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Books on India
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Update No: 037 - (22/02/07)
TERROR STRIKES AGAIN
Following the Mumbai train blasts of July 2006, India witnessed another
horrific terrorist attack, this time on the Samjhauta Express travelling to
Pakistan from India. Two homemade bombs are believed to have killed 66 people on
that train. The dead included a number of Pakistanis. The governments of both
countries have condemned the attack saying that it would not stop the leaders of
either country from going ahead with peace talks on Kashmir. The Indian
government called the bombing "an act of terror" and has promised to
apprehend those responsible. In a statement reported by Reuters, Gen. Pervez
Musharraf, the Pakistani president, said, "We will not allow elements which
want to sabotage the ongoing peace process to succeed in their nefarious
designs." The event occurred on the eve of a visit by Khurshid Mehmood
Kasuri, the Pakistani foreign minister, to the Indian capital, New Delhi. And
two weeks later, the governments of both countries are scheduled to meet on
sharing terrorist related information. What is rather disheartening is that acts
such as these have routinely derailed peace initiatives taken by both countries.
The Samjhauta Express between India and Pakistan began as a confidence building
measure allowing both countries to work together towards promoting peace and
stability in the region. The service, en route from Delhi to the border post at
Attari, began 30 years ago, and after a two-year suspension at a time of acute
enmity between India and Pakistan, and it resumed operations in January 2004.
According to a statement issued by the Indian Ministry of External Affairs,
visas will be issued to Pakistani relatives of those who were feared dead.
INDIA-MALAYSIA DEFENSE PACT
A Xinhua News Report claims that India and Malaysia are going ahead to
conduct military exercises and India is also ready to train Malaysian Sokhoi
fighter pilots and Scorpene submarine personnel. The fourth Malaysia-India Joint
Commission ended last week at the end of which Malaysian Foreign Minister Syed
Hamid Albar remarked how both countries shared the same military doctrine and
philosophy as former British colonies and members of the Commonwealth. During
his visit to India, Syed Hamid had lengthy talks with Indian Prime Minister
Manmohan Singh and External Affairs Minister Pranab Mukherjee on future
cooperation between both nations, from trade to defence. The two countries
agreed to strengthen their defence cooperation, including more exchanges of
military personnel, more joint military exercises, and stronger Indian
assistance in training Malaysian pilots. Malaysia and India both have purchased
Scorpene submarines from France. Malaysia currently has procured two
diesel-fuelled Scorpene class submarines being assembled in France and Spain
respectively, which are expected to be delivered by 2008 and 2009.
INDIA-EU
As part of Luxembourg Foreign Minister Jean Asselborn's four day visit to
India, the country is seeking to deepen political and economic bilateral ties by
addressing the issue of liberalizing European labour markets to Indian
professionals. Asselborn, also the country's Deputy Prime Minister and
Immigration Minister will meet with Indian External Affairs Minister Pranab
Mukherjee during the opening up of the Luxembourg labour market and its reforms
regarding foreigners' status. Luxembourg Parliament is expected to discuss the
issue of dual citizenship and a draft law on this is under examination by the
concerned committee of Parliament. A restriction on the movement of skilled
Indian professionals to Europe for jobs has been a thorny point in relations
between India and the European Union. New Delhi has since long been urging the
EU to liberalize its visa regime. Also, an important topic of discussion
expected to be covered in the meeting is both India and Luxembourg's quest for a
non-permanent seat in the UN Security Council.
ECONOMY
WORLD BANK REPORT
While India and Pakistan once again face an increase in terrorist threats, a
recent study published by the World Bank points to the grim situation regarding
regional integration in the subcontinent. According to this report, efforts to
promote regional integration and cooperation in South Asia have suffered from
regional political conflicts, primarily between India and Pakistan. The report
was prepared in concurrence with the South Asian Association for Regional
Cooperation (SAARC) Business Conclave in Mumbai and the Chamber of Commerce and
Industry. While the report claims that South Asia has experienced remarkable
growth since the 1980s, it also underscores the challenge of instituting
second-generation reforms. According to the bank, past growth was helped by the
implementation of first generation policy reforms aimed at global integration,
improving macroeconomic stabilization, and strengthening the private sector. The
primary challenges facing second generation reforms are: the high cost of doing
business, weak institutions, weak knowledge economy, and poor infrastructure,
and says that reforms in these areas are inter-related and hold prospects for
large pay-offs. The bank also observed that while South Asia may be a relative
newcomer to global integration, it is still lagging behind other regions such as
East Asia in terms of openness. It is in this context that SAARC provides a
regional forum for political and economic dialogue via the South Asian Free
Trade Agreement (SAFTA.). For countries in the Asian subcontinent, the World
Bank Report primarily focuses on the benefits of working within the SAARC
framework.
GAS CARTELS
In a different story published in the Economic Times, there is talk about
forming a world gas cartel and what that would mean for India. In 1960, Iran,
Iraq, Kuwait, Saudi Arabia and Venezuela joined together to form the
Organization of Petroleum Exporting Countries (OPEC), which today accounts for
79% of the global crude oil reserves. Four decades later, there seems to be hope
of building a gas cartel on the lines of OPEC. However, according to Soma
Banerjee of the Economic Times, this move could divide the energy map of the
world between producers and consumer countries. Russia and Qatar are the two
largest gas producers in the world and even the suspicion of a move to form a
cartel is certain to send alarm bells ringing for most of Europe, and in the
larger economies of Asia. Russian President Vladimir Putin in his recent visit
to Qatar and Saudi Arabia hinted at the possibility of forming a gas OPEC to
collaborate with gas producing countries like Algeria, Qatar, or even Iran. The
idea was to represent the interests of producer countries to influence the
global market. For India, this means thinking differently about the issue. India
has already struck long-term gas supply deals with Qatar and has developed its
first LNG terminal at Dahej, Gujarat, fuelled by gas from Rasgas Qatar. Efforts
are on to strike more such deals with Qatar, Australia and even Russia to
provide the much needed energy security for the country. Talks were on between
Russia and India to explore possibilities of shipping gas as LNG from the
Sakhalin fields in Russia. A gas cartel, which would dictate global gas prices,
may end up jacking global prices in line with the global crude oil market. For
large gas producing nations like Russia and Qatar, a cartel would ensure
stability of prices and upsides for their economies which are largely energy
driven. But forming this cartel may not be an easy task. Banerjee claims that
oil and gas are different in their properties. While crude oil is a global
commodity, gas is still largely regional, which differs from region to region.
According to energy experts, while 60% of the global crude is traded in global
trade markets, almost 93% of global gas is still supplied through pipelines
based on long-term gas contracts. Therefore, while global gas prices are
dictated by demand-supply forces and volume of global trade, gas prices are
ruled by contracts between consumers and producers. For these very reasons,
India may have to think long and hard about the long term consequences of any
global cartel.
WALMART OPTIMISTIC ABOUT INDIAN MARKETS
The World's largest retailer Wal-Mart is optimistic about entering Indian
markets by setting up a chain of Walmart stores in India over the next five
years. However, the company is faced with numerous political hurdles before it
can accomplish any of its goals. According to sources close to the US firm, the
hundreds of retail outlets that Wal-Mart plans to open in India in partnership
with Bharti over the next five years might not carry the Wal-Mart name at all. A
Wal-Mart spokesperson in India said the front-end stores would be 100% owned and
operated by Bharti, while the US firm would focus on back-end operations like
logistics and other supply chain management. While Wal-Mart is betting big on
its entry to the US$300 billion Indian retail market, it might have to remain
satisfied with the back-end operations. Walmart is more concerned about
expanding its presence into the country quickly despite the persisting
opposition from various lobbies. Sources say that the chief problems related to
branding could be sorted out later.
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CREDIT RATINGS
S&P increased India's debt rating based on national growth
The debt rating for India was raised recently to investment grade by Standard
& Poor's for the first time in 14 years as the Indian economy continued to
grow at a record pace, the International Herald Tribune reported on January
31st.
S&P increased the rating by one level to BBB- from BB+, Moody's Investors
Service raised its rating to investment grade in January 2004, followed by Fitch
Ratings in August 2006.
Investment grade ratings may spur a flow of cash from overseas into power, steel
and other industries in India, which receive less than a tenth of the funds
invested in China. Higher debt rankings will also reduce borrowing costs for
companies in India, sustaining the average 8 per cent growth of the past four
years, which is the fastest since the nation's independence in 1947.
"This kind of rating action will prompt more foreign direct and portfolio
investments," said Shuchita Mehta, an economist at Standard Chartered Bank.
"The central bank will have to be more proactive in managing liquidity in
the economy to curb inflation."
Accelerating growth encourage foreign investors to buy a net US$8.31bn in Indian
stocks in 2006 after buying a record US$10.7bn the year before, increasing money
with banks and enabling them to increased lending to consumers and companies by
more than 30 per cent each year in the past three years.
That pace of loans growth, the fastest since 1971 when the central bank started
collating data on lending, pushed inflation to a two-year high of 6.12 per cent
this month, and may prompt the central bank to raise its key borrowing rate for
the fourth time in a year.
Investments in shares helped India's foreign-exchange reserves to rise to a
record US$178.13bn in January, according to central bank data. India has the
world's largest reserves of foreign exchange.
Higher sovereign ratings will also help local companies and banks to sell bonds
overseas. Bank of Baroda plans to sell as much as US$1.5bn of medium-term notes
to finance overseas expansion. ICICI Bank has sold US$2bn of dollar-denominated
bonds, the most raised overseas by an Indian company, to meet demand for loans
as the nation's middle class grows.
"The upgrade is well deserved. India's economy is growing very rapidly, it
has a large pile of reserves and external debt is well under control," said
Sanjeev Sanyal, senior economist at Deutsche Bank in Singapore. "However,
the real surprise has been the recent fiscal correction made possible by a boom
in tax revenues."
The finance minister, Palaniappan Chidambaram, expects the economy to grow 9 per
cent in the year ending March 31st, the fastest pace on record and an expansion
surpassed only by china among the world's biggest nations.
The rating upgrade will help India narrow the gap in manufacturing, which makes
up 17 per cent of India's economy, half the level in China.
Ford Motor started work on its third factory in China in 2004 with an investment
of US$1.5bn. IN comparison, the automaker in 2005 planned to invest US$75m in
its lone Indian factory.
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ENERGY
Russia, India to build new nuclear power reactors
Russia has offered to build several nuclear power reactors for India in a draft
agreement signed during the visit of Russian President, Vladimir Putin, in New
Delhi on January 25th, New Europe reported.
After wide-ranging talks Putin and Indian Prime Minister, Manmohan Singh, also
issued a joint statement promising cooperation on the peaceful uses of atomic
energy.
A memorandum of intent for the development and construction of four additional
atomic reactors in the Kudankulam power project in the southern state of Tamil
Nadu and at other new sites in India was signed in the presence of Putin and
Singh.
Singh said Russia had agreed to help construct four additional reactors at
India's Kudankulam power project. Russia is already helping to construct two
reactors at Kudankulam under a 1988 agreement.
The new reactors can be built only after international restrictions on trading
in fissile material with India are lifted by the Nuclear Suppliers Group and the
International Atomic Energy Agency (IAEA).
"India undertakes that the reactor facilities and nuclear fuel supplied by
Russia shall remain under IAEA safeguards during the entire period of actual use
in accordance with the agreement on safeguards, which shall be concluded between
the Republic of India and the IAEA," the joint statement on nuclear energy
cooperation said.
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MINERALS & METALS
India steals a march in the steel industry
There have been bigger takeovers than Tata Steel's £6.2bn acquisition of Corus,
its Anglo-Dutch peer. But few have been so momentous - it is the first large
foreign acquisition by an Indian company - while at the same time reliant on
such a risky industrial strategy, the Financial Times reported on February 1st.
Tata Steel is a small, low-cost, rapidly expanding producer based in eastern
India. Corus is large and mature: it owns almost the entire steel industries of
Britain and the Netherlands. Marrying the two does little to lower the cost of
iron ore, labour, energy, transport of capital, which are crucial to making
money out of steel. Tata has no plans to shut Corus plants down.
Tata produces its own ore and argues that it can save on the Corus procurement
budget. The two companies can also share research and development costs, which
should produce modest synergies. It may be possible to ship cheap slab steel
from Tata's plants in India for finishing at Corus' plants in Europe, but that
is years off and will be constrained by high transport costs.
Tata does, however, have a strategy. First, it is betting that a consolidated
European steel industry will have more stable pricing, justifying a high
valuation for Corus. Second, Tata thinks globalisation will mean that customers
such as car manufacturers want to buy steel in lots of different countries,
which would give a company that can supply in Europe as well as in India a
business advantage.
Nor is Europe the only place where Tata is investing. It has bought plants in
Thailand and Singapore and plans to build plants in Iran and Bangladesh. It will
soon join Arcelor Mittal as one of the few global steel producers.
The question is whether the underlying assumptions add up. In the past few years
steel prices have been more stable. But the industry is still far from
consolidated: Arcelor Mittal, the sector's giant, has only 10 per cent of the
world market. Prices may have become less volatile for some products in some
regions but globally, and especially in Asia, there is still too much capacity.
Even if steel does consolidate to the same extent as iron ore, where three
companies dominate, it will remain an industrial commodity. Average prices might
increase but, just like iron ore or oil, they will remain cyclical.
The second question is whether being global will pay off. Companies such as
Toyota certainly buy steel in a lot of countries. But unless that steel is
either cheaper or better because it comes from a single supplier, companies such
as Tata will profit but little.
Tata's purchase is a welcome sign of growing confidence in corporate India. The
globalisers - Tata and Arcelor Mittal - certainly believe they can convert
global scope and local scale into higher steel prices; they will make a lot of
money. But they are up against the paradox, it is never very profitable.
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