📰 India, Russia to build stealth frigates
Goa Shipyard Ltd. signs ₹500 mn tech transfer deal with Rosoboronexport.
•India on Tuesday signed a $500 mn deal with Russia to locally manufacture two stealth frigates with technology transfer. The agreement was signed between Goa Shipyard Limited (GSL) and Rosoboronexport of Russia.
•“The $500 mn deal is for material, design and specialists assistance from Russiafor the two ships. Balance work will be done by GSL, and it will have a whole lot of Indian equipment including BrahMos missiles,” an official source said.
•The cost of the engines for the ships which would come directly from Ukraine and the cost of constructing them at GSL are in addition. While the ships are built by Russia, the engines are supplied by Zorya Nashproekt of Ukraine. Four gas turbine engines, gear boxes and specialist support will cost around $50 mn per ship, the source stated.
•“Work on the two frigates will start in two years by mid-2020 and is expected to be completed by 2026- 2027,” the source added.
•In October 2016, India and Russia signed an Inter-Governmental Agreement (IGA) for four Krivak or Talwar stealth frigates — two to be procured directly from Russia and two to be built by GSL. Of late, GSL has maintained a good track record. It has delivered 28 ships ahead of schedule in the last four years.
•India recently signed a $1 bn deal with Russia for direct purchase of two frigates. The basic structures of the two frigates are already ready at Yantar shipyard in Russia and will be finished now.
•After the Defence Acquisition Council (DAC) accorded approval for the deal, GSL was selected for the project in February 2017. Following this GSL completed the price negotiations with Russia as well as the Defence Ministry and the Indian Navy. The Cabinet Committee on Security (CCS) has already cleared the deal.
•India had earlier procured six frigates weighing 4000 tonnes of the same class in two different batches, the Talwar class and the upgraded Teg class. The four ships to be built will weigh 300 tonnes more than the earlier ones and will be armed with BrahMos supersonic cruise missiles, Navy officials had said earlier.
•On Monday, Russia was declared the lowest bidder in the Army’s Very Short Range Air Defence (VSHORAD) deal and last month India signed a $5.43 bn deal for five S-400 long range air defence regiments. The series of deals with Russia come in the backdrop of looming US sanctions under the Countering America's Adversaries Through Sanctions Act (CAATSA) law.
📰 Amid institutional decline
The issue today is whether a dishonest system can be managed honestly
•Allegations of interference in major institutions have been the big news of late. The ongoing fracas in the Central Bureau of Investigation (CBI) has got out of hand, with the two top officials in the chain of command accusing each other of corruption. The recent pronouncements in the Supreme Court do not promise an early resolution.
•The fight against widespread graft in the country has been set back. The Deputy Governor of Reserve Bank of India (RBI) has highlighted the serious consequences if there is an erosion of its autonomy. The intervention by the Supreme Court in the CBI issue places a question mark on the independence of the Central Vigilance Commission (CVC) and the functioning of the government as a whole in making key appointments in the CBI. The CBI controversy has also left an imprint on the Intelligence Bureau and the Research and Analysis Wing.
•The list of institutions in decline is long. The ongoing #MeToo movement has exposed the sordid goings-on in large swathes of the media and the entertainment industry. Earlier too, the Election Commission was under a cloud over the announcement of election dates, action taken against some Delhi legislators and the functioning of electronic voting machines. The functioning of the judiciary itself has been a cause for concern. Then there is the attempt to introduce Civil Service Rules in Central universities, an attempt to erode the autonomy of academics. The crisis in the banking system and the huge non-performing assets that overrun their balance sheets impact the viability of the financial system.
The present and past
•The storm is gathering pace. The decline of institutions in India is not recent. In 2016, demonetisation brought out the centralisation of power and a lack of consultation with important sections of the government. The chaos prevailed for months and about 99% of the money came back into the system, thus defeating the very purpose of carrying out this draconian measure. Those with black money escaped and those who had never seen black money were put to great hardship. The RBI and the banks were marginalised.
•The CBI imbroglio is no surprise. Political interference in the agency and corruption among its ranks have been talked about but are hard to prove. The Supreme Court, in 2013, even called the agency a ‘caged parrot’ but this was not concrete enough. The political Opposition when feeling the heat of various investigations has always accused the agency of being its ‘master’s voice’. Now that the spat within has come out in the open, with a spate of accusations, these fears have become all the more credible.
A deep rot
•The rot has set in deep, with charges of government manipulation in crucial cases. With the Vineet Narain case, in the 1990s, the Supreme Court tried to insulate the CBI from political manipulation by placing it under the supervision of the CVC. But that has not worked since the independence of the CVC itself has been suspect.
•Why is the autonomous functioning of the CBI and CVC such an irresolvable issue?
•The CBI is an investigative agency largely manned/controlled by personnel drawn from the police force. And this is a force used to doing the bidding of the ruling dispensation. The rulers themselves commit irregularities in the routine and depend on the police to cooperate with them. The rulers cannot pull them up in their own self-interest.
•In the police, there are ‘wet’ and ‘dry’ duties where money can be made in the first but not in the second. Being on the right side of the political masters is lucrative. While earlier there may have been few such officers doing political bidding, now it seems they dominate.
•It is akin to having a ‘committed bureaucracy’, an idea floated during the Emergency. The issue is: Committed to whom? To the national interest or to the rulers?
•The rule of law is being subverted and illegality being committed on a large scale. Growth of the black economy is a measure of illegality. It has gone up from 4-5% of GDP in 1955-56 to the present level of 62%. It has become ‘systematic and systemic’ and eroded institutional functioning all across the board. This has damaged institutions.
•Institutions provide the framework for individuals and systems to function. Their breakdown leads to a breakdown of societal functioning — democracy is weakened, the sense of justice is eroded and the Opposition is sought to be suppressed. The tainted not only survive but also get promoted and damage institutions.
•If institutions are strong, they are respected and it becomes difficult to manipulate them. It enables the honest to survive. In strong institutions, individual corruption is an aberration but when they weaken, it becomes generalised. It leads to individualisation, illegality becomes acceptable and the collective interest suffers. Even an ‘honest’ Prime Minister tolerated dishonesty under him. The dilemma is, can a dishonest system be managed honestly?
📰 When giants clash: on the US-China discord
The U.S.-China discord at APEC highlights the dangers of their tariff war
•Breaking with more than a quarter-century of history, the Asia-Pacific Economic Cooperation (APEC) organisation wrapped up its summit with no joint communiqué issued. Its leaders, principally led by the U.S. and China, clashed over the proposed wording of the document. The economic rivalry between Washington and Beijing appeared to fracture the 21-nation summit into two segments. The source of the friction stemmed from the Trump administration’s “America First” policy, under which Washington led the charge on “unfair trade practices”. This was an implicit accusation that China wasn’t levelling the playing field in global trade. The U.S. has been urging China to increase market access and grant intellectual property protections for American corporations, cut back on industrial subsidies and, at a broader level, bring down the $375-billion trade gap. Vice President Mike Pence, who attended on the President’s behalf, also hinted at strategic pushback when he called upon nations to eschew loans that could leave them in a debt trap with Beijing. The Chinese message at the plenary was a strategic one too: President Xi Jinping did not mince words in touting Beijing’s Belt and Road Initiative. The BRI has worried smaller Asian nations and the U.S., particularly given that China views the Asia-Pacific landscape as a means to secure economic predominance worldwide.
•To understand what this clash of the global economic titans portends for the world trading system, it is instructive to examine the path of their mutual conflict thus far. The troubles began over the summer when both countries started taxing $50 billion worth of the other’s imports, followed by the U.S. slapping $200 billion of Chinese exports with a 10% tariff, to be ratcheted up to 25% by the year-end. China, unsurprisingly, retaliated with a promise to impose reciprocal taxes to the tune of $60 billion. Already, the tariff war has resulted in the IMF downgrading its global growth outlook for this year and the next to 3.7%, down 0.2 percentage points from an earlier forecast. If this continues, eventually global supply chains may be hit, and shrinking trade volumes may cause companies to seek out new trading routes and partners. Institutionally, multilateral rule-making bodies such as the WTO may lose their authority, and an interlocking system of bilateral trade treaties and punitive sanctions networks may substitute the consensus-based approach that was forged so painstakingly after World War II. Asia will be at the heart of this war of attrition because strategic control of its high-value maritime trading routes is the key to China’s dreams of global trade dominance. After the APEC summit the world is still poised on the edge of the trade war vortex. The forthcoming G20 meeting in Argentina offers an opportunity to pull back from the brink.
📰 BASIC nations push for ‘climate finance’
A reminder for developed countries
•Ahead of the United Nations Conference of Parties (COP) in December, Environment Ministers and top climate change negotiators from Brazil, South Africa, China and India (BASIC) convened in Delhi on Tuesday and said the countries — as a group — would continue to push for developed countries on their earlier commitment to providing $100 billion annually from 2020.
•So far only a fraction of these monies have actually been provided, the BASIC group stated.
•This year’s edition of the COP — the 24th such meeting — will see representatives from at least 190 countries, think-tanks, and activists converge in Katowice, Poland from December 2 to 14 to try to agree on a Rule Book that will specify how countries will agree to take forward commitments taken at the 21st COP in Paris in 2015. At that meeting, countries had agreed to take steps to limit global warming to 2C below pre-industrial levels and “as far as possible” limit it to 1.5C before the end of the century.
•A key aspect to make this possible is climate finance, but countries so far aren’t agreed on what constitutes climate finance: do investments made by private companies in developed countries in new green technology count? Does improving efficiency in a thermal plant count?
•“Ministers reiterated that public finance is the fulcrum of enhanced climate ambition by developing countries and urged developed countries to fulfil their climate finance commitments of mobilising USD 100 billion per annum by 2020. They encouraged developed countries to progressively and substantially scale up their financial support and finalise a new collective finance goal to inform parties for future action through NDCs (nationally determined contributions),” said a joint statement by the Ministers. The NDCs are the commitments made by countries to adapt to climate change and reduce emissions.
•“The fact is that, on the ground, there is not much development on providing finance,” said Union Environment Minister Harsh Vardhan. China too said that claims on finances provided so far by the developed countries were disputable. “There have been claims of $64 billion provided so far…we don’t agree with that calculation,” said Xie Zhenhua, Special Representative for Climate Change Affairs of China.
•In the run-up to the climate conference, India has had meetings with several countries to firm up a key plank of the forthcoming negotiations on transparency. That is, what would be the mechanism in place for countries to reporting their emissions inventory, steps taken and how other countries could be certain that this was being done truthfully and that this data passed agree-upon norms of quality.
📰 Farmers badly hit by demonetisation, admits Agriculture Ministry
Report concedes that farmers couldn’t buy seeds due to cash crunch.
•Millions of farmers in India were unable to buy seeds and fertilisers for their winter crops because of demonetisation, according to a report submitted by the Union Agriculture Ministry to the Parliamentary Standing Committee on Finance.
•This official acknowledgement of the impact of demonetisation comes on a day when Prime Minister Narendra Modi, speaking at a rally in Jhabua, Madhya Pradesh, said that he used the “bitter medicine” of demonetisation to bring back money into the banking system and to give “proper treatment to deep-rooted corruption system” in the country.
•The Parliamentary Standing Committee on Finance, headed by Congress MP Veerappa Moily, was on Tuesday briefed on the impact of demonetisation by the Ministries of Agriculture, Labour and Employment, and Micro, Small and Medium Enterprises.
‘Not enough cash’
•The report submitted by the Ministry of Agriculture, reviewed by The Hindu, said that demonetisation came at a time when farmers were engaged in either selling their Kharif crops or sowing the Rabi crops. Both these operations needed huge amounts of cash, which demonetisation removed from the market. “India’s 263 million farmers live mostly in the cash economy,” the report said, adding, “millions of farmers were unable to get enough cash to buy seeds and fertilisers for their winter crops. Even bigger landlords faced a problem such as paying daily wages to the farmers and purchasing agriculture needs for growing crops.”
Failed to pick up
•Even the National Seeds Corporation (NSC) failed to sell nearly 1.38 lakh quintals of wheat seeds because of the cash crunch. The sale failed to pick up even after the government, subsequently, allowed the use of old currency notes of ₹500 and ₹1,000 for wheat seed sales.
Sharp questions
•According to sources, the Standing Committee sent the team of bureaucrats from the Agriculture Ministry packing because the Secretary, Agriculture, did not show up.
•Many of the Opposition members raised sharp questions during the meeting. According to sources, All India Trinamool Congress’ Dinesh Trivedi asked if the government was aware of a report by the Centre for Monitoring Indian Economy (CMIE), which stated that 1.5 million jobs were lost during January-April 2017 post-demonetisation.
•The Labour Ministry filed a laudatory report on demonetisation.
•The Ministry said that comparisons of quarterly employment surveys (QES) for the periods just before and after demonetisation revealed an increase of 1.22 lakh and 1.85 lakh respectively in the fourth and fifth round of the QES, in the total employment for establishments with 10 or more workers.
•Farmers’ distress is an important issue in three of the five States that are facing Assembly poll: Madhya Pradesh, Rajasthan and Chhattisgarh.
📰 Make it the Indian way: Why the country must adapt to additive technologies
•If ‘Make in India’ is to succeed, it needs to encompass ‘Make it the Indian Way’. It need not emulate mass production technologies, fuelled in Detroit by massive capital investment or in Beijing by cheap labour. We are fortunate to be in a historic moment when the manufacturing sector is about to go through a transformation wrought by disruptive technologies — we have to find a way of making it work in India’s favour rather than against it.
Getting a measure
•Industrial 3D printing has begun to transform manufacturing in Western countries. The 3D printing has not yet entered our everyday lexicon, and even people who have heard of it view it as a toy technology that geeks play with, creating prototypes of robots using small machines that create moulds using materials such as plastic and photosensitive resins. Part of it must be the name, whoever heard of serious manufacturing using a printer! Rename this to “additive technology” and think of Ford Motors cutting down its cost of creating a new car prototype from six months and several hundred thousand dollars to four days and $4,000, and you begin to see its power.
•Traditional manufacturing of mechanical parts involves making a mould and then stamping out parts by thousands every day. The equipment to make these parts and moulds is expensive, thus the cost of the first hundred units is high. Per unit costs decline only when they are mass produced. Because of limitations of how this technology works, one typically builds many small parts, which are later on assembled on an assembly line using unskilled labour or robots to build an entire system. Traditional manufacturing leads to high inventory costs of multiple parts that need to be produced and stored before being assembled. This makes the design phase complex and costly, rendering it expensive to redesign to correct initial mistakes or innovate to meet changing consumer needs.
•In additive manufacturing, the physical object to be built is first designed in software. This design is fed to computerised machines, which build that object layer by layer. The technology is suitable for building the entire system in one go, with hollow interiors without assembly or interlocked parts. Changing features or tweaking shapes is a simple software change effected in minutes. Retooling of machines is not required and each unit can be customised. By eliminating the need to hold a large inventory of parts, set up an assembly line and purchase costly machines, adaptive manufacturing reduces capital and space requirements as well as the carbon footprint.
No longer geeky
•Additive manufacturing started out as a technology for nerds and geeks trying to build an arm of a robot or a body of a drone in their garages. Rapid progress in technology over the last five years has taken this type of machines from using one nozzle and simple resin materials to multiple nozzles, diverse materials and materials with different hardness in the same system. Today it is possible to build an entire shoe, including shoelaces, in a university laboratory. Tomorrow, Adidas and Nike may well start manufacturing them en masse.
•Although it began as a quick and cheap way of developing prototypes, additive manufacturing has now gone mainstream in developed countries and is beginning to replace traditional manufacturing for many different applications. One recent survey of U.S. manufacturers shows that about 12% have started using additive manufacturing for their products and expectations are that this will result in about 25% of products in the next three-five years. This technology is used to build helmets, dental implants, medical equipment, parts of jet engines and even entire bodies of cars. In some industries, the progress is astonishing. Nearly all hearing aid manufacturers now use additive manufacturing.
•This technological nirvana carries dangerous implications for developing nations. It decreases reliance on assembly workers and bypasses the global supply chain that has allowed countries like China to become prosperous through export of mass-produced items. This may well lead to the creation of software-based design platforms in the West that distribute work orders to small manufacturing facilities, whether located in developed or developing countries, but ultimately transfer value creation towards software and design and away from physical manufacturing. This would imply that labour intensive manufacturing exports may be less profitable.
Opportunities in India
•Fortunately, this manufacturing paradigm has several features that play to the strengths of the Indian ecosystem. First, it eliminates large capital outlays. Machines are cheaper, inventories can be small and space requirements are not large. Thus, jump-starting manufacturing does not face the massive hurdle of large capital requirement and the traditional small and medium enterprises can easily be adapted and retooled towards high technology manufacturing. Second, the Indian software industry is well-established, and plans to increase connectivity are well under way as part of ‘Digital India’. This would allow for the creation of manufacturing facilities in small towns and foster industrial development outside of major cities. Third, it is possible to build products that are better suited for use in harsh environmental conditions. Products that required assembly of fewer parts also implies that they may be better able to withstand dust and moisture prevalent in our tropical environment and be more durable.
Fourth, in a country where use-and-throw is an anathema, maintaining old products is far easier because parts can be manufactured as needed and product life-cycles can be expanded. Finally, maintaining uniform product quality is far easier because the entire system is built at the same time and assembly is not required.
•For countries that have already invested in heavy manufacturing, this shift to adaptive manufacturing will be difficult and expensive. For new entrants, it is easier to leapfrog. The “Make it the Indian Way” approach we advocate will need public-private partnership and multi-pronged efforts. On the one hand, we need to accelerate research at our premier engineering schools on manufacturing machines and methods and encourage formation of product design centres so that the products built suit the Indian environment and consumers. We also would need government support to provide incentives for distributed manufacturing in smaller towns, and for the IT industry to work on creating platforms and marketplaces that connect consumer demands, product designers and manufacturers in a seamless way.
•However, a combination of science and art, with a pinch of Indian entrepreneurship thrown in, will allow us to develop a manufacturing ecosystem that will not only allow India to compete with global manufacturing, it will also create products that are uniquely suited to Indian conditions. The Industrial revolution somehow bypassed India, but we have a unique opportunity to catch the wave of the manufacturing revolution if we can learn to surf.
📰 Give and take: on the RBI board meeting
The Centre and the RBI did well at the board meeting to address each other’s concerns
•After the heat and dust of the last one month, the board meeting of the Reserve Bank of India on Monday turned out to be muted and professional, as it should have been. Any summary and precipitate action by the Centre to have its way would have created more problems than it solved, apart from it not going down well with the markets. The decisions taken by the board address the concerns of both the Centre and the central bank, though on balance it appears that the RBI carried the day. Two of the biggest concerns of the Centre where it was expecting an immediate resolution — relaxation of the Prompt Corrective Action framework on 11 public sector banks and provision of liquidity for non-banking financial companies — will be addressed at a future date. The first one has been referred to a department of the RBI for examination, while no decision seems to have been taken on the second. In addition, the Centre’s attempt to tap the RBI’s rich reserves has also been staved off for now, with the matter left to be decided by a committee set up exclusively for the purpose. This is as it should be. Given that the membership and terms of reference of the committee will be jointly decided by the Centre and the RBI, there is little scope for either side to complain of bias. The RBI has been transferring all of its surpluses to the Centre in the last five years based on the recommendations of an earlier committee led by Y.H. Malegam. Given this, it is unclear what more the new committee can possibly recommend on future surpluses, unless of course it is allowed to go into sharing of the reserves that now exist on the RBI’s balance sheet.
•The central bank partially yielded to the Centre on two other issues — the Basel capital framework for banks and easing credit flow to micro, small and medium enterprises (MSMEs). The RBI didn’t concede the demand for alignment of the capital norms to Basel (they are higher now), but by pushing back the deadline by a year for increasing the capital buffer, it has freed up funds for banks to lend. Again, by permitting debt recast for MSME borrowers of up to ₹25 crore, the RBI has attempted to address their credit concerns, which was one of the major demands of the Centre. Clearly, there was enough give-and-take in the meeting that left both sides with the feeling that they had gained something. At Monday’s meeting the board turned hands-on probably for the first time in recent memory, from being just an advisory body. That the meeting went on for over nine hours clearly indicates that there was an intense exchange of views, which is not a bad thing at all. Differences between the Centre and the central bank must be thrashed out in such a setting, rather than in the media or in public speeches.
📰 Board committees to assist RBI
‘Aim is to move to a system of rule-based decision making from the present discretion-based one’
•The Reserve Bank of India (RBI) is set to get a makeover in line with its global counterparts, with several board committees to be formed on various aspects like technology, risk management, banking regulation, supervision, among others, to assist the central bank in its operations.
•Proposed by the government, the issue will be discussed in the next board meeting of the central bank, scheduled for December 14. The other issue of improving governance standards of the RBI was on the agenda for Monday’s board meeting but could not be discussed. The third matter, relating to liquidity facility to non-banking finance companies, will also be discussed in the next board meeting.
•“The aim is to move to a system of rule-based decision making from the present discretion-based one,” said a person familiar with the development.
•“At present, there are no such committees of the central board. The board will discuss the issue in the next meeting,” the person said adding there could be a committee which will be formed to study the matter. The move is also seen to make the RBI management accountable to the board and making the board more hands-on. Till now, the board has not been involved in any policy-related matters but is engaged in providing a broader vision to the regulator.
•On Monday, after discussing several contentious issues during the nine-hour long board meeting, decisions were taken on four aspects: forming a committee on RBI’s economic capital framework, debt recast scheme for micro, small and medium-sized enterprises, extending the deadline for last tranche of capital conservation buffer by one year and review of banks under prompt corrective action by the Board for Financial Supervision (BFS).
•According to sources, the BFS that comprises the governor, four deputy governors and a few board members, will study the performance and earnings of banks of the first six months of the current fiscal that are under the prompt corrective action framework of RBI. Accordingly, a decision will be taken to bring out some lenders from PCA depending on their performance. At present, 11 out of 21 public sector banks are under the PCA framework.
•According to a Kotak Securities report, several public sector banks that are under PCA will get some relief on the capital adequacy ratio as the deadline for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), has been extended by one year, that is, up to March 31, 2020.
$1.7 billion relief
•“The capital infusion programme from the government, which has been the only source of capital for these banks, gets relaxed because of the revised framework. Our calculation suggests that the government has probably received a relief of $1.7 billion because of the delay in transition as they would have had to infuse this capital by FY2019,” it said.
•On debt recast for MSMEs, the scheme will be applicable only to standard assets that are under stress and for loans for up to ₹25 crore. RBI will now prepare the fine print for the scheme and will take about 15 days to announce it formally.
