Books on India
Irdian Rupee (INR)
Update No: 032 - (02/10/06)
THE POLITICS OF INVESTMENT
India, while seeking 150 billion to build power plants, ports and roads to
sustain economic growth, finds itself battling political interference in
business to attract money from overseas. Investors at a Merrill Lynch & Co.
Conference in New York said that opposition by the communist parties to the
privatization of airports and the Congress party-led ruling coalition's
inability to end the distribution of free power to farmers in some provinces is
making it increasingly difficult for investors to invest in such projects in
India. Because politicians are talking about interfering in private market
transactions, companies such as Sanderson and Stocker in Ithaca, New York, which
manages $60 million in portfolio investments have decided to "trim"
their positions in India Some members of Prime Minister Manmohan Singh's
Congress party, have proposed that private businesses should set aside jobs for
people belonging to the underprivileged sections. According to the Vice
President of Sanderson and Stocker, "politicians are abandoning a
meritocratic environment and they're reserving places both in education and,
this was new to me, in private industry." India uses affirmative action
such as educational and job quotas in state-run companies to redress centuries
of caste discrimination. Recent moves to increase quotas have led to protests
because of concern over the resultant drop in seats for everybody else.
Prime Minister Singh deserves credit for starting India's economic changes in
1991 when as finance minister he dismantled decades of socialist controls on the
economy and ended a system of licenses that were needed to start any business in
India. However, Singh faces resistance from communist allies on speeding up
economic changes. Some investors say progress has improved. According to
Sarvjeev Sidhu, global head of emerging markets debt at Aegon US Investment
Management LLC, "it used to be one step forward, two steps back,"
global head of emerging markets debt at Aegon US Investment Management LLC,
Sidhu's company manages about $4 billion in emerging markets. What appears
surprising to these investors is that Indian government officials attending the
Merrill conference are telling investors things have changed and that overseas
investors and developers would have no cause for concern. According to the
Indian Power Ministry, all regulations have been comprehensively laid down,
reducing any chance for future uncertainty. However, to attract investors to
India, the government needs to do more than just setting up comprehensive
regulations. The government should try to ensure that regulations in place are
conducive to attracting investor friendly companies instead of alienating them.
TORRID GROWTH AT 8.9%
According to a news report in the New York Times, the Indian economy grew at
an unexpectedly torrid 8.9 percent annual pace in the second quarter of 2006,
fuelled by a sharp turnaround in its once-listless manufacturing sector. India
is now growing faster than most other economies in the world, and is close to
rivaling China, whose emergence as a manufacturing center has left India racing
to catch up. Now, with the government working to ease regulatory burdens for
business and to upgrade the country's patchy infrastructure, Indian factories
are rapidly moving ahead. Manufacturing output was 11.3 higher in the second
quarter of 2006 than in the same period in 2005, exceeding even the performance
of India's services sector, including its booming software and call-center
businesses. The Indian Finance Minister has expressed optimism at these results
and claims that these are intoxicating times for India, the kind of times,
critics warn, when it is easy to get carried away. Even as the statistics grow
rosier, economists are wondering whether the country can sustain such rapid
expansion for long. One important danger, they say, is that the fractious
left-leaning coalition that now governs the country may be losing the political
will to push free-market policies that could attract more foreign investment.
Those policies are becoming harder to sell to voters as the economic boom widens
the gap in income between rich and poor in the country. Ifzal Ali, the chief
economist of the Asian Development Bank, said recently that GDP growth figures
alone do not provide an accurate idea of the kind of structural problems that
the country is facing. People like Ali have a valid argument. They believe that
it is not enough to sit back and enjoy the high growth rates but also confront
the pressing problems of structural adjustment.
INDIA AND THE UNITED STATES
According to Indian Defense Minister Pranab Mukherjee, the India-US civil
nuclear agreement marks a turning point in the relationship between the two
countries and India is looking forward to the completion of the legislative and
other processes to permit the commencement of civil nuclear cooperation. The
agreement pertains solely to civilian power generation, said Mukherjee, and will
not in any way affect India's strategic program or its indigenous research and
development program. The Defense Minister also re-iterated that India has always
used such sensitive technologies with caution and care. In his words,
"there has not been even one case of outward nuclear proliferation from
India to any country. This is the premise on which the international community
today is prepared to cooperate with us in developing civil nuclear
technology." The India-US initiatives have gone beyond the realm of civil
nuclear cooperation indicating greater promise for the relationship. In the last
18 months alone, India and the United States have signed an Open Skies Agreement
to increase the number of flights between the two countries and enhance trade
and tourism. Since then, the number of flights has increased and non-stop
flights between the two countries have commenced. The two countries had also
taken various India-US initiatives that will have a positive global impact in
areas such as the promotion of democracy, in natural disaster management, in
meeting the challenges caused by pandemics like HIV/AIDS and avian flu and in
other fields. What is perhaps critical now is whether the India-US nuclear deal
will actually take off in the American Congress. While the Bush administration
would like the deal to go through, many remain skeptical of whether giving India
out-of- the-box leverage on nuclear issues could imply an undermining of the
non-proliferation regime. Yet, the fact that this debate still continues not
only in India but also amongst the Indian-American community in the United
States indicates the seriousness on the part of people to accept the contours of
this new relationship.
INDIA AND SRI LANKA
India recently called for a 'special effort' to strengthen the already
fragile ceasefire agreement between the Sri Lankan government and the Tamil
Tiger rebels and to find a negotiated political settlement based on 'maximum
devolution of powers'. India India's Union Cabinet Minister of Panchayati Raj,
Youth Affairs and Sports Minister Mani Shanker Aiyar is reported to have stated
in Colombo that a devolution package must be put in place that could command
consensus among different political parties, normalize ethnic relations and
address the legitimate aspirations of all sections of Sri Lankan society. Aiyar,
is a prominent front runner in the ruling Congress Party and expressed his views
during a keynote address on the 'Current situation in Asia, particularly
Southern Asia.' Reiterating India's commitment to Sri Lanka's independence,
sovereignty and territorial integrity the visiting Indian minister said that he
expected 'to discuss with President Mahinda Rajapaksa the concept of Panchayati
Raj in India as Sri Lankan leaders had expressed interest in that concept'.
Quoting extensively from Indian Prime Minister Manmohan Singh, Aiyar described
the bilateral free trade agreement (FTA) between Sri Lanka and India as a 'huge
success with win-win situation to both the countries'.
THE INDIA-BRAZIL-SOUTH AFRICA AGREEMENT
In an effort to foster south-south cooperation, India, Brazil and South
Africa have come forward with a new initiative. The emergence of the
transatlantic links between India, South Africa and Latin America began when the
leaders of three countries, India's Vajpayee, Brazil's Lula, and South Africa's
Mbeki spearheaded a new approach to south-south cooperation at the 2003 UN
General Assembly Forum, resulting in a trilateral India-Brazil-South Africa
agreement (IBSA). IBSA encompasses a total population of 1.3 billion people and
an economy of $1.26 trillion. The First meeting of the foreign ministers of IBSA
Dialogue Forum was held in New Delhi on March 4 and 5 2004. Issues addressed
included social development, disarmament, infrastructure, health care,
sustainable economic development, and poverty alleviation. After successes in
the Doha and Cancun rounds of the WTO summits, the heads of IBSA met for the
first ever-trilateral summit recently at Brasilia just before the NAM summit.
"As emerging economic giants in the developing world, India, Brazil and
South Africa account for a combined gross domestic product (GDP) of over one
trillion U.S. dollars and it seems set to push the number in an unexploited
trilateral market" commented the South African Broadcasting Corporation.
The South African Foreign Ministry spokesman Ronnie Mamoepa said, "Since
its establishment in 2003, the IBSA had become instrumental in promoting closer
coordination on global issues between South Africa, India and Brazil. The three
have become frequent guests of the annual gathering of the Group of Eight (G8)
industrialized countries". "The historic summit was the culmination of
three Ministerial Trilateral Joint Commission meetings that have taken place in
New Delhi (2004), Cape Town (2005) and Rio de Janeiro (2006), under the
leadership of the three foreign ministers," he further said.
With regard to building a Trans-Afghan Pipeline (TAP), companies from UAE,
United States, Greece and Canada have shown keen interest in joining the
consortium and financing the project. China and Ukraine, under certain
conditions, would be willing to join TAP. From the point of view of India's
participation in the project, the important question is whether India along with
China has worked out new synergies in acquiring overseas energy assets. After
nine meetings of the steering committee and several sessions of the technical
group, the TAP has cleared many obstacles. The questions still on the table
include the details of the sale and purchase agreement and the pricing formula.
Formation of consortium and other practical matters must wait for mutually
satisfactory solution of these questions.
India and China have teamed up to invest US$850 million to buy a 50% stake in
Omimex de Colombia Ltd, which has oil-and-gas-producing assets in the South
American country and is owned by US-based Omimex Resources Inc. The two Asian
firms have formed a joint-venture company, Mansorovar Energy Colombia Ltd. This
is the first acquisition made jointly by ONGC's overseas arm, ONGC Videsh Ltd,
with Sinopec Group, the parent of listed Sinopec Corp. India's largest refiner,
Indian Oil Corp Ltd, is also in talks with Sinopec about setting up a company to
purchase crude oil jointly. Talks are on for a joint bid in Kazakhstan. In the
recent past, New Delhi and Beijing have worked jointly in Syria and Sudan. In
the first instance of Sino-Indian cooperation, the two countries won a joint bid
in December 2004 to buy PetroCanada's 37% stake in Syrian oilfields for $573
million. In March this year, the two state-run energy firms Hindustan Petroleum
Corp Ltd and Sinopec Corp signed a preliminary agreement for projects in India,
China and elsewhere. The two will cooperate in international trade, exploration
and production, refineries and petrochemicals, and consultancy services. In
January, a wide-ranging agreement was signed between India and China for the
hydrocarbon sector. India's energy giant ONGC and China National Petroleum Corp
signed an initial deal covering exploration and production, while state-run gas
transporter GAIL (India) Ltd signed a pact with Sinopec, CNOOC (China National
Offshore Oil Corp) and Beijing Gas. In January, when the agreements were signed,
Mani Shanker Aiyar, then Petroleum Minister of India stated that excessive
rivalry between Indian and Chinese companies for the acquisition of overseas
hydrocarbon assets is to the advantage only of the seller of the asset and to
the disadvantage of both our countries irrespective of who finally wins the bid.
Automakers come knocking
India's quest to be a leading carmaker has received a vigorous boost recently,
with a parade of global companies unfurling plans to assemble cars for domestic
consumption and export, the International Herald Tribune reported on September
The recent announcements - by Bayerische Motoren Werke, Suzuki, Nissan,
Volkswagen, Honda and Toyota - reflect the allure of selling cars to every
echelon of an increasingly affluent society.
The government recently forecast that automobile sales would leap from US$34
billion this year to US$145 billion in 2016, accounting for one-tenth of India's
At the market's top end, BMW announced that it would assemble cars in India for
the first time, catering to a widening sliver of the new rich.
A US$25 million plant in the southern port of Madras will manufacture 1,000 of
BMW's 3-series and 5-series models starting next year, with a peak capacity of
1,700 cars a year.
But the site, producing expensive cars and depending on existing models, is an
So lucrative is the Indian market that most companies are inventing smaller cars
to cater to value-conscious consumers - then seeking to export those
made-for-India cars around the world to ensure large, cost- efficient production
"Previously, they thought, 'What do we have that could fit into
India?'" said Paul Blokland, an automotive expert in Bangalore who has
advised Volkswagen, BMW, Hyundai and other producers on entering the Indian
market. "Now, they think, 'what can we invent for India and fit into the
rest of the world?'"
Honda and Toyota announced recently that they would bolster their India presence
with smaller cars.
Honda said it would quadruple its Indian capacity to 200,000 cars by 2010,
primarily with small cars. Toyota, which has yet to market a small car in India,
said it would soon do so in the hope of seizing a 10th of the local market by
Also, Maruti Udyog, the Indian automaker jointly controlled by Nissan and Suzuki
of Japan, said that it would spend about US$650 million to expand its Indian
factories and build new ones, nearly doubling its capacity in the country to 1
million cars by 2010. Exports, primarily to Europe, will multiply more than
tenfold in that period, to 400,000 cars a year from last year's total of 35,000.
Volkswagen has confirmed rumours that it was scouting plant locations to make
its first Indian-made vehicle, also to be a small car.
These moves came a month after General Motors said it would build a US$300
million plant in India to produce a fuel-efficient hatchback called Chevrolet
Spark, priced between US$6,000 and US$8,000.
The plans appear to embody what the business writers John Seely Brown, a former
chief scientist at Xerox, and John Hagel, a former management consultant, have
called "innovation blowback" - in which multinational companies pick
up new skills in emerging markets and then apply them to their home markets.
In a recent interview, Nick Reilly, president of General Motors in Asia, said
the Indian market had compelled his company to learn how to make money on small
cars - a talent that could prove useful at home in the United States, where high
fuel prices are making smaller cars more popular.
"If we're going to be successful in Asia, we have to be successful in small
cars," he said. "And that will give us the potential products to go
back into our traditional markets of Europe and the US with smaller cars, which
we haven't had before."
The spurt in Indian car output adds to mounting signs of an industrial
awakening. To date, the Indian economy has gained stature mostly in services,
including an outsourcing industry that has generated about one million jobs.
Though impressive, that achievement has spread little opportunity among villages
and small towns, where more than two-thirds of Indians live.
On a recent visit to a Hyundai factory in southern India, managers spoke of a
country that was slowly changing to make itself friendly to manufacturers - and
of a world that was slowly adjusting to the idea of "Made in India."
After years of resistance by unions, the government of Tamil Nadu, the state
where the Hyundai plant is located, recently permitted factories to run on
three-shift, 24-hour cycles. The switch made the plant the first Hyundai site in
the world to operate without pause, Heung Soo Lheem, chief of India operations
for Hyundai, said in an interview.
When the company started exporting the Santro hatchback to Europe, in 2003,
dealers there sought a 5 per cent discount on India-made cars, which they saw as
At Hyundai's invitation, several dealers visited the factory in India; impressed
by what they saw, they withdrew their request.
Goldman Sachs plans India investment
Goldman Sachs Group, which ended a 10-year alliance with the Indian billionaire,
Uday Kotak in March, plans to bring US$1billion in investment capital to India
over the next two years, the International Herald Tribune reported on September
"That's putting our own capital to work in this market," L Brooks
Entwistle, chief executive of the India business of Goldman, said. "It's
investment in businesses, in companies, real estate and infrastructure."
Investment banks like Goldman and Merrill Lynch are expanding in India to profit
from an economy growing at 8 per cent a year. Goldman said it would set up its
own business in India after breaking with Kotak.
Merrill spent US$500m last year to double its stake in its unit in India. The
firm has said it will commit more funds to expand in India and hire more
"If any market of this size is expanding at a rate of 8 per cent or more,
as a banker you have to be there - both to benefit as an investor and as a deal
maker," said Navneet Munot, a fund manager at Birla Sunlife Asset
Management in Mumbai. India is a lucrative market with adequate regulation, and
"its not surprising that the big players are coming here."
Goldman has 50 people in its Mumbai office and "well over" 1,000 in
the southern city of Bangalore, the hub of India's information technology
industry, said Entwistle, who was named head of the firm's business in India in
The joint venture with Kotak's bank was Goldman's first, marking a break with
126 years of tradition at the time it was signed in 1995. Goldman sold its 25
per cent stakes in two ventures with Kotak Mahindra Bank for 3.3bn rupees, then
worth US$75m, opting to build its own business in a market where announced
mergers totalled US$36.7bn in 2005.
Indian companies also sold US$14.4bn of stock and equity-linked securities last
year, according to data compiled by Bloomberg.