Chinese President Hu Jintao: Can you spot the slowdown?

In the horribly cut-throat environment that characterises the global economy, a rival's slowdown is often greeted with whoops of delight in opposition camps. But what happens when the engine of global growth itself begins to decelerate? That's a question Indian economic planners are grappling with right now.

The facts: The latest annual report of the un Economic and Social Commission for Asia-Pacific says China's GDP growth rate is expected to fall to 8.5 per cent this year, a full percentage point lower than last year, and further to 7.8 per cent in 2006. As a result, the report forecasts, the entire Asia-Pacific region will grow at only 6.2 per cent, down from last year's growth rate of 7.2 per cent.

What implications will this have for the Indian economy? Steel, coal, iron ore, oil and chrome prices will definitely fall, since China currently consumes 40 per cent of the world's cement output and accounts for 90 per cent of the growth in world steel demand. Result 1: lower realisations for Indian companies like Tata Steel, Essar Steel and ONGC, even though some of them don't export these commodities to China. Result 2: input costs of most other companies will fall. So, India Inc. can look forward to some improvement in its margins and profitability. Alternatively, consumers can look forward to lower prices almost across the board if companies decide to pass on the lower prices to them. Either way, it should provide a fillip to consumption and push up the GDP growth by several basis points. This is expected to have a positive fallout on stock prices.

Also, some of the investments currently going to China will be diverted to India. But don't expect miracles here. "Even if there is a perception that India is growing and China is slowing, it is unlikely to make India, the next big FDI destination," says Andrew Holland, Executive VP (Research), DSP Merrill Lynch. The reason: poor infrastructure and sectoral caps on foreign investments are still huge impediments to the free inflow of FDI.

So what does the balance sheet say? A slowing dragon will definitely add a spring to India's step, but don't expect the country to become the engine of global growth anytime soon.

-Ashish Gupta

Whither Hong Kong?
EU's refusal to cut farm subsidies is likely to derail the forthcoming WTO ministerial round.

Minister Nath: No hope for WTO talks

An air of pessimism surrounds the forthcoming Ministerial Round of the World Trade Organization (WTO) in Hong Kong beginning December 5. Most people expect it to end in failure. Agriculture remains the biggest stumbling block. The spoilsport this time: France. As Union Commerce & Industry Minister Kamal Nath said at recent press conference: "Signs of movement on the part of developed countries-mainly responsible for trade distortion and protection-have been scarce and insufficient.''

Recognising this, WTO Secretary General Pascal Lamy has said the French, and tacit EU, refusal to reduce the huge subsidies it pays its inefficient farmers means the organisation's 148 members will have to lower their goals for the Hong Kong meeting. That's because unless there is some consensus on the farm front, there is unlikely to be any movement on any other sector. The g-20 has made it clear that it will not discuss any other issue, including Non-Agriculture Market Access (NAMA), unless the subsidy question and the "food security and livelihood concerns of poorer nations" are sorted out to its satisfaction. NAMA is important to both the US and the EU as it deals with reduction in industrial tariffs in the developing world.

India has complicated the issue further by making a robust services sector offer. It has also made it clear that it will bend on agriculture and industrial tariffs only if it wins significant concessions on cross-border supplies (Mode I) and movement of natural persons (Mode IV).

"We could end up having just another approximation round at the Hong Kong Ministerial Meet," says Pradeep S. Mehta, Secretary General, Consumer Unity & Trust, an NGO working on the WTO issues. This means ministers will only agree to discuss the modalities of various issues at the next round. Wonder why they all need to congregate in Hong Kong for that?

-Ashish Gupta

Cleaning Up Banks
The RBI's decision to allow foreign investments in ARCs will go a long way in tackling the issue of NPAs.

RBI's Reddy: The foreign hand

It's a hangover from the country's ill-fated, but long-standing tryst with socialism. The crony capitalism that it bred saddled the banking system with huge non-performing assets (NPAs). That's really a polite term for bank loans that companies have refused to repay. At last count, the figure totted up to a staggering Rs 60,000-1,00,000 crore. The first Asset Reconstruction Company (arc), the magic wand that promises to clear up this messy Augean Stable, was set up in 2003 under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, but it simply didn't have the kind of money required to even make a dent on this problem. Now, the government has given the sector a booster dose. On November 8, the Reserve Bank of India (RBI) announced that it was opening up arcs to foreign direct investments (FDI) up to 49 per cent. Foreign institutional investors (FIIs), however, were barred from buying into these companies. Just two days later, the RBI issued another circular allowing FIIs registered with the Securities and Exchange Board of India to invest up to 49 per cent in security receipts (SRS) issued by the arcs, subject to a cap of 10 per cent for individual FIIs.

How do arcs work? They buy bad loans from banks at a fraction of their face value and then pursue the defaulting companies to recover the dues. Their profit: the difference between the amount recovered and the amount paid. Globally, the norm is for arcs to buy distressed assets for cash, but in India, they will be allowed to issue SRS; these are basically IOUs for the agreed amount that will usually be redeemed only on recovery of funds either through restructuring or liquidation.

"Allowing foreign investments in arcs will lead to greater competition and also allow them easier access to huge amounts of money," says Ashwani Puri, Executive Director, PricewaterhouseCoopers. Foreign players like Standard Chartered Bank, Citicorp and Barclays Bank have already expressed interest in entering the arena. And analysts believe that India can easily attract $5 billion (Rs 22,500 crore) over the next one-and-a-half years as a result of this policy change.

- Ashish Gupta