Indian Economy: News and Discussion (June 8 2008)

[Suraj]

The FDI data just buttresses CII's recent analysis about how investment-led growth is helping to compensate for the shortfall in consumption led growth due to inflation and higher interest rates. Capital from outside is unhindered by local interest rates, and corporates still have significant accumulated cash reserves from the profits over the last four years, plus access to external borrowings, so that their interest rate concerns are not as significant.

The sectors where interest rates are a concern are the ones where the buyers bear the downside - such as real estate and EMI-based consumer goods. The manufacturers, especially the large ones, don't bear as much a risk here. Right now is the best time for a company to commit significant investment in additional capacities, when the market is soft and the competition is facing the same problem. It is also a good time to invest in infrastructure - roads for one - but GoI's attitude to the NHDP as been stepmotherly due to Vajpayee's legacy in it.

[Suraj]

Business Standard critique of the inflation data and its outdated statistical basis. What the article misses is that even the GDP data is suspect, since IIP (industrial production) also uses a 1993-94 base year, while overall GDP data is based on a 1999-00 base year, which makes the GDP base year revision rather meaningless.
Index failures

As the inflation numbers have surged into dangerous territory, there are clear instances of the weaknesses in the way in which the index is calculated, distorting the true number, which may be above or below what the index itself shows. Prices of commodities, which have risen rapidly, are adjusted with a lag, causing a disproportionate spurt in the index. While the index is supposed to capture market transactions, the prices of several commodities do not reflect the market reality. There are other infirmities too. The bottom line is that, if the existing index does not capture the underlying reality in price movements across the economy, it needs to be replaced with something better.

A few years ago, the government initiated the design of a Producer Price Index (PPI), which has a number of advantages over the WPI in accurately measuring the inflation rate in the economy. To place this in context, the best measure of inflation would be the GDP deflator, or the price index that converts GDP at constant prices into GDP at current prices. Since it mirrors the basket of goods and services measured in GDP, it captures the full range of price movements in the economy. Unfortunately, the GDP deflator comes out with too much of a lag to be able to respond effectively to changes in the inflation rate. For instance, the deflator for the April-June 2008 quarter, which will capture the dramatic developments on the price front during that period, will become available only on August 31. What the PPI would do is to balance the high frequency and short time lag of the WPI with the width of coverage of the GDP deflator. Because it is not dependent on the observation of market transactions, as the WPI is, it can cover a range of goods and (particularly) services not transacted in traditional wholesale markets. Price information is sourced directly from an identified set of producers of the entire list of goods and services included in the GDP calculations and the selling prices for defined units is obtained from them on a relatively high-frequency basis. For the Indian economy, in which services are so important, this approach would have filled a huge vacuum, besides making up for some of the other flaws of the WPI.

Unfortunately, this process seems to have stalled. Even as the GDP series was updated with weights for different activities being set to the base year 1999-00, the WPI (along with its companion, the Index of Industrial Production) still languishes with a base year of 1993-94. The dramatic changes in the Indian economy since then have simply not been introduced into two of the most critical indices. The country’s decision-makers surely deserve better. The issues standing in the way of a new index must be resolved as quickly as possible.

SEBI's reform drive

The last six months have been largely uneventful in a capital market that has been in a correction phase. Against this backdrop, the new Securities and Exchange Board of India (Sebi) chairman, CB Bhave, has trained his sights on primary market and mutual fund reforms, and the introduction of currency futures. The primary market in particular has sometimes looked like an organised lottery. Issues were oversubscribed 50- or 100-fold. A rampant grey market had emerged. Stocks would list at unrealistically high premiums and then suddenly lose momentum. And, investors’ money would remain blocked as share allotments usually amounted to only a small percentage of those applied for.

In response, Mr Bhave has questioned the need for retail investors’ money to leave their bank accounts till allotment. He has announced a pilot project, wherein the retail investors’ money will be blocked in his bank account to the extent of the bid amount, and on allotment the bank will transfer only the amount for allotted shares, and free the remaining funds. The Sebi chairman also wants to cut the IPO allotment process to 3-5 days, from the present 21, and towards this end the application process can be made electronic; the allotment is already in demat form. Meanwhile, QIBs have so far shelled out only 10 per cent of the bid amount with their IPO applications. Mr Bhave wants them to make full payment of their bid amount along with the IPO application. This should result in better price discovery, and the grey market can be killed.

Relaxing the rules for rights issues and qualified institutional placements (QIPs) is another step in the right direction. The Sebi chairman has allowed companies to price QIPs on the basis of the average price of two weeks before the issue, against the earlier requirement of taking the higher of the average six months’ or of the average 15 days’ price. He has also reduced the time taken to complete a rights issue from 109 days to 43. Both steps will enable companies to raise funds more easily. The introduction of currency futures and interest rate futures will now introduce a wider bouquet of products. As for mutual funds, Mr Bhave has set up an advisory committee headed by S A Dave, a former Sebi chairman, to go into the outstanding issues. The direct investment route in mutual funds, where the investor will not bear any load, has not taken off. Thus, there may be a need for a change in the compensation of the distributor, which should shift from the fund house to the investor. Meanwhile, legalising load rebate will ensure efficient pricing for the mutual fund investor, to the extent of the services offered by the distributor.

What else? Sebi has been slow in penalising offenders. With consent orders becoming a reality, especially after the Nissan Copper case, Sebi needs to figure out how the investor at the short end of the stick gets his dues. And in a globalised capital market, Sebi needs to worry about not letting the market shift out of the country, be it in participatory notes or Indian futures trading on overseas exchanges.

Article about FinMin's losing clout:
North Block`s decline

Has the finance ministry lost the clout it used to enjoy within the government? Two different events in the last ten days have prompted this question. One, the finance ministry has questioned the department of telecommunications’ move to go ahead with the roll-out of 3G telephone services and to announce its guidelines. Two, the Union Cabinet has approved the Sixth Pay Commission’s recommendations for implementation. Not only that, it has enhanced the Commission’s award and rejected suggestions of postponing the date of its enforcement and transferring the arrears payment to the Employees’ Provident Fund account.

In one instance, the finance ministry tried to prevent the kind of fiscal profligacy that can play havoc with the government’s finances and the economy. And in the other instance, the ministry tried to assert its right to be consulted on the question of framing a policy that has substantial financial implications. In both the cases, it got over-ruled. In respect of the Pay Commission recommendations, its sensible advice got superseded by the government’s political considerations. With regard to the 3G telephone service guidelines, the finance ministry’s objections were set aside simply because it either had a poor argument or it failed to make out a convincing case.

But the point to be noted here is that even a poor argument in the early days of economic reforms in the 1990s would have won the finance ministry any battle that it wished to be engaged in. North Block, where the finance ministry is located, enjoyed a clout that was formidable and could influence decision making by different economic ministries in the 1990s. Those days, the finance ministry played a big role in deciding foreign investment norms for different sectors or, for that matter, in framing the first telecom policy that was unveiled in 1993. That clout has considerably waned over the years. And that’s the big difference between the finance ministry of the 1990s and what it is now.

[Nayak]

http://www.telegraph.co.uk/money/main.j ... dia119.xml

India is closing gap with China

By Peter Hutchison, in Mumbai
Last Updated: 1:32am BST 19/08/2008

The amount of foreign direct investment (FDI) in India for the first quarter of this financial year exceeded the total received in 2005/06, the country's Reserve Bank said.

In further evidence of the expansion of the world's fastest-growing economy, data released by India's central bank showed that $10bn (£5.4bn) of FDI was received in the first quarter of the fiscal year, which ran from April to June.

The news came just a few days after Tesco became the latest multinational company to announce it was investing in the Indian market.
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The Q1 figure smashed the total FDI in 2005/06, which was just short of $9bn, the RBI said in its latest financial report. If the first-quarter trend continues, then India is likely to meet, and possibly break, its FDI target of $35bn for 2009.

Yesterday's announcement was further evidence that India is catching up with China as the developing nation most attractive to Western investors.

China averages $50bn FDI every year, but if India continues to develop at the current rate there could be parity within a decade.

Of the $10bn made in Q1, slightly more than $2.2bn was a result of the purchasing of shares by foreign companies in Indian businesses.

To highlight the speed with which India's economy is growing, a Mumbai newspaper noted that the total accrued through FDI was less than $10bn annually in 2005/06 before exploding to $22bn the following year and $32bn in 2007/08.

Tesco announced last week that it is to supply thousands of Indian shopkeepers and supermarkets with its products in a multi-million-pound deal with Indian conglomerate Tata.

[Avinash R]

Reliance Communications launches BIG TV DTH
Mumbai, Aug 19
Reliance Communications today launched the country's first mpeg-4 quality Direct to Home (DTH) service --Big TV, with an aim to capture five million customers in the first 12 months of operation.

Offering the biggest bouquet of more than TV, music and Movie channels, BIG TV would be rolled out in over one lakh outlets across 6500 cities and towns in the country.

Speaking to newsmen at the launch here, CEO of Reliance Big TV Arun Kapoor said that the service aimed to capture 40 per cent of the marketshare of around 12 to 13 million connections by next year as against the current offering of five million.

He said that DTH had the potential to emerge a 60 million connections industry by 2012 as the penetration was only a mere six million from amount 120 million TV households in the country currently.

BIG TV would also launch its own channels within the next 12 months besides offering IPTV within next two to three months. Work on IPTV rollout was on in full swing, he added.

Mr Kapoor said BIG TV would be India's first fully Digital Home Entertainment Service on world's most advanced MPEG4 Direct-To-Home (DTH) Platform. BIG TV DTH, at its launch stage, would offer over 200 channels with digital quality picture and sound, significantly higher than any other DTH or Cable Operator in India. The feature-rich BIG TV DTH Service would be available in over 1 Lakh outlets across 6500 towns, making it by far the country's largest retail rollout of a Home Entertainment product and service.

He said ''The huge potential of a quality and value offering in the Home Entertainment Service market offers us a unique opportunity to tap the strength and synergies of telecommunications and entertainment sectors embedded within Reliance ADA Group. With the launch of BIG TV DTH, we aim to offer a unique viewing experience in millions of Indian Homes, further accelerate the growth momentum and enhance value for many million shareholders of Reliance Communications''.

Tracing the ethos and philosophy of Reliance ADA Group, BIG TV DTH at launch is offering 100 channels more than any competing offering, has a retail presence of 2-3 times more than any other DTH operator and offers services in more than double the number of cities than any other DTH operator has still reached.

Mr Kapoor said ''Providing a Better Value proposition to BIG TV customers by offering superior content and service at prevailing market price points is an integral part of our strategy to achieve leadership position within first year of launch''.

[Katare]

Backward states better ranking in investment sweepstakes

Foreign capital inflow hits $22 bn by half time

China will receive around $100Billion in FDI this year. So on a GDP normalized basis India is receiving more FDI than China at these quarterly rates.

Credit growth showed 6% upswing in '07-08: RBI

This is not 6% growth in credit offtake from Banks but total growth has gone up by 6% of GDP to 26%GDP loaned by Banks to economy. This is humongous growth. Combine this with FDI and unpresidented corporate profits it points towards huge ongoing capacity agumentation.

[Suraj]

Record wheat harvest likely

Farmers in India, the world’s second-biggest wheat producer, may increase planting starting October because of above-average rainfall, possibly helping the nation gather a record harvest for a second year.

“Rains are good and conditions seem to be very favorable” for wheat plantings this year, Food Secretary T Nanda Kumar said in an interview in New Delhi yesterday.

The country may have harvested a record 78.4 million tonnes of the grain in the year ended June 30, up 3.4 per cent from the previous year, the farm ministry has said.

Rainfall has been at least 25 per cent above normal in the main wheat-growing states of Uttar Pradesh, Punjab and Haryana in the June 1-August 13 period, according to the weather office. Showers across the nation have been 2 per cent more than average.

RBI surprises govt with a Rs 15000 cr profit share

The Reserve Bank of India (RBI) has transferred a record Rs 15,011 crore to the government as surplus from its profits for 2007-08. This is significantly higher than what the government had budgeted to receive from the financial sector, including the surplus from RBI and dividend from banks and financial institutions in which it has equity stake.

RBI’s domestic income could be higher this year, as the general interest rates were northbound during most part of the year. Besides, the central bank had also hiked repo rates (the rate at which it lends against securities) for banks during the year — a move which could have resulted in higher interest income. As for the income from foreign sources, even the yields on top-rated sovereign paper were seen hardening. Moreover the central bank has also withdrawn deposits parked with foreign banks, many of which have been impacted by the subprime crisis.

The central bank follows an accounting year of July-June. The April-June quarter has seen a substantial rise in yields and also an increase in RBI intervention in the foreign exchange market. RBI’s dollar sales in the forex market also add to its surplus, as it ends up selling dollars at a profit.

India Inc's investment plans surge to Rs 10 trillion: Assocham

India Inc seems unperturbed by signs of global recession, with their capacity expansion plans surging past Rs 10 trillion in the first six months of this year nearly double the figure for the previous five months, a study said.

Indian companies have announced capacity expansion investment worth Rs 10,50,950 crore ($240 billion) in the first six months of 2008, against Rs 5,67,851 crore ($130 billion) between July-December 2007, industry body Assocham said in a report on state-wise investments.

Out of the total 24 states tracked by the Chamber Research Bureau Andhra Pradesh, Maharashtra, Orissa, Rajasthan and West Bengal were the most preferred destination by the private players for making investments in the first half of 2008.
Maharashtra topped the chart with investment commitments worth Rs 1,20,065 crore in sectors like power, real estate, automobiles, ports and shipping, Assocham President Sajjan Jindal said.

The biggest of the announcements were made by Tata Power at Rs 25,000 crore, planning to raise power generation capacity to 12,861 MW for the next five years, Reliance Industries for setting up semi conductor plant and other micro -technology units, at an expenditure of Rs 21,666 crore for the next 10 years.

[amit]

Foreign capital inflow hits $22 bn by half time

China will receive around $100Billion in FDI this year. So on a GDP normalized basis India is receiving more FDI than China at these quarterly rates.

Katare, good point.

I haven't been following this as closely as I should have. As far as I can recall, there used to be a discrepancy between what India considers as FDI and what China and the rest of the world considers FDI, as a result of which Indian flows were under reported.

Does this discrepancy still exist? If so the actual inflows, when compared to China, should be even higher, na?

Credit growth showed 6% upswing in '07-08: RBI

This is not 6% growth in credit offtake from Banks but total growth has gone up by 6% of GDP to 26%GDP loaned by Banks to economy. This is humongous growth. Combine this with FDI and unpresidented corporate profits it points towards huge ongoing capacity agumentation.

Capacity agumentation is just what the doctor ordered (pun intended)!

One sure way to ensure the next jump in the sustainable growth percentage.

Nice to see some good news in the time of high inflation and $100+ a barrel.

[Rupesh]

Astrologers make a killing as bulls turn to stars( finally its all in your stars )
21 Aug, 2008, 0400 hrs IST,Prashant Mahesh, ET Bureau

MUMBAI: Do stars, moons and the planets add up to profits at the stock market? To some people, the answer to this would be in the affirmative. More than anything else, it is important to understand that the dependence on astrology comes from volatility in the market. If one is in the midst of a bull run, the bucks just keeping in. Today, trends clearly indicate that a lot of investors are betting on astrology to guide them through the choppy market. This is often the time, when caution replaces greed, and stability is what is welcomed.

“Volatility and uncertainty in the market attract clients to astrology,” says Lt Col Ajay, CEO, Astromoneyguru.com, a company offering astrological services with a focus on the market. Ask him for his next prediction and pat comes the answer — crude oil prices, over the next 15 days, will again reach a level of $130.

It is not just about predictions. The element of a sound and a basic understanding of how the stock market functions can hardly be ignored. As is well known, the stock market is typically affected by factors such as companies’ fundamentals, technicals, the political scenario, to name a few. “We give recommendations based on market timing, psychology and political events,” says Dharmesh Joshi of ganeshaspeaks.com.

Strangely enough, a company’s fundamentals are never taken into consideration by the astrologers. So, how do they go about it? They start off with basic information like the date, time and place of one’s birth. Based on this, they will be in a position to predict what type of an investment is best suited to a person. This could be short-term or long-term in nature.


If, for instance, it is short-term, one is told on when one should trade and which stock or sector will be the best investment. It is not unusual to receive advice on the lines of trading in stocks starting with the letter “A” and belonging to sectors such as cement, steel or oil and gas. If the luck of that letter works in the investor’s favour, he will not have a reason to complain.

A player like ganeshaspeaks.com got into the business of predicting stock market trends five years go. Today, the client base in excess of 150 and is growing by 20% each year. Mr Joshi is quick to admit that astrology is not 100% accurate, but rather it improves the rate of success by 20-25%. He charges Rs 1,000 as a monthly fee and speaks of stock brokers and fund managers as his clientele. Indians, who today live in Saudi Arabia, London and the US, bank on his recommendations which reach them through email.

Astromoneyguru.com, meanwhile, has seen its client base jump four-fold from 1,000 to about 4,000 over the past three years. They offer services on stocks, commodities and metals. It has a 15-member team and services its clients out of Jaipur. Predictions are made on an hourly basis, weekly and a monthly basis. It does not come cheap and the fees could vary from Rs 3,500 per annum to as much as Rs 1 lakh per annum depending on the type of services required.

At the end of it, what is required is the coming together of three critical factors — an understanding of markets, astrology and a certain level of computer literacy. There are barely a handful who are good at all of these.

http://economictimes.indiatimes.com/Ast ... 386923.cms

[vina]

Wait for the yellow matter to hit the fan in the stock markets tomorrow as they open. It aint over yet baby. The small guys are going under, wait for a big guy to go under for the fun to REALLY start.

Lehman has been active in the Real Estate space with private equity plays in India. Lehman will liquidate holdings in EMs where they can still make money and get out and all the builders and others who have been selling projects to Private Equity (there was a reported sale of a 5 star hotel project in ORR today in the papers) guys will take a hit.. Expect real estate to correct further. The prices have to drop.. (where yours truly is waiting patiently with cash on hand..)

Lehman in deep trouble. Looks like it will be touch and go. If other banks start pulling credit lines and large withdrawal notices come in, it will be a classic run on the bank and Lehman will be another victim of the credit crisis.

If that happens the two "fixed income / mortgage backed securities specialists" in Wall St would have gone down the toilet. Those two raked it in when the interest rates were dropped to historical lows, and are all set to get wiped out when the interest rates go upwards .

The New York Times
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August 21, 2008
Lehman Outlook Dims on Failed Sale Report
By REUTERS

Filed at 8:42 a.m. ET

LONDON (Reuters) - The outlook for Lehman Brothers Holdings Inc <LEH.N> darkened further on Thursday as a newspaper reported that an intended asset sale had collapsed and a Citigroup analyst forecast big losses for the group.

The fourth-largest U.S. investment bank has taken a $7 billion hit from credit-related writedowns and losses since the start of the global crisis and is forecast to write down more.

Lehman is concerned its capital cushion is not enough to absorb losses, and people close to the matter said this week it is considering selling at least a part of its asset management business.

The Financial Times said Lehman's talks with China's biggest brokerage, CITIC Securities <600030.SS> and state-owned Korea Development Bank (KDB) <KDB.UL> on a sale of up to half its shares had failed, fuelling speculation about the U.S. bank's efforts to raise more capital.

CITIC told Reuters it had held no formal talks about buying a stake in Lehman, while Lehman and KDB spokespeople declined to comment.

A KDB official, who declined to be identified, said the South Korean bank was scaling back its overseas assets and staff to reduce exposure to volatile foreign markets.

The note by Citi analyst Prashant Bhatia added weight to a forecast by JPMorgan Securities on Tuesday that Lehman will take a further $4 billion in writedowns tied to losses from mortgage-related investments.

Bhatia cut his third-quarter outlook for Lehman, Goldman Sachs <GS.N> and Morgan Stanley <MS.N> and said the U.S. investment banks might incur further writedowns, mainly on their mortgage assets, with Lehman forecast to suffer the biggest hit at $2.9 billion.

The analyst widened his third-quarter loss estimate for Lehman to $3.25 a share from 41 cents a share.

However, Bhatia said he saw a "lower probability" Lehman would sell its Neuberger Berman asset management business or raise capital in the near term.

"Even under the potentially more stringent rating-agency guidelines related to the amount of preferred securities in the capital mix, we anticipate that Lehman can absorb over $3 billion of after-tax losses without adding more common equity," he said.

At 8:22 a.m. EDT in Frankfurt, Lehman shares were trading down 0.1 percent at 8.95 euros. The stock closed Wednesday in New York at $13.73, valuing the bank around $9 billion.

The shares have plunged more than 80 percent since early 2007.

The Wall Street Journal said the U.S. Federal Reserve acted on rumors last month and called Credit Suisse Group <CSGN.VX> to see whether it had pulled a credit line from the bank.

Credit Suisse told Federal Reserve officials that it had no intention of pulling the line of credit, the paper cited people familiar with the matter as saying.

Fed officials contacted Credit Suisse last month, but it is unclear whether the move occurred before or after the U.S. Securities and Exchange Commission subpoenaed dozens of hedge funds and financial firms about four Lehman-related rumors, the paper said.

Lehman Brothers and Credit Suisse spokespeople in London declined to comment.

(Reporting by Olesya Dmitracova; editing by Karen Foster)

[Singha]

there's going to be more interest in domestic players in the next round
of iim placements compared to hk, sin, london and nyc

[derkonig]

^^^
you bet sirji..
the summer internships trend will give a very good picture of the upcoming placements trend...

[Kamal_raj]

India set to achieve $40 bn FDI in FY09

http://www.expressindia.com/latest-news ... 09/353095/

[ramana]

Does India have to look at exports?

The New New World Order


The guy says Indian growth will be reduced due to infaltion from food and energy policies on India. But will still be there.

My point is should there be an goods exports string to the Indian bow?

[Suraj]

India finalises free trade agreement with ASEAN

The formal pact will be signed this December at the India-Asean summit at Bangkok, which is expected to be attended by Prime Minister Manmohan Singh.

The breakthrough comes after six years of negotiations for the trade pact, which is expected to add $12 billion by 2010 to trade between the participating nations.

A SNEAK-PEEK AT THE INDO-ASEAN FTA
* Reduces tariffs to zero in over 4,000 goods out of 5,000 that are traded. To be done in a phased manner over six years
* Partial reduction in import tariffs on highly sensitive farm goods. Tea, coffee — 45%, pepper — 50%, crude palm oil — 37.5%, refined palm oil — 45%
* Sensitive list of goods with partial duty cuts — 606 items, (Agricultural — 16, Textile — 304, Machinery & auto — 60, chemicals & plastic — 226)
* Negative list with no duty cuts — 489 items. (Agricultural — 302, Textile — 81, Machinery & auto — 52, chemicals & plastic — 32, Others — 22)
* Operational from Jan 1, 2009, Deal to be signed in December, 2008 at Bangkok
TRADE SNAPSHOT
* Bilateral Trade (Apr-Feb 07-08) — $34.38 billion which is 9.59% of India’s global trade
* Exports — $14.02 billion, Imports — $20.36 billion

The deal comes at a time when the Doha round of world trade talks are stalled.

The India-Asean FTA also comes at a time when China has already signed a similar pact with the economic bloc, as a result of which bilateral trade between them soared to over $171 billion last year.

Today, a joint statement issued after a meeting of trade ministers from India and key Asean members said the agreement will facilitate the creation of an open market for 1.7 billion people with a combined gross domestic product of $2.4 trillion.

During the course of the FTA talks, several issues had emerged as stumbling blocks, which included composition of the negative list (trade items that are outside the purview of duty cuts mandated by the pact) and tariff cuts on five highly sensitive farm products (see chart).

In fact, India had to compromise on several of these issues and accede to demands of nations like Vietnam, Indonesia and Malaysia. The sticking points included reducing the number of items in the negative list, reducing tariffs on highly sensitive farm products as well as Rules of Origin, norms that ensure that products from non-Asean countries like China are not routed to India at zero duty under the FTA.

Once the deal is operational — which is likely from January 2009 — the signatories to the pact will begin cutting import tariffs in a phased manner.

Normal goods will see import duties reduced to zero over six years, items in the sensitive list, will see partial tariff reductions over a longer period of time (see chart).

Talks for the India-Asean FTA began during the National Democratic Alliance government, with both sides initialling a framework agreement in late 2003. It is a measure of the importance that the current United Progressive Alliance (UPA) government has placed on expanding India’s role in trade with the Asean nations that the pact has been finalised.

The UPA had internal concerns over reducing tariffs on five highly sensitive farm products — tea, coffee, pepper crude, refine palm oil. In fact, UPA chairperson Sonia Gandhi and minister of state for commerce Jairam Ramesh had last year written to Prime Minister Singh expressing concern over the possible adverse impact of such a move.

Editorial: Over-estimating poverty?

The World Bank recently published the results of a research project on global poverty. The main innovation in the research methodology is the development of a new poverty benchmark, based on Purchasing Power Parity (PPP) exchange rates and domestic prices for 2005. The previous benchmark was based on 1993 numbers, which were clearly inadequate for capturing the dramatic changes in the Indian economy and, for that matter, emerging economies in general over the last decade.

From the Indian perspective, while the broad trends are indisputable, several questions arise from the numerical estimates of poverty. With the new poverty benchmark of $1.25 per capita per day, which translates into Rs 21.6 per day in urban areas and Rs 14.3 per day in rural areas at the 2005 prices, 42 per cent of Indians were estimated to be below the poverty line in 2005. This was substantially down from 60 per cent in 1981, but will still come as a shock to people, who are used to thinking of poverty incidence being in the low 20 per cent range. Very significantly, both from the perspective of the methodology for the study and the design of poverty alleviation programmes in India, the proportion of people who had less than a dollar a day, a popular benchmark, was estimated to be 24 per cent in 2005, down from 42 per cent in 1981, which brings it quite close to the official Indian estimates of poverty. This means that 18 per cent of Indians, about 200 million people, earn and spend between $1 and $1.25 a day. These are people who would not be considered poor by the system and therefore do not have access to various entitlements but have a standard of living not very different from the “official” poor. Two hundred million people falling through the cracks in this manner is, politically speaking, a ticking time-bomb.

This is where some concerns about the numbers are appropriate. In an article in this newspaper last week, Surjit Bhalla criticised the new PPP numbers and the benchmarks based on them as being completely inconsistent with other indicators of growth and development. His analysis suggests that, with the new numbers, emerging Asia as a region looks far worse off than with the old numbers. Virtually everybody who is doing business in emerging Asia today would dispute that fact; for most products and services, the last decade has unquestionably been a boom phase. The notion that a large number of first-time consumers for various goods and services can generate exponential rates of growth in demand for long periods of time has been validated for several products in all the countries in the region. Specifically in the Indian context, the recent record of penetration of products such as two-wheelers and mobile phones, not to mention a number of fast-moving consumer goods, challenges the estimate that there is such a large number of people on the fringes of the official poverty line. No one should dispute the fact that poverty in India is way too high and the quality of life of even the near-poor is unacceptable. However, the danger in over-estimating the problem is that it might evoke the wrong policy response, focusing on the immediate rather than the important.

[Suraj]

India's economy grows at 7.9% in Q1

India's Gross Domestic Product (GDP) growth for the April-June 2008 period
has slowed down to 7.9 per cent, as against 9.2 per cent over the
corresponding quarter of the previous year. The GDP has been showing an
average growth of over 8 per cent over the last four years.

The economic activities which registered significant growth in Q1 of 2008-09
over Q1 of 2007-08 are, 'manufacturing' at 5.6 per cent, 'construction' at
11.4 percent, 'trade, hotels, transport and communication' at 11.2 per cent,
'financing, insurance, real estate and business services' at 9.3 per cent,
and 'community, social and personal services' at 8.4 per cent.

The growth rates in 'agriculture, forestry & fishing', 'mining & quarrying' and
'electricity, gas & water supply' are estimated at 3.0 per cent, 4.8 per
cent and 2.6 per cent, respectively during this period.

The production of crops rice, wheat, coarse cereals and pulses during the
Rabi season (which ended in June, 2008) of 2007-08 recorded growth rates of
3.3 per cent, 3.4 per cent, 8.6 per cent, and (-) 7.9 per cent, respectively
over the production in the corresponding season of previous agriculture
year. Among the commercial crops, the production of oilseeds declined by
12.6 per cent during the rabi season of 2007-08, while the production of
cotton and sugarcane recorded growth rates of 14.0 per cent and (-) 4.2 per
cent, respectively during the agriculture year 2007-08.

The GDP data, released by the Central Statistical Organisation (CSO),
Ministry of Statistics and Programme Implementation here today said that
among the services sectors, the key indicators of railways, namely, the net
tonne kilometers and passenger kilometers have shown growth rates of 9.3 per
cent and 7.0 per cent, respectively during Q1 of 2008-09.

In the transport and communication sectors, the production of commercial vehicles
, cargo handled at major ports, cargo handled by the civil aviation, passengers
handled by the civil aviation and the total stock of telephone connections
(including WLL and cellular) registered growth rates of 9.1 per cent, 8.8
per cent, 8.3 per cent, 4.4 per cent and 44.8 per cent, respectively during
Q1 of 2008-09 over Q1 of 2007-08. The other key indicators, namely,
aggregate bank deposits, and bank credits have shown growth rates of 21.1
per cent, and 25.8 per cent, respectively during Q1 of 2008-09 over Q1 of
2007-08.

The Index of Industrial Production (IIP), the index of mining, manufacturing
and electricity, registered growth rates of 4.7 per cent, 5.6 per cent and
2.0 per cent, respectively during Q1 of 2008-09, as compared to the growth
rates of 2.7 per cent, 11.1 per cent and 8.3 per cent in these sectors
during Q1 of 2007-08. The key indicators of construction sector, namely,
cement and finished steel registered growth rates of 5.8 per cent and 4.5
per cent, respectively during Q1 of 2008-09, as against the growth rates of
7.2 per cent and 5.4 per cent, respectively in Q1 of 2007-08.

[Vipul]

15 of world's top 20 pension funds head for India.

[shyam]

India finalises free trade agreement with ASEAN

I think, while signing these treaties, India should add a clause that these countries would protect human rights of Indians working and living in those countries. Any violation of that can allow India to relook at treaty agreements with specific country involved.

[Katare]

Exports up 31.2%, crude oil pushes import bill by 48.1%

Trade deficit will become a major problem in next couple of quarters if patrolium prices are not increased to rationalize demand. Oil imports are @ 60% of exports revenue which clearly is not sustainable level. I expect Rs to further depriciate to 48-49 level.

[Suraj]

Trade deficit will become a major problem in next couple of quarters if patrolium prices are not increased to rationalize demand. Oil imports are @ 60% of exports revenue which clearly is not sustainable level. I expect Rs to further depriciate to 48-49 level.

Oil prices have softened recently, but any significant recapitalization efforts directed at Fannie/Freddie (which probably will happen) will cause another monetary flood that will send oil and commodities up again. Another upside is potential for greater capital flows as the investment led growth over the fiscal attracts more foreign capital. Remains to be seen how far the two sides balance each others, in terms of the Rs/$ exchange rate. It is just as well that there's a significant number of SEZs coming onstream over this fiscal, as they will further contribute to export led output growth and in the process buttress the Rupee.

[Prem]

Long term trend in Crude price is Southward. Crude lost close to 5$ a barrel today . By 2012 almost 6 million barrels a day will be added to daily supply.100$ a barrel is not sustainable . Iranian might try this by cutting the production but wont last long.

[Katare]

Prem, The long term crude oil trends are clear. I am worried about short term stuff like next year or so. Eventually time averages out everything but the ones who stand unhurt/least-hurt and firm in difficult times are the ones benefit most when good times come. The Indian economic policy makers must take good, hard & long look at next couple years and I hope they would make right trade-offs with focus on long term sustainability of our growth model.

China has just passed a massive $56 Billion economic stimulus package to prop up sagging economy which has slowed down to an abysmal rate of little over 10%.

With Olympics over, significant appreciation of Yuan and petroleum prices rationalized they are expecting a sustained slowdown. One has to be impressed with Chinese proactive management of economy. In our case it was rather disappointing to see that headline inflation almost tripled within a few months while whole nation and economist were sleeping. As usual Indian govt is fire fighting on war scale to control the inflation monster which should have been kept in cages with proactive measures.

The next few quarters are going to be pretty tough and I hope we would not let things slip out of hands. I would be mighty disappointed if we have make another take-off attempt.

[Prem]

Katare ji,
I concur. India need better economic management.

[Suraj]

I'm not very pessimistic. For one, I discount the GDP growth numbers due to the questions over the IIP and associated data. These questionsa aren't merely BR staple - they've gone mainstream with Business Standard heavyweights repeatedly underlining the same issue. The same problem also overstates inflation because of spikes in a small set of items being amplified in the overall index.

Also, I believe the effect of the SEZs are being understated, in addition to all the additional domestic capacity. They have the potential to significantly amplify export growth in value added items. Just as oil price pressure affect our exchange rate downwards, the falling exchange rate pushes up export competitiveness, compensating for it.

Something I've intended to do for a while is construct a data series of corporate performance data over the last few fiscals, sorted by industry, compared roughly against GDP growth rates for that sector. It would give a better picture of where skewed GDP projections exist. We're using a 15 year old IIP base year. More than just a matter of numbers for GDP H&D, precision of response is tied to the precision of data available.

[Prem]

Bloomeberg reporting GOI has just fired the RBI governor.

[Suraj]

It was certainly not so dramatic, and YV Reddy was not 'fired'. His term was due to end, and there was some debate over the last 2 months as to whether to give him an extension until after elections, or pick a new RBI head. They chose the latter. Reddy appears to be less of an inflation hawk than Subbarao, so it would be hardpressed to see GoI favouring the latter, since Finance Ministry has often stated it prefers softer interest rates:
Subbarao May Raise Indian Rates After Taking Over From Reddy

Duvvuri Subbarao, an advocate of higher interest rates as the top bureaucrat at India's Finance Ministry, now has the chance to turn his words into action.

Finance Minister P. Chidambaram yesterday named the 59- year-old Subbarao to succeed Yaga Venugopal Reddy as governor of the Reserve Bank of India. Raising rates is the ``obvious'' answer to surging prices, Subbarao said in a July 28 interview with Bloomberg Television.

The appointment comes two weeks after the government's chief economic adviser, Arvind Virmani, urged the central bank to tighten policy to bring inflation down from a 16-year high. Spiraling costs have contributed to Prime Minister Manmohan Singh's Congress party losing ground in nine of 11 state polls since January 2007. A national election must be held before May.

``India has an election coming up and governments have lost elections in the past on inflation,'' said Maya Bhandari, senior economist at Lombard Street Research Ltd. in London. Subbarao ``needs to be much tougher with monetary policy'' than Reddy was.

Reddy's five-year term ends this week. He's been raising borrowing costs since 2004 to prevent the world's fastest growing major economy after China from overheating. Inflation surged to 12.6 percent last month after the government raised fuel costs to cut its subsidy burden. It was the biggest gain since Singh, then finance minister, started to open the economy to foreign investors in the early 1990s.

[Singha]

great. my home loan is already at 11.75% and they had to appoint stalin as komissar of
interest rates

[Katare]

I'm not very pessimistic. For one, I discount the GDP growth numbers due to the questions over the IIP and associated data. These questionsa aren't merely BR staple - they've gone mainstream with Business Standard heavyweights repeatedly underlining the same issue. The same problem also overstates inflation because of spikes in a small set of items being amplified in the overall index.

Also, I believe the effect of the SEZs are being understated, in addition to all the additional domestic capacity. They have the potential to significantly amplify export growth in value added items. Just as oil price pressure affect our exchange rate downwards, the falling exchange rate pushes up export competitiveness, compensating for it.

Something I've intended to do for a while is construct a data series of corporate performance data over the last few fiscals, sorted by industry, compared roughly against GDP growth rates for that sector. It would give a better picture of where skewed GDP projections exist. We're using a 15 year old IIP base year. More than just a matter of numbers for GDP H&D, precision of response is tied to the precision of data available.

Suraj,
I am not pessimistic on economy; I have always shown more optimism and trust on fundamentals of Indian economy than most at BRF. What I am worried about is short term political compulsions mixed with inaccurate data driving wrong economic policy response to create serious dent in the macros. Usual attitude of “sleep till shit hits the fan” doesn’t inspire much confidence either. Weakest link seems to be Rupee’s over-valuation at the moment with oil, its derivative products (fertilizers, pesticides, bitumen etc) and other commodity price boom being culprit. I would not count on export growth push from a weaker currency compensating for imports in the age where export destination markets are so sluggish. Also SEZ's would not make a significant dent in export markets in next couple of quarters, they are more of a long term big-bang trump card.

Here are the two new items that sorta shows both side of the coin......


Oil heads towards $100 as Gustav fades

Rupee at new 17-month low despite RBI move

[Katare]

It was certainly not so dramatic, and YV Reddy was not 'fired'. His term was due to end, and there was some debate over the last 2 months as to whether to give him an extension until after elections, or pick a new RBI head. They chose the latter. Reddy appears to be less of an inflation hawk than Subbarao, so it would be hardpressed to see GoI favouring the latter, since Finance Ministry has often stated it prefers softer interest rates:
Subbarao May Raise Indian Rates After Taking Over From Reddy

Duvvuri Subbarao, an advocate of higher interest rates as the top bureaucrat at India's Finance Ministry, now has the chance to turn his words into action.

Finance Minister P. Chidambaram yesterday named the 59- year-old Subbarao to succeed Yaga Venugopal Reddy as governor of the Reserve Bank of India. Raising rates is the ``obvious'' answer to surging prices, Subbarao said in a July 28 interview with Bloomberg Television.

The appointment comes two weeks after the government's chief economic adviser, Arvind Virmani, urged the central bank to tighten policy to bring inflation down from a 16-year high. Spiraling costs have contributed to Prime Minister Manmohan Singh's Congress party losing ground in nine of 11 state polls since January 2007. A national election must be held before May.

``India has an election coming up and governments have lost elections in the past on inflation,'' said Maya Bhandari, senior economist at Lombard Street Research Ltd. in London. Subbarao ``needs to be much tougher with monetary policy'' than Reddy was.

Reddy's five-year term ends this week. He's been raising borrowing costs since 2004 to prevent the world's fastest growing major economy after China from overheating. Inflation surged to 12.6 percent last month after the government raised fuel costs to cut its subsidy burden. It was the biggest gain since Singh, then finance minister, started to open the economy to foreign investors in the early 1990s.

I think it has always been other way, YV Reddy trying to raise interest rates and FM asking him to keep 'em down. PC went as far as restricting PSU banks from raising rates when Reddy increased CRR 3 times in a row. It's just as simple as is it looks "his tenure is over and it's time for a new face to come take the command". Subbarao sahib has very impressive resume. He is IIT Kanpur fallow, He topped civil services exam in 1972 and then he went to US to get masters degrees in economics and eventually got a PHd in economics too. Certainly seems qualified and learned. Best of luck to him and rest of us too.

[Suraj]

Subbarao does appear to have great paper credentials - IIT-K grad, Civil Services topper, Economics PhD and an MIT stint. Lets see how he does in reality.

Very interesting critique on RBI's special market operations (SMO) window for state oil companies to sell their bonds (excerpts):
RBI as an oil spigot ?

The RBI, between June 5 and August 8 in effect provided US$4.4 bn to government-owned oil companies in exchange for oil bonds (outright purchase or collateralised repo). The SMO from the perspective of the RBI is effectively a swap on the assets side of its balance sheet, specifically, rupee-denominated oil bonds for foreign currency reserves. Since the liabilities side of the RBI’s balance sheet is unchanged, the SMO is monetary neutral.

Notwithstanding the language reminiscent of central bank provision of market liquidity for financial intermediaries during times of crisis, the case for the SMO premised on “systemic implications for the smooth functioning of financial markets” is not entirely cut and dry. However, the SMO has everything to do with maintaining petroleum imports into the country. The SMO could have been more accurately christened as “RBI Swap Facility for Oil Companies Routed through Designated Banks”.

The fact of the matter is that the RBI has had to willy-nilly don the mantle of market maker of first (as opposed to last) resort for oil bonds because of scarce interest from banks to buy the bonds or hold them as collateral for the benefit of oil companies. Presumably, this is because the price on offer did not adequately internalise the unattractive caveats of the bonds. The coupon and the non-SLR eligible nature of these bonds (in combination) make them largely unattractive to scheduled commercial banks and other participants in the secondary market. The market would have discounted these bonds on account of the embedded characteristics.

The matter then arises regarding the valuation of oil bonds by the RBI in the absence of a credible market-determined price history for the bonds. It is reported that the oil bonds were priced at a spread of 25 basis points above the yield of G-Sec of the relevant maturity. Of course, this positive spread over G-Sec in itself does not mean that a quasi-fiscal subsidy is not operative. Outright purchases of these securities at prices above fair value (or even acceptance of collateral above fair value) would constitute a quasi-fiscal subsidy from the RBI. Without access to the valuation methodology that would have been deployed, it is difficult to gauge the fair value with accuracy.

It is estimated that oil bond issuance over the current fiscal could be about 2 per cent of GDP; therefore, the money due to the oil companies from the Union government is expected to be huge for the foreseeable future. Unless there is a sharp correction in oil prices or a policy combining adjustment in domestic retail prices and reduction in government duties, the oil companies will continue to require help to source the foreign exchange to import crude oil (although the SMO has been ascribed as a temporary facility). If demand does not adjust, supply will; reports of long lines at diesel pumps in several states show that the oil companies are responding in a manner that is feasible for them.

Several conclusions and observations can be made. First, the dire fiscal situation that the central government finds itself in has now sucked the RBI in its vortex, but it is to be hoped that a durable alternative mechanism will be put in place with alacrity to ensure that the SMO is not further resorted to; it can be argued that some of the hard work over the past decade to ensure that the RBI’s proximate objective for conducting monetary policy is not compromised — by getting stuffed with government paper — has been undone. Secondly, we would be hard-pressed to name another country (even among those that subsidise fuel) that has had to resort to the central bank in this manner. Thirdly, praying for international crude prices to adjust sharply downwards soon does not constitute government policy, sound or otherwise. Fourthly, the proceeds of the oil bonds upon maturity will be in rupees, hence the RBI, if it wants to rebuild official foreign currency assets to make up for the decline on account of the SMO, will have to intervene in the market at the time and buy foreign currency at the ruling market exchange rate (the central bank shoulders an exchange rate risk if rebuilding foreign currency reserves is an objective).

Business Standard on Subbarao's elevation:
Change, with continuity

The general perception for some time has been that there are differences between the finance ministry and the Reserve Bank of India on key policy issues, including interest rates and exchange rate management. Observers will therefore read an extra significance into the fact that the serving finance secretary, D Subbarao, has been named to succeed Y V Reddy as RBI governor, in preference to the existing deputy governor. No one in the last three decades or more has made such a direct move from North Block to the top job in Mint Road. Whether Dr Subbarao’s positions on the critical issues differ significantly from his predecessor will be known soon enough. What is important is that the new dispensation at the RBI quickly comes to grips with the situation and responds effectively to both the structural needs of the financial sector and the immediate macro-economic challenges.

The first test will come with the quarterly monetary policy announcement, scheduled for end-October. Dr Reddy took an aggressive anti-inflationary stance in the past few months, with the stated intent of bringing inflation expectations firmly under control. Once embarked upon, such a stance must be followed through to its logical conclusion, which means that as long as the inflation rate is way above the comfort zone, policy rates must be raised. However, it has appeared on occasion that the finance ministry has not been persuaded about the merits of this approach and believes that maintaining a growth-friendly interest rate scenario is the priority. The question that the new governor must ask is whether a reversal of the current policy stance will hurt more by fuelling expectations than it will help by shoring up growth.

A second area of concern in the short term is the movement of the rupee, which has swung both ways over the past year and a half, leaving people confused about the nature, even existence, of exchange rate policy. With competing proposals for exchange rate management on the table, the RBI needs to make both the end-game and the transition path clear.

But just as his predecessor had to deal with the fall-out of the Asian financial crisis (successfully protecting India from the virus), Dr Reddy has had to deal with unprecedented macro-economic circumstances, from the surge in capital inflows to the recent supply-side inflationary pressures. He responded by sterilising the dollar inflows (which pushed up money supply, risking inflation), and then began moving aggressively on interest rates when the inflation surge of 2008-09 was not fully visible. In doing so, he ploughed a lonely furrough for a while, so it is ironic that his legacy should be an inflation rate that is way above what the RBI would like it to be. As often happens, therefore, his legacy is essentially an unfinished agenda. Dr Subbarao would be well advised to aim for a fine balance between continuity in fighting inflation and change on the structural side of the financial sector — for which two expert committees have laid out their road maps.

Merchandise exports during first quarter are already 28% of annual target. We should exceed $200 billion in merchandise exports this year:
Merchandise exports likely to stay robust

Data released by the commerce ministry show that in the April-July period, Indian exports have already reached $59.2 billion, which is 28 per cent of the export target of $200 billion for the current financial year.

In the same period last fiscal, a much lesser percentage of the $160-billion exports target for FY08 was achieved, but the target was met by the end of the fiscal.

While experts are analysing the 31.2 per cent rise in exports during July (the segment-wise export data is not available at the moment), higher overseas sales of petroleum products, chemicals and engineering goods is seen as the possible reason for the healthy export growth.

Moreover, the near-10 per cent depreciation in the rupee against the dollar has also resulted in better realisation of export income.

Tushar Poddar, vice-president, Asia economic research, Goldman Sachs, says that despite concerns of a slowdown in developed markets like the US and EU, the downside to Indian exports is limited.

“First, exports to developed markets — the US and EU — are not as important as in the past. Nearly two-thirds of India’s exports now go to other regions, especially to China, West Asia and Africa. As these markets continue to grow, we believe demand for exports will sustain,” Poddar said in a report today.

Moreover, the recently finalised free trade agreement (FTA) with the 10-member Association of South-East Asian Nations (Asean) will also add pace to export growth as import duties will be brought down.

According to Poddar, high-skilled products from sectors like engineering goods as well as resource-intensive products have more potential in emerging economies like Brazil, Russia and China rather than traditional products like handicrafts and leather, which are exported to the US and EU.

The resource-intensive sector has seen high export growth rates owing to rise in prices of commodities.

“The large exports of refined petroleum, however, have more to do with refining capacity rather than any commodity endowment. Indeed, of the total value of about $25 billion of exports in 2007-08, only about 14 per cent represents value-added due to refining, the rest being oil imports. Be that as it may, volumes have also been rising. Further, in the near term, our commodities team does not expect commodity prices, especially oil, to decline substantially, which will continue to sustain export growth,” Poddar said.

While India exports more of petroleum products, light consumer goods, chemicals, as well as food products, other Asian countries like China, Korea, Taiwan and Japan have export interests in transport goods, machine and electronics. Thus, India’s export interests are mostly not in competition with these countries.

[Suraj]

Direct tax revenues continue strong growth:
Direct tax kitty swells 38% in April-August

Riding on higher tax deducted at source (TDS) receipts, net direct tax collections rose by 38.31 per cent to Rs 84,409 crore in the first five months of fiscal 2008-09, as compared with Rs 61,030 crore in the corresponding period last fiscal.

This is a slight moderation compared with the over 42 per cent growth in net direct tax collection seen in the same period of the previous fiscal. Net direct collection refers to tax collections after refunds, but before transfer of states’ share in central revenues.

Overall growth in TDS was more than 40 per cent, but growth in corporate TDS was even higher. Corporate TDS collections rose by over 55 per cent to Rs 26,445 crore in the April-August period this year against Rs 17,037 crore during the year-ago period.

The higher TDS compliance is attributed to several verifications and surveys carried out by the Income Tax Department, which resulted in detection of hundreds of crore of rupees not deducted or not paid to the government account after deduction.

Corporation tax collections were up 43.49 per cent to Rs 48,450 crore during the period as against Rs 33,766 crore in the same period last year.

Personal income-tax (including fringe benefit tax, securities transaction tax and banking cash transaction tax) collections grew at 31.79 per cent to Rs 35,840 crore in the period as against Rs 27,195 crore a year ago.

Interesting new facility - GoI can hire private expertise on a contractual basis:
Centre okays hiring private specialists for govt service

The gates have been opened for the hiring of outside specialists by government departments and agencies on a contractual basis with the government approving the Sixth Pay Commission recommendation to this effect.

The approval of the recommendation for allowing lateral entry into the government service implies that private sector specialists can be hired and appointed to government posts, including possibly cadre posts, with salaries that are market-linked.

Government officials said the scheme was aimed at bringing in outside expertise for specialised functions in technical, scientific or other streams. The terms of the contracts, including the emoluments to be paid, will be the responsibility of the nodal ministries.

The enhanced expenditure would have to be met by the ministry or department from its annual budgetary allocation.

The lateral entry scheme is expected to boost the availability of talent in government departments. Citing instances, officials said professionals like actuaries, harbour pilots or IT specialists could not be inducted into service at government pay levels.

Shyam Ponappa on structural issues affecting food, as part of a multi part article:
Changing mindsets about food prices

There is a radical disconnect between reality, policies, and public opinion on a number of issues in India. This is not only disconcerting, it reflects a mindset that is not conducive to resolving these issues beneficially. Consider some examples:
# the state of our food grains production, pricing, supply and demand,
# supply constraints that are structural, but have triggered monetary responses leading to reduced consumer spending and dampened business investment, slowing GDP growth to 7.9 per cent in April-June 2008 (perhaps heading as low as 7 per cent for 2008-09?),
# the shoddy and worsening state of our roads and highways, despite considerable effort and vast expenditure, or
# the misrepresentation by naysayers of nuclear power as an adjunct to other methods of power generation.

Food supply & demand: One aspect of the problem has to do with supply not increasing as fast as demand. A study by Icrier estimates that given current trends, domestic demand for total cereals will exceed domestic supply after 2020. The implication is that with continuing high levels of anticipated world demand, if we do not increase domestic supply through better research and application, extension, and/or strategic investments abroad with supply contracts, high food prices could well get worse in the years ahead.

Repressed food prices: A second aspect of this issue relates to pricing. India’s food grains procurement prices have been repressed relative to the market and to world prices for many decades. Small farmers get the worst of it, because they have to sell as soon as they harvest, i.e. when prices are generally low. They cannot afford not to sell at procurement prices which are far below market, as shown by the Minimum Support Price. Yet, while the National Commission on Farmers chaired by Prof. M S Swaminathan recommended an increase in procurement prices, even this newspaper(!) ran an editorial that these recommendations were wrong because this would lead to higher prices and more inflation, without providing data and context, or further explication. While scepticism is healthy to the extent of seeking facts to arrive at conclusions, such statements without supporting data or reasoning appear rather arbitrary and uninformed.

Data & analysis: The need and collective responsibility is to help establish and address the relevant facts, as well as to make them widely accessible. For this, the data have to be continually aggregated and available, and studied.

Perversely, many of the same pundits who argue for low food procurement prices make the opposite argument in the case of oil and petroleum products, i.e. that prices should be increased, despite our fuel costs being much higher than in many other countries — which will indeed increase inflation across the board. What justifies these contradictory positions: pass through fuel price hikes, which are an input cost to many products/services, while repressing food prices? Certainly not the simple inequity that makes farmers more expendable, one hopes?

Policies from a solutions mindset: There need to be long-term, concerted, well-coordinated efforts involving the Centre and the states to address the underlying supply deficiencies. This needs to be driven by analysis of the facts. Start with tracking realities and analysing the data. This country’s burgeoning population is finally becoming more able to afford the food they need and want. Keeping procurement prices low holds down incentives for production, apart from inflicting great hardship on small farmers who have to contend with rising input costs and general prices, while selling their produce for less.

[pradeepe]

Interesting new facility - GoI can hire private expertise on a contractual basis:
Centre okays hiring private specialists for govt service

The gates have been opened for the hiring of outside specialists by government departments and agencies on a contractual basis with the government approving the Sixth Pay Commission recommendation to this effect.

The first option which I have already heard a li'l bit about is Govt agencies looking to hire retired employees on a contractual basis. In todays situation, many of them have many years of active productive life left, know every nook and cranny in the system with thorough domain knowledge after 30-40 years of service. Sounds like a good idea.

[Singha]

folks like NAL and HAL have been doing it for some time iirc. I knew one such person from
NAL.

the people who should really step up and take their place work in INFY or have become
suited-booted city of london i-bankers

[Nitesh]

http://pib.nic.in/release/release.asp?relid=42285
Department of Economic Affairs, Ministry of Finance has been publishing ‘India’s External Debt: A Status Report’ on a regular basis since 1993. The current volume of the Report, the fourteenth in the series, brings out developments in India’s external debt during 2007-08. It also provides time series data and an analytical presentation of India’s external debt statistics since 1990. A cross-country comparison presents India’s external debt position in an international perspective.

India’s external debt stock at end-March 2008 amounted to US$ 221.2 billion (Rs. 884,516 crore), reflecting an increase of 30.4 per cent over the previous year. Valuation change due to weakening of the US dollar vis-à-vis other major international currencies accounted for almost 20 per cent of the increment in total external debt during the year. In terms of rupees, the increase in India’s external debt during 2007-08 was lower at 19.6 per cent due to the appreciation of Indian rupee essentially against the US dollar. The escalation in external debt during the year could be ascribed mainly to rise in external commercial borrowings (39.5 per cent) and short-term debt (34.8 per cent). Between end-March 2007 and end-March 2008, Government debt as a proportion of total external debt declined from 28.4 per cent to 25.6 per cent and as a percentage of GDP, it dropped from 5.3 per cent to 4.8 per cent.

All the major solvency and liquidity indicators of external debt continued to remain in the comfort zone: foreign exchange reserve cover of external debt continued to be at a high level, up from 117.4 per cent during 2006-07 to 140.0 per cent during 2007-08; debt service ratio remained low at 5.4 per cent during 2007-08, though this was marginally higher by 0.6 percentage points over the previous year; other indicators, such as the ratio of external debt to Gross Domestic Product which measures the burden of external debt, was 18.8 per cent during 2007-08; the ratio of short-term debt to foreign exchange reserves stood at 14.3 per cent; and the ratio of short-term debt to total external debt was 20 per cent at end-March 2008.

A cross-country comparison based on the data given in World Bank’s ‘Global Development Finance, 2008’ shows that India’s position among the top ten debtor countries of the developing world was fifth in 2006 in terms of the stock of external debt. India’s debt service ratio was the second best after that of China. The element of concessionality in India’s external debt portfolio was the second highest after that of Indonesia.

“India’s External Debt: A Status Report, 2007-2008” has endeavoured to improve the scope and reporting of the debt numbers (especially that of short-term external debt) to make the Report more comprehensive.

[ramana]

Book Review in Telegraph, Kolkota, 5 Sept 2008

HIGHS AND LOWS OF THE INDIAN ECONOMY AFTER INDEPENDENCE

HIGHS AND LOWS OF THE INDIAN ECONOMY AFTER INDEPENDENCE

Under liberal regimes
Arvind Panagariya’s latest work is arguably the most comprehensive and incisive book written on the economic history of post-independence India. A distinguished professor of economics at Columbia University, the author is familiar to the lay readers in India through his columns in a leading financial daily that tackle complex economic and social issues.

The book divides the period between 1951 to 2006 into four phases based on mean growth rates: 1951-65, at 4.1 per cent, is titled “Takeoff under a liberal regime”, 1965-81, at 3.2 per cent, is “Socialism strikes with a vengeance”, 1981-88, at 4.8 per cent, is “Liberalisation by stealth”, and finally 1988 to 2006, at 6.3 per cent, is labelled “Triumph of liberalisation”.

The first phase witnessed massive public investment in industry, infrastructure, agriculture and social sectors. This was made possible by running down the huge sterling balances inherited from World War II and through liberal foreign aid. But as Jawaharlal Nehru found to his dismay, the prosperity could not be sustained and two droughts, war with Pakistan and the consequent suspension of foreign aid resulted in economic ruin in 1965. The second phase, with garibi hatao as Indira Gandhi’s clarion call, was a nightmare so far as the economy was concerned, with the growth rate of gross domestic product shrinking to 2.6 per cent and per capita growth becoming almost nil as a consequence. Moreover, poverty was not reduced. In an interesting exercise, Panagariya demonstrates how apparent growth during the Rajiv Gandhi years had only weakened the macro economic condition and it is the growth since 1992 that is genuinely sustainable.

The chapter on the economic and social evolution of India and Korea makes interesting reading. Both countries were in a post-colonial phase in the 1950s with a growth rate of around 4 per cent and similar per capita GDP rates. Thereafter, Korea switched to export orientation while India remained devoted to import substitution. Korea became a miracle economy with a GDP per capita of $198,624 in 2007 — which is 20 times India’s $965. The delay, till 1991, in the opening up the Indian economy resulted in myriad problems that India today finds difficult to cope with. The recent reforms make it evident that the number of people living below the poverty line or without basic education is strongly related to the GDP per capita. So the cost of the delay in the opening up of India till 1991 has to be measured in terms of the hundreds of millions of people left below the poverty line, an equal number left without access to healthcare and around half a billion deprived of primary education.

No book on the Indian economy can be complete without the author having a crack at poverty and inequality. Panagariya is no exception. The topic is highly contentious since official sample surveys, which form the empirical basis of the debate, changed definitions of poverty a number of times. As such, there is no continuous series of study on which everyone can agree. Panagariya has done a commendable job in painstakingly describing the subtle changes in the definitions of poverty, thus bringing about some order in this field.

He argues convincingly that policy focus on equality often weakens the fight against poverty. This is what has happened in the case of India. The current debate of using foreign exchange reserves to fund infrastructure investments is discussed and policy directions suggested. Not surprisingly, Panagariya relates poor industrial progress to restrictive labour laws dissuading the organized sector from entering labour-intensive industries. The ways of providing basic health facilities, education, water and sanitation to the people living in remote areas are dealt with in detail and pragmatic solutions offered. The subject of tax reforms, with necessary subsidies to the poor, and the methods of their implementation are also addressed. Panagariya laments the mistake committed by a poor country like India in ignoring the importance of international trade.

Although the book deals with a period ending in 2006, one wonders whether Panagariya could have introduced another phase with a growth rate of 8 per cent. He could have suggested the ways of using the additional revenue. And what would have been his prescription for tackling the present situation of high growth coupled with high inflation? A follow-up is eagerly awaited.

SATRUJIT BANERJEE

[vina]

There is a big bank collapse on the horizon. Everyone is expecting that. Lehman is a known quantity.. But I think the collapse will come from the "left field".. Panda's banking system is a shell. Any shock would reverberate from there. Just imagine the kind of things being said here in this article happening in India. The 200 brand new aircraft carriers hits home surely..

The New York Times

September 5, 2008
Main Bank of China Is in Need of Capital
By KEITH BRADSHER

HONG KONG — China’s central bank is in a bind.

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.

The central bank’s predicament has several repercussions. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts. This could heighten trade tensions with the United States. The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit.

The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.

The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the former division chief for China at the International Monetary Fund.

“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.

Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates. When interest rates rise, the prices of bonds fall.

Officials at the central bank declined to comment, while finance ministry officials did not respond to calls or questions via fax seeking comment. Data in a study by the Bank of International Settlements based in Basel, Switzerland, sometimes called the central bank for central banks, shows that many central banks had small capital bases relative to foreign reserves at the end of 2002, though few were as low as the People’s Bank of China.

Given the poor performance of foreign bonds, the Chinese government could decide to shift some of its foreign exchange reserves into global stock markets.

The central bank started making modest purchases of foreign stocks last winter, but has kept almost all of its reserves in bonds, like other central banks.

The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value.

The central bank’s difficulties do not, by themselves, pose a threat to the economy, economists agree. The government has ample resources and is running a budget surplus. Most likely, the finance ministry would simply transfer bonds of other Chinese government agencies to the bank to increase its capital. But even in a country that strongly discourages criticism of its economic policies, hints of dissatisfaction are appearing over China’s foreign investments.

For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”

Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities. With aircraft carriers costing up to $5 billion apiece, $1 trillion would, in theory, buy 200 of them.

By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.

The yuan has risen 21 percent against the dollar since China stopped pegging its currency to the dollar in July 2005.

The actual declines in value of the central bank’s various investments are a carefully guarded state secret.

Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.

China spent more than one-eighth of its entire economic output last year on foreign bonds, and then picked up the pace during the first half of this year. Chinese officials have suggested in recent comments that they are increasingly interested in stopping the yuan’s rise, and thus are willing to continue buying foreign securities to support the dollar. In fact, the yuan weakened slightly against the dollar last month after 26 consecutive months of gains.

Along with Treasuries, China has invested heavily in mortgage-backed bonds from Fannie Mae and Freddie Mac, the struggling mortgage finance giants that are sponsored by the United States government. Standard & Poor’s estimates China’s holdings at $340 billion. (Lehman is trying to junk it's real estate debt into another company.. sort of like dropping the mill stone that is dragging it down).

Some bond traders suspect that the central bank has scaled back its purchases of these securities, as have China’s commercial banks. But the central bank trades this debt through many third parties in many countries, making its activity opaque to outside analysts.

The central bank has gone to great lengths to maintain its foreign purchases. The money to buy foreign bonds has come from the reserves required that commercial banks must deposit with the central bank. In effect, China’s commercial banks have been lending the central bank more than $1 trillion at an interest rate of less than 2 percent.

To keep the banks strong when they were getting such little interest on their reserves, the central bank has kept deposit rates low. The gap between what banks are paying on deposits and the rates they are charging ordinary customers to borrow is several percentage points. This amounts to a transfer of wealth from ordinary Chinese savers to the central bank and on to Americans who are selling their debt to the Chinese.

The central bank is now under considerable pressure to reduce the commercial banks’ reserve requirements to encourage growth as the Chinese economy shows signs of slowing.

Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said .

[Singha]

ahem wuff wuff
http://images.businessweek.com/ss/08/09 ... /index.htm

[Vipul]

Direct tax collections up 4% in August.

[putnanja]

Report sees change in Finance Minister

Report sees change in Finance Minister

K.R. Srivats

Barclays Capital says in its research report that the current Finance Minister, Mr P. Chidambaram, will be replaced by Dr C. Rangarajan, the ex-chairman of the Economic Advisory Council to the Prime Minister, in the next few weeks.

“The appointment of Dr Subbarao (as RBI Governor) and the possibility of Dr Rangarajan being made the new finance minister, is a response, in our view, by the Prime Minister to embark with a fresh economics team to address the inflation problem and large off-budget subsidies…”, says the research report.

When contacted over telephone, the author of the report, Mr Sailesh K. Jha, Senior Regional Economist with Barclays Capital, told Business Line that “the change is imminent” and this was what he had gathered from his discussions with various policy makers in top echelon of the Government before he authored the report.

[vina]

Ah. Now you know why the US market tanked last week without any seemingly obvious cause. Fannie and Freddie share holders are going to be wiped out. Expect shock to shoot through the financial markets next week on open.

Guys . This one is a biggie. Fannie and Freddie going into recievership is like SBI and and UTI and all their investments going bankrupt in the Indian market.

The holders of Fannie and Freddie debt , in significant percentage are foreign central banks. Expect the pain from this to convulse the global financial markets on Monday morning open. Notice how this is announced over the weekend when markets are closed to ease in the shock and allow time for it to attenuate a bit before Monday.

This credit crisis has wiped out all major "mortgage specialists" . Freddie, Fannie, Bear Stearns and Lehman anyway is a goner sooner or later. Now odds are with Freddie and Fannie out, Lehman too will go under.

September 6, 2008
U.S. Rescue Seen at Hand for 2 Mortgage Giants
By STEPHEN LABATON and ANDREW ROSS SORKIN

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers.

A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.

The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.

For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind-the-scenes debate among policy makers has been waged over whether to seize the companies or let them work out their problems. Even after the companies are put under government control, debates will continue over how they should look and operate over the long term.

But the declining housing and financial markets have apparently now forced the administration’s hand. With foreign governments growing increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months.

Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

As their problems have deepened — and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.

In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected.

The debt securities the companies issue to finance their operations are widely owned by mutual funds, pension funds, foreign governments and big companies.

Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Fed, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm, Sullivan & Cromwell, who was representing Fannie.

Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies.

Spokesmen at the two companies did not return telephone calls seeking comment.

The meetings reflected the reality that senior administration officials did not believe they could wait for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency in March by government intervention after its stock plummeted and lenders withheld their capital.

Instead, Mr. Paulson has struggled to navigate through potentially conflicting goals — stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses.

Publicly, administration officials have tried to bolster the companies because the nation’s mortgage system relies on their continued ability to purchase mortgages from commercial lenders and pull the housing markets out of their slump.

But privately, senior officials have been critical of top executives at the companies, particularly Freddie Mac. They have raised concerns about major risks to taxpayers of a bailout of companies whose executives have received huge compensation packages. Mr. Syron, for instance, collected more than $38 million in compensation since he joined the company in 2003.

Although Mr. Syron promised regulators earlier this year that he would raise $5.5 billion from investors, he has repeatedly failed to make good on that promise — even as Fannie Mae raised more than $7 billion. Mr. Syron was slated to step down from the chief executive position last year, but that was delayed when his appointed successor, Eugene McQuade, chose to leave the company.

With the possible removal of the top management and the board, it is no longer clear who would appoint new management.

Mr. Paulson had hoped that merely having the authority to bail out the two companies, which Congress provided in its recent housing bill, would be enough to calm the markets, but if anything anxiety has been increasing. The clearest measure of that anxiety has been the gradually widening spread between interest rates on Fannie- or Freddie-backed mortgage securities and rates for Treasury securities, making home mortgages more expensive. The stock price of the companies has also plunged over the last year.

After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.

With Fannie and Freddie guaranteeing about $5 trillion in mortgage-backed securities, and a big share of those securities held by central banks and investors around the world, Mr. Paulson appears to have decided that the stakes are too high to take any chances.

The Treasury Department is required by the new law to obtain agreement from the boards of Fannie and Freddie for a capital infusion. The exception is if the companies’ regulator, Mr. Lockhart, determines that the companies are insolvent or deeply undercapitalized it could take the companies over anyway.

Experts said that the longer the administration waited, the greater the potential risks and costs. Charles Calomiris, a professor of economics at Columbia University’s School of Business, said delaying a government rescue would only increase the risks and costs.

“The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,” he said. “You don’t want zombie institutions floating around with time on their hands.”

Stephen Labaton reported from Washington and Andrew Ross Sorkin from New York. Edmund L. Andrews contributed reporting from Washington, and Eric Dash and Charles Duhigg from New York.

[Singha]

Lehman has a plan. split itself into a good and bad bank(holding the distressed debt papers).
the good bank infuses capital into the bad bank and untethers it.

the good bank then raises capital from dimwitted but H&D loving and cash rich east asian
sovereign funds with nowhere to park their money and wanting the prestige of 'owning' part of
wall street.

thats the plan atleast