Indian Economy: News and Discussion (Jan 1 2010)

[Prem]

http://www.indiablooms.com/BusinessDeta ... 60211b.php
Kalam projects India’s good economy

The recession is over now and GDP growth is good. If GDP continues to be 10 percent in the next eight years then India can be an economically strong nation by 2020,” Kalam said while delivering a talk on ‘Imagination Leads to Creativity’ on the second day of the D D Kosambi Festival of Ideas in Panaji.
Elucidating on the topic, he said that agriculture and the industry sector should work hand in hand to boost India’s economy.“The division between rural and urban should diminish by 2020 and both – agriculture and industry should work together. India should excel in health care and should be one of the best destinations for scholars,” he told an overcrowded gathering that largely comprised of youths and school students. An eminent scientist, Kalam advised youths to fight corruption in the country by eliminating corruption in their homes first: “The youths should tell their parents that corruption is not healthy. If a daughter or son tells their father not to be corrupt, it will certainly bring a change.”

[Prem]

http://spinport.com/indian-economic-gro ... on/314796/
Indian Economic Growth Threatened by Inflation

The prime minister of India has warned that his inflation presents a “serious threat” to his country’s exuberant economic growth.Manmohan Singh declared that the control of inflation was a matter of the highest priority, prompting widespread belief that the eighth interest rate rise in less than 12 months was in the offing. India’s GDP grew by 8.5%, and it is one of the emerging markets that is driving world economic recovery.Mr. Singh said inflation had to be tackled with “great urgency” and that present rates could not be sustained. Inflation stands at 8.4%, with food price inflation of 17%, its highest for more than a year. Onion prices have risen markedly in the last month after heavy rain in the west, where most onions are grown, ruined stocks. Only 10% the expected amount came to market. Onion is a staple used in nearly every savory dish. A kilogram used to cost 20 rupees but went up to 85 ($1.87). It is now 50-60 rupees per kilo. India’s stock market fell this year due to fears that high inflation would discourage foreign investors.The government has attempted to intervene by banning exports and slashing import duties. It attempted to import cheaper onions from Pakistan, but Pakistan experienced a shortage.

[RamaY]

Agriculture rebound driving India's GDP growth

With over dependence on monsoon, the country's agricultural growth continues to fluctuate year- on-year depending on the weather gods.

when will the dependence on weather gods get reduced??

Whenever India "Nationalizes River Waters and starts River Linking Project" augmented by hundreds of small/medium storage tanks in the range of 1-10 TMC all over India.

[RamaY]

Agriculture rebound driving India's GDP growth

Only yesterday MMS, PM of India, was blaming falling food grain production for the inflation.

And he was supposed to be the eminent economist

[Theo_Fidel]

The only basin with a real surplus is the Brahmaputra basin. Godavari's surplus will reduce as the population rises and numerous dams under construction complete.

In any case if the monsoon fails, even Brahmaputra will be in deficit. River linking is not going to reduce our dependence on monsoon.

[joshvajohn]

First Approval in India’s National Plumbing Project, Despite Possibility to Endanger Tigers
http://www.circleofblue.org/waternews/2 ... er-tigers/

river linking suggestions in India
http://nrlp.iwmi.org/main/maps.asp

River linking strategies
http://nrlp.iwmi.org/main/Default.asp

A good article on Water management and flood water control and distribution and link rivers
http://www.ias.ac.in/currsci/jun102003/1390.pdf

Linking rivers is a must to meet the needs of people in India today. There should be investment in recycling plants for water too.

Indian states should also think about desalination plants to provide water to their cities permanently.

The use of water should be restricted in some ways so that people do not waste water enormousely. Some suggestions of making urban people to pay for water (at a minimal level) may be a reasonable suggestion but the slum dwellers would suffer. But such attempts may reduce the consumption of water to a reasonable level rather than wasting it.

For agricultural sector the drip irrigation is also a good idea through initially a bit expensive to set up but later it is profitable. In this way even if there is a failure in monsoon, the economy of the people depending on the agricultural production may be sustainable.

[RamaY]

The only basin with a real surplus is the Brahmaputra basin. Godavari's surplus will reduce as the population rises and numerous dams under construction complete.

In any case if the monsoon fails, even Brahmaputra will be in deficit. River linking is not going to reduce our dependence on monsoon.

If you were right then thousands of TMC water must not get wasted in rainy season every year.

The river linking project is to divert the excess waters during floods to other reservoirs.

[arnab]

Agriculture rebound driving India's GDP growth

Only yesterday MMS, PM of India, was blaming falling food grain production for the inflation.

And he was supposed to be the eminent economist

Agriculture includes both food and cash crops. The article does mention that farmers are focusing on cash crops like cotton and sugarcane. So MMS's assertion could be correct without contradicting the fact that 'agriculture is rebounding'.

[Theo_Fidel]

If you were right then thousands of TMC water must not get wasted in rainy season every year.

The river linking project is to divert the excess waters during floods to other reservoirs.

Please look up the project. There will be NO diverting during the floods.

The water will be captured in reservoirs and THEN sent onwards. Similar to Telugu Ganga. The biggest canal in river linking is about 25,000 cusecs. A couple of 40,000 cusec ones are proposed but the feasibility WRT to terrain is not certain. Such a canal would transfer 2 TMC per day. Allowing for evaporation/seepage maybe 1.5 TMC gets to end areas. Our monsoon floods rarely last more than a week. So you can do the math. Flood waters have a ton of silt in them. Not only that during floods reservoirs are invariably drawn down to prevent a catastrophic over topping.

Even the stilled water in the Telugu Ganga has caused severe silting. Despite heroic attempts of keeping the canal flowing for 8+ months in a year, only 7TMC has gotten to Chennai of a promised 15 TMC, in a good year. Many years it is only 3 TMC.

Thousand TMC sounds like a lot but keep in mind KRS and Srisailam alone store ~ 500 TMC live storage. I believe Inchampalli alone will hold ~ to 200 TMC.

There is plenty of water if our farmers could use it efficiently. For almost every crop India uses twice/thrice the water of a world class performance.

[Arjun]

Good editorial from the ET (Growth to be sub-dragon). The subtext is that growth in Gross Capital Formation has come down over the last few years due to lack of urgent reforms.

What is sauce for the goose might be sauce for the male bird as well, but what is strong growth for a tiger economy like India’s is not what would be sterling growth for less feral markets. The 8.6% that has officially been estimated as India’s growth rate for the current fiscal would be spectacular for most countries, but for India, which had grown in excess of 9% for three years prior to the crisis of 2008, the inability to get back to 9% for at least till after 2011-12 is, indeed, galling. In the 9%-plus years, fixed capital formation, the biggest chunk of investment, had grown about 15% a year. The slowdown saw it come all the way down to 2% and it remains 8.4% even in the current fiscal, according to the Central Statistical Organisation .

What is needed to increase the pace of investment is sound policy, which depends on sound politics. India needs clear policy to release land for urbanisation, industrialisation, building roads, opening mines and so on. Without such policy, investment cannot grow and growth will stall. Creating policy that will make people willingly release land calls for innovation to make land-losers stakeholders in the prosperity that comes up on their alienated land. We need firm clarity on not patronising power theft, so that investment in power is not held up. We need clarity on public-private partnership contracts so that we have competitively priced infrastructure and not get-richquick scams. If we have such policy clarity, growth will rev up again, all the way to proper tigerish levels.

Agriculture has come to the rescue this fiscal, growing at 5.4%, thanks to recovery from last year’s drought. This will fall next year, unless new, focused initiatives are taken to boost the untapped potential of eastern India . Economy-wide inflation is put at 9.7%, higher than the RBI’s estimate for year-end inflation. This will make monetary policy tighter, financing costlier and growth, tougher. A counterbalancing positive would be likely stronger global growth. But the net result is unlikely to be a growth rate higher than the current fiscal’s . Unless the government gets its act together to focus on governance and policy clarity without squandering the fiscal bounty, fast growth is bound to yield.

[somnath]

griculture includes both food and cash crops. The article does mention that farmers are focusing on cash crops like cotton and sugarcane. So MMS's assertion could be correct without contradicting the fact that 'agriculture is rebounding'

That is true..Though the trend growth rates in Agri are about 2-3%, and it has a higher coeff of variation to overall GDP..So a low growth years creates the base effect impact for high growth in the subsequent year...a lot of it is simply the result of aboe-normal growth in procurement prices that follows a typical sub par growth year....At a secular level, agri growth has plateued out, and there are no radical ideas in the horizon to lift it up...Especially foodgrains, MMS is spot on, though he isnt saying anyting new..

River-linking nationally is not one of the radical solutions though...It is an outright crazy idea...

[somnath]

Good editorial from the ET (Growth to be sub-dragon). The subtext is that growth in Gross Capital Formation has come down over the last few years due to lack of urgent reforms.

In the 9%-plus years, fixed capital formation, the biggest chunk of investment, had grown about 15% a year. The slowdown saw it come all the way down to 2% and it remains 8.4% even in the current fiscal, according to the Central Statistical Organisation .

Agriculture has come to the rescue this fiscal, growing at 5.4%, thanks to recovery from last year’s drought. This will fall next year, unless new, focused initiatives are taken to boost the untapped potential of eastern India .

ET is a tabloid..Dosnt even know what it is talking about...GFCF has held steady at >30% levels througout the crisis and beyond..

http://mospi.nic.in/Mospi_New/upload/na ... sept10.pdf
http://indiabudget.nic.in/es2009-10/chapt2010/tab16.pdf

So God knows what the 2% number is...

"Agriculture is saviour" - what bull..Agri contributes about 17-18% of GDP now, @ 5% growth, thats about 70-80 basis points to overall growth, not a "saviour" deal...And typically (unless there is a drought) a low growth year in agri is followed by a higher growth year because of base effect and procurement prices...

[RamaY]

Thousand TMC sounds like a lot but keep in mind KRS and Srisailam alone store ~ 500 TMC live storage. I believe Inchampalli alone will hold ~ to 200 TMC.

Theo garu,

Facts are facts. I have given few facts at the end of this post.

If there are no excess waters available; then there wouldn't be any need for the Jalayajnam project by YSR at the cost of 100,000 Crores in Andhra Pradesh alone.

Now some facts and sources:

1. Project Proposal for National River Liking Project

The Project that Mr. Prabhu’s taskforce is mandated to implement may well be the largest infrastructure project ever undertaken in the world. It will build 30 links and some 3000 storages to connect 37 Himalayan and Peninsular rivers to form a gigantic South Asian water grid. The estimates of key project variables--still in the nature of back-of-the-envelope calculations—suggest it will cost a staggering US $ 120 billion, handle 178 km3 of inter-basin water transfer/year, build 12,500 km of canals, create 35 giga watts of hydro-power capacity, add 35 million hectare to India’s irrigated areas, and generate an unknown volume of navigation and fishery benefits (Mohile 2003; Institution of Engineers 2003; GOI 2003). Far from 2016, most observers agree that the Project may not be fully complete even by 2050.

At $120B cost for 35 million acres of new irrigated land - it costs $3428 per acre. The Jalayajnam project is estimated to cost $2345 per acre; and remember this is in Andhra Pradesh, the Annapurna of India.

2. Godawari water disputes tribunal report

The average annual flow (50% dependable flow) of Godavari basin has been estimated to be about 110.5 KM3 (3901 TMC); whereas the utilisable flow (75% dependable flow) is about 76.3 KM3 (2694 TMC). The present utilization is only about 38 KM3 (1342 TMC), which is hardly 50%

3. Annual water resources by River Basin


4. India water resources by state

[Arjun]

Good editorial from the ET (Growth to be sub-dragon). The subtext is that growth in Gross Capital Formation has come down over the last few years due to lack of urgent reforms.

ET is a tabloid..Dosnt even know what it is talking about...GFCF has held steady at >30% levels througout the crisis and beyond

Somnath, please make an effort to comprehend the language. The 15%, 2% etc refer to growth in GFCF, not to its percentage of GDP.

"Agriculture is saviour" - what bull..Agri contributes about 17-18% of GDP now, @ 5% growth, thats about 70-80 basis points to overall growth, not a "saviour" deal...And typically (unless there is a drought) a low growth year in agri is followed by a higher growth year because of base effect and procurement prices...

Again you seem to have missed out on the context. What the edit is saying is that GDP growth will be on track this year, as compared to the targets set, largely on account of better than expected performance on the agricultural side.

Basic thrust of the edit is this - there are a whole host of reforms in various industries that are urgent, and India has started to lose out in comparison with the other leading emerging market leaders as a result of this governance deficit.

My opinion on the fundamental legacy of this UPA government is as follows- we have regressed from a situation where India in the middle of the last decade was considered to be neck and neck with China to emerge as the next superpower (amidst all the Chindia hype), to a situation today where Brazil is increasingly more likely, than India, to be bracketed with China as the new 'tiger economy'. All of this is due to massive failure on pressing ahead with next-generation reforms.

[somnath]

Somnath, please make an effort to comprehend the language. The 15%, 2% etc refer to growth in GFCF, not to its percentage of GDP

Arjunji, in case you "comprehension" is correct, ET is mathematically challegened. If GFCF as % of GDP remained at ~30% for 2009 and 2010, there is no way that the growth rate would have been 2%, as nominal GDP growth itself would be ~12-13%.

Again you seem to have missed out on the context. What the edit is saying is that GDP growth will be on track this year, as compared to the targets set, largely on account of better than expected performance on the agricultural side.

A 70 bps point contribution to 860 bps is large?

My opinion on the fundamental legacy of this UPA government is as follows- we have regressed from a situation where India in the middle of the last decade was considered to be neck and neck with China to emerge as the next superpower (amidst all the Chindia hype), to a situation today where Brazil is increasingly more likely, than India

There are no gainsaying on the challenges..But Brazil? It averages about 3-4% over the last 20 years..It is expected to clock 5% growth in 2011, down from 7.5% in 2010(which in turn was a result of a low base effect in 2009)..

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

there are lots of things "for" Brazil, but they are not the long term competitition for us...

about "middle of last decade hype" etc - if anthing, the gap will narrow in the coming years as our growth outpaces China's..

[Arjun]

Arjunji, in case you "comprehension" is correct, ET is mathematically challegened. If GFCF as % of GDP remained at ~30% for 2009 and 2010, there is no way that the growth rate would have been 2%, as nominal GDP growth itself would be ~12-13%.

Please see this document, posted earlier by Suraj. A drop in growth of GFCF to 2% in '08-'09, when the real GDP growth was 6.9%, would explain the drop in GFCF from 37.7% to 34.9%: Savings and Investment figures

Again you seem to have missed out on the context. What the edit is saying is that GDP growth will be on track this year, as compared to the targets set, largely on account of better than expected performance on the agricultural side.

A 70 bps point contribution to 860 bps is large?

Please see what the article says: "Agriculture has come to the rescue this fiscal"...ie the planners had made some assumptions for industrial, services, agri growth. Obviously agriculture growth exceeded expectations while the other two did not perform in comparison to expectation.

there are lots of things "for" Brazil, but they are not the long term competitition for us..

For 2010, Brazil grew at 7.5%. But yes, looks like Brazil will not be competition on the GDP growth front.

However, where Brazil and other regions of the world are increasingly competitive is in attracting investments. Lets take private equity alone - in mid to late part of the last decade, India was the undisputed leader in attracting private equity capital among emerging markets, more so than even China. What has changed now is that India is only one of several players - China has caught up with and started to far exceed India in terms of external PE capital deployment. SE Asia as a region has started to exceed India. Brazil is ramping up and may soon catchup on this front...

[Singha]

they want our market but unwilling to create jobs here.

http://online.wsj.com/article/SB1000142 ... stpop_read

India is planning to add 20,000 megawatts of solar power to its grid by 2020 as it seeks to step up electricity capacity to meet the demands of a growing economy while developing clean-energy sources. The program will disburse about $20 billion in subsidies to power plant developers in coming years. But an Indian regulation that goes into effect in April will bar those firms from importing any foreign-made solar panels—the technology that converts sunlight into electricity.


Foreign solar-panel makers can only get a piece of the action if they set up local manufacturing plants in India through joint ventures, something few U.S. companies have expressed interest in.

"We're very concerned," Mr. Locke said in an interview with The Wall Street Journal. "We think that's the wrong way to go. We think there are different ways in which you might try to achieve the objective of supporting more manufacturing within India."

He said the U.S. is proposing alternatives like tax incentives or subsidies that would encourage U.S. and other foreign firms to set up solar-panel production facilities in India without shutting out their exports.

.....

India has two major solar-panel producers, Moser Baer India Ltd. and Tata BP Solar India Ltd., a joint venture of Tata Power Co. and BP Solar International Inc. Those firms will get the lion's share of orders from India's national solar program. Spokesmen for the Indian firms had no immediate comment. Tata-BP has said previously that it produces highly efficient solar panels and that the import restrictions will help jumpstart India's solar technology industry.

In an interview last December, Indian Commerce Secretary Rahul Khullar— the top bureaucrat within the Commerce Ministry—said there was little chance that India would reverse its policy, and accused the U.S. of a double standard, saying it hasn't objected as forcefully to similar import restrictions in China's wind power sector.

Mr. Locke said China isn't getting any special treatment. The U.S. has pressed successfully for China to remove barriers that were preventing foreign firms from getting involved in wind projects, he said. "Our position has been consistent," he said. (yes consistently GUBOing to every chinese demand)

[Suraj]

Brazil's high GDP growth is a commodity export driven blip. Their investment/GDP remains in the 15-20% range, a figure far too low to sustain anything more than 4-5% GDP growth at an ICOR of 4. It's true that investment/GDP in India fell in 2008-09, but part of it was driven by the subsidy outgo when oil prices peaked, and has risen since.

As for US complaining about India requiring solar panel makers to have manufacturing facilities in India, that's what they required of wind turbine makers like our own Suzlon, who runs a plant in Minnesota. Our policy is very sound in this regard. Let them complain.

[Singha]

Brazil is also a large exporter of food. worlds largest producer of vegetables. I think they are slash and burning vast swathes of amazonia to open up cheap land for poor people from the coast to relocate and get a second chance.....


comments on that article:


"Foreign solar-panel makers can only get a piece of the action if they set up local manufacturing plants in India through joint ventures."

Why should US companies balk at that? GE just handed its avionics tech to China and agreed to these terms. You can't cut your own throat any more than Immelt did.
,,,,,
Why GE?

Westinghouse recently handed over 50,000+ (read Fifty Thousand) blueprints of its newest AP1000 reactor design (first Generation III+ reactor) and associated components to Chinese government-owned China National Nuclear Corp. These reactors except for the main pressure vessel will mostly be made in China and the technology passed on to the Chinese company.

Unlike the Chines who steal western and Japanese technologies from companies who invest in China, Indian companies (agencies) seldom do that. Case in point: Kawasaki Transportation did the initial builds for High-speed rails for China with a local partner in 002 to 2006 and now the Chinese pushed them aside and have come up with a much better, sleek and faster bullet train based on the same Kawasaki technology. Japanese company couldn't do a ding in protest.

Talk about irony here!!

[somnath]

Lets take private equity alone - in mid to late part of the last decade, India was the undisputed leader in attracting private equity capital among emerging markets, more so than even China. What has changed now is that India is only one of several players - China has caught up with and started to far exceed India in terms of external PE capital deployment. SE Asia as a region has started to exceed India. Brazil is ramping up and may soon catchup on this front...

Arjunji, PE is but one part of foreign investments, and a relatively small one at that..PE invetsors flock to places (and industries and companies) with obvious "discounts"..These discounts may be on account of regulations, or simply the stage of the industry...A lot of PE investors have flocked to Brazil (and Indonesia and a lot of other natural resource-rich countries) because of rising commodity prices...

And in any case, foreign invstment plays a very insignifcant role in topline growth rates (though their role in external setor management is huge)...

[vina]

Uh oh. China suffers worst drought in 60 years . Major wheat growing areas have received as little as 15% rain /winter snow. Expect agri commodity prices to hit the roof . Wheat prices are set to soar.

Expect Pawkistan and the rest of it's Arap birathers in places outside the oil rich countries (Egypt, Syria, Jordan etc) to have the "revolutions" running full steam ahead soon, as China starts importing unprecdented quantities and jacks up prices around the world.

[Arjun]

Arjunji, PE is but one part of foreign investments, and a relatively small one at that..

But it is in my estimate the most desirable type. FII investment in any case chases the market and its drawbacks are well-known. FDI in terms of strategic investment from overseas firm may be desirable in case that is the only way to bring in new technology or unavailable expertise. However, minority PE investment (as opposed to buyouts which are not the norm in India) comes in to support Indian entrepreneurship and continued Indian ownership of the asset built, and adds value through management, governance inputs - so is the most preferable.

Also, coming to size, PE has the potential to supplant foreign strategic investment as the dominant part of FDI.

It is true that one reason India is losing out (relatively speaking) is because of high valuations compared to other regions. At the same time, a big reason is also that new sectors and areas (such as infrastructure) where foreign PE would be extremely welcome, have been very slow in liberalizing. India has not adequately capitalized on the huge goodwill towards its management talent that was evident a few years back.

[Arjun]

It's true that investment/GDP in India fell in 2008-09, but part of it was driven by the subsidy outgo when oil prices peaked, and has risen since.

Just to understand, you are saying the borrowings on account of deficit crowded out credit to industry? Or is it because as government spend / GDP % increased - other GDP components went down proportionately?

[Suraj]

We ran a significant current account deficit in the last three years - exports cratering due to the worldwide financial trouble, commodity and crude prices through the roof resulting in a massive deficit in successive years - $88 billion in 2007-08, and $118 billion in 2008-09, and then $76 billion between Apr-Dec 2009-10 (see economic survey data. Our trade deficit basically doubled in 2 years between 2006-07 and 2009-09, with the deficit in the latter year amounting to 10% of GDP. That's a massive outgo on an annual basis, driven by a non-diversified export basket and a high dependence on commodity imports; our gross invisibles receipts do not fully cover it. Further, with the economic crisis, companies cut back on capacity expansion across the board, preferring to hoard cash.

The above is also why I question those who ask for the rupee to be freefloated. We've a fledgling export driven growth policy through our SEZs; they need a stable exchange rate regime, even a dirty peg, as the RBI follows, in order for effective pursuit of export growth. What we need is policymaking that drives export growth in both services and merchandise, combined with augmented oil exploration policymaking to increase more of our crude imports with domestic supplies from NELP-n sources.

[somnath]

Just to understand, you are saying the borrowings on account of deficit crowded out credit to industry? Or is it because as government spend / GDP % increased - other GDP components went down proportionately?

Because of the enhanced subsidies, less money available with the govt, hence public investments went down..

But it is in my estimate the most desirable type. FII investment in any case chases the market and its drawbacks are well-known. FDI in terms of strategic investment from overseas firm may be desirable in case that is the only way to bring in new technology or unavailable expertise. However, minority PE investment (as opposed to buyouts which are not the norm in India) comes in to support Indian entrepreneurship and continued Indian ownership of the asset built, and adds value through management, governance inputs - so is the most preferable

PE is as footloose as FII investments..In fact a lot of the FII investments are from mutual funds, that are typically quite stable (because of the nature of their mandates)...PE on the other hand is typically highly leveraged, has a mandate to basically "flip", are extremely susceptible to withdrawals on investor pull-outs, genericaly have short-term mandates - net net extremely volatile...

[somnath]

The above is also why I question those who ask for the rupee to be freefloated. We've a fledgling export driven growth policy through our SEZs; they need a stable exchange rate regime, even a dirty peg, as the RBI follows, in order for effective pursuit of export growth. What we need is policymaking that drives export growth in both services and merchandise, combined with augmented oil exploration policymaking to increase more of our crude imports with domestic supplies from NELP-n sources.

RBI has effectively allowed the rupee to remain stable..There are dual policy imperatives -exports, for which a weaker rupee is required, and high inflation (on commodity prices) for which a stronger rupee helps..As a result, it ended up practically retaining the same level for the rupee when most other EM ccies appreciated..

http://rbidocs.rbi.org.in/rdocs/Publica ... 200910.pdf

I dont think there are too many proponents of "free float" anymore - no ccy is truly free floating, in fact no ccy was ever truly free floating...

[Arjun]

Because of the enhanced subsidies, less money available with the govt, hence public investments went down.

GFCF is broken up as public sector, pvt sector and valuables. I assume public sector refers to PSUs, which typically invest out of retained earnings. Are there government investments outside of the PSUs, and is that also counted under 'public sector'?

PE is as footloose as FII investments..In fact a lot of the FII investments are from mutual funds, that are typically quite stable (because of the nature of their mandates)...PE on the other hand is typically highly leveraged, has a mandate to basically "flip", are extremely susceptible to withdrawals on investor pull-outs, genericaly have short-term mandates - net net extremely volatile...

Leveraging in PEs is for buyout funds, which are most certainly not the norm in India, or most of Asia. If you consider a 5 - 7 year horizon as 'flipping' you could call it that.

FII investments on the other hand, are for periods ranging from a few months to couple of years at the max. If the argument is that FIIs would reinvest in Indian stocks - the same holds true for PE funds now that they've seen returns from the Indian market.

This is absolutely the first time I've heard anyone terming PE as more volatile than FIIs !! Can you refer any articles at all that argue for the case?

[somnath]

GFCF is broken up as public sector, pvt sector and valuables. I assume public sector refers to PSUs, which typically invest out of retained earnings. Are there government investments outside of the PSUs, and is that also counted under 'public sector'?

Yes, there are govt investments outside PSUs as well - investments under the national highways, JNNURM, PMGSY etc are done directly through govt departments...subsidies too, on the other hand are dispensed through PSUs (primarily oil) - so the Indian system is quite even handed!

Leveraging in PEs is for buyout funds, which are most certainly not the norm in India, or most of Asia. If you consider a 5 - 7 year horizon as 'flipping' you could call it that.

someone told you that? A typical PE investment is a leveraged investment (BTW, "buyout fund" etc are marketing terms, doesnt mean much in real investment terms) - check the leverage in PEs like KKR or Blakstone...On tenor, while 5-7 years is the typialy tenor of a partciular PE fund, individual investments in them have a much shorter duration..Typical "flipping tenor" is 3-4 years...

"FII" is a very braod category - within it are mutual funds, hedge funds, insuranec companies, pension funds etc...a lot of them have long term mandates (MFs, PEnsion funds, insurance), and they need to track indices like MSCI (whih have a certain fixed allocation to various markes, incl India)..Hence their investments dont tend to be very volatile...

Not sure if there has been any study of PE v/s FII yet (PE funds are yet quite new as a major category in India), but data on FII outflows should give you an idea of their "volatility" - I think there has only been 2 or 3 years in the last 16-17 that net FII invstments have been negative - that should give you an idea..

http://www.sebi.gov.in/Index.jsp?contentDisp=Database

[Arjun]

A typical PE investment is a leveraged investment (BTW, "buyout fund" etc are marketing terms, doesnt mean much in real investment terms) - check the leverage in PEs like KKR or Blakstone...On tenor, while 5-7 years is the typialy tenor of a partciular PE fund, individual investments in them have a much shorter duration..Typical "flipping tenor" is 3-4 years...

"FII" is a very braod category - within it are mutual funds, hedge funds, insuranec companies, pension funds etc...a lot of them have long term mandates (MFs, PEnsion funds, insurance), and they need to track indices like MSCI (whih have a certain fixed allocation to various markes, incl India)..Hence their investments dont tend to be very volatile...

Not sure if there has been any study of PE v/s FII yet (PE funds are yet quite new as a major category in India), but data on FII outflows should give you an idea of their "volatility" - I think there has only been 2 or 3 years in the last 16-17 that net FII invstments have been negative - that should give you an idea..

http://www.sebi.gov.in/Index.jsp?contentDisp=Database

A typical PE investment in the US is leveraged - certainly not in India or the rest of emerging Asia. In the US, PE was the term used to distinguish from VC and predominantly involved leveraged buyouts....In India and emerging Asia, due to a variety of reasons, most prominently the entrepreneur rarely wanting to exit - the predominant mode has been minority investments that don't change the management. So what the term PE means in emerging Asia is quite different from what it means in the US.

KKR and Blackstone are buyout funds in the US, and are minority investors in India. In India the investments are very rarely leveraged. Plus, I don't see what relevance leverage has to this discussion.

PE funds essentially invest the funds of pension, insurance firms & endowments - so their funds are obviously long term. As regards tenor, you have to compare apples to apples. Either you compare investment tenors in a particular firm / stock, or you compare net inflows across the sector into the country. On the former, average tenor of investment in most stocks by FIIs is definitely lower than for PE funds. Even if you look at the latter metric, PEs again will most likely come out better because there have been very few exits thus far on most investments. Also, as all the Indian examples show - AuM of most alternative funds operating in India has grown dramatically over the years - so once a fund is fully invested the next one is raised, typically within 2 - 3 years of the previous one.

There is also enough data on annual PE inflows into the country that demonstrate both the growth over the years and future potential. My only concern is that while India was the unquestioned top dog on this front, among emerging markets, a few years back - that is no longer the case.

[somnath]

Arjunji,

You have lots of misconceptions..

typical PE investment in the US is leveraged - certainly not in India or the rest of emerging Asia. In the US, PE was the term used to distinguish from VC and predominantly involved leveraged buyouts....In India and emerging Asia, due to a variety of reasons, most prominently the entrepreneur rarely wanting to exit - the predominant mode has been minority investments that don't change the management. So what the term PE means in emerging Asia is quite different from what it means in the US.

KKR and Blackstone are buyout funds in the US, and are minority investors in India. In India the investments are very rarely leveraged. Plus, I don't see what relevance leverage has to this discussion.

Leverage is "critical" to ascertain the longevity of the investment. A leveraged investment is prone to "cutouts" by the leverage provider (typically a bank) - (which is why RBI frowns upon ANY leveraged investments in onshore securities, though they really cant ascertain what is leverage and what isnt in a lot of cases)...

PE investments in Asia are not leveraged? I personally see an average of 2 such transactions every month...I think you are confusing MLBOs with LBOs per se..Now MLBOs are only one type of PE investment...A lot of PE investments in India are LBOs too (for example, the recent sellout of Honda's stake in Hero Honda - had a clutch of PE investors involved on a leveraged basis)...The entrepreneur may not want to exit, but the PE fund does! A minority investment can also be leveraged..And leverage makes the deal sweeter for him (you borrow, say @ 4% for an investment you think will generate 15% - do the maths)...

PE funds essentially invest the funds of pension and insurance firms - so their funds are obviously long term. As regards tenor, you have to compare apples to apples. Either you compare investment tenors in a particular firm / stock, or you compare net inflows across the sector into the country

???A very small portion of PE fund LPs are insurance companies or pension funds...Most of PE fund investments come from institutions that specialise in such investments and private HNIs..For macroeonomic management purposes, the holding tenor in a specific stock is not germane..what is germane is whether the money is entering and exiting the country too rapidly...The track record of FIIs in India has been that broadly they dont exit rapidly at all (in fact they have hardly "exited" in any meaningful way)...Fresh inflows is a different question - that is defined by valuations, global sentiment etc..

My only concern is that while India was the unquestioned top dog on this front, among emerging markets, a few years back - that is no longer the case

I dont have relative PE flows data across countries, but PE fund flows are not a great barometer of macro policy success...To take a random example, Indonesian coal mines are a favourite PE destination today..Reason? Promoters have picked up these mines at close to nothing (by being chummies with local/central govt), and with coal prices shooting through the roof and BAPEPAM regulations quite lax on entry and exit, it is extremely lucrative for PE investors...A well-regulated coal sector on the other hand will not present such windfall oportunities...

[joshvajohn]

TN borrowing according to central govt guidelines: Anbazhagan
http://news.oneindia.in/2011/02/07/tnbo ... d0126.html


Central government should restrict the stategovernment's borrowing for freebies. TN Government - DMK govt - has given free television and free bies to the level it might bring down the economy of the India. Even the freebies has implicit correptive practices. Ofcourse if the people are poor and in need of help it is not a problem to provide subsidies such as free electricity to farmers (which is aleast reasonable because farmers do not get price for their crops). but not tv and so on. the incentives to government officials in terms of bonuses and extra salary even without asking means the government is keen to win the election and not bothered about the economy of the state and the country. If everyone starts doing this this will bring the country down. Either court or the central government should say this is enough and no more of freebies unless socially and regionally strongly justfied.

[Arjun]

You have lots of misconceptions..

We'll soon figure out which one of us has the misconceptions !

LBOs are only possible where the PE firm acquires control over the target and consequently is responsible for the decision to load the target firm with debt. In the case of a minority investment, such as with Hero Honda, any debt structured as part of the deal on the companys' books would solely be the responsibility of the Company's board, which is not controlled by the PE firm in any case. So in the case of Hero Honda, it is the Munjals who are financing the buyout- partly through PE and partly through debt.

It is a well-known fact that LBOs are not possible in India and anybody familiar with the industry in India would tell you this. There are even publicly available articles on the theme. I am happy to share them with you - but I am sure you have the ability to dig them out on your own.

A very small portion of PE fund LPs are insurance companies or pension funds.

PEs predominantly raise capital from pension funds, endowments, trusts and also HNIs. The other source are FoFs (fund of funds), which in turn raise capital from the very same sources. The HNI portion is a very small part - any data on the industry will tell you this. Further, the LPs of the PE funds 'commit' funds to the PE for the life of the fund (typically 5 - 7 years) and they have no way of asking for their funds back in between if the GP has not obtained an exit from an investment prior to the end of the tenor.

I dont have relative PE flows data across countries, but PE fund flows are not a great barometer of macro policy success...

PE investments into private firms count as FDI, and FDI is a big barometer of macro policy success. To give you an indication, India received $23 Bn in FDI last year - PE investments alone in 2007 in India were $13 Bn.

[somnath]

Arjunji,

in the case of Hero Honda, it is the Munjals who are financing the buyout- partly through PE and partly through debt.

And the PE firms in question have gotten funding overseas from banks ...Which makes it a leveraged investment..

It is a well-known fact that LBOs are not possible in India and anybody familiar with the industry in India would tell you this

???Why so? the largest PE deal in recent times was the IGate takeover of Patni - was a classic LBO..IFC is one of the largest PE investor in the world (and perhaps in India as well) - it regularly raises funding from banks overseas to make investments..The reason why it is so successful is its AAA rating, which lowers cost of funding for them..BTW, who in the "industry" has told you this?

PEs predominantly raise capital from pension funds, endowments, trusts and also HNIs

The largest PE fund in the world in Goldman Sachs Principal Investments - which is GS's own balance sheet money..some of the largest PE funds are all principal invstemnts made by banks like Barclays, Morgan Stanley etc...while pension funds and endowments allocate a certain amount to PE, they are by no means the largest investors...the larger invetsors are all specialised institutions in the business...

Further, the LPs of the PE funds 'commit' funds to the PE for the life of the fund (typically 5 - 7 years) and they have no way of asking for their funds back in between if the GP has not obtained an exit from an investment prior to the end of the tenor

If you have ever worked in (or on) a PE fund, you would know that the total drawdown is srepad over 2-3 years, while the payouts are made between 5 and 7...Avg hlding periods are in the 3-4 year range...At the end, the monies have to be paid back to the investors...

PE investments into private firms count as FDI, and FDI is a big barometer of macro policy success. To give you an indication, India received $23 Bn in FDI last year - PE investments alone in 2007 in India were $13 Bn

FDI is one barometer of success..But PE flows depend on a number of other considerations compared to "conventional" FDI..

PE flows over the last 4-5 years..
http://www.indiainfoline.com/Markets/Ne ... 5055244425

You can see that it has an uneven pattern..FDI on the other hand has shown a secular growth..
http://www.rbi.org.in/scripts/Publicati ... x?id=12846

there is therefore an obvious disconnect between the trends in PE and overall FDI flows..

therefore, PE investments by themselves is not a statement of "external vote" on India's macro...

[Arjun]

And the PE firms in question have gotten funding overseas from banks ...Which makes it a leveraged investment..

PE funds typically have limited or no leverage at the fund level - whatever debt is taken on is at the portfolio company level. There are detailed Limited Partnership agreements signed between the fund LPs and GPs, which cover among other things the specific mandate of investments... the 2/20 rule for GPs etc force a high level of performance on the GP and if the LP was interested in leverage for enhancing returns he would be doing this at the LP level, rather than at the GP fund level which would unreasonably skew the operational performance of the GPs

the largest PE deal in recent times was the IGate takeover of Patni - was a classic LBO..IFC is one of the largest PE investor in the world (and perhaps in India as well) - it regularly raises funding from banks overseas to make investments..The reason why it is so successful is its AAA rating, which lowers cost of funding for them

Again this was PE in support of a strategic buyer (iGate). So Apax took a minority stake in iGate, with the PE funds plus additional debt funds to be used to buy Patni. As you are aware any debt funding in India has to abide by very strict credit norms - and therefore the run away debt levels typically associated with US/Europe style buyouts is simply not possible in India.

Btw, the statistics regarding buyouts (even if loosely defined as control investments) is that they comprise a mere 3-5% of the PE activity in India. In China it is around 7-10%, with similar or lower levels in SE Asia. Buyouts comprise as much as 72% of total PE volume in the US.

The PE world is a very active industry and there are several organizations devoted to the industry - no industry organization would consider IFC a PE firm. Its a multilateral development institution.

The largest PE fund in the world in Goldman Sachs Principal Investments - which is GS's own balance sheet money..some of the largest PE funds are all principal invstemnts made by banks like Barclays, Morgan Stanley etc...while pension funds and endowments allocate a certain amount to PE, they are by no means the largest investors...the larger invetsors are all specialised institutions in the business...

Firstly the rankings are all publicly available, and I doubt GS is today the largest. More importantly, this type of investment is termed as proprietary capital or principal investing. The PE industry refers to funds that manage third-party capital.

Pension funds and endowments account for 70% or more of total PE industry capital - these are widely available statistics and there are multiple organizations tracking these figures on a regular basis.

If you have ever worked in (or on) a PE fund, you would know that the total drawdown is srepad over 2-3 years, while the payouts are made between 5 and 7...Avg hlding periods are in the 3-4 year range...At the end, the monies have to be paid back to the investors...

Exactly right - but the point was regard to the long-term nature of the investors in a PE fund. The Limited Partnership Agreement (LPA) which is a detailed document signed between the GP and LPs typically gives the LP no right to redemption unless the GP has started making exits, which could in the extreme scenarios be 7 years and above.

FDI is one barometer of success..But PE flows depend on a number of other considerations compared to "conventional" FDI..

PE flows over the last 4-5 years..
http://www.indiainfoline.com/Markets/Ne ... 5055244425

You can see that it has an uneven pattern..FDI on the other hand has shown a secular growth..
http://www.rbi.org.in/scripts/Publicati ... x?id=12846

there is therefore an obvious disconnect between the trends in PE and overall FDI flows..

therefore, PE investments by themselves is not a statement of "external vote" on India's macro...

1) The data is uneven not because of the availability of 'dry powder' PE capital for investment into India, which has shown secular growth over the years. But because of unwillingness on the part of Indian entrepreneurs to divest at lower valuations during the downturn....Unlike in FDI from firms putting up greenfield plants - actual deals done for PE also depends on the willingness of entrepreneurs to agree to reasonable valuations.

2) The RBI data shows the FII record (portfolio investments) to be even more uneven than the PE part.

3) Once reforms are undertaken and infrastructure in particular is opened up in a big way, 15 Bn next year and 20 Bn year the year after in PE inflows is very doable. Given that overall FDI was $23 Bn this year, this makes a huge difference to the Indian economy.

[somnath]

Arjunji,

any more discussion on PE and the thread will go OT, so I will stop with a few pointers.

PE funds typically have limited or no leverage at the fund level - whatever debt is taken on is at the portfolio company level

It does not effectively matter where the debt lies - the impact on RoE is the same to the PE investor. If the investment is so leveraged up, and most PE investment have a degree of leverage (that too provided by offshore banks), the investment is at the mercy of a bank trhat is not interested in taking a long term view, but only with its own servicing..

no industry organization would consider IFC a PE firm. Its a multilateral development institution

Who told you? IFC is NOT a PE fund? It has the HIGHEST activiuty among all PE players in India...

Firstly the rankings are all publicly available, and I doubt GS is today the largest

http://www.privateequityonline.com/Arti ... icle=52488

More importantly, this type of investment is termed as proprietary capital or principal investing. The PE industry refers to funds that manage third-party capital

Whats the difference? 2009 list of PE firms

http://www.peimedia.com/2009pei300

I can see MS, GS, LEhman, Barclys..

But because of unwillingness on the part of Indian entrepreneurs to divest at lower valuations during the downturn....Unlike in FDI from firms putting up greenfield plants - actual deals done for PE also depends on the willingness of entrepreneurs to agree to reasonable valuations

That is precisely the point..PE investing depends on a lot more than just long term macro...

[Arjun]

It does not effectively matter where the debt lies - the impact on RoE is the same to the PE investor. If the investment is so leveraged up, and most PE investment have a degree of leverage (that too provided by offshore banks), the investment is at the mercy of a bank trhat is not interested in taking a long term view, but only with its own servicing..

Somnath, the point we are debating is the degree of leverage used by growth capital PE firms as opposed to buyout firms. I have already shown you that growth capital accounts for more than 90% of all transactions in India. Of the balance minor percentage - whatever debt which is taken on by portfolio firms is (a) a decision taken by the target firm board which is not controlled by the PE and (b) is obviously within norms that the RBI finds acceptable for India.

Who told you? IFC is NOT a PE fund? It has the HIGHEST activiuty among all PE players in India...

Seriously, why confuse issues? IFC is a developmental organization - and NO industry organization would consider it to be a PE shop. Arguing on the same lines - you might as well call the Indian government the largest VC investor in the country - since it has spawned so many PSUs !!

Whats the difference? 2009 list of PE firms

http://www.peimedia.com/2009pei300

I can see MS, GS, LEhman, Barclys..

The very fact that these firms are appearing on these lists implies that they are not relying exclusively on their proprietary capital -which is what you stated upfront as being their dominant source of capital. I see that GS, for example, manages more third party capital than its own.

Discussion might be OT, so might as well stop.

[vina]

.IFC is one of the largest PE investor in the world (and perhaps in India as well) - it regularly raises funding from banks overseas to make investments..The reason why it is so successful is its AAA rating, which lowers cost of funding for them..

Err. IFC is the private funding arm of the World Bank! If they are not AAA rated who will. Also if you work for IFC as part of World Bank, you get tax free income!

The largest PE fund in the world in Goldman Sachs Principal Investments - which is GS's own balance sheet money..some of the largest PE funds are all principal invstemnts made by banks like Barclays, Morgan Stanley etc...while pension funds and endowments allocate a certain amount to PE, they are by no means the largest investors...the larger invetsors are all specialised institutions in the business...

Well, with the Volker act in place after the financial collapse, that kind of risky business has to be separated away from the bank.

So the bulk of the banks (Citi, JPM Chase, MS, GS etc) are all in the process of separating out and spinning off /closing/divesting their prop trading business, their prop investments (PE and Principal Investing) and it is going to be back to good old I-Banking (advisory, fee based businesses) and very little of risking your own capital going forward!

FDI is one barometer of success..But PE flows depend on a number of other considerations compared to "conventional" FDI..

PE flows over the last 4-5 years..
http://www.indiainfoline.com/Markets/Ne ... 5055244425

You can see that it has an uneven pattern..FDI on the other hand has shown a secular growth..
http://www.rbi.org.in/scripts/Publicati ... x?id=12846

there is therefore an obvious disconnect between the trends in PE and overall FDI flows..

therefore, PE investments by themselves is not a statement of "external vote" on India's macro...

The PE scene in India are largely limited to Growth Capital investing. None of the classic PE scenes such as LBO and /or distressed investing etc are possible especially against entrenched and hostile management, given the family nature of most Indian businesses and also the fact that the Junk Bond (politely called High Yield Bond) markets dont exist in India (if you really want to have domestic source of PE capital ) .

And in classic sense, a PE game is ALWAYS a bet on the earnings/revenue multiples going forward , with financial engineering thrown in as the booster. Well, with structurally high intrest rates in India, the exit multiples too have to be higher to account for the higher cost of capital and risk in India to make a deal equvialent to what you would do in You Yess.

[somnath]

IFC is the private funding arm of the World Bank

Also a PE fund!

Well, with structurally high intrest rates in India, the exit multiples too have to be higher to account for the higher cost of capital and risk in India to make a deal equvialent to what you would do in You Yess

1) LBOs do not mean hostile take-overs by definition.
2) A lot of the so-called growth capital investments in India are leveraged.
3) the PE funds seldom, in fact never borrow onshore - the borrowing is always offshore.
4) PE is a specific type of foreign investment - its not a great leading (or lagging, or voting) indicator of macro progress.

[Arjun]

Also a PE fund!

It is a fund all right, but would be more appropriately termed a development fund, rather than a PE fund.

Difference is in

(a) objectives. PE funds are purely returns driven, whereas IFC has objectives in addition to returns.
(b) Capital source. PE funds manage third-party capital, whereas development funds, sovereign wealth funds and principal investment funds do not.
(c) Structure. GP/LP structure and 2/20-like incentivization is standard for PE funds, and not so for the other fund types.

1) LBOs do not mean hostile take-overs by definition.
2) A lot of the so-called growth capital investments in India are leveraged.
3) the PE funds seldom, in fact never borrow onshore - the borrowing is always offshore.
4) PE is a specific type of foreign investment - its not a great leading (or lagging, or voting) indicator of macro progress.

1) Correct
2) Not true. What percentage would you say is leveraged and what can you show as substantiation?
3) PE funds do not borrow at the fund level..all debt is at portfolio company level. The exception might be those funds that invest in debt-like instruments - such as distressed debt / mezzanine funds (which are often counted under PE category).
4) That's your view. If economists can cite FDI in China as a measure of that country's progress, leadership in PE investments (a possibility couple of year backs for India, but now receding) can well be cited in India's case- and there is enough justification for it. Growth capital PE robustness is an indication of the faith in the country's entrepreneurs from sophisticated international investors - and is very much a new age indication of a nation's potential.

[Prem]

PREVIEW-India Dec industrial output growth seen at 2 pct
http://www.reuters.com/article/2011/02/ ... 4U20110209

India's industrial output INIP=ECI growth probably slumped to 2.0 percent in December from a year earlier, mainly due to a high base a year ago, a median forecast in a Reuters poll showed.The forecasts of 25 analysts polled showed a wide divergence, ranging from a contraction of 1.0 percent to a growth of 7.0 percent.Official figures had showed annual industrial output growth plummeted to an 18-month low of 2.7 percent in November, well below October's upwardly revised annual growth of 11.3 percent.Of the 25 polled, 16 expect December's reading to be lower than that of the previous month, with five of them predicting a contraction.FACTORS TO WATCH
The HSBC Markit Purchasing Managers' Index INPMI=ECI, an indicator of manufacturing expansion, nudged up to 56.8 in January from 56.7 in December.
That was the 22nd straight month the key manufacturing index in Asia's