Japanese companies are increasing overseas acquisitions, using their cash-hoards to snap up assets beaten down by the global credit crisis and economic slowdown.
The value of foreign purchases by Japanese companies this year has already topped 2007's total by 91 per cent, according to data compiled by Bloomberg. That's the biggest gain among the world's 10 largest markets and contrasts with fewer deals in the US and UK, where credit is drying up after the subprime rout.
Takeovers by companies including TDK Corp. and Daiichi Sankyo Co are putting Japan on course for its biggest buying spree since the 1980s bubble, when Japanese buyers overpaid for assets like New York City's Rockefeller Center and California's Pebble Beach Golf Links.
“Pebble Beach and those kinds of trophy assets, it's clear those were crazy deals, but now they're buying things that are earnings enhancing and using cash that's been generating no income to do it,” said London-based Scott McGlashan, who manages Japanese stocks as part of J O Hambro Capital Management Ltd.'s $4.7 billion in assets. “It's a very opportune time for Japanese companies looking to make acquisitions overseas.”
Japanese companies have cash equal to 11 per cent of their assets, the second-highest amount after China among the world's 10 biggest equity markets, according to Bloomberg data.
Buying-Spree: Foreign purchases climbed to $48.6 billion so far this year from $25.4 billion for all of 2007, Bloomberg data show. The value of deals in the US is down 67 per cent from 2007 and UK. acquisitions are off 66 per cent as debt financing costs climb.
McGlashan said he is on the lookout for deals that mirror Daiichi Sankyo, Japan's No. 3 drugmaker, which has gained 11 per cent since it agreed June 11 to buy India's biggest drugmaker Ranbaxy Laboratories Ltd. for $4.6 billion. Nikko Citigroup Ltd. analyst Hidemaru Yamaguchi boosted his share price estimate for Daiichi Sankyo by 7 per cent after the purchase.
TDK, Japan’s largest maker of magnetic heads for hard-disk drives, announced plans last month to acquire Germany's Epcos AG, which makes components for Nokia Oyj, for $1.87 billion. TDK paid 6.1 times Epcos's earnings before interest, taxes, depreciation and amortization, or Ebitda, less than the 8.7 times average for Epcos's 15 closest European peers.
“In general, M&A doesn't benefit the acquirer because it tends to occur during boom times when management is overconfident and they pay too much,” said Seiichiro Iwasawa, chief strategist at Tokyo-based Nomura Securities Co. Ltd. “Japan is unique because they remember their massive bubble-era failures and have such low confidence that they are being extremely careful to do deals that make sense.”
Takeda, Kirin: Pharmaceutical companies may use their above-average levels of cash to make purchases and food producers may pursue takeovers to grow outside Japan's shrinking domestic market, Iwasawa said.
Takeda Pharmaceutical Co., Japan's largest drugmaker, had $15.5 billion in cash and securities as of March 31, equal to more than half its total assets. The company agreed to buy US-based cancer drug specialist Millennium Pharmaceuticals Inc for $8.8 billion on April 10. Takeda shares gained 3 per cent since then, beating the Topix's 2.4 per cent decline.
Kirin Holdings Inc. spent more than $3 billion the past two years on acquisitions in Asia. The nation's biggest beverage maker has said it's ready to spend almost $3 billion more by 2010. The company yesterday agreed to buy Australia's Dairy Farmers for A$675 million ($580 million), adding to its lead as the country's largest seller of fresh milk.
The buying spree helped Goldman Sachs Group Inc. report record profit in Japan for the year ended March 31. The New York-based firm holds the top spot among merger advisers for deals where Japanese companies are acquiring overseas assets, according to Bloomberg data. UBS AG ranked second and Nomura Holdings Inc was first among domestic companies.
‘Buy for Profit’: Paul Sheehan, chief executive officer of Thaddeus Capital Management, a Hong Kong-based hedge fund, said companies are using foreign acquisitions to boost their size, rather than shareholders' wallets.
“The deals are nowhere near as accretive as returning cash to shareholders or buying domestic competitors and profiting through consolidation and cost saving,” he said. “I don't buy for growth, I buy for profit.”
Mitsubishi Estate Co bought Rockefeller Center for $1.4 billion in 1989 and lost it seven years later after defaulting on the mortgage. Pebble Beach, the site of the 2010 US Open, was snapped up by Japanese golf magnate Minoru Isutani in 1990 for $841 million.
It was sold less than two years later at two-thirds the purchase price as Isutani's company went bankrupt. Toshiba, Japan Tobacco: Recent buyouts have been more successful. Toshiba Corp's 2006 purchase of US nuclear reactor designer Westinghouse Electric Co is paying off as the unit's profit rose almost five- fold in the first quarter, paring an overall loss caused by weakness in Toshiba's semiconductor business.
Japan Tobacco Inc, which bought UK-based Gallaher Group Plc in 2007 in Japan's largest foreign takeover, expects gross profit in overseas markets to climb 10 percent this year, while domestic earnings are forecast to fall 15 per cent as the number of smokers declines.
Thursday, August 28, 2008
'We'll have to take hard decisions if global oil prices stay high'
Planning Commission deputy chairman Montek Singh Ahluwalia speaks on GDP growth forecasts, infrastructure investment, energy policy and financial sector reforms in an interview with KG Narendranath & Subhash Narayan. Excerpts:
What is your take on the current scenario with respect to the Indian economy, which is marked by high inflation, a credit squeeze and reasonable fears of low industrial output? The Economic Advisory Council to the prime minister has forecast that GDP growth this year would be 7.7%, a significant dip from last year’s 9%.
There is a wide range of predictions. EAC has projected that growth this year would be 7.7%, but the Centre for Monitoring Indian Economy has predicted 9%. My view has been that a range of 8-8.5% is reasonable and maybe, the low end of that range is likely. However, we should be quite satisfied if we grow at around 8%, given the current global economic conditions.
How much does the current rate of inflation worry you? How would the graph of weekly WPI-based inflation move in the short term?
A year on year inflation rate exceeding 12% is a cause for worry but inflation is a worry all over the world. There is also a question of what index to use. The CPI shows a much lower inflation rate of 7% and that is the way inflation is measured in most countries. I expect the WPI inflation to come down over the next three to four months.
The global slowdown has already adversely impacted India’s exports, as is experienced by industries like textiles, engineering goods and chemicals. Even the IT sector is now feeling the pinch, thanks to the spending slowdown in export markets like the US, indicating that the services sector wouldn’t be left unhurt either.
A slowdown in GDP growth will obviously be reflected in individual sub-sectors so this is not adding anything to what is known. I will only add that the projected slowdown (of the Indian economy) does not reflect a basic deceleration in the country’s growth momentum. India can doubtless grow at an average rate of 9% over five years (in the Eleventh Five-Year Plan), provided sensible policies are in place. The proviso is important. So, I don’t subscribe to the view that 9% growth is going to happen no matter whatever is done or not done on the policy front. I’m confident that it (9% growth in Eleventh Plan) is achievable, but we need to do many things — in agriculture, infrastructure, energy policy and also in a number of other areas — to really accomplish it. The Planning Commission has outlined the whole policy agenda for the Eleventh Plan. Even if three-fourth of what has been prescribed by the commission is actually acted upon, then we will certainly yield an average growth of 9% in the current Plan period.
EAC has said agriculture growth this year would be just 2% as against 4.5% last year. Your comments.
Our target concerning farm sector growth for the Eleventh Plan as a whole is 4%. We have already had a year in which the growth exceeded that figure. In the current year, the growth could be a little less than 4% though we need not conclude just yet that it will be only 2%. A lot will depend on the quality of monsoon — thankfully, monsoon has already picked up in certain areas, but we still have little more time to go (before deciding on the quality of monsoon).
What are the policy measures required for the farm sector to gather further growth momentum?
There are a number of things we have to do. There is tremendous scope for increasing productivity of land with existing technology, if the right kind of farming practices are adopted. There is need to have more (public) expenditure and also better implementation in areas such as irrigation, watershed management in rain-fed areas, production and distribution of seeds, and providing technical knowledge to farmers , particularly on soil nutrition, which is necessary for bringing about scientific application of fertilisers. We also need to develop infrastructure that will support agricultural diversification.
When it comes to the objective of increasing farm output, what are the segments that should get high priority?
The projected farm sector growth of 4% is not expected to come from food grain sector, which needs to grow at only 2% per year. It’s the non-food grain sector, which will grow at 6-8% and result in 4% overall growth. This sector —comprising horticulture, dairy, livestock, poultry, fisheries etc — produces perishable goods, and to have an expansion of this segment of agriculture, it is very important to develop marketing linkages, logistic and transportation capacities. These are areas largely in the domain of the state governments. In this regard, many states have already reformed the Agriculture Produce Marketing Committee (APMC) Act, but some of them haven’t yet notified all of the relevant rules for the reform to be implemented. While better management of public expenditure is crucial for farm sector growth, it is also necessary to involve the private sector in its development. We need to have mechanisms for contract farming that can help link farms to markets and also a system for transmission of technical knowledge. Improvement in rural road connectivity is also important. All these areas are being addressed through a variety of government programmes.
Have you in mind any specific measure that could make a big difference to the agriculture sector?
We need to use the resources being made available for the National Rural Employment Guarantee Scheme — around Rs 18,000 crore a year — for improving land productivity and thereby increase farm output. The NREGS is already performing a really useful function of generating employment. Converging the NREGS resources with schemes to increase land productivity would be a sensible way to increase farm incomes and employment. All this, of course, will have to be supported through sufficient expansion of agriculture credit. The UPA government has done an excellent job when it comes to expansion of agriculture credit and this is reflected in the major increase in credit flows to the sector in the last three years. In addition there has been a one-time loan waiver for a large number of farmers.
When it comes to increasing farm productivity, balanced use of fertilisers is very important. It’s only recently that a new investment policy for the fertiliser sector has been announced, even though the sector has been witnessing an investment famine for the last few years, making the economy much more vulnerable to the high prices of imported urea.
The new investment policy (in the fertiliser sector) gives incentives to the right kind of fertiliser production. But for the full results of this new policy, we’ll have to wait for another 3-4 years. As an immediate priority, we need to focus on utilising as much of the (existing) capacities as we can, and also taking timely steps for needbased imports of fertilisers.
Off-budget liabilities like oil and fertiliser subsidies, it is estimated, would be 5% of GDP this fiscal. Ideally, these should also be reckoned as fiscal deficit.
I think the 5% estimate is from the EAC report. Whether to bring these off-budget liabilities on the book, or to keep them off the book is essentially a question of accounting. The important point to note is that most of this (off-budget) deficit is really due to the very large increase in international prices of petroleum and fertilisers. We’ve passed on some of this price increase to the consumers, absorbed a fraction by reducing taxes and also forced the producers to take a hit. But a very large part of this price increase has not been passed on and this enlarges the subsidy bill. Clearly, it is not a sustainable solution to maintain this level of hidden deficit (off-budget deficit) year after year. The objective of policy should be to bring down the total deficit, sum of off-budget and on-budget deficits, to a comfortable level. Right now, it (the total deficit) is definitely not comfortable.
What happens if global prices remain high?
If that happens we will really have to take some hard decisions. The ability of the economy to grow at a healthy rate will depend on our ability to take these hard decisions. I’m not pessimistic about India’s ability to grow even with high global oil prices, provided we take the right policy decisions. If we are moving on to a world in which the medium-term prospects are that of expensive energy, we must make sure subsidies are meant only for the needy. There’s a need for lifeline availability of energy at affordable prices, and we should assure that. But beyond that, energy should be fully priced. If the Rajiv Gandhi Gramin Vidyut Yojana is properly implemented, it can potentially bring down the use of kerosene for lighting and therefore, largely obviate the need for subsidy.
Despite the ambitious targets set for power gen eration in the Eleventh Plan, the situation on this front doesn’t seem to be encouraging, despite Ultra Mega Plants .
The dip in generation growth that you are referring to is a transient one, which I don’t regard as pointer to the medium-term prospect in this regard. In the last Five Year Plan, we could add just 21,000 MW to the generation capacity. I’m reasonably sure that in the 11th Plan we will add three times of that to the generation pool, even if we fall slightly short of the target of 78,000MW. As for ultra mega power plants, they will mostly come up during the 13th Plan, but we have other projects that will help meet the target.
As regards the viability of the power sector, coal sector reforms are very important. So, too, are measures for addressing the investment torpor in the distribution sector.
Yes indeed, a rational approach to energy must cover all relevant sectors. Having said that, it is not the case that there are no reforms in the coal sector. By allowing captive mining of coal for power production, we have allowed new private investment into the industry. This is a substantial reform measure that we are closely watching to see if the process of allocation of captive coal mines is being accelerated.
I also agree that the single most important challenge facing the power sector is the one concerning distribution. The AT&C losses continue to be 35%. No system can survive with losses of that magnitude. The 10th Plan target was to reduce these losses to 15% but we could not achieve that. Now, the 11th Plan target, again, is to cut these losses to 15%. Some states like Andhra Pradesh (18%) and Tamil Nadu (20%) have brought down AT&C losses substantially. We’re encouraging other states to learn from the experiences of these states.
Attracting investment in the power sector won’t be a problem if we cut the AT&C losses and also accelerate the move towards open access. Open access is to become mandatory from January 1, 2009. However, it is important that wheeling charges are made reasonable. Unfortunately, most of the electricity regulators continue to have a public-sector protection mentality and this hampers open access initiatives, which, if properly carried out, could have brought distribution companies under competitive pressure.
The ambitious project to attract $500-billion investment in infrastructure doesn’t seem to fully fructify. The target is to increase infrastructure investment from 5% of GDP now to 9% by the end of this Plan. This corresponds to investment of $500 billion, over the five year period. This means attracting an additional $150 billion over what would happen with normal growth.
That is indeed ambitious, and most of it will have to come from public sector corporations making an extra effort, and from public private partnerships (PPPs). Fortunately, we now have a policy in place that has generated a lot of interest, but there are also problems. To generate the massive flow of investment, transparency and better project preparation are vital. We have to do more in this area.
Many state governments are doing a very good job in this regard; some are seeking our help to structure the projects. Andhra Pradesh has demonstrated an outstandingly successful pure PPP model for a metro system by bidding out the Rs 12,000-crore Hyderabad metro to a private party without requiring the centre or state governments to pay anything—in fact, the state will get some revenue from the proposed metro. The revenue model of the project involves land associated with the metro being aggressively developed to subsidise the metro.
Do you think the pending Bills of financial sector reforms will pass muster in the tenure of the UPA govt?
Let me not speculate on what will be passed by the Parliament. In fact, we have a very clear agenda on financial sector reforms – the bills pending in parliament are a small part of that agenda. We need to take a much broader approach to financial sector reforms. The Planning Commission is about to receive the report of the high-level committee headed by Dr Raghuram Rajan, which is expected to outline a ten-year road map for reforms. This should be the basis for intense discussions on the next steps in reforms. We will put this in the public domain to elicit views and stimulate discussions. It should be noted that India’s savings rate is much lower than China’s and so, for us to grow at 9-10%, we need much greater financial sector efficiency than China. This makes financial sector reforms especially important in our context.
What is your take on the current scenario with respect to the Indian economy, which is marked by high inflation, a credit squeeze and reasonable fears of low industrial output? The Economic Advisory Council to the prime minister has forecast that GDP growth this year would be 7.7%, a significant dip from last year’s 9%.
There is a wide range of predictions. EAC has projected that growth this year would be 7.7%, but the Centre for Monitoring Indian Economy has predicted 9%. My view has been that a range of 8-8.5% is reasonable and maybe, the low end of that range is likely. However, we should be quite satisfied if we grow at around 8%, given the current global economic conditions.
How much does the current rate of inflation worry you? How would the graph of weekly WPI-based inflation move in the short term?
A year on year inflation rate exceeding 12% is a cause for worry but inflation is a worry all over the world. There is also a question of what index to use. The CPI shows a much lower inflation rate of 7% and that is the way inflation is measured in most countries. I expect the WPI inflation to come down over the next three to four months.
The global slowdown has already adversely impacted India’s exports, as is experienced by industries like textiles, engineering goods and chemicals. Even the IT sector is now feeling the pinch, thanks to the spending slowdown in export markets like the US, indicating that the services sector wouldn’t be left unhurt either.
A slowdown in GDP growth will obviously be reflected in individual sub-sectors so this is not adding anything to what is known. I will only add that the projected slowdown (of the Indian economy) does not reflect a basic deceleration in the country’s growth momentum. India can doubtless grow at an average rate of 9% over five years (in the Eleventh Five-Year Plan), provided sensible policies are in place. The proviso is important. So, I don’t subscribe to the view that 9% growth is going to happen no matter whatever is done or not done on the policy front. I’m confident that it (9% growth in Eleventh Plan) is achievable, but we need to do many things — in agriculture, infrastructure, energy policy and also in a number of other areas — to really accomplish it. The Planning Commission has outlined the whole policy agenda for the Eleventh Plan. Even if three-fourth of what has been prescribed by the commission is actually acted upon, then we will certainly yield an average growth of 9% in the current Plan period.
EAC has said agriculture growth this year would be just 2% as against 4.5% last year. Your comments.
Our target concerning farm sector growth for the Eleventh Plan as a whole is 4%. We have already had a year in which the growth exceeded that figure. In the current year, the growth could be a little less than 4% though we need not conclude just yet that it will be only 2%. A lot will depend on the quality of monsoon — thankfully, monsoon has already picked up in certain areas, but we still have little more time to go (before deciding on the quality of monsoon).
What are the policy measures required for the farm sector to gather further growth momentum?
There are a number of things we have to do. There is tremendous scope for increasing productivity of land with existing technology, if the right kind of farming practices are adopted. There is need to have more (public) expenditure and also better implementation in areas such as irrigation, watershed management in rain-fed areas, production and distribution of seeds, and providing technical knowledge to farmers , particularly on soil nutrition, which is necessary for bringing about scientific application of fertilisers. We also need to develop infrastructure that will support agricultural diversification.
When it comes to the objective of increasing farm output, what are the segments that should get high priority?
The projected farm sector growth of 4% is not expected to come from food grain sector, which needs to grow at only 2% per year. It’s the non-food grain sector, which will grow at 6-8% and result in 4% overall growth. This sector —comprising horticulture, dairy, livestock, poultry, fisheries etc — produces perishable goods, and to have an expansion of this segment of agriculture, it is very important to develop marketing linkages, logistic and transportation capacities. These are areas largely in the domain of the state governments. In this regard, many states have already reformed the Agriculture Produce Marketing Committee (APMC) Act, but some of them haven’t yet notified all of the relevant rules for the reform to be implemented. While better management of public expenditure is crucial for farm sector growth, it is also necessary to involve the private sector in its development. We need to have mechanisms for contract farming that can help link farms to markets and also a system for transmission of technical knowledge. Improvement in rural road connectivity is also important. All these areas are being addressed through a variety of government programmes.
Have you in mind any specific measure that could make a big difference to the agriculture sector?
We need to use the resources being made available for the National Rural Employment Guarantee Scheme — around Rs 18,000 crore a year — for improving land productivity and thereby increase farm output. The NREGS is already performing a really useful function of generating employment. Converging the NREGS resources with schemes to increase land productivity would be a sensible way to increase farm incomes and employment. All this, of course, will have to be supported through sufficient expansion of agriculture credit. The UPA government has done an excellent job when it comes to expansion of agriculture credit and this is reflected in the major increase in credit flows to the sector in the last three years. In addition there has been a one-time loan waiver for a large number of farmers.
When it comes to increasing farm productivity, balanced use of fertilisers is very important. It’s only recently that a new investment policy for the fertiliser sector has been announced, even though the sector has been witnessing an investment famine for the last few years, making the economy much more vulnerable to the high prices of imported urea.
The new investment policy (in the fertiliser sector) gives incentives to the right kind of fertiliser production. But for the full results of this new policy, we’ll have to wait for another 3-4 years. As an immediate priority, we need to focus on utilising as much of the (existing) capacities as we can, and also taking timely steps for needbased imports of fertilisers.
Off-budget liabilities like oil and fertiliser subsidies, it is estimated, would be 5% of GDP this fiscal. Ideally, these should also be reckoned as fiscal deficit.
I think the 5% estimate is from the EAC report. Whether to bring these off-budget liabilities on the book, or to keep them off the book is essentially a question of accounting. The important point to note is that most of this (off-budget) deficit is really due to the very large increase in international prices of petroleum and fertilisers. We’ve passed on some of this price increase to the consumers, absorbed a fraction by reducing taxes and also forced the producers to take a hit. But a very large part of this price increase has not been passed on and this enlarges the subsidy bill. Clearly, it is not a sustainable solution to maintain this level of hidden deficit (off-budget deficit) year after year. The objective of policy should be to bring down the total deficit, sum of off-budget and on-budget deficits, to a comfortable level. Right now, it (the total deficit) is definitely not comfortable.
What happens if global prices remain high?
If that happens we will really have to take some hard decisions. The ability of the economy to grow at a healthy rate will depend on our ability to take these hard decisions. I’m not pessimistic about India’s ability to grow even with high global oil prices, provided we take the right policy decisions. If we are moving on to a world in which the medium-term prospects are that of expensive energy, we must make sure subsidies are meant only for the needy. There’s a need for lifeline availability of energy at affordable prices, and we should assure that. But beyond that, energy should be fully priced. If the Rajiv Gandhi Gramin Vidyut Yojana is properly implemented, it can potentially bring down the use of kerosene for lighting and therefore, largely obviate the need for subsidy.
Despite the ambitious targets set for power gen eration in the Eleventh Plan, the situation on this front doesn’t seem to be encouraging, despite Ultra Mega Plants .
The dip in generation growth that you are referring to is a transient one, which I don’t regard as pointer to the medium-term prospect in this regard. In the last Five Year Plan, we could add just 21,000 MW to the generation capacity. I’m reasonably sure that in the 11th Plan we will add three times of that to the generation pool, even if we fall slightly short of the target of 78,000MW. As for ultra mega power plants, they will mostly come up during the 13th Plan, but we have other projects that will help meet the target.
As regards the viability of the power sector, coal sector reforms are very important. So, too, are measures for addressing the investment torpor in the distribution sector.
Yes indeed, a rational approach to energy must cover all relevant sectors. Having said that, it is not the case that there are no reforms in the coal sector. By allowing captive mining of coal for power production, we have allowed new private investment into the industry. This is a substantial reform measure that we are closely watching to see if the process of allocation of captive coal mines is being accelerated.
I also agree that the single most important challenge facing the power sector is the one concerning distribution. The AT&C losses continue to be 35%. No system can survive with losses of that magnitude. The 10th Plan target was to reduce these losses to 15% but we could not achieve that. Now, the 11th Plan target, again, is to cut these losses to 15%. Some states like Andhra Pradesh (18%) and Tamil Nadu (20%) have brought down AT&C losses substantially. We’re encouraging other states to learn from the experiences of these states.
Attracting investment in the power sector won’t be a problem if we cut the AT&C losses and also accelerate the move towards open access. Open access is to become mandatory from January 1, 2009. However, it is important that wheeling charges are made reasonable. Unfortunately, most of the electricity regulators continue to have a public-sector protection mentality and this hampers open access initiatives, which, if properly carried out, could have brought distribution companies under competitive pressure.
The ambitious project to attract $500-billion investment in infrastructure doesn’t seem to fully fructify. The target is to increase infrastructure investment from 5% of GDP now to 9% by the end of this Plan. This corresponds to investment of $500 billion, over the five year period. This means attracting an additional $150 billion over what would happen with normal growth.
That is indeed ambitious, and most of it will have to come from public sector corporations making an extra effort, and from public private partnerships (PPPs). Fortunately, we now have a policy in place that has generated a lot of interest, but there are also problems. To generate the massive flow of investment, transparency and better project preparation are vital. We have to do more in this area.
Many state governments are doing a very good job in this regard; some are seeking our help to structure the projects. Andhra Pradesh has demonstrated an outstandingly successful pure PPP model for a metro system by bidding out the Rs 12,000-crore Hyderabad metro to a private party without requiring the centre or state governments to pay anything—in fact, the state will get some revenue from the proposed metro. The revenue model of the project involves land associated with the metro being aggressively developed to subsidise the metro.
Do you think the pending Bills of financial sector reforms will pass muster in the tenure of the UPA govt?
Let me not speculate on what will be passed by the Parliament. In fact, we have a very clear agenda on financial sector reforms – the bills pending in parliament are a small part of that agenda. We need to take a much broader approach to financial sector reforms. The Planning Commission is about to receive the report of the high-level committee headed by Dr Raghuram Rajan, which is expected to outline a ten-year road map for reforms. This should be the basis for intense discussions on the next steps in reforms. We will put this in the public domain to elicit views and stimulate discussions. It should be noted that India’s savings rate is much lower than China’s and so, for us to grow at 9-10%, we need much greater financial sector efficiency than China. This makes financial sector reforms especially important in our context.
Wednesday, August 27, 2008
India has fewer poor people: World Bank
India has brought down the number of people living below $1 a day by 2 percentage points to 24.3 per cent in three years up to 2005, as Asia’s third-largest economy accelerated to 7 per cent plus growth in those years, latest data from the World Bank reveal.
In absolute numbers, 9.6 million people came out of poverty between 2002 and 2005, the largest reduction between two consecutive surveys released by the World Bank since 1981.
If $1.25 per day is taken as a benchmark for defining the poverty line, then 4.7 million came out of poverty in this period.
Since the data reported by the World Bank have a time lag of three years, the effect of increase in food and commodity prices — which disproportionately affect the poor — in the last two years is not known.
Also, the World Bank now says it has upwardly adjusted the cost of living in developing countries to $1.25 per day against $1 per day.
The poverty line of $1.25 is the average poverty line found in the poorest 10-20 countries, the World Bank said in a press statement.
The new study suggested the number of people below the poverty line would have increased by 400 million in three years to 1,399.8 million in 2005 (at $1.25 per day), against 1,090.2 million (at $1 per day) in 2002.
If similar comparison were adopted for India, the number of people in poverty would have increased by 179.1 million between 2002 and 2005. In percentage terms, it would be 41.6 per cent as on 2005 as against 26.3 per cent in 2002. The difference between India’s own estimate of poverty and the World Bank’s one is because of a difference in how the poverty line is calculated.
The World Bank’s calculation is based on the average of the poorest countries, whereas India’s estimate is based on how much money is required for an individual to have ideal intake of daily food and expenditure on shelter and other necessities.
GAINS IN POVERTY REDUCTION
(Figures in %) 1990 1993 1996 1999 2002 2005
BELOW $1 A DAY
India 33.3 31.1 28.6 27.0 26.3 24.3
World 29.9 26.9 23.5 22.8 20.8 16.1
BELOW $1.25 A DAY
India 51.3 49.4 46.6 44.8 43.9 41.6
World 41.7 39 34.7 33.7 31.1 25.7
BELOW $2 A DAY
India 82.6 81.7 79.8 78.4 77.5 75.6
World 63.1 61.4 58.3 57.0 53.6 47.6
If India’s poverty line is translated in Purchasing Power Parity (PPP) terms, it is $ 1.02 per day.
“High GDP (Gross Domestic Product) growth in India has reduced poverty. However, to achieve a higher rate of poverty reduction, India will also need to address inequalities in opportunities that impede the poor from participating in the growth process,” the World Bank said.
In absolute numbers, 9.6 million people came out of poverty between 2002 and 2005, the largest reduction between two consecutive surveys released by the World Bank since 1981.
If $1.25 per day is taken as a benchmark for defining the poverty line, then 4.7 million came out of poverty in this period.
Since the data reported by the World Bank have a time lag of three years, the effect of increase in food and commodity prices — which disproportionately affect the poor — in the last two years is not known.
Also, the World Bank now says it has upwardly adjusted the cost of living in developing countries to $1.25 per day against $1 per day.
The poverty line of $1.25 is the average poverty line found in the poorest 10-20 countries, the World Bank said in a press statement.
The new study suggested the number of people below the poverty line would have increased by 400 million in three years to 1,399.8 million in 2005 (at $1.25 per day), against 1,090.2 million (at $1 per day) in 2002.
If similar comparison were adopted for India, the number of people in poverty would have increased by 179.1 million between 2002 and 2005. In percentage terms, it would be 41.6 per cent as on 2005 as against 26.3 per cent in 2002. The difference between India’s own estimate of poverty and the World Bank’s one is because of a difference in how the poverty line is calculated.
The World Bank’s calculation is based on the average of the poorest countries, whereas India’s estimate is based on how much money is required for an individual to have ideal intake of daily food and expenditure on shelter and other necessities.
GAINS IN POVERTY REDUCTION
(Figures in %) 1990 1993 1996 1999 2002 2005
BELOW $1 A DAY
India 33.3 31.1 28.6 27.0 26.3 24.3
World 29.9 26.9 23.5 22.8 20.8 16.1
BELOW $1.25 A DAY
India 51.3 49.4 46.6 44.8 43.9 41.6
World 41.7 39 34.7 33.7 31.1 25.7
BELOW $2 A DAY
India 82.6 81.7 79.8 78.4 77.5 75.6
World 63.1 61.4 58.3 57.0 53.6 47.6
If India’s poverty line is translated in Purchasing Power Parity (PPP) terms, it is $ 1.02 per day.
“High GDP (Gross Domestic Product) growth in India has reduced poverty. However, to achieve a higher rate of poverty reduction, India will also need to address inequalities in opportunities that impede the poor from participating in the growth process,” the World Bank said.
Stocks to watch: Tata Sons, ONGC Videsh, HDIL, DLF, SAIL
Equities are likely to open higher on Wednesday tracking cues from global shores. However, with crude oil prices inching northward, gains may be limited. Volatility is also likely given the August series derivatives contracts expiry due on Thursday.
Oil prices continued to move upwards on Wednesday on concerns that Tropical Storm Gustav may disrupt supplies. Crude for October delivery was at $116.71 per barrel, up $1.16 from its previous close.
Meanwhile, rupee was a tad higher at 43.75/76 per dollar, from the previous close of 43.84/85.
Tata Sons, the unlisted holding company for Tata group firms, is considering options to sell part of its stake in India’s largest software exporter Tata Consultancy Services to fund the group’s expansion plans, especially in telecom. Currently, Tata Sons holds 74.81 per cent stake in TCS, which has a market value of nearly Rs 61,000 crore at Tuesday’s closing price.
ONGC Videsh, the foreign investment arm of the country’s largest exploration company, ONGC, on Tuesday put in a formal bid to acquire UK-based oil firm Imperial Energy at 1,250 pence per share. Imperial Energy, with assets in the Russian Federation and CIS countries, is valued at $2.58 billion at the bid price.
Domestic airlines like Jet Airways and SpiceJet are considering fare hikes ahead of the start of the peak travel season in September-October to cope with rise in jet fuel prices.
In yet another attempt to keep steel prices from rising further, the government may raise export duty on iron ore. The committee of secretaries reviewing prices of essential commodities is set to discuss a proposal to raise export duty on iron ore to 20 per cent from 15 per cent.
Country's largest steel producer SAIL will set up a Steel Processing Unit in Gwalior at an investment of Rs 83 crore to meet the rising demand of the the product. The unit is expected to be completed in 18 months and would have a production capacity of one-lakh ton per annum of TMT bars.
The promoters and two major shareholders of Firstsource Solutions have put their combined 68 per cent in the BPO firm up for sale. The sellers — ICICI group, Aranda Investments and Metavante — are learnt to be asking for Rs 1,865 crore, or Rs 64 a share, for the transaction.
Cairn India is likely to sell its investments in Videocon Industries. At the current rate of Rs 272 per share, this investment us valued at Rs 72 crore.
With Trinamool Congress supremo Mamata Banerjee sticking to her principal demand on the return of the 400 acres set aside for the Singur vendor park, Tata Motors has told its Nano vendors that the company is working on a business plan to ensure they are not “financially hit” if the Nano project is shifted from Singur.
Realty giant DLF is planning to raise Rs 10,000 crore in next one year for its development projects.
Mumbai based HDIL may raise around Rs 1,000 crore to relocate slum dwellers for Mumbai airport project, say reports.
Shares of Nu Tek India, telecom infrastructure services provider offering rollout solutions for both mobile and fixed telecom networks, will list on the exchanges today. The company has fixed the issue price at Rs 192 per share. The issue was subscribed 1.63 times.
Oil prices continued to move upwards on Wednesday on concerns that Tropical Storm Gustav may disrupt supplies. Crude for October delivery was at $116.71 per barrel, up $1.16 from its previous close.
Meanwhile, rupee was a tad higher at 43.75/76 per dollar, from the previous close of 43.84/85.
Tata Sons, the unlisted holding company for Tata group firms, is considering options to sell part of its stake in India’s largest software exporter Tata Consultancy Services to fund the group’s expansion plans, especially in telecom. Currently, Tata Sons holds 74.81 per cent stake in TCS, which has a market value of nearly Rs 61,000 crore at Tuesday’s closing price.
ONGC Videsh, the foreign investment arm of the country’s largest exploration company, ONGC, on Tuesday put in a formal bid to acquire UK-based oil firm Imperial Energy at 1,250 pence per share. Imperial Energy, with assets in the Russian Federation and CIS countries, is valued at $2.58 billion at the bid price.
Domestic airlines like Jet Airways and SpiceJet are considering fare hikes ahead of the start of the peak travel season in September-October to cope with rise in jet fuel prices.
In yet another attempt to keep steel prices from rising further, the government may raise export duty on iron ore. The committee of secretaries reviewing prices of essential commodities is set to discuss a proposal to raise export duty on iron ore to 20 per cent from 15 per cent.
Country's largest steel producer SAIL will set up a Steel Processing Unit in Gwalior at an investment of Rs 83 crore to meet the rising demand of the the product. The unit is expected to be completed in 18 months and would have a production capacity of one-lakh ton per annum of TMT bars.
The promoters and two major shareholders of Firstsource Solutions have put their combined 68 per cent in the BPO firm up for sale. The sellers — ICICI group, Aranda Investments and Metavante — are learnt to be asking for Rs 1,865 crore, or Rs 64 a share, for the transaction.
Cairn India is likely to sell its investments in Videocon Industries. At the current rate of Rs 272 per share, this investment us valued at Rs 72 crore.
With Trinamool Congress supremo Mamata Banerjee sticking to her principal demand on the return of the 400 acres set aside for the Singur vendor park, Tata Motors has told its Nano vendors that the company is working on a business plan to ensure they are not “financially hit” if the Nano project is shifted from Singur.
Realty giant DLF is planning to raise Rs 10,000 crore in next one year for its development projects.
Mumbai based HDIL may raise around Rs 1,000 crore to relocate slum dwellers for Mumbai airport project, say reports.
Shares of Nu Tek India, telecom infrastructure services provider offering rollout solutions for both mobile and fixed telecom networks, will list on the exchanges today. The company has fixed the issue price at Rs 192 per share. The issue was subscribed 1.63 times.
Stocks to watch: Tata Sons, ONGC Videsh, HDIL, DLF, SAIL
Equities are likely to open higher on Wednesday tracking cues from global shores. However, with crude oil prices inching northward, gains may be limited. Volatility is also likely given the August series derivatives contracts expiry due on Thursday.
Oil prices continued to move upwards on Wednesday on concerns that Tropical Storm Gustav may disrupt supplies. Crude for October delivery was at $116.71 per barrel, up $1.16 from its previous close.
Meanwhile, rupee was a tad higher at 43.75/76 per dollar, from the previous close of 43.84/85.
Tata Sons, the unlisted holding company for Tata group firms, is considering options to sell part of its stake in India’s largest software exporter Tata Consultancy Services to fund the group’s expansion plans, especially in telecom. Currently, Tata Sons holds 74.81 per cent stake in TCS, which has a market value of nearly Rs 61,000 crore at Tuesday’s closing price.
ONGC Videsh, the foreign investment arm of the country’s largest exploration company, ONGC, on Tuesday put in a formal bid to acquire UK-based oil firm Imperial Energy at 1,250 pence per share. Imperial Energy, with assets in the Russian Federation and CIS countries, is valued at $2.58 billion at the bid price.
Domestic airlines like Jet Airways and SpiceJet are considering fare hikes ahead of the start of the peak travel season in September-October to cope with rise in jet fuel prices.
In yet another attempt to keep steel prices from rising further, the government may raise export duty on iron ore. The committee of secretaries reviewing prices of essential commodities is set to discuss a proposal to raise export duty on iron ore to 20 per cent from 15 per cent.
Country's largest steel producer SAIL will set up a Steel Processing Unit in Gwalior at an investment of Rs 83 crore to meet the rising demand of the the product. The unit is expected to be completed in 18 months and would have a production capacity of one-lakh ton per annum of TMT bars.
The promoters and two major shareholders of Firstsource Solutions have put their combined 68 per cent in the BPO firm up for sale. The sellers — ICICI group, Aranda Investments and Metavante — are learnt to be asking for Rs 1,865 crore, or Rs 64 a share, for the transaction.
Cairn India is likely to sell its investments in Videocon Industries. At the current rate of Rs 272 per share, this investment us valued at Rs 72 crore.
With Trinamool Congress supremo Mamata Banerjee sticking to her principal demand on the return of the 400 acres set aside for the Singur vendor park, Tata Motors has told its Nano vendors that the company is working on a business plan to ensure they are not “financially hit” if the Nano project is shifted from Singur.
Realty giant DLF is planning to raise Rs 10,000 crore in next one year for its development projects.
Mumbai based HDIL may raise around Rs 1,000 crore to relocate slum dwellers for Mumbai airport project, say reports.
Shares of Nu Tek India, telecom infrastructure services provider offering rollout solutions for both mobile and fixed telecom networks, will list on the exchanges today. The company has fixed the issue price at Rs 192 per share. The issue was subscribed 1.63 times.
Oil prices continued to move upwards on Wednesday on concerns that Tropical Storm Gustav may disrupt supplies. Crude for October delivery was at $116.71 per barrel, up $1.16 from its previous close.
Meanwhile, rupee was a tad higher at 43.75/76 per dollar, from the previous close of 43.84/85.
Tata Sons, the unlisted holding company for Tata group firms, is considering options to sell part of its stake in India’s largest software exporter Tata Consultancy Services to fund the group’s expansion plans, especially in telecom. Currently, Tata Sons holds 74.81 per cent stake in TCS, which has a market value of nearly Rs 61,000 crore at Tuesday’s closing price.
ONGC Videsh, the foreign investment arm of the country’s largest exploration company, ONGC, on Tuesday put in a formal bid to acquire UK-based oil firm Imperial Energy at 1,250 pence per share. Imperial Energy, with assets in the Russian Federation and CIS countries, is valued at $2.58 billion at the bid price.
Domestic airlines like Jet Airways and SpiceJet are considering fare hikes ahead of the start of the peak travel season in September-October to cope with rise in jet fuel prices.
In yet another attempt to keep steel prices from rising further, the government may raise export duty on iron ore. The committee of secretaries reviewing prices of essential commodities is set to discuss a proposal to raise export duty on iron ore to 20 per cent from 15 per cent.
Country's largest steel producer SAIL will set up a Steel Processing Unit in Gwalior at an investment of Rs 83 crore to meet the rising demand of the the product. The unit is expected to be completed in 18 months and would have a production capacity of one-lakh ton per annum of TMT bars.
The promoters and two major shareholders of Firstsource Solutions have put their combined 68 per cent in the BPO firm up for sale. The sellers — ICICI group, Aranda Investments and Metavante — are learnt to be asking for Rs 1,865 crore, or Rs 64 a share, for the transaction.
Cairn India is likely to sell its investments in Videocon Industries. At the current rate of Rs 272 per share, this investment us valued at Rs 72 crore.
With Trinamool Congress supremo Mamata Banerjee sticking to her principal demand on the return of the 400 acres set aside for the Singur vendor park, Tata Motors has told its Nano vendors that the company is working on a business plan to ensure they are not “financially hit” if the Nano project is shifted from Singur.
Realty giant DLF is planning to raise Rs 10,000 crore in next one year for its development projects.
Mumbai based HDIL may raise around Rs 1,000 crore to relocate slum dwellers for Mumbai airport project, say reports.
Shares of Nu Tek India, telecom infrastructure services provider offering rollout solutions for both mobile and fixed telecom networks, will list on the exchanges today. The company has fixed the issue price at Rs 192 per share. The issue was subscribed 1.63 times.
Tuesday, August 26, 2008
World Economy in 2008
Across the world, people, irrespective of their religion and nationality, are all set to celebrate the advent of New Year 2008 with much verve and enthusiasm. All hope for a better future and prevalence of happiness and prosperity in the global family.
Economy Watch wishes you all the best for the forthcoming year. On this occasion, we join the global festivity by presenting to our global audience a short analysis and set of predictions on World Economy 2008.
The world economy is predicted to continue growing in 2008. However, the rate of growth is expected to be lower than the current year. The projected world growth rate for the year 2008 is around 4.8%, whereas the ongoing growth rate for 2007 year end is 5.2%. Central Banks of different countries are expected to stay away from monetary restrictions in the face of inflations. This is expected to contribute significantly to the growth of the world economy in 2008. Also high investment is expected to continue in the year ahead. The most interesting aspect of economic growth in 2008 is the fact that the world economy in the said year is expected to be driven by emerging economies like China and India, rather than by economies of USA, European countries and Japan.
Growth prospects for the world economy in 2008
The slowdown in the world economy in recent times has been attributed to the slow growth of the US economy. Private consumption in the USA has lacked momentum. The Real Estate sector worldwide has faced severe crisis. In the global economy, volatile oil prices, fluctuating financial markets and continued inflation are forecasted to be the major threats to economic growth in 2008. However, the momentum of growth in the emerging economies is an encouraging sign for the world economy. According to IMF Chief Economist Simon Johnson, China and India are expected to make the largest country level contributions to the growth of the world economy. Higher corporate profits, high employment and growing international trade are positive traits prevailing in the world economy which can be expected to continue through 2008.
The performance of the developing countries will remain a key factor in the world economy in 2008. While Emerging Asia (mostly East and South East) is expected to grow at 8.3% in 2008, Africa and the Middle East are expected to grow at 6.5% and 5.9% respectively.
US economy in 2008
The US economy is experiencing low growth rates. By the end of 2007, the US economy is expected to register a growth rate of only 1.9 %, one of the lowest growth rates the United States of America has seen in recent years. Although economists do not perceive the risk of an immediate recession in the US economy, however, lack of growth in industrial production, decline in the real estate sector, slow growth of employment and insufficient business credit are factors that would weigh heavily on the growth of the US economy in 2008. Economists have projected a 3% growth for the US economy in 2008.
Chinese Economy in 2008
The Chinese economy is forecasted to grow at 10.9 % in 2008 which, in spite of a slowdown from 2007, would still be substantial. China’s global trade surplus is predicted to reach the 300 billion dollars mark next year which is a growth of 20%. Inflation of 4.5% is forecasted for the Chinese economy in 2008.
Indian Economy in 2008
A growth of above 8% has been forecasted for the Indian economy in 2008. According to Indian Finance Minister Mr. P. Chidambaram, Indian exports would reach the $200 billion mark in 2008. The growth of the service sector which contributes more than 50% to India’s GDP, the potential of the Indian Stock market and the appreciating Indian Rupee are expected to be major factors in India’s economic growth in 2008.
Japanese Economy in 2008
Growth in the Japanese economy is expected from higher investments and increasing private consumption. The Japanese economy, growing at 2.4 % in 2007 is expected to grow at 2.2 % in 2008
The Middle East Economies in 2008
The Middle East economies are expected to benefit from rising oil prices. An average 5.9 % growth rate has been forecasted for the Middle East economies, while Iran and Egypt are expected to register higher growth rates.
African Economies in 2008
After years of slow growth, the African Economies are gaining momentum and maintaining steady growth rates. The average growth rate of the Sub Saharan African economies, which was 5.7% in 2006, is expected to be at 6.1 % at the end of 2007 and further rise to 6.8% in 2008. The African oil exporting countries like Nigeria and Angola are providing boost to the African economies.
European Economy in 2008
Capacity utilization is expected to increase in the European economy (Euro countries) in 2008. Growth of 2.3% is forecasted for the Euro economy in 2008.
UK Economy in 2008
Growth in the UK economy is also forecasted to slow down in 2008. Currently growing at 2.6%, it is expected to grow at 2.3% in 2008.
Russian Economy in 2008
The Russian economy, growing at 7 % in 2007 is expected to grow at 6.5 % in 2008.
Economy Watch wishes you all the best for the forthcoming year. On this occasion, we join the global festivity by presenting to our global audience a short analysis and set of predictions on World Economy 2008.
The world economy is predicted to continue growing in 2008. However, the rate of growth is expected to be lower than the current year. The projected world growth rate for the year 2008 is around 4.8%, whereas the ongoing growth rate for 2007 year end is 5.2%. Central Banks of different countries are expected to stay away from monetary restrictions in the face of inflations. This is expected to contribute significantly to the growth of the world economy in 2008. Also high investment is expected to continue in the year ahead. The most interesting aspect of economic growth in 2008 is the fact that the world economy in the said year is expected to be driven by emerging economies like China and India, rather than by economies of USA, European countries and Japan.
Growth prospects for the world economy in 2008
The slowdown in the world economy in recent times has been attributed to the slow growth of the US economy. Private consumption in the USA has lacked momentum. The Real Estate sector worldwide has faced severe crisis. In the global economy, volatile oil prices, fluctuating financial markets and continued inflation are forecasted to be the major threats to economic growth in 2008. However, the momentum of growth in the emerging economies is an encouraging sign for the world economy. According to IMF Chief Economist Simon Johnson, China and India are expected to make the largest country level contributions to the growth of the world economy. Higher corporate profits, high employment and growing international trade are positive traits prevailing in the world economy which can be expected to continue through 2008.
The performance of the developing countries will remain a key factor in the world economy in 2008. While Emerging Asia (mostly East and South East) is expected to grow at 8.3% in 2008, Africa and the Middle East are expected to grow at 6.5% and 5.9% respectively.
US economy in 2008
The US economy is experiencing low growth rates. By the end of 2007, the US economy is expected to register a growth rate of only 1.9 %, one of the lowest growth rates the United States of America has seen in recent years. Although economists do not perceive the risk of an immediate recession in the US economy, however, lack of growth in industrial production, decline in the real estate sector, slow growth of employment and insufficient business credit are factors that would weigh heavily on the growth of the US economy in 2008. Economists have projected a 3% growth for the US economy in 2008.
Chinese Economy in 2008
The Chinese economy is forecasted to grow at 10.9 % in 2008 which, in spite of a slowdown from 2007, would still be substantial. China’s global trade surplus is predicted to reach the 300 billion dollars mark next year which is a growth of 20%. Inflation of 4.5% is forecasted for the Chinese economy in 2008.
Indian Economy in 2008
A growth of above 8% has been forecasted for the Indian economy in 2008. According to Indian Finance Minister Mr. P. Chidambaram, Indian exports would reach the $200 billion mark in 2008. The growth of the service sector which contributes more than 50% to India’s GDP, the potential of the Indian Stock market and the appreciating Indian Rupee are expected to be major factors in India’s economic growth in 2008.
Japanese Economy in 2008
Growth in the Japanese economy is expected from higher investments and increasing private consumption. The Japanese economy, growing at 2.4 % in 2007 is expected to grow at 2.2 % in 2008
The Middle East Economies in 2008
The Middle East economies are expected to benefit from rising oil prices. An average 5.9 % growth rate has been forecasted for the Middle East economies, while Iran and Egypt are expected to register higher growth rates.
African Economies in 2008
After years of slow growth, the African Economies are gaining momentum and maintaining steady growth rates. The average growth rate of the Sub Saharan African economies, which was 5.7% in 2006, is expected to be at 6.1 % at the end of 2007 and further rise to 6.8% in 2008. The African oil exporting countries like Nigeria and Angola are providing boost to the African economies.
European Economy in 2008
Capacity utilization is expected to increase in the European economy (Euro countries) in 2008. Growth of 2.3% is forecasted for the Euro economy in 2008.
UK Economy in 2008
Growth in the UK economy is also forecasted to slow down in 2008. Currently growing at 2.6%, it is expected to grow at 2.3% in 2008.
Russian Economy in 2008
The Russian economy, growing at 7 % in 2007 is expected to grow at 6.5 % in 2008.
FDI inflows likely to swell to $40 bn
Foreign direct investment (FDI) inflows are likely to expand by 62.8 per cent in 2008-09 to $40 billion, as against $24.57 billion in the last financial year as the services sector is expected to attract a major chunk of foreign investments
“In the January-June period of 2008, FDI inflows crossed $20 billion, while in the first quarter period (April-June) this year, inflows were over $10 billion. Looking at this trend, FDI inflows in 2008-09 may cross $40 billion,” industry secretary Ajay Shanker told reporters at a Ficci seminar here today.
“Higher FDI inflows will help in moderating the depreciation of the rupee against the US dollar,” said Saugata Bhattacharya, vice-president, Axis Bank.
Significantly, the Prime Minister’s Economic Advisory Council had estimated FDI inflows, which are long term foreign investments, would be of the order of $46.2 billion in 2008-09. The commerce and industry ministry had forecast an FDI inflow $35 billion in the current fiscal. The industry secretary’s estimate falls between the two projections.
Moreover, with increasing number of Indian companies investing abroad, the council had forecast an FDI outflow of $26.5 billion during 2008-09. As a result, the net FDI inflow is pegged at $19.7 billion during the current fiscal.
With the wholesale price index-based headline inflation currently at a 16-year high, the domestic equity markets have become less attractive for overseas investors. According to data released by the Securities & Exchange Board of India today, the net outflow of equities held by foreign investors between January and August this year stood at $7.7 billion.
Desegregated data available with the Department of Industrial Policy and Promotion shows that between April and May this fiscal, the tax haven of Mauritius continued to be the top source of FDI inflows ($2.85 billion), followed by the United States ($794 million) and Singapore at $616 million.
In the first two months of 2008-09, financial and non-financial services sector attracted FDI inflows of $1.19 billion, followed by construction sector with $1.16 billion.
“In the January-June period of 2008, FDI inflows crossed $20 billion, while in the first quarter period (April-June) this year, inflows were over $10 billion. Looking at this trend, FDI inflows in 2008-09 may cross $40 billion,” industry secretary Ajay Shanker told reporters at a Ficci seminar here today.
“Higher FDI inflows will help in moderating the depreciation of the rupee against the US dollar,” said Saugata Bhattacharya, vice-president, Axis Bank.
Significantly, the Prime Minister’s Economic Advisory Council had estimated FDI inflows, which are long term foreign investments, would be of the order of $46.2 billion in 2008-09. The commerce and industry ministry had forecast an FDI inflow $35 billion in the current fiscal. The industry secretary’s estimate falls between the two projections.
Moreover, with increasing number of Indian companies investing abroad, the council had forecast an FDI outflow of $26.5 billion during 2008-09. As a result, the net FDI inflow is pegged at $19.7 billion during the current fiscal.
With the wholesale price index-based headline inflation currently at a 16-year high, the domestic equity markets have become less attractive for overseas investors. According to data released by the Securities & Exchange Board of India today, the net outflow of equities held by foreign investors between January and August this year stood at $7.7 billion.
Desegregated data available with the Department of Industrial Policy and Promotion shows that between April and May this fiscal, the tax haven of Mauritius continued to be the top source of FDI inflows ($2.85 billion), followed by the United States ($794 million) and Singapore at $616 million.
In the first two months of 2008-09, financial and non-financial services sector attracted FDI inflows of $1.19 billion, followed by construction sector with $1.16 billion.
Cos may shift to alternative fuel
Companies which use diesel to run their backup generators say they would shift to alternative fuels if the government decides to adopt dual pricing, where these firms would be charged higher and retail customers would continue to get subsidised fuel.
Corporations in many states are forced to use their own diesel-powered generators as state electricity boards are unable to supply uninterrupted power due to demand far exceeding electricity generation.
Even at the current subsidised price, manufacturing units claim it costs two to three times more to run a diesel-powered genset against what they pay to electricity boards.
“If diesel prices go up, we would shift to other fuel options,” said P K Jain, former president of PHD Chamber of Commerce and Industries and also the chairman of Gurgaon-based The Malt Company (India) Ltd, which uses diesel gensets to produce captive power.
“But if we shift to other fuels, the price of that fuel would go up and ultimately it’s the consumer who is going to pay higher,” he added.
At present, around 25,000 Mw is generated through captive plants in the country, which is about 17 per cent of India’s total installed power generation capacity of 145,000 Mw. A bulk of this captive power — about 80 per cent — is generated through diesel gensets and is used to combat power shortages.
Therefore, the subsidised diesel meant for the transport sector has increasingly found its way to sectors like power and fuelling demand for the commodity.
The most recent increase in diesel prices coupled by a rise in demand has resulted in a 12-15 per cent spurt in the fuel bills of captive power generators using diesel. The government recently increased the retail price of diesel by Rs 3 per litre.
“The increase in the price of diesel has caused a 12-15 per cent increase in our fuel bills. It is not possible to absorb the high cost. We have to rely on diesel for power generation because we are not getting enough power supply from the state electricity board,” said Jain.
The cost of captive power generation by using diesel has risen up to Rs 11-12 per unit, which is significantly higher than Rs 4.50 per unit, the rate at which his company is supplied power by the state electricity board, reducing the profit margins, he added. His is one of the many companies in the area which rely on diesel-fired captive gensets in Haryana.
Textile exporters at Tirupur in Tamil Nadu are also depending on diesel-powered gensets to tide over daily power outages of four hours. It costs around Rs 10 per unit of power generated if diesel-powered captive genset is used; nearly 40 per cent more than what they would pay to the Tamil Nadu Electricity Board.
Earlier this month, Petroleum Minister Murli Deora had also said “there is a 23-24 per cent unforeseen increase in demand because it is being used in power generation”.
The rise in demand for diesel has fuelled to a large extent by its supply to power sector companies.
“With the prices of crude oil sky-rocketing, power generators do not have much choice. In near future, if crude settles down to $80-100 per barrel, then the market will become fair for diesel too,” said a senior analyst with an accounting and consulting firm.
The higher diesel prices have affected not only captive power generators but also bigger power producers like NTPC Ltd.
Corporations in many states are forced to use their own diesel-powered generators as state electricity boards are unable to supply uninterrupted power due to demand far exceeding electricity generation.
Even at the current subsidised price, manufacturing units claim it costs two to three times more to run a diesel-powered genset against what they pay to electricity boards.
“If diesel prices go up, we would shift to other fuel options,” said P K Jain, former president of PHD Chamber of Commerce and Industries and also the chairman of Gurgaon-based The Malt Company (India) Ltd, which uses diesel gensets to produce captive power.
“But if we shift to other fuels, the price of that fuel would go up and ultimately it’s the consumer who is going to pay higher,” he added.
At present, around 25,000 Mw is generated through captive plants in the country, which is about 17 per cent of India’s total installed power generation capacity of 145,000 Mw. A bulk of this captive power — about 80 per cent — is generated through diesel gensets and is used to combat power shortages.
Therefore, the subsidised diesel meant for the transport sector has increasingly found its way to sectors like power and fuelling demand for the commodity.
The most recent increase in diesel prices coupled by a rise in demand has resulted in a 12-15 per cent spurt in the fuel bills of captive power generators using diesel. The government recently increased the retail price of diesel by Rs 3 per litre.
“The increase in the price of diesel has caused a 12-15 per cent increase in our fuel bills. It is not possible to absorb the high cost. We have to rely on diesel for power generation because we are not getting enough power supply from the state electricity board,” said Jain.
The cost of captive power generation by using diesel has risen up to Rs 11-12 per unit, which is significantly higher than Rs 4.50 per unit, the rate at which his company is supplied power by the state electricity board, reducing the profit margins, he added. His is one of the many companies in the area which rely on diesel-fired captive gensets in Haryana.
Textile exporters at Tirupur in Tamil Nadu are also depending on diesel-powered gensets to tide over daily power outages of four hours. It costs around Rs 10 per unit of power generated if diesel-powered captive genset is used; nearly 40 per cent more than what they would pay to the Tamil Nadu Electricity Board.
Earlier this month, Petroleum Minister Murli Deora had also said “there is a 23-24 per cent unforeseen increase in demand because it is being used in power generation”.
The rise in demand for diesel has fuelled to a large extent by its supply to power sector companies.
“With the prices of crude oil sky-rocketing, power generators do not have much choice. In near future, if crude settles down to $80-100 per barrel, then the market will become fair for diesel too,” said a senior analyst with an accounting and consulting firm.
The higher diesel prices have affected not only captive power generators but also bigger power producers like NTPC Ltd.
Monday, August 25, 2008
India, U.S. begin reworking draft nuclear deal
The United States and India began reworking a draft agreement to win approval from a global nuclear trade bloc that has been sceptical of the two nations' proposed civilian nuclear deal, officials said on Monday.
A 45-nation meeting on whether to lift a ban on nuclear trade with India ended inconclusively last week after many members wanted to attach conditions, like trying to ban further nuclear tests by the Asian power.
The deal would allow India access to nuclear technology and fuel, overturning a three-decade ban on trade after India tested nuclear weapons in 1974.
The countries in the Nuclear Suppliers Group (NSG) will meet again on Sept. 4-5, when the United States is expected to rework the draft for a waiver breaking the nuclear trade embargo.
"The ball has been set rolling," an Indian foreign ministry official said when asked if the two countries had begun reworking the draft. "Our foreign secretary is in the U.S. and the two delegations have been meeting."
U.S. Assistant Secretary of State Richard Boucher met Indian officials on Monday but refused to answer questions on what changes were likely in the U.S. draft.
He hinted last week that the two sides were open to accommodating some changes in the draft so long as they did not impede the bilateral pact.
Washington says it was committed to getting the draft past the NSG as soon as possible.
"The United States and India will continue our vigorous joint advocacy for the initiative at the highest levels of NSG government," David C. Mulford, U.S. Ambassador to India, said.
Diplomats say conditions tabled at the NSG included intrusive U.N. inspections of Indian civilian nuclear sites; cancellation of any waiver if India tests bombs again; and periodic reviews of Indian compliance with the exemption.
India says it will not agree to any conditions to get an NSG approval.
Sensitive to leftist charges that closer ties with the United States will undo its strategic autonomy, New Delhi has insisted on a "clean and unconditional" waiver from the NSG.
"We will continue to work with our Indian partners to persuade the Nuclear Suppliers Group countries that such an exemption is in the international community's best interest," Mulford said.
The bilateral deal has disturbed pro-disarmament nations and campaigners since India is outside the global Non-Proliferation Treaty (NPT) and developed nuclear bombs in the 1970s with Western technology imported ostensibly for peaceful ends.
Time is running out on the bilateral deal which still has to reach the U.S. Congress for ratification by early September at the latest before the house breaks for the November U.S. presidential election.
A 45-nation meeting on whether to lift a ban on nuclear trade with India ended inconclusively last week after many members wanted to attach conditions, like trying to ban further nuclear tests by the Asian power.
The deal would allow India access to nuclear technology and fuel, overturning a three-decade ban on trade after India tested nuclear weapons in 1974.
The countries in the Nuclear Suppliers Group (NSG) will meet again on Sept. 4-5, when the United States is expected to rework the draft for a waiver breaking the nuclear trade embargo.
"The ball has been set rolling," an Indian foreign ministry official said when asked if the two countries had begun reworking the draft. "Our foreign secretary is in the U.S. and the two delegations have been meeting."
U.S. Assistant Secretary of State Richard Boucher met Indian officials on Monday but refused to answer questions on what changes were likely in the U.S. draft.
He hinted last week that the two sides were open to accommodating some changes in the draft so long as they did not impede the bilateral pact.
Washington says it was committed to getting the draft past the NSG as soon as possible.
"The United States and India will continue our vigorous joint advocacy for the initiative at the highest levels of NSG government," David C. Mulford, U.S. Ambassador to India, said.
Diplomats say conditions tabled at the NSG included intrusive U.N. inspections of Indian civilian nuclear sites; cancellation of any waiver if India tests bombs again; and periodic reviews of Indian compliance with the exemption.
India says it will not agree to any conditions to get an NSG approval.
Sensitive to leftist charges that closer ties with the United States will undo its strategic autonomy, New Delhi has insisted on a "clean and unconditional" waiver from the NSG.
"We will continue to work with our Indian partners to persuade the Nuclear Suppliers Group countries that such an exemption is in the international community's best interest," Mulford said.
The bilateral deal has disturbed pro-disarmament nations and campaigners since India is outside the global Non-Proliferation Treaty (NPT) and developed nuclear bombs in the 1970s with Western technology imported ostensibly for peaceful ends.
Time is running out on the bilateral deal which still has to reach the U.S. Congress for ratification by early September at the latest before the house breaks for the November U.S. presidential election.
Friday, August 22, 2008
NSG critics focus on non-proliferation benchmarks
Vienna: At the end of the first full day of deliberations on India at the Nuclear Suppliers Group, it was clear that the American proposal to exempt India from the cartel’s stringent export guidelines had produced plenty of heat but not enough light.
Speaking to reporters after the plenary dispersed for the day, the senior-most U.S. official at the NSG struck a noncommittal tone in saying the group had had “a very full discussion today” and that he remained optimistic that “we’re going to be successful in this process.”
John D. Rood, who is Under Secretary of State for Nonproliferation and who kicked off the discussion at the NSG in the morning as head of the U.S. delegation, also said the proposal to grant India a waiver “is a serious subject and it’s a room full of serious people who have taken it in that manner.” He said there would be “additional discussions” within the NSG on Friday “but for our part in the United States, we continue to believe this is a very important initiative, and we remain committed to achieving an outcome that is both a net benefit for the non-proliferation regime and it meets India’s energy needs.”
The U.S. has “an important emerging relationship with India that we continue to believe is critical and important for the United States,” he added.
The morning’s discussions began with the NSG’s German chair calling the special plenary to order and inviting opening comments on the American proposal that had already been circulated to members.
First off the bat was the U.S. According to an account provided to The Hindu by a participant from a former Eastern Bloc country, the U.S. urged the adoption of the waiver as it stood “in a nice but not so forceful way.” The diplomat divided NSG members into three groups based on their opening interventions. Those who strongly backed adoption of the text included the Czech Republic, Russia, Belarus and the Ukraine. A second group of “like-minded countries” said they wished to be “constructive” but wanted some additions and conditions included in the text. Among these were Austria, Ireland and New Zealand. Switzerland too expressed concerns, he said, as did the Nordic group. The third group consisted of those who came out in favour of the proposal but who did not appear overly enthusiastic.
This group, according to the diplomat, included Germany and Japan, as well as Canada and Australia.
Other diplomats described Thursday’s deliberations as “positive” and “constructive.” “There is nothing new that is being said. Every country’s position is well known. But the question is whether we can take a decision either way by tomorrow,” a diplomat who did not want her country to be identified told The Hindu. “If not, perhaps another meeting may be necessary.”
According to these diplomats, many interventions lamented the implications of the India exemption for the future of the Nuclear Non-Proliferation Treaty and the non-proliferation regime in general. Some delegations noted that an earlier reference to the desirability of India eventually accepting international safeguards over all its nuclear facilities — equivalent to New Delhi giving up the bomb and signing the NPT — had now been dropped.
Indeed, the issues of NPT, full-scope safeguards and non-proliferation concerns figured prominently in an informal briefing Foreign Secretary Shiv Shankar Menon held for NSG members at the UN complex on Wednesday night.
Both Austria and New Zealand attended that briefing and asked questions, diplomats said.
Indian officials say the raising of general non-proliferation objections by several countries may contain a silver lining because it shifts the terrain of discussion away from technical and legal nit-picking towards more “political considerations.”
One NSG country diplomat said most delegations concede that the bulk of their specific concerns have already been addressed by the Indian non-proliferation commitments listed in the draft waiver. “What some countries are looking for is tighter language tying the NSG’s waiver to those commitments.”
Asked for his assessment after Thursday’s more formal Indian presentation to NSG members, Foreign Secretary Shiv Shankar Menon said India and NSG had decided to maintain the confidentiality of their interactions. Speaking on condition of anonymity, however, other Indian officials acknowledged the battle was “tough” but said the overall atmosphere in Vienna was “positive.”
Speaking to reporters after the plenary dispersed for the day, the senior-most U.S. official at the NSG struck a noncommittal tone in saying the group had had “a very full discussion today” and that he remained optimistic that “we’re going to be successful in this process.”
John D. Rood, who is Under Secretary of State for Nonproliferation and who kicked off the discussion at the NSG in the morning as head of the U.S. delegation, also said the proposal to grant India a waiver “is a serious subject and it’s a room full of serious people who have taken it in that manner.” He said there would be “additional discussions” within the NSG on Friday “but for our part in the United States, we continue to believe this is a very important initiative, and we remain committed to achieving an outcome that is both a net benefit for the non-proliferation regime and it meets India’s energy needs.”
The U.S. has “an important emerging relationship with India that we continue to believe is critical and important for the United States,” he added.
The morning’s discussions began with the NSG’s German chair calling the special plenary to order and inviting opening comments on the American proposal that had already been circulated to members.
First off the bat was the U.S. According to an account provided to The Hindu by a participant from a former Eastern Bloc country, the U.S. urged the adoption of the waiver as it stood “in a nice but not so forceful way.” The diplomat divided NSG members into three groups based on their opening interventions. Those who strongly backed adoption of the text included the Czech Republic, Russia, Belarus and the Ukraine. A second group of “like-minded countries” said they wished to be “constructive” but wanted some additions and conditions included in the text. Among these were Austria, Ireland and New Zealand. Switzerland too expressed concerns, he said, as did the Nordic group. The third group consisted of those who came out in favour of the proposal but who did not appear overly enthusiastic.
This group, according to the diplomat, included Germany and Japan, as well as Canada and Australia.
Other diplomats described Thursday’s deliberations as “positive” and “constructive.” “There is nothing new that is being said. Every country’s position is well known. But the question is whether we can take a decision either way by tomorrow,” a diplomat who did not want her country to be identified told The Hindu. “If not, perhaps another meeting may be necessary.”
According to these diplomats, many interventions lamented the implications of the India exemption for the future of the Nuclear Non-Proliferation Treaty and the non-proliferation regime in general. Some delegations noted that an earlier reference to the desirability of India eventually accepting international safeguards over all its nuclear facilities — equivalent to New Delhi giving up the bomb and signing the NPT — had now been dropped.
Indeed, the issues of NPT, full-scope safeguards and non-proliferation concerns figured prominently in an informal briefing Foreign Secretary Shiv Shankar Menon held for NSG members at the UN complex on Wednesday night.
Both Austria and New Zealand attended that briefing and asked questions, diplomats said.
Indian officials say the raising of general non-proliferation objections by several countries may contain a silver lining because it shifts the terrain of discussion away from technical and legal nit-picking towards more “political considerations.”
One NSG country diplomat said most delegations concede that the bulk of their specific concerns have already been addressed by the Indian non-proliferation commitments listed in the draft waiver. “What some countries are looking for is tighter language tying the NSG’s waiver to those commitments.”
Asked for his assessment after Thursday’s more formal Indian presentation to NSG members, Foreign Secretary Shiv Shankar Menon said India and NSG had decided to maintain the confidentiality of their interactions. Speaking on condition of anonymity, however, other Indian officials acknowledged the battle was “tough” but said the overall atmosphere in Vienna was “positive.”
Thursday, August 21, 2008
Will India get N-waiver? NSG to decide
It is the big day for the nuclear deal as the Nuclear Suppliers' Group (NSG) begins a two-day meeting in Vienna.
Without the NSG's approval, India cannot import nuclear fuel and technology from the world.
However, several countries still have concerns and since a decision at the NSG has to be unanimous, India is lobbying hard.
On Wednesday night, Indian officials, including foreign secretary Shiv Shankar Menon and Prime Minister's special envoy Shyam Saran met with the past, present and future heads of the NSG, namely, South Africa, Germany and Hungary.
The Indian team looked relaxed and even enjoyed some coffee ahead of the meeting, that prepared the groundwork for Thursday.
Ahead of the meeting in Vienna, US ambassador David Mulford spoke exclusively to NDTV. He said, "We think we will eventually get a consensus, but don't know how quickly."
"This won't be easy, we need to be patient," he said.
Without the NSG's approval, India cannot import nuclear fuel and technology from the world.
However, several countries still have concerns and since a decision at the NSG has to be unanimous, India is lobbying hard.
On Wednesday night, Indian officials, including foreign secretary Shiv Shankar Menon and Prime Minister's special envoy Shyam Saran met with the past, present and future heads of the NSG, namely, South Africa, Germany and Hungary.
The Indian team looked relaxed and even enjoyed some coffee ahead of the meeting, that prepared the groundwork for Thursday.
Ahead of the meeting in Vienna, US ambassador David Mulford spoke exclusively to NDTV. He said, "We think we will eventually get a consensus, but don't know how quickly."
"This won't be easy, we need to be patient," he said.
Wednesday, August 20, 2008
Govt clears 220 bln-rupee fertiliser subsidy - TV
The Indian government has decided to pay 540 billion rupees in cash subsidies to fertiliser companies and has cleared the first tranche amounting to 220 billion rupees, a news channel said on Wednesday.
The second tranche is expected to be cleared soon, and both the tranches will be paid off in three months, television channel CNBC TV18 reported, citing Ram Vilas Paswan, minister for chemicals, fertiliser and steel.
Shares of fertiliser firms Tata Chemicals, Rashtriya Chemicals, National Fertilisers, Nagarjuna Fertilizers and Chambal Fertilsers rode up 2-5 percent on the news.
India's fertiliser subsidy bill is likely to treble to 1.19 trillion rupees this fiscal year from last year, as the country tries to shield farmers from rising global prices, Paswan had said last month.
Indian fertiliser companies have to sell their products to farmers at below-market prices and the government compensates them in cash or bonds.
The second tranche is expected to be cleared soon, and both the tranches will be paid off in three months, television channel CNBC TV18 reported, citing Ram Vilas Paswan, minister for chemicals, fertiliser and steel.
Shares of fertiliser firms Tata Chemicals, Rashtriya Chemicals, National Fertilisers, Nagarjuna Fertilizers and Chambal Fertilsers rode up 2-5 percent on the news.
India's fertiliser subsidy bill is likely to treble to 1.19 trillion rupees this fiscal year from last year, as the country tries to shield farmers from rising global prices, Paswan had said last month.
Indian fertiliser companies have to sell their products to farmers at below-market prices and the government compensates them in cash or bonds.
Tuesday, August 19, 2008
Net telephony freed, call rates set to plunge further
Consumers will soon be able to make STD calls as cheap as 10-40 paise and possibly make free local calls from their computers. Telecom regulator TRAI on Monday removed all curbs on internet telephony in the country, allowing internet service providers (ISPs) to terminate internet telephony calls on phones, including mobiles.
Till date, a call from a computer could legally be made only to another computer within the country, and not to a phone. (The policy regime, though, allowed domestic users to make international calls to a phone from their computer.)
For consumers, this means they can make calls from PCs to fixedline and mobile phones in India. They can also make a call to personal computers from their handsets.
The move ensures that rural India will be the biggest beneficiary as users would be able to make ultra-cheap calls from PCOs using this technology. Broadband growth is also likely to get a boost. Also, WiMax, a wireless broadband technology getting ready for launch in India, is a potential gainer from the move. Challenges remain in the form of low PC penetration—3.6%—in the country. The move is also aimed at clamping down on the grey market in the country where players have been offering such services illegally.
At present, voice calls over the internet can be made only between two computers and not between a computer and a mobile/fixedline phone. Net telephony allows ISPs to challenge the dominance of telcos in the domestic communication market. Most telcos are ISPs as well.
But net telephony can also hit the revenues that telcos such as Bharti Airtel, Vodafone Essar and others earn from long distance services. This has resulted in telecom operators already protesting TRAI’s move on the grounds that it would destroy their business viability. Telcos also said that they would lobby with the government against accepting TRAI’s proposals to open up the sector.
For ISPs, internet telephony will open up major new revenue channels. Additionally, cheap internet telephony can also lower the operating expenditure of domestic call centres and BPOs.
Net telephony can also bring in new revenue streams to many national long distance (NLD) licence holders and act as an catalyst for them to extend their fibre networks beyond metros and tier-I cities.
Opposing TRAI’s recommendations, the Cellular Operators Association of India (COAI), the body representing all GSM operators, said “as telcos had got licences after paying a huge entry fee (Rs 1,651 crore), ISPs too must be charged this fee before they are permitted to offer net telephony services”.
“Many of the new applicants are still waiting for allotment of spectrum so as to enable them to start the service. Against this backdrop, it is very unfair to allow unfettered access to ISPs. Hence, in order to maintain the level playing field, it is imperative that ISPs should be required to migrate to UASL licence and should be subject to the same entry fee, license fee revenue share and other terms and conditions as are applicable to existing licensees,” COAI said in a statement.
According to COAI director-general TV Ramachandran, unrestricted internet telephony would infringe upon the scope of access providers and destroy the business viability of existing service providers. “To assume that the impact would be limited because of a low number of broadband subscribers was incorrect. As the number of broadband subscribers grows, the issues of level playing field will become even bigger,” he added.
Rubbishing the concerns of telcos, TRAI has said it’s in the interest of consumers that unrestricted internet telephony be permitted. TRAI has also blasted existing telcos over their failure to provide Net telephony despite having the licences to do so. “It was expected that access service providers will provide highly popular services like Internet Telephony and boost broadband penetration but it has not happened. As such, our subscribers are denied advanced value-added services in contrast to global scenario where such Internet-based services are popular. Such regulatory restrictions discourage technological advancements and the result is grey market activity to provide these services to common masses,” TRAI added, while justifying its moves to open up the sector.
TRAI chairman Nripendra Misra added that telcos cannot cite level playing field issues to block technological progress. “Globally telecommunications are being shaped by steep growth of broadband and wireless subscribers. The regulatory environment should be dynamic, enabling, efficient and should encourage competition. Hence, regulatory framework for internet telephony has to be considered in view of convergence and other similar developments taking place across the globe,” he said.
ISPs said telecom operators would only benefit with the opening up of net telephony. ISP Association of India president Rajesh Chharia said: “ISPs are globally considered as resellers. About 70% of our revenue goes to the telcos. To terminate these calls, we would have to use their networks and hence, rely on them. Instead of looking at us as competition, it should be seen as a way to reach untapped markets.”
In its bid to address security concerns, TRAI has said “all ISPs interested to provide unrestricted Internet telephony shall install Lawful Interception equipment”. The regulator also added that ISPs will have to enter into mutual agreements with NLD players for offering this service
Till date, a call from a computer could legally be made only to another computer within the country, and not to a phone. (The policy regime, though, allowed domestic users to make international calls to a phone from their computer.)
For consumers, this means they can make calls from PCs to fixedline and mobile phones in India. They can also make a call to personal computers from their handsets.
The move ensures that rural India will be the biggest beneficiary as users would be able to make ultra-cheap calls from PCOs using this technology. Broadband growth is also likely to get a boost. Also, WiMax, a wireless broadband technology getting ready for launch in India, is a potential gainer from the move. Challenges remain in the form of low PC penetration—3.6%—in the country. The move is also aimed at clamping down on the grey market in the country where players have been offering such services illegally.
At present, voice calls over the internet can be made only between two computers and not between a computer and a mobile/fixedline phone. Net telephony allows ISPs to challenge the dominance of telcos in the domestic communication market. Most telcos are ISPs as well.
But net telephony can also hit the revenues that telcos such as Bharti Airtel, Vodafone Essar and others earn from long distance services. This has resulted in telecom operators already protesting TRAI’s move on the grounds that it would destroy their business viability. Telcos also said that they would lobby with the government against accepting TRAI’s proposals to open up the sector.
For ISPs, internet telephony will open up major new revenue channels. Additionally, cheap internet telephony can also lower the operating expenditure of domestic call centres and BPOs.
Net telephony can also bring in new revenue streams to many national long distance (NLD) licence holders and act as an catalyst for them to extend their fibre networks beyond metros and tier-I cities.
Opposing TRAI’s recommendations, the Cellular Operators Association of India (COAI), the body representing all GSM operators, said “as telcos had got licences after paying a huge entry fee (Rs 1,651 crore), ISPs too must be charged this fee before they are permitted to offer net telephony services”.
“Many of the new applicants are still waiting for allotment of spectrum so as to enable them to start the service. Against this backdrop, it is very unfair to allow unfettered access to ISPs. Hence, in order to maintain the level playing field, it is imperative that ISPs should be required to migrate to UASL licence and should be subject to the same entry fee, license fee revenue share and other terms and conditions as are applicable to existing licensees,” COAI said in a statement.
According to COAI director-general TV Ramachandran, unrestricted internet telephony would infringe upon the scope of access providers and destroy the business viability of existing service providers. “To assume that the impact would be limited because of a low number of broadband subscribers was incorrect. As the number of broadband subscribers grows, the issues of level playing field will become even bigger,” he added.
Rubbishing the concerns of telcos, TRAI has said it’s in the interest of consumers that unrestricted internet telephony be permitted. TRAI has also blasted existing telcos over their failure to provide Net telephony despite having the licences to do so. “It was expected that access service providers will provide highly popular services like Internet Telephony and boost broadband penetration but it has not happened. As such, our subscribers are denied advanced value-added services in contrast to global scenario where such Internet-based services are popular. Such regulatory restrictions discourage technological advancements and the result is grey market activity to provide these services to common masses,” TRAI added, while justifying its moves to open up the sector.
TRAI chairman Nripendra Misra added that telcos cannot cite level playing field issues to block technological progress. “Globally telecommunications are being shaped by steep growth of broadband and wireless subscribers. The regulatory environment should be dynamic, enabling, efficient and should encourage competition. Hence, regulatory framework for internet telephony has to be considered in view of convergence and other similar developments taking place across the globe,” he said.
ISPs said telecom operators would only benefit with the opening up of net telephony. ISP Association of India president Rajesh Chharia said: “ISPs are globally considered as resellers. About 70% of our revenue goes to the telcos. To terminate these calls, we would have to use their networks and hence, rely on them. Instead of looking at us as competition, it should be seen as a way to reach untapped markets.”
In its bid to address security concerns, TRAI has said “all ISPs interested to provide unrestricted Internet telephony shall install Lawful Interception equipment”. The regulator also added that ISPs will have to enter into mutual agreements with NLD players for offering this service
Indian Sugar Exports May Drop Next Year, Jain Says
Sugar exports from India, the world's biggest producer after Brazil, may drop 80 percent next year as production declines, supporting global prices.
Shipments may total ``no more than'' 1 million metric tons in the year ended Sept. 30, 2009, down from 4.5 million tons this year, S.L. Jain, director general of the New Delhi-based Indian Sugar Mills Association, said in an interview. The group forecast in June that mills may ship as much as 2.5 million tons.
A decline in Indian shipments may sustain a 29 percent rally that made sugar the biggest gainer on the Standard & Poor's GSCI index in the past three months. Global demand will exceed supply by 3.3 million tons next year, down from a surplus of more than 11 million tons this season, Czarnikow Group Ltd. said in a report Aug. 15.
``I'm not expecting large exports next year, certainly not more than 1 million tons,'' Jain said yesterday. Indian mills have exported 4.3 million tons so far this year, he said.
India's production may drop 17 percent in the year starting October to 22 million tons from 26.5 million, Jain said. The association in July forecast output at 20 million tons because of insufficient rain in Maharashtra state, the biggest producer.
Monsoon Rainfall
The June-September monsoon, which accounts for four-fifths of the country's rainfall, was 36 percent above average last week, according to the weather office. Rains in July, the wettest month in the four-month rainy season, were 18 percent less the average of 293 millimeters (11.5 inches).
``Rains have revived of late,'' he said. ``Taking this into account production may not drop as much as we had expected.''
Jain's forecast compares with the 22 million tons predicted by the London-based International Sugar Organization. Czarnikow expects output to drop to 23.9 million tons from 28.9 million as farmers switch to crops including rice and pulses.
Sugar for October delivery gained 4.2 percent to 13.67 cents a pound yesterday on ICE Futures U.S., the former New York Board of Trade. White sugar futures increased 4.4 percent to $389.50 a ton in London.
Shipments may total ``no more than'' 1 million metric tons in the year ended Sept. 30, 2009, down from 4.5 million tons this year, S.L. Jain, director general of the New Delhi-based Indian Sugar Mills Association, said in an interview. The group forecast in June that mills may ship as much as 2.5 million tons.
A decline in Indian shipments may sustain a 29 percent rally that made sugar the biggest gainer on the Standard & Poor's GSCI index in the past three months. Global demand will exceed supply by 3.3 million tons next year, down from a surplus of more than 11 million tons this season, Czarnikow Group Ltd. said in a report Aug. 15.
``I'm not expecting large exports next year, certainly not more than 1 million tons,'' Jain said yesterday. Indian mills have exported 4.3 million tons so far this year, he said.
India's production may drop 17 percent in the year starting October to 22 million tons from 26.5 million, Jain said. The association in July forecast output at 20 million tons because of insufficient rain in Maharashtra state, the biggest producer.
Monsoon Rainfall
The June-September monsoon, which accounts for four-fifths of the country's rainfall, was 36 percent above average last week, according to the weather office. Rains in July, the wettest month in the four-month rainy season, were 18 percent less the average of 293 millimeters (11.5 inches).
``Rains have revived of late,'' he said. ``Taking this into account production may not drop as much as we had expected.''
Jain's forecast compares with the 22 million tons predicted by the London-based International Sugar Organization. Czarnikow expects output to drop to 23.9 million tons from 28.9 million as farmers switch to crops including rice and pulses.
Sugar for October delivery gained 4.2 percent to 13.67 cents a pound yesterday on ICE Futures U.S., the former New York Board of Trade. White sugar futures increased 4.4 percent to $389.50 a ton in London.
Monday, August 18, 2008
Are valuations at further risk?
At best, earnings may grow at a compounded average growth rate of about 20% in fiscal 2009 and fiscal 2010
The price-earnings multiple of the Sensex, the Bombay Stock Exchange’s benchmark index, has dropped from as high as 28.6 times trailing earnings in early January to 18.3 times trailing earnings currently. But, despite this decline by a third, valuations are far from low, especially when viewed in relation to expected earnings growth. Brokerages have trimmed earnings estimates for the current year and the next year on account of rising interest rates and firm commodity prices.
(VALUATIONS ARE STILL NOT LOW)
At best, earnings may grow at a compounded average growth rate of about 20% in fiscal 2009 and fiscal 2010, and if interest rates rise further or commodity prices continue to rule at current levels, even these estimates are at risk.
For the Sensex, the price-earnings to growth, or PEG, ratio may be slightly below 1 at present, but for most of its constituents, current valuations are higher than the estimated growth in earnings for the coming two years. According to data collated by Enam Research, eight of the 12 sectors represented in the Sensex have trailing price-earnings (P-E) multiples that are higher than the estimated growth in the their earnings (see chart). The PEG ratio, which is arrived at by dividing P-E multiple by earnings-per-share growth, is widely used as an indicator of a stock’s potential value.
Some investors use the one-year forward P-E multiple and then compare it with the estimated growth in earnings to arrive at the PEG ratio. But as one fund manager points out, that would be a case of double counting the impact of future growth.
Using the trailing P-E multiple, only the metals and mining, oil and gas, telecom and IT services sectors are valued at a PEG of less than 1. The first two sectors have historically traded at low valuations because their fortunes are linked to commodity prices. In the case of oil and gas, there is the added worry about government intervention in pricing. And for both the telecom and IT sectors, PEG is only slightly lower than 1, and doesn’t really warrant a call for “value- buying”.
The engineering sector, which has the highest estimated earnings growth rate of 26% currently, trades at a valuation of as much as 38 times trailing earnings. For some other sectors such as auto and cement, the price-earnings valuation may look low when seen in isolation, but earnings growth estimates are even lower.
Going by the valuation of the Sensex constituents, there seems to be little upside for the index. What’s more, many Indian firms have adopted aggressive accounting policies in the recent past to buoy reported profit. In some cases, current reported profit may be inflated and hence the P-E multiple may seem lower than they actually are.
Fertilizer stocks: the proof of the pudding...
The Indian government has approved a new policy for the urea sector to tackle the problem of stagnant domestic production and encourage investment by Indian firms. Production from new units and incremental produce through debottlenecking of existing plants are promised higher realizations. Depending on whether the incremental production has come from greenfield or brownfield expansion, or debottlenecking, manufacturers will get 85-95% of import parity price, subject to a price band of $250-425 (Rs10,705-18,199) per tonne.
According to Enam Research, an additional 20% output through debottlenecking can result in a doubling of profit from current levels. Assuming a company goes in for a brownfield expansion and increases capacity by 50% (although this may take about two years to complete), profit could rise by three times. For brownfield expansions, some amount of expense incurred on gas transportation will be reimbursed, making it even more lucrative for firms to consider new investments.
Not surprisingly, fertilizer stocks rose by between 7% and 9% within three days of the policy announcement. Shares of Zuari Industries Ltd jumped by as much as 21% in the same period. But in the next two trading sessions, most fertilizer stocks gave up those gains. Only shares of Zuari have risen meaningfully (15%) since the policy announcement.
Some fertilizer firms seem to be wary about the availability of gas for the new plants. But some analysts believe the supply of gas from the Krishna-Godavari basin will address the gas shortage problem to a large degree.
The fact that the markets have disregarded that possibility and the potential for profits to zoom in the event of any expansion implies that the investors would rather wait and see if these firms actually go ahead with new investment plans.
Another reason for the lacklustre performance of the stocks, of course, is the bearish phase the markets are in currently.
The price-earnings multiple of the Sensex, the Bombay Stock Exchange’s benchmark index, has dropped from as high as 28.6 times trailing earnings in early January to 18.3 times trailing earnings currently. But, despite this decline by a third, valuations are far from low, especially when viewed in relation to expected earnings growth. Brokerages have trimmed earnings estimates for the current year and the next year on account of rising interest rates and firm commodity prices.
(VALUATIONS ARE STILL NOT LOW)
At best, earnings may grow at a compounded average growth rate of about 20% in fiscal 2009 and fiscal 2010, and if interest rates rise further or commodity prices continue to rule at current levels, even these estimates are at risk.
For the Sensex, the price-earnings to growth, or PEG, ratio may be slightly below 1 at present, but for most of its constituents, current valuations are higher than the estimated growth in earnings for the coming two years. According to data collated by Enam Research, eight of the 12 sectors represented in the Sensex have trailing price-earnings (P-E) multiples that are higher than the estimated growth in the their earnings (see chart). The PEG ratio, which is arrived at by dividing P-E multiple by earnings-per-share growth, is widely used as an indicator of a stock’s potential value.
Some investors use the one-year forward P-E multiple and then compare it with the estimated growth in earnings to arrive at the PEG ratio. But as one fund manager points out, that would be a case of double counting the impact of future growth.
Using the trailing P-E multiple, only the metals and mining, oil and gas, telecom and IT services sectors are valued at a PEG of less than 1. The first two sectors have historically traded at low valuations because their fortunes are linked to commodity prices. In the case of oil and gas, there is the added worry about government intervention in pricing. And for both the telecom and IT sectors, PEG is only slightly lower than 1, and doesn’t really warrant a call for “value- buying”.
The engineering sector, which has the highest estimated earnings growth rate of 26% currently, trades at a valuation of as much as 38 times trailing earnings. For some other sectors such as auto and cement, the price-earnings valuation may look low when seen in isolation, but earnings growth estimates are even lower.
Going by the valuation of the Sensex constituents, there seems to be little upside for the index. What’s more, many Indian firms have adopted aggressive accounting policies in the recent past to buoy reported profit. In some cases, current reported profit may be inflated and hence the P-E multiple may seem lower than they actually are.
Fertilizer stocks: the proof of the pudding...
The Indian government has approved a new policy for the urea sector to tackle the problem of stagnant domestic production and encourage investment by Indian firms. Production from new units and incremental produce through debottlenecking of existing plants are promised higher realizations. Depending on whether the incremental production has come from greenfield or brownfield expansion, or debottlenecking, manufacturers will get 85-95% of import parity price, subject to a price band of $250-425 (Rs10,705-18,199) per tonne.
According to Enam Research, an additional 20% output through debottlenecking can result in a doubling of profit from current levels. Assuming a company goes in for a brownfield expansion and increases capacity by 50% (although this may take about two years to complete), profit could rise by three times. For brownfield expansions, some amount of expense incurred on gas transportation will be reimbursed, making it even more lucrative for firms to consider new investments.
Not surprisingly, fertilizer stocks rose by between 7% and 9% within three days of the policy announcement. Shares of Zuari Industries Ltd jumped by as much as 21% in the same period. But in the next two trading sessions, most fertilizer stocks gave up those gains. Only shares of Zuari have risen meaningfully (15%) since the policy announcement.
Some fertilizer firms seem to be wary about the availability of gas for the new plants. But some analysts believe the supply of gas from the Krishna-Godavari basin will address the gas shortage problem to a large degree.
The fact that the markets have disregarded that possibility and the potential for profits to zoom in the event of any expansion implies that the investors would rather wait and see if these firms actually go ahead with new investment plans.
Another reason for the lacklustre performance of the stocks, of course, is the bearish phase the markets are in currently.
Recession may grip Japan, but China shops hard
Recent data from Japan and the euro zone have reflected a much larger negative impact than initially expected from the deteriorating US housing sector, credit crisis and surging oil prices
Japan’s economy shrank in the second quarter, as a slowdown in demand likely dragged the world’s second largest economy into a recession, but China’s record retail sales in July helped bolster the global outlook.
Japan’s economy contracted 0.6% on a quarterly basis, the fastest since 2001 when it was last in a recession, ending the longest period of uninterrupted growth in six decades and putting the global economy at risk of a prolonged slump.
Recent data from both Japan and the euro zone have reflected a much larger negative impact than initially expected from the deteriorating US housing sector, fallout from the credit crisis and surging oil prices.
As a result, forecasts for higher interest rates to fight price pressures have been pushed back.
Economists are expecting data due later to generally tell the same story of endemic weakness in developed markets. The legion of unemployed Britons claiming benefits in July is expected to spike by the most since 1992, while US retail sales are predicted to have slipped.
“The pullback in the Japanese economy was quite broad, perhaps more broad-based than expected, but the global component is with the trade figures since exports were down quite a bit,” said Jan Lambregts, head of Asia research with Rabobank Global Financial Markets in Hong Kong. “Japan compared with five years ago has a much more diversified set of export destinations, but if all of them are slowing down, there is no real shelter,” he said.
Tokyo’s Nikkei share average tumbled 2.1%, with shares of companies that derive their revenues from both abroad and at home hit hard on fears about much slower global growth. Outside of Japan, stocks in the Asia-Pacific region sank to a 17-month low, according to an MSCI index.
The annnualized contraction of 2.4% in Japan compared with 1.9% growth in the same quarter in the US, where government stimulus supported the economy.
Euro zone second quarter GDP figures are due on Thursday.
Many economists say the Japanese economy is in much better shape than when it went through slumps in 1998 or 2001, with companies having cleaned up their balance sheets after the collapse of an asset bubble in the 1990s.
Japan’s economics minister Kaoru Yosano said the economy was weakening, hurt mainly by external factors such as high oil prices, but added that it won’t keep falling. “Even though the economy contracted in April-June, it would be more accurate to think that it won’t last long,” Yosano said.
A somewhat bright spot in an otherwise blighted global economic scene was non-Japan Asia, where consumers looked forward to an easing in inflation, which has plagued the region’s markets, fomented riots and confounded policymakers.
Retail sales in China, the world’s fastest growing major economy, grew at a record annual rate of 23.3% in July on the back of rising incomes, sparking hopes that Beijing’s efforts to shift to more consumer-driven growth have found some success.
However, China’s flimsy social security system, high labour market turnover and expensive health care and education mean households still save about 30% of their incomes. “The potential for China’s domestic consumption is huge, but it will be a long-term process for China to wean its economy off exports and investment,” said Zhao Qingming, an economist at China Construction Bank in Beijing.
A 23% drop in oil prices since mid-July has also brightened the mood of Australia’s consumers.
Japan’s economy shrank in the second quarter, as a slowdown in demand likely dragged the world’s second largest economy into a recession, but China’s record retail sales in July helped bolster the global outlook.
Japan’s economy contracted 0.6% on a quarterly basis, the fastest since 2001 when it was last in a recession, ending the longest period of uninterrupted growth in six decades and putting the global economy at risk of a prolonged slump.
Recent data from both Japan and the euro zone have reflected a much larger negative impact than initially expected from the deteriorating US housing sector, fallout from the credit crisis and surging oil prices.
As a result, forecasts for higher interest rates to fight price pressures have been pushed back.
Economists are expecting data due later to generally tell the same story of endemic weakness in developed markets. The legion of unemployed Britons claiming benefits in July is expected to spike by the most since 1992, while US retail sales are predicted to have slipped.
“The pullback in the Japanese economy was quite broad, perhaps more broad-based than expected, but the global component is with the trade figures since exports were down quite a bit,” said Jan Lambregts, head of Asia research with Rabobank Global Financial Markets in Hong Kong. “Japan compared with five years ago has a much more diversified set of export destinations, but if all of them are slowing down, there is no real shelter,” he said.
Tokyo’s Nikkei share average tumbled 2.1%, with shares of companies that derive their revenues from both abroad and at home hit hard on fears about much slower global growth. Outside of Japan, stocks in the Asia-Pacific region sank to a 17-month low, according to an MSCI index.
The annnualized contraction of 2.4% in Japan compared with 1.9% growth in the same quarter in the US, where government stimulus supported the economy.
Euro zone second quarter GDP figures are due on Thursday.
Many economists say the Japanese economy is in much better shape than when it went through slumps in 1998 or 2001, with companies having cleaned up their balance sheets after the collapse of an asset bubble in the 1990s.
Japan’s economics minister Kaoru Yosano said the economy was weakening, hurt mainly by external factors such as high oil prices, but added that it won’t keep falling. “Even though the economy contracted in April-June, it would be more accurate to think that it won’t last long,” Yosano said.
A somewhat bright spot in an otherwise blighted global economic scene was non-Japan Asia, where consumers looked forward to an easing in inflation, which has plagued the region’s markets, fomented riots and confounded policymakers.
Retail sales in China, the world’s fastest growing major economy, grew at a record annual rate of 23.3% in July on the back of rising incomes, sparking hopes that Beijing’s efforts to shift to more consumer-driven growth have found some success.
However, China’s flimsy social security system, high labour market turnover and expensive health care and education mean households still save about 30% of their incomes. “The potential for China’s domestic consumption is huge, but it will be a long-term process for China to wean its economy off exports and investment,” said Zhao Qingming, an economist at China Construction Bank in Beijing.
A 23% drop in oil prices since mid-July has also brightened the mood of Australia’s consumers.
The world and oil: it’s deja vu
Consumption responses to high oil prices can be seen across the world. But memories are short.....
It’s a feeling of déjà vu. I was a graduate student in Dallas, Texas, in 1972 when the first oil shock pushed the world into recession. Oil prices later plunged to nearly $10 per barrel, subsequently rocketed to $150 levels, and of late, seem to be retreating again.
The initial oil shock in the early 1970s forced the US economy into recession and also shocked American consumers. A country used to unlimited cheap oil and driving huge oil-guzzling Chevrolets and Cadillacs was not geared for queuing up at gas stations. It was during this period that the Japanese car manufacturers, particularly Honda with its classic Civic with its low gas consumption, started making inroads into the American market.
Overseas, it was not much better. The rest of the world followed the Americans into recession, but adjusted by raising the price of petrol and trying to cut down fuel consumption. They also looked at alternative energy sources. Shale oil and tar sands from Canada held out hope, but the cost of production was still too high to make them economical.
New Zealand was perhaps the most adventurous. One of its “think big” projects was to convert methanol to petrol. In 1979, it decided to go ahead with this. Citicorp arranged the billion dollar financing in 1981 — the largest project financing ever done. A South African firm, Sasol Ltd, perfected the technology to convert coal into petrol (invented in Germany in the 1920s), but because of the country’s racial policies it was not welcomed.
Nuclear technology was initially seen as an alternative. But, the Three Mile Island incident in the US in 1979 and the Chernobyl disaster in the USSR in 1986 stopped new nuclear projects dead in their tracks.
Over the years, with oil production rising, prices crept downward again and several initiatives were abandoned. The Synthetic Fuel Plant was mothballed (it has since been revived in another form) and the enthusiasm for shale oil and tar sands died as the cost of production was too high.
Brazil was perhaps the only country which made a determined effort to find alternatives. With its vast farm lands, sugar cane-based ethanol helped reduce its dependence on oil imports.
Japan is probably the only developed economy that made energy conservation a national goal and its industry found new ways to limit its oil consumption. It limited its annual energy usage to a billion barrels after the 1970s. A decade ago, its companies restructured to be competitive at $4 per gallon oil. It is probably the most successful among the Organisation for Economic Co-operation and Development countries in becoming more energy-efficient through initiatives such as low-emission cars, rooftop gardens, energy-efficient air conditioners and refrigerators, “intelligent machines” from subway fare chargers to building escalators that automatically turn off when not in use, and using plastic pellets from recycled plastic as fuel in their steel mills. It is now looking at selling this technology to other countries.
The supply-demand situation is now quite different from the 1970s and the 1980s, when the US, Japan and Europe were the dominant consumers. Now, the US, China, Russia, Japan, Germany and India account for almost 53% of global consumption. On the supply front, Russia and some Commonwealth of Independent States are beginning to be players in the energy market. Along with them, some African countries such as Angola, Sudan, and gas producers such as Qatar and the United Arab Emirates are stepping up production as well.
For the last 12-24 months, the situation has been paradoxical. It was only when oil touched almost $150 a barrel that the economies started tumbling and the tipping point was the housing market collapse in the US. Until then, the world economy, particularly emerging markets, grew at record rates. There was no incentive for oil producers to reduce prices.
The upside is that other initiatives that were abandoned because of their economics are now being taken up. Oil extraction from shale and tar sands is becoming viable, with Canada as the largest player. Coal-to-petrol plants, with Sasol’s technology, are being set up in Germany, West Asia and the US. Nuclear energy is no longer feared. Other energy alternatives such as wind, hydroelectric, ethanol from sugar cane, corn and other sources are also being actively pursued.
Closer home, Asian markets, including India and China, continue to maintain their growth, albeit at a slower pace. In the US, the sale of the gas guzzlers and sport-utility vehicles has almost stopped, making the already difficult restructuring of the US auto industry even tougher. Tata Motors is on both sides of the fence. Its recent acquisitions of Jaguar and Land Rover are bound to be impacted, but the Tata Nano and the company’s skills and technology in making low-cost cars are drawing attention from car manufacturers globally. Other industries in India should learn from Japan and make minimizing energy usage a top priority.
Unfortunately, people have short memories. If oil prices go back to the $60-80 per barrel levels (which in my opinion is possible within the next 12 months), then the world will go back to its old habits until the next crisis.
It’s a feeling of déjà vu. I was a graduate student in Dallas, Texas, in 1972 when the first oil shock pushed the world into recession. Oil prices later plunged to nearly $10 per barrel, subsequently rocketed to $150 levels, and of late, seem to be retreating again.
The initial oil shock in the early 1970s forced the US economy into recession and also shocked American consumers. A country used to unlimited cheap oil and driving huge oil-guzzling Chevrolets and Cadillacs was not geared for queuing up at gas stations. It was during this period that the Japanese car manufacturers, particularly Honda with its classic Civic with its low gas consumption, started making inroads into the American market.
Overseas, it was not much better. The rest of the world followed the Americans into recession, but adjusted by raising the price of petrol and trying to cut down fuel consumption. They also looked at alternative energy sources. Shale oil and tar sands from Canada held out hope, but the cost of production was still too high to make them economical.
New Zealand was perhaps the most adventurous. One of its “think big” projects was to convert methanol to petrol. In 1979, it decided to go ahead with this. Citicorp arranged the billion dollar financing in 1981 — the largest project financing ever done. A South African firm, Sasol Ltd, perfected the technology to convert coal into petrol (invented in Germany in the 1920s), but because of the country’s racial policies it was not welcomed.
Nuclear technology was initially seen as an alternative. But, the Three Mile Island incident in the US in 1979 and the Chernobyl disaster in the USSR in 1986 stopped new nuclear projects dead in their tracks.
Over the years, with oil production rising, prices crept downward again and several initiatives were abandoned. The Synthetic Fuel Plant was mothballed (it has since been revived in another form) and the enthusiasm for shale oil and tar sands died as the cost of production was too high.
Brazil was perhaps the only country which made a determined effort to find alternatives. With its vast farm lands, sugar cane-based ethanol helped reduce its dependence on oil imports.
Japan is probably the only developed economy that made energy conservation a national goal and its industry found new ways to limit its oil consumption. It limited its annual energy usage to a billion barrels after the 1970s. A decade ago, its companies restructured to be competitive at $4 per gallon oil. It is probably the most successful among the Organisation for Economic Co-operation and Development countries in becoming more energy-efficient through initiatives such as low-emission cars, rooftop gardens, energy-efficient air conditioners and refrigerators, “intelligent machines” from subway fare chargers to building escalators that automatically turn off when not in use, and using plastic pellets from recycled plastic as fuel in their steel mills. It is now looking at selling this technology to other countries.
The supply-demand situation is now quite different from the 1970s and the 1980s, when the US, Japan and Europe were the dominant consumers. Now, the US, China, Russia, Japan, Germany and India account for almost 53% of global consumption. On the supply front, Russia and some Commonwealth of Independent States are beginning to be players in the energy market. Along with them, some African countries such as Angola, Sudan, and gas producers such as Qatar and the United Arab Emirates are stepping up production as well.
For the last 12-24 months, the situation has been paradoxical. It was only when oil touched almost $150 a barrel that the economies started tumbling and the tipping point was the housing market collapse in the US. Until then, the world economy, particularly emerging markets, grew at record rates. There was no incentive for oil producers to reduce prices.
The upside is that other initiatives that were abandoned because of their economics are now being taken up. Oil extraction from shale and tar sands is becoming viable, with Canada as the largest player. Coal-to-petrol plants, with Sasol’s technology, are being set up in Germany, West Asia and the US. Nuclear energy is no longer feared. Other energy alternatives such as wind, hydroelectric, ethanol from sugar cane, corn and other sources are also being actively pursued.
Closer home, Asian markets, including India and China, continue to maintain their growth, albeit at a slower pace. In the US, the sale of the gas guzzlers and sport-utility vehicles has almost stopped, making the already difficult restructuring of the US auto industry even tougher. Tata Motors is on both sides of the fence. Its recent acquisitions of Jaguar and Land Rover are bound to be impacted, but the Tata Nano and the company’s skills and technology in making low-cost cars are drawing attention from car manufacturers globally. Other industries in India should learn from Japan and make minimizing energy usage a top priority.
Unfortunately, people have short memories. If oil prices go back to the $60-80 per barrel levels (which in my opinion is possible within the next 12 months), then the world will go back to its old habits until the next crisis.
Thursday, August 14, 2008
India's IIP data grim, indicates economic slowdown
The latest industrial growth data or Index of Industrial Production (IIP), released by the Central Statistical Organization on Tuesday, showed that the country's industrial output rose to 5.4 percent in June, up from a revised figure of 4.1 percent in May but lower than 8.9 percent posted in the year ago period, indicating that the economy might be cooling down, weighed by high inflation rate and decline in credit growth.
According to the data, the manufacturing sector, which accounts for over 79 percent of the IIP, grew by 5.9 percent in June 2008, up from a revised figure of 4.2 percent in May, but lower than 9.7 percent posted a year ago.
Consumer durables grew 3.5 percent in June 2008 against a negative growth of 3.6 percent in the year ago period. The performance of the consumer non-durables segment was even better as it recorded a growth of 12.2 percent during the month as compared to 6.3 percent in June 2007, pushing up the overall consumer sector growth to 10 percent.
Capital goods, a key gauge of industrial activity, rose 5.6 percent in June 2008 as against growth rate of 23.1 percent a year earlier, while the mining sector bounced back to post 2.9 percent growth in June 2008 compared with 1.5 percent posted in June 2007.
Intermediate goods sector grew 2.9 percent in June against 8.6 percent while basic goods grew 2.9 in the period under review, down from 9.2 percent a year ago.
Out of 17 industry groups, only 10 managed to post positive growth in June 2008. Interestingly, in March 2008, 12 industry groups had shown positive growth, indicating widening of a slowdown. The industry group 'Beverages, Tobacco and Related Products' showed the highest growth of 22.3 percent, followed by 12.6 percent in 'Transport Equipment and Parts' and 11.5 percent in 'Basic Chemicals and Chemical Products.'
On the other hand, 'Food Products' group, which have a 9.1 percent weight in the IIP, continued to trade in negative growth terrain, down 3 percent in June 2008 as against a positive growth of 0.5 percent in June 2007.
Groups like 'Jute and Other Vegetable Fiber Textiles,' 'Wood and Furniture,' 'Leather and Fur Products,' and 'Paper and Printing' also posted negative growth of 9.8, 1.3, 2.5 and 2.4 percent respectively.
In cotton textiles, growth slipped 1.1 percent in June 2008 from 7 percent in June 2007. The basic metals and alloys industry, which appears to have been hit by higher input costs, grew just 5.9 percent in the period under review as compared to 21.3 percent in June last fiscal.
However, machinery and equipment continues to hold steady with 9.2 percent growth as against 11 percent in the previous year.
The latest data also showed that growth of six core infrastructure industries, which account for 26.7 percent of industrial production expansion, slowed down to 3.4 percent in June 2008, from 5.2 percent in June 2007.
Petroleum refinery production (weight of 2 percent in the IIP), electricity generation (weight of 10.17 percent in the IIP), and cement production (weight of 1.99 percent in the IIP) showed slowdown in growth, rising 5.6 percent, 2.6 percent and 3.8 percent respectively in June 2008, compared to growth rate of 9.9 percent, 6.8 percent and 6 percent in the year ago period.
Crude oil production (weight of 4.17 percent in the IIP) registered a negative growth of 4.7 percent in June 2008 compared to a negative growth rate of 1.8 percent in June 2007.
Growth rate of finished (carbon) steel production (weight of 5.13 percent in the IIP) declined marginally to 4.4 percent in June 2008 compared to 5.1 percent in June 2007.
However, coal production (weight of 3.2 percent in the IIP), bucking the declining trend, registered a healthy growth of 6.2 percent in June 2008 compared to growth rate 0.9 percent in June 2007.
According to market analysts, the latest data on industrial growth was in line with expectations, though lower than the double-digit growths seen in 2006 and early 2007, due to tightening monetary policy and rising borrowing costs.
"The number has come in higher than our expectation, but the trend is clearly weakening as a result of higher interest rates, rising input costs and slowing global demand," said Sonal Varma, economist at Lehman Brothers in Mumbai.
D.K. Joshi, principal economist at domestic ratings agency CRISIL, said the IIP figures show that overall industrial performance in India continued to remain weak. According to Joshi, the growth rate has halved because of monetary tightening by the Reserve Bank of India (RBI) over the past year coupled with the slowing down of global economy and pressures coming from high commodity prices, particularly crude oil.
"We are in an industrial scenario which appears decisively weak. The IIP may pick up but it is going to be slightly subdued vis-a-vis last year. The underlying trend is that growth is weakening," Joshi said, adding that IIP could average out to above 7.5 percent for the current fiscal, but could be worse next year.
According to Axis Bank economist Saugata Bhattacharya, the data on IIP growth rate suggests "a continuing slowdown in industrial growth."
"Infrastructure slowdown is a supply-side issue. Capacity constraint is always a problem in coal, power and crude oil sector. Also the monetary tightening affecting the growth is obvious," Bhattacharya said.
"In terms of individual industries, the highest growth segments were textiles, chemicals and transport equipment. The first two indicate that exports have become a significant driver for industrial growth. Whether this will sustain following the partial reversal in the rupee remains to be seen," the Axis Bank said in a report.
"With first quarter GDP numbers for 2008-09 set to be released this month-end, Axis Bank expects a slowdown in some service segments that are linked to industrial activity. "If industrial growth continues to be tepid for the next few months, we might need to revise our GDP forecast for 2008-09 below 7.5 percent. This might not happen with the resurgence in the monsoon rains," the report said.
"The June data suggests weaker industrial production has set in," Goldman Sachs economists Tushar Poddar and Pranjal Bhandari said in a research note. "Coincident indicators like non-food credit growth, cellular subscriptions and commercial vehicle sales suggest a moderation in activity rather than a sharp slowdown, and we expect this trend to continue this financial year."
"However, with inflation remaining well above the RBI's (Reserve Bank of India) target range, we continue to expect one more round of rate increases of 25 basis points on the repo rate and 25 basis points on the cash reserve ratio by end-October," they said.
According to Abheek Barua, chief economist at HDFC Bank in New Delhi, if inflation risks abate a bit, growth would have an impact on monetary policy.
"In coming months, I see the IIP growth figure to hover at around 6-7 percent. I am not able to solve the puzzle as to why there is surge in the consumers durable segment. The RBI has been tightening the monetary measures, and credit the offtake has come down. In this scenario, I see no reason for surge in consumer durable segment. As for consumer non-durables, the growth must have been aided by good monsoon witnessed in some parts of the country and prospects of a better produce," Barua said.
"I think the monetary policy measures being taken since January this year are beginning to impact the industrial growth. Our GDP growth projection remains at 7.8 percent as the industrial growth outlook is not very promising," said Rajeev Kumar, CEO, Indian Council for Research on International Economic Relations (ICRIER).
"The RBI will also have to be very careful in its future decisions. If it continues to tighten monetary policy, it would have an adverse impact on the industry," Kumar said.
India's biggest bank, State Bank of India raised its benchmark prime lending rate (BPLR) by 100 basis points (1 percent) to an annual 13.75 percent effective Tuesday.
State-run Indian Overseas Bank and Indian Bank also hiked their BPLRs by 50 basis points and basis points respectively.
The rate hikes follow central bank, Reserve Bank of India's (RBI) decision last month to increase its key lending rate or repo rate by 50 basis points, to a 7-year high of 9 percent, and banks' cash reserve requirements or CRR by 25 basis points to 9 percent.
The move prompted India's largest mortgage lender Housing Development Finance Corporation (HDFC) and other top banks including ICICI Bank and HDFC Bank to raise their respective prime lending rates.
However, some analysts are optimistic that the economy would bounce back.
"IIP numbers for June were in line with expectations. The growth has definitely slowed compared to last year. Though this moderation raises some concerns on the overall growth, we do not see the situation worsening. The moderation in IIP is due to previous tightening by RBI. Inflation being the key priority, both RBI and the finance ministry have traded growth for containing inflation," said Krupesh Thakkar of India Capital Markets.
"Even though industrial production has almost halved to 5.2 percent in the first quarter vis-a-vis 10.3 percent last year, it is surely looking up on a sequential basis. We expect industrial growth to touch 7.5 percent towards the year-end," said Manish Sonthalia, vice president (equity strategy), Motilal Oswal Securities.
Agrees Ketan Karani, vice president, Kotak Securities. "IIP figures were very much on expected lines. We'll experience some lag effect for another 2-3 months ahead before it shows some real improvement," Karani said.
Meanwhile, all analysts agree that the RBI's move to tighten monetary policy to tame inflation, would adversely affect India's economic growth.
India's economy grew about 9 percent in the fiscal year which ended in March, but high oil and food prices led to India's wholesale price index (WPI)-based inflation rate soaring to 12.01 percent in the 12 months to July 26, higher than previous week's figure of 11.98 percent.
While the RBI last month cut its growth forecast for the current fiscal year (FY09) to 8 percent from the earlier 8-8.5 percent, economic think tank National Council of Applied Economic Research (NCAER) revised India's economic growth projection to 7.8 percent, down from an earlier estimate of 9 percent for the current fiscal year.
"The diminished growth is on account of slower global growth and higher rate of inflation," NCAER said in its quarterly review of the economy.
Earlier, investment bank Goldman Sachs kept India's growth forecast for fiscal year 2009 at 7.8 percent due to a weak investment outlook on account of rising interest rates, while credit rating agency Moody's said inflation in India would continue to remain at 11.5 percent during the current fiscal and cautioned India that its sovereign ratings outlook may turn from the current 'stable' to 'negative' if its fiscal policy failed to contain the external shocks such as high crude oil prices or further aggravated inflationary concerns.
While Standard and Poor's chief economist for Asia Pacific Subir Gokaran said that the rating agency's forecast of 7.8 percent economic growth for India this year takes into account the pattern in the industry and the industrial slowdown is not surprising, Soumendra K Dash, chief economist at CARE Ratings, said even a 7 percent economic growth rate for the current fiscal would be nothing short of an "achievement."
"With the monetary policy unable to tame inflation and crude oil prices rising consistently, our outlook on the GDP growth is grim," Dash said.
However, the sentiment of Corporate India continues to be upbeat.
"There is no need to worry as this data is fluctuating and the investment in the capital formation continue unabated. Investment in the capital form should ensure a growth rate of 7.5-7.75 percent in the current fiscal," said Rana Kapoor, founder and CEO, Yes Bank.
According to Venugopal Dhoot, chairman, Videocon Industries, despite high inflation rate, India is faring better than other countries. "India has now become part of the global system and in comparison to what is happening worldwide, India is doing better. Since the government has adopted corrective measure in terms of taxation and with the economy growing at 8 percent, the next six months should see a better situation," Dhoot said.
Agrees Sunil Khandelwal, CFO, Alok Industries. "This is not the impact of the last one or two months, it takes time for the production to catch up. However, I don't think there will be any material slowdown and in the next 6 months I definitely see growth ahead," Khandelwal said.
Apex industry chambers, however, have mixed opinions.
According to Sajjan Jindal, president of Associated Chambers of Commerce and Industry (ASSOCHAM), even if the industry is accorded to the best possible packages in terms of incentives and concessions, the GDP growth is unlikely to be close to 9 percent. "We would be lucky if India achieves a GDP growth of 8 percent as in first quarter of current fiscal, since industrial production has suffered heavily," Jindal said.
But Anjan Roy, economic advisor, Federation of Indian Chambers of Commerce and Industry (FICCI) holds a different view. "The industrial growth is showing a recovery trend. It is a good thing. There is a need to maintain the trend," Roy said.
According to Roy, if the economy managed to grow at a rate of around 8 percent in the current fiscal, it would not be a small achievement given the recession in the global market, and high prices of crude oil.
"Indian economy will certainly bounce back in coming months. What is being witnessed today is just a momentary phase," he said.
Meanwhile, Montek Singh Ahluwalia, deputy chairman, Planning Commission, said there was need to speed up the industrial growth rate if the economy had to register an overall 8 percent growth rate.
Ahluwalia acknowledged that India was growing more slowly this fiscal than in the last. However, "one month's industrial growth rate cannot and should not be taken as an indicator of the final growth rate in the current fiscal," he said.
According to the data, the manufacturing sector, which accounts for over 79 percent of the IIP, grew by 5.9 percent in June 2008, up from a revised figure of 4.2 percent in May, but lower than 9.7 percent posted a year ago.
Consumer durables grew 3.5 percent in June 2008 against a negative growth of 3.6 percent in the year ago period. The performance of the consumer non-durables segment was even better as it recorded a growth of 12.2 percent during the month as compared to 6.3 percent in June 2007, pushing up the overall consumer sector growth to 10 percent.
Capital goods, a key gauge of industrial activity, rose 5.6 percent in June 2008 as against growth rate of 23.1 percent a year earlier, while the mining sector bounced back to post 2.9 percent growth in June 2008 compared with 1.5 percent posted in June 2007.
Intermediate goods sector grew 2.9 percent in June against 8.6 percent while basic goods grew 2.9 in the period under review, down from 9.2 percent a year ago.
Out of 17 industry groups, only 10 managed to post positive growth in June 2008. Interestingly, in March 2008, 12 industry groups had shown positive growth, indicating widening of a slowdown. The industry group 'Beverages, Tobacco and Related Products' showed the highest growth of 22.3 percent, followed by 12.6 percent in 'Transport Equipment and Parts' and 11.5 percent in 'Basic Chemicals and Chemical Products.'
On the other hand, 'Food Products' group, which have a 9.1 percent weight in the IIP, continued to trade in negative growth terrain, down 3 percent in June 2008 as against a positive growth of 0.5 percent in June 2007.
Groups like 'Jute and Other Vegetable Fiber Textiles,' 'Wood and Furniture,' 'Leather and Fur Products,' and 'Paper and Printing' also posted negative growth of 9.8, 1.3, 2.5 and 2.4 percent respectively.
In cotton textiles, growth slipped 1.1 percent in June 2008 from 7 percent in June 2007. The basic metals and alloys industry, which appears to have been hit by higher input costs, grew just 5.9 percent in the period under review as compared to 21.3 percent in June last fiscal.
However, machinery and equipment continues to hold steady with 9.2 percent growth as against 11 percent in the previous year.
The latest data also showed that growth of six core infrastructure industries, which account for 26.7 percent of industrial production expansion, slowed down to 3.4 percent in June 2008, from 5.2 percent in June 2007.
Petroleum refinery production (weight of 2 percent in the IIP), electricity generation (weight of 10.17 percent in the IIP), and cement production (weight of 1.99 percent in the IIP) showed slowdown in growth, rising 5.6 percent, 2.6 percent and 3.8 percent respectively in June 2008, compared to growth rate of 9.9 percent, 6.8 percent and 6 percent in the year ago period.
Crude oil production (weight of 4.17 percent in the IIP) registered a negative growth of 4.7 percent in June 2008 compared to a negative growth rate of 1.8 percent in June 2007.
Growth rate of finished (carbon) steel production (weight of 5.13 percent in the IIP) declined marginally to 4.4 percent in June 2008 compared to 5.1 percent in June 2007.
However, coal production (weight of 3.2 percent in the IIP), bucking the declining trend, registered a healthy growth of 6.2 percent in June 2008 compared to growth rate 0.9 percent in June 2007.
According to market analysts, the latest data on industrial growth was in line with expectations, though lower than the double-digit growths seen in 2006 and early 2007, due to tightening monetary policy and rising borrowing costs.
"The number has come in higher than our expectation, but the trend is clearly weakening as a result of higher interest rates, rising input costs and slowing global demand," said Sonal Varma, economist at Lehman Brothers in Mumbai.
D.K. Joshi, principal economist at domestic ratings agency CRISIL, said the IIP figures show that overall industrial performance in India continued to remain weak. According to Joshi, the growth rate has halved because of monetary tightening by the Reserve Bank of India (RBI) over the past year coupled with the slowing down of global economy and pressures coming from high commodity prices, particularly crude oil.
"We are in an industrial scenario which appears decisively weak. The IIP may pick up but it is going to be slightly subdued vis-a-vis last year. The underlying trend is that growth is weakening," Joshi said, adding that IIP could average out to above 7.5 percent for the current fiscal, but could be worse next year.
According to Axis Bank economist Saugata Bhattacharya, the data on IIP growth rate suggests "a continuing slowdown in industrial growth."
"Infrastructure slowdown is a supply-side issue. Capacity constraint is always a problem in coal, power and crude oil sector. Also the monetary tightening affecting the growth is obvious," Bhattacharya said.
"In terms of individual industries, the highest growth segments were textiles, chemicals and transport equipment. The first two indicate that exports have become a significant driver for industrial growth. Whether this will sustain following the partial reversal in the rupee remains to be seen," the Axis Bank said in a report.
"With first quarter GDP numbers for 2008-09 set to be released this month-end, Axis Bank expects a slowdown in some service segments that are linked to industrial activity. "If industrial growth continues to be tepid for the next few months, we might need to revise our GDP forecast for 2008-09 below 7.5 percent. This might not happen with the resurgence in the monsoon rains," the report said.
"The June data suggests weaker industrial production has set in," Goldman Sachs economists Tushar Poddar and Pranjal Bhandari said in a research note. "Coincident indicators like non-food credit growth, cellular subscriptions and commercial vehicle sales suggest a moderation in activity rather than a sharp slowdown, and we expect this trend to continue this financial year."
"However, with inflation remaining well above the RBI's (Reserve Bank of India) target range, we continue to expect one more round of rate increases of 25 basis points on the repo rate and 25 basis points on the cash reserve ratio by end-October," they said.
According to Abheek Barua, chief economist at HDFC Bank in New Delhi, if inflation risks abate a bit, growth would have an impact on monetary policy.
"In coming months, I see the IIP growth figure to hover at around 6-7 percent. I am not able to solve the puzzle as to why there is surge in the consumers durable segment. The RBI has been tightening the monetary measures, and credit the offtake has come down. In this scenario, I see no reason for surge in consumer durable segment. As for consumer non-durables, the growth must have been aided by good monsoon witnessed in some parts of the country and prospects of a better produce," Barua said.
"I think the monetary policy measures being taken since January this year are beginning to impact the industrial growth. Our GDP growth projection remains at 7.8 percent as the industrial growth outlook is not very promising," said Rajeev Kumar, CEO, Indian Council for Research on International Economic Relations (ICRIER).
"The RBI will also have to be very careful in its future decisions. If it continues to tighten monetary policy, it would have an adverse impact on the industry," Kumar said.
India's biggest bank, State Bank of India raised its benchmark prime lending rate (BPLR) by 100 basis points (1 percent) to an annual 13.75 percent effective Tuesday.
State-run Indian Overseas Bank and Indian Bank also hiked their BPLRs by 50 basis points and basis points respectively.
The rate hikes follow central bank, Reserve Bank of India's (RBI) decision last month to increase its key lending rate or repo rate by 50 basis points, to a 7-year high of 9 percent, and banks' cash reserve requirements or CRR by 25 basis points to 9 percent.
The move prompted India's largest mortgage lender Housing Development Finance Corporation (HDFC) and other top banks including ICICI Bank and HDFC Bank to raise their respective prime lending rates.
However, some analysts are optimistic that the economy would bounce back.
"IIP numbers for June were in line with expectations. The growth has definitely slowed compared to last year. Though this moderation raises some concerns on the overall growth, we do not see the situation worsening. The moderation in IIP is due to previous tightening by RBI. Inflation being the key priority, both RBI and the finance ministry have traded growth for containing inflation," said Krupesh Thakkar of India Capital Markets.
"Even though industrial production has almost halved to 5.2 percent in the first quarter vis-a-vis 10.3 percent last year, it is surely looking up on a sequential basis. We expect industrial growth to touch 7.5 percent towards the year-end," said Manish Sonthalia, vice president (equity strategy), Motilal Oswal Securities.
Agrees Ketan Karani, vice president, Kotak Securities. "IIP figures were very much on expected lines. We'll experience some lag effect for another 2-3 months ahead before it shows some real improvement," Karani said.
Meanwhile, all analysts agree that the RBI's move to tighten monetary policy to tame inflation, would adversely affect India's economic growth.
India's economy grew about 9 percent in the fiscal year which ended in March, but high oil and food prices led to India's wholesale price index (WPI)-based inflation rate soaring to 12.01 percent in the 12 months to July 26, higher than previous week's figure of 11.98 percent.
While the RBI last month cut its growth forecast for the current fiscal year (FY09) to 8 percent from the earlier 8-8.5 percent, economic think tank National Council of Applied Economic Research (NCAER) revised India's economic growth projection to 7.8 percent, down from an earlier estimate of 9 percent for the current fiscal year.
"The diminished growth is on account of slower global growth and higher rate of inflation," NCAER said in its quarterly review of the economy.
Earlier, investment bank Goldman Sachs kept India's growth forecast for fiscal year 2009 at 7.8 percent due to a weak investment outlook on account of rising interest rates, while credit rating agency Moody's said inflation in India would continue to remain at 11.5 percent during the current fiscal and cautioned India that its sovereign ratings outlook may turn from the current 'stable' to 'negative' if its fiscal policy failed to contain the external shocks such as high crude oil prices or further aggravated inflationary concerns.
While Standard and Poor's chief economist for Asia Pacific Subir Gokaran said that the rating agency's forecast of 7.8 percent economic growth for India this year takes into account the pattern in the industry and the industrial slowdown is not surprising, Soumendra K Dash, chief economist at CARE Ratings, said even a 7 percent economic growth rate for the current fiscal would be nothing short of an "achievement."
"With the monetary policy unable to tame inflation and crude oil prices rising consistently, our outlook on the GDP growth is grim," Dash said.
However, the sentiment of Corporate India continues to be upbeat.
"There is no need to worry as this data is fluctuating and the investment in the capital formation continue unabated. Investment in the capital form should ensure a growth rate of 7.5-7.75 percent in the current fiscal," said Rana Kapoor, founder and CEO, Yes Bank.
According to Venugopal Dhoot, chairman, Videocon Industries, despite high inflation rate, India is faring better than other countries. "India has now become part of the global system and in comparison to what is happening worldwide, India is doing better. Since the government has adopted corrective measure in terms of taxation and with the economy growing at 8 percent, the next six months should see a better situation," Dhoot said.
Agrees Sunil Khandelwal, CFO, Alok Industries. "This is not the impact of the last one or two months, it takes time for the production to catch up. However, I don't think there will be any material slowdown and in the next 6 months I definitely see growth ahead," Khandelwal said.
Apex industry chambers, however, have mixed opinions.
According to Sajjan Jindal, president of Associated Chambers of Commerce and Industry (ASSOCHAM), even if the industry is accorded to the best possible packages in terms of incentives and concessions, the GDP growth is unlikely to be close to 9 percent. "We would be lucky if India achieves a GDP growth of 8 percent as in first quarter of current fiscal, since industrial production has suffered heavily," Jindal said.
But Anjan Roy, economic advisor, Federation of Indian Chambers of Commerce and Industry (FICCI) holds a different view. "The industrial growth is showing a recovery trend. It is a good thing. There is a need to maintain the trend," Roy said.
According to Roy, if the economy managed to grow at a rate of around 8 percent in the current fiscal, it would not be a small achievement given the recession in the global market, and high prices of crude oil.
"Indian economy will certainly bounce back in coming months. What is being witnessed today is just a momentary phase," he said.
Meanwhile, Montek Singh Ahluwalia, deputy chairman, Planning Commission, said there was need to speed up the industrial growth rate if the economy had to register an overall 8 percent growth rate.
Ahluwalia acknowledged that India was growing more slowly this fiscal than in the last. However, "one month's industrial growth rate cannot and should not be taken as an indicator of the final growth rate in the current fiscal," he said.
Tuesday, August 12, 2008
‘India is likely to benefit from the global slowdown’
“Those days, we had direct access to Mr Murthy,” says KC Reddy, CIO, ABN Amro MF, referring to NR Narayana Murthy. Reddy was reminiscing how he, as an investment analyst covering IT companies, wrote what was probably the first research report on Infosys.
Infosys and the Indian market both have come a long way, and so has KC Reddy. He has worked in various reputed organisations such as Credit Agricole Asset Management (Hong Kong), Thames River Capital (London) and Charlemagne Capital (London) where he was involved in managing a range of equity funds including Asia Fund, Greater China Fund and India Fund. At ABN Amro Asset Management, India, Reddy will also be the fund manager for ABN Amro Opportunities Fund and ABN Amro Future Leaders Fund. He spoke to N Sundaresha Subramanian and Vivek Kaul
It’s a homecoming for you. How are you feeling?
This is the first time I’ll be on the fund management side in India. I am looking forward to it.
Does your decision to move to India have a macroeconomic angle, given the slowdown around the globe?
Personally, moving back to India was a priority. Moreover, after the takeover by Fortis, they increased the capital allocated to the mutual fund business ten-fold to $50 million. They are bullish on India and were looking to strengthen their mutual funds business. I thought it was a good opportunity. From a personal perspective — this is not a house view — global economy is set for a phase where it will be driven by China. We made a lot of money in the emerging markets. India will be one of the few countries that will benefit from the global slowdown.
Does being a fund manager in India require a different sort of orientation than being one abroad?
Different kind of funds call for different styles. But the basic things remain the same. In my stint with managing emerging market funds, I have become familiar with brokers, analysts and different sections of the market. Therefore these are not new to me. Lot of people have become fund managers in the bull market. There is less focus on research and more on taking big, macro calls. There is a tendency to speak to market people.
There is trading in lot of companies because either brokers or CNBC said so.
There is less discipline in India. We will focus more on in-house research and less on outside. We will do financial modelling and prepare forecasts and focus more on bottom-up approach. In the last few years, everything went up and making money was not difficult. Index strategies worked well. Going ahead, though the long-term outlook is good, not everything will go up. It would be like the second half of the 90s, where it was difficult to make money. Focus will be on bottom-up strategy.
Have you reoriented the portfolio in some of your schemes?
Almost all schemes we have done some reallocation, though not completely. We have been keeping in line with the objective of the scheme, for example, we have exited positions where we had less conviction.
We have cut out overweight on index stocks, where we have less conviction. Global economy is in the process of slowing down. Any company exposed to the global slowdown is in the risk of earnings growth. We went underweight on commodities-related stories in June. So far, it has worked in our favour.
Other big companies, we are not negative on valuation, but the beta is not very high, given their earnings could fall 40-50%.
Similarly, we went overweight as early as June. Active valuations are factoring 30-50% drop in earnings already. But as the global credit crunch eases, MTM losses on the bond side could come down. Risk-reward looks very favourable.
Don’t you feel rising rates will hit banks?
Interest rates are close to peaking. Increase in inflation has flattened, if you noticed over the last few weeks. We might see an accelerated fall in global commodities, not only in oil, but also in agri-commodities. There is significant inventory build-up in edible oil, palm oil and soya. Lot of apple production is coming in and we expect a similar scene in copper also. Demand destruction is shocking. Prices will fall sooner than anticipated. And governments will be keen on cutting down rates to push growth. If our views ring true, we see bond yields closer to 8% than 9%, and then lot of MTM losses will be reverted.
Besides, banks are in a better position to pass on costs to customers than many manufacturing companies. Surprises are possible as most funds are underweight or short.
Even other rate-sensitive sectors such as real estate and auto are mildly positive from a trading perspective.
What are the other sectors that interest you?
There are some very interesting midcap ideas. We are looking at telecom, IT and healthcare space. These are less affected by the slowdown, valuation is single-digit PE and are high ROE stories. They have been unjustifiably hammered. Once market recovers, people will come back.
What is your view on commodity prices?
Commodities have room to fall further. The demand destruction is phenomenal and is not appreciated by the commodity bulls. Global oil demand is down 1.5%, within that Chinese demand is down 2.5%. The US car sales are down to their 1992 number. There are signs of falling demand in Europe, Japan and Korea.
In China, the big factor was Olympics. With the Olympics underway already, demand is slipping there too. There is degrowth in oil demand globally. Supply issues have kept it up. But, price elasticity won’t kick in until it falls below $80. Similar demand destruction is seen in varying degrees across the commodity space. Prices have to fall.
What is your message to investors?
August, September and October have the potential to be the most important months in the world economy in the next 10 years. One has to be very cautious and watch the data. Investors should go back to the old style of investing, must diversify and stick to valuations, should keep expectation low to 20% returns.
Infosys and the Indian market both have come a long way, and so has KC Reddy. He has worked in various reputed organisations such as Credit Agricole Asset Management (Hong Kong), Thames River Capital (London) and Charlemagne Capital (London) where he was involved in managing a range of equity funds including Asia Fund, Greater China Fund and India Fund. At ABN Amro Asset Management, India, Reddy will also be the fund manager for ABN Amro Opportunities Fund and ABN Amro Future Leaders Fund. He spoke to N Sundaresha Subramanian and Vivek Kaul
It’s a homecoming for you. How are you feeling?
This is the first time I’ll be on the fund management side in India. I am looking forward to it.
Does your decision to move to India have a macroeconomic angle, given the slowdown around the globe?
Personally, moving back to India was a priority. Moreover, after the takeover by Fortis, they increased the capital allocated to the mutual fund business ten-fold to $50 million. They are bullish on India and were looking to strengthen their mutual funds business. I thought it was a good opportunity. From a personal perspective — this is not a house view — global economy is set for a phase where it will be driven by China. We made a lot of money in the emerging markets. India will be one of the few countries that will benefit from the global slowdown.
Does being a fund manager in India require a different sort of orientation than being one abroad?
Different kind of funds call for different styles. But the basic things remain the same. In my stint with managing emerging market funds, I have become familiar with brokers, analysts and different sections of the market. Therefore these are not new to me. Lot of people have become fund managers in the bull market. There is less focus on research and more on taking big, macro calls. There is a tendency to speak to market people.
There is trading in lot of companies because either brokers or CNBC said so.
There is less discipline in India. We will focus more on in-house research and less on outside. We will do financial modelling and prepare forecasts and focus more on bottom-up approach. In the last few years, everything went up and making money was not difficult. Index strategies worked well. Going ahead, though the long-term outlook is good, not everything will go up. It would be like the second half of the 90s, where it was difficult to make money. Focus will be on bottom-up strategy.
Have you reoriented the portfolio in some of your schemes?
Almost all schemes we have done some reallocation, though not completely. We have been keeping in line with the objective of the scheme, for example, we have exited positions where we had less conviction.
We have cut out overweight on index stocks, where we have less conviction. Global economy is in the process of slowing down. Any company exposed to the global slowdown is in the risk of earnings growth. We went underweight on commodities-related stories in June. So far, it has worked in our favour.
Other big companies, we are not negative on valuation, but the beta is not very high, given their earnings could fall 40-50%.
Similarly, we went overweight as early as June. Active valuations are factoring 30-50% drop in earnings already. But as the global credit crunch eases, MTM losses on the bond side could come down. Risk-reward looks very favourable.
Don’t you feel rising rates will hit banks?
Interest rates are close to peaking. Increase in inflation has flattened, if you noticed over the last few weeks. We might see an accelerated fall in global commodities, not only in oil, but also in agri-commodities. There is significant inventory build-up in edible oil, palm oil and soya. Lot of apple production is coming in and we expect a similar scene in copper also. Demand destruction is shocking. Prices will fall sooner than anticipated. And governments will be keen on cutting down rates to push growth. If our views ring true, we see bond yields closer to 8% than 9%, and then lot of MTM losses will be reverted.
Besides, banks are in a better position to pass on costs to customers than many manufacturing companies. Surprises are possible as most funds are underweight or short.
Even other rate-sensitive sectors such as real estate and auto are mildly positive from a trading perspective.
What are the other sectors that interest you?
There are some very interesting midcap ideas. We are looking at telecom, IT and healthcare space. These are less affected by the slowdown, valuation is single-digit PE and are high ROE stories. They have been unjustifiably hammered. Once market recovers, people will come back.
What is your view on commodity prices?
Commodities have room to fall further. The demand destruction is phenomenal and is not appreciated by the commodity bulls. Global oil demand is down 1.5%, within that Chinese demand is down 2.5%. The US car sales are down to their 1992 number. There are signs of falling demand in Europe, Japan and Korea.
In China, the big factor was Olympics. With the Olympics underway already, demand is slipping there too. There is degrowth in oil demand globally. Supply issues have kept it up. But, price elasticity won’t kick in until it falls below $80. Similar demand destruction is seen in varying degrees across the commodity space. Prices have to fall.
What is your message to investors?
August, September and October have the potential to be the most important months in the world economy in the next 10 years. One has to be very cautious and watch the data. Investors should go back to the old style of investing, must diversify and stick to valuations, should keep expectation low to 20% returns.
Lakshmi Mittal winging into SpiceJet?
Lakshmi Niwas Mittal, the London-based billionaire who controls ArcelorMittal, the world’s largest steel company, is believed to have evinced interest in buying ailing low-cost carrier SpiceJet.
“He (Mittal) would like to go for a full buyout,” a source familiar with the development said.
This will require Mittal buying, apart from the promoters’ stake, the $80 million (Rs 350 crore) foreign currency convertible bonds (FCCBs) that SpiceJet issued to Istithmar, the Dubai government’s investment arm, and investment bank Goldman Sachs.
The Tatas hold around 7% stake in the airline. Mittal could not be reached for comment.
Mittal’s interest is a surprise because the airline doesn’t have a strategic fit with his businesses. “It doesn’t make any sense for Mittal to look at SpiceJet,” said an industry source.
On the other hand, liquor and aviation baron Vijay Mallya remains keen on scooping the no-frills carrier to lift Kingfisher’s market share above that of arch rival Jet Airways.
Meanwhile, Wilbur Ross, the US investor often called the ‘King of Bankruptcy’, who is close to Mittal (he is on ArcelorMittal board), wants to rework the terms of his investment in SpiceJet.
Ross had in July announced an investment of Rs 345 crore in the airline. SpiceJet sources insist that deal is not in danger, but they admitted it “may not be sealed on original terms”.
A source familiar with the development said Ross’ return to the negotiating table came after the Airports Authority of India (AAI) issued an ultimatum to SpiceJet to pay up dues or be charged landing and navigational fees on a cash-and-carry basis from August 1.
“After this ultimatum, Ross set down certain conditions before he injected funds into the airline,” the source said.
The conditions include writing down of dues to creditors and delivering operational performance within a specified timeframe.
Ross is also believed to be trying to negotiate the conversion rate of the FCCBs to as low as Rs 10 a share from the Rs 25 per share discussed when talks for the deal had closed, the source said. “Though Ross is keen on bringing in capital, he may not do it on original terms,” said the source. His fund has raised concerns over some legal issues too.
Ross had completed due diligence of SpiceJet on July 31.
A senior SpiceJet official confirmed that the AAI has extended the airline’s credit period till August 31. The official, however, was mum on whether Ross was renegotiating the terms of deal.
Sources said Ross may eventually not go for conversion of bonds into equity. “That is why there is no question of triggering an open offer (after breaching the 15% stakeholding as per Sebi rules) or hitting the ceiling of 49% on foreign direct investment,” said the source.
Besides AAI, SpiceJet has to pay dues to private airport operators Delhi International Airport Ltd, Mumbai International Airport Ltd and Bengaluru International Airport Ltd too.
And these are only mounting. “It has started delaying payment of aircraft lease rentals to lessors due to paucity of working capital,” said a source.
“He (Mittal) would like to go for a full buyout,” a source familiar with the development said.
This will require Mittal buying, apart from the promoters’ stake, the $80 million (Rs 350 crore) foreign currency convertible bonds (FCCBs) that SpiceJet issued to Istithmar, the Dubai government’s investment arm, and investment bank Goldman Sachs.
The Tatas hold around 7% stake in the airline. Mittal could not be reached for comment.
Mittal’s interest is a surprise because the airline doesn’t have a strategic fit with his businesses. “It doesn’t make any sense for Mittal to look at SpiceJet,” said an industry source.
On the other hand, liquor and aviation baron Vijay Mallya remains keen on scooping the no-frills carrier to lift Kingfisher’s market share above that of arch rival Jet Airways.
Meanwhile, Wilbur Ross, the US investor often called the ‘King of Bankruptcy’, who is close to Mittal (he is on ArcelorMittal board), wants to rework the terms of his investment in SpiceJet.
Ross had in July announced an investment of Rs 345 crore in the airline. SpiceJet sources insist that deal is not in danger, but they admitted it “may not be sealed on original terms”.
A source familiar with the development said Ross’ return to the negotiating table came after the Airports Authority of India (AAI) issued an ultimatum to SpiceJet to pay up dues or be charged landing and navigational fees on a cash-and-carry basis from August 1.
“After this ultimatum, Ross set down certain conditions before he injected funds into the airline,” the source said.
The conditions include writing down of dues to creditors and delivering operational performance within a specified timeframe.
Ross is also believed to be trying to negotiate the conversion rate of the FCCBs to as low as Rs 10 a share from the Rs 25 per share discussed when talks for the deal had closed, the source said. “Though Ross is keen on bringing in capital, he may not do it on original terms,” said the source. His fund has raised concerns over some legal issues too.
Ross had completed due diligence of SpiceJet on July 31.
A senior SpiceJet official confirmed that the AAI has extended the airline’s credit period till August 31. The official, however, was mum on whether Ross was renegotiating the terms of deal.
Sources said Ross may eventually not go for conversion of bonds into equity. “That is why there is no question of triggering an open offer (after breaching the 15% stakeholding as per Sebi rules) or hitting the ceiling of 49% on foreign direct investment,” said the source.
Besides AAI, SpiceJet has to pay dues to private airport operators Delhi International Airport Ltd, Mumbai International Airport Ltd and Bengaluru International Airport Ltd too.
And these are only mounting. “It has started delaying payment of aircraft lease rentals to lessors due to paucity of working capital,” said a source.
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