Tuesday, October 31, 2006

Role of PPP in infrastructure development

PPP (Public Private Participation) framework is simply the securing of public outcomes through contractual arrangement involving multiple stakeholders outside Government.

It enables the Government to leverage the infrastructure projects by a factor of 10 times. That is for every one rupee of investment the government comes up with, the PPP arrangement could mobilize about Rs. 10 for a project.

But PPP entails thorough design engineering, assessing its financial viability, contractual framework, project financing, environmental and social assessments etc. In the absence thoroughness, the government will find it difficult to support the project, the bidders will add hefty risk premia and financing agencies will the project un-bankable.

PPP is a sustainable and proven method for government to accelerate the provision of infrastructure services in our country.

Infrastructure investments envisaged in the country:
Highways 1,72,000 cr by 2012
Airports 40,000 cr by 2010
Ports 50,000 cr by 2012
Energy 5,40,000 cr by 2012

Highlights from the 5th Economic Census

  1. Of all the enterprises in the country, 61% exist in the rural areas.
  2. Rural India is the hub of small enterprises with about 20.9% of all enterprises without premises dotting the rural landscape. Urban India accounts for 15.5% of such enterprises.
  3. Over the period 1998-2005, average annual growth rate of employment of 2.49% has lagged behind the average annual growth rate of enterprises of 4.8%.
  4. The whole of India has a total of 42,124,000 enterprises. They had on average employed only about 2.35 workers.
  5. India’s working population is pegged at 450 mln. Of this 198 million were employed in manufacturing and services sector while the remaining 252 mln were engaged in agriculture related activities.

FDI: Is bias against nations justified?

The context in which this question is being asked is the discrimination being followed by India against Pakistan and Bangladesh in so far as investments from these countries are concerned. Instances of investment proposals from China also being discouraged are noticed. This is on account of security threats.

One argument is that in so far as security threats are concerned, there is hardly any difference between desi and foreign companies. The concerns apply to both the types of companies. In today’s increasingly globalized world, both capital and services move seamlessly across the borders. It becomes very difficult to identify the origin or source foreign investment because third countries could be used as conduits. So in such a scenario, a better approach would be to specify stringent criteria for investments in sensitive sectors. Ideas like having a foreign investment law incorporating the security concerns of the country could be enacted.

Another view is that discrimination of countries based on security concerns smacks of fossilized approach to security in a globalized world. Today’s threat may become tomorrow’s darling and vice versa. Ownership of companies also is very complex; today a company may be registered in US and owned by a French company. But tomorrow the same may be acquired by an Egyptian company. So which country is to be labeled as a threat? With regard to the stand taken against China, what perplexes logical thinking is that when China is using its FDI muscle in US as a leveraging point, why can’t India do the same with China?

A smart approach to security should be unobtrusive and yet Orwellian. Ultimately, security of a country depends on the integrity of its citizens and this is the biggest security threat that any country faces. FDI is only a red herring.

Sunday, October 29, 2006

Role of India in the global economy: P. Chidambaram

If we could rise to the challenges and stay on the path of sound economic policies and fiscal prudence, the repositioning of India in the global order would be faster than what has been predicted.

Balance sheet of India’s achievements:

  1. Gross National Income in PPP (Purchasing Power Parity) terms is 4th after US, China and Japan.
  2. India’s share of global GDP in PPP terms was 5.9% in 2005, the fourth highest in the world.
  3. India’s contribution to global growth was 8%.
  4. Indices of India’s trade and financial integration have increased over a ten year period. Trade integration has increased from 25.6% of GDP in 1992-93 to 35.14% in 2003-04. Financial integration has increased from 15.33% to 19.88% during the same period.

There is every reason to believe that India will be able to maintain these growth rates in the longer term because:

  1. There has been a shift in the structure of the Indian economy, with a decline in the share of agriculture and an increase in the share of industry and services.
  2. Industry’s rise has been accompanied by a robust growth in manufacturing sector without any cyclical downturns. There are signs of improved overall industrial competitiveness.
  3. Services sector is the major growth driver and is broad based.
  4. India has demonstrated its resilience to shocks. Hence the impact of exogenous and endogenous factors on growth is limited.
  5. India’s growth was initially driven by consumption and in of late has been complemented by robust investment.

Route dispersal policy and sops to regional airlines

The government is considering exempting regional carriers from paying airport and navigation charges for the first five years of operations. Initially these benefits will be given to those carriers which have aircraft of less than 80 seats.

One argument against this policy goes like this:
The goal of the policy – that of achieving increased connectivity between small cities and regional aviation hubs and improve the economics of aviation business are better achieved by market forces than administering complicated sops. Regional airlines have not had much success in India because of the government’s policy of route dispersal. This cross subsidy approach to providing a certain minimum level of countrywide air connectivity from profits made on trunk routes, forces all airlines to put a certain minimum capacity on category II and category III routes such as the Northeast and J&K. Since operating many different types of aircraft has cost issues, these airlines ply their big aircraft even on these uneconomical routes, which further magnifies their losses.

If this route dispersal policy is discontinued, the regional airlines will automatically grow because they have suitable small jets and turbo props which are more suited for such short-haul flights. The bigger airlines also, instead of plying their bigger aircraft will then start code sharing arrangements with them resulting in business viability for the smaller airlines. This has happened in the US post 9/11.

Friday, October 27, 2006

NABARD to oversee micro lenders

New bill to be introduced in winter session.
NABARD may regulate the over Rs. 35,000 cr microfinance sector. This would mean a regulator for over 400 mln beneficiaries who are served through MFIs. The cost of serving the banking needs of 75 mln households amounts to about Rs. 80,000 cr according to industry figures. At present only 5% of the annual credit demand is met for the population living below poverty line. Nearly 80% of the demand is met by informal sector.

NABARD first launched the SHG Bank Linkage Programme in 1992. As on March 2006, nearly Rs. 5000 cr was mobilized for 32.98 mln households. There are more than 22 lk SHGs today and an additional 3.85 lk will be added this fiscal. The MFIs want the government to allow them to mobilize savings also.

India’s export performance

Currently they are all petro-charged exports. With refining capacity expected to increase to over 30 mln tonnes in the next 2 to 3 years, exports could increase further. Asia and ASEAN account for over 50% of our exports while the share of Americas is down for the first time to less than 20%.

This commendable performance should make us rethink on sops to SEZs. Sufficient attention to infrastructure alone should ensure growth rates without any fiscal incentives.

Gaining access to Japan’s generics market

Japan is the second largest pharmaceutical market worldwide after the US. It is a $65 bn market. Japan spent about 9% of its GDP on healthcare in 2004. Japan’s share of people who are more than 65 years in age is about 30%, as against 19% in US and 26% in Germany. This offers a vast potential market for Indian pharma companies. Japan’s generics market is poised to increase five fold from the current $3.3 bn due to the current policies being put in place in Japan.

Indian pharma companies need to develop non-manufacturing capabilities, such as conducting bio-equivalence studies necessary for obtaining drug approvals and investing in large scale distribution capabilities to meet Japan’s mandate of national level supply. These can result from:

  1. Indian companies seeking Japanese partnerships instead of trying to go alone.
  2. Focus on generic products that build on existing assets, with better pricing and more attractive economics.
  3. Lobby the Japanese government to ensure a level playing field for generics to compete with branded drugs among the Japanese population.

India-Bimstec FTA talks

Bimstec countries include – India, Bangladesh, Bhutan, Myanmar, Nepal, Sri Lanka and Thailand.

The talks are progressing slowly on account of the differences over the number of products to be subject to liberal rules of origin.

New Delhi will be playing host to the summit of these countries in February 2007.

India’s intra-regional trade with Bimstec countries has increased from 4.12% in 2001 to 6.61% in 2003.

Rules of origin determine which products should qualify as originating from member countries and hence get preferential access. Relaxed rules could result in third country’s goods flowing in on favourable terms.

Indian Defence scene

India to buy 330 T-90S battle tanks from Russia. India bought 310 T-90S main battle tanks in 2001 for around $800 mln – 124 in complete form and the remaining 186 to be assembled at Avadi in response to Pakistan inducting the Ukrainian built T-80 UD MBT into service in 1997 onwards.

Russia to supply rocket engines for India’s Unmanned Aerial Vehicles (UAV) Lakshya under a $100 mln deal although transfer of technology under license could be withheld due to international ban on missile technologies.

o Indigenously built Advanced Light Helicopter is named ‘Dhruv’.

o ‘Brahmos’ missiles – the supersonic cruise missiles developed in collaboration with Russia are named after the Brahmaputra and Moskova rivers.

o Indra-II – is an indigenously developed radar

o Nag – anti-tank guided missile

o Mi-26 and Mi-17 – are helicopters

o IL-76 and AN-32 are transport aircraft

SAIL-Chattisgarh dispute about Chiria mines

Chattisgarh government has been insisting that it will not transfer the Chiria iron ore mines in favour of SAIL that were transferred to SAIL from IISCO on merger of the latter with the former. Chattisgarh government has argued that it requires fresh registration as the merger has brought into picture a new entity. It has been insisting that it would transfer the mining rights only to those of the developers who are willing to add value and pump investments into the state. Both the parties went to the courts. PMO has intervened and directed both the parties to settle the matter out of court. SAIL proposed that it would set up a 12 mln tonne steel production capacity in the state in lieu of the mining rights.

Thursday, October 26, 2006

Powering India to economic prosperity

Power is growing at the rate of 6-7% currently. There is an 8% deficit and 12% peaking deficit facing the country. To bridge this gap, it would require an investment of about $20 bn per annum. Only an integrated economic view of the power value chain from fuel supply to the consumer is essential to attract private capital and ensure the viability of the power sector.

A five point strategy suggested by experts includes:

  1. Securing payment to private generators.
  2. Effectively implementing Electricity Act, 2003. Unbundling, removing cross-subsidies through tariff rationalization, effective implementation of open access regime are found slipping up.
  3. Establishing power exchange: This will go a long way in making peaking plants viable. They can survive only if they are allowed tariffs at least twice as high as those of the base load plants. The PX will essentially work as a day ahead spot market.
  4. Partial or complete privatization of DISCOMs: Delhi’s privatization has given hope.
  5. Enhancing fuel availability: Both coal and natural gas.

Wednesday, October 25, 2006

How good is CK Prahlad's idea on reducing poverty?

Management guru C.K. Prahlad is famous for his book “The fortunate at the bottom of the pyramid: Eradicating Poverty Through Profits”. He identifies 5 ways to improve affordability:

1. Easy payments in installments
2. Dramatic cost-cutting
3. Goods in smaller rather than large packings
4. Pay-by-use
5. Direct distribution, cutting out intermediaries

The latest provisional poverty data for 2004-05 shows that poverty reduction since 1993 has been just 0.7 percentage points per year, as against 1 percentage point per year in earlier times. The total number of people below the poverty line is 300 mln, roughly about 1/3rd of the total population. This is more or less equal to the total population of our country at the time of independence. All this at a time when the factors identified by Prahlad are taking roots.

This shows that the private sector cannot achieve much unless the government does its bit for the poor. Free power and subsidized fertilizer used mainly by the biggest farmers will not relieve the country of poverty. What is needed is world class roads, telecom and electricity in every village to democratize commerce. That will typically require public private partnership, harnessing government finance with private provision. That will then improve the ability of the private sector to contribute to poverty reduction.

Coal Price Index

The private developers bidding for the Mundra coastal ultra mega power project have demanded equal weightage be given to the South African index Richards Bay as well as the Australian Index.

This indicates that power companies are looking at Arica along with Australia and Indonesia for import of coal for their power projects.

With nearly 80 mln tonnes of coal due to be imported by the power sector, the central regulator has developed a coal index to determine price. The regulator has given a 60% weightage to the ACR Asian Index, 30% weightage to Producer Price Index of Australia and 10% weightage to Barlow Jonker Index (BJI). The index has given small weightage to African coal.

The other coal indices followed worldwide include:
JPU Reference Price Index
ACR New South Wales Asia Index

Enron Scandal

On July 25, Jeffrey Skilling (President and CEO) and Kenneth Lay were found guilty of defrauding investors by usig off-the-books delas to hide debt and inflate profits. Enron, once US’s 7th largest company, collapsed into bankruptcy in December 2001 when the deals were disclosed. It wiped out thousands of jobs, more than $60 bn in market value and more than $2 bn in pension plans.

Kenneth Lay, the founder and Chairman of Enron who died in July is freed of charges by a federal judge. Lay was convicted on ten counts of fraud, conspiracy and lying to banks.

The other people convicted in the episode include:
Andrew Fastow, the Chief Financial Officer
Richard Causey, Chief Accounting Officer
Ben Glisan Jr., Treasurer
Lea Fastow, Assistant Treasurer
David Delaniey, CEO of Enron North America

The security angle to the FDI

Of late the NSC (National Security Council) is issuing warnings on investments from tax havens and from certain other (read countries) sources of investment.

The NSC has said that J&K, Chattisgarh, Sikkim, NE states, areas in the promixity of vital nuclear, space and defence installations and area within 50 km of the border with China, Pakistan and Bangladesh should be treated as sensitive locations.

It has pointed out loopholes in the system of screening antecedents of foreign players and discerning their activities. It wondered why the FEMA notification 20/2000 put a ban on FDI from only Pakistan and Bangladesh and left out other countries.

The NSC wants safeguards against adverse consequences of foreign laws to units of foreign companies located in India. The Council said in all agreements entered by state governments, central government and PSUs, a national security exception clause should be introduced. An umbrella legislation titled National Security Exception Act could be adopted like in the US, UK and Canada, it feels. This could also empower the government to suspend or prohibit any foreign acquisition, merger or take over.

What is the ‘earnout’ method to finance acquisitions?

An earnout is called so because the shareholders of the company being acquired ‘earn’ their payments as their company meets certain targets in stipulated time. The entire payment is not made all at one go. Very often the management of the company being acquired may have valued it highly because of the growth potential, but this valuation may look high on present level of profits or cash flows. Earnouts work in this scenario because sellers get paid a certain amount only after the acquired firm reaches a certain revenue level.

Naga insurgency problem

There are two militant outfits responsible for the insurgency problem. They are NSCN (I-M) and NSCN (Khaplang). NSCN stands for National Socialist Council of Nagalim. They have been conducting talks with the Centre for the last 9 years. The latest round of talks with them in Amsterdam failed to yield any result.

Their demand is for unification of Naga-inhabited areas and for a “special federal relationship” which is nothing but a cloak for the longstanding ‘sovereignty’ demand.

The time may have come for the Government of India to segregate the feasible from the infeasible demands on their list of over 30 demands, give priority to demands relating to development, and try and achieve some measurable progress within the framework of India’s unity, sovereignty and democratic structure.

Tuesday, October 24, 2006

Is 9% growth feasible in 11th Plan period?

Padmini Swaminathan, Director, MIDS, Chennai
While a 9% growth rate is feasible, what is not comprehensible is how it will ensure inclusiveness. The Approach Paper makes no mention of where the country today stands with respect to the issues of landownership and landless labourers. Secondly, while it emphasizes the significance of prioritizing basic research through, what it calls, ‘properly anticipated identification of strategic research pathways’, it is completely silent on why institutions such as the agricultural universities, created specifically to address and provide region-specific problem solving capcity have failed to deliver. Thirdly, lack of credit at reasonable rates and the problem of indebtedness have not been tackled in spite of their being the subject of several inquiry commissions set up in the past at various points by different central institutions including the RBI.

Ajit Ranade, Group Chief Economist, Aditya Birla Group
The biggest capital spending that we need from the government is in formation of human capital. Three distinct trends that have emerged in the agriculture and rural economy:
1. Rabi crop (spring harvest) has become as important as the kharif crop.
2. Non-food is as important as food crop.
3. Non-farm exceeds farm output in rural areas.

About financial inclusion

Microfinance through MFIs (Microfinance Institutions) and the linking of SHGs (Self Help Groups) with banks has now reached some 15 mln families. The limits to financial inclusion are set by the sheer numbers of India’s poor, over 70 mln families, meaning that at best, 21% of the poor are reached by microfinance. According to information from the 2001 Census, only 36% of all the families in the country have access to any form of formal financial services.

Studies have shown that the banks could profitably make small loans at rates between 20-24%, the same rates that more efficient MFIs charge on their lending. The experience of the past 15 years has demonstrated that it is free consumer choice rather than official diktats that promotes growth.

Mullaperiyar Dam Issue

The issue is one of dam height. Supreme Court has allowed raising the water level of this dam in Kerala from 136 ft to 142 ft. Kerala has persistently opposed raising the dam’s water level located in Idukki district on the ground that it would endanger five downstream districts on Kerala side. Also on environmental concerns for the Periyar Tiger Reserve. The SC allowed the TN govt. to carry out the necessary repairs of the dam before the water level is raised to the maximum of 152 ft.

Monday, October 23, 2006

What is the PIO status and OCI status?

There is about 25 mln strong Indian diaspora out there in the world. There are two schemes the PIO (Person of Indian Origin) card and the OCI (Overseas Citizen of India) to give some facilities to the NRI diaspora.

The PIO card was launched in August 2002. It can be issued to PIOs of all countries except those from Afghanistan, Bangladesh, Bhutan, China, Nepal, Pakistan and Sri Lanka. It confers the following benefits:

  1. Shall not require a separate visa to visit India for 15 years from the date of issue of the PIO card.
  2. Will be exempt from the requirements of registration of her/his stay on any single visit in India, if the visit does not exceed 180 days.
  3. Parity with NRIs in respect of all facilities in the economic, financial and education fields except in matters relating to the acquisition of agricultural/plantation properties.

The OCI scheme is announced under section 7A of the Citizenship Act, 1955. It can be issued to any PIO except those from Pakistan and Bangladesh, provided the country of nationality allows dual citizenship in some form or other. It confers the following benefits:

  1. A multiple entry multi-purpose life long visa for visiting India.
  2. Exemption from registration with local police authority for any length of stay in India.
  3. Parity with NRIs in economic, financial and educational fields except in relation to acquisition of agricultural or plantation properties. No parity shall be allowed in sphere of political rights.

How is excessive foreign exchange reserve a problem?

India has currently about $166 bn foreign exchange reserves as against China’s $987.9 bn.

A large stock of foreign exchange reserves is not an unmitigated blessing. Larget than required foreign exchange reserves entail huge cost. Normally, higher capital inflows put upward pressure on the country’s currency. Currency appreciation leads to lower exports and higher imports, which means that the level of economic activity gets severely affected. The final outcome is recession and unemployment. To prevent such a predicament, central banks intervene in the forex market, something the RBI normally does. It buys up dollars, to prevent the rupee from appreciating, in exchange for rupees. But this creates the possibility of inflationary pressures, resulting from excess liquidity in the system. To prevent this, again, is unwarranted. The return from bonds far exceeds the returns from US Treasury Bills – 10 year benchmark government bond provides a return in excess of 8% as against about 3% return from US Treasury Bills – in which the reserves are invested. Thus, the attempt to keep the rupee undervalued, entails a huge loss worth billions of dollars.

Friday, October 20, 2006

Merge Sarva Siksha Abhiyan and Midday Meal Scheme?

No, it spells bad management:
Both are laudable programs managed separately. Merger of the two would burden the school system while adding too many cooks to the feeding scheme.
The SSA has succeeded in improving the enrolment in class I; it is now 100% for ST children. But the dropout figure for this group stands at 60% by class V.
Merger may look a good policy (since ostensibly the objectives are complementary) but it spells bad management.

Yes, it will augment attendance, literacy levels:
SSA’s mission is to ensure participation of all children in the age group of 6-14 to assure continuation of education up to class VII. In addition, it fulfills goal of bridging social, regional and gender gaps, with active participation of the community in the management of schools.
The Midday Meal Scheme has nearly been universalized and covers around 12 crore children in over 9.5 lakh schools.

Navy war room leak case

The case is about a conspiracy for obtaining information of various purchases to be made by the military. The CBI has filed a charge sheet against Delhi based businessman Abhishek Varma for allegedly conspiring to obtain documents that compromised the country’s sovereignty and integrity. The allegation is that he was handling Indian affairs of Atlas Group of Industries and had received remittances to the tune of Rs. 6.5 cr, ostensibly for paying bribes to defence personnel for obtaining information of various purchses to be made by the military. The compromised defence information contains 369 pages of sensitive procurement-related letters and file notings of the defence ministry.

Thursday, October 19, 2006

Baglihar dispute between India and Pakistan

A hydro-electric project is being built by India in Baglihar on river Chenab in J&K with World Bank assistance. The project is touted as the life line to the poverty stricken Doda district of J&K and is expected, on completion to change the economic profile of the region.

Pakistan approached the World Bank, with a complaint that India, during the course of its construction, had violated the Indus Water Treaty. Pakistan alleged that India had unilaterally increased the height of the dam, and also questioned plans to construct sluice gates beneath the pondage, arguing that it was not needed to produce electricity. The gate’s design was also objected to. The complaint was lodged by it under Article IX(2) of the Indus Water Treaty.

The World Bank on May 12, last year appointed Prof. Lafitte as the ‘neutral expert’ to adjudicate the dispute between the two sides. The interim report submitted by the expert has rejected Pakistan’s contention.

Wednesday, October 18, 2006

The Grameen model

There are stated to be two models practiced by the Grameen Bank. The essential difference between Grameen I and II is the aspect of group liability.

In the original form, the five poor rural women who formed a group underwrote each others’ loans. This involved a group tax, a portion of the group’s collective savings that was put into an account from which moneyh was withdrawn to pay for unpaid installments. It was a system that was created to ensure high repayment level. The system ran into trouble when group members became intolerant of habitual defaulters, leading to violence and social tension.

This led to Grameen II in which all savings are on an individual basis and there is no group liability. The system is now more flexible and allows a defaulter the option to restructure the amount due into a flexi loan based on the customer’s ability to repay.

See also http://discover-it.blogspot.com/2006/10/dr-muhammed-yunus-and-grameen-bank.html

Tuesday, October 17, 2006

Life insurance: A premium on India

An HSBC report of February 2006 predicts that both markets (India and China) will be larger than the US is today by 2035.

India is home to 20% of the world’s population under 24 years – that’s a potential 1.2 mln market.

India’s working age population accounts for 58.2% of the total population.

In India, the private consumption accounts for 64% of GDP compared with China’s 42%.

India’s middle class will more than double by 2010 – from 6% of the population to 12-13% -- representing a market of 153 million.

Short-selling in guilts to return

Unlike stocks there is no futures and options market in bonds, which makes hedging restrictive and expensive. Therefore, the RBI is planning to allow ‘covered’ short-selling.

What this means is: In order to deploy extra cash or borrow in the short-term banks and primary dealers cut repo (repurchase obligations) deals with each other. Under this, the lender gives Rs. X and accepts securities from borrower, and then reverses the transaction to return the securities and receive Rs. X plus Y from the borrower.

This can be an overnight deal, and can be as long as a fortnight.
A T+5 short-selling in government bonds is expected to make the market more robust, and allow room for contrarian views.

India to contest US duty on shrimps

US has imposed anti-dumping action which includes imposition of 9.45% anti-dumping duty on Indian shrimps and the requirement to furnish a continuous bond based on the anticipated anti-dumping duties for the next year. The provision requires an exporter to furnish dollar bond for the estimated anti-dumping duties on future exports for next year in addition to duties on present exports, it is monetarily devastating for the Indian exporters.

This is the second attempt made by US to put barriers on shrimp imports. In 1995, it tried to ban all shrimp imports except ones having a certificate signed by a delegated Indian government authority stating that the shrimps were caught in a way so as not to endanger sea turtles. The move was declared discriminatory and arbitrary by a WTO panel and the US was made to revoke the measure.

India and EU join hands in this issue:
US calculates the margin of dumping by comparing the average normal value of the investigated products and individual export prices. When adding up the comparisons to determine the total amount or margin of dumping of the product, it puts at zero any negative amounts of dumping (hence the name zeroing). As a result, the US calculates a margin of dumping and collects an amount of anti-dumping duty in excess of the actual margin of dumping practiced by the companies concerned.

The EU pointed out to WTO that on an earlier occasion the US’ use of zeroing in its administrative reviews was held by the WTO’s Appellate Body to be inconsistent with the antidumping agreement of the WTO. India, Thailand, Brazil and Japan have decided to back the EU argument.

Monday, October 16, 2006

Article 311 of the constitution of India

It is in the news for the reason that the PM made a strong plea for corruption-free government.

The Administrative Reforms Committee headed by Veerappa Moily is examining the issue of removal of this key provision in the constitution which gives immunity cover to dishonest civil servants.

The Santhanam committee on prevention of corruption and the National Commission to review the working of the constitution headed by justice M. Venkatachaliah also suggested the revisiting of article 311.

This article lays down that a civil servant can be dismissed or removed from service only after an inquiry in which he has been informed of the charges against him and given reasonable opportunity of being heard in respect of those charges.

Saturday, October 14, 2006

Paradoxes of coal mining policies

The pricing of coal was fully deregulated after the Colliery Control Order 2000 was notified with effect from January 2000. But this has led to a monopolistic market. Coal India controls almost 90% of the domestic production and maintains a supply which is only sufficient to meet the projected demand, thereby limiting the scope of competition.

There are also high entry barriers for competing producers to enter coal mining and they cannot freely sell the coal they mine under current law. Therefore, it is believed, coal prices may not be fair and competitive.

The cost of energy per unit at pit head for domestic coal and at port for imported coal comes out approximately at Rs. 0.66 for domestic coal and Rs. 1.57 for imported coal. Therefore, domestic coal prices may appear fairly competitive.

Dr. Muhammed Yunus and the Grameen Bank

The Nobel peace prize winner established the bank in 1976. Today, over 6 mln poor in Bangladesh alone have become creditworthy customers of retail banking, thanks to his belief that unsecured credit could be an effective weapon to fight poverty. The cornerstone of this model is to galvanize rural women into a powerful customer base, provide them with micro credit, inculcate savings habit and set them off on a journey towards thrift. In fact, as on date, 94% of Grameen Bank’s patrons are women who display a repayment rate of 98%.

The Grameen method is simple. Five poor rural women are made to form a group. Eight groups form a centre, normally in the same village. They meet mandatorily once in a week and discuss and deal only in micro finance. They seek loans for productive, income generating purposes or for education and housing. The loans are approved on the basis of satisfactory credit history and purpose. All the members save regularly and repay weekly and share responsibility.

Since its inception, the Bank has loaned more than $2 bn including to 50,000 beggars who were encouraged to start small businesses alongside or instead of begging.

Dr. Yunus won several other awards and they include: the Ramon Magasaysay Award (1984), the Aga Khan Award for Architecture (1989), the Mohamed Shabdeen Award for Science (1993) and the World Food Prize by World Food Prize Foundation (1994).

See also http://discover-it.blogspot.com/2006/10/grameen-model.html

Thursday, October 12, 2006

Wind power

India’s power needs are projected to reach over 2,40,000 MW by 2012, an increase of over 10,000 MW per year.

Wind power could generate enough electricity to fulfill the world’s current energy needs five times over, according to scientists. Technically recoverable resource is estimated as high as 53,000 terawatt hour per year. This is over twice the world’s energy demand projection for 2020. There are around 8000 suitable sites around the world for generating wind power. If wind turbines are set up in all these regions, it would generate 72 terawatts of electricity compared to the world’s 2002 energy requirement of 14 terawatts.

The current estimates suggest that India has a wind power potential of over 45,000 MW.
Over 11,000 MW of wind power capacity was installed around the world in 2005, a 40% increase pushing the global total at the end of the year to 59,000 MW. The countries with the highest wind power installed capacity are Germany (18,445 MW), Spain (10,027 MW) and US (9,181 MW). India with 4,253 MW stands in fourth place.

Wednesday, October 11, 2006

India’s corporate bond market

The Indian corporate bond market which sees annual issuances of close to Rs. 70,000 cr is dominated by private placements. Reasons for the tardy pace of the growth of the bond market:

  • The biggest subscribers such as institutional players, especially banks, prefer to lend to corporates rather than subscribing to their debt issuances.
  • Earlier, inter-regulatory issues centering around turf issues between RBI and the capital markets watchdog SEBI dogged the market.
  • It is a market which has a small investor base – mainly institutional players.
  • Liquidity is a major bug bear. Daily volumes in the corporate bond market on the stock exchanges is hardly about Rs. 100 cr.
  • There is the issue of trading platform or delivery channel to contend with. Though NSE is equipped, SEBI opted for BSE.
  • Lack of a uniform stamp duty – something which may be close to being sorted out.
  • Other issues are: rigid listing norms, availability of latest data and other operational issues.
  • Raising funds abroad is seen as a viable option.
  • Bank lending at attractive rates for corporates.

Monday, October 09, 2006

Child Labour ban

The ban on child labour will come into force from 10th October, 2007 with the coming into force of the Child Labour (Prohibition & Regulation) Act which bars children under 14 years from working as domestic help or servants at roadside eateries and other non-hazardous jobs. Their working in factories, mines and hazardous work environment is governed by another enactment.

The problem with the new law is that it does not provide for any comprehensive rehabilitation package.

A UNICEF report “World’s Children 2006” states that in India, which has the largest number of working children, 17% are under the age of 15 and girls aged 12-15 are the preferred choice of 90% households.

USO Fund

Universal Service Obligation Fund is a corpus created to help telecom firms provide services in rural areas. It was created through the universal service levy at 5% of the adjusted gross revenue earned by all the operators except pure value-added service providers like ISPs, voice-mail, e-mail etc.

Shantanu Consul is the administrator of the fund. The fund has currently created a capacity of about 30 mln lines in rural India. It plans to provide one phone for three households by 2007 in rural areas, which amounts to over 5 cr rural connections.

Cricket equipment sales market

The market is estimated to be close to Rs. 500 cr and is extremely unorganized and is dominated by cottage industries based in Meerut and Jallandhar. Besides catering to the domestic market – the largest consumer of cricketing goods – nearly 90% of all the bats and cricketing accessories sold around the world by any of the leading global brands – such as Slazenger, Kookaburra and Woodword – are manufactured right here in India.

A bat has to be made from willow that grows in England and expert bat-makers commonly known as pod-shavers were a tribe that existed only in the Old Blighty. Over 90% of the world’s English willows or roughly four lakh pieces of the holy timber still come from JS Wright&Sons’ farm in Essex.

Saturday, October 07, 2006

Cock a snook

To show that you do not respect something or someone by doing something that insults them.
Ex: In the end he refused to accept his award, cocking a snook at the film industry for which he had such contempt.

Indian coffee

The Great Indian robusta is considered among the world’s best espresso coffee beans.
Of the 2 lakh tonnes of washed robusta produced in the country annually, 1 lk tonnes goes into making popular instant coffee. Another 50,000 tonnes are used in the domestic market and only the remaining 50,000 tonnes actually reach export market as opposed to a much bigger quantity of robusta.

Worldwide Arabica is accepted as the better quality compared to the more common robusta.

Thursday, October 05, 2006

Is credit growth a concern?

What risks does credit growth pose and how should policy makers respond?

Credit growth is at 30% for the past two years and promises to do so in the current year as well. The RBI has favoured the growth to slow down to 20%.

Credit can grow rapidly for three reasons: financial deepening, normal cyclical upturns and excessive cyclical movements. Only the last qualifies as a ‘credit boom’ and is destabilizing in nature.

Credit growth poses a problem when asset prices get magnified. For instance, when stock prices zoom, firms’ net worth rises sharply and banks may be tempted to lend more to these companies. When asset prices collapse, banks find themselves in trouble.

The World Economic Outlook (of IMF) states: a credit expansion is a boom when it exceeds the standard deviation of a country’s credit fluctuations around trend by a factor of 1.75. The other warning signs are: a surge in capital inflows, a consumption or investment boom, a sharp rise in stock prices, a worsening of corporate leverage and an increase in banks’ external borrowings.

In taking a view on whether credit growth, we need to take a look into the composition of credit – corporate vs retail, domestic vs foreign currency, sensitive vs non-sensitive – in judging whether there is an unsustainable boom. We must also look out for imbalances in the macro-economy. When we do so, the current surge in credit does not appear to warrant concern.

Navaratna Status to BSNL

Navaratna status is conferred by Department of Public Enterprises. To be qualified as a Navaratna, the company must obtain a score of 60 (of the total 100). The score is based o six parameters which include net profit to net worth, total manpower cost to total cost of production or cost of services, PBDIT (Profit Before Depreciation, Interest and Taxes) to capital employed, PBIT to turnover, EPS (Earning per share) and inter-sectoral performance. Additionally, a company must first be a miniratna and must have four independent directors on its board before it can be made a navaratna.

The navaratna status will empower a company to invest up to Rs. 1000 cr or 15% of their net worth on a single project without seeking government approval. In a year, these companies can spend up to 30% of their net worth not exceeding Rs. 1000 cr. They will also have the freedom to enter joint ventures, form alliances and float subsidiaries abroad.

Wednesday, October 04, 2006

GIC of Singapore

Government Investment Corporation is the global investment management arm of the Singapore Government. Established in 1981 to manage Singapore’s foreign reserves, GIC has invested in more than 40 countries around the world with the bulk of the investment going to the US, Europe and Japan. It has global investments in excess of $100 bn and has an exposure of $100 mn to India. It has recently set its sights on Bangalore for realty development business.

Monday, October 02, 2006

How useful is Housing Price Index?

  1. It can lend to the Indian property market transparency in the first place.
  2. It provides to the end user the essential fundamental knowledge for assessing risks pertaining to various real estate investment classes and an important basis for benchmarking and price discovery.
  3. To the principals, it would provide a significant means to establish credit parameters.
  4. It would have a substantial impact in estimating price-peaks or asset bubble situations.
  5. It would be a great tool to assess the health of the housing financing companies.
  6. It would enable the government to formulate meaningful policies for the sector and determining property taxes in a more scientific manner.