As another budget looms, here is the goodnews: India’s fiscal situation has improved beyond the expectations of most people. Further, the improving trend is set to continue. It doesn’t matter that subsidies are on the rise and the Sixth Pay Commission’s impact will have to be factored in. The sea-change in our fiscal fortunes calls for a rethink of long-held attitudes towards government spending. Many find it difficult to digest the improvement in the first place. There is plenty of quibbling about the correct fiscal numbers. The most commonly heard whine is that the Centre’s budgetary numbers understate the fiscal deficit because some of the oil, fertiliser and food subsidies are being met through the issue of bonds. Wire money online to India with Xoom.com for as low as $4.99. This sort of quibbling misses the point. The key figures to focus on are, one, the combined deficit of the Centre and the states; and, two, the total liabilities of the Centre and the states. In respect of these two key figures, we are pretty much on target, if not ahead of it. Start with the Centre’s fiscal position. The fiscal deficit was to be brought down to 3.3% of GDP in 2007-08 from 3.7% in 2006-07.For 2006-07, the provisional figure is down to 3.5%. On top of this, GDP growth for 2006-07 has been revised from 9.2% to 9.6%. In 2007-08, GDP growth is likely to above the budget’s estimate of around 7.5 %.Putting together all these, the fiscal deficit target of 3% mandated for 2008-09 by the FRBM Act is likely to be met in 2007 -08 itself. In the 2008-09 budget, the Sixth Pay Commission impact has to be taken into account.This is expected to be around 0.5% of GDP.Despite this; there is a good chance of meeting the FRBM target for 2008-09. But we would still have off -budget bonds which the IMF estimates at 1.2% of GDP. So, yes, the sceptics are right up to a point – induding off-budget bonds, we will be missing the FRBM target. But that is because the sceptics focus only on the Centre’s fiscal position. To some extent, the slippage at the Centre is on account of improvements in the states, thanks to higher transfers from the Centre to the states and forgiveness of state debt by the Centre. We should be looking at the combined fiscal deficit of [...]
Archive for February, 2008
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LET’S HAVE A LOOK ON THE INTEREST RATES
February 27th, 2008 
Tejinder Interest rates have started coming down. Large public sector banks like SBI and Canara bank have slashed key lending rates twice in the last one month and home and consumer loan rates have been cut across the board. And all this without the RBI signaling any rate easing in its last monetary policy. While the RBI did urge banks to consider changing rates without any direct cue from itself and the Finance minister has been requesting bank chiefs to lower rates, there could be a couple of other important reasons why banks have started cutting rates proactively. One, growth is slowing down. In early 2007, the furious pace of credit growth was a problem. Now that the central bank has effectively cooled this tear away credit growth with higher interest rates, we have come to the other end of the spectrum because growth could be lower than desired: The economy is slowing, many sectors are witnessing lower off-take and banks do not want to be in a situation where their bread and butter is affected by their inability to lower interest rates pending fiat from the RBI. Therefore, they are simply doing what is best for their own business, lowering the price of money: Now, why have they not waited for an explicit cue from the central bank this time? Perhaps because of inflation. Even a casual glance at commodity prices will tell you the story. Crude is $100 a barrel, gold is at a high of $950 an ounce and silver at a 27-year- high, base metals have had an incredible run of late and even soft agricultural commodities are stubbornly high. The US Fed, staring at a recession, does not have the luxury of looking at inflation but the RBI does. Particularly so, with this being a pre-election year and the Finance Ministry is surely not missing any opportunity to remind it of the fact. It is entirely possible then that another couple of monetary policy meetings may pass without the RBI pressing the rate trigger. Banks don’t want to keep waiting only to realise halfway down the year that slower growth has started denting credit off-take in a serious manner. That is the way it should be: the RBI does what it thinks is good for the nation, balancing inflation and growth, while banks do what is good for their business of lending. Generally interest rate cuts [...]
VICTIMS HAVE VANISHED
February 26th, 2008 krishna From an obscure house in Gurgaon to a remote jungle resort in Chitwan, Nepal, where he has been finally nabbed, we have been through a horrific roller coaster ride with the man who is allegedly one of India’s leading kidney dealers. With almost vicarious fascination, we learn day after day of his enormous wealth, he was carrying hundreds of thousands of rupees as loose change when caught, and his palatial homes both in India and abroad. Of his fascination with luxury cars and failed beauty queens. Of his extensive contacts across the world where he found recipients for his gruesome racket. While this ghastly drama was unfolding, reports surfaced of the organised trade in blood right outside premier hospitals in the capital. As each scandal surfaces, we see the nefarious collusion between sections of the medical community and organ traffickers like kidney kingpin Amit Kumar. But that apart, the one piece in the macabre jigsaw that we rarely bother about is that of the victims. It is no secret that unscrupulous touts exploit the grinding poverty; and often illiteracy; of their victims in order to lure them to clinics where they are deprived of their kidneys. In the Gurgaon clinic that has been busted, we learn that at least 500 kidney transplants had taken place over the past few years. The question then arises, what happened to the donors? We can be fairly certain that they did not receive the requisite postoperative care without which the donor is condemned to a life of debilitating ill health and even early death. The police seem to have made no effort to trace these unfortunate people. In Chennai, the hub of the kidney trade in India, over 2000 people sell their kidneys each year. Many victims are trafficked from Nepal and once the deal is through sent back home. It is clear that there is also political pressure on the medical fraternity to either collude in or turn a blind eye to this illegal trade. According to 1994 legislation, a State-approved ethics committee must approve all transplants. But, as many tsunami survivors who sold their kidneys testified, getting around such committees was relatively easy. The testimony of the victims is crucially in the legal procedure against charlatans like Kumar. If it is proved that coercion was used to trap a donor, then the penalties are that much higher. The state that was [...]
IS THE NUCLEAR DEAL SKIDDING?
February 26th, 2008 Tejinder So it is official now: time is running out for the India-US civilian nuclear deal. A three-man team of US senators led by Joseph Biden, who heads the influential Senate Foreign Relations Committee, disclosed this at a press conference in Delhi. Much water has flown down the Yamuna and the Potomac since Prime Minister Manmohan Singh and President George W. Bush inked the deal in July 2005. It focuses on developing India’s civilian nuclear power programmes in exchange for placing its civil nuclear facilities under International Atomic Energy Agency (IAEA) safeguards. Wire money online to India with Xoom.com for as low as $4.99. But controversy has dogged it from the word go, with detractors – chiefly the Left partners of the government – deriding it as a potential ‘sellout’ of India’s interests. The truth, of course, is that the Bush administration staked an unprecedented amount of political energy on this agreement, which represents a big change in US policy. Apart from revising domestic law, the US would have to convince its 44 Nuclear Suppliers Group (NSG) partners to waive guidelines prohibiting the supply of nuclear material or technology to States that don’t accept IAEA safeguards on all its nuclear facilities. Never mind India’s credentials as “a responsible State with advanced nuclear technology”. According to the deadline identified by the Biden team, the US Congress will only consider the deal if it reaches Capitol Hill before July. This effectively means that New Delhi must finalise the India-specific safeguards agreement with the IAEA and get the nod of the NSG in the next few months. In the event the US Congress doesn’t ratify it, the deal almost certainly runs the risk of being renegotiated by the next Congress. And going by the campaign rhetoric of the two Democratic Party presidential candidates, neither Barack Obama nor Hillary Clinton is likely to back a deal initiated by Mr Bush.There is no guarantee, either, that the Republican candidate John McCain will endorse President Bush’s overture towards India. So it would be unfortunate if the agreement were to fall through because of political reasons than due to any technical ones, as both countries have staked so much political capital on it. As many experts have pointed out, there are no technicalities in the deal that can’t be sorted out with more discussion, which makes it all the more a shame that critics oppose it just for [...]
DON’T LET THE FEEL GOOD FADE
February 25th, 2008 Tejinder Amidst so much talk and analysis of what is going wrong in the economic world today, the one thing that has not been stressed enough is what impact it may be having on the “feel-good” factor for stewards of the Indian economy. The one strong underpinning of this multi-year bull market has been how confident businessmen and investors have felt about the future. This is not as tangible or quantifiable as other economic metrics but every bit as important. After all, businesses and markets are run by human beings. When they feel less confident, they go into a shell, which often compounds the problems which made them less confident to begin with. Wire money online to India with Xoom.com for as low as $4.99. Put yourself in the shoes of the CEO of an Indian company and ask what he must be feeling today. Just one quarter back he had unlimited access to capital, the economy was cruising at 9 per cent and the global economy was expected to deal with a US slowdown and come out of it relatively unscathed. Now, it appears the US is probably already in recession, economists are talking about a serious Asian slowdown, Indian GDP growth is grinding closer to the 8% mark by next year, industrial production has turned sluggish, interest rates are stubbornly high with the Reserve Bank of India reluctant to cut yet and access to equity capital is drying up with big IPOs being pulled out. Global investors are also getting risk averse so access to private capital and even global market access may be constrained for companies. All this is happening at a time when Indian companies are in the midst of executing fairly significant expansion plans requiring large capital expenditure. For managements to take on more risk and for investors to fund it, sentiment needs to be strong. Yet, everything that has happened in the last few weeks points in the opposite direction. Not to mention the state of the stock market. Never believe a CEO when he tells you market movements do not concern him. A large part of the feel-good in any economic environment is derived from the capital market, make no mistake about it. Do you doubt that business sentiment will be crippled if the Sensex goes to 12,000 and stays there for some time? Sentiment is a fickle thing, it turns all so easily. [...]
DOES HE KNOW SOMETHING?
February 25th, 2008 krishna Dr. Manmohan Singh was worried. No, not worried, but concerned. No, not concerned, but agitated. Yes. When curiosity starts biting viciously, the mind cannot but get agitated. He was, of course, curious. And there seemed to be no way of quenching that curiosity. The media were agog with rumours about an impending cabinet reshuffle. If it had been an official announcement, the PM would not have bothered. He knew that a formal denial would follow. This was a rumour featured in all gossip columns. The greatest gossip of them all, the visual media, were also forecasting a cabinet reshuffle. One can ignore news, but the man who disregards a rumour, does so at his own peril. So the cultured Doctor was sure that there was going to be a reshuffle. But who was going to barge in and who was going to be kicked out? Will the portfolios of the ministers be changed? Who will get what? The PM was anxious to know. Of course, being only the PM and not Sonia Gandhi, he had no right to expect to know anything in advance. His lot, he knew, was to wait and watch. He would come to know, when the ministers would be sworn in by Abdul Kalam. No, no, not Abdul Kalam. He was no longer the President. That woman – what was her name? – Some Patel, Ahamed Patel? No, a woman. Some other Patel. Ah! Pratibha Patil! When she would say ‘I…’ and rest her office, the ministers – at least the new ones if any – would have to confess their names and admit their identities: Then the Prime Minister would know. But curiosity is something that cannot wait to be killed at the last moment. He wanted to know in advance, at least before the invited audience at the Rashtrapati Bhavan came to know the names and the faces. What faces? Does it matter at all? After all, whatever the face is now, it will be lost once the person joined the cabinet. But that is a side issue. Who are going to become ministers? That is the question now. Curiosity, earlier biting the PM, now started eating into him. He had to do something about it. He could ask Karunanidhi. At least he would know, whether his daughter was going to be inducted into the cabinet or not. But if Dr. Manmohan Singh [...]
THE LEGEND OF A BIG FALL
February 25th, 2008 krishna What a shame. The stock that was supposed to double on listing actually lost a fifth of its market value on Day One. One sincerely hopes this ends the mindless flipping game that has dogged the IPO market through this Bull Run. When Anil Ambani and his investment bankers proudly spoke about how $190 billion had come in by way of subscription money; creating history; I had a sinking feeling this was coming. Now the truth is out. Wire money online to India with Xoom.com for as low as $4.99. Yesterday, all of $2.5 billion of Reliance Power stock got traded, cash and derivatives put together, and even that stock could not be absorbed. Where were those billions that had rushed in to subscribe it? If indeed that had come in to buy the great growth story in Indian power, has it all changed in barely a month? I said it then and I will say it again; these institutional bidders are a bunch of flippers with no regard for the paper they are buying. So, the next time you get all excited about a foreign cited about a foreign fund buying a stock at a lofty price, do remember that all of them had egg on their face with Reliance Power. They are suckers who promoters and bankers have wrapped around their little fingers. So now Anil Ambani has his cash sitting nice and pretty in the bank, raised at Rs 450, while you are holding the baby at Rs 370. Truly sad. Yet, do not feel even for a second that great “value” has emerged ill that stock after the first cut. Rs 370 is lower than Rs 450, but not fair value for the stock. It still trades at just under five times expected book value for 20012-13 that is five years forward. You can buy NTPC today, with larger capacity on the ground at three times the book value. Reliance Power can fall to Rs 300 and still be expensive. It probably will, if it is not supported. Anil Ambani has fabulous businesses in his group, in Reliance Communications and Reliance Capital. Yet, I think he has played his cards all wrong with this IPO and severely dented the image of his ADA Group. The next time he approaches the market to raise capital; the memory of this debacle will haunt him.
THE BURIAL OF EMBEDDED VALUE
February 25th, 2008 krishna When a momentum party ends in the stock market, the biggest hangover is always felt by the “themes” that emerged as most popular during the heady days of bullishness. One theme that gained a lot of currency in late 2007 was “embedded value” or sum of parts (SOTP) valuations. Stock prices that could never be justified by current earnings were easily explained by ascribing value to future business streams of the company. Promoters were only too happy to play along: they merrily announced value “unlocking” strategies from diverse businesses and plans to raise humongous amounts of money in these subsidiaries using the then prevalent market euphoria. So analysts and promoters played this game of make believe to the hilt and investors made money for a while, till the music stopped. One look at the screen today will reveal the carcasses of those great SOTP stories. Wire money online to India with Xoom.com for as low as $4.99. Power was the area that promoters wanted to exploit the most. Their eyes must have lit up at the IPO valuation of Reliance Power and even more so at the prospect of it doubling on listing. So it became the perfect cue for companies like Sterlite and JP Associates to announce the hiving off of their power businesses and plan placements/listings for them at valuations benchmarked to Reliance Power. Analysts did not waste any time in revising price targets upwards based on this ingenious unlocking of embedded value. REG and Jindal Steel and Power floated around in similar SOTP bubbles. Sadly, the script did not play to plan. The list is long: Punj Lloyd was rerated to include Pipavav Port valuations, IDFC and ICICI got great rub-off s from their brokerage holdings as brokerage stocks soared to ridiculous valuations and countless stocks derived embedded, value premiums from their real estate holdings. Now the scales have fallen from investors’ eyes but too late, stock prices of these companies have collapsed. In hindsight, which is perfect, it was sheer madness. One bit of insanity led to another. First, outlandish valuations were ascribed to a sector, and then those valuations were used to pump up stock prices of another company holding fragments of that business. Nobody questioned the fact that the starting point or the very foundation of such “derived” value was completely out of whack. I suppose all things pass in a bull market, [...]
REASON OF AGE
February 24th, 2008 krishna When does childhood end and adulthood begin? The International Convention on the Rights of the Child defines a child as any human being below the age of 18. But in India, a signatory to the Convention, there has always been a great deal of confusion on the age below which one is considered a child. For example, the legal age of marriage for a girl is 18 but the age of sexual consent is 15. So, in effect, the law accepts that it is possible for a girl to be married by 15, even though that is in violation of the Prohibition of Child Marriage Act, 2006. The Child Labour Prohibition Act defines those below 14 as children and those between the ages of 14 to 18 are permitted to work in hazardous industries. It is with a view to clear this muddle that the Law Commission has sought to make the marriage age a uniform 18 for both boys and girls and the age of sexual consent 16. Of course, this still leaves much to be desired but is a welcome first step. . The bewildering cornucopia of laws governing children and juveniles with their varying definitions of age has made it easy for abusers and offenders to exploit the loopholes and get away with crimes against children. In a country like India with its appallingly poor system of recording births and deaths, millions of children do not know their real age. This creates several problems. One, it denies access to children into the school system where a birth certificate is mandatory. Two, it once again allows the exploitation of children by unscrupulous people who can claim that the child is actually of the age of consent. The Law Commission’s next step should be to recommend that the age of the child in all laws should be the same and based on scientific parameters and the definitions laid down in the Convention on the Rights of the Child. Local laws should also follow the same age guidelines as the national ones, so that there is no doubt as to who is or is not a child. India is bound to do so under the Convention on Child Rights that states that all signatories ensure that all legislation is fully compatible with the Convention. As with all our social sector laws, the devil lies in the implementation. We can [...]
THAW IN THE VALLEY
February 24th, 2008 krishna Those who are adept at reading the tea leaves on the Kashmir issue may well find that the configuration is looking far better than it has for some years now. Even as winter tightens its grip over the volatile Valley, the militants find that they are skating on thin ice. The Hizbul Mujahedeen militants, once the undisputed overlords of Kashmir, are in tatters today after their ranks have been decimated by the security forces. Many of its cadres have surrendered and its top leadership, or what is left of it, is at loggerheads with each other. The other militant groups are also somewhat directionless today following the turmoil in Pakistan after Benazir Bhutto’s assassination. Pakistan’s Inter Services Intelligence, widely credited with orchestrating militancy in the Valley, appears to be lying low in light of the renewed international scrutiny on terrorism emanating from the region. While it is odious to draw comparisons, the contrast between an economically buoyant India and a strife-torn Pakistan has never been more stark. The result has been that many of the Valley’s youth no longer consider Pakistan as a viable option to throw their lot in with. Rather, they are eager to make the best use of the opportunities offered by a new age India. This is not to suggest that the era of militancy is behind us. There is no doubt that on seeing the ground slipping from underneath their feet, the militants will try to mount spectacular attacks in different parts of India. But the dream of wresting Kashmir away from India is now a mirage. Given these factors, the situation is very much advantage India. The challenge now is for New Delhi to capitalise on these favourable developments and take measures to win over the sections in the state that still remain alienated from it. So far, successive governments have singularly failed to read the mood in the Valley and act accordingly. The time is ripe to deliver on the promises of developing infrastructure and industry in the state. So fat, all efforts have been piecemeal and subject to political vagaries. Sticking points like the final resting place of Jammu and Kashmir Liberation Front founder Maqbool Butt’s remains – he was hanged in Tihar Jail in 1984 for the murder of an intelligence officer should be resolved. If the government fails to act now, the mood could well change as we have [...]
