f o r    m a n a g i n g    t o m o r r o w
NOV. 20, 2005
 Cover Story
 BT Special
 Back of the Book

Retail Conundrum
The entry of foreign players, and FDI, could galvanise the retail sector and provide employment to thousands. Left parties, however, feel it would push small domestic players out of jobs. What is the real picture?

The Foreign Hand
Huge spikes and corrections in the BSE Sensex have lately come to be associated with the infusion and withdrawal of capital from foreign institutional investors (FIIs). Are India's stock markets becoming over dependent on FIIs?
More Net Specials
Business Today,  November 6, 2005
Ugly Business
Is there a pattern to the run-ins between India Inc. and the powers that be?

Those who are too smart to engage in politics," wrote Plato more than 2,000 years ago, "are punished by being governed by those who are dumber." What was true then of the city-state that the Greek philosopher wrote about, is true today of the modern republic. And in a country that's waking up to the ameliorative powers of corporate citizenry and free markets, the dumb rulers aren't just getting insecure but vicious. Result: Increasing instances of clash between the corporate and political worlds. Be it Deve Gowda versus Narayana Murthy, or Mani Shankar Aiyar versus Subir Raha, or the public broadcaster versus the private broadcaster. The reasons, the context and their significance may vary, but at the heart of the battles is not so much a power struggle as a simple abuse of power by the person who wields it.

Reddy's Balancing Act
The Sensex Rollercoaster
Greasing Saddam's Palms
Q&A: Stephen Roach
The New Ad Shops
Lenovo Gets Its India Act Together

Let's take the most telling fight of the three: The Gowda-Murthy spat. The former Prime Minister-by-default, Janata Dal (Secular) leader, and a partner in the Dharam Singh-led Congress government in Karnataka, has three major issues against Murthy personally and the industry he represents: One, he doesn't like the rural-urban partnership proposed by Murthy (why it should take a Murthy and not the state government to devise such a plan is a question Gowda isn't asking). He says that's old wine in a new bottle. Two, he's upset that hundreds of acres of agricultural land has been taken over by it companies, particularly Murthy's Infosys, when it ought to have remained with the farmers. That Bangalore's it industry is single-handedly responsible for putting India on the global map is something Gowda surely sees, but doesn't want to acknowledge. Indeed, "What is the contribution of the IT sector to the state?" is what he recently asked. Only Rs 27,600 crore of the state's total exports of Rs 61,800, Mr Gowda. "It is a typical case of advancing economics and regressive politics," notes Rajiv Kumar, Chief Economist, Confederation of Indian Industries (CII).

Finally, he's also upset that Murthy didn't do enough to speed up the setting up of Bangalore's new international airport, whose promoting company was chaired by Murthy until he quit in protest over Gowda's remarks. Well, the project was first conceived in 1991, and the state government's clearance came only early this year. Still, Bangalore International Airport Ltd is confident of commissioning the airport by 2008. Besides, Gowda must know that but for Bangalore's it companies, the city would still be a retiree's paradise, and not a centre of global it offshoring. So, who is he getting at via Murthy? Karnataka's former Chief Minister S.M. Krishna, also a Congress leader but his rival. "It's clear that the distance between the political universe and the business universe is increasing," says Santosh Desai, President, McCann Erickson.

Sometimes the government will be perverse simply because it can afford to be so

Often, the rift is widened by plain turf battles. Like in the case of ONGC and the Union Petroleum Ministry. Mani Shankar Aiyar, the ministry's boss, wanted more government nominees to be accommodated on the energy company's board, and when that move was stymied by Chairman Subir Raha, Aiyar even threatened to parcel out the company's core business of overseas oil exploration (ONGC Videsh). "Our government's behaviour is in complete contrast with that of the Chinese government, which is acting completely in concert with the Chinese Overseas Oil Company (CNOOC) to gather oil assets globally," says an oil industry watcher.

Sometimes the government will be perverse simply because it can afford to be so. The clash between the public and private broadcasters is a classic example. A recent executive fiat makes it mandatory for private channels to share telecasts of events of "national importance" (largely ad money-spinning cricket matches) with Doordarshan, the state-owned broadcaster. Why? There's no economic justification. "It's an unfair, unwarranted, and retrograde step that will send out wrong signals to the world at large," fumes R. Venkateish, MD of ESPN-Star Sports.

But the larger issue, as Nagesh Kumar, Director General of Research and Information System for Developing Countries, an economic think-tank, points out, is that "the government needs to redefine its role more in terms of setting strategic and social policy direction". And that would mean not feeling threatened by actual, or imagined, loss of political power that follows the demise of a command-and-control economy.

The fortnight's burning question.

Q. Will the Sensex Slip to 7,000?

Yes. Jamshed Desai, Head-PMS & Investment Advisory Services

The current leg of bull-market run is over. From here on, markets will slide and would consolidate. With liquidity drying up, the market is expected to fall. Prices cannot run ahead of fundamentals and with valuations being excessive, the fall is expected to continue in the market.

Yes. Jayprakash Sinha, Head of Research, Kotak Securities PCG

The market can slip to the 7,000 mark if there is panic selling in the market on the back of fund outflows from FIIs and hedge funds. Currently, the Sensex is fairly valued, but if the market sentiment turns bearish, then heavy selling can even drag the market below cheap valuation (levels).

No. Sandeep Neema, Fund Manager, JM Financial AMC

I don't think the Sensex will slide to 7,000 in the immediate future. Already, the Sensex has witnessed a sharp 10 per cent correction from its peak. However, we have to see how the current interim rally shapes up. If FII inflows, which are the biggest driver for our markets, don't return, we may see a further fall in Sensex from the current levels. At the moment that's unlikely.

Reddy's Balancing Act

RBI's Reddy: Inflation ready

It's a constant battle that every central banker fights: how to fuel economic growth with cheap credit without stoking inflation. In his quarterly review of the country's monetary health, RBI governor Yaga Venugopal Reddy has chosen to err on the side of caution. While he left the benchmark prime lending rate untouched at its three-decade low of 6 per cent, he raised the reverse repo rate (a tool that the RBI uses to suck out surplus liquidity in the system) by 25 basis points to 5.25 per cent. Simultaneously, he also increased the repo rate, the rate at which the RBI infuses liquidity into the system, by an identical percentage at 6.25 per cent. "These measures should see us through till the beginning of the next year," said a beaming Reddy. But it was apparent that the central banker was keeping a wary eye out on inflation. By his own estimate, the credit offtake has been quite broadbased this year, led by housing, real estate and personal loans. In industry, petroleum, coal, power, roads and ports, cotton textiles, drugs and pharmaceuticals, iron and steel, and automobile have been strong borrowers. Given the runaway credit growth and the expansion of money supply, the market is betting on yet another reverse repo hike at the next quarterly review meeting on January 24, 2006.

The Sensex Rollercoaster
Why is the index so volatile, and how long will it stay so?

The thunderous noise that you heard on dalal street this Diwali wasn't the burst of crackers celebrating another record level breached by the Sensex, but the sound of stocks coming crashing down, rising a bit, and then crashing again. That made October the most volatile month on D-Street as far as intra-day yo-yoing of the bellwether stocks was concerned. The average daily volatility was 2.1 per cent compared to an average 1.45 per cent in the previous nine months. Given that the Sensex was at vastly higher levels (it peaked at 8,821.84 points on October 5) in October, the absolute average intra-day swing between the Sensex high and low was more than 170 points. As a result, the Sensex had lost a whopping 1,136.2 points by month-end from its high. "The fight between the bulls and bears and other types of animals (day traders, jobbers and arbitrageurs) caused huge volatility in the markets," says Ambareesh Baliga, Vice President, Karvy Stockbroking.

The primary culprits, however, were the FIIis, who sold equities worth Rs 3,439 crore between October 3 and 27. Sure, mutual funds did mop up stocks worth Rs 2,503 crore in that time, but it wasn't enough to arrest the slide. Why did the FIIs sell? A surge in the interest rates in the us got them interested in the American markets once more, besides which the 2.3 per cent fall in rupee value (also a result of dollars flowing out) last month may have prompted them to sell to protect their asset value. "Selling has been mainly due to hedge funds and short-term players, who are a nuisance across the globe, but we have to live with it (the volatility)," says Mike Ferrer, Regional General Manager, ING Investment Management Asia Pacific.

Some others, however, say the fall was expected. "Prices cannot run ahead of fundamentals, and with stocks being overvalued, the fall is expected to continue," says Rajesh Jain, CEO, Pranav Securities. He believes that investors should play it safe and only commit 5 per cent of their investment at current levels, and pick good mid-cap stocks, since large-cap stocks are prone to the FII flu. While the worst case scenario envisages a 10 per cent drop from the realistic value of 7,800-8,250 points, others like Ferrer think this is the time to buy. "The market has corrected substantially from its high, and any downfall from the current levels is an opportunity to buy," says Ferrer, who's recommending his clients to go overweight from neutral.

That's a brave call because India is still the costliest among emerging markets, and is the world's third most expensive by price-earnings multiple. But investors like Ferrer seem to be betting on the fact that the India story is driven by economic fundamentals, and is not as cyclical as Hong Kong, Taiwan or Singapore. After all, by all estimates, the economy will surge between 7 and 7.5 per cent this financial year.

Greasing Saddam's Palms

Oil's not well: Indian firms did it too

In a stunning report, former us Federal Reserve Chairman Paul Volcker has revealed that 129 Indian companies, of 2,253 companies worldwide, paid bribes, wittingly or unwittingly, to bag orders under the United Nation's oil-for-food programme, launched in 1996. Volcker's report, commissioned by the UN, names top Indian companies such as Tata International, Ranbaxy, Kirloskar Brothers, and Ajanta Pharma among those who made illicit payments in excess of $100,000 (Rs 45 lakh). All told, Indian companies are estimated to have paid $22 million (Rs 99 crore) to win contracts worth $425 million (Rs 1,912 crore). But bribing seems to have been the only way to get business in Saddam Hussein's Iraq. The investigators estimate that $1.8 billion (Rs 8,100 crore) was bilked from the $64-billion (Rs 2,88,000- crore) humanitarian programme, which ended with the US attack on Iraq in 2003. "The corruption of the programme by Saddam would not nearly have been so pervasive if there had been diligent management by the United Nations," Volcker says in the report. As for the companies, few responded to the report's findings, and those that did either denied having bribed Hussein's regime or said the payments were authorised by the UN.

"India must Build On Its Foundation"

Stephen Roach, Morgan Stanley's chief economist and Director of Global Economic Analysis, spoke his mind recently to BT's and on India and the global economy. Excerpts:

What are the key challenges facing India today?

I am encouraged by what I see. Unlike other Asian economies, there is a fine balance between the domestic industry and what India exports. More FDI needs to come in and infrastructure needs to improve. Infrastructure is a big area of concern and is a bottleneck.

Why is the balance between domestic trade and exports so important?

This is crucial and most developing countries, those in Asia in particular, do not have it. Look at China: 80 per cent of its GDP comes from exports. What happens if the us consumer goes?

How do you view India's progress over 14 years of economic reforms vis-à-vis China?

It must be understood that India has its own style and so does China. The pluses in China are high levels of FDI, savings and high quality infrastructure. India, however, is miles ahead of China when it comes to creating world class companies, banking systems and capital markets infrastructure. What is important for India in terms of economic development is that the solid foundation has to be sustainable. This is apart from maintaining a balance between services and the manufacturing sector. The next 5-10 years are critical and here is where India has to build on the foundation.

What is your view on the way India has gone about attracting FDI?

India has a cultural aversion towards FDI There is a fear that you will end up losing control over your domestic resources. The assets will always stay, they don't leave. Foreign investors will not dismantle the company. The FDI route is a win-win situation.

How should India market itself to foreign investors?

There are some big lessons for India from China. China's national savings rate is twice that of India. They have utilised money from savings for infrastructure development. The benefits are obvious-they have the best roads. If you want the best roads, don't go to the US, go to China. The ability to mobilise resources is China's biggest advantage. India has to be more aggressive when it comes to marketing itself. You possibly need your own ad agency for selling your growth story to the world.

What is your view on other Asian markets?

Japan is always attractive. It has been in a slump for 15 years and is still the symbol of Asia's economic strength. China is the new dominant force. The way China is headed, I am not so sure of Japan reclaiming its top position.

Will inflation threaten global growth?

Inflation concerns have resurfaced because of high crude oil prices. This is the fourth energy shock since the 70s. Asia still has a cost advantage to labour input and that will, end of the day, continue to serve the region to bring in foreign investment.

How will the global economy look five years from now?

I think the US consumer will come to his/her senses and would have dealt with excess consumption. India would have made progress in agriculture and curbing unemployment. The biggest bump on the way will be the overspending of the US consumer. This is important since all of us depend on the US consumer.

The New Ad Shops
Entrepreneurship among admen is again in fashion.

L&K's Kenneth: Adding up to great expectations

There's a wave of entrepreneurship sweeping across the Indian ad world. Call it a counter-trend. Even as global powerhouses such as WPP, Publicis and Omnicom consolidate their presence in India by acquiring the few remaining independent agencies, India's ad veterans are bringing in new names like Dentsu, Law & Kenneth and M&C Saatchi.

Last year, ad veteran Sandeep Goyal tied up with the world's biggest agency brand, Dentsu of Japan, to set up shop in India. Praveen Kenneth, who had brought in London-based creative hotshot St Luke's into India in 2002, teamed up with global ad maverick Andy Law to launch Law & Kenneth globally, including in India, a couple of months ago. And more recently, M&C Saatchi acquired New Delhi-based creative boutique Dhar & Hoon, in partnership with Kamal Oberoi, former President of JWT India.

"The acquisition route is untenable because of unreasonable expectations of the few remaining independent ad houses," says Sandeep Goyal, Chairman, Dentsu India. He should know. There was a time in late 2002 when Dentsu did look at buying up Orchard Advertising, Triton and yes, even Dhar & Hoon, before finally deciding on its joint venture with Goyal. "For M&C Saatchi, it was a question of starting out with a good talent base here rather than any need for acquiring existing (Indian) business," says Oberoi, who is now CMD, M&C Saatchi India.

But then, do three examples make a trend? Well, yes and no. For even though most ad conglomerates-and their marquee agency brands-are already present in India, there are still lots of small-to-medium agencies out there who want a piece of the action in what is easily one of the fastest growing markets in the world. Names such as the Publicis-owned Bartle Bogle Hegarty, Singapore's Batey, the us-based Weiden+Kennedy are floating around in this context. "Apart from mainline agencies, there are global players in direct marketing, design and brand identity creation that are looking at Indian admen to hand-hold their entry into India," says L&K's Kenneth. For the Indian ad industry veterans, it's time to don the entrepreneur's hat once again.

Lenovo Gets Its India Act Together

Lenovo's Yang: Eyeing the Indian market

Is a Chinese thinkpad still a thinkpad? That in a nutshell, is the question topmost in the minds of IBM laptop customers, both current and potential, following the landmark acquisition in May this year of Big Blue's $10- billion (Rs 45,000-crore) PC business by an upstart Chinese company called Lenovo. Even as Lenovo is busy selling its "nothing will change" pitch to Big Blue faithfuls in mature markets, it is putting its strategy together for emerging markets, including India. "Consumers the world over are very different, but our approach in India will be very similar to China's," said Lenovo Chairman Yang Yuanqing on his recent trip to India. Lenovo dominates the Chinese retail PC market with a 30 per cent share, but its market outside of China is in the enterprise segment, thanks to IBM's focus on it. Lenovo, however, hopes to address this gap as soon as possible, particularly in India, where Yang again sees a likeness to China and a potential for retail outlets, unlike the US, where retail space is too expensive. "The Indian market will suit Lenovo very well in what they are doing, but execution is key," says Martin Gilliland, Principal Analyst, Gartner. "In the retail segment, a Rs 12,000-14,000 PC is what they will target in the Indian market, and if they do that, they could see significant volumes," he adds. Lenovo is already a fixture on the Kaun Banega Crorepati show (yes, the PCs of Amitabh Bachchan and the contestants are Lenovo). It may be a matter of time before it comes out of the telly and into Indian homes.




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