HYDERABAD BUSINESS

EDUCOP WORLD - IMMEDIATE CAMPUS REQUIREMENTS 2011

2011-10-08T02:03:00.000-07:00

Our reputed client in Hyderabad urgently needs Campus Freshers for the following posts:

1.Analytics Manager
2.App Designer / Developer
3.Blog Editor
4.Blogger / Pro Blogger / Professional Blogger
5.Blogger-in-Chief
6.Brand Ambassador
7.Brand Champion
8.Brand & Project Manager
9.Brand Promoter
10.Client Engagement Manager
11.Client Services Coordinator, Online / Social Media
12.Community Content Outreach Coordinator
13.Community Data Guerrilla
14.Community Manager
15.Content Manager – Strategic Marketing
16.Content Strategist
17.Conversation Manager
18.Director of Enterprise Communications
19.Director of Integrated Media
20.Director of PR & Social Media
21.Director of Social Media
22.Director of Social Media Communications
23.Director of Social Media Strategy
24.Digital Marketing Manager
25.Digital Media Coordinator
26.Digital Media Strategist
27.Digital PR Consultant
28.Digital / Social Media Strategist
29.Ghost Blogger
30.Head of Search Marketing
31.Idea Inventor
32.Internet Media Associate
33.IT & Telecom Consultant
34.Leadership Trainer
35.Marketing Communications Specialist
36.Mobile Social Media Developer
37.Multi-media Communications Specialist
38.Multi-media Journalist
39.New Media Coordinator
40.New Media Developer
41.New Media Specialist
42.Online Community and Social Media Czar
43.Product Evangelist
44.Podcaster
45.Search and Social Media Optimizer
46.Serial Entrepreneur
47.Social & Digital Media Manager
48.Social Impact Manager
49.Social Media Activist
50.Social Media Advocate
51.Social Media Analyst
52.Social Media Attorney
53.Social Media CFO
54.Social Media Community Manager
55.Social Media Consultant
56.Social Media Coordinator
57.Social Media Evangelist
58.Social Media Expert
59.Social Media Guru
60.Social Media Lead
61.Social Media Marketer
62.Social Media Manager
63.Social Media Missionary
64.Social Media Monitor
65.Social Media Music Publicist
66.Social Media Professional
67.Social Media Representative
68.Social Media Rockstar
69.Social Media Specialist
70.Social Media Strategist
71.Social Networks Designer
72.Tweeter / Ghost Tweeter
73.Underground Band Promoter & Event Planner
74.Virtual Worlds Developer
75.Youth Marketing Manager

Interested may apply immediately through campus placement officer to educopworld@gmail.com within a fortnight only.

All the posts carry best in the industry pay package plus perks apart from the 'best selection grade' attraction.

THIS IS MEANT ONLY FOR 'CAMPUS RECRUITMENT' - NO PERSONAL OR INDIVIDUAL APPLICATIONS PLEASE.

Economy Becoming Important in Deciding Electoral Fortunes

2009-03-16T04:33:00.000-07:00

By Sushma Ramachandran

The state of the economy is increasingly being considered a crucial element in elections as voters now tend to give greater priority to ground realities of price rise and job opportunities, though caste and regional considerations continue to remain important. The situation of course differs from state to state.

The people of Gujarat, for instance, seem to have forgiven and forgotten the role of Chief Minister Narendra Modi in the communal riots of the past and given him a vote of confidence for having speeded up economic development and improved infrastructure in the state.

In contrast is Uttar Pradesh where the social engineering of Chief Minister Mayawati apparently reigns supreme as caste and religion continue to remain predominant factors in elections. No doubt the approach of the electorate to their political leaders reflects on the overall development of different states with Gujarat way ahead as far as most economic indicators are concerned while Uttar Pradesh is one of the worst performing states in the country on most counts.

However, even with such yawning differences between the perceptions of the electorates in different states, basic economic issues such as price rise and jobs have always played a key role in elections. In one famous instance, the soaring prices of onions brought down a government.

It is no wonder therefore that Madhya Pradesh Chief Minister Shivraj Chauhan is not interested in espousing Hindutva as an election issue and instead has sought to highlight his developmental work to promote the cause of the Bharatiya Janata Party (BJP) in the state. One must also recall the scramble among state governments to bag the Nano project.

So the report card of the economy is increasingly becoming critical during general elections. And the judgement of the electorate on this score is going to be vital for the ruling United Progressive Alliance (UPA) as well as the opposition National Democratic Alliance (NDA) and the rising Third Front.

Even Mayawati has become aware of the need to ensure that there is a significant improvement in the economic well-being of the people. Despite her focus on the much-vaunted social engineering to harness the energies of both Dalits and Brahmins, she is reported to have chalked out a systematic plan to ensure development of infrastructure. And bureaucrats have been directed to implement time bound programmes of development.

Whether these plans have actually been successful or not is a moot point. But the fact is that during this tenure as chief minister, Mayawati has not been unmindful of the need to bring about a tangible change in the quality of life rather than merely relying on caste-based support. This is diametrically different from the route adopted by Railway Minister Lalu Prasad when he was Bihar chief minister, as his focus was more on caste considerations than on trying to pull the state out of its economic backwardness.

In contrast, the present Bihar Chief Minister Nitish Kumar has recognized the need for trying to bring the fruits of economic progress to the most backward areas of the state and his recent tour of all districts was an effort to publicize the drive towards economic development.

Another aspect of this realization by political leaders is the anxiety to try and woo large industrial projects to enhance job opportunities. The story of the Nano project is well known but even for other ventures there has been stiff competition. Maharashtra, for example, used to be the state of choice for most investors at one point of time.

This is no longer the case with the southern states having vied successfully for major plants. It is for this reason that the giant Hyundai plant is in Tamil Nadu though its major market is in North India.

One of the main aims of West Bengal's Chief Minister Buddhadeb Bhattacharjee has been to revive the state's former glory as a bastion of industrialization and economic progress. The failure of the Nano project to take off in Singur came as a major blow to these aspirations.

So while political commentators try to work out the caste configurations of each Lok Sabha seat, it is clear that voting patterns will be different in regions where economic development has made inroads.

For instance, the continuing farmers suicides in Andhra Pradesh and Vidarbha will make life very difficult for incumbent political leaders. On the other hand, in Gujarat where Narendra Modi is reported to have brought about a sea-change in the developmental process, especially in regard to wiping out corruption, the people are expected to once again vote overwhelmingly in favor of the BJP.

As general elections are round the corner, every economic indicator released on a routine basis is being watched with a hawk's eye by both the ruling coalition and parties in the opposition.

This includes the latest data on declining industrial output and the fall in inflation numbers. The first set of figures showing a dip in industrial output during December are bound to be worrying for the incumbent government since this is an indicator that several stimulus packages have not kicked in to give much-needed pep to the economy.

From the point of view of opposition parties, the industrial output data indicates that the economic gloom is not only continuing but that the blame for it can be squarely laid at the door of the UPA government.

On the other hand, the decline of the wholesale price index brings cheer not only to the ruling coalition but to the common man as it signals a fall in prices of essential commodities. Inflation has reached a seven-year low at 2.3 percent.

Retail prices at the consumer level tend to remain much higher than the wholesale price index, but even so there will be some relief for the man (or woman) in the street. For the opposition this is bad news as the price situation is always a key factor with voters while judging the performance of an incumbent government.

The economy may not always be the clinching factor for voters as they go to the ballot booths, but it is certainly playing a much larger role than before.

Plus, it is possible that young voters who are constituting an increasingly large segment of the electorate, will look more for a perceptible improvement in the quality of life rather than going by the old, traditional parameters while voting.

What is Behind The Falling Rupee?

2009-03-16T04:31:00.000-07:00

By M H Ahssan

The foreign currency markets around the world are much like the markets for any other goods.

If the supply of rupees rises relative to its demand, then the price of it will fall. And it has been falling for many years! It took 7.50 rupees to buy one US dollar in 1970, but it took 52 rupees in the first week of March 2009 – 593.33 percent decline in nearly 39 years or 15.6 percent a year!

If the demand for rupees rises relative to its supply, then the price of it will rise. This happened very briefly from mid 2007 to mid 2008 when the overseas demand for Indian software services rose among other things; it gained strength against the US dollar and hovered between 38 to 42 rupees per US dollar compared to 48 rupees in early 2007 and 49 rupees in late 2008.

Why is the rupee falling now?
The RBI can use monetary policy two ways: one way is to defend the rupee against the foreign currency and second to stabilize or to improve the domestic economic conditions.

If the goal of RBI is to defend the rupee then it could directly intervene in the foreign exchange market. It would sell major currencies like dollars, euros, pounds, or yens in open market and buy rupees. Generally, this kind of intervention would be coordinated with other central banks, which would also buy rupees. This action would cause rupees to go up in price. However, RBI has hardly ever intervened in the currency market.

Presently, RBI has lowered interest rates, a monetary policy tool, not to address the problem of the falling rupee, but to address the nation’s falling economic growth. But, this action is actually working against the rupee in the foreign exchange market. And here is what’s happening.

RBI has cut its lending rate (called repo rate) to banks at 5 percent. It has also lowered the rate (called reverse repo rate) at which it borrows from banks to 3.5 percent. It is encouraging the public as well as companies to borrow money from banks and buy goods and services to help spur the economic growth. They are sending the message that rupees are available at a lower interest rate for someone to borrow.

Yes, rupees are available but the companies involved in exporting their goods and services are in no mood to expand their businesses because economies of the USA and countries in Europe and other places are in bad shape. The 52 rupees to a dollar rate should make it very attractive for foreign buyers to buy Indian goods and services, but foreigners are broke. So, there is no demand for rupees and the excess rupees are floating in the Indian economy.

Yes, rupees are available and the 52 rupees to a dollar rate should make it very attractive for foreign visitors to buy rupees and visit India, but foreigners are broke and can’t afford to travel. Those foreign travelers who could travel are worried about the safety in India; the terrorists’ incident in Mumbai is still fresh in their mind. So, there is no demand for rupees and excess rupees are floating in the Indian economy.

Yes, rupees are available and the 52 rupees to a dollar rate should make it very attractive for foreign investors to buy rupees and invest in Indian companies but foreigners are broke and can’t afford to invest. Those investors who could invest are likely to wait and see which party comes to power after the general election in May 2009. Also, Indian companies’ stocks aren’t performing well like many companies around the globe. So, there is no demand for rupees and excess rupees are floating in the Indian economy.

Yes, rupees are available and the 52 rupees to a dollar rate should make it very attractive for foreign investors to buy rupees and park their money in the Indian banks but foreigners are broke and can’s afford to invest. Also, interest rates offered by Indian banks are not that attractive. So, there is no demand for rupees and excess rupees are floating in the Indian economy.

Multinational companies convert their earning from rupees to the currency of the country they come from. And when the rupee keeps falling, they are in a hurry to exchange rupees, otherwise their balance sheets in their currency would look bad. Such conversions cause more demand for foreign currencies.

The foreign funds have been selling Indian shares and taking dollars back to America causing pressure on the rupee. India has recently decreased it imports, which brought its trade deficit down by US$1.5 billion from December 2008 to January 2009. Yet, both the trade deficit and budget deficit are high and are contributing to the fall of the rupee.

In a nutshell, the supply of rupees has risen and its demand has fallen causing the rupee to fall against the dollar. Both the rupee and the US dollar have lost the value only that the rupee has lost a lot more.

Whom does the falling rupee hurt?
Indian students who are studying abroad will have to pay more to purchase the currency of the country in which they are studying. Their cost of education will go up as a result of the falling rupee. Indian tourists will find it expensive to travel abroad. Indian patients going overseas for medical problems will find the treatment expensive. Indian companies buying raw material, finished products, and spare parts from abroad will find it expensive to continue to do businesses with foreign companies. The foreign debt payments of both Indian government and Indian companies who have borrowed money from overseas banks will go up.

What is the effect of the falling rupee?
Inflation. The money supply (M3) increased from 40,06,722 crore to 45,90,189 crore rupees from March 31, 2008 to Feb 13, 2009 – an increase of 5,83,467 crore rupees or 14.56 percent. Since the supply of rupees is greater than its relative demand, according to Milton Friedman, the coming of inflation will prove that it is always and everywhere a monetary phenomenon. Furthermore, RBI and banks have lowered the lending rate to accelerate the demand for loans and thereby pumping more rupees into the economy.

Right now the good news is that India’s inflation has dropped to 3 percent in February of 2009, and D.K.Joshi, an economist with Crisil Ltd., is predicating that it could reach to zero. Well, dream on!

The inflation is a lagging indicator and is waiting just around the corner to go up. The decelerating economic growth, rising gold prices, rising cost of imported goods and services, and the falling rupee in the world market are sure signs of inflation to come. And if the economy fails to pick up, India may see a stagflation.

Pharma M&A wave set to reach India

2009-03-15T23:17:00.000-07:00

By M H Ahssan

While Biggies Merge To Boost Pipeline; Debt, Low-Valuations Make Indian Cos Target

While merger-mania is gripping the global pharma industry, a similar trend may soon spill over to the Indian market, with pharmaceutical companies quoting at low valuations and saddled with huge debt.

Recently, there have been a spate of deals in the pharma space led by Pfizer Inc’s acquisition of Wyeth for $68 billion, followed by the merger of Merck and Schering Plough. Experts believe that Bristol-Myers Squibb may be the next target of an acquisition, and many more deals are inevitable.

Back home, there has been speculation about Wockhardt and Piramal Healthcare being potential acquisition targets.

Analysts believe that the trend may intensify in India. “Due to global consolidation, pricing pressures, regulatory compliance issues and leverage taken on books for past high-priced acquisition, large Indian pharma is feeling the pressure and there will be substantial consolidation within the Indian market,” says Sujay Shetty, associate director, PricewaterhouseCoopers India.

The primary drivers of global mergers and acquisitions are falling revenues of Big Pharma due to slowdown pressure and a shrinking block-buster drug pipeline. Pharma consultancy IMS Health estimates that by 2011, drugs worth some $60 billion will come off patent.

So MNCs are trying to augment revenues by acquisitions and alliances with generics and other companies where they see additional businesses like vaccines, biotech drugs and specialist therapies. For instance, Pfizer gets the biotech business and OTC business of Wyeth to increase its revenues through the acquisition.

Pipelines have been stag nating, hence there is need to replenish them. In the recent Merck-Schering Plough deal, Mercks pipeline will double to 18 late-stage drugs with a formidable research and development pipeline.

In the current economic environment, big mergers and deals are a good strategy to improve bottomlines and cut costs. Research and development and marketing expenses account for a whopping 35-40% of total expenses. These deals will allow for synergies and cost reductions when a merger happens.

Pharma biggies like Glaxo are trying to bolster their presence in emerging markets and in generic companies. There are many Indian companies whose valuations have reduced by 70-80%.

Experts believe that some of them will fall prey to either big Indian companies or foreign players.

“This is the perfect time to shop for companies that are strategically highly compatible and are available at much lower valuations. Companies with a reasonable risk appetite make best use of such opportunities and the phenomenon is quite apparent with number of deals happening in global pharma space. Pharma is still perceived as the industry, which is relatively immune to any downturn, and hence most M&A activity is happening in this space while earlier it used to be services or technology. As for trend spilling to India, I think companies are taking a wait and watch approach as of now,” says Zydus Cadila executive director Ganesh Nayak.

As far as availability of funds is concerned, Big Pharma, for all its problems — does have massive cash resources and can do these blockbuster deals as well as attract the needed bank-funding, as pharma has been less affected by the downturn on account of the defensive nature of the industry.

Big Pharma M&A deals, a booster shot for contract manufacturers
The third mega pharma merger deal was done last week with Roche buying a controlling stake in Genentech for $47 billion. This follows Merck’s $41 billion deal to combine with Schering-Plough and Pfizer’s game changing $68 billion buyout of Wyeth in January this year. While the recent consolidation in pharma industry is an outcome of the challenges faced by the global pharma companies over the last few years, this spells good news for Indian pharmaceutical contract manufacturers such as Piramal Healthcare, Jubilant Organosys, Divis’ Labs and Dishman Pharma.

With these large acquisitions being focused on reducing costs and increasing revenues, Indian companies think they will get more contract deals. Pharma contract manufacturers either supply formulations (finished dosages) or active pharmaceutical ingredients (drug raw materials) to global companies. The phrase Big Pharma is often used to refer to companies with revenue in excess of $3 billion.

According to industry estimates, outsourcing helps Big Pharma cut costs by 30-50% due to cheap labour in India. For instance, Pfizer-Wyeth combine expect to save $ 3 billion by 2010 end and Indian pharma contract manufacturers could play an important role. “Going forward we expect that manufacturing will be more skewed towards India and China. Chinese players lose out to Indian companies on quality and adherence issues. Recession cannot wipe out Big Pharma and Indian pharma outsourcers stand to benefit as these dinosaurs merge,” N Santhanam, chief operating officer of Rs 2,800 crore Piramal Healthcare, said. Piramal’s Pharma Solutions provides end-toend support for bringing a drug to market or managing the life cycle of a launched drug.

R Sankaraiah, executive director (finance) of Jubilant Organosys, observes: “Slowdown has put further pressure on the margins as governments worldwide aim at bringing down overall public health care expenditure. This trend of consolidation and collaborations will continue and is likely to have a positive impact on the Indian CRAMS sector.” In the first nine months of FY09, Jubilant’s contract manufacturing business grew by 61%. Analysts feel several India-based companies are well positioned to leverage their competitive advantages in terms of low-cost business model, knowledge-based talent pool, efficient innovative technologies and large patient population to deliver cost effective solutions. In fact, as luck would have had it, most Indian contract manufacturers are at the fag end of their capex cycle (indicating minimum requirement of more capacities).

On the short-term, these big mergers may not play out well for Indian contract manufacturers but the longterm story remains very much intact. “Big Pharma’s focus on rationalising working capital needs and reducing stocks from the system would result in lower offtake of sales in the next couple of quarters...but the focus on optimising will lead to more outsourcing,” pharma analyst Rohita Sharma at Enam Securities said.

India-Pakistan trade takes a terrorist hit

2009-03-12T02:39:00.001-07:00

By Raja Murthy

Bilateral trade between India and Pakistan, considered a vital aspect in improving the prospects for sub-continental peace, have become a victim of the terrorist attacks on cricketers this month in Lahore in Pakistan and on civilians late last year in Mumbai in India.

Terrorism is being cited alongside the global downturn for a forecast 60% plunge in trade volumes between India and Pakistan in the financial year about to start, according to the Federation of Indian Chamber of Commerce and Industry (FICCI).

Bilateral trade between Pakistan and India will probably fall to US$900 million in the year ending March 31, 2010, compared with $2.2 billion already earned in the fiscal year ending this March 31, according to the New Delhi-based FICCI. The organization has more than 1,500 companies and 500 chambers of commerce and business associations among it members.

Given the current anti-terrorism mood in India with regard to the Pakistani establishment after the November 26 terrorist attacks in Mumbai - which Indian and US law enforcement agencies attribute to Pakistan origins - even the forecast trade volume may be optimistic.

The March 3 terrorist attack on visiting Sri Lankan cricketers in the Pakistan city of Lahore has made more remote the chance of a resumption of bilateral trade ties that India snapped after the Mumbai attacks.

Indian businessmen have been refusing since the Mumbai attacks to travel to Pakistan, even to sign previously agreed contracts, let alone to strike new business deals, according to FICCI. The Pakistani business side is reported to be showing a similar reluctance to travel to India.

In February, commerce secretaries of the eight-nation South Asia Association for Regional Cooperation (SAARC) meeting in New Delhi discussed measures to strengthen the South Asian Free Trade Area (SAFTA) agreement that was signed in 2004 in Pakistan. Little progress was made to benefit the Indian and the Pakistani business communities.

Even though Indian and Pakistani officials met directly during the New Delhi SAARC conference for the first time since the November 26 attacks, they failed to crack the ice on the frozen bilateral ties.

India's trade links with other violence-ridden neighbors such as Sri Lanka have survived any similar drastic dive in volumes. India and Sri Lanka expect trade in goods and services to rise from $516 million to $1.5 billion by the time their Comprehensive Economic Partnership Agreement (CEPA) takes formal shape, probably by 2012.

Pakistan is not included among the special bilateral trade pacts that India is exploring with other Asian countries and with the European Union (EU). India first entered into a CEPA agreement with Singapore, and is moving towards similar trade pacts with the 10-member Association of Southeast Asian Nations, South Korea, Japan and the EU.

Key sectors expected to significantly dip in India-Pakistan cross-border trade include textiles and clothing, textile machinery, cotton, agricultural products, particularly cereals, and steel and chemicals.

The trade decline will hit Pakistan's foreign exchange earnings most severely, with the balance of trade favoring India, according to a "System on Foreign Trade Performance Analysis" by India's Department of Commerce.

India's imports from Pakistan in the April to October period last year rose about 70% to $253.62 million compared with the same period in 2007, according to provisional data. India's exports to Pakistan in the period slipped to $914 million from $917.11 million, according to Commerce Ministry data.

If life were more peaceful, annual potential trade volumes between the two nations have been estimated by various trade associations at between $6.6 billion and $10 billion by 2010.

Pakistan ranks second in India's import list of South Asian countries, after Nepal. In contrast, Pakistan ranks fourth in India's list of export destinations to South Asian countries, after Afghanistan, Maldives and Bhutan.

India’s exports with Pakistan are overshadowed by the country's total of $144.26 billion in exports for the April 2008 to January 2009 period, an overall growth of 13.2% from $127.45 billion for the corresponding period in the previous year, according to Commerce Ministry data.

That India and Pakistan do strictly limited business with each other emerges in the contrast in export figures for India to other countries during the same April-October 2008 period. India's exports to the US grossed $12.75 billion, United Arab Emirates ($12.14 billion), Singapore ($5.75 billion), China ($4.82 billion) and Hong Kong ($4.15 billion), the top five destinations worldwide for Indian exporters.

Pakistan's loss in bilateral trade with India could be the gain of third countries such as Dubai, Singapore and beyond. "For textiles, Indian importers have already initiated talks with producers and manufacturers from countries like Egypt and Italy as these are considered as good replacements for import sources from Pakistan," according to FICCI.

Historically, India and Pakistan trade relations see a repetitive pattern of brief upswings interrupting longer phases of rupture that India has consistently blamed on Pakistan's currently most infamous export - terrorists. Pakistan, in turn, blames tensions on its pet peeve - the Indian-run part of Kashmir, which Pakistan claims in addition to that part of the state it controls.

Even before the Lahore attack this month, the otherwise lucrative business in the sport between the two countries had taken a severe hit after India suspended its scheduled January 2009 cricket tour of Pakistan following the Mumbai attack.

The cancelation, which led to the Sri Lankans touring instead, led to an estimated $40 million loss to the near-bankrupt Pakistan Cricket Board, which suffers from similar boycotts from other cricketing countries fearing terrorist attacks. The sudden flight home of Sri Lankan players who bucked the trend by venturing into Pakistan, six returning with bullet wounds, will serve as a long-remembered warning against other such tours.

Pakistan's players are also paying a financial penalty for the attacks and government responses, over and above the immediate loss from canceled games. In retaliation to India pulling out of its January tour, the Pakistan government banned its cricket stars from participating in multi-billion dollar Indian Premier League, denying their own players and families massive income from six weeks of playing in Asia's richest cricket tournament.

In response, eight IPL franchise teams suspended the IPL contracts of Pakistan players, at considerable cost to those involved. Misbah ul-Haq lost $125,000 in his annual contract fee, Sohail Tanvir $100,000, Umar Gul $150,000 and Kamran Akmal $150,000. The contracts of the other five Pakistani IPL players were terminated, costing Younis Khan $225,000, Shoaib Akhtar $425,000, Mohammad Hafeez $100,000, Shoaib Malik $500,000, Salman Butt $100,00 and Shahid Afridi $675,000.

Terrorism is not the only factor dragging down official bilateral trade, nor are laments on the dismal state of affairs new.

"The official trade between our two countries is meager at around $200 million and the unofficial trade including both smuggling and through third countries is estimated around $1.5 billion to $2 billion," A C Muthiah, the then-president of FICCI, said in July 2003, during a meeting of the India-Pakistan Chamber of Commerce and Industry, a Karachi-based body promoted by the FICCI and the Federation of Pakistan Chambers of Commerce and Industry.

The India-Pakistan Chamber of Commerce and Industry, like its respective governments, has made little progress in resolving the long-standing sore points hindering trade relations between the two countries, apart from cross-border tensions.

In July 2005, the Federation of Indian Export Organizations, a 43-year-old body of exporters and related organizations, released an internal study specifying impediments to bilateral trade relations and remedies that included:

Pakistan reciprocating India in granting most-favored nation (MFN) status to India, in accordance with World Trade Organization rules. The MFN status ensures that all trading partners of a country receive equal trade benefits such as low tariffs.

A multiple-entry business visa with a two-year validity instead of the current six-month validity that India and Pakistan offer.

Increasing overland trading routes.

Trading carried out in local currencies at a mutually accepted exchange rate rather than in international currencies, and traders being spared paying exorbitant higher currency rates per business transaction.

And, of course, the basic requirement of getting rid of gun-toting terrorists using businessmen on either side for target practice.

The ‘Beauty’ Of Money

2009-03-09T00:09:00.000-07:00

By M H Ahssan

Why should women be conservative in investment planning? HNN explores the options at your end to make the most of the market.

Investment traditionally has been a man’s world. It’s not that women are not permitted, but traditionally it has been like that. The entire system of markets and investment mechanisms has been developed by men; with women largely remaining at the periphery of these systems. While women do participate in investing, men far outweigh them in the number and volume of investments. Women make up roughly half of the India’s population but their presence among active investing population is negligible in the country.

Financial planning is becoming imperative for women now as an increasing number of them especially in urban centres have regular jobs and careers. They now need to plan for critical life stages of education, work, marriage, maternity and retirement. For women, one of the major steps towards empowerment is achieving financial security and independence through gaining control on investing decisions.

The financial world is gradually waking up to the reality that increasingly that the ‘better half’ now has money in her hands that is waiting to be invested. The recent bull market has helped in accelerating this change process. An unprecedented increase in women participants was seen in hey days of the rally. We saw working women, college girls and even housewives getting their first exposure to capital markets. While most restricted themselves to trading on small bets, some became involved in serious investing.

While the conventional tools of investing prevail, marketers of financial products are now increasingly designing products targeted at the fairer sex. Be it insurance policies or saving bank accounts, financial companies are now creating women-centric products to tap a huge market, which has not yet been justifiably penetrated and serviced. For instance, LIC launched Jeevan Bharati, an insurance policy exclusively for women first in 2003. Last year, it launched Jeeven Bharati – I, an updated version of the earlier policy. Most banks today cater to women customers through specially designed products like special bank accounts, saving schemes etc. Who knows we will soon have mutual funds especially designed for women just as we have funds targeted at senior citizens or children.

A woman investor, most of the times invest in safe investments like gold jewellery, fixed deposits etc. Investments under mutual funds or ELSS schemes are done primarily with an objective of tax planning. Very few women would go ahead and try their hands at investing in exotic products like derivatives, interest rate swaps, arbitrage products etc.

Interestingly, the styles of investing differ between the two genders. Tradition and science both have testified that women are more risk averse than men. They are more conservative and less likely to take business risks. Budgeting comes naturally to them by virtue of handling household expenditures. Investment decisions also differ between the two genders. Many times women know less of the various investment options available, and hence are less confident about the decisions they take about their investments.

If you are a woman reading this, be prepared to get more involved in the investment decision-making process. Financial decisions are no longer a man’s domain. Knowledge about various financial products is freely available - online as well as offline. Relationship managers, some of them being women, are more than happy to service women customers. Thanks to their discipline, women as a category of investors are better placed to make money in the current markets than their male counterparts.

And there is no dearth of pampering on this count. Marketers of financial products are aggressively wooing the new generation woman. With increase in working and independent women, the marketers of investment products are coming around to address the changing gender roles in the world of investing. Many micro financial institutions cater to women’s financial needs and offer special financial assistance. Customised products, women-specific tax concessions, communication and counseling are being rolled out.

In the current difficult times of financial uncertainty, it is time for women to be ready to take the burden of any contingencies like job loss, pay cut etc. rather than be a helpless witness to the unfortunate turn of events. While she performs a balancing act between career, home and family, a woman today also has to add financial investing into her ‘things to do’ list. And women’s day seems quite appropriate to make this promise to yourself to financially empower yourself, thereby empowering your family too.

INVESTMENT OPTIONS
- Investment strategies differ between the two genders
- Financial planning is no longer a man’s domain
- Most banks today cater to women customers through specially designed products like bank accounts, saving schemes etc.
- Many micro financial institutions cater to women's financial needs and offer special financial assistance
- Customised products, womenspecific tax concessions, communication and counselling are being rolled out

Special Report: It’s not all gloom and doom

2009-03-09T00:05:00.000-07:00

By M H Ahssan

While it would be naïve to suggest that in a globalised world India would not be affected, it would be equally wrong to transfer the global doom and gloom in its entirety to India.

We are now in the midst of the worst global recession in living memory. What started as a financial crisis has moved to the real economy. It is here that the differences in the impact on different countries will manifest itself.

The root cause of the current problems in the west is the high debt levels of the private sector and households. The problem has been aggravated by uncertainty and consequent fear of the unknown. A look at Japan shows how difficult it is to power a recovery after a bubble bursts. Therefore, these economies will go through:

• The de-leveraging of households and the private sector with its impact on demand

• The painful rebuilding of the financial sector. We are yet to see the unwinding of credit default swaps, the refinancing of speculative grade debt, the refinancing of regular local and international trade debt and the problems regarding non-housing related consumer lending.

• Rebalancing of country financials. The deficits of the US, etc., and surpluses in Asia.

• A real economy that is deteriorating way faster than expectation and will create further troubles for the financial sector.

• Politics: we will see debates on everything — globalisation, free trade, role of government, etc.

Asia’s economies have been growing at an annual rate of approximately 7.5% on the back of an export boom fuelled by debtladen western consumers. These economies were, therefore, bound to be hit hard by slowdown in the west. The problem was aggravated by the credit crisis which made trade finance harder to get. Trade within Asia, consequent to Asia’s slowdown, also dropped. In the long run the Asian economies will need to boost domestic demand (consumption). The root cause for the lack of domestic demand is the composition of GDP in terms of proportion of exports and wages. They will have to shift from a capital-intensive manufacturing model to a labour-intensive services dominated one.

We in India were happily chugging along at an 8% plus growth rate till the world decided to ruin our party. The surge in the price of oil and commodities resulted in us importing inflation. It forced us to employ a tight money policy and a rising interest rate to curb demand.

The global financial crisis froze international liquidity and shifted Indian demand, met through international resources, to the local markets. Also FIIs sold and remitted money overseas, pressurising the rupee and aggravating the local liquidity scenario.

The transmission of the financial crisis to the real economy led to a major global economic slowdown, which has affected our exports as well. A combination of these factors resulted in a slowing down of GDP to around 7%. While it would be naïve to suggest that in a globalised world India would not be affected, it would be equally wrong to transfer the global doom and gloom in its entirety to India. Because we have a few things going for us:

One, the financial tsunami of toxic asset and crazy market regulation which flattened the financial systems of the west passed us by. Indian banks are safe, secure and profitable. Currently, as a banking system we have gross average NPAs of around 2% odd and net average NPAs of 1%. At worst, we can see average NPAs go up to a gross of around 3% and a net of 1.5%. The Indian banks can by and large afford these from the profits. More importantly, there is no stalling of the banking system. Credit by Indian banks has been growing at 24% plus. That industry is crying about shortage of funds is consequent to sources of funds (other than bank finance) drying up — that is global and local equity markets, international, trade finance, ECBs, etc.

Clearly,what is needed is the development of bond, currency and derivative markets in India so that long-term finance is available. However, this is a solution for the medium to long term. A near-term solution would require a split of the problem into short-term funding (i.e., up to 12 to 18 months) and long-term funding. The short-term funding issue has been solved. There is enough money available, banks are parking money with the RBI at 4% (reverse repo rate has since been cut to 3.5%). Interest rates have dropped drastically. Today, housing loans are at 8-9%, car loans at 12-13.5%. AAA corporates are borrowing at sub 10% and small and medium enterprises (depending on risk) at 13% onwards.

The focus on banks’ PLR is pointless because between 50-80% of bank loans (depending on composition of lending) are not linked to the PLR. In any case, given changed conditions globally, the concept of PLR has become irrelevant.

In order to enable banks to lend long term we have to allow them to raise longterm funds which are not subject to SLR and CRR. The RBI pays no interest on CRR and the yield on SLR (risk free government borrowing) is by definition lower than what banks will pay to raise money and this results in pushing up costs for the banks and corporates to unacceptable levels.

Two, about 60% of Indian GDP is domestic consumption and our percentage of exports is 23%. So, we can, through fiscal and monetary measures, coupled with government spending, pump prime our economy.

Three, the fall in the price of crude and commodities will provide the government with some fiscal spending leeway because at current prices we should not need oil or fertiliser subsidy.

And, four, inflation is falling and will fall further as the effect of oil and commodity prices passes through the economy and company balance sheets. Interest rates are falling and are set to fall further.

Basically while we cannot avoid the pain we can surely ensure we suffer less. Any crisis leads to anxiety and uncertainty, which affects individual and corporate behaviour. Compounding the problem is subjective uncertainty: we tend to imagine the worst. This leads to paralysis of consumers, companies and investors.

The only solution to this is to pull out all stops at one go — reduce SLR, CRR (interest rates) cut duties, oil price, spend on job creation, provide incentives for spending, etc. It will work and will get people to focus on India’s structural positives — rising productivity, high savings, working financial system, low import barriers, high export potential, GDP growth of approximately 6%, rising per capita income, and rural demand.

INDIA BRIGHT SPOT IN MNC GLOOM STORY

2009-03-08T23:47:00.000-07:00

By M H Ahssan

Indian subsidiaries, relatively minor cogs in the wheels of large multinational companies until 2007, have emerged as crucial profit generators, as earnings in developed Western markets tumble amid the worst economic downturn in a generation.

Barring a few exceptions, the locally-listed units of companies such as ABB, Glaxo, Siemens, Cummins, Oracle, Suzuki, Whirlpool, Nestle and Areva have increased their contribution to the global consolidated earnings, as growth remains robust in various sectors of Indian industry.

Significantly, this has happened despite a sharp depreciation of the rupee against major international currencies in the past one year, which tends to depress earnings in dollar terms, as the dollar value of the subsidiary’s contribution is lower after currency conversion. Had this not happened, the contribution of these Indian units would have been much higher.

The Indian unit of engineering group ABB contributed 18% of global profits in the last quarter. ABB India posted a net profit of Rs 193 crore ($50 million) in the October-December quarter of 2008, up 7% from the year-ago period. The parent company, by comparison, posted a nearly 88% drop in net income globally for the fourth quarter at $213 million.

Diesel engine maker Cummins reported a 78% jump in net profit to Rs 133 crore in the fourth quarter of 2008 at its Indian operations. This comes at a time when its parent’s net earnings more than halved to $43 million. As a result, Cummins India’s contribution to global earnings has jumped to almost 63% from about 10% in Q4 of 2007.

Ditto with business software major Oracle, which acquired Indian banking software company i-flex (now Oracle Financial Services Software) four years ago.

Indian arms generate better revenues
It posted a 74% increase in profits (Rs 193 crore) from India for the October-December quarter. For the same period, Oracle’s global earnings fell 0.7% to $1.29 billion. India’s biggest carmaker, Maruti Suzuki, has helped its Japanese parent despite lower profits. Suzuki’s losses during the last quarter would have been higher by 32% (around 4 billion yen) had it not been for the contribution from Maruti.

Similarly, consumer durables company Whirlpool India reported lower earnings for the October-December quarter, but still contributed a higher percentage of profit, which rose to 3.2% from 1.1%.

Despite a drop in revenues during the fourth quarter, Siemens India’s contribution to its parent’s earnings has risen to around 4% from 0.5%, while in the case of GlaxoSmithKline, which has two separate listed companies in India, the combined profits from its consumer goods and pharma units more than doubled to Rs 240 crore. The UK parent reported a 10% drop in earnings to £1 billion during the quarter. Some like Colgate reported better earnings growth in India compared to the global firm, but a 25% depreciation in the rupee’s value against the dollar over the past one year brought down its contribution to the consolidated earnings. Swiss cement maker Holcim’s two Indian firms, ACC and Ambuja Cements, together saw profits drop around 25% for 2008. But this drop was much lower compared with Holcim, the profits of which for the year more than halved.

India’s economy, which grew by more than 9% on average in the past three years, is expected to slow to near 6-7%, but this is far better than the deep recession staring at most developed economies. However, HDFC Bank chief economist Abheek Barua chose to play down the impact of Indian subsidiaries. “Whether India and China can help the global economy to grow with them is yet to be seen. Similarly, it is still unclear whether the Indian arms can lift the global performance of MNCs to stem the global downturn,” he said. The past two years have seen a sea change in the profile of a majority of Indian arms of multinationals — from being revenue drivers for their parents, they have now metamorphosed into significant profit generators.

Nestle India reported a 29% jump in net profit for 2008, while its Swiss parent posted a 17% drop in profit, excluding a one-time gain from a stake sale in a company.

One exception to the trend was Hindustan Unilever. Its Anglo-Dutch parent Unilever reported a sharp 51% jump in profits during the fourth quarter of 2008, while the Indian arm reported a decline in profits. A company spokesman did not respond to a specific query on the likely reasons behind the dip in profit contribution, but the firm had earlier said its profit decline was because of exceptional items. Profits apart, for many global firms, India is generating better revenues too. For the world’s largest mobile operator, Vodafone, its Indian subsidiary Vodafone Essar posted a 37.3% jump in revenues to $674 million for the quarter ended December 31, the highest in percentage terms among the 30-plus countries it operates in. Two of every three new mobile customer that Vodafone added during the quarter globally were in India.

For GlaxoSmithKline’s consumer healthcare business, India is among the top five markets globally in terms of sales. The company believes its focus on local brands is giving it the edge. “Only 5% of our sales in India come from global brands, the rest is from brands managed locally. This speaks of the potential the local arm has,” said executive vice-president for marketing Shubhajit Sen.

Coca-Cola India is another example. Although it does not have a publicly-listed arm in India and its profit contribution is not known, the company has delivered its 10th straight quarter of growth. In India, the company’s unit case volumes increased 28% in the fourth quarter. Nestle has also generated eight straight quarters of 20% plus sales growth.

A symbol for rupee? Soon

2009-03-05T19:54:00.000-08:00

By Arvind Swami

The Indian rupee will soon sport a new symbol. The Union ministry of finance is organising a public competition to design one. The designer of the finally selected symbol will be awarded Rs 2.5 lakh but will have to surrender the copyright to the government of India.

According to a circular (No 10/8/06-Cy.II) issued by B S Rawat, deputy secretary, department of economic affairs, ministry of finance, most countries in the world have distinct identification symbols for their currencies — $ represents the US dollar and £ is used for the British pound — but there is still no official currency symbol for the Indian rupee. Only ‘Rs’ is used to represent it, and India shares the abbreviated form of the rupee with Pakistan, Nepal, Seychelles and Sri Lanka.

Reserve Bank of India (RBI) officials, whose persistent efforts finally yielded results, welcomed the move and said the initiative should have been l a u n ch e d decades ago.

The jury of examiners comprises seven members drawn from institutes such as the Sir J J Institute of Applied Art, National Institute of Design, Lalit Kala Akademi, Indira Gandhi National Centre for the Art & Culture as well as officials from the government and the RBI. Members of the jury will look for symbols that represent the widely accepted historical and cultural ethos of the country.

Among the guidelines mentioned for designing the symbol are that the symbol should be applicable to a standard keyboard, and be in the Indian national language script or a visual representation. A participant can send a maximum of two entries.

The shortlisted designers will receive Rs 25,000 for their efforts. The last date for submission of entries is April 15.

THE ROAD LESS TRAVELLED

2009-03-03T22:34:00.000-08:00

By M H Ahssan

PSU banks may have been nudged by govt to rev up auto demand by speeding up credit, but they face an uphill task in taking up the mantle from private peers.

They are a new-found vehicle for the government to rev up the ailing auto sector. Taking a cue from the finance ministry, public sector banks (PSBs) are now aggressively marketing car loans, which, hitherto, was the domain of private sector behemoths such as ICICI Bank and non-banking finance companies, who were forced to apply the brakes on such disbursals following a fear of delinquencies and slowing demand.

In the current economic dispensation, the auto loan segment has been identified as one of the worst-hit by the government, which has appealed to PSBs to perform a rescue act. Except for the State Bank (SBI), other PSBs were never comfortable in car loan financing.

It is largely because of their partial success in home loans — a retail segment which PSBs stayed away from until the late 1990s — that has perhaps given them the courage to seriously look at car loans.

However, the dynamics of car financing vary from that of a home loan. In case of a home loan where the asset — the house — against which the loan is extended, seldom sees a depreciation in its value; the hypothecated asset in case of an auto loan — the car — depreciates in its value from day one.

Consequently, while a bank can more than recover the loan amount in event of a home loan default, taking possession of the vehicle may not be that simple in the light of stringent recovery norms put in place by RBI, a fact discovered by private sector banks and NBFCs over the past few months.

“Against this backdrop, PSBs may find it difficult to analyse the loans if they don’t have the necessary expertise in this area of lending,” says Chiragra Chakrabarty, principal consultant at PricewaterhouseCoopers, adding, “This could lead to an adverse selection problem. Moreover, with the banking regulator coming down heavily on the recovery methods adopted by certain banks, there is a challenge for them (PSBs) of recovering loans.’’

Top PSB captains themselves admit that the dynamics of this market are entirely different. MV Nair, CMD, Union Bank of India, explains: “This market was, over the years, ruled by private banks and NBFCs. The dynamics of the market are different, and we are aware of the risk. So, we exercise caution at every level.”

“PSBs are traditionally not cut out for car financing business. But there is an opportunity for banks, such as ours, as the aggressive, private players are absent in this segment. A lot of space has been created,” says George Joseph, CMD, Syndicate Bank.

SBI has always been among the top few car financiers. Other PSBs are now latching on to the opportunity by signing up with automakers for financing deals. These include the likes of Andhra Bank, Central Bank of India, Syndicate Bank, UCO Bank and Union Bank.

In the auto loan segment, PSBs primarily focus at car and two-wheeler loans. Tenure for car loans range from 3-7 years. However, they operate differently from private banks. While private banks typically offer loans only up to 75-80% of the ex-showroom price of the vehicle, PSBs, led by SBI, offer up to 80-90% of the on-road price, which includes insurance and registration costs. This may be advantageous for a customer, but it adds to the risk for the bank.

There have also been instances of fraud in the car loan market. Senior bankers point out that the documentation of one out of four customers has been forged. Even if PSBs take the necessary safeguard action, other challenges remain — chief among them being an improvement in the pace at which loans are sanctioned. Leading dealers have indicated that while PSBs take around 8-15 days to clear a loan to the dealer, private banks do the job within a day or two.

PSBs claim to have streamlined their marketing force so that they can deal with customers at the dealers’ end itself to reduce the processing time. SBI, for one, now promises to sanction a loan in three days and deliver the cheque to the car dealer within five days. Still, they have a long way to go to match their private sector peers’ efficiency in this respect.

However, a senior SBI executive justifies the due diligence. “We don’t intend to be overly aggressive in the car loan segment. In the process, we tend to lose some business. We reject many a proposal because we try to ensure the quality of the asset,” says the executive.

In order to minimise the risk of auto loans turning bad, SBI and other PSBs will primarily focus on the salaried individual segment.

Apart from the dynamics of lending, PSBs will also have to contend with supply-demand issues. Car production has not picked up while the economic slowdown has affected consumer confidence. It will come as no surprise if people continue to go slow on borrowing.

This could be borne out by CLSA’s recent report in which the investment bank noted: “We expect the steepest fall in vehicle loans, with annual credit flow for this segment remaining stable over 2009-10 and its share falling to 5% of incremental lending.’’

So, while the government prods PSBs to help revive the sagging auto sector, it must be kept in mind that these lenders do not end up becoming like UTI, which in the past, met its nemesis trying to prop up the stock markets.

OpEd: At sea in the economy

2009-03-03T22:30:00.000-08:00

By M H Ahssan

Unless it suffers a dramatic change of heart it is difficult to see how the United Progressive Alliance will prevent a political backlash from the sliding economy.

The Congress party’s decision to team up with the Trinamool Congress in West Bengal for the coming general elections cannot fail to give the party a much-needed shot in the arm. The two parties together stand more than an even chance of wresting West Bengal away from the Left Front. In the 2006 state assembly elections the Congress-Trinamool alliance polled only 8.8% less than the Left Front. A shift in the vote of 5% will therefore suffice for it to win a majority of the seats. Since then, as recent panchayat elections have shown, the Trinamool Congress has grown rapidly in strength. This alliance could, therefore, decide who rules India three months from now.

But India would be the poorer if the Congress treats this merely as an alliance of convenience and does not absorb some of the political philosophy that underlies the Trinamool’s growing ascendancy. For, the Trinamool can help to revive something that the aged, and now manifestly elitist, Congress has demonstrably lost. This is a heart that beats for the poor.

This allegation may sound strange: hasn’t the Congress quadrupled the outlays on health education and rural development in the past five years? Hasn’t it started the National Rural Employment Guarantee Scheme? And hasn’t it launched targeted ‘missions’ to ensure that the money actually reaches the intended beneficiaries? The answer is that it has done all these things but has remained firmly elitist, nonetheless.

A close look at the programmes shows why all of them, without exception, are top-down, therefore paternalistic. They create no legally enforceable rights for the beneficiaries, place no reciprocal obligations upon them, and therefore do nothing to empower them. They remain what all such programmes have always been — handouts to the poor. Their purpose has remained quintessentially conservative — to preserve the ascendancy of the urban-industrial elite by keeping the poor in their place. Since all the power and rights have remained squarely in the hands of the fund-givers, it is no surprise that nine-tenths of it has continued to stick to their hands on the way down to the intended beneficiaries.

The Trinamool too started as a ‘standard’ , ‘paternalistic’ political party. But under the spur of recent developments in West Bengal it has developed into a different animal. Today, it is the only party that is fighting not just for benefits for the poor but for their rights; not just to secure just a few more scraps from the table but the right to sit at it. It has shown this in Singur and Nandigram, where it has doggedly maintained that land and cultivation rights cannot be taken away from owners without securing their explicit consent, and that mercilessly flailing police lathis falling on the backs of alleged troublemakers and Maoists, is not the way to secure it.

The Trinamool’s success in stopping the Tatas’ ‘nano’ car project was greeted with horror by organised industry and dismay by the government of West Bengal, which had gone out onto a limb to meet Tatas’ requirements. But in the long run far more good than harm is likely to come out of it, for the party has shown that despite India’s transformation into a market-dominated, free enterprise, economy that makes no pretense of socialism it is still possible for the poor to find champions within its democracy. From this it is but a small step to concluding that they can fight democratically to defend existing rights or to acquire new ones, and that they therefore have no need to resort to violence. This is precisely the faith that the poor have been losing during the past decade. The loss is reflected in the growing violence and rapid spread of Maoism in central India and the chronic insurrection in the Northeast.

The onset of global recession has made what was still a threat in the future into an immediate one. Literally all and more of the growth of employment since the 1991 economic reforms has taken place in the unorganised sector. During the past decade this has grown at a healthy pace of more than 5% a year. But these new workers enjoy absolutely no protection against adversity. Having lost their moorings in the overpopulated, comparatively stagnant countryside they have flocked into the towns in search of work. The acceleration of growth since 1993 and the very high rates of the past five years, and the concentration of this growth in the towns shielded them from adversity, but that golden period has ended with terrifying suddenness.

The UPA government has been in denial for the best part of three months. It first claimed that India would get off very lightly from the global recession. But that fond belief was exploded a few days ago when the estimate of growth between October and December was slashed to 5.3%. Judging from what is happening elsewhere January to March could be even worse. The worst hit are the export industries, but as a recent searing expose in the Indian Express of the panic that is seizing the formerly thriving slum of Dharavi in Mumbai shows, the damage is spreading rapidly to domestic industry as well.

India’s policymakers have shielded themselves from blame because, unlike China, they do not collect data for the unorganised sector more than once every five years. But policymakers do not need detailed statistics to know what is happening to the economy, and the people know it. The UPA government has frittered away the best part of five months doing just a little too little, just a little too late. As a result the spread of recession and the fear that stops people from spending has always kept one step ahead of their reflationary policies. Even today, the Reserve Bank continues to drag its feet over lowering the cash reserve ratio and repo rates dramatically because it is more concerned with preventing a fall in the exchange rate than in saving jobs and growth. Unless it suffers a dramatic change of heart it is difficult to see how the UPA will prevent a political backlash from the sliding economy.

A better way to fix the banks

2009-03-03T22:20:00.000-08:00

By M H Ahssan

Here’s a plan that could solve the toxic-asset pricing problem voluntarily—without requiring Uncle Sam to nationalize the whole industry—and make (pretty much) everyone a winner.

In recent speeches, President Obama and Fed Chairman Ben Bernanke have said clearly that the United States will provide whatever capital is needed to keep US banks solvent and that they do not plan to nationalize even deeply troubled banks. This is good news, because economic recovery requires a healthy, profit-motivated US banking system.

However, there has largely been silence from the administration on taking any action to remove bad loans from bank balance sheets. Until the hundreds of billions of dollars of impaired assets that currently weigh down bank balance sheets are removed, credit flows will be restricted. If we wait for the banks to absorb the losses from these loans (net of recoveries), we will wait a long time, and the economic turnaround will be very slow in coming.

To date, plans to remove these bad assets have foundered on precisely how to do so—specifically, on how best to value the assets. Details matter. The Treasury has launched a program to use “stress tests” to identify, proactively, the bad assets on bank balance sheets, using financial models to project future loan values and loss rates under different economic scenarios. The intent is to get better answers about the extent of future losses and to better understand which banks are healthy. But what happens next? Which valuation method will be used to buy the bad assets? If prices are set too low, banks won’t sell the assets unless forced to do so. If prices are too high, the existing shareholders would be “unjustly enriched.” This dilemma is what stopped the first Paulson plan to remove toxic assets, and no amount of stress testing gets you around it.

Our aim is not to plunge into those political debates but rather to propose a broad answer to the valuation challenge under two basic assumptions: (1) forced asset sales are appropriate only for deeply troubled financial institutions, and (2) what’s essential now is a powerful and compelling voluntary program that motivates the rest of the banks to clean up their balance sheets before the deteriorating economy and forced write-downs in the future also cause them to become deeply troubled.

This risk cannot be overstated. McKinsey—as well as others, such as Goldman Sachs—estimates that US banks may currently hold as much as $2 trillion of impaired assets. Given the likely depth and duration of the recession, the losses on them could eventually exceed $1 trillion—on top of the $500 billion in losses already realized. Whatever the precise tally, the final reckoning is certain to be larger than many US banks can absorb out of common equity and from their earnings.

So what needs to be done? The answer first requires a brief detour into Accounting 101, which will also explain why the market in bad loans has so far been moribund. At present, assets on bank balance sheets are valued in either of two ways: fair value or hold-to-maturity value. Where possible, fair value uses mark-to-market accounting; however, absent the ability to determine a real market price, a mark-to-model approach must be used. In hold-to-maturity accounting, so long as principal and interest get paid under the terms of the original loan agreement, assets remain on the balance sheet at their original value. Most securities are valued using fair-value accounting (unless they are treated as long-term investments). Most loans use hold-to-maturity valuations. To date, the lion’s share of the mark-downs absorbed by banks have been on securities and loans subject to fair-value accounting. However, more than 60 percent of the credit on the balance sheets of US banks uses hold-to-maturity accounting, and it is within these assets that the bulk of future losses will occur.

Now assume you want to create a market for such impaired assets. The problem with fair-value accounting is that in the absence of a real, active market to set prices, the only alternative is to mark to someone’s model. But whose? Since private investors are motivated to make money, they want to use conservative assumptions to value securities. That, in turn, gives banks little incentive to sell—and so most have not. Absent government coercion, such a standoff will probably continue. As for the even bigger amount of potential bad loans that banks now value under hold-to-maturity accounting, the problem is that while you can actuarially foresee, under various assumptions, that some percentage of a portfolio will go bad, you can’t know which specific loans will default or how much of the original loan value you will recover. That too is a recipe for inaction.

To break the logjam, we propose that the government step in and establish a voluntary program to create a real market price and terms for the sale of bad assets. Rather than use modeling for valuation, the program would set discounts from either of the two basic approaches to accounting value, based on some recent past date (for instance, December 31, 2008). A reasonable level might be 10 percent off for securities already marked to fair value and 20 percent off for loans being held to maturity. Upon their sale to the government, existing shareholders would absorb the loss taken on the discount, and that loss of common stock value would be replaced by converting TARP1preferred stock to nonvoting common (which would be vested with voting rights if sold to private parties).

Under this approach, the banks themselves could determine which assets to sell to the government, based upon its posted terms and conditions. If, over time, the government wanted to encourage sales, it could reduce the discount. If it wanted to discourage them, it could raise the discount. As time passed, the accounting valuation date would also be updated (for instance, from year-end 2008 to June 30, 2009).

The government would be partially protected from overpaying through this approach by its increased ownership of common stock in the bank, which means it would recover, as a shareholder, much of whatever it overpaid. If it underpaid, it would keep the gain. In addition, the government could provide an incentive for the banks, which should know these credit instruments best, to maximize the value of the assets they offload to it—say, by allowing them to earn a percentage of the subsequent asset recovery price as a servicing fee.

By our rough figures, if the government purchased $1.5 trillion in assets with an average 20 percent discount from accounting value ($300 billion), it would end up acquiring an ownership stake of some 36 percent in the industry as a result of the conversion of preferred stock to common or the injection of new common stock to make up for the equity lost through its discounted purchases. While that is a significant stake in the banking industry, it remains considerably less than what would occur under full-blown nationalization. And if restoring the ongoing-concern value of banks helped the industry’s valuation to regain its January 2007 level (about 20 percent less than its high), we calculate that the government’s shareholdings would be worth about $560 billion. Upon sale to private hands, this kind of gain would go a long way to recouping the costs of TARP.

There can, of course, be many variations on this proposal. Our point is that the government should be offering carrots, not just sticks, if it wants the banking industry to move quickly to get rid of bad assets—and to avoid the likelihood of even greater pain down the road.

Bet short-term if you are risk averse investor

2009-03-03T22:09:00.000-08:00

By M H Ahssan

Debt fund investors are a confused lot. They are unable to take a call on where interest rates are headed. On one hand, the government is saying that the interest rates would come down further. On the Other, it is expected to borrow more money, raising fears of hardening of interest rates.

No wonder, investors do not know whether they should go for short-term schemes or long-term ones. Or, whether they should look for alternative safe investment avenues.

‘‘Yes, there is a lot of confusion because of the contradictory situation. If the government borrows more from the market, the rates will go up. But the government has to keep the rates down in a slowing economy, so it will have to take measures to keep the rates low,’’ says Mukesh Dedhia, director, Ghalla & Bhansali Securities, a wealth management firm.

‘‘If the government opts for monetisation to bridge the gap, then there won’t be any impact on the rates. Considering the particular situation we are in, there is no harm in doing it,’’ Mukesh Dedhia adds.

‘‘Investors should be ready to face a little risk if they are investing in the debt schemes now. Sure, the 10-year (government security) yield can still go down by 50-75 basis points, but it doesn’t seem like happening immediately,’’ says a mutual fund manager, who doesn’t want to be named. ‘‘In fact, a lot depends on how the RBI would handle situation if there is a slight pick-up in credit during the middle of the year.’’

According to financial advisors, if you are risk averse, you should opt for short-term schemes than the long-term ones.

This is because though there is scope for long-term funds to deliver higher returns, it involves a higher element of risk because of the uncertainty in the money market.

‘‘If the yield comes down by 100 to 200 basis points, you have a chance of making 10-12% from long term funds, but there is a bit of risk involved,’’ says Dedhia. As for an alternative avenue for investment, he suggests arbitrage funds.

‘‘They have given a return of around 8% in the last one year. If you hold it for than a year, the returns would become tax free as these funds are classified as equity schemes,’’ he says.

Arbitrage funds generate fixed income by exploiting the arbitrage opportunities in the cash and equity derivative markets.

They typically take advantage of the price difference of the stocks in the cash and future market. These funds are useful for risk averse investors looking for fixed-income returns at a rate above the average fixed income rate of return.

Trade stalls across divided Kashmir

2009-03-02T03:15:00.000-08:00

By Athar Parvaiz

Trade and travel between the Indian and Pakistan parts of Kashmir allowed to a limited extent as part of confidence-building measures between the two rival countries appear to have become a casualty of the terror attacks last November on India's financial center of Mumbai.

This is despite Indian Foreign Minister Pranab Mukherjee immediately after the attacks vowing that the "Kashmir-centric" confidence-building measures would not be affected by the terror strikes, which left 180 people dead.

Trade between the divided parts of Kashmir, which had started in October 2008 but was struggling thanks to the lack of infrastructure and facilities, might have improved but for the renewed acrimony between India and Pakistan over the Mumbai attacks, according to traders.

Over the past three years, India and Pakistan began a number of confidence-building measures as part of a peace process. These included the reopening of the Srinagar-Muzaffarabad highway, sealed since 1947 when the disputed territory was carved up between India and Pakistan.

In 2005, India and Pakistan agreed to reopen the highway to allow families divided by the Line of Control (LoC), the de facto border, to cross to meet their kith and kin. By 2008, warming relations between the two countries allowed the opening of the road across the LoC to trade as well.

The volume of trade cross the rugged terrain was limited and on a barter basis, but traders in Srinagar appreciated the measure and had hopes that it would expand with time.

"We were told that all the facilities regarding the facilitation of trade between the two parts of Kashmir would be put in place by the end of 2008, but nothing of the sort happened,'' Mubeen Shah, president of the Kashmir Chamber of Commerce and Industry, told Inter Press Service (IPS).

"The fact is we are yet to settle the account of the trade items which we have exchanged on the occasion of resumption of trade across the LoC on October 21, 2008.''

Several demands by the traders are pending. The most significant is the restoration of telephone links between the divided parts of Kashmir and the setting up of bank branches at cities such as Srinagar and Jammu in Indian-administered Kashmir and Muzaffarabad and Mirpur in Pakistan-administered Kashmir.

"The chief minister [of India-controlled Jammu and Kashmir] Omar Abdullah has himself stated many times that trade across the LoC was meaningless unless traders were able to exchange phone calls. The government should do some practical work to ensure it,'' said Shah.

"Communication facilities for Kashmiris stand snapped for decades even as people elsewhere in India and Pakistan can make or receive phone calls to each other,'' said civil rights activist Hameeda Nayeem. ''People on this [Indian] side of the divided Kashmir can only receive calls from the other side, but can't make calls from here," she said.

Nayeem asserts that exchange of business ideas is a basic requirement for trade to flourish. "And it has not been helpful for confidence-building that there are no facilities to allow money transactions.''

Shah is worried by the fact that trade has been mostly confined to traders who happen to have relations on the other side of the LoC. "This is mainly because no trader wants to risk his goods. Traders need to be assured about costs and profits. Since there is no security, traders hesitate to send across goods,'' Shah said.
"At present, the trade goes on only in a cosmetic and subdued manner. We are having problems reconciling accounts. For example, our fruit growers sent fruit worth three million rupees [US$58,600] in the first consignment, but they didn't get what they consider the equivalent in return through the barter system."

Observers expect no improvement on this front at least until general elections in India slated for April are over as political parties focus more on rhetoric than on peace-making with Pakistan.

"The present United Progressive Alliance [UPA] government [a coalition of more than a dozen political parties led by the Congress party] - is wary of the opposition alliance, the National Democratic Alliance led by the right-wing, pro-Hindu Bhartiya Janata Party [BJP], which slams it for any softness regarding Pakistan or Pakistan-backed Kashmiri pro-freedom leadership," said political analyst Noor Baba.

"At this point in time, the UPA government would not like to take any risks which may give a handle to the BJP as the parties gear up for the elections,'' Baba said. ''It would rather focus on those issues which would better its prospects in the general elections."

The Indian government is putting pressure on Pakistan to do more on the Mumbai terror strikes. India believes the plan was entirely orchestrated in Pakistan, and Islamabad recently admitted that the plan was partially devised there.

"The Indian government cannot afford to relent and will try its best to sustain the pressure so as to better its chances in the upcoming elections," Baba told IPS. ''The Congress-led coalition government has to do this in order to deny leverage to the BJP."

The chances of the Indian government resuming peace talks with Kashmiri separatist leaders appear bleak, especially after the successful conclusion of state assembly elections.

During her recent visit to Kashmir, UPA chairperson Sonia Gandhi called on separatist leaders to take part in the democratic process, indicating the "massive people's participation" in the assembly elections - which saw a coalition of the Omar Abdullah-led National Conference and Gandhi's Congress party coming to power.

The central government and pro-India political parties were encouraged by the good voter turnout in Kashmir, especially when the elections were held amid a wave of anti-India sentiment triggered by the allotment of land to a Hindu shrine board in May 2008. Dozens of people were killed and hundreds injured in protests and clashes that followed.

Kashmir continues to simmer. On February 22, two youths were shot dead and another seriously injured allegedly without provocation by security forces. Earlier in the month, a youth was killed in Lolab, north Kashmir, and another in Kuil-Pulwama.

These killings have led to demands by political parties and rights activists for the revocation of the draconian Armed Forces Special Powers Act. "The special powers give the security forces a sense of impunity and they go to any extent, including killing of innocent people,'' said Mehbooba Mufti, leader of the opposition Peoples' Democratic Party.

PARLE AGRO LAUNCHES LEMON DRINK, ‘LMN’

2009-03-02T02:56:00.000-08:00

Press Release

Indian beverage major, Parle Agro has rolled out a new fruit-based lemon drink, LMN in the non-carbonated segment. The new brand – LMN is a natural lemon juice drink and the only brand in India with a taste closest to home made, fresh limewater, also known as nimbu pani. With no artificial flavors and real lemon juice, LMN will provide consumers a healthy, refreshing drink with the goodness of vitamin C. Every summer, the Indian beverage market has seen cola majors battle it out. This summer, the launch of LMN will see the cola wars taking a back seat and the battle spilling over to the non-cola segment, to be more precise in the nimbu paani category.

On the occasion of LMN’s launch, Nadia Chauhan, Joint Managing Director and CMO, Parle Agro stated – “Nimbu Pani has traditionally been India’s most commonly consumed cold beverage. In fact the idea of a branded lemon drink is so simple that you would wonder why nobody thought of it earlier. The challenge for us was packaging a natural product while retaining its fresh, original taste through out its shelf life. For the last 20 years, Parle Agro has been the market leader in fruit based beverages; we have constantly worked keeping in mind Indian preferences while formulating products that cater to the Indian palate. It is without any doubt that, only an Indian company can understand what real nimbu pani tastes like and what the Indian consumer wants in a packaged offering.”

LMN takes a refreshingly fresh take on lemon. With a catchy tagline – “The Emergency Lemon Refresher”, LMN aims to strike a chord with youth and adults alike. In today’s times of fast food and speed dating, the name LMN is derived from the SMS version of the word lemon.

Currently nimbu pani is consumed in vendor stalls by the roadside or at home. While the roadside nimbu pani has hygiene issues, achieving a consistent taste in home-made nimbu pani is a task. LMN will target both these segments of consumers to turn them into branded consumers of nimbu pani. Besides this LMN will also target an emerging segment of consumers who are simply looking for a healthy, refreshing beverage.

Packaged nimbu pani will have tremendous growth potential, higher than other packaged drinks in the out-of-home / on-the-go consumption segment, mainly because of a major shift in consumer behavior. Today, the beverage consumer is looking for hygiene, convenience, refreshing taste, affordability and year around availability. With a familiar tasting, healthy, thirst quencher like nimbu paani available as a branded offering, Parle Agro is confident about LMN doing well in the market.

LMN is priced at affordable price points and could deliver huge volumes for Parle Agro, which aims to touch a turnover of Rs. 3000-3500 Crore by 2011 purely through organic growth. LMN will be available in both PET and Tetra Pak in the following SKU’s and prices.

With different SKU’s LMN will target a large consumer base and demographics. While the 110 ml innovative TCA pack will work as a shot of refreshment for those looking at economy or consuming a small quantity, the 200ml pack will mainly aim at the youth and the on the go consumption market. The 500ml PET bottle will enable staggered consumption and possibly one that friends and family can share.

The branding on the pack of LMN is bold and stark and will make consumers relate to lemons instantly. The striking green and yellow color makes the pack noticeable and increases its shelf appeal. In the PET offering, the unique bottle design of LMN makes it stand apart from the rest.

LMN’s launch will be supported by a 360 degree marketing campaign comprising of a TVC, print advertising; point of purchase promotions and BTL activities. The media campaign will kick off by mid-March.

A ready-to-drink product like LMN will shake up the Rs. 1500 Crores non-carbonated beverages market, comprising of juices, nectars and fruit drinks. Now consumers will have a choice to choose between a healthy, refreshing lemon drink versus a cola or even water to quench their thirst. The amount of vitamin C present in LMN is equal to two whole lemons! Lemons as such are rich in vitamin C (an anti-oxidant) and potassium, which have the ability to replenish lost essential body fluids. A lemon drink rehydrates and is light on the stomach. It is a perfect refresher for any situation.

About Parle Agro
Parle Agro is a trusted name in the Indian beverage industry and has been refreshing India since two decades with leading brands like Frooti, Appy, Appy Fizz and packaged drinking water, Bailley. As an industry pioneer, Parle Agro is the first to introduce fruit drinks in a Tetra Pak in India, the first to introduce apple nectar and the first to introduce fruit drinks in PET bottles. In 2007, Parle Agro forayed into the confectionery business. In the confectionery division, Parle Agro has brands like Mintrox, Buttercup, Buttercup Softease and Frewt Éclairs. The latest product from Parle Agro – Saint Juice was launched in 2008.

How capitalism is mutating for survival?

2009-03-01T22:29:00.000-08:00

By M H Ahssan

As banks collapse and government bailouts proliferate, it's difficult to see how capitalism is going to reinvent itself.

When last heard of, Citibank, a bank 20 times bigger than State Bank of India, had a market value just about equal to the latter. Giant enterprises -- from GE to GM -- were either tottering from market blows or emitting death rattle sounds.

Well, don't believe your eyes. Don't trust your ears either. A few weeks ago, this writer predicted that capitalism will always survive because it is the only system that responds to information, incentives and penalties efficiently. It can falter, but it manages to pick itself up. In the current recessionary scenario, capitalism is beginning to mutate for survival.

Three elements of this ongoing mutation are already visible. First, we are seeing a clear shift in business attitudes. Among the most interesting ideas coming out of the US is bank nationalisation, which some would consider the very antithesis of capitalism. Nouriel Roubini, professor of economics and international business at Stern Business School, New York University, says that it is cheaper to nationalise banks temporarily than to bail them out.

The argument is simple. Banks are currently unwilling to lend to one another and to customers because they are mortally scared of defaults. You don't know who will go belly-up. There is a crisis of confidence and throwing good money after bad may not be enough to stem the rot. If you were nationalised, though, no bank would be unwilling to lend. Uncle Sam stands right behind you.

It's also cheaper. Citibank has already swallowed up $20 billion in equity, and has been given guarantees for another $300 billion against potential dud loans (a.k.a. toxic assets). Its current market worth is a meagre $13-14 billion. Why bail out a $14 billion company with $320 billion?

If banks are temporarily nationalised, they would be free to take normal risks by lending to businesses and customers. When the normal credit cycle is resumed, the economy will start to rebound. Once banks rebuild their credibility, they can be resold for a profit.

In short, Mutation No 1 is the subtle shift in assumptions: nationalisation is not any more seen as inimical to capitalism. It is a useful safety net in crisis situations.

Just as capitalism embraced the welfare state to dull the edge of worker revolts in the first half of the 20th century, in the 21st century capitalism is co-opting nationalisation to its cause. Bravo!

Mutation No 2 is also visible. As cash becomes scarce in a recession, capitalism survives by shifting to barter. No matter what happens to the financial system, the real economy always works -- albeit slowly. Also when you are broke or paying down excessive debt, you want to conserve cash. But that doesn't mean you can't buy what you need by offering your own services in return.

Let's take the case of India's IT companies. Many of their US clients can't pay top dollar for their services; some are offering them a share of cost savings or future profits in part-payment. At the bottom end of the market, every jobless worker can become an entrepreneur, trading his skills in return for services he needs.

Barters work best in a recession, since they help you keep your cash. All across the US, barter sites and exchanges are mushrooming, enabling people to buy goods and services in exchange for other goods and services. The cash economy will return in force when the recession starts receding. At last count, there were at least 500 barter sites in North America and Latin America.

Mutation No 3 occurs precisely because capitalism is down. Just as necessity is the mother of invention, entrepreneurship --the basic building block of capitalism -- thrives in a recession. In a downturn, companies start downsizing operations or cutting out product lines, but the customer need for products and services that are discontinued does not disappear.

Carl Schramm, an evangelist for entrepreneurship, estimates that in the last five US recessions, the recovery was propelled largely by people who began new businesses. For example, even as people stop buying big houses, a new business is springing up in ready-to-use, micro houses with foldable furniture.

Nobody may be buying the Hummer anymore, but smaller cars are beginning to sell better. The US auto giants may be headed for oblivion, but the industry will revive under Japanese or Chinese entrepreneurship.

In short, capitalism succeeds best at the precise moment of its apparent failure. The animal spirits are reviving.

Why not a refinery in Rajasthan?

2009-03-01T22:09:00.000-08:00

By M H Ahssan

Rajasthan and J&K are the only large states without a refinery. Rajasthan did not produce crude, and the market was relatively small till Cairn discovered crude. After commerciality was established, ONGC proposed in 2004 to build a refinery near Barmer. Conversion facilities are usually set up near the source of the inputs or at the market for the output, as crude alone accounts for more than 90% of input cost.

Rajasthan’s refinery project, however, was scrapped sometime in 2007. A few days ago, it was reported that the newly-elected Congress government there had approached the Centre to revive it. The petroleum secretary reportedly said that viability must first be established. This reasoning cannot be faulted. The question is why did ONGC initiate this potentially unviable project? The simple reply is: ONGC did not create Rs 2 lakh crore value — the highest ever in India at the time — by pursuing unviable projects.

The case for this refinery is complex. Firstly, ONGC’s interest was prompted more by the compulsion to cut losses rather than value addition through forward integration. While privatising exploration blocks, the private sector operator was given the ‘right’ to explore, but ONGC was made liable for 100% of royalty and cess. ONGC was allowed the consolation of a ‘walk-in’ option for 30% equity in case of commercial discovery. This policy to use public sector funds to subsidise the private sector still prevails.

In case of the Rajasthan discoveries, the impact on the ONGC balance-sheet was assessed to be a loss of $1 billion, over the field life-cycle. The management, with an eye to the interests of the company and shareholders (including GoI with 74%), decided to relinquish the licence. The ‘parent’ ministry pilloried ONGC for the anti-national act of discouraging FDI but had to assure ONGC that steps would be taken to mitigate the loss.

Based on this, ONGC retained the licence and exercised the option. It also opened talks to buy out Cairn. Had the ministry been honest with the assurance, the deal would have been closed. Given this context, ONGC decided to capture the margins for refining, product transportation and marketing to offset a fraction of the loss of paying Cairn’s share of royalty and cess.

This continues to cost the people of India hundreds of crores of rupees every year. ONGC’s under-recovery in case of the Rajasthan discoveries is high because cess does not consider inferior quality crude, compounded by high production costs because of reservoir characteristics. Transport cost is high too as pipelines and tankers have to be insulated and steam-traced to keep this crude in flowing condition.

The field development plan showed that peak production would be sustained for five years or so. A crude pipeline from Rajasthan to the coast would be fully utilised for five years, operate at declining rate for perhaps another 5-7 years and then be abandoned. In comparison, pipelines for crude, refined products and gas are running full capacity for over 40 years. Further, moving inland crude to the coast violates one of the cardinal principles of petroleum supply and distribution in India.

Cairn pointed out that under the contract, their responsibility ended with delivering crude to the wellhead. The option to process this crude at existing refineries was not available. The production profile in the field development plan did not justify a new refinery, so ONGC proposed the only viable option. It suggested building a 9 million tonne refinery to process a blend of sub-standard Rajasthan crude and ‘champagne’ quality Bombay High crude. Then the crude pipeline between the coast and Barmer would be a low-cost one, bringing in Bombay High crude. As the local production declined, more crude from BH (or even imported) could flow in. For marketing, a product pipeline would go to the high-demand market in north-western Rajasthan / south-western Punjab, and another would connect this public sector refinery to the public sector pipeline network for Rajasthan, NCR and Haryana.

But the proposal was scrapped. The reason is obvious: this would cut into the markets of refineries to the south. In time-honoured style, the first step was to give the dog a bad name. Several wise guys emerged from the woodwork to proclaim that 9 million tonne is uneconomical and a 15 million tonne train must be considered. What are the capacities for the inland refineries being built at Bina and Bathinda and the coastal refinery at Paradeep, pray? Nowhere near 15 million tonne. What were the design capacities for the last two refinery trains commissioned in the public sector? Six million tonne each. There was never a case for a 15 million tonne inland refinery, and public funds were wasted studying this option.

Another declaration: refining is not a profitable venture. In the last decade, the private sector has commissioned over 40 million tonne green-field refining capacity while the government controlled champions have notched up zero, except for the 0.2 million tonne by ONGC in 2001! Obviously, the Ambanis and the Ruias have been squandering money while public sector investment is safeguarded by ensuring no refinery project is anywhere near commissioning!

With the Barmer project slated to be studied anew, if the ministry again concludes that a 9 million tonne refinery for domestic crude there is not viable, it must withdraw immediately from the projects at Bina and Bathinda, designed on imported crude.

For Rajasthan, there is an excellent fallout of the 2007 decision to scrap the 2004 ONGC proposal. The Centre is to bear the capital investment and operating costs for the crude pipeline from Rajasthan to the coast. Upfront, this is a commitment of more than $1 billion from the Consolidated Fund of India; and over half of this investment will have to be written off. The ministry can divert, say, only half to subsidise the refinery, and balance that with $500 million central funding.

Of course, no one would dream of casting aspersions on the petroleum minister’s unquestioned innocence of the oil and gas business. For the new Rajasthan CM, this is a great chance to remedy Rajasthan’s lack of refineries, and catalyse an industrial upsurge before the pre-poll code of conduct kicks in.

The aftermath of an economic earthquake

2009-03-01T22:06:00.000-08:00

By M H Ahssan

For those who can identify the emerging opportunities, recession throws up and turn them around to their benefit, success is assured

In the early hours of a cold, unsettled December 11, 1967 a powerful earthquake struck Koyna, a town in Maharashtra. At a frightening 7.5 on the Richter scale, it remains the most powerful earthquake to ever jolt the state, claiming 125 lives and injuring over thousands not to mention the vast loss to crops and property. What is worthy of note here is that Koyna had a dam. It was meant to be a seismically safe zone. And yet, the earthquake turned out to be a multiple seismic disaster creating aftershocks long after the main earthquake was over with tremors felt as far as Mumbai and Pune.

Let’s move the spotlight to 2008. The current global recession, dubbed as the ‘mother of all depressions”, has an uncanny resemblance to the above mentioned earthquake.

The world was basking in the glow of sterling economic growth rate when the quake set in. Governments, financial institutions, experts… all had nurtured the impression that we are ‘safe’. And yet the economic quake struck with such intensity that the world was taken by surprise. Questions such as ‘How could such a disaster happen?’, ‘Why hadn’t anyone detected it beforehand?’ and ‘What are we going to do now?’ resounded worldwide, creating an air of disbelief and shock.

The economic earthquake set in motion in the US in 2007 has now fully erupted into a complete global recession that will continue to impact global economy and finances over the years to come.

But were we really unaware of the impending storm? Similar to the warnings given by birds, insects and animals before an earthquake strikes, we were warned by the rumblings of the subprime loan mess in 2007. An imperceptible 3 on the Richter scale, it was just a crack. Yet it had the potential to reach 7 on a Richter, which it did in October of 2008. The resounding collapse of Wall Street created economic ‘seismic’ waves causing widespread damage. The resulting aftershocks and tremors are still being felt and are still causing major, irreversible damage to bonds, stocks, banks and global financial firms.

The credit crisis saw Merrill Lynch gone — sold to Bank of America for $44 billion. USA’s most trusted bank Lehman Brothers vanished and JP Morgan Chase was sold for $25 billion to Bank of America in the bailout by the government. In Germany the collapse of Hypo Real Estate may indicate a similar disaster as the bankruptcy of Lehman Bros was to the US. Like landslides, fires, or floods following major earthquakes, bankruptcies have been hitting all the sectors of economy be it manufacturing, telecom, consumer retails or services. Despite a $700 billion bailout of Wall Street by the Bush administration and up to $2.25 trillion in public money allocated to prop up major banks and financial firms, the tsunami of recession shows no signs of ebbing.

Does this incident have a message for us all? As President Barack Obama said: “Let us remember that if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers.” Clearly, growth must be all-inclusive and based on realistic standards. Becoming successful is a lot easier than staying successful. And ironically, the icons of financial success, the pillars of economic stability, themselves fell into this trap.

All said and done, had we scrutinised the rumblings in 2007, we might have averted this disaster. Technology has enabled us to predict earthquakes to some extent. We need a similar early warning system to alert us to future economic crises. Then again, if we had a support structure akin to a Seismic retrofit — special features that are built into buildings to enable them to bear the jolts of an earthquake — we might not have suffered so badly. The need of the hour is a global and financial ‘retrofit’ that would help us weather similar shocks in the future.

However, this very same economic upheaval not just carries prospects of recovery and renewal, but big opportunities for growth. Large seismic activities change geographies. Similarly, economic quakes establish new rules, throw up new opportunities and redistribute power. Those who identify these opportunities grab them and turn them around, become the new rulers of the new economy. Overall, there are five mega trends that we must watch out for in the aftermath of this global economic earthquake.

First, the markets are clearly shifting east. The IMF forecasts that the main economies will shrink and the burden of keeping the world economy moving will fall on big emerging economies like India and China. For example, a century ago Europe demanded commodities and services, attracting the world’s attention and hence revving up off-shore economies and creating global wealth. Similarly, the focus is now shifting East. The heightened demand for varied range of goods and services will regenerate global financial firms and restart the spluttering engines of advanced economies. This opportunity is under explored and for companies on a lookout, it is a splendid time to start digging.

The second mega trend is the shifting battlefield for talent. For a long time India has had a strong lead here but getting talent now is no longer as easy as it used to be. The demand greatly surpasses the availability and that’s because our education system is greatly outmoded. Our universities teach a lot of theory, but hardly impart skills to manage real life challenges. Moreover, industry-relevant training is almost never imparted. Therefore, the war for talent is going to get tougher, and stakeholders will have to come together urgently to manage this crisis.

The third mega trend is the increasing stress on our environment. Apart from rising pollution levels, a growing economy will lead to an increasing demand for natural resources. The grim fact is that the already embattled ecosystem cannot take any more strain without serious consequences. Therefore, it is imperative for companies across the board to embrace Green practices. In fact, going Green should become one of the core targets of every company. Otherwise the world will have to pay a huge price for whatever economic progress achieved.

The fourth mega trend is the emergence of new industry structures. At HCL, we work on fairly loosely-held ecosystems that are not defined by ownership, but by requirements on an ongoing basis. Characterised by flexibility, these structures could feature new products such as a wireless device used for exchanging and transferring money. In fact, this technology is very much under experimentation at the Indian Institute of Science. However, a defined organisation would find it virtually impossible to create something like this.

The fifth and the last mega trend is the ubiquitous access of information technology. Way back, Lew Platt, chairman and CEO of HP, was asked: “What do you think will make India change itself completely?” He answered: “Technology.” Information is changing the economics of knowledge. For instance, cable technology has enabled people to see anything happening anywhere in the world, whipping up their emotions and inspirations. People think that if that is what somebody else has and if that is how they get something, even they will just go about and get it.

In these testing times it is but logical that only the fittest will survive. And those who look for hidden opportunities will not only survive, but thrive. Fortunately, India has been largely left unscathed by the recession, thanks to our strong economic fundamentals resulting from our unique approach in embracing global market trends. According to management guru, Dr Jagdish N Sheth, recession teaches us how to survive and pushes us to innovate. It compels people to become enterprising and create the current needed to push the economy out of the slush and stagnation. At such times entrepreneurs are born and businesses sprout creating new employment opportunities. For corporate houses, it is a time to restructure and redesign their work universe using innovative, cost effective and futuristic tools to maximise their resources.

Times of change always brim with opportunities. For those who can rise above the dismal outlook, identify the emerging opportunities and turn them around to their benefit, success is assured. All one needs is foresight, vision and a dream to map the future.

At the risk of labouring the point…

2009-03-01T22:02:00.000-08:00

The next government must seize the opportunity provided by the economic downturn to revisit the pending reforms, especially of the labour market, says Mythili Bhusnurmath

Do big bang reforms in India happen only sporadically and that too only when we have our backs against the wall? Or do they take place hallu-hallu (slowly, slowly) as they say south of the Vindhyas, so that the incremental changes are scarcely perceived as ‘reform’ and as a result occasion much less opposition than if attempted in ‘one fell swoop’?

The answer is, a bit of both. If 1991 was big-bang reform necessitated by the dire straits the country was in, in many other areas such as currency convertibility, import tariffs, capital markets and foreign direct investment, reforms have progressed a little at a time and without much fanfare.

At the same time there are many areas, notably the labour market along with judiciary and public administration that have seen virtually no reform. Now at last, there are small signs of change, at least as far as the labour market is concerned. The recently concluded Indian Labour Conference held in the Capital against the backdrop of job losses — estimates range from half a million to many times that number — saw some welcome pragmatism from representatives of organised labour.

Fortunately, this comes at a time when the labour ministry is already engaged in framing a National Employment Policy (NEP). Yes, we’ve heard such talk in the past and nothing has changed on the ground. But what’s different this time is that both workers and trade unions now seem to acknowledge the inexorable reality of the market place. The very fact of large-scale job losses despite ‘protective’ labour laws has left them with little option.

More important, the new policy, whenever it is finalised, will be the outcome of a slow and tortuous process of consultation and dialogue with all stakeholders: trade union representatives, representatives of employers as well as government. Unlike earlier when they steadfastly opposed all talk of labour flexibility, trade unions now recognise their best interests will not be served by trying to protect job security at the cost of industrial sickness. But rather by ensuring labour is adequately compensated in case of layoffs.

This new-found pragmatism is best reflected in the maturity shown by R A Mittal, national secretary of the Hind Mazdoor Sabha, in the case of contract law. Here the bone of contention is the definition of ‘regular’ work (the present law lays down that contract labour should only be used for work that is not of a regular nature).

Speaking at a workshop organised by the labour ministry with the International Labour Organisation about court rulings on contract labour, Mittal went so far as to say: “Given the court’s stance there is no option but to accept contract labour as a reality and work towards empowering workers. If a contract labourer is made to do regular work he must be provided with benefits on par with regular workers… The law is now redundant as far as the ban on contract labour is concerned but it is still valid in the social security benefits it seeks for contract labour.”

This is a huge shift in mindset. The government must now build on it by speedily putting in place the necessary support structure: a proper social safety net, ideally some kind of unemployment insurance, funded by contributions only from employees in case of those in the higher income brackets and supplemented by contributions from government for employees in the lower income brackets.

The draft policy, put up on the labour ministry’s website speaks of “the need to modify such provisions of the law that render adjustment of workforce inflexible, and thus adversely affect efficiency of production on the one hand and employers’ willingness to employ more workers on the other, with due regard to the reasonable compensation to the affected workers.” At the same time it recognises the need to ensure a minimum measure of social security on a statutory basis to hitherto unprotected workers.

A year ago when the Indian economy was growing at close to 9%, one could still hope that the reversal in employment trends between the late 1990s (when employment grew only 0.98% during 1993-94 to 1999-2000) and the early years of this century (when employment grew 2.6% during the period to 2004-5) might allow us the political luxury of putting labour reform on the back burner.

But the situation has changed dramatically since then. The economic slowdown will throw thousands out of employment. Add the usual addition to the labour force — about 10 million a year — and we have a potentially dangerous situation on our hands, with ramifications that go well beyond livelihood concerns.

This is where the shift in focus in the NEP, from the traditional preoccupation with job ‘security’ to efforts to accelerate the growth of formal employment and improve the quality and productivity of jobs in the informal sector is particularly welcome. The policy recognises the need to look beyond organised labour (accounting for less than 10% of the country’s labour force) and calls for labour market policies to be integrated into all our macroeconomic policies.

This is not as difficult as might seem. In the present context government could provide a direct boost to employment by calibrating fiscal incentives to employment outcomes, making credit more readily available to small and micro enterprises, linking concessions to special economic zones and approvals for foreign direct investment to employment outcomes and last, but not least, laying equal emphasis on skill development so that the quality as well as quantity of employment improves.

The last time we faced a crisis of this magnitude, we went in for radical reform, dismantling the licence-permit raj. This time around we must use the crisis to push the envelope further in areas that have so far been untouched by reform. The present crisis has graphically brought home the harsh reality of job losses in a globalised environment where countries can no longer insulate themselves from boom and bust cycles, even when these have their origin elsewhere.

“You never want a serious crisis to go to waste. What I mean by that is that it’s an opportunity to do things that you think you could not do before,” said Rahm Emanuel, White House chief of staff to President Barack Obama. Will the next government rise to the challenge? It must if India is to deliver on the promise of truly inclusive growth.

Games industry cool to slowdown blues

2009-02-22T22:46:00.001-08:00

By Sarah Williams

The games industry is booming, helped by new peripherals that ratchet up the realism on your Xbox, PS3 or WiiMatt Bingham.

House prices might be plummeting and car sales dwindling but one sector is bucking the global economic trend: the video games industry has never had it so good. Gamers bought a record 82.8m titles in 2008. That’s a 26% increase on the previous year, making the UK the second-biggest games market in the world behind America. Analysts from Gfk Chart-Track, the British research company that published the report, say that as consumers hunker down at home, 2009 is likely to be another bumper year. Britain isn’t alone in experiencing a gaming boom. Last year global revenue from games software added up to an estimated $32 billion enough to overtake DVD sales for the first time.

The reasons for this growth aren’t hard to fathom. Just as cinema audiences grew during the Great Depression of the 1930s when people sought out good-value entertainment, so the recession is making gaming all the more attractive.

Games designers have been quick to capitalise on the trend by making their titles all the more complex and adding online play, extending their titles lifetimes. But its the accessories market thats really taking off. An entire industry now supplies add-on hardware for Xboxes, PlayStations, Wiis and PCs, bringing unprecedented levels of realism to gaming.

The first step for most gamers trading up their hardware to enjoy these cinematic games is to invest in a bigger, higher-resolution TV. But for a dream gaming setup, only a projector will do. Forget memories of dusty slide-shows on a wobbly screen; todays gaming projectors will splash a bright, high-definition image onto a wall at a size far larger than any TV set.

The most elaborate games pay a great deal of attention to audio design, and to do them justice a dedicated sound system is needed. Many titles support 5.1 sound a subwoofer, a central speaker and four satellite surround-sound speakers which is particularly useful for alerting players to sneak attacks in action games. Philips amBX system even adds lighting and air effects from fans to the audio mix, although hardcore gamers turn to the pinpoint accuracy of surround-sound headphones.

But the current cutting edge of gaming is 3-D. At the giant Consumer Electronics Show held in Las Vegas earlier this year, Sony demonstrated a 3-D version of the Gran Turismo driving game running on a standard PS3. Already available to buy in America at least is the GeForce 3D Vision system from Nvidia, the graphics card manufacturer. The card is compatible with more than 300 existing PC games, and splits the video signal sent to a 2-D monitor into the familiar red and blue channels used for 3-D films. Seen through the glasses that are included, driving games such as Burnout Paradise and first-person shooters such as Left 4 Dead become much more playable, with furniture such as maps and personal statistics floating eerily in the players peripheral vision. Threats and fast-moving objects, meanwhile, become easier to spot. The Nvidia kit costs $199. Expect many more innovations such as this to filter down from the PC gaming world into the next generation of consoles. The film industry had little competition in 1930s when it came to exciting, affordable entertainment; this time it’s got a fight on its hands.

Gold glitters, but silver shines brighter

2009-02-22T22:46:00.000-08:00

By M H Ahssan

Silver Gives 28% Return Vs Gold’s 17% This Year; It May Continue To Outperform Gold

Everyone’s talking about gold and its glitter but check the returns silver has delivered this year. After falling around 10% in 2008, silver has outperformed its much hallowed yellow counterpart. Based on Saturday’s closing in the Mumbai bullion market, ready silver (.999) at Rs 23,230 per kg has given returns of 28% this year. In comparison, gold (99.5 purity) has returned 17%. Analysts say silver has the potential to outperform gold in future too and investors should keep their eyes open while parking their money in the precious metals space.

While silver fluctuated in the wide range of Rs 16,400 to Rs 27,000 in 2008, and finally ended the year 2008 at levels which were around 10 % lower than in 2007, gold has had an unprecedented bull run and finished 2008 with over 20% returns.

This at times when stock markets were down, enhanced the proposition of gold for investors, say market experts.

But commodity gurus like Jim Rogers have been betting on silver for sometime. He has recently announced that if pushed to choose between the two precious metals, the Singaporebased investor would choose silver.

When HNN contacted him on silver’s fortunes, the man who was one of the first to call the commodities boom right said, “I own it.”

People like him, who own silver in India have seen silver rise from Rs 18,100 per kilo (on December 31, 2008) to Rs 23,320 in close to 50 days in Mumbai bullion market. This is no different from what has happened in other bullion markets like those at Delhi, Chennai, Hyderabad, Indore and Kolkata. Gold, which started the year at which Rs 13,435/gm, closed at Rs 15,745/gm on Saturday-giving close to 17% returns in the same period.

Though people may be obsessed with tracking gold prices, precious metal experts believe that silver has the potential to outperform gold in future also. Like gold made all-time high the past week, silver too climbed to a five-month high.

“If one has Rs 100 to invest in precious metals, he/she could invest Rs 60 in silver and the rest (Rs 40) in gold. It’s a good investment option,” Mandar Pote, who tracks bullion at Angel Commodities said.

At commodity exchanges such as NCDEX and MCX, silver has been the top gainer amongst commodities with 9-10% gain this week while gold was the second best giving returns of 7-8%, data shows.

According to investment advisory firm SMC Global, silver contracts for March delivery at MCX are showing an uptrend while the weekly stock position shows rise of 3,649 kilograms for the week ended February 19.

Indian garment exporters may lose out to low-cost competitors

2009-02-20T01:46:00.000-08:00

By M H Ahssan

Garment exports from India show little signs of picking up this winter-autumn season, following a gradual shift of international buyers towards low-cost neighbouring countries. International bookings of garments have dropped sharply, although exporters slashed prices by 11-12%.

“Major global buyers like Wal-Mart, JC Penney, Li & Fung, Gap and Target have indicated plans to cut offtake from India by 12-15% this year, while they are increasing their offtake in neighbouring countries,” said Rahul Mehta, president of the clothing manufacturing association of India. Countries like Vietnam and Bangladesh have lower import duties and cost of production enabling them to offer more competitive prices, said industry officials.

According to the industry analysts, garment exports from India would be lower than Bangladesh, Vietnam, Indonesia and Combodia. It is expected that India would end up exporting garments worth $9 billion this fiscal, down by almost 10% compared with the last year. Bangladesh is expected to export worth $12 billion garments.

Global buyers have also cut down purchases in the wake of a global meltdown and recessionary trends in western economies. Premal Udani, managing director of Kaytee Corporation said that the industry is likely to face further challenges, if the winterautumn order booking fails to meet expectations.

“Currently, bookings are 20-25% lower than the same period last year and sentiments are weak ahead because of gloomy outlook of textile industry,” said Mr Udani.

Two relief packages and a 2% interest rate subvention in pre-and post-shipment credit up to September 2009, seem to offer little relief yet to the industry.

Exports said that they had hoped for sops like scrapping of the fringe benefit tax and higher duty drawback rates. However, any further relief packages have been ruled out before Parliamentary elections, said a government official.

Urban Indians simply refuse to feel the pinch

2009-02-20T01:44:00.000-08:00

By Prateek Sinha

Call it irrational exuberance or rational expectations . Urban Indians continue to be reasonably optimistic about the state of the economy and as high as 75% of them expect their family’s financial situation to remain stable or improve over the next 12 months. This is so, even as a majority of them acknowledge that the economy is doing badly at present. Expectations of this kind determine spending behaviour and that is why the pervasively gloomy mood in most developed markets has industry and economists worried. The mood in India, in contrast, is positive, finds a 14-city survey of 2,900 reasonably well-informed and well-off people. The survey was conducted by Futures Company and TNS Global as part of its ‘Feeling the Pinch’ series, previous editions of which covered the UK and the US. About one in every three persons in urban India is not worried about economy at all.

A little over 53% expect their finances to remain the same while over 21% expect their finances to improve over the next 12 months. However, worries about their financial stability have risen over the past three months. Less than 20% said that they are facing financial difficulty, while more than 38% said they were financially comfortable or well off and 41% said they have enough to make ends meet. That confidence emanates from the level of savings respondents have accumulated over the years, says Rima Gupta, Country Head, The Futures Company. After all, with the economic boom of the past few years, more than 50% feel they were better off than they were three years ago.

But that’s the broad trend. The survey of people in the SEC A, B, and C categories (socio-economic classes that are clerical/supervisory staff and above), conducted in January, however, saw divergent trends. Individuals in metro cities were slightly more pessimistic about the economic outlook than their non-metro counterparts. That can probably be attributed to the impact of external factors on metro residents. They were more affected by the stock market collapse, the Satyam episode and the Mumbai terror attacks. In contrast, people in the smaller towns were more preoccupied with mundane matters such as meeting expenses for basic necessities, impact of prices and paying for children’s education. They have gained from inflation cooling off. About 71% of those living in metros said the economy was doing badly or fairly badly compared 61% in the non-metros. Further, 36% in non-metros felt the economy was performing well or fairly well against 28% in the metros.

Yet, the sudden change in the economic climate in the country had majority of the people concerned about their financial situation. Only a little more than 13% said they had not become more worried about their financial situation over the three months preceding the survey. The anxiety level was higher among the non-metro dwellers, with nearly 64% saying they somewhat more or a lot more worried now, perhaps due to the nature of their concerns and greater fear of losing their job due to the slowdown. Small-town folk came across as more confident, with more than 82% saying their family’s financial position would be about the same or better over the next 12 months.

Dr Reddy’s stuck on assigned land

2009-02-20T01:10:00.000-08:00

By Swati Reddy

Offers Market Price For The Same Land Taken Over By Govt

With the Ranga Reddy district administration resuming 10.24 acres of land from Dr Reddy’s Laboratories at Bachupally as it is an assigned land, the company is now seeking to buy the same piece of land at market rate. The request, however, has been kept pending by the state government.

Dr Reddy’s had purchased the land in survey no 44 of Bachupally village in Qutubullapur mandal from assignees a few years ago. After the district administration found out that it was assigned land, proceedings to resume the land were initiated in 2005. Dr Reddy’s challenged it in court but after the matter went up to the High Court, eventually the district administration resumed it as per rules.

However, the company management has urged the state government to alienate the same land at prevailing market rate — Rs 66 lakh per acre.

The pharmaceutical company had set up its biotech park’s manufacturing facilities at survey nos 41 to 47, 53 and 83 covering about 140 acres at Bachupally a decade ago. The 10.24 acres assigned land in survey no 44 is in the middle of its facilities.

Three months ago, managing director of Dr Reddy’s Laboratories Satish Reddy wrote to the Ranga Reddy district collector seeking alienation of the same land as the firm does not want any further fight with the state government over the issue. This after initially the company had challenged the decision before the revenue divisional officer of Chevella division. An appeal was also made to the joint collector of Ranga Reddy district and later the fight was taken to the high court.

“The land can be alienated in public interest. By exporting its products to the US and other European countries and earning about Rs 100 crore worth of foreign exchange every year, the company is acting in public interest. A positive decision also directly helps 350 people working in the unit,’’ Satish Reddy said in his letter.

The revenue department, however, has not taken any decision on the plea.

The land was originally ‘patta’ land which was declared as ‘ceiling surplus land’ after one Pannamaneni Rama Krishna Prasad had handed over 51.76 acres to the state government in 1977. It was described as ‘Khariz Khata’ and mentioned in revenue records through ‘Failsal patti’ of the year 1980-81 and pahani for the same year.

Later the land was assigned to 11 landless poor families including one Chakali Sathemma and 10 others. The assignees names were also mentioned in revenue records as ‘Laoni pattedars’ in 1991-92 through ‘Faisal patti’ of the same year.

When contacted, joint collector of RR district M Jagan Mohan said a report was sent to principal secretary of revenue department to take a decision on the request of Satish Reddy.

Crisis challenge for Sino-Indian trade

2009-02-19T03:22:00.001-08:00

By Pallavi Aiyar

The trade momentum built up between India and China over the past few years has survived the onset of the global financial crisis, with bilateral trade surging by more than a third last year and China ousting the United States as India's top trading partner.

Bilateral trade rose 34% in 2008 to US$51.8 billion, according to Chinese data, a more than 10-fold increase since 2002, when the figure stood at a mere $5 billion.

More than 100 Indian companies have opened up shop in China since 2000, including banks and even a law firm, while Chinese investment in India is also growing. Chinese government figures put the value of cumulative contractual Chinese investments in projects in India since 2000 at $22 billion, almost half coming in the last year alone. Between January and October 2008, the value of contractual Chinese investments in India was $10.5 billion.

However, while the Sino-Indian economic relationship is marching upwards, fundamental concerns remain that have shown little sign of resolution.

On the Indian side, there is a widening trade deficit, worry over the composition of exports and concern at the inability of Indian companies with Chinese operations to break into the domestic Chinese market.

The Chinese complain that India is holding back on a proposed regional trade agreement and that Chinese companies have on occasion been prevented from investing in India on the grounds that they pose a security threat.

Both sides also complain of insufficient knowledge of the business practices and the regulatory framework of the other country. Cultural discomfort involving language and food habits form an additional barrier - despite being neighbors, the two countries appear culturally more comfortable doing business with the West than with each other.

For the Indians, the most ominous sign in the trade relationship is the emerging trade deficit with China. In 2004, the balance of trade was $1.7 billion in India's favor. By 2006, this surplus had turned to a $4.12 billion deficit, widening further last year to $11.2 billion, with Indian exports of $20.3 billion overshadowed by imports from China worth $31.5 billion.

Large trade deficits have already marred China's relationship with other countries, notably the United States. India and China, however, lack any serious governmental mechanism through which they can manage trade friction. In India, lingering insecurities about the competitiveness of the country's industry compared with the might of China's manufacturing are coupled with suspicions of the lack of transparency in Chinese pricing and accounting systems.

India is thus reluctant to grant China market economy status, a first step towards negotiation of the proposed regional trade agreement. Currently, India is a leading initiator of anti-dumping cases against China. Were New Delhi to grant market economy status to China, India would have to accept pricing figures supplied by Beijing, a situation some fear may lead to large-scale dumping of Chinese products.

The two countries have a ministerial-level joint economic group that is supposed to meet every two years to discuss bilateral issues of an economic nature. It last met in 2006 after a gap of six years, failing to meet again in 2008.

When Prime Minister Manmohan Singh visited Beijing in January last year, Indian industry leaders brought up its concerns during a business summit that was held at the same time. The Chinese side promised to give the matter serious attention and alluded to the possibility of sending large-scale buying missions, a strategy it has deployed with the US and European Union. The Chinese vice minister of trade did subsequently undertake a trip to India, but the deals that were signed at the time were worth less than $100 million in value, far from being adequate to redress the deficit in any serious manner.

Nor has there been significant movement towards removing non-tariff barriers erected against Indian products. For example, the Indians believe their is great potential for their agricultural products. Yet eight years after a bilateral agreement was signed on China's accession to the World Trade Organization under which Beijing agreed to the import of 17 types of Indian fruits and vegetables, only three items - mangoes, grapes and bitter gourd - have been approved for import from India.

Even there, India businesses appear to lack aggression in making the most of what is available to them. Thus, although mangoes were cleared for export to China in 2003, this correspondent has been unable, year after year, to find any Indian mangoes in Chinese stores. Given problems with cold storage facilities, logistics and poor infrastructure at the Indian end, exports of the fruit to China remain problematic. Those producers who are able to overcome these lacunae choose to focus on Western markets with which they are already familiar.

As a result, Sino-Indian trade has failed to develop in terms of content. Indian exports to China continue to be overwhelmingly dominated by primary products with little value added. In the first 11 months of last year, 71% of Indian exports to China comprised iron ore, up from 59% in 2007. The Chinese conversely export to India mainly high-value, finished products such as electrical machinery, a situation that has remained unchanged over the last several years despite much hand-wringing on the Indian side.

The global economic crisis has now muddied the picture further. On the one hand, China's demand for steel slumped towards the end of last year - the China Steel Industry Association reported a 17% decline in steel production in October 2008. Shipments in the 10 months ended January fell 1.5%, Bloomberg reported, citing the Federation of Indian Mineral Industries said.

That decline has since reversed, with India's iron-ore exports rising in January for the second straight month as China increased purchases following Beijing's announcement of a US$586 billion economic stimulus plan focused heavily on infrastructure projects.
The economic downturn also prompted Jet Airways, India's largest domestic carrier, to halt its Shanghai-Mumbai service in January, barely six months after it started to much fanfare. The Indian Embassy in Beijing, meanwhile, said visas issued to Chinese nationals in 2008 did not increase over the the previous year, despite an aggressive campaign to attract more Chinese tourists, including the opening of the first India Tourism office in China early last year.

That Sino-Indian trade should falter when the rest of the world is staring at recession should not be surprising. Nevertheless, the two countries are almost alone in continuing to grow, albeit at a slower pace than previously. That is likely to create new opportunities for trade and investment across the Himalayas. What is required is the will and foresight to convert these opportunities into realities.

Economic catastrophe looms

2009-02-19T03:20:00.000-08:00

By M H Ahssan

When the US Congress passed its US$787 billion stimulus package last week, the size of the plan caused many observers to forget the water that has already passed under the bridge. Fewer still are wondering what havoc will erupt when all this liquidity eventually washes ashore.

The latest spending, signed into law this week by President Barack Obama, came on top of $300 billion committed to Citigroup, $700 billion for Troubled Assets Relief Program 1, $300 billion for the Federal Housing Administration, $200 billion for the Term Auction Facility and some $300 billion for mortgage guarantors Fannie Mae and Freddie Mac. Just over the past six months, which excludes the initial George W Bush administration stimulus and several massive, unfunded Federal guarantees, nearly $5 trillion has been committed by the government to the financial industry. Rational observers cannot be faulted for concluding, despite administration claims to the contrary, that the government is merely throwing money at the problem.

Although the rhetoric has managed to convince many observers of the possibility of success, the gold market appears to clearly understand the implications of this unprecedented spending.

The feeling that the government has no idea how to proceed has created palpable panic. In response, pragmatic investors are seeking the ultimate store of wealth. In 2009, as has occurred countless times throughout history, that store will be stocked with gold. Thus, whether the Federal government's interventions will succeed or fail will be anticipated by the price of gold. Right now, the market is screaming failure.

Prior to the latest round of Federal spending, the Federal government had committed $4 trillion to postpone bank collapses and to lay the groundwork for subsequent restructuring. But has any of this activity actually rescued the banking system? In light of the evidence of deepening recession, is it likely that the additional $787 billion in the latest stimulus will instill enough confidence to restore economic growth? If not, what damage will it do to the eventual recovery?

Congressional rescue packages rarely work. Nevertheless, Congress is turning up the heat with previously unimaginable increases of government debt to fund stimulus and rescue packages. Senator John McCain rightly describes the scheme as "generational theft". Each package of debt will encumber many future generations, halt restructuring and also threaten latent hyperinflation.

While Congress claims that the seriously over-leveraged economy is in desperate need of restructuring, it appears blind to the fact that deleveraging will encourage such restructuring. Instead, Congressional leaders actively seek to increase leverage and add debt. They warn of fire, while pouring petrol on the flames.

The seriousness of the situation is magnified by the rapidly increasing scale of the problem. Just this week, the release of the latest minutes of the Federal Reserve confirmed that even that bastion of eternal optimism is sobering. The American economy, which shrank by 3.8% in the last quarter of 2008, is forecast to decline by some 5.5% in the first quarter of this year. In some pockets, the unemployment rate is already in double figures. Despite massive government spending on rescue and stimulus, the American consumer clearly is becoming increasingly nervous, and the credit markets show few signs of recovery.

With bad news only getting worse, investment markets are turning into quagmires. The Dow Jones Average is testing new lows, and the commodities markets show few signs of life. In such times, the price of gold should fall along with the prices of other assets and commodities. But, the reverse has occurred. In the past two months, gold has staged a remarkable rally. This is despite the activity of price-depressants such as official gold sales by the International Monetary Fun and official "approval" for massive naked short positions to be opened by new "bullion" banks.

Not only have gold spot prices risen in the face of such selling pressure, but the price of physical gold is now some $20 to $40 per ounce above spot. This would indicate that investors are now so nervous that they are insisting on taking physical delivery.

Make no mistake, the economy will not turn around soon. When the recovery fails to materialize, look for governments around the world, and especially in the US, to send another massive wave of liquidity downriver. When it does, the value of nearly everything, except for gold, will diminish. Don't be intimidated by the recent spike in gold. Buy now while you still can.

How bankable is your savings account?

2009-02-16T23:57:00.000-08:00

By M H Ahssan

Identify Your Banking Needs & Do Proper Research On The Bank Before Opening A Savings Account

Savings bank account holders have always been viewed as sticky customers by banks. Most of them do not leave the bank unless they shift homes or move jobs. Yet, opening a savings account is perhaps one of the least researched decisions. This may be due to the fact that most customers perceive savings account as a commodity, where interest rates are fixed and transactions largely involve depositing and issuing cheques and withdrawing funds. But, in not choosing an account carefully, many customers end up opening multiple accounts as their original bank does not fulfil all their needs.

By identifying their banking needs and accordingly selecting a bank, account holders will be rewarded with considerable savings in terms of time, as well as, money. It would obviate the need for multiple accounts to hedge the risks. “This will ensure that you don’t have to forego the benefits that come with maintaining a higher balance,” said KVS Manian, group head, retail liabilities and branch banking, Kotak Mahindra Bank.

Identify the right bank
The first step towards selecting the ideal bank account is evaluating the profiles of various banks in general and the branch in particular. The bank’s target group should also be considered while making a decision, that is, you need to know whether the bank’s focus is on the mass, mass-affluent or high-end customers. For instance, if the target group of a bank is high-end customers, and you fall in the middle-income group, you may not be treated as a valued customer, resulting in dissatisfactory level of service.

For instance, large-sized private banks may not attach enough importance to small-time traders’ needs as they are not priority customers for such banks, and even routine services like signature verification could turn out to be time-consuming affairs.

Analyse channels offered
Once you are convinced that you would be comfortable with the bank’s profile, you can look at the convenience aspect. “Branch and ATM network constitute the key factors impacting this decision. If the bank under your consideration does not have a branch located close to your place, find out if they at least have an ATM near your house to make up for it,” suggested Anindya Mitra, senior vice-president, retail liabilities, HDFC Bank.

If you intend to avail of locker facilities, proximity of the branch will be crucial. Another channel which could be of great interest to many, especially senior citizens, is the home banking facility. You need to enquire whether the bank undertakes to deliver cash, cheque books and documents at your doorstep. This apart, before signing up for a savings account, ascertain whether services such as bill payment, transfer of funds and placing orders for cheque books are offered through all channels.

Evaluate technology-friendliness
“If service is the differentiator, then technology is the enabler. The affluent class, in particular, is constantly on the move. Thus, a savings account should allow customers to access their banking needs whenever and wherever they need the same,” said an HSBC Bank official. While most banks claim to offer all platforms, it does not necessarily mean that they provide all the services as well. “Not all banks offer all the services on Internet, phone and mobile platforms.

If you are an Internet-savvy person, but net banking is not your bank’s strength, it could cause a lot of inconvenience,” pointed out Mr Manian. To cite an example, if your bank does not facilitate regeneration of net banking password on the Internet, you will end up spending time and money to visit the branch for submitting the application. Same is the case with mobile banking. If you happen to be a frequent traveller, who completely relies on his/her cell phone for most transactions, you will not be comfortable with a bank that does not have a fully-enabled mobile platform.

Scrutinise product features
A comparison between the account features offered by various banks is essential. Typically, most foreign and private banks do not offer accounts with a minimum balance requirement of less than Rs 5,000-10,000, whereas public sector banks continue to offer products starting with Rs 500 too. You also need to enquire whether your account follows the minimum daily balance or the average quarterly balance system. In case of the former, the bank could slap a non-maintenance charge, if you fail to maintain the relevant balance even for a day. On the other hand, an account with average quarterly balance would mean you can avoid the charges by ensuring adequate balance on most days.

“If you need to transfer money on a regular basis to a family member not based in your city, a nofrills account won’t be of help, as it may not issue ‘At Par’ cheques, thus leaving the recipient hassled,” informed Mr Manian. In addition, find out if the account comes with the sweep-in-sweep-out facility as it can help you avoid the notional loss incurred in letting cash idle away in the account.

Be aware of the charges
Upon opening an account, most banks supply an account opening kit containing a schedule of charges detailing the non-maintenance charges, cheque return penalty, debit card charges, etc. Many account holders are unaware of the fee levied on debit cards after the first year of acquiring the same. Some banks also charge customers for SMS alerts. While comparing the charges of various banks, you need to determine whether they are inclusive or exclusive of service tax. A thorough scrutiny of the schedule of charges will ensure that you are not taken by surprise later.

Rural focus excites microfinance sector

2009-02-16T23:37:00.001-08:00

By M H Ahssan

Although the interim budget does not contain any specific step for rural entrepreneurs, the government’s focus on rural development has brought cheer to micro-finance institutions (MFIs).

“The budget has a definite focus on rural India with a commitment to financial inclusion with increased job opportunities, better housing, infrastructure and a 50% reduction in BPL population by 2014,” said M R Rao, COO of SKS Microfinance. “This is in line with the mandate of MFIs and will mean an accleration in our efforts.’’

The budget’s reiteration of the decision to set up the Unique Identification Authority of India under the Planning Commission — a move notified last month — and the plan provision of Rs 100 crore for this has also excited MFIs.

“Establishing such a universal identity system will enable the 70% of Indian population involved in the informal sector obtain access to government schemes. In particular, this identity will facilitate financial inclusion of the masses — which is currently constrained by KYC (knowyour-client) norms,’’ said P N Vasudevan, MD of Equitas Micro Finance. The trouble is also that the rich and powerful in rural areas manage to corner a lot of the benefits for themselves.

Many of them, for instance, join multiple self-help groups, giving different addresses, and raise money from all of them. “They get this money for nominal interest rates like 7% which they put in chit funds where they get returns of 30% or more. This is a big fraud on the system. A biometric identity card can ensure that benefits go to the right people,” says V S Somanath of Nano Ventures, a MFI.

MFIs support income generating activities of its members including livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to pottery) and new age businesses (beauty parlour to photography).

“Overall the budget is aimed in the right direction and with a larger focus on execution excellence and involvement of private sector in delivery, the true benefits of inclusive economics can percolate to the people at the bottom of the pyramid and thereby enable a more sustainable economic development,” said Vasudevan.

To spice things up, netas mix ’n’ match

2009-02-16T23:30:00.000-08:00

By M H Ahssan

He has done it on three occasions in the past. But for many young Indians it was an unfamiliar sight to watch stand-in finance minister Pranab Mukherjee arrive in a steel grey bandhgala with the most important document of the day in a leather briefcase.

Unlike his predecessor P Chidambaram who generally smiled profusely for the shutterbugs on Budget day, Mukherjee seemed to have rationed his cheer as he posed for the cameras. It was, perhaps, an indication of things to come. An interim budget is usually a staid affair. This year, it was almost grim as the finance minister reeled out tomes of facts and figures. There were no wisecracks, no hint of humour. Senior BJP leader L K Advani was among the handful of politicians diligently noting down points from the speech.

The House only stirred when Veerendra Kumar, the 71-yearold JD(S) MP from Kozhikode, took ill after about 45 minutes of the 65-minute-plus speech. When Speaker Somnath Chatterjee adjourned the House for 10 minutes, railway minister Lalu Yadav was one of the first to head out for a break.

On the brighter side, Rahul Gandhi looked dapper in a black jacket over a white kurta-pyjama. Actress Jaya Prada, the Samajwadi Party MP from Rampur, made a pretty picture in a rust churidar-kurta and chiffon dupatta. But then she swished in at 12.15pm, barely three minutes before Mukherjee ended his speech.

Jyotiraditya Scindia made a just-in-time appearance before the speech began, in his trademark blue kurta-white churidar, and a black woven jacket. He turned around for the swarming camerapersons, flashing a smile with his shades on. Navjot Singh Sidhu dutifully obliged the shutterbugs, bright and chirpy in an orange turban and matching tie with little animal prints. Jairam Ramesh walked in well after the Budget started, his longish hair blown back by a strong breeze.

The young Scindia was also the first to move out, and be swarmed by the media. As he spoke, Sharad Yadav emerged but obligingly hovered around for media attention, although his car waited in the portico. Sharad Pawar tried to avoid the media completely, gesturing with his driver for the smoothest exit point where he could quickly get into his car. But amusing was SP MP from Firozabad, Ramjilal Suman. As a cameraman called out to him, the poor guy desperately looked around for a spittoon, but didn’t find one.

Security was tight but not overbearing. Sniffer dogs and personnel went around the sprawling estate, the dogs nosing their way through the tangerines, the flowers, the food stuff, the budget papers in dark green rucksacks, anything worth an investigative sniff.

Many women MPs were dressed in splendid saris from every corner of India — tussars, kanjivarams, gadwals, kanthas. They showed no matter how lacklustre the interim budget may have been, Parliamentarians were putting their brightest foot forward.

Poll tone: Bharat in, India out

2009-02-16T23:29:00.000-08:00

By M H Ahssan

Fear Of Backlash Makes Pranab Stick To The Road Well Travelled

Pranab Mukherjee’s Interim Budget made headlines for what he did not say or do. Many feel he could have converted the economic crisis into an opportunity to hand out sops at no political cost.

It is learnt that the decision to stay on the right side of the customary propriety not to turn the vote-on-account into a blandishment for the voter was a unanimous one, and largely because the leadership was not sure that a deviation from the convention would have been rewarded at the hustings.

Expectedly, Congress’s calculations for the looming elections are writ large over the budget. Mukherjee, who has has been accused of number dressing to scale down the estimated fiscal deficit, has been very transparent in stating that the “aam aadmi” theme, with which the party undercut NDA’s ‘Shining India’ pitch in 2004, stays as its zeitgeist for the coming encounter as well. “Aam aadmi has become the focus of development process,” he said.

The “common man” strand ran through the tom-tomming of achievements to the declaration of intent. But as Mukherjee reeled off figures to claim how UPA had delivered on its promises, it was clear that the focus of the campaign would be on Bharat rather than India. This despite the the delimitation exercise that was said to have offset the overwhelming advantage rural India has had in shaping poll outcomes.

Congress strategists, clearly, are convinced that villages continue to have a higher weightage in the electoral college (Mukherjee pegged their share of the population at 60%). The attention may also have to do with the belief that migrants in cities take their voting cues from folks back home.

The rural voter has been wowed with claims of jobs already done as also promises of continued commitment — doubling of agricultural credit with continuing interest subsidy, the mega loan waiver, generous Minimum Support Prices, National Rural Employment Guarantee Scheme and, of course, the highly popular Indira Gandhi Awas Yojana. A high-wattage campaign to flaunt the schemes is already on. No prizes for guessing that Congress will substitute DAVP’s ads with its own once the announcement of polls puts an end to the surrogate advertising.

There are announcements for specific constituencies. No figure has been put to back up the promise to provision adequate funds for minority welfare schemes. But to put it on the top of the section dealing with social sector in disregard of BJP’s continued campaign is a statement by itself.

INTERIM BUDGET - WHO’S SMILING AND WHO’S NOT

2009-02-16T23:24:00.000-08:00

By M H Ahssan

The Interim Budget does not have any major announcements that affect the industry, except for some measures such as extension of interest subsidy (on pre- and postshipment credit) to boost exports in sectors such as textiles, leather and gems & jewellery. However, a slew of measures were announced as part of the stimulus packages in early December 2008 and January 2009. While some of these measures are positive for the respective sectors, the excise duty reduction (by 4%) across sectors has been mostly passed on to consumers. In the following sections, we assess the impact of all these measures, including announcements in the Interim Budget, if any

Automobiles
The net impact of various policy changes is marginally positive across auto segments. However, lower economic growth prospects, weak consumer sentiment, high interest rates and stringent disbursement norms will continue to impact automobile demand. Due to the 4% reduction in excise duty announced in December 2008, and lower fuel prices and car finance rates, (partly offset by the increase in prices by some car manufacturers in January 2009), the cost of ownership for a typical compact car has declined by 3%.

Banking
Banks: Several liquidity enhancing measures have been announced since October 2008. However, the relaxation in nonperforming loan norms in real estate and corporate sectors may lead to weakening of asset quality and exert greater stress on the sector. The monetary easing measures combined with fiscal stimulus would be effective provided there is revival in both business and consumer confidence. With economic recovery expected to be protracted, these measures would have limited impact on the banking sector.

HFCs & NBFCs: The fiscal measures announced focus on facilitating credit availability, but implementation and revival in business and consumer confidence remains the key for these measures to be effective. Like banks, the fiscal stimulus would have a limited impact on HFCs and NBFCs.

Cement
The government had lowered the excise duty on packaged and bulk cement by 4% in the fiscal stimulus package announced on December 7, 2008. Cement producers passed on the cutback in duties by reducing prices. Consequently, the impact of lowering of excise duty is neutral for the sector. The imposition of customs duty on imported cement, which was announced in the fiscal stimulus package announced on January 2, 2009, will not have a major impact as India's cement imports are negligible.

Construction
The allocation of Rs11,840 crore under JNNURM will ensure greater focus on urban infrastructure development. The amount sanctioned is higher than Rs 6870 crore sanctioned in the previous budget. However, the crucial factor is the actual outlay. With IIFCL being authorised to raise Rs 10,000 crore via tax-free bonds, delays in order execution of construction companies on account of developers not achieving financial closure will reduce.

Consumer durables/Household appliances
Impact of the reduction in the excise duties on consumer durables from 16% to 12% announced in the government's fiscal stimulus package in December 2008 is neutral, as a significant portion of the production of major consumer durable manufacturers come from excise free zones. Other producers have partly passed on the excise duty cuts.

Housing
The fiscal stimulus package in early December 2008, classified loans under Rs 20 lakh as priority sector lending. The new classification of loans is aimed at encouraging banks to lend. However, due to the deterioration in the job market scenario owing to the prevailing slowdown, especially in the IT/ITeS and financial services sectors, banks may continue to hesitate to increase their advances. However, the Rs 4000 crore re-finance facility for NHB will ensure availability of loans for the sector. The reduction in home loans rates by PSU banks to 8.5% for loans up to Rs 5 lakh (10% margin) and 9.25% for loans in the range of Rs 5-20 lakh (15% margin) has prompted large private players such as HDFC and ICICI Bank to cut rates by 50-75bps.

Paper
The government reduced excise duty on paper from 8% to 4% for most varieties of paper. The overall impact is neutral as producers have passed on the duty cuts. The government also exempted newsprint, uncoated paper and light weight coated paper used for printing newspapers / magazines from customs duty on February 11, 2009. The impact of this is also neutral as domestic newsprint prices are lower than the landed costs even post the duty cuts.

Roads and Highways
IIFCL will refinance 60% of commercial bank loans for PPP projects with an investment of Rs 1,00000 crore over the next 18 months. This will improve the availability of credit for infrastructure projects such as BOT road projects undertaken by private players. Despite a budgetary allocation of Rs 9900 crore for national highways and Rs 4000 crore towards the development of rural roads, the implementation of projects may be slow due to policy ambiguities and land acquisition delays.

Steel
Steel players will benefit marginally from government measures such as bringing HR coils under the restricted category and levy of import duty on flat products. The reduction in excise duty will not have any impact, except in cases where the output is sold directly to the consumer, as most steel sales are MODVAT'able. The withdrawal of export duty on iron ore fines and export duty reduction on iron ore lumps and pellets will encourage iron ore exports.

Textiles
The extension of the interest subvention on pre-shipment and post-shipment credit till September 30, 2009, will benefit exporters through lower interest costs on working capital loans. The impact of the acrossthe-board excise duty cut of 4% is negligible on the cotton textiles chain, as CENVAT is optional; the reduction in excise duty on polyester and other man-made fibres to 4% has been passed on. The increase in the duty drawback rates on fabrics and the extension of the DEPB scheme till December 31, 2009 will benefit exporters.

INTERIM BUDGET 2009 - WHAT’S THE IMPACT ON ECONOMY?

2009-02-16T23:20:00.000-08:00

By M H Ahssan

GROWTH: The main driver in the next few months is going to be lower interest rates and increased credit flows to consumers and companies. The government can help things along by quickly spending whatever money is available. We expect growth during 2009-10 to be less than in the current year, but with a turnaround beginning in the second half.

INFLATION: With energy and commodity prices crashing in the past few months, cost pressures have disappe-ared. Sluggish global growth will ease demand pressures as well, with excess capacities in many sectors. Inflation will not be a threat during 2009-10, but could re-emerge as the global economy recovers due to expansionary monetary policies.

INVESTMENT: Expansion of capacities in most sectors is unlikely to take place for some time. Overall, investment will be subdued. Public spending on infrastructure will be the most significant contributor, while real estate will show signs of recovery during the year in response to low interest rates and falling prices.

INDUSTRIAL PRODUCTION: With all the demand drivers for industrial production moderating, this indicator will be sluggish. Consumption, investment and exports have all been affected by the slowdown. The former two will respond to policy stimuli during the year, while exports will have to wait until conditions in key importing countries change.

EMPLOYMENT: Sectors that had ramped up workforces during the boom years of 2006-08 are likely to see significant attrition. This can happen in both white-collar (finance, IT and ITES) and blue-collar (jewellery, garments and construction) activities. Public spending will be key to restoring blue-collar jobs during the year.

EXPORTS: US, UK, the Euro zone and Japan, which together account for more than half of India's exports, are all in recession and will remain that way for some months at least. Consequently, exports will almost certainly decline during the first half of the year but may stabilize towards the end of 2009.

INFRASTUCTURE: Investment in infrastructure was just beginning to pick up as public-private partnership models in various sectors were being successfully launched. These will be hit by a drying up of private, particularly foreign, funds. The onus on government to keep investment going will increase considerably.

INTEREST RATES: With the Reserve Bank of India able to infuse liquidity and lower short-term rates in a benign inflationary environment, interest rates should remain soft through the year. However, increased pressure from government borrowing will tend to harden rates at the longer end of the yield curve.

CONSUMPTION: With lower growth and increased uncertainty about incomes and jobs in many sectors, consumption spending will be adversely affected. However, agricultural incomes should hold up and government and public sector employees, who have full job security, will earn substantially more. This should help stabilize spending.

FISCAL DEFICIT: The finance minister estimated the fiscal deficit for 2008-09 to be 6% of GDP and expects it to go down to 5.5% on the basis of his projected revenues and expenditures. Since both can change as a result of the new government's policies, in the foreseeable macroeconomic environment, it could end up higher than that.

Double jeopardy for budget maths

2009-02-16T23:19:00.000-08:00

By M H Ahssan

Slowdown Squeezes Revenues, Deficits Balloon As Pay Panel Hikes Spending

The global economic slowdown and the Sixth Pay Commission’s recommendations have between them made a mess of the budget arithmetic for the current year, more than quadrupling the revenue deficit from 1% of GDP in the budget estimates (BE) to 4.4% in the revised estimates (RE). The fiscal deficit too has more than doubled from 2.5% of GDP in BE to 6% in RE.

When the Budget was announced by the then finance minister P Chidambaram in February last year, it had been pointed out that the Pay Commission’s award had not been adequately factored in, but the FM believed there was enough cushion in his estimates to absorb some extra spending if the need arose.

What he could not have anticipated then was the global meltdown and its impact on India’s own economy. The result of the slowdown has been that gross tax revenues are over Rs 65,000 crore lower in RE than in BE. The sharpest decline has been in excise duties, which in the BE were supposed to fetch Rs 137,874 crore but are now projected to rake in only Rs 108,359 crore.

Part of the nearly Rs 30,000 crore shortfall on this account is a natural outcome of a rapidly slowing industrial sector in the second half of the year. But in part it must also be because one of the measures adopted to stimulate a recovery involved a 4% across-theboard cut in excise duties.

Customs collections are almost Rs 11,000 crore lower in RE than in BE, corporate income tax are now expected to yield roughly Rs 4,400 crore less than earlier estimated and personal income tax, North Block now believes, will fetch about Rs 15,700 crore less than the BE. That’s the bad news on the receipts side. On the expenditure side, an increase of almost Rs 58,000 crore in the subsidy bill – largely due to fertilizers – of about Rs 15,000 crore in pay and allowances for civilian Central government staff and another Rs 18,000 crore in defence salaries and perk have all contributed to the BE going completely awry.

Thus, while revenue expenditure in BE was pegged at Rs 658,119 crore, it is now estimated that the figure would be Rs 803,446 crore. That’s an increase of over Rs 1.5 lakh crore. Put the higher expenditure and the lower revenue receipts together and the revenue deficit which was supposed to be just Rs 55,000-odd crore has crossed Rs 2.4 lakh crore.

This, in turn, has meant that the government has had to borrow about twoand-a-half times the amount it had originally intended to do — Rs 3.3 lakh crore rather than Rs 1.3 lakh crore.

For the coming year, the FM has preferred to play it safe in projecting income. Though the Budget assumes a 7% growth in GDP and no changes in tax rates, excise and customs duty collections are projected to rise by just about 2% over the RE for the current year. Surprisingly, though, taxes on both corporate and personal incomes are projected to go up by around 10%.

This is because of recent experience when indirect taxes proved less buoyant than direct taxes. From a situation in early 1990s when less than one in five tax rupees came from direct taxes, there has been a seachange to one in which these taxes are expected to contribute almost 57% in the BE for 2009-10.

India gives verdict before polls: fix the economy

2009-02-16T23:09:00.000-08:00

By M H Ahssan

The UPA Government’s Vote on Account on Monday played safe and didn’t announce any major plan for the economy. That may hurt: a nationwide HNN survey suggests that the economy is the dominant issue for voters before General Elections.

As many as 32 per cent people told the survey its the state of the economy that is the main issue this time. A smaller 21 per cent people said that national security and terrorism would be a crucial factor.

The survey was conducted by HNN in association with the Centre for Study of Developing Societies (CSDS) and reveals the findings from over 20,000 samples from 28 states spanning over 1,280 locations.

As many as 18 per cent people felt that rising unemployment would be high on their minds while casting their ballot. Only 5 per cent people said that reservations would be the most important issue in the coming elections.

Just two per cent people would cast their vote on the basis of the Indo-US Nuke deal, the controversial agreement which lead to the Left Front leaving the United Progressive Alliance (UPA) Government and forcing it take a floor test in Parliament.

Just 1 per cent people said that Hindutva is an important issue in the elections—a finding that may interest the Bharatiya Janata Party, which recently announced that it is committed to building the Ram Temple in Ayodyha.

This election will also see political parties battling it out to win the youth vote. Here too, the poll found that the level of concern over the economy was very high among those under 35, with job fears being heightened.

As many as 32 per cent young urban graduates and 25 per cent young rural graduates said that unemployment was the most important issue to them.

Ironically, despite the faltering economy hurting the UPA Government, the level of satisfaction with the present government remains on the higher side.

The HNN-CSDS survey suggests that around 66 per cent people are satisfied with the UPA, 21 per cent are dissatisfied and the rest have no opinion.

The UPA can’t afford to be smug though. In 2004, the scales were tilted in a similar fashion towards the National Democratic Alliance (NDA) Government. As many as 7 per cent were satisfied with the NDA 's performance and 28 per cent were dissatisfied. But the NDA lost the battle.

The survey also found that while 45 per cent people were in favour of giving the UPA Government another chance and 30 per cent are against it.

In 2004, 48 per cent people were in favour of giving the NDA another chance and 30 per cent were against it. For both the UPA and the NDA then, the poll offers a glimpse into the future.

Raising the pitch through emotional issues might make for an exciting election campaign, but its offering solutions to the economic slowdown that could be critical in influencing voter preferences.

Survey methodology
The survey used the most scientific and representative method of sampling, the three stage random sampling technique to select the respondents for this purpose. In a face-to-face situation over 16,000 respondents in 23 states were interviewed at their place of residence.

As many as 332 assembly constituencies and 996 polling stations were surveyed to understand the mood of the nation.

Economy the big election issue, not terror

2009-02-16T22:52:00.000-08:00

By HNN Bureau

The vote-on-account is over, the tenure of the 14th Lok Sabha is drawing to a close and the focus now shifts to the General Elections. In about 100 days the country will know who will form the next government.

Over the next six days, HYDTV will bring you the results of the most extensive nationwide poll ahead of the General Elections 2009.

To kick-start the first in a series of debates, HYDTV had a panel comprising Editor-In-Chief of Outlook Vinod Mehta, columnist Swapan Dasgupta, Editorial Advisor to the TOI Group Gautam Adhikari, Editor-In-Chief of The Hindu N Ram, political analyst Yogendra Yadav and HYDTV's National Affairs Editor Kajol Singh. The debate was moderated by Editor-in-Chief of HNN M H Ahssan.

Slowing Economy, the new national issue
Swapan Dasgupta opened the debate by saying, “Economy by far is the most important issue. We are in the midst of a downturn and the Government is still in denial. If this is the mood in February then the gloom would be far more magnified in March, which is the election season.”

Livelihood issues high on voters' agenda
In deciding whom to vote for, the issue that will matter most will be…
Economy and inflation 32
National security and terrorism 21
Unemployment 18
Reservations 5
Indo-US Deal 2
Hindutva 1
Others 3
Can't say 18
Note: All figures in percent.

Most panelists agreed that elections are now moving back to bread and butter issues. Economy and inflation top the chart with 32 per cent people in the survey saying it will be a deciding factor on who they will vote for.

“The poll results have shown the maturity of the Indian voter,” Vinod Mehta said.

“More and more are now realising that the economy is no more about figures and statistics. People are calculating their cost of living and how much they lost from the stock market. Also, one must note that the Congress dream team’s public relations has been miserable. Chidambaram would stand up and say the fundamentals of the Indian economy are strong and all around stock markets would be crashing and people losing their jobs,” Mehta added.

So do the Indian politicians accept that they have to have a sound understanding of the economy if they have to win the voters’ hearts and minds?

Country’s economy and inflation is an issue that cuts across classes

Those to whom economy and inflation will be the most important issue…
All 32
Urban poor 29
Rural poor 31
Rural well to do 37
Urban well to do 33
Note: All figures in percent.

Disagreeing with the flow of the discussion, Gautam Adhikari said, “Economy is a much more complex process. The fundamentals of the Indian economy compared to the rest of the world are in fact not too bad. Behaviour of the stock market does not always reflect the fundamentals of the economy.”

Dasgupta took the issue forward and explained, “Economy has been on top of the minds of the voters since the 80s. The question is does the economy finally matter when people actually vote?”

“It could be,” said Yadav and added, “If price rise happens to be on the menu it will be the top preference for the voters before they vote. What we should be looking at now is a package that can be termed as livelihood. It may not be related to the global meltdown but it plays out in a complex way politically. Price rise can become a poll issue when one can point a finger at a particular government. Here, the question is are we looking at state or Central government? Secondly, one also has to look at the alternative to this Government.”

So does the UPA Government realise the depth of the crisis that it is facing?

“There was a bit of complacency in the way the Government approached the vote-on-account. The figures from the survey actually show a personal rather than a collective experience from the voters,” Kajol Singh said.

Mehta reiterated, “Rather than false reassurances by the UPA in this time of gloom and doom, it would have been better to take the country into confidence and share the real numbers.”

However, Adhikari asked, “But do you expect the Finance Minister to talk down the economy?”

“If there is a significant mismatch between the happy smiling peasants and the bright youngsters in the Bharat Nirman ads then mismatch between that image and people’s personal experience will have a political fallout,” Dasgupta reasoned.

Agreeing, Mehta said, “The Bharat Nirman ads are a disaster given the reality and what is being portrayed.”

N Ram too agreed that this mismatch would end up being the Government’s Achilles Heel. “Yes, it is bad news for the Government and I suppose it was expected. I do agree with Vinod that the much better way would have been to square with the people. The country has been in considerable denial,” he said.

People report an economic down turn in the last six months
Those who say that compared to six months ago, it is now…
Harder to meet household expenses 44
Same as it was six months ago 29
Easier to meet household expenses 16
Can’t say 11
Note: All figures in percent.

However, M H Ahssan interjected by asking the panelists if the people, who are taken into confidence about the harsh reality of the economy, will vote back the Government? “If you say things are bad then it is almost like a mandate against the Government.”

But Ram said it is better being more truthful and realistic rather than be in denial.

“Today, fundamentals are weak and the figures lack credibility. Recessionary tendencies are eating into the economy. Unemployment will also be a huge issue,” he added.

Gauging the mind of the Indian voter
The UPA Government has announced several schemes over the past year or so, and it hopes to gain maximum electoral dividends from those, but how aware are voters about these schemes?

The National Rural Employment Guarantee Scheme is among the many Congress social schemes that voters are not aware of. Only 48 per cent of rural poor have heard about the National Rural Employment Guarantee Act and 11 per cent of them give credit for the scheme to their state governments.

“One of the main problems in Congress is that it doesn’t know how to sell itself. The Congress is hopeless in communicating its ideas to the people. The NREGA is a good idea but it has been implemented badly. The ads for NREGA are worse than Bharat Nirman. If you have a good social welfare scheme then you need to communicate to the people who will avail it and not to a TV audience,” Mehta said.

To which Dasgupta added, “If there is a confusion on who is the author of the scheme then it dilutes it. If there is some inadequate awareness that such a scheme exists then it has been faultily implemented.”

There is a structural problem in Indian elections, according to Adhikari. “There is one General Election but it is also governed by local perceptions. Regional perceptions often trump what the Central government is trying to do. This has been a problem all along but more so since the coalition governments came to power. But I agree with Vinod that the Congress’ communication strategy is pathetic.”

But how is all this translating on the ground?

“No scheme helps you in election unless people identify you as the author and see some difference made to their own lives. What is wrong with the Congress is the absence of a political design that underwrites all these things,” Yadav explained.

The Congress party lacks the organisation to translate good schemes into votes.

“The NREGA is a very good scheme but the Congress seems to have no conviction here, they expanded it across India a far too late. There is lack of political mobilisation. It seems as if they just implemented the scheme for electoral ends,” Ram said.

So is it too little and too late for the Congress to now take it to the people?

“In a sense the Congress has missed a historic opportunity of almost a new political alignment in India. They have spent all the money and received very little political rewards,” Yadav said.

“It is not imperative or guaranteed that populous schemes can fetch electoral returns. The case of Operation Barga in West Bengal gave the CPM enormous dividends,” Dasgupta added.

Mehta then explained how in all the social sector schemes the Cabinet was divided right down the middle. “There were people in the Cabinet who were against these schemes,” he said.

How was the Government handling of the November 26 attacks perceived by the people?

The Mumbai terror attacks changed many things in India, Pakistan and also the stand of the United States of America on the issue of terror in the region. But what does the man in the streets of India think of the way the November 26 attacks in Mumbai last year?

The survey threw up figures depicting a mixed opinion amongst voters.

A mixed opinion on government handling of Mumbai attacks
Those who say that after the Mumbai attacks the central government…
Took the right steps 26
Did not do enough 22
Took unwise steps in haste 4
No opinion 20
Did not hear about Mumbai attacks 28
Note: All figures in percent.

Twenty six per cent people say that the Government took the right steps while 22 per cent say that the Government did not take the right steps.

Four per cent say that the Government took unwise steps in haste and 20 per cent have no opinion on the matter. But surprise, surprise - 28 per cent have just not heard about the 26/11 Mumbai terror attack.

So it was an almost even divide of people perceiving the Government's handling of the terror attacks that shook the subcontinent. Significantly, large parts of rural India seemed to have no idea of at all about the 26/11 terror attacks.

So, is 26/11 really a voting plank or not? Are the opinions on terror issues going to sway the voters in any direction or not?

Will the level of dissatisfaction on the handling of the issue mean any electoral gains for the NDA?

Satisfied with handling, but reserved Forty-seven per cent of those who said the Government took the right steps will vote for the UPA while 28 per cent of those will vote for the NDA.

Dissatisfaction with government action is
not giving enough dividends to NDA
Those who say that after the Mumbai attacks the central government… Will vote for UPA Will vote for NDA
Took the right steps 47 28
Did not do enough 32 37
Took unwise steps in haste 29 42
Note: All figures in percent only for those who heard of Mumbai attacks. Rest ‘no opinion’.

Not happy with terror handling, but not much lost Thirty-two per cent of those who said that the Government didn’t do enough will vote for the UPA, whereas 37 per cent will vote for the NDA.

To err is human, so mood high to forgive UPA's 'unwise' steps Twenty-nine per cent of those who said that the Government took unwise steps in haste will vote for the UPA, while 42 per cent of them will vote for the NDA.

M H Ahssan pointed out that the government seemed to have managed to contain the damage here in a sense. The Government (read the UPA) could have gone horribly wrong though.

"It was a national issue. The entire country was shocked. Many people therefore would reserve their opinion. Even then there was a lot of criticism and it still continues. Now the issue is which government are they angry with? Are they angry with the Central government or are they angry with the state government? I know they belong to the same party," said Gautam Adhikari.

M H Ahssan said that it is a level playing field now. There were blasts in Ahmedabad, in Jaipur and even the NDA had seen terror strikes in its tenure. So it is a national issue and not so much a state-wise issue.

Swapan Dasgupta agreed that it may not be a number one issue on people's minds but it still was a critical one. "It is more an important issue for those who in any case would have voted for the NDA. I think this bolsters their conviction that not enough has been done," said Dasgupta.

"Here, we see that within the country it has split almost even. Within the NDA voters, invoking the question of terrorism matters far more than it does for the UPA voters," pointed out Dasgupta.

The panel agreed that though terror is an important issue, it may not turn into a major one in the elections.

"The Congress started off rather badly and they seem to be doing well in the end. The BJP meanwhile seems to be completely turning itself on this issue and does not know what not to strike though they have the right idea," said Vinod Mehta.

Quoting the law of diminishing returns, Mehta said that the BJP has a problem in detection of what is the right note to strike on the issue," Mehta said. "The Congress seems to have done extremely well and the recent diplomatic victory over Pakistan will bring some reward for the Congress party too," Mehta added.

Adhikari agreed that BJP's harping too much on the terror issues could backfire on the party. Dasgupta was quick to add that this very plank though will be an important issue for the BJP to get its traditional voters to come out and vote.

Considering that 26 per cent people say that the Government took the right steps, Yogendra Yadav felt that it was not a small figure by any chance.

"Interestingly the UPA seems to have handled an issue which is not its own turf, rather well. On the other hand they seem to have handled their own turf issues like economy, garibi, aam admi rather badly," Yadav pointed out an ironic way of politics. Rajdeep Sardesai added to it that some people say that P Chidambaram seems to have done better as Home Minister than as a Finance Minister in at least handling the public image of the portfolio.

Swapan Dasgupta pointed out to a curious reversal of roles where Sonia Gandhi is talking of terrorism and is talking tough on Pakistan while Advani is talking of bread and butter issues in his political campaign speeches.

"In the last elections in 2004 we had this bizarre situation when the NDA did disastrously in the urban areas which were its traditional strongholds and did not do all that badly (apart from the south) in the rural areas," said Dasgupta.

Vinod Mehta said that while in BJP's tenure a nine months of near eye-ball to eye-ball contact on the border with Pakistan served nothing, the Congress seems to have achieved an impossible feat. "By its soft approach on Pakistan, i.e. short of declaring war, the UPA through coercive diplomacy have made Pakistan believe that it is an exporter of terror," said Mehta.

"Pakistan stands in the corner like an errant boy saying yes we have done it, so all is forgiven," added Dasgupta.

Rajdeep rounded off the topic of Pakistan as an electoral issue pointing out that at least on electoral terms on the issue, the UPA seems to have neutralised the NDA.

Level of happiness with the ruling UPA government :

The level of happiness with the Manmohan Singh-Sonia Gandhi led UPA government seems to be 66 per cent according to the survey. Those happy with the BJP led NDA government was a high as 57 per cent.

High satisfaction with UPA
Those who say they are… Satisfied Dissatisfied
With NDA in 2004 57 28
With UPA in 2009 66 21
Note: All figures in percent. Rest ‘no opinion’.

Forty-five per cent would like to give the UPA government another chance but 30 per cent say no. Meanwhile, more wanted to give the BJP government in 2004 (as high as 48 per cent) and yet the NDA government was voted out.

The government seems to have not done well in its pet issues but is still a favourite with the voters.

N Ram, Editor-In-Chief, The Hindu pinned the credit of winning hearts on the UPA, especially riding on the Mumbai terror attacks issue.

Ram recalled the statement of BJP leader Rajnath Singh who had advocated military action and trade sanctions against Pakistan, post the Mumbai terror strikes. "The UPA were sober and they did not buy into the mad bomber ideas advocated into sections of the media and in a very shrill way by the BJP. Completely crazy ideas," said N Ram.

"I feel that 26/11 was some kind of a turning point in blunting the edge that the BJP led NDA seemed to have,” said N Ram. ""IT looks like a third category will play a crucial role in deciding who will form the Government," he added.

Adhikari pointed out that those wanting the UPA government back in power is not a figure too different from the one showing those who wanted the then ruling NDA government back in power in 2004. So there is not much to read in there as the differences are pretty even. This he felt was the democratic response, the core of the way our electorate functions.

What is the public mood at the moment, then?

Mehta was surprised that the anti-incumbency was not so high while one would expect it to have been much higher.

"The mood of the nation is something of a mystery. No body knows what people are thinking at the moment. No body knows how they are going to vote. It is going to be a big challenge for the survey to know what is the clear public mood," said Mehta.

So is there no decisive public mood seen in the electorate?

"Part of the problem lies in the fact that we speak an old language to describe a new political reality. We are stuck in the old language of the 1970s and 1980s when there was a clear public mood that swept across the country. Now it is actually statewide. National election is a derivative outcome of the principal choices made at the state levels," said Yogendra.

National issues refracted at the state levels?

That is the reason national parties use most common derivatives like a public figures and personalities to cut across these barriers.

Ahssan pointed out that the regional allies would be the answer to local loyalties if national mood and personality failed to deliver.

"The alliances that you make at the state levels will count," added Adhikari.

Anti-incumbency not being a big issue now is nothing to write home about, pointed out Yogendra. He reminded that in 2004 too the NDA faced no anti-incumbency factor at least as seen in pre-poll surveys.

So it depends on anti-incumbency at state level, quizzed Ahssan.

People want to give UPA another chance,
just as they did to the NDA in 2004
Those who say… NDA in 2004 UPA in 2009
Should get another chance 48 45
Shouldn’t get another chance 30 30
Note: All figures in percent. Rest ‘no opinion’.

Kajol Singh, National Affairs Editor of HYDTV was quick to add that if personalities mattered so much, then Atal Bihari Vajpayee would not have failed in 2004. "Elections are now more and more fragmented, and have become localised," she said.

She credited the Congress for having figured out certain things in advance and fine tuned them to their benefit.

"The Congress came to power in 2004 after eight years of being out of it and they realised that they must accept coalition and embrace acceptability. So they played the role of a centrist party. And that is why their acceptance level is a little higher today. But in the process it has become inarticulate, they have not been able to communicate and probably embarrassed over some of the policies they have had to adopt," highlighted Kajol.

Dasgupta said that it is more than given now that both the major national political parties accept the power of coalition.

He pointed out that though there is no anti-incumbency so clearly visible, there are vulnerabilities of the UPA government. The outcome depends on whether between January when these polls were conducted and till April when we go to polls, whether the NDA is going to be able to exploit the vulnerabilities to its advantage.

"It's really a test for the opposition," said Dasgupta.

Mehta said how well the NDA exploits UPA vulnerabilities is important.

"All depends not on the core of each coalition, but on parties surrounding the core," said Adikari.

Yogendra had a takeaway for the day. "Though economy is a serious anxiety, it is not playing out the way the NDA would have it play out," concluded Yogendra.

"Gentlemen, the bottom-line is that it is a game of political roulette," reminded M H Ahssan summing up the show's discussion. "The bottom-line is nobody knows," Mehta added the rejoinder.

M H Ahssan took that as the factor that made the coming elections even more exciting when even the psephologist's could be proven wrong.

Flat Budget flattens Indian market

2009-02-16T22:48:00.000-08:00

By Ruchi Sanyal

Sensex Tanks 329 Pts, Investors Lose Rs 90,000cr Of Wealth

Dalal Street’s disappointment with the finance minister’s Interim Budget on Monday was succinctly summed up by an irate broker in just one sentence: ‘‘Things would have been better if there was no Interim Budget.’’

With a loss of Rs 90,000 crore and BSE sensex down 329 points at 9,305, investors on the Street suddenly realised that hopes that were built around a probable economic stimulus package remained just that—hopes.

On Monday, as finance minister Pranab Mukherjee stood up to present the budget, the sensex was marginally down and hardly showed any movement for the first 10 minutes of the speech. However, as it became clear that Mukherjee was more interested in talking about the coalition government’s achievements over the past five years and was unlikely to make any major announcements, investors rushed to press the sell button.

‘‘It was like a presentation of a report card where the student has failed miserably in the last year,’’ said Arun Kejriwal, director, KRIS, an investment advisory firm. By the time the budget speech was over, the index had lost 300 points and it lost further ground to finally settle near the day’s low of 9,279. ‘‘It was a 70-minute live telecast of the Congress-led government’s five-year track record,
in which there was zero takeaway for industry and the market,’’ said V K Sharma, head-research, Anagram Securities.

While lack of any economic stimulus did disappoint the market initially, what also unnerved investors was the minister’s indication that things in India could get worse and his admission that the fiscal deficit this financial year could be as high as 6% of the GDP, given the global financial crisis.

‘‘The admission of a 6% fiscal deficit is in line with market estimates, which always debated the 2.5% fiscal deficit number of the last budget,’’ said Amitabh Chakraborty, president-equities, Religare Capital Markets.

The market’s disappointment was reflected in the index falling by over 3%, with real estate, metal and infrastructure sectors bearing the brunt of the selling pressure.

Other than these three sectors, banking stocks were also hammered down as investors believe a worsening economic situation would also affect banks’ bottomlines. Given that the uncertainties of LS elections will take centrestage in the next few weeks, investors are unlikely to witness any revival in the market.

Why did Pranab present a low-key Budget?

2009-02-16T22:44:00.000-08:00

By M H Ahssan

Speculation Is That Cong Didn’t Want Mukherjee To Make Any Crowd-Pleasing Proposals

Mystery surrounds the UPA governments decision to present a flat Interim Budget/Vote-On-Account (VoA) — devoid of any tax changes/fiscal measures. Stand-in finance minister Pranab Mukherjee has cited constitutional propriety to justify his playing by the book. By convention, a VoA is meant to do no more than simply seek Parliament’s approval for expenditure to run the government in the 3-4 months of the transition phase before and after elections, till a fullfledged Budget can be presented.

Just as there’s nothing that stops a nightwatchman in Test cricket from scoring a few runs instead of merely holding the fort, there’s nothing in the Constitution that prohibits a government from doing more. Why then did the UPA forgo an opportunity to come out with a few vote-catching fiscal proposals just ahead of elections? It could have justified another stimulus package in the Budget in the context of the global financial crisis and the domestic slowdown in business. The opposition, which in normal times would have been well within its right to cry foul, would have appeared churlish in blocking say, tax/duty incentives/rebates for the salaried middle class or industry or for investors, given the urgent need for an economic recovery.

Mukherjee, in his speech said, “There may be need to consider additional fiscal measures when the regular budget is presented by the new government after the elections.’’ Deputy chairman of Planning Commission and Manmohan’s economic confidante, Montek Singh Ahluwalia reportedly said that with just a few more days of this Parliament remaining, there would have been no time left for discussion. Fact is, the last Budget (2008-09) was cleared by Parliament with almost no discussion.

All these questions have spawned a range of speculative answers, none of which can be confirmed. The one that’s doing the rounds the most is that the Congress high command did not want Mukherjee, who’s standing in for a still-recovering Manmohan Singh, to steal the thunder with a flurry of crowd-pleasing proposals. According to this version, the government might in the coming days come out with a third stimulus package. But senior Congress leaders scoff at this conspiracy theory while senior finance ministry officials discount the possibility of a last-minute dose of fiscal measures from this government.

A top official in the ministry pointed out that between the two stimulus packages so far, the government had signalled additional spending of about Rs 150,000 crore as well as duty rebates of Rs 40,000-50,000 crore.

The Reserve Bank, too, had pitched in on the monetary policy front with rate cuts and various other measures aimed at stimulating growth. “A lot has already been done. We must first allow the impact of the recent actions to play out. Also, there are signs of some industrial recovery in February,’’ the official said.

At the same time, Montek has kept the window open for more monetary action. He was quoted by a TV channel as saying that it was for the RBI to decide on the timing of such action. Having been disappointed by Mukherjee’s Budget, the markets now seem to be pinning hopes on another dose of rate cuts.

Why did Pranab act like an accountant?

2009-02-16T22:40:00.000-08:00

By M H Ahssan

To say it was a disappointment would be putting it rather mildly. The Congress party, it seems, has suddenly become a stickler for Constitutional propriety. The government could announce changes in foreign direct investment norms a few days ago but found it rather hard to provide fresh funds to those who have lost their jobs in labour-intensive, export-oriented industries such as textiles, garments, gems and jewellery, leather and handicrafts. Not even crocodile tears were shed for them.

There were expectations that a grandiose announcement would be made about a low-cost housing scheme or, perhaps, an insurance scheme for workers in the informal sector. There was speculation about an expanded crop insurance programme or new policies to step up spending on infrastructure, health-care and education. But nothing of the sort came. In the recent past, Budget speeches have been statements that spell out the ruling party’s economic policy priorities.

What the Union finance minister, Mr Pranab Mukherjee, read out in the Lok Sabha on Monday was a bland, matter-of-fact statement-of-accounts of the country’s balance-sheet over the last 12 months. Twenty-five years after he had last presented a Union Budget, he chose to not succumb to the temptation of articulating the government’s new promises, policies and programmes on the economic front in the run-up to the 15th general elections scheduled for April-May.

Perhaps, Mr Mukherjee is not a free agent. Perhaps such announcements are better made by the Congress president, Mrs Sonia Gandhi. Perhaps the release of the Congress manifesto may be a better occasion to make such pronouncements even if the event attracts fewer television viewers.

What the balance-sheet has revealed is pretty grim and ominous but not entirely unexpected. A positive fallout of the Interim budget speech is that the government has now openly stated that it is postponing the fulfillment of the deficit targets specified in the Fiscal Responsibility and Budget Management Act that had become an article of faith of sorts for the former finance minister, Mr P. Chidambaram.
Thus, the fiscal deficit as a proportion of GDP for the current fiscal year is up to a level of 6 per cent against the 2.5 per cent budgeted for with the deficit itself widening two-and-a-half times, while the revenue deficit is up from one per cent of GDP budgeted for to 4.4 per cent, the deficit itself going up more than four times. This is hardly surprising since the government’s tax collections are down Rs 62,000 crores while its total expenditure has exceeded the Budget estimate by over Rs 150,000 crores.

Mr Mukherjee said that “in the days of financial stress, tax rates must fall and our ability to pay taxes must rise”. He also stated: “We are going through tough times” and remarked that “current indications of the global situation are not encouraging”. Earlier he had remarked: “Extraordinary econ-omic circumstances merit extraordinary measures”, adding immediately, “now is the time for such measures”. The obvious question that arises is why the government chose not to ann-
ounce a third economic stimulus package.

Can those who have become unemployed afford to wait for the new finance minister to announce the full-fledged budget for 2009-10 in June? Would new policy announcements for the proverbial aam aadmi not make good economic sense as well as good political sense? After all, it is none other than the Prime Minister, Dr Manmohan Singh, who is fond of saying that there is no difference between good politics and good economics.

Who knows? A few big-ticket announcements may still be made before the Election Commission announces the dates of polling and the model code of conduct comes into force. The bigger issue is that even if such announcements are made, these may not materially impact the outcome of the elections or significantly influence voting behaviour. Yes, in the past, pre-election announcements have not helped stem anti-incumbency sentiments. But that need not have prevented the Congress and the UPA from trying a bit harder? The railway minister, Mr Lalu Prasad, certainly made no secret of his intentions to increase his popularity when the Interim Railway Budget was presented on Friday.

The question, thus, goes unanswered. Why did the accountant in Mr Mukherjee gain precedence over the politician in him? If Mrs Sonia Gandhi knows the answer, we would have to wait for her reply.

One last crib. Why did the acting finance minister stick to only one quote from Nobel laureate Mr Amartya Sen on the need for a new commitment towards “security” during an economic downturn. Our favourite Bengali-babu could surely have found an appropriate couplet or two from the voluminous works of the other Nobel laureate from his home state, Rabindranath Tagore, instead of concluding his speech by merely stating that “our people will surely recognise the hand… that alone can help our nation on the road to peace and prosperity”.

Poll-eve Budget for rural India

2009-02-16T22:38:00.000-08:00

By M H Ahssan

The Interim Budget, presented against the backdrop of the forthcoming Lok Sabha elections, was heavily tilted in favour of rural India, infrastructure and agriculture. This could explain the knee-jerk reaction of the stock market, which tanked three per cent to register its disappointment at no tangible sops to recalcitrant sectors like real estate. But the rest of India, which has benefited from the stimulus packages and the Rs 80,000-crore largesse from the Reserve Bank of India since September last year, also stands to benefit though they don’t seem to realise it.

Acting finance minister Mr Pranab Mukherjee has talked of a hefty increase in non-Plan expenditure and this could immediately revive consumption. He has also increased the allocation for the mass rapid transport systems in several cities. All these are designed to increase employment and consumption, which would benefit the services and the FMCG and white goods sectors.

Mr Mukherjee repeatedly cautioned the nation that there is no room for complacency and warned that difficult times could continue till the end of the year. Mr Mukherjee has also assured the country and, incidentally, the global community, that though fiscal responsibility and budget management targets (FRBM) have been relaxed in these “extraordinary circumstances”, fiscal consolidation must be achieved at the earliest. The first 45 minutes of his speech could be called a report card of his government’s achievements on various fronts, and particularly in inclusive growth, but he emphasised that the “need for growth with equity and downturn security is inescapable in a market economy”. He reiterated the need for a social security net.

Mr Mukherjee laid out a road map that could be followed if his government comes to power after the elections. He held out a possibility of personal income-tax rates being reduced and defusing of distortions in tax rates. The new government, he said, would have to pursue macroeconomic policies that would create employment, reduce poverty, spur agricultural growth, strengthen the regulatory framework, bridge the infrastructure gap, speed up exports, and, among other things, “provide safety nets for the dislocative effects of the economic slowdown”. He also reiterated that planned expenditure would have to be increased substantially to cope with the global recession.

Defending the huge deficit, which is 5.5 per cent of GDP for 2009-10, Mr Mukherjee said conditions are not likely to be normal and hence the huge deficit. The verdict immediately after the finance minister concluded his speech was “zero for the stock market and industry”. One can imagine the disappointment of these two sectors because of all the self-induced hype by the media and business leaders tripping over each other issuing wishlists. But in calmer moments they will realise that the market sank under the weight of its own expectations.

What is vote on account?

2009-02-16T03:42:00.000-08:00

By M H Ahssan

In the year India goes to polls, the United Progressive Alliance (UPA) government will seek a vote on account to meet its expenses for the few months before the elections. Technically, a sanction of Parliament for withdrawal of money from the Consolidated Fund of India to meet the government’s expenses is known as a Vote-on-account.

The government would seek a vote on account because Parliament will not be able to vote on the entire Budget before the commencement of the new financial year, starting April, due to general elections. A fresh budget would be brought before Parliament by the government that comes to power.

The government usually goes for Vote-on-account in two situations. First, when the government is unable to pass a full Budget in Parliament for some reason before March 31, which is when the financial year ends. Second, when the term of the incumbent government ends close to March 31. The present government will seek a Vote-on-account, as its term ends in May, two months later.

A full fledged Budget has to go through multiple stages including the general discussion, discussion on Demands for Grants of various Ministries/Departments, Appropriation Bill and Finance Bill. All this can take a long time. Thus it becomes imperative that funds are made available to the government for functioning in the meantime; otherwise no financial resources will be available for the expenditure of various Ministries in the next fiscal.

In order to avoid such an emergency, through a special provision, Government obtains the vote of Parliament for a sum sufficient for its expenditure on various items for a part of the year - thus avoiding a crisis.

A Vote-on-account is different from both interim and full Budget as it deals only with expenditure, while interim and complete Budgets deal with both expenditure and receipts.

Normally, a Vote-on-account is taken for two months only. But in an election year or when it is anticipated that the main Demands and Appropriation Bill will take longer than two months, the Vote-on-account may cover a period exceeding two months. Typically this period does not exceed six months, as that is the maximum gap possible between two sittings of Parliament.

Vote-on-account is also sometimes exploited by political parties to announce sops before the polls, though it does not allow for the altering or introducing of new duties and taxes.

The National Democratic Alliance Government before its dissolution in 2004 Lok Sabha elections had announced a series of concessions and tax reliefs on the eve of the Vote-on-account. The obvious intention of the NDA Government was to gain some mileage on the eve of the next general election.

In 1991, the then Finance Minister Yashwant Sinha, in the Chandra Shekhar government, while presenting a Vote-on account had announced plans to divest government equity in public sector undertakings.

PERSPECTIV E: The power of managing complexity

2009-02-15T22:23:00.000-08:00

By M H Ahssan

The key is not to eliminate complexity but to balance its benefits with its costs

Downturns reveal a company’s weaknesses. An organisation that seemed nimble and focused during a period of expansion may be sluggish and ineffectual when demand drops off. Survival can depend on quickly determining which products are making money, what customers really value, and where organisational bottlenecks are getting in the way of effective action.

One major cause for this sluggishness is complexity — product complexity, organisational complexity, and process complexity.

The costs of complexity are usually hidden, so executives often don’t grasp the magnitude of the problem until a downturn hits and businesses start feeling strong pressure on margins and profits — as is happening in India.

The challenge is that some complexity is actually advantageous, even in a downturn. For example, country or regional business units are closer to the ground than headquarters and are more likely to know what customers want. It takes a complex organisation to provide enough local autonomy so products or services can be tailored to those customers while still taking advantage of global scale. That kind of complexity can be vital to sustain sales through a recession.

A similar challenge arises when companies struggle to balance complexity and innovation. Adding new products, services, features and options creates complexity of all sorts. But companies become leaders by offering customers new choices, and in a downturn innovation may be a company’s salvation. Take Diageo, a leader in the super-premium spirits segment in India. It has introduced many new products, flavours, and packages in the Indian market over the past few years to maximise customer choice. It could have introduced many more from its broad global portfolio — yet it chose not to. Instead, it has struck a fine balance between its international products and local innovations, leading to a 40% growth rate. The key is not to eliminate complexity but, as Diageo has done, to balance its benefits with its costs.

A useful way of analysing the level of complexity in your company — and separating complexity that’s beneficial from complexity that hurts the business — is to begin from a base of zero. Imagine, for example, that your company produced just one product or service with no variations, sort of like Henry Ford’s classic Model T. A manufacturer with only one product would still need a supply chain, a factory, a distribution network, and a sales-and-marketing function. But it could greatly simplify its IT systems, its distribution and sales efforts, and its forecasting. One plant manager with whom we discussed this exercise was flying in 15 planes’ worth of parts almost every day to meet the next day’s production schedule. In a Model T environment, he noted, “all those costs would disappear instantaneously.”

The point of the exercise, of course, isn’t to return to the days of the Model T, but to determine your zero-complexity costs, and then assess the costs of adding variety back in. Often the cost curve has a ‘knee’ — a step change triggered by adding one more model or level of variety — and you can determine whether moving beyond the knee is worth the additional expense. You can also assess the benefits of innovation, and determine the focal point where a given innovation overshoots what most customers want and are willing to pay for.

The key task — more essential in a downturn — is to manage these balance points. For example, you might decide to eliminate individual options and instead offer customers a small number of configurations that include the most popular features. Thus Honda’s CRV comes in just eight configurations and 13 interior/exterior colour combinations, for a total of 104 possible build combinations. This is far fewer choices than most cars offer, yet the CRV is the hottest-selling vehicle in its class in the US. In India, the CRV has also made a strong impact, witnessing strong sales growth over the past few years.

Similar kinds of analyses can diagnose organisational and process complexity. We’ve found that companies get the best results by attacking product complexity first and organisational complexity next and only then focusing on process complexity. The reason is this: complex processes often reflect unnecessary product variety or poor organisational design. If you attempt to simplify a process without changing product or organisational complexity, you find even more complexity cropping up in some other process area — like pushing on one side of a balloon only to find it bulging out on the other side.

Unfortunately, most companies that do attempt to manage complexity usually begin with processes, often through efforts such as ‘lean six sigma’. Typically, the emphasis is on how companies can execute all their current operations faster and with fewer resources. But that’s actually the wrong place to start.

Reducing process complexity should be a company’s last step, and it involves looking for the process improvements that add the most value and by eliminating unnecessary data collection. In a downturn, the decision about which processes to tackle should be governed in part by how long it will take to yield results. Fixing an inefficient product development process might take years, whereas fixing a poor inventory-management process might take only a few weeks. One of the world’s largest natural-resources companies found that it had no fewer than 483 process improvement projects in the works — and that only 25 would deliver a significant impact. In tandem with product and organisational simplifications, the company was able to boost operating income by more than 20%. Meantime, the same company found it could reduce its volume of reports by 40% in one major business unit.

All these complexity-management efforts help a company become lean and flexible enough to adjust to the changing market conditions in a downturn. It pays off again when the economy improves and a company has stripped out enough complexity to accelerate quickly out of the downturn.

Paying for ignoring the anomalies in financial services

2009-02-15T22:21:00.001-08:00

By Rajgopal Raju

First, the classic disclaimer. Some of my best friends are bankers. But at a time when I see little old ladies in my corner shop laboriously hunting for coins to put 10 quid on a prepaid heating meter card, in the coldest winter for decades, it’s hard not to be angry at bankers, politicians, and yes, even foreigners and immigrants, instead of just laughing about it. Believe me, 10 quid doesn’t get you much heating for arthritic old bones. Energy companies have still not dropped prices from the oil-high spike days. And yeah, we still have those antiquated pay before the heater comes on systems.

If anything came out of last week, when Masters of the Universe faced angry lawmakers on both sides of the Atlantic, it’s that these guys really do live in an alternate reality. I thought I was the one who reads SF. More likely, they refuse to face the new reality — as one senior civil servant here said, “They’re like the dinosaurs who’ve eaten to the edge of the forest, and don’t realise their time is over.”

Despite all their zillion dollar public relation advisors, they hadn’t the foggiest notion how it sounds to say things like ‘we’ve seen our personal share portfolio drop from billions to millions,’ or ‘we’ve been good boys, we cancelled that nth corporate jet after the Mr Obama smacked us’, or ‘it’s impossible to live on half a million dollars a year.” Or even the base fact that the world will stop turning unless they can give out bonuses. Never having had to mingle with the aam aadmi — all those corporate jets — they don’t get the deep, searing anger against their kind. The privileged usually don’t. However, many bank chiefs now claim they’re going to take one dollar salaries — they haven’t realised that if politicians put bankers under the guillotine now, millions of Madame Defarges would happily knit and cheer them on. I’m not saying it’s correct, please note. But that’s how it is. If anything, the depositions worked to fuel public anger against the banking class.

The public wants blood, any blood, and at least in the welfare states of Europe, rich, tall, mostly white men, in the UK usually Lord this and Sir that, are juicier targets than Italian fitters, Polish plumbers or poor mothers of octuplets.

Politicians are finally getting the hint — and realising that they have to ditch their cosy relationships with high finance. Obama did it first, with his salary caps in a society where personal property is as sacrosanct as as apple pie. Gordon Brown has been forced to jettison high-profile advisors and regulators who are ex-investment bankers.

Both extremes are dangerous. We’re still pouring vast amounts of taxpayer money into banks hoping they’ll fix things. We’re putting people, who unlike, say, politicians and mediapersons, are not used to being public villains, against a wall, fighting for their five star lifestyles, and giving them free money to fix the world? What would you do? I’d take what I can get and run to the Bahamas. And yes, it is unfair to tar all bankers with the same brush. Most didn’t even know what was going on. The best option, really, is to throw some high profile sacrifices to the wolves. Jail a few, cut off (figuratively, please) a dozen or more symbolic heads, get some non-finance outsiders on to those boards, and get on. And yeah, give up those bonuses. You might actually live to earn another day, before some mad mob really lynches you. The prospect is real, though it might happen in Slovenia instead of Pennsylvania. There’s just this much that even a passive western public will take.

In London, the anger now has focused on banker bonuses. American banks gave out some $18 million in bonuses for 2008 — British banks are still to announce theirs, and most, we hear, are Marie Antoinettishly going ahead. After Obama, the UK government is under intense pressure to tear up those gilt-edged contracts, but is still trying moral suasion. They’re daily upping the ante, though, as public outrage pours in.

This has generated a fascinating conflict of opinions. Even usually establishment commentators are swinging from one extreme to the other. Here’s how the argument goes: for, not all bankers are bad guys, why deprive those who did good work? Against, those who did ditto in retail, engineering, metals, auto, etc., are paying with their pensions and jobs so why shouldn’t other bankers? Without bonuses, there will be a talent outflow, even in these hard times. Counter, what talent? Firstly, these guys goofed up, next, who needs exotic skills like complicated trading or slicing paper trails, anyway? Sure, let financial services take its chances on losing talent, like every other industry sector is being forced to do, from lawyers to auto designers. For, who’s going to fix the mess if there aren’t any good bankers left? Against, maybe we need someone else to fix the mess, who said they were good in the first place? And why can’t they learn to live on half a million dollars, like other highly skilled people in other professions?

In India, we’ve always accepted huge income inequalities as a given, fate, karma, the accident of birth if you will. We don’t pillory our rich for their ostentatious homes, marriages, or extravagant lifestyles. America takes a middle road — the pursuit of happiness is a constitutional right. But riches are supposed to be earned, not inherited. In Europe, which has a socialistic approach, they genuinely believe that a bricklayer should earn as much as an engineer or doctor. For years, society turned a blind eye to the financial services anomaly, mainly because they kept the credit lines flowing, and allowed governments to run massive welfare states. That prosperity has now disappeared. I suspect worse to come.

Technology & tolerance: Tools to treasure

2009-02-15T22:20:00.000-08:00

Diversity, and the freedom to espouse it, is necessary for organisations, and also for a technologically and economically resurgent India. It also embodies the very idea of India, says Kiran Karnik.

Many assert that we live in an age of technology. Undoubtedly, technology is a major driver of economies around the world, and is having an increasingly bigger impact in the socio-cultural sphere. Yet, this — by itself — is not new; after all, the economic importance of technology has been seen from the days primitive humans devised better weapons for hunting, and its socio-cultural role — through settlements resulting from agriculture, for example — has been important for centuries. What is different today is the speed at which technology is changing and progressing. It is the rate of change in technologies and the rapidity of its spread that is radically different from earlier eras.

We have seen in India the pace at which cable and satellite TV spread across all parts of the country and penetrated deeply into the socio-economic pyramid, as contrasted with the leisurely pace of conventional TV. Even more striking is the phenomenal story of mobile telephony, already — in just over a decade — the device is owned by more Indians than any other. The ubiquity of information and communication technologies, and continuing innovations in their applications, is bringing about radical shifts in mindsets as much as in economics. For example, connectivity has annihilated the concept of “remote”: today, with mobiles and internet linkages, the very definition of isolation has changed. With allowable exaggeration, one could say that geography is history, heralding the death of distance.

In a changing environment, organisms that do not evolve and adapt may not survive. This is as true of social structures as it is of biological entities: organisation and countries that do not adapt to the new environment of rapid technological change are likely to be endangered. What is required is not just a coping mechanism to weather on-going change, but proactive measures that enable one to take advantage of the situation.

For a number of reasons, India is wellpositioned to capitalise on this scenario, which requires the ability to adapt to change and a strong technological base. The first is potentially helped by demographics: the high proportion of young people in our population — for some decades to come — is a great advantage, given that the young are far more amenable to change. The second (the technology base) has been built over the last six decades and though it does need far more attention and resources, it is already of a magnitude to potentially be an initiator — and not just adapter — of new technologies.

India’s space and nuclear technology progammes — despite years of embargoes by the west — exemplify the country’s strong technological base. In recent years, this has been supplemented by growing capability in fields like information technology, bio-technology and automobile design. These provide a good foundation for understanding, predicting and handling the changes that result from technological advances. However, if we are to go beyond this and be an active participant in shaping change, there is need for a major thrust in S&T, through massive investments in R&D, science and engineering education and in mechanisms to encourage private investment and promote industry-academia-R&D interaction.

The superstructure, to stretch the metaphor, depends not only on the foundation, but also on the soil or the ambience within which it is embedded. In an era of fast — and, often, revolutionary — technological change, to be a leader requires that one has to think differently, to go beyond imitation or incremental change. Economic and strategic power will increasingly go to those who innovate, who create the breakthrough technologies. The days of seeking economic advantage by efficiently productising technology developed by others, are numbered because of the speed with which technologies become obsolete, as also the increasingly restrictive regimes, which often deny access to new technologies. Radical breakthroughs, on a sustainable and on-going basis, happen mainly when the socio-cultural milieu encourages divergent — even subversive — thinking.

A quick solution to India’s colossal problems of poverty, illiteracy, healthcare, social justice and economic equity, depends on its ability to devise and use new and innovative tools. Some of these will be technological, will others will be societal, organisational and fiscal. Such solutions — with the speed and scale warranted by the magnitude of the problems — will necessarily be radical deviations from the present, requiring many alternatives to be tried and an even larger number thought about. We need, therefore, to catalyse an explosion of radically new ideas. Such a flowering of creativity, in a number of different areas, can take place only in an ambience where divergent thinking is encouraged. The future of India depends upon this.

India, with its immense diversity in every sphere, and a vibrant democracy, is well placed to foster such creativity. Yet in recent times, we have seen attempts to stifle such openness. Recent incidents in Mumbai, Mangalore and elsewhere, have brought to the fore groups that seem determined to stamp out diversity. The issue is not just about “outsiders” or of women’s rights. The larger issue is that of diversity, of tolerance and a respect for the rights and freedom of others. While fringe groups have a right to their view, they must not be allowed to impose this on others through force or even threat, coercion and fear. It is the duty of the State to permit all citizens to live a life style of their choice and certainly to have and propagate any ideas, howsoever radical these may be, as long as they are within the bounds of the existing laws. Permitting lumpen groups, of whatever persuasion, to enforce their own version of laws and morality is a dereliction of duty by the State.

In an evolving society, many ideas and behaviours are manifest. We need, in our own collective interest, to permit all streams of ideas, however diverse or deviant, and not seek to stifle them or impose pre-determined ones. Such diversity, and the freedom to espouse it, is necessary for organisations, and also for a technologically and economically resurgent India; it also embodies the very idea of India.

Budget: Will it poll-vault or prop up economy?

2009-02-15T22:16:00.000-08:00

By M H Ahssan

What rotten luck! Writing a column for a business newspaper on the morning of major policy announcements is replete with its own peculiar set of hazards. Damned if you write about it, and double-damned if you don’t. Look at the quicksand here. Speculate and you could end up with egg on your face. Ignore it, and readers wonder if you’ve finally tipped over to the other side. The only way one can salvage the situation is by moving beyond the present and the immediate.

Today’s column will try to raise some issues that might help readers determine whether the measures have enough horsepower to drag the economy out of the quagmire. Given that there is a general election coming up, it might also be useful to differentiate between prepoll bluster and genuine economic largesse. It might also help to remember that this is going to be one hell of a tightrope walk for this government — throwing cash at the economy at a time when its finances are deteriorating and the global economic environment is in crisis.

The first, and most obvious, question is: will zapping the economy with large doses of stimuli really help? The only way to find out is if the measures announced in the interim budget by stand-in FM Pranab Mukherjee really induce you to go out and spend some of your savings. Given the uncertainty over retaining jobs in most of the urban centres, consumption spending in the metros is likely to remain tardy for some time to come. The next best bet therefore is the rural areas, where the successful monsoons of the past few years have left many people with some disposable incomes. And, there is no immediate threat of layoffs here. So, how does the budget address this constituency? Another broader question: does the interim budget do anything to boost overall consumption — whether it’s rural or urban — and does it manage to put more money into wallets?

Remember, there is a hidden layer just below the level of economic stimulus, and it is called elections. It might be interesting therefore to see how they camouflage some of the political handouts as a part of the stimulus package. Here’s a pointer: with crude oil prices now crashing below $40 per barrel, the government might have slightly greater leeway in their spending plans over the next 15 months. Lower oil prices have direct and indirect effects.

It not only reduces India’s import bill immediately, but will also reduce the subsidy bill that the government incurs for compensating oil companies (which had to sell petroleum products to the pubic at a price below their raw material cost). Ditto for fertilisers. So, despite the larger-than-estimated total subsidy bill by the end of the year — primarily because of the high food subsidy bill and the huge oil and fertiliser subsidies incurred in the first six months — the government will have acquired some headroom on the fertiliser and oil subsidy bills now. The question to ask is: are funds being spent on growth-inducing areas, or are they being diverted towards expenditure under the spurious head of “social sector expenditure,” that does nothing to the economy but pays enormous political dividends?

Which brings us to the next question: will this budget create some long-term fiscal burdens? You bet! Government finances are already creaking under the strain of so many stimulus packages and give-aways. Tax collections have already slowed down. The government has already revised its tax collection estimates downwards once. Given the continuing slowdown, experts are wondering whether the government will need to recalibrate its tax revenue estimates further downwards. Whatever might be the analysis, one thing is sure — the government’s tax collections will not only miss this year’s target, but will most certainly further dip in the next financial year. At the same time, with so much money being spent on prodding the economy, the government will have to keep borrowing to finance its ballooning expenses.

The trick might therefore lie in additional revenueraising strategies. One, there is a sure source of revenues in the scheduled auctions for 3G spectrum. The second is, of course selling some of the family property — it is high time the government resumed its divestment programme. The pause button was pressed on this revenue source soon after the UPA government got the Left Front on board. As a result, it missed out on the bull run and an excellent opportunity to bolster revenues. It may not be too late even now. In fact, the government’s selective divestments also could, theoretically, even give the stalled stock markets some sort of a push. Did you spot any additional revenue-raising items?

Finally, it might be a fun idea to try and use the interim budget document to figure out if this government is confident of returning to power. Who knows what clues might be available here. Have fun.

The Big Subhiksha Harakiri

2009-02-15T21:38:00.000-08:00

Till a year ago, the Subhiksha story looked real. And then, the mess happened, reports Veeshal Bakshi.

Till five months ago, the suave R Subramaniam could do no wrong. The dapper IIM-Ahmedabad graduate had built Subhiksha, a 1600-stores retail chain, from a scratch that was seen to be giving a tough competition the likes of Mukesh Ambani’s Reliance Retail and Kishore Biyani’s Big Bazaar and Food Bazaar. Subramaniam’s success even convinced one of India’s most successful entrepreneurs and investors, Azim Premji, to shell out a whopping Rs 230 crore for a 10% stake in Subhiksha in September 2008.

But then, just like one of those most anticipated Bollywood blockbuster movies that bomb at the box office, Subhiksha went down in a dramatic sequence of events. It all started with delays in payment of salaries and rentals for its stores. Within weeks, most of its stores shut down and were vandalized as even its security guards refused to report for work. Today, Subhiksha is almost out of business, leaving in the lurch not only its 15,000-odd employees but also a clutch of Indian and foreign banks from whom it borrowed over Rs 700 crore and a group of equity investors like ICICI Venture, ICICI Prudential Mutual Fund and Azim Premji.

Subramaniam has blamed the company’s poor financial structuring model for the mess in his various interviews to the media over the past few weeks. The company has an equity share capital of just Rs 32 crore against a debt of Rs 700 crore. Premji’s Rs 230 crore did not come into the company as he purchased a 10% stake in Subhiksha from ICICI Ventures.

But if poor capitalization of the company was the only reason for the company going down, then other major players like Kishore Biyani’s Future group and Reliance Retail should not be facing any problems. But the fact is that even they are feeling the heat of the economic downturn and depressed consumer spending.

The root cause of the problems being faced by almost all the retail companies is a basic flaw in the business model which escalated due to the closure of the financial tap both in terms of debt and equity funding. One may ask how such seasoned and successful entrepreneurs can make basic errors. But the fact is that some of the most successful companies end up making the basic mistakes.

Subhiksha’s focus on the Fresh and FMCG (fast moving consumer goods) products as well as Mobile phone stores was its biggest mistake. Fresh products (like vegetable, fruit etc) and FMCG do not provide sustainable profit margins. These products are used to attract footfalls in the stores. The profits are generated from other products like garments and household goods. In case a retail company wants to make decent profits from FMCG products, it must have its own brands of sugar, rice, tea, edible oils etc so that one can make the manufacturers’ margins as well. Reliance, Vishal Retail and Future group has already moved into this direction and are thus better placed than Subhiksha.The inventory wastage and logistics are other critical issues which most of the retail companies have not managed to address successfully.

Mobile phones retailing is again a low margin business. One of the major reasons why retail chains got aggressively into this business was to add meat to their top-line revenues. Anyone in the industry will tell you that if profit margin was the only consideration, then this is not the business to be in. Industry estimates show that net margins are as low as 1 to 2%.

Thus, the basic business model pursued by Subhiksha was off-the-mark, both in terms of format and category of stores and products. While Subhiksha wanted to be India’s largest discount retail stores chain, it ended up taking properties on rentals in prime locations, what is known as “high street” locations in the retail industry. This further added to the company’s financial problems.

All this may have still not surfaced and Subhiksha may have pulled through if the financial markets had remained robust. In good times, interest rates were low so debt was an easy and attractive option. The equity funding tap too flowed liberally. But then it all changed. Interest rates went up, saddling Subhiksha with much higher interest burden. At the same time, equity funding dried up, catching the company in a classic cash flow conundrum.

Subhiksha is presently engaged in negotiations with banks for corporate debt restructuring. Banks will have little option but to restructure the company’s debt if they harbour any hopes of recovering their money. Subramaniam says he needs another Rs 300 crore to restart operations which has to come from equity funding. Subramaniam holds around 59% stake in the company and is believed to be in talks with larger retail players for a sell-out.

The deal has also been hawked to some private equity funds but valuation of the company will be a major issue today as the retail sector is going through turmoil due to poor consumer spending and falling margins. Other retail players who are still making some profit are also looking for funds. Thus, Subhiksha today has competition even when it comes to raising fresh funds. Azim Premji has maintained a studied silence so far on whether he is ready to infuse fresh equity funding into the company.

Even if Subhiksha manages to raise the Rs 300 crore which Subramaniam say is required to restart operations, it could be many months before you can walk into a Subhiksha store to buy your vegetables and groceries

INTERVIEW: ‘Didn’t discriminate among classes’

2009-02-15T00:29:00.000-08:00

By M H Ahssan & Kajol Singh

Railway minister Lalu Prasad presented the last budget of his tenure, in an attempt at a bold image makeover from his earlier track record in Bihar, which declined drastically on all parameters under his rule. He has been credited with scripting a turnaround story for the railways, and bringing the giant enterprise back from the brink. Not everyone agrees, though. Many feel he merely built upon what began under his predecessor, the current Bihar chief minister and arch rival Nitish Kumar, and was helped on by a buoyant economy. Others have even accused him of puffing up figures. But all agree that his stint was eventful, which saw many important initiatives.

Lalu discusses his performance in an exclusive conversation with HNN.

What do you count as your most important achievement?

I focused on bringing fares down and improving passenger amenities. But I did not discriminate among passengers. Everyone benefited, not just the poor. Before I took over, the practice was to flog upper-class passengers. I stopped that. After all, they are also citizens like you and me. So, while they were not punished for not being rich, poor got huge relief. I launched air-conditioned Garib Raths for them, affording them the luxury that they could only dream of.

I have the satisfaction of proving my detractors wrong. ‘Log mujhe gali dete the... ab kahan hain sab? Sabko chup kara diya maine apne kaam se’. You mentioned that passenger amenities were also your priority. But there is a huge clamour against the sharp decline in the quality of food served to passengers.

I don’t deny that, though the problem is broadly in the northern part. What has happened is that P Chidambaram as finance minister imposed service tax on railway caterers. And since we would not allow them to increase prices, contractors could make profit only at the cost of quality and quantity. Some of them even withdrew from the business. But now I have suggested a cut on frills like ‘soup/woup’ and to ensure there is no compromise on the essentials. ‘Sada do lekin solid ho’, that is the instruction.

What about hygiene, the lack of which is a major deterrent to many who would like to travel by rail?

Yes, that is a problem. I will not deny that. But passengers are also to be blamed. We took steps to improve the situation, but a lot remains be done. We have also done a lot to ensure the security of passengers —from CCTVs and luggage scanners to more cops on trains and sniffer dogs.

You are partial towards Bihar.

People who say such things don’t understand that Bihar was neglected all these years in terms of central projects. Railway projects that have come up there can be catalysts for development. Or else, the entire state will be in the grip of Naxals. Who will want this? And my support for Bihar is not at the cost of any other state.
There have been other railway ministers before you from Bihar.

I would not like to comment on what they did to help the state. There are records. But the role of Nitish Kumar as chief minister has been very negative. He has been a huge obstructionist and has created problems that have delayed projects. I have to get the Centre to bring in a special law to help railways get around the problems he created in acquisition of land.

Are you going to miss the railways? Will you like to continue in the same ministry after the polls?

Who knows what is going to happen? I am hopeful of UPA’s return to power, but there is no guarantee I will be in the same department. In any case, I am not hung up on the railways. I will miss the people with whom I worked. I will miss the huge workforce who supported me. But I have the satisfaction that I have proved all my rivals wrong, who dismissed me as a non-performer.

Medical Industry Diagnosis: Triage for Health Care and New Vision for Life Sciences

2009-02-13T00:15:00.000-08:00

By M H Ahssan

If inefficiency is the path to opportunity, the future for India's health care sector may be bright. Just how close that future is varies by market segment. In the case of life sciences, its arrival could coincide with industry participants' greater willingness to accept risk, while health insurance could seize its day amid rising treatment costs. As for health care delivery's chance to shine, that could be more in the distant future, stymied by a lack of infrastructure investment and trained professionals.

On the one hand, medical tourism is on the rise. On the other, tuberculosis seems unstoppable in certain states. "Paradox is one characterization," said Bhaven Sampat, professor of health care management at Columbia University and panel moderator. "But challenge is another. Like every rapidly developing country, India is faced with the challenge of how to manage growth with distribution, how to balance equity with efficiency, and how to ensure that as parts of the Indian health care sector enter the worldwide elite, the masses are not left behind."

An assessment of Indian health care reveals poor performance on the key dimensions of coverage, purchasing and delivery. "Despite India being the largest exporter of generics, most people have never seen a tablet," said Rajiv Gulati, director of India-China strategy at Eli Lilly. "Patients from the U.S. and the UK come to India for treatment, but approximately 70% of Indian patients have never seen a doctor."

'A Good and Sustainable Growth Rate'
But everything starts somewhere, and "despite the woefully inadequate infrastructure, the health care sector is growing at a compound annual growth rate of 15%, which is a good and sustainable growth rate due to the ever-widening gap between demand and supply," said Suneeta Reddy, finance director at Apollo Hospital Enterprises, a network of 41 hospitals with a combined 8,000 beds.

India has only 1.5 beds per thousand people, while China, Brazil, Thailand and Korea have an average of four beds per thousand people. Investments of $20 billion may be needed over the next five years to increase the availability of doctors and hospital beds. In the meantime, changing demographics and disease profiles, as well as rising treatment costs, may cause spending on health care delivery to double over the next 10 years. Reddy noted that one driver of this growth is "the move from chronic to lifestyle diseases. India is becoming the diabetic capital of the world and Indians have a predisposition to heart disease." Other drivers include a demand for tertiary care that had not existed before, medical tourism representing a $2.5 billion dollar opportunity, and the growth of preventive health care, she said.

In addition, consumers have become far more knowledgeable about what is available in the market and more demanding about quality and service. The typical Indian is looking at clinical outcomes, with a focus on success rates and infection control similar to those of their U.S. counterparts, Reddy said. Two-thirds of India's spending on health care is out-of-pocket, due in large part to an inefficient and inequitable coverage and prepayment system. Despite this, Reddy hopes that rapid growth in the insurance sector will "necessitate a credible provider network to grow simultaneously."

For now, though, the health care paradox is entrenched. In a nation of 250 million cell phone users, there are no statistics on immunization control, noted Prakash Khubchandani, founder and managing director of KrimsonHealth, a developer of healthcare infrastructure based in Mumbai. He linked this to the nation's acute shortage of medical professionals and stated that "if we can increase education levels to what we are gearing up for over the next decade, India can be the next health care superpower." However, education is not the only hindrance. Primary health care and immunization programs fall on the government, whose infrastructure is inadequate. Forty percent of primary health centers are understaffed. Asked whether this was a technical issue or a matter of priorities, Khubchandani pointed to a "lack of private-public partnerships, policy regulations and proper regulatory authorities."

Reversal of the Brain Drain
Yet whereas the lack of opportunity often takes people overseas to find their careers, "the brain drain process is being reversed at a very rapid pace," Khubchandani said. "In the past, India lacked the education and paying capacity and people often went abroad to make the right kind of money." He noted the experience of a 750-bed hospital being built in Mumbai. Owing to the shortage of domestic professionals, foreign doctors are eligible to apply. To make the move to India more attractive, foreign doctors are offered amenities, including apartments, and are guaranteed five-year contracts.

"The lack of professionals directly correlates to the number of colleges, which are extremely few and difficult to set up," Reddy said. "Health is a state subject and therefore government permission is required for the setup of any medical or nursing facilities. This is a dichotomy that needs to be addressed in order to meet India's health care aspirations." That said, India offers an attractive value proposition for doctors based abroad. Its private-sector infrastructure and clinical outcomes match those of developed nations. Patient volumes are large, living standards are comparable and, most important, doctors don't need to set aside large amounts of their salary for legal insurance.

To stimulate a more universal growth and radically improve the quality of health care, the panelists added, the government needs to encourage private investment, define and enforce minimum standards for health care facilities, facilitate the supply of quality manpower, support the growth of insurance, and reform the government's role as payor and provider.

For many years, health insurers were reluctant to enter the business because of a one billion rupee capital requirement and unattractive market conditions. However, recognizing that the government would be unable to cover a population of 1.2 billion people, a bill was passed encouraging investment in the private health insurance sector and relaxing capital requirements. "But it's a complex industry that is fraught with issues," Reddy noted. "In the U.S., providers deal with corporate hospitals such as HCA and Tenet, while in India they have to deal with nursing homes that don't follow any standardized reporting procedures." This is changing as new hospitals that enter the sector look to protect their brand.

An Untapped Population
Tapping a population that has never been insured before in a market with a 35% compound annual growth rate opens the door for opportunity, Reddy said. "With this growth, there has to be a credible risk management framework. Institutions are publishing clinical protocols and insurance companies are looking at this data. Earlier, there was no actuarial data for people to price their products, but with the data now available, private insurance will offer many more products and we will see a growth in this sector."

Khubchandani was not as optimistic. He focused his argument on the inefficient coverage of the middle class and those in rural India. Over the last few years, the government has introduced several programs to subsidize villagers but "this will only increase the problem because the trickle down to the grassroots level of money is so bureaucratically dodged that the end consumer doesn't receive much," he said. "That is going to be the tremendous challenge; I don't see how foreign insurance companies are going to deal with this level of corruption."

Additionally, many Indians have shied away from medical insurance policies because of lengthy and costly claims processing. Reddy, however, believes that, in the future, "patients will not have access to hospital care without insurance claims as treatment costs continue to rise." Health insurance, she added, "was subsidized for a long time and the loss ratio was 200%. Currently the loss ratio on corporate health care is 100% while retail is only 60%. People are realizing that they need to be honest and hospitals are recognizing that they need to be transparent if they wish to get their money back to make this system work."

On the provider side, panelists said, more efficient delivery can be achieved by giving greater autonomy to government hospitals, forming public-private partnerships and focusing government effort on public health and rural primary care. There has been a distinct shift from public to private health care over the last decade; patients turn to private providers for most of their needs because doctors and medicines are more easily available and the quality of care is better.

Khubchandani said his group has been exploring partnerships with public hospitals, which often are mismanaged and lack adequate infrastructure, manpower or equipment to sustain patient volumes. "The red tape is so colossal that it is incredibly difficult to do these kinds of partnerships without government policies in place. There has to be an effective way to get around this roadblock." Reddy said the private sector will spur the necessary changes. "There are clear inefficiencies in the public sector, such as technology absorption, lack of adequate reward for doctors, lower quality of clinical outcomes, and absence of right to second opinion," she noted. "The private sector addresses these issues. You can't blame patients for wanting to access better levels of care."

A Need to Embrace Risk in Life Sciences
If the future of health care delivery in India remains a still-distant promise, little more than a change of mind-set stands in the way of the life sciences sector. Cost and competitive pressures on Big Pharma and India's strengths as a low-cost location combine to present huge opportunities, according to panelists at the Harvard Business School India Conference. They advised India's life sciences entrepreneurs to shed their "service" mind-set and embrace risk, while tapping into the emerging "innovation ecosystem."

Rashmi Barbhaiya, CEO of Advinus Therapeutics, a research-based pharmaceutical company in Bangalore and Pune, noted that Indian life sciences entrepreneurs "generally like to follow rather than do something different and take risks." While Indian pharmaceutical companies have demonstrated their success with generic drugs, he said, they have to make the transition from being a service provider to being an innovator. He added that he's often asked about the challenges Indian companies face from their Chinese counterparts. "When India makes the transition from service to innovation, U.S., Japanese or European companies will come to India, and [India] will not have to worry about China."

Shiladitya Sengupta, a professor at Harvard Medical School, said he doesn't like seeing "90% of research dollars go to 10% of the population." From his point of view, technology is the key to providing affordable health care to the five billion people "at the bottom of the pyramid." Sengupta encountered skeptics when he helped found Tempo Pharmaceuticals, which uses proprietary nanocell technology to create medicines at a fraction of the price of branded products. Tempo, which licenses its nanocell technology from the labs of cofounder Ram Sasisekharan, a Massachusetts Institute of Technology professor, has an asthma drug that will go into trials next year, and the company has raised $22 million in venture capital.

Tempo's asthma drug uses off-patent ingredients to lower production costs to about a tenth of that for Advair, a $4 billion GlaxoSmithKline brand that is the market leader, Sengupta said. Tempo is currently developing nanobiology-based drugs for oncology, rheumatoid arthritis, atherosclerosis, inflammatory bowel disease and other diseases.

From Bench to Bedside to Market
Health care solutions for underserved markets like those in India should not just be affordable and accessible, but also "translatable and scalable from bench to bedside and to market," Sengupta noted. In another venture, he is working on developing low-cost diagnostic kits for markets such as India. "A glucose meter costs about $350 in the U.S.; a hemoglobin injection kit costs $50 to $100. You have to actually price it at 20 cents. Those are business opportunities."

A survey of India's research and academic infrastructure conducted by Sengupta to support the development of new drugs and medical devices yielded a list of 300 universities and "a similar number of national institutes of excellence," but without any connectivity. Subsequently, he brought together heads of universities and government officials to create a strategy for collaboration and new institutions.

Within two years of launching this effort, Sengupta won Indian government approval to set up two organizations -- the Translational Institute for Health Science and Technology and the UNESCO University of Biotechnology, which received funding from the United Nations agency. Among the institutions in the pipeline over the next five years are a stem cell institute, four national institutes of pharmaceutical sciences, a national institute of medical genetics, an animal biotechnology institute, a marine biotechnology institute, three molecular medicine centers and an agri-food biotechnology center, he said.

According to Sengupta, India currently needs 5,000 PhDs annually but produces only 1,500, "most of whom are of questionable quality." He said he and his colleagues have identified areas of need in teaching, R&D, testing and validation, manufacturing, regulation and marketing. The talent needs include biologists, medicinal chemists, molecular biologists and organic chemists, he noted.

From Generics and Low Costs to Development
Rakesh Bamzai, president of marketing at Biocon, a biotechnology company in Bangalore, said new doors opened for the Indian life sciences industry three years ago after the Trade Related Intellectual Property Rights agreement brought India's patent laws closer to those of the United States and Europe. "Over the years, India has focused a lot on generics, big volumes and low-cost manufacturing," he said. "But after 2005, people are looking at more and more development. Research is still a big dream for companies in India, but development is a reality."

Bamzai said India is also emerging as a big market for clinical development. Biotech and pharmaceutical companies, he added, are extending product life cycles by looking at the development of other indications of existing products.

Already, India has emerged as a dominant player in many pharmaceutical segments. According to Bamzai, Biocon is the world's fourth-largest producer of human insulin; Biocon and Wockhardt, another Indian pharmaceutical company, make India the third-largest producer of human insulin. India is also the "leading maker of anti-diabetes drugs; we have a 20% market share in anti-retrovirals and a 40% share in hypercholesterol drugs," he added.

India's R&D labs are also cranking up 30% of the abbreviated new drug application filings in the United States, he said. And they file half the "drug master files" -- submissions to the U.S. Food and Drug Administration with information about facilities, processes or articles used in the manufacture and storage of drugs.

Indian companies also have 40 to 50 new chemical entities under development, said panelist Anuradha Acharya,CEO of Ocimum Biosolutions, which has offices in Indianapolis and Hyderabad. She described her firm as a "global genomics outsourcing partner for discovery, development and diagnostics" for pharmaceutical companies. She said more than three-fourths of the top 50 pharmaceutical companies are doing clinical development in India.

Besides supplying the developed world, Indian pharmaceutical companies are successfully tapping markets in Syria, Iraq, Iran, Azerbaijan and Algeria, Bamzai said. "If you see the [profit-and-loss statements] of companies that are doing well in India, it is because they are doing better in these countries. The values are higher and entry barriers are low in these markets."

Spotting Opportunities in Big Pharma's Challenges
Acharya, who returned to India from the United States to found Ocimum in 2000, has already made three international acquisitions --Gene Logic Genomics in the United States, Isogen Life Science in the Netherlands and the genomic diagnosis business of MWG Biotech in Germany. Previously financed by the International Finance Corp., the World Bank's private equity arm, Ocimum recently raised $17 million in venture capital.

"It's the big firms that are feeling the pressure and that pressure is becoming opportunity for companies like us," Acharya said, adding that the Indian cost arbitrage opportunity "is still a big attraction." Preclinical trial costs in India are about a tenth of what they are in developed countries, while clinical trials could be done for half the cost, she noted, citing research by Rabo Finance of the Dutch Rabobank Group.

According to Acharya, the top drivers for Indian life sciences companies are drugs going off patent, workforce reductions at Big Pharma companies, and the advance of "personalized," genomics-based medicine. Also creating opportunities are such trends as a shift in focus from "treating sickness to preventing sickness," pharmaceutical companies' preference for being "virtually integrated" rather than fully integrated, and a change in mind-set from being "U.S. centric to global centric."

As for seizing such opportunities, Barbhaiya of Advinus Therapeutics said that rather than adopting a "Just Do It" philosophy, it would be better to be able to say, "Just Done It." He reminded the students in the audience that, "If a non-MBA like me can do it, I am sure you all can do it as well."

Bharti Group's Sunil Bharti Mittal on Lessons of Entrepreneurship and Leadership

2009-02-13T00:09:00.000-08:00

By M H Ahssan

When Sunil Bharti Mittal started in business more than 30 years ago in Ludhiana in Northern India, he borrowed $1,500 to make bicycle crankshafts. Today, he heads the $5 billion Bharti Group, whose flagship company, Bharti Airtel, is India's largest mobile phone operator. Forbes magazine, which estimates Mittal's net worth at some $11 billion, ranks him among Asia's self-made billionaires. Mittal spoke with HNN in an informal meeting, explored on the leadership and entrepreneurial lessons he has learned during his career. Among them: When faced with a choice between perfection and speed, choose speed; perfection will follow.

HNN: You started in business in 1976 at age 18, with $1,500 that you borrowed from your father. I believe your first business was making bicycle crankshafts. Could you tell us about your earliest entrepreneurial experiences and what you learned from them?

Mittal: I was raised in Ludhiana, a very industrious town, where almost everybody is an entrepreneur of some kind. It is the bedrock of small-scale industry, the principal industries being cycles or cycle parts, hosiery, or yarn to make knitwear, and light engineering items. Coming out of college with a small amount of capital, one could only do what was allowed in the ecosystem there. I decided to manufacture bicycle parts, in particular crankshafts. It was a hot forging unit that I put up, and that's where I cut my teeth on business.

HNN: You moved to Bombay in 1980. At that time, your business plans were a little more ambitious. Could you tell us a little bit more about your business ventures at that time?

Mittal: I realized that one could probably make some modest success out of what I started to do in bicycle parts, but there was a limitation. At the end of the day, the manufacturers of bicycles decided how much -- at what price you could supply to them. And just making shafts wouldn't have made you a player of any size or scale.

So, it was very clear that I had to get out of Ludhiana into a much bigger place, Delhi or Mumbai -- Bombay at that time. And I spent about two, three years in Bombay importing a variety of products -- steel, brass, zinc, zip fasteners, plastics -- and eventually bought India's first portable generator. And that was the first turning point in my career.

HNN: Was that the venture with Suzuki?

Mittal: Yes, that venture was with Suzuki. That's how I got in touch with the Japanese, spent two to three years with them, learning their techniques and practices. I internationalized my concepts, learned the art of diplomacy in international trade. I would say that was the period which gave me opportunities, on the one hand, to make some significantly higher amounts of money than I could have done in cycle trade. More importantly, it gave me independence and experience in marketing, brands, international trade. That held me in good stead later on.

HNN: What were the main lessons you learned at that point in your career?

Mittal: I think, two or three things. I realized very early on that you need to tie up with some large entities -- much, much larger than yourself. From there on, we set up a string of partnerships, and they were all with very large companies, multi-billion dollar corporations: Suzuki, AT&T, Siemens, Lucky Gold Star (now LG). Suzuki Motor Company was there, of course. We also partnered with British Telecom and Telecom Italia.

So, that is the course I followed: Tie up with large companies. It's easy to say, but large companies intuitively don't ally with small companies or entrepreneurs. So, one had to persuade these large companies, assure them that they needed to be in the Indian market. We also had to convince them that we had a high governance structure despite being a small company, and give them the comfort to join hands with us to exploit and come into the Indian market together.

HNN: How did you enter the phone business?

Mittal: That, I would say, was happenstance. In fact, you could call it an accident, because the government banned the import of generators. One fine day, there was no business. All the business that I had developed was gone. My beat was Japan, Korea, Taiwan. I went back into those areas looking for a new product. And one of the theories that I'd built around my entrepreneurship was to do things that have not been done before. Because if you are competing with the big boys in areas where they are strong, there's no chance for you to succeed. My quest to look for the next big breakthrough product -- which also didn't need too much capital -- was met in Taiwan at a trade fair when I saw push-button telephones. I brought India's first telephone set replacing the rotary phone.

That became a huge success, and my romance with telecom started thereafter. So, it went onto cordless phones, answering machines, fax machines, and then India's first mobile phone.

HNN: India in those days was such a highly regulated market, and an especially challenging environment for somebody who wanted to be innovative. How did you navigate your way around those currents?

Mittal: Tough, but as an entrepreneur you get trained on everything. You understand import policy, you know how customs work, you know excise laws. You practically learn to do everything yourself. You hit roadblocks, you have difficulties. I had to open my own LLC, take my own consignment, taking the material on trucks myself to the market.

An entrepreneur gets a huge amount of experience. Then, you also know how to deal and move into the system. And the good news is that my excellence in the entrepreneurial area truly started happening alongside the breaking down of these barriers. The more the barriers dropped, the more we surged. So, 1992, in that sense, was the turning point, when the Narasimha Rao government along with now Prime Minister Manmohan Singh -- then finance minister -- decided to open up, [and] about 10 to 20 of us young entrepreneurs really moved in. Each one of us has created a fantastic business out of that.

HNN: In concrete terms, how did the business environment change so that it allowed this entrepreneurial surge to happen?

Mittal: Take the case of telephone manufacturing. The government completely regulated what you could import, what you could not import, how much you could manufacture. I got my first industry license to make cordless telephones; it had a limit of Rs. 2 crores of sales. I mean, it's ridiculous when you go back -- half a million dollars today. You could not manufacture more than two crores of sales. Now, if you see that number, what does it mean? Sub-scale operations, [a] small, tiny factory, and you don't manufacture telecom products like that. It's not a small-scale factory that you can put up. Suddenly, one day, the government said, "No licenses required." From controlling what you could do [snaps fingers] it was gone in one day. That, to my mind, was the first time the entrepreneurial energies were released into a more constructive arena of marketing, branding, doing the right things.

HNN: In just about 10 years, you have built Bharti into India's largest mobile phone operator. How did that come about? What are some of the main lessons you learned from your experience that could be helpful to other entrepreneurs?

Mittal: I think, very clearly, we could have never claimed that we had more capital or better technologies, because everybody was buying the same technologies; GSM is a set standard. We couldn't claim that we had massive brand or distinguishing strength in the market. The only thing that we needed on our side was speed, and we used that to great effect.

We were in the market ahead of competition. We brought new products on the market ahead of competition. We rolled out our networks. We begged, borrowed, stole, put things out. And while they were never near perfect, they were first. And that gave us, to my mind, a lot of advantage.

Our theory was: If you're caught between speed and perfection, always choose speed, and perfection will follow. You never wait for perfect positioning, because in business you don't have the time; especially if you're small, you can't do it.

And the large companies took their own time. They were months behind us, and that made us pick up a market niche for ourselves, which in turn made us big.

HNN: How did you position yourself against your competitors? Was your strategy based entirely on speed, or did you also have other tactics?

Mittal: No. I think one thing was that we were very, very passionate about our business. This was the only business we were doing. Other competitors had other businesses and this was one of the new businesses they were starting. Speed, new products into the market, close to the customer, knowing what the customer wants -- I think we lived that whole space ourselves, day in and day out. And that made all the difference.

HNN: How do you see Bharti's future in the mobile industry? I know you tried recently to merge with MTN in South Africa, but that merger didn't work out. What were your strategic goals for that merger, and what else might you be considering for the future?

Mittal: We believe that while India is not done in so far as rolling out networks, the process is done. We'll keep on adding two and half or three million customers a month until we get to a point where India has seven or eight million customers, management teams are in place, brand is very strong, distribution is in place, the company has no debt.

So, India is done. Now, what does the senior management team do? You have to create new opportunities of growth. And they lie in other emerging markets -- therefore Africa, the Middle East. And we have today a business model which is the best business model in the world -- the lowest costs with the highest quality.

And I think that model is ready to go out. So, we would like -- whenever we get an opportunity like MTN -- to seriously attempt to put some assets together.

HNN: Would you look for partners in other parts of the world?

Mittal: Well, we keep on getting shown opportunities around the globe, and we remain open.

HNN: Let's turn now to the retail industry, where you have a partnership with Wal-Mart. Help me understand how you evaluated the retail opportunity and what your thought process was in making the decisions you did.

Mittal: We wanted to do something more in India. As we grow telecom outside of India, I think there are opportunities in India. And one of them, we felt, was in the area of retail. India's retail needs to get organized, and it will one day. It may take its own time, and everything in India does take time, but we will organize the retail to a point where $400 billion will come through organized retail stores.

We had opportunities to tie up with Carrefour, Tesco and Wal-Mart. And in fact, we were almost in the signing stages with Tesco when the Wal-Mart meetings started to happen and we liked the store model, we liked the same low-cost delivery mechanism, the values of Sam Walton. So, I would say that we are very, very pleased to venture into this area.

It has its own issues. Like telecom, this has resistances built in. There are barriers, there are issues. And we enjoy properly dealing with these issues.

HNN: Speed was the hallmark of you experience in the mobile industry, but of course the retail market is very, very different. How do you deal with those challenges?

Mittal: It's frustrating. I must confess that it's going much slower than what we originally thought. Speed is still what we like, but this is now a large company. We have a tie up with a large company. They believe that you need to tie up a lot of loose ends before you launch yourself.

The first three stores that have opened up with the assistance of Wal-Mart demonstrate that planning does make a difference. So, we are spending a lot of time planning; it's not wasted time. The supply chain is being built. The first distribution center has come up. The three stores are having in-fill rates of 95%. And they're having sales per square foot of 30% to 40% higher than the other top two or three operators in the country.

So, the start is good. It is surely slow. But, I think you'll start seeing some action fairly soon.

HNN: Are any political changes needed to make that happen?

Mittal: FDI must be allowed. We would rather have Wal-Mart right in there with equity rather than providing franchise support from the outside. So, we would like FDI to open up.

HNN: You have been quoted as saying that India needs a "football revolution." How exactly would that come about?

Mittal: It's a shame, and it in some sense saddens my heart that a country like India does not have any representation in world soccer. It's a sport which is watched by the largest amount of people in the world -- we're talking about hundreds of millions of people, topping over a billion people who watch soccer.

HNN: Did you play soccer growing up?

Mittal: No, we played everything else that kids in middle-class families do. I won't say football was my main sport, but it is for one of my sons. Both my sons play. My nephews play. And my son plays fairly competitive football. I enjoy watching it with them.

It's also, to my mind, a sport which can create a revolution of sorts in a country like India, very soon. One ball, one open field, a few kids, and it starts off. There are no expensive kits or equipment required to support this game.

And I also believe that India had a football base earlier on. In 1950, they were in the World Cup. They could not play because they didn't have shoes. They refused to wear shoes and they couldn't play. That was the last time India reached that point.

I see no harm in giving it one serious shot -- of carrying an Indian team into a 20-year team. I personally believe we can do it. Ten years is good time for us to plan.

HNN: Cricket has received quite a shot in the arm with the formation of the Indian Professional League. Is that in the cards for football?

Mittal: Yes, India is a cricketing nation. It's a cricket-mad nation. I think we need an alternative sport. We need something else to offset cricket. Will football have its own premier league? It will, certainly. In fact, the IPL (Indian Premier League) is a copy of the English Premier League. And that's the fundamental basis of football.

And yes, we will see something along those lines. It'll take a long time for people to switch from cricket to football, but younger people are watching a lot of international soccer. There is going to be the European Cup in Austria a few days from now. And you can see already some fever building up in India. The timing is right.

HNN: In all the years that you have been an entrepreneur, what is the single biggest leadership challenge that you have faced? How did you deal with it and what did you learn from it?

Mittal: It's hard to put down, in a single event, what would be the hardest decision. But, I would say bidding for a mobile license -- against all odds -- in 1992, when I was a rank outsider. I think the total sales were about $5 million in all, and going and bidding for a mobile license was tough.

But, we persevered, we went into it against the might of the biggest of the biggest in the country and in the world. And we ended up getting a license. More importantly, not only a license -- we rolled out India's first network and have now become India's largest.

So, that starting point of having, in a sense, defied the logic of, "This is only for the big boys. You need deep pockets. Don't even look at this." That defiance of the conventional wisdom, to my mind, was very important -- and being determined to challenge that thought that you can't do it as a young entrepreneur.

Rainfall Insurance in India and Bank Lending in Pakistan

2009-02-12T23:45:00.000-08:00

By Sudhir Mishra

In developing countries, economic behavior does not always follow patterns set in developed ones.

Two papers presented at a conference on India's Financial System explore such examples. One asks why the poorest Indian farmers choose not to purchase inexpensive rainfall insurance that could help them avoid starvation in a drought. A second explores an unexpected phenomenon in Pakistan, when banks failed to increase their business loans despite a rich increase in capital after the September 11 terrorist attacks. The conference, held at Wharton in April, was organized by the school's Financial Institutions Center with the Centre for Analytical Finance at the Indian School of Business in Hyderabad and the Stockholm-based Swedish Institute for Financial Research.

Rainfall Insurance for the Most Vulnerable
Farming has always been risky, but in developed nations, farmers use futures contracts, insurance and other financial products to make it through the lean years.

One might expect poor farmers in a developing country like India to jump at the chance to do the same. But when a company started offering inexpensive rainfall insurance several years ago, fewer than 5% of the eligible farmers bought it.

Defying expectations, the insurance was more likely to be purchased by the farmers who needed it least, while it was rejected by the farmers at greatest risk of financial catastrophe if the rains failed. "Participation rates were lower among the more vulnerable households," said James Vickery, a research economist at the Federal Reserve Bank of New York, who outlined his paper entitled, "Patterns of Rainfall Insurance Participation in Rural India."

Why? The answer should make any marketing or advertising executive smile: Many potential customers simply didn't understand the product -- not well enough, at least, to dip into their severely limited resources to pay for it. With better marketing and a few modifications to the policies, it may be possible to get more subsistence-level farmers to embrace rainfall insurance, helping to soften periodic famine in some of India's poorest areas.

"This type of insurance is in its nascent stages," said Vickery. "The goal of the product is essentially to insure against insufficient rainfall during the monsoon season.... It may not be very well understood." His co-authors are Xavier Gine of the World Bank and Robert Townsend of the University of Chicago.

While harvests can fail for many reasons, weather is the most common. Because a drought hits an entire geographical area, it is hard for a stricken family to get help from relatives and neighbors who most likely are suffering as well. Subsistence farmers in India try to reduce drought risks by scattering plots over as wide an area as possible and emphasizing hardy varieties of crops. But there is a cost: They avoid varieties that might be more productive but are more sensitive to weather.

For a number of years, the Indian government has tried to ease the problem with the National Agriculture Insurance Scheme. Farmers who take out crop loans for seed and other purchases are required to carry this insurance, and it is available to others as well. Payouts are based on measured crop yields in designated test plots. But participation has been very low -- just 9% of the 138 million rural households.

The system has a number of problems. It takes a long time for claims to be paid, for example. And the geographical areas covered are so large that farmers worry that test plots may not suffer the same low yields their own plots do, denying them needed insurance payouts. In recent years, a number of insurers have tried to resolve this problem by offering insurance based on rainfall measured at gauges long operated by the Indian Meteorological Department. This provides a simple, trusted, transparent and low-cost index on which to base insurance claims.

The study looked at "micro-insurance" policies developed by ICICI Lombard with help from the Commodity Risk Management Group of the World Bank. The product was marketed in two rural regions by BASIX, a micro-finance institution that had been offering farmers small loans for years. The policies were first available in 2003; the study focused on 2004.

The policies were designed for the two main cash crops in the area, castor and groundnut, and were aimed at farmers with two to 10 acres and annual incomes of $375 to $750. A $5 policy covered one acre, and offered a maximum claim of about $150. Payments were based on the degree to which rain fell short of given thresholds during three stages of the growing season from June through September, or when there was too much rain. In Narayanpet, a mandel, or county, in the Mahaboobagar district, insured farmers received $43.50 an acre in 2004, for example.

Who Bought and Who Didn't
In 2004, policies were bought by 315 farmers in 43 villages and covered 570 acres, giving the average farmer $240 in maximum coverage. The researchers conducted a survey at the end of the season to find out why some farmers bought insurance and others did not. They questioned 1052 households in 37 villages. In the surveyed area, only 267 of 5,805 eligible households bought the insurance -- 4.6%.

Surveyed households had median landholdings of four acres, liquid assets of about $200 and net worth of less than $2,000. Household heads had a median of 3.3 years of formal education.

The survey found a number of differences between farmers who bought insurance and those who did not. "Buyers are around one-third wealthier, report around 50% more land and nearly twice as much in liquid assets," the authors write.

A test asking farmers to choose between hypothetical bets found that insurance buyers were less concerned about risk than non-buyers. About a third of buyers were members of groups that shared wells, compared to 4% of the overall population, and 46% of buyers had outstanding loans from BASIX, compared to 7% of the overall population. "Buyers are twice as likely to be members of the area Gran Panchayat (local council), and are also more likely to self-identify as 'progressive' households," the study found.

Among the households that bought insurance, 65% cited reasons such as reducing risk and assuring a harvest income. In general, insurance was purchased by farmers who, compared to non-buyers, were in a better position to make it through a drought. Theory predicts the opposite.

Why did the poorer farmers avoid insurance even though they needed it more? "Strikingly, the most frequently cited reason among non-purchasers is that the consumer did not understand the insurance product," the authors write. About 25% of non-purchasers gave that reason, while 21% said they could not afford the premium. Another 24% worried there was too big a chance they would not receive an insurance payout, citing reasons such as the rain gauge being too far away.

Higher participation was found among farmers belonging to well associations, those with loans from BASIX and those who said they trusted BASIX.

The authors concluded that "even though insurance is available in principle to all households in the village, the households' familiarity and trust in the insurance provider constitute the most important determinant of households' purchase decisions." Basically, the study found that insurance was purchased by the more sophisticated farmers who could afford to take a chance on a new product.

The authors suggested that some modest changes would encourage more farmers to buy insurance. Since farmers are short of cash during the growing season after paying for things like seed, one improvement would be to make insurance payouts immediately after each of the three phases of the growing season rather than in November, as was done in 2004. The insurer also could let farmers buy insurance on credit, allowing them to pay off the loans after the harvest. "A household with more land and more wealth is more likely to purchase insurance," Vickery said. "That seems generally consistent with the idea that credit constraints are important."

Farmers also would be more likely to buy insurance if the product were better explained. In 2004, the product was offered in marketing meetings with much of the explanation provided by other farmers who may not have understood the product very well themselves. "Early adopters of insurance are likely to be households where the cost of experimenting with the insurance is relatively low...," the authors write, adding that "over time, lessons learned by insurance 'early adopters' will filter through to other households, generating higher penetration rates among poor households."

Lending in Pakistan and "Demand Shock"
Money flows to where the potential returns are greatest. Except when it doesn't.

In recent years, economists have puzzled over why money is flowing out of rapidly developing countries -- through enormous foreign investments in U.S. Treasury bonds, for instance. "Developing countries, especially the higher growing countries such as China and India, are actually exporting money back to the developed countries," said Bilal Zia, economist at the World Bank's Development Research Group.

Theory and history predict the opposite: Capital should flow from the developed countries to the developing ones, where greater room for growth offers bigger investment returns.

What causes this unexpected pattern? For an answer, Zia and two colleagues looked at bank lending in Pakistan after the September 11 terrorist attacks in the U.S. They found that conservative bank lending practices impede developing countries' ability to make the best use of growing capital reserves. "Banks are just not capable; they don't have the ability to absorb the capital that's going in," Zia said. Because companies cannot get bigger loans, economic growth is slowed.

The results are reported in a paper titled, "Dollars Dollars Everywhere, Not a Dime to Lend: Credit Limit Constraints on Financial Sector Absorptive Capacity." Co-authors are Asim Ijaz Khwaja of the Kennedy School of Government at Harvard and Atif Mian of the Graduate School of Business at the University of Chicago.

The researchers chose Pakistan because it offered a good example of a "demand shock" -- a rapid economic change that provides good before and after data. Prior to September 11, Pakistan was in economic trouble, largely because of international sanctions imposed after the country exploded a nuclear bomb in 1998. Annual economic growth had fallen to between 3% and 4%, compared to 6% in the first half of the 1990s.

This quickly changed after September 11 when Pakistan was seen as a key ally in the war on terrorism. "This was primarily due to the removal of international financial sanctions, a reversal of capital flight, and a significant increase in international economic assistance," the authors write. "The net result was an unexpected surge in the supply of liquidity, a sharp drop in real interest rates, and a rise in aggregate demand."

Between June 2001 and June 2003, remittances from Pakistanis living abroad increased by 300%, and interest rates fell from 11% to 2.5%. Foreign exchange reserves quintupled in less than two years. Yet the amount of bank lending to companies remained virtually unchanged. "Given the low cost of funds and positive demand, one would expect an increase in overall bank lending to firms, absent any lending constraints," the authors write. "In reality, the macro evidence is extremely stark and shows little change in corporate lending, despite such a large and positive net demand shock."

Conservative Lending Practices
The problem, Zia and his colleagues conclude, was conservative lending practices. Rather than looking at a borrower's potential for growth, for example, banks tend to base lending limits on the borrower's existing collateral. "Credit limits, once set, are actually very sticky," Zia said, explaining that banks are reluctant to raise them.

"The central bank's 'prudential regulations' provide strict guidelines to banks in terms of how credit limits should be determined for applicants," the authors write. "These guidelines are very conservative in terms of collateral requirement, and bind a firm's credit limit to its past cash flows. For example, total unsecured lending of a given firm cannot exceed 500,000 Rs (about $8,500)." In addition, total debt is kept very low relative to a company's total equity, they found.

Many private banks are even more conservative, though certain types of borrowers have better access to loans. Exporters, for example, often have higher credit limits, since they are doing business with foreign firms with good reputations, the authors find. Similarly, large firms have better access to credit than small ones, since large ones have better reputations and more collateral.

Excessively tight lending practices have a number of negative effects. Among the most important is the income lost because companies cannot get the capital they need to grow. The authors estimate this cost at the equivalent of 2.3% of Pakistan's gross domestic product in 2000. "This is a huge loss," Zia said.

In addition, according to the authors, reserves that are not disbursed through bank loans become easy money that fuels risky investment. In the two years following September 11, stock prices in Pakistan increased five-fold, while housing prices grew at well over 100% a year.

"Evidence that this was a speculative bubble is becoming increasingly apparent with the recent collapse of the real estate market and a noticeable cooling off in the equity markets," the authors say, adding that to get the fullest benefit from economic growth, developing countries like Pakistan, China and India need to find better ways to put capital to work at home, rather than investing it overseas.

Catastrophe Modeling: A New Approach to Managing Risk

2009-02-12T23:41:00.000-08:00

By M H Ahssan

BOOK REVIEW
Before Hurricane Hugo swept through Georgia and North and South Carolina in 1989, the insurance industry in the U.S. had never suffered a loss of more than $1 billion from a single disaster. Since then, numerous catastrophes have exceeded that figure. Hurricane Andrew in 1992 caused $15.5 billion in insured losses in southern Florida and Louisiana. Damages from the Northridge earthquake on the Western coast of the U.S. in January 1994 amounted to $12.5 billion.

Residential and commercial development along coastlines and areas that are prone to earthquakes and floods suggest that future insured losses will only grow -- a trend that emphasizes, as never before, the need to assess and manage risk on both a national and a global scale. "People today are asking the question, 'How do we scientifically evaluate catastrophic risk?'" says Howard Kunreuther, co-director of Wharton's Risk Management and Decision Processes Center. A new book -- edited by Kunreuther and Patricia Grossi of Risk Management Solutions -- sets out to answer that question. The book is titled, Catastrophe Modeling: A New Approach to Managing Risk.

"Businesses are clearly interested in this topic because they need to know more about the nature of the risks they face, their likelihood of occurrence and the damages that may result," says Kunreuther. "Insurers are interested because they need to know what premiums to set for different types of risk in the context of their overall risk portfolio; and the government is interested because it needs to know what regulations and standards would be appropriate to lessen risk and reduce losses." Kunreuther and Grossi's book analyzes how catastrophe models can be used in these contexts.

The authors pulled off an unusual feat: They asked the three leading companies in the world that do catastrophe modeling to contribute chapters on the role of modeling in rate setting, portfolio management and risk financing. "It was a coup for us," says Kunreuther, noting the involvement of AIR Worldwide, EQECAT and Risk Management Solutions. "These companies are alone in systematically analyzing risk using data from the best scientists and engineers in the world, and providing information back to insurers, reinsurers and financial institutions."

Kunreuther had first brought these three companies together in 1996 when the insurance industry overall was still reeling from Hurricane Andrew and the Northridge earthquake. "Insurers simply didn't know how to deal with risk anymore," he says. A leading insurer had $4 billion worth of damage and its Florida office was able to avoid bankruptcy only because the parent company bailed it out. "One of the key features of our book is an analysis of ways that insurers can reduce their losses by taking certain preventative steps," Kunreuther says. "You can't reduce the probability of these events occurring, but you can lessen the damage that results from them."

Catastrophe Modeling has a larger audience than the authors initially anticipated, Kunreuther notes. It is relevant not just to insurers, reinsurers and actuaries, but also to "any business or policy maker who is concerned with catastrophes and is looking at ways to reduce risk and obtain financial protection against future losses," he says, adding that one possibility is the use of new capital market instruments such as catastrophe bonds (insurance-linked securities). And while Catastrophe Modeling focuses primarily on natural disasters, its approach can be applied to other areas -- for example to a business risk, environmental risk, or organizational enterprise risk. Indeed, the last chapter extends catastrophe modeling to terrorism, looking at the impact of 9/11 on the insurance industry, the nature of terrorism coverage, and recent developments in terrorism modeling.

EP Curves
If there is any innovation that gets people to think about risks on a broader level, says Kunreuther, it's the idea of exceedance probability (EP) curves, used by risk managers to quantify their catastrophe risk potential. Catastrophe Modeling describes in detail how EP curves are developed and their importance in managing one's risk.

For example, in Part IV of the book, Patricia Grossi and several former Wharton students used the catastrophe models to analyze the probability of an earthquake of a particular magnitude occurring over the next year on a certain earthquake fault near Oakland, Calif. Separately, a model can predict the damage from such an event that would result to homes in that area and to the portfolio of a hypothetical insurer. This data forms the building blocks of the EP curve. The same exercise is done for other possible earthquakes and the resulting information further adds to the EP curve's configuration. The model also looks at the probability of the damage or loss exceeding a certain value. "An insurer could say, 'We have insured a portfolio of homes in Oakland. What is the likely damage? What is the probability that the loss will be greater than $X million or $Y million?'" says Kunreuther. "Then the insurer prices its policies accordingly. The company could also determine if it has too much coverage, which could end up exposing it to bankruptcy.

"That is the key to everything we do in this book," Kunreuther notes. "If an insurance firm says it doesn't want to tolerate more than a 1% probability of having a loss greater than a certain amount, then the insurer has several different ways of reducing that loss. One is reinsurance. A second is catastrophe bonds. A third is mitigation," or measures taken to reduce or eliminate loss from natural disasters. Such measures can range from retrofitting unreinforced masonry buildings and developing new standards in building codes to giving tax breaks for certain property improvements. "A fourth strategy is to reduce coverage," Kunreuther continues. "A fifth is raising premiums. These approaches allow insurers to say, 'Suppose I had this portfolio of risk in a particular area. What would happen to me, and what can I do about it?'"

One of the book's most critical elements, Kunreuther adds, was the presence of a technical advisory committee of scientific experts who reviewed models constructed by the three modeling companies, including their analysis of potential losses from earthquakes to residential properties in Charleston, S.C. The companies' identities were kept confidential in order not to reveal the specifics of their estimates, and each company was given a common portfolio of risk to analyze.

Grossi, who was a Wharton PhD student at the time the book was written, then compared these models. The point, says Grossi, was "to discover the variation between results generated by each of the three models." Grossi expected that the exceedance probability curves produced would most likely be dissimilar, given the degree of uncertainty in generating an EP curve for the Charleston area -- a "low" seismic hazard region as compared to California. However, Grossi also noted that "it was important to compare the curves to discover the range in which losses would most likely fall. While each EP curve was valid, comparing the curves makes one appreciate the uncertainty in catastrophe risk and think in terms of a range of loss estimates -- rather than a single estimate."

Scarcity of Historical Loss Information
In Catastrophe Modeling, Grossi, Kunreuther and their colleagues note that governments, individuals and corporations -- particularly in well-developed countries -- often fail to prepare for major natural disasters such as hurricanes, tornadoes, earthquakes and floods. Policymakers typically are moved to action only after the disaster occurs. Yet there is no sign that natural disasters are going to let up any time soon: In the last eight months alone, hurricanes Charley, Frances, Ivan and Jeanne swept through parts of Florida, New Jersey and Pennsylvania; the Asian tsunami killed approximately 300,000 people in 11 countries; and, most recently, floods in Southern California have washed away homes and roads and cut electrical power to thousands of Los Angeles County residents.

Big disasters, of course, continue to mean big losses. Worldwide, loss figures from natural disasters during the last decade exceeded $40 billion every year but one. In 2004, the economic losses from natural disasters totaled $120 billion with $14 billion directly attributable to the December 26th tsunami in the Indian Ocean.

Because of the growing recognition that disasters can wreak enormous havoc, catastrophe modeling has already gained widespread acceptance by the private and public sectors, the authors note, and is relied upon to support a wide range of risk management strategies. One particular challenge the modelers face "is the scarcity of historical loss information. Unlike auto accidents and fires, which occur frequently and thus provide a basis for actuaries to estimate future losses," natural catastrophes offer no such abundance of available claims data.

As the book notes, while the probabilistic approach to catastrophe modeling is the most appropriate, "it requires modeling complex physical phenomena in time and space, compiling detailed databases of building inventories, estimating physical damage to various types of structures, and translating physical damage to monetary loss ..." From the modeler's perspective, the authors indicate, "the task is to simulate, realistically and adequately, the most important aspects of this very complex system."

After describing the risk assessment process in one section of the book, another section looks at how to link this assessment with insurance -- specifically, how insurers can take advantage of the scientific advances in evaluating natural disaster risk to develop strategies for reducing their losses. On one level, this translates into a very simple question concerning rate making: When an insurer decides to provide coverage for a given risk, how much should it charge? But it also raises strategic issues of portfolio management and risk financing.

Catastrophe modeling is able to examine an "appropriate mix of risk management strategies," the authors write. "An underwriter can link to a company-wide database" to determine what premium it should charge for a new account and also how this risk "correlates with others in the company's portfolio. The portfolio manager can implement underwriting guidelines to determine what premiums to charge for new policies as a function of their location and potential hazards. Different risk transfer programs can be priced and evaluated in conjunction with an existing portfolio of risk." The company can then decide "whether to reduce its exposure, raise its premiums, buy a catastrophe bond and/or transfer some risk to a reinsurer."

Linking Science with Policy
The book is divided into four parts. The first, entitled "Framework for Risk Management Using Catastrophe Models," looks at the need to manage risk; the private sector stakeholders in risk management (including property owners, insurers, reinsurers, the capital markets, rating agencies and state insurance commissioners); and the government's role in risk management. Part I also includes an introduction to catastrophe models and insurance, covering the history, structure and uses of such models; and a look at ways of quantifying the likelihood, consequences and insurability of catastrophic risks.

Part II explores natural hazard risk assessment, starting with a chapter on the risk assessment process and the role of catastrophe modeling in dealing with natural hazards. Another chapter considers the nature and impact of uncertainty on catastrophe modeling, and has case studies based on hurricane and earthquake scenarios in Florida and South Carolina.

Part III, entitled "Linking Risk Assessment with Insurance," includes chapters written by each of the three modeling firms. It covers the use of catastrophe models in insurance rate making, looking at such topics as actuarial principles and the role of regulation. A second chapter focuses on insurance portfolio management, with an emphasis on portfolio composition and catastrophe modeling along with issues regarding portfolio risk. The final chapter in this section explores risk financing, asking the question, "What risks should be financed?" It analyzes risk financing mechanisms, the costs of risk transfer and risk financing schemes.

Part IV focuses on risk management strategies using catastrophe models by analyzing three model cities -- Oakland and Long Beach, Calif. (each facing an earthquake hazard) and Miami, Fla. (subject to hurricanes). The first chapter looks at the impact of mitigation on homeowners and insurers, insurer decision processes, homeowner decision processes and the need for workable public-private partnerships. A subsequent chapter studies the impact of risk transfer instruments by developing a framework for evaluating alternative strategies, such as reinsurance and catastrophe bonds as additional sources of funding.

Notes Kunreuther: "This eight-year project with experts from the private and public sector has been a learning experience for all of us. It has highlighted the importance of trying to quantify risks while at the same time indicating the nature of the uncertainties surrounding these estimates. We view the book as a starting point for improving the risk management process by linking science with policy."

Conglomeration or Strategic Focus: Which Is the Better Choice?

2009-02-12T23:40:00.000-08:00

By M H Ahssan

The 1998 merger of Citicorp and Travelers into Citigroup created an institution with more than $700 billion in assets and operations in some 100 nations, providing commercial banking, wholesale and retail investment banking, life and property-liability insurance, in addition to other financial services. Liberalization of product restrictions in other nations has led to similar mergers and acquisitions, as well as to the creation of financial service firms of unprecedented size and scope. The economic and systemic concerns raised by these new "universal banks" are at the center of current policy debate. On the level of business strategy, however, this trend begs the question of whether or not integrating lines of business is ultimately more profitable than remaining specialized in one area—that is, whether joint producers (conglomerates) or specialists are more economically viable in the long-run.

In a paper titled, "Conglomeration versus Strategic Focus: Evidence from the Insurance Industry," four researchers set out to answer precisely that question. Written by Allen N. Berger of the Wharton Financial Institutions Center and the Board of the Federal Reserve System in Washington, D. C., J. David Cummins of the University of Pennsylvania’s Wharton School (who is also the executive director of the S. S. Huebner Foundation for Insurance Education), Mary A. Weiss of Temple University, and Hongmin Zi of Korea-based Sejong University, the study focuses specifically on the insurance industry and provides some conclusions through the use of a concept called "profit-scope economies."

While traditional studies tend to focus exclusively on production cost, profit scope economies measures efficiency by taking both costs and revenues into account. According to the researchers, this concept sets the study apart from others in its ability to account for differences in methods of production that can generate skewed information about cost. For example, joint producers might need to spend more on technology to provide "one-stop shopping" convenience for customers, but they might ultimately regain that cost through increased revenue. According to the traditional cost scope economies measurement, these producers would be viewed as having cost diseconomies; when they are evaluated using profit scope economies, however, the results are more accurately positive.

Another innovative feature of the study is its exclusive focus on the insurance industry. Although the study aims to provide answers for the finance industry, the authors have specific reasons for their choice of insurance as a subject. Like the financial industry, the insurance industry is experiencing a surge in mergers and acquisitions. Moreover, the existence of true "specialist" firms in the industry—those that focus exclusively on property-liability or life insurance—allows the researches to rely on actual data, as opposed to the kinds of hypothetical models used for studies of the financial industry. Of equal importance is the historical lack of restrictions on joint production in the insurance industry: As a result, the industry offers many examples of mature firms that joint produce, as well as those that specialize.

Interestingly, both joint producers and specialized firms have remained competitively viable in the insurance marketplace over time—an empirical puzzle that the study addresses. Drawing from a debate in the finance literature, the researchers define the problem in terms of two competing hypotheses: the "conglomeration" hypothesis and the "strategic focus" hypothesis. The conglomeration hypothesis holds that owning and operating a broad range of businesses allows firms to exploit shared resources for production, to generate revenue from one-stop shopping, to create internal markets, and to diversify risk. The strategic focus hypothesis, on the other hand, argues that maximum value comes from focusing on core businesses and competencies, and that conglomeration leads to management problems and a lack of market discipline. As the authors note, neither hypothesis alone seems to account for the success of both joint producers and specialists in the insurance industry.

The researchers approach this puzzle by estimating profit scope economies using data from 111 insurance firms that produce both life and property-liability (P-L) insurance, 293 firms specializing in life insurance, and 280 firms specializing in P-L insurance over the period 1988-1992. To account for what seems to be the competitive success of both the joint producers and specialists, the researchers also develop several hypotheses regarding firm size, product mix, distribution systems, and organizational form. They conclude that, indeed, both hypotheses hold—that joint and specialized producers are competitively viable. The catch is that the two hypotheses—conglomeration and strategic focus—seem to dominate for very specific types of firms. The authors break this down according to the following criteria:

The conglomeration hypothesis mainly applies to insurers that are large, to insurers that emphasize personal lines of business, and to those that use vertically integrated distribution systems (i.e., in which the company controls the agency).
The strategic focus hypothesis seems to hold for small insurers that emphasize commercial lines and for insurers that use non-integrated distribution systems.
These results underscore the importance of remaining focused on consumers’ needs when the question of conglomeration vs. specialization arises. For example, most commercial consumers have internal resources devoted to shopping around for a tailored product, and they purchase in a high enough volume to demand good value. Therefore, firms that cater to commercial consumers should remain focused on value and quality—or, in other words, maintain strategic focus. Likewise, if a firm caters to personal consumers, who often lack time to shop and depend on the firms themselves for information, it can more easily exploit the ideals of "convenience" and "one-stop shopping" while offering different product lines.

Insurance: Indian and Foreign Firms Test Positive for Growth Steroid

2009-02-12T23:38:00.000-08:00

By M H Ahssan

Driving through India's financial capital Mumbai, some of the brightest billboards that catch your eye promote insurance companies. Most of them represent big brands like New York Life, MetLife, Aviva and AIG. For the last five years, they have been working hard to make their presence felt in a under-insured market.

The insurance firms had little choice, considering that they had to grab consumers' attention for their brand and products. Moreover, they had to wean them away from the state-owned insurers, chiefly the Life Insurance Co. (LIC) for life and General Insurance Corporation (GIC) for non-life (or property and casualty) insurance.

The hard work is paying off. For the first time since India's insurance industry opened up in 2000, the numbers are looking up, albeit partly on investment returns. Six of the eight private general insurance companies reported net profits in 2005, in three years of setting shop against the expected five years or more. The 14 private life players are hoping to turn profits in two years or more. Normally, that could take 10 years in a new market.

And that market is growing rapidly. Total life insurance premiums grew 41% to nearly $8 billion in the financial year up to March 2006; non-life premiums grew 16% that year to about $4.4 billion. In the past year alone, private life insurers posted a whopping 85% growth in premiums collected at $2.23 billion. In the non-life sector, private players beat the industry's 16% growth with nearly 27% at $4.4 billion in premiums collected. To put that in a peer group perspective, China collected $47 billion in 2003-04, 24% over that in the year before. In India, life is roughly three to four times bigger than non-life. And there is potential within life since most consumers see insurance as a tax-saving-cum-investment vehicle rather as than a pure cover.

In December 2000, foreign delegates representing the financial services industry at the Indian Economic Summit in New Delhi had reckoned that over the next five years, private insurance companies would secure 5% of the Indian market. But by November 2005, 14 private life insurers had captured about 34% of the market. Private non-life players, fewer in number, had secured a 26% market share. These are possibly the fastest growth rates private insurance players have seen in any part of the world. In India, it can only be compared with the aviation industry, where in 10 years private firms have grabbed about 50% of the market.

Waiting in the Wings

Not surprisingly, more foreign players are waiting to enter. The Principal Group of the U.S. (already with a presence in India's mutual funds market) has struck a joint venture with two state-owned banks for a joint venture. South African Sanlam has received approval and its partner is the Shriram Group of Chennai. Others in line include AXA, Mitsubishi and Samsung. They join at least two other state-owned banks that wish to start insurance arms.

Foreign insurers have done well. Their issues are more to do with a rapidly maturing market than a nascent one. Their medium- to long-term intention is to reach out to the larger, semi-urban and rural markets with new products. The big bugbear for foreign insurance firms is ownership. They want 51% or more and that will take some time coming. For a country that has less than 1% of the global insurance pie, this may be an important trigger for further investment.

Foreign banks have been operating in India for about 150 years but were never given freedom to expand branches or access some kinds of business, like those from the government. Insurance is a different story. India had a competitive insurance market ever since the British-owned Oriental Life Insurance Co set up shop in 1823. The industry expanded as part of the private sector until 1956 when the government nationalized it. The LIC was then formed and it took over the management of some 245 companies, including 16 foreign firms.

In 2000, India's insurance industry was opened up again, this time simultaneously to new Indian and foreign firms. Present regulations limit foreign participation to 26% of the joint venture company, a problem area as mentioned earlier. This may be the only major policy obstacle over time as seen by overseas firms. Despite that, there are 27 direct insurance players in the country already with more waiting in the wings.

McKinsey's director in India and banking industry expert Leo Puri says the opening of insurance has been a smooth deregulation process. "The state mammoth, the LIC, has not been destabilized and the objective of deregulation has been met. Employment has grown and so as the insurance business."

Bajaj Allianz Life Insurance CEO and Allianz country head Sam Ghosh concurs, "The insurance sector is one of the true success stories of the ongoing financial reforms and opening up of the industry to foreign players."

New York Life International was the first U.S. insurance Co. to set up shop in India in 2000. Its CEO, Joseph Gilmour says it helped to arrive at the time the market was being privatized: "We saw that as an opportunity. It was a situation that allowed us to work with the emerging market directly to have a regime of governance that would benefit all consumers and, of course, insurance companies."

Only 22% of the insured population in India has life cover. Moreover, most of them are not covered adequately. More than 40% of insurance consumers think of it as a savings product while only 20% buy insurance on death risk considerations. Life insurance premiums contributed to less than 2% of the country's GDP (now approaching $800 billion), compared to between 5% and 10% in developed countries. But the market is growing fast.

Many experts, including the former chairman of the Insurance Regulatory & Development Authority, (IRDA) N. Rangachary, then predicted that private players (including foreign) would grab a 10% to 15% market share in 10 years. (Rangachary led IRDA until mid-2003, covering a crucial period when the industry moved from nationalization to liberalization.) Figures now suggest new players had hit 9% in the second year of operations.

The future looks brighter. According to the current IRDA chairman, C. S. Rao, "a lot of people are underinsured, yet penetration rate and coverage per capita have gone up. Since 2000, penetration levels have risen from 2.3% to 2.88% (India's population: 1.1 billion). Similarly, in terms of insurance density or premium per capita, the coverage is as high as $16.4 as opposed to $9.4 in 2002."

LIC has retained its dominance in the market with a 78% share of the life business. Private players have grabbed the rest and their share is growing. With aggressive selling and marketing tie-ups (also known as bancassurance) with public sector banks, LIC is seen as having responded well to the changing rules of the game. For instance, LIC issued 10 million fresh policies in the current year up to mid-October, a 16% growth over the previous year. Last year, it issued 2.4 billion fresh policies.

General insurance was nationalized in 1972 and the four state-owned players control around 77% of the market (as of the end of 2005). GIC, which was once the parent of the four other state-owned general insurance companies, is now categorized as a reinsurer. The four companies -- GIC, New India Assurance, Oriental Insurance and the United Insurance -- work out of nearly 4,200 offices across the country and have a direct or indirect presence in 30 countries.

For some players, the life business has grown tremendously. The largest private insurer, ICICI Prudential (a joint venture between privately run ICICI Bank and Prudential) says it grew 106% between 2003 and 2004. ICICI Prudential also has the highest capitalization, at $200 million. But non-life has grown faster. In 2004, gross premium income was up 10% (approximately $4 billion). In the year before, that market grew 21%. Private insurance players (mostly with foreign joint ventures) took their share from 9.5% in 2003 to around 14% in 2004.

Bajaj Allianz General Insurance CEO Kamesh Goyalsays volumes have helped hit the profit line early. "Private insurers have been able to make profits because the high volumes have helped leverage management expenses." He also says better spreads and reduced claims ratios contributed to companies turning profits much ahead of the five-year expected wait.

A good start has provided the confidence to think bigger. Says ICICI Prudential Life CEO and managing director Shikha Sharma, "The biggest challenge we face is to build a greater footprint with mass products. We may have to come out with different strategies for different markets." The other big challenge is to expand the very acceptance of insurance and raise its levels. "India's vast rural population, which is largely untapped, offers an opportunity as well as a formidable challenge for the new players."

In addition, there is an acceptance that the insurance companies themselves are learning. "For the new players, the first few years have been on a learning curve, with the focus being on setting up capacity and base," says Shivaji Dam, member of the board and former managing director of Kotak Mahindra Old Mutual Life (a joint venture with Old Mutual Life of the U.K.).

Non-life private players are also growing by taking bigger risks. The IRDA says much of the growth is in portfolios that are traditionally regarded as loss prone. As a result, motor insurance has grown 20%, health 27%, products like liability (directors, corporate, officers, physical products) have grown 100%. Until October of this year, private insurers had collected premiums worth $2.6 billion compared to $2.2 billion for the same period a year ago

Not surprisingly, the newer non-life players are attempting to dig deeper into existing business segments. Royal Sundaram Alliance managing director Antony Jacob says his company is gearing up to tap the small and medium business market. Tata AIG General Insurance CEO Dalip Verma broadly agrees the future lies in retail, so far considered out of reach because of high acquisition costs.

Some industry watchers say customers don't care who their insurers are. According to general insurer ICICI Lombard's CEO Sandeep Bakhshi, "We believe the private-public distinction is now over after four years. One needs to start performing in terms of level of quality. Corporate customers like to see whether new players operate with a level of integrity and the value proposition they bring."

Back in life, group insurance is a big segment. According to ICICI's Sharma, "Group accounts for about 10% of total premium generated. And many players might be using it as market strategy." Sharma admits her firm leverages parent ICICI Bank's close corporate ties in procuring corporate superannuation and gratuity accounts.

The market will open up further when consumers show greater willingness to experiment. Unit Linked Insurance Plans (ULIPs) are among the most popular. ULIPS are similar to mutual fund products where the premium is invested in various equity and bond funds in keeping with the policy-holder's risk appetite. Some players even allow for topping up the premium without affecting the sum assured or the value of the base policy. "Consumer attitudes and perception about insurance have changed," notes Bajaj Allianz's Ghosh. "Insurance is now considered a viable financial instrument to meet different needs."

The big battle for share is being fought in the institutional market. There are two components to this. The first is concerns about large organizations buying insurance for their employees. While the bank owned insurance companies, such as ICICI Prudential and HDFC Standard Life, have an edge, everyone is hitting this segment aggressively. State-owned LIC has bagged some big deals here, including one totaling Rs. 1,300 crore ($282 million) with Infosys Technologies of Bangalore, covering 1,300 of the latter's employees.

With all players investing almost uniformly in channels, the individual effort helps the collective. LIC, which pioneered the agent model, has gone from 700,000 foot soldiers or agents to more than a million. LIC also boasts a network of over 2,000 branches, 100 divisions and seven zonal offices. Your middle class neighbor may well double as an insurance agent in his spare time if he or she has a day job or it might be the only source of income. The total agent force in the country for all players is believed to be around 1.3 million, a figure that is expected to keep growing significantly.

According to HDFC Standard Life Insurance CEO Deepak Satwalekar, "As players look at ways of increasing their distribution network, offerings of various companies will become available to more people in more cities in the near future. This would mean both sales channels and service channels being set up." It also means more foot soldiers.

There are some unresolved issues here, however. Bajaj Allianz's Ghosh says that a cap on commissions paid to agents is crippling the insurer's ability to attract the right talent. "Apart from a few professionals, the majority of agency forces today are part-timers. Companies need to have the freedom to design compensation plans for agents within a given overall set of guidelines."

McKinsey's Puri agrees. "The frontline sales team needs to be adequately trained to ensure customer retention. Failure on the part of the agents affects the brand and the churn of agents is also linked to the lapsing of policies. This explains the need to drive alternate channels of distribution."

Other near-term obstacles include a 30% cap on "riders". (Riders are a sort of toppings on the pizza. Along with a basic policy, one can take additional risk covers through riders. For instance, one could buy a "critical illness" rider along with a basic policy; critical illness cover cannot be an independent policy and is capped at 30% of the sum assured.) According to Ghosh, "There is an urgent need to remove the limitation on the number of new riders that can be provided to consumers. Globally, riders have proved to be an effective tool of increasing sale of insurance products. Insurers need to be able to adapt the same model in India as well."

The biggest problem for the present is perhaps tariffs. According to ICICI Lombard's Bakhshi, "The next big step is to open up or de-tariff the market. We expect that there will be difficulty. The industry has to first reach a level of maturity -- which we now feel it has -- before detariffing can take place. Once that happens, underwriting guidelines would come into play and it will be up to each player to ensure that each line of business is profitable." Ghosh agrees. "Tariffs in a liberalized insurance market are an anachronism. Insurers will not be able to pass on the true benefits of liberalization to the consumer unless there is true competition in the pricing of all the non-life insurance products."

Yet another hitch the Indian operations of U.S. insurers face is in accounting treatment. Life insurance companies will take at least another two years to break even under the Indian accounting standards, said Sunil Kakar, chief financial officer of Max New York Life. He says overall expenses accounted for are lower under the U.S. GAAP (Generally Accepted Accounting Principles) compared to the Indian standard. This is because the U.S. GAAP allows expenses, such as first-year commissions, to be amortized over the length of the policy. But under Indian norms, companies are not permitted to defer acquisition costs -- commission rates are usually 40% of the first premium income -- over the life of the policy, says Kakar. As these acquisition costs have to be absorbed within the same year and cannot be deferred, life insurance companies such as Max New York Life say that it is possible to break even only in the 7th or 8th year of operations.

Meanwhile, insurers are going all-out to get new business, leaning heavily on modes like bancassurance. This typically involves sale of insurance products through banks and their channels such as branches and ATMs. With 65,000 bank branches across the country, or one per average of 15,000 people, the dispersion is high. Aviva, whose Indian partner is the Dabur group in New Delhi, claims it has the largest number of bancassurance tie-ups. Last month it announced tie-ups with 11 co-operative or regional banks.

S. Krishnamurthy, CEO of SBI Life, subsidiary of India's largest bank State Bank of India, says banks themselves have gained from such linkages. In the first quarter of 2004-05, half the firm's total premium collection of $11 million came from bancassurance. "Productivity per bank employee is much higher than that of the traditional agents," says Krishnamurthy.

With growth on their mind, foreign insurers want faster deregulation. With initial success has come the desire for more, notably the opportunity for foreign players to go up to 49% of the joint venture. McKinsey's Puri says the key issue today is ownership. "Each time the global players invest in information technology, management time and expertise, they get back only 26% in economic benefits."

And most companies are waiting. New York Life's Gilmour asks, "Do we want to increase our stake? The simple answer is yes. We really negotiated that right at the beginning." New York Life works with 50-50 partnerships in other Asian markets, such as in China with Haier and in Thailand with Siam Commercial Bank.

But is it a doomsday scenario if that were not to happen? "Oh, the worst case scenario is that the business will need to grow more slowly," says Philip G. Scott, group executive director of Aviva. His firm reported a 251% growth in gross written premiums for the first six months of 2004-05. Aviva first came to India in 1834 and was the largest insurer at the time of nationalization.

Another focus on will be managing risk. "The central theme for managing the Indian insurance industry in the future will be risk identification, risk assessment, risk monitoring and control," says Ghosh. Adds HDFC Standard's Satwalekar, "Apart from extending distribution reach, new players would focus on good investment and cost management."

Meanwhile, insurers are getting more innovative, using the Internet, newspaper advertisements, billboards and television commercials as well. Insurers are already among the most aggressive telemarketers in urban India, along with credit cards and banks. Some, like Tata AIG, hired actor Naseeruddin Shah, who some view as India's Marlon Brando. In one hurriedly withdrawn campaign, Shah posed in an advertisement that promised your heirs a death benefit of Rs. 1 crore ($220,000) for a mere Rs. 99 ($2) per month. The advertisement did not say that AIG's policy would work only if you happened to die on one of six national holidays.

Australian cricketer Steve Waugh models for AMP Sanmar Assurance. In one campaign, he smiles at you while seated on a park bench with three smartly dressed boys and girls. The tag line says, "Starting today, you have a world champion on your side." Max New York Life recently signed up Rahul Dravid, star batsman and captain of India's cricket team.

The tag lines are catchy. Aviva says "Kal Pe Control," a Hindi-English mix that translates as "Control your tomorrow." MetLife and New York Life have adapted to local tastes. New York Life's global line is "The Company You Keep." In India, it's a more informal "Your Partner for Life."

MetLife sticks to its U.S. tagline: "Have You Met Life Today?" The hope, obviously, is that if they haven't done so already, many Indians soon will.

What Makes Titan Tick? Finding Opportunity in India's Unorganized Retail Sector

2009-02-12T23:13:00.000-08:00

By M H Ahssan

Titan Industries -- India's leading watch manufacturer and the world's fifth largest -- recently fired a fresh salvo in the watch market. In September, the Bangalore-headquartered US$760 million company made its very first foray into the world of plastic watches with a new range called "Super Fiber." A trendy and youthful collection of both analog and digital watches, the Super Fiber range is part of Titan's mass-market Sonata brand. However, unlike the rest of the Sonata brand, which has watches priced up to US$30, the entire Super Fiber range is priced below US$10.

With this new launch, Titan is taking dual aim. On the one hand, it is looking specifically to target mass-market consumers in the 16 to 25 age group. Perhaps more importantly, it is also looking to make fresh inroads into the country's huge "unorganized" retail sector -- including corner shops, kiosks, street vendors and other single-proprietor venues -- which traditionally has been dominated by cheaply made, value-priced goods.

Although organized retail has taken hold in India -- with large, "modern trade" stores offering a more sophisticated shopping experience, better selection, competitive prices, and formalized return and exchange policies -- the unorganized sector isn't going away any time soon. At present, unorganized outlets represent 97% of Indian retail, and according to a 2008 report by the Indian Council for Research on International Economic Relations, the sector is expected to grow at an annual rate of 10%, reaching US$496 billion in 2011. Based on that analysis, Titan's strategy seems timely. But a question remains: How does it plan to succeed in a market segment where bargain prices and cultural associations often outweigh brand cachet?

"The sub-$10 watch market in India is flooded by cheap Chinese imports and low-quality domestic products. The value we bring to this segment is high quality and exceptional styles," explains Bhaskar Bhat, Titan's managing director.

Harish Bhat, chief operating officer for the company's watch division (Titan also manufactures jewelry and other products), explains that, unlike the low-quality plastic watches currently available in the market at this price point, Super Fiber watches offer superior performance and durability. The straps are made of polyurethane and the cases are ABS (acrylonitrile butadiene styrene), making the watches more flexible, fall resistant and water resistant. Despite its low pricing, the Super Fiber range also comes with a one-year replacement warranty. "Our global sourcing and economies of scale give us a significant price advantage and enable us to offer an easy entry for consumers to the branded world at this price point," he says.

Bhaskar and Harish expect Super Fiber to play a key role in doubling Sonata's sales from five million watches a year at present to 10 million watches per year over the next three years. This will make Sonata, which is currently India's largest-selling watch brand, one of the largest-volume watch brands in the world.

They have reason to be confident. The Indian watch market is currently estimated to be around 42 million units, of which only 15 million units are from the organized-retail players. Among the organized players, Titan leads the pack with a lion's share of around 11 million units across its watch portfolio of four brands: the flagship brand Titan (addressing the mid- and premium segments), Sonata (the budget segment), Fast Track (the youth segment) and Xylys (Titan's top-end, Swiss-manufactured brand). The second-largest branded player in the Indian watch market is Timex, with a market share of around 7%.

The sub-$10 category that Titan is now targeting with Super Fiber accounts for around 40% of the market in terms of volume. With over half of India under 25 years of age, Titan's game plan is to catch them early on in the value chain and then get them to upgrade to its higher-value products.

A Cricket Connection

Titan is targeting Super Fiber sales to come in mainly from the semi-urban markets -- and in keeping with its target group, the company has roped in Mahendra Singh Dhoni, the young cricketing icon who hails from the small town of Ranchi in Eastern India, as its brand ambassador.

S. Ramesh Kumar, professor of marketing at the Indian Institute of Management, Bangalore, points out that at the lower end of the price spectrum, cultural aspects unique to the Indian context and value perception are important for brands attempting to break into the unorganized sector.

Kumar cites Fair & Lovely "fairness" cream, Parachute hair oil and Tiger biscuits as examples of brands that have used habits and beliefs that are unique to the Indian context. "Being fair is beautiful, coconut hair oil for healthy hair and eating biscuits with tea are some of the beliefs and habits associated with consumers in the Indian context, and these brands have successfully used these beliefs [to create] an appropriate value perception among consumers."

Kumar adds that value perception is applicable to both quality of offerings as well as the pricing aspects, and he points out that all three brands have low-priced sachet packing as stock keeping units. "Titan's low-priced model, with its cricket-based celebrity associations, is another example of how a brand combines value perception with culture," he says. (Cricket, as is well known, is an intrinsic part of Indian culture.)

Titan's associates see the company's move in this space as hitting a sweet spot. "Coming from Titan, Super Fiber assures quality and style -- both of which are currently lacking in this price segment. It has the potential to redefine the low-end, unorganized watch market in India," says B.K. Singhania, a partner at Bangalore-based Arun Distributors, a long time distributor of Titan watches.

Redefining the market in fact is pretty much core to Titan's success since its inception in 1987. At that time, the watch market comprised primarily mechanical watches, and the government-owned Hindustan Machine Tools (HMT) was the only significant branded player. HMT's watches stood for accuracy and robustness -- and for the consumer, the sturdy watch was just a functional time-keeping device.

Titan entered the market with two key differentiators: One, it brought in quartz watches, which it promoted aggressively, and two, it introduced the element of style -- which until then was missing in this segment. There were other firsts, too, that Titan introduced in the watch market: It ushered in a completely new retail experience, brought out advertising with aspirational value and offered after sales service in a showroom environment.

With the entrance of Titan, the watch got transformed from a humble time-keeping device to a style statement and a fashion accessory. According to Harish Bijoor, brand consultant and chief executive officer of Harish Bijoor Consults and visiting professor at the Indian School of Business: "Titan changed the paradigm in the watch market. It was, in fact, one of the first Indian brands to realize that differentiation is the key to success." Adds Santosh Desai, chief executive officer of Future Brands, a subsidiary of the Future Group: "Titan has the ability to bring in a certain amount of newness of thought into existing categories. Titan's decision to come in only with quartz, for instance, was a very brave one," at a time when nearly all Indian consumers were familiar with hand-wound watches.

Fragmented Categories

Desai points out that a brand attempting to be among the first branded presences in a fragmented category must first justify why the category needs a brand in the first place. "There are good reasons why categories don't have brands. It could be the artisan aspect of the category, like in the case of female ethnic garments, or deep personal relationships like with jewelry, or it could be the sheer price aspect like in commodities. You need to redefine the market and create a value perception of a different kind that gives the consumers an overriding reason to shift to a brand."

This is exactly what Titan did when it entered the jewelry market in 1994 with its Tanishq brand. Tanishq not only brought a wide design expertise and a plush retail environment to a segment which until then was limited to local family jewelers and small set ups, but by being the first to introduce the karat meter to measure the exact purity of gold, it brought the element of trust to the forefront. Before Titan, 'trust' between the consumer and the jeweler was a factor of personal relationships. "The reassurance of guarantee and purity in such a transparent manner was a great new value addition that Tanishq brought to this category," says Desai.

While there are strong city-specific players like Ganjam and C. Krishnaiah Chetty in Bangalore or G.R. Thanga Maligai in Chennai, Tanishq, with sales of US$450 million is the only significant national brand. The jewelry market in India, estimated to be around US$15 billion to US$20 billion, primarily comprises a host of small players.

C.K. Venkatraman, chief operating officer of Titan's jewelry division, says that Titan has adopted a double-pronged growth strategy for its jewelry business. In the metros and larger cities where the Tanishq brand is well established, it is working at increasing its reach by becoming more accessible. In the past three years, it has doubled the number of Tanishq showrooms from 60 to around 120. Simultaneously, it is also reaching out to the semi-urban and rural markets through a separate mass-market brand called GoldPlus, which it launched around three years ago. Titan currently has 30 GoldPlus stores in South India. Over the next couple of years, Venkatraman plans to expand the GoldPlus showrooms in very small towns across the country.

Interestingly, Titan has not associated the GoldPlus brand with Tanishq. Instead, it is drawing strongly from its parentage as a Tata-owned company, positioning the brand as 'GoldPlus from Tata.' Venkatraman explains why: "Tanishq is still a young brand, and its awareness is limited to the larger cities, but the Tata brand is over 100 years old and is synonymous with reliability and trust. It is known everywhere." According to Venkatraman, while Tanishq will play on the style platform, in the case of GoldPlus the primary focus will be on value. Bijoor, however, questions this strategy: "Over the next eight to ten years, even the smaller markets will go the Tanishq way. So why not look at taking Tanishq itself to the smaller towns and do evangelical work there?"

Eyeing Other Territories

Meanwhile, Titan is now looking to bring the power of the brand to yet another unorganized category: Last year it entered into prescription eyewear with Titan Eye+. The prescription eyewear market in India is estimated to be around 25 to 30 million units per annum with revenues of US$300 million and growing at around 15% to 20% per annum. As per industry statistics, only around 25% of the people who need prescription eyewear are actually using them.

Despite its size and growth potential, however, this is another industry that is largely fragmented. While there are some strong regional branded players like GKB and Lawrence & Mayo, there is no large national player in this space. It is this opening that Titan is aiming to fill with its Titan Eye+.

Like in watches and jewelry, Titan's play in eyewear is based on trust, design and retail. In the year-and-a-half since it has entered this space, Titan has opened 30 stores across 12 cities, and over the next three years it plans to open around 250 stores across the country. Unlike traditional 'across the counter' optical stores, the Titan Eye+ stores are styled on a browse, select and buy format where the customers are offered a wide range of frames and lenses comprising both in-house as well as global brands like Gucci, Armani, Essilor, Bausch & Lomb and so on. Each store also has a style consultant and a state-of-the-art optometric clinic that promises zero error prescriptions free of cost.

Ravi Kant, chief operating officer, eyewear division, points out that even though global lens brands like Essilor are present in India, customers typically leave the choice of lens to the optician. "There is no transparency in the prescription eyewear market in India, and the customer typically has no clue what he is paying for," he says. Kant adds that as in the case of watches, in eyewear Titan's focus is on positioning the product as a style and fashion statement and driving multiple [purchases]. "Eyewear is no longer about just seeing well. It is also very much about looking good and it is fast becoming a lifestyle product," says he.

The lifestyle space, in fact, is where Titan is looking to make a larger play. Having tasted success in watches and jewelry and forayed into eyewear, Titan now wants to leverage its strengths in manufacturing, design expertise, retail knowhow and brand building for other lifestyle products. It is actively researching new categories that it can enter. Titan is also looking at expanding Fast Track, its youth brand comprising watches and sunglasses, to other accessories like belts, bags and so on.

Bhaskar Bhat is, however, emphatic that Titan will not enter any category where the opportunity to compete is only on price and product quality alone. Says Bhaskar: "We have always chosen to enter segments where we saw that the consumer was being significantly underserved. In watches, it was lack of choice; in jewelry, it was under-caratage; and in eyewear, it was lack of information. In each of our businesses, we have focused on offering sharp differentiators, and the greatest consumer opportunity to differentiate comes in the unorganized sectors."

Desai of Future Brands expects that over the coming years, more and more unorganized sectors will in fact see a brand play. One key driver of this, he says, will be the fast-growing modern trade format. Traditional Indian stores, he notes, are like "cupboards," where only a few items are visible and consumers cannot access them directly. Typically, it is the shopkeeper who mediates. The modern trade format, on the other hand, offers the consumers the opportunity to build a direct relationship with brands. "The moment modern trade opens up, the number of brands that a market can handle goes up dramatically," says Desai.

Citing the example of the female ethnic wear category, Desai adds: "Earlier, there were very few national retail chains which could offer controlled distribution, and that made it very difficult to set up a national brand in female ethnic wear. With modern trade opening up, it will be far easier for categories like these." Desai sees Fabindia, which has a chain of 97 stores across the country, as one of the first national brands emerging in this space.

Pointing to examples like radio-cab service Meru Cabs and household services provider Handiman Services, Richa Arora, founder and chief strategy officer of Five By Six Consulting, notes that services is an area where one is likely to see a lot of branding soon, especially in the metros. According to Arora, who has earlier worked with companies like Britannia, Balsara Home Products and FCB Ulka: "Across categories, the consumer is fed up of the low level of service. He is now more aware and more demanding, and this makes it conducive for brands to emerge in the services sector."

According to Bijoor a nation gets hungry for brands when its economic profile has an equal proportion of the "haves" and the "have nots". "Currently, around 35% of the Indian population is prosperous, while 65% is non-prosperous," he says. "Typically, it takes over two decades to build a strong, ubiquitous brand. With India moving towards higher prosperity, this is the right time to start building more evangelical brands in India."

'I See Myself as an Entrepreneur' - Gautham Thapar

2009-02-12T22:55:00.000-08:00

By M H Ahssan

Gautam Thapar's life so far can be divided into three distinct phases. The first was when he was "an outsider looking in" on the wealthy Thapar family, owners of one of the biggest industrial houses in India. His father had opted out of the business, and young Gautam was regarded as a barnacle living off the largesse of the hardworking members of the clan. "I had heard talk that the family tree was big enough to support some dead branches," he once told a reporter. "I thought I'd stay on in the U.S. and find my own destiny rather than be another dead branch."

Thapar was studying chemical engineering at Pratt University in New York in the early 1980s when his uncle and group chairman L.M. Thapar, who had been grooming his eldest nephew Vikram Thapar as his successor, sent for him. Gautam returned to India, albeit reluctantly, to plunge into the family businesses. Like Ratan Tata, who in his initial days was given the toughest nuts to crack, Gautam was asked to rescue sick companies like pulp manufacturer AP Rayons. He did so with great success.

This was the second phase: salvaging the empire's bleeding outposts, reinvigorating the group's ailing flagship -- paper manufacturer Ballarpur Industries Ltd. (BILT) -- and participating in the split of the group into four separate entities in 1998. In 1995, L.M. Thapar kept his promise to begin handing over the reins of the business to Gautam's cousin, Vikram, by appointing Vikram managing director of BILT. But the next three years were disastrous for the company, and in 1998, Gautam took over as managing director. He has been successfully running the show since. When L.M. Thapar died in 2007, he left his share of the Thapar Group to Gautam.

Now in the third phase of his career -- as the undisputed head of the family business -- Gautam has renamed the US$3 billion group Avantha. Its two major companies are the $1.7 billion power transmission and distribution equipment manufacturer Crompton Greaves and the $600 million BILT. It has a number of smaller outfits such as BILT Tree Tech (forestry), Global Green Company (India's largest exporter of gherkins, pickles and the like), Solaris Chemtech (a manufacturer of caustic soda and allied chemicals), Avantha Power & Infrastructure (coal-fired power) and Avantha Technologies (technology outsourcing services).

Avantha now has globalization on the agenda. Its overseas acquisitions began in 2005 with Crompton Greaves taking over Belgium-based power transformer maker Pauwels. In September 2008, Global Green acquired Hungarian foods company Puszta Konzerv. The group is targeting revenues of US$10 billion and a market capitalization of US$25 billion by 2013.

In an interview with HNN, Thapar, now 48, spoke about leading a family business in the Indian context, the Thapar succession saga and the plans and prospects of the Avantha Group.

HNN: In the West, ownership in family businesses is normally divorced from management by the third or fourth generation. It doesn't seem to happen that way in India. Why?

Gautam Thapar: I think we need to make a distinction between public ownership in a family business through a stock market listing, and family ownership of business in general. In the first case, a large part of the reason this divorce doesn't happen in India is the nature of our capital markets, the size of the economy and the nature of the institutional investors in our markets. Despite our vibrant equity markets, we have no debt capital markets to speak of. The size of individual market sectors in the Indian economy is small, and it is only now beginning to get to a scale and size that makes large investments possible. For years, the only institutional investor was the government of India. Given a choice 35 to 40 years ago, many family-owned businesses would not have opted for raising equity in capital markets, but were forced to do so due to tax and non-availability of capital.

In the second case, over time a system for sharing decision making on a day-to-day basis does evolve between owners and their key employees that allows family businesses to continue to be family-owned and managed in the third, fourth or fifth generation. Since there is no outside investor, there is no problem with such a structure.

Q: How would you describe your early life, as part of the powerful Thapar Group, yet not part of it?

A: Largely a case of an outsider looking in. It had advantages and disadvantages. In my case, I felt I had nothing to lose in challenging the status quo. At best, I would bring about much needed change and carve out a role for myself. Worst, I would be completely ignored or sacked.

Q: You were never in the running for succession to the Thapar throne. You did not receive any particular grooming. What qualities did you bring to the table when you started working for the group?

A: I brought to the table a willingness to challenge the conventional wisdom and the decision-making process. Although I was not in any succession plan, I still had the family's last name and people were uncertain where I fit in the general scheme of things. I counted on the fact that they might not like my very pointed observations and challenges and would be forced to respond and defend themselves or their proposals. I used the uncertainty principle to my advantage.

HNN: I believe you were very reluctant to come back to India after studying engineering in the U.S., and you were not on talking terms with your uncle L.M. Thapar for some time. What motivated your return?

A: My motivation was simple. My visa expired and I was unable to stay on. I also ran out of money. I did not come back to work in the family business, but rather to mark time and do something useful before returning to the U.S.

Q: Who mentored you in the group, and what were your initial days like?

A: I was mentored by a vice president by the name of Brij Mohan Bakshi. He asked me to come into his office every morning and sit there throughout the day, ask any questions and participate in any meeting. He looked after our diversification into synthetics with Dupont. It was an amazing insight into so many aspects, both tactical and strategic, that go into the decision process in an organization.

Q: The Thapar Group has existed since 1919. Why did you feel the need to change the name to Avantha?

A: The Thapar Group decided to split in 1998. There were now four Thapar Groups. Additionally, I bought out my brother's holding in Crompton Greaves in 2005-06 and was also managing my uncle L.M. Thapar's business. Upon my uncle's death in 2007, I was in the position of running the largest and most successful parts of the business. I felt it was time we moved away from the baggage of the past and charted out a new identity for ourselves, essentially consolidating my ownership and inheritance under one name.

Q: What does 'Avantha' mean?

A: 'Avan' comes from the French 'avant,' meaning forward, vanguard, advancing; and the Sanskrit 'stha' stands for stability. Also, the last three letters 'Tha' are short for Thapar.

Q: How hands-on are you? There is a perception that the Mumbai-based Crompton Greaves is professionally managed and has been doing exceedingly well (though it has had losses in the past), while the Delhi-based BILT has been run by the family and has put in a patchy performance. How true is this?

A: Once again, perception and reality differ. Both companies went through major financial problems between 1995 and 2001, which forced us to take drastic action. To say one had a patchy performance vis-à-vis another is to miss the point. Professionalism in and of itself does not guarantee any success. Ultimately, it is the quality of leadership and decision making that matters. The history of companies and managements is littered with CEOs who started believing their own PR and omnipotence -- a sure-fire recipe for trouble.

Q: Your two flagships today are Crompton Greaves and BILT; they account for nearly 80% of your revenues. But they are totally unrelated businesses. Are there any synergies there? Can the same management style be used successfully at both?

A: The only synergy that exists is me. Ultimately, these are companies with old cultures. Neither is going to change into looking like the other. What I do is to try and bridge the learning for both the companies, while providing a stable ownership structure.

Q: What is the rationale for going into areas like foods and outsourcing? Are you merely chasing the flavor of the month?

A: If we chased flavors, I should be doing real estate. I like businesses that are different and a little ahead of their time in the market.

Q: What is your vision for the group?

A: I see myself as an entrepreneur. I believe I have the vision to spot opportunities to create value and wealth, the risk-taking ability to commit to the opportunity, and the ability to put together a management team to execute. We are financially innovative, yet conservative and low key. In essence, I function as an allocater of capital and other resources within the framework I've described. That is the framework we use to develop our people. We will continue to diversify as the opportunity presents itself. That's the entrepreneurial part.

Q: What are your plans in insurance and power? What other areas are you looking at diversifying into?

A: Insurance is on the back burner; power is very much in the cards, both generation and distribution. Initially, it is captive [coal]; later, it will be non-conventional energy like wind and solar. None of these diversifications are through any of the existing companies.

Q: You have started on a series of international takeovers. What is next on the agenda? How do you see yourself on the global stage?

A: Our acquisitions have been specific and served specific purposes. These have been met. Our next phase will look at technology and service opportunities in the same verticals.

Q: How do you see India's role in the future of global business?

A: Despite all the excitement in India, we're still barely 2% to 3% of world trade. Additionally, we are a low-cost and low-price economy. Companies with goods, products and services that are geared towards delivering that value proposition in any segment of the economy will always be the strongest as they cater to the largest consuming base in the economy. One example is telecom. A willingness to adapt your business model to suit the economy is a necessity for success. India's role will continue to expand on the world stage as she becomes a larger part of the global economy.

Q: What is your view on succession in the Avantha group? Will your daughters take over from you?

A: My children will have to learn how to manage their wealth. I am already setting up a structure that will allow them to exercise that right without interfering with the day-to-day running of the company. The best that I can do for them is to leave them with a structure and people that allow them to do that. If they're interested in running a business day-to-day, then they will have to go through the grind.

'Second Fiddle' No Longer: India's PC Market Opens up to Notebooks

2009-02-12T22:51:00.000-08:00

By M H Ahssan

A few years ago, notebook computers -- lightweight, portable PCs that can easily fit inside a bag or briefcase -- were the preserve of the elite in India, used only by corporate executives, the super rich and super geeks. They accounted for a very small fraction of total personal computer sales in the country. But the picture has been changing rapidly, and in just a few years one out of every two PCs sold in India is expected to be a notebook.
The rise of the notebook as a primary computing device may seem remarkable in a country where PC penetration is just 2% to 3% and the total installed base of PCs is estimated at only 28 million units. "The notebook, despite the advantage of offering mobility, has long played second fiddle to the much larger and more established desktop market in India," says Rajiev Grover, director of the personal systems group at Hewlett Packard (HP) India. HP is the largest player in the country's notebook market, with over 35% market share in unit terms. "It was seen as a niche factor and not meant for the burgeoning mass market. But now, it is on the threshold of a mobile-phone-like revolution in India."

According to Sumanta Mukherjee, PC market analyst at research firm IDC India: "The notebook story in India is clearly one of phenomenal growth." The numbers bear this out. According to IDC, in calendar years 2005, 2006 and 2007, notebooks grew over the previous year at respective rates of 148%, 108% and 81%. Between January and September of 2008, notebook shipments grew by 54%. As a percentage of total PC shipments (desktops and notebooks) in 2004, notebooks accounted for a mere 5.5%. In the first nine months of 2008, notebooks, at 1.87 million units, accounted for almost 30% of total PC sales of 6.42 million units.

Even as notebook sales have flourished, desktops have experienced a slowdown. According to IDC, desktop sales growth dropped from 19% in 2005 to 7% in 2007. For the January to September period of 2008, shipments fell by 5.4%. "The growth in the PC market in India is being driven by notebooks, and with notebooks continuing to show robust growth on a larger base, it is clear that their story is still strong," says Mukherjee. "We expect that by 2012 the split between notebooks and desktops will be equal."

Vinnie Mehta, executive director of the Manufacturers' Association for Information Technology, agrees that the market is transforming. In a September 2008 statement, he stressed that notebook sales had driven India's PC market during the April to June quarter. "With sales crossing 610,000 units in the first quarter of this fiscal year, notebooks account for close to a third [33%] of the total PC market in the country, up from less than 3% four years ago. With shifting consumer preference in favor of notebooks over the desktop, this proportion will only get larger with time."

Driven by Price
"The explosive growth of notebooks," says Amar Babu, managing director of Lenovo India, "is a great example of what can happen when there is the right technology that meets specific customer needs at the right price point."

Affordability is certainly a key reason that notebooks are taking off. According to IDC, over the last few years notebook prices in India have been dropping by about 10% a year, primarily because of technological advancements, changes in the customs duty structure and growing volumes. Prices have not dropped at the same rate in the more mature desktop market, so the price difference between a desktop and a notebook has been reduced substantially.

Using rough estimates, industry players point out that four to five years ago, while a notebook was priced around US$2,000, a desktop was about half that. Today, notebooks are available for around US$500, desktops for around US$400. As Sameer Garde, country general manager at Dell India, notes: "Price by itself is no longer a major deterrent for someone looking to buy a notebook."

The growth in the telecom ecosystem and recent advancements in wireless connectivity have played an equally important role in driving notebook adoption. "Increasing globalization has led to a more competitive landscape, and the norms of productivity therefore are changing rapidly," Garde says. "Both organizations as well as individuals in India are realizing that mobility and connectivity are a very potent combination when it comes to increasing productivity. A whole new usage model is being driven by this." The model taking hold in large enterprises is one of notebooks no longer being limited to top management; instead, they are percolating down the ranks to middle managers and sales teams to enable a faster information flow and improved decision-making.

Not only the corporate world has embraced the notebook: Other segments driving the market include education, small and medium businesses, and consumers. For instance, notebooks have ushered in a new way of delivering education in areas such as engineering and management, and many educational institutions factor the price of a notebook into their fee structure. For consumers, notebooks are fast becoming a lifestyle product. According to IDC, in 2006 and 2007 the consumer notebook segment grew at 261% and 248%, respectively. In 2008, it is estimated to have grown at 95% over the previous year.

"In most mature markets, because of the high penetration of PCs, most people start off with a desktop and then get a notebook as their second PC or as a replacement," Lenovo's Babu says. "In India, a lot of people are leapfrogging to buying a notebook itself as their first PC." According to IDC's Mukherjee: "India is a very price-sensitive and value-conscious market, and notebooks are satisfying both these needs for first-time buyers."

The entry of new user categories has redefined the notebook market. Vendors have introduced different products for different target segments. HP, for instance, has its HP-Compaq portfolio for commercial users and HP Pavilion and Compaq Presario for individuals. Dell has the E-series for corporate customers, Vostro for small and medium businesses, and the XPS, Studio and Inspiron for consumers. Lenovo has the Think Pad for corporate users and the Idea for consumers. Acer has the Aspire brand for consumers and the Extensa and Travelmate for the commercial segment.

Global Strategy at Work
One may argue that these target-specific products are part of the vendors' global strategies and are not specific to India. But the very fact that vendors are looking at segmentation in a market where PC penetration remains low is a clear indication of the potential they see.

There are other indicators. India was the first country outside of China where Lenovo forayed into the consumer space, introducing its products to that market in 2006. India was also the first country in the Lenovo world to get a film celebrity to endorse its consumer brand. The case is similar with Dell and its recent "Take Your Own Path" campaign targeted at small and medium businesses. When Dell launched its new Latitude E-series globally in October, New Delhi was one of three cities chosen for the launch (along with San Francisco and London). The New Delhi launch was by none other than company chairman Michael Dell.

HP's global re-launch of its Compaq brand in 2007 was held in Mumbai. HP is now introducing its "Digital Clutch" (the notebook that HP has designed in collaboration with fashion designer Vivienne Tam) and targeting it specifically to women. With consumers becoming a larger piece of the pie and the notebook becoming more of a lifestyle product, features such as better sound quality, screen size options, different colors and different finishes are coming into play.

"Earlier, all the innovation was around making the notebook more robust and more secure for the corporate customer," says HP's Grover. "Now, the innovations are around providing different benefits to the different user groups. It is very important that we fulfill both the spelled-out as well as the unspelled-out needs of the different segments. For instance, with the notebook transforming into a lifestyle product, women clearly have different expectations [in terms] of style and colors."

Meanwhile, with the universe of notebook buyers and users growing beyond the metros to the smaller cities and towns, vendors are getting closer to customers. In addition to increasing their reach through multi-brand outlets, vendors are increasing their numbers of exclusive stores across the country. HP has doubled its stores to 180 in the last three years. Acer has more than 100 exclusive stores and Lenovo has 157. Just a few months ago, Dell opened its first two exclusive retail showrooms. All have plans to add more.

Vendors are also wooing customers through large-format retail stores such as Croma, Next, e-Zone, Staples and Metro. "The buying experience of a notebook has become an important parameter in the purchase decision along with product features, brand and price," says S. Rajendran, chief marketing officer at Acer India. "The growth of organized retail in India will also give an added [stimulus] to notebook buying."

Netbooks Stake Their Claim
Rajendran also sees potential in the Indian market for netbooks -- small, lightweight notebooks suitable for accessing web-based applications. He cites figures from market research firm DisplaySearch, which show that in July-September 2008, netbooks accounted for 14% of total global notebook shipments, with Acer emerging as the leader with a share of almost 40%. "We expect netbooks to be popular in India also, especially among small and medium businesses, and also as a second computing device in upper-middle class homes." Rajendran predicts that India's netbook market will be around 300,000 units this fiscal year.

Ravi Bapna, associate professor of information systems at the University of Minnesota's Carlson School of Management and executive director of the Centre for Information Technology and the Networked Economy at the Hyderabad-based Indian School of Business, is optimistic about the role of netbooks in India. "The netbook could have a potentially larger penetration ability as it could become an aspiration device for the lower-middle class," he says. "However, a stronger ecosystem of applications and services innovation is needed for the full potential to be realized. Can it really solve the day-to-day pain points felt by this segment of society? At present, the answer would be no, but that does not mean future applications will not."

Industry players largely expect the market to grow further once 3G wireless technology is introduced in the country. "[3G] will impact every user segment, [whether] commercial or consumer, and will definitely be a trigger for further growth," says Dell India's Garde. Lenovo's Babu agrees: "Wi-Fi drove a certain level of growth in the usage of notebooks, despite not being pervasive wireless. 3G will certainly drive a fresh wave of growth in this space."

Bapna, however, sees it differently. "It depends on the competing technologies that can provide high-speed mobile Internet," he says. "I doubt 3G technology is going to have a significant acceleration effect on notebook adoption. In contrast, my prediction is that the growth will occur in high-end mobile handsets [and] iPhone-type devices. Their quality and the functionalities provided are bound to keep improving as the bandwidth constraints get eliminated."

Meanwhile, apart from concerns about the global economic slowdown's potential effect on the growth of India's notebook market, one long-term constraint may be language. "A large part of the Indian market is vernacular, but the entire ecosystem of the personal computer is very English-oriented," HP's Grover notes. "For further growth, we need to remove this language barrier. In order to do this, different players like the government, device manufacturers, Internet service providers, content providers and others who are all working currently in silos need to work together to develop the ecosystem."

INDIA'S LOW COST 'CHEAP' COMPUTERS

2009-02-11T22:59:00.000-08:00

By M H Ahssan

India announces the cheapest computer amid doubts over sustainability

Rs 500, They Say, Will Fetch You A Laptop Computer. Here’s What It Can’t.
- 11 litres of enhanced petrol in Bangalore: Rs 543.40
- Casio FX-991M scientific calculator: Rs 790
- 10 shares of Satyam Computer (on Feb 4): Rs 501
- A PVR gold ticket at Select City Walk, Delhi: Rs 550
- Bombay-Delhi non-AC sleeper ticket (Tatkal): Rs 575
- Domino’s pizza (Non-veg): Rs 529 (taxes included)
- CAT exam application form (reserved category): Rs 650

Is it a phone, toy, calculator, storage device—or just a device camouflaged as a computer? The world is watching with more than passing interest. After all, it's the prototype of what is touted to be the world's cheapest laptop—with a jaw-dropping price tag of $10, about Rs 500. First signs aren't encouraging. Dubbed as project Sakshat, this 10-by-5-inch wonder—promoted by a government-funded consortium—looks more like a hand-held gadget than a standard computing device. It's supposed to be power-efficient, have a 2GB memory, wireless and broadband internet connectivity.

That's all we know for now. The HRD ministry has been rather secretive. According to reports, the project was being developed with help from the Vellore Institute of Technology, IISC, Bangalore, iit Madras and a few PSUs. However, IIT Madras director M.S. Ananth and Ashok Jhunjhunwala, a pioneer in low-cost computing devices, told Outlook they were not involved in the project. Even senior officials at IISC claimed they were not involved in project Sakshat.

While the exact details remain unclear, the government insists Sakshat will mark India's march into the world of computer manufacturing at an unbelievable price point. Really? Forget for a moment the sarcasm over whether India could really introduce a product that could define a new paradigm in low-cost computing. After all, Indian manufacturing has thrown up the Tata Group's low-cost car Nano (which has been delayed no doubt, but has captured the world's imagination).

The bigger doubt is whether India's fascination with low-cost computing devices will yield a winner. They've been around in various hues, shapes and brands, some even with blessings from the government. But most sank without a trace against competition from established multinationals that played with price and features to draw customers closer to fully-functional models.

In 1991, the government had come up with a computer priced at Rs 10,000 but could not sustain it. In 1999, the hand-held Simputer made headlines but is yet to gain critical mass. NetPC, a stripped-down internet access computer promoted by Chennai-based Novatium, had limited success. Other products like HCL's Compact MyLeap laptops fall roughly in the same category—but are priced much higher, at around Rs 13,000.

To be sure, affordability—and the greater goal of spreading computing to a wider audience—is a worthwhile target. The government plans to distribute its latest offering to educational institutions in rural areas. The project is part of the Rs 4,612-crore National Mission on Education through ICT. Already, there's confusion over the price. The initial tag was Rs 1,000 but the government plans to bring it down depending on the volume of orders. But sources say the actual price would be between Rs 1,000-1,500.

Make no mistake, that's an achievement.

Either way, Sakshat would be the cheapest computer in the world, if one can call it that, far cheaper than the XO laptop developed by MIT Media Labs founder Nicholas Negroponte's One Laptop Per Child (OLPC) project, which planned to distribute $100 (Rs 5,000) laptops for education. Currently, OLPC's XO laptop costs around double the amount, at $180-200 (around Rs 10,000).

But even at that level, is there a market in India for such stripped-down machines? The government believes only low-cost devices could change India's poor PC penetration levels which stands at 3.6 per cent. The real picture is, however, different. Says Girish Mehta, director, consumer marketing, Dell: "People who are buying their first PC tend to go for a fully-functional device. They are normally looking at a machine that is able to take on new applications even two years later." And that holds good for most rural areas as well. A lot of companies are also donating fully-loaded PCs to schools in remote areas. Adds Nasscom president Som Mittal: "India needs a low-cost computing device. But where taxes add 20-22 per cent on the price, even low-cost machines become expensive."

Analysts feel Sakshat wants to take on OLPC, which was initially shunned by the ministries but later supported by the PMO and finally launched in India last September. Says OLPC India president and CEO Satish Jha: "We have met a large number of people in India and every single education secretary we met has liked the idea." But will the Rs 500-computer be able to take XO head on? As expected, analysts have been scathing.

The viability of pricing the product cheap was a key point of attack. Most experts felt that, at Rs 500, it would be difficult to have even one key component of the machine. Not surprisingly, OLPC—which would be most affected if Sakshat succeeds—is not convinced about the workability of the idea. Says Jha: "It will be interesting to see how this device is put together because the chip for a laptop is not available for less than $18, while the plastic casing, wiring and parts add another $20. With raw materials, factory wages and labour, it's impossible to come up with a product at that price. We created a world where the cost of a laptop was brought down from $1,000 to $100. But to have the product at $10 seems strange."

According to sources, the only way the laptop could be produced so cheap was by using a small screen and keyboard in a thin, low-cost plastic casing and run by a low-power processor. The product most likely would not have a CD/DVD drive or a hard disk—it would have internet access as its main function with a capability to store data only on external devices like portable hard drives or flash cards which could cost more than the machine itself.

Observers feel that with the general elections in sight, the government may want to strike the right note with the rural public by promising the world's cheapest computing device. But as of now, nothing concrete is available and no one seems to have used and tested its capability. According to an official connected with the development, even what was showcased at Tirupati last week was a "pre-prototype or a concept model" to show the government's intentions rather than final shape of the product itself.

Having created such hype, the onus is on the government to deliver. The world is already calling it a damp squib. Will the government—and the agencies apparently associated with it—be able to prove it otherwise?

Interim India Budget 2009

2009-02-10T23:43:00.000-08:00

By M H Ahssan

This is not just that old 'guns vs. butter' argument, but a call of more of the latter and in a strictly literal sense, about roti, kapda and makaan. And if there is an argument here, it is about what kind of butter to buy.

In a few days, external affairs minister Pranab Mukherjee, standing in for Prime Minister Manmohan Singh, will present the interim budget. Before he firms up the budget proposals, Mukherjee will have to asses the requests by the deputy chairman of the Planning Commission, Dr Montek Singh Ahluwalia, for additional sums for development work.

In a letter to the Prime Minister, Ahluwalia has asked for an additional Rs 55,000 crore for social welfare programmes, over and above what the finance ministry (now under Mukherjee) has earmarked for this year’s budget. As Ahluwalia says, the finance ministry has said Rs 285,149 crore is available for 2009-10. That, he flatly says, is not enough. And this is why:

* this is an increase of only 4 per cent in nominal terms over the gross budgetary support of 2008-09. In real terms, this is a reduction.

* As a result, it will not be possible for the government to provide any form of fiscal stimulus to ward off the possibility of doom and gloom. While Ahluwalia doesn’t say that in so many words, by referring to ‘stimulus,’ he has the global economic crisis in mind.

In an election year, when every possible sop has to reach the voter (he must at least know more are coming), this will not do. So, Ahluwalia is looking for growth, particularly as the wolf of depression is at the door. He wants:

* The fiscal deficit that is being kept at 5 per cent be increased. If the fiscal deficit is increased by 1 per cent, another Rs 55,000 crore would be available and that would swell the gross budgetary support to Rs 340,000 crore.

* This, he says would be a substantial increase, as it would be a 24 per cent increase over the Revised Estimates of the previous year’s budget.

The alternative to having this stimulus is pretty grim. The Rs 285,149 crore GBS would be only an increase of Rs 11,000 and very little can be done for the big schemes that the UPA government led by Dr Manmohan Singh is pinning its faith on. Also, there will be little for the new programmes like the National Knowledge Network, the construction of roads in Naxal-affected areas and such like. If you go with such a small increase in these economically difficult times, there is no stimulus and we are at the mercy of the wolves of the Great Depression of this century.

Yes, the additional Rs 55,000 crore will raise the overall deficit to about 9.5 percent but even that is tolerable compared with this year’s deficit of 11.3 per cent. If the increase remains at Rs 11,000 crore, some of it (about Rs 1,958 crore) crore will go as additional central assistance to the states.

* Rs 300 crore goes for the Tsunami Rehabilitation Programme
* Rs 600 crore goes for the New Delhi Commonwealth Games
* An additional Rs 910 crores will additional buses and other facilities under the
Jawaharlal Nehru Urban Renewal Mission

Central sector schemes will also benefit:

* About Rs 1800 crore will go for Railway overbridges
* Rs 2000 crore will go for highways in the Naxalite-affected areas
* About Rs 300 crore for the already lavishly funded Rural Employment Guarantee Fund

The Dr Manmohan Singh government has invested in a number of major projects. There is a belief that the success or failure of these projects will play a part in the elections three months away. And these projects are about big numbers.

* The National Rural Employment Guarantee Programme: Rs 30,300 crore
* The National Rural Health Mission: Rs 12,050 crore
* The Midday Meal Scheme: Rs 8,000 crore
* The Sarva Siksha Abhiyan: Rs 12,050 crore
* The Indira Awas Yojana’s: Rs 8,800 crore
* The Integrated Child Development Programme: Rs 6,300 crore

The significant feature of these numbers is not how big they are: together these six programmes alone add up to 75 per cent of India’s entire defence budget. The important point is that the numbers are no different from this year’s revised estimates. This means that the government of India has no additional funds to bolster the six flagship programmes of the government, on which it has bet its life on.

With an Rs 11,000 crore increase, only a few major schemes will get some more money. These are:

* The Pradhan Mantri Gram Sadak Yojana: an additional Rs 1,470 crore
* The Rajiv Gandhi Gramin Vidyutikaran Yojana: an additional Rs 500 crore and
* The Accelerated Power Development Programme: an additional Rs 580 crore

Also, strategic ministries would not get a penny more: atomic energy would stay at Rs 3,550 crore, space at Rs 3,600 crore and science and technology at Rs 1530 crore. Only highways and road transport and information technology would get big hikes of Rs 2,000 crore and Rs 1,500 crore respectively. (NOTE: All numbers mentioned are not projections by some chamber or association, but allocations being firmed up by the government itself. They WILL change if the additional money, or even some part of it comes through)

Severe burden on the exchequer they may be, the social welfare programmes have hopefully done some good. As Ahluwalia himself has said privately, the NREGA has done well in some states and not as well in others. As the government believes, even if they are partly successful (there are enough cases of leaks) some benefits will accrue and that will translate into votes.

So, think of the growth strategies with an additional Rs 55,000 crore. Not to speak of welfare schemes.

Punters favourite 'Slumdog Millionaire'

2009-02-09T23:09:00.000-08:00

By M H Ahssan

About Rs 100 Crore Riding On The Film In Indian Punting Circles

A story on life in the slums of Mumbai has become a betting obsession for bookies in India and abroad. Slumdog Millionaire is the hot favourite of punters across the globe to shine at the Oscars on February 22. About Rs 100 crore is estimated to be riding on the film in the Indian betting circles.

According to punters in Gujarat and Mumbai, where most of the domestic betting is concentrated, Slumdog Millionaire is the runaway favourite to win the Oscar for the best motion picture at odds of 1.53:1. It means, if a punter bets Rs 1.53 for Slumdog Millionaire to win the Oscar and if the film does, he will get Rs 2.53.

“We are accepting bets for three things—AR Rahman (best music category), the movie (best picture category) and Danny Boyle (best director category). The odds are in favour of Slumdog,” says a Mumbai-based bookie. According to him, the odds for Mr Rahman winning the Oscar is pegged at 1.25.

Slumdog has bagged ten nominations in nine categories at the Oscars this year, including three for Rahman. The film has already grossed Rs 360 crore at the box office worldwide. Its opening weekend collections were at about Rs 13.5 crore in India.

While international websites began accepting bets on Slumdog as soon as the nominations were announced, the interest in Slumdog betting in India has started gaining momentum only in the past few days. “Post the third Sri Lanka versus India match we have been receiving more bets on Slumdog. Bets worth Rs 20-30 crore on Slumdog have been accepted in my circle in the past few days,” says a Ahmedabad-based punter who also has operations in Surat and Rajkot.

The betting prices are being decided by the Mumbai-based bookies and then passed on to others all over India. Mr Boyle is favoured to win the Oscars in the best director category by Indian punters, but not as much as the international community. “Little different to international betting websites, in India Mr Boyle is favoured at 1.55:1. While for the film the odds are also in favour and as high as 8:15,” says a Mumbai-based bookie.

All the leading international betting websites offer the lowest odds for Slumdog, making it the runaway favourite to win the Oscar for best motion picture. The well-known British betting website Ladbrokes is offering odds of 1.16 for the Slumdog, with The Curious Case of Benjamin Button being the second favourite at odds of 6.50.

Interestingly, no international websites have been offering bets on the best music category as yet as all the bets are on the acting, best film and best director categories. Rahman, however, is a hot favourite back home.

“There are so many people betting on Slumdog that even Gladiator and Titanic weren’t such hot favourites to the awards. The underdog story in the film is something that is relevant at this point. In fact, we have noticed that as some of the stock market indices fall, the trading on this market goes up,” says John Delaney, chief operating officer of Intrade, an Irish portal, which feels Slumdog has an 83.5% probability of winning the Oscar for best motion picture.