I Interview

ASEAN-India FTA only a matter of time

Both India and Indonesia share a common cultural background and political ideology, but the bilateral trade took off only after India conceived it's Look east Policy in 1993. But after seventeen years, the bilateral trade was USD 11, 720 million to increase to USD 20 million by 2020. With Indonesia ratifying the India ASEAN Free Trade Agreement, India can hope to finalise the deal soon. And M. Ghalib, Indonesia's Ambassador to India spoke to BE's Priyalina Basu about the relations between the two countries

Andi. M Ghalib

Ambassador of Indonesia to India

Q) What is the progress of the Indo-ASEAN free trade agreement that was scheduled to be finalised in June this year?

A) Indonesia has ratified the FTA on August 24 and the other members too are ready to develop the FTA. The field is all set to take off and it is only a matter of time it will be finalised. All the ASEAN members want a happy and mutual cooperation with India.

Q) Of late, many countries are giving attention to investing in eastern India. Do you have any plan to invest there? If so, what sectors you will concentrate upon?

A) Yes, we are looking at the immense possibilities of eastern and north eastern India. Before visiting Kolkata, we visited to Nagaland and Manipur to explore opportunities. But the main problem is that we do not have sufficient information we had to import it from elsewhere. India can either export jute to Indonesia or set up factories in Indonesia. The Indonesian government also provides infrastructural assistance and cheap labour to the industry if anyone wants to set up industry there.

Q) Apart from jute, what are other areas are looking in eastern India ?

A) Other potential sectors in this part of India are the textile, IT and food processing industries.

Q) It has been said that Indian investment does not create the same concern in Indonesia that Chinese investment does. What, according to you, are the basic differences between the two types of investors?

A) Both India and China are economies that have different styles of investment. All we can say is that both the countries are working well there. Indonesia is trying to build an India, China and Indonesia tie in our country. But of late, China too has given qualitative importance to their products.

Q) What is the present progress of the India- Indonesia cooperation on tsunami early warning technology and climate change research?

A) The progress on tsunami early warning technology including agro-meteorology, air quality monitoring, geophysics instrumentation and climatology and climate change research is really satisfying.We have a strong collaboration with India when it comes to renewable energy sectors.

Q) How are the two countries boosting there defence ties?

A) Keeping the present threat of terrorism in mind, we are seriously thinking of working out defence ties together.

INTERVIEW

Claudia McKay, Microfinance Specialist, Consultative Group to Assist the Poor(CGAP)

Q) How has the mobile banking system facilitated microfinance operations in Africa?

A) Africa is the birthplace of the most successful mobile banking (m-banking) service in the world – M-PESA in Kenya. In just three years, M-PESA has attracted nearly 10 million customers, about half of Kenya’s adult population. The success of M-PESA has inspired more than 70 imitator mobile banking systems across the globe. However, m banking to date has largely been driven by mobile network operators (MNOs) and to a lesser extent, by some large banks. Microfinance institutions have by and large not played a

significant role in this exciting new industry. The MFI world uses human-driven methodology to provide mostly credit while the m-banking world uses very sophisticated backend systems to provide transfers and payments.

However, in recent months MFIs located in countries like Kenya where there are widespread m-banking services have started linking into these services to offer their customers more convenient ways to repay loans and make deposits, where applicable. Customers report that paying loans with M-PESA is easier, faster and much less risky than the traditional method of collecting payments at a group meeting and then sending group members to a bank branch. Other MFIs are learning about m-banking services and earning additional revenue by acting as agents on behalf of the service. For example, four MFI networks in Mali use their branches as agent outlets for Orange Mali.

Unfortunately, many MFIs are located in countries where there is no existing m-banking service. Developing an m-banking service is expensive, time consuming and complex and very few MFIs have significant financial, technical and managerial capacity that is required. MFIs in these contexts can experiment with other ways to use mobile phones to increase customer convenience (such as automatic loan reminders) and strengthen the institution and its management information systems (MIS) so it will be ready to link to a system once it is developed.

Q) How safe is mobile banking and is it accessible to the target group of microfinance?

A) Mobile banking transactions are securely processed and settled between the agent and the customer in real-time so there is minimal risk for the customer. Many African countries are in the midst of drafting regulations to ensure mobile banking customer funds are protected. Regulators are understandably concerned since non-banks (like mobile network operators) are not subject to the same prudential regulation that applies to banks. For this reason, most regulatory approaches include provisions for ‘fund safeguarding’ – requiring non-banks to maintain liquid assets equal to the amount of issued electronic value and other measures to ensure that customers have access to their funds whenever they need it.

There are currently more than three billion unbanked people in the world. One billion of these unbanked people do have mobile phones. In fact, according to Vodafone, a parent company of Safaricom, at least 50% of current M-PESA users are unbanked, meaning that they are using money transfer services to help manage their financial lives even if they do not have bank accounts. CGAP looked at the outreach of 8 providers across the world and found that 37% of clients were unbanked. Somewhat less data is available about the income levels of mobile banking clients. In Brazil, low-income people comprise a clear majority of branchless banking clients. In three other mobile banking services (including WIZZIT in South Africa) low-income consumers comprised just one-quarter of active clients. So, while the majority of mobile banking customers today are not low-income and unbanked, there are enough low-income, unbanked users to bring confidence that mobile banking is accessible for this group.

Q) What segments do you think need special technical attention to mobilise microfinance system in the continent?

A) As m-banking services expand across Africa, MFIs with strong management teams, stable management information systems and effective internal controls will be the best placed to take advantage of these services and benefit the most. Strengthening these areas are good for the core mission of an MFI anyway, and they will make the MFI that much more ready to adopt m-banking when it does become available.

Q) How many African microfinance institutions are you linked with at present and what are the major problems they face at present?

A)The Technology Program at CGAP funds a small number of projects around the world that are designed to demonstrate technology-based models that will dramatically expand the reach of financial services to low-income people. This program is co-funded by the Bill & Melinda Gates Foundation and the UK Department for International Development. Currently, we are funding 14 projects, including 4 in Africa. Since most MFIs do not have the technical or financial resources to lead large-scale implementations in this sector, most of our grants are to banks, mobile network operators and payment system providers. For example, one of our projects is with Equity Bank which is offering an interest-bearing savings account via M-PESA. However, we hope to support the involvement of MFIs in this sector through technical support to our donors, publications, conferences and other relevant avenues.

MFIs in countries with existing m-banking services face some technical challenges. MFIs with weak MIS sometimes resort to manual reconciliation between their MIS and that of the mobile network operator. There is also concern that individual repayments via mobile phone may have a negative impact on group cohesion, which is a critical element of traditional microfinance. Finally, MFIs will need to educate customers about the new processes and overcome potential customer reticence in using new technology. Those MFIs in countries without any existing m-banking services face greater challenges and have fewer options available.

Microfinance and Mobile banking in Africa

Ross Levine, economist at Brown University, once wrote in his book Finance and Growth, “The quality and reach of a country's financial services are crucial determinants of economic growth.” In Africa, mobile or m-banking has been the latest trend explored by microfinance institutions (MFI) to provide more affordable, accessible, convenient and secure banking services.

Kenya

In 2007, it introduced the concept of m-banking in microfinance and has been the most successful African country in this regard. MFIs like Kenya Woman’s Finance Trust (KWFT) and Faulu allow clients loan repayments and deposits with advantages like SMS alert for payments, low operating charges and unlimited banking hours. The platform has helped MFIs reduce high operational costs and increase focus on core functions. A 2008 survey found that the m-banking service as a system was five times safer than traditional methods. More than 95 % users found the services not only safer but also faster, more convenient, easier to use, and cheaper.

At the Africa-Middle East Regional Micro-Credit Summit in Nairobi in April this year, Kenyan President Mwai Kibaki praised the MFIs’ initiative to extend m-banking to a massive 62% of the population who have no access to traditional banking. Mobile bankers use their mobile accounts as de facto savings accounts by keeping cash credit.

Some Kenyan MFIs have developed close partnerships with technology provider companies like PesaPot, Red Could and Safaricom through schemes like M- Pesa (m for mobile and pesa is Swahili for money) and M Keso.

In M-Pesa, microfinance borrowers can conveniently receive and repay loans using the network of Safaricom airtime resellers which enable MFIs to offer more competitive loan rates to their users as there is a reduced cost of dealing in cash. M Kesho is an improvised m-banking system from Safaricom and Equity Bank of Kenya. The scheme facilitates easier banking transactions like deposits, withdrawals and loan applications through mobile phones. According to Michael Asola, CEO PesaPot, “Mobile banking has fast become an important part of microfinance institutions in Kenya. Today, M-Pesa has roughly 10 million customers in Kenya, 40%t of the adult population.”

The economic outcome has been striking. This year Safaricom’s projects contributed to 20 % of Kenya's GDP through M-Pesa. Olga Morawczynski of the University of Edinburgh estimates that rural households that are mobile money subscribers saw their incomes increase 5 to 30%.


Uganda

In Uganda, The Microfinance Deposit Taking Institutions (MDI) Act of 2005 regulates deposit mobilising MFI (called MDIs) and provides a legal framework for savings mobilisation of those MFIs. Like its neighbouring Kenya, Uganda introduced similar banking technologies where m-banking especially the M-Pesa schemes has been a success in scaling-up microfinance.

Malawi

The Opportunity Bank of Malawi also initiated m-banking earlier this year to reach out to 80% Malawians who live in rural and semi-urban areas. Around 60% of these already have mobile phones. Prior to this, the bank had introduced biometric ATMs, POS devices with cash-back services at agent shops and trucks that brought banking services to remote areas.


Drawbacks

Despite the immense potential for m-banking, the MFIs are still struggling to take full advantage of it. Till date, a large share of m-banking is regulated by Mobile Network Operators (MNOs) rather than MFIs.

Another major problem is that the MFIs tend to apply the strategies blindly without modifying them. Kabir Kumar, a microfinance analyst, says, “MFIs, while dealing with the local payments through mobile phones tend to copy the method, which has been recommended for large banking institutions. In most cases, MFIs probably should not be getting
into setting up these mobile payments and thereby ending in a mess.”

He feels microfinance lenders will gain from allowing m-banking
to spread because of the better access and care given to borrowers. He explained,” As we’ve seen in Kenya, where in the absence of a widely available retail payment environment, mobile payment infrastructure provides a lot of convenience to microfinance borrowers.”

Potential of m-banking in India

Seeing the success of the Kenyan model, many Indian MFIs like Sahitya in Rajasthan are starting mobile banking services. According to economists Robin Burgess and Rohini Pande, 1 % increase in the number of rural locations banked per capita reduce rural poverty by 0.42 % and the economic productivity is increased by 0.34%. The high
potential of the system, however, is yet to be explored fully as the Indian model is still agent-based.

Interview:

We believe in delivering a complete value package to our consumers: Karl Slym

General Motors India is all set to enter the Light Commercial Vehicle market by FY 2011-12 in one and sub one tonne categories. They will also introduce two other passenger cars by that time, in a joint venture with SAIC (Shanghai Automotive Industry Corporation). The LCVs will be produced at the Halol facility in Gujarat, while the passenger vehicles will be manufactured at the Talegaon plant in Maharashtra. Karlos Slym, President and M D, General Motors, India shared some of his plans with BE’s Priyalina Basu in this regard.

Q) In India, General Motors sales have increased 45% this July. What have been the reasons for this?

A) There are a number of factors working behind this sales growth. However, I would like to say there are two major factors that attributed to this. First, is the growing demand of Indian customers, especially for Chevrolet Spark and Beat and secondly, the development of the brand image of Chevrolet.

Q) What is the present market trend? Are people investing on luxury cars?

A) Yes, investments in some segments of luxury cars have increased. SUVs like Chevrolet Captive are in high demand. However, it is also important that the demand for light commercial vehicles in India is likely to rise by 24% in next 3-4 years.

Q) What are your export plans? Would you go for increasing market shares or your target will be to increase sales volume?

A) We are planning to export the Beat and products manufactured in the SAIC and we will be looking to increase sales volume rather than market share because on market share basis, we are already in a good position.

Q) For export, which market would you be concentrating on?

A) Right now, we are concentrating mainly in the Asia-Pacific region, especially in the four neighbouring countries- Nepal, Bhutan, Bangladesh and Sri Lanka for the next 12 months. Then we will think of expanding to the ASEAN nations and Latin American countries.

Q) Have you ever nurtured the idea of selling INR1 lakh car like Tata to capture small income group customers?

A) No, we have not, because we believe in delivering a complete value package to our consumers, which include safety and comfort rather than the price. But I think the Chevrolet Spark and Beat in the INR 3-4.5 lakh ranges will be helpful for the small income group customers.

Copyright@ Business Economics, August 1 2010

FTA negotiations expected this year: Mouneer Agbariya

India and Israel share a bilateral relationship that is getting stronger with time. In technology and skilled services, both have a lot to offer each other. A high level delegation is all set to come to India to discuss various factors like FTA, food processing technology, irrigation and many more. Mouneer Agbariya, the Economic Counsellor of the Embassy of Israel spoke to BE’s Priyalina Basu about their future plans.

Q) What is the progress of India and Israel free trade agreement?

A) The professional teams met in last May and discussed the chapters that the agreement will include and other matters related to the negotiations. It is expected that by the end of this year the two countries will have the first meeting of negotiations.

Q) How can Israeli technology help the food processing industry of India?

A) This can be mainly done by the transfer of technology of shelf-life, cooling chains, packaging, storage, etc. I think a key rule would be for the dairy to expand the variety of products to the consumers as well as the quality.The Indian Union Minister of Food Processing is expected to visit Israel accompanied by official and business delegations by the end of this year.

Q) An Israeli delegation is scheduled to visit Kolkata. What areas would they be looking at?

A) The delegation will be on water technologies. These technologies include water management, water treatment, desalination, waste water treatment, filtration, municipal supply and so on.

Q) How can Israeli know-how help to enhance the productivity of the dairy and agricultural industry in India?

A) The best way is by increasing the collaboration between the business communities of the two countries with the support and the guidance of the governments. The exchange of the business delegations, exhibitions, conferences, etc., will bring more interaction and definitely more exchange of opportunities.We have decided to open a trade office in Kolkata to assist the Embassy to increase and intensify its activity in this important part of India.

Britain seeks a bigger role in Asia starting with India

“Britain has lost an empire and has not yet found a role.”

— Former US Secretary of State Dean Acheson, 1962.

Margaret Thatcher, John Major, Tony Blair and Gordon Brown failed to rebut him. Can David Cameron, the new Prime Minister of Britain, be able to help Britain get an image makeover? Cameron during his maiden visit to India made it clear that Britain wanted to establish its strong presence through the dynamic economies of Asia.

Disillusioned by the ‘special relationship’ with the US and the overtly bureaucratic European Union (EU), Britain has subtly revamped its foreign policy. After India, Cameron is scheduled to visit China in November this year and William Hague, the UK Foreign Secretary who has already been to China and Japan, has written to all the employees of his office to make the best use of the country’s extensive diplomatic network.

Political:

From the moment he became the resident of 10 Downing Street, Cameron stressed a ‘special relationship’ with India. His ‘frank’ comments about Pakistan exporting terrorism and that it should do more to “crack down on and eliminate” terrorists, earned praise from Indian officials who had been lukewarm in their response to the staid Labour government led by Gordon Brown.

Britain, one of the five permanent members of the United Nations Security Council, has been backing India’s claim for a permanent membership.

Economic:

According to several indicators, while the diplomatic relations between India and Britain have been cordial, from the British perspective, there were ground level gaps on the economic front.

India dominates in sectors like financial services, retail and education. Jo Jones, a Tory MP from Orpington, commented, “Market access to India in these areas that are important to Britain is still not very easy.” Eyeing these sectors to help in the acceleration of economic growth back home, Cameron requested India to further open up these sectors to the mutual benefit of both countries. At present, India allows 51% FDI in the single brand retail sector, but multi-brand retailing is still a closed sector for foreign investment. The FDI from Britain to India has fallen steadily in the last five years. In 2007-08, it was INR 4,690 crore out of INR 9,8664 crore that declined in 2009-10, to INR 3,094 crore out total of INR123,378 crore.

On the trade front, India is in an advantageous position. According to the latest report released by UK Trade and Investment, India is the fourth largest investor in the UK, ahead of Germany and China and behind only the US, Japan and France. Britain, on the other, has fallen from being the third to the thirteenth largest trade partner of India. According to Keith Vaz, Labour MP from East Leicester-shire, “India today is so powerful that it does not need to count UK anymore but the UK cannot do business outside EU without India.”

While Britain’s market might not be big, India will benefit from stronger economic ties with Britain as it will help in quicker realisation of the Free Trade Agreement with the huge EU market. India and EU have at present a GBP50 billion a year two-way trade. In his media address, Cameron stressed Britain’s strengths: “We have access to European markets. We have a highly trained workforce and as I have said, we are one of the most open and welcoming economies.”

Britain also sought India’s help to get over the sovereign debt crisis. The economic recovery in Britain has been rather sluggish in the post-meltdown period. Faced with the spiralling fiscal deficit, the UK government has resorted to massive austerity measures. Its economy grew by just 1.1% in the second quarter of 2010 after clocking 0.3% expansion in the previous three months.

In the energy sector, India can reap the benefit of buying offshore stakes of BP in Vietnam.

Defence:

India will benefit by the 700-million pound (about ` 5,500 crore) military deal to acquire 57 additional Hawk advanced jet trainers for the Indian Air Force and Navy, in two separate contracts. This means getting access to the higher and sophisticated technology in which Britain excels. Cameron said, “We have a very strong defence industry and I am delighted to see the BAE-HAL agreement. I think we bring lots of expertise we can share with you.”

Education:

Prior to Cameron’s visit, education was thought to be the bone of contention between the two countries as the British government had decided to put a cap on the non-EU immi-gration of skilled labour. While Valerie Vaz, a Labour MP, argued that Britain must encourage more doctors from India to work in Britain’s national health services, there was no concrete discussion on the issue. This was overshadowed in noise over issues like the return of the Kohinoor. The only comment made on skilled labour was by the British Business Secretary Vince Cable who said that the coalition partners of the ruling regime in Britain had agreed to form a pact on immigration outside the EU, but it would not hamper investments from India.

Indian students are a majour source of revenue for the British government just as degrees from famous British colleges are of value to Indian students. This understanding was evident in Cameron’s statement to the press, “I think we have some of the best universities of the world and I have brought 14 Vice-Chancellors with me. We have one of the strongest science bases in the world and we brought institutions like Welcome Trust with us.” The two sides agreed to launch a new phase of the UK-India Education and Research Initiative. But there was no promise to reduce the amount in the education bond that the Indian students will have to pay before going there to study.

The three-day visit was not about overnight changes in bilateral relations. What Cameron did was to try and transform a “cordial” relation-ship into a “better, highly fruitful” one. Time, as usual, will be the performance evaluator.

Copyright@Business Economics August 1 page no 8-9

Voice for Veto

India is willing to compromise on the veto power for a permanent seat in the UNSC stating that it is more important to make itself heard on issues of international security

Priyalina Basu

For a country, a permanent seat in the United Nations Security Council (UNSC) is to declare that it has ‘arrived’. But the elite club that controls world politics, especially its permanent members, the P5 (Britain, the US, France, Russia and China), is far from rolling out the red carpet for the arriveste powers like India and Brazil or for that matter even Germany and Japan.

The emerging powers, rather than push their way in with a bang, are willing to go slow and steady and compromise on the distinguishing feature of the power seat – the right of veto.

Hardeep Singh Puri, India’s envoy to the UN said, “The new permanent members shall not exercise the right of veto until the question of the extension of the right of veto to new permanent members has been decided upon in the framework of the review mandated fifteen years after the entry into force of the Council reform.”

Anachronistic Approach

At a time when other multilateral set-ups like the IMF (International Monitory Fund) or the World Bank are going through reforms to be in touch with the new realities and shifting power-dynamics of the world, the UNSC prefers to be frozen in the past. This despite there being constant calls for its reform.

In 2004, a team of advisers came up with recommendations for reforming the UNSC. The G4 nations issued a joint statement to back each other’s claims for permanent membership. In 2006, India decided to run for a Security Council seat and has been canvassing for the spot since then. Nineteen countries including Nepal, Sri Lanka, Afghanistan and Bangladesh spoke in favour of giving Indian a seat on the Security Council table starting January 2011 at a meeting in New York.

Most of the permanent members do realise that the time has come to accept that the emerging powers cannot be kept waiting or away from key decisions that affect them. According to former British Prime Minister Tony Blair, “A UNSC without India as a permanent member is an anachronism. An IMF or a World Bank without a proper role for India will no longer do, India will demand and India will receive the position due to one of the world’s major powers.”

William Burns, the US Under Secretary of State for Political Affairs, favoured India’s bid by saying, “India’s expanding global role will naturally make it an important part of any future consideration of reform of the United Nations Security Council.”

But in all the support, there has been no mention of India’s veto right. So it is assumed that the new permanent members shall be deprived of this power.

Necessity or Not?

Now the question is: Do we really need to have a veto power? Yes. Being an UNSC permanent member without the veto is like fighting without a weapon. It gives an edge during negotiations.

According to the UN charter, each of the per-manent members enjoys certain powers

· Investigate any situation threatening international peace.

· Recommend procedures for peaceful resolution of a dispute.

· Call upon other member nations to completely or partially interrupt economic relations as well as sea, air, postal, and radio communications, or to sever diplomatic relations.

· Enforce its decisions militarily or by any means necessary.

· Oversee workings of the Counter Terrorism Committee (sets the benchmarks of counter terrorism practices at the global level) and the Military Staff Committee (that plans UN military missions and assists in the regulation of armaments)

However, all these are useless without the veto. Any of the UNSC’s permanent members can prevent the adoption of any (non-‘procedural’) UNSC draft resolution they dislike by using the veto. Even the mere threat of a veto may lead to changes in the text of a resolution, or it being withheld altogether (the so-called ‘pocket veto’). Therefore, it is probable that India’s initiative on these issues would be rejected if it goes against the interest of the P5, especially of China.

Moreover, it goes against the democratic set-up of the Security Council. Each of the permanent members of the Council should have the same power. Only five members having exclusive veto power sometimes goes against the interest of the members of other countries. On the other hand, it is argued that if too many powers have the veto then UNSC resolutions will be few and far between. The core issue then becomes whether there should be a veto or a vote by majority only.

But as the veto is not likely to be given up by the P5, a more realistic approach would suit India, especially when sharing the table with powers like China with whom it has some major disputes. It is felt that if the new entrant to the UNSC will compromise from the beginning, it will start from a weak position and will always be at a disadvantage. But with hardly any progress on the UNSC reform front, weariness has set in. India prefers being a partner in discussions on issues of global concern rather than wait for the diplomatic trump card of overturning decisions contrary to its position.