For more than a decade now, India has been toying with the idea of capital account convertibility (CAC). Its advocates say the move-which would allow unrestricted conversion of the rupee into any foreign currency such as the us dollar-would be a logical conclusion to the financial market reforms that the country has undertaken since deciding to deregulate the economy in 1991. More importantly, it would raise the comfort levels of investors and, thus, boost the inflow of foreign capital into the country. "Access to deeper, more liquid markets and better risk management," says Jamal Mecklai, Chief Executive, Mecklai Financial, listing the benefits from such a move. Way back in 1997, a committee on CAC, headed by former RBI deputy governor S.S. Tarapore, had spelt out the conditions under which full convertibility could be ushered in. Key among them were fiscal consolidation (i.e. manageable fiscal deficit), moderate rate of inflation, strong financial sector and ample forex reserves. Nearly 10 years on, those conditions seem to have been met or, at least, within reach. Says former Union Finance Minister, Yashwant Sinha: "We have comfortable foreign exchange reserves, inflation is under control and more importantly, there is confidence in the Indian economy." In other words, the time is ripe to go the whole hog on capital convertibility. But is it?

There are a few questions one needs to answer before opening the sluice gates to capital inflows and outflows. For instance, are India's economic fundamentals strong enough to withstand global shocks? Do the benefits from full convertibility outweigh the risks that come in tow? And what is it that Indian corporates get that they already haven't got from the switch to a more liberal foreign exchange regime (read: the switch from foreign exchange regulation under FERA to foreign exchange management under FEMA and more)? "If we need funds to invest overseas, we can always raise them overseas. If there is no need to change the rules, then why change them?" asks Sumant Sinha, President (Corporate Finance), A.V. Birla Group. Besides, despite the seeming comfort of broad macro-economic numbers, the economy is vulnerable to situations like a drop in agricultural production or a slowdown in major markets (think us). "The volatility empirically noticed in the early years of total convertibility may be too much for the economy to bear. Therefore, it may be sound to proceed cautiously on this path," says Milind Sarwate, CFO, Marico Industries.

Sarwate is, of course, referring to the East Asian meltdown of 1998 that was triggered by sudden outflow of foreign capital. Almost overnight, countries like Thailand, Indonesia, South Korea and Malaysia saw foreign investors pull out billions of dollars from their markets. India and China were not affected, thanks to their controls on capital flows (Malaysia also put controls in the wake of the meltdown and recovered faster than the other economies). Opponents of full convertibility, therefore, say that there is merit in retaining some control, especially when not all economic indicators are positive. "The largest inflows at present are from non-resident Indians. With global interest rates firming up, if there is a run on the funds, then where are the fundamentals to sustain it?" asks R.S. Sharma, Director (Finance), ONGC.

Sharma points to another interesting fact. Of the BRIC countries (Brazil, Russia, India and China), only India has a trade deficit. And if there are further spikes in crude prices, not only will the deficit widen, but inflation will start rising too. "With 70 per cent of India's oil requirements being imported, a spike in oil prices could upset the apple cart," says U. Venkatraman, head of forex and money markets at IDBI. Moreover, the financial intermediaries need to be nimble-footed in managing the risks associated with full capital account convertibility. "However, the financial sector is still reliant on administered controls by the Reserve Bank of India," adds Rajiv Kumar, formerly chief economist at CII, but now director and chief executive of economic think-tank ICRIER, offering another reason why India needs to be cautious about full convertibility.

Normally this magazine is a big votary of unrestricted trade, but on this issue, it would like to argue that some amount of control on capital flows is not just desirable, but vital to insulating the economy from global upheavals. The Indian elephant has just about started moving, let us not put it in the path of a financial market locomotive.

-Shalini S. Dagar

INSTAN TIP
The fortnight's burning question.

Q. Will the Bird Flu Hurt Economy?

Yes but... Hema Chaukar, Advisor Western Regional Council, FICCI

Initial fear and anxiety have already affected the poultry business and, in turn, the economy. However, with awareness building among people, the fears have receded. In the long run, I don't see the bird flu impacting the economy.

No. Abheek Barua, Chief Economist, ABN Amro Bank

The bird flu has been fairly localised. And at this stage, I don't think there is any major concern of the virus impacting our economy. Apart from poultry and the related sector, I don't think it will have an impact on the Indian economy, which is far larger than the East-Asian economy. So far, there is no panic among the external investor community.

No. C.K. Vaidya, Managing Director, Godrej Agrovet

The impact of bird flu will depend on how long the current situation lasts. The initial impact has already been felt in consumption and prices of chicken. However, with consumption of chicken picking up, I think normalcy will be restored within the next three to four weeks.

--compiled by Mahesh Nayak

Indo-US CEO Forum: Back to the Government

The power set: Top CEOs with the Prime Minister

Last July, when prime minister Manmohan Singh went on his first state visit to the US, besides seeding the ground for a nuclear pact, he set up an Indo-US CEO Forum, comprising 10 CEOs each from the two countries. The forum's mandate was clear: It was to "serve as a channel to provide senior-level private sector input into discussions and formulation of an economic policy". In other words, the CEOs were to help identify ways to build further business confidence and remove barriers to trade and investment, thereby, boosting growth, creation of jobs and delivery of social benefits.

Last fortnight, when US President George W. Bush came on his first visit, he brought along a delegation of business people. Unfortunately, some of the big guns expected-Hank Paulson, Chairman & CEO, Goldman Sachs, and Stephen Schwartzman and Peter Peterson, co-founders of private equity giant Blackstone-didn't turn up. Yet, the co-chairs of the forum-JP Morgan Chairman William Harrison and Tata Group Chairman Rata Tata-made sure they didn't let their political leaders down. In a report, the forum has identified six major areas of cooperation to boost business between the two countries. There are specific recommendations pertaining to infrastructure, energy security, R&D, technology, and trade and development. For example, they have recommended making Mumbai a financial hub, and setting up of a $5-billion (Rs 22,500-crore) Infrastructure Development Fund. "I think there is a lack of excitement about investing here because of factors like poor energy supply and roads," Harrison put it bluntly. The surest way of killing the forum would be to not act on its recommendations.

-Ashish Gupta

Profiting From Rivalry
Telekom Malaysia leads over rival Maxis for Spice.

Is it a deal? Spice's Modi

The last time around state-owned Telekom Malaysia wanted to get its foot in the booming telephony market in India by acquiring a stake (along with STT of Singapore) in Idea Cellular, the government nixed its plans because of restrictions on multiple ownership in same circle. It has a new target in sight, B.K. Modi-controlled Spice Telecom, where it is in final negotiations to buy the 49 per cent owned by Modi's co-investors, Ashmore Investment Management and Deutsche Bank. Says an industry watcher: "The Malaysian management will be doubly careful this time because, for one, Telekom Malaysia's acquisition track record is not so great; and two, Modi's previous foreign partners didn't have a great relationship with him." Abdul Wahid Omar, CEO, Telekom, which topped rival Maxis's price for Spice (it operates in Karnataka and Punjab), has admitted there are issues, but he's likely to push for a quick resolution. Cellular growth in Malaysia is flattening and Omar has big plans for neighbouring markets. "The negotiations are continuing," is all Spice CEO Umang Das would say at the time BT went to press.

-Kumarkaushalam

Bangalore Vs Hyderabad
Five reasons why (we think) US President George Bush visited Cyberabad and not India's Silicon Valley.

Bangalored: Say the word Bangalore, and lost jobs is what American techies think of. In contrast, Hyderabad, where Microsoft, Google, Oracle and Amazon have centres, is not yet a swear word.

Diaspora: Every rich and hardscrabble Andhraite wants, and incredibly manages, to get to the US; an estimated 25 per cent of Indian IT professionals in the US today are from Andhra Pradesh.

Rajat Gupta: In Hyderabad, where did President Bush spend over an hour in his four-hour fleeting visit? At the Indian School of Business, a brainchild of, among others, McKinsey's Rajat Gupta.

The Ongole Cattle: Don't forget Bush is from Texas and, hence, a lover of all things bovine. Hyderabad's Acharya N.G. Ranga Agricultural University showcased an exotic Ongole bull. While Bush patted it, he asked more about a buffalo from Haryana.

Power Politics: Andhra Pradesh is ruled by the Congress Party as against Karnataka, where a sleepy Congress-JD(S) coalition was recently ousted by the rival JD(S) and BJP alliance. Catch the government sending a state dignitary to a rival party's bastion.

-E. Kumar Sharma

Helping Dunlop, Helping Themselves

Waiting to roll: They also make votes

Just before the 2001 state elections, the Left Front in West Bengal was a silent onlooker to the closure of Dunlop India's Sahaganj factory, and paid dearly for it. It nearly lost the Hooghly constituency (of which Sahaganj is a part) and conceded a few seats in adjacent constituencies to the opposition. Five years is a long time when it comes to political memory, but the upcoming state elections seem to have refreshed it. "We will extend all concessions for the revival of Dunlop," state commerce and industry minister Nirupam Sen declared recently. The new management, led by P.K. Ruia, wants waiver of sales tax dues of Rs 34.31 crore, electricity dues of Rs 15 crore, and other dues of about Rs 1.30 crore, besides benefits and subsidies available to large industrial units in backward areas. Ruia's deal: better work conditions, improved wages and other benefits for a lesser workforce (he wants to bring it down to 1,000-1,500 employees from the 2,600 already on the tyre-maker's rolls). The icing on the cake for Ruia, however, is that the Left Front has promised to help him get back the magnificent Dunlop House in the heart of the city from its new owner-the Pataka (bidi) Group. Just how? That the party won't explain. Promises are a small price to pay when you are out buying votes.

-Ritwik Mukherjee

Q&A
"Costs In India Are Rising"

The Ohio-based Convergys Operates a BPO business that spans four continents, employing 66,000 people in 67 centres. In India to take stock of its BPO and software development operations, Chairman, President and CEO James F. Orr of the $2.5-billion (Rs 11,250-crore) BPO spoke to BT's E. Kumar Sharma on plans to ramp up local operations. Excerpts:

How does India figure in the scheme of things at Convergys?

It is very significant. We are approaching a 1,000 people here now in software development, and that is a very significant portion of our overall total proportion (of people employed in software development). That group plays a very important role in our billing business, not so much in (revenue) terms. In all, we have a little over 10,000 people, as the rest of the business here is call centre.

How do you intend to ramp up growth here? Will you look at acquisitions?

Acquisitions have been playing an important part in the growth of our company over the past 20 years, either for a piece of technology or to expand our footprint, and we remain very interested. We are looking for technologies. Principally, technology-based acquisitions and ideally, early stage and we have, in fact, looked at a number of Indian companies. But the IPO market over here is such that, whether they can really do it or not, they have a perception that they can create a valuation. That makes it very difficult for somebody to make an acquisition work in terms of the economics of it.

How competitive is India versus Canada or the Philippines?

The cost of talent is very important to US and India certainly has, up to this point, a significant cost advantage versus other markets. But with wage inflation at 15 per cent a year, obviously that competitive gap narrows very quickly. I think the cost gap is closing between India and other locations. But we still see opportunity to grow here.

What are you doing to attract talent and to retain it?

We are looking at how to build a career path to enable folks to make transition from call center to software development. That is something unique that we can offer folks that many companies can't.

Where do you see Convergys five years from now?

I think it is possible for the company to get to $4.5 to $5 billion (Rs 20,250 to Rs 22,500 crore) in revenue in five or six years with higher margins than what we have today.

Another Stab At Electric Vehicles

Not yet red hot: British MP Lord Sainsbury at the India launch

A Russian-English idea is moving on wheels across continents, and it's come to India. Ultra Motor Company-a privately-held English company found in 2002 around a technology patented by Russian inventor Vasily Skondin-recently announced the launch of three electric vehicles, two two-wheelers and one three-wheeler. "We see a huge opportunity in taking auto transport to rural areas and also to women," says Ian Woodcock, company Chairman. Since Ultra is a technology development company, it has to convince vehicle manufacturers to buy its technology and sell it in the retail market. "The first models are expected in collaboration with our (Indian) partners in August this year," says CEO Paul Dyson. Ultra has at least part of its strategy right. Its two-wheelers will cost under Rs 14,000. Better still, they will be 80 to 90 per cent cheaper to operate and require no licence or registration. But there's a problem:The electric scooter's top speed is 25 km/hr, and it can go only as far as 40 km on a single charge. And hasn't that been the bane of all electric vehicles?

-Shaleen Agrawal

Sensex: Where Is It Headed?
Despite some concerns, the markets seem set to march on.

Edelweiss' Shah: Sees the market going up for now

Budget time usually brings out the worst in stock markets. Last two years, the Sensex slipped steadily in the run up to the February-end Union Budget. In 2004, for instance, the 30-stock index dropped from 6,035 on February 17 to 5,665 on February 27, and even last year, it slipped marginally from 6,670 on February 15 to 6,570 on February 25. But this year, it rose from 9,981 on February 17 to 10,370 on the day of the budget, and another 195 points a day after. (It closed March 6 at 10,735.) Having pole-vaulted what could have been a psychological hurdle, the Sensex seems set to march on stoically.

But the question is, just how far is it likely to go this year? "The Finance Minister is talking about 10 per cent GDP growth and if that's achievable, Sensex can easily touch the 13,000-mark. However, if the monsoons are disappointing, reaching the target will be delayed by a quarter. But liquidity and growth will continue the Sensex momentum," says Gurunath Mudlapur, Managing Director, Atherstone Institute of Research. But there's fear that the market has already started to discount 2008 earnings. Incredibly, that is not the big fear. "The concern is not on the rate of growth, which is expected to be around 15 per cent in 2006-07. But the worry is the price investors are willing to pay for stocks and then hold them for a longer duration on the assumption that nothing can go wrong. Assuming only growth and neglecting risk is dreadful," notes the CEO of a domestic mutual fund.

But market was fearful too when the Sensex crossed the 8,000 mark. A lot of investors exited at those levels and have been too scared to re-enter at higher levels. "Players who booked profits at around 8,000 levels are still waiting to deploy their cash in the market," notes Rajesh Bhogani, retail dealer at Parag Parikh Securities. He, however, has a word of advice: "The way the Sensex is scaling higher, it looks unlikely that they will get any chance to invest at the levels they left. Inflow of money has been the key trigger in the market and till the time inflows continue, I don't think this momentum will stop." Agrees Rashesh Shah, CEO & MD, Edelweiss: "The budget has been good and has reinforced the India growth story. A lot of inflows were on hold due to the budget, which has now started to flow-rapidly-into the markets. This will continue to propel the markets upwards."

That includes the FIIs or mutual funds that mopped up Rs 11,500 crore from investors in the last two months from new schemes. But keep an eye on the March-quarter earnings. That may well trigger the Sensex's movement-either upwards or downwards.

-Mahesh Nayak