Manufacturing woes: Costs have been rising in the state

It is nearly two months since the state machinery in Andhra first sent out guarded hints on Volkswagen's plans to set up a manufacturing facility in the state. There is, however, still no official word from the company on its plans. But the question that everybody seems to be asking, with or without the German project, is: Where are the vendors needed for any major auto unit? Take Vijayawada, for instance, where the state is upgrading an auto components cluster. Out of the 1,600-odd units there, most are servicing units and only 30 to 40 manufacture components.

It is not auto alone. Ask those in the government why the state has been unable to replicate its success in it and pharma in manufacturing, and they'll tell you that manufacturing has not received the level of attention it ought to have. Early in June, the Confederation of Indian Industry (CII) put out the findings of its business outlook survey of the five southern states (Andhra Pradesh, Karnataka, Kerala, Pondicherry and Tamil Nadu). The survey indicates that while the state recorded robust growth in sectors such as it and agro-based industries in 2004-05, its manufacturing sector was hit by increasing raw material costs, lower profit margins and competition from cheap Chinese products. Narender Surana, MD, Surana Telecom and past chairman of the Andhra Pradesh State Council of Ficci, says what is needed is a two-pronged approach. "We need tax incentives and the state's focus on thrust areas in terms of regions and products," he says.

In the current year, the state is implementing two schemes to upgrade two industry clusters. One is the auto components cluster in Vijayawada and the other, the pharma cluster in Hyderabad. The two schemes-funded mainly by the Centre and cluster companies-will cost nearly Rs 130 crore and will be completed by December 2007. That apart, in the current year too, it intends to upgrade 10 industrial estates across the state. Recently, Nano-Tech Silicon India, a South Korean-led venture, did the ground-breaking for its chip-manufacturing unit near Hyderabad. But whether the state government's new initiatives are enough to lure other big manufacturers remains to be seen.

-E. Kumar Sharma

"The Issue Is Not Poverty Level, But Reduction"

Poverty Gurus: World Bank's Valerie Kozel and Princeton's Angus Deaton

Angus Deaton, Dwight d. Eisenhower Professor of Economics and International Affairs at Princeton University, and Valerie Kozel, senior economist at the World Bank, are old hands at studying and writing on Indian poverty. They were in India recently to launch their new book "The Great Indian Poverty Debate". BT's Ashish Gupta met up with Deaton to discuss poverty, the problem with sampling in India, and what needs to be done. Excerpts:

Why is there so much divergence regarding the number of poor in India? The World Bank says 35 per cent, India's Planning Commission says 26 per cent, and some other economists, like Surjit Bhalla, 15 per cent.

First of all, the levels of poverty are less important than the rate of change because the levels can be quite arbitrary. The question basically is, how quickly is poverty coming down in the country? But the real discrepancy lies in the sources of the data. If you look at consumption from the National Accounting System, then it is growing much more rapidly than in the National Sample Survey (NSS) data. So if you are Surjit Bhalla, you basically use the national accounting data and you change the household sample survey data to situate it with the national accounting data. And that way you get very rapid poverty reduction.

But that's basically assuming before you start the fact that the growth in GDP is being shared equally among the poor. But I wouldn't want to make that assumption. Then, I am forced to use household survey data. And the household survey data shows that consumption is not growing as fast as the GDP. And it is this big difference between the rates of growth that is really the reason for such wide divergence; it allows people to have different opinions even to the extent of saying that nothing really has changed for the poor over the years.

So what according to you is the best way to calculate poverty?

I really don't know what is the best way, but any such study should meet India's needs. But there are things that need to be sorted out. First, we have to get the NSS to do the survey in a consistent manner and not change the methodology every now and then.

Secondly, I would also want some outside agency to look at the samples used, because it will do away with the discrepancies. Thirdly, there are certain items in the consumption basket that should be removed. For example, deposits in banks. According to me, poor people hardly bank in India.

Lastly, according to you, what is the percentage of poor in the country?

I would stick to my earlier numbers. For rural households the headcount ratio has fallen from 37.1 per cent in 1993-94 to 30.2 per cent (1999-2000), and for the urban poor, it is down from 32.9 per cent to 24.7 per cent for the same period. So some progress has been made, though not as much as one would have liked.

The BT 50 Index
Dalal Street learns to rock.

The bullish mood in the market now is so strong that it has totally ignored two big negative points (international oil prices crossing the $60/barrel mark or Rs 2,640 and a faltering monsoon) to reach much higher levels. The BT 50 Index has hit a peak of 269.76 points. As expected, most sectoral indices too have hit their peaks, the exceptions being BT BFI and BT Pharma. But expect a correction once this FII money-induced frenzy settles.

Our flagship free float methodology-based index-BT 50-has completed two years now. The free float methodology has several advantages: first, it considers only the value of stocks freely available in the market (after excluding the part held by promoters and other strategic investors) and the weightage assigned to individual shares is more representative than the market capitalisation-based methodology; second, it takes care of the perpetual selection dilemma regarding closely-held companies. For instance, the inclusion of these companies may distort the index based on total market capitalisation methodology, but dropping them altogether may reduce its representative character. The free float methodology facilitates inclusion of large closely-held companies but assigns them a lesser weightage. After the success of our broad market free float index (that the Sensex subsequently decided to adopt this is testimony to the efficacy of the free float method), we decided to launch sector indices using the same method. While the general index captures the overall movements (covering several sectors), sector indices capture the movements in individual sectors. All these indices have a common base period (January 1, 2002). The weightages are reassigned every quarter after companies declare their ownership details. The base value of all BT indices is 100.

-Narendra Nathan

CORPORATE
The Beginning Of Consolidation?
The Centurion Bank-Bank of Punjab merger could be the first of many more to come.

Centurion Bank Chairman Rana Talwar: Starting a trend

The proposed merger between centurion bank and bank of Punjab (BOP) could just set the ball rolling for consolidation in the private sector banking space. The boards of the two banks will meet on June 29 to finalise the details of their marriage. There are obvious synergies that will accrue. Bank of Punjab has a strong presence in the North while Centurion Bank is well placed in the West and South. "There is also a segment synergy. While Bank of Punjab has a strong presence among SMEs, we are strong at the retail end," says Centurion Bank Managing Director Shailendra Bhandari. "The positive feature of the deal is that it is a market-driven merger where the investors have decided to pool resources," says Ashvin Parekh, Partner and National Industry Leader at Ernst & Young, adding: "What impresses me most is the quality of management." The merged bank will have a staff strength in excess of 2,500.

Both banks are listed and the scrips of both have been range-bound recently. On the BSE, the Centurion Bank scrip moved down 1.97 per cent from Rs 15.20 on June 20 when the merger was announced, to Rs 14.90 on June 27. The bop share has also been flat, moving from Rs 33.40 to Rs 33.50 during this period. The Bank of Muscat has a stake of close to 26 per cent in Centurion Bank. The promoter group at Bank of Punjab owns about 27 per cent of its equity, while 48.7 per cent is with the public. The former earned a net profit of Rs 25.11 crore on a total income of Rs 410.55 crore in 2004-05. The corresponding figures for bop for the first nine months of 2004-05 (it still hasn't announced its results for the full year) are Rs 12.01 crore and Rs 303.04 crore, respectively.

Analysts are quite upbeat about the development. "There is a need for consolidation in the private banking space, although it will finally depend on the fundamentals of each case. Smaller banks will have to consolidate to survive," says Rajeev Thakker, Head Of Research at Parag parikh Financial Advisory Services.

-Krishna Gopalan

FDI
Posco's On In Orissa

POSCO Chairman Ku-Taek Lee: We are in India, finally!

It's now official. The Pohang Steel Company (POSCO) of South Korea, the fifth largest steel producer in the world, has signed a memorandum of understanding with the Government of Orissa to set up a 12-million-tonne steel plant in Paradip at a cost of $12 billion (Rs 52,800 crore). According to the agreement, Posco will build a 3-million-tonne plant by 2010 and ramp up capacity by 3 million tonnes every two years over the next six years. Orissa also granted a 30-year iron ore mining lease to POSCO, which will yield 600 million tonnes of iron ore for the new plant. This is India's largest FDI (foreign direct investment) project till date.

-Arnab Mitra