Britain's Blair: Tough job ahead

The second week of June hasn't been too kind to the 25-member European Union (EU). Even before it could fully recover from the double whammy of a "no" from two of its founding members-France and the Netherlands-on the ratification of its new Constitution, differences over farm subsidies between France and Britain have seen its next Budget (2007-2013), come unstuck. The "no" from France and the Netherlands has come for purely domestic reasons. Brussels' directive that the concept of "a single European market" should include doctors, lawyers, accountants, plumbers and other professionals has not gone down too well with the French and Dutch. They fear that they would be undercut by an influx from the low-cost neighbours such as Poland. Says Charles Tannock, Member, British Conservative Party and European Parliament: "The new Constitution is as good as dead."

All the wranglings have taken their toll on EU's common currency, the euro, which has been on a decline since the beginning of this year. By the week ended June 18, the euro had dropped 1.2 per cent against the dollar. However, many are calling this dip a mere "correction". Says A.V. Rajwade, forex and treasury management consultant: "Too much is being read into the decline of the euro. A fall of 10 per cent compared to a rise of around 40 per cent in the last three years vis-à-vis the dollar is just a correction."

But what does a fractured EU and a weak euro mean for the Indian economy? A squabbling EU is definitely not good news for India's exporters, but it is unlikely to impact Indian trade. The reason: neither has the composition of the eu changed nor has its tariff levels. But the bigger issue is whether in the short run the euro will continue as an alternative to the dollar in the currency reserves of central bank. According to a recent study by the Bank of International Settlements (BIS), the biggest seller of dollars in the last three years has been India, which has reduced its dollar assets from 68 per cent of the total reserves to just 43 per cent in 2004. "That (the decline) will certainly discourage fresh investments in the euro," says Nagesh Kumar, Director-General, Research and Information for Developing Countries. That means India has little choice but to stay invested in the US dollar.

-Ashish Gupta

BOLLYWOOD
The Movie As A Product

Bollywood's Chopra: The showman

Hollywood already does it, and now bollywood thinks it should do too. And which is to market movies like a consumer product. Moving in for the kill are the ad agencies. "Even if we can look at 20 per cent of the film industry, it will be big bucks," says Ashish Bhasin, Director, Integrated Marketing Action Group, part of Lintas India. Adds Yash Chopra, Bollywoods' top-drawer producer: "Often producers wonder how to promote their films, and agencies can surely lend a sense of freshness to the whole issue." Brands have already managed to find place in movies (via paid placements), but now marketers are looking at how to weave them seamlessly with the theme of the film. "I would say the cusp between entertainment and brands is just about forming," says Mindshare's Managing Director, Vikram Sakhuja. The agencies must be hoping that it makes a great story.

-Krishna Gopalan

HIGH-RISE
Dear Cities

If you've been thinking of relocating to China, here's another reason to do so. According to Mercer's latest Cost of Living Survey 2005, Chinese cities such as Beijing, Shanghai, Shenzen, Guangzhou and Tianjin-despite their booming economies-have gotten cheaper to live. How come? Two factors seem to have worked in their favour: One, the weakening of the US dollar, to which China's yuan is pegged, and "the greater availability of western goods in the Chinese cities" that has resulted in lowering of expatriate costs, the study notes. Tokyo, however, continues to be the world's most expensive city to live in, followed-for the first time-by another Japanese city, Osaka. As for India, cost of living has been going up too. Mumbai moves up from 109 to 105 and Delhi from 116 to 110. Bangalore and Chennai, on the other hand, have become cheaper to live in despite their growing affluence.

In Aid of Audit Committees
KPMG launches a first-ever Audit Institute in India.

KPMG India's Gomes: Audit committees will get more teeth now

There's a new three-letter word that strikes terror in the hearts of company directors: Sox, or the Sarbanes-Oxley Act. The Act was introduced in the US in the wake of a wave of accounting scandals, and is aimed at improving corporate governance, particularly in the area of financial reporting. Since then, the whole concept of corporate governance globally has attained a new meaning and companies have had to face uncomfortable questions from regulators on the way they have been running their businesses. In India, too, companies listed abroad, and also those raising funds or doing business abroad, have had to fall in line with the stricter new standards. Now, they have help at hand. Last fortnight, global accounting and consulting firm KPMG launched its Audit Committee Institute in India. The Institute, which was first established in the us in 1999, followed by China in January 2003, where it is called the Hong Kong Audit Committee Institute (HKACI), will aid independent directors on the boards of companies by providing them a forum to exchange information with other independent directors. "It will assist independent directors and audit committees with the challenges that the board members face," says KPMG India's MD, Ian Gomes.

Welcoming the launch of Audit Committee Institute (ACI) in India, Tata Sons' Director J.J. Irani points to the possibility of modifying the Indian Companies Act. "Today, the audit committee in a company assures the conscience upholder of what is right and what is wrong. One option could be to have the chairman of the Audit Committee as an independent director," he says. Irani is the Chairman of the Expert Committee on Company Law that has, in fact, recently recommended that one-third of a listed company's board should consist of independent directors. Stressing that the role of the members of the audit committee would have to be made more important, Irani suggests that it could become a forum where the independent directors get educated.

-Krishna Gopalan

An FMCG Rally, Thanks To VAT
What does the revival in FMCG's fortunes on Dalal Street have to do with the Value-Added Tax?

Stock-taking: No, the sticker price doesn't change for you, lady

Something curious has been happening on Dalal Street. No, we aren't talking about Sensex's historic pole-vault, but the sharp jump in shares of FMCG companies. Since April this year, the Bombay Stock Exchange index for FMCG is up almost 19 per cent compared to the Sensex's 8 per cent gain. It is true that the Rs 47,800-crore FMCG industry has shown signs of growth after almost two years of decline, but the modest 5 per cent growth doesn't quite explain the exuberance on the FMCG counter. If anything, worries over the monsoon should have hit the stocks. Obviously, the stock market expects FMCG companies to boost profits. But how?

The unlikely answer: The new value-added tax (VAT) that kicked in starting April this year. "FMCG companies are not passing on the extra margin they now have because of lower tax burden due to VAT, to either retailers or consumers, even while we have come into the tax-net now," complains R. Subramanian, MD, Subhiksha Trading Services. Earlier, FMCGs followed the first point of sales tax, with only the FMCG company paying the tax, with no sales tax on either the retailer or the wholesaler. But with VAT, the entire chain comes under the tax net. Even with a lower 12.5 per cent VAT compared to 16 per cent excise duty for most FMCG products earlier, marketers are still billing the retailers at the old price, pocketing the almost Rs 1,000-crore margin. That's shaving 0.5 per cent to 2.5 per cent off the trade's margins. "It's a very big issue with us, and we're fighting an ongoing battle with FMCG marketers on it," says K. Radhakrishnan, VP, FoodWorld.

To be sure, a few big marketers and retailers have already struck a tacit deal, where the marketer has agreed to compensate for loss of margins, though no one will publicly admit as much. But with just 5 per cent of the trade organised, big FMCG companies are laughing all the way to the bank.

-Shailesh Dhobal

CREDIT
Interest Rates Firm Up

Purchasing power: Price is no issue

Interest rates on consumer goods and housing loans are on the rise, but that doesn't seem to be deterring buyers. Carmakers, like Rajiv Dube of Tata Motors, say unless interest rates rise by 100 basis points, demand is unlikely to be affected. (At between 9 and 9.5 per cent, interest rates on car loans are up 50 basis points over a year ago.) In consumer electronics, falling prices have kept up demand. "So long as easy finance options are available, the growth rate will not fall," says Ravinder Zutshi, Deputy MD, Samsung India. In housing too, says Pranav Ansal, a leading developer, demand is not very price sensitive. "Indians link possession of a housing unit more with social and financial security," he says. Of course, competition among banks will make sure that there are always good deals going around.

-Swati Prasad