Indian Economy: News and Discussion (June 8 2008)

[putnanja]

Kya bola tha mein tumko ravi

I had predicted the same earlier too, if you look at my older posts

[Rupesh]

Market tanks as RBI hikes rates in inflation fight
29 Jul, 2008, 1556 hrs IST, ECONOMICTIMES.COM



MUMBAI: Equities plunged on Tuesday following higher than expected interest rate hike by the Reserve Bank of India. Interest sensitive sectors were amongst the worst hit.

Bombay Stock Exchange’s Sensex closed at 13,759.89, down 589.22 points or 4.11 per cent. The 30-share index touched a high of 14,153.12 and low of 13,727.14.

National Stock Exchange’s Nifty ended at 4,177.80, down 154 points or 3.56 per cent. The broader index touched a high of 4,332.20 and low of 4,159.15.

BSE Midcap Index ended 2.65 per cent lower at 5481.53 and BSE Smallcap Index declined 1.20 per cent to close at 6,830.28.

Biggest index losers were ICICI Bank (-8.85%), Reliance Infrastructure (-8.6%), HDFC Bank (-7.98%), Tata Motors (-7.71%), State Bank of India (-7.48%) and Larsen & Toubro (-7.02%).

Hindustan Unilever (2.97%), Sterlite Industries (0.83%) and Infosys Technologies (0.01%) were the only gainers in the 30-share index.

Market breadth turned sharply negative with 1662 declines outnumbering 969 advances on BSE, while on NSE, there were 320 gainers against 931 losers.

In order to rein in rising inflation, the Reserve Bank of India raised repo rate by 50 basis point to 9 per cent from the existing 8.5 per cent. The central bank also raised the cash reserve ratio or the CRR ( percentage of banks' deposits which they must keep with the central bank) by 25 basis points from the existing 8.75 per cent. This will come into effect from August 30

http://economictimes.indiatimes.com/Mar ... 302080.cms

Home Loan rates will definitely go up...

[SwamyG]

CNBC is having India: Raising New Empire, on 7/29/2008 @ 9:00pm EST.

[Vipul]

Three private cos allowed to manage provident fund.

Pension reforms have started . With the Left off its back, the government on Tuesday pushed for reforms and allowed three private sector companies to manage the pension funds with Employees' Provident Fund Organisation (EPFO). The decision ends the 56-year monopoly of the State Bank of India as the sole EPFO fund manager.

The EPFO board met, with labour minister Oscar Fernandes in the chair, to take this historic decision.

It identified HSBC, ICICI Prudential and Reliance Capital as the three private sector finance companies that would manage, in addition to SBI, EPFO funds — to the tune of Rs 2.4 lakh crore. Trade union representatives were also present for the meeting, and barring the Congress-affiliated INTUC, they submitted a vote of dissent.

The move will save the fund Rs 2.5 crore per annum in fund management fees. At present, EPFO pays Rs 5 crore to SBI. But the new fund managers have quoted lower fees. HSBC quoted the lowest at 0.0063%, followed by ICICI Prudential at 0.0075% and SBI and Reliance Capital at 0.01%.

The allocation of fund for the management to the successful bidders, based on the asset management fee, will be decided by the EPFO's finance and investment committee.

Govt got 10 bids for EPFO

With private sector companies allowed to manage EPFO, the labour secretary said 10 financial bids were received by the government and four companies have been given the mandate.

However, the representatives of AITUC and HMS, D L Sachdev and A D Nagpal, alleged that the name of Anil Ambani group-owned Reliance Capital was added at the last minute. Just HSBC and Prudential Capital had been cleared by the committee, they said.

[Raju]

POLITICS IN LAST FORTNIGHT LED TO EPF DECISION: BJP


By GLOBEGATHER.COM NATIONAL NEWS BUREAU, 31 JULY 2008
Joining the Left parties in the criticism of the EPFO board decision, the BJP today said that the 'politics' in the last fortnight at the Centre is responsible for the inclusion of Anil Ambani-led Reliance Capital as one of the managers of Employees Provident Fund.

"The politics of the last 15 days is responsible for the decision. The cost of political expediency is being paid off," party spokesperson Prakash Javadekar told non persons here.

The government must come clean on the issue and should explain the choice of private players and also explain if it is the beginning of the handing over of the hard earned money to the equity market, he added.

"Why did they do all this in such a hurry. How did they select the private players. What wrong did they find in the management of the worker's money with the State Bank. The government needs to answer," Javadekar said.

The monopoly of state-owned SBI in managing provident fund totalling about Rs 2.5 lakh crore had ended with government yesterday allowing three private players -- ICICI, HSBC and Reliance Capital -- piece of the cake.

[Singha]

I am not euphoric. all it does is have these 3 manage the funds rather than SBI, at a
lower cost management fees.

EPFO is still there as the guy who swallows our money and never keeps good records.
no online login to check current balance, no monthly email or paper stmts, they send
a statement to employer maybe once in two years, same old dusty govt office.

I WANT THE EPFO itself to be ABOLISHED or made optional in that cos can give employees
a choice to bank their PF with pvt players or most cos would anyway choose that as
default - similar to a pvt PF trust or 401K manager.

Its like the AAI - unless totally banished, the smell of decay and urine hangs like a cloud.

[Suraj]

Interesting Business Standard analysis of recent corporate performance. The current inflationary period has actually boosted nominal returns of quite a few companies significantly. Real growth would of course be somewhat lower. The last paragraph is particularly telling, indicating that companies find themselves
Companies in the downturn

In a typical business cycle, one would have expected a downturn to witness an across-the-board softening of both sales and profit growth, the former affected by both smaller volumes and lower prices of goods and services. However, the Indian economy, and for that matter the global economy, is not in a typical business cycle. The supply shock generated by rising prices of oil and other commodities has pushed the inflation rate and the growth rate in opposite directions. The impact of this on corporate performance depends on whether the rising prices of output offset the rising prices of inputs as well as declining volumes.

Sales for the entire sample grew by 34 per cent over the corresponding quarter of last year, significantly faster than the 20 per cent rate of growth achieved in 2007-08. This suggests that rising prices more than offset declining volumes. In contrast, though, net profits for the sample, which had grown by an impressive 38.5 per cent in the corresponding quarter of last year, decelerated to a more mundane 18.4 per cent this year. Clearly, rising input costs made a huge dent in profitability. The net impact of this was to take operating margins down by close to 3 percentage points, to just below 20 per cent. While this reflects weaker performance, the margin numbers are still good enough to inspire confidence about the sustainability of current operations and capacity expansion plans. In short, the aggregate picture shows a downturn, but is not bleak as standard downturns go.

However, the sectoral picture looks quite different. The sharp increase in global commodity prices has been a boon for companies who produce these. Refineries, mining, trading and fertiliser companies (112 in the sample) registered over 50 per cent sales growth and over 40 per cent profit growth. Of course, this means that margins came down somewhat for even these companies, because of a sharp increase in operating costs. The performance of fertiliser companies (9 in the sample) was striking, with an 89 per cent increase in sales and a massive 431 per cent increase in profits. With issue prices remaining fixed, the increase is presumably reflective of increased subsidy payouts. On the refineries front, private refineries have been in the limelight as a consequence of demands that a windfall tax be levied on them because they export all their products. The profit numbers, however, do not indicate any windfalls; Reliance Industries, the largest of the private refiners, increased profits by only 13 per cent over last year. As long as a refiner is buying its crude oil from someone else, its profitability is determined largely by its operating efficiency.

Companies in the sample outside these four sectors performed much more modestly. Sales grew by just about 16 per cent over the previous year, while net profit declined — albeit marginally. Rising input costs and the fluctuations in the exchange rate both took their toll. For these sectors, the business cycle is very real indeed.

Meanwhile, the fact that turnover growth is quite rapid while margins have shrunk suggests that companies are still focusing on growth, even at lower realisation — perhaps because their margins are very high by historical standards and there is room to take a hit on that count in order to keep business coming in. And since a large number of companies are sitting on free cash, it is also likely that they will keep investing for the future, as a result of which investment demand may not show a big drop. What this suggests is that, while companies recognise the fact of the downturn, they are less bleak in their outlook than many have assumed — either because they don’t think the downturn is very serious, or because they have the reserves to ride out the storm.

[Suraj]

India's Exports Rise 23.5% to $14.66 Billion in June

India's export growth accelerated in June as companies shipped more gems, oil and other manufactured products to overseas markets.

Shipments, which account for about 15 percent of the economy, rose 23.5 percent to $14.66 billion from a year earlier, after gaining 13 percent in May, the government said in a statement in New Delhi today. Imports increased 26 percent to $24.45 billion, widening the trade deficit to $9.78 billion.

Overseas sales are rising as companies boost shipments to Europe, Japan and other developing Asian countries to counter slowing demand from the U.S., India's biggest export market. Still, shipments may weaken later this year as soaring inflation and flagging growth crimps spending by customers abroad.

Exports in the three months ended June 30 rose 22.3 percent from a year ago to $42.8 billion, today's report showed. Imports in the quarter rose 29.7 percent to $73.3 billion, resulting in a trade deficit of $30.4 billion, compared with $56.5 billion in the same period a year earlier.

Trade Minister Nath has set a target of more than tripling India's share of world trade to 5 percent by the year 2020 from the current 1.5 percent. India is targeting exports of $200 billion in the current fiscal year that started April 1, 28 percent more than $155.5 billion in the previous year.

[Rupesh]

Ambani divorce papers may soon be in public domain

MUMBAI: The famous, but so far unseen, family agreement, which formalised the split between Mukesh and Anil Ambani, may soon become public.

"The MoU, if required, would be produced before the court by Smt Kokilaben, mother of the Ambani brothers," according to Ram Jethmalani, counsel for Reliance National resources (RNRL), an Anil Ambani group company, which is engaged in litigation with the Mukesh Ambani-controlled Reliance Industries over natural gas supply from the Krishna-Godavari (KG) basin. Mr Jethmalani spoke to ET on the sidelines of the legal proceedings in the Bombay High Court.

The family agreement assumes significance in view of the arguments advanced by RIL's lawyer Harish Salve that the MoU was a 'ghost agreement' as nobody has seen it yet and questioned the enforceability of such an MoU.

Thus, the 'family agreement' may take centre stage at the Bombay HC next week. "It's a private document between the Ambani brothers. Besides broad framework of the demerger, it also has the details of the division of the personal assets of Ambani family," said a person broadly familiar with the contents of the MoU.

A single-judge bench of the HC, in an earlier order, had directed the Ambani brothers to renegotiate the gas sales agreement as per the family agreement or the MoU. The MoU has not been submitted in the court as evidence. Mr Salve has argued that the RIL board was not party. "It's a piece of trash, as far as this case in concerned," said Mr Salve.

The case will come up before a two-judge bench of the Bombay HC on Tuesday, when RIL's counsel is likely to complete his submissions and Mr Jethmalani will begin his argument.

The MoU was signed in June 2005. Later in January 2006, the RIL board passed a number of resolutions which led to the formation of the Anil Dhirubhai Ambani Group (ADAG).

Ownership of Reliance Capital, Reliance Infocomm (now known as Reliance Communication), BSES (now called Reliance infrastructure) and RNRL, which were earlier majority owned by RIL, was handed over to ADAG. Certain contracts signed as part of this process including the gas supply agreement (which is being litigated over in the Bombay HC) and various non-compete agreements have been the subject of bitter disputes between the estranged brothers.

Mr Salve's statements only reiterates the legal stand adopted by RIL. In various communications sent to ADAG, RIL has reiterated that it is not party to the family agreement and is not aware of any such agreement. These communications were in response to letters written by ADAG, alleging that RIL was violating the non-compete clause by entering sectors such as power and financial services. RIL's stand is that it is only bound by resolutions passed by the RIL board.

http://timesofindia.indiatimes.com/Amba ... 319040.cms

[Sumeet]

$1 trillion laundered every year in India: KPMG Report

MUMBAI: Over $1 trillion is being laundered every year by drug dealers, arms traffickers and other criminals in India, according to a report by audit and consulting firm KPMG released here on Tuesday.

The report comes close on the heels of the murky cash-for-vote controversy that erupted in parliament during the trust vote July 22, reflecting the country's parallel economy.

Quoting from the 2008 International Narcotics Control Strategy Report, prepared by the US Department of State, KPMG said India's emerging status as a regional financial centre and informal cross-border money flows are the main contributors to growing money laundering in the country.

"Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (diamonds), smuggling, trafficking in persons, corruption, and income tax evasion. India continues to be a drug-transit country," the US narcotics survey has said.


KPMG feels that in future, the major challenge for the finance sectors like banking, brokerage houses and insurance companies would be combating money laundering and terrorist financing.

KPMG's report also highlighted the vote of confidence in parliament, which exposed the prevalence of unaccounted for money in the country.

"A few politicians threw a large sum of cash in parliament and alleged that there was an attempt to bribe them for their vote. This confirms the continued existence of a parallel banking system popularly called as 'hawala'," it said.

"According to Indian observers, funds transferred through the hawala market are between 30 to 40 percent of the formal market," the report said, and noted that the central Reserve Bank of India estimated official remittances to the country to be around $28.2 billion.

The report suggests for India to reduce the informal money transfer channels it needs to focus anti-money laundering (AML) policies and procedures, formal monitoring of AML systems and controls, and ensuring sanctions compliance.

[svinayak]

How does KPMG get this information
They are not govt agencies

[Theo_Fidel]

India's Exports Rise 23.5% to $14.66 Billion in June

India's export growth accelerated in June as companies shipped more gems, oil and other manufactured products to overseas markets.

Shipments, which account for about 15 percent of the economy, rose 23.5 percent to $14.66 billion from a year earlier, after gaining 13 percent in May, the government said in a statement in New Delhi today. Imports increased 26 percent to $24.45 billion, widening the trade deficit to $9.78 billion.

Helped this along by buying a Enfield Bullet of all things in Massaland.

Dealer said there is a long waiting list.

Lets see how Tuk Tuk Raja Gaddi performs.

[Katare]

How does KPMG get this information
They are not govt agencies

It is an independent estimate derived from available official and private information. Through in some imaginative statistical models and subjective/perceptive/myths with that and you get one of these reports.

[Suraj]

While the correlation of monsoon to economic growth has statistically reduced significantly in recent years, it remains an important factor. An article about the need to broaden irrigation capabilities to mitigate the monsoon risk:
Risk proofing India

To begin with, the monsoon is a three-month phenomenon. So the difference between good and bad times for most of India depends on what kind of rain it gets in three out of 12 months. Even within these three months, rainfall is not evenly distributed. There are around three episodes of heavy rain lasting for about three days each.

Often, after arriving on time, the monsoon disappears or the monsoon currents weaken. Then the whole country waits for the monsoon to “revive”. Even when a wayward monsoon revives, there can be a sting at the end. Sometimes it rains excessively in the last phase creating floods and damaging the standing paddy crop, which would have been ready for harvesting as the cooler weather sets in.

What is the solution? Obviously to increase irrigation so that the dependence on the precise progress of the monsoon (it will continue to supply most of the water) from day to day is reduced. But only around 40 per cent of the cropped area in India is irrigated and most of the irrigation potential that can be realised through large dams and canal systems has already been achieved. Also, as the wisdom of creating such projects is now questioned, the future lies elsewhere. The entire country, covering every village, has to go in for a programme of saving and storing water, below and above the ground, as part of overall watershed development programmes.

An enormous irrigation potential still remains untapped in most villages, where the first task is to rejuvenate tanks and, where possible, construct them. Rainwater, which mostly runs off, has to be channelled into wells, which both store the water and recharge groundwater. Wherever possible, bunds have to be constructed to create small reservoirs. The next bigger step is to prevent soil erosion by creating first grass and then tree cover over land that has become denuded, leading to rapid run-off of rainwater. As soon as the scope for the latter increases, villages in a watershed area need to co-operate, requiring planning at the taluk or district level.

Pointer to significant price erosion in cement in the near future, which would propel further real estate development. FYI, as recently as 4 years back, cement capacity utilization was ~75%, so the cement producer's view isn't so alarming.
Cement industry sees supply glut in future

The Rs 85,000 crore domestic cement industry is fast realising the painful situation it is getting into, as the GDP growth rate is on a slippery path and over 70 million tonnes of fresh capacities are in the pipeline in the next two years.

The industry added capacity worth 30 million tonnes in FY08 and is estimated to add 45 million tonnes and 30 million tonnes in FY09 and FY10 respectively. Top industry players have voiced concerns regarding production growth rates and slowing consumption.

“As substantial capacity is being built, there will be losses. The consumption growth will not be equally robust, resulting in prolonged pain for the industry,” said H M Bangur, president of Cement Manufacturers’ Association and managing director of Shree Cement.

The industry will have huge capacities by 2010 with the addition of 20 million tonnes in the last six months and 70-80 million tonnes in the pipeline, he added.

The cement demand has a 1.3x correlation with the GDP. The capacity utilisation is expected to come down by as much as 85 per cent in the current financial year from 95 per cent in the previous financial year due to capacity addition and expected slowdown in the construction and housing sectors. And in FY10, it is expected to slip below 80 per cent.

The 203.51 million tonne industry is expected to add 45 million tonnes in FY09. Taking into account a delay of 4-6 months, the overall addition could be around 32 million tonnes, taking the total capacity to 230 million tonnes by March 2009.

Pawan Burde, a senior research analyst tracking the cement industry at Angel Broking, said, “Even if consumption grows by 10 per cent in FY09 and capacity utilisation is 85 per cent on a capacity of 230 million tonnes, there will be surplus of around 15 million tonnes.” The cement despatches in 2007-08 were 167.67 million tonnes.

The prices of cement will not rise in such a scenario. We expect a 10-15 per cent decline in the prices over the next year, Burde added. The average price of cement is Rs 230-235 per 50 kg bag.

Apparently the farm loan bailout has become a 'sovereign guarantee' of sorts:
Banks firm on farm loans despite default fear

Bankers, including those from public sector banks who have a lion’s share in farm credit, met financial sector secretary Arun Ramanathan in the capital for a review meeting.

“The secretary emphasised that credit flow to agriculture needs to maintain its tempo. Nearly 40 million farmers have managed to get rid of the defaulter’s tag and the government has taken an undertaking from banks to ensure fresh loans to beneficiaries of the scheme,” said a senior public sector bank executive who attended the meeting.

While data are unavailable, fresh credit flow to farmers during April-July this year was lower than the comparable number last year as bank executives were busy implementing the scheme, while demand in certain parts of the country has been lower due to deficient rains, government officials pointed out in the meeting.

Bankers also expressed concern over the rising dues, especially from those farmers who were not defaulters. “The fresh credit should not turn into bad debt, else it will badly affect the financial health of banks,” a banker said.

According to the guidelines, the amount eligible for wavier can be considered as performing assets only when banks make loss provisions in present value (PV) terms. The discount rate for arriving at the loss in PV terms is to be taken as 9.56 per cent. This was the yield to maturity on 364-day treasury Bill on July 30, 2008, the date when the circular was issued.

Despite interest rate pressures, bond yields fall due to oil price softening:
Bond yields drop below 9%

The yield on the benchmark ten-year paper fell below 9 per cent to 8.96 per cent on Tuesday after a gap of over four weeks, according to the data from the Negotiated Dealing System (NDS) of the Reserve Bank of India (RBI).

The yield had shot past 9 per cent to close at 9.15 per cent on July 2 from the previous day’s close of 8.66 per cent following the higher inflation data.

According to dealers, crude oil prices fell below $120 a barrel, triggering a rush for government bonds. The market is of the view that moderate crude oil prices will bring down the demand of funds from oil companies, easing the fiscal deficit.

Liquidity, on the other hand continued to remain tight and RBI had to infuse around Rs 22,790 crore into the system.

Incidentally, call rates (the overnight money) and ten-year yields are ruling at the same level at 8.96 per cent. Therefore, at every positive trigger, banks are looking for good investments.

Moreover, the market is expecting additional liquidity from the government expenditure which it is expected to start in the form of disbursement of the debt waiver funds.

[amit]

This shows India Inc's appetitie is still intact:

Tata Power Says It Will Bid for Singapore's Senoko

``We confirm the development,'' Mumbai-based Tata Power said in a statement today after the Business Standard reported that Senoko Power may be sold for more than $3 billion. The Indian company will get access to generation capacity of 3,300 megawatts should it win the bid, the report said.

The acquisition will be Tata Power's second large investment overseas. The utility spent $1.2 billion on buying two mines in Indonesia last year to secure coal supplies. Tata Power has invested 240 billion rupees ($5.7 billion) to build 5,600 megawatts of thermal and wind power capacity across India.

[Vipul]

Direct tax collections up 47 per cent in April-July.

[Katare]

Direct tax collections up 47 per cent in April-July.

In my book, Direct Tax reforms and increase in compliance is one of the greatest achievements of India in last few years. This year’s achievement is special since it is being sustained on a very large-base with weakening economy and a gravely mauled stock market. Last year first time in our history direct tax collections exceeded indirect/production taxes, this made us a progressive society or a pro-poor society. Just a decade back it would have been considered preposterous to even think that it can be done in India.

We must reward and recognize CBDT and IT department for tremendous achievements. Last year's Rs180 corer reward should just be a beginning. FinMin must fill all the vacancies and release money for modernization/integration of regional offices.

[Vipul]

There has been a massive computerization drive across all the IT offices in India ["IT" in IT ] . They are being networked and hooked up with some special program to check evasion of taxes.As the economy grows and more people are bought in the tax net the effect will be exponential.

[Suraj]

Recall that recently CII and FICCI came out with statements about how their corporate data surveys indicated industrial performance significantly greater than the IIP statistical numbers that the government releases, and how they felt investment driven GDP growth would compensate for falling consumer-led growth this fiscal. This article is about the subject:
Undue optimism?

The Index of Industrial Production (IIP) for May 2008, released last month, shocked many observers when it showed a growth rate of less than 4 per cent. This sharper than expected dip reinforced concerns that the restrictive monetary policy regime was taking a heavy toll on growth, even as it struggled to gain control over inflation. It intensified the debate between proponents and opponents of the current monetary policy stance.

However, alternative evidence emerging from direct surveys of producers by two national industry associations, the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (Ficci), appears to challenge the perception that industrial growth is tapering off. In striking contrast to the IIP numbers, both surveys suggest that a significant number of industrial segments grew by healthy rates of over 10 per cent during the April-June quarter. In the CII survey, output in 47 out of 100 segments covered by the survey grew by over 10 per cent. Another large proportion of responding companies indicated that their output grew by over 10 per cent. Of course, there were 21 segments in the CII survey which showed output declines during the quarter. However, the overall picture is certainly not as downbeat as the IIP numbers suggest. Based on its own survey results, Ficci in turn estimates that industrial output will grow by 9.5 per cent during the current year, significantly above the current range of estimates from most forecasters.

Questions can be raised about how representative the surveys are. However, the same criticisms have been aimed at the IIP, which provides no guarantee that the same companies are submitting production figures month after month. The surveys go one step further than the IIP in being able to capture some of the underlying drivers of current and likely performance, as perceived by the respondents. From this perspective, the Ficci survey suggests that the longer-term outlook of producers remains optimistic, and significant investment activity as well as mergers and acquisitions is taking place as a result. Further, the effects of the boom of the past few years persist. The demand for high-end consumer products remains robust on the back of rapid growth of incomes during these years.

If the Reserve Bank of India were to put greater weight on these numbers than on the IIP, it would certainly feel vindicated in the decisions on interest rates and the cash reserve ratio that it has taken during the past couple of months. The dilemma of having to sacrifice growth in order to tackle inflation, which was highlighted by the IIP numbers, is much less visible in the survey results. If growth is not slowing down as a consequence of tighter money, then there is little doubt that further tightening is necessary to rein in inflation. However, such a course has its dangers; the widespread concern amongst industry leaders about the interest rate hikes being excessive suggests that, whatever the first quarter performance may indicate, the immediate future for industrial output is none too rosy. The June IIP numbers, to be released next week, may help to reconcile the differences between the two sources. Meanwhile, it is important to point out that, while the concerns about a slowdown may be exaggerated, they remain legitimate.

It is interesting that the FICCI's 9.5% industrial growth estimate is almost twice as high as the average IIP growth data over the period. We know the IIP base year is outdated and that the statistical policies are suspect, but such a huge divergence is startling.

[Suraj]

Two articles, both about fiscal responsibility. Katare, you'd find the first particularly interesting, since it dwells on the 10th Finance Commission changes to revenue sharing. Not only have the states not received their due share, but the new cesses are designed to be unshareable. Ultimately this could be seen in the light of the previous administration being a votary of devolution of powers to states, while the current administration is more centrally-driven. This is particularly problematic since the surcharges don't always even fully go to the cause they are being collected for.
Respect the fiscal compact

It would seem that the FRBMA is not the only fiscal rule that has been the victim of central government behaviour (in spirit, if not in letter). A case in point is the sharing of Union taxes with states. Most readers of this paper would be aware that the Finance Commission every five years, inter alia, determines the states’ share of taxes imposed and collected by the Centre. Until 1999-2000, only income tax and Union excise duty were shared with the states; the 10th Finance Commission recommended a major change, specifically, that all union taxes should be included in the shareable pool. Prior to the enactment of the Constitution (Eightieth Amendment) Act, 2000, the sharing of Union tax revenues with the states was in accordance with the provisions of Articles 270 and 272, which, respectively, provided for the compulsory sharing of income tax (excluding corporation tax) and Union excise duty. The amendment altered the pattern of sharing of Union taxes in a fundamental way. Article 272 was dropped and Article 270 was changed, which provided for sharing all taxes and duties except those referred to in Articles 268 and 269 — respectively, surcharges on taxes and duties, and cess levied for specific purposes. There are three well-known advantages (to my mind) emanating from these changes: (i) removal of the anomalous incentive for the central government to concentrate its tax efforts on those taxes that it did not have to share with the states like corporation tax and customs duty; (ii) imparting flexibility and elbow room to the central government for pursuing tax reforms in a coherent manner; and (iii) allowing states to share the aggregate buoyancy of taxes that are under the remit of the Centre.

The 11th Finance Commission, in this context, had recommended that states’ share for the five-year period, 2000-01 to 2004-05, be 29.5 per cent (28 per cent plus 1.5 per cent on account of additional excise duties levied in lieu of sales tax), which was accepted by the Union government. Subsequently, the 12th Finance Commission recommended the share at 30.5 per cent for the period 2005-06 to 2009-10. Against this background it is apposite to briefly examine states’ shares in central taxes.

From the table it is clear that the allocation to states has been substantially and consistently less than the stipulated percentage. In none of the years has it been close to the Finance Commission recommendations accepted by the central government, which underscores the increasing importance of cesses and surcharges on taxes imposed by the Centre, which the latter is not required to share with the states. A quick back-of-the-envelope exercise from the Budget documents reveals that for 2007-08 the aggregate of revenue from cess and surcharge on income tax, corporation tax, customs duty, excise duty and service tax was of the order of Rs 70,000 crore (at about 1.5 per cent of GDP it is a number not be sniffed at!).

While there may be credible reasons to allow the central government to impose a cess/surcharge, the subject merits consideration on several counts: First, while surcharges and cesses could, under specific circumstances, be justified (for example, extraordinary financing for a national public good like defending against an enemy border incursion), the extant surcharges/cesses seem to be enduring irrespective of circumstances and the dispensation at the Centre. Second, despite the large quantum of revenue from cesses and surcharges, there is a virtual absence of formal proposals to share the cess revenues with states on grounds of fairness (based on principles of vertical equity established by successive Finance Commissions). Third, the dearth of compelling motivation justifying the seemingly ad hoc compromise of sound public finance practice; in other words, tax reform is undermined by fiddling.

Allocating revenue from a specific cess for stipulated expenditure implies that the Centre’s spending priorities are somehow more worthwhile than the states, or, that “Delhi knows better”. The central government on its part may contend that, for example, the education cesses are finding their way to states anyway and, that too, for an unexceptionable objective, viz. enhancing human capital of the young. However, with justification, it could be reasoned that some states may want to spend more on enhancing human capital through subsidising primary health and prenatal care or, even on law and order in these difficult times. In other words, “a one size fits all” approach structured by the Centre is not easily defensible when it comes to prioritising social expenditure.

Another economics heavy but hard-hitting article underlining the danger of centrally driven fiscal dominance to macroeconomic development in general:
Remove fiscal dominance

Since the history of the period is yet to be written, few people know of the valiant battle that Dr C Rangarajan, then deputy governor of the RBI, waged within the institution in the 1980s to sneak in monetary policy — the real thing, not what used to pass for it before the 1990s — into India’s economic armoury. Before that, it was the era of what is called fiscal dominance, which basically meant the government would spend as much it wanted to and everyone and everything else, including interest rates, had better adjust to that.

Yet, when it came to fishing the inflation chestnut out of the fire, it was monetary policy that was asked to come to the rescue because only it could make a difference. Thus, the credit for fiscal expansion would accrue to the government; the pain of monetary contraction to the RBI.

In a recent paper* posted on the US Fed’s website, Michael Kumhof of the IMF, Ricardo Nunes of the US Fed and Irina Yakadina also of the IMF, say that “if nominal interest rates are allowed to respond to government debt, even aggressive rules that satisfy the Taylor principle can produce unique equilibria”, meaning you will get periods of relatively stable inflation. But they add, “following such rules results in extremely volatile inflation”.

This, if you ask me, lies at the heart of the harm that the UPA government has done. It has made the Indian economy vulnerable to inflationary volatility. The gains of 1994-2004 have been lost, if not forever then for a long time to come, because political instability of the kind we are about to witness is a fertile breeding ground for fiscal dominance and emasculation of monetary policy.

Much of the paper is devoted to proving the point with the help of maths. So the message comes out loud and clear: if the government will not behave itself, “the optimal response to inflation is highly negative, and more aggressive inflation fighting is inferior from a welfare point of view”. Ergo, eliminate fiscal dominance.

Another important point which the paper makes, and which will grate on the finance ministry’s ears, is that in developing countries inflation targeting is a stupid idea. To quote:

“…when the fiscal authority is unable, or unwilling, to control tax revenues and spending, (where there are) weak taxation systems, tax evasion, banking crises or overspending… the usual prescription of the inflation targeting literature, a more than proportional interest rate response to inflation innovations known as the Taylor principle, becomes impractical and undesirable.” This, pretty much, is what the RBI has been saying.

The paper goes on to make another point of great relevance to India today. That is whatever India’s economic Taliban may say, “It has not been clear from the literature whether this situation can be rescued by a central bank that adapts itself to fiscal dominance by conditioning its actions on fiscal variables such as government spending or government debt”.

But this is something for the RBI to ponder: has it been guilty of being overly accommodative of the government? The record certainly suggests that. By being accommodative, the RBI has been rendering itself ineffective.

To quote: “…an interest rate rule that tackles fiscal dominance by responding to debt and that simultaneously satisfies the Taylor principle is not a robust solution,” meaning it doesn’t work because of a whole range of reasons.

To start with, there is the high volatility of all variables; then there is the persistent violation of the zero lower bound on nominal interest rates rule; and finally, there is the negative impact on welfare.

To sum up: “Only solid fiscal fundamentals allow for both a benign outcome in terms of welfare and for the ability to fight inflation aggressively. Fiscal reform in developing countries is therefore an indispensable step before implementing inflation targeting regimes.”

*Simple Monetary Rules Under Fiscal Dominance, International Finance Discussion Papers, Number 937, July 2008, http://www.federalreserve.gov/pubs/ifdp ... p937.pdfas

[Suraj]

Good news: Posco's $12 billion project gets clearance from Supreme Court
Vedanta, Posco Win Final Approval for Delayed India Projects

Vedanta Resources Inc., India's largest copper producer, and Posco, Asia's third-biggest steelmaker, won final approval from India's highest court to start delayed projects in the mineral-rich state of Orissa.

Vedanta unit Sterlite Industries (India) Ltd. met the Indian Supreme Court's terms for a bauxite mining project, Chief Justice K.G. Balakrishnan said in his order today. The bench also allowed South Korea's Posco to build a $12 billion steel plant in the state.

Land disputes, protests by environmental groups and delays in getting mining licenses have stalled ventures by global metal companies in the eastern state of Orissa. The order, allowing Posco to proceed with its plant and Vedanta to feed its 45 billion rupee ($1.1 billion) alumina factory, will bolster confidence in the nation's economy, investor Jayesh Shroff said.

``This is good news for investments,'' said Shroff, who helps manage the equivalent of about $4 billion at SBI Asset Management Co. in Mumbai, including Sterlite shares. ``Finally things are moving on the ground.''

The court also allowed Posco to buy iron ore from the market for its factory, in addition to procuring the material from Orissa Mining Corp., which owns all the mines in the state. The bench separated the issues of setting up of the plant and procurement, said Janakalyan Das, the Orissa government's counsel.

``This is a vital clearance,'' Posco India General Manager Avinash Tiwari said by telephone in Mumbai. ``We continue to remain keen on the project and will now expedite our process for land acquisition.''

The Supreme Court denied Vedanta permission in November to mine in the state after the company's proposal was challenged by environmentalists. A Supreme Court bench, headed by Justice Balakrishnan, set Vedanta conditions for mining in the ecologically fragile Niyamgiri hills in Kalahandi, including partnering with a state agency for a permit.

Vedanta then formed the Lanjigarh Scheduled Area Development Foundation with the Orissa government, Orissa Mining Corp. and unit Sterlite Industries as stakeholders. The company petitioned the court to allow Orissa Mining's proposal to mine in the hills.

Posco, which plans to initially build a 4 million ton factory and a 400 megawatt power plant, had scheduled to start the project in April 2007. It faced opposition as locals and political parties wanted the plant to be moved to non-arable areas from farmlands.

The venture, potentially India's biggest foreign direct investment, has been delayed because Posco has to secure a mining permit and the land hasn't been cleared of occupants. It secured environmental approval from the government in August, more than two years after agreeing to initiate the project.

The Seoul-based company has signed an agreement with Steel Authority of India Ltd., the nation's biggest steelmaker, to cooperate on developing and purchasing raw materials and sharing sales networks in the South Asian nation. India's government owns 86 percent of New Delhi-based Steel Authority.

PSU stake selloffs in the aftermath of trust vote:
India's $10 Billion Share Sales to Lead IPO Revival

Bharat Sanchar Nigam Ltd., India's biggest telephone company, and NHPC Ltd. plan to raise more than $10 billion in share sales, leading a revival in offerings as stocks rebound from the worst start to the year in three decades.

The government plans to sell as much as 10 percent of Bharat Sanchar, Chairman Kuldeep Goyal said yesterday. State-run NHPC, India's largest generator of electricity from water, on Aug. 6 sought regulatory approval for a sale.

Finance Minister Palaniappan Chidambaram said July 24 the government will resume asset sales to raise funds for former oil, power and telecoms monopolies. Indian companies have completed the fewest IPOs in three years in 2008 as owners including billionaire Anil Ambani scrapped offers.

Reliance Infratel Ltd., a telecommunications tower company controlled by Ambani, and real estate developer Emaar MGF Land Ltd. were among companies that canceled offerings in the first six months as the benchmark Sensitive Index slumped 34 percent, the biggest first-half drop since it was created in 1979.

[putnanja]

ASEAN, India to sign free trade pact in Dec

[shaardula]

folks i need help understanding this...

yesterday, i was watching ndtv, abdullah/syed/mirwaiz/lone one of these guys mentioned that fruits is 600 crore industry in Kashmir. and they would have to go to M'bad to save industry.

my question is: isn't the industry size determined by market? can TSP be an equal equal market for kashmiri fruits? I am assuming that fruits are not in short supply in TSP. They already have a supply source. flooding a market whose supply side is already well developed with india load full of fruits would kill TSP market and kill value of kashmiri fruit also no?

kashmiri apple is big deal in india. is it in TSP also? or can they export it from TSP. but that would require some prep work no? to get superstores in KSA and UAE to stock kashmiri fruits?

i dunno economics or JK help understand. TIA.
i didnot want to post this in JK forum bcoz that is singing its own song, dont want to spoil that party.

[Katare]

You are right the suze of market is determind by the consumer's purchasing power. If they sell it in PoK the industry would become worth 100corer paki Rupee over night.

[Rishirishi]

folks i need help understanding this...

yesterday, i was watching ndtv, abdullah/syed/mirwaiz/lone one of these guys mentioned that fruits is 600 crore industry in Kashmir. and they would have to go to M'bad to save industry.

my question is: isn't the industry size determined by market? can TSP be an equal equal market for kashmiri fruits? I am assuming that fruits are not in short supply in TSP. They already have a supply source. flooding a market whose supply side is already well developed with india load full of fruits would kill TSP market and kill value of kashmiri fruit also no?

kashmiri apple is big deal in india. is it in TSP also? or can they export it from TSP. but that would require some prep work no? to get superstores in KSA and UAE to stock kashmiri fruits?

i dunno economics or JK help understand. TIA.
i didnot want to post this in JK forum bcoz that is singing its own song, dont want to spoil that party.

The Kashmiri apples would never be able to compete in the middle eastern market, who is stopping them now? the question is not about economics for the sepratists, rather it is their pervert idea of creating a sharia state, where no one is allowed the freedom to think. They could hardly care if kashmiris starve or not.

[shaardula]

thanks folks.

apparently, next two months critical for fruits and allied industry and must sell now.
as high a 'standard of living' as they might have, i dont think they can afford to take a hit on an year's worth of income. so if they are completely blocked off then resentment amongst abduls will grow. but if they are allowed to sell in M'bad now, then they can compute in leisure during the winter months that 1 rupee is defintely more than 30 ps. especially somebody who is used to having a rupee at his disposal, no?
especially bcoz the highway is now open and they still chose to march towards Mbad.

part of the problem i guess is that they have skewed sense of aata chawal prices. i really wish BRF deconstructs Kashmir for the rest of us like they have done TSP & Afg.

aside: why cant indian agri break into middle east?

[Nayak]

NYTimes uvacha

http://www.nytimes.com/2008/08/12/busin ... ll.html?em

Cost-Cutting in New York and London, a Boom in India
Zackary Canepari for The New York Times

Not to be confused with the canyons of Wall Street, the view overlooking Gurgaon, India, is a backdrop for workers at Copal Partners on a break. Copal provides research and reports for investment banks.

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By HEATHER TIMMONS
Published: August 11, 2008

GURGAON, India — On the top floor of a seven-story building in this dusty aspiring metropolis, Copal Partners churns out equity, fixed income and trading research for big name analysts and banks. It is a long way from the well-cooled corridors of Wall Street, and quarters are tight; business is up about 40 percent this year alone.

“This is one bulge-bracket bank,” said Joel Perlman, president of Copal, pointing toward a team behind an opaque glass wall. “And this,” he said, motioning across a narrow corridor “is another.”

The banks edit and add to what they get from Copal, a research provider, then repackage the information under their own names as research reports, pitch books and trading recommendations.

Wall Street’s losses are fast becoming India’s gain. After outsourcing much of their back-office work to India, banks are now exporting data-intensive jobs from higher up the food chain to cities that cost less than New York, London and Hong Kong, either at their own offices or to third parties.

Bank executives call this shift “knowledge process outsourcing,” “off-shoring” or “high-value outsourcing.” It is affecting just about everyone, including Goldman Sachs, Morgan Stanley, JPMorgan, Credit Suisse and Citibank — to name a few.

The jobs most affected so far are those with grueling hours, traditionally done by fresh-faced business school graduates — research associates and junior bankers on deal-making teams — paid in the low to mid six figures.

Cost-cutting in New York and London has already been brutal thus far this year, and there is more to come in the next few months. New York City financial firms expect to hand out some $18 billion less in pay and benefits this year than 2007, the largest one-year drop ever. Over all, United States banks will cut 200,000 employees by 2009, the banking consultancy Celent said in April.

The work these bankers were doing is not necessarily going away, though. Instead, jobs are popping up in places like India and Eastern Europe, often where healthier local markets exist.

In addition to moving some lower-level banking and research positions to support bankers and analysts in New York and London, firms are shipping some of their top bankers from those cities to faster-growing developing markets to handle clients there.

Owing in part to credit weaknesses and billion-dollar charges from the subprime crisis, “people who were off-shoring high value jobs are increasing the intensity of that, and people who were not are now in the planning stage,” said Andrew Power, a financial services partner at Deloitte Consulting.

Wall Street banks started cautiously sending research jobs to India a few years ago, hiring employees by the handful and running pilot programs with firms like Copal, Office Tiger, Pipal Research and Tata Consultancy Services.

In 2003, JPMorgan and Morgan Stanley said they planned to move a few dozen research jobs to Mumbai, Lehman Brothers was working on a pilot program to create research presentations in India and both Merrill Lynch and Goldman Sachs said they had not moved any research to the country.

Five years later, the trickle is a flood. Third-party firms say they are seeing a 20 to 40 percent upswing in business this year alone.

Morgan Stanley has about 500 people employed in India doing research and statistical analysis. About 100 of Goldman Sachs’ 3,000 employees in Bangalore are working on investment research.

JPMorgan has 200 analysts in Mumbai working for its investment banking operations around the world, doing industry analysis, and compiling data and charts for marketing materials. It has an additional 125 analysts in Mumbai supporting the bank’s global research division.

Citigroup employs about 22,000 people in India, several hundred of whom work in investment research. Deutsche Bank has 6,000 employees in India, according to the bank’s Web site. Deutsche started a pilot program to outsource some research in 2003, and would not provide any update.

Theoretically, as much as 40 percent of the research-related jobs on Wall Street, tens of thousands of jobs, could be sent off-shore, said Deloitte’s Mr. Power, though the reality will be less than that.

The jobs off-shore are more likely to come from the investment bank and trading divisions of Wall Street firms, rather than the sales side, which produces analyst reports about companies and industries, said Andy Kessler, a former analyst who has written several books about Wall Street.

“There’s a huge amount of grunt work that has been done by $250,000-a-year Wharton M.B.A.’s,” Mr. Kessler said. “Some of that stuff, it’s natural to outsource it.”

He added, “These are middle of the office jobs, not back office, but they’re not the people on the front line.”

After research, the next wave may include more sophisticated jobs like the creation of derivative products, quantitative trading models and even sales jobs from the trading floors.

Proponents of the change say Wall Street’s wary embrace of the activity may signal the beginning of a profound shift in the way investment banks are structured, with everyone but the top deal makers, client representatives and the bank management permanently relocated to cheaper locales like India, the Philippines and Eastern Europe.

In the future, executives in India like to joke, the only function for highly paid bankers in New York or London will be to greet clients and shake hands when the deals close.

“Wall Street has to look at the world differently,” said Manoj Jain, the chairman of Pipal Research, a 400-person firm with offices in Chicago, Delhi and Gurgaon. Moving high-value jobs out of high-cost cities is “no longer a hypothesis,” he said.

Pipal has “more work than it can take” right now, he said, and is seeing new clients beyond United States banks, like investment management companies and European financial firms. Like analysts at most offshore research operations, Pipal’s number crunchers do not make recommendations, or generally put their name to the research they write. Instead, they work with the big-name bank or fund analyst to create the research that they want.

Permanently moving banking jobs out of New York or London is a touchy subject on Wall Street. Many investment banks, including Morgan Stanley, Goldman Sachs, Merrill Lynch and Citigroup, would not make executives available to discuss the topic.

Press officers for most banks asked not to be quoted or argued over semantics. For example, one spokesman said his bank’s fast-growing India support operations are not an outsourcing facility, but a “center of excellence”; another argued that large cost cuts at his bank’s New York and London headquarters were really “re-engineering” so the bank should not be included in such an article.

“Some of that is self-serving,” Octavio Marenzi, chief executive of Celent, said of the impulse to keep quiet. “If I admit that research analysts can be off-shored to India, that means that I could too.”

He said the “more advanced firms” will be able to use the cost differences and talent pools in India, and in the future in China, to their advantage.

A few banks have openly embraced off-shoring. Credit Suisse has 6,500 employees around the world working in lower-cost locations in India, Poland and Singapore. Of these about 500 are doing high-value jobs.

“We have people helping the execution of deals, data gathering, helping to build financial models, writing research, and doing scenario analysis,” said Vineet Nagrani, head of knowledge process outsourcing at the bank.

The bank has small teams working on fixed-income research, credit research and foreign exchange research, “all of which are going to grow” Mr. Nagrani said. Credit Suisse is also doubling the number of investment bankers and private bankers in India who deal with local clients in the next 12 months.

The bank’s clients, so far, seem happy. “As long as clients get a good quality product and can talk to their favorite research analyst” they do not care if the grunt work is done in New York or India, Mr. Power said.

Third-party outsourcing firms face two hurdles when winning this business, N. Chandrasekaran, chief operating officer of Tata Consultancy Services, said. First, banks need to be confident that third parties are capable of doing the work. Second, they need to decide whether they want to move the work out of the bank at all.

To address the first issue, Tata sets up pilot programs with clients. A new Tata office in Cincinnati, which will employ 1,000 people in three years, is intended to give the company a United States presence.

In addition to growth outside India, these outsourcing experts are bringing in Chinese nationals, Arabic speakers and even the very people they are replacing: business school graduates from America.

Daniel Peng, who will be a senior at Dartmouth next year, is working in the equity research department of Copal Partners as a summer intern. “I thought it would be a good emerging markets experience,” he said.

Tellingly, Mr. Peng still hopes for an old-fashioned Wall Street job when he graduates. New York would be “ideal,” he said.

More Articles in Business » A version of this article appeared in print on August 12, 2008, on page C1 of the New York edition.

[putnanja]

Economic Advisory Council presents grim growth report

Economic Advisory Council presents grim growth report

Special Correspondent

It expects a slide in GDP growth to 7.7 per cent this fiscal

“Tight monetary stance needs to be maintained”

Council’s projection conservative: Chidambaram

NEW DELHI: In a grim foreboding on the price front, the Prime Minister’s Economic Advisory Council (PMEAC) on Wednesday projected the inflation to touch 13 per cent in the near term. It expected a slide in the GDP (gross domestic product) growth to 7.7 per cent this fiscal from a high of 9.1 per cent in 2007-08.

Releasing the council’s ‘Economic outlook for 2008-09’ at a press conference here, its outgoing Chairman C. Rangarajan said: “For some more time, inflation can increase. It could touch 13 per cent... but by December, it will start declining and is likely to moderate to 8-9 per cent by March 2009.”
Coordinated action

In agreement with the Reserve Bank’s tight monetary policy prescription to contain inflation — which has already touched a 13-year high of 12 per cent — Dr. Rangarajan said: “It [inflation] could be brought down to 8-9 per cent by March 2009 through co-ordinated policy action…The tight monetary stance needs to be maintained till the pace of inflation comes down.”

Explaining the PMEAC’s rationale for lowering its projection on economic growth for 2008-09 to 7.7 per cent from a healthier 8.5 per cent forecast in this January, Dr. Rangarajan said: “There is a slowdown in agriculture, industry and services and the global environment is not very conducive to growth. This will affect [the] Indian economy as well.”

In a more optimistic note, however, Finance Minister P. Chidambaram sought to indicate that the council’s projection on GDP growth was conservative. Briefing journalists after his meeting with chiefs of public sector banks (PSBs), Mr. Chidambaram said: “If the PMEAC pegs GDP growth at 7.7 per cent, I can confidently say it will be close to eight per cent.”

According to the PMEAC, the farm sector growth is likely to decelerate to two per cent during the current fiscal compared to the 4.5 per cent increase achieved in the previous fiscal. , Dr. Rangarajan pointed out that the growth in industrial production was also expected to slide to 7.5 from 8.5 per cent and services to 9.6 per cent from 10.8 in 2007-08.

Even then, the 7.7 per cent economic growth rate would not be “unrespectable and would be [the] second-highest growth rate by any country,” PMEAC’s new Chairman Suresh Tendulkar pointed out. Another council member G.K. Chadha agreed that a GDP growth of 7.7 per cent would, in fact, be “very respectable.” “One should not forget that there are business cycles and growth cannot move only in one direction,” he said.
External factors

Dr. Rangarajan pointed out that the slowdown in economic growth was mainly owing to external factors such as rising prices of crude oil and food commodity in the international market coupled with the global slowdown triggered by the U.S. sub-prime mortgage crisis. Such an adverse global environment, he said, would have implications for the country’s current account deficit by way of an expected sharp rise to 3.2 per cent from 1.5 in 2007-08.

In particular, the soaring inflation rate was mainly on account of surging global commodity prices while there were serious fiscal risks arising from growing off-budget liabilities, estimated at five per cent of the GDP. “Implementation of the rural employment guarantee programme and Sixth Pay Commission’s report, we think, will take total deficit to 5 per cent…This is [a] very large fiscal deficit,” Dr. Rangarajan said.

On this front, the PMEAC viewed that while the fiscal deficit targets would not be met, the revenue deficit would continue to persist. Noting that the government had already referred these issues concerning off-budget subsidies to the 13th Finance Commission, Dr. Rangarajan said: “As long as they are small there is no problem... but today off-budget liabilities because of oil bonds and other factors have become significant.”

Cabinet may take up pay panel report today

Aarti Dhar

Manmohan holds discussions with Ministers on report

Government may enhance the Military Service Pay

NEW DELHI: The Union Cabinet is likely to take up for approval the recommendations of the Sixth Central Pay Commission on Thursday. The suggestions made by a Committee of Secretaries — set up following widespread resentment, especially among the armed forces, over the recommendations — have been incorporated in the Commission report.

Authoritative sources told The Hindu that Prime Minister Manmohan Singh held a meeting on Wednesday to discuss the report. It was attended by External Affairs Minister Pranab Mukherjee, Defence Minister A.K. Antony, Finance Minister P. Chidambaram and Home Minister Shivraj Patil, besides the Cabinet Secretary and Secretaries of various Ministries.

After the Commission submitted its report in March, there was “disappointment” and “resentment” over its suggestions. The loudest protest came from the armed forces and officers of the Indian Police Service and the Indian Forest Service. The government then set up the Committee of Secretaries, headed by the Cabinet Secretary, to look into “anomalies and disparities” of the employees, and suggest necessary changes.

It was no less than Defence Minister A.K. Antony, who favoured a hike for his men, over and above what was recommended in the pay panel report.

It is now learnt that the government has agreed to enhance substantially the Military Service Pay (MSP) for soldiers as well as some solace to middle ranking officers.
Pay parity sought

The IPS officers are demanding pay parity for DGPs with Secretaries, abolition of the post of Deputy Inspector-General of Police and promotion to the rank of IG after 16 years of service. They are also seeking incentives for constabulary and lower-rank personnel of the Central Police Organisations, and allowances for performing counter-insurgency, high-altitude and field area duties.

Employees of the engineering service, the Indian Forest Service and the health services too have petitioned the Committee of Secretaries seeking a better deal.

[Suraj]

India industrial output growth slows in June from year ago

India's industrial output grew by just 5.4 percent in June, down sharply from the rate a year earlier, data showed Tuesday, in another sign that Asia's third-largest economy is slowing.

Experts have forecast economic growth will slow this year as high borrowing costs and tough global financial conditions bite, with some predicting expansion as low as seven percent, down from nine percent last year.

Industrial production accelerated by just 5.4 percent in June compared with 8.9 percent in the same month a year earlier, the figures showed.

"We expect the overall trend to be down on the back of rising inflation, interest rates and slowing export demand," said HSBC economist Manas Paul.

But the figure -- in line with analysts' forecasts -- picked up from May when industrial output grew by a revised 4.1 percent while consumer production remained robust, growing by 10 percent, partly due to a low year-ago base.

For the April-June financial quarter, industrial production growth slowed to 5.2 percent, down from 7.1 percent in the same period a year earlier, reflecting the impact of a slew of interest rate hikes.

India interest rates have almost peaked -SBI chief

Interest rates in India have almost peaked, the chairman of State Bank of India, the country's top lender, said on Wednesday, a day after it raised its prime lending rate by 1 percentage point.

The Reserve Bank of India (RBI) last month raised its key lending rate to its highest in seven years at 9.0 percent to combat a surge in inflation, now at a 13-year peak of 12 percent.

State Bank took its lending rate up to 13.75 percent on Tuesday, following other banks which have also raised interest rates.

"They have almost peaked," O.P. Bhatt told reporters ahead of a meeting of heads of state-run banks with the finance minister.

He cited softening oil prices, a good monsoon and lower prices of commodities except steel, as factors pointing towards a peak in interest rates.

"The demand pull from Beijing Olympics is also over, the global economy is slowing down. So there seems enough reason that it has peaked or near peaked unless there is any further cause for action by external factors or by the RBI," he said.

National Stock Exchange Gets Approval for Indian Rupee Futures

The National Stock Exchange of India, the nation's biggest, has been awarded the rights to trade currency futures, beating rival, the Bombay Stock Exchange.

``We have granted an in-principle approval,'' C.B. Bhave, chairman of the Mumbai-based Securities & Exchange Board of India said today after a board meeting.

The Bombay Stock Exchange, Asia's oldest, will be granted approval after it reaches the National Stock Exchange's level of ``preparedness,'' Bhave said. The Multi Commodity Exchange, the world's third-biggest gold exchange, has also applied, he said.

India currently allows trading in currency derivatives such as forwards and options. Nearly a dozen Indian companies have filed lawsuits against lenders including ICICI Bank Ltd., the second-biggest, accusing them of hiding risks to lure small businesses into contracts they don't understand. No rulings have been issued.

``Currency futures will make price-discovery transparent,'' said Sudhir Joshi, treasurer of HDFC Bank Ltd. in Mumbai. ``It will boost currency-market liquidity.''

Currency futures are publicly traded derivatives that allow investors to trade a currency on a future date at a fixed price.

India Eases Rules for Share Sale to Big Investors

India's stock market regulator eased the pricing rules for companies selling shares to institutional investors and reduced the time required for completing a rights share sale.

Companies can sell shares based on the average price of two weeks preceding the offer, Securities & Exchange Board of India Chairman C.B. Bhave said today. Rights issue must be completed in 43 days from 109 days at present, he said.

``It will not be practically possible,'' to sell shares as per the current pricing formula in the present market scenario, said Bhave. Companies currently sell shares using either the average six-month price, or the average rate of two weeks before the offering, depending on which is higher.

India has been taking steps to raise corporate governance standards in its $1 trillion stock market, Asia's fifth-biggest. Last year, the regulator asked companies to get their initial public offerings, made registration by hedge funds compulsory, and told analysts to publish their holdings and disclose if they or their company are paid for services.

Mutual funds would be required to disclose their results within four months of the end of the financial year, instead of six months currently, Bhave said.

Domestic funds managed $132 billion in total assets on June 30, 11.5 percent of India's stock market value.

Changes announced today ``will reduce the risk faced by investors and corporates,'' Bhave said.

[vina]

My reading of the economic tea leaves.

1) Commodity price cycle is at close to it's peak. There are no quick gains anymore to be made in the commodities space , now with prices beginning to soften across the board (oil, wheat, rice, corn, metals.. you name it). This will not attract capital running away from financial markets looking to make a quick buck.

2) The real estate market in the US still has some ways to go before it reaches market clearing price. The write offs will continue and so will the pain. Unlike financial markets , real estate markets dont reset price very quickly to market clearing prices, but it eventually will

3) I think global inflation rates are set to fall, given the trend in commodity prices, esp that of oil and demand destruction on the back of weaking growth and high inflation.

4) The pressure on US dollar wanes because of weakening commodity prices and this will have a direct effect on global inflation, because the US has effectively been exporting inflation as a way of getting out of trouble.

5) Pressure on rupee weakens (in addition to democracy, we share the dependence on imported oil with the US ).

6) Indian inflation weakens over the next 6 to nine months (speed will depend on speed at which oil prices fall globally , which will see how soon indian macro finances come back in shape from being currently out of whack).

7) Interest rates are going to stay where they are for the next 6 to 9 months . Interest rate sensivites are going to get walloped.
Real Estate in India is in the toilet. The developers dont want to see and face reality. Atleast they are coming out of denial. Nice fat, IT like gross margins and net margins of real estate story is dead. And arguments based on land bank are rubbish. Come on. you cant sell what you have on hand, if you actually develop the land bank at prices that will sell, the bottom will fall out of the current market.

9) Growth will hit 7% to 8% max (will be a miracle), but pretty decent.

10) All in all, the Indian economy would have weathered the shock pretty decently , despite the prolifigacy of the Neta Babu class and the freebies like NREGA and babu salaries and other terrible waste and brain dead economic policies.

11) I think we will finally break out of the Administered Pricing Mechanism in the remaining sectors and hopfully see a burst of reforms to remove the barriers and road blocks to higher growth.

12) Finally, Congress comes roaring back to power (I know it is a very wishful fond /hope) and the commies are cut down to size..wiped out in Kerala and chopped significantly in WB to give hope for the final push to break the edifice the next time)

[Vipul]

Indirect tax collection up 13.5% in July.

Driven by good realisation of custom duties, indirect tax collection went up by 13.5 per cent to Rs 20,019 crore in July.
while the central excise collection during July soared by 8.9 per cent, realisation from custom duties increased by 18.7 per cent in the month over the corresponding period last year, said an official release.

Total indirect tax collection during the month worked out to be Rs 20,019 crore, up from Rs 17,639 crore recorded in July 2007.The indirect tax collection during April-July period increased by 12 per cent to Rs 74,359 crore.During the four-month period of the current fiscal, customs realisation increased by 20.3 per cent, while excise revenues were up by 4.4 per cent only.

As regards service tax, the release said, collection during June increased by 21 per cent to Rs 5,064 crore.
During the first quarter (April-June), the service tax collection surged by 29 per cent to Rs 14,838 crore.

[Suraj]

The enigma of India`s growth

notwithstanding the brave words of the government, agriculture has continued to stagnate even as India grows: “The per capita income for those dependent on agriculture at $327 a year is only 22 per cent of that of the remaining half of the population at $1,490. And the gap would widen every year by almost $120 even if agriculture grew at the desired rate of 4 per cent and the economy at 8 per cent .

Further falls in poverty will necessarily have to follow employment generation of a very high order. I had earlier referred to the disproportionately high dependence on agriculture as the employer of last resort. The Economic Survey 2008 has revised this figure down to 50 per cent, but agriculture contributes only 18 per cent of the GDP.

Dr Shankar Acharya says: “There is clearly something wrong with our employment policies and outcomes” (Business Standard, April 24, 2008). He points out that the huge mismatch between supply and demand for labour is the result of an absence of labour-intensive manufacturing which creates decent low-skilled jobs in poor countries. Our growth, while not quite jobless, has not succeeded in absorbing the surplus labour to the extent needed.

This is not an easy task. It requires that the population dependent on agriculture must come down in absolute numbers. My simple, back-of-the-envelope calculations show that to wean 1 million workers (or 2.5 million people) away from agriculture with a per capita income of $400 a year, still well below that in service and manufacturing activities, will require an investment of $17 billion a year, every year. Compare this to the total investment of $10 billion over a four-year period in the government’s most ambitious such activity, the Bharat Nirman project.

`Investment growth may slow down`

The capital investment intention for the current financial year, based on companies having institutional assistance up to 2007-08, amounted to Rs 1,48,350 crore. If fund raising from sources other than banks and financial institutions — such as external commercial borrowings and public and rights issue is added up - the proposed investment adds up to Rs 1,73,173 crore.

Corporate India needs to invest Rs 71,934 crore during 2008-09 to surpass last year’s Rs 2,45,107 crore.

In the last two years, fresh projects in the private sector involved a capital expenditure of over Rs 1,00,000 crore.

Not sharing enough

One of the important tasks the 13th Finance Commission, headed by former finance secretary Vijay Kelkar, has to look at is whether the current formula for sharing tax revenue between the Centre and states is working well. As pointed out by Urjit Patel on this page last week, the percentage of taxes shared with the states is now around 26, compared with the 12th Finance Commission recommendation of 30.5 per cent. In other words, though various finance commissions have expanded the divisible pool of taxes to be shared (the 10th brought customs duties and corporate taxes into the divisible pool) and the amount to be shared (the 11th Finance Commission raised the level to 29.5 per cent and the 12th raised it further to 30.5 per cent for the period 2005-06 to 2009-10), the actual percentage that is shared has remained constant. The reason for this is simple — the central government has managed to find new ways each time to ensure that the states don’t get their full dues.

When some taxes were kept out of the divisible pool, the Centre focused on raising revenue from those sources. Now that the pool has been expanded, it has taken the form of imposing cesses (on education, for instance) and surcharges (on income tax) that are not mandated to be shared. In addition, there are revenues like the money received from telecom licensees, which too are not shared with states. Dr Patel has calculated that, for 2008-09, this non-divisible pool amounts to around 1.5 per cent of GDP. Given the tax-GDP ratio, that’s probably around 15 per cent of the tax base that remains outside the divisible pool, a level that reflects a sharp increase from previous years.

It is of course true that buoyant central tax revenue has meant a fiscal bonanza for the states, and it is this that has caused a sharp improvement in the states’ fiscal position in recent years. Also, as the central government points out, part of the money with the Centre gets back to the states by way of centrally sponsored projects. But the problem with this approach came up at the National Development Council meeting last year, when the Eleventh Five-Year Plan was approved. While the states are funding higher shares of their own Plans, the share of grants has been falling, while the share of “tied” aid is rising. In the Eleventh Plan, the chief ministers pointed out, just 12 per cent of the total assistance to states was untied.

[Nayak]

http://www.ft.com/cms/s/0/164f5cb6-6a61 ... fd18c.html

US credit card defaults prove a boon for India

By Joe Leahy in Mumbai

Published: August 15 2008 03:00 | Last updated: August 15 2008 03:00

The declining fortunes of the consumer in the US, and increasingly the UK, are proving to be a boon for India's outsourcing industry, with some leading operators gearing up to increase the size of their debt collection and recovery units.

Firstsource, an Indian business process outsourcing company that handles credit recovery for most of the top five US banks and half of the top 10 credit card issuers, said it was increasing staff numbers to win business from growing credit card defaults in both national markets.

"There is more demand for that service. If I could add 100 people today, overnight, I would do it," said Ananda Mukerji, Firstsource chief executive, in an interview with the Financial Times.

Overdue accounts at the six large US credit card issuers increased in June on the back of rising unemployment, and higher food and fuel prices.

Loans on which repayments were more than 30 days late increased by five basis points to 4.03 per cent, after falling for two months as hard-hit consumers used tax rebates to try to reduce their debts, according to Bloomberg data.

The worst affected issuer in June was American Express, with loans overdue by 30 days rising by 16 basis points to 3.21 per cent. Firstsource is predicting the situation will also worsen in the UK.

Market research conducted by the company and released last month showed that 22 per cent of consumer credit managers that responded to a survey had reported increased write-offs in the past 12 months.

Firstsource said its staff for conducting collections in the US alone had risen from 250 when it started the business in 2004 to 600, while revenue from collections had risen from $20m to $50m in about three years.

Indian outsourcing companies offer collection services by stationing people in the US and in India.

Firstsource specialises in accounts that are 90-180 days overdue.

The post-360 days overdue work, which often involves legal action against defaulters, is performed by other agencies with a greater local presence.

"We have seen some ramp up on the collection side," said Amitabh Chaudhry, chief executive of Infosys BPO, a unit of India's second-largest computer services outsourcing company.

He said debt collection was one of the areas helping to balance a slowdown elsewhere in the outsourcing industry, such as the business of processing mortgages from western clients.

However, while there was more bad debt, the deepening credit problems of the US consumer were also making it harder to collect.

Mr Mukerji said: "There are more credit card outstandings being defaulted on today than there were a year back, so that's a growth opportunity for us.

"But the profitability is lower because it is harder to collect today than it was a year back."

Copyright The Financial Times Limited 2008

[Vipul]

Gujarat biggest investment destination in India.

Gujarat is still on top of the heap when to comes to the list of most attractive investment destinations in the country.
The state attracted maximum project investments in 2007-08, followed by Maharashtra, Orissa and Andhra Pradesh, according to a study by the Reserve Bank of India on projects funded by banks and financial institutions. At the same time, the overall investments in the country are expected to moderate in 2008-09.

With a proposed investment of Rs 62,442 crore from 100 projects, Gujarat continued to occupy the top spot as far as investment intention is concerned.Of the total investment intentions in 2007-08, the state accounted for 22% of the total proposals for the year, though the share dipped from the previous year’s share of 25.8%.

Maharashtra, which ranked second, had a share of 12.7%, envisaging investments worth Rs 36,202 crore. Orissa was third with 10.9% share, accounting for investments worth Rs 30,913 crore, followed by Andhra Pradesh (8.5%), Chhattisgarh (6.2%), Tamil Nadu (5.6%), Karnataka (3.7%), Uttar Pradesh (3.5%) and the rest sharing less than 3% each.

The study involves 910 projects that were sanctioned assistance by banks and financial institutions in 2007-08 with an aggregated envisaged project cost of Rs 2,84,371 crore.However, as for the investment outlook for 2008-09, the central bank has said private corporate investment is likely to increase, although it may grow at a slower pace. Cumulative capital expenditure for all ongoing projects is expected to dip to Rs 1,48,350 crore, compared to Rs 1,99,262 crore in 2007-08 and Rs 1,68,010 crore in 2006-07.

If the aggregate capital expenditure in 2008-09 were to surpass the level intended for 2007-08, fresh capital expenditure in 2008-09 must be above Rs 71,934 crore.

Although there could be a slight shift in financing conditions which may affect the fundamentals that drive business investment, corporates’ incentives to invest are likely to remain strong in 2008-09. This would be because domestic demand and capacity utilisation rates would be high amidst improved profitability of the last few years.

The study also notes, “The real GDP grew at a substantially high rate in 2007-08, on top of robust economic growth in recent years. Notwithstanding the recent slowdown in overall business activity, corporate sector managed to maintain quite a decent profitability level in 2007-08 and against the backdrop of upbeat performance in recent years, the corporate sector appears to have the capacity to invest. Downside risks arise from the likely impact of high and rising international oil prices, increasing cost of external capital, hardening of interest rates abroad and input and wage cost pressures in some industries.”

[Avinash R]

India given 15,261 patents in '07-08

[Nayak]

India bucks crunch with foreign buying spree

By Daniel McAllister
Sunday, 17 August 2008

India has shrugged off the global credit crunch with a rash of acquisitions of foreign firms over the past six months, research by accountants KPMG has showed.

The pace of acquisitions brings the country to the brink of buying as many companies as it sells, with Indian firms picking up 322 firms in developed economies, compared to 340 deals in the opposite direction, since 2003.

Ian Gomes, the chairman of KPMG's emerging markets practice, said: "This is testament to the growing power of the Indian corporate base. When everyone is talking about the credit crunch and sovereign wealth funds, Indian trade buyers have continued doing what they've done for years. They are now serious players on the world scene." However, the Indian powerhouse is not immune from the global slowdown, he warned.

The figures for the first half of 2008 show India has bought 50 companies in developed countries, more than half of the total of Western companies snapped up by emerging economies.

[Nayak]

The enigma of India's growth

August 16, 2008 11:32 IST
Last Updated: August 16, 2008 12:06 IST

"India seems to be held together by chicken wire and chewing gum," I said to a niece visiting us six years ago on Independence Day and wondered how long before it would start giving way. "Don't worry," she said, "we'll invent stronger chicken wire and stickier gum."

Events since then show that the young lady, a star shining brightly in India's largest private bank, was largely right. The India success story is long past the flavour-of-the-month stage and even the most die-hard critics have had to accept it.

This article is not about the usual success stories and fault lines. I wish to reflect on the large picture from three angles to see what our real degree of comfort is.

First, by any yardstick, India's success as indicated by its $1 trillion GDP in actual currency units (the only true measure of economic power in the era of globalisation) and its sustained 8 per cent plus annual growth appears improbable.

The horrendous state of infrastructure, unending shortages of energy and attendant high costs, chaotic and unpredictable twists and turns in the policy and governance environment, pervasive corruption, abysmal quality of life in cities and villages, would all suggest imminent collapse, not growth, which is the envy of most of the world.

India has indeed invented sturdier chicken wire and more adhesive gum!

Second, poverty, once a defining adjective for India, is on the decline. It is now not confined only to official statistics, the latest of which point out that for the first time the number of the poor is actually falling and at a rapid rate at that.

The poverty ratio in 2005-06 was 24 per cent, with an actual decline of over 20 million in the head count of 280 million over the preceding year (Planning Commission internal assessment reported in The Indian Express, July 22, 2008). One can see it visually as well in travels in the countryside, including relatively remote areas. Let us accept this remission without entering into a debate as to what caused it.

Third, there is ebullience of a can-do spirit abroad. Surging exports of manufactured items, albeit still of a relatively small number of articles, show that we are moving fast to shed the stigma of shoddy goods long associated with the sector.

A highly successful first generation entrepreneur, now a star performer in a global business, confidently predicted that India will see an inflexion point within the next five years in the secondary sector, with the world increasingly thinking of it as an alternative manufacturing hub to China, especially for relatively high-value products.

I have no reason to doubt his optimism, based on the experience of many others like him. The eager acceptance of world-wide challenges is not confined any longer to the IT sector or giants such as the Ambani brothers or the Tatas. It has percolated to those orders of magnitude smaller than them.

So now I come to the dreaded two words, 'and yet'. Even the most vociferous champions of India's growth would have to admit that it has not been inclusive. I had pointed out in these columns (Business Standard, April 17, 19 and 24, 2008) that notwithstanding the brave words of the government, agriculture has continued to stagnate even as India grows: "The per capita income for those dependent on agriculture at $327 a year is only 22 per cent of that of the remaining half of the population at $1,490.

"And the gap would widen every year by almost $120 even if agriculture grew at the desired rate of 4 per cent and the economy at 8 per cent . . . The gulf between India and Bharat is real and fearsome." My friend the entrepreneur-technocrat readily accepts this and ruefully admits that a solution eludes even his proven and formidable problem-solving abilities.

Further falls in poverty will necessarily have to follow employment generation of a very high order. I had earlier referred to the disproportionately high dependence on agriculture as the employer of last resort. The Economic Survey 2008 has revised this figure down to 50 per cent, but agriculture contributes only 18 per cent of the GDP.

Dr Shankar Acharya says: "There is clearly something wrong with our employment policies and outcomes" (Business Standard, April 24, 2008). He points out that the huge mismatch between supply and demand for labour is the result of an absence of labour-intensive manufacturing which creates decent low-skilled jobs in poor countries. Our growth, while not quite jobless, has not succeeded in absorbing the surplus labour to the extent needed.

This is not an easy task. It requires that the population dependent on agriculture must come down in absolute numbers. My simple, back-of-the-envelope calculations show that to wean 1 million workers (or 2.5 million people) away from agriculture with a per capita income of $400 a year, still well below that in service and manufacturing activities, will require an investment of $17 billion a year, every year.

Compare this to the total investment of $10 billion over a four-year period in the government's most ambitious such activity, the Bharat Nirman project.

And finally to the rising spirits. The captains of industry may exult in it, but we are still an anarchistic people as public events, intolerance of any divergence, and the lack of discipline and public morality abundantly make clear. The eminent historian, Dr Harbans Mukhia, had observed in a luminous essay some years ago that the world over, development means a greater sense of responsibility and self-control, while in India, the exact reverse seems to be happening.

In the decade since then, this phenomenon has grown manifold. The ever-widening gulf cannot but exacerbate this, as can be seen from the turn of events such as the Gurjar agitation not too long ago, or the current Amarnath imbroglio. Conflicting claims on increasingly scarce resources such as land, water and energy hold the portent of acute civil strife.

On this Independence Day, I wonder yet again how long the stronger chicken wire and stickier gum will hold.

[Nayak]

Why Wilbur Ross Likes India

India's stock market has cooled down enough to suit Ross, who is buying $80 million of SpiceJet's convertible debt

by Nanette Byrnes

Two years ago, Wilbur Ross, an investor in distressed securities, set up a $300 million fund focused on India. He convinced India's Housing Development Finance Corp. (HDFC), a local giant, to partner with the fund, bringing its extensive network of local contacts and strong reputation to the venture. He staffed an office in Mumbai, run by managing director Ranjeet Nabha, a Dartmouth MBA who had been a vice-president at JPMorgan Chase (JPM) and later CEO of a software company. And then Ross proceeded to do very, very little.

Now, Ross is at last making a major move. On Aug. 11, the chairman of New York-based WL Ross & Co. announced his India fund would buy an $80 million chunk of convertible bonds issued by Indian discount airline SpiceJet (SPJT.BO). The once red-hot Indian stock market has cooled down enough to suit Ross, who made his name patching together the remnants of dying U.S. industries like textiles and steel. And several years of cutthroat competition—and more recently, record-high prices for jet fuel—have left India's nascent airline industry in particular need of help (BusinessWeek.com, 7/7/08).

More Indian investments from big-name Western investors like Ross are likely. There do still remain some industries that don't allow direct foreign investment, including retail (BusinessWeek.com, 8/13/08). However, generally over the past 15 years there has been a tremendous liberalization of such restrictions, says Deloitte consultant Ira Kalish, an expert on the Indian and Chinese markets. "Private equity and venture capital players are taking an interest in India," he says, "and I would expect to see more."
Staying Below Limits on Foreign Ownership

Like most Ross deals, this one is complicated. His firm is buying $80 million worth of SpiceJet's convertible debt, but only converting about $25 million of that into stock in order to stay below limits on foreign ownership of air carriers. At the same time, Dubai investment group Istithmar World Capital is exchanging its existing secured SpiceJet debt for $10 million in unsecured debt, freeing up cash that had been tied to that securitization. Goldman Sachs (GS) and NM Rothschild & Sons India combined to invest another $10 million.

The airline, which failed to hedge against the damaging rise in jet fuel costs and has racked up $20 million in unpaid airport fees and plane leases, needs the cash. But shoring up its day-to-day operations is just Step One for Ross, who will now join the board of directors. He sees broader promise in the chance to consolidate the industry. While Ross expects India's gross domestic product to grow at 6% to 7% a year, he thinks its large size and underdeveloped road transportation will keep demand for air travel rising at two to three times that growth rate. India's low per capita income will put discounters like SpiceJet in the best position, he says. The drop in oil prices has helped, too.

Long term, Ross is buying SpiceJet as a consolidation play, not a sole operator. "There are about a half-dozen of these low-cost carriers in India, all losing money," says Ross. "I think there's room for maybe two." A price war, combined with those unhedged jet fuel costs, has left competitors vulnerable.

"I think the [price war] will end because the other companies will run out of money and will run out pretty soon," he predicts. And already there has been some sign of consolidation with airline carriers Kingfisher and Deccah pairing up.
A Veteran of Korean and Japanese Markets

India isn't Ross's first foray into Asia. The investor, whose company runs almost $8 billion in investments worldwide, has been in Korea and Japan for many years. He operates in Vietnam and his portfolio companies have a dozen factories in China. But India's combination of fragmented industry and legal protections for creditors makes it an attractive market not just for setting up factories (as both his textile and auto parts companies have done) but also for bankruptcy and work-out investing.

While the service sector and skilled workers have fared well in India's economic rise, a strong rupee and weak rail and truck transportation have held back India's manufacturers, many of them smaller, local companies. "They are having a hard time competing on the international scene," says Ross. "To do a big global business, you have to have a large company, and we think there's a consolidation opportunity in India."

Ross's interest in the slow side of the Indian economy coincides with renewed government focus on expanding those sectors, says Jay Swaminathan, a professor at the University of North Carolina's Kenan-Flagler Business School. To correct the lopsided growth of the economy, Swaminathan says, New Delhi is paying more attention to businesses like manufacturing, infrastructure, and agriculture that help the rural and less educated who have been largely left out of the growth that has so benefited the urban intelligentsia.
Balance Sheets Burdened With Nonperforming Loans

Consolidation isn't a slam dunk, says Standard & Poor's (MHP) director Joydeep Mukherji. Laws protecting workers can make U.S.-style "rightsizing" tough to pull off, though Mukherji notes that companies can get around those by negotiating an acceptable deal with the union.

India has begun to work out some of the billions of dollars in nonperforming loans on bank balance sheets, the legacy of lax lending practices in the 1990s and early 2000s. Ross's single purchase prior to SpiceJet, of tweed maker OCM India, came via India's Arcil, an asset reconstruction company modeled partly on the Resolution Trust Co. that the U.S. set up for thrift assets in the 1980s.

Byrnes is a senior writer for BusinessWeek in New York .

[Nayak]

http://www.newstrackindia.com/newsdetails/12102

Equestrian industry booming in India
Kanpur/New Delhi, Sun, 17 Aug 2008 ANI

Kanpur/New Delhi, Aug 17 (ANI): As more and more people are getting hooked onto the sport of horse racing and polo, lots of opportunities for the Indian leather industry are opening up one of them being the equestrian industry.


A pioneer in producing unmatched quality of horse accessories is the leather industry of Kanpur that is today doing a laudable business.


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There are around 300 units in Kanpur alone, with an annual turnover of about 120 million dollars for exports to US, UK, Australia and Germany.


"When it comes to leather, Kanpur plays a key role for manufacturing the majority of products that are exported to Europe and UK. Generally, because of the availability of raw material, the leather industry is helping a great deal the equestrian market," said Syed Hussain, Owner GB Exports, Kanpur.


The industry is now venturing into Asian markets like Thailand and Korea as well.


It is the fine quality leather and excellence of workmanship, which has helped it gain worldwide popularity.


"In the couple of years, Indian Industry has grown 30 to 40 per cent. People prefer our products because our quality is very good, workmanship is excellent, tanneries are giving high quality leather compared to leather available abroad," said Achal Sood, owner of a website dealing in equestrian industry.


While Germany is popular for breeding world class racing horses, the riders around the world look on to India when it comes to horse riding equipment.


"Many big riders like Olympic Coach Sam and others only prefer Indian saddler. They prefer Indian leather. All over the world Indian leather is used in every saddle," said Angad, Show Jumper, Indian Team.


However, the Indian equestrian industry today has very few showrooms dedicated entirely to horse accessories.


It is mostly through international exhibitions or by sending samples to oversees clients that the manufacturers market their products. The Internet too has played a vital role in giving a boost to the business.


But the industry shows potential to overcome all the hurdles and deliver world-class products. (ANI)

[Vipul]

FDI inflows cross $10bn mark in Q1.

India is fast catching up with China in the flow of Foreign Direct Investment as capital inflows through this route has crossed $10 billion in the first quarter of this fiscal, said a Reserve Bank data.

Foreign Direct Investment (FDI) in the first quarter of FY09 has far exceeded the total FDI flows received by the domestic economy in 2005-06, it said.

The total FDI inflows into the country in the April-June period amounted to $10.073 billion, nearly one billion more than the total FDI inflows - $8.961 billion - in the 2005-06 fiscal, RBI said in its August report.

The FDI flow into India was less than $10 billion annually until 2005-06. It shot up to $22 billion in 2006-07 and $32 billion in 2007-08. China has averaged $50 billion annually in the past decade. If the first quarter trend continues, India could cross this fiscal $40 billion mark for the first time.

During April-June, FDI flows have doubled when compared to the same quarter of FY 2008, $5 billion.

Of the total FDIs reached here in the April-June period this fiscal, around $2.253 billion was on account of the acquisition of shares of Indian companies by foreign entities, RBI said.

While the momentum is expected to continue in the remaining part of FY09 on the back of a strong domestic demand, the pace of the growth may be a little lower compared to the preceding months.

Corporate investment also is expected to be robust this fiscal, as strong domestic demand is likely to push up the private corporate investments in the current fiscal but in a slower-pace owing to deceleration in global and domestic economies, the apex bank said.

“The private corporate investment in 2008-09 is likely to increase, although it may grow at a slower pace... Corporate’s incentives to invest are likely to remain strong in 2008-2009 owing to high domestic demand and high capacity utilisation rates amidst improved profitability of last few years,” the report said.

The capital investment intention of companies in the domestic market having institutional assistance up to the last fiscal amounted to Rs 1,48,350 crore as against Rs 1,25,248 crore envisaged for 2007-08, the apex bank added.

In the current fiscal, the proposed investment aggregates to Rs 1,73,173 crore, if the capital spending envisaged by companies raising funds from sources other than banks and foreign investors were added, RBI said.

“If the aggregate capital expenditure in FY09 was to surpass the level intended for the year 2007-08, the fresh envisaged capital expenditure in 2008-09 must be above Rs 71,934 crore,” the apex bank said.