BRICS, Columns/Op-Eds

Article in “Russia & India Report”: BRICS for a new world

by Samir Saran and Vivan Sharan
March 12th, 2011
Please find here the original article

The 4th BRICS Academic Forum recently concluded in New Delhi. Over 60 delegates representing academic institutions, think tanks and expert community from the member countries participated in substantial debates that covered virtually every challenge and opportunity of contemporary times. The debates were intense, sometimes combative but almost always conducted among friends. This was the key takeaway from this meeting. The community is strong, it is aware of the differences, eager to resolve those and is comfortable with the irresolvables. The skeptics of BRICS for four years, would now need to rethink, this group has evolved, this group sees potential in greater and deeper engagement, and this group is capable of proposing bold and visionary ideas at the New Delhi Summit later this month and in the other interactions before and after.

This was not always the case and we only have to recall the early days of the relationship. To anyone witnessing one of the early Track 2 interactions on a cold day in Moscow in 2008, it would have seemed improbable that the grouping would come this far. There was early hesitance and unformed agendas among each of the experts gathered from the four countries (at that time BRIC). The Brazilian experts were unsure of their being there in the first place. A very prominent diplomat from Brazil saying, “why are we here, why do you need us, you are all neighbours and should talk amongst yourselves”. The Russians at that time, and who must be credited for the inception of the BRIC idea, saw in it a political opportunity to create a grouping of that could counter the Atlantic alliance and the Western economic and political weight. They were to be dissappointed, India and China were already deeply integrated with the US and EU in the arena of trade and economics and would not play ball. The experts from China liked the BRIC idea, which could be another instrument for projecting their growing pole position in world affairs and India was beginning to manage the nuances of diverse relationships in multi-polar world. It had also learnt from the SCO experience and this time it would not demur.

However, the early days of the conversations amongst experts and indeed among the policy makers from these countries lacked detail. This has changed, from the macro discussions on global governance, financial architecture, security and greater coordination, the discussions today focus on the substantive, on experince sharing, on creating institutions and linking up existing ones. In the fourth year of the BRICS (South Africa joined last year), the group has come of age. This is attested to by two facts. First, the experts from the four countries have signed an agreement to step up their interactions which till now have been sporadic and on the sidelines of the Leaders Summit and two, the wide ranging recommendations that the experts forum has submitted for the consideration of the Leaders at the summit in New Delhi demonstrate the limitless possibilities for the grouping.

The Forum’s recommendations to the 4th BRICS Leaders Summit to be held in New Delhi on March 29th are relevant and actionable. They are the result of intense discussions, debates and negotiations between the delegates on common challenges and opportunities faced by BRICS members, as they seek to set the global agendas for governance and development going forward. The theme for this year’s Academic Forum was “Stability, Security and Growth” – all common imperatives for the emerging and developing BRICS nations.

17 policy recommendations were carefully crafted by the Forum and are centred on key priorities for BRICS within the aegis of governance, socio-economic development, security and growth. The mandate of the Forum was to provide concrete policy alternatives to BRICS Leaders and to the credit of the delegates this year, the recommendations may have lived up to the mandate. The Forum deliberated context specific micro debates embedded within larger narratives. Varied and significant themes were addressed including the articulation of a common vision for the future; a framework to respond to regional and global crises; climate change and sustainable resource use; urbanization and its associated challenges; improving access to healthcare at all levels; scaling up and implementing new education and skilling initiatives; the conceptualization of financial mechanisms to support and drive economic growth; and finally sharing technologies, innovations and improving the cooperation across industrial sectors and geographies.

The Forum deliberated upon two distinct sets of engagement. One set of engagements is through research and initiatives that are “Intra-BRICS” in nature. These involve experience sharing across social policy, resource efficiency, poverty alleviation programmes, sustainable development ideas, innovation and growth. Each of these themes can be effectively mapped to help tailor policy within BRICS. The recommendations highlight the possibilities for enhancing such engagements through exchange of institutional experiences and processes, free flow of scholars and students, joint policy research, capacity and capability building for facilitating such interactions.

The second set of engagements and outcomes pertain to interaction of BRICS with other nations,  external actors and groupings at various multi-lateral forums and institutions. These are reflected in the recommendations pertaining to climate policies, Rio +20, financial crisis management, traditional security threats, terrorism and other new threats and global challenges around health, IPR and development.

The Forum provided a valuable platform for exchange of perspectives between delegates without adhering to national positions or party loyalties. There were heated debates on issues such as the possible institutionalisation of a BRICS Development Bank and an Infrastructure Investment Fund that could assist in the development aspirations of the BRICS and other developing countries. The discussions on the setting up on new, credible institutions to initially supplement and eventually substitute existing financial institutions such as the World Bank and IMF reflect the strong desire of BRICS to move ahead and away from the traditional development agendas of 20th century institutions that are today incapable of empathising with some of the realities and aspirations of the 21st century. This is perhaps a reflection on the way Bretton Woods Institutions are managed and governed and indeed to their legitimacy itself.

The recommendations reveal that BRICS view the sustainable development agenda through the lens of inclusive growth and equitable development primarily. The recommendations have also clarified that BRICS will continue to focus on achieving efficiency gains in resource use. Both these outcomes point towards resolute and far sighted policy guidance by the Forum. Climate change mitigation debates which have become a proxy for “Promoting Green Technology” and indeed are an outcome of “re-industrialisation policy” of some EU countries were conspicuous by their absence from the debates. Instead, with “plurality in prosperity” as a common ideal, the outcomes also signify that the research community within BRICS want the sustainability discourse to shift from one that emphasises common responsibility to one that emphasises common prosperity. This means that BRICS must attempt to reorient consumption patterns and energy use globally, towards sustainable trajectories. The BRICS Leaders would do well to replicate the cohesiveness of the BRICS academics in the articulation of their vision for creating sustainable economies, ecologies and societies. Similarly the promotion of cultural cooperation, establishing innovation linkages, sharing pathways to universal healthcare and medicine for all, strenghthening indigenous knowledge are all recommendations that are timely and appropriate.

The gradual transition process of BRICS becoming the global agenda setters has been one of the more exciting developments to watch and study. While sceptics may still dismiss the possibility of BRICS being “rule-makers”, it is unlikely that they will not influence “rule-making” processes. The experts at the forum were unambiguous in their vision for the grouping. While recognising that in many instances BRICS might eventually yield to sub optimal policy formulations due to national agendas and geo-political constraints, they were determined that the incubation period is over and now the bar must always be set high and the leaders must be ambitious. In the words of one of the delegates at the 4th BRICS Academic Forum, BRICS have indeed created a “new geography of cooperation” and opportunities are boundless.

Samir Saran is Vice-President and Vivan Sharan an Associate Fellow at the Observer Research Foundation. The foundation hosted the 4th BRICS Academic Forum. 

In the News

BSE-Greenex, the 25th dynamic index on the Bombay Stock Exchange (BSE), is being unveiled.

On Wednesday, BSE-Greenex,  the 25th dynamic index on the Bombay Stock Exchange (BSE), is being unveiled. Besides the BSE, Greenex will be run by gTrade Carbon Ex Ratings Services Private Limited (gTrade;, the structure involving Indian Institute of Management-Ahmedabad researchers, think-tank Observor Research Foundation, and private investors.

by Rohit Bansal, Daily Pioneer
Please find here the link to the original article.
Please find here the entire media package of the launch of g-trade: g-trade media package

Does India Inc need to be told its ‘carbon performance’ based on quantitative, performance-based criteria? “Yes,” is the simple answer. An economy of our size and aspiration needs to green flag by way of an inclusive market-based mechanism. If I may go a step further, large business entities in India need to offer themselves for deeper probing, way beyond mandatory disclosures. A new index is merely a way to harmonise and discipline.

Green ethos is a tool of soft diplomacy. It interests global industries, investors and Governments. That said, moving beyond tokenism, printing an annual report of recycled paper being the cliche, makes real green flagging a pain that those who sit on the BSE100 must bear. I did some checks on whether Greenex is treading on territory already covered by global indices. It is not (links** to the Dow Jones Sustainability Index, the S&P Environment, Social and Governance Index and the FTSE4Good Index are flagged below). Its basis, as per gTrade chairman Samir Saran, a London School of Economics alum, is publicly-disclosed energy and financial data, not subjective parameters. With this, Saran aims to promote sustainable investing in India. His is a multi-pronged approach of increasing investor awareness, advocating progressive regulatory reform, and targeting energy intensive industrial sectors. “gTrade seeks ethical investments in green technologies and follows a first of its kind business model, and aims to launch ethical financial products in the carbon markets,” he says.

With an interest in nine sectors, pharma and biotech, steel, cement and cement products, fertilisers and agri chemicals, textiles, financial services, utilities, machinery, and oil and gas, is gTrade is aiming to compare energy guzzlers within, say, cement or steel, as also inter se with, say, financial services. Here trust evoked by IIM-A may be crucial. Sector-specific proprietary algorithms must sensibly compare energy efficiency performance of various companies/sectors.

gTrade will employ index constituent weight capping.  Index constituent weights will be capped at 6 per cent during dynamic rebalancing, in an effort to increase the diversification within the index and ensure greater compliance with international regulatory and statutory investment guidelines.

Greenex’s nirvana lies in providing a tool for use by “green” retail and institutional investors to track the performance of India’s largest and most liquid, energy efficient stocks. Also, license beyond familiar territory and help in the development of green financial products including mutual funds, ETFs and structured products.

How the “winners” are incentivised might determine the success of green flagging. I include here, how the “losers” are punished. Social media activists must watch this space. You, not just gTrade, drive social expectation. Your questions will keep India Inc mindful of their social contract, in the instant case with green flagging.

BRICS, Columns/Op-Eds

Article in “Russia and India Report”: Navigating the trust deficit

by Samir Saran and Jaibal Naduvath
February 17th, 2012

Please find here the original article

At the 17th round of the Indo-Russian Inter-governmental Commission on Trade, Economic, Technological, Scientific and Cultural Cooperation (IRIGC-TEC) held in November last year, the two governments agreed to set up an investment fund with public-private partnership to finance projects in the two countries. Barely a month later, after almost 18 years of negotiations, Russia was formally invited to join the World Trade Organization (WTO), and, has until June of this year to ratify the accession agreement. Beyond reducing tariff barriers and eliminating non-tariff barriers, accession to WTO is also expected to reduce government interference in business, a key pre-condition for free enterprise. Russia’s evolving economy has been witness and victim to continued government interventions.

Nevertheless, given the impending WTO accession, the India-Russia joint investment fund has managed to get its timing right. Current India-Russia bilateral trade, estimated at around USD 9 billion, is admittedly far below its potential. Trade promotion initiatives such as this investment fund, a possible Comprehensive Economic Cooperation Agreement (CECA) with the Russia, Belarus, Kazakhstan Customs Union combined with the business confidence the WTO accession would inspire, is expected to double bilateral trade to USD 20 billion by 2015, an ambitious, though very achievable feat. With a Price to Earning (P/E) ratio of 6, compared to India’s 14, China’s 15 and Brazil’s 8.5, Russia’s market is attractively priced amongst the emerging markets with traditional industries such as oil and gas, metals and minerals remaining hugely undervalued.

Despite warm bilateral ties, and close political engagement and co-operation extending well over 55 years, India-Russia trade has rarely managed to go beyond the legacy confines of defense equipment, space, energy, metals and minerals, and, commodities, even while, ironically, both countries have independently managed to very successfully leverage new vistas of opportunity in economies they stood together against for a better part of the 20th century. Russia-European Union (EU) trade in 2010, for instance, stood at around USD 191 billion, with the bloc accounting for over 47% of Russia’s total trade turnover, representing a three-fold increase in just ten years. On the other hand, India-EU trade has grown to USD 107 billion this year and is expected to double in two years on the back of a Free Trade Agreement (FTA) currently being negotiated. Compared to this, India-Russia bilateral trade of around USD 9 billion today pales in significance even though it represents a quantum leap from about USD 3 billion in 2006-07.

Russia-India two-way trade and investment has rarely ventured beyond government-controlled domains, which are also accompanied with government-backed guarantees of some kind. Russia’s active participation in several military, aerospace and nuclear projects in India and Indian investment in Russia’s energy sector and preferred trade in controlled commodities are part of this broader trend. But, the true test of any meaningful business relationship lies in the unmitigated ability of private enterprise on either side to confidently engage, invest and gain from each other’s economies, outside the security of sovereign assurance, even if notional. This is not so in the case of Indo-Russian trade.

Russia, of course, dominates the Indian defense sector and is comfortable navigating through Indian officialdom, which still retains much of its controlled economy character from the 70s and 80s. However, this may not remain the case for long. Under greater media scrutiny and public glare, the defense relationship will need to become far more efficient in terms of reliability, time lines and price points, else Russian dominance in the sector could be potentially challenged. Further, as the offset policy starts playing out and thereafter as the Indian private sector becomes engaged in defense production and R&D, Russia may no longer be a competitive player in this segment. To really be a beneficiary of India’s transformation over the coming 2 decades, Russia needs to expand its portfolio by diversifying into the arenas of industry and infrastructure in India. In doing so, its ability to confront India’s dynamic and loud democracy, and an increasingly uncompromising civil society will be as severely tested as its ability to navigate the country’s highly regulated business terrain arising from complex land use norms, environment clearances, and fiscal regimes, all of which have shown to evolve over time.

On the other hand, Russia offers India minerals and land, besides a huge market for software, services, value added goods and consumables. The resource sector in Russia, though, continues to be dominated and overwhelmed by its government with significant self-interest. Agriculture and land based activities too would be prone to similar dynamics and one can expect Indian private sector’s trepidations to be strong on investing in either. Apart from large Public Sector Companies and select large Indian Multi National Corporations, it is unlikely that Indian private sector will invest in Russia, despite undervaluation and potential for attractive return. Indian businesses’ traditional risk aversion is demonstrated by flight of capital to low return economies of the Atlantic that have corresponding low risk political ecosystems as well.

When Indian businesses consider making investments in Russia, they still seem daunted by perceptions constructed by imagery of the powerful and manipulative oligarchy, political nepotism and uncertainty, and seemingly poor judicial and legal recourse frameworks. Fears to do business in Russia have been hyped by experiences of companies such as ExxonMobil, Total and Shell in Russian Oil Sector, which were divested of their interests by Russian political class in a manner that was viewed as ad-hoc, if not vindictive. This imagination has often resulted in investments by Indian entrepreneurs being channeled into markets such as UK, EU and US, which are far more taut than Russia in terms of economic opportunity.

Ironically, Russian investors feel the same way towards India, drawing from a regular narrative of chaotic democracy, policy inconsistency, political fickleness, and civil instability with commitment cycles perceived to not exceed the life of the dispensation in power. One of the collaterals of the 2G verdict of the Supreme Court, which saw the revocation of 21 of Sistema Shyam Telecom’s (SSTL) 22 telecommunications licenses, could be the flickering and faint Russian Interest in Indian business opportunity. Russia’s USD 28 billion telecom to tourism conglomerate, Sistema JSFC, operating in India through its subsidiary MTS, had invested USD $2.5 billion over the past three years into the project, in arguably, the largest private sector intervention by a Russian company in India’s new economy to date. Further, Russian state owned Federal Agency for State Property Management acquired a 17.4% stake in SSTL by investing a hefty $600 million just last year. Fortunately, there is a growing business constituency, which views such re-calibrations as an inevitable part of polity evolution, but nonetheless the experience of Sistema, which may see itself as a victim of judicial overreach as some argue, could well define Russia’s appetite for India’s growth story.

Russia’s accession to WTO this summer and the consequent abolishment of tariff and non-tariff barriers will heighten global interest in Russia. Pro-investment initiatives such as the proposed joint public–private investment fund combined with demonstrable political and economic will on both sides should result in heightened interest in private enterprise on both sides to explore and invest in each other. Multi-billion dollar National Minerals Development Corporation – Severstal Joint Venture steel project in Odisha or Indian companies negotiating long-term agreements for supply of diamonds from Russia are positive signs for medium to long term economic engagement between the two countries.

BRICS, Columns/Op-Eds

Article in “The Hindu”: Giving BRICS a non-western vision.

by Samir Saran and Vivan Sharan
New Delhi, February 14, 2012

Please find here the link to the original article.

India is all set to host the Fourth BRICS Summit in March this year. The journey from Yekaterinburg to New Delhi has demonstrated that the political will amongst member nations to sustain this contemporary multilateral process is strong. Along the way South Africa has been welcomed into the original “group of four.” Yet, the challenge for BRICS has always been, and continues to be, the articulation of a common vision. After all, the member nations are at different stages of political and socio-economic development. While some have evolved economically and militarily they are yet to succeed in enabling plural governance structures, while others who represent modern democratic societies are being challenged domestically by inequalities and faultlines created by caste, colour, religion and history. The BRICS nations do have a historic opportunity — post the global financial crisis and the recent upheavals in various parts of the world — to create or rebuild a new sustainable and relevant multilateral platform, one that seeks to serve the interests of the emerging world as well as manage the great shift from the west to the east.

Way forward

Indeed, two out of the five economies in BRICS, China and Russia, have already emerged, and are veritable heavyweights in any relevant global political and economic discourse. Why then should BRICS depend on sluggish multilateral channels such as the World Trade Organisation (WTO), or try to imbibe didactic, non-pragmatic western perspectives on issues purely of common interest? It is amusing to be offered solutions to poverty and inequality, bottom of the pyramid health models, low cost housing options, education delivery, energy and water provision, et al by the wise men from organisations and institutions of the Atlantic countries. When was the last time they experienced poverty of this scale, had energy deficiency at this level and suffered from health challenges that are as enormous? The responses to the challenges faced by the developing world reside in solutions that have been fashioned organically.

BRICS could systematically create frameworks offering policy and development options for the emerging and developing world and assume the role of a veritable policy think tank for such nations, very similar to the role played by the Organisation for Economic Co-operation and Development (OECD) in the 20th-century world. Thus BRICS must create its own research and policy secretariat (for want of a better term) for addressing specific issues such as trade and market reforms, urbanisation challenges, regional crises responses, universal healthcare, food security and sustainable development (many of these issues are being discussed year at the BRICS Academic Forum in March).

Non-traditional security

The OECD’s stated mission is to “promote policies that will improve the economic and social well-being of people around the world.” Although the BRICS nations account for a fourth of global GDP and represent over 40 per cent of the total global population, none of them are OECD members as yet; instead what they have is “enhanced engagement” with the OECD. The BRICS nations have already created a viable platform for “enhanced engagement” with each other through the institutionalisation of the annual Leader’s summit, preceded by an Academic Forum of BRICS research institutions and a Financial Forum of development banks (and this year, a newly instituted Economic Research Group will focus on specific economic issues). The dominant discourses within each of the BRICS nations today are centred on non-traditional security, which can be efficiently addressed through collective market based response mechanisms.

Despite intra-BRICS trade volumes rising exponentially over the past decade, there are few instances of actual financial integration within the consortium (aside from the case of Russia and China starting bilateral currency trading last year). A useful first step to enable this would be to institute a code of liberalisation of capital movements across the five countries, as a modern day parallel to the 1961 OECD code with an equivalent mandate. In the current environment of global economic uncertainty, multinational corporations are perhaps the most adaptable and profitable drivers of economic growth. Therefore, at the outset, the creation of favourable policies for multinationals to conduct business across BRICS would be well justified. Moreover, just as the OECD has a comprehensive set of guidelines that set benchmarks for various economic activities, from testing standards for agricultural goods to corporate governance of state owned enterprises, the BRICS nations could create their own guidelines on the best practices and standards within the consortium.

Finally, within the BRICS nations, there are both import and export centric economies. This provides an excellent template for a realistic multilateral negotiating platform where obdurate self serving bargaining positions are natural starting points. The stalled discussions at the Doha Round of the WTO are an example of the difficulties of consensus building. Since the BRICS nations are already addressing a plethora of issues covered by the Doha Round, they are well placed to move ahead of it, and resolve mutual positions and common concerns.

What started as an investment pitch by Goldman Sachs (BRIC) has evolved into a useful multilateral instrument, for the BRICS nations. BRICS must now move on from being a grouping of individual nations, discussing agendas, to becoming a “go-to” institution for setting regional and global agendas. The essence and ethos of such an institution must in turn, flow from the inorganic prism of stability, security and growth for all. Stability from business cycles and financial governance failures, security from traditional and non-traditional threats posed to humans and the environment, and unbiased growth and prosperity are common aspirations for all BRICS nations, and they must be achieved and delivered from within. The Fourth BRICS Academic Forum will attempt to address these imperatives.

Samir Saran is Vice-President and Vivan Sharan an Associate Fellow at the Observer Research Foundation. The foundation is the Indian coordinator for the Fourth BRICS Academic Forum on March 5-6, in New Delhi.

Columns/Op-Eds, Politics / Globalisation

Article in Financial Express: Identity and Access in Uttar Pradesh

by Samir Saran and Vivan Sharan
January 30th, 2012
Please find here the original article

Uttar Pradesh (UP) is home to a population similar in size to Brazil and is spread out over a vast area, ranging from the fertile Gangetic Plains to the arid Vindhya Hills. It has traditionally also been the state that shaped national politics and the caste, class and religion based political landscape is representative of the complexities of democracy in India. It is also today a state that defines the challenges that lie ahead in the coming decade and more. Be it physical or social infrastructure, employment or environment, industry or agriculture, multiple narratives within the state need to be reconciled. However, the causal relationship of caste with opportunity continues to be most vexed. There are significant divergences in access to the basic necessities – water, electricity and modern cooking fuel (two out of Mayawati’s election rally cry trio of ‘bijli, sadak and paani’) across this geography. Once rich in economic growth potential, driven by the gains achieved by the agriculture sector through the Green Revolution, the state is now the primary contributor (21.3%) to the overall poverty in the country as per the Multi Dimensional Poverty Index of the UNDP with close to 70 percent poor households.

Over the years, the state has seen increasing political emphasis and rhetoric directed at the marginalized social groups that exist within the state, as a strategic ploy to secure voting constituencies. This specifically includes people categorised as Scheduled Castes (SCs) and Other Backward Classes (OBCs) who represent majority proportions in relation to the total population of the state (Figure 1). It is ironic then, that the average income of SCs and OBCs in UP, is over 18 percent and 20 percent lower respectively, than the all India average, according to the latest NSS data compiled at the India Data Labs at the Observer Research Foundation.

India DataLabs @ ORF: NSSO Consumption Expenditure 2009/10

In terms of access to drinking water (within dwelling) the SCs are the worst off amongst the 3 groups, followed by the OBCs. The Central, Eastern and Southern regions (the NSS divides the State into 5 regions found in Figure 1) fare poorly; a combined average of around 35% of SCs and OBCs have access within their dwellings in these regions, compared to close to 60% in the relatively prosperous Northern Upper Ganga Plains. This average diminishes to an appalling 14 percent in the Central, Eastern and Southern regions if only SCs are considered.

Inherent barriers to social and economic mobility have compounded the inequities created by lack of basic infrastructure provision, and political apathy towards development in the state.  These worrying realities are exacerbated by the fact, that there has been negative growth in access to electricity (an average of -15.23%), over the five year period 2004-05 till 2009-10,  in the Central region and negligible growth in Eastern region, amongst all of the aforementioned social groups (Figure 2).  This negative growth is primarily driven by the sharp decline of access in urban areas. A nearly 22% decline over the 5 year period, in access to electricity in the case of OBCs  living in urban areas located in the Central region, is instructive of the fact that despite representing the largest political constituency in the region, they have been unable to secure commensurate development entitlement.

India DataLabs @ ORF: NSSO Consumption Expenditure 2004/05 & 2009/10

A recent World Bank Report on “The Role of Liquefied Petroleum Gas in Reducing Energy Poverty” suggests that everything else being equal, a higher level of LPG access is positively correlated with higher education levels in households in developing countries such as India. Unfortunately, there are large inequities in access to the modern cooking fuel across social groups (Figure 3). While affordability is a key concern, and according to the report, high costs are the most important determinant preventing consumption shifts across households; from less efficient primary sources of cooking fuels such as firewood, there are few justifications that help resolve facts such as – OBC urban households in the Central region have shown a 30 percent decrease in access to LPG over 2004-05 to 2009-10 (while access has remained nearly stagnant in rural areas).

India DataLabs @ ORF: NSSO Consumption Expenditure 2009/10

Indeed income class has a bearing on the levels of access to drinking water, electricity and LPG, and this is particularly true in developing societies, where lack of access reinforces income groups and in turn sharpens particularities of social groups. Low income poverty traps are dominant since the poor have no means to improve existence, owing to mediocre infrastructure, poor education and skills attained, lack of health services and poor productivity levels perpetuated by inequitable access to these essentials. The overall lack of access to specific social groups across regions, as visible in the case of UP, only adds to the sustained and absolute poverty levels of the state.

The higher levels of development seen in the Northern and Southern Gangetic Plains, serves to highlight that, successive governments have been unable to leverage the agricultural productivity of the region and enhance basic infrastructure throughout the state. The logical conclusion is then, that the bulk of the development in the state has resulted from proximity to water and fertile soil and the development of industry, rather than policy or administrative interventions, affirmative action or otherwise. Over the past decade, in the aggressive battle for votes, political parties have emphasised an inclusive development agenda and rallied support through promises for social mobility across castes and classes. The statistics while telling a part of the tale do suggest such promises to be mere rhetoric. Even in regions where some groups have telling political weight, ‘Bijli’ and ‘Paani’  eludes them. This is certainly a dangerous’sadak’ for the most populous state of the country, to keep treading on.

*Samir Saran is Sr. Fellow & Vice President and Vivan Sharan is Associate Fellow at the Observer Research Foundation, New Delhi.

BRICS, Columns/Op-Eds

Article in “Russia and India Report”: It’s time for a ‘BRICS Fund

by Samir Saran and Vivan Sharan
November 14th, 2011
Please find here the original article

With a post-crisis global recession deepening in the eurozone and other parts of the world, the BRICS countries can take the lead to set up a ‘BRICS Fund’ to reenergize faltering growth in both developed and developing economies, argues Samir Saran and Vivan Sharan.

The current global economic scenario is uncertain, volatile and misleading. The uncertainty stems from a breakdown in macroeconomic correlations and a continuation of a post-crisis recessionary environment in large parts of the world.  The volatility emanates from the unpredictable price action across asset classes and increased sensitivity of almost all asset classes to financial and political fragilities, like those that are prevalent in the euro zone. Meanwhile, the misdirection and misallocation of capital across asset classes is a direct consequence of the lack of clear signals by political institutions and markets alike, leading to broad scale risk aversion especially in the case of sovereign investors such as central banks.

Increasingly, as such strains constrains economic development and investment flows, it is necessary for the BRICS nations to realise their new roles in the emerging global economic order. The imperative to shape the dynamics of future growth must come from these new drivers of economic momentum. One of the ways to do it could be the creation of a BRICS fund – a consolidated wealth fund with appropriate and proportionate monetary contributions from the central bank reserves of all the BRICS countries. Such a multilateral fund, with pre-determined investment mandates, could prove to be a useful tool for rebalancing capital flows, and reenergizing faltering growth in both developed and developing economies.

About one eighth of all assets managed in the US are allocated to “impact investments” or “social investments” – an impressive statistic that must be replicated by emerging economies. With a view to the future, it is clear that social, economic and environmental sustainability are going to be essential for economic development and growth – at individual company, industry and international level. A BRICS fund which invests back into sustainable initiatives both within the BRICS and outside in the least developed economies could prove to be an unparalleled tool to promote and accelerate sustainable growth trajectories. Rather than being a problem of capital generation, the key challenge in financing transitions to sustainable, low carbon trajectories is the redirection of existing and planned capital flows to financially viable allocations in non-traditional asset classes. Alternative investments into sovereign debt of struggling economies based on mutually agreed upon special purpose vehicles could be another avenue for funding which would also leverage the BRICS’ bargaining position in multilateral negotiations.

In the recent international climate negotiations at Durban, it was decided by member countries that that the second commitment period of the Kyoto Protocol will run from January 2013. Furthermore, it was decided that the Durban Platform for Enhanced Action – an agenda strongly backed by the EU and the Association of Small Island States (AOSIS) would be instituted to develop another new Protocol by 2015 – an international legal instrument that will be applicable to all parties to the UN climate convention and will come into effect after 2020. Simultaneously, the parties to the COP agreed to institute a $100 billion Green Climate Fund (GCF) – a measure largely intended to appease developing nations such as those in the AOSIS to come on board the EU agenda. The strategy worked well, although smaller economies should be aware that in the past a bulk of the funds that have been made available to developing countries through the Clean Development Mechanism of the UN have gone to private project developers in China, India and Brazil (in that order). China got the lion’s share of close to half of the total investments made till now. If the investment flows were analysed at from a primarily deterministic prism, it would be hard to conclude that the funds from the GCF would benefit small developing economies, or impact real organic change. The Durban negotiations provided a textbook case where bargaining positions of developing countries, and especially those in the BASIC group of countries including Brazil, South Africa, India and China, could have been leveraged, had these countries already committed to fund sustainable development through a parallel fund. Instead, the outcome was sub optimal – given that there still is no mechanism for the eviction of carbon squatters who have conveniently pushed the onus onto countries that are still in the low to mid income development profiles for what is effectively a $100 billion payoff.

The BRICS fund could also provide suitable SPVs to smoothen any future financial shocks to the highly integrated global economy. Just as in climate change scenarios, financial shocks and imbalances are likely to alter the growth trajectories of developing economies in a much more significant way than of advanced, developed economies which already have monetary cushions owing to high per capita incomes and strong existing infrastructure. The BRICS fund could help the central banks of the member countries counter the effects of erratic demand cycles, global resource pricing distortions, and systemic contagious failures in global financial markets, through strategic investment stimuli. Such a mechanism would not only be complementary to the policy mandates of the central banks of the BRICS nations, but would send a strong signal about their overall financial policy independence of Bretton Woods institutions such as the IMF.

Whatever the investment mandate – the overall emphasis for such a fund would have to be the generation of absolute returns to be considered worthwhile by all of the relevant stakeholders. Furthermore, it is beyond doubt that multilateral institutions have limited degrees of freedom. If a BRICS fund becomes a reality, a necessary condition would have to be complete operational and functional independence to deliver what is needed. This would only be possible with the effective and efficient delegation of policy sovereignty. The modern-day central banking trend of institutional independence would be a good model to follow. Ensuring political and financial goals are separate, and asset allocation occurs purely on the basis of the accepted common mandate and profitability would create a strong shared institution.

From purely the perspective of profitability and diversification of sovereign assets, such a fund would provide a good alternative mechanism for central banks within the BRICS to allocate appropriate portions of their reserves to riskier assets than they traditionally are mandated to invest in. Thus, the fund could substitute for Sovereign Wealth Funds, an increasingly popular concept for diversifying sovereign reserves through alternate mechanisms, while simultaneously creating significant signaling benefits which would be advantageous in matters of setting trends and norms in international financial investment agendas in the future. Today, financial institutions are zealously protective of their cash assets. This is far from being a panacea for the prevailing economic scenario with a failing European idea and a politically problematical environment in the US. A BRICS fund could provide the much-needed liquidity and confidence, especially to capitalise on resilient business models looking for seed money.

For decades, economies in the BRICS consortium have been subjected to the rhetoric of structural reform by actors that have consistently overspent on consumption. The retooling and rebalancing of the global financial system is an imperative that cannot be ignored any longer. With the increasing cooperation between BRICS countries along political and economic lines, the conceptualisation of alternative mechanisms to promote the development agenda at a time when financial institutions are cautious with their money is certainly justified. Disruptive changes to status quo policies and investment patterns are traditionally most effective in uncertain, volatile environments. Looking forward, this decade presents a mixed bag of opportunities and challenges for nations and economies. With the emphasis and impetus of growth shifting to the emerging and recently emerged economies, it is only natural that the BRICS countries take the initiative and the lead to innovate their way out of international crises.

Samir Saran is Senior Fellow and Vice President at the Observer Research Foundation. Over the past year, he has been actively involved in setting up a green business “gTrade” to promote sustainable investing in India. 

Vivan Sharan is Associate Fellow at the Observer Research Foundation. He has interned at the UNDP, and PWC undertaking disparate research tasks. His primary research interests are in monetary policy, equity/debt markets in America and the BRICs.