Rethinking China's might by Minxin Pei my Comments

Minxin Pei’s article in the Washington Post was carried by the Hindustan Times on January 29, 2012. “Rethinking China’s Might” makes interesting reading. The thrust of his article is that the rise of China is exaggerated in relation to the rise of China as a threat to the US. He argues that instead of marginalising American influence Chinese attitudes are pushing Asian countries closer to Washington, elevating America’s status. Spoken in the US-China context and keeping in mind limitations of Chinese financial and military power in relation to the US this may be acceptable. It is true that China is still far behind the US in many aspects and its financial and economic clout are double edged swords. The two are locked in a Double Nelson.

In India we should weigh this in our context and how China’s continued rise economically and militarily at a time we seem to floundering or its recent attitude towards some of its neighbours, will affect us. First we should be realistic about catching up with China. Statistics and calculations about economic performance and other aspects of human development do not give that hope. Unless of course we believe in the theme that one day China will collapse under its own weight.
The reference that China’s flexing of muscles has made the US more relevant in Asia is partially valid. Countries of the Asia Pacific are merely seeking an insurance knowing that they cannot change geography and knowing that the US has not been a thumping success in Vietnam, Iraq and Afghanistan. Ultimately, all states realise that they cannot ignore China. Nor can we.

It is nice to look good in the neighbourhood. This is what we believe in. Not o with the Chinese. They are more inclined to put their belief in the dictum that in international politics it is better to be respected, even feared rather that loved.

RN Kao Memorial lecture by Naresh Chandra on India’s Security Challenges in the next decade – Role of Intelligence

Mrs Malini Kao, Members of Kao Saheb’s family, Shri Ajit Seth, Cabinet Secretary, Shri Sanjeev Tripathi, Secretary (R&AW), Former Chiefs of R&AW, Intelligence Bureau, Members of Press and other distinguished guests in the audience.

I feel greatly honoured and privileged to have been asked to deliver the R. N. Kao Memorial Lecture this year. I believe, it is the sixth in the series started in 2007 by Shri Tharakan, the then Secretary, R&AW. It feels good to be following the five distinguished speakers who have delivered the lecture in previous years.

Before this distinguished gathering, it is hardly necessary to enumerate the achievements of Shri Ramji Kao, one of the most celebrated civil servants of our time and the architect of our secret service. He was given charge of organizing the R&AW in September, 1968. Shri Kao had been associated with the creation of the Aviation Research Centre after 1962. He was able to set up and harness the capacities for both human and technical intelligence so successfully that within a period of less than three years, the Organisation was able to make a most valuable contribution to our triumph in the 1971 conflict.

He is recognized as a father figure and role model for all officers, young and old, in the R&AW and the Directorate General of Security. As a person Shri Kao had an elegant and striking presence. He was measured and precise with his words yet had a keen sense of humour, an amazing human touch and a love for arts.

A significant feature of Shri Kao’s vision for the R&AW was to lay strong emphasis on the quality of manpower and the multi-disciplinary sources from which select personnel should be drawn. He realized that the most important element of the whole exercise was the expertise and the quality of personnel that R&AW could select and motivate for the complex tasks entrusted to the Organisation. He was also the first to recognize the need for having a specialized service like the RAS to develop a body of professionals with core competencies needed by the agency.

I am happy to recall that my first contact with Shri Kao was when he called me on phone in late 1968 to assist in securing release of an IPS officer from UP. All I could do as Deputy Secretary in the Home Ministry was to get the information and inform him that the file was stuck in the office of Chief Secretary. Later, Shri Kao was successful in his attempt to get the services of that officer, who later came to head the R&AW. My last meeting with Kao Saheb was in March, 2001, when I returned to New Delhi from Washington DC. He was gracious enough to invite me to tea at his residence and was generous in his remarks about the improvement of relations with the USA. His analyses of India-US relations and knowledge of the current situation was impressive and as keen as ever. I would always cherish his genial friendly manner and the way he could put junior officers at ease.

Presently engaged in review of National Security systems and issues, in a Task Force, which will make recommendations to Government of India soon, I cannot be very free, therefore, with loud thinking and tentative conclusions at this time. Nevertheless, I will venture to highlight some aspects of the issues involved that might be of interest to the knowledgeable gathering present here. These do not reflect the views being finalized in the Task Force.

To take up the security challenges we might face in the next decade and beyond, it might be appropriate to dwell on what our National Security Doctrine ought to be.

A country’s national security is conceived in terms of its capacity to defend and advance its stated interests and principles. This requires adequacy of infrastructure and the availability of specialized personnel to meet these challenges effectively. National security has come to acquire a much wider connotation comprising not only the traditional aspects of defence and maintenance of public order but also issues of nation’s economic strength, its technological capability along with food and energy security and the quality and well-being of its human resource. It is in this wider context that one has to identify and analyse challenges at present and those emerging in the future and consider the role of intelligence agencies. Proper intelligence input is essential to taking informed decisions on issues of national security. Intelligence agencies are important arms of the State for meeting external challenges and for the proper management of internal security.

In brief, our national security objectives are: (i) preservation of territorial and maritime integrity of the country; (ii) having friendly relations with all countries; (iii) providing for sustained economic and social development accessible to all; (iv) creating credible capacities to meet conventional and non-conventional threats and challenges emerging from space and cyber space; and (v) nurturing the values of secularism and democracy. These objectives set the agenda for our policies and programmes and bring out the challenges that we face in the future for the successful prosecution of these objectives.

To consider the security environment in which we have to fashion our policies, we find the global strategic context changing rapidly, driven by the speed of technology development, realignment of forces occasioned by the recent decline in the markets of the West along with emerging economic strength and rise of China and India. Many see in this a strategic shift from the West to the East, but one has to be realistic and not assume that this shift is going to indefinitely endure. Even today, the aggregate size of the economies of the US, Europe and Japan, covering about a tenth of the world’s population have an aggregate GDP which is eight times the size of the combined GDP of China and India, which together account for one-third of human-kind. This imbalance will reduce but gradually as the years roll by and so this asymmetry needs to be factored in our policies aimed at managing the rebalancing of strategic power internationally.

These developments require careful management of the current global redistribution of power and taking steps to engineer a suitable political equilibrium within a rising Asia. In the economic sphere, the main challenge would be in the shape of achieving rapid economic growth, a larger share of international trade and business along with substantial growth in employment opportunities. While every effort would be necessary to expand bilateral trade relations on fair terms of trade, the challenge would be in acquiring the necessary mineral resources for energy, fertilizer and other industrial inputs in friendly countries. Sustained and broad-based economic development and all inclusive growth are central to strengthening national security. Programmes aimed at employment-generation, along with inclusive economic development remain a challenge. Promoting vast sections of our people out of poverty into gainful occupations has to be recognized as a security imperative.

The main constraint to achieving rapid economic growth is going to be inadequacy of infrastructure, particularly the capacity to meet energy requirements in various sectors of our economy. The problem is likely to get more complex with the threat of climate change that calls for effective national and global intervention. All nations recognize the importance of taking urgent and drastic measures to reduce dependence on fossil fuels that add to greenhouse emissions but their approaches are heavily conditioned by national self-interest. In this area, India will have to be alert to the need for promoting a more equitable sharing of the global commons in order to secure its right to reasonable share of the ecological and economic space.

Our strategic concern has to seek an external environment in the region and beyond that is conducive to peaceful development and the protection of our value systems. While our policies are centred on the fact that we do not harbour any aggressive designs nor seek to threaten anyone, we have to take all necessary measures to safeguard the country and the interests of the people. We must also keep pace with technological advancement and provide for adequate infrastructure and the human resources required for growth in agriculture and industry and specialized services in the new emerging fields of military technology, cyber security, techint, forensics, etc.

To describe the security challenges nearer home, I would like to mention the rise of China as the first issue. In my view, we should not consider this only in the narrow context of a security threat or challenge, but also take note of the opportunities that emerge from the rapid growth of China’s economy. One need not under-estimate the apprehension generated by the thrust of China’s actions in countries of our neighbourhood, particularly in Pakistan and the coastal areas of our immediate neighbours. We are also yet to deal with and resolve the border disputes persisting in the Northeast as well as the Northwest. The continued military and technological assistance extended to Pakistan by China directly or through North Korea in the sphere of nuclear weapons technology and missile systems has been a dangerous development.

The growth in various sectors in China, especially in defence production capability require concentration of efforts to improve our defence preparedness, much larger capacity for defence production and upgradation of our armed forces. It is a national security requirement that the gap in the size of the economy between China and India does not widen to a level that further increases our concerns for a balanced relationship between the two major powers in Asia. This also highlights the need of improving the capability of our agencies in the area of economic and commercial intelligence.

Our relations with China have elements of cooperation and competition at the same time. While both of us are pre-occupied with internal transformation, we will need much better communication and dialogue to avoid misunderstanding each other’s actions and motives without letting the guard down on the serious security aspects. This is another area in which the role of intelligence agencies is of crucial importance.

While these challenges have to be taken very seriously, the importance of dialogue and building up of trade and investment relations with China have to be accorded priority. China is already our largest trading partner, but the terms of trade need urgent reform. It is also necessary to promote greater understanding of each other by promoting exchanges between the two countries involving not only diplomats and military personnel but also trade delegations and people from various walks of life.

This also highlights the importance of having language experts covering not only the Chinese language but the languages spoken in countries of our extended neighbourhood. There is paucity of language experts today and the capacity to train more people is very limited. Besides ensuring a number of language experts for translation and simultaneous interpretation, it would be necessary to train our own officers in the government and the agencies to acquire proficiency in various foreign languages of importance.

In the case of Pakistan, the situation is likely to remain as difficult and complex as before. Recent trends are even more discouraging. It has now become customary to describe Pakistan in very negative terms, such as a failing state, epicenter of terrorist activities, untrustworthy ally, etc. A noted academic and terrorism analyst has called Pakistan “perhaps the biggest and wobbliest domino on the world stage”.

The fact that the Pakistan military has a number of nuclear devices and associated delivery systems including missiles is a serious cause of concern, not only to India but to all powers committed to non-proliferation. Cooperation with agencies to ensure the provision of necessary safeguards has become international security imperative because of the fear that such weapons, or fissionable material might fall in the hands of non-state actors.

Dealing with the security challenge from Pakistan is a subject by itself and cannot be covered adequately in this address. Suffice it to say that this is the most serious challenge that our armed forces, intelligence and security agencies and the people as a whole have to face in the next decade or more. This is one area in which the armed forces and all the agencies including the NTRO, NATGRID and the recently announced NCTC will need to function in close coordination. Systems will have to be kept under constant review to ensure free and unrestricted flow of information through the entire security network covering many departments. This is essential to ensure that actionable intelligence inputs reach stations where counter measures have to be taken in time.

There is a perception that our humint capacity in our western neighbourhood has declined in recent years. I am sure this area is being given special attention in order to ensure that timely and accurate information is available not only to agencies responsible for counter-terrorism, but also to decision-makers for taking more informed decisions and timely action. While creating the capacities to anticipate and deal with unwelcome developments, infiltration and worse from across the border, we must not lose the long-term objective of having fruitful and friendly relations with people of Pakistan who are our closest neighbour in terms of history, culture and language. While exercising the utmost vigilance and remaining alert, we need to seize every opportunity of communicating with counterpart segments of Pakistani society in the hope of convincing our neighbour that we as a people wish them no harm and would like to partner with them in the overall development of the sub-continent.

Other countries of the region which have to be on our radar screen are Afghanistan, Myanmar, Nepal, Bangladesh and Sri Lanka. While these are all passing through a period of transition, our relations with them would further improve with the resolution of many problems dogging their internal situation.

In the case of Afghanistan, our policy of providing development assistance and support for infrastructure development, training of Afghani personnel and maintenance of certain basic services in that unhappy land must continue according to the wishes of the Government of Afghanistan. For stability in this region a strong government in Kabul is in everybody’s interest.

The situation today is fluid. Deterioration in US-Pakistan relations has created problems for provisioning the US-led NATO forces in Afghanistan. Further reductions planned this year in US force levels would create space for other interested powers, particularly Pakistan to take undue advantage of the situation. Development in Afghanistan and the ground situation needs to be specially monitored to enable making the right choices.

With Nepal, we have the closest and most comprehensive relationship. The fact that we have a largely open border between India and Nepal adds a major security dimension to our relationship. Continued engagement with Nepal with adequate assistance to their development programme is to the mutual benefit of both the countries. Nepal has been fairly cognizant of our security concerns, particularly in ensuring that their territory is not used by any neighbouring country or non-state actors for launching terrorist and other unfriendly acts against India. However, activities of some foreign agencies in Nepal will continue to be of serious concern.

In the case of Sri Lanka, our economic and political support to them should help in securing a more fair and durable political settlement between the major communities of that island. Problems and grievances of the Tamil community, if not adequately addressed by Colombo, have the potential of spilling over to the southern tip of India, creating a complication in India-Sri Lanka relations.

Our sincere efforts to improve the relations with Bangladesh have started to bear fruit, but much still needs to be done to take full advantage of the great potential that exists for cooperation and exploitation of water and mineral resources in a spirit of cooperation and friendship. There is great potential for economic cooperation between India and Bangladesh, including projects which improve connectivity and better road transport between Bangladesh and the territory of India bordering Bangladesh. Mutually beneficial projects have not been able to take off because of domestic political considerations. The situation can improve with sincere diplomatic efforts taking into account the political sensitivities involved on the Bangladeshi side. Lately, Bangladesh government has been quite responsive to our security concerns with regard to insurgent groups making unauthorized use of places in that country in order to regroup, train and make unwelcome inroads into Indian territory.

In the Indian Ocean and the countries of the littoral, India has unique and special responsibilities for ensuring safety of passage of vessels carrying precious cargo, particularly oil, fertilizer and minerals. Besides providing requisite capacity to Indian Navy, cooperative arrangements would need to be worked out with concerned Navies. Effective arrangements for sharing intelligence and commercial information would need to be worked out by our agencies.

Among the security challenges requiring urgent attention, terrorism is the most pressing real and eminent threat; especially from externally sponsored and state-assisted cross-border terrorism. Home-grown terrorism, both complements and adds to the burden. Left-wing extremism is the most serious threat to our internal security.

Note has to be taken of the nexus that exists between terrorist outfits, criminal gangs involved with drug trafficking, gun-running, pushing of fake currency and irregular movement of persons across national borders. This creates a very nefarious network of crime and threat to security that requires a very comprehensive and refined approach. For instance, relevant data and information on the activities of all these elements will need to be compiled, analysed and assessed as a base for supporting preparation of counter-measures by the concerned agencies. Needless to say this requires coordinated efforts by the intelligence agencies, para-military forces and state police. To the extent possible, cooperative assistance will have to be sought from agencies in neighbouring countries.

Within the country, there are serious gaps in our capacity to manage internal security issues effectively. This is a very wide subject but mention needs to be made about the crying need for reforming and modernizing the police force at the level of police stations and districts. There is similar need for augmenting resources for the lower judiciary and the government prosecution branch at the district level. Delays in securing assistance from the police or availing judicial remedy in a fair manner is a major cause of frustration, resentment and disaffection among the people at large. Substantial improvement in these areas is a national security imperative.

Although there is less likelihood of any conventional or full-scale conflict breaking out in the near future, the possibility of limited conflict or skirmishes in sensitive locations on the border or LOC cannot be ruled out. These perceptions require the necessary level of readiness in our capability to respond adequately. Our Defence Services cannot lower their guard in discharge of their paramount responsibility in this respect. Defensive and fighting capabilities of the Services will have to be continually upgraded along with establishing adequate infrastructure. Defence expenditure and programmes for upgradation of military technology, equipment, etc., has to be in reasonable proportion to the capabilities being developed in our neighbourhood. In this area, intelligence agencies have to play an important role in gathering and assessing relevant information to enable more informed decisions being taken by government. Shri Kao had realized the importance of R&AW working with other agencies to optimize the quality of intelligence and analysis generated by different agencies. Cooperative arrangements organised by him were in evidence during the 1971 conflict and thereafter.

The role of intelligence agencies has transformed tremendously and their functions have become manifold. In response to the changing security scenario from days of mere surveillance and information gathering through spies, double agents and police informers, the scene has changed completely with the introduction of new technologies, electronic gadgets and cameras and methods which are not only available to State agencies but also to well-funded terrorist and militant organizations and insurgents. The problem has acquired a new dimension with the ability of these irregular outfits to hire or recruit as their members from among highly qualified personnel. In this context, it is evident that the importance of what the Indian intelligence agencies are required to do cannot be over-emphasized.
Besides the traditional work involving gathering of information, making assessment and producing actionable reports for those in-charge of taking remedial measures, the agencies have now to manage new areas in a fast-changing scenario. For instance, highly specialized and trained personnel are needed to read and decode signals, interpret long distance photo-imageries, do forensic analysis of all explosives and other materials, undertake analytics, do horizon-spotting for anticipating emerging problems and connecting the dots coming out of diverse sources of data collection. The principal challenge in meeting these requirements would be to hire specialized personnel in requisite numbers and train them to the professional level required in the organization. A comprehensive programme of manpower planning and personnel development is going to be the single-most important issue to be tackled. The scene today is not encouraging. There are huge shortages in the agencies, specially in certain critical areas of their work. The rules and procedures for creating posts, recruiting people and the institutional capacity to train them is not adequate to meet this requirement in a timely manner. Finding innovative solutions, more pragmatic and liberalized procedures will need to be adopted to overcome this problem. This whole area is currently being reviewed by the Task Force to examine issues connected with National Security.

It is not necessary to provide for all specialization and skilled manpower within the agencies and government departments. There are experts and analysts available outside the government in the universities, think-tanks, the scientific community, specialists in business and commerce and journalism. I think the time has come for those in the government to reach out more and more to these national assets which are outside the government fold. This can be done not only through cooperative arrangements with necessary safeguards, but also through interchange of specialist personnel between government agencies and non-government institutions. In times of conflict, many nations have adopted such an approach to great advantage. In the US, interchange between government think-tanks and other non-government institutions is very common. In India, we are yet to utilize the substantial potential that exists in this respect.

A revolution in communication and the tremendous expansion of the internet has created a new situation. The utility of monitoring telephonic conversation or intercepting messages on wireless is hardly sufficient any more. Besides the print media and TV, the social media has now a reach which runs into millions with extremely fast communication capable of creating a surge of public opinion and movement faster than any government agency can monitor, let alone control. We have seen highly centralized governments taken by surprise on movements springing on to the streets in unexpectedly large numbers united with a common intent. This is a new destabilizing phenomenon, but the impact of such events is fortunately less in democracies where the media is free and open.

Cyber security threats are very real and pose a serious danger to our security systems. It transcends geographical and domain boundaries and is not subject to control through physical security. The prevalent threats, besides theft and fraud include espionage, sabotage, psywar and propaganda. For adequate cyber security considerable expertise needs to be developed in the areas of cryptography, network security and information security. In fact, establishing and following a cyber security doctrine is the first step to building an effective defence system. Such a doctrine has to be developed for the entire cyber space covering each organization involved with providing or using internet services. Recent experience has shown that threats and actual attacks are becoming more and more unpredictable. This requires preventive measures and contingency plans to deal effectively with the crisis in quick time.

These new developments call for structures and methods enabling much faster response. The earlier divisions and distinctions in the sphere of security and intelligence are no longer valid. The line between internal and external threats has got blurred. Cross-border terrorism has links in our own country and several internal insurgencies and home-grown terrorism has external ramifications, like sanctuaries, training camps, etc., available in neighouring countries.

There is also greater need for effective systems and mechanisms for sharing all worthwhile actionable intelligence without delay and for coordination in the follow-up action or response. This requires a holistic view of the entire network through which information flows to the departments and agencies of the Central and State Governments. In all spheres it has been found that important bits of information lie unnoticed and unattended while it would have made a crucial difference in the hands of the concerned authority. This aspect needs to be studied by the major departments and agencies to improve the system of collection, storage and retrieval of information across different turfs in a seamless manner. In the case of sensitive information, officials in the hierarchy can be accorded a level of clearance to enable use with the necessary safeguards.

India is steadily building capabilities to take care of its security concerns largely on its own. This is good, but some concerns have international dimensions. In this, diplomacy and strategic partnerships would play an important role, but intelligence cooperation with major powers and countries is also required, particularly in combating international terrorism. We have to always oppose any move to compartmentalize terrorism by considering foreign terrorists as your terrorists and some as ours, depending on their target country. However, we may have to make allowances for each other’s constraints, priorities and areas of divergence of interests.

The intelligence apparatus in India conforms to the generally accepted pattern prevalent in democratic countries. Most totalitarian governments and dictatorships follow an integrated system as is the case in communist countries, China, Russia, Pakistan, Myanmar, etc. In democracies like USA, UK, France, Japan, etc., the security service and the secret service have come to be separated. This occurred in India in September, 1968. Separation of normal police, the security service and the secret service provide necessary safeguards in protecting citizens’ rights and upholding due process of law. For instance, the intelligence establishment is not empowered to arrest and detain persons except through and with the help of civil police. The citizen is thus assured that the secret security apparatus cannot touch him directly, but only through normal police where legal and judicial remedies are available. Further, the secret service does not have a role within the country and operates in a manner which is consistent with the overall national security objectives and interests of the country.

The operations of the external agency have certain specialized features. Its officers and operatives often have to work in alien or even hostile environment. We have to see how these intelligence operatives should be best recruited and trained and how to take care of their future prospects. First, we need persons of strong nerves who can take care of themselves in unpredictable circumstances and who can work coolly under pressure, and also having the judgement to guard against risks and retaining the benefit of deniability. They are expected to do whatever it takes to achieve their objective and yet discharge their duties without breaking the law of their own country, although the rules of engagement differ when they have to operate abroad in unfriendly and hostile territory. We have also to choose people from different backgrounds and walks of life with special skills and aptitudes. Therefore, all recruitment to the organization may not be best done through the normal selection procedures and bodies or into one or two organized services. We have to study procedures in other countries and adopt some features to suit the conditions in our own country. In bringing about any major changes in the system of recruitment the prospects of existing incumbents should not be overlooked.

In the training of recruits, more attention has to be paid to their mindsets and mental orientation and the overall approach and attitude towards service in the organization they are joining. Needless to say, much more attention has to be given to the practical side of training in addition to theory. At the same time, besides the need for area specialization and acquisition of some special skills, there will be obvious need for diversifying their cover and having different criteria for placement, promotions and remuneration.

In the interest of their work, intelligence agencies have to be provided much greater degree of flexibility and freedom in using public funds and resources. It is not possible to apply the same rules of transparency and audit that are imposed on other departments of the government. On the question of accountability, I find that the views I had expressed several years ago remain largely valid still. If public servants undertake activity with the use of public funds, then a measure of transparency and accountability are questions which cannot be ignored. Being part of the Executive there is no fundamental immunity available to intelligence agencies from parliamentary scrutiny or judicial review. To an extent, this also goes for audit of expenditure incurred by the intelligence agencies. It would be clear to the meanest intelligence, however, that there is no way the intelligence agencies can be expected to function in the open for a substantial part of their operations. If public funds are to be utilized for the purposes described above as functions which intelligence agencies must necessarily perform in the national interest, then a balance has to be struck between two sets of conflicting considerations. It is no use imposing the standard framework of accountability in a manner which brings essential secret and security services to a halt, causing funds and energy to be expended to no effect. We must remember what we are dealing with and what the other side is throwing at us. So in a democracy run by rule of law who is ultimately responsible for striking a balance on this issue, and for making a right choice? In Parliamentary form of government this can be only done by the Prime Minister as Chairman of the Cabinet Committee on Security with ultimate accountability to Parliament.
There is also the contradiction involved in the spirit that characterizes the RTI Act on the one hand and the Officials Secret Act on the other. The generally accepted principle in securing right balance is to weigh the pros and cons of putting information in the public domain, keeping in mind that the same would be also available to the interested diplomatic agents of foreign missions based in India. While intelligence agencies are exempted from application of the RTI Act, audit and accountability has to be ensured rather carefully to avoid damage to security interests.

At the same time, it is important for intelligence agencies to devote attention to their image, public relations as well as communication with the media. Closed-door meetings by officers with senior editors on non-attributable basis have helped in the past in managing public opinion in crisis situations. Failure to do so has on occasion resulted in embarrassment and avoidable burden upon those taking important strategic and tactical decisions. This is an area requiring greater interaction and special handling by trained professionals.

I thank Secretary (R&AW), former heads of agencies, members of the media and other distinguished colleagues for enabling me to share my views.

Thank you.

Source : The 6th RN KAO MEMORIAL LECTURE BY SHRI NARESH CHANDRA, 20th January 2012

Truth is stranger than science fiction

H G Wells who gave us The War of the Worlds, the first science fiction novel about Martians landing on earth, is sometimes credited with thinking up the tank in his 1903 short story The Land Ironclads. Jules Verne, after whom the French have named their elegant restaurant atop the Eiffel Tower in Paris, was more famous for his science fiction novel Twenty Thousand Leagues Under the Sea, which created the first fictional submarine, the Nautilus. The Bruce Willis starrer Armageddon was probably as real as John Le Carre's Tinker Tailor Soldier Spy.

Real wars have always been challenges and opportunities to try out new weapons, assess their efficacy, which is usually measured in lethality with minimal loss to the user. Reagan's Afghan jihad proved the efficacy of the Stinger missile that brought down Soviet aircrafts and helicopter gunships and was the one weapon that hurt the Soviet Army the most. The Iraq war in the time of George Bush Sr was marked by the use of precision guided missiles (smart bombs). Nintendo Wars had arrived and the primary and reasonable aim was to achieve destruction of targets and victory with minimal loss of American lives.

Futuristic warfare: US Army is researching towards deploying

Brigade Combat Teams of about 2,500 soldiers, unmanned autonomous

remotely guided robotic systems and equipment meant for Future

Combat Systems by 2025.

George Bush, the Second, fought more than one war more or less simultaneously in Iraq and Afghanistan. This was the era of cluster bombs and the BLU-82B/C-130 weapon system which was first used in Vietnam (more popularly known as daisy cutters that was a 6800 kg conventional bomb that could clear enough forest space for helicopter landings) and eventually, in a variation of surveillance UAVs, Predator UAVs (drones) that killed with precision by remote control were introduced in the Afghan war. Another variation of the drone now making its debut in Afghanistan is a pilotless helicopter intended to fly cargo missions to remote areas rendered dangerous and inaccessible to motor convoys because of road mines and bombs.

This year the US Department of Defence is expected to spend US $ 77.8 billion on R & D. The effort has been a trend towards high intelligent warfare and precision and miniaturised weapons. The idea is to move towards a leaner military machine. For instance, even today an average US infantryman is probably equipped with the lethality and staying power of a company; apart from high quality body armour, he is equipped with GPS, night vision devices, and thermal imaging, communications systems that enable real time intelligence with which he can call in close air or artillery support against targets in all weather. It is estimated that seven such infantrymen have enough weaponry, munitions and staying power to battle off a battalion.

The trend now is towards intelligence weapons systems with precise missions that are network centric, capable of swift decision and superior performance in all echelons with fewer casualties. US Army research is towards deploying Brigade Combat Teams of about 2,500 soldiers, unmanned autonomous remotely guided robotic systems and equipment meant for Future Combat Systems by 2025. The US Navy similarly predicts unmanned, autonomous robots in the water, on the ground and in the air.

The UAV of tomorrow will be the size of bumblebees; there is current research in the US to develop devices that are smaller than birds and called 'smart dust' which are complex sensor systems not much bigger than a pinhead. Millions of such devices could be dropped in enemy territory to provide detailed surveillance and ultimately support offensive war missions. Nano weapons are the other new research weapons along with smart weapons. The American plan of reducing troop strengths abroad would be counter balanced by these new kinds of deployments.

Also by the end of 2030 or 2040, cyber warfare will move centre stage where information control of one's own communication systems and disrupting the enemy's communication, command and control will be the first determinant of military success. The Chinese have been watching these US military developments very closely to see how wars of the future will be conducted. We are still trundling along, unable to decide which artillery gun to buy, leave alone manufacturing one ourselves. We need to pay attention to high-tech research before our Armed forces become military dinosaurs -- quaint but ineffective. This is what will separate the men from the boys in the future.

Source : Mid Day . Mumbai , 19 January 2012, Article written by Vikram Sood ,

former chief of Research and Analysis Wing (RAW)

Pakistan- The drama begins to unfold (Amended)

Until the last weekend there was surreal theatre in Pakistan with shadows boxing each other. The main players in the developing political confrontation were Nawaz Sharif and Imran Khan with Pervez Musharraf an incongruous joker in the pack as they all expected to be sworn in as Prime Minister. Imran used the bad metaphor of Tsunami and as it now turns out there is indeed a tsunami sweeping the body politic of Pakistan.

The fog has now lifted and the spotlight has moved away from politics and it now on in on President Zardari, PM Gilani, the Army and the Supreme Court. Both the main alleged conspirators of Memogate - Husain Haqqani was in hiding in the Prime Minister's House as he feared his life was threatened and later Ejaz Mansoor declined to come to Pakistan as he feared for his own security. Today the fog has lifted and it is clear that the confrontation is now head-to-head between the civilian government led by Prime Minister Yousef Raza Gilani and the PPP led by Asif Zardari against the almighty Army, the ISI and joined by the Supreme Court led by Chief Justice Iftikhar Choudhry.

While the Supreme Court investigates the Memogate it is rather strange that the memo was allegedly written in May it surfaces only in October when Mansoor Ijaz wrote about it. The point is why was this talked of months after writing and why was it referred to at all. Since then relations between the Pak Army and the PPP government have nose dived.

Gilani's midweek statement that the Army chief General Kayani and DG ISI Shuja Pasha had violated the Constitution by sending their reply direct to the Supreme Court instead of routing it through 'competent authorities'. Interestingly, Gilani had said this to the Peoples' Daily Online at a time when Gen Kayani was visiting China. Gilani had obviously used remarks by Chief Justice Iftikhar Chaudhry that an act by a government functionary without approval from the government was unconstitutional. Gilani specifically named General Kayani and Lt Gen Pasha.

The Army responded after Kayani's return, through a statement by its public relations outfit, the ISPR, saying that the allegations by Gilani against the Kayani and Pasha had "very serious ramifications with potentially grievous consequences for the country."

It has also been pointed out that the reply was routed through the Defence Secretary and the Attorney General. The PM retaliated by sacking the Defence Secretary Gen Khaled Naeem Lodhi - the man who had earlier said that the Army was not under civilian control. A civilian, Nargis Sethi who is also Cabinet Secretary and Gilani's confidante will hold additional charge.

The Army has also appointed Brigadier Sarfaraz Ali as the Brigade Commander of 111 Brigade, Rawalpindi - commonly known as the 'Coup Brigade'. The Army has called a meeting of its Principal Staff Officers - all Lt Generals - tomorrow to assess the situation.

This public spat is the one absorbing Pakistan now. Some TV channels have been portraying the Army's case saying that they had sacrificed lives for the nation, fought in FATA and so on and that t was an insult to the sipaah salaar to treat him in this manner. The battle lines have been drawn.

The question uppermost in everybody's mind is: will there be a coup. In the past received wisdom has been that in any confrontation between the Army and the civilians the Army has won. The Supreme Court had earlier declared both PM Gilani and President Zardari as dishonest as it criticised the government's refusal to write to Swiss authorities in the alleged multi-million dollar money laundering case against Zardari.

The Supreme Court may not approve of or acquiesce to a military coup although some say that the Court's pursuit of the Zardari case and its enquiry into Memogate could lead to a judicial coup.

Gilani has been talking to other political parties about early elections; the PPP hopes to gain majority in the Senate and then agree to call for elections. This will happen after March but the crisis is here and now.

In an effort to undercut support to Imran Khan through persons like Shah Mahmood Qureshi who jumped off the PPP bandwagon after he was sacked as Foreign Minister, from Multan, Gilani has been talking about a new province, Seraiki in southern Punjab and also to assist his son who plans to contest from the seat vacated by Qureshi.

In a recent interview with GeoTV President Zardari also asserted that he was not going anywhere but then that is what all politicians say. There was a touch of defiance when asked about Kayani's absence at a Presidential dinner, Zardari said he did not care.

The props for a coup are in place but will it happen? In the past Pakistan has had to face US anger and sanctions following a coup, but circumstances have evolved in the past that converted Pakistan into a stalwart ally. The crisis this time has come at an awkward time for the US as President Obama gets into fighting re-election, needs to keep Afghanistan quiet as he pulls out.

Therefore events in Pakistan are unnecessary distraction for President Obama because a coup will bring in Congressional sanctions at a time when Pakistan is financially and economically broke and the US needs Pak Army's cooperation. Even Pakistan's chosen friends in the Arab world have declined to extend loans to help Pakistan tide over its financial problems.

In this case the US would secretly back the Army despite all the ill feeling in recent weeks while publicly supporting the civilian government. Probably the US would prefer that the PPP government be sacrificed in an early election, something the Army would appreciate and all is well with the world. There would have to be a backroom deal and one would watch out for visits to Qatar.

Attn: News Editors/News Desks: The views expressed in the above article are that of Mr.Vikram Sood, former Secretary R and AW. (ANI)

Pirates of the Arabian Sea and Other problems

The harrowing and tragic experiences of November 26, 2008 had reflected a failure of all our systems that allowed the three-day carnage. Two years later, in May 2010 by when our maritime alert systems should have improved, a discarded cargo vessel MV Wisdom mysteriously ran aground at Juhu beach.


The ship had been towed close to the Mumbai coast past Bombay High and had narrowly missed hitting the Bandra-Worli Sea Link. While details of what happened have remained shrouded in mystery, there would have been some questions that the intelligence and security agencies would need to answer. For instance, what if the ship had carried some lethal cargo either radioactive, explosives, or CBW? Was it a Trojan horse whose occupants disappeared or was it just a dry run to test our responses?

Concerted Vigil needed: The alliance of terrorists from Lashkar-e-Tayyba with Somali pirates poses a serious maritime security threat to India

For the past few years, the law and order on the high seas of the placid and commercial Arabian Sea has been deteriorating with Somali pirates colluding with the Shahbab terrorists from southern Somalia and the Lashkar-e-Tayyaba of Pakistan. Piracy in the Arabian Sea has been coming dangerously close to the Indian shores

In January 2011, Indian coast guards aborted an attempted piracy attack close to the Lakshadweep while later in March there were two similar piracy attempts -- one about 600 nautical miles west of the Indian coast and another close to the Lakshadweep islands once again. Indian shipping interests have had at least 200 attacks so far from pirates.


Piracy and sea terrorism affect the security and commercial interests of major powers like China who seek to ensure continued supply of energy across the Arabian Sea. China has to take into account two choke points for energy imports -- the Strait of Hormuz or the Malacca Straits, which hurt China, India and Japan. India receives imports amounting to US $ 50 billion and exports worth US $60 billion across the Arabian Sea every year. The Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and then to the Arabian Sea.


About 15.5 million barrels of oil flowed through the Strait every day in 2009 and constituted about 33 per cent of all sea borne trade of oil, which was down from 40 per cent in the previous year. About 75 to 80 per cent of all crude exports were meant for Asian markets -- China, Japan, South Korea and India. It has been estimated by the International Energy Agency that by 2030 China will import 13.1 million barrels of oil per day up from 3.5 million barrels per day in 2006. About half of these imports come from West Asia, which will continue to grow in the coming decades.

Almost due east from the Gulf of Oman is the Gwadar port on the Makran coast of Balochistan. About 550 km south west of the Gulf of Oman in the Arabian Sea is the Gulf of Aden leading to the Suez canal; the southern coast line of the Gulf is Somalia, the home of present day pirates and terrorists.

The Seychelles archipelago, where China seeks berthing facilities, is about 1,350 kms from Somalia and about 2,800 kms from Kerala. China has begun to make moves in Afghanistan and Iran as it sees itself as a successor to the US. Its geo-strategic interests in Pakistan are well known. Securing the seas is a natural prerequisite to ensuring uninterrupted supplies of energy for its factories. It is the triangle of Gwadar, the Strait of Hormuz and Seychelles that would be important to Chinese interests in ensuring a steady supply of energy.

The pirates collect logistical data and raise funds for Al-Shahbab, in exchange for protection. The Lashkar-e-Tayyaba and Al-Shahbab alliance would have serious maritime security issues for India and the two could operate out of Karachi more effectively just as the 26/11 terrorists did.

Our long coast line is inadequately manned by counter terrorist or security details. India has to get serious to protect its coastal interests and further afield protect the high seas -- never an easy task. Eternal vigil and strengthening pre-emption capabilities are the best ways of safeguarding against the threat from terrorism and challenges from other powers and their competing interests that would impinge on ours. Platitudes and declarations will not do.


Source : Mid Day , Mumbai , 5th January 2012

The Great Walmart of China !

Foreign investment is generally beneficial as it creates jobs, adds value, and contributes to the GDP. Companies like Hyundai, Ford and Honda have built a giant automobile industry in India now producing over 2 million cars and tens of thousands of new jobs. By 2017 India will emerge as the third largest car making country in the world producing over 7 million automobiles. This would not be possible without foreign investment, technology and leadership. In sector after sector foreign investment has created huge new capacities catering to domestic and foreign markets. The level of foreign ownership makes little difference to the contribution foreign companies make to the economy. The desirability of foreign investment must never be questioned as long as it creates jobs, adds value and contributes to development. And these are just the factors that go against foreign direct investment in retail.

Study after study in developed and developing countries alike have shown that big box retail rather than creating jobs, destroy jobs. In fact their utility in developed economies is due to the labor savings they achieve. Classical economics was wary of the monopolistic producer who would charge ‘too much’ from the poor working classes while producing the much-needed ‘bread’. The single producer was the dread from which economists sought ‘perfect competition’, meaning many producers catering to many consumers resulting in fair competition in a perfect market. Adam Smith could never have conceived of a global operator with a huge hoard of cash and instant information becoming a ‘sole’ consumer. To the economists ‘monopsony’ was a theoretical concept – to be defined as a construct before belaboring the dangers of a monopoly. The danger of monopsony, seldom thought of by economists as a threat, is now upon us. In the last three decades the advents of giant retailers like Walmart (turnover $422 billion in year ended January 2011) and producers like Nestle (turnover 60.9 billion Euros year on year October 2011) have made monopsony a reality.

The bulk buying and the recourse to monopsonic practices result in pushing down producer prices, undoubtedly with resultant benefits to the consumer. Thus, the more of a commodity large retailers purchase in bulk, the lower the prices growers of agricultural commodities obtain! Studies by FAO and Oxfam attest to this. For instance, a decade ago coffee growers earned $10 billion from a global market of over $30 billion but now they receive less than $6 billion out of a global market $60 billion. The cocoa farmers of Ghana now receive only 3.9% of the price of a typical milk chocolate bar but the retail margin hovers around 34.1%. A banana farmer in South America gets 5% of the retail price of the banana while 34% accrues to distribution and retail.

The table below from “Oxfam: International Commodity Research – Coffee” clearly indicates the price of coffee during the period 1980-2000 plunging as production scales new heights. Analyzing the reason for this the study explains that the major cause for it as follows: “The high level concentration along the coffee supply chain is clearly not to the advantage of producers, who are price takers. Multinationals involved in the coffee sector control an ever- increasing percentage of processing, marketing and retailing. Because they are facing a multitude of small producers in 80 poor countries, multinationals can set the rules of the game. This buyer-driven supply chain means that multinationals capture most of the value-added linked with the production of coffee. Multinationals can put a downward pressure on producer prices by playing one producer against the other or by encouraging new countries or regions to start producing coffee via foreign direct investment.”

The average size of a Walmart is about 100,000 sq.ft and the average turnover of a store is about $ 53.2mn, each employing about 300 workers. The turnover per employee averages $ 175,000. Wal-Mart has a 9% return on assets, a 21% return on equity, and its CEO Michael Duke's $35 million salary, when converted to an hourly wage, worked out to $16,826.92. In comparison to this new employees are paid $8.75 an hour that would gross $13,650 a year. By contrast the average Indian retailer had an annual turnover of Rs. 330,000. Only 4% of the 12 million retail outlets were larger than 500 sq.ft in size. India has 53 towns each with a population over 1 million. If Wal-Mart were to open an average Walmart store in each of these cities and they reached the average Walmart performance per store – we are looking at a total turnover of over Rs. 141,000 million with the employment merely of about 16,000 persons. Extrapolating this with the average trend in India, it would mean displacing about 758,000 persons. Quite clearly Walmart is not going to create more jobs in India. On the contrary it will cause a massive loss of jobs in direct retail. This is the experience in the USA also. A 2004 study by the Pennsylvania State University concludes that counties with Walmart stores suffered increased poverty than those, and suggested that it was the displacement of higher paid workers in small family owned retailers. Another 2007 study has shown that towns in Nebraska with and without Walmart fared similarly different in terms of joblessness and poverty. A study of Wal-Mart’s expansion in Iowa found that 84 percent of all sales at the new Wal-Mart stores came at the expense of existing businesses within the same county. Business Industry analyst, Retail Forward, predicted that for every new Super center that Wal-Mart opens, two local supermarkets will close.

It will appropriate at this stage to consider the sizes of these giant retailers. Walmart’s turnover exceeds the GDP of Norway, which ranks 20 in the list of GDP’s. It’s almost four times the next largest retailer Carrefour. This is indicative of the power of the corporation. Typifying this power was the less than a day visit to India by the Chairman of Walmart Stores Inc, Mr. S. Robson Walters on November 6, 2009, described as a by Walmart as a private visit, and when the only person he called on was the Prime Minister, Dr. Manmohan Singh. After he departed Commerce Minister Anand Sharma said: “This is not the time for us to revisit the policy. Single-brand retail is good enough. Those who have commenced operation are happily doing business and so we cannot tweak the policy as of now.” The persuasive powers of such a large corporation can never be underestimated. Despite the unequivocal position of the government, as stated by its Commerce Minister, this very same government on November 24 announced that it was opening up the retail sector to up to 51% foreign ownership. Now one may ask if any of the other stakeholders in India’s retail business would have had such easy access to the higher echelons of government?


The major argument in favor of the benefits a Walmart or Carrefour will bring centers around the perceived benefits to agriculture and better prices to the farmer. Surprising all, Congress general secretary and MP, Rahul Gandhi, told election gatherings across Farrukhabad and Kannauj in UP that FDI would solve the puzzle of a kilogram of potato fetching Rs 2 or less to the farmer and a packet of potato chips costing Rs 10. "A packet of chips is made from just half a potato," he added, virtually turning the opposition to FDI into a conspiracy against farmers. One might suggest to him that PepsiCo has been buying potato and tomato for sometime now without making a dent on farmer prices.

Empirical evidence from many countries where big retail chains dominated show that on the contrary farm realizations actually decline. A recent joint study in Finland by Agrifood Research Finland and Pellervo Economic Research Institute reveals that for each kilo of rye bread purchased in 2010, for which the consumer paid 3.52 Euros, 1.24 went to the seller, while the grower received only 14 cents. A further 1.74 Euros were shared by the milling company and logistics, while the rest went to the state as taxes. The study also revealed that while the trade got 19% of the takings on food, it went up to 29% in 2009. Finally, the study showed that food prices rose faster than other consumer goods between 2000 and 2010. Big business and MNC’s like PepsiCo, Cargill, ConAgra and even ITC and Reliance have been procuring food grains and farm produce for several years now and there is no evidence that general prices have increased. Even where better prices were paid to contract farmers, data available suggests that input costs have been higher. Simple economic logic tells us that nobody pays more for a commodity that can be obtained for less. Business is about extracting profits and not about charity.
Protagonists of FDI in retail talk a lot about modernizing the supply chain. Consider this. The National Sample Survey relating to household expenditures reveals that fruits and vegetables only account for 9.88% of urban household expenditure9. It is widely agreed that the supply chain that links the Indian producer to the domestic consumer is primitive, outmoded and wasteful. Many studies exist that detail the extent of wastage. One will readily concede that large format retailing with its capacity for bulk procurement and capital investment, even if it accounts for a fraction of the retail trade in the sector, might be able to make some headway in modernizing the supply chain.

But before we get into the 'for and against' argument vis-à-vis FDI, we must also ponder over the fact that a modern and nationwide supply chain has been created, indigenously, for milk and milk products which account for 8.11% of household expenditure. Similarly we have an effective supply chain for food items such as cereals, pulses, and sugar and edible oils, which together account for 24.16% of household expenditure. All other non-food goods purchased by our households such as tobacco products and alcohol, processed foods and snacks, toiletries, detergents, garments etc which together account for 52.57% of all urban household expenditure are made available for consumption by modern and efficient supply chains. Thus, what the average household does not get from a modern supply chain is a very small part of its purchase. So the argument that the pro-FDI lobby extends vis-à-vis of FDI in Retail of modernizing the entire supply chain is a bit exaggerated. The supply chain as it is now is mostly modernized and efficient, and what is yet to be modernized covers only a very small part of urban household consumption. The argument then that we need the merchants of the western world like Walmart to modernize just 9.88% of the supply chain is a bit bogus and self-serving.

More than anything else it is Walmart's Chinese connection that should cause us to worry. While Walmart has 352 stores in 130 Chinese cities with a total turnover of $7.5 billion, Walmart directly buys via its procurement centers at Shenzhen and Dalian over $ 290 billion worth of goods from more than 20,000 Chinese suppliers, 70% of its 2010 turnover of $420 billion. Of this over $60 billion of goods are exported to the USA alone, making Walmart the fifth largest exporter to the USA, and also suggesting that Walmart’s procurement from China is the major source of its profits.

With its huge monopsonic power, Walmart actually depresses wages, by forcing suppliers to cut costs. A good example to demonstrate the low wages in the Chinese labour market is contained in a report by Thomas Fuller in The International Herald Tribune of August 3, 2006, which investigated the percentage split in profit in the shoe industry between the Chinese factories and those who market and sell the finished products in the US and Europe. The factory owners after the laborious process of manufacturing makes a profit margin of 65 cents per pair of shoes, which are sold ex-factory for $15.30. “A major U.S. retailer, after factoring in shipping, store rent and salaries, sells the boots for $49.99. Assuming a pretax profit margin of about 7 percent, an average among large U.S. retailers, it earns $3.46 on the same pair of boots.” However the story doesn’t end with the unfair profit margins. The Chinese laborers, who make the shoes, box them and even affix the price tag, are the ones who get the worst deal. The International Herald Tribune says “Yet for all the sweat that goes into making shoes in Tianjin, the factory payroll is equivalent to $1.30 a pair, 2.6 percent of the U.S. retail price.” Should the salary of every worker in the Chinese shoe factory be doubled, the retail price in the US would merely go up from $49.99 to $5.29.

Even if one were to ignore the manipulated value of the Yuan to make Chinese made goods export competitive, it is clear that by keeping wages low and without the protections afforded to labor by trade unions, collective bargaining, overtime and assurance of good working conditions, China is in effect subsidizing exports. What the flow of cheap Chinese goods through the Walmart direct pipeline from China into India will do to Indian companies, particularly the SME’s can well be imagined. Even without Walmart, Indian SME’s are being driven out in sector after sector by cheap Chinese imports. For instance there is no light fittings industry left in India. Same for toys. One can well imagine what a Walmart pipeline will do to the hosiery and woolen goods manufacturers in Ludhiana and Tiruppur. The once prosperous clock making industry around Rajkot has almost entirely fled to China. Millions of jobs in the semi-organized sector now stand threatened. In 1985 Sam Walton, the founder of Walmart was forced to say: “Something must be done by all of us in the retailing and manufacturing areas to reverse this serious threat of overseas imports to our free enterprise system… Our company is firmly committed to the philosophy by buying everything possible from suppliers who manufacture their products in the United States.”

We should also be worried about our fast growing trade deficit with China. The trade deficit with China is now likely to exceed last year's record $20 billion figure. India's trade deficit with China widened to $14 billion after seven months this year, as China's overall trade surplus soared to the highest in two-and-a-half years amid an unexpected surge in exports to the European Union. With bilateral trade reaching $41.5 billion in July, by rising 17 per cent and on track to surpass last year's record $61.7 billion figure, the Indian government should be concerned by this latest import data. Burgeoning trade deficits have contributed significantly to the recent steep devaluation of the rupee. But is the government worried enough to seek to narrow the deficit?

Having said all this, one must concede that change is remorseless. The constant displacement of workers by machines and methods is the story of the future. Textile mills made most weavers redundant, just as robots in automobile manufacturing have rendered many workers as surplus. This is the story in all sectors of manufacturing. While the future cannot be avoided there is no need to hasten the pain. Big box retail will bring benefits to many stakeholders; not the least being the state, which will see improved realization of taxes and the construction industry, which will be called to build the new retail centers. Better quality control and good management methods will spread into other sectors and down the supply chain manufacturers will demand from their suppliers what is demanded of them by their buyers.

Given our pressing need to absorb growing numbers from the hinterland into our labor pool, should we exacerbate our problems by facilitating foreign procurement coupled with efficient local distribution, thereby suffocating our own manufacturing industry?

This at a time when we still have not got around to facilitating lower cost and more efficient manufacturing in India through enabling legislation and regulation. The contribution of industry to GDP in 1992-96 and 1997-2003 was 30.9% and 23.7% for India, while for China over roughly the same period it was 62.2% and 58.5%15. We need to address issues at home before we unthinkingly or unintentionally invite problems from abroad. The Government would be better advised to address this issue first, rather than devoting itself entirely to the cause of foreign retailers.

Different countries have dealt with the problem of the sudden onset of giant foreign retailers differently. In Thailand no large markets are permitted within 15 km of the city center. It might be better to follow the Chinese model of caution and hurrying slowly. China just allowed FDI in retail in 1992 and the cap was at 26%. After ten years the cap was raised to 49% when local chains had sufficiently entrenched themselves. 100% FDI in retail was permitted only in 2004, after the infant retailing industry had acquired some muscle. Walmart in China however is a very different company to what it is in then USA or elsewhere. 15000 suppliers serve its China operations alone, and Walmart China claims that over 95% of its goods sold in china are sourced locally.

Even in as liberal an economy as Japan, large-scale retail location law of 2000 stringently regulates factors such as garbage removal, parking, noise and traffic. Recently Carrefour decided to exit Japan by selling off its eight struggling outlets after four years to the Japanese Aeon Co as the extremely cumbersome Japanese regulations blatantly favor its own homegrown retail firms. . Malaysia’s Bumiputra clause insists that 30% of equity is held by indigenous Malayans. Philippines insist that 30% of inventory by value be grown within the country.

The US or European experience shows that retail giants destroyed the livelihood of small shopkeepers, who became employees of such giants for paltry salaries. A retail supermarket encompasses the entire chain and shrinks the intermediaries – lowering costs and removing jobs. In a country with no social security net – the replacement of thousands of retailers by a single large intermediary will shrink jobs by the millions in distribution industry. What option will these millions have then except to take to the street? Many talk of the revolution in retail, but governments must be more concerned with revolutions forming on the streets.

There are ways of achieving the former while avoiding the latter. Two simple suggestions to tweak the policy on the anvil are:

1. Insist that big box retailer’s be foreign exchange neutral. That is, they export as much as they import.

2. Restrict big box retailers to outside municipal limits and to satellite towns instead of restricting them to within the 53 cities with more than a million people each. This will ease the urban chaos and encourage people to move into less expensive housing outside the big cities.

3. And finally, why put limits on foreign equity holdings? Allow companies like Walmart to own 100% of their business in India. At the same time the government must insist that they bring in foreign loans to finance their entire capital investments in India. This will enable Indian financial institutions and banks to remain within sectoral limits and to extend financial assistance to Indian retailers.

Above all the policy maker must realize that while it is an American corporation earning profits for its US shareholders, Walmart is mainly a retailer of Chinese goods. Its business model is quite unique. As Nick Robbins wrote in the context of the East India Company, “By controlling both ends of the chain, the company could buy cheap and sell dear” In this case it means profits for the Americans, jobs for the Chinese.

Article written by Mohan Guruswamy who is Chairman Centre for Policy Analysis, New Delhi and Distinguished Fellow at Observer Research Foundation New Delhi. 26th December 2011