At cross purposes: FM Chidambaram (left) and RBI's Reddy

Is it just another procedural wrangle or is it an indication of the growing rift between the Ministry of Finance (MoF) and the Reserve Bank of India (RBI)? There have been far too many runs-in between the department run by P. Chidambaram and the organisation headed by Y.V. Reddy for this to be dismissed as a coincidence.

The latest? A disagreement, or, shall we say, policy debate, over easing remittances for the purchase of trademarks or franchises. In a move to give more autonomy to commercial banks, the MoF, on July 11, 2006, issued a notification omitting Entry 16 of Schedule III of the FEMA Current Account Rules, which requires prior RBI approval for remittances on account of purchase of trademarks or franchises. Such notifications are followed by an RBI circular to all the head offices of authorised foreign exchange dealers within 15 days of operationalising the same. It has been two months now, but the RBI is still to release the Authorised Personal Directives (circulars)-without which dealers aren't authorised to give effect to the notification-to banks. In fact, the notification is not even posted on the RBI website. When contacted, RBI spokesperson Alpana Killawala, initially said the circulars had been sent to the banks, but clarified later that they "will be sent within a couple of days". The ministry, though, is blisfully unaware of what's going on. "This matter hasn't come to our notice. We will investigate it," says Vinod Rai, Special Secretary, Banking and Finance.

This is not the first time MoF and RBI have pulled in opposite directions. The two have clashed over the latter's efforts at "tightening money supply". The central bank has already raised the reverse-repo rate three times this year, taking it to 6 per cent, even as the Finance Minister went on record saying: "There is ample liquidity in the market and, therefore, I would be happy if interest rates do not harden."

It is well known that Chidambaram and Reddy do not see eye to eye on Participatory Notes, which the latter wants to ban because of their potential for misuse. RBI's main contention is that P-notes are out of sync with the needs of modern, transparent financial markets. The ministry, on the other hand, favours constructive use of P-notes subject to stringent regulation and is firm that the present status quo will continue. By the looks of how things are progressing, this round seems to be going Chidambaram's way.

Rupee convertibility is another point of friction between the two. The Finance Minister is keen on attracting greater foreign direct investment inflows on the basis of a freer rupee. But RBI wants to move towards this goal slowly and cautiously. The second Tarapore Committee report, which favoured freeing the rupee progressively over five years, seems to toe Reddy's line.

The apex bank and the MoF differed yet again with regard to FDI in asset reconstruction companies (ARCs). The FDI limit in arcs is currently at 49 per cent. The Finance Ministry favours an aggregate FDI cap of 74 per cent in arcs with a sub-cap of 49 per cent for individual holdings. RBI, on the other hand, wants the status quo to continue. It is still not clear which way the issue will go, but some indications have emerged to show that Chidambaram may get his way on these.

Incidentally, State Bank of India CMD O.P. Bhatt recently joked about the alleged differences between his two bosses. Indian officialdom is not known for its sense of humour. It will be interesting to watch how the dramatis personae deal with the matter.

-Pallavi Srivastava

Ready For The World
Smaller firms are also getting themselves rated.

Bankers are chasing medium-scale enterprises with a vengeance; and such companies, on their part, are literally hounding the credit rating agencies. The reason: they want to get themselves rated. The benefits are very tangible and go far beyond getting easier access to bank loans and better interest rates, resulting in a lower cost of funds. A good investment grade rating can help these companies attract equity partners and even raise external commercial borrowings (ECBs). Most of these companies have turnovers ranging from Rs 50 crore to Rs 500 crore and investment in plant and machinery is anywhere between Rs 5 crore and 25 crore.

The S&P-owned CRISIL says hundreds of SMEs are lining up to get themselves rated. care, another rating agency, too, corroborates this trend. Says Rajesh Mokashi, Executive Director, care: "As the business grows, there is a need for an independent opinion."

"We have got close to 500 rating requests from relatively smaller companies and more than a hundred are in the pipeline," adds D. Thyagarajan, Director (SME Ratings) at CRISIL. The company has now gone one step further and has signed Memoranda of Understanding (MOUs) with close to a dozen banks, like State Bank of India, Bank of Baroda, UCO Bank, Corporation Bank and Canara Bank, for rating their SME customers. "Our ratings give banks a credible third-party credit opinion. This helps them take credit decisions, cuts down the time and resources they spend on credit evaluation and reduces their transaction costs," says Thyagarajan.

Several of these companies have successfully raised money abroad through ECBs, though no credible data is available. "Raising money abroad is not very difficult these days for SMEs," says G. Nagada, Financial Advisor at Vidyut Metallics, which recently borrowed through the ECB route.

"SMEs that have foreign currency earnings through exports have a natural hedge against foreign exchange risk and can consider ECBs," says Thyagarajan. "Today, quality-conscious SMEs are doing business overseas and raising ECBs is a natural progression for them if cheap funds are available," says Mokashi.

Incidentally, the rating mechanism, the parameters and the standards for these smaller companies are the same stringent ones used for larger companies. Consequently, several of them do not make the grade. Only about 10-20 per cent of the companies that get themselves rated actually walk out with ratings that can be termed investment grade.

-Anand Adhikari

WOOING THE RUSSIAN TOURIST

Tourism target: From Russia with Love

The Indian hospitality industry is looking at a new milch cow: the rich in Russia and other constituents of the Confederation of Independent States (CIS). "There is a paradigm change in the expectations of tourists. Earlier, they were happy with 'sand, sun and sea' tourism, but they are now looking for experiential tourism," says Amitabh Kant, Joint Secretary, Tourism. The Incredible India campaign will soon be launched in Russia-where a holiday in India is usually equated with a visit to Goa and Kerala-and is expected to attract greater numbers to options like heritage tourism, wildlife tourism and medical tourism in India.

"Tourism here is not only about monuments; it is the culture, theme, magic and the soul of India," says Subhash Goyal, Chairman, STIC travels. Hotel chains like Leelaventure and Bharat Hotels will be part of the campaign. "We see progressively higher numbers of tourists from CIS countries during November-March every year and the campaign will help create awareness among more people," says Lalit Suri, CMD, Bharat Hotels. Tourist arrivals from CIS countries have been growing from 38,526 in 2003 to 61,187 in 2004 to 76,000 in 2005. The target for this year: 25 per cent more than the previous year.

-Pallavi Srivastava

The Yo-Yo Effect
What goes up must come down. But does it also apply to interest rates?

Which way are interest rates headed? If one looks at the global cues (plunging crude oil prices and the falling us Fed rate), RBI Governor Y.V. Reddy has little choice but to kick-start a benign interest rate regime once again in the coming October policy review.

But Reddy's task is not as easy as it looks. The mandarins on Mint Street are closely monitoring the potential lag effects of crude and commodity prices, domestic liquidity position and the strong overall credit demand-though a few sub-segments, like real estate and personal loans, are exhibiting signs of tapering off.

The prime lending rates (PLRs) of public and private sector banks indicate that there has been a quarter to one percentage point rise in interest rates over a one-year period.

In the Indian context, the inflation monster is still around to play spoilsport and mar the prospects of a decline in interest rates. The inflationary expectations emanate from an overall strong year-on-year domestic credit growth of 32 per cent (against a widely held misperception of a slowdown) and a 19 per cent growth in money supply against the projected figure of 15 per cent for 2006-07. These two will need careful watching in the months to come. If interest rates are lowered, it will almost certainly lead to an explosion in demand, which, in turn, will result in demand pull inflation. And the RBI, obviously, wants to avoid such a situation. The silver lining: the inflation rate itself is currently at 4.91 per cent, comfortably below the RBI's projection of 5-5.5 per cent.

"How various domestic factors like money supply and credit growth pan out going forward holds the key to the direction of interest rates," says B. Sambamurthy, Chairman of the public sector Corporation Bank. K.V. Kamath, Managing Director & CEO of ICICI Bank, is also very cautious. "I'd rather wait and watch," he says. Only K.S. Harshan, Executive Director, Federal Bank, sticks out his neck by saying: "There is still an upward bias in interest rates."

In fact, the only pointer to a softer interest rate regime seems to have come from Punjab National Bank, which announced a 9 per cent floating home loan rate, down from 9.25 per cent, ahead of the festival season. No other big player has followed this lead. Bankers say credit demand in the domestic market will continue unabated as interest rates are still reasonably low and affordable. "And, so far, there is no major threat of non-performing assets (NPAs) at the retail level," they say.

What does all this mean for interest rates? Domestic and international factors seem to be pulling in different directions and are sending out contradictory signals on the subject. Reddy will have to find a way to square this circle. As of now, bankers are preferring to wait and watch rather than take any call on the matter.

A related issue: will the credit growth continue at the same pace? "Personal and home loans are two segments where the banks are turning a bit cautious," says Sambamurthy of Corporation Bank. The implication: there could be some slowing down in the two segments. Harshan of Federal Bank disagrees. "In an economy growing at over 8 per cent, demand for credit will continue to grow." Here, too, there is no consensus. We'll have to wait for Reddy himself to give the cue.

-Anand Adhikari

Mind Over Matter
Intellectual Capital rating is gaining ground.

Edvinsson speak: IC is critical to an organisation's future

In December last year, some 30 employees of Bangalore-based MindTree Consulting spent three months getting an Intellectual Capital (IC) Rating. Tangible corporate assets have been measured and assessed for many years, but it's only now that companies have started assessing their people and their intellects. "Businesses are beginning to recognise the value of the intellectual capital hidden within companies," says Leif Edvinsson, founder of Intellectual Capital, a firm specialising in this field and the man who invented the system of intellectual capital audits. According to him, the tangible assets of any company form just 20 per cent of its value while the intangible ones (branding, people, etc.) make up an overwhelming 80 per cent. "But organisations are only just beginning to realise the value of nurturing these assets," he says.

"Intellectual capital is the factor of production that does not show in the traditional balance sheet, but is, nevertheless, critical to an organisation's future," explains Edvinsson. To nurture this and to encourage innovation, which is critical for survival, companies need to reorganise themselves around people and take cognizance of a younger and more creative workforce. This is especially true in the Indian context," says Edvinsson.

Companies like e4e Financial Services, Bhoruka Power and Conzerv Systems have or are in the process of getting their IC rated by Bizworth, the Indian partner of Edvinsson's Intellectual Capital.

-Rahul Sachitanand

Q&A
"Stop Talking"

John Ralston Saul stirs up many hot debates with his radical ideas of "dying" globalisation, ineffective privatisation and bureaucratic transnationals corporations. He spoke to BT's Shalini S. Dagar on some of them. Excerpts:

You say globalisation is dying. On what basis are your making this statement?

Yes, globalisation is collapsing, because in the past three to four years, the West has realised that the theory can be as easily or more easily run from India and China as it can be from the West. What the West had believed in was not globalisation but an international economic theory run from the West. So, in the last six months there has been a return of the old-fashioned economic nationalism. And it will only grow.

Has trade liberalisation not helped at all?

World trade has increased some 22 times in 30-odd years, but economic growth around the world during this time has been average to mediocre. And in the same period, there has been this astonishing increase in disparities. One of the reasons is that nearly half of this trade comes without wealth creation and from the movement of goods across borders within transnational corporations-a lot like the British East India Co.

So what is the solution?

The answer is to stop talking ideology, and to stop talking of globalisation, deregulation and liberalisation as a religion.

You have very strong views on privatisation...

The essence of the private sector is profit-making. If it is applied to an area where competitive principles do not work, say water supplies, it does not make sense. Public sector bodies, on the other hand, work only when they are led by strong political leadership and strong policy ideas. The solution is not deregulation or government ownership. Maybe, non-profit regional bodies could work in some cases.