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IASbaba’s Daily Current Affairs – 29th March 2017

ECONOMY

TOPIC: General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

Investment models.

Bilateral Investment Treaties and concerns

Introduction

In a globalised economy foreign investment and multilateral agreements are crucial in today’s economic architecture. Especially in a time period where protectionism is on the rise and with events like Brexit and new government in USA concern have risen for developing and progressive economies.

Issue:

With several bilateral investment treaties lapsing on March 31, FDI inflows could take a hit.

By this April 1, the government would have taken India back to the pre-1991 inward-looking economic era as far as India’s approach to bilateral investment treaties (BITs) is concerned.

History:

Till the early 1990s, India didn’t sign BITs because foreign investment was not considered significant in a statist India.

The absence of BITs meant foreign investors couldn’t use international arbitration to hold India accountable under international law for any detrimental regulatory overreach.
- So, when the Foreign Exchange Regulation Act that came into force in 1974 required a foreign company to convert foreign equities into minority holdings of 40%, many helpless foreign companies like Coca-Cola, IBM, Kodak and Mobil either quit India or applied to the government to do so.
In 1991, India lifted its self-imposed economic exile by starting the process of experimenting with the market and wooing foreign investors.
- As part of this image makeover, India started signing BITs from the early 1990s.
- The signing spree continued unabated till 2010 with India inking BITs with 83 countries.
- However, rattled by many BIT claims brought by foreign investors from 2011 onwards, last year, India unilaterally issued BIT termination notices to 58-member countries.
- Reportedly, these BITs would lapse on March 31 after the expiry of the mandatory one-year notice period.
Although the terminated BITs will continue to be relevant for existing foreign investment in India and Indian investment in these countries for the next 10-15 years due to survival clauses, any new investment, either from these 58 countries to India or vice versa, shall not enjoy BIT protection as was the case before 1991.

BITs and foreign investment

Some argue that foreign investment inflows to India are not dependent on BITs. Two studies question this wisdom.

The first, examines the impact of BITs on FDI inflows in 15 Asian developing countries including India from 1980-81 to 1999-2000.
- The study shows that BITs signed by these 15 countries with developed countries had a stronger and significant impact on FDI inflows in these 15 countries.
- However, BITs signed by these 15 countries with developing countries didn’t have much impact on foreign investment inflows.
- Till the year 2000, out of the 14 BITs India signed, nine were with developed countries.
- Therefore, BITs had a significant impact on FDI inflows in India, which rose from $393 million in 1992-93 to $4,029 million in 2000-01.
The second study, a very recent one considers the impact of BITs on FDI inflows in India from 2001-2012.
- This study also demonstrates that BITs signed by India contributed to rising FDI inflows in the said period by providing protection and commitment to foreign investors.
- The significance of BITs in attracting investment was also emphasised by Canada’s Trade Minister during his recent visit to India.
- The Minister said that absence of an India-Canada BIT is restricting the scope and volume of investments that Canadian pension funds can make in India.
It is nobody’s case that BITs alone determines FDI inflows-
- But they do play a critical role in mitigating regulatory risks
- Thus encouraging investors to invest — critical for India, which has a dubious distinction of not being a friendly place to do business in.

The OECD classifies India among countries that impose heavy regulatory restrictions on foreign investment.

Recent instances of Central government meddling with private contracts between Indian seed companies and Monsanto; threatening Amazon, the e-retailer company, with visa-cancellation of its staff if it didn’t stop selling a product in a third country that allegedly hurts Indian sensibilities; overnight withdrawal of 86% of legal tender from circulation without considering its impact on businesses, have all strengthened this image.

Few takers for the Model BIT

To be fair to the government, it wants to sign new BITs with all these 58 countries based on the new Model BIT adopted in 2016.

However, most developed countries have not shown much interest in the Model BIT because instead of striking a balance between investment protection and state’s right to regulate, it tilts towards the latter.
There are fundamental differences between the Indian approach and the Canadian and European approach to protection of foreign investment, as reflected in the investment chapter of the recently signed EU-Canada Comprehensive Economic and Trade Agreement (CETA).
- First, the EU-Canada CETA contains a ‘most favoured nation’ (MFN) provision — a cornerstone of non-discrimination in international economic relations — which is missing in the Indian Model BIT.
- Second, the Indian Model BIT, unlike the EU-Canada CETA, mandatorily requires foreign investors to litigate in domestic courts for five years before pursuing a claim under international law.
- Third, the EU-Canada CETA provides protection to foreign investors in situations where the state goes back on the concrete representations it made to lure an investor, which the investor relied upon while investing.
The Indian Model BIT is silent on this, thus exposing foreign investors to regulatory risks. Fourth, the EU-Canada CETA talks of pursuing the establishment of a multilateral investment court to settle investment disputes. Will India support such a proposal?

Conclusion:

It is important that government takes the global best practices adopts and adapts to Indian needs. But BITs being crucial tool w.r.t investment we need to ensure that global and holistic acceptance is sought for increasing the coverage and spread.

Connecting the dots:

Critically analyse the need to renegotiate the BITs in a time bound manner and the framework needed to be worked out.

NATIONAL

TOPIC: General Studies 2

Role of civil services in a democracy

Government policies and interventions for development in various sectors and issues arising out of their design and implementation

Lateral movement in civil services

Recently, the central government is considering stepping up lateral movement of experienced officers from various Central and State services at the level of joint secretary.
Such step is taken to fill up the shortfall of experienced IAS officers eligible to be appointed to senior positions.
This move is expected to give opportunity to those in specialised services to move into mainstream administration and bring their domain expertise in specific issues into policymaking and governance.
It is also expected to reverse some of the appropriation of top positions by the IAS lobby from non-IAS services over the last few decades.

Lateral movement from private sector

However, simply increasing the numbers is not important. Capability and skills, particularly in the middle-to-top strata of the bureaucracy have to be improved urgently.
In US and UK, direct hires of experienced professionals, particularly from the private sector, is also required, if governance delivery is to meet the needs of a complex and rapidly evolving economy.
But attracting lateral movement from other services to fill vacancies in the bureaucracy is far easier than attracting talent from the private sector.
This is not for the reason that remuneration is not competitive, but also because of the vast difference in working conditions.
Skilled professionals expect a certain degree of operational freedom which is difficult with current bureaucratic style of functioning as well as constant political interference.
Government of India has, in the past, also inducted outside talent from time to time into the higher tiers of government usually in advisory positions but occasionally even in key administrative assignments. For example the Chief Economic Advisor, Government of India is traditionally a lateral entrant who is below 45 years and an eminent economist.

The long term solution

Lateral movement between different cadres at centre and state this time to fill the vacancies is a short term fix.
To fill up the managerial positions at top bureaucratic levels, there is a need of a policy that actively seeks the best talent for various positions, whether such talent is to be found within or outside the current bureaucratic system is government’s prerogative.
The government could define either a certain number or certain specified positions in the administrative structure to be filled by lateral appointments. These should be advertised at the highest level to get the best resources.
The government must also put into place a system that reviews and suitably rewards outstanding performance of such appointees to attract more such talent.
A larger pool with diversity of experiences and domain expertise can ensure that policies have a better connect with ground realities, and get implemented more efficiently.
India can learn from Singapore which has close association of public and private sector. Very high quality individuals from the private sector routinely join the public sector and excellent civil servants move easily into the private sector. This kind of permeability brings the two sectors very close to each other:
- Public servants as they join the private sector, have a very good idea about the rules, regulations and compliance issues and have a very good bird’s eyeview of the entire industry be it manufacturing, finance or tourism.
- Similarly, those who join the public sector from the private sector, bring with them the virtues of efficiency and work ethics.
Thus, it is a very healthy mix to do administration. Further, such lateral movement allows academics to easily join the public sector and contribute significantly in the areas of public health and economics.

The problems

The idea of lateral recruitment is good as long as it concerns highly technical aspects of governance like Department of Information technology, cybercrime cells, trade and commerce etc.
This is because since most of the bureaucrats are generalist they are less adept in handling technical areas required for updating and maintaining quickly and ever-growing areas of information technology and related issues.
For areas like agriculture, power and ministries related to urban supply and socio development, expertise and knowledge of bureaucrats are normally at par with lateral knowledge.
There is a possibility that political interference may lead to favouritism in making lateral appointments. Here, it affects the work efficiency of the department as well as promotes into nepotism in other departments too.
Lateral entry only at top level policy making positions may have little impact on field level implementation, given the multiple links in the chain of command from the Union Government to a rural village.

Efforts till now

The 10^th Report of 2^nd ARC titled, “Refurbishing of Personnel Administration – Scaling New Heights” emphasises that 10% of posts at joint secretary level in Government of India should be open to lateral entry from state government services or private sector or academics etc.
The present government has asked for formal comments from cadre controlling authorities to present their views and suggestions on the matter.
In the last five years, the number of consultants in government departments has gone up manifold. But they are being recruited at junior level, thereby not allowing them to take key decisions.
Also, there has been huge emphasis on inculcating corporate sector culture in the government after the new government was formed.

IASbaba’s views

It is high time that bureaucracy and political class recognise that the time is up for colonial style of governance to govern India as it is no longer effective or efficient. The concept of unified civil services needs a relook which promotes one-size-fits-all bureaucracy, recruited through a dated competitive examination system. Even the ARC felt that lateral entry as done in the past on an ad hoc basis can hardly be considered a suitable model of manpower planning since the present incumbents in government departments tend to resist entry of outside talent and the whole process remains personality driven and inchoate. There is therefore a need to institutionalize the process of induction of outside talent into the government. The lateral movement system opens up choice of top civil service appointees from different sources and also makes it possible for lateral entrants to bring in their own work culture which enables renewal and adaptiveness in government organizations.

Connecting the dots: