Thread: Indian Economy

India is ripe for liberalisation

It is often asserted that India has the potential to become one of the world's great legal centres in the 21st century, alongside London and New York. It has innate advantages in its common law traditions and English language capability. But until very recently India had not recognised the role that advisory legal services have to play in attracting foreign investment and developing a broader-based services economy.

This is beginning to change and 2007 may represent the turning point at which the world's largest democracy recognises that a more open legal market could be good, not only for Indian business and economy, but also for Indian lawyers.

There is good reason to believe that there is a new political willingness to grasp the nettle of reform of the Indian legal market.

There is much wider engagement in the debate about the possibility of the legal market opening. In July 2006 the Indian Ministry of Commerce and Industry issued a consultation document on the opening of the legal market in the context of the World Trade Organisation trade negotiations. Sources suggest that the ministry was pleasantly surprised at the reaction from many in the legal profession to the possibility of foreign lawyers entering the market, even if this fell short of an enthusiastic welcome.

A similar pragmatic reaction was also evident at the conference on trade in legal services held on 20 January in Delhi by the Associated Chambers of Commerce and Industry of India and the Society of Indian Law Firms. Most of the Indian participants were in favour of the market opening provided that domestic reforms were undertaken first in order to prepare local law firms for foreign competition.

The practical reforms that India needs to undertake if it is to maximise its potential as a legal market are also being edged forward. These include a bill, now in parliament, that would not only permit limited-liability partnerships, but would also lift the cap on the number of partners in law firms.

There are also signs of a growing debate on the role of advertising and publicity in the legal profession. Bar Council of India rules prohibit Indian advocates from publicising their services, but a current case at the Indian Supreme Court on advertising by lawyers may help to initiate a rethink. This would be a critical development, as advertising is seen by Indian law firms themselves as the single most important reform that could be undertaken to help them compete in international markets. There is also a new fluidity in the legal market and real evidence that the most ambitious Indian law firms are preparing for a more competitive and exciting marketplace. There are law firm mergers, such as the Fox Mandal-Arthur Little and Co merger of last year, while Indian firms are also hiring foreign lawyers in order to increase their ranges of client services.

All of this suggests that change is in the air in India, but says nothing about how reform might happen and to what timetable.

The congress government has a window of opportunity to introduce reforms in the next 12-18 months. If it does not, there is no guarantee that a favourable political and economic climate will continue, or that the political figures who are pushing reform will remain in their current roles. Such a window would also coincide with negotiations on an EU-India free trade agreement, which is likely to include discussion of legal services.

The 'how' is more difficult, but it must involve new legislation. The Bombay High Court judgment of 1995 set out an extremely conservative interpretation of India's Advocates Act, which is not helpful for Indian firms, which cannot build multinational partnerships or even effective legal outsourcing businesses on the current interpretation. The judgment has also increased the cost base of Indian companies, which cannot take legal advice from a non-Indian advocate in India.

But perhaps most significantly, it has been counterproductive for the Indian economy, which is failing to build on one of the core strategic advantages it has over most other major Asian economies - its common law heritage.

Booming economy lifts Indian Railways

TIMES NEWS NETWORK[ TUESDAY, FEBRUARY 27, 2007 01:43:18 AM]
Expedite the freight corridor project

The rail budget quantifies the already known turnaround story of the Indian Railways (IR). However, from the projected numbers for 2007-08 it is clear that the efficiency gains have been almost squeezed out completely and IR would have to enhance capacity quickly if it is to benefit from rapid economic growth.

The freight-driven 16% growth in traffic receipts and a sharply lower 9.6% in working expenses — captured in a remarkable 78.7% operating ratio — is the essence of the turnaround story.

This has largely been driven by higher realisation from freight, as the revenue growth of 16.6% in 2006-07 (RE) is nearly double the increase in freight volume. Clearly, while IR has not effected across-the-board freight hikes, it has managed to hike rates through mid-year reclassifications.

Part of the improvement has also accrued from increased loading of freight trains, better turnaround time and capacity addition to passenger trains through additional coaches. Since freight rates are already high, any more increase is not feasible.

Further improvements would, therefore, have to come from larger volumes where IR is constrained by shortage of rolling stock and crowded track infrastructure. The projected lower 11% freight revenue growth and the much lower 7.7% increase in net revenue in 2007-08 along with a marginally poor operating ratio of 79.6% adequately capture the constraints.

The higher surplus for the year have, however, allowed IR to increase the annual plan by over 30% and substantially step up investment on higher capacity rolling stock. While this should address the short-term capacity constraints, the track constraints are sure to hit IR soon.

It is, therefore, important that IR approaches the freight corridor issue expeditiously, and not be reluctant about taking on a private partner, if needed.

On the passenger side, however, IR continues to bungle along. The lower-than-projected higher-class earnings in 2006-07, perhaps justify the fare cut but there was no case for lowering the highly subsidised second-class fares.

This is akin to creating a situation for a shock therapy at some stage, as there is a limit to reducing per unit cost though capacity increase in existing trains.

The improvement in passenger amenities such as cushioned seats in second class and special cars for the disabled are welcome. In all, it is a budget that dips heavily into the gains of the past but does not offer much by way of any outline for sustaining the run.

India May Seek to Spend on Ports, Cut Tariffs to Slow Inflation

By Cherian Thomas

Feb. 27 (Bloomberg) -- India's government may spend as much as 60 percent more on ports, power plants and roads in its next budget, allowing companies to cut costs and help damp the fastest inflation in two years.

Finance Minister Palaniappan Chidambaram will also probably cut import tariffs to make products cheaper in the budget for the year starting April 1 in New Delhi tomorrow. Chidambaram presented his first budget in 1996, when India's economy was half its current $854 billion size.

Prime Minister Manmohan Singh, facing political pressure over rising prices that are eroding the spending power of India's poor, last week asked state chief ministers for their help to curb inflation. Improved infrastructure may encourage more companies to follow in the footsteps of Nissan Motor Co. and Renault SA, which are investing in factories in the world's second-fastest growing major economy.

"If the government gets it right on inflation, the country can look forward to sustained high growth,'' said Robert Prior- Wandesforde, an economist at HSBC Holdings Plc in Singapore. "Removing infrastructure bottlenecks should improve the productive potential of the economy, so that it can sustain demand growth without running into inflationary difficulties.''

India's benchmark inflation rate climbed to 6.73 percent this month as record economic growth boosts demand for farm and factory products. Gains in consumer prices paid by farmers are at an eight-year high of 8.94 percent, while price increases for urban dwellers are the most in six years.

Cars, Houses

The fastest loan growth since 1971 and higher salaries are enabling Indians to buy products from cars to houses, stretching the capacity of Steel Authority of India Ltd. and other companies. The central bank, which has raised its key overnight lending rate five times in the past year, has warned areas such as housing are showing signs of overheating. Chidambaram may also prune tax exemptions on home loans to slow mortgages.

India, Asia's fourth-biggest economy, may grow 9.3 percent in the quarter ended Dec. 31 from 9.2 percent in the previous quarter, according to a Bloomberg News survey. The government expects a record 9.2 percent expansion in the year to March 31, the fastest pace after China among the world's major economies.

"Inflation control is on top of the agenda of the government,'' said Venugopal Dhoot, president of India's Associated Chambers of Commerce and Industry, or Assocham. "The government will cut customs duty further to check inflation and to meet its commitment to cut the tariff to Asean levels.''

Consumer affordability has increased demand for food products such as wheat, sugar and cooking oil. India, the world's second-biggest wheat grower, last year became an importer of the grain for the first time in seven years. It also banned export of wheat and pulses to augment supplies.

Import Duties

Chidambaram on Jan. 22 unexpectedly cut import duties on a range of products from steel to sulphur to palm oil, a month ahead of the scheduled announcement in the budget, to rein in prices. Five out of six traders and importers surveyed by Bloomberg News on Feb. 22 expects India, the world's second- biggest buyer of vegetable oil, to further cut duty on palm oil.

Since 2001, the government has more than halved the maximum customs rate for manufactured goods to 12.5 percent, to align the levy with the Association of Southeast Asian Nations such as Singapore where the tariff ranges between zero and five percent. Assocham's Dhoot expects India's peak customs rate to be cut to 10 percent.

Prime Minister Singh's Congress party faces seven state elections this year, the most important being in April in the northern province of Uttar Pradesh, which sends a seventh of all lawmakers to parliament. The election outcome in Uttar Pradesh will set the tone for the next general elections in two years.

Power Plants

India's infrastructure deficiency adds to the cost of companies operating in India.

Honda, Japan's No. 3 carmaker, has its own power plant because government supplies account for only a quarter of its needs. Ford Motor Co., which has a factory in southern India, requires its engine supplier in central India to fit delivery trucks with global positioning system devices so it can locate vehicles stuck in traffic and adjust production schedules.

India produces about 8 percent less electricity than it needs, cutting gross domestic product by a 10th, the finance ministry estimates. Highways, which move almost 80 percent of the goods transported in India, account for only about 2 percent of the country's roads. It takes an average 85 hours to unload and reload a ship at India's major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.

"The government has enough money this year to meet its budget deficit target and allocate more for infrastructure,'' said Saumitra Chaudhuri, chief economist at rating company ICRA Ltd. "Tax revenue has been buoyant because of rapid growth.''

Budget Deficit

Chidambaram had planned to narrow the budget deficit to 3.8 percent of gross domestic product in the year ending March 31, from 4.1 percent of GDP in the previous year, after providing eight percent of the 5.63 trillion rupee budget on food and fertilizer subsidies, 13 percent on defense, 21 percent on interest payments and another 29 percent to states' exchequer.

The government may not have to increase bond sales next year as increases in tax revenue will cover expenses such as on roads and defense. Chidambaram may announce bond sales of 1.52 trillion rupees ($34.4 billion) in the year starting April 1, the same level as last year, according to the median estimate of seven traders surveyed by Bloomberg News on Feb. 23.

Tax collections have risen 38 percent in the nine months ended Dec. 31 compared with a target of 15 percent. India, which spends a seventh of China's $150 billion investment in public works each year, wants to team up with non-state and foreign companies to invest as much as $65 billion in infrastructure each year until 2012.

Credit Rating

Improving government finances prompted Standard & Poor's last month to raise India's debt rating to investment grade for the first time in 14 years. Moody's Investors Service raised its rating to investment grade in January 2004.

S&P said another rating upgrade would depend on further reductions in the budget deficit. India is bound by a law to cut the budget deficit by 0.3 percent of GDP each year, and to eliminate its revenue deficit by 2009, borrowing only to fund investments thereafter.

JPMorgan Chase & Co. economist Rajeev Malik expects Chidambaram to maintain existing corporate and personal income tax rates and get rid of the 10 percent corporate surcharge. Domestic companies pay a 30 percent tax rate, and an additional levy of 10 percent on it to fund the government's education and other programs. Foreign companies in India pay a tax of 40 percent and a 2.5 percent surcharge on it.

"A critical feature of future fiscal reforms will be the pace at which the government eliminates tax exemptions -- in the form of subsidies and concessions,'' said Malik.

Tax exemptions to companies and individuals in the year ended March 31, 2005, cost the government 1.58 trillion rupees, equivalent to 52 percent of the total tax revenue collected that year, Malik said.

Indian Forecast Sees High Growth As Sustainable
Ruth David, 02.27.07, 1:18 PM ET

MUMBAI -

As Indian stocks continued to slide a day before the release of the annual budget, the Finance Ministry released a bullish survey of the country’s economy, forecasting that economic growth rates of 9% were sustainable, and that fiscal and monetary measures to curb rising inflation would soon begin to gain some traction.

The economy is expected to record a growth rate of 9.2% for the fiscal year ending March 31, its highest level in close to two decades, raising concerns that the economy is overheating. Inflation, which touched a two-year high earlier this month, has fallen slightly to 6.63%.

“You will find that the outlook for the economy remains positive despite concerns about the rise in prices. We share the concerns,” Finance Minister Palaniappan Chidambaram told reporters in New Delhi. “We have taken a number of steps to curb inflation and we will continue to take more steps,” said Chidambaram, who will present the budget Wednesday.

Apart from taming inflation, Chidambaram said that the government’s challenge was to ensure that the benefits of growth are enjoyed by all social classes. India’s ruling coalition, supported by communist parties, is keen to ensure that it is seen as taking action over growing disparities in wealth, especially ahead of polls in key states.

The Finance Ministry acknowledged that unemployment had risen despite the high rate of growth, in part because of the stagnant farm economy.

The ministry report recommends that the government strengthen regulatory mechanisms to guard against volatility in the Indian markets.

“In terms of volatility of weekly returns, uncertainties as reflected by the Indian indices were higher than that depicted by indices outside India such as the S&P 500 of United States of America and Kospi of South Korea,” it says.

The benchmark Sensex index rose from 13,000 to 14,000 in just 26 trading sessions at the end of the year, but over the last few weeks, it has plummeted 1,300 points from its record high of 14,723.

On Tuesday, the Sensex slid 1.3% to end the day at 13,478 and the National Stock Exchange’s Nifty index lost 1.5% to close at 3,884.

According to the Finance Ministry survey, foreign investment in India rose 98.4% in the half-year that ended last September to $4.2 billion. India has now overtaken South Korea to become the fourth-largest investment destination in Asia.

The net level of capital flows remained positive despite large outflows due to domestic companies seeking acquisitions overseas. Net foreign institutional investment amounted to $1.6 billion in the April-September period, down from $5.4 billion in the corresponding period the previous year.

Investor optimism has been spurred by strong growth. Industrial activity expanded 10.6% year-on-year from April to November, the highest rate recorded since fiscal 1996.

The report saw limited risk to the economy from volatility in oil prices and the possibility of delays in completing global trade talks.

India must not lose nerve on growth
by Reuters on Tuesday, 27 February 2007

India said on Tuesday the country must not lose its nerve over the economy's rapid growth, saying the momentum is sustainable even though containing inflation would be a challenge.

The economy is expected to expand 9.2% in the current fiscal year to the end of March - its fastest pace in 18 years - sparking concerns of overheating as infrastructure fails to keep pace with rising domestic demand.

With such strong growth and inflation running at a two-year high, analysts expect more steps to cool price pressures.
Story continues below ↓

"From a near-term perspective, inflation would dominate policy attention, which would mean more corrective steps in the form of duty reductions, interest rate hikes and easing supply-side constraints," said Shuchita Mehta, chief India economist at Standard Chartered Bank.

The finance ministry said in its annual economic survey for 2006/07, which precedes a budget presentation on Wednesday, that economic fundamentals were robust and the outlook for Asia's fourth-largest economy was upbeat.

"The economy appears to have decidedly 'taken off' and moved ... to a new phase of higher growth," it said.

The rupee edged up to 44.18 per dollar while the 10-year bond yield rose 1 basis point to 7.88 percent after the report.

Analysts say supplies are failing to keep up with demand and food prices have risen due to stagnating farm production.

"We have to maintain a taut monetary and fiscal stance in order to contain inflation while supporting the growth process," said Saumitra Chaudhuri, economic adviser at ICRA.

The survey said rapid capacity expansion could avert capacity constraints and it saw rising investment sustained in 2007/08. Import growth, a major indicator of overheating, appeared to be "within reasonable limits".

"There is no scope for uneasiness or nervousness about high growth. International experience shows that troublesome inflation need not be the price to be paid for favourable high growth."

Since coming to power in 2004, the communist-backed coalition has pushed growth as the key to lifting 260 million Indians out of poverty.

The survey said fiscal reforms and rising tax revenues would help rein in the federal deficit to 3.6% of gross domestic product this fiscal year, below a 3.8% target and down from 4.1% last year.

But it said the government must still curb wasteful spending.

"Like going up a hill, the adjustments become harder as the destination gets closer," it said.

The coalition is trying to cut the deficit to free resources to improve conditions for the poor, but analysts cautioned the reduction may not be sustainable.

Inflation as measured by wholesale prices is running at an annual 6.6 percent after a peak of 6.73% at the start of the month.

Consumer prices are rising even faster and the survey warned that unless supply-side constraints, especially in food, were removed, inflationary pressure would not be fully tamed.

The finance minister said the government would take more steps to curb price pressures while Prime Minister Manmohan Singh said he recognised inflation was a problem.

"Our challenge is to tackle inflation without hurting the growth of agricultural and industrial economy," Singh told reporters.

The government, nervous about rising prices at time when it may lose key state elections, has cut some import duties and the central bank has tightened monetary policy several times in the past three months.

The survey said the impact of recent fiscal and monetary measures would be visible in days to come.

It said limited risks remained from global economic imbalances, oil prices and a delay in global trade talks.

Unemployment had risen because growth was not high enough and the farm economy was stagnant, it said, calling for more effective delivery of social services like health and education.

India preferred by o'seas investors

2007/2/28
By Gautam Chakravorthy MUMBAI, Bloomberg


India may retain its position as a preferred destination for overseas funds because the economy is expected to grow more than 8 percent for the fourth year in a row.

The global economy is expected to have an "impressive growth" in 2007 that encourages cross-border portfolio investment to emerging economies, the government said in the Economic Survey for year ending March 31 presented to lawmakers Tuesday. The survey is a prelude to the budget finance minister Palaniappan Chidambaram will present tomorrow.

The Bombay Stock Exchange's benchmark Sensitive Index had its fifth yearly gain in 2006 and more than doubled in the past two years. Demand rose from overseas investors, who bet companies such as ACC Ltd. and Larsen & Toubro Ltd. will benefit from the world's fastest growing major economy after China. The government forecasts India's economy will expand 9.2 percent this financial year.

Overseas investors bought a net US$8.94 billion in stocks and bonds last year, compared with a record US$9.46 billion in 2005. They placed a net US$48 billion in Indian stocks and bonds since they were allowed.

The total number of overseas investors registered in India rose 27 percent in 2006 to 1,044 while their sub-accounts increased 34 percent to 3,045, according to the survey.

Indian companies will continue to prefer raising money from the primary market through sales of bonds and shares, after raising a record 1.62 trillion rupees (US$36.6 billion) in 2006, according to the survey.

Companies raised 1.17 trillion rupees selling shares to select investors, including founders. Of the total funds raised from the primary market 75 initial public offerings by companies raised 247.8 billion rupees, accounting for 76 percent of the money raised, according to the survey.

Indian economy may grow at 9% in FY08: FM
India Infoline News Service / Mumbai Feb 28, 2007 19:57

The chances are very bright to witness growth close to 9% next year, Chidambaram told at a media conference in New Delhi. There is no sign of investment slowing down

The booming Indian economy may continue to grow at about 9% in the next financial year, Finance Minister P. Chidambaram said on Wednesday after presenting the budget for the year 2007-08.

"The chances are very bright to witness growth close to 9% next year," Chidambaram said at a media conference in New Delhi. "There is no sign of investment slowing down."

GDP growth in Asia's fourth-largest economy unexpectedly slowed to 8.6% in the three months ended Dec. 31 from 9.2% in the previous quarter as agriculture and manufacturing output slowed.

Farm output, which accounts for a fifth of the economy, increased 1.5% in the quarter ended December 2006, the Government said today. This was down from 1.7% in the previous quarter and 3.4% in the first quarter. Manufacturing sector growth recorded an expansion of 10.7%, down from 11.9% in the previous quarter.

"The Government won't hesitate to take more steps to moderate inflation,'' Chidambaram said. "The best way to fight inflation is to increase supplies. Every single measure is intended to increase production and increase productivity."

The Government seeks to bring the rate of inflation to between 4% and 5%, Chidambaram said.

Inflation, based on Wholesale Price Index (WPI), is at a two-year high owing to supply constraints in essential food items and higher demand for manufactured goods. The benchmark inflation rate climbed to 6.73% this month, above the central bank's tolerance level of 5%.

India Reduces Tariffs, Lifts Spending as Growth Slows

By Cherian Thomas and Anand Krishnamoorthy

Feb. 28 (Bloomberg) -- India's government slashed import tariffs to curb inflation and increased spending on ports, roads and farms to sustain economic growth that slowed last quarter.

Finance Minister Palaniappan Chidambaram reduced duties on coal, cooking oils and other imports in today's budget in New Delhi. Growth in Asia's fourth-largest economy unexpectedly eased to 8.6 percent in the three months ended Dec. 31 as farm output increased at the weakest pace in two years, the government said in a separate report today.

Rising prices of rice and wheat prompted Indian voters to oust Prime Minister Manmohan Singh's ruling Congress party in two state elections held this month. Chidambaram said the government is sticking to its forecast of 9.2 percent growth in the year to March 31, the fastest in almost two decades.

“The authorities are now seriously targeting prices,'' said Sanjeev Sanyal, senior economist at Deutsche Bank AG in Singapore. “Agricultural growth does fluctuate from year to year, but India still has a very strong growth rate spurred by industry and services.''

Government spending on infrastructure including ports, power generation and roads will be raised by 40 percent to 1.34 trillion rupees ($30.2 billion) in the year starting April 1, Chidambaram told parliament. Better infrastructure may see more companies follow Nissan Motor Co. and Renault SA, which are investing in factories in India.

Stocks Tumble

India's rupee dropped the most in six weeks as the benchmark stock index slumped, declining as much as 0.4 percent to 44.370 against the dollar, spurring concern global investors will take money out. Indian stocks posted their biggest drop in eight months after Chidambaram included a tax increase on dividends in his budget. The yield on the benchmark ten-year bond rose 5 basis points to 7.94 percent.

Asian stocks fell the most in eight months, extending a rout in global equities that started in China and triggered a slump in the U.S. compounded by signs the world's largest economy is slowing.

India's $854 billion economy expanded at the slowest pace in a year last quarter, the Central Statistical Organisation said today. The government expects growth of close to 9 percent in the year starting April 1, Chidambaram said, the fastest pace after China among the world's major economies.

“India might grow as fast as China in the not-too-distant future,'' said Robert Kalin, who manages about 500 million euros ($661 million) in Indian stocks at DWS Investment GmbH in Frankfurt. “Inflation may stay above the central bank's comfort zone for much of this year.''

Rivals China

Credit Suisse expects India's economy to expand 10 percent in 2007, faster than China's economy, which it forecasts will grow 9.9 percent during the period.

The benchmark inflation rate in India climbed to a two-year high of 6.73 percent this month, above the central bank's tolerance level of 5 percent, as sustained growth boosts demand for farm and factory products. Gains in consumer prices paid by farmers are at an eight-year high of 8.94 percent, while price increases for urban dwellers are the most in six years.

The Harvard-educated finance minister reduced import tariffs today for the second time in five weeks, betting cheaper imports will drive prices in the economy down. He unexpectedly cut duties on Jan. 22 on a range of products from steel to sulphur to palm oil, a month ahead of the scheduled budget announcement, to rein in prices.

Tariff Cuts

Chidambaram today also cut the maximum customs rate for manufactured goods to 10 percent from 12.5 percent, to align the levy with Association of Southeast Asian Nations such as Singapore, where the tariff ranges between zero and five percent.

The fastest loan growth since 1971 and higher salaries are enabling Indians to buy products from cars to houses, stretching the capacity of Gujarat Ambuja Cements Ltd. and other companies. The central bank, which has raised its key overnight lending rate five times in the past year, has warned areas such as housing are showing signs of overheating.

Higher incomes have increased demand for food products such as wheat, sugar and cooking oil. Singh's government today banned futures trading in wheat and rice to curb inflation, after earlier halting exports of wheat and pulses to augment supplies.

Slower agricultural growth has also put pressure on the price of staple foods in Asia's second-most populous nation. Farm output increased 1.5 percent in the quarter to Dec. 31, the government said today, slowing from 1.7 percent in the second quarter and 3.4 percent in the period before that. Manufacturing also cooled, recording an expansion of 10.7 percent, down from 11.9 percent in the previous quarter.

Monsoon Rains

“The growth numbers are surprising,'' said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. “The main culprit seems to be the sluggish growth in the farm sector. The unequal distribution of rains during the period seems to have impacted the agriculture growth.''

The agricultural sector in India, which accounts for a fifth of the South Asian economy, depends on the four-month monsoon rains ending September each year to water crops as only a third of the nation's arable land is irrigated.

India's 234 million agricultural workers may benefit from the government's farm credit target of 2.3 billion rupees announced today by Chidambaram.

Singh's ruling Congress party yesterday lost power in the northern states of Punjab and Uttarakhand among three elections this month. Singh wants to curb inflation ahead of polls in April in the more critical state of Uttar Pradesh, which sends a seventh of all lawmakers in parliament. The election outcome in Uttar Pradesh will set the tone for the next general elections due by April 2009.

Poor Infrastructure

Infrastructure deficiencies in India are hurting supplies and adding to the cost of companies operating in the $854 billion economy.

Lafarge India Pvt Ltd., the local unit of the world's largest cement maker, has its own power plant because government supplies are inadequate. Ford Motor Co., which has a factory in southern India, requires its engine supplier in central state of Madhya Pradesh to install global positioning system devices in its delivery trucks to locate vehicles stuck in traffic so that it can adjust production schedules.

Tax Revenue

India produces about 8 percent less electricity than it needs, cutting gross domestic product by a 10th, the finance ministry estimates. Highways, which move almost 80 percent of the goods transported in India, account for only about 2 percent of the country's roads. It takes an average 85 hours to unload and reload a ship at India's major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.

“Tax revenue has been buoyant this year because of an acceleration in economic growth,'' said N. R. Bhanumurthy, an economist at Institute of Economic Growth in New Delhi. “The government's finances are improving rapidly and it is finding resources for infrastructure spending.''

Chidambaram said he plans to narrow the budget deficit to 3.3 percent of gross domestic product in the year ending March 31, 2008 from an estimated 3.7 percent in the previous year.

Indian minister urges government to spend on agriculture and education
By Anand Giridharadas and Amelia Gentleman
Published: February 28, 2007

MUMBAI: Buoyed by a strong economy, the finance minister of India on Wednesday called for billions of dollars in investment in agriculture and education as a way to more evenly spread the benefits of growth.

In an annual budget address, Finance Minister Palaniappan Chidambaram proposed billions of dollars in spending to enrich the ailing rural economy and to open access to quality education, a dearth of which has hindered the thriving outsourcing industry in India.

Answering calls for greater investment by Indian outsourcers and multinationals like Microsoft that have vast operations here, Chidambaram proposed to raise central government spending on education by 34 percent, to $7.3 billion, including a doubling of outlays on secondary education. He proposed increasing health care spending by 22 percent, to $3.4 billion, and to inject an extra $1.3 billion into Bharat Nirman, an effort to build rural infrastructure like roads and telephone lines.

"Education and health care are the prime imperatives as far as this budget is concerned," the prime minister, Manmohan Singh, said after the speech.

By focusing on the grinding poverty in India, the budget proposal suggested that the government, led by the Congress Party, was already turning its eye toward the 2009 general election, said Kuldip Nayar, a veteran political commentator in Delhi. That emphasis appeared to come at the expense of some of the business-friendly measures for which industry had hoped.

A widely expected corporate tax cut was not part of the package, which included new taxes on dividend payments, office rentals and the profit of information technology firms.

Infosys, the Indian software giant, immediately said that its margins would fall by 1.5 percent under the proposal.

"The finance minister is making a simple statement: 'I'm happy companies are making money, but give me more of that,'" Uday Kotak, the vice chairman and managing director of Kotak Mahindra Bank, one of the largest Indian financial houses, said during a televised discussion by business leaders.

The Sensex, the benchmark index of the Bombay Stock Exchange, which had fallen about 300 points before the speech as part of the worldwide stock- market tumble, plunged an additional 240 points, closing at 12,938.09, down 4 percent from the start of trading.

Some investors and economists interpreted the emphasis on poverty as a signal that economic liberalization was sliding further down the priority list.

Ifzal Ali, the chief economist of the Asian Development Bank in Manila and a vocal champion of anti-poverty efforts, was nevertheless gloomy about what he said was the lack of measures to sustain high growth rates.

"A disappointing feature of the budget speech is the omission of reforms for labor markets, privatization, financial sector, foreign direct investment caps, etc., which are critically needed to improve the business and investment climate," Ali said in an e-mail message after the speech. "Have reforms gone into a deep slumber?"

Chidambaram used the speech to propose a multifront attack on inflation, which has crept above 6 percent. Declaring inflation to be a grave threat to the average Indian, the government has recently lifted short-term interest rates, tightened the money supply and curbed duties on essential commodities.

The finance minister announced a handful of additional tax cuts Wednesday intended to further dampen inflation, including the reduction of peak import tariffs on nonagricultural goods to 10 percent from 12.5 percent. The government also announced a ban on new futures contracts for wheat and rice on commodities exchanges, fearing that speculative investing is helping to inflate prices.

But a thrust of the Chidambaram speech was on the need to curb inflation by addressing the bane of the Indian economy: 115 million farming families, dispersed among more than 600,000 villages, whom growth has left behind. They are unable to increase their yields at the pace at which urban consumption is growing, causing prices to rise.

The farm sector, which employs two- thirds of the country but accounts for just one-fifth of the economy, has grown at slightly more than 2 percent a year for the past several years.

That is a far cry from the 9.2 percent growth projected for the broader economy in the fiscal year ending March 31.

"Everything else can wait, but not agriculture," Chidambaram said, quoting the first Indian prime minister, Jawaharlal Nehru.

Chidambaram proposed to increase bank credit to induct five million more farmers into the formal banking system, and away from the murky world of moneylenders.

He proposed to extend death and disability insurance to eight million families of landless villagers.

Chidambaram was at pains to emphasize the government commitment to its vision of "inclusive growth," especially given election defeats Tuesday in two northern states — defeats which the prime minister conceded were linked to anger about high prices.

Chidambaram devoted the first 40 minutes of his 90-minute speech to outlining how his government proposed to expand opportunity.

He introduced plans for more and better training in vocational and technical institutes, along with plans to build 500,000 more classrooms and employ another 200,000 teachers.

A proposed scholarship program would pay for 100,000 students to continue their education beyond the age of 11, to curb the high rate of dropouts.

But criticism emerged instantly from business groups which said that the budget focused too heavily on the poor — and from left-of-center economists who said it was not pro-poor enough.

Jayati Ghosh, an economist at Jawaharlal Nehru University in Delhi, said too little money would go to health care, the reversal of food price increases and new employment plans.

"This was a historic opportunity," she said. "Tax revenues are up, the economy is buoyant. There was a real chance to allocate money to these critical areas. That opportunity wasn't taken."

Amelia Gentleman reported from New Delhi.

'Help us to build rural India'
PRESS TRUST OF INDIA
Posted online: Thursday, March 01, 2007 at 1711 hours IST
Updated: Thursday, March 01, 2007 at 1708 hours IST

NEW DELHI, MARCH 1: Finance Minister P Chidambaram asked industry leaders to join hands with the government in putting agriculture and rural economy on a high growth path, which is also the main focus of Budget 2007-08.

"Just imagine what can happen to industry and services if agriculture grows at 4 per cent. It is in your interest that agriculture must grow at 4 per cent," Chidambaram said at a post-budget interaction with the industry.

If the purchasing power of rural India is at par with urban India, it would lead to a manifold increase in demand for goods and services, he said, adding the government would facilitate growth in agriculture through budgetary support for farm credit, fertiliser, irrigation and certified seeds.

He lamented that wheat production had been stagnant at around 69-72 MT, rice 90-94 MT and pulses 11-14 MT over the past few years, even as rise in population and per capita income had changed consumption patterns in the country.

Pointing out to the contrast between a prosperous and poor India, he said: "We can't delude ourselves that we will live a particular style of life, while they continue to languish in poverty".

He said the industry and services should welcome the focus given to agriculture and rural economy, which would create additional demand for their goods like refrigerators, two-wheelers and TV sets.

The government is also focusing on sectors like small cars, textile, leather and footwear, gems, jewellery and pharmaceuticals to make the industry competitive in these areas globally.

Originally Posted by Akshay

'Help us to build rural India'
PRESS TRUST OF INDIA
Posted online: Thursday, March 01, 2007 at 1711 hours IST
Updated: Thursday, March 01, 2007 at 1708 hours IST

NEW DELHI, MARCH 1: Finance Minister P Chidambaram asked industry leaders to join hands with the government in putting agriculture and rural economy on a high growth path, which is also the main focus of Budget 2007-08.

"Just imagine what can happen to industry and services if agriculture grows at 4 per cent. It is in your interest that agriculture must grow at 4 per cent," Chidambaram said at a post-budget interaction with the industry.

If the purchasing power of rural India is at par with urban India, it would lead to a manifold increase in demand for goods and services, he said, adding the government would facilitate growth in agriculture through budgetary support for farm credit, fertiliser, irrigation and certified seeds.

He lamented that wheat production had been stagnant at around 69-72 MT, rice 90-94 MT and pulses 11-14 MT over the past few years, even as rise in population and per capita income had changed consumption patterns in the country.

Pointing out to the contrast between a prosperous and poor India, he said: "We can't delude ourselves that we will live a particular style of life, while they continue to languish in poverty".

He said the industry and services should welcome the focus given to agriculture and rural economy, which would create additional demand for their goods like refrigerators, two-wheelers and TV sets.

The government is also focusing on sectors like small cars, textile, leather and footwear, gems, jewellery and pharmaceuticals to make the industry competitive in these areas globally.

Now why don't our finance ministers of all political hues ask wealthy farmers to pay taxes on their farm income?

I would be more happier if the GoI was doing something to reduce the population of farmers and move those people into other trades. Too many people are on subsistence farming. It is not productive at all. Chidarbam (sp?) is making a mistake by stepping in and interfering with market forces that are clearly design to force farmers to seek other trades. Chidarmbam should have introduce measures that would retrain farmers in other productive areas such as services or manufacturing or other sectors. Chidarbam should discourage farming and encourage taking up of new trades and focus on extending loans to those who are willing to take up new trades.

With regard to railways, the current high revenue growth and net profit growth path is not sustainable after 2 years unless major capex is spent to increase capacity.

With regard to sustaining 9% plus growth, I jsut dont see it yet, I see us in the 8s.

Why has the budget decided to fight inflation?

Fear that the economy will overheat.

In is in my view that the economy is close to or at capacity and hence suppliers are responding by increasing prices, a way to explain overheating.

Only solutions are to curb inflation

Cut tarrifts, ie go for more free trade which allows you to go beyound PPF in terms of utility curve maximization and hence generating extra income....

Increase expenditure in infrastructure

Developping rural India which is probably well under capacity if revived.

India's Industrial Output Expands More Than Expected

By Cherian Thomas

March 12 (Bloomberg) -- India's industrial production grew more than expected in January, stoked by surging consumer demand.
Production at factories, utilities and mines increased 10.9 percent from a year earlier, following December's revised 12.5 percent gain, the Central Statistical Organisation said in New Delhi today. Analysts expected a rise of 10.1 percent.

Factories and power plants in India are running at close to their limits, according to the International Monetary Fund, as unprecedented bank lending and higher salaries fuel consumer spending. That's kept inflation above the central bank's tolerance level of 5 percent since September.
“Consumption demand is still strong and power companies are working close to capacity,'' said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “The central bank will continue to look at increasing borrowing costs.''

Reserve Bank of India Governor Yaga Venugopal Reddy and his fellow policy makers have raised the benchmark overnight lending rate five times since January 2006 to a four-year high of 7.5 percent to slow inflation, currently at 6.1 percent. The central bank next meets in Mumbai on April 24.
India's $854 billion economy will probably expand a record 9.2 percent in the year to March 31, following 9 percent growth in the previous year, the government said Feb. 7. That's the fastest pace after China among the world's major economies.

China Rivalry

Credit Suisse expects India's economy will grow 10 percent this year from 9.5 percent in 2006, overtaking China where industrial production gained 14.7 percent in December from a year earlier after 14.9 percent growth in the previous month. Credit Suisse expects China to expand 9.9 percent in 2007.
India's manufacturing output increased 11.6 percent in January from a year earlier after a 13.4 percent gain in the previous month, according to today's report. Mining grew 6 percent and electricity gained 8.5 percent in January.
India's rupee held near its highest in almost two weeks on speculation faster economic growth will help local stocks and attract overseas investors. The benchmark Sensitive index rose 0.1 percent to 12902.63 at close of trading in Mumbai. The yield on the 8.07 percent bond due 2017 fell 8 basis points to 7.94 percent.

Besides record loans growth, India's industrial production, which makes up a quarter of the economy, is being spurred by rising incomes and savings.
Commercial bank loans to companies have risen at about 30 percent in each of the past three years, according to central bank data. The pace is the fastest since the Reserve Bank started collating data in 1971.

No Impact

“The increase in interest rates haven't had an impact on car sales yet,'' said Jagdish Khattar, managing director, Maruti Udyog Ltd., India's biggest carmaker, which last month posted its fastest sales growth in three years. About three-quarters of the cars bought in India are from money borrowed from banks.

Overseas companies are investing more in India to take advantage of growing demand.

In information technology and communications business, for example, Vodafone Group Plc., the world's largest wireless carrier, and other foreign companies have committed investments worth $19.92 billion in India, the world's fastest growing major wireless market, according to the government.
Demand is also being aided by rising salaries. Workers in India this year can expect a 7 percent increase in annual real salary, after adjusting for inflation, the biggest rise among the 45 countries including U.S. and Japan surveyed by human resources consultant ECA International.

Power, Ports

Industries such as steel and cement are also benefiting from Prime Minister Manmohan Singh's decision to increase infrastructure spending by 40 percent to 1.34 trillion rupees ($30.2 billion) in the year starting April 1 in a bid to attract more overseas manufacturing companies.

India produces about 8 percent less electricity than it needs, cutting gross domestic product by a 10th, the finance ministry estimates. Highways, which move almost 80 percent of the goods transported in India, account for only about 2 percent of the country's roads. It takes an average 85 hours to unload and reload a ship at India's major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.

“To get inflation sustainably under control requires the structural constraints to stronger supply growth to be eased,'' said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore. “Demand has been allowed to jump ahead of the improvements in overall supply, creating the underlying inflationary pressures.''