Sunday, December 11, 2011

Goldman's O'Neill "Disappointed" as India "Explodes"

For at least two years in a row, BRIC has, in the words of SGS's Albert Edwards, stood for Bloody Ridiculous Investment Concept, not an acronym for populous emerging markets of Brazil, Russia, India and China as Goldman Sachs' Jim O'Neill saw it ten years ago.

In fact, O'Neill has himself expressed disappointment in India, one of the BRICs, a designation that has boosted foreign investment in India and helped accelerate its economic growth since 2001.

"All four countries have become bigger (economies) than I said they were going to be, even Russia. However there are important structural issues about all four and as we go into the 10-year anniversary, in some ways India is the most disappointing," said O'Neill as quoted by Reuters.

Noting India's significant dependence on foreign capital inflows, Jim O'Neill went further and raised a concern about the potential for current account crisis. "India has the risk of ... if they're not careful, a balance of payments crisis. They shouldn't raise people's hopes of FDI and then in a week say, 'we're only joking'". "India's inability to raise its share of global FDI is very disappointing," he said.

United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively. Stocks in all four countries have underperformed relative to the broader emerging markets equity index, as well as the markets in the developed nations. Pakistan's KSE-100 has significantly outperformed all BRIC stock markets over the ten years since BRIC was coined.

As India's twin deficits continue to grow and the Indian rupee hits record lows relative to the US dollar, there is pressure on Reserve Bank of India to defend the Indian rupee against currency speculators who may precipitate a financial crisis similar to the Asian crisis of 1997.

In addition to Jim O'Neill, a range of investment bankers are turning bearish on India. UBS sent out an email headlined "India explodes" to its clients. Deutsche Bank published a report on November 24 entitled, "India's time of reckoning."

"Suddenly everything seems to be coming to a head in India," UBS wrote. "Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared."

India's current account deficit swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.

Its fiscal deficit hit $58.7 billion in the April-to-October period. The government in February projected a deficit equal to 4.6 percent of gross domestic product for the fiscal year ending in March 2012, although the finance minister said on Friday that it would be difficult to hit that target.

As explained in a series of earlier posts here on this blog, India has been relying heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its rising current account gap. Those flows are called "hot money" and considered highly unreliable.

Indian policy makers face a significant dilemma. If they do nothing to defend the Indian currency, the downward spiral could make domestic inflation a lot worse than it already is, and spark massive civil unrest. If they intervene in the currency market aggressively by buying up Indian rupee, the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis Goldman Sachs' O'Neill hinted at.

Related Links:

Haq's Musings

India's Twin Deficits

Karachi Tops Mumbai in Stock Performance

India Returning to Hindu Growth Rate

Soft or Hard Landing For Indian Economy?

Karachi Stocks Outperform Mumbai, BRICs


Anonymous said...

United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively.

ok As a percentage of GDP India is # 2 among the BRIC and Russia is ahead because most of the investment is in oil as it is the world's largest oil producer.

Riaz Haq said...

Anon: "ok As a percentage of GDP India is # 2 among the BRIC and Russia is ahead because most of the investment is in oil as it is the world's largest oil producer. "

Yes, but India depends on foreign capital inflows (FDI+FII) to balance its current account ....a fact that makes India much more vulnerable than China or Russia.

Anonymous said...

Yes, but India depends on foreign capital inflows (FDI+FII) to balance its current account ....a fact that makes India much more vulnerable than China or Russia.

well the CAD is worst case $60 billon...after $40 billion FDI (the six month figure X2 )it is $20 billion..even if it is $30 becomes $30 billion...

30/1600= <2% of GDP hardly the sort that causes an 'explosion'..also exports are picking up as indian goods become more competetive vis a vis China due to strengthening yuan and depreciating rupee...

Also there will always be some FII net inflows so the CAD may well be less than 1% of GDP...

But yes some caution is warranted!

Riaz Haq said...

Anon: "well the CAD is worst case $60 billon...after $40 billion FDI (the six month figure X2 )it is $20 billion..even if it is $30 becomes $30 billion..."

Yes, if the situation remains steady.

But there are three issues to consider:

1. With the alarm raised by Goldman Sachs, UBS and Deutsche Bank, the FDI and FII inflows are likely to continue to decline.

2. Indian exports are likely to suffer with Europe in crisis, and this could make India's trade deficit worse.

3. There could be rapid decline in reserves if RBI decides to intervene in currency markets, precipitating a balance of payments crisis. If it doesn't intervene, rising inflation would hamper economic growth and further reduce investor confidence.

It's a tough situation for Indian policy makers.

Pavan said...

Thanks. I agree with this analysis. Incidentally, foreign debt worth 100 billion dollars is due for payment by June 2012. There is an option of rolling it over but then interest costs will rise only further. When the big deal defence contracts now being signed come up for payment over the next few years, the situation will get worse. I am afraid we are getting into a debt trap situation as health expenditure has to be tripled if we want to improve human development parameters.

Anonymous said...

There could be rapid decline in reserves if RBI decides to intervene in currency markets, precipitating a balance of payments crisis. If it doesn't intervene, rising inflation would hamper economic growth and further reduce investor confidence.

Please explain the link between a weaker rupee and inflation.

Except oil which is sold under an administered price mechanism most of the constituents of the inflation basket are indeginous to India.

Riaz Haq said...

Anon: "Please explain the link between a weaker rupee and inflation."

From electricity to telecom to transport vehicles, most of the items of daily use in India rely on imported components.

Take infrastructure for example. Every one uses it, and India imports most of the infrastructure equipment in power and telecom sector. India imports various chemicals, gypsum and cement from Pakistan, etc etc.

Chinese are now supplying equipment for about 25% of the new generating capacity India is adding to its national grid, up from almost nothing a few years ago. There are thousands of skilled Chinese expatriates at Indian plant sites, along with Chinese chefs, Chinese television and ping pong.

India is already the biggest export market for China's two leading telecom equipment manufacturers, Huawei Technologies and ZTE, as both companies have focused on India in recent years. As India has grown to the world's No. 2 mobile phone market in recent years, its imports of Chinese handsets have soared.

And oil is a big part of the imports. The fact that Indian govt subsidizes it doesn't mean it doesn't cost Indian treasury and tax payers. These subsidies also worsen India's twin deficits which affect rupee valuation.

Anonymous said...

'Take infrastructure for example. Every one uses it, and India imports most of the infrastructure equipment in power and telecom sector. India imports various chemicals, gypsum and cement from Pakistan, etc etc.'

except telecom equipment India is a net exporter of infrastructure goods.Please check trade goods exports are #2 after ITES and software...

And oil is a big part of the imports. The fact that Indian govt subsidizes it doesn't mean it doesn't cost Indian treasury and tax payers. These subsidies also worsen India's twin deficits which affect rupee valuation.

Not really india has a cross subsidizing scheme in place petrol is very expensive(costliest in Asia) which means most cars sold are small HOWEVER diesel is subsidized so the fuel used in transport is fairly moderately priced,petrol doesn't impact price of goods diesel does...
Diesel cars sell at a hefty price because of a excise structure that taxes them heavily to prevent a wholesale conversion of the car fleet to diesel...

Net-Net the government makes massive money on sale of petroleum products via petrol taxes well in excess of subsidies given and are the biggest source of funds at the state level.
Ever wondered how India's tax/GDP ratio is higher than China?

Riaz Haq said...

Anon: "except telecom equipment India is a net exporter of infrastructure goods.Please check trade goods exports are #2 after ITES and software..."

Then why does India run such huge trade deficits? What do you import from China? Power and telecom equipment. And what do you export to China? Iron ore is India's biggest export to China. Please check your facts.

In spite of Gandhi's Swadeshi movement and Indian policy of developing self-reliance, the nation remains heavily dependent on imports from China for its critical infrastructure, and its growing appetite for weapons systems on Russia and Israel. These growing imports are fueling India's current account deficits, and adding to its paranoia with regard to the rise of China. In response, Indian government is acting to reduce dependence on Chinese imports, a move that will likely add further to its trade imbalance because of the higher costs of imports from non-Chinese and non-Russian sources.


Anon: "Net-Net the government makes massive money on sale of petroleum products via petrol taxes well in excess of subsidies given and are the biggest source of funds at the state level."

If that is true, then Indian govt is passing oil price increases to the consumers which will fuel inflation as the rupee falls.

Anonymous said...

Then why does India run such huge trade deficits? What do you import from China? Power and telecom equipment. And what do you export to China? Iron ore is India's biggest export to China. Please check your facts.

I have the main export markets for India's infrastructure goods are South America,Asean and Africa.
In volume this is more than what is imported from China.

Yes India-China trade is very skewed as is China-US/EU/Japan trade....

But overall India's uncovered CAD should be less than 1% this fiscal,well well below comfort levels.

As for China power equipment imports are a transient phenomenon that started 5 years ago when 9% growth created a supply side problem this has started FALLING as our own Industry adds capacity with massive expansion underway at BHEL,Larsen and Toubro,Thermax, JSW, Bharat Forge etc etc

Telecom is another story though...we are self sufficient in Fibre optic infrastructure but are woefully short in other aspects...

Riaz Haq said...

India industrial output falls 5.1%, reports Wall Street Journal:

Industrial output fell 5.1 % from a year earlier in October, after a 1.9% expansion in September, dragged down by a contraction in manufacturing and mining production, government data showed Monday.

The reading widely missed the median estimate in a poll of 15 economists for a contraction of just 0.55%.

Industrial output last fell in June 2009, when it shrank 1.8%.

Government bonds rose following the data amid growing expectations the RBI will hasten a rate cut. The benchmark 7.80% 2021 bond rose to 101.85 rupees from 101.76 rupees before the data and closed at 102.26 rupees.

Economists said a rate cut may come early next year if inflation continues to decline over the next few months.

"While the governor of the RBI continues to stress that he is more concerned about inflation than growth, this is the sort of number that will surely make him sit up and take notice," said Robert Prior-Wandesforde, director of Asian Economics at Credit Suisse.

The RBI, which has raised interest rates 13 times since March 2010, has previously said the likelihood of another increase at its next policy review on Dec. 16 was low.

Despite headline inflation likely remaining elevated at about 9% for November, the sharp contraction in production could prompt some monetary measures at the policy meeting this week, added Citigroup economists Rohini Malkani and Anushka Shah.

Monday's data showed that manufacturing output, which has a 75.5% weighting in the index of industrial production, fell 6% from a year earlier in October, compared with a 2.4% rise the previous month. Mining output shrank 7.2%, after falling 5.6% in September.

Ashmit (India) said...

It's ironic that you question the consumer growth story in India, when O'Neill's disappointment arose out of the fact that policy flip flops disallowed the likes of tesco, walmart and carrefour to profit from the multi billion dollar indian retail space.

In other words, if India's consumer growth story was under question, there would not have been any ripples in the global biz circles because of India’s moves on FDI in retail. The "disappointment" arises from recognising the inability to profit from the vast the potential that india holds.

As for the CAD, trade imbalances and the rupee fall - as you so ardently believe - a glass can either be seen as half full or half empty.

For those who appreciate how market economics work, there are clearly two very visible aspects of the rupee fall. While, it's true that the it hits the import bill, it is also true that a devalued rupee makes indian exports more competetive. The rupee's fall gives it an edge over the yuan.

With the Indian services sector contributing, vastly, to the GDP - the services exports will benefit from the sharp rupee falls.

Extrapolating from the rupee-export co-relation - the falling rupee should aid the exports, allowing for bridging the trade deficit and also allowing the inflow of dollars that would help plug the leaking CAD.

The Indian policy makers are lost in a maze that they themselves created. The investors, global and domestic, are nervous - as they should be. The growth numbers are looking increasingly fragile, but to start pondering over an obituary is insane.

Besides, Mr. Haq, allow me to point out to you a dichotomy. You reject my claims of India's potential as a superpower, when I quote Goldman Sach's (GS) reports. You dismiss the projections and refer to the likes of GS as "dangerous" and "unhealthy" for the economy.

Yet, you endorse the "dangerous" and "unhealthy" claims of GS when its suits your end of running down India.

But how about some perspective?! Despite the nervous situation that india finds itself in, it continues to perform better than pak on most economic indicators - such as inflation, unemployment, growth, forex reserves, growth in exports, etc.

Drawing conclusions about pak based on indicators used in your analysis - such as rupee, trade imbalance, forex reserves, inflation - will present a feeble picture of pak.

For instance, the trade deficit for nov 2011, shot up by 55.5% YOY and by 48.7% for the first 5 months. Meanwhile, quantum of exports fell by 13% in Nov 2011 YOY. Meanwhile, for the same period, imports soared by nearly 20%.

But the import bill is set to get worse as the pak rupee (like its indian counterpart) also hit record lows. So with pak importing about 80% if its oil needs, the writing, it seems, is on the wall. And i assume that we're only too aware of the expected domino effect that expensive crude will have on inflation in pak (higher than india). A reuters report claims that, "With dwindling reserves, coupled with import payments, debt servicing and a lack of external aid, the pressure on the local currency is expected to continue."

Moreover, the CAD situation and the potential for BOP crisis (just like 2008 when pak had to go begging to the IMF for 11 billion USD) cannot be ruled out. Pak's CAD in July-Oct increased to 1.55 billion USD as compared to 541 million USD in the same period last year. If not the quantum of the deficit, then the pace at which it increased should worry you.

As for stable inflow of foreign investments - according to the SBP - Foreign Private Invesments in pak for july-oct fell by 61%, while FDI for the same period fell by 27.7%.

Here's some food for thought - if according to you Pak is too big to fail with an GDP of 175 billion, what does it mean for india with a GDP of 1.73 trillion??

Riaz Haq said...

India rupee has slid 19% against US dollar since March this year, according to the Wall Street Journal:

The Indian rupee partially recovered from a fresh record low against the U.S. dollar Tuesday, aided by a late rebound in local stocks and as the euro pared its losses.

The dollar was at INR53.22 late Tuesday, after touching an intraday high of INR53.515, and compared with INR52.84 late Monday. The greenback's previous record high was INR52.85, on Monday.

The rupee has borne the brunt of global risk aversion emanating from the euro-zone crisis and due to concerns over high domestic inflation, slowing growth and a possible widening of the federal government's budget deficit.

The dollar has gained nearly 19% against the rupee since March, making it Asia's worst-performing currency this year.

The rupee could easily be set to fall to as much as 55 to a dollar by the end of the year, as unhedged local firms rush for cover on their dollar debt, said Ashish Vaidya, head of trading at UBS in India.

Local authorities are making efforts to boost foreign-exchange supplies to help arrest the rupee's slide against the U.S. dollar, the junior minister of finance said. "The finance ministry has been keeping a close watch on the situation," Namo Narain Meena said in the upper house of parliament.

A subcommittee of the Financial Stability and Development Council, headed by Reserve Bank of India Governor Duvvuri Subbarao, is also continuously assessing the matter, he added.

The Bombay Stock Exchange's Sensitive Index rose 0.8% to end at 16,002.51, recovering from its intraday low of 15,771.59.

Meanwhile, Indian government bonds rose on investors' expectation that moderating economic growth will allow the central bank to take a dovish stance and ease policy rates sooner than expected.

The 8.79% 2021 bond ended at INR102.55, up from INR102.26 Monday.

The Reserve Bank of India is likely to pause tightening interest rates at its rate-setting meeting Friday, after 13 increases since March 2010.

"But a fast depreciating rupee may add to some imported inflation as India buys about 80% of its crude oil need," said a senior dealer at a state-run bank.

The market is awaiting November's inflation data, due Wednesday.

According to the median estimate in a Dow Jones Newswires poll of 15 economists, the wholesale price index likely rose 9.04% in November from a year earlier, compared with a 9.73% increase in October.

satwa gunam said...

i agree. India fiscal deficit and balance of payment deficit in the current account is the main reason for the ruppee falling suddenly as the capital inflow has stopped for whatever reason.

this gives an opportunity for the country to understand that current account deficit is something which is dangerous and it requires to be kept under control.

Riaz Haq said...
India’s economy
Slip-sliding away

EXPECTATIONS for India’s economic growth rate have been sliding inexorably. In the early spring there was still heady talk about 9-10% being the new natural rate of expansion, a trajectory which if maintained would make the country an economic superpower in a couple of decades. Now things look very different. The latest GDP growth figure slipped to 6.9% and industrial production numbers just released, on December 12th, showed a decline of 5.1% compared with the previous period, a miserable state of affairs. The slump looks broadly based, from mining to capital goods, and in severity compares with that experienced at the height of the financial crisis, in February 2009, when a drop of 7.2% took place. Bombast is turning to panic.

Riaz Haq said...

Here's a mid-year economic performance summary by Finance Minister Dr. Hafeez Shaikh as reported by APP:

ISLAMABAD, Dec 19 (APP): Federal Minister for Finance, Dr Abdul Hafeez Shaikh here on Monday said economic indicators were showing positive results due to prudent economic policies initiated by the government.Briefing a newsmen, here at the Ministry of Finance, the Minister said the government wanted to improve the workings, efficiency and performance of State Owned Enterprises like Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM) and Pakistan Railways through introducing efficient management and operating through the professionals in order to make them profitable entities for the economic development of the country.
He added that government has fulfilled the minimum financial requirements of the PSM in order to help the organization improve its working capacity.
He informed the media that large scale manufacturing sector has registered growth of 3.6 percent during the first quarter of current financial year which was a health sign for national economy.
He added that revenue collection up to December 16 stood at Rs. 715 billion which was realized at Rs. 555 billion during the same period of last financial year.
Besides, the governmental expenditures were fixed at 42.5 percent during first five months of current financial year which was recorded at 38 percent, he added.
He further informed that government expenditure had targeted to 50 percent of the total expenditures by December this year which would reach up to 42 percent.
However , he said that it would spent about 40 percent of (PSDP) by December.Secretary Finance, Dr Waqar Masood said that export grew by 11.5 percent against the expected targets of 5 percent,while imports grew by 20 percent as against the expected targets of 10 percent.
He informed that inflation rate was recorded at 10.2 percent during the period under review which was recorded at 14 percent during the last year.
Foreign remittances in the country were increased by 18 percent which crossed US $ 5 billion mark during last five months of current financial year.
Secretary Finance said that Federal Board of Revenue (FBR) was determined to achieve its revenue targets of Rs. 1952 billion as revenue collection has registered 28 percent growth as compared to same period last year.

Riaz Haq said...

The Indian stock market today lost its trillion-dollar status, as a decline in the rupee and share valuations led to its size slipping below this mark to $994.97 billion, according to India's Economic Times:

India had managed to hold onto the select league of the countries with a trillion-dollar stock market by a whisker for past few days, but finally gave in today after the market barometer Sensex fell to a fresh 28-month low and the rupee lost further value against the US dollar.

At the end of today's trade, the total size of the Indian market, measured in terms of cumulative valuation of all listed stocks, stood at Rs 52,60,440.78 crore.

As the rupee ended the day at Rs 52.87 level, the stock market's size in the American currency was USD 994.97 billion -- just a shade below the trillion-dollar mark.

The Indian market had a size of USD 1.0116 trillion (Rs 53,48,352.02 crore) at the end of yesterday's trade.

A total of 13 countries are now estimated to be left in the trillion-dollar stock market club, including the US, the UK, Canada, Brazil, Australia, Hong Kong, South Korea, China, Japan, Spain, Germany, Switzerland and France.

The Indian market had first achieved a trillion-dollar size about four and half years ago on May 28, 2007, but moved out of this coveted league about a year later on July 1, 2008.

India again joined this elite club of markets with trillion-dollar valuation about a year later on June 3, 2009.

The Indian market was, in fact, seen inching towards the two-trillion dollar mark at least twice in the past -- first in early 2008 and then at the beginning of 2011 with a size as high as USD 1.9 trillion.

A sharp plunge in the market this year has led to the Indian market valuation falling by close to Rs 20 lakh crore (over USD 500 billion), from about Rs 73 lakh crore (USD 1.7 trillion) at the beginning of 2011.

The rupee has been a declining trend for many months now and had hit its record low level below Rs 54-level last week, but the fall was somewhat arrested since then on the back of an intervention by the Reserve Bank.

The market size has been hovering above the trillion- dollar mark for last few days and an eminent miss was averted on Thursday last week, when the RBI managed to reverse the downfall of rupee after a record fall to Rs 54.30 level.

On Friday, the market size stood at Rs 54,11,301 crore or USD 1.026 trillion, based on that day's currency rate of Rs 52.30, as the market tanked sharply. The trillion-dollar tag had been lost that day itself, if the rupee had managed to hold onto its record high levels.

In terms of individual exchanges, the total size of stocks listed on the NSE yesterday itself slipped below trillion-dollar mark to USD 989 billion (Rs 52,30,333 crore).

At the end of today's trade, NSE-listed market valuation stood at Rs 51,42,566 crore (USD 972.68 billion).

However, the market valuation of NSE-listed companies is not considered as the country's stock market size, as not all the companies are listed on this exchange.

Indian stocks are mainly listed on two national bourses, the BSE and the NSE, but the numbers of listed companies on the two stock exchanges differ sharply.

While about 1,600 stocks are actively traded on the NSE, the number is almost double at over 2,900 at the BSE.

Almost all the stocks listed on the NSE are also listed on the BSE and therefore the cumulative valuation of companies listed on the BSE is treated as the total market size.

Mayraj said...

Businessweek report on infrastructure and power deficits hurting India:

Dec. 19 (Bloomberg) -- Truck driver Sujan Singh should be delivering cars to Mumbai from Maruti Suzuki India Ltd.’s plant near New Delhi. Instead, he’s sitting at a roadside cafe by one of India’s busiest highways, waiting for the traffic to ease.

“I’ll start again in the evening and travel through the night as you face huge congestion during the daytime,” he said, enjoying the warmth of a burning pile of trash in the New Delhi winter air. “Most of the highways are just single lanes and the roads are so uneven and bad that that it causes accidents.”

India’s failure to upgrade its 4.2 million kilometers (2.6 million miles) of roads, close a 10 percent power deficit and ease congestion at ports is hobbling the central bank’s efforts to beat inflation. Even after raising interest rates by a record 375 basis points in 1 1/2 years, wholesale prices have risen more than 9 percent for 12 straight months. The bank says supply bottlenecks that push up costs must be tackled.

The country of 1.2 billion people is paying for two decades of neglect. While China 20 years ago went on a multitrillion dollar spending spree for roads, railways, ports and power stations, its South Asian neighbor concentrated on services. Now, as China reins in prices and expands industry inland to restrain wages, India’s near record-low rupee and price gains are damping consumer spending and choking off company earnings.

“India has allowed a large number of cars without creating enough roads; a large number of industries without enough power to run them,” said Sunil Sikka, president of Havells India Ltd., the nation’s second-largest electrical components maker by value. “It’s like trying to wear shoes without socks -- very, very irritating and difficult.”

Cars and Soap

Sikka said Havells has to pay higher packaging costs to protect lamps and switchgears from India’s bumpy roads, where average speeds are 20 kilometers per hour (12 mph). Businesses from Maruti to soap and food maker Hindustan Unilever Ltd. also suffer, said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi.

“All companies where there is movement of goods and services and distribution are getting hit,” said Thunuguntla. “It adds to their costs and affects productivity.”

Riaz Haq said...

In a tough message to India Inc, Prime Minister Manmohan Singh urged industry leaders to stop negative comments, and pitch in to help India grow.

"I must confess that it is a little disappointing to sometimes hear negative comments emanating from our business leadership or be told that government's policies are causing slowdown and pessimism in the industrial sector. Such comments have added to uncertainty and have emboldened those who have no stake in our economic growth.

It is true that our country faces a large number of issues which need urgent resolution. The energy sector, the port sector, the transport sector, the supply of gas and coal, all need greater attention. Corruption and better governance also require firm handling. I wish to assure you that our Government is serious about tackling these issues. We are also committed to ensuring the predictability and transparency of our policy and regulatory environment," the Prime Minister said.

These comments were a part of PM's remarks at a meeting of the Council on Trade and Industry held yesterday evening. India Inc met the PM to discuss concerns over economic slowdown, high interest rates and lack of reforms.

We had a very good interaction with the PM. He listened to all the different challenges faced by the Industry. The PM is very determined to get back on the growth path, Swati Piramal, Member of the PM Council on Trade told NDTV Profit.[RELATED-STORIES]

Those present at the meeting included Tata Sons Chairman Ratan Tata, Bajaj Auto Chairman Rahul Bajaj, Reliance Industries’ Mukesh Ambani, former Chairman of Infosys NR Narayana Murthy, Bharti Airtel's Sunil Mittal and ICICI Bank's Chanda Kochhar. Commerce and Industry Minister Anand Sharma and Deputy Chairman of the Planning Commission Montek Singh Ahluwalia also attended the meeting.

Read more at:

Riaz Haq said...

Pakistan is turning away from the West and looking East, reports

(Dai Bingguo) visit came shortly after Beijing and Islamabad finalized a $1.6 billion currency swap agreement which will allow the two countries to boost their trade relations and decrease the involvement of the dollar. Currently China-Pakistan trade stands at $10 billion a year, but Dai has called for that figure to be increased to $15 billion over the next three to four years.

China is strengthening its role as a regional leader, and Pakistan is among key targets for Beijing’s influence building strategy. It is investing in a number of big construction projects in the country, including the Karakorum Highway and Gwadar Port, both of which will improve China’s transport links with energy-rich Gulf nations. It will also help Pakistan develop its nuclear power industry.

The Chinese army also regularly performs joint war games with Pakistani forces. Islamabad is seeking China’s military support against its long-time rival, India, while China needs a stable and well-defended Pakistan to stop any future incursion into its territory of extremists from volatile Afghanistan.

The visit comes as Pakistan distances itself from its long-time strategic ally, the US. The year 2011 was a difficult one for relations between Islamabad and Washington, with a number of incidents contributing to the deterioration. The downward spiral started in January when a CIA contractor killed two men but later evaded punishment because families of the victims were paid blood money. The case caused anger in Pakistan when the US said the perpetrator had diplomatic immunity and demanded his release.

In May, US commandos raided Pakistan’s territory and killed Osama bin Laden, who had been living in the country for several years. Islamabad was given no warning of the operation, which angered the Pakistani military. Washington said if it had informed Pakistan’s government in advance, the Al-Qaeda leader would have been alerted, enabling him to escape.

In November, a US air strike on a Pakistani border post killed 24 troops who were mistaken for Taliban militants. It took the Pentagon a month to reluctantly admit their part of the blame for the deadly mistake and offer apologies. However, the Pakistani military do not appear to consider the case closed.

The Americans also have their share of grudges against Pakistan, from the alleged embezzlement of military aid to alleged support for Taliban attacks in Afghanistan, to harboring bin Laden. With relations between the allies deteriorating, Pakistan has more and more incentive to turn away from the US as its key partner and side with China, which challenges American influence in the region.

Joseph Chang, a professor of political science at Hong Kong City University, believes the alliance is beneficial to both sides. China, an ally of Pakistan against India and Soviet Union during the Cold War, now sees the benefits of a partnership with Pakistan as primarily economic.

“Pakistan has been Beijing’s best ally throughout the history of the People’s Republic of China,” he told RT. “Increasingly, Pakistan has a certain strategic value to China because of the completion of the Karakorum Highway, as well as the almost-completion of the Gwadar port. China certainly hopes that it can, through land links to Pakistan, then open up sea links to the Indian Ocean and bring oil through this route, avoiding the overcrowded Straits of Malacca.”

Chang believes Pakistan could also profit from the alliance: “China is always very helpful in terms of trade, investment as well as military and economic aid. So having an ally like China will help to much strengthen Pakistan’s bargaining power with Washington DC.”

Riaz Haq said...

Here's investment strategist Stephen Roach (Morgan Stanley) on why India is riskier than China:

India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India’s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October.

But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion.

While China is in better shape than India, neither economy is likely to implode on its own. It would take another shock to trigger a hard landing in Asia.

One obvious possibility today would be a disruptive breakup of the European Monetary Union. In that case, both China and India, like most of the world’s economies, could find themselves in serious difficulty – with an outright contraction of Chinese exports, as in late 2008 and early 2009, and heightened external funding pressures for India.

While I remain a euro-skeptic, I believe that the political will to advance European integration will prevail. Consequently, I attach a low probability to the currency union’s disintegration. Barring such a worst-case outcome for Europe, the odds of a hard landing in either India or China should remain low.

Seduced by the political economy of false prosperity, the West has squandered its might. Driven by strategy and stability, Asia has built on its newfound strength. But now it must reinvent itself. Japanese-like stagnation in the developed world is challenging externally dependent Asia to shift its focus to internal demand. Downside pressures currently squeezing China and India underscore that challenge. Asia’s defining moment could be hand.

Riaz Haq said...

Pakistan's key share index KSE-100 dropped about 5% in 2011, significantly less than most the emerging markets around the world. Mumbai's Sensex, by contrast, lost about 25% of its value, putting it among the worst performing markets in the world.

Riaz Haq said...

Chinese banks bail out India's Reliance, according to International Financing Review:

Anil Ambani’s Reliance Communications has been saved from a potential financing crunch by a surprise US$1.1bn loan from a group of Chinese state-owned banks. RComm will use the new funds to repay a US$1.2bn convertible bond issue due for redemption on March 1, putting an end to fears of a potentially devastating default.

The loan has raised eyebrows as a rare instance of Chinese support for one of India’s biggest business groups. China Development Bank, Export-Import Bank of China, Industrial and Commercial Bank of China and other Chinese lenders provided the entire refinancing, according to an announcement from RComm on January 17.

RComm “will benefit from an extended loan maturity of seven years and attractive interest cost of about 5%”, said a company press release.

The new loan comes as European banks – RComm’s traditional relationship lenders – are scaling back exposure to Indian borrowers. RComm has taken a hit from India’s ongoing telecoms corruption scandal, with police questioning chairman Anil Ambani last year, and its existing syndicated loans feature prominently on axe sheets in circulation from European banks.

However, bankers with direct knowledge of the matter said that, in return for the loan from the Chinese policy banks, RComm was expected to purchase equipment from the country’s PC companies, such as Huawei and ZTE Corp.

“Chinese banks have a lot of cash and they tend to throw it around, but they only do so when there is something packaged with it,” said a veteran loans banker in Singapore. “It is a great deal for Reliance Communications as it provides another source of liquidity when traditional ones are drying up. However, there was more in it than just pure returns that incentivised the Chinese lenders.”

This is not the first instance of such an arrangement. Late last November, Sasan Power, the project company for the Sasan ultra mega power plant and a subsidiary of RComm affiliate Reliance Power, completed a US$2.2bn refinancing, including a US$1.114bn 13-year tranche. Bank of China, CDB and Chexim took US$1.06bn of that tranche, for which Chinese export credit agency Sinosure provided cover.

That was the first Indian loan to which Chinese lenders had committed such large amounts, after they began to take lead roles on Indian deals in 2007. Prior to Sasan Power, the take of Chinese lenders as MLAs on Indian deals amounted to just US$218.26m from six transactions in three years.
More redemptions looming

Bankers warned, however, that the Chinese loan was unlikely to provide a template for other Indian companies to follow.

“The names that have trade links with the PRC will appeal more to the Chinese banks. Those that think they can meet the criteria are being marketed to the Chinese banks,” said a banker with a foreign bank in Mumbai.

More than two dozen Indian companies in the BSE-500 index face redemptions on foreign currency convertible bonds worth a combined Rs330bn (US$6.5bn) at end-March 2013, according to brokerage Edelweiss. These include RComm’s US$925m outstanding CB, which the loan will repay.

Entities without ties to China must look elsewhere and may have to rely on Indian banks to overcome their refinancing pressure.

For example, Orchid Chemicals & Pharmaceuticals is in the market, through sole bookrunner Axis Bank, for a US$100m 6.5-year loan that will partly refinance a CB issue of US$170m coming due in mid-February. The facility, marking Orchid’s debut in the offshore loan markets, pays a top-level all-in of 490bp over Libor, based on an average life of five years....

Riaz Haq said...

India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion, according to a report in the Indian Express:

...The composition of capital inflows shifted in favour of debt, with a rise in the proportion of short-term flows. If the pace of FDI inflows does not pick up once again and FII equity inflows revert to the decelerating trend, CAD may have to be largely financed through debt creating flows in the coming quarters. Recent pick up in FII flows has been mainly on account of investment in debt instruments.
On the capital account, recent policy measures have stimulated debt capital flows in the form of investments by FIIs in debt instruments and NRI deposits. Going forward, however, it would be necessary to reduce dependence on debt inflows and accelerate the reform process in order to ensure revival of equity flows as investors look for strong growth opportunities in an otherwise gloomy global environment, the RBI says.

Widening current account deficit (CAD), diminishing capital flows and moderately deteriorating vulnerability indicators, notwithstanding improved net international investment position, warrant acceleration of the domestic reform process. The RBI feels this will encourage renewed equity flows.

Subbarao made it clear that close monitoring of the short-term external debt will be required in 2012-13. Given that both global and domestic scenario remains bleak, investors would generally tend to prefer shorter-dated government securities.

Capital flows

* In 2011, out of $8.65 billion foreign debt inflows, as much as $4.18 billion came in December while there was an outflow of $357 million from equity

* India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion

* If the pace of FDI inflows does not pick up and FII equity inflows decelerate, CAD may have to be largely financed through debt creating flows in the coming quarters.

Riaz Haq said...

Here's a Daily Times report on some of the German multinational companies in Pakistan:

ISLAMABAD: The German embassy in cooperation with the Pakistan German Business Forum (PGBF) and German-linked companies and institutions active in Pakistan held an exhibition titled ‘Germany on the Road’ in Multan. Germany on the Road has been designed to present the multitude of linkages between Germany and Pakistan by giving German companies, Germany-linked companies and German institutions the opportunity to display their activities in Pakistan in a concise and vivid manner. During the exhibition up-to-date information about Germany as well as appealing give-away were handed out and a buffet dinner was offered. The event was sponsored by BASF Pakistan, CEI Logistics, EXCEL Group/PrintSol, GWE German Water and Energy, KSB Pumps, Küppersbusch/Teka Pakistan, MAN Diesel Pakistan, METRO Cash and Carry Pakistan, Nordex SE Germany, SAAS Synergie/Alno and SAP Pakistan.

I am surprised that Siemens Pakistan is not at the event.\04\01\story_1-4-2012_pg5_15

Riaz Haq said...

Here's an interesting excerpt from NY Times review of Ed Luce's book “In Spite of the Gods: The Strange Rise of Modern India”:

Despite its robust democracy and honest elections, India faces the future saddled with one of the most corrupt government bureaucracies on earth. Mr. Luce encounters a woman in Sunder Nagri, a New Delhi slum, whose quest for a ration card entitling her to subsidized wheat and other staples involved bribing an official to get an application form. The form was in English, which she could not read, so she had to pay a second official to fill it out. When she turned up to claim her wheat, it was moldy and crawling with insects. The store owner had evidently sold his good government wheat on the black market.

In the northern state of Bihar, Mr. Luce writes, more than 80 percent of subsidized government food is stolen. Most ration cards are obtained through bribery, by Indians who are not poor. It’s the same story in nearly every area of an economy touched by the groping tentacles of a government that “is never absent from your life, except when you actually need it.”

As a former cabinet official tells Mr. Luce, corruption is not simply a nuisance or an added burden on the system. Rather, he says, “in many respects and in many parts of India it is the system.”

Mr. Luce, traveling the country’s rickety rail system, covers an enormous amount of ground. He inquires into the Kashmir dispute while dissecting India’s fraught relationship with Pakistan; marvels over New Delhi’s spanking-new subway system; describes the middle class rage for megaweddings; pays a visit to Bollywood and, in some of his most absorbing chapters, analyzes the changing caste system, the status of India’s Muslims and the alarming rise of Hindu nationalism.

All this and a visit to, a Mumbai company that markets brands through the Internet, cellphones and interactive television shows. Its founder, Alok Kejriwal, is still in his 30s, and to Mr. Luce represents the new India.

“I am greedy,” he tells the author. “I have no trouble admitting to that.”

At one point, Mr. Luce ponders India’s constant state of chaos and compares it to a swarm of bees. From inside the swarm, things look random, but from the outside, the bees hold formation and move forward coherently.

Sometime in the 2020s, at current growth rates, India will overtake Japan to become the world’s third-largest economy. Greatness lies within its grasp, Mr. Luce argues, if it can figure out a way to restructure its inefficient agriculture, put millions of desperately poor people in jobs that pay more than a pittance, wake up to a potential H.I.V.-AIDS crisis and root out government corruption.

Mr. Luce takes a cautiously optimistic view. “India is not on an autopilot to greatness,” he writes. “But it would take an incompetent pilot to crash the plane.”

Hopewins said...

Sep 8th 2012

Riaz Haq said...

India on verge of financial crisis, says The Guardian:

The Reserve Bank of India (RBI) in Mumbai. The country is facing its own financial crisis. Photograph: Vivek Prakash/REUTERS
India's financial woes are rapidly approaching the critical stage. The rupee has depreciated by 44% in the past two years and hit a record low against the US dollar on Monday. The stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country.

In a sense, this is a classic case of deja vu, a revisiting of the Asian crisis of 1997-98 that acted as an unheeded warning sign of what was in store for the global economy a decade later. An emerging economy exhibiting strong growth attracts the attention of foreign investors. Inward investment comes in together with hot money flows that circumvent capital controls. Capital inflows push up the exchange rate, making imports cheaper and exports dearer. The trade deficit balloons, growth slows, deep-seated structural flaws become more prominent and the hot money leaves.

The trigger for the run on the rupee has been the news from Washington that the Federal Reserve is considering scaling back - "tapering" - its bond-buying stimulus programme from next month. This has consequences for all emerging market economies: firstly, there is the fear that a reduced stimulus will mean weaker growth in the US, with a knock-on impact on exports from the developing world. Secondly, high-yielding currencies such as the rupee have benefited from a search for yield on the part of global investors. If policy is going to be tightened in the US, then the dollar becomes more attractive and the rupee less so.

But while the Indonesian rupee and the South African rand are also feeling the heat, it is India – with its large trade and budget deficits – that looks like the accident most likely to happen. On past form, emerging market crises go through three stages: in stage one, policymakers do nothing in the hope that the problem goes away. In stage two, they cobble together some panic measures, normally involving half-baked capital controls and selling of dollars in an attempt to underpin their currencies. In stage three, they either come up with a workable plan themselves or call in the IMF. India is on the cusp of stage three.

Riaz Haq said...

Jim O’Neill, ex Goldman Sachs investment banker who coined "BRICs", praises #China government’s #coronavirus response: ‘Thank God this didn’t start in somewhere like India’. His comments anger #Indian officials. #India #Modi #BJP #CowUrine #COVIDー19|twitter&par=sharebar

Jim O’Neill, the chair of U.K. think tank Chatham House, on Wednesday commended the “fast, aggressive” Chinese response to the coronavirus outbreak, suggesting western countries should follow suit.

“Thank God this didn’t start in somewhere like India, because there’s absolutely no way that the quality of Indian governance could move to react in the way that the Chinese have done,” O’Neill, the former Goldman Sachs chief economist, told CNBC’s “Squawk Box Europe” on Wednesday.

“That’s the good side of the Chinese model, and I think you could probably say the same about Brazil too,” he added.


On one hand, O’Neill acknowledged that the dominance of President Xi Jinping and the diminished responsibility of officials in Wuhan, where the virus originated, may have enabled COVID-19 to initially spread quicker.

“That said — and it’s often like a lot of other things when China got hit with a crisis over the last 30 years — once they realized the scale of it, the system seems to be capable of dealing with it pretty quickly, relative to other places, and pretty decisively,” O’Neill contended.

Chinese authorities suppressed early warnings from doctors and citizens in Wuhan and forced them to apologize for spreading “lies” and in turn failed to contain the outbreak in its infancy. The government has been widely criticized for its delayed response at the outset, with Raymond James analysts likening the situation to the Soviet Union’s handling of the Chernobyl nuclear disaster.

Ophthalmologist Li Wenliang sounded the alarm in December when he told a group of doctors on Chinese social media about seven cases he saw. He and seven other whistleblowers were reprimanded by the Wuhan police in January for spreading “illegal and false” information.

Chinese authorities shut down vast swathes of the country’s travel infrastructure and industrial production last month, causing a profound short-term shock to the Chinese and global economy. However, new cases of the virus in greater China have now slowed to a trickle, while Italy deals with a rapid escalation in new infections and a spiking death toll.

Negi highlighted that the Indian government supplied 15 tons of medical assistance comprising masks, gloves and other emergency medical equipment to China on 26 February 2020.

The outbreak is now a global pandemic while new cases in China have begun to slow, and Beijing is now attempting to cast doubt over whether the virus actually originated in China at all.

A ‘globalized people’
O’Neill, the former commercial secretary to the U.K. Treasury suggested that western governments dealing with outbreaks of their own, such as Italy and the U.K., should look to emulate China, South Korea and Singapore in the swift deployment of aggressive containment measures.

He also argued that finance and economic policymakers must begin treating health policy more seriously and think of it in the same way as other investment spending, and criticized the protectionist agenda of the U.S. and other nations on international trade.

“Unless we get rid of all forms of communication, we are globalized people and we need to think and learn from each other about the right solutions at any moment in time for all of us,” O’Neill concluded.