Indian Economy: News and Discussion

[Armand2REP]

Revised figures put government expenditure from - .7% to 14.2%. Fixed asset investment raised from 3.7% to 7.6%. Past inflation has been revised up an average of 2%. State and local governments are running 11% deficits. India is falling into the Chinese trap of buying their growth on borrowed cash. These revisions reflect a little fuzzy math a la China. Inflation is already high and posting good growth numbers, all this extra stimulus is not needed. India will be just fine at a healthy 6% growth with lower inflation.

 

[Daredevil]

I don't think any of the growth India has achieved so far is on the back of stimulus unlike China. Growth is strongly driven by robust domestic consumption. Inflation in India is mostly due to supply side issues rather than over-heating of economy. GoI has been so far inept in taking care of supply-side issues and always end up having high inflation rates.

 

[Armand2REP]

India: Fast Growth Does Not Mean a Strong Economy
Published by Derek Scissors, Ph.D.

For reasons ranging from geopolitics to poverty alleviation, a strong India is good for the U.S. India's strength will depend in great measure on the vibrancy of its economy. A complete picture of how the Indian economy is faring is therefore indispensable. It turns out India's recovery from the crisis is partly illusory—its growth is not sustainable and is not creating broad prosperity.

False Goals

India's GDP growth weakened immediately after the fall 2008 financial crisis but was nonetheless one of the world's best performances. It has now returned to the pre-shock 8–9 percent and remains one of the world's best performances. For the April–June quarter, India just reported that real GDP growth (using factor costs) was 8.8 percent.

There is discussion now of growth accelerating further to 10 percent. Domestically, rapid economic growth is supposed to be the cure for widespread poverty, among other things. Internationally, such growth is to herald India as the next global growth story. It will likely do neither.

Indian growth, driven for more than a decade by market reform initiated in 1991, is now being achieved the old fashioned, unsustainable way: through intense fiscal and monetary stimulus. Growth thus stems in part from New Delhi deliberately choosing to risk high inflation. Inflation is a tax that erases apparent wealth gains and redistributes income, hurting the poor in particular.

Irresponsible Stimulus

Growth anywhere in the 8–11 percent range is fast but unsurprising for India at the moment. This is not because of India's genuinely high growth potential, which features demographic expansion and strong consumer demand. Rather, the fast growth is unsurprising because it is the result of both fiscal and monetary hyper-stimulus.

Fiscal stimulus gets the attention. Last fiscal year, the federal deficit was close to 7 percent of GDP. It is projected to fall under 6 percent this fiscal year and will do so due to one-time gains. There is no indication of spending restraint; in fact, quite the opposite. Long-overdue reform of the direct tax code was gutted in large part to support continued increases in federal spending.

In the same way, critical changes to the goods-and-services tax have been delayed and limited due to the desire of state governments to spend more. State government deficits pushed the consolidated national deficit past 11 percent of GDP last fiscal year and will push this year's deficit close to 9 percent of GDP.[1] The level may rise again next year.

Monetary policy is worse. There is an ongoing debate over whether interest rate increases are coming too fast. This borders on ludicrous. India has large negative real interest rates, a terrible financial distortion by any standard. The Reserve Bank of India's (RBI) August hike brought the rate at which the central bank lends to banks to 5.75 percent. This left the real price of loans, after inflation, over negative 4 percent, a perverse incentive to borrow as much as possible.

Yet government and businesses complain that RBI is being too aggressive by modestly raising the world' lowest real borrowing costs. Because RBI is not fully independent, negative real rates should be expected to persist—the federal government needs low interest rates to keep its own borrowing costs low. With this amount of combined stimulus, it is no wonder growth is rapid and likely to remain rapid for several more quarters.

As it stands, though, rapid GDP growth will not last. RBI documents large productivity gains in the initial reform period (1992–1997) but weaker gains since.[2] The results are declining returns to investment and a blunting of benefits of demographic expansion. Lack of reform ensures more such weakness, and the ruling Congress Party has chosen to emphasize liquidity and spending rather than reform. For a while, quantity can replace quantity, but economic performance must eventually suffer.

Encouraging Inflation

The government tries to stimulate the economy through spending but undercuts that through inflation. Inflation is an unfair tax. Among other things, it punishes those who put money away for the future by eroding their savings. More broadly, it harms certain asset holders and sectors of the economy and (comparatively) rewards others without any connection to behavior or scarcity. It thus undermines efficiency, inhibiting long-term growth.

In India, the primary impact of recent high prices has been to harm the poor, whose income largely goes to necessities. Food inflation stood at 14.6 percent at the end of the April–June quarter. While this is now easing for the moment, fuel and power inflation was 14.3 percent at the end of June and may be accelerating. Asset prices are also rising because the cost of holding cash is so high. And the Ministry of Commerce continues to revise all old inflation figures higher so that previous harm was repeatedly understated.[3]

The government's response to painfully high prices has been to pretend they will go away soon. In autumn 2009, the government claimed that consumer inflation would dampen before spring 2010. Instead, wholesale inflation joined consumer inflation in double digits. In February 2010, Prime Minister Manmohan Singh indicated the worst was over, a claim later echoed by Finance Minister Pranab Mukherjee and others.[4] This also turned out to be false.

The failed promises have continued for almost a year. Eventually, the government will be right—but only because a higher base from the previous year will cause inflation to fall. Lesser amounts of inflation still mean that prices are rising, and rising from a far higher base. Substantial inflation can be anticipated for some time because monetary policy, in the form of the large and negative real interest rates, continues to be so irresponsible.

Finally, the situation may be worse than it appears. Incomparable inflation indicators—weekly wholesale prices versus monthly consumer prices and so on—lead to confusion. It is possible that the most important inflation measurement, the GDP deflator, has been persistently underestimated in the reform era. If so, real GDP growth, which is corrected for inflation using the GDP deflator, has been overestimated for nearly two decades.[5]

Indian GDP adjusted for purchasing power is fourth-largest in the world, more than three times nominal GDP. But the adjustment for purchasing power is going to shrink—and measures of the economy with it—due to Indian inflation being much higher than the rest of the world's. This is another sense in which real income growth is being exaggerated.

The U.S. Can Help

The Indian government has opted for high growth and high inflation. There are other paths featuring market-oriented reform rather than hyper-stimulus that would yield high growth without the inflation tax.

There was lost opportunity to use the recent telecom bandwidth auction not to maximize government revenue but to promote quality, jobs, and growth in a critical industry. A much broader step that still can be taken is to end government discretion to seize land by assigning specific and transparent rural property rights. In 1980s China, this produced high growth and poverty alleviation. It could do the same for India.

Inflation, government waste, and other failures should be enough to convince India to turn away from state-led development. If India resumes in earnest the market-oriented reforms begun to such great effect in 1991, the U.S. can help in the following ways:

* The Departments of State and Agriculture should offer in the U.S.–India agriculture dialogue technical assistance in promoting rural property rights;
* The new India–U.S. Financial and Economic Partnership should focus on cooperation in unwinding mutual fiscal and monetary stimulus; and
* The U.S. should refrain from its own intervention in U.S.–India commerce, such as recent congressional action to target visas for Indian workers.[6]

Not a Sign of Prowess

India's present growth is not a sign of economic prowess; it is a choice most countries do not make because the concurrent high inflation typically targets the poor.

Derek Scissors, Ph.D., is Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation.

India: Fast Growth Does Not Mean a Strong Economy | The Heritage Foundation

 

[Daredevil]

Amid China trouble, India, Japan to firm up economic pact

NEW DELHI: Amid dissonance in relations with China, India is looking to expand strategic and economic ties with Japan as the two sides hold the final round of negotiations next week to finalise a key economic pact ahead of Prime Minister Manmohan Singh's visit to Tokyo in October.

Commerce Secretary Rahul Khullar is expected to travel to Tokyo Tuesday to hold a final round of negotiations on a comprehensive economic partnership agreement (CEPA) with Japan, well-placed sources told IANS.

The pact, called Economic Partnership Agreement (EPA) in Japan, is expected to slash tariff duties on around 9,000 products, ranging from steel and apparel to drugs and machinery, and give a big boost to bilateral trade which was estimated to be around $11 billion in 2008-09.

The two sides are keen to clinch the pact well in time before Manmohan Singh travels to Tokyo for the annual summit with his Japanese counterpart Naoto Kan, likely Oct 25-27.

Manmohan Singh's visit to Tokyo will be keenly watched in Beijing that sees both a rising India and Japan, which it overtook as the world's second largest economy recently,as rivals and competitors in the Asian hemisphere.

Beijing has taken note of the recent launch of negotiations for a bilateral nuclear pact between India and Japan, a breakthrough of sorts given Tokyo's past aversion to doing nuclear business with any country outside the fold of the Nuclear Non-Proliferation Treaty.

Significantly, the China threat perception figured in discussions between External Affairs Minister S.M. Krishna and his Japanese counterpart Katsuya Okada a fortnight ago. The Japanese side spoke of its unease about the opaqueness of China's military spending and stressed the need for transparency during discussions, top sources said. India shared this sense of unease, the sources added.

The recent Chinese aggressiveness on issues critical to India's sovereignty like the denial of visa to a senior Indian Army officer on grounds that his command included Jammu and Kashmir has revived the spectre of the China threat in India.

The reports of the presence of 11,000 Chinese troops in Pakistan-administered Kashmir has further fuelled anxiety in New Delhi, which has already conveyed concerns to Beijing over the issue.

The incident has also prompted India to pursue a more robust Look East policy to position itself as a democratic alternative to China in the East Asian region, which will hold the regional summit in Hanoi October-end.

Against this backdrop, although Indian officials maintain India's relations with Japan are independent of its ties

with China, New Delhi and Tokyo have been quietly giving a strategic orientation to their relationship.

Two months ago, India and Japan held two back-to-back separate dialogues that discussed a wide array of issues, including counter-terrorism, jointly combating piracy and UN reforms, to give more heft to their strategic partnership.

With an eye on Beijing's growing clout in Africa, the Japanese foreign minister sought India's cooperation in starting talks with African countries to push forward UN Security Council reforms when he visited India last month.

The subtle message was not lost on China.

 

[Aruni]

I think we ought to hold off on the chest-thumping on reports of a new dawn for India-Japan economic relations. If you compare trade and investment data, the relationship Japan shares with China is phenomenal and the India-Japan story is nowhere on the horizon when compared to that. Yes, Japan is keen to develop its strategic relationship with India and part of that certainly involves greater economic links, but in terms of hard numbers, India is not even in the picture.

Yet, it is foolish of us not to be more pro-active in attracting Japanese investment in India. Japan does invest a substantial sum in India at present but there will be an opportunity in the next 5-10 years that India should grasp. I am referring here to the rising per unit of labour costs in China, natural as a result of rising living standards. I am not yet sure whether China can climb up the value chain within that time frame, so there is an opportunity for India to create a segment for itself in the market as a destination for Japanese investment.

In theory, we should be able to attract investment in high-end sectors as well given our legally enshrined protection for IP, however, given the status of our clogged legal system, this really isn't an advantage at this stage.

 

[Rahul92]

At present India has registered 8.8% growth but if we concentrate on forthcoming years that is by 2050 when India will get a tag of developed nation the minimum growth will be register at those years is 3% growth But the govt should focus on problems like poverty,illiteracy,population etc....:emot154:

 

[nitesh]

This is a good sign for agriculture

Wet spell boosts prospects of record kharif harvest

 

[plugwater]

India, China look top investment targets to 2012: UN

GENEVA: The world's biggest companies are planning to boost their international investments over the next two or three years, with most spending planned in major emerging economies, according to a United Nations study.

China, India and Brazil are the top three target countries for foreign direct investment (FDI) until the end of 2012 with the United States, for years number one, now in fourth place, the U.N. trade and development agency UNCTAD said.

The Geneva-based agency, which acts as a think-tank on economic trends in developing nations, said the global economic crisis from 2008 was less harmful than feared for investment.

The conclusions were based on a survey of the FDI climate among 236 leading multinational corporations and 116 investment promotion agencies.

Global investment flows slumped in 2008-09 as a result of the economic downturn but are expected to recover slowly in 2011 and 2012.

MERGERS AND ACQUISITIONS

Incoming FDI, mostly from richer countries like the United States and the bigger powers in the 27-nation European Union, is a key component in development plans for many poorer countries.

But in recent years big firms based in the more successful emerging economies have taken a growing role, investing in both rich and poor nations, often through mergers and acquisitions.

The crisis had accentuated a shift of the geographical focus of FDI towards developing and former communist economies.

These countries accounted for 9 of the top 15 priority FDI destinations for global firms, UNCTAD said.

China was the number one attraction for the second year, with India up from third in 2009 and Brazil up from fourth, pushing the United States down from second.

Russia was fifth, the same as in 2009, but Mexico leapt to sixth place from 12th last year, leapfrogging Britain at seventh, Vietnam at eighth and Indonesia at ninth. Germany, Europe's biggest economy, fell from seventh to 10th.

Thailand, Poland, Australia, France and Malaysia were the five countries next most favoured, the UNCTAD survey showed.

In July, UNCTAD predicted that total FDI flows could rise to $1.3-$1.5 trillion in 2011 after $1.2 trillion this year, and jump to $1.6-$2 trillion in 2012.

The highest total on record was $2.1 trillion in 2007, but this fell 16 percent in 2008, then a further 37 percent to $1.11 trillion in 2009 as the crisis left companies slashing spending.

UNCTAD said optimism that the worst of the crisis was over had encouraged companies to revise investment programmes, with some 58 percent saying they would boost FDI in 2011-12.

But it noted that optimism was greater among multinationals based in the developing world than among those in richer economies, especially those headquarted in Europe.

India, China look top investment targets to 2012: UN - The Economic Times

 

[LETHALFORCE]

India overtakes the U.S. as second most attractive FDI destination for 2011-12:UNCTAD

Malaysian Mirror - India takes over U.S as second most FDI destination

GENEVA - India has replaced the United States as the second most important foreign directive investment (FDI) destination for transnational corporations during 2010-2012, Press Trust of India (PTI) reported citing a survey conducted by UNCTAD.

In its latest 'World Investment Prospects Survey 2010-2012', the United Nations Conference on Trade and Development said transnational corporations remain buoyant about investment prospects in China, India and Brazil.

According to the survey, India is the most important FDI destination next only to China.

India replaced the US as the second most important destination for FDI by transnational companies last year following severe recession in the US. In the last survey, the US was the second most important destination and this time the country has slipped to fourth position.

Global FDI flows are expected to jump increase from US$1.2 trillion this year to US$1.3-US$1.5 trillion in 2011 and US$1.6-US$2.0 trillion in 2012.

"The results point to a recovery in global FDI flows in 2010 and further growth in 2011 and 2012," UNCTAD said.

Basing its results on the responses from 236 leading transnational corporations and 116 investment promotion agencies, it forecasts an upswing in the international foreign direct investment flows.

"The crisis was less destructive to FDI than had been feared" despite the worsening economic situation and growing recession in the industrialised countries, UNCTAD said.

Notwithstanding the squeeze in the investment budget during the worst economic crisis in the last eighty years, there has been perceptible shift in the TNC's geographical focus to developing and transition economies.

The emerging countries weathered the downturn better than their industrialised country counterparts. Further, the developing countries are leading the global recovery and are also contributing to the TNC strategies — Bernama

 

[Pintu]

Food inflation goes up to 11.47% - The Times of India

Food inflation goes up to 11.47%
PTI, Sep 9, 2010, 12.24pm IST

NEW DELHI: Food inflation went up to 11.47 per cent for the week ended August 28, on the back of increase in prices of cereals, fruits and milk.

This is the second consecutive week when food inflation has shown an upward trend, after a brief period of moderation in July and first half of August.

Food inflation was 10.86 per cent during the previous week ending on August 21.

On a yearly basis, cereals prices rose by 5.07 per cent driven mainly by higher prices of pulses, rice and wheat compared to the same period last year.

While pulses became dearer by 13.44 per cent, prices of rice and wheat rose by 4.74 per cent and 7.04 per cent, respectively, during the week under review on yearly basis.

Among other food items, milk prices soared by 17.60 per cent during the week compared to the same period last year, while that of fruits went up by 10.34 per cent.

Prices of vegetables, however, maintained a downslide in line with trends during the past few months.

While vegetables overall saw a decline of 9.38 per cent on an annual basis, potato became cheaper by over 50. Onion prices also slid by 10.32 per cent.

Food inflation has been in double-digit for most of the year, except a fortnight in mid-July when it had plummeted to single digit level.

The overall inflation, which also includes rate of change in prices of manufactured goods, fell to single digit at 9.97 per cent in July after a gap of five months. The figures for August will be released later this week.

 

[Pintu]

Food inflation rises to 11.47%, RBI hike seen - The Times of India

Food inflation rises to 11.47%, RBI hike seen
TNN, Sep 10, 2010, 03.42am IST

NEW DELHI: Food inflation rose to 11.47% for the week ended August 28 on the back of rising price of perishable items that become particularly vulnerable in the rainy season and fuelling fears of a rate hike by RBI in its policy review on September 16.

This is the second consecutive week that the index based on wholesale price of food items has risen. This time round, a rise in price of cereals, fruits and milk pushed up the index from 10.38% logged in the previous week. The consecutive rise in food inflation only reinforces expectations of RBI tightening money supply in the system by raising short-term lending rates. Though this measure may not directly be able to control rising food prices, it will help in stopping it from spilling over to the broader economy.

Planning Commission deputy chairman Montek Singh Ahluwalia said inflationary pressure would remain in the economy for some time. Overall inflation for July stood at 9.97% and data for August is expected next week. PM Manmohan Singh had on Wednesday expressed hope that inflation would come down in the coming months. Headline inflation remained in double digits for five consecutive months till June before dropping to single-digit level in July.

On an annual basis, cereals grew 5.07% more expensive in the week ended August 28. Within this group, price of pulses soared by 13.44%, while rates for rice and wheat increased by 4.74% and 7.04% respectively. Among other food items, milk soared by 17.6% during the week compared to the same period last year, while fruits became 10.34% dearer.

Vegetables, however, became cheaper by 9.38% and potato by 50.44% in the week ended August 28, while onion fell by 10.32% on an annual basis.

 

[Patriot]

India slips two positions to 51st in global competitiveness ranking news

09 September 2010


Geneva: Continuing its inexorable downward slide the United States hit a new low with the World Economic Forum (WEF) placing it fourth amongst the most competitive nations.

The previous year it had occupied the top slot. India may have a very highly regarded prime minister, an economist to boot, but that has not prevented the country slipping two places to the 51st position.

Switzerland, Sweden and Singapore ranked ahead of the United States. India's Asian rival China improved its standing to 29th position. The African nation of Chad figures at the bottom of the list of 139 countries.

The rankings were presented by the WEF in its annual review of the competitiveness of countries.

According to the WEF's Global Competitiveness Report 2010-11, released today, Switzerland occupies the top slot for its ability to provide the most competitive environment on several fronts. Singapore and the United States both slipped two positions from last year.

These rankings are viewed as indicators of the business climate in 139 countries and tanke into consideration a range of political, social and economic parameters.

Though Switzerland has "[state-supported] monopolies in key sectors, it maintains overall economic stability and largely open trade and investment policies," said Margareta Dryeniek Hanouz, senior economist and director of the WEF, who is also the co-author of the report.

As for India the report said it performed well in complex financial sector areas, standing 17th in terms of its financial markets, 44th in business sophistication and 39th in innovation, but failed to improve the basic drivers of competitiveness.

It slipped two spots to 51st due to its poor performance in a range of social sector areas such as education, health and infrastructure.

"There are two Indias," said Thierry Geiger, an associate director at WEF, who also authored the report. "While there is widespread poverty, poor health and education facilities and poor infrastructure in rural India, the other India is experiencing rapid growth," he said.

The report praised China, up at the 27th position from 29th last year, for relieving poverty and improving overall access to education and health. It said life expectancy is 10 years shorter in India as compared to China and Brazil.

It also said despite high economic growth, India continued to be impacted by budget deficits, high public debt and high inflation. In contrast, China has over $2 trillion in forex reserves and a sound macro-economic environment.

The WEF is largely known for its annual Davos show.





domain-b.com : India slips two positions to 51st in global competitiveness ranking

 

[SixSigma1978]

No point in selling TV/DVDs to a state where half the villages don't have electricity. Build power plants first - solve the perennial Electricty, Water and Law and Order problems first

 

[Rage]

Big ticket items like TV's/DVD's are not all they sell in Bihar or UP's villages. The biggest seller is clothes- and believe me people have lots of spendin' power for that, these days.

Other items of interest include cellphones, toys, accessories- household and personal, and eatables. There is also such a thing as 'value malls', which specialise in discount shopping- such as clothing and small consumer goods: like watches, cutlery, kitchenware, stationary, etc. Meanwhile, there are plenty of thakurs, small business owners, corrupt government employees and large, rich farmers to form a large enough market for flat-screen TV's, DVDs and the like.

 

[Pintu]

Industry sets doubts at rest, grows 13.8% in July - The Times of India

Industry sets doubts at rest, grows 13.8% in July
TNN, Sep 11, 2010, 02.05am IST

NEW DELHI: Growth in India's industrial output nearly doubled from a year-ago period to 13.8% in July on the back of a double-digit expansion in capital goods production. The figures released on Friday beat down fears of demand deceleration and lifted expectations of the economy notching an overall growth of over 8.5% but also reinforced the case for further monetary rightening by the RBI.

Coming after the slowdown scare sparked by lapses in calculating the first quarter GDP figures, the latest figures remove doubts over whether India's growth story was real or apprehensions that Asia's third largest economy may be pausing to catch its breath. No wonder, a buoyant finance minister Pranab Mukherjee saw an average industrial growth of 12-13% this financial year.

Government's think-tank, the Planning Commission, too said the economy could beat the Centre's overall growth projection of 8.5% for this fiscal, particularly in view of the stellar showing by the labour-intensive manufacturing sector. The latest Index of Industrial The Economic Times showed output of capital goods, used by the manufacturing industry, soared 63% from 1.7% a year ago.

But not everyone is feeling as buoyant. According to Crisil chief economist D K Joshi, the July figures may not sustain. "I don't see the IIP growth beyond 9% this fiscal. These high numbers are not sustainable.'' Economist Rajiv Kumar too feels it may be too early to revise the GDP figures upwards. "I expect that there will be slowdown in industrial activity in the coming months.'' The economy grew by 8.8% in the first quarter of this fiscal.

Other analysts said if demand does not grow in proportion to the robust growth of 63% in capital goods, it could lead to inventories piling up in future and reduction in manufacturing activities.

All eyes will now be on Tuesday's inflation data for cues on the RBI's next policy move. Headline inflation for August is due next week and analysts expect it to have eased to 9.6%, which would be its second consecutive month below double digits. Yet with food inflation accelerating for three consecutive weeks and signs of manufacturing capacity constraints, policymakers fear high food prices could spill over into the broader economy.

Overall, the manufacturing sector grew 15% in July against 7.4% a year ago. Consumer durable goods production was also up 22.1%, the same as in July 2009. But electricity generation grew at a slower 3.7% against 4.2% a year ago. In terms of specific industries, 12 out of 17 groups showed positive growth in the month under review.

The group of industries listed under `machinery and equipment other than transport equipment' has shown the highest growth of 49.9%, followed by 31.1% in other manufacturing industries and 24.9% in transport equipment and parts. But wood and wood products showed a negative growth of 9.4% followed by 2.1% in beverages, tobacco and related products.

The growth figures came about despite the government partially withdrawing stimulus by raising excise duty by 2% to 10% and rate hikes by the RBI. This gives relief to government statisticians and planners. Official data released last month had put economic growth in the April-June quarter, based on actual expansion without accounting for taxes, at 8.8%. But GDP growth at market price, which reflects the value of the production or services that includes indirect taxes, was just 3.65%.

Usually, the difference between the growth rate of GDP from the two methodologies is 2-3%. With the numbers creating confusion, the government quickly set the anomaly right by revising the GDP figure at market prices to 10.02% from 3.65% earlier.

 

[Rage]

UPDATE 2-India's July industrial output soars; rate hike seen | Reuters

 

[Rage]

Calling India's Tax Man

Calling India's Tax Man

* SEPTEMBER 11, 2010

India ought to be a huge draw to investors. It boasts favorable demographics, democracy, a rule of law and a certain amount of economic liberalization. And then the government goes and pulls a stunt like last week's tax ruling against Vodafone.

A Mumbai court Wednesday gave tax authorities permission to ding the British company for up to $2.6 billion in capital-gains taxes related to its 2007 purchase of a majority stake in an Indian mobile service provider from Hong Kong-based Hutchison Telecommunications.

The case is so convoluted it could only happen in India. For starters, Vodafone was the buyer and yet could be forced to pay taxes on Hutchison's capital gain. A provision in Indian law in some cases requires the buyer to withhold the tax from its payment to the seller.

Worse, it's unclear whether this transaction was taxable in India in the first place. Although the company changing hands, now known as Vodafone Essar, is one of the country's largest mobile service providers, the deal itself happened in the Cayman Islands. Technically, Vodafone's Dutch subsidiary bought the Cayman Islands holding company that owned Hutchison's stake in the Indian telecom.

Tax authorities argued that because an Indian asset changed hands, India is owed capital gains taxes. Vodafone argued that this was a transaction completed offshore by two foreign companies, so India didn't have taxing jurisdiction. The court ruled that only some parts of Essar's value are taxable (such as the intangible value of its brand in India) and left it to the tax men to calculate what Vodafone owes.

Many companies complete this kind of deal in jurisdictions like Singapore where tax treaties specifically bar Indian attempts to collect capital gains taxes. Even so, Vodafone had reasonable grounds to believe it wouldn't be taxed for an offshore transaction. The existing law is murky enough that the national parliament currently is considering a revision to clarify this jurisdictional question.

The biggest problem here is what this case says about regulatory and legal predictability for investors. Other countries' capital gains taxes clearly state which kinds of deals fall under their jurisdiction. Delhi, in contrast, had never pursued a tax claim like this before and seems to have started in this case mainly because tax authorities were drawn to the large amount of money involved.

Vodafone itself shows the benefits of making life easier for foreign investors. It employs more than 9,000 Indians, directly serves 111 million subscribers and its presence has boosted competition and helped drive down prices for all consumers. Vodafone also recently paid $2.6 billion to Delhi for a license for next-generation spectrum to deliver mobile data services. How much more does Delhi want?


Review & Outlook: Calling India's Tax Man - WSJ.com

 

[Pintu]

Big swings may go with launch of new WPI today - The Economic Times

14 Sep, 2010, 04.06AM IST,ET Bureau
Big swings may go with launch of new WPI today


NEW DELHI: Calculation of inflation in India will undergo an overhaul when the government releases a new series of wholesale price index on Tuesday that will track prices of items such as refrigerators, computers and TV sets to better reflect the changing consumption pattern.

The base year against which price rise is measured is also being advanced by a decade to 2004-05, starting from monthly inflation data for August to smoothen out the index by reducing fluctuations. The existing series will be restated so that a comparison of the last five years is possible.

"The change in base would improve the accuracy and make the index less prone to fluctuations," said TCA Anant, chief statistician of India. The WPI, the most widely tracked measure of inflation, will have 400 new products in the goods basket, while about 200 outdated items will be dropped from the list.

"The commodity basket will be analysed every quarter, even though the groups will remain fixed," said a senior official with the department of industrial policy and promotion.

"The change of base should not have a large impact on numbers," said Pronab Sen, advisor to the Planning Commission and former chief statistician. "However, there was no way of predicting which way the index would move," he said.

The new series of WPI is based on the recommendations of a working group led by Planning Commission member Abhijit Sen. The working group submitted its technical report in May 2008 and recommended the change of the base year to 2004-05.

To reflect the change in the structure of the economy, the weights of the index have been changed suitably. The system of releasing food and fuel index every week and WPI monthly will continue.

There is a substantial increase in the number of items in the basket of manufactured products. In the new series, there would be 555 items compared with 318 items at present.

Ready-made food, computer stationary, dish antenna, VCDs, crude petroleum and computers would also be part of the new series.

Under primary article group of the new WPI, there would be 102 items as against 98 at present while fuel and power category would remain unchanged with 19 items.

The government is also working on a service price index, which would measures the variation in prices of services. This carries immense importance as the services sector contributes around 57% of the country's gross domestic product. Work is also going on to provide an index for sectors such as road transport, ports, aviation, telecom, post and telegraph and banking. By this fiscal year end, two indices namely on financial services and trade and transport should be released, a government official said.

 

[Daredevil]

Indian model of growth wins praise over its Chinese rival

PTI, Sep 14, 2010, 01.29pm IST
BEIJING: Indian economic growth, often described as chaotic and weighed down by poor infrastructure, came in for praise from experts here, compared to more disciplined but highly autocratic Chinese model.

While Indian economic growth was more fuelled by high domestic consumption and services, the Chinese model relied heavily on manufacturing and exports, said Western and Chinese experts at the state TV debate, on the sidelines of of the World Economic Forum being held here.

Besides, India has comparative strategic advantage in the value chain whereas China relied mostly on the labour and cost advantages, said Fu Jun, professor of the Political Economy of the Peking University.

"India in comparison has done a better job", Jun said.

"What is interesting from now on is which one is more viable. I have to give credit to India. What India will do next is to continue the strategy and move into other areas. By comparison we (China) have to readjust our strategy into manufacturing. I do not see reasonable balance between supply and demand," he added.

Human resources development minister Kapil Sibal, who was participating in the debate, said, "Because our economy is based on domestic demand, there is much greater innovation and ability of the entrepreneurs to actually produce wealth. In the long run a lot of innovation and lot of wealth production is going to come from our part of the world."

Martin Wolf, associate editor of the Financial Times, who was critical of the Indian growth model said, however, "Indian development is working despite failure of organisation and poor infrastructure. It is clear that lot of successful multinational companies have good assets in India."

The debate, the first of the three was held on the side lines of the Geneva based World Economic Forum which was being held at Chinese port city of Tianjin, where over 1,400 political, business leaders and economists gathered to deliberate on "Driving Growth through Sustainability".

Besides Sibal, Karnataka chief minister, BS Yeddyurappa and a host of Indian business leaders are taking part in the meeting, which is inaugurated today by Chinese Prime Minister, We Jiabao.

 

[Sabir]

West Bengal Pulling Up its Socks

Articles - West Bengal Pulling Up its Socks | IPFOnline.com

If recent reports emanating from West Bengal are anything to go by, the State is now moving towards creating a entrepreneurship-friendly image to help boost its industrial status, reports Huned Contractor

A news report published in The Telegraph dated July 20, 2010 states that the CPM has hauled up its ministers and asked them to try and reassert the image of a "do-it-now" government in a desperate bid to stem the slide in its electoral fortunes. The CPM State Secretary Biman Bose has also been reported to have expressed resentment over "lack of coordination among ministers", saying it had affected development work. "In land acquisition, setting up industries, issuing below-poverty-line cards or streamlining the public distribution system, where several departments are involved, coordination is a must," Bose was quoted as saying. This is not just a political move. As the State's Chief Minister Buddhadeb Bhattacharjee has earlier pointed out, it is a necessity of the times to be able to attract investments in the State so that West Bengal is not left too far behind as compared to the other States in the country.

This can also be borne out from what the State's industry minister Nirupam Sen had to say in the course of an interview conducted in March last year. "There may be some negative perceptions about our State but if we look at the facts, West Bengal is still in the front row as far as investments are concerned. In 2008, West Bengal got the highest numbers of industrial entrepreneurs' memorandum (IEMs) among different States. The proposals amounted to almost Rs 95,000 crore," he stated. The emphasis is on maintaining the momentum. However, a report published by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) stated that West Bengal had slipped from the fourth to the 13th position as an investment destination. Clearly then, there is something not quite right in terms of matching the vision with the ground reality.

Has it been a fall-out of what happened with the Tata Group's Nano plan at Singur? Sen doesn't think so. According to him, that was just a one-off incident and hasn't really affected the industrial status of the region. A lot of proposals, as per his statement, have been received in the iron and steel sector. According to the Ministry of Steel, 222 memoranda of understanding (MoUs) have been signed with various States for planned capacity of around 276 MT and major investment plans are in Orissa, Jharkhand, Chattisgarh, West Bengal, Karnataka, Gujarat and Maharashtra. To give credence to the fact that West Bengal is still in the reckoning, Korean steel major Posco has begun checking out West Bengal, raising hopes of the State hosting an investment by Korea's biggest steel company whose plans to set up a 12 million tonne plant in Orissa have been swinging high and low.

According to a media report, Posco officials visited the Kulti Growth Works (KGW) of the Steel Authority of India Ltd (SAIL) near Asansol in West Bengal. KGW has the capacity to make mostly non-ferrous castings as well as some steel castings. Posco India sees the Indian market as one with huge potential as much for the growing market for steel (mainly for infrastructural projects) as also for the country's mineral resources. Adhunik Corporation, which is planning to set up an integrated steel plant in West Bengal, has been provided 505 acres at Raghunathpur in Purulia district. Adhunik Corporation's project involves setting up a steel plant with a capacity of 1.1 million tonnes per annum along with a 1,000 MW captive power plant and a 1 million cement plant at Raghunathpur.

Meanwhile, after putting its steel project in West Bengal on the right track, JSW Steel plans to commission two units of its 1,600 MW power plant in West Bengal by 2015. In a regulatory statement, it said the company board has approved the formation of a special purpose vehicle (SPV) by its subsidiary JSW Bengal Steel jointly with JSW Energy for setting up the power plant using thermal coal from Ichhapur mines. "The power plant will be set up as two units of 800 MW each with an investment of about Rs 9,680 crore, comprising Rs 7,680 crore for setting up the power plant and Rs 2,000 crore for the development of mines. The project is proposed to be funded on a debt-equity ratio of 3:1 (Rs 7,260 crore and Rs 2,420 crore respectively)," the statement said.

In another positive development, India Resources Ltd (IRL), a mining firm listed on the Australian Stock Exchange, has decided to enter into contract mining of coal with Bankura Coal Co in the Raniganj sector with a total investment of over Rs 100 crore. This is also perhaps the first instance of contract mining by a foreign company in the coal sector which is dominated by public sector major, Coal India Ltd. Bankura Coal has six sponge iron companies under its wing and has been allotted a lucrative coal block in the heart of the State's Raniganj coal belt. The mine has total reserves of 95 million tones. India Resources will start operations at the new mine within three years.

"The output from this mine is expected to peak in the seventh year of operations when it is estimated to produce half a million tonnes of coal," Arvind Misra, Managing Director of IRL, said. This is part of India Resources Ltd's strategic move to get into the exploration side of the mining business in India. Such projects send out a clear signal that India Inc still has a lot of faith left in West Bengal's economic and industrial stance. "The policies are working in the right direction to make Bengal's industrial prospects conducive," is how ASSOCHAM's Secretary General D S Rawat puts it. In another step forward, Mackeil Ispat and Forging Ltd has set up a plant with a production capacity of 40,000 tonnes annually at the industrial town of Durgapur in West Bengal for an investment of Rs 200 crore.

"We have funded the Rs 200-crore project through debt and internal accruals and may visit the capital market for a maiden public offering of shares at a later stage to fund the second phase," is what the company's Chairman P Chakraborty told reporters after the plant was commissioned. He further revealed that the company plans to set up a steel melting shop of 3,00,000 tonnes a year at Durgapur with an investment of Rs 500 crore by December 2011. The furnaces that will be used to make the forgings will be fuelled by coal bed methane gas and liquefied petroleum gas sourced from Great Eastern Energy Ltd.

As for the often-heard complaint about the scarcity of power in West Bengal, here is some heartening news. At a seminar, West Bengal Green Energy Development Cor-poration's Managing Director S P Gon Chaudhuri said, "We are expecting to generate 110 MW from land-based solar power plants to be set up with the help of private sector companies. Another 5 MW will be produced through rooftop panels by 2013." Around Rs 1,500 crore will be invested to produce the 115 MW. The government has given a proposal to the New and Renewable Energy Ministry to get this amount. At present, the State produces only 15 MW of solar power. According to the National Solar Mission, India should have an installed capacity of 20,000 MW by the end of the 13th Five Year Plan in 2022, implemented in three stages. "Out of 20,000 MW by 2022, we want to produce 2,000 MW," Gon Chaudhri said, adding that six companies - Webel, Moser Baer, Reliance Industries Ltd, Synergy Solar (P) Ltd, Astonfield and Videocon - have shown interest in making solar modules in the State.

West Bengal is also among the fastest growing States with regard to the IT sector and the IT and ITeS sector is projected to contribute 15-20 per cent to the State's economy by the end of 2010. In the first five years of his tenure, Bengal Chief Minister Buddhadev Bhattacharjee focused on the IT sector. He got Wipro and hoped for Infosys, while TCS expanded. In fact, Wipro's chief Azim Premji once said that Bhattacharjee was the best chief minister. The chief minister also stepped in to allocate land to Wipro and Infosys. Both the companies were earlier offered land at an IT township called Kolkata Links located near a spa resort called Vedic Village which erupted in controversy, involving the State government as well. One of the reasons why IT has enjoyed such growth in West Bengal is that there is no dearth of highly skilled manpower in the State, given its tradition of stressing on the importance of education.

Placed in the larger picture, it is not surprising to find that the ASSOCHAM study indicates that the State's business confidence index is at a more-than-satisfactory 6.5 on a scale of 10. The study was conducted among 280 chief executive officers and managing directors and over 225 respondents opined that the State can be rated on par with favourite investment destinations like Gujarat, Maharashtra, Karnataka, Andhra Pradesh, Rajasthan and Himachal Pradesh. Over 200 CEOs observed that apart from domestic investment, West Bengal can attract investment from overseas players in clean energy, biotech and nanotechnology, healthcare, education and infrastructure. As per the ASSOCHAM estimates, West Bengal received investments up to Rs 5.3 lakh crore till September 2009 over a 12-year period. As pointed out earlier, there are high stakes riding on the hope that this kind of progress will remain on track.