8 ISSUES AND INSIGHTS MUMBAI | MONDAY, 1 SEPTEMBER 2014 1

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AirAsias train of thought
AirAsia has taken its announcement that it will
woo train travellers with fares of less than
~1,000 pretty seriously. Responding to a
suggestion from a consumer who follows its CEO
Mittu Chandilyas Twitter account, it has started
putting billboards at railway stations with a
catchy blurb Say Goodbye to Overnight Train
Travel. The billboard also gives details of its
flights from Bangalore to Kochi, Goa, Chennai,
Chandigarh and Jaipur. It also acknowledges
@sourabindu, who had volunteered the idea.
I
ndias persistently high infla-
tion is a major cause for worry
for the Reserve Bank of India
(RBI). Among the Asian peers,
Indias headline inflation is the
highest so far (see chart).
Headline inflation is driven by
inordinately high levels of food
prices. While the El Nino effect has
receded, slow monsoon continues
to be a threat. India may not yet
face a drought but the situation
remains worrisome. The delayed
arrival and slow progress of mon-
soon resulted in June receiving its
lowest level of rainfall since 2009,
when India last experienced a
drought. While the situation has
improved since then, there are
some tell-tale signs of distress.
According to the latest estimate
by the India Meteorological
Division, rainfall during this years
monsoon will be around 87 per
cent of the long-period average,
which means that the final
amount of rainfall will be less than
usual. More importantly, however,
a normal monsoon is somewhat
of a statistical phenomenon since
some regions of the country may
experience drought while others
may experience flood, and we
might yet end up with a normal
monsoon. While some regions in
Maharashtra faced a drought this
year (and overall close to half of
the country received deficient
rainfall though only three per cent
received scanty rainfall), there has
been extensive flooding in Odisha,
Uttar Pradesh, Uttarakhand
and Assam.
While the extent of damage
caused by floods is yet to be ascer-
tained, indications are that heavy
raininmajor growingareas has tak-
enatoll onthepaddycrop. It is esti-
mated that up to 40 per cent of the
crops in low-lying, flood-prone
areas might be damaged.
According to the available infor-
mation, about 60per cent of sowing
has been completed in Assam,
while in the states of Uttar Pradesh
and Odisha, sowing is in the final
stages. So, if water levels dont
recede soon, the crop might be
damaged. It is important to note
here that in India the kharif (or
monsoon) season accounts for 90
per cent of the paddy crop and
these three states together account
for nearly 40 per cent of total pad-
dy grown in the country.
In any case, there has been a
delay in sowing this year due to the
delayed monsoon. While the situa-
tion has improved of late, the latest
available information (August 22)
indicates that 12per cent of thenor-
mal sowing area is still to be sown,
while monsoon will remain active
for another month.
So far, the least progress has
been made in the sowing of rice
(85.7 per cent sown) and coarse
cereals (86.2 per cent sown). There
is, therefore, a possibility that food
grain production will fall by about
10per cent or byevenmoreif floods
take a more serious toll. Moreover,
since delayed sowing leads to a
delay in harvest, there is a possibil-
ity that the rabi (or winter) crops
may have to be planted late, there-
byaffectingproduction. Rabi crops
will also likely suffer in areas with-
out irrigation facilities since a weak
monsoon lowers the moisture con-
tent of the soil.
Clearly, food inflation in India
faces enough tailwinds to worry
policymakers. The fact that aver-
age monthly food inflation in
India was more than 12 per cent
year-on-year over the past five
years highlights the structural
constraints inhibiting Indias food
economy. Not surprisingly, during
this period, Indian food inflation
went out of sync with global food
prices at a rapid pace. With mon-
soon woes adding to the pressure,
RBI ought to remain vigilant on
food inflation and its spillover
effect on broader inflation. We
believe that RBI may not be in a
position to cut policy rates during
the first half of 2015, as is widely
expected in the market.
Thewriteris vice-president andIndia
economist, SocieteGenerale.
Theseviews arepersonal
Food inflation still bites
Poor monsoons mean the Reserve Bank of India needs to remain
vigilant about this critical parameter and its spillover effects
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CHINESE WHISPERS
Pressing a point
The fact that Prime Minister Narendra Modi
(pictured) is the undisputed boss of the
government is well established by now, but
the Press Information Bureau (PIB) appears to
be keen to emphasise that point at every
opportunity. In his capacity as head of the
executive arm of government, Modi chairs
cabinet and Cabinet Committee on Economic
Affairs (CCEA) meetings. Since last month,
however, all press releases and statements
issued by the PIB mandatorily mention that
the meeting was chaired by Prime Minister
Modi. This was never the case in the two
United Progressive Alliance regimes. In those
days, the PIB statements merely mentioned
that decisions were taken at a meeting of the
Union cabinet/CCEA.
Smart cities: Under construction?
The big bang launch of the governments
financial inclusion agenda had generated
considerable excitement in the media and is
being seen as a major achievement as the
regime completes its first 100 days in power.
But what of the National Democratic
Alliances other signature project to set up
smart cities? If youre looking for information
about this project on the ministry of urban
developments website, heres what youll
find. Under Schemes and Programmes, the
Smart Cities prompt gets a prominent all-cap
link. Click on it and youll get a blank page
with a message saying, This Page is Under
Construction plus a footnote that the page
was last updated on August 26.
O
ver the past three months there
has been considerable buzz
around the defence sector in
India a result of the expectations
raised by the new government, sup-
portive statements by the defence min-
ister and delivering on the promise to
increase foreign direct investment (to
49 per cent as a start). The prime minis-
ter, too, has shown that he can find the
time to visit various defence establish-
mentsandhasbeenquicktounderstand
some of the problems that plague our
defence industry. He has emphasised
on numerous occasions that he would
like a major portion of our defence
requirement to be designed and manu-
factured in India.
All this is the easy part and not new.
The challenge lies in the implementa-
tion and that is why it is surprising and
worrisome that there is nothing to sug-
gest that anyinformedthought hasgone
intothiscrucial aspect of defenceacqui-
sition. It may be early days, but how do
you justify a lack of focus arising out of
the dual responsibility of one person
handlingtwoultra-important portfolios,
finance and defence?
If we think one minister however
sharp and intelligent can handle both
jobs, theneither managingIndiasecon-
omyandpublicfinanceis childs playor
no one understands the nature of a
defence ministers job. Operational
issuessuchasrecruitment, organisation,
training and deployment of our armed
forces are important and require review
and monitoring at the ministry level,
but the defence minister can make a
major impact in defining a clear acqui-
sition policy supported by a responsive
procurement system, so that intent is
translated into deliverables.
Although the United Progressive
Alliance over a 10-year period did come
out with a Defence
Production Policy and
aDefenceProcurement
Procedure(DPP) updat-
ed every two or three
years with cosmetic
changes, it was clear
that the formulation of
these policies were an
end in themselves and
were to be slavishly fol-
lowed with no concern
for the effect such poli-
cies may have on the
countrys security.
If implementationis
the key, then the
defenceacquisitionpol-
icy must be seen as a
means to an end and
procurement goals
must be derived by tak-
ingbothpublicandpri-
vate sector capabilities
intoaccount, sothat our
armed forces get the
right qualityequipment
at the right time in the
desired quantity at the
best possible price. No
singlefactor shouldbeallowedtodictate
the procurement process unless they
involve sensitive issues that impinge on
national security.
Although the overall concept of the
current DPP is workable, it has numer-
ous lacunae. It is not my intention to
review the complete DPP (an exercise
that must beconductedsooner thanlat-
er) but it will serve the purpose to take
one example of the lack of thought on
implementation.
The example concerns the well-
intentioned Make category of pro-
curement in the DPP procedure, under
which selected Indian private and/or
public sector companies are funded by
the government on an 80:20 basis (80
per cent funding from government and
20 per cent from the company called
Development Agency or DA) to design
and develop sophisticated weapon sys-
tems. The DAs are free to bring in tech-
nology from outside as long as there is a
transfer of technologytoensurethat crit-
ical technologies in the development
process reside with the Indian DA.
Two such important programmes
under the Make procedure are the
FutureInfantryCombat Vehicle(FICV)
and the Tactical Communication
System(TCS). Therespon-
sibility to select the DA
that hasthebest technolo-
giesandcapacitytodesign
and develop complex
defenceprogrammes cen-
tres on an Integrated
Project Management
Team (IPMT) nominated
by the defence ministry.
This is where the problem lies.
The prospective DAs have been
investing in technology and engineer-
ing systems to acquire the capability of
alarge-scalesystemsintegrator through
joint ventures and technology tie-ups
with major defence companies in the
world. By contrast, the IPMT comprises
ex officio appointees that get turned
around every few months and, in most
cases, are generalists. The Defence
Research and Development
Organisation (DRDO) members on the
IPMT, too, are, with exceptions, dated
in their knowledge of new technologies
and engineering systems. This results
inamismatchbetweentheskill levelsof
the DAs and the IPMT .
There is also the ques-
tion of the lack of continu-
ity. The evaluation of the
responsetotheExpression
of Interest and the subse-
quent understanding of
theDetailedProject Report
for a Make category pro-
gramme could take two to
three years. But the IPMT chairman
couldbechangedthriceduringthisperi-
od and members are frequently rotat-
ed, so that even the benefit of the learn-
ing curve is lost. This results in long
delays and the programme ultimately
being scrapped and re-issued despite
considerable investment by DAs.
This is precisely what has happened
in the case of the FICV. After a two-year
evaluation process, the Expression of
Interest for the programme was with-
drawn (it may be re-issued later this
year). Though the TCS programme has
moved somewhat faster, it is still way
behindschedulewithconstant hold-ups
owing to lack of clarity on procedural
issues. Where else in the world would a
country be willing to spend approxi-
mately ~6,000 crore on developing a
major defence system crucial to nation-
al security and leave the selection, eval-
uation and monitoring of the project to
a part-time IPMT with questionable
knowledge of the subject and no per-
manency or accountability?
Something must be terribly wrong
withour systemif thepeopleinuniform
who desperately require the equipment
being developed and the bureaucrats
whohavedirect responsibilitytooversee
acquisition or procurement do not
realisethis. All that is requiredis tohave
a permanent IPMT for each project set
up through a government notification
that will beresponsibleandaccountable
for the project from the development
phase to trial evaluation, manufactur-
ing and through life support. The IPMT
could include suitable retired defence
and DRDO officers, industry experts in
engineering and manufacturing from
theprivateandpublicsectorsinrequired
technical disciplinesandserviceofficers
for customer interaction. Surely, a
~6,000-crore development project with
potential salesof ~60,000croredeserves
this level of monitoring and responsi-
bility to deliver?
Without a professional and perma-
nent IPMT, Make category pro-
grammes are doomed to cost and time
over-runs and possible failure. Private
sector defence companies will have no
incentivetocontinuetoinvest inR&Dto
support suchprogrammesandIndiawill
continue to import over 80 per cent of
our defence requirement.
This is just one example of how the
defenceminister urgentlyneedstothink
through complex development issues.
The Make category procedure must
bemadetoworksinceit ismost suitedto
developing a defence industrial base in
India. Threetofour professionallyman-
aged Make category programmes for
major weapon systems by selected
Indian private and public sector com-
panies will change the face of defence
manufacturing in five years. Defence
acquisition and procurement is a full-
timejobandif thedefenceminister is to
dofull justicetothisimportant aspect of
national security, then it is obvious that
he will have no time to devote to the
countrys financial and economic
health. Lets have a permanent defence
minister. Its time to get serious.
Thewriterisformerchief executiveof
MahindraDefenceSystems, amajordefence
companyintheprivatesector
Theseviewsarepersonal
Narendra Modi has repeatedly emphasised indigenisation but wheres the action on the ground?
Defence: Its time to get serious
about Made in India
A new banking structure
Apropos the editorial Lure of lucre (August
29), it is important to ask a simple question.
Why do only some bankers feel tempted to
take bribes and not others? It is within our
reach to fix this and with essentially the same
overall structure. Unfortunately, we are being
failed by ideology on both sides of the divide:
the battle between the tired Left ideology and
the challenged Washington consensus.
MayI suggest somesimplesteps toaddress
this problem:
Corporatise the public sector banks: Bring
themunder theCompanies Act andtakethem
out of the State Bank of India Act and Bank
NationalisationAct. Givethemthesamestruc-
ture as IDBI Bank. Essentially, get them out of
Parliament.
Let government be the single-largest owner
but with a holding below 51 per cent, and no
one else should own over five per cent.
Let board appointments reflect some large
owners in addition to the government with
the banks board nomination committee
appointing directors other than the govern-
ment director. Let the government propose
the appointment of the chief executive offi-
cer (CEO) and directors, to be ratified by oth-
er directors.
Allow human resource policies to reflect
sane market reality.
Keep priority sector prescriptions for fund-
ing: this allows government to get support for
its priorities.
Ease the entry of new banks to keep pres-
sure on incumbents to innovate in a rapidly
digitising world and not retry failed experi-
ments such as small banks. Why not fix
urban and rural co-operative banks first?
Payments bank are a hard way to facilitate
payments especially as the size of the prize
for telecom companies will be modest and
the benefits they will get will be an account
of customers becoming more sticky because
of this additional service, but for this they
will pay the price of Reserve Bank of India
oversight.
Do not create a Bank Investment Company
(BIC) or a Banks Board Bureau. It will be the
banking division that will populate the BIC.
It is better to trust the board of the reconsti-
tuted public sector bank in fact, the Axis
Bank model works. If you need a special pur-
pose vehicle for investment, create it for cen-
tral public sector enterprises and take these
enterprises out of the ministries that
control them.
EnsureCEOappointments arefor fiveyears.
Once appointed, there should be no retire-
ment age but tenure of appointment.
JanmejayaSinha Mumbai
PSUs: The hierarchy effect
Apropos the editorial Lure of lucre (August
29), it is not possible to put in place any sys-
tem that pays or sacks for performance in
public sector undertakings (PSUs) under the
current hierarchical and seniority-based
architecture. The government owns these
companies, and, therefore, the chairpersons
managing directors or executive directors
(think United Bank) report to the mandarins
in Delhi, who in turn report to their respective
ministers. While ministers can suffer short
tenures and, therefore, are subject to strict
punishment in the event of underperfor-
mance, bureaucrats are not.
RohanSoares Mumbai
BY MIKE FLANAGAN
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WORLD MONEY
KUNAL KUMAR KUNDU
KHUTUB HAI
USSecretaryof Defense ChuckHagel (right) meets Defence Minister ArunJaitleyonAugust 8
If we think one
minister can handle
both jobs, then either
managing Indias
economy is childs
play or no one
understands a defence
ministers job
R
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R
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INFLATION TAILWINDS: ASIAN PEERS
Consumer Price Inflation
Source: National sources
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HAMBONE