View through the Prism of Real life Practices

Prashant Kulkarni Asst. Professor, Economics and Public Policy, Indus Business Academy, Bangalore

IBA PUBLICATIONS
IBA Campus Lakshmipura, Thataguni Post, Kanakapura Main Road Bangalore 560062. India

Published By: IBA, Publications Prashant Kulkarni, IBA, Bangalore 2012 Diagrams & Illustrations as credited.

Cover Design & Edited By: Sanjog Behera and Durvankur Suhas Sheth ISBN No. 978-81-920996-8-2 First Edition 2012 All rights reserved. No part of this publication may be reproduced, or transmitted in any form or by any means, electronic or mechanical, including copying, or by any information storage and retrieval system, without permission of the copyright owner. Enquiries concerning reproduction outside the scope of the above should be sent to the address mentioned below.

Citation: The papers part of this edited book may be cited as: Name: Stalking Theory: View through the Prism of Real life Practices

Preface
Research has been my passion. This curiosity has led to dabbling in several fields and my colleagues have been tolerant and even enthusiastic partners in my indulgence. Rarely have been papers which can classified as pure management stream papers as taught in current day B-Schools. Further the spillover is visible in my students adapting to research in quite a big way. Some of those papers have been published in other journals/edited books while many have received acclaim at national and international. I believe and experience has validated that students have the knack of exploring previously unventured domains. We therefore see papers that have captured phenomenon hitherto unexplored in the management stream. The idea for documentation of these papers arose in the discussion with Prof. Subhash Sharma, our Director quite some time ago. The idea was dormant was quite long time but found its awakening a few months when I finally decided to put that effort to document the papers presented all these years. In this process, I thank all the students who have worked with me in research papers. I cannot forget still those night outs in cracking our heads in trying to figure out the analysis and when we did figure out the data, cracking our heads in finding explanations for the anomalies that were encountered. I venture to name all the students whom I have worked in no particular order. Anindita Kundu, Hitesh Taunk, Hemanti Richa, Manish Arora, Surabhi Agarwal, Preeti Laddha, Sarbeswar Rao, Anwit Goswami, Kumar Sushant, Namrata Choudhary, Mandeep Singh, Tushma Singh, Ankisha Rastogi, Kesha Parmar, Jimmy Chheda, RuchikaSoni, Swapna A, Brinda D, Preeti Morla, Swati Lamba, Soumya Ranjan Panda, Nilay Shrivastava, Sneha Sahal, Dinesh Rawat, Madhumita Thakur, Preeti Agrawal, Arpita Nagraj, Sasmita Subudhi, Somlata Sahu, Jisha Balakrishnan and many others. In some cases however, the papers may not have come out for some or the other reason. This book owes its editing, formatting and cover design to the efforts of Sanjog Behera and Durvankur Sheth. I thank our Chairman Sri B.M.L. Jain and our CEO Sri Manish Jain for their support and encouragement all these years. Further without the constant coaxing of Prof. Subhash Sharma, these papers would have been dormant in one corner of my system than being collated as a compilation for future researchers to work. I thank IBA publications for bringing this volume. Ill keep my preface short and let the readers judge the book.

Contents
1. Intellectual Property, Business Models and the Digital Domain: A Survey ................ 2 2. Globalization, Information Economy, Private Corporations and Public Policy:

Addressing the Challenges in the Emerging Economies........................................... 12

3. Does Terror Impact Market Sentiments? View from the Market .............................. 24 4. Does Foreign Direct Investment (FDI) Benefit Host Countries: Uncovering the

Relationship between FDI, GDP and Capital Formation in Host Countries .............. 38
5. Urbanization and Environment: Impact and Implications for Sustainable Development

................................................................................................................................ 52
6. Governance, Market State and Cities ....................................................................... 61 7. Mapping the Poverty-Environment Linkages in the Emerging Economies ............... 74 8. Innovations in Governance: International and National Experiences ........................ 86 9. Does Bank Lending Influence Capital Formation and Agricultural Production ..............

105
10. Agro commodity Prices and Macroeconomics: Exploring the Interlinkages using Co-

integration Model .................................................................................................. 119

11. Weather Risk, Agro Commodity Prices and Macro Economic Linkages: Examining

the Inter-linkages using Co-integration Model ....................................................... 132

12. Supply Chain Management in Fresh Produce Retailing: Evidence from Indian

Retailers ................................................................................................................ 147

13. Supply Chain Management and Working Capital Cycle: Evidence from Companies

.............................................................................................................................. 164
14. Mapping the Success of Organized Food Retailing through the Eyes of Retailers and

Consumers............................................................................................................. 173
15. Does Firm Size Influence Profitability: Evidence from Indian firms ...................... 190 16. Does Budgetary Announcements influence Stock Market Movements? ................. 197 17. Globalization and Indian Companies ..................................................................... 204 18. Mapping the Public Perception about Organic Food .............................................. 219

Intellectual Property, Business Models and the Digital Domain: A Survey1

Prof. Prashant Kulkarni2 With the internet and the accompanying digital revolution challenging the conventional industrial information structure, relationship between various dominant actors stands redefined. Intellectual Property Rights, as originally conceived and subsequently enforced, seems incompatible with the digital business models. Therefore we do see legal battles over what seems on face of it trivial issues. A situation is being resulted where societies priding themselves on free expression and creativity, actually are ending up stifling it. The current paper traces the growth of the digital revolutions, changes in the industry and product structures and surveys the alternative models that safeguard innovator interests and encourages creativity. The effective functioning of the economic activities necessitates the presence of rules and enforcements. The market, with its obvious inabilities to create these rules and enforcements depends upon the government legislation for enactment and enforcement of these rights. Property rights and contractual rights deemed minimum prerequisites to be provided by the state, delineate the sphere of private domain wherein both private institutions and individuals interact with one another. Further, the state is saddled with the responsibility of providing political rights and social rights to its citizens. Internet and the accompanying digital revolution present a challenge to contemporary notions of business, politics and society. Dominant market positions were often achieved through innovations in the product markets. The shift from the production patterns of the industrial economy towards the customized production of the information society has created a dent in the ability of the private corporations to set the agenda for the civil society and the governments. Over 70% of the wealth accumulated in the rich economies is in the form of intangible, knowledge based assets (Gelder 2006). Improvements in quality and productivity accompanied by decreasing costs reiterate the human dependence on the knowledge economy. Access to information remains the preserve of neither the state nor the corporation. The complex relation that has evolved between business strategies, government regulations, and non-government organizations in the information era has profound implications. In popular perception, US have recrafted the rules of the global trade reinforcing the earlier arguments of US shaping up the international order using its privileged position of first mover advantage. Description and tales of Western ignorance vividly described in the colonial literature3, invisibility and neglect of life and death in Africa gets reinforced when

The paper is updated version of the paper titled same that was presented at 2nd IPRs Confluence at SJMSoM, IIT Mumbai. The paper had won Best Paper award at the Confluence. 2 Asst. Professor, Economics and Public Policy, IBA Bangalore 3 See among others, the writings of George Orwell Stalking Theory: View through the Prism of Real life Practice 2|P age

we seek to understand the Western response to AIDS crisis in Africa4. Since it began two and half decades ago, the pandemic has claimed more than 22 million lives, of which more than 70% in sub-Saharan Africa alone. In comparison, the death rate because of AIDS in the Western world is showing a decrease because of the availability of life prolonging drugs. The anti-retroviral therapies are pretty expensive and beyond the reach of citizens in Africa who survive on one or two dollars a day. Drug prices remain high on account of the patent laws that prevail in the Western world. The pharmaceutical companies have sought to take patents on all aspects of the compound, including the compound itself, dosage methods and processes of making it. The whole idea of patent protection is to encourage innovation but the protection lasts well beyond the term of any single patent and keeps cheaper generic manufacturers out of the market for as long as possible. Moreover it is often observed that patent monopoly and thus high drug prices in developing world results in selling smaller numbers of expensive medicines to a wealthy class, rather than trying to distribute large numbers of cheap medicines at a few cents a day to the many poor5. TRIPS are one of the most important documents signed on intellectual property over the last century or so. In setting minimum standards in copyright, trademarks, geographical indications, industrial designs and layout-designs of integrated circuits, TRIPS explicitly recognized knowledge as a private good rather than a public good. Further, it rolled out a process of globalizing and standardizing the set of intellectual property principles it contains. TRIPS aims at influencing states in providing effective protection to digital technology and biotechnology and thus the process for transfer of control of these resources to the private corporations that have enormous resources at their disposal. With the US being the largest net exporter of intellectual property in the world, TRIPS effectively leads to increased concentration of power with the leading American corporations6. Violations often result in severe consequences7. IP Literature and Traditional Business Models Discourses in Intellectual Property, grounded either in sociological or legal foundations rests on certain assumptions, all open to questioning. The first assumption is premised on the
Strong arguments can be found in Drahos and Braithwaite (2002), Information Feudalism: Who Owns the Knowledge Economy, Earthscan Publishing 5 The decision of the Mandela regime to allow parallel imports became a trade dispute between US administration and South Africa. European governments and the US both publicly and privately lobbied for removal of this restriction. The provisions of TRIPS were quoted to allow patents to function without what the companies described as discrimination. However the litigation that pharmaceutical companies wanted to pursue was withdrawn and matter settled due to public pressure. 6 Nakamura (2003) shows that private US firms invest at least one trillion US dollars a year in intangible assets and that the market value of the USs capital stock of intangible assets is at least 5 trillion US dollars. 7 Tower publications dominated the text book market in South Korea. They reproduced tens of thousands of American text books with little or no royalty payments and license fees to the original American publishers. With the US text books expensive and beyond the reach of many students, the story is familiar across Asia. In this instance however the US authorities converted into a trade dispute and pressurized the South Korean government to close down Tower publications. Its founder was jailed sending shockwaves in Seoul and effectively closed down the reproduction market for text books and other publications. Further arguments and implications found in in Joe Karaganis (Ed) (2007), Structure of Participation in Digital Culture, Social Science Research Council Stalking Theory: View through the Prism of Real life Practice 3|P age
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argument that socially and juridicially the system is sound. Given the system is sound; it will work well in the future too and thus independent of the specifics of time and place. Finally, IP Literature assumes the existence or possibility of other alternatives8. Arguments favoring a balance between right holders limited-term monopoly and public benefit of unhindered access to scientific records and cultural traditions ignore a key fact that the rights do not reside with the creators but are owned by publishers and media corporations. Secondly copyright products increasingly are going digital. Digitization makes possible for a vendor to restrict the access of his products. A user can reproduce the goods immediately, infinitely and at zero marginal costs. Todays battlefield in the IP domain being fought courtrooms and media and the society is resolving these conflicting tendencies of producer and user rights. A cursory glance at digital expansion will place these battles in a clear light. The penetration of internet was swifter than what even its most enthusiastic supporters expected it to be. Private actors though play dominant role, the governments continue to rule the internet. While the cross border regulations have weakened and cross border flows have been liberalized, the governments continue to assert their authority over cyberspace to defend the pre-internet era interests and functions. Internet governance has led to a consensus driven global rule-making. Individual governments have asserted authority, often incompatible with the global realities and domestically rooted solutions have been advanced globally. Moreover, the asserting of the authority through the extraterritorial application of domestic rules adds an element of complexity. Even both the US and European authorities are divided on the mode of approach towards responding to the digital challenges9. Online commerce and communication are perceived to be relatively frictionless. However the interlocking systems of regulating information follow enforced by the national governments contradicts this perception (Cohen 2002). Yet, the digital network technologies lead to considerable reduction in costs associated with the traditional offline transactions. Profit, being the essence of any information entrepreneur, evolves from the presence of frication in online commerce. The regime of intellectual property rights is widely believed to create this friction by allowing proprietary control over access to information. Further the belief that it will leverage that control to enforce a broad range of restrictions on information usenot only by copyists and other free riders, but also by citizens, consumers, critics, and legitimate competitors can reshape the ways in which online interaction is structured reinforces the earlier argument. The production and exchange of information, knowledge and culture have depended on the principles of industrial information economy10 for the last two hundred years. However, the
A detailed analysis on the merits and demerits of these arguments are found in The Copy/ South Dossier (Alan North eds.) Copy/South Research Group, 2006 9 While the European authorities more favor a stricter approach towards internet, US favor the market based approach. Knowledge based industries in US were successful in lobbying the US administration to create a new regime for Intellectual Property Rights (IPRs) namely the TRIPS. The regime was supposed to consolidate the position of the US industries like pharmaceutical, biotechnology, software, entertainment among others. However the going for these businesses is not smooth in the digitized world. 10 The term introduced by Yochlai Benkler (2006). Refer Benkler, Y. The Wealth of Networks, YaleUniversity Press Stalking Theory: View through the Prism of Real life Practice 4|P age
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growth and spread of information technology has resulted in structural shift in the way information is produced, organized and exchanged. These shifts permeating through the society have the potential to transform the control of information and knowledge from the complex organizations to the citizens, consumers and autonomous individuals of cultural, social and political groups (Benkler 2006). These changes have been accompanied by the new opportunities in the production and marketing of information, knowledge, and culture. There is a shift in the dominance of the market and proprietary production towards non market and non-proprietary production, both by individuals alone and by cooperative efforts in a wide range of loosely or tightly woven collaborations. These newly emerging practices are reported from diverse areas as software development and investigative reporting, avant-garde video and multiplayer online games. Instances can be cited from Wikipedia to Gigapedia to Napster to Linux to P2P networks among other examples. They signal the first steps in an information order presenting a greater freedom to individuals in decision making in the information economy. Threatened by the emergence of individual and cooperative non market production of information and culture, the order established by the industrial information economy is beginning a series of battles to protect its turf. The redistribution of property rights into the hands of few private corporations and media conglomerates place them in the central command of the marketing resulting in asymmetry in the market competition. It further compromises on the liberty of scientific and social which is in the hands of individual scientists. The direction and outcome these produce over the next few years are likely have a significant effect on how we come to know what is going on in the world we occupy, besides the degree and extent of that control in the hands of autonomous individuals and participants in cultures and communities (Benkler 2006). The ease with which the digital content can be downloaded, created, modified and distributed has destabilized the traditional business models. New business models revolving around new distribution networks have emerged. Chris Anderson (2005) introduces the term Long Tail11 for this model which has been adopted successfully by Amazon. In the traditional brick and mortar model, in a situation of high degree of choice, a large population of customers and negligible stocking and distribution costs results in a selection and buying pattern that reflects a power law distribution curve, or Pareto distribution, instead of the expected normal distribution curve. A natural inference is the creation of certain degree of inequality by favoring the upper 20% of the items ("hits" or "head") against the other 80% ("non-hits" or "long tail"). The logic is however inverted in the click and mortar model. Anderson rests his case on the premise that products that are in low demand or have low sales volume collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters. This is possible in a scenario where the store or distribution channel is large enough. No matter the decrease in stocking and distribution costs, the physical space acts as a hindrance in storing large stock of items at a given place. Conversely the digitization of content results in near infinite storage of material with almost zero marginal costs. He finds support in research by Brynjolfsson and others which show a
Chris Anderson, (2005), The Long Tail: Why the Future of Business is Selling Less of More, Hyperion Publishing Stalking Theory: View through the Prism of Real life Practice 5|P age
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significant portion of Amazon.com's sales coming from obscure books which are generally not available in brick-and-mortar stores12. Alternatives in the Digital Domain Before examining the alternatives, an understanding of the characteristics of digital goods will facilitate the grasp of economics of digital goods. Danny Quah (2002) demonstrates five characteristics of the digital goods. Digital goods are non-rival, infinitely expansible, discrete, spatial, and recombinant. Non rivalry indicates a use by one agent will not degrades it value and utility to another agent13. To Quah, a good is infinitely expansible when it can be produced in large numbers at zero marginal costs. Digital music and images, being produced in large numbers at zero costs and free redistribution over the internet, easily send the music companies into a state of apprehensive excitement14. Digital goods being discrete imply an indivisibility of the goods. Since the digital goods are not available as fractions, the significance rests in the instantiation of the goods. However the production of the first copy requires considerable investment. Further digital goods, being a spatial, are nowhere and everywhere at the same time. Recombinant in essence means the production of new digital goods by merging antecedents and further having features absent in the original, parent digital goods. Modern IPR law was not designed keeping the digital goods in mind. Copyright laws have applied not to the underlying ideas but the expression of the idea. In a competitive market, the price of digital goods would equal its marginal costs and thus zero. Tensions and tradeoffs result when a conflict emerges between individual reward and social distributional efficiency. In resolving these tensions, given the nature and properties of the goods, the author presents two alternative models from literature. InnoCentive is an "open innovation" company which opens research and development problems to the general public for solutions. It gives cash awards for the best solutions to solvers who meet the challenge criteria. The phenomenon known popularly as crowdsourcing serves as an example for marrying open source principles with scientific R&D projects. As opposed to the outsourcing which involves delegating the work to a company, crowdsourcing involves assigning the work to an undefined, generally large group of people, in the form of an open call. Similar examples exist across the domain. Each of these similar examples represents a business model that the firms have leveraged to flourish.

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A similar case is of Netflix whose analysis of movie rentals show that the total volume of low popularity items exceeds the volume of high popularity items. 13 Quah argues the excludability is ancillary to the fact that good is rival or non rival. To him, it arises from law or from technology or from both but will not itself be intrinsic to digital goods. For further analysis read Danny Quah (2002), Digital Goods and New Economy, LSE Economics Department, http://econ.lse.ac.uk/staff/dquah/ 14 For historical analysis of non rivalry and infinitely expansible goods, see the writings of Thomas Jefferson. Stalking Theory: View through the Prism of Real life Practice 6|P age

Intellectual Property is related to Business Models Chesbrough (2003, 2006, and 2007) locates the business model as an intersection and interaction of value creation and value capture15. Chesbrough finds that firms utilize only 525% of their patented technologies. He attributes this to the inefficiencies of the innovation market. With the costs of development of technologies being high and potential value of those goods being difficult to determine, it is unsurprising to find these technologies dormant. This is a consequence of a firms inability to charter unmarked terrains requiring an unfamiliar configuration of assets, resources and positioning. Firms tend to stick on with known patterns and ideas that fit with these patterns often get promoted. Therefore a question arises about the intellectual property generated and unutilized. A natural outcome would be to favor the abandonment of innovation by the firm. This gains credence if one observes the cost benefit analysis of product development, design and marketing. To Chesbrough, rising costs of development coupled with shorter product life cycles, investments in innovations are increasingly difficult to be justified16. In a world dominated by these scenarios, IPRs appear paradoxical. A way out as suggested by Chesbrough is the adoption of open business models17. Chesbrough believes that management of Intellectual Property (IP) depends on the innovation paradigm the firm chooses to operate. In a Closed Innovation paradigm, the firm creates its ideas, monetizes them and excludes them from usage by others. Open business Models, on the other hand, recognize the value of ideas being generated outside the boundaries of the firm. If there is no dearth of ideas outside, the firm must leverage those ideas and thus become a buyers and seller of Intellectual property. This leverage is possible if the firms business model is adapted to capitalizing on these paradigms. Using examples ranging from Procter and Gamble, Air Products, IBM among others he demonstrates how firms have leverage their business models in capturing value from other businesses18. He is critical of IP enthusiasts who argue that US companies sit on a gold mine of Intellectual Assets and those assets have an economic value left underutilized. It is not per se the IP has latent economic value but the realization of that value is subject to the business model firm adopts and operates. Technology does not any independent value but is commercialized only the business model used to employ them. Business-dependent value of IP is crucial for its effective utilization and thus the traditional IP literature is myopic when it fails to incorporate

Value creation refers to a series of activities yielding a new product or a service with value addition at each stage. A firm may enjoy competitive advantage by establishing an unique asset or resource or position within that set of activities and is called as value capture. 16 When Intel decided to build a semi-conductor fabrication layout in Israel, it cost $3 billion. Just twenty years before, its cost would be just around 1% of the current costs. The life cycle of product and thus the shelf life have dramatically fallen. The hard disk drives whose shelf life was 3-6 years now has fallen to a few months. 17 For detailed analysis, Henry Chesbrough, Why companies should adopt open business models, MIT Sloan Management , 2007) 18 Ibid. On the other hand, a classic example of failure to leverage the IP value is Xerox PARC. Forerunner of several products today, PARC failed to leverage the Intellectual assets generated in terms of increased profits for Xerox. See a detailed explanation in Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, HBS Press, 2003 Stalking Theory: View through the Prism of Real life Practice 7|P age

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this dependence paradigm. Firms must either create a business model to capture the value or let someone elses business model govern the value realizable by innovation. Piracy is Good and Encourages Creativity As YouTube, Vimeo among others continue in soar in popularity, amateur creators are increasingly at the receiving end of the lawyers representing leading media firms and conglomerates. The crime of these creators is merely exhibiting their creativity which to Jack Valenti represented a brand of terrorism. Since this new creativity captures or uses the creativity of the old, copyright owners fight back using the copyright legislations to prevent the unauthorized production of expression. Exceptions like Viacom might exist but enough owners have insisted on permission to have touched and hence taint diverse range of creative activities. Lawrence Lessig19 believes that in the war between copyright owners (media and entertainment firms) and peer to peer file sharing activities, amateur creativity has become a collateral damage. To Lessig, the remix creators bring back the culture and tide of amateurism that was once feared to perish in the onslaught of the record players in the early 1900s. He believes the return of this remix culture has the potential to encourage economic growth in the US, and inspire a new model and means of learning for a generation that has no time to read a book but spends scores of hours each week watching, listening and creating new media. He rues the fact the copyright wars in targeting the pirates, criminalize creativity, drives piracy underground and in the long run become corrosive to the economy and the society. Quoting the example of Brazil, he argues that the state by inspiring free culture and free software presents an alternative model to proprietary system currently dominant. The International Intellectual Property Alliance (IIPA) representing the US copyright interests has long argued that the piracy in Brazil costs US industries $1 billion per year. Faced with US pressure to target the pirates, Brazil developed an alternative model20. The first was the adoption of free software. This meant respecting Microsofts rights as also encouraging alternative software models that remain unhindered from copyright laws. Further, a project called Points of Culture (Pontos de Cultura) was started to facilitate establishing free software studios, built with free software, in a thousand towns and villages throughout Brazil. The objective is to enable people in creating culture making use the tools supporting free cultural transmission. The outcome would be an archive of Brazilian music, stored in digital form, and governed by a license inspired by free softwares GPL. The Canto Livre project will free music made in Brazil, for Brazilians (and the world) to remix and re-create. Like freesoftware project of Stallman and others, it seeks to achieve the freedom on the back of copyright. To achieve this freedom, Lessig suggests five changes to copyright laws retain and foster creativity and amateurism21. The first prescription is to deregulate amateur remix. Digital technologies enable and empower society to create and recreate culture and thus a cultural
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Lawrence Lessig, In Defense of Piracy, Wall Street Journal October 11, 2008. Lessig discusses it in detail in Lawrence Lessig, The People Own Ideas, Technology Review, June 2005. 21 A detailed analysis is found in Lawrence Lessig, Remix, Penguin Press, 2008 Stalking Theory: View through the Prism of Real life Practice 8|P age

vitality is maintained. While it is possible that few might profit from others creativity, models can exist to compensate the original creators. Secondly he advocates the deregulation of the copy. He feels the law is obsessed with copy and should instead focus on the uses of the copy like public distribution of the work. Uses rather than copy itself are connected to the economic incentives of the copyright. Further he calls for simplification of the copyright laws invoking the First Amendment. Besides, he argues that copyright, in the present form being inefficient and further trivialized by the advent of technology, there needs to be an inculcated a sense of efficiency and clarity in the ownership of the copyrights. Finally he calls for decriminalizing the copyright act and instead focuses on alternative models that ensure the payment and revenue streams are generated for the creators. A New Business Model I conclude the survey by analyzing a business model in the entertainment industry that is successful and also radically altered the dimensions and structure of the music industry. Business modeling process is an outcome of a complex set of interdependencies and interrelations, seeking to balance the often divergent interests of the artists, manufacturers, consumers and technologists in the industry. Apples iTunes represent an attempt to build a viable and sustainable model of online music. Music industry revolves around three processes viz. creation of music, marketing of music and finally distribution of music. In the traditional structure, labels dominated the scene commanding 80-90% of the profits by leveraging their strengths in marketing and distribution. Napster and much other peer to peer software altered this structure upsetting the profitability of these labels. Long legal battles ensured the collapse of Napster but could not kill the movement it had started. To become a key player in digital integration Steve Jobs of Apple saw an opportunity in online music and launched iTunes Music Store. The store lets customers search a catalog of over 700,000 tracks, including music from all five major labels. With one click, users could now purchase the songs and download them into their iTunes music library for $0.99 cents per song and $9.99 per album. Further there were no subscription fees. Moreover, songs were downloaded in digital quality and were allowed to be burned onto CDs for personal use. While it could be played on up to three computers, there were no restrictions as to its usage on portable players such as Apples iPod. Access to the store was embedded in Apples iTunes software which includes a music player, CD ripping and burning tools, an interface to the iPod, free Internet radio stations, and a limited streaming audio feature called Rendezvous22. The success of iTunes(it reportedly sold one million songs in the first week of its launch) has led to numerous other players in the industry including e-music, MSN Music and Rhapsody. In a world of DRM, Apple has a found a way of playing by the rules, yet letting the consumers enjoy the autonomy of choice and use and freedom from the legal hassles that have engulfed ordinary music lover.
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A detailed discussion of the complex interrelationships in the online music industry and its interplay with the copyright laws can be found in William Fisher III, iTunes: How Copyright, Contract and Technology Shape the Business of Digital Media- A Case Study, Berkman Center for Internet and Society, 2004. 9|P age

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Conclusions We are in the midst of change. Digital technologies serve as engines of cultural innovation. Their influence stems from the virtualization of group networks and social identities like Facebook and extends to the digital convergence of textual and audio-visual media. The growth and adoption of electronic commerce gets inter-wined with the development and strengthening of intellectual property legislations. The global nature of internet is evident in the fact that while service providers are located in industrialized world, the benefits are derived across developed and emerging countries alike. Limitations arise for direct command and control mechanisms to flourish. Delegating the regulatory functions depend on the presence of effective stick and carrot policies. Fears that private sector may not enforce the rules and regulations strictly deter the governments from delegating the authority to these bodies. The lack of clarity in the relationship of government and corporation may lead to issues like accountability. This becomes more pronounced when the control systems cut across borders. Technology is per se neutral and all the pillars viz society, government and corporations will make use of it in pursuit of maximization of their goals. Though the search for paths of sustainable development in the global economy seems difficult, a clearer sense of the various ways in which value chains of global system are administered and evolved will enable the achievement of the desired outcomes. Borrowing from game theory, it is the optimal solution that seems to evade the players as of now. How best they arrive at reconciling and adapting their interests will determine the future of the digital era. References 1. Smith, K., (2000) What is the knowledge economy? Knowledge-intensive industries and distributed knowledge bases, www.druid.dk/summer2000/ Gallery/smith.pdf 2. Steven Weber, (2000) The Political Economy of Open Source Software, Berkeley Roundtable on the International Economy 3. Yochai Benkler (2001), The Battle over the Institutional EcoSystem in the Digital Environment, Communications of the ACM, February 4. Peter Drahos, John Braithwaite, (2002), Information Feudalism: Who Owns the Knowledge Economy, Earthscan Publications 5. Danny Quah (2002), Digital Goods and New Economy, LSE Economics Department, http://econ.lse.ac.uk/staff/dquah/ 6. Julie Cohen (2002), Intellectual Property and Information Economy in Lehr and Pupillo (eds), Cyber Policy and Economics in the Internet Age, Kluwer Academic Publishers. 7. Henry Chesbrough (2003), Open Innovation: The New Imperative for Creating and Profiting from Technology, HBS Press 8. Lessig, L. (2004), Free Culture: How Big Media Uses Technology and the Law of Lockdown Culture and Control Creativity, Penguin Books, New York

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9. William Fisher III, iTunes: How Copyright, Contract and Technology Shape the Business of Digital Media- A Case Study, Berkman Center for Internet and Society, 2004 10. Julie Hennessey, Apple Computer, Inc.: Think Different, Think Online Music, Harvard Business Case, 2004 11. Lessig, L. (2005), The People Own Ideas, Technology Review, June 2005 12. Mikko Valimaki, (2005), The Rise of Open Source Licensing: A Challenge to the Use of Intellectual Property in the Software Industry, Turre Publishing 13. Graham Dutfield, (2005), Mind Sharing, Foreign Policy, March/April 14. Thomas Friedman , (2005), The World is Flat: A Brief History of the Twenty First Century, Farrar, Straus and Giroux 15. Kenneth Neil Cukier, (2005), Who will Control the Internet, Foreign Affairs, NovDec 16. Chris Anderson, (2005), The Long Tail: Why the Future of Business is Selling Less of More, Hyperion Publishing 17. Alan Story, Colin Darch and Debora Halbert (2006), The Copy/South Dossier, The Copy/South Research Group 18. Benkler, Y., (2006), The Wealth of Networks: How Social Production Transforms Markets and Freedom, Yale University Press. 19. Henry Farrell, (2006), Regulating Information Flows: States, Private Actors and ECommerce, Annual Review of Political Science 2006. 9:35374, First published online as a Review in Advance on Feb. 17, 2006 20. Adams, A., (2006), Introduction: Valid Protection or Abusive Control?, International Review of Law, Computers and Technology, Vol. 20, No. 3, pp. 233-237 21. Lessig, L. (2006), Code, Basic Books 22. Nicolla Lucchi, (2006), Digital Media and Intellectual Property: Management of Rights and Consumer Protection in a Comparative Analysis, Springer Publishing 23. Chesbrough, H. (2007), Why Companies Should Have Open Business Models, MIT Sloan Management Review, Winter 24. Joe Karaganis (Ed) (2007), Structure of Participation in Digital Culture, Social Science Research Council 25. David Kravets, (2008) Recording Industry Decries AM-FM Broadcasting as a form of Piracy, http://blog.wired.com/27bstroke6/2008/06/recording-indus.html, Accessed on June 24, 2008 26. Prashant Kulkarni et al (2008), Globalization, Information Economy, Private Corporations and Public Policy: Addressing the Challenges in the Emerging Economies, Presentation at VI AIB International Conference, IIM-Indore, August 11-13 27. Lessig, L. (2008), In Defense of Piracy, Wall Street Journal, October 11, 2008 28. Lessig, L. (2008), Remix, Penguin Publishing 29. www.wipo.int

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Globalization, Information Economy, Private Corporations and Public Policy: Addressing the Challenges in the Emerging Economies23
T.V.P.Chowdry24 Prashant Kulkarni25 Anantha Murthy N.K26 Information and knowledge are decisive in human development. Since the industrial revolution, information architecture designed on the principles of industrial economy has been predominant in the functioning of the society. The technological advances in Internet and Telecommunications within the society aided the shift from industrial economy to a services based economy are creating a foundation for a new order of information and knowledge access, control and transfer. The implications on the functioning of the governments, corporations and society notwithstanding, remains uncertain if these forces will lead to strengthening the order of information feudalism27 or would they create conditions for decentralization and diffusion of information resources creating a new order of social production and exchange at the core of the economy rather than the periphery28. We examine the implications of these structural changes on the governments, private corporations and society in the context of emerging economies. The effective functioning of the economic activities necessitates the presence of rules and enforcements. The market, unable to create these on their own depends upon the government legislation for enactment and enforcement of these rights. Property rights and contractual rights are deemed minimum prerequisites to be provided by the state. These rights delineate the sphere of private domain wherein both private institutions and individuals interact with one another. Besides, the state provides political rights and social rights to its citizens. The arrival of internet and the accompanying digital revolution is a catalyst for economic change. Asserting the pace of growth of information technology presents a challenge to contemporary notions of business, politics and society faces little or no disagreement. The end of the Cold War has redistributed the powers between the state, market and society. The advantage the nation state had over the rest since the Treaty of Westphalia has eroded conceding the space to the markets the society. Dominant market positions were often achieved through innovations in the product markets. The shift from the production patterns of the industrial economy towards the customized production of the information society has created a dent in the ability of the private corporations to set the agenda for the civil society
23

The paper is an updated version of the paper presented at the AIB International Conference at IIM Indore August 2008 24 Sr. Professor, Technology, Management and Design 25 Asst. Professor, Economics and Public Policy, IBA Bangalore 26 Faculty, Quantitative Methods and Operations Research 27 The term was first introduced by Peter Drahos in Information Feudalism ( 2002), Earthscan Publications. 28 The idea of social production and exchange replacing the market based industrial information economy was first mooted by Yochai Benkler (2006) in Wealth of Networks, Yale University Press. Stalking Theory: View through the Prism of Real life Practice 12 | P a g e

and the governments. Access to information is no longer the preserve of the nation state or the corporations. However, it does not imply that the civil society has an upper hand. The complex relation that has evolved between business strategies, government regulations, and non-government organizations in the information era has profound implications. This serves as the backdrop of the study. The journey from radio to television to wireless broadband has accelerated the diffusion of information within the society. Over 70% of the wealth accumulated in the rich economies is in the form of intangible, knowledge based assets (Gelder 2006). Improvements in quality and productivity accompanied by decreasing costs reiterate the human dependence on the knowledge economy. State of Current Research Globalization gets associated with a set of characteristics that alter the distribution of political capacity between state and non-state actors. Besides the redistribution of the political capacity, it influences the relationship between different political levels of decision making. Globalization often implies erosion in the importance of territorial jurisdiction. Mobility of capital, access to and control over transnational communication, financing, and production networks are some of the reasons behind this (Scholte 2000). The gigantic proportions to which the leading corporations have grown in the course of takeovers and mergers, indicates an emergence of a conflict between the government resources and private corporations. A cursory glance at literature reveals two approaches in understanding and analyzing global governance. The functionalistic approach, originates from the notion that global governance is the response to the problems emerging from globalization. Questioning the nature of duties MNCs can take over and perform and further their abilities to perform their tasks, it argues for co-operative solution between both the government and the private actors (Rosenau/Czempiel 1992, Messner/Nuscheler 1996, 2003). The power theoretical approach stems from the notion that global governance is a consequence of the power shift from the traditional state actors to non-state actors as a result of globalization. It argues that globalization gives new opportunities while setting limitations for both the actors in their pursuit of their interests (Hewson/Sinclair 1999, Fuchs 2005a, Levy/Newell 2004). Though both the perspectives are moving closer to each other they yet differ on focus and approach29. The early years of Internet era seemed to promise radical changes in the system of governance. In his 1996 Declaration of the Independence of Cyberspace, John Perry Barlow30 asserted that the governments neither had a moral right to rule the cyberspace nor possessed the means to enforce its control. David Johnson and David Post (1996) foresaw a rise of an electronic medium which would cut across geographical boundaries and create entirely new phenomena. Implied was the creation of new and unique set of legal rules since the existing
29

This argument is elaborated in Doris Fuchs (2006) Transnational Corporations and Global Governance: The Effectiveness of Private Governance 30 John Perry Barlow is an American poet, essayist, and retired Wyoming cattle rancher, political activist and former lyricist for the Grateful Dead. He is the founder of Electronic Frontier Foundation and a cyber libertarian Stalking Theory: View through the Prism of Real life Practice 13 | P a g e

rules based on national sovereignty would become redundant. They reasoned that Internet constituted a separate and independent jurisdictional space. The notion that control of the internet was best left to private sector spread to the governments too which later resulted in the creation of ICANN31. The penetration of internet was swifter than what even its most enthusiastic supporters expected it to be. Private actors though play dominant role, the governments continue to rule the internet. While the cross border regulations have weakened and cross border flows have been liberalized, the governments continue to assert their authority over cyberspace to defend the pre-internet era interests and functions. Internet governance has led to a consensus driven global rule-making. Individual governments have asserted authority, often incompatible with the global realities and domestically rooted solutions have been advanced globally. Moreover, the asserting of the authority through the extraterritorial application of domestic rules adds an element of complexity. Even both the US and European authorities are divided on the mode of approach towards responding to the digital challenges. While the European authorities more favor a stricter approach towards internet, US favor the market based approach. Knowledge based industries in US were successful in lobbying the US administration to create a new regime for Intellectual Property Rights (IPRs) namely the TRIPS. The regime was supposed to consolidate the position of the US industries like pharmaceutical, biotechnology, software, entertainment among others. However the going for these businesses is not smooth. Many challenges confront these businesses in this digitized world. In popular perception, US have recrafted the rules of the global trade reinforcing the earlier arguments of US shaping up the international order using its privileged position of first mover advantage. Few have argued that the initial advantage seems to have dissipated and the self-regulation has tied the US hands. In fact states which applied direct suasion to relevant private players have shown some success. The degree to which the states can influence private actors alters the dimension of international and domestic political outcomes. Further, the conventional role of the state as a protector of social values gets undermined by the dismantling of cross border barriers in the economic and informational sphere. Limits in the state power to restrict access to certain types of information to its citizens when they are available to citizens of other states leads to the doubts about of freedom of domestic policy choices. The non rivalrous nature of information, value addition model of information economy coupled with low cost of inventory and storage and zero or negligible marginal costs merit a detailed examination of the interaction of the various arms of the information economy. While we agree the current information architecture favors the US industry, we confine ourselves to the interactions between the governments, private corporations and societies in the era of information economy. Online commerce and communication are perceived to be relatively frictionless. However the interlocking systems of regulating information follow enforced by the national governments
31

The battle for control of internet is described in depth in Kenneth Neil Cukier, (2005), Who will Control the Internet, Foreign Affairs, Nov-Dec 14 | P a g e

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contradicts this perception (Cohen 2002). Yet, the digital network technologies lead to considerable reduction in costs associated with the traditional offline transactions. Profit, being the essence of any information entrepreneur, evolves from the presence of frication in online commerce. The regime of intellectual property rights is widely believed to create this friction by allowing proprietary control over access to information. Further the belief that it will leverage that control to enforce a broad range of restrictions on information usenot only by copyists and other free riders, but also by citizens, consumers, critics, and legitimate competitors can reshape the ways in which online interaction is structured reinforces the earlier argument. The production and exchange of information, knowledge and culture have depended on the principles of industrial information economy32 for the last two hundred years. However, the growth and spread of information technology has resulted in structural shift in the way information is produced, organized and exchanged. These shifts permeating through the society have the potential to transform the control of information and knowledge from the complex organizations to the citizens, consumers and autonomous individuals of cultural, social and political groups (Benkler 2006). These changes have been accompanied by the new opportunities in the production and marketing of information, knowledge, and culture. There is a shift in the dominance of the market and proprietary production towards non market and non-proprietary production, both by individuals alone and by cooperative efforts in a wide range of loosely or tightly woven collaborations. These newly emerging practices are reported from diverse areas as software development and investigative reporting, avant-garde video and multiplayer online games. . Instances can be cited from Wikipedia to Gigapedia to Napster to Linux to P2P networks among other examples. They signal the first steps in an information order presenting a greater freedom to individuals in decision making in the information economy. Threatened by the emergence of individual and cooperative non market production of information and culture, the order established by the industrial information economy is beginning a series of battles to protect its turf. History has been the witness to these backlashes from the established order in the past too. The redistribution of property rights into the hands of few private corporations and media conglomerates place them in the central command of the marketing resulting in asymmetry in the market competition. It further compromises on the liberty of scientific and social which is in the hands of individual scientists. The direction and outcome these produce over the next few years are likely have a significant effect on how we come to know what is going on in the world we occupy, besides the degree and extent of that control in the hands of autonomous individuals and participants in cultures and communities (Benkler 2006). The Upward Push As narrated above instances abound on the diffusion of internet technologies and democratization of information production. The scope for disruptive innovation is immense and across the domains. Few instances are sufficed to buttress the point.
32

The term introduced by Yochlai Benkler (2006). Refer Benkler, Y. The Wealth of Networks, YaleUniversity Press 15 | P a g e

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The music industry traditionally functioned on the sales of CDs wherein the records are compiled on a CD and sold to the consumers. Choice was limited. Besides, the recording industry and radio companies have squared off for decades on issues of royalty payments by both AM and FM radio broadcasters to singers, musicians and their labels33. Now technology has disrupted the traditional discussion on the industry. P2P networks, iPods and satellite radio have changed the way the music is listened to. Napster was the first widely-used peerto-peer sharing service, resulting in profound impact on how people, especially university students, used the Internet. Its technology allowed music fans to easily share MP3 format song files with each other. The music industry was quick to respond and accused the company of massive copyright violations. Although the original service was shut down by court order, the companies could not prevent the emergence of the decentralized peer-to-peer file-sharing programs, which have been much harder to control. Apple capitalized on this phenomenon further revolutionizing the access to musical content. Persuading the top music companies to license their tracks it was made available on its iPod. It was sold through its iTunes stores on pay per download service. Amazons deal with Sony BMG Music Entertainment to offer digital downloads of music without copy protection on Amazon further supports the shift of power from the firms to the individuals. Thomas Friedman considers the emergence of open sourcing as the most disruptive phenomenon of the internet era34. Communities come together and collaborate on online projects voluntarily without expectation of a monetary benefit. In the industrial information economy system, the computer software functioned in an IPR regime that prohibited the reproduction, modification, improvisation and redistribution of the versions. The system was designed to encourage innovation as lack of protection would simply offer no incentive for an innovator to create something original or even improvise the existing version. Open source movement strikes at the very heart of this assumption. The essence of open source software is that source code is 'free' implying the software code is open, public and non-proprietary. Open Source software is distributed with its source code. The Open Source Definition rests on the following features. The first is the permitting free re-distribution of the software without royalties or licensing fees to the author. Secondly the source code to be distributed with the software or otherwise made available for no more than the cost of distribution. Further it permits modification of the software and deriving other software from it. Finally it allows the users to redistribute the modified software under the same terms. Open Source projects range from small utilities and device drivers to Sendmail (an e-mail transfer program that almost completely dominates its market) to WWW servers (Apache) and a full operating system -- Linux. Contributions of hundreds, sometimes thousands of developers, who work from around the world in a seemingly unorganized fashion, who in turn do not receive any direct pay or compensation for their contributions are driving the phenomenon. Weber (2000)
33

See David Kravets, Recording Industry Decries AM-FM Broadcasting as a form of Piracy,

http://blog.wired.com/27bstroke6/2008/06/recording-indus.html, Accessed on June 24, 2008

34

Thomas Friedman , (2005), The World is Flat: A Brief History of the Twenty First Century, Farrar, Straus and Giroux 16 | P a g e

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puts the success of Linux and Apache as an empirical demonstration of building, developing and maintaining a large complex system of code in a non-proprietary setting. Further the work is highly parallel and relatively unstructured. More people use Wikipedia than Amazon or eBay. It ranks consistently in the top ten of the most accessed websites in the world. Its 2.2 million articles, and very often the first hit in a Google search, and further no distractions in the form of advertisements serves as a popular attraction for the any internet user. Its growth and success has been attributed to its tapping of the heretofore unmarshaled energies of the un-credentialed. Wikipedia became the point of convergence for the self-taught and the expensively educated. The cranks co-existed with the mainstreamers and further nobody knew who really knew what he or she was talking about, because everyone's identity was hidden under anonymity. However all were on a mission to create an end product that made legible sense besides offering a scholarly take. It was to be reference point for any topic on earth and rival even the Encyclopedia Britannica. While Encyclopedia Britannica cost a lot of money, Wiki was free besides being unpromotional and neutral. The need for the outcome of all edits to fit together as readable, unemotional sentences mutedto some extentnatural antagonisms. The ease with which the digital content can be downloaded, created, modified and distributed has destabilized the traditional business models. New business models revolving around new distribution networks have emerged. Chris Anderson (2005) introduces the term Long Tail35 for this model which has been adopted successfully by Amazon. In the traditional brick and mortar model, in a situation of high degree of choice, a large population of customers and negligible stocking and distribution costs results in a selection and buying pattern that reflects a power law distribution curve, or Pareto distribution, instead of the expected normal distribution curve. A natural inference is the creation of certain degree of inequality by favoring the upper 20% of the items ("hits" or "head") against the other 80% ("non-hits" or "long tail"). The logic is however inverted in the click and mortar model. Anderson rests his case on the premise that products that are in low demand or have low sales volume collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters. This is possible in a scenario where the store or distribution channel is large enough. No matter the decrease in stocking and distribution costs, the physical space acts as a hindrance in storing large stock of items at a given place. Conversely the digitization of content results in near infinite storage of material with almost zero marginal costs. He finds support in research by Brynjolfsson and others which show a significant portion of Amazon.com's sales coming from obscure books which are generally not available in brick-and-mortar stores. A similar case is of Netflix whose analysis of movie rentals show that the total volume of low popularity items exceeds the volume of high popularity items. InnoCentive is an "open innovation" company which opens research and development problems to the general public for solutions. It gives cash awards for the best solutions to
Chris Anderson, (2005), The Long Tail: Why the Future of Business is Selling Less of More, Hyperion Publishing Stalking Theory: View through the Prism of Real life Practice 17 | P a g e
35

solvers who meet the challenge criteria. The phenomenon known popularly as crowdsourcing serves as an example for marrying open source principles with scientific R&D projects. As opposed to the outsourcing which involves delegating the work to a company, crowdsourcing involves assigning the work to an undefined, generally large group of people, in the form of an open call. Resistance from the Top However the going is not smooth for the proponents of mass social production. The private corporations as we saw in the case of Napster offer a strong resistance. Description and tales of Western ignorance vividly described in the colonial literature36, invisibility and neglect of life and death in Africa gets reinforced when we seek to understand the Western response to AIDS crisis in Africa37. Since it began two and half decades ago, the pandemic has claimed more than 22 million lives, of which more than 70% in sub-Saharan Africa alone. In comparison, the death rate because of AIDS in the Western world is showing a decrease because of the availability of life prolonging drugs. The anti-retroviral therapies are pretty expensive and beyond the reach of citizens in Africa who survive on one or two dollars a day. Drug prices remain high on account of the patent laws that prevail in the Western world. The pharmaceutical companies have sought to take patents on all aspects of the compound, including the compound itself, dosage methods and processes of making it. The whole idea of patent protection is to encourage innovation but the protection lasts well beyond the term of any single patent and keeps cheaper generic manufacturers out of the market for as long as possible. Moreover it is often seen that patent monopoly and thus high drug prices in developing world is aimed at selling smaller numbers of expensive medicines to a wealthy class, rather than trying to distribute large numbers of cheap medicines at a few cents a day to the many poor. The decision of the Mandela regime to allow parallel imports became a trade dispute between US administration and South Africa. European governments and the US both publicly and privately lobbied for removal of this restriction. The provisions of TRIPS were quoted to allow enforcement of patents, the withdrawal of which was what the companies described as discrimination. However the litigation that pharmaceutical companies wanted to pursue was withdrawn and matter settled due to public pressure. TRIPS are one of the most important documents signed on intellectual property over the last century or so. TRIPS recognized knowledge as a private good rather than a public good. It sets minimum standards in copyright, trademarks, geographical indications, industrial designs and layout-designs of integrated circuits. It further sets the state of globalizing and standardizing the set of intellectual property principles it contains. This is even pronounced given the fact that most of the countries are members of WTO or desire to do so. The standards of TRIPS while aimed at influencing states in providing effective protection to digital technology and biotechnology set the stage for their control to be transferred to the private corporations with enormous resources at their disposal. With the US being the largest net exporter of intellectual property in the world, TRIPS effectively leads to increased
36 37

See among others writings of George Orwell Strong arguments can be found in Drahos and Braithwaite (2002), Information Feudalism: Who Owns the Knowledge Economy, Earthscan Publishing 18 | P a g e

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concentration of power with the leading American corporations. Nakamura (2003) show that private US firms invest at least one trillion US dollars a year in intangible assets with the market value of the USs capital stock of intangible assets estimated at least 5 trillion US dollars. With difficulties in measuring the value of intangible assets, their management and valuation remain haphazard (Hands and Lev 2003). Violation of IPRs faces severe consequences. Tower publications dominated the text book market in South Korea. They reproduced tens of thousands of American text books with little or no royalty payments and license fees to the original American publishers. With the US text books expensive and beyond the reach of many students, the story is familiar across Asia. In this instance however the US authorities converted into a trade dispute and pressurized the South Korean government to close down Tower publications. Its founder was jailed sending shockwaves in Seoul and effectively closed down the reproduction market for text books and other publications38. Small-scale industry, old commodity markets, and historic trading communities have been Delhis strengths39. The decline in the control mechanisms of the earlier era has strengthened them. These new dynamic networks often extend to into the neighboring states using old and new spatial formsmobile weekly markets and small shopsand also enabled the entry of networks of hawkers and street traders from other social groups. Another instance was the cassette revolution of the 1980s transformed popular music culture. Cassette culture in the first phase of globalization, largely non legal, effectively broke the monopoly of the organized market dominated by the large music companies. The low cost cassettes survived by being sold in neighborhood shops and comprised songs sung by lesser known artistes. Long-forgotten folk music emerged, remixed and circulated in the market. The penetration of cable television industry and increased usage and adoption of computer further transformed the industry. T-Series, the first major beneficiary used an opening in the copyright laws to push version recording, an innovative use of lesser-known artists to sing tunes sung by well-known singers. This paved the way for the development of the new media culture which now exists in the form of re-mix phenomenon. The key to this is the mix of the legal and the non-legal. T-Series transformed the distribution system by moving into neighborhoods, shops, grocery shops, paan wallahs, and teashops literally commoditizing the cassette. Palika Bazaar in Central Delhi for video, Nehru Place for software and hardware, and Lajpat Rai Market in the Old City for music as well as hardware for the cable industry became the hub for this phenomenon. The control and adherence to IPR regime has now made T-Series too respect IPRs and follow the regime. In large markets it was relatively easier for firms to use patents to establish a cartel. In the US legislation had come down heavily on cartels and patent regime seemed to serve a way out to circumvent the legislation. Patents, while not necessarily required to build a cartel, certainly assisted the bigger players to enforce them. The essence of the knowledge game was to privatize the property created through intellectual means and pursuit. Corporate laboratories
38

Detailed arguments and implications found in Joe Karaganis (Ed) (2007), Structure of Participation in Digital Culture, Social Science Research Council 39 ibid Stalking Theory: View through the Prism of Real life Practice 19 | P a g e

produced knowledge, developing them into products and legally obtain a patent, copyright or a trademark enabling the corporate to establish a monopoly. The game finds echo in the principles enunciated in foundations of microeconomics. In competitive markets, presence of many players would eliminate super normal profits and once marginal costs equaled marginal revenues, no further incentive existed for further production. Thus the knowledge players try to stay out of the commodity markets which are by and large competitive in nature. As we noticed above, American Publishers Association used the copyright principles to fix prices for books and Hollywood followed suit in determining price of admission to cinemas. In November 2001, under public pressure, the World Trade Organization (WTO) at its meeting in Doha, Qatar decided to adopt what has come to be known as Doha Declaration allowing the countries to make full use of public health protections in TRIPS Agreement. These protections made possible the producing generic version of drugs for domestic consumption when the country could not afford to import the more expensive patented pharmaceuticals. The adamant stand of US Trade Representative in opposing this led to the breakdown. With the WTO in the process of resolving the deadlock, one pharmaceutical companyPfizer was allowed to participate directly in the negotiating process. This was attributed to the fact that the USTR position was directly determined by the US pharmaceutical industry40. Pfizer claimed that the Doha Declaration would damage its profits. This seemed incredulous to many as the poorest of the countries represented just 1% of the pharmaceutical market. Besides taxpayers funded good deal of research even in advanced countries. It was not the first time Pfizer was influencing the US position on TRIPS. The roots of this influence can be traced to a New York Times op-ed piece written by its Chairman Barry MacTaggart41. The charge centered on the premise the legal basis provided to manufacture generic versions of its patented drugs in countries like India, Brazil, Mexico, Canada among other countries hurt its profits. It accused WIPO of trying to grab high technology innovations in favor of developing countries. This was the foundation of USTR 301 and later the establishment of TRIPS. Pfizers tactics of using USTR to pressurize Thailand, Philippines, and Brazil too merit attention on how the knowledge industry uses the State to corner the benefits of the new information society. The Bayh-Dole Act 1981 allowed universities and small business to own patents in inventions they had developed with federal funds. An area which saw the biggest increase in patents was the life sciences and genetic engineering. The increasing relationship between the industry and the universities leading to what is termed as University Industry Complex threatened the traditional roles of public funded institutions being: the conscience and critics of society, the education of new generations and the pursuit of knowledge or truth, free from market forces or government agendas. The relationship is leading to the companies trying to institutionalize their influence and in cases curtailing academic freedom. Novartis is paying the University of California at Berkeley 5 million US dollars per year for plant research and granting the university access to company databases. However it involves a tradeoff. This trade off comes in the form of seats on university and departmental research besides securing
40 41

Forbes, January 28, 2003 Barry MacTaggart, Stealing from the Mind, New York Times, July 9, 1982 20 | P a g e

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the first negotiating rights of up to 30% of all academic discoveries made by the supported departments. The company went a step forward and prohibited the academics from discussing this deal which is a curb on academic freedom. Further a number of academic scientists left the universities to own start-ups, draw federal funds and patent their inventions. This assisted in integration of universities in the corporate world. Boston and San Francisco areas became the hub for this relationship to flourish42. The Human Genome project serves as another instance of commercialization creeping into research and development. Originally conceived of as primarily an international public sector project to decode and analyze data about human genes and nucleotide sequences and to be put in the public domain now saw competition from laboratories that had commercial intentions in mind. Craig Venter, one of the original players in the Human Genome Project, went into partnership with Perkin-Elmer Corporation, to form a new company, Celera. Other players such as Incyte Pharmaceuticals also entered the game. However, despite possessing deep reserves, the private corporations depend on public funding particularly in areas like biotechnology. To them, alliances with universities offer tremendous benefits43. Public funding is leading to private licensing. Similar instances abound in numerous places. Future Outlook We are in the midst of change. Digital technologies serve as engines of cultural innovation. Their influence stems from the virtualization of group networks and social identities like Facebook and extends to the digital convergence of textual and audio-visual media. The growth and adoption of electronic commerce gets inter-wined with the development and strengthening of intellectual property legislations. The global nature of internet is evident in the fact that while service providers are located in industrialized world, the benefits are derived across developed and emerging countries alike. Limitations arise for direct command and control mechanisms to flourish. Delegating the regulatory functions depend on the presence of effective stick and carrot policies. Fears that private sector may not enforce the rules and regulations strictly deter the governments from delegating the authority to these bodies. The lack of clarity in the relationship of government and corporation may lead to issues like accountability. This becomes more pronounced when the control systems cut across borders. Developmental bodies like WTO are being forced to convert into patent protection bodies creating a super government at a global level. However the role thrust is not intended for a neutral and impartial referee but of on aiding and advancing the agenda of the private corporations based in advanced economies in the guise of national interest. Benkler (2001) among others identify a new context for the construction of democratic cultural values. To them, virtues like privacy and free speech that have shaped up the conventional political landscape stands transformed within the boundaries of the digital environment and institutions. Moreover, digital culture and environment seeks to drawn the attention of the political institutions in focus on protection and strengthening the values of sharing,
42 43

Drahos (2002), op.cit. ibid 21 | P a g e

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collaboration, and creativity. The digital environment provides the atmosphere for a more extensive interlinkages and diffusion of cultural production. The society and nation state are yet to come to terms in institutionalizing the process and built in safeguards with the struggle over values no longer confined to delineating the boundaries between the state and the individual. The introduction of new technologies may actually facilitate in coordination among governments at the regional or global level. Though governments will take time to adjust adapt to the new environment, there is little reason to believe that it will lead to reduced role of democratic process and accountability. We believe however that local interests will dictate the direction of the process than lofty concerns about problems affecting in distant areas. Technology is per se neutral and all the pillars viz society, government and corporations will make use of it in pursuit of maximization of their goals. Though the search for paths of sustainable development in the global economy seems difficult, a clearer sense of the various ways in which value chains of global system are administered and evolved will enable the achievement of the desired outcomes. Borrowing from game theory, it is the optimal solution that seems to evade the players as of now. How best they arrive at reconciling and adapting their interests will determine the future of the digital era. References 1. Smith, K., (2000) What is the knowledge economy? Knowledge-intensive industries and distributed knowledge bases, www.druid.dk/summer2000/ Gallery/smith.pdf 2. Steven Weber, (2000) The Political Economy of Open Source Software, Berkeley Roundtable on the International Economy 3. Lessig, L., (2001) The internet under siege, Foreign Policy, Nov-Dec. 4. Peter Drahos, John Braithwaite, (2002), Information Feudalism: Who Owns the Knowledge Economy, Earthscan Publications 5. Julie Cohen (2002), Intellectual Property and Information Economy in Lehr and Pupillo (eds), Cyber Policy and Economics in the Internet Age, Kluwer Academic Publishers. 6. Henry Farrell, (2003) Privacy in the Digital Age: States, Private Actors and Hybrid Arrangements, Working Paper, Revised Version 7. Milton L. Mueller, (2004), Ruling the Root: Internet Governance and Taming of the Cyberspace, MIT Press 8. Lessig, L. (2004), Free Culture: How Big Media Uses Technology and the Law of Lockdown Culture and Control Creativity, Penguin Books, New York 9. Rod Dixon, (2004), Open Source Software Law, Artech House Publishing 10. Austan Goolsbee, (2004), Taxes, Competition and the Information Economy, NBER Reporter Spring 11. Weber, Steven and Bussell, J., (2005) Will Information Technology Reshape the North-South Asymmetry of Power in the Global Political Economy? Studies in Comparative International Development, Vol. 40, No.2, pp 62-84

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12. Mikko Valimaki, (2005), The Rise of Open Source Licensing: A Challenge to the Use of Intellectual Property in the Software Industry, Turre Publishing 13. Karlson Hargroves and Michael Smith (2005), (eds) Natural Advantage of Nations: Business Opportunities, Innovation and Governance, Earthscan Publishing 14. Graham Dutfield, (2005), Mind Sharing, Foreign Policy, March/April 15. Thomas Friedman , (2005), The World is Flat: A Brief History of the Twenty First Century, Farrar, Straus and Giroux 16. Kenneth Neil Cukier, (2005), Who will Control the Internet, Foreign Affairs, NovDec 17. Jean O. Lanjouw, (2005), Patents, Price Controls and Access to New Drugs: How Policy Affects New Market Entry Working Paper 11321, NBER Working Paper Series, www.nber.org/papers/w11321. 18. Chris Anderson, (2005), The Long Tail: Why the Future of Business is Selling Less of More, Hyperion Publishing 19. Andreas Georg Scherer, Guido Palazzo, Dorothe Baumann, (2006) Global Rules and Private Actors Towards a New Role of the Transnational Corporation in Global Governance, Business Ethics Quarterly, Vol 16, ,pp 505-532 20. Viktor Mayer-Schoenberger and Malte Ziewitz, (2006) Jefferson Rebuffed: The United States and the Future of Internet Governance, KSG Working Papers, http://ksgnotes1.harvard.edu/Research/wpaper.nsf/rwp/RWP06-018 21. Benkler, Y., (2006), The Wealth of Networks: How Social Production Transforms Markets and Freedom, Yale University Press. 22. Henry Farrell, (2006), Regulating Information Flows: States, Private Actors and ECommerce, Annual Review of Political Science 2006. 9:35374, First published online as a Review in Advance on Feb. 17, 2006 23. Adams, A., (2006), Introduction: Valid Protection or Abusive Control?, International Review of Law, Computers and Technology, Vol. 20, No. 3, pp. 233-237 24. Lessig, L. (2006), Code, Basic Books 25. Nicolla Lucchi, (2006), Digital Media and Intellectual Property: Management of Rights and Consumer Protection in a Comparative Analysis, Springer Publishing 26. Joe Karaganis (Ed) (2007), Structure of Participation in Digital Culture, Social Science Research Council 27. D. Bach & A.L. Newman, (2007) Local Power, Global Reach: The Domestic Institutional Roots of Internet Governance, STAIR 3, No. 1: 23-41. 28. F.M. Scherer, (2007), Technological Innovation and Monopolization, KSG Working Papers, RWP07-043, Available at www.ksgharvard.edu 29. David Kravets, (2008) Recording Industry Decries AM-FM Broadcasting as a form of Piracy, http://blog.wired.com/27bstroke6/2008/06/recording-indus.html, Accessed on June 24, 2008 30. www.wipo.int

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Does Terror Impact Market Sentiments? View from the Market44

Prof. Prashant Kulkarni45 Prof. Anantha Murthy N.K.46

Segregation of politics and economics, however desirable, seems unlikely. Political events tend to have an impact on economics. When a change of government happens, there is bound to be some impact on the policy front. Similarly labor unrests are often influenced by political considerations. However, in recent times, terrorism has emerged as great disruptor of economic activity. The roots of terrorism can be traced to late 1960s and early 1970s during the Palestinian fight against Israeli occupation. But it has assumed menacing proportions of late. It is not only the direct impact of the attack in terms of physical injury; the psychological trauma that people undergo is also equally high. Moreover, as demonstrated time and again, terrorists seemed to be picking their targets with ease. While one tends to see these activities in political terms, their influence in destroying the economy of their target is much higher. It is but natural to assess and quantify the impact of terrorist attack on the economic activity. One such barometer is the financial markets. The stock market index takes a sharp beating whenever such an incident occurs the most visible impact could be the 9/11 attacks which struck at the heart of the financial world. According to a report the Wall Street based securities industry saw its profit of nearly $20 billion being nearly wiped out. This phenomenon repeats time and again in other cases like Madrid, Mumbai, Oklahoma and more recently in London. With increasing integration among financial markets across the globe, the impact too tends to be far reaching. While assassination of John F. Kennedy or a bomb blast during the Conservative Party Conference in 1984 would have triggered a panic in NYSE or LSE, other markets would have remained relatively unaffected. But now the impact would be probably more spread out. Market theories suggest that these events do not account for more than 5-10% of the performance of the markets. They argue that it is the fundamentals of the firm that count most. Moreover in the case of capital markets, the any aberration would even out over a period of time. While one could rationalize these instances to changes happening in democratic politics, it is difficult to reconcile the same in case of terrorist attacks. Another factor worthwhile considering would be the impact of these events on particular industries. Referring once again to 9/11, it had a greater impact on the valuations of the airline, tourism and insurance industries as compared to the other industries. In some sections
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The paper is developed on the research report prepared by the authors on Impact of Terrorism on Financial Markets 45 Asst. Professor, Economics and Public Policy, IBA Bangalore 46 Faculty, Quantitative Methods and Operations Research Stalking Theory: View through the Prism of Real life Practice 24 | P a g e

it may have an impact on the bottom line of the firms located in that geographical belt. This may be seen as an indirect impact of the terror attack. Objectives of the Study The primary objective of the research is analyzing the impact of the terrorist attacks on the financial markets. The study is aimed towards understanding the perceptions of the market players viz. the investment banks, brokers, analysts and investors about how terrorist attack influences the market Further, it will suggest remedial measures by which the sensitivity of impact on the financial markets can be reduced to a large extent

Methodology Understanding and assessing the impact would require an interdisciplinary approach encompassing the fields of political science, economics, and sociology besides finance. Current practitioners of International Political Economy (IPE) have focused on employing indicators of electoral system and policy making system to draw their theories. Political scientists have developed models that give an insight to equilibrium levels in political decision making. Some studies have pointed out that if these models were incorporated in the financial market model, it can withstand the impact of at least democratic events. Based on this, Bernard and Leblang have published a study on Democratic Politics and Financial Markets: A Prospectus. On the other hand studies by Rand Corporation examining the impact of terrorism on industries using Israel as an example has made use matching techniques and event based studies to understand the phenomenon. Abadie and Gardeazabal also make use of similar technique to understand the impact of Basque terrorism on Spanish economy. Bernard and Leblang further argue that most existing models are simplistic in nature and cannot be generalized. They favor the usage of CAPM model clubbed with Efficient Market Hypothesis to examine the impact. Our methodology is based on the perceptions of the market players themselves on the impact. This stands in contrast to the other studies that have focused on the deviations from the normal of the various indices following the terrorist attacks. We interviewed 60 respondents through a structured questionnaire. The respondents belonged to different firms involved in the financial markets. They included brokers, investment bankers, equity analysts and fund managers. These respondents were based in both Mumbai and Bangalore. The data thus collected was subjected to a battery of statistical tests. Apart from employing the basic tools like Standard deviation, we went further to use chi-square test to help in determining the degree of association.

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Literature Survey A growing literature is producing evidence that acts of terror bear significant economic costs in addition to the suffering and uncertainty that is commonly associated with terrorism. In a recent survey, Frey et al. (2004) discuss a small but growing number of empirical studies that report results along these lines for specific areas such as tourism, foreign direct investment, domestic investment, stock markets, foreign trade, and general economic activity. Studying the impact of terrorist events (as well as military invasions) on a number of capital markets, Chen and Seems (2004) conclude that terrorist attacks have indeed the potential to affect financial markets on a global scale, even though the resilience in particular of the U.S. capital markets to absorb such events seems to have been increasing in recent years. A paper by Berrebi and Klor (2005) employs scoring matching techniques and event study analysis to disentangle the impact of terrorism across different economic sectors. In particular, using the Israeli-Palestinian conflict as a case study, the study differentiates between Israeli companies that belong to the defense, security or anti-terrorism related industries and other companies. The findings show that whereas terrorism has a significant negative impact on non-defense-related companies, the overall effect of terrorism on defense and security related companies are significantly positive. Similarly, using panel data on countries' defense expenditures and imports from Israel, it finds that terror fatalities in Israel have a positive effect on Israeli exports of defense products. These results suggest that the expectation of future high levels of terrorism has important implications on the allocation of resources across industries in Israel. In recent years, terrorism has shown new patterns, shifting increasingly from military targets to civilian targets, including individuals and business activities. Figure 1 shows that business facilities have represented, by far, the preferred target of international terrorist attacks since 1998. Recent terrorist attacks affected both the national and the global economy. The economic consequences can be largely broken down into short-term direct effects; mediumterm confidence effects and longer term productivity effects. The direct economic costs of terrorism, including the destruction of life and property, responses to the emergency, restoration of the systems and the infrastructure affected, and the provision of temporary living assistance, are most pronounced in the immediate aftermath of the attacks and thus matter more in the short run. Direct economic costs are likely to be proportionate to the intensity of the attacks and the size and the characteristics of the economy affected. While the September 11 attacks on the United States caused major activity disruption, the direct economic damage was relatively small in relation to the size of the economy. The direct costs resulting from the terrorist attacks were estimated by the Organization for Economic Cooperation and Development at $27.2 billion2 (Bruck and Wickstrom, 2004), which represented only about percent of the U.S. annual GDP. The indirect costs of terrorism can be significant and have the potential to affect the economy in the medium term by undermining consumer and investor confidence. A deterioration of confidence associated with an attack can reduce the incentive to spend as opposed to save, a
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process that can spread through the economy and the rest of the world through normal business cycle and trade channels. Likewise, falling investor confidence may trigger a generalized drop in asset prices and a flight to quality that increases the borrowing costs for riskier borrowers (IMF, 2001b). The size and distribution of the effects over countries, sectors, and time would depend on a range of factors, including the nature of the attacks, the multiplier effects, the type of policies adopted in response to the attacks, and the resilience of the markets (Bruck and Wickstrom, 2004) (Refer Figure I).

Source: US Department of State Statistics (2003) Using stock prices from 25 economies, Strauss and Yong (2004) test whether the terrorist attack in the United States on September 11, 2001, resulted in a contagionan increase in correlation across global financial markets. Unlike prior works on contagion, they model the intrinsic heteroskedasticity. They argue that national stock markets, particularly in Europe, responded more closely to U.S. stock market shocks in the three to six months after the crisis than before. They further advocate the benefits of international diversification in times of crisis are substantially diminished. Richard Koss (2002) argues that while the 9/11 attacks disrupted the financial markets in the short run, they demonstrated the adaptability and flexibility of the traditional system besides the effectiveness of the policy tools (Refer Figure II for equity volatility and Figure III for behavior of short term interest rates between 1991 and 2002).

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Figure II

Source: Bloomberg News

Figure III

Source: Bloomberg News

De Bondt and Thaler (1985) in their research paper investigated whether people tend to overreact to unexpected and dramatic events and thus, affect stock price movements. The
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study used monthly stock return data from NYSE during the period from 1926 to 1982. The study found out that winner-portfolio (past data based) underperforms the market index by about 5%, while loser-portfolios (past data based) outperform the market index by about 19.6%. The study thus emphasizes the notion that investors overreact and push stock prices to extreme ends on both sides, and that the market may be efficient in the short-run but not in the long-run. Fair (2002) studied the effect of major events (both macroeconomic and political) on stock prices on a one-to-five-minute time-scale. This was a study that tried to match particular events to significant changes in stock prices. The study focused on the reaction of NYSE stocks over the period from April, 1982 to October, 1999. A total of 1,159 large (more than 0.75% in absolute value) 1-minute, 2-minute, 3-minute, 4-minute and 5-minute price changes were observed. The study found out sixty-nine events that led to significant price changes. But a large number of changes had no obvious reasons at all. Also many events were found not to have any impact at all. So Fair concludes that determining the extent and direction of stock price changes in response to a particular event is a highly complicated exercise. Madan Sabnavis (2005) conducted a study on the effect of various economic events, natural disasters and political disturbances on Sensex, the Bombay Stock Exchange index which is considered the barometer of the Indian stock market, over the period from 1991 to 2005. The study also captured the turnaround time for each of the events in case of negative impact. Economic events and natural disasters were not found to have much impact on Sensex movements. However, political events like resignation of a Prime Minister or attack on Parliament had much more effect on Sensex. But, in all the cases, except after Babri mosque demolition, the markets were found to recover within the next few days. ANALYSIS Many respondents feel that the impact of any terrorist attack on stock markets is bound to be limited and the market recovers back to normalcy within few days. This seems to be consistent with the research findings elsewhere. (E.g. See Fair (2002), Koss (2002)). In order of their importance, terrorist attack ranks low among various factors that impact the stock markets. Company fundamentals and economic fundamentals seem the most important elements that influence the valuations in the stock markets. Among the political factors, it is the possibility of the government change and likely change of policies that accompany it are worrying the experts than the one of terrorist attacks.

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General Factors influencing the financial markets: Correlation Matrix A A B C D E F Note: * 1.000 0.300* 0.241 -0.185 -0.275* -0.550** B 0.300* 1.000 0.061 0.284* -0.343** -0.295* C 0.241 0.061 1.000 -0.007 -0.180 -.108 D -0.185 0.284* -0.007 1.000 -0.070 0.085 E -0.275* -0.343** -0.180 0.070 1.000 0.534** F -0.550** -.295* -0.108 0.085 0.534** 1.000

Correlation coefficient is significant at the 0.05 level (2-tailed).

** Correlation coefficient is significant at the 0.01 level (2-tailed).

Chi-Square test: H0: Terrorism is the most important factor influencing the stock markets. H1: Terrorism is the not the major factor influencing the stock markets.

A Value of test statistic Degrees of freedom Table value at 1% Los. 43.400 3 11.345

B 28.483 5 15.086

C 25.448 3 11.345

D 45.490 6 16.812

E 26.132 5 15.086

F 31.792 5 15.086

Interpretation: The results show that terrorist attack lies in the lower half of the factors influencing the stock markets. So respondents feel that terrorist attack is not an important determinant of financial market behavior but company fundamentals and economic fundamentals are. Note: A. Company fundamentals B. Economic fundamentals C. Financial sector in the country
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D. Political stability E. Investors sentiments F. Speculation When we go deeper and seek their responses in the importance of political factors and different types of political factors, the response was not very strong in favor of terrorist attacks scaring the markets.

POLITICAL FACTORS: Correlation Matrix A A B C D 1.000 0.397** 0.007 -0.091 B 0.397** 1.000 0.125 0.107 C 0.007 0.125 1.000 0.389** D -0.091 0.107 0.389** 1.000

Note: ** Correlation coefficient is significant at the 0.01 level (2-tailed).

Chi-Square test: H0: Terrorism is the most important political factors influencing the stock markets. H1: Among the political factors influencing the stock markets, terrorism is not one of the prime factors. Change Government Value of test statistic Degrees of freedom 24.710 3 in Civil war/military Internal Terrorist attacks coup Violence 20.419 5 15.086 13.484 3 11.345 58.000 6 16.812

Table value at 1% 11.345 Los.

Interpretation: It is clear that the markets are more influenced by changes in governments as compared to terrorist attacks.

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Note: A. B. C. D. Change in Government Civil war/military coup Internal Violence Terrorist attacks

Respondents believed that the attacks create uncertainty but felt that the impact would largely be confined to certain specific sectors like tourism .As such businesses dependent on these sectors are likely to get affected. Surprisingly they ruled out increase in insurance premiums and said these attacks do not have any effect on investor plans of the ordinary investors in the markets. But some shift will happen towards investment in bank deposits and government securities in case of ordinary investors. This shift is attributed to the loss of confidence in financial markets. INFLUENCE OF TERRORIST ATTACKS ON THE STOCK MARKETS: Correlation Matrix of influence of terrorist attacks on stock markets: A A B C D E F G H Note: * 1 0.133 0.350** -0.100 0.395** 0.360** 0.184 0.277* B 0.133 1 0.165 -0.231 -0.268* 0.434** 0.122 0.185 C D E F G 0. 184 0.122 0.115 -0.078 -0.089 0.181 1 H 0. 277* 0.185 -0.121 -0.113 0.224 0.005 0.289*

0.350** -0.100 0.165 1 0.112 -0.021 -0.231 0.112 1 -0.107

0.395** 0.360** -0.268* -0.021 -0.107 1 -0.044 -0.089 0.224 0.434** 0.695** -0.049 -0.044 1 0. 181 0.005

0.695** -0.049 0.115 -0.121 -0.078 -0.113

0.289* 1

Correlation coefficient is significant at the 0.05 level (2-tailed).

** Correlation coefficient is significant at the 0.01 level (2-tailed).

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Chi-Square test: H0: There is no influence of Terrorists attacks on stock markets. H1: There is an influence of Terrorists attacks on stock markets. A Value statistic of B C D E F G H

test 16.871 25.258 19.290 9.097 4 4 4 3

14.290 5.355 4 3

14.613 24.129 4 4

Degrees of freedom

Table value at 1% 13.277 13.277 13.277 11.345 13.277 11.345 13.277 13.277 Los.

Interpretation: There is an influence of Terrorists attacks on stock markets. But no influence of terrorists attacks towards Herding mentality and contagion and Investments shift to commodity market. Note: A. B. C. D. E. F. G. H. Higher level of uncertainty Security related expenditure affecting economic performance Negative impact of specific industries like tourism Herding mentality and contagion Weakens Interest rates. Investments shift to commodity market. Drives ordinary investors from the market Effects on insurance premiums.

Questioned about the intensity of the effected, the responses showed that interlinkages between location of the attack and the financial markets define the intensity of the impact. Apart from the geographical distance and possible impact on the economic situation as a whole too contribute in accentuating or alleviating the intensity of the impact. FACTORS DEFINE INTENSITY OF EFFECT OF TERRORIST ATTACKS: Correlation Matrix of factors defines intensity of effect of terrorist attacks: A A B C 1 0.390** 0.116 B 0.390** 1 -0.078 C 0.116 -0.078 1 D -0.228 -0.121 0.067 E 0.419** 0.268* -0.036 F 0.199 0.460** -0.173 G 0.068 0.519** 0.031

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D E F G Note: *

-0.228 0.419** -0.199 0.068

-0.121 0.268* -0.460** 0.519**

0.067 -0.036 -0.173 0.031

1 -0.126 0.005 0.297*

-0.126 1 -0.316* -0.047

0.005 -0.316* 1 -0.520**

0.297* -0.047 -0.520** 1

Correlation coefficient is significant at the 0.05 level (2-tailed).

** Correlation coefficient is significant at the 0.01 level (2-tailed). Chi-Square test: H0: There is no Significance of Factors defines intensity of stock markets against Terrorists attacks. H1: There is a Significance of Factors defines intensity of stock markets against Terrorists attacks. A Value of test statistic Degrees of freedom Table value at 1% Los. 22.387 3 11.345 B 26.065 4 13.277 C 53.484 3 11.345 D 31.387 3 11.345 E 26.548 4 13.277 F 15.290 4 13.277 G 23.000 3 11.345

Interpretation: Geographical proximity in crucial in determining the intensity of the influence. Consumer confidence in the financial markets may go down. The strength of the banking sector often is crucial for the resilience in the markets. Note: A. B. C. D. E. F. G. Geographical proximity to the location Possible impact of the attack on the economy Interlink ages between the location of the attack and the financial market. Sectoral Impact. Contagion Consumer confidence in the markets. Strength of the banking sector

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Duration of Impact of terrorist Attacks: Respondents felt that the maximum impact is likely to last a week and in some cases up to a month but rarely beyond that. 1. Duration Day of the event Up to one week Up to one month Up to 3-6 months Up to a year More than a year Total Number of Responses 07 29 11 09 05 01 62

Source of Data: primary Data collected from the respondents. Impact of Terrorist attacks on ordinary Investors Respondents feel that ordinary investors shift towards bank deposits and government securities for parking their savings. The attacks do undermine the investors confidence in the financial markets of the target countries and have the potential to dissuade them from the financial markets. Factors Dissuade them from stock Markets Shifting of Investments to commodity markets. Undermines investor confidence. Number of Responses 21 19 39

Shifting of investments to bank deposits and government 36 securities Total Source of Data: primary Data collected from the respondents. Note: Multiple responses possible. 62

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Resilience of the markets and the Adequacy of Market Preparation to counter any such attacks Indian stock markets are not completely geared up to handle the effects of these attacks but neither seems to be under prepared. However respondents feel that markets are more resilient in the developed markets compared to emerging markets.

Factors Strongly prepared Somewhat prepared Neither prepared nor unprepared Somewhat unprepared. Highly unprepared. Total

Number of Responses 06 24 07 19 06 62

Source of Data: primary Data collected from the respondents.

Market Resilience in Developed Countries Factors Markets are more resilient in the developed countries. Markets are resilient in the emerging countries. Number of Responses 36 08

There is not much difference between markets in 18 developed and emerging countries. Total 62

Source of Data: primary Data collected from the respondents.

Conclusions In conclusion, given the strong inter linkages among the global capital markets news spreads rapidly (especially bad news), with quick spillover, or contagion, effects. Evidence shows that developed markets exhibit greater resilience than the developing nations thus fastening the process of recovery. The strength of the financial sector in the country provides the market with adequate liquidity which in turn promotes stability and ensures the absence of
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panic in such situations. Here too we find the developed nations led by US are ahead of the emerging markets. There is greater stress on the need for awareness among the policymakers and regulators around the world about what is going in other parts of the world. The real-time information economy that dominates the worlds policy making calculus has the potential to have serious negative consequences in a very short time by causing a potential communication gap. Effective communication both in terms of frequency and intensity has to be strengthened. This includes sharing important informationlike unusual stock trading or large dollar transactions that might have consequences elsewhere. There is also a need to put in place disaster recovery mechanisms across the Indian markets to restore normalcy in minimum possible time in case of a cataclysmic event. The importance of a healthy and stable banking and financial sector accompanied by the efficient execution of monetary policies needs no reiteration. These foundations and regulations underlie Western banking systems thus generating sufficient abilities of shock absorption. Finally, while many terrorist attacks cannot be avoided, others can be, or their disruption minimized, by sharing important information. This includes sharing information with other policymakers and regulators internally as well as across borders. Terrorist and military attacks generally increase the cost of doing business because of added security and increased risks. These risks can be managed by instant and effective sharing of real time information. References 1. Flynn, Patrice, "Financial Bailout of September 11: Rapid Response", Challenge: The Magazine of Economic Affairs, Vol. 45, No. 1, January-February, 2002 2. Fielding, David. "Modeling Political Instability and Economic Performance: Israeli Investment during the Intifada." Economica, 70, February 2003b 3. Abadie, Alberto and Gardeazabal, Javier. "The Economic Costs of Conflict: A Case Study of the Basque Country." American Economic Review, 93(1), March 2003 4. Taylor, Brian, "The Historical Impact of Crises on Financial Markets", Global Financial Data, www.globalfindata.com. , 2004 5. Bruck, Tilman and Wickstrom, Berngt-Arne, "The economic consequences of terror: guest editor's introduction", The European Journal of Political Economy, Vol. 20, 2004 6. Chen, Andrew H., and Siems, Thomas F, "The effects of terrorism on global capital markets", The European Journal of Political Economy, Vol. 20, 2004 7. Eldor, Rafi and Melnick, Rafi. "Financial Markets and Terrorism." European Journal of Political Economy, 20(2), June 2004 8. R .Barry Johnston and Oana M. Nedelscu, The Impact of Terrorism on Financial Markets, IMF Working Paper No. WP/05/60, 2005 9. Claude Berrebi and Esteban F. Klor, The Impact of Terrorism across the Industries: An Empirical Study, Rand Corporation, May 2005 10. TRIA and Beyond: Terrorism Risk Financing in US, A Report published by Wharton Risk Management and Decision Processes Center, The Wharton School, University of Pennsylvania, August 2005
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Does Foreign Direct Investment (FDI) Benefit Host Countries: Uncovering the Relationship between FDI, GDP and Capital Formation in Host Countries47
Prof. Prashant Kulkarni48 Prof. Anantha Murthy N.K.49 With the increasing liberalization of the economies across the world, considerable attention has been devoted to study the merits and demerits of FDI on host countries. Theorists try to understand FDI through two viewpoints. Literature of FDI focuses on two different models to understand the implications of FDI on host countries. The MacDougall (1960) among others focus on measuring impact of FDI in terms of factor rewards, employment and capital flows to host countries. Hymer (1960) examines the motivations behind the firms decision to undertake investments abroad and thus stresses on measuring impact of FDI in terms of the indirect effects it creates like externalities or spillovers. We use the MacDougall approach in seeking to understand the direct impact of FDI on host countries. Thus the primary objective of our study is to measure the impact of FDI on two key parameters viz. Gross Domestic Product (GDP) and Gross Capital Formation (GCF) of the host countries. Using the data from World Investment Report for information on FDI stock and flows into developing world and national statistical databases for data on GDP and GCF, we examine the impact of FDI over GDP and GFCF using statistical tests. We hypothesize that increased FDI increases capital formation and GDP of the host country. FDI is a critical element in the flow of international capital. Unlike other types of international capital flows, FDI is less volatile. Support exists in many crisis episodes like Latin American debt crisis (early 1980s where portfolio investments fell 7 times more than the fall in FDI); Mexican debt crisis (1993) which saw a fall in FDI by about 30% but at the same time portfolio equity fell by nearly 80%. Similarly, during the South East Asian crisis in 1997-9850, the World Bank statistics show that median coefficient of variation of FDI is 0.77 as against 1.88 for non FDI flows. Similarly average coefficient of variation is 1.11 for FDI and 1.81 for non FDI flows. Literature of FDI focuses on two different models to understand the implications of FDI on host countries. The first was developed by MacDougall (1960) which is based on the theories of international trade. It seeks to measure impact of FDI in terms of factor rewards, employment and capital flows to host countries. The other approach developed by Hymer (1960) uses the theories of industrial organization to examine the impact of FDI. Unlike the former, this one seeks to examine the motivations behind the firms decision to undertake
47

The paper is updated version of the paper titled same that was presented at International Conference on Economics and Finance organized by Serial Publications and Journal of World Economic Review 48 Asst. Professor, Economics and Public Policy, IBA Bangalore 49 Faculty, Quantitative Methods and Operations Research 50 Global Financial Development World Bank publication,1999 Stalking Theory: View through the Prism of Real life Practice 38 | P a g e

investments abroad. It argues that the imperfection in the goods or the factor markets or government interference in competition is the main reason why firms decide to move abroad. In general, Hymer approach is about measuring the impact of FDI in terms of the indirect effects it creates like externalities or spillovers. Motivation for FDI primarily comes from the prospects of the investors making long term profits in the companies they directly control. Foreign bank lending and portfolio investments, on the other hand, are dictated by the need to make short term gains and are prone to herd behavior. Besides adding to investible resources and capital formation, FDI can play a major role in transferring production technology skills, innovations and managerial practices. The spillovers can occur through multiple channels. Linkages between foreign affiliates and local firms can occur either through backward linkages (relationship between foreign affiliates and local suppliers) or forward linkages (relation between foreign affiliates and local customers). The second is the significance of R&D investment by these foreign affiliates which many studies (e.g., Catherin, 2000 and WIR 2005) have shown depends on the intensity of the competition in the local market. The third is the ownership share of the foreign affiliates in the host country markets. This depends on the government policies of the day. While the government restriction on foreign ownership may push them to joint ventures, there remains a question mark whether the productivity spillovers really occur from the foreign affiliates to their domestic counterparts. The demonstration effect of foreign companies on their domestic counterparts in the host countries is still out for jury. Some studies in the US (Mansfield and Romeo, 1980) did find that the domestic firms imitate the foreign firms to remain competitive. The final spillover effect comes through the training provided by MNCs to the domestic workers. While there may not be strong technological improvements, some studies in China indicate the greatest strength lies in the development of human resources owing to relatively weaker skills in these employees as compared to their Western counterparts. Though economists differed in their definition of FDI, they broadly followed the guidelines developed by the World Bank and IMF for defining it. The World Bank defined FDI as net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. IMF defined the FDI capital flows as equity capital, reinvested earnings and other capital associated with various inter-company debt transactions Unlike the past when most of the FDI would tend towards manufacturing sector, the recent years have seen a distinct shift towards the services sector. The shift however has not been revolutionary. There was a continuous increase in the share of services FDI since the 1970s, but it was getting more pronounced in the recent years. While the services sector accounted for less than a quarter of the total FDI flows in the 1970s, it nearly doubled by the early 1990s. The next decade saw it jumping up further to reach nearly 70% by early 2000s. Another major feature was the continuing trend of the increasing share of the developing countries not only in terms of inward FDI flows but also in terms of outflows. Intense
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competition in both domestic and foreign markets is making companies look towards new methods of improving their competitiveness. This probably led to an upturn in the number of cross border Mergers and Acquisitions (M&A). Greenfield FDI too is showing a continuing to rise. However several questions get raised over the impact FDI is likely to have on the host country. This background makes us to frame the following objectives Objectives 1. 2. 3. 4. To examine the trends and directions of FDI flows and stock To understand the implication of FDI on host countries. To examine the relation between FDI stock and the GDP growth rate of the country. To gauge the extent of FDI flows in gross fixed capital formation of the country

FDI: A Historical Perspective Some historians trace the roots of FDI to the early times of Sumerian civilization in 2500 B.C. Later, during the colonial expansion starting from the mid sixteenth century, British, Dutch, Spanish and French merchants set up firms across the West Indies, Latin America, Asia and Africa. British East India Company that received the charter from Queen Elizabeth I in 1600 A.D was considered one of the earliest FDI investments. Virginia Company of Britain which established its shop in New World (presently US) in early 1600s was considered the first direct investment inflow into the US. The period 1875-1914 represented the first stage of cross border investments in the private sector. The rapid growth in railroads, tramways, and water, gas, electricity and banking systems across the US during this period saw a number of British companies investing in these projects. Most of this, however, was in the nature of portfolio investment as opposed to direct investment and happened in the First World. In the 1970s, apart from establishing guidelines on what constituted FDI, IMF began to publish estimates of both direct and portfolio investments across countries. The share of FDI in total investment flows remained around 15% through the 1970s and the early 1980s. By the 1980s, the US however began losing ground as the largest net FDI provider. Most of the investment in Europe was intra European investments (two thirds of total outflows from Europe in late 1990s). Latin America and South East Asian countries were the largest recipients of FDI till the early 1990s. By the late 1990s China was not only one of the largest recipients of FDI but also a supplier of FDI. Another important feature of FDI flows during this period was its rapid increase at almost 100% during the period 1980-2000. This was even greater compared to the growth in world trade that grew at around 90%. A glance at various United Nations reports show that more

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than 100 countries effected more than 500 changes in their FDI legislation for the period 1991-1996 alone51. The recession which hit many countries followed by the 9/11 attacks had a negative impact on the FDI inflows. Transnational corporations (TNCs) scaled down their investment plans apart from their presence in many countries. Though FDI had begun to show signs of recovery, it was not uniform (Exhibit II). Chart I Trends in Global FDI flows 1991-2003

Source: www.unctad.org/fdistatistics Overview of Literature Early FDI theories could explain only a part of patterns of FDI flows. They failed to incorporate the differences between direct investment and portfolio investment (Aliber 1970). Vernon (1966) incorporated concept of product life cycle into theories international trade to explain the existence of international trade, production and consequently capital flows. Hymer (1960) laid the foundation for eclectic paradigm of FDI theory by focusing on firm specific advantages. Hymer believed that the firms operating in a foreign country were at a disadvantage compared to the domestic firms. The theory assumes lower cost of operations for the domestic firms on grounds of familiarity with local conditions such as legislation, business culture, and language and so on. To offset this advantage, firm-specific advantage superior technology, brand name, managerial skills and scale economies allow overseas firms to
51

Charles Hill quoted in Dr. Thomas Head, Dr. Peter F. Sorensen, Attracting Foreign Direct Investment: The Potential Role of National Culture, The Journal of American Academy of Business, Cambridge, March 2005 Stalking Theory: View through the Prism of Real life Practice 41 | P a g e

compete with domestic firms. However the theory ignored the decision process about FDI. Dunning (1977) carried forward the theory developing the OLI paradigm52. Dunning (1981, 1986) extended the framework of the OLI paradigm to develop the investment development path (IDP) theory. This theory suggests a U-shaped relationship between the level of an economys development and the net outward flows of FDI. Starting with the first stage when FDI inflows are small and outflows are zero or negligible, economies take significant advantage of the location during the second stage. This leads to a substantial increase in the inflows of FDI though the economys contribution in terms of outward FDI remains marginal. During the third stage, net outward flows are still negative but increasing either due to constant outward investment and falling inward investment or alternatively, the rising FDI outflows are outpacing inflows. Economists advocate the free flow of capital across nations enabling it to seek out the highest rate of return. The pace at which countries are moving to liberalize their currency regimes from a close and fixed rate regime to one that moves in the direction of capital account convertibility is inviting increasing attention on the effects of these policies. In addition, these policies have been accompanied by a growth in international capital flows. The lifting of restrictions on FDI entails significant risk for the developing world in its endeavor to maximize its benefits. Supporters however argue that increased flows raise domestic investment and create spillovers. Gastanaga, Nugent, and Pashamova (1998) find that those countries with relatively liberalized capital accounts tend to attract more foreign direct investment flows. Feldstein (2000) makes case of risk reduction through free flows in the international capital by allowing the owners of the capital to diversify their lending and investment. He carries forward his argument by highlighting the role of capital flows in integrating and spread of best practices of corporate governance, accounting rules, and legal traditions besides placing constraints on the governments ability to pursue what he terms as bad policies. He substantiates this further by suggesting FDI facilitates technology transfer, promotes competition in the domestic market and encourages human capital development. In fact improving access to technology becomes a prominent channel through which FDI can increase productivity in the economy and serves as a strong argument by the advocates of FDI. Moreover the profits generated by FDI increases the corporate tax revenue in the host country. Hausmann and Fernndez-Arias (2000) present an unfavorable view international debt flows, especially of the short-term variety, on the premise that they are based on interest rate differentials and exchange rate expectations, not on long-term considerations. Besides it is the first to run for the exits in times of trouble and many believe it to be the cause of the South East Asian crisis of the late 1990s. In contrast, FDI is thought to be immobile since it is immediately repriced in the event of the crisis, unlike short-term debt.

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This choice is determined by ownership advantages, location advantages and internalization advantages, thus the acronym OLI 42 | P a g e

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FDI is believed promote competition in the domestic input market by increasing competition in the host-country industry. The entry of multinational players, who through their scale, technology and advertising expenditure, bring about efficiency in the market, force the local players to become productive. The Empirical evidence suggests that there are strong linkages between FDI flows and domestic investment. Bosworth and Collins (1999) and Mody and Murshid (2001) find a near unitary correlation between FDI and domestic investment. Multinational corporations seem the most efficient way for the developing economies to gain access to newer technologies developed and adapted by firms in industrialized countries. In addition, this may lead to diffusion of knowledge across the domestic industry. Athukorala and Menon (1995) show that FDI in Malaysia facilitated technology transfer and improved the skills of the labor force. Spillovers seem to benefit FDI in countries marked by sound investment climates marked by well-developed human capital, efficient infrastructure services, sound governance, and strong institutions Critics argue that FDI crowd out domestic investments. Some studies, however, reported that FDI, on the contrary, crowded in domestic investment. But evidence seemed to have been mixed. Agosin and Mayer (2000) present evidence of crowding in investment in Asia. They find similar findings though to a lesser extent in Africa. In contrast their studies on Latin America suggest a strong crowding out effect. They conclude that the effects of FDI on host countries seemed unlikely to be favorable and required a comprehensive rather than a simplistic approach towards FDI by host governments. In sectors like utilities, foreign players had entered by buying government companies. Many foreign banks often remained away from traditional domestic segments serviced by local banks. But the entry of large hotel chains often squeezed the smaller hotels out of business. Chile faced severe power shortages in the late 1990s in spite of electricity privatization and large scale investment by foreign investors Argentina too faced a similar problem. Foreign investor negotiated tariffs in dollars and prices were indexed to US inflation rates. While initially there was a fall in prices, the local price deflation resulted in sharp rise of prices by the end of 1990s. Argentina which had become a net energy exporter by the early 1990s turned back to net energy importer in the early 2000s. In Peru, entry of TNCs in telecom industry created an imbalance between the urban areas and far flung regions. Telephone density was much higher in the capital Lima and surrounding areas compared to that of the interior regions (WIR 2005). Further FDI has been considered as an important source financing capital formation. Lipsey (2000) finds little evidence of foreign investment increasing capital formation in developed world. Kroska (2001) show that while FDI substitutes domestic credit it also complements foreign credit and privatization revenues in Central and Eastern Europe. Johnson (2002) show that FDI should have a positive effect on economic growth as a result of technology spillovers and physical capital inflows. His empirical research drawn from both cross-section and panel data analysis on a dataset covering 90 countries during the period

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1980 to 2002, finds indications that FDI inflows enhance economic growth in developing economies but not in developed economies Barry and Bradley explore the structural changes arising out of increasing FDI flow and consequent relationship with economic growth in Ireland. They conclude since tariff-jumping FDI is likely to be less dynamic in technological terms liberalized trading arrangements seem a prerequisite for substantial FDI inflows. Further they view the findings from their study as a support of Vernons product cycle model. Firstly the flow of early FDI in simple standardized products moving towards a shift to maturing products and finally a potential for attracting more R&D activity in the area of new products. Sahoo and Mathiyazhagan (2003) demonstrate a long term and positive relationship between FDI and growth in India. This contradicts pioneering studies by Singer (1950) and Griffin (1970) which suggested a negative impact of growth on developing economies and support studies by Rodan (!961) who argue a positive impact of FDI on host developing countries. Research Framework We study the impact of FDI as a source of capital formation on the real growth rate per capita. We follow Johnson (2005) in this respect. To develop a measure of physical capital formation, we use Gross Capital Formation as percentage of GDP as a proxy measure. This approach has been used earlier by Olofsdotter (1998). LABOUR and GOVERNMENT are introduced as control variables. Similarly OPENESS and EXCHANGE too are introduced. OPENESS measures the degree of trade openness in the country. LABOUR is captured by measuring the work force in the economy. GOVERNMENT is measured by government expenditure as percentage of GDP. Therefore the function can be written as GROWTH= f(LABOUR, OPENNESS, EXCHANGE, CAPITAL, GOVERNMENT, FDI) The regression equation can be written as GDP real pc growth= +0 LABOUR+ 1OPENNESS+ 2 EXCHANGE + 3CAPITAL + 4GOVERNMENT + 5FDI + Error Where LABOUR is the total workforce in the economy, OPENNESS is defined as export + import as percentage of GDP, CAPITAL is GCF as percentage of GDP, GOVERNMENT is Government Expenditure as percentage of GDP and FDI is the foreign direct investment as source of physical capital. We test the following propositions. H0: There is no Impact of FDI on economic growth H1: There is an Impact of FDI on economic growth.

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This proposition is tested both for developed and developing countries H0: There is no Impact of FDI on economic growth in developed countries H1: There is an Impact of FDI on economic growth in developed countries

H0: There is no Impact of FDI on economic growth in developing countries H1: There is an Impact of FDI on economic growth in developing countries Data Description The sources of data include the World Investment Reports of 2004 and 2005. These reports are published annually by the United Nations Commission on Trade and Development. Besides we draw the data from the World Development Indicators. We also make use of the data published by World Resources Institute (earthtrends.wri.org). We further classified the countries into developed and developing countries as per the classification adopted by WDI databases. The time period of the data is between 1980-2005. Our sample was initially 85 countries (25 developed and 60 developing). However in some cases, the missing data resulted in a final sample size of 76 countries (25 developed and 51 developing countries). Our analysis used the T-statistic to test our hypothesis. We also used the co-relation study to understand the relation between GDP and FDI inward stock and also the relation between FDI inflows and Gross Fixed Capital Formation. We also made use of bar charts and diagrams apart from the normal tools and mean and standard deviation Results and Discussion The following graphs illustrate the relation between fitted values and residuals and real GDP growth rate per capita (Exhibit I and II). Exhibit I Line Graph illustrating Economy Growth of Developing countries
10.000 8.000

Real gdp per capita

6.000 4.000 2.000 0.000 -2.000 -4.000 Developing countries 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 Fitted Values Residuals Real gdp pc

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Exhibit II Line Graph illustrating Economy Growth of Developed countries

5.000 4.000

Real gdp per capita

3.000 2.000 1.000 0.000 -1.000 -2.000 developed countries 1 3 5 7 9 11 13 15 17 19 21 23 25 Fitted Values Residuals Real gdp pc

Examining the correlation among the independent variables, we find that government expenditure as % of GDP relates negatively with labour force, openness, exchange rates and capital formation. A low correlation exists between Government and FDI. FDI shows a negative correlation with Labour, Openness, Exchange rates and a positive but low correlation with Capital.

Table I Correlation of independent variables in Developing countries Labour Labour Openness Exchange Capital 1.000 -0.246 0.002 0.379 1.000 -0.046 0.189 0.301 -0.086 Openness Exchange Capital Government FDI

1.000 0.023 -0.218 -0.100

1.000 -0.234 0.157 1.000 0.005

Government -0.092 -0.010 FDI

1.000

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Table II Correlation between Real GDP per capita (growth) and FDI as % of GCF Real GDP per capita FDI Real GDP per capita 1.000 0.163 FDI 1.000

When we proceed to do a cross sectional analysis on developed countries, a similar trend is visible. FDI has a negative correlation with Labour, Exchange rate, Capital and Government Expenditure. However, FDI displays a stronger relation with Growth in developed countries as compared to the developing countries. Table III Correlation of independent variables in Developed countries Labour Labour Openness Exchange Capital 1.000 -0.060 0.201 -0.157 1.000 0.610 0.347 -0.093 0.278 Openness Exchange Capital Government FDI

1.000 0.555 -0.384 -0.132 Table IV

1.000 -0.576 -0.058 1.000 -0.072

Government 0.189 -0.101 FDI

1.000

Correlation between Real GDP per capita (growth) and FDI as % of GCF Real GDP per capita FDI Real GDP per capita 1.000 0.624 FDI 1.000

Further there is an impact of FDI on growth at 10% significant level. Labour is significant at 1% and Exchange at 10%. Government too is significant at 1%. Further there is a small positive elasticity between FDI and Growth in developing countries. Government however shows a negative elasticity with growth. (Table V and VI).

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Table V Multi Regression Results: Sample F Constant Labour Opennes Exchange Capital Governmen value(Ove s t rall) 9.6982 0.0866 0.0000 4.1378t 0.0107 1.4867t 0.0003 1.7678t 0.0653 -0.653 FDI

51

0.0407 1.6863t (0.0988)***

(0.0000)* 0.0770t

1.5343t -3.065t

(0.9390) (0.0002)* (0.1442) (0.0840)*** (0.1321) (0. 0037)*

* ** ***

indicates Significant at 1% Level of significance indicates Significant at 5 % Level of significance indicates Significant at 10 % Level of significance

The values inside the parenthesis are the p-values. t indicates the computed t-statistic value.

Table VI Multiple correlation and Coefficient of determination R Adjusted Standard Error R Square square 0.75460.5694 0.5107 1.4807 R In case of developed countries, FDI is significant at 5% level. However we do not find any significance for other factors. R at 75% and R2 at 56.94% are good indicators of the overall determinants of growth (Table VII and VIII).

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Table VII Multi Regression Results Sample 25 F Constant Labour OpennessExchange Capital Government value(Overall) 2.4042 (0.0696)*** 1.9284 0.8447 0.0000 0.0062 0.0171t 1.2642 -0.0054 -0.0033 -0.0248 FDI 0.0133 2.3288t (0.0317)**

-0.8842t -0.0419t -0.0248t

(0.4093) (0.9865) (0.2223) (0.3882) (0.9670) (0.5375)

* ** ***

indicates Significant at 1% Level of significance indicates Significant at 5 % Level of significance indicates Significant at 10 % Level of significance

The values inside the parenthesis are the p-values. t indicates the computed t-statistic value.

Table VIII Multiple correlation and Coefficient of determination R Adjusted Standard Error Square R square 0.75460.5694 0.5107 1.4807 R

We then combine both the samples of developed and developing countries and examine the impact of FDI on growth for the whole sample. We find significance at 5% level in case of FDI. Other factors which are significant include Labour (1%), Exchange (10%) and Capital (1%) (Table IX and X).

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Table IX Regression Results Sample F value Constant Labour Openness Exchange Capital Government FDI (Overall) 76 8.9996 -1.1726 0.0000 0.0021 0.0003 0.1086 -0.0343 0.0.250 (0.0000)* -1.1758 3.6808t 0.4326 1.7490t 2.9646t -1.0731t 2.6336t (0.0104)**

(0.2437) (0.0005)* (0.6667)

(0.0847)*** (0.0042)* (0.2870)

* ** ***

indicates Significant at 1% Level of significance indicates Significant at 5 % Level of significance indicates Significant at 10 % Level of significance

The values inside the parenthesis are the p-values. t indicates the computed t-statistic value.

Table X Multiple correlation and Coefficient of determination R Adjusted Square R square 0.66260.4390 0.3902 R Standard Error

1.4332

Inferences and Future Directions Taken together the results of regression on growth provide indicators of FDI influencing the growth. But the influence seems weak in case of developing countries. The complexity of the relationships presents a challenge to researchers and managers alike. We believe further investigation into these relationships is essential to uncover the influence of FDI and further the role of control factors. The correlation between FDI and growth is stronger in developed world as compared to developing world. The results may serve an insight in developing world where FDI is often seen as a panacea for growth. Further Capital does not show any significant relationship with growth. The results therefore seem inconclusive. This study follows the current approach to the subject. We have attempted to use rational logic within the constraints of available data to uncover the relationship between FDI and growth.
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References 1. Paul Krugman, 1998, Firesale FDI, Working Paper, Massachusetts Institute of Technology. http://web.mit.edu/krugman/www/FIRESALE.htm. 2. Borensztein, E., De Gregorio, J., and Lee, J. W. (1998). How Does Foreign Direct Investment Affect Growth?. Journal of International Economics 3. Gastanaga, V. M., Nugent, J. B., Pashamova, B. (1998). Host Country Reforms and FDI Inflows: How Much Difference Do They Make?. World Development, 4. Aitken, B. and Harrison, A. (1999), Do domestic firms benefit from direct foreign investment? Evidence from Venezuela, American Economic Review, 5. Ricardo Hausmann and Eduardo Fernandez-Arias, 2000, Foreign Direct Investment: Good Cholesterol?, Inter-American Development Bank Working Paper No. 417 (Washington). 6. Manuel R. Agosin, Ricardo Mayer (2000), Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment, Discussion Paper, UNCTAD, UNCTAD/OSG/DP/146 7. IMF (2001), World Economic Outlook. Washington, DC: International Monetary Fund. 8. IMF (2003), World Economic Outlook. Washington, DC: International Monetary Fund. 9. World Investment Report, UNCTAD Publications, 2003-2007 10. Sandy Kyaw (2003), Foreign Direct Investment to the Developing Countries in the Globalized World, DSA Conference, University of Strathclyde, Glasgow 11. Xavier Sala-I-Martin, Gernot Doppelhofer, Ronald Miller, (2004) Determinants of Long Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach, American Economic Review, September. 12. Blonigen, B.A. and Wang, M. (2004), Inappropriate pooling of wealthy and poor countries in empirical FDI studies, NBER Working Paper no 10378 13. Andreas Johnson (2005), The Effects of FDI on Host Country Economic Growth, Working Paper, Jonkoping International Business School, Sweden 14. Peter J. Buckley, Jeremy Clegg and Chengqi Wang (2006), Inward FDI and host country productivity: Evidence from Chinas electronics industry, Transnational Corporations 15. IMF (2006). World Economic Outlook. Washington, DC: International Monetary Fund. 16. Chandana Chakraborty, Peter Nunnenkamp (2006), Economic Reforms, Foreign Direct Investment and Economic Effects on India, Kiel Working Paper No. 1272 17. Trends in Foreign Direct Investment in OECD countries, OECD Publications, www.oecd.org

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Urbanization and Environment: Impact and Implications for Sustainable Development53

Prashant Kulkarni54 Anantha Murthy N.K.55 At the beginning of the twentieth century, 150 million people lived in urban settlements, representing less than ten per cent of the world's population. This increased twenty fold to nearly 3,000 million, i.e. almost half the world's population by the end of the century. The outcome is an increasing association of the cities with environmental degradation, poverty, dirt, traffic congestion and proliferation of slums rather than on the economic wealth they generate. With the support in terms of infrastructure and delivery of public services unable to keep pace with the rate of urbanization, the negative images of the city seem to stay. To add to the woes, air, water and noise pollution have engulfed many cities of the developing world. Hence, a perception of increasing urbanization being a cause for environmental degradation seems well founded. Central to this perception lays the data that seems to suggest the increasing incidence of urbanization and consequent demands on the resources it places upon is accompanied by deterioration in the environmental quality indicators. Therefore we take the well-established method of analyzing the indicators of urbanization with respect to their impact on the environmental indicators. Needless to mention, the challenge lies in defining the indicators. Therefore the current paper surveys the existing literature on the indicators representing the state of urbanization and environment. Following the identification of the indicators would be to design an appropriate methodology to test the impact. This gives the basis for the authors inferences. Trends in Urbanization At the beginning of the twentieth century, 150 million people lived in urban settlements, representing less than ten per cent of the world's population. By the end of the century, the world's urban population had increased twenty fold to nearly 3,000 million, i.e. almost half the world's population. Asia accounted for the lion's share (47.5 per cent) of the world's population in 'million' cities and had 143 of such 'million' cities. Asia also has 13 of the world's 23 mega-cities of at least 8 million inhabitants56. Contrary to most predictions, there is a slowdown in the population growth rates for many cities not only in developed world but also in the developing countries. The largest cities in these countries grew far more slowly in the 1980s than during the previous two decades.
53

The paper is updated version of the paper titled same presented at IJEB- Serial Publications International Conference on Recent Developments in Finance and Economics held in New Delhi, December 2011 54 Asst. Professor, Economics and Public Policy, IBA Bangalore 55 Faculty, Quantitative Methods and Operations Research 56 UN Statistics Stalking Theory: View through the Prism of Real life Practice 52 | P a g e

Besides, the mega cities harbored less than five per cent of the world's population in 1990. This indicates the large cities do not dominate the global demographic landscape to the extent predicted. Forecasts that cities such as Calcutta and Mexico City would grow to gigantic conglomerations of 30 to 40 million inhabitants now seem a distant nightmare. Cities suffer from inadequate maintenance of urban infrastructure. This is to a good extent the result of lack of access to funds for the city governments. Further, the inflow of migrants into the city has accentuated the pressures on the infrastructure. Besides, it has also been a source of social conflicts within the city. Apart from this, we also see a deterioration of environmental standards in the country. The problem is accentuated in developing countries Exhibit I Table 2: Environmental Fragility in Developing Countries Characteristics Aridity Only Arid, slope Arid, poor soil Arid, slope, poor soil, forest Slope Only Slope, poor soil Slope, forest Poor Soil Only Poor soil, forest Forests (only) Total
Source: World Bank (2003)

Population (million) 518 350 36 107 25 216 149 26 41 430 386 44 130 1294

Share of population on fragile lands (%) 40

Share of earths land surface affected (%) 35

17

33

22

100

73

Urbanization environmental nexus is viewed through IPAT prism. The impact on urbanization on environment (I) is a product of the population in urban agglomerations, affluence of the population and technological impact. The current study attempts to use this equation to measure the impact Trends in Urbanization At the beginning of the twentieth century, 150 million people lived in urban settlements, representing less than ten per cent of the world's population. By the end of the century, the world's urban population had increased twenty fold to nearly 3,000 million, i.e. almost half the world's population. Asia accounted for the lion's share (47.5 per cent) of the world's

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population in 'million' cities and had 143 of such 'million' cities. Asia also has 13 of the world's 23 mega-cities of at least 8 million inhabitants57. Three major trends dominate the discussion on urban landscape. First, contrary to most predictions, there is a slowdown in the population growth rates for many cities not only in developed world but also in the developing countries. The largest cities in these countries grew far more slowly in the 1980s than during the previous two decades. Second, the mega cities harbored less than five per cent of the world's population in 1990. This indicates the large cities do not dominate the global demographic landscape to the extent predicted. Forecasts that cities such as Calcutta and Mexico City would grow to gigantic conglomerations of 30 to 40 million inhabitants now seem a distant reality58. Third, the belief that larger cities may mean mismanagement and weak governance structure leading to chaos and instability does not seem to be the case. The links between urban change and economic, social, political and cultural change are not yet clear. Some large and rapidly growing cities have been well-managed and serviced, while some of the worst physical conditions have beset small towns. Yet, the progressive urbanization of the globe is certain. It estimated that nearly half the worlds population will be in urban areas within the next decade or two (Refer Exhibits I and II). As urbanization gathers momentum, it is unlikely that cities will remain isolated from the effects of globalization59. The world cities which are major players in national economies will become more visible and in all probability will drive the forces of globalization in their respective countries. Exhibit I Urban Population as a percentage of total population 2010* Country Argentina Australia Bangladesh Brazil China ARG AUS BGD BRA CHN 90.9 89.1 27.3 86.5 44.9 90.1 88.2 25.1 84.2 40.4 89.2 87.2 23.2 81.2 35.8 88.2 86.1 21.5 77.8 31.4 87 85.4 19.8 74.8 27.4 2005 2000 1995 1990

57 58 59

World Development Indicators 2006, devdata.worldbank.org/wdi2006 World Development Indicators 2002

Globalization is a multifaceted process of drawing countries, cities and people ever closer together through increasing flows of goods, services, capital, technology and ideas

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Egypt France Germany India Indonesia Japan Korea, Rep Pakistan Russian Federation South Africa Sri Lanka Thailand United Kingdom United States Viet Nam

EGY FRA DEU IND IDN JPN KOR PAK RUS ZAF LKA THA GBR USA VNM

43.7 77.8 75.6 30.1 53.7 66.8 81.9 37 72.6 61.7 15.1 34 90.1 82.3 28.8

42.8 76.7 75.2 28.7 48.1 65.8 80.8 34.9 73 59.3 15.1 32.3 89.7 80.8 26.4

42.5 75.8 75.1 27.7 42 65.2 79.6 33.1 73.4 56.9 15.7 31.1 89.4 79.1 24.3

42.8 74.9 75 26.6 35.6 64.6 78.2 31.8 73.4 54.5 16.4 30.3 89 77.3 22.2

43.5 74.1 73.4 25.5 30.6 63.1 73.8 30.6 73.4 52 17.2 29.4 88.7 75.3 20.3

Source: www.earthtrends.wri.org * Projected figures

Exhibit II: Percentage of population residing in urban areas

World/Re gion World More developed region Less developed region Africa 1980 In billion 39.4 1.752 70.2 .797 % 1985 % 41.2 71.5 In billion 1.997 .838 % 43.1 72.7 1990 In billion 2.282 .880 % 47.6 75.8 2000 In billion 2.962 968 % 52.8 79.1 2010 In billion 3.779 1.060

28.8

.954

31.5

1.159

34.3

1.401

40.3

1.993

46.8

2.717

27.3

.130

29.6

.164

32.0

.205

37.6

.322

44.2

.493

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Asia Latin America

26.2 65.0

.678 .233

28.6 68.4

.813 .273

31.2 71.5

.974 .315

37.1 76.6

1.369 .400

43.8 80.4

1.845 .482

Source: World Urbanization Prospects- The 1992 Revision, United Nations. New Work, 1993 Data Results We use the multiple regression models to capture the impact of urbanization on environment. Typically, the measure used is the IPAT model where I (Environmental impact) is a product of population (P), affluence levels (A) and technology (T) Therefore the function can be written as ESI= f{(ALPTA, EP, HI TECH, FW) }

The regression equation can be written as

ESI=

+0ALPTA+ 1EP+ 2 HI TECH + 3FW + Error

The following proposition is tested both for developed and developing countries H0: There is no Influence of Economic indicators on ESI H1: There is an Influence of Economic indicators on ESI Results of Regression Model Results of multiple regression for ESI Summary measures Multiple R R-Square Adj R-Square StErr of Est ANOVA Table Source Explained Unexplained

0.9328 0.8701 0.7661 3.5877

Df 4 5

SS 430.9867 64.3573

MS F 107.7467 8.3710 12.8715

p-value 0.0193

Regression coefficients
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Coefficient Std Err Constant ALPTA (x1) EP (x2) Hi-Tech (x3) FW(Dummy x4) 51.5262 0.0617 0.0014 -0.0618 -11.7092 7.2647 0.0762 0.0004 0.1546 4.4853

t-value 7.0927 0.8092 3.3491 -0.3998 -2.6106

p-value 0.0009 0.4552 0.0203 0.7058 0.0476

Lower limit 32.8518 -0.1343 0.0003 -0.4591 -23.2391

Upper limit 70.2006 0.2577 0.0025 0.3355 -0.1793

Results of multiple regression for ESI Summary measures Multiple R R-Square Adj R-Square StErr of Est ANOVA Table Source Explained Unexplained

0.2956 0.0874 -0.1734 7.5118

Df 4 14

SS 75.6329 789.9839

MS 18.9082 56.4274

F 0.3351

p-value 0.8498

Regression coefficients Coefficient Std Err Constant ALPTA (x1) EP (x2) Hi-Tech (x3) FW(Dummy x4) Inferences 48.9569 -0.0680 0.0007 -0.0919 -2.9933 5.7769 0.0920 0.0010 0.1378 6.5957

t-value 8.4746 -0.7390 0.7162 -0.6671 -0.4538

p-value 0.0000 0.4721 0.4857 0.5156 0.6569

Lower limit 36.5666 -0.2654 -0.0014 -0.3874 -17.1396

Upper limit 61.3472 0.1294 0.0029 0.2036 11.1530

While the developing world doesnt present a picture of an impact of urbanization on environment, we do detect an impact in the developed world. The impact is due to energy consumption. The data is limited by the lack of comprehensive index to measure to the impact. Environmental Sustainability Index (ESI) , now reformulated as Environmental Protection Index (EPI) is of recent vintage . Hence the lack of data does hinder the robustness of the results. However the model is consistent with the existing research on the subject and can serve as a broad framework for future studies.

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Annexure Annexure I Country Japan Israel Spain France Germany Netherlands Canada United States of America Australia United kingdom Urban 84,810 6,349 34,079 47,541 60,727 13,356 26,394 248,981 18,373 54,620 Rural 43,157 579 10,200 14,106 21,873 3,063 6,482 56,845 2,370 6,149 Total 127,967 6,928 44,279 61,647 82,599 16,419 32,876 305,826 20,743 60,769 % age 66.3 91.6 77 77.1 73.5 81.3 80.3 81.4 88.6 89.9

Annexure II Country Kenya Egypt Morocco South Africa China Republic of south Korea India Pakistan Indonesia Syrian Arab Republic Saudi Arabia Turkey United Arab Emirates Russian Federation Ukraine Mexico Argentina Brazil Urban 7,982 32,193 17,377 29,266 561,251 39,182 341,247 58,487 116,832 10,726 20,138 51,101 3,408 103,778 31,365 81,951 36,298 163,462 Rural 29,556 43,305 13,848 19,310 767,379 9,042 827,768 105,415 114,795 9,202 4,597 23,776 973 38,721 14,841 24,584 3,233 28,329 Total 37,538 75,498 31,224 48,577 1,328,630 48,224 1,169,016 163,902 231,627 19,929 24,735 74,877 4,380 142,499 46,205 106,535 39,531 191,791 % age 21.3 42.6 55.7 60.2 42.2 81.2 29.2 35.7 50.4 53.8 81.4 68.2 77.8 72.8 67.9 76.9 91.8 85.2

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Annexure III- Access to Drinking Water and Sanitation Developed Economy: Improved coverage Drinking water

Developed Economy Australia Canada France Germany Israel Japan Netherlands Spain United Kingdom United States Developing Economy

Total 1990 100 100 100 100 100 100 100 100 100 99

2008 100 100 100 100 100 100 100 100 100 99

Urban 1990 100 100 100 100 100 100 100 100 100 100

2008 100 100 100 100 100 100 100 100 100 100

Rural 1990 100 99 100 100 100 100 100 100 100 94

2008 100 99 100 100 100 100 100 100 100 94

Total Developing countries 1990 2008 Algeria Argentina 94 97 Brazil 88 97 China 67 89 Egypt, Arab Rep. 90 99 India 72 88 Indonesia 71 80 Kenya 43 59 Korea, Rep. 98 Mexico 85 94 Morocco 74 81 Pakistan 86 90 Russian Federation 93 96 Saudi Arabia 89 South Africa 83 91 Turkey 85 99 Ukraine 98 Annexure IV- Sanitation coverage

Urban 1990 97 96 97 96 90 92 91 97 94 94 96 98 97 98 94 99

2008 98 99 98 100 96 89 83 100 96 98 95 98 97 99 100 98

Rural 1990 72 65 56 86 66 62 32 64 55 81 81 63 66 73

2008 80 84 82 98 84 71 52 88 87 60 87 89 78 96 97

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Improved coverage

Sanitation

Developed Economy Australia Canada France Germany Israel Japan Netherlands Spain United Kingdom United States

Total 1990 100 100 100 100 100 100 100 100 100 100

2008 100 100 100 100 100 100 100 100 100 100

Urban 1990 100 100 100 100 100 100 100 100 100 100

2008 100 100 100 100 100 100 100 100 100 100

Rural 1990 100 99 100 100 100 100 100 100 100 99

2008 100 99 100 100 100 100 100 100 100 99

Total Developing countries 1990 Argentina 90 Brazil 69 China 41 Egypt, Arab Rep. 72 India 18 Indonesia 33 Kenya 26 Korea, Rep. 100 Mexico 66 Morocco 53 Pakistan 28 Russian Federation 87 Saudi Arabia South Africa 69 Turkey 97 Ukraine 95

2008 90 80 55 94 31 52 31 100 85 69 45 87 100 77 97 95

Urban 1990 93 81 48 91 49 58 24 100 80 81 73 93 100 80 98 97

2008 91 87 58 97 54 67 27 100 90 83 72 93 84 98 97

Rural 1990 73 35 38 57 7 22 27 100 30 27 8 70 58 95 91

2008 77 37 52 92 21 36 32 100 68 52 29 70 65 95 90

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Governance, Market State and Cities60

Prof. Prashant Kulkarni61

The end of World War II saw a paradigm shift in the way the map of the world looked like. The war had hurt both victors and vanquished alike. Britain and France faced massive food shortages. Russia though projecting a strong image was not spared either. Germany had been the worst affected due to the second massive defeat within thirty years. Japan was reeling under the onslaught of the atomic era. European countries were yet to get rid of the shock treatment rendered by the whims and fancies of one dictator. Only the United States seemed to be insulated from the effects of the war. The catastrophe had weakened the resolve and might of the European colonial powers to hold on to their colonies. Led by India in 1947, most countries in Asia and Africa emerged independent from their colonial masters. This massive decolonization changed the map of the world and launched it into a new era. The world itself by and large got divided into two camps. One was led by the United States (US) and Western European countries and advocated free market economy and democracy. The other led by Soviet Union put into practice the principles of Karl Marx and heralded the emergence of Communist regimes (almost all indirectly controlled by Soviet Union (USSR)) across Eastern Europe. This was to set the stage for what has come to be described as the Cold War between the two superpowers. The destruction the War wreathed on the Axis Powers resulted in these powers springing back as if with a vengeance. This was also the time where development economics took the center stage. Though many of the proposals of John Maynard Keynes were not accepted at Breton Woods conference his ideas stimulated a host of economists. They veered around the idea of the need of massive investment in the public infrastructure by the government to boost demand and thus the economy. Inspired by these economists most of the newly independent countries envisaged an active role for the government in the economic development of the country. The zenith was probably reached in the early 1970s when Richard Nixon embraced these policies. But the late 1970s and early 1980s saw a reversal in the trend. Led by Margaret Thatcher and Ronald Reagan, the world moved towards an embrace of free market principles. The reforms Perestroika and Glasnost started by Mikhail Gorbachev that ultimately led to the collapse of Communism in almost all parts of the world and ultimate collapse of the Soviet Union itself seemed to signal the triumph of free market ideology over the government control of economy. Fifteen years down when the world seems to question the effectiveness of these principles and whether fruits of these reforms have reached the people, it would be instructive to understand how the world looks today.
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This paper is developed on the report prepared by the authors on Financial Reforms in Bangalore Mahanagara Palike 61 Asst. Professor, Economics and Public Policy, IBA Bangalore Stalking Theory: View through the Prism of Real life Practice 61 | P a g e

At the beginning of the twentieth century, 150 million people lived in urban settlements, representing less than ten per cent of the world's population. As the century draws to a close, the world's urban population has increased twentyfold to nearly 3,000 million, i.e. almost half the world's population. Asia accounted for the lion's share (47.5 per cent) of the world's population in 'million' cities and had 143 of such 'million' cities. Asia also has 13 of the world's 23 mega-cities of at least 8 million inhabitants. Three major urban trends have been observed at the close of the present century. First, contrary to most predictions, population growth rates have slowed down for many cities in developing countries. The largest cities in these countries grew far more slowly in the 1980s than during the previous two decades. Second, the world is less dominated by very large cities than had been forecast. Less than five per cent of the world's population lived in megacities in 1990. The prediction that cities such as Calcutta and Mexico City would grow to gigantic conurbations of 30 to 40 million inhabitants has not come true. Third, the links between urban change and economic, social, political and cultural change are not clear. Some large and rapidly growing cities have been well-managed and serviced, while some of the worst physical conditions have beset small towns. Several tendencies in shaping the urban future of the third millennium can be discerned. First, the progressive urbanization of the globe is certain. It has been estimated that in the first decade of the twenty-first century more than half the world's population will be living in urban settlements. Second, there will be growing interaction between urbanization and globalization. Globalization is a multifaceted process of drawing countries, cities and people ever closer together through increasing flows of goods, services, capital, technology and ideas. The world cities have come to the fore because they perform special functions in the new global economy. The third characteristic of the urban future is the likely continuing devolution of powers and responsibilities to local authorities and civil society. This process began in the 1990s when traditional modes of urban governance were found wanting and existing institutions could not adequately deal with the old and new urban problems. In a globalizing world, countries and cities are increasingly linked in interdependent and interlocking relationships. While world cities are important in their own right in a world order in which national boundaries fail to stop cross-border flows of capital, people and ideas, sub regional economic entities have emerged. Called growth triangles, some neighboring territories involving several countries have sought creative economic co-operative development. Examples of successful growth triangles in Asia are those known as Southern China, with the participation of Hong Kong, Guandong, Fujian and Taiwan, and SIJORI, including Singapore, Johor (Malaysia) and Riau Island (Indonesia). These two growth triangles are centered, respectively, on the world cities of Hong Kong and Singapore. A variant of this theme of sub regional development is what some scholars call region-states. They produce sound economic development in some regions that may be parts of a country or may involve several countries.
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Another spatial expression of rapid economic development in the global economy is urban corridors which have been observed in East Asia, Europe and elsewhere. Globalization has not been a boon to all cities. While it has brought new opportunities and wealth to some cities, it has marginalized others. The marginalized city can be found anywhere in the world, but especially in Africa. It is outside the cyberways, lacks the requisite information infrastructure and is generally not able to plug into the global economy. Four common features characterize cities in all parts of the world. First, urban unemployment remains high. This explains the phenomena of area boys' unemployed, able-bodied men, sometimes drug-dependent, in Lagos and parking boys' in Nairobi. Second, urban infrastructure is often inadequately maintained even in developed countries. Water and sewer systems fail in Chicago and Washington, and electricity on the Eastern seaboard. In developing countries the problems are often much worse. Poor infrastructure has led to problems in water supply, urban sanitation and transport. The urban poor suffer most. Third, environmental problems, especially air, water and noise pollution have grown in many cities of the developing world. Fourth, growing social conflicts, such as homelessness and crime, plague many cities. These are the result partly of growing competition for jobs and partly of the free movement of people. In the next century, the relevant unit of economic production, social organization and knowledge generation will be the city. World cities will be especially influential in shaping the development of the global economy. Technological advances and easy access to information will enable cities to evolve more efficient ways of production, capitalizing on the cheapest sources of materials. In the information age that has just begun, cities act as generators, processors and depositories of knowledge. Knowledge is generated by research, discovery and innovation. As knowledge is a highly valued resource, cities will be in competition to generate knowledge. The knowledge industry, science parks, technological development zones, technopolies and others will be further developed in the cities of the future. Cities of the future will have more freedom. Greater freedom will be enjoyed by individuals and institutions because they will be networked electronically. Wired interactions will supplement face-to-face contacts. This will affect urban lifestyles as people can work at home, shop by computers and travel with credit cards. The clamor for greater participation and democracy will see more attention and resources devoted to non-governmental, community-based organizations. Cities of the future will have the opportunity of reorganizing themselves socially and institutionally. With the knowledge and wisdom that humankind has inherited from our ancestors and with new technologies and resources, there is no reason to believe that we are not prepared to face our urban future which is both a daunting challenge and a window of opportunity.

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Revolution in information technology and communication has changed the way we perceive things happening across the globe. Instant images capturing the happenings from remotest corners in the world are flashed on television screen across the globe in seconds. Modern Telecommunications has seen to it that anytime, anywhere, anyone can be contacted. Capital, if available in convertible currencies, can be moved across continents in a matter of minutes. People are no longer ignorant of the things happenings around them. No one can afford to still think in terms of one country alone and not the entire world, if he wants a share of the huge cake of global markets. At an Enterprise level, the needs are small and the goals are smaller. But when it comes to the strategies at the Governance level, one has to be very careful in formulating policies be it internal or external. National Government and State Government level, development activities are based on the financial structures at the Local levels and the financial soundness of the local bodies. However it is clear by the available literature that this is not the ideal situation all over the world. So the development itself has divided the world into two clearly defined sets. One being developed and the other under developed. At the National and State level what makes a country great and successful is its sustained financial success, similar to the bottom line of the enterprise levels. Can we say the same thing about local bodies also? The idea of free market economy has captured the imagination of the population at large. The collapse of the Soviet Union was seen to herald the demise of developmental economics. While the western countries marched miles ahead many Third World countries lagged behind. Dictatorships, riots, coups, economic mess, poverty dominated the landscape in many of these countries. Resource rich countries like Botswana, Angola, and Namibia fell by the wayside due to faulty policies. On the other hand countries like Malaysia, Singapore, Taiwan, and South Korea made rapid progress. Many analysts wondered the reasons for this wide gap. A school of economists argued that the culture and environment of the countries played a major role in the success or failure of a country. On a macro plane observers believe that the way the country utilizes its resources and learns from the experiences of the past would determine how far it would travel along the line of prosperity. There is also a school of thought which argues that determination of this soundness at the top is determined by the soundness of the policy structures at the bottom. Implied in this assertion is the role the state governments and the local bodies play in building the foundation for the country to grow and prosper. This could also be seen as analogous to the set up where the strength of the industry is derived from the micro enterprises that produce and sell those goods. There is also another facet to the story. The strength of these local bodies would depend upon the financial soundness they are able to maintain. This becomes important especially in the scenario wherein they have to depend on the federal or state government for funding. The ability to resist the pressure from the top would depend vastly on the ability of the authority to raise resources by itself. This calls for a thorough study on the various cities who have adopted different measures to stay afloat. While few cities have succeeded many other have failed. Therefore it becomes all the more necessary to study the phenomenon.

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The rise of a city was itself a product of what Alvin Toffler calls Second Wave. The Industrial Revolution swept England and Europe in the late eighteenth and the early nineteenth century. Mushrooming of factories and decline of agriculture led to the migration of people from the countryside to the areas where these factories were located to get better wages. Workers herded around the factory site leading to the formation of townships. These townships eventually led to the formation of cities and later mega cities. These cities brought with them the problems of pollution, lack of shelter, congestion, crime etc. In the developing countries, fed on the prescription of rapid industrialization for rapid growth, there was massive urbanization without having the necessary infrastructure in place to meet the growing migration. Cities are at the centre of three powerful trends: urbanization, globalization and decentralization. The associated risks and opportunities will shape the future of the region. Urbanization will continue to reach rates of 80-85%, which are characteristic of mature cities. At the same time, globalization, which heightens competition among cities for market shares and jobs in East Asia, is gradually also reaching the far Latin American cities of Brazil and Argentina. Cities that are unable to respond to the challenges of new technology and of an ever-increasing demand for knowledge seem to be fated to lag behind. Decentralization, which forces cities to take on greater responsibility for their own management and revenues, acts both as an opportunity and a challenge in terms of responses to urbanization and globalization. Further, cities are seeing themselves as engines of economic growth, providers and managers of land, and suppliers of social services, such as education and health. They rightly understand their role as facilitating the investment climate and the externalities that impact decisions of investment and production. European and Chinese cities, taking the lead, are moving to create investor-friendly environments, eliminating red tape, and increasing employment opportunities. The World Bank itself recognized these trends when it proposed the urban strategy in 2000. the strategy aim s to promote a) a national urban policy that includes a general framework establishing guidelines on the powers and responsibilities of cities. b) participatory city development strategies and the development of each communitys relative advantages. c) a focus on urban poverty and upgrading and d) technical assistance and institutional strengthening at all levels of the public sector and private constituencies to understand the dynamics of cities and how to best use their energies. However this strategy seems to focus more on addressing the issues of globalization than improving public services per se. In India, urbanization is a recent phenomenon. India is a heterogeneous country which could well be called a melting pot of races the term which is often used to describe US. There is a wide disparity in the developmental pattern of various states and within the states. Bihar struggles at the bottom whereas smaller states like Goa have done wonders. In states like
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Andhra Pradesh where cities like Hyderabad have slogged all the attention, vast interior towns remain trapped in the wheel of underdevelopment. One wonders whether this has to do with the policies undertaken at the top or is it the result of the failure at the bottom. It is evident however that there is strong gap between the cities themselves like Bangalore and Patna. The lack of employment opportunities in rural areas has seen a migration of rural families towards the cities. Besides, the cities themselves have witnessed massive spurt in their native population. Added to these is the continuous incorporation of surrounding suburbs or the peri-urban areas as they are called into city corporation area. These people have to be provided basic amenities. This is placing a huge burden on the city managers leading to gaps in provision of infrastructure services. Though poverty rate has declined over the last 50 years and quality of urban life improved in terms of availability of water and sanitation, power and electricity, transportation, telecommunication and like, concerns still exist. Indias urban population, as per the 2001 Census of the country, was 285.35 million (27.8 per cent of the total population) to improve the quality of life of urban inhabitants as well as to facilitate economic growth requires huge investment of funds. Of more than 5000 urban agglomerations and other towns identified in the 2001 Census, 35 urban agglomerations were metropolitan cities having a population of one million and above. The rate of urban population growth in the country continues to be high compared to developed countries, and the large cities in the country are becoming larger due to accretion of population to these cities. While the total population growth rate in the country was expected to decline significantly in the coming decades, urban population would continue to grow at about 3 per cent per year. Estimates indicate that the urban population would reach about 550 million by 2021 which would take the level of urbanization to more than 40%. Presently, there are three mega-cities, with population in excess of ten million, in the country, but by the year 2021, will have six mega-cities (Calcutta, Mumbai, Delhi, Chennai, Bangalore and Hyderabad). This would make India have the greatest concentration of mega-cities in the Asian region. The countrys current urban population is almost equal to the combined urban population of United States, UK and France. Cities often seem to generate chaos instead of opportunities. Discussion on cities tends to lead on environmental degradation, poverty, dirt, traffic congestion and proliferation of slums rather than on the economic wealth the city generates. Though 90% of the urban population has access to safe drinking water only 63% have access to potable water within their premises. Less than two thirds of population has access to basic sanitation facilities. Only about 60% of the solid waste generated is being collected every day62. Environmental degradation is emerging as a major area of concern in the urban societies. Though ULBs are responsible for providing services like drinking water, sanitation, primary health, most are found wanting on these issues. In fact many observers feel the quality of services has deteriorated over the years.

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Efforts for a planned development of urban areas in the country were initiated immediately after the country attained independence. As per the Indian Constitution, the ULBs were responsible for maintenance of basic infrastructure and services in cities and towns. But by and large the development in urban areas has been haphazard and unplanned. The actual development in urban areas has largely been unplanned and uncontrolled. Support in terms of infrastructure and delivery of public services has been unable to keep up pace with the rate of urbanization. This has created serious problems with rapid deteriorating situation in the cities as far as quality of life is concerned. All the cities and towns in the country have serious shortage of power, water supply, sewerage, developed land, housing, transportation and other facilities. Large proportions (30 to 40 per cent) of urban populations, particularly in metropolitan cities, are below the poverty line leading to proliferation of slums. This in turn leads to educational deprivation and deteriorating health levels of these sections of urban inhabitants. The urban local bodies responsible for providing these services lack resources to provide these services. Constraints exist in the form of lack of powers in terms of financial resources. They do not have adequate expertise in dealing with situations that arise from lack of public services. Neither do they have authority to determine and collect adequate levels of service charges. The legal and administrative systems concerning urban planning, governance, and management are archaic. Legislations often act as a hindrance rather than as a facilitator of urban development. Reforms many a time, if carried out, lack teeth and seem symbolic. Legislations such as the Urban Land Ceiling and Regulation Act and the Rent Control Act continue to adversely affect the land and housing market, giving rise to inefficient land uses. These issues largely stem from that fact that the policy makers are unable to draw up a long term strategy to handle the growth in these cities. Scarcity of resources and weak managerial and operation capabilities has made things worse. It needs no exaggeration to say that urban financing and management as one of the complex and politically sensitive issue. It is ironical to note that while cities symbolize economic growth and prosperity, the bodies managing the cities are starved of funds. The increasing gap between the municipal financial resources and the expenditure add to the woes of the local authorities who themselves in many cases do not have control over financial resources. Many of these bodies have to depend on higher governments for grants. There is consistency in disbursing these grants. Higher governments usually resort to ad-hoc grants instead of a planned transfer. The local bodies therefore find it difficult allot money for various projects. Even when the grants do come in, questions are often raised about transparency and predictability. Though in some countries, specialized institutions have been set up, and the local bodies which are financially strong, borrow money from these institutions. Unlike in Europe and US where local bodies can tap capital and money markets, financial markets are not so well developed to support such initiatives in the developing world In India itself, the India Infrastructure Report (1996) estimates that urban bodies required and annual investment about Rs.22, 000 Crore on water and sanitation alone as against the expected fund flow of about Rs. 5000 crores. It is beyond the limits of many ULBs to raise

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the resources of this nature. Therefore a strong revamp of the financing patterns of the urban bodies has to be undertaken63. Statistics relating to the status of urban infrastructure show that 92 per cent of urban population has access to potable water supply. However in reality the position is far from satisfactory. Less than 60% have access to potable water within their premises. In many cities, urban residents do not get daily supply of water. In some cities they dont get water even once a week. Residents often have to resort to constructing underground storage tanks and overhead tanks to supplement the supply. Instances abound when people buy water from private vendors. Therefore accessibility of potable water as per the statistics does not reflect a satisfactory service delivery of water. Further, adding to the problems is the existence of Leakages of a high order. Leakages occur due to unauthorized use of water by the urban populace besides natural leakages due to faulty pipelines. While no accurate figures are available, estimates suggest that about 40 per cent water is unaccounted for in large cities. Water meters are not installed in many places and even when installed do not work at times. Environmental degradation is emerging as a major area of concern in the urban societies. More than half of the population does not have access to sanitation facilities. Estimates suggest that a third to half of the solid waste generated in cities remains uncollected every day. In the last 40 years, while the vehicle population in the country increased 80-fold, the road length increased by only 5 per cent with almost nil progress on widening of existing road. This has put severe pressure on the city roads creating problems in traffic management. Encroachments on roads and other public places, add to the woes. Recent floods in Bangalore. Mumbai and Chennai are largely attributed to these encroachments on drains and lakes blocking the natural flow of rain water. Though ULBs are responsible for providing services like drinking water, sanitation, primary health, most are found wanting on these issues. In fact many observers feel the quality of services has deteriorated over the years. The lack of employment opportunities in rural areas has seen a migration of rural families towards the cities. Most cities are overwhelmed with migration and are unable to cope up with this. This has led to problem of lack of infrastructure, and unemployment. The rising unemployment, more people fighting for the land and other services is seen to increase crime rates within the city. While poverty rate has declined over the last 50 years, urban poverty remains a major problem area. These issues stem from the inability of the policy makers to draw up a long term strategy to handle the growth in these cities. Scarcity of resources and weak managerial and operation capabilities has made things worse. Most urban bodies are under fiscal stress and unable to meet the requirements for maintaining the services in the city. They are forced to depend on the higher bodies to meet their financing needs and this has been seen as reducing autonomy for the local authorities.

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Urban infrastructure remains the crucial element for providing support to the production abilities of firms, increasing trade and globalization of the Indian economy, international competitiveness, meeting the demand from public and business, and attracting investments in urban areas. This necessitates augmentation and up gradation of urban infrastructure and services to remain globally competitive. But measures to achieve this which would improve the quality of life of urban inhabitants as well as facilitate economic growth would necessitate huge investment of funds. India Infrastructure Report published in 1996, did highlight the required annual investment of about Rs.22, 000 crore on water and sanitation alone as against the expected fund flow of about Rs. 5000 crores. In dollar terms, the figure for providing these infrastructure works like water supply, sewerage, solid waste management and urban roads in the next ten years works out to around US$ 90 billion as against the availability of just about US$ 10 billion. Estimates worked out by Ministry of Poverty Alleviation and Urban Development indicates a gap of nearly $17 billion in the operations and management of just the basic services in the city. These estimates do not take into account other provisions like construction of modern transport infrastructure etc. The new economic policies being followed in the country aim to reform the traditional system of funding and budgeting to gradually withdraw it. The luxury of having soft options for financing urban infrastructure and services available in the past may have to give way to new fiscal instruments necessitating reduction in subsidies and reduction in plan allocation. Improved pricing and cost recovery mechanism will have to be worked out. This in turn will make the ULBs search for innovative strategies and financial instruments to generate resources for financing sustainable urban infrastructure development. Private sector may have to be involved and capital market instruments would have to be designed to tap these markets for urban infrastructure financing. In the existing scheme of things this seems to be beyond the limits of ULBs to raise the resources of this nature. A strong revamp of the financing patterns of the urban bodies is needed. They have to be given powers to raise funds. In the US most municipal bodies tap the market. To maintain the market ratings they are compelled to maintain transparency and accountability in their system. Traditionally urban governance and management falls under the constitutional domain of the State governments. Until the 74th Amendment, the urban local bodies were creatures of the state governments rather than the constitution. It was up to the state governments to enact suitable legislation to delegate authority, powers and functions to these ULBs. This has weakened the local institutions over the years. Encroachment on traditional and legitimate municipal functions by creating parallel urban development authorities and other similar bodies, weak executive system, fragile fiscal health, and inadequate staffing and expertise in municipal management have all contributed to this problem. There exists plethora of institutions engaged in the provision of urban infrastructure and delivery of services. Their functions often overlap with each other resulting in multitude of conflicts. This lack of coordination contributes in no small measure to unplanned development and inefficient management of these bodies.

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These issues have resulted in the inability of the ULBs to mobilize resources to develop and implement commercially viable infrastructure projects, Ineffective management of these bodies act a deterrent to peoples participation in managing infrastructure and other activities of the body. The financial health of most urban local bodies is extremely weak and their authority to set rates and user charges to recover costs remains largely on paper. The administration and collection of taxes, fees and user charges is far from satisfactory in many places. However, a number of initiatives have been taking place in recent years. Several local bodies are embarking upon reforms in different spheres of their domain to facilitate planned and controlled growth of the urban agglomeration. Greater decentralization measures have been taken to give more powers to these local bodies. These measures were achieved through the Constitutions 74th Amendment Act 1992. The Act serves as the statutory framework for the functioning of these local bodies. Introducing some fundamental changes in the system of local urban governance, it provides for periodic and fair conduct of election to the ULBs in each state. To ensure the smooth conduct of elections the Act makes provision for a statutorily constituted State Election Commission. It eliminates the threat of supersession or premature dissolution by the State government which used to be the order of the day not long back. It also incorporates provisions for reservation of seats with a view of ensuring adequate representation of weaker sections like Scheduled Castes, Scheduled Tribes, Backward Classes and women in the municipal bodies. The Act for the first time specifies a set of functions that are to be devolved to the local bodies. These get a constitutional sanctity by their inclusion in the Twelfth Schedule of the Constitution. However the final power of allotment of these functions to the local bodies rests with the State government. It may, in its wisdom may allot greater number of functions and powers to the ULBs. On the other hand it may also choose to withhold the transfer of few of these functions to these ULBs. The functions, besides the traditional core functions, include urban and environment planning and implementation of social justice programmers. To improve the fiscal health of these local bodies, the Act requires the states to constitute a Finance Commission, once in every five years. The Commission is mandated to recommend to the State Legislatures, measures to improve the financial health of municipal bodies through assignment of taxes, duties, tolls and fees, sharing of state revenues and grants-in-aid. It also provides for setting up Ward Committees with the aim of ensuring greater participation of people in the civic affairs. Fiscal incentives by central government have been linked to undertaking reforms by these ULBs. In 2003 the Government of India announced a number of measures to improve the situation in the urban local bodies. The government announced setting up of two incentive funds for urban reforms at state and municipal levels - the Urban Reform Incentive Fund (URIF) and the City Challenge Fund (CCF). The Urban Reform Incentive Fund (URIF) provides reform linked assistance to the states in the country to encourage and accelerate the process of urban reforms. States are required to sign a Memorandum of Agreement (MOA) with Central Government for certain reforms including repeal of Urban Land Ceiling and Regulation Act, rationalizing the Stamp Duty in phases to bring it down to no more than 5 per cent by the end of the Tenth Five Year Plan apart from reforming the Rent Control Laws to
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remove rent control. The last one was expected to stimulate the private investment in rental housing. The states were also required to computerize the entire process of land legislation besides reforming the property tax collection measures to achieve an efficiency of more than 80%. In the years to come, it was expected that the property tax would become the major revenue earner for the local bodies. Levying of user charges by Urban Local Bodies to recover full cost of operation and maintenance was to be allowed. The ULBs were also asked to introduce the double entry system of accounting which would provide for greater transparency and accountability. The City Challenge Fund (CCF) facilitates city-level reforms by funding the transition costs of moving towards sustainable systems of municipal management and service delivery. Further, a Pooled Finance Development Scheme (PFDS) was designed to enable the smaller local bodies to access the capital markets. The Government of India has also permitted the urban local bodies to issue Tax-free Municipal Bonds with suitable safeguards in place. The Ministry of Urban Development and Poverty Alleviation, GOI, has also developed a Model Municipal Act and advised all the state governments in the country to frame their Municipal Acts on the lines suggested in the Model Act. The urban local bodies will be able to leverage funds, introduce improved accounting systems and invite private sector participation in the development of urban infrastructure and delivery of services. The state Act on ULBs when modified would provide the legal framework for initiating these activities. Other incentives include permission for foreign direct investment in the development of integrated townships, fiscal incentives in the form of tax holiday for urban infrastructure, solid waste management and water treatment systems and exemption of custom duty for import of equipments for water, sanitation and solid waste management projects. At the state level too, reforms have been initiated to overcome the legal and financial impediments. Considering the fact that the ULBs has neither the funds nor the capacities to meet the increasing demands on it in terms of infrastructure provision and service delivery in the urban areas, States are now on the lookout for alternative sources like private sector participation. It is also well known that there exists a big gap between the requirements and availability of funds for urban infrastructure. The ULBs are highly dependent on the state governments for funding. In most ULBs, the financial; health depends on the grants of the state governments. To compound the misery, the State governments themselves are in a state of perpetual fiscal crisis. This adds the pressure on both the ULBs and the state government. It is essential to reduce this burden. Measures aimed at aimed at improving the credit-worthiness of urban local bodies, increasing transparency and accountability and private sector participation in service delivery are being undertaken in these ULBs. Foreign direct investment is being increasingly sought. Attention is also being focused on the developing public private partnerships. Almost all the state governments have signed the MOA with Central government to carry out the reforms envisaged in the Urban Reform Incentive Fund. Tamil Nadu, has introduced the double entry accrual based accounting system in all the local bodies in the state and some states like Karnataka, Rajasthan, and Maharashtra are following suit. Reforms in property tax assessment and administration have been implemented by a number of states in selected cities. Efforts are on
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to develop management information systems and geographic information systems (GIS) to improve the functioning and decision-making process. E-governance is being introduced in a big way in Andhra Pradesh leveraging on its strength in Information Technology. The Government of Andhra Pradesh has made use of information technology in a big way to introduce e-governance in local bodies. The urban local bodies themselves have carried out reforms themselves to improve their fiscal health. These include property tax reforms in Ahmedabad, Bangalore Mirzapur etc. Private sector involvement in Tirpur, Vijayawada etc., levying user charge to recover cost of operations in Bangalore etc., introduction of Fund Based Accounting in Bangalore, and similar efforts in Ludhiana, Al cities of Tamil Nadu etc. Effective management of assets in Ludhiana, Indore etc, improved Management Information System in Bangalore etc. are some of the measures undertaken by different cities in the country. While some significant steps have been taken by the Central Government and some of the state governments and urban local bodies to implement municipal reforms for urban infrastructure and services, there are shortcomings. This is not surprising considering the scale and complexities of urban infrastructure development in the country and gaps in the requirements and availability of financial resources. The implementation of the provisions of the Constitution 74th Amendment has been very slow. Some states have not been able to devolve some of the new functions, like urban planning, to urban local bodies since there are parallel structure already existing and there is bound to be conflict of powers and functions between these two bodies. Besides the capacities of urban local bodies to perform the planning function is very limited. Efforts have to be made to enable capacity building of urban local bodies in terms of training of municipal officials and elected representatives, improved management systems, and development of information systems. While the States and ULBs were seriously perusing the path of reforms the Union Government in its Budget 2005-6 announced a new urban rejuvenation programme called national Urban Renewal Mission later rechristened as Jawaharlal Nehru National Urban Renewal Mission. The reform parameters were more or less retained. There are two sub mission one on urban infrastructure and the other on urban poor. Before the earlier URIF, CCF etc were actually launched; the central Government has scrapped and launched a new Mission. The new Mission is supposedly based on a similar exercise successfully implemented in Johannesburg. The city corporation of Bangalore had in 2001 did a similar urban experiment which was not so successful. India seems to have missed the Second Wave. The late realization of outgrown towns called Cities and the mega metro problems associated with the unplanned outgrowth did wake up some State Governments and some efforts were made in Cities like Bangalore, Hyderabad, Ahmedabad and sub outgrowths in cities like Surat, and Indore. The Central intervention through 74th amendment, the objective being Rural decentralization, failed to facilitate the Urbanization. The adhocism in Central Policies such as URIF , CCF etc were killed before the takeoff and usual bureaucratization of all new JNNURM may not facilitate the late Second Wave
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References: 1. India Infrastructure Report 1996 2. Andrew E.G. Jonas and Kevin G. Ward City Regionalisms: Some Critical Reflections on Transatlantic Urban Policy Convergence, Working Paper Series (01/01) of Economic Geography Research Group, 2001 3. BMP Annual Reports 2001-02 top 2003-04 4. Jack Diamond, Performance Budgeting: Is Accrual Accounting Required, IMF Working Paper 2002 5. Steve Davis, European Waste Management: Background to Discussion on EWCs A PSIRU Report for EPSU, Public Services International Research Unit, University of Greenwich, March 2003 6. Uwe Loshe Improving Municipal Finance-A Global Challenge, Habitat Debate, April 2003 7. Paul A Grout and Margaret Stevens, Financing and Managing Public Services: An Assessment, CMPO Working Paper Series, September 2003 8. C. Rangarajan Address at the National Seminar on Municipal Finance, Indian Institute of Public Administration New Delhi, December 2003 9. Proceedings of National Seminar on e-Governance in Municipalities August 2004 10. Cities Alliances Report on World Cities 2004. 11. George A Boyne, Explaining Public Service performance: Does Management Matter?, Working Paper at Cardiff Business School, 2004 12. Edward L. Glaeser and Albert Saiz, The Rise of the Skilled City, BrookingsWharton Papers on Urban Affairs,2004 13. Vinod Tewari, Municipal Reforms for Sustainable Urban Infrastructure Development in India Presentation at United Nations Asia Pacific Leadership Forum: Sustainable Development for Cities, Hong Kong, February 2004 14. Elaine Kamarck, Government Innovation Around the World, Faculty Working Paper Series, John F. Kennedy School of Government, Harvard University, February 2004 15. Kulwant Singh Trends and Issues in Decentralization and Urban Governance in India, Presentation at 2nd International Conference on Decentralization at Manila, July 25-27, 2002, www.decentralization.ws/icd2/papers/trends_issues_india.htm 16. Dr. H.K. Pradhan, Market Based Financing of Municipalities and Sub national Governments: An Indian Experience, A Presentation, September 2004

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Mapping the Poverty-Environment Linkages in the Emerging Economies

64

T V P Chowdry65 Prashant Kulkarni 66 Anantha Murthy N.K. 67 Linkages between poverty and environmental degradation are complex and multidimensional. It is often manifested through resource depletion and consequent impact on environment and the dependent communities. Rapid population growth, particularly in last few hundred years has created a certain sense of imbalance between mankind and nature. Arguments exist about the changing nature of economic consumption and its impact on the poor and the depressed, normally vulnerable to these changes. In rural India, natural resources and ecosystems form the sustenance for around 600 million68. Along with Brazil, India has one of the largest land areas under the forests. Most of the people living around these areas depend upon the natural resources like agriculture, forestry, fishing etc for their livelihood. While for centuries, there has been a balance of nature between the population and their ecosystems, to many, the recent trends of increased industrialization and urbanization seem to have begun altering this trend. Declining forest area, deteriorating soil conditions, depletion of ground water resources water and air pollution are just some of the instances exhibiting the impact of environmental degradation (Exhibit I).

Exhibit I- Environmental Degradation: Cause and Impact Cause Water contamination Manifestation Impact

Water related diseases Kill an estimated 3 million such as diarrhea and people in developing countries, cholera the majority of whom are children under the age of five. diseases 2.5 million deaths a year particularly in tropical countries

Water contamination and Vector-borne inadequate sanitation such as malaria

64

The paper is updated version of the paper titled same presented at ISPIM Asia International Conference at JNU, New Delhi 65 Sr. Professor, Technology, Management and Design 66 Asst. Professor, Economics and Public Policy, IBA Bangalore 67 Faculty, Quantitative Methods and Operations Research 68 Government of India Census 2001 Stalking Theory: View through the Prism of Real life Practice 74 | P a g e

Air pollution Soil erosion degradation Desertification and

Respiratory and related 3 million people die every year diseases and disorders mostly women land Reduced yield of farms Starvation and poverty and fields Loss of fertile land Lost income; Loss of tropical forests

Source: Source: UNDP (2002, 2000 and 1998) The assumption that the poor depend heavily on the exhaustible natural resources creating environmental degradation while plausible is not entirely correct. Similarly businesses exploiting natural resources, manifesting in the tragedy of commons too does not provide a complete explanation. The usage of the resources often transforms the resources itself irrespective of its utility for subsistence or profit maximization. Economic growth entails usage of natural resources often causing damage to ecosystems, which could turn to be irreversible. The rapid economic growth in South East Asia has been accompanied by adverse environmental consequences. Similar concerns are being expressed about China. Environmental degradation and poverty are inextricable intertwined and often result in vicious cycle. Poverty puts stress on environment resulting in depletion and degradation of resources which in turn acts as a cause for poverty. It also implies that there is a tradeoff between growth and environment. This school of thought traces its origin to Ingleharts thesis (1972) on environmental protection being a full stomach phenomenon. Growth, Poverty and Environment Poverty is generally assessed in terms of income or consumption with reference to a determined poverty line. Jeffrey Sachs describes absolute poverty as69 Extreme poverty means that households cannot meet basic needs for survival. They are chronically hungry, unable to access health care, lack the amenities of safe drinking water and sanitation, cannot afford education for some or all of the children, and perhaps lack rudimentary sheltera roof to keep the rain out of the hut, a chimney to remove the smoke from the cook stoveand basic articles of clothing, such as shoes. The Millennium Declaration in General Assembly resolution 55/2 of 18 September 2002, adopted by 147 heads of State and Government and 189 Member States made the eradication of extreme poverty and hunger as the paramount goal70. The benefits of economic growth, often the primary macro-economic objective of development, are expected to percolate to the bottom sections of the society improving their welfare levels. In this process, environmental protection is stepped aside. Government policies, however, of late, are recognizing the role of
69

70

Jeffrey Sachs, The End of Poverty: Economic Possibilities of our Time, The Penguin Press, New York 2005 United Nations, Road map towards the implementation of the United Nations Millennium Declaration,

report of the Secretary-General (A/56/326), p.56. Stalking Theory: View through the Prism of Real life Practice 75 | P a g e

the environment in poverty reduction at both macro and micro levels. These policies are being aimed at reversing environmental damage and leveraging the possible positive linkages between environmental protection and poverty reduction. By all accounts, poverty has declined considerably in the world with the exception of sub Saharan Africa. Poverty environment linkages differ from region to region. Pollution from vehicles and industries affect the urban environment while keeping the rural hinterland free from the side effects to a good extent. There is however a real danger of the effluents released into the rivers from the industries in the urban setting causing damage to rural belt few kilometers down the river. Land degradation primarily affects the rural population. This leads to lower output putting pressure on the availability of food and raw materials for the urban society. Hence a certain measure while may have direct impact on a setting, there a spillovers that are bound to affect the other sections of the society. Absolute poverty in Asia and Asia Pacific is a predominantly rural phenomenon. The pressures on the rural areas force people to migrate to the urban centers in search of better prospects. While this has the potential of increased pressure on the cities causing a deterioration of the living conditions there through the proliferation of slums, it does ease the pressure on agricultural land in the rural belt to an extent. In fact poverty itself is a product of unequal distribution of resources between various groups and classes. In the past 50 years, the number of people living on fragile lands in developing countries doubled to 1.3 billion, and rural population growth remains higher than average in countries with 30 percent or more of their population on fragile land71. Economic activity, irrespective of the nature and use, alters the state of the environment. Instances include agricultural activities releasing methane into the atmosphere, energy sector being the source of emission of carbon dioxide, industries releasing effluents into the water polluting the aquifers and thus drinking water. The households too contribute to the growing pollution through use of private vehicles and production of domestic waste. Intensive use of fertilizers and pesticides causes land degradation and contaminates ground water resources. Many farmers, being illiterate are not trained in usage of fertilizers and pesticides making the situation even worse. Excessive grazing destroys the core, increasing the salinity. The water which is used by the rural poor through wells is a fertile ground for breeding of mosquitoes and water borne disease vectors. In coastal areas, commercial fishing ventures over fish threatening eco balance of the seas and the rivers. Besides the quantity and species of fishes decline sharply leaving the small fisherman little or no catches. Lack of access to fuels, causes the dependence on firewood as fuel. Collection of firewood destroys the forest which acts as sinks for carbon emissions by the city based industries and households. The poor often live on the fringes of the city. The land is usually barren, on mountainous slope or flood prone. Many of them work in the industries and hence live in clusters around the industrial area. Thus the families come in direct line of the effects from the discharge of

71

Colin H Kahl, Demography, Environment and Civil Strife, Brookings Blum Round Table, www.brookings.edu, Retrieved on November 23, 2006 76 | P a g e

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gases and liquid effluents affecting their health. Many others earn their living through scavenging. Natural Resources and Poverty Often, poorer the household, greater is the dependence on natural resources for their livelihood. Agriculture, animal husbandry, fishing, lumbering, mining etc are examples of this. To acquire fuel, they collect firewood from the forests; clear the forest lands to sow the crops, which results in reduction of forest cover. Decreasing forest cover forces the rural society particularly its womenfolk to concentrate more on day to day activities like collecting water and firewood which further depletes the resources. This depletion causes decrease in productivity of these natural resources again coming back to the vicious cycle concept discussed above. The time spent in collecting the fuel wood or drinking water diverts their time from productive activity like agriculture lowering their incomes. Unable to compensate this, they suffer from lower food consumption levels. Besides, the ability to plan and save for future consumption is severely constrained. Further, the belief that more children mean more hands and thus more income leads to more child births. The family which in the present state would be suffering from mal nutrition is hardly in a position to offer decent life to the new born adding to the poverty. This also becomes a barrier to womens emancipation. Unlike their urban counterparts, large sections of rural population do not have access to cheap credit. Credit and insurance markets are absent. Assets and agricultural stores are minimal. Usage of biomass fuels72 causes indoor air pollution a health hazard killing more than 2 million women and children per year in the developing world73. In fact biomass fuels constitute nearly 30% of the total fuels in the country (Refer Exhibit II for energy consumption patterns in India). While usage of biomass fuels has shrunk relative to 1970-71, concerns continue to exist. Moreover, lack of access to proper support systems in form of primary health care, the vulnerability of the poor to health problems arising out of environmental damage makes the matters worse. Cleaner technologies reduce pollution from the industries, but the costs prevent them from becoming available to the masses. Add to this, the lack of sanitation facilities and the picture gets even worse.

Biomass fuels include firewood, twigs, animal residue, crop residue etc. Department for International Development, United Kingdom, European Commission, UNDP and World Bank, Linking poverty reduction and environmental management, policy challenges and opportunities, January 2002,
73

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Exhibit II Table 1: Energy Consumption in India (petajoules) Year Lignite 1970 1975 1980 19 29 44 (0.39) (0.48) (0.62) 1466 1910 2222 Coal (29.77) (31.81) (31.07) 622 799 1082 Refined Oil (12.63) (13.31) (15.13) & LPG 42 79 86 Natural Gas (0.85) (1.32) (1.20) 2492 2821 3202 Biomass (50.61) (46.98) (44.77) 258 334 484 Hydropower (5.24) (5.56) (6.77) 25 33 32 Other (0.51) (0.55) (0.45) 4924 6005 7152 Total (100) (100) (100) Source: Government of India Statistics 1985 77 (0.85) 3124 (34.49) 1480 (16.34) 270 (2.98) 3518 (38.83) 540 (5.96) 49 (0.54) 9059 (100) 1990 130 (1.12) 4201 (36.10) 2035 (17.49) 606 (5.21) 3866 (33.22) 723 (6.21) 74 (0.64) 11636 (100) 2000 216 (1.22) 8498 (48.07) 2813 (15.91) 815 (4.61) 4456 (25.20) 744 (4.21) 138 (0.78) 17680 (100) 2005 259 (1.21) 10198 (47.58) 3785 (17.68) 1156 (5.39) 5052 (23.67) 775 (3.62) 211 (0.99) 21437 (100)

Climate Change, Natural Disasters and Poverty Countries like India face threats from climate change. Emission of greenhouse gases potentially causes damage to the ecosystem retarding the development process thus aggravating poverty. With the expected decline in freshwater availability, coastal infrastructure, reducing land cover, and forestry, the implications for food security is enormous. A temperature rise of 2C in a country like India could lower yields of staple crops, wheat and rice by 10 percent and reduce farm revenues by up to 25 percent. The variability in rainfall and consequent erratic seasonal patterns could affect the rain fed agriculture. Natural calamities like hurricanes, floods, earthquakes too contribute in increasing human vulnerability, undermining livelihoods and human well-being. An outcome of this might be instability in the economy potentially generating or exacerbating conflict Ecotourism, a labor-intensive activity employs people from rural areas, often from those in remote and isolated areas and islands. Ecosystem services include the provision of natural habitat for wild pollinators that are essential to food crops; watershed protection and the maintenance of hydrological regimes (recharging of water tables) by natural processes, including rainfall; and the natural breakdown of waste products and pollutants. There is close relationship between the livelihood and health of the poor ecotourism and its activities. Any changes in the rhythm of the activities could be fatal to the reduction of poverty and survival of the society.

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The discussion generated above brings to the fore the dilemmas faced by the policy makers in resolving the conflict between environment, growth and poverty. Empirical studies have shown that a quarter of the rural household income is derived from usage of village commons (Jodha 1986). The environmental damage, is estimated by some sources (Brandon and Homman 1995, Venkatachalam, 2002) to be around 40, 000 crores. The inability to move from subsistence farming to higher levels, rules out the possibility increasing returns in agriculture. Poverty Environment Nexus and Societal Relations Discussion on Poverty Environment nexus is often treated in isolation with little effort to go behind the complexities. In many cases, the nexus is strongly influenced by local demographic, institutional and cultural factors. Environmental stresses are accompanied by similar stress on demographic patterns which serve adversely the purpose of poverty alleviation. This in turn increases the pressure on the state owing to demands placed from suffering segments of the economy and marginalized individuals. Demands may include calls for costly development projects, such as hydroelectric dams, canals, and irrigation systems, subsidies for fertilizer and other agricultural inputs, and urban demands for employment, housing, schools, sanitation, energy, and lower food prices. The governments ability to meet these mounting demands comes under the scanner and could become a rallying point for the dissenting groups. The diminishing productivity affects the states capacity to collect taxes placing a` strain on its fiscal balances. Lack of revenues would hinder the governments ability to increase capital expenditure at the very time it requires to be concentrated upon. Ghettoization of the urban poor in particular adds to these miseries. The undermining of the states authority due to these factors has the potential to cause civil strife of which instances abound from Chiapas (Mexico) to El Salvador to Philippines to Somalia. The tradeoffs become a Hobsons choice for the policy makers. Few experts have argued about a positive relationship between poverty and environmental degradation. This is based on the hypothesis that poor producers, with no alternatives around, will systematically degrade the resources on which they depend. Yet, there is also a considerable amount of literature denying such positive cause-effect relationships. This body of literature argues that macroeconomic change results in environmental degradation and poverty. But the research has not invested much effort in developing a conceptual framework to include plausible cause-effect models. Besides, the acknowledgment of the complexity and interrelationships of the issues is missing. Over-exploitation of natural resources (such as forests and fisheries) is more likely the result of actions of relatively wealthy interests engaged in the pursuit of commerce. Much depends upon the strength of local institutions engaged in environmental and resource management, and the extent to which they represent the interests of poorer groups. P-E Nexus, Governments and Institutions The nature and the degree of the nexus are determined by the institutional dynamics reflected by the political equations in the country. These political equations in turn reflect the degree of
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conflict among the various social groups and classes in the country. The bargaining power of the elite sets the tone for institutional approval for the exploitation of resources and rural communities. There is recognition of the fact that rise in national income is a prerequisite for growth and further, natural resources and thus environmental security has a major role to play. Governments face co-ordination problem with various ministries and departments, each one of them having their own objectives. The success of the government programme depends on how effectively the government handles these differences. Harmonization of these objectives to achieve greater welfare call for identifying and achieving the necessary tradeoffs at least cost to the different agents. With a view of achieving the greater objectives, many countries have formulated different programme. There have been attempts in the international fora too at both bilateral and multilateral levels. Internationally, policy makers have recognized the importance of poverty alleviation and environmental protection. The Earth Summit in 1992, Convention for Biodiversity, and World Summit for Sustainable Development (2002) all have explicitly pointed out the importance of environmental security in poverty eradication. But unfortunately, little has been done on the ground to show for the results. The Earth Summit converged on the challenge to reconcile the seemingly conflicting objectives of economic growth and environmental protection. Integration of environmental economic, social and cultural dimensions has been sought to be achieved through institutional and economic approaches. The World Summit of Sustainable Development advocated a multi pronged effort at political, social, economic and environmental fronts to achieve sustainable development. This also becomes a sine qua non to achieve the objectives of Millennium Development Goals (MDGs) which includes halving of the current poverty levels by 2015. To integrate the various policies aimed at environmental and developmental welfare, South Korea formulated Green Vision 21 in 1995. Various ministries including that of environment, industry, trade, telecommunication and transport were involved in formulation of plans to meet the stated objectives. Similar plans have been formulated in other countries too. These plans have some common grounds adapted to the local conditions. The common grounds include emphasis on conservation of natural resources, decrease environmental pollution by phasing out ozone depleting gases, movement towards adoption of cleaner technologies apart from financial support by governments further augmented by multilateral and bilateral donors. Instances include the plans in China for planting 26 million hectares of forests by 2030. Similar efforts are on in India too. In Australia Murray Darling Basin agreement is aimed at cleaning up the river. However the question mark exists over the success of a similar plan to clean up River Ganges in India. Government measures have a tendency to get bogged down by bureaucracy and red tape. Cost and time over-runs are common. The failure of government in many areas is a potential cause for strife and disturbances. We feel there is a need to look at the alternatives including the market based instruments. Moreover the attention of the policy makers is diverted

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towards prevention of environmental resource-driven environmental issues. This ought not to be so.

conflicts

while

discussing

Violence exacerbates poverty disrupting economic activities thus wasting vital financial resources in unproductive activities (Renner and French, 2004). Loss of investor confidence in countries affects FDI inflows and also reduces the aid flows from donor countries. The decline in such funds can bring about severe negative impacts, particularly on countries that depend to a large extent on foreign aid. A unique Vehicle Quota System was introduced in Singapore to control the number of vehicles. Apart from reducing traffic congestion it reduced emissions from fossil fuel lowering the pollution levels. The system predetermines the number of new vehicles that can be registered annually. The prevailing traffic conditions determine the number of licenses awarded per year and the price of the license too is determined by the supply-demand condition of the market. Similar experiments have been tried out in London through introduction of congestion tax. The private vehicles entering into the central business district in the city were taxed during peak hours. It reduced congestion, pollution besides bringing in revenue for the city government. P-E Nexus and Communities There is an increasing need for involvement of communities in success of environmental conservation. The increasing frequency of animal human encounters in India and other parts of the world is largely due to encroachment by humans into the forest areas that were the habitat of the wild animals. Faced with shrinking habitat, these animals enter into the villages causing destruction to life and property in these areas. It is not only in the villages but as illustrated by the leopard attacks on the fringes of Sanjay Gandhi National Park in Mumbai that even the cities are not spared by these encounters. To overcome these difficulties, community involvement can happen through c couple of broad measures. The first has to do with strengthening of the resource base of the poor and the latte necessitates government support and policy to help the poor cope up with the environmental threats. Unaware of the private property rights, the rural poor often rely on customary and informal arrangements. These uncertainties hinder agricultural activity and inhibit investment when it is most required. The commons is a source of security to the poor and must be made available to the poor by government intervention in the form of granting property rights to the settled people. In India, a successful story is that of the tenancy reforms, the enactment of land ceiling legislation and the distribution of surplus (over ceiling) land to the poor in the State of West Bengal. Operation Barga, which began in the 1960s but consolidated since the late 1970s registered sharecroppers and provided them with tenurial security through legal enactment and social mobilization. A large number of sharecroppers (1.5 million), more than a third of whom belonged to depressed classes, were formally provided with security of tenure. A common property resource (CPRs) which is the backbone of the village economy is one of the major causalities of environmental degradation.
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The Annapurna region in Nepal was one of the most popular trekking destinations in Nepal attracting over 60% of the total overseas trekkers in Nepal. By the mid 1980s, natural environment, resources and cultural integrity of this region had deteriorated due to overgrazing, intensive agriculture, poverty and high population growth rate. The influx of this large number of trekkers added to the problems putting the cultural and natural environments of the region in jeopardy. The Annapurna Conservation Area Project (ACAP) began in 1986 to address the problem striking the balance between economic development and environmental conservation. Recognizing the need for involving local communities and ensuring their prosperity would go a long way in protection of these habitats, it used the local population as the focal point of its conservation mechanism. While the process of introducing conservation to the region's 150,000 inhabitants, and converting them to the cause, turned out to be a long drawn affair, the persistence of the activists paid off. Social forestry, gaining popularity in countries like China, sustains on the active participation of various stakeholders like farmers, landowners, industries or community-based organizations. It provides forest products and services to meet local needs and generates employment to the local population. Managing trees becomes a mean to improve their economic and social conditions. In Tanzania, more than 800 villages have planted more than 350,000 hectares of woodland in a severely deforested area. The Government and the World Conservation Unions calculations show that cash benefits of conservation work out to be around $14 a person each month. Besides, the villagers also get thatch, wild foods, medicinal plants, timber, and fuel wood. Introducing new and cleaner technologies at lowest possible costs has been one of the challenges to the policy makers. To combat indoor air pollution, India has been long engaged in designing, producing and marketing improved cooking stoves. The governments strategies of incentives and subsidies to the poor for using these stoves have paid dividends in many part of the rural belt. The scheme also received wide publicity from media both electronic and print. Water supply in New York City is another instance of using innovative tools to combat environmental degradation. The City Council faced a dilemma on the mode of supply safe drinking water to its citizens. It had two choices. The first was setting up a filtration plant costing around $6 billion. The other involved spending of $1 billion which consisted of managing ecosystems and forests in the surroundings. The latter, who was adopted, fetched an economic benefit of $3 per person to the council. Business and Poverty Environment Nexus: Role of Market Based Mechanisms (refer Exhibit III)

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Exhibit III Various market Bases Instruments

Instrument

Modus operandi

Examples

Environmental tax Taxing the polluters as cost Emission taxes in Philippines, of neutralizing pollution. taxing discharge of effluents in Singapore User charges Charged on usage of natural Congestion tax in London resources Incentives for encouraging Subsidies to small industries for clean technology installing clean technologies, subsidizing biogas in India Recycling products Introduce markets pollution rights Discount on new purchases by surrendering empty refills for Carbon trading

Subsidies

Deposit/refund system Securitization Licensing/ Property Rights

Allow selective permits in Permits for logging, mining etc. exchange for revenue

Source: UN ESCAP Survey 2003

The market based system works on the premise that the environmental protection and the poverty eradication can be achieved only if there is an profit element to it. Businesses are dictated by the monetary incentive when they choose environmental protection ahead of exploitation of natural resources. Market System also works by influencing the producers and consumers by providing them with a choice to the extent of reduction of environmental damage through a policy of fiscal incentives and disincentives. This rests on the ability of the government to continuously police the actions of the various stakeholders and consequent enforcement of the penalties on the violators. Fines and penalties, licenses, user charges, trading of rights, profit sharing, and subsidies are some of the methods used to self regulate or allow the market to regulate itself. Conclusions Two main characteristics distinguish environmental markets from traditional markets. Firstly, the environmental markets trade public goods, by which we mean goods that are not rival in
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consumption. An example is the fraction of carbon dioxide in the planets atmosphere, an amount that is the same for all. Further all these public goods that are traded are not standard but are privately produced public goods. They are produced by individuals in the course of their everyday lives. Examples include driving cars and using air conditioners which produce atmospheric quality. The externalities they generate needs to be factored in . Community participation is has not been given importance. Thus an important stakeholder has been left out. Governments frame their policy considering the macro objectives in mind while the ground realities are often different. Bottom up approach is required than the top down approach that is followed. Market forces have their limitation in case of public goods. They may turn out to be less efficient than traditional markets .They may work in the developed world but information asymmetries in the developing world will act as an inhibitor and turn out to favor only a few. Access and dissemination of information is absent or minimal in many countries. We believe unless there is decentralization of policy, design, formulation design and implementation of programme, they stand little chance of success. The treatment to break the nexus between poverty growth and environmental degradation has to be treated in a holistic manner and not in isolated chunks and pieces.

References 1. K.F.Jalal, Sustainable Development and Poverty Nexus, ADB Occasional Papers, 1993, Retrieved from www.adb.org 2. J.E.M.Arnold and P.Bird, Forests and Poverty Environment Nexus, Paper Prepared for the UNDP/EC Expert Workshop on Poverty and Environment 1999, Revised paper June 1999 3. Environment-Policy Nexus Revisited: Linkages and Policy Options, Economic and Social Survey of Asia, 2003 4. Susmita Dasgupta, Uwe Deichman, Craig Meisner, David Wheeler, The Poverty/Environment Nexus in Cambodia and Lao Peoples Democratic Republic World Bank Policy Research Working Paper No. 2960, January 2003 5. T. Udaya Lakshmi, Poverty Environment Nexus: A Legal Perspective, ICFAI Journal of Environmental Law, April 2004 6. David Reed and Pradeep Tharakan, Developing and Applying Poverty Environment Indicators WWF Publications, October 2004 7. Lori Snydeer Bennear and Cary Coglianese, Evaluating Environmental Policies, Faculty Research Working paper Series, www.ksg.harvard.edu, November 2004 8. Atiur Rahman, Environment-Poverty Nexus: A Global Overview, United Nations Department for Economic and Social Affairs (UNDESA), Bangkok, 2004 9. Vijay Prakash Ojha, The Trade Off Among Carbon Emissions, Economic Growth and Poverty Reduction in India, Sandee Working Paper, 2005 10. John Vidal, The new economics of ecological capital, The Hindu, October 13, 2005
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11. Trond Vedeld, Social and Environmental Agendas: Linkages to Poverty Reduction, Norwegian Institute of Urban and Regional Research, 2005 12. Global Environmental Outlook 2006, UNEP Publication, 2006 13. Jean-Marie Baland, Pranab Bardhan, Sanghamitra Das, Dilip Mookherjee and Rinki Sarkar, Managing the Environmental Consequences of Growth: Forest Degradation in the Mid-Himalayas Paper presented at the India Policy Forum 2006, at NCAER New Delhi, 2006 14. Dr. Rimjhim Aggarwal, Exploring the links between environmental degradation, poverty, and fertility among rural households: some conceptual issues, Panel Contribution to the Population-Environment Research Network Cyber seminar on Rural Household Micro-Demographics, Livelihoods and the Environment, April 2006 15. Poverty Environment Nexus, A Book of Readings, ICFAI University Press, 2006 16. Anthony Nyong, Resource and Environmental Security, Bookings Blum Roundtable, August 2006 17. Jeenifer Windsor, Breaking The Poverty Insecurity Nexus: Is Democracy the Answer, Brookings Blum Roundtable, August 2006 18. Jane Nelson, Operating in Insecure Environments: the Youth Demographic, Brookings Blum Roundtable, August 2006 19. Dr. Lingappan Venkatachalam, Population-Poverty-Environmental Nexus: An Empirical Investigation in the Indian Context Institute of Social and Economikc Change. 20. T.V.P. Chowdry, Prashant Kulkarni, Anantha Murthy, Surveying Poverty Environment Nexus: Role of Governments, Business and Communities - Issues and Perspectives, Paper Presented at ISPIM Asia Conference, JNU, New Delhi January 2007

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Innovations in Governance: International and National Experiences74

Prof. Prashant Kulkarni75

Different cities have tried out different mechanisms for improving their financial health and also the quality of public services. Johannesburg was the second largest city in South Africa after Durban. It was also the richest urban area in South Africa. It was known as City of Gold for the gold mines that flourished in the region. The city was home to nearly two thirds of the countrys corporate and contributed nearly one sixth of the countrys Gross Domestic Product (GDP). It further contributed to more than 10% of countrys employment76. Like in other cities, it too had a dominant black presence that traditionally supported African National Congress (ANC). By 1998, the city was on the verge of a severe fiscal crisis. Income had declined whereas expenditure was on the rise. The crisis threatened to engulf the city in a state of bankruptcy. To solve this crisis, consultants were hired to prepare a report. This led to Igoli 2002 the report that called for restructuring of Johannesburg. The report aimed to make Johannesburg World City.77 The plan revolved around introducing principles of business in the management of the city. It called for the local body to enter into a series of contractual agreements with the private partners who were to offer public services to the residents. The City South Africa underwent a transition from apartheid regime to democracy in the early 1990s. Led by Nelson Mandela was considered an idol, ANC started its programme that aimed at uplifting the nations black majority. The community had been impoverished and suffered during the apartheid regime that had lasted for more than 100 years. Johannesburg was home to various races, ethnicities and nationalities. It was believed that distribution of income was highly uneven across the different communities in the city. Crime rates were high and experts warned that this conflict could lead to undermining of local democracy and peace. There were multiple sources of authority in the city of Johannesburg. Till 1995, the city was ruled by 13 different authorities with differing capacities and often overlapping powers and functions. The system resulted in imbalances in allocation and delivery of services to the residents accentuated by rapid urbanization. In 1995, the system was overhauled to make it a two tier structure. It was to comprise GJMC and four local metropolitan councils (MLCs). This authority was to be replaced by a unicity authority by the end of 2001. ANC which was
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This paper is developed on the report prepared by the authors on Financial Reforms in Bangalore Mahanagara Palike 75 Asst. Professor, Economics and Public Policy, IBA Bangalore 76 City Development Strategy Reports of the Johannesburg Metropolitan Authority 77 ibid Stalking Theory: View through the Prism of Real life Practice 86 | P a g e

the ruling party supported this initiative to meet it objective of one city, one tax base. Though was ANC was reelected in the Presidency, the priorities seemed to undergo a change with a greater focus on delivery. The changes in the functioning of the government were thought to contribute to the problem. Though each78 MLC and GJMC had its own budget and was responsible for its implementation, it was felt that it was as good as having one budget. However each council had its own tax structure and tax base. It seemed to many that it was an attempt to slowly integrate different races and ethnicities into an unified structure. However the political contest between the councils over tax allocation and collection caused divisions among the local councils. There was also lack of clarity among the roles responsibility and accountability of the different bodies. In late 1997, the city officials appointed a team of consultants to study the problem and suggest the remedies. The primary focus of the team was to review the process of urbanization and the accompanying problems like housing, public transport, environment, infrastructure development activities etc. It studied the functions of the various different departments including the Mayors office79. The report criticized the structure of the local body, the mode of operation and concentration on non core activities as the core problems facing the city. It reported extensive duplication and lack of prioritization among the city officials. It classified the functions into asset based, agency based and others. Asset based functions included local public transport, gas, electricity, water supply, sanitation and sewerage, fresh produce markets, cemeteries, beer halls, sports facilities, parking lots etc. Agency functions comprised of housing social welfare and ambulance services. The rest of the functions included museums, maintaining zoological and botanical gardens etc. Even though the review was on it was becoming evident that the city was coming under financial strain. By early 1998, it owed 3 months of dues to the local power company. It recorded a deficit of R338 million. In what was seen as an insult to injury, it had to use an overdraft of R400 million to pay punitive interest rates on overdrafts and call bonds. The city administration had to take some steps to control the situation. The urgency to solve the crisis became more apparent due to the fact that Johannesburg was the richest local body in the country. The central government also saw it as an opportunity to reform the local bodies across the country. The Crisis: Why it Happened? Analysts attributed the strain to multiplicity of causes rather than pointing out to a single source. There was an increased spending and no controls were set. Most of the spending was directing at providing facilities to a small proportion of population. With the dismantling of apartheid, the city had to manage additional responsibilities. These new areas had been
Dr. Jo Beall, Dr. Owen Crankshaw, Susan Parnell, Towards Inclusive Urban Governance in Johannesburg, Report prepared for ESCOR Commissioned Research on Urban Development, Urban Governance, Partnership and Poverty, May 2001 79 ibid Stalking Theory: View through the Prism of Real life Practice 87 | P a g e
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severely affected by lack for infrastructure. The extra burden of providing adequate infrastructure facilities was a strain on the local body. The city budgets were expenditure driven. By all accounts there seemed to be no thought given on the resources needed to be generated to drive this expenditure. Neither there seemed to be any thought on the beneficial effects of the expenditure incurred. In the post-apartheid regime this was coupled with the rise in demand from black dominated areas which remained grossly underdeveloped. The accounting system was found to be deficient in understanding the fiscal situation. It was based on revenue collection and often presented a misleading picture to the city managers. The financial system tended to emphasize more on the regulatory aspects rather than focusing on the principles of financial management. Experts opined that the city government went in for high levels of borrowing at times going in for expensive call bonds that added to the interest burden of the body. On the other hand revenue generation showed a decline causing the increasing deficit. The former black areas contributed very low levels of revenues attributed mainly to lower incomes among the population there. It was felt that the government did very little to increase the productivity of the workers. Though there was overstaffing, the powerful trade unions ensured that there was no retrenchment of the excess staff. The central government also reduced its grants to the local bodies which seemed to make things worse. As a first step to solve the crisis, the government appointed a committee of 10 councilors to govern the GJMC. This came to be popularly known as C10. The mandate before it was to revise the budgets of GJMC for 1998-99 to provide for financial depth even in case of possible shortfall of tax revenues. It was also asked to create a mechanism that would lead to more effective utilization of the existing staff and also suggest ways to improve the credit quality of the city. The information systems in the councils were seen to be outdated and C10 was asked to suggest measures to improve the information systems. It also went into the activities of the corporation and examined the surplus generating activities and also the functions that could be outsourced to the third parties. However C10 failed because of it slack of expertise. The fiscal problems showed no signs of abatement and led to its dissolution. It was replaced by an expanded team of fifteen councilors which came to be known as C15. C15 was asked to design and implement the policies on municipal services. It was also given the mandate to negotiate with private players on outsourcing and hiving off the different municipal services in the city of Johannesburg. It was also asked to identify areas of cooperation with the private sector and new areas and functions that could be outsourced or corporatized.
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A subcommittee was also formed to facilitate easy implementation of Public Private Partnerships (PPP). This was needed since only the Metro Gas the utility that supplied gas to the city was in a stage wherein it could be privatized. Two types of activities were further identified. The non-core activities like airports, Metro Gas, power plants water were to be disposed while in other activities like information technology, public transport, fleet management were to be run like the corporate. But these would not be privatized though the principles of corporate world would be the guiding points of managing these functions. The city also appointed project managers to look after each of these functions. Terms of reference and approval for each project manager wee also drafted. External consultants were also brought in to help in transition. Feasibility studies were to be conducted to ascertain the health of the utilities and the desirability of having an alternative and effectiveness of that alternative. To further quicken the process of transition, a City Manager was appointed for Johannesburg in early 1999. His term was to run for two years. He was to be assisted by Chief Transformation Officer (CTO), Chief Financial Officer (CFO) and Chief Labor Relations Officer (CLRO). Ketso Gordhan was the first City Manager and it was his recommendations on the revitalizing the city that came to be known as iGoli 2002. iGoli 2002 It was a three year plan which thought as a solution to address the institutional, financial and service delivery problems affecting the city. It called for creation of a unicity structure. As a consultancy report put it80: It introduces the unicity concept by transforming local government through changed governance, financial viability, institutional transformation, sustainable development and enhanced delivery iGoli 2002 had acquired deep significance in the debate over the future of Johannesburg both within the ANC and outside. According to the City Mayor81: iGoli 2002 is an innovative transformation and development plan with primary goal of effective, efficient and sustainable democratic governance ensuring stimulation of socioeconomic investment opportunities which have local provincial, national and international significance But it resulted in a strong debate across the city and the country. The left wing which was dominant and felt threatened argued that it resulted in bowing before the market forces. They further questioned the need for privatizing the services. Most experts felt that the debate was more on the nature of proposals formulated by iGoli 2002 rather than the need for the restructuring the city.
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Prem Govender and James Aiello Johannesburgs Strategic Plan for Municipal Services Partnerships, Development South Africa, Summer 1999 81 Mogase, I, Message from the City Mayor in GJMC 1999, iGoli 2002: Making the City Work, 1999

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What iGoli 2002 Proposes? The first step in the process was the proposal to create a unicity structure. The proposal envisaged creation of a political body with functional and management independence. The utilities and corporatized entities were to be delinked from the centralized administrative processes. The creation of the new body involved notification of the council, demarcation of wards, elections to the council followed by the constitution of the metropolitan Council which would ten constitute, sub committees, ward committees etc. It envisaged creation of 10 companies that would run Johannesburgs utilities autonomously. The units would be run on business lines rather than the government lines. The councilors would not constitute more than 20% of the board that would be formed to run the companies. It also sought to keep the role of trade unions minimum. The plan identified half the functions of the new structure as utilities of agencies. Nearly 20% of those functions were to be corporatized and the balance to be run as under the existing arrangements. Proponents of the plan stressed this fact the only 10% of the functions were to be corporatized and these mostly comprised the non-core functions of the body. The administration was also to be divided into eleven regional administrations with one core. Public utilities were to be created to manage the water supply and sanitation, electricity and solid waste management. It further proposed to create separate agencies for constructing and maintaining roads, storm water drains parks and cemeteries. These agencies were to be arm length agencies and the aim of the council was to create conditions for entry of private sector into these activities. All these utilities and agencies would be corporatized and run as companies. However they would remain the ownership of the Metropolitan Council. The corporatized units would enjoy autonomy in their functions. They had to raise revenues to meet their costs. In case of shortfall there was a provision of the government stepping in and providing the grants. This was however to be in exceptional circumstances. The city council would normally act as a client to these utilities. The other entities that were to be corporatized included the city zoos and the Civic Theatre. Functions like managing Metro gas, Rand Airport, fresh produce market and the Sports Stadium were to be sold off the private parties. Supporters of privatization argued these activities constituted only 3% of total activities undertaken by the Metropolitan Council. They argued further that the money raised by selling off these units could be utilized to develop and strengthen the other units that were being corporatized. Critics however argued that the process was largely driven by the City Manager and his team advised by the donor agencies. Consultations outside this group seemed minimal. The information technology division had been outsourced in the past but experts felt that it had not yielded desired results. The new plan was to keep the core with the administration while the ancillary activities

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Stakeholders, Critics and Pitfalls In August 1999, the city held a conference among various stakeholders to debate the plan,. It received widespread support from all the political parties including Confederation of South African Trade Unions (COASTU). It also support from the international donor agencies. Local media and businesses also came out in support out of the plan However it faced several hurdles. Analysts opined that the sharp differences in which the different stakeholders viewed their interests posed the biggest challenge to the implementation of the plan. The two dominant unions in GJMC were South African Municipal Workers Union (SAWMU) and Independent Municipal and Allied Trade Union (IMATU). The trade unions for long had dominated the public sector and utilities in the city and through the country. It felt that its role was threatened. Fearing the loss of clout, it launched agitations through the city. Strikes were held and the unions threatened to disrupt the privatization and corporatization plan. While IMATU abandoned the path of disruption in her initial stages and tried to work out a deal with the policy makers to secure the best possible terms, SAWMU remained adamant. Efforts were made to involve it in the implementation of the plan but it went in vain. In an interesting development, COASTU of which SAWMU was a member signed an agreement with the South African Local Government Association (SALGA) on the reforms in municipal services. The agreement provided for co-operation between the local unions affiliated to COASTU. It was followed by lengthy negotiations. Added to this the South African Communist Party (SACP) also joined the protests. The students and the church also opposed the plan strongly. The city was witness to clashes between supporters and opponents of the plan and security forces had to be called in. In 2000, the ruling ANC contested the strike by SAWMU. City watchers attributed it to the determination of ANC governed council to move with the reforms. This was in contrast with the conciliatory moves undertaken by the ANC till then. Opponents got a boost when an independent survey conducted in early 2000 showed that most workers were skeptical about the retaining the jobs. This was in spite of commitment by iGoli 2002 planners to retain the existing employees for at least three years. The fear of insecurity was thought by many as fostering the discontent against the plan. The union leaders backed their claims with research reports from Bolivia, Argentina and Canada that showed the disadvantages of privatization plan in municipal services. Though the administrators could not secure a total support on the iGoli 2002, SAWMU did give tacit support on some of the issues. Observers believed that the dues owned by the users of the utilities to the government were the primary factor that led to the crisis. According to estimates, by 1999, nearly R2.1 billion was owed by the consumers to the government. The basic premise of the new plan was the restructuring of the utilities and the pricing mechanisms would make consumers pay their dues in a prompt manner. However a section of citizens particularly the affluent classes were believed to be unhappy at the cross subsidization proposed in the pricing structure. This section believed that the utility providers lacked in accountability and transparency. They

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held that the quality of service provided did not measure up to the tariffs charged. The poorer sections could not afford to pay even the subsidized rates in some cases. Another problem that was haunting the service providers was the nature of logistics involved in providing services to a large scale of population. By the late 1990s, more than 150,000 households did not have a metered connection for water supply. This was causing a great loss to the council. Political constraints were believed to be a difficulty in regularizing the connections. Analysts however suggested the adoption of innovative measures like staggered payment of dues to solve the problem. The plan also came in for some criticism from the environmentalists. Supporters however argued that the plan advocated the efficient and balanced use of resources and took care of environmental concerns. The termination of illegal water and electricity connections was thought to help saving of water and electricity. The plan also called for strict environmental supervision apart from laying stringent measures. Critics believed that the major aim of the plan was to please the financial community and the international agencies on which the city depended for its finances. Though few supported the criticism, they felt that it helped identification of revenues streams and the utilization for the revenues. There had been no linkage between the revenue and the expenditure. This plan was thought to bring about the linkages between the two. The staff and officials of the city government had to trained and motivated. It was felt there was lack of trained staff and often their responsibilities overlapped. It was felt that demarcation of responsibilities and prioritization of functions had to be taken up for smoother implementation. Performance and Outlook The city had recovered from the crisis by mid 2001. The city recorded a surplus of R71 million for the financial year ending June 2001. It improved further the next year generating a surplus of R83 million. Analyst opined that despite the hurdles, iGoli 2002 could be called a success. It was to be succeeded by a longer plan called iGoli 2010. This plan with a vision was to make Johannesburg a World Class City. iGoli 2010 aimed for an integration of service delivery, human development and economic growth. The plan was to involve UN Habitat for implementation of the plans. The elections to the council were held in While the results certainly generated optimism among the city watchers and residents alike, experts were cautious about the future. Santo Andre in Brazil had a population of nearly 650,000. It too faced high unemployment and severe problem of shelter. This created fertile conditions for social inequalities. The city council had tried to address this issue through better housing schemes but failed to make any progress. They focused on involving the resident of slums in new schemes that were designed. The involvement was in the form of both technical and financial relationships. The programme also included the provision of better basic amenities like water and electricity.
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Illiteracy eradication programme were implemented. There was an effort to impart a sense of dignity to the residents. People were willing to build their own houses. Similar projects too were undertaken in other cities notably Brasilia the national capital. The capital was swarmed by people from rural areas. The migration was largely on account of lack of jobs in the countryside. Most of these migrants settled down in slums where the living conditions were fare from better. The city took the assistance of the central government to relocate these into new settlements. Zonal regulations were changed to facilitate the development of local land. The land was to be registered in the name of women. The government provided only the land and infrastructure. The citizens were to construct the houses themselves. Within a short period of time the face of the city was changed. The new settlements also led to the spurt in economic activities. Job generation, monetary incentives from government to children in schools, supplementing food aid to the residents, free uniforms to school children were the initiatives that led to greater social inclusiveness. Cebu in Philippines provides yet another instance of promoting social inclusiveness. Cebu a provincial capital was one of the most prosperous cities in the country. It achieved high growth rates in the 1980s in contrast to the negative growth rates the country was posting. It accounted for nearly 10% of the countrys exports by 1995. Interestingly nearly two thirds of the population was involved in services sector. Experts have attributed this economic resilience to the strong bonding forged between the city government and the local business. However the economic prosperity in the city did not seemed to have reduced the poverty in the city. Though the central government had passed a statute on local autonomy, there were limitations that prevented it from being enforced in full. There was an influx from the neighboring regions leading to a rise in the informal settlements and informal economy. Land reclamation and new infrastructure projects also relocated the urban poor. It also posed an environmental hazard. The inequalities between the higher and lower income groups showed no sign of decrease. The city had to ensure a better delivery of services. It went in for a partnership with Non Governmental Organizations (NGOs). Beginning in 1998 with a programme for children, the scheme was extended to different sectors including public health, housing, water and nutrition. In Mexico, local bodies and the Mexican government involved the private sector in designing the housing schemes. Cemex, a leading producer of cement actively participated and encouraged the people to build their own houses. This was in a country where historically owning a house was considered a luxury. Lyons was one of the bigger cities in France. In 1960s in an attempt to solve the housing problem it had built high rise neighborhoods. Most of the residents had abandoned with the passage of time. Immigrants, mostly poor people occupied these high rise neighborhoods. The city began to face a problem of imbalance development. Under the Milenaire 3 plan the city worked itself to restore the development and natural surroundings. London for long was governed by multiplicity of structures. The history of the city local body showed that the powers and functions of these multiple bodies overlapped each other. It
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suffered from lack of financial autonomy and strength. Till 1964, London City Corporation and London County Council shared the responsibilities for governing the city. In 1964, Greater London Council (GLC) was formed by abolishing the county council. 32 boroughs were created afresh from the existing boroughs. In 1985, the Conservative government abolished the city government and the functions of the local bodies now got transferred to the central government. The Labor government restored the local bodies in 1998 by creating the Greater London Authority (GLA). It was to comprise of the Mayor (executive functions) and the London City Assembly (legislature functions). In spite of the progress in devolution, the problems in governing the city remains. London on the other hand was facing a problem of congestion. The Mayor Ken Livingston introduced the congestion tax. The aim of the tax was to reduce congestion in the city. The scheme came into effect in February 2003. Vehicles entering the central part of London on weekdays were required to pay a tax of $5 per day. Bicycles, mopeds and motorbikes were exempted. Some other vehicles were eligible for discount. The discount and exemptions were provided on the basis of their meeting strict environmental criteria. More than 150 check points were set up to monitor the vehicles that entered and left the congestion zone. Penalties were imposed on evaders. Traffic congestion and journey times reduced significantly both inside and outside the zone. While the average speed in the zone was around 8 miles per hour in 2002, it had increased to nearly 11 miles per hour by 2005. Traffic congestion fell by 40% against targeted 25%. Journey times fell more than 10%. The revenues surpassed the targets every year. The congestion tax became the focal point of the transport strategy for London. Karlsruhe in Germany adopted a different approach. The local corporation decided to float a company Stadtwerke Karlsruhe. The company was entrusted with the responsibility of provision of basic services like water, electricity, natural gas or distance heating. But the municipality also provided scope for the private parties to operate in the field. These companies were to be responsible for the services and the consumers had the choice of getting the services from any of these companies. These companies also paid royalties to the City Corporation based on the services offered. Stadtwerke Karlsruhe itself was to be privatized within a certain period of time. The city administration of St. Louis had tried for long to alleviate the problems of the inner city. The real income grew at very low rates compared to rest of the country. The city was prone to racial tension and this made matters difficult. The city population was witnessing a decline. The city government and the business leadership embarked on programme that aimed to focus on capturing the economic opportunities presented by the region. This was a departure from traditional programme that tended to eliminate the disadvantages than focusing on leveraging the advantages. The city leaders formed St. Louis Inner City Competitive Alliance that worked on market based participation I developmental programme. Tacoma, Washington was considered to be a city of decline by the 1980s. Crime was rampant and the city projects were unproductive. The city government believed that public investments would spur private capital flows. The dilapidated buildings were damaged to be rebuilt but the private money was not forthcoming. In this situation, citizens took on to
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themselves to build the city. By 2000 the city had been on the road to prosperity. The turning point here had been the participation of the people. Cartagena in Colombia had a population of 850,000 in 2000. The city had a long history of misgovernance and citizens complained about the poor quality of service. The local municipality decided to hand over the water supply and sewerage operations to a joint venture company AGUACAR. This company was a product of joint venture between the local municipality and a Spanish firm. It was to be an experiment in public private partnership in the provision of services. Though the system showed marked improvements, the reach of the service remained confined to few segments of the society. The experiment did not touch the urban poor. Critics attributed the role of municipality as dormant. The council found it difficult to negotiate with the private partner to reach the social base. This creates difficulty in meeting the social obligations of the municipality. Citizen participation remained minimum. In Savelugu, Ghana the community public partnership served as the model for providing water supply. The decision for setting up of tariffs is made at locals water councils. People from all walks are represented in these councils. The distribution of water is based on demographic concentrations rather than political considerations. The public water management board acts as a customer to the water utility GWCL and retails water to different areas. The water management board is responsible for collecting tariffs to pay GWCL. The involvement of public has helped in ensuring the success of the system. In different municipalities in Norway, the municipalities are responsible for providing water supply and sewerage. Though companies are floated, municipalities run the companies. The role of the private sector has been negligible in providing basic services in this country. The privatization of water supply in Cochobamba, Bolivia resulted in a widespread protest that left at least one person dead. The privatization had resulted in price hike by around 200%. After months of uprising the government had to abandon the project. More than the question of privatization or the rise in prices, the issue generated debate over the lack of transparency in the process of privatization. In this case too citizen participation was missing. ULBs in India have traditionally followed cash based accounting. Under this method, accounts were maintained on a single entry system with accounting controls limited to budgetary controls and bank balancing. Annual Accounts prepared reflected only the cash flows and not accrued income and outstanding liabilities. Segregation of capital and revenue transactions was not possible leading to inability of preparing the balance sheet. Accounting reforms trace their root to early 1980s when Mumbai and Chennai attempted to introduce the double entry based accrual accounting system. While it did generate some positive results, the outcome was limited. Complete conversion was not achieved. Similar efforts in Gujarat also did not take off completely.

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Tamil Nadu once again took the lead in implementing the Double entry accrual accounting system across 107 ULBs (excluding Chennai which already had one)in the state in 1998. This can be considered the first major success story of accounting reforms in the municipal sector. Within three years of starting the process, Tamil Nadu managed to implement the double entry accrual based accounting in all the five corporations (excluding Chennai where it had been implemented in the early 1980s) and 100+ municipalities. The government created a single Act, The Tamil Nadu Urban Local Bodies Act 1998covering all the Municipal Corporations, Municipalities and Town Panchayats. This Act replaced the existing multiple legislations. They also brought about an Accounting Manual for the ULBs which would serve as a guideline for them to follow. It create three sources of guidance on accounting. The Tamil Nadu Urban Local Bodies Act, 1998 The Tamil Nadu Urban Local Bodies Rules, 2000 The Accounting Manual for Urban Local Bodies in Tamil Nadu The Act provides the statutory basis for the maintenance and use of municipal fund, expenditure, authorization etc. the Rules enforced in 2000 specify the format in which the funds and accounts have to be maintained. The funds have to follow these prescribed formats. These Rules empower the government to issue the Manual. The basic features of the Accounting System can be summarized as follows Maintaining the accounts to be under double entry basis from the single entry system. The ULBs were required to segregate both revenue and capital items and the capital items were routed through the Capital Account. Accounts were maintained in three distinct funds viz. General Fund, Water Supply and Drainage Fund and Elementary Education Fund Separate financial statements had to be prepared for each of these funds. Computerization of accounts was also undertaken and employees were given extensive training to facilitate and easy changeover. Regular accrual of incomes A strong monitoring system to oversee the implementation. Monthly progress reports were prepared by the ULBs to be sent to Regional Directors who sent it to Commissioner of Municipal Administration. About 25 Chartered Accountant Firms were contracted with to assist ULBS in the implementation of the new Accounting Manual. The absence of any professional document to guide the change over necessitated the development of the Manual for accounting purposes in ULBS. The Manual was the result of the work undertaken by a three member committee set up in 1997. The Manual consists of three volumes IIIIIIAccounting Procedure Chart of Accounts Forms and Formats
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The Manual suggested a common set of account codes and formats to bring about uniformity in accounting practices across all ULBs. This was to be used as a reference document The implementation was done in phases. In the first phase starting from April 1, 1999, twelve ULBS were selected, two of them being Municipal Corporations. The second phase that commenced a year later extended this process to the remaining 95 municipalities. The Manual also received approval from Institute of Chartered Accountants of India (ICAI). The government understood the need for training the official before embarking upon this venture. It held an intensive training and orientation programme at all levels. The first level was of the Municipal Commissioners. Let the accountants and junior accountants were trained. The training was over a period of 15 days spread over two groups. To cover the 95 ULBs of phase two, the state was divided into 7 regions each consisting of 12-15 ULBs. The Local Fund Auditors were also trained about the mechanisms of its working. The first phase of implementation gave an opportunity for the government to review the manual. It was fund that the manual was too technical for the junior personnel, the people who actually execute the job on-field. Consequently, a simpler version was introduced during the 2nd phase. The next step was to monitor the implementation. ULBs had to submit progress reports to the Regional Director every month. Each Regional Director (RD) was responsible for 12-15 ULBs coming under his jurisdiction. RDs sent their reports to the Commissioner of Municipal Administration. The project also received funding from the World Bank. The new system made the preparation of balance sheet mandatory. 24 supporting schedules were provided for preparing the list of assets and liabilities during the transition from cash based to accrual based accounting system. Despite enthusiasm from the municipalities and the active involvement of the consultants, there were some initial problems necessitating the need for improvement of the manual. The improvements were able to bring greater clarity on the accounting issues of assets and liabilities. Separate accounts had to be maintained for Revenue Fund, Capital Fund, Water Supply and Drainage Fund and Elementary Education Fund. The new rules obligated the ULBs to prepare Income and Expenditure statement and the Balance Sheet separately for each of these funds. Apart from this, monthly statements were prepared for trial balance and project expenditure statements. Bank Reconciliation statements were also prepared on a monthly basis. The Trial Balance was to be updated daily by posting of accounting records like Receipt Book, Payment Book and General Ledger. The new accounting policies recognized all assets and liabilities in the balance sheet and provided for provision for depreciation and bad debts. Debts outstanding for more than 6 years were allowed to be classified under bad debts. Different rates of property tax were levied for general purpose, water supply and drainage and education. This made it necessary to separate funds for ea of them. Coding was introduced for funds to be included under each head. This is described in the following table

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General Fund Revenue Account Capital Account

Elementary Education Fund Income Expenditure Income Expenditure Income Expenditure statement statement statement Balance sheet Balance sheet Balance sheet

Water Supply Fund

Based on the manual the municipality could display funds under a particular format as shown below. Expenditure Amount Salaries of engineers and staff Maintenance charges Purchases Depreciation Surplus/deficit Income Amount Water and Drainage Tax Water Supply charges Charges for new connections TOTAL

TOTAL

The Commissioner prepares the budget in the prescribed format. One copy of the budget abstract was to be put up on the notice board and another gets published in the local newspaper Initiatives were also taken in some other ULBS for carrying out municipal reforms. These included Municipal Corporation of Delhi, Hyderabad Municipal Corporation, Jaipur Municipal Corporation, Agra Municipal Corporation and Tumkur City Municipal Council besides the BMP. The Government of India also took initiatives one of which was the appointment of a Task Force in 2002 to prescribe standardized formats for preparation of budgets and maintenance of accounts by the ULBs in the country.

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Service Indicators
Water Supply Sanitation Road & Storm Water Drainage Street Lights Solid Waste Management

Per capita Supply LPCD Present supply as % of 2005 demand @ 90 lpcd Frequency of supply % of Households with service connection Hours of water supply Ratio of distribution network to road length No of slum dwellers per standpost % Households with metre connection % Water lost thro leakage Cost per 1000 litres Revenue per 1000 litres Employees per 1000 Connections Share Establishment to Total Water Supply Expenditure

Service Levels

Liquid waste generated % treated

Percentage Roads Surfaced % CC roads % of BT roads % roads with foot paths

% of SV lamp to total lights

% Waste collected Collection frequency Vehicle usage % Compost generated % Door to door collection

% of Households with sewage connection % of households with individual toilets/low cost sanitation % drains to raodlength Public toilets (seats) per 1000 population O&M cost per public toilet Cost per capita % Cost Recovery % of cost recovery Establishment cost to sanitatiion expenditure Employees per 1000 population

% Road with
drains

Spacing between
lamp post

Capcaity of Spacing of
dustbin dustbin

Service Coverage

Stalking Theory: View through the Prism of Real life Practice

Service C ost & E fficiency

O&M cost per km of road Staff per KM

O&M cost per light Energy charge per light Share of establishment to total expenditure

Cost/ ton of waste collected Percapita Expenditure Road length per Conservancy staff

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The Municipal Corporation of Hyderabad (MCH) has been considered a pioneer in adopting IT and E-governance in pursuit of its goals. MCH serves the twin cities of Hyderabad and Secunderabad and provides municipal services ranging from maintaining register of births and deaths to solid waste disposal, primary education etc. The Standing Committee is empowered to specify format of maintaining of the accounts. The Committee derives the power from Section 179 of the Hyderabad Municipal Corporation Act, 1955. Its introduction of e-Governance in the local body was based on increasing usage of IT in civic services, development of MIS for better financial management, establishing e-Seva centers for payments from public, and establishing a 24*7 grievance redressal system. But progress had been slack in reforming its accounting process. Single entry cash based accounting system had made it difficult to get accurate financial information. This created difficulties in planning and managing the financial system. No balance sheets could be created neither MIS reports were generated. MCH was facing difficulties even in valuing its assets and liabilities. It was to overcome these inherent difficulties, MCH introduced reforms in its accounting process in 2001. The first step was the adoption of a double entry system for accounting. The objective was to convert from cash to accrual basis, facilitate quick and reliable MIS reports thus creating transparency through disclosure and access to financial statements. MCH appointed a team of consultants to assist in developing a new system and also to develop software that would facilitate the computerization of the accounting and financial functions of the corporation. Steps were taken to ensure the staff was provided adequate training while completing the transition from the old to the new. In 2002-03, for the first time, the financial statements were prepared under the new system. MCH adopted an Accounting Manual that put out comprehensive guidelines to be followed on accounting entries in different cases. Each of its 14 chapters devoted in detail to a particular type of transaction guiding the user the various steps he has to take to the minutest
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of the details. The customized Financial Accounting Software was used to for easier use of the process. The system also had built in controls and checks to enable the Financial Advisor to monitor his department on a daily basis. Instances can be cited of payments not being made without booking a journal voucher and collections could not be remitted to the bank without the contra vouchers being passed for it. Internal auditors were present at Circle offices to verify the collections. But income except property tax continued to be accounted for under case basis. Expense however moved completely to accrual system. To be recognized as a liability all expenditure items had to undergo pre audit testing before approval. While MCH presented the financial statements under various fund heads, it did not record its daily transactions on a day to day basis. While Maharashtra had made attempts to bring about reforms in municipal bodies as early as mid 1980s, it was only in the last few years that efforts have been made to scale it up to the state level. The earlier initiatives were confined to few local bodies and even there too few specific functions. The 2001 reform study supported by Financial Institutions Reform Expansion Project (FIRE-D) (belongs to USAID) and Directorate of Municipal Administration involved the development of accounting manuals which would facilitate the maintaining of accountings and preparation of financial statements on an accrual basis. The study selected three municipal corporations (Sangli-Miraj, Navi Mumbai and MiraBhayander) besides two municipal councils (Islampur and Navghar-Manikpur) as pilot ULBs for implementing the reforms. A detailed study was conducted to find the transaction profile in these ULBs under both revenue and capital items. Based on the studies stricter budgeting controls were imposed and internal auditing systems strengthened. In case of Navi Mumbai, it was found that many of the formats stipulated for accounting could be used with some changes and improvements. Draft manual was developed by early 2002 and the first cut of inventory of the assets of the pilot ULBs was undertaken. There were however difficulties on quantifying these assets. In the next phase more intensive work was carried out and many of these difficulties were minimized. One more feature was the decision to run both existing and the new system simultaneously till the new system was established fully. Local CA firms were also involved in solving day to day difficulties of the ULBs. The thrust of the implementation was to make the UB staff to make the entries and not the local CA firm. While at least two employees of the ULB were assigned to do the work fully, their assignments often were found to dilute this primary task. But with the passage of time this was eventually solved. In the meantime, training programme was organized for employees of non-pilot ULBs to gear them up for the eventual implementation of the new system. While comparing the reforms undertaken in the other cities, Agra presents an interesting example. Agra Municipal Reforms (AMR) was launched in March 2003. It aimed to strengthen the fiscal and institutional capabilities of the Agra Nagar Nigam (ANN). To
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undertake the initiatives under capacity building schemes, a study was commissioned to identify the potential areas. It identified the following six measures as foundation for undertaking the reforms. Reforms were to be introduced in valuing property tax by the introduction of Self Assessment Scheme (SAS) for the residential properties. Capital cost method to be introduced for valuing non-residential properties. The study recommended the need to invite Private sector participation in operation and maintenance of municipal services. This participation was to extend even to the delivery of municipal services. It further called for strengthening of the financial management system of ANN. It further suggested the setting up of a grievance redressal cell. Except for the financial management part, AMR incorporated the other recommendations. It was also to help ANN effectively manage the assets created under the Yamuna Action Plan. AMR project also had take in to account the complexities involved in building yup a sustainable fiscal base. The effective delivery of municipal services and maintaining urban infrastructure depended on the fiscal strengths of the local body; the sustainability of the fiscal resources often depended on factors that were largely non-fiscal in nature. This necessitated AMR include participation of local communities in implementing and delivery of the projects under AMR. The improved mechanism for administering property tax regimes for both residential and non residential properties will enhance the revenue generation of ANN. On the other hand, the involvement of private participation in operating, maintaining and delivery of public services traditionally offered by the Municipal Corporation would reduce expenditure on ANN. Greater involvement of the citizens and a strong redressal mechanism in these programme would increase tax compliance thereby increasing revenues. The bottom line was offering the citizens Value for Money (better service maintenance and delivery for greater tax compliance and collection). The UP Municipal Corporation Act provides for unit area method for valuing residential properties and capital cost method for valuing non residential properties. While these methods were adopted, there was a need to increase tax base. GIS methods were employed to map non residential properties. While this will result in a comprehensive data base of all the properties coming under ANN, it will further help in ascertaining the undervalued properties. Simplifying the tax collection by introducing procedures similar to Saral form of Income Tax department, workshops were held for tax department officials on SAS, unit area valuations and capital cost methods. To overcome the discretionary aspect of capital cost method, unit area method was sought to be applied to non residential properties thus giving them the benefit of self assessment schemes. Computer based collection system and involvement of banks in tax collection helped the tax collection procedures further. ANN also realized that better quality and more extensive system of services can be obtained by involving the private sector. It seemed a better alternative than to revamping the tried and tested public sector institutions. Private Sector participation brings in investments which the local bodies can ill afford to make given the fiscal constraints they face with. There is also the element of competition that creeps in when the services are divided between the private and public sector and among the private sector. AMR visualized involvement of private sector in garbage collection, composting of biodegradable wastes from hotels, transporting solid waste
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to disposal sites. Further maintaining streetlights was also handed out to the private sector. The success of the project was felt in many of these projects even in the pilot phase. While there were few acrimonious notes in the initial stages, they were weeded out as the project passed by. AMR project has a component for participation of the civil society for addressing the issues and Residents Welfare Associations were created to articulate the needs of the citizens and also efforts were made to rope in NGOs to effectively mobilize public opinion. The Community Development Department would sustain the interaction with the community groups. These structures would also act in tax collection. To constantly gauge users satisfaction because municipal services are paid for by the users through taxes and user charges, a Complaint redressal system (CRS) was set up. The working of the system was designed by drawing similar experiences of other cities like Vizag, Surat, Guntur and Tirunelveli. Reference 1. India Infrastructure Report 1996 2. Felisa U Etamadi, Civil Society Participation in City Governance in Cebu City, Environment and Urbanization, April 2000 3. Steve Russell and Elizabeth Vidler, The rise and fall of Government-Community Partnerships for Urban Development: Grassroots Testimony from Colombo, Environment and Urbanization, April 2000 4. Andrew Nickson, Establishing and Implementing a Joint Venture-Water and Sanitation Services in Cartagena, Colombia, Working Paper 442 03, University of Birmingham, January 2001 5. Janelle Plummer and Richard Slater, Just Managing: The Solid Waste Management Partnership in Biratnagar, Nepal, Working Paper 442 02, University of Birmingham, January 2001 6. Dr. Jo Beall, Dr. Owen Crankshaw, Susan Parnell, Towards Inclusive Urban Governance in Johannesburg, Report prepared for ESCOR Commissioned Research on Urban Development, Urban Governance, Partnership and Poverty, May 2001 7. Emanuele Lobina, Cochobamba-Water War, Report of Public Services International Research Unit, University of Greenwich, June 2001 8. BMP Annual Reports 2001-02 top 2003-04 9. Felisa Etamadi, Towards Inclusive Governance in Cebu Working Paper No.25, The University of Birmingham, May 2001 10. Steve Davis, European Waste Management: Background to Discussion on EWCs A PSIRU Report for EPSU, Public Services International Research Unit, University of Greenwich, March 2003 11. Uwe Loshe Improving Municipal Finance-A Global Challenge, Habitat Debate, April 2003

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12. Yves Cabannes, A Lesson on Participatory Budgeting from Latin America, Habitat Debate, April 2003 13. Celina Souza, Building Municipal Capacity for Finance and Budgeting in Brazil, Working Paper at University of Birmingham, September 2003 14. Paul A Grout and Margaret Stevens, Financing and Managing Public Services: An Assessment, CMPO Working Paper Series, September 2003 15. London Analytical Report, Prepared by the Strategy Unit Analysis 16. Londons Linkages With UK, Report by Oxford Economic Forecasting, May 2004 17. Proceedings of National Seminar on e-Governance in Municipalities August 2004 18. Cities Alliances Report on World Cities 2004. 19. George A Boyne, Explaining Public Service performance: Does Management Matter?, Working Paper at Cardiff Business School, 2004 20. Edward L. Glaeser and Albert Saiz, The Rise of the Skilled City, BrookingsWharton Papers on Urban Affairs,2004 21. Promoting Service Delivery by the Colombo Municipal Council through Effective Partnerships Presentation at ADB Regional Seminar at Manila, February 10-12, 2004. 22. Steve Thomas, David Hall and Violeta Corral, Electricity Privatization and Restructuring in Asia-Pacific Report commissioned by Public Services International, April 13,2004. 23. Dr. H.K.Pradhan, Market Based Financing of Municipalities and Sub national Governments: An Indian Experience, A Presentation, September 2004

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Does Bank Lending Influence Capital Formation and Agricultural Production 82

Ms Namrata Choudhary83 Prof. Prashant Kulkarni84 Prof. Anantha Murthy N.K.85 The role of public investment in agricultural capital formation has declined even sharper. The fall would have been sharper but for the private investment which has filled the gap. This raises the question about the complementarities between private and public investment. Even more important is the determinants of the capital formation. Traditionally banks have played a role in capital formation. Interestingly the capital formation has also happened through informal channels for which very little data is available. The paper examines the impact of bank lending on capital formation and consequent impact on the production. The correlation between the direct and indirect bank credit on the capital formation is 93% and coefficient of determination is 88%. Our studies show that there is an influence on bank lending on capital formation both public and private which consequently impacts the production patterns. Capital formation does lead to increase in production. There is a strong correlation between the public and private capital formation and agricultural production. The impact as measured by the coefficient of determination is less than 50% 1. Introduction 1.1 With agriculture providing sustenance to nearly 60% of the Indias population, it is natural that slow agricultural growth in recent years becomes a source of concern for policymakers. Current agricultural practices seem neither economically nor environmentally sustainable. It is evident that poorly maintained irrigation systems and almost universal lack of good extension services are responsible. Farmers' access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation. Public investment in agriculture has declined continuously. Private investment remains inadequate. 1.2 The interlinkages between capital formation and agricultural growth, and agricultural growth and poverty alleviation are well documented. Given the positive impact of agricultural growth on poverty alleviation, the role of capital formation as one of the major engines of agricultural growth needs no elaboration. Starting from Tara Shukla (1965) a number of studies have tried to understand the relationship between capital formation and agricultural growth and the changing patterns of capital formation in agriculture.
82

The paper is updated version of the paper titled same presented at International Conference on Agriculture and Food Industries organized at IIM-Lucknow 83 Analyst at leading financial services and consulting firm, Bangalore 84 Asst. Professor, Economics and Public Policy, IBA Bangalore 85 Faculty, Quantitative Methods and Operations Research Stalking Theory: View through the Prism of Real life Practice 105 | P a g e

1.3 Recent debates focus on the declining public sector investment in agriculture, complementarities between public and private investment, compositional shifts in capital formation, determinants of public and private sector investment behavior, inter-State disparities in capital formation and their implications for transfer of resources by Central Government to State governments among other issues. Besides, the discussion also has sought to focus on the policy directions in the agricultural sector. 1.4 GDP growth though impressive, is not uniform. Agricultural growth has grown at much lesser pace than that of the manufacturing and services sector. In fact the contribution of agriculture has declined from more than half of the GDP in the early years of independent India to less than a quarter now. This trend has been reflected even in the trends in capital formation. The growth in capital formation agriculture is recorded to be around 3.5 times in the last 50 years compared to 4.5 times in the services sector. The sectoral split up reveals a worsening picture with the agricultural sector contributing just around 10% of the overall gross capital formation in the country. 1.5 The role of public investment in capital formation has declined even sharper. It is evident that the fall would have been sharper but for the private investment which leads us to the question on whether there is complementarity between private and public investment. These complementarities can also be reflected in the role of public sector and private sector banks which play a major in being sources of capital formation. 1.6 NABARD for long has been the apex institution for providing and regulating credit for the promotion and development of agriculture. The role of Regional Rural Banks (RRBs) in purveying agricultural credit is also another feature of the Indian banking system. But critics have often questioned the effectiveness of these institutions in institutionalizing the lending system. The increasing trends in suicide by farmers and rural indebtedness highlight the drawbacks in the institutional lending procedures. These question marks on the ability of the banks in capital formation and subsequent impact on the production, acts as a motivation for undertaking this study. 2. Objectives of the Study 2.1 To analyze the patterns of bank lending to the agricultural sector. 2.2 To examine the patterns in public and private capital formation in the agricultural sector. 2.3 The role of banks in capital formation. 2.4 The impact of the above on the agricultural production. 2.5 Analyzing the gaps in the existing model and our recommendations. 3. Methodology We use the data from RBI, NABARD and CMIE on bank lending to the rural sector. We further make use of the data released by government organizations on the capital formation and the production in the agricultural sector. We undertake a review of the

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various credit planning and delivery models on agricultural lending. Based on the above we run efficiency and causality tests on the data. 4. Literature 4.1 Literature is consistent in arguing that capital formation increases production implying a higher GDP. Capital formation basically refers to the net additions to the (physical) capital stock in an accounting period, or, to the value of the increase of the capital stock; though it may occasionally also refer to the total stock of capital formed. Capital is said to be "formed" when savings are used for investment purposes, often investment in production. 4.2 A natural implication is the increasing stress on improving capital formation in the agricultural sector. Studies hold it as a panacea to increase the rural income and prosperity. Further many studies argue that the linkages between public and private capital formation are positive and complementary. Any decrease in one can affect the other thus affecting the overall position. However, this has always proven to be debatable one. 4.3 Studies also show that the econometric techniques for establishing correlation or using regressions to point out complementarities between public and private capital formation may be misleading, iii) the data base published by C.S.O. and used by most of the studies pertaining to capital formation may be away from the reality Change in stock as associated with the household sector by C.S.O. cover only the increase in inventories of livestock and do not cover increase in inventories including supplies and materials, work in progress and crop output help by the farming households during the accounting period,. Further underestimation in such cases is common. The underestimation is common even in the case of the gross fixed capital formation (GFCF) .Thus the status of capital formation hinges on the nature of statistical system and quality of data available for measurement of capital formation. 4.4 Ghulati and Bhalta (2002) debated on the stagnation of capital formation in agriculture. Public sector investment has declined in real terms while private sector has not been able to fill this gap. They examined the extent of deceleration, in particular on public sector account and further the reasons for the decline. They made an attempt to provide answers to these questions by first examining the temporal behavior and structure of public and private GCFA. 4.5 The analysis indicates that the trend rate of growth in GCFA accelerated during the 1970s then experienced a decline and recovered in the 1990s. Further they found that the public sector capital formation was the lowest during 1980s probably refuting the theories that suggest the decline in capital formation happened after 1991-92. 4.6 Purohit and Reddy (1999) presuming an existence of high complementarities between public and private capital formation found considerable variations across the Indian states both in their agricultural development and capital formation. 4.7 The Committee on Capital Formation argues that that a simple dichotomy between consumption and gross fixed capital formation can lead to problems dealing with flows of goods and services that do not fit comfortably under either heading. They argue for a need to achieve an economically meaningful and feasible set of
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accounting procedures for the assets acquired through gross capital formation within an integrated, coherent set of accounts encompassing past and future periods as well s the present. 4.8 Sharma, et al (2000) talks about conceptual aspects of overdues, recovery and prudential norms, along with impact of NPAs on health of Rural FIS. They analyze the patterns of NPAs and their consequent impact on the recovery of loans in these institutions. 4.9 Ghulati and Bhalta (2002) focus on the magnitude of bad debts or defaults in Indian agriculture. It is revealed that though the loan disbursements of RFIs have increased, NPAs too have shown a corresponding increase. The magnitude of debt shows that bad debt as percentage of loans outstanding increased from 3.58 in 1980 to 4.2 in 1992 and declined thereafter. 4.10 Bhaskaran (2003) study the pricing of agricultural loans by co operative banks. Despite several problems, both internal and external, affecting the viability of these rural financial intermediaries (RFIs), performance of these banks in disbursing crop loans has generally been good as with less than 5% of the total deposit/funds (assets) of the banking sector, the cooperative banks are supporting nearly half the credit flow under crop loans. 4.11 The value of elasticity coefficient of capital formation has been found different by different authors. Chakravarthy (1987) found it to be 0.62 for the period 1970/71 to 1982/83, 0.66 in study by Shetty (1990) for the period 1960/61 to 1986/87, -0.50 by Mishra and Chand (1995), 1.55 for the period 1960-70, 0.69 for the period 1970-80 and 0.31 for the period 1980-90 by Misra and Hazell (1996), In all these instances the differences have been attributed to the variations in the data sets used. It has been quite useful to understand and unearth the complexities of relationship among the public and private investment. 4.12 Roy (2001), infers that public investment levels do influence its private counterpart thereby proving complementarities between the two. But the relationship exhibited a paradox in the sense that while an increase in public investment generally had a positive impact on the private investment, the same did not follow suit. A decline in public investment also increases the private investment. 4.13 In all above studies it is contended by various studies that declining trend in the former is likely to have adverse impact on overall capital formation of the sector. This might impede the overall growth of the sector and its contribution to the GDP may fall further. 5. Analysis 5.1 Analyzing the trends in the GDP and GCF we find there has been a continuous increase in the GDP. It increased from Rs. 62904 crores in 2003-04 to Rs. 236064 in 1993-94. But the growth in agricultural GDP has not been uniform. In terms of sectors of the economy, however, the GDP in agriculture increased by 2.19 times. The corresponding rise in manufacturing and construction and service sectors is observed as 5.42 times and 5.33 times respectively In terms of relative contribution of these sectors, the share of agriculture in GDP has declined from around 51 percent to
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30 percent. By contrast the contribution of other sectors, namely, manufacturing and service sectors has gone up. The former of these increased its share in GDP from 20 percent (in 1960-61) to 29 percent (in 1993-94). The service sector, however, has increased its share much higher than the other sectors. Its relative contribution in the GDP has gone up from 29 percent to around 41 per cent. There have been continuous fluctuations in the GDP of agricultural sector. These have been captured in the tables below. Table I- Agricultural GDP as % of total GDP Years 90-91 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 Agricultural GDP as % of GDP 1.92 1.57 1.51 1.43 1.26 1.37 1.28 1.24 1.27 1.31

Graph I : Agricultural GDP as % of total GDP

Graph of GDP
2.5 2

GDP

1.5 Series1 1 0.5 0 1 2 3 4 5 6 7 8 9 10 years

5.2 The trend gets repeated when we observe the sectoral contribution to country's gross capital formation (GCF). In absolute terms, the GCF in agriculture increased by 3.44
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times from Rs. 1777 crores in 1960-61 to Rs. 6119 crores in 1993-94. By contrast, the corresponding increase in manufacturing and service sectors was 4.98 times and 4.20 times respectively. The statistics indicate that agriculture sector's contribution to GCF started declining in seventies. The trend has continued with the few exceptions from around 20 per cent in 1969-70 to around 11 percent in 1993-94. These trends in GCF indicate that falling (increasing) share of a sector in GDP necessarily does not mean a falling (increasing) GCF in the sector. Table 2- Gross Capital Formation in Agriculture Gross Fixed Capital Formation in and for Agriculture at 1993-94 Prices (Rs.Crore) GFCF Year (1) 1980-81 1985-86 1990-91 1995-96 2000-01 2001-02 GDP (2) 401128 513990 692871 899563 1198685 1265429 Percent Share in GDP of GFCF for Agriculture (6) 3.4 2.5 2.3 1.9 1.5 1.6 4.3 3.4 3.1 2.8 2.3 2.3

In For in Agriculture Agriculture Agriculture (3) 13721 13061 15805 16824 18364 19880 (4) 17279 17656 21560 25283 27946 28830 (5)

Table 3 -Gross Fixed Capital Formation in and for Agriculture at 1993-94 Prices (Public )(Rs. crores)

GFCF Year (1) GDP (2) in Agriculture (3) For Agriculture (4)

Percent Share in GDP of GFCF in Agriculture For Agriculture (5) (6)

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1980-81 1985-86 1990-91 1995-96 1999-00

401128 513990 692871 899563 1148442

7358 6005 4871 5318 4637

9855 9224 8706 9631 9902

1.8 1.2 0.7 0.6 0.4

2.5 1.8 1.3 1.1 0.9

Table No 4- Capital Formation in Agricultural Sector Capital Formation in agricultural sector Years 90-91 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 Private 10441 10841 11508 11963 11025 13083 12980 12250 13881 15261 Public 4395 4849 4668 3979 3870 4221 3927 4969 4359 5249

5.3 The graph below shows the trends in private capital formation in the agricultural sector. There has been a general rise in the trend with slight drops for a couple of years.

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Graph II- Private capital formation

PRIVATE CAPITAL FORMATION

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1 2 3 4 5 6 7 8 9
CAPITAL FORMATION

Series1

10

YEARS

Examining the trend for the public capital formation, we find it to be more fluctuating. The private capital formation in the early part of the 1990 was or more or less constant while the public capital formation grew at a faster rate. In the middle of the 1990s both show a slight dip but have recovered. It now seems the private capital formation is showing an increase at a faster rate over the public capital formation

Graph III- Public Capital Formation

PUBLIC CAPITAL FORMATION

CAPITAL FORMATION

Series1

6000 5000 4000 3000 2000 1000 0 1 2 3 4 5 6 7 8 9 10 YEARS

Source: Developed by the authors 6. Bank Lending 6.1 Bank lending to agriculture too has undergone significant changes. While there has been an increase, the patterns in indirect lending do show that it has not been able
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to keep up pace with the direct lending. Both were at the same level around 1991-92 but the gap has increased by 2003-04. Banks are more willing to lend directly to the farmers and farm operations and analyzing the trends do show that lending has increased from the all the financial institutions. Graph IV- Bank Lending to Agriculture

Bank Lending to agriculture

Bank lending direct and indirect
70000 60000 50000 40000 30000 20000 10000 0 1 2 3 4 5 6 7 8 Years Indirect lending Direct lending

Source: Developed by the authors Table no 5- Indirect Credit from Banks Indirect credit from the banks Years 1991-92 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Cooperatives 1727 17371 18927 19972 20818 21857 22952 24108 SCBs 200 1036 1271 1904 1997 3431 3967 7990 RRBs 9 1 1 6 8 7 . . REC 709 829 787 1093 2203 3051 4109 4722 Total 2645 19237 20986 22976 25026 28346 . .

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Table no 6-Direct Lending from Banks Cooperatives 1995-96 1996-97 1997-98 1998-99 1999-00 3240 3765 4075 4401 4731 SCBs 4647 5050 5304 6921 6845 RRBs 532 575 645 765 700 Total 19237 20986 22976 25026 28346

6.2 Based on the above data we adopted a multiple regression approach to test the influence of bank lending on capital formation and its consequent impact on agricultural production.

Graph V: Agricultural Production

PRODUCTION
1600.00 1400.00

Series1

CAPITAL FORMATION

1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 1 2 3 4 5 6 7 8 9 10 YEARS

Source: Developed by the authors

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Table No 7- Summary of Capital Formation, Bank Lending to Agriculture and Agricultural Production YEARS CAPITAL FORMATION PRIVATE PUBLIC BANK LENDING TOTAL DIRECT FINANCE 16145 23814 27448 29443 33094 36466 40485 46581 56857 70781 TOTAL INDIRECT FINANCE 1189 3674 4986 6335 8117 12968 18825 18238 23690 28520 PRODUCTION

90-91 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04

10441 10841 11508 11963 11025 13083 12980 12250 13881 15261

4395 4849 4668 3979 3870 4221 3927 4969 4359 5249

1169.36 1304.44 1313.06 1361.70 1475.42 1460.57 1482.94 1494.62 1436.36 1432.58

OLS MODEL RESULT The following set of hypothesis is tested. Ho: There is no impact of bank lending on private capital formation Ho: There is no impact of bank lending towards public capital formation Ho: There is no impact private & public capital formation towards agriculture production.

Functions

Correlation Coefficient R 0.9393 Private CF, Direct bank lending, indirect bank lending 0.5409 Public CF, Direct bank lending, Indirect bank lending

Coefficient of determination R2 0.8822

F-value

Significance

26.2118

0.000561

Significant

0.2926

1.4474

0.297

Significant

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0.6506 Production, private CF, public CF Note : CF-Capital formation

0.4233

2.5686

0.1456

Significant

7. Inferences 7.1 Bank lending is showing an increase. The NPAs do show a decline. There is increasing trend towards direct credit compared to the indirect mode. The private bank lending too is showing an upward trend. This is likely to ease the pressure on the co-operative banks which had borne the brunt of lending towards farm operations and the poor lending design too took a toll on them. Another institution that used to lend highly and still continues to lead are the regional Rural Banks (RRBs). They too have a high share of NPAs. 7.2 The association exists between the two components of capital formation viz. public and private capital formation. The scope of the paper is not aimed at measuring the complementarities but the impact of capital formation on bank lending. 7.3 Bank lending influences private capital formation highly. The correlation between the direct and indirect bank credit on the capital formation is 93% and coefficient of determination is 88%. Measuring the impact of direct and indirect bank lending on public capital formation is comparatively lower. The association as measured by the coefficient of determination is only 29%. 7.4 Capital formation depends not only on the bank lending but also on other factors which we have not taken into account. Agricultural lending to a good extent still remains a domain of the informal sector. The influence of this sector has to be taken into account which very few studies have done. The need to bring this sector to mainstream is long awaited need. There are no reliable data sources to measure the role of this sector. 7.5 Capital formation does lead to increase in production. There is a strong correlation between the public and private capital formation and agricultural production. The impact as measured by the coefficient of determination is less than 50% . Production is subjected in different degrees to influences from land salinity, rainfall and labor costs. Studies need to be undertaken to examine the relation between these factors. 7.6 Our studies show that there is an influence on bank lending on capital formation both public and private which consequently impacts the production patterns. While the other factors will matter, the importance of finance cannot be underestimated and this can provide the context for banks to step up their lending mechanisms. Further the banks must ensure that the lending moves from the realm of the informal mechanisms of the local money lenders to the formal lending system.

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REFERENCES Bhalla, G.S., Peter Hazell and John Kerr 1999, Prospects for India's Cereal Supply and Demand to 2020, Food, Agriculture and the Environment Discussion Paper 29, International Food Policy Research Institute (IFPRI), Washington D.C. Chand, Ramesh 2000, Emerging Trends and Regional Variations in Agricultural Investments and their Implications for Growth and Equity, Policy Paper, National Centre for Agricultural Economics and Policy Research, New Delhi. Chand, Ramesh and Dayanatha Jha 1999, Agriculture Sector Reforms for Growth and Efficiency, Paper presented at Conference on National Competitive Policy organized by National Productivity Council on April 5-6, 1999, New Delhi. Dhawan, B.D. 1998, Studies in Agricultural Investments and Rural Savings, Commonwealth Publishers, New Delhi. Dhawan, B. D. 1996, Relationship between Public and Private Investments in Indian Agriculture with special reference to Public Canals, Indian Journal of Agricultural Economics, Vol.51, No.1 & 2, Jan-June. Government of India 1999, New Series on National Accounts Statistics (Base Year 1993-94), Central Statistical Organization, Department of Statistics and Programme Implementation, Ministry of Planning and Programme Implementation, Government of India, New Delhi. Government of India 1996, Capital Formation and Saving in India, Report of the Working Group on Savings, CSO, New Delhi. Government of India 1991, Estimates of State Domestic Product and Gross Fixed Capital Formation, Central Statistical Organization, Department of Statistics and Programme Implementation, Ministry of Planning and Programme implementation, Government of India, New Delhi. Government of India 1982, Capital Formation and Saving in India, 1950-51 to 197980, Report of the Working Group on Savings (Chairman: K.N. Raj, Ministry of Finance, New Delhi. Gulati, Ashok and Shashanka Bhide 1993, Structural Adjustments and Agriculture, Working Paper No. 44, National Council of Applied Economic Research (NCAER), New Delhi. Mishra, S.N. 1996, Capital Formation and Accumulation in Indian Agriculture since Independence, Indian Journal of Agricultural Economics, Golden Jubilee Number, Vol. 51, Nos. 1&2, January-June. Mishra, S.N. and Ramesh Chand 1995, Public and Private Capital Formation in Indian Agriculture: Comments on the Complementarity Hypothesis and Others, Report, Institute of Economic Growth, Delhi University Enclave, Delhi. Also published in Economic and Political Weekly, June 24, 1995. Misra, V.N. 1998, Economic Reforms, Terms of Trade, Aggregate Supply and Private Investment In Agriculture: Indian Experience, Economic and Political Weekly, August 1.

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 Mitra, Ashok, 1996, Public and Private Investments in Agriculture, in Bhupat M. Desai (ed.) 1997, Agricultural Development Paradigm for the Ninth Plan under New Economic Environment, Oxford and IBH, New Delhi. Mujumdar, N.A. and K.A. Menon 1986, Saving and Capital Formation in the Agricultural Sector: A Review, in M.L. Dantwala ed. Indian Agricultural Development since Independence: A Collection of Essays, Oxford and IBH Publishing, 1986. National Accounts Statistics (NAS) 2000, National Accounts Statistics, Central Statistical Organization, Government of India, New Delhi Rao, C.H. Hanumantha 1994, Agricultural Growth, Rural Poverty and Environmental Degradation in India, Oxford University Press, Delhi. Ravishankar, V. J. 1990, Public Spending and Investment in Indian Agriculture: Composition, Trends and Key Issues, World Bank, September. Reserve Bank of India (RBI) and NSSO 1991-92, Statistical Tables relating to Capital Expenditure and Capital Formation of Rural Households, All India Debt and Investment Survey, 1991-92. Shetty, S.L. 1990, Investment in Agriculture: Brief Review of Recent Trends, Economic and Political Weekly, Feb. 17-42, 1990.

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Agro commodity Prices and Macroeconomics: Exploring the Interlinkages using Co-integration Model
86

Ms Surabhi Agarwal87 Ms Preeti Laddha88 Prof. Prashant Kulkarni89 Prof. Anantha Murthy N.K.90 Linkages between macroeconomic factors and commodity market have been a subject of discussion for a long time. The discussion largely concentrates on oil and bullion market. However given the importance of agricultural production and its consequent impact on the prices in the commodity markets and role in the national output, it is quite evident that thought has to be given to the role these markets play. Production impacts the prices on the supply side and by extension there is bound to be influence on the GDP. Literature of late has been arguing on the declining influence of agro-commodity prices on the inflation levels and WPI. The paper examines the interlinkages between commodity prices and macroeconomic factors like GDP and inflation. Our study indicates no long term convergence between these macro-economic variables and the prices of rice, wheat and oilseeds... Traditional discussion on commodity markets linkages and macroeconomic and microeconomic factors often ignores agricultural commodities. However given the importance of agricultural production and its consequent impact on the prices in the commodity markets and role in the national output, thought has to be given to the role these markets play. Though services sector dominates the Indian Gross Domestic Product (GDP), agriculture and thus by extension agricultural markets remain a sizeable force for the Indian economy. It contributes 24% in Indian GDP besides employing 57% of the work force. The Green Revolution, the White Revolution, the Yellow Revolution and the Blue Revolution have ensured that Indias agricultural growth has been rapid in terms of output and yield. The per capita availability of food grains has risen in the country from 350 gm in 1951 to near about 400 gm per day now, of milk from less than 125 gm to 226 gm per day and of eggs from 5 to 30 per annum despite the increase in population from 35 crores to 95 crores. Besides the linkage effects of agriculture cannot be ignored. Like other countries, the importance of agriculture in the Indian economy has dropped steadily over the last two decades. Agriculture now accounts for 23% of GDP, as compared with the level of 50% in 1947.

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The paper is updated version of the paper titled same presented at International Conference on Agriculture and Food Industries organized at IIM-Lucknow 87 Product Manager at a leading Research firm in Noida 88 Senior Business Analyst with a leading Research firm in Mumbai 89 Asst. Professor, Economics and Public Policy, IBA Bangalore 90 Faculty, Quantitative Methods and Operations Research Stalking Theory: View through the Prism of Real life Practice 119 | P a g e

Figure 1: Fluctuations in the national GDP of Agriculture

Source: GoI Statistics

Forty-two percent of the world's laborers are employed in agriculture, making it by far the most common occupation with the figure touching 57% of the work force in India. . Yet, agricultural production accounts for less than five percent of the Gross World Product (an aggregate of all Gross Domestic Products). Further, the last four years has witnessed fluctuating foodgrain production in India, the steepest fall coming in the year 2002-03 when the decline in food grains production was anywhere between 13-14 percent. Reviewing our agricultural situation, it is clear that it lacks in four vital areas. These four are (i) the public investment and credit; (ii) the infrastructure; (iii) the market economy; and (iv) the knowledge. Taken together they are responsible for the development deficit in the agrarian and rural economy. With nearly 60% of Indias households depending on agriculture, developments in agricultural markets have a potential to have an impact on large section of the population. While commodity markets have existed in India for years, they remain by and large unorganized. The banning of forward trading in the sixties prevented its evolution into the organized form. In recent years the emergence of commodity exchanges and revival of futures trading despite the occasional ban seems to have given the commodity markets a new lease of life. Commodity prices have strong interlinkages with various macroeconomic factors like GDP, inflation money supply and exchange rates. But little literature exists documenting this relationship. Some studies that examined these relationships include Frankel (2006) on the relationship between monetary policy and commodity prices, Susan Thomas (2003) on policy issues and commodity markets; Pindyck and Rotenberg (1990) talk about the co-movement
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of the commodity prices, Borzenstein and Reihnart (1994) discuss the macro-economic determinants of commodity prices among other studies. Movements in commodity prices on world markets serve as indicators on supply and demand conditions in the commodity markets. Spikes or sharp drops in prices highlight the impact of shocks that affect the markets. Long-term trends in commodity prices, on the other hand, reflect the influence of changes in technology, consumer preferences, and market structures, policies and institutions. For developing countries that depend heavily on commodity exports for foreign exchange, the cash price is analytically less revealing than is the purchasing power it provides. For countries where agricultural trade accounts for a large proportion of total trade, movements in the terms of trade of agriculture can have important implications for the affordability of food imports and for food security. This is particularly true for LDCs and some other developing countries. These issues make it evident for the need to investigate deeper into the interlinkages between the commodity prices and macroeconomic factors like inflation, money supply, exchange rates and GDP. Thus this serves as natural background for us to frame the objectives for the present study. OBJECTIVES The current study incorporates the following objectives Understanding the linkages between macroeconomics and commodity markets in India. Measuring the degree of influence of commodity prices on macroeconomic factors in India. Understanding what these relations mean for the economy as a whole and agro based industries in particular Discusses market based instruments for the agro based industries to manage the macroeconomic risk

METHODOLOGY There are certain macro economic factors which influence the Agricultural commodity prices on the whole. In this paper we try to examine the relationship between GDP, wholesale price index (WPI) and agricultural yield and prices. Five major crops were selected namely rice , wheat , cotton ,sugar and oilseeds . We hypothesize that the macroeconomic indicators have a significant influence on the commodity prices and thus impact pricing mechanisms in the commodity markets both at spot prices and futures. We use index numbers of prices for these commodities as proxy for commodity prices. Choosing WPI over CPI made sense since we wanted to take the producers prices for examining the linkages than the consumer prices which would are influence by other components like transportation and taxes. Producer prices represent the prices of the inputs plus the production costs. We use historical data from Government of India statistics obtained through the Annual Economic Surveys and the
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Statistics published by the Ministry of Statistics and Personnel, GoI. Further using the same sources, we obtain the data for GDP growth rate of agriculture and allied sector, WPI and net exports. We undertake an exhaustive literature survey. Using the secondary data mentioned above we apply the basic tools like trend analysis and charts. We proceed to examine the basic cause effect relationships using co-relation studies. We examine further to understand the degree and extent of impact by using co-efficient of determination. Correlation studies between these independent variables would give us the nature of short term relationship among these variables. But it is equally important to examine whether there is a long run convergence among these variable. Several methods have been used. We use the Augmented Dicky Fuller Test and co-integration to test the convergence.

Macroeconomics and Commodity Markets

Mendeza et al (2003) estimate two models capturing the long term relationship between Spanish prices and agricultural production using cointegration. They found that the Spanish agricultural output is responsive to agricultural prices. Agrekon (2005) using the vector error correction model investigate the impact of monetary and macroeconomic factors on food prices during the 1960-1998 period. He concludes that the food price shocks do have significant impacts on domestic food production, and are a major source of macroeconomic instability in West Africa. Kuznets analysis (1966) highlights the growth in agriculture as a precondition for economic growth and structural change. Saghaian (2002) also uses Johansen's cointegration test along with a vector error correction model to test the overshooting effect in the agricultural prices in an open economy. The empirical results indicate that agricultural prices adjust faster than industrial prices to innovations in the money supply, affecting relative prices in the short run, but strict long-run money neutrality does not hold. Economic literature gives ample indications of the importance of macroeconomic factors in determining the agricultural commodity prices. Pindyck and Rotemberg (1990) find that prices of seemingly unrelated commodities move together, even after controlling for macroeconomic indicators such as inflation, industrial production (IP), and interest rates. The authors regress the price changes of seemingly unrelated commodities (wheat, cotton, copper, gold, crude, lumber, and cocoa) on some important macroeconomic indicators and find the regression residuals to be highly correlated. There have been a number of studies that have analyzed efficiency of commodity markets in developed countries. The econometric techniques developed by Engle and Granger (1987) and Johansen and Juselius (1990) for cointegration allow for a Vector Auto Regressive (VAR) Model for the determination of spot and future prices and allows for testing market efficiency .The inflation effect determination of the commodity prices uses a technique demonstrated in Boswjik and Franses (2002) for removal of autocorrelation in the time series analysis.

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Figure II Chart 1. Reuters-CRB Futures Price Index,1970-2006 By Months Chart 2. CRB & CPI Indexes, Annual Change By months, 1965-2006

Source: Boswjik and Franses (2002), Informa Economics and AGRA Informa Company

Figure 3: Long Run Link between Commodity Prices and CPI

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Source: Furlong and Ingentio 1996

Figure 4: Short run Link between the Commodity Prices and CPI

Source :Furlong and Ingentio (1996)

The graphs above show the boom and the bust in the Commodity Price inflation and its impact on North American agricultural competitiveness. These basic changes are shifting both the economic outlook for global and North American agriculture and for investment incentives, patterns and risk worldwide. To take advantage of these opportunities, firms must fully understand the evolving context, the changing threats and the increasingly dynamic global trends. Frank Browne and David Cronin (2007) shows the influence of commodity prices on consumer prices usually seen as originating in commodity markets. They argue, however, by using the VAR Model that long run and short run relationships should exist between commodity prices, consumer prices and money and the influence of commodity prices on consumer prices occurs through a money-driven overshooting of commodity prices being corrected overtime.. They conclude that the results indicate that monetary aggregates have to be brought into studies of the commodity price-consumer price relationship. They also indicate that a commodity price gap could have a practical benefit in enhancing monetary analysis in trying to understand and predict inflation. Susan Thomas (2003) argues that the securities markets are highly relevant in thinking about reforms to the commodity market. There may be many opportunities to utilize the knowledge, technology and institutional capacity that is present on the securities markets, to help obtain a comparable transformation on the commodity markets. If this comes about, it constitutes a
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channel through which the securities markets could have an impact upon the lives of a very large number of people in India. Furlong and Ingentio (1996) examines the empirical relationship between changes in commodity prices and inflation by looking at the performance of non-oil commodity prices as stand-alone indicators of inflation. Further they analyze these relationships in conjunction with other leading indicators of inflation. They show that the empirical link between commodity prices and inflation has changed dramatically over time and commodity prices alone no longer remain a robust indicators on inflation as was the case in 1970s and early 1980s. Similar conclusions had been arrived by various studies earlier including Garner (1995) and Bloomberg and Harris (1995). Garner (1995) find that lagged changes in commodity prices Granger cause inflation between 1973 and 1994 though the effect was not significant between 1983 an 1994. Some other studies include Cody and Mills (1991), Kugler (1991) and Furlong (1988). Ghosh and Chandrasekhar (2002) argue that commodity price buoyancy is on account of investment shift from the capital markets to the commodity markets besides the fluctuations in the exchange rates rather than the changes in supply-demand equation. This probably explains the paradox of the rise of prices when growth conditions are down with the fear of recession haunting the economy. ANALYSIS Correlation analysis suggests that commodity prices and WPI do share a strong relationship. However, testing the convergence among them in the long run using the ADF test for cointegration gives us mixed results. The index numbers were taken considering the normal fluctuations in the prices. The producer prices were taken as they better represent the output prices. Graph 1: Commodity Prices
Commodity Prices in Various Years
200 180 160 140 120 100 80 60 40 20 0
19 95 19 199 96 6 -1 99 7 97 -9 8 98 -9 9 99 -0 0 0 20 0-0 01 1 20 200 02 2 20 200 03 3 20 200 04 4 -2 00 5

Rice(Prices) WheatPrices) CottonPrices) SugarPrices) Oilseeds(Prices)

Prices

Years

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Graph 2: Yield of different commodities

Yield in different Years

350 300 250 200 150 100 50 0 19 9596 19 9697 19 9798 19 9899 19 9900 20 0001 20 0102 20 0203 20 0304 20 0405

Wheat Rice Cotton Sugar Oilseeds

Yield

Years

Graph 3: Wholesale Price Index

WHOLESALE PRICE INDEX

200 180 160 140 120 100 80 60 40 20 0 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 200496 97 98 99 00 01 02 03 04 05 Years

WPI

WPI

Graph 4: GDP growth rate in agricultural sector

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GDP growth rate in Agri and Allied sector

12 10 8 6 4 2 0 -2 -4 -6 Year 199596 199697 199798 199899 199900 200001 200102 200203 200304 200405

Year 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05

GDP growth rate

Table 1: Index Numbers for Commodity prices for select crops (1995-96 to 2004-05) Cotton 159 133 155 167 147 157 149 142 181 185 Sugar 113 119 134 154 156 153 146 135 139 142 Rice 117 129 134 146 171 168 167 166 169 175 Oilseeds 117 115 114 139 122 103 113 138 158 174 Wheat 112 137 138 152 175 177 175 176 181 183

(Source: Central Statistical Organization, www.indiabudget.nic.in/ economic survey from 1990-2004)

Table 2: Yield per hectare Year 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 Cotton 13.1 14.3 14.8 12.2 11.5 9.5 Sugar 283 273.6 280 295.7 299.3 296 Rice 79.6 79.6 83.52 86 89.7 85 Oilseeds 22.4 24.1 25.5 25.2 20.7 18.4 Wheat 62.6 64.5 66.38 70.8 76.4 69.7
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2001-02 2002-03 2003-04 2004-05

10 8.7 13.8 17.1

297.2 281.6 236.2 234.2

93.3 72.7 87 87.8

20.7 15.1 25.1 24.8

72.8 65.1 72.1 73

(Source: Central Statistical Organization, www.indiabudget.nic.in /economic survey (1999-2004))

Table 3: Agricultural GDP growth rate and the WPI Year 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 WPI 121.6 127.2 132.8 140.7 145.3 155.7 161.3 166.8 175.9 187.9 GDP -0.9 9.6 -2.4 6.2 0.3 -0.1 6.5 -5.2 9.1 1.1

(Source: www.indiabudget.nic.in/ economic survey from 1990-2004)

The correlation results are given in the table below OLS MODEL RESULTS Commodity GDP, Output, Prices R R2 Cotton 0.247 0.061 Sugar 0.241 0.058 Rice 0.50 0.25 Oilseeds 0.539 0.29 Wheat 0.332 0.110 Coefficient Of Correlation WPI, Prices R R2 0.563 0.317 0.446 0.199 0.87 0.76 0.708 0.501 0.883 0.779

Where R =

R2 = Coefficient of Determination

OLS MODEL SIGNIFICANCE RESULTS Commodity Cotton Sugar GDP, Yield, Prices Significance Level Not Significant Not Significant WPI, Prices Significance Level Significant Significant
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Rice Oilseeds Wheat

Significant Significant Not Significant

Significant Significant Significant

The results do present a mixed picture. We find that the there is significant correlation between the prices of rice and oilseeds and yield of corresponding prices and the agricultural growth rate. However the relationship is not significant in other cases. As expected there is a high degree of correlation between WPI and commodity prices. However in case of sugar and cotton, the degree of co-relation with WPI is less (56 and 44% respectively). Interestingly both sugar and cotton have a high degree of weightage attached to them in WPI composition compared to the other three crops. Looking at the results, we went further ahead to check if there is any long term convergence between these relationships. We followed co integration method adopting the ADF test approach. Our results are tabulated below. RESIDUAL DATA SET Year 1 2 3 4 5 6 7 8 9 10 Cotton -3.605 6.335 -5.91 3.91 -1.64 -1.09 5.27 -5.80 6.05 -3.51 GDP, Yield, Prices Sugar -2.34 7.5 -4.5 4.33 -1.43 -1.92 4.93 -7.30 4.49 -3.69 Rice -3.4 7.81 -5.7 2.47 -3.5 -1.8 0.67 -1.2 6.4 -1.5 Oilseeds -3.6 5.48 -7.65 1.455 -0.98 0.27 5.11 -1.78 4.64 -2.94 Wheat -2.84 8.28 -4.69 2.38 -5.07 -1.62 3.124 -4.23 6.52 -1.85 Cotton -31.04 -6.058 -16.86 -17.9 1.606 4.55 16.11 26.83 6.86 15.88 WPI, prices Sugar -12.4 -10.8 -15.3 -20.8 -17.5 -5.1 5.1 18.03 24.43 34.44 Rice Oilseeds Wheat 3.93 -21.53 8.39 -1.3 -14.56 -5.71 -0.3 -8.28 -0.90 -3.3 -17.43 -4.04 -21.5 -1.24 -17.57 -8.37 22.11 -8.75 -1.86 20.89 -1.57 4.54 9.35 3.14 10.9 4.80 8.29 17.5 5.89 18.72

CO-INTEGRATION RESULTS Commodity T Stat Cotton Sugar Rice Oilseeds Wheat -9.564 -3.741 -0.651 -1.723 -2.227 GDP =f ( Y, P) Critical Significance Value -2.365 significant -2.365 significant -2.365 not significant -2.365 not significant -2.365 not significant WPI = f(Prices) T stat Critical Significance value -0.8137 -2.365 Not significant -0.2114 -2.365 Not significant -1.7640 -2.365 Not significant -1.6269 -2.365 Not significant -0.1136 -2.365 Not significant

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We find that only cotton and sugar exhibit stationarity in the case where GDP is a function of Pries and Yield but not in the case of WPI being a function of Prices. While they are co integrated, their correlation is low. This indicates a convergence in spite of a low co-relation among them.

INFERENCES
There is no denying the fact that agricultural GDP growth rate, yield of the respective crops and their prices exhibit a co-relation in the short run. However when translated into a longer time period, we get mixed results. Macroeconomic influences are minimal or remain oblivious to the changes in agricultural prices and yield. This is also reflected in the continuing decline in the share of agriculture in the national GDP. This is a matter of concern. Question however remains open to study concerning the impact and degree of relationship between the macroeconomic factors and the consumer prices or prices of value added products. These findings would be of interest to the industry and policy makers alike. Besides the current nature of the industry leading often to overproduction can be also be one of the reasons for these findings. The finding that a strong correlation between the prices and WPI in short run is expected since they do form a composition of the WPI. The significant fact is that the price fluctuation does not exhibit convergence with WPI and consequently inflation in the longer time period. This phenomenon of commodity prices not being indicators of inflation has been tested and studied as mentioned above. These studies included Furlon et al (2007), Furlong (2003), Garner (1995) among others. The changing composition of WPI also is an indicator of these trends. The latest controversy over the higher importance to sugar prices in WPI is also open to question given there is long term convergent trends in the two but the influence of sugar prices remain minimal. If there is an impact it will be at consumer price level and not at the producer price level. Our findings reflect the studies that there is a very high impact of the commodity prices on WPI . To an extent the degree of impact of prices on inflation does affect the net export position of the country. There is also the issue of the commodity prices responding to aggregate demand shocks. Though this has not been the focus of the study, our conclusions do indicate that the availability of alternative instruments might have reduced the hedging in commodities which would have influenced these prices. Prices may respond to short run shocks indicating a high co-relation with the WPI but may not sustain it in the longer run. We have not taken into account the relationship between the monetary and fiscal policies and the commodity prices which would probably explain the phenomenon of long run nonstationarity. We suggest that it is a mix of change in different factors that affect the prices rather than individual factor operating in isolation.

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REFERENCES
1. Agrekon, Impacts Of Monetary and Macroeconomic Factors on Food Prices in West Africa , Vol 44 No.2 ,June 2005 2. Central Statistical Organisation ,New Delhi 3. Chathrath , Arjun ,Ai, Chunrog ;Song ,Frank, On the Comovement Of Commodity Prices ,1st August ,2006 4. Commodity Price Inflation and its Impact on North American Agricultural Competitiveness, 2006 , Informa Economics And AGRA Informa Company 5. Economic Survey ,1995-2006 Agricultural GDP( www.indiabudget.nic.in) 6. Elam, E. and B.L .Dixon, Examining the Validity of a Test of Futures Market Efficiency. The Journal Of Future Markets , 8 (1988) : 365-372 7. Fisher (1939) , Kuznets (1955) ,Clark (1940) and Chenery and Syrquin(1975),Inter Sectoral growth Linkages In India : Implications For Policy And Liberalised Reforms 8. Fama .E.F., Efficient Capital Markets : A Review of theory and Empirical Work, The Journal Of Finance , 25 (1970): 383-417 9. Frank Browne and David Cronin , Commodity Prices, Money and Inflation,738, Pg 4,2007 10. Indian Budget : www.indiabudget.nic.in ( Economic Survey -1995-2006) 11. Jeffrey Frankel (1986), Asset pricing and Monetory Policy: Review of The Effect of Monetory Prices on Real Commodity Prices, NBER. 12. Judith .A.Clarke and Mukesh Ralhan , Direct And Indirect Casuality Between Exports and Economic Output For Bangladesh and Sri Lanka : Horizon Matters ,EWP 05012 , July 2005 13. Johansen , S. and Juselius ,K.(1990) , Statistical Analysis of Cointegration Vectors, Journal Of Economic Dynamics and Control ,12 , 231-254 14. Jos A. Mendeza, Ricaro Morab and Carlos San Juan , (2003), A Cointegration Analysis of the Long Run Supply Response of Spanish Agriculture to the Common Agricultural Policy , 15. Saghaian , Sayed H.(@002), Monetory Impacts and the Overshooting Of Agricultural Prices In An Open Economy 16. Seema Bathla , Inter Sectoral growth Linkages In India : Implications For Policy And Liberalised Reforms , 20th October ,2003 17. Susan Thomas, Agricultural Commodity Markets In India : Policy Issues for Growth :1-25 , May 21 ,2003

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Weather Risk, Agro Commodity Prices and Macro Economic Linkages: Examining the Inter-linkages using Co-integration Model91
Ms Preeti Laddha92 Ms Surabhi Agarwal93 Prof. Prashant Kulkarni94 Prof. Anantha Murthy N.K.95 Rainfall has been an unpredictable element in agricultural production for long, the farmer has to depend on the vagaries of nature to sustain his crops. The Indian subcontinent receives its rainfall from the south-west (summer) monsoon during June-September with very little rainfall in winter. June and July thus become crucial months for sowing the summer crop, which accounts for 50% of total agriculture input. Any deficit here will affect all the summer crops like groundnuts, cotton, sugarcane, kharif rice and soybeans. Experience and theory suggest that commodity prices and weather indices do not correlate well in a local area. This makes it virtually impossible to manage weather risk with a price hedge. There are no physical markets in weather. Moreover weather risk is localized and beyond human control Weather insurance often has failed because of inherent defects in its planning. We study the impact of weather i.e. rainfall on agricultural production and thus by extension the prices, and the GDP. Our results through ADF co-integration analysis indicate a short term relationship between the factors but there seems to be no convergence among these factors in the long term. INTRODUCTION: Agriculture contributes 24%in Indian GDP and employs 57%of the work force. India has made rapid strides in agriculture since independence in terms of growth in output, yield and area under crops. The Green Revolution, the White Revolution, the Yellow Revolution and the Blue Revolution have all aided this. The natural corollary would be a strong co-relation between the performance of the agricultural sector measured in terms of yield and the commodity prices and its consequent impact on the agro based industries. Going a little further one can assert with reasonable confidence that risks associated with agriculture have a direct bearing on the performance of these industries that range from food processing, food retailing, timber, forestry, horticulture and like. Yet the agricultural sector faces risks from multiple sources, broadly classified as production risk and output risk. The former includes weather risk, pest and disease, and improper cultivation practices. The latter while dependent on the management of the production risk
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The paper is updated version of the paper titled same presented at International Conference on Agriculture and Food Industries organized at IIM-Lucknow 92 Senior Business Analyst with a leading Research firm in Mumbai 93 Product Manager at a leading Research firm in Noida 94 Asst. Professor, Economics and Public Policy, IBA Bangalore 95 Faculty, Quantitative Methods and Operations Research Stalking Theory: View through the Prism of Real life Practice 132 | P a g e

gets associated with the price risk and policy risk. However, the weather being an uncontrollable risk, poses a biggest threat. Despite massive investments in irrigation projects, just over a third of the total cultivable area is under irrigation. The Indian subcontinent receives its rainfall from the south-west (summer) monsoon during June-September with very little rainfall in winter. June and July thus become crucial months for sowing the summer crop, which accounts for 50% of total agriculture input. Any deficit here will affect all the summer crops like groundnuts, cotton, sugarcane, kharif rice and soybeans. Further weak/delayed rains are likely to result in an increase in rural indebtedness affecting rural incomes. Implied is the impact on sectors directly or indirectly dependent on the agricultural production. The market structure in agriculture is anchored towards price takers implying the participants do not have control over prices. Unable to influence the prices, the farmers are further subject to vagaries of nature. Experience and theory suggest that commodity prices and weather indices do not correlate well in a local area. This makes it virtually impossible to manage weather risk with a price hedge. There are no physical markets in weather. Moreover weather risk is localized and beyond human control. Unlike other market products, there is no way one can influence modify and manipulate weather by regulation, speculation, cartels, major market players or mass-market dynamics. Risk Management in Agriculture Figure I- Classifying Risks

Source: Bharat Ramaswami ,Shamika Ravi, S.D.Chopra; Discussion Papers in Economics On Risk Management in Agriculture June 2003 Discussion Paper 03-08 Indian Statistical Institute, Delhi.

Traditionally production risks have been sought to be overcome by use of crop insurance policies. Farmers in India have been subjected to publicly administer insurance schemes since 1972. Multi Peril Crop Insurance and Derivatives has been tried out in various forms. Though every scheme has been flawed the government tries to improvise the schemes to strengthen
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the risk management in the farm production. Lack of financial viability, risk-premium mismatch, inadequate risk forecasting models, adverse selection can be cited for the failure of these schemes. The private insurance markets remain underdeveloped in many developing countries including India for a variety of reasons (Skees 2000). They generally cover specific risks and not management risks. Index based contracts are replacing insurance schemes in some countries. The farmers are compensated for when a certain natural disaster or event occurs. For instance, the rainfallindexed contract would compensate the farmers who have purchased these contracts if the rainfall region falls below or exceeds certain specified levels. Of late weather derivatives, already popular in the US market, are fast gaining acceptance in Europe and India. These instruments have great potential in the future. The above background makes its necessary for us to study and understand the impact of weather on the agro production and its linkages to other factors. If the above instruments have to be applied, it must be proved that weather has significant impact on the prospects of wide range of sectors. This leads us to investigate the question of the degree of influence of weather on the commodity prices and subsequent linkages to macro economic factors like inflation, exchange rates and GDP. Summarizing this we frame the following objective for the current study OBJECTIVES The following objectives have been framed for this study. To measure and analyze the impact of weather on commodity prices. To measure the degree of weather risk inherent on commodity prices and consequent linkages to inflation, exchange rates and GDP Assessing the sectoral impact of these risk factors Analyzing the present instruments to counter weather risk and suggestions to design new instruments Implications of these instruments for different industries.

METHODOLOGY As suggested above, rainfall is an unpredictable element in influencing the production of agriculture. The production influences prices and also the Gross Domestic Product (GDP). We hypothesize the relationship of rainfall influencing the agricultural prices, yield and the GDP and growth rate. Five major crops were selected namely rice , wheat , cotton ,sugar and oilseeds. We use index numbers of prices for these commodities as proxy for commodity prices. Choosing WPI over CPI makes sense as we want to use the producers prices for examining the linkages than the consumer prices which are influences by other factors like transportation and taxes. Producer prices represent the prices of the inputs plus the production costs.

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We make use of the data obtained from the Meteorological Survey of India for the rainfall statistics. In India, agricultural yield is influenced by South Western rainfall and hence the usage of the data on monsoon rather than post monsoon and pre monsoon rainfall. Actual rainfall may not per se influence crops but the deviation from the normal determines the conditions for drought and floods. Hence, we use the deviation from the normal as a statistic Further, we use historical data from Government of India statistics obtained through the Annual Economic Surveys and the Statistics published by the Ministry of Statistics and Personnel, GoI. Using the same sources, we obtain the data for GDP growth rate of agriculture and allied sector, WPI and net exports. We start from an exhaustive literature survey. Then using the secondary data mentioned above we apply the basic tools like trend analysis and charts. We proceed to examine the basic cause effect relationships using co-relation studies. We examine further to understand the degree and extent of impact by using co-efficient of determination. Correlation studies between these independent variables would give us the nature of short term relationship among these variables. To examine a long run convergence among these variable, we proceed with Augmented Dicky Fuller Test and co-integration to test the convergence. We then apply co-integration model to test our above mentioned hypothesis. RAINFALL, PRICES and MACROECONOMYExisting literature on weather risk focus on various risk associated with agriculture. The agricultural sector is exposed to a variety of risks which occur with high frequency. These include climate and weather risks, natural catastrophes pest and diseases, which cause highly variable production outcomes. Production risks are aggravated by price risks, credit risks, technological risks and institutional risks. Risk management in agriculture ranges from informal mechanism like avoidance of highly risky crops, diversification across crops and across income sources to formal mechanisms like agriculture insurance, minimum support price system and futures markets. Agriculture is often characterized by high variability of production outcomes or, production risk. Unlike most other entrepreneurs, farmers are not able to predict with certainty the amount of output that the production process will yield due to external factors such as weather, pests, and diseases. Farmers are further hindered by adverse events during harvesting or threshing resulting in production losses. Input and output price volatility is an important source of market risk. Output price variability originates from both endogenous and exogenous market shocks. Segmented agricultural markets are not only influenced by local supply and demand conditions but often the increased integration with global markets has increased the interlinkages with the global production. Moreover, many agricultural production cycles stretch over long periods of time, and farmers must anticipate expenses that they will only be able to recover once the product is marketed. This leads to potential cash flow problems aggravated by lack of access to insurance services, credit besides the high cost of borrowing. Farmers are further affected in

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varying degrees by changes in regulations, level of price or income support payments and subsidies. Because of the disproportionate importance of the monsoon rains, variability in monsoon is a significant factor in governing farming practice and variability in yields. The intensity and degree of monsoon rainfall vary from year to year. The monsoon may set in late with large delays in rainfall, have long breaks in July and August or withdraw earlier. The coefficient of variation of monthly rainfall is high in most parts of the country and at most times of the year. Table 2.3 tabulates the coefficients of variation of monthly rainfall in different parts of the country. Any deficit or delay in rainfall affects all the summer crops like groundnuts, cotton, sugarcane, kharif rice and soybeans. Besides, onset of monsoon date is variable. Implied in all these is the impact on number of sectors that are directly or indirectly dependent on the agricultural product. Even within the monsoon period, it is only a few heavy falls that account for most of the annual rainfall in many parts of the country. For example, in Saurashtra and Kutch, only 10% of rainy days account for 50% of annual rainfall. As a result, outcomes over a very short period determine the success of monsoon. The coefficient of variation of monthly rainfall is high in most parts of the country and at most times of the year. Monthly rainfall variability even in the rainiest months (July and August) and areas, is as high as 40 to 50% over most of central, northern and eastern India. In the south excluding the west coast, the coefficient of variation is 60 to 100%. In September, the coefficient is even higher and in October, the uncertainty reaches 80 to 100% in the southern portions of the peninsula. In the winter months, the rainfall amounts are small and the coefficient of variation is very high. The variability of weekly or fortnightly rainfall is many times greater. Deficient rainfall during any month of the monsoon season is just as likely to be followed in succeeding months by abundant as well as deficient rainfall and vice versa. Hence rainfall is not very predictable. The likely result of these factors is an increase in rural indebtedness affecting rural incomes. Deschnes and Greenstone (2006) have written a pair of papers that assess some effects of climate change. Using the long-run climatologically models year-by-year temperature and precipitation predictions from 2070 to 2099 they examine the future of agriculture in the United States. They forecast an increase in the annual agricultural production, and therefore agricultural profits, by about 4 percent, or $1.3 billion. Richardson (2007) examines the hypothesis between rainfall and GDP growth in Zimbabwe. He finds that the relationship has weakened over the years and concludes that the macroeconomic management matters more than rainfall per se in determining the GDP growth. Hansen et al (1998) using canonical correlation analysis examined the impact of the weather on crops like tobacco and corn in the United States. They concluded that El Nino phenomenon influenced the values of corn tobacco, soybean and cotton.

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Dumler (2002) studying the impact of weather on Kansas wheat concludes that impact on weather prices is a short term while in the long run the output depends on the multiple factors. Amy Cheung and Tiho Ancev, studied weather risk management using Climate Prediction Model. They link the climate simulation model with the economics of farm production to analyze farm production and weather risk. Skees and Price (2000) talk about the need to use global futures market and indexed insurance models to counter the risks. Ramaswami et al (2003) argued that the regions and the villages differ with respect to rainfall, soil, crop and other socio-economic characteristics the consequence of which would be the rainfall risk would have to be treated a both covariate (i.e., a systemic risk) and individual specific depending on the year and the region. A 2003 survey of coffee farmers in Karnataka revealed that weather volatility is the single most important risk faced according to the respondents. The study attributes low rainfall is the primary cause affecting the kharif crop production in India Fig.2- Risks in Agriculture

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Dates

Number of Years Kerala May 11-15 5 15-20 8 21-25 7 26-31 12 June 1-5 20 6-10 14 11-15 3 16-20 0 21-25 1 Mean date May 30 Median date June 1 Range May 11 to June 25 Standard deviation (days) 9 Source: Government of India, Ministry of Agriculture and Irrigation, National Commission on Agriculture, Chapter 13

Bombay 0 0 1 3 12 22 25 4 3 June 9 June 9 May 20 to June 25 6 (1976), Report of the

Table 2- Performance of South West Monsoon during 1989 to 2002 (1 June - 30 September)
Year Number of Meteorological Sub-Divisions @ Excess/Normal Deficient/Scanty Rainfall Rainfall Percentage of Districts with Normal/Excess Rainfall Actual Rainfall as % of Normal Rainfall (All India)

1 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

2 29 32 27 32 31 25 33 32 32 33 28 28 30 15

3 6 3 8 3 4 10 2 3 3 2 7 7 5 21

4 72 88 68 65 78 77 79 82 81 81 67 66 68 44

5 101 119 91 93 100 110 100 103 102 106 96 92 92 81

@ Total number of meteorological sub-divisions was 35 upto 2001. From 2002 onwards, the no. of met subdivisions is 36. Excess : +20% or more of Long Period Average Rainfall Normal: Between +19% and -19% of Long Period Average Rainfall Deficient: Between -20% and -59% of Long Period Average Rainfall Scanty : Between -60% and -99% of Long Period Average Rainfall *Source: Department of Meteorology, Government of India

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ANALYSIS The correlation analysis suggests a short term relationship between the rainfall, prices, yield and the GDP. The following table shows the prices of different commodities for the years 1990-91 to 200203. Producer prices have been taken into account to take care of output prices.

Table 1 Year Cotton 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 146 238 218 246 378.84 391.14 327.18 381.3 410.82 361.62 386.22 366.54 349.32 PRICES ( index number WPI) Oilseeds 223 266 265 254 281.94 297.18 292.1 289.56 353.06 309.88 261.62 287.02 350.52 Rice 178 217 249 266 295.26 311.22 343.14 356.44 388.36 454.86 446.88 444.22 441.56 Sugarcane 152 160 180 237 282.03 267.81 282.03 317.58 364.98 369.72 362.61 346.02 319.95 Wheat 172 204 227 253 275.77 283.36 346.61 349.14 383.56 442.75 447.81 442.75 445.28

Table 2: Production of the commodities

Year Cotton 1990-91 1991-92 1992-93 130.9 129.2 151.6

Production ( Index number ) Oilseeds 179.5 181.5 193.6 Rice 149.4 150.2 146.5 Sugarcane 154.3 162.6 145.9 Wheat 156.6 158.2 162.5

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1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03

142.8 158.1 171 189.2 144.3 163.4 153.3 126.6 132.9 116.2

203.4 208.4 212.1 231.3 198.2 224.9 193.3 176.5 194.8 152.2

161.5 164.5 154.8 164.4 166 173 180.3 170.9 187.5 146.1

147 176.3 179.9 177.6 178.9 184.8 191.6 189.4 190.2 185.422

170 186.8 176.4 197 188.5 202.5 217 198 206.7 184.9

Table 3 - GDP and rainfall Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 Rainfall actual as percentage of normal 119 91 93 100 110 100 103 102 106 96 92 92 81 GDP growth rate in agriculture (%) 4.43 -1.85 6.22 4.1 5.08 -1.13 10.1 -2.82 6.87 0.3 -0.1 6.5 -5.2

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Graph I -Commodity Prices Price of commodity in various year

500 400
Prices

wheat rice cotton oilseeds sugar

300 200 100 0

19 90 -9 1 19 92 -9 2 19 94 -9 5 20 02 -0 3 20 00 -0 1 19 96 -9 7 19 98 -9 9

Year

Graph 2-Production of commodity

Production of commodity for various year
production(index number)

250 200 150 100 50 0

1990-91 1991-92 1992-92 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 2000-01 2001-02 1999-2000 2002-03

wheat rice cotton oilseeds sugarcane

year

The rainfall data is taken as deviation percentage from the normal. This is because actual rainfall may not be important in determining the agricultural production as the rainfall requirements vary from crop to crop. The deviation from normal signifies to what extent there has been excess or scarcity of rainfall in the given geographical region.

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Graph 3 - Agricultural GDP

GDP Agriculture for various year

12 10
agriculture GDP

8 6 4 2 0
94 -9 5 90 -9 1 98 -9 9

GDP Agriculture

19

19

19

-6

year

Graph 4- Actual rainfall as % of normal

rainfall in various year

140 120 100 80 60 40 20 0
actual rainfall as % of normal

20

19

19

20

-4

02 -0 3

92 -9 2

96 -9 7

00 -0 1

-2

actual rainfall as %of normal rainfall

Based on the data set we generated we ran the basic statistical tests.

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19 9 2 94 -9 19 5 96 -9 19 7 98 20 9 9 00 -0 20 1 02 -0 3
year

-9 19 90

19

92

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OLS MODEL RESULT COMMODITY Prices, Rainfall, production Multiple R 0.456658 0.51708 0.845772 0.87788 0.956431 R Square 0.208537 0.267377 0.71533 0.770684 0.91476 GDP, Price, production, rainfall Multiple R R Square 0.669543 0.448288 0.72309 0.52286 0.6094 0.37137 0.55833 0.311734 0.62197 0.386853

Cotton Oilseeds Rice Sugarcane Wheat

Where R = R2 =

Coefficient Of Correlation Coefficient of Determination

OLS MODEL SIGNIFICANCE RESULTSCOMMODITY Prices, Production, Rainfall Significance Level Significant Significant Significant Significant Significant GDP, Production, Prices, Rainfall Significance Level Significant Significant Significant Significant Significant

Cotton Oilseeds Rice Sugarcane Wheat

We do find that there is a significant correlation between commodity prices, production and the rainfall levels. This is to be expected as the rainfall is an important element in the Indian agricultural inputs. Extending this model we can show that this naturally has an impact on the GDP level. The correlation factors do show a considerable co-movement on all these counts. To test the long run convergence among these factors, we run the co-integration test using the ADF test. RESIDUAL DATA SET Year Cotton Price, Rainfall, Production Oilseeds Rice Sugarca Wheat ne GDP, Price, Production, rainfall Cotto n -0.594 Oilsee ds 1.931 Sug Wheat arca ne -1.13 -1.70 0.4125
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Rice

-78.658

-7.9248

8.3041 -41.2031 38.892

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2 3 4 5 6 7 8 9 10 11 12 13

-80.8477 -133.863 -65.8593 74.4086 28.9739 -57.039 73.7092 83.0450 17.1406 75.48 44.564 18.914

-28.2201 -33.0515 -35.5448 10.8796 1.51403 -10.4739 8.07423 61.5896 18.6403 -26.6 -14.076 55.1937

-100.1 -39.87 -60.07 5.837 17.792 18.311 18.687 37.004 16.658 33.977 -49.57 93.112

-73.9144 15.905 69.89 -4.568 -35.5688 -11.5266 18.4004 42.1804 16.4469 17.5859 -2.32741 -10.9054

-39.89 -2.720 -27.26 2.090 -7.442 0.841 -19.48 1.0065 -4.405 -5.702 -18.03 2.0538 17.099 -4.414 7.5177 2.986 -33.10 -2.168 38.305 1.488 -3.898 7.0115 51.099 -1.871

-2.728 3.5546 -0.497 0.3779 -5.672 2.5265 -5.612 2.0341 -1.012 -0.347 4.3587 1.0882

-3.63 5.69 0.10 0.03 -2.70 6.91 -5.25 2.61 -2.87 -1.08 2.04 0.00 125

0.67 3.61 -1.68 .391 -2.56 7.17 -6.43 1.82 -1.57 -1.21 6.03 -3.17

-3.204 4.8015 1.649 -2.263 -3.729 5.0557 -5.360 2.1706 -4.788 0.4662 4.4251 -0.635

CO-INTEGRATION RESULTS COMMODI TY Price, rainfall, production T -Stat Cotton Oilseeds Rice Sugarcane Wheat -1.92241 -2.56052 -1.26638 -1.93812 -1.1487 Critical Value -2.261 -2.261 -2.261 -2.261 -2.261 Significant Not significant Significant Not significant Not significant Not significant GDP, rainfall, production, prices T stat -1.987 -1.317 -3.989 -4.005 -3.009 Critical Value -2.261 -2.261 -2.261 -2.261 -2.261 Significant Not significant Not significant Significant Significant Significant

Co -integrating the results show that there is no stationarity except in the case of oil seeds when it comes to price rainfall and production. On the other hand rice, wheat and sugarcane are stationary when we add GDP into our variable components. INFERENCES Based on our analysis we can infer that rainfall while can create a supply shock, the Indian agricultural system is well absorbed to take this shocks within its stride. An implication would be a reduction of dependence of Indian agriculture on the rainfall. But an important point we have to consider is that except 2002-03, the rest of them generally seem to have witnessed normal rainfall. Further studies are needed to confirm this conclusion. These studies should take into account. Of late, innovations have resulted in the development of
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crop risk insurance and drought and flood years in the economy. The reduced dependence on the rainfall aided by bumper production probably results in the lag effects on the macroeconomic factors. Moreover, rainfall deficit in some parts of the country being offset by normal rainfall in some other parts can mitigate risk to some extent. The production fluctuations are also mitigated through imports. These could be discerned as the reasons for non-convergence of these factors in the long run. Despite this, there is a need to develop weather risk tools. Traditionally there is a lack of adequate tools developed to counter the weather risk. Data from weather derivatives is still scanty to make a strong conclusion about the relationship between the vagaries of rainfall and the farm prices. The same is the case with weather insurance products. The weather derivatives market needs to be strengthened. Being highly structured, they allow a dynamic management of the weather risk. Besides they serve a useful purpose of portfolio diversification. Apart from the coverage against risk, unlike traditional insurance products, the presence of secondary trading helps in risk transfer and management. Weather risk management goes beyond the government. Practically, the individuals, communities and businesses bore and manage this risk in their day to day decisions and investments. This creates an imperative for capacity building and instruments and tools for a wide variety of participants upon whom this risk trickles down. And it is also essential that governments involve these individuals, communities and businesses in prioritizing the challenges that they handle in the form of weather risk. Accurate prediction of seasonal crop yields using various models requires understanding the linkages between the economic variables and the rainfall patterns. Improvement of rainfall models can further reduce the seasonal variation in yields. In this context, the importance of accounting for regional variability in rainfall assumes significance. By moving to a processbased approach, yield variations can be forecasted and further the impact on the macroeconomic scenario in the country be calibrated. This can be useful in designing weather risk insurance models and strengthen the derivatives markets. Besides, it can serve as valuable inputs for future cropping patterns. REFERENCES: 1. Bharat Ramaswami ,Shamika Ravi, S.D.Chopra (2003) Risk Management in Agriculture Discussion Paper 03-08, Indian Statistical Institute, Delhi. 2. Central Statistical Organization ,New Delhi 3. Economic Survey ,1995-2006 Agricultural GDP, www.indiabudget.nic.in 4. G Kotreshwar Managing monsoon risk in India- why not monsoon derivative, a. The ICAFI Journal of Derivatives Markets, Vol. III, No. 3, 2006 2. The ICFAI Journal of Derivatives Markets, April 2004 3. The ICFAI Journal of Derivatives Markets, Vol. III, No. 3, 2006 4. Jerry R. Skees (2000) Paper on Risk Management Challenges in Rural Financial Markets: Blending Risks Management Innovations with Rural Finance
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5. Johansen , S. and Juseliu ,K, .(1990) Statistical Analysis of Co integration a. Vectors, Journal of Economic Dynamics and Control , 12 , 231-254 6. Pranav Prashad, Emerging trends in farm insurance- weather Insurance Oct 18-19 2006. 10. Report of the working group on Risk Management in Agriculture for the 11th Five year Plan (2007-2012), Planning Commission. Government of India

7. Saghaian , Sayed H. , Monitory Impacts and the Overshooting Of a. Agricultural Prices in an Open Economy , 1st Feb.2002 8. Susan Thomas, Agricultural Commodity Markets In India : Policy Issues for a. Growth :1-25, May 21 ,2003 9. Weather Insurance : Need of the hour ,Financial Express, July 26th 2004 10. Indian Budget : www.indiabudget.nic.in. 11. www.ficciagroindia.com

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Supply Chain Management in Fresh Produce Retailing: Evidence from Indian Retailers96
Mr. Kumar Sushant97 Prof. Prashant Kulkarni98 Prof. Anantha Murthy N.K.99 Mr. Chidambara S.T.100 The rapid changes in the fresh produce supply chains are forcing companies to adapt strategies to bring the produce on the consumers table as fresh as possible. Unlike other goods, fresh produce easily goes to decay and has a higher requirement for safety. Low cost transportation and in effect leading to the whole supply chain can become a major advantage for the supermarkets. Management of supply chain in fresh produce thus requires a concerted effort on improving transportation practices. Firstly the management of the logistics of fresh produce, including the development and management of different varieties, implementation of criteria, supervision of quality, packing, transportation, storage, processing and distribution. The other relates to the efficient management of the relation and organization, including the selection of suitable logistic channels and partners, determination of contracts, allocation of added value, and maintenance of long-term partnership and smooth running of the supply chain. Our study examines the strategies of different retailers and develops a model based on the supply chain strategies and consumer base of the firm. Key words:-Food retailing; transportation; supply chain management; fresh produce retailing; inventory management Introduction Global fresh produce supply chains are changing rapidly. The traditional marketing channels are facing threats from the transactions based on modern supply chain practices. The outcome suggests the movement towards closer interactions between farmers, processors, retailers and others in the supply chain. The management of supply chain is a chain of processes in which plans, organization materials and services flow from the suppliers to the terminals users or consumers. The management of the supply chain goes beyond the traditional concept of flow of physical materials to ensure mutual reliance and support of partners. Supply chain management extends a firms capabilities by co-coordinating operations to encompass source, make, and delivery processes in collaboration with channel partners and suppliers. The typical supply chain is given in the exhibit.1
96

The paper is updated version of the paper titled same presented at International Conference on Agriculture and Food Industries organized at IIM-Lucknow 97 Manager with a leading Logistics and Supply Chain firm 98 Asst. Professor, Economics and Public Policy, IBA Bangalore 99 Faculty, Quantitative Methods and Operations Research 100 Researcher with a leading FMCG firm in Ahmedabad Stalking Theory: View through the Prism of Real life Practice 147 | P a g e

Exhibit .1 Cross-border supply chain

CONSUMER

RETAILER Industrialized Country FOOD INDUSTRY

AGRI- INDUSTRY

FARMER

INPUT-SUPPLIER

Developing Country

Source: to Stimulate Cross-Border Trade in Developing Countries and Emerging Economies by Jan van Roekel

Some estimates suggest that nearly 35% to 40% of the total production of fresh fruits and vegetables is wasted in India. To state the need for strengthening of the cold supply chain infrastructure in the country is obvious. The complicated distribution or marketing channels in the chain hamper the final success of a firm. In reality, professional managers face a lot of channel options and have to do a lot of planning and negotiations before determining the channel structure. Further, they are constantly faced with challenge of the changing channels. Unlike other goods, fresh produce easily decay and has a higher requirement for safety. Besides the continuous changes in consumer demand owing to their diversity of their preferences add to the complexity of the managing the fresh produce supply chain. All these determine the following characteristics and requirements for the management of the supply chain of the fresh produce: 1. Fresh produce shall be moved from the field to the table as soon as possible;
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2. The quality of fresh produce during transportation shall be maintained; 3. Consumers shall be provided with fresh and safe varieties; 4. The waste during the transportation shall be decreased and the cost of transportation shall be lowered down; 5. Fresh produce shall be a core competitive advantage for the supermarkets. Thus the management of the supply chain of the fresh produce in the supermarkets involves a twofold approach firstly in managing the logistics and secondly the need to manage the relation and organization of the supply chain channels and partners in the long run. Advances in transportation technology have made it possible for shippers to deliver perishable products to purchasers thousands of miles away with no substantial loss in freshness and quality and at lower and lower costs. Besides the delivery times have reduced sharply. All these factors have greatly facilitated global trade of perishable food products. Companies are required to construct and further sustain ever more efficient and responsive supply chains as the nature of competition moves from firm against firm to supply chain against supply chain. Collaborative marketing ventures drive evolution of the global agrofood chain and encouraging greater vertical and horizontal co-ordination. Demand-driven sales planning improves the accuracy of projections for product volume and mix and ensures they are used consistently throughout the organization in production scheduling vendor management, and sales and operations planning. Globally, supply chains are fairly mature and efficient. This gives the retailer little opportunity to improve profit margins. Objectives Given background the Indian fresh produce retailer operated, it is imperative to analyze the supply chain strategies and systems and their consequent impact on consumer behavior The objective of this paper is to analyze the management of the supply chain of the fresh produce in the supermarkets, explore the existing problems in the management and internal causes and provide relevant suggestions. To analyze the importance of transportation in supply chain of fresh produce The strategies of retail firms in ensuring the consumers get the fresh produce at their table without compromising on cost and quality and the role of transporting these produce from the market to the store Effectiveness of transportation links the retailers maintain in achieving the above aims Identifying the gaps and our recommendations for the study Methodology The sampling technique adopted was stratified random sampling in which respondents were selected from Bangalore. Five retail store and operations managers were interviewed in depth for the study. Their feedback formed the basis for analysis using SPSS. Based on the analytical findings we developed a matrix for supply chain systems and strategies with consumer behavior. Bangalore was chosen since about 80% of the city population came to purchase the fruits and vegetables from this retail stores only.
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Product/Service Description In this study the Product/Service were defined as the freshness of fruits and vegetables providing to the customers at optimum price. Questionnaire Design Here the questionnaires are of open and closed ended by Likert scale. Here in the questionnaires we have given a broad choice to retail mangers to choose the option Apart from questionnaires we also have taken some extra data relevant to our survey and research. Specifically, the way each service contributes to the shopping experience (e.g. convenience, accurate pricing, freshness of fruits and vegetables, promotion etc.) seems to have a direct effect on consumers attitude and intention to use technology-based services. Overview of Models and in Practices in different countries Retailing in India has been moving through a rapid development where various corporate are entering. It is a crucial phase especially in terms of drawing consumers into big retail space that India is providing. It can be make it from all major corporate houses is getting into retail stores by leveraging their experience and presence in the Indian market. Especially by corporate like reliance and Birla are leveraging a distribution capacity and scaling. Pioneers like Big Bazaar are diversifying into various dimension of retailing by magnifying the business potential. The Indian retail space not only is faming in terms of volume but giving various facets to Indian customers. The strategies drawn up big houses and small retails are entering into challenging mode. Especially value chain links and raising infrastructure cost will be strategic issues to ponder upon in the coming future. There is no fixed formula and delivery solution in the Indian retail space. The competition in the retail space has given hopes for various spaces especially leveraging resources, service delivery, franchise opportunities and competition in the real world. Fresh produce in China is divided into three levels, namely, wholesale market in the producing area, wholesale market in the selling area and retail produce market. The model for China is illustrated in (Exhibit.2).

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Exhibit.2

Source:-The supply chain and management of fresh produce in China Huang Zu-hui, Song Yu and Liu Dong-ying Chinas supermarkets source fresh produce mainly through their own production bases, farmers organizations, wholesale markets besides the continuing reliance on middlemen. Namely, production bases, middlemen, farmers organizations and wholesale markets. The combination of production bases and supermarkets is becoming a trend with some needs being sourced from the wholesale markets. Sometimes, the farm households also provide some seasonal or regional produce.

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Exhibit 3

Source:-The supply chain and management of fresh produce in China

Huang Zu-hui, Song Yu and Liu Dong-ying

By late 1990s, South Africas fresh fruit industry was facing tough times due to the 1997 deregulation of the export system. This in effect increased competition resulting in lowering of prices. A study of the situation highlighted the deficiencies in logistics and quality aspects of fruits. Accurate information on logistics was not forthcoming nether the issues of quality were being addressed. To address the problem, the partners initiated an information system development project to enable them to monitor product flow from country of origin to market. Both private and public parties participated in the project. Thailand consumers were spending an increasing proportion of their income on fresh fruits and vegetables, (19% in 1985 to 24% in 1993). The traditional market outlets, the streets and the so called wet markets were the major distribution points. Overall, 5% of sales are through supermarkets, though this proportion nearly 50% in the capital Bangkok. In recent years, international retailers like 7-Eleven, Royal Ahold, Tesco, Makro, Carrefour and Sainsburry have established supermarkets especially to serve Thailands urban conglomerates. In 1998, TOPS began a supply chain project aimed at providing Thai consumers high-quality, safe, fresh produce with reliable availability at affordable prices. To achieve that goal, however, the supply chain faced a number of problems. Ensuring roughly 250 suppliers deliver perishables directly to the backdoors of 35 stores at least three times a week required high handling costs, significant post-harvest and shrinkage losses and low service levels. TOPS sought public-sector assistance to meet the objectives of raising the level of service within the perishables supply chain by reducing lead times and post-harvest losses and
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shrinkage. This would improve quality and safety of produce by developing preferred supplier relationships. Modern agricultural practices and a certification scheme were introduced to enhance awareness and knowledge levels among employees and consumers alike. Since at the start of the project none of the fresh-goods suppliers offered the valueadded functions required (e.g., sorting, washing, packaging), the project concentrate on building a fresh distribution center to perform productive functions like quality control, washing, packaging and processing. This value-added center was a complete green-field operation located on the edge of Bangkok. The center served as the locus for the projects work to improve supply chain performance for perishables. This reduced the number of preferred suppliers from 250 to 60 in the first half of 2001, with 40 out of the 60 certified by the Department of Agriculture (DOA) and carrying the DoA label. The TOPS standard was accepted by most major players in the Thai retail industry (including leading suppliers) The project encountered challenges in the form of intercultural barriers. The preferred supplier program ran up against the traditional Thai system of personal networks in agricultural trade. Optimization of supplier network is seen to go against the traditional personal relationship based trading between buyers and suppliers. Despite its inefficiencies, it had ensured stability and continuity. However, the project succeeded in convincing many participants that the implementation of the preferred supplier program was essential to improve the supply of perishables. Canadian food distribution sector is constantly subjected to regulations by the food inspection agency. The regulation provide for the maintenance of temperatures for different products. The sector emphasizes on the providing a critical linkage between the food production stage and the consumers. It further stresses on the maintaining of the quality and safety of the food until it is purchased by consumers. Food transportation vehicles (e.g. vessels, aircrafts, trains, trucks, cargo containers or trailers) and containers used by manufacturers for the transportation and storage of food products are designed, constructed, maintained, cleaned and utilized in a manner to prevent food contamination.

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Exhibit .4 Retail Retail: Producers Wholesalers Wholesalers stores --grocery Supermarkets

Producers

Consumers

Consumers
prococesp Food service

Processors

Food service distributors

Food services

Source:-Transportation and distribution of Perishable Foods Densy Le Blanc, Atlantic food and Horticulture Research Centre Kentidile, Nova Scotia. Fresh produces supply chain in India: an overview Indias shopping sector is currently dominated by more than 12 million mom-and-pop stores, most of them tiny, dusty and offering a small and unreliable selection of goods. However in recent years, the entry of some of the major players in the retail sector is slowly transforming the landscape of the Indian retail sector. While largely the sector developed on multi format store specialized stores too are on the rise. It is no longer unusual to see fresh fruit and vegetable chains in India. Subhiksha, Reliance, Heritage are some names that come to the mind. At the same time, foreign retail chains such as Wal-Mart and Carrefour are pressing to enter the market through joint ventures and by lobbying the government to change protectionist laws so they can set up wholly owned chains. McKinsey report estimates the Indias retail market to be worth $1.52 trillion by 2025, up from $370 billion in 2005. Further it goes on to suggest that food-and-beverage category will account for 25% of all retail spending in 20 years. India's current food-distribution system owes its origin to the 1940s and '50s, where chronic food shortages were the order of the day. This had made government introduce the public distribution system to crack down on the cartels. Further the system of mandis was introduced and the minimum support price was announced for grains and many other crops. This system grew into a monster, creating a strong chain of intermediaries, without value addition to the system while adding to the costs and the prices of the products. Moreover this had an effect of paralyzing the entire system. Farmers often wait months to be paid and go frequently into debt to the very traders who buy their produce and then sell those seeds and
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fertilizers for the next crop. Customers, meantime, had little choice but to accept food of uneven quality and unreliable supply. Supplying these consumers with fresh, clean and safe vegetables and fruit presents a formidable challenge and necessitates the building of a sophisticated supply chain that links farms and consumers, country and cities. The existing supply chain system in India is fragmented. Industry experts estimate more than 30% of all fresh produce is lost or spoils before it reaches the market. On average, goods pass through six or seven middlemen before a consumer can buy it, resulting in tortuous journeys, big markups and poor quality. The congested and crumbling roads, unreliable power supply which more often than not is erratic, unsafe water and the unresponsive bureaucracy all add to the woes. However the transition to the organized retailing has not been smooth. Like in Thailand, India too has been dominated by the system of open markets and street sellers. They feel that unorganized market has lost nearly 16 crore per day in February due to the entry of Reliance and Subhiksha in Delhi. While this may be exaggerated, the perceived threats are by no means imaginary. On an average, 6,000 tons of fruits and 7,000 tones of vegetables is traded every day in Delhi. The estimated size of the credit market in the unorganized fruit and vegetable market is Rs 22 crore per day. .Fruit and vegetable vendors belonging to the unorganized sector in the Capital have taken the fight to organized fresh-produce retailers like Reliance Fresh and Subhiksha. Vendors in the unorganized sector are offering free home delivery and a one-week credit, which they get from traders in the wholesale vegetable market, to the customer. In addition to being the worlds second largest producer of fresh fruits & vegetables, India is also amongst the lowest cost producer of farm products. To capitalize on such inherent advantages, two new entrants have begun implying modern practices to consolidate their operations. Field Fresh Foods is setting up a world-class Agri Research Center and a Model Farm in Punjab in the first phase primarily carrying out research on hybrid seeds and agro farming techniques. The government policy on liberalizing exports in agricultural sector has given a further boost to the business. The company would source and contract farming in the states of Punjab, Jammu & Kashmir, Himachal Pradesh, Haryana, Western U.P and Uttranchal. The resulting produce, which will include fresh fruits and vegetables like apples, mangoes, lynches, kino, grapes, cherry tomato, baby corn, Okra, iceberg lettuce etc, will be exported to the global markets. Later, it plans to expand the farming operations to the rest of the country. Reliance too has focused on logistics in a big way. Their logistics set up is based on the premise that every scooter carries around 60 kg of vegetables within a radius of 4 km, delivering multiple orders placed with the vendor. The credit period of one week has helped in getting re-orders from customers. Moreover, it is counting on the volumes market to cope up with the transportation costs. Namdhari has built a continuous cold chain network to ensure the freshness of the vegetables till it reaches the consumer. The harvested vegetables are transported in refrigerated trucks,
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then transferred to the pre-cooling room and finally packed in a grading room under a cool climate. They are transported to their destinations through air. Literature overview Bailey and Evans (2006) stress the need for collaborative practices as a means to sustain supply chain performances. They argue the importance of a focus on inter firm relationship and construction of retail supply encompassing these relationships. However as Barratt (2004) and Hingley (2005) show there is still no clarity on what collaboration actually encompasses. Bailey and Evans (2006) further suggest that the dimensions and the nature of relationship between inter firm collaboration and other factors affecting the supply chain have yet to be understood. White (2000) examines the nature, perceptions and evidence of the relationships that exist between suppliers and representatives of major British food retail chains. Maurer and Arts examine the strategic drivers of supply chain in fresh produce industry in the context of New Zealand retailing. Prussia et al, (2001) argue that a simulation game developed specifically for managers of businesses that handle fresh fruits and vegetables could help reduce losses and improve the quality of produce available to consumers. Prussia et al (2006) further develops the model to simulate different products, forecasting the quality loss from its journey from the packer to the end consumer. Bessant et al (2003) look upon supply chain as a mechanism of inter firm learning where common interest and interdependence of firms provide a motivation for promoting and up gradation of technologies. Analysis Each store orients itself to certain attributes. Subhiksha: - This retail store is oriented towards the lower price of fruits and vegetables. They adopt every day lower price market strategy. Reliance fresh fruits and vegetables: - Thereliance fresh fruits and vegetables believe in varietals and freshness of their items to the customers. Monday to Sunday: - .This retail store believe in the good service quality to the customers by providing fresh fruits and vegetables at an optimal price. Fab Mall:-Fab mall believe in customer loyalty and good service providing to the customers. Food bazaar: - The food bazaar also believes in lower price and customer loyalty strategy services to the customer.

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The analysis concentrates on linking the importance of transportation studies with the customer centric strategies to ensure the fresh produce they purchase is fresh and reasonably priced. The importance of transportation or rather going beyond the logistics and the entire supply chain system would be in understanding the systems that exist in the firms. This includes having an own logistics unit, elimination of all middlemen, minimizing the transportation costs and time while maintaining the freshness of the fruits and vegetables. The other systems would be outsourcing of the logistic functions to minimize the costs. The strategies these firms adopt in ensuring the consumers get the freshness at their table at lowest possible price and enough choice to consumers makes the firms adopt a tradeoff between the supply chain systems and customer centric strategies. These also often determine the nature of consumers the firm targets. The firms responses to the questions relating to their supply chain systems are captured below. Table.1 Variables Transportation facilities Owned Outsource fully Partly owned and partly outsourced Responses 4 0 1

Warehousing Own warehouse 4 Outsourced No warehouse 1 Refrigeration facilities No facility 4 Facility 1 .Involvement of middle men No middlemen 5 Distance between warehouse and shops less than 10 kms 5 Transportation costs as % of procurement costs Less than 20% 5 More than 20% 0 Damage minimization Less than 10% of the damage occurs in transportation 5 Source: Data compiled from the survey done by the authors
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The findings clearly indicate that the firms adopt strategies that aim at minimizing the transportation cost, prefer to own their own logistics systems and believe that damage in the transportation stage is minimum. Some of the retail stores have their own logistics like Matador, Tata- 407 etc. However some of the stores do also outsource their transportation network to an extent and depend on private players for meeting their needs. The retailers argue that owning the logistics firms does reduce costs and is the primary reason for going in for internal networks. This seems in contrast to the prevailing wisdom of outsourcing reducing costs. Packaging is given quite importance and all stores insisting that their packaging reduces the wastage or spoiling of the food items. Ventilation is provided during transportation and frequent ensuring that the fruits and vegetables retain their freshness is seen as the reason for minimizing the damage in transportation while keeping the produce fresh. All managers insisted that there are no middlemen involved and it is the direct interaction between the producers and the stores that decided the procurement. Middlemen are involved only in case of special items which are not being possible to procure in the local market. No retail store owns a refrigeration system. They procure the produce only to meet the daily needs. This necessitates the requirement of an efficient sales forecasting system which the firms believe they have. They claim that the accuracy of forecasting is more than 80%. Table 2 Variables Decision making Store level Regional office/ head office level Head office based on store managers feed back Procurement policy Store based Collective basis Forecasting model Daily basis Weekly basis Fortnightly basis Accuracy of Forecasting Greater than 90% 80-90% 60-80% 50-60% Less than 50% Responses

5 4 1

Source: Data compiled by the survey done by the authors

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The analysis indicates that the firms believe that they have accurate forecasting systems and is done on a daily basis. The decision making procures involves a submission of daily requirements to the head office which based on this evaluation procures the goods from the production centers. The firms policy on pricing and freshness is captured below. TABLE-3. Variables Pricing of vegetables Premium pricing Pricing based on open prices Low prices Freshness Variety Source: Survey done by the authors The firms pricing policy is often a mixture of premium pricing and market based pricing. By market based pricing we mean that the prices are linked to prices prevailing in the markets. They insist that they keep fresh produce and offer sufficient variety to attract customers. The nature of customers also determines the variety and pricing of fruits and vegetables stored. The customer profile is captured below TABLE-4. Variables Major customers Families Hotels and Restaurants Frequency of visit Daily 2-3 days a week Weekly Fortnightly Source: Survey by the authors Generally the major customers are families at the individual and hotels and restaurants at the bulk level. Focusing on the consumer visits, generally we find that consumers shop for these products around twice a week. There is no definite evidence of the new consumers visiting these shops. This probably indicates that the base is still not very clear.
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Responses 3 market 2

5 5

Responses 5 5 (multiple responses )

Inferences Based on the above analysis, we arrive at the following inferences. The retail stores do say that they ensure the freshness of the fruits and vegetables are maintained but on the variety their responses do not match with the store observations. This could be attributed to the nature of the store and the consumer profile. None of them deny the need to use latest technology to gear up the logistics mode. Consumers rank freshness as quite high among their preferences in the choice of fresh produce. The key lies in building the supply chain system that meets this need of the consumers. Moreover this freshness has to be given at optimal cost. So they should maintain this by adopting different technique. TABLE-5 Format of the stores Subhiksha Monday to Sunday Reliance fresh fruits and vegetables Fab mall Food bazaar cost - - time - - distance facility - - + + + + middle own men transportation damage freshness + + - - + + + +

- - - -

- - - -

- - - -

+ + + + + +

+ + +

- - - -

+ + + + + +

Source: Developed by the authors based on the survey

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TABLE-6 Format of stores Freshness

Optimum price Subhiksha Monday to Sunday Reliance fresh fruits and vegetables Fab mall Food bazaar + + +

freshness + + + + + + + + + +

variety + + + + + + + + +

Source: Developed by the authors from the survey Notation--+ + highest + Medium - low lowest

Our study shows that almost all the stores score heavily on the freshness experience factors while there is a mixed response on the price front. The transportation cost should be less for each and every retail stores. The transportation time and distance should also be less, so that they can minimize the cost overall. And the store manger should try to maintain the freshness during the transportation of fruits and vegetable and try to less damage of that fruits and vegetables. Any involvement of middle men should be stopped so that the extra charges will be avoided on this food items. And the retail store should try to keep a number of fruits and vegetables in an optimal price and they should. Also for the maintaining of freshness of the fruits and vegetables they should keep some extra facility.

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We capture our study in the following matrix.

S U P P L Y C H A I N

S Y S T E M S

FOOD BAZAR * FABMALL SUBHIKSHA * NAMDHARII * * MONDAY TO SUNDAY * NILGIRI * HERITAGE * RELIANCE *

MARKETING STRATEGIES

Source: Developed by the authors based on the study

The marketing strategies on the X-axis can be either be promotional based or on the long term building of loyalty. We observe that the firms in the first quadrant focus less on promotional strategies and concentrating on building up the base. The y-axis indicates the nature of supply chain system whether it is producer centric or customer centric. Producer centric firms play on the supply side and customer centric firms on the demand side. We observe that almost all of them play on the customer centric strategies in their supply chain systems. In short the quadrants are projected below

Quadrant left below- Producer centric; low profile marketing strategies Quadrant right below- producer centric supply chain system; high promotions Quadrant Top left: Customer centric supply chain system; low profile marketing strategies Quadrant Top Right: Customer centric Supply chain system; high profile marketing Many retailers will need to invest to maintain cold storages as well as the correct temperature at all points of the supply chain. Several airlines are believed to in the process of expanding their cargo businesses in anticipation of higher future demand. Sources say that low-cost players such as Air Deccan have already initiated discussions with several domestic retailers and are working out a strategy to cater to this demand. Jet Wadia's Go Air is also learnt to be in the process of launching its cargo business. This includes indirect job generation across
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associated areas such as security services, logistics, Further disintermediation in the supply chain alone will result in various new job opportunities for the rural youth as well, which didn't exist earlier, such as in packaging. The Indian retail industry has realized the importance of fresh produce management and invested in the supply chain systems. It is how they will integrate the supply chain system and performance into their marketing strategy or rather the marketing communication resulting in building a consumer base that will determine their success or failure. References 1. Kevin Z. Chen, University of Alberta, Agri food supply chain management Opportunities, Issues and Guidelines. 2. William Coyle, William Hall, and Nicole Ballenger, Transportation Technology and the Rising Share of U.S Perishable Food Trade 3. Huang Zu-hui, Song Yu and Liu Dong-ying, The supply chain and management of fresh produce in China 4. Aristeidis Theotokis, Katerina Pramatari, Georgios Doukidis, RFID and Innovative Retail Services: The Consumer perspective 5. Glen Thompson, (2001) A report for the Rural Industries Research and Development Corporation, Global Linkages Pty Ltd, April 2001 6. Krisztina Demeter1, Andrea Gele, Supply chain management framework: dimensions and development stages 7. Jan van Roekel, Sabine Willems, Dave M. Boselie, Agri-Supply Chain Management to Stimulate Cross-Border Trade in Developing Countries and Emerging Economies 8. Glen Thompson, Supply Chain Management Building partnerships and alliances in international food and agribusiness -A report for the Rural Industries Research and Development Corporation by Global Linkages Pty Ltd 9. Simon Robinson, Indias Supply-Chain Food Fight, Time Sunday, July, 15, 2007 10. Meeta Punjabi, Vijay Sardana, Initiatives and Issues in Fresh Fruit and Vegetable Supply Chains in India, New Delhi, India 11. Murat Bao , Mariye Yksel, Tufba avuooflu DiYculties and barriers for the implementing of HACCP and food safety systems in food businesses in Turkey 12. Lidia V Norina, Supply Chain Management for Single Desk Sellers 13. The Hindu- Online edition of Indias National News Paper. 14. Local vendors throw the gauntlet to Reliance Fresh, Subhiksha, The Financial Express, 15. Neha kaushik, The retail boom spin-offs, Business Line -. 16. McDonalds Indias Cold Chain.

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Supply Chain Management and Working Capital Cycle: Evidence from Companies101
Hemanti Richa102 Prashant Kulkarni103 Anantha Murthy N.K.104

Supply Chain Management (SCM) is fast developing as a major strategic tool as companies go in for cost cutting and revenue enhancement. SCM ensures a companies ability to forecast demand, take an order, give an accurate date, source and manufacture the right goods, position inventory properly, pick, pack and ship efficiently. It includes chain-wide information sharing, planning, resource management and global performance measurements. Senior executives in many companies view supply chain management as a critical driver of competitive advantage. As the marketplace becomes more competitive, it is critical to reinforce this advantage. We propose to bridge this gap by applying statistical tools to understand the linkages between the various financial parameters and SCM strategies by focusing on working capital cycle in particular. This research study is undertaken on 5 companies in different sectors. We find that trends point towards an impact of SCM decisions on working capital cycle. Supply Chain Management (SCM) aims at integrating the company's internal systems to those of its suppliers, customers and partners, eliminating the inefficiencies that can creep into the network. These synergies across this network of the firm, its suppliers, customers and partners, add considerable value throughout the supply chain. The participants of supply chain aim to achieve reduced cost, decreased response time, minimized inventory investment, and improved product quality by integrating the processes. Management techniques such as Just-In-Time (JIT), Total Quality Management (TQM), Business Process Reengineering (BPR), employee empowerment and cross-functional management philosophies, besides the ever growing applications of Information Technology (IT), have contributed to a good extent in building the theoretical and practical foundations and implementation of supply chain management. The supply chain council defines SCM as the effort involved in producing and delivering a final product from the suppliers supplier to the customers customer. Supply chain encompasses all of the activities with moving goods from the raw materials stage through to the end user. In other words, it comprises all of those activities associated with moving goods from the raw materials and parts, manufacturing and assembly, warehousing and inventory
The paper is a version of the paper titled same presented at the National Conference on Management Sciences organized by ORSI and IIT Chennai at IIT Chennai 102 Researcher based in New Delhi 103 Asst. Professor, Economics and Public Policy, IBA Bangalore 104 Faculty, Quantitative Methods and Operations Research Stalking Theory: View through the Prism of Real life Practice 164 | P a g e
101

tracking, order entry and order management, distribution across all channel, and delivery to customers.

Source:www.tutor2u.com While SCM has become the buzzword, literature is still evolving over measurement of the performance indicators. One needs to have a robust measurement technique to justify and understand the implications of SCM strategies on the profitability of the firm. Keeping this in mind we frame the following objectives for measuring the effectiveness of the firms Objectives 1. To study quantitative effect of supply chain solutions in different companies. 2. Impact of SCM in improving operational efficiencies by measuring its impact on the working capital cycle 3. Assessing their impact on the profitability of the firm 4. Suggest directions which SCM could evolve in the coming years. Methodology The theoretical models were analyzed through a literature survey of SCM strategies across the companies. To measure the impact of the SCM on Working capital we have initially taken a sample size of 5 companies. We then go on defining the variables to be used in measuring the relationships. The various observable items in supply chain are the raw material cycle,
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finished material cycle, debtors turnover period, creditors turnover period, working capital cycle. These terms are very useful as they provide us with the quantum of time reduced in cash conversion as well as the time gap between inputs of a product and its delivery to the customer. We analyze these indicators using co-relation tests and ANOVA. Literature Survey SCM evolves with the changing strategies and tactics of the firm. The fierce competition necessitates the introduction of products with shorter life cycles while technological advances minimize the operation deficiencies. SCM is about coordinating all these activities to deliver value to the customer. Pittilgio Rabin Todd & McGrath (PRTM) Consulting, conducted a research documenting the link between supply chain and profitability. The research found that market leaders were able to reduce their costs by 5 or 6 as percent of sales by implementing efficient supply chain management policies. Literature sums up the goals of SCM into two broad measures (Dekker, Van Goor 2000). Process efficiency in the channel, with consequent cost reduction; Process effectiveness in the channel, with consequent value creation for final customers.

Many performance metrics have been developed for supply chain. Sink and Tuttle (1989) claim that you cannot manage what you cannot measure. A T Kearney Consultants (1985) have identified a high correlation between superior performance & development /use of sophisticated assessment/measurement capabilities. The study reported that firms engaging such systems reported an increase in productivity of 14 to 22 %. However the metrics are still evolving and literature is not yet abundant on design of performance measures (Beamon, 1988). He divides the measurement approaches into qualitative and quantitative ones and advocated the measurement into resource based, output based and inherent flexibilities of the process. Sonia Ruggerio (2005) present the problems associated with the measurement systems with regard to SCM. The measures being numerous often function isolated and are incompatible with each other. There is a greater tendency to focus on the measuring the past financial performance than on the future indicators. Besides very little compatibility exists between measures and the strategies. Activity Based Costing (ABC) tries to overcome some of the limits of traditional cost analysis methodologies making complexity costs visible besides attempting to rationalize the allocation of costs to final objects as much as possible. Cokins (1999) advocates the use of ABC to identify the supply chain cost drivers. Business Process Reengineering (BPR) perceives that all activities have to be reengineered to have substantial improvement in performance with respect to quality, time, cost and service.

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Integrating ABC and BPR resulted in a new metric called Activity Based Management Accounting (ABMA). The information output of ABMA is composed of four systems that are: Activity Based Budgeting (ABB), which supports activities and process budgeting Activity Based Accounting (ABA), which supports activities and process accounting Activity Based Costing (ABC) which allocates activities and process costs to products, services, clients or orders Non-Financial Indicators (NFI), which are physical or technical parameters that monitor cost and value drivers.

Lockamy and Smith stress the importance of target costing methodology in supply chain management to measure both the existing relationships among supply chain operators and the characteristics of customer needs. The Balanced Scorecard (BSC) approach (Kaplan and Norton, 1996) created a framework to measure the performance of SCM. Brewer and Speh identify a framework to monitor supply chain performance similar to one advocated in BSC. The model measures the performance by means of the business process perspective, while its results (concerning customer satisfaction and financial results) can be measured by customer perspective and the financial perspective indicators. Moreover, the innovation and learning perspective gives a direction on the probable movement of the supply chain on the value curve in the days ahead. Keebler (2001) highlights the characteristics that play a central role in performance management systems. The tendency to play the centrality of the firm while ignoring the other channels is one such characteristic. The process orientation of the measures often ignores the suppliers who play a crucial part in the success of the entire process. Michael Hugos (2003) develop a set of four parameters to measure the efficiency of Supply Chain operations. He advocated the use of customer service, internal efficiency, demand flexibility and product development to test the efficiencies of SCM (Exhibit II).

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CUSTOMER SERVICE

Build to Stock (BTS) Complete order fill date & order line item fill rate On-time delivery rate Value of total backorders & number of backorders Frequency and duration of backorders Line item return rate
INTERNAL EFFICIENCY

Build to Order (BTO) Quoted customer response time & on-time completion rate On-time delivery rate Value of late orders & number of late orders Frequency and duration of late orders Number of warranty returns and repairs

Inventory Value Inventory turns Return on sales Cash-to-cash cycle time Activity cycle times Upside flexibility Outside flexibility

DEMAND FLEXIBILITY

PRODUCT DEVELOPMENT Percent of total sales from products introduced in last 12 months Percent of total SKUs that were introduced in last 12 months Cycle time for new product development and delivery

Source: Michael Hugos, Essentials of Supply Chain Management, 2003, John Wiley and Sons Pohlen and Goldsby suggest the application of a dyadic model of EVA, to expand this analysis outside company boundaries by including the value generated by suppliers as well as customers. AHP-analytical hierarchy process, proposed by Felix T S Chan et al (2004) provides assistance in measuring, aggregating, and benchmarking the performance of processes. Cohen and Rousell (2004) insist that supply chain measures should incorporate both performance measurement function and performance management function. They stress the need for linking the goals of SCM to strategy of the firm. Further they suggest multi perspective approach that incorporates both internal and external measures, both financial and operational measures, functional, inter-functional and inter-firm measures and finally both forward and backward looking measures. This approach is similar to BSC approach. Analysis Two elements in the business cycle absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans. Each component of working capital (namely inventory, receivables and payables) has two dimensions 1. Time and 2. Money. Getting money to move faster around the cycle (e.g.
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collect monies due from debtors more quickly) or reducing the amount of money tied up (e.g. reduce inventory levels relative to sales), enables the business to generate more cash reducing borrowing to fund working capital. Implied is the reduction in the cost of short term debt from the banks and increase in the availability of free cash flows. The operating cycle of a firm begins with acquisition of raw material and ends with the collection of receivables. Therefore O=I+DC Where, O = operating cycle period I = inventory storage period-includes raw material, stores, work in process, finished goods storage period D = debtors collection period C = creditors payment period We take a sample of 5 companies. We take inventory as a proxy for supply chain effectives. We examine the impact of sales, inventory and the working capital cycle on the cash conversion cycle.
comparison of nwc,inv, sales and ccc
12000 10000 8000 6000 4000 2000 0 -2000

nwc inv sales ccc samle1 samle2 samle3 samples samle4 samle5

We use the co-relation test to examine the intra-firm factors.

Average

NWC Inventory NWC Inventory 1.000 0.862 0.862 1.000

Sales

CCC

0.909 0.841 0.948 0.701

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Sales CCC

0.909 0.841

0.948 0.701

1.000 0.628 0.628 1.000

The co-relation matrix shows uniformity across the samples. We followed this by using ANOVA to check the impact across the firms. We frame the hypothesis as Ho- there is no impact of SCM practices on the firms cash conversion cycle H1- There is a definite impact of SCM practices on the firms cash conversion cycle. Source Between variation Within variation Total variation SS 95942.170 37879.088 133821.258 Df MS F 12.664

4 23985.542 20 24 1893.954

Since F values exceed the table value (F (4,20)=2.8861) we reject the null hypothesis. Based on the results we arrive at the following inferences Inferences 1. There is an impact of SCM practices on the working capital performance of the firm across the sectors 2. We attribute this to the fact that SCM practices have an impact first on the operational efficiencies of the firm which gets reflected in the working capital. 3. Good working capital practices reduce the cash conversion cycle freeing the cash reserves that otherwise get locked in accounts receivable. 4. While SCM brings effectiveness on working capital and thus operational efficiencies resulting in cost advantage to the firm, but we do feel that there has to be a stronger discussion on the causes of this proposition. 5. The low co-relations among two variable tests call for further refining the tests incorporating latent variables and further investigate the linkages among SCM related concepts. References

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1. Anderson, David L and Hau Lee, The Internet-Enabled Supply Chain: From the First Click to the last Mile, http://Ascet.com. 2. Vargas, L, (1990), An overview of the analytic hierarchy process and its applications, European Journal of Operational Research, Vol. 48, pp. 2-8. 3. Sink, D S and Tutlle, T C, (1989), Planning and measurement in your organization of the future, Industrial Engineering and Management Press, Norcross, USA. 4. Neely, A., Gregory, M and Platts, K, (1995), Performance measurement system design: a literature review and research agenda, International Journal of Operation & Production Management, Vol. 15, No.4, pp. 80-116. 5. Rolstandas, A, (1995) Performance measurement: a business process benchmarking approach, Chapman and Hall, New York, NY, USA 6. Bowersox, DJ and Closs, DJ (1996) Logistical Management The Integrated Supply Chain Process, McGraw-Hill New York. 5. Christopher, Martin, Creating the Agile Supply Chain, http://christopher.ascet.com. 6. Beamon, B M., (1998), Supply chain design and analysis: models and methods, International Journal of Production Economics, Vol. 55, pp. 281-294. 7. Moore, N, (1998), Supply chain management, Work Study, Vol. 47, No. 5, pp. 172174. 8. Van Hoek, R I, (1998), Measuring the unmeasurable measuring and improving performance in the supply chain, Supply Chain Management, Vol. 3, No. 4, pp. 187192. 9. Beamon, B M and Ware, T M, (1998), A process quality model for the analysis, improvement and control of supply chain systems, Logistics Information Management, Vol. 11, No. 2, pp. 105-113. 10. Waggoner, D B., Neely, A D., and Kennerley, M P, (1999), The forces that shape organizational performance measurement systems: an interdisciplinary review, International Journal of Production Economics, Vol. 60, pp. 53-60. 11. Beamon, M B., (1999), Measuring supply chain performance, International Journal of Operation & Production Management, Vol. 19, No. 3, pp. 275-292. 12. Cross, Gray J, How e-business is transforming supply chain management, Journal of Business Strategy 21 (2): 36-39, March/April 2000. 7. Domocker, Judy, Business seek to cut weak links from supply chains, Information Week (776): 141-146, March 06, 2000. 13. Ganeshan, Ram, An Introduction to Supply Chain Management, http:// silmaril.smeal.psu.edu/misc/supply-chain-intro.html. 14. Jay, Bal, Richard Wilding & John Gundry, Virtual teaming in the agile supply chain, International Journal of logistics Management 10(2): 71-82, 2000. 15. Khurrum S Bhutta, Faizul Huq Merging ECR and Consumer Centric Marketing, Working paper at Department of Management sciences, University of Texas at Arlington, 2000. 16. Messmer, Ellen, Supply chain software meets Web-based e-commerce, Network World 17(18): 52, May 01, 2000. 17. Rachel Mason-Jones, Ben Naylor and Denis R Towill Engineering the Leagile Supply chain International Journal of Agile Management Systems, 2000.
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18. Turban, Efraim, Jae Lee & David King, Electronic Commerce: A Managerial Perspective, Prentice Hall Inc. (New Jersey) 2000. 19. Chandra, C and Kumar, S, (2000), Supply chain management in theory and practice: a passing fad or a fundamental change? Industrial Management and Data Systems, Vol. 100, No. 3, pp.100-113. 20. Bourne, M., Mills, J., Wilcox, M., Neely, A., and Platts, K, (2000), Designing, implementing and updating performance measurement systems, International Journal of Operations and Production Management, Vol. 20, No. 7, pp. 754-771. 21. Kuwaiti, M E and Kay, J M, (2000) The role of performance measurement in business process re-engineering, International Journal of Operation & Production Management, Vol. 20, No. 12, pp. 1411-1426. 22. Gunasekaran, A., Patel, C and Tirtiroglu, E, (2001), Performance measurement and metrics in a supply chain environment, International Journal of Operation & Production Management, Vol. 21, No. 1/2, pp. 71-87. 23. Holmberg, S, (2000), A system perspective on supply chain measurement, International Journal of Physical Distribution and Logistics Management, Vol. 30, No. 10, pp. 847-868. 24. Lambert, D M and Cooper, M C, (2000), Issues in supply chain management, Industrial Marketing Management, Vol. 29, pp. 65-83. 25. Lochamy, A.III and Smith, W, (2000), Target costing for supply chain management: criteria and selection, Industrial Management & Data Systems, Vol. 100, No. 5, pp. 210-218. 26. Kueng, P, (2000), Process performance measurement system: a tool to support process based organizations, Total Quality Management, Vol. 11, No. 1, pp. 67-85.

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Mapping the Success of Organized Food Retailing through the Eyes of Retailers and Consumers105
Ms. Hemanti Richa106 Mr. Manish Arora107 Prof. Prashant Kulkarni108 Mr. Chidambara S.T.109 Prof. Anantha Murthy110 Abstract: Post 1991 period, the consumer awareness has increased. He also has become price sensitive. The consumer looks for convenience in food shopping and consumption. The rising income levels coupled with the shoppers desire for both convenience and new tastes and stimulation, gave ample opportunities for the organized sector to take shape in the form of supermarkets. Since the deep penetration of kirana stores in India, It is self-evident that success of the organized food retailing would have to essentially draw away shoppers from, the roadside hawkers and kirana stores to supermarkets. The low pricing strategies of the kirana stores where the competition is ruthless with little heterogeneity, organized retailers would have to depend on his understanding and ability to squeeze his supply chain to succeed. This study attempts to determine the important attributes which are the key determinants in consumer behavior towards organized food retail. Further we generate a model that links the strategies of the retailers to their attempts in retaining and expanding their customer base. INTRODUCTION Estimates suggest retailing to be currently worth USD 200 billion and are projected to reach USD 23 billion by 2010. In terms of market share it is expected to rise by 20 to 25 per cent. Yet, the 2007 CRISIL report suggests, the contribution of the organized retail accounts for merely 2% to 3% out of the total retail market in India. However organized retail in India is on a high growth path expecting to touch 40% CAGR over the next few years. Besides, the industry employs nearly 6 percent of Indias work force. Food and grocery (F&G) items, account for nearly three quarters of the total retail sales, across both the organized and unorganized sectors. The Indian food retail market is six times bigger than Thailands and four-five times bigger than that of South Korea and Taiwan. India also has the largest number of retailers, about 12 million, though they are mostly small. The
The paper is updated version of the paper titled same presented at International Conference on Agriculture and Food Industries organized at IIM-Lucknow 106 Researcher based in New Delhi 107 Specializes in transaction advisories and financial consulting at a leading infrastructure consulting firm in New Delhi 108 Asst. Professor, Economics and Public Policy, IBA Bangalore 109 Researcher with a leading FMCG firm in Ahmedabad 110 Faculty, Quantitative Methods and Operations Research Stalking Theory: View through the Prism of Real life Practice 173 | P a g e
105

Indian consumer spends nearly 70% of his income on Food & Grocery items (F&G) (Sinha & Kar, 2007). Exhibit 1.
TREND OF RETAIL INDUSTRY IN INDIA Duration Sales growth Share of organized retailing in total retailing Area Metros Competitors Very few Moderate 1995-2000 Very high Low (< 1%) 2000-2005 High Low (1-5%) 2005-2006 Moderate slow Medium (5-40%) 2007 Slow to negative High (> 40%)

Metros and A-Class cities

Metros and nonmetros Many direct and moderate indirect competition Urban and rural

Global Moderate direct and many indirect competition Global

Customer profile

Urban upper and upper middle class

Urban upper and middle class

Source: 1:5.4.-Techrtopok

This naturally has attracted several leading players into the industry. Business houses like Future Group ( Pantaloons, Big Bazaar, Food Bazaar) ,Reliance, Tata Trent, More (Aditya Birla Group), Food World (RPG Group) have come up with their own retail models with the Bharati groups tie up with Wal-Mart being the icing on the cake. Pantaloons (Futures) group under the banner of Big Bazaar (and Food Bazaar) is so far the biggest player with grocery sales of approximately $244 million in 2006, very closely followed by Mother Dairy with sales of about $220 million and Subhiksha at $160 million. The presence of organized retail has touched nearly 80 cities, and during 06, retail space with the organized players has grown at about 50% during the last two years and their sales grew by 46%. (Sinha & Kar, 2007). It is this context of the retailing structure in India that beckons a researcher to examine what sustains the organized retailer in the form of supermarket, hyper market or even the specialized grocery store. The study attempts to study the success of the organized retail in India. This helps us to frame the following objectives. OBJECTIVES The basic objective of this study is to determine the various success factors in the food retailing industry through the eyes of retailers, customers and grocers. This is done by analyzing: Changing patterns of food retailing in India Success factors of the organized food retailers vis--vis the ordinary grocers. Role of supply chain as a success factor
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measuring success at store level versus the macro level Consumer perceptions on the organized retailing sector The retailers perceptions on their success

METHODOLOGY Backed by a robust secondary literature survey, we move into the domain of primary research. There are two components in this. The first part was an exploratory research carried out to identify the various attributes which play a significant role in building the consumer perception of retail stores. Towards this end, the various attributes were decided and the final study designed. The first part comprises of in-depth interviews we have had with the leading retailers. The senior managers involved in backend operations in the retail industry and the front end store managers were contacted and their responses noted. The consumers were also administered a questionnaire for their preferences on shopping in the organized firms compared to the grocery stores. Then the data is analyzed using conventional statistical tools. These are reinforced by the using perceptual mapping model. Structure and Overview of the Food and Grocery Retail Market Though Indian retailing scenario compares rather dismally with other countries.(7 % in 2003 compared to 80% in US, 70% in Western Europe 40% in Brazil and Argentina 20% in China)(Gupta,2005) it possess a few advantages. India is the fourth largest economy as far as purchasing power parity is concerned, just behind USA, Japan and China. An A C Nielsons report in 2004 points out of the average monthly expenditure of $ 50 ,$ 21 is spend on fresh food, which accounts for 42% of the total expenditure. The demographic patterns with the age groups favoring the younger population augur well for the Indian retailer. Implied is a boon for the retail entrepreneur unshackling from the realms of regulation that has bogged the Indian economy till 1991. In a few years from now the composition of the Indian population will be predominantly in the age group of 20-49 i.e. the working population. This will be further strengthened by the rising incomes resulting in greater purchasing power. Increasing number of nuclear families, easy financing options, increase in the population of working women and emerging opportunities in the service sector during the past few years have been the key growth drivers of the organized retail sector in India. Consumers show a growing preference for organized retail, resulting in increased penetration. India has the largest 'young' population in terms of sheer size and this young segment is the major driver of consumption as they have the ability (disposable income) and willingness to spend. Increasing instances of double incomes (DINKS, DISK111) in most families coupled with the rise in spending power is further fuelling the growth of retail sector.

111

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Table 1. Changes in India Urban Population 1991 2001 2011

Source: Ernst & Young

Share Year Growth Rate

City type

Average Return on Investment in Retail Real Estate 9-10% 8-9% 10-11%

26% 28% 41%

Tier 1 Cities Tier 2 Cities Tier 3 Cities

Table 2: Distribution of Households by Household Income 1989-90 to 2009-2010(000 households) 198990 Urban MH LM Low Total 11270 38415 14879 40106 198990 Rural 9095 16956 68870 198990 All 20276 53208 83749 200102 Urban 28884 70164 7648 200102 Rural 23978 14809 57518 200102 All 52862 64916 65166 200910 Urban 51140 79725 3253 200910 Rural 56363 13957 31465 200910 All 107503 24458 34718

102334 142440 53488

134704 188192 69202

152744 221946

MH (Middle High): above Rs.90000 p.a.; LM (Low Middle): 45000 to 90000,Low: below 45000 Source-NCAER

The segments of the Indian retail industry are highlighted in Figure 1. Figure 1. Market Distribution in Organized Retail.
watch & jewelry, 18 durables, 18 pharma, 27 furniture & fixtures, 27 food & grocery, 91

clothing, 55

Source: KPMG in India Retail survey, 2005

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But the going for the Indian food retailer has not been easy. Accustomed to buying from the traditional kirana shop or the next door vegetable seller the average Indian consumer is not shifting to the supermarket format easily. The shift to supermarkets ,hypermarkets etc. often becomes a slow process The deeply distributed kirana stores (11 stores per 1000 people , according to FICCI report,2006) almost all of which is unorganized and family driven present tough challenge to the organized sector. This probably has resulted in the emergence of various retail formats to attract different segments (Exhibit 2). 1. 2. 3. 4. The discounter (Subhiksha, Apna Bazaar, Margin Free) The value-for-money store (Nilgiris) The experience shop (Foodworld, Trinethra) The home delivery (Fabmart) (Vijay Anand & Vikram Nambiar)

Exhibit 2:
New Format Food Retailers in India (2001) Format type Number Total 2001-02 sale (Rs.Crore) ofstores sq.ft Hypermarket Hypermarket Food supermarket Opened mid 2001 Opened mid 2002 89 100000 50000 260000 150 50 212

Store name Big Bazaar Giant Food World

Group Pantaloon RPG Group RPG Group (51%) & Dairy Farm Intl. (49%) Nilgiris Group Independent retailer Independent retailer

Nilgiris Margin Free Markets Subhiksha

Food supermarket Discount grocery

50 240 112

89000 360000 NA

230 540 162

Discount grocery Source: www.ficci.com

Besides the kirana stores, the other major force is the co-operative stores. Besides these, small family owned retail businesses, the other format of retailing that the erstwhile socialistic pattern of economy had promoted was that of the cooperatives, which retailed food and other Fast Moving Consumer Goods (FMCCG) products very successfully till the 1990s after which the government support for such cooperatives was on the decline. Till date about 35000 such cooperative stores operated in the country. (Gupta, 2005) With an increase awareness and change in buying habits, Indian consumer, no longer can he be taken for granted. The consumer looks for convenience in food shopping and consumption. Car ownership has increased and rapidly necessitating the need for parking space while shopping which the ordinary grocery were unable to provide. The rising income
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levels coupled with the shoppers desire for both convenience and new tastes and stimulation, gave ample opportunities for the organized sector to take shape in the form of supermarkets. Initially the supermarkets were one stop window offering a variety of products. The invention of the bar code allowed a store to manage thousands of items and their prices and led to justin-time store replenishment and the ability to carry tens of thousands of individual items facilitated these supermarkets. The size and the resources which these supermarkets possessed enabled them to build efficient supply chain systems and improvement in their financial performance. Supply chain innovations for retailers were particularly strong in the second half of the 1990s and have continued into today. The kirana (mom-and-pop) stores continue to meet all the requirements of consumers in terms of their daily necessities albeit without the convenience of the shopping as provided by the retail chains. This has been one of the success stories of the Indian retail industry and an inescapable part of the Indian daily routine. Further the supply chain system is highly fragmented and inefficient. These arise on account of the restrictive procurement practices, and multi-level storage and commissions pushing up the final retail prices paid by the Indian consumer to 2.6 times the prices paid to the Indian farmer. According to a recent report by CRISIL, the total avoidable supply chain costs are up to Rs. 1 trillion in the F&G vertical. About 57 per cent of this is due to avoidable wastage and about 43 per cent is due to avoidable costs of storage and commissions. Consequently, the average realization of the farmer is only 35-40 per cent of the retail price as compared to 60-65 per cent of the retail price in countries like the USA which have an organized retail penetration of about 80%.It is hampered with the presence of several intermediaries (from farm-processor-distributorretailer). Advances in food processing, supposed to reduce wastage and add value to farm produce, storing and organized distribution and retailing of agricultural product have fallen short of expectation. Direct procurement from the farm and extending shelf life through appropriate processing is still in infancy stage. The long gestation periods, lack of access to institutional funding no or little Government support add to these woes. With low margins in the food and grocery retailing and consumers not dissatisfied with existing shops where they buy compound the difficulties. For example, the next-door grocery shopkeeper is smart and delivers good customer service, though not on value. All these factors have ensured that the organized retailing have a very low presence in the Indian scenario. According to CRISIL Research report, "If one-third of the above-mentioned savings (around Rs 335 billion) are passed on to the consumer in the form of lower costs, it amounts to more than 3.5 per cent of the country's spend on food items (Rs 9,510 billion); this can play a significant role in lowering food inflation." Consumers demand for new products, variety, lower prices etc. has forced the market to adapt to the new situation. Scanning the rising purchasing power of the consumers, increased competition and new management practices have changed pricing strategies. Farm-to-retail price spreads vary widely and are affected by unpredictable forces such as weather, supply/demand and international trade. This leads to investment in new technologies leading to adoption of new business models, greater variety of products, and better quality service at the lowest cost. Shelf life is often the most important
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criteria for the success or failure of the store. All these factors necessitate the need to scale up which the organized retailers have done successfully. The retailers ability to raise grocery store prices is limited due to obvious reasons. The average margin in retailing industry is 3%. Retailers have added new products (food and non-food) as well as services (credit facility and home delivery), and have built larger stores in order to offer consumers one-stop shopping convenience. At the same time, though, they have incurred increased procurement, labor, and capital investment costs. The retailers believe they can decrease costs through supply-chain management practicescoordinated activities that generate operating, procurement, marketing, and distribution efficiencies. Exhibit 3: Dynamics of Retail Business

Store Layout and Visual Merchandising Merchandise Planning and Presentation Private Label Management Store Promotions Management Loyalty Program Employees Management

Store Management Information Customer Management Key Back-end Management Enabler Technology

Management Vendor

of Vendors

Negotiations and Distribution Center

Warehousing Management Logistics

Management

Source: Fitch

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Retailers often have to cope with intercultural barriers and sensibilities. Firms like Wal-Mart struggled in Germany and China as they did not understand the local consumer culture. Keeping this in mind, retail houses like Future Group, Landmark, Reliance Retail, are coming out with different retail formats. Some initiatives include Food Worlds attempts to open live chakkis to allow grinding of fresh wheat, fresh juice counters, live dairy and even a live kitchen. Some retailers have focused on rural markets, the popular among them being the echoupal initiative by ITC. Besides, the Godrej Adhaar, the rural retail initiative of Godrej Agrovet Ltd operates a chain of 18 stores providing a host of services to farmers and their families. Others include, M & M Shubh Labh stores, Escorts rural stores, Tata Kisan Sansar, and Warnabazaar, Maharashtra (annual sale Rs.40 crore). (Ailawadi & Keller, 2004) Retail Strategies and Success Factors The continuous rise of promotions and private labels is an indicator in growth in retailing. Brand images are sought to be created and reinforced through association with quality, service, product assortment, pricing and even credit policy. Keller (2003) estimates the power of retailers brand equity by examining the favorable responses of consumers to the actions exhibited by the retailers than they do to the competing retailers. Bell and Lattin (1998) show that large basket shoppers prefer Every Day Low Price (EDLP) stores whereas small basket shoppers prefer High-Low Promotional Pricing (HILO) stores. The price format also determines the consumers choice of the store and product format. Inman, Shankar, and Ferraro (2004) show that certain types of product categories have signature associations with specific channels, e.g., supermarkets with food, drug channel with medications and health products, and mass merchandisers with household items. But, Farquhar and Herr (1993) argue that brand is a prototypical of a product category which may make it difficult to extend it outside the category. Some other studies among them Meyers-Levy (1989) has shown brand extension research also shows that a large number of associations could produce interference effects and lower memory performance. Schmitt (1999, 2003) has developed the concept of Customer Experience Management (CEM) which he defines as the process of strategically managing a customers entire experience with a product or company. (Kusum L Ailawadi & Kevin Lane Keller, 2004). Some studies show that the value gap between the price quality and the willingness to pay has to be bridged to create greater consumer interest in the organized sector. The return from branded goods is not more than 6-10 % whereas the retailers have an expectation of 15-19% margin for early break even along with managing the high standards of front end service. ( Shajahan & Bharath,2004) Table 3: Consumer Retailer Bridge Customer Value Requirement (CVR) Image CVR-RVP Mapping Retailer Value Functional Areas Proposition (RVP) Mapped Product Merchandise Planning and Management Industries Apparel, Health and Beauty, Books, Music

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Value for Money

Price

Supply Chain Management and Logistics

Food and FMCG

Service

Experience/Access CRM and Managing People, Site Selection ,Store Layouts

Banking, Credit Card, Courier Service, Airline, Travel Agency, Consumer Durables

Source: ET Intelligence Group 2003 Analysis A well designed valid and reliable customer survey was done and the following observations came out after analysis using SPSS. Chart 1: Income groups vs. retail format

INCOME GROUPS vs RETAIL FORMAT

6 5 4 3 2 1 0 0 1 2 3 4 5
Source : Based on the survey developed by the authors

DISCOUNT STORES LOCAL MARKET CONVENIENCE SHOP SUPER MARKET

X axis- Ranking of Retail Format

Based on income criteria, the different income slabs were divided and the results came out are the following : Consumers having monthly income Below INR 10000 prefer discount stores and supermarkets. Consumers having monthly income INR 10000- INR 20000 tend to go for supermarkets, local markets as well as convenience shops. Consumers in the monthly salary range of INR 20000-INR 30000 go to supermarkets, local markets and convinience shops. Consumers with monthly income more than INR 30000 prefer supermarkets and convienience shops.
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Table 4: Frequency of Shopping and Income Levels HOW OFTEN YOU SHOP ONCE A WEEK MONTHLY INCOME BELOW 10000 10000-20000 20000-30000 30000& ABOVE Total
Source: Primary Data collected by authors

Total

TWICE A WEEK 1 6 5 8 20 0 1 1 4 6

THRICE A WEEK 0 2 2 2 6 1 9 8 14 32

Table 5- Shopping Habits and Age Groups Age SUPER CONVEN MARKE IENCE T SHOP BELOW 20 20-35 35-50 50 & ABOVE 0 9 0 0 0 4 3 0 TYPES OF SHOP VISITED LOCAL MARKE SPECIALIS T T SHOP 1 3 0 1 0 0 0 0 DISCOUN T STORES 0 1 0 0 OTHER S 0 2 0 0

Source: Primary Data collected by authors

This indicated that the younger generation in the age group of 20-35 frequents the supermarket. This is due to the influence of advertising and the perceived need to adopt anything in. The respondents though generally skewed toward the younger groups, still project this combination. Shopping in specialist stores elicits no response and probably is due to unawareness among the consumers whether they are aware of specialist stores.

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Chart 2- Graphical representation of relationship between age groups and types of shop visited.

Row and Column Points

Symmetrical Normalization
age TYPES OF SHOP VISITED 1.0 0.5

OTHERS DISCOUNT STORES SUPER MARKET 20-35

Dimension 2

0.0 -0.5 LOCAL MARKET -1.0 -1.5 -2.0 -2 -1 0 1 2 BELOW 20 50 & ABOVE CONVENIENCE SHOP 35-50

Dimension 1
Source: Based on the Primary Data collected by authors

Survey indicated the ideal combination of the attributes and their relative importance as a complete retail package. The six different attributes are shown with their percentage share in the following radar graph. This implies that when a consumer goes into the retail outlet they are looking for a similar mix of attributes and if that can be offered by the retailers, they will be gaining more market share in the organized retail market. Chart 3 - Ideal Preference of customers
Ideal Preference of customers
variety 300 experience 200 100 0 discount quality price

service

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The survey results reinforce the above combination by observing the reasons for customers behaviour of changing stores, they came out to be in the below displayed order Chart 4 - Change factors preferences
Change factors for preference
variety 30 experience 20 10 0 discount quality price

service

Source: Primary Data collected by authors

This graph clearly shows that the customers give maximum weightage to quality and price, followed by variety, service, discount schemes and the complete shopping experience. Based on the consumer ranking of the attributes we develop the following graph linking the attributes and the agreement levels of the consumers regarding their attributes. Chart 5 Agreement level of customers on attributes

25 20 15 10 5 0 SA A D SD DK safety quality healthy pricing info'n ambience mandi experince freshness

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X-axis- Agreement Level Y axis- Response Frequency SA- Strongly agree, A- agree, D-disagree, SD- strongly disagree, DK- dont know

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The graph indicates an agreement on safety and ambience indicating the need for consumers to have a feel of the store while ensuring safety levels of food. There is generally a mixture of levels of agreement and disagreement over the availability of information We tried to identify the match between what the consumers actually want and what retailers believe the consumers want. Based on the questionnaire administered to the retailers , some valuable inputs came out on supply chain , average store space, averagre number of SKUs in stores, store format, service standards, ambiance etc. the major advantage comes from cutting the supply chain in upcoming organised retail formats. Now the new trend of direct procurement from farmers, or having only one intermediary as wholesaler has shortened the supply chain and increased the margins at each level, which the retailers are passing on to the consumers. The major customers of the stores are families, so bulk purchases come in handy and act as motivators for the consumers. Almost all the retail stores have their own warehousing facility , in the outskirts of the city where they have minimum five stores. Warehousing facility is created in outskirts because of the escalating cost of real estate in India. Also the logistics are partially owned by the firm, so as to have complete control over the operations. Some companies have gone a step ahead and have refrigerated logistics facility to keep the freshness of F&G intact. Also companies are coming out with improved logistcs to sustain efficient flow of supplies during monsoon. Most of the firms have a sales forcast tool at work, which works on daily sales(sales per day = average bill value per customer per day * number of footfalls per day). This sales forecast is 70%-80% accurate, in case of most of the stores. Some companies work on a different criteria of replenishment teams, these teams are responsible for replenishment of supplies, and these teams or sales forecast tool work along with the store managers observations. As F&G sales differ regionaly, seasonally, availability, schemes of other stores and various other reasons which are difficult to incorporate in IT dominated forecasting systems, here the keen observations of store managers come in handy. Currently the logistics cost in the complete procurement cost are high, nearly 10%-15%, which should be ideally less than 2% of the total procurement cost,this figure is likely to come down as the organised retail formats move from supermarkets to hypermarkets. The pricing , which came out as the most important factor according to customers, is done based on the position of the company in the industry. A consumer saves about 10%-11% on bill in Discount stores, as compared to supermarket format where average savings are 5%-7%. But the savings advantage is countered by the supermarkets by having about 40% more SKUs than the discount stores. The unsold F&G is generally treated in three different ways, dumping by some stores(pricing includes the estimated dumping), resale to the same vendor at a lower value pre decided in contracts by some and sale to restuarents and hotels at a lower value. The average contribution from F&G is different based on different retail formats, ranging 50% in speciality stores to 10%-20% in supermarkets. The growth rate has been decided by the companies based on their policy, but generally the target given to stores is to have a increase of about 5%-10% per month, this figure varies based on the presence of store in the area. Some hurdles the organised sector faces is in terms of operations , as the new retail stores have efficient IT backup for operations, most of the vendors are not able to comply to the systems, also category management is not one of the focus points, the locations matter the most as the real estate
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cost are sky rocketting and all the major player in the industry are showing muscle and money power to capture the best locations. The divergence or convergence of perceptions between retailers and consumers is captured below Particulars Retailers view Price Customer view

Providing items at 5 to 10 % less cost No saving if we add commuting compared to mandi or other local cost in total bill of purchase. grocers. Providing better quality than local mandi. Yes ,we get better quality ( saves time ). Providing better service than grocers. Grocers are providing better customize service.( providing credit facility).

Quality Service

Variety

Large number of SKUs & different Yes we get more variety & types of goods under one roof. goods.

Source: Primary Data Collected by the authors 5.0 Inferences The survey shows that the retail boom is in full swing and the younger generation is the one caught by this bug. Most of the shoppers in the supermarkets and the discount stores belong the 20-35 age group. These are generally single or double income couples with no kids (DINKS) or with single kid (DISK). The older groups generally prefer the convenience stores or the local markets. The consumers prefer to look for variety, price and service as the main attributes while the retailers play on prices and experience. If we were to plot a model on retailing success factors we would obtain the following model. The model measures the strength of the consumer base on X axis and the promotional strategies on the Y axis. As we move right on the X axis the consumer base goes on strengthening. Moving upwards on the y-axis indicates the increase in promotional strategies.

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Hemanti Richa, Manish Arora et al (2008) The first quadrant indicates low promotional activity and a floating base. The second quadrant indicates a core base and low promotional activities. Nilgiris and Namdhari both have very low promotional activities and rely on the consumer loyalty for their sales. They have developed over a period of time a strong customer base which has remained constant. The consumer segment they target generally prefers low key activity and do not get influenced by the promotional ideas. The third base indicates high decibels of promotion activity but a floating base. Most of the retail units we studied belonged to this segment. All these are building up a consumer base but not sufficient enough to sustain them. The last quadrant indicates high level of promotional activity coupled with a strong consumer base. They know their segment at and their marketing mix is targeted towards them. Reliance is in the second quadrant but seems moving towards the upper quadrant. Its strategy seems to be comparatively lower level of promotional activity while building up a strong base. Reliances strategies are also strongly geared up to the back end and thus controlling the supply base and seems not too worried on the promotional levels to increase the demand pull of the consumers. References S Shajahan and Shankar Bharath, Retailing industry :challenges and opportunities, Marketing Mastermind,2004,ICFAI Rahul Gupta , Food Retailing : Emerging Trends, Effective Executive, Feb 2005,ICFAI Shishir Kumar and C S V Ratna ,Food World : The pioneer in food organized retailing, , ICFAI press 2003 Food retailing in the 21st century : riding a consumer revolution, www.fmi.org
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Vijay Anand and Vikram Nambiar , Indian food retail sector in the global scenario, , Satguru consultants. Piyush kumar Sinha and Sanjay Kumar Kar, An insight into the growth of new retail formats in India, IIMA research and publications, Mar 2007 Kusum L Ailawadi and Kevin Lane Keller Understanding retail branding : conceptual insights and research priorities, Journal of Retailing,2004,volume 80,issue 4,pages 331-342. Piyush kumar Sinha and Arindam Banerjee, Store choice behavior in an evolving market, International Journal of Retail & Distribution Management Volume 32 Number 10 2004 pp. 482494 www.ebsco.com S Sunder , Building successful retail brands, BIM,Trichy. Pearson Stward, 1996,Building brands directly, Macmillan press Knapp Duane E, 2000, The brand mindset, McGraw Hill. K. Demeter, A. Gelei: Supply chain management framework: dimensions and development stages, Budapest University of Economic Sciences and Public Administration, Hungary Churchill A and Iacobucci S, 2002 marketing research : methodological foundations, 8th edition , South Western pp 755-756 Dash, Joseph F, Schiff man, Leon G, and Berenson Conard ,1976, risk and personality related dimensions of store choice , Journal of Marketing , vol 40, Jan, pp 32-39 Enders, Albrecht, Jjelassi, Tawfik, 2000, the converging business models of internet and bricks-and-mortar retailers ,European management journal , Vol 18 issue 5, Oct, pp 542-55

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Annexure 1 Format Organized Retailing Formats Definition Value position Large High Low selection service price Large self-service stores, primarily selling food items Examples India

Hyper/Super markets

Other countries FoodWorld, Wal-Mart, Nilgiris, Kroger, Subhiksha, Tesco, Big Bazaar. Carrefour. Convenio. 7-Eleven.

Convenience Small food stores, stores open long hours and catering to basic needs Department stores Large stores retailing branded goods in multiple non-food categories

Shopper's Stop, Ebony, Westside, Globus, Pantaloons. Benetton, Levi's, Bata, Arrow. Snowhite, Square. Saks, Marks & Spencer, .1C Penny, Macy. Gap, Toys 'R' Us, Benetton, Circuit City. -

Specialty chains

Chain stores focusing on a brand or product category Upgraded mom and pop stores selling branded general merchandise

Upscale multi-brand

Source: ET Intelligence Group 2003 Annexure 2 S.No 1 2 3 4 5 6 7 8 Mean 4.23 4.66 4.68 4.78 4.8 5.63 7.07 7.76 Imp.Index 2.12 1.98 1.66 1.51 1.60 0.81 0.15 0.02 Store FABMALL FOODWORLD SUBHIKSHA SUN 2 MON FOODBAZAAR RELIANCE NILGIRI NAMDHARI

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Does Firm Size Influence Profitability: Evidence from Indian firms112

Ms. Kesha Parmar113 Prof. Prashant Kulkarni114 Prof. Anantha Murthy N.K.115 Conventional wisdom suggests economies of scale influence profitability. However past studies have indicated mixed results in various sectors. Our study examines the linkages between economies of scale and firm profitability in Indian context. The financial data of Indian firms is analyzed using multiple regression models incorporating various firm level variables to test the relationships. We hypothesize firm size influence profitability and hence larger firms have an advantage. Key words: Firm size, Profitability, Asset-Profitability relationship, Economies of scale and profitability Large firms traditionally seem to have an advantage over the smaller firms. Translated into performance, it would imply the impact of size on the firm profitability. In an era where reported earnings are subject to decisions by outsiders and managers and investor decisions influenced by projected returns, this could serve as an interesting insight. Investor expectations often drive stock prices and in turn are influences by the firms projected profits. A firms performance can be measured by its profit rate, ROA and stability of market share amongst others. Some of these alternative measures of performance are found related to the firm size. The Law of proportionate effect (Gibrats Law) (1931) depicts that firms growth is independent of its size. Baumol (1959) argues that rate of return increases with the size of firm. Empirical investigations of relationship between firm size and profitability have varying results. Some are positive and some are negative. So therefore it is imperative to study the impact of firm size on profitability of firm in Indian context. Moreover, question arises that do firm size influence profitability in Indian context. With little research focusing on this aspect we concentrate our study towards this end. Our objective can be summarizes as follows: Impact of firm size on profitability of firm Does firm size prove advantageous to Firm

This paper is updated version of the paper titled same presented at AIMS International Conference IIM Ahmedabad, January 2011 113 Researcher and alumnus of IBA Bangalore 114 Asst. Professor, Economics and Public Policy, IBA Bangalore 115 Faculty, Quantitative Methods and Operations Research Stalking Theory: View through the Prism of Real life Practice 190 | P a g e

112

To know the linkage between the other financial economics of scale and firm size in Indian context.

Literature Survey Baumol (1959) finds that large firms besides having all the options of the small firms are also able to ensure that their investment can be directed towards activities creating scale economies thus excluding the smaller firms. Hall and Weiss (1967) claim the outcome of this hypothesis would be to indicate the presence of higher rate of returns in the larger industries even in the long run and in the absence of barriers to entry other than the ones directly associated with availability of capital. Alchians proposition (1965) points to theory of managerial utility maximization. The separation of ownership and management increases with firm size making large rms, potentially susceptible to managerial utility maximization than smaller rms. This serves towards a framework indicating a negative relationship between rm size and profitability. Further it talks about a threshold size, once reached, might further enhance the degree of separation between ownership and management for additional increase in the size of the firm. These arguments suggest that the relationship between rm size and prot can become negative beyond the threshold rm size (Amato and Wilder (1985)) Gibrats law implies that with a random growth process, the expected growth rate is independent of a firms size and other identifiable firm and industry characteristics. This has been the basis for studies on the impact of the firm size on the growth rate of a firm. Studies starting from Simon (1955) Gibrats law have tried to explain the firm size-distribution of the large firms in the United States. Empirical evidence of the Gibrats law so far seem to suggest no clear conclusions either way. Hymer and Pashigian (1962), Mansfield (1962), have tried to empirically validate Gibrats Law. Lindsey (1981) and Hall and Weiss (1967), show that growth rate does significantly determine protability. The former explained the change in profit on account change in demand or cost attributing it to growth of firm assets. Gale (1972), and Shepherd (1972) and Punnose (2008) too reach similar conclusions indicating the higher levels of profits for large sized firms. Marshall (1961) and Marcus (1969) argue otherwise. Their findings indicate that larger firms experience lower profit rates accounting it to the diminishing returns to the fixed factors of production. Similarly, Haines (1970) too observe negative correlation between firm size and profit rate in the case of US firms. Evans (1987) finds an inverse relationship between firm size and growth rate. Few studies point out the importance of reaping the advantage of scale in production and process and marketing to leverage economies of scale in terms of higher profit levels. In some studies like Binks and Ennew (1996), Carpenter and Petersen (2002), and Beck et. al. (2005)], we find the conclusion pointing out the positive effect of profit on growth being more pronounced for the smaller firms than the larger ones. Empirical evidence suggests the profit rates of firms can persist over time, and moreover, increasing levels of profits help firm grow faster.
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Research Framework Based on past studies, the current paper measures the impact of firm size on profitability using assets as a proxy for firm size and PAT as proxy for profitability. Sales too have been found to influence PAT. It is also observed that leverage and advertising having an impact on profitability. We therefore frame the study controlling for the impact of sales, leverage (measured by D/E ratio) and advertising intensity (Advertising to Sales ratio). The study is on Indian firms. The data for the Indian firms is obtained from CMIE-Prowess for the time period 2000-01 to 2009-10. The initial sample consisted of 310 firms. Accounting for missing data (data for firms not available for all periods), we finally arrive at a sample size of 105 firms. The firms belong to diverse sectors. Since the study is exploratory, we do not go into a sector wise analysis and restrict ourselves to macro perspective of linkages. We frame the following identity linking the economies of scale and profitability. Profitability =f ( Assets, Sales, D/E ratio, Ad intensity) The Multiple Regression model To Study the degree level of the impact of firm value towards the profitability we can consider the multiple regression model as Y= b0+ b1x1+b2x2+b3X3+b4X4+ Error Where b0: constant b1, b2, b3 are regression coefficients and Y= PAT (measured in Values Rs. Crores) X1=Assets of the companies (Rs. Crores). X2: Sales in Rs. Crores X3: D/E ratio X4: Ad Intensity. (ratio of advertising expenditure to sales) This generates the following hypothesis Ho: Firm size is independent of profitability. In other words firm size does not influence the profits. Ha: Firm size influences the profitability of the firm.

Results and Analysis

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We try to capture the trend in the firms profits and assets in a graph (view Figure I- II). These indicate firm profile is similar. Figure I- Asset Profile of Sample firms

ASSETS
120000 100000 C R O R E 80000 60000 40000 20000 0 0 20 40 60 80 100 120 ASSETS

Note: X axis represents various firms and Y-axis represents the assets in crores

Figure II- Sales Profile of sample firms

SALES
100000 C R O R E 80000 60000 40000 20000 0 0 20 40 60 80 100 120 SALES

Note: X axis represents various firms and Y-axis represents the assets in crores

To test the relationship among the observed variables, we run the model on SPSS and present the correlation matrix among the independent variables below

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Table-I Assets Assets Sales D/E- Ratio Adv Intensity 1 .558** -0.017 0.057 Sales .558** 1 -0.135 -0.052 D/ERatio -0.017 -0.135 1 0.165 Adv Intensity 0.057 -0.052 0.165 1

**. Correlation is significant at the 0.01 level (2-tailed).

High correlation is indicated between sales and assets. Leverage and assets see a weak negative correlation. Interestingly advertising intensity and sales too see a weak negative correlation. The correlation coefficient shows that there is a strong positive correlation indicating that the firm value parameters influencing positive affinity towards the profitability. Here it is observed that the independent variables assets and sales are even though strongly correlated, it is not causing a serious problem of multi collinearity since the (R2 value) coefficient of determination value is very high indicates that by 73.2% variation in the profitability can be explained by the independent variables and 22.8% is due to the other uncontrolled factors and the least estimate of standard error is 739.608 crores (Table II). Table-II Model Summary Model Correlation Co-efficient .855 Co-efficient of Adjusted Determination Square 0.732 0.721 R Std. Error of the Estimate 739.608

ANOVA shows the regression model is statistically in testing the hypothetical part. Whereas when it comes to the components of the model, the assets and sales shows the statistical significant and where as the other controlled variables shows insignificant (Table III). Table-III Sample size 105 F-value 68.217 Constant -0.177 Assets 11.763 Sales 2.662 D/E Ratio -1.771 Ad. Intensity -1.217

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(0.000)**

(0.860)

(0.000)**

(0.009)*

(0.080)

(0.226)

** indicates significant at 1% los.

* indicates significant at 5% los

We find evidence that controlling for sales, leverage and ad intensity, firm size does influence profitability of the firm. To test our hypothesis further, we ran the model sector wise. Based on the availability of data, and the relative importance of sectors, we chose to run the model on telecommunication firms and oil and natural gas firms. We present the results below in Table IV Table IV- Sector wise analysis Sector oil and petroleum Communication Observ ations 10 11 R Square 0.940974 0.958672 Adjusted R Standard Square Error 0.893752338 1180.595978 0.931120559 448.819806 Correlation Coefficients 0.970037897 0.979118142

Observ Sector ations F Value Constant Assets D/E Sales ADVT oil and petroleum 10 19.92694 0.853183057 0.004770385 0.561701417 0.967711 0.599931 telecommunication 11 34.7953 0.122893034 0.029150145 0.996195969 0.002933 0.126717 Analyzing the results, sector wise, we find assets influence PAT for both the sectors (for telecom at 5% LOS). Sales have an impact for telecom but not in the case of oil and petroleum. The correlation of >.9 in both the cases and coupled with high R2 indicates the reliability of the model Conclusions Testing the conventional wisdom of large firms gaining in terms of profits, we do find size is an important determinant of profits. It has been argued that larger firms in an industry are believed to be relatively more efficient than small firms. An argument in its favor was the motivation of small firms to aspire to be large ones. Larger firms reap economies of scale, thus lowering costs and also are in position to gain market control. In a business environment fraught with risks and uncertainties, larger firms seem to cope with it better given the access to resources and better management skills. However we also find both large and small firms co-existing. Studies in retail for example have shown that large firms do not have a statistically significant advantage over smaller firms. Our study points out to an advantage of larger firms as visualized in the impact of assets over profitability. The study is an exploratory step and should pave way for further unraveling of dynamics of asset intensive firms impacting various firm performance measures like PAT and further the measures shareholders are interested in like the ROE.

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References 1. Anindita Kundu, et al, Advertising and Firm Value: Mapping the Relationship between Advertising, Profitability and Business Strategy in India, in Changing Ideas in Strategy (eds: Arun Sinha), Narosa Publishing , November 2010 2. Timothy Burson, Effects of firm size on profit rates in financial services, Journal of Economics and Economics Education Research, January 2007 3. Kaen, Fred R. and Baumann, Hans D., Firm Size, Employees and Profitability in U.S. Manufacturing Industries (January 13, 2003). Available at SSRN: http://ssrn.com/abstract=382402 or doi:10.2139/ssrn.382402 4. Darko Tipuric, Is there as relationship between firm size and profitability, Zagreb International Review of Economics and Business(Special Conference Issue), December 2002 5. P.Ganeshan, Determinants of profits and profitability of public sector banks in India: A profit function approach, Journal of Financial Management and Analysis, 2001 6. J.T. MacDonald, Determinants of firm profitability in Australian manufacturing, Economic Record, 1999 7. Richard Pomfret, Daniel Shapiro, (1993) "Firm Size, Diversification, and Profitability of Large Corporations in Canada", Journal of Economic Studies, Vol. 7 Iss: 3, pp.140 - 150 8. D.R.Kamerschen, Influence of ownership and control on profit rates, American Economic Review, 1968 9. Hall and Weiss, Firm size and profitability, The Review of Economics and Statistics, 1967 10. J.S.Bain, Relation of profit rate to industry concentration: Study of US manufacturing, Quarterly Journal of Economics, 1951

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Does Budgetary Announcements influence Stock Market Movements?116

Prashant Kulkarni117 118 Anantha Murthy N.K. Annual budget presented on the last day of February can be described as the single most economic event of the year. The contours of the government policy on the national economy are outlined on that day. This naturally makes the stock markets eagerly await the Union Budget. Even though the undertones may be bullish, any further movement of bourses gets determined by the actions the government takes in the Union Budget. The budget, being the financial statement of the government, sets the pace and the tone for the economic policies of the government over the next year. The impact of the budget in recent years is often being measured on the reaction of the stock market. If the reaction is favorable, pundits usually hail the budget as reform friendly and other sobriquets. On the other hand, a negative reaction is seen as an indictment of the policies of the finance minister. Keeping the twin fold objective of measuring the relationship between the budget and the stock market and further the impact of the budgetary announcement on the stock we design this study. After a literature survey, we proceed to test the impact of the budget on the stock market. We study the reaction of the stock markets to the budgets. There is a possibility that the reaction could be a knee jerk one and the real impact is measured in the stock market activities after the budget. Statistical tests are used towards testing these objectives. Literature Survey Nageswara Rao (1997) found that budgets increased the volatility of stock prices of the market portfolio. However, he also found that the credit policy announcements did not influence stock price behaviour. The slack season credit policy, (i.e., effective from April to September each year) coincide with the union budget and the Exim policy and was believed to be the reason for the nullification of the impact. No explanation was however given to the lack of response when the busy season credit policy (i.e., effective from October to March) announced during the SeptemberOctober period every year. Fair (2002) studied the effect of major events (both macroeconomic and political) on stock prices on a one-to-five-minute time-scale. His aim was to match particular events to significant changes in stock prices by focusing on the reaction of NYSE stocks over the period from April, 1982 to October, 1999. A total of 1,159 large (more than 0.75% in absolute value) 1-minute, 2-minute, 3-minute, 4-minute and 5-minute price changes were observed. Out of them, 220 price changes were identified to be significant. The daily percent changes were regressed on the anticipated part of the announcement and the components were tested for statistical significance. The study found out sixty-nine events that led to
116 117

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significant price changes. But a large number of changes had no obvious reasons at all. Also many events were found not to have any impact at all. So Fair concludes that determining the extent and direction of stock price changes in response to a particular event is a highly complicated exercise. Al-Khazali (2003) examined the short- and long-term relationships between stock prices, inflation and economic output in twenty-one emerging capital markets of Asia and North Africa from January 1980 to December 2001. The study found all the four variables (i.e., expected real stock returns, expected inflation, expected real economic activity, and inflation variability) to be stationary for all the countries. The Ordinary Least Squares (OLS) results showed a negative relationship between expected inflation and stock returns in the short-term for all countries except Malaysia. The inclusion of expected economic activity did not alter the outcome. However, in the long-term, the co-integration tests show a positive relationship among stock returns, CPI and Index of Industrial Production (IIP). So combining the findings, it can be said that stocks act as an inflation-hedge in the long-term but not in the short-term. Harvinder Kaur (2004)10 in her paper, studied the extent and direction of volatility on Indian stock prices over the period 1990 to 2000. This was a purely descriptive study of volatile movements in BSEs Sensex and NSEs Nifty. A total of three types of volatility were looked intovolatility of daily returns in a year, volatility of daily returns in a month and volatility of monthly returns in a year. Annualised volatility of daily returns in a year was found to be the highest in 1992, followed by that in 2000 and 1999 respectively. In case of volatility of daily returns in a month, April was found to be the most volatile month followed by March and February. The researcher has attributed this to the possible effect of budget that is usually presented in the month of February. Summing up, it was found that 1992 was the most volatile year, and April was the most volatile month during the research period. Incidentally, the Harshad Mehta scam was unearthed on 29th April, 1992. The gradually declining levels of volatility afterwards in spite of the new highs of Sensex and Nifty goes on to prove the effectiveness of new regulatory measures brought in after 1992. Shin(2005) examined the relationship between return and risk in a number of emerging stock markets. The main contribution of this study is to present more reliable evidence on the relationship between stock market volatility and returns in emerging stock market by exploiting a recent advance in non parametric modeling of conditional variance. This Study employed both a parametric and semi parametric GARCH model for the purpose of estimation and inference. The data for this study covers 14 relatively well-established emerging which have stock price index series available from the International Finance Corporation (IFC) emerging market data base. The findings of this study suggest fundamental differences between emerging markets and developed markets. Investors in emerging markets are often compensated for bearing relevant local market risk, while investors in developed markets are often penalized by bearing irrelevant local market risk.

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METHODOLOGY Sources of data: The present study is based on secondary data collected from the BSE SENSEX Database. Period of study: The study covers a period of seven years from 2000-2001 to 2006-2007. Statistical Tools: The following statistical tools are used to analyze the data collected. 1. 2. 3. 4. Union Budgets: Correlation analysis Regression analysis F test Analysis of variance

Table 1 shows the Union Budget and BSE Sensex. We study the movements of the Indian Stock Market Index around all Budget dates in this period. There are eight budgets in this dataset. We study the Union Budget and its impact on stock market, using the stock market as an information processing tool which can give useful insights into Union Budgets. Table 1 Union Budget and BSE Sensex from 2000-2001 to 2006-2007 Year 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 Date of Budget 28th Feb 28th Feb 28th Feb 3rd Feb(Interim) 8th July(Final) 28th Feb 28th Feb 28th Feb Sensex 5,739.11 4,158.71 3,636.71 3,289.13 5,668.22 4,907.95 6,649.10 10,339.48 Government NDA NDA NDA NDA UPA UPA UPA UPA Finance Minister Yeshwanth sinha Yeshwanth sinha Jeswanth Singh Jeswanth Singh Chidambaram.P Chidambaram.P Chidambaram.P Chidambaram.P

Table 2 showing Average BSE sensex for Previous Budget period, Budget period And After Budget period Years 2000 2001 2002 2003 PBP 5421.82 4149.556 3353.495 3333.198 BP 5689.106 4314.69 3526.059 3280.471 ABP 5301.985 3615.809 3587.657 3161.998
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2004 2005 2006 Here

4826.335 6314.929 9531.646 PBP- Previous to Budget period. BP- Budget Period. ABP- After Budget period.

4965.777 6597.06 10088.66

5146.933 6686.708 10798.12

Comparision of Sensex values from 2000-2006

Mean sensex vaules

12000 10000 8000 6000 4000 2000 0 2000 2001 2002 2003 years 2004 2005 2006 PBP BP ABP

Table 3 Correlation matrix Sensex in Pre-Budget period, Budget period and After budget period PBP BP ABP PBP 1.0000 1.0000 0.9920 BP 1.0000 1.0000 0.9920 ABP 0.9920 0.9920 1.0000

It is understood from the correlation matrix that all the sensexes in budget periods have significant relationship with sensexes in other budget periods. Correlation coefficient between before the budget period and the budget period is 1.0000 which is slightly higher than the correlation coefficient between the budget period and after budget period. So it signifies that there is an impact of budget over BSE sensex.

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Testing of Hypothesis: To observe the impact of the budget announcements on the BSE Sensex, The following hypotheses are framed. H0: There is an impact of budget on the stock market sensex. H1: There is no impact of Budget on the stock market sensex. Table 4 Analysis of Variance for budget announcements on the BSE Sensex Source of Variation Between periods Within periods Total Degrees Freedom 2 18 20 of Sum of squares 201999.162 103270682.588 103472681.750 Mean sum of Computed Ferrors Statistic value 100999.581 0.018 5737260.144

The analysis of variance Table 4 indicates that the hypothesis is accepted. It is concluded that there is an impact of budget on stock market sensex.

Table 5 Market Capitalization of BSE from 2000-2006: Year Date of Budget Market Capitalization (in Crores) Before Budget Budget After budget period period period 927383 1029257 912842 736631 716173 571553 544397 596716 612224 611472 619873 572198 734389 1206854 1661532 2616194 775996 1196221 1730941 2695543 905193 1201207 1698428 3022191

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

28th Feb 28th Feb 28th Feb 3rd Feb(Interim) 8th July(Final) 28th Feb 28th Feb 28th Feb

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Market capitilization in crores from 2000-2006

3500000

turnover in crores

3000000 2500000 2000000 1500000 1000000 500000 0 2000- 20012001 2002 2002- 20032003 2004 years 2004- 20052005 2006 20062007 BBP BP ABP

Table 6 Correlation Matrix: Market Capitalisation BBP BP ABP BBP 1.000 0.998 0.989 BP 0.998 1.000 0.991 ABP 0.989 0.991 1.000

It is concluded from the above table correlation coefficient between before the budget period and the budget period is 0.998 which is slightly higher than the correlation coefficient between the budget period and after budget period. So it signifies that there is an impact of budget on Market capitalization of BSE. H0: There is an impact of Union budget on market capitalization of stock market H1: There is no impact of Union budget on market capitalization of stock market Table 7 Analysis of Variance for market capitalization of stock market Source Between periods Within period. Total Dof 2 18 20 SS 17997433920.667 MSS 8998716960.333 F-Value

10902572554167.100 605698475231.508 0.015 10920569988087.800

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The analysis of variance table 7 shows that the hypothesis is accepted. It is inferred that there is an impact of Union budget on market capitalization of stock market. Table 8 Correlation and Regression Analysis: Correlation coefficient 0.9920 Co-efficient determination 0.9841 of Std error 366.3074

It is concluded from the above table that there exists an almost perfect positive correlation between the sensex values between the budget period and the after budget period. Coefficient of determination shows the 98.41% of impact of budget on sensex values. Conclusions It is concluded based on the analysis that there is an impact of the budgetary announcements on the stock market but the markets return to normal within a period of time. Volatility seems to be at the highest during February the budget period. This could be in anticipation of the budget and the volatility in March is the aftereffects of the budget. The budgetary announcements also have an impact on the capitalization in the market. References 1. Arindam Gupta and Debashis Kundu, Reaction of Indian Stock Prices to Selected Economic and Political events A Study from 1991 to 2005, in (eds) Advances in Business and Finance, ICFAI University Press, 2006 2. S.V.D. Nageswara Rao, Stock Returns and Macro Variables: The Indian Evidence Presentation at National Conference on Finance and Economics, ICFAI Business School Bangalore, November 2004 3. Union Budget documents, www.finmin.nic.in 4. www.bseindia.com

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Globalization and Indian Companies119

Mr. Chidambara S.T120 Prof. Anantha Murthy N.K121 Prof. Prashant Kulkarni122 The dynamic process which globalization has unleashed presents opportunities as well as challenges to these organizations, particularly the local players in the emerging economies. The three-pronged aspects of technological growth, globalization and consumer evolution have brought forth a new dimension to the competitive dynamics of business today with tremendous implications for the local companies. While many have perished, some local players have not only withstood the onslaught but have emerged triumphant. In many instances, survival often depends on how companies adapt to the fast changing situations. Forced to be on their feet each and every moment, these organizations seem to have certain competitive characteristics that distinguish them from the rest. We seek to explore these qualities that have made Indian companies emerge on the world stage. Globalization refers to a process and not a state of being. More accurately it can be described as a move or a series of moves from individuals, businesses and governments alike towards what may be described as a global economy. These moves are often responses to impersonal market forces that hover around the business, society and governments alike thus making it a reactive process than a conscious originator of global integration. . These responses and interactions can take the shape of various forms including defending your turf through competitive means or governmental regulation and in some cases taking the battle overseas. With numerous arguments for and against it, there seems to be no consensus on how globalization is going to shape up the future. On the one hand we see the back offices in Bangalore handling the work in US, the Indian professionals striking gold mine literally to say, in the Silicon Valley and we also see the protests in Seattle and Cancun against the opening up of trade. However, it needs no reiteration to state that companies have to face globalization irrespective of the consequences. Few firms have perished in the onslaught but few have emerged triumphant in the process. Moreover the winners and losers are spread across geographical and functional domains. The question however remains whether the Indian firms have really gone global. It is this question that serves as the focus of the present study. We use the case study methodology for analyzing the companys strategies as they go about facing the new environment. These case studies rely on secondary data collected from
119 120

This paper is updated version of the working paper titled the same Researcher with a leading FMCG firm in Ahmedabad 121 Faculty, Quantitative Methods and Operations Research 122 Asst. Professor, Economics and Public Policy, IBA Bangalore Stalking Theory: View through the Prism of Real life Practice 204 | P a g e

different magazines, journals newspapers and of course the ever growing internet. We further analyze the financial statements of these firms to measure the extent of globalization. We plot forex earnings as percentage of sales with other financial indicators like Return on Equity (RoE), Return on Capital Employed (RoCE), Return on Assets (RoA), Earnings per Share (EPS), Price-Earnings (PE) Ratio and Price-Book Value (PBV) Ratio. How Companies Approach Globalization The pace of globalization is not uniform. The opening up of the economy consequent to globalization resulted in the entry of Multinational Corporations (MNCs) entering in to these markets which were previously unexplored. With access to deep financial reserves, greater access to technology, experienced management in tackling the competition and advanced marketing strategy, MNCs had a substantial advantage over their local counterparts. The global market is strongly driven by the demands existing at various levels like software even though customers are across the globe. The movement from the national stage to the global level necessitates a lot of ground work Typically companies go through the process of globalization in distinct stages. In the pre liberalization era many of these domestic firms grew under government protection and were virtual monopolies. The first stage saw many of these firms concentrating on domestic markets while strengthening their core expertise. The next step would see companies orienting themselves to the global market though the concentration overseas would still be a small percentage of total operations. With the passage of time, this concentration on overseas market would increase with possible setting of manufacturing facilities overseas. The next step would see the integration of these processes with the company combining the global efficiency with the local knowledge and market structure to reap the benefits. Further internationalization of the operations is fast becoming a norm. Tony Frost and Niraj Dawar (1999) draw upon the experiences of several companies in the emerging markets to create a matrix of how these local companies have responded to the global forces. Their model rests on the presumption that two forces shape up the firms strategy. The first is the pressures on the firm to globalize and the second is the nature of the firms assets. They argue that where pressures to globalize are low and the nature of assets is customized to home market, companies are better off in concentrating on certain niche segments where MNCs are traditionally weak. They cite the example of Bajaj Auto which has successfully managed to hold on to its market share in the India two wheeler market. They contend that if the firms assets are such that can be transferred abroad they should do it even they may not be under great pressure to globalize. The example of Asian Paints is cited in this instance. Some companies whose assets being customized to home market but are facing stiff competition may not have alternative but to exit the market or switch over to some market segment. In the final matrix are those companies which have taken advantage of transferability of assets in the growing pressures of globalization to emerge as major players themselves. Sundaram Fasteners is cited by the authors to prove their case.

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Indian firms have taken different routes towards meeting the challenges of globalization. The industry took the lead were the Information Technology (IT), Pharmaceutical and Manufacturing. Even though IT has been depending on the overseas market, the pharmaceutical industry moved is expanding overseas after a consolidation in the domestic markets. The manufacturing sector too has moved global with a number of companies in the automobiles, auto components manufacturing, paper, steel, oil and gas and Metals expanding overseas. Each specific sector has its own compulsions of going global especially to meet the market expectations. For product based companies which are going global being part of local culture and taste becomes an important aspect of the value chain. The manufacturing sector is facing the issue of the cultural differences especially in terms of co-coordinating across countries and maintaining an efficient supply chain management. The natural resources companies are facing a tough competition to acquire suitable resources and meet the local environmental challenges which are in synchronization with global policies. The drive towards going global has manifested in terms of establishing market base, acquiring organization, joint ventures and a means of organic growth. The experience as till now as been fruitful with various players having their own learning and bringing a unique model of adapting to global strategies. The race in the competition does not only exist in the new economy companies but also in the traditional brick and mortar industries like manufacturing. The business groups which these companies are part of also determine the nature of the strategies of the firm. An example could be of the Tatas wherein the push for globalization has been from the group as a whole rather than an individual firms decision. The going global phenomenon to meet challenges of the supply chain management has been displayed by the Bharat Forge and Mahindra and Mahindra. Hindalco too has been looking for greener pastures abroad and has acquired natural resource deposits. Incidentally Aditya Birla group, of which it forms a part of, went on global expansion decades ago when such a thing was unheard of in India. Hindalco has acquired oil mines in Australia which integrates its value chain. ONGC and reliance have acquired oil basins in developing countries. Ratan Tata believes that global companies are differentiated by their strong global position global assets, capabilities, brands and their relative resilience to shocks and even to the business cycle. He adds further that a companys aim to go global is not just through geographical expansion but depends on how it becomes globally competitive, leverage global opportunities and has the required global capabilities that make it global. In the last six months of 2007, 213 Indian companies entered into M & A worth $ 44 billion dollars. Even the global share is small compared to the acquisition happening. The current year old economy sectors have dominated M & A. Most companies are having less than $ 50 million and 88.6 % were under $ 100 million. Between 2005 and 2007 1.3% of the transactions have crossed the billion dollar mark. Most companies have preferred familiar territory like North America and Europe. Some of the companies have also acquired unfamiliar territory depending on the needs and demands of the organization.

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Literature Survey Vernon (1979) believed that product life cycle explanation of entry was not a sufficient condition for entry into foreign markets. This was even true for companies that had a long standing and exploited the learning curve in the industry. It is the firm which reconfigures its activities to suit its needs that determines the competitive advantage. Bartlett and Goshal (1988) identify performance of specific activities at right place and at right scale, market access and customer responsive requiring localization of production or service dimensions besides leveraging the knowledge base as the key factors in the internationalization of the firm. In first phase of entry of the Western firms into markets like India and China, they were expecting vast sections of society flocking to their goods starved as it is by lack of Western products and catered to homemade inferior products. This view which Prahalad and Lieberthal call "corporate imperialism," became a limitation in their understanding and vision of the Eastern markets. This distorted the operating, marketing, and distribution decisions multinationals made in serving developing countries. They have missed, as a result, the very real opportunity to reach much larger markets further down the socioeconomic pyramid. Succeeding in these broader markets requires companies to spend time building a deep and unbiased understanding of the unique characteristics and needs of developing countries and their peoples. Schrioff and Arnold (2003) argue the need to separate features of the brand and product. They place design, aesthetics and brand name and other intangibles as brand standardization features. The other framework in the matrix is placing the product standardization features. Low standardization in both categories creates what the authors call Localization. High product standardization calls for product standardization strategies. The other extreme of high brand standardization requires the companies to follow regional adaptation strategy. High scores in both areas make the company truly global. Daniel Litvin (2003) opines that modern companies find it difficult to operate overseas. This is a result of their failure to anticipate the local problems. These problems are often rooted in the socio cultural roots of the host countries. Moreover, they often view the local conditions through the prism of Western society which aggravates the problems. Pankaj Ghemavat (2004) believes that though there is a general perception that standardized products are displacing locally customized products in many categories, the evidence suggests otherwise. The process of standardization is not as fast as made out to be Wathieu, Zaltman Lien argue that global and local marketing efforts run at the opposite sides of the spectrum, ignoring the crucial aspects of consumer behavior Douglas Holt, John Quelch, Earl Taylor find that a transnational brand is the corporate brand of firms that market globally in order to leverage economies of scale and scope, according
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They believe that the consumer preferences towards the brands rests the five parameters namely quality, status, country-of-origin, citizenship, and American values. The ability of the particular brand to perform against these dimensions as compared to competition will go a long way to emerge as global brand. Ananth Raman and Watson (2004), stress the pressures of globalization leave little options to the managers other than to adopt and create more effective decision support systems besides bringing global perspectives in managing supply chains. Hansen and Nohria believe that the ability to collaborate, share knowledge and joint development of ideas will serve as the foundation for competitive advantage. This becomes imperative as the MNCs start competing against other MNCs possessing similar size, access to resources, and market penetration. Analysis Based on our analysis of the financials of the 30 companies under consideration, we arrived at the following results Table I indicates the forex earnings as percentage of net sales of various companies besides the select financial data of Indian firms. Table I- Select financial data of the firms COMPANY Infosys Wipro TCS Hindalco Tata steel Sterlite Tata Motors M&M Bajaj Auto Sundram Fasteners Forex/Sales ROA ROCE RONW EPS 93.15 35.41 73.57 28.08 91.83 30.81 28.53 10.33 14.08 35.40 47.51 6.32 21.10 36.86 48.92 18.33 21.09 11.61 29.39 23.43 22.86 21.07 P/E P/BV PBIT 2350.18 1862.09 1878.83 2122.30 4390.29 553.96 1894.55 827.44 1230.11 107.91

20.15 105.50 31.58 10.66 32.39 46.84 17.14 20.15 13.55 26.50 23.86 20.83 23.36 24.61 35.52 9.68

26.24 21.68 10.47 66.22 52.97 9.62 7.02 1.39 2.55 3.18 4.18 3.38 3.38 3.71

28.10 34.67 29.59 18.54 32.62 14.33 82.32 17.02 12.72 18.01

8.77 15.69 5.91 15.87 12.86 15.60 27.49 11.20

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Bharat Forge Suzlon Indian oil Reliance Zee Entertinemen t Grasim L&T Crompton Graves Tata Tea Apollo Ranbaxy Lupin NPIL DRL CIPLA Biocon

45.83 10.00 7.76 23.60 1.81 14.08 34.52 11.19

31.05 33.67 21.39 17.59

42.95 38.69 25.26 19.83

21.65 30.61 43.23 14.92 54.80 8.75

9.14 4.24 1.82

291.87 572.40 9146.08

53.24 12.69

2.27 10418.61

22.38

4.85

7.91 22.74 21.09 23.67 13.70 18.35 26.16 19.23 25.26 17.88 30.76 26.75

5.46 21.92 20.15 24.20 11.88 14.19 23.77 26.81 34.22 17.11 27.60 27.18

2.76 68.16 94.28 13.91 49.48 21.52 14.84 23.31 25.84 20.45 11.33 27.16 22.58 42.43 28.53 20.28 20.20 22.60 38.22 40.50 26.04 24.69 50.56 17.96

3.61 2.64 4.60 6.11 2.52 3.22 7.17 4.68 5.78 3.57 6.07 3.32

214.18 1398.84 1353.04 188.77 211.41 96.65 613.42 233.51 217.94 501.62 559.24 147.29

2.88 12.82 18.80 14.55 14.05 14.12 16.97 10.10 1.76 9.21

68.07 20.07 49.57 11.39 12.70 17.67 63.65 13.85 49.17 22.04 53.90 18.26

Source: Capitaline Databases Examining the co-relation among these variables we find that EPS and PBIT are negatively co-related with most of the other variables (Table II). Table IIForex earnings /Sales Forex earnings /Sales Co-relation table among these variables

ROA

ROCE

RONW

EPS

P/E

P/BV

PBIT

1
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ROA ROCE RONW EPS P/E P/BV PBIT

0.449647

1 1 1 -0.08782 -0.27465 1 -0.42027 1 1 1

0.364738 0.602531

0.277743 0.444632 0.900744 0.041526 0.38926 0.3278 -0.18577 -0.04961 -0.21776

0.716158 0.555907 -0.09581 0.118085

0.64362 0.595908 -0.06087

-0.09564 0.348891

-0.03676 0.350295

-0.39473 0.23992

RoE measures the investor returns. We examine the relationship between RoE and Forex Earnings as percentage of sales (Exhibit I). Exhibit I- Return on Equity vs. Forex as % of Sales

TCS Bh.F Suzlon NPIL Tata Motors Crompton TS L&T Hindalco Apollo Sterlite Tata Tea Zee Ent Wipro Cipla Lupin SF RIL DRL Biocon Ranbaxy
Infosys

ROE

IOC

M&M Grasim BAL

Forex/ Sales

Infosys is not able to generate RoE in proportion to the earnings from overseas services. TCS scores high on this count. With IT and pharmaceutical firms showing the way, it may not be long before the traditional manufacturing sector catches with up the rest. Suzlon, Hindalco and Mahindra and Mahindra may be the next big stars. Indian Oil concentrates on the
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domestic markets for obvious reasons. It seems Tata Tea has not consolidated its overseas operations as reflected by the low score on Forex/Sales Secondly we analyze the relation between forex as percentage of net sales and the return on capital employed. Further the relation is determined between forex earnings and Return on Assets (Exhibit II). Exhibit II- Return on Assets vs. Forex as % of Sales

infosys tata steel sterlite w ipro suzlon cipla TCS

ROA

NPIL tata mot Baj Auto M&M grasim CGIL SF IOC Apollo tata tea hindalco Zee

biocon

ranbaxy

RIL

Lupin bharat forge sterlite

DRL

Forex/Sales

Source data: Capitaline databases It is evident from the above matrix that the IT firms are able to generate high ROA which can be attributed in part to their dependence on overseas sales. Pharmaceutical companies too are similar position. Interestingly the old economy firms generate high RoA in spite of dependence on domestic markets for their exports. It is likely to change with companies like Tata Steel consolidate their overseas subsidiaries and Suzlon gains market power. Companies like Bharat Forge and Sterlite have sizeable component of their sales overseas but do not seem to generate higher RoA. We also try to measure the relationships between forex component of sales with the valuation measures like PE ratio, PBV ratio and EPS.

Exhibit III- Forex as % of Sales Vs ROCE

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ROCE

12 7 23 16 13 20 19 15 8 9 5 18 10 17 4 14 6 22 11 25 26 21

1 24

Forex/Sales

Source data: Capitaline databases Note:(1: Infosys;2:Wipro;3:TCS;4:Hindalco; 5:Tata Steel; 6:Sterlite; 7:Tata Motors;8:Mahindra and Mahindra;9:Bajaj Auto;10:Sundaram Fasteners;11:Bharat Forge;12:Suzlon;13:Indian Oil;14:Reliance;15:Zee Entertainment;16:Grasim Industries;17:Larsen and Tubro;18:Crompton Greaves;19:Tata Tea;20:Apollo Hospitals;21:Ranbaxy Laboratories; 22:Lupin;23:Nicholas Piramal India Limited;24:Dr.Reddys Laboratories;25:Cipla;26:Biocon) The picture here too is similar. IT and pharma firms are top of the list (Exhibit III). Greater capital has to be employed to generate greater returns and these are the firms that are generating good returns from the overseas component in relation to the capital invested. There is a concentration of other firms in the border with the 2nd and 3rd quadrants. An inference that could be drawn is that a few firms have moved away from the rest with the marathon being given as an analogy.

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Exhibit IV- Forex/ Sales- EPS Analysis

Infosys Grasim

BAL

EPS

Hindalco IOL TS L&T Suzlon M&M Tata Motors Apollo NPIL Tata tea Crompton SF Zee Ent Sterlite Bh.F Lupin Cipla RIL Biocon DRL

Ranbaxy

Wipro

TCS

Forex/Sales

Source data: Capitaline databases Infosys earns the highest EPS which seems a contrast to the low RoE generated in relation to the forex revenue component of its services. Most of the firms perform rather poorly on this score (Exhibit IV). Exhibit V- Forex/Sales-PE Ratio

15

P/E Ratio

6 20 23 7 16 13 8 12 9 18 17 19 10 4 5 14 11 25 22 26

24

21

Forex/Sales

Source data: Capitaline databases

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Note: (1: Infosys; 2:Wipro; 3:TCS; 4:Hindalco; 5:Tata Steel; 6:Sterlite; 7:Tata Motors; 8:Mahindra and Mahindra; 9:Bajaj Auto; 10:Sundaram Fasteners; 11:Bharat Forge; 12:Suzlon; 13:Indian Oil; 14:Reliance; 15:Zee Entertainment; 16:Grasim Industries; 17:Larsen and Tubro; 18:Crompton Greaves; 19:Tata Tea; 20:Apollo Hospitals; 21:Ranbaxy Laboratories; 22:Lupin; 23:Nicholas Piramal India Limited; 24:Dr.Reddys Laboratories; 25:Cipla; 26:Biocon) We do not find much difference in this analysis too with investor perceptions running highly positive about the IT and pharmaceutical sectors (Exhibit V). Not surprisingly Indian investors are not too optimistic about the manufacturing firms most of whom perform below par. This results in cluttering of these firms around one point while the new economy firms move to the forefront. Market reaction drives the PE ratio and to that extent we can visualize a rather pessimistic opinion about the manufacturing sector. Exhibit VI- Forex/Sales- PBV Ratio

Infosys w ipro bharat forge TCS

ranbaxy

P/BV

CGIL NPIL

cipla

lupin L&T tata motor Apollo M&M Zee baj auto tata steel grasim tata tea IOC hindalco suzlon Sund fast sterlite RIL biocon DRL

Forex/Sales

Source data: Capitaline databases The matrix indicates that IT firms are the ones which have high PBV ratio in relation to their overseas component of their sales (Exhibit VI). Analyzing these factors, we can observe that IT and pharmaceutical companies dominate the top spots. This is not surprising given the high amount of exposure they have overseas.

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Exhibit VII- Forex/Sales- EBIT Analysis

14

13

EBIT

7 16 8 20 9 17

1 2 3 6 25 22 26 24 21

12 18 19 15 23

10

11

Forex/Sales

Source data: Capitaline databases Note: (1: Infosys; 2:Wipro; 3:TCS; 4:Hindalco; 5:Tata Steel; 6:Sterlite; 7:Tata Motors; 8:Mahindra and Mahindra; 9:Bajaj Auto; 10:Sundaram Fasteners; 11:Bharat Forge; 12:Suzlon; 13:Indian Oil; 14:Reliance; 15:Zee Entertainment; 16:Grasim Industries; 17:Larsen and Tubro; 18:Crompton Greaves; 19:Tata Tea; 20:Apollo Hospitals; 21:Ranbaxy Laboratories; 22:Lupin; 23:Nicholas Piramal India Limited; 24:Dr.Reddys Laboratories; 25:Cipla; 26:Biocon) In an interesting observation almost all firms have the same level of EBIT-Forex/Sales relationship (Exhibit VII). An indicator is that the impact of forex earnings on EBIT is similar. The only exception seems to be Reliance and Indian Oil which have high EBIT figures but lower forex earnings. The case of Indian Oil as seen above is due to its concentration on domestic markets as public sector firm.

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Inferences The Indian organization has the capability to go global is not only driven by acquiring companies but by being of part global value chain. This results in getting increased access to markets but there is a risk of understanding and meeting the regulations in global market. The organizations are more vulnerable to downturn in the global markets. Organizations that are going global have different vision in perspective and needs to be synchronized with organizational capability. Some of the organizations are going global by displaying its uniqueness in terms of being pioneer or integrating across the value chain to be a prominent player. Many of the Indian companies have adapted the strategies to achieve the scale and deploy appropriate growth strategies. The current Indian scenario of going global is not only facilitated by unique business strengths but strong entrepreneurship that exists in India business empires. The strong vision of the top management and being part of the global play also has made them to take risk. Dedicated team is involved onshore in making drive possible in understanding the culture and integrates them into business. Innovation is a key part of the organization models which they have integrated them into current system to keep going in the changing business environment. Major Indian companies have developed their unique capabilities by the experience and expertise they have developed over a period of time. On the surface it looks the common phenomenon being adapted for going global is the M & A route. At the same time it has developed its core competency and displayed entrepreneurial capability of handling it. Some of the common unique capabilities which Indian organization have adapted for going global are o Moving beyond low cost resources provider and become a value generator. o Incorporating the lessons learned from local markets and into global arena o Managing the supply chain management effectively o Adapting globalization has a part of organizational growth o Innovation to be a part of organizational culture to grow Automobile firms are moving global but the pace is slightly lower and it may be sometime before these catch up with the global leaders. Automobile industry structure is no longer national in nature and Indian companies if they have any chance make themselves a name in the market have to start now. In fact the process has already started with Mahindra and Mahindra and Bajaj Auto increasing their foreign footprints. The acquisition of Daewoo by Tata Motors has been one of the key features by keeping the competitive space in the local market and also bringing the latest technology back to India. One of the major challenge Indian organization have taken is to bring indigenous vehicle by having a strong R & D establishment here. Scorpio has met with lot of success in India and now they have targeted the global market to make it part of their global portfolio. Mahindras acquisition of Jaguar and its entry

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into US market and Chinese market further support our point of Indian firms going abroad. The pharmaceutical industry has displayed its strength by showing its capability as excellent infrastructure. Indian has more than 85 plants that are approved US FDA the highest outside US. It has moved up the value chain by manufacturing bulk drugs to formulations and generics to branded sector. However, the pharma sector strategies have been mainly on challenges of achieving sales in volume and maintaining productivity besides venturing into export sales. Later some players have gone on to acquiring organizations and bringing back the formulations and enhancing the productivity through strong integration. Experience with all major pharma companies has been to slowly get into distribution network, the acquiring a manufacturing plant and then bringing a right balance between delivering product and price in the global market.

Conclusions We believe that to survive in the global environment, an organization has to reorient itself to the global needs than to stick on the local agenda. Managing a global organization would require it to align the firms characteristics to the global standards. The assets have to be leveraged to customize the client needs. The movement onto the global arena necessitates the scale and knowledge. The emphasis of the Indian economy has not only been on its infrastructure but also on the rural inclusive growth which needs to drive economy in order to sustain. The consensus among the political parties has facilitated this. The local demand of the market also made Indian organization to adapt global challenges especially to meet uncertainties in the market and achieving sustainable growth because of strong competition. The future challenge of Indian economy to move global is the drive that needs especially to move fast with competition and understand the market in order to drive locally. The past experiences of Indian firms in competing globally were hindered by the lack of financial strengths and legal restrictions in meeting in the local conditions. While it is true that structure of few industries do favor the larger ones, there are industry structures that have oriented themselves into favoring smaller players. Multinationals do bring a formidable array of resources at their disposal to overwhelm the strongest of the local players, but the local players can evolve their niches, marshal their resources smartly and emerge victorious in their domain. The organizations that are going global have different vision in perspective and needs to be synchronized with organizational capability. The globalization drive by the Indian companies combines its strength of the upcoming economy besides catering to the growing local demand. The organizations in India after being exposed to the liberalization policies are slowly moving towards global takeovers to meet strategic requirements of the internationalization besides expanding their portfolio. The various sectors are moving
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towards a growth, consolidation and competitive mode to make its presence strong in the respective market. The global consolidation has not happened overnight and major players have displayed their strengths in the local market by being the market leader and then have ventured into global market with different business models. The challenge always exists to drive in terms to achieve better results and manage across various cultures. References 1. C.K.Prahalad and Kenneth Liebethral, End of Corporate Imperialism, Harvard Business Review, August 2003 2. Niraj Dawar and Tony Frost, Competing with the Giants: Survival Strategies for Local Companies in Emerging Markets, Harvard Business Review, March-April 1999 3. Jane Fraser, Lowell Bryan and Willhelm Rall, Race to the World: Strategies to Build a Global Firm, Harvard Business School Press, 1999 4. Senthil Ganesan and Malini N. Nicholas Piramal: Survival Strategies for International Patent Law regime, ICFAI Business School Case, 2004 5. A.V. Vedpuriswar, The Globalization of Indian Companies, ICFAI University Press, 2004 6. A.V. Vedpuriswar, The Evolution of Global Corporations, ICFAI University Press, 2004 7. Shishir Kumar, Asian Paints (India) Ltd: Going Global, Marketing Mastermind, September 2004 8. Subir Roy, Made in India, McGraw Hill Publications, 2005 9. Meenu Shekar, Weaving New Designs, Business India, January 30, 2005 10. Anita McGahan, How Industries Evolve, Harvard Business School Press, 2005 11. Priya Srinivasan, Auto Ancillarys Czar, Business Today, October 2005 12. Global Competitiveness Report 2006, World Economic Forum, 2006 13. Globalization- An Introduction, Book of Readings, ICFAI University Press, May 2006 14. Globalization of Indian Companies Concepts and Cases, Book of Readings, ICFAI University Press, November 2006 15. Going Global- Strategies and Experiences, Book of Readings, ICFAI University Press, November 2006 16. Going Global- Challenges and Experiences, Book of Readings, ICFAI University Press, November 2006 17. T.V.P Chowdry, Prashant Kulkarni, Anantha Murthy N.K., Competing Against the Giants: Case Studies of Indian Companies, Proceedings of the 4th AIMS International Conference, IIM Indore, December 2006. 18. Global Competitiveness Report 2007, World Economic Forum, 2007

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Mapping the Public Perception about Organic Food123

Mr. Anwit Goswami124 Mr. Sarbeswar Rao125 Prof. Prashant Kulkarni126 Prof. Anantha Murthy N.K.127 Mr. Chidambara S.T.128 Indias organic food production is increasing each year to meet the ever rising export demand. Exports rose to Rs 180 core in 2006/07, an increase of 20% from earlier year. But it has made little progress in the local markets as the cost continues to be high. Organic farming is defined as an approach to agriculture where the aim is to create an environmentally and economically sustainable agricultural system, which maximizes reliance on farm-derived renewable resources and the management of ecological and biological processes and interactions. The lack of a ready market and often unremunerative prices for their produce is deterring many farmers from switching to organic farming. Organic food consumption in India is very low, targeting high end consumers. Our study explores the reasons behind the low popularity of organic food among the local consumers. The study finds that the low awareness levels, o certification and lack of availability are the major factors for lack of growth in organic food market. Introduction: "If enough diversity is lost, the ability of crops to adapt and evolve will have been destroyed. We will not have to wait for the last wheat plant to shrivel up and die before wheat can be considered extinct. It will become extinct when it loses the ability to evolve and when neither its genetic defenses nor our chemicals are able to protect it. And that day might come quietly even as millions of acres of wheat blanket the earth." Cary Fowler and Pat Mooney Authors of Shattering: food, Politics and the Loss of Genetic Diversity Winners of the 1985 Right Livelihood Award for their work on Sustainable Agriculture.

The concept of food quality goes beyond defining the characteristics of the final product, but encompasses the manner in which it is produced, processed and transported. The rising health
The paper is updated version of the paper titled same presented at International Conference on Agriculture and Food Industries organized at IIM-Lucknow 124 Into Entrepreneurial Activities and Consulting in North East India 125 Manager with a leading firm in North East India 126 Asst. Professor, Economics and Public Policy, IBA Bangalore 127 Faculty, Quantitative Methods and Operations Research 128 Researcher with a leading FMCG firm in Ahmedabad Stalking Theory: View through the Prism of Real life Practice 219 | P a g e
123

consciousness among the consumers across the globe is creating conditions for a shift towards purchase of natural food materials. Excessive use of chemical agriculture combined with the potential health effects has reinforced this perception. Scientists and policy makers have joined the common man in advocating the need for sustainable and eco-friendly farming system. The rapid growth of organic agriculture worldwide during the last few years and is now practiced in approximately 120 countries of the world. Apart from the continuous increase in its share of agricultural land and farms, uncertified organic farming too abound for which very little statistics exist. Organic farming is perceived to benefit small farmers all over the world by high premium, low capital investment, ability to achieve higher premium in the market, and the ability to use traditional knowledge. India too has not escaped the effects of organic farming. The increasingly felt need of sustainable agricultural development has led many NGOs, and even corporate towards focusing on organic farming Organic farming is defined as an approach to agriculture where the aim is to create an environmentally and economically sustainable agricultural system, which maximizes reliance on farm-derived renewable resources and the management of ecological and biological processes and interactions. The demand for organic products was estimated to grow at a rate of 15-20 per cent per annum in key organic markets, such as the United States and Europe, which are major importers of organic foods. India, as an exporter of agricultural products, stands to benefit from this expansion in demand. However, not much is known about the Indian organic industry, especially by other agribusiness sectors, because little market research and policy analysis on organics has been conducted and published. In India however, the producers have generally focused on the export market compared to the domestic market. This is attributed to the high premiums the organic products fetch (20-30%) compared to the inorganic products in global market. This has resulted in export of about 70 per cent of organic agriculture items produced in India being exported. Traditionally, the organic farming was largely the effort of the individual initiatives of the farmers, the odd entrepreneur and non-governmental organizations. However, in recent times, growth is slowly becoming evident in the domestic market and is getting reflected in the increase in organized producers, retailers and product offerings in the market. Yet organic products still depend on local and small brands. The lack of a ready market and often unremunerative prices for their produce is deterring many farmers from switching to organic farming. In many cases, the producer does not receive timely payments from middlemen including organic food traders. Buyers of organic food too, cannot find what they need, at least not at reasonable prices. With supplies often being erratic or unreliable, instances abound of buyers being unaware that the food they are buying is indeed organic.

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A survey conducted by ACNielsen in 2006 on online Indians show that, Indians while being health conscious lack access to organic food products. Greater awareness of health issues drives purchase of food products with indicate a potential for organic food but the lack of availability and premium prices (the price difference between the conventional food and organic can be threefold at times) often act as deterrents towards switching to organic food. Factors like certification, a three-year long and expensive process and procurement, packaging and retailing costs, act as hindrances in making organic food popular besides contributing towards making the food expensive. Lack of government subsidies as compared to conventional farming also is a disadvantage. There is no funding support from the lending institutions either to promote the marketing. There is no clear definition or certification for organic farming. This is major source of confusion for consumers. Organic products differ from conventional products and other green-and-clean products by the way in which the product is produced rather than the physical attributes of the product itself. Many industry analysts believe that credible certification and consistent labelling of organic products is a necessary step towards avoiding consumer confusion and building consumer confidence. Objective of the study: 1. 2. 3. 4. 5. 6. Analyzing the organic farming scenario globally and India in particular. Factors favoring the development of organic farming Consumer tastes and preferences and organic products Sustainability of organic products Barriers to its growth Our recommendations

Methodology: The basic research involves undertaking a comprehensive literature survey regarding organic farming scene not only in India but across the globe. We then glance at the factors favoring these products. We follow it up doing a primary research studying the usage and attitudes of consumer towards organic farm products. The consumers are clustered based on psychographic segment and geodemographic segment. Using analytical tools we examine the trends in organic farming and its sustainability in the long run. We use perceptual mapping and cluster analysis for understanding the consumer behavior towards these products. Using regression models we try to estimate its future potential. Type of Research This is a research is about mapping the public perceptions about Organic Food. It is a general public decision survey.

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Sampling Technique Systematic sampling method is used for sampling from all the respondents who are using organic food and who are not aware of this. Sample Size: The sample size has been fixed to 100 respondents which includes students, private and public sector employees and self employed and of different age group. Tool for collection of data A structured questionnaire is used to collect the primary data from general public. Method of collecting data Interview method with the help of structured questionnaire. The respondents were assisted whenever they needed. Method of analysis Each data is tabulated and analyzed with the help of percentage response, corresponding graphs are made use of each data is evaluated and findings are recorded. Besides, a pilot study of 20 interviews was undertaken prior to main fieldwork to test the questionnaire length, structure and respondent understanding of definitions related specifically to the food and farming sector Data analysis All results were analyzed using the industry standard software, SPSS. Descriptive statistics are presented (mainly proportions by groups). Literature review: The rising interest in organic agriculture has resulted in a number of studies on different aspects of organic versus conventional agriculture. Many have adopted a consumer-based approach to understanding organic agriculture. This is deemed essential in terms of responses to changes in market dynamics. Studies in Oregon (US) show that consumers choose organic foods at least some of the time. Their perceptions of "organic" include both positive (such as chemical free) and negative (such as cost). Maintaining good product quality can enhance positive consumer perceptions. Besides the findings, it also suggests that organic food purchasers in Oregon tend to be environmentally conscious. A strong organic movement aided by the government support has a positive influence on the development of the organic sector particularly in countries like Brazil and Bolivia. These countries believe that organic food helps in asserting food sovereignty. In Latin America more than ten countries on the DAC list have an organic legislation, in Asia six countries and in Africa two countries (Huber et al. 2007). More countries are in the process of drafting laws.
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Consumer studies in Argentina showed that scarcity as well as high price premiums are the most difficult obstacles in the effort to expand domestic consumption expansion. Hay (!989) felt that organic food purchasers felt that the products were healthier, nutritious as compared to the products grown through conventional means. Huang et al (!993) feel that psycgraphic factors play a major role to organic consumers that the socio-economic factors. Baker and Crosbie (1993) conclude in their study done in North America that the most important factor determining consumer food safety preference was extent of product damage. The main health and safety concerns were linked to fat levels, food poisoning and pesticides. Freshness and nutritional attributes were the most important considerations in purchasing organic. People were willing to pay extra premium in exchange for low chemical residues (Buzby and Skees (1994)). Canadian consumers rank taste (93%), nutrition and health (89%), ease of preparation (68%), preparation time (66%), and price (62%) as key considerations. Sixty percent of buyers were females. In Canada too price premium was an option for the consumers over the chemical residues. (Cunningham -2002). Packer (2001) showed that chemical residues in fresh produce were the major concern for the consumers whose preference continued to be dominated by the taste of the food products. Wolf (2002) conclude in his study that attributes that are very desirable or extremely desirable to consumers included fresh looking, fresh tasting, high quality, seedless, good value, reasonably priced, healthy for me, high in nutrition, looks sweet, free of insects, sale priced, and free of pesticides. Oysten et al (2001) reported that half of the Norwegians felt that organic food is healthier, compared to almost an equal number in France. Grunert and Juhl (1995) came to the conclusion that the environmentally conscious respondents were likely to be frequent purchasers of organic food. Concern for environment was also a major finding for Davis (1995) in Western Europe. Hack (1993) too reports similar conclusions. Mahesh (1997) finds that organic consumers rate them highly on quality, nutrition and taste. A nationwide survey of consumers in India also showed that there is an environment of distrust in the quality of food available to the Indian urban consumer. This has provided a good reason for them to switch over to organic food but cite lack of access as a key deterrent. Thus, supply, rather than the demand is the larger issue today. Such limitations will remain until there is generation of sufficient volumes to enable the viability of trade and retail marketing in organic products. But studies also show that certification itself will not draw trust of the consumer. Experience abroad particularly in Europe highlights the need to construct and maintain a robust supply chain. In short we can argue that the framework for organic purchase decisions can be illustrated can be fitted in the following framework.

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Exhibit I
Exogenous Factors
Certification Packaging and labeling Product availability

Knowledge and Awareness

What is organic?

What makes organic unique?

Product-Related Factors
Perceived AttributesProduct Characteristics Health benefits Nutrition Animal Welfare Sensory characteristics Food Safety Value Impact on Environment Production Process

Social and Demographic Variables

Gender Occupation Age Education Family size (and children)

Consumer Preference and Attitude

Economic Factors Household income Product price Prices of other products

Organic product purchase decision

Adapted fromSamuel Bonti-Ankomahand Emmanuel K Yiridoe(Organic and Conventional Food: A Literature Review of the Economics of Consumer Perceptions and Preferences) Stalking Theory: View through the Prism of Real life Practice 224 | P a g e

Analysis Profiling an organic food user leads us to conclude that he or she in typically in the age group of 30-50 earning more than 30,000/- per month. He or she may generally work in a new economy kind of a firm. Influenced by the stress levels and the modern age mantras, we can assume that he would have shifted to organic food at least partially if not fully. Aided by the fact, awareness through internet and word of mouth rank high among our respondents we can visualize the following. He would have been searching for healthier and safe alternatives. Friends could have been a source of knowledge about organic food and its perceived merits. Google it out and one will get enough information about the topic and he is ready to experiment. Some of them have switched over to exclusive retail stores. Gender wise it is has been nearly an uniform mix with just over 50% being males. Our findings get enhanced that these people generally feel strongly food safety, healthy and the perceived quality. PROFILE OF THE SAMPLE: This section of the report will outline the profile of the respondents in this research in terms of their demographics and characteristics. These findings set in context the results of the research. Age and gender Table-1 Age and gender
Gender

Male below 18 Age 18-30 30-50 above 50 year Total 0 16 36 7 59

Female 0 5 31 5 41

Total 0 21 67 12 100

Fig-1

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Age and gender of the sample

40 35 30 25 20 15 10 5 0

Number of respondent

male female

below 18

18-30 Age

30-50

above 50 year

Monthly household income Table-2 Monthly household income

Income below 10,000 10,000-20,000 20,000-30000 above 30,000 Total Respondents 11 23 20 46 100

Fig-2
Monthly household income
50 40 30 20 10 0

below 10,000 10,000-20,000 20,000-30000 above 30,000

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Occupation Table-3 Occupation

Occupation salaried person business man Self-employed professionals Others Total Respondents 74 16 7 3 100

Fig-3
Occupation of chief wage earner
80 70 60 50 40 30 20 10 0

salaryied person

business man

Selfemployed professionals

others

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Shopping Habits of the People (Age Based Classification)

PLACE

Total

supermarket specialized open market shop

exclusive organic retail outlet 0 8 2 21 67 12

Age

18-30 30-50 above 50 year

8 31 1

4 23 3

9 5 6

Total

40

30

20

10

100

Table-4 Shopping Habits of the People (Age Based Classification) Fig-4

Implied in this graphical representation is the overwhelming response to supermarkets and specialized stores among 30-50 age groups. This raises question marks about the sustenance of the grocery shops in the long run. Questioned about the safety of the food they eat, only 11 % of population believes that the food they eat is safe. The fact that nearly 90% of them shopped exclusively in organic retail stores indicates that organic food scores highly on safety. The consumer having salary below 10,000 and salary between 10,000-20,000 remain neutral implying that they are not very certain about the safety aspects of the food items they consume. Another implication is that they may not want to admit that the food they eat is not up to the mark.

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Relation between average monthly income, where they shop and their perception about the food they buy Table-5 Relation between average monthly income, where they shop and their perception about the food they buy
Salary PLACE SCALE Below 10,000 0 3 0 3 0 0 0 0 0 1 7 8 0 10,00020,000 1 9 4 14 0 0 0 0 2 2 5 9 0 3 20,00030000 6 7 0 13 0 1 3 4 1 2 0 0 0 10 26 Above 30,000 7 3 0 10 1 25 14 22 4 40 1 26 3 30 3 5 12 20 10 Total

supermarket safe to eat agree neutral disagree Total Specialized shop safe to eat strongly agree agree neutral Total Open market safe to eat strongly agree agree neutral Total Exclusive safe to eat strongly agree organic retail outlet Total

10

10

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Fig-5
Food consume is safe to eat
30 25 20 15 10 5 0

Below 10,000 10,00020,000 20,00030000

strongly agree strongly agree disagree strongly agree neutral neutral neutral agree agree agree

Above 30,000

Supermarket

Specialis ed shop

Open market

Exclusive organic retail

The respondents in the higher income group generally agree on the health aspects of food. They believe that the food they eat is healthy irrespective of the shop they go. Shoppers in the open market generally feel that they do not get healthy food in the market. Relation between average monthly income, where they shop and their perception about the food they buy Table-6 Relation between average monthly income, where they shop and their perception about the food they buy
Salary PLACE below 10,000 Super market healthy agree neutral disagree Total specialized shop healthy strongly agree agree neutral Total 3 1 4 26 3 3 10,00020,000 1 9 4 14 13 10 6 20,00030000 7 6 above 30,000 7 3 18 18 4 40 6 Total

20

23 1 30

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Open market healthy agree neutral disagree Total exclusive healthy strongly organic retail agree outlet Total

2 4 2 8

4 5

9 9 2

3 10

20 10

10

10

Fig-6

Food consumed is healthy

30 25 20 15 10 5 0
disagree agree agree neutral neutral agree strongly agree strongly agree neutral strongly agree Number of people

Below 10,000 10,000-20,000 20,000-30000 Above 30,000

supermarket

specialised shop

open market

exclusive organic

The above tables indicate that the consumers in exclusive retail shop which is 10% of the sample perceived the food they consume to be safe to eat and healthy. Shoppers in the specialty shop perceive the food they buy is of good quality. More than 50% of them agreed strongly on this count. These findings found good strength even in the open markets. At the same time the consumer generally buying in open market shows around45%. The supermarket consumers remained generally neutral on these counts safety (56.4%), quality (38.4%) and healthy (46.1 %).

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Relation between average monthly income, where they shop and their perception about the food they buy Table-7 Relation between average monthly income, where they shop and their perception about the food they buy

Salary PLACE SCALE below 10,000 agree neutral disagree Total specialized good shop quality strongly agree agree neutral disagree Total Open market good quality agree neutral disagree Total exclusive good organic quality retail outlet Total strongly agree 1 2 0 3 0 10,00020,000 4 6 4 14 0 20,00030000 5 8 0 13 0 above 30,000 10 0 0 10 17

Total

Super market

good quality

20 16 4 40 17

0 0 0 0 2 0 6 8 0

0 0 0 0 1 3 5 9 0

2 1 1 4 2 1 0 3 0

9 0 0 26 0 0 0

11 1 1 30 5 4 11 20

10

10

10

10

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Fig-7
Food consumed is of good quality
18 16 14 12 10 8 6 4 2 0
strongly agree disagree disagree disagree strongly agree agree agree neutral neutral agree neutral

Number ofpeople

below 10,000 10,00020,000 20,00030000 above 30,000

Supermarket

Specialized shop

Open market Exclusive organic retail

Observing table 5, 6 and 7 we find that the consumers buying there food from specialized shop and exclusive organic retail shops seem more health conscious in term of safety, quality and healthy of food they consume compared to the rest. Consumers buying from open market and supermarket having salary below 10,000 and 10,000-20,000 have not clear idea on safety, quality and healthy of food they consume. As in this two segment 56%of consumer 45% of consumer and 33.33% of consumer were neutral to safety, healthy and quality aspect of food. Relation between average monthly income, where they shop and their perception about the food they buy Table-8 Relation between average monthly income, where they shop and their perception about the food they buy
Salary below 10,000 10,00020,000 6 20,00030000 1 above 30,000 1 8 Total

PLACE

SCALE

Super market reasonably strongly priced agree agree disagree Total specialized shop reasonably strongly priced agree 3 3

10 2

8 1 10 6

29 3 40 7

14

13 1

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agree disagree Total Open market reasonably strongly priced agree agree disagree Total exclusive reasonably agree organic retail priced disagree outlet Total 3

2 1 4

11 9 26

13 10 30 3

3 2 8

2 1

14 3 20 9 1 9 1

10

10

Fig-8
Food consumed is resonably priced
12 10 8 6 4 2 0

below 10,000 10,00020,000 20,00030000 above 30,000

strongly agree

strongly agree

strongly agree

agree

agree

agree

disagree

disagree

disagree

agree

supermarket

specialized shop

open market

exclusive organic

The consumer who generally buys their food from exclusive organic stores agree that it is reasonably priced which is in contrast to the general perception about price being a constraint on organic farming. However the consumers generally feel that the food they buy (large portion of which is inorganic in nature) agrees that it is reasonably priced.

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disagree

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Relation between average yearly income, where they shop and their perception about the food they buy Table-9 Relation between average yearly income, where they shop and their perception about the food they buy
Salary PLACE SCALE below 10,000 agree disagree 0 3 10,00020,000 3 11 20,00030000 2 11 above 30,000 10 0 15 25 Total

supermarke sufficient t information

Total Specialized sufficient shop information Total open market sufficient information agree disagree agree disagree

3 0 0 0 0 8

14 0 0 0 3 6

13 1 3 4 1 2

10 5 21 26 0 0

40 6 24 30 4 16

Total exclusive sufficient organic information retail outlet Total agree disagree

8 0 0

9 0 0

3 0 0

0 7 3

20 7 3

10

10

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Fig-9 Consumer has enough information about how the food was produced and processed 25 20 15 10 5 0
agree agree agree disagree disagree disagree agree disagree

Below 10,000 10,00020,000 20,00030000 Above 30,000

supermarket

Specialized shop

open market

exclusive organic retail outlet

High income consumers in specialized shops disagree with the fact that enough information is available on the way food is produced and processed. Even in the organic outlets, consumers are divided on the availability of information about the way food is produced and processed. There is general agreement among consumers that supermarkets do not provide sufficient information about the food production. Awareness level of organic food among consumer Table-10 Shows awareness level of organic food among consumer
Salary PLACE SCALE below 10,000 0 10,00020,000 2 20,00030000 3 above 30,000 10 15 Total

supermarket know about knows organic food unknown Total

3 3

12 14

10 13

0 10

25 40

specialized shop

know about knows organic food unknown Total

26

26

0 0

0 0

4 4 26

4 30

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open market know about knows organic food unknown Total

8 8

8 9

3 3

0 0

19 20

exclusive know about knows organic retail organic food outlet Total

10

10

10

10

Fig-10

Awareness level of organic food among consumer

30 25 20 15 10 5 0 knows unknown knows unknown knows unknown knows exclusive organic supermarket specialized shop open market below 10,000 10,000-20,000 20,000-30000 above 30,000

The average consumer having been to specialized shop has an idea about organic food (86.66%) but is in contrast to the supermarkets where only 37.5% of the consumers are aware of the organic food.

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Types of organic food normally bought by consumers with respect to where they buy Table-11 Tables showing types of organic food normally bought by consumers with respect to where they buy Types of organic food normally bought by consumers
PLACE Supermarket specialized exclusive organic out let Local market Internet/home shopping Total Fruits 0 26 Vegetable 0 19 grocery 0 9 bakery 0 12 processed food 0 4 milk 0 2 Meat 0 0

10 0

10 0

10 0

10 0

10 0

5 0

0 0

0 36

0 29

0 19

0 22

0 14

0 7

0 0

Fig-11
Types of organic food buy
40 35 30 25 20 15 10 5

Internet/home shopping Local market exclusive organic out let Specialized shop

milk

grocery

bakery

Fruits

processed food

Vegatable

Meat

Supermarket

Consumers generally purchase organic fruits and vegetables. Bakery produces too are purchased in good numbers. In case of grocery only a third has ever purchased groceries. In case of processed food only 15.3% consumer buys processed food in case of consumer from specialized shop.

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Consumer perception on need of certification with respect to salary and where they buy Table-12 Table showing consumer perception on need of certification with respect to salary and where they buy
SALARY PLACE SCALE 1000020000 2 2000030000 3 above 30000 10 15 Total

supermarke need to know the agree traceability and trust t worthiness of organic food Total Specialized need to know the Strongl traceability and trust y agree worthiness of organic food store Total open market need to know the agree traceability and trust worthiness of organic food Total exclusive organic store need to know the Strongl traceability and trust y agree worthiness of organic food Total

2 0

3 0

10 26

15 26

0 1

0 0

26 0

26 1

1 0

0 0 10

1 10

10

10

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Fig-12
Need to know the traceability and trust worthiness of organic food 30 25 20 15 10 5 0 agree Strongly agree agree Strongly agree

1000020000 2000030000 above 30000

supermarket convenience open market exclusive store organic

Consumers strongly feel about the need for certification and labelling of organic food. In many cases the consumer is unaware whatever the food he or she is purchasing is organic or not. The agreement levels echo across the income segments and also in the all the types of the stores. Consumers perception regarding constraint to switch to organic food Table-13 Tables showing consumers perception regarding constraint to switch to organic food a) Highest constraint
PLACE SCALE SALARY 10000-2000020000-30000 above 30000 supermarke CONST1 price t availability ignorance Total specialized CONST1 price store availability ignorance lack certification of 0 0 2 2 0 0 0 0 0 0 3 3 0 0 0 0 4 3 1 8 3 14 3 6 4 3 6 13 3 14 3 6 Total

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Total open market CONST1 price ignorance Total exclusive organic store CONST1 price availability Total

0 1 1 2 0 0 0

0 0 0 0 0 0 0

26 0 0 0 2 8 10

26 1 1 2 2 8 10

b) Second highest constraint

PLACE SCALE 1000020000 supermarke CONSTR price t 2 availability ignorance 0 2 0 SALARY 2000030000 0 3 0 above 30000 1 3 4 1 8 4 Total

Total specialized CONSTR price store 2 availability ignorance lack of certification Total open market CONSTR availability 2 ignorance

2 0 0 0 0

3 0 0 0 0

8 2 9 1 11

13 2 9 1 11

0 1 1

0 0 0

23 0 0

23 1 1

Total exclusive organic store CONSTR price 2 Total

2 0

0 0 8

2 8

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c) Third highest constraint

SALARY PLACE SCALE 1000020000 2 20000-30000 above 30000 Total

supermarket CONSTR3

price availability ignorance lack of certification

3 2 3 1

8 2 3 1

Total specialized store CONSTR3 price lack of certification Total

9 2 5

14 2 5

open market CONSTR3

price availability

2 1 3

2 1 3 3 3

Total exclusive CONSTR3 organic store Total lack of certification

Availability is the main constraint and obviously supply is an issue here. Lack of availability leads to the higher prices (simple law of supply and demand). Lack of certification is another important constraint. People are unable to distinguish between organic and conventional food which may be a cause for awareness.

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Table-14The table shows the constraint to switch to organic food

Factor Price availability Ignorance/lack of awareness Lack of certification Total Percentage 27.65957447 33.19148936 17.65957447 21.4893617 100

Fig-13 Constraint to switch to organic food

35 30 25 20 15 10 5 0
price availability Ignorance/lack of awareness Lack of certification

Inferences Profiling the consumers our conclusions can be summarized as follows. Despite the perceived advantages, the awareness about organic food is not high. Less than half of the consumers surveyed were even aware of the food. The lack of certification of mode of identifying the organic food products can be one of the causes. Many consumers claimed unaware whether they were purchasing organic food or not. We believe that the awareness has to be increased. The presence of corporates in organic farming can be a useful advantage. Advertising is very limited. There is a need to increase advertisement. There is a increasing need to increase the supply side also. Lack of availability is often cited as the reason for non purchase of food products. The increase in availability is likely to bring down the prices and increase the awareness. The lack of subsidies or gains from organic production deters many farmers from switching to organic food. The government can introduce subsidies similar to conventional chemical farming. This view too found resonance among most of the respondents. There has
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very little progress on certification. While certification exists, the exclusive stores follow it while the rest do not have any method to differentiate between organic and inorganic products. As mentioned above the high income groups working in modern economies dominate the buyers groups. Firms need to sustain these groups while focusing on the groups that are aware of organic foods but hesitant to experiment.

Aware and purchase

36

Aware but not purchase 3 3 10

Neither aware nor purchased 11 20 17

Below 10000

10000 TO 20000

20000 TO 30000

Above 30000

Source: Developed by the authors based on the survey

The marketing mix has to be geared towards conventional advertising if organic food has any chance of getting converted from a health conscious fad and specialty food gearing up to a niche segment into a one with mass following. The existing awareness is due to the internet and modern religious movements. The consumer can get a detail idea about organic food, its
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production from the producers website and leaflet where as only the customers who are the regular buyer of Exclusive organic retail outlet are aware of it , so the producer has to give stress on leaflet for promotional and awareness activity. There is an urgent need to move beyond these groups and targeting the lower segments. The focus should be towards ensuring consistent and reliable supplies of organic food for the shopkeepers/retailers. Further these supplies would have to ensure quality and quantity is not compromised. Further the prices have to be lowered. Strategies to achieve this include supporting the conversion to organic production, to encourage the pooling of produce from small farmers into larger consignments and arrange supplies from different regions of the country. References: 1. Dr. N. Selvaraj, Dr. B. Anita, B. Anusha and K. Shoba,(2006)From Research Station To Farmer To Market : Experiences Of Horticultural Research Station, Ooty Organic Agricultural Research And Extension Horticultural Research Station, Tamil Nadu Agricultural University, Ooty-643 001 2. India Together: Timbaktu Organic is scaling up - 28 December 2006, www.indiatogether.org/2006/dec/agr-timbaktu.htm 3. Agriculture & Human Values; Jun2003, Vol. 20 Issue 2, p151-163, 13p, 5 charts 4. C Surendranath,( November 2003 )Organic: Market-driven and sustainable? 5. Bharat Dogra, (1983) Traditional agriculture in India : High yields and no waste The Ecologist, Vol.13, No. 2/3, 6. http://www.acnielsen.co.in/ACNielsen-India News-Press Releases-20February 7. Contribution and challenges of the International Federation of Organic Agriculture Movements in Asia (IFOAM),Agro-chemicals News in Brief, Special Issue, November 1999 8. Mahesh Chandra Donia,( 2007) Growing popularity of organic foods dented by higher prices, Posted online: Thursday, March 15, 2007 at 0039 hours IST 9. Willer, Helga and Minou Yussefi (2006) The World of Organic Agriculture. Statistics and Emerging Trends 2006.International Federation of Organic Agriculture Movements (IFOAM), Bonn Germany & Research Institute of Organic Agriculture FiBL, Frick, Switzerland 10. Public Perceptions Of Food And Farming In Scotland Final Report Phase One (Main Survey) December 2003,Prepared for: Scottish Executive Environment and Rural Affairs Department, Prepared by: Market Research UK Ltd, City Wall House,32 Eastwood Avenue,GlasgowG41 3NS,Website: www.mruk.co.uk 11. Salvador V. Garibay and Katke Joyti, (2003) Market opportunity and challenges for Indian organic products,Research Institute of Organic Agriculture (FIBL) and ACNielsen ORG-MARG,Feb-2003 12. L Sirieix, B. Schaer ,Buying organic food in France: Shopping habits and Trust http://129.3.20.41/eps/othr/papers/0512/0512010.pdf 13. Hui-Shung Chang, Lydia Zepeda and Garry Griffith, (2005) The Australian Organic Food Products Market: Overview, Issues and Research Needs
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http://www.agrifood.info/review/2005/Chang_Zepeda_Griffith.html,Australasian Agribusiness Review - Vol. 13 2005Paper 15,ISSN 1442-6951 14. Samuel Bonti-Ankomah and Emmanuel K Yiridoe, (March, 2006)Organic and Conventional Food: A Literature Review of the Economics of Consumer Perceptions and Preferences 15. Manoj Kumar Menon,(2007) The Market Potential For Organic Foods In India In: Papers Submitted to the International Conference on Organic Agricutlure and Food Security, FAO, Rome, Italy, 3-5 May 2007. Page 65-67. 16. Public Perceptions Of Food And Farming In Scotland Final Report Phase One Main Survey), Prepared by: Market Research UK Ltd, Glasgow G41 3NS December 2003 17. Carolyn Raab, Deana Grobe, (2005) Consumer Knowledge and Perceptions About Organic Food http://www.joe.org/joe/2005august/rb3.shtml 18. IFAD (2005), Organic Agriculture and Poverty Reduction in Asia: China and India Focus: Thematic, Evaluation. Report 1664, Office of Evaluation, IFAD, Rome 19. Helga Willer and Minou Yussefi, The Current Status of Organic Farming in the World - Focus on Developing Countries 20. Elsa Rodrguez, Victoria Lacaze and Beatriz Lupn, Willingness to Pay for Organic Food in Argentina: Evidence from a Consumer Survey School of Economic and Social Sciences, Universidad Nacional de Mar del Plata 21. http://www.organic-europe.net/country_reports/denmark/default.asp 22. http://www.satavic.org/organic food.htm

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