The Economist : India Budget

Friday, March 4, 2011

PRANAB MUKHERJEE, India’s finance minister, is full of beans. His budget on February 28th drew praise from some observers for not being too lavish despite big state elections due next month. Chuckling over it the next day, he said the economy was in fine shape. Getting 9% growth “plus or minus” in the coming year will be a cinch, at least if the monsoon comes on time. “I require only the blessings of a god and a goddess.” It is tempting to expect the gods to keep smiling. Only China, among big economies, has pipped India’s 8.6% growth in the past year. Mr Mukherjee foresees a rosy period of easing inflation, reviving foreign investment and robust public finances. He may be in for a shock.

Inflation is still a pressing problem. High food prices hurt the urban poor. In December street protests over the price of onions led the government to ban their export. Onion prices have since collapsed, but other causes of inflation remain. Cash is pouring into rural areas through a make-work scheme, named after Gandhi. This will expand as Congress, the party at the head of the government coalition, tries to ease dire poverty in villages, where most voters still live. Benefits will flow faster as cash transfers replace clunky subsidies for fuel and fertiliser. Pilot schemes for this will start early in 2012, and may be speeded as Indians are issued with identity cards, in a separate initiative. Social spending is set to leap by 17% next year, as the government attempts to encourage “inclusive” growth. Congress’s chief, Sonia Gandhi, next wants a law embodying a universal “right” to food. How this might work (if at all) is unclear. Again, technocrats favour transfers of cash or vouchers over dishing out food through a vast and corrupt state bureaucracy. Either way, the subsidies mean demand for food will soar.  No matter, says Mr Mukherjee breezily. By spending on agriculture, giving farmers credit, easing transport bottlenecks and getting better cold-storage distribution, supply will rise, too. As for other causes of inflation, seven interest-rate rises by the central bank have removed monetary excess, he says.  Little can be done about painful world prices for oil and other commodities, but, barring a big shock, Mr Mukherjee guesses annualised inflation will drift down to about 6% in a year’s time, from nearly 10% today.

If that sounds a stretch, so do claims that investors will crowd back. Foreign direct investment in 2010 fell to $21 billion, from $27 billion in 2009, even as it grew elsewhere in Asia. Overseas portfolio investors who once raved over India’s stockmarket have pulled out $2 billion in the past couple of months, reflecting fears of overheating.  Investors, local and foreign, complain that the environment minister has blocked good projects. They grumble that fine talk of opening up retailing and other industries leads to no action. Two decades ago the then-finance minister, Manmohan Singh, began scrapping regulations and unleashing growth. Today, with Mr Singh in his second term as prime minister, the government looks timid. Ministers retort that they continue to liberalise. Promised financial reforms, if passed (earlier efforts lapsed), could eventually let outsiders play a bigger role in insurance and lend more for new infrastructure: $1 trillion is to go on new roads, rail, ports and so on in the next few years, nearly half to be funded privately. This money would go further if land acquisition were less corrupt and chaotic. Delhi’s swanky new airport train, a public-private project, was delayed for months in part by wrangling over land. Mr Mukherjee admits there is a problem, and talks hopefully of the “expeditious” passing of a land-acquisition act. That seems unlikely.  Reform may yet roll, in the form of a long-planned general-services tax. From June, 11 states will launch their first attempts. Next year, if the opposition backs it, the whole country will get the tax. That would help to reduce a budget deficit that is now over 5% of GDP. So would getting more people to pay income tax: a raid by gleeful tax inspectors on Bollywood starlets in January attracted lots of attention. But if such efforts are delayed, the government will have to adopt other devices to patch up the public finances. It used billions from a one-off auction of 3G telecom spectrum to plug budget gaps this year. It promises to sell more chunks of state-owned businesses, presumably in order to fill holes in the year to come.

Reference :

FT : India’s Robber Barons

Monday, January 10, 2011

India’s extraordinary economic boom has developed a split personality. Driven by energy, skill and ambition, India’s entrepreneurs are scaling new heights, but the underbelly of corruption in business and government has also surfaced with alarming clarity. As yet another great economic year came to a close, corruption scandals tumbled out of the closet with unending regularity. Both in its rot and heady dynamism, India is beginning to resemble America’s Gilded Age (1865-1900). Ending with Theodore Roosevelt’s rise to the presidency in 1901, the Gilded Age transformed an agrarian US into an economic and industrial giant. Yet Roosevelt’s assessment was gloomy: “The dull, purblind folly of the very rich men; their greed and ignorance, and the way in which they have unduly prospered . . . these facts, and the corruption in business and politics, have tended to produce a very unhealthy condition.”

Four similarities between America’s Gilded Age and present-day India are worthy of note. First, in 1865, less than 30 per cent of the US population lived in cities. By the mid-1890s, the nation was more than 50 per cent urban. Mirroring roughly the same trends, India’s population today is 70 per cent rural, but by 2030, half of India will be urban. Second, America’s industrial capitalism in the 1870s and 1880s emerged in a noisy and participatory democracy with election turnouts often touching 80 per cent. In India, too, turnouts are high. The political ascent of the “lower castes” is India’s equivalent of the rise of the Irish in the American Gilded Age. India’s emerging capitalism is thus very different from China’s authoritarian capitalism. Third, India’s recent growth has created billionaires to equal the Vanderbilts, Carnegies, Rockefellers and Morgans of America. India has 6.9 per cent of the world’s 1,000 or so billionaires, while its gross domestic product is only 2.1 per cent of world GDP. The total wealth of Indian billionaires is more than a fifth of the nation’s GDP, equalled only by Russia. By comparison, the wealth of China’s billionaires is less than 3 per cent of its GDP. Fourth, like the barons of America’s Gilded Age, most of India’s billionaires have used three methods to tilt the playing field to their advantage: securing rich natural resources such as mines and land; ensuring favourable regulations in various industries; and restraining the entry of foreign competition wherever possible.

This has required collaboration, often collusion, with governments at all levels – as in late 19th-century America. During the administration of President Ulysses Grant (1869-76), several cabinet members were indicted for financial wrongdoing. At the state level, the story was no different. And cities witnessed the emergence of “bosses” and political machines. Consider modern India. Licences for the use of spectrum for mobile telephony were apparently sold at rock-bottom prices by the government to telecoms companies at a time of enormous demand, depriving the Treasury of revenue. Using access to power, families of ministers and heads of state governments, belonging to various political parties, have illegitimately bought land and houses at below-market prices and powerful business families have procured mining rights in a corrupt manner. The recent scandals associated with the auction of new Indian Premier League teams suggest India’s cricket obsession has been shamelessly exploited by well-connected business and political insiders. With rising incomes, says Sonia Gandhi, head of the ruling Congress party, India is witnessing a shrinking moral universe.

America’s Gilded Age was followed at the dawn of the 20th century by the Progressive Era, marked by cleaner politics, a bipartisan fight against corruption, more honest business practices and a channelling of private wealth into philanthropy. Will India’s political parties fight corruption as a non-partisan matter? Will the rising middle class throw out the corrupt? Will the wealthy systematically embrace philanthropy? Continued growth is a safe bet, but the quality of India’s prosperity depends on how these questions are answered. Government has to move towards greater transparency and crystal-clear bidding processes, and tycoons must consider how to generate legitimacy for their accumulation of wealth.

Reference : The Financial Times, Jan 7th 2011

FT : Pakistan Turmoil

Saturday, January 8, 2011

Pakistan’s seasonal gift from the International Monetary Fund, its faithful benefactor, was a welcome one. A nine-month extension to the deadline for compliance with the terms of its latest borrowing programme, totalling about $11bn, was supposed to “provide time to the Pakistani authorities to complete the reform of the general sales tax [and] implement measures to correct the course of fiscal policy”.  The problem is in the IMF’s use of the word “authorities”. Whatever authority the government once had is fast eroding. Tuesday’s murder of Punjab governor Salman Taseer, a key supporter of Asif Ali Zardari, has weakened the president’s Pakistan People’s party just as it has been abandoned by coalition partners, robbing it of a parliamentary majority. Even with added time, the PPP’s chances of delivering on its tax-reform promises to the IMF – requiring renewed consultations with provincial governments and the private sector – seem slim.

The less the government achieves, though, the less keen investors will be to bridge the gap between tax receipts and government spending, which amounted to 1.6 per cent of gross domestic product in the first quarter of the current fiscal year. Hence, Pakistan’s unnervingly wide sovereign credit default swap, midway between Ireland and Greece. The country may not fall into arrears with the IMF imminently: repayments and charges due in the current calendar year are a relatively light $414m, equivalent to seven months of petrol taxes. Still, the ongoing cost of war on Taliban insurgents and flood-related rebuilding leaves little room for manoeuvre.  What’s more, 27 years of IMF borrowing have given Pakistani negotiators a reputation for intransigence rivalled only by the Egyptians and the Vietnamese. At this rate, another letter beginning “Dear Mr Strauss-Kahn” will be winging its way from Islamabad to Washington by September.

Reference : The Financial Times, Jan 7th 2011

China’s growth model is unsustainable and the country faces a sudden slowdown unless it undergoes urgent economic and political reforms, according to a renowned Chinese academic.  A scathing indictment of the country’s extraordinary growth story, written by Yu Yongding, a former member of the People’s Bank of China monetary policy committee, has been published in the state-controlled China Daily newspaper.  It points to rising social tensions, pollution, a lack of public services and an overreliance on exports and investment, particularly in property, as threats to the nation’s economic future.  “China’s rapid growth has been achieved at an extremely high cost. Only future generations will know the true price,” Mr Yu wrote in an editorial.  “[The] growth pattern has now almost exhausted its potential. So China has reached a crucial juncture: without painful structural adjustments the momentum of its economic growth could suddenly be lost.”  His comments come at a time when many international observers already accept the inevitability of China overtaking the US as the world’s largest economy. Within China, many Communist party leaders speak about the superiority of “socialism with Chinese characteristics”, as shown by its apparent resilience in the global financial crisis.  China’s economy grew 9.6 per cent in the third quarter from the same period in 2009. But many economists are worried about overheating after annual consumer price inflation rose from 4.4 per cent in October to 5.1 per cent last month.

Mr Yu has been influential in Chinese policymaking. Besides his central bank role, he is former head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. His harsh critique reflects a debate among policymakers before a 2012 transition that will see many of China’s leaders replaced by younger cadres.  Joseph Cheng, a professor of political science at the City University of Hong Kong, said many reform-minded scholars were concerned that reforms had stagnated “because leaders are preoccupied with jockeying for position”.  Mr Yu described a lack of innovation and creativity as the economy’s “Achilles heel”, and lamented the inefficient use of capital.  “Some local governments are literally digging holes and then filling them in to ratchet up the GDP,” he wrote. “Consequently, there are simply too many luxurious condominiums, magnificent government office buildings and soaring skyscrapers.”

While most of his observations have been expressed before, it is unusual to see such complaints from a senior establishment scholar in state media. His comments included a call for political reform to help “break the unholy alliance” between government officials and business people. “Under China’s current institutional arrangements, meritocracy is a prerequisite for good governance, but meritocracy has been eroded by a political culture of sycophancy and cynicism. Once again, the dialectics of economic development has brought political reform back to the fore.”  If China could not change the current system of “capitalism of the rich and powerful” and reduce the widening gap between rich and poor that was “fomenting social tension”, then “a serious backlash is brewing”.

Reference : The Financial Times, Dec 24th 2010

FT : Indonesia Stirring

Friday, November 19, 2010

…..Indonesia [is] a young democracy of nearly 240m people and one of Asia’s fastest-growing economies…..In the coming decade, more than 60m low-income workers are poised to join in what will be the coming of age of Indonesia’s middle class. That projected boom will also make Indonesia – already a member of the Group of 20 nations and the largest south-east Asian economy – the fastest-growing consumer market after India and China. Big retailers, banks, carmakers, insurers and consumer goods producers are tapping the growth, posting record profits this year…..Euromonitor, the market research group, expects the number of Indonesian households with $5,000-$15,000 in annual disposable income – a rough gauge for middle income – to grow from 36 per cent of the population this year to more than 58 per cent by 2020.

…..Indonesia’s economic growth is restoring people’s prospects 12 years after the devastating 1997-1998 Asian financial crisis…..“In any developing country today, the most important sign of success in the economic policy is that you have a growing, strong and vibrant middle class,” Angel Gurría, the head of the Organisation for Economic Co-operation and Development told the Financial Times. “This really is the measure of the success.” Irma Estiningtyas, a spokeswoman for the Indonesian Life Insurance Association, which launched its first big television advertising campaign this year, said: “Growth in 2010 is really stunning.” With assets worth more than $16bn, the industry “is now one of the most active and productive investors in Indonesia’s stock and bond markets”. Signs of increased buying power are abundant in the dozens of malls dotted across Jakarta, Indonesia’s capital of nearly 10m, where foreign retail chains and luxury fashion outlets are adding locations. Optimism about consumer spending has been a driver of investor sentiment. So, too, has economic growth of about 6 per cent, tame inflation, high foreign currency reserves and financial reform.

The Jakarta stock exchange, which has attracted billions in foreign capital inflows, reached a record high this week. Shares in Astra International, Indonesia’s biggest carmaker, have risen 63 per cent this year. In the first three quarters, the company’s vehicle sales grew 60 per cent, with a larger share of profit being made on the islands of Sumatra, Sulawesi and Kalimantan. Prijono Sugiarto, Astra’s president, says Indonesia will probably pass Thailand this year as the region’s largest automotive hub, with output of 730,000 automobiles and 7.2m motorcycles. Astra, which is expanding factory capacity, cannot keep pace with demand. Growth is also shifting from urban centres on Java, the main island, to other parts of the archipelago, the Asian Development Bank wrote in an August study of Asia’s rising middle-income households. “Some poor people managed to move up the ladder to become new middle class, like in China,” said Guntur Sugiarto, an economist at the ADB. “There is poverty reduction in rural areas – much bigger than in the urban areas.”

Reference : The Financial Times, Nov 19th 2010.

India’s staid public sector companies are usually the last to attract interest from foreign investors.  But in the past week, a stodgy government monopoly, Coal India, the world’s biggest miner of the fuel, staged the country’s biggest listing.  The $3.4bn initial public offering attracted cash offers worth 15 times the stock available from investors from all over the world.  “Indian capital markets have arrived on the global stage after Coal India,” says Vikas Sharma, president and chief executive of Nomura in India.  Under Indian rules, investors’ bids for the stock had to be fully funded, meaning they had to front up with the equivalent of a total of about $51bn in cash, says Mr Sharma.  “That leaves about $48bn of capital still on the table waiting for the right opportunity in India after this listing. By any stretch of the imagination, that is a large amount of money.”  Stocks are not the only area of Indian corporate finance generating international excitement.

Five years ago, mergers and acquisitions worth more than $1bn were almost unheard of in India.  So far this year there have been 13 deals of this size and larger, according to figures from Dealogic.  The increased deal volumes stem from higher liquidity in western markets and India’s strong growth story.  The economy is expected to expand more than 8.5 per cent in the year ended March 31, compared with 7.4 per cent a year earlier – growth rates that most developed markets can only dream of. “Why are investors looking at India?  It’s purely because of the growth differential,” says Nilesh Shah, deputy managing director of ICICI Prudential Asset Management in Mumbai.  So far this year, Indian companies have raised equity of $26.02bn, a figure approaching the full-year record of $33.99bn set in 2007, according to Dealogic.  Bankers are preparing to compete over the next five weeks for the mandates of more large government deals, including the $4.3bn secondary offering of Indian Oil, the state-owned petrol refiner and retailer.

The volume of India-related M&A deals this year has reached more than $67bn, nearing the 2007 record of more than $76bn, representing an extraordinary recovery from the economic crisis.  Frank Hancock, head of corporate finance at Bar-clays Capital in India, says: “You’re seeing an Indian outbound M&A paradigm driven by the search for energy security, new technology and new markets, as well as labour cost arbitrage, which involves taking a process back to India and doing it cheaper.”  Natural resources remains one of the dominant themes, particularly coal. India’s plans to roll out more than 100,000 megawatts of power generation capacity in the coming years will require new sources of coal.  This was one of the drivers behind the Coal India IPO.  The country’s growing hunger for steel is also driving demand for coking coal.  “People are usually extremely interested in any discussion around coal,” says Vedika Bhandarkar, vice-chairman for Credit Suisse in India.

Information technology outsourcing companies are also looking for acquisitions in continental Europe and Japan to augment their success in the UK and the US, she says. Bankers say that as Indian companies pursue more M&A offshore, the opportunities for ancillary business for international investment banks are also growing. Companies are now seeking not only the initial bridge financing for deals but also refinancing and hedging.  In spite of the current bullishness on India, bankers say that the country needs to develop more depth in its financial markets if it is to gain insulation from global boom and bust cycles.  Only a small fraction of the country’s domestic savings, which are among the world’s highest, are deployed in the stock market.  The corporate bond market is also illiquid and small, forcing Indian companies to continually seek financing overseas.  “History shows that foreign liquidity usually disappears just when you need it,” says Mr Hancock.  “There’s huge wealth here in India that can be tapped more effectively.”

Reference : The Financial Times, Nov 1 2010.

Blackstone, the private equity group, said yesterday it expects to invest up to nearly $4bn in India over the next five years after it announced its biggest single transaction in the country so far, a $300m purchase of a stake in a local power generation company.  The deal shows how US private equity companies are ramping up their interest in the country, with rival Kohlberg Kravis Roberts also announcing two big deals this year.  V. Jayasankar, head of private equity at Kotak Investment Banking, estimates the total volume of private equity deals in India this year could top $8bn, or about two-thirds of the peak of two years ago.  Akhil Gupta, chairman and managing director of Blackstone Advisors India, said the group had already invested $1.25bn in India in equity commitments.

“If you look at our performance over the last five years and the fact that we’re a much bigger team now and much more experienced in India.  “We think that in the next five years we should be able to do two to three times what we’ve done in the last five years,” Mr Gupta said.  In Blackstone’s latest deal, the group is to invest $300m in exchange for a “significant” minority stake in Moser Baer Projects Private.  Last month, Blackstone took a small stake in Monnet Power, a subsidiary of listed Monnet Ispat and Energy, for about $59m.  Monnet’s core asset is a coal-fired plant in Orissa, on India’s east coast.  The deal is expected to close by the end of the year.  Moser Baer Projects has a diverse pipeline of thermal, solar and hydro power generation as well as coal mining operations.  Its parent, Moser Baer India, is a high-tech company but with a strong manufacturing base.  It is the world’s second-largest maker of optical storage devices such as CDs and DVDs.  Mr Gupta said he expected to invest up to $1bn in India’s power sector in the coming years but any deals would depend on whether the projects had acceptable execution risk.  Power is a difficult sector in India because of challenges obtaining coal and other fuel sources, land issues, government regulations and political risk.  Sushil Bhagat, chief financial officer of Moser Baer Projects, said it is planning to build 5,000 megawatts of power generation capacity by 2016, 80% consisting of coal-fired thermal plants.  This would require total investment of nearly $7bn for which the company had already secured about $1.1bn in debt.

Reference : Financial Times, Aug 19th 2010