillion rupees in investment, 60 times the level four years earlier. That helped create more than half a million jobs, the Commerce Ministry said. About 478 more SEZs have been approved.

“China spent a lot of money creating infrastructure, which India did not do,” said Priyankar Bhikshu, head of India research at DTZ Holdings Plc in Gurgaon, near Delhi, and author of a report called “Special Economic Zones in India: Expanding Contours.” “As the true spirit of SEZs now emerges, export competitiveness will unfold in the next couple of years.”

“SEZs have the potential to propel India as a major exporting nation,” said Aradhana Aggarwal, who teaches economics at the University of Delhi and is writing a book called “SEZs in India: Past Experience, Present Status and Future Prospects.”

One Office

The government-sponsored and private enclaves reduce red tape by offering a single office for environmental, tax and other government clearances. They also offer a way around power and water shortages in a nation that produces 10 percent less electricity than it needs. Companies operating in the zones get tax breaks for 15 years and don’t have to pay local excise or customs duties.

“Units can profit from tax and infrastructure benefits,” said Kishor Ostwal, managing director of Mumbai-based CNI Research (India) Ltd. He recommends investors hold stocks of Adani Power Ltd., which co-developed Mundra Port & Special Economic Zone Ltd., one of India’s largest by area at 16,000 acres, and Torrent Pharmaceuticals Ltd., which is building a plant in Dahej SEZ, both in Gujarat state.

Adani Power shares have risen 38 percent this year, while Torrent is up 40 percent. The benchmark Mumbai Stock Exchange Sensitive Index of 30 companies is up almost 14 percent.

Power Plant

Spread over 310 acres, the Noida zone’s rows of white, two- story buildings bustle with workers loading and unloading trucks with steel pipes, cement, electrical equipment and other materials. The zone has its own power plant, bus network, mail center, banks and automatic teller machines. Proposed additions include a second generator and a six-lane highway to Delhi.

“The biggest benefit is that this is designated as foreign territory,” said Optic Electronic’s Singh, who invested 100 million rupees to start his factory in unit 4C and is planning to expand. “I can do business better in here since it is exempt from local laws.”

Companies, including Gitanjali Gems Ltd., India’s biggest jewelry retailer, have benefitted.

“Our exports have risen after we moved some of our production to a special economic zone,” said Chairman Mehul Choksi. Overseas sales have grown between 40 percent and 50 percent, he said, without citing a time period. Gitanjali Gems shares have almost tripled in the past 6 months.

Export Battle

India’s push to build up exports may exacerbate a battle between nations from Brazil to South Korea that are trying to raise their own exports to lift economies after the global slump. Brazilian Finance Minister Guido Mantega said in September that a “currency war” had begun as nations tried to cheapen exchange rates to boost exports.

Brazil, South Korea, Turkey, South Africa and Russia are among nations that have their own economic zones, according to the World Bank.

“As these zones take off and Indian exports become more competitive, countries which rely on exports to drive economic growth will have a tough time,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai.

India’s biggest zone by exports, the Santa Cruz Electronics Export Processing Zone, covers 100 acres and produced shipments worth $4 billion in the fiscal year to March 31, 2009. China’s largest SEZ by area is the southern island of Hainan, spread over 13,100 square miles.

Chinese Scale

“The difference between Indian and Chinese SEZs is one of scale,” said Rajesh Mohan Joshi, who teaches economics at the New Delhi-based Indian Institute of Foreign Trade.

China now has seven economic zones and another 100 smaller state and high-tech industrial parks. Shenzhen boasts some of China’s largest companies, including Huawei Technologies Co., the nation’s biggest maker of telephone-network equipment.

India’s zones are hindered by difficulty in buying land, said N. R. Bhanumurthy, an economist at the Institute of Public Finance and Policy in New Delhi.

“Unless the government resolves the issue of acquiring land, India will struggle to match the manufacturing prowess of China,” he said.

Singh’s government is backing a land acquisition bill that may be debated in parliament in the session scheduled to end Dec. 13. By guaranteeing market prices for seized land and helping resettle displaced residents, the government is trying to reduce disputes that have blocked companies from expanding.

Fatal Clashes

India suspended its SEZ program in December 2006 after farmers protested what they said were cheap prices paid for their land. Clashes in March 2007 left 14 dead in West Bengal state. The government restarted the system in April 2007 after prescribing a ceiling on size -- 12,355 acres -- and forbidding state administrations to take land by force.

More export zones are springing up in India.

Indiabulls Industrial Infrastructure Ltd., a unit of India’s sixth-biggest developer by market value, plans to complete a 2,500-acre zone in Nasik, western India, by March 2011. Sri City Special Economic Zone, 34 miles outside the southern Indian city of Chennai, held road shows in Malaysia, Australia, Japan and Taiwan to attract investors. Ravindra Sannareddy, managing director of Sri City, said he expects to attract 80 billion rupees in the next three to five years.

“Special economic zones offer unexplored opportunities,” said Vinay Sharma, who quit his job in 2008 as vice president of Mumbai-based Reliance Industries Ltd., owner of the world’s largest oil refinery, to set up a warehouse for oil and gas companies in Visakhapatnam SEZ on India’s east coast. “It is the unique set of services they offer that make them attractive.”

Global Prospective: US Fed's Quantitative Easing Explained........ By a Cartoon

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