Indian Economy: News and Discussion (Apr 1 2011)

[Theo_Fidel]

Meanwhile, while we were sleeping....

http://indiatoday.intoday.in/site/story ... 42204.html

The POSCO project in Orissa has hit a roadblock. Mounting protests forced the government to suspend land acquisition for the steel plant on Monday. The move came on a day activist and Ekta Parishad chief P. V. Rajgopal reached Dhinkia, the epicentre of the anti-Posco movement.

Narmada Bachao Andolan leader Medha Patkar also arrived in Bhubaneswar on Monday on her way to the project area to interact with the protesters and chalk out the movement's future strategy to force the South Korean firm out of the area. "Evicting people against their wishes to help a foreign firm is illegal and unjust. The state government is behaving worse than the British did during the Raj," she said.

Rajgopal said: "The law says land should be acquired for an urgent purpose. Helping a foreign firm set up a mega industry is certainly not an urgent purpose." The land acquisition work, which was suspended for three days last week in view of the Raja festival and the rains, was scheduled to be resumed on Monday.

But the government developed cold feet after people formed a human barricade to prevent the entry of officials to Dhinkia and Gobindpur and a string of highprofile social activists - including Swami Agnivesh - visited the belt to express their support for the protesters. Sources said the work would be resumed when the situation improves.

[sugriva]

This "prints money to fund deficits" BS that the "learned" maulanas of the learned school sprout from time to time needs to be trashed. Since about 1997 the govt has stopped financing the budget deficit by printing money. The preferred way to do it now is by using OMO, which perhaps is a causative agent for domestic debt to be around 70% of GDP.

[Theo_Fidel]

Kelkar is a creature of his own self interest. He has made some very questionable claims about GST. All it will do is increase taxes on everyone. Of course GOI loves it. 20% tax rate on just about everything. How is this going to make the economy run better. No wonder the States rightly balk. No one in Indian finance believes it will generate the $500 billion in benefit he has claimed. There is a lot of skepticism over who pays for all the new equipment and software and training.

It would be useful to know where he is right now. Apparently in Canada running a foundation there. Yes, before you check Canada does have the GST which he has modeled our plan on. Before that he was a creature of the IMF. These are not credentials to tom tom here.

[somnath]

Since about 1997 the govt has stopped financing the budget deficit by printing money

Thats correct - I think this was discussed earlier as well...Until 1993, all fiscal deficit were automatically moneised through the issuance of hat was called "ad hoc Tbills"...Under a programme led by Montek Ahluwalia, it got progressively reduced and completely eliminated in 1997...after 1997, the central govt could still monetise (relatviely small amounts) from time to time by selling general G-secs to RBI directly..Even that loophole got plugged in 2003..

Effectively, it had stopped in 1997..But then, those who accuse others of knowing "garbage about India" could not be accused ever of being logical with facts (or theory)!

[vina]

The preferred way to do it now is by using OMO, which perhaps is a causative agent for domestic debt to be around 70% of GDP.

Yawn...Instead of using the presses to print notes with Gandhi Bicchar on it saying "Satyameva Jayate" under the Ashoka symbol and saying "We promise to pay the bearer a sum of X rupees".. in other words , IOU , also called Wampum , they now use the same presses.. okay they got more high tech and created it just electronically and made A/4 sized notes which said the same thing "We promise to pay the bearer Rs X ", and in other worlds, also IOU and also called Wampum! Now the difference is that the normal "Wampum" can be used to pay salaries, by veggies, do anything else and is used as a medium of exchange at face value, the new electronic "Wampum" called "Bonds" are issued to the oil companies for "under recoveries" (another classic invention of the Indian genius.. like "No Objection Certificate", like the "Zero" of old, and I think "Under Recovery" must rank right up there with those two in terms of esotericness and abstraction.. but I digress) and amazingly enough, these IOU "Wampums" were not part of the fiscal deficit of the govt (Pranab M to his credit brougth those Wampums under the deficit IIRC), but are part of the assets (a*s sets?) of the oil companies!

Now I wonder if the oil companies can actually use those "bonds" Wampum to buy veggies, or use them as a medium of exchange at face value. I would love to see them actually traded and what is the market value of them. Let me guess, they are worth as much as the "Sovereign Guarantee" that the GOI gave to the bankrupt ITI's bond offer (ITI is the oldest PSU in India, the first one set up after independence I think, the pillar of the old Bangalore establishment of PSU companies ) . Now, I would love to see any ITI bond holder (all are held by PSU banks) try to collect on a single missed payment (I am told they stopped paying long ago) and invoke the sovereign guarantee!

Yawn.. instead of using the printing presses to print one kind of wampum, they use it to print another kind of Wampum. Same-Same no ? What is the difference? Net net, inflation went up, interest rate shot up, growth is in danger.

[somnath]

It would be useful to know where he is right now. Apparently in Canada running a foundation there. Yes, before you check Canada does have the GST which he has modeled our plan on. Before that he was a creature of the IMF. These are not credentials to tom tom here.

Wow, when you cant trash the message (on pure intellectual inadequacies), trash the messenger...

Vijay Kelkar is in Canada? Well, he runs the Ottawa India Development foundation, New Delhi (yeah, this I googled for, to check)..

"Creature" of IMF? VK was India's permanent rep in IMF for 3 years - India, being a founding member with 2% of votes, has a seat in the Executive Directors..Typically we nominate a senior civil servant, which Dr Kelkar has been throughout his life...

Our GST is modeled after Canada's? Any reference?

But of course, lack of knowledge never stopped insinuations, did it? But ask for references to claims? Well maybe "my uncle told me so" is the most likely bet...

And some more great "knowlegde" being depicted here..

Instead of using the presses to print notes with Gandhi Bicchar on it saying "Satyameva Jayate" under the Ashoka symbol and saying "We promise to pay the bearer a sum of X rupees".. in other words , IOU , also called Wampum , they now use the same presses.. okay they got more high tech and created it just electronically and made A/4 sized notes which said the same thing "We promise to pay the bearer Rs X

So issuance of currency notes = issuance of bonds, from a monetary perspective?!! Wow..

Now I wonder if the oil companies can actually use those "bonds" Wampum to buy veggies, or use them as a medium of exchange at face value

Again, lack of knowledge never stopped sarcasm...these bonds are treated exactly as any other govie, and traded likewise..Your bond funds (or liquid fund) are likely to have an allocation to these bonds...Oil ompanies raise funding from banks regularly by placing these as collateral...

[vina]

Oil companies raise funding from banks regularly by placing these as collateral...

Yawn.. What can I say about "soup-e-rear" comprehension and big use of words like "Monetary Polycee" . Us Zimble folks from outside of Dilli Ding Dong know only zimble things. What monetary /phishcal whatever. The difference between the "normal" wampum and this "bond" wampum is . Can your veggie vendor take this "bondwa" for 1 kg of aloo ? Will your employee take a 100 of those for his salary ? Yes, RBI wampum. No Gubmint wampum. RBI Wampum can buy Aloo.. Gubmint wampum cannot. But both are Wampum! You call it monetary/phishcal whatever, us zimblee folks don't understand.

Now Kishkinda Naresh, comes and says, they do "OMO" and dont run printing presses! I just pointed out, they do run the printing presses, but to print a different kind of Wampum to finance the deficit. And contrary to your "wisdom" I know for a fact that the Oil Bonds issued by the GOI to the oil companies are significantly less liquid than the normal T bonds/bills (whatever that is called in India).

Yeah. yeah, I know.. Oil Bonds Issued when everything is super comprehensible, it all looks the same.

Investment in these special bonds will not be treated as an eligible investment for the purpose of statutory liquidity ratio.

The bonds will be transferable and eligible for market ready forward transactions (repo). The bonds, however, will not be an eligible underlying security for ready forward transactions (repo/ reverse repo) with the RBI, the release added.nvestment in these special bonds will not be treated as an eligible investment for the purpose of statutory liquidity ratio.

The bonds will be transferable and eligible for market ready forward transactions (repo). The bonds, however, will not be an eligible underlying security for ready forward transactions (repo/ reverse repo) with the RBI, the release added.

Any fool bank will over collateralize that thing. Even if it is you pawning gold at a pawnshop, you are over collateralized. That gives a measure of the riskiness..(oh..oh. credit default modeling slippery slope I am afraid), I wonder, if the oil companies used this Oil Bond wampum to raise money, by how much was it overcollateralized .

As always Google Chacha is a friend..Oil bonds defusing the ticking time bomb

It is a little unfair to name the instruments issued as 'bonds' as the Government doesn't mop up any cash in lieu them. These are just a lame compensation for losses 'forced' on OMCs, encashable at a future date.

Oil bonds serve OMCs in two ways. The first is to earn interest on these bonds and get the face value of the bonds at maturity. The other option is to sell these bonds to a third party and get immediate cash. These oil bonds hardly help OMCs as the interest income is too small (and most of the time indefinitely delayed) to meet their day to day expenses. As far as the redemption of the bonds is concerned, it is dated far away in future. Even if the bonds are allowed to be traded, they sell at huge discounts (which we feel is fair since there is no asset generation from these bonds) and have very low liquidity. Ironically, the oil bonds are shown as an 'investments' in OMCs' balance sheet while in reality these are virtual compensation for real losses.

Hence, OMCs have to meet their expenses by taking high cost debt that leads to general interest rate hikes and crowds out the private investment.

The obvious reason to issue bonds instead of paying in cash is that there is no immediate cash outflow for the Government in former case. The not so obvious reason is that the oil bonds, which are a form of debt that Government owes to OMCs (or whosoever has these bonds) are kept off the financials of the Government. In other words, it does not get reflected in the fiscal deficit.

On the other hand, cash subsidies are actual outflows that and get accounted for in government's books. They are more transparent and serve the OMCs' cash needs better. Also, since they have an impact on fiscal accounts, the government is likely to be more careful is disbursing them. The practice will also force it to rationalize time and amount of subsidies on fuels apart from petrol.

However, the story doesn't end here. The switch is a huge concern for upstream sector. With crude oil prices at two year high, we will not be surprised if the Government passes more of subsidy burden to upstream sector. This will have an adverse effect on its profit margins. There are high chances that the decision will claw back as the Government intends to come up with an FPO for ONGC soon. With so many dilemmas and pending decisions, we are sure that year 2011 will be no less interesting for this sector.

Well, in this budged the Oil Bond was accounted in Fisc Deficit by Pranab M. But the author was prescient in predicting that the upstream companies will be saddled with additional burden!


Well..anyways. Have a nice day.

[somnath]

The difference between the "normal" wampum and this "bond" wampum is . Can your veggie vendor take this "bondwa" for 1 kg of aloo ? Will your employee take a 100 of those for his salary ? Yes, RBI wampum. No Gubmint wampum. RBI Wampum can buy Aloo.. Gubmint wampum cannot. But both are Wampum! You call it monetary/phishcal whatever, us zimblee folks don't understand

Which is why "zimble" folks dont work on policy!

But again, so prinitng of currency = issuance of bonds? That would be new - maybe you can explain how the monetary impact of the two actions are the same, in terms of velocity of money, M1, M3 impact and also, impact on inflation...

And contrary to your "wisdom" I know for a fact that the Oil Bonds issued by the GOI to the oil companies are significantly less liquid than the normal T bonds/bills (whatever that is called in India).

This takes the cake in ignorant supercilliousness..So you dont know what govies/T-bills are called in India, but you "do know" about oil bonds!

Obvioulsy, your "knowledge" doesnt extend beyond google searches, which is why a 5 year old news report is referenced for "knowledge"...Now lets see,

Investment in these special bonds will not be treated as an eligible investment for the purpose of statutory liquidity ratio.

The bonds will be transferable and eligible for market ready forward transactions (repo). The bonds, however, will not be an eligible underlying security for ready forward transactions (repo/ reverse repo) with the RBI, the release added.

1. Which of the above mean that oil bonds represent a higher risk on the Indian sovereign (which is what you said in your previous post) than ordinary govies?

2. Which of the above mean that banks need to "overcollateralise" while lending?

3. the bolded section - it has already been changed - oil bonds are now eligible for ready fwd txns repo/reverse repo (random google searches for making supercillious point dont make for a learning experience)..

Now,

what has the merits of oil bonds got to do with a discussion on whether the govt monetises dificits or not?

Oil bonds arent a great idea in principle, but how does it mean that they are of "inferior" credit grade (I see some more uninformed allusion to credit default swaps) to govies?

[nandakumar]

On GST, a couple of thoughts.
The Government has designed it as a combination of excise cum service tax for the Centre and VAT (erstwhile sales tax) for the State. In a typically bureaucratic make-work fashion the assessee (tax payer) is supposed to submit his transaction to the Central excise/service tax authorities for levy of Central portion of the GST and take his books of accounts to the State authorities (the old commercial tax officer) for assessment of the State GST.
The logical question to ask if there is one transaction and by extension there is also one value, why would it be necessary for the tax payer to take his books to different authorities and get it assessed to tax? Of course, it is a bit of a stretch to expect the commercial tax officers who doubtless must have paid a fancy premium to some minister to get a posting to one of the more lucrative circles in the commercial twxes department to expect that he would agree with assessment value for the transaction at the same level as the central excise officer belonging to the Centre. We are stuck with this design only because we have already created a tax administration machinery at the Centre (excise) and at the State (sales tax/VAT) and not giving work to them is unthinkable.
The sensible thing to do would be for the Centre to retain powers of taxation on some key commodities (cigarettes, alcohol and perhaps a reasonale levy on petroleum products and do away with the whole paraphernalia of central excise department. The combination of customs, personal income tax and corporate taxes should take care of the revenue needs of the Centre. The GST as a State levy should suffice for the State administration. The assessee too would have been spared the burden of being subjected to two assessments for the same transaction.
Vijay kelkar certainly missed a trick by not proposing a rational reengineering of the indirect taxes system in the country in not recommending that the Centre vacate the field of indirect taxes system in the country albeit with some minimal exceptions.

[vina]

But again, so prinitng of currency = issuance of bonds? That would be new - maybe you can explain how the monetary impact of the two actions are the same, in terms of velocity of money, M1, M3 impact and also, impact on inflation...

Uh.. I had dumbed it down to it's gist. Can the "bondwa" buy 1Kg of aloo tes? Seems you dont get it and are lost in big words like "velocity" , M1, M3, "impact" .. See, when I see words like "velocity" and "impact" I think Fyzzics, not buying aloo! What can I say. First go to Serangoon and get an Aloo Bonda and enjoy it and then everything will fall in place.

And oh, BTW, In Yindia, it is not the RBI alone which creates Aloo Wampum. The GOI can as well ! The Re 1 note (of yesteryears, the coin has replaced it and that too is going to be an extinct species soon I guess with the presses rolling) was a liability of the GOI ! .. Ah there you are . The GOI in theory print 40000000000000 Re 1 notes and be done with it!

Obvioulsy, your "knowledge" doesnt extend beyond google searches, which is why a 5 year old news report is referenced for "knowledge"...Now lets see,

Right Sherlock! Wake up. Jan 5, 2011 was 6 months ago!

Snip.. rest of half baked filibuster deleted.

[somnath]

Right, so no answers, but some more well, supposed sarcasm..

Uh.. I had dumbed it down to it's gist. Can the "bondwa" buy 1Kg of aloo tes? Seems you dont get it and are lost in big words like "velocity" , M1, M3, "impact" .. See, when I see words like "velocity" and "impact" I think Fyzzics, not buying aloo! What can I say. First go to Serangoon and get an Aloo Bonda and enjoy it and then everything will fall in place

Does this mean printing ccy = issuance of bonds? If yes, the logic isnt clear..

Right Sherlock! Wake up. Jan 5, 2011 was 6 months ago!

This was 24th Mar, 2006...Elementary, my dear Watson..

Yeah. yeah, I know.. Oil Bonds Issued when everything is super comprehensible, it all looks the same.

Given your "I know" comes from this, you should take the trouble of checking out the vintage...

As for the rest, how it is relevant to a discussion on monetisation or importantly, how oil bonds represetn an "inferior" exposure to GOI risk, well..

[somnath]

The Government has designed it as a combination of excise cum service tax for the Centre and VAT (erstwhile sales tax) for the State. In a typically bureaucratic make-work fashion the assessee (tax payer) is supposed to submit his transaction to the Central excise/service tax authorities for levy of Central portion of the GST and take his books of accounts to the State authorities (the old commercial tax officer) for assessment of the State GST

That is not my understanding of the implementation...Tax is only going to be levied at one point, ie, the point of sale, and it would have both the central as well as the state tax consolidated...And it would be levied on the manufacturing cost...And the buyer, in case he is buying an intermediate good, will claim tax credit in his returns...

The sharing between Centre and States is as per a predefined formula, it doesnt have a txn-end intervention...

So the system is actually quite elegant, one point of tax levies, and tax credits allowed for levies paid on intermediates...

[nandakumar]

That is not my understanding of the implementation...Tax is only going to be levied at one point, ie, the point of sale, and it would have both the central as well as the state tax consolidated...And it would be levied on the manufacturing cost...And the buyer, in case he is buying an intermediate good, will claim tax credit in his returns...

Somnath, You are quite right, tax is going to be levied at one point. A tax liability being attracted at the point of sale does not necessarily mean that the assessment is going to be a unitary event. Technically, you could have a situation where more than one tax authority can have a jurisdiction on a single transaction.
To give you a concrete example, let us say, you go to a barber and get your hair cut. Technically you could be subjected to a VAT for the hair dressing service which is payable to the State Government. You could also be levied a profession tax pass-through levy which is collected by the barber and passed on to the municipal authorities. I must clarify that in India profession tax is a 'compounding' levy which in tax parlance means a levy based on some pre determined norm. But that apart, the point i wish to make is that the same transaction can be subjected to dual levies and by extension, dual administrative jurisdiction.
Let me give an example of how this will work in the GST model contemplated for the country. Let us take the case of Maruti Suzuki. The Gurgaon factory produces the car and sells it to a dealer in say Mumbai. This attracts a GST at the price at which Maruti invoices the car to the dealer. Maruti submits the transaction to GST levy before a designated authority of the Centre who would assess the transaction for the value it represents and determine the central GST payable on it. This would then be allowed to be set off against the Central GST paid on the inputs (components, services etc.) used in the manufacture of the car toarrive at the value addded in the commerce.
The transaction is also assessed to tax by the Mahrashtra Government for the State component of the GST. If there are any inputs that has gone into the manufacture which has suffered Maharashtra State GST this will be set off. A complicated tax information exchange system will be set up which will then keep track of tax credits due from one State to the other so that only the State where the consumer is located gets to enjoy the revenues for the value embedded at the point of sale.
The Mumbai dealer in turn sells the car to an end-consumer buyer. The process is repeated with an assessment for the Central GST and the State GST. Under the existing system the centre gets to colelct the value added in manufacture while the State gets to keep the value added in the whole chain (manufacturing value plus distribution chain value). Under the new system proposed the Centre too gets to collect a share of the value added in the entire chain but the rate itself is so structured as to leave the Centre no worse off than what it currently levies as central excise duty plus service tax.
Tax administration becomes a lot easier if commodity taxation is left to the States with two or three exceptions. That was my point.

[somnath]

^^Thats well put..It would require an IT backbone of some sort to make the system work, but once set up, the "assessment" might not be such a big deal...the experience with Income Tax returns is a good case in example..After the entire "saral"-isation process, its much more transparent and less discretionary...

On the question of leaving it completely to the states, unfortunately we have had a very bad experience of such "freedom" over 60 years...Each state puts its own levies, and in multiple different fashions...Ergo, we dont even have a common Indian Market today...Just the price of petrol differes nearly 15% between the lowest to the highest...This is also the reason why states are being so cussed about it...However, in a world where nation states are giving up such "sovereignties" to multilateral bodies (like WTO, or FTAs), sticking to them inside the country is behind the times....

About your proposal to take away indirect taxes completely, well, unless we have a much wider coverage possible on direct taxes, it is going to be a bit of a chimera purely on revenue grounds...And remember, the big daddy in GST is actually "S", something that is not fully covered under VAT yet...

[nandakumar]

^^
On the question of leaving it completely to the states, unfortunately we have had a very bad experience of such "freedom" over 60 years...Each state puts its own levies, and in multiple different fashions...Ergo, we dont even have a common Indian Market today...Just the price of petrol differes nearly 15% between the lowest to the highest...This is also the reason why states are being so cussed about it...However, in a world where nation states are giving up such "sovereignties" to multilateral bodies (like WTO, or FTAs), sticking to them inside the country is behind the times....

..

The GST rests on the principle that tax is levied at each stage on the value added. this is achieved by taxing the transaction at the value at which buyers and sellers enter into it but with a provison that taxes upto that stage is set off against the tax payable on the output. Now, if cascading of taxes (tax on the tax value already loaded in a comemrcial transaction) is to be avoided ideally there must be uniform rate across all economic activities.
I mean that is the surest guarantee that one doesn't end up being unable to recover taxes paid on inputs (at higher rates) because the output that he is originating is subjected to a lower rate of tax.
A common rate is therefore a pre-requisite in any VAT regime. Of course States make an exception to this rule by levying a lower rate on certain basic essentials (food articles) and a puntiive rate on luxury/sin goods (alcohol, cigarettes perfume etc.). It is believed that that the ability to set off input taxes against the tax payable on output remains largely unaffected across a whole range of goods and services. So it is possible to enforce a common rate that would not be subjected to the whims and fancies of individual States. So the tyranny of States as an argument against leaving the jurisdiction of commdoity taxation in the hands of States is not tenable.

Quote:
About your proposal to take away indirect taxes completely, well, unless we have a much wider coverage possible on direct taxes, it is going to be a bit of a chimera purely on revenue grounds...And remember, the big daddy in GST is actually "S", something that is not fully covered under VAT yet. Unquote:
The GST as currently being discussed contemplates services being brought under its ambit. One can expand the scope of services to be brought under GST. This too is no bar on unified tax administration for GST at the State level. Incidentally the possibility of having a State-level GST was also mentioned in the Govt. discussion paper (page 18 fo the discussion paper).
I am giving below the link
http://www.finmin.nic.in/WorkingPaper/G ... 0India.pdf

[somnath]

So it is possible to enforce a common rate that would not be subjected to the whims and fancies of individual States. So the tyranny of States as an argument against leaving the jurisdiction of commdoity taxation in the hands of States is not tenable

I am not so sure about that...Just look at the number of 2 wheeler plants set up in Uttarakhand......Its the easiest policy tool for any new state govt looking to earn brownie points on "industraliation" attempts...

The GST as currently being discussed contemplates services being brought under its ambit. One can expand the scope of services to be brought under GST

Correct..My point was that abolishing indirect taxes compleetly wont be sustainable on reveneu terms...Especially as services till recently were completely out of ambit, and is showing large revenue potential even with limited coverage...

[Theo_Fidel]

Nandakumar,

Thanx for the reasoned explanations. India's system as you have pointed out is a dual GST, not a unitary one.

The places GST has been very successful is in relatively unitary states such as France, Germany, etc.

Fully Federal countries will have trouble with this. For instance the US still does not have a VAT because the states will not agree on a common rate. In fact there are states with no Sales tax and states with only sales tax. All of them function just fine.

In a Federalist free for all such as India, the GST is going to be problematic. There will be constant chipping away esp, WRT to local taxes by the states. For instance there is in TN an entertainment tax on foreign films, esp. in foreign languages. Technically under the GST this would have to stop. But who is going to tell that to the Tamil chauvinists. So is the center going to subdivide the CST portion by state. I'm sure there are similar odd rules in other states.

I'm of the view that it is better for the states to decide what the tax should be. Far closer to the action.

In any case GST is coming. But its benefits to the economy will be slight esp. compared to VAT where the aim was to capture off the book transactions which it has done very very effectively. This is not the aim of GST.

GOI gets more money from uniform service tax. Over time the states will find ways around it, discover the sky does not fall and slowly reduce it back to the present VAT level. Hard to see how this benefits the economy. We can take our time over it.

[somnath]

The places GST has been very successful is in relatively unitary states such as France, Germany, etc.

Really? Didnt you just say that India's GST was modeled after Canada's? Is Canada a "relatively unitary" state too? what determines "success" or the lack of it? The fact that the US doesnt have one? Or is it also another of those "my uncle told me so"?

In any case GST is coming. But its benefits to the economy will be slight esp. compared to VAT where the aim was to capture off the book transactions which it has done very very effectively. This is not the aim of GST.

Says who? Any references? By past track record, no...Or is this also a neo-IMF conspiracy hatched by vested interests looking for post retirement sinecures in the US? Oh no, not US, after all they dont have a VAT/GST themselvess, isnt it? Maybe Germany...

Its perhaps too much to expect you to even go through and understand Vijay Kelkar's report on GST, but at least back up what you claim with something other than "my uncle told me so"....

[abhischekcc]

Somnath said: Factually, Reliance+Tata together generate sales that would perhaps add up to something like 5-6% of GDP...Government accounts for ~30% of GDP, so who is creating more "wealth for the nation"?! Its an absurd comparison, but then the proposition itself is absurd...


You seem to be confused about creating wealth and owning wealth. How much investment as % of GDP has the govt taken since independence to build that 30%, and how much have Tata/Reliance taken? - That should be the real test of creating wealth.

[Theo_Fidel]

It appears we have reached a point where inward/outward FDI now matches.

http://www.google.com/hostednews/afp/ar ... 425216.291

Overseas investments by Indian firms has more than doubled on the previous fiscal year as companies expand their international footprint, data from India's central bank showed Wednesday.

Foreign direct investment (FDI) by Indian firms into overseas markets rose over two-fold to $43.92 billion in the fiscal year ended March, against $17.98 billion a year earlier, the Reserve Bank of India (RBI) data showed.

It is the first time the RBI has released such data as it seeks to improve transparency as Indian firms increase their overseas presence and exports, it said on its website Wednesday.

In the first two months of the current fiscal year, FDI by Indian firms rose to $5.1 billion, the bank data showed, without providing a comparative figure.

"In the post-2003 period, Indian overseas investment policies have enabled corporates and registered partnerships to invest in businesses abroad, currently to the extent of 400 percent of their net worth," the bank added.

Indian firms have invested in software, banking, pharmaceuticals and steel sectors overseas in recent years and made major acquisitions across the world.

FDI into India recovered in April, up 43 percent to $3.1 billion, from a year earlier, data showed this week, led by investments into services, construction and the automobile sector.

WRT exports this is a good sign. Moving up the value chain.

http://economictimes.indiatimes.com/new ... 950932.cms

India's engineering exports registered robust growth of 119.4 per cent to USD 7.9 billion in May year-on-year, driven mainly by an increase in demand from traditional markets like the US and Europe.

In May last fiscal, engineering exports stood at USD 3.6 billion, according to data released by the Engineering Export Promotion Council (EEPC).

"Besides an increase in demand from the US and Europe, we are getting good number of orders from new markets like Latin America and Africa," an EEPC official said.

During April-May this year, engineering exports grew by 115 per cent to about USD 14.5 billion.

Enthused by the impressive growth in the last fiscal, the council has set up an export target of USD 72 billion for the 2011-12 fiscal.

[somnath]

You seem to be confused about creating wealth and owning wealth. How much investment as % of GDP has the govt taken since independence to build that 30%, and how much have Tata/Reliance taken? - That should be the real test of creating wealth

"Wealth" is a stock variable, investment/income are flow variables...India's GDP, or national income, comprises of ~30% govt expdt...That 30% comprises both consumption expenditure and investments...So there is no "building" to 30% - its a current flow variable...

Govt's job is to invest and create enabling conditions for the pvt sector to grow, and create wealth in the process..That includes infrastructure, investments and various other things like "special access" to certain gas fields To compare wealth creation by the govt against a pvt sector company is an absurd concept in itself......

[Suraj]

I find the suggestion about a significant component of exports being refined petroleum products as a bad thing, rather strange. Particularly coming from Singapore residents, when that country is following a similar path

RIL Jamnagar regularly tops the Exxon/Shell Singapore refining margins, at times reporting GRMs >$15/barrel, and typically between $5-12, from various articles over the past few years. Reliance mints anywhere between $3-5 billion annually out of crude refining margins from Jamnagar, probably more, including all the value-added organic chemical/polymer output. I can understand issues with iron ore exports, but we're not exactly digging up the ground and shipping off crude here.

[ranjbe]

An interesting dissection of each state in India by its total GDP; per capita GDP, and population and its closest equivalent country in the world in these three categories, from latest Economist magazine (2009 figures).
For example, Maharashtra:
GDP US 175.3 billion (highest in India), closest equivalent, Singapore.
GDP/capita: $4743/person,(Chandigarh @$9345, highest in India) closest equivalent, Sri Lanka
Population: 100.5 million (UP @ 195.8 million. highest in India) closest equivalent Mexico).
http://www.economist.com/content/indian-summary

[somnath]

I find the suggestion about a significant component of exports being refined petroleum products as a bad thing, rather strange. Particularly coming from Singapore residents, when that country is following a similar path

Ah, tyranny of the pink media, again...

Its a rather complicated topic, not a "pink paper" domain usually, but in brief..

One, petroleum refining (Jamnagar style) is different from cracking chemicals (Patalgang) - the latter is a far higher "value adding" activity...the point is on the former...

Two, what are the economic merits of fully "export oriented refineries"...

Its a hotly debated issue..Most refineries around the world are situated close to the point of final consumption, not near the well-head, and certainly not in a completely off-site location..Multiple reasons..
1. Shipping crude is cheaper than shipping finished products...
2. Pumping crude through pipelines again is far cheaper than pumping finished products..

Which is why most US oil consumption is refined in the US West Coast rather than in the Middle East...Same reason why even Indian refineries are located close to consumption centres rather than well-heads or offsite...Bongaingaon, for example was a political compromise - the PSU wanted to refine Assam crude in a place in WB where it was expected to be old, Assamese students created a ruckus, a via media was found in Bongaingaon, which is technically in Assam but close to WB..

Which is why Exxon/Mobil et al dont have most of their refineries parked in the Gulf, but closer to consumption centres..

3. GRMs are a thin sliver of the price of the finished product, typically 4-7%...In an EOU, it means a value addition of only 6-8% over the imported raw material (crude)...Exports with such low value addition are typically not preferred from an economic perspective..Especially given the plethora of tax incentives involved in exports - on customs duty, income tax waivers, of course the full SEZ drama now...In the Trade policy 2009-14, a minimum value addition of 15% was proposed for certain incentives...The petro EOU industry (read: RIL) was up in arms on that - and I think they have diluted that specifically for petroleum (not sure)...

Specifically, the RIL story
When they planned the Jamnagar rfeinery, in typical RIL style, it was neat...It would be setup as a EOU, and get the tax benefits of an EOU, but a substantial portion of the finished product would be to fuel the domestic market (which had been opened up and RIL was gearing up to really scale up there)..Not unlike what Nokia does out of Sriperumbudur SEZ...However, plans went awry as crude prices spiked and all oil ministers (Ram Naik onwards) took the easy way out of implementing a de facto APM...In true RIL style, they rolled back their domestic plans completely and started exporting 100%..And yes, overnight the refinery also got reclassified as an SEZ...

To be completely fair to RIL, its not just "system management", the refinery too is world class..Its one of the newest large refineries in the world, so has the leading edge tech, and RIL's project management is legendary...

The issue really is whether importing crude from SAudi Arabai and exporting it away to Europe is a hugely "value adding" activity, economically speaking...The jury is out on that...Which is why refineries are not the top thing on the agenda of ME states looking to "diversify" away from oil dependence, though it is the easiest option for them...Certainly doesnt meet the Indian trade policy benchmark of 15% either (mentioned earlier)...

Some really top level number crunching...If RIL makes a net forex income = GRM (it should be a less, plant&machinery is imported, transport costs are in USD), then assuming GRM of USD 7/barrel = ~ USD 49/million tons = ~ USD 1.5 billion in forex...Decent numbers, not to be scoffed at...But are they net "value adding"? Would RIL (and India) be better off if RIL operated the plant in the US West Coast and remitted the entire profits of that to India? Maybe, maybe not - US tax breaks are nowhere near SEZ levels in India ...(I am not an energy analyst - so if these specific numbers are wrong, happy to be corrected...I am only laying out the broad theoretical framework)...

Net net, in terms of economic value add, its an open question..

Singapore case
The rationale is really simple...SG is primarily a transshipment hub for the whole of SEA...And locating a refinery in SG is actually feeding "local" consumption in SEA, rather than "exports", from a geogrpahical sense..So it is as per the broader economics of oil refining...Why SG, and not Malaysia or Indon? Well, much superior infrastructure and availability of talent...

[somnath]

An interesting dissection of each state in India by its total GDP; per capita GDP, and population and its closest equivalent country in the world in these three categories, from latest Economist magazine (2009 figures).
For example, Maharashtra:
GDP US 175.3 billion (highest in India), closest equivalent, Singapore.
GDP/capita: $4743/person,(Chandigarh @$9345, highest in India) closest equivalent, Sri Lanka
Population: 100.5 million (UP @ 195.8 million. highest in India) closest equivalent Mexico).
http://www.economist.com/content/indian-summary

This is quite neat - already all over the egroups/linkedin wires...

[somnath]

Great one from Surjit Bhalla - as entertaining, as incisive as usual...

http://www.indianexpress.com/news/what- ... y/807396/0

[kmkraoind]

DoT tells BSNL to prepare VRS plan

The department of telecommunications (DoT) has directed state-owned Bharat Sanchar Nigam Ltd to prepare a voluntary retirement scheme (VRS) for 50,000 of the latter’s employees.

The move will require a one-time payment of Rs 4,000-5,000 crore, for which DoT would give financial support, a senior official from the latter told Business Standard.

This is part of the government’s measures to get loss-making BSNL back on the rails. The latter has 280,000 employees, far higher than the industry standard. Last month, Union communications minister Kapil Sibal had said the government would turn around BSNL in the next six months.

About 50,000 of BSNL employees are expected to retire in the normal course in the next four to five years, the official said.

When asked, BSNL chairman and managing director R K Upadhyay said, “The Board for Reconstruction of Public Sector Enterprises had recommended we give VRS to our employees. The exercise is still on and we have not taken any decision on it yet.”

The need to reduce the workforce was earlier suggested by Sam Pitroda, advisor to the Prime Minister on infrastructure. He wanted BSNL to reduce its employee base by about 100,000.

DoT had earlier directed both BSNL and its sister concern, Mahanagar Telephone Nigam Ltd, to work on reducing staff. MTNL, which offers telecom services in Delhi and Mumbai, has asked DoT to clear a VRS to be offered to 15,000 employees in the current financial year, a third of its workforce. The proposal has already been cleared by the MTNL board. It has asked DoT to help with Rs 2,000-3,000 crore for this scheme.

However, any proposal for reducing workforce has been met with strong opposition from the staff unions. Even schemes for a VRS have been opposed.

For the first time since inception in 2000, BSNL had posted a loss, of Rs 1,823 crore in 2009-10. It is expected to post one of Rs 2,500 crore for 2010-11.

[Singha]

looking at the comments these use 2009 figures.

in any case Maharashtra alone is == TSP in GDP

in coming years a few more states will cross over.

[Suraj]

somnath: While I appreciate the details about crude refining vs cracking, that entire matter is tangential; I was not comparing the two in the first place. I was pointing out that SG has the Jurong Exxon/Shell facilities and it's rather curious to complain about relative low value add from RIL Jamnagar when SG happens to run refineries on a similar scale and has encouraged it via policy for decades, dating back to before Jamnagar I.

So it isn't profitable or strategic for Reliance (and Essar) to situate their refineries where they are ? Presumably you know better than both them ? The jury may allegedly be out on that, but odds are most of them hold RIL stock one way of the other and are quite happy about it

[vina]

looking at the comments these use 2009 figures.

in any case Maharashtra alone is == TSP in GDP

in coming years a few more states will cross over.

Yes. The 2012 data will look quite different with the GDP in fast growing states looking a bit different. But lets go back to the map and look at it. 3 states with around $80b in GDP . TN, Gujarat and WB. Gujarat has a Percapital GDP of around $4150 , TN $3500 and WB crashes down to $2400! A clear under performer, despite having a large metro like Kolkata in it and the industrial base.

The other problem is the well known "BIMARU" , esp , UP and Bihar . Their population together is roughly 3 times that of Maharashtra, and a GDP roughly slightly less than 3/4 of Maharashtra .and hence a disastrous pre capital GDP. So that is the problem. "The Kenya, Eritrea, Haiti, Benin , Sudan, Tajikistan, Mauritania and Lesotho" in the bosom of India is the big problem.

Also, I am pleasantly surprised by TN's performance. Among the 4 southern states, it is the leader, pipping Kerala by some $150 or so. All the southern states have a per capita GDP north of $3000. If they double it in say 10 years, that will be historical 'middle income" country status of $6000 or so . Of course, Guj and Maharahstra will get there earlier. All in all, the west and south seem well set to climb the virtuous cycle of growth and prosperity.

The Gangetic belt is the big laggard. From the looks of it, there will continue to be crushing poverty there for another 30 years or so. West Bengal will continue to b nothing but an exporter of skilled manpower and commie apparatchiks I am afraid and continue to muddle along and we will see unedifying spectacles like the one Didi put up in Dilli this week "We are asking money only for bread and water!" and glorifying bakshessh seeking and the politics of entitlement. Shame!

I only hope and pray that UP and Bihar come screaming from behind and overtake WB. Only then can it be shamed into doing something I suppose. Go Nitish Kumar!

[somnath]

While I appreciate the details about crude refining vs cracking, that entire matter is tangential; I was not comparing the two in the first place.

It was only one (of the many!) points in my post - simply responding to your point

Reliance mints anywhere between $3-5 billion annually out of crude refining margins from Jamnagar, probably more, including all the value-added organic chemical/polymer output

Seems you completely missed the point on economic rationale...

I was pointing out that SG has the Jurong Exxon/Shell facilities and it's rather curious to complain about relative low value add from RIL Jamnagar when SG happens to run refineries on a similar scale and has encouraged it via policy for decades, dating back to before Jamnagar I.

So it isn't profitable or strategic for Reliance (and Essar) to situate their refineries where they are ? Presumably you know better than both them ? The jury may allegedly be out on that, but odds are most of them hold RIL stock one way of the other and are quite happy about it

The point isnt about firm profitability..Of course its profitable for RIL..the point is about macroeconomic value add...Especially in context of the question being addressed originally, ie, "quality" of our export basket..

Does it make sense for India to dole out tax breaks, exemptions, DEPB, land, special infrastructure or infrastructure-related exemptions on top et al, for essentially a low value adding activity like oil refining? the jury on that is out........We had a reasonably "robust" debate on that last year on certain exemptions on petro exports (havent kept track, dont know what happened in terms of a decision)...

For SG, repeating again, it is a transshipment hub for entire SEA..Bulk of SEA's oil supplies anyway passes through SG port, whether crude or finished...It does not have to create extra-special infrastructure or give massive tax breaks for companies to be inentivised to do the refining in SG...

[Singha]

singapore's infra is anyway good and tax reasonable now. but does anyone historically know what it did to tempt the growth of manufacturing there...I vaguely recall one paper which spoke of the things done to facilitate the export and transshipment push way back...iirc there were incentives...even today pretty low value add incentives (150 jobs) for the giant google/yahoo/facebook type datacenters lead to a feeding frenzy among american state governors to offer good land and abundant power to the munna's who setup shop.

[somnath]

^^SG manufacturing is very selective and targeted...They dont go around trying to attract anything and everything...For example, they dont try and attract an auto assembly for exports -they know countries like M'sia have better credentials to do that...About trasnshipment, while I dont know the history, I am sure they would have gone gangbusters at it - the port is the only "natural resource" that SG has...

On tax breaks given by US states, while a lot of noise is made on them, in reality, the USD quantum of "breaks" isnt all that high, and spread over many years...Not like India, where state govts fall over each other in a beggar-thy-neighbour rush through blanket tax exemptions - which is one reason of course why GST is so important...

[Suraj]

The point isnt about firm profitability..Of course its profitable for RIL..the point is about macroeconomic value add...Especially in context of the question being addressed originally, ie, "quality" of our export basket..

Jamnagar I has been in operation since 1999, and Jamnagar II was under construction since before the SEZ Act took shape and came into effect. Your viewpoint suggests that the macroeconomic value add question wrt SEZ related exemptions was a consideration in their conception, but it was not. They got breaks, no different from the form of targeting GoSG does in supporting the Port of Singapore and assorted targeted industries, latest being their biotech initiative, as I recall, as well as the rather ghastly focus on gambling that's turning the place into another Macau.

[Theo_Fidel]

Also, I am pleasantly surprised by TN's performance. Among the 4 southern states, it is the leader, pipping Kerala by some $150 or so. All the southern states have a per capita GDP north of $3000. If they double it in say 10 years, that will be historical 'middle income" country status of $6000 or so .

The middle income band runs from about $980 to about $11,000 or so and is further divided into Lower/Upper middle income. The break is at about $4,000 depending on who you rely on.

At this moment India is a middle income country. I get very annoyed when I see that developing country status. We moved out couple of years ago. Long ways to go.

[vina]

Jamnagar I has been in operation since 1999, and Jamnagar II was under construction since before the SEZ Act took shape and came into effect. Your viewpoint suggests that the macroeconomic value add question wrt SEZ related exemptions was a consideration in their conception, but it was not. They got breaks, no different from the form of targeting GoSG does in supporting the Port of Singapore and assorted targeted industries, latest being their biotech initiative, as I recall, as well as the rather ghastly focus on gambling that's turning the place into another Macau.

As usual the "Super Comprehension" is talking through his Musharraf and passing off as "facts" stuff that is simply not true (case in point, Oil Bonds being = = to GOI T bonds, which is simply not the case, if it were the entire point will be lost and the oil companies will simply go and monetize it which they can't and hence they go and borrow from the market at high cost!.. oh well, I digress). I was living and working in Singapore in the mid 90s when "Super Comprehension" was probably in his diapers or at best a pimply faced middle school kid.

Singapore story was ALL ABOUT attracting manufacturing and growing it's pre independence status as the travel and transportation hub of the Malacca Straits. That hub status was historical , they had the sense to grow it (unlike the Commies in Calcutta.. funnily enough, Singapore was administered from Calcutta! who went and destroyed the industrial and transit base in the name of "socialism/communism/welfare " / whatever).

Singapore and later Malaysia and Asean's growth strategy as a whole was to attract global leading brands to set up manufacturing in their countries, primarily for export (come on.. Singapore's market size was laughable back then) and the country itself was a giant entreport. For eg, consider computer disk drives. By 1984, the entire industry had shifted lock stock and barrel out of silicon valley into Singapore (Seagate, IBM, Western Digital.. nearly every one). Lots of Japanese electronics companies moved manufacturing there as well. All had huge incentives given to them and massive tax breaks. The entire Jurong Island was developed as a petrochemical hub ( Shell refinery is the center piece of that ecosystem it provides the bulk of the feedstock for other value added speciality chem players like Bayer and Du Pont.. no refinery, none of those would exist).. In fact it is one GIANT SEZ , even if you dont call it by that name.

In fact, the entire Jurong industrial park and the Jurong Island is one of Singapores' main economic engine. The others are of course, the port at Tajong Pagar and the Changi Airport and the associated Singapore Airlne. They worked had in developing those into the best in the world, and were unparalleled until the Malaysian port right across (in Johor Bahru I think) came up and big shippers like Maersk moved there. Same with the airport. Until, Bangkok and Malaysia came up with their world class airports and airlines (mid 90s or so) , Changi was unrivalled. Singapore's financial sector was something they hoped to build, but could never really rival Hong Kong and longer term, I think Dalal St will be lot more bigger financial market than Singapore can ever be.

Singapore and Malaysia gave massive tax breaks for IT/Vity manufacturing and attracted component guys in droves.. That slammed to a halt thanks to the Chinese. The Chinese basically picked up this model and "out Aseaned" Singapore and Malaysia , thanks to Shenzen and the pearl river delta.

Now with the manufacturing goose cooked by the Chinese, the Singaporeans and general Asean folks think that the way out is by "value addition" .. Tough luck. That is a skill based thing and they don't have the people for that (they need to import them... and it goes back to the story of is this a country or a hotel that Lee Kwan Yew faced). Singapore and Malaysia are "developed" or caught in the middle income trap. No way out I guess. The thing that will continue for them is tourism, services..or more accurately "regional head offices of large multinationals" .. wonder how sustainable that is long term, but as a competitive edge, Singapore and Asean are eroding.

The sad part of that is Singapore and Dubai grew preciely because of India's missteps. If we had done even a bit of our homework, AI should have rivaled SIA and India should have been the transport hub liking SE Asia /Australia with Europe, the entire gold market in Dubai and Singapore is a result of India's ridiculous commie ding dong driven misplaced jihad against gold, stuff like Jurong Island and Jebel Ali FTZ could have been done 25 years ago in India very easily.

Singapore is not very different from the Jamnagar refinery. Here we get lower grade crude from Iran/Iraq/ Gulf that is quite close from there, and refine and rexport it back to Iran , africa, Europe and other places , Singapore gets Indonesian crude refines it and exports it as well. In fact, the entire country is a duty free export zone. Why you go buy something at a shop in Singapore, while getting out of the country you can go to the GST counter at Changi and get the GST refund! So what value did that shopkeeper add ?

The problem is , that the others are more pragmatic and do what it takes to keep their people employed, get the money in and grow, while we get into some totally inane and insane things about "is there macro value added" ..right Sherlock, there is EVA at firm level, how does it not add EVA at macro level , as if the sensible measure is not the returns the business generate, but how much the Govt can bleed that business by some ridiculous taxation.

[vina]

At this moment India is a middle income country. I get very annoyed when I see that developing country status. We moved out couple of years ago. Long ways to go.

Well yes, parts of India (primarily South, West and pockets of North) seem to be there. But then, the Sudan, Eritrirea and Haitis ,Benins and Gabons in the midst really dont let me be able to declare it as yet. Those Eritreas and Haitis need to get upto $3000 per capita to be able to genuinely declare it as so,not just statistically, but look and feel and on the ground "sense and sensibility"

[Hari Seldon]

Vina garu,

'Twas a tour-de-force there.

Like some wiseguy said, the most precious global commodity going forward post 2008 is *demand*. The export-driven model in that sense is so dearly dependent on foreign demand that risk inherent in such dependence does tend to play up, often at inconvenient times.

India exporting to its strengths in certain sectors is par for the course. Whilst we'rer growing exports where and when we can, fine, relying on global demand to generate large-scale perma employment opportunities is quite a risky bet. I suspect folks in GOI aren't unaware of it.

Anyway, the ASEAN types have profited from the model and grown rich and all that riding it. Will we be able to rteplicate their success with the global demand of tomorrow decisively less certain than that of 2nd half of the 20th century? Time will tell but I doubt we'll like the answer to that one.

[vina]

India exporting to its strengths in certain sectors is par for the course. Whilst we'rer growing exports where and when we can, fine, relying on global demand to generate large-scale perma employment opportunities is quite a risky bet. I suspect folks in GOI aren't unaware of it.

Exactly. That is the problem with the Asean model. None of the firms doing the exporting have any stakes there and the ownership is not there and those firms are in those countries only as long as there are enough tax breaks /labor arbitrage (disk drives, hardware manuf.. think of it.. those countries had their IT/vity boom in the early 80s, we had it in the 90s..same drivers.. but an important diff which I will come to in a sec)/productivity. The problem is that it is not "sticky" (all strat-e-jee folks worry day and night about customer stickiness, coz that is the only way you build a sustainable piss-ness.. e-con-o-mists couldn't care a damn ..). The hardware guys are notorious for that. They are constantly in the move of cheapest cost. When Shenzen came out there was a massive hollowing out from Asean and Japan to Shenzen .. All the global multinationals hollowed out and Asean never quite recovered after 1998 IMHO. Singapore is fine with that tiny population, but for others it is a tough grind and no easy IT/vity manufacturing driven growth.

In India, with the ownership of those largely INDIAN (like IT/vity, Jamnagar), the relationship is lot stickier! Even if there is a loss of competitive advantage, the hollowing out wont happen to the extent if they were all "videhsi mehmaans" like in Asean. For eg, folks like HP are NOTORIOUS for being mobile and going in search of productivity and costs. In fact, other than HP office in Palo Alto, nearly everything in that company's Asia business is "mobile" . If you are going to build your future on that , think again.

Anyway, the ASEAN types have profited from the model and grown rich and all that riding it. Will we be able to rteplicate their success with the global demand of tomorrow decisively less certain than that of 2nd half of the 20th century? Time will tell but I doubt we'll like the answer to that one.

You can have export driven by geninuine competitve advantage , beyond easily replicable factor inputs.. Think for eg, the German and Italian and Japanese exports. That is the kind of model to go for. The ASEAN kind of "videshi mehmaan" model is dead. China has grabbed it and there is no room for two Chinas ,unless China's costs become so high very soon that there is a player lower down (even there Cambodia, Vietnam etc are better suited to grab slices I think).

[Suraj]

I've seen some curious changing dynamics w.r.t India and Singapore from a business perspective. Back in the 1990s, SG used to have the APAC/ASEAN head offices of several MNCs operating in India, as a result of which the Indian division was hierarchially below APAC head office in SG (or in some cases HK). As the Indian market grew bigger, companies realigned upper management to have Greater India reported directly to HQ, as a result of which SG was downsized to ASEAN HQ, making them peers. In some cases they became subordinate, all in a matter of years. Some takleef and echandee loss of face was observed