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Subject: Economics

  • Masala Bonds

    What’s New In The Masala Bonds?

     

    During his visit to the UK last week, Prime Minister Narendra Modi spoke about the Indian Railways issuing bonds and listing them on the London Stock Exchange.

     

    Let’s explore the Bonds as a financial instrument and then dive deep into Masala Bonds.

    What are Bonds?

    Bonds are debt instruments which allow the companies or govt. to raise funds only by incurring debt and lender is guaranteed of a fixed repayment (Principle and Interest).

    What are instrument available with Company to raise funds?

    1. Issue Bonds – Companies will have to pay the fixed amount when the bond matures.

    2. Issue Shares – Companies would like to raise money, but don’t want is as a debt, so company will issue shares.

    Can you imagine who (Company/Investor) will prefer what (Debt/Shares)?

    Companies will prefer to raise money through equities i.e. issuing shares because they will part a share of the company to the investors, while the investors will prefer to purchase bonds because bonds are more secured.

    Shares may give higher returns in the long run. So, it is risk-return trade-off.

    How the bonds are more secure than shares?

    In case of liquidation of the company, the bond holders are the one who get their claim before the share holders.

    Now, let’s get into main discussion on Masala Bonds

     

    What’s new in the Masala Bonds?

    Basically, overseas rupee bonds are known as Masala bonds.

    • Indian firms have earlier raised money abroad through bonds and other forms of borrowings, but always in foreign currency.
    • However, the first overseas rupee bonds were issued in 2013 by the International Finance Corporation, the World Bank’s private sector investment arm.
    • To raise funds for capital expenditure, the Indian Railway Finance Corporation will be issuing bonds denominated in rupees.

    What are the risk associated Indian companies with foreign currency overseas bond? 

    • An Indian company issuing a overseas bond(i.e. in other currencies specially dollar) runs into a risk on account of currency fluctuation.
    • If rupee weakens during the period of bond, then it add significantly to costs at the time of repayment, normally at the end of 5 years.

    How Masala Bonds will benefit Indian companies?

    • If the issuer, issues bonds in rupees, then he gets rid of this risk (currency fluctuation) which passes on to the investor.
    • This bond brings a new and diversified set of investors for Indian companies, and more liquidity in foreign exchanges, apart from bank funding and the corporate bond market in India.

    Does Masala bond offer something for foreign investors?

    The investor who purchases a bond issued by an Indian entity is betting on India, in a hope that currency and inflation would be stable enough to ensure good returns after hedging for foreign exchange risks.

    With India’s GDP or national income rising, and projected to grow at a reasonably fast clip over the next few years, many overseas investors would like to buy into such bonds to join the party and to earn higher returns compared to the US and Europe where interest rates are still low.

    How does Govt. and RBI view Masala Bonds?

    The local currency bond markets can contribute to financial stability by reducing currency mismatches and extending the duration of debt.

    It will also be a sign of early acceptance of the Indian currency in trading and settlement overseas, showing the confidence of investors and can lead to  internationalization of the currency over the medium- and long term.

    Foreign investors prefer to hedge their risks overseas because there are limited products in the Indian market, especially for longer periods.

    The other worry, if the overseas rupee bond market takes off, will be about the growth of the Indian corporate bond market and Indian banks as top companies shift to another market, impacting growth here.

    Was such an approach adopted by any emerging economies in past?

    China’s People’s Bank of China has previously issued yuan denominated bonds to raise funds at a little over 3%.

    China had issued bonds in its own currency in Hong Kong dubbed dimsum bonds and plans to issue more as part of its plan to push its currency for global trade.

    1. Unlike China, the Indian govt. has never borrowed abroad on its own, preferring to push its state owned firms, instead.
    2. RBI, unlike the Chinese central bank, cannot issue debt with no legal sanction for it.

    But these have been borrowings in dollar or other currencies. The Railways bond, on the other hand, will be denominated in rupees.

     

    Published with inputs from Pushpendra

  • UDAY Scheme for Discoms

    UDAY: Reviving Power Discoms

    In a bid to rescue almost bankrupt state electricity retailers, the Cabinet recently approved this scheme for reviving power utilities having debt amounting to Rs 4.3 lakh crore.

    uday-head-for-BLOG

    What is Ujjwal Discom Assurance Yojana?

    UDAY provides for the financial turnaround and revival of Power Distribution companies (DISCOMs), and importantly also ensures a sustainable permanent solution to the problem. It has ambitious target of making all discoms profitable by 2018-19.

    The scheme will ease the financial crunch faced by power distribution companies, that has impaired their ability to buy electricity.

    It is based on the premise that it is states’ responsibility to ensure that discoms become financially viable.

    UDAY

     

    How UDAY will revive Discoms?

    It has all the 3 elements —

    1. Clear up the legacy issues of past losses and debt.
    2. Provide a financial road map to bring tariffs in line with costs by FY19.
    3. Provide enough deterrents for the state govt to not allow the state discoms to become loss ridden post FY18, as losses start to impact their FRBM limits.
    • The State govt. will takeover the discom liabilities over 2-5 year period.
    • This will allow discoms to convert their debt into State bond. These bonds will have a maturity period of 10-15 years.
    • It will allow transfer of 75% outstanding debts incurred by stressed discoms to States’ debt, 50% in 2015-16 and 25% in 2016-17.
    • The central government will not include the loans of the discoms in calculation of the state’s deficit till 2016-17.

    Why are these Discoms so stressed?

    There are various reasons that lead to Discoms becoming unsustainable over the period of time.

    1. Politics of free power, repressed tariffs and power thefts leading high transmission losses.
    2. Poor infrastructure and low standard of management.
    3. Power subsidies are given to all, irrespective of rich/poor.
    4. Discoms in states of Rajasthan, Tamil Nadu and UP are the most stressed ones.

    Almost 25% T&D ( Transmission & Distribution) losses suffered by discoms. Remaining 75% is sold at a price much lower than discoms’ procurement costs. Wondering Why??

    The most obvious reason is political interference, i.e. tariff is set by a group of largely political appointees.

    Financially stressed DISCOMs are not able to supply adequate power at affordable rates, which hampers quality of life and overall economic growth and development.

    What will be the impact of this scheme?

    • It is expected to help the banks in managing their bad loans.
    • It will relieve discoms who can push power distribution in right way.
    • It will allow states to align tariff costs, so that discoms run on a sustainable basis.

    What are thrust areas of UDAY to turnaround discoms?

    1. Improve operational efficiency.
    2. Reduction in cost of power – By monitoring technical and commercial losses by smart metering and feeder separation.
    3. Reduction in the interest cost of discoms.
    4. Enforcing financial discipline on discoms through alignment with States’ finances.

    What could be potential challenge to UDAY?

    • Electricity is not a central subject, states’ cannot be made to participate in the programme.
    • Finding buyers for such bonds might prove difficult, as these would enjoy the SLR status.
    • It has not laid down a specific performance-monitoring and compliance mechanism.
    • It does not cover inadequate investment in network & poor supply, which is essential for reliable and quality supply.
    • No central monetary assistance is provided, rather states’ will be provided subsidised funding from the central govt.’s power schemes as well as priority in supply of coal.
    Published with inputs from Pushpendra

     

  • Insolvency and Bankruptcy Code

    How is ease of doing business linked with the Insolvency and Bankruptcy Code?

    In India, lack of resolution of insolvency is one of the significant factors for the failure of credit market in the country. The present legislations governing insolvency are fragmented, multi-layered and the adjudication of insolvency matters take place in multiple forum, resulting in an unpredictable regime.

    The Insolvency and Bankruptcy Code has been hailed as an excellent reform for India that will pay a critical role in improving the ease of doing business.

    Why does India need a Bankruptcy law?

    Currently it takes, on an average, more than 4 years to resolve insolvency in India. The proposed Bankruptcy Code will replace over a century-old archaic insolvency act – The Presidency Towns Insolvency Act, 1909.

    • Delays in making decisions on the viability of business.
    • Sometimes, company promoters try to delay reorganisation or attempts to sell-off assets or change of management.
    • Delays in disposing off cases by Debt Recovery Tribunal.
    • Continued litigation at various levels and delays in appellate level.
    • Currently, there are 4 different agencies viz. the HC, the Company Law Board, the BIFR and the DRTs that handle insolvency-related cases.

    How can a modern law help?

    • Speedy closure will help firms on the verge of brink in two ways, i.e. either restructure the firm or sell-off the assets to recover the money.
    • It will promote efficient allocation and greater availability of credits for businesses, as it frees up capital.
    • Development of financial markets such as bond market, due to clarity on repayment for debtors.

    What is the international experience in this regard?

    • US Bankruptcy Code provides for fairly quick liquidation or reorganisation of the company.
    • In UK, once the cases are filed, then after 12 months, either the part of assets are discharged to pay-off debt or court-appointed administrators handle the case, if company can be turned around.

    Was any committee formed to suggest Insolvency reforms?

    • The Bankruptcy Law Reform Committee (BLRC) was set up in August, 2014 under the chairmanship of Mr. T.K. Vishwanathan.
    • It was the first committee with the mandate of suggesting comprehensive and not incremental reforms.
    • The BLRC extensively studied the insolvency regime within India as well as various international jurisdictions.

    What was the recommendation of the Committee?

    • The committee proposed an all-encompassing law for corporate and individual insolvency, reflecting the best practices from across the globe.
    • The corporates should assess the viability of an enterprise in the early stages of insolvency, such that the creditor and the debtors can negotiate a financial arrangement while preserving the economic value of the enterprise.
    • However, if the negotiations fail, then the enterprise is liquidated. The insolvency resolution is required to be done within a period of 180 days.
    • It also suggested fast track insolvency resolution for certain entities which is required to be completed within 90 days.

    What are the provisions of draft Insolvency and Bankruptcy Code?

    The code aims to bring modern framework to deal with bankruptcy and insolvency of variety of economic players, including individuals, but excluding financial firms.

    • It will restore some power to creditors, both financial and operational.
    • It will fast-track mechanism of insolvency resolution process may be applicable to certain categories of entities.
    • The corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days.
    • It also provides for fast-track resolution of corporate insolvency within 90 days.
    • Debt Recovery Tribunals will be adjudicating authority over both individual & unlimited liability partnership firms.
    • National Company Law Tribunal will be adjudicating authority with jurisdiction over companies with limited liability.
    • It has a clause to provide for insolvency professionals who will specialize in helping sick companies. <These professionals will help revive control the management of distressed firm to revive it>
    • It also provides for information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system
    • To setup Insolvency and Bankruptcy Board of India to act as a regulator for these utilities and professionals.
    • The bill also seeks to establish Insolvency and Bankruptcy Fund of India.

    What about Financial Sector Insolvencies?

    • FSLRC recommended creation of a resolution corporation to monitor financial firms and intervene before they go bust.
    • The aim is to close-down the firms which can’t be revived or change their management to protect investors or depositors.

    The reform is dubbed as 2nd most important reform after GST, as it will also improve the ease of doing business in India.

     

    Published with inputs from Pushpendra

  • Soil Health Management – NMSA, Soil Health Card, etc.

    Soil Health Card – A Tool For Agri Revolution

    Launched by the central government in February 2015, the scheme is tailor-made to issue ‘Soil card’ to farmers which will carry crop-wise recommendations of nutrients and fertilizers required for the individual farms.

    Agriculture as primary activity in India

    • Agriculture since ages is the mainstay of the Indian population.
    • The story of Indian agriculture has been a spectacular one, with a global impact for its multi-functional success in generating employment, livelihood, food, nutritional and ecological security.
    • Agriculture and allied activities contribute about 18% to the GDP of India (as of 2014-15). The green revolution had heralded the first round of changes.
    • India is the second largest producer of wheat, rice, sugar, groundnut as also in production of cash crops like coffee, coconut and tea.

    What is the scope and focus of government in agriculture?

    • India is now eyeing second Green Revolution in eastern India.
    • The need for enhanced investment in agriculture with twin focus on higher quality productivity and welfare of farmers.
    • In the entire scenario, importantly the government has laid emphasis on the awareness campaign and enhanced agri knowledge for the farming community.

    Why is there a need of awareness in assessing soil health position?

    • Awareness of soil health position and the role of manures would help in higher production of foodgrains in eastern India too and this would help tackle the decline in production in central and peninsular India.
    • The growth in foodgrains, rice and wheat, from eastern India would provide an opportunity to procure and create foodgrain reserves locally.
    • This would reduce the agricultural pressure on Punjab and Haryana as well.

     

    Is it Gujarat’s model programme?

    • From 2003-04, Gujarat has been the first state to introduce Soil Health cards, to initiate the scientific measures for Soil Health care.
    • In Gujarat, over 100 soil laboratories were set up and the result of scheme was found quite satisfactory.
    • To start with, the agriculture income of Gujarat from Rs 14000 crore in 2000-01 had gone up to staggeringly high Rs 80,000 crore in 2010-11.

    Why did government start taking effective action on soil health card initiative?

    • According to renowned expert and the ‘father of Green Revolution’, M S Swaminathan, there is need to opt for wide range of crops cultivation.
    • The awareness of soil health conditions would only make these operations easier and more result oriented. The government can help farmers adopt crop diversification.
    • The Soil Health Card mechanism definitely aims to help herald some essential revolutionary changes and salutary effect in country’s agricultural scene.
    • Farmers would understand the fertility factor of the land better and can be attracted towards value added newer crops.
    • This would help reduction in risk in farming and also the cost of overall cultivation process would get reduced.

    Why has Soil Health Card portal been launched?

    • Some states are already issuing Soil Health Cards but, it was found that, there was no uniform norm for sampling, testing and distribution of Soil Health Cards across the states.
    • Taking a holistic view on these, the central government has thus rightly taken measures like launching of a Soil Health Card portal.
    • This would be useful for registration of soil samples, recording test results of soil samples and generation of Soil Health Card (SHC) along with Fertilizer Recommendations.
    • Soil Health Card portal aims to generate and issue Soil Health Cards based on either Soil Test-Crop Response (STCR) formulae developed by ICAR or General Fertilizer Recommendations provided by state Governments.

    How will it be implemented by Union and State governments?

    • The scheme has been approved for implementation during 12th Plan with an outlay of Rs.568.54 crore.
    • For the current year (2015-16) an allocation of Rs.96.46 crore – only for the central government share-has been made.
    • The scheme is to be otherwise implemented on 50:50 sharing pattern between Government of India and state Governments.
    • In order to improve quality of soil and ultimately for better nutrient values and higher yields.
    • Experts say while at present, general fertilizer recommendations are followed by farmers for primary nutrients, the secondary and micronutrients are often overlooked.

    Can proactive steps and such programs lead to efficient and effective agriculture? Really?

    • The government is effectively marching in quite ambitiously for a grand success of the Soil Health Card scheme and proposes to ensure that all farmers in the country have their respective Soil Health Cards by 2017.
    • In the first year of NDA regime 2014-15, a sum of Rs 27 crore was sanctioned and in 2015-16, there is an allocation of Rs 100 crore to all the states to prepare soil health cards.
    

    
			
    
		
    
		
	
  • 
		
		
    
			
			
    PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee
    
			
    Kelkar Committee Report: Reforming the PPP
    

    In the Union Budget 2015-16, Finance Minister announced that the PPP mode of infrastructure development has to be revisited, and revitalized. In pursuance of this announcement, a Committee was constituted to look into the issues.
    

    The proposals include a provision for monetisation of projects, revamp of the model concession agreement and creation of a new institutional mechanism.
    

    What was committee asked to look into?
    

      

    • Review of the experience of PPP Policy.
      • 

    • Analyse risks involved in PPP projects in different sectors and suggest optimal risk sharing mechanism.
      • 

    • Propose design modifications in PPP based on international best practices and our institutional context.
      • 

    • Measure to improve capacity building in govt for effective implementation of the PPP projects.
      • 

    

    Why is there need to reform PPP framework?
    

    Background: PPP contracts are typically of very high-value, often with huge capital and operating costs.
    

      

    • The emergence of risks not foreseen at the time of signing the agreement exposes such projects to potential distress, making them unviable for the developers and prompting demands for a renegotiation of the original terms.
      • 

    

    



    

    How to manage risks in PPP projects?
    

      

    • Optimal allocation of risks across PPP stakeholders to boost investment.
      • 

    • Sector specific model concession pacts to capture interest of all stakeholders.
      • 

    

    What are the design modifications proposed by the committee?
    

    The Kelkar panel has come out with clear-cut norms on resolving issues and clarifying norms on re-negotiation of contracts.
    

      

    • Formulate a national PPP policy and seeking Parliament’s backing for it to be effective.
      • 

    • It emphasised upon the need to establish independent sector regulators for faster implementation of infrastructure projects and swifter dispute resolution mechanisms.
      • 

    • The report stated that the PPP structure should not be adopted for small projects.
      • 

    • It added that the govt should encourage development of airports, ports and railways through PPP, by ensuring easier funding for projects with long gestation periods.
      • 

    

    Let’s take a look at much deeper level about various specific dimensions of PPP framework and panel’s recommendation.
    

    How to streamline the stalled projects?
    

    Background: The Ministry of Statistics and Programme Implementation (MOSPI) says that 40% of all central govt infrastructure projects are behind schedule or have overshot their original cost estimates.
    

    Panel’s view: Follow the example of the Ministry of Road Transport and Highways, and NHAI, which has taken several successful steps in reducing the number of stalled projects in the sector.
    

    What are the institutions proposed in the report?
    

      

    • An Infrastructure PPP Project Review Committee be constituted.
      • 

    • It recommends creation of an Infrastructure PPP Adjudication Tribunal. 
      • 

    

    How to renegotiate the PPP contracts?
    

    Background: More than 50% of PPP projects come up for renegotiation.
    

    The panel has suggested extensive guidelines stipulating the reasons that form the basis for re-negotiation & those that should not be entertained as valid reasons.
    

    The panel wants full disclosure of few items prior to the renegotiation:
    

      

    • Long-term costs
      • 

    • Risks and potential benefits
      • 

    • Financial implications for the govt
      • 

    

    Panel has suggested formation of an independent body, like a renegotiation commission, which can oversee the renegotiation of model concession agreements across sectors.
    

    What is panel’s view on Swiss Challenge method?
    

    Swiss Challenge Method: It is a process of awarding contracts as any person with credentials can submit a development proposal to the govt, which will be made online and a second person can give suggestions to improve and beat that proposal.
    

    The Panel wants Swiss Challenge method to be actively discouraged.
    

    Reason: It brings information asymmetries in the procurement process and result in lack of transparency and in the fair and equal treatment of potential bidders in the procurement process.
    

    Criticism: India’s ambitious plan to build new expressways across the country by adopting the ‘Swiss Challenge’ method has become uncertain.
    

    Why report calls for changes in anti-corruption law?
    

    The report calls for promptly amending the Prevention of Corruption Act, 1988
    

    Reason: To differentiate between genuine errors in decision-making and plain corrupt practices.
    

    What is panel’s view on 3P India?
    

    Background: Finance Minister had announced the setting up of 3P India in 2014-15 budget with a corpus of Rs 500 crore.
    

    The panel wants the revival of a defunct proposal to establish 3P India to support PPP projects. It can function as a centre of excellence, enable research, and review and roll out activities to build capacity
    

    How to deal with private sector?
    

    The private sector must be protected against the loss of bargaining power over long time spans. It has asked for comprehensive guidelines to be framed in this regard.
    

    How to build capacity in PPP projects?
    

      

    • Strengthen 3 key pillars of PPP framework – governance, institutions and capacity.
      • 

    • Structured capacity building programmes for different stakeholders.
      • 

    • A national level institution to back institutional capacity building activities.
      • 

    

    The report pitches for pragmatism, transparency and a business-like attitude for all stakeholders.
    

    

    

    Published with inputs from Pushpendra 
    

    
			
    
		
    
		
	
  • 
		
		
    
			
			
    Real Estate Industry
    
			
    Challenges, opportunities & criticism of the Real Estate Regulatory Bill 2016
    

    The Real Estate Regulatory Bill, 2016 is being hailed as a much-needed step to reform the real estate sector. It will help regulate the sector and bring in clarity for both buyers and developers.
    

    What was the need for regulation in the real estate?
    

      

    • The real estate sector has some issues such as a lengthy process for project approvals, lack of clear land titles, and prevalence of black money
      • 

    • There wasn’t complete transparency as far as govt approvals were concerned
      • 

    • There were also instances when projects were sold without adequate clearances
      • 

    • The delayed projects, sometimes by up to 6 years and arbitrary changes in layout plans are rampant in the sector
      • 

    

    How does the Bill seeks to regulate the sector?
    

    The basic thrust of this Bill is to regulate the delivery of projects to home buyers. It provides them a legal safeguard for their investment, and seeks to address timely delivery of houses. It seeks to enforce the contract between the developer and buyer and act as a fast track mechanism to settle disputes
    

      

    • It establishes state level regulatory authorities called Real Estate Regulatory Authorities (RERA)
      • 

    • The Bill establishes state level tribunals called Real Estate Appellate Tribunals.  Decisions of RERAs can be appealed in these tribunals
      • 

    • It makes mandatory the disclosure of all information for registered projects like details of promoters, layout plan, land status, schedule of execution and status of various approvals
      • 

    • The Bill prohibits a developer from changing the plan in a project unless two-thirds of the allottees have agreed for such a change
      • 

    • It says that builders must specify the time-frame for completion of projects and stick to it, or be ready to pay penalties
      • 

    • The Bill mandates that 70% of the amount collected from buyers of a project be used only for construction of that project < This provision will effectively allow developers to continue their practice of diverting funds collected for a project towards land acquisition or other projects, and will work in their favour by also allowing them to grow their land and/or project portfolio>
      • 

    

    How will the Real Estate Regulatory Authorities help improve the sector?
    

      

    • Residential real estate projects need to be registered with RERAs, except few
      • 

    • Promoters cannot book or offer these projects for sale without registering them
      • 

    • Real estate agents dealing in these projects also need to register with RERAs
      • 

    • On registration, the promoter need to provide details of the project to the RERA
      • 

    

    Challenges ahead
    

      

    • The Bill will make life difficult for builders, as they would face more red-tapeism now, especially in procuring relevant approvals.
      • 

    • This Bill does not address the developers demand of a single-window clearance from the govt
      • 

    • The implementation of the Bill is up to the states, it leaves builders with greater chances of being harassed
      • 

    

    Impact
    

      

    • Timely completion of projects would lead to a steady increase in supply of homes
      • 

    • It is expected that these measures will eventually bring down home prices and increase demand
      • 

    • It will be good for the overall economy too, as the housing sector has strong backward (cement, steel and other building material industries) and forward (furniture and furnishings, interior decoration, electrical and electronics) linkages with other industries
      • 

    • More number of job creation in the economy
      • 

    

    Criticism
    

      

    • The builder lobbies argued that the bill should have a time-frame for municipal and other authorities to give timely approvals, because the delay in approvals lead to delays in handing over possession of apartments
      • 

    • In terms of pricing, which is governed by circle rates, it will be difficult to monitor
      • 

    

    Future
    

      

    • The states’ support for faster clearances to projects will be required to make this Bill successful
      • 

    • Govt is also trying to bring in a National Urban Rental Housing Policy, which would take into account the requirements of tenancy hassles in modern days
      • 

    

    

    Published with inputs from Pushpendra

    

    

    

    Sagarmala Project: Smart ports for Blue Revolution in India
    

    The Union Cabinet chaired by the Prime Minister Modi, on March,2015 gave its ‘in-principle’ approval for the concept and institutional framework of Sagarmala Project. Let’s take a glance on it.
    



    

    What’s the prime objective of Sagarmala?
    

    The prime objective of the Sagarmala project is to promote port-led direct and indirect development and to provide infrastructure to transport goods to and from ports quickly, efficiently and cost-effectively.
    

    What’s the current issue and background of ports in India?
    

      

    • At present there are around 200 ports (small and big) in the country, of these, only 12 are major ports which are government owned ports, which handle about 58% of sea-borne traffic.
      • 

    • These major ports operate as Trusts under the Major Ports Trust Act, 1963, except for the Port of Ennore, which is a company under the Companies Act.
      • 

    • There are legacy issues with these govt owned major ports, they do not keep pace with emerging technology, requirements of international trade, emerging trends in containerisation, flexible rules, size of ships etc.
      • 

    

    Which are the 12 Major Ports ?
    

    These are Kolkata (including Dock Complex at Haldia), Visakhapatnam, Chennai, V.O. Chidambaranar (Tuticorin), Cochin, New Mangalore, Mormugao, Jawaharlal Nehru Port Trust (JNPT), Mumbai, Kandla and Ennore.
    



    

    Just, Look back into the history?
    

    In 2003, then PM Vajpayee proposed Project Sagarmala with following features:
    

      

    • Setup Sagarmala Development Authority (Similar to National highway authority of India).
      • 

    • It will get money via Maritime development cess. (5 paise per kg on cargo).
      • 

    • It will improve ports, shipping industry, inland water transport, coastal shipping.
      • 

    • PPP and FDI to gather more investment.
      • 

    

    Then, which are the Key pillars to achieve Smart-development ?
    

      

    • Supporting and enabling Port-led Development through appropriate policy and institutional interventions.
      • 

    • Providing for an institutional framework for ensuring inter-agency and states’ collaboration for integrated development.
      • 

    • Port Infrastructure Enhancement, including modernization and setting up of new ports.
      • 

    • Efficient Evacuation to and from hinterland.
      • 

    

    What are some of the measures to make Smart Ports?
    

      

    • Ports should be registered as Companies under Companies Act.
      • 

    • The port administration should only look after the provisions of infrastructure and safety and not day-to-day running of the port
      • 

    • There is still no regulation to control the trade practices.
      • 

    • Hence, there is a dire need to introduce a regulatory architecture that takes care of ex-ante declaration of rates of services.
      • 

    

    Then, what’s the plan to implement such a vast initiative?
    

      

    • For a comprehensive and integrated planning for “Sagarmala”, a National Perspective Plan (NPP) for the entire coastline shall be prepared within six months.
      • 

    • It will identify potential geographical regions to be called Coastal Economic Zones (CEZ).
      • 

    • While preparing the NPP, synergy and integration with planned Industrial Corridors, Dedicated Freight Corridors, National Highway Development Programme, Industrial Clusters and SEZs would be ensured.
      • 

    

    What are the suggestions for effective mechanism at state level?
    

      

    • Set up State Sagarmala Committee to be headed by CM / Minister in Charge of Ports.
      • 

    • Sagarmala Coordination and Steering Committee (SCSC) shall be constituted under the chairmanship of the Cabinet Secretary and others.
      • 

    • This Committee will provide coordination between ministries, state governments and agencies connected with implementation and review the progress of implementation of the National Perspective Plan.
      • 

    

    How does it ensure the sustainable development in CEZ?
    

      

    • This would be done by synergising and coordinating with State Governments and line Ministries of Central Government through their existing programmes.
      • 

    • Such as those related to community and rural development, tribal development and employment generation, fisheries, skill development, tourism promotion etc.
      • 

    • In order to provide funding for such projects and activities that may be covered by departmental schemes a separate fund by the name ‘Community Development Fund’ would be created.
      • 

    

    What’s the role of Institutional Framework ?
    

      

    • It has to provide for a coordinating role for the Central Government.
      • 

    • It should provide a platform for central, state governments and local authorities to work in tandem and coordination under the established principles of cooperative federalism.
      • 

    

    What’s the role of NSAC?
    

    A National Sagarmala Apex Committee (NSAC) is envisaged for overall policy guidance and high level coordination, and to review various aspects of planning and implementation of the plan and projects.
    

    So, Is it Good to have smart ports on the line of Smart Cities?
    

    Can you answer some questions?
    

    #1. Can you examine the bottlenecks in Indian port infrastructure and list the initiative taken in recent times to address this issue?
    

    #Q.2 Indian port infrastructure can be revamped by Sagarmala project by effective management? critically comment.
    

    

    

    Published with inputs from Arun
    

    
			
    
		
    
		
	
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    Capital Markets: Challenges and Developments
    
			
			
    
		
    
		
	
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    Oil and Gas Sector – HELP, Open Acreage Policy, etc.
    
			
    Recently, Cabinet has approved new Hydrocarbon Exploration and Licensing Policy (HELP), which will replace New Exploration Licensing Policy (NELP), for Oil and Gas exploration, Will that make any change in oil and gas exploration regime? Let’s see this in brief!
    

    Let’s first take an overview of New Exploration Licensing Policy (NELP)
    

      

    • New Exploration Licensing Policy (NELP) was created in 1997
      • 

    • To provide an equal platform to both Public and Private sector companies in exploration and production of hydrocarbons
      • 

    • Directorate General of Hydrocarbons (DGH) was a nodal agency for its implementation
      • 

    • Between 1998 and 2012, there were 9 rounds of oil and gas block auction (NELP 1 to NELP 9)
      • 

    • Although 126 discoveries have been made in 41 active blocks, commercial production has commenced only in 3 blocks
      • 

    • Reasons for the delay vary from inadequate technology to delayed regulatory approvals
      • 

    • Today, only 2 blocks, the Reliance Industries-operated KG D6 block and the Gujarat State Petroleum Corporation-operated Cambay onshore block, are producing oil or gas
      • 

    

    <Let’s Move towards new version of Policy>
    

    What are the Main facets of HELP policy?
    

      

    • Uniform License for exploration and production of all forms of hydrocarbon
      • 

    • Open acreage policy
      • 

    • Easy to administer Revenue sharing model
      • 

    • Marketing and pricing freedom for the crude oil and natural gas produced
      • 

    

    What is Unified Licensing Policy?
    

      

    • As the name suggests, all licenses are unified i.e. this allows exploration and production of all hydrocarbons such as oil, gas, coal bed methane and shale oil and gas in a block
      • 

    • Contrast this with NELP, which required separate licensing for different types of hydrocarbons time and cost overruns
      • 

    

    Concept of Open Acreage Policy
    

      

    • Contractors will now have the flexibility to request bidding for any block on-tap under Open Acreage Licensing
      • 

    • Earlier, they had to wait for the government to auction blocks, and could only bid for blocks that were put up for auction
      • 

    • This will enable Exploration & Production (E&P) companies choose the blocks from the area they like
      • 

    

     What’s new in Revenue-sharing formula?
    

      

    • Present system is that of of production sharing based on Investment Multiple and cost recovery/ production linked payment
      • 

    • Under the new revenue-sharing formula, contractors will share the revenue from the time first drop of oil/gas starts flowing from the field.
      • 

    

     How this policy of revenue sharing is in tune with Ease of Doing Business?
    

      

    • Earlier, under the Production/profit Sharing Methodology, it became necessary for the Govt to scrutinize cost details of private participants and this led to many delays and disputes<as govt was given its share only after all the costs were recovered, govt had to make sure that private parties do not inflate cost to reduce govt’s share>
      • 

    • To prevent loss of government revenue, there were requirements for Government approval at various stages to prevent the contractor from exaggerating the cost
      • 

    • Activities could not be commenced till the approval was given.  This process became a major source of delays and disputes
      • 

    • Under the new regime, the Govt will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc.
      • 

    • So, no CAG audit, no approvals required, no micromanagement by govt.
      • 

    • Companies would worry less about the govt and focus more on operations
      • 

    

    


    
Parameter
Production sharing Contract
Revenue Sharing Contract

    

    
Risk
Investor can take higher risk as he will be able to recover investment before sharing with govt
Won’t take higher risk, has to share revenues from the first drop of oil

    

    
Govt interference
Higher as costs have to be rechecked
minimal

    

    
Useful for
High risk high cost environment such as deep fields
Low cost environment, fully explored blocks

    

    
Recommended by
Kelkar Committee
Rangrajan Committee

    

    
Govt policy
NELP
HELP

    
    

    

    India remains one of the least explored countries and could hold large potential resources. For example, 15 basins out of a total 26 sedimentary basins in India spread over on-land, offshore and deepwater, are estimated to hold prognosticated hydrocarbon resources of over 200 billion barrels of oil equivalent. Hence some recommend Production sharing contracts for India with investing capacity to manage such contracts better.
    

     Graded system of royalty to boost investment
    

      

    • The current policy regime, in fixing royalties, does not distinguish between shallow water fields (lower costs and risks) and deep/ultra-deep water fields(much higher costs and risks)
      • 

    • Under the new policy, there is lower royalty rates for difficult areas compared to NELP royalty rates
      • 

    • A graded system of royalty rates have been introduced, in which royalty rates decreases from shallow water to deepwater and ultra-deep water
      • 

    • Royalty rate for onland areas have been kept intact so that revenues to the state governments are not affected
      • 

    

    Pricing and Marketing Freedom
    

    At present, natural gas price is determined by taking into account the average of prices in gas-surplus countries such as the US, Canada and Russia, but proposed formula is market-efficient
    

      

    • New Policy allows pricing freedom to companies with a cap on prices to protect consumer interest
      • 

    • Gas price will be the lowest of imported fuel price; weighted avg of naphtha, coal and fuel oil; and the price of imported LNG
      • 

    • Policy also gives marketing freedom
      • 

    • The new price will apply to undeveloped gas discoveries and not on currently producing fields
      • 

    

    So, new price formula combined with lower royalty rates will help in undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure fields. Increased investment and competition will eventually bring down gas prices as well as import dependence of India and lead to the development of a competitive gas market in the country.
    

    From NELP to HELP
    

    


    
UNIFORM Licensing Policy
One license for E&P of all the hydrocarbons from a block

    

    
Open acreage system
Licenses on tap

    

    
Revenue sharing model
Minimal govt interference

    

    
Marketing and pricing freedom
Sell to whoever you want at market determined prices subject to a ceiling price

    
    

    

     
    

    How Contract extension will help to remove further obstacles?
    

      

    • The grant of extension of production sharing contracts for 28 small, medium sized discovered fields is welcome
      • 

    • Because, this move will remove uncertainty and help contractors plan their investments in these blocks
      • 

    • The extension will be for 10 years, both for oil and gas fields or economic life of the field, whichever is earlier
      • 

    

     Way forward
    

      

    • India currently produces around 90 mmscmd (Million Metric Standard Cubic Meter Per Day) of gas, hardly meeting 40 per cent of the needs (imports majority of gas from Qatar)
      • 

    • Oil and Natural Gas Corp (ONGC), Reliance Industries and Gujarat State Petroleum Corporation(GSPC) will now get freedom to price gas from its idle discoveries in deep sea, ultra deepsea and high-pressure and high-temperature areas
      • 

    • So, overall we can say that, Govt’s target for O&G seems to be on track, to attract more investments, boost production and take away govt discretion from Oil and Gas Exploration
      • 

    

    
			
    
		
    
		
	
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    Food Processing Industry: Issues and Developments
    
			
    Developments in Food Processing Industry
    

    The food processing industry in India is increasingly seen as a potential source for driving the rural economy as it brings about synergy between the consumer, industry and the farmer. However, food processing activity is still at a nascent stage in India with low penetration.
    

    Importance of Food Processing Industry
    

      

    • It holds the potential of reducing enormous wastage of agricultural produce in the absence of processing technologies and cold chain facility
      • 

    • It is labour-intensive industry, which has the potential to employ 13 million people directly and 35 million people indirectly
      • 

    • This will also lead to increase in farm income, generate employment opportunities, foster forward and backward linkage effects, contribute to exports and integrate Indian economy with the rest of world
      • 

    

    What is the magnitude and size of this industry?
    

    India is strategically located at the centre of the Middle-East and South-East with a long coastal line and easy sea connectivity as well as plenty of raw material for long period which can attract multi-national companies instead of food processing.
    

    It is the 5th largest industry and has the highest rate of growth as well as a very high employment elasticity. Currently, it accounts for nearly 16% of total employment in the organized manufacturing sector and 32% in unorganized sector.
    

    What are the factors which can drive this industry?
    

      

    • India’s demographic profile with 65% of population below 30 years of age
      • 

    • Fast changing consumption patterns
      • 

    • Increase in disposable incomes of the people
      • 

    • Fast increase in the number of working women, who prefer the packaged food
      • 

    • Growth of organised food retail in India
      • 

    • Nearly 55% of the total expenditure on an average is spent on food and grocery in rural areas and nearly 40% in urban areas and only 10% of what we grow is processed in India
      • 

    

    What are the challenges faced by FPI?
    

      

    • Indifference of policy makers as very little outlays are allocated in Five Year Plans. In the XI FYP, an outlay of Rs. 4000 crore was earmarked out of which significant proportion was not spent
      • 

    • The legislation’s like APMC Acts, Essential Commodities Act, etc restricts free movement of commodities
      • 

    • Very poor infrastructure i.e. near absence of technologies, incubation facilities, pre-cooling chambers, irradiation facilities, etc < Food Irradiation is a technology that improves the safety and extends the shelf life of foods by reducing or eliminating microorganisms and insects>
      • 

    • High tariffs in the form of high excise duties as well as import duties
      • 

    • Non-tariff barriers in the form of stringest regulation of laboratory testing, grading, sampling and packaging
      • 

    • Lack of entrepreneurship, as 70% of the total value of food processing items manufactured in India is dominated by the unorganised sector
      • 

    • Lack of training facilities related to this industry
      • 

    • Very low Research & Development
      • 

    • Indian agriculture focuses on traditional crops rather than market-oriented agriculure with diversified commercial crops
      • 

    

    What are the Govt efforts to promote this industry?
    

    XI Five Year Plan: Govt. recognized the potential of this sector and launched Mega Food Park. It also adopted various measures such as modernization of Abattoir (Slaughter houses), modernization of meat shops, upgradation of street food, effective implementation of Food Safety and Standards Act 2006, technology upgradation, entrepreneurship development programme, setting up of training institutes, etc
    

    Mega Food Park
    

    These are the parks with state-of-art infrastructure related to all of the facilities required for food processing industry with their captive power plants, transportation and other hygienic facilities to attract food processing units to avail of this infrastructure for manufacturing food-processed items.
    

    The target was to set up 30 Mega Food Parks, but only 9 came up.
    

    XII Five Year Plan: There was significant shift in govt. policy towards this industry in XII FYP, as it allocation to the tune of 4-times as compared to XI FYP, with an outlay of Rs. 15000 crore. It also launched National Mission on Food Processing, in the background of the success of National Mission on Horticulture.
    

    National Mission on Food Processing
    

    The mission has two main principles: Decentralization and Outreach.
    

    The mission is totally centrally sponsored and the responsibility of its implementation lies with the state govt., who will have to take initiative in organizing the unorganized food processors into SHGs (Self-Help Group) and provide them training and other facilities. State govt. will have to bring about synergy between agriculture and food processing industries.
    

    Budget 2016-17
    

    Govt. has decided to allow 100% FDI in multi-brand retail for food products produced and processed in India will play a catalytic role in leapfrogging Indian economy.
    

    Future
    

    It will be the endeavor of policy makers to ensure that food processing industry conform to global standards of health and hygiene and adopt CODEX standards (related to food safety) laid down by Food & Agriculture Organization and WHO, for the protection of consumer health.
    

    Food processing needs a fillip in the form of better logistics, access to credit, technology indigenisation and implementation of food safety laws.
    

    Suggested Readings: 
    
Untapped potential of food processing – The Hindu
    
Food Processing in India – Make in India
    

    
			
    
		
    
		
	
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    Rural Infrastructure Schemes
    
			
    Has 2 departments under it – Dept. of Rural Development and Dept. of Land Resources. National level schemes under them – Pradhan Mantri Gram Sadak Yojana (PMGSY) for rural roads development, Swarnajayanti Gram Swarozgar Yojana (SGSY) rural emploment and for rural housing, Indira Awaas Yojana (IAY) & Integrated Watershed Management Programme (IWMP).