For a brief while last fortnight, the hopes of foreign investors waiting to invest in retail must have soared. That was when The Economic Times-the country's largest selling financial newspaper-carried a Page One story that said the government had readied norms for allowing foreign investment into retail. Among the stipulations, the paper said quoting a Cabinet note, were a minimum capitalisation of $5 million (Rs 22 crore) for the foreign retailer and a limit on the number of outlets the foreign retailer could open. The next day, however, the newspaper carried another story saying the government's Left allies were opposed to any foreign investment in retail-restrictions or no restrictions. Never mind that China already allows 100 per cent FDI in retail. Does the UPA government have a strategy to counter its Communist ally's intransigence? "We will be discussing (the framework for FDI in retail) with all stakeholders, including consumers and retailers, before arriving at any concrete proposal," is all that Ajay Dua, Secretary, Union Ministry of Commerce and Industry, is willing to say for now. Adds Nilotpal Basu of CPI(M) and mp: "There is neither any proposal from the government nor is there any need to respond. At this stage, we are principally and conceptually opposed to FDI in retail. It is neither relevant nor necessary at this point."

Basu and his comrades' opposition to foreign retailers stems from the fear that their entry will wipe out the estimated nine million mom-and-pop or kirana stores in India that account for 96 per cent of retail sales even in urban India. The argument in that case should be applicable to entry of any organised retail, the debate about Indian or foreign being irrelevant. But Basu and his friends would be happy to know that despite organised retail's growth in India over the last 10 years (when a bare 2,500 retail chain stores were opened), the kirana stores are booming. For instance, market research firm ACNielsen estimates that in 2004 alone, some 5 lakh kirana stores opened to sell fast moving consumer goods. Says N.V. Sivakumar, Executive Director, Retail and Consumer Industry Leader, PricewaterhouseCoopers: "Even after China opened up retail, the top 10 retailers in the country are Chinese-owned, and the foreign retailers are co-existing with local mom-and-pop stores."

Indeed, while there's just one (lame) argument in favour for stalling foreign investment in retail, the reasons for opening up are many. Take employment. Currently, 21 million people, or 7 per cent of the workforce, are said to work in the retail sector. If foreign investment is allowed, another seven to eight million jobs could get created in the sector over the next four to six years. Why? Because every time a big organised retailer sets up shop, an entire ecosystem springs up around him. This includes everybody from the farmer to the manufacturer to the packaging and label supplier to the transporter, among others. Besides which the supply chain from the producer to the consumer becomes more efficient, lowering prices for the consumer. "Everybody is keen on India, we should make a beginning," says Sivakumar. Adds Harsh Bahadur, CEO, Metro AG, a cash-n-carry retailer with one outlet in Bangalore: "When we entered China in 1997, we began with $45 million (Rs 198 crore) in exports, and now it has grown to over $2 billion (Rs 8,800). We can replicate that in India."

Given the sector's immense potential, Indian retailers are loath to see, say, a Wal-Mart come in. "FDI in retail is not warranted at this stage, I am in favour of a calibrated entry," says Sanjiv Goenka of RPG Enterprises, which owns Spencer's. "If at all FDI has to come in now, it should begin with furnishings and lifestyle products," adds Kishore Biyani of Pantaloon Retailing. Offers P. K. Bhandari, Group President, Raymond: "We can begin with 26 per cent and then gradually take it up to 100 per cent in four to five years." Indeed, there is a wide variety of options available to make FDI in retail both 'safe' and successful. What's lacking is the political will.

-Kumarkaushalam

INSTAN TIP
The fortnight's burning question.

Q. Are Interest Rates Set to Soar?

Yes. Ajay Mahajan, President, Financial Markets, YES Bank

We expect an interest rate hike of 25-50 basis points. Factors like inflation due to the rise in manufactured goods and energy prices, large borrowings by the government in the coming months, tightening liquidity in the system due to strong credit offtake and lower differentials between global and domestic interest rates should see RBI hiking rates in the short term.

No. Brijesh Mehra, MD, Head of Wholesale Client, ABN-Amro Bank

Despite the rise in crude oil prices, inflation rate has remained low so far. With ample liquidity in the system and the global oil prices falling from their peak in the last few weeks, interest rates could remain unchanged in the short term..

No, but... Moses Harding, Executive VP (Treasury, Global Operations & Investment Banking), IndusInd Bank

I would prefer RBI to adopt a wait-and-watch policy ahead of the busy season. However, if crude jumps back above $65 and rupee moves above Rs 45 per dollar ahead of the monetary policy, RBI would be forced to 'hike' interest rates to cushion the volatilities in the currency market.

--compiled by Mahesh Nayak

Revenge Of The Greenback

Money-spinner: The US dollar regains some of its lost charm

In just over a month, the rupee has lost close to 2.32 per cent against the US dollar, depreciating to 45 last fortnight (on October 14), before recovering to 44.85. In September, the dollar was at 43.83 to the rupee. And the outlook only looks bleak unless the Reserve Bank of India (RBI) intervenes aggressively through the state-owned banks to protect the falling rupee. "We expect the rupee to depreciate to 45.10-45.30 levels on the back of FII outflows and a rising import bill by December," predicts Tarini Vaidya, Treasury Head at Centurion Bank.

The trigger for this sudden slide came from recently- released data by the central bank that indicated a worsening trade as well as current account deficit in the first quarter April-June of the current fiscal. The trade deficit expanded to a whopping $15.8 billion (Rs 69,520 crore) in June-end as against $5.2 billion (Rs 22,880 crore) last year, thanks to imports outstripping exports. Similarly, the current account witnessed a deficit of $6.2 billion (Rs 27,280 crore) at the end of the June quarter as against a surplus of $3.4 billion (Rs 14,960 crore) in the corresponding quarter of previous year. "India's biggest import, oil, continues to contribute to the country's trade and current account deficit in a soaring international crude oil price scenario," notes U. Venkatraman, Treasury Head, IDBI Bank. An upturn in the short-term US interest rates has led to outflow of dollars from the Indian stockmarkets. With forex dealers expecting Allan Greenspan to hike the Fed rate to 4 per cent at its November 1 meeting, you can expect the rupee's slide to continue in the short term.

-Anand Adhikari

What Goes Up...
The bull's down, not out, but you've got to stop dreaming of 10k by Diwali.

Dalal Street: Course correction

Nav hazaar navratri, dus hazaar Diwali (9,000 at Navratri, 10,000 at Diwali) was the festive cheer on the street at the beginning of October. Alas, the fireworks had to be kept on hold, and the bse's benchmark index, the 30-share Sensex, came crashing down just when it was tantalisingly close to the 9K milestone. Unbridled selling by the till-recently-bullish foreign institutional investors (FIIs) triggered a 7 per cent slump in the Sensex from its peak of 8,821.84 on October 5 to 8,2201.73 by October 14. The 620.11 point-collapse is startling against a backdrop of upbeat inflows of $0.97 billion (Rs 4,268 crore) in September. Or is it? Says Nilesh Shah, Chief Investment Officer, Prudential ICICI: "There is a pull-back in the market. The market was in an overheated position, with stocks having started to move away from fair value to bubble value."

Whilst out-of-whack valuations may be one reason for the fall, there were other factors that contributed too. For instance, markets in developed as well as emerging countries plunged last fortnight. The Nikkei index lost 104.74 points or 0.8 per cent in the last fortnight to close at 13,420.54 on October 14, 2005, while the Hang Seng index fell over 6 per cent to close at 14,485.88. The domestic bourses are of course being driven largely by FII liquidity, and overseas investors chose to sell Indian stock as well. Till October 13, FIIs were net sellers to the tune of Rs 964 crore. So where is all this money headed? To the US, apparently. The strengthening of the dollar, courtesy of rising interest rates, coupled with currency depreciation in emerging markets like India, has added some shine to the American markets, and that's why much of the investible funds are heading west. Says V.K. Sharma, Director & Head of Research, Anagram Stockbroking: "The present weakness in our markets is a part of the global phenomenon. If the world markets (excluding the us) recover, so could our markets." Sharma's immediate concern, though, is the FII sales in the futures and cash market. "In the stock and index futures, the FIIs have been net sellers to the tune of Rs 2,178 crore in October," he adds.

Such worries notwithstanding, it would be premature to write the obituary of the great Indian bull. Yes, the indices will sink below the 8,000 level, but that's hardly reason to panic. As Shah points out, a correction is healthy for the market. The long-term fundamentals, however, are still strong, and there is cash waiting on the sidelines, to grab stocks that are looking more realistically valued post-correction. As for the FIIs, they will be back. Whilst last fortnight's selling spree may appear huge, that sum is still a fraction of the Rs 36,900 crore overseas investors have poured into India thus far this year.

Yet, it's pretty visible that the markets aren't too strong. Last fortnight the benchmark BSE index had broken through the trend line of 8,240, which is significant as it was made by joining the Sensex highs of August 3 and August 18. The next support level for the Sensex is 8,121, which might be already breached by the time you read this piece. Anything below 8,121 is bad news, which could eventually take the market down to 7,500 levels. That may or not happen, but you can be reasonably sure you won't see 10,000 balloons floating over the bse building on Diwali.

-Mahesh Nayak

IT/ITES's Next Target: Big Pharma
Global pharma companies ship back office work to India.

Nipuna's Artwork centre: Making drugs intelligible to consumers

It is an outsourcing dose India's IT/ITEs players would be only too happy to take. In September this year, drug giant GlaxoSmithkline (GSK) inaugurated a new offshore "Artwork" facility at Hyderabad-based Satyam Computer Services' BPO arm, Nipuna Services. The centre's task: Make the consumer information on medicine packs more intelligible by elaborating in plain English things like composition and dosage. GSK calls the initiative, the first of its kind in India, a vital link between itself and its customers. Nipuna, which stepped up focus on the segment starting this year, has one other global pharma company as customer and is talking to two others. Out of its total headcount of 1,700, 150 are in the pharma vertical. Says Venkatesh Roddam, Nipuna's new CEO: "This is an important area for us, given the huge potential," referring to the estimated $48-billion (Rs 2,11,200-crore) outsourcing opportunity globally in the drug industry.

Chennai-based Cognizant Technology Solutions couldn't agree more. In January this year, the world's biggest pharma company, Pfizer, outsourced high-end business processes in clinical data management and biometrics to Cognizant. A majority of the 100-odd people working on the account have degrees in pharma, bioinformatics, biostatistics, and business intelligence. Pfizer is just one of the top five global pharma companies that Cognizant, which gets 18 per cent of its total revenue from healthcare and pharma, has snagged as customers over the last two years. Says Mohan Narayanan, VP (Life Sciences), Cognizant: "While costs are going up on the one hand, regulations are becoming more complex on the other, so drug companies want to outsource as much as possible."

The opportunities for Indian IT/ITEs players could be in a variety of areas, including adverse event information (say, handling post-marketing feedback for Merck's controversial Vioxx), product data management (like what GSK's Artwork centre at Nipuna does), clinical data management, employee tech help desk, and pharmacovigilance (ensuring integrity of test data).

"Pharma companies are typically quite conservative when it comes to outsourcing, but going forward there will be a lot of areas that they could look to ites players for," says G.V. Prasad, Executive Vice Chairman and CEO of Dr Reddy's Labs and a director on the board of Nipuna. The challenge for Indian vendors will be to maintain quality as they ramp up.

-E. Kumar Sharma

IT TAKES TWO TO TANGO

Apparently, there's plenty of method in Bollywood madness. Reliance Capital's decision to acquire a 51 per cent stake in Adlabs a couple of months ago caught the markets by surprise. Adlabs' recent announcement to fund 12 films to be directed by Ram Gopal Varma also came as some kind of a surprise-needlessly. According to Adlabs' Chairman, Manmohan Shetty, the company earlier had a cap on film funding, but "with the infusion of fresh capital, we decided to get into newer areas", he explains. The schedule for completion of the projects is in line with the way Varma's "the Factory" has been operating-12 films in 18 months. For Varma, the deal is expected to work well since it will assure him of a cash flow and allow him to leverage on the clout that Adlabs enjoys in the spheres of film processing and film exhibition. But Adlabs may have to wait till the beginning of next year before Varma takes the director's chair. He has a commitment to direct 10 films for K Sera Sera. Even at his speed, he has finished only seven.

-Krishna Gopalan