Indian Economy - News & Discussion 27 May 2012

[member_27444]

The only way INR is going to stay @ 66 is by going back to old days of non convert ability and fixing the exchange rate. Goldman says as of current situation it will hit 72 minimum
Of courses mavericks stern warning is followed by all Indians including pawars and Deoras don't take to early flight it may be back to 39 but Narayan murthy is happy BPOs want it to be Paki Rupee

[vina]

^^^Please explain how? That analysis is shocking. I have never encountered this equation explaining inflation. The more I think about it, the more it sounds wrong.

Some basics of E-Con o-Mix.

Savings = Investment

Capital Stock ---> Capital Formation is an input to most growth models and is a serious and important factor of production (land, labor etc being among others).

Productivity is what helps square the circle and keeps you on a long term growth path without inflation.

Without productivity growth, Rahul Baba, NAC, Diggy Baba , Desh Ki Bahu and Amartya Sen can simply put Rs 1,00,00,000 (1 Cr) instead of Rs 100 on a Gandhi note and hand it out to every man, woman and child in India and proclaim that we are 400% richer than Norway onree!

[Arjun]

^^^Please explain how? That analysis is shocking. I have never encountered this equation explaining inflation. The more I think about it, the more it sounds wrong.

Overall price levels of goods and services in the country is determined by total supply of goods and services to be consumed and by total supply of money available for consumption. If the latter increases relative to the former, that results in inflation.

Theo is implying that India is increasingly spending on consumption (savings rate has fallen to 30% from 35%+) while supply of goods and services has not kept pace.

[panduranghari]

^^^Please explain how? That analysis is shocking. I have never encountered this equation explaining inflation. The more I think about it, the more it sounds wrong.

Some basics of E-Con o-Mix.

Savings = Investment

Capital Stock ---> Capital Formation is an input to most growth models and is a serious and important factor of production (land, labor etc being among others).

Productivity is what helps square the circle and keeps you on a long term growth path without inflation.

Without productivity growth, Rahul Baba, NAC, Diggy Baba , Desh Ki Bahu and Amartya Sen can simply put Rs 1,00,00,000 (1 Cr) instead of Rs 100 on a Gandhi note and hand it out to every man, woman and child in India and proclaim that we are 400% richer than Norway onree!

No Vina. You are waaaayyyy off the mark.

The thing you are talking about contributes primarily to the CAD or CAS. The growth path you talk about depends increasingly on debased currency. So what e con no mix are you talking about? Unless I am missing your tongue firmly in cheek comment.

[Austin]

http://profit.ndtv.com/news/economy/art ... ome-latest
Japan, India expand rupee swap line to $50 billion

St. Petersburg: Japan and India have decided to expand a bilateral currency swap facility to $50 billion from $15 billion, the two countries announced on Friday after bilateral talks on the sidelines of a Group of 20 summit.

The expanded facility would boost the financial backing for the rupee, one of the emerging markets currencies that has been hit hard by the prospective scaling back of ultra-easy U.S. monetary policies.

[nawabs]

India’s External Debt: A Status Report 2012-13

http://pib.nic.in/newsite/erelease.aspx?relid=99162

The level of India’s external debt is on a rising trend with the elevated level of current account deficit and hence overall external financing requirements. With rising debt flows, deceleration in GDP growth and depreciating rupee, key external debt indicators witnessed some deterioration as at end-March 2013 as compared to end-March 2012. However, debt service ratio, measured by the proportion of total debt service payments to current receipts (minus official transfers) of balance of payments, at end-March 2013 showed some improvement over end-March 2012, coming down from 6.0 to 5.9 and India’s external debt has remained within manageable limits as indicated by external debt-GDP ratio of 21.2 per cent during 2012-13.

At end-March 2013, India’s external debt stock stood at US$ 390.0 billion, increasing by 12.9 per cent over the end-March 2012 level of US$ 345.5 billion. The rise is mainly due to increase in short-term debt, commercial borrowings and non-resident Indian deposits.

The long-term external debt at US$ 293.4 billion at end-March 2013 reflected an increase of 9.8 per cent, while the short-term debt at US$ 96.7 billion increased by 23.7 per cent over the level of end-March 2012. The long-term debt accounted for 75.2 per cent of total external debt at end-March 2013 indicating the dominance of long-term borrowings in total external debt.

The share of commercial borrowings in total external debt stock stood at 31.0 per cent at end-March 2013, followed by short-term debt (24.8 per cent), NRI deposits (18.2 per cent) and multilateral debt (13.2 per cent).

Government (sovereign) external debt stood at US$ 81.7 billion at end-March 2013 vis-a-vis US$ 81.9 billion at end-March 2012. The share of Government external debt in total external debt was lower at 20.9 per cent at end-March 2013 as compared to 23.7 per cent at end-March 2012.

A cross country comparison shows that India continues to be among the less vulnerable countries with its external debt indicators comparing well with other indebted developing countries. The International Debt Statistics 2013 of the World Bank, which contains external debt numbers for 2011, shows that India’s position was fourth, in terms of absolute debt stock amongst the top twenty developing debtor countries. However, in terms of ratio of external debt to Gross National Income, India’s position was the third lowest.

[Theo_Fidel]

I don’t know about other things but I have been poring over the Housing capital stock data of India recently and firmly convinced that the incredible inflation of prices/rents is directly related to the extremely poor levels of housing capital in India. In Central Chennai rents of Rs 25,000-40,000 pm for dingy little apartments are quite normal now. This is approaching costs in USA without anything like the services and infrastructure backing it up.

Take one metric - the size of our cities. To be livable with our present mixed use pattern of Apartment complexes mixed with row houses. Population density should be somewhere in the 5000 persons per sqkm range. Just to give you a reference Tokyo has density of 6,000 / sqkm. Seoul SoKo is quite a bit denser in its heart but India has a lot more open area than Korea. Now the urban core can have higher densities, for instance Paris urban core approaches 20,000 per sqkm. But the greater city quickly drops back down to 5,000 per sqkm.

Right now Chennai area has 8-9 million folks on its way to 25 million fairly shortly. Say we check what it would take to build a livable city at 10 million. 10 million / 5000 = 2000 sqkm. Add a few sqkm for water bodies, open spaces, and bump that up to 2,500 sqkm. Yet the total city of Chennai is only ~ 500 sqkm. And of this only 50% has been developed, meaning roads, water lines, schools, etc. So the majority of Chennai lives within 250 sqkm or so! Yielding a present population density approaching 50,000 per sqkm! So what is 2500 sqkm. A quick glance at Google earth shows that this would be an area that stretches from Chengelput to Kanchipuram to Thiruvallur to Ponneri. As you can imagine most of these areas are weeds and dust and completely undeveloped.

So right now 8 million folks are living and using the infrastructure meant for 250x5000 = 1.25 million, ergo shortages and inflation. We have invested 1/10 the amount necessary to build a city for 10 million folks. In my view 9/10ths of the investment needed to make housing in our cities bearable are still ahead of us.

---------------------------------

Arjun,

Housing classification has been driving me nuts. When it is first built it is an investment but from every day after it is a consumption item. I'm not sure I entirely understand this logic but technically all existing housing counts under consumption. If you put in marble tiles it is consumption, if you paint it, it is consumption, etc.

Maybe Suraj can clarify...

[RamaY]

Question: At what levels will the rupee stabilise?

Answer: At what levels it is very difficult to say, but I believe at the present level the rupee is well corrected. Now what is the word corrected mean, we can only at it in terms of a base year and see whether the exchange rate of the rupee has been adjusted for inflation differential between India and other countries. If you take 2004-2005 as the base, the calculations made clearly indicate that somewhere about 62-63/$ it is well corrected therefore anything beyond that is result of whereas other forces operating in the system. I believe that rupee can stabilise and even strengthen from the current position as capital flows come in. So we are on the road to stabilisation.

Stabilized conversion rate for INR is a mirage. I made this comment before...
http://forums.bharat-rakshak.com/viewto ... 6#p1503096
http://forums.bharat-rakshak.com/viewto ... 1#p1427461

Imagine the conversion rate of INR/USD in 2004 was Rs40/$1. Circa 2004 RBI opened the repatriation of money in both-directions on MMS' direction. Since then we have seen a constant inflation rate of 8-9% in India supported by 8-9% bank interest rates where as USA kept the interest rates at near 1%. When combined with FIIs, investment in Bonds other open money transfer instruments... we can calculate how the relationship between INR and USD will be.

For example an NRI can transfer $ to INR in an NRE account and after sometime can take money back in $. NRIs can take their NRO funds as well after getting a Chartered Accountant certify their transactions associated by tax filings.

here is the rough calculation -

Interest Rate 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Conversion Rate 40 43 47 50 54 59 63 68 74 79 86 93 100 108 116 125 135
USD 1% 100 101 102 103 104 105 106 107 108 109 110 112 113 114 115 116 117
INR 9% 4000 4360 4752 5180 5646 6154 6708 7312 7970 8688 9469 10322 11251 12263 13367 14570 15881

[Vipul]

The elephant experts didn’t see.

(Reading below feels like Murkh Mouse Singh has followed the Dummies guide on how to go about Systematically demolishing the country's economy)

Normally a new government faults the previous dispensation of another party for leaving behind a bad economy. But when the UPA government took over in 2004, it had some good words for its predecessor, the NDA.

In his Budget speech in July 2004, Finance Minister P. Chidambaram noted that “the economic fundamentals appear strong” and “the balance of payments robust”. Yes, the current account surplus of $22 billion for the three years 2002-04 had broken the unbroken run of current account deficits for almost a quarter century — despite the average oil prices having doubled.

This coincided with the world taking serious notice of India’s rise. But how come that India, which was seen as a rising hope for the world when the UPA assumed office, now finds itself in a hopeless situation — with its rupee almost halving in value in the last 20 months and still losing? What led to this fall?

The national discourse on the present crisis is more like the story of the six blind men and the elephant. Most experts catch and hold out one aspect of the phenomenon as the cause of the crisis.

Everyone understands that the rupee fall has been caused by the galloping current account deficit since 2004. Many experts are blinded by the inevitable oil and unwanted gold imports as the culprits for the huge current account hole.

Some say the hole is so big because inadequate Indian reforms have dried up the flow of foreign capital. Some others hold global slowdown as the cause for India’s current account woes. Others say that because of poor reforms the growth is slow and, therefore, exports haven’t picked up. In the anarchic debate, the real cause of the current account hole and the consequent rupee fall — the elephant — is totally missed out.

Almost everyone is blind to the fact that more than oil and gold, it is the unprecedented import of capital goods which has torpedoed the balance of payments and dented the current account with a huge deficit of $339 billion during the nine-year UPA rule.

The capital goods imports in this period aggregated $587 billion, almost a third of India’s nominal GDP — the elephant which the experts have missed.

Actually, oil imports after off-setting exports ($279 billion) were less, at $515 billion, and gold imports (net of exports of gems and jewellery) were $161 billion. It is the gargantuan capital goods import that has blown the current account to pieces. It also has damaged the Indian economy from within.

Here is the pathetic story. During NDA rule, the average annual capital goods import was $10 billion. But in the very first year of UPA rule (2004-05) it jumped by one-and-a-half times, to $25.5 billion. Thereafter it galloped year after year — to $38 billion in the second year, $47 billion (third), $70 billion (fourth), $72 billion (fifth), $66 billion (sixth), $79 billion (seventh) $99 billion (eighth), and $91.5 billion (ninth). In the first four years, the capital goods import totalled $180 billion. In the next five years, the total vaulted to $407 billion.

In theory, capital goods import signals economic boom, promising rise in industrial production, in GDP. But here? Even as capital goods import rose by 79 per cent in the five years, the growth in index of industrial production fell by 56 per cent (from 11.5 per cent earlier to 5 per cent in the latter five years). And directly hit by the imported capital goods tsunami, domestic capital goods manufacture nosedived by one-tenth in 2011-13.

Even if India had had enough dollars to pay for the capital goods import without running a current account deficit, the huge import of capital goods would have devastated the national manufacture. The story does not stop here. The current account deficit also exported the growth away.

It is fundamental economics that exports add to national wealth (GDP) and imports cut into it. The current account deficit year after year has cut the GDP by 0.8 per cent in 2007-08, by 1.5 per cent (2008-09) by 2.1 per cent (2009-10) by 1.4 per cent (2010-11) by 2.6 per cent (2011-12) and by 3.9 per cent (2012-13).

But for the current account deficit, the nominal GDP of India could have been 16.9 per cent (not 16.1 per cent) in 2007-8, 14.4 per cent (not 12.9 per cent) in 2008-9, 17.2 per cent (not 15.1 per cent) in 2009-10, 21.7 per cent (not 20.3 per cent) in 2010-11, 17.7 per cent (not 15.1 per cent) and 15.6 per cent (not 11.7 per cent) in 2012-13.

Perhaps India could have been ahead of China. More. The UPA’s nine years saw the aggregate import of manufactured goods jump to $50 billion – up 20 times.

The surge in import of capital goods and manufactured goods put Indian manufacturing in the ICU. And note. Gold imports dent the current account yes; but they do not kill local manufacture. But capital and manufactured goods imports have achieved both!

And shockingly it is the Government that incentivises the huge capital goods import with a red carpet of tax waivers costing lakhs of crores of rupees. The Government cut the customs and excise tariffs in 2008 as fiscal stimulus to the economy in view of the global meltdown. For mega power plants the tariff was made ‘Nil’. The stimulus caused additional revenue loss of Rs 2.6 lakh crore each year. The result was the capital goods import tsunami, which rose by almost 80 per cent since 2008.

The total tax revenue lost by tax cuts in four years from 2008-09 to 2011-12 was Rs 22.6 lakh crore. The ratio of customs duty to imports halved from 15.6 per cent in 2004-5 to 7 per cent — even as the imports rose six times from Rs 3.6 lakh crore to Rs 23.5 lakh crore — reducing the effective import-weighted tariff to almost one-eighth of its 2004 levels.

As far back as in January 2005, Prime Minister Manmohan Singh and Finance Minister P. Chidambaram had sworn in public to reduce the unnecessary tax waivers as the tax rates were reasonable.Yet not a single rupee of tax waiver was rolled back in the 2005 Budget or in 2006 or in 2007 or in 2008. On the contrary, tax waivers were doubled from Rs 2.6 lakh crore to Rs 5.2 lakh crore a year, and year after year, from 2008-09 as the red-carpet welcome for the capital goods tsunami. And capital goods imports stimulated by tax cuts, which trebled the fiscal deficit, rose by 79 per cent to $407 billion. But for the tax cuts, with the global meltdown in 2008, there would have been no great propensity to invest. Clearly, the huge rise in capital goods import is the direct effect of the tax stimulus — a case of tax-cut induced, not demand-led, investment.

Had capital goods import not been tax-incentivised to rise (by a whopping 79 per cent) the current account deficit over the nine-year period of UPA rule ($339 billion) could have been less, perhaps by $182 billion — namely just $157 billion, had the imports been on the pre-stimulus levels. And consequently the forex reserves would have been more by $182 billion.

Don’t go that far. Imagine the capital goods import and therefore the current account had been less by just $100 billion. There would have been no crisis. Isn’t it stupid to invite the huge current account deficit via capital goods import by incurring huge fiscal deficits via tax cuts?

The stupidity did not end there. The tax cuts were intended to be passed on by the corporates to consumers so that their buying power was not eroded and the economy did not get into recession. But the corporates did not pass on the stimulus tax cuts to the consumer. This is evident from the rise in the ratio of corporate profits to GDP from 11 per cent in 2004-5 to 12.5 per cent after the stimulus. The current account deficit directly pulled down the rupee value. And the fiscal deficit incurred to invite the current account deficit indirectly knocked down the Indian rupee.

Yet the real culprit — the tax-cut induced capital goods import — is virtually unnoticed in the national discourse. Ignoring (suppressing?) the real cause, the Government is applying the usual ointment of soliciting external commercial borrowing and stock market investments as cure for the cancerous growth in current account deficits.

On top of it, the UPA is proposing an additional Rs 1.50 lakh crore spend on the Food Security Bill to buy votes. A government interested in the nation and the rupee would have deferred the Bill to better times. Why then will the rupee not fall, and continue to fall?

Saying that the intrinsic value of the rupee is three times its market value, The Economist magazine ([January 2013) lists the rupee as the most undervalued currency in the world.

Yet it is getting valued less and less. It does not need a seer to say that reckless management of the external sector is the real reason for the rupee fall. Will the establishment thinkers realise the truth — which is the precondition for remedy?

[vishvak]

And there were comments against BJP CM NaMo when his administration offered lands cheap for manufacturing within.

"the real culprit — the tax-cut induced capital goods import — is virtually unnoticed in the national discourse"
Now we also have to consider rebuilding manufacturing as well, so Walmart or others can't complain of unavailable material for 30% local materials condition.

[Bade]

Ford has a $10B plan for India

Ford Motor Co. plans to invest more than $10 billion in India during the next four to five years to develop its local supplier base and help turn the Asian country into a global small-vehicle export hub.

The Dearborn automaker today will unveil the plans, which will allow it to buy more parts from Indian suppliers and increase production capacity in India amid ever-changing economic conditions and growing global demand for small, fuel-efficient cars and crossovers. Ford eventually will export as much as 50 percent of its Indian production — or more than 200,000 vehicles — to more than 50 global markets.

“Despite current macroeconomic factors and ongoing market challenges, India is a key part of our global strategy,” said Dave Schoch, president of Ford’s Asia Pacific operations, in prepared remarks to the Society of Indian Automobile Manufacturers in New Delhi. “Exports from India have always been an integral part of that strategy and will help us to stay on track for turbocharged growth in the region, while going further to provide our customers with the vehicles that they want and value.”

From The Detroit News: http://www.detroitnews.com/article/2013 ... z2e920lLyD

[Suraj]

Gurumutthy's article is not particularly heavy on details, while being heavy on the sensationalist element. The most basic piece of missing information is the breakdown of capital goods imports. I posted a little more about that a couple of days ago, because I was curious.

We import way too much power equipment from PRC and elsewhere because we lack the capacity to produce them in that much volume at home; as Theo stated, in technological terms they're not substantially more advanced than us at the cutting edge. However they do have the capacity to build basic elements much more easily. Importing the most cutting edge components of supercritical boilers is not a problem, but we should not be in a position where we are importing the entire componentry of a power plant en masse from PRC/SoKo/Japan, as someone like Reliance Power does by signing a $8 billion deal with Shanghai Electric.

Similarly, we import tens of billions worth of iron and steel, not even ore. Simultaneously, we're 20-30MT behind on the plan to add iron and steel production capacity by 2012. The previously quoted data on steel output does not provide more context - while Japan and US have greater production, their infrastructure is, for comparative purposes, fully built out. We're decades away from being even close to that. Their consumption amounts to what they need to produce consumables, and to replace existing infrastructure. Our production needs to be 150-200MT just to cheaply build out infrastructure; PRC did that by quadrupling steel output in the last decade.

There's an enormous volume of roads, buildings and other elements that consume steel; if we don't oversupply basic core elements, we will produce all that slowly at marginal market prices, rather than force down prices to stimulate cheaper infrastructural buildout. The costs it would place on steelmakers in the form of low margins would be made up by increase in volume. A virtuous investment cycle of core sector supply will feed its own future demand.

[RamaY]

From the article Vipulji posted above

And shockingly it is the Government that incentivises the huge capital goods import with a red carpet of tax waivers costing lakhs of crores of rupees. The Government cut the customs and excise tariffs in 2008 as fiscal stimulus to the economy in view of the global meltdown. For mega power plants the tariff was made ‘Nil’. The stimulus caused additional revenue loss of Rs 2.6 lakh crore each year. The result was the capital goods import tsunami, which rose by almost 80 per cent since 2008.

The total tax revenue lost by tax cuts in four years from 2008-09 to 2011-12 was Rs 22.6 lakh crore. The ratio of customs duty to imports halved from 15.6 per cent in 2004-5 to 7 per cent — even as the imports rose six times from Rs 3.6 lakh crore to Rs 23.5 lakh crore — reducing the effective import-weighted tariff to almost one-eighth of its 2004 levels.

As far back as in January 2005, Prime Minister Manmohan Singh and Finance Minister P. Chidambaram had sworn in public to reduce the unnecessary tax waivers as the tax rates were reasonable.Yet not a single rupee of tax waiver was rolled back in the 2005 Budget or in 2006 or in 2007 or in 2008. On the contrary, tax waivers were doubled from Rs 2.6 lakh crore to Rs 5.2 lakh crore a year, and year after year, from 2008-09 as the red-carpet welcome for the capital goods tsunami. And capital goods imports stimulated by tax cuts, which trebled the fiscal deficit, rose by 79 per cent to $407 billion. But for the tax cuts, with the global meltdown in 2008, there would have been no great propensity to invest. Clearly, the huge rise in capital goods import is the direct effect of the tax stimulus — a case of tax-cut induced, not demand-led, investment.

...
The stupidity did not end there. The tax cuts were intended to be passed on by the corporates to consumers so that their buying power was not eroded and the economy did not get into recession. But the corporates did not pass on the stimulus tax cuts to the consumer. This is evident from the rise in the ratio of corporate profits to GDP from 11 per cent in 2004-5 to 12.5 per cent after the stimulus. The current account deficit directly pulled down the rupee value. And the fiscal deficit incurred to invite the current account deficit indirectly knocked down the Indian rupee.

Reminds me about the discussion we had with Somnath??? about the tax incentives to Indian companies and how it should be considered as subsidies for rich and wealthy.

It pales in comparison with these numbers.... We need to understand how much of this is WTO mandated and how much of it is MMS/PC pinky promise to their masters...

[Suraj]

GoI has an EPCG (export promotion capital goods) import scheme, that enables exports to import capital goods cheaply, provided they satisfy certain requirements for volume of exports. Here's an ET article explaining it:
What is EPCG ?

The Export Promotion Capital Goods (EPCG) scheme was one of the several export-promotion initiatives launched by the government in the early '90s. The basic purpose of the scheme was to allow exporters to import machinery and equipment at affordable prices so that they can produce quality products for the export market.

The import duty on capital goods — like all other items — was high during that period, inflating the cost of capital goods nearly 50%, so the government allowed exporters to import capital goods at only 25% import duty. For waiver of the remaining portion of import duty, exporters were supposed to undertake an 'export obligation' (a promise to export) which was worked out on the basis of the duty concession obtained.

Exporters were given eight years to carry out their commitment to export. Once the 'export obligation' was fulfilled, the owner of the capital goods concerned could sell them or transfer them to another facility. Till the promised export materialised, the owners of the machinery or equipment were barred from even moving the goods concerned out of their manufacturing unit.

However, by importing capital goods of all kinds at concessional rates, including entire power plant machinery, rather than enable domestic companies to access cheap capital (through borrowing, or in the case of PSUs, divestment, or both) to enhance their capacity, it just made the development of domestic heavy industrial capacity much harder, because China could essentially dump its additional production capacity on us.

[brihaspati]

I am just curious : when founding, what was Tata's innovation? What was so pathbreaking - tech/product - etc that had not been done before elsewhere for example most of such innovations in that domain as in Carnegies in US?

Andrew Carnegie invented NOTHING . His innovation was in setting up large gigantic steel plants and playing the consolidation game brilliantly. ie. He did YumBeeYea giri brilliantly. That was his innovation.

Jamshedji Tata was India's Carnegie. He replicated exactly what was in Pittsburgh, in Jamshedpur . ie, steel plants at the confluence of two rivers so that there is water always (1920s steel plants needed continuous supply of water), proximity to raw materials (coal and iron ore) and proximity to giant markets. What is true for Pittsburgh-New York in 1920 is exactly true for Jamshedpur- Calcutta in 1920 !

In fact, the Chief Engineer who put up the TISCO plant was the best steel maker the world knew at that time, whom Jamsehdji personally went and met at Pittsburgh and brought him to India.

What are you contradicting? I said what did he do in "innovation" [not "invention"] that "was not already done also before" as in "Carnegies" - in plural implying not only him but his team of engineers and his goon henchman manager!

[Vipul]

We import way too much power equipment from PRC and elsewhere because we lack the capacity to produce them in that much volume at home; as Theo stated, in technological terms they're not substantially more advanced than us at the cutting edge. However they do have the capacity to build basic elements much more easily. Importing the most cutting edge components of supercritical boilers is not a problem, but we should not be in a position where we are importing the entire componentry of a power plant en masse from PRC/SoKo/Japan, as someone like Reliance Power does by signing a $8 billion deal with Shanghai Electric.

Not to nitpick but Surajji, IIRC at no point did the total demand for power equipment in a single year outstrip the capacity of the local manufacturers (BHEL, L&T, Thermax) to supply. In anticipation of future growth we had even more suppliers coming in (BRG, Jindal, Gammon and Doosan) some of them offering advanced 800 MW capacity super critical units. BHEL alone now has capacity to supply 30,000 MW of power units yearly.It was this large manufacturing base with modern technology provided by Mitsubishi and Hitachi that the chinese wanted to kill. Hence they offered the $8 Billion deal to ADAG group at very attractive terms - loans/suppliers credit.

[Suraj]

Vipul, is there at article or data to support that ?

If demand NEVER exceeded supply, how can it be possible that BHEL alone has been running an order backlog of anywhere between Rs.1.2 and 1.8 lakh crore, substantially larger than their annual turnover ? Even if the backlog is basically the order to fulfillment delay for the oldest open orders on their books, the backlog of 2-4x annual turnover means they are slow at fulfillment. Either that, or their order demand simply assumed an equilibrium against their ability to supply, i.e. no one goes to them after a point, knowing BHEL are booked and they won't get their equipment for at least 4 years.

I'm aware that PRC provides cheap credit to back their exports, but *how* cheap, relative to BHEL or L&T ? And what comparable delivery timelines and maintenance/service support ?

[Suraj]

Housing classification has been driving me nuts. When it is first built it is an investment but from every day after it is a consumption item. I'm not sure I entirely understand this logic but technically all existing housing counts under consumption. If you put in marble tiles it is consumption, if you paint it, it is consumption, etc.

Maybe Suraj can clarify...

Public investment in urban areas is not and will not be politically worthwhile until the urban voting bloc is sufficiently large and powerful. The current urban:rural ratio is barely 40:60, with the urban bloc being more apathetic in general.

Private investment in building housing stock is tied to access to credit and ability to acquire land, neither of which is cheap or easy, with insufficient administrative impetus to reform because that process would intrude into the system of rural-driven patronage.

The only way around is for states with a beneficial demographic profile of high urbanization within a few large cities administered by effective leaders demonstrating the way forward. For example, a state like UP is effectively unmanageable - there are too many people spread over too many small towns and villages.

[Vipul]

Surajji while i have no any ready links to give, we can deduce what is available from the simple fact that BHEL has/had a capacity of 15,000/20,000 MW every year and is now being expanded to 30,000 MW.
The total new power generation capacity increase envisaged in the Eleventh plan was 78,000 MW which was pared by 20% to 62,000 MW, still the total addition was below that. Note that the total addition in 5 years is less then BHEL's old capacity even at 15,000 MW per year.
What are we missing out on?

As regards PRC providing cheap credit to back their exports, and how cheap it is relative to BHEL or L&T - Per A.M Naik the Chinese enjoy subsidy support to the extent of 25 to 30% of the total value.

Even A M Naik has stressed in the interview that inspite of various efforts at the FICCI and CII level the Govt was hell bent on favoring imports from other countries and from China alone India imported goods worth $250 Billion and instead of at home India created/ensured 15 to 20 Million jobs abroad.

[Suraj]

That data lies in contradiction to import data reporting substantial capital goods imports from PRC. Would you mind following up on the topic and looking for more information on why so much power equipment is imported from a country like PRC that's not substantially more technologically advanced, compared to Japan or Germany ? If there's actual capacity at BHEL and always has been, what explains the capital goods import ? We can always use more domain experts who have sought ought details of particular topics, such as how SSridhar is a TSP expert. Thanks.

[Vipul]

It is really simple Zero Duty on Chinese Power equipment imports along with RBI permission for external commercial borrowings (ECBs) denominated in Chinese currency for power plants enabled cheap credit(Yuan Loans) from the Chinese banks to overcome the quality/service weakness in grabbing a disproportionate share of the market in India.

[sivab]

It is really simple Zero Duty on Chinese Power equipment imports along with RBI permission for external commercial borrowings (ECBs) denominated in Chinese currency for power plants enabled cheap credit(Yuan Loans) from the Chinese banks to overcome the quality/service weakness in grabbing a disproportionate share of the market in India.

And here is the result

http://www.indianexpress.com/news/bhel- ... -/1058887/

Cash-strapped power equipment manufacturer Bharat Heavy Electricals Ltd (BHEL) has informed Prime Minister Manmohan Singh's Office that it has reduced its capacity utilisation by 60-70 per cent as huge pending receivables, piling inventories and a drying order book has compounded its woes.

At a meeting convened by Singh's principal secretary Pulok Chatterji on November 23, BHEL CMD BP Rao said with cash reserves depleting, his PSU is facing cash flow issues owing to lack of fresh orders from the power sector.

"In fact, BHEL is very tight for cash and capacity utilisation may go down drastically in future if the power sector continues to be plagued with problems," an official who attended the meeting quoted Rao as saying. The CMD also told Chatterji that with the banks not forthcoming to electricity generation sector, the producers are becoming cautious, which has possibly led to BHEL's order book drying up. He said BHEL's capacity utilisation is already down by 60-70 per cent.

The cash-strapped PSU has till recently been forced to deliberately withhold dispatches of finished equipment to some of its buyers during the last quarter ostensibly to exert pressure on them to make payments. Although the move yielded some dividends for the company, but it is also a worrying indication of the navratna company's financial strength. Its problems have multiplied as power generating companies and firms producing cement and steel are understood to be going slow on their projects.

BHEL's net profit for the second quarter of the current financial year was nearly 10 percent down at Rs 1,274.45 crore as against Rs 1,412.03 crore in the same quarter last financial year. The PSU had said its income from operations in the July-September quarter grew marginally by 2 percent at Rs 11,009.28 crore, from Rs 10,758.08 crore in the same period last fiscal. So far BHEL along with private power equipment manufacturers like Larsen and Toubro and others are understood to have lost over Rs 65,000 crore worth orders to Chinese companies which led the government to consider enforcing a levy on import of equipment for mega power plants.

[Vipul]

Similarly, we import tens of billions worth of iron and steel, not even ore. Simultaneously, we're 20-30MT behind on the plan to add iron and steel production capacity by 2012.

Surajji, do you mean to say that India is importing Finished Steel as it does not have the installed/commissioned capacity to manufacture it?
If so that is not the case while the total demand for steel in 2013-14 is expected to be 75 MT production capacity had already reached 76.7 MT in 2012.

[Kakkaji]

But this 58% support for either government as long as it is stable seems to me to be a concession to their own short-term profit motives. I would much rather that business and industry took a stronger stance against dynastic politics.

What? And have their own dynastic businesses get raided by Income Tax, Excise Dept etc. ?

Businesses in India cannot take a strong stand against the existing Govt. and survive. All they can do is surreptitiously fund the opposition in the elections.

[member_27444]

BHEL one of the so called Ratnas is crying foul about imports from PRC turbines, heat exchangers
Off the shelf where a sour Ratnas will deliver in about by next election

[gakakkad]

@ Suraj et al , a couple of years ago ,I posted an article saying how INC was destroying indigenous power generation capacity . L&t chief was lamenting that they did not get orders of there existing capacity as reliance et al were buying from panda...those were not the "doom and gloom" days ,yet ..those were still the days when general media discourse was , "the next superpower"...


added later..


>>It is really simple Zero Duty on Chinese Power equipment imports along with RBI permission for external commercial borrowings (ECBs) denominated in Chinese currency for power plants enabled cheap credit(Yuan Loans) from the Chinese banks to overcome the quality/service weakness in grabbing a disproportionate share of the market in India.

this had been discussed previously here ..iirc somnath et al dismissed ,these as paranoid fears...

there were people ,including some in brfata who had foreseen the doom and gloom ,when there was all the talk of 'double digit growth' and 2T economy...


what essentially happened , is that panda manufacturers got to sell to Yindia ,essentially tax free...but yindian companies had to pay a tax... and panda currency as it is was undervalued...

so essentially it was a policy meant to destroy indigenous capacity....

the role of reliance is very shady as they lobbied for the self destructive arrangement ...and motives of GOI accepting such stupidity are also questionable...

people lamented at my comment about letting UAE make massive investments in desh...while no one really thought that duty free imports without any investment were what would wreck the economy..

if goi made the chineses companies invest and manufacture in Yindia ,it would have been a different story altogether...would panda really try bombing the mumbai poona corridor if it had 500billion dollars worth of manufacturing entities there ?

[Theo_Fidel]

There was a time 5 years ago when BHEL production capacity was severely lacking.The way I heard it BHEL is still a very inefficient performer. From the day the order is placed to the day equipment is delivered is often 36-42 months, sometimes even longer. BHEL is simply too slow. This slowness causes massive additional costs to its equipment that so far they have simply passed on to producer. Well, the producers said enough of that and now source equipment from Panda which can deliver in 12-18 month time scale with superior costs. All PSU's have this problem. For instance in the USA the average time from spudding an oil well to hitting 5000 feet depth is ~6 weeks. In India oil PSU 6 months is common. These things are simply not getting better, there is simply no incremental improvement process on going in so much of India. BHEL has no clue how to get its manufacturing schedule down to 12 months say and beat the Chinese at their own game.

In fact recently TN has been paying a terrible price for buying domestic power equipment and roundly made fun off on this very forum. AMMA has finally decided enough is enough and essentially fired BHEL which is based in Thiruchi! So more Panda equipment is going to be coming.

The steel India imports if you look at the break down is rolled steel called AHSS (advanced high strength steel). All modern cars use it. Without it modern dies and forming equipment can not be used, meaning the modern sleek shapes can not be created. India does not make it and 75% of the steel in your car is imported. There are occasional reports on foreign steel companies setting up a manufacturing plant in India. But no Indian company is trying, certainly not in the private sector. No steel imports, no Indica.

I think it is time to reluctantly face the fact that many of our large companies. I'm talking Reliance, Birla, TATA, JSW, etc have crony capitalistic tendencies. There is little ruthless domestic competition in most of our economy. One of the few areas we have genuine competition, cellphones, has essentially crushed these titan companies. That should tell you what their competitive ability is.

That is not the end of it unfortunately. Both Adani & TATA have built huge power plants that are engineered to use imported coal. They can never use domestic coal. All the government agencies have been bought off. I'm conflicted by this, should we restrict coal import and starve, a la 1990, or openly import and find something else to export to make up the difference. I prefer the latter.

[Suraj]

It is really simple Zero Duty on Chinese Power equipment imports along with RBI permission for external commercial borrowings (ECBs) denominated in Chinese currency for power plants enabled cheap credit(Yuan Loans) from the Chinese banks to overcome the quality/service weakness in grabbing a disproportionate share of the market in India.

Thanks. That's a great start. Please continue following this topic, if possible.

Surajji, do you mean to say that India is importing Finished Steel as it does not have the installed/commissioned capacity to manufacture it?
If so that is not the case while the total demand for steel in 2013-14 is expected to be 75 MT production capacity had already reached 76.7 MT in 2012.

Yes, and the projections for imports rise substantially too:
India steel import may touch 40-50 million tonnes by 2020

"Steel imports may be 40-50 million tonnes by 2020 as the demand is likely to go up to 200 million tonnes against 150 million tonnes of domestic production," Jindal Steel and Power Deputy Managing Director V R Sharma said on the sidelines of a steel conference here.

India had imported around six million tonnes of steel in the 2011-12 fiscal.

India's steel imports to rise in 2012/13 as local supplies stall

India's finished steel imports could rise to around 8 million tonnes in 2012/13, a top industry executive said, up about 18 percent, as a lack of domestic supplies means India bucks a global trend of weak demand for the construction material.

Imports have already soared 53 percent in April to July as local steelmakers, scrambling for raw materials like iron ore due to environmental and legal delays, run below capacity and are unable to meet demand in Asia's third-largest economy.

The above data suggests annual steel imports of $5-10 billion. The data you provided for capacity is not really much of a positive. That presumes a capacity utilization of 98%, way more than the average steel plant. Typically you want enough capacity so that utilization is about 80%, permitting downtime for maintenance and repair. Based on domestic output of ~80MT + ~8MT imports, that's 88MT demand, to be satisfied with an installed capacity of ~110MT (based on 80% utilization), or approximately Japan's figure, as I mentioned before. I recall posting such a projection (approx 110-120MT capacity by 2012-13) back when POSCO and Mittal's projects were stlll fresh and not mired in the hurdles they subsequently were.

On a side note, it's good to see a vigorous investigation of this topic. The data uncovered so far is a massive indictment of GoI's inability to formulate and implement a plan aimed at driving industrialization and manufacturing, and the data collected is much more useful than just repeated whines and laments directed at various people. Hopefully the press will also pursue these topics further in the coming days.

[Suraj]

@ Suraj et al , a couple of years ago ,I posted an article saying how INC was destroying indigenous power generation capacity . L&t chief was lamenting that they did not get orders of there existing capacity as reliance et al were buying from panda...those were not the "doom and gloom" days ,yet ..those were still the days when general media discourse was , "the next superpower"...

I remember those debates very well. It's hard not to laugh thinking back of what he and others claimed then - an 'aal iz well' approach much at odds with several posts made back then about these topics. To be fair, we can survive on some realities, such as that we're an energy and capital deficit nation, and make the best of things. There are others who are much worse off, e.g. Japan's near total energy import dependence, or Singapore's dependence on both imported energy and water. We can put up with some incompetence, but not years of failure to implement policy directed at heavy industrial development and manufactured goods output.

[Austin]

India has adequate forex reserves: Montek

St. Petersburg: India today said it has "adequate" foreign exchange reserves -- at present $280 billion -- to defend its currency amid global volatility and ruled out taking any external assistance unless there is a "radical" change in the situation.

Planning Commission deputy chairperson Montek Singh Ahluwalia also said the rupee's fall this year has clearly overshot limits.

"With $280 billion in reserves, I don't think we will be drawing on currency swap arrangements unless there is a radical change in the situation," said Mr. Ahluwalia, who is the 'sherpa' to Prime Minister Manmohan Singh at the ongoing summit of the Group of 20 industrialised and emerging economies.

Mr. Ahluwalia also reiterated that some depreciation of the Indian rupee -- which had touched historic low of close to Rs. 69 last month -- was justifiable.

"But when it was close to Rs. 69 there was clear overshooting and the extent of rupee was not all connected with high market volatility," he said, adding that economists, working on varying assumptions, had estimated the rupee's value at anything between Rs. 59 and 65 against the USD.

"Some depreciation was justifiable. But when it was 69 there was clear overshooting that was not desirable," he said.

He said currency markets had "over-reacted" against the backdrop of a global volatility in the currencies of emerging economies in the wake of the imminent phasing out of fiscal stimulus by the US. The Federal Reserve mulled an early pullout of the $85 billion-a-month.

[member_20317]

In fact recently TN has been paying a terrible price for buying domestic power equipment and roundly made fun off on this very forum. AMMA has finally decided enough is enough and essentially fired BHEL which is based in Thiruchi! So more Panda equipment is going to be coming.

Can you suggest a search cue. I would like to read who said what. I have been on BRF for quite some time and I seem to have missed it.

I think it is time to reluctantly face the fact that many of our large companies. I'm talking Reliance, Birla, TATA, JSW, etc have crony capitalistic tendencies. There is little ruthless domestic competition in most of our economy. One of the few areas we have genuine competition, cellphones, has essentially crushed these titan companies. That should tell you what their competitive ability is.

That is not the end of it unfortunately. Both Adani & TATA have built huge power plants that are engineered to use imported coal. They can never use domestic coal. All the government agencies have been bought off. I'm conflicted by this, should we restrict coal import and starve, a la 1990, or openly import and find something else to export to make up the difference. I prefer the latter.

The crony capitalism bit is also my diagnosis. However we need to remember that these big businesses began expanding in an economy that was essentially a vacuum. At that time it made sense to do certain things and lesser sense to do certain others. The low lying fruits get taken first. That is natural to enable a wider net being cast. And I have seen companies do a lot more then what you are giving them credit for. I have seen builders explore chinese practices, steel manufacturers look at new products, crony capitalists explore new financial instruments.

The imports are a good idea but we must approach our own businessmen as we approach our soldiers, our workers and our political leaders.

What appears as crony capitalism could actually be old accumulated wealth and networks, which we used in the first 2 decades after 1990.

[Theo_Fidel]

Take a look at the solar energy & power threads. The ideal pushed was the GJ solution, which TN is now following. In fact most of India is now following. Chinese equipment, Indonesia/Australia coal.

I think it was Raman who posted that even the glue for 3M glue stick and post-its are imported. This is what crony capitalism does, it sterilizes the competition and prevents small companies from starting, growing and competing.

They may explore chinese practices but they will never implement them and find ways to improve on them.

[member_27444]

Boss importing is lucrative way of siphoning money from India into Swiss or Bahamas banks
You over invoice and take cuts
You can't do that to BHEL. May be with BEML importing Tatra trucks mr. natrajan is writing a book and Gen, Singh is speculated write the Foreword to our has it.

[gakakkad]

talking of steel :

India relaxes steel import standards

http://www.moneycontrol.com/news/curren ... 32055.html

India said on Wednesday some steel products can be imported for certain critical applications without local quality certification, a move that could further hit domestic suppliers after imports rose 15 percent last fiscal year.
.............................

This move will destroy the industry that is already suffering from raw material shortages and higher imports," said DS Rawat, secretary general of lobby group ASSOCHAM. ASSOCHAM will send a letter to Prime Minister Manmohan Singh on Thursday requesting him to reconsider the decision, Rawat told Reuters.

crony onlee...

[Cosmo_R]

The causes of the current crisis are more straightforward. It's little to do with housing stock, crony capitalism and invoicing games:

http://blogs.timesofindia.indiatimes.co ... nvironment

"The government had, of course, used this temporary growth phase to start its own mini-party. Budgets showed higher revenue but even higher spending. The government spent way more than it earned. Consequently, private players faced interest rates of 15% for borrowings. The government printed so many rupees, it flooded the market and the currency bought less and less"

[member_27444]

That's called crowding the market
That's why private institutions have to pay higher interest if the government also borrows heavily

Only Uncle Sam is capable of maya next o lord Krishna
Lets see lord Raghava(n) can shoot the arrows thru 7 trunks of GOI

[gakakkad]

The causes of the current crisis are more straightforward. It's little to do with housing stock, crony capitalism and invoicing games:

http://blogs.timesofindia.indiatimes.co ... nvironment

"The government had, of course, used this temporary growth phase to start its own mini-party. Budgets showed higher revenue but even higher spending. The government spent way more than it earned. Consequently, private players faced interest rates of 15% for borrowings. The government printed so many rupees, it flooded the market and the currency bought less and less"

article lacks substance...the reason why curency bought less and less is because growth in manufacturing/agriculture did not keep up it m2 money supply growth...all interlinked onlee..

[subhamoy.das]

http://en.wikipedia.org/wiki/List_of_co ... et_exports

Most large economies in the world runs a CAD or are net importers but that does not put so much strain on their currency. Even in India the pressure we have see in last few months I have never seen in my life before. The problem with India is that it exported only the INDIA STORY and hot money came in. Now that the INDIA STORY looks over the hot money is going back putting so much pressure.

On the CAD front what was clearly in our own hands and we failed to do is to scale local manufacturing to meet local demand. This day was supposed to arrive and has arrived. It is good that the demand is increasing leaps and bound and i wonder if driven by black market, service exports, GOI doling out cash, corruption leaking money into the system. What ever may be, the demand has over run the GOI. Now they have to kill demand by high taxing it which in will bring down GDP and will lower tax revenue and will increase the fiscal deficit and will put pressure on rupee and things will become expensive. So GOI is fighting a loosign war here and no TAMBRAM or BAMBAM will be able to win in sitting at the RBI HQ. We need a strong political leader who can do deep reforms and at fast pace and follow a pro-business attitude to revive local manufacturing from defence to consumer electronics.

[Theo_Fidel]

Will instituting greater fuel efficiency help with our massive fuel import bill? The reason I ask is because the trucks that run around India don't seem to get very high mileage. Even the power plants don't seem to run at world class efficiency. Our cars too can definitely get much better mileage, I have not seen a single hybrid car as the government does not mandate it. During traffic jams all the vehicles are standing around and puffing fuel away. What is plan in terms of fuel efficiency? Sorry for all the questions but I don't follow the vehicle market.

[Gus]

i've seen one prius in OMR chennai. probably imported SKD and attracts 100% duty..should run into 20 or even 30 lac. Good luck selling that to the mass.